Best of the Week
Most Popular
1.US Dollar Crashes, Gold And Bitcoin Skyrocket As Economic Recovery Lie Is Exposed - Jeff_Berwick
2.Now Obama Warns Americans to ‘Be Prepared’ for Disaster… What Does He Know? - Jeff_Berwick
3.EU Referendum - Britain's Immigration / Migrant Crisis Explained - Nadeem_Walayat
4.EU Referendum - British People vs Establishment Elite, Vote LEAVE an Act of Defiance! - Nadeem_Walayat
5.Prominent Billionaire Investors Warn of Financial Crash, Quietly Position Themselves - MoneyMetals
6.Bankers Warn of BrExit Financial Armageddon if British People Vote for Freedom - Nadeem_Walayat
7.Bad U.S. Jobs Report Prompts Stocks Bear Market Rally Towards New All Time Highs! - Nadeem_Walayat
8.Gold And Silver – Friday May Have Marked A Pivotal Turnaround - Michael_Noonan
9.EU Referendum - British People vs Establishment Elite, the Illusion of Democracy and Freedom - Nadeem_Walayat
10.Felix Zulauf: Monetary Stimulation Creates Bubbles, Not Prosperity Nor Growth - GoldandLiberty
Free Silver
Last 7 days
Venezuela vs. Ecuador (Chavismo vs. Chavismo Dollarized) - 25th June 16
Gold, Silver And PM Stocks Summer Doldrums Risk - 24th June 16
Here’s Why China “Economic Hard-Landing” Worries Are Overblown - 24th June 16
Jubilee Jolt: Markets Crash, Gold Skyrockets as Britain Takes Brexit - 24th June 16
BrExit Morning - New Dawn for Britain, Independence Day! - 24th June 16
LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - 24th June 16
Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - 24th June 16
EU Referendum Shock Results Putting BrExit LEAVE in the Lead Hitting Sterling Hard - 24th June 16
Final Opinion Poll Gives REMAIN 52% Lead, Bookmakers, Markets and Pollsters ALL Back REMAIN Win - 23rd June 16
Does BREXIT Matter? Outlook for Sterling - 23rd June 16
Keep Calm and Vote BrExit - Last Chance to Break Free of EU Superstate - 23rd June 16
Here’s the Foreign Policy Trump and Clinton Really Want - 23rd June 16
Details Behind Semiconductor Stocks Leadership - 23rd June 16
Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - 23rd June 16
BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - 22nd June 16
Proof that the Gold Bears are Wrong - 22nd June 16
Here’s a Trillion-Dollar Investment Opportunity for Those Few with No Debt - 22nd June 16
BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - 22nd June 16
Increase In U.S. Rig Count Will Not Cap Oil Prices - 22nd June 16
Are Copper and China Stocks Set to Rally? - 22nd June 16
SPX May Break Its Trendline - 22nd June 16
Believe it or Not: More Kids Live At Home Now than Since The Great Depression - 21st June 16
EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - 21st June 16
British Pound Outlook - BREXIT, Europe and You - Does your vote matter? - 21st June 16
Fascist Victory Behind the European Union - 21st June 16
EU Referendum Opinion Polls Analysis Shows Strong Momentum in REMAINs Favour - 21st June 16
Is It Time to Dump Gold and Buy Platinum? - 21st June 16
Could Central Bankers Be Gold and Silver's BIGGEST Allies? - 20th June 16
Words Still Mean Things – Brexit With Graham Mehl - 20th June 16
Baroness Warsi the Manchurian Candidate Quits LEAVE for REMAIN, Boris Johnson Next? - 20th June 16
