October, Friday 21, 2011

DOW + 267=11808
SPX + 22 = 1238
NAS + 38 = 2637
10 YR YLD +=2.20%
OIL +1.46 = 87.53
GOLD +21.80 = 1643.00
SILV +. 82 = 31.50
PLAT +20.00 = 1516.00

Today we had two bits of news that bolster the stock market. First, the rumors that the Federal Reserve might, maybe, possibly consider Quantitative Easing Round 3 – in other words the Federal Reserve might throw FREE MONEY at the markets.

The second bit to bolster the markets was a jolt of optimism that there is at least slightly improved visibility on the path to nearing a resolution of the European sovereign debt crisis and the troika would pass out FREE MONEY.

Just in case you were wondering why Wall Street is hated – this is it. Wall Street should have been celebrating the fact that a coalition of allies managed to take out Kadaffi in Libya in a relatively short period of time and with zero loss of US soldiers lives AND President Obama announced this morning that the United States will withdraw nearly all troops from Iraq by the end of the year, effectively bringing the war in Iraq to an end. He said the last American troops will depart the country by January 1 "with their heads held high, proud of their success, and knowing that the American people stand united in our support for our troops." 

The truth is that Wall Street doesn’t give a tinker’s dam about supporting our troops; there is no recognition of the sacrifices made by the greatest military in history. More than 1 million of America’s absolute best have served in Iraq; more than 32,200 will carry scars for the rest of their lives, and 4,500 Americans and coalition partners gave the ultimate sacrifice. More than 100,000 have already left Iraq; many of those soldiers headed over to Afghanistan but the remainder will be home for the holidays. If you see one of these heroes, please be sure to thank them for their service. If you are in a position to offer a job, please do so.

One of the most despicable things I have seen is the reaction of some politicians to the victory in Libya. Many have tried to parse their praise – limiting their congratulations for coalition forces – trying to make political gain out of a situation that is not about them. You are entitled to differing opinions about whether we should have entered the Libyan conflict or about past relationships with the dictator Kadaffi, but the victory in Libya should be considered one of the greatest military victories in history based upon the expertise and skill and courage of the forces. Our military helped bring down a brutal dictator – not one American life was lost – and then we walk away and tell the rebels to take their freedom and make the most of it. That is a damned noble approach.

Now, earlier this week, before we heard the news about the end of two wars, I ran across this news item:

Accord­ing to the Asso­ci­ated Press, Sen. John McCain (R-AZ) sent a let­ter to the bipar­ti­san bud­get super­com­mit­tee in which he indi­cated he is open to cost-saving steps in mil­i­tary ben­e­fits.

The AP reports that McCain sup­ports Pres­i­dent Obama’s pro­posal to start charg­ing older mil­i­tary retirees a $200 annual enroll­ment fee for TRICARE for Life. In addi­tion, McCain urged the super­com­mit­tee to con­sider restrict­ing working-age mil­i­tary retirees and their depen­dents from enrolling in TRICARE Prime. McCain pointed out that the Con­gres­sional Bud­get Office has esti­mated that such a move would save $111 bil­lion over 10 years.

While I respect Senator McCain’s service to his country, he has turned into a real ass. If you want to cut costs, look someplace else. As a nation we made a solemn vow that if young men and women would fight for their country, their country would take care of them. Honor the commitment. If that means you have to raise taxes – then you raise taxes. If that means Senator McCain has to take a pay cut then he takes a pay cut. If that means Warren Buffet has to pay more taxes than his secretary, then he pays more taxes. But you honor your commitment to veterans and you thank them for the bargain.

We have been at war for more than 9 years and here in the USA we have been unhampered; we have been unburdened by the wars; we have been safe from attacks; your children can sleep safely at night; you can enjoy your freedom. The union may be imperfect but it is strong and it exists fro one simple reason – men and women, brothers, fathers, daughters, and sons have paid the ultimate price throughout our history. There is one simple truth in the history of America – No Vets – No America.

