Livinglies’s Weblog

The latest change in Fed policy sounds good. You get that warm fuzzy feeling that credit will loosen up and that things are getting better. But the fact remains, that this is ANOTHER transfer of the power to create money to the PRIVATE sector, it is another green light for PRIVATE TAXATION, and worst of all, it comes at a time when inflation is already running high and threatening to become worse than at any time in recent history.

Flooding the market with more dollars is simple: it reduces the value of those dollars. as the value goes down some businesses will appear to prosper, but when those business owners go to buy something, they will realize they lost profit even though their accountants report they made more. In nutshell, if it costs $25 to buy a loaf of bread or $15 to buy a gallon of gas, the fact that your sales went up won’t do you any good.

Beware the earnings figures from public reporting companies. There is no FASB directive that requires real disclosure of real earnings in constant currency. This will become painfully obvious as the next 12 months unfold.

NEW YORK (MarketWatch) — The Federal Reserve, along with other central banks, said Friday that it was increasing the funding it is providing to banks and announced that, for the first time, it was willing to accept bonds backed by auto loans and credit cards.

“In view of the persistent liquidity pressures in some term funding markets, the European Central Bank, the Federal Reserve and the Swiss National Bank are announcing an expansion of their liquidity measures,” the Fed said in a statement.

The Fed took the move in an attempt to flood the market with supply and lower short-term lending rates, such as the London interbank offered rate, or Libor.

The U.S. central bank announced an increase, to $75 billion from $50 billion, in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility, beginning with the auction on May 5.

This increase will bring the amounts outstanding under the TAF to $150 billion.

The move to expand the TAF was widely anticipated because of strong demand for loans through the program.See full story.

“The program is now reaching a magnitude where it can play a significant role in plugging the gap between the remaining demand for unsecured term funding in the bank market and the latest decline in supply following the run on Bear Stearns,” wrote Lou Crandall, chief economist for Wrightson ICAP.

The expansion was “probably marginally disappointing because there was a widespread expectation … that the Fed would extend the term of at least some TAF auctions to three months,” wrote Stephen Stanley, chief economist for RBS Greenwich Capital.

The TAF, announced on Dec. 12, was followed in March by the creation of several other Fed lending programs targeted at different sectors of the credit markets.

All told, the Fed has now offered to lend up to $462 billion in cash and Treasurys to the markets, in addition to the nearly unlimited funds available through the discount window and the primary credit dealer facility.

The three-month Libor rate — a benchmark for lending between banks — was 2.78% on Thursday, well above the 2% federal funds rate. Crandall said extra supply from the Fed in the next three weeks should tighten the spread between the Libor and fed funds rates.

Deeper cooperation

The Federal Open Market Committee also has authorized further increases in its existing temporary currency-swap arrangements with the European Central Bank and the Swiss National Bank.

These arrangements will now provide dollars in amounts of up to $50 billion and $12 billion to the European Central Bank and the Swiss National Bank, respectively, representing increases of $20 billion and $6 billion.

The FOMC also authorized an expansion of the collateral that can be pledged by bond dealers in the Fed’s Schedule 2 Term Securities Lending Facility auctions of Treasurys.

Primary dealers may now pledge AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial-mortgage-backed securities and agency collateralized mortgage obligations.

Accepting asset-backed paper could help provide money to the student-loan market, Crandall noted. 

Steve Goldstein is MarketWatch’s London bureau chief. Washington Bureau Chief Rex Nutting contributed to this report.

Besides the obvious fraud, breach of duty and illegal disclosure of fees and interest that every lender made by participating in the mortgage meltdown, they continue to make conventional “errors” that can result in extra fees for them and compounding losses for you.

Whether it happens in your account or someone else’s account the costs are going to be paid, at least in part, by you. Many so-called errors are timing issues decided by policy makers at the bank. By not posting a deposit that they know is good, they can create an NSF situation, charge you an NSF fee for each incoming check and thus cause a deficit in an account that you thought you had in money in and where you should have had the money posted.

The bank creates an artificial NSF situation and then charges you. The burden shifts to you to fight with them. This compounds to more NSF fees and in some cases, we have seen those fees go into thousands of dollars. 

CONSUMER BANKING

Bank on mistakes

When banks make errors, consumers often pay — and costs can be steep

By Gail Liberman and Alan Lavine

Last update: 7:25 p.m. EDT April 28, 2008

PALM BEACH GARDENS, Fla. — The price tag of one recent bank error: At least $2 million. The bank mixed up the account of 49-year-old Benjamin Lovell with the account of a different person with the same name.

