Brain Damage - And, Uh, QE Is Working (I'll Explain)

The Fed has lost control of the markets and Wall Street economists, media analysts and most blog writers suffer from tragic and terminal mental disabilities.

First off, I'd like to say that I'm really quite amazed at the degree of "surprise" over the FOMC policy statement yesterday.  Anyone who understands the nature of QE and why it's being done knew back in May when Helicopter Ben first mumbled the word "taper" that the Fed wouldn't reduce QE.  Given the response reflected by the media and the fact that 100% of Wall Street's brain trust expected a $10-15 billion "taper," I'd say that every single Wall Street economist is brain damaged.  What he hell are they getting paid for when they get their forecasts so egregiously wrong every god damn week?  Seriously.

And now I'm seeing articles which are reporting that now the big debate is the timing of an eventual taper.  Einstein is credited with attributing insanity to the act of making the same mistake repetitively.  I guess Wall Street, and the media who regurgitates Wall Street's vomit, must not only be brain damaged, but they all must be insane as well.  Analyze this you brutes:   Ben Bernanke said - almost verbatim - that the Fed will reduce its stimulus policy when the unemployment is below 6.5%.  He specifically said that  "we are tied to the data, we don't have a fixed calendar schedule" and that a low interest rate policy will be in effect until unemployment goes below 6.5%.  The Fed is tied to the data not the calendar.  Bold, italics, underlined.  If you know how to use google you can find the exact quote from Bernanke's mouth.  If Wall Street's overpaid finest - and paid with taxpayer largesse, I might add - wants to figure out when the Fed will "taper," then they should spend their time figuring out what it will take to get unemployment below 6.5%.  Here's my call:  we won't see that number in our lifetime.

Now I'll explain for Zerohedge, CNBC, Fox Business, Bloomberg News and ALL the severely mentally challenged Wall Street analysts exactly why the Fed is printing money.   Follow the f#cking money.

The Fed is printing money in order to keep the banks - both the domestic too big to fails AND the foreign too big to fails - from failing.  That's the policy.  In fact, I believe that in the whirlwind of wealth transfer in 2008 - led by the Obama Government - that Congress may have even legislated into law the too big to fail idea.

If QE is about the economy and jobs, why is more than 50% of the money being printed going to - and sitting in - the Fed bank account held by the U.S. subsidiaries of foreign-owned banks?  Here's the money trail.   Since "QE" began, the Fed has printed up roughly $2.8 trillion dollars.  I've gone through this exercise in past posts, but here's the updated numbers.  Of that $2.8 trillion,  roughly $2.3 trillion is sitting in the banks' "excess reserve" account at the Fed.  Of that $2.3 trillion, $1.193 trillion has gone to U.S. banks charted in this country.  However, $1.225 trillion has gone to the foreign banks with operations in the U.S.  You can find these numbers in the Federal Reserve Board report on Assets and Liabilities in the United States, Table H.8 - here's the pdf for you:  LINK

I'm not sure I need to state the obvious here, but if QE is all about trying to stimulate an economic recovery, then how come 82% of everything the Fed has printed up is sitting in the "cash accounts" of the banks at the Fed?  The only explanation is that the Fed is engaging in this money printing in order to prevent the banks from collapsing.  There can be no other explanation.  None.  Not to throw salt on the wound but, as I've demonstrated ad nauseum in previous posts, the economy is not recovering.

And this is why I never believed that the Fed would "taper."  Especially after that interest rate spike in May.  I think the Fed actually wanted to extend a token taper, which it knew would have to be reversed, but could not even do a meaningless token amount after Helicopter Ben's mid-May faux pas caused the biggest interest rate spike in 50 years of data.

The fact that they can't even dish up a token taper really says a lot about how bad things are behind the scenes with bank balance sheets. The banks that have a big exposure to interest rate derivatives got crushed when the interest rates spiked up in May. That spike was the biggest spike in 50 years of data. What that means is that bank hedge models weren't even close to predicting that event AND the banks weren't even close to being properly hedged against this mega-multi-trillion dollar interest rate derivatives exposure. 

Think about Long Term Capital. Remember that abortion?  It was "outlier" black swan type market movements that sent LTCM to its grave. That's the kind of market movement we had in May with interest rates in the context of the kind of interest rate derivatives exposure that the banks have when there's an outlier move like that.  There is no other explanation and this is why the Fed kept injecting money into the system that went directly to the banks cash account at the Fed even after Bernanke mumbled something about it being time to pull back on QE.

Here's how it works:  the banks need that $2.3 trillion in cash to put up as collateral against their multi-trillion dollar market-to-market losses on their interest rate (and credit default) swaps.  That keeps them in the game longer and extends the amount of time they have for a divine miracle to come along and save them from completely incinerating from a big nuclear derivatives melt-down.   The fact that the Fed can't even pull back by a token amount tells us that the situation is still unstable and probably getting worse.  You could see that I'm right in the expressions on Bernanke's face and in his eyes when he was giving his post-FOMC press conference.  He's frightened and that's why he's leaving the Fed.

Any other analysis of this is nothing more than sound and fury, a tale told by an idiot.  Anyone who thinks that QE is about helping "main street" and the middle class is severely brain damaged. And, by the way, as long as the banks don't collapse, QE is indeed working.  It will probably take a collapse of the dollar for it to fail, but stay tuned on that one because if you pay close attention to what China is doing with the yuan and with gold, on a clear day you can see the dollar's cliff.