Alan's Finance Blog

Ron Paul – The Fed Twists, The Market Shouts

Last week the Federal Reserve began the second incarnation of “Operation Twist”, an attempt to drive down interest rates by purchasing long-term Treasury debt and selling short-term debt. This is just the latest instance of the central bank desperately flailing around doing something merely for the sake of doing something. Fed officials still do not understand– or admit– that the Fed itself caused the financial crisis by driving interest rates too low and relentlessly expanding the money supply. Thus, this latest action will just exacerbate the problem.

Markets, however, understand that the Fed has failed and has no clue what it is doing. This is why markets went into a tailspin after the Fed’s new strategy was announced. Stock, bonds, and commodities dropped in price while the financial press wondered whether this worldwide sell-off meant that the entire system was collapsing. Not since 2008 had there been such a dramatic drop across so many different sectors of the market.

Because of continued rising inflation and the Federal Reserve’s suppression of interest rates, investing in traditional safe havens such as savings accounts, mutual funds, and Treasury bonds has become unprofitable. Lots of money is moving through the system seeking a return on investments or at least some measure of safety, as increasingly desperate investors move their funds around in search of long-term profits and stability. Until the Fed stops its monetary intervention and allows interest rates to be set by the free market, investors will move their money in a volatile manner. They will invest in commodities and stocks while prices swing upwards, but will flee to bonds and cash at the first sign of a downturn.

The uncertainty caused by the Fed does help some people – professional traders on Wall Street for example. Increased volatility and huge price swings mean more opportunities for profit, as sophisticated electronic trading programs can buy and sell huge positions within a fraction of a second of a major market movement. But small businessmen are misled by the artificially low interest rates into making unwise investments, and those whose jobs vanish when the Federal Reserve’s latest bubble pops suffer. Without the knowledge or ability to move with the markets or diversify overseas, average Americans see their savings stagnate or depreciate– along with their hopes and dreams for a better tomorrow.

The only way to return to a sound economy is for the Federal Reserve to cease and desist its monetary manipulation and allow interest rates to be determined by markets, just as the price of goods, services, and labor should be determined by markets. Everything the Fed is doing by pumping money into the economy benefits only the insolvent, too-big-to-fail banks. Low interest rates encourage consumers to take on more debt, meaning more profits for the banks issuing those loans. Purchasing mortgage-backed securities, as the Fed has done, keeps housing prices inflated, helping the banks who have non-performing mortgages on their books. However, it hurts consumers who continue to be priced out of the housing market. In order to maintain a decent standard of living for the American people and to restore the vibrancy of the U.S. economy, it is time to end the Fed.

Ron Paul

BOE, ECB Put Pressure on Fed; Four Ways to Profit!

Mike Larson

The list of opponents to the Federal Reserve’s “easy money forever” policy is growing longer.

In the U.K. … we learned that the Bank of England is tilting more to the hawkish side. Policymaker Spencer Dale joined colleague Martin Weale in actually voting for a 25 basis point hike in the BOE’s main policy rate, currently 0.5 percent. The more aggressive Andrew Sentance went even further, pushing for a 50 basis point hike.

While five members of the bank’s policy-setting committee voted for no change … carrying the day … the future direction of U.K. rates looks all but certain. And no wonder! U.K. consumer prices are rising at a 4 percent year-over-year rate.

Trichet’s comments raised speculation that the ECB may be eyeing a move on interest rates.

In continental Europe … the European Central Bank is positioning for a change in policy too! ECB member Yves Mersch warned that his colleagues will “have to rebalance our monetary policy stance” soon with the economy picking up and inflation topping the bank’s target.

President Jean-Claude Trichet also reiterated his resolve to combat inflation. And again, I’ll say “no wonder!” Inflation in the euro zone climbed to 2.4 percent in January, above the bank’s 2 percent target.

In other emerging and developed markets worldwide, the rate-hiking trend I first discussed months ago is accelerating. In just the past several days, Sweden raised its benchmark rate for the fifth time in seven months to 1.5 percent … Chile hiked rates again to 3.5 percent … Israel boosted up by 25 basis points to 2.5 percent … while Vietnam jacked rates up for the second time in a week to 12 percent.

