The Nose Knows

 

Something seems to happen to people once they get to Washington -- or is it before?

Yeah, they sure do like to tell porkies in that part of the country, as a commentary from TheStreet's John DeFeo,"10 Myths That Politicians Want You to Believe," will attest:

The financial system is on the brink of collapse after trillions in bad loans were issued by greedy bankers. If you were a U.S. political figure, would you:

A.) Tell everyone to suck a lemon, and (maybe) let the economy implode.

B.) Fire the bankers who made the bad loans, prosecute the guys who broke the law and guarantee a portion of the loans in a grin-and-bear-it show of good faith.

C.) Reward the bankers who made the bad loans with billions of dollars in bonuses and guarantee every loan with U.S. taxpayer money (with interest, because we borrowed the money from China).

If you answered C, then maybe you should run for office, support laws that funnel billions to insolvent companies, retire from politics and start working for one of the companies you helped bail out. Heck, that's what former Republican-senator Judd Gregg did (newly hired by Goldman Sachs).

But don't worry, the revolving door between Wall Street and government is just a "myth", and here are 10 actual myths that politicians want you to believe:

10. Quantitative Easing Helps the Economy

Make no mistake, quantitative easing is a gift to bankers and nothing else. Let's take a deeper look:

Quantitative easing is when the United States' central bank, the Federal Reserve, buys U.S. Treasury bonds.

• Treasury bonds are a future obligation of the United States, paid out with Federal Reserve notes (dollars).
• Federal Reserve notes are a current obligation of the United States, redeemable for goods and services.

If the Federal Reserve purchases bonds directly from the United States Treasury, they are electronically creating dollars (current obligations) in exchange for future obligations. This is inflationary if the amount of obligations (money) is increasing faster that the amount of capital (goods, services, products and ideas). But the Federal Reserve doesn't buy bonds from the Treasury, it buys them from "primary dealers."

Primary dealers are a network of banks (including Goldman Sachs, JPMorgan Chase and Citigroup) that are obligated to buy bonds from the U.S. and serve as a trading partner with the Federal Reserve. So Goldman Sachs can buy a bond from the Treasury on Monday and sell it to the Federal Reserve on Tuesday (at a profit) -- the blog ZeroHedge has named this game "Flip That Bond."

Bottom Line: If Americans weren't already saddled in debt, quantitative easing might work. But as things stand, the Federal Reserve is giving bankers risk-free trading profits and causing food and gas prices to surge (making it even harder for Americans to get out of debt).

9. Republicans Are Fiscal Conservatives

Since 1968, the U.S. national debt accelerated fastest under President Ronald Reagan until President Obama claimed this distinction. The national debt does not take inflation into account, so perhaps we should look at inflation-adjusted deficits instead. According to research by Dave Manuel,

From 1946-2010:

Democratic President

• Total Years: 29
• Average Inflation Adjusted Deficit: $150.73 billion

Republican President

• Total Years: 36
• Average Inflation Adjusted Deficit: $202.28 billion

A president is not solely responsible for the nation's deficit, but he does sign the budget into law. And Republicans have put their John Hancock on some really short-sighted budgets while preaching conservatism.

8. President Obama Is an Enemy of Wall Street

When he was on the campaign trail, then-candidate Obama had some tough words for those who repealed Glass-Steagall (the law that prevented banks from acting like hedge funds), calling the process of deregulating banks a "legal but corrupt bargain." But get a load of this:

• The two men who served as principal negotiators for banking deregulation: Gene Sperling and Larry Summers.
• The two men who President Obama appointed to become his top economic advisers: Gene Sperling and Larry Summers.
• Two guys who happen to be paid millions of dollars in consulting and speaking fees by "too big to fail" banks: Gene Sperling and Larry Summers.

President Obama is the best friend Wall Street could have.

7. The Financial System Is Safer Today Than in 2008

The Federal Reserve, which neglected to use regulatory powers to rein in the last crisis, has been awarded more regulatory powers. The majority of "too big to fail" banks are even bigger. And while the government is guaranteeing fewer mortgages through Fannie Mae(FNMA_) and Freddie Mac(FMCC_), it's made up the difference by guaranteeing mortgages through the Federal Housing Authority. "Good as cash" money market funds are full of mortgage-backed securities backed by the government (who needs to borrow money to back them up).

Meanwhile, high-frequency trading is alive and well and the causes of the Flash Crash have not been addressed. In fact, the solution of stock-specific "circuit breakers" (the percentage a stock can plummet before it stops trading) will guarantee future crashes. Here's why:

Having a defined breaking point provides high-frequency traders with an arbitrage window: If they can create an event that causes a stock to temporarily plummet, they can use "sweep to fill" orders (a special type of order used to buy stock rapidly, in small increments) to buy the stock back up to fair value. The size of the circuit breaker limits the size of the profit, but this removes the uncertainty of what trades will be honored or killed.

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