BOE Kicks Off New Global Money Printing Cycle

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Markets like money printing. The Bank of England (BOE) today announced its own QE2.  Statments from Fed Chair Ben Bernanke and talk of the EU recapitalizing its banks was already juicing up global stocks before the BOE took this earlier-than-expected action.

In its latest round of quantitative easing, the BOE will be purchasing 75 billion pounds in bonds. While some news reports euphemistically described this action as the BOE will be "spending" the money, the correct phraseology is that it will be "printing" this money. The BOE has previously printed 200 billion pounds to buy bonds starting in 2008 during the first credit crisis. The U.S. Fed has already engaged in two rounds of quantitative easing (only one of many ways that money can be printed) and a third should be expected.

Stocks had already turned around on Tuesday with big rallies. Fed chair Ben Bernanke made a statement that he was willing to do more to help the economy. Bernanke has been "helping" the economy since he started lowering the fed funds rate in September 2007. While he has helped the economy, the U.S. has experienced the worst recession and worst bear market since the Great Depression in the 1930s, the official unemployment numbers have remained close to double digits, the U.S. has had the largest number of bank failures since the Savings and Loan crisis, and thanks to his quantitative easing, the U.S. has been able to run a series of trillion dollar plus budget deficits that are going to lead to serious problems in the future.  Why shouldn't markets rally with more of that in prospect?

In the short term, markets don't care about dire consequences that are somewhere down the road. They rally based on liquidity and money printing provides it for them. While the news that the EU is going to recapitalize its banks sounds positive, there is little if any discussion in any article about where the money is going to come from. For the answer, picture a giant printing press spewing out fresh euro bills at break net speed. Investors should also expect a lot of nationalizations as part of this process. Belgium has just announced it will take over failed bank Dexia (described by the news media as "troubled"). Dexia is the largest bank in the country.

Market volatility is common during credit crises. Investors should expect continued market selloffs interspersed with big rallies. Ultimately, money printing will not save the day however because real value can't be created out of thin air. The day that will happen, is the day that PIIGS will fly. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Inauguration Day 2009 - Looking for a New Beginning

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

President Obama hit all the right notes in his inauguration speech today. His spot on rhetoric needs to now be followed up with matching action ... and that won't be easy. The global financial system is in disarray. As far as economic policy is concerned, the concrete plans of the new administration look like more of the same, albeit with a different focus from the previous administration on who gets the bailout funds. There isn't yet any indication that the groundwork for a new economic structure, the only viable long term solution, is going to be put down. Until that happens, economic policy will essentially be an attempt to hold up a flawed model that is collapsing because it is permeated with rot.

We were reminded of the global aspects of the Credit Crisis yesterday with events coming out of Britain. The Royal Bank of Scotland was down 67% in Monday's trading as the British government upped its stake from 58% to 70% ownership. Some commentary in the press worried about full nationalization, as if 70% government ownership wasn't close enough. The bank lost $41 billion this year, the most ever for a British corporation. The British government announced a more comprehensive second round of bailouts for the banking system, following the first round which took place only a couple of months ago. Not only does it appear that there is no such thing as a single bailout for an insolvent financial company, but the same holds true for an insolvent financial system.

While average people poured into the nations capital and crowded the streets and Washington Mall, the well connected were having a different Inauguration experience. In an contrast worthy of the waning days of Versailles, images of the bejeweled and elegantly appointed rich and powerful partying in Washington's balls can be contrasted with the state of California delaying payments to the aged, blind and disabled because its coffers are bare. The state also has indefinitely delayed tax refunds to individuals and businesses that overpaid their 2008 taxes. In theory, the government can't just take your money in the U.S, but this might just prove to be in theory. California officials claim the state is facing insolvency within weeks.

All Americans should be happy that the U.S. is finally moving beyond race as a barrier to full participation in U.S. political system and should look forward to the day when an East or South Asian, Latino, non-Christian, or a Gay or Lesbian candidate can be a serious contender for the presidency. Successful systems only continue to be successful because the most talented rise to the top and getting rid of discrimination is the only way to insure that this happens. The talented at the top seems to have been a lacking in Wall Street for some time now and this is one reason things have gone so terribly wrong with our financial system.