FTSE Soars, Stock Markets Bounce on LEAVE Polls Surge, Bookmakers Widen BrExit Odds - 20th June 16
Brexit Would Trigger Devolution of Europe - 20th June 16
Stock Market Week Of Uncertainty - 20th June 16
Will Gold’s Bullish Price Chart Outperform Gold’s 5 Bearish Indicators? - 20th June 16
Bonds And Stocks At All-Time Highs: Are Markets Confused Or Broken? - 20th June 16
Silver Sleeping On the Job - 19th June 16
BrExit Odds Sink, REMAIN Polls Boost by Jo Cox Killing by Radical Right Extremist, Conspiracy? - 19th June 16
How Elliott Waves Tell You When to "Jump In" & When to "Jump Out" of Markets - 18th June 16
Stock Market Inflection Point During Bifurcation - 18th June 16
Gold And Silver – Insanity Is World “Norm.” Keep Stacking! - 18th June 16
Gold Stocks - Bull Markets that Follow Epic Bears - 18th June 16
The Fed Giveth and the Gold Bullion Banks Taketh Away… - 17th June 16
Brexit: "The Vote Heard Around the World" - 17th June 16
Gold Stocks Summer Breakout? - 17th June 16
Stock Investors Get Higher Returns and More Dividend Income - In Less Time With Less Risk - 17th June 16
How to Use the Gold-to-Silver Ratio? - 17th June 16
Inflation, Deflation & Associated Trading Prospects - 17th June 16
Overnight Markets Struggling to Stay Flat - 17th June 16
Gold Price Surges to Highest in Nearly Two Years On Central Bank and Brexit Haven Demand - 17th June 16
Stock Market Thinking Upside Down; Dow 18k Still Key - 17th June 16
Jo Cox MP Terror Attack Killing Claimed for "Britain First" - Witness Report - 17th June 16
Stock Market, Iron Ore, Bitcoin – Is Silver Next for Chinese Momentum Investors? - 16th June 16
EU Referendum Campaigning Suspended Following Shooting of MP Jo Cox, Suspect Named as Tommy Mair - 16th June 16
Why People are Migrating to the UK, Illegal Immigration, Housing Crisis Consequences - 16th June 16
Stocks Fluctuate Following Recent Decline - Bottom Or Just Pause Before Another Leg Down? - 16th June 16
The US Consumer-Driven Economy Has Hit a Brick Wall - 16th June 16
Bitcoin Price Going Parabolic Again, Now At $730 and Up 60%+ In Last Three Weeks - 16th June 16
China's Hard Landing Has Already Begun! - 16th June 16
Crude Oil Price - Oil Bears vs. Support Zone - 16th June 16
Central Bankers Are Wrong About Inflation and Deflation - 15th June 16
Alignment Of The Dow, Interest Rates, Debt and Silver Cycles Will Deliver A Fatal Blow - 15th June 16
Stock Market Bounce May be Over - 15th June 16
EU Referendum: Have the Bookmakers Got it Wrong? LEAVE Opinion Polls Lead - 15th June 16
Gold Price Rally - 15th June 16
How to Invest for Brexit Report - 15th June 16
Stock Market Short of the Decade? - 15th June 16
Stock Market Sell Off Coming! - 14th June 16
QE - The Good, Bad & Ugly - 14th June 16
This Demographic Shift Makes Our Social Security Useless - 14th June 16
Gold Stocks Ultimate Objective in a World of Monetary Transition - 14th June 16
Philosophy of the New World Order - 14th June 16
The Brexit Game - Boris Johnson vs David Cameron EU Referendum Zombies - 14th June 16
EU Referendum: LEAVE Opinion Poll Lead of 51% to 49% Whilst Bookmaker Odds Still Strongly Favour REMAIN - 14th June 16
George Soros Making Big Bets on Gold - 14th June 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

