Maintenance of Illusion is Not a Sound Economic Policy

Hello all! Still amazed at what happens every day? I know I am. This blog was given special treat last post as Michael Panzer himself, the writer of the blog http://www.financialarmageddon.com/ stopped by and left a comment. I always stop by Mr. Panzer's site and his listing of this blog on his blogroll gives me a bunch of traffic! Thanks again for stopping by! That is exciting stuff.

Participation is Voluntary for Wall Street
There was a ton of coverage done on Hank Paulson and Ben Bernanke's testimony today in front of the Senate. There is so much to hash over, I can in no way cover all the details. I want to focus on a couple of particularly annoying points that stuck with me.

The first point is the desire by some in the Senate to attach CEO and other top executive pay restrictions during this time of Federal giveaways. It seems only correct to me to insist that the same boardroom members that brewed up this debacle should only get a minimum pay package on the taxpayer's bill. I mean, if indeed we are on the verge of total systemic collapse, multi-million dollar bonuses should be low on the CEO priority list as opposed to keeping a firm open.

Of course, this is not the case! When pressed about the pay cap inclusion, Mr. Paulson shows us that the inmates are running the asylum and that the same fellows that caused this mess still expect to make a killing. His quote (loosely; I cannot pour over all the transcripts right now):

"It may be difficult to get firms to participate if pay restrictions are enacted."

Did you get that? Insolvent banks looking to pocket big money from the taxpayers will not participate if their pay structures are messed with. No problem, none at all. These guys can opt out and please sign a form so I know who to short to ZERO if the ban is ever lifted! The sheer nerve of such a statement shpws you all you need to know about this mess.

Maintenance of Illusion is Not a Sound Economic Policy
The whopper of the day belonged to Benny Bernanke. Confused senators questioned how in the world the treasury purchase of toxic paper would make any difference, as there are plenty of buyers for that paper right now. Bernanke lowered the boom on us wall as he explained that the purchase price of the bad paper will be close to FULL WRITTEN VALUE! Of course! I myself had serious doubts about how this plan would help banks with capital, and here is the answer:

The FED and Treasury Plan on Paying Mythical Prices for the Trash paper

Reread that sentence again. There is no potential benefit here. This is a cash grab plain and simple. Even some senators that were pretty sure to rubber stamp this bill visually winced at this detail.

I can really appreciate the effort here. The main problem is that too much debt was created and extended with no reasonable expectation that is would ever be made good on. The reality has now sunk in. These instruments (Mortgage paper, school loans, Second mortgages, car loans) have a value, but that value effectively renders most firms insolvent. The solution presented by the FED and Treasury is to pretend. Seriously, the plan is to play make believe that these securities have close to their written value.

I am sorry to inform the powers that be of this simple fact:

Maintenance of Illusion is Not a Sound Economic Policy

I know, it's rough. I know this stinks. Is it really the best plan put forward by our "best and brightest