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Posts Tagged ‘Ben Bernanke’

by Tyler Durden
January 1, 2012
ZeroHedge

 

When it comes to the fabled President’s Working Group on Capital Markets, also known as the Plunge Protection Team, the myths about the subject are certainly far greater than any underlying reality. To be sure, vast amounts of popular folkflore has been expounded into the public arena, with most of it being shot down simply due to it assuming conspiracy theories of such vast scale that the human mind is unable to grasp the complexity, and ultimately the inverse Gordian Knot makes an appearance with the claim that vast conspiracies are largely untenable simply because it is impossible to keep a secret from so many people for so long. Yet what if the secret is not a secret at all but is fully out in the open, and is only a matter of interpretation, and contextualizing? Why just 3 years ago it would appear preposterous to allege the capital markets are a ponzi and that the Fed does everything in its power to keep stocks higher. Well, what a difference three years make: now the Chairman himself in a Washington Post OpEd has admitted that the sole gauge of Fed success is the loftiness of the Russell 2000, neither unemployment nor inflation really matter now that the Fed’s third mandate has been fully whipped out. Furthermore, Keynesian economics, and the entire top echelon of the educational system have also been represented as a paradigm which merely perpetuates the status quo as the alternative is the realization that the whole system is a house of cards. As for the global capital markets being nothing short of a ponzi, we merely point you to the general direction of Europe, the ECB and its bank, where the monetary interplay is nothing short of the world’s biggest pyramid scheme. Yet the PPT, or whatever it is informally called, does not exist? Consider further that only recently did it become known that the former SecTres Hank Paulson himself was exposed as presenting material non-public information to a bevy of Goldman arb desk diaspora hedge funds, headed by with none other than the head of the President’s Working Group on Capital Markets Asset Managers committee David Mindich. So, if contrary to all the evidence that there is some vast underlying pattern, if not a conspiracy per se, one were to take the leap of faith and take the next step, where would one end up? Well, most likely looking at the Exchange Stabilization Fund, or ESF, which Eric deCarbonnel has spent so much time trying to unmask. Is it possible that the ESF, located conveniently at the nexus between US monetary policy, foreign policy and last but not least, a promoter of the interests of the US military-industrial complex, is precisely the organization that so many have been trying to expose for years? Watch and decide for yourself.

As a reminder deCarbonnel is not some tinfoil hat clad sub-basement dweller – it was his input that led us to the realization that in attempting to control the Treasury curve, the Fed will, and already has, experiment with selling puts on various Treasury maturities in an attempt to generate reflexivity whereby the synthetic determines the value of the underlying (something ETFs are now doing oh so well), the value naturally always being higher, higher, higher irrelevant of what underlying demand there is (and as we showed last week, with a record amount of international outflows in the past month, the demand, at least from abroad, is just not there). So what does Eric assert?

Quite a bit as it turns out.

After months of work, the video series on the Treasury’s Exchange Stabilization Fund is finally finished!

 

Why you should watch these five videos:

 

It is impossible to understand the world today without knowing what the ESF is and what it has been doing. Officially in charge of defending the dollar, the ESF is the government agency which controls the New York Fed, runs the CIA’s black budget, and is the architect of the world’s monetary system (IMF, World Bank, etc). ESF financing (through the OSS and then the CIA) built up the worldwide propaganda network which has so badly distorted history today (including erasing awareness of its existence from popular consciousness). It has been directly involved in virtually every major US fraud/scandal since its creation in 1934: the London gold pool, the Kennedy assassinations, Iran-Contra, CIA drug trafficking, HIV, and worse…

So while nursing that New Year’s Day hangover, take some time and watch this series of videos. If nothing else, they even if merely the extended ramblings of some person that one can quickly dismiss as merely the latest lunatic, they do present an alterantive reality to what so many may be accustomed to. After all at the end of the day imagination, the ability to think outside the box, and to see patterns where previously there were none, is the greatest threat to the ending status quo by far.

 

Part 1

 

Part 2

 

 

Part 3

 

 

Part 4

 

 

Part 5

 

 

Read the entire article HERE.

Another example of why you should choose physical gold and silver rather than the paper counterpart. These derivatives are simply way too over leveraged and when the music stops someone is going to be left without a chair and the one sitting will most likely be JPMorgan or Goldman Sachs. And don’t expect the government to do anything about it. Lawrence Lepard describes the heist below:

By Lawrence Lepard
November 18, 2011
ZeroHedge

Imagine you are Ben Bernanke, or on the Board of Governors of the Federal Reserve. The time frame is July and August of 2011 and the price of gold is on a tear. Commodities inflation has been persistent and is breaking out everywhere. Your prediction that inflation “is contained” and is a “temporary phenomena” are beginning to look absurd. What do you do?

Simple. Hint that QE3, the primary drive of inflation, is coming and then fail to deliver at the September FOMC meeting. That takes care of the price of gold and the gold stocks. Ah, but those pesky commodities speculators keep making money and trading against what you want the markets to do. So what is to be done there? Hey Jon Corzine, how about you tank the largest broker for the small commodities punters in the world, and we let them twist in the wind? That will serve them right. Teach them to bet against the government approved scenario.

Think it did not happen? Well think again. All of the pieces fit. It sure is convenient that all those commodities speculators are now out of the box. Also, who will want to speculate on commodities in the future given customer funds are no longer protected. Furthermore, commodities speculators are not a very “All American” group. From the authorities point of view they can say: screw them, who will feel sympathy? Hell, James Bullard, Fed Governor, in an interview on CNBC yesterday said the MF Global collapse proves that the system works. Yes it does Jim, for you. Personally, I have $90,000 at MF Global and I would like to have my honestly earned money returned. Unfortunately, the odds of that happening any time soon seem slim. In part because when MF Global entered bankruptcy the judge appointed a Trustee whose law firm has done substantial work for JP Morgan, a deeply interested party. We will probably never find out what happened here. But for those of us whose eyes are open the results speak for themselves.

This whole mess stinks to high heaven. I am with Gerald Celente, if the largest commodity broker in America can go bankrupt and nothing is done, then where can you put your money and expect it to be safe? I, for one, do not accept that Jon Corzine is stupid enough to lever up MF Global 40:1 and use the proceeds and customer money to bet on European sovereign debt. This was a hit, pure and simple. That is why there is no resolution to the problem, and it is just another example of the deeply corrupt US political/financial axis. It may take money away from a bunch of commodities speculators, and it may cool down the perceived inflation, but it is just another hole in the dike which is The US Financial System. A dike whose life can probably now be measured in months, not years.

Read the entire article HERE.

by Matt Taibbi
November 10, 10:07 AM ET
Rolling Stone

Federal judge Jed Rakoff, a former prosecutor with the U.S. Attorney’s office here in New York, is fast becoming a sort of legal hero of our time. He showed that again yesterday when he shat all over the SEC’s latest dirty settlement with serial fraud offender Citigroup, refusing to let the captured regulatory agency sweep yet another case of high-level criminal malfeasance under the rug.

The SEC had brought an action against Citigroup for misleading investors about the way a certain package of mortgage-backed assets had been chosen. The case is very similar to the notorious Abacus case involving Goldman Sachs, in which Goldman allowed short-selling billionaire John Paulson (who was betting against the package) to pick the assets, then told a pair of European banks that the “designed to fail” package they were buying had been put together independently.

This case was similar, but worse. Here, Citi similarly told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.

This whole transaction actually combined a number of Goldman-style misdeeds, since the bank both lied to investors and also bet against its own product and its own customers. In the deal, Citi made a $160 million profit, while its customers lost $700 million.

Goldman, in the Abacus case, got fined $550 million. In this worse case, the SEC was trying to settle with Citi for just $285 million. Judge Rakoff balked at the settlement and particularly balked at the SEC’s decision to allow Citi off without any admission of wrongdoing. He also mocked the SEC’s decision to describe the crime as “negligence” instead of intentional fraud, taking the entirely rational position that there’s no way a bank making $160 million ripping off its customers can conceivably be described as an accident.

“Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” And this: “How can a securities fraud of this nature and magnitude be the result simply of negligence?”

Rakoff of course is right – the settlement is nuts. If you take Citi’s $160 million profit on the deal into consideration, what we’re talking about then is a $125 million fine for causing $700 million in damages. That, and no admission of wrongdoing.

Just imagine a mugger who steals $70 from some lady’s wallet being sentenced to walk free after paying back twelve bucks. Magritte himself could not devise a more surreal take on criminal justice.

It gets worse. Over the last decade, Citi has repeatedly been caught committing a variety of offenses, and time after time the bank has been dragged into court and slapped with injunctions demanding that they refrain from ever engaging the same practices ever again. Over and over again, they’ve completely blown off the injunctions, with no consequences from the state – which does nothing except issue new (soon-to-be-ignored-again) injunctions.

In this current case, this particular unit at Citi had already been slapped with two different SEC cease-and-desist orders barring it from violating certain securities laws. Here’s a summary from Bloomberg:

The commission already had two cease-and-desist orders in place against the same Citigroup unit, barring future violations of the same section of the securities laws that the company now stands accused of breaking again. One of those orders came in a 2005 settlement, the other in a 2006 case. The SEC’s complaint last month didn’t mention either order, as if the entire agency suffered from amnesia.

The SEC’s latest allegations also could have triggered a violation of a court injunction that Citigroup agreed to in 2003, as part of a $400 million settlement over allegedly fraudulent analyst-research reports. Injunctions are more serious than SEC orders, because violations can lead to contempt-of-court charges.

But the SEC avoided the issue of the 2003 injunction by charging Citi with a different type of fraud. But, as Bloomberg points out, it probably wouldn’t have mattered much if they had accused Citi of violating the 2003 injunction, since the bank had already done that once and not been punished for it:

In December 2008, the SEC for the second time accused Citigroup of breaking the same section of the law covered by the 2003 injunction, over its sales of so-called auction-rate securities. Instead of trying to enforce the existing court order, the SEC got yet another one barring the same kinds of fraud violations in the future.

So to recap: a unit of Citigroup, having repeatedly violated the same laws and having repeatedly violated the SEC’s own cease-and-desist orders and injunctions, is dragged into court one more time for committing a massive fraud.

And what does the SEC do? It doesn’t even bring up Citi’s history of ignoring the SEC’s own order, slaps the bank with a fractional fine, refuses to target any individuals, allows the bank to walk away without an admission of wrongdoing, and puts a cherry on the top by describing the $160 million heist not as a crime, but as unintentional negligence.