NEXT: Banking Bloodbath Covers Wall Street in Red

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Unlimited Liquidity Today, Unlimited Inflation Tomorrow

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The U.S. Federal Reserve, the ECB, and the central banks of England and Switzerland agreed over the weekend to "provide unlimited U.S. dollar funds to financial institutions" to support inter-bank lending. The Euro-zone will also guarantee bank debt until the end of 2009 and will assist its countries in buying preferred shares in failing banks in order to help recapitalize them. As this agreement was being worked out, Britain nationalized three of its major banks to prevent their failures. Meanwhile, the United States has altered the focus of its Wall Street bailout plan to concentrate on the purchase of non-voting bank shares and it looks like the American taxpayer won't be getting any equity in return (as the bill supposedly guaranteed).

The Euro-zone is essentially following the lead of Great Britain (the country that sold half of its gold in 1999 at the market bottom and which has a worse housing crisis than even the United States). Britain is now injecting $438 billion in loans to its banking sector - a sum that is proportionately much larger than the $700 billion U.S. bailout, but probably still not nearly enough. Its three bank nationalizations this weekend include the Royal Bank of Scotland (on the New York Investing meetup's likely bank failure list in September) where the taxpayers will get a majority 60% stake. Lloyds TSB and HBS were also merged by the government, which then bought a 40% ownership position in the new combined bank.

As the British banking system is being rapidly nationalized, the U.S. seems to be backing away from this socialist model. Instead of buying bad debt with the Wall Street bailout money, it now appears that preferred stock will be purchased (although media reports in this regard are garbled to say the least). Preferred stock is non-voting and represents no ownership rights in a company. It is merely a loan in perpetuity. Europe in general seems to be trying to adopt this approach as well. If there is any profit made on the government's money pumping (and there always is), none of it will be going to the respective taxpayers of any country that handles the banking crisis this way.

Where all the money is going to come from to pay for the 'unlimited' liquidity injections into the collapsing American/European financial system has not been stated. It is highly unlikely that it will dropping from the sky attached to a big balloon. Printing more money is the only possible option. This makes the inflation hedges gold and silver even better investment possibilities going forward. Amazingly they are both at particularly low prices - at least in the futures markets. While both had severe sell offs in the U.S. markets on Friday (sell offs for gold and silver that take place only in U.S trading have happened many times), anecdotal reports indicate that people were rushing coin shops and bullion dealers to purchase them.

NEXT: Stock Market Rallies Like It's 1932

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Three Bank Monty - Monday's Global Bank Failures

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The nationalization of the world's banking systems took a big step forward on Monday, with major bank failures happening in the U.S., England, and the European continent. In all cases, the respective governments are getting a piece of the action. While it is generally acknowledged that socializing anything will lead to inefficient operations, general dysfunctionality, and substandard practices, apparently the governments of a number of developed economies have decided that socialized banking is an important component of the solution to the current economic crisis. These are of course the same geniuses that created the government policies that allowed the current economic crisis to take place and then remained completely oblivious to them as they unfolded.

In the U.S., Wachovia now no longer exists. Only last week it was the fourth largest American bank. Over the weekend the FDIC 'facilitated' troubled financial giant Citigroup's purchase of Wachovia's banking operations. Wachovia's own demise can be traced back to its takeover of mortgage lender Golden West Financial in 2006. Citigroup is supposed to be absorbing $42 billion in Wachovia's losses, but this will not happen if the banking bailout plan passes because the bill states that the taxpayers pick up the tab in such circumstances. The FDIC is supposed to cover any remaining losses and in exchange for doing so will get $12 billion in preferred stock. Nevertheless, in a statement that seems to lack both truth and consistency, the FDIC said that the Wachovia bailout won't cost its deposit insurance fund anything. Even though Wachovia's stock fell to 91 cents in Monday's before the bell trading (under one dollar is the market's statement that a company is insolvent), the FDIC claimed the Wachovia did not fail. If you believe that, you are also likely to believe that a pile of manure is a mountain or roses. Wachovia is indeed the largest bank failure in U.S. history (at least for now).

