Schwarzenegger: I can be bought!

Financial engineering or financial foolishness: mimicking below-zero federal interest rates?

It’s one thing for the government simply to lend  money at or near zero interest rates – but what is up with a “below zero” rate? 

It’s one thing for the Federal Reserve to lend money freely – at zero interest rates; but it seems quite another to pay borrowers to take the money. Is this really what a below-zero interest rate is really about or is the Federal Reserve planning something altogether different?

According to Reuters …

“Evans says Fed needs to mimic below-zero rates”

“A grim economic outlook highlights the need for the Federal Reserve to step up quantitative measures to boost growth, with official interest rates already effectively at zero, Charles Evans, president of the Chicago Fed, said on Saturday.

“Evans said that based on the outlook for rising unemployment, falling industrial production and a wider output gap, economic models suggest rates should be below zero.”

I know this is a deadly serious situation, but I can’t stop from thinking that the same type of intelligence who built the derivative pricing models, the securities ratings systems models – and yes, the global warming models – might be the ones that are “suggesting” that interest rates should be below zero.

GeekSpeak: “constrained by zero?”

"If it were not constrained by zero, those models would want to push it below zero, but that's not possible," Evans told reporters after a panel at the American Economic Association's meeting in San Francisco.”

Enter Fed Chairman Ben Bernanke’s Buzz-word: Quantitative Easing …

“Quantitative easing, a way to flood the banking system with large amounts of money, ‘is a way to mimic below-zero rates and provide support to the economy,’ he said.”

Correct me if I am wrong, but doesn’t flooding the banking system with money without creating a corresponding increase of value lead to inflation: too much money chasing too few goods? Is this the real government plan: use inflation to drive up the values of everything, including housing, to achieve the appearance of stability and growth – and then hope someone in subsequent Administrations will be able to return our currency to some semblance of value? Or do they think that it really matters anymore since everyone will be using the same money?

I am sure it matters to those who are using this inflated value money to buy up tangible assets that will have lasting value when the rest of the world reacts to the consequences of this financial Ponzi scheme.

It’s always about the process …

“The process often involves buying up large quantities of assets from banks, such as the Fed's latest programs to buy mortgage-backed securities.”

And therein lies the answer: you really can mimic below-zero interest rates if you purchase worthless or near worthless securities with real dollars!

“In December, the Federal Open Market Committee, the Fed's policy-setting body, took the surprising step of lowering the federal funds rate to a range of zero to 0.25 percent. Cash fed funds had been trading below the previous 1 percent target rate for several weeks.”

So now it’s a recession?

“In his remarks, Evans, who is a voting member of the FOMC in 2009, said the Fed's various lending programs should help cushion the impact of the year-old U.S. recession but a large traditional fiscal stimulus plan is also needed, even with the problems it could create over the longer term.”

Isn’t it amazing that the economists employed by the Federal Reserve and its leadership wouldn’t even acknowledge a recession until the NBER (National Bureau of Economic Research) looked back on the numbers and said, “Yes, I do believe we have been in a recession.”?

It is amazing to me that they keep talking about a “stimulus”

" ‘I believe a big stimulus is appropriate,’ Evans said. ‘But it is sobering to be deploying large amounts of taxpayer funds at a time when our fiscal balance sheet is already coming under significant stress.’"


You mean someone actually seriously thinks about this stuff? Especially when Treasury Secretary Henry Paulson pulled the $700 BILLION number out of his (Al, I was going to say something else here, but I remember what you said) HAT as being sufficiently large to connote seriousness, but less than that scary “trillion” dollar number. What may be sobering is the fear that our leadership and their advisors may be held criminally responsible for their actions and still do not have the answers to the biggest questions facing the financial community.

1.  How do you recognize the true value of derivatives which may be built on shifting sand?

2.  How can you de-leverage the financial effects of purchasing these derivatives with massively leveraged borrowed money from other financial institutions without cratering everyone’s balance sheet?

3.  How can you repatriate those “off balance sheet” accounts without wiping out all of your institution’s equity?

4.  How can you stop the downward spiral of housing prices and stabilize the housing market to provide some “floor value” for now-dubious securities?

5.  How can you unwind the credit default swap pseudo-insurance debacle without creating some certifiable authority for registering, valuing and trading these instruments?

