Here is a very rough draft of the major paper that I am working on. I actually am further along than it might appear (research and creating graphics is mostly done now).
I am going to a wedding in France for the next two days so I don't know how often I will be able to work on this blog.
The financial crisis can't be over because it hasn't even begun yet. Below are the seven stages of the real financial crisis
Stage 1: Pressure builds until commodity shortages reach breaking point
*****Hyperinflation will begin in China and destroy the dollar*****
*****Soybean Shortage Sets Time Frame For Dollar Collapse*****
*****Inflation Taking Root In China*****
*****Chinese Dragon Breathes Life Back Into Commodity Prices*****
*****China Doesn't Need The US Anymore*****
*****China's Economic Data Shows Strength And Explains Rising Commodity Prices*****
Beijing Fears Inflation
Terrible Outlook For 2009 Global Wheat Output
*****India's Thirst Drives Water to Crisis Level*****
Ug99 Fungus Threat To 80% Of World's Wheat Crops
World Hunger About To Start In India
Drought Threatens More Than 11.3 Million Hectare Crops In North China
*****Disaster Feared As Desertification Spreads*****
*****US Could Run Out Of Sugar As India Faces Water Shortage*****
Weak Monsoon Threatens India Food Crisis
Stage 2: Deflation in US commodity markets
This is where the financial crisis really starts. Before I go into the ramification of a default on the futures market, I need to quickly go over inflation/deflation and the money supply.
The supply of any assets is the total amount people see on their statements every month and believe they own. Similarly, the supply of money is the amount people have in their wallets plus the amount of money they have in their bank accounts (checking, savings, money-market, etc). The amount of dollars that Americans believe they own is only a fraction of the actual amount of dollars which exist.
In any modern banking system, there always exist a disconnect. Below is graph of the US money supply from 1986 until July 2009.
Inflation is the invisible process through which the supply of money (or other asset) is inflated by lending. In inflation, the supply of money as seen on banking/brokerage statements grows despite no similar change in the actual supply of money in existence. Since the more there is of something, less it is worth, the value of an asset drops as its supply is inflated. In the supply of money, inflation happens every time a bank loans out a depositor's cash.
Example of inflation
As an example of how inflation, let's take an imaginary town (Pleasantville) where a new bank (Everbank) opens. Before Everbank's arrival, the townspeople of Pleasantville used only cash. After Everbank opens, townspeople deposit their all their money, and Everbank then has $1000 on deposit. Now Person A comes to town, takes out a 1000 dollar loan from Everbank, and then uses all the money to buy stuff in Pleasantville. As the money is spend, the townspeople deposit it all back to Everbank. Soon, Pleasantville's townspeople believe they have $2000 on deposit at Everbank, which means Pleasantville's money supply has now been doubled. Since the townspeople now see twice as much money on their bank statements and feel richer, they are willing to pay more for goods they really want and prices begin to increase. This is inflation. Of course, Everbank will keep loaning the $1000 out again and again, while the townspeople will keep depositing again and again, so the Pleasantville's money supply will keep growing and prices will keep moving higher.
Now normally, in modern banking systems, banks are required to keep reserves against deposits that slow the inflation process down. However, US regulators, in their great wisdom, decided that American banks didn't need such reserve requirements in the mid-nineties (look at graph of the US money supply above and you can easily notice the change around 1995).
Key features: Inflation is slow and invisible. It never happens all at once: Inflation happens gradually as people are slowly tricked into believe they own more and more of something. Inflation can happen in the supply of anything that can be deposited or lend (for example: replace the 1000 dollars in example above with 1000 ounces of gold/silver).
If inflation is the process where people are tricked into believing they own more and more of something, deflation is the panic when they realize they've been tricked. In the money supply, deflation happens when banks and other institutions start defaulting on their debt (checking accounts, savings accounts, etc). The amount of money people see on their banking statements (and think they own) drops sharply as banks fail and stop sending statements. The public's reaction to deflation is panic. People start doubting the numbers they see on all bank statement and rush to withdraw their money, causing further bank failures and more panic. Because the supply of money is rapidly shrinking during deflation, the value of money rise for those lucky enough to still have it.
Deflation can only occur in an asset whose supply has been inflated. Without inflation, there is no deflation.
