Best of the Week
Most Popular
1.Stock Market in DANGER of Strangling the Bears to Death - Nadeem_Walayat
2. Germany Pivoting East, Exit US Dollar, Enter Gold Standard - Jim_Willie_CB
3.Flight MH17 – Kiev Flash Mob's Last False Flag? - Andrew_McKillop
4.Stock Market Crash Nightmare! - Nadeem_Walayat
5.Gold - The Million DOLLAR Question... - Rambus_Chartology
6.Gold And Silver – BRICS And Germany Will Pave The Way - Michael_Noonan
7.The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - Nadeem_Walayat
8.The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - Felicity Arbuthnot
9.Which Way is Inflation Blowing? Watch Commodities - Gary_Dorsch
10.U.S. Economy Quarterly Review and Implications for 2014-2015 - Lacy Hunt
Last 5 days
Gold Price and U.S. Dollar’s July Rally - 28th July 14
Second Quarter Corporate Earnings: Marching Toward a Strong Economic Recovery - 28th July 14
Time to Put a New Economic Tool in the Box - 28th July 14
Mossad in Gaza, Ukraine and the Cult Of The All-Powerful Elite - 28th July 14
Elliott Wave Gold Price Projection Since 1970 - 28th July 14
Investors Remain Uncertain As Stock Fluctuate Near Long-Term Highs - Will The Uptrend Extend? - 28th July 14
The Mass Psychology Of Decline - 28th July 14
Will the US Destroy the World? - Don’t Expect to Live Much Longer - 28th July 14
GDM and GDXJ Gold Stocks In-depth Look - 28th July 14
Stock Market One FINAL High? - 28th July 14
What It Means - Paradigm Collapse And Culture Crisis - 27th July 14
Wall Street Shadow Banking: You Can’t Taper a Ponzi Scheme: “Time to Reboot” - 27th July 14
6 Tips for Picking Winning Gold Mining Stocks - 27th July 14
Israel's War on Children, Exterminating the Palestinians Future - 27th July 14
Guilt By Insinuation - How American Propaganda Works - 26th July 14
Surprise Nuclear Attack On Russia To Liberate Ukraine - 26th July 14
Use "Magic" Of Gold/Silver Ratio To Greatly Increase Your Physical Holdings - 26th July 14
Derivatives Market Species Origins - Abuse, Props and Risks - 26th July 14
Stock Market Manipulation and Technical Analysis - 26th July 14
China’s Stock Market Finally Looks Like A Buy - 26th July 14
Ed Milliband Fears Israel Jewish Fundamentalist Gaza War Massacres Backlash - 26th July 14
The Big Energy = Power Battle Is Coming - 25th July 14
USrael - Zionists in Control of America's Goyim Brainwashed Second Coming Slaves - 25th July 14
More Weakness Ahead for Gold Miners - 25th July 14
Gold Price Strong Season Starts - 25th July 14
Geopolitics and Markets Red Flags Raised by the Fed and the BIS on Risk-taking - 25th July 14
Gold Lockdown Until Options Expiry - New Singapore Gold Contract Threatens Price Manipulation - 25th July 14
The Bond Markets, Black Swans, and the Tiny Spirit of Santo - 25th July 14
No Road Map For Avoiding The Future - 25th July 14
Israeli War Machine Concentrating Women and Children into UN Schools Before Killing Them - C4News - 25th July 14
Israeli Government Paying Jewish Fundamentalist Students to Post Facebook Gaza War Propaganda - 25th July 14
Why the Stock Market Is Heading For A Fall - This Time Is Not Different - 25th July 14
An Economic “Nuclear Strike” on Moscow, A “War of Degrees” - 25th July 14
BBC, Western Media Working for Israeli Agenda of Perpetual War to Steal Arab Land - 25th July 14
Ukraine: What To Do When Economic Growth Is Gone - 24th July 14
Stock Market Clear and Present Danger Zone - 24th July 14
The Five Elements to Creating a Something-for-Nothing Society - 24th July 14
Instability is the New Normal? - 24th July 14
Israel's Suicide Bombers Over Gaza - 24th July 14
EUR-AUD Heads Into The Danger Zone - 24th July 14
Tesco Supermarket Death Spiral Accelerates as Customers HATE the Mega Brand - 24th July 14
Ukraine MH17 Crisis - Best Remember Who Your Friends Are - 24th July 14
Three Reasons Why Gold Price and Gold Stocks Will Rise - 24th July 14
HUI Gold Bugs Fighting To Break Downtrend - 23rd July 14
What Putin Knows About Flight MH17 - 23rd July 14
Why Microsoft Will Continue to Rebound, Huge Upside Potential - 23rd July 14
Will Putin Survive? - 23rd July 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

