Whalen Says Forget QE, Get Tough With Banks

Chris Whalen has a particularly tough-minded post at Reuters in which he explains why QE does little for the real economy (similar to the conclusions reached by the Bank of Japan regarding its own QE) and why its benefits for banks fade over time. Key sections:

When interest rates are low, savers move their preference for liquidity to infinity, especially after the past several years of market breakdown. Retirees spend less because the interest earned on bonds and savings has plummeted….

When the Fed buys securities through QE, it is removing duration from the markets, pushing down yields and volatility. For a while this boosts the net interest margin (NIM) of leveraged investors such as banks, who are able to borrow at lower rates to fund current assets. As assets re-price to the low rates maintained by the Fed, however, NIM begins to disappear. Over the medium to longer term, think of duration and NIM as being linked, so obviously a sustained period of QE is bad for NIM. This is why NIM in the U.S. banking sector is starting to fall.

Just as the earnings of leveraged investors like banks are starting to suffer due to zero rate policy, so too the spending by all manner of savers, from retirees to companies and not-for-profits to municipalities, is falling too. Fed Chairman Bernanke and the other members of the FOMC are killing the real economy to save the banks — but none of the benefit flowing to the banks is reaching U.S. households. In fact, the Obama Administration has been providing political cover for the Fed to conduct a massive, reverse Robin Hood scheme, moving trillions of dollars in resources from savers and consumers to the big banks and their share and bond holders.

Yves here. A big error the Fed made during the crisis was overly sharp rate cuts when markets swooned. The cliche was “75 [basis points] is the new 25.” A lot of commentators got nervous when the Fed cut its Fed funds rate below 2% because that put it on the path to ZIRP. But there were so many other distractions that concerns about the level of policy interest rates got lost in other crisis issues.

Whalen further argues that increased concentration in the banking industry has allowed the big banks to strangle credit:

“In every Fed easing event during my career in finance (1986, 1992, 1998, 2002), it was the wave of refinancing of debt after the Fed eased interest rates that put permanent disposable income into the hands of households,” notes a former Fed official who worked in the banking industry for decades. “In this last easing, however, FNM, FRE and the TBTF banks have conspired to break the transmission mechanism for monetary policy and are now strangling the U.S. economy to save themselves from past errors.”….

First, the Obama Administration should use the power provided in the Dodd-Frank legislation to force an accelerated cleanup of bad assets and to mandate refinancing and principal reductions for performing loans with viable borrowers….

Second, President Obama also needs to focus on the growing competitive problem in the U.S. mortgage sector…

The top three banks control 55% of all mortgage originations. The top 10 banks control 95%. The top five run the only surviving channels to sell loans to Fannie Mae (FNM) and Freddie Mac (FRE), and force their pricing upon the entire banking industry. Small banks give up half the economics of a typical loan to sell a loan to FNM or FRE indirectly, through WFC or JPM. Why is there no antitrust investigation of the top banks by the Department of Justice?

The Obama Administration should move to restructure FNM and FRE now, not in 2011. The Treasury should use its existing authority under the conservatorship to force FNM and FRE to make rules changes to allow for the refinancing of all existing residential mortgages, if only to reduce the current cost of the debt and increase disposable income for households…

President Obama should make some political hay over the fact that loan origination margins for the top four banks have gone from ½ point to over 4 points in the last two years. This is the subsidy for Wall Street above and beyond the zero interest rate policy of the Fed.

My quibble about the Fannie/Freddie refi idea is that this more deeply entrenches the role of the GSEs when Whalen argues against their powerful role, and it also creates large amounts of low yield paper which if we escape our near deflation conditions, will mean big time losses to the chump holders (and until we get over causing pain to bondholders, having Bill Gross hold a lot of securitized low yield mortgages means Bill Gross will be lobbying for more ZIRP and QE). Plus this move (by design) is a subsidy to homeowners and not renters. I’d prefer more straightforward ways of getting cash to ordinary consumers. But putting more heat on the banks is very much in order. And if they don’t like official criticism, they have only themselves to blame.

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  1. Neil D

    It is very – and I do mean very – hard for me to swallow the idea that credit worthy borrowers deserve principle reductions – especially those who extracted equity via HELOC to fund whatever purchases they made with the cash. They have become, in effect, renters. And what, exactly, is wrong with that?

    If people NEED to move for a job, then there might be a reason to support short sales under very limited circumstances via some sort of relocation assistance, but I cannot imagine how we would set rules to determine eligibility. There is simply no way to make this fair. It’s best to force people into bankruptcy and foreclosure. Lot’s have people have been through it and they survived. That means they won’t buy a new car, they will not have credit cards, and they won’t be dining out every week. Sorry – that’s just the way its going to be.

    1. Yves Smith Post author

      You are cutting off your nose to spite your face. In the old days when banks owned loans, it was absolutely routine to write off principal. The bank saw it as much better than taking the house and taking bigger losses.

      Your resistance to letting your neighbor (who you assume to be profligate, as opposed to unlucky) get a writedown is that the bank ultimately takes bigger loses, which given the state of the banking system, you will ultimately pay for via bigger overt and hidden subsidies.

      So you’d rather subsidize the banksters, who clearly should have known better than help your neighbor (oh, and real estate values in your neighborhood), who in many cases does not fit your stereotype? Really?

