The Fed Drops Rates To Help SPECULATORS, Not Housing
May 21, 2008
Elaine Meinel Supkis
I was fooling around with a bunch of graphs while listening to Mahler's Symphony #6. And then had some revelations. We have to understand how the Fed interfaces with mortgage rates and housing bubbles. The chart below makes it crystal clear: the Fed causes these things to happen because of the SPREAD between its rates and bank rates. Also, the Congress is holding hearings this week about speculators driving up the value of many important commodities at a mad rate that hasn't been seen since, since...since Volcker had to raise interest rates to 18% to stop them back in the 1980's. Time to read the testimony at that hearing and I hope to hear from readers about this riddle. Thanks!
When I drew up this graph and began to color it in, I noticed several things. One was, the interest rate charged by the Federal Reserve doesn't match the mortgage rates offered to homeowners by the banks. Indeed, there is virtually NO match! What the hell is going on here?
I noticed that only twice did the Fed rate rise above the rate the banks charged for house loans. Both were due to Volcker's attempts at killing off inflation! Between each dragon-slaying event, housing BOOMED. But so did inflation. After the second surge by the Fed, Volcker was thrown out of office and we got the Greenspan/Bernanke regime. Note how each time the Fed dropped interest rates, the banks DIDN'T FOLLOW SUIT. They merrily charged far more for mortgages than the Fed's ongoing rates! But every time the Fed RAISED rates and the mortgage and Fed rates merged, housing COLLAPSED. And this time around, from 2006-2008, is no different!
Anyone who tells me the Fed drops rates to 'save housing' is NUTS. Or listens to propaganda. The central bankers are born liars. They lie about nearly everything and anything. If you gave them a lie detector test, they would cause the needle to jerk right off the chart.
The question is, if rates have barely changed between 2000 and 2008, why has housing had this sudden boom and even faster bust? Who had money burning in their pockets and were eager to give it to anyone and everyone so long as they promised to pay back at the rates that were more than 350 basis points higher than the money the Fed was shoveling into the member banks? Eh?
Sometimes things hit me like lightning. I was going to do a different story but needed to review some statistics so I went off to the Fed and fooled around in their graphs section. This chart is very much a revelation to me! For I added the percentage of rise and fall in value of the housing stock. Then and only then, did it become crystal clear: the rate of interest for mortgages did NOT cause the housing bubble! Not even slightly!
No, the true nature of this beast was the action of the tentacles of the Federal Reserve: all of its member banks. They got the cheap loans, not the homeowners. They had cheap money that HAD to do out the door, fast. A huge amount of cheap loans that HAD to be quickly turned into 'money' as it had to become the tar baby for some human somewhere who would use FUTURE labor to pay for the money handed out via the central bank to the member banks!
The Hunt for the Chump was on! As this easy money that was so tempting poured into the accounts of the member banks, so long as it sat there, it was a DEBIT, not an asset. To change it into a plus money making asset required giving it out as a loan in the housing markets. The pool of 'good people' who could put 10% down was limited. The funds the Fed made available was unlimited. So all the member banks dropped requirements to the point of 0% down and no certification of income or anything at all. I remember when a person couldn't get a loan for housing unless your income could support it.
But during this bubble, that was thrown out the door. People could buy 2, 3, 10 properties. People in prison bought and traded properties! Anyone including a flood of illegal aliens could buy a home with no money down. When the 350+ basis point difference became too difficult for the increasingly ill-funded purchasers using this flood of Funny Money™, the banks willingly shoved even the payment of interest into the future with their new 'teaser' rates and the 'don't bother with the interest and let it become part of the principal' games.
In other words, the rate drops were NEVER for the homeowners. Who always needed a sudden flood of Funny Money™? If I drew a chart showing Wall Street collapses, there it is: EVERY DAMN TIME THE FED DROPS RATES IT IS FOR GOLDMAN SACHS AND JP MORGAN!
And shockingly, guess who founded the Fed? Eh? Of course, readers here know I hate the Fed and wish it ill. The main thing here is, the manipulations, the gyrations our interest rates undergo, the wilder and wilder surges we all go through are not due to the Fed 'tightening' or 'loosening' money. It is due to the Fed doing this on behalf of a bunch of pirate speculators! Who have only one desire: to enrich themselves as fast as possible. Greenspan let the cat out of the Fed bag by muttering something about 'irrational exuberance' except Goldman Sachs and JP Morgan are not irrational at all.
