Best of the Week
Most Popular
1. Best Cash ISA Savings Account for Soaring UK Inflation - February 2018 - Nadeem_Walayat
2.Gold Price Forecast 2018 - February Update - Nadeem_Walayat
3.Bitcoin Crypto Currencies Crash 2018, Are We Near the Bottom? - Nadeem_Walayat
4.Trump Bubble Bursts, Stock Market Panic Dow 1175 Point Crash Analysis - Nadeem_Walayat
5.Gold Corrects, Bitcoin Markets Crash, Whilst Stocks Plunge - Nadeem_Walayat
6.US Treasury Bonds: Fuse to Light the Bonfire - Jim_Willie_CB
7.Dow Falls 666 Points As Cryptocurrencies Crash And Krugman Emerges From His Van - Jeff_Berwick
8.Stock Market Roller Coaster Crash Ride Down to Dow Forecast 23,000 - Nadeem_Walayat
9.Trading the Shadows - Oil, Dollar, Stocks, Gold Trend Analysis - B.R. Hollister
10.Stock Market Analysis: Baying for Blood - Abalgorithm
Last 7 days
Gold Setting Up For A Massive Upside Price Rally - 25th Feb 18
Heavy Police, SIA Security and Media Presence for Sheffield Tree Fellings Monday Meersbrook Park Road - 25th Feb 18
World Stock Market Indices: What Will Happen in 2020 – 2022 - 25th Feb 18
Will We See A Cryptocurrency Wipeout This 2018? - 25th Feb 18
Stock Market Volatility Attributed to 'Shenanigans' - 24th Feb 18
Reintroducing The Concept Of Stock Market Investing Risk - 24th Feb 18
How Global Growth and Infrastructure are Driving Commodities - 24th Feb 18
Tips to Get Financing for a New Business - 24th Feb 18
Heavy Police Presence at Resumption of Sheffield Street Tree Fellings Protests - 24th Feb 18
Why You Should NOT Sub4Sub Free Youtube Subscribers - YTpals, Subpals, SubmeNow Test Results - 23rd Feb 18
One Belt, One Road, One Direction for Precious Metals - 23rd Feb 18
Gold’s Curious Sentiment - 23rd Feb 18
Relationship Between Crude Oil and U.S. Dollar in February 2018 - 23rd Feb 18
Why The Next Oil Boom Will Be Fueled By Blockchain - 23rd Feb 18
Gold Bull and Bear Markets - 23rd Feb 18
Why Recent Lows Are Crucial for US Dollar - 23rd Feb 18
Will Bitcoin be Larger Than NEO in 2018? - 23rd Feb 18
Stock Market SPX Probable Pop-n-drop - 22nd Feb 18
Stocks Fail to Hold Gains, But Still No Correction - 22nd Feb 18
Why We Should Buy Essay - 22nd Feb 18
The Latest US Debt Blow - 22nd Feb 18
6 Tips For Seamless Business Foreign Exchange - 22nd Feb 18
How to Anticipate Stock Market Trend Changes - 21st Feb 18
Gold Miners’ Rally? What Rally? Watch Out for More Fake Moves! - 21st Feb 18
5 Big Drivers of Higher Inflation Rates Ahead - 21st Feb 18
Goofy Indictments Divert Attention from Criminal Abuses at the FBI and DOJ - 21st Feb 18
Bitcoin or British Pound ‘Pretty Much Failed’ As Currency? - 21st Feb 18
Stock Market Waiting for the Fed - 21st Feb 18
National Identity Demands Restrictive Immigration - 21st Feb 18
Best Opportunities for Freelance Technical Writing Jobs - 21st Feb 18
4% US 10-year Treasury Note Yield Will Be a Floor Not a Ceiling - 20th Feb 18
Governments Are LYING about Their Gold Activities while Mining Companies Cower - 20th Feb 18
No Silver Lining Here - 20th Feb 18
Semi Conductor Stocks SEMI Bearish? - 20th Feb 18
The Prisoner Promised Land - 20th Feb 18
Best Car Dash Cam Review: Z-Edge S3 Dual Dash Cam - UNBOXING (1) - 20th Feb 18
How Inflation Reduces The Real Value Of Social Security Net Of Medicare Premiums - 19th Feb 18
Could Stellar Lumens be a Challenger to Bitcoin for International Payments? - 19th Feb 18
US-China Trade War Escalates As Further Measures Are Taken - 19th Feb 18
How To Trade Gold Stocks with Momentum - 19th Feb 18
Is a New Gold Bull Market on the Horizon? - 19th Feb 18
Stock Market Decision Point! - 19th Feb 18
An Inflation Indicator to Watch, Part 1 - 18th Feb 18
Get on Top Of Debt Before It Gets on Top of You - 18th Feb 18
Will the Stock Market Make a Double Bottom? - 18th Feb 18
5 Reasons Why Commodities Are the Investment Place to be in 2018 - 18th Feb 18
1 Week Later, Stock, Bond Market Risk Remains ‘On’ as 2 of 3 Amigos Ride On - 17th Feb 18
Crude Oil Prices: A Case of Dueling Narratives? - 17th Feb 18
Free 1000 Youtube Subscribers Services - YTpals, Subpals, SubmeNow Test - 17th Feb 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

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.


© 2005-2018 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

6 Critical Money Making Rules