Well, you have to love the selective reporting.

Everyone on CNBC fawns over the better-than-expected retail sales numbers, which ex-autos reflected people doing what every idiot American apparently did - spend their "stimulus check" before they got it.

Of course we knew that already from the Fed Credit report, the internals of which reflected an insane annual increase in credit card debt. What's collateralizing all that? Nothing!

And for double jeopardy you can look to the "bankruptcy reform" that will prevent a huge number of those unfortunates from being able to escape their debt by walking into the courthouse.

"Welcome to Wage Garnishment Hell Sir; Lucifer is right over there, and your turn with him is next!"

Ignored was the import and export price report, with imports rising at an annualized rate of 15.4%, up 6.2% excluding petroleum.

That's the worst number seen since the 1980s.

Export prices were up 7.7% annualized, which of course is an issue too.

Was there any mention of this? Of course not, other than one line on CNBC.

Not that any of this really matters, in the end, does it? Do import prices mean anything? Let me ask you - what's important to you when you go to the store? Is it how far the money in your wallet will go? How many gallons of milk, bricks of cheese, cartons of eggs you can buy?

Or is it that as long as we have a piece of plastic in our wallets and it doesn't come back "declined", we will buy buy buy and thus we should go out in the stock market and do so as well?

It appears that, for today, the answer is the latter.

We simply do not have financial media in this nation that is anything other than an organized gang of pumpers, so you play the hand you're dealt!

Guess what? The bond market didn't ignore the import price report. The TNX rocketed north by nearly 9 basis points from the close yesterday.

Gold got smashed on the data release. Huh? I thought Gold responded to price inflation? Hmmmm..... perhaps not eh? My view has been that Gold is a great geopolitical risk hedge, but sucks as a price inflation hedge as its correlation over time has been rather crappy. In fact, if it were any sort of decent hedge against price inflation it would not have fallen back in the 1980s, would it? After all, there was no negative price inflation during that time, right, but gold fell like, well, a gold balloon.

Merideth Whitney cut broker estimates and said that recent gains based on mark-to-market losses in their retained earnings area are likely to reverse (duh), and this will of course impact earnings. No, you think?

Median home prices down 7.7% on the year, now under $200,000. Credit tightening was responsible for most of it, which is IMHO a good thing (although you won't hear people saying that too loudly!), as we need to return to solid, honest lending standards.

The real problem here isn't the instant impact, it is what it does to boomers who have most of their net worth tied up in their house. The hopes and dreams of these people are being smashed to dust as many of them have "lived larger" by pulling HELOC and cash-out money for the last several years and are now seeing their equity position be destroyed wholesale.

Ultimately this is a very ugly phenomena as it will leave them reliant on social programs that cannot be sustained (e.g. Social Security) or keep them from retiring at all. Down that rabbit hole of course lies decades of slower consumer spending and productivity - not a good macro-level trend at all, but it is a reality we cannot avoid.

Oh, if you're wondering how our bank's "reserves" are, have a peek.

Hint: Sit down first, and click for a big version. You won't need your reading glasses, in fact, I might suggest getting drunk to blunt the impact.....



Note that this chart was "redacted" a few months ago, and a few Tickerforum participants, including Pika-Steph, complained. I hear rumblings that a few FOIAs might have even been launched. Voila - the truth reappears!

Betcha they're hoping nobody notices.

Oops - a few of us did.

I know, I know, that "doesn't matter".

Uh huh. Oook. Everything is going swimmingly when our banks are borrowing from The Fed to pay salaries and the light bill, not to mention covering your ATM withdrawal, because all the reserves that usually are there behind their loan book has "taken flight" and gone home (or was that "we lost all the money speculating in the housing bubble on silly things like CDOs?" Hmmmm...)

