Yearly Archives: 2012

The Federal Reserve Bank is Naked: QE 10T Dollar ‘Loans’ Swaps and Naked Mortgage Bonds of Quantitative Easing 1

Posted on by Lan Pham   

More broadly there seems to be a confluence of events as the American public and its treasury are being plundered in parallel to once-sovereign countries of the Eurozone, bound together by debt and much of the over $1,000 trillion in derivatives (money that does not exist). All based on a quasi-private Federal Reserve monetary system that prints dollars (or euros) from nothing in exchange for savings earned and countries as collateral for the privilege of its debt. Smoke plumes rise in the Middle East. From my first post, Welcome to EconomicsVoodoo.com! (October 17, 2012)

The banking and financial crisis emerging in September 2008 is often called a global financial crisis, but to be more precise the data point to a crisis of the Western central banks. I referenced euros previously, so this is the euros companion to Quantitative Easing 0-1-2-3∞ & The Federal Reserve’s Love Affair with its Banks and Mortgage Bonds: Levitating The Black Hole. QE 0-1-2-3 is incomplete as concurrently the Federal Reserve Bank also entered into $10.06 Trillion in dollar ‘loans’ liquidity swaps with foreign central banks that we examine in Section I. Why QE $10T as we look at a few of Europe’s largest banks in Section II, which leads us to the $1.25 Trillion naked reasons behind the Federal Reserve Bank’s Quantitative Easing I purchase of phantom agency mortgage bonds  that we revisit more closely in Section III.

What the Federal Reserve Bank and its largest member banks, some European banks did with the $1.25 trillion Federal Reserve MBS purchase program in 2009 “QE 1” may leave some in disbelief. Consider an example from this MBS purchase program, the Federal Reserve gave a handful of banks $57.7 billion for a $600 million mortgage bond issued in 1980s . For a moment, recall that quantitative easing or ‘QE’ is the printing of dollars (or euros) in digital or paper form beyond the capacity to earn them through the production of goods and services. The banking and financial crisis in 2008 is often attributed to subprime mortgages, but it is not the mortgage loans per se, but the opaque $7 trillion or so mortgage derivative bonds (presumably containing mortgage loans) and $62 trillion in credit default swaps (CDS) ‘insurance’ derivatives built into the bonds and their insurers that make losses exponential.

I. Federal Reserve Bank & European Central Bank’s $8.01 Trillion Dollar-Euro Swaps

At the height of the crisis in the United States, the Federal Reserve Bank extended $8 trillion of the $10 trillion in dollar liquidity swaps to the European Central Bank through the Federal Reserve Bank’s creation of the Central Bank Liquidity Swap Lines [Data] as shown in the Voodoo Swaps Chart 1 below; swap agreements were with 14 foreign central banks. These dollar liquidity swaps in essence were loans, though not technically called loans, but merely a swap or an exchange of currencies between two central banks, neither central bank having $8.01 trillion U.S. dollars and about €6 trillion equivalent to do so.

In doing so, each central bank essentially helped the other to print dollars and euros. Another nearly $1 trillion in dollar swaps was with the Bank of England, equivalent to nearly half of the United Kingdom’s GDP.  The Federal Reserve printed dollars equivalent to 70% of U.S. GDP in 2008.

Banking & Financial Crisis 2008: Federal Reserve $8 trillion in dollar "loan" swaps with the European Central Bank

Voodoo Dollar-Euro Swaps Chart 1. Federal Reserve $8 Trillion in Dollar Liquidity “Loans” Swaps with the European Central Bank

TECHNICALLY, the Federal Reserve and the ECB did not swap $8.01 trillion dollars for euros at one time, as it would look somewhat problematic for the Federal Reserve Bank monetary system and the ECB because these trillions in dollars and euros do not exist. Continue reading →

Understanding The Truman Show

Posted on by Lan Pham   

The Truman Show goes on, as local gas pump prices have reportedly jumped more than 10%  since last evening, after unlimited quantities of dollars had been secured for the levitation of the largest member banks of the Federal Reserve System, and more generally, the entire system.