BRING OUT THE SOFT CUSHIONS! The SEC gets rough with Citigroup.

Imagine a car thief who, when caught driving a stolen Lexus, tells the police he simply stepped into the wrong car and drove off by mistake. Now imagine he tells the same story when, two years later, he’s caught screaming over the GW bridge in a stolen Mercedes.

Then, two years after that, he’s caught on the Cross-Bronx Expressway blasting the stereo in a boosted 7-series BMW. Cops ask him for an explanation. “I must have gotten in the wrong car by mistake,” he says, shrugging. And the cops buy the story and send him home without a charge.

That’s roughly what we’re dealing with with this SEC action. To extend the metaphor just a little further – let’s say that BMW wasn’t even the only car he accidentally drove away that day, but the cops didn’t bother with the others. In the latest Citi case, the $700 million fraud was just one of many dicey CDOs marketed by that unit of Citi. But the SEC chose to address just that one case in its settlement.

Rakoff quite correctly took issue with all of this. From Jonathan Weil’s Bloomberg piece:

“What does the SEC do to maintain compliance?” Additionally, [Rakoff] asked: “How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of prior consent judgments?” We’ll see if the SEC finds any.

Rakoff gained some notoriety a few years ago when he rejected as inadequate an SEC settlement with Bank of America, which was accused of misleading shareholders about the size of the bonuses paid out by Merrill Lynch, the investment bank BofA was in the process of acquiring. Rakoff dismissed the original $33 million fine as “half-baked justice,” although he eventually approved a $150 million fine.

The amazing thing about the wave of corruption that has overtaken the financial services industry is that most of it couldn’t happen without virtually every player at every level signing off on these deals. From the ratings agencies to the law firms to the accounting firms to the regulators to the bank executives themselves, everybody had to be on board in order for a lot of these fraud schemes to work.

Judges are a part of that picture, and too often, members of the bench sign off on dirty deals made between banks and regulators when the law says that such settlements must be “fair, reasonable, adequate and in the public interest.”

It’s great that Rakoff is behaving as any decent human being would and rejecting these disgusting settlements. But equally disturbing is the fact that more judges haven’t done the same thing. Are people with backbones really that rare?

by PAUL W KINCAID
November 12th, 2011
PressCore World News

 

An audit of the Federal Reserve has revealed that the privately owned Federal Reserve secretly doled out more than $16 trillion in zero interest loans to some of the largest financial institutions and corporations in the United States and throughout the world.  The non-partisan, investigative arm of Congress also determined that the Federal Reserve acted illegally.  In fact, according to the report, the Federal Reserve knew their financial transactions were illegal and provided conflict of interest waivers to its employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.  The report is evidence that reveals major securities fraud in the embezzlement of $16 trillion by the Federal Reserve.  Securities fraud and embezzlement are both felony criminal offenses.

Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted.  Embezzlement is performed in a manner that is premeditated, systematic and/or methodical, with the explicit intent to conceal the activities from other individuals, usually because it is being done without their knowledge or consent. U.S. Code TITLE 18 > PART I > CHAPTER 31 – EMBEZZLEMENT AND THEFT § 644. Banker receiving unauthorized deposit of public money

Whoever, not being an authorized depositary of public moneys, knowingly receives from any disbursing officer, or collector of internal revenue, or other agent of the United States, any public money on deposit, or by way of loan or accommodation, with or without interest, or otherwise than in payment of a debt against the United States, or uses, transfers, converts, appropriates, or applies any portion of the public money for any purpose not prescribed by law is guilty of embezzlement and shall be fined under this title or not more than the amount so embezzled, whichever is greater, or imprisoned not more than ten years, or both; but if the amount embezzled does not exceed $1,000, he shall be fined not more than $1,000 or imprisoned not more than one year, or both.

$16 trillion is 10 times more than what the U.S. Congress authorized and Bush ($700 billion) and Obama ( $787 billion) signed off on.  The Federal Reserve was only authorized by Congress to disburse $1.487 trillion in federal tax dollars in bailouts.  The Federal Reserve embezzled another $14.5 trillion.

The Congressional report determined that the Fed secretly hide most of the embezzled money into their own banks.  The rest the Fed unilaterally transfered trillions of dollars to foreign banks and corporations from South Korea to Scotland.  Foreign banks and corporations which the Federal Reserve bankers had a personal financial interest or stake in.

The report reveals that the CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in federal money from the Fed – conflict of interest.  Moreover, JP Morgan Chase served as one of the clearing banks (money laundering banks) for the Fed’s emergency loans programs (aka – embezzlement schemes).

In another disturbing finding, the Government Accountability Office said that on Sept. 19, 2008, William Dudley, who is now the New York Fed president, was granted a waiver to let him keep investments in AIG and General Electric at the same time AIG and GE were given federal funds.  One reason the Fed did not make Dudley sell his holdings, according to the audit, was that it would have exposed the Fed’s conflict of interest and major securities fraud in the embezzlement of $16 trillion.

The investigation also revealed that the Fed outsourced most of its embezzling to private contractors, many of which were rewarded with extremely low-interest and then-secret loans.

The Fed outsourced virtually all of the operations of their $16 trillion embezzlement scheme to private contractors like JP Morgan Chase, Morgan Stanley, and Wells Fargo.  For their part the same firms also received trillions of dollars in Fed loans at near-zero interest rates. Morgan Stanley helped the Federal Reserve banker launder embezzled $trillions into AIG.

A more detailed Government Accountability Office investigation into corruption charges, securities fraud, embezzlement, money-laundering and conflicts of interest at the Fed was due on Oct. 18.  The Sanders Report on the GAO Audit on Major Conflicts of Interest at the Federal Reserve

Did you know that the $14.5 trillion the Federal Reserve embezzled (US Congress only authorized $1.487 trillion) could pay the entire U.S. national debt – $14.346 trillion.  To avert default the U.S. government need only to seize the assets of the Federal Reserve banks (the big six U.S. banks collectively hold about $9.399 trillion in assets) and get back the $trillions that the Federal Reserve illegally embezzled and money laundered to their foreign banks and corporations.

The U.S. government can recover $trillions from the Federal Reserve and their banks through asset forfeiture.  Asset forfeiture is confiscation, by the State, of assets which are either (a) the alleged proceeds of crime or (b) the alleged instrumentalities of crime, and more recently, alleged terrorism.  Proceeds of crime means any economic advantage derived from or obtained directly or indirectly from a criminal offense or criminal offenses.  Crimes committed by the Federal Reserve banks against the United States and its people include; conflict of interest, securities fraud, embezzlement, fraud, money laundering, hoarding, profiteering, larceny, racketeering . . .

In 1982, a criminal forfeiture provision was enacted as part of the Racketeering Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961, which provided for the forfeiture of all property over which the RICO organization exercised an influence.

The Money Laundering Control Act of 1986 added new felony provisions at 18 U.S.C. § 1956 for the laundering of the proceeds of certain defined “specified unlawful activity,” as well as prohibiting structuring transactions under 31 U.S.C. § 5324 (with the intent to evade certain reporting requirements). The law also added civil and criminal forfeiture provisions at 18 U.S.C. §§ 981 and 982 for confiscating the property involved in money laundering.

According to the Legislative Guide to the United Nations Convention against Transnational Organized Crime and the Protocols Thereto, “Criminalizing the conduct from which substantial illicit profits are made does not adequately punish or deter organized criminal groups. Even if arrested and convicted, some of these offenders will be able to enjoy their illegal gains for their personal use and for maintaining the operations of their criminal enterprises. Despite some sanctions, the perception would still remain that crime pays. . . . Practical measures to keep offenders from profiting from their crimes are necessary. One of the most important ways to do this is to ensure that States have strong confiscation regimes”

Top 10 Banks in the United States

Institution Headquarters Assets 1. Bank of America Corp. Charlotte, N.C. $2,340,667,014,000 2. J. P. Morgan Chase & Company New York, N.Y. 2,135,796,000,000 3. Citigroup New York, N.Y 2,002,213,000,000 4. Wells Fargo & Company San Francisco, C.A. 1,223,630,000,000 5. Goldman Sachs Group, Inc. New York, N.Y. 880,677,000,000 6. Morgan Stanley New York, N.Y. 819,719,000,000 7. Metlife, Inc. New York, N.Y. 565,566,452,000 8. Barclays Group US, Inc. Wilmington, Del. 427,837,000,000 9. Taunus Corporation New York, N.Y. 364,079,000,000 10. HSBC North America Inc. New York, N.Y 345,382,871,000

According to United States Code, TITLE 12 CHAPTER 3 SUBCHAPTER IX § 341. Second. states that the U.S. Federal Reserve Banks can be dissolved today by “forfeiture of franchise for violation of law.” Securities fraud and embezzlement by the Federal Reserve Bank is cause for immediate forfeiture and imprisonment of the Federal Reserve and its bankers.

List of banks involved in the $16 trillion + securities fraud and embezzlement

The Federal Reserve Bank of New York provides an up to date list of “Primary Dealers” obligated to implement the Federal Reserve fraud and embezzlement scheme. http://www.newyorkfed.org/markets/pridealers_current.html

“Primary dealers serve as trading counterparties of the New York Fed in its implementation of (Fed) monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed‘s trading desk with market information and analysis (non-public stock market information – aka insider trading) helpful in the formulation and implementation of monetary policy (so that the Fed can profit from this insider information). Primary dealers are also required to participate in all auctions of U.S. government debt (acquiring wealth generated from the transactions of the illicit funds – aka money laundering for the Fed) and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders. (the New York Fed is stating who they are working for – on behalf of its foreign official account- holders)”

List of Primary Dealers (Fed’s money laundering banks.  Listed in alphabetical order only.)

