Bernanke Helps Banks Recapitalize By Paying Interest On Excess Reserves

That's the nice formulation of what's been happening since 2008 in banking from Mish today, here, taking inflationists like Michael Pento to the woodshed:

The simple fact of the matter is Pento has no idea how bank lending works in the real world. 

There is no other way to state it. If banks thought they had good credit risks, they would lend (provided of course they were not capital impaired).

Moreover, by paying interest on reserves, Bernanke is slowly recapitalizing banks over time. Would Bernanke easily give that up? Well he hasn't so far. Nor has he even dropped a hint of it.

The Federal Reserve can talk all it wants about fulfilling its too many and misguided missions, and it does so, incessantly, and I would say purposefully in order to divert your attention from the real mission. Nor is this done without the full approval of the political class in America, which profits from the arrangement.

The one thing you can be sure of is that the one mission the Federal Reserve has is to watch out for its own in the Federal Reserve banking system. Recapitalizing the banking system whose failures have cost the banking industry north of $88 billion is the Fed's #1 priority.

Our country is of the bankers, by the bankers, and for the bankers. If you can't find work or refinance your house, dat's tough, Anwar. Dhey are on a meession from Gad. The banks must be saved at all costs, which is why the taxpayers are on the hook for everything in the Fascist States of America.

Who is recapitalizing YOU?

Why Quantitative Easing is Here to Stay

It looks like in saving the banks from drowning, the Fed, the dollar, and the country are headed for Davy Jones' Locker.

From Michael Pento:

The truth is that without the ability to fully withdraw prior liquidity the Fed is incapable of significantly raising interest rates. After all, the Fed can't raise rates by fiat. It must sell assets to do so. Similarly, to support the dollar it must take money out of circulation, which is also accomplished by asset sales.

But the Fed's arsenal is no longer stocked with high grade weaponry.

As the rest makes plain, here, its stockpile is full of duds.

Tom Petruno on the Zombie Bears

Not once in this more or less even-handed discussion does the massive rot infecting bank balance sheets because of declining housing and commercial real estate prices get mentioned.

You'd never know that half of the nearly 8000 banks in this country have serious problems, nor that the savings of millions of Americans have disappeared because of the bursting of the housing bubble.

But hey, we can live with rot, and maybe even recover, right? Cancer patients do it all the time. Except for the ones that die.

Against the sickening round of prolonged chemotherapy and radiation currently being applied through extend and pretend and stimulative liquidity, the bears instead advocate surgery:

The zombie bears are certain that the worst lies ahead, and that consumers and investors should prepare accordingly — although how exactly to prepare is a matter of debate.

"We need a deleveraging, deflationary depression, and in three to five years we're going to have a much better economy," said Michael Pento, senior economist at Euro Pacific Capital in New York.

"We just have to go through hell in the meantime."

Decline in Household Debt Due to Defaults, Not Deleveraging

So concludes Mark Whitehouse for The Wall Street Journal, here. Of a decline of $610 billion in debt, only $22 billion is due to deleveraging. The vast majority of the decline is due to default, over a half trillion dollars.

Michael Pento here apparently hasn't gotten the message, but points out that whatever else may be said about consumers not adding to their debt profile, the government has picked up the slack, and stratospherically so. For that reason he abjures all talk of debt deflation.

"The Feds Have No Faith in Recovery"

Penetrating analysis here from the chief economist at Delta Global Advisors.

November 5, 2009

The Feds Have No Faith in Recovery

By Michael Pento

The stock market has enjoyed a significant rally since the end of the first quarter. The Bureau of Economic Analysis reported last week that the economy grew at a 3.5% annual rate in the third quarter--a figure they achieved by that claiming inflation was running at only a 0.8% annual rate, despite a sharp drop in the dollar, a spike in commodity prices and record highs for gold.

The cyclical bull market in stocks and positive print on GDP has caused some on Wall Street and in Washington to claim the recession has ended. Despite all the good economic news, an end to fiscal and monetary stimulus is nowhere in sight, precisely because policymakers know the happy news is artificially derived.

