Bailouts are Now Option One

The muggy air has arrived here in Massachusetts. Muggy is the hardest sleeping weather as the heavy air makes you warm , but the air temp gets cool at night. It is a "conundrum" to borrow a FED phrase.

A Word About Health Care
Up front, I work for a pharmaceutical company and my mother is a nurse so whatever bias comes from that you should know up front.

That said I have a few thoughts regarding the all out rush to radically change the health care system. I share them here for discussion, but not in any political sense. This issue has become too politicised and that is why no one can see straight about it.

My take:
-In my admittedly small sphere of "people I know" nobody is without health care and all have always had the best care available at a minimum wait.
-There is NO WAY to expand "free" health care to 50 million people without it 1) costing you more and 2) devaluing service. I cannot be more clear on this.
-Once in place, the costs will be 2-3 times higher than anticipated, as all government programs become. Add to this that when the private insurers are gone and outlawed there will be NO WAY to take down the government system, even if it is a total failure.
-There is no "free" here either, no matter what is said tonight. You will pay, oh you will pay. Higher taxes, higher fees, and plenty of "one time charges".
-Health care is not a right, it is a choice. While some prefer plasma TV's, full cable channel menu, and dining out 4 times a week on a minimum wage salary, others pay their premiums and budget out extra cash for the unknown. Once again the prudent must pay for the imprudent.
-Once started, the discussion on "who gets the care" will be nasty and it will be heavily on the political. We all know smokers must pay higher rates. We know old people will pay higher rates. Who next? A soda tax is already been discussed, but I drink diet soda which has no obesity correlation. Will fat people pay more? How about rock climbers and joggers who fill the orthopedic units across the country with breaks, sprains, and joint damage? Who decides? What are the criteria?

Clearly the system we have is not the best possible, but I would argue it works for me and I want it as is. There are just too many issues to overcome and giving the government more control over our lives, in light of their spectacular failure across the spectrum in the last year, is not a good idea. My 2 cents.

Dollar Discussion
On Monday I posted some dollar weakness related ideas. Tonight The Housing Time Bomb fleshes out some more thoughts on dollar weakness:
It's Dollar Day!

...the dollar has pretty much collapsed since the market started rallying in March. I find this to be an interesting phenomenon.

Traditional thinking would tell you that this makes no sense:

Back when the world made sense, a strong currency was the base of any country with a strong economy. This makes the recent rise in equities even more suspect in terms of fundamentals in my view. If things are so rosy then why isn't the dollar strengthening?

Supposedly Europe is in much worse shape then we are. If this is the case then why the COLLAPSE in the dollar versus the Euro?

The note about the Euro strength was a point I had missed. An interesting observation. More:

The only thing that's saved the dollar thus far is the FCB's have continued to store the majority of their reserves into treasury holdings . They essentially blow themselves up if they bail on the dollar because of their treasury exposure.

What we need to start realizing is this doesn't HAVE to be the case. China appears to be gobbling up hard assets all over the place. Other FCB's continue to demand alternatives to the US dollar. I am not sure we will ever find one, but that doesn't mean the dollar can't collapse as the world diversifies its assets.

You need to ask yourself the following:

Why is oil rallying when there are tankers upon tankers filled with oil with nowhere to go as a result of no demand? Why is gold not collapsing in price like other hard assets like housing?

Lets take it a little further: Why is the DOW rallying like mad as the economy continues to struggle?

Great additions to the discussion.

Read the entire piece for some additional conclusions.

I would only add to the "just because something has never happened, does not mean it cannot happen" meme. Everyone expects the dollar to stay great even in the face of wild spending and collapsing revenue. The world always seeks out the dollar for safety is the argument. Ok, I would agree. But that implies the US will always and forever be worthy of such a safety flight. Well, that may not always be the case. We see China making a real efforts to settle in Yuan as well as acquire hard assets in bulk.

