On March 30, 2010 I created a post describing where I thought extra printed money in the system was accumulating, back at the Fed itself. Simply put, many of the extra digital dollars that were being conjured into existence through phony asset purchases were bouncing from server to server in seconds, and winding back up at the Central Bank electronic accounts as Excess Reserves.
Digital dollars are of course the end result of a flim-flam game of asset purchases and repurchases by the Fed and the banks and other major financial players. This was done to try and paper over literal insolvency that happened when the music stopped and all the financial imbalances hit critical mass. The head of the Federal Reserve, Ben Bernanke, and the rest of his compatriots do not like to be accused outright of printing money. So instead the way this game works is that the Federal Reserve accepts as "collateral" any non-performing asset held in the financial system at full value, and credits the seller with dollars in their account for the asset. By calling it an even trade, they claim they are not printing money, but trading one asset for money.
Now they communicate all this through the glorious language of economics, which is good for them because most in our media get bored with it and relegate a lot of the details to quiet bylines.
Let me offer a real world example that explains how this works. Picture the above transaction to be like a car title loan company accepting a title to an automobile that has been totaled and smashed, and then loaning the person full face value as if the car itself was in brand new condition. This happens to work out great for the person who wrecked the car, since they don't have to make much in the way of payments to the car title loan company, as the company has already agreed to repossess the physical car as collateral if they fail to make payments. This is the bailout. The person can take all that money and go and buy a new car. Nifty.
The car title loan company has effectively unleashed new money for circulation in the system, by accepting a junked car for cash and pretending the junked car was worth far more than its actual worth.
But wait, this doesn't work out too well for the car title loan company, does it? In a normal market, the title loan company would go bankrupt immediately, so no such transaction would ever occur in real life.
But in our bailout program, this is what the car title loan company did. And you are on the hook for making them whole on their bad trades. Our leaders in Washington along with those in the clubby world of the Federal Reserve, bankers and Wall Street, created an agreement whereby the American people were put on the hook for bailing out the car title loan company so they could keep making these trades of junked cars for cash with ... bankers and Wall Street, and give them more money to pay for bigger executive bonus pools.
If this sounds short-sighted to you, then you know more than most of our elected delegation in Congress, who voted the whole thing into existence. No strings attached, blank check signed by Uncle Sam.
Our entire economic future was effectively mortgaged in the form of excess dollar creation. The financiers now know that if they wreck their cars in the future, that the taxpayer will come in and bail them out and take their junked vehicles at full dealer price value.
Some call this 'moral hazard'.
I call this a con game, a three card Monte parlor trick years in the making, that our elected leaders got sucked into hook, line and sinker.
There are many ways this could have been done that would have been punitive, and which were suggested and shot down at the time by this same directionless DC mob.
For just one example.. total compensation of everyone employed by bailed out institutions should have been capped to no more than some predetermined level, say... no one could make more the President of the United States while relying upon taxpayer money. If executives were too uncomfortable going from millions a year to the salary of the mere President of the United States, well, all the better that they work faster to clean house, and make the changes needed in their companies to bolster their reserves, purge the bad loans and operate their business sensibly so they could get back to Big Bonus time.
But of course the government allowed all these bozos to run off with all their bananas without even a spanking.
So much for oversight.
If Aladdin were alive today he wouldn't bother with the ruckus with the Genie. The digital dollar machine requires mere keystrokes.
Quantifying remaining Quantitative Easing
But where are we now? Well in just another year with the cutely-named Quantitative Easing or QE-I, QE-II programs in effect, more digital dollars have been injected into the system and some of these dollars have made their round trip back to the Central Bank:
An additional $1.6 trillion dollars now exist that did not exist by August of 2008. The Fed and its defenders argue this is not monetary printing, because they have assets of equal value in their balance sheet so it zeros out (remember, they are counting wrecked cars at new dealer price value to make this math work). I already talked about the hyperinflationary dangers earlier so won't repeat those here.
However I also look at this $1.6 trillion figure in another way, as a proxy for systemic losses incurred by the system and a benchmark for how much more printing they may do.
If this is a reasonable assumption, then one can use estimates of total housing value losses and Excess Reserves to make assumptions about how much more digital printing will be done.
In the year 2000 the total value of US Housing Real Estate was measured by the Federal Reserve in the Flow of Funds Table to be $11.5 trillion dollars.
At the peak of the housing bubble in 2006 the Fed estimated that household real estate had nearly doubled in value (in six years!) to $22.7 trillion dollars.
As of June 2011 the value of household real estate had fallen by $6.7 trillion or 29% to $16 trillion dollars, for a retracement of 60% back towards 2000 levels.
A loss of another $5 trillion puts us back to the same level as the year 2000.
Long-term residential real estate rises at about 1% per year in inflation adjusted terms. So long-term values the total value of real estate in the United States should, by that measure, be $12.8 trillion today over year 2000 levels. This would also imply that at the present level of $16 trillion we are still overvaluing housing stock in this country by 20%, or $3.2 trillion dollars.
So if the $1.6 trillion Excess Reserves is a proportional proxy for losses to date then we can create a ratio. ($1.6 trillion Excess Reserves) / ($6.7 trillion decline in household real estate values) = 24%.
Should the fair long-term value of housing be $12.8 trillion today and we have $3.2 trillion to go, then the Excess Reserves statistic would grow by an additional ($3.2 trillion x 24% = $770 billion dollars).
I know all this may sound cumbersome but since we are dealing with non-transparent policymakers and clueless elected leaders, it's important to be able to think critically. So just be patient and re-read as necessary to understand the steps: Housing values went up by $11.2 trillion dollars in six years, and have fallen by $6.7 trillion dollars since the peak. That $6.7 trillion dollar loss has been shifted around the system and eventually backstopped by the Federal Reserve, who took a lot of junked cars at full value in order to make the lenders whole, and guaranteed the deal without the consent of the American taxpayer (but with the consent of their elected leaders).
Now, the General Accounting Office recently released their Fed Audit and showed that from 2007 through 2010 bailouts summed to $16 trillion dollars. (page 131)
$16 trillion dollars in bailout money was created. That amount of money is enough to practically buy every house in the United States at their present value.
$16 trillion in bailouts for real home declines that were much less, only $6 trillion over the same time frame. Why were systemic losses much more than real estate declines? Remember the financiers treated all this like a casino... ever hear of 'doubling-down' in blackjack? Something like that.
Anyway $1.6 trillion wound up as Excess Reserves back at the Central Bank. So this means that for every $1.00 of bailout money secretly committed by the Fed (it took an act of Congress to force them to release the total amount, mind you), $0.10 cents wound up back at the Fed. Or put another way, every $1.00 in Excess Reserves means that $10.00 dollars in bailout/quantitative easing/glad-handing was done.
So if we end up with another $770 billion dollars in Excess Reserves, then this would imply another $7.7 trillion in Quantitative Easing remains ($770 billion Excess Reserves x $10.00 implied bailout dollars).
I could be off by trillions here. My logic could be all wrong. My assumptions imply a linear or constant relationship in these factors over time and I don't think that is correct.
But I have nothing in the way of proprietary data to use for modeling. Nothing in the way of the kinds of inputs those inside the system have had at their fingertips for years about bond quality, payment history, loan data. None of that is public like stock prices or quarterly earnings reports. The people analyzing that data and making decisions have either been blind, clueless, or in on the game and thereby stacking the odds for personal gain.
So until we have more people in Congress that force better release of data.. we're stuck making crude projections based upon sparse data points... and jumping for the bailout switch every time a banker/speculator jumps out of the dark at us and screams "BOO!".
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