Sunday, July 25, 2010

In the Mind of a Child

My house is a complete mess right now. We are about set up for the kitchen project to commence tomorrow. Paper plates, paper cups, and easy cook meals via the microwave or the Steel Keg will have to do for the next 2 weeks or so. Of course waiting until the last minute to buy your range, hood, microwave, sink, faucet and flooring is not recommended.

In the Mind of a Child
Last week I was pressed for time so I did not really write much. After giving things some thought today, I came to the conclusion that global denial is in fact coordinated policy and the markets (via stock proxies) are willing enablers. Small business and the private sector have not been able to join in on the La-La Land Parade, but maybe they should it has been quite a party so far.

What do I mean? Take any of the following:
Kid Dynamite writes about the FDIC playing guarantee games. Read the whole entry and can see the next logical application of "extend and pretend".

Even more action involving the FDIC and said guarantees; even now issuing FDIC Bonds which is a first:
The FDIC must sell assets to continue the closings. It has about $37 billion of bad-bank assets to sell, but the stockpile would bring only 10 to 50 cents on the dollar.

Enter the FDIC's Securitization Pilot Program, the sale of U.S.-guaranteed FDIC senior certificates. This enables the FDIC to push much of the losses off its books, thanks to the U.S. guarantee of principal and interest. The program starts with a $500 million issue.

"They aren't really selling the bad assets. They're selling the equivalent of a Treasury bond without congressional approval," says William Black, a former thrift regulator. "It hides the economic substance of what's really happening—an unlimited taxpayer bailout."

The FDIC contests the characterization, saying it doesn't expect a claim on the guarantee because of an equity cushion to absorb the losses, and the use of only performing mortgages in the pools. The agency says a lot of resources stand between it and the taxpayer.
Of course this will get a total of ZERO discussion or review.

The Euro Stress tests were about as silly as expected, but note this observation:
First of all, you should be skeptical anytime EVERYONE is saying that the stress tests were too weak, if the market doesn't register the same disappointment.
Well then I guess the market knows all! Makes things easy, yes?

All is going so well we finally see some acknowledgement of what I have been saying forever; low rates are now structural in nature and no large economy will be able to function if rates rise:
Ernst & Young: The UK Recovery Is So Weak That They Won't Be Able To Raise Interest Rates For Many Years To Come
Exactly.

The Housing Time Bomb opines on all this with the following questions:
The problem longer term is there are too many questions that have no answers:
How long can the Fed replace the consumer?
How long can we continue to sell $189 billion in treasuries like we are about to do next week?
How long will unemployment continue to rise?
Where are the new jobs going to come from?
How are we going to pay down the deficit?
How are the states going to stay solvent?
How do we continue to fund Social Security and Medicare?

An excellent set of questions.

So what is the solution to all of this? It is simple really, you just have to think like a child.

Ignore it and pretend it does not exist.

For all that has been written over the past 2 years it really all boils down to that one line. The very essence of all the programs have been to enforce the denial.

Extend unemployment insurance? Why not? Jobless people will stay somewhat quiet if they get handed a few bucks rather than get nothing. There is now a large section of the "working"population that will be on extended UE for as long as 5 years before this is all said and done. These people would be the engine for change if they were motivated, and UE benefits keep that from happening.

FDIC, Fannie, Freddie, FHA, all these guaranteed debt issuers will never have to have their day of reckoning. Discussion on how broke they might be, or what their assets are really worth can be fun, but it is also useless. All these assets are what the US policy makers say they are one way or another.

Overall if you pile on all the uses of the following terms:
-Guarantee
-Backstop
-Explicit Backing
-Accommodating
-Shift Losses
-Taxpayer funded

A clear picture can be seen.

Just like a child, our policy is to ignore and pretend. I can say that I am amazed this has both worked and been adopted all over the global financial system. I guess we can really get away with this kind of stuff, someone or something would have stopped the process by now. It stinks to be wrong, but I guess I was foolish to think rules and reality were things that come to the surface. What can you do?

If you use the basic premise submitted here the news and events in things finance only make more and more sense. Strange days.

Have a good night.

3 comments:

getyourselfconnected said...

Is it really Monday tomorrow???

CT-Hilltopper said...

Yup.

Anonymous said...

Just like a child, our policy is to ignore and pretend. I can say that I am amazed this has both worked and been adopted all over the global financial system. I guess we can really get away with this kind of stuff, someone or something would have stopped the process by now. It stinks to be wrong, but I guess I was foolish to think rules and reality were things that come to the surface. What can you do?

Extend and pretend, has been the operating model for some sectors (vis a vis farms & commodities pricing) of the economy since 1934. Waiting til "reality hits" before you get back in is a mugs game. Those waiting for reality in the farms & commodities pricing before they get back in are all dead now.