Revisiting the Financial Crisis: Meeting of the Federal Open Market Committee on September 16, 2008 Part 2

This is part 2 of the my thoughts on the Federal Open Market Committee on September 16, 2008. You can read part 1 here. This meeting of the FOMC took place after Lehman Brothers filed for bankruptcy.

William C. Dudley had a laughably bad read of how the financial industry would react to the Federal Reserve not lowing the interest federal funds rates. This is the interest rate set by the Federal Reserve for banks lending to each other. Banks were desperate for credit after the Lehman Brothers announcement. Dudley thought banks would support the Fed not lowering the federal funds rates.

MR. DUDLEY. Well, I think the market participants would gain some comfort to the extent that the Federal Reserve as an institution indicates concern about what’s going on in the financial markets. But in some ways the Desk has already signaled that concern by its intervention, so I’m not sure that additional indications are needed. But in the language you might want to indicate to market participants that, if things were to materially worsen in the financial markets, the Committee might revisit the issue of where the federal funds rate should be.

Dennis P. Lockhart, the President of the Federal Reserve Bank of Atlanta, believed that the economy would start to recover in 2009.

With that as prologue, let me make just a couple of comments on regional soundings from the last couple of weeks. Anecdotal reports from the Sixth District support the view that the economy is quite weak but not deteriorating markedly. The CFO of a large retailer of housing-related goods said that they think they see a bottom forming. I am also starting to hear some reports that housing markets feel as though they are beginning to stabilize; but, really, it is a little too early to say that a bottom has formed in any of our housing markets. My overall sense from District contacts and our surveys is of an economy that is quite weak, with no clear trend evident.

Turning to the national outlook, like most forecasts, my view on the likely path for the economy has not changed materially since our August meeting. I see nothing in the data and hear nothing from District reports that alters my views that the second half will be very weak. I expect this weak period to be followed by a slow recovery gathering in 2009, but the foundation of a recovery starting around year-end or early 2009 may be far from solid. The contraction of credit availability that is confirmed by both surveys and anecdotal evidence could deepen as financial institutions face tight liquidity and difficulty recapitalizing. A protracted credit crunch would likely operate as a substantial drag on the economy.

The economic stimulus package, signed into law by President Barack Obama, helped keep a recession from turning into a depression. We can see that the unemployment rate ticked up after the September meeting of the FOMC.

Lockhart was also wrong in his prediction of the federal funds rate.

My view of the appropriate policy path is consistent with the Greenbook—that the fed funds rate target will remain stable at or close to the current level for several months going into 2009. My preference is to hold the fed funds rate at the current level of 2 percent. Among the reasons is that a ¼ percentage point drop, as suggested by alternative A, is really not clearly called for by a changed outlook for the real economy. Inflation risks are still in play, and I think we should give credit markets more time to digest events and sort out rate relationships.

The Federal Reserve changed course and have kept federal fund rates near zero percent. From the Federal Reserve website.

To support continued progress toward maximum employment and price stability, the Federal Open Market Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In its December 2013 statement, the Committee reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than half a percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In addition, at its December 2013 meeting, the Committee indicated that, based on its assessment of measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments, it will likely be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal.

The Federal Reserve has kept fund rates near zero percent to keep credit moving between the banks. The fourth quarter of the 2008 was projected to have low GDP. Unemployment has showed signs of increasing. The housing bubble had popped. Banks were starting to go into panic mode after the Lehman Brothers bankruptcy. What was Lockhart thinking that the 2 percent federal fund rate could be maintained?

Future Federal Reserve chair Janet Yellen was correct in her projection unemployment and housing construction numbers would dip.

Recent data also suggest that labor markets are weakening across the board—a development that will cast a pall on household income and spending. The interaction of higher unemployment with the housing and financial markets raises the potential for even worse news—namely, an intensification of the adverse feedback loop we have long worried about and are now experiencing. Indeed, delinquencies have risen substantially across the spectrum of consumer loans, and credit availability continues to decline. One ray of hope is that the changes at Fannie and Freddie have caused a notable drop in mortgage rates. Another is that the decline in home prices has become somewhat less steep, and we have seen an outright improvement in home inventories relative to sales. But my contacts are very pessimistic about the prospects for nonresidential construction. They note that construction is continuing on projects in the pipeline with committed funding, but new projects are all but impossible to finance.

Unfortunately, Yellen mistakenly back keeping the federal fund rates at 2 percent.

