Tyler Durden: 

Everywhere you look these days, it seems that ZIRP, or the Fed's Zero Interest Rate Policy, is the panacea to all the world's problems. In fact, ask any tenured economy Ph.D. what inflation is and you will get a stare down, be told you are a moron, that banks need to print more, more, more and that we are really roiling indeflation, with some latent mumblings about buying their economics textbook for the inflationary price of $124.95. Everywhere, that is except the Fed itself. Because in an extremely ironic twist, it is none other than the San Francisco Fed, which operates the "Be Fed chairman for a day" simulation, where you try to keep both unemployment and inflation within the "price stabeeleetee" barriers, that reveals the reality of ZIRP. The laughter really begins when one recreates precisely what the Fed is doing: namely the policy of Zero Interest Rates, now well in its third year, that things take a turn for the surreal. We challenge any reader to play the Fed simulation game, and to do what Bernanke has done: namely lock the Fed Funds rate at the legal minimum: between 0.00% and 0.25%. In our personal experience, we were dismissed as Fed Chairman after annual inflation literally went off the charts and hit 38.36% following 4 years of ZIRP. And according tothe Fed, inflation would now, 2.5 years into ZIRP, realistically be running at about 17%. Which incidentally isexactly where it is, at least for those who have not mutated sufficiently to be able to metabolize iPads and fly to and from work using their own pair of wings. Of course, every hyperinflation has a silver lining: US unemployment will be just 1.5%. Granted everyone will be making pitchforks and rope, but they would be employed.

I first heard about “Operation Twist”—the Fed's latest knob-twisting and deck-chair-on-the-Titanic-rearranging effort—from James Rickards back in August. Still, I never thought “the Bernanke” would actually call the initiative by this name, a Chubby Checker reference from when this kind of thing was last tried.

“Quantitative Easing 3” had apparently become a non-starter: “money-printing” (even though the Fed wasn't doing exactly that...) is now a Republican talking-point and political liability—and it has also clearly failed. Unlike QE, “Twist” doesn't involve an increase in purchases, but a selling off short-term debt and buying up long-term debt. The ostensible purpose is to lower long-term interest rates, which would allow middle-class voters to refinance their 30-year mortgages—and thus be happy and pacified for the 2012 election. (Perhaps the Bernanke even thinks he can re-inflate the housing market...)

One could, of course, look at this from another perspective, and see that the Bernanke is not so much leading interest rates as following them. The Fed is, in a sense, riding the 30-year tail wind of the bond market towards zero.

But I usually look at things from a different perspective altogether—namely, how the Central Bank will manage Washington's unfathomable debt mountain. Actually paying off some 100 trillion in Treasuries and entitlement liabilities—and I think these debts will be paid, at least nominally—entails massive inflation. As I discussed in depth a year ago, the Fed can get away with this by locking the world into long-term debt—the kind of debt that's difficult to get out of and which the Fed can more easily inflate into oblivion. In this way, the Bernanke is leading the charge into low-interest, long-term paper. Indeed, the Fed is set up as the biggest sucker.

This particular controversy, which is ironically transpiring in the former capital of the Confederacy, may well symbolize the present state of Western Civilization as much as anything fostered by the forces of PC to date. A writer of absurdist fiction who wished to illustrate the madhouse that modern society has become would have a hard time thinking up something this good. The piously politically correct folks at the Federal Reserve may have destroyed the economy, but at least they are inclusive. Un-effing-believable.

The Richmond Federal Reserve Bank's attempt to show inclusiveness in the workplace by flying the rainbow flag outside its building has reignited a divisive gay-rights debate.

Del. Robert G. Marshall, R-Prince William, is calling on the bank to remove the flag, terming its presence "a serious deficiency of judgment by your organization, one not limited to social issues."

In a letter to Richmond Fed President Jeffrey M. Lacker, Marshall says the homosexual behavior "celebrated" by the bank "undermines the American economy."

"What does flying the homosexual flag, or any other similar display, have to do with your central banking mission under the Federal Reserve Act passed by Congress?" writes Marshall, one of the General Assembly's most conservative members.

The Fed, which deems itself an independent entity within the federal government, placed the flag at the request of PRISM, a group of gay, lesbian, bisexual and transgender bank employees, to coincide with Lesbian, Gay, Bisexual and Transgender Pride Month.

Jim Strader, a bank spokesman, said the flag was raised to fly for the month of June, and that there are no plans to change the timetable. It hangs under the American flag on a pole in front of the building.

"We are flying the pride flag as an example of our commitment to the values of acceptance and inclusion," Sally Green, the bank's first vice president and chief operating officer, said earlier this week.

Opponents in the battle over gay-rights expansion in the state staked out familiar positions, with the conservative Family Foundation saying it's "disappointing" to see the bank participate in the "celebration."

"At The Family Foundation, we will simply choose to use this flag, like the view of Mr. Jefferson's Capitol, as motivation for the work that lies ahead," said Victoria Cobb, president of organization.

Equality Virginia, a Richmond-based gay-rights group, threw its support behind the Fed's decision on Friday, criticizing Marshall and the Family Foundation as "Virginia's self-styled morality police."

"The Federal Reserve Bank of Richmond should receive accolades for its decision to recognize and celebrate its GLBT employees, customers and vendors during Pride month," said EV's Executive Director James Parrish.

Parrish took issue with the Family Foundation's claim that state residents spoke on gay rights when they voted 57 to 43 percent in 2006 in favor of the state's marriage amendment. He argues that people's attitudes on gay-rights issues have evolved and pointed to more recent polling.

