Figure 1
Federal Reserve balance sheet
Mr. Soini is the chairman of the True Finns Party in Finland. (Published in todays WSJ)
May 9, 2011. "When I had the honor of leading the True Finn Party to electoral victory in April, we made a solemn promise to oppose the so-called bailouts of euro-zone member states. These bailouts are patently bad for Europe, bad for Finland and bad for the countries that have been forced to accept them. Europe is suffering from the economic gangrene of insolvency—both public and private. And unless we amputate that which cannot be saved, we risk poisoning the whole body.
The official wisdom is that Greece, Ireland and Portugal have been hit by a liquidity crisis, so they needed a momentary infusion of capital, after which everything would return to normal. But this official version is a lie, one that takes the ordinary people of Europe for idiots. They deserve better from politics and their leaders.
To understand the real nature and purpose of the bailouts, we first have to understand who really benefits from them. Let's follow the money.
At the risk of being accused of populism, we'll begin with the obvious: It is not the little guy that benefits. He is being milked and lied to in order to keep the insolvent system running. He is paid less and taxed more to provide the money needed to keep this Ponzi scheme going. Meanwhile, a kind of deadly symbiosis has developed between politicians and banks: Our political leaders borrow ever more money to pay off the banks, which return the favor by lending ever-more money back to our governments, keeping the scheme afloat.
In a true market economy, bad choices get penalized. Not here. When the inevitable failure of overindebted euro-zone countries came to light, a secret pact was made.
Instead of accepting losses on unsound investments—which would have led to the probable collapse and national bailout of some banks—it was decided to transfer the losses to taxpayers via loans, guarantees and opaque constructs such as the European Financial Stability Fund, Ireland's NAMA and a lineup of special-purpose vehicles that make Enron look simple. Some politicians understood this; others just panicked and did as they were told.
The money did not go to help indebted economies. It flowed through the European Central Bank and recipient states to the coffers of big banks and investment funds.
Further contrary to the official wisdom, the recipient states did not want such "help," not this way. The natural option for them was to admit insolvency and let failed private lenders, wherever they were based, eat their losses.
That was not to be. As former Finance Minister Brian Lenihan recently revealed, Ireland was forced to take the money. The same happened to Portuguese Prime Minister José Sócrates, although he may be less forthcoming than Mr. Lenihan about admitting it.
Why did the Brussels-Frankfurt extortion racket force these countries to accept the money along with "recovery" plans that would inevitably fail? Because they needed to please the tax-guzzling banks, which might otherwise refuse to turn up at the next Spanish, Belgian, Italian, or even French bond-auction.
Unfortunately for this financial and political cartel, their plan isn't working. Already under this scheme, Greece, Ireland and Portugal are ruined. They will never be able to save and grow fast enough to pay back the debts with which Brussels has saddled them in the name of saving them.
And so, unpurged, the gangrene spreads. The Spanish property sector is much bigger and more uncharted than that of Ireland. It is not just the cajas that are in trouble. There are major Spanish banks where what lies beneath the surface of the balance sheet may be a zombie, just as happened in Ireland for a while. The clock is ticking, and the problem is not going away.
Setting up the European Stability Mechanism is no solution. It would institutionalize the system of wealth transfers from private citizens to compromised politicians and otherwise failed bankers, creating a huge moral hazard and destroying what remains of Europe's competitive banking landscape.
Some defend the ESM, saying its use would always require unanimity. But the current mess with Portugal shows that the elite in Brussels will seek to enforce unanimity through pressure when it cannot be obtained by persuasion. Abolishing unanimity is only a matter of time. After that we have a full-fledged fiscal transfer union that is obviously in hock to Brussels' anti-growth corporatism.
Fortunately, it is not too late to stop the rot. For the banks, we need honest, serious stress tests. Stop the current politically inspired farce. Instead, have parallel assessments done by regulators and independent groups including stakeholders and academics. Trust, but verify.
Insolvent banks and financial institutions must be shut down, purging insolvency from the system. We must restore the market principle of freedom to fail.
If some banks are recapitalized with taxpayer money, taxpayers should get ownership stakes in return, and the entire board should be kicked out. But before any such taxpayer participation can be contemplated, it is essential to first apply big haircuts to bondholders.
For sovereign debt, the freedom to fail is again key. Significant restructuring is needed for genuine recovery. Yes, markets will punish defaulting states, but they are also quick to forgive. Current plans are destroying the real economies of Europe through elevated taxes and transfers of wealth from ordinary families to the coffers of insolvent states and banks. A restructuring that left a country's debt burden at a manageable level and encouraged a return to growth-oriented policies could lead to a swift return to international debt markets.
This is not just about economics. People feel betrayed. In Ireland, the incoming parties to the new government promised to hold senior bondholders responsible, but under pressure, they succumbed, leaving their voters with a sense of democratic disenfranchisement. The elites in Brussels have said that Finland must honor its commitments to its European partners, but Brussels is silent on whether national politicians should honor their commitments to their own voters. In a democracy, where we govern under the consent of the people, power is on loan. We do what we promise, even if it costs a dinner in Brussels, a "negative" media profile, or a seat in the cabinet.
When in Europe's long night of 1939-45, war came to Finland with the winter blizzards, my mother was one of eight siblings being raised on a small farm in central Finland where my grandparents eked out a frugal living. My two young uncles rushed to the front and were both wounded in action during Finland's chapter of Europe's most terrible bloodshed. I was raised to know that genocidal war must never again be visited on our continent and I came to understand the values and principles that originally motivated the establishment of what became the European Union.
This Europe, this vision, was one that offered the people of Finland and all of Europe the gift of peace founded on democracy, freedom, justice and subsidiarity. This is a Europe worth having, so it is with great distress that I see this project being put in jeopardy by a political elite who would sacrifice the interests of Europe's ordinary people in order to protect certain corporate interests.
Europe may still recover from this potentially terminal disease and decline. Insolvency must be purged from the system and it must be done openly and honestly. That path is not easy, but it is always the right path—for Finland, and for Europe."