What is fascinating is the FOMC was obsessed with inflation during the meeting. Inflation turned out to be the least of the America's economic problems in 2009. Inflation actually dropped to 1.1 percent in November of 2008 In December the rate was 0.1 percent. Inflation stayed below 3 percent in 2009.

Meeting of the Federal Open Market Committee on September 16, 2008 by Michael Robert Hussey

Revisiting the Financial Crisis: Meeting of the Federal Open Market Committee on September 16, 2008 Part 1

The Federal Reserve has finally released the minutes of the Federal Open Market Committee after Lehman Brothers filed for bankruptcy. William Dudley opened with a briefing on the current economic status. The Fed did an overnight repo (repurchase agreement) to put money back in the market. The stock market ended up losing half its value during the following five months. Dudley was too optimistic about the repos.

To try to have more effect on this issue, this morning we came in much earlier than we normally do—around 8:00 a.m. We did a $50 billion overnight repo. The funds rate at the time was trading at 3¼ percent. I think this means that we are obviously adding way too many reserves for the current maintenance period; but the good news is that, when this maintenance period is over a week from tomorrow, we get a fresh start. So at the current time I think we will see essentially a lot of firmness in the funds rate in the morning and then the funds rate trading down to zero late in the day. Where the funds rate averages relative to the target is going to be somewhat difficult to say. Yesterday, despite the collapse in the funds rate to essentially zero at the end of the day, the funds rate was quite firm relative to the target. I don’t remember the numbers, but it was in the 2½ percent range. We are going to try to hit the target on average, but it is going to be very difficult. In the current circumstances, it probably is more sensible—at least my advice would be—to err on the side of providing enough liquidity to the market rather than trying to be cute and worrying just about the target federal funds rate.

The Fed was buying the repos to give a quick fix to cash strapped financial institutions. The banks would agree to buy to repos back at a greater interest.

According to Bloomberg News, Lehman Brothers used repos to hide the true worth of the investment bank. Lehman was essentially lending money to itself through Hudson Castle Group Inc. This was legal under the law. Lehman pledged the notes to Hudson Castle as collateral to JPMorgan Chase & Co. The notes were essentially worth nothing.

Dudley told the Committee that Goldman Sachs and Morgan Stanley were at risk. Investors feared that Goldman Sachs and Morgan Stanley could go under like Lehman Brothers.

Now, the Lehman filing has also intensified the pressure on Morgan Stanley and Goldman Sachs in a number of respects. The Lehman failure means that investors now view the debt of Morgan Stanley and Goldman Sachs as having much more risk than it did on Sunday. This means that these firms need bigger liquidity buffers than they had before, and it does have implications for long-term profitability. As a consequence, their share prices fell very sharply yesterday. Morgan Stanley was down about $5 a share, to $32, and Goldman Sachs’s stock was off 18 points, to $135. Morgan Stanley experienced a modest, but not insignificant, pulling back of their counterparties and ate into their liquidity buffer by a measurable degree.

If no one wants to do business with Goldman Sachs or Morgan Stanley than they will quickly run out of money. Banks only keep about ten perfect of their revenue. The rest of the money loaned or invested out. Banks make their money from collecting interest from their various deals. THe problem is this creates a problem for the banks if there is an economic crisis.

Dudley correctly told the committee that AIG presented a bigger crisis to the financial institutions. People that bought to collect on credit default swaps they bought in the event of Lehman Brothers assets failing. Dudley told the Committee that AIG doesn't have the money to repay the on the swaps their clients bought.

Of course, we also have the issue of AIG. The AIG problem is at least starting as a liquidity crisis. The problem with AIG is that the parent company doesn’t have a lot of liquidity resources and doesn’t have easy ability to funnel liquidity up from their subsidiaries because most of the subsidiaries are regulated entities. So AIG is running into two problems: One, they are unable to roll their commercial paper and, two, as their ratings are downgraded—they were downgraded by Moody’s yesterday, I think from AA minus to A minus, but don’t quote me on that—they have to post a lot more collateral against their derivatives exposures and also with respect to their GIC (guaranteed investment contract) business. So AIG is in a situation in which the parent is basically going to run out of money—today, tomorrow, Thursday, or very, very soon. Now we say it’s a liquidity thing, but a lot of times when people look closer at the books they find out that the liquidity crisis may also be a solvency issue. I think it is still a little unclear whether AIG’s problems are confined just to liquidity. It also may be an issue of how much this company is really worth.

What Dudley is actually saying here is that Eurupean banks were freezing out the major American investment banks.