Finally, deflation can, at great cost, be prevented in paper money (ie: US dolla rs) by a government determined to do so. First, deflation's contagious fear can be countered by guaranteeing bank debt (checking accounts, savings accounts, etc). Thanks to FDIC insurance, most people will not withdraw their money even if they suspect their bank to be insolvent. Second, the government can rapidly increase the actual supply of money in existence (the monetary base) by money printing to prevent banks from failing, which the US has done (you can easily see this on the graphic above). By expanding the monetary base, the fed has prevented major bank failures which might have created deflationary panic despite FDIC insurance.
Example of deflation
Despite what many believe, we have not seen true deflation in the US over the last two years. The contagious fear and hoarding involved in real episodes of deflation have been absent. To emphasize this point, I would like to point to a time where true deflation shook the US. In the passage below, Frank Vanderlip (then president of City Bank, aka Citibank) remembers the banking panic of 1907.
THE specters that haunt a banker when his world goes mad are terrible. I can tell you because I remember 1907.
A "run" is always appropriate material for the nightmare of a banker. Just fancy yourself as a banker— and discovering outside your plate glass façade an ever-lengthening column of men and women, all having bankbooks and checks clutched in their hands. Fancy those who would be best known to you, the ones with the biggest balances, pushing to the head of the line— there to bargain excitedly with the depositors holding the places nearest the wickets of the paying tellers. Even that won't give you a hint of what a banker's dread is like unless you heighten the effect with a swarm of hoarse-throated newsboys, each with his cry pitched to an hysterical scream; and then give the hideous concert an over-tone of sound from the scuffling feet of a mob.
Although the depositors never gathered as a mob outside our bank, I knew the flavor of terror just from contemplating the possibility. We had the biggest and strongest bank in the country, but obviously we could not hope to be in a position, ever, to pay their cash to all of our depositors if they should demand it simultaneously. Bigness does not save an elephant staked on an ant-hill. Bigness will not save a bank if a run endures long enough. In that year, 1907, the size of the National City Bank was regarded as phenomenal in America, and more than impressive in London, Paris, Berlin and St. Petersburg. We had in our own vaults as our lawful reserves more than $40,000,000—and three-quarters of that sum was in gold.
In a curt announcement, the public read that the National Bank of Commerce had declined any longer to clear the checks of the Knickerbocker. The depositors of the Knickerbocker believed they read in this statement something of deeper significance. They began to pour into the trust company, determined to withdraw their deposits. The Knickerbocker did not have much cash. Trust companies were not required to keep cash reserves against their deposits at a ratio at all comparable with that required of the National Banks in the central reserve cities, New York, Chicago and St. Louis, which had to have in their vaults, always, cash equal to 25 per cent of their demand deposits. Lacking cash, the Knickerbocker quickly had to close its doors.
Immediately, an already timorous public grew suspicious of most of the other trust companies, and lines of depositors began to form in front of their doors. Extra editions of the newspapers, falling prices registered in the stock-market, wild rumors, these things contributed force to the wave of emotion that engulfed the banking system.
Almost every caller was some one needing to be soothed. One acquaintance who came to my desk was a man with black eyebrows so mobile from excitement they seemed likely, any moment, to scamper up his forehead and vanish into his hair. He was Julian Street, the young author, and he was clutching in a trousers' pocket something unprecedented in the pockets of all other authors I had ever known. Street had fifty yellow $1,000 bills. He explained possession credibly; the money was part of his wife's inheritance and, after an adventure, he had just retrieved it from one of the trust companies.
On that first morning of the panic Street had taken fright as had every one else; you could catch the infection of terror over the telephone from the tone of a voice. A short while before a considerable part of his wife's fortune had been turned into cash. Pending reinvestment, it was on deposit with one of the trust companies; but even the strongest trust companies had become suspect. As he came down-town everywhere Street saw men and women dashing about in the manner of ants when their hill is trod on. He determined to get the money and bring it to me.
When he presented his certificate of deposit at the trust company he was invited into a conference with a vice-president. This man attempted to reason with Street; he said the company was as strong as the country itself and that it was foolish for Mr. Street to incur the risk of robbery or loss by some other means. But Street was firm, and so another official added his arguments and when he could not change the client's mind, the president himself joined the group. For nearly three hours those men argued and cajoled. Probably their pride was involved, but all that they said simply frightened Street more, until he was the personification of the 1907 panic.