They play with the toys Santa gives them. And cheap loans is the biggest gift Santa has! I was very angry last fall as Cramer was running around foaming at the mouth about 'blood in the streets' but every time the Fed dropped interest rates, stocks would shoot upwards to new records. Now, rates are dropped and stocks...hey! They shoot up! But yesterday, these pirates learned there will be no more rate cuts for JP Morgan or Goldman Sachs and the stock market crashed. They blamed it on record oil prices. But I saw in the news all last week when stocks were rising, that this was due to higher oil prices and since oil companies are on the stock market ticker, this drove UP stocks!
In other words, stocks are ENTIRELY dependent on how low interest rates are. Why is this, I ask.
HAHAHA. Are these clowns using hard-earned savings to play the markets? OR ARE THEY USING LOANS? The answer is painfully obvious! We know there is a lot of loans out there right now because they are being used by speculators...in commodity markets! The cheaper the loans, the more they make commodities climb. THIS IS CAUSING INFLATION.
Long ago, I said all the yapping about the housing crisis was NOT the cause of the banking collapse. It was a symptom. The real cause is in the graph above: housing is crashing due to the banks ceasing the flow of money towards housing for the simple reason, the 350+ basis point advantage is GONE. They make NO PROFITS. But they do make profits if this money flows to...the speculators. They have an endless appetite for cheap loans! Considering the risks they are taking, a loan for less than 11% is cheap as hell.
If oil rises by 165% in six months, my god! The profits! Paying 10% on a loan from a bank to play that market: what a spread! This is why the hedge funds that finally dumped their toxic paper off at the Fed for a fist full of Treasuries ran off to the oil markets and plunked it all down on bids! As well as rice, wheat and a host of other things. No one is putting on housing. Housing is dead as a doornail since it is declining. We can be certain, when it begins to rise again, they will pour money into housing lenders again.
Right now, the spread between mortgages and Fed rates is around 250 basis points. In the news this week is the not-so-surprising information that the lenders are letting people buy houses with only 3% down. A ridiculous amount. This is in a desperate attempt to revive the housing bubble for political reasons. Too many people are poking around the smoking ruins of the housing/banking collapse. And the flood of Funny Money™ pouring into commodities is rapidly destroying our nation's economy, nay, the entire planet's international and internal commerce and trade!
Since the US is hugely responsible for this global inflation, we have to understand how it works in order to fix it. Below is the testimony of the people responsible for controlling the speculators who are running riot across the entire planet. To show how nearly impossible it is to rein them in under present circumstances is obvious. We shall talk about that in a moment:
Testimony of The Commodity Markets Council On Financial Speculation in Commodity Markets: Are Institutional Investors and
Hedge Funds Contributing To Food and Energy Price Inflation?
Before the Committee on Homeland Security and Governmental Affairs U.S. SenateMay 20, 2008
Examining The Role Of Institutional Investors And Hedge Funds In Commodity
MarketsCMC views the investment activity of institutional investors and index funds as legitimate “financial hedging,” but we recognize that it is passive in nature and not responsive to price levels or supply and demand fundamentals. In 2005 and 2006, CMC worked closely with the Commissioners and staff of the Commodity Futures Trading Commission (CFTC) to bring about a better industry understanding of the nature of index fund activity in futures markets. The result of this collaborative effort was the CFTC’s release of a new Commitment Of Traders (COT) Supplemental report showing index fund financial hedges as a separate and distinct category.
We believe the COT Supplemental Report provides much needed transparency to the market about the size and behavior of such investors. Despite being a relatively young report, it is already one of our industry’s most essential tools for analyzing markets. Although some organizations believe that the activities of large institutional investors in futures markets pose a threat, CMC believes that this is not necessarily the case. CMC recognizes that passive investment in the commodity markets may have had some price impact, but current evidence shows that market fundamentals generally support the current price levels seen in the futures markets.
The CFTC recently indicated that it will take a “go-slow” approach in expanding exemptions for this new class of investors. CMC supports this regulatory approach because it will allow the Commission and market users more time to thoroughly evaluate the potential this passively invested money may have on commodity markets. Given the many concerns in the commercial marketplace about convergence, CMC believes it is critical for market participants to have a clear idea and understanding of this new type of investor. It is important to note that this type of investment is new and different, but not necessarily bad.
