FED


April 6, 2011, 
Dear Dr. Paul:
There are serious questions about the legality of Quantitative Easing. You are among the few who are well-qualified and well-placed to get to the bottom of it.
Most people believe, and the media confirm them in that belief, that the Fed can legally create dollars ‘out of the thin air’ in any quantity, and can do with them as it pleases. This may well be the pipe dream of Dr. Bernanke who is quoted as saying that the U.S. government has given the Fed a tool, the printing press, to stop deflation — but it hardly corresponds to the truth. The Fed can create new dollars only if some stringent legal conditions are satisfied, and then, it can only dispose of them in certain ways prescribed by law.

Contrary to a statement of Dr. Bernanke, made before he became the Chairman of the Board of Governors of the Fed, he could not drop freshly printed dollars from a helicopter, no matter how many reasons for such an action he may be able to cite. Another thing the Fed is not allowed to do legally is to purchase Treasury paper from the U.S. Treasury directly. It must be purchasedindirectly through open market operations. If you don’t put the Treasury paper through the test of the open market before the Fed is allowed to buy it, the presumption is that the market would reject it as worthless, or would take it only at a deep discount. The law does not allow the F.R. banks to purchase Treasury paper directly from the Treasury because that would make money creation through the F.R. banks a charade, reserve requirements a farce, and the dollar a sham.

If that were the only problem with Quantitative Easing, it would be bad enough. But there is something else that is even more ominous. The fact is that the Federal Reserve banks can purchase Treasury paper only if they pay with F.R. credit that has been legally created.

F.R. credit (F.R. notes and F.R. deposits) is legally created if it has been issued in accordance with the law. The law says that F.R. credit must be backed by collateral security at the time of issuance, usually in the form of an equivalent amount of U.S. Treasury paper. The procedure is as follows.
The F.R. bank seeking to expand credit takes its Treasury paper, owned outright and free from encumbrances, and posts it as collateral with the Federal Reserve agent who will then authorize the issuing of credit. In other words, if the F.R. banks do not have the unencumbered Treasury paper in their possession, then they cannot create additional credit legally.

There is some evidence that the F.R. banks do not have F.R. credit available to make the kind of purchases Dr. Bernanke is talking about as part of his Quantitative Easing. Nor do they have unencumbered Treasury paper in sufficient quantity that they could post with the F.R. agent for authorizing the issue of additional F.R. credit.

The point is that the process of posting collateral first, and augmenting F.R. credit afterwards must under no circumstances be reversed. What the F.R. banks cannot legally do is to buy the Treasury paper first with unauthorized F.R. credit, post the paper as collateral, and justify the illegal issuance of credit retroactively. Nor can they borrow the bond from the Treasury, post it as collateral, and pay for the bond retroactively.

This is an important limitation separating the regime of market-based irredeemable currency from the regime of fiat money involving outright monetization of government debt — the graveyard where the Continental dollar, the assignat, the mandat, the Reichsmark, and the Zimbabwe dollar (among countless others) rest.
At any rate, retroactive authorization of F.R. credit, if that’s what the Fed is up to, would be a violation of both the letter and spirit of the F.R. Act. It would mean converting the dollar into outright fiat money through the back door, bypassing Congress. It would show absolute bad faith on the part of the Chairman of the Federal Reserve Board of Governors, Dr. Ben Bernanke, who certainly knows what the law is. Such a blatant violation of the law would make him totally unfit for the powerful office he occupies. It would call for his immediate and dishonorable discharge by the President, pending Congressional investigation of the matter.

The various violations of the law of which the Fed is accused point to a concerted effort to remove the shackles the law has put on the money spigots lest crooks help themselves to the public purse. These violations are not isolated incidents. They are aiming at the corruption of the monetary order of the nation and the world. Moreover, they would ultimately figure prominently among the causes of the financial instability the world has been suffering from since 1971 and, more recently, since 2008.

Without understanding this fundamental truth, all talk about stabilizing the monetary system and reining in the runaway budget deficit is an exercise in futility.
Yours very sincerely,
Antal E. Fekete
Note: an identical letter has been sent to Congressman Mike Pence of Indiana.

What the Federal Reserve is up to, and how we got here.

Vodpod videos no longer available.

Collateralized debt obligation is now effectively worthless because the collateral behind the debt can no longer be collected. The banks cannot go and get it.
Let’s say you have 10 mortgages at $1 million a piece, the sum total of those mortgages are $10 million. So, the banks took the 10 mortgages and bundled them together into a collateralized debt obligation or CDO with a face value of $10 million.
They then sold that new entity that they created to an investment group of some sort, a pension fund, hedge fund, etc. promising them a yield of let’s say 7%. The sales pitch would emphasize the fact that this CDO was backed by real collateral. In the event of loan defaults by the borrowers, the banks would tell the buyer of the CDO that the collateral behind the loan could be sold to recapture any potential losses on the part of the purchaser.
Everything seemed to work fine until the defaults began and the foreclosure process kicked into high gear. The foreclosure process has exposed fatal flaws in the system and the flaw is that the banks cannot prove clear ownership of the mortgage.
Consequently, they are then barred from foreclosing on the property. Because they can no longer foreclose on the properties, the CDO is now effectively worthless.
The hedge funds and the pension funds cannot now sell these CDO’s on the open market, so how are they going to recover their original investment? Perhaps you may say that won’t be a problem because these instruments were insured. The problem is now the credit default swap or the insurance policy that was purchased to protect against default assumes that the insurer has the financial wherewithal or resources to make good on the claim.
If there were only a small number of these problem CDO’s this would not be an issue. But as the number of the foreclosures continue to skyrocket, and more and more banks are prohibited from seizing the collateral behind the property, the sheer magnitude of the number of claims presented to the insurer will overwhelm their balance sheet.
In effect what you have is an insurance company which doesn’t have enough money to pay off the claims. Compounding the problem is the fact that the CDO’s and credit default swaps related to these claims form a mass network of interdependence. This then ripples through the entire system and creates a domino effect which can cause the failure of entities creating the next financial crisis.
Ultimately the Federal Reserve will be asked to step in and buy up the now worthless CDO’s and put those on its balance sheet. In order to do this the Federal Reserve will have to engage in massive quantitative easing, taking onto its balance sheet the worthless CDO’s in exchange for newly issued treasuries.
This of course will have a horrific effect on the US Dollar which is why gold and silver are heading much higher.
Dan Norcini (JS Mineset)

…especially watch Segment 4 of 5

In a recently declassified lot of FED papers from a top secret cache, a batch of very old photographs were discovered, which -after scrutiny- leave no doubt about its previous Chairman’s true origins

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