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The Dukes of Moral Hazzard

February 2, 2010

I know it’s hard for most to read a rant about such a heady topic from somebody who:

1-         Can hardly spell

2-         Spends his free time killing brain cells with beer

3-         Still idolizes Luke Skywalker

4-         Is unable to add or subtract without a calculator

Let me start by saying that by no means do I believe that our President or Govt or Ben Bernanke is intentionally harming the country or have hatched a diabolical plot with Socialist designs.  I do feel that Bernanke is an arrogant twat who thinks he can use the current crisis as a means or an excuse to change the rules to suit his needs and entirely change the roll of the Fed.   Obama is just a limp dick.  People don’t understand what the Fed is sposed to do in normal times much less how egregious their actions have been of late.  Even Paul Volker has mentioned the Fed’s actions have been borderline illegal. Removing private risk and placing it onto the shoulders of the tax payers is unacceptable.  The man should be arrested.

“Treason doth never prosper; what’s the reason? For if it prosper, none dare call it treason.”

Sir John Harrington, 1600 (circa)

Unprecedented fiscal and monetary stimulus programs have “come at the cost of significant increase of risk to sovereign balance sheets and a consequent increase in sovereign debt burdens that raise risks for financial stability in the future, We have transformed the banking crisis into kind of a sovereign solvency crisis by buying up a lot of private securities and auto companies and so forth,” We’ve dealt with the consequences of vaporizing $3 trillion of private demand in the U.S. by providing a lot of public demand.”  -IMF

My pal Joe got me thinking on Sunday when discussing the Fed.  He said something like “what would we do if we didnt have the ability to print money?”

This has been debated since our forefathers and long before central banks.  Central banking was brought in only after it was decided that it was easier to finance things, such as wars, by printing money instead of taxation.  What people still to this day fail to see is that printing money is just as good as increasing taxes. Instead of taking money out of your wallet, the Govt simply makes the money in your wallet worth less through inflation or the lack of de-flation.

IMHO If we didnt print money we would certainly have less booms and therefore less busts.  Printing money is bad. Not good.  Inflation is bad.  If you dont believe me go back to Germany 1923.  If Germany doesn’t suffer inflation we dont have the 3rd reich. No Hitler! No cool tunics or Camo helmets. (ok, maybe inflation has some pros)

But honest, inflation is very very very bad.  But you may have noticed we are not experiencing inflation now and the Fed is just printed truck loads of cash.  What gives?   I will discuss deflation later, but first —- BUBBLES

Printing money causes assets prices to inflate (assets such as investments/real estate are not included in the inflation/CPI figure)


So, what the fuck is wrong with higher asset prices?  For those of you who slept through recent crisis allow me to present exibit A – the real estate bubble.  (I cant go into detail, but prices went up, (the bubble) prices went down, people lost jobs, the Fed saves the banks yada yada ydada…

Lets discuss the current asset bubbles – the equity and MBS (mortgage-backed securities)

Its important that you understand that Investments are a zero sum game (nobody pays DIV anymore). If Google made 133 Billion this quarter the stock would not move unless more people bought it than sold it. Simple.

The MBS market works the same way and we will spend the next 5 minutes (depending on how fast you can read) talking about MBS.

The MBS market has catapulted to nose bleed levels this past year.  The reason for this?  The obvious reduction in home foreclosures? the vast amounts of unemployed finding high paying jobs right?

Fuck no.

More people purchased mortgage-backed securities than sold them.

(Well, just one person purchased them – Ben “fuck face” Bernanke)

See, about a year ago the Fed sent a note to banks and other large investment houses (see PIMCO / Blackrock etc..) which said:

“Guys, the boys and I have decided to buy a fuck load of MBS paper so you may want to wait and unload your smelly paper on us.  Sheet, even buy some in anticipation. Yours truly – BBFF”

The shit face banks and PIMCO etc agreed to buy treasuries with the proceeds of their MBS sales.

Bill Gross coined this agreement “shaking hands with the Govt”

SO, the fed printed a shit load of money and purchased MBS (and other crap, but we wont go there).  Banks used the proceeds to invest in treasuries and the stock market and everything went up, crisis over and everything is totally fucking awesome … and NO INFLATION! Whats the big deal?

Not so fast honey fart.  The Federal Reserve Bank, like any other bank, has a balance sheet – assets and liabilities, profits and losses (profits/losses are handed over to the US Treasury).




Other (lost of speculation on what “other” means)


Interest on bank cash reserves. (No interest on the printed money. Sweet.)

In normal times the Fed holds almost exclusively treasuries and takes the coupon payments and hands over the cash to the Treasury.

(So the Treasury pays itself its own coupons/interest.  Mull that the fuck over.)

Recently the Fed handed over $50 billion.  Nice job guys!  Purchasing MBS paper made the value of their existing paper go up.

(BTW the Fed is only supposed to purchase securities for a short period – i.e. not hold them to maturity.)

So when will the Fed sell their MBS?  Will they be able to find a buyer for the 1,320,000,000 in MBS it has purchased … Hmmmm.

Now, listen up, the Fed said last year it will buy MBS until March this year.  What is going to happen when they stop buying?

Its called massive fucking losses handed over to the Treasury.  Add this to the massive losses handed over by Freddie and Fannie Mac and you can conceivably have a trillion+ in losses.  Losses mean higher taxes or more printing.  Printing will not be an option due to inflation so higher taxes and a lower standard of living is in our future.

