Thursday, June 16, 2011

Is the Fed Insolvent?

By Robert Romano
Is the Federal Reserve a so-called “bad bank?"
According to Euro Pacific Capital Chief Economist Michael Pento, the Fed has just $52.5 billion of capital to back its $2.7 trillion balance sheet, an equity cushion of just 2 percent.

Over $917 billion of that balance sheet is in mortgage-backed securities (MBS), the same assets whose depreciation played a central role in the financial crisis. If the value of those securities, which are linked to housing values, were to fall by just 6 percent, the Fed would be bankrupt.

That’s particularly disconcerting, especially with housing in a double-dip recession. Home values are now lower than they were in April 2009, the previous bottom in the housing market. Another 6 percent of price depreciation is not out of the question.

Pento compared the Fed to investment firms like Bear Stearns that bet poorly on housing, and eventually became insolvent. “Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30 to 1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51 to 1,” he commented.
Making matters worse, Pento reports that in January, the Fed changed its accounting practices “to ensure that it never technically runs out of capital.” Instead, it is now booking any losses as Treasury liabilities, essentially putting taxpayers on the hook for bailing out the central bank — all without any vote in Congress. Pento called it “a system that would make Enron jealous."

When the Fed announced the move, Bank of America-Merrill Lynch analyst Brian Smedley, a former New York Fed staffer, and colleague Priya Misra wrote in a research note, “The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed ‘insolvency’ in a scenario where interest rates rise significantly.”

Of course, potential rising interest rates are not the only threat to the Fed’s solvency. After QE2 ends this month, the Fed will be continuing its program to sell $917 billion of MBS and then using the money to purchase yet more treasuries.
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New EPA Regulations to Improve the Environment Tank the Economy

By Rebecca DiFede
America’s energy sector once again comes under attack from the Environmental Protection Agency (EPA). This time, not only will utility companies feel the backlash of the EPA’s new regulations, energy consumers will as well.

Utility giant American Electric Power (AEP) announced that it was going to have to shut down five plants and spend upwards of $8 billion by 2014 in order to comply with the EPA’s new proposed rules for the limiting of toxic emissions and waste, including mercury.

Bill Wilson, president of Americans for Limited Government (ALG), reacted to the newly proposed rules, saying, “This is just one more example of the Obama Administration's war on the U.S. economy and their total disregard for the people who are thrown out of work due to their extremist policies.”

Since the power plants are subject to standards of maintenance as mandated by the EPA, AEP is obligated to conform to these outrageous policies, lest they fail to pass the safety tests (also created and overseen by the EPA), which would cause them to have to shut down entirely. This would cost even more jobs and more money, as well as deprive countless homes of adequate access to power.

The EPA claims its intentions are good and that it only is concerned about the health and safety of the public, but one has to wonder then why it would jeopardize the energy sector with such heavy and abrasive rules that force major electricity suppliers such as AEP to fall to its knees.
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Time for Leaders to Lead

By Rick Manning
Our nation is another day closer to defaulting on our national debt and the Senate continues to be absent without leave in the debate. It makes one wonder whether anyone has told Harry Reid that he was re-elected by the voters of Nevada and remains the Senate Majority Leader.

In case anyone missed it, in the past couple of days the economic news has continued to worsen and even well respected financial analysts are beginning to get a panicky tone in their voices.

Bill Gross, the head of Pimco, the world’s largest bond fund worried publicly that the United States may in fact have debts that far exceed the $14.3 trillion debt ceiling, and in fact approach “nearly $100 trillion.”

New York University’s Nouriel Roubini fears that the world economies may face a “perfect storm” of problems in 2013 based upon a combination of U.S. debt problems, Japanese economic stagnation, the European sovereign debt crisis and a slowdown in China’s rampaging economy noting, “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”

Meanwhile Republican House Majority Leader Eric Cantor is worrying publicly that if significant cuts are not made in a debt ceiling deal matters may get taken out of the hands of Congress through a vote of no confidence by the financial markets raising interest rates.

So where is the Senate Majority Leader?
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