Three years ago, Congress balked at the mere thought of giving Hank Paulson’s (so lovingly portrayed in Andrew Ross Sorkin’s straight to HBO Too Big To Fail) proposed TARP, which came in an “exhaustive” 3 page term sheet with limited bailout powers however with virtually unlimited waivers and supervision, and voted it down leading to one of the biggest market collapses in history. Curiously, a more careful look through Europe’s €500 billion (oddly enough almost the same size as America’s $700 billion TARP) European Stability Mechanism or ESM, reveals that in preparing the terms and conditions of the ESM, Europe may have laid precisely the same Easter Egg that Paulson did with TARP, but failed. Because at its core, the ESM is like a TARP… on steroids. It is a potentially unlimited liquidity conduit (only contingent on how much cash Germany wants to allocate to it – which in turn means how much cash Germany is willing to let the ECB print), with no supervisory checks and balances embedded, and even worse with no explicit or implicit liability clauses – in essence it is a carte blanche for its owners to do as they see fit without any form of regulation. As the following brief but must watch video explains, the ESM “is an organization that can sue us, but is immune from any forms of prosecution and whose managers enjoy the same immunity; there are no independent reviewers and no existing laws apply; governments can not take action against it? Europe’s national budgets in the hands of one single unelected intergovernmental organization? Is that the future of Europe? Is that the new EU? A Europe devoid of sovereign democracies?” Ironically even America’s feeble and corrupt Congress stopped a version of TARP that demanded far less from the taxpaying citizens. Yet somehow, Europe has completely let this one slip by. Is it simply to continue the illusion of the insolvent Walfare State for a continent habituated by zombifying socialism, or is Europe by now just too afraid and too tired to say anything against its eurocrat class? One thing is certain: when the people voluntarily give up on democracy, out of sheer laziness or any other reason, the historical outcomes are always all too tragic.
As first reported here, two weeks ago European banks saw the amount of USD-loans from the Fed, via the ECB’s revised swap line, surge to over $50 billion – a total first hit in the aftermath of the Bear Stearns failure prompting us to ask “When is Lehman coming?” However, according to little noted prepared remarks by Anthony Sanders in his Friday testimony to the Congress Oversight Committee, “What the Euro Crisis Means for Taxpayers and the U.S. Economy, Pt. 1”, we may have been optimistic, because the end result will be not when is Lehman coming, but when are the next two Lehmans coming, as according to Sanders, the relaunch of the Fed’s swaps program may “get to the $1 trillion level, or perhaps even higher.” As a reference, FX swap line usage peaked at $583 billion in the Lehman aftermath (see chart). Needless to say, this estimate is rather ironic because as Bloomberg’s Bradely Keoun reports, “Fed Chairman Ben S. Bernanke yesterday told a closed-door gathering of Republican senators that the Fed won’t provide more aid to European banks beyond the swap lines and the discount window — another Fed program that provides emergency funds to U.S. banks, including U.S. branches of foreign banks.” Well, between a trillion plus in FX swap lines, and a surge in discount window usage which only Zero Hedge has noted so far, there really is nothing else that the Fed can possibly do, as these actions along amount to a QE equivalent liquidity injection, only denominated in US Dollars. Aside of course to shower Europe with dollars from the ChairsatanCopter. Then again, before this is all over, we are certain thatparadollardop will be part of the vernacular.
Historical ECB swap line usage with the Fed, and projected assuming $1+ trillion in use. Just to put it all into perspective.
For all those lamenting the ECB’s lack of willingness to print, fear not: the almighty Chairsatan has vowed to valiantly take his place when needed. As in 2 weeks ago. From Bloomberg:
European financial companies led by Royal Bank of Scotland Plc were borrowing about $538 billion directly from the Fed when the central bank’s emergency loans to all banks peaked at $1.2 trillion on December 2008, according to a Bloomberg News examination of data released by the Fed under last year’s Dodd- Frank Act and earlier this year under court-upheld Freedom of Information Act requests.
The Fed hasn’t provided any estimates of how large the swap lines might get, said David Skidmore, a Fed spokesman. He declined to elaborate.
