Ron Paul’s Audit the Fed bill is now up to 190 cosponsors!

A recovery is supposed to be in the works in the midst of increased savings, declining debt balances on credit cards, more bankruptcies, higher unemployment and new wave of foreclosures. Consumer participation in GDP is down from 72% to 70.4%. Bank and other financial firms’ balance sheets are what they say they are and we have a stock market bear rally built on sand just as we had in 1931. And, lest we forget, bogus government statistics calculated to confuse professionals and investors alike. What an upside down world. How do you make money when you are losing money? Wait until late July and in August when the second quarter earnings are released by financial firms. They won’t be pleasant reading. The market rally and much of the earnings are simply fraud. Wall Street and investors simply shrug their shoulders and look away. They know but they do not want to know. Ever present in the scams is the SEC, which has never seen a major firm they did not like. Acting on violations only when forced too at large firms and perpetually pursuing the small and medium sized brokers and brokerage firms and newsletter writers. Then there is the veracity of our government for which few have any respect, trust or confidence. Our treasury department woefully short of revenues has the privately owned Federal Reserve monetizing sovereign debt because they cannot sell it all, some $300 billion in Treasuries and $750 billion in Agency debt as the Fed monetizes an additional $1.5 trillion in bank owned CDOs, collateralized debt obligations, so as to remove them from bank balance sheets so they can purchase Treasuries to compete the daisy chain of fraud. Ten-year Treasury note yields as a result have traded up to 3.84% from 2.35% just five months ago. Foreigners are sellers as an avalanche of Treasuries hit the street. The demand for Treasury funds over the next few years will be colossal. If government raises taxes the economy will fall further. As we forecast earlier the Fed could monetize $2.5 and $4 trillion in Treasuries and other toxic waste by the end of the calendar year. Incidentally, there is not a remote chance that the Fed will ever be able to withdraw funds from the system and every professional has to know that. The result is a collapsing dollar and higher gold and silver prices in anticipation of higher inflation. This year the dollar could easily break 71.18 on the USDX, the dollar index, versus six major weighted currencies. That would again cause, as it did from 11/07 to 6/08, countries and foreign businesses to reject taking dollars in trade. Such an event is in our crystal ball. Propaganda and smoke and mirrors won’t work this time.

Earlier this week our Secretary of the Treasury was booed, jeered and laughed at during a speech to students at Beijing University. That is what minds outside of the box think of our monetary policy. He said trust me, they said no. Needless to say, this was little reported in the mainstream media. The people representing the money powers that control our nation are viewed as an international disgrace. Foreigners recognize the financial Mafia that runs America, but most Americans are clueless to who the real power running America is.

We have heard much about the 40 to 60 times deposit ratios used by banks in the 2003 thru present period. Normally that ratio is 8 to 10 to one dollar on deposit. We painfully remember the subprime and ALT-A loans and the totally unqualified that received them. Then the loans that Fannie Mae and Freddie Mac should have never approved and finally the asset backed securities and collateralized debt obligation bonds foisted on professionals at AAA when they were in fact BBB.

What has not been publicized was the SEC position under pressure from the elitists on Wall Street during the easy money period and the steep yield curve to exempt brokerage houses from the net capital rule. That as well led to leverage of 40 to 60 to one. If the banks could do it they wanted to be able to do it too to compete. That decision ultimately led to five failures. Even a mitigating gold standard could not have surmounted lack of regulation. After almost 50 years in the markets and a former brokerage house owner we know financial institutions should never be allowed to self regulate. If we have financial regulation we cannot have regulators who are friends with the people they regulate. No revolving door between Wall Street and the regulator. The same goes for the revolving door between Wall Street and banking and Washington, particularly in the Treasury Department. Real interest rates will always rise in a period of monetary and fiscal profligacy similar to what we are now experiencing as a result of unbridled leverage.

Keynesians will tell us such financial discipline is not possible in the real world, but of course it is. They just want to perpetually break the rules. There is no such thing as a self-regulating monetary policy. Distortion reigns instead of a slightly expansive classical free-market model. Markets can be far more rational then they are presently if the players are not allowed to run wild, as we have seen since 2002. In addition a privately owned Federal Reserve should never be allowed to exist never mind take on government responsibilities, such as financial regulation, which is currently contemplated. The Fed has always subordinated monetary policy to the desires of Wall Street and banking and at times has bowed to political expediency. The Fed is responsible for every recession and depression we have had since 1913. The great market distortions are all a product of Fed decisions. The Fed is now using adversity to expand its empire, taking on the responsibilities of government when it should not be allowed too. Its power to print money and credit has to be ended. No more papering over their mistakes or willful arrangements with Wall Street and banking. Who caused the dotcom boom and the housing bubble, they did.