As Fed Zigs While Foreign Bankers Zag,
Consequences and Opportunities Pile Up

Yet here in the U.S., it seems like nothing much has changed. The “doves” still have the upper hand, with Chicago Fed president Charles Evans signaling this week in an interview with the Financial Times that he’s in the Ben Bernanke camp. Specifically, he said “policy ought to remain accommodative for really quite a while, even a while after conditions start to improve.”

There’s a reason I keep harping on these interest rate trends. They have serious consequences for all kinds of investments, from commodities to currencies to bonds …

First, the shift toward tighter monetary policy that’s already underway in emerging markets — and about to get underway in the U.K. and Europe — will likely flatten the yield curve. Or in plain English, shorter-term rates should climb more quickly than long-term rates as investors price in the likelihood of central bank rate hikes. That’s why the iPath U.S. Treasury Flattener Exchange Traded Note (FLAT) I highlighted a while ago is perking up.

Second, the increasing divergence between the views of U.S. policymakers and foreign ones should hurt the value of the dollar. That makes foreign currencies and debt securities more attractive. So do the relatively more attractive interest rates available overseas. That’s why I prefer emerging market bonds and funds that own short-term overseas debt securities, like the Federated Prudent DollarBear Fund (FPGCX), over U.S. Treasuries.

You can expect gold and silver prices to rise as inflation concerns mount.

Third, monetary metals such as gold and silver should continue to perform well. I say that because even with rates rising overseas, they’re well below published rates of inflation. That means “real” rates, or those adjusted for inflation are negative — historically a bullish signal for commodities. Consider the U.K. example, where you have a real rate of MINUS 3.5 percent (the 0.5 percent policy rate minus the 4 percent YOY increase in consumer prices)!

Fourth, if you’re looking for more specific investment ideas and recommendations, consider subscribing to my Safe Money Report. What I’ve outlined here is just a few pages from my playbook … and I think 26 cents per day is a small price to pay for the rest!

Until next time,

Mike

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money, Interest Rates Profits and LEAPS Options Alert. He is often quoted by the New York Sun, Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

There Was a Fed Chairman Who Swallowed a Fly

By: Peter Schiff, Euro Pacific Capital, Inc.

While it’s true that history repeats itself, the patterns should always be separated by a generation or two to keep things respectable. Unfortunately, in today’s economic world, it seems the cycle can be counted in months.

On July 24, 2009, just as the Federal Reserve unleashed its first quantitative easing campaign (now called “QE1″ - an echo of the reclassification of the Great War after still more destructive subsequent developments), Fed Chairman Ben Bernanke wrote an opinion piece in the Wall Street Journal to soothe growing concerns about excess liquidity. He assured the public that the Fed had an “exit strategy.”

In a response entitled “No Exit for Ben“, I called the Chairman’s bluff. I argued that the Fed had no exit strategy, and that Bernanke was trying to fool the market into believing that quantitative easing was not debt monetization.

Just 16 months later, Bernanke is at it again, penning another op-ed to defend his second round of QE. Except this time, instead of feigning an exit strategy, he just outlines a path to expand the program in perpetuity.

In recent months, Fed economists have taken great pains to tell us how much better off the economy is now than it was in the first half of 2009. Given this supposed good news, what prompted the current turnaround in policy? Could it be, perhaps, that perpetual easing was the policy all along?

Should we expect another op-ed in a few months in which Bernanke tries to reassure us that QE3 will not over-liquefy the market? How much longer can the Fed play this game before the public and the markets wise up?

The reason I knew QE1 would fail, and that the Fed had no exit strategy (other than more rounds of easing), is because the remedy is totally flawed. If Bernanke’s predecessor, Alan Greenspan, had engaged in prudent monetary policy, we never would have arrived at the point of desperation that made quantitative easing a palatable option. However, we did, and Bernanke’s understanding of economics is so remedial that making the right choice is essentially impossible for him. Now, we are caught in a vicious circle of spending, borrowing, and easing.

