Thursday, March 24, 2011

Weimar Angst and the United States Today

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market"(, 2009)

When Money Dies: The Nightmare of the Weimer Hyperinflation, by Adam Fergusson, was published in 1975 and became a best-seller in 2010. Federal Reserve Chairman Ben S. Bernanke's claim that "inflation expectations are contained" is refuted (once again) by this 35-year, dust-gathering incident, unless the public took a sudden interest in multiplying millions, billions, and trillions - a "delirium of milliards" - the phrase of soon-to-be-assassinated Weimar government minister Walter Rathanau.

Interest in the German episode (which peaked in 1923) was described by Professor Peter Bennholz, University of Basle, and author of Monetary Regimes and Inflation: History, Economic, and Political Relationships, published in 2003, and not yet matching Fergusson's sales, but out-of-the-money call options on a spike might be worth exploring. Bernholz, studying all 29 hyperinflations in history, does so to "point our attention to the time from which the public tries to escape the loss of money by reducing its use by a flight into other currencies and commodities." For his study, Bernholz uses the "arbitrary convention" that hyperinflation "has reached in at least one month 50 percent or more." It is not necessary for inflation to approach that astounding level for major dislocations to occur.

Some characteristics of Weimar Germany are apparent in the United States. Parallel observations are sometimes less than they appear (e.g., in both cases, the people enjoyed eating meat), but are striking. The German incident happened over four years (also arbitrary. It can be argued that any year from 1914 to 1921 was the point of departure.)

Similarities to the U.S. have been in motion for 30 years or so. These include: (1) a high concentration of wealth among those who leverage, (2) the middle- and lower-classes falling behind, but not understanding or knowing it (or - knowing it but not allowing themselves to think about it), (3) the rise of a gambling culture, (4) including financial speculation on the stock exchange, which spread to all ranks of the population, (5) the blossoming of a financial industry, with quantity crushing quality (Weimar bank tellers became financial advisers since most people were at a loss, and would take any advice, which was often horrible, but probably well-intentioned), (6) the "striking displays of luxury beside poverty" (quoting Fergusson), (7) a "growing lack of concern for one's fellow man" (the difference between greed and the attempt to survive is blurred), (8) values are distorted, in both senses, the one feeding the other: a wife selling her husband's gold watch for four potatoes, (9) the quality of goods (and services) collapses (an evolution with consequences to morale and personal dignity), (10) the denial by the central bank that it is in any way attached to the inflation.

Adam Fergusson discussed When Money Dies with radio host Jim Campbell earlier in March. I will talk about current complexities this Sunday, March 27, 2011. See below for details.

Streaming Live on the Internet - Click on:
"Business Talk with Jim Campbell"
Sunday March 27th @ 10-11am Eastern

Fred Sheehan
Contrarian Fed Expert
On "Quantitative Easing" & Fed Policies -

Are they working and the Threat of Inflation?

Monday, March 21, 2011

Ignorance and Opportunity

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market"(, 2009)

Following are some of my remarks prepared for Allen & Company's Fifteenth Annual Arizona Conference. The discussion, "Munis and the Euro: Crises or Opportunities?", took place on March 8, 2011. The moderator was Senator Bill Bradley, Allen & Co., New York. Participants were Dick Ravitch, Ravitch, Rice & Company, New York; David Kotok, Cumberland Advisors, Sarasota, Florida; Uri Dadash, The Carnegie Endowment, Washington, DC.; and Frederick J. Sheehan.

The panel discussion was conversational, so less formal and more wide-ranging than what follows. I have written about much of the "Ignorance" in previous dispatches, so omit redundent notes here. The "Opportunity" will also be familiar to many readers, and so is repeated in truncated form at the end.

To the prepared remarks:

I will discuss four topics:

First, some background to current problems;

Second, why it is not wise to make predictions about the amount and size of defaults;

Third, some areas where municipal solvency and bonds are most vulnerable;

Fourth, the opportunities.


I will start with some numbers:

In 1995, $153 billion of mortgage debt was borrowed by home buyers. In 2005, it increased $1.1 trillion.

As for municipal borrowing:

In 1996, states and municipalities retired a net $7 billion in debt. In 2007, they borrowed $215 billion.

At the same time, tax receipts were rising fast.

In 2003, State and Local Government Current Receipts were $979 billion. By 2007, receipts were $1,304 billion.