A closer look indicates that neither the administration nor the Federal Reserve believes its own recovery rhetoric. They understand that the economy will not prosper without continued life support.

I believe removing such artificial stimulus is needed so the country can immediately begin de-leveraging and to prevent the accumulation of yet more baneful debt. What is truly amazing is how many people on Wall Street are foolish enough to postulate that our problems have been solved. The stock market will not be so easily fooled for much longer.

The Great Depression Part II was narrowly averted last year by slashing interest rates to near zero. The Fed made money virtually free because the record level of indebtedness ($34 trillion) in the economy required such low rates so that borrowers could service their obligations. Otherwise a cataclysmic domino effect of defaults and bankruptcies would have occurred. To avoid that scenario, the public sector assumed some of the private sector's debt and then subsequently took on a significant amount more. The debt of the nation continues to increase at a 4.9% annual rate. All public debt is ultimately the responsibility of the private sector to pay off--either directly or through future taxes. As a result, the economy has never been more precarious than it is today.

In spite of this, the stock market appears to be doing quite well. We've seen a 57% rally off the March lows in the S&P 500. However, if you measure the market against other assets its performance is much less impressive. Since the beginning of 2000 the S&P is down about 50% measured in terms of a basket of currencies other than the falling U.S. dollar. The index is down nearly 80% against the real inflation hedge--gold!

The sad truth is that this recent market rally has been produced on the back of a weakening dollar and the slashing of corporate overhead. Cutting payrolls and research and product development projects are not a prescription for sustainable growth. As I like to say, you can't burn your furniture to keep your house warm forever. Eventually, top-line revenue growth must emerge or Wall Street's game of beat-the-expectations will be short lived.

It's also worth noting that a country cannot devalue itself to prosperity and that a bull market cannot survive an inflationary environment for long. In the short run, nominal gains in the averages can occur since everything priced in dollars tends to increase in value. However, the rally will be truncated unless the Fed provides consumers and corporations with a stable currency.

The ramifications of a crumbling currency are vastly misunderstood. A strong dollar is the cornerstone of a healthy economy. It is essential for balanced growth and healthy investment to occur. On the other hand a weak currency decimates the middle class and the corporate sector's ability to maintain earnings growth. Inflation lies behind all infirm currencies, and it is inflation that destroys the purchasing power of consumers. The diminished value of their wallets leaves them with the ability to buy only non-discretionary items. As a direct result, unemployment rates soar and economic output plunges.

I believe we will suffer from a protracted period of stagflation. Money supply, as measured by M2, has increased 5% Y.O.Y. Meanwhile the output of goods and services is falling. As long as the money supply is chasing a shrinking GDP pie, there will be upward pressure on prices.

Making the situation even worse is the manner in which the money supply is growing. The quality of growth is very low because the increase in supply is coming from commercial bank purchases of Treasury debt, rather from an issuance of credit to the private sector for capital goods creation. Total Loans and Leases at Commercial banks are down 8.2% from last year. Meanwhile, the amount of Treasuries held at all commercial banks is up 20% year-on-year.

That means money supply growth is emanating from government's misallocation and redirection of capital. It isn't being loaned out to build mines and factories; it is instead being loaned out to increase consumption and build even more consumer debt.

If the Treasury and Federal Reserve truly believed the economy and the stock market were on a sustainable recovery path, talk of extending and increasing the home buyer's tax credit would be off the table. The Fed would already be reducing the size of the monetary base. The truth, however, is that no one in government really believes in this recovery. If they did, they would be hiking interest rates and the deficit would be shrinking.

The government's realization of our precarious economic condition means its largess will continue. Near term, that may ease some pain. So did the artificial stimulus that gave rise to the housing boom. In the end, a protracted period of a near-zero interest rates, along with endless economic stimulus, will spawn another bubble and not a genuine recovery.

Michael Pento is chief economist at Delta Global Advisors and a contributor to greenfaucet.com.