From: cvau...@ipa.net

To: Undisclosed

Sent: 3/5/2008 11:21:35 AM

Subject: The Federal Reserve Has Become Irrelevant

This article appears in the March 7, 2008
<http://www.larouchepub.com/eirtoc/2008/eirtoc_3510.html>  issue of

Executive Intelligence Review.

The Federal Reserve
Has Become Irrelevant

by John Hoefle

Could they really be that stupid? That is the question which comes to mind watching the
recent spate of statements by government officials discussing what they see as the
problems facing the economy, and what needs to be done to solve them. Rather than
admitting the global financial system has failed, and must be put through bankruptcy,
they blather on about whether or not we have entered into a recession, and about the
need to protect asset values from the effects of what they prefer to call the "housing
crisis."

Take the case of poor Ben Bernanke, who had the misfortune of taking over as chairman of
the Federal Reserve just in time for the worst financial crash in six centuries.
Bernanke has a reputation for being an expert on the Crash of 1929 and the banking
problems which surrounded it, but judging from his public statements, he still believes
we are in the midst of a housing crisis.

"Many of the challenges now facing our economy stem from the continuing contraction of
the U.S. housing market," Bernanke told the House Committee on Financial Services in his
Feb. 27, Semiannual Monetary Report to Congress.

We do not dispute that there is a housing crisis in the U.S.; home sales and home prices
are indeed falling, precipitously, with predictable effects. What we reject, and
emphatically so, is the idea that housing is the cause of the present crisis: As we have
detailed in prior articles, it is the bankruptcy of the system as a whole, which blew
out the real estate markets. The so-called "subprime crisis" is actually an effect of a
financial system which depended upon ever-higher mortgage debts to feed a financial
bubble. The subprime loans were a response from the banking system to continue to sell
homes when prices rose so high people could no longer afford them.

What we are facing is a crisis of the banking system itself, and of the securitization
and off-balance-sheet apparatus which the banks created to hide their own bankruptcy,
and anyone who is afraid to say that, is irrelevant.

Banking Crisis

The fact that they refuse to say it, doesn't mean they don't understand it, at least in
part. It is clear from the Fed's money-pumping and collateral-soaking operations that
the Fed realizes the banking system is in meltdown mode, and it is fair to suspect that
the Fed is doing far more than it would dare publicly admit, to keep the banks' doors
open.

The problem facing the regulators is that the financial system is collapsing, held
together more by denial than anything else. The vaporization of trillions of dollars of
nominal wealth has triggered an avalanche of losses, losses which the system cannot
withstand, and so considerable effort is being expended to maintain the fiction that the
bond market hasn't exploded, the paper still has value, and the banks are not broke. The
problem is that the eventthe collapse of the global financial systemhas already
occurred, and what we are now witnessing are the effects of that collapse.

The FDIC has already begun adding staff to its Division of Resolutions and Receiverships
in preparation for a wave of bank failures, and has placed job postings on its website
for those with the skills in "duties associated with a financial-institution closing."
Three banks failed in 2007, compared to none in the two previous years, and the number
of institutions on the FDIC's "problem" list jumped 50%, from 50 in 2006, to 76 in 2007.

One need but look at the headlines of the agency's latest Quarterly Banking Profile to
see signs of trouble ahead. "Quarterly Net Income Declines to a 16-Year Low," said one;
"One in Four Large Institutions Lost Money in the Fourth Quarter" said another. The
banks still reported a profit of $5.8 billion for the quarter, the lowest such total
since 1991, and down 84% from the $35 billion the banks reported for the fourth quarter
of 2006. For the year, the banks claimed $105 billion in profits, down 27% from $145
billion in 2006. In an era where write-offs of double-digit-billions have become almost
common, the handwriting is on the wall.

The ominous tone of the normally upbeat FDIC report continues well beyond the headlines.
Non-current loansloans 90 days or more behind in paymentsrose by $27 billion, or 33% in
the last three months of the year, the largest percentage rise in the 24 years the FDIC
has been tracking the figure, and net charge-offs jumped sharply. The banks as a whole
added a net $15 billion to loan loss reserves, despite which, the level of reserves fell
to just 93 cents for every dollar of reported non-current loans, the first time since
1993 that non-current loans have exceeded reserves.

