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The Fed 400 Billion “Twisting”

2011 September 22
by Ian Welsh

program is designed to give money to banks.  It will succeed, just like prior Fed quantitative easing (QE) succeeded.  Some money will also slosh out to other parts of the financial system.  It will have no significant effect on the economy, because it is not designed to do so, any more than QE was.

28 Responses
  1. September 22, 2011

    If it’s true that you are having medical issues, I hope you feel better soon.

    That’s the Obama administration: if we give gifts to the wealthiest, they will deign to share bits of them with the rest of us. A few months from now, we’ll get another report from inside the White House about how Obama is surprised and frustrated that banks haven’t picked up lending, and soon we’ll go through all this again.

    Like Matt Taibbi, I no longer listen to the president, but I saw a clip of him making his “It’s not class warfare” speech about taxing the rich the other day. Is it just me, or was his heart not in it at all? He flubbed words, stuttered, stammered; I think he hated giving that speech.

  2. September 22, 2011

    >>>Is it just me, or was his heart not in it at all? He flubbed words, stuttered, stammered; I think he hated giving that speech.<<<

    Didn't hear the speech, but Obama is clearly out of touch and just floundering at this point. I'm thinking that he's resigned himself to being the fall guy for the economy and by his behavior, he certainly doesn't seem to mind that. Afterall, the guy is set for life at this point, so he'll just cash in and run around making millions from speeches and appearances. To be honest, notwithstanding a trashed presidency, none of this is in anyway consequential for him personally.

    I wouldn't be surprised if someone mounts a primary challenge. At this point, that won't make much of a difference either other than for entertainment value.

  3. September 22, 2011

    >> It will have no significant effect on the economy, because it is not designed to do so, any more than QE was.<<

    The Fed is basically out of bullets and the only loaded gun they had was when Greenspan created this mess with his loose money policy and moral hazard. The Fed's "fight" has really been an illusion more or less designed to create an exit ramp/lifeboat for the favored few. Now, they're not even trying to hold up the pretext that they can do anything. The onset of the Greater Depression is upon us.

  4. Ghostwheel permalink
    September 22, 2011

    >>>I wouldn’t be surprised if someone mounts a primary challenge. At this point, that won’t make much of a difference either other than for entertainment value.<<<

    It's rather insulting to a sitting president that he should be challenged in primary from within his own party. So by all means, I hope it happens.

    An attack upon his vanity is the only stake we have to drive into him. Let's see what's behind the fluttering curtain of his fragile ego when he realizes so many of his former supporters have grown to despise him.

  5. zot23 permalink
    September 22, 2011

    I agree with Greg L, this i all smoke and mirrors at this point. Like the sailor in the movie Titanic who kept the crowd off the lifeboat so the rich could board (then turned around and loaded it), this is all a rear guard action to pull out as much as possible before the crash. At least for the smart rich, there will plenty of Galtian true believers jumping out of windows when the SHTF.

    It’s not going to work, the banks are going down and if the economic system isn’t fixed to give people a fair shake, it’ll be Versailles all over. Not the cultured gardens and powdered wigs, but the guillotine Versailles.

    It would be so nice if they could just FUCKING STOP and not go there.

  6. September 22, 2011

    Not entirely on topic, but there’s this, regarding the Tea Party crackers:

    “Unconventional Meeting of Minds”
    Scholars and Tea Partyers gather to consider changing the Constitution

    most of it is behind a paywall, but FYI.

    http://chronicle.com/article/An-Unconventional-Meeting-of/129048/

  7. gtash permalink
    September 22, 2011

    Twisting the night away.

    Or twisting a might today.

    Or twisting slowly in the wind.

  8. Ian Welsh permalink*
    September 22, 2011

    They’re not out of bullets. There are things they could do, they just refuse to do them.

