February 14, 2008
Elaine Meinel Supkis
Happy Valentine's Day, love to everyone here. But no love for the Federal Reserve. They just released a major report that details the last 6 months of banking hell. The entire system has slipped off the edge of the cliff and this report should be all over the web but it is not...yet. Lee Adler has done a short story about it and I hope to make further points. His claim the Fed has reduced the M1 money supply seems right to me. But when I looked at all the graphs, I saw a bigger picture, one that clearly shows how the Fed let banking get out of control not just at the lowest levels but they, themselves. The errors of the US banking system in a world where everyone is frantically building gigantic FOREX reserves must be addressed.
Fed Eunuchs Reveal True Selves In Technicolor
by Lee Adler
Many observers have expressed disbelief that the Fed is actually aggressively reducing the monetary base, in particular that part of the base which directly affects the trading accounts of 20 of the world’s largest banks, the Fed’s Primary Dealers. Wall Street Examiner Professional Edition subscribers have had the benefit of seeing the data on a day to day basis as charted in the daily Fed Report. The general public however, has not had the benefit of that insight. The vast majority of market pundits, economists, and quasi-journalists for the mainstream infomercial outlets like Marketwatch, the Wall Street Journal, Bloomberg, and especially CNBC, are totally clueless. To a man and woman, they all think that the Fed has aggressively been adding liquidity to the system.The proof, they say, is in the pudding and the Fed has just served it up in multicolored, multi-layered glory. The Fed itself is confirming, in graphical form, the very facts that I have been reporting on and charting for our subscribers every day for the past half year and more. The Fed has aggressively collapsed the size of the System Open Market Account, beginning slowly last July, then moving aggressively beginning in December. The effect has been to withdraw billions of dollars of what is, in essence, margin buying power from the trading accounts of the Primary Dealers.
Click here to see the entire PDF file from the New York branch of the Federal Reserve.
Click on image to enlarge:
He refers to a most interesting chart here. The Total Domestic Portfolio tracks several funding systems used to by the Fed to control the flow of money from banks to each other and into other financial systems. Such as the bond markets, for example. SOMA funds are the vast majority of these systems. What is SOMA? I will answer that in a minute after we look at this chart and further statements by Mr. Adler.
The Fed aggressively cut the size of its permanent holdings of Treasuries, and also substantially cut its holdings of repurchase agreements, resulting in the collapse of the System Open Market Account (SOMA). It replaced only part of that with the Term Auction Facility. The Currency Swap facility with foreign central banks has no direct day to day impact on the US market. When the Fed turned out the lights at the SOMA office in July, that was the end of the bull market. When the Fed began moving the furniture out to the hinterlands, again the US stock market took the brunt of the hit.
I am not a financial expert, I am a lowly entertainer who tells silly fairy tales about wizards, dragons and killer kitty cats. When I read any financial documents, the many words and abbreviations they use interest me because I know nothing at all. This way, over the years, I have picked up a few tid bits of information. So when I saw this huge document put out with no fanfare which talks endlessly about this strange creature, SOMA, I was curious. Soma is the ancient Indo-european word for opium. Much of post-1800 capitalism is based on the sales of opium, in particular, moving opium to China via British ships. Just as pre-1800 capitalism was based on the African slave markets. Which provided the ships and funding to start the opium market activity.
So, in honor of this dark history, it is very amusing to me that a fundamental part of the Federal Reserve banking systems reserve basis is called 'Soma'. I am very firm in my belief that magic numbers and magic words are powerful forces with finance. And the ancient connections of death, wealth and religion are key to understanding modern finances.
Short and long term repos both declined very suddenly between 11/11/7 and 1/2/8. I do love these sorts of dates. Also, there was a bit of a spike just before the sudden messes beginning on 7/17/7. The long term repos suddenly increased between Labor Day and Thanksgiving. Then it collapsed, both long and short term repos seeing huge reductions but not nearly as huge as the SOMA holdings! This dropped from nearly $800 billion to below $700 billion by Valentine's Day. This is a massive, $100 billion fall in less than three months!
Instead of the usual 'repos', the Fed filled this yawning chasm with new things: the TAF and the Currency Swap games. Now. let's visit another Fed web page to see what SOMAs are:
System Open Market Account [SOMA]
The System Open Market Account consists of the Federal Reserve's domestic and foreign portfolios. The SOMA domestic portfolio consists of U.S. Treasury securities held on both an outright and a temporary basis. The SOMA foreign currency portfolio consists of investments denominated in euros and yen.The Federal Open Market Committee (FOMC) has designated the Federal Reserve Bank of New York to execute open market transactions on behalf of the entire Federal Reserve System. The resulting investments are held in the SOMA portfolio.