      1. Wes

        > So you’d rather subsidize the banksters …

        I’d rather subsidize no one.
        Enough subsidies.
        The less idiot politicians with their agendas are involved the better.
        Let the parties to a mortgage contract work this out – all of them have options.

      2. Neil D

        I think you may have read more into my comment than I intended. I don’t think people who have jobs and can afford their mortgage payments deserve help just because they owe more than the property is worth. And why is it so terrible to suggest that the people who drained their equity via HELOC or cash-out refis should be helped last or not at all?

        It is a shame that many Americans were fooled into thinking that a house was a secure investment. Now we know better. I simply don’t want to do anything to recreate that illusion.

        1. PQS

          You wrote: “I don’t think people who have jobs and can afford their mortgage payments deserve help just because they owe more than the property is worth.”

          What about the reality that some of these properties will never, in a million years, be worth what the loan was for, AND the buyers cannot just “walk away” without massive additional financial pain from the banks? This, too, seems unfair. (I’m thinking of the “recourse” situation where the banks can not only take the property, but also sue the homeowner for other costs, which, as we all know, will quickly ratchet up to the tens of thousands as the banks try to recover from THEIR stupidity.) Who can better afford a “writeoff”? America’s middle class, struggling, or the banks, with their trillions? Really?

          I think the answer is for states to rescind the “recourse” laws. Of course, every TBTF bank and mortgage servicer will then respond fiercely, but that’s what should happen.

          The “recourse” is the unfairness, here, IMHO. Property loans are guaranteed by the property. If the borrower defaults for whatever reason, the property should be the only recourse for the bank. (Exceptions in case of fraud, etc.) Otherwise, the situation is truly David vs. Goliath. And David, I’m afraid, is hitting the wall of tolerance for Goliath, which has much larger social implications.

          1. Neil D

            I agree that recourse laws will have to go. I guess I’m not too worried about the MBS investors losing out. Although my pension fund will probably be one of the losers. We’ll pay no matter what we do.

          2. Dan10400

            Well, if it is a government employee pension fund, can always just soak future taxpayers for that, so no worries!

          3. Yves Smith Post author

            Writing down principal is an acknowledgment that the mortgage, and therefore the house IS worth less than when the loan is made. By contrast, and perversely, refusing to find a way to share the pain between the banks and the borrowers allows banks to maintain their “extend and pretend” fantasies.

    2. Ellen1910

      “. . . they won’t buy a new car, they will not have credit cards . . . .”

      I suspect that once the population of the foreclosed-upon, the defaulters, and the bankrupts becomes large enough, profit-seeking lenders will begin to accord these stigmas less weight. As Yves might say, lenders aren’t about to cut off their noses to spite their faces.

    3. scraping_by

      One of the understudied and underreported aspects of Gilded Age II was the huge mind shaping campaign that promoted financial fantasy. There have been thirty years of books, magazine articles, brochures, television networks, etc., all repeating the same snake oil. It’s little wonder that most people bought in, especially those young enough to know no other world, to speak to no one with experience. The permabulls owned the mindspace in the Reagan Era (which we are still stuck in).

      Just the hoorah promoting the stock market for the middle class must have racked up millions of dollars of guys in suits repeating mathematical-sounding come-ons. Part of every newscast for decades has been promoters called analysts making pitch for dollars flowing in.

      Even the face to face financial practice used the “biased long” vocabulary. No loan officer ever doubted new economy belief of Ever Upward. Everyone talked, thought, and acted gambling, not shelter.

      American law is prisoner to English common law in not seeing commercial fraud when it sees it. The old saw of “You shouldn’t have been such a fool” puts the buyer out of legal protection that the seller can call on any time. Getting cheated deprives a person not only of property rights, but civil rights. So no wonder the blame can be shifted firmly onto the citizen who isn’t a player.

      Those who held on to the wisdom of their Depression-era ancestors were explained away, along with most common sense economics and events such as the dot-com bust. The fog has been laid on pretty thick, and it’s not clear it’s lifting.

  2. F. Beard

    From a MORAL viewpoint borrowers were driven into unserviceable debt and savers were cheated of honest interest rates via money-for-debt, otherwise known as fractional reserve lending. From a MORAL viewpoint it thus makes sense that the population be bailed out. The way to do it without new debt is for the Treasury to create some new legal tender fiat (United States Notes) and just give it equally to the population.

    Inflation risk? Then set reserve requirements to 100% to put banks out of the money (credit) creation business.

    Long term solution? Let government money be legal tender for government debts only. Let the private sector develop its own money supplies. Let their be floating exchange rates amongst them all.

      1. cswake

        I’m not sure if your sarcasm is not showing through, but the article you linked has a relatively well known study by Price Fishback. It specifically states that he concluded:

        [What can be said about the company town is that it does not appear to have risen to the level of exploitation many commentators have assumed. As Fishback concludes coal miners were able to protect themselves from exploitation through the use of both “voice and exit.”]

    1. Wes

      > From a MORAL viewpoint borrowers were driven
      > into unserviceable debt…
      No, not at all. Who forced them to assume this debt? No one. Their own stupidity, hope that prices only go up.