This all leads to the conclusion that municipal spending no longer concerned itself with the future - the spenders simply extrapolated their budgets and borrowing into a splendid future.

The link between real estate bubbles and municipal finance bubbles is as old as the hills.

I will continue with a quote:

A.M. Hillhouse, author of a splendid study of municipal bonds - Municipal Bonds: A Century of Experience, 1836 - 1936, analyzed the U.S. municipal bond market across that century. He concluded:

"[T]he major portion of overbonding by municipalities arises out of real estate booms."

Hillhouse, who considered his book a font of wisdom for future generations, wrote:

"There will be no justification for a city's coming forward [in the future] with the excuse that... its revenue has dried up in times of falling property values... [T]he cause of the debt trouble [must be regarded] as an unwarranted failure of the city to adjust its borrowing program to certain known facts."

His book, as you might expect, never went to a second printing. Nevertheless, there should have been no doubt that a municipal bust would follow the residential mortgage crash. I wrote a study, "The Coming Collapse of the Municipal Bond Market" in 2009. The title may or may not turn out to be accurate, depending on one's portfolio, but there was and is no doubt municipal extravagance had left us with a grave problem.

Current theories and books written about the Depression do not dwell on the 1920s real estate boom. Real estate lending in the 1920s might rival the recent debacle, in form, if not degree. There was a flight to the suburbs. Inflated civic conceit hired construction crews to build houses, roads, sewers, schools, skyscrapers, and highways that crossed the country for the first time. When Treasury "Secretary Mellon endeavored to cut back federal spending, state and local governments stepped up spending at a rate that more than offset the Mellon program...."

I will continue with some more quotes - my point being that it is not necessary to talk about the past two decades to understand why municipal finance is in disarray. The town librarian could have gathered previously documented warnings. In those locales where the library has been closed for lack of funds - and there are many - a moderate level of common sense would have noted the city elders had lost control, and possibly, their minds.

In March, 1933, Professor Herbert D. Simpson gave a lecture at the 45th annual meeting of the American Economic Association:

"Throughout this period - [he was speaking of the 1920s] - there was another form of real estate speculation, not commonly classified as such, but one that has had disastrous consequences. This is the real estate "speculation" carried on by municipal governments, in the sense of basing approximately 80 per cent of their revenues upon real estate and then proceeding to erect a structure of public expenditure and public debt whose security depended largely on a continuance on the rate of profits and appreciation that had characterized the period from 1922-29."

Per Hillhouse, Simpson tried to steer municipal financing from its dependence on house building and price appreciation:

"The financial difficulties of local governments in consequence of both the inflation and deflation of real estate values demonstrates strikingly the unwisdom of a revenue system concentrated so heavily upon real estate..."

This elicits a truism that was ignored in equal parts during our twenty-first century mortgage and municipal bubbles: When asset prices fall, the collateral falls, but borrowed money, linked to the original asset price, still needs to be paid back.

Simpson recounted the credulity with which the citizenry accepted heavier property taxes in the 1920s. Similar to our recent splurge, the Jazz-Age home dweller did not mind that property tax revenues, municipal borrowing and municipal spending were all inflating - at unsustainable rates. The forgotten professor went on:

"During this period of prosperity, real estate taxes were paid with little complaint.... [U]nder these conditions, public expenditures expanded and taxes were increased without protest; and public officials exploited the real estate groups as systematically and thoroughly as the real estate groups had exploited the rest of the public. The result has been a structure of public expenditure which has been difficult to curtail, and a volume of indebtedness whose solvency is now jeopardized on a large scale."

Morgan partner Dwight Morrow was not a fan of his New Era - the 1920s New Era. He knew the asset inflation would come to a bad end. Morrow wrote: "It is the social effect which is so dangerous. It transfers the habit of spending from those who have long experience of spending to those who have no experience."

Today, our state-of-the-art Federal Reserve is actively and explicitly promoting and feeding asset inflation.


1 - We Don't Know if unions and municipalities will reach agreements over benefit reductions

2 - If they do not reach an agreement, and the decision goes to a court, We Don't Know how courts will rule. Union pension plans are legal contracts. Yet, pensions and benefits are unsustainable. How will judges rule?

It is worth keeping in mind that most, if not all, states have legal recourse to amend pensions under certain conditions. In California - I quote: "an employee does not have the right to any fixed or definite retirement benefits but only to a substantial or reasonable pension."