“To get above $600 billion wouldn’t be a stretch,” said Desmond Lachman, a former International Monetary Fund deputy director who’s now a resident fellow at the American Enterprise Institute, a conservative public-policy center in Washington. “You’re talking about a European banking system that is huge in relation to that of the United States.”
Josh Rosner, a banking analyst with New York-based Graham Fisher & Co., said the Fed’s swap lines may end up helping Europe support banks that might not deserve emergency loans.
“As a result of this commitment of financial support, we’re now supporting undemocratic approaches implemented largely by authorities who have demonstrated an ongoing inability to either recognize the scope and scale of the problems or come to a consensus on the proper approach,” Rosner said.
The ultimate size of the swap lines is “unknowable at this point,” he said.
For those wondering what all this means, we remind you that there was a roughly $6.5 trillion synthetic (duration mismatch) USD short as of 4 years ago, as we reported at the time. That short has gotten substantially larger following a 4 year regime of the USD as a funding currency courtesy of ZIRP. Which means that any time the liquidity shortage threatens to collapse the system, the first thing to go stratospheric will be the USD as the global financial system scrambles to cover its short. It also means that anything the Fe and/or ECB can do from a pure printing standpoint will be peanuts compared to the utter carnage unless the dollar short is not preserved. Which naturally means that it is up to the Fed to continue drowning the world in either nominal dollars, or swapped ones, such as under the form of a USD-EUR swap, which is nothing but a forward operations. In essence, with the FX swap lines, the Fed engages in the ultimate currency warfare tool: it sells dollars to the entities most needy. And it does so, because if it doesn’t, said needy entities will implode, and the hollow financial dominoes will topple, leading to a mess that not even infinite synthetic or real printing of binary of paper dollars, euros, or anything else will do to fix.
Which is why all those wondering if gold should be bought now or the second after the ECB starts printing, we have one piece of advice: just look at the chart above. It says all one needs to know.
Lastly, since the Sanders testimony is worth a read in and of itself, we recreate it below. Some of the choice selections:
The Eurozone is teetering on collapse and it has been decades in the making. The cause of their problems is 1) excessive government spending leading to 2) excessive government debt coupled with 3) slow GDP growth.
If we look at Household and Financial Debt in addition to Government Debt, the UK’s Debt to GDP ratio exceeds 900%. Japan is over 600% and Europe is almost 500% Debt to GDP. The U.S. is over 300%. In summary, Euro, Japan and the U.S. are drowning in debt. And a recent article from economists at the ECB that finds:
The European Union will unify, break up or downsize. But regardless of what option they choose, they still have too much spending and debt relative to the ability to pay for it: GDP growth. But additional debt is not the answer. It is the problem.
The obvious solution is austerity (reduction in government spending). But making loans to the European Central Bank or individual countries doesn’t solve the underlying structural problems; it only makes the Debt to GDP problem even worse. It is simply a short-term solution and actually encourages the Eurozone to delay making the hard decisions.
Ben Bernanke and his Fed mates’ secret letterhead: “destroying capitalism from within.”
After four years of disastrously wrong policies, let’s declare stubborn, hubris-soaked wrongheadedness a virtue and saint Ben Bernanke and his Federal Reserve mates. If we had to distill down the Fed Chairman and the Federal Reserve’s policies since the wheels came off the Fed’s “shadow banking” system of fraud, collusion, embezzlement and free-floating leverage, we’d have to start with a systems-analysis perspective.
Any system which separates risk from results (gain/loss) is doomed to implode, as the lack of feedback from the real world (also known as consequences) enables the self-reinforcing feedback known as “moral hazard”: losses by those who took the risk to reap a gain are made good by those who did not take the risk and who do not stand to gain from the risk they are covering.
In this case, the mortgage origination and packaging “industry” and the investment banks’ origination and marketing of fraudulent-from-inception derivatives “industry” took the risks to reap outsized gains from the financialization of mortgages and other debt instruments via leverage, commodifying debt and arcane derivatives, all of which were sold as “low-risk.”
