Finally, It’s the Fed That Has Become Too Big to Fail


We’re still not sure whether CNBC was making a joke or simply advertising its ignorance with a recent headline, “Accounting Tweak Could Save Fed from Losses,”   This was a tweak about as subtle and ingenuous as Bernie Madoff’s balance sheet.  What the central bank did was revise and advantage its own rules so that if some financial catastrophe were to inflict huge losses on the Federal Reserve System, the U.S. Treasury would take the hit, not the Fed itself.  Oh, and taxpayers needn’t be concerned about the presumptuousness of this coy arrangement, since the changes provide for the Fed to pay back the losses with future profits.  Do we really need to point out to CNBC et al. that any such profits would have to come almost entirely from…interest income on Treasury bills, bonds and notes held by the Fed?

Advances in banking have made it possible to store most of America's liquid net worth on computer chips that would fit into this piggy bank's snout

Who would have believed that the nation’s banking system would one day be powered by the feather merchants’ version of a perpetual motion machine, or that the bulk of America’s liquid “wealth” could be stored on a few computer chips no bigger than a piggy-bank’s snout? As we now know, all it takes to pull off this scam is a credulous press, an ignorant Congress, and central bankers so cynical that they actually believe the public is too stupid to understand what’s going on.  Thus is Helicopter Ben able to say with a straight face: “Under a scenario in which short-term interest rates rise very significantly, it’s possible that there might come a period where we don’t remit anything to the Treasury for a couple of years. That would be I think a worst-case scenario.”  Hello!!!!  Are we actually supposed to believe that the day this Zimbabwean twist on quantitative easing is announced, that it won’t send the dollar into a death dive, making Americans poorer by a third, or even half, overnight?

Media Fell for Ol’ Switcheroo

News reports noted that the Fed rule-change was announced on January 6 but that it took a couple of weeks for its significance to sink in. Significant in what way?  In Reuters’ words, it is significant because “It makes [the Fed’s] insolvency much less likely.”  This explanation is darkly funny for two reasons.  In the first place, by accepting the Fed’s spin at face value, the news media have trained their eagle eye not on the crafty magician’s hands, but on the breasts of his assistant, just as the Fed might have hoped. And second, the notion of insolvency’s being “much less likely” is a blatant cop-out that as much as admits the news media don’t know what the hell the rule change is going to accomplish. They are telling us the Fed’s three-card-Monte switcheroo is significant because it supposedly will protect the Fed against going belly-up.  But is that what is significant here?  In fact, when the day comes that the Fed is forced to acknowledges the worthlessness of its vast mortgage holdings – a day that is surely coming — even the village idiot will understand that Treasury is powerless to set things right (other than by ginning up hyperinflationary quantities of cash). In the meantime, don’t expect the working press to delve into the actual significance of the “accounting tweak;”  for if they were to expose it for the brazen fraud it is, the resulting epiphany of a failing economy with no political route to recovery would be too painful and bewildering to bear.

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  • Enrico Rusticali January 25, 2011, 7:25 am

    So in a matter of a few weeks the CFTC gave the OK to silver market riggers the OK to continue doing their thing, now the FED gets to cook the books. It should be flattering to see so much fraud needed to take down the US financial system. The money changers couldn’t bury us with their fraudulent monetary system, it just wasn’t accumulating enough debt fast enough. So why not create more securitized nonsense in order to accelerate the implosion.

  • david casciano January 25, 2011, 4:46 am

    great info and what a shame how apathtic this once great country has become.

  • dan January 24, 2011, 11:02 pm

    up the b.u.t.t. again ,without any ky..I am getting real sore

    the fools debate ..
    the leaders gather for speeches…
    life goes on till it ends…

    they will not enjoy their ill gotten gains…
    that will be written in lead……..

  • Robert January 24, 2011, 8:44 pm

    I think the Fed is dead. It’s like “Weekend at Bernies”, only this time the title is “Weekend at Bernanke’s”

    It’s just that this time, the sunglasses required to disguise the dead guy are going to cost more money than currently exists in the entire world.

