August 10, 2010

Bailout War: All QE on the Western Front

Filed under: Bailouts Only Propped Up Zombies — Tags: , — Russ @ 2:54 pm


So after a brief stint on the wagon the Fed’s off on the binge again. The FOMC announced Tuesday that they’re going to recycle $250 billion worth of MBS cash flow into a heroic new push on that darn string.
I don’t think many people doubted this day would come sooner rather than later, since the Bailout is the core policy of the government and the core feature of what is now a command economy. Since the two imperatives of policy are to prop up the zombie banks’ balance sheets and try to reflate asset bubbles (or in the case of stocks keep the rally bubble reflated), and since the “private sector” is unable and unwilling to do this on its own, the only mechanisms available are the Fed’s festering balance sheet and the laundering of MBS through the GSEs.
(On that GSE front, no new word on last weeks rumors of a general rate reduction, though we’re waiting on the next GSE policy huddle on the 17th for definite news on what’s happening if anything. Meanwhile yesterday Freddie Mac outdid its sister Fannie in their latest disgrace, announcing a $4.7 billion loss for the quarter and opening up its mooching sack for another $1.8 billion mugging of the taxpayer. This comes a week after Fannie’s $1.2 billion loss and $1.5 billion suck.
These losses are all incurred on MBS they bought from the banks at intentionally bloated prices. That’s yet more Bailout robbery.)
So the Fed will dole out another quarter trillion in free money to the banksters, who will lend it back to the government at a higher rate. I still can’t get over that scam. I feel like if I read it in a satire I’d think it skirts the bounds of heavy-handedness. Yet this really happened on our Earth…
They say this signifies that most within the Fed have finally accepted (at least privately and in action, if not in public rhetoric) that inflation is about as much of a threat as the Hottentots as America sinks into the Second Great Depression and deflation tugs ever more insistently at the bubbles and the balance sheets.
I used to joke that the creationists would reject gravity as well if there was a monetary or religious angle. Well, the inflationistas have been propagating a figurative denial of gravity for a long time now with these bubbles, and since the crash they’ve striven with great mysticism to regain the faith. These hippies didn’t join hands to chant and levitate the Pentagon, but the towers and mints of Wall Street and Washington.
What’s really going on here is a struggle for control. The system wants a basic, consistent, low inflation rate for assets and the economy in general. (Spikes and volatility for necessities like food are OK.) So staying that course constitutes maintaining control, while capitulating to deflation, or sprawling into hyperinflation, are the forms of losing control.
Reality wants to deflate, and these bubbles will all go flat. Asset prices are still bloated way beyond any physically anchored economic value. But at the same time there’s far too much funny money in circulation even at this level of oil production, let alone once descent sets in over the next five years. And now the Fed will bloat even further? While there’s little possibility of conventional inflation, there’s an excellent chance of a bout of hyperinflation before the final deflation sets in.
(That deflation is where we’re inevitably headed in the end is a key reason we need the bottom-up debt jubilee.)
At least at first it won’t be these criminals, this vile combination of robber, psychopath, and concentration camp doctor, who feel the pain. We the liquidated will get pummeled and ravaged. That’s what the elites of finance and government impose upon us. What happens after that, though, is 100% up to us.


  1. “What’s really going on here is a struggle for control.”

    The government wants inflation to solve their financial system problem, but the ultimate question reduces to whether “$250 billion worth of MBS cash flow” is either:

    predictable: formulaically derived?

    probable: range of expected value?

    or uncertain: lacking cash flow or mark-to-model valuation?

    Comment by Stephen A. Boyko — August 10, 2010 @ 3:09 pm

    • For these guys, is there any difference? Their “predictable” and “probable” all equals the uncertain. Unless we say their calls are predictably and probably bad.

      I wonder if anyone at the Fed actually believes mark-to-model? I suppose anything’s possible, what with the prodigies of idiocy there.

      Comment by Russ — August 10, 2010 @ 3:51 pm

      • Yes!

        I have been making this argument for sometime as a platform for real change. During this journey, I have met a critical mass of mavericks who tend to view things somewhat similarly.


        We’re All Screwed:
        How Toxic Regulation Will Crush the Free Market System

        Book Blurbs

        •Such as Federal Reserve Bank of Cleveland James Thomson, Vice president-Policy Analysis and Development.

        Robert Barbera, Chief Economist at ITG and author of “The Cost of Capitalism”

        • Those of us with companies positioned to be taken public are looking at possible IPOs in London, not New York. Why? Steve Boyko explains that the cause is overregulation that is strangling private enterprise. American entrepreneurs now labor under the strict supervision of an administrative state that looks more like the former Soviet Union than the land of the free and the brave.