This would reassure people that dollar liquidity was available in Europe throughout the European day. My advice to you is that this is probably a good idea in this environment because we are seeing that the lack of dollar liquidity in Europe is really having a feedback effect on people’s willingness to do business with one other in the broader markets.

The Committee agreed to swap dollars for Euros with the European Central Bank and other parties. Donald Kohn did not want this recorded in the minutes. Ben Bernanke agreed with Kohn.

CHAIRMAN BERNANKE. Why don’t we have discussions with our counterparties—we won’t announce anything today, I would assume?

MR. DUDLEY. No, I think they have to take it up the chain of command, just as we do here. So it’s going to take probably a day.

MR. KOHN. This would come out in the minutes for this meeting.

CHAIRMAN BERNANKE. Right. We’ll announce something.

MR. STERN. But I assume there will be an announcement at some point.

CHAIRMAN BERNANKE. Of course. When would we announce this measure?

MR. DUDLEY. I think it would be after we’ve had a chance—I mean, I think we have a lot of work to do with our foreign counterparties. This was basically raised to me this morning.

Dudley was concerned that the dollar would not be available in Europe. Jeffrey M. Lacker felt that the ECB was attempting to hoard dollars because of the economic crisis. I think both Dudley and Lacker are right.

MR. LACKER. Note here a sense of discomfort with our lending them dollars that they already have and so our serving as a substitute for their mobilizing their own dollar reserves for this purpose. Obviously, the demand could swamp their own reserves, and at that point I would feel differently about this. But my understanding is that the distribution within the European system of central banks is uneven, and in some sense this just provides them with a way to circumvent negotiating how those dollars would be distributed from different central banks to different private-sector banks within their own system. Broadly, I’m uncomfortable with our playing that role.

The short answer is banks all over the world were going to the Federal Reserve for a line of credit.

Bernanke signed off on the Euro swap deal with Europe because he was concerned about the dollar weakening in Europe.

There is another action item I would like to add, given what is happening, which is that there are very significant problems with dollar funding in other jurisdictions—in Europe and elsewhere.

Later in the meeting, Lacker was talking about raising interest rates. On what planet was he living on.

I can support standing pat with the funds rate today. I think that’s a good idea. I think, looking forward, that we will want to raise rates sooner rather than later if core inflation doesn’t moderate.

The Federal Reserve ended up keeping interest rates near zero in response to the great recession. The Federal Reserve ended up dropping interest rates to 1 percent on October 29, 2009.

The labor market was already weak when Lehman filed for bankruptcy. Economist Dave Stockman provides a bleak picture to the Committee. Unfortunately, Stockman thought the unemployment numbers might get better.

The other notable development over the intermeeting period has been the weakness in the labor markets—now not principally in the payroll employment figures. Private payroll employment has been falling pretty sharply but not any faster than we would have thought. But the rise in the unemployment rate is remarkable. Now, some of the 0.4 percentage point increase in the unemployment rate last month could be statistical noise. It wouldn’t be entirely surprising to see it fall back some. But the more than 1 percentage point rise that we’ve had since April is not going to be statistical noise. Some of that increase probably reflects a bigger response to the emergency unemployment compensation program than we previously thought, and we’ve upped our estimates for that to a little less than 0.3 percentage point on the level of the unemployment rate. But even putting that aside, we have experienced a more significant rise in the unemployment rate, and I think that’s consistent with other things that we’re seeing in terms of the labor market data. We’ve seen another appreciable jump in initial claims. Announced job cuts are up. Job openings are down. Survey hiring plans have softened.

Stockman thought there was a chance for the housing market to recover in 2009. Boy, was he wrong.

The three things that are absolutely central to producing that outcome are our projection that we’re going to get a stabilization in housing in 2009—and early in 2009; that there will be some diminishment of the drag on growth from the financial turbulence; and that oil prices flatten out. Of those three, to my mind, the component that probably is most central and most important would be seeing some stabilization in the housing market, not only because this has been a big drag on growth and will also have consequences for household wealth but also because if there’s going to be some clarity and reassurance to financial market participants, it seems as though some end to the housing debacle has to be in sight. We think we are seeing a few glimmers of hope there—however, we thought that on occasion in the past and have been proven wrong. But sales of existing homes have been flat since the turn of the year. Sales of new homes have been flat for several months now. We’ve had a drop in mortgage interest rates that followed the takeover of Fannie and Freddie. Starts have fallen so much now that, in fact, builders are making significant progress in working down the inventory of unsold new homes and even months’ supply has tipped down of late. So we think that some things are looking a little better for us there. As a consequence, we’re expecting to see some bottoming-out near the end of this year or the beginning of next year—but not a sharp recovery. Overall residential investment actually is still a negative for 2009 but less of a negative than it has been this year.

