Mr. Market’s Temper Tantrum Over Fed Tapering Talk

Posted on by

Lordie, the market upset we’ve had over the past week plus over Bernanke using the T, as in “tapering” word, is escalating into a full-blown hissy fit. We now have the Wall Street Journal and other finance-oriented venues telling us how unbelievably important today’s job report is. Huh? One jobs report is just another in a long series of data points.

So why has this one been assigned earth-shaking importance? Let’s look at what is going on in the economy:

1. PMI has slipped into negative territory

2. Refis (a boost to consumer ability to spend) are falling fast

3. Inflation expectations are falling

4. Inflation is falling

5. Unemployment is over the Fed’s target and we still have a ton of discouraged workers and underemployment

6. The sequester will only make 1-5 worse.

This reading is corroborated by reader responses to our latest query on local conditions. The bottom line from geographically wide ranging reports seemed to be that while certain areas were hot (and the biggest seems to be Washington, DC), the rest of the country is at best mixed, with a lot of erosion beneath the surface.

Before the markets’ “loose lips sink ships” freakout, we did have a frothy-looking stock market, rising home prices (but at a far lower level of activity than previous housing recoveries) and rising (but still not all that good) consumer confidence as offsets.

So what was Bernanke thinking with even mentioning tapering? The savvy economists I know are uniformly of the view that there is no way the economy will be strong enough for the Fed to let up on QE any time soon (not that I believe that QE does all that much for the real economy, but it does help the confidence fairy).

Possible motivators are:

1. Perversely, because the Fed believes in QE, it has to believe the economy is getting better, ergo not to believe it will need to take its foot of the gas would be an admission of central bank impotence. Horrors!

2. As discussed in earlier posts, the Fed under Greenspan took to signaling interest rate increases way way in advance to give the big boys the opportunity to reorganize their affairs accordingly. But since the Fed has targeted quantities, and not yields or bond prices, it can’t assure a slow and steady exit. And the fact that no one has confidence in how the exit might work (and on top of that, there’s a lot of misunderstanding, for instance, some believing that the Fed needs to sell bonds when MBS amortize in 5-ish years), which is not exactly helpful

3. The Fed may be feeling political pressure and/or rebellion in its ranks (see here for instance). Many investors are uncomfortable with the size of the Fed’s balance sheet. Given that it took a pitched battle for the Fed to escape full-blown, ongoing Audit the Fed, some members of the Board of Governors might lean to getting out of QE on the early side simply to reduce the noise level. Since Alan Grayson sent a letter to Bernanke asking some pointed questions about the Fed’s exit strategy, political worries might not be completely unfounded. The body of his letter to Bernanke dated June 5:

Over the past two months, the prices of agency mortgage-backed securities – including those on the balance sheet of the Federal Reserve – have declined. This decline is consistent with broader interest rate increases. It is possible that interest rates could continue to increase, causing a further decline in the value of assets held by the Federal Reserve.

With this is in mind, I have the following questions:

1) How have rising rates over the past two months affected the value of the mortgage-backed assets on the Federal Reserve’s balance sheet?

2) What has the Federal Reserve done, if anything, to mitigate possible losses?

3) Considering the significant possible losses implied by a $3 trillion balance sheet, will the Federal Reserve be marking its assets to market?

4) What effect, if any, will the Federal Reserve’s shrinking to negative capital base have on the economy?

5) Will rising interest rates and associated balance sheet losses mean the Federal Reserve will reduce or end its contributions to the Treasury?

6) Is it possible that the Federal Reserve could require a fiscal infusion from the Treasury should the central bank capital base become technically insolvent? If not, what is the legal basis for the Federal Reserve operating with negative capital?

7) Considering that major losses to the Federal Reserve would be, at the very least, an embarrassment for the central bank, is there an institutional bias towards continuing quantitative easing so as to prevent or delay such an embarrassment? Have you taken any steps to mitigate this institutional conflict of interest?

8) What is your internal policy regarding remittances to the Treasury?

What I find odd about the period after the markets started getting upset about the taper talk isn’t that there was a negative reaction. It’s that no one from the central bank has gone out to reassure rattled nerves. Damage containment has been the response every time there’s been an official pronouncement that has landed with a splat. Calm everyone down and consider whether to soft-sell later.

So investors and bankers have escalated their hissy fit. For instance, the Financial Times blares, Doubts over Fed’s QE3 spark dollar fall. Huh? We had Abe make his Abenomics Part 3 dud announcement, which led to a yen rally, and the ECB stand pat, which helped the Euro. But the dollar fall is all the Fed’s fault. Really?