April 25, 2011. It is unbelievable how we can be duped believing on nonsense theories in economic issues. Like today there is no inflation in the USA? The correct statement is: There is no domestically induced inflation in the USA. We all believe that but our mega-bankers tell that inflation is coming - like in Asterix they used to say "Sky is Falling, Sky is Falling..." - and we run for cover that they point to us. The only correct statement is: There is no domestically induced inflation in the USA.. If you have visited any grocery store in the USA you know that the prices are no more the same as last year nor even last month and they are not coming down as long as we have wars around the Middle-East.
When these wars end we will have stabilization of energy prices but not before that. The energy companies have no other solution than to drill, drill and drill, and absolutely no support to renewable energy development. And our politicians must obey those who always have paid their re-election campaigns, meaning the mega-banks and Big Oil. China has already put an energy policy in place that will in due time solve all their energy problems. The rules in books there say that within a few years every utility in China must get 20% of their electricity from renewable energy companies on their area regardless of the cost of this energy. This is a simple but extremely effective capitalistic method to develop highly competitive renewable energy industry within the shortest possible time period and the same time cover the whole country. In the future the percentage can be increased as the need may be.
With this China's externally induced energy inflation will disappear, not overnight but within a decade or two.
The next is the price of food. We will always have draughts and bumper crops and the price of food will continue to have variation. If we would build security storage system there is no need to have any food based inflation either but of course this is not in the interest of private enterprises and if the governments do not handle this we will continue to have food price induced inflation around the globe.
The last but most dangerous of these inflation generators are the in purpose manipulated interest rates. Interest rates are not controlled by the governments like we are led to believe but by the private Banking Empires and mega-banks who use fitting economic theories to make our central banks to believe that they need to change the interest rates to cool down or to accelerate the economic activities. Nothing is further from the truth.
Economics is not a natural process found anywhere in the nature and with that it is totally man made system consisting of forever changing rules that are shoveled through our ears and eyes exactly the same way as Hitler mesmerized the German people to wars against the Europe that had totally abused and humuliated it through the piece treaty of Versailles ending WW I. Most stop reading here as they refuse to answer why all the governments and private financiers of the world have used decades and tons of paper money money to analyze every single of Hitler's public and private speeches. They have been analyzed to the bone including all silent movies and every recorded and written discussion that means every word he has ever uttered. We have also analyzed his every facial movement to make sure that there is no error in interpretation of the words he has said in any of the remaining silnt movies. Hitler was the mastermind and genius in manipulating public opinion. Everything we have discovered from these analysis is currently used shamelessly against us in every public media you can find.
For human life nothing else is necessary than food and shelter. The rest is just luxuries that some like to have more than some others. After a certain amount of all those you want most have enough and stop wanting anything more. But of course we will always plenty of those who cannot stop collecting wahever it is regardless of the cost in money and lives.
Here is a borrowed story from FT regarding the financial crisis in Greece by Dr. Desmond Lachman, American Enterprise Institute, Washington, DC. This anecdote highlights once nmore the goals of the UK and US Aristocracy: EU must be destroyed at any cost to maintain the Anglo-American hegemony in the world. That is an futal effort as at best it might move the tipping point up to a decade further. The new power sprouts are growing larger and larger and they cannot be stopped any more. At the end they will cut off the shackles of the banking slavery that has been here in mild form for over a millennium until it reached it's full brutality in 1815 during the aftermath of the battle of Waterloo where Napoleon was defeated. What comes after is still in infancy - is it good or bad? Only time can tell but the time of the Banking Empires and Emperors is disppearing to the sunset.
"Do not blame the 'herd' for Greece's high borrowing costs"
Sir, Your editorial "Europe must use borrowed time well" (April 21) asserts that Greek solvency is still within reach and that Greece's present high borrowing costs reflect, to an important degree, market herd behaviour. In so doing, your editorial glosses over several
important facts on the ground that would suggest that a large writedown of Greece's sovereign debt is almost inevitable.
Over the past six quarters, Greece's gross domestic product has contracted by 8 per cent while retail sales are currently some 20 per cent below year-earlier levels. At the same time, rather than increasing by the 8 per cent programmed by the International Monetary Fund, Greek tax collections declined by well over 10 per cent in the first quarter of 2011. In the absence of a rebound in these collections, Greek tax revenues could be some $10bn below IMF- programmed levels in 2011.
Greece's dismal economic performance to date under the IMF- European Union adjustment programme is validating the view of those who warned that draconian fiscal adjustment within the euro straitjacket was bound to lead to a collapse in the Greek economy, which would contribute to an increase in Greece's public debt to GDP ratio well beyond the already high 160 per cent projected by the IMF programme.
This experience would also suggest that the application of further severe budget tightening within the euro straitjacket now being prescribed by the IMF will lead only to a further collapse in the Greek economy that will make it even more difficult for Greece to service its debt.
Far from Greece's currently high interest rates being the result of herd behaviour, it would seem to be reflecting the market's accurate assessment that Greece has a fundamental solvency problem. To pretend otherwise only delays finding a solution to Greece's very difficult economic problems.
April 22, 2011. Explosive video covering the discussion between Matt Taibbi and CNN's Eliot Spitzer (63rd New York Attorney Genral, and 54th Governor of the Satate of New York).
"Housewives" story -- he's probably my favorite interview on the finance stuff because he (Eliot Spitzer) knows this material so well, and always has interesting things to add. In any case, here's the video from last night's appearance:
April 22, 2011. Text by Matt Taibbi from Rolling Stones.
This video went up on Zero Hedge yesterday. In the first minute you will want to throw both of these little bears in a sack and drown them, but by the end they win you over.
There are so many things about QE that are crazy, but there’s one thing that I’d like to point out in particular. Yes, this is a huge money-printing program with potentially disastrous inflationary consequences. And yes, the influx of all this money could easily distort markets and prices far beyond the extreme distortions we’ve already been dealing with (commodities prices shot through the roof after this latest QE round was announced). But the thing I want to focus on is the subsidy aspect of QE, pointed out in the video. QE is designed to buy Treasuries and other assets, but the Fed does not simply go out and buy Treasuries itself; it does it through its primary dealers, who include of course banks like Goldman, Sachs. The Fed all but announces when it’s going to be doing this buying and in what quantity, which allows the banks to buy up this stuff at lower prices ahead of time and then sell it to the Fed at inflated cost.
