Zero Hedge

Going through today’s pertinent Q&A with Bernanke, initially we focus on Fed nemesis #1, Ron Paul. First question of relevance: “Do you Mr. Bernanke think that rates were hold too low for too long?” The degree of Fed delusion is easily seen by the response: “the bottom line is nobody really knows for sure, but the evidence is quite mixed.” Obviously the bald one has never attempted to sell a home in the Inland Empire. The evidence sure would be a little less mixed in that case. But at least Bubble Ben has given a speech on it (which incidentally caused John Taylor to almost have a conniption against the stupidity of the Fed’s chairman). Yet just in case you thought the man may have at least one screw unloose in his voluminous cranial hollow, Bernanke opens his mouth and says “Even if rates were too low for too long, the magnitude of the error was not big enough to account for the huge crisis we had. I think what caused the crisis was a failure in regulation.”…..And this is the man who determines monetary policy….Only now do we find out he has never actually ever opened an Econ 101 textbook, instead opting to go straight to writing them. Luckily Ron Paul proceeds to give the Princeton “expert” a much needed lesson in monetarism, and what happens when rates are zero for far too long.

To be expected, Bernanke certainly did not appreciate being schooled in Econ 101. After Paul rips Bernanke’s face off with the Chairman’s constant excuse that regulation is the answer to everything, arguing instead that artificially low rates merely send constantly flawed price signals, Bernanke retorts “Well you need some system to set the money supply. I guess you are a gold standard supporter.” At this point Paul gives the most priceless response ever: “I am for the constitution.” (4:50 into the clip)… A flabbergasted Bernanke again proceeds to cast the blame… This time everywhere but the Fed: “Every major country in the world uses a Central bank to make some decision about the money supply.” We ask the philosophy experts among our readers to tell us just what type of fallacy this is. Ron Paul once again has a brilliant response: “Then there is no good information for the investor unfortunately.” What are you talking about Ron – there is Cramer. At least until such time as his particular regulators wake up… Which they seem to have done so today finally.

Next up, California’s Brad Sherman asks the current-former Fed Chief duo the following runner up to the most critical question of the day: “Bureaucracies hate bad headlines, they’ll often do desperate things behind the scenes to avoid that big headline from breaking. Prudential regulators are going to get bad headlines if a big institution fails, particularly under some circumstances, and if they can prevent that failure, if they can just put it off for six months, their reputations and careers can be saved. Monetary policy, just cutting the interest rate by quarter point can save a troubled institution. So how can we be sure that monetary policy is not influenced by the natural human desire of bank supervisors, to save one or two institutions, for at least long enough for them to move over to another department. How do we make sure that monetary policy does not meet the career needs of bank supervisors?” And the token bullshit response from the follicularly confused one: “I don’t think that’s a very realistic scenario.” Oh really? We think it is, and in fact we think that the probability of influence on monetary policy arising from this line of thinking is much, much greater than all that other BS we have been hearing about how an audit will make the Fed become an engine of hyperinflation, the argument that Barney Frank, Chris Dodd, Mel Watt and all the other bought and paid for Wall Street cronies are using to prevent Ron Paul’s audit the Fed initiative from ever passing. Bernanke elaborates on what one day will be an amusing case study: “I suspect the Central Bank Chairman will be around and concerned about his or her reputation when the economy has excessive inflation or whatever problem might arise from bad interest rate policy. I don’t think there is much evidence for that particular issue.” How about the issue that every reputation can be bought and paid for by someone with a big suitcase full of brand new $100 trillion bills, with a portrait of Supreme Chancellor Blankfein on the front? This is post the hyperinflation – certainly the Central Bank chairman will not be dumb enough to want to be paid in Pre-Petition money.

Yet of all questioners, Rep. Scott Garrett asks the truly most relevant questions of the day. First among them: “Are the GSE obligations sovereign debt?” Bernanke’s response: “We stand behind it, but whether it is legally sovereign debt or not, I am not equipped to tell you.” Same thing from Volcker, who adds that it is a “bad arrangement where you have this quasi private organization and the government stands behind it.” So not even the wannabe uber regulator knows how to account for an amount equal to half of the total US Federal Debt. Swell.

On Lehman Garrett asks “The Fed was there on scene, your folks were there at Lehman’s. Was the Fed aware of the Repo 105 and the accounting irregularities going on?” Bernanke answers “No – they were hidden. We are currently, for example, the principal regulator of Goldman Sachs, and we have about a dozen people on site, and another dozen who are looking at the company. We had in this case two people assigned to Lehman. And their main obligation was to make sure we get paid back our loans…. Our objective on the discount window loan was to make sure it was safe and they were safe.“

Now parse the last few sentences carefully. Not only does the Fed admit that it is and was in the Fed’s interest to delegate manpower to make sure that Goldman is fine (in an agent ratio of 6-to-1 “scouring” over Goldman’s books), but Bernanke blatantly contradicts himself when claiming the reason for the presence of the Fed’s entourage. If the Fed was indeed so focused on recouping its discount window borrowings, then how on earth did Geithner green light that Lehman would be allowed to deposit a nearly $3 billion  CDO, which contained loans by CFC, which after a cursory look Citigroup determined was “Bottom of the barrel” and “junk”? What is the basis of this dual standard – why does the Fed pretend to be concerned with safeguarding taxpayer money (with which Bernanke justifies its minimalist presence at Lehman) when it comes from the Discount Window yet is happy to collateralize “junk” paper in the Primary Dealer Credit Facility? Is whoever was in charge of the Lehman account at the FRBNY some schizophrenic (and please let it not be discovered that the person in charge was, just like in AIG’s case, again Steven Manzari)? And why does the Fed believe it has any credibility as an uber-regulator when it constantly fails a less than uber-one?

