Last Call For The No Taper Caper

Helicopter Ben made everybody happy today when the Fed decided that with, you know, a government shutdown coming in a couple of weeks that now may not be the best time to roll back bond purchases.  The immediate short-term result?  A record high for the Dow Jones and S&P 500.

Fed chair Ben Bernanke added fuel to Wednesday's stock rally during his press conference.

Bernanke laid out plans to maintain the central bank's "highly accommodative monetary policy" for the foreseeable future, even if the Fed eventually chooses to taper.

Bond yields, which have been rising lately, slid back as well as investors bought more bonds. The 10-year Treasury yield fell to 2.71% from 2.87% earlier in the day.

The Fed's moves also pushed down the dollar and drove up commodities. Gold prices spiked more than 4% following the announcement. Oil prices rose more than 2%.

Whoever does get the keys to Helicopter Ben's ride will be dropping billions in bond cash each month for a long, long time.   Our economy has become more and more dependent on it.  Stimulus by any means necessary when Republicans in Congress wants to end government assistance anyway...well, to everyone but the one percent.

Is Larry Summers Done For? UPDATE: Yep, He's Gone

Sure is looking like Larry Summers may not even make it past the Senate Banking committee, much less get 60 votes in the Senate for Fed Chairman.

Lawrence H. Summers’s prospects of becoming chairman of the Federal Reserve have become murkier since three key Democratic senators signaled in recent days that they would oppose his nomination.

Senator Jon Tester, Democrat of Montana and a member of the Banking Committee, said on Friday that he would vote against sending Mr. Summers’s nomination to the full Senate for a confirmation vote. Two of Mr. Tester’s fellow Democrats on the committee, Senators Jeff Merkley of Oregon and Sherrod Brown of Ohio, have also signaled through their aides that they would vote no.

Such resistance complicates matters for Mr. Summers because without the votes of those three Democrats, he would need Republican support on the Banking Committee, where Democrats have a three-vote majority. The panel holds the first vote on any nominee to lead the Fed.


It is not clear how the rest of the committee might vote. Senator Elizabeth Warren, Democrat of Massachusetts, is believed to be reluctant to support Mr. Summers but has not said publicly how she would vote.

I can't imagine that Warren would be a yes either under any circumstances.  That means Summers may be sunk before he even gets a vote in the full Senate.  If that's true, the message to President Obama is "don't bother to nominate him at all."

That's a message I happen to agree with.

[UPDATE]  WSJ is now reporting that Summers has withdrawn his name from consideration.

WSJ: Larry Summers withdraws name for Fed chair pic.twitter.com/u0HVsUwPBb
— E McMorris-Santoro (@EvanMcSan) September 15, 2013

Story here.

Last Call For Ben's Helicopter

The race to replace outgoing Fed Chairman Ben Bernanke continues to roll on, and while the "Anyone But Larry Summers" crew has strong contenders in Janet Yellen (who would be the first female Fed chief) and Roger Ferguson (who would be the first black Fed chairman) WaPo's Neil Irwin argues that the newest dark horse after this weekend's Jackson Hole conference is Bank of Israel head Stan Fischer.

The short version: He is an outstanding academic economist; he was the No. 2 official at the IMF; and he did a virtuoso job leading the Bank of Israel until earlier this year, making him the central banker to one of the nation’s closest allies. Whether you’re looking for academic brilliance, crisis management or central banking experience, Fischer’s resume is sterling.

He is deeply respected, even beloved, in the community of central bankers, an intellectual leader among the group of men and women who guide the world economy. In fact, he was a mentor to many of them. As it happens, he was thesis adviser to both current Fed chair Ben Bernanke and European Central Bank President Mario Draghi. In the symposium Saturday, Fischer raised a typically thoughtful point about capital flows to emerging markets, posing a question to the panelists who had just presented a paper.

And hey, I'm all for Not Larry Summers.  But Fischer? 

The reason Fischer is not viewed as a front-runner for the Fed chairmanship is that he is viewed as a foreigner. He was born in Zambia and raised overseas before becoming a U.S. citizen in 1976. More politically tricky is that he was a high public official of another country for the last several years while serving as governor of the Bank of Israel.

But Fischer has been an American citizen for a generation and maintained his U.S. citizenship while serving overseas.  And the politics around Israel are unique. Would Republicans really lead a charge against confirmation for Bibi Netanyahu’s top economic adviser?

They should, but not a one would.  And while this guy may not be Larry Summers, "Bibi's economic guy" is not a plus in my book.

The Keys To Ben's Helicopter

Don't look now, but Helicopter Ben Bernanke's term as Fed Chairman is almost up.  Somebody's going to need to fly the thing without crashing it into a mountain. The White House has made it pretty clear that spending political capital on getting Ben another term in January isn't going to happen, so much so that the search for his successor is starting now, seven months ahead of time.