"The country is in terrible shape," he said, "if you three men can spend hours making such a to-do about an account of this size."
"But for your own good, Mr. Street. . ."
"Cash !" roared Street. "I want the cash. Read what it says on this certificate: payment on demand. I demand the cash."
"Not so loud, please, Mr. Street, because we are simply trying to keep you from a foolish action. What can you do with the money?"
"None of your business. I want that cash."
"Well, if you insist, let us give you a certified check."
"Cash," repeated Street shrilly, "or I go out and give the story to the newspapers."
They surrendered then and gave him his bundle of thousand dollar bills...
Madness, of course, is the word for the sudden, unreasonable, overpowering fright that communicates itself through all the human herd at such a time as that to which I refer. From too much usage, the word "panic" has ceased to have its proper cutting-edge as a tool for the mind. It has degenerated into a mere time symbol in our vocabularies, a sort of asterisk, marking the calendar of our memory opposite such years as 1873, 1893, and 1907. Yet , a banking panic, such as occurred in 1907, is actually akin to that which happens when a leaking ship's company is mastered by fear, instead of a stern captain, and rushes for the small boats, forgetful of all obligations except the brutish one of self-preservation. This swift contagion comes, when it does, as quickly as you can say the word:
Key features: Deflation is brutal and swift. It is the opposite of inflation:
1) While inflation robs people slowly by reducing the value of money, deflation robs people instantly by wiping out their savings.
2) While inflation slowly reduces the value of an asset, deflation causes its value to spike as people (dollar's value increase sharply during the great depression).
3) While people are mostly unaware of inflation happening, no one can ignore the fear and madness which deflation creates.
The three most important things to remember about deflation are:
1) The more the supply has been inflated by lending, the worse the resulting deflation.
2) Deflation in hard assets can't be stoped (ie: no one can print gold or wheat)
3) After the first defaults, deflation becomes self-sustaining.
Why those who believe in deflation can be ignored
Those who believe in deflation are convinced that, since the US banking sector and consumer are so overstretch, rising defaults will prevent the money supply from growing, despite the Fed's money creation. To some extent they are right: look at the graph of the money supply above. Despite the increase in monetary base, the money supply has hovered around 14 trillion for nearly a year. If the US money supply was all that mattered, those on the deflation side of the debate could be right.
If the US money supply has increased 768% in the last 30 years, So why didn't prices go up?
US Monetary Base
US Money Supply
Crude Oil ($ per barrel)
Wheat ($ per bushel)
cattle ($ per cwt)
Sugar (cents per pound)
Gold ($ per oz)
Copper ($ per ton)
Of course, commodity prices spiked back in 1980. Even so, Americans believe they own nearly 8 times more dollars then they did back in 1980. Although production of commodities has increased, so has demand. No matter how severe the economic slowdown, it is ridiculous for oil today to be lower than 30 years ago. Commodities in January 2009 failed to even double what they were back then.
Since deflation reverses the effects of inflation by deflating supply to what it was before, it doesn't actually make prices fall, but instead it undoes the price rises caused by inflation. If the US money supply's 768% inflation over the last three decades failed to move prices up, why would anyone expect deflation to keep them down now?
Why prices didn't go up and why they will go up now
There is a very simple reason commodity prices aren't higher despite people believing they believing they own 8 times more dollars today: people believe they own a lot more commodities too.
Remember, the supply of any assets isn't the actual amount of that asset that exists, but the amount people believe they own. Right now, the world accepts commodity futures and options (promises to deliver commodities in the future) as though they were the real thing. In the same way that people think they own the money in their checking accounts, people believe they own the commodities equal to the commodity futures and options they see they see on their brokerage statements. Below is a graph of open interest of major commodities since 1986.
Open interest on major commodities has increased 16 times since 1980! Some of this increase in open interest is spread trading (traders buy one futures contract and sell another), but most of it is inflation: financial institutions pledging to deliver commodities they don't have.
In case someone thinks that the massive increase in promises to deliver commodities is natural, below is the open interest graph for copper and cocoa (used to make chocolate) over the same time period. These two commodities are examples of more normal increases open interest (notice how open interest remains nearly unchanged in the last six years).
Stage 3: The collapse of US credit markets
This is where the dollar enters a freefall.