      > From a MORAL viewpoint it thus makes sense
      > that the population be bailed out.
      This is called “moral hazard” and is contrary to what moral is. You are not really bailing out “population” – instead you would be bailing out the irresponsible part of population and punishing the responsible part. Moral hazard, as I said.

      1. LeeAnne

        Please just ask yourself the question: has there been any way to own a house in this country without signing a mortgage?

        It has been government/corporate policy for people to be in debt to live a middle class life. Tax deductions on mortgages is one method that has driven up the cost of housing, suburban living and peer pressure for status another.

        Unless the bankers (corporatist fascist government) relent with debt forgiveness and lower prices back to 2005 real market prices before the scam criminal asset valuation rackets in residential home values in particular took over, extreme poverty in the US will grow.

      2. F. Beard

        You are not really bailing out “population” – instead you would be bailing out the irresponsible part of population and punishing the responsible part. Moral hazard, as I said. Wes

        What I propose would be a ONE-TIME reset followed by genuine reform including the abolition of the government backed banking cartel and liberty in money creation and usage. Furthermore, debt forgiveness is Biblical (Deuteronomy 15, Leviticus 25) even when the debt is legitimate not to a government backed counterfeiting cartel.

        Plus you overlook that the distribution would be to all Americans to compensate savers too not just to borrowers.

        Thanks LeeAnn :)

        1. Wes

          No, I think you got it wrong IMHO.
          (BTW, please tip your hand – how would you benefit from the action that you are proposing?)
          Naked fiat printing (or effectively similar action) will dilute the currency and thus punish the savers and help the borrowers.
          It is always a one time reset. and then another…. and another…
          > Furthermore, debt forgiveness is Biblical…
          True, although I am not a religious person.

          1. F. Beard

            (BTW, please tip your hand – how would you benefit from the action that you are proposing?) Wes

            Well, I’m not in debt. Since I propose the savers be bailed out too then I would get my cut. But I’ll forego that if you’ll just build a statue in my name. :)

            BTW, you still haven’t comprehended that SAVERS would be bailed out too with an equal amount. The only losers would be the banks in real terms which is appropriate since they are the villains. BTW, my mother owns bank stock. However, in nominal terms the banks would be fixed.

  3. RueTheDay

    Right now, the financial system (banks and shadow banks) is broken. QE does little more than cause more excess reserves to pile up at the Fed. Keynes said, “we have magneto trouble”, but here we have TRANSMISSION trouble. We should have nationalized the banks when we had a chance, sold off the bad assets at market value, and then re-privatized the newly healthy banks with new management and ownership, back when we had the chance. Unfortunately, the window for doing that has long passed. We’re destined to repeat Japan’s experience now. Sorry.

    1. Bates

      Agreed we have thrown a lot of money at propping up the banks…but, it is not too late to liquidate them. Granted, the pain now will be much greater than before incredible amounts of dollars were created to bail them out.

      It will be painful for all of us but the alternative will be painful for a long time…and continuing encroachment into capitalism by the gov and Fed. ‘Liquidate them all’…Mellon. Kant had an interesting take on values. What is the value of our capitalist system without total encumberance by the Fed and the government? Our capatilist system has an intrinsic worth that defies a dollar price.

      ‘Everything has either a price or a dignity. Whatever has a price can be replaced by something else as its equivalent; on the other hand, whatever is above all price, and therefore admits of no equivalent, has a dignity. But that which constitutes the condition under which alone something can be an end in itself does not have mere relative worth, i.e., price, but an intrinsic worth, i.e., a dignity.’ Kant.

      ‘Fiat justitia, pereat mundus, (“Let justice be done, though the world perish”), which he translates loosely as “Let justice reign even if all the rascals in the world should perish from it.”)

      Cuts off nose to spite face? Not hardly. The wonderful virtue of capitalism is that if left alone it will teach the lesson of misalocation of capital to successive generations…and when tampered with it sends all the wrong messages all the time.

      1. Doug Terpstra

        “The wonderful virtue of capitalism … left alone”

        Another cult Pharisee (or Koo-aid quaffer) who feigns ignorance of the power of concentrated captial, a force as inexorable and immutable as gravity. How can you possibly not understand that this “misallocation” of capital: the bailouts, corruption of lawmakers, subversion of justice and capture of regulators, aggresive crimnal wars, environmental destruction, etc., were engineered by the capitalists themselves, not the meddling of petty bureaucrats! Yours is an egregious case of willful blindness or worse.

        for 40+ years “[t]he wonderful virtue of capitalism … left alone” has indeed inflicted a painful and mortal lesson on us—and on successive generations. And that is that unbridled capitalism, social Darwinism, will always “tamper” with and destroy democracy and impose the tyranny of fascism and rigged markets.

        Power (read: capital) corrupts; absolute power (read: concetrated capital) corrupts absolutely.

        We must come to the realization that there must be mechanisms, clawbacks, very large inheritance taxes, taxes on speculation, high taxes on idle wealth etc. … oh, and actual prison terms for fraud and war crimes, to prevent the black hole of concentrated power/captial from ever again gaining the tyranny it now “enjoys”. The only hope for this now, IMO, is for the total collapse of this present system. There is no tweaking of twigs, spinning of knobs, lever pulling, voting, petitioning, calls, or letter-writing that will have any effect now. The whole thing must come down.