In a 24 hour span, the United States announces it has effectively ended two wars. We should be rejoicing. Wall Street should be dancing in the trading pits and handing out stock shares to every veteran that served during the past 9 years.

Actually, I’ve got an even better idea:

Article 1, Section 8 of the United States Constitution spells out the Powers of Congress and those powers include: “To make Rules for the Government and Regulation of the land and naval Forces; To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions; To provide for organizing, arming, and disciplining the Militia, and for governing such Part of them as may be employed in the Service of the United States” Further, the Constitution says Congress shall have the power to: “borrow money on the credit of the United States;” also, “To coin Money, regulate the Value thereof,” and also, “to pay the Debts and provide for the common Defence and general Welfare of the United States”. It seems pretty clear that Congress has the legal power to serve the banking and credit needs of the military. Why the hell should bankers be permitted to act as middlemen between our troops and the government that pays them?  There is a long history, from colonial times to the Civil War, of our nation making direct payment to our soldiers.

The GI Bill was created in 1944 and it was one of the most significant pieces of legislation in American history. The GI Bill helped soldiers returning from war with cash payments while they were looking for work, money for education, and low interest, low down payment home loans. The GI Bill is probably the greatest single source of wealth creation ever. Eight out of ten men born in the 1920’s were assisted by the GI Bill. Millions of GI’s were able to further their education, start businesses, buy homes, and find jobs. By 1955, the country had gained 400,000 engineers, 200,000 teachers, 90,000 scientists, and 22,000 dentists. The GI Bill created a vast middle class following World War II, or at least it provided the equality of opportunity for millions of GI’s to create a middle class. The GI Bill unleashed prosperity never before known, despite failing to accommodate many African American vets. Some people think the GI Bill is a huge welfare program. That is a lie. Every penny paid out to veterans was earned. There would not be one penny to pay out unless the veterans had done their jobs.

By 2007, the median nationwide price of a home was $219,000, but the VA home loans only went up to $144,000. In 2006, at the peak of US subprime lending, the number of VA loans fell to barely a third the level of two years earlier, according to VA data. Troops turned to banks when our government was too stingy to meet their credit requirements, and the bankers spit in the faces of America’s bravest. No one asked them for their credit score when we asked them to fight for us, but when active troops needed a place to live, the banks considered our troops to be a credit risk. Sure, the banks made home loans, but they frequently labeled the troops as subprime borrowers and slammed the troops with hidden fees and adjustable rates that jumped to excessive rates. There has never been and will never be anything “subprime” about an American soldier. It is bizarre to think that a soldier who might have his hand on an atomic bomb and is the guardian of our national security is nothing but a “credit risk” to the bankers; a soldier that can command a jet worth hundreds of millions of dollars is too risky for the bankers to extend a fair deal on a mortgage to house his family.

For far too long, the banks have treated the brave heroes of the military with the utmost contempt and hatred. Ground zero for foreclosures has been centered on military bases. Military personnel were targeted for subprime loans and when the egregious terms of those loans became evident, many soldiers’ families faced eviction. Military families faced eviction while on active combat duty. That’s just wrong. Laws were written and routinely ignored by the banks that were intent on evictions despite laws, despite common decency.

Our soldiers are poorly paid, so poorly paid that it is sometimes difficult to make the money stretch from paycheck to paycheck. Many soldiers were forced to resort to payday loans just to get by. The problem was so pervasive that legislation was finally written to limit payday loans to stop the incredible abuses.

Our troops deserve better pay. There is no justification for paying corporate mercenaries 8 times the pay of enlisted troops. Next, the GI Bill needs to be updated to meet the credit requirements of the troops. We need to give the troops the opportunity to break free of bankers that have abused troops in the past. The bankers have proven, through their deeds and actions, that they disrespect the uniform. The bankers have proven that they serve money above all else; they do not deserve the privilege of serving the banking and credit needs of America’s heroes. A new GI Bill that includes a Military Bank could eliminate the need for a middleman that sucks out value from a soldier’s hard earned pay.