In addition, while the Treasury, in consultation with the Federal Reserve System, has responsibility for setting U.S. exchange rate policy, the New York Fed is responsible for executing foreign exchange intervention. The U.S. monetary authorities—the Treasury and the Fed—may intervene in the foreign exchange market to counter disorderly market conditions, using funds that belong to the Federal Reserve and to the Exchange Stabilization Fund (ESF) of the Treasury Department.
And since this SOMA is sopping up euros and yens, this alerts us to a serious problem. Namely, the monetarist model for modern finance is as full of holes as swiss cheese after the cow jumps over the moon. The bankers are supposed to hold a market basket of currencies, gold, swap deals and bonds, etc. In this little game, the judicious juggling of these many things should lead to a wonderful outcome of stable prices, balanced world trade and general prosperity via the wise lending of money to enterprise and for domestic consumption.
Only this is a fabulous beast, an unicorn that can't exist. For the temptation to turn this into an unbalanced system whereby everyone tries to push thing to their limits in the hope of getting ever greater profits, is irresistible. Can't we just stuff our pockets from the money tree? The US is playing a monetary game with rules we set up for ourselves, rules that ignore whole mountains of important incoming information. And we want our friends and allies to do the same.
Only they are all playing different games with very different rules. Their SOMA mixes are not the same as ours at all. Indeed, trying to balance our own while ignoring theirs is clear insanity. If we don't notice they are parking their own funds and supporting their own banks on a totally different system, we get dangerous dynamics. The yen, for example, is on a different program from the dollar. The Japanese have tremendous motivation to weaken the yen vis a vis the dollar and the euro. For trade purposes. The Europeans have a mixed bag response for their own currency and it is morphing all the time due to the madcap growth of the European Union as it takes in more and more countries. But the dollar can't ignore giant FOREX reserves, for example.
That changes the SOMA big time, I would suggest. The mix of dollars and yen, globally, are profoundly warped by this massive trillion dollar reserve. The Fed should be addressing this with rising rage, not playing goofy games like blaming China for this. Since a good part of the globe is now playing this game with Japanese rules, the attempt by the US to use our older SOMA formula is fated to lead to us losing this international monetary game. Winners are people who force other systems into default or force them to do things that harm the national economies. And no global economy has been hammered like the US.
The recent news that 'depression' Japan had a much higher growth rate than the US should start huge alarms over here. All this is connected to the collapse of the SOMA funds here in the US and the need for emergency funds.
SOMA information from the Fed:
To add reserves to the banking system and accommodate the trend growth in currency in circulation, the Federal Reserve purchases government securities. To drain reserves from the banking system and limit the ability of banks to make loans and investments, the Federal Reserve sells securities. The Federal Reserve Act and the Monetary Control Act of 1980 provide the Fed with the authority to exchange maturing securities and to buy and sell obligations of the U.S. government in the open market.
The Fed is no longer in control of world banking. They apply brakes or gas and all sorts of unintended things happen. The Fed refuses to understand that savings are the basis of all banking. Minus that, you get inflation and chaos. The Fed's restrictions on finances will cause panic and depression due to it being the wrong solution to the inflation we see. The inflation is rooted in the alternate banking system and the Japanese carry trade cycle. So long as the Japanese save giant funds and park it in their FOREX reserves, they can issue an amazing number of loans to others. The Fed has chosen to save virtually nothing. Before 1964, no nation had any FOREX reserves larger than the US. Most were much smaller. The surge in these accounts across the planet is a sign that a New World Banking Order has emerged behind the Fed's back. And this is intimately connected with our trade deficits, world energy prices, inflation of all commodities and the rise of China. The longer we ignore this, the worse it will be for us.
I know this will be a long article but the pile of data we can mine from all this should be seen in quick succession. It makes it very clear how our banking system has become very disordered.
The above charts make it pretty clear, there has been a huge disturbance from July to today.