But hey, better the govt shoulder the losses than private institutions right?

When private institutions over-leverage and default that institution suffers.  When the govt over-leverages and defaults we are all fucked.  Game over.  Printing money.  Bad.

But the Fed wont let the ponzi game end.  They will announce soon enough that it will indeed not end the MBS purchases.  Sure as my middle name is Glenn they, the ass fuck heads they are, will keep buying and buying and knitting and knitting and knitting …  Also, When the Govt is all of a sudden the biggest swingin cock in the investment land there will undoubtadly be conflicts of interest … Example: If the Fed raises rates that will tank the value of their MBS book.  So the Fed has come up with the idea of increasing the rate of interest on bank reserves instead.  More free money for the banks and further entries onto the liability side of the ledger for tax payers.  Also, raising rates will increase the debt service of the treasury, i.e. higher interest expense for those treasuries they need to roll over.  It behooves the Govt to keep reates low for their own necks..

Yes, I mean what I am about to write (somewhat). The public anger directed at the banks is somewhat misplaced.  Thats right, I said it.  The banks are not to blame (entirely) for all that ails us.  They came to the party, did some dancing and got a bit too drunk off the punch – but the party was thrown by our Govt and they spiked the punch bowl.  (God, thats a corny metaphor.)

The Govt is just being gamed by the banks.  Political “fat cats” have been attempting to sway public opinion against the banks in a pathetic attempt to deflect blame for their own incompetence.  They orchestrated the housing bubble.  They are now trying to reflate the asset bubble.  The Govt is the problem.  Just take a look what the Govt did directly after the last housing bubble burst – THE  S&L CRISIS …


This is what the dopes did after the bank S&L crisis almost destroyed the economy.

The HUD Reform Act of 1989: To provide for refinancing of mortgages, loans, and advances of credit under the lower income homeownership program of section 235 of the National Housing Act.

The Federal Housing Administration, generally known as “FHA”, is the largest government insurer of mortgages in the world.

The Homebuyers and Renters Relief Act of 1989: To increase the affordability of homeownership for first-time homebuyers and promote the development of low-income rental housing.

The Housing Opportunity Zones Act of 1990: To remove legislative and administrative barriers to the production of new and substantially rehabilitated housing that is affordable to lower-, moderate-, and middle-income families.

The Department of Housing and Urban Development Accountability Act of 1989: To prevent abuses of the process for selection for housing assistance under programs administered by the Secretary of Housing and Urban Development.

The Community Housing Investment Partnership Act.

The Recycling of Existing Assets for Cost-Effective Housing Act of 1989: To authorize the Secretary of Housing and Urban Development to make grants to States to establish revolving funds to assist low- and moderate-income homebuyers and renters.

The Low-Income Housing Credit Act of 1989: To amend the Internal Revenue Code of 1986 to improve the effectiveness of the low-income housing credit.

The Low Income Housing Preservation Act of 1989.

The Housing Affordability Act.

Homeownership and Opportunity for People Everywhere Act of 1990 (The “HOPE” Act). “There are authorized to be appropriated for grants under this title $96,000,000 for fiscal year 1991, $260,000,000 for fiscal year 1992, and $400,000,000 for fiscal year 1993. Sums appropriated pursuant to this subsection shall remain available until expended.”

Fair Lending Enforcement Act of 1990: To amend the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act.

The Housing and Community Development Act of 1989.

The Housing and Community Development Act of 1990.

The Community Housing Investment Partnership Act.

The Homeownership Assistance Act of 1989: To authorize the insurance of certain mortgages for first-time homebuyers, and for other purposes.

The Home Mortgage Overcharge Prevention Act of 1989: To amend the National Housing Act to limit the amount of interest paid by a homebuyer upon the prepayment of a mortgage insured under the Department of Housing and Urban Development single-family mortgage insurance program.

The Neighborhood Mortgage Lenders Accountability Act: If any examination of an approved mortgagee by the Secretary (including an examination under subsection (d)) discloses that the mortgagee has failed, in the determination of the Secretary, to meet the lending needs of the community served by the mortgage (as determined by the Secretary under subsection (a)(1)) with respect to residential housing lending, the Secretary may, in the discretion of the Secretary, require that the mortgagee, for continued status as an approved mortgagee for purposes of this Act, develop and submit a plan for remedying such deficiencies.

The First-Time Homebuyers Assistance Act of 1989: To authorize the Secretary of Housing and Urban Development to establish a demonstration program to insure mortgages with no downpayment for moderate-income first-time homebuying families.

The Homeownership Through Sweat Equity Act of 1989: To authorize the Secretary of Housing and Urban Development to carry out a demonstration program of providing grants to housing development agencies to acquire abandoned and vacant housing for rehabilitation and rehabitation by homeless and low-income families.

4 Comments leave one →
  1. February 2, 2010 7:23 pm

    Just referenced you in my post on the subject of sovereign default: Safe Assets and Sore Surprises. By the way, I have just added a Reference List to my economics blog with economic data series, history, bibliographies etc. for students & researchers. Currently almost 200 meta sources, it will in the next days grow to over a thousand. Check it out and if you miss something, feel free to leave a comment.

  2. February 3, 2010 9:56 am

    Just want to say your article is awesome. The clarity in your post is simply impressive and i can take for granted you are an expert on this field. Well with your permission allow me to grab your rss feed to keep up to date with forthcoming post. Thanks a million and please keep up the good work. Excuse my poor English. English is not my mother tongue.


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