The Fed is "a private business and should be able to make its own personnel and corporate policy decisions without Bob Marshall's guidance or the Family Foundation's approval," he said.

Marshall wrote in the letter to Lacker that homosexual behavior is a Class 6 felony in Virginia, referring to the state's sodomy law. That statute remains on the books despite a U.S. Supreme Court ruling that declared unconstitutional a Texas law that prohibited private, sexual acts between consenting same-sex adults.

Brian Gottstein, spokesman for the Virginia Attorney General's Office, said its attorneys "have not heard of a scenario in recent decades, even before the decision in Lawrence v. Texas, where a consenting couple acting in private was prosecuted."

That's consistent with the experience of Richmond Commonwealth's Attorney Michael N. Herring, who said "To my knowledge no one enforces consensual sodomy as a result of [Lawrence v. Texas]."

George W. Bush spent hundreds of billions of dollars, over 4,000 American dead and nearly 32,000 wounded, all to make Iraq a democracy.

Then Ben Bernanke comes along and prints a few trillion, causes world food prices to spike, and all of a sudden we've got revolutions all over the Middle East, revolutions which have at least as much a chance, maybe better, at making these countries as democratic as Iraq (and Afghanistan) currently are. A dictatorship which looked to last nearly forever, Gaddafi's, is on the ropes and headed for a fall, after years of American and especially European sucking up to it, all because of Big Ben.

Maybe when Bush and the neocons got their grand idea to invade the Middle East and turn the Muslim countries into democracies, they should instead have just fired Greenspan and appointed Helicopter Ben Bernanke. Though he's clueless as to the unintended consequences of his money printing, he's inadvertently spreading democracy, and so far at no cost in American lives.

Graham Summers on Ben Bernanke:

Bernanke is printing money and funneling it into the Wall Street banks for one reason and one reason only. That reason is: DERIVATIVES.

According to the Office of the Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activities for the Second Quarter 2010 (most recent), the notional value of derivatives held by U.S. commercial banks is around $223.4 TRILLION.

Five banks account for 95% of this. Can you guess which five?

Looks a lot like a list of the banks that Ben Bernanke has focused on bailing out/ backstopping/ funneling cash since the Financial Crisis began doesn’t it? When you consider the insane level of risk exposure here, you can see why the TRILLIONS he’s funneled into these institutions has failed to bring them even to pre-Lehman bankruptcy levels.

Ben Bernanke is a stooge and a fraud, but he is at least partially honest in his explanations of why he wants to keep printing money. The reason is to try to keep interest rates low. Granted he’s failing miserably at this, but at least he understands the goal.

Of course, Bernanke tells the public and Congress that the reason we need low interest rates is to support housing prices. He doesn’t mention that $188 TRILLION of the $223 TRILLION in notional value of derivatives sitting on the Big Banks’ balance sheets is related to interest rates.

Yes, $188 TRILLION. That’s thirteen times the US’s entire GDP and nearly four times WORLD GDP.

Now, of course, not ALL of this money is “at risk,” since the same derivatives can be traded/ spread out dozens of ways by different banks as a means of dispersing risk.

However, given the amount of money at stake, if even 4% of this money is “at risk” and 10% of that 4% goes wrong, you’ve wiped out ALL of the equity at the top five banks.

Put another way, Bank of America, JP Morgan, Goldman, and Citibank would CEASE to exist.

Viewing scenes of mass riots, looting, blood in the streets, the torching of government buildings, and the Egyptian army opening fire on citizens, most mainstream commentators have discussed the situation in Cairo in the only way they know how—it’s all about “democracy.”

Summed up briefly, Egyptian President Hosni Mubarak is a “brutal dictator” and is finally getting his comeuppance. The solution is for Egypt to hold elections… or rather, hold elections that the Muslim Brotherhood wouldn’t win, for “democracy” means voting in pro-Israel, pro-Washington, and pro-market representatives. At any rate, once Egyptian Twitter is turned back on, liberal utopia will ensue. 

More nuanced commentators have noted Washington’s incoherent and frivolous policy of trying to unleash democracy in the Middle East—and finaning such forces—while at the same time giving massive foreign-aid outlays (1.5 billion) to Mubarak’s Egypt in the hope of stability. (It seems that even the most devout neocon, neo-liberal, and globalist recognizes that the true voice of the demos in the Middle East is something close to Islamism.)

Very few have asked the all-important question of “Why now?”—that is, what caused, or at least sparked, this violent uprising, as well as similar affairs in Tunisia, Algeria, and Yemen? The Arab Republic of Egypt had been chugging right along under Mubarak’s dictatorship for some 30 years; indeed, Egypt experienced steady GDP growth of late, putting the lie to the idea that democracy is correlated with economic progress. So again, why now? What has changed? Did Egyptians simply wake up last Thursday morning and collectively decide that they’ve had enough and now want to vote?

[ht: LRC]

Economic Collapse points out that Bernanke once swore before Congress that the Fed would not monetize the debt -- yet with QE2, this is exactly what he's doing. 

Also in the blog, EC includes a quote from Peter Schiff that leads me to believe that I was overanalyzing matters in my last piece in stating that QE policy is "inherently self-contradictory." The fact is, Bernanke is buying Treasuries because the Fed can't find any other buyers. Writes Schiff, 

At the end of the day, all this deflation talk is a red herring. The true purpose of QE 2 is to disguise the decreasing ability of the Treasury to finance its debts. As global demand for dollar-denominated debt falls, the Fed is looking for an excuse to pick up the slack. By announcing QE 2, it can monetize government debt without the markets perceiving a funding problem.