Similarly, William Pesek in Bloomberg argues that the “bond crash” of 1994 visited all sorts of horrors on investors, including the Asian crisis of 1997. Erm, the reason for the big losses in 1994 were due not so much to tightening as to the fact that Greenspan surprised everyone (the consensus was overwhelmingly for further interest rate reductions) AND unbeknownst to the central bank, there were a ton of derivative bets on further interest rate declines. The derivatives losses were bigger than the 1987 crash and prompted a host of Congressional investigation but squat in the way of reforms. And hot money was messing up emerging markets before the Fed increased rates; I was in Indonesia in early 1995 (the rate move was late 1994, too soon to affect the real economy in emerging markets) and you could see it was bubbly even then. Way way too much new construction. Similarly, the Asian Tigers could have choked off the hot money but chose not to. So this is a long winded way of saying there is some truth to Pesek’s charges, the financiers are playing it up because they’ve come to believe they have an imperial right to profit and to be protected from risk. So tell me again why you deserve the big bucks, if it isn’t for your risk management and investing acumen?

So it still isn’t clear what the Fed was thinking in bringing up tapering now, and continued oracular silence hasn’t helped matters. The central bank may figure the jobs release today will allow it to maintain its pose of mystery, and if not, it can take to the squawkbox later in the day. But will they? Stay tuned.

Print Friendly, PDF & Email


  1. dearieme

    No one knows what the long term costs of QE will be, so QE will continue until we start to find out.

  2. Jim Haygood

    You know, it was only two months ago that the S&P 500 broke above its 2007 high of 1,565. At yesterday’s close, it remained 3.7% above its 2007 high water mark.

    Similarly, despite a back-up in mortgage rates to four percent, these interest rates are still within the lowest percentile of our lifetimes.

    Historical data suggest that rising interest rates don’t become a serious headwind for equities until Treasury yields reach the 5 to 6 percent range … which might as well be on Mars for now.

    One never knows when the top is in. But the theme of our era being life-threatening, party-till-you-puke wretched excess, current conditions still seem way too tame to qualify as the end of barking ZIRP madness with QE cherries on top.

    I’m yellen for Janet!

    1. Richard Kline

      I’m of the view that Bernanke and his peanut gallery are aware of nascent bubbles in both equities and institutional mortgage engorgement, speculations fed quite directly by QE. The “We might mabye be considering tapering off, fellas” number seems indeed a signal, to get the speculative risk into back-down mode, or at least to slow down. That to me would fit with Uncle Ben’s silence on ‘turbulence in the speculative flows’—which would be exactly the goal of such a pronouncement, and thus Ben’s deafness to the screeching by the stenographers in the financial press.

      That’s just a guess, but to me is the only chain of putatively reasoned behavior in this which makes any sense. It’s not the interest rates dummy, it’s the speculation. Remember folks, Ben & Co. don’t _care_ about the real economy, it’s asset prices and the illusion os solvency for the major financials which are his only charge. He’s talking about taking the drugs out of the punch, not even taking the bowl away yet, to me.

      1. Jim Haygood

        Bloomberg (perhaps in response to a heads-up from a ‘highly placed official’) puts a finer point on it:

        Chairman Ben S. Bernanke needs to see four months of job growth averaging at least 200,000 to justify reducing the pace of asset purchases, according to Vincent Reinhart, a former director of the Fed’s Division of Monetary Affairs.

        Boston Fed president Eric Rosengren and Chicago’s Charles Evans, both voting members of the Federal Open Market Committee this year who have consistently supported increased stimulus, have cited job growth of 200,000 as a benchmark for labor-market improvement.

        Evans last month said he’d like to see monthly employment growth of 200,000 or more for at least six months. Rosengren, in a May 29 speech in Minneapolis, said “significant accommodation remains appropriate at this time.” Responding to a question, he said he wants to see consistent monthly payrolls increases exceeding 200,000.

        All plausible enough … but probably only half the story. After all, what about the suffering workers of Wall Street?

        Most likely, the new Taper Rule (replacing the hoary old Taylor Rule) is 200,000 monthly jobs or S&P 2,000 … whichever comes first.

        Got stocks?

      2. jake chase

        The effect and perhaps the purpose of QE has been to loot the remaining savings of the industrious middle class while simultaneously reengorging the giant squids atop the bank pyramid and the parasites of the shadow banking system. Because the squids all remain insolvent and the only thing QE has accomplished is to keep the bonuses flowing to vipers of the executive class, the FED QE Fandango will not be ending any time soon and probably not in what remains of my lifetime. Instead, we will get periodic bleats from whatever stooge occupys the Chairman’s chair, of which Ben’s ‘tapering’ message is the first.

