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Federal Reserve System

Election 2012 Means the Real Bernanke Bombshells Won't Fall Until December

By , Money Morning - • Print | Email

If you were expecting big news from this week's Fed meeting it looks like you are going to be in for a long wait. This week's FOMC meeting was business as usual.

There was no change in interest rates, no change in the determination to keep rates low into 2015 and no change in the Fed's latest solution, otherwise known as QE infinity.

The truth is the real bombshells won't likely start until the Fed's next meeting in December. By then, the landscape could be completely changed.

With Election 2012 still at stake, it's who controls the Oval Office that matters most when it comes to Fed policy.

You'd never know that if all you did was watch the debates.

Ben Bernanke may well be the second most powerful person in the country, yet his name was never mentioned-not even once. Remarkably, monetary policy was completely absent from the debates.

Election 2012 and the Fed

That's true even though the two candidates differ substantially when it comes to the Federal Reserve.

For instance, Mitt Romney has repeatedly said he would not reappoint Ben Bernanke when the Fed chairman's current term ends in January 2014. Conversely, President Barack Obama has indicated his support for Bernanke and his easy money policies.

For that matter, Bernanke himself is in an open question. He may retire in January 2014 no matter who wins Election 2012.

However, at the December meeting one major thing will have changed: the time horizons of both investors and policymakers.

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How Helicopter Ben Helps Jobs and, Inadvertently, Gold Prices

By , Money Morning - • Print | Email

The world's central bank leaders continue to spike the monetary punch bowl, with investors imbibing on gold once again.

This flurry of gold buying prompts many curious investors and doubting media to ask me two questions: 1) How can demand for gold and gold stocks continue; and 2) How high can gold prices go?

To answer these questions, we need to look at the intentions behind the economic and political decision-making across several developed countries, analyze the causes, the effects, and the possible ramifications.

For example, one of the most debated topics today is America's ongoing unemployment situation.

Job loss has affected the lives and pocketbooks of millions of Americans and our friends and families, culminating to a center-stage position in the election this year. All eyes turn to President Barack Obama and Mitt Romney to explain how each intends to create jobs.

During the two years following the Great Recession, Americans lost jobs at a similar rate to the employment losses during the Great Depression and in Finland after 1991. But two years after the crisis, U.S. employment losses stopped and reversed direction.

Compare this to the situations in Norway, Spain, Finland and Sweden, each of which had prolonged unemployment.

After Norway's financial crisis in 1987, it took 8.5 years to return to the country's employment peak. It took 13 years for Spain's employment to return to its 1997 peak. For Finland and Sweden, it took more than 17 years following their 1991 peaks.

Although the job losses in the U.S. don't seem as dismal, "Helicopter" Ben Bernanke wants to avoid Europe's and Japan's catastrophic situations.

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One Reason the Fed Meeting Today Might Not End in QE3

By , Money Morning - • Print | Email

Dismal economic reports for the United States have recently made the stock market rise – not the expected reaction.

That is due to traders anticipating that a third round of quantitative easing (QE3) or a similar measure will be coming to stimulate the American economy.

Yet, despite unemployment rising in the United States and growth falling, no major economic stimulus programs along the lines of QE3 have yet been announced by Federal Reserve Chairman Ben Bernanke at any Fed meeting.

The timing of QE2 explains why.

QE2 was a program where the Federal Reserve inflated its balance sheet to purchase about $700 billion in U.S. Treasury bonds to finance the federal budget deficit. This unprecedented act was required as few other investors, either foreign or domestic, were buying U.S. Treasury bonds at the prevailing interest rates.

Without this action, the low interest rate environment promised by Bernanke until at least 2014 and imperative for the recovery of the United States economy, particularly the real estate sector, would have been untenable.

The Federal Reserve as a result became the "buyer of last resort" for U.S. Treasury bonds.

QE2 was announced by Bernanke at the Jackson Hole economic policy summit in August 2010. However, the Fed's bond buying did not start until after the mid-term elections in November 2010. QE2 ended in June 2011.

That is why QE3 has neither been announced nor initiated.