    Rick’s analysis ties nicely with the recent announcement by The World Economic Forum that the planet needs another $100 in new fiat currency in order to set things straight:

    This is the same World Economic Forum that suggested that Carbon (the 2nd most plentiful element in the Universe behind Hydrogen) is the perfect substance to base global units of exchange around…

    Hmmmm yeah- What’s another $100Trill between friends, right?

    Read the article I linked too, only mentally substitute the word “debt” for the word “credit” because they are one in the same.

    Meanwhile, Silver rages into deeper and deeper backwardation in London as the price falls, while the Ponzimonium that is the COMEX tries to cook the books to make it look like nothing more than a European price distortion affair.

    I’m pretty sure that buying any long dated call on Silver at market prices wil be like having your own legal printing press

    Meanwhile, the US MINT’s published production figures on Silver Eagles in 2010 surpassed the US’s total domestic silver production, meaning that the USMint either 1) imported silver or 2) started up their own mine somewhere in secret.

    To say that we live in interesting times is like saying that Hiroshima was one heck of a big firecracker…

    • Benjamin January 24, 2011, 9:20 pm

      I never heard of the WEF, but the _audacity_ of them! We just need to release double the amount of credit we’ve had heretofore, and just keep a better eye on it? They were too bored with 1/2 the amount but will do much better with twice the amount because it’s more interesting?

      Really??? Wow. Just… Wow!

      On a side note, the kinds of strict controls needed to (appear to) control that credit is obvious. We, The Slaves of this Big Brother State…

  • John Jay January 24, 2011, 7:29 pm

    The Fed and the Federal government have been busy preparing financial nitroglycerin.
    We are all now holding our collective ears.
    There is now no chance that justice will triumph and RICO indictments will claw back trillions from investment banks, and even the Federal Reserve itself.
    They don’t even bother to produce a cover story any more, their hold on power is that secure.

    • redwilldanaher January 26, 2011, 4:14 am

      “They don’t even bother to produce a cover story any more, their hold on power is that secure.” – Exactly what I’ve been muttering since longer than I can remember. If this fact doesn’t give you cause for concern…

  • DG January 24, 2011, 5:49 pm

    What is amazing is the deafening silence in response to these measures (present company excluded). Quit reporting M3? Whatever. No “why???”
    “and the poets down here, don’t write nuthin’ at all, they just stand back and let it all be”
    Turning, Argentine, I think we’re turning Argentine, I really think so.
    Think about it. Last week, a Chinese bank opened up to US citizens to deposit your dollars in yuan. Limited to $20k per year, but its a start. In Argentina, they loped along for years, in a slow death spiral, right to the cliff. The only folks from the proletariat that survived with savings in hand were those that got out of pesos and into dollar accounts prior to the collapse of the peso. Look at the $MERV. It is up what? 3500% since the collapse in December 2001.
    Did they go Mad Max? No. Just a lot of pain caused by high unemployment and reduced services (unless you were either with the banks, the political class, or the corporate elite. sound familiar?)
    If only we could grow bananas in the US. does Apple count!? 😉 That’s it! We’re an Apple Republic!!

    • Benjamin January 24, 2011, 9:10 pm

      Love your Apple republic comment. And the irony is, we’re relying on a guy named Jobs who is having health problems… in times of high unemployment, in a sick economy.

      If I were a numerologist, I’m sure I would have a field day!

  • fu January 24, 2011, 5:29 pm

    Doesn’t this violate the FEDs 1913 charter…ergo its illegal AND UNCONSTITUTIONAL ?!

    • Steve January 24, 2011, 8:30 pm

      How can something anti-constitutional become anti-constitutional? The Banking Act of 1913 is High Treason at Law; The Trial of Thomas Earl of Strafford. The only issue is, what the masses accept in democracy can be forced upon all no matter how illegal, how unlawful, how unconstitutional.