I am quoting Amy B. Monahan, law professor at the University of Minnesota, from a paper in which she addresses legal remedies available to states and used in the past to reduce pension benefits of public union workers.

[Amy B. Monahan, Visiting Associate Professor, University of Minnesota Law School and Associate Professor, University of Missouri School of Law. "Legal Limitations on Public Pension Reform," Presented at Vanderbilt University, conference on "Rethinking Teacher Benefit Retirement Systems," February 19-20, 2009]

By the way, recently there have been federal legislation initiatives floating around that would allow states to declare bankruptcy. There is at least an implicit intention, by some parties, to use this legislation to reduce public sector wages. This is unnecessary. If an agreement cannot be reached among the parties, the state courts have the authority to reduce benefits.

3 - We Don't Know what the federal government - including the Federal Reserve - will do if states and cities go into default. Treasury Secretary Geithner may copy Hank Paulson's bazooka maneuver with Congress. The Fed may, or may not, buy a trillion dollars worth of municipal bonds before the Senate Banking Committee puts Chairman Bernanke in the witness box.

3 - We Don't Know what cities and towns that rely on a certain level of state aid to pay the bills will do. This, of course, is a Don't Know only after We Do Know that a state has stopped or reduced local aid payments.

4 - We Don't Know if states and municipalities will tell the feds to fund their own mandates. That is, regarding state and local costs that were either signed into law or regulations imposed at the federal level, but were not funded by the federal government. We are seeing some opening salvos, here, in Arizona, which is making cuts to Medicaid. I think cities and towns will test the waters, for example, in schools - where, instead of laying off teachers, they may drop federally mandated requirements.

5 - We Don't Know, once this step is taken, the response of the federal government and the courts.

6 - We Don't Know if states and municipalities will raise taxes if they are unable to meet municipal bond payments.

Rating-agency and brokerage-firm literature publish statements such as the following:

"What makes general obligation bonds...unique is that they are backed by the full faith and credit of the issuing municipality. This means that the municipality commits its full resources to paying bondholders, including general taxation and the ability to raise more funds through credit."

This is only true on occasion. A good place to study the variety of decisions is with a paper written by Kevin A. Kordana, an Associate Professor of Law at the University of Virginia. ["Tax Increases in Municipal Bankruptcies," Virginia Law Review, September 1997, Volume 83, Number 6.]

7 - Another Don't Know is the level of ignorance in cities and towns, where it is too often the case that nobody understands the financial situation. An outsider who drops by city hall can be amazed at how little anyone knows.

8 - Finally, and most importantly, the decision - or indecision, as it may be - to break the cities' or towns' contractual obligation to pay its lenders includes a lack of will among the parties. Here, we will have to wait and see.


Disagreements about public employee benefits and payments are in the headlines, so I will start there.

I used to work with investment committees of corporate, union, and municipal pension plans, to design pension policies. This included analyzing assets and liabilities. Understanding future, annual cash flows - outflows to retirees - was important for duration- and cash-matching of assets to payments. I said to the pension committee of a town in 1989: "There will come a point when you won't be able to pay these benefits."

This was not a surprise at all. They knew that. They had no say in negotiations between the different union groups in the town and the selectmen who approved the benefits. There had been an increase in future benefits through improvements to the benefit formula almost every year for several years. And, there was a boost to the formula almost every year during the next decade.

The proportion of retirees to current workers was small back then. Plus, discounting the much higher future payments 20 or 30 years out produced tiny numbers, that, over time, have blossomed. Now, we have reached the point when the benefit payments are exploding as a percentage of costs for many municipalities.

A second problem is maintenance expenses for municipalities that went on a building spree. A rule of thumb is they are about 30% higher than the prior trend.

A third potential problem is that many cities and towns are dependent on continual access to the bond market. If Treasury rates jump 3% or 4% in a failed auction, the light bill may not be paid.

A fourth means by which municipalities have telescoped the future into the present is by raising money through General Obligation bonds that is supposed to be used for a specific purpose but, the money is instead used to cover current expenses.

A fifth problem is the next step in the misuse of General Obligation proceeds. There are cities and towns that raise enough additional money in the bond market to cover the projected rise in next year's operating expenses.


Opportunities in municipal bonds will spring from ignorance. They already have. There may be a panic of indiscriminate selling when owners of munis understand a municipal bond is not simply "money good." Such ignorance has produced great buying opportunities in the past.