Wall Street Journal reporters Peter Nicholas and Jon Hilsenrath are reporting that the White House has "quietly begun assembling a short list of candidates" to take over as chairman of the Federal Reserve when current Fed Chair Ben Bernanke's term expires in January.

Earlier this month, President Obama said in an interview, "Well, I think Ben Bernanke's done an outstanding job. Ben Bernanke's a little bit like Bob Mueller, the head of the FBI - where he's already stayed a lot longer than he wanted or he was supposed to."

Yeah.  The smart money is on current Fed Vice Chair Janet Yellen.

By every account, Yellen is a thoughtful and brilliant economist, which has allowed her to rise to where she is today.

"Ms. Yellen climbed the Fed ranks by being methodical rather than iconoclastic," writes Wall Street Journal reporter Jon Hilsenrath in a recent profile of the Fed vice-chairman. "She shows up at policy meetings with carefully crafted statements. Those who work with her say she arrives at the airport hours early."

"[Yellen] is very low-key, but impresses people quickly with the depth of her understanding and the sincerity of her views," said fellow Berkeley professor Andrew Rose in 1994, describing her as "collegial, persuasive and effective."

She has also worked with the academic elite of the economics sphere her entire career. Her mentor at Yale, where she received her Ph.D. in 1971, was Nobel-Prize winning economist James Tobin, whose legacy is enshrined in today's economics textbooks. After graduating from Yale, she taught at Harvard for five years. Then, she did a two-year stint (1976-1978) as a staff economist at the Federal Reserve, where she met her husband, fellow economist and future Nobel Prize winner George Akerlof.

After the Federal Reserve, Yellen was faculty at the London School of Economics for two years. Then, in 1980, she accepted a position at the University of California, Berkeley, where she stayed until her appointment to the Federal Reserve Board of Governors in 1994 by President Bill Clinton.

Having been kicking around the Fed for 20 years is a pretty big bullet point on the resume, admittedly.  Republicans on the other hand are going to extract their pound of flesh, since both they and the Paultards believe the Fed created the financial crisis by themselves (and the banks had nothing to do with it, which is like blaming the fire department for arsonists.)

We'll see.

Last Call

Gentlemen!  Quickly!  To the Bernanke National Heliport!

The Federal Reserve took a genuinely unexpected step Wednesday afternoon when it announced it would significantly enhance its current monetary easing program. The Fed, for the first time, committed to keeping monetary policy loose until the economy crosses precise thresholds — specifically, an unemployment rate below 6.5 percent or a inflation above 2.5 percent.

It also upped its monthly asset purchases by spending an additional $45 billion a month on Treasuries.

Only one member of the Fed Open Market Committee dissented. The significantly more aggressive policy is designed to provide businesses greater incentive to invest, and comes, perhaps not coincidentally, as Congress nears a deadline past which taxes will increase and spending will be cut to the tune of about $50 billion a month.

That $45 billion in treasuries is on top of the $40 billion per month in mortgage-backed securities announced in September.

In other words, the Fed is moving to counteract the fiscal slope before it happens, which means we should probably stop panicking about it in general, and that Republicans have even less leverage now.

Things are looking up.

The Full Bernanke

Helicopter Ben just pushed the Big Candy-like Red Button, kids.

The Federal Reserve launched another aggressive stimulus program on Thursday, saying it will buy $40 billion of mortgage debt per month and continue to purchase assets until the outlook for jobs improves substantially. 

In a significant shift in the direction of U.S. monetary policy, the Fed has tied its unconventional bond buying directly to economic conditions, a move that is likely to be controversial among central bank critics.

“If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the Fed said in a statement.

In an additional step that reflects just how concerned Fed officials have become about the health of the economy, policymakers said they would not likely raise rates from current rock-bottom lows until at least mid-2015. Previously, it had set such guidance at late 2014.

Not only is it QE3, but it’s got no set expiration date, apparently.  You know, exactly the kind of sustained growth program that everyone’s been screaming for now for a couple of years.  That sound you hear is Austrian-school economists exploding like microwaved giant jawbreakers, not to mention the sound of Mitt Romney’s campaign guys going “Umm…we argued that something had to be done, but we refused to provide specifics…now what?”

I gotta fiver says House Republicans will try to impeach somebody before the week’s out.

Congressional Republicans, wary of the Fed’s recent efforts to stimulate the recovery, said Wednesday that the its political independence could be jeopardized if officials embark on another round of stimulus so close to Election Day.