In his most recent op-ed, Bernanke rather envisions a “virtuous circle” in which QE2 causes stock prices to rise, which then “boost[s] consumer wealth, and increase[s] confidence.” The wealth effect, in turn, “spur[s] spending and produce[s] higher incomes and profits,” which finally “support[s] economic expansion and promote[s] increased employment.”

Despite the devastation of the Fed’s previous burst bubbles (stocks in ’99 and real estate in ’08), Bernanke still believes in the virtue of pumping. His current policy is to inflate another stock market bubble to cure the recession that resulted from the bursting of the housing bubble, which was itself inflated to counter the effects of the bursting tech stock bubble. Does the story of the old lady who swallowed the fly come to mind? She eventually tried swallowing a horse, and we know how that ended. It’s hard to decide who is more culpable for the strategy: Bernanke for selling it or the country for buying it.

In the 16 months since Bernanke assured us that QE1 would not jeopardize price stability, oats prices are up 40%, concentrated orange juice up 45%, gold and rice up 50%, corn up 55%, coffee up 60%, copper up 70%, sugar up 90%, and cotton and silver up 100%! (The sluggish Dow Jones Industrials are “only” up 30%.)

Last week, Kraft Foods reported a 26% rise in third quarter revenue; however, because of steeply rising material costs, profits actually dropped 8.5% over the same period. If Bernanke is correct in assuming that consumer prices will stay low, the only way Kraft shares could go up would be for the market to assign much higher multiples to lower earnings. You can hope that will happen, but it’s not a wise bet.

Given that QE2 will also push down the dollar against foreign currencies, companies exporting to the US will face the same bind as Kraft. If foreign suppliers don’t raise prices, a weaker dollar will cut into their profits.

My guess is that neither foreign nor domestic companies will take the hit, but pass the costs along to consumers. Rising prices will soon became a daily occurrence on Main Street, not just in the stock market.

For all the wrangling over extending the Bush tax cuts, no one seems bothered by the continuation of the Bernanke tax increases. For the typical American wage earner, the inflation tax will more than offset the benefits of slightly lower income taxes. Savers and retirees will suffer the most as the interest paid on their assets continues to fall and the purchasing power of their principal is eroded.

In reality, quantitative easing will produce the exact opposite of its intended result. In the short-run, it may create the illusion of economic growth and temporarily add some service sector jobs, but once the QE ends, the growth and jobs will vanish. Then, the Fed will most likely try once again to douse the fire it started with another round of QE gasoline, creating an even larger and less manageable inferno. Let’s hope we can change policy before the whole economy burns to a cinder.

Peter Schiff is president of Euro Pacific Capital and host of The Peter Schiff Show.

For in-depth analysis of this and other investment topics, subscribe to The Global Investor, Peter Schiff’s free newsletter. Click here for more information.

Elliott Wave International’s Understanding the Fed eBook is now available

Dear reader,

My friends at Elliott Wave International have just released a free 34-page eBook, Understanding the Fed. It’s the free report the Federal Reserve doesn’t want you to read!

This eye-opening free report, which represents more than 10 years of research by Robert Prechter, goes beyond the Fed’s history and government mandate; it digs into the Fed’s real motivations for being the United States’ “lender of last resort.” In this 34-page report, you’ll discover how the Fed’s actions, combined with public outrage, may ultimately lead to its demise, plus much more about its secret activities and how it affects your money.

Download your free copy of EWI’s Understanding the Fed eBook, here.

Warmest regards,
Alan
———-
About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

Fed’s Currency Swap Lines: A BIG deal for the Dollar

The Fed met this week on monetary policy. It was a bit of a snoozer. What wasn’t a snoozer, however, was what they’ve included in their recent monetary policy statements regarding currencies.

Most market participants have been entranced by the Fed’s language about their target interest rates …

Will they say they’ll keep rates low for an “extended period” or not?

But the real story was buried in the last paragraph of the December Fed statement and reiterated in their latest statement.

Here’s what it said …

“The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1.”

Following the Fed’s statement this week, there was a coordinated release of comments from the European Central Bank, the Bank of England and the Swiss National Bank confirming that the swap lines were no longer needed.

