International Forecaster Weekly

Banks Will Still Profit in this Faltering Economic Recovery

The objectives of Keynesian economics, keeping the profits of banks intact, treasury and fed want to keep gold down, reconsider the recovery, weapons sale to Saudi, and other failures in economic and fiscal judgement.

Bob Chapman | August 18, 2010

When government interferes with free markets they cease to work properly. Measures that interrupt and manipulate distort markets on a short to intermediate basis, but the final result is never in doubt. Things are altered but only little changed. What is serious about intervention is that it breaks the social and political contract between government and the people. This is the type of social engineering and pragmatism espoused by John Maynard Keynes, which brings us to where we are today. If Keynes were still alive he would witness the failure of the system, he was instrumental in creating it. Keynesianism is in part economic theory, but its real goal is the social-governmental manipulation of markets intended to concentrate government power in the hands of the corporate few producing corporatist fascism as the final economic and financial power under such a system and the final implementation, which ends in the brute force and the manipulation of laws for its completion, which is totalitarian government.

Keynesianism is part of the quest for power, commercial and political, which was attempted in Italy and Germany in the 1930s and 1940s. You might say this was the modern testing ground, financed and abetted by internationalists sources in London and New York. When these sources attempted to ensconce General Smedley Butler as the American president in the early 1930s, and he understood what they were up too, he ended his relationship with the crypto-fascist government, which at that time was in the process of being forced on the American public. Thus, this economic and financial theory of Keynes was part of the rise of corporatist fascism. His ideas and those of others were never able to capture the imagination and following of the American people, thus today it is being forced upon them. The theory is we know better what is good for the people than they do. This allows the elitists to control political power by controlling both major parties from behind the scenes. People do not want this kind of government and do not willingly embrace it. As a result it has to be forced upon them by using economics, politics or the distortion of the law. Thus, we see the pragmatic rise of Keynesianism as an integral part of the effort to bring about total dictatorial power on a scale only previously attempted during the reign of the Roman Empire. This fellow Americans is what is being done to you, your country and your culture.

Each passing day more and more observers come to the conclusion that there has not been and will not be a recovery in the sense that they believed there would. The proof is the actions the Fed has taken to use additional monetary easing and to continue zero interest rates. We forecasted such events some six weeks before they occurred and believe the Fed will have to inject some $5 trillion over the next two years just to keep the economy going sideways.

As Treasury Secretary Geithner assures us of recovery, Mr. Bernanke assures us that enough stimulus will be added to achieve that recovery. As this transpires the economy falters. We can promise you this all has little to do with the economy, which is an after thought and everything to do with keeping the profits of financial institutions in tact and growing. The stimulus is upon us.

Not only is the Fed going to purchase Treasury and Agency paper with the interest they have received from the CDOs and MBS they purchased from mostly financial institutions, but also they intend to sell that paper back to the sellers. The Fed refuses to tell us what they paid for this toxic garbage, so we will assume it was 70% of the face value. They will now sell these bonds back to the lenders for 25% of face value. The American taxpayer gets to pay the difference. The lenders make out like bandits and the Fed will have cleared its books of what was $1.8 trillion of assets at $1.35 trillion. Ostensibly, the Fed will use those funds to purchase Treasuries and Agencies.

In addition the banks are sitting on $1 trillion plus, which they borrowed from the Fed at zero interest rates and then lent back to the Fed at 2-1/2%. We believe that interest rate will either be reduced or eliminated. The banks can either return the funds or lend them. Under the fractional banking system that can be at any multiple. Lending nine times assets is considered normal. The banks presently are committed for an average of 40 times. Even at five times they can lend $5 trillion if they can find borrowers. A combination of purchases by the Fed and lending by the banks will furnish the required liquidity needed to keep the economy stable, albeit temporary, for the next two years. We believe this is the Fed’s plan, which we exposed a number of weeks ago, while most experts were sleeping. The insiders know and we watched what they were doing and in their greed they exposed the entire plan.