Collateral backing futures contracts will be sold
Inflation fears will drive investors out of treasuries
A large number of investors, expecting deflation and falling prices, are invested in US treasuries. These investors are going to somewhat surprised and . Once they understand what is going on (maybe by reading this article?), their shock will turn to horror and they will begin dumping treasuries as fast as they can (IF they can find anyone to buy them).
The Fed will start selling.
Faced with surging food prices, the Fed's first reaction will be to sell assets and shrink its balance sheet. Of course, under intense pressure from the treasury, the fed will reverse course and start buying treasuries again. However, for the first month or two, the Fed will be amoung the sellers of US debt.
China will break the dollar peg
If China lets domestic food prices double or triple, not only will it kill off the domestic growth driving its economy, but it will also cause all types of social unrest. China would even need to think . Chinese exporters will be badly hurt, but that will be a small cost if it can keep food prices down.
The rest of the world will sell US treasuries
With the price of food and cheap consumer goods (from China) skyrocketing, any country that has any reserves will sell them.
In fact, after food prices spike and china drops the dollar peg, I can't think of anyone who would want to buy US debt. It will not be pretty.
Uncle Sam Manipulating Bond Market
Treasury Auctions Disappoint Due To "Overwhelming Supply"
*****Treasury Yields Accelerating Upwards*****
*****Understanding The US Treasury Market*****
*****Securities Lending Created Over 4 Trillion Demand For US Bonds*****
Doubts About Fed's Ability To Control Inflation Are Growing
< span style="color:blue;">*****The Steepening US Yield Curve And The Fed's Toxic Assets*****
The Fed's (lack of) Exit Strategy
*****California Leads Nation to Bond Default Abyss*****
*****California's Rapid Descent Into The Abyss*****
California About To Start Issuing IOUs
Leading Newsletter Paints A Grim Picture Of The Future
Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."
"But the dollar can't collapse because there is no alternative to the US dollar for a reserve currency..."
I love the "there is no alternative to the US dollar for a reserve currency" argument. Every time I hear it, I imagine someone standing on the deck of the Titanic on the night of April 14, 1912, and declaring, "This boat can't possibly sink because there aren't enough lifeboats!"
The lack of viable alternatives doesn't mean the dollar can't sink, it simply means that when it does go down, it will result in a tragedy of epic proportions which will be remembered for centuries to come.
Stage 4: *****The collapse of US derivative markets*****
This is where everything starts going to hell.
*****About The 14 Trillion Collateral Behind The 1.144 Quadrillion Derivatives Market*****
*****The Interest Rate Swap Apocalypse*****
*****The Insanity Of Naked Option Writing*****
*****Bad Ways Of Betting Against The Dollar*****
Stage 5: The collapse of Wall Street
How did we get to this point? Well, the treasury is the root of the problem.
Treasury Encroachment into the US Capitalistic Economy
Below is a value of the dollar's value since the creation of the Fed, which clearly shows how go make clear that is responcible for devaluation of the currency.
The Federal Reserve Act of 1913
The seeds of the dollar's destruction were planted back in 1913, during the creation of the Federal Reserve, when the US Treasury proposed making the dollar into a fiat currency (a currency backed by taxpayer guaranties rather than a hard asset like gold). While Wall Street had wanted a central (to help prevent another banking panic like 1907), then Secretary of the Treasury, William McAdoo, proposed a rather radical bill, a Federal Bank issuing US currency, backed by the taxing authority of the government. Wall Street (which wasn't yet the corrupted mess it is today) saw the danger and opposed violently.
Even as Glass and Wilson presented the revised plan to Congress and the country, bankers were waging an intense campaign against the bill. The level of panic they felt now seems quite remarkable, but in 1913 the proposal, as Link reminds us, constituted an unprecedented level of "government intervention in the most sensitive area of the capitalistic economy." Meeting in Chicago, the country's leading bankers demanded, essentially, a return to the Aldrich plan, while in Boston the House bill was denounced as socialistic by a convention of the American Bankers' Association. Prominent conservatives such as Frank Vanderlip of National City Bank, the railway magnate James J. Hill, and Senators Aldrich and Root condemned the democratic bill as the embodiment of populist schemes, a generator of "fiat" money, and a step towards socialism. Academic opinion in the core was also hostile. Yale President Arthur D. Hadley, a respected economist, wrote President Wilson that the Glass-Owen program would "involve the country in grave financial danger." Prominent professors concurred with Aldrich at a meeting of the Academy of Political Science, condemning the bill's dangerous absence of limitation on note issue. The result of such a legislation, editorialized the New York Times, would be the opening of "a fathomless abyss of inflation." The banking Law Journal editorialized that the bill constituted "a proposal for the creation of a vast engine of political domination over the forces of profitable American industry.... The fight is now for the protection of private rights and to be successful it must be waged to enlist public opinion against unwise legislation with tendencies to financial disaster to all the people."