“It really is interesting that it is happening right now before an election,” said Rep. Raul Labrador (R-Idaho). “It is going to sow some growth in the economy, and the Obama administration is going to claim credit.”

“I am shocked, just shocked, that politics are going on in this city!” Rep. Tom McClintock (R-Calif.) said sarcastically.

Yeah, let's think about that.  For helping the economy and following its dual mandate of lowering  inflation and lowering unemployment,  the Fed must be punished.  The American people are being helped economically by the federal government, a crime that probably merits Bernanke's public flogging, right?

Expect to hear more of this utter nonsense from batshit crazy Republicans in the days ahead.

Podcast Versus The Stupid!

Another weekday PVTS bonus show, It's A Foreign Concept To Mitt, as Bon and I cover Mitt's meltdown in the wake of the awful event in Libya and Egypt,  Helicopter Ben pushing the Big Red Button, and Missouri Republicans overriding Gov. Jay Nixon's veto stopping employers from stripping birth control from insurance plans for religious reasons.

Listen to internet radio with Zandar Versus The Stupid on Blog Talk Radio

As always, you can click on the iTunes button to get PVTS to go, or download the episode from our archive page.

Last Call

Felix Salmon dissects why Helicopter Ben is continuing Operation Twist to keep interest rates and inflation low rather than going for quantitative easing from the Magic Printing Press.

From today’s presser, my feeling is that Bernanke maybe doesn’t feel as strongly any more that he would be reckless to act more aggressively. But he does still feel that the upside from doing so is “doubtful”. If he’s forced by crisis to pull out the ammo, he’ll do so. But Bernanke clearly doesn’t consider the unemployment crisis to be a crisis in that sense. If something happens suddenly, then policymakers can act strongly and decisively. Years of high unemployment are in many ways more damaging than the sudden drop in government spending that risks arriving with the fiscal cliff. But because the damange is slow-acting and invidious, it seems that unemployment, on its own, is incapable of persuading Bernanke to do more.

My question is what will it take to get Helicopter Ben to hit the big red button, a full-blown European meltdown?  Because that's where we're headed.

The QE3 Is About To Set Sail

All abooooooooooooard the Bernanke Boat!

Equities gained as European Central Bank President Mario Draghi said officials stand ready to act as the euro region’s growth outlook worsens. Federal Reserve Bank of Atlanta PresidentDennis Lockhart said extending Operation Twist, the program to lengthen maturities of debt on the central bank’s balance sheet, is an “option on the table.”

The Fed said in its Beige Book survey of business conditions today that the U.S. economy maintained a moderate pace of growth as factory output rose and the real-estate market improved. The report gives central bankers anecdotal evidence on the state of the world’s largest economy two weeks before they meet in Washington.

“There’s always hope that some magic tool would be found,” said Ron Florance, managing director of investment strategy for Wells Fargo Private Bank. His firm manages $169 billion. “There’s no sense of any economic recovery on the near-term horizon for Europe. I would be surprised if the Federal Reserve isn’t already having a contingency plan if everything unravels in Europe.” 

Helicopter Ben has a plan to save Europe.  At least, that's the rumor.  Of course, I'm thinking anything the Fed might try to do will run face first in the GOP doing everything they can to destroy the economy in order to win, and that's going to be an ugly battle here on Capitol Hill.  Anything remotely looking like "stimulus" comes across from Ben's office, it will be war.

And I'm pretty sure the losers in that war will be your average Americans.

Last Call

A lot of numbers have been thrown around in the accounting of just hom much money the banks got from the Fed, but if this analysis is to believed, it's utterly insane: some $29 trillion total.  Randall Wray at EconoMonitor:

There are a number of issues that must be understood. First, the Fed quibbles about the differences among lending, guarantees, and spending. For the purposes of this blog I will accept these differences and call the sum across the three “commitments”. In spite of what Bernanke claims, these do commit “Uncle Sam” since Fed losses will be absorbed by the Treasury. (The Fed pays profits to Treasury, so if its profits are hurt by losses, payments to Treasury are reduced. If the Fed should go insolvent, the Treasury will almost certainly be forced to recapitalize it.) I do, however, agree with the Chairman that a tally should not include facilities that were created but not utilized (there were several of them, and the tally I present below does not include any facilities that were not used).

Second, there are (at least) three different ways to measure the Fed’s bail-out. One way would be to find the day on which the maximum outstanding Fed commitments was reached. According to the Fed, that appears to have been about $1.5 trillion sometime in December 2008. I’m willing to take Bernanke at his word. Another way would be to take the total of commitments made over a short period of time—say, a week or a month. That would be a measure of systemic distress and would help to identify the worst periods of the GFC (global financial crisis). Obviously, this will be a bigger number and will depend on the rate of turn-over of Fed loans. For example, many of the loans were very short-term but were renewed. Bernanke argues that it is misleading to add up across revolving loans. Let us say that a bank borrows $1 million over night each day for a week. The total would be $7 million for the week. In a period of particular distress, the peak weekly or monthly lending would spike as many institutions would be forced to continually borrow from the Fed. Bernanke argues we should look only at the lending at a peak instant of time.