Even forgetting about the obvious insider trading aspect to all of this, the official middleman status of the banks is a direct government subsidy and it is little remarked upon, even by the Tea Party crowd, which is otherwise so opposed to “welfare.” But these sorts of subsidies exist all throughout the financial services industry.
You want to take out a mortgage or a credit card; you obviously can’t get your credit from the government at 0% interest. What you do instead is you get a mortgage from a private bank at 4.7% or 5%, and that bank in turn has borrowed from the Fed at 0%. This would almost make sense if indeed these banks were legitimately providing a service for that 5% cut, i.e. if they were carefully and judiciously weighing the credit risk of applicants. But if anything these banks have been even more irresponsible (more irresponsible by far, actually) with their money than the masses of people who are now in trouble with their credit cards, mortgages, student loans, etc. They not only don’t deserve this subsidy any more than ordinary people do, they’re actually the worst possible destination for an appropriation of emergency funding, which is what this Fed money is supposed to be.
Another example of a subsidy: you want to bet on oil futures, you can’t just go do it; you have to make your investment through a company that has a special exemption from the CFTC to speculate on the commodities market. A company like Goldman Sachs, whose subsidiary J. Aron has just such an exemption.
Or if you want to buy health insurance, you can’t choose to buy either the cheapest possible private plan, or a public-run health plan. Instead, you have to buy private insurance from a group of companies which all collectively have an anti-trust exemption from the government, which allows them to artificially set prices higher. You’re not buying the cheapest possible insurance directly on the open market; you’re effectively buying government-subsidized insurance at artificially high prices, through a middleman company.
QE is madness on a level far beyond the subsidy aspect, but the subsidy is worth pointing out.
April 21, 2011. Still wondering why the Finns and the peoples of the Northern Europe are in arms against the bail-outs of the South? Their anger is not directed against the peoples of the South even as it looks so. It is directed against the Banking Empires who bribed the Politicians and Bankers of the South to use the backing of the tax payers money while giving to the ordinary people practically free high return "investment" money on a silver platter for specific investments e.g. worthless mortgage securities. They knew perfectly well that all these investments would fail as surely as the sun rises from the East and sets to the West.
They fooled the ordinary people to became victims in this game while the guilty ones are the Banking Empires, Politicians, local Bankers and the ruling Aristocracy who let the fake money to be used in these scams. The Aristocracy was totally aware what happens with bad investments - they just let it go ahead as usual as at the end the tax payers would be forced to pay the bills again - they thought.
It is time for the peoples of the World to show these criminals - no more this BS!
The short story below by Mr. Kari M Ruokonen from Helsinki Finland tells volumes:
"It's hard to watch imprudent countries
I am a Finnish taxpayer who has accepted one of the highest tax burdens in Europe and expect to retire at the age of 63. Now I am told that my retirement age will be 65 or possibly 67 while my tax rate is approaching 60 per cent of my income.
During last Sunday's elections I did not vote for the anti-Europe True Finns party. However, I do see a point in its campaign against the bail-out of the "less fiscally prudent countries".
While Finns diligently pay their taxes, as honesty is considered the backbone of society, I find it difficult to see my tax Euros spent in supporting countries that have consistently lied to the European Union during the past decade or so about their economies and where tax evasion is a national hobby.
Why should I, as an individual, support a bail-out whereby I will work until the age of 65-67 and pay very high taxes on my income to see my tax money spent on bailing out a country where the retirement age is 58 and the tax burden much less? "
If you still wonder why this True Finn's party surfaced so strongly in last week's elections in Finland then think about what happened when the Communism was abandoned in Russia two decades ago:
At the time Finland was a amjor window for the communism to the West and vice versa with an Embassy next to another watching what was going on. Communism needed trade with West and Finland was one of it's larger hubs for this purpose. At this time also a large portion of the Finnish GDP was based on trade with the communist Russia. It was not just Finnish product that went through here.
When communism finally failed huge slice of the Finnish GDP disappeared practically during one night. It was the people on factory floors that suffered most as they were like workers everywhere. Income was just sufficient to provide for everything they needed to live relatively comfortable life but it did not support any investments towards retirement. The result was a disaster for the country and the people on the factory floors remember this like yesterday.
Finland needed help, much more help, than the rest of the Europe or West ever realized but nobody gave a penny. Note that the average Finn today is better educated than most peoples in the world and they see what is going on from different angle. And you keep on asking why the Finns do not show this time solidarity to the other peoples in trouble?
If it would be the peoples fault the Finns would be first and ready to help but in this case we have a game where the Aristocracy of the West is screwing up the peoples of the South at the moment. If they succed like it looks the game does not end.
Their real purpose is to destroy the European Union. Too many people in Europe are too well educated and do not buy this BS any more. They know the US$ 600,000,000,000,000 or US$ 600 Trillion derivatives game build to "balance" the world trade. In comparison the combined GDP of the world is only US$ 60,000,000,000,000 or US$ 60 Trillion. The trade between the Nations is only a fraction from this GDP. They also know that this huge derivatives game in almost 100% under control of the largest Western Banking Empires who in turn are controlled by the Western Oligarchy.
The real story is the global domination and for that end European Union must be financially destroyed. The emerging upheavals in the Middle-East are the alternative that will be brought to full scale war if the ongoing finacial game stops and fails.
April 15, 2011. There is a false illusion held up by the US politicians as a smoke screen that debt taken by US Treasury from FED carries an interest. It is the other debt, approaching US$ 12 Trillion that is outside the FED that carries the interest. In reality it is the US Congress under lucrative lobbying by the mega-banks that made these promise without asking the US tax payers anything at all. Of course by the letter of the law the US Tax Payer owe this money to somebody that they hardly know to exist. With all the money involved finding the truth cannot be discovered in a lifetime.
