The Fed & Treasury Auctions: Is there any real money being paid?

Interesting exchange in the comment section of MarketWatch for this article on the Fed buying T-bills at Treasury auction.  Here's the exchange:

Q: Can anyone explain to me how they issuers of debt, can be the buyers of the same debt? This doesn't make sense on any kind of level.

A: (Gooby) Here's how they do it. 

The Fed loans (interest free money) to the TARP minions (JP Morgan, GS, and foreign central banks that Bernanke will not reveal) so that they can drive the market and gold back up in order to sucker the ordinary investors into jumping in with their hard-earned wealth. Then the minions will play their microtrades, skim off their profits, make the market dump, pay back the Fed and buy more TREASURIES...... 

Ordinary investors are funding TARP minions buying US Debt. ..........so we get screwed when we get the bill for the TARP bailouts and then we'll get screwed when we also get taxed to cover the interest on the TREASURIES.

A: (Wil-E-Coyote) US Treasury issues the bonds, Federal Reserve buys them (effectively retiring them). 

Magic money then credited to the US Treasury account, without the need for taxes.

(Repeat until currency is worthless).

A: (Freefall) Like Coyote said, US treasury sells the bonds, the Fed buys them with their printing press. However, these buybacks are not purchased directly from the Treasury per se as treasury floats debts through auction. The Fed purchases them through primary dealers effectively increasing liquidity(more cash available to lend). They used to control liquidity through 'temporary open market operation' or 'permanent open market operation.' However, after the crisis, the Fed only does buybacks and POMO which are effectively retiring those debt instruments off the market permanently.

A: (Woodsmoke52) A lot of people are consoling themselves that the coming inflation holocaust spawned by the Fed/Treasury collusion will push stock prices higher. Yes, inflation is likely to drive stock prices higher, but there's a catch. Stock prices rose in the 1970s, but they didn't keep pace with inflation and they won't do so this time. Stocks are not historically a good hedge against steep monetary inflation. Real estate does better, but even real estate falls short of CPI increases. And 18.8 million empty housing units say that today is not a good time to buy residential real estate. If you want to park wealth in real estate, I would suggest an old farm in the midwest. Someplace you can unload a shotgun or a 7mm mag without upsetting the neighbors.

With the big-spending 45-54 year old demographic shrinking and baby boomers beginning to retire and sell stocks out of their retirement plans, there is nothing to support stock prices for years to come. The government is increasing the money supply at a rate many times that of GDP growth. Ultimately, that can have only one outcome. It is consumer essentials that will go up the most, not paper assets.

CPI inflation is modest now (about 6%-7% according to shadowstats.com) but when the economy begins to show a real uptick in consumption, the velocity of money will pick up. As soon as that happens, inflation will run wild. Think about it: millions of unemployed people are no longer producing goods and services, but still consuming. If government keeps mailing out the food stamp cards, extending unemployment checks and granting 100% LTV mortgages through the GSE's, consumption will overwhelm actual production.

Do not sell gold when the price reaches $2000.

A Bursting Seam: Will Kurdistan Tear Iraq Apart?

An excellent article from CFR on both the recent history of, and challenges currently facing, the relationship of the Kurdish regional government and the Iraqi federal government. Given the immense oil reserves at stake in and around Kirkuk, it's no wonder that the referendum on the city's status has been delayed repeatedly, and that violence pervades the city today.

The Kurdish Issue Flares Up in Iraq
Author: Daniel Senor, Adjunct Senior Fellow for Middle Eastern Studies


July 21, 2009
Wall Street Journal

At their White House meeting today, President Barack Obama and Iraqi Prime Minister Nouri al-Maliki will discuss the escalating conflict between Iraq's Arabs and Kurds. Tensions have almost turned into warfare in recent months, especially following the Iraqi Army's deployment of its 12th Division in Kirkuk late last year. It is a critical time for the U.S. to play a constructive role, but this cannot happen if Mr. Obama throws away his most potent card: a clear signal that he is prepared to slow down planned U.S. troop withdrawals.

How did Iraq arrive at this new flashpoint? Between the end of the first Gulf War in 1991 and the fall of Baghdad in April 2003, Iraqi Kurds lived in a semi-autonomous region. The informal border-called the Green Line-stretched from just north of Diyala and Kirkuk, and cut through part of Ninewa. Ever since, the Kurds have had their own parliament and ministries, control over all the cultural institutions in the region, and their own militia called the peshmerga.