In earlier questioning by Spencer Bacchus, Bernanke answered that the only reason why the Fed had a “couple” of people in the company, was to make sure that Lehman “repaid the money lent by the Fed’s Primary Dealer Credit Facility.” Yet the Fed had lent out money, as noted above, collateralized by, well, excrement. Once again that is a truly “brilliant” overture by a wannabe regulator of all that has a dollar sign in front of it. 

Bernanke digs himself even deeper. When explaining why the FRBNY got paid back, BB says “we took collateral and we took extra large haircuts to make sure it was safe.” Oh… so now you care about getting paid back. Was it, perhaps, under the guidance of one Goldman Sachs, who may have at this point decided it was time to rid the world of the pesky Lehman Brothers that made you start enforcing legitimate collateral controls?

Then Garrett asks the key question: “In light of these reports is this something that we should be concerned about? Is activity at these other [banks such as Goldman] is that something that (a) we should be concerned about and (b) something the Fed should be concerned about and are you looking into it.” Bernanke’s retort “[the banks] are now under our consolidated supervision, so we are now paying attention to these issues.” That’s the non-answer. As to the answer of whether the Fed is looking at whether shady accounting is going on or was going on in the past, Bernanke’s version of the Fifth is as follows: “I don’t know. This report just came out this week.” In other words if Peck had not agreed to declassify Valukas’ report, if there was no pressure to put the Examiner’s report in the public domain the Fed would never have expressed any interest into just what kind of shady accounting goes on to mask the Tier 1 and Risk Based Capital of the banks under its supervision, and that leverage ratios by most of the banks it supervises are likely complete shams?

A relentless Garrett keep probing: to the NJ representative’s question whether the Fed demanded that Lehman’s regulator (whoever it may be since it was not the Fed, even though the Fed had implemented three separate liquidity stress tests, of which Lehman failed every single one) require that Lehman raise its liquidity, Bernanke once again gets an acute case of amnesia: “I don’t have the exact information that you are asking.” So once again the Fed proves that the only thing it can regulate is the bribery sinking fund at Goldman et al with direct recipient Federal Reserve governors. Everything else will just fall into place once yet more of Goldman’s competitors are done away with, and Goldman (and JPM, of course, can’t forget Fed, Jr), are left standing as the only two financial firms in the known universe. And this is the Fed that lame duck and financially supremely challenged Chris Dodd wants to put in charge of regulating everything in this country? If that really ends up happening, we are so #&$*ed… but not before Goldman funnels all of Americas’ money into its Middle-Class Irredeemable Negative Interest Rate All-market Fund SIV.

More articles from Zero Hedge….

By Chris Carey, Bailout Sleuth

Two
days after Sen. Chris Dodd (D-Conn.) introduced legislation that would restrict the Federal
Reserve’s regulatory authority, Fed Chairman Ben Bernanke came to
Congress to persuade lawmakers to preserve its strength.

Dodd’s
bill would severely curtail the Fed’s bank supervisory power.
Currently, the Fed regulates about 5,000 bank holding companies and 850 state member
banks. Under Dodd’s bill, the Fed would only have supervisory authority on bank
holding companies with more than $50 billion in assets. The others would be
overseen by different regulators.

Bernanke,
testifying before the House Financial Services Committee, argued that the Fed
is “uniquely suited” to regulate large, complex institutions. “No other
agency can, or is likely to be able to, replicate the breadth and depth of
relevant expertise that the Federal Reserve brings to the supervision of large,
complex banking organizations and the identification and analysis of systemic
risks,” Bernanke said.

He
also defended the Fed amid new reports indicating that the agency was unaware
of dubious accounting methods occurring at the now-defunct Lehman Brothers
Holdings Inc., even when its own staff had almost unfettered access to the
company’s books following the collapse of Bear Stearns & Co. “We only had a
couple of people in the company, who’s primary objective was to make sure we
got paid back the money we were lending,” Bernanke said. “We were not charged
with supervising the company.”

Bernanke
dismissed suggestions from some lawmakers that the Fed has an inherent conflict
of interest due to its dual roles setting monetary policy and regulating banks.
Rep. Brad Sherman (D-Calif.) said the Fed may be tempted to make monetary
policies favorable to failing banks if it feared a bank under its regulatory
authority was in jeopardy.

“I don’t
think that’s a very realistic scenario,” Bernanke said.

More articles from the Bailout Sleuth….

In testimony today before Congress, Fed Chair Ben Bernanke outlined his reasons why the Federal Reserve is uniquely suited to be the regulatory supervisor for U.S. banks.

