State attorney generals sue powerful fed agency blocking bank lending

I just heard a snippet of a very interesting interview on Mike Huckabee’s radio talk show this morning.

Guv. Huckabee was speaking to South Carolina Attorney General (AG) Alan Wilson about a lawsuit Wilson and other state AGs just filed against the federal government over the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by Obama in July 2010.

Wilson maintains that one big reason why the U.S. economy is stalled and unemployment remains high is because banks won’t lend money to businesses, although they’re sitting on a lot of cash. Wilson attributes this to the Consumer Financial Protection Bureau (CFPB) — a creation of the Dodd-Frank Act and a powerful federal govt agency that has no Congressional oversight and restricted judicial review, but answers only to the even more powerful Federal Reserve System, itself a bastard hybrid of part-govt part-private banks which is also not subject to Congressional oversight.

The very powerful director of the CFPB is Richard Cordray, an Obama appointee. The even more powerful director of the Federal Reserve is Ben Bernanke.

The authors of the Dodd-Frank Act are both unaccountable: Sen. Chris Dodd had already retired from the Senate in 2011, and Congressman Barney Frank is not seeking reelection. Both also had a direct hand in the housing collapse that began America’s Great Recession in that, in their respective roles as chair of the Senate Banking Committee and chair of the House Financial Services Committee, the two men had ignored the imprudent reckless lending policies of the government-sponsored mortgage lenders Fannie Mae and Freddie Mac.

~Eowyn

A rogues gallery (l to r): Chris Dodd, Barney Frank, POS, Richard Cordray, Ben Bernanke

Here is an article, “Republican State AGs Resisting Cooperation with CFPB,”  by Carter Dougherty for BusinessWeek on the lawsuit:

A group of Republican state attorneys general has declined to sign cooperation agreements with the Consumer Financial Protection Bureau, part of an escalating Republican revolt against the agency that began in the U.S. Congress.

Richard Cordray, the agency’s director, asked all 50 states in March to sign a memorandum of understanding designed to protect confidential information shared among states and the bureau. To date, only 12 states — all but one with Democratic attorneys general — have signed, according to the bureau and documents obtained in a public records request.

Oklahoma Attorney General Scott Pruitt said in an interview that he is declining to sign the agreement because of legal objections to the law that created the consumer bureau, the 2010 Dodd-Frank Act. “There are misgivings I have about the authority and scope and power of the CFPB and the power granted to the director,” Pruitt said in an interview. “Frankly, until some of those issues are fleshed out, it is very premature for a state to enter into an MOU.”

Four attorneys general, led by Pruitt, plan to join an existing lawsuit that challenges the constitutionality of Dodd-Frank and the CFPB, according to a person briefed on the decision. Pruitt and attorneys general from South Carolina, Michigan and Kansas may become plaintiffs in the suit as soon as tomorrow, said the person, who spoke on condition of anonymity because the decision wasn’t public.

Separation of Powers

The lawsuit in federal court in Washington was filed June 21 by State National Bank of Big Spring, Texas. The bank argues that the structure of the consumer bureau violates the constitutional principle of separation of powers because Congress does not appropriate its budget, the president has limited ability to remove its director and courts face restrictions in reviewing its actions.

South Carolina Attorney General Alan Wilson, told a campaign rally last week in Greenville, South Carolina, of plans for legal action.

“We’re going to challenge that law,” Wilson said on Sept. 14, in remarks reported by Fox News. “We’re going take the battle back to Washington, D.C., because community banks on Main Street shouldn’t be choked to death so that big banks on Wall Street can take our money.”

The CFPB was created by Dodd-Frank to consolidate federal financial consumer protection authority in a single agency. Since starting work in July 2011, it has set up a complaint system for consumer services, proposed regulations on housing finance and is studying areas including mandatory arbitration, payday lending and overdraft protection.