Bailouts are Now Option One
There has been extensive coverage of the impending commercial real estate problems. Well, there has been great coverage if you do not read the mainstream media or listen to CNBC. If you read this blog and others like it (try Zero Intelligence, they are pretty good!) then you are well aware that there is a sea of commercial structures to match the flood of residential empty homes across the nation.

This is of course, bad. Add to this that the concentration of bad CRE loans resides in many smaller regional banks (not "to big to fail" allegedly) because those small fish could not compete with the big boys in residential loans and you have a real mess on the way.

Never fear my dear readers. The FED is well aware of the issue and has already put their number one option on the table. Care to guess what it is going to be?

If you guessed managed loan defaults, bank closures, bondholder haircuts, and a reduction in mini malls across the American Southwest (hello Phoenix metro!) you are asked to limit your thinking to more simple terms.

If you guessed government bailouts and backstops, you win a lolly pop. The really cool kind with gum in the middle! Lucky you!

Sadly, I am not kidding. Ben Bernanke in the course of his testimony today made the coming CRE bust sound easy to fix. So easy in fact I would like to show you the FED's newest tool in the war against mortgage defaults which was on display today:

The FED bought an Easy Button!

In a strange twist, the congressional panel had relevant questions about the CRE issue today and asked Bernanke about them. Of course so soon after the FED head penned an opinion piece about how he will "exit" all the fiscal support programs a soon as possible, Mr. Bernanke was probably thinking this was not a good time for this discussion:

Bernanke Says Commercial Property May Pose Risk for Economy
July 22 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said a potential wave of defaults in commercial real estate may present a “difficult” challenge for the economy, without committing to additional steps to aid the market.

I highlight the "without committing" part because the next passage shows that to be untrue:

The Term Asset-Backed Securities Loan Facility, a Fed emergency program that lends to investors to purchase securities backed by consumer and business loans, began accepting commercial mortgage-backed securities as collateral last month.

Fed policy makers will extend the TALF, currently scheduled to expire Dec. 31, should they judge financial markets are still “some distance from normal operation,” Bernanke said today.

“We will certainly be monitoring the situation, and if markets continue to need support, we will be extending the final date of that program,” Bernanke said.

That does not sound like a non commitment. Just like that 24 Trillion in promises will never, ever be called in. Nice! Finally:

It “may be appropriate” for the government and Congress to consider “fiscal” steps to support the industry, Bernanke said today. Ideas for fresh support for the market could include government guarantees for commercial mortgages, Bernanke also said today, while noting no proposal on the subject has emerged.

If you believe there are no plans in place already, then you write for Bloomberg.

Mish makes the day's top observation with this nugget:

Given the commercial mortgages have "completely shut down", does anyone buy Bernanke's line that he is "somewhat concerned"?
Here is the real deal: Bernanke is terrified and so is the rest of the Fed.

If the FED is even saying they are "concerned" it means they are as scared as possible.

A follow up to the Bernanke discussion was located by Economic Disconnect and I publish it here for the enrichment of the readers. Please note these lines were garbled and only my "Sarcasm ON" device was able to translate the mumbling:

Bernanke: "I cannot believe I just told them that we will have to bailout the commercial real estate market, and nobody asked my how we are going to pay for it! This EASY Button is the real deal! As long as they keep Ron Paul out of here, I should be able to get out of here soon. Bailouts get easier the more you do them. We should get a burrito, lets hit Anna's Taqueria!"

I have read plenty of articles written by some writers I have great respect for that are very complacent that the FED will magically exit all the support programs should things start to get ugly on the inflation/dollar debasement front. They base this on the evidence that the FED says they will be able to do it. I find that line of reasoning to be lacking at best, and outright ridiculous at worst. The FED will not be exiting anything anytime soon. The sooner commentators see that, the sooner they may figure out the rally in the indices.

The markets may be pricing in low cost loans, a sea of liquidity, and a government explicit guarantees for a time frame measured in years, not months. Once this realization comes to the front of the discussion, I would like to see how the dollar is doing then. I look forward to seeing how the FED supporters square reality with their faith in the FED's words.

Have a good night.