For the currency markets, this is a big deal. Yet, few have thought the juicy details of the Fed’s plans on currency swaps are of interest.

But I do. I suspected it was a game changer for the dollar when I was studying the statement last December. And so far, the price action in the currency markets is confirming that.

Here’s a bit of background …

In September and October of 2008, the Fed announced that it would be opening temporary currency swap lines with central banks around the world in fixed amounts through April of 2009. As that expiry date neared, the Fed extended the period to October, and then extended it again until February of this year.

Here’s what that means: The Fed agreed to give foreign central banks U.S. dollars at a determined exchange rate for the currency of the respective foreign counterpart. And when the swap ends, the two central banks simply repay the same quantity of currency back. There’s no exchange rate risk and no impact on the demand for currency in the open market.

Why Did the Fed Offer Dollars to the Rest of the World?

When the credit crisis was at its peak, banks around the world were hesitant to do any short-term lending with other banks. As a result foreign bank-to-bank lending rates for dollars, the world’s primary business currency, shot up. That restricted access to dollar borrowing and pushed a lot of consumer interest rates higher in the U.S. and abroad.

By providing these currency swaps with other central banks, the Fed helped to inject dollar liquidity into banks around the world. And it was well needed.

In short, it was good for the global financial system because it helped reduce the fear premium that was causing market interest rates to soar.

You can see this clearly in the chart below. In panel A, while the Fed and other central banks were cutting benchmark interest rates to the bone (the white line), the Libor rate (the orange line), or the rates at which banks make short term loans between themselves, was going in the opposite direction.

Subsequently, when the dollar swap lines were rolled out, you can see in panel B how this divergence was reversed.

The Implication for Currencies

Most importantly for currencies, what these currency swaps did was increase the supply of U.S. dollars in the global markets — a negative drag on the value of the dollar.

So with the Fed announcing that it will close its currency swap lines with foreign central banks by February 1, the unlimited access to dollars by foreign central banks has come to an end.

This development is easily a positive for the dollar.

Let’s take a look at the timeline of these developments and the respective performance of the dollar …

As you can see from the chart, following the Fed announcement that the swap lines would be extended through October, the dollar has gone through a period of decline. Since December, when the Fed announced these facilities would be ending in a little more than a month’s time, the dollar has been on the rise.

When they opened these massive swap lines in late 2008, the goal was to alleviate the dollar liquidity crunch at banks around the world. However, in the process they increased the supply of dollars around the globe — a negative consequence for the value of the dollar. But now that these lines will be closed, it’s clearly a dollar-positive development.

And with the weight of evidence leaning in favor of the dollar at this stage, as I laid out here in my article last week, this latest announcement by the Fed provides more reason to believe in this dollar rally.

Regards,

Bryan Rich

Bernanke’s Burn Notice – Why Now? Research Reveals Insight Into Fed Chairman’s Popularity

By Elliott Wave International

Like a spy who gets a burn notice, Federal Reserve Chairman Ben Bernanke has suddenly lost his support.

Bernanke has gone from being Time magazine’s Man of the Year in 2009 to … what? A Fed chairman embroiled in a controversial reconfirmation process before U.S. Congress. Why the sudden turnaround in his fortunes?

Robert Prechter, president of the research firm Elliott Wave International, has written about the history of the Fed and its chairmen several times over the years, and his research shows that their popularity rises and falls with social mood, which is measured by the stock market. Here is a compilation of excerpts from Prechter’s monthly market letter, The Elliott Wave Theorist, from 2005-2009 about the trouble he sees brewing at the Fed.

Can the Fed Stop Deflation? Robert Prechter answers this all-important question in his Free Deflation Survival Guide. The guide gives you a 60-page ebook that will help you understand deflation and its effects on society; you’ll even learn how to survive and prosper in such an environment. Download Your Free 60-Page Deflation eBook Here.