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The Real Villain is the One Behind the Curtain in the Libor Scandal

By , Chief Investment Strategist, Money Morning • @ShahGilani_TW - • Print | Email

There's nothing like pulling back the curtain on the fraud that's center stage in the Libor manipulation scandal and finding the levers are really being pulled by central banks.

It's not about the banks doing what they did. The revelation is this: Central banks are the biggest impediment to free markets and the reason capital markets have become casinos.

And until the tyranny of their grip is broken, the majority of public investors are going to rightfully sit on the sidelines and long-term economic growth will be impossible.

The Libor scandal is just a sideshow. There's nothing new there.

Banks manipulated Libor (the London Interbank Offered Rate), the benchmark for over 800 trillion dollars in interest rate-sensitive loans and financial instruments, to jack up profits on trading positions they held.

Bankers scheming, lying and cheating for bigger bonuses at the expense of anyone in their way…that's news?

No, but here's the real inside scoop…

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FOMC Meeting Minutes: Will We Ever See QE3?

By , Contributing Writer, Money Morning - • Print | Email

Investors were anxiously listening today (Wednesday) to see if the Federal Open Market Committee (FOMC) meeting minutes gave any hints the Fed may engage in a third round of quantitative easing (QE3) to bolster the ailing U.S. economy.

But no such clues were shared.

Last month the Federal Reserve decided to extend Operation Twist, a bond maturity extension program. But many investors wanted a third round of asset buying, or QE3, instead of more twisting.

Immediately following details of the June FOMC meeting, the Dow Jones Industrial Average, which had been choppy all day, was little changed. Then came the negative reaction and all three major indexes ticked lower, and the VIX, the "fear index," edged higher. The Dow fell as much as 90.14 points, or 0.7%, to 12,562.98 in afternoon trading.

Though QE3 is not completely out of the question, things need to deteriorate further for the Fed to even consider more bond purchasing as a means of stoking the economy, according to the FOMC meeting minutes.

Just four Fed officials referred to more quantitative easing in their individual forecasts, with two in favor and two considering another round.

Had that FOMC meeting been held today, maybe more officials would have supported a heavier stimulus measure. Since that meeting, fresh data have shown manufacturing is weak and unemployment levels are still elevated – and look to move higher.

In addition, economists have drastically reduced second-quarter growth estimates amid the weaker-than-expected numbers.

This has left scores scratching their heads asking how much worse things need to get before the Fed makes a move.

The minutes also show that several Fed officials want to create "new tools" to ease financial conditions. With little left in their cache to give the economy a much needed boost, "new tools" are warranted, but scarce at best.

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Did Federal Reserve Bank Stress Tests Fuel Too Much Confidence?

By , Associate Editor, Money Morning - • Print | Email

The Federal Reserve released the results of its third round of bank stress tests yesterday (Tuesday), determining 15 of the 19 tested banks were in good enough shape to withstand a severe recession.

The Fed tested whether banks have enough capital to survive an unemployment rate of 13%, a 21% drop in home prices, slowing economic growth in Europe and Asia, and a 50% drop in stock prices.

The tests assumed that banks would face $534 billion in losses in just over two years, and measured how much capital remained. The Fed earmarked $341 billion of those losses for loan portfolios.

The results of the bank stress tests show how institutions have worked to shore up balance sheets in the wake of a crisis – but can simulations really prove that banks won't fail?

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Bernanke Testimony to Congress: The World According to the Federal Reserve

By , Associate Editor, Money Morning - • Print | Email

The U.S. Federal Reserve Chairman Ben Bernanke testimony to Congress ended ahead of schedule today (Thursday) in the Senate, reiterating the same tame message he communicated to the House yesterday: The Fed thinks the economy will grow modestly.

"We don't see at this point that the very severe recession has permanently affected the growth potential of the U.S. economy," Bernanke told the Senate Banking Committee in his twice annual economic testimony to Congress.

Here's a look at what Team Bernanke does see in the economy:

Bernanke Testimony to Congress

No Additional Stimulus

Bernanke said elevated unemployment and subdued inflationary pressures support low interest rates into 2014, but did not give a hint of any additional stimulus measures.

Bernanke also defended previous stimulus measures, which have drawn criticism for not being worth their hefty price tags.