So, in my humble opinion, it comes down to a shell game to protect our financial institutions. Transfer the results of all of their bad decisions across a larger base of taxpayers while convincing them you are saving the nation. To this I would add a sixth question.

6.  How do you avoid sending some prominent bankers, politicians and bureaucrats to jail for their complicity in a loosely-coupled scheme to create wealth from nothing more than manipulating paper with computers? Especially when the financial damage to the aging American population is really tallied? To my way of thinking, this includes those individuals who falsified their creditworthiness, inflated appraisals, prevented regulatory agencies from doing their work, prevented the reform of Fannie Mae and Freddie Mac – and, most grievously, created legislation for special interests which adversely affected the American people.


“Without the Fed's programs to help unfreeze credit markets and to-the-bone rate cuts, ‘the downturn -- and its costs to society -- would be even more severe than what we are currently facing,’ said Evans.”

How can we be sure? Treasury Secretary Paulson testifies that the TARP (Troubled Asset Relief Program) allocated and/or disbursed  $350 BILLION dollars of the taxpayers hard-earned money with less success than imagined – and then had the chutzpa (nerve) to say that he would like more funding for a few additional ideas he might have. If I remember correctly, Paulson was quoted as saying some of the money was used to purchase other institutions while the rest of the money was used to bolster the recipient's balance sheets or used for unknown purposes.

So much for the Congressional mandate of transactional transparency.

And speaking of transparency, the Federal Reserve refuses (even under the Freedom of Information Act) to reveal who has gotten Fed money and to what purpose this money was used. This is legal because one should remember that the Federal Reserve is a private  and unregulated financial institution owned by its member banks – and has been chartered to act as our nation’s central banking authority.

“Since the financial market crisis erupted, the Fed has created several new programs aimed at bypassing the traditional banking system and smashing through the credit-market logjam, including the direct purchase of mortgage-backed securities.”

I wouldn’t use the term “bypassing” as much as I would use the term “bolstering.”

“Even so, the U.S. jobless rate appears on pace to exceed 8 percent in 2009, from the most recent reading of 6.7 percent in November, Evans said.”

Lest we not forget, the triple mission of the Federal Reserve is to create and execute  a monetary policy which encourages the intertwined objectives of encouraging economic growth, holding inflation in check and creating employment opportunities.

But there is no doubt in my mind that they serve their Wall Street masters first …

The term “Greenspan Put” or “Helicopter Ben” seems to be a colloquial way of stating that the Federal Reserve often acts first to benefit Wall Street and the financial community before tackling the problems facing ordinary Americans.'

“The ‘Greenspan Put’ refers to the monetary policy that Alan Greenspan, the former Chairman of the United States Federal Reserve Board, and the Fed members fostered from the late 1980s to the middle of 2000. During this period, when a crisis arose, the Fed came to the rescue by significantly lowering the Fed Funds rate, often resulting in a negative real yield. In essence, the Fed pumped liquidity back into the market to avert further deterioration.” <Source>

“In 2002, when the word ‘deflation’ began appearing in the business news, Bernanke gave a speech about deflation. In that speech, he mentioned that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedman about using a ‘helicopter drop’ of money into the economy to fight deflation.) Bernanke's critics have since referred to him as ‘Helicopter Ben’ or to his ‘helicopter printing press’. In a footnote to his speech, Bernanke noted that ‘people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation.’” <Source>

The spreading contagion …

“Although the current recession started with the collapse of the U.S. housing market, Evans said many non-financial industries now face the risk of ‘long-term structural impairment.’"

In a large part, access to capital markets and being able to borrow funds at a fair rate is critical to the survival of American commerce. However, there are those who are attempting to capitalize on the current economic crisis to overcome their failed business models which no longer make sense in today’s technological age or who have been so stymied by union and governmental intrusion into their affairs that they are unable to compete in a global marketplace.

“Evans said fiscal programs to support growth ‘must be large in order to be effective and to instill badly needed confidence’ given the severity of the downturn.”


What confidence? Does he mean the appearance of investor confidence to continue investing in Madoff-style Ponzi schemes where the leadership and the earlier investors of large companies are paid off from funds supplied by later investors? Does he mean the confidence that Americans have in their government? Does he mean the confidence to stand on your own and avoid creating massive government entitlement schemes which reward those who can game the system disproportionately over those who struggle to just get by?