State Cooperation

Cooperation with state attorneys general has been a signature effort of the consumer bureau since Harvard professor Elizabeth Warren began setting it up in late 2010. Warren, who is now running for the Senate as a Democrat from Massachusetts, touted state law enforcers as “natural partners” for the agency because of their focus on consumer protection.

Republicans opposed creation of the bureau, and Senate Republicans refused to confirm anyone to the position of CFPB director. That standoff led President Barack Obama to install Cordray as director on Jan. 4 using a process known as a recess appointment.

Republican opposition to CFPB and Cordray hasn’t been absolute.

Republican state attorneys general including Rob McKenna of Washington, John Suthers of Colorado and Mark Shurtleff of Utah signed an Oct. 18, 2011 letter supporting Cordray as CFPB director. Cordray, in response to a personal request from Suthers, publicly promised to help AGs combat payday lenders who dodge state laws by affiliating with Native American tribes.

Constitutionality Challenged

Pruitt of Oklahoma has spearheaded the work among attorneys general on challenging the constitutionality of Dodd-Frank, according to the person briefed on the lawsuit. Diane Clay, a spokeswoman for Pruitt, declined to comment on the lawsuit.

“General Pruitt has been leading the discussion on legal challenges to the unconstitutional provisions in Dodd-Frank for more than a year, and will work with South Carolina to lead the state litigation once plans are announced,” she said.

Michigan attorney general Bill Schuette and his counterpart in Kansas, Derek Schmidt, will also join the lawsuit, the person said. Schuette’s spokeswoman Joy Yearout declined to comment. Schmidt spokesman Jeff Wagaman did not return an e-mail or phone call seeking comment.

‘Disdain’ for States

Pruitt, Wilson and Schuette all signed a March 5 memo from the Republican State Leadership Committee, an association of Republican state officials, that criticizes the Obama administration’s “disdain for states, federal laws it finds inconvenient, the Constitution and the courts.” The memo includes Cordray’s recess appointment on a list of Obama’s objectionable actions.

Pruitt has opposed other initiatives backed by the Obama administration. In February, he declined to join a 49-state settlement with five large mortgage servicers over foreclosure practices, preferring to cut his own deal instead.

The CFPB and the National Association of Attorneys General signed a “joint statement of principles” in April 2011. In a March 6 speech, Cordray, a former Ohio attorney general, asked states to also sign individual MOUs, and asked for a “quick turnaround.”

“We want to expand on what you already do so well — and we want you to take advantage of new resources we bring to the arena,” Cordray said in an address to NAAG in Washington.

Agreements Tallied

More than five months later, only 10 states had signed the memorandum: New Hampshire, New Mexico, Montana, New York, Vermont, North Carolina, Hawaii, Iowa, Mississippi and Nevada, according to copies obtained on Aug. 22 under a Freedom of Information Act request.

Since then, the District of Columbia, Wyoming and North Dakota have signed such memorandums with the consumer bureau, agency spokeswoman Moira Vahey said in an e-mail.

“We are pleased that we have a dozen agreements and additional agreements in the works. However, this is a state-by- state process and will take time,” Vahey said.

The purpose of the memorandum is to “preserve the confidentiality of information the parties share,” according to the documents. It states that any non-public “written or oral information exchanged between the parties will be deemed confidential.”

North Dakota attorney general Wayne Stenehjem is the only Republican among state officials who have signed the memorandum. Those who have declined gave differing reasons.

Greg Zoeller, the Republican attorney general of Indiana, said the pact was “unnecessary” because his office can sign confidentiality agreements that cover specific enforcement cases they work on with CFPB.

“I never quite understood why they wanted a common memorandum of understanding,” Zoeller said in an interview. “It has not really caught on well.”

At the same time, Zoeller downplayed the need for broader challenges to the CFPB. He called potential lawsuits evidence that the country is in a “silly season” before the election, and said that a Republican-only lawsuit “hurts our credibility in challenging federal laws.”