        Richard J. Bishirjian, Ph.D., President, Yorktown University

        • As the pendulum swings from under-regulation to over-reaction in times of economic crisis, why not move to a more flexible model? Firms, companies and investors are not identical–and one-size-fits-all standards are not the solution. This work makes the case for a multi-tiered approach that reflects that there is a real diversity of knowledge and risk tolerance in the contemporary economy.

        Nikolas Gvosdev, Senior Editor, The National Interest

        • We are all painfully aware that our system of regulation constantly fails to provide the desired outcomes intended by those regulations. Steve Boyko clearly points out why and offers a new approach. Those seeking a more principled and analytic approach should give this book their full attention.

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        • With the experience of past policies failure, a new approach is needed. Steve Boyko has addressed the problem and the causes in a direct manner. His book should receive the widest dissemination within the Federal, State, Local, and Tribal governments, as well as within the academic community. Commercial enterprises would be well advised to study this work to stay ahead of the learning curve.

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        • Having had to deal with a universe of healthcare regulation and the whole SOX debacle, which only added cost and likely had little impact on changing behavior, because a crook is a crook, I hope a least some of our Government Officials, Law Makers and Rule Writers will take Steve Boyko’s book to heart.

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        • Steve Boyko makes several key points: 1) regulations need to be other than one-size-fits-all, 2) bubbles always take place, but they increase in frequency if regulations don’t affect the greed related issues of all parties fairly (i.e “We are all Skrewed”), and 3) SOX is an example of RULE WRITING, not GOVERNANCE!” This is an excellent book that addresses issues needed to be considered by Government Officials and Law Makers.

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        Comment by Stephen A. Boyko — August 10, 2010 @ 4:14 pm

  2. Well, if I understand it correctly this time the QE will go to pushing down medium-term Treasury yields, which is a much better–or at least more fair–way of printing money.

    Comment by jimmy james — August 10, 2010 @ 3:15 pm

    • True, I guess it’s a somewhat less bad way of doing it. (Durden at Zerohedge seemed disappointed, calling it QE 1.99999999). Still, the Bailout by any other tool…

      Still bad for real investors, savers.

      Also not likely to be good for commodity prices, for the suckers who actually use things in the real economy.

      Comment by Russ — August 10, 2010 @ 3:48 pm

  3. Russ – you rock!

    Regarding this; “What’s really going on here is a struggle for control. The system wants a basic, consistent, low inflation rate for assets and the economy in general. (Spikes and volatility for necessities like food are OK.) So staying that course constitutes maintaining control, while capitulating to deflation, or sprawling into hyperinflation, are the forms of losing control.”

    The system wants a basic, consistent, low inflation rate for assets and the economy in general; as a mask, as a decoy, as a ruse, as a means to keep the marks in the game, so as to conceal the real system goal of a long and well metered out population eliminating, resource consuming reduction, deflation. They can run this con for ever. These gangster pricks are not stupid, This crisis is their INTENTIONAL creation.

    The deflation is the control. Japan was in many ways a pilot program.

    Bottom up proportional debt jubilee yes!

    Deception is the strongest political force on the planet.

    Comment by i on the ball patriot — August 10, 2010 @ 6:03 pm

    • Thanks, i ball.

      Renouncing debt is key. Unfortunately, just rational analysis of why people should walk away from debt and not incur new debt is unlikely to have much effect. There will either come a tipping point and a mass (financial) migration, or not.

      I’m not sure how to politically harmonize and render effective the moral arguments. If only there were a way to reinstate the old moral taboos about taking on new casual debt while at the same time discrediting the bogus ones about walking away from existing debt involving top-down swindles.

      The common link is of course moral rejection of debt itself. But, to put it coarsely, the one argument looks pro-deadbeat, the other anti-.

      Those are both superficial perceptions (both would actually assert public power vs. system criminal power), but in politics the superficial is often what’s most important, at least in the short run.

      Comment by Russ — August 11, 2010 @ 1:19 am

  4. Hyperinflation is not in the cards. Whenever I see someone predict it or call it inevitable I back away slowly (and look for other spittle-flecked keywords like “Ponzi” and “printing”). Hyperinflation only occurs with massive destruction of the real, productive economy — 70% unemployment to start. What do you need for hyperinflation? You need very specific conditions of lots and lots of dollars chasing a drastic collapse of real goods. Without a mechanism for getting dollars into the hands of average citizens it will not, cannot happen. People will starve in the streets with deflation, the economy will fold in on itself like a paper crane and you still will not see hyperinflation. Zimbabwe and Wiemar Deutschland are far different scenarios than we have now. There you had mass land confiscations and an entire industrial region confiscated by a foreign occupier.