Think about it this way. A half dozen drunken sailors are at the bar, and the bartender refills their shot glasses with whiskey each time a drink is taken. At any instant, the bar-keep has committed only six ounces of booze. That is a useful measure of whiskey outstanding. But it is not useful for telling us how much the drunks drank. Bernanke would like us to believe that if the Fed newly lent a trillion bucks every day for 3 years to all our drunken bankers that we should total that as only a trillion greenbacks committed. Yes, that provides some useful information but it does not really measure the necessary intervention by the Fed into financial markets to save Wall Street.

And that leads to the final way to measure the Fed’s commitments to propping up our drunks on Wall Street: add up every single damned loan, guarantee and asset purchase the Fed made to benefit banks, banksters, real Housewives on Wall Street, fraudsters, and their cousins, aunts and uncles. This gives us the cumulative Fed commitments.

And if you go ahead and do that, as two UMKC graduate students have done, you come up with a mind-busting figure:

When all individual transactions are summed across all facilities created to deal with the crisis, the Fed committed a total of $29,616.4 billion dollars. This includes direct lending plus asset purchases. Table 1 depicts the cumulative amounts for all facilities; any amount outstanding as of November 10, 2011 is in parentheses below the total in Table 1.  Three facilities—CBLS, PDCF, and TAF—overshadow all other facilities, and make up 71.1 percent ($22,826.8 billion) of all assistance.

Table 1: Cumulative facility totals, in billions

Source: Federal Reserve

Facility	Total	Percent of total
Term Auction Facility	$3,818.41	12.89%
Central Bank Liquidity Swaps	10,057.4(1.96)	33.96
Single Tranche Open Market Operation	855	2.89
Terms Securities Lending Facility and Term Options Program	2,005.7	6.77
Bear Stearns Bridge Loan	12.9	0.04
Maiden Lane I	28.82(12.98)	0.10
Primary Dealer Credit Facility	8,950.99	30.22
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility	217.45	0.73
Commercial Paper Funding Facility	737.07	2.49
Term Asset-Backed Securities Loan Facility	71.09(.794)	0.24
Agency Mortgage-Backed Security Purchase Program	1,850.14(849.26)	6.25
AIG Revolving Credit Facility	140.316	0.47
AIG Securities Borrowing Facility	802.316	2.71
Maiden Lane II	19.5(9.33)	0.07
Maiden Lane III	24.3(18.15)	0.08
AIA/ ALICO	25	0.08
Totals	$29,616.4	100.0%

Yeah. That figure is in billions, as in $29,600 plus billions, commonly known as $29.6 trillion.  Some ten trillion just in liquidity swaps, and another nine trillion in the Fed's primary dealer credit window, plus another ten trillion in change in other various and sundry programs.  Twice our entire national debt, just to get the banks out of the hole they were in.  Helicopter Ben was dropping cash out of helicopters made of cash.

Oh, and the banks are right back to playing the same games they were before, because they know if they screw up again, the Fed will bail them out...again.

It is any wonder that the Village Elite are looking to scrap as many social programs as possible in order to make the average American pick up the tab for what's coming next?

Tick Tock, Euro Clock

Not a few days after the Financial Times's Wolfgang Munchau warned that the EU had basically until the end of next week to get a solution in place or the euro is done then we see the EU's money man, Oli Rehn, is warning of the same thing.

Europe faces a crucial 10 days to save the euro zone after agreeing to ramp up the firepower of its bailout fund but acknowledging it may have to turn to the International Monetary Fund for more help to avert financial disaster.

"We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," Economic and Monetary Affairs Commissioner Olli Rehn said on Wednesday as EU finance ministers met.

Euro zone ministers agreed on Tuesday night on detailed plans to leverage the European Financial Stability Mechanism (EFSF), but could not say by how much because of rapidly worsening market conditions, prompting them to look to the IMF.

Italian and Spanish bond yields resumed their inexorable climb towards unsustainable levels on Wednesday, as markets assessed the rescue fund boost as inadequate.

Stocks fell and the euro weakened after ratings agency Standard & Poor's hit some of the world's leading banks with a credit downgrade.

