Fed ‘Activism’ Harms U.S. Growth, Ex-Fed Governor Warsh Says

By Ann Saphir
Reuters
Friday, January 27, 2012

http://in.reuters.com/article/2012/01/26/usa-fed-warsh-idINDEE80P0I12012…

The Federal Reserve’s latest efforts to bolster the recovery with unprecedented policy tools will hurt the U.S. economy in the long run, a former member of Fed Chairman Ben Bernanke’s inner circle suggested on Thursday.

In his first public comments since stepping down as a Fed governor last March, Kevin Warsh said there is a place for exceptionally accommodative monetary policy to provide “important transitional support for an economy.”

“But recent policy activism — measures that go beyond a central bank’s capacity or traditional remit — threatens to forestall recovery and harms long-term growth,” Warsh said, according to excerpts of remarks prepared for delivery to the Stanford Institute for Economic Policy Research.

Warsh was the only member of Bernanke’s inner circle with close ties to Republican lawmakers. An inflation hawk, Warsh nevertheless voted in favor of the Fed’s groundbreaking moves to ease monetary policy after the financial crisis, including two bond-buying programs that swelled the Fed’s balance sheet to unprecedented levels.

But Warsh apparently grew increasingly uncomfortable with the dovish stance of the central bank. Shortly after the Fed launched its second round of so-called quantitative easing, in November 2010, Warsh publicly expressed doubt over its effectiveness.

He announced his resignation the following February, and is currently a visiting fellow at Stanford’s Hoover Institution.

Since Warsh’s departure, the Fed has embarked on still more easing, signaling last August its intent to keep rates ultra-low through at least mid-2013. On Thursday it extended that low-rate vow through late 2014.

The Fed also began publishing policymakers’ forecasts for short-term interest rates and adopted an explicit inflation target for the first time, setting the target at 2 percent. Bernanke said both moves would clarify the Fed’s policy decisions, making them more effective.

Bernanke also opened the door wide to a third round of quantitative easing, saying continued low inflation and high unemployment would create a case for it.

On Thursday, Warsh took aim at Bernanke’s latest communications push and his recent foray into housing policy.

“Central bank transparency is good, but transparency that delineates future policy breeds market complacency,” Warsh said. “It threatens to undermine the wisdom of crowds and the essential interchange with financial markets.”

Warsh also was critical of leaning on government-run mortgage finance firms to pull the country from its housing slump, a policy idea the Fed floated in early January in an unsolicited paper to top lawmakers outlining a number of ways to revive the sector.

The paper noted that exposing the firms to losses could be worthwhile if such actions could spur a vigorous recovery in housing, the bane of the current sluggish recovery.

Warsh disagreed.

“The government-sponsored housing entities remain sources of vulnerability to the U.S. economy, and repeated ad-hoc attempts to push Fannie Mae and Freddie Mac to take greater risks at taxpayer expense is deeply counterproductive,” Warsh said, according to the excerpts.

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On the three month bankruptcy anniversary of the company whose rehypothecation gimmicks will one day be seen as a harbinger of everything that is broken with the multi-trillion ponzi system, but not just yet despite loud warnings otherwise, we are getting close to a final verdict of where the $1.2 billion (and possibly more as originally predicted by Zero Hedge – see below) in commingled client money may have gone. Note the use of the passive voice because using the active, as in money that MF Global executives stole from clients, is prohibited in a legal system in which nobody goes to jail for something as modest as $1.2 billion in theft. That verdict? “Vaporized.” No really (and yes, in the passive voice of course). From the WSJ: “As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a “significant amount” of the money could have “vaporized” as a result of chaotic trading at MF Global during the week before the company’s Oct. 31 bankruptcy filing, said a person close to the investigation.” Uh huh… Because money simply vaporizes. Which means one of two things: i) the “vaporization” is merely the phrase that so called investigators use to avoid the far more troubling sounding “stolen” as it would imply guilt, something which the former NJ governor and Goldman CEO (and not to mention JP Morgan which most likely was on the receiving end of the $1.2 billion + transaction) will, under guidance from counsel, sternly disagree with, or ii) the capital markets are such an unprecedented and manipulated fraud, that nobody has any clue at any moment, where any client money is, and that any residual capital still “invested” in mythical representations of “assets”, which are likely rehypothecated so many times, that not even Bank of America’s robosigning division would have a clue where to start unraveling, will promptly be converted into tangible manifestations of capital. So when someone asks what happened to stock market volume, and to investor confidence in the “stock market” feel free to use just that phrase: “it vaporized.”

WSJ “explains” how $1.2 billion “vaporized”

Many officials now believe certain employees at MF Global dipped into the “customer segregated account” that the New York company was supposed to keep separate from its own assets—and then used the money to meet demands for more collateral or to unfreeze assets at banks and other counterparties as they grew more concerned about their financial exposure to MF Global.

