Today over at Jesse's Cafe Americain there was a truly fascinating post that covers the time period when the US government seized privately held gold in 1933 and then revalued gold (and thus devalued the dollar) in 1934. There are tons of great charts and analysis and I point you to the entire post here.
The entire post is a great read, but I took home the final summation as a great point:
"It would have been much more equitable to devalue the dollar and to change the basis for dollar/gold first, before requiring private citizens to surrender their holdings. But of course, this would have lessened the liquidity available for direct infusion into the Federal Reserve banks."
It is clear from the article that the government took away gold and revalued the dollar in a slight of hand way of providing phantom capital to banks. While such manipulations are far easier today due to the lack of a gold standard and available printing presses, it strikes one with how powerful a government can be. I would surmise the serious times of the Great Depression rendered much of the populace pretty willing to allow anything.
And today, faced with almost the same kind of impaired banks, how far is the government willing to go? If you read Ben Bernanke's speech from yesterday (Mish has a great wrap up) then I would say as far as they think they have to. Just how far that is is any one's guess at this point. Including the FED and Treasury.
I came across this news item over at Housing Doom today (via CNBC) and I instantly was both shocked and angry. In the above section I wondered just how far the government would go to try and "fix" things. It seems almost anything is on the table as the National Community Reinvestment Coalition (NCRC) has a great idea about abusing the eminent domain law:
"Taylor and the NCRC are proposing a new government program, using TARP money, whereby the government would “use its power of eminent domain to take troubled properties/loans from mortgage servicers and lenders, so large numbers of loans could be modified, writing down principal and interest rates. The loans would then be re-sold to the private market.”
That second half of TARP had better come soon as the plans for that money continue to grow like pondweed.
The Housing Doom author has 4 major concerns that I would also have:
My concerns are as follows:
1.)That rather than re-establishing a secondary market, this would kill it. Would investors really believe "Hey, we know that former purchasers of mortgages were turned into fish bait, but now it’s safe to go back in the water?" As long as the government keeps changing the rules and putting investors at a disadvantage, there will be no stability in mortgage markets.
2.)The moral hazard issue is huge here. Why buy a house you can afford when you can buy a home beyond your means and have the price adjusted to your budget? This punishes those who were more conservative in their purchases or chose to rent. This rewards the wrong people.
3.)Investors as well as homeowners would benefit from this plan on the pretext that this helps renters. Should flippers and speculators be bailed out in the name of "helping" their renters? Just how much irresponsible behavior should be financed at the expense of the responsible?
4.)Lastly, I am concerned about the fact that this would be seizing mortgages, not real property, and that this is stretching the definition of "public use".
It should serve a reminder how far and how fast the US has lost it's collective soul in the face of an economic downturn that this kind of plan has even seen the light of day. Further, that this plan has not garnered howls of opposition is further proof that things may be too far gone to be worth saving.
The last 6 days have been a rough time for the markets. Mounting job losses, poor retail sales, and even more trouble at the banks have taken about half of the rally points away from December. Again if you read Ben Bernanke's speech, you know that the FED and the Treasury are ready, willing and will pretend to be able to come to the rescue.
From the department of "totally expected" we get this report from CNBC that details the Treasury promising more TARP money that has not been approved yet to Bank of America so they can take over Merrill Lynch. You see, Merrill's balance sheet is getting so bad that not even bank of America after cash infusions from TARP I can cover the losses without going bust. From CNBC:
US Close to Giving BofA Billions More in Aid
The U.S. government is close to pledging billions of dollars of additional aid to Bank of America, the Wall Street Journal reported on Wednesday, making the bank the second to require a second round of emergency government assistance.
Bank of America is struggling to digest its January 1 acquisition of Merrill Lynch, the newspaper said, citing people familiar with the situation. The bank's shares dropped more than 5 percent after hours, reaching their lowest level since 1991.
Merrill Lynch's losses in the fourth quarter were larger than expected, which spurred Bank of America to start talking to the U.S. Treasury in mid-December, the newspaper said. The terms of the government aid are still being finalized, and details are expected to be announced with Bank of America's fourth-quarter earnings, due out January 20.
A possible deal would involve protecting Bank of America from Merrill's bad assets by capping the bank's potential losses from them.
The talks were driven by Treasury Secretary Hank Paulson, who was concerned that Bank of America would be unable to close the deal, possibly leaving Merrill Lynch without a partner.
If you need a translation of the phrase "capping losses" it means that the taxpayer will eat almost 95% of any losses that BAC may incur from this deal.
It warms the heart to see the Treasury in constant contact with banks about their inner workings. TARP II now looms large as it has already been promised all over the place. Will 350 Billion get it done? Who knows, and that is the problem.
Instead of playing this game of lending facilities, TARP cash infusions, "Bad Bank" creation, etc we need to get all the dirt out on the table and get a fair idea just how far don the rabbit hole this all goes.
What the FED and Treasury need to do is require all banks to compile a list of ALL their illiquid and troubled assets. Then the banks must submit a description of where they would stand if their holdings were valued at
1. 90% on the dollar
2. 70% on the dollar
3. 50% on the dollar
4. Worse than 30% on the dollar
At these levels we may be able to flesh out a final infusion number instead of making crap up as we go.
The FED/Treasury? and the banks are under the illusion that all of the seriously impaired assets they hold are just victims of some kind of mispricing by the markets. they think that if enough time can be bought, things will recapture some semblance of their former values. They are hoping for a miracle. Hope is a poor investment philosophy.
The US public has a right to a ballpark estimate of just how much money will have to be created to paper over this mess. I am sure that foreign creditors would like to know as well. The Wall Street types are great at making financial models so they should have no problem creating an excel spreadsheet with the breakdowns I have listed above.
The time is coming when we are going to have to get some brutal honesty out of the crooks and shysters on Wall Street and their enablers in government. I think that the money numbers that are going to be required will be astonishing. Good thing those treasury bills are selling like hotcakes, we are going to need the money!
Have a good night.