      Everyone is playing in the mud, and don’t think they are the dirty ones.

    • Dave January 25, 2011, 2:13 am

      Since when does that matter?

  • FranSix January 24, 2011, 4:48 pm

    The other scenario that nobody is willing to contemplate is a negative discount rate, rather than a rise in rates.

    The Fed is now the beneficiary should this occur, not the Treasury.

  • Benjamin January 24, 2011, 4:04 pm

    “Under a scenario in which short-term interest rates rise very significantly, it’s possible that there might come a period where we don’t remit anything to the Treasury for a couple of years.”

    Wait! Remit has a few different meanings…

    1: We won’t give money to the Treasury (they will give it to the Fed, then?)

    2a: We will not fail to collect on that significantly risen interest ((a poster of Uncle Sam, pointing) Now hiring: Taxpayers. Don’t call us… we’ll call YOU!)

    2b: We will not pardon the Treasury any portion of it’s MASSIVE debt. See 2a.

    3: The financial system is not about to become honest for at least a couple of years, post interest rise. ie We keep lying for at least another couple years, afterwhich things’ll be so screwed up no one will be able to figure out up from yellow, nor soft from cold.

    Etc, etc…So as it turns out in the dictionary, it all pretty much means the same thing after all. Now all we need is a scenario under which short-term rates rise very significantly…

    …which has only been discussed here a few times in the past couple weeks. Now, let’s think about what two years of HI would do.

    If you can lose 1/2, literally overnight, and assuming this was done only a modest 4 times a year, a person with 1 billion dollars would have ~3.9 million in purchasing power after two years. One would had to have started out with 256 billion in order to retain 1 billion in purchasing power.

    But we have to consider what the first night would do. There would be SUCH a rush out of cash! If the first and consequent nights caused the number of halvings to double per quarter…

    My calculator doesn’t allow me to divide 1 billion by 1/2 more than 43 times without an (e)rror. At that point, one billion was down to ~.0001, and occurred somewhere in the 2nd quarter of the 2nd year. So at that point, one would had to have started out as a trillionaire in order to have a single dollar to their name (but even then, thier loses would just be getting started!).

  • RamseySte January 24, 2011, 3:48 pm

    I think this is sophistry to hide the fact that the US Treasury would get the money to pay any Federal Reserve insolvency from the Federal Reserve, when the Fed would buy US Treasuries!
    The Federal Reserve can not go bankrupt. It can just print what it wants, like it did when buying up $1.5 trillion of Fannie and Freddie loans. The above is just a shell game.

    And I think this is just to tie people’s brains in knots so that they can not figure out how the US government and the big banks stay solvent.

    It is easy. The Fed prints. And some day when the big banks start lending there is going to be a heck of an inflation. AND when the Fed STOPS printing money after that, there is going to be one heck of a depression.

    Interesting times.

  • Enrico Rusticali January 24, 2011, 3:34 pm

    The avoidance of debt would imply the Fed has some respect for what is left of the US financial system. I believe the goal is to bring in the SDR eventually.
    I am in Italy visiting family and I made a purchase from a US company that is being delivered via USPS. The shipping bill (Customs Declaration Dispatch Note – CP72) It quotes the insurable value in US 25.00 and right nest to it the next box……… SDR Value 19.95. This will be the next gen garbage planned for the draining of life from the next generations.

    • Robert January 24, 2011, 8:15 pm

      Who cares?

      What is an SDR? it is simply another policy statement made by another batch of statisticians.

      in other worlds, replacing the dollar with the SDR in practice is no different than replacing the dollar with SDR’s in theory…

      “what we need is a fancy new currency unit issued by a new global central bank”

      You have GOT to be kidding me.

      What the world needs is a massive re-awakening to what the term “value” really means in an individualistic sense.

    • roger erickson January 25, 2011, 8:37 pm

      > What the world needs is a massive re-awakening to
      > what the term “value” really means in an
      > individualistic sense.

      ?? Only if you want to ignore the entire history of social species. You know, the one leading to humans?