For instance, no Democratic attorneys general joined lawsuits against the Obama health care law, Zoeller said. The Supreme Court eventually ruled against them.

Other Republicans involved with state issues took a harder line on the Obama administration and Cordray’s work.

“This effort for bipartisan cooperation with the states has clearly failed at this point,” Chris Jankowski, president of the Republican State Leadership Committee, said in an interview.

The bank’s case is State National Bank of Big Spring v. Geithner, 1:12-cv-01032, U.S. District Court, District of Columbia (Washington).

Ben Swann – QE3 = QE Infinity Until the Crash

Ben Bernanke giving banks $40,000,000,000

 per month indefinitely?

QE3: The Next Rip Off of the American Middle Class

Did you feel it?

Feel what, you ask.

I’ll be blunt: Did you feel screwed? Because that’s what happened two days ago, on Thursday. As Peter Schiff, president of Euro Pacific Capital, writes: “September 13, 2012 may one day be regarded as the day America finally threw in the economic towel” as a result of Federal Reserve Chairman Ben Bernanke setting loose QE3.

I know your eyes tend to glaze over at words such as “Federal Reserve,” “monetary policy” and “QE3″. But you need to pay attention because that’s precisely what our government is counting on, which then enables them to fiddle with monetary policies like QE3.

QE is Quantitative Easing; 3 refers to this being the Feds’ third QE because two previous Quantitative Easings had failed at jump-starting America’s stalled economy, which then of course calls for yet another QE. [Snark] Nothing succeeds like failure!

According to Wikipeida, Quantitative Easing is a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system, generally through buying of the central government’s own bonds to stabilize or raise their prices and thereby lower long-term interest rates. This policy is usually invoked when the normal methods to control the money supply have failed, e.g. the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.

Did you understand that? Me neither!

What I do know is that, from teaching (for many years) a college course on the political economy of Japan, Quantitative Easing was used unsuccessfully by the Bank of Japan (which is really the Japanese government) to fight deflation after the bursting of Japan’s “bubble economy” at the end of the giddy 1990s. Today, Japan’s economy, sadly, remains in the doldrums. So much for Quantitative Easing.

Below is an op-ed by a guest writer for FOTM, Dave McMullen, who’s one of our regular commenters. Following Dave’s op-ed is a great video that explains what the euphemistic term “Quantitative Easing” means. It’s a hoot. Highly recommend!

~Eowyn

QE3: The Next Rip Off of the American Middle Class

By Dave McMullen

This week Ben Bernanke announced that the Federal Reserve bank will begin to spend 40 billion dollars a month (with no cap on spending) to buy mortgage-backed securities. [Note: A mortgage-backed security is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.]

Once again, our government is asking taxpayers to buy the same toxic mortgage-backed derivatives that caused the crash of our economy back in 2008. Once again we are being forced by our government to bail out the same criminal financial institutions, whose criminal conspiracy had caused the collapse of the housing market and the ensuing recession in the first place.

The government now wants to own these properties, but remember the money from the TARP (Troubled Asset Relief Program) bailout of 2008 could have easily purchased all of them, and at the least, taxpayers would have owned the assets. But the government chose to give the money to the banksters, with little or no regulation on how the funds were to be used. TARP may have helped the banks but it was a disaster for our housing markets: 80% of U.S. homebuilders were bankrupted; the average home lost 30-40% of its value.

This devaluation of our real estate was caused by the worthless money printed by the Federal Reserve bank.  In other words, the Obama administration virtually stole the equity from every U.S. homeowner to bail the banksters out.

So now the government is doing this all over again. The Federal Reserve will print more worthless Fiat currency to buy these same toxic mortgages and the results will be the same. QE3 will further devalue our real estate and our money, thereby causing more inflation that will lead to more unemployment.

How much more can our fragile economy withstand?