The Quantifornication of U.S. Housing Market, Banks and Economy

Economics / Quantitative Easing Oct 05, 2012 - 10:03 AM GMT

By: Richard_Mills

Economics

Best Financial Markets Analysis ArticleOverheated US housing prices started dropping in 2006. Homeowners were going underwater (they owed more than the house was worth) and many had questionable credit - "fog the mirror loans" were common, if you breathed you got a loan. *Banks sold these mortgages to agencies like Fannie Mae and Freddie Mac. They bundled the mortgages with other loans bearing similar interest rates and then sold them as Mortgage-backed securities (MBS), so called because their value was backed or secured by the value of the underlying mortgages.


An MBS is therefore a derivative because its value is derived from the underlying asset - the mortgage that was often underwater and held by someone with bad credit.

*The Residential Mortgage Backed Securities (RMBS) Working Group, a state-federal task force created by President Obama, just announced their first legal action.

"Co-chair, New York Attorney General Eric T. Schneiderman has filed a Martin Act lawsuit against J.P. Morgan Securities LLC, JP Morgan Chase Bank N.A., and EMC Mortgage LLC for making fraudulent misrepresentations and omissions to promote the sale of residential mortgage-backed securities (RMBS) to investors. According to Attorney General Schneiderman's lawsuit, these defendants deceived investors as to the care with which they evaluated the quality of mortgage loans packaged into residential mortgage-backed securities prior to Bear Stearns & Co's collapse in early 2008, incurring losses that have totaled approximately 22.5 billion to date." MENAFN.com

The Federal Reserve started easing monetary policy aggressively throughout 2008. By December of 2008, the federal funds rate was between 0 and 1/4 percent.Additional stimulus was injected by expanding the holdings of longer term securities. The System Open Market Account (SOMA) purchased mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae (agency MBS).

"On numerous occasions in 2008 and 2009, the Federal Reserve Board invoked emergency authority under the Federal Reserve Act of 1913 to authorize new broad-based programs and financial assistance to individual institutions to stabilize financial markets. Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008." Government Accountability Office (GAO)

Broad Based Programs

The Term Auction Facility was $40 billion in loans to rescue the banks. It wasn't near enough, the Treasury department got authorization to spend $150 billion more to subsidize and eventually take over Fannie Mae and Freddie Mac, they also bailed out AIG.

Dollar Swap Lines exchanged dollars with foreign central banks for foreign currency to help address disruptions in dollar funding markets abroad.

The Term Securities Lending Facility auctioned loans of U.S. Treasury securities to primary dealers against eligible collateral.

The Primary Dealer Credit Facility provided overnight cash loans to primary dealers against eligible collateral.

The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility provided loans to depository institutions and their affiliates to finance purchases of eligible asset-backed commercial paper from money market mutual funds.

The Commercial Paper Funding Facility provided loans to a special purpose vehicle to finance purchases of new issues of asset-backed commercial paper and unsecured commercial paper from eligible issuers.

The Term Asset-Backed Securities Loan Facility supported the issuance of asset-backed securities (ABS) collateralized by loans related to autos, credit cards, education, and small businesses. In March 2009, the Fed announced that it was expanding the scope of the TALF program to allow loans against additional types of collateral.

Late in 2008 there was a run on ultra safe money market accounts - according to AMG Data Services a record $140 billion was pulled out in one day.

The Troubled Asset Recovery Program was proposed and $350 billion was approved by Congress - the money was used to buy bank and automotive stocks.

In response to the crisis and a stalling economy the US Federal Reserve initiated Quantitative Easing and Operation Twist.

Quantitative Easing

The initial Fed response to the subprime mortgage crisis was to lower interest rates, then, having no traditional tools left in its toolbox the Fed introduced a new policy - quantitative easing (QE).

In September of 2008 the $1.7 trillion QE1 was started. The Fed purchased mostly mortgage backed securities and established a commercial paper lending facility. In October of 2010 QE2 started. At $600 billion, QE2 was much smaller then QE1 and its buying was mostly confined to purchasing long term government bonds.

QE1 & QE2 failed to restart the economy and housing market.

Operation Twist

Operation Twist is the Fed's initiative of buying longer-term Treasuries while simultaneously selling shorter-dated issues in order to bring down long-term interest rates.

By purchasing longer-term bonds, the Fed drives up prices which forces yields down - price and yield move in opposite directions. Selling shorter-term bonds causes their yields to go up because their prices fall. These two actions "twist" the shape of the yield curve, hence the name Operation Twist.

Quantitative Easing Three, QE3

The Federal Reserve has just launched QE3. Key components are:

  • The creation of $40 billion a month to buy MBS's
  • The continuation of Operation Twist #2
  • An open-ended commitment to keep purchasing securities at whatever level is judged necessary until the labor market improves "substantially"
  • An extension of the 0.0% to 0.25% target range for the Fed Funds rate until at least mid 2015

The definition of insanity is "doing the same thing over and over again and expecting different results."