While Wachovia was collapsing in the U.S., the Benelux countries (Belgium, Luxenbourg and the Netherlands) had to bailout Fortis NV with a $16.4 billion cash infusion. In return, the three governments will get a 49% stake in the bank. The demise of Fortis should be seen as a derivative implosion similar to that which brought down U.S. insurance giant AIG. Fortis has had to write down its credit default swaps (CDOs) by 78% so far and this essentially made it insolvent. As was the case for Wachovia, the downward spiral for Fortis was also caused by it taking over a financial company with a dicey lending book. Fortis was part of a three bank consortium that purchased ABN Ambro in October 2007 (long after the credit crisis was front page news). The lead bank in that consortium, Royal Bank of Scotland, is on New York Investing's likely to fail bank list and its stock was down 11% in early Monday trading.

England doesn't have to wait for a future bank failure however. The British government on Monday was forced to nationalize Bradford and Bingley, taking over its $91 billion mortgage operation. The Brits also paid Spain's Banc Santander $33 billion to 'facilitate' its purchase of Bradford and Bingley's savings business. Bradford and Bingley specialized in mortgages for rental properties and it was reported that there had been no income verification for at least 17% of its loans. This was the second bank nationalization in England, Northern Rock was the first, and followed the government arranged purchase of HBOS Plc by Lloyds TSB Group only nine days ago. It is quite obvious that it will not be the last either. Total mortgage lending in Great Britain has fallen 95% (yes 95%) in the previous month. A credit collapse of this magnitude makes the dislocations of the 1930s Great Depression pale in comparison.

NEXT: A Bridge Loan to Nowhere - The Wall Street Bailout Plan

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Peoples Republic of the U.S. - the AIG Bailout

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

In a socialist state, the government decides what a company is worth, not the market. The Federal Reserve clearly demonstrated this concept by purchasing almost 80% of the insurance giant AIG on Tuesday night, September 16th. The Fed paid over 10 times what the market said its stake in AIG was worth. It is not clear what U.S. laws allow for the nationalization of part of the insurance industry, nor what companies will be bought next now that this precedent has been set.

The final phase of AIG's death spiral began on Monday evening when the major credit agencies downgraded it. This credit downgrade required AIG to post billions of dollars of additional collateral for its mortgage derivative contracts - capital that AIG simple didn't have. The implications were far more serous than the public realized, since AIG is a central player in the CDS (credit default swaps) market and does business with almost every financial institution in the world. If AIG went under it would have been unable to pay off its CDS obligations and its counter parties would have unable to collect on its trades. It was estimated that a large number of hedge funds, and possibly some banks, would have gone under along with AIG.

Over the weekend AIG attempted to borrow $40 billion form the Federal Reserve. The Fed, originally set up to lend just to commercial banks, had no legal authority to lend to insurance companies. And even though it had extended its lending to broker-dealers in March and to mortgage giants Fannie Mae and Freddie Mac in July, it was reluctant to add insurance companies to the list. Then on Tuesday evening, the Fed (with support from the Treasury and President Bush) decided to extend its legal authority way beyond anything ever intended by agreeing to pump $85 billion into AIG. The media described this $85 billion as a 'loan' even though a 79.9% equity stake in AIG was being given in exchange (note to media: this is a stock purchase, not a loan). This is not for already existing AIG stock, but for newly issued AIG stock, so AIG will have to increase its outstanding amount of stock to five times its current level. This is a better deal for stockholders than usual, since they will be left with something, instead of being completely wiped out.

Based on Tuesday's closing price, AIG had a market cap of just over $10 billion dollars. In order to buy 80% of the company (which was worth $8 billion according to the market), the U.S. paid $85 billion or over 10 times the market price. Socialism leads to just such economic absurdities. Unless this is stopped, expect more of this in the future - and the permanently ruined economy that always follows.

NEXT: The Mega Move Up in Gold and Silver

Daryl Montgomery
Organizer, New York Investing
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Exposing Fannie Mae and Freddie Mac - The Government Takeover

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video for this posting can be found at: TBA

It took only about six weeks after congress passed a bailout package before the U.S. government had to take direct control of Fannie Mae and Freddie Mac. The terms of the bailout package were open ended and extremely generous at Treasury Secretary Paulson's insistence. He claimed that if it was made obvious that the full financial power of the United States government was behind Fannie and Freddie, the need to take any action would be minimized (despite the fact that is was universally agreed that Freddie was insolvent and would therefore need continual cash infusions to keep operating). The Congressional Budget Office backed up Paulson by estimating that there was a greater than a 50% chance that the bailout would cost nothing.