      Doesn’t the USA, at least, need a massive re-awakening to the concept of “Return on Coordination?”

      i.e., it always comes down to the people next to you, that have your back, and you theirs?

      You’ve summed the limitation of capitalism as you define it. Reality is that it’s never about commodity resources, but rather about the coordinated ability to acquire & use them JIT/JAN.
      Snails hoard. Army ants rule.

    • Robert January 26, 2011, 4:07 am

      “You’ve summed the limitation of capitalism as you define it. Reality is that it’s never about commodity resources, but rather about the coordinated ability to acquire & use them JIT/JAN.
      Snails hoard. Army ants rule.”

      I don’t what the hell you are talking about.

      Are you suggesting that commodity resources are somehow invalid as capital…? Or, are you proposing that Social interaction is the only valid method of measuring life liberty, and the pursuit of happpiness?

      Army Ants live fast and die young. They exhaust their environment of resources, They live in remarkably crowded conditions, and they tirelessly endeavor to serve the health and wealth of a queen, rather than serving to their own sovereignty.

      Snails live much longer lives, depend on no one but themselves, maintain their own (portable) domicile, and take from their environment only what they need…

      In other words- Army Ants struggle to maintain ultimately unsustainable societies, while snails live in harmony with their surroundings.

      Your assessment that Army Ants rule is highly subjective.

  • dan January 24, 2011, 2:01 pm

    Democracy is the theory that the common people know what they want and deserve to get it good and hard.
    H. L. Mencken

  • Cam Fitzgerald January 24, 2011, 1:54 pm

    Incredible. I just keep shaking my head in total disbelief. We often talk about the possibility of hyperiflation and the end of the currency as we know it. For many it is just idle talk, conspiracy theory or wild conjecture. But then along comes news that wakes you up again and you just have to stop dead in tracks and ask yourself “Can this really be happening”? The crazy part is, that all interest rates need do is return to their historical averages in order to trigger a crisis. That is how we know we are in deep trouble. The day is approaching.

    • mario cavolo January 24, 2011, 2:57 pm

      Hi Cam,

      Right, so then let’s ask this central question, what IF and how, if in genuine, realistic, practical FACT, can the world’s monetary system leaders/govt’s/ bankers insure that interest rates stay low?…and I mean ALL countries have a vested interest in this make or break number, not just the U.S., This is a very serious question.

      I still say the world can muddle along without the feared ” doomsday catastrophe” with outrageous debt and with the same historically slow decline in currency purchasing power that’s been going on for decades, that the debts will be wrung out via the inflation and other tricks (unpleasant ones) available in the system.

      Say we project out to 5 years hence 2016; the USD index is at 60. Private & public Asian money had already poured back into the cheap U.S. economy, why is that scenario so hard to swallow? How about this, rising Asia will more and more buy up cheapening U.S. and Europe. Asian currencies (and AU and CDN) will go up in value and the USD and EURO will go down 20% in value and that will be the new static balance pivot so to speak in the interconnected global economy. The U.S. companies with exposure abroad like KO and GE and YUM and L’Oreal and many others will be healthy; The disaster in this scenario is sadly the screwed lower/middle class American sector, but there are plenty of winners across the globe and in America too. They “were” the lifeblood of a utopia now gone.

      Cheers, Mario

    • Benjamin January 24, 2011, 5:04 pm


      IF one can build a case for rising Asian currencies creating a reversal. But even then, the JPY has been rising against the USD since 1975, during which time we lost much manufacturing and exporting to Japan. I’m not sure about CNY/USD, comapred to the yen, as my charts don’t go back that far. All I can say is what anyone else can say, and that is that the CNY has been rising vs the USD in more recent years, yet… here we are, having lost what we had left to that country, with so much more debt piling up as a result of it.

      Obviously, the U.S., and West in general, has/had a lot of wealth to transfer to “balance things out”. And with things this bad now, but no reversal having taken place… Any reversal of fortune is going to take place when not a few hundred million Westerners are in abject poverty, but when pretty much the entire West is.