Investigators also are examining other scenarios that have gained traction in recent weeks, such as the possibility that MF Global suffered steep losses on investments made using customer money. Officials investigating the case have looked into whether such investments were appropriate under rules at the time.

As money poured out of MF Global, much of it likely passed through J.P. Morgan Chase & Co. and other banks where the securities firm had accounts, as well as trade-clearing partners such as Depository Trust & Clearing Corp. and LCH.Clearnet Group Ltd., people familiar with the matter said.

Those companies have denied being knowingly in possession of any missing MF Global money, and any efforts to make them fill the hole would face daunting hurdles. And because the firms usually were middlemen between MF Global and other counterparties, the funds they touched were then scattered widely, complicating the search.

So one hand, nobody at MF Global was responsible because every member of lower, to middle to upper management was responsible (and certainly not Jon Corzine), secondly, not one regulator was responsible, because every regulator was equally oblivious of the grand theft occurring right under their noses. Finally nobody on the receiving end of this fund flow was responsible, as the money could have ratably gone to one of an infinite number of destinations. And here we were thinking that dilution is only applicable to what the central banks do to their currency. Little did we know that it is the de facto global modus operandi for the systemic fraud endemic in modern finance, whereby not one person is held accountable, as otherwise everyone would be held accountable.

Brilliant.

Finally, it is becoming once again apparent that the final tally will be at least $1.2 billion. To wit:

But hundreds of millions of customer dollars are potentially snarled in litigation with other parts of MF Global, including its U.K. arm, and U.S. officials might never be able to recover those funds. As a result, Mr. Giddens believes the shortfall is at least $1.2 billion, though regulators at the Commodity Futures Trading Commission and CME Group Inc., parent of the Chicago Mercantile Exchange and New York Mercantile Exchange, have estimated the total is smaller than that.

Visually:

And from Zero Hedge November 1:

Doing some quick inverse addition and we get a (w)hole of $5.45 less $2.5 less $1.5 or $1.45 billion. In other words, the theft by MF Global was not stealing hunderds of millions form its customers: it has stolen a whopping $1.5 billion! For those confused, this is not a rogue loss of $1.5 billion, something which was enough to send UBS’ Kweku to prison. This is outright theft resulting from illegally commingled accounts. Our only question is will $1.5 billion in theft be enough for the first real perp walk of an Obama-friendly Wall Street executive?

It is becoming increasingly difficult to even care anymore; it is also becoming increasingly certain that any client capital in the “markets” will sooner or later disappear in one of many comparable bankruptcies, and there just like here, nobody will be held accountable, as holding someone accountable will actually expose to everyone the whole scam that is modern ponzinomics, in which binary representations of money in the forms of ones and zeros, not only don’t exist in the real world, but is in effect collateralized by the same ever smaller pool of dwindling hard assets. Not only that, but someone may actually, gasp, go to jail.

And that is not allowed under a legal system which is in bed with the very financial system that preserves it and funds it.

Ironically, it is the conspiracy theory movie, “The International” that captures precisely the interplay between the terminally broken and beyond corrupt legal system and modern financial markets:

WEXLER
Justice is not possible.

SALINGER
Why not?

WEXLER
Because, Agent Salinger, your idea of justice is an illusion. Understand the very system that you serve and protect will never allow anything to happen to Skarssen [i.e., Jon Corzine] or the bank [i.e., insert any current bank]. On the contrary. The system guarantees the IBBC’s [i.e., insert any current bank] safety because everyone is involved.

And that should answer all questions about how $1.2 billion can simply “vaporize.”

Posted on 29th January 2012 by DavosSherman in Economy

Davos Post Mortem

Submitted by Tyler Durden on 01/29/2012 16:03 -0500

And like that, this year’s Davos World Economic Forum has come and gone, having achieved nothing except allowing a bunch of representatives of the status quo to feel even more self-righteous and important in the world’s biggest annual circle jerk, in which fawning journalists ask the questions their cue cards demand, knowing too well their jobs are on the line if they ask anything even remotely provocative (and with the price of admission in the tens of thousands of dollars, one wonders just how many Excel classes these “journalists” could have taken as an alternative, in order to actually do some original math-based research, yes, shocking concept, to present to their readers instead of merely regurgitating others’ talking points). Bloomberg TV has compiled the best video summary of the highly irrelevant soundbites by economists, CEOs and other people of transitory power, who provide absolutely no original insight into anything, and in which ironically it is Mexico’s Felipe Calderon who summarizes it best: “we have a timebomb the bomb is in Europe and we are working together to deactivate it before it explodes over all of us.” Lastly, we provide a quick glimpse into current and previous guests of Davos to show just how utterly worthless is the “braintrust” of those present.

