Thursday, April 3, 2008

Can Confidence in the System be Based on, Well, Confidence?

Sorry for the lack of a post last night. I had some Internet connectivity issues. I hate wireless Internet connections. They suck. I prefer real telephones (no cells), a real stereo (no ipod) and a real hard wire that brings in the Internet (no wireless). Anyways, one does what one can.

Homebuilders Get First of Many Helpful Hands
One of my major issues with this whole FED mediated activity to prop up , sorry "guarantee stability", prices and markets is that the bailout mentality has now been fully embraced. Moral hazard is so last month! Case in point, a provision that was vehemently opposed when the Stimulus Bill was passed a little while back has now been pushed through quickly without problems:
Homebuilders get breaks from Congress
By ALAN ZIBEL, AP Business Writer Thu Apr 3, 11:32 AM ET
WASHINGTON - Homebuilders and the mortgage industry are emerging as big victors in a bipartisan agreement reached by Senate leaders on legislation designed to limit the housing crisis.
The $15 billion Foreclosure Prevention Act of 2008, expected to be debated Thursday afternoon on the Senate floor, is drawing fire from critics who say it would do little to actually prevent foreclosures. The bill contains a $6 billion emergency tax break that would let companies use losses from 2008 and 2009 to offset profits earned over the previous four years, instead of the usual two-year time frame.
That's good news for big homebuilders such as KB Home and Pulte Homes Inc., which have been saddled with massive losses over the past year.
Jerry Howard, chief executive of the National Association of Home Builders, said in an interview that the tax break is "very important to the building community." It will keep many small homebuilders out of bankruptcy, he said, and will prevent large builders from having to liquidate assets.
Other big beneficiaries would be Wall Street banks such as Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley. In fact, any company now struggling after years of healthy profits that pumped up their tax bills could benefit.

"This is a focused, modest package that will get tremendous bang for the buck in terms of improving the housing crisis," Sen. Charles Schumer, D-N.Y. said in a statement Wednesday. "For sure, there is more to be done. But given the constraints of reaching a bipartisan agreement, this is a worthwhile step."

What a sweet deal! The same fools that brought us overbuilding, acted as middlemen for bad loan policies, and pumped the housing bubble for record profits can now use their well deserved losses to get tax breaks! Seriously, things are reaching a point that almost anything that sounds like a sick joke turns out to be a fact.

So how long until Ford and GM are deemed "too important to fail" and massive taxpayer money is committed to fund their money losing operations? The floodgates are open now for bailouts. Even Diana Olick who writes the good CNBC Realty Check series has been infected with bail out mania. Here is a part of her post today on why she is in favor of the homebuilder tax breaks:
There are a slew of top-brass government types on the Hill today defending their bailout of Bear one of the big investment houses that fuelled the subprime craze by eating up all kinds of horrid mortgage products that were doomed to fail.
Bear got greedy and Bear got the bailout. And everyone and their brother, from the Treasury Secretary to FHA to Fannie to Freddie are jumping over each other to bail out troubled borrowers, many of whom frankly should have known better than to get into mortgages that were WAY over their heads. They were greedy, and they’re getting the bailout.

So why not the builders? They’re no more to blame than anyone else in this mess, and therefore they should get some help as well.
These are the companies that build everyone’s biggest investment, and I think we need to invest a bit in them, even if they did get on the boom-bandwagon like everyone else. Unless of course you’d rather see your new three-bedroom three-bath colonial shipped over in pieces from China.


Hard to argue with her logic. If everyone else is getting a bail out, then why not the homies? Why not indeed! For the record Diana, China can never build our homes because lead paint has been illegal here for use in homes for some time! HAHAHA! Vote in the new poll on who else should get bailed out.

Can Confidence in the System be Based on, Well, Confidence?
There was so much to go over with Bernanke's testimony over the past couple of days. There are plenty of transcripts and plenty of blog coverage of many pertinent comments. I want to share a few thoughts on a general feeling I got from Bennie's answers and what that means going forward.

What has jumped out at me after review of testimony is that the FED is morbidly obsessed with stock markets. There can no longer be argument about whether the FED considers stock and other asset prices when forming policy. They do. The big rush to push through the BSC calamity was to preempt a horrible stock market result in the Asian markets. This possibility was the driving force behind the deal. A horrid start in Asia would likely have been mirrored in the US markets. Was this the "systemic crisis" the FED wanted to avoid? A perhaps 1000 point down day for the DOW? Would the world have ended? We will never know.