Prior to Federal Reserve Act, Banks could issue bank notes against specie (gold and silver coins) in their vaults, supervised by the office of Comptroller of the Currency which regulated reserve requirements, interest rates for loans and deposits, the necessary capital ratio etc. Dollars were printed by the Comptroller of the Currency to ensure uniform quality and prevent counterfeiting. In this system, the control over the US money supply was divided between banks and Government: banks held the power to issue currency against the gold in their vaults and the Comptroller of the Currency controlled how many dollars they could issue against this gold through regulation (reserve requirements, etc). Though it had its flaws this system worked well to preserve the value of the dollar over time, as demonstrated in the chart belo
Historical purchasing power of US dollar thru 2004 (American Institute for Economic Research)
With the Federal Reserve Act of 1913, the balance of power over the US money supply shifted strongly in favor of the Treasury. Instead of dollars being against the gold in vaults of private banks, dollars were now issued against the gold held at the Federal Reserve, which was part controlled by Washington. Furthermore, making the dollar backed by the US taxpayer provided justification for much greater government, resulting in the Gold Reserve Act of 1934 and The Banking Act of 1935.
The Gold Reserve Act of 1934
The Gold Reserve Act increased concentration of power over the US money supply in the hands of Treasury. In 1934, The Gold Reserve Act passed through Congress in five days, with minimal debate. Under this act, the Federal Government took away title to all "Gold Certificates" and gold held by the Federal Reserve Bank (the independent Fed?) and vested sole title with the U.S. Treasury.
The day after the passage of the Gold Reserve Act, President Roosevelt fixed the weight of the Dollar at 15.715 grains of Gold "nine-tenths fine". The Dollar was thereby devalued 40.94% from $20.67 to one troy ounce of Gold to $35.00 to one troy ounce of Gold. The Treasury, which had become the possessors of all the nation's Gold on the previous day, saw the value of their Gold holdings increase by $US 2.81 Billion. The Treasury now "owned" the Gold, and no one else inside the U.S. was allowed to own any Gold except by the express permission of the Treasury.
Furthermore, A provision in the Gold Reserve Act also established The US Exchange Stabilization Fund. The fund began operations in April 1934, financed by $2 billion of the $2.8 billion paper profit the government realized from raising the price of gold to $35 an ounce. The ESF was designed as a creature of the Executive Branch not subject to legislative oversight. The Gold Reserve Act authorized the ESF to use its capital to deal in gold and foreign exchange in order to stabilize the exchange value of the dollar.
The Banking Act of 1935
The Banking Act of 1935 effectively moved the power center of the Federal Reserve from New York to Washington D.C. Prior to 1935, the Federal Reserve Board members in Washington, D.C. were significantly less powerful than the twelve heads of the regional Federal Reserve Banks. These regional heads were called Governors and had the power to conduct open market operations (buy/sell securities). However, the banking act changed the titles of regional district heads to "President" and stripped them of their ability to conduct open market operations. Meanwhile, it increased the salary of the Federal Reserve Board members and gave them the title of Governor (creating The Board of Governors of the Federal Reserve we know today). The open market operations were also concentrated at the New York Fed under the board's control. Finally, The Board of Governors of the Federal Reserve was moved from New York to Washington. The Banking Act of 1935 enormously increased the power of the president-appointed 'Chairman of the Federal Reserve Board.
Other important changes
Finally, a change in the law, in 1970, allows the Secretary of the Treasury, with the approval of the President, to use money in the ESF to "deal in gold, foreign exchange, and other instruments of credit and securities."
The Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA)  is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s. It established the Resolution Trust Corporation (RTC) to close hundreds of insolvent thrifts and provided funds to pay out insurance to their depositors. It moved thrift regulatory authority from the Federal Home Loan Bank Board to the Office of Thrift Supervision (OTS) (within the United States Department of the Treasury) to regulate thrifts.