Quantitative Easing 0-1-2-3∞ & The Federal Reserve’s Love Affair with its Banks and Mortgage Bonds: Levitating The Black Hole and Beyond will test its limits against time (t) such as reported last month, Germany is scrambling to count its gold bars being held at the Federal Reserve Bank of New York-London corridor. But perhaps Germany had reportedly already quietly withdrawn two-thirds of it home in 2001 after the creation of the euro (the Federal Reserve has been printing euros for its member banks through currency swaps). Hong Kong removed its gold from London in 2009 and Venezuela in 2012, which underscores confidence in a system that relies on QE (faith-based accounting & printing money) since the banking and financial system crisis-collapse in 2008 and more broadly, sustained shifts away from the U.S. dollar observed in currency holdings over time.

Carl Bernstein, one of the two journalists who broke the Nixon-Watergate scandal, wrote an interesting 25,000-word cover story published in Rolling Stone magazine on October 20, 1977, entitled, “The CIA and The Media.”

The article was published in 1977, so we can be 99% certain (+/- 100% margin of error) that such practices have been sharply curtailed. We will soon look at the $1,000 trillion in derivatives, but in the meantime, a few interesting snippets from Bernstein on the free press, journalism:

In many instances, CIA documents show, journalists were engaged to perform tasks for the CIA with the consent of the managements of America’s leading news organizations. The history of the CIA’s involvement with the American press continues to be shrouded by an official policy of obfuscation and deception for the following principal reasons:

 ■ The use of journalists has been among the most productive means of intelligence gathering employed by the CIA. Although the Agency has cut back sharply on the use of reporters since 1973 primarily as a result of pressure from the media), some journalist operatives are still posted abroad.

 ■ Further investigation into the matter, CIA officials say, would inevitably reveal a series of embarrassing relationships in the 1950s and 1960s with some of the most powerful organizations and individuals in American journalism.

 …Other organizations which cooperated with the CIA include the American Broadcasting Company [ABC], the National Broadcasting Company [NBC], the Associated Press[AP], United Press International [UPI], Reuters, Hearst Newspapers, Scripps Howard, Newsweek magazine, the Mutual Broadcasting System, the Miami Herald and the old Saturday Evening Post and New York Herald-Tribune.

 By far the most valuable of these associations, according to CIA officials, have been with the New York Times, CBS and Time Inc. The CIA’s use of the American news media has been much more extensive than Agency officials have acknowledged publicly or in closed sessions with members of Congress. Continue reading →

Beyond Quantitative Easing 0-1-2-3∞ & The Federal Reserve’s Love Affair: Is It Really Over?

Posted on by Lan Pham   
The End of the Age of America, 2016-2017; The Age of China and Asia

Voodoo Figure 4. The End of the Age of America

Emerging and developing economies have grown to account for about two-thirds of the world’s central bank holdings of foreign exchange reserves as their relative holdings of U.S. dollars have quietly gone in the opposite direction…  Increasingly, bi-lateral trade agreements among other nations exclude the use of the U.S. dollar as payment for international trade, once the domain of the U.S. dollar as the world reserve currency. Other countries see what is unfolding in this country but it is unclear if the American public sees it. — Quantitative Easing 0-1-2-3∞ & The Federal Reserve’s Love Affair with its Banks and Mortgage Bonds: Levitating The Black Hole (Oct. 22, 2012)

These developments can be seen in Figure 1, as China is the primary driver of the group of emerging and developing (E & D) economies. Government central bank foreign exchange reserves (Forex), also call official international reserves, consist of foreign cash and bonds. In this context, think of Forex reserves as a component of a country’s ‘savings’ from production; part of the composition of savings are the currencies central banks hold, U.S. dollars being the world reserve currency, and to a lesser degree euros, yen, and pound sterling. The size of the Forex reserve and its composition of currencies may give an indication of a country’s growth and weighting of its import-export production, savings or indebtedness, its ability to influence exchange rates or confidence about currencies.

Decline in U.S. Dollar & Treasury Holdings among Central Banks, 1995-2012

Voodoo Figure 1. Decline in U.S. Dollar & Treasury Holdings among Central Banks, 1995-2012

In just eight years from about 2000 to 2008, China in leading the E&D economies, nearly doubled its share of global central bank foreign currency reserves to now hold two-thirds of the world’s currency reserves ‘savings’ as seen in Voodoo Figure 1. In the U.S. by 2008, the worst banking and financial collapse in a century (perhaps a few) continues to unfold. From 1995 to 2012,

  • China and the E&D economies reduced relative holdings of U.S. dollars by about half (slightly over 40% to 20%) quietly over the past 18 years, but a striking difference is
  • advanced economies held on at about 60% of its Forex in U.S. dollars (not shown in the chart) as its share of global foreign currency reserves plunged from two-thirds to about one-third.

