The Cynical Economist

From here
by Gary North

This question divides economists even more than it divides voters. Voters do not think much about this question. Economists think about it throughout their careers. They do not agree with each other regarding the answer.

The problem is, about half of American economists who specialize in monetary theory and banking policy are either on the payroll of the Federal Reserve System or sell their services to the FED on a piece-rate basis.

Most of the others are trying to get in on the deal. Through the FED, economists set policy for American banking, and, through banking, just about everything else.

The economists are not agreed. Federal Reserve policy is therefore not consistent. It is mostly a system of trial and error – these days, very large errors. Through the influence of the FED among foreign central banks, and through the influence of the top dozen American graduate schools, the confusion over what money is has spread to the entire world.

In the area of monetary policy more than any other area of modern life, the self-certified, self-policed, and self-confident experts are making it up as they go along. Then the rest of us have to go along.

In my forthcoming series of articles, you will learn the following: The experts do not know horse apples from apple butter about monetary theory. Monetary theory should be an integrated part of a general economic theory of how the world works. Counterfeiting produces bad results for almost everyone except the counterfeiters. Fractional reserve banking is legalized counterfeiting.Government fiat money is counterfeit.Those who trust government money will lose wealth more surely than those who do not trust it.

If you stick with me through this series of articles on monetary theory and policy, you will have a much better idea about where modern society has gone wrong. You will also have a better idea of how to protect yourself against the inevitable consequences, all of which are negative, of the government's violations of sound money principles.

It boils down to this question: If you don't know what money is, how will you obtain more of it? This is another way of saying that if you don't understand the modern violations of monetary theory, you will not understand the extent to which you are vulnerable to bad policies which are going to produce disastrous consequences, just as they have in the past.

THE DEBATE OVER MONEY

What is money? These three words introduce one of the most baffling areas of economic thought. I can think of no other area of economics in which there is greater confusion, leading to greater economic disruptions, than this one.

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From Chris Martenson

This is important information. What I’ve found and present below is that the Federal Reserve is not just supporting the housing market, it is the housing market.

Just as important as a person’s desire to buy a home is their ability to gain access to mortgage funding.

The mortgage market is a gigantic beast with many moving parts, but it is pretty easy to understand from a high level.

The process works like this: A homeowner secures a mortgage from a bank or mortgage company. Then the mortgage is sold off to another company, with the cash generated by that sale now available to lend to other potential homeowners. Ultimately the mortgage may pass through several sets of hands but ultimately it lands with a terminal holder.

In that chain, the mortgage might get sold off several times, or perhaps sliced and diced by Wall Street wizards, but all that matters is that some company (with cash) is there at the end to buy the mortgage to keep the whole chain moving along.

Lately, the “terminal buyers” in that chain have increasingly ended up being the federal government (through the GSEs) and the Federal Reserve.

And not just by a little bit, but by a lot.
Here are the numbers:

So far in 2009 (through August), a total of 3.2 million existing homes were sold for an average price of $217,000, while 263,000 new homes were sold for an average price of $264,000.

Taken together, and assuming that we live in a world where 10% is the average down payment, we get this table:

That is, a total of ~$686 billion in new mortgages were issued in 2009 (through August).

Now let’s look at how many Mortgage Backed Securities (MBS) and agency debt obligations were accumulated by the Federal Reserve on its balance sheet over the same period of 2009:

(Source)

It turns out that in 2009 (again, through August), the Federal Reserve has bought $624 billion of MBS and a further $98 billion of Agency debt, for a total of $722 billion in money injection into the housing market through Fannie Mae, Freddie Mac, and the FHLB.

In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued.  So, through August, the Fed bought more than 100% of the entire supply of new (purchase) mortgages in 2009.

That’s not a free housing market; that’s a market bought, owned, and sustained by the Federal Reserve’s willingness to print up three quarters of a trillion dollars out of thin air.

While the individual mortgages issued in 2009 may or may not be the exact same ones purchased by the Federal Reserve, that’s immaterial.  All the mortgage issuers care about is that when they issue a mortgage, a purchaser with money exists somewhere down the line.  The chain needs a terminal buyer, and that buyer has become the Federal Reserve.

The impact of these purchases by the Federal Reserve is to both provide liquidity and to drive down the rate of interest for new mortgages.  By lowering both the long end of the Treasury curve (which the Fed does by actively buying Treasuries) and providing more than sufficient demand for MBS and agency paper, long-term interest rates come down.

Without the Fed’s activities, it is a rock-solid certainty that mortgage interest rates would be higher than they are, and possibly a LOT higher.

What all this means is that when (not if) the Federal Reserve begins to try and unwind itself from all of the magnificent interventions of the past year, it must contend with the fact that it is the housing market.

Where the Fed is hoping that it can gently release the soft chubby fingers of the housing market, which will then toddle off under its own power, it will discover that it is actually carrying a helpless newborn.

From Bloomberg
By Le-Min Lim and Bob Chen

Nassim Taleb, author of “The Black Swan,” questioned why Federal Reserve Chairman Ben S. Bernanke, and Treasury Secretary Tim Geithner kept their posts after failing to foresee the collapse in global credit markets.

Bernanke was appointed to a second term last month by President Barack Obama, while Geithner took his job after being the president of the New York Fed from November 2003 through January of this year. Current National Economic Council Director Lawrence Summers was treasury secretary between 1999 and 2001.

