The Fed Officially Kicks Off the Next Recession



March 12, 2006

The Fed Officially Kicks Off the Next Recession
by Robert McHugh

It is official. A recession is coming. How do I know? Because this week
new Fed Chairman Ben Bernanke gave an official warning to bankers about
commercial real estate loans. That is always the kickoff to a recession.
It is the starter's gun, the national anthem before a ballgame, the
opening hymn at a church service. Here is how it works. The Fed has three
official tools to control the money supply: Setting reserve requirements
(telling banks how much of their deposits they cannot lend. The higher the
reserve requirements, the less loans, the less money creation by the
economy). The second tool is open market operations. Here they set the
amount of money in the system by buying or selling securities. Third is
setting the discount rate, the rate of interest banks must pay to borrow
money at the Fed. Theoretically, the higher the rate, the less money banks
will borrow, the less they have to lend, and the less money that is
created by the banking system.

However, there is a fourth tool, a stealth tool, which has more power and
impact than the other three. It is called the Federal Reserve Bank
examiner. He/she is the person who goes into a bank about once a year and
decides which loans are good and which are bad. Based upon their holy
edict, a loan is classified in one of several categories which determines
how much money the banks must set aside from earnings to reserve for
possible losses. It is completely an estimation game. So the rules can and
do change, based upon the whims of the examiner, taking his marching
orders from the Fed Chairman. If the Fed wants the money supply to expand,
then Fed examiners come in with reasonable standards for review of loans,
and classify those loans with a general leaning that they will be repaid
according to terms. Thus banks do not have to reserve as much for possible
estimated losses and are in effect not discouraged from making more loans.
When the Fed wants money supply to grow, aggressive lending standards
often get passing grades. That's when you business people will see your
friendly bank commercial lender more often, jawing you into that expansion
project you've been thinking about, inviting you to golf outings and ball
games. They want more loans. They need your expansion project.

However, once the Fed Chair sounds the alarm about commercial real estate
loans, it starts an entire chain of events that ultimately and
unequivocally leads to economic recession. Here's what happens. Out of the
blue (that seems to be a favorite modus operandi for all Fed operations)
those friendly back-slapping Federal Reserve examiners (not really, they
are never overly nice -- okay I've met two or three out of a pool of three
hundred -- Mike, Eddie, Eric, you know who you are and I know you read my
stuff) show up with a scowl that droops like the golden arch. They ask for
the files, a table, an outlet, a coffee pot, and the key to the little
boys and girls room. About two days after they arrive, the banker knows
something has changed, something serious, and he gets this knot in the pit
of his stomach that will last for about three years. Examiner Margo asks
for a meeting with banker Joe. She brings her supervisor to raise the fear
level of the meeting. The Bank's President, Joe, brings his top commercial
lender for protection of his fanny, and that lender brings his junior
lender who will ultimately be the sacrificial lamb and get the ax should
things blow up.

<more...>

http://www.safehaven.com/article-4759.htm



We'll all soon be working for the likes of this fellow:

http://www.mentalsewage.com/loser/img/trufflewasp.jpg

http://www.garotasquedizemni.com/archives/grimace.jpg

.

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