Rolfe Winkler

Bernanke didn’t have staff support on AIG bailout (Ed Harrison) Ed has a copy of a letter from Rep. Darrell Issa, in which he claims Fed staffers weren’t keen on bailing out AIG. He wants another subpoena.

Fed as chump or Fed as crony (Yves Smith) Long form thoughts about why Tim Geithner’s defense yesterday was troubling.

Bernanke seen winning second term (Felsenthal, Reuters)

FOMC statement, redacted (David Merkel) Picking apart the Fed’s FOMC Statement yesterday. The headline is that they still see rates staying low for an “extended period,” which is problematic language/policy in my opinion because it will lead to bank/investor complacency. Quantitative easing, i.e. printing electronic money to buy MBS and other paper, will end on schedule at the end of March. Look for it to pick up again in the future. To fight off deflation, the Fed will be forced into multiple rounds of quantitative easing….just like the Bank of Japan.

Bono invests in Yelp (Bits) Elevation Partners, the VC firm funded by U2′s lead singer (among others), is committing $100 million to the local search site. No word on the % stake the money will buy, but $75 million will be paid to existing shareholders to cash them out. Good deal for Yelp? We know that they turned down a $500m offer from Google recently. If Elevation is getting anything less than 20% of the company for this investment, it would value the company at greater than $500 million.

Prime Minister: Greece victim of “rumors” (Bloomberg) Yeah, uh huh. And Wall Street was unfairly maligned by short sellers worried about capital shortages in fall ’08.

Freddie delinquencies increase sharply (CR)

Divided SEC makes climate another “risk” (Scannell/Hughes, WSJ) Investors aren’t clamoring for this information in 10-Qs. The Republican commissioners have this one nailed: “a breathtaking waste” of the SEC’s time/resources and a foolish, misguided gesture to put the SEC’s imprimatur on an agenda about which it has zero expertise.

How to report the news (YouTube) Brilliant.

Academics fight rise of creationism at universities (Guardian) I had no idea this was a problem outside of the American bible belt.

VIDEO: Dump truck destroys pedestrian bridge in Turkey (Break) A guy on the bridge sees trouble coming but freezes…..doesn’t think to run back….

Jon Stewart on Obama’s war against bankers…

Paul Volcker’s speech to the Economic Club of NY last week (pdf) was generally reported as the latest example of the former Fed Chairman calling for more substantive financial system reform. He did repeat those points, but the focus of his speech was about the importance of the Fed maintaining its regulatory and supervisory authority over the banking system. At a certain point, this seems the stuff of absurdist theater. If the Fed never intends to use its regulatory authority, why insist the authority be maintained?

The problem with his speech is that while he acknowledges the Fed is badly staffed — mostly with economists/mathematicians, few from business/banking — he doesn’t address the clear failure on the part of the FOMC to 1) grapple with bubbles nor 2) to get serious about sensible reforms. He bemoans “reform light,” but that is precisely what the Fed is delivering.

Volcker wants tougher rules for derivatives trading, yet Pat Parkinson — the man Bernanke appointed as the Fed’s top bank regulator — has long favored a hands-off approach to derivatives. Volcker argues proprietary trading and other risky activities should be spun-off from commercial banks. It makes no sense for such risky activities to be backstopped by the financial system safety net — deposit insurance and last resort lending from the Fed. Yet Bernanke has done nothing to indicate he’ll separate the two.

Volcker is correct that the Fed should play a vital role in regulating the banking system. But this assumes the guys in charge actually use their regulatory power. Bernanke hasn’t done so. Instead he adopted his predecessor’s deregulatory zeal and penchant for bailing out the system.

Continuing the pattern of the last 25 years, the next financial market emergency is likely to be more disruptive than the last. The Fed has already lost so much credibility that when the next one hits, it’s not hard to envision it being neutered.

In his latest missive to investors (pdf link here), Eric Sprott asks if our Ponzi economy is at risk of collapse. In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion. So who bought all the rest? According to Treasury, “other investors” bought $510 billion, up from just $90 billion in 2008. With the Fed’s printing press turned off, the question for next year is whether “other investors” can buy more Treasuries than they did this year…

As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.