Bernanke offered two reasons why the Fed is the natural agency for financial supervision. First,
he suggested that some supervisory responsibilities are essential in order for the Fed to carry out its primary monetary policy functions:

[The Fed's] involvement in supervising banks of all sizes across the country significantly improves the Federal Reserve’s ability to effectively carry out its central-bank responsibilities. Perhaps most important, as this crisis has once again demonstrated, the Federal Reserve’s ability to identify and address diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it has as both a bank supervisor and a central bank. Not only in this crisis, but also in episodes such as the 1987 stock market crash and the terrorist attacks of September 11, 2001, the Federal Reserve’s supervisory role was essential for it to contain threats to financial stability.

Insofar as the Fed is expected to fulfill its function as a lender of last resort through the discount window, surely it needs detailed knowledge of the borrower’s financial situation. And actionable information on the financial system’s health and stability is just as surely essential for knowing when and how fast to change interest rates.

Second, Bernanke observed that no other agency has the Fed’s breadth and depth of relevant expertise:

Federal Reserve staff members have expertise in macroeconomic forecasting for the making of monetary policy, which is important for helping to identify economic risks to institutions and markets. In addition, they acquire in-depth market knowledge through daily participation in financial markets to implement monetary policy and to execute financial transactions on behalf of the U.S. Treasury. Similarly, the Federal Reserve’s extensive knowledge of payment and settlement systems has been developed through its operation of some of the world’s largest such systems, its supervision of key providers of payment and settlement services, and its long-standing leadership in the international Committee on Payment and Settlement Systems.

The Fed employs hundreds of extremely bright and very well-informed economists. On my visits to the Federal Reserve, I’ve been amazed at how well the staff work together to assimilate information and perspectives. In my experience, you can ask any one of them a question about pretty much anything, and although the person you’re talking with may not know the answer, he or she will know the name of the person within the Fed who does know. I’ve interacted with lots of different institutions over the years, and have never seen another one that functions so effectively as a single, cohesive neural processor. Certainly the objective record of Federal Reserve forecasts is pretty impressive; see for example the assessments by Christina and David Romer and Faust and Wright.

Doubtless others will be skeptical, trotting out the Fed’s spectacular underestimation of financial problems during 2005-2007. That criticism is of course well taken, and both the Fed and the economics profession as a whole have much more work to do in terms of recognizing exactly what should have been done differently. But let’s be practical. What other institution did a better job? Where in Washington today do you see an agency with the intellectual resources to get this right? Simply squawking that we need a change is not constructive leadership; it’s political finger-pointing and CYA.

Indeed, it’s striking that many of those who were instrumental in relaxing the oversight on Fannie Mae and Freddie Mac now believe that a regulatory body more directly under their political control could do a better job than the Fed. In the mean time, the FHA continues even today to dig us into a deeper hole.

Notwithstanding, the debacles of Fannie and Freddie and the perhaps soon-to-come trainwreck from the FHA also illustrate the primary concern I have about giving the Fed more supervisory authority. The more power the Fed is given in such matters, the greater the political pressures will be from the outside to satisfy certain constituencies, and the less the Federal Reserve will resemble the remarkable institution that Bernanke and I described above.

Read more….

“Federal Reserve Chairman Ben Bernanke said Wednesday that the central bank didn’t know about Lehman Brothers’ use of controversial transactions that moved roughly $50 billion of assets off its balance sheet less than a year before it collapsed.”

Read more….

By Charles Hugh Smith, OFTWOMINDS
By Charles Hugh Smith

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

More articles from Charles Hugh Smith….

The Daily Reckoning

In today’s Daily Reckoning we’ll look at why the current placid market conditions are the calm before another credit storm. At issue is whether the Federal Reserve really intends to withdraw its support of the U.S. mortgage market. At stake is what happens to global capital flows, currencies, and tangible assets if the Fed retreat sparks a rise in interest rates.

But first, what in the shillelagh is the Fed actually thinking?

The U.S. private banking cartel left the short-term price of money unchanged overnight. In announcing its decision it concluded that, “Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

April gold futures were up $17.35.

To be clear, a shillelagh is an Irish cudgel, used to beat things or threaten drunken bar patrons on St. Patrick’s Day. Ben Bernanke is not Irish, as far as we know. But the Fed has used its digital printing press to beat 10-year interest rates into submission. That’s kept a lid on U.S. 30-year mortgage rates and prevented a further implosion in the American housing market.

Believe it or not, that means something to Australian banks. Without a full-time Aussie bank analyst on board, it’s hard for us to say how exposed the Big Four’s portfolios are to American commercial and residential real estate. But it’s safe to say that the quality of bank collateral – both here and in America – is still a big issue, and probably under-reported in the media.

In the States, the irony is that crappy subprime-backed mortgage collateral has been replaced with U.S. Treasury Notes and Bonds. Ultra safe, right? Not!

On Monday, ratings agency Moody’s warned that both the United States and the United Kingdom could lose their AAA rating on sovereign debt if they don’t get domestic finances on a more solid footing (cut spending and reduce borrowing). U.S. banks are absolutely stuffed to the gills with government debt. A ratings downgrade would wipe out a huge chunk of bank collateral. Some improvement in the last two years, eh?

As a new capital importer whose chief creditors are banks in the U.S. and the U.K., you’d think Australian banks would be worried about losing their credit lifeline. At the very least, credit would again be hard to come by if the U.S. suffers another banking shock. But in the meantime, Australia has problems of its own.