TARP Failed. QE1 and QE2 were models of political corruption. QE3 may well be the “straw that breaks the camel’s back.”

It may be time to pick up the pitch forks and march on Washington. But at the least, call your Congressmen and tell them “NO MORE!”.

Fed’s low interest rate is killing Social Security

Already, we are told that Social Security (SS) is in trouble, forecasted to start paying out more in benefits than it takes in by 2017, and to go completely broke by 2033.

But there is yet another reason why Social Security is heading to ruinage even faster — the Federal Reserve’s low interest-rate policy. The reason for that policy, of course, is to keep America’s GARGANTUAN national debt from ballooning even faster than it already is.

But the Fed’s policy means U.S. Treasuries offer record-low interest rates. (As an example, the last auction of 10-year Treasury Note, on July 6, 2012, yielded an interest rate of 1.544% !) This is creating a problem for retirees who, in their work years, had been frugal and conscientiously saved to secure their “golden” years, but now find themselves unable to live off the paltry interest generated from their savings and must dip into their principal. The Fed’s policy is also a problem for investors, among whom is none other than the Social Security Trust Fund (SSTF).

Writing for ZeroHedge, July 4, 2012, Bruce Krasting explains that in June of each year the SSTF reinvests a significant portion of its investment portfolio in newly issued Special Issue Treasury Securities. The interest rates on these bonds is set by a formula that was established in 1960. The formula was designed to insulate the SSTF from transitory changes in interest rates by averaging market based bond yields over a three-year period.

But Ben Bernanke’s Fed Reserve has set interest rates at zero the past four years. The result is that in 2012, the 1960′s formula has finally caught up with the SSTF. It got murdered on this year’s rollover.

Data from the Social Security Administration (SSA) show that $135 billion of old bonds matured this year. This money was rolled over into new bonds with a yield of only 1.375%. The average yield on the maturing securities was 5.64%. The drop in yield on the new securities lowers SSA’s income by $5.7B annually. Over the 15-year term of the investments, that comes to a loss of $86 billion. It gets worse.

Bernanke has pledged that he will keep interest at zero for a minimum of another two years. Since the formula used to set interest rates for SSA looks back over the prior three years, this means SSA will be stuck with a terrible return on its investments until at least 2017, which means still lower investment returns for the next five years.

A total of $543 billion of securities with an average yield of 5.6% is coming due. The reduction in income from the 4.2% drop in yield translates to $23 billion a year, totalling $350 billion for 15 years. It gets worse.

Not only will SSA’s interest income substantially drop over the coming decade, the problem is exacerbated because SSA has provided projections for its interest income over this time period that don’t jive with this reality.

In its 2012 report to Congress, the Social Security Administration maintains it will earn an average of 4% over this period. That is not possible any longer. Given the Fed’s low interest-rate policy, the most SSA could earn is an average of 2.3% (it could be significantly lower). The drop in yield translates to a reduction in income of $535B over the forecast period.

Based on a realistic assessment of interest income at SSA, the trust fund tops out in 2015, its peak value will be ~$2.823B. The SSTF has reported that the TF will top out at $3,061B, and that milestone will not be reached until 2021. Essentially, the train wreck will happen 6 years earlier then assumed, and the TF will be $250B short. It gets worse.

The other key ingredients in the SS “pie” are tax receipts from workers and the amount of monthly benefit payments (the assumptions used is that GDP growth will average 4%, and unemployment falls to 5.5% -  no recessions over the ten-year horizon). These are not realistic assumptions. This means that once the SSTF hits its peak in 2015, the run off in assets will happen very quickly.

The SSTF has stated that the date in which the Trust Fund falls to zero will be 2033. The actual termination date of the Social Security Trust Fund is much closer than that. It could come as early as 2023.

Anyone who is 55 or older should be worried about this. Based on current law, all Social Security benefit payments must be cut by (approximately) 25% when the Trust Fund is exhausted. This will affect 72 million people. The economic consequences will be severe. The drop in SS transfers translates into a permanent drag on GDP of 2%. In other words, when this happens, the country will be unable to have any significant positive growth for a long time to come.