And yes, yesterday's mass banking sector ratings agency downgrade hit banks like Goldman Sachs,  Bank of America, and Wells Fargo.  The contagion scenario from a euro collapse is guaranteed.  All of that explains this morning's stunning announcement from the Fed:

Central banks from the world's leading developed economies said on Wednesday they will take coordinated steps to prevent a lack of liquidity in the global financial system.

The U.S. Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said in a joint statement they had agreed to lower the cost of existing dollar swap lines by 50 basis points from December 5, as well as take other measures.

Woot, "other measures" are always fun.  Helicopter Ben's Magic Printing Press has gone international.  Hello, QE3!  The roller coaster is back folks.  Time to ride.

Last Call

So, forget about Chris Christie still not running for President or Apple's iPhone5 iPhone4S, the real news today is all about Helicopter Ben.

Bernanke also signaled that the Fed will consider further action if the economy continues to worsen. The Fed’s policy committee “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,” he said.

The warning to lawmakers came as the Fed chief acknowledged the weak recovery and delivered a dour outlook on the economy.

“Overall, the recovery from the crisis has been much less robust than we had hoped,” Bernanke said. He said that the Fed’s policymaking committee “now expects a somewhat slower pace of economic growth over coming quarters” than it did in June, when it last released formal projections.

And of course, Republicans want to make sure that the Fed can do absolutely nothing.

 A Republican leader in Congress was poised on Tuesday to introduce legislation to strip the Federal Reserve of its mandate to ensure full employment, the latest bid in Washington to clip the central bank's powers.

Yes, why should the government do anything about unemployment right now?

Time to Tweet For Jobs, folks.  Let the GOP know the real jobs in danger are their own.

The GOP's Double Or Nothing Bet On Nothing

The GOP is now dead set on making sure the federal government does nothing to help the economy or the millions of Americans out of work as Republican leaders are warning Helicopter Ben that if he tries anything, they're coming for him first.

Republican leaders in Congress have asked Federal Reserve Chairman Ben Bernanke to refrain from any further monetary stimulus during policy makers' two-day meeting ending Wednesday.

"Respectfully, we submit that the board should resist further extraordinary interventions in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people," read a letter from Republican leaders and addressed to Bernanke.

The letter was co-signed by House Speaker John Boehner of Ohio, House Majority Leader Eric Cantor of Virginia, Senate Minority Leader Mitch McConnell of Kentucky and Senate Minority Whip Jon Kyl of Arizona.

"It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate," read the letter.

Yes, because the entire Republican macroeconomic theory textbook can fit on a matchbook cover ("Cut taxes!") we get the extraordinary step of Republican dictating policy to the Fed.  On the other hand, more than a few Republicans on the 2012 campaign trail want to set up a few ropes and trees for Helicopter Ben anyhow, so the GOP is just continuing their tactic of implied threats against Bernanke and the Fed should they ever get back in power.

Of course should the GOP get back in full control of Washington, they'll turn on the printing press and yell "deficits don't matter".

To its credit, the Fed this afternoon told the GOP to go stimulus itself.

The Federal Reserve on Wednesday dialed up its aid to the beleaguered U.S. economy, launching an effort to put more downward pressure on long-term interest rates over time and help the battered housing sector.

The Fed said it would launch a new $400 billion program that will tilt its $2.85 trillion balance sheet more heavily to longer-term securities by selling shorter-term notes and using those funds to purchase longer-dated Treasuries.

It will now also reinvest proceeds from maturing mortgage and agency bonds back into the mortgage market, an acknowledgement of just how weak conditions in the sector have remained.

"Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,'' Fed said in its statement.

Going to be interesting to see which of the GOP calls for Bernanke's hanging first.

Moving Forward At Your Own Perry-il, Part 3

Wow, it's only been like three days, and Rick Perry has already racked up enough demerits for KP duty.  Brian Beutler:

Texas governor, and freshly minted GOP presidential candidate Rick Perry will have to explain what he meant when he said "we would treat [Fed chairman Ben Bernanke] pretty ugly down in Texas" if he prints money -- or, more charitably, printing more money than usual. Likewise, he'll have to explain why he thinks printing money -- or prints more money than usual -- would be "almost treasonous," at least as compared to, say, secession.

But what's gone completely unnoticed in the wake of candidate Perry's first big flap is his rationale for opposing a looser Fed policy in this depressed economy: specifically that it would work, boost the economy, and thus make it harder for the GOP to defeat President Obama.

"If this guy prints more money between now and the election, I don't know what y'all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous -- or treasonous -- in my opinion."

To recap, exercising Fed policy to save America's economy when a Republican is president, vital and necessary.  When that President is Barack Obama, it's treason.   Also, Texans will attack central bankers on sight.  This from, as Beutler mentioned, a proponent of the state's secession from the union.

