The 2011 Remake of “The Sting”
Published in La Tribune
(France) on 7 February 2011
by Marc Fiorentino (link to original)
Madoff was actually an amateur. With the $50 or $60 billion he embezzled, he did not make the most of the possible operations of the famous Ponzi scheme. It has to be said that the Geithner-Bernanke duo — our new Robert Redford and Paul Newman in this remake of “The Sting” — has created fierce competition. Let's analyze this massive con, because it is set up with a perverse subtlety and a subtle perversity.
First of all, let's start with a little refresher course: the American Treasury Department and the Federal Reserve are two different pockets of the same money. Even if the American central bank is independent, its resources are the same as the American Treasury's. When the Fed loses money — and it is going to lose a fortune in its massive purchase of Treasury bonds because interest rates have started to rise again — there is a loss that directly adds up to the U.S. budget deficit, which is already in very bad shape, each year.
What happened in 2010? The U.S., already in virtual bankruptcy, used expansionary monetary policy. It injected hundreds of billions of dollars that it did not possess into the economy. The U.S. Treasury had to borrow those hundreds of billions. The problem was that China did not want any more of these new subprime loans. Neither did Japan nor the Gulf countries. American households absorbed most of these Naples garbage-like loans as they invested the savings that were recently rebuilt.
But that was not enough. As a result, the Fed entered the picture and lent money to the U.S. Treasury. But the Fed and the Treasury are the same thing! The money came from one pocket to go into the other — and today both pockets are torn.
Last week, we learned — to no one's surprise but still with dread — that the Fed became the first bondholder of American securities before China! Fascinating, isn't it? Obama's administration, which wanted to reform the banking system, did what no other bank or no big time con ever tried to do. It has to be said that one more contradiction will not make any difference to the administration: the 20 largest American banks paid a record amount of money — $135 billion — for salaries in 2010, whereas Obama was supposed to destroy Wall Street, the lure of profit and the bonus system. Michael Douglas was right to say in 2010 that greed is not just good, it is also legal. Whatever.
The problem with this oh-so-impressive conjuring trick is that it will not be possible to use it in 2011. You are about to understand why. Interest rates are going up. So every day, the Fed is losing money on the $1.1 trillion Treasury bonds it swallowed up. It will probably make a mad, headlong rush with a QE3 or QE4, but it will not be able to keep absorbing the needs for loans of its fellow Treasury Department.
Madoff needed markets to keep increasing in order to have his scheme last. The Lehman Brothers' crisis ruined his pyramid. Geithner and Bernanke need interest rates to decrease in order to keep pouring dollars all over the place without raising suspicion among people.
All right, but there is a "but."
With raw material prices that are soaring — one of the consequences of that quantitative easing operation — asset values that are growing because of speculation and banks that are returning to their worst habits, interest rates are rising, slowly but surely. And if they start to rise more sharply, it will be enough for this great con to be discovered.
“But, if it were that simple, what are the police doing?” you are going to ask me. The police — that is to say, the rating agencies or the SEC — are about as strict with the Treasury Department and the Fed as the Tunisian police were with Ben Ali's in-laws!
Today, our duo of acrobats is in a mad, headlong rush that is inevitably heading the U.S. to disaster. What a job they did!
First of all, let's start with a little refresher course: the American Treasury Department and the Federal Reserve are two different pockets of the same money. Even if the American central bank is independent, its resources are the same as the American Treasury's. When the Fed loses money — and it is going to lose a fortune in its massive purchase of Treasury bonds because interest rates have started to rise again — there is a loss that directly adds up to the U.S. budget deficit, which is already in very bad shape, each year.
What happened in 2010? The U.S., already in virtual bankruptcy, used expansionary monetary policy. It injected hundreds of billions of dollars that it did not possess into the economy. The U.S. Treasury had to borrow those hundreds of billions. The problem was that China did not want any more of these new subprime loans. Neither did Japan nor the Gulf countries. American households absorbed most of these Naples garbage-like loans as they invested the savings that were recently rebuilt.
But that was not enough. As a result, the Fed entered the picture and lent money to the U.S. Treasury. But the Fed and the Treasury are the same thing! The money came from one pocket to go into the other — and today both pockets are torn.
Last week, we learned — to no one's surprise but still with dread — that the Fed became the first bondholder of American securities before China! Fascinating, isn't it? Obama's administration, which wanted to reform the banking system, did what no other bank or no big time con ever tried to do. It has to be said that one more contradiction will not make any difference to the administration: the 20 largest American banks paid a record amount of money — $135 billion — for salaries in 2010, whereas Obama was supposed to destroy Wall Street, the lure of profit and the bonus system. Michael Douglas was right to say in 2010 that greed is not just good, it is also legal. Whatever.
The problem with this oh-so-impressive conjuring trick is that it will not be possible to use it in 2011. You are about to understand why. Interest rates are going up. So every day, the Fed is losing money on the $1.1 trillion Treasury bonds it swallowed up. It will probably make a mad, headlong rush with a QE3 or QE4, but it will not be able to keep absorbing the needs for loans of its fellow Treasury Department.
Madoff needed markets to keep increasing in order to have his scheme last. The Lehman Brothers' crisis ruined his pyramid. Geithner and Bernanke need interest rates to decrease in order to keep pouring dollars all over the place without raising suspicion among people.
All right, but there is a "but."
With raw material prices that are soaring — one of the consequences of that quantitative easing operation — asset values that are growing because of speculation and banks that are returning to their worst habits, interest rates are rising, slowly but surely. And if they start to rise more sharply, it will be enough for this great con to be discovered.
“But, if it were that simple, what are the police doing?” you are going to ask me. The police — that is to say, the rating agencies or the SEC — are about as strict with the Treasury Department and the Fed as the Tunisian police were with Ben Ali's in-laws!
Today, our duo of acrobats is in a mad, headlong rush that is inevitably heading the U.S. to disaster. What a job they did!