The flip side of the plan is that monetization causes inflation and in this case perhaps hyperinflation. That infusion of capital could keep the stock market at an unreasonably high level, as it is assisted as well by zero interest rates. The great danger is higher gold and silver prices, an indication of higher inflation and loss of purchasing power. That is why, over the past 15 years, the Treasury has manipulated and suppressed gold and silver prices, via the “President’s Working Group on Financial Markets.” The Treasury and the Fed do not want gold and silver prices higher because they reflect the destruction of buying power for US dollar users. This is the game being played and the inside players know they will have to face the music in two years. They will either have to repeat the performance or deflationary depression will take over and swallow the system. It should also be noted that the Treasury via Fannie Mae, Freddie Mac, Ginnie Mae and the FHA has been guaranteeing trillions of dollars in subprime loans, knowing full well that next year those loans have to be rewritten and rolled - as much as 50% could fail. That and the poor economy could bring 20 to 30 percent lower real estate prices over the next several years further depleting the wealth of Americans and causing more massive losses for taxpayers. Many of those packages of loans were also again sold to investors who will be taking losses. If you mix in the losses in commercial real estate you have quite a rancid kettle of fish. This does not present a very encouraging future.

Some view the Fed’s intention to reinvest cash receipts from the CDO-MBS portfolio into Treasuries as no big deal. What the Fed does not tell you is what else they are doing. That is what counts and that is the difference. Can you recall your TARP commitment via AIG that was used to bail out banks, brokerage houses and foreign financial entities? That was a state secret until the Fed was forced to reveal what they had done. Some $112.5 billion went to foreign banks. Thus, the Fed cannot be counted on for any element of truthfulness.

There is no exit strategy and that now is very obvious, at least from a conventional viewpoint. If economists, analysts and strategists understood what this is all about their viewpoints would change dramatically. This crisis just didn’t happen – it was created. Eventually the people behind the curtain will pull the plug and those inside the matrix won’t know what hit them.

The $5 trillion the Fed intends to inject into the system over the next two years, or whatever is necessary, is the signal that tells you the plug is not ready to be pulled, at least not for now. They have to get their next war going first.

The Fed well knows that more and more liquidity is no solution. That has been proven over and over again in history. It has again been proven over the past three years.

We just witnessed another phony market rally based on inside information that the insiders used to best advantage. The elitists ran up the dollar again in another futile attempt to pad the dollar’s value before people realized that excess liquidity could only weaken the dollar. The gold and silver suppression team did its best to smother gold and silver, but was unsuccessful again. We have never seen so many economists, analysts and newsletter writers be so wrong. Being wrong must be a communicable disease.

Treasury paper is at record lows as investors scramble for perceived safety. The manipulation of gold, silver and commodities just gives opportunists the opportunity to buy cheaper. The dollar rally will soon end and gold and silver will move higher – even Goldman thinks so. The hearts of our monetary and fiscal systems are sick and only a purge will make them well again. The longer the inevitable is postponed the worse it is going to be.

Our purchased Congress has again put the fox in charge of the henhouse in the Wall Street Reform and Consumer Protection Act, which will be privately funded by the foxes and not by Congress. The legislation anoints the Federal Reserve as a financial potentate, a financial and monetary dictator that will effectively run America. The vagueness of the legislation is such that its powers are virtually unlimited. This is a far cry from Ron Paul’s legislation to audit and investigate the fed. It proves how powerful banking and Wall Street really is. Via campaign contributions and other artifices, they control most of our elected representatives. They even have a new agency to protect consumers, which is certainly ludicrous. While supposedly protecting consumers the Fed is creating trillions of dollars out of thin air that these same consumers are responsible for. Americans are as well responsible for the losses incurred by the FDIC. Before this depression is over Americans will be enslaved to debt, debt so overwhelming that it can never be paid, and will enslave Americans permanently.

The step that the Fed is engaged in now is a major continuation of quantitative easy, which will be followed by propaganda to make banks lend trillions of dollars and for American consumers and business to borrow to keep the economy running and to pile up more debt. We are skeptical that individuals and business will take the bait. Government programs are now being discussed to refinance toxic waste, known as CDOs and MBS. We explained earlier that the Fed wants to repackage MBS debt obtained from the same banks at $0.70 on the dollar and resell it to them for $0.30 on the dollar. The public pays the difference and the Fed frees up money on its balance sheets. This way on a fractional basis they can lend additional funds and along with bank lending create enough liquidity to keep the financial system from collapsing. The government, or should we say the taxpayer, is guarantying all this debt. All that is left is to get people to stop saving and to start piling up debt again. This is the thinking behind stimulus as opposed to austerity and higher taxation, as currently being practiced by Europe and England. The powers behind government in America are going for broke. If what they are doing doesn’t work, the US financial system goes down and the world financial system with it.