  9. Shoes4Industry permalink
    September 22, 2011

    The government could limit consumer interest rates to <10% and it would be a huge boost the the economy. Consumers would either start spending again or pay down their own debt, either of which would have immediate results. Fed does nothing to the the money supply, banks take the hit after years of fleecing cardholders, cost to the taxpayers =zero. Exodus 22:25

  10. September 23, 2011

    >>They’re not out of bullets. There are things they could do, they just refuse to do them.<<

    I think this depends greatly on the context. Yes, the government might be able to engage in some sort of meaningful stimulus to ameliorate widespread unemployment. A meaningful writedown on debts, like some sort of mortgage forgiveness might be very helpful was well. But both of these things lie outside of the purview of the Fed whose sole purpose has been to accommodate the Wall Street crowd. Both of these things are also just salve for the wounds that don't address the underlying problems.

    Disaster capitalism, exhibited most directly by privatization, financialization and so called free trade, basically serves as a check on gainful employment with the main beneficiaries having purchased the entire political system lock, stock and barrel. These are the main problems and I feel that it's not just mere refusal to do the right thing. At this point, they simply can't. The economic and political systems in this country are no longer owned by the people (if they ever were) and are no longer responsive to our needs. The Obama presidency against the backdrop of the economic crisis puts that in stark relief.

    There is just so much to correct. Too much in fact. And there are too many interests that are arrayed against that. Our best hope, from my perspective, is total collapse, which we seem to be well on the way towards.

  11. beowulf permalink
    September 23, 2011

    To be honest, notwithstanding a trashed presidency, none of this is in anyway consequential for him personally
    You wait, I think its a deadlock certainty that in the general election campaign, the Republicans will revive the Obamacare death panel argument in a most ingenious way. A Perry or Romney or Palin (she may yet jump into the race) nomination speech promising to appoint a special prosecutor would send a cold chill down the spine of an awful lot of Administration officials.
    A missile strike from an American military drone in a remote region of Yemen on Thursday was aimed at killing Anwar al-Awlaki, the radical American-born cleric believed to be hiding in the country, American officials said Friday.
    http://www.salon.com/news/opinion/glenn_greenwald/2011/05/07/awlaki

    Even Rick Perry looks like a civil libertarian by comparison, he’s never executed anyone (even the innocent ones) who wasn’t first convicted of capital murder by a jury of their peers. There ought to be a law against this! In fact there are at least two:
    18 USC 1119. Foreign murder of United States nationals
    (b) Offense.— A person who, being a national of the United States, kills or attempts to kill a national of the United States while such national is outside the United States but within the jurisdiction of another country shall be punished as provided under sections 1111 [Murder], 1112 [Manslaughter], and 1113 [Attempted Murder].
    18 USC 1117. Conspiracy to murder
    If two or more persons conspire to violate section 1111… or 1119 of this title, and one or more of such persons do any overt act to effect the object of the conspiracy, each shall be punished by imprisonment for any term of years or for life.

    What’s diabolical about this as a campaign issue is it would validate every single crank, paranoid Tea Party conspiracy theory (and perhaps win the agreement of a liberal or two) by denouncing something factually undisputed and legally indefensible. After all, if the President asserts the unilateral right to identify, convict and execute traitors– a power no British King has claimed since the Magna Carta– what can stop him from labeling gun owners, right to life activists or the Southern Baptist Convention as traitors and sentencing them to Obamacide? Yeah, the campaign ads sort of write themselves, don’t they?
    As a legal matter, the most astonishing thing, truly, is AG Eric Holder didn’t resign over this; just a few years ago, Bush’s AG John Ashcroft and Deputy AG James Comey both threatened to resign unless Bush rescinded (and he did) a wiretapping plan they thought illegal. Would anyone argue that wiretapping is a more serious crime than murder? The word for people who think like that is Democrat, not American (sorry, still writing campaign ads).

  12. anon2525 permalink
    September 23, 2011

    As a legal matter, the most astonishing thing, truly, is AG Eric Holder didn’t resign over this;

    Is Holder the least visible, least active USAG in recent memory? How far back do we have to go to find one that did less than him? AG Gonzalez was also inactive (at prosecuting crimes), but was visible thanks to his justifying admin’s crimes. Other than prosecuting whistle-blowers, what has Holder done in nearly three years?