This chart by Business Insider show foreclosures increased in 2009. Banks went into overdrive on foreclosing on homeowners. JPMorgan Chase was forced to pay $13 billion for the illegal mortgage practices of Washington Mutual.

Meeting of the Federal Open Market Committee on September 16, 2008 by Michael Robert Hussey

Revisiting the Financial Crisis: Predatory Lending

According to a Wall Street Journal article, former Federal Reserve Governor Edward Gramlich proposed in 2000 to crack down on predatory lending in the subprime mortgage industry. Chairman Alan Greenspan shot down the proposal.

"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board.

"He was opposed to it, so I didn't really pursue it," says Mr. Gramlich, a Democrat who was one of seven Fed governors.

Predatory lending was very real. Washington Mutual Bank was bought by JP Morgan Chase. The United States District Court for the Central District of California ruled against JP Morgan Chase.

The first formal complaint was filed against Washington Mutual Bank on January 6, 2012 by the Kenneth Eade Law Firm. Washington Mutual was eventually purchased by JP Morgan Chase. The complaint alleges that Washington Mutual Bank issued both a traditional mortgage and a home equity line of credit in order to finance a customer's Southern California home purchase. In 2008 both loans fell into foreclosure, and the owner's request for a short sale was denied.

After JP Morgan Chase took ownership of Washington Mutual, the bank attempted to collect approximately $250,000 additional dollars from the home equity line of credit. The delinquency also negatively affected the customer's credit score. According to anti-delinquency statutes in California, a bank is prohibited from collecting on money mortgages after a foreclosure has occurred. The suit alleges that JP Morgan Chase is in violation of the federal Fair Credit Reporting Act as well as the California Consumer Legal Remedies Act.

JP Morgan Chase was trying to quickly collect cash from homeowners. In Florida, the defunct David J. Stern law firm attempted to foreclose on homeowners with forged documents.

JP Morgan Chase bought Washington Mutual so they could sell the bad mortgages as mortgage-back securities. The problem was JP Morgan Chase didn't tell investors that the mortgage-backed securities were toxic. JP Morgan Chase was forced to agree to a $13 billion settlement with the state of New York. $4 billion of the money went for relief to homeowners.

New York Attorney General Schneiderman had less than kind words for JP Morgan Chase.

“Since my first day in office, I have insisted that there must be accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy,” said Attorney General Schneiderman, co-chair of the RMBS working group. “This historic deal, which will bring long-overdue relief to homeowners around the country and across New York, is exactly what our working group was created to do. We refused to allow systemic frauds that harmed so many New York homeowners and investors to simply be forgotten, and as a result we’ve won a major victory today in the fight to hold those who caused the financial crisis accountable.”

Goldman Sachs bought derivatives that bet on the housing market crashing. Goldman Sachs sold to their investors bad mortgage-backed securities.

Sen. Carl Levin questioned CEO Lloyd Blankfein about about Goldman Sachs betting against investments they are selling.

Levin reads internal emails of Goldman Sachs sale force telling each other that Timberwolve was a "shitty deal" for their clients.

An internal email shows that Goldman Sachs knew they making money betting against their clients.

The predatory lending placed homeowners at risk. The mortgages were then bundled up into toxic mortgage-backed securities that hurt such investors as pension funds. Alan Green span did nothing about this when he had the chance in 2000.

Revisiting the Financial Crisis: Sen. Michael Bennett Ignores Warnings

This is how clueless Sen. Robert Bennett was during the 2007 hearing of the Committee On Banking,Housing, and Urban Affairs. Bennett made this statement to Federal Reserve chair Ben Bernanke.

Senator BENNETT: And, by coincidence, I suppose the best rebuttal is in a piece that appeared in this morning’s paper by Brian Wesbury, who is the Chief Economist at First Trust Advisors, LP, in Illinois, ‘‘A Portrait of the Economy.’’ I would ask unanimous consent that the entire piece appear in the record.*

Chairman DODD: Without objection.