“Bernanke, Geithner and Summers didn’t see the crisis coming so why are they still there?” Taleb told a group of business people in Hong Kong. Bernanke is like “a pilot who didn’t see a hurricane,” he added.

Bernanke said on Sept. 15 that the U.S. recession had probably ended, following a financial meltdown that caused more than $1.6 trillion of losses at the world’s biggest financial institutions. Taleb said the risks that caused the global crisis are “still with us” and urged the U.S. government to avoid burdening the public or future generations with the cost of the bank bailout. The national debt is $11.77 trillion, U.S. Treasury Department figures show.

“The solution is simple: we have to sweat it out,” he said. The U.S. has “to kill the debt,” not pass it on.

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From Counterpunch
By PAUL CRAIG ROBERTS

he G-20 ministers declared their meeting in Pittsburgh a success, but as Rob Kall reports in OpEdNews.com, the meeting’s main success was to turn Pittsburgh into “a ghost-town, emptied of workers and the usual pedestrians, but filled to overflowing with over 12,000 swat cops from all over the US.”

This is “freedom and democracy” at work. The leaders of the G-20 countries, which account for 85% of the world’s income, cannot meet in an American city without 12,000 cops outfitted like the emperor’s storm troopers in Star Wars. And the US government complains about Iran.

The US government’s complaints about Iran have reached a new level of shrillness. On September 25 Obama declared: “Iran is breaking rules that all nations must follow.” The heads of America’s British, French, and German puppet states added their two cents worth, giving the government of Iran three months to meet the “international community’s demands” to give up its rights as a signatory to the non-proliferation treaty to nuclear energy. In case you don’t know, the term “international community” is shorthand for the US, Israel, and Europe, a handful of arrogant and rich countries that oppress the rest of the world.

Who is breaking the rules? Iran or the United States?

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From Bloomberg
By Rich Miller

Full employment ain’t what it used to be.

Economists since the mid-1990s have reckoned that full employment was equivalent to about a 5 percent unemployment rate, taking into account the time required to switch jobs. Now Nobel Prize winner Edmund Phelps and Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian say the fallout from the deepest recession in more than five decades is driving the so-called natural rate higher, perhaps to 7 percent.

“We are in the midst of a large and protracted increase in both actual unemployment and its natural rate,” said El-Erian, 51, whose Newport, California-based company manages the world’s largest bond fund. Even with the economy growing, “it will take at least a couple of years” for joblessness to fall to 7 percent from 9.7 percent now.

That may keep the federal budget deficit near a record $1.6 trillion into next year and might prevent the Federal Reserve from raising interest rates in 2010, said Bruce Kasman, chief economist at New York-based JPMorgan Chase & Co., the second- largest U.S. bank. Elevated unemployment will also “dampen the recovery in consumption and economic growth,” El-Erian said.

President Barack Obama has highlighted job creation as the ultimate measure of the economy’s health, telling CNN television on Sept. 20 that it is “the single most important thing we can do.” By this measure, the U.S. is still coming up short, he added. That may hurt Obama’s Democratic Party in the November 2010 Congressional elections.

Rising Unemployment

Government data to be released Oct. 2 will probably show that unemploymentrose to a 26-year high of 9.8 percent in September as companies pared payrolls by 180,000, according to the median forecast of economists surveyed by Bloomberg News.

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Public servants have highest absentee rate in Canada - government workers, like others, have been asked to do more with less for a long time and this has led to frustration, burnout and stress. “This is especially true in the federal public service,” he said. “It’s a fact that there is a morale problem, and it’s a fact that when people are happy, they show up for work more, and when they are unhappy, they show up for work less.”

Recession — or a Slowly Developing Depression with Rallies? – Optimism about the U.S. economy is the new cool. So much so that economists and even bearish analysts now lean toward saying, “It’s the end of the recession as we knew it.” But Bob Prechter sees the recent optimism as part and parcel of the bear market rally. It’s the kind of rally that engenders happy thoughts about the future of the economy. In contrast, he points to an employment ratio that tells a truer story of the U.S. economy. This ratio, in addition to his knowledge of stock market history, prompts Prechter to explain why he still sees a depression ahead in his most recent Theorist.

RATIONAL IRRATIONALITY - The real reason that capitalism is so crash-prone.

Meet the Hazzards - As we mark the end of the first year of the financial bailout, the public seems to regard the government’s actions with a toxic combination of rage and confusion. People are pissed off but too bewildered to know what to do with that anger. The confusion isn’t an accident. The government hasn’t exactly been forthcoming about how it’s made buckets of money available to the banking sector. When it does disclose some information–such as in July’s SIGTARP report from the Treasury or the Federal Reserve’s weekly balance sheet–it’s in the form of intimidating descriptions, accounting mumbo jumbo and technical reports that do little to illuminate just what the hell is going on.

What Causes a Depression? - …how does it all work? We’re doing some serious thinking this week. What is it that actually causes a depression? A stock market collapse? Or too much debt? How come government can appear to cure the problem sometimes – 2001-2007 – but not other times? How come the Japanese were not able to increase consumer prices? Even now…Japan’s inflation rate is negative. And why is it, despite the most massive effort at monetary inflation ever undertaken, the US bond market still forecasts an inflation rate of less than 2%?

Ruins of an Empire