(November 2005) The Coming Change at the Fed | Public figureheads have a way of representing eras. This is certainly true of entertainment icons and politicians. The history of Fed chairmanship implies a similar tendency for changes of the guard to coincide with changes in social mood and therefore stock prices and the economy. [The chart below] depicts our social-mood meter—the DJIA—since the Fed’s creation in 1913, marked with the reigning chairmen according to a list on the Fed’s website.

The first chairman, Hamlin, presided over a straight-up boom. As it ended, Harding took over and presided over an inflationary period that accompanied a bear market, exiting just as a new uptrend was developing. Crissinger took over at the onset of the Roaring Twenties, and Young presided over the boom, the peak and the rebound into 1930. Meyer took over just as confidence was collapsing and left the office in early 1933 at the exact bottom of the Great Depression. The next three chairmen struggled through the choppy years of the 1940s. Then Martin presided over virtually the entire advance from the early 1950s through 1969, exiting just before the recession of 1970. Burns and Miller presided over a bear market and exited as the new uptrend was developing. Volcker, after weathering an inflation crisis, presided over the explosive ’80s. Greenspan has presided over the manic ’90s and the topping process. [Ben Bernanke] will have his own era. Given the eras that have immediately preceded the coming change in leadership, the odds are that this new environment will be a bear market.

(June 2006) Economists are convinced that the Fed can “fight” inflation or deflation by manipulating interest rates. But for the most part, all the Fed does is to follow price trends. When the markets fall and the economy weakens, the price of money falls with them, so interest rates go down. When the markets rise and the economy strengthens, the price of money rises with them, so interest rates go up. The Fed’s rates fell along with markets and the economy from 2001 to 2003. They have risen along with markets and the economy since then. Regardless of the Fed’s promise to keep raising rates, you can bet that the price of money will fall right along with the markets and the economy. Pundits will say that the Fed is “fighting” deflation, but it will simply be lowering its prices in line with the others.

It is highly likely that the next eight years or so will test the nearly universally accepted theory—among bulls and bears alike—that the Fed can control anything at all. The Great Depression made it look like a gang of fools, as will the coming deflationary collapse. We have predicted unequivocally that the new Fed chairman will go down as Hoover did: the butt of all the blame, and if you are reading the newspapers you can see that it’s already started. “When Bernanke Speaks, the Markets Freak” (San Jose Mercury News, June 10, 2006); “Bernanke is being blamed for spooking Wall Street” (USA Today, June 7, 2006); “Bernanke to blame for volatility” (Globe and Mail, Canada, Jun 13, 2006). The new chairman had a brief honeymoon (which we also predicted), but it’s already over.

By the way, I heard his commencement speech at MIT last week, and in it he spoke eloquently of the value of technology and free markets. But he also opined that economists have successfully applied technology to macroeconomics. We believe that the collective unconscious herding impulse cannot be tamed, directed or managed. In our socionomic view, the Fed cannot control the mood behind the markets, but rather, the mood behind the markets controls how people judge the Fed. We’ll ultimately find out who’s right.

Can the Fed Stop Deflation? Robert Prechter answers this all-important question in his Free Deflation Survival Guide. The guide gives you a 60-page ebook that will help you understand deflation and its effects on society; you’ll even learn how to survive and prosper in such an environment. Download Your Free 60-Page Deflation eBook Here.

(December 2009) Bernanke’s greatest achievement was not the measly $1.25t. of debt that he arranged to have the Fed monetize; it was convincing the government to shift the burden of debt default from the speculators and creditors to taxpayers.

(September 2009) Thanks to the Fed Chairman and two Treasury Secretaries, profligate bankers have been cashing checks off the Fed’s and the Treasury’s accounts, and the poor savers and taxpayers who fund these institutions are unaware that their personal bank accounts are being tapped by counterfeiters and thieves.

That lack of awareness may soon change. Declining social mood is fueling the drive to expose the Fed’s secrets. [Ed. note: Bloomberg News has sued the Fed under the Freedom of Information Act; Congressmen Ron Paul, R-Texas, and Barney Frank, D-Mass., are leading a charge to audit the Fed.] Exposing the Fed’s secret deals could lead to scandal and the collapse of major money-center banks. But most important to our monetary outlook, it will serve to curb the Fed’s reflation efforts. As I have written many times, deflation will win. Social mood is impulsive and cannot be stopped. The downtrend will claim its victims by whatever measures it must take to do so.