      To what point? I have no exact numbers, but a good approximation is about as poor as Asia was during much of the 20th century. Which is a whole heck of a lot more to go yet. At that point, selling resources, labor included, at dirt cheap prices will be feasible enough to begin considering.

      As for rich Chinese citizens looking for bottom bargains… What of them? Nobody wants this to get much worse, so many can and will imagine bottoms anywhere and everywhere along the way to the actual bottom. So while they might turn out to be right, in the end, correction won’t be here until it happens.

      And, I contend, it won’t look anything like what many imaginations say it looks like today. I say this not because I want to, but because nothing thus far is solid proof that this is as bad as it gets.

  • mario cavolo January 24, 2011, 1:43 pm

    Hi Everyone,

    Fabulous commentary Rick….ergo step 2?….the inevitable falling dollar means everything else rises in terms of “price”….stocks, oil, commodities, etc… in which case then we hope that by means of the other variety of vehicles and games available to the moneymasters, the USD will hopefully for all of our sakes be a relatively controlled decline of 10-20% over the coming years rather than any “crash” type scenarios…PLEASE.

    Ergo…step3? Then how low does the USD have to go before the flow of funds reverses back into the USD / U.S. economy? As in, last week’s discussion here of the already massively increased level of China ODI into the U.S., plus today’s ICBC bank announcement putting China’s banks on U.S. soil…whoa whoa whoa…

    We can all easily swallow Rick’s comment that the Chinese are smart enough not to throw good money after bad. However, when the USD index hits say 68 ish and real estate values drop another 10%, with their own real estate prices having risen too high too quickly in the past 2 years, I think there will be Chinese ODI alligators happily snapping on the U.S.’s heels; Individual rich Chinese are already entering the U.S. on trips with max cash declared at the gate to buy up real estate, now we can see the rising indications of deals being made at the big biz/government levels….problem is whether all these flows of money will just continue to make the rich richer or if the U.S. leadership will structure these deals in a way that’s good for the middle class…I’m not confident they will start doing what they should be doing and I doubt many here would disagree. A friend was recently back in Brooklyn – his comment on what he noticed?…its being taken over by Chinese….geez.

    Tomorrow’s America will be a broadly structured societal shell of culture; internationally owned by the rich, emerging markets who are going to buy it up as it sinks and rebuild it. It will be a society even more culturally and internationally diverse than now with a greatly increased % of Chinese & Indians in the population.

    All because of the direction the Fed took the country in response to the 2008 financial crisis not to mention the longer circumstances leading to it the crisis.

    Meanwhile, Gann’s 60 year cycle says we’re now at that very significant 60 year commodity cycle top; yet corn and cotton are going limit up lately, what the hell? Gann better be right because the world will not survive with ag and oil prices out of control and if the Fed interferes by printing up another trillion or two, we’re sooooo beyond screwed in so many ways my head can’t process it all. I leave that to much better thinkers here than myself. This next month is going to be a wild ride…

    Cheers, Mario

    • Benjamin January 24, 2011, 5:45 pm

      Hello again, Mario

      I have to wonder whether buying real estate is a wise idea, even after another 10% decrease. Unless the land bears or can bear proven reserves of any commodity(ies), I think real estate is going to take a big step backwards in the consideration of broader market trends.

      This has been asked and explained in various ways here before, but my own personal explanation as to why real estate won’t be a part of an HI “bonanza” is precisely because of the HI; renters/borrowers/or even outright buyers are destined to not generate the necessary returns on the investment, as the money devalues too sharply, too quickly.

      The same can be said of commodities, actually, except that those can be bartered and used to make useful things. That said, the only point I see in speculating in real estate to have locations to change to in the chaos… Assuming squatters won’t steal/destroy it out from under you, and assuming you have a fail-safe way of traveling about in such circumstances… Lots of if, ands, buts, and what-have-yous that pretty much make them lousy investments, imo!