Given the prediction that the Social Security Trust Fund will fall to zero by 2023, that is in 10-11 years, if you are or will be receiving Social Security, you should expect your SS checks to decrease by 25%. Make your plans accordingly!

But the news get even worse.

Even before 2023 arrives, in just FOUR years, by 2016, the first of the Social Security funds — SS disability — will be broke, having plain run out of cash. This will trigger a 21% cut in benefits to 11 million Americans — people with disabilities, plus their spouses and children — many of whom rely on the program to stay out of poverty. [Source: Washington Post]

In summary, the monetary policies of Ben Bernanke and the Federal Reserve aren’t just breaking the backs of small savers, they are killing Social Security. The results will be:

• Social Security Trust Fund will run out of money even sooner than we’d been told — by 2023 (instead of 2033). When that happens, by law Social Security checks will be cut by 25%.

• Social Security Disability will run out of money even sooner, in just 4 years by 2016. When that happens, your disability checks will be cut by 21%.

If you don’t make plans for the impending disaster now, you’re in willful denial. Don’t say you haven’t been forewarned!

~Eowyn

Ron Paul confronts Fed Chairman

At the House Financial Services Committee hearing yesterday, Feb. 29, Ron Paul socked it to Federal Reserve Chairman Ben Bernanke.

At around the 3:50 mark, Paul asks Bernanke if he does his own shopping, if he is aware of what true inflation is, and if he knows that Americans don’t trust the government because they are being lied to about inflation. Then Paul delivers this zinger: “The Fed will self-destruct anyway when the money is gone.”

H/t ZeroHedge

See my post “Steep rise in food and gas prices under Obama” and Sagebrush’s “The Truth About the Federal Reserve.”

~Eowyn

Why 8.3% unemployment is baloney

Design by BKeyser

You probably heard or read about the good news that last month (January), the U.S. unemployment rate “unexpectedly” declined to 8.3%!!! Better still, the Labor Department says that “total non-farm payrolls rose by 243,000 in January”!!!

But wait. Those figures of 8.3% unemployment and 243,000 new jobs are deceptive. Writing in the New York Post, John Crudele explains:

“Those 243,000 jobs are the total after seasonal adjustments. The question you should be asking is, what’s the un-tampered-with number before the adjustment?

Glad you asked. The Labor Department reported a loss of 2,689,000 jobs in January.

Seasonal adjustments are intended to smooth out holiday bumps like that. But because of the depth and unusual nature of the nation’s Great Recession, those seasonal adjustments are being skewed.

Here’s how it works: In January 2010…there was an actual, unadjusted job loss of 2,858,000 jobs.

To make it simple, the government computers were expecting a bigger unadjusted loss than the 2,689,000 jobs because last January’s decline was 2,858,000.

Why weren’t there as many job losses this January? Very likely because the weather throughout the country is a lot milder this year than during the past two Januarys.

A loss of jobs that isn’t as bad as expected turns into a job gain. Does that mean there really are 243,000 new jobs out there? Absolutely not.

Let’s say there are rumors in your company that 300 people are going to be laid off. Instead, management decides to fire just 200.

Two hundred people, of course, have lost their jobs. But, adjusting it for expectations, 100 people didn’t get fired. Using this analogy, the government would say that, on an expectation-adjusted basis, 100 jobs were created.

That’s sort of what happened in the January employment report because of seasonal adjustment.”

Or, to use another analogy:

I go to a casino to play the slot machines. I expected I would lose $100. Instead, I lost “only” $70. So I tell other people that I made $30 from gambling!

Even Federal Reserve Chairman Ben Bernanke recognizes that the 8.3% jobless figures is deceptive.