Let’s look at what is behind these rapid shifts from the two countries leading these changes, shown in Figure 1 to Figure 2. An important determinant of the increase in central bank foreign reserves is driven by the country’s productivity, so we look at trade. Countries trade in both goods and services but the focus is on manufacturing as the value of manufacturing goods accounts for over two-thirds of U.S. and over 90% of China’s exports in 2011.  From the available data in Figure 2, for about 25 years China’s share of world manufacturing output appear dormant until about 1995, when it began to rise to match its growing share of global central bank Forex reserves (more detail in Figure 3).

The Western Derivatives Decade: Decline of U.S. Manufacturing as China Rises

Voodoo Figure 2. The Decade of Financial Derivatives of the Largest Member Banks of the Federal Reserve System: The Rise of China. The derivatives data from ISDA (IRS, CDS, currency swaps) is for illustration purposes and is incomplete, as there are over $1,000 trillion in notional derivatives outstanding. Following the collapse in 2008, there was a re-valuation of derivatives by the IMF and BIS and similarly a change in the valuation of bank balance sheets by FASB’s suspension of mark-to-market rule in 2009. QE & The Federal Reserve’s Love Affair showed the effects of FASB. Derivatives are financial contract instruments based on or whose value is ‘derived’ from the underlying value of an asset, at least that is the definition.

Continue reading →

Russia’s President Vladimir Putin Speaks of ‘Unipolar World’, One World Order

Posted on by Lan Pham   

In my previous post, “Quantitative Easing 0-1-2-3∞ & The Federal Reserve’s Love Affair with its Banks and Mortgage Bonds: Levitating The Black Hole,” the data points to the system being levitated by faith-based accounting and money printing since the banking and financial collapse in 2008.

We are entering a stage of open money printing that other countries recognize as accelerating (unofficial) U.S. currency devaluation as the media whips the public into inflation-deflation voodoo. Inflation is the printing of dollars beyond the capacity to earn them through the production of goods and services; this has been substituted in the past decade with the Federal Reserve system’s largest member banks’ production of over $1,000 trillion in derivatives – legal financial contracts based on money and assets that do not exist. The term currency devaluation would scare most people, so it is called ‘inflation’.

Comment: I was asked what was meant about devaluation, as many countries are engaged in currency wars, i.e. competitive devaluation. While this is the case, some devalue from a position of relative strength, for instance to maintain a competitive edge in export trade. Others devalue indirectly for example, through QE, from a position of relative weakness as currency is printed as a remaining means to pay or monetize debt, gain advantage in trade, or perhaps to achieve other objectives. There are internal effects in how it affects the purchasing power of consumers and external effects in how it affects exchange rates, how it affects capital flows to other countries, as the challenge here is the world reserve currency that is the international medium for trade settlement. Other ways to devalue could be intervening in the currency markets or official declaration, and other less obvious ways, etc. In the context of the scale of the banking and financial crisis-collapse since 2007/2008 and indebtedness of many countries facing severe recessions, the ‘currency wars’ signals volatility and instability in the monetary system. 

The quantity of dollars (or euros) printed to levitate the system is unlimited but there is a constraint on time as other countries move to insulate themselves from the effects of The Black Hole. This includes alternative currency arrangements and quiet accumulation into gold, what was the domain of the U.S. dollar (U.S. Treasury bonds) as the world reserve currency – the accepted medium for international payment of goods and services, a requirement for oil.

Let’s look at the big picture to see the far-reaching consequences of what is unfolding here to consider its intersection with global security issues. Another follow-up post indicates the shifts have been quietly underway and what that may look like for future generations, as we will return to other mechanisms being used to levitate the system.

Russian President Vladimir Putin’s Prepared Remarks at the 43rd Munich Security Conference (February 10, 2007)

A conference of world leaders in Munich, Germany. The transcript is also in the Washington Post (February 12, 2007). There is a mention of hiding missiles under pillows and market manipulation. (Disappeared from You Tube LINK). Here is a copy 43rdMunichConferencePutin.mp4 and Transcript.