      But there can’t be an HI event. It’ll be 20-30 years or whatever of slow, grinding pain. But as I pointed out in another post, that’s already been going on, and things have yet to reverse. In fact, the opposite has occurred. Things keep worsening instead of reversing.
      And with the very real possibility of a default in munis, I just can’t see how anyone can maintain trust in Keynes/Friedman. At least without a very sharp correction, aka CRASH in the dollar. We’re simply not through this yet. A muddle-through period doesn’t square with that immenent, aforementioned default, and I believe history will see the last 30-40 years as that muddle-through that many are looking for in the now/near-future.

      In any event, there is nothing any of us here, nor elsewhere, can do about it. Unless you happen to have a few hundred trillion lying around, you’ll be toast like everyone else in an HI that is, despite my hard deflationary stance, very, very likely to happen. However, China seems better off compared to many Western nations, so…

      You’re at least on that side of things, however long that can last and however effective that can be.

    • Robert January 24, 2011, 8:10 pm

      Benjamin- you hit a key point that everyone needs to think about.

      Every vicious hyper-inflation of the last century (Germany, Argentina1, Brazil, Zimbabwe, and Argentina2) generated distorted price increases on everything EXCEPT real estate.

      I think I posted before about the Frenchman who offered the Berlin City council a single ounce of Gold for an entire block of forclosed buildings in Munich in 1923- and the German government jumped at his bid.

      And Mario- Please study Gann’s theory a little more closely- Gann based his premise on hard money and barter- I don’t think his rationale works when the pricing denominator is infinitly upward adjustable simply by the stroke of a pen or the pressing of the “enter” key on a computer keyboard.

      I don’t think this cycle is anywhere near its top.

    • Benjamin January 24, 2011, 8:44 pm


      Thanks for the example from the many in history, as I completely forgot about that. If history shows it, and the logic says it can’t work… Well, all I can say for those investors speculating in U.S. real estate is that they’re gonna get their heads cut off from sticking them into that guillotine hole.

      “I don’t think this cycle is anywhere near its top.”

      Speaking of which…

      I went and tried to halve a dollar 255 times by resetting the calculation to an approximate amount, to free up decimal places. 255 is the number of times the currency value would suffer under the conditions which I subjected it to, double from each previous quarter, over a two year period.

      It was no use. There just aren’t enough decimal places in a typical windows calculator to carry out that kind of operation.

      But it was clear that the most pain would come as the end approached. It was around 80 halvings that took a dollar to a ridiculously low amount (like millionths of a penny). And that wasn’t even halfway through the third quarter of the second year. 175 more were needed, so the 80 wasn’t even 1/3rd the whole.

      I am reminded of a show I once saw on the Discovery Channel, which was about the various planets. The red spot on Jupiter is incredibly huge and, as the show explored, said it was like 100 or so times bigger/more powerful than the biggest/most powerful hurricane ever recorded. They simulated what it would be like for the state of Florida to be hit by such a hurricane. Needless to say…

    • mario cavolo January 25, 2011, 6:14 am

      Exactly, even Elliott Wave Theory which says “we’re now at wave x and so the next expected wave is y…. and then the FED writes a trillion dollar check….oops. Meanwhile all equities and ag commodities are together in unison topped out big time….good grief….

  • Enrico Rusticali January 24, 2011, 1:30 pm

    This explains the 30 billion swap subprime for treasuries in the early days of the crisis. It is a total joke. The 144 billion in bonuses (equal to the state’s shortfall) is a normal bonus in actuality but adjusted for hyperinflation.
    The burden falls on the savers and those of is that give value to this fiat system. If Americans continue to believe that this is all due to poor decisions originated from a carefully thought out attempt to right the ship, think again. It is all by design to implode the US dollar and the entire world currency system by default. There will be no recovery from this hot potato. I say claw-backs are called for at this stage.

    • Martin C January 24, 2011, 1:45 pm

      Enrico, to what end? A world currency or a route to debt avoidance?

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