        Does this mean the markets will keep going up? I suspect not. More likely is a nervous rush to exit first and a discovery there are no more suckers left to buy.

        1. allcoppedout

          I agree this. A big question for me is why I fell so sure. Its like one of those cases where you know who the perpetrator is before the evidence really leads there. We are at a relative disadvantage on the evidence in the UK because there is much more secrecy – Sir Humphrey works at ONS and the BoE is so bad what good stuff I find is found looking for something else! It’s odd in the sense we have never had much notion of democratic right to information you have in the States, yet have become less imperialist. Just a thought. It might be just because we lost the WW2.

          What I’d want from our governments (and such as BoE, Fed) would be a spreadsheet/database tracking QE and similar, but we can’t trust the state to produce any reliable numbers or process tracking. It all starts in Athens BC.

          I think we see (in this mess) that ‘government’ can’t do open government at all because the decisions that allow elite power only relate to keeping the boundaries of that power intact. If this is the case, open information would screw the privilege. We are working against a criminality deeper than even Bill Black indicates – one could almost start to believe in a Mason/Templar/Etc. conspiracy over eons (plenty of books – all rubbish). I don’t go for that.

          One of the accounting dodges in the 19th century bank frauds in the UK and Ireland was ‘bad handwriting’ and have something similar going on now, all teched-up. The lack of reliable information is similar to some policing situations – we consider 7 levels in our national intelligence model from ‘dross to gold’. When I first had to preach business economics to earn a living, I was amazed how much leftish research drew its data from sources like the Economist – reminding me of being swooned by a supergrass out to fill me with information to bring his rivals down.

          If Yves got any answers to similar relevant questions in the UK, many would be the specialist form of saying nothing in a lot of words. We have know this forever – the bureaucrats openly admit to it. We all contribute to this by falling for the mystification ruse and being so clever. In the meantime, banksters operate at a simple level in which people are ‘marks’, ‘muppets’ – now what would the word be for the suited turkeys who write up the bullshit – and the politicians we actually see on film taking bribes and rooting-grubbing to take financial gain from their positions.
          All these people have to create ways for their criminality to be hidden in plain sight. Victorian burglars used to rub lemon juice on their faces to make themselves invisible – last case I know of one Macarthur Wheeler in 1999 (US), nicked after 2 successful bank robberies earlier in the day and amazed the lemon juice had not made him invisible to CCTV.

          In science we are always concerned to minimise the control system – no doubt this is tough for the hot fusion people – and the reason is you don’t want to be spending energy in control. Finance and the role economics plays in this look like a control system out of control to me. Globally it’s probably as bad as usury finance in India (etc.) and historically its evil – funding wars and always involved in fraud and one way or another murder.

          Those calling for primitive banking (interesting in that it would be very high-tech) are right – what’s at stake is a return to the democratic path we were cutting or fascism-plutocracy. What few seem to get to is how difficult open information systems are to create. We should have economic data as easy to use as enpalthy or log tables by now – instead we can’t say whether Reinhart & Rogoff were cheating or made an honest mistake (I know what I believe but we have libel laws), track drug money or QE …

  3. Schofield

    Look let’s get Lance Armstrong about this. For Mr Market Muscle Man being able to blow asset bubbles is the same as taking steroids! Of course, sitting in your Wall Street office it’s best to start with a little “blow” to fuel your Muscle Man of the Universe complex but can you think of a better way to make mega-bucks fast than “inflating expectations”?

    1. charles sereno

      Given the success of Sequesterall in improving consumer confidence and the stock market, a new drug, Taperall, is now under development according to sources at the Fed.

  4. skippy

    Greensplaine on Braaaak Box CNBC a moment ago….

    “Our ability to predict is not as good as we thought”

    Skippy… Crying the Onion methinks… aka taps…

    PS. Becky looks quite ill…

    1. AbyNormal

      they should all be heaving their breakfast

      “I have a foreboding of an America in my children’s or grandchildren’s time — when the United States is a service and information economy; when nearly all the manufacturing industries have slipped away to other countries; when awesome technological powers are in the hands of a very few, and no one representing the public interest can even grasp the issues; when the people have lost the ability to set their own agendas or knowledgeably question those in authority; when, clutching our crystals and nervously consulting our horoscopes, our critical faculties in decline, unable to distinguish between what feels good and what’s true, we slide, almost without noticing, back into superstition and darkness…

      The dumbing down of American is most evident in the slow decay of substantive content in the enormously influential media, the 30 second sound bites (now down to 10 seconds or less), lowest common denominator programming, credulous presentations on pseudoscience and superstition, but especially a kind of celebration of ignorance”
      Carl Sagan, The Demon-Haunted World: Science as a Candle in the Dark

          1. Walter Map

            Mexico is the short-term projection. The long-term projection is Haiti.