Providing the Kurds with a protected region made perfect moral and geopolitical sense. Saddam had repeatedly attempted genocidal campaigns against them: the Anfal depopulation campaign in 1987-88, in which the Baathist regime killed or expelled hundreds of thousands of Kurds; the expulsion of thousands of Fayli (Shiite) Kurds from northern Iraq into Iran; and the 1988 slaughter of 5,000 Kurds with chemical weapons in Halabja.

In April 2003, the peshmerga helped the U.S. fight Saddam-not just in the Kurdish area but also south of the Green Line. When it came to Kirkuk, however, the Kurds moved in during the war and never left. With Saddam gone, the Kurds quickly set up Kurdish Regional Government (KRG) offices in the city and began to establish facts on the ground.

From the Kurdish point of view, all this was natural and just. Before Saddam's brutal expulsions during his Arabization campaign, Kirkuk had a Kurdish majority.

Iraq's post-Saddam interim constitution-which we in the Coalition Provisional Authority helped the Iraqis draft-recognized Kurdish authority only over the territories that the Kurds controlled before the fall of the regime. The permanent Iraqi Constitution went a step further in requiring a referendum to determine the future status of Kirkuk. While both articles clearly left Kirkuk outside the jurisdiction of the KRG in the near term, the language also conceded that Kirkuk and other nearby areas were "disputed territories." In the eyes of the Kurds, this ambiguity left the door open.

At that time, resolving the Kurdish issue was subordinated to the urgent need to address the Sunni insurgency and the growing power of Moqtada al-Sadr's Mahdi militia. Today the threats from Iraqi al Qaeda and the Sadrists are significantly diminished.

Two factors will drive the Kurdish-Arab issue to a boiling point over the next six months unless the Obama administration heads them off. First, oil. There is still no federal Iraqi hydrocarbons law. The KRG and the Iraqi government rely on different interpretations of Article 111 of the Iraqi Constitution, which declares that "oil and gas are the property of all the Iraqi people in all the regions and governorates."

Kirkuk's oil is a big issue for the national government in Baghdad. When Mr. Maliki's government wrote its federal budget for 2009, oil prices were hovering around $150 per barrel. And while the Iraqi government had wisely forecast prices to fall to $80 per barrel-and made budget projections accordingly-oil prices were still 50% below their projections by mid-year. This has caused panic at Iraq's Oil and Finance Ministries.

From the Kurds' standpoint, oil is part of a broader KRG strategy to draw international pressure on Baghdad to grant further Kurdish autonomy. It is no coincidence that on the eve of Mr. Maliki's visit to Washington, the KRG's Ministry of National Resources released an embarrassing document contrasting its success in attracting foreign energy investors with the national government's approach, which has been stalled.

Second, politics. On Saturday, the Kurds vote on a new parliament and president. While polls show that President Massoud Barzani and the two largest Kurdish parliamentary parties will be re-elected, the dynamic of this election is making Kurdish leaders nervous. Historically, Kurdish elections turned on the KRG's power struggle with the national government. But in this election, the Iraqi Kurds seem to be more preoccupied with local governance issues such as KRG corruption. This may be prompting KRG officials to foment tension with Baghdad in the hope that the perception of external threats will strengthen their position at the polls.

As for Mr. Maliki, he must prepare for national elections in January. Tapping into Iraqi-Arab nationalism is to his political advantage. In short, the political schedule all but ensures that there will be no grand Baghdad-Erbil bargain soon.

Kurdish leaders are deeply concerned about the withdrawal of U.S. forces. Under the current timeline, most U.S. troops will be out of Iraq by the end of the summer 2010, with 35,000 to 50,000 remaining through the end of 2011, at which point all U.S. forces must be gone. Mr. Obama should consider slowing the withdrawal schedule. The willingness of the Kurds to negotiate will decrease if they believe U.S. forces will not be there to help enforce an agreement. In addition, the U.S. government must be sensitive to the possibility that al Qaeda may see an opportunity in the north to support an Arab cause.

There is pressure building within the Pentagon to cut forces in Iraq even faster than planned to send more troops to Afghanistan. That pressure should be resisted. We must not do in Iraq what Mr. Obama, when campaigning last year for the job of commander in chief, said we did in Afghanistan: lose a key fight by focusing too intently on another theater.