Sprott has over $4 billion under management, the majority of which is in physical bullion, both gold and silver.

This blog has also argued that the American economy is a pyramid scheme:

At the end of the day, flushing more debt through the system is the only lever policy-makers know how to pull. Lower interest rates, quantitative easing, deficit spending, it’s all the same. It’s all borrowing against future income. Each time we bump up against recession, we borrow a bit more to keep the economy going. With garden variety recessions, this can work. Everyone wants the good times to continue, so no one demands debts be paid back. Creditors accept more IOUs and economic “growth” continues apace. If it sounds like Bernie Madoff’s Ponzi scheme, that’s because it is.

Each time Bernie’s scam got a few too many investor withdrawals, he’d simply plug the hole by raising more investor cash. The guys at Fairfield Greenwich were making so much in fees, they were happy to funnel more his way. But at a certain point, Ponzis get too big. There simply aren’t enough new investors to pay off older ones. In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable.

Naturally, policy-makers sound just like Ponzi-schemers: Just give us a little more cash to get us through this rough patch and everything will be copacetic. Ben Bernkanke at the National Press Club alluded to the famous quote by St. Augustine: “Oh Lord, give me chastity, but do not give it yet.” President Obama convened his “fiscal responsibility” summit days after passing the stimulus bill and days before proposing huge increases in health care spending.

Like pyramid schemes, fractional reserve banking systems simply don’t work in reverse. “It’s A Wonderful Life” demonstrates why.There must always be new money coming into the system to refinance debts. If investors/depositors suddenly demand their money back, the system crashes.

Deflation to a central banker is like withdrawals from a Ponzi scheme. Too much at once and the scheme collapses. The Fed’s (impossible) job is to make sure it never does.

Bernanke says he’ll stop printing money to absorb debts, and he may for a time. But the American Ponzi has grown so large, the private credit system is, IMHO, no longer capable of generating sufficient debt finance to keep it going. So to avoid a debt deflationary depression the Fed will have to rev up its printing press again.

Japan has been wrestling with its own Ponzi collapse for 20 years, keeping it at bay with trillions of dollars worth of deficit spending and money printing.

Hasn’t worked for them and it won’t work for us.

Fed repeats “exceptionally low” for “an extended period” (Fed statement) The Fed maintains that it isn’t raising rates for the foreseeable future, but repeated that it plans to end MBS asset purchases by April next year. Too bad we can’t get a surprise rate hike in order to chase risk back out of credit markets…

Wells’ CLO deal called “landmark” (Paulden, Bloomberg) The return of CLOs would be the latest sign that Wall Street is dancing again.

Big decision looms on Fannie and Freddie (Timiraos/Hagerty, WSJ) Suggests Obama could expand his commitment to Fannie and Freddie beyond $400 billion while he’s still able to unilaterally. If he waits till next year, Congress would have to approve.

Man of the Year: Ben Bernanke (Time) Ha! Ben should have said thanks but no thanks. Ten years ago Time christened Rubin/Greenspan/Summers as The Committee to Save the World. In the fullness of time, all have been proven failures. Time’s endorsement is final confirmation that Bernanke too is a failure.

Norway raises rates (Kremer, Bloomberg) More fodder for yesterday’s Norway thesis. Higher rates make for a more attractive currency…

Some debt-laden graduates wonder why they bothered with college (ABC News) Full of choice quotes: “You’re led down this path of needing to go to college,” [says one indebted grad]. “The college diploma is the new high school diploma.”

Spend more. Get less. The worst fun city in America (Wachs/Eskenazi SFWeekly)

The year in photos, part 1, part 2 and part 3 (The Big Picture) More from the best photo blog on the web.

Canadian ice-fishing…

The title of the video is a little unfortunate. I don’t think Volcker would be a realistic option, I just wish we could find someone like him.

Correcting a brain-fart: Ben Bernanke is Chairman — not President — of the Fed.