Senator BENNETT: He starts out, ‘‘It is the best of times. It is the scariest of times. Last year, U.S. exports, industrial production, real hourly compensation, corporate profits, Federal tax revenues, retail sales, GDP, productivity, the number of people with jobs, the number of students in college, airline passenger traffic, and the Dow Jones In-dustrial Average all hit record levels. For the third consecutive year, global growth was strong, continuing to lift and hold millions of people out of poverty. From 30,000 feet—heck, from 1,000 feet, it sure looks like the best of times. In relative terms, the first 5 years of the current recovery have been much better than the first 5 years of the 1990’s recovery. But this has not softened the pessimism of many pundits and politicians who are either unimpressed or expect the whole thing to come crashing down any minute, unless the Government firmly grabs the rein of the global economy and steers it clear of disaster.

And then he goes on to outline the history of how badly things have gone every time the Government has tried to step in and steer it clear, starting with the 1930’s and then the 1970’s. He makes this comment about the 1970’s, which I responded to, and it says, ‘‘Forgotten in the rush to pass judgment on capitalism is the fact that the last two times the Government seriously tried to control the economies in the 1930’s and 1970’s and made a terrible mess of it’’—well, I will leave the rest of it for people to read, but the one thing I would say to you, Mr. Chairman, if he is right—and I think he is—in the year of your stewardship, the last year, exports, industrial production, real hourly compensation, profits, tax revenues, retail sales, all are at record levels, you must have been doing a pretty good job. And if you were running for office, you would take full credit for absolutely all of it. Thank you, Mr. Chairman.

People were warning of an impending financial crisis and Bennett decided to treat this as utter nonsense. Bennett and other members of Congress can't say they weren't warned about a pending economic crisis. They heard these warnings and ignored them.

FEDERAL RESERVE’S FIRST MONETARY POLICY REPORT FOR 2007 by Michael Robert Hussey

Revisiting the Financial Crisis: Mortgage-Backed Securities

This is the start of a series of the financial crisis. The purpose of this series is to prove that there were several indications of an oncoming financial crisis that the federal government chose to ignore.

This Federal Reserve report published in June of 2008 indicates that the Fed realized that there was serious problems with subprime mortgages. In 2007, the S&P/Case-Shiller house price index released a report that indicated the largest drop in home prices since the Great Depression. Part of this was the market adjusting to the housing bubble. What goes up eventually comes down. Home prices went into free well into 2008. Below is a CNN graph of the S&P Case-Shiller National Home Price index numbers for the final quarter of 2008.

Bloomberg News reported on December 7, 2006 that Ownit Mortgage Solutions Inc. laid off 800 workers. The Los Angeles Times reported that Ownit could not meet its financial obligations. Ownit blamed Merrill Lynch & Co. for letting the company die. Former Ownit employee Kevin Panet told this to Bloomberg News about what management told him about Ownit's relationship with Merrill Lynch. The result was a disaster. Mortgages eventually depreciate in value. The housing bubble popped. Yet the major investment banks tried to keep riding the housing wave.

``There were meetings with top management late in the day on Monday saying, `Look, we're having some problems with our partners and brace yourselves,''' Panet said. ``It's a lousy market right now, and it's heading down not up.''

Here is how Ownit worked. Merrill Lynch & Co., JPMorgan Chase & Co., Credit Suisse First Boston were providing funding to Ownit to sell subprime mortgages to people with bad credit. These investment institutions would then buy the subprime mortgages and bundle them up into mortgage-backed securities. Merrill Lynch, and JPMorgan Chase bailed when the housing bubble popped. Ownit filed for Chapter 11 bankruptcy on December 28, 2006.

In 2004, Erick Bergquist reported half of its $4 billion worth of production to Merrill Lynch.

A Merrill spokesman confirmed that it had bought a stake in the wholesaler. "Merrill Lynch is active in the mortgage-backed securities market in many areas.

We are always looking to establish strategic relationships with quality firms," a Merrill spokesman said.

Merrill Lynch and other investment banks started losing billions in 2007. In good part to mortgage-backed securities. Merrill Lynch CEO E. Stanley O'Neal was forced to step down.

In pure destructive power, the subprime mess has become Wall Street's version of Hurricane Katrina. It has wreaked havoc on the nation's iconic brokerage firm, Merrill Lynch (Charts, Fortune 500), and biggest bank, Citigroup (Charts, Fortune 500), which have announced billions of dollars in losses and parted ways with their celebrated CEOs, E. Stanley O'Neal and Charles Prince. Banks, brokerages, and lenders have announced thousands of layoffs, and more are sure to come.