Thus far what the government has done hasn’t worked. If you take the probable growth of 1.3% to 2.4% in the second quarter and you subtract 1.7% from the stimulus, you come out with virtually no real growth. In fact, for the past year and a half there was little or no growth; perhaps minus growth. If the Fed doesn’t get stimulus into the system again quickly it will be too late. The downward spiral has already begun - shipments, new orders, wages and capacity utilization are already falling off a cliff. This problem is also affecting former very strong areas of the country.

Those who believe a recovery is on the way had best examine their premises. The Fed, Wall Street and banking intend to buy two more years. If they are successful inflation will elevate substantially and the only place to find safety will be in gold and silver related assets. A word to the wise should be sufficient.

Last week saw the Dow fall 3.3%, the S&P 3.8%, the Russell 2000 fell 6.3% and the Nasdaq 100 fell 4.4%. Transports fell 5.7%; cyclicals 5.6%; utilities 2.4%; high tech fell 5.9%; semis 8.2%; Internets 3.9% and biotechs 3.4%. Gold bullion gained $10.00, the HUI fell 1.3% and the USDX rose 3.1% to 82.92.

Two-year Treasury bills were 0.51%, 10-year notes fell 14 bps to 2.68% and the 10-year German bund fell 13 bps to 2.39%.

The Freddie Mac 30-year fixed rate mortgage fell 5 bps to 4.44%, the 15’s fell 3 bps to 3.92%, one-year ARMs fell 2 bps to 3.53% and 30-year fixed rate jumbos fell 8 bps to 5.37%.

Fed credit fell $142 billion, as Fed foreign holdings of Treasury debt jumped another $10.6 billion to a record $3.164 trillion. Custody holdings for foreign central banks have increased $209 billion YTD and 12.4% YOY.

M2, narrow, money supply rose $16.9 billion to $8.636 trillion. YTD they fell $475 billion, and YOY $771 billion, or 21.5%.

Total commercial paper rose $8.6 billion to $1.105 trillion. CP has declined $65 billion, or 9% annualized YTD, and is up $31 billion YOY.

At least a dozen major drug and device makers are under investigation by federal prosecutors and securities regulators in a broadening bribery inquiry into whether the companies made illegal payments to doctors and health officials in foreign countries.

In the United States, companies routinely hire doctors as consultants to market drugs and devices to their colleagues and other health professionals at medical conventions and small gatherings. Such consulting arrangements are generally legal in the United States.

But in much of the rest of the world, doctors are government employees. And even consulting arrangements that would be considered routine in the United States might violate the Foreign Corrupt Practices Act, particularly if the payments are outsize or the arrangements are not disclosed.

US brokerages want to weigh in on how much the Financial Industry Regulatory Authority pays its senior executives and urged the watchdog to hire outsiders to investigate its ties to convicted money manager Bernard Madoff.

Securities dealers backed say-on-pay after Finra’s 20 top managers received a combined $29.1 million in 2008, the industry-funded regulator said yesterday in a statement disclosing voting results from its annual meeting. The pay proposal and the demand that Finra conduct an independent study of Madoff are nonbinding, meaning they can be ignored by the board.

“The board of governors continually reviews Finra’s policies and practices in order to ensure they support its mission to protect investors and the integrity of our markets,’’ Finra said in the statement. “The board will carefully review each of the proxy proposals beginning at its next meeting.’’

Elton Johnson Jr., the president of Moreno Valley, Calif.- based Amerivet Securities Inc., submitted the proposals and campaigned for them after complaining that Finra’s executives are overpaid.

Of brokerages that cast ballots, more than 71 percent supported the provision that would give them an annual vote on the compensation of Finra’s five highest-paid executives. More than 68 percent supported the Madoff probe.

Finra, which is overseen by the Securities and Exchange Commission, gets its funding from the 5,000 brokerages it regulates.

The managers whose pay Johnson has questioned include SEC chairwoman Mary Schapiro, who received $3.26 million in 2008 while serving as Finra’s chief executive.

Another nonbinding proposal approved by Finra members was a mandate that the watchdog disclose investment transactions.