The Working Group on Financial Markets (also, President's Working Group on Financial Markets, the Working Group, and colloquially the Plunge Protection Team) was created by Executive Order 12631, signed on March 18, 1988 by United States President Ronald Reagan.
Why are all the rule changes above important? Because they set the stage for Treasury to begin manipulating US markets.
Treasury/ESF Interference with US markets
The shows the amazing correlation between US secretaries of the treasury and gold prices.
This amazing correlation is made possible by the Exchange Stabilization Fund.
Under Robert Rubin, the government interventions which started as a stopgap measure reached a whole new level, and market manipulation evolved into an endemic feature of the US markets.
GATA Chair Bill Murphy blames Citi alum Robert Rubin for gold manipulation.
Basically, it all started with [former US Treasury Secretary under the Clinton Administration] Robert Rubin, back when he was the head of Goldman Sachs in London. He would borrow gold from the central banks at a 1% interest rate, and then sell it. He took this idea and made it the essence of his "Strong Dollar Policy" [while at the US Treasury].
During Rubin's tenure at the Treasury, we had the SouthEast Asian currency collapse of '97, the South American currency collapse of '98, and the Russian Ruble collapse of '98.
Although historically such foreign currency crises normally would have ignited the precious metals sector, but Robbing Rubin utilized his power at the Treasury to drive the gold and silver prices into the ground during these various regional currency crises. The government was interfering in the markets before, but Rubin took it to a whole new level.
All of America's closest allies are SOLD OUT of gold.
(There many allegation that US "Deep Storage Gold" does not exist or is encumbered.)
Statistics from United States Geological Survey show that the united states has exported 5000 metric tons of "Gold compounds" in last two years, and the US Census Bureau has assigned an astronomically high value to these exports. Until someone explains to me what these "gold compounds" are, I am going to assume that they were half the US gold reserves leaving the country.
Treasury/ESF Interference In US Stock Markets
Beginning in 1987, the Treasury/ESF began interfering with US Stock markets.
... in a 1992 article, John Crudele quoted someone who maintained strong connections in the Republican Party as stating that the government intervened to support the stock market in 1987, 1989 and 1992:
Norman Bailey, who was a top economist with the government's National Security Council during the first Reagan Administration, says he has confirmed that Washington has given the stock market a helping hand at least once this year.
"People who know about it think it is a very intelligent way to keep the market from a meltdown," Bailey says.
Bailey says he has not only confirmed that the government assisted the market earlier this year, but also in 1987 and 1989.
Referring to the U.S. Exchange Stabilization Fund, he wrote, "Sources have told me that in the early 1990s it was secretly used to bail the stock market out of occasional lapses." He further stated one source indicated "that the account used Wall Street firms as intermediaries and that Goldman [Sachs]... was used most often as a go-between."
Two 1995 transcripts of Federal Open Market Committee refer to politically dangerous Treasury initiatives.
The Fed's denial of stock market activity, combined with claims that the Treasury controlled ESF did intervene, is intriguing when considered in the context of two 1995 Federal Open Market Committee transcripts. At the January 31 meeting, St. Louis Federal Reserve President Tom Melzer expressed concern about the Fed's proposed participation with the Treasury in the bailout of Mexico then under discussion. The Clinton administration had decided to use the ESF to fund the rescue when Congress refused to grant an appropriation. Melzer worried:
In effect, one could argue that we would be participating in an effort to subvert that will of the public, if you will. I do not want to be too dramatic in stating that. This could cause a re-evaluation of the institutional structure of the Fed in a very fundamental and broad way.35
To which Greenspan cryptically, yet ominously, responded:
I seriously doubt that, Tom. I am really sensitive to the political system in this society. The dangers politically at this stage and for the foreseeable future are not to the Federal Reserve but to the Treasury. The Treasury, for political reasons, is caught up in a lot of different things. [Emphasis added.]
At the March 28 meeting, FOMC members again expressed hesitation about the Fed's planned participation with the Treasury in the Mexican package. Once more, Greenspan attempted to alleviate any fears, but also noted:
We have to be careful as to precisely how we get ourselves intertwined with the Treasury; that is a very crucial issue. In recent years I think we have widened the gap or increased the wedge between us and the Treasury.... In other words, we have gone to a market relationship and basically to an arms-length approach where feasible in an effort to make certain that we don't inadvertently get caught up in some of the Treasury initiatives that they want us to get involved in. Most of the time we say "no." [Emphasis added.]