        1. Bates

          “for 40+ years “[t]he wonderful virtue of capitalism … left alone” has indeed inflicted a painful and mortal lesson on us—and on successive generations.”

          We have yet to see capitalism. We have been capitives of the Fed since 1913. Where is your reference point? It doesn’t exist? There you go bud. You have never experienced capitalism in your lifetime…neither have I.

          1. Doug Terpstra

            “We have yet to see capitalism”.

            Thanks, bud. Granted the Fed is a direct product of extant ‘crony’ capitalism, then please do enlighten us with your pure defintion of virtuous capitalism. Is it the “virtue of selfishness” of Ayn Rand’s or Greenspan’s objectivism, free of pesky regulation?

            And once you define it, how do you address the point you conspicuously evaded about the inherent and inexorably corrupting power of concentrated capital? Is there any room in your utopian form of capitalism for shared wealth, social purposes and commonwealth? What regulations, speed limits, curbs, guardrails, lighting, etc are appropriate, IYO?

          2. Anonymous Jones

            Haven’t seen a unicorn yet either…

            But seriously, if Bates has never seen capitalism, how does he know its wonderful virtue? Am I the only one laughing here?

  4. Steve

    So 40-50 years ago (credit card circa 1960’s Bank of America), the US jumped off a cliff and now, with the ground quickly approaching, someone thinks they know how to avoid what comes next?

    There is one of two endings the American people get to pick from and I’ll make it easy to visualize by using movie/TV parallels.

    The Republicans will bring you “Mad Max”, the Democrats, “Max Headroom” (which is a slightly more effeminate portrayal of the same society, at least they still had journalists).

  5. john

    “Why is there no antitrust investigation of the top banks by the Department of Justice?”

    This is a central issue across the board. The preponderance of franchises in all things commercial that has grown in the last thee decades has been grating on me for years. WallMart accounts for 50% of US retail: how is this not an anti-trust violation?

    Across the board consolidation and hidden monopoly power across the US economy is central to depressed wages, stagnant wage growth, high unemployment, high income concentration and the collapse of aggregate demand.

    Barry Lynn has a new book out called “Cornered” that should be read by anyone interested in how the US could become competitive again. And he shares Yves high regard for the economics profession! “Econned” and “Cornered” together address the financial side and the real economy side of the same crisis of concentrated market power that is destroying US capitalism.

    Market powers have captured our politics. Because our courts can’t tell the difference between money and political speech, our political class, people who MUST accept bribes to participate in elections have learned that they can only be elected by catering to well funded interests. For thirty years things have been getting easier for well funded interests and more difficult for the rest of us.

    This is almost what Hayek was warning against, except he imagined that power would stay concentrated in a dictatorial state like England was in its war against Fascist totalitarianism. Churchill ran a nicer dictatorship than Hitler’s and left open the possibility of being tossed at the end of the war and was, but his government was very authoritarian when Hayek was writing “The Road to Serfdom”. Hayek did not imagine that corporate entities would come to totally dominate the state, what he feared was the inverse configuration. For those of us not corporate CEOs, this is however a distinction without a difference.

  6. Econ Amateur

    I’m no expert on Japan’s “lost decade” (or any other topic for that matter), but it seems to me that their experience cannot easily be imported into the U.S. Given the different structure of the Japanese economy versus our own (export v. import), and the dollar’s reserve currency status, I’m more concerned with deflation than stagflation.

    It’s no secret that the Fed’s QE and other government sponsored programs (such as TARP)are disguised subsidies to the banking sector. But one has to wonder at what point do we move from stagflation (which is the current status of the economy) to deflation. And if this happens, I fear the cost of servicing the mountains of private and public debt.

    As a young person (under 30, barely), my concern is what happens if we enter a period marked by deflation, high debt levels, and an increasing “elderly” population which needs increased government support while providing little economic support. (After the recent crisis, many people in the retired or near-retirement categories lost much of their nest egg. This is why I suggest these groups will need increased government support. I’m not trying to offend those older than me.) What tools will the Fed and Washington have to combat a system that no longer rotting, but collapsing?

    1. Bates

      ” What tools will the Fed and Washington have to combat a system that no longer rotting, but collapsing?”

      Society Generale is giving free advice to those that wish to preserve what assets they have…

      ‘Société Générale tells clients how to prepare for potential ‘global collapse’…

      ‘”As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.’


  7. i on the ball patriot

    Yves, just as you have noticed (in your links comments) a subset of people under 40 who have thinking patterns that manifest as obsessive and aimless milling about without strategy because they can not discriminate between what is important and what is not, I have noticed an extremely large subset of people OVER forty with a very similar affliction in that they can not discriminate between a responsive to the will of the people government and a government that has been hijacked by the wealthy ruling elite and is knowingly, willingly, and intentionally exploiting and eliminating its citizens (yes Dorothy, dying homeless under the bridges is elimination), and so they continually direct futile remedial efforts to that crooked government .

    Chris Whalen exhibits this affliction perfectly when he says;

    “First, the Obama Administration should …”

    “Second, President Obama also needs to focus on …”

    “The Obama Administration should move to …”

    “President Obama should make some …”

    And of course this gem;

    “Why is there no antitrust investigation of the top banks by the Department of Justice?”