Today’s Age reports that, “National Australia Bank revealed yesterday that its $18.4 billion portfolio of troubled credit instruments had caused losses of $1.3 billion over the past two years. It was NAB’s first disclosure of the damage done by the holdings.” Better late than never.

NAB says it has an $18.4 billion portfolio of “troubled credit instruments.” With total assets of $654 billion, $18.4 billion seems like a drop in the bucket. You wouldn’t want to take an $18 billion loss. And by all accounts, NAB says its losses are under control.

But it does make you wonder, doesn’t it? Are Australian banks really as insulated from further loan losses as UK and US banks? If property prices never fall in Australia again (commercial and residential real estate) maybe so. But we have our doubts.

One useful nugget from the NAB story is that the bank as set up a new entity for its “troubled CDOs.” It’s a vehicle for NAB to quarantine its “Specialised Group Assets.” Or, the financial equivalent of locking your crazy syphilitic auntie in the attic and chaining her to the wall. She might not be going anywhere. But at least she won’t be infecting the rest of the household.

NAB has given us a preview of what we suspect the Federal Reserve is going to do. It’s our view that the Fed cannot realistically remove support from the mortgage market. Its announced intention to do so is merely cosmetic. It’s placating anxious holders of dollar-denominated assets. After all, when ratings agencies and your main creditor start publicly voicing concerns about your main product, you have to at least pay those concerns lip service.

But do you really think the Fed can afford to withdraw its support of the U.S. mortgage market? The Fed’s $1.75 trillion quantitative easing program has kept the U.S. housing market from totally imploding. A spike in mortgage rates would dry up already anemic U.S. housing sales. Prices would fall. Millions more who are hanging on for grim death would see their mortgages go under water. And they would begin to walk away.

Putting aside the implications for bank collateral, we’re talking a serious systemic collapse of the U.S. housing market. If you think that unlikely, then you’re not paying attention to just how unsuccessful the Federal loan modification programs have been. Housing prices are not recovering in America, and they won’t for some time.

So if we’re right and the Fed can’t risk tipping the housing market into apocalypse, how will it behave? NAB’s “Specialised Group Assets” are a clue. This is a distant cousin of Henry Paulson’s “Bad Bank” idea at the beginning of the crisis. It was conceived as a government-funded entity that would but all the garbage debt off the banks at some small discount to the theoretical (not market) value of the loan portfolio.

The banks would get rid of the troubled assets and have a clean balance sheet. The loans would be concentrated into a government agency that could modify the loans to its heart content, delaying foreclosure, lowering the interest rate, and lengthening the duration of the mortgage.

Mind you there are heaps of problems with this solution. How will the government agency be funded? Will it create a new class of zombie properties that are carried at above-market valuations and prevent a market-clearing price from emerging in the U.S. market? And won’t it keep millions of U.S. borrowers in debt for many years, stuck with an asset that doesn’t appreciate and a debt that doesn’t amortize?

Who knows?

But we think the Fed will find a way to fund, in some underhanded fashion, a new entity to centralise the risk of the U.S. mortgage market. Risk has been concentrating in fewer and larger institutions over the last few years. But the mortgage debt is still too toxic to be borne by any institution that wants to appear healthy and well capitalised in the market.

The Fed also wants to clear the MBS off its balance sheet so it’s free to engage in more QE (which will be necessary when U.S. deficits cannot be funded by creditors and the interest cannot be paid by tax receipts alone). So, the bad housing debt must be off-loaded.

Of course this is all speculation. But it is impossible now for the Fed and the banks to tolerate a further write-down in collateral. It must be marginalised or exempted from being carried on the main balance sheet. A great mortgage default moratorium is coming, and all the assets tied to the mortgages in question are going to be off-loaded on some credit leper island.

At least that’s how we’d do it if were trying to save a doomed system without freaking out the public and sparking a run on the dollar. Thankfully, saving a bankrupt system is not our job. Surviving it, however, is.

Dan Denning
for The Daily Reckoning Australia

Similar Posts:

• The Collapse of the U.S. Housing Market and Mortgage Bubble
• Bernanke Calls U.S. Economic Recovery “Nascent”
• Commercial Mortgage Backed Securities Are Back
• Property Sector Has Seen the Value of its Assets Wiped Out
• Federal Reserve to Buy $300 Billion In U.S. Treasury Bonds

More articles from The Daily Reckoning….

Zero Hedge

Today will be day 12 of 13 (or something just as silly) that the market has been melting up on no volume: yet another truly ridiculous statistic in the anals of momoism. As David Rosenberg points out: “the market has been able to digest California, Dubai, and Greece” – and this has all been offset by what? Merely promises of ever increasing liquidity and bailouts by the Fed, first domestically, and soon internationally. Have people really forgotten yet again that this is precisely what got ua on the verge of a historic collapse in the first place? Yes, the Fed bailed capitalism out last time around (with about 3 hours to spare), but this time it has gone dodecatuple all in, and unless intelligent, and very rich life, on Mars is discovered pretty quickly, this will all end in ruins (certainly those of the Marriner Eccles building).

