Fed Premeditated Mispricing Of Risk In Housing, Oil, Junk Bonds And Other Markets

I have written that skeptics of Wall Street view the housing bubble of the mid 2000's as a premeditated mispricing of risk. More on that at the end of this article. Now that we have Bank of America coming out and saying that stocks and other assets are mispriced regarding risk and the Fed is behind it, so we have to wonder what else is mispriced regarding risk.

It looks as though investors may be buying financial assets that were meant to fail, but are inflated for a time before failure, due to this mispricing. This allowed assets to reach pricing heights not possible had the risk been priced correctly and crashes to be delayed. To a certain extent, we often see what finance wants us to see, and we don't see the big picture until after the fact. But Bank of America (BAC) has put the blame for bubbles and busts squarely upon the shoulders of the Federal Reserve Bank.

In the private sector the continual application of fraud looks like racketeering, and one could say that there should be RICO laws opposing the behavior. The Fed is more private than most people think.

In one case, pricing of oil, it appears that there could be political motivation for asset price declines and the duration of those declines. However, most of the asset manipulation is inflated, which results in speculation that allows bankers to make some money.

That is exactly what Will Rogers said prior to, and during the Great Depression. He believed that speculation was premeditated and made statements in jest about how bankers claim they don't know much about their business. He accused them of criminal behavior to their faces. Rogers said this to the bankers at the American Bankers Association in NYC:

 "You have a wonderful organization. I understand you have ten thousand here. And if you count the ones in the various federal prisons, it brings your total membership up to around thirty thousand." 1923

However, apparently they do understand their business, especially when the manipulation of speculation, through mispricing of risk, comes from the top.

So, what could be mispriced now? Maybe oil is mispriced, as the drop in production that is coming could one day cause a severe bounce back. I don't have an opinion, but you wonder if strings are being pulled to keep oil prices low, as a political attack on Putin's Russia? Certainly, keeping oil too low for too long could destroy production and cause a massive bounce back of prices.

In fact, the author of this article claims that the mispricing of oil is by traders and is deliberate. The central bankers just may have something to do with it and the longer oil is mispriced, the worse the bounce back will become in the future.

High yield bonds could be mispriced, since the highest, safest tranches are trading at levels showing a lot of risk. Michael Snyder has reported that this market could have destructive results. If that is the case, it is because, again, risk was mispriced on purpose.

Why would anyone want to misprice high yield "junk" bonds on purpose. Well, it is because they are used as collateral for capital intensive industries such as oil and telecommunications. As long as those industries are humming along, the mispricing doesn't hurt anything, until they don't hum along. Oil isn't humming much these days.

Exotic assets could all be mispriced, including high end fine art, and Los Angeles upper end housing.

Turns out that the threat of deflation could also be mispriced, as the Fed thinks inflation will run at 2.5 percent over 30 years. Treasury bonds could be the best deal in history if inflation runs below that number. But that is not advice from an investment pro, just an observation. The Fed has done a great job, if you can call it that, of keeping core inflation low while ripping food and energy costs upward. That slowed when it was determined that oversupplying the world in oil would hurt Russia. At least that is my take.

It does not seem like it would be in the interest of the Fed to allow rates on the long bonds to rise significantly. I wrote about that here and here.

With regard to the housing bubble, the risk that all mortgages could not go bad at the same time was not adequately factored into the formulas, the Gaussian Copulas, used to weigh the risk of the mortgage backed securities (MBSs), sold to investors. Mispricing these MBSs was fraud, plain and simple.

The  mispricing of MBS risk lead to the failure of the bonds, which were used as collateral in the money markets. And even central bank credit must be properly collateralized. But the central banks accepted the faulty Gaussian Copula which resulted in MBSs being mispriced.

David Li's Gaussian Copula was adopted by Basel 2 as revealed by Susan Lee, and it ruined the financial system. Basel 2, meaning the Fed and the central banks associated with the BIS, is responsible. Then regulation of the banks failed when the off balance sheet hiding of assets resulted in banks being able to look solvent when their capital ratios were totally out of whack. Huge transfers of wealth went from the middle class to the wealthiest among us when the securitization machine broke. The Fed even let crash that occur.

And here is the problem, if the government was lying, you could say it is sovereign and can do what it wants. But the Fed is not part of the government. It is a private organization made to look like a government organization. It has, after all, the name, Federal Reserve Bank. That sounds very federal.

Janet Yellen receives a cabinet level salary, set by congress. That looks like government in action. But then we learn the Fed employees are paid by the securities they own.

If anyone doubts this, you can look at the 1982 Ninth Circuit Court case, Lewis vs. the USA, where a Fed employee crashed into Lewis. The court rules that the Fed employee was not a government employee and Lewis could not sue the US government for the damages! If Janet Yellen runs you over in her car, you won't be able to get government relief.

The Fed is private, and its real mandates is to make money for and protect the big banks. That makes the mispricing of risk a criminal behavior, in my opinion. The Fed does not exist to make money for American citizens. It exists to make money for the banks.

The Fed hides its private nature, and the government assists in that endeavor. CNBC also assists, and I have personally never heard CNBC, which I watch often, ever say the Fed is a private bank. Even Larry Summers adds to the confusion, saying the Fed is a public institution that should not have big banks owning shares.

It is very disturbing that Larry Summers is debating Bernie Sanders on the Fed and on what Sanders gets right or gets wrong, when Summers is fooling us as to the public or private nature of the Fed. Summers clearly stated the Fed was a public entity. I got the feeling from reading the article by Summers in the Washington Post that he wanted the banks to relinquish shares in the Fed to make the Fed look even more public than it already isn't. And that "isn't" isn't a typo.

Andrew Jackson chased one central bank from America's shores at extreme peril to his own life. So, you wonder how much more manipulative corruption of assets and resulting damage to our economy can be tolerated before it will finally force the government either to bid adieu to our own Federal Reserve Bank or nationalize it with rigid control over its behavior.

Further reading:

The Federal Reserve Knew LIBOR Was Exploding in 2007 and Did Nothing


A Whole Lot of Gold Hoarding Going On

and here is a well known pundit unfortunately defending the practice of price manipulation:

Jim Grant on CNBC Discusses Mispricing of Assets 

Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Ayelet Wolf 7 years ago Member's comment

Fascinating expose to say the least.

Gary Anderson 7 years ago Author's comment

Thanks Ayelet. The Fed fixes prices the old fashioned way, in the back room. Abenomics seeks to fix them out in the open. It is all a sign of desperation, but the alternative, negative rates and cashlessness, is far worse.