A proposed US weapons sale to Saudi Arabia of F-15 fighter jets also includes as many as 132 Apache attack helicopters and UH-60 Black Hawk helicopters that bring the total value of the package to around $60 billion, according to a government official familiar with the plan.

“Wall Street banks are creating the ‘next investment bubble’ by selling opaque and unregulated structured notes to investors hunting for yield, according to Christopher Whalen, managing director of Institutional Risk Analytics.  Using the same ‘loophole’ that allowed over-the-counter sales of collateralized debt obligations and auction-rate securities, firms are pitching illiquid structured notes whose value is partly derived from bets on interest rates… ‘The only trouble is that the firms originating these ersatz securities, as with the case of auction-rate municipal securities, have no obligation to make markets in these OTC structured assets or even show clients a low-ball bid,’ Whalen wrote.”


The Pentagon and State Department about two weeks ago informally notified congressional committees that handle arms sales of the planned transaction, the official said.

“I think it would be the largest ever,’’ said William Hartung, director of the New York City-based New America Foundation’s Arms and Security Initiative.

“Other deals that used to be considered large,’’ like the $9 billion sale of 72 F-15s to the Saudis in 1992-93 or the kingdom’s $9 billion acquisition of AWACS surveillance aircraft in 1981, “aren’t even in the ballpark, even allowing for inflation,’’ Hartung said.

The package includes 84 F-15s at a cost of $30 billion and helicopter sales totalling about $30 billion that include spare parts, training simulators, long-term logistics support, and some munitions.

The Saudis would buy about 72 UH-60 Black Hawk helicopters and as many as 60 AH-64D Longbow Apaches, the official said. The Longbow is the Army’s premier antitank helicopter, capable of firing laser-guided or all-weather missiles. The Longbows are in addition to 12 that Congress in 2008 cleared Boeing to sell to the Saudis.

The proposal fits the Obama administration’s strategy of buttressing the defense capabilities of Middle East allies to counter Iran’s growing offensive missile might and suspected nuclear weapons program.

It would be part of the Gulf Security Dialogue started by the Bush administration. The Longbow Apache has been sold to Egypt, Israel, Greece, Kuwait, the United Arab Emirates, the Royal Netherlands Air Force, Singapore, and Taiwan.

The Pentagon intends to formally notify the Senate and House foreign affairs panels by mid-September, the official said.

A federal appeals court yesterday threw out a decision that had barred Congress from withholding funds from ACORN, the activist group ruined by scandal and financial woes.


The ruling by the US Court of Appeals for the Second Circuit in Manhattan reversed a decision by a district court judge in Brooklyn that found Congress had violated the group’s rights by punishing it without a trial.

Congress cut off ACORN’s federal funding last year in response to allegations that the group engaged in voter registration fraud and embezzlement and violated the tax-exempt status of some of its affiliates by engaging in partisan political activities.

Fueling the outrage was a video of three employees allegedly advising a couple posing as a prostitute and her boyfriend to lie about her profession and launder her earnings.

ACORN responded with a lawsuit accusing Congress of abusing its power with what amounted to a “corporate death sentence.’’

The Appeals Court disagreed, citing a study finding that only 10 percent of ACORN’s funding was from federal sources.

“We doubt that the direct consequences of the appropriations laws temporarily precluding ACORN from federal funds were so disproportionately severe or so inappropriate as to constitute punishment,’’ the three-judge panel wrote.

The Center for Constitutional Rights, which argued on behalf of ACORN, said it might ask the Appeals Court to rehear the case. [For those of you who have forgotten this is Obama’s criminal goon squad.]

The bank that makes the most revenue trading stocks and bonds, lost money in that business on 10 days in the second quarter, ending a three-month streak of loss-free days at the start of the year.  Losses on Goldman Sachs’s trading desks exceeded $100 million on three days during the period that ended on June 30.  Today’s filing also shows that the firm’s traders generated more than $100 million on 17 days during the quarter. Of the 65 days in the quarter, Goldman Sachs traders made money on 55 days, or 85% of the time.

More than half of the 100 biggest takeovers made during the last mergers-and-acquisitions boom have something in common: By one measure, they never should have happened.  The stocks of 53 companies that made the biggest purchases from 2005 to 2008 lagged behind industry peers two years later, according to Bloomberg’s ranking group.