Speaking of momentum, as everyone rushes to find ever greater fools (no scarcity these days), the economic condition is forgotten. But the market is a leading indicator skeptics will say… Perhaps, in every other Keynesian situation that did not have global sovereign default on the other side of the crossing. We are now truly in a unique situation where the market is a leading indicator of nothing but greed and stupidity (in retrospect, that’s not all that unique). Here is a good recap of where we have been, and where we are, courtesy of Rosie (who we hope is sufficiently inebriated at this point to note the humor in the current situation).

The equity market at any given moment of time is one part reality and three parts perception. Our friend, Brian Belski at Oppenheimer was on CNBC the other day and claimed that this was turning into a normal economic recovery. And that is what many market participants seem to believe until they don’t believe it any more. Their resolve has been impressive. But if this were a normal cycle, then:

• Employment would already be at a new high, not 8.4 million shy of the old peak.
• The level of real GDP would already be at a new cycle high, not almost 2% below the old peak.
• Consumer confidence would be closer to 100 than 50.
• Bank credit would be expanding at a 14% annual rate, not contracting by that pace.
• The Fed would certainly not have a $2.3 trillion balance sheet
• And, the government deficit would not be running in excess of 10% of GDP or twice the ratio that FDR ever dared to run in the 1930s.

If this were a normal cycle, then there would be a ‘clean’ 5-6 months’ supply of homes on the market, not the 21 months overhanging as is the case now when all the shadow inventory is included from the foreclosure pipeline.

If this were a normal cycle, then the funds rate would not be near zero and one in six Americans would not be either unemployed or underemployed.

If this were a normal cycle, then mortgage applications for new home purchases would not be down 13.9% year-over-year (just reported for the week of March 12) on top of the already depressing 29.4% detonating trend of a year ago.

But the perception that this is turning out to be a normal sustainable expansion is strong and pervasive, although the reality is that this is just a brief statistical bounce aided and abetted by unprecedented government bailouts and intervention.

While we are inundated with that old refrain about “not fighting the tape”, in our view, this is just a glib excuse to stay long the market because of the herd effect, and to be honest, we heard that same trite rhetoric over and over again back in the spring and summer of 2007.

This is not the time to live in the moment but to plan for the future. It is a time to reflect not what the talking heads have to say on bubble-vision but on what history teaches us in the aftermath of a busted asset and credit cycle. The Nikkei enjoyed 260,000 rally points during its post-bubble era and yet the market is still down 70% from the peak; the rallies were to be rented, not owned.

The Dow in the 1930s saw no fewer than 30,000 rally points that would get investors periodically juiced up that the post-bubble economy was heading back on track from the New Deal stimulus. But go back and you will see that the next bull market did not begin until 1954 even if the ultimate lows in the Dow were turned in 22 years earlier. It was a multi-year tumultuous period that was racked by volatility and manic market performance. The key to success over the long haul was to immunize the portfolio from the massive ups-and-downs, ensure that you were getting paid to take on risk as opposed to paying for taking on risk, and a pervasive focus on capital preservation, dividend yield and dividend growth among blue-chip stable cash flow companies, and income-generating securities, including corporate bonds for those entities that had the capacity to survive.

Despite massive attempts at monetary and fiscal reflation, which did produce periodic sugar-high influences on growth, government bond yields did not bottom until 2003 in Japan and 1941 in the U.S.A. — over a decade after the initial credit collapse. This is not the story that a ‘live in the moment’ investor may want to hear today, but even as the market lurches forward, the economic outlook is more uncertain than is commonly perceived and we believe investors are taking on too much risk to be overweight equities at this time. The primary trend towards consumer frugality, liquidity preference and deflation has not vanished just because of the impressive bear market rally in risk assets that has occurred over the course of the past year.

Yet nobody cares, as the Pied Piper of Monetary Insanity once again leads the Wall Street rats to the euphoria of irrational exuberance, followed promptly by the guillotine. But everybody forgets the inevitable second part.

And speaking of the credentials of the Pied Piper, it would be useful if at least the Fed could keep its swan song song consistent.

What is most interesting is to see how the Fed’s view of the housing market has changed over the past four months (then again, it’s run by the same Chairman who told us that the problems in housing and subprime mortgages would be contained just a short three-years ago):

• November 2009: “Activity in the housing sector has increased over recent months.”
• December 2009: “The housing sector has shown some signs of improvement over recent months.”
• January 2010: No comment.
• March 2010: “…housing starts have been flat at a depressed level.”

So where should we look to for the next focus of risk flaring? Why, to our beloved creditors of course.

So far, the market has been able to digest California, Dubai, and Greece, but what about China? That could be the next shoe to drop (before Iran — have a look at Israel and the Crisis with Obama on page A21 of the WSJ) specifically the new spat between the U.S. and China over currency policy. Make no mistake, if China does not make a move away from the peg with the U.S. dollar over the next few weeks, there is a very good chance that trade sanctions are going to come our way. April 15 looms large as that is the day when the U.S. Treasury could well declare the Renmimbi as being “manipulated”.

Gold will be a very nice safe haven in this environment (also have a look at Martin Wolf’s article today on page 9 of the FT — China and Germany Unite to Weaken the World Economy). Also see Prompted by Economy, Lawmakers Press China to Address Value Of Its Currency on page B3 of the NYT.