These passages obviously suggest that by 1995 the Treasury was engaging in activities that Greenspan deemed politically dangerous and, accordingly, with which he was very reluctant to be associated. It is only logical that these actions had not been disclosed publicly by the time he made these two statements. Had they been public, the Treasury would have already suffered the consequences of the political dangers of which Greenspan spoke.
How the treasury's ESF manipulates the stock market
The Treasury's ESF buys options and futures in order to manipulate stocks. This works because Wall Street banks balanced their book, That is to say they match up their asset and liability. When a firm (ie: Goldman, JPMorgan, etc) sells S&P; futures to the ESF, it is establishing a short position or a liability in the stock market, and balancing this short position requires buying stocks.
Wall Street firms may not know for whom they are selling futures contracts to because of the Fed's role as a proxy for the treasury. Since the treasury doesn't have the facilities to conduct open market operations (buying/selling securities), it uses the Fed's System Open Market Account (SOMA). The New York Federal Reserve official in charge of the SOMA therefore has three vital roles: he is responsible for conducting the Fed's open market operations, managing the Exchange Stabilization Fund (ESF), and managing the foreign custody accounts held at the NY Fed.
The 1997 mini-crash
The October 27, 1997 mini-crash is the name of a global stock market crash that was caused by an economic crisis in Asia. The points loss that the Dow Jones Industrial Average suffered on this day still ranks as the sixth biggest points loss in its 112-year existence. The crash also halted trading of stocks on the New York Stock Exchange for the first time ever.
In response to crashing equity markets, the treasury's ESF bought 30,000 S&P; 500 futures contracts from Wall Street firms in October 1997. These firms then had to go out and buy an enormous quantity of stocks to bring their books into balance. This buying is what preempted a politically undesirable freefall, turning a crash into a mini-crash.
The Treasury's actions worked. On October 28, The U.S. stock markets initially continued their drop from the 27th plunging down 186 p oints by 10:06 AM, but then abruptly ended their decline, and started climbing. Twenty eight minutes later at 10:34 A.M., the Dow rallied to a triple-digit advance up 137.27 points. Prices continued to soar throughout the rest of the day, and at the close of trading the Dow finished with a record 337.17 point gain (recovering 61% of the previous day's loss).
Sinking ships & dishonest systems
Ever since Rubin, dollar has been living on borrowed time. In a system that has no future, people begin living like there is no tomorrow. This is why Goldman (the firm most aware of the Treasury's shananigans) went from "long-term greedy" to "short-term greedy"
I am not claiming that everyone on Wall Street has first hand knowledge of market manipulation (No one has proof of anything because no one knows what is going on. Regulators have created a system with no transparency). However, anyone who has been on Wall Street for any length of time knows that something is horribly wrong. Take last year's Bear Stearn put options as an example
Bear Stearn put options
*****Government Sanctioned Insider Trading*****
On March 10, 2008, Bear Stearns stock dropped to $70 a share -- a recent low, but not the first time the stock had reached that level in 2008, having also traded there eight weeks earlier. On or before March 10, 2008, requests were made to the Options Exchanges to open a new April series of puts with exercise prices of 20 and 22.5 and a new March series with an exercise price of 25. The March series had only eight days left to expiration, meaning the stock would have to drop by an unlikely $45 a share in eight days for the put-buyers to score. It was a very risky bet, unless the traders knew something the market didn't; and they evidently thought they did, because after the series opened on March 11, 2008, purchases were made of massive volumes of puts controlling millions of shares.
On or before March 13, 2008, another request was made of the Options Exchanges to open additional March and April put series with very low exercise prices, although the March put options would have just five days of trading to expiration. Again the exchanges accommodated the requests and massive amounts of puts were bought. Olagues contends that there is only one plausible explanation for "anyone in his right mind to buy puts with five days of life remaining with strike prices far below the market price": the deal must have already been arranged by March 10 or before.
"To prove the case of illegal insider trading, all the Feds have to do is ask a few questions of the persons who bought puts on Bear Stearns or shorted stock during the week before March 17, 2008 and before. All the records are easily available. If they bought puts or shorted stock, just ask them why."