For instance, in May 1933, all City of Miami bonds (with yields ranging from 4-3/4% to 5-1/2%, and maturities from 1935 to 1955) were quoted at $26. In the mid-1970s, the same combination of ignorance and fear created great buying opportunities for New York City bonds. All bonds traded for $25.

It will be awhile before buyers should pile in, but the wait may be worth it. A bond veteran who traded municipals in the 1970s - one who actually understood the securities - told me that buying New York City bonds at the bottom was extremely profitable.

Monday, March 14, 2011

The Exponentiality of Municipal Costs (and Some Advice for Endowments and Foundations)

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market"(, 2009)

The word in social media is "exponentiality" of growth. Webster's, American Heritage, and Microsoft Word do not acknowledge it, I don't know how to spell it, but this path-breaking discussion of rising municipal costs deserves a word from the future.

The pension costs of states and municipalities in years hence are often stated in a calculation of future liabilities. For instance, the future obligations of state and municipal pension funds are calculated (in frequently cited studies) at between $1.5 trillion to $3.5 trillion.

Among the reasons for this range are the assumptions used by the actuary who produces the pension valuation, an annual exercise that shows a pension plan's current state of affairs. The liabilities, which, in turn, become pension payments, extend out 50 years or more: until the last member of the plan and all plan dependents have died. The actuary chooses an expected rate-of-return that will apply over the lifetime of the plan. The actuary also makes assumptions about the retention rate of current retirees, since benefits usually increase by years of service; the correct actuarial life table (how long will members and dependents live); and combines these with several other probabilities. Different assumptions are a reason for the $2.0 trillion range of future obligations, shown above.

In general, the rate-of-return being assumed by states and municipalities is too high, often 8.0%. Thus, the discount rate for future payments is too high. (The discount rate is the same as the rate-of-return assumption in municipal plans. This is not true in corporate plans.) Projections of future payments by plans using such assumptions are unrealistic.

Whatever the trillions turn out to be, the number is not of much use to interested parties. It is more helpful to know how municipal contributions will increase over time. These exponentialities are as varied as the pension plans - and the municipal bonds - to which they are attached.

Be that as it may, following are figures from three different state pension plans that may help the layman form an impression of how a specific plan might cause municipal finance restructurings again and again in the years ahead. There are two ways to read an actuarial valuation: either at a glance or through hours of analysis. The former is chosen here, since that is enough to illustrate the exponentialities; but is inadequate to address them. (Anticipating the question, should someone want the latter, I will do so - at a price.)

Some notes:

Pension obligations apply to General Obligation bonds, not Revenue bonds, though the eccentricities of municipal finance are bound to confound such an absolute statement. There is no substitute for reading the documents for each bond.

The state or town makes a "contribution" to the pension plan. The Plan is composed of a portfolio of assets that is expected to rise in price over time. (Thus: the importance of the actuary's rate-of-return on investments.) Benefits are paid from this portfolio of assets. Future employer contributions (there may also be employee contributions) are what bondholders, taxpayers, and retirees need to monitor for potential default by the states.

Future increases of pension contributions are not the only exponentiality. Future health costs may be higher than pension assessments. The bond owner should read the municipalities' actuarial valuation for "Postretirement Benefits Other Than Pensions."

Maintenance costs; because of the exponentially greater square footage of schools, town halls, and panic rooms built over the past 20 years; have increased expenses of such expansively minded municipalities at double-digit rates, a rule-of-thumb is for costs being 30% higher than the previous trend of cost increases.

The examples below were chosen because Massachusetts is local, New York's statements are thorough and clear, and North Dakota is celebrated as an oasis of fiscal sanity. The population (the members) of the "The State-Boston Retirement System," as well as the municipal workers covered by other Plans, is a subset of what the name indicates. States and cities have several different pension plans.

#1 - The State-Boston Retirement System:

The State-Boston Retirement System (SBRS) was required to make a minimum contribution of $143 million in 2000. This was the employer contribution. Plan participants may have also been required to put a percentage of their paychecks into the Plan. The minimum required contribution increased to $257 million in 2009 and to $336 million for fiscal year 2010. The actuarial firm, The Segal Group, estimates the minimum contribution will be $484 million in 2020. The Segal Group is using an expected rate-of-return of 8.00% to 8.25% during that period, and all years after.