Fed Credibility Bubble Bursts as Too Big to Fail General Motors Goes Bankrupt

InvestorEducation / US Bonds Jun 01, 2009 - 07:28 AM GMT

By: Money_and_Markets

InvestorEducation

Diamond Rated - Best Financial Markets Analysis ArticleMartin Weiss writes: General Motors used to be among the giant companies widely considered “too big to fail.”

Almost all of Wall Street said a GM bankruptcy was “unthinkable.” Most Americans didn’t even consider it as a real possibility. And as recently as February, outgoing and incoming administration officials were still insisting they would never let it happen.


But three and a half years ago, in our October 11, 2005 edition, “GM Headed for Bankruptcy,” I warned you that “too big to fail” was a myth … that the myth would be shattered … and that the final day of reckoning for General Motors would be in federal bankruptcy court.

Now, that day is here.

General Motors, once the world’s largest company, will be in a New York bankruptcy court, filing for Chapter 11 later today, and it’s high time to declare that …

“Too Big to Fail” Has Failed

Plus, it’s high time for all Americans to confront a new, more sober reality: The government is not nearly as powerful as advertised.

Case in point: If you’re among those who thought Fed Chairman Ben Bernanke had the power to end this debt crisis, think again.

Despite the most massive bond buying spree in the Fed’s 95-year history, Bernanke has failed to stem an avalanche of selling by bond investors … failed to stop bond prices from plunging … and failed to roll back a rising tide of long-term interest rates.

How is this possible?

For a quick review of the events, just rewind the clock to the Fed’s March 18 press release, when Bernanke launched his newest, high wire act with great fanfare and bravado.

At that time, despite $700 billion on TARP funds authorized by Congress, the U.S. Treasury Department was making virtually no headway in unfreezing credit markets. The world’s largest lenders were still in gridlock. Most forms of credit were still unavailable to even the most worthy borrowers. The credit-addicted global economy, suddenly deprived of its regular debt fix, was in convulsions, collapsing uncontrollably.

So, in a desperate attempt to jump-start the credit markets, Bernanke dared go where no other Fed Chairman had gone before.

He dropped short-term rates to zero.

He committed to buying $300 billion in long term Treasury securities plus another $100 billion in government agency securities.

He even promised to buy up to another $750 billion of mortgage-backed securities.

Total new commitments in that one announcement alone: $1.15 trillion.

But by going so far out on a limb so fast, it was impossible for the Fed Chairman to estimate what the impact might be. There was no historical precedent. No way of knowing.

He didn’t know how worldwide bond investors might respond.

He couldn’t begin to guess to what degree his actions might rekindle their inflation fears or damage their trust in the credit of the U.S. government.

He had no basis for estimating how many investors would shun or dump U.S. bonds … how far they could drive down bond prices … or how far they might push up long-term interest rates.

Worst of all, if, for whatever reason, his new venture truly upset the equilibrium between the supply and demand for bonds, he had no Plan B.

In a nutshell, on March 18, Ben Bernanke jettisoned his balancing poles, abandoned any policy safety net and launched a stunt that would make the most daring tightrope walker tremble with fear.

And unfortunately, right now, even before all the moneys have been spent, the enterprise is already beginning to fail.

The critical events …

The Fed has bought #130.5 billion in Treasury bonds, but ...

Event #1 Huge Fed Purchases of Treasuries

Since March 25, the Fed has been buying Treasury notes and bonds like they were going out of style.

The Fed kicked off the program with a purchase of $8 billion and followed up with another $7.5 billion two days later. Since then, the Fed has jumped into the Treasury-bond market with average purchases exceeding $5 billion at least 10 times per month.

Total bought so far: $130.5 billion.

The Fed has failed to stop Treasury bond prices from falling sharply!