I told you guys the opposition research on Perry would be miles of laughs, right up until this jackass gets the nomination.

I will give Perry credit for one thing however:  he's pissing off Karl Rove.  Meanwhile, President Obama is having fun with the newbie.

You know, Mr. Perry just got into the presidential race. I think that everybody who runs for president, it probably takes them a little bit of time before they start realizing that this isn't like running for governor or running for senator or running for Congress, and you've got to be a little more careful about what you say. But I'll cut him some slack. He's only been at it for a few days now.

 Classic Obama, folks.  Classic.

Last Call

Matt Taibbi's piece on Goldman Sachs and the financial crisis is your evening reading tonight.  A taste:

Goldman's chief financial officer then and now, a fellow named David Viniar, wrote a letter in February 2004, commending the SEC for its efforts to develop "a regulatory framework that will contribute to the safety and soundness of financial institutions and markets by aligning regulatory capital requirements more closely with well-developed internal risk-management practices." Translation: Thanks for letting us ignore all those pesky regulations while we turn the staid underwriting business into a Charlie Sheen house party.

Goldman and the other banks argued that they didn't need government supervision for a very simple reason: Rooting out corruption and fraud was in their own self-interest. In the event of financial wrongdoing, they insisted, they would do their civic duty and protect the markets. But in late 2006, well before many of the other players on Wall Street realized what was going on, the top dogs at Goldman — including the aforementioned Viniar — started to fear they were sitting on a time bomb of billions in toxic assets. Yet instead of sounding the alarm, the very first thing Goldman did was tell no one. And the second thing it did was figure out a way to make money on the knowledge by screwing its own clients. So not only did Goldman throw a full-blown "bite me" on its own self-righteous horseshit about "internal risk management," it more or less instantly sped way beyond inaction straight into craven manipulation.

"This is the dog that didn't bark," says Eliot Spitzer, who tangled with Goldman during his years as New York's attorney general. "Their whole political argument for a decade was 'Leave us alone, trust us to regulate ourselves.' They not only abdicated that responsibility, they affirmatively traded against the entire market."

They knew the financial crisis was coming, because their own actions assured it would happen.  And knowing it was coming, they then proceeded to bet massive amounts of money that the housing market would collapse into a massive depression.  For this, they were rewarded tens of billions of dollars, and given hundreds of billions more in government credit to make more bets to earn even more money to "pay back the Treasury department."  It was a win for GS.  It was a win for the Treasury department.  And when Obama saw what he had inherited, he realized he had no choice but to keep playing or watch the country snap back into depression.

But somebody's got to pay for all this mess.  Guess who?  Go look in the mirror if you want a hint.

Pop Goes The Bubble Cause The Bubble Goes POP

That wet ripping sound you heard coming from the direction of Wall Street was the bottom coming out of the commodities market this afternoon.  Good ol' Asariel documents the atrocities at the Great Redoubt:

So, what happened?  We'll turn to Reuters first for some ideas.  In Oil plummets 8 percent as commodities battered, the article quotes Chris Jarvis, senior analyst for Caprock Risk Management, for some theories.  "Crude oil is selling off sharply for two primary reasons:  QE2 is coming to an end in June and without a QE3 behind it, it will take liquidity out of the market, hurting risky asset classes such as commodities....  With Osama bin Laden dead, the market is adjusting the geopolitical risk premium down accordingly.  Given this, speculative money is being taken off the table."

 

Silver took a beating  because the Chicago Mercantile Exchange Group is raising margin requirements for the 5000-ounce COMEX silver futures, according to Silver deepens dive to 5-week low, gold slips.  The margin requirement was $11,745 per contract.  Starting May 9, it will go to $21,600 per contract.

 

If you don't follow commodities much (and I don't), that's comparable to taking the house requirement for a stock from 30% to 55%.

 

Michael Shaoul, chairman of Marketfield Asset management, chalks it up to panic in Commodities Sink Most Since 2009 as Stocks Fall.  "You have those super crowded trades.  Now you're in liquidation mode.  There's nothing to do with weak US economic data.  It's not a global financial crisis.  It's  a classic liquidation move in a crowded trade."

 

One final piece of the puzzle:  the dollar was up against the euro, the British pound, the yen, and the Australian dollar.  Since commodities are traded in dollars, a strengthening dollar will help push commodity prices down.

 

Makes sense to me.  Silver's gone from $20 in January to $48 last week, dropping to $36 today.  Speculation, much?  Oil too burst, dropping a whole ten bucks today.  See if that does anything to gasoline prices where you live.

The flight to safety in recent months has been not to the dollar, but to silver, oil, gold, just about any commodity speculators could get their hands on the futures contracts for, and as the dollar continued to fall against the Euro, people bid up the prices of everything.  But today, Jean Claude Trichet of the European Central Bank mentioned the dreaded "R" word..."responsibility".