The blow to shareholder wealth is staggering. Since June 29, Citi's share price has dropped 35%, from $51 to $33, while Merrill's stock has slid from $84 to $54, a 36% swoon. In the same period, the dozen biggest Wall Street firms and the commercial banks with the largest investment arms - a list that includes Bank of America (Charts, Fortune 500), J.P. Morgan Chase (Charts, Fortune 500), and Credit Suisse (Charts) - have lost more than $240 billion in market value. Dozens of smaller companies in the mortgage business have suffered huge losses or folded completely.

To be continued.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 by Michael Robert Hussey

Janet Yellen on Financial Reform

I am not a subscriber to Time. Therefore I can't read the entire interview with new Federal Reserve chair Janet Yellen. I did find her remarks on Dodd-Frank fascinating.

"I think Dodd-Frank is good roadmap and lays out most of the steps that are necessary. But we may also need to take some further steps that have not been taken yet."

I can't imagine Yellen getting appointed as Federal Reserve chair when Tim Geithner was Treasury Secretary. Geither was successful in derailing Elizabeth Warren's nomination. Geithner would have a heart attack if he heard a Federal Reserve chair advocate for more financial reform.

Rubio Votes Against Janet Yellen

Sen. Marco Rubio gives an absolutely nonsensical reason for voting against the confirmation of Janet Yellen as the Federal Reserve chair.

“While Dr. Yellen is an accomplished individual, I will be voting against her nomination to chair the Fed because of her role as a lead architect in authoring monetary policies that threaten the short and long-term prospects of strong economic growth and job creation. Altogether, she has championed policies that have diminished people’s purchasing power by weakening the dollar, made long-term savings less attractive by diminishing returns on this important behavior, and put the U.S. economy at increased risk of higher inflation and another future boom-bust."

There is no immediate risk of inflation. If Rubio knew anything about economics or didn't have contempt for the intelligence of his constituents then he wouldn't babble such nonsense. Inflation is caused by the increase of the price of goods. According to the U.S. Bureau of Labor Statistics numbers, inflation has actually been going down since the January of 2012. There has been no major threat of 70s level inflation during the Bush or Obama years. There certainly wasn't high levels of inflation during the Clinton years.

Where does Rubio get his information that Yellen's monitory policies have put the U.S. at risk of inflation. Does Rubio even know that there is always some level of inflation. Prices of goods always increase. Rubio voted against the first woman Federal Reserve chair over a made up issue.

Even Rubio admits Yellen's resume is impressive. Wall Street preferred Yellen over Lawrence Summers. Wall Street likes quantitative easing.

This isn't about inflation, Yellen's credentials or Wall Street. The only logical reason Rubio voted against Yellen is she is an Obama nominee.

Group of Senate Democrats Against Larry Summers at the Federal Reserve

Talking Points Memo report that Senate Democrats have sent a letter to President Barack Obama. These mostly undisclosed Democrats are against Lawrence Summers being appointed as chairman of the Federal Reserve.

"There's a lot of concern among a lot of Democrats about an appointment of Larry Summers to that long-term position as Fed chairman," Sen. Tom Harkin (D-IA), who signed the letter, told the Journal. "He was one of the architects of getting rid of Glass-Steagall, of getting rid of other regulations. There's real concern about his economic views not really being in line with Obama's views."

Sens. Dianne Feinstein (D-CA), Dick Durbin (D-IL) and Angus King (I-ME) are also confirmed to have signed the letter.

These groups of Democrats want Obama to appoint Janet Yellen as chair of the Federal Reserve. Sheila Bair, former chair of the FDIC, makes the case to appoint Yellen. Bair notes Yellen's resume and knocks Summers role in deregulation.

That could change if the heir apparent to succeed Ben Bernanke as Chair of the Federal Reserve Board, Janet Yellen, is nominated for the job by President Obama. Certainly, there is no better qualified candidate to fill Bernanke's shoes when he steps down in January. A noted economist, Yellen headed the Council of Economic Advisors for two years; led the San Francisco Federal Reserve Bank for six years; and has served ably as Bernanke's Vice Chairman since 2010. Unlike Larry Summers, Tim Geithner, and Bob Rubin -- minions frequently mentioned in the financial press as potential Bernanke successors -- she was not part of the deregulatory cabal that got us into the 2008 financial crisis. In fact, she had a solid record as a bank regulator at the San Francisco Fed and was one of the few in the Fed system to sound the alarm on the risks of subprime mortgages in 2007.

Bair and Ezra Klein report there currently a whisper campaign against Yellen's nomination. The question is who is behind the whisper campaign?