On September 7th, the U.S. government seized Fannie Mae and Freddie Mac, firing their top management and taking direct control of their operations. The Treasury department announced almost immediately that it would initially be pumping $200 billion into the two companies (so much for the bailout costing taxpayers nothing). Auditors who had been examining Freddie and Fannie's books found that Freddie had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of 2008, which it wouldn't have had to disclose until early 2009. Fannie Mae had used similar methods, but to a lesser degree. Both companies needed capital and a lot of it to keep operating. One wondered how many U.S. banks and brokers were doing similar things with their books, but the public didn't know about it because there were no outside auditors to tell them.

With the government takeover, Fannie and Freddie's over $5 trillion in debt would now reasonably have to be added to the official U.S. national debt figures. Adding Fannie and Freddie's total debt to the national debt would increase it to between $14 or $15 trillion or roughly the size of the official GDP figures (the actual GDP figures were much lower than those claimed by the government and the actual national debt, including social security, medicare and medicaid entitlements was somewhere around 50 to 60 trillion dollars). Ironically, the idea of privatizing Fannie Mae was conceived of in the 1960s during the Johnson administration to get its debt off the government's books.

The government bailout was intended to support Fannie and Freddie's bonds, many of which were held by foreign governments including China and Russia. U.S. banks and thrifts also held an estimated $1 trillion of this debt. If Fannie and Freddie defaulted on their bonds, the U.S. would have had great difficulty ever borrowing again from foreign sources and both our government and economy would wind up seizing up almost immediately. A number of U.S. banks would likely have gone under soon thereafter as well in the event of a bond default. While bonds holders got bailed out, the stockholders were wiped out. This included U.S. pension funds, most of whom were major holders of Fannie Mae and Freddie Mac stock.

Fannie and Freddie were by far the largest bailout in U.S. financial history. Where would the already debt ridden U.S. government get the money to pay for it? If it couldn't borrow the money, which was indeed likely, it would have to print it. Only time would tell how much inflation this would cause and how much value the U.S dollar would lose as a result .

NEXT: Probable Future Outlook for the United States

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Exposing Fannie Mae and Freddie Mac - The Bailout

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video for this posting can be found at: http://www.youtube.com/watch?v=Q8XU5XhwdyY..

In mid-July 2008, Fannie and Freddie's stock prices were plummeting, with Freddies stock getting into the low single digits. Knowing that they had to do something right away, the Federal Reserve and Treasury department announced emergency measures to rescue the two companies. First, the Fed opened its discount window to Fannie and Freddie, something that had only been available to commercial banks for more than seven decades until broker-dealers also got access to the Fed in March 2008 (it was clear that the expansion of this privilege to more and more industries was a trend in the making). Secondly, the Treasury department went to Congress with a bailout plan. Secretary Paulson asked for a blank check from the U.S. government on behalf of Fannie and Freddie on the grounds that just having such strong financial backing would prevent their problems from getting worse. In less than two months the U.S. government would be forced to take direct control of both institutions, indicating that this was either one of biggest lies or most imbecilic statements in U.S. financial history.

The U.S. congress passed the 'Federal Housing and Economic Recovery Act of 2008' in late July. In the bill, Paulson got the blank check he requested, at least until the end of 2009. Provisions were also made to give up to 400,000 homeowners lower fixed-rate interest rates loans and an additional $3.9 billion was allocated for neighborhood grants (which seemed to be some pork barrel provision). The bill also established a new regulator for Fannie and Freddie to replace OFHEO. There was nothing wrong per se with OFHEO's regulation, other than every time it tried to control Fannie or Freddie, powerful politicians stepped in to prevent it. Of course, the politicians responsible for creating the Fannie and Freddie mess were not going to put the blame on themselves, but tried to make OFHEO the fall guy instead.