    QE is the lion that mewed. You take an interest bearing asset and trade it for an asset that pays less interest. This is deflationary. Low interest rates are deflationary. The CB explicitly guaranteeing a very long period of very low interest rates is deflationary. Japan has been in deflation for 20 years. Every time they get spooked by fears of hyperinflation and they tighten up, what do they get? More deflation. Deflation is inevitable without, as you have previously pointed out, widespread repudiation/jubilation. Hyperinflation is a cudgel word the financiers use to beat down anything that would help Main Street. And people foolishly believe it.

    Sure the CB likes to maintain an artificial interest rate spread. Yeah, clever, they hope like hell it will save them like it did in the 80s when their mercenary adventures in Latin America went sour. What’s a government or two between friends? Unfortunately these banks aren’t walking wounded, they’re the living dead — and they will do anything to preserve their power. Fine, let’s say they’re struck with insanity and give every American a million bucks. Three hundred million Americans turn around and pay off all their credit cards. Aside from a sudden surge in jetski sales this would destroy the banks. Hyperinflation isn’t something the banks will ever resort to, and should the specific conditions for it arise we’d be too busy fighting off Canadian invaders or casting the last smoldering cinders of California into the sea to worry about something as trivial as the value of a dollar.

    Comment by reslez — August 11, 2010 @ 3:22 am

    • Well, no one would say I’m crazy over hyperinflation around here. I’ve consistently said reality demands deflation.

      I didn’t say I think the Fed would choose it. On the contrary I characterized it as a possibility once they lose control of the situation. (And I didn’t call it inevitable.)

      I agree that there’s no real economic basis for it. But then there’s no basis for the existing asset bubble.

      I do see one obvious way for the banksters to try to profit off hyperinflation – amass foreign reserves, trigger the dollar hyperinflation, then use the foreign currency to buy up whatever assets they don’t already own. In 1923 with dollars you could buy a whole city block in Berlin for the price of a small lot in the US. (And one perk of being a Nazi party employee was that they were paid in foreign currencies. The last I read historians were still uncertain where Hitler got the foreign currency; it lends some credence to the contemporary charge that he was getting money from the French.)

      So if other looting measures were failing, I could picture Wall Street considering such an adventure. Needless to say, they wouldn’t have moral qualms over it.

      Comment by Russ — August 11, 2010 @ 4:49 am

      • Put in a different vernacular deflationary too-random-to-regulate (TRTR) is more improtant to focus on than TBTF scale (i.e. balance sheet) of GS or FRB

        Comment by Stephen A. Boyko — August 11, 2010 @ 8:49 am

    • Hyperinflation isn’t something you mysteriously stumble into. It’s better understood as the result of a collapsing real economy. Productive capacity falls off a cliff and the country is unable to cut demand (people with dollars) quickly enough to match. Hyperinflation is a symptom of an underlying problem: 300 million people want to eat but there’s only enough food for 60 million. I suppose, in that scenario, you could prevent hyperinflation by confiscating dollars — a sudden 80% asset tax or something — but you still have 240 million extra people.

      France confiscates the Rhine industrial region, devastating productive capacity, but the Wiemar government continues to spend, in fact spends even more to repay war debt and make payments to the unemployed industrial laborers. Zimbabwe confiscates productive land from white farmers and parcels it out to supporters of the regime — production plummets — 80% unemployment — and the regime keeps spending. Extreme scenarios, government toppling scenarios. Hyperinflation is extreme inflation.

      Could the Fed destroy the productive capacity of the economy? Sure, in fact they already are. But without the intervention of Zoth-Ommog or an unscheduled landing of 1999 RQ36 it’s not happening nearly fast enough to cause hyperinflation. Demand is decreasing in line, in fact we are deflating. People with no money have no claim on goods and can’t cause inflation. Until someone identifies some mechanism by which hyperinflation could conceivably occur I’ll continue to view all references to it as debt/deficit hysteria. I frequently detect map/territory confusion in this topic. Asset inflation is meaningless in itself. The only problem with the asset bubble is that incomes did not rise to support valuations. Who cares if a house costs five hundred dollars or five million so long as that price remains 3x gross wages?

      Comment by reslez — August 13, 2010 @ 7:07 pm

      • I don’t have any emotional investment in the idea of hyperinflation. But just to play devil’s advocate, we won’t know the effect of the all the oil projects mothballed in 2008-9 on account of the credit crunch until 2013-15. When that displaced new production fails to make up for declining production from existing fields is when Peak Oilers expect us to experience the classical Peak effect where demand tries to exceed supply.

        That would be similar to having our Ruhr confiscated. If it plays out like that, do you expect the government to move quickly to slash the money supply to bring it into line with the new physical reality?

        Like I said, I’m not a hyperinflation fiend. But I do think it’s possible.

        Comment by Russ — August 14, 2010 @ 4:06 am

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