In a dinner speech at a central banking conference organized by the Bank of Finland in Helsinki, Trichet told his audience that Europe's monetary union must allow countries that have pursued sound policies to reap the benefit of them, while others pay for their own mistakes.

His remarks came on the same day that the EU and International Monetary Fund formally unveiled a EUR78 billion rescue package for Portugal, the third debt-laden member of the euro zone to seek assistance from its partners in less than a year.

Portugal's bailout means that euro-zone and other EU governments have now committed more than EUR250 billion in aid to economies that have failed to live with the constraints of the common currency, a trend that was largely responsible for the dramatic increase in support for a previously marginal right-wing party in Finland's parliamentary elections in April. 

With Trichet signaling that the Europeans are cutting off the Eurozone version of Helicopter Ben's magic printing press, the dollar's plummet against the Euro reversed itself big time today.  And as Asariel correctly notes, a stronger dollar means lower commodity prices.  Likewise, a sharply stronger dollar means sharply lower commodity prices, and that was enough to pop the bubble across the board on commodity's Big Casino game as everyone got spooked and headed for the exits.

We'll see where the commodity markets head after this, but this bubble was due to burst some time ago, and until the dollar starts weakening again, commodity traders will be seeing red.  It doesn't hurt that dropping commodity prices on things like oil and grain right now will only help the US economy, which was in real danger of locking up due to extended high gas prices.  I'm hoping this will cause a steady drop this month depending on how long the dollar rally lasts.

Having said that, can QE3 be too far around the corner?

The Smartest Econo-Moose In The Room

The winger logic this morning goes something like this:

1. The NY Times notes that ordinary Americans have not really benefited much from Helicopter Ben's QE2 program.
2. Therefore, this is proof that QE2 has failed.
3. Sarah Palin said QE2 would fail.
4. Therefore, given 2 and 3, Sarah Palin is the smartest person on Earth.

No, really.

She did this back in November in a speech at Phoenix, which the Wall Street Journal, in a laudatory editorial at the time, characterized as zeroing in on the connection between a weak dollar and rising prices for oil and food. “We don’t want temporary, artificial economic growth brought at the expense of permanently higher inflation which will erode the value of our incomes and our savings,” the Journal quoted Mrs. Palin as saying. “We want a stable dollar combined with real economic reform. It's the only way we can get our economy back on the right track.” Now here is the New York Times quoting a raft of economists who have reached the conclusion that Mrs. Palin’s warning was right down the line.

No really, she's a visionary genius.

Will any of this bring some humility to the Fed and its chairman? It will be something to watch for in his first big press conference Wednesday. No doubt it will be one of the most crowded press conferences in recent memory, and there will be lots to ask about. But one of the questions will be how in tarnation Mrs. Palin figured it out so far ahead of everyone else.

The usual supplicants are crowing, in awe of Sarah Palin's supreme intellect.  But here's what I said almost six months ago:

I'm a Keynesian, but I think this is bad Keynesian policy.  It's certainly not the best way to stimulate the economy.  It is the best way for the banks to make a hell of a lot more money to sit on and not invest in workers and capital, and unless the banks loosen credit, there's not going to be anything useful out of this.  It's trying to water your crops by blowing up the reservoir dam. You will get water to the crops, it just might take your farm with it.

The problem is the more useful ways to stimulate the economy have been summarily rejected, blocked, and killed by the GOP.  That will not improve in the next two years, so the Fed has to step in.

However this has got to be the most painful way of doing it...short of you know, doing nothing at all.  And we've got nothing else to try. 

Investors want to borrow money cheaply and then get a high rate of return for it.  Since interest rates are near zero, investors are borrowing that money from the Fed cheaply and plowing it into commodities:  wheat, corn, oil, silver, gold.  This is bad for consumers as prices for those go up, but they are an excellent rate of return for investors.

And since the GOP has blocked literally everything else the government can try that would be remotely stimulative, we're left with literally the worst option of the lot.  Surprise, it's not working very well.  It was a long shot at best and all it ended up doing was feeding more Big Casino games that would hurt the American people.  Everyone bet commodities futures would go up...and wow, they did!  Shocking, I know...it's called a "speculative bubble."  The markets loved it.  It did nothing for 90% of America other than make food and gas prices go up.

Any actual stimulus plan would have been killed in Congress.  When Obama and the Democrats had the chance to do a real stimulus plan, they punted.

And if figuring out that wasn't going to work real well makes Sarah Palin smart, that makes me Einstein having Socrates' babies.  What would Sarah Palin have done instead?  Well...nobody seems to have an answer for that, least of all Sarah Palin and her supporters. 