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These charts look like an earthquake graph. Back when this was beginning, bond traders sent me emails alerting me to this wild gyrations. The gyrations are due to all the many strange efforts the Fed put in to fix obvious collapses. If there were no massive interventions, the spread would simply widen totally as we saw yesterday when the latest muni bond sales rang up rates of 20%! Also, these charts make it obvious that we are not out of the woods at all. Indeed, the bottom chart shows things deteriorating very rapidly at an even faster pace, as we saw in the news. The average person yawns when they see this but the nasty truth is, only a person as viciously focused as a Volker can now stop this process by admitting the real rate and pegging the Fed to it. Right now, the Fed wants fake rates so they are dropping rates via their usual tools. Only the real rates are responding with increasing violence. And this is due to rising inflation, rising budget deficits in the US and rising trade deficits. The negatives are growing, not shrinking.
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This chart again, shows how, after the Japanese yen suddenly began to strengthen from 120 to the dollar in early June to 107 to the dollar, the sudden end of the Japanese carry trade caused a huge spike here. This is all being blamed on the goofy notion that before 7/17/7 when the G7 attacked China and 8/10/7, the financial mess in the US housing markets had NO EFFECT AT ALL and then suddenly, knocked it all sideways?
Stocks were soaring during this time. The left overs of the buy-out mania which very much depended on the Bank of Japan, was roaring ahead. But when it ended, in less than three weeks, all this funny money vanished! And this is VERY SUDDEN. Not a slow deterioration. NONE of the charts above show any slow deterioration. It is VIRTUALLY ABSENT. But right after the July G7 meeting and China saying they would haul us all into proper banking methods because the G7 wanted this, that day, the carry trade began to collapse and this collapse was very sudden.
None of the housing messes were sudden at all. Not even slightly. The mess was well known to anyone with brains since the end of 2005!
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The behavior of the Federal Funds rates show this wild disorder. Note how they were 4-5 from 2003 to 2007. then in August, it shoots to 20 where it is today. And look at the range within trades! From between 19 to 79 bp to a huge jump of 200 to 250 bp. Ouch. And the extraordinary high payment days went from less than one a month to 40--in 3 months! It seems as if these announcements of special high amount sales are occurring every couple of days.
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Lending volumes increased from an average of only $21 billion to over $120 billion. Talk about a massive rise! All, in less than four months.
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Note the remark for this chart: 'absence of outright purchases in the second half of the year amid pressures in the funding markets and portfolio draining needs'. HAHAHA. They had to sell stuff! Why couldn't they say that? And this was a PANIC sale, not a profitable sale. It was done to save the system, not to bring more wealth into the US. Indeed, many of our present system are set up in this way: they are mostly DRAINS on our wealth! Understanding the whole system means recognizing how modern banking NEEDS capitalism and capitalism is all about gaining capital out of labor and commodities and then plowing it back into the system, not parking it offshore, or in gold funds or frittering it away bidding up the value of art works at Sotheby's.
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SOMA lost funds. And the key here is, the US was utterly unable to purchase Japan, China or Germany's output! In other words, they bought from us and are holding from us as we see in their huge US bonds and FOREX currency reserves. The US cannot run in the red here. Not in an inflationary global economy. I would dearly love to seek out and compare similar charts in Germany and Japan [no hope of China spilling the beans here].
As I pointed out so far, we know that NONE of the charts here show ANY disturbances until a specific day and this day has NOTHING to do with US mortgage payers not paying the rent. They do have a singular harmonic coincidence with key G7 meetings and with Japan and China trading shots over the issue of the G7 refusing to attack Japan for their obvious fake currency and even faker depression while hammering on Chin for both of these things. China took matters in their own hands as we can plainly see.
And now we are in a mess that WILL NOT END if the tool needed to keep things going is the awful Japanese carry trade! Back to the news:
Paulson, Testifying With Bernanke, Foreshadows New Loan Rules
Treasury Secretary Henry Paulson said U.S. regulators plan to alter rules for packaging loans into bonds in the aftermath of the subprime-credit collapse.Paulson and Federal Reserve Chairman Ben S. Bernanke, who testify before Congress today, first want markets to stabilize, reducing borrowing costs for companies and consumers. Policy makers are trying to revive an economy that expanded at the slowest pace since 2002 last year.
Paulson, Bernanke and their counterparts at the Securities & Exchange Commission and Commodity Futures Trading Commission are ``carefully'' reviewing loan securitizations, the Treasury chief said yesterday. The process magnified losses on subprime mortgage-linked securities because it reduced the incentive for lenders to ensure that borrowers could repay their debts.
