Topic: The Federal Reserve
FED to Monetize Another $1.75 Trillion in 2009 .... debasing the dollar to prop up the housing boom that the FED created.by Jake Towne, the Champion of the Constitution
(libertarian)
Monday, June 29, 2009
"A government that robs Peter to pay Paul can always depend on the support of Paul."
In the June 24, 2009, the Federal Open Market Committee (FOMC) led by FED Chairman Ben Bernanke announced that the FED will monetize another $1.75 Trillion in 2009. The announcement reads "the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn."
This is a last-ditch attempt to continue to prop the housing market from a further collapse due to option, Alt-A, ARM mortgages. As with most of the current interventions, instead of "softening the blow" this action will merely drag out this depression, and likely will make the end resolution that much more catastrophic. Monetization of debt increase the money supply of dollars, which inevitably causes debasement of the dollar by inflation.
Perhaps the real shame in the FED's actions is they merely continue to spur malinvestments and prolong the false economy we now live in. Retired Soviet apparatchiks in their rocking chairs are probably watching their old foes, and reminiscing,"Da, Igor, wasn't that the way we used to do it?"
The FOMC also reported that it "expects that inflation will remain subdued for some time." However, they themselves must realize that the true inflation rate is close to 6%, right? In the mid-1970s, Nixon flipped out and ordered price and wage controls while the inflation rate was a mere 4%.
They themselves must realize that 45 banks have failed so far this year, and it's only the tip of the iceberg in terms of the banking system's insolvency. Right?
As Mark Thornton of the Mises Institute wrote in "Keynes's Upside-Down World," if we had instead just allowed the free market process to work, inside of endless, unprecedented, and unresearched governmental interventions, the downturn would have finished by now. The unemployment rate would be dropping, and companies like GM and AIG would be exiting or finishing the bankruptcy process, and stronger companies might be moving in. Instead of having more electric or electric-hybrid cars starting to roll off the line in the coming year, we will be stuck with government-controlled production rates and subsidizing inefficient autos.
As I've written and said countless times, those who do not believe the government are protecting themselves not just with physical paper dollars, but more importantly with physical food, physical gold, and physical silver.
Those that believe the government? They may be wiped out. In the meantime, Paul will obtain a refinancing deal and continue to enjoy making mortgage payments to the banks on overvalued housing (or more likely, commercial) property until the interventions run out, or the scourge of inflation catches up with him.
P.S. You can listen to my most recent interview with "Patriot Pastor" Kinley from last week on BlogTalk Radio here. On July 1, 4 PM EST, I will be on live with Ken Van Doren of the Voice of Liberty on www.RevolutionBroadcasting.com.
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings of this article to your blog or anywhere else in order to promote the Restoration of our Republic.
Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.
Tu ne cede malis sed contra audentior ito. Do not give in to evil but proceed ever more boldly against it.
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Good article, Jake. It is amazing how far from "reality" the whole thing is getting. I guess it shouldn't be a surprise and these policies aren't "new", but instead intensified reruns!
Okay Jake, so Bernanke seems to be continuing a course of complete idiocy. I have to wonder though if there is some hidden game being played between the central bankers and the public, though most of the public don't realize they're in the game, a lot like your Matrix allusion. There was the transcript of a round table discussion with Bernanke, Kruger and a few others I don't have any respect for a while ago on the NYT website-- the discussion was so fatuously simple that all the participants seemed to be clueless about economics! But maybe that was just a disinformation piece directed at those of us who realize that if Bernanke and crew hold the black stones, then it is WE who play the white ones and we'd sure better figure out what his strategy is if we want to beat him.
So Jake, with the in depth study you have made of these people, I beg you to answer me this question: Why? What possible reason could anyone have in trying to prop up the housing market? I just don't understand their reasons, either public or cryptic. Local real estate markets have always been cyclic, as are most commodity markets, so I truly don't understand why anyone would expect an aggregated national housing market to behave any differently, nor to even think that was a bad thing. With your insight into the enemy, please enlighten me.
Posted By: Jake, the Champion of the Constitution
Date: 2009-06-30 06:56:46
Dear Hiram -
Let me take a stab at your question, keep in mind its just my opinion.