            QE ultimately amounts to advance distribution of the expected proceeds of future robberies of the real economy to the financial industry: Wall St. gets richer to the detriment of the general population. They’re bound to pillage the country until there’s nothing left to steal, but they’re counting their booty before it’s actually been stolen and skimming future profits which will probably never materialize because the ongoing damage to the economy won’t sustain it. Think of it as an aggressive but wholly unrealistic revenue recognition policy.

            The fed is concerned that there isn’t really as much left to steal as their terminally greedy clientele expects to book. They’re not at all worried about the peasantry, which can easily be suppressed by the usual totalitarian dirty tricks, but they’d prefer to avoid the prospect of having to face a horde of rapacious corporatists who are unhappy about all the writedowns.

            Notice that “jobs” doesn’t even enter into this discussion.

            Everything of value has already been stolen: it just hasn’t been delivered yet. But it will be. There is nothing on the horizon to even slow them down, much less stop them or reverse course. That’s why Haiti is inevitable.

          2. Nathanael

            Mexico is actually on the upswing. South America has found its own, very resilient path.

      1. nonclassical

        …for the “dumbing down” look no further than sell-phone soma…at our brave new world..

  5. F. Beard

    I first learned to hate and despise our money system when I learned how the stock market hangs on its every word and when Greenspan said “If you understand what I just said then I must have misspoke” in testimony to Congress, I wanted to leap through my TV set and pummel him.

  6. Malmo

    “Greenspan: Taper Now, Even If Economy Isn’t Ready”

    This headline is a joke, right? Eeven if one disagrees with QE isn’t he saying here that the economy doesn’t matter. Huh?

    He even says that we could see the Fed lose control of the bond market. I’m no expert MMTer or MR fella, but I was under the distinct impression that the Fed ultimatly controls bond yields. Does Greenspan understand this? If not then that is simply amazing.

    1. tyler healey

      If you don’t understand what Greenspan just said, it’s because it didn’t make any sense.

      In all seriousness, QE sucks. So does ZIRP. They both decrease the interest incomes of retirees, which is just cruel when one considers the inadequacy of Social Security and Medicare and the soaring poverty rate amongst seniors.

      1. Malmo

        I’m not sure if QE sucks or not. Low interest rates are a function of our defaltionary spiral, thus even though they hurt some folks, they also help others, including me. If taking the punch bowl away is because inflation is getting out of hand, then I get it. If taking it away is because of political expediency, then it’s just plain stupid.

        1. tyler healey

          The US didn’t have ZIRP in the 1990s, yet employment growth was solid.

          Perhaps high interest rates are not contractionary. They might even be expansionary.

          1. Malmo

            In the 1990’s we had significantly more growth/inflation, however. Inflation needs to come before interest rates. Were not there.

  7. steve from virginia

    What a near-zero interest rate environment proposes is that there is near-zero risk. The 30-year Treasury yield is 3.23. The risks are that low … for three decades to come?


    Once on the debt treadmill one can never step off but must run faster and faster to keep in one place. Because central banks cannot offer unsecured loans (and still remain lenders of last resort), when the private sector lenders cease making unsecured loans or make fewer of them there is a rapidly expanding lending gap that cannot be made up. Borrowers are thrown off the treadmill and the entire racket goes pear-shaped in a big hurry; Hello, risk!

    In a near-zero interest rate environment, risk has to be vacuumed from lending markets by the establishment. Our markets have morphed from places where margin is bought and sold to where moral hazard is. The entire process is a con game, nothing but propaganda yet failure of the process is fatal; risk hasn’t disappeared it has been moved around.

    Meanwhile, the Fed isn’t going to start lending 3% money to citizens any time soon; what happens with the bosses is irrelevant to the man on the street … The real cost of goods and services becomes less and less affordable due to increased rates of resource depletion and higher extraction costs; IE, more risk.

    Of course, this is the way it should be because the man on the street has no incentives to do anything but destroy his grandchildrens’ irreplaceable capital for entertainment purposes only.

    Here is the real problem: we have no good end- or purpose for ourselves other than waste, we’ve sanctified the wasting process and built our ideas of prosperity around it … no different from building it around drowning kittens in a bathtub.

    Meanwhile, the central banks pretend to make themselves useful by gorging themselves on risk … it is hard to see how this will end well. Once the CB loses credibility there is no effective lender of last resort and no guarantor for deposits. The system itself becomes irrelevant and there is a race for the exit into gold or other collectibles, commodities or real estate. There are sensible reasons why analysts with a certain apocalyptic lean call for currency collapse; it makes a certain amount of good sense. No currency is better than the credibility of the issuer’s institutions and management.