Putin (in Russian): Thank you very much dear Madam Federal Chancellor, Mr  Teltschik, ladies and gentlemen! I am truly grateful to be invited to such a representative conference that has assembled politicians, military officials, entrepreneurs and experts from more than 40 nations.

This conference’s structure allows me to avoid excessive politeness and the need to speak in roundabout, pleasant but empty diplomatic terms.

This conference’s format will allow me to say what I really think about international security problems. And if my comments seem unduly polemical, pointed or inexact to our colleagues, then I would ask you not to get angry with me. After all, this is only a  conference. And I hope that after the first two or three minutes of my speech Mr Teltschik will not turn on the red light over there.

Therefore. It is well known that international security comprises much more than issues relating to military and political stability. It involves the stability of the global economy, overcoming poverty, economic security and developing a dialogue between civilisations. This universal, indivisible character of security is expressed as the basic principle that “security for one is security for all”.

As Franklin D. Roosevelt said during the first few days that the Second World War was breaking out: “When peace has been broken anywhere, the peace of all countries everywhere is in danger.” These words remain topical today. Incidentally, the theme of our conference — global crises, global responsibility — exemplifies this.

[The “Unipolar World”]

Only two decades ago the world was ideologically and economically divided and it was the huge strategic potential of two superpowers that ensured global security. This global stand-off pushed the sharpest economic and social problems to the margins of the international community’s and the world’s agenda.

And, just like any war, the Cold War left us with live ammunition, figuratively speaking. I am referring to ideological stereotypes, double standards and other typical aspects of Cold War bloc thinking.

The unipolar world that had been proposed after the Cold War did not take place either. The history of humanity certainly has gone through unipolar periods and seen aspirations to world supremacy. And what hasn’t happened in world history?

However, what is a unipolar world? However one might embellish this term, at the end of the day it refers to one type of situation, namely one centre of authority, one centre of force, one centre of decision-making.

It is world in which there is one master, one sovereign. And at the end of the day this is pernicious not only for all those within this system, but also for the sovereign itself because it destroys itself from within. And this certainly has nothing in common with democracy. Because, as you know, democracy is the power of the majority in light of the interests and opinions of the minority.

Incidentally, Russia – we – are constantly being taught about democracy. But for some reason those who teach us do not want to learn themselves. Continue reading →

Quantitative Easing 0-1-2-3∞ & The Federal Reserve’s Love Affair with its Banks and Mortgage Bonds: Levitating The Black Hole

Posted on by Lan Pham   

“A black hole is a region of spacetime where gravity prevents anything, including light, from escaping… Around a black hole there is a mathematically defined surface called an event horizon that marks the point of no return.”—Wikipedia

When Did QE Stop?

To much frenzied media coverage, the Federal Reserve Bank announced a third round of quantitative easing “QE 3∞“ on September 13, 2012. The Federal Reserve will essentially print unlimited quantities of dollars to purchase agency mortgage bonds and maintain nominal interest rates targeted at 0% (“ZIRP”) to keep borrowing costs reasonable for its member banks, among others.

“QE 3∞” in 2012 is the unlimited version of “QE 1” in 2009 following the banking and financial system crisis in September 2008. What does this mean?

QE is simply the printing of dollars in paper or digital form by the quasi-private Federal Reserve Bank, as the Federal Reserve does not have this money. In QE 1 (web), the Federal Reserve Bank printed $1.25 trillion to purchase agency mortgage-backed securities (MBSs). Agency MBSs are mortgage bonds (akin to a mutual fund filled with mortgages, peoples’ homes) issued and guaranteed or held by the quasi-private Fannie Mae and Freddie Mac.

On a practical level this means the Federal Reserve Bank printed $1.25 trillion with a computer stroke and became the owner or recipient of homeowners’ mortgage payments.  The Federal Reserve will do this on an unlimited basis in QE 3 going forward, as it states ‘to foster maximum employment and price stability’.

What is it about the Federal Reserve Bank’s love affair with mortgage bonds that the media and the Federal Reserve will not speak of?

 I.  QE0: Insolvency of the Largest Banks in the Federal Reserve System

Let’s pause for a moment. The most significant QE was not even called QE. It was the suspension of the Financial Accounting Standards Board’s (FASB) mark-to-market accounting rule 157 in April 2009. The rule required banks to value assets on their balance sheets at current market price or fair value, but since 2009, became what the banks hope it is worth or what they paid for it.