"Why? What possible reason could anyone have in trying to prop up the housing market? "
The first reason is political and psychological. No matter what crap you hear about the FED being "independent", this just isn't believable. Our politicians have pretty much completely succumbed to the knee-jerk reaction to fix everything in the economy - and by doing so - they have revealed their true colors as dyed-in-the-wool socialists and central planners.
In their minds,they may simply wish to "guide us" from making further mistakes.
However, as my next piece will demonstrate, our central planners are ANYTHING BUT naive and stupid. I believe that what we are seeing is the collapse of the fiat monetary system - how long this will take, no idea, I am sure the central bankers, seeing the collapse, will stretch it out as long as possible.
They may have merely miscalculated with their statistic-based Keynesian minds and sincerely believed that they could pass off their paper fiat crap as money indefinitely - the growth of the Euro currency union, then the Amero were parts of that plan.
However, as my next (unpublished right now) Part 13 of the Money Matrix series will demonstrate a lot more, but until then try these sources:
PAY VERY CLOSE ATTENTION TO WHAT GREENSPAN SAYS HERE starting at 4:40 - He can't tell you "what the real money IS."
http://www.youtube.com/watch?v=8M27cXKqsBo
"very much believe that a debased currency gives a debased economy". Pls understand that Greenspan is one of the very first economic computer modelers starting back in 1980ish. He gave up on his "Gold and Economic Freedom" essay he wrote a long time ago which is here
Posted By: Jahfre Fire Eater
Date: 2009-06-30 14:06:47
Hi Jake,
Great article, as usual. I think Hiram's question is important because understanding the motivation goes a long way towards understanding why it is a bad idea for most of us to have bubbles created then propped up.
The "why?" may be obscure but it isn't complicated. In every asset bubble the price is mistaken as value for the bubbling asset. The simple fact that this mistake actually works during the inflating part of the bubble is what causes bubbles to accelerate.
Now, this artifical value has been leveraged into loans and into other price-based investments. If housing prices deflate, all this additional investment leverage will come crashing down. It isn't just one lever beyond the mortgage anymore, it is a daisy chain of levers all based on the mistake that the price of a home was some indication of its value.
For instance, I live in a shack in the forest that most people wouldn't want to live in. The price was low. However, I don't care at all about the structure, I value the location, the views, the low population density and the solititude this home affords. I value it highly. It is quite unlikely that the price of this home will ever exceed the value I get from it. That's what I mean about the difference between price and value.
So, based on price, not on value, banks made 'equity' loans that now put banks at risk to varying degrees because that equity no longer exists but the loan does. The chain continues, banks used to assess risk and price loans accordingly. In a bubble, all that management takes too much time so they turned from a risk management business model to a transaction-fee-based business model. The volume of the transactions was suddenly more important than the quality. Risk was supposedly managed by diversity. By packaging the loans into various crates, like sorting eggs Grade A, Grade B, Jumbo, etc. supposedly the damage done by any one loan going bad was absorbed by the good loans in the bundle and no one took a loss for a few bad loans. Then the government got involved and relaxed lending standards to lure an ever larger pool of borrowers into the system. The appearance of an unending flood of new incentives to buy homes caused an unprecidented uptick in speculative activity with house flipping becoming the basis for infomercials, talk shows, books and more lawyers.
If the nuggets of value that support all this folly (Real Estate) begin to slip in price, the entire ball of wax will melt and dribble away like a snowball in the fireplace. This bubble affects everything, around the globe in a way that has never been seen on this magnitude.
The fed is acting as if they think opening more of the water tight cells in the Titanic will spread the damage in such a way that the boat will rise to the surface again.
So, am I so super bright that I see this and they don't. Nope. That isn't what I suspect. I suspect they know this is folly but they see a way to promote their politics through financial policy. What political advantage can be had by following a known disastrous course? The intentions. Real voters will remember the intentions behind the speeches given to promote these awsome fiascos. They expect failure, they'll deal with hard times just like folks always do but come election time, they will remember who "tried" to help. Propping up the bubble is not possible. There is no proven theory that indicates current policies will do so. There are only intentions and future votes. That is what it's all about.
Posted By: Jahfre Fire Eater
Date: 2009-06-30 18:50:33
Hi Jake,
I've been reading your stuff long enough to know you're as clear as anyone on these topics. We just have different perspectives and priorities.