Craig Torres and Josh Zumbrun report for Bloomberg, Feb. 7, 2012, that appearing before the Senate Budget Committee, Bernanke said the 8.3% understates weakness in the U.S. labor market. He explains:

“It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work. There are also a lot of people who are either out of the labor force because they don’t think they can find work [or in part- time jobs]. We still have a long way to go before the labor market can be said to be operating normally. Particularly troubling is the unusually high level of long-term unemployment.”

The percentage of the unemployed who have remained without work for 27 weeks or more actually increased in January — from 42.5% in December 2011 to 42.9% in January 2012.

Remember that the next time someone tells you that unemployment has gone down under Obama.

~Eowyn

Herman Cain and the Federal Reserve

Many conservatives were elated when, on May 21, 2011, Herman Cain announced he’s running for the presidency in 2012.

In spite of Cain’s many impressive achievements and credentials, however, some of us are wary because of his close association with that strange hybrid creature called the Federal Reserve System. Cain was a former deputy chairman (1992–94) and chairman (1995–96) of the civilian board of directors to the Federal Reserve Bank of Kansas City.

The Federal Reserve System (FDS) was conceived in secrecy in 1910 on Jekyll Island, New York, then created in 1913 via the Federal Reserve Act. It is a strange public-private hybrid of privately-owned banks that act as America’s central bank with limited government supervision. As America’s central bank, the FDS supervises and regulates the banking system, manages the country’s money supply through monetary policy, maintains the stability of the financial system, and attempts to prevent and contain banking panics.

The importance of the Federal Reserve and its public-private nature have provoked many a conspiracy theory, which is not helped by its Inspector General Elizabeth Coleman’s admission in May 2009, that the FDS could not account for $9 Trillion in “off-balance sheet transactions,” whatever that means.

Coleman’s admission provoked outrage among the American people, who demanded Congress to audit the Federal Reserve. The Fed, in turn, resisted every effort. Its chairman, Ben Bernanke, at one time even resorted to fear tactics, darkly warning that an audit by the General Accounting Office “would be highly destructive to the stability of the financial system, the dollar and our national economic situation.”

All of this was made worse when, in December 2010, a limited one-time peak into the Federal Reserve revealed a secret taxpayer-funded bailout of foreign banks in the amount of a mind-boggling $12.3 Trillion – and Congress wasn’t even informed, not to speak of being consulted.

When asked about auditing the FDS, Herman Cain at first was defensive but eventually allowed that he is not opposed to auditing the Federal Reserve System. Below is more information on Cain and the FDS.

~Eowyn

Herman Cain and the Fed

By Joseph Lawler on 5.27.11

Joshua Green at The Atlantic takes note of an interesting situation: Herman Cain, currently undertaking a populist and Tea Party-based campaign for the presidency, is a former Kansas City Federal Reserve chairman.

There are elements of the Tea Party, especially those influenced by Ron Paul, who are against the Fed in general. And the Tea Party has led the wider trend in Republican thought against loose monetary policy. For Cain to have been a member of the Fed and defend it some cases is an obstacle in his attempt to present himself as the Tea Party favorite.

Cain was appointed as a Class C director of the Kansas City Fed board in 1992. In that capacity, he provided advice to the president of the KC Fed (the conservative Thomas Hoenig) about conditions for private, non-bank businesses. According to Green, that particular bank was very conservative at the time, and so was Cain:

I had better luck with Drue Jennings, a Kansas City lawyer who served with Cain on the Federal Reserve Board and succeeded him as chairman. Jennings is quite fond of his old colleague. “Herman was a pleasure to work with,” he told me. “His views were pretty consistent with those of the Fed at the time. Alan Greenspan was, of course, chairman and Herman was in lock stop with the policies of the Fed.” Jennings added that this was not atypical; he could not recall a single dissent from anyone during this three-year term. Still, he said, Cain was no pushover. “He’s a guy you’ll never find in a gray area,” Jennings said. “He’s intelligent, well spoken, and very assertive to the point of almost being aggressive. He’s anything but shy.”
Jennings said Cain fit the profile of the Kansas City Fed. “Inflation was always the big bugaboo,” he told me, “and when it comes to monetary policy, he was an inflation hawk. I’ll tell you, that’s the most conservative bunch of guys I’ve ever met.”
At a recent Spectator press event I had the opportunity to ask Cain about his views on the Federal Reserve. His view is that the Fed’s current dual mandate is overbroad, and that it should not be tasked with promoting maximum employment. He argued that the only role of the Fed should be to stabilize the price level, and suggested that as president he would try to end the dual mandate.
While keeping inflation expectations stable doesn’t necessarily entail a specific Fed stance (for instance, during a downturn it would be necessary for the Fed to engage in very loose monetary policy to avoid deflation), Cain made it clear that he favored tighter money for the current economy. In other venues, he’s expressed approval of some kind of gold standard or other asset backing for U.S. currency. And he’s not impressed by current Fed chairman Ben Bernanke’s management of the crisis and weak recovery — he said flatly that he wouldn’t reappoint Bernanke in 2014 if he were president. Cain declined to suggest who he would replace Bernanke with, however. Although he had a few candidates in mind, he chuckled that he wouldn’t want to invade their privacy just yet.

The Curious Case of the Obama Economy

Your humble blogger was distressed by this little ditty from Reuters yesterday:

Thu May 5, 2011 2:18pm

Oil plunged more than 8 percent on Thursday, heading for the third biggest daily drop in dollar terms on record, as concerns about economic growth and monetary tightening spurred a sell-off in commodities.

U.S. crude tumbled below $100 a barrel in heavy trading volume after weak economic data from Europe and the United States fed concerns that have battered commodities all week. German industrial orders fell unexpectedly in March while U.S. weekly jobless claims hit eight-month highs.

…Crude oil is selling off sharply for two primary reasons: QE2 is coming to an end in June and without a QE3 behind it, it will take liquidity out of the market, hurting risky asset classes such as commodities,” said Chris Jarvis, senior analyst, Caprock Risk Management in New Hampshire.

Wow, that sounds pretty bad.

And yet a mere 18 hours later, Reuters published this:

Fri May 6, 2011 10:15am

U.S. private employers shrugged off high energy prices to add jobs at the fastest pace in five years in April, pointing to underlying strength in the economy, even as the jobless rate rose to 9.0 percent.

…U.S. stock index futures extended gains, while U.S. bond prices extended losses. The dollar rose further against the euro and yen.

The unemployment rate has dropped a full percentage point since November and the latest rise will strengthen the Federal Reserve’s resolve to stick to its ultra-easy monetary policy stance.

The Fed last month signaled it was in no hurry to start withdrawing its massive stimulus for the economy, even as other major central banks around the world have begun to raise interest rates.

I consider myself well versed in finance, but there are some things about this I cannot figure out. How did Ben Bernanke change his mind overnight? Is oil going down because of a strong dollar or a troubled dollar? And if Wall Street finance gurus are the ones who messed up everything in 2008, then why do we keep taking their opinions as gospel?

Can someone help me out here?

-Candance

Rigging Wall Street Part II: Why the Fed’s Plan Hinders Hiring

Last week the Fellowship explored how the Federal Reserve’s QE2 strategy is designed to pour wealth into the stock market. Next we discuss what that means for unemployment.

As discussed before, low interest rates pull money out of savings accounts in search of profit elsewhere. From the investor’s point of view, an investment account full of expensive stock means newfound hope for household wealth.

But what does that mean for companies? Simply put, if they want to cooperate with the Fed’s strategy, they have to do their part to keep those stocks valuable. Investors can be persuaded to buy some stock initially, but it won’t stick if the shares don’t keep any value. Thus the Fed is pushing this from both sides: investors drift toward stock, companies pad the value of that stock, and more people come around.

