Fed policies have ‘goosed’ balance sheet wealth – but done little for economic growth.

Fed policies during the financial crisis years (2007 – 2010) provided massive liquidity transfusions, access to credit, and debt relief for major banks and other privileged financial interests.

Fed policies have done little, however, to strengthen the economy and restore financial health for the average American citizen.


The Asset-Rich, Income-Poor Economy
By Kevin Warsh and Stanley Druckenmiller,                                                                 Originally posted at WSJ   – accessed from ZeroHedge 6-20-14

Economist Richard Koo diagnosed Japan’s crash in the early 1990s and subsequent two decades of economic malaise as a “balance-sheet recession.” That conclusion wasn’t lost on the Federal Reserve during the financial crisis of 2008-09. The Fed engineered an emergency response to craft what can best be described as a balance-sheet recovery.

At its policy meeting earlier this week, the Fed made clear that it’s scarred, if no longer scared, by the crisis. Extraordinarily loose monetary policy will continue in force. While the Fed’s monthly asset purchases will decline, short-term interest rates will remain pinned near zero. And long-term rates need not move higher—the Fed assures us—even with improving inflation dynamics, credit markets priced-for-perfection, and stock prices at record levels.

The aggregate wealth of U.S. households, including stocks and real-estate holdings, just hit a new high of $81.8 trillion. That’s more than $26 trillion in wealth added since 2009. No wonder most on Wall Street applaud the Fed’s unrelenting balance-sheet recovery strategy.

It’s great news for those households and businesses with large asset holdings, high risk tolerances and easy access to credit.

Yet it provides little solace for families and small businesses that must rely on their income statements to pay the bills. About half of American households do not own any stocks and more than one-third don’t own a residence. Never mind the retirees who are straining to make the most of their golden years on bond returns.

The Fed’s extraordinary tools are far more potent in goosing balance-sheet wealth than spurring real income growth. The most recent employment report reveals the troubling story for Main Street. While 217,000 jobs were created in May, incomes for most Americans remain under stress, with only modest improvements in hours worked and average hourly earnings.

It’s taken a full 76 months for the number of people working to get back to its previous peak, a discomfiting postwar record. Unfortunately, during the same period the U.S. working-age population increased by more than 15 million people. That’s why the share of the working-age population out of work is now at a 36-year low. There are now more Americans on disability insurance than are working in construction and education, combined.

Meanwhile, corporate chieftains rationally choose financial engineering—debt-financed share buybacks, for example—over capital investment in property, plants and equipment. Financial markets reward shareholder activism. Institutional investors extend their risk parameters to beat their benchmarks. And retail investors belatedly participate in the rising asset-price environment.

All of this lifts balance-sheet wealth, at least for a while. But real economic growth—averaging just a bit above 2% for the fifth year in a row—remains sorely lacking.
Higher asset prices are not translating into meaningful increases in capital expenditures, and the weak growth in business investment is proving to be an opportunity-killer for workers. Those with jobs have some job security. But they are less willing to run the risk of finding a better opportunity, or negotiating for higher wages.

Those without jobs, especially in the younger cohorts without a post-high school education, do not attach to the workforce, thus never gaining the entry-level skills and discipline to build a career. The malaise in the labor markets—and muted business investment—help explain why productivity measures are a full percentage point below historical norms.

The Fed’s latest forecast has the economy growing above 3% during the balance of this year and next, and the unemployment rate falling to about 5.5% by the end of 2015. If the Fed’s sanguine scenario finally comes to pass, interest rates are likely to move meaningfully higher across the yield curve. The money pouring into the financial markets may be redirected, in part, to the real economy. Stocks, leveraged loans and real estate are likely to re-price in a higher interest-rate environment. If rates move quickly or unexpectedly, the vaunted balance-sheet recovery could suffer a blow.

What if there is an unexpected shock that causes the economy to slow in the next year or two? The Fed would surely be called upon to bolster asset prices and stimulate the real economy. But would a return to $85 billion per month of bond-buying really be effective? We are skeptical that either Wall Street or Main Street would be comforted by quantitative-easing redux.

Balance-sheet wealth is sustainable only when it comes from earned success, not government fiat. Wealth creation comes from strong, sustainable growth that turns a proper mix of labor, capital and know-how into productivity, productivity into labor income, income into savings, savings into capital, capital into investment, and investment into asset appreciation.

The country needs an exit from the 2% growth trap. There are no short-cuts through Fed-engineered balance-sheet wealth creation. The sooner and more predictably the Fed exits its extraordinary monetary accommodation, the sooner businesses can get back to business and labor can get back to work.

What is the difference between 2% growth and 3% growth in the U.S. economy? As the late economist Herb Stein recounted, the answer is 50%. And the real difference is one between a balance-sheet recovery that helps the well-to-do and an income-statement recovery that advances the interests of all Americans.

The Leviticus 25 Plan changes all this.  It levels this playing field – providing access to liquidity and broad-scale debt reduction at the family level.

It revitalizes free market dynamics and re-energizes productivity.