I was trying to be brief, something I tend to always try and fail at. In doing so I left off the conclusion I introduced in the beginning. Why all this is bad for you and I even though it may be done with good intentions? [ If they can be taken at face value...which I do not...but there's another article. :-) ]
Due to competition and technological advances and focused educational paths, deflation should be the norm in a free society. Governments hate that because there is no political power in deflation. They cannot finance perpetual wars by floating increasing debt with a deflating currency. The government doesn't want to pay back today's loans with currency that is deflating. They want to inflate to ensure that todays loans are paid off with dollars that are worth less than the dollars borrowed and spent today. That is the reason for the monetary policy aimed at fighting deflation and inevitably fostering inflation. Inflation is their only acceptable solution and they will do whatever it takes to ensure that happens. Inflation also ensures that savers suffer, people on fixed incomes become ever more dependent on the State.
I'm beginning to hear a lot of talk from folks taking more debt with the rational that "the fed will monetize it." That doesn't make sense to me. I understand how the FED monetizes national debt and I understand how that eventually results in inflation but I don't see how that helps pay off a mortgage. Especially in this economic climate of lay-offs and cutting back. I'd be interested to read your thoughts on that. Something isn't clear to me about it. If wages could rise ahead of and at the same rate as inflation then maybe....but that doesn't happen. Wage increases always come later and less than inflation, remarkably so as the inflation turns hyper. So that means eventually a person has to choose to buy groceries or pay the mortgage but can't do both.
Also, if the borrowed money had been used to purchase gold or other stable assets, then it would make sense to pay off a mortgage with those assets after the hyper inflation makes them worth many times their present price in dollars. Most folks I hear talking about their loans being monetized are not buying gold, at all.
Deflation is good for workers and savers. and folks on fixed incomes. People will save money if they think it will be more valuable in the future. This is a good thing for the people and for the economy. Savers foster increased competion which fuels the cycle of better goods and lower prices. Businesses have to get ever better to compete for those saved dollars.
Anyway, I'm just skimming the surface still but at least I tied my rationale back to my premise.
Posted By: Jake, the Champion of the Constitution
Date: 2009-06-30 20:16:43
Jahfre -
You are absolutely correct about hyperinflation making all dollar-denominated debt easy to pay off. In Weimar Germany, the companies that ended up buying capital at interest did quite well.... if they were able to still make a good someone wanted to buy :) In a hyperinflation, rule of thumb, prepare to work for your bread and/or become a stock-jobber for some good ol'fashioned gambling - I think the rule of thumb is 80-90% of earnings then goes to food.
To your question, in terms of taking on debt because of the FED's monetizing, I view it as very risky. I don't think any common person, like me, has the proper information to make that call since you would need a crystal ball into the credit markets, esp OTC derivatives. There is no question in that monetization of debt is strict Austrian monetary inflation, but the effects on asset prices are still left to the consumer, and credetary inflation/deflation.
If consuming drops way off - I think the numbers are down 40% already this year - then its STILL a crapshoot between the FED and the market - plus the FED can destroy dollars or buy assets whenever it feels like it. The game is rigged, but like for the reasons you mentioned, given a choice the FED will hands-down choose to inflate over time
Part 14 of the Money Matrix series will rip into the Treasury market. I'm trying to synthesize what I've read of Mises with the best of Fekete and put it into layman's terms - it still wont clear up the future - but hopefully it will give fundamental understanding when the Treasury market collapses under its own weight.
I'm rambling a bit, but I think I got to your question, though I don't have an answer, just thoughts. The key factor of course is time - is hyperinflation 6 months away? 5 years away? Makes a big difference in planning. Is there time to create some weirdo-SDR that is partially fiat and partially a basket of commodities??
I suppose the Treasury bond market will be a telling indicator of what happens next with the person saddling themselves up with debt. That game is too rich for my blood, but you know, there are people who are taking in all the credit cards they can, maxing them out, then moving on to new credit cards - not really all that different from Uncle Sam. I suppose if an individual has a safety net somewhere, (like the gold you mentioned) it's a risk some might take.
People always react to the system they are placed in, and depreciating fiat debt-money creates bad morals.
Money is an invention of mankind, and has resulted in a lot of good for our race, so the phrase "Money is the root of all evil" is nonsense. FED-currency being the root of all evil is something I could agree with though :)
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"A government that robs Peter to pay Paul can always depend on the support of Paul."