    Yes, the cliche was “75 [basis points] is the new 25.” and the new cliche is “normal is abnormal.”

    I’m not always sure if this is the result of drinking the kool aid or selling the kool aid, but I’ve seen a fair bit of this starting maybe 40 years ago when the kool aid sales started to blossom around the globe.

    Deception is the strongest political force on the planet.

  8. Siggy

    QE is the further debasement of the already debased fiat currency. With more QE we will be throwing more fuel on the fire. It’s becoming a fire that may be beyond being amenable to extinguishment.

    I have a 5% mortgage. I now have one car instead of two. We eat out once a month instead of three or four times. I will buy no new clothes this year and very few next year. Our trips to the supermarket entail the extensive use of coupons and we buy meats in bulk when they are on sale and we freeze the purchases for later consumption. I cannot yet rent comparable housing for less than my Mortgage + Insurance + Taxes. In fact my total cost of my housing is one third of what a comparable rental would be.

    If an extreme need arrises we can do a HEW for about 75% of the current price of the home. It would be doable because we wouldn’t quite get to the jumbo loan category.

    Now our medical costs are growing at the rate of 15% a year, largely for medications, however the insurance premiums are going up at the rate of 8% per year.

    Now, if that Bozo in the Whitehouse, or those poltroons in Congress want me to spend a little more, they need to rethink what it would take. First, they’d need to find a way to recognize that as an employee I would be very productive given my wide range of experience. But then, who is going to hire some old guy who thinks that you save to fund future consumption?

    Now we are bailing out failed banks because they are the intermediators for the money supply. We’ve allowed them to utilize fractional reserve based credit money creation to the extent that they have destroyed the purchasing power of the currency.

    Some guy named Fuld was testifying yesterday and he claimed that his firm was just fine and should have been helped in order to avert a bankruptcy. My, My My, and he also didn’t know anything about recording a repo105 loan as a pure sale.

    Wow, the firm commits an accounting fraud an no one is looking to put anyone in jail. Well maybe they punished him by taking away his compensation and artfully calculated bonus package.

    I’m mad as hell and I want to know when are the rest of you folks going to demand that we get the representation that is called for in our contract for government? It’s time to vote a lot of people out of office and to do it repetitively until those poltroons in Washington acknowledge and do their duty.

    1. Kathi Berke

      You will get your wish. Incumbents will be voted out in November in record numbers. The tea party, with their appeal to xenophobia and manipulation of the understandable, nonpartisan anxiety of the American people, will assume even more outsized importance in terms of policy-driven solutions.

      And who funds the tea party? The fossil/chemical fueled billionaire Koch brothers. They will pursue their interests with a relentlessness that makes a hungry tiger look indecisive.

      If you think their policies will increase the hiring of people like you (and me), overaged, overexperienced, overqualified people who played by the rules, you’re going to suffer a rude awakening.

      Obama is the Manchurian president. He rewarded his contributors, the bad actors who are now overwhelming giving to the Republican party. He was not my choice for the Democratic nomination.

      But the newly elected won’t care about anything but corporate priorities. As far as being concerned about public funding for education, police, firemen, infrastruture, everything will be turned over to the private sector, who will use public money to pay themselves lavish salaries (see: Correctional Corporation of America ).

      What countries are recovering more quickly from the economic crisis? Countries that offer more to their people than shareholder value. Canada, Germany, etc. They have “socialist” agendas for more than simply corporations. Universal health care, for one.

    2. i on the ball patriot

      Siggy, good comment, but …

      Cutting back spending is prudent in the current situation, but it is also self defeating in this current Pernicious Greed for Control fiscal structure that has been created through aggregate generational corruption of government.

      That present corrupt fiscal structure allows credit, and credit derivative products (money creation of varying usurious leverages), to be created and controlled by the very few without proper oversight or regulation. Those same very few wealthy elite controllers also own and control the public propaganda media that shapes attitudes towards the use of that credit. Using that misappropriated corrupt rogue power, they have, and still are, intentionally creating debt traps (bubbles) around the globe. The bubbles are excessive and not payable by design so as to create a deflationary mindset and a long, slow and painful perpetual deflation.

      When you prudently cut back on spending, as you and your wife have done, you contribute to and worsen the deflationary spiral in this kind of corrupt system. Your prudent actions feed the now stronger, pay as you go, don’t borrow mentality. When you, and prudent others, don’t borrow, no new money is created, no new money is spent, assets plummet in value, your home is no longer ‘your bank’ (and is fast becoming a liability), businesses cut back, people are laid off, wages are cut back, benefits are cut, government services are cut, pensions plans are cut, mutual funds and stocks drop in value, your personal possessions are worth less, etc., rinse and repeat with each new ‘news broadcast’ (read propaganda top down orchestration).

      The fear induced, along with a lot of other intentionally created divisiveness, simply causes everyone to reach down and tighten their belts another notch.

      And you are right, QE feeds the same foxes and continues the rinse and repeat cycle. It is a false hope move.