Why Bernanke Is Doing QE3

Federal Reserve chairman Ben Bernanke is begging Congress to do something about unemployment.

Our assessment and that of the research literature is that the polices we've undertaken have had real benefits for the economy, that they have provided some support, that they have eased financial conditions, and help reduce unemployment. All that being said, monetary policy, as I've said many times, is not a panacea. It's not by itself able to solve these problems. We're looking for policy makers in other areas to do their part. We'll do our part and we'll try to make sure that unemployment moves in the right direction but we can't solve this problem by ourselves."

The Do Nothing Congress went on recess without resolving unemployment for military veterans. Republicans killed the Veteran Jobs Corps bill. If Republicans don't want to create jobs for veterans coming back from Afghanistan and Iraq then what hope is there. Republicans also don't want Bernanke to enact QE3.

Mitt Romney

In a speech to New York City donors on Friday, Romney said in reference to QE3 that the course for America was to foster economic growth, not print more money.

"We're not going to have to look for the sugar high that comes with QE3 or QE4 or QE5 or QE6," Romney said, according to Bloomberg. "The real course ahead for America is to encourage the growth of our economy, not just to go out there and print more money."

I wonder if Romney paid attention to his economics courses when he got his MBA. Quantitative easing is the Federal Reserve buying assets, such as mortgage-backed securities, from major banks. The theory is the influx of cash in the market will help the economy and create hiring. Fiscally speaking, Bernanke is throwing a Hail Mary because Congress refuses to take action on unemployment. Republicans don't want to pass stimulus packages or QE3. There policy on unemployment is literally tax cuts for the top 1 percent and doing nothing else.

Unemployment Will Continue

This is a Federal Reserve graphic of what unemployment will look like in the next few years. There is no light in the near horizon. Part of the problem aggregate demand. The poor and middle class have less money to spend. That is why the GDP has been hovering under 3 percent this year.

Obama has sought the advice of CEOs from Fortune 500 companies. What they have been telling Obama is corporate tax cuts are needed. This isn't a change of position. While progressives believed that Obama was their knight; Obama said during the 2008 campaign that he would consider cutting corporate taxes. Obama's focus on job creation has been to appoint David Cote, CEO of Honeywell, and John Lechleiter, CEO of Eli Lilly & Co. to the Jobs and Competitiveness Council. The chair of the council is Jeffrey Immelt, CEO of General Electric. GE paid zero taxes in 2010. GE also received $3.2 billion tax return.

Obama has appointed men that are using their White House position to push for more corporate tax cuts.

fomcprojtabl20110622

Why the Lame Duck Session is Important to Obama

Newt Gingrich went on cable news to show his compassionate conservative side. Gingrich declared unemployment insurance is "money for doing nothing." There are a lot of people not working because job growth has been miserable. The Department of Labor released the unemployment numbers. It ain't pretty.

The unemployment rate edged up to 9.8 in November, and nonfarm payroll was little changed (+39,000), the U.S. Bureau of Labor Statistics reported today. Temporary help services and health care continued to add more jobs over the month, while employment fell in retail trade. Employment in most major industries changed little in November.

This is why I laughed when Rick Scott said the Affordable Health care Act would be a job killer. Retail is affected when the economy takes a downturn. People have less money to spend. People get sick, regardless of economic conditions. Government money is being pumped into the private heal care system at a greater rate because of so-called Obamacare. The law will mandate millions of more Americans buying health insurance. This means more people getting check-ups and treatment. Scott didn't exactly turn down Medicare money when he ran Columbia/HCA. As the $1.7 billion fine levied by the Justice Department would indicate.

The lack of job growth has gotten so bad that Federal Reserve chairman Ben Bernake in quietly asking Congress to pass more stimulus. It is unheard of for a Federal Reserve chairman to advocate the passage of legislation.

Treasury Sec. Tim Geithner is negotiating with Republicans on extending the tax cuts. Given the way the Obama administration has been horrible at negotiating it would not be surprising if no unemployment extension is passed. Repubicans are playing chicken with the Democrats. Wanna guess which side will win?

Sadly, Democrats have poll numbers supporting extending unemployment benefits and letting the tax cuts for those making above $250,000 expire. Bloggers Joy-Ann Reid and Benjamin Kirby will stress that progressives must support Obama even though the president is allegic to policies progressives support. (Not an exciting GOTV message for 2012). Progressives should not support Obama when his fiscal policies hurt millions of Americans.