(August 2009) On July 26, in a speech in Kansas City, MO, Fed Chairman Ben Bernanke declared, “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.” (WSJ, 7/27) We think this implication of a fait accompli is premature. Clearly, the Fed Chairman and the majority of economists are of the opinion that the worst of the financial crisis is past and that the Fed’s unprecedented lending has averted deflation and depression. But wave 3 down in the stock market will dispel these illusions. Years ago, we suggested that Chairman Greenspan quit if he wanted to keep his lofty reputation. He didn’t do it. Now Chairman Bernanke should consider this option.

So will Bernanke serve a second term as Fed chairman? The January 2010 Elliott Wave Financial Forecast says, “Social mood is still too elevated to deny Bernanke reappointment as head of the Fed. … But rising political tension confirms that his next term will be far more stressful than his first.”

Can the Fed Stop Deflation? Robert Prechter answers this all-important question in his Free Deflation Survival Guide. The guide gives you a 60-page ebook that will help you understand deflation and its effects on society; you’ll even learn how to survive and prosper in such an environment. Download Your Free 60-Page Deflation eBook Here.

Fed Promises Easy Money for an Extended Period

by Claus Vogt

Every few weeks the world’s most powerful and influential central bankers — those in charge of the world’s number one reserve currency, the U.S. dollar — come together in what’s called the Federal Open Market Committee (FOMC).

They discuss the economy, interest rates, financial markets and whatever else they deem important. Then they decide to set the Federal Funds Rate at a level they think is appropriate.

And last week was their week. So today I want to analyze what their decisions mean for the stock market and for you as an investor.

The Fed Statement Reassures
A Very Lax Monetary Policy …

The FOMC meets regularly to decide where to set the Federal Funds Rate.

After each FOMC meeting, the Fed releases a statement. And the one for September 23, 2009, is very telling in my opinion. Here’s its most important part:

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

As you can see, the Fed is promising a continuation of its extremely lax monetary policy “for an extended period.” So all the recent media talk about a soon-to-begin exit strategy or a normalization of monetary policy was obviously premature. The Fed is reassuring us that there will be easy money for as far as the eye can see.

Why?

Two reasons come to mind:

First, the Fed is still very concerned about the economy … the employment situation is dire … and a double-dip recession is a real possibility.

Second, and more important, is that they know how precarious the banking situation still is. They know that the bad debt problems have not been solved … that most banks would go bankrupt if they had to implement mark-to-market rules … and that the banking system is still on life support.

This Is Important News
For the Stock Market

Since the Fed is confronted with two major problems — a shaky economy and an unstable banking system — it’s not worrying about a possible stock market bubble in the making.

Why is this so important?

Just look at the charts below. The stock market has rallied some 60 percent since the March low. But earnings are still very depressed. Hence the classic version of the P/E ratio — using twelve months trailing GAAP earnings — shot to the stratosphere!

Source: www.decisionpoint.com

Twelve-month trailing earnings as of the first quarter 2009 were a mere $6.86 for the S&P 500 making for a P/E ratio of 154. According to Standard and Poor’s, these earnings are estimated to rise to $7.51 in the second quarter, and $7.61 in the third quarter. Then they’re expected to jump to $39.35 in the fourth quarter and $43.58 in the first quarter 2010. Based on this last figure the P/E ratio will decline to 24.

Historically the normal range for this very P/E ratio — based on 12-month trailing GAAP earnings — has been between 10 (undervalued) and 20 (overvalued). Hence even if the corporate sector will see the estimated jump in earnings, the stock market is still very expensive.

Classic stock market valuation metrics show that this is a highly overvalued market. And overvalued markets can stay overvalued for a long time and even become more overvalued — as long as the Fed does not take away the proverbial punch bowl.

This means one of two things …

We’re Witnessing the Next Bubble, Or
Earnings Have to Increase Dramatically!

Fed chief Bernanke’s inflationary stance could be the fuel that ignites the next stock market bubble.