Bank of Nova Scotia, New York Agency (the third largest bank in Canada. Opened New York Agency in 1907)
BMO Capital Markets Corp. (the fourth largest Canadian bank)
BNP Paribas Securities Corp. (Paris, France)
Barclays Capital Inc. (London, United Kingdom)
Cantor Fitzgerald & Co. (United States)
Citigroup Global Markets Inc. (CIA drug money laundering bank, United States)
Credit Suisse Securities (USA) LLC (Zurich, Switzerland)
Daiwa Capital Markets America Inc. (Tokyo, Japan)
Deutsche Bank Securities Inc. (Frankfurt, Germany.)
Goldman, Sachs & Co. (United States)
HSBC Securities (USA) Inc. (founded in Hong Kong, headquarters London, United Kingdom)
Jefferies & Company, Inc. (United States)
J.P. Morgan Securities LLC (United States)
Merrill Lynch, Pierce, Fenner & Smith Incorporated (United States)
Mizuho Securities USA Inc. (Tokyo, Japan)
Morgan Stanley & Co. LLC (United States)
Nomura Securities International, Inc. (Tokyo, Japan)
RBC Capital Markets, LLC (a Canadian investment bank, part of Royal Bank of Canada)
RBS Securities Inc. (Royal Bank of Scotland Group)
SG Americas Securities, LLC (United States)
UBS Securities LLC. (Zürich & Basel, Switzerland.  Rothschild controlled.  The Rothschild family hold the popes purse strings from this bank – the keys of the Vatican is a predominate part of their logo.)

All of the above named banks (includes both U.S. and foreign banks) money launder the over $16 trillion (U.S) that the Federal Reserve embezzled.  These banks money launder the Fed embezzled U.S. Tax Dollars in three steps:

1) the illicit funds are introduced into the financial system by “placement”,

2) the “Primary Dealers” carrying out complex financial transactions in order to camouflage the illicit funds (“layering”), and

3) they acquire wealth generated from the transactions (loans, mortgages, stock market trading) of the illicit funds (“integration”).

All listed banks are controlled by the European Central Bank (Rothschild family) which controls it all for the Vatican, which is headed by the Nazi German Pope.  All are working to enslave the World under a New World Order, aka Fourth Reich, aka Fourth unHoly Roman Empire.

Read the entire article HERE.

by Bernie Sanders
U.S. Senator of Vermont
October 19, 2011

WASHINGTON, Oct. 19 – A new audit of the Federal Reserve released today detailed widespread conflicts of interest involving directors of its regional banks.

“The most powerful entity in the United States is riddled with conflicts of interest,” Sen. Bernie Sanders (I-Vt.) said after reviewing the Government Accountability Office report. The study required by a Sanders Amendment to last year’s Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny.

The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves.  “Clearly it is unacceptable for so few people to wield so much unchecked power,” Sanders said. “Not only do they run the banks, they run the institutions that regulate the banks.”

Sanders said he will work with leading economists to develop legislation to restructure the Fed and bar the banking industry from picking Fed directors. ”This is exactly the kind of outrageous behavior by the big banks and Wall Street that is infuriating so many Americans,” Sanders said.

The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose “reputational risks” to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates “an appearance of a conflict of interest,” the report added.

The 108-page report found that at least 18 specific current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis.

In the dry and understated language of auditors, the report noted that there are no restrictions in Fed rules on directors communicating concerns about their respective banks to the staff of the Federal Reserve. It also said many directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve.  The rules, which the Fed has kept secret, let directors tied to banks participate in decisions involving how much interest to charge financial institutions and how much credit to provide healthy banks and institutions in “hazardous” condition. Even when situations arise that run afoul of Fed’s conflict rules and waivers are granted, the GAO said the waivers are kept hidden from the public.

The report by the non-partisan research arm of Congress did not name but unambiguously described several individual cases involving Fed directors that created the appearance of a conflict of interest, including:

• Stephen Friedman In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap Fed loans. During the same period, Friedman, chairman of the New York Fed, sat on the Goldman Sachs board of directors and owned Goldman stock, something the Fed’s rules prohibited. He received a waiver in late 2008 that was not made public. After Friedman received the waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009 unbeknownst to the Fed, according to the GAO.
• Jeffrey Immelt The Federal Reserve Bank of New York consulted with General Electric on the creation of the Commercial Paper Funding Facility. The Fed later provided $16 billion in financing for GE under the emergency lending program while Immelt, GE’s CEO, served as a director on the board of the Federal Reserve Bank of New York.
• Jamie Dimon The CEO of JP Morgan Chase served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and was used by the Fed as a clearing bank for the Fed’s emergency lending programs. In 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns.At the time, Dimon persuaded the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. He also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank.

To read a more detailed analysis of the GAO report prepared for Sen. Sanders, click here.

To read the full GAO report, click here.

Read the entire article HERE.

BY CRIS SHERIDAN
10/19/2011
Financial Sense

The Government Accountability Office (GAO) just released its findings from their second audit of the Federal Reserve revealing a well-established revolving door and numerous conflicts of interest between the Fed and top banking executives, most of whom sit on its board.

As revealed in The Sanders Report, which should probably be mandatory reading for the Occupy Wall Street movement, specific board members directly profited from removing restrictions or giving certain banks access to cheaper Fed loans while simultaneously holding stock in that company. Although such actions would’ve normally been restricted by the Fed’s own internal regulations to prohibit such obvious conflicts of interest, waivers were issued instead to certain individuals allowing them to maintain their financial relationships with companies like the most-beloved Goldman Sachs.

What is most troubling, however, aside from the numerous incidents cited in the report, is how completely non-transparent the Fed is when compared to other central banks around the globe. Here’s an astonishing list of examples from The Sanders Report mentioned above (emphasis mine):

The central bank in Australia prohibits its directors from working for or having a material financial interest in private financial companies located in its country. If such regulations were in place at the Fed, the CEO of JP Morgan Chase and many other bank executives would be prohibited from serving on the Fed’s board of directors. (See page 65 of GAO report)

The central bank in Canada requires its directors to disclose any potential conflicts of interest as soon as they are discovered; avoid or withdraw from participation in any real, potential, or apparent conflicts of interest; and cannot vote on any matters in which there is a conflict of interest. If these regulations existed at the Fed, Stephen Friedman would have been required to immediately resign from Goldman’s board, sell his Goldman stock, or resign from the Fed’s board of directors. Instead, Mr. Friedman was allowed to financially benefit from the increase in Goldman’s stock while it received approval from the Fed to become a bank holding company and received billions in emergency Fed loans. (See page 46 of GAO report)

The central bank in Canada also prohibits its directors from having affiliations with entities that perform clearing and settlement responsibilities in the financial services industry or serve as dealers in government securities. The Fed does not. These regulations would have prevented both Friedman and Dimon from serving on the Fed’s board of directors. (See page 46 of GAO report)

The directors of central banks in Australia, Canada, England and the European Union all have to disclose potential conflicts of interest and must disclose its conflict of interest policies on the internet. The Federal Reserve does not. (See page 47 and 49 of GAO report)

Unless you have time to read all 127 pages of the GAO release, I highly encourage you to read the 5 page Sanders Report instead. Given how ugly and incriminating this information is, the Fed should start thinking about some high-profile firings or, at least, putting together a top-notch public relations team…if they haven’t already.

If they don’t do something, expect to see protesters showing up at the Federal Reserve Bank in New York pretty soon (conveniently located down the street from Zuccotti Park at 33 Liberty Street).

By the way, for those of you who believe our banking institutions are the root of our financial problems, I pose to you the following questions:

Q: Which is the largest bank in the nation?
A: Our central bank, the Federal Reserve

Q: Who is primarily responsible for supervising and regulating the banking industry?
A: The Federal Reserve

Q: Who is reponsible for maintaining financial stability?
A: The Federal Reserve

Q: Who lowered interest rates to artificially low levels and helped foster a speculative housing bubble?
A: The Federal Reserve

Q: Who said on live television in 2005 that we weren’t in a housing bubble and that we wouldn’t see a recession? (click here for video)
A: Federal Reserve Chairman Ben Bernanke

(BTW, if you think that a housing bubble and market crash weren’t seen by others years earlier, click here)

Q: Who now bails out the banks with money printed out of thin air and raises the cost of living for everyday Americans?
A: The Federal Reserve

Of course, it wouldn’t be fair to blame the Federal Reserve for all our problems, but holding their feet to the fire to implement far greater transparency and a comprehensive elimination of various conflicts of interest with member banks is a good place to start.

Read the entire article HERE.

OCTOBER 18, 2011
The Daily Bail

 

This story from Bloomberg just hit the wires this morning.  Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.

This means that the investment bank’s European derivatives exposure is now backstopped by U.S. taxpayers.  Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties.  Now the Fed and the FDIC are fighting as to whether this was sound.  The Fed wants to “give relief” to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.  You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.

What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan.  Even worse, The Total Exposure Is Unknownbecause Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.

This is a recipe for Armageddon.  Bernanke is absolutely insane.  No wonder Geithner has been hopping all over Europe begging and cajoling leaders to put together a massive bailout of troubled banks.  His worst nightmare is Eurozone bank defaults leading to the collapse of the large U.S. banks who have been happily selling default insurance on European banks since the crisis began.

Original Article HERE.

 

*****Bloomberg By Bob Ivry, Hugh Son and Christine Harper – Oct 18, 2011*****

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Accommodating Clients

Jerry Dubrowski, a spokesman for Charlotte, North Carolina- based Bank of America, declined to comment on the transfers or the firm’s discussions with regulators. The company “continues to accommodate the needs of our clients through each of our multiple trading entities, including Bank of America NA,” he said in an e-mailed statement, referring to the company’s deposit-taking unit.

Barbara Hagenbaugh, a Fed spokeswoman, said she couldn’t discuss supervision of specific institutions. Greg Hernandez, an FDIC spokesman, declined to comment.

Bank of America posted a $6.2 billion third-quarter profit today, compared with a loss of $7.3 billion a year earlier, as credit quality improved and the firm booked one-time accounting gains. The lender rose 7.3 percent to $6.47 at 1:54 p.m. in New York trading, making it the day’s best performer in the Dow Jones Industrial Average. Credit-default swaps on Bank of America eased 10 basis points to a mid-price of 380 as of 11:49 a.m. in New York, according to broker Phoenix Partners Group.

Moody’s Investors Service downgraded Bank of America’s long-term credit ratings Sept. 21, cutting both the holding company and the retail bank two notches apiece. The holding company fell to Baa1, the third-lowest investment-grade rank, from A2, while the retail bank declined to A2 from Aa3.

Moody’s Downgrade

The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.

Bank of America estimated in an August regulatory filing that a two-level downgrade by all ratings companies would have required that it post $3.3 billion in additional collateral and termination payments, based on over-the-counter derivatives and other trading agreements as of June 30. The figure doesn’t include possible collateral payments due to “variable interest entities,” which the firm is evaluating, it said in the filing.

Dubrowski declined to comment on collateral or termination payments after the downgrade.