"If you look back at Quantitative Easing 2, so called, in November 2010, concerns at the time were that it would be a high inflationary environment, it would hurt the dollar, it would not have much effect on growth, etcetera," said Bernanke. "But since November 2010, we have had since then the QE2 and the so-called Operation Twist, we have had about 2-1/2 million jobs created, we have seen big gains in stock prices, we have seen big improvements in credit markets, the dollar is about flat, commodity prices excluding oil are not much changed, inflation is doing well in the sense that we are looking for about a 2 percent inflation rate this year."

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Is Gold Money?... Don't Ask Ben Bernanke, Examine the Federal Reserve

By , Money Morning - • Print | Email

If you really care about your financial future, here's something you need to know.

It's about a story that received almost zero coverage from the mainstream press. I can't say that I am surprised.

It involves gold.

Thanks to requests by Bloomberg News under the Freedom of Information Act, the Federal Reserve has revealed unprecedented details concerning the personal holdings of its regional bank presidents.

What they found is nothing short of stunning …

Ben Bernanke on Gold

But let me back up a little.

There's an exchange between Fed Chairman Ben Bernanke and Congressmen Ron Paul you need to hear first.

During a monetary policy report delivered to Congress last summer, Congressman Ron Paul asked Bernanke if he thought gold is money.

After a clearly uncomfortable pause Ben said, "No. It's a precious metal." [By the way, if you haven't seen Ron Paul questioning Bernanke about gold, click here. It's already had over half a million views.]

Paul went on to ask Bernanke why it is then that central banks hold so much gold. Bernanke answered that it was simply a tradition.

Well, congrats Ben, you did get that one right, just for the wrong reasons. (Deep down, you surely know the true reasons).

The fact is gold has been a monetary tradition for millennia.

Nearly 2,000 years ago Aristotle laid out what characteristics make for good money. According to Aristotle:

  1. It must be durable.
  2. It must be portable.
  3. It must be divisible.
  4. It must be consistent.
  5. It must have intrinsic value.

So it's no accident that the most common basis for money – in all of human history – has been gold.

You might want to reread that: the most common basis for money – in all of human history – has been gold. It's no accident.

After all, only gold meets all five of those requirements for sound money.

It is only in the past century that fiat money has supplanted gold or gold-backed currencies on a worldwide basis.

What makes today's central bankers and their system of printing fiat currencies and setting interest rates so special? It is hubris and nothing more.

Fiat currencies are just a relatively recent, and failing, experiment in economics. So much so, it's become exceedingly dangerous to hold them of late.

Here's why.

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Ben Bernanke is Every Gold Bug's Best Friend

By , Money Morning - • Print | Email

After prices fell 10% in December, many investors wondered if the bull market in gold was running out of steam.

That was before Federal Reserve Chairman Ben Bernanke swooped in with a "red cape" and fired the bulls back up.

Since the Fed reassured the world that interest rates will remain at "exceptionally low levels" for another two years, gold has jumped more than 3%.

UBS AG (NYSE: UBS) described the situation simply, "if investors needed a (further) reason why they should be long gold now, they got it yesterday … a more accommodative policy is a very good foundation for gold to build on the next move higher."

To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.

Bernanke and the Fed aren't the only central bankers in the fiscal and monetary bullring.

Brazil has cut its benchmark interest rate a few times and China lowered its reserve rate for banks in December. According to ISI Group, 78 "easing moves" have been announced around the world in just the past five months as countries look to stimulate economic activity.

One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8% year-over-year in December, or about $4 trillion, according to ISI. I mentioned a few weeks ago how China experienced a record increase in the three-month change in M-2 money supply following China's reserve rate cut.

Together, negative real interest rates and growing global money supply power the Fear Trade for gold. The pressure these two factors put on paper currencies motivates investors from Baby Boomers to central bankers to hold gold as an alternate currency.

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Are Federal Reserve Presidents Gaming the System?

By , Associate Editor, Money Morning • @DavidGZeiler - • Print | Email

The presidents of the U.S. Federal Reserve may not have used their knowledge for personal gain, but a look at their assets does show several apparent conflicts of interests. More than 600 pages of disclosure documents were released last week after Bloomberg News filed a Freedom of Information Act request. The most troubling revelation concerned […]

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