  13. Chaz permalink
    September 23, 2011

    Fed will give it to the banks. The banks will gladly take it and put it in the executives and shareholders back pockets as they did the last time. The banks will continue to thump their fists and scare monger for more money. It will never be enough because after all we are dealing with fundamental human nature. We will get deeper and deeper into a mess. I’m beginning to think we should let the worlds economy collapse so that people can see exactly what a ponzi scheme this whole thing is. Maybe we will then devise a new and better system that has wider benefits to all and not just a select few…

  14. September 23, 2011

    The “collapse” has occurred. What is unfolding is the psychological realization of it.

    This is a mere opinion, but I think that it is a considered one.

    It happened with peak oil. Once an “imminent” danger is accepted as a possibility by more than the unfortunately prescient Cassandras of the world, it’s more than a possibility at that point – it has already happened. The imminence is really only that it will finally “hit the papers,” as it were.

    It happened with the current depression (remember when it was a “recession” that “might” become a depression?) It was already a depression then.

    It’s happened with Anthropogenic Global Warming. Finally being accepted, we’re way past the point of doing anything about it.

    Indeed, it could be argued that the fringe of Cassandras are merely watching the water circling the drain during their early, impotent bleatings – if they know anything of human nature. Which they undoubtedly do. That’s what makes them Cassandras.

    We never miss anything until we’ve lost it.

    Sorry for the doom and gloom. It’s cyclical anyway, it’s deep winter – at least we can contemplate the character of a long-forgotten, but surely forthcoming, spring.

  15. September 23, 2011

    Re: my last comment, Ian.

    It occurs to me that it is rather rude of me to dump such unproductive negativism on your thread. If I want to write stuff like that, I should reserve it for my own place. I would not be offended *at all* if you disappeared it.

  16. Ian Welsh permalink*
    September 23, 2011

    No, Greg, that’s not true. The Fed can easily make money available to non-banks, directly. They have done so in the past. Legality is moot, who is going to stop them? No one. Just like no one stopped them when they broke the law serially in the past.

    With the cooperation of the FDIC they could even do so entirely legally. With the cooperation of Fannie and Freddie they could do an organized write down of mortgages.

    In fact, it is even possible to force the banks to do all of this legally. They can play, or the Fed can start selling the toxic trash it has and forcing price discovery, then return the stuff to the banks. All of this leaving aside regulatory powers the Fed has over banks.

    It is a myth that the Fed can’t do anything but what it’s doing, a myth which has been carefully spread so that it won’t do anything but give the banks money with no strings attached. Any time the Fed wants to use its leverage it can. Just force a major bank or brokerage into bankruptcy, and the rest will fall in line.

    This is “unthinkable”, but it is entirely possible, and even entirely legal.

    Petro: I see nothing particularly objectionable in your comment.

  17. George permalink
    September 23, 2011

    “It will have no significant effect on the economy…”

    It has had an effect already. My online bank responded by lowering interest rates.

    More futzing around by the Fed isn’t going to fix a badly broken banking system.

  18. September 23, 2011

    >>>It is a myth that the Fed can’t do anything but what it’s doing, a myth which has been carefully spread so that it won’t do anything but give the banks money with no strings attached. Any time the Fed wants to use its leverage it can. Just force a major bank or brokerage into bankruptcy, and the rest will fall in line.<<<

    Ian, I don't dispute what the Fed should do at all. I'd offer that it's not the Fed alone who should do more, but there's the entire government who should do far more. Conversely, both should also be doing far less of those things that are inimical to the interests of the people. No, there's no dispute at all about what they could and should do.

    Mythology has surrounded the Fed going back some time, but particularly so under Greenspan's tenure. Our illusory pre-2007 economy was supposedly delivered courtesy of the Greenspan Fed and the one thing that's consistent in the period preceding and post the economic upheavals is a system that's been wholly centered on the oligarchs and the favored few. I'd argue that's been a constant more or less during the Fed's entire existence.