    Right now, watching the private- and public sector bosses ‘manage’ things is like watching the Three Stooges paint a house.

    1. jake chase

      Steve, you say ‘we have no good end- or purpose for ourselves other than waste, we’ve sanctified the wasting process and built our ideas of prosperity around it’

      IMHO, this is the wisest thing I have read in a very long time. It is too bad we cannot wake up tomorrow and find a total absence of petroleum and fissionable material. It is just possible that our culture might then be compelled to right itself.

      Then again, some bank would probably own all the horses and only let one go on mortgage at 18%.

      1. mansoor h khan

        Jake chase,

        It is not that bad!

        All elites in history have known that in order to have a kingdom (slaves) there must be peace, security and rule of law most of the time. Slaves do need to be fed and trained to work and slaves do need to be in decent mental health state to run the operations of a farm, factory, government or a military.

        I suspect that once the infighting (among the elites) is done/resolved the elites will come around and reset our expectations about economic growth and tell us about the reduced rate of material production we will have to live with in the future.

        Yes. It is not a guarantee. The Roman empire did collapse. But our elites have the benefit of hindsight to learn from such collapses.

        I would like to see stringent conservation of fossil fuels moving forward with much reduced fossil fuel footprint (read: much lower consumption levels) by the rich and even by the middle class.

        We should levy a fossil fuel sales tax to tax all consumption and give more to the lower middle class and the poor.

        The ranks of the poor will definitely swell. I expect the number of people on Food Stamps to go from 48 million to over a 100 million in the next 10 years.

        We CAN run a low grade fossil fuel based industrial civilization for a very long time if we implement stringent conservation now. By low grade I mean we cut out almost all activities which require fossil fuel but are not necessary for survival.

        Mansoor H. Khan

    2. nonclassical

      …let’s not overlook FACT that Wall $treet “investment banks” have managed to off-lay (holding co status) trillions- derivatives upon FDIC auspices…we know where payment-is intended…

  8. Dan Kervick

    5) Will rising interest rates and associated balance sheet losses mean the Federal Reserve will reduce or end its contributions to the Treasury?

    I think on that one the answer is clearly “yes”. The Fed only remits to the Treasury what is left from its earnings after it covers its own operating expenses and after paying the statutorily required 6% dividend on paid-in capital to member banks. If there is nothing left over after that, nothing gets remitted.

    6) Is it possible that the Federal Reserve could require a fiscal infusion from the Treasury should the central bank capital base become technically insolvent? If not, what is the legal basis for the Federal Reserve operating with negative capital?

    I’ll look further into the laws here, but it seems to me that there is no economic reason why the Fed cannot operate in a condition of permanent negative equity. So the Treasury wouldn’t need to “bail out” the Fed, but if the Fed was in a permanent condition of negative annual earnings, so that the negative balance on its balance sheet grew deeper and deeper, then there would be no remittances to the Treasury.

    7) 7) Considering that major losses to the Federal Reserve would be, at the very least, an embarrassment for the central bank …

    I agree that it would be a political embarrassment given the current level of public understanding. But if people understood how things work, they would not view Fed “losses” negatively. The central bank is the seat of the government’s monetary power; it is not an entity that exists for the purpose of making money for its stockholders. We shouldn’t really want the central bank to be making a “profit” under most circumstances. If it is, then that means it is sucking more money out of the economy than it is injecting into it.

    It might look like a good thing that the Fed is returning money to the US Treasury. But that only happens because the Fed is buying performing assets and producing a net drain of money from the economy. And the money returned to Treasury is not really being used to fund an expansionary fiscal policy; it is being used in the current political environment to reduce the deficit. Thus, the net result is a contractionary tax increase.

    1. Jim Haygood

      ‘If people understood how things work, they would not view Fed “losses” negatively.’

      What you really mean is ‘if people swallowed the Kool-Aid, they would not view Fed losses negatively.’

      Cast your mind back to the early 1950s. Banks held large reserves of Treasuries and vault cash, averaging 25% of assets. Each bank, on its own, was a fortress of financial strength.

      Now, thanks to subterfuges (nowhere statutorily authorized) such as overnight sweeps, required reserves of $118 billion represent less than one percent of U.S. banking assets. In other words, risk has now been completely centralized at the Federal Reserve itself.

      In turn, the Fed’s capital of $63 billion is less than 2 percent of its assets — roughly where Fannie Mae’s capital ratio stood, before Fannie lost her ass.