It is the only economic recovery plan in America that builds strength and restores economic liberty at ground level first, advancing the interests of all Americans.

The Leviticus 25 Plan.  It pays for itself over a 10-15 year period.

Earnings are sliding and 76% of Americans are living paycheck to paycheck. It’s time for a change…

“…Real Hourly Earnings Slide to Lehman Bankruptcy Levels”
ZeroHedge  6-17-14  –  Excerpts:
“[As] reported moments ago by the BLS, real average hourly earnings just posted their third sequential decline in a row, dropping from $10.33 in February, to $10.32 in March, to $10.30 in April, to $10.28 in May.
Furthermore, this was the first year over year decline since October 2012.
And to put today’s $10.28 real average hourly earnings number in context, this is the same real wage seen last in July 2013, July 2012, March 2011 and then, if one goes further back… the month after Lehman failed!”

Source: BLS

Major U.S. and foreign banks and financial centers submerged themselves through a buildup of toxic mortgage assets, systemic blunders and bad commercial loans leading into the early years of the global financial crisis. These banks then received Federal Reserve “secret liquidity lifelines” to keep them  on ‘life support’ or otherwise ‘healthy.’

Meanwhile, 6 years later,  76% of Americans are living “paycheck to paycheck” (CNN Money 6-24-13), and “more than 25 million middle class American households are living paycheck to paycheck” (CNN Money 4-25-14).  And Average Real Hourly Earnings are in decline.

America needs a new plan, one that will re-ignite the economy, relieve debt at the family level, generate real income, and restore economic liberty for all Americans.

American citizens deserve the same access to credit that major banks and financial centers received during the economic collapse (2007 – 2010).

The Leviticus 25 Plan.



Fortis Bank SA/NV – #20 recipient of Fed’s “secret liquidity lifelines”

Fortis Bank SA/NV was a large Dutch-Belgian banking and insurance conglomerate, the 20th largest revenue-generating company in the world in 2007. It assumed a certain degree of ‘underwater status’ during the global financial crisis and ended up receiving billions in bailouts from various government entities, including the U.S.

Bloomberg  Nov 28, 2011 :                                                                                                    “Fortis Bank SA/NV, the banking unit of Brussels-based Fortis, was broken up after getting 7.2 billion euros ($10.3 billion) of capital from the governments of Belgium and Luxembourg in September 2008. It was later nationalized. Belgium sold a 75 percent stake in the bank to Paris-based BNP Paribas SA in an all-stock transaction that took seven months to complete. In a 2009 report, Fortis disclosed borrowing as much as 58.7 billion euros from the emergency liquidity lending facilities of the Belgian and Dutch central banks in October 2008. Data show Fortis Bank also tapped the U.S. Federal Reserve’s discount window, taking a $7 billion overnight loan on Sept. 29, 2008, and as much as $26.3 billion in February 2009 from the Commercial Paper Funding Facility and Term Auction Facility.

Peak Amount of Debt on 2/26/2009: $26.3B

The Federal Reserve’s “secret liquidity lifeline” bailouts of U.S. and foreign banks set the stage for a gradual (6-year running) erosion of the U.S. Dollar.

American citizens indirectly financed those ‘free money giveaway’ bailouts through a loss of greenback purchasing power.

American families deserve nothing less than the same access to credit that U.S. and foreign banks received during the global financial crisis 2007-2010.

It is time to restore American families to economic “health.”                                                    The Leviticus 25 Plan.



37.2% of Americans “Not in Labor Force” – a 36-year high.

CNS News, by Ali Meyer (June 6, 2014)                                                                             Excerpts:

“The percentage of American civilians 16 or older who do not have a job and are not actively seeking one remained at a 36-year high in May, according to the Bureau of Labor Statistics.

In December, April, and now May, the labor force participation rate has been 62.8 percent. That means that 37.2 percent were not participating in the labor force during those months.
Before December, the last time the labor force participation rate sunk as low as 62.8 percent was February 1978, when it was also 62.8 percent. At that time, Jimmy Carter was president.”


It is time to decentralize and restore economic liberty in America by allowing individual citizens to allocate resources, instead of relying on central planning solutions – with big government allocation of resources.
The Leviticus 25 Plan.

Fall 2008: Major U.S. Banks were ‘on the ropes.’ Concentrated exposure to ‘cesspool-grade’ subprime debt … coupled with systemic blunders. Federal Reserve ‘prints’ trillions for bailouts.

The Fall of 2008 marked the beginning of what would be a long slide in the value of the U.S. Dollar vs. hard assets as the Fed initiated various forms of direct (and indirect) debt monetization and emergency loans – much of it directed at major financial institutions (both U.S. and foreign).  And U.S. taxpayers have been picking up the ‘inflation’ bill (primarily food and energy) ever since.

Excerpts from “The Quiet Coup,” by Simon Johnson, The Atlantic May 2009

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15 [2008], causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall [2008], AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October [2009], John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10 million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year [2008] to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

…[TARP] money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand….