Doing so helps insolvent banks avoid the appearance of insolvency by not having to write-down the amount of losses on assets, such as mortgage bonds, assuming there is a willing buyer (There isn’t really). Private sector financing for the housing market through demand for private label MBSs, which are mortgage bonds backed by mostly subprime mortgages reincarnated as prime issued and sold by the largest banks, collapsed since fall 2008.

Let’s give this FASB suspension of mark-to-market accounting event a name, QE0 , to mark the point of no return in April 2009 about six months after the banking and financial collapse in September 2008.

Following the collapse, lawmakers in the U.S. House of Representatives lined up to threaten FASB in a series of hearings to suspend mark-to-market accounting, as Representative Michael E. Capuano (D-Mass.) warned FASB’s chairman in March 2009: “Do not make us tell you what you have to do.” (Transcript of the U.S. House of Representatives Mark-to-Market Hearing, March 12, 2009). The American Bankers Association, Citigroup, and the Bank of New York Mellon Corp., the world’s largest custodian of financial assets, also pressured for the rule change (web).

[On a side note:  MIT finance professor-CBO chief economist revised my memo to say that assets may already fully reflect market values. After I was fired I learned that MIT Professor Deborah Lucas called by the U.S. President to CBO in 2009 (web) has a CBO economist sit on FASB. This CBO economist and CBO Director Elmendorf are part of the Hamilton Project at the Brookings Institution. Robert Rubin is the project’s founder and Dr. Lawrence Summers, once chief advisor to the U.S. President, sits on its Advisory Council to promote economic growth and health care. Former Federal Reserve Bank Chairman Alan Greenspan, Robert Rubin, and Lawrence Summers were instrumental in the proliferation of derivatives in the late 1990s. ]

Let’s look at a few simple charts. What does QE0 FASB look like for the largest banks?

Voodoo Assets and Liabilities Chart 1:U.S. Commercial Banks Net Worth: Assets minus Liabilities - Can you spot the banking and financial crisis?

From Voodoo Chart 1, was there a banking and financial crisis in 2008 that froze global markets? From the crisis in fall 2008 to 2009, there is no change between assets and liabilities! No change, for what has been considered the worst banking and financial crisis in a century (a few?). Continue reading →

Welcome to Economics Voodoo!

Posted on by Lan Pham   

It was not long ago in fall 2010 that I was a senior congressional staffer financial economist at the Congressional Budget Office (CBO) when I was fired after 2 ½ months for writing about the damage from the banking and financial system collapse since fall 2008. The writings included ‘robo-signing’ foreclosures as symptomatic of deeper problems in the securitization of $7 trillion mortgage bonds that CBO denied was a problem and the condition of the nation’s banks.

I was told that CBO should take the lead in treating foreclosure problems as “the kind of event of the moment where we should be adding skepticism, not just repeating the hype in the press”  and my writing about it showed “poor judgment about what is important and what isn’t.” This came from my direct report, then-CBO assistant director and chief economist, currently MIT Professor of Finance Deborah Lucas who was called by the U.S. President in 2009 to serve in a leadership role at CBO. CBO Director Douglas Elmendorf, a Harvard Ph.D. economist, agreed that such writings lacked knowledge of economics and poor communication skills for not understanding what it meant to remove them.

For those unfamiliar, CBO is a small federal agency that scores (produces cost estimates) Congress’s bills and can make or break them with its scoring. CBO’s panel of economic advisors includes Goldman Sachs, Morgan Stanley, former Federal Reserve economists, and distinguished economists from academia who are or were former scholars of the Federal Reserve.

Closure to the Congressional Inquiry

After over a year of congressional inquiry, my story was first made public in the Wall Street Journal, “Congress’s Number Cruncher Comes Under Fire,” (Feb. 2, 2012) what the Journal allowed the public to know. When the true nature of the issues would not come out, I was stunned that the congressional inquiry led by Senator Grassley, Ranking Member of the Senate Judiciary Committee, also declined to release my letter to the public to expose the issues. This happened during the week the New York Attorney’s General announced the lawsuit against MERS, but that too went silent a few days after the nationwide foreclosure settlement. All understood the ramifications of the NY AG lawsuit against MERS. Continue reading →