‘Be Prepared’

Bank of America’s rating is now four grades below the one Moody’s assigned to JPMorgan Chase & Co. (JPM), the biggest U.S. bank by deposits at midyear, and a level below the rating given to Citigroup Inc. (C), the third-biggest. Bank of America is the only U.S. lender that lacks a rating of A3 or higher among the five firms listed by the Office of the Comptroller of the Currency as having the biggest derivatives books.

“We had worked very hard over the course of the last nine months to be prepared to the extent that we did receive a downgrade, and feel very good about the way that we’ve minimized the potential impact” Bank of America Chief Financial Officer Bruce Thompson said in a conference call today with analysts. “Since the downgrade, we have not seen any change in our global excess liquidity sources.”

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

Dodd-Frank Rules

Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.

The legislation gave the FDIC, which liquidates failing banks, expanded powers to dismantle large financial institutions in danger of failing. The agency can borrow from the Treasury Department to finance the biggest lenders’ operations to stem bank runs. It’s required to recoup taxpayer money used during the resolution process through fees on the largest firms.

Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill. The company repaid federal bailout funds in 2009 with interest.

‘The Normal Course’

Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

The moves by Bank of America are part of “the normal course of dealings that we’ve had with counterparties since Merrill Lynch and BofA came together,” Thompson said today.

‘Created a Firewall’

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.

In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.

The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.

Section 23A “is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.

 

Read the entire article HERE.

by Bud Conrad
October 17, 2011
Casey Research

Foreign central banks buy US Treasury and Agency debt through accounts at the Federal Reserve, where it is held in custody. Without these central banks buying our debt, the US federal government would have to find a new source of funds or the result could be higher interest rates. Looking at the data on a monthly basis (and then multiplied by 12 to give the annual rate), here is the dramatic picture of how foreign central-bank purchases of our debt have shifted, from buying $500 billion to selling off $1 trillion. At this rate of selling over several months, interest rates would go higher – if other things were equal. Of course, things are not equal because the Fed has been forcing rates lower with its massive QE2 and other programs. QE 2 was $600 billion over nine months, or an annualized rate of $800 billion per year. Since foreigners are selling off our government debt, Fed purchases of government debt are even more necessary.

(Click on image to enlarge)

Here are the data on the amount of Treasuries purchased in the last quarter of the year at an annualized rate: Foreigners have decreased their holdings for the first time since 2007.

(Click on image to enlarge)

Here’s another chart worth considering. This is a comparison to the ten-year Treasury, with the purchases of Treasuries inverted.

(Click on image to enlarge)

In my latest article in The Casey Report on interest rates, I discuss the above chart and cover the broader issues driving interest rates.

What could be the cause of all this? The Senate passed a controversial bill that threatens to punish China for “currency manipulation” which will bring mandatory tariffs. China’s opposition to the Senate action could be the power behind the big shift in direction of these custody holdings. In an election year, government action against Chinese imports may be seen as supportive for US jobs, thus garnering votes. But unintended consequences of decreasing liquidity in the credit markets will put pressure on financial markets. The movement shown in these charts could be the result of China’s reaction to some of those anticipated policies. We can’t tell what country is doing the selling until two months have gone by and the TIC data are published. In some senses, it doesn’t matter which country is behind the shift. If rates begin to rise rapidly, even in the face of continued Fed manipulation, it could call into question confidence in the Fed’s ability to keep supporting the economy. The rate on the ten-year Treasuries jumped from 1.8% to 2.2% in the last week. Foreign selling of this magnitude is dangerous for the dollar, and it could be very bad for US interest rates.

[Whether this shift is temporary or a long-term reversal remains to be seen – but the end of the US dollar as the world’s reserve currency is all but certain. How can one prepare for such a life-changing move? Listen to the audio recordings of the recently held Casey Research/Sprott Summit, When Money Dies, to gain insights and actionable advice from experts including Adam Fergusson and Doug Casey on how you can not just survive what’s coming, but thrive. Order your set today.]

Additional Links and Reads

Banking Corporatism in 1912 (Ludwig von Mises Institute)

The Mises Institute dug up a great cartoon from 1912, representing what would happen to the US with the creation of a central bank. The picture says it all. That’s essentially what did happen.

Kinder Morgan to Buy El Paso for $21.1 Billion (Bloomberg)

In the biggest energy transaction of the year thus far, Kinder Morgan purchased El Paso Corp. to form the country’s largest national gas pipeline network. The natural gas market is an interesting beast. On the one hand, natural gas prices are dirt cheap. On the other, they can’t say low forever, but as Doug Casey says just because something is inevitable doesn’t mean that it’s imminent. There are some who have given up on investing in natural gas, while others are willing to put big bucks into it.

What I find interesting about the whole field is that involves so much hard science. Whether the general economy will go up or down is the realm of economics – not exactly a science. And of course, the economy will affect oil and gas prices, but natural gas requires making estimates of scientific facts. How much gas is left in the ground? What are the well decline rates? How damaging are fracking chemicals? While in economics we can argue back and forth without getting anywhere, these questions will have clear answers in the future. Someone will be right, and someone will be wrong.

Seven in Ten College Grads Are Employed Full Time for Employer (Gallup)

The second table of results from this poll, copied below, showed some particularly noteworthy findings which I’ve discussed before.  This table represents only workers and the unemployed who are searching for a job. At the top of the unemployment pile are workers aged 18 to 29 with 14% unemployment and 30% underemployment. That’s pretty crazy – only 56% are working full time. And of those 56%, how many do you think actually have a good, career-track job versus something like flipping burgers?

This relates to today’s intro. If one graduated college in 1998, one could get a job at Goldman Sachs. Graduate ten years later, and one will be lucky to find a position as an assistant accounting clerk with the exact same qualifications.

Read the entire article HERE.

BY STEVE ST. ANGELO
10/10/2011
Financial Sense

 

 

The world is about to peak in global silver production. This will not occur due to a lack of silver to mine, but rather as a result of the peaking of world energy resources, declining ore grades, and a falling Energy Returned On Invested – EROI.  The information below will describe a future world that very few have forecasted and even less are prepared.  This is an update to my previous article Peak Silver and Mining by a Falling EROI.  In my first article I stated that global silver production may peak in 2009 if we were to enter a worldwide depression.  We did not have the global depression as massive central bank printing and bailouts have thus far postponed the inevitable.

The world has entered a plateau of global oil production over the past 5-6 years.  A higher oil price has not brought on more supply to offset depletion rates from existing fields.  From the graphs above we see a correlation between global silver supply and oil production, especially in the latter part of the 20th century.  Up until the late 1800’s and early 1900’s the majority of energy used in mining silver came from human and animal labor.  It is truly amazing just how much silver was produced in the United States at this time without the use of oil and modern mining practices (information provided later in the article).  This all changed as global oil production as well as the technique of open-pit mining increased.

 

The 3 Big Energy Game Changers for Silver Mining

 

There are a number of some very large open-pit mining projects supplying silver that are forecasted to go into production within the next several years as well as others by the end of the decade.  It is astounding to see these 25-45 year extended forecasts by these mining companies without any consideration of what the energy environment will be like in 2015-2020 or later.  It seems like everyone in the sector assumes there will be ample supplies of energy at commercially viable prices.

 

This is where the trouble begins.  There are three negative energy game changers that will impact the mining industry going forward.  They are: (1) the Peaking of global oil production, (2) the Land Export Model and (3) the falling EROI – Energy Returned On Invested.  Of the three, I believe the falling EROI will be the most devastating.  Before explaining why this is the case, let’s take a look at each.

 

Peak Global Oil Production

 

According to JODI’s global oil production figures represented HERE in a post on theOilDrum.com, it looks like the global peak of convention crude/condensate and natural gas liquids took place in 2006:

 

 

Global oil production has increased steadily since the early 1980’s and has now been in a bumpy plateau for the past 5-6 years even with much higher oil prices.  It is true that there are more projects and oil fields slated to come online in the next several years, but much of the increase will be offset by depletion in existing fields.  To add insult to injury, the majority of oil that is exported throughout the world is being supplied by countries that are also increasing their own domestic oil consumption.  This is a double-edged sword for dependent oil importing nations— which leads us to the Export Land Model.

 

Export Land Model

 

The Export Land Model developed by geologist Jeffery Brown and others shows how oil- exporting countries suffer higher declines of exports due to increased domestic consumption.  As the nation increases its own oil consumption for their expanding economy, this causes exports to fall even greater than declines in oil production alone.  This becomes apparent when we look at what is taking place in Saudi Arabia.

 

 

In 1980, Saudi Arabia produced approximately the same amount of oil it is presently. However the kingdom is exporting 2+ mbd (million barrels a day) less oil.   The right side graph above reveals that as domestic consumption has increased (black line), exports have declined.  By 2020, Saudi Arabia’s domestic consumption is forecasted to reach 5.9 mbd of oil equivalent, including natural gas, which will decrease the country’s exports even further (Jadwa Investment’s “Saudi Arabia’s coming oil and Fiscal Challenge”).

 

If we add up all the other exporting oil countries and consider what the future percentage loss from this model might be, the drop in oil exports will be significant indeed.  Here we can see that the peaking of global oil production, plus the declining oil exports described above by the Export Land Model, puts a serious dent in the ability for future growth in the world economies.  If the world economies are unable to grow, neither will the supply of base metals and silver.

 

These two energy constraints are in themselves bad enough news for the global economy and the mining industry.  Unfortunately the third is by far the most devastating.  The falling EROI measures what amount of that oil will be available for market.  It is also described as the net energy that remains after production costs are considered.

 

The Falling EROI: Energy Returned on Invested

 

In my opinion, the EROI —Energy Returned On Invested— is by far the most important aspect confronting our economy, society and world at large.  Ironically, the EROI of oil and natural gas has been falling ever since man drilled his first well.

 

 

According to work done by Cutler Cleveland of Boston University, the EROI of U.S. oil andgas was 100/1 in 1930. It fell to 30/1 by 1970, and hit 11/1 by 2000.  Oil was so abundant during the 30’s in the States that it only took the cost of 1 barrel of oil to produce 100 barrels for market.  By 2000, it has declined nearly tenfold.

 

The graph on the right side shows the falling Global oil and gas EROI (by Gagnon, Hall & Brinker) to be 18/1 in 2006.  They plot with a solid black line that a possible 1:1 EROI projection may be by the mid 2030 decade.  As this EROI ratio continues to decline, it puts a huge stress on the world economies by increased energy costs while providing less net energy for the market.