The solution for the US debt crisis is simply a gimmick: The US Treasury "sells" US$ 12 Trillion worth of new treasuries to FED and pays then all her interest bearing debt it owes to others. The current Government debt holders would get their money as cash and could re-invest it as they please. The bonds used to have a clause allowing the debtor to redeem them early, so our government should use this clause. Some debt holders might not like to get dollars in cash but that is only a temporary problem for them until they can locate a willing businesses to borrow or to exchange it all to company shares. They may want to keep the future dollars without interest in form of new zero interest bonds "for the rainy day" if they trust dollars from the privately owned FED. If they want to liquidate these bonds today they would hardly get anything as FED would be practically bankrupt. But if they wait for 20 to 50 years depending on the bonds, they might get back the face value of these bonds in dollars as US Treasury just might be willing to back these bonds this way.
Unfortunately, the permanent solution can be found only by nationalizing FED. The new US FED would have the backing of the Nation, it's wealth and all Federal tax money flowing through it's accounts. This move would immeditely stabilize the dollar while the functions of the new FED would largely remain the same as today.
The major investors could also join the current private mega-banks to gamble against these banks to try to double their cash monthly by using the US$ 600 Trillion global derivatives markets. These markets form the most sophisticated casino and money laundering system on the planet. There are no limits for the bets beyond the tiny fraction of the collateral or just "personal" trust that the player must have. This casino was created almost from thin air by the same mega-banks that have created all our past, current and likely also future financial crisis including the wars over the past two centuries. They are currently (even before 9/11) working on a big one to get the Christian and Muslim worlds to collide. It is the old principle that the Romans, Ottomans, Genghis Khan, Napoleon, and everybody before and after have used to subdue the world (and on micro scale even even against the individuals) to servitude - "divide et impera".
It is not the duty of the tax payers to keep on bailing out our more than criminal looking financial system. The mega-banks have been playing this game in current form since the establishment of the FED in 1913. The tax payers have been duped to believing that their duty is to pay these gambling debts of the mega-banks or otherwise their lives will be ruined.
The Governor of the Bank of England stated just a week ago that the "too big to fail" is nothing but a (political) myth to mislead the tax payers believing that the sky is falling if these private mega-banks would fail. Banks of course claim that they must be rescued as they are too big to fail. The tax payers did not ask them to gamble and bet in derivatives and related markets. As long as people believe this to be true the bankers have a free ride and can continue as usual as tax payers will get frightened in due time regarding their and their families' survival and at the end they will again bail out these mega-banks.
The wars form the only real threat to the people and the destruction of each of them will cause is several magnitudes larger than the outcome if we just let every mega-bank on this planet to fail. We have thousands of smaller banks that are capable of handling every financial transaction we will ever need.
To survive we need food and shelter on primary level. The failing mega-banks will not grow food nor can they shelter us. Without war the fields and houses are still there intact. All payments can be handled by smaller banks that are actually more honest.
Look how difficult it is to shut down the micro-banking and Hawala systems that latter has been in use forever in the Middle-East and the users include also the so called "terrorists" and terrorist Nations. There is always a myriad of ways to do everything these mega-banks claim to be so difficult that only they can do them and that without them the world will fail
The mega-banks are just protecting their squirrel-wheels and the servitude they have put a large part of the world already. This modern servitude strategy started with the Rothschilds when they managed to corner the UK stock markets following the Napoleon's defeat at Waterloo in 1815. Their nest egg and starting kit contained the wealth of several European sovereigns. Napoleon knew that they had access yo this hidden wealth and offered to give 25% of it all to them but that was not enough. Perhaps thsi was the real reason for Napoleon to lose as he had run out of money and with that the manpower he needed to win the battle at Waterloo.
Bailing out private mega-banks is actually taxation without representation. After this last bail-out sequence these banks are back to their old tricks and again paying their leadership enormous bonuses (tax payers money) while none of them is lending real money to the public at large. The governments are not managing these banks and none of them asked any advise from their respective governments before making any of their investment decisions. They represent a powerful force in a society and with that the largest of them can easily lobby and bribe enough of the acting government individuals to propose and write new laws in their favor. As these financial powers control the news media all politicians know that without their support their past election was their last. In this environment it is easy to get support for the bogus claims: "too big to fail", and "failures would provide an serious damaging and dangerous systemic risk to the whole society and even the world at large" and "could put peoples lives back several decades."
There is no surer way to go back several decades for the tax payers than by bailing out these mega-banks from their bankruptcy. The Greece, Irish and Portuguese peoples will see very soon what it really means. The Icelanders will not suffer but a couple of years with their nonconformist actions by showing the middle finger to their criminal bankers, by putting the banks to receivership and by telling to the governments of the UK and the Netherlands to get lost. These two countries bailed out their citizens who lost their savings lured by the out of the world offers by the three Icelandic banks and demand now that the citizens of Iceland pay them. If they would do just that every citizen of Iceland would remain in servitude for UK and Netherlands for a few decades with no hope of getting out. Being that way I would recommend that no citizen from UK nor from Netherlands would go to Iceland during coming next few generations.
Finland is the only country that we know that when joining the EU demanded that to bail out any failing country inside the EU the whole governing body of Finland must agree. In the worst case a national referendum must be held before any funds are committed to this purpose. How did they figure this out so early? Simple: when communism failed in Russia, Finland was hit harder that the rest of the world could understand on every fronts of her economy. Finland had been a window for communist Russia (Lenin was hiding in Finland at some time during the communist revolution) to the West and with that it had a flourishing trade with it resulting that a major portion of her GDP originated just from this trade. The communist fall in Russia in December 1991 evaporated all trade in an instant. There was not a single country in the world who would help Finland in her now very grave situation. They learned their lesson the hard way and this was behind their farsighted thinking when joining EU and Euro.
We should also follow the old Sumerian and Egyptian parctice from time period as they had no inflation at all. We cannot go back to bartering society like it was then but we for sure could fix the interest rate for the money. We know that on long run the societies tend to grow at rate of about 3.5% based on the GDP growth rates in healthy economic environment.