Now let's talk about this a bit, because The Fed has released some Orwellian Speak attempting to cover up reality. Here are the money quotes:

"The H.3 statistical release indicates that nonborrowed reserves of depository institutions have declined substantially since mid-December to a level that is now negative. This development reflects the provision of a large volume of reserves through the Term Auction Facility (TAF) and has no adverse implications for the availability of reserves to the banking system."

That statement is true but does not bear on the question.

Here's the other one:

"To maintain a level of total reserves consistent with the Federal Open Market Committee's target federal funds rate, increases in borrowed reserves must generally be met by a commensurate decrease in nonborrowed reserves, which is accomplished through a reduction in the Federal Reserve's holdings of securities and other assets. The negative level of nonborrowed reserves is an arithmetic result of the fact that TAF borrowings are larger than total reserves."

Now there's the money quote, but you have to read and understand it.

Let's talk about the purpose of all of this stuff.

Fed Credit, in general, is all about balancing out the system. Or at least, its supposed to be.

Let's say you borrow $1,000 from Bank A and spend it at a merchant. That merchant banks with Bank B. Bank A is now short $1,000 in cash form his drawer and is supposed to hold reserves equal to 10% (for example) of the loans he has outstanding.

He needs that $1,000 but Bank B has it. He therefore goes to The Fed and gets it in the form of "borrowed reserves".

But note that Bank B has an extra $1,000 in "non-borrowed" reserves, because the merchant deposited your $1,000 over there!

So the net impact of this balancing act on the system is zero. This is why, if you look at that chart, you will see that the non-borrowed reserves has risen generally over time as has the size of the banking system, and while it has declined from time to time in recessions when economic activity slows it tends to rise, because the velocity of money slows down and debt tends to be repaid (or defaulted.)

So what happened this time?

That "balancing mechanism" has been thrown completely out the window, and The Fed has instead taken to propping up insolvent institutions!

Let me explain.

You borrow $1,000 from Bank A. But instead of spending it at a merchant who deposits it in Bank B, you lose some of it. In other words, the money is literally vaporized (e.g. debt defaults, ala a CDO that explodes and the margin call cannot be met.)

Bank B never sees the money but Bank A is still out the $1,000. Now there's a problem, because when Bank A goes and taps the Fed credit facility there is no corresponding offset in the system.

The Fed has gone from being a balancing (liquidity) mechanism to being a funding (equity) mechanism, and what's worse, the collateral they are holding is not worth the amount of loans they have outstanding.

That is, the system as a whole is insolvent, in that it fails the essential test of having the amount of reserves mandated by law.

What's worse, since the H.3 report says that the amount of "required reserves" is $40 billion or so, and the non-borrowed reserves is more than double that amount the system is not only insolvent (that is, has non-borrowed equal to the required amount) but in fact is negative by double the amount required.

What does this mean? It means that in aggregate the banking system is broke.

The system in aggregate has a negative net value by about $60 billion.

This does not mean that there are not solvent banks. There are lots of them.

But there are also lots of insolvent banks and Bernanke and The Fed are intentionally concealing this in violation of at least the spirit of FDIC and other banking system regulations, in that those regulations require that insolvent institutions must be resolved in a manner that is the least disruptive to the system.

Attempting to prop up failed institutions is inherently in violation of this requirement because it places the system at risk of even larger damage, and the scope of this potential damage has continually increased since January!

It further makes Bernanke and the rest of The Fed folk out to be raw liars.

They are not providing mere liquidity (balancing of reserves) to the system as they claim; the H.3 release and the above graph (depicting the H.3 release in graphic form) prove that in fact they are now supporting these banks instead.

But where did that support come from?

It came from The Treasury, in that The Fed's balance sheet is ultimately funded by the Treasury's sale of bills and bonds, which The Fed literally prints money to buy.

The taxpayer is in fact paying the light bills, salaries and bonuses of insolvent banks and we are not being told about it!

Still think your money is safe eh?

Speaking of salaries, those are pretty nice salaries (and bonuses!) for all those CEOs who lost all that money, aren't they? Gee, when did the taxpayer get a say in the amount of those bonuses?

