Janet Yellen And The FOMC’s Dilemma

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Janet Yellen And The FOMC’s Dilemma

Mr Bear may currently be in hiding, but he can scarcely contain himself.

The media is currently focused on the financial garbage from Greece and Puerto Rico stinking up investment portfolios, but truth be told the entire global bond market is putrid. Then there’s the hundreds of trillions of dollars of OTC interest-rate derivatives purchased from Wall Street by rubes in the money-management and hedge-fund industries to hedge their credit risks.

Graham Summers of Phoenix Capital Research made this point on the Greek debt issue: “As I write this, the markets are moving higher on news that Greek PM Tsipras is willing to accept the bailout offer that the IMF made before the default. The markets are misreading this. That bailout offer has expired even if the IMF allows such a deal, the damage has been done. At the end of the day, the “Greek” issue is in fact a “debt” issue. And Greece is just a drop in the ocean of debt sloshing around the financial system.”

Mr. Summers’ point was that many billions of dollars of Credit Default Swaps bundled with the $1.5 billion dollar Greek IMF debt are now in the money, or should be. But no one in the financial media seems to be aware of the dire implications.

What happens to the banks who are counterparties to these credit default swaps when bond holders demand specific performance on these derivative contracts two seconds after the Greek default? Since the bonds in default are owned by the IMF, and the IMF won’t recognize government defaults, they classified the Greek default as being in a “state of arrears.”

This is clearly a dodge to protect the banks from their impossible legal obligations, obligations they knew were impossible from day one when they willingly assumed them – for fees and commissions. Never in the history of finance has there been such a premium placed on insincere government regulation and banking integrity.

It’s obvious what Janet Yellen and the Fed “policy makers” are trying to do; exactly what they’ve been doing since the late 1980s; keep the game going at all costs. Sadly though the costs incurred in this farcical experiment in unconstrained debt creation have expanded to the point of being catastrophic.

To better understand this mess, let’s examine 2 Key interest rates used by the Ms. Yellen and her ‘policy makers” to stimulate or brake what they call “economic growth”:

The Fed Funds Rate (overnight money)
Yield on the US Treasury Long Bond
The Federal Reserve sets the Fed Funds Rate to stimulate or restrain “economic growth.”

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