 

There has been so much misinformation put out by different organizations as to the amount of oil and natural gas reserves that it is has totally confused the investing community and the public.  Whenever I get into a debate about peak oil or oil reserves there is always someone who brings up the notion that the United States is sitting on trillions of barrels of shale oil.  This is  the subject of a whole other article, but to get to the point, shale oil as a savior of the inevitable United States (or World) Energy Crisis is a pipe dream.  Here are the three biggest lies propagated in the U.S. energy industry:

 

1. 1950’s – Nuclear energy…..too cheap to meter.
2. 2000’s – Shale Oil trillion+ barrels of U.S. reserves
3. 2000’s – Shale Gas 100 years worth of U.S. supply

 

To explain why there is a great deal of hype in shale oil and gas, take a look at the graph below.

 

 

Shale oil is much more expensive to extract than light sweet crude in Saudi Arabia.  Many say that increased technology will bring more oil to the market, but it does so at a lower EROI.  The lower the EROI, the less net energy is available for market.  With less net energy, there is less growth.

 

Furthermore the depletion rates of a typical shale well in the North Dakota Bakken Field are 75-80% by the second year.  Shale gas depletion is even worse, with fields reported from the Texas Barnett Field declining 60% in the first year.  The notion that the U.S. will be able to increase oil production significantly with shale oil turns out to be a red herring when you figure that these severe depletion rates make it impossible to do so.

 

Another nail in the coffin for shale oil is its low EROI.  The figures on the right side of the graph above show the different EROI ratios for conventional and nonconventional energy sources.  The only thing worse on the EROI scale than shale oil (5:1) is tar sands (2-4:1).  Why are these EROI ratios so important and ultimately devastating to the world economy and silver mining?  The next graph provides the answer.

 

 

As we can see from the left side of the global oil peak, everything is rosy; high EROI ratios with a majority of net energy already consumed by the world economies.  Once we slide over to the other side, the picture gets downright scary.  Even though there is a great deal of oil on the downward side of the peak, the majority of it gets consumed in the production of the energy itself.  Once it costs more to produce a barrel than you get in return, the game is over.

 

Unfortunately, there is more to it than that.  There is a minimum EROI that a modern society needs to sustain itself.  All the EROI ratios listed above are figured from the point the oil & gas comes out of the well.  We have to remember the oil & gas has to be transported and refined and the interstate-highway system and infrastructure has to been maintained.  All of these are costs that are subtracted out of that EROI ratio.  This is explained in detail by Charles Hall & David Murphy HERE.  The bare minimum a modern society needs is an EROI of 3:1….but if you want the luxuries of art, entertainment, medicine, education or etc; the ratio has to be higher still.

 

The graph above is one possible forecast of net energy.  The creator of the graph has produced another showing a more gradual slope of net energy.  I have had several conversations and email exchanges with other geologists and engineers who believe the graph presented above is a more realistic representation than the second.  I agree.

 

Peak Oil is Here Whether You Believe it or Not

 

Before we get into the silver part of the article, there is one more topic on energy that needs to be discussed.  There is continued debate about the Abiotic Theory of Oil as well as the blocking of oil drilling in certain areas of the United States by environmentalists.  The Abiotic Oil Theory states that oil fields are continuously being refilled, so there will be no peak oil.  Even though this might be true in some small cases as it pertains to methane, the amount is infinitesimal.

 

 

The list of countries presently past peak is long.  If we consider a good portion of these countries are in areas of the world that do not have much in the way of regulations or environmentalists, peak oil still took place.  It is true that there is still some oil in the U.S. being kept from the market by environmentalists and the government, but in the end….it doesn’t change the overall picture all that much.

 

Lastly, for those of you who believe the information above is controlled by the Illuminati, Bilderbergs or whomever and there is still plenty of oil in wells capped all over the country, there is nothing that can be written or said to change your mind.  As illustrated by the data, peak oil is here whether you believe it or not.

 

As the world is currently peaking in oil production, the United States passed its peak forty years ago in 1971.   The same can be said for overall silver production.  The U.S. extracted the majority of its high grade silver by the middle of the 20th century.  Today, the U.S. has to resort to mining a great deal more total ore to produce the same or less silver than it did years ago.   This process is occurring throughout the world.  In my first article (link provided at the top of this article) most of the information on ore grades came from Gavin Mudd and his work on the Australian mining industry as well as data on declining global gold ore grades.   To continue to understand this ongoing process, I choose to focus on the United States as the USGS – U.S. Geological Survey – has kept some very detailed records of historical mining activity in the States.

 

CASE STUDY: United States Past Silver Production and Falling Ore Grades

 

In the early days, miners and investors sought out the best quality and highest ore grades they could find.  The higher the ore grade, the higher the profit.  Today, there is a great deal of excitement when mining companies release drill results with higher ore grades than expected.  Yet, these same ore grades would have been embarrassing to the prospector and investor just 100 years ago.  How the passage of time makes us forget what life was like just a short while ago…

 

The majority of the top eight silver ore-producing states in the country peaked in annual silver production before the 1940’s.  Only Idaho and Nevada had higher peaks after 1950.

 

 

Colorado had the highest annual silver production of all 50 states with 25.8 million ounces produced in 1893, almost 120 years ago.  New Mexico peaked in 1885, Montana in 1892, California in 1921, Utah in 1925, and Arizona in 1937.  Even though Idaho had its true peak in 1966 at 19.8 million ounces, it surpassed its previous record by only 200,000 ounces, which occurred in 1937.  Nevada peaked late in the game due to two factors:  1) it has recently become the largest gold producer in the country currently, providing nearly 75% of nation’s gold.  (with gold mining comes by-product silver), and  2) due to the McCoy/Cove Mine, which single-handedly mined 11 of the 27.4 million ounces Nevada produced at its all time peak in 1997.

 

Not only did the McCoy/Cove Mine help Nevada to become the second-highest silver producer in U.S. history, it also accounted for 35% of all silver extracted from the state between 1987 and 2003.

 

 

The record silver production in Nevada as well as the McCoy/Cove mine are now gone.  In its last recorded year of production, the McCoy/Cove Mine produced 596 oz of silver in 2006.  That’s correct, a mere 596 oz (that year it was still producing some gold).  According to theMajor Mines of Nevada 2010 publication just released, Nevada only produced 7.3 million ounces of silver in 2010…a 70% decline in just 13 years from its peak.

 

From the late 1800’s to 1950’s the same eight states listed above produced the lion’s share of silver in the country.  Very few people who are asked will know which state was the largest producer at this time.  Most when asked will say Idaho, Utah or Colorado.  I was quite surprised to find out that Montana outperformed them all by producing 775 million ounces by 1950.

 

 

Montana produced the most silver in the country at this time due to the richness of copper in the state, where silver was a by-product.  According to the MONTANA MINING NEWS MINING JOURNAL dated 8/30/1930:

 

Anaconda Copper Mining Company is confining work at the Flathead Mine, near Kalispell, Montana, to development, because of the present metal prices, according to a reported statement by Jack Dugan, superintendent. Thirty men are employed in extracting 40 tons daily, of ore, said to average 50 ounces of silver, per ton.

 

This is an example of the kind of high grade ores they were pulling out of Montana back in 1930.  Impressive as it was, this was not the average.  To give you an idea of the difference of 75 years, Montana produced 9.3 million ounces of silver in 1935 at an average ore grade of 3.45 oz/ton.  In 2010 there were only two mines producing silver as a by-product of copper.  The larger producer is the only publicly traded company in Montana and it produced a little more than 1 million ounces of silver at an average ore grade of 0.87 oz/ton or a 75% decline.

 

The USGS provides Mineral Yearbooks for the states back until 1932.  One can imagine what the ore grades must have been in 1892 when Montana produced its most silver in one year at 19 million ounces.

 

Idaho:  the Largest Silver Producer in the Country’s History

 

The one state that sticks out like a sore thumb in the graph above is Idaho.  It is the only state that has produced over a billion ounces silver by 1990 with the majority of it after 1950.  Even with this significant production, Idaho wasn’t able to escape the negative aspects of falling ore grades.

 

In the late 1800’s and early 1900’s a larger percentage of silver came from a grade called “Dry and Siliceous Ore”.  During this time, between 40-50% of silver produced in the country came from this type of ore.  To give you an example in 1922, 46.8% of silver in the U.S. came from dry and siliceous ore.   The percentage dropped over the next decade— falling some years into the teens (especially during the 1930’s depression).  By 1935, it climbed back to 40%.

 

This is the sort of ore that primary silver mines are made of as it contains the most silver per ton.  Idaho had some of the richest dry and siliceous ore grades in the country.  The graph below represents how much this sort of ore grade has declined since the 1940’s.

 

 

The reason why this graph only shows data up until 1980 for Idaho and 1989 for the U.S. is due to the fact that information was withheld from the USGS due to proprietary reasons by the mining companies.  Furthermore, this is also true for individual state reporting of detailed silver statistics after 1990.  In the early days the states provided the USGS with so much information on gold and silver that many of the gold-silver reports were over 200-300 pages.  Today the Silver Yearbooks barely fill 15 pages.

 

To bridge the gap to the present day, we can look at what has taken place in the largest publicly traded mining company in the state.  Hecla’s Lucky Friday Mine in Idaho produced 3.3 million ounces in 2010 at an average ore grade of 10.25 oz per ton.  The chart below compares the difference from the same mine in 1965.

 

 

Here we can see that Hecla has only produced a little more than 100,000 ounces of silver than it did in 1965 but has to process almost double the amount of total ore.  This insidious decline of silver ore grades over the years seems subtle to the mining industry that is focused on quarterly results, but becomes an increasingly difficult problem now that the world suffers from peak oil and a falling EROI.

 

The United States:  Produced 25% of all Global Silver 1900-1950

 

When the U.S. was the Saudi Arabia of the world in oil production at the early and middle part of the 20th century, it was also the second-largest silver producer in the world behind Mexico.   Of the 10.5 billion ounces of silver produced by the world from 1900-1950, the United States accounted for 2.7 billion (or 26%) of the total amount.

 

 

This historical graph is relevant due to the fact that in next 60 years from 1951-2010 the U.S. only produced 2.58 billion ounces of silver… with significantly falling ore grades shown below.

 

 

The chart above represents total ore from mining gold, silver, copper, lead and zinc.  The majority of silver comes from base metal mining in which zinc/lead provides the highest percentage compared to copper and gold.  In 75 years, the total ore grade of silver has fallen nearly 92% while actual production has remained basically flat.  This is due to the fact that all base metal ore grades in the U.S. are falling as well.