FED admits in the summary below that interest rate is of secondary importance in a society where economic growth and stability must be secured
If we fix the interest rate to same 3.5% for all borrowed money we are not making an error. If you save you gain at same rate than the society around is growing and that is then good for the retired people as they can maintain their living standards from their savings. This rate is also low enough that no business is discouraged by the cost of money. The banking system will survive with the difference between FED's bank rate. This rate to the banking system at large can vary between 0.5% to 3% when outgoing loan rate is 3.5%. The banks will not borrow more from FED in business environment where they must pay 3% for that money and can get only 3.5% from their clients. That is sufficient to balance the economy.
When interest rates are not going to be above 3.5% nobody can be squeezed to bankruptcy by simply increasing the interest rates like even up to 29.99% on the credit card loans. Nobody can survive that kind of interest long and as it is done that one default allows others instantly to increase their interest rate the same one that secures that bankruptcy will follow and all property of that person or family will be liquidated in a fire sale with pennies on the dollar.
The most accurate and current public FED finacial facts are shown below:
Glenn D. Rudebusch senior VP and acting director of research at the Federal Reserve Bank of San Francisco
To make financial conditions more supportive of economic growth, the Federal Reserve has purchased large amounts of longer-term securities in recent years. The Fed's resulting securities portfolio has generated substantial income but may incur financial losses when market interest rates rise. Such interest rate risk appears modest, especially relative to the Fed's policy objectives of full employment and price stability.
In the midst of the recent financial and economic crisis, with short-term nominal interest rates essentially lowered to zero, the Federal Reserve started expanding its portfolio of longer-term securities in order to spur economic growth, reduce unemployment, and avoid deflation. However, the Fed’s purchases of longer-term securities have been controversial, in part because of the associated interest rate risk, including the possibility that increases in interest rates will cause the market value of the Fed’s portfolio to fall. For example, former Fed Governor Frederic Mishkin (2010) argued that “major holdings of long-term securities expose the Fed’s balance sheet to potentially large losses if interest rates rise. Such losses would result in severe criticism of the Fed and a weakening of its independence.” This Economic Letter provides a financial assessment of the Fed’s interest rate risk and places that risk in the context of the Fed’s macroeconomic goals for monetary policy.
The Fed’s bigger balance sheet
Responding to the financial crisis that started in August 2007 and the ensuing deep recession, the Fed took extraordinary monetary policy actions. By the end of 2008, the Federal Open Market Committee (FOMC) had reduced the overnight interest rate—the usual instrument of monetary policy—essentially to its lower bound of zero. With no scope for lowering short-term interest rates further, the Fed started to provide additional monetary stimulus to the economy by buying longer-term Treasury and federal agency securities. These purchases reduced the stock of such securities available to private investors and put downward pressure on longer-term interest rates. The Fed’s securities purchases generally supported asset prices and improved credit conditions, thereby helping stabilize the economy (Rudebusch 2009, 2010).
Figure 1
Federal Reserve balance sheet
As Figure 1 shows, the Fed’s recent securities purchases have caused its balance sheet to grow enormously. Just before the financial crisis, the Fed’s largest financial asset was about $0.8 trillion in Treasury securities, and its chief liability was a similar amount of currency outstanding in the form of Federal Reserve notes. The Fed now holds about $2.4 trillion in Treasury and federal agency securities. These assets are roughly balanced by a similar amount of currency and bank reserves, which can be thought of as the electronic equivalent of currency.
Although the Fed’s securities portfolio carries essentially no credit risk, its market value can vary over time. Of course, throughout history, central bank balance sheets have contained tradable assets, such as gold, government bonds, and foreign currencies. So financial risks associated with fluctuations in the market prices of central bank assets are nothing new. Still, the increased size of the Fed’s current portfolio could result in unusually large financial gains and losses from market fluctuations. Furthermore, besides producing a larger balance sheet, the Fed’s purchases have shifted the composition of the Fed’s securities portfolio toward longer-maturity securities. Indeed, the duration of the Fed’s portfolio—which is roughly a measure of average maturity—rose from between two and three years before the financial crisis to between four and five years now. The longer duration of the Fed’s portfolio implies that its market value is more sensitive to changes in interest rates. The combination of a larger securities portfolio with a longer duration implies that the Fed is taking on more interest rate risk than usual.
Accounting for rising interest rates
In understanding the Fed’s interest rate risk, it is useful to separate the effects of rising short-term interest rates from the effects of rising long-term interest rates. In general, when short-term interest rates rise, the manager of a portfolio financed by short-term liabilities faces increasing interest expenses. Similarly, when short-term interest rates rise, the Fed will pay a higher interest rate on bank reserves, which increases the funding cost of its securities portfolio. In contrast, the Fed’s interest income that is generated from its holdings of fixed-coupon longer-maturity securities will be essentially unaffected. Thus, rising short-term interest rates will squeeze the Fed’s net interest income.
Table 1
Federal Reserve income statement
(Billions of dollars, January 1 through December 31, 2010)
Note: Numbers may not total due to rounding.
The potential quantitative effect of rising short-term rates can be assessed using the Fed’s income statement in Table 1. In 2010, the Fed earned $82.9 billion in interest income, which is equal to an average coupon yield of around 4% applied to a $2 trillion portfolio of longer-term securities. The interest expense for funding these assets last year was only $3.1 billion, which is equal to the Fed’s reserves rate of 0.25% applied to more than $1 trillion in bank reserves. If short-term interest rates were to rise, the Fed’s net interest income would fall as interest expenses rose and its fixed-income earnings changed little. Importantly though, currency, which now represents about 40% of Fed liabilities, has a zero funding cost. So, short-term interest rates would have to rise rapidly to quite high levels—in the neighborhood of 7%—for the Fed’s interest expenses to surpass its interest income. Such an outcome appears very unlikely. Indeed, in the latest Blue Chip consensus forecast, it takes almost five years for short-term rates to gradually inch up to 4% and long-term rates to reach 5%. By that time, bank reserves are likely to be reduced closer to pre-crisis levels, so the Fed’s interest expenses would remain limited.
