Ben Bernanke Lied Twice in His Last News Conference and JapanRUS.

Bernanke lied twice on his last news conference as Chairman of the Federal Reserve.

1. He lied when he said that the Fed did not see the housing bubble coming. That is just false. I wrote about it here:

In September, 2007 the Fed that supposedly was clueless issued this ominous warning:

At its September meeting, the FOMC lowered its target for the federal funds rate 50 basis points, to 4-3/4 percent. The Board of Governors also approved a 50 basis point decrease in the discount rate, to 5-1/4 percent, leaving the gap between the federal funds rate target and the discount rate at 50 basis points. The Committee’s statement noted that, while economic growth had been moderate during the first half of the year, the tightening of credit conditions had the potential to intensify the housing correction and to restrain economic growth more generally. The Committee indicated that its action was intended to help forestall some of the adverse effects on the broader economy that could otherwise arise from the disruptions in financial markets and to promote moderate growth over time. Readings on core inflation had improved modestly during the year, but the Committee judged that some inflation risks remained, and the Committee planned to continue to monitor inflation developments carefully. The Committee further noted that developments in financial markets since the last regular FOMC meeting had increased the uncertainty surrounding the economic outlook. Accordingly, the Committee would continue to assess the effects of these and other developments on economic prospects and remained ready to act as needed to foster price stability and sustainable economic growth.
And how could the Fed not have known that the collateral used in the money markets based upon many failed loans was not deteriorating? How long could the scam of bad collateral go on without big money fearing the bogus paper that were these mortgage backed securities.

These MBS were used as collateral in the money market, which takes good paper and the money markets are assumed to be safe. They have to be safe. But that didn't stop banks and investment companies from using crap bonds as collateral. How the Fed didn't see this is hard to understand. I don't believe the story.

2. He said he wanted a faster recovery and is disappointed in the slow recovery. I don't believe it. As Gary A, I wrote at Seeking Alpha that the Fed is in a box. I believe that collateral is in shortage. I am not the only one. So does Tyler Durden of Zero Hedge. The only reason that the QE must taper is that QE is choking credit as we speak! How did Bernanke expect the economy to grow when he is controlling the collateral that is needed to guarantee new private loans? QE is in essence, crowding out new lending, although with low interest rates, banks may not do much of it anyway! 

So, we are in a liquidity trap, meaning that the banks don't want to provide liquidity to anyone except themselves as long as they can't make money on it through higher interest rates. Yet higher interest rates could destroy the bankers' bet on low rates! That would put the banks at risk. 

This is one damn mess that could have been avoided if there had been no housing bubble and crash and if derivatives had not been so prevalent in lending. Bankers want to protect banks, so derivatives allow the banks to place the risk upon the borrowers, so long as interest rates stay low. 

The Fed should have stopped the bubble in its tracks. and should admit that we can't have a strong financial recovery. JapanRUS.

There is only one way to get money to small and medium business with the banks in this shape, and that is through state banks like Ellen Brown advocates and like we see in North Dakota. There is simply no other way. 

Going back to the mess, we now see that in a healthy economy, interest rates are higher. But the banks have bet on interest rates being low, taking the floating but low rate side of the swap they issue borrowers. The borrowers take the high fixed rate. That works great until interest rates rise.

So, going forward, as Shah says here, we will simply not have enough government debt. Yes, that is right. We won't have enough pristine bonds to work as collateral. I have written about this as well. What happens when this situation occurs is what happened in the last bubble and crash. The collateral got less pristine and less pristine, until crap bogus AAA rated bonds based on doomed mortgages were used as necessary collateral in the capital markets.

We could be facing that again, but maybe with less of a bubble to help the banks make a profit? This is indeed one big mess.


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