      This is leverage gone berserk, wielded by PhD bureaucrats who think they can just flash a badge and make skeptical markets back down. It don’t work that way, Dan. Hubris kills.

    1. diptherio

      No Swoon…Rate Up(?!?)

      That headline sounds bizarre to anyone not throughly indoctrinated in the Washington-Wall Street consensus.

      Unemployment is up, but not as much as we were expecting…so that’s good! Also, we accidentally overstated last months numbers by 16,000 jobs (11%)…oops!

  9. Malmo

    Page is taking forever to load up. Been like that for several days. I don’t think it’s on my end. Everything else loads fine.

    1. diptherio

      Yeah, same thing for me. Blocking all the ads and trackers helps quite a bit (I usually allow most of them, for Yves’ sake), but the site still loads considerably slower than normal. This morning seems especially slow.

      Still, good things come to those who wait (just pretend you’re back in 1997…it’s like time-travel, hehe).

      1. diptherio

        I now have to revoke my comment, after crawling along at a snail’s pace all morning, the site is now loading fast as ever, even with the ads re-enabled. Rack it up to the vagaries of modern technology (and we take it for granted, until it stops working).

    2. Yves Smith Post author

      We’ve been under a sort of attack from China. But lots of IPs. So it might be some weird bot behavior. It’s been going on for a week plus. We’ve installed Cloudflare but that does not seem to help much.

      Please be patient. We are slotted to move to a new host next week. That MIGHT help.

      1. Malmo

        It’s a nuisance. Nevertheless, hasn’t prevented me from comig here at all. Not so sure about others.

  10. washunate

    In a world of massive wealth inequality, is there a reason to expect #3-5 to have much impact on stocks over the short term?

    They’re basically broad based measures when almost all financial assets are owned by the top 20% of American households.

    At this juncture, stock gyrations just seem to be gambling by the wealthy about whether the government will slow down or speed up corporate welfare funded by the money printing train.

    “So it still isn’t clear what the Fed was thinking in bringing up tapering now, and continued oracular silence hasn’t helped matters.”

    Agreed, my completely-ignorant-but-fun-wild-speculation is that this happened because something big is going to be unveiled down the road (larger QE, another MF Global, etc.).

    1. jake chase

      All financial assets may be owned by the top 20%, but 50% of those assets are owned by the top 1% and 50% of the assets of the 1% are owned by the top 1/10%.

      Now you know why the markets are not allowed to fail. What they are allowed to do is ‘correct’ 40% whenever the suckers are all in.

      Any body know if we are there yet?

  11. psychohistorian

    Mr Market is preparing America for its part in the global Shock Doctrine event we are entering/in.

    The market decisions are made by those that hold enough percentage to control the dance and insure that when the music stop there will be enough “chairs” for them.

    One big circus facade to fool them all…..fool me twice, shame on me.

    Lets laugh them out of control of the sick society they have created.

  12. CB

    The Confidence Fairy is too easily persuaded. I’d call her a cheap date, but in Fed terms, she’s not.

    OT: The Contacts utility of email won’t function with FireFox browser. Steve Ballmer lives in the old MS world. I thought him a poor choice for president at the time.

    1. washunate

      On the OT, I’d offer that he’s the perfect guy.

      Ballmer was personally recruited by Gates (met at Harvard in the 1970s), been with Microsoft now for over three decades. Few other people would have stuck to Gates’ vision of ‘Windows Everywhere’ so religiously in the face of real world evidence of the strategy hamstringing the company.

  13. kevinearick

    As you can plainly see, another layer of the middle class is being replaced with cheaper capital-labor on the ground, in the strip malls, trades, etc, and gubment wants you to see and trade on a month of theoretically higher quality jobs. Barnanke is tapering at rollover, a half-cycle change in timing. And another section falls off into the ocean…

    The top will protect itself with the middle, until it can’t.

    1. kevinearick

      if you look, you will see that all the new jobs are loss-leaders, primarily for those watching their retirements go down the drain on the margin…

    2. CB

      The top has always used the aspiring middle to protect itself against the bottom and the middle has always fallen for it. Even after the middle is ruined, it never blames the top. “Lord, what fools these mortals be!”

  14. HS

    The premise that QE was enacted in order to facilitate an economic recovery is starting to look pretty silly, at this point. It is very much looking like the true goal of QE, was to give the 1% a free pass to loot the US Treasury. What we should really be asking ourselves is: What is it that they are preparing for?

  15. Kokuanani

    Yves, I have a question for you that I hope you’ll address in a future column: once the Fed buys all those “toxic assets” from the banks who were stupid enough to make the loans in the first place, what does it DO with them?