After accounting for other income and operating expenses, the Fed’s 2010 net income was $81.7 billion. From this amount, the Fed added to its capital reserves and paid dividends to its member banks. It then remitted the remainder—$79.3 billion—to the Treasury. While the Fed has a substantial net income cushion, it must still consider the risk of capital losses on its securities portfolio when long-term interest rates rise. To do this, the Fed values its securities at acquisition cost and registers capital gains and losses only when securities are sold. Such historical-cost accounting is considered appropriate for a central bank that is motivated by macroeconomic policy objectives rather than financial profit and is consistent with the buy-and-hold securities strategy the Fed has traditionally followed.
The Fed’s securities portfolio grew in 2010, so it had essentially no realized capital gains or losses. Although not part of its standard accounting, the Fed does report unrealized capital gains and losses on its securities portfolio for greater transparency (Federal Reserve Board 2011). This disclosure mimics private-sector mark-to-market accounting on holdings of longer-term securities. As shown in Table 1, when valued at market prices at the end of 2010, the Fed’s securities were worth $71 billion more than their amortized purchase price. These capital gains reflect the general decline in longer-term interest rates since the securities were bought. If longer-term interest rates were to rise, these unrealized capital gains would be reduced and perhaps turn into capital losses. If the Fed sold securities and realized the capital losses, its net income would be reduced.
Figure 2
Federal Reserve remittances to Treasury
To add it all up, Figure 2 shows the Fed’s remittances to the Treasury over the past decade, which have jumped with the Fed’s enlarged balance sheet, and a plausible illustrative scenario for future remittances. These future remittances are based on net portfolio income projections by the Federal Reserve Bank of New York (2011) using the above Blue Chip consensus interest rate forecasts, a constant adjustment for average operating costs and dividends, and an assumption that gradual securities sales by the Fed commence next year and continue through 2017. Even after accounting for rising interest rates and realized capital losses, the Fed’s payments to the Treasury remain sizable. Of course, it is conceivable that capital losses could reduce the Fed’s net income to zero or even generate net losses. In such unlikely circumstances, the Fed’s capital base would be maintained by letting remittances to the Treasury fall to zero. In the most extreme case, future remittances would also be reduced (and recorded as a change in deferred credit), but the Fed’s capital base and financial position still would remain completely secure.
Costs and benefits of the Fed’s actions
The above financial accounting helps put the broader fiscal costs and benefits of the Fed’s large-scale purchases of securities in perspective. One obvious benefit to the U.S. Treasury (and, by extension, the U.S. taxpayer) has been the additional income received from the Fed. Figure 2 shows that, from 2008 to 2010, the Fed transferred to the Treasury $83 billion more than the 2000–2007 historical average would have predicted. That is, instead of paying more interest to, say, a foreign bondholder, the Treasury paid the Fed, which then returned the funds to the Treasury. A second fiscal benefit from the Fed’s securities purchases followed from the ensuing stronger economic recovery. As longer-term interest rates were pushed lower by the Fed’s actions, the resulting higher output and household income boosted federal tax revenue and reduced federal outlays. Finally, as a third benefit, lower longer-term interest rates also lower the Treasury’s borrowing costs for issuing new debt. These three financial benefits would likely overwhelm any future capital losses that the Fed might realize on its securities holdings, even if short- and longer-term interest rates jumped quite high.
However, it is important to stress that this financial accounting is ancillary to the Fed’s mission. The Fed, of course, strives to be a cost-efficient steward of the public purse. But its statutory mandate for conducting monetary policy is to promote maximum employment and price stability. These macroeconomic goals are the key metrics for judging monetary policy. Financial considerations—even potentially large capital losses—are secondary.
Of course, financial considerations would take on a greater significance if they obstructed the Fed’s ability to implement monetary policy. However, regardless of its income expenses or capital losses, the Fed still has the operational ability to raise short-term interest rates to stem inflationary pressures. In particular, the Fed’s ability to pay interest on bank reserves allows it to conduct monetary policy independently of the size of its balance sheet (Bernanke 2010).
Still, while it is generally recognized that central bank capital losses would not directly impede monetary policy operations, some analysts worry about the attendant political pitfalls (Borio and Disyatat 2010). Large realized or unrealized capital losses could be misinterpreted and subject the Fed to criticism, especially if the losses exceeded the additional interest income from the enlarged portfolio. In the worst case, the political backlash could perhaps threaten the Fed’s operational autonomy. In the past, the Bank of Japan has taken such threats quite seriously and has limited its balance sheet policy actions in part because of a fear that capital losses could tarnish its credibility (Bernanke 2003). Indeed, to insulate itself from such political fallout, the Bank of England obtained in advance an explicit government indemnity for potential future capital losses stemming from its program of large-scale asset purchases. The Fed’s accounting arrangements, as detailed above, automatically provide a similar implicit indemnification. Still, the most effective means for avoiding such criticism likely is to communicate clearly to the public the Fed’s monetary policy objectives and the macroeconomic benefits of its actions.
Conclusion
In its policy actions, the Fed’s primary focus has been on restoring the economy to health and maintaining low inflation. The Fed’s recent securities purchases appear likely to register financial gains, though these are at risk if interest rates rise. However, as then-professor Ben Bernanke (2000) wrote: For a central bank “to allow consideration of possible capital losses to block needed policy actions is misguided.” That is, interest rate risk should be a secondary consideration, subordinate to the macroeconomic goals of monetary policy.
March25, 2011 The ten rules by Reid Hoffman, Co-Founder and Chairman at LinkedIn:
Rule #1: Look for disruptive change.
If you’re about to start on a new venture, ask yourself: What is becoming possible or necessary that wasn’t possible before? Is a new product or service able to take over an existing market or create a new market? When I co-founded LinkedIn the tech industry was in a deep depression. I looked at all the opportunities created by the Internet and had the idea that eventually everyone would need a professional profile online. The disruption was that people were able to directly reach the best candidates rather than hoping for responses from a listing in the paper or an ad on a Web site.
Rule #2: Aim big.