Lovell, accused of spending the money without notifying the bank of the mistake, faces a hearing Thursday in Brooklyn’s Kings County criminal court. The charge against him: Grand larceny. Lovell’s attorney argues that Lovell didn’t intend to steal, but believed he was entitled to the funds.

The case is just one example of the growing problem of bank errors. While most consumers likely won’t face charges of grand larceny, there may be other financial pitfalls in store for those who don’t carefully monitor the accuracy of bank transactions, including:

• Steep, ricocheting bounced check fees — not only charged by your bank, but also by merchants — if a bank error leads to an overdrawn checking account.

• Late fees and default interest rates on credit cards if credit card payments aren’t properly credited.

• Undetected fraud.

The Office of the Comptroller of the Currency, regulator of national banks, said complaints of bank errors rose to 2,217 in 2007, a 10% rise from 2006. By contrast, total complaints rose 7% to 28,362. Of course, the data likely are limited to those customers who detected banks’ mistakes.

But how many errors go undetected by those who are too busy to check every detail of their account transactions? After careful scrutiny of her own accounts, one reader says she caught thousands of dollars in bank errors, including:

• A check debit for $400 should have been a deposit.

• A $3,000 credit card payment was applied to someone else’s account.

• Despite an ATM withdrawal of $40, no cash actually was provided.

“These items were entirely in my responsibility to fix,” the reader complains. “The financial organizations provided little, if any, help, though it was their mistake and if I hadn’t pursued it, would not have recovered the money.”

More errors, or is it fraud?

Tomas Norton, a Princeton, N.J.-based fraud consultant, says the problem may not necessarily be more bank errors. (One sign that bank errors have been around for years lies in a comical “Beverly Hillbillies” video, dubbed “Before identity theft there were bank errors,” at CrazyAboutTV.com/video.)

Rather, more of those errors may be due to fraud, Norton says. That problem is compounded by the fact that it’s increasingly difficult to get bank errors fixed.

“The problem with the errors is that no matter how it occurs, whether it’s an error or deliberate, the bank is always protected,” Norton says.

“If your payment doesn’t get to the bank on time, even though there’s a plausible delay in the mail, they don’t take those excuses,” he says. With a credit card, not only could you lose your attractive 7.99% rate, but your account balance retroactively can be charged 31%!

Also, banks have come to view checking and savings account operations as ways to generate income, Norton says, so fees for customer missteps have escalated dramatically, and your bank may be less willing to quickly fix errors that trigger those fees. In addition, customers often must deal with frustratingly bureaucratic call centers.

Meanwhile, the time period for you to notify your bank of an error — often overlooked in deposit agreements — has been slashed. The latest deposit agreements give you only 60 days to notify your bank of an account error, Norton says. Fail to meet this deadline, and even though an error is your bank’s fault, the price tag for the mistake, including accompanying fees, could be yours.

“Billing disputes and error resolution” represented the top consumer complaint among the 4,451 filed with the FDIC in 2007. The same problem also led the 2007 roster of complaints at the Office of Thrift Supervision.

Protect your accounts

What can you do to avoid being a victim of bank-account errors?

• Immediately reconcile your bank accounts when statements arrive. Check for all errors, including any unauthorized transactions. Monitor check endorsements, credit card transactions and electronic debits.

• Consider checking your accounts between cycles, either online or by telephone.

• If you detect fraud, immediately file a police report.

• For all errors, including fraud, immediately notify your bank in writing by certified mail. Keep copies of your notice. For debit card or deposit account errors, call immediately. But also send the certified letter to a top officer of your bank. For credit cards, mail your notice to the “billing inquiries” address on your statement. Record times, dates, and names of all those with whom you speak.

• Use special care depositing checks or money orders. If they may be counterfeit, don’t deposit them until you call the issuing bank to verify authenticity.

• Beware that if a deposit is erroneously credited to your account, the bank may freeze your account until it’s corrected. For more information on dealing with bank errors, visit this OCC page.

Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is “Quick Steps to Financial Stability” (Que/Penguin). You can contact them at www.moneycouple.com. 