If you oppose either or both of the current wars, that is your choice, and you are free to express your opinions. Remember that it is the politicians that push us into wars and it is the soldiers that deliver us into peace. I think most Americans would agree that our troops have earned our most complete respect. America’s best deserve the best loan rates; they deserve better loan rates than we offer the bankers.

We start by creating a Military Bank.

The Military Bank can be created by an act of Congress to meet the legitimate credit needs of all active military personnel, including: Army, Navy, Air Force, Marines, Coast Guard, and Reserves. Any person who is good enough to stand in harm’s way and shed blood for their country is good enough to be given a good deal. All active military personnel would be entitled to the best possible terms on legitimate credit that our country has to offer. In 2009, the Federal Reserve has been lending money to banks at a rate of approximately one-quarter of one percent to one-half of one percent (0.25% to 0.5%), therefore the Military Bank would offer loans to active military personnel at a rate not to exceed 0.25%. If the lowest interest rate (the Fed funds target rate) increases from its current historic low levels, then the interest rate offered to military could also increase, but be capped at a maximum of 5%. If it’s good enough for the bankers it is good enough for America’s greatest heroes that defend our freedom.

This does not mean that a Private First Class earning an annual salary of $20,322 per year would be entitled to borrow a billion dollars from the Military Bank. All lending would be based on legitimate need and legitimate ability to repay the debt. The Department of Defense could make financial advisors available to all personnel (they do that already) to offer guidance on the prudent use of credit. The Veterans Administration is in place and capable to help. Financial advisors could create a financial roadmap for all personnel and help establish uniform, consistent standards and amounts of available credit. The Military Bank would be available to all military that wishes to do business with the Bank; no personnel would be forced to do business with the Bank.

Any person who is good enough to shed blood for their country is good enough to be given a good deal, now and in the future.

Regarding Europe's debt crisis – Finance ministers from the 17 euro countries agreed Friday to pay Greece its next batch of bailout loans, avoiding a potentially disastrous default, at least for now. There are two summits scheduled for next week, investors took an optimistic view that a resolution will soon be reached. Germany and France -- Europe's economic superpowers -- conceded late Thursday that a solution will not be finalized at this weekend's summit, but one would be announced no later than the following Wednesday.

 Buying was also motivated by fear of missing a sharp move if basic agreements are reached over the weekend. But buying was really motivated by the idea that the European central banks will be flying over the continent in helicopters and tossing out FREE MONEY.

Greece's embattled socialist Prime Minister George Papandreou is clinging to power after losing a deputy in the effort to impose a fresh wave of austerity on an angry public, but his grip is weakened by problems at home and abroad.

A shrinking parliament majority, street protests and lack of wider consensus are testing Papandreou's resolve, as will any failure on the EU's part to come up with a comprehensive solution to Greece's biggest post-war economic crisis.

Snap elections now would be disastrous for his ruling Socialists, who won polls two years ago on tax-and-spend pledges and found themselves unprepared to deal with the debt crisis threatening to take down the euro and derail the global economy.

So, this was the backdrop in Europe – things are so bad that the ECB will be throwing money at the problem – not throwing money at citizens , but it will come raining down on the banks.

How does Europe borrow money from the Federal Reserve?

Behind The Money
By John Melloy, Executive Producer, Fast Money

The European Central Bank tapped a foreign exchange swap facility with the Federal Reserve earlier this month, borrowing $500 million. In exchange, the ECB puts up collateral of Euros worth around $500 million.

The ECB wants the dollars so it can lend them out to European banks, which have been having trouble borrowing dollars at affordable rates due to fears about their financial health.

But it’s worth taking a moment to pay attention to what actually happens mechanically. Because the way we talk about these swap facilities can create the illusion that somehow we’re sending boatloads full of dollars overseas and that the ECB is then sending us boatloads full of euros.

Would-be pirates will be disappointed to hear that there are no currency flotillas crossing back and forth on the Atlantic.

What’s really happening takes place, for the most part, down on Maiden Lane in Manhattan’s financial district. That’s where the headquarters of the Federal Reserve Bank of New York is located.