Economic Nirvana

It became quickly apparent that People are desperate to learn about Davos and what the elite are doing to “fix” the economy.

Some “Search Terms” [my blog’s trends] for this week: Davos attendees, Davos World Economic Forum attendees, Davos WEF list, Davos wants 150 trillion dollars, did Obama go to Davos, Joe Biden at Davos, Davos and the Greece default, WEF attendees, Bill Gross on Davos, Davos is a joke, Citi at Davos, Davos sluts,Economic Forum 2012 2600 participants bio, Davos world depression, Davos elite guest list, Fix economy at Davos.

You get the idea. The terms in bold gave me an idea for an article.

Some Bios of Those Who Attend Davos

So here is a short piece, the bios of some (past and present) elite over there at the Davos World Economic Forum. The guise is that they are there to make the economy and the world a better place. If that was the case, in one short sentence I could sum up a better way to do so: “Davos attendees, stay the [ehem] home—free markets are meant to be free for a reason—and if you want to fix the economy go to my blog and click on the 30 or so links there under Best Economic Blogs ”.

But when you read the bios you’ll probably draw the conclusion that the elite go to Davos to serve their interest—not ours.

Shocker, I know.

Some Select Bios of Those at Davos This Year or Years Prior

Joe-”We asked Jon Corzine for Economic Advice”-Biden: Right after Obama & Biden got in the White house these economic imbeciles faced with a financial crisis called—drum roll please—MF Global’s Jon-”I Bet My Clients’ Money on Greece”-Corzine for advice on what do do. You can watch the short YouTube video here. People should posses a basic IQ just to be allowed to visit the White House. The very track record of this for an administration should disbar them from running, or even living in DC.

Larry-”I Lost $1,800,000,000.00 for Harvard Betting on Derivatives”-Summers: He’s got some other serious claims to fame, Obama is considering him for the top post at the World Bank, he helped Alan Greenspan muzzle Brooksley Born who wanted to regulate derivatives in the 1990s. You can watch that here. I wouldn’t let Summers advise me on investing for my late dog. He must have been impressed with how Summers falls asleep at White House meetings. This year Larry is attacking “Capitalism” and says it needs to be reformed. We don’t have capitalism, if we did the banks that made idiot decisions would have failed. We have Corporatcracy as I wrote about here and on this one site it got 145,000 reads which indicates that people–other than these morons at Davos–get this.

Gordon-”I sold 60% of England’s Gold Reserves When Gold was at the Rock Bottom Price of $275 an Ounce”-Brown. Like Summers he sleeps at important meetings. Another economic genius.

Jon-”I Bet 36,000 Clients’ $1,200,000,000.00 on Greece MF”- Corzine. Don’t feel too bad, he was going to be tapped for Timmy Geithner’s job of United States Treasury Secretary. At Davos in 2008 he predicted a “mild recession.”

Then we have the companies.

BP Who drilled for 12 hours of global consumptionunder a mile of water and 3 additional miles of rock.

Citi 1.2 trillion in assets and 37.6 trillion in offbalance sheet derivatives.

Deutche Bank Under fire from internal whistleblower for accusing bank of fudging numbers.

Ernst & Young accused of helping hide financial risks at Lehman Brothers, you can read about it here.

GE (Who Obama has as its head as his Council on Jobs) took money in bailouts, owns MSNBS and CNBS and GE Capital slashed about 11,000 jobs or 10% of its workforce, you can read about it here.

JP Morgan Chase 1.4 trillion in assets and 89.9 trillion in off balance sheet derivatives. Its former executive is Obama’s Chief of Staff.

I could go on for hours, but I think that should help a lot of the folks stumbling across my blog looking for a complete list, which I published here.

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Technicians make a big deal out of the 50% Fibonacci retracement level due to the psychological implications of that level in the minds of traders, both bulls and bears. Generally speaking,  those who have been on the wrong side of a trade and who have very deep pockets, will oftentimes allow the market to continuing moving against them while they wait for the inevitable price retracement, either higher or lower depending on which side of the market that they are on.

Once they regain half of their losses, they will oftentimes then finally get out of the losing trade and move to the sidelines to access their next move. That means that a market that has been moving lower after making a peak in price, can very often expect to see some strong selling at this 50% retracement level. Note on the chart that I have indicated in red “Should be a tough fight here” at this particular level which came in near $1725.

Today gold went through this level and as of the time of this writing has not as of yet shown any indication of wavering on the part of the bulls or any eagerness to cut losses if they have been riding the wave down from $1900. This fact bodes well heading into next week as it sets the gold market up for a potential test of first, $1750, and then $1770.

The fact that the mining shares as evidenced by the HUI are acting so strongly today, is suggestive that those equity guys are reassessing their views of where the gold price is headed and are pricing in a higher level than they originally were thinking.

Downside support lies first near $1710-$1705 followed $1680.