Right now I can’t rule out either one. I do, however, lean towards the first. And in reading the Fed’s FOMC statement one thing becomes obvious: If we’re on our way to a new stock market bubble the Fed will not prick it any time soon.

The September 23 statement that I cited earlier is as clear as you can expect from the Fed. Much clearer than anything Greenspan said during his long reign. His famous “irrational exuberance” speech, which was never followed by any action, is a perfect example.

Bernanke is much different …

From the very beginning of his career at the Fed he made it known that he’s a first class inflationist, and he strongly believes prosperity can be achieved by printing money. Now the Bernanke Fed is clearly reiterating this inflationary stance. By doing so the Fed is rubberstamping the current stock market rally and apparently not worrying about a possible bubble!

There is an old Wall Street saying: “Don’t fight the Fed.” I think it’s wise to heed it in today’s environment.

Best wishes,

Claus

Will Banks Rescue FDIC?

By Robert J. Samuelson
NewsWeek

It seemed like a classic “man bites dog” story. America’s banks, having been repeatedly rescued by the government in the past 18 months, were about to turn the tables and rescue the government by lending billions of dollars to the beleaguered Federal Deposit Insurance Corporation. So reported The New York Times. Well, it could happen, but it’s a long shot, and even then, the banks wouldn’t quite be rescuing the FDIC.

True, the FDIC—which insures bank deposits up to $250,000—has experienced a dramatic decline in its cash reserves as more U.S. banks have failed. It needs money. So far in 2009, 94 banks have failed. At the end of June, the FDIC also had 416 banks with $300 billion in assets on its “problem list,” the largest number since 1994.

All this has had a devastating effect on the fund that the FDIC taps to pay depositors in failed banks. In mid-2008, the FDIC’s cash reserves totaled almost $56 billion. A year later, they had dropped to $42 billion and, worse, $32 billion of that was already committed to failures that the FDIC anticipated in the coming year. The remaining $10 billion is a thin cushion for additional failures. Indeed, the FDIC has projected that failures over the next five years will cost another $70 billion. Click here to find out more!

Where is the FDIC going to get the extra dough? In some ways, its plight isn’t as dire as it seems. Unlike most federal agencies, the FDIC isn’t supported by taxpayers. Fees on banks cover its costs. In 2009, those regular fees will total about $12 billion, and similar amounts can be expected in the future. The FDIC could supplement its regular fees with a special assessment. The agency did that in the second quarter of 2009, raising almost $6 billion. But there’s a catch: the fees count as a bank expense and, by dampening bank lending, may hamstring the economic recovery.

“What they’re learning is that such large expenses can do more harm than good,” says James Chessen, chief economist of the American Bankers Association. “It’s a hit to bank capital. It makes it more difficult for banks to lend in their communities.”

The FDIC could also borrow from the U.S. Treasury. It could receive up to $100 billion almost immediately, says FDIC spokesman Andrew Gray, and could go as high as $500 billion with approval from the Treasury and the Federal Reserve. But there may be political and public-relations obstacles. Shelia Bair, head of the FDIC, has had spats with the Treasury, and the Times quotes one industry official as saying that Bair “would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help.” Banks also dislike Treasury borrowing because it looks like another industry bailout.

It’s in this context that borrowing from banks themselves has been discussed. The banks would lend to the FDIC and would then be repaid from the future insurance fees levied on (yes) banks. Just whether the existing fees would suffice or future fees would have to be raised is unclear. Any Treasury borrowing would similarly be repaid from banks’ future insurance fees. “[I]t is a question of the timing of bank premiums, not of the willingness of banks to fully support the [FDIC],” Edward Yingling, head of the ABA, wrote Bair last week. However, FDIC spokesman Gray says that the bank borrowing is “not an option being given serious consideration.”

One other possibility is that the FDIC could advance all the quarterly fee payments for 2010 to the beginning of the year. This would provide more upfront cash to deal with failures, though it would not increase the FDIC’s total cash. The five-member FDIC board is expected to make some decision next week.

SOURCE: http://www.newsweek.com/id/215976?from=rss”>