 

For example, copper has shown a huge decrease in ore grade since the early 1900’s.  In 1906 the average ore grade for copper was 2.5%.  By 1935 the average copper ore grade had fallen to 1.89% and in 2009 the United States produced copper at 0.43% a ton.  This is a decline of 77%.

 

The Falling EROI and Declining Ore Grades

 

On top of declining ore grades and adding insult to injury, is the falling EROI of energy.   When the U.S. and the world were tapping into high quality concentrated ore grades in the early years, they did so with the majority of human and animal labor.  This kind of labor was not only very efficient but it also utilizing a higher EROI.  The open-pit mining practices employed today are in fact quite the opposite….extracting metal at a much lower EROI.

 

For example, people today have this misguided opinion that modern farming is very efficient.  They see one farmer on a huge tractor working hundreds or thousands of acres of agricultural land.  They do not factor in all the energy it costs to plant, fertilize, harvest and process the crop.  This does not include all the energy and technology it takes to develop hybrid seeds, the manufacturing of the tractor and equipment as well as many other aspects that go into modern farming.  In reality, the pre-industrial farmer with horse and plow was extremely more efficient that his modern counterpart.

 

FOOD EROI’s

 

Hunter Gatherer = 10/1
Pre-Industrial farmer = 10/1
Modern high-tech farmer = 1/10

 

The pre-industrial farmer with horse and plow was able to produce 10 calories (of food) for market for every 1 calorie of energy (food) consumed by the operation.  Today, the modern farmer needs to consume 10 calories of energy to provide only 1 calorie of food for market.  If we consider this ratio, the modern farmer is 98.8% less efficient than the simple farmer with horse and plow.

 

The only reason why modern farming practices have been successful at this horrible rate of efficiency is due to the high EROI of energy over the past 100 years.  Now that the EROI is falling considerably, it is putting severe pressure on the agricultural industry.  This will also be true for the mining industry.

 

Base metals are extracted by either open-pit or underground mining.  Of the two, open-pit mines account for the larger percentage of metal produced in the world. (Surface Mining Methods and Equipment)  The technique of open-pit mining utilizes huge excavators and large haul trucks to move the ore from the mine.  There is a great deal of energy consumed in the development, manufacturing, maintenance and operation of these huge earth moving machines in the mining industry.

 

It is difficult to estimate an EROI ratio for open pit mining as the end product is metal and not energy.  That being said, a simple rule of thumb can be assumed if we take the negative EROI of modern farming as an example.  The larger and more complex the machine used in industry, the more inefficient its production as it pertains to the EROI.

 

Now that we understand the past and present EROI ratios in the agricultural sector, we can see why the early miners and prospectors were much more efficient in producing silver than the huge open-pit mining operations of today when we consider all the energy involved.  As the world’s energy sources start to decline in the future and the falling EROI destroys an ever increasing portion of the net energy available for market, the number of open-pit mines will decline as well.  As this process takes place, the peak in global mining will occur due the fact that human or animal labor cannot equal the extraction rate of diesel powered earth-moving machines.  What is taking place in the mining industry today is the WORST OF BOTH WORLDS… declining ore grades on top of a falling EROI of energy.

 

The Coming Global Depression:  Another Nail in the Coffin for Peak Silver

 

The world hasn’t suffered an economic depression for almost 80 years.  The Kondratieff-Wave analysts who study business cycles say we are now overdue for a depression.  Even though this is true, they are correct for the wrong reasons.  Business cycles have occurred because humans were able to constantly grow and expand their economies.  It was due to the 10/1 EROI of the pre-industrial farmers that enabled the rest of the economy to grow and flourish.  After several generations of booms, we had the busts.

 

As we moved into the modern-industrial economy cheap energy with a high EROI allowed the world economies to grow exponentially—allowing these business cycles to continue.  Today we are at the top Boom part of the cycle.  The big Bust and depression have been postponed due to the ability of central banks to print money and financial institutions to invent hundreds of trillions of dollars worth of derivatives to hedge overly inflated assets.  When the global depression finally arrives, we will never return to anything like we enjoyed before.  This bust will be the depression that ends all global depressions.

 

If we consider what took place during the last depression, base metal & silver mining activity fell off a cliff.  The interesting thing to note in the next two graphs below as global silver production declined, gold production actually increased.

 

 

 

Global silver production declined 38% from 1929 to 1932, whereas gold production actually increased 24% in these three years.  It took eight years before the world was able to increase silver production over its 1929 figure.  Gold on the other hand, increased its global production a staggering 80% during the same time.

 

This time will truly be different.  The world will not be able to increase its gold production anywhere near the percentage it did in the 1930’s.  There is a good chance that actual global gold production will decline as the supply chains break down disrupting the highly technical method of refining and processing gold.  Another reason may be due to its dependence on copper production as part of its supply.  When economies collapse, so does the demand for base metals such as copper, zinc and lead.  This is the reason why silver production suffers greater during a depression than gold.

 

 

Here we see just how much difference there is in the base metal mining percentage between gold and silver.  Zinc & Lead account for the larger portion of the base metal percentage of silver mining, whereas copper production provided 15% of all the gold produced in the world in 2010….or 75% of the base metal pie.

 

When the world’s central banks are unable to continue to prop up the global economies with money printing, economic growth will drop considerably.  China is starting to show signs of an economy heading into a brick wall.  Base metal production will decline significantly in the following years cutting back the production of silver as well.  If history is a good reference, the future global supply of silver can decline between 20-40%.

 

A Brief look at World Silver Production

 

Over the past decade global silver production has increased on average between 2-3% per year.  In 2010, according to the World Silver Survey, global silver production reached 735 million ounces of silver.   In the first half of 2011 some of the top silver-producing countries have increased their production while others have seen declines.   The top producing silver mine in the world, BHP Billiton’s Cannington, has seen its production decrease from 18.9 million oz in the first half of 2010 to only 15.5 million ounces in the first half of 2011 (an 18% decline).  Cannington — like all mines— suffers from falling ore grades.

 

 

In 2000, Canningtion mined 1.6 million tons of ore and produced 30 million ounces of silver at an average ore grade of 636 g/t.  By 2011, it mined 3.1 million tons of ore (or 92% more) just to produce an additional 5 million ounces than it did eleven years ago.  What is occurring at Cannington is typical of mines throughout the world.

 

If we take a look at global silver supply, only a handful of countries have increased their production significantly over the past several decades.  Out of all the countries listed in the graph below since 1985, China has had the largest percentage increase.  China increased its estimated production from only 2.5 million ounces in 1985 to 99 million oz (or +3,850%) by 2010.  The other countries that have increased their production in order of highest percentage are, Bolivia from 3.6 mil oz to 41 mil oz (+1,039%), Argentina from 2.1 mil oz to 20.6 mil oz (+880%), Chile from 16.6 mil oz to 41 mil oz (+147%), Peru from 58.2 mil oz to 116.1 mil oz (+100%), and finally Mexico from 73.2 mil oz to 128 mil oz (+75%), in the same time period.  Even though Mexico is the number one silver producer in the world, it had the lowest percentage increase of all six countries.  These countries account for 61% of all global silver supply.

 

 

Australia was not included in the graph for two reasons.  First, even though its production has increased 71% since 1985, its future growth is not forecasted to improve as much as the nations listed above.  Secondly, because of Australia’s western form of capitalistic government, it is least likely to deal with issues of political instability, threats of nationalization or protectionist policies such as those in South America, Mexico and China.

 

Argentina, Bolivia, Chile and Peru— which are located in South America— may suffer from the same type of policies that have plagued the resource industry in Venezuela.  Not only are Venezuela’s oil fields nationalized, in August of this year, President Hugo Chavez has also ordered the same for the gold mining industry.

 

In Mexico, billionaire Hugo Salinas Price has gained significant support in the country to reintroduce the Silver Libertad as legal tender to compete with the Peso for the Mexican people.  If this policy were to pass, a large percentage of Mexico’s silver production would be consumed by its own people to protect them from continued inflation.  Furthermore, the country suffers from a great deal of upheaval and violence from the drug wars which could lead to political instability possibly threatening the mining industry.

 

Lastly, over the past several years the world has felt the ramifications of China’s cutback of rare earth mineral exports.  China currently produces between 95-97% of the 17 rare earth minerals in the world.  Not only have prices of rare earth minerals increased substantially due to this monopolistic policy, it is also forcing foreign companies to move their facilities that manufacture end-user products in China.  These companies are also being requested by China to transfer valuable technology to other domestic companies so they can benefit from the knowledge.

 

This may also occur in exports of Chinese silver.   As global tensions increase due the continued disintegration of the world fiat currency system, China may decide to put a total ban on silver exports.  Even though Chinese exports have declined substantially (from 3,000 metric tons in 2005 to only 1,575 metric tons in 2009), there is a good possibility that they may turn off the silver spigot completely.

 

The countries listed above are enjoying the best records of increased silver production, but at the same time are some of the worst candidates for dependable future global supply.

 

Final Remarks and Conclusion

 

The world produced a record amount of silver in 2010.  Many analysts are forecasting a continued increase in global production for the next decade.  There are several factors that show why this will not be possible.

 

As the world peaks in global oil production and the net energy available for market continues to shrink due to the falling EROI (Energy Returned On Invested), of oil and natural gas, global economic growth will come to a screeching halt.  The falling EROI of energy is a one way street to the bottom.  Unconventional energy sources such as shale oil, shale gas and tar sands will not be able to stop this decline.

 

As global economic growth disintegrates so will the demand for base metals – which 70% of silver is a by-product.  On top of that, silver ore grades are relentlessly falling in mines throughout the world which takes an increasing amount of energy just to keep production flat.  If the mining industry tries to incorporate more human and animal labor to offset declining oil based energy in the future, it will do so only at much lower rates of production than today.  This is due to the fact that human or animal labor cannot match the extraction rate of diesel powered excavators or huge dump trucks when it comes to mining silver.

 

Then there is the negative effect of a global depression on the production of silver.  Presently the world has entered into tremendous chaos and economic turmoil.  Conditions are ripe for a complete disintegration of the financial markets, thus pushing the world over the edge into a new dark age of hyperinflationary depression.  In this sort of atmosphere, countries may resort to the nationalization of mines as well as other protectionist’s policies.