Just one small question, if I may?

"What happens when (not if) foreigners deduce that our entire banking system, in aggregate, has no reserves and is in fact simply being propped up by taxpayer debt, effectively adding its deficit to the government's, as it has lost hundreds of billions speculating on bad paper in the housing market?"

Is that likely to cause "not amusing" results in the Treasury marketplace with very "not amusing" consequences for Treasury interest rates?

'Yall sitting up and awake yet? Good!

Then read this:

"Federal Reserve Chairman Ben S. Bernanke said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed."

and

"'A bankruptcy filing would have forced Bear's secured creditors and counterparties to liquidate the underlying collateral,' Bernanke said in his speech. 'Given the illiquidity of markets, those creditors and counterparties might have sustained losses.'

That's right, he said he will loan even more money to those he knows are bankrupt (in aggregate), he said he did authorize a loan to an institution he knew was bankrupt at the time, and those who have fraudulently concealed their exposure to bad debts, resulting in massive real losses, will be given a pass while he furiously efforts dumping the loss on "someone else."

Who's that "someone else"? Keep reading.....

Oh, I forgot to add that this "non borrowed reserve" number only recognizes the losses that banks have admitted to. The real losses, when one includes those hiding in "Level 3", might be as high as ten times those that have been taken in public.

Yes, the real system deficit could be as high as $1 trillion.

We don't know and Ben won't force the banks to tell us - or Congress.

What's worse, those who are supposed to want to buy our Treasury debt aren't being told the truth, while at the same time our own Treasury Department is estimating that we will run a record deficit of over $500 billion.

That is, if there was a time that we could not afford a "buyer's strike" from purchasers of that debt who get pissed off at our lying and simply refuse to have anything further to do with our Treasury bills, it would be now - precisely when Ben and his cohorts at The Fed, Treasury and in Congress are lying with every move their lips make about the true state of the banking system and our economy.

But back to the central issue: Does Bernanke really think he will get away with preventing people from having to take losses?

That is, of course, a mathematical impossibility.

All you can do is transfer who takes the loss; in this case, Bernanke's intent is to transfer that loss to the taxpayer through intentional obfuscation and Congress has permitted it by refusing to force the truth out into the open where it can be dealt with before it blows up in our face.

Specifically, it appears that Ben thinks he can shove a potential ONE TRILLION in bank losses off on the taxpayer while his buddies in those very same banks bring home millions in bonuses and stock options!

SOMEONE IN CONGRESS NEEDS TO GRAB THIS GUY AND ADMINISTER A CLUE STICK BEFORE THE BOND MARKET DOES IT IN A WAY THAT WE CANNOT EASILY RECOVER FROM.

We have spent $165 billion of public funds already and the House Bill will spend $300 billion more on supporting theft and fraud!

What do you think the government will have to do if there is a bond market dislocation and government funding costs double? I wonder.... do you think Social Security and Medicare will all be ok? What do you think will happen if we "eat" that one trillion and then Congress turns around and tries to "cushion" the problem in the economy with a second trillion?

Think they won't? They've already blown $400 billion and the real pain for consumers hasn't even begun yet!

But perhaps - just perhaps - there's a ray of sunlight peeking through the clouds.....

How about this off Bloomberg headlines - no story.... yet....

"*BILL 'THROWS SOUND UNDERWRITING OUT THE WINDOW,' HUD SAYS
*TAXPAYERS WOULD PAY FOR BAD LOANS UNDER BILL, HUD SAYS
*ASSISTANT HUD SECRETARY BRIAN MONTGOMERY SPEAKS IN INTERVIEW
*FANNIE, FREDDIE MUST HELP WITHOUT TAXPAYER RISK, OFHEO SAYS"

Amazing; the first small sliver of truth appears.....

Congress needs to do its damn job and force Bernanke to expose those insolvent institutions, making them eat their own losses!