``You can't have gone through the process we've gone through without knowing there needs to be some changes,'' Paulson, 61, said in an interview with Bloomberg Television yesterday in Washington. ``First, we need to get through this period with as little impact as possible on our economy. And then secondly, we need a strong policy response.''
Closing the barn door after the horses ran it over, smashed it and galloped off across the plains and into the seas! Wow. They knew these loans were bad. They encouraged bad loans. Greenspan even urged everyone to take on bad loans. Arrest Greenspan.
UBS Won't Support Failing Auction-Rate Securities
UBS AG won't buy auction-rate securities that fail to attract enough bidders, joining a growing number of dealers stepping back from the $300 billion market, said a person with direct knowledge of the situation.The second-biggest underwriter of the securities, whose rates are reset periodically at auctions, notified its 8,200 U.S. brokers of the decision yesterday, said the person, who declined to be identified because the announcement wasn't publicly disclosed. Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Citigroup Inc. allowed auctions to fail as mounting losses from the collapse of subprime mortgages causes capital markets to seize up.
This news shows us the banking crisis is worsening. We can't stop or fix this if the Fed and our government and our trade partners who all run trade surpluses with us all conspire and they are conspiring, to hid the business of the Japanese carry trade and how they hope to fix all this by reestablishing this carry trade. Which was set in motion in order to have one way trade with the US and to flood us with easy term loans which we can no longer absorb due to being too deep into debt.
The ONLY way this can restart is for the US to not only not pay any interest on any loans but to also never pay any principal! This is clearly insane and impossible. We we should grow up and realize there is no Santa Claus and the one who is carrying a bundle of carry trade loans down our chimney is a thief hoping to put us in hock so we will be beholden to this Santa!
We have to bite the bullet here. There is no easy solution that features more loans and less savings. Only the reverse.
Banking figures are so hard to contemplate. They are also subject to being fudged, a la foxes reporting upon the number of chickens in their care.
If the international hot money boys believe that the whole US banking system is due for a rough spell, rather than short their least favourite asset classes, they will make a grande exit, en masse. In doing so, they will need to sell lots of dollars.
The US dollar index (ICE) has fallen to some measure of support at 75. It is not yet possible to determine whether 75 will represent a Verdun-like, major turning point where dollar bears have their own posteriors handed to them, or a Maginot line, where the dollar bulls find that the Huns are coming through with all guns blazing. (No affront to the Huns is intended. I am one of those, myself.)
I like to watch a ratio of two ETFs, UUP/UDN, to help gauge the effective trend of the dollar. If the ratio breaks down from here, the US banks will find their problems to be intractable. If the ratio holds or rises, the FED will be in a process of pulling another rabbit out of its battered hat.
Regards.
Posted by: stevo | February 14, 2008 at 02:57 PM
What do you think of this comment?
http://wallstreetexaminer.com/?p=2280#comment-78462
Are those that say The Fed is owned by Roths nuts?
Posted by: PW | February 14, 2008 at 03:01 PM
I need to admit that my own understanding of this jargon is very, very limited. But, here's what occurred to me, based on my understanding of what M1, and SOMA means - did the Fed intentionally reduce the real money supply, and replace it with the TAF? As a way of protecting against a mass flood of overseas dollars returning home suddenly and without notice? In my view, the TAF would be a stop-gap way of rolling over liquidity from one day to the next, allowing more fine-tuned adjustment of actual liquidity in play than standard tools. Anyone care to comment on that?
Posted by: CT | February 14, 2008 at 04:10 PM
Good questions, CT! I hope to find someone somewhere online who can answer those questions. I, too, am just trying desperately to figure things out. We must do this to survive.
About the Rothschilds: yes, they are a common thread in international banking. Personal relations very much matter in banking.
Posted by: Elaine Meinel Supkis | February 14, 2008 at 05:39 PM
"SOLD OUT!!!!".... TRICLE DOWN HEARSAY. Mainstream amerikana KNOWS now that they've been sold down the river by the Fed Reserve mafioso... despite the best efforts of the SOMA media-drug conglomerates to pacify the masses. There's a groundswell of populism growing, manifested in burgeoning public events nationwide, that substantiate the "resistance" to the spoon fed efforts to continue the status quo. It's seems all over but the crying for these morons who can't face theat they've LOST the capitalistic game they fomented (and China-Russia wealth is winning). This AWAKENING of the populace is heartening and will, hopefully, defeat the best efforts to sneak in the police state. Wouldn't it be fun to see the arrogance of the supposed MENSA contemptuous elite is proven ineffectual? Maybe excessively optimistic but..... maybe the biddha had it right bud!!! Misery stems from attachment.