Suck-up …

“President-elect Barack Obama has said that signing a major economic stimulus package will be his first priority when he takes office on Jan. 20, with a goal of creating 3 million jobs over two years.”

We do not see that the TARP stimulus package is working. There is no transparency in the current financial system. And he notes that the Obama Administration will be throwing  even more money at the problem. As one who is extremely skeptical of politicians who make grandiose pronouncement without revealing the details, I cannot help but think that Obama’s plan may mean the further socialization of America by insuring that the great majority of those jobs might be related to a unionized infrastructure effort – and thus handing over substantial control of our nation to socialistic unions in the European mold.

“Evans also said the market crisis that erupted in 2007 showed huge holes in financial regulation.”

"’Significant weaknesses have been revealed in our system of financial regulation. ... These failures call for a reassessment of the roles of market discipline and our regulatory structures,’ he said”

What he did not say is that the Federal Reserve, under the powers granted under Regulation Z (Truth-in-Lending) and HOEPA (Homeowner Equity Protection Act) could have stopped much of the fraud that seemed to empower the Wall Street GREED MACHINE … as well as putting forth more oversight on the creation of derivatives using sophisticated computer modeling.

Bottom line …

The politicians and their special interests are capitalizing (pardon the pun) on the current financial crisis to bail out the financial institutions which leveraged themselves out of their equity ownership of the the financial institution and are now financially and morally bankrupt. It appears that no person or institution has  much more than a theory of what it might take to stabilize the crumbling institutions other than letting them fail and their assets purchased by others.

This is playing directly into the hands of our enemies and those who do not wish us well as it allows them to cheaply purchase a piece of the United States and further interfere in our affairs. In essence the politicians and their lawyer/lobbyists have sold out the American people for nothing more than a few pieces of silver. Yes, the Bush Administration may have kept us safe from actual attack, but both the Administration and Congress have wreaked havoc on America.

What can YOU do?

End the political polarization of America that empowers the crazies as they cobble together marginal and toxic elements to achieve an electable margin. Elect honorable people without the taint of corruption or the silliness of celebrity.

Do not vote for politicians who pander to those who will destroy America’s healthcare, educational, judicial, retirement, social and cultural infrastructure in order to secure the votes which will someday vote us out of our own homes in favor of an alien culture run by mysterious proxies from abroad.

Quit playing at politics as if it were some type of sport and that political gatherings were little more than social events.

Quit treating celebrity as modern-day royalty and put them back in their place of entertaining and informing Americans. Most entertainers, by nature or training are liars who are able to convincingly fake sincerity – consider Arnold Schwarzenegger as the prototype narcissistic celebrity. He has failed to lead California out of excessive budgetary spending, enabled the special interests, spends an inordinate amount of time fundraising and looks good only when he is posturing and telling us what we should do – to continue to make him look good. This is not what we need. Lest someone compare Schwarzenegger to Ronald Reagan, let them remember, in addition to being an actor, Reagan was a student of history and spent many years putting forth his political philosophy before being elected to office. An exceptional man in an exceptional time.

Avoid the Administration’s encouragement of profligate spending as your patriotic duty. Spend wisely and purchase value.

Avoid falling for political demands that you surrender your money, your vote and, in some cases, suffer a reduction in your personal freedoms – based on a real or imagined crisis. I am rapidly approaching the point where I believe that the Administration and their sycophants and special interests are busy cooking up the next major crisis to obscure the fact that they haven’t been able to solve the current financial crisis.

It is time to take back our government from the politicians who have conveniently manipulated the justice system to look large-scale wrong doing and avoid punishing those individuals who have stolen a major portion of America’s wealth and conveyed it to people who produce little or nothing as they serve as facilitators greasing the wheels of politics and commerce.

Get involved. In the final analysis, it will be the ordinary citizens who rise up to save America.

-- steve

Quote of the day: “The only thing worse than a man you can't control is a man you can.”  - Margo Kaufman

A reminder from a large improvement can result from a small change…

The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius

Reference Links:

Evans says Fed needs to mimic below-zero rates | Reuters

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"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius

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