 

When the nails of the peak silver coffin are added up, the death of increasing future supply is close at hand.  The CEO’s and analysts in the mining industry are for the most part oblivious to these factors that will destroy their ability to make viable forecasts of future projects.  It amazes me to see professionals plan a huge open-pit mine with a 25-45 year economic plan without any consideration of what the energy environment will be like at that time.  For some strange reason, there is this false assumption that “If we build it, the energy will come.”

 

If the world enters a depression within the next year or two, this will certainly guarantee the global peak of silver production.  Why?  It won’t matter if the global economy recovers in the next decade, because the peaking of oil and the falling EROI of energy will have destroyed enough net energy to kill any attempt to bring global silver production back to the level it was before.

 

Lastly, anyone who is good at connecting the dots will realize the ramifications of this article go way beyond just the peaking of silver.  The falling EROI of energy will not only be a destroyer of precious net energy, but will also help bring down the largest empire in the world.  This will be the subject of a future article.

Read the entire article HERE.
 

 

 

 

 

 

 

 

 

 

 

 

This is an old piece, but I thought it has powerful information that pertains to the current economic climate.

Enjoy,
Mike.

By Ryan Grim
Huffington Post
10/23/09

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.

“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”

One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.

The Fed failed to see the housing bubble as it happened, insisting that the rise in housing prices was normal. In 2004, after “flipping” had become a term cops and janitors were using to describe the way to get rich in real estate, then-Federal Reserve Chairman Alan Greenspan said that “a national severe price distortion [is] most unlikely.” A year later, current Chairman Ben Bernanke said that the boom “largely reflect strong economic fundamentals.”

The Fed also failed to sufficiently regulate major financial institutions, with Greenspan — and the dominant economists — believing that the banks would regulate themselves in their own self-interest.

Despite all this, Bernanke has been nominated for a second term by President Obama.

In the field of economics, the chairman remains a much-heralded figure, lauded for reaction to a crisis generated, in the first place, by the Fed itself. Congress is even considering legislation to greatly expand the powers of the Fed to systemically regulate the financial industry.

Paul Krugman, in Sunday’s New York Times magazine, did his own autopsy of economics, asking “How Did Economists Get It So Wrong?” Krugman concludes that “[e]conomics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system.”

So who seduced them?

The Fed did it.

Three Decades of Domination

The Fed has been dominating the profession for about three decades. “For the economics profession that came out of the [second world] war, the Federal Reserve was not a very important place as far as they were concerned, and their views on monetary policy were not framed by a working relationship with the Federal Reserve. So I would date it to maybe the mid-1970s,” says University of Texas economics professor — and Fed critic — James Galbraith. “The generation that I grew up under, which included both Milton Friedman on the right and Jim Tobin on the left, were independent of the Fed. They sent students to the Fed and they influenced the Fed, but there wasn’t a culture of consulting, and it wasn’t the same vast network of professional economists working there.”

But by 1993, when former Fed Chairman Greenspan provided the House banking committee with a breakdown of the number of economists on contract or employed by the Fed, he reported that 189 worked for the board itself and another 171 for the various regional banks. Adding in statisticians, support staff and “officers” — who are generally also economists — the total number came to 730. And then there were the contracts. Over a three-year period ending in October 1994, the Fed awarded 305 contracts to 209 professors worth a total of $3 million.

Just how dominant is the Fed today?

The Federal Reserve’s Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more. (HuffPost placed calls to them but was unable to get exact numbers.) The Fed also doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a “visiting scholarship.” A Fed spokeswoman says that exact figures for the number of economists contracted with weren’t available. But, she says, the Federal Reserve spent $389.2 million in 2008 on “monetary and economic policy,” money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.

That’s a lot of money for a relatively small number of economists. According to the American Economic Association, a total of only 487 economists list “monetary policy, central banking, and the supply of money and credit,” as either their primary or secondary specialty; 310 list “money and interest rates”; and 244 list “macroeconomic policy formation [and] aspects of public finance and general policy.” The National Association of Business Economists tells HuffPost that 611 of its roughly 2,400 members are part of their “Financial Roundtable,” the closest way they can approximate a focus on monetary policy and central banking.

Robert Auerbach, a former investigator with the House banking committee, spent years looking into the workings of the Fed and published much of what he found in the 2008 book, “Deception
and Abuse at the Fed”. A chapter in that book, excerpted here, provided the impetus for this investigation.

Auerbach found that in 1992, roughly 968 members of the AEA designated “domestic monetary and financial theory and institutions” as their primary field, and 717 designated it as their secondary field. Combining his numbers with the current ones from the AEA and NABE, it’s fair to conclude that there are something like 1,000 to 1,500 monetary economists working across the country. Add up the 220 economist jobs at the Board of Governors along with regional bank hires and contracted economists, and the Fed employs or contracts with easily 500 economists at any given time. Add in those who have previously worked for the Fed — or who hope to one day soon — and you’ve accounted for a very significant majority of the field.

Auerbach concludes that the “problems associated with the Fed’s employing or contracting with large numbers of economists” arise “when these economists testify as witnesses at legislative hearings or as experts at judicial proceedings, and when they publish their research and views on Fed policies, including in Fed publications.”

Gatekeepers On The Payroll

The Fed keeps many of the influential editors of prominent academic journals on its payroll. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank’s money. A HuffPost review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another.

“Try to publish an article critical of the Fed with an editor who works for the Fed,” says Galbraith. And the journals, in turn, determine which economists get tenure and what ideas are considered respectable.

The pharmaceutical industry has similarly worked to control key medical journals, but that involves several companies. In the field of economics, it’s just the Fed.

Being on the Fed payroll isn’t just about the money, either. A relationship with the Fed carries prestige; invitations to Fed conferences and offers of visiting scholarships with the bank signal a rising star or an economist who has arrived.

Affiliations with the Fed have become the oxygen of academic life for monetary economists. “It’s very important, if you are tenure track and don’t have tenure, to show that you are valued by the Federal Reserve,” says Jane D’Arista, a Fed critic and an economist with the Political Economy Research Institute at the University of Massachusetts, Amherst.

Robert King, editor in chief of the Journal of Monetary Economics and a visiting scholar at the Richmond Federal Reserve Bank, dismisses the notion that his journal was influenced by its Fed connections. “I think that the suggestion is a silly one, based on my own experience at least,” he wrote in an e-mail. (His full response is at the bottom.)

Galbraith, a Fed critic, has seen the Fed’s influence on academia first hand. He and co-authors Olivier Giovannoni and Ann Russo found that in the year before a presidential election, there is a significantly tighter monetary policy coming from the Fed if a Democrat is in office and a significantly looser policy if a Republican is in office. The effects are both statistically significant, allowing for controls, and economically important.

They submitted a paper with their findings to the Review of Economics and Statistics in 2008, but the paper was rejected. “The editor assigned to it turned out to be a fellow at the Fed and that was after I requested that it not be assigned to someone affiliated with the Fed,” Galbraith says.

Publishing in top journals is, like in any discipline, the key to getting tenure. Indeed, pursuing tenure ironically requires a kind of fealty to the dominant economic ideology that is the precise opposite of the purpose of tenure, which is to protect academics who present oppositional perspectives.

And while most academic disciplines and top-tier journals are controlled by some defining paradigm, in an academic field like poetry, that situation can do no harm other than to, perhaps, a forest of trees. Economics, unfortunately, collides with reality — as it did with the Fed’s incorrect reading of the housing bubble and failure to regulate financial institutions. Neither was a matter of incompetence, but both resulted from the Fed’s unchallenged assumptions about the way the market worked.

Even the late Milton Friedman, whose monetary economic theories heavily influenced Greenspan, was concerned about the stifled nature of the debate. Friedman, in a 1993 letter to Auerbach that the author quotes in his book, argued that the Fed practice was harming objectivity: “I cannot disagree with you that having something like 500 economists is extremely unhealthy. As you say, it is not conducive to independent, objective research. You and I know there has been censorship of the material published. Equally important, the location of the economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward noncontroversial technical papers on method as opposed to substantive papers on policy and results,” Friedman wrote.

Greenspan told Congress in October 2008 that he was in a state of “shocked disbelief” and that the “whole intellectual edifice” had “collapsed.” House Committee on Oversight and Government Reform Chairman Henry Waxman (D-Calif.) followed up: “In other words, you found that your view of the world, your ideology, was not right, it was not working.”

“Absolutely, precisely,” Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

But, if the intellectual edifice has collapsed, the intellectual infrastructure remains in place. The same economists who provided Greenspan his “very considerable evidence” are still running the journals and still analyzing the world using the same models that were incapable of seeing the credit boom and the coming collapse.

Rosner, the Wall Street analyst who foresaw the crash, says that the Fed’s ideological dominance of the journals hampered his attempt to warn his colleagues about what was to come. Rosner wrote a strikingly prescient paper in 2001 arguing that relaxed lending standards and other factors would lead to a boom in housing prices over the next several years, but that the growth would be highly susceptible to an economic disruption because it was fundamentally unsound.

He expanded on those ideas over the next few years, connecting the dots and concluding that the coming housing collapse would wreak havoc on the collateralized debt obligation (CDO) and mortgage backed securities (MBS) markets, which would have a ripple effect on the rest of the economy. That, of course, is exactly what happened and it took the Fed and the economics field completely by surprise.

“What you’re doing is, actually, in order to get published, having to whittle down or narrow what might otherwise be oppositional or expansionary views,” says Rosner. “The only way you can actually get in a journal is by subscribing to the views of one of the journals.”

When Rosner was casting his paper on CDOs and MBSs about, he knew he needed an academic economist to co-author the paper for a journal to consider it. Seven economists turned him down.

“You don’t believe that markets are efficient?” he says they asked, telling him the paper was “outside the bounds” of what could be published. “I would say ‘Markets are efficient when there’s equal access to information, but that doesn’t exist,’” he recalls.

The CDO and MBS markets froze because, as the housing market crashed, buyers didn’t trust that they had reliable information about them — precisely the case Rosner had been making.

He eventually found a co-author, Joseph Mason, an associate Professor of Finance at Drexel University LeBow College of Business, a senior fellow at the Wharton School, and a visiting scholar at the Federal Deposit Insurance Corporation. But the pair could only land their papers with the conservative Hudson Institute. In February 2007, they published a paper called “How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?” and in May posted another, “How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions.”

Together, the two papers offer a better analysis of what led to the crash than the economic journals have managed to put together – and they were published by a non-PhD before the crisis.