Capitalism’s primary characteristic is that capital is put at risk for a gain/loss. If risk is off-loaded onto the Fed’s bottomless balance sheet and the taxpayer via government-funded bailouts and guarantees, then capital is not actually at risk. Thus what we have isn’t capitalism, but cartel crony-capitalism, a phony version of the real thing which guarantees private banking profits and socializes banking losses.
The Fed was recently revealed as having arranged billions in private gain via secretly backstopping the banks with $7.7 trillion. This highlights Bernanke and his buds’ second catastrophically wrong policy, that of systemic opacity.
The acme of open markets is transparency. Without transparency, markets are not free or open, they are manipulated— both to hide those who are benefitting from the destruction of transparency (monopolies, cartels, fiefdoms, kleptocracies, oligarchies, etc.) and to manipulate the market as part of a permanent propaganda campaign to “manage perceptions:” the market’s up, everything’s dandy.
Bernanke and his faithful banking-sector lackeys have destroyed transparency at every turn, refusing an audit (an audit smacks of—sniff—democracy—how distasteful), masking the $7.7 trillion in backstopping, and hiding the toxicity of the Fed balance sheet, which is loaded with over $1 trillion in distressed mortgage securities that the Fed lovingly took off the bankrupt balance sheets of its craven masters, the banks.
In other words, the Fed has massively rewarded the reckless and rescued the incompetent from the consequences of their actions. If that isn’t the perfection of wrongheadedness, what is?
Then there’s the disastrously destructive ZIRP—zero interest rate policy. The Fed’s idea here is childishly simple, and childishly ignorant: if we lower interest rates to zero, then everyone who is over-leveraged and over-indebted will be able to borrow more, but for less interest, and that will buy the system time to magically heal itself.
The Fed cannot dare grasp that “healing” in capitalism means writing off uncollectable debt and sending insolvent lenders and debtors to bankruptcy court. Capitalism would quickly dispense with their cronies in the banking sector, and so capitalism must be destroyed. That is the Fed’s raison-d’etre: destroying capitalism from within. Lenin would be envious.
ZIRP has myriad pernicious consequences. Let’s say you have some capital that you want to apply such that it earns a fair return. If interest rates are near-zero, then a fair return has been rendered impossible by Fed policy.
The Fed leaves you only two choices: either put your capital into “risk-on” assets that are inherently risk-laden, or loan the capital out at low rates in an opaque market and hope you’ll actually get the principal back.
Imagine being in charge of issuing mortgages which weren’t guaranteed by the Federal government agencies of Fannie Mae, Freddie Mac and FHA—that is, imagine you actually lived and worked in a capitalist system, instead of a kleptocratic crony-capital haven.
You might hesitate to loan out large sums of money (jumbo mortgages) in a market where the risk of a decline in the asset (real estate) is obvious but official manipulation means you can only receive a very paltry return on the capital you’re putting at risk.
Since the market isn’t able to price real estate, risk or credit transparently, then prudent investors would be forced to shun the market: how can you invest wisely when assets, debt and risk can’t be priced by the market?
Prudent lenders would withdraw from such a rigged, risky market, which is precisely what has happened. Literally 99% of the mortgage market is now guaranteed by the Federal fiefdoms, all of which are losing tens of billions of dollars and require monumental taxpayer bailouts to keep underwriting the banking sectors’ private profits.
Private mortgage lending has simply vanished, and no wonder: if you can’t price assets, risk or debt, then only the reckless would enter the market, and even they would only do so if the Fed guaranteed the profits would be theirs to keep but losses could be transferred to the Fed or taxpayers.
The only way to restore trust and clear the market of uncollectable debt is to let the market transparently price, risk and credit—precisely what the Fed’s policies are designed to stop. The Fed’s knees are chafed from kow-towing to their banker masters, and worshipping the “magic” of their Keynesian Cargo Cult and Lenin (“destroying capitalism from within” should be stenciled on the Fed letterhead).
Separate risk from gain, obliterate transparency and choke the market with zero interest rates, and you’ve not only destroyed capitalism, you’ve also destroyed the economy by rewarding the most venal, corrupt, fraudulent and capital-destroying players while stranding the prudent on an island of opacity where the true price of assets, credit and risk cannot be discovered.