    Does it just continue on the merry way of the banks, hounding borrowers, providing “employment” to servicers?

    Isn’t there some way the Fed, as the “new owner” of these debts, could be required to restructure them — a combination of cram down and refinancing at lower interest rates?

    Any “losses” because of such refinancing and cram-downs would likely be chump change compared to the $85 billion per month going to the Bad Behaving Banks, and such money would have a good effect on the recipients.

    At the very least, the “new owners” should be required to end this limbo where borrowers have been evicted, but title remains in their name, and they’re hounded re costs of lawn-mowing.

    Perhaps I just don’t understand the mechanics of QE. I certainly don’t see it benefiting anyone other than banks and the confidence fairy.

    OTOH, I’m sure the geniuses at the Fed and on Wall Street are planning some way to dispose of these loans that will benefit new “middlemen” they hire/create, while screwing borrowers.

    Just wondering.

    1. nonclassical


      ..should you answer above, please also address your opinion of relative “value”
      of these “toxic assets”?? I can’t get over feeling bushbama deal with banks included full paper debt value of, if QE3’d over substantial period of time. I have read if all were dumped on market, 2008, value would have been circa 20%

      what are your thoughts, beyond obvious necessity to go through each, to establish “value”??

      1. Nathan Tankus

        It occurred to me a month ago that what the Fed should have done (and still can do as far as I’m aware) is buy the servicing rights of these mortgages along with these mortgages (I’d imagine the IRS could do the actual servicing). That way they can unilaterally write down mortgages in the same way that servicers have been unilaterally foreclosing. I doubt most privately held investors would fight since this would ultimately generate higher returns for them and it would be a better return for the Fed itself (not that it matters).

    2. Yves Smith Post author

      The Fed is not buying, and has never bought toxic assets. Even during the crisis, when it had a zillion special facilities, the most it did was lend against toxic assets as collateral. All those special facilities have been unwound.

      It has bought GSE paper, meaning government guaranteed stuff. I have not looked into the mechanics, but I’d suspect it is only buying new GSE paper. All the new paper is being underwritten to high, some say overly restrictive standards in terms of LTVs, cash down, credit scores. Only deviation is HARP, where underwater borrowers WHO ARE CURRENT can refi.

      So the Fed is basically monetizing housing debt. This is a direct subsidy to the housing market, and to borrowers who refi (they get to spend more). Also to banks, since it does goose the value of other mortgage debt via arbitrage.

      1. jake chase

        So, it sounds like the toxic assets remain on the banks’ books but are marked to fantasy, allowing the banks to pretend to solvency, until foreclosure actually occurs. Meanwhile, as I understand it, the servicers of MBS continue pretending the mortgages are current, remitting principle and interest to the investors, and the investors pretend they still have assets valued near par, and the Fed enables all this by paying 3% interest on ‘reserves’, and the economy is in the toilet because fewer people qualify for mortgages and housing starts continue to slump and the only real economy we have had in the US for twenty years is the sale and resale of houses to one another. Is this the size of it?

    3. Jimi

      If any of you are being hounded on a property you were evicted from a foreclosure go down to your County and file a “Quit Claim” deed to it.That will break ANY legal interest you had/have.

  16. clarence swinney

    The House is fixated on Obama scandals rather than the economy.
    One third of the committees are investigating rather than fixing.
    Twp thirds of the jobs lost in the Great Recession paid middle class wages yet 22% created under Obama paid a mid-wage. Obama can talk when he said “ we know America thrives when every person
    can find independence and pride in their work, when the wages of honest labor liberate families from the brink of hardship”.
    He promised to address income inequality. When? How?
    The gap between middle-class and wealthy has grown steadily since 1970s.
    Income inequality is reducing the ability of Americans to climb from one class to another. “Permanent inequality”?
    Between 1979 and 2007 the top 1% saw after-tax income grow by 275%, the next 19 % by 65%.
    Eighteen percent for the bottom fifth.
    No Republican has presented a populist message only stopped Obama’s Americas Jobs Program which could have created/saved 4 million jobs.
    We have a National Income of $14,000B yet this year will borrow $642B.
    The and tax exemptions cost us over $1300B.
    When will we awaken and pay our way and go to taxing wealth as in the past great growth years.
    The jobs sent overseas will not return. Cheap labor equals big profits. Instead of a 20% mark up try an 80% mark up.