My god. This is pure madness! This 'type of investment' is not new at all! It is a ghoul from a very musty, old grave. Time and again, the bankers create a mania of some sort. This is usually due to lending maniacs money to play games with tulips, Mississippi mud or South Sea froth. As for the harm being done by these speculators: it is immense. This commodity bubble mess is historic. I have seen this before: it was in the late 1970's and Volcker strangled it quite dead with his high interest rates.
This sort of brain-dead supervision by the people who should be taking things in hand is typical. For example, when Congress sits down to discuss the trade deficit, this same mealy-mouth, pandering talk is all we get. Only when the heads of the Fed talk with Ron Paul do we see any sign of life. The rest of the multi-millionaires in the Senate, for example, flee the room when Paul takes on the Fed. They don't want to hear about this at all. Nor do they really care about the trade deficit or they would all be yelling. They are a tad frightened about the massive bubble in commodities because this will destroy what is left of our nation! It can cause WWIII! No one outside the US is very happy with this mess except the Saudi Royals and Putin. And Chavez. And Iran, for that matter. I would think our Senators would look at this and flip out. Yeah.
A prediction: if oil hits $200 a barrel as the US threatens Chavez and Iran as well as Russia [with those stupid missiles in Poland!] this will be due to the speculators knowing this threatens the future of oil shipping so they bid up the price. And at $200 a barrel, our economy will collapse. Millions of Americans will have to go without heating, travel to work, food will be too expensive, our nation will collapse. And if the Fed feeds these speculators more cheap loans, it will get WORSE. Cheap Fed loans=>speculators using it to bid up oil=>total social and economic collapse of the US. I would think someone would put all this together and react.
Equally important is the distinction between passive investment and price-responsive investment. Typically index funds and institutional investors engage in passive investments. They take a position and hold it until a determined time. They do not change their position based on market movements. On the other hand, hedge funds tend to be more responsive to market signals and act as a traditional speculator. As such, hedge funds are subject to speculative limits which are appropriate.
In the last decade, futures markets, especially in the enumerated agricultural commodities, have grown immensely because of the relevance of their products to the commercial hedging, financial hedging, and general international and domestic trading communities – including hedge funds, index funds, and institutional investors. This increase in volume boosts liquidity, aids in price discovery, and enhances market efficiency.
Futures markets today reflect global economics and trends, not speculative buying power. Speculative activity in futures markets may influence day to day prices, but it is powerless in the face of larger, fundamental forces. If prices begin to retreat tomorrow, speculative activity will follow that retreat, not cause it.
My god. This guy is effing insane. He is mad as a hatter without a toupee. How on earth has flooding the commodity markets with a vast sea of easy loans, aid in 'price discovery'? It would be like when I go out to pump some gas in my car. I discover I am going to have no money for food! What a neat thing to find! ARGHHH. And 'liquidity': hey! I recall for the past six months, the bankers shrieking about the LACK of liquidity. And yet, when even one drop of liquid is squeezed out of the central bank's lemons, the price of all commodities shoots to the moon! What a shock!
Policy Recommendations To ConsiderTo address the concerns surrounding this new investor in commodity markets, CMC
recommends:1. Monitor Index Fund Positions. To maintain competitive markets, exchanges and the CFTC should continue to monitor index fund participation and be prepared, if necessary, to examine the structure of the hedge exemptions granted to the funds. In the agriculture futures markets, volume grew immensely in the last decade and the increased liquidity benefited all market participants. Fund investment contributed to this prosperity, and CMC believes that the CFTC and lawmakers should move slowly when adopting measures that will discourage such participation in the markets.
2. Continued Product Innovation. As the markets evolve and learn to adapt to the changing supply and demand dynamics, CMC would support legislation and regulations that allow exchanges to continue to innovate and create new products to manage risks. [ARRRGHHHH! LIKE HELL!]
3. CFTC Study Of Alpha Trading. CMC also recommends that the CFTC initiate a study of the trend toward “alpha” or “enhanced return” trading by index and hedge funds. Because this type of investment is price-responsive and not passively managed, CMC believes it is speculative in nature and should be reported as such on the CFTC COT Supplemental Report.Margin Requirements
With crude oil prices moving higher and higher, CMC shares the concerns of many lawmakers. We are confident in the ability of CFTC professional staff to monitor and evaluate trading in energy markets, as well as their conclusions about the impact of speculation on prices in the energy futures markets. [Sort of like watching the Titanic sink while appreciating how nicely the orchestra on deck is playing]
CMC is concerned about a provision in the Consumer-First Energy Act of 2008 that would require the CFTC to set a “substantial increase in margin levels for crude oil.” It appears the intent of the provision would be to lower prices; however, we believe that increased margin requirements would force many market participants off-exchange and into less transparent markets.