Who cares about any of this, one may ask. The market can only go up, up, up. Yes, if one considers price discovery to be a function of micro volume block buying by algos who have only been programmed to bid the market up. We broke key resistance levels in the past 2 days, and nothing: no major short covering spree, no influx of new buyers. The market has become a stealth melt up mechanism, driven by who knows what money (mutual funds are out), with shorts out. This is precisely the environment that allowed the market to go bidless overnight in 1987. When will this happen – nobody knows. Although if we continue to antagonize the only major foreigner who has allowed the Fed and the government to embark on its ludicrous policy of fiscal and monetary insanity, we will surely find out very soon.

More articles from Zero Hedge….

Zero Hedge

Today Ben Bernake and Paul Volcker will lead Panel 1 at a hearing of the House Financial Services Committee on “Examining the Link Between Fed Bank Supervision and Monetary Policy.” With the just announced news that the Volcker Plan is dead after all, we fully expect this to be the last public appearance of the former Fed chairman before he is stuffed back in the closet for good. After all with 8.33 bid to cover for 1 year Ukranian bonds what can go wrong?

The hearing can be seen live at 2 PM eastern at the following link.

Here is a list of all participants in today’s hearing.

Witness List & Prepared Testimony:

Panel One:

• The Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve
• The
  Honorable Paul Volcker, Chairman of the President’s Economic Recovery
  Advisory Board, Former Chairman of the Federal Reserve

Panel Two:

• Mr. Anil Kashyap,
  Edward Eagle Brown Professor of Economics and Finance and Richard N.
  Rosett Faculty Fellow, Booth School of Business, University of Chicago
• Mr. Allan Meltzer, The Allan H. Meltzer University Professor of Political Economy, Tepper School of Business, Carnegie Mellon University
• Mr. Rob Nichols, President and Chief Operating Officer, Financial Services Forum
• Mr. Jeffrey L. Gerhart, President, Bank of Newman Grove, on behalf of Independent Community Bankers of America (ICBA)

Official prepared remarks can be found here as soon as it is released.

More articles from Zero Hedge….

Zero Hedge

Via UBS Financial Markets

Currency Curse Continues Complicating Life For Commentators – Market pundits scrambled to fill up air time by attributing the market movement to this data or that comment. The market rally catalyst was quite singular however.
As rumors spread of a firmed up Greek rescue package, and the S&P suggested it was shifting Greece out of ICU, the Euro soared. It spiked 0.7% which is a significant move in the currency arena.

The result was immediately evident and dramatic. Gold spiked $20 and oil shot up over $2. Those moves came long before the FOMC statement. Those moves were not influenced by some piece of economic data. Those moves were not the result of some shift on the outlook for the President’s health plan. Those moves were the direct result of the jump in the Euro and the correspondent weakening of the dollar.

We believe that the Euro/Dollar move was also the primary catalyst in the stock market. Given the action in gold and oil, the stock market’s reaction was rather mute. With such a strong tailwind, you might have expected something like a 100/150 point move in the Dow. The real question on stocks was what was holding stocks back given the currency boost.

The restrained action in stocks was also noted by the WSJ (albeit from a slightly different direction). They discussed it in a story headlined – “For the Dow, the Quietest 6-Day Steak”.

Although the stock market was muted, it did move the ball. The S&P closed above 1159. It hadn’t closed at a level that high since early October 2008. The Dow moved up 44 points but failed to take out the high of 10725, which leaves the outside risk of a Dow Theory non-confirmation as a lingering possibility.

The bulls got the S&P clearly through 1150 but failed to close above the backup certification at 1160. It was a victory but not quite the rout they were hoping for. Crossing 1150 failed to inspire a sudden rush of short-covering, which many presumed would occur. Breaching a key target should not be accompanied by a yawn.

Takeaways From The FOMC Statement – As the pundits are noting this morning, the FOMC statement was not substantially different from the statement of January 27th.

Of note (to us) is the change in wording on the labor situation. In January’s note, they said “that the deterioration in the labor market is abating”. Yesterday, they said “that the labor market is stabilizing”

So, in January they saw the labor market worsening but at a slower pace. Yesterday, they suggested things were stabilizing – in essence – bottoming out.

Overall, the new statement seems to suggest that the Fed is clearly homing in on jobs. That may be their guideline for the timing of any policy change. They are also focused on the housing market. There was also a hint that business inventories had re-built to somewhat worrisome levels.

The Greek Problem Has Not Exactly Disappeared – While the S&P appears to have been mollified and front page headlines are fading, the concerns about Greece and the Euro continue. Here’s a bit from a piece on Bloomberg:

March 17 (Bloomberg) — Harvard University Professor Martin Feldstein, who warned almost two decades ago that the euro would prove an “economic liability,” said Greece’s austerity plan will fail and the country may quit the single currency to fix its fiscal crisis.

Under pressure from investors and fellow policy makers, Prime Minister George Papandreou’s government is striving to knock four percentage points off its budget gap this year from 12.7 percent of gross domestic product and has vowed to meet the EU’s 3 percent limit in 2012 for the first time since 2006.

“The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy,” Feldstein, an adviser to U.S. presidents since Ronald Reagan, said in a March 13 interview in Geneva. “The alternatives are to default in some way or to leave, or both.”