Regardless of whether a start-up is targeting a big idea or a small one, it will still require the same amount of blood, sweat and tears—so aim big! What is “big?” It is a new product or service that creates or dominates a significant market.
Rule #3: Build a network to magnify your company.
People tend to think that behind every great start-up is a single entrepreneur with a whiz-bang idea. The reality is great companies are built by a number of people with talent who are surrounded by amplifying networks. The most successful entrepreneurs bring in advisors, investors, collaborators and early customer relationships.
Rule #4: Plan for good luck and bad luck.
You should always assume you will have both good luck and bad luck with your new company. Good luck is not as simple as “it worked out.” Rather, this is when you discover a great opportunity and can quickly shift to go after it. Bad luck is what happens when your first idea doesn’t work. It doesn’t mean failure; it means you need to pursue plan B.
Rule #5: Maintain flexible persistence.
Very often entrepreneurs are given conflicting advice: “Be persistent! Stay committed to your vision!” or “Pivot on key data! Know when to change!” The challenge is to follow them both, but know which advice is most appropriate for which situation. You must know how to maintain flexible persistence.
Rule #6: Launch early enough that you are embarrassed by your first product release.
With my first startup, Socialnet.com, it took us nine months to launch the first product. That was a disastrous mistake. We wanted to have all the detailed functionality right away, including social controls to people could decide to connect or not with the people in their networks. We wanted everyone to “Ooh” and “Aaah” about how terrific the product was. We wasted a bunch of time and it put us months behind on more important problems that needed to be solved, such as how to get our product in the hands of millions of people. From that I learned, if you are not embarrassed by your first release, you’ve launched too late!
Rule #7: Aspire, but don’t drink your own Kool-Aid.
Target excellence, but be very careful about blind trust or belief in your theories. It is important to launch as early as you can in order to learn how your customers use your product or service. It is equally important to identify metrics that tell you if your aspirations and vision are on target. You should also get feedback from your network in order to iterate or pivot on the target, the product and/or the service. In other words, maintain your aspiration but always look for good perspective on how you are doing. It is very easy for creative innovators to get caught up in their own story rather than learning where they should be headed.
Rule #8: Having a great product is important but having great product distribution is more important.
I meet a lot of entrepreneurs who think the best product is the most important thing and that the best product should always win. What a lot of people fail to realize is that without great distribution, the product dies. How will you get your product in the hands of millions or hundreds of millions of people?
Rule #9: Pay close attention to culture and hires from the very beginning.
Your first hires set your culture, so make them good ones. These first people hire the next people and so on. The old wisdom was that you needed people with a decade more of experience in your start-up. The things a smart person learned a decade ago won’t help you now – you’re doing things that have never been done before, and the world and the competitive landscape are changing at hyper speeds. What you really need are people who can learn fast.
Rule #10: Rules of entrepreneurship are guidelines, not laws of nature.
Do not pay too much attention to rules set by other people. Entrepreneurs are inventors. They are successful when they make something work for the very first time. Sometimes in order to make something work, you will drive over the guardrail of one of these rules. Entrepreneurs sometimes just make new rules.
April 7, 2011. American Superconductor, ticker AMSC, reported on April 5th a problem with their large client in China that would affect adversely their 4Q revenue and the 2010 results.
Citi Bank was apparently waiting and ready to react immediately, too fast to be honest, as the accounting is not yet even finished at AMSC. Citi however told instantly after their clients of course to the world: the knife is falling on AMSC don't buy these shares!
This is a replay (small scale of course) from the September 15th, 2008 when the immense financial powers started selling short the US stock markets. These mavericks claimed initially in public that people at large were selling not them. How could the people at large even know what was happening in the world as they were all happily at work knowing nothing at all. But by the end of this fateful day their their lives would have changed. Did all the people really have a "vision" at the same time of the day or night whatever it may have been at their location that they must call their brokers and demand that all their share positions are to be liquidated immediately regardless of the price?
Lehman Brothers went belly up and Citi Bank among others was one of those lucky ones who ended in trouble but were rescued. Citi survived as the fellow financial powers claimed them to be too big to fail and uncle sam came and rescued them. Citi has now first hand experience of it all. With smart people around they studied and analyzed what happened from every possible angle and at the end they had a plan to play this same game just by picking up smaller companies one by one and then just to rob their shareholders in broad daylight - and it all would be legal!
Only 8 days ago a small battery company lost 35% of its share value in one day when the company management reported a slightly negative outlook for the short term. This formerly American battery company (ALTI) had developed a sophisticated battery that can be fully charged and discharged in less than 10 minutes and it can take this cycle at least 10,000 times - ideal for electric cars, wind mills, solar systems, power stations and a myriad of other applications. The share price drop was for sure excessive but strange things may happen and one bird does not make a flock.
Now this starts looking like a pattern even from our narrow market scanning. On April 5th after market close the share price of AMSC dropped almost 50% within 24 hours. Again we had one of the highly sophisticated technology company at stake. This company products are also useful for everything related to saving electricity. The time of the cheap energy is over regardless that we have huge coal and natural gas reserves. People even think today that natural gas is even clean energy. Yes natural gas it is cleaner than the coal or the oil but not much cleaner if you look at the real facts that are based on the chemical compositions of these energy sources and the chemical reactions that produce the energy. The inadequately educated people on the American streets just do not get this - and are fooled again!
American Superconductor, AMSC), had a market value of $1.2 billion at 4:00 pm on April 5th and when the extended trading started at 4:15 pm the market value plunged instantly to $650 million. Citi with it's cohorts flooded the markets with huge sell orders be it real shares or just naked shorts, who knows. The transaction target price was about $14 per share, down from $24 just 15 minutes earlier. When the extended hour trading was over well 3 million shares had been traded at this price level. The large trading volume was necessary to convince the outsiders next morning that this was a new price for this company.