The actuary calculates a corridor of possible contributions, from a minimum to a maximum. The SBRS made the minimum contribution each year, which, all else being equal, means contributions in future years have been, and will be, higher than if it had allotted more. As municipal finance goes, the SBRS has been prudent. See:
Illinois is No Peter Pan for the Eval Knievel approach to pension fund management.

The Segal Group (in the person of Kathleen A. Riley, FSA, MAAA, EA, Senior Vice President and Actuary, who signed the valuation), and all other related parties who have an interest in achieving a compound, 10-year return of at least 8%, may find the minimum required contribution in 2020 will be much higher than the present estimate. Since such estimates, as well as health cost projections, are the base from which budgets are built, as well the foundation for rating-agency reviews, we might hope the reigning authorities have the good sense to cut the return assumption in half. And, if pigs could fly.

#2 - The New York State and Local Retirement System:

The New York State and Local Retirement System (NYSLRS) made a contribution of $164 million in 2000. In 2009, that had risen to $2.4 billion. What the future holds is a mystery: these numbers are from the March 31, 2009 Comprehensive Annual Financial Report, not the actuarial valuation. There are signs that the contributions will only go up. From the text: "[I]n 1999, benefit payments were approaching $3.5 billion, while this year's payments totaled $7.3 billion." Note: these are the actual dollars paid to the retirees, not the Plan's contribution.

There is a graph in the NYSLRS Financial Report (p.21, for holders of New York State General Obligation Bonds) that shows a steady rise of the number of retirees over the past 10 years. The salaries of those retiring today are much higher than those a decade ago. Since the pension received is usually a function of the final salary and years of service, payments will rise.

#3 - North Dakota Teachers' Fund for Retirement:

The North Dakota Teachers' Fund for Retirement (NDFR) popped out in a search for a North Dakota state plan. The Peace Garden State (as every school child knows) was chosen because it is often mentioned as an exemplary fiscal citizen. This choice was intended to show the condition of a pension plan with rock-solid management.

Contributions (in this case only, the number includes both employer and employee contributions) rose from $54.5 million in 2001 to $78.1 million in 2010. The Unfunded Actuarial Accrued Liability (the lower, the better) changed from a surplus of $21 million in 2000 to a deficit of $546 million in 2009, then plunged to a shortfall of $795 million in 2009.

This is an example of the havoc wreaked by the markets in 2008, though, as noted, the method here is glance-and-write. A full examination would elicit other developments, such as (among many possibilities) a generous boost to the retiree benefit formula. Similar damage can be seen from 2009 to 2010 for the SBRS, above.

This may cause a fatal blow to such plans if we suffer another such period. Many university endowments and foundations are similarly strapped. The funding ratio of assets to the Actuarial Accrued Liability (the higher, the better) fell from 109% in 2000 to 82% in 2009 to 55% in 2010. The Fund's initial descent followed the crash, when the same ratio fell from 96% in 2001 to 85% in 2003. (Because of timing and smoothing, pension valuations reflect past market booms and busts with a lag.) Yet, it can be roughly stated that the funded ratio fell by half (109% to 55%) over a period when stock market returns were approximetly zero.

Solely from inference, experience, and intuition (not knowing the asset mix employed, etc, etc.), it was not so much the negligible returns of the past decade, but the bust-boom-bust-boom pattern that probably did more to leave the Plan in such poor condition. The growing unfunded liability - that needs to be funded - will place a larger financial burden on the employer, at a time when not much is going right.

Back to the actuary's long-term, 8% rate-of-return: this could be fulfilled, yet, a 50% loss in the interim could sink the Plan. In the current environment - of unprecedented government interference, thus instability in the markets - pensions, foundations, and endowments should pay insurance, the simplest example being put options on indexes. Insurance costs money and reduces returns - until the moment it may save the pension fund or institution from an incapacitating blow. A university that can no longer afford its physics laboratories, a museum that sells its Goyas, a hospital that slashes its clinical education budget, is not the same institution.

There has been a trend, encouraged by some consultants, for pensions, foundations, and endowments to borrow money (for instance: borrow 100% to 200% the value of plan assets, at a 4.5% - 5.0% interest rate) and to invest the funds with the intention of earning a higher return while paying off the loan. Not knowing the future, this is a reckless strategy, even though, to a committee of trustees, it may be presented, and may sound like, the most sensible solution given a deteriorating situation.