Oh wait, we know exactly what she would have done, cut taxes on the rich and wait for it to trickle down to the rest of us.  We tried that, of course.  It was called The George W. Bush Years.  You see where that got us.  And yet, the fiscally responsible plan is completely ignored by everyone.

Funny how that works.

Going After The Real Bad Guys

Hacker group Anonymous is apparently shifting gears and shifting targets, moving to go after the banksters and their government enabler, Helicopter Ben Bernanke.

The world's most (in)famous hacker group - Anonymous - known for effectively shutting down their hacking nemesis security firm (with clients such as Morgan Stanley and, unfortunately for them, Bank of America)- HBGary, advocating the cause of Wikileaks, and the threat made by one of its members that evidence of fraud by Bank of America will be released on Monday, has just launched communication #1 in its Operation "Empire State Rebellion." The goal - engage in "a relentless campaign of non-violent, peaceful, civil disobedience" until Ben Bernanke steps down and the "Primary Dealers within the Federal Reserve banking system be broken up and held accountable for rigging markets and destroying the global economy effective immediately."

Doesn't get any bigger than that.  We know the government won't touch the banksters, and that they most likely won't receive a day of jail time, or even be charged with anything at this point.    But if Anonymous is really going to go after the Fed and the big money at the top of the pyramid, then stay tuned.

Things are about to get a whole lot more interesting.

Jobapalooza

October and November job gains revised upward 70K and a 103K job gain in December dropped the unemployment rate to 9.4% last month, but of course Helicopter Ben will keep his hands on the throttle.

Fed Chairman Ben Bernanke speaks on the economic outlook before the Senate Budget Committee at 9:30 a.m.

Analysts say the Fed's focus is on unemployment and expect it to complete the bond-buying plan.

"Gains in payrolls won't be enough to spark a change in Fed policy until the gains either accumulate for many, many months or are accompanied by gains in inflation expectations," said Tony Crescenzi, a strategist at bond fund PIMCO.

The economy usually needs to create at least 125,000 jobs a month to keep the unemployment rate from rising, but a faster pace might be needed now since so many discouraged workers are sitting on the sidelines. As job growth picks up, these workers could re-enter the labor force, keeping upward pressure on the jobless rate.

Employment gains in December were led by the private services sector, which saw payrolls rising 115,000 after gaining 84,000 in November. Retail jobs increased 12,000 after a surprise 19,400 slump in November when retailers reported their best sales in years.

Temporary hiring, seen as a harbinger of permanent employment, increased 15,900 after 31,100 in November.

The U-6 number is down to 16.7%, and we're headed in the right direction, but that just means we're breaking even instead of losing jobs.  We'll need a almost a decade of 250K job growth months just to get back to 2007 employment highs, let alone to improve on them.

A Whole Wide World Of Bank Bailouts

Boy, we sure are generous as Americans, taking it on the chin here at home while taxpayers helped to bail out non-US banks.  CNBC and the Financial Times:

More than half of lending under the Fed’s term auction facility – the largest of its crisis programs – went to foreign banks. Details of the varied uses to which they put it may add to political criticism of the Fed.

The Taf was set up in December 2007 to provide one-month loans to creditworthy banks as markets dried up for lending longer than overnight. In August 2008, it began offering three-month loans as well.

Rabobank of the Netherlands and Toronto-Dominion of Canada, two of the only banks in the world with triple A credit ratings, used more than $20 billion in cumulative Taf loans.

Ed Clark, TD chief executive, said that using Taf was logical even though his bank never had a liquidity problem. “That wasn’t how we made a lot of money. But you make a dollar here, you make a dollar there. What’s the spread you make on a billion dollars?” he said.

In the summer of 2008, TD was borrowing $1 billion from TAF at rates of between 2 and 2.5 percent. For that borrowing it used the lowest quality – and hence highest yielding – collateral acceptable to the Fed.

More than 80 percent of its collateral had a triple B credit rating at a time when such bonds yielded about 7 percent. TD could therefore have made a notional gross spread of about $4m a month during 2008.

So not only were the big US banks making money off this scheme, taking worthless commercial paper, giving it to the Fed at face value as collateral, and getting cheap loans back in return, but overseas and Canadian banks were taking advantage of the TAF as well.

Keep in mind this all happened in early 2008, too -- before Obama took office, this was all Hank Paulson's idea -- and ask yourselves why the same Republicans who are looking to make Americans eat billions in spending cuts are the same guys who had no problem giving away taxpayer dollars to banks in Canada and Europe.

Think about that the next time a Bush-era Republican launches into another tirade about how we must control spending.