The reason the Federal Reserve is having so little effect is that virtually all of the “bad money” was created out of its reach. People create their own money in many types of transactions, and even if some portion goes through the Federal Reserve, for purposes of accounting between banks, the creation and existence of the “bad” money exists apart from any action taken or not taken by the Federal Reserve. Greenspan might have had it wrong, but he isn’t to blame for the actions of people who were operating outside the scope of his authority or responsibility.

The Glass Seagal Act kept banks and securities firms apart. The simple logic was that neither banks nor securities firms have any direct interest in serving or protecting the public. That can only be achieved by regulation from government. Put them together and you have a recipe for disaster. Banks and securities firms have as their primary goal to make money.  And if they get an idea to make a ton of it, no matter how stupid it is, (see Mortgage Meltdown), they will do it. Because in the end, the people who make these decisions do so in a bubble of their own — small wonder they create financial bubbles and crises. 

If I agree to lend you $500,000 to buy a house worth $300,000, that is or was a perfectly legal transaction. It also is completely out of reach of the Fed.  If you in turn sign papers acquiring the house and I pay the seller the $500,000, the transaction goes through the Fed for accounting purposes in determining the balances at financial institutions. But it is not money created by the Fed nor is it subject to regulation by the Fed. The “money supply” was increased by $500,000 and all the Fed could do is see it but not touch it. Insiders know that $200,000 of “value” is completely fake, but this is carefully scripted to create “plausible deniability.”

If I sell shares in your loan to other people as “derivative mortgage-backed” securities, they sound like pretty good investments to most people and they buy it for perhaps $600,000. Again, money exchanged hands and all the Fed can do is watch.  And by the way the “money supply” was just increased by another $100,000 or $600,000 depending upon which theory of econometrics you subscribe to. Again only the insiders know that an additional $100,000 had been added to the completely fake valuation of the original transaction from which the mortgage backed security “derives” its value. 

Here we had the perfect storm. The repeal of Glass Seagal which allowed financial institutions (regulated by the Fed) and securities firms (not regulated by the Fed) to become one institution provided they (the banks and securities firms) protect the public from scoundrels. This is akin to delegating the job of creating peace in the Middle East to Saddam Hussein.  

Or if you like, it can be compared with the FDA and other agencies that have come under the direct influence and control of corporate America serving the profit motive, shoving aside the duty to serve and protect the people, leaving the citizenry with no protection. 

Like the FDA, the law provided shields from the appearance of stupidity. In this case, even though banking and securities were under the roof of one house, it was OK as long as there was a chinese wall between the two functions. Right. I worked in both the banking and securities sectors. There is no wall but they all understand how to create plausible deniability.

The Fed alone is not going to stop the crash that is coming. But these behemoth two-headed monstrosities will probably be allowed to defer the crash with more funny money. This will compound the devaluation of the dollar but give the appearance, for a while, that everything is under control. Most people don’t remember what happened to the value of the dollar in the 1980’s. Few know or remember the 2500% inflation in Germany in one month. It doesn’t take much to crash because money is only an idea, a belief, a confidence in the system. If those ephemeral subjective perceptions of the public change, money is gone — all of it. 

If we really want to allow the country to go into recession and not a crash we have to convince ourselves and convince people in other parts of the world that we are again a nations of laws, regulating currency, monetary policy, securities trading, in a sane reasonable manner. An economy based upon getting consumers to go deeper and deeper into debt buying things they don’t need and probably won’t want soon after purchase is not a valid premise. 

Economic stimulus is a good thing in theory. But if it consists of getting more money into the hands of consumers and then pressuring them to part with it on objects of doubtful added value, then this plan is no better than the behemoth plan of creating more funny money to cover the old funny money. 

The party is over. We are going to have to take the hit on our own nose to show that we are a stand-up crowd and not a rowdy group of criminal greedy myth-sellers. The fundamental premise driving the economy must include consumer spending only in relation to growth in other fundamental areas of commerce and society — innovation, production of products that people in other countries want, and the discovery of intellectual property that is useful in adding sustained value in the perception of consumers.

The answer is neither deregulation nor more regulation. It is changed regulation keeping the long-term viability of the country and its people as the top priority. Anything less will reduce the United States to a third world country that has adopted China as its lender of last resort — a country with no vested interest in doing anything other than using us for economic leverage, and who is now producing the control systems for our weapons, along with sponsoring the migration of Chinese nationals to the U.S. , while they build their own military capability at an alarming rate. 

Something has to give folks. Is anyone out there listening?