Here’s where things stood as of last night as Greek officials deliberated:

Understandably, Reuters appears to be confused by what’s going on in this very fluid situation. Between the time that this URL was copied for the links post a few minutes ago until the time it was posted, the title changed from “Greece heads to Brussels empty-handed” to “Greek political leaders agree on bailout reforms: sources”, however, they were careful not to use the word “imminent” in the updated story.

At issue is the Fed’s continuing policy of bond-buying. While the central bank has stopped expanding its balance sheet with new asset purchases, it is engaged in a plan to sell short-dated Treasury bonds and replace them with a like amount of long-dated government debt. The result? Ten-year Treasury borrowing rates are around historic lows, and with them, mortgage rates.

For Bernanke, this is by design, not accident. He told Toomey a significant aim of the Fed is to gobble up enough risk-free Treasury debt so that investors are forced into riskier investments that will in principle generate better levels of growth.

“We don’t want to go too far,” Bernanke told the committee. He said the Fed was “very attentive” to signs that its stimulus was in the process of generating imbalances, and added the central bank had “greatly expanded” its surveillance of financial markets, in a bid not too be caught off guard.
…
“The effects of Fed policy, independent of all the other factors, on Treasury rates [are] modest,” Bernanke said. The bigger problem is investor confidence in future government borrowing. “Rates will rise eventually, and if investors were to lose confidence in U.S. federal fiscal policy, there is nothing the Fed can do to stop those rates from rising”.

If memory serves, it was Ken Rogoff (of This Time is Different fame) who observed that, throughout history, there is virtually no warning for when the bond market turns on a nation’s sovereign debt (so much for the Fed’s “attentiveness”) and, when combined with Bernanke’s warning above that there’s little they’ll be able to do under those circumstances, this sets the stage for one monster U.S. sovereign credit crisis somewhere down the road.

And optimistic ‘Mericans tend to borrow and spend, more of that being confirmed in yesterday’s report on consumer credit that showed another monthly gain for outstanding credit card balances after declining steadily for years after the 2008 financial creisis and recession. Jake has details on that in this item at EconomPicData.

An agreement has been “imminent” for two weeks now on what are believed to be “very large haircuts” on Greek debt  that seem to get bigger with each day that goes by without a deal in what, so far, appears to be a very successful “Blazing Saddles” style of negotiating.

If you were to extend the chart to the left, you’d see that bank assets rose modestly for decades while the many economic/financial imbalances were being built up as the end of “The Great Moderation” signaled the beginning of “The Great Central Bank Intervention”.

In all, there are a dozen or so more images in this depressingly good collection of charts(.pdf) at Cumberland that will make you wonder anew where this is all headed.

Note that you’ll have to read fast because you can’t slow this down, despite the appearance of those little buttons in the lower right. If you’d like to view these at your own pace, just scroll to the bottom of this Economist story about Greece and the euro.

Roach says that, along with many other Western central bankers, Fed Chief Ben Bernanke is “betting the ranch on open-ended QE and zero interest rates” that, throughout history, have only been used as emergency measures, not long-term policy.

Of course, Japan is the unquestioned leader in government debt – about double that of second place Italy – but, flipping through the tabs of this interactive graphic reveals that, overall, the U.K. is the worst of the lot … it’s a good thing they can print their own money.

If not for the swath of S&P credit downgrades in recent days, there would probably be even more sore arms in Europe from everyone patting each other on the back, that is, after a $500+ billion program of back-door money printing seems to have produced the desired effects on the red and yellow lines above.

Instead, relying on the many poor souls in the financial media who had to slog through transcripts for all eight meeting that year, we find that Treasury Secretary Tim Geithner (New York Fed President at the time) appears to have been the most misguided as to the legacy of the outgoing Fed chief when he noted:

I’d like the record to show that I think you’re pretty terrific, too. [Laughter] And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative. [Laughter]

Surely you can understand better now…

More confirmation of the Peter Principle and that economists are particularly ill-suited to run an economy were provided in this assessment of the Greenspan tenure at the Fed by San Francisco Fed President Janet Yellen who, since, has been promoted to Fed Vice Chair:

Needless to say, it’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. And if I might torture a simile, I would say, Mr. Chairman, that the situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot. [Laughter]

Again with the laughter.

About the only one who seemed to have a clue about what was going on back in 2006 was Fed Governor Susan Bies who at that very same January meeting noted the following:

The one area—and I want to second Dave Stockton’s remark—of main concern is the housing market. Let me talk about it a little differently from some previous comments today. When we look at the aggregate levels of debt that households have and relative prices, one of the things as an old lender I worry about is the ability to service the debt and the discretionary spending that households have. While 80 percent of mortgages are fixed rate, 20 percent are variable. Starting in 2002, we saw a jump in ARMs, taking advantage of the very steep yield curve at the time. We now are in a period when not only the fancy option ARMs, the exotic products of the past eighteen months, but also the 3/1 ARMs and the five-year ARMS that became very popular in 2002 and 2003 are repricing.

If interest rates just hold where they are right now, we estimate that the monthly debt service cost is going to go up by at least 50 percent on that 20 percent of mortgage portfolios. If you look at the Greenbook, you’ll notice that the financial obligation ratio rose quite substantially in the past six months. It is now back to the peaks of 2001 and 2002, and we have a lot of mortgages still to reprice. We also know that some of these exotic mortgages don’t amortize, but they will kick in and start amortization and that will also pull cash out of discretionary spending.

Months later, in the May transcipt(.pdf), Ms. Bies again warned about the housing market:

I just wonder about the consumer’s ability to absorb shocks. The buildup of home equity and the ability to borrow against it have helped individual homeowners when they have had layoffs, medical problems, divorces—all the things in life that create month-to-month problems for cash flow. With the growth of negative amortization, home equity is not being built up anymore. Negative amortization clearly helps consumer spending because consumers, in effect, have a smaller amount of their take-home pay that has to go to the mortgage payment every month, and so it is available to be spent elsewhere. It is probably a more pernicious type of home equity withdrawal because you don’t take an action to withdraw it. Now it is planned that you will have negative amortization. It clearly changes the way we look at the role of savings as a precautionary balance to get the consumer through bad times, and it also has long-run implications regarding the importance of asset values vis-à-vis default rates both for the banking sector and for the household sector.

So the growing ingenuity in the mortgage sector is making me more nervous as we go forward in this cycle, rather than comforted that we have learned a lesson. Some of the models the banks are using clearly were built in times of falling interest rates and rising housing prices. It is not clear what may happen when either of those trends turns around.

Finally, in the December transcript(.pdf), Bies warns about subprime lending:

One thing I’m hearing more from some folks who have been investing in mortgage-backed securities and maybe in some CDOs (collateralized debt obligations), where they’ve been tranched into riskier positions through economic leverage, is the realization that a lot of the private mortgages that have been securitized during the past few years really do have much more risk than the investors have been focusing on. I’m hearing this from folks who understand that the quality of what goes into those pools varies tremendously when you don’t have the Fannie Mae and Freddie Mac framework for the underwriting.

Of course, none of these concerns made any difference, most Fed members likely content to continue on with the Greenspan policy of “mopping up” after bubbles, should the housing market prove to be just that.