"Even if I were the most bearish man on Earth, I can't imagine buying puts 50 percent below the price with just over a week to expiration," said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities & Futures LP. "It's not even on the page of rational behavior, unless you know something."
The 57,000 puts that traded March 11 at the $30 strike price and the 1,649 that traded at $25 were collectively worth about $1.7 million, Bloomberg data show. Each put is equal to 100 shares of stock.
"That trade amounted to buying a lottery ticket," said Michael McCarty, chief options and equity strategist at New York-based brokerage Meridian Equity Partners Inc. "Would you buy $1.7 million worth of lottery tickets just because you could? No. Neither would a hedge fund manager."
Imagine you saw a bank being robbed in broad daylight. The police are there, but ignore it completely. A year later, not only is no one in jail, but an investigation hasn't been started.
How would you feel about the long term prospects and stability of the country where you watched this happen?
The buyers of puts on Bear Stear committed a crime, highly profitable insider trading. They should be in jail, yet they are not. US regulators never made any attempt to put them there.
How can anyone in the financial world, who watches such crimes happen on a regular basis, have any faith in the long term viability of the US financial system?
Wall Street behaves like there is no tomorrow
Treasury interference in US market corrupted corporate culture. Bankers started behaving like there was no tomorrow because they knew something was fundamentally wrong with the system. They started pursuing business practices which can only be described as "picking up pennies in front of a steamroller".
Wall Street's Financial Wizardry And Fraud
*****401(k)s Hit by Withdrawal Freezes*****
Enormous Settlement Failures In The ETF Market
*****Wall Street Selling Imaginary Treasuries*****
*****Wall Street Addicted To Selling Non-existent Shares*****
*****The Folly Of Financial Derivatives*****
*****Videos Explaining High Frequency Trading And The Fed's Obsession With Secrecy*****
*****Securities Lending And Why Wall Street Sold 2.5 Trillion Treasury IOUs Last October*****
Accounting Standards Now Determined By Mob Rule
*****AIG was a Ponzi scheme*****
*****US Banks Operating Without Reserve Requirements*****
*****Options, Manipulation, And Government Sanctioned Insider Trading*****
*****Dark Pools And Insider Trading Growing On Wall Street*****
August Option Sweet Spots
*****Banks Pretend To Have Billions In Vault Cash*****
*****Bailout Insanity And Bank Arrogance*****
The History Of Mispricing Risk And Fending Off Regulators
*****Bailout Insanity And Bank Arrogance*****
AIG Plans New Round Of Bonuses
Banks Repaying TARP To Be Free Of Bonus Restrictions
Banks Lobbying Congress To Stop Consumer Protection Agency
*****Goldman Sachs Arrogance*****
While the collapse of the US financial markets will be tragic, it needs to happen. US markets are now rotten to the core and beyond salvation. A fresh start is badly needed.
Stage 6: Dollar hyperinflation
This is where the money printing starts.
What life looks like during hyperinflation
The Dynamics of Inflation and Hyperinflation
What Is Hyperinflation?
Stage 7: US economic disintegration
This is where ...
*****The Terrifying Future Facing America*****
*****Obama Administration Tearing Contract Law Apart*****
US Bankruptcies And Defaults
Potential for Famine in the US
*****What The Dollar's Collapse Is Going To Do To Global Food Consumption*****
Why Chinese Consumption Will Disproportionally Benefit Agricultural Commodities
Potential for Famine in the US
One in nine Americans on food stamps
US Import Bubble
Why the US Trade Deficit is Worsening and Dollar Implications
The US Import Bubble
*****Trade Imbalances, The Great Depression, And Today*****
The Death of American Manufacturing
US economic disintegration
U.S. states start printing their own currencies
Recession Puts a Major Strain On Social Security Trust Fund
How Pension Accounts (Don't) Stack Up
*****Economy Implodes As Wave Of Layoffs Sweeps US*****
FDIC unable to find an acquirer for failed bank
The weakest holiday shopping season since 1969
State unemployment claim systems overwhelmed
Governors ask Uncle Sam for $1 trillion
State Budget Troubles Worsen
As Unemployment Soars, Some States on Brink of Insolvency
'State of New Jersey Is Insolvent'
Chicago Prepares For Mass Layoffs
These ARE unprecedented times
The dollar, like the titanic, is about to sink, I suggest you find your way to the life boats.