A margin payment, also called a performance bond, is the amount of money or collateral deposited by either a customer with a broker, a broker with a clearing member, or a clearing member with a clearing organization. A margin payment does not serve as a partial payment on a purchase, but rather serves to manage counter-party risk and ensure the financial integrity of the markets. Raising margin requirements will not reduce volatility or manage prices. It will increase the cost of futures transactions and potentially push speculative liquidity from the regulated exchange marketplace.
CMC Grain Futures Performance Task ForceWith unprecedented challenges facing the US grain markets, CMC brought together exchanges and exchange-users to discuss futures market performance. The Task Force reviewed many market-related issues with the participants and the role of institutional investors and hedge funds was a significant point of discussion.
As CMC is still working to finalize our findings report, I can provide a general overview based on the dialogue the Task Force panel had with the participants. CMC will make the full report available to you as soon as it is complete.
The overriding concern expressed by participants is the financial impact of high commodity prices and increased price volatility – not futures market performance. Most market participants agree that current supply and demand fundamentals support high commodity prices. They do not believe that institutional investors or hedge funds are pushing price levels higher. Specifically, participants identified the following as the primary reasons for current price levels:1. Strong economic growth in developing countries such as China and India resulting in increased demand for commodities.
2. Increased demand for commodities used for biofuel production and government mandates on biofuel use that result in inelastic demand for grains and vegetable oils.
3. Reduced yields in major producing regions due to weather events that are resulting in historically low world grain stocks-to-use ratios.
4. Export restrictions imposed by other nations.5. A weakening U.S. dollar.
Meanwhile many grain and oilseed handlers face greater financial scrutiny as the sub- prime mortgage problems increase the pressure on lenders. This tighter credit creates an increased need for more consistent convergence between cash and futures markets.
Consistent convergence was the primary topic regarding technical futures market performance. While most participants agree that basis weakens in high price environments relative to more normal market conditions as grain and oilseed handlers’ increased risk is incorporated in lower cash grain bids, participants still expect consistent basis strengthening as futures markets approach expiration. Some Task Force participants have disagreed on why convergence has been inconsistent – citing either insufficient storage charges on futures market receipts and certificates; index fund and/or speculative activity in the market; or the multitude of external shocks hitting the market. Most of those interviewed by the Task Force urged Exchanges to not make drastic changes until the markets adjust to this new operating environment.
The panel discussed a number of proposals that might improve convergence, but no broad consensus emerged from the process. Nonetheless, the largest number of participants generally supported increasing storage rates. Participants also supported seeking CFTC approval to clear OTC grain swaps.
Seriously, they are desperate to stop the OIL speculators. But NOT the entire system which is totally out of whack. Examining where this mysterious speculative money comes from is literally life and death. The Japanese carry trade is where the lowest interest rates on earth are. And we have to confront the Bank of Japan about all this just like we have to bang on Bernanke's bald head about all this. Damn. They have to stop the merry go round of easy lending to the big speculative banking houses, the founders and owners of the Fed itself. JP Morgan and Goldman Sachs. We have to clip their wings before they fly off with all the wealth in the world.
.... and this is authoritarian free enterprise (or fascism, without anybody noticing.)
Stop and consider how many people are actually producing ANYTHING in our countries (not bureaucrats, not public servants of any kind, not lawyers, not accountants, not bankers or brokers). Now take away the military "industry" and "intelligence" community. You will discover that the 4 day work week (1 parent working) forecast in my youth would have arrived long ago. These mind bending wizards of greed have done nothing but focus on deceipt and confusion for their entire existence.
The fiat monetary systems have consumed all capital, one merger and acquisition at a time. The capital has been destroyed and sent to .... COMMUNIST China.
For our complacency, we will deliver our children to poverty and bondage. The something for nothing generation of entitled sloth has a duty to halt this madness.... but we will not, for we know nothing but self interest. The images of 'flower children', 'peace activists' and 'freedom lovers' will be the irony for future generations to ridicule. Maybe they will be wiser?
Elaine, the speculator has a very valid role in the markets - to stabilize the producer's business cycle. The leveraged speculator of Wall Street pedigree is quite another beast.
Posted by: pulse | May 21, 2008 at 11:49 PM