Like most interbank transfers these days, everything is done electronically.

When the ECB wants dollars, it gives notice to the New York Fed. The notice contains how many dollars the ECB wants, when it wants them, what the exchange rate is at the time, when it will pay back the dollars, and what the interest rate will be.

The interest rate is always one percent plus something called the Overnight USD Indexed Swap Rate. When the ECB last borrowed, it agreed to a 1.09 percent rate. (It’s very telling that only the ECB has to pay interest. There’s no price for the Fed getting to hold euros.)

Next—and this is important—nothing happens. Not really, that is.

Nothing moves anywhere. No currency flotillas leave for the high seas.

All that happens is that an account at the NY Fed that the ECB has designated as its swap account gets credited with the dollars. This account is really just a line on a spreadsheet in a computer in that Fed building on Maiden Lane. Crediting the account just means that someone enters numbers into a spreadsheet.

At the same time, the ECB enters numbers onto a spreadsheet housed in a computer in Frankfurt, Germany, where the ECB is headquartered.

Those numbers represent Euros that are now “in” an account for the NY Fed.

Neither the dollars nor the Euros come from anywhere. They aren’t moved or debited from anywhere. They are invented right on the spot with a few taps on the key pad. And that’s all. There’s no printing press fired up to make new dollars or euros.

This is sometimes called “fiat money.” But that makes it sound as if some command from a sovereign created the money. It’s really closer to “keyboard money,” since it is created by data entry in a computer.

While the swap is outstanding—a period which can last for up to 88 days—the ECB can lend the dollars in its account to European banks. It does this simply by telling the NY Fed that it wants to credit the account of a European bank and debit its account. This all happens, again, by someone typing the data into a computer.

Flash forward to the maturity date—the date when the swap is supposed to be unwound. On that day, the Fed simply zeros out the ECB’s account. This means there are no dollars left in it to be lent out to banks, although that’s really just a metaphor. What it really means is that the Fed will not credit the accounts European banks if asked to do so out of the zero’d out account.

If the ECB’s account on the maturity date has the right amount in it, then the swap is closed off. If there’s a shortfall, then a new swap is created to represent this amount. This means that it’s pretty much impossible for the ECB to default on this loan, since any shortfall is just rolled over into a new loans.

Why might there be a shortfall? Remember, the ECB is borrowing dollars so that it can lend them out to European banks. If those banks haven’t repaid those loans, it must “purchase” the dollars from elsewhere—most likely other banks.

What’s more, the ECB must pay interest on the swap—which means that it must always purchase a few dollars more than it borrowed or collect those dollars in interest from the banks it lent to. If it doesn’t purchase the dollars or get those interest payments, you get a shortfall.

By the way, there’s nothing in the swap agreement about what happens if the Fed doesn’t have the euros to refund the ECB. That’s because it is impossible for the Fed not to “have” those euros. You see, the ECB created the euros “held” as collateral for the loan by entering data on a spreadsheet. As far as I can tell, there is no provision at all for the Fed to “draw” from the “account” in which the euros are held.

They just “sit” there—although, again, since its just numbers on a spreadsheet, nothing is physically sitting anywhere.

To be honest, I don’t think there is an economic point to the existence of the Fed account with the ECB. What do we care if there is a spreadsheet in Frankfurt that represents the conceptual Fed possession of a bunch of euros?

I suspect the reason for this is entirely legal and optical. It’s good for all the central bankers to be able to tell the world that these loans are fully collateralized. Depending on how you read the regulations, the Fed may even be required to be able to claim it has collateral for the loans—even if that collateral is just a line entry on a spreadsheet in a computer housed in the very central bank that is borrowing dollars.

I’m not even 100 percent confident that anyone in Frankfurt does enter the numbers into a spreadsheet. Why would they? There’s no point at all to having them entered and automatically erased at the end of the swap.

And since the Fed doesn’t use those euros during the period of the swap, there’s no need to keep track of how many are in the account. If you’re a Frankfurt central banking clerk, why not just take a smoke break instead of opening the computer file that has this totally made up account in it?