  17. Renodino

    To get the critics off its back, maybe the Fed is allowing the taper discussion to ramp up until the wheels on the economy start to shake and shimmy. It’s already happening in the real world, but soon “serious people” will start crying like babies when they see where this is headed. Then the Fed will step in with grand measure of reassurance. Crisis averted.
    There is no wage/price pressure, like Yves said. Inflation is stuck at 1%. Public companies are taking themselves private with buybacks because there’s no need for more capacity to meet demand. Raising interest rates in a shrinking world economy is crazy talk of the first order. So crazy it might work to shut everybody up.

  18. Chauncey Gardiner

    Bond prices are falling and yields rising despite continuing QE by both the Fed and Bank of Japan, despite weak economic data and the effects of the sequester cited by Yves’ in her post, and observations by others with respect to ECB austerity and a weak global economy.

    My question is what the lead steers are seeing that we are not?… or if this is all just another charade, short squeeze set-up, or racketeering tantrum intended to perpetuate a wealth concentration strategy as long as possible?

    Increasing yields on 10-year Treasury bonds have coincided with rising stock indices, suggesting that bonds have been sold to generate Cash that is at least in part being reinvested in stocks.

    Other Possibilities:

    1.) The economy is actually performing better than the data suggests?

    2.) Federal government demand for funds pushed up Treasury rates in the short-term?

    3.) The Fed is quietly reducing MBS purchases under QE as a policy objective intended to allow interest rates to rise in order to increase banks’ Net Interest Margins as their older MBS and mortgage loans are repaid or written off?

    4.) Foreign purchases of U.S. Treasuries have been reduced by Yen carry trade curtailments related to Yen currency appreciation, lower Chinese recycling of U.S. dollars, EU economic weakness combined with strength in the euro, or other factors?

    5.) Sudden weakness in the U.S. Dollar and a desire to maintain the current high price of crude oil is in turn driving a policy of higher US Treasury rates to both maintain the U.S. Dollar as the global reserve currency for Oil and to make domestic shale oil production economically attractive to members of that industry?

    6.) Other?… (Such policies are rarely implemented or changed for only one reason.)

    BoJ QE Link:

  19. B c

    The Fed would like to avoid having to buy 100% of new Treasury debt instead of just 70% like it is now. Talk of a slow end to QE is just for that purpose, to keep the rubes now buying the other 30% in the Ponzi. It’s very unpleasant when a global civilization realizes its the victim of a self inflicted Ponzi scheme. That’s why continued self delusion is so important.

  20. brazza

    I’d love hear Yves’ views (and a serious review and discussion) on Serge Latouche’ “de-growth” socio-economic views. Isn’t it about time we considered from a perspective other than the constant-growth paradigm? I can’t help but see QE as nothing more than a way to prolong the agony, kicking the rock further, avoiding the core issue. The issues continue to be focused on tactics rather than strategy.

  21. Conscience of a Conservative

    I don’t recall anyone being able to quanitify what if any economic growth has been attributable to Fed Q.E. We do know that asset prices have gone up, sometimes a lot at the expense of paying out savings to those on fixed incomes who depend on savings. Perhaps the Fed is at the beginning stages of not wanting to be responsible for the bubbles or excesses forming. After allo the big hissy fit the market is throwin is just re the difference between where rates were at what rates would be if the Fed was engaged in rate suppression which is what? around 100 basis points from where rates are now? Mortgage rates would still be very attractive from an historical context.

  22. TC

    I’m thinking the primary reason Confetti is talking “tapering” is related to dynamics at the intersection of global hot money flows, interest rates and the dollar exchange rate. Gotta keep up appearances pretending the U.S. banking system isn’t many times over hopelessly insolvent, so global hot money flows into dollar denominated assets continue, helping Confetti’s bid to drive rates lower and support the dollar’s exchange rate. What’s a lie when “financial stability” is at stake?

    As the GSEs no longer are in a position to play “shadow Fed,” it’s up to the real deal to provide the liquidity backstop so critical to sustaining confidence leveraged speculators require in order maintain leveraged longs, if not increase their exposure. So, Confetti’s talk of “tapering” is a joke. McDonalds can’t sell burgers fast enough to generate private sector capital necessary to relieve Confetti’s burden.

    Better, then, we see Confetti’s MBS purchases a beta test in the Fed’s evolution to becoming like the BoJ intervening in equities markets? At any rate, there probably will be no tapering until the coming bubble of wheelbarrows on Main Street bursts. My guess is 2017-2018 we’ll be Weimarized for all to see as clearly as revelations of FBI data mining are meant to push our Shadow Greek Prime Minister into overt alliance with al Qaeda in Syria (confirming on all accounts that, politics is a dirty business, particularly at the intersection where both key members of state intelligence services, as well as behemoths of imperial finance are easily manipulated on account of their mutual, woeful insolvency).

Comments are closed.