US Dollar fails at 82

Since the late spring of last year, the US Dollar has been the recipient of a fair amount of “safe haven” flows, mainly in response to the woes afflicting Europe and by consequence, the Euro. We have said repeatedly that the US Dollar rally was not based on any desire to own the Dollar out of bullish economic fundamentals but rather out of fears concerning the viability of the Euro.What this translates to is that any news or developments that seem to lessen the severity of the European sovereign debt situation, whether through concerted Central Bank action or from any other front, will send money flowing right back out of the Dollar and back into the Euro. Note that the last two weeks, particularly this week after the FOMC just cut the legs out from under the Dollar for as far out as the eye can see ( 2 years), the Dollar has seen very heavy selling which has confirmed the level near 82 as significant chart resistance. The Dollar failed here last week and has not as of yet been able to regain its footing.

When you couple the FOMC statement this week with today’s release of the abysmal 1.7% US GDP reading for 2011, is it any wonder that the Dollar is sinking like a lead brick.

If it fails to bounce here near 79, it looks like it has a clear shot back down towards 77.

Fed’s Two Mandates

The Fed has two mandates: 

“maximum employment and stable prices”

What assclown failures they are!  You’d have to be death, dumb, blind & stupid not to realize they have one mandate – protecting their member banks who own them.

Maximum employment:

Wages of said jobs

Value of “our” dollar which aids in stable prices

Prices

But of course I am not a paper trader anymore, so it is the expanded charts that hold my interest. It is clear the breakout is confirmed and is for real. Two closes above the trend line on heavy confirming volume. 1760 has to fall to break the trend of lower highs. Significant resistance is going to come from the 1760 -1800 area. I would like to see a swing high in that resistance zone and then a reaction swing low somewhere above that  down trend line.

The weekly chart shows the long term situation and it looks real good for a move to the middle trend line in the up channel. I like this price level during the next 4 weeks or so. The technical say we have this move and more available. RSI at 55, stochastic at neutral, and MACD climbing into a bullish cross. Buyers of the panic are being handsomely rewarded. I am accumulating cash for the next 10% correction. Just say no to paper, buy the real thing and prepare for Freegold.

The big white candle breaks the long term daily trend line.

Here’s the chart I really like to follow and as a buyer of physical gold. Let the paper players have fun with the daily chart and the whipsaws. An accumulator of physical should simply buy when enough dollars are accumulated for a purchase. If you are a reforming paper trader and still want to play a bit, time your purchases of physical to technically favorable situations on the long term weekly chart. Clearly anytime since the low of 1525 has offered a technically favorable opportunity to buy. RSI is just now coming off of long term support. Stochastic is now neutral and MACD is putting is reversing and setting up a bullish cross. Price is going back up to the top of the trend channel at 1800. Freegold is coming and price swings measured in the 100s will be meaningless to the ultimate physical gold price. When I can buy gold I am content. When I can buy it from a non-overbought position, I am pleased. When I can buy it from an over-sold position, I am ecstatic! I bought from 1650 all the way down to 1550, eating up my cash and finally using credit to snarf up as much as I could get my hands on. Now I will pay off the bank credit I used while price climbs.

A Closer Look At the Gold Chart For a Break and Run Possibility

Keep an eye on gold for the next few days to see how it handles any consolidation here.

The formation, at least so far, is remniscent of the breakout that led gold to the all time high last year.

It could fail and retest some lower support level. We need to be aware of that possibility. But a consolidation with a subsequent gap higher and breakout run could be a wild ride.

Posted by Jesse at 5:48 PM

Gold shattered overhead resistance near $1680 and has continued higher as momentum based buying is coming in driving out panicked shorts who were hoping for a halt in the advance to occur as the market encountered bullion bank selling originating at $1680. The FOMC made that a mirage as a zero interest rate environment for the next two years means an environment in which it pays to own gold. The yellow metal pays no interest but at this point, neither do short term Treasuries and those offer no protection from currency induced price increases. Just look at what is occuring across the commodity sector today as hedge funds now push the price of food, energy and metals in a northerly direction. Forget about tame inflation – that just vanished.

The sheer size and scope of this fund buying has driven out everything in front of it except for the strongest of shorts.

Gold has light resistance starting at $1705 (it is right on this level now) or so and extending towards $1720-$1725. The latter is the important 50% Fibonacci retracement level from the all time high to the recent double bottom down near $1535. The bears are going to make a stand near this level. If the fund buying remains as robust as it was today – the bears are going to be routed. Pushing through this cap will set it up to make a run at $1750. If the shorts can defend $1720 – $1725 then we should see a retracement back towards the $1700 level initially followed by $1680 where support should emerge.

By the way, the HUI and some of the gold stocks dodged a very big bullet today courtesy of the FOMC. They were in severe danger of breaking down technically.