Another major theme that Bernanke continued to hammer at was that confidence in the system was a paramount necessity. The FED head never made a quantitative assessment of housing, derivatives, or mortgage backed securities. Bernanke made it clear that the system is basically based on fictional values assigned to various investment vehicles, and the "value" of it all is rooted not in a realistic actual price. As long as NOBODY TAKES MONEY OUT, everything is fine. This is a momentous admission.

Bernanke made it clear (at least to me) that only accelerating debt and credit can keep the financial system running. Any attempt to do a "run on a bank" to get hold of actual payouts and assets will cause the instant insolvency of most banks, and hence a cascade of problems. Pretty scary stuff, and yet I have not seen it picked up anywhere else. It seems that confidence in the system is based solely on confidence in the system! Round about logic.

One last observation is that the FED is operating right now very reactively. They were unable to see any of this beforehand, and are making policy on the run here. The rushed BSC deal stinks to high heaven, and Bernanke was unable to answer questions concerning the collateral used by BSC that the FED has. troubling indeed.

Important Reading Material
While I know my blog is the only source of information you will ever need, I would like to highly recommend two articles that stand out as truly stellar works that command your attention. No excuse not to read these two articles;
Mish has a killer post, and it is a must read:
http://globaleconomicanalysis.blogspot.com/2008/04/fed-uncertainty-principle.html
Easily the most original thinking I have seen in a long time. Great work.

Mr. Practical at Minyanville is always on fire and his last two are standouts:
http://www.minyanville.com/articles/C-LEH-banks-dollars-economy-debt/index/a/16528

http://www.minyanville.com/articles/db-jpm-LEH-BSC-UBS-futures/index/a/16547
Wonderful observations.

Leave Friday rock and/or movie blogging ideas in the comment section.

Have a good night.

6 comments:

Anonymous said...

GYSC

Our goverment is bought and paid for that's why Denninger
can send all the petitions, faxes, e-mails, letters, and phone calls he want's it won't make a damn bit of difference.

February 12, 2008 - Brian Catalde, president of the National Association of Home Builders

“Today, the National Association of Home Builders’ Political Action Committee, BUILD-PAC, and its 150-member Board of Trustees representing all 50 states, agreed to cease all approvals and disbursements of BUILD-PAC contributions to federal congressional candidates and their PACs until further notice.


http://www.nahb.org/news_details.aspx?sectionID=0&newsID=6210

The cake is rotten.

Kevin

Anonymous said...

Music idea...in honor of 15-April I'm pulling my paperwork together to the background sound of Pink Floyd's cash registers and money as the root of all evil and the traditional "Taxman".

watchtower said...

I've been thinking, I bought a crapload of silver in the ninetie's and wound up selling it before the bull market in PM's took off. Can I get a bailout for something like that?

OK, now for some suggestions for "Friday Night Rock Blogging"

1. Night Ranger's "Rock in America" (because you can still rock in America...for now)

2. Def Leppard's "Animal" (because it was one of my wifes faves when she was a teenager)


Movie idea: "A Man for All Seasons" to remind us there once was a time when men stood by their principals...to the death.

Anonymous said...

Hey all,

Watched most of the free CNBC streams today..... what a house of cards we all live in? It's like Jenga:

hasbro.com/games/family-games/jenga

A simple game that's been around for years. Keep building up as you pull blocks out of the bottom. Well guys it's been going up and up and up for years now but there (AINT) shiza left on the bottom to pull from. So when in doubt break the rules and crack open a new box and keep stacking them up forever. At what point will the value of the game even be worthless?(pointless?)

I might also mention a good listen here. Yeah it's out there but just listen to Mr. Ventura's new book title:

prisonplanet.com/audio/020408ventura.mp3

Watchtower: I am sad to hear you got of the silver run so early. I am going to be taking possession of some bars here next week. Glad there was a dip when I could get FRN to buy it with.

Also to all that care. I have been offered my old security guard job back at a supervisory role so more money and easy work is on the way.

Thanks for all the support.

G

PS: Keep in mind that oil is still holding over $100/bl.

watchtower said...

G

I did buy back in, just not at the bottom:(

Glad to hear that your going back to work, and an advancement with more pay sounds like icing on the cake, congratulations!

Anonymous said...

Good deal G don't quit looking for what you really want it's out there.

Kevin