Without question, the most outrageous part of the bailout bill was its cost estimate. The Congressional Budget Office (CBO) predicted it would cost only $25 billion (the same as the cost they predicted for the Iraq War, now estimated by a recent outside study to be over 100 times higher at $3.2 trillion). The CBO even made the preposterous statement that there was a greater than 50% chance the bailout would cost U.S. taxpayers nothing. What thinking, or lack thereof, led to this conclusion is not clear. Since everyone agreed that Freddie Mac was insolvent, by definition it would have to have money pumped into it to keep it operating. So from the beginning there was a zero percent chance that the bailout would cost nothing.

There is certainly evidence that Congress itself had a more realistic assessment of the potential bailout costs. As part of the rescue package, they raised the national debt ceiling $800 billion (the sixth time the national debt ceiling was raised during the Bush administration) to $10.6 trillion. If the bailout was going to cost only $25 billion, there was no need for a higher debt ceiling. Clearly the cost estimates were meant for a gullible public, not Washington insiders who knew the truth. It was the New York Investing meetup's opinion that the Fannie Mae and Freddie Mac bailout would cost U.S. taxpayers at least a trillion dollars - and even that might be an optimistic projection.

NEXT: Exposing Fannie Mae and Freddie Mac - Future Risks

Daryl Montgomery.
Organizer, New York Investing meetup.
http://investing.meetup.com/21.

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Exposing Fannie Mae and Freddie Mac - Subprime Crisis

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our video for this posting can be found at: http://www.youtube.com/watch?v=pQjgEAMa5SA.

By August 2007, it became clear that the U.S. housing market was in trouble. Banks and brokers were starting to face massive write downs for all the irresponsible home loans they had been granting for the previous several years and this was causing available mortgage money to dry up. Federal government officials, including President Bush, the Treasury Secretary Henry Paulson, the Fed chair Ben Bernanke, the head of the Senate Finance committee Chris Dodd and his counterpart in the House Barney Frank, unanimously supported using government backed Fannie Mae and Freddie Mac to help prop up the faltering mortgage market. While this was done purportedly to help struggling home buyers, it was in reality an attempt to help the U.S. banking system. The likelihood that the U.S. taxpayer would be stuck with one huge bill because of these actions didn't seem to have been considered - and if it was, no federal official or representative seems to have been bothered by it.

Fannie and Freddie were encouraged to buy dicier loans, particularly Alt-A. Even some subprime loans started showing up on their books. Together these loans accounted for as much as 20% of the total debt they backed by the first half of 2008. A similar percentage of loans on their books were for over 80% of the original home price and since housing prices were falling, this percentage for actual home value was not only much higher, but growing rapidly. Caps on the size of a mortgage that Fannie could handle were raised substantially at that time to over $700,000. These actions along with the diminished role of banks in mortgage lending wound up creating a de facto nationalization (the de jure nationalization would come later) of the American mortgage market. In the last half of 2007, Fannie and Freddie backed 90% of mortgages in the United States and 81% in first half of 2008.

As a consequence of government policies, the condition of these already financially weakened and corruption plagued companies deteriorated even further. The leverage, calculated as liabilities divided by shareholder equity, that Fannie Mae was utilizing rose to an eye popping 78 to 1, more than double the 33 to 1 leverage that caused Bear Stearns to implode overnight. This huge leverage was made possible with the complicity of Fannie and Freddie's regulator (OFHEO) who kept lowering the capital surplus requirements the companies needed to maintain, first from 30% to 20% and then to 15%. This allowed Fannie and Freddie to continually state to the press that they had much more capital on hand than the minimum amount set by their regulator and thereby imply that they were in a sound financial state, even though they were not.

In fact, by the first quarter of 2008, Freddie's liabilities exceeded it assets by $5.2 billion. Based on the basic principles of accounting, it was an insolvent company. While this information was public, other than the New York Investing meetup, few seemed to notice this obvious fact. Only when a former Fed official made a public statement pointing out that the emperor had no clothes in July 2008, did the problems with Fannie Mae and Freddie Mac suddenly receive major press and government attention.

NEXT: Exposing Fannie Mae and Freddie Mac - The Bailout

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.