    They've never considered it in their purview any sort of accommodation or consideration of the everyday person, notwithstanding their claims about unemployment concerns. I believe this is so mainly because they're owned by and represent the financial oligarchs who hold sway over our political and economic systems. Doing anything like mortgage writedowns and slapping the hands of recalcitrant bankers is simply not on the table and will never be on the table barring some sort of dramatic change that can only come from some sort of revolution.

    To actually do the right thing means there would have to be an admission of all the wrong things they and the rest of our government have done. That includes the "extend and pretend" business supported by the suspension of mark to market and the stress test farce not to mention the denuding of regulations and non prosecution of rampant fraud and criminality. Righting this ship is going to involve a lot and I just don't think they're prepared to do any of that. Ultimately, the Fed is only part of an entire economic and political system that's responsible for the situation at hand. In my view, it's the system or the thinking behind it that must change and although painful for all concerned, perhaps the most direct route for that to occur is for the system to collapse on its weight.

  19. September 24, 2011

    Things getting ugly on #OccupyWallStreet – mass arrests happening.

    http://dissenter.firedoglake.com/2011/09/24/live-blog-of-occupywallstreet-one-week-later-growing-stronger-by-the-day/

  20. September 25, 2011

    Talk about the Fed? Criticize it? You might be labeled a domestic terrorist:

    http://www.zerohedge.com/news/here-comes-fiattackwatch-bernanke-goes-watergate-prepares-eavesdrop-everything-mentioning-fed

  21. September 26, 2011

    @Lisa – thanks for that link. Fascinating.

  22. September 26, 2011

    @Lisa – I wanted to post on that story, but I can’t find anything else on it – Durden provides no links, and the rest of the web merely links to his (characteristically) hyperbolic post. Can you find anything?

  23. beowulf permalink
    September 26, 2011

    Other than prosecuting whistle-blowers, what has Holder done in nearly three years?

    He should have resigned at least three times over, 1. When the WH cut him off at the knees on prosecuting terrorists in civilian courts, 2. When the President overruled the opinion of the DOJ Office of Legal Counsel (which Holder concurred with) that our military actions in Libya fell within the War Powers Act, 3. And, as mentioned above, the targeting of US citizens for assassination. I wonder if OLC ever issued a legal opinion on that one.

  24. Formerly T-Bear permalink
    September 28, 2011

    A current Al Jazeera essay is noteworthy and very well written (be sure to read the first part linked just before the passage quoted below):

    http://english.aljazeera.net/indepth/opinion/2011/09/20119248127283684.html

    A passage from:

    I now turn to some other equally if not more important deficits – ones that cannot be so readily re-negotiated, re-structured or otherwise fiddled with. In this part, I describe two physical deficits: the infrastructure deficit and the ecosystem deficit.

    Rooted as they are in physical laws, they need to be taken far more seriously. Beyond that are three structural/functional deficits: the sustainability deficit, the time/jobs deficit and the equality deficit; two cognitive deficits: the critical thinking deficit and the imagination deficit; and one political deficit: the democracy deficit.

    All of these deficits are vitally important for us to consider, because we ignore them at the peril of destroying civilization as we know it.

    The deficits enumerated illustrate exceptionally well the “geographic” nature required for the study of the economy and its economic complexities and the need to develop a clear and concise (precise works too) language to communicate with. Another deficit is obvious as well, there being no alternative to the standard economic orthodoxy, no intellectual construct, no perceptive well from which to draw upon in the same manner as the neoliberal beliefs have been developed to render support to their cult of economic shamanism.

    The great failure of neoliberal economic thought is the imprecision with which its advocates use language, the crisis has produced nothing but economic babble conveying nothing but inconsistent meanings and contradictory information all contributing to the inability to confront and solve the crisis facing the economy and the wellbeing of the world. It is the marquee signature of neoliberal ideology that these deficits are neither known nor accounted for in their firmaments or read in their interpretations of entrails on their high alters.