Citi had reportedly told the following to their clients - publicly available in the morning of 4/6/2011:
To make sure that AMSC is at fault the first lawsuit against AMSC was already in making in the morning of 4/6/2011, there will be many more targeting AMSC and not the real orchestra leader, the Citi Bank:
What happened in real world for the share price is shown in the following graph:
Be assured that Citi will not lose a penny in this operation compared to all individual shareholders who lost about 50% of their nest egg invested to this company. And it these individual shareholders were margin account holders they are faced margin calls. When the money is tight like it is currently they could likely not get a loan from bank and in that case their positions in AMSC would be just liquidated by the broker at "market price". This huge price drop was needed to get the margin calls out and share liquidation started. Champaign bottle were opened at Citi offices, you get plenty of bubbly with $600 million.
As only from the surface positive sign we found that one company director and the same time over 10% shareholder Mr. Douglas & family associates bought about 3 million shares on April 5th and 6th. Some at $24+ price and the majority at $14+ price. Before Citi case in the shareholder structure was 75% institutions, 10% Mr Douglas & family associates and 15% by other insiders and the rest was in the hands of individual investors.
At this writing April 7th 48 hours after the Citi started this game 51.3 million of the 50.4 million AMSC's shares have been sold. You see it correctly we are already on the second round of shares changing hands. We also know from SEC reports that one company directors that is more than 10% shareholder has bought 3+ million shares more during this 48 hour period. We smell a BIG RAT and Citi with it's cohorts are deeply in this mess.
The situation is unreal and we must assume that naked shorting is also going on by players like Citi & al., who have more than enough collateral to buy and deliver their naked "sales" to real buyers at the time when the delivery must be made. The sole purpose in this game is to rob the shareholders from their wealth. Selling shares short at $24+ and buying them back at $14+ is certainly profitable by any standards. Those who get a margin call when the collateral disappears by shares dropping 50% lower must bring in cash or your broker will liquidate enough of your holdings at whatever price they get to satisfy the margin call. If enough investors have this same problem the system will accelerates and share prices drop rapidly even further in a snow ball effect. This is how Citi & al., will squeeze the shares away from their owners. This squeeze was happening in huge volumes during the 2008 financial crisis.
If we speculate a little further Citi Bank may have even a directive from the owners to expand this this game: "We want to buy the best American renewable energy companies at as low prices and your job is to make market conditions such that we can do it. Use the tactics you learned from the 2008 financial crisis from which we saved you (uncle some was there only to inject cash). Use naked shorting to force the share prices of target companies to sink to an attractive "whole sale" level and we take care of the rest.
Was City simply profiteering together with their clients? Despite plenty of hot air in the US Congress naked short selling remains legal. How you make your money is irrelevant in America as long as it is legal at the moment. After 1929 depression laws were created to prevent naked shorting of shares and that lasted until our recent past two Presidents slept at helm and allowed Wall Street dismantle these laws one by one using phony proofs showing to the uneducated that they are no more needed as now we the Americans are ethical and above such human greed. The current president did nothing real to force these necessary laws back that his predecessors removed.
Note that the 1% of the richest American own now 40% of all wealth in the USA (CNN April 6th, 2009). Only a decade ago this number was 23%. The wealth of the 1% multiplied fast after they got the benefits of the government financial aid to the US banking system after the 2008 crisis. The housing got practically nothing and is still driving ordinary people to bankruptcy. How long can the people wait watching soap operas, base ball and football. With this pace the number will bee 99% in not so distant future. What happens when majority realizes that it has become slaves for the 1%? Perhaps we learn something from Libya. Perhaps we also ask help from the same organization that our CIA created and financed to fight Russians in Afghanistan.
Our financial leaders start soon telling that the inflation fighting has become our primary goal and interest rates will be raised. Hogwash, inflation is not domestic as long as China, India & al. ship us inexpensive products that we can no more produce here as nobody can survive at that low wages they pay in these countries. The same way when we lose cereal crops in Russia that will reflect to all food prices and again our rulers insist that we fight these praises by increasing interest rates. We have been made to believe that increasing interest rates domestically will bring the prices down on the other side of the world. GOP should try asking their buddies in the oil industry to keep domestic oil and gas prices down regardless that the oil companies can get higher prices from overseas.
Of course we can solve our energy problems by using more renewable energy but that will not happen quickly even in the best of conditions, and that is again unknown to the American people. China created recently an energy policy by a degree stating that X% of the electricity sold in any utility's service area must come from renewable sources - regardless what the utility must pay for this electricity. The capitalism that is alive in China will take care of this price problem.
We also refuse to accept that all our past and even future economic theories are based on human greed and none of them is based on real science:
Everything in science is in balance at any environment. This balance shifts according to the laws of the nature when the conditions change. Economic theories do not have and cannot have this luxury of balance ruled by the nature. The ancient Sumerians and Egyptians discovered this all when they pondered the financial problems without morass radiating from the modern society. They had found out that interest rate for money must be a fixed and the same interest must be charged from everyone who needs to borrow. From our recent rulers only the US Treasury Secretary Paul O'Neill understood this to be real and he even called all economic theories nothing but belief systems and new religions. Over century ago Le Chatelier's principle explained the equilibriums and why they must exist in the nature. We all must know that none around us cannot be consistently logical nor even true. Economists call their studies as Science regardless that the universe around including our planet and all beings on it cannot show a single example of it.
Accounting is ruled by Math. Some think that Math can prove their economic theories. We can actually use Math to prove that for any economic theory one more economic theory can be built that produces different outcome while both are logical but must have boundaries. Not one of these theories will survive if anything goes behind the theory boundaries. We have had brilliant thinkers trying to solve the unsolvable equation sets why groups of human beings will react certain ways in certain conditions.
It is great as long as it lasts without encountering a "Black Swan" that when happens ruins it all!
Our latest financial misery starting in September 2008 was created by human greed and nothing else. We would have nothing such around today had we studied the societies of the ancient Sumerians and Egyptians and accepted that they had already the right answers in many issues and understood the human mind perhaps better than we do today. But we today are the only brilliant ones with nothing to learn from the old or the history as we have and know how to use the i-phone, the i-pad and alike and they did nor do not. It is not what we have in our hands and around us, it is what we have between our ears. When one does not know the past one knows no more than any monkey already knows in the jungle.