Forward Guidance | James Howard Kunstler

James Howard Kunstler -- World News Trust

Feb. 17, 2014

“Guidance” is the new organizing credo of U.S. financial life with Janet Yellen officially installed as the new Wizard of Oz at the Federal Reserve.

Guidance refers to periodic cryptic utterances made by the Wizard in staged appearances before congress or in the “minutes” (i.e. transcribed notes) from meetings of the Fed’s Open Market Committee. The cryptic utterances don’t necessarily have any bearing on reality, but are issued with the hope that they will be mistaken for it, especially by managers in the financial markets where assets are priced and traded.

One such infamous moment of guidance was Ben Bernanke’s May 2007 statement saying that percolating sub-prime mortgage problems were “contained.” If that was a signal for anything it was a green light for banks not yet deemed too big to fail to continue constructing swindles called collateralized debt obligations (CDOs), which were bundles of already bundled mortgage backed securities based on janky mortgages for million-dollar houses owned by Las Vegas busboys, and the like, that had no prospect of ever being paid. The banks kept at it sedulously for another year, and then in September of 2008 this stream of combustible financial garbage blew up the banking system. Nobody at the Fed saw it coming, least of all Janet Yellen.

And then the banking system was “rescued” by the “program” (free money bailouts) enacted by congress called TARP, while the Fed set up a carry trade system that would enable the floundering (now) too big to fail banks to convert massive volumes of zero-interest no-risk loans into a dependable revenue flow to “build reserves,” that is, allow them to appear solvent while engaging in new dodges, swindles, and manipulations of markets, currencies and interest rates.

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