Mr. Senor is an adjunct senior fellow at the Council on Foreign Relations. He served as a senior adviser to the coalition in Iraq and was based in Baghdad in 2003 and 2004.

To read about the history of Kurdistan, see an essay here from my archive.

Seeing the Forest, Not just the Trees

An excellent article that, read in conjunction with Taibbi's "Counterfeit Ecomony," captures the essence of the millions of mindless securities insurance transactions that form the backbone of today's investment economy. The little guy can't even play in this game, let alone win at it.

Wall Street on the lam

By Eugene Robinson
Friday, October 23, 2009
Originally posted @ http://www.washingtonpost.com/wp-dyn/content/article/2009/10/22/AR2009102203866.html?

Slashing executive salaries, bonuses and perks at the seven bailed-out companies that gorged most gluttonously at the public trough is emotionally satisfying, but it shouldn't be. It's like arresting jaywalkers while ignoring the bank robbery that's happening in broad daylight down the block.

Don't get me wrong. The Obama administration's "pay czar," Kenneth Feinberg, is right to put a lid on compensation at the Not-So-Magnificent Seven: Citigroup, Bank of America, General Motors, Chrysler, GMAC, Chrysler Financial and the unforgettable AIG. Twenty-five of the biggest earners at each of those firms will have their overall compensation cut roughly in half, and most of that will come as restricted company stock, not cash. This means that what they ultimately reap, when they are eventually allowed to sell the stock, will depend on how well the company performs -- which will depend on how well the executives do their jobs.

Tying pay to performance: What a concept.

Feinberg even muscled outgoing Bank of America chief executive Kenneth Lewis into accepting no pay or bonus for this year. But Lewis will still have an estimated $70 million retirement package to keep him warm at night, so hold your tears.

It's nice to know that there must be some pooh-bah at B of A, Citigroup or AIG who will have to live without the new $90,000 Porsche Panamera he was planning to buy. But Feinberg's writ of imperial decree doesn't extend beyond those seven companies, and the rest of Wall Street gives no indication of remotely understanding what the big deal is about compensation. Goldman Sachs, for example, has a bonus pool this year of at least $16 billion and perhaps as much as $23 billion.

But all this is just a sideshow. The main event is the limited, far-too-modest attempt by the Obama administration and Congress to curb the irresponsible Wall Street practices that led to the financial meltdown -- and, if unaddressed, will lead inexorably to the next crisis.

Deregulation allowed the financial marketplace to devolve from an institution that served the overall economy -- by allocating capital most efficiently to the companies that could put it to best use -- into an institution whose primary mission was to serve itself.

The vast over-the-counter trade in instruments known as derivatives, nominally worth a staggering $600 trillion worldwide, is largely an exercise in make-believe. Firms make highly leveraged investments in exotic securities whose true value is opaque. Then they hedge these investments by buying insurance against potential losses, although the insurer doesn't have a fraction of the money it would need to make good on all its promises.

All this investing and hedging generate huge transaction fees and big profits, which can be skimmed off the top each year. Everything's fine, until there's some disruption in the real economy -- a downturn in the housing market, say. If the disruption is severe enough, the web of make-believe deals starts to unravel. At which point the government steps in and bails everybody out.

The White House and Treasury Department have proposed reforms that would ameliorate, but not eliminate, this ridiculous cycle. What the administration won't do is outlaw some kinds of derivative products or transactions; officials say that if they went down that road, they would always be one step behind Wall Street's inventiveness and greed. I think it would be worth a try.

The administration did propose that derivatives transactions go through clearinghouses and be conducted on transparent, regulated exchanges. But as reform legislation begins to work its way through Congress, Wall Street firms -- including companies that received bailout funds -- have boosted their spending on lobbying and political donations.

As a result, legislation approved Wednesday by the House Agriculture Committee -- which has jurisdiction over the futures markets -- would exempt up to 30 percent of derivatives transactions from new regulations. A bill approved Thursday by the House Financial Services Committee that would create a Consumer Financial Protection Agency, strongly opposed by most luminaries on Wall Street, was amended in the committee to exclude mortgage insurers, title insurers, accountants, lawyers and others.

Banks, meanwhile, are jacking up overdraft charges and instituting new kinds of credit card fees before any new limits kick in. Hey, get it while you can.

Capping salaries and bonuses is fine. But we need to pay attention to the guys in ski masks with bulging bags of money slung over their shoulders. They're about to jump into the getaway car.