      This is why I say that this is an intentional pitting of the prudent against the not so prudent. Now you can believe that this all is just the bumbling ineptness of a few well meaning misguided folks at the top — Greenspan, Bernanke, Grahm, etc., — who have read a little too much of Atlas Shrugged, or, you can get real and look at the real tell; why no remedy, and, “Why is there no antitrust investigation of the top banks by the Department of Justice?”

      Being mad as hell is not enough, you have to see clearly the depth of the corruption, the intentional nature of it , and the fact that the electoral system is as corrupt as the “Bozos” (my dad used that term a lot) that we get from it.

      There is no reason that money could not be loaned directly to the people instead of to the parasitic banks, interest free, with a small administration charge. Loans would be made by committees of citizen draftees charged with looking out for the best interests of the local community.

      Deception is the strongest political force on the planet.

      1. Siggy

        When I was making my bones as a broker and IPO originator, consumption ran something like 62% to 64% of GDP. The recent figure has been 68% to 70%. Lets call the differential 6%. That 6% differential has been funded by MEW done in spades. That is debt for pure consumption. It is undifferentiated from debt that is incurred when the sovereign deigns to wage war and needs a lot of things that go poof. Now debt for production prodiuces an income stream that can be applied to servicing of the debt and the setting aside for nice ice cream sociable.

        The big scam is that we need the consumer to spend. Well, I say extinguish all that excess credit money that has been created, much it has been funneled into the housing market where prices never decline. Why is that we have had this asset price bubble in houses while the increase in the price level of most consumables has been relatively moderate. I like the figure that includes energy and food. Why it is that the quants at the Fed and several other ne’er do well locations like to exclude energy and food, just puzzels the hell out of me.

        Why do we keep changing the basis of the GDP deflator. lately it’s 2005 twas once somewhere in the 1980’s and once in the realm of the 1970’s. Why do we keep changing the basis. Well, it seems if you hold fast to a year say 1929, you get a horrendous rate of increase and a high compound rate of change;i.e., inflation, the reciprocal of which describes the loss of purchasing power that has and is occurring.

        Please note that I have a relatively fixed level of income and my frugality is very much influenced by the fact that the purchasing power of my currency keeps evaporating.

        Now, as an avowed i on the ball patriot, here’s one up under your chin. An increase in the level of consumer consumption is not going ameliorate our distress. We are awash in an enormous excess supply of credit and it is the credit money that has to be extinguished. Unless and until that happens, the banksters will continue to be able to game the economy.

        This is a lot like a poor soul with lung cancer, there is no cure and the treatments destroy the quality of little bit of life that remains. That’s what is transpiring as we chatter along here and elswhere.

        There is no easy cure and there will be continuing pain until the market obtains a valid store of value to be used as money. That will be the basis of a true correction. But that will also require that we find a way to employ some 12 to 16 million folks whose former employment has been evaporated, never to return. How, and for what, do we retrain those folks?

        1. i on the ball patriot

          Siggy, I am not advocating an increase in consumption and I agree with you when you say; “an increase in the level of consumer consumption is not going ameliorate our distress”. Reread my comment.

          I am saying the present situation puts us all (and I believe very intentionally as a top down orchestration), in a catch twenty two situation, a situation of; damned if you do and damned if you don’t where we are being pitted (prudent and not so prudent), one against the other through the machinations of a hijacked government. The goal of past bubble blowing (which is always misdirected resource consumption controlled by the few), historically, has been for profit, where now in the recent past, through our co-opted government, the goal of bubble blowing today has changed to control for reduced consumption and herd thinning and the new bubbles are; intentionally deflationary, self reinforcing, and assisted by well orchestrated propaganda.

          Your closing line in your initial comment; “It’s time to vote a lot of people out of office and to do it repetitively until those poltroons in Washington acknowledge and do their duty.”, is what caused me to respond to your comment.

          You can vote these Bozos out of office until the cows come home and it will make no difference as the electoral system is as corrupt as the rest of the system.

          I believe we are a lot more on the same page than not but differ in the mechanics for change.

          Deception is the strongest political force on the planet.

      2. Doug Terpstra

        Thank you, Patriot and Siggy! Your comments are like the dew that illuminates the spider’s deadly web. Patriot writes:

        ‘This is why I say that this is an intentional pitting of the prudent against the not so prudent. Now you can believe that this all is just the bumbling ineptness of a few well meaning misguided folks at the top — Greenspan, Bernanke, Grahm, etc., — who have read a little too much of Atlas Shrugged, or, you can get real and look at the real tell; why no remedy, and, “Why is there no antitrust investigation of the top banks by the Department of Justice?”’

        That this same crew of bumbling gravediggers are in place at every position of power (Warren, Born, Romer out; chauvinists in) to lay the foundation for “recovery” is criminal deception writ large, and the premise that these are only ‘well-intentioned-fools’ is the tiresome scam web in which even journalists are hopelessly entangled.

  9. Kathi Berke

    TBTF is a government-assisted oligopoly. #1: They are getting money at ZIRP rates. #2: They are not lending to small business or individuals at all because they can make a lot more money in the currency trade or through credit card usury or fees on everything they can think of.

    Free marketeers complain about redistribution of wealth from high income earners to less-high income earners, complaining that higher marginal tax rates (like the 39.6% during Clinton years) sap incentive and unfairly penalize the meritorious.