His diagnosis clashes with that of European Central Bank President Jean-Claude Trichet, who calls Greece’s strategy “convincing” and rejects as “absurd” any speculation it might leave the euro zone. Investors nevertheless aren’t ruling out Feldstein’s analysis. Billionaire George Soros said last month that the euro “may not survive,” and credit default swaps indicate a 22 percent chance Greece will default within five years, up from 16 percent a year ago.

The judgment of Feldstein, 70, a former contender to chair the Federal Reserve, marks his latest broadside against the single currency five years after he said its rules generated a “very strong bias toward large chronic fiscal deficits” and more than a year since he first suggested the 16-nation bloc may splinter.

In addition to the Bloomberg story, today’s NYT has an article titled: “Ailing Euro Seen As A Signal of Deeper Woes on Continent”. It does not portray a rosy future for either the Euro or the European Union.

Further, in today’s FT, Martin Wolf analyzes the posture of Germany and China toward debtor nations. He believes that if their current attitudes are continued, global deflation could result. That could make “double dip” seem pleasant.

Cocktail Napkin Charting – Tuesday, we said that the napkins suggested resistance in the S&P looked like 1156/1160. Yesterday’s high was 1160. For today the napkins suggest resistance is likely 1166/1170. We’d love to see some sign of a breakout if that level is breached. Support looks like 1148/1151.

Today – Bernanke testimony could be a factor but continue to watch the dollar. Action in crude and gold will help you measure influence level.

At any rate, in honor of St. Patrick and at the risk of becoming the Salman Rushdie of the Hibernians, I will reveal to you a secret Irish prayer that St. Patrick gave the Irish in 452 A.D. For over 15 centuries it has been whispered in the ear of each Irish lad on the day before he receives his first corkscrew.

“For those who are with us
May God turn their fortunes bright
For those who are against us
May God turn their hearts toward us
And if God cannot turn their hearts
May He at least turn their ankles
So we may know them by their limp!”

Consensus: Up the rebel, up your spirits, up your glasses and let the market take care of itself.

Trivia Corner

Answer - The one word that fits in both blanks to make sense of the sentence is “reverse” as in” “Esrever is reverse in reverse.”

Today’s Question - Silly Rebus – If “CCCCCCC” is “Seven Seas”, then what are these: “JOANB” (A crime?); theTHE (Alpha & Omega); ATTE (the critical point).

History Trivia

On this day in the year of our Lord 389, there lived a foin broth of a lad who was…. dependin’ on the boyographer ye read: a Spanish peasant, a French herdschild, a Celt from Bannavem or a Gael from Dumbarton, Scotland. At any rate, at age 16 this lad was kidnapped by pirates and sold to one of the only 2,500 Irish kings that were reigning at the time. He served this King as a swineherd mucking out stys and such. For six years he labored in slavery, poorly fed; often beaten; surrounded by people who spoke a language he couldn’t understand. Then he discovered that six years of such treatment was equivalent to a parochial school education. So he became a Catholic and escaped to France to become a monk.

Upon becomin’ a bishop he mistakenly perceived the French to be a bunch of snail eatin’, grape juice drinkin’, truffle huntin’ toads. He longed for the emerald green fields of God’s own land and the special amber holy water found there.
He returned to Ireland which was still under the influence of a group of heathen English druids and a few nocturnal banshees. Nonetheless, he set about convertin’ and baptizin’.

Unfortunately Patrick was not an MBA and, therefore, did not know the law of diminishin’ returns. So he managed to baptize over 120,000 people, built over 300 churches, chased the snakes out of Ireland, developed the shamrock and established a factory to make pennants with the slogan “Go Notre Dame”.

To celebrate the life of this fabulous man, sing ye some sad songs, talk ye merrily of battles and take ye a wee nip of somethin’ till ye might be seein’ da little people.

It was not the little people that bothered markets yesterday. It wasn’t even the little changes in Fed language. What moved the markets was movement in the Euro – and that was not so little.

More articles from Zero Hedge….

By Karl Denninger, The Market Ticker

I know you’re not going to listen to me.

I’m going to say it anyway, because as a concerned citizen of The United States of America, I must.

You are making a grave, perhaps nation-ending mistake.

Attempting to “deem” the Health Care bill passed when it has not actually been voted on is not Constitutional.  Article 1, Section 7:

All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by Yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.

This is the black-letter law of the land. 

There are millions of Americans who are extraordinarily pissed off right now.  Some of them, like me, write scathing columns on The Internet or we rant on Talk Radio and Television (such as Judge Napolitano)

But some just smolder.  Some remember the other founding document of our Republic, The Declaration of Indpendence, which says, in part:

That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

That doesn’t sound so good.  What has tempered these people is largely what always has in all nations, that is:

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed.

Indeed.

Neither you or I know where the line is for that cross-section of the citizens in this land.  I cannot speak for them, for I am not inclined toward the sort of actions that they are, nor do I countenance them.  As such I’m not exactly on those folks’ ”A list”.

In fact I fear the day they decide to express their disgust, for while in singular number those expressions are horrifying, as a group such actions harken to a time I hope we would never revisit in this nation.

But I do understand, and see, that they are seething in anger at what has befallen this once-great country.

They have watched as thirty years of corruption in Washington DC has turned our economy and government into a bad joke.