The government and its appendages want stocks to trade at an inflated level. The objective of Quantitative Easing (QE), called "money printing" by the plebiscite, was stated by Brian Sack, head of the New York Federal Reserve Markets Group, on October 4, 2010: QE will "keep asset prices higher than they otherwise would be." Keeping asset prices higher than they otherwise would be ensures that, at some unknown time, asset prices will trade at a lower price than they should be.

Thursday, March 10, 2011

Alan Greenspan Auditions on Comedy Central

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market"(, 2009)

"There is no question at this stage that the momentum of this economy, leaving out the oil price issue, leaving out the Euro problems that have emerged, and very specifically leaving out the budget problems, this economy is really beginning to pick up momentum. The fascinating issue for forecasters is how do you factor in all of the negatives."

-The King Report, March 8, 2011, quoting from former Federal Reserve Chairman Alan Greenspan's "Guest Host" appearance on CNBC (also known as The Comedy Channel), March 9, 2011

Former Federal Reserve Chairman Alan Greenspan
waiting offstage before his CNBC comedy act.

Wednesday, March 2, 2011

Yellen and Khaddafy - Studies in Paranoia

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market"(, 2009)

The continued existence of the Federal Reserve System is both the greatest threat to national solvency and an insult to the American people.

On February 25, 2011, Federal Reserve Vice Chair Janet L. Yellen explored new depths of dishonor. (For an earlier depth, see:
Liquidate the Fed.) At a University of Chicago Business School forum, the life-long academic claimed: "I'll highlight the role of central bank communications in bolstering the effectiveness of unconventional monetary policy." [All Yellen statements are in italics.] The title of Yellen's speech was: "Unconventional Monetary Policy and Central Bank Communications." It was dishonest from beginning to end.

After the preliminaries, Yellen expounded her theme: "In the remainder of my remarks, I will present some evidence regarding the effectiveness of these policy tools..." Among the "unconventional" policy tools mentioned by Yellen were purchases by the Federal Reserve of mortgage-backed securities and "longer-term Treasury securities." The reason to buy longer-term Treasuries was "to depress term premiums and longer-term interest rates."

Chairman Ben S. Bernanke, the leading practitioner of mendacious central-bank communications, explained the Fed's plan to buy long-term Treasury securities in the Washington Post on November 4, 2010. He claimed the purchase of these bonds would drive their prices up; hence, their yields would drop. As a consequence: "[L]ower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment." [My bold - FJS]

Bernanke could not have been more wrong. On the day his communication was published, 10-year U.S. Treasury bonds yielded 2.33%. Today, they yield, 3.4% - a rise of 46%. Mortgage rates generally mimic Treasury yields. Over the same period, the 30-year Freddie Mac fixed mortgage rate has risen from 4.10% to 4.95%. House prices are falling again. In January, 2011, median, existing houses sold for $158,000 - the lowest level since April, 2002. Since the housing bubble was so great, the renewed decline is trampling more bystanders. From David Rosenberg, head economist at Gluskin, Sheff, in Toronto, on February 7, 2011: "The [U.S.] labor force has plunged an epic 764,000 in the past two months.... People not counted in the labor force soared 753k in the past two months.... [I]t looks like real weekly earnings contracted in January for the third month in a row."

Vice Chair Yellen went on: "My reading of the evidence, which I will briefly review, is that both unconventional policy tools - the use of forward guidance [that is - her contorted communication of unconventional policy to the public] and the purchases of longer-term securities - have proven effective in easing financial conditions."

With no more discomposure than Colonel Khaddafy, the academic stated: Last August [2010], the FOMC announced that it would begin reinvesting principal payments on agency MBS and agency debt into longer-term Treasury securities.... Consequently, when the Committee announced in early November that it intended to purchase an additional $600 billion in longer-term Treasury securities, that decision was largely anticipated by financial market participants, and it occasioned only minimal market response."

Certainly, the announcement in August put money in motion, but "only minimal market response" pretends interest rates have been stable since. Her "reading [that] the purchases of longer-term securities - have proven effective in easing financial conditions," is as great a distortion as the paranoid claims by the bedraggled Libyan dictator.

This is, in fact, the position in which Yellen and the other Fed apologists now operate. As in the last furlongs of the Soviet Empire, the Federal Reserve is a paranoid body that finds every action fails, and its only hope to retain legitimacy is to establish untruths and hope the prestige of the office smothers opposition.

Hear one-hour interview of Frederick J. Sheehan by Dr. Stan Monteith from Radio Liberty - February 17, 2011