    Without cogent understanding or cognizance of economic factors, the platform from which effective economic countermeasures to control the crisis is missing; no coherent, no consistent, no effective measures can be contrived. The machinery of governance necessary to economically function has been thoroughly co-opted or neutered, the legislative function has ceased to exist, the executive function is bought and paid for, and the judicial function is no more than a delusion; the republic is dead, its constitutional foundations do not exist in their recognizable historical form. Only a tabula rasa remains with-which to reconstruct as one will, their worldview. It will be either reflective if what exists, or it will not. May you live in exciting times. Indeed.

  25. Formerly T-Bear permalink
    September 28, 2011

    Addendum:

    What is necessary is for governments to regain control of the markets, tightly leash them, exercise authority over their ability to act and tax their operations upon each transaction in addition to steep progressive taxes and surcharges upon income generated. Capital gains to be taxed in inverse proportion to time held. Inheritance limited to a maximum of (currently) ten millions per inheritor, to be held separately from all other inheritors. A surcharge tax be levied on all accumulations of wealth that depletes those accumulations in a period of 75 years from the date of their creation, the sole exception are foundations dedicated to the public and social welfare or providing education funds enabling students education. No such foundation to exercise direction or control over the economic source of that wealth whatever the corporate design utilized.

    In regaining control of the markets, governments must intervene to provide a level field for participants; high speed electronic transactions taxed per transaction the rate of tax inverse to time involved as a way to curtail manipulative speculation by financial entities. Financial entities to be separated from ownership of public banking facilities, public banking facilities supported by public insurance security for accounts. Create public assured and traded bonds guaranteeing safety for private savings, retirement funds, and other non-speculative funds requiring growth factors it meet future obligations that is outside and protected from market manipulation and risk loss. Keep all speculative funds confined to high risk investments and the market that serves those investments, isolate high risk manipulation to Wall St. Once a bond and rate are agreed, that contract becomes binding for the agreed life of the contract to the contracting parties, any losses on early termination are the risk of the contracting party departing the contract, their losses are never indemnifiable from public funds. Evolve the accounting system to recognize time as a decisive component in their procedures of accountancy; no momentary snapshot of either assets and liabilities, or profit or loss is complete without the time factor incorporated into the calculations. Impede, slow, congeal the speed that capital flows internationally; charge capital for the costs of security for that capital creates against the momentary rent it now demands for existing. Overnight deposits only manipulate accountancy numbers, there is never an economic justified association involved. Many other issues can be thought of, these are just a motley few.

  26. anon2525 permalink
    September 28, 2011

    [Holder] should have resigned at least three times over…When the WH cut him off at the knees …When the President overruled …And, as mentioned above, the targeting of US citizens for assassination.

    Compare and contrast this with that book that came out last week where we are lead to believe the Treasury dept. did whatever it wanted to do, contrary to Obama’s orders. Why is it that he is “unable” to get Geithner to do what he wants, but he’s perfectly able to get Holder to do what he wants? And yet Geithner somehow still has a job.

  27. Formerly T-Bear permalink
    October 1, 2011

    Digby’s Hullabaloo has a piece that better puts what was intended in my addendum:

    http://digbysblog.blogspot.com/2011/10/forcing-investors-to-truly-invest-by.html

    which distinguishes economic productive investments as opposed to “economic” rent gathering investments (a la Wall St. pseudo capital casino operations) which was my point above. To control the wealth of Wall St. governments would best accomplish these ends by creating an actual economic option available for those who wish to invest in a rationally regulated market with government sanction of respectability also limited security. Leave the decision to the market which system would prosper.

  28. Formerly T-Bear permalink
    October 4, 2011

    The third part of the Al Jazeera essay on deficits is here:

    http://english.aljazeera.net/indepth/opinion/2011/10/201110275914108293.html

    and the fourth part is yet to come.

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