How do companies make stock more valuable? By hoarding money behind it. This simple diagram explains something liberals seem unable to grasp:

To see this in action, look no further than Lowe’s home improvement stores. Today the company announced a surge in earnings thanks to snow shovel purchases and repairs from ice damage. When asked what it would do with the extra money, the company discussed plans to – wait for it – make its stock more valuable:

On a conference call to discuss its results Wednesday, Lowe’s didn’t mention dividends, but it said it plans about $2.4 billion in share repurchases this year. At the end of November, Lowe’s said it plans $18 billion in buybacks through early 2016, or an average of $3.6 billion a year, which at today’s prices would buy back over half its currently outstanding stock. It also targeted a dividend that’s 35% of earnings, up from about 30% currently.

Translation: it will reduce the number of slices in the pie and then pay bigger bonuses to those who still hold the remaining slices.

That’s what companies are doing right now. When genius reporters at USA Today complain about companies sitting on extra cash, they stir up their readers into anger that these companies refuse to spend the money on hiring more workers. And very few in the media report both sides.

General Motors was able to launch its IPO last November (which liberals cheered as its only way out of bankruptcy) precisely because it limited new wage spending and stockpiled enough value to make the stock attractive.

Companies have no motivation to spend the money on anything else. Yes they could grow and open more stores and hire more people, and in a few years that would make them richer – but the Fed doesn’t want them blowing through that money when there’s a crisis to solve right now.

And so we live in a Catch 22. Building a strong stock market pressures companies to put off expansion. This will boost consumer confidence and get people to spend more… which will somehow get companies to expand eventually.

-Candance

 

Why the Fed is ‘Rigging’ the Stock Market

While the Dow Jones average continues to defy impossibility with its astronomical highs, Americans are starting to wonder why the mood on Wall Street is so far removed from real life everywhere else.

Two things must be understood.

Number one: ask any reporter on the stock market beat and they’ll tell you the mood in New York is really no different from yours. Brokers are edgy, cautious, and living one day at a time. Many of them are quick to admit “equity markets have been artificially stimulated by ‘so much tape and glue from the Fed, Treasury, White House, and Congress.’”

In other words, they are watching the market get artificially pumped up before their very eyes and they are powerless to stop it.

Number two: this is being caused mostly by low interest rates.

Reuters explains:

The driving force behind the rally is the money that poured into riskier assets like stocks in the last quarter of 2010 after the U.S. Federal Reserve pledged to keep interest rates low.

Low interest rates are typically thought of as way to encourage affordable borrowing. That’s the line most often used by liberal economists – less oppressive interest means more people will borrow and banks will gladly extend the “cheap” credit.

And yet that hasn’t happened. Mortgages remain stagnant, companies are not borrowing for growth, and no new jobs are being created. The Miami Herald reported Sunday that small businesses are still only getting loans through government programs.

So if easy borrowing is not the real goal, then what is? Propping up the stock market.

Bernanke hinted at this in November 2010:

Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

While low interest rates mean less interest on your mortgage, they also mean lower interest you earn on bonds or savings accounts. And there is the rub; who would stockpile money in the bank if it earned zero interest? Who would feel rushed to pay off a mortgage or car loan if the payments are minimal?

The economic laws of gravity kick in, and money naturally flows wherever it can profit the most. Consumers ditch the savings account for greener grass elsewhere. And thanks to a little prodding from the Fed, the most appealing place to store your money these days is corporate equity.

The market looks hot, the media say Wall Street is booming, consumer confidence goes up, and people start spending more. Investment accounts are full of expensive shares. Household wealth appears to overcome debt, maybe even an underwater mortgage. Economic crisis solved.

Six months after QE2, this is finally starting to become mainstream knowledge. And sites like The Economist are worried whether it will work.

As for the Fellowship, we have our doubts as well.

-Candance