They have watched their jobs go overseas to a Communist Nation for the benefit of a handful of corporate oligarchs, while Washington chortles.

They have watched banksters do everything in their power to imprison them in debt, including bribing Congress to remove usury laws, “reform” bankruptcy so as to render a significant percentage of the population under effective indentured servitude (allegedly prohibited by the Constitution) while the very same banksters declare bankruptcy at the drop of a hat and stick lenders with losses, and while these very same banksters peddle fraudulent securities, cook their balance sheets and generally defraud everyone in the nation – then force the taxpayers, at gunpoint (quite literally, if you remember the fall of 2008 – you were in the room with Bernanke and Paulson when they threatened tanks in the streets) to bail them out.

Finally, they have watched Health Care turn into a monstrous mess, with cost increases of 10, 20 even 30% or more a year.  These costs are expanding at that rate because ambulance chasers like former Presidential Candidate John Edwards make millions while Congress has passed laws forcing Americans to eat the development expense for every advanced medical technology over the last 30 years.  Congress has refused to demand that medical practitioners bill everyone the same price for the same procedures and drugs.  Congress has passed laws exempting medical providers and insurers from anti-trust law, so those aggrieved cannot sue in private causes of action for these abuses.  And finally, Congress has forced all of us to eat the cost of care for illegal invaders who commit their first crime with their first step over our national boundary.  All of these abuses and more could be addressed, but none of them are in the bill you wish to advance, and that, Madame Speaker, is intentional.

But all of this, while it has been outrageous and even criminal, has been, for the most part, Constitutional.  It may be the stuff of a Banana Republic, and it may violate equal protection of the law (a founding principle and in fact a guaranteed right), but Congress has never cared about any of that in my 47 years on this planet.

Witness all the laws you, Madame Speaker and the rest of the Government (including this Health Care plan) do not have to obey while the rest of us do under pain of fine or even imprisonment.

What you propose to do now, however, is not Constitutional.

Rather than negotiate, advance and pass something like my four-point plan that would, along with dropping anti-trust protections and ending the practice of preventing reimportation of drugs and devices, attack the problem at the source, you instead are putting forward the Senate’s 2200-page monstrosity.

You are doing so because this bill is not about Health Care at all.  It is about revenue, and you know it.  It is about the fact that The Federal Government is running into a wall at warp speed trying to furiously cover up all the fraud and scams in the financial system while at the same time spending over $1.5 trillion we do not have to replace collapsed consumer demand. 

You must raise revenues, and you know it – or this ship called “The USS Treasury” sinks beneath the waves, and the first sacrifices to go overboard will be all the Seniors on Medicare and Social Security – not by choice, but by force of fiscal insolvency.

In short, this is just another Washington scam. 

But this time you’re going too far, and you’re taking a horrific risk. 

You must not, Madame Speaker. 

You must instead face this nation and tell the truth.

We cannot fund the scams and frauds any more.  Those who committed them must go to prison, even if they’re campaign contributors.

We cannot borrow 10% of our GDP and spend it forward, as the CBO projects we will try, in a futile and permanent attempt to replace consumer demand.

If we do not stop this idiocy we will soon be unable to fund Social Security, Medicare and Welfare in all its forms, leading to an immediate and critical breakdown of our society.

The mad reach for revenue, Madame Speaker, is why you’re in such a hurry – and you know damn well I’m right.

If you succeed, we will get your tax bill now and the promised health care never. 

That’s a fact.

There is a bright white line for every person in this country who has taken an oath to uphold our Constitution.  It is in different places for each of those individuals, but you had better believe it exists.

For some it will be crossed if you try to disarm Americans, as was attempted after Katrina. 

For some it will be crossed if you try to occupy their homes. 

And for some, it may be crossed if you attempt to “deem” this bill passed, when The House has not actually passed it.

I pray this evening I am wrong, and that for no material number of people – indeed, for no one person – that is where their personal line is.

But I am reasonably certain that this prayer will be offered in vain.

Therefore, the choice is yours, not mine, for all I can do in furtherance of my hopes (and abeyance of my fears) is pray. 

You, Madame Speaker, on the other hand, can act to quell this idiocy.

Or you may tempt fate, you may tempt the millions of people who have swore an oath to defend and uphold The Constitution and, having done so, went to war throughout our history.  Many of those people, along with millions more who never wore a uniform stand today in defense of that “quaint” old piece of parchment – but not in defense of you, nor any other person.

You may also provoke States to assert their long-dormant 10th Amendment rights for real, not in some quaint “one off” regarding intra-state weapons manufacturing.  That, Madame Speaker, harkens back to a time I’d rather not revisit as well.

You will almost certainly lose your Speaker’s Gavel come November, as the mortal sin against the Constitution of deeming a bill passed without actually voting on it is so inimical to a republican form of government and displays such gross arrogance that you have forfeited your right to wield that gavel by mere contemplation of the act. 

I am quite certain that I stand with millions of other Americans who are willing to put forth whatever effort is necessary to see that occurs come November – at the ballot box – whether you proceed with your abhorrent plan or not. 

But what I pray for this evening, as I complete my day and offer homage to God before retiring, is that your office, and those of your fellow Democrats who are about to violate your sacred oaths willfully, intentionally, and with malice aforethought – is all you lose.

More articles from the Market Ticker….