Full article:  http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/

Simon Johnson, a professor at MIT’s Sloan School of Management, was the chief economist at the International Monetary Fund during 2007 and 2008. He blogs about the financial crisis at baselinescenario.com, along with James Kwak, who also contributed to this essay.


Note The Leviticus 25 Plan, featuring direct credit extensions from the Federal Reserve to American families, would provide for massive debt reduction at the family level. 

This ‘ground level’ solution is critical for reducing the scope of Government and re-igniting economic growth.

 Any objection that The Leviticus 25 Plan might be unfair to banks ignores the damage that banks have done to themselves and to the economy with their excessive thirst for risk and profits over the past 10 years.  

The time has arrived for American families to receive their own just considerations – direct credit extensions from the Federal Reserve.

The Leviticus 25 Plan

Hypo Real Estate Holding AG – #19 recipient of Fed’s “secret liquidity lifelines”

Hypo Real Estate Holding AG, based in Munich, Germany, is an enterprise made up of a group of banks that specialize in real estate financing.

Hypo purchased Ireland-based Debfa Bank in October 2007.  Debfa later ‘took on water’ when a group of municipal bonds it had underwritten got downgraded.

Depfa’s heavy debt burdens quickly dragged Hypo down during the global financial crisis.  And the Fed galloped to the rescue, on the back of U.S. taxpayers – to help bail out Germany-based Hypo in the fall of 2008 (Bloomberg  Nov 28, 2011):

“Hypo Real Estate Holding AG, a German commercial-property lender with 1,366 employees, borrowed as much as $28.7 billion in November 2008 from the U.S. Federal Reserve through the New York branch of its Depfa Bank Plc unit. That’s about $21 million per employee. It borrowed almost one-third as much as Citigroup Inc., which has 190 times as many employees.

The Fed aid came in addition to 142 billion euros ($206 billion) of emergency credit lines and debt guarantees from German authorities. Hypo, which invested in mortgage-backed securities in the years before the financial crisis, said in a 2009 report that it lost access to short-term funding after Lehman Brothers Holdings Inc.’s bankruptcy. Hypo didn’t disclose any Fed borrowings until the loans became public in 2011.”

Peak Amount of Debt on 11/4/2008: $28.7B


If the Fed can utilize the financial resources of the American people to provide liquidity to a foreign entity like Hypo Real Estate Holding – to help make them financially ‘healthy,’ then the Fed can also extend liquidity directly to American families to relieve debt burdens and improve the financial health of U.S. citizens.

The Leviticus 25 Plan.

Here we go again – banks leveraging up with “repackaged junk” bond debt (CLO’s)

“Repackaged Junk Has Never Smelled So Sweet: JPM Forecasts Record $100 Billion In 2014 CLO Issuance”  –  ZeroHedge  06/04/2014

“If the Fed is looking for definitive proof of bubble euphoria it should look no further than the CLO market: according to Bloomberg, so far in 2014, more than $46 billion of collateralized loan obligations have been raised, after $82 billion were sold in all of 2013. As a result of this epic dash for repackaged trash, JPMorgan boosted its annual forecast for CLO issuance from $70 billion to as much as $100 billion, which means 2014 may end up as the biggest year on record. We assume it is with great irony that Bloomberg summarizes: “The business of bundling junk-rated corporate loans into top-rated securities is booming like never before after the implementation of regulation aimed at making the financial system safer.”

The reason for the irony is that it was rampant CLO issuance which helped finance some of the biggest leveraged buyouts in history during the last credit boom: buyouts which in the subsequent year almost without fail flirted with bankruptcy as a result of over-levered balance sheets and collapsing cash flows, which however found a second wind courtesy of the Fed’s ZIRP policies.”


“If JPM’s prediction about $100 billion in CLO issuance is correct, 2014 will be an all time record year not only for CLOs but HY underwriting in general, as the yield on average “High Yield” bond drops to never before seen levels matched only by near-all time default lows.

For those lucky few who are not familiar with CLOs, here is a reminder:
CLOs pool high-yield corporate loans and slice them into securities of varying risk and return, typically from AAA ratings down to BB. The lowest portion, known as the equity tranche, offers the highest potential returns and the greatest risk because investors are the first to see their interest payouts reduced when loans backing the CLO default.


“But most amusingly, none other than the Fed has warned about the scramble for repackaged junk yield: “the growth in riskier corporate lending led the Federal Reserve and the Office of the Comptroller of the Currency to warn lenders last year to improve lax underwriting practices. Todd Vermilyea, a Fed official, said May 13 that standards “have continued to deteriorate in 2014” and that “stronger supervisory action” may be needed.”

The banking world’s packaging up and securitizing of junk corporate bond debt, known as Collateralized Loan Obligations (CLOs) is on track to reach record levels this year.

This aggressive risk posture replay should validate the legitimacy of the only plan in America capable of deleveraging American families from household debt – and thereby providing a healthy layer of insulation from a potential ‘Round 2” credit crisis.

The Leviticus 25 Plan.