Right now Obama has American support for ending the upper-income bracket Bush tax cuts and extending unemployment. The Fedrral Reserve chairman is publicly backing more stimulus spending. The lame duck session is Obama's best chance to accomplish these legislative priorities and he is negotiating away his best opportunity. Things will only get worse when John Boehner officially becomes House Speaker.

If Republicans snatch victory when Obama has the advantage then the only reason to support him is because he is not a Republican. Obama has the offer more than not being Sarah Palin if he wants to get re-elected.

Quantitative Easing

Paul Krugman wrote a blog post claiming people protested too much about inflation.

And for those who insist that we need to look at inflation in stuff like gasoline, bread, and milk: well, the BLS has convenient average price data, so let’s compare some of those prices to what they were, say, three years ago, when Bush was in the White House and all was well with the world. Over those three years, the price of gasoline has soared by … well, actually gasoline is a bit cheaper now than three years ago. OK, but milk … actually, milk prices are down substantially since three years ago. But it’s true: bread has gone up in price.

Krugman writes that people weren't complaining about deflation lowering the cost of gasoline. That is because consumers were complaining about gas being high and they were right. I'm sure many small businesses were feeling the pinch of deflation. A mom and pop convenience store can see the prices of milk, food and other products decrease. This same mom and pop store owner still haas to pay the same cost for his lease, workers and utility bills.

Tas noted today that another unintended side effect of the Federal Reserve $600 billion is that it could raise the cost of living faster than pay increases. Right now it is an employer's market and there is less worries from companies that they have to give pay raises in order to retain employees.

Krugman is supporting a policy called quantitative easing. The Federal Reserve will buy more buying government bonds, private bank bonds and printing more money. The Federal Reserve needs a bigger cash revenue stream. In economic terms quantitative easing is a "hail Mary" pass. The practice is used after near zero interest rates have not received the intended results. The Federal Reserve have kept interest rates at historic lows and banks aren't lending.

Tas tweeted me that Obama is hoping that a cheaper dollars will increase exports from the United States. China has been so good at increasing their export business by devaluing the yen. If Obama is expecting exporting to take off and banks to start giving out loans before the 2012 general election then he is in for a big surprise. My attitude is much like Tas's. If quantitative easing works then great. Let's just not kid ourselves about the possible side effects.

Shiny Happy Economics Message

Jon Stewart makes fun of George W. Bush staging an optimistic economic press conference when Federal Reserve Chairman Ben Bernanke is giving Congress the bad news. Bush refuses to call the bailout of Fannie Mae and Freddie Mac a bailout. Bush told the White House press corp that the Treasury Deparment is only seeking approval of a bailout. Oh really.

The U.S. Treasury plan, which needs the approval of Congress, would extend credit to lend money to or buy stock in both Fannie Mae and Freddie Mac, the two companies that own or guarantee more than $5 trillion worth of U.S. home mortgages, almost half of the nation's total.

The move was necessary to restore confidence in the nation's financial system, but higher rates could be on the way as a result, Mike Smith, a banker with Sunset Mortgage in Bend, said Monday.

George W. Bush: Government action -- if you're talking about bailing out -- if your question is, should the government bail out private enterprise, the answer is, no, it shouldn't. And by the way, the decisions on Fannie Mae and Freddie Mac -- I hear some say "bailout" -- I don't think it's a bailout.

The Orwellian language from the White House never ends.

The Credit Lending Crisis

This is a good indication of how serious the credit lending crisis is.

AMERICA's four biggest banks have announced they have each borrowed $US500 million ($613 million) from the Federal Reserve, taking an unusual step to ease the credit squeeze that has been rattling the financial system for weeks.

The banks - Citigroup, Bank of America, JPMorganChase and Wachovia - said on Wednesday that they had tapped the so-called discount window of the Federal Reserve Bank of New York, five days after the central bank lowered the rate and loosened its collateral requirements in an effort to inject more money into the credit markets.

The Federal Reserve cut the interest rate, it charge to banks, from 6.25 to 5.75. The banks helped created this problem by spending $300 billion in online advertising to sell mortgages. They sold mortgages to many people whom shouldn't have been approved. Noble Prize-winning economist Edmund Phelp commented on the lack of oversight.

"It seems to me that markets were not equipped with the adequate new instruments, the necessary institutions to administer these new credit markets."

What made matters worse is the housing market bubble finally popped. The top 5 U.S. homebuilders lost $1.85 billion in the third quarter.

In other news: President Bush said the economy is "strong."