In a development of significant interest, the level of derivatives reported by the banks
fell during the quarter, to $165 trillion at year-end from $173 trillion on Sept. 30.
The level of derivatives for 2007 was still up 25% over 2006, and quarterly drops in
derivatives holdings have happened before, but in dollar terms, the $8 trillion drop in
the fourth quarter was the largest quarterly drop ever, and in percentage terms, at 5%,
it was second only to the $6 trillion (12%) drop in the fourth quarter of 2001, the
quarter following 9/11. If the derivatives markets have peaked, then the problems facing
the banks are far worse than anything the banks and their regulators have admitted.

Other signs of a banking crisis abound. The big banks which own Visa, the world's
largest credit-card processor, are planning on selling roughly half of the company in an
initial public offering. The IPO is intended to raise some $15-19 billion, giving the
banks some badly needed capital, and helping them reduce their exposure to credit cards,
one of the many nightmares on the horizon. Raising capital has become serious business
for the banks, with Citigroup, Merrill Lynch, Morgan Stanley, Bank of America, and
Wachovia raising over $55 billion in the last few months, to offset some of their
losses.

While the biggest banks are the most bankrupt, the smaller banks are also in trouble.
Figures from the Comptroller of the Currency (OCC) show that the commercial real estate
exposure of the nation's community and mid-sized banks is in the range of 275% of their
capital as of 2006, compared to about 80% for the large banks.

Bailouts

Numerous bailout proposals are circulating in Washington, all of them based upon the
idea that the current asset decline is an aberration, and that the government should
step in and protect the asset valuations until the market returns to normal. FDIC
chairman Sheila Bair has proposed freezing scheduled interest rate hikes on troubled
mortgages. Sen. Chris Dodd (D-Conn.), head of the Senate Banking Committee, proposed
that the Federal government purchase and refinance mortgages headed for foreclosure.
Bank of America and Cridit Suisse are circulating their own proposals. Many of these
proposals involve having the Federal Housing Administration insure loans, and then
having Fannie Mae and Freddie Mac buy them; Freddie and Fannie have been instructed to
begin buying so-called jumbo loansthose over $417,000despite the fact that both
institutions are already hemorrhaging money. Freddie Mac reported a loss of $2.5 billion
for the fourth quarter, while Fannie Mae lost $3.6 billion.

All of the plans, while claiming to protect the public, are actually intended to protect
the valuations of mortgage-related securities, as a way of protecting the banking
system. Rather than admit that housing prices are too high, that debt levels are
unsustainable, and must be adjusted through bankruptcy proceedings, the plans would
convert the debt to government obligations, in effect shifting the huge asset losses to
the taxpayers.

Treasury Secretary Henry Paulson has attacked some of these proposals as bailouts of
speculators, even while advancing his own bailout plans. While some bankers are
clamoring to be saved, Paulson is smart enough to realize that the bankersor at least
some of themwill have to take their lumps. He has been adamant that banks must write
down their losses and recapitalize, even while he has attempted to organize
private-sector bailouts like his ill-fated M-LEC Super-SIV plan, and his Hope Now
Alliance.

Paulson, as a former Goldman Sachs banker, knows quite well that the financial system is
finished, and is determined to save the core institutions of that old systema handful of
big banks, investment banks, and other institutionsto survive as part of the new system
the bankers are attempting to put into place. Much of the old system will have to be let
go, with the new system to be raised, Phoenix-like, out of its ashes. The politicians
are to be kept out of this as much as possible, in Paulson's view, because the new
system will rely much more on technocrats than politicians, much more on the private
sector than the government.

While the technocrats attempt to decide our fate, the news media is doing its best to
distract us with minor dramas like the fate of the monoline bond insurers, and all the
losses that will follow should the monolines fail to retain their crucial AAA credit
ratings. If they fail, we are repeatedly and breathlessly told, all hell will break
loose. But, all hell has already broken loose. The monolines wouldn't even be an issue
were the bond market not collapsing, a point which ought to be obvious, but which the
media continually misses.

California Gov. Arnold Schwarzenegger and New York Mayor Michael Bloomberg, acting on
behalf of fascist bankers like Felix Rohatyn, are touring the country pushing
privatization of public infrastructure. They claim the private sector, with all its
cash, can afford to build projects the governments cannot, but it is the old bait and
switch scam. These private sector funds are rapidly evaporating. The bankers don't
intend to spend billions, they intend to make billions by charging ordinary citizens for
using infrastructure the citizens have already paid for. It is a very old-fashioned
rip-off, and you can expect to pay through the teeth. Assuming, of course, that you
survive.

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