As we predicted long end interest rates are already telling us that their policies are flawed as Treasuries fall in value and yields rise, a reflection of coming inflation, as the same time the dollar is falling and gold and silver are rising. The Fed is in a box and they cannot get out. From a fiscal perspective we have had five administrations that have created tremendous fiscal debt. The damage done by the last two administrations was horrendous. Don’t forget as interest rates rise on debt service the debt gets larger and larger. These higher rates are already limiting any housing recovery and we see rates moving higher; at least to 4% on the 10-year Treasury note. That would translate into a 30-year fixed rate mortgage of about 5-1/2%. That rate will disqualify many borrowers as unsold inventory increases via further foreclosures that will last into 2012. That means further price declines. That will further destabilize the banking system. The unsold housing inventory in lenders hands and the value of CDO and ABS bonds will fall as well.

The answer is elimination of the Fed. Its powers would be returned to the Treasury, which would have to be transparent and the revolving door between Treasury and Wall Street and banking closed. The Treasury would have to run a tight ship limiting money and credit creation to 5% and by raising interest rates. The crisis has to be addressed eventually and the longer it takes the worse it will be. The power to run Washington by Wall Street and banking has to end. The connection has to be broken. Treasury and Congress have to start acting responsibility and the financial service sector will have to accept lower profits, lower bonuses and a smaller industry.

Credit default swaps have to be settled and banned and all derivatives regulated. There has to be a permanent cap on leverage at banks and brokerage houses of 10 to one and their underlying financial bases have to be changed and closely monitored. If we do not make these changes the financial system as we now see it is doomed.

Within 2-1/2 years Treasury short-term debt will be $16.6 trillion, or 110% of GDP. This is close to 1`21% of GDP attained after WWII, as Thomas Jefferson said, “Loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible.” This is the kind of society we have today. This year foreigners will have to buy $862 billion treasuries, up from $724 billion. We don’t see that happening so the Fed will have to buy $1.5 trillion worth, perhaps more.

Legislation to give Congress greater oversight of the Federal Reserve has been severely watered down on the Senate floor in private negotiations between Sen. Charles Grassley (R-IO), the top ranking Republican on the Finance Committee, who wanted more oversight and Richard Shelby (R-AL).

The Grassley Amendment intended to give the Comptroller General of the Government Accountability Office power to audit any action taken by the Fed – the third undesignated paragraph of Section 13 of the Federal Reserve Act, which would be almost everything that the Fed has done on an emergency basis to address the financial crisis, encompassing its massive expansion of opaque buying and lending.

          Handwritten into the margins, however, is the amendment that watered it down “with respect to a single and specific partnership or corporation.” With that qualification, the Senate severely limited the scope of the oversight. Richard Shelby was fully responsible for this course of action. Actions will be limited to specific companies. This modified version does not allow the GAO to look at all taxpayer risk. It in no way threatens the Fed’s monopoly on monetary policy and their secret independence. The list of Fed actions that can be probed are listed but they still could be knocked out in committee.  They are:

1. Actions related to Bear Stearns and its acquisition by JP Morgan Chase, including:

a. Loan To Facilitate the Acquisition of The Bear Stearns Companies, Inc. by JPMorgan Chase & Co. (Maiden Lane I)

b. Bridge Loan to The Bear Stearns Companies Inc. Through JPMorgan Chase Bank, N.A.

2. Bank of America -- Authorization to Provide Residual Financing to Bank of America Corporation Relating to a Designated Asset Pool (taken in conjunction with FDIC and Treasury)

3. Citigroup -- Authorization to Provide Residual Financing to Citigroup, Inc., for a Designated Asset Pool (taken in conjunction with FDIC and Treasury)

4. Various actions to stabilize American International Group (AIG), including a revolving line of credit provided by the Federal Reserve as well as several credit facilities (listed below). AIG has also received equity from Treasury, through the TARP, which would also be captured in amendment #1020.

a. Secured Credit Facility Authorized for American International Group, Inc., on September 16, 2008

b. Restructuring of the Government's Financial Support to American International Group, Inc., on November 10, 2008 (Maiden Lane II and Maiden Lane III)

c. Restructuring of the Government's Financial Support to American International Group, Inc., on March 2, 2009

5. TALF -- finally, amendment #1020 would expand GAO's authority to oversee the TARP, including the joint Federal Reserve-Treasury Term Asset-Backed Securities Loan Facility (TALF)

*Neither* Amendment #1021 nor #1020 would include short-term liquidity facilities:

1. Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
2. (AMLF)
3. Commercial Paper Funding Facility (CPFF)
4. Money Market Investor Funding Facility (MMIFF)
5. Primary Dealer Credit Facility and Other Credit for Broker-Dealers (PDCF)
6. Term Securities Lending Facility (TSLF)

Section 404 of the Sarbanes-Oxley legislation has been a bonanza for accounting firms. It has caused a high proportion of major foreign companies to de-list themselves from the NYSE and it has erected an artificial barrier to the globalization of capital markets. Thus, it isn’t all bad as depicted by corporate America.

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-- Posted Sunday, 7 June 2009 | Digg This Article