Not As Simple As A Pay-Off

Economist Rob Johnson serves on the UN Commission of Experts on Finance and International Monetary Reform and was a top economist on the Senate banking committee under both a Democratic and Republican chairman. He says that the consulting gigs shouldn’t be looked at “like it’s a payoff, like money. I think it’s more being one of, part of, a club — being respected, invited to the conferences, have a hearing with the chairman, having all the prestige dimensions, as much as a paycheck.”

The Fed’s hiring of so many economists can be looked at in several ways, Johnson says, because the institution does, of course, need talented analysts. “You can look at it from a telescope, either direction. One, you can say well they’re reaching out, they’ve got a big budget and what they’re doing, I’d say, is canvassing as broad a range of talent,” he says. “You might call that the ‘healthy hypothesis.’”

The other hypothesis, he says, “is that they’re essentially using taxpayer money to wrap their arms around everybody that’s a critic and therefore muffle or silence the debate. And I would say that probably both dimensions are operative, in reality.”

To get a mainstream take, HuffPost called monetary economists at random from the list as members of the AEA. “I think there is a pretty good number of professors of economics who want a very limited use of monetary policy and I don’t think that that necessarily has a negative impact on their careers,” said Ahmed Ehsan, reached at the economics department at James Madison University. “It’s quite possible that if they have some new ideas, that might be attractive to the Federal Reserve.”

Ehsan, reflecting on his own career and those of his students, allowed that there is, in fact, something to what the Fed critics are saying. “I don’t think [the Fed has too much influence], but then my area is monetary economics and I know my own professors, who were really well known when I was at Michigan State, my adviser, he ended up at the St. Louis Fed,” he recalls. “He did lots of work. He was a product of the time…so there is some evidence, but it’s not an overwhelming thing.”

There’s definitely prestige in spending a few years at the Fed that can give a boost to an academic career, he added. “It’s one of the better career moves for lots of undergraduate students. It’s very competitive.”

Press officers for the Federal Reserve’s board of governors provided some background information for this article, but declined to make anyone available to comment on its substance.

The Fed’s Intolerance For Dissent

When dissent has arisen, the Fed has dealt with it like any other institution that cherishes homogeneity.

Take the case of Alan Blinder. Though he’s squarely within the mainstream and considered one of the great economic minds of his generation, he lasted a mere year and a half as vice chairman of the Fed, leaving in January 1996.

Rob Johnson, who watched the Blinder ordeal, says Blinder made the mistake of behaving as if the Fed was a place where competing ideas and assumptions were debated. “Sociologically, what was happening was the Fed staff was really afraid of Blinder. At some level, as an applied empirical economist, Alan Blinder is really brilliant,” says Johnson.

In closed-door meetings, Blinder did what so few do: challenged assumptions. “The Fed staff would come out and their ritual is: Greenspan has kind of told them what to conclude and they produce studies in which they conclude this. And Blinder treated it more like an open academic debate when he first got there and he’d come out and say, ‘Well, that’s not true. If you change this assumption and change this assumption and use this kind of assumption you get a completely different result.’ And it just created a stir inside–it was sort of like the whole pipeline of Greenspan-arriving-at-decisions was
disrupted.”

It didn’t sit well with Greenspan or his staff. “A lot of senior staff…were pissed off about Blinder — how should we say? — not playing by the customs that they were accustomed to,” Johnson says.

And celebrity is no shield against Fed excommunication. Paul Krugman, in fact, has gotten rough treatment. “I’ve been blackballed from the Fed summer conference at Jackson Hole, which I used to be a regular at, ever since I criticized him,” Krugman said of Greenspan in a 2007 interview with Pacifica Radio’s Democracy Now! “Nobody really wants to cross him.”

An invitation to the annual conference, or some other blessing from the Fed, is a signal to the economic profession that you’re a certified member of the club. Even Krugman seems a bit burned by the slight. “And two years ago,” he said in 2007, “the conference was devoted to a field, new economic geography, that I invented, and I wasn’t invited.”

Three years after the conference, Krugman won a Nobel Prize in 2008 for his work in economic geography.

One Journal, In Detail

The Huffington Post reviewed the mastheads of the American Journal of Economics, the Journal of Economic Perspectives, Journal of Economic Literature, the American Economic Journal: Applied Economics, American Economic Journal: Economic Policy, the Journal of Political Economy and the Journal of Monetary Economics.

HuffPost interns Googled around looking for resumes and otherwise searched for Fed connections for the 190 people on those mastheads. Of the 84 that were affiliated with the Federal Reserve at one point in their careers, 21 were on the Fed payroll even as they served as gatekeepers at prominent journals.

At the Journal of Monetary Economics, every single member of the editorial board is or has been affiliated with the Fed and 14 of the 26 board members are presently on the Fed payroll.

After the top editor, King, comes senior associate editor Marianne Baxter, who has written papers for the Chicago and Minneapolis banks and was a visiting scholar at the Minneapolis bank in ’84, ’85, at the Richmond bank in ’97, and at the board itself in ’87. She was an advisor to the president of the New York bank from ’02-’05. Tim Geithner, now the Treasury Secretary, became president of the New York bank in ’03.

The senior associate editors: Janice C Eberly was a Fed visiting-scholar at Philadelphia (’94), Minneapolis (’97) and the board (’97). Martin Eichenbaum has written several papers for the Fed and is a consultant to the Chicago and Atlanta banks. Sergio Rebelo has written for and was previously a consultant to the board. Stephen Williamson has written for the Cleveland, Minneapolis and Richmond banks, he worked in the Minneapolis bank’s research department from ’85-’87, he’s on the editorial board of the Federal Reserve Bank of St. Louis Review, is the co-organizer of the ’09 St. Louis Federal Reserve Bank annual economic policy conference and the co-organizer of the same bank’s ’08 conference on Money, Credit, and Policy, and has been a visiting scholar at the Richmond bank ever since ’98.

And then there are the associate editors. Klaus Adam is a visiting scholar at the San Francisco bank. Yongsung Chang is a research associate at the Cleveland bank and has been working with the Fed in one position or another since ’01. Mario Crucini was a visiting scholar at the Federal Reserve Bank of New York in ’08 and has been a senior fellow at the Dallas bank since that year. Huberto Ennis is a senior economist at the Federal Reserve Bank of Richmond, a position he’s held since ’00. Jonathan Heathcote is a senior economist at the Minneapolis bank and has been a visiting scholar three times dating back to ’01.

Ricardo Lagos is a visiting scholar at the New York bank, a former senior economist for the Minneapolis bank and a visiting scholar at that bank and Cleveland’s. In fact, he was a visiting scholar at both the Cleveland and New York banks in ’07 and ’08. Edward Nelson was the assistant vice president of the St Louis bank from ’03-’09.

Esteban Rossi-Hansberg was a visiting scholar at the Philadelphia bank from ’05-’09 and similarly served at the Richmond, Minneapolis and New York banks.

Pierre-Daniel Sarte is a senior economist at the Richmond bank, a position he’s held since ’96. Frank Schorfheide has been a visiting scholar at the Philadelphia bank since ’03 and at the New York bank since ’07. He’s done four such stints at the Atlanta bank and scholared for the board in ’03. Alexander Wolman has been a senior economist at the Richmond bank since 1989.

Here is the complete response from King, the journal’s editor in chief: “I think that the suggestion is a silly one, based on my own experience at least. In a 1988 article for AEI later republished in the Federal Reserve Bank of Richmond Review, Marvin Goodfriend (then at FRB Richmond and now at Carnegie Mellon) and I argued that it was very important for the Fed to separate monetary policy decisions (setting of interest rates) and banking policy decisions (loans to banks, via the discount window and otherwise). We argued further that there was little positive case for the Fed to be involved in the latter: broadbased liquidity could always be provided by the former. We also argued that moral hazard was a cost of banking intervention.

“Ben Bernanke understands this distinction well: he and other members of the FOMC have read my perspective and sometimes use exactly this distinction between monetary and banking policies. In difficult times, Bernanke and his fellow FOMC members have chosen to involve the Fed in major financial market interventions, well beyond the traditional banking area, a position that attracts plenty of criticism and support. JME and other economics major journals would certainly publish exciting articles that fell between these two distinct perspectives: no intervention and extensive intervention. An upcoming Carnegie-Rochester conference, with its proceeding published in JME, will host a debate on ‘The Future of Central Banking’.

“You may use only the entire quotation above or no quotation at all.”

Auerbach, shown King’s e-mail, says it’s just this simple: “If you’re on the Fed payroll there’s a conflict of interest.”

UPDATE: Economists have written in weighing in on both sides of the debate. Here are two of them.

Stephen Williamson, the Robert S. Brookings Distinguished Professor in Arts and Sciences at Washington University in St. Louis:

Since you mentioned me in your piece on the Federal Reserve System, I thought I would drop you a note, as you clearly don’t understand the relationship between the Fed and some of the economists on its payroll. I have had a long relationship with the Fed, and with other central banks in the world, including the Bank of Canada. Currently I have an academic position at Washington University in St. Louis, but I am also paid as a consultant to the Federal Reserve Banks of Richmond and St. Louis. In the past, I was a full-time economist at the Bank of Canada and at the Federal Reserve Bank of Minneapolis.
As has perhaps become clearer in the last year, economics and the science of monetary policy is a complicated business, and the Fed needs all the help it can get. The Fed is perhaps surprisingly open to new ideas, and ideas that are sometimes in conflict with the views of its top people. One of the strengths of the Federal Reserve System is that the regional Federal Reserve Banks have a good deal of independence from the Board of Governors in Washington, and this creates a healthy competition in economic ideas within the system. Indeed, some very revolutionary ideas in macroeconomics came out of the intellectual environment at the Federal
Reserve Bank of Minneapolis in the 1970s and 1980s. That intellectual environment included economists who worked full-time for the Fed, and others who were paid consultants to the Fed, but with full-time academic positions. Those economists were often sharply critical of accepted Fed policy, and they certainly never seemed to suffer for it; indeed they were
rewarded.
I have never felt constrained in my interactions with Fed economists (including some Presidents of Federal Reserve Banks). They are curious, and willing to think about new ideas. I am quite willing to bite the hand that feeds me, and have often chewed away quite happily. They keep paying me, so they must be happy about the interaction too.

A former Fed economist disagreed. “I was an economist at the Fed for more than ten years and kept getting in trouble for things I’m proud of. I hear you, loud and clear,” he said, asking not to be quoted by name for, well, the reasons laid out above.

Read the entire article HERE.