Posted by: RobertoG | February 14, 2008 at 06:44 PM
PW & EMS
I refer you to this explanation of Federal Reserve ownership :
http://www.themoneymasters.com/faqs.htm#q1
PW, the statement from that blog was promptly attacked by Lee Adler.
per Ron Paul the Federal Reserve has never been audited. how much is the 6% annual dividend equal to? Mr. Adler obfuscates exactly in the manner which the money masters outlines.
no expert, just watching.
Posted by: pulse | February 14, 2008 at 07:48 PM
There are no real controls over the Fed. They are the top wizards who wave many wands and if the wand breaks, they whittle a new one as we just saw the last three months. But each wand they make is broken on the rocks of economic reality.
Posted by: Elaine Supkis | February 14, 2008 at 08:06 PM
As far as I can tell, the US is formally bankrupt, although others use the term "technically bankrupt" when writing about it.
I also read somewhere that the Chinese banking system (and probably the Soviet one) was insolvent for many years but they managed to keep it afloat until they could reform it or whatever.
I wonder if ours can be kept alive in this fashion until it is reformed or whatever the Chinese did to save theirs or if the problems are just too intractable.
For one thing, our national debt loads are extraordinary even by communist totalitarian state standards and I do seem to know that about 5 banks are exposed to 98% of the 500 trillion derivatives timebomb. They are completely insolvent but also the main players in the banking system.
I know the bankers are trying to keep the system alive until they can off-load their debts onto us, but will they succeed given the enormity of the problem? I don't know.
Personally, I think the 5 insolvent banks should go belly-up, but I doubt it will happen because they are part of our government now, if not the government itself. So, my fear is that they will be saved at the expense of everyone else.
Posted by: DeVaul | February 15, 2008 at 02:39 PM
DeVaul, Russia dealt with this by going bankrupt. Millions of Russians suffered horribly.
China went bankrupt in 1948. Since then, no. But millions of Chinese did starve to death with the Great Leap to Hell, for example, as well as the Cultural Death Revolution. But since 1980, they have been very, very careful. Considering all things.
Posted by: Elaine Meinel Supkis | February 15, 2008 at 04:14 PM
Actually, I was referring to the time period after the Cultural Revolution. I believe that a Chinese official stated that their banks were insolvent, but they propped up the system somehow until I gess they went on their export binge. I cannot remember where I read this, but it was a Chinese official who said it and he also stated that the banks were insolvent for many years and the government knew it.
Of course, they have a different system from ours and perhaps that is how they kept it all mum until they could get back into the black. Still, it was interesting to read something like that from a Chinese official.
Posted by: DeVaul | February 15, 2008 at 05:18 PM
Oh, it was much worse than that. MONEY DISAPPEARED.
When the Chinese officials came to live with me in the very early 80's, around 1983, they got everything via government offices. They thought a $20 a week stipend was fabulous.
Boy, that didn't last long.
First day in my big house: 'So. Government give you BIG house.'
Me: 'No! I bought this with my own money. Money I earned working in New York City.'
We went on and on with me explaining how I used 'money' to buy things. To prove this to them, they went with me to work. They watched me haggle over money. They went to the banks with me. I explained the American Express card I used. I had to teach them about how to use money.
Then they wanted to MAKE money. HAHAHA. We had tons of fun on that one. They took to it like ducks to water. Rapidly, they began to make money. Then they began to set up their private import companies. It was very fascinating. One of them ended up running the major shipping out of Shanghai.
Posted by: Elaine Meinel Supkis | February 15, 2008 at 09:37 PM
But the central bank never went bankrupt, by the way. It sat on the money like a dragon on an egg. Russia, on the other hand, was looted.
Posted by: Elaine Meinel Supkis | February 15, 2008 at 09:38 PM
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Posted by: mqoahcpsj vmuq | March 15, 2008 at 10:07 PM
I'm new here, just wanted to say hello and introduce myself.
Posted by: Guimapaurry | August 16, 2008 at 05:10 PM
Well, come to the threads that are more recent and people will say hello, Guimapaurry.
Posted by: Elaine Meinel Supkis | August 16, 2008 at 08:17 PM