"The Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. These actions should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate..." Federal Reserve

"We will be looking for the sort of broad-based growth in jobs and economic activity that generally signal sustained improvement in labor market conditions and declining unemployment." Federal Reserve Chief Ben Bernanke

How effective have all these programs, with trillions of dollars spent, been? Not very...

Durable Goods

New orders for manufactured durable goods in August decreased $30.1 billion or 13.2 percent to $198.5 billion. This decrease was the largest since January 2009.

New Orders

Thompson Reuters

Labor force participation

Labor Force Participation Rate

Our overall workforce participation rate looks pretty dismal.

"Bernanke is justifying QE Part Infinity on the need to promote employment. The U.S. unemployment rate has stayed above 8 percent for 43 consecutive months - the longest such period since the Great Depression of the 1930s. Although the unemployment rate in August fell to 8.1% from July's 8.3%, the drop occurred for all the wrong reasons -- 368,000 fewer Americans were looking for work and the labor participation rate fell from 63.7% to 63.5% -- its lowest level since September 1981. If labor participation had remained at July levels, the unemployment rate actually would have risen." Jim Fink,Fed Chairman Bernanke Unleashes QE Part Infinity to Save One Job: His Own, investingdaily.com

"The Federal Reserve is, of course, well aware that the unemployment situation is far, far worse than what is being captured in the official headline unemployment rate of 8.1%. The government knows full well that the true unemployment rate, once workforce participation rate manipulations are netted out, is closer to 19%." Making 9 Million Jobless "Vanish," Daniel Amerman

Shocking stats:

  • Nearly half of American's die broke
  • One out of three Americans has no savings
  • Our labor force participation rate is at a 30 year low
  • Household income has fallen to 1995 levels
  • There are over 46,000,000 million Americans currently receiving food assistance - that's one out of every seven people
  • From 2007 to 2010, a typical US family lost 39 percent of its wealth
  • The Gini index, a measure of household income inequality, increased 1.6 percent in 2011, its first annual increase since 1993

Conclusion

"Space may be the final frontier but it's made in a Hollywood basement."

Californication is a brilliant 1999 song by the Red Hot Chili Peppers. Many of the lyrics reference the often insane, unrealistic, impossible dream images Hollywood sells to the world.

Quantifornication is the term I coined for what the Federal Reserve is selling to the world - the unrealistic, insane fiat dream that the monetary policy currently being employed by the Fed can fix the predicament we are in.

In the movie the Matrix, Neo is given a choice by Morpheus, if he takes the blue pill he will return to sleep unaware of the truth, if he takes the red pill he will wake from the dream and become aware of the illusion, created by the AI entity, and fed to the humans in their pod dream world.

Are you a blue pill person or a red pill type of person? The rocky shores of awake reality are far different than our political masters, and the mainstream media, would have you believe.

What's playing in your pod? Quantifornication should be on all our radar screens, is it on yours?

If not, maybe they should be.

By Richard (Rick) Mills

www.aheadoftheherd.com

rick@aheadoftheherd.com

If you're interested in learning more about the junior resource and bio-med sectors please come and visit us at www.aheadoftheherd.com
Site membership is free. No credit card or personal information is asked for.

Richard is host of Aheadoftheherd.com and invests in the junior resource sector.
His articles have been published on over 400 websites, including: Wall Street Journal, Market Oracle, SafeHaven , USAToday, National Post, Stockhouse, Lewrockwell, Pinnacledigest, Uranium Miner, Beforeitsnews, SeekingAlpha, MontrealGazette, Casey Research, 24hgold, Vancouver Sun, CBSnews, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FNArena, Uraniumseek, Financial Sense, Goldseek, Dallasnews, Vantagewire, Resourceclips and the Association of Mining Analysts.

Copyright © 2012 Richard (Rick) Mills - All Rights Reserved

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

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

Catching a Falling Financial Knife