Event #2 Despite the Fed’s Giant Purchases, Treasury Bond Prices Have Continued to Plunge

Instead of rising or stabilizing as Bernanke had hoped, Treasury bond prices have fallen sharply.

Sure, bond prices momentarily jumped higher in the wake of the Fed’s landmark March 18 announcement. And yes, they have typically enjoyed mini rallies whenever the Fed bid up the market with some more big bucks. But in the final analysis, bond prices have wound up sharply lower and long-term rates sharply higher.

Event #3 Mammoth Fed Purchases of Mortgage Bonds

Plus, the Fed has bought $507 billion in mortgage-backed securities, but ...

The amounts the Fed has poured into the market for mortgage-backed securities (MBSs) make its Treasury purchases look small by comparison: The Fed launched the program with a $10 billion purchase on January 7, ramping it up quickly from there, and buying up to $33 billion a pop by late March.

Total bought so far: A whopping $507 billion!

Event #4 Despite the Fed’s Mammoth Mortgage Bond Purchases, We’ve Just Seen a Sudden Collapse in Mortgage Bond Prices

The Fed has now suffered an even bigger failure ...

For a while, it seemed the Fed was able to hold the line, keeping the price on a benchmark long-term mortgage bond near the 100 level.

But last week, the market collapsed. And even with a modest recovery on Friday, there is no mistaking the abject failure of the Fed to keep mortgage prices up and mortgage rates down.

This all raises the simple but unanswerable question:

Now what?

Since the Fed has no Plan B, what does it do next?

Does it print more money, buy more bonds and pray that despite no change in policy, it will magically see a change in results?

Does it try to repeal the law of gravity — to somehow prevent sellers from selling and falling prices from falling?

Does it seek to travel back in time — to somehow reverse the blunders of past Fed Chairmen who helped create today’s debt monster in the first place?

Sorry, but those “solutions” are both insane and impossible.

Why? Why are they insane and why is Bernanke’s policy a failure?

Because his tight wire is flanked by two, conflicting — and destabilizing — forces, only one of which can possibly be countered at any one time.

Destabilizing Force #1 Too Much NEW Debt

The Treasury alone will need to issue a whopping $1.84 trillion in net new Treasury securities this year — just to finance the deficit expected by the Obama Administration.

That excludes any larger deficit due to a worse-than-expected decline in the economy.

It excludes any costs for credit that goes bad (among the trillions that the government now guarantees).

It even excludes the $50 billion additional funding now being contemplated for General Motors … or the hundreds of billions now being demanded by cities and states … or the uncountable billions from any future shoe to fall.

Yes, a lot of people seem to think the Fed can just print all the money it needs and inflate away the problem. But these people have conveniently ignored …

Destabilizing Force #2 Too Much OLD Debt

According to the Fed’s Flow of Funds Report (pdf page 67, Table L.4), at the end of last year, there were $14.5 trillion in Treasury securities, agency securities and mortgage-backed securities outstanding in the world — precisely the ones the Fed has been trying to buy up this year.

The big dilemma: If just 10 percent of those are dumped on the market, it would trigger the sale of $1.45 trillion worth, easily overwhelming the Fed’s purchases.

The bigger dilemma: The main reasons investors sell — fear of inflation and damage to the U.S. government’s credit — are, themselves caused by the Fed’s own buying. In other words, the more the Fed buys, the more our bond investors are motivated to sell.

Bottom line:

  • To the degree the Fed rushes into the market to deal with destabilizing force #1 — too much new debt — it merely aggravates destabilizing force #2 — too much old debt. And …
  • Ultimately, there’s only one way the Fed can resolve force #2 and convince investors to hold on. It must abandon its efforts to counter force #1. It cuts back or stops its money printing to buy up bonds.

Just a future scenario? Not quite.

My charts above demonstrate that this is already beginning to happen right now: Mr. Bernanke’s daredevil tight wire act is already a failure.

The great day of reckoning of this massive government rescue enterprise is already approaching.

My Recommendations

Do not be deceived by the Fed’s supposedly almighty powers.

Do not get lured in by Wall Street’s hype.

And whenever anyone tells you that a company is “too big to fail,” just remember General Motors.

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Steve Gilmore
06 Jun 09, 20:02
"Too Big to Fail Has Failed"

this is a very interesting article. It's also a great website.

Steve


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014