    If financial institutions are effectively bankrupt (their liabilities outweigh their assets) yet are propped up by the Treasury/Fed one-two punch, isn’t the pay of their top execs basically a major tax on the “poorer”? Their salaries don’t seem like merit pay to me, although I’m certain it does to them.

    If you drive your institution and the entire global economic system into a near death experience because you gain untold riches and you are not penalized for your bad behavior, in fact you are rewarded, then you will continue that path. (Moral hazard, d’oh.) Why not? Now that investors know the full faith and credit of the U.S. backs every TBTF transaction, bet the house. Speaking of houses:

    Wes, did you know that housing prices dropped precipitously, therefore even homeowners who weren’t reckless according to your lights fell underwater? Did you know that real unemployment is way double digits and layoffs in the private sector will continue (see August ADP payroll report)?

    American companies will not hire because they see the American consumer as dead in the water so they’re focusing solely on the countries where consumer spending is growing. And if they do hire, they will low-ball the employee because they can.

    We have a situation where the banks are getting free money from the government with no strings attached; they are not lending because they have better opportunities elsewhere; the ordinary (lower 99%) American individual cannot raise money for her/his small business or personal “luxuries” like food, shelter, medical care, child care, etc. unless she/he borrows at usurious rates; workers across the board have to take less money; services are being cut to the bone and the Bush tax cuts will be continued.

    If this is “capitalism”, then it leads to starvation for the hoi polloi. Obviously, the American system where maximizing shareholder value while simultaneously gorging on the American taxpayer through the Fed/Treasury dyad is dangerous for your health.

    1. PQS

      Lowball is right. I just landed a job after six months off (construction casualty).

      My pay? 25% less than past job.

      Health insurance expenses? Nearly double to insure my family. I almost fell over. I’m just fortunate that I live in a state with other options, so I will get insurance for the family elsewhere, from a non-profit entity.

      But they seemed surprised when I told them that insurance costs to the tune of almost an entire week’s pay WAS NOT the NORM ANYWHERE else for my entire career. Sheesh.

  10. joebhed

    Jeezum, the issue is not whether so-called QE can ever work or not.
    The problem is that so many countries try to promote inreases in aggregate demand by priming the supply side of the equation.
    Have a read of this analysis of various QE efforts and why they must fail.

    Innocent frauds meet Goodhart’s Law in
    monetary policy

    It is available here:


    If only nations, governments and academians believed in a permanent money system, not issued as debt, and issued by governments, the concept of QE would disappear.

    The means to implement such a system is available here”


    The Money System Common
    A heretical reality.

  11. LeeAnne

    Aw, ‘just leave capitalism alone’ as if anything practical like putting up a STOP sign on the road is beyond comprehension; and it might as well be for gangstas who have in common one thing: that they are uniquely and special for being above the law; the law is their opportunity for business activity on the dark side of the financial scale: drug trafficking – $380,000,000,000 (that’s $380 Billion) Wells Fargo/Wachovia/Citi in no penalty drug money laundering; private mercenary gun slingers unregulated and foisted on an innocent society in the Middle East destroyed in the name of the people of the US, etc. while protecting and nurturing the illegal drug industry.

    While law abiding suckers are busy, the bankers and corporations plot -a little overdraft here; credit cards for freshmen; liar loans, etc. And that’s just some of the visible mass market stuff.

    You can’t build a telephone booth (in the immortal words of the great banker and statesman, Felix Rohatyn), without laws and regulations.

    Nor can you walk across the street safely without laws and regulation.

    Fox News isn’t the only place bloviators spout off talking points; they wend their way onto blogs; ordinary wind bags trying to bully the humanitarians, the patriots, the sincere, the talented and the purposeful.

    They attack leaders and potential leaders. It pays to do nothing that might encourage them; like responding to their insults and vulugarity.

  12. Jim Haygood

    Whalen’s diagnosis of the antistimulative effects of low interest rates is fine as far as it goes, but he gives short shrift to expectations.

    During 1979-1980 when interest rates were freakishly high [I was earning 19% in a money market fund], many people extrapolated the prevailing trend into expectations of runaway inflation.

    Similarly, today’s pathologically low rates are stoking deflation fears and ever more pointed comparisons to Japan. In Japan, nominal GDP growth is zilch. Taking nominal GDP as a proxy for returns, what interest rate would be needed to encourage borrowing for new capital projects — minus 5 percent?

    Fed staffers must have written hundreds of papers about post-1990 Japan. Yet Bernanke has stumbled into Japan’s ZIRP trap, where the policy rate is frozen at zero regardless of economic developments.

    None of those mountains of PhD papers, to my knowledge, ever convincingly solved the problem of why a fiat currency issuer [Japan] has been unable to inflate at will. QE reflected traditional credit channel theory, but it hasn’t worked.

    Lars Svensson of the Swedish Riksbank described currency devaluation as ‘A Foolproof Way of Escaping from a Liquidity Trap’ in a February 2001 paper.


    I wouldn’t go that far. But I would definitely recommend to the BOJ and the Fed to lay off their counterproductive tampering with the yield curve. Instead, sell the domestic currency, and buy international reserves until the deflation stops. Ahhhhh … that’s better!

    1. Doug Terpstra

      “Yet Bernanke has stumbled into Japan’s ZIRP trap, where the policy rate is frozen at zero regardless of economic developments.”

      I kinda doubt that Benny-boy stumbled into anything. Rather his actions serve his owners, the banksters, almost exclusively with little if any trickle down, except yellow rain. See Pierres’ comment below.

      These people no longer deserve any benefit of doubt as being well-intentioned-but-mistaken, when they know exactly what they are doing. It’s time to smash that crumbling premise, so tenaciously guarded by the MSM, especially with respect to Obama, that the criminal elite are well-meaning.

  13. Jim in MN

    They cannot control the tides.

    Once the policy call to prevent real estate writedowns was made, the US economy was brutally hamstrung. Call it bailout nation, zombification, or whatever else, by preserving the cancerous toxic bonds we are poisoned, systemically poisoned.

    To you and me it is simple: zero real rate of return for 20-30 years.

    The fly in the ointment, of course, is us, the US consumer, who quite naturally will take a zero real rate of return to mean a permanant need to reduce consumption and increase savings. Add to that the ongoing costs of the bailout in terms of their ultimate incidence (‘only consumers pay taxes in the end’), and you can take 20% off of US economic activity for a generation.

    There isn’t anything they can do about it except to screw things up worse (zero real return is a best case scenario) while further destroying public faith in the legitimacy of government.


    Tell us the truth. Stop lying. It’s better than digging the hole deeper while new economic and financial bombs continue to detonate.

    The Big Policy Call (no bond haircuts) is helping to keep insurance and pension companies from bleeding out…it’s also protecting the wealth of the oil sheikhs, Chinese communists and hyperrich from all over the world. Is that a necessary evil? Maybe. Maybe not.

    Tell us the truth. What’s really going on? The public knows we are being obfuscated while a quarter million in new debt is nailed onto our babies. It will lead to further uncontrollable actions on the part of the masses…of which increased savings is the least consequential. Political action can easily lead to US Treasury default in the next few years.

    Reckon carefully, oh policy overlords. The bell will toll. The tides will roll. Might as well switch to truth and go down with some integrity. Never too late y’know…

    1. shrek

      Ive tried to point out to many people that economics is nothing more than a bunch of numbers if doesnt contribute to enough peoples sense of well being and offers a narrative for there existence. We are dangerously close to losing our path. If the President doesnt start punishing people who got us into the crisis and things get worse our entire political system and country could plunge into complete in the abyss.

  14. Hugh

    We have two economies in this country, a real one and a paper one. QE only helps the paper economy. It is the gas in extend and pretend, the air to keep bubbles blown. When Rubin, Bernanke, Summers, and Geithner, the four horsemen of the financial apocalypse, talk about the economy they mean the paper economy. When many of us here talk about dangerously deteriorating fundamentals, about the effects on actual people, we are talking about the real economy. This is how they can see green shoots where we see scorched earth, how they can continue discussing recovery while we expect collapse.

  15. mannfm11

    Yves, I agree with you on the refinance. If they refinance, it should be to shorten the term. The problem in housing is many decades of ponzi financing. We have been sold the idea of home ownership when in reality it has been paying fixed rent to the banks. I venture not over 1 or 2 out of 100 30 year mortgages are ever repaid, but instead rolled into new financing by the next borrower. Ponzi financing always depends on the liquidity of the lender and the ever growing price of the asset financed. The trade deficit alone should be evidence that the US consumer is over consuming, not under consuming and the problem is we are attempting to recreate a situation where consumers, through sales and refinances, were extracting trillions out of their homes. The credit card game would have blown up a long time ago if not for the relief of home equity and bankruptcy. Both windows have been closed at the median. The only way credit can be paid back is default or continued debt growth, which is of course a move in the opposite direction. To continue huge deficits to protect the blunders of the past means we make the national march down the gangplank. As it stands, the entire world economy has been set up on Ponzi finance. This includes US government finance, which depends on keeping everything inflated or it goes broke as well, and Social Security which has no fund other than what be imagined by any insurance scheme. Reserves are never to pay anything, but to sit there as evidence premiums have been paid. If an insurance company goes broke, the reserves are liquidated and paid pro-rata. This won’t be so with the Social Security fund, as we will be sent a bill.

    A big haircut is coming. It will either be a percentage or everytning could go to zero. All our financial heros are frauds, save maybe Charlie Gergen of Berkshire. Of course he isnt the front man everyone knows. Bill Gross has revealed himself as a fraud, having bought junk and rattled his head for bailouts.

  16. KnotRP

    Krugman himself thinks giving money to banks (which is what QE does)…somehow…produces US jobs.

    The current incentives will continue to drive the destruction of the comsumer base from which those incentives come. We’re in for a societal reset.

  17. Bernard

    No one is willing to uphold the rule of law and force prosecutions of the thieves or let the monsters die. so Frankenstein. No holding back. No Laws. Until then, the Masters of the Universe will continue to rob Americans blind, and take Social Security, while give more to the “have mores”.

    the Privatize the Profits, Socialize the Costs.

    that’s the only time “socialism” is okay to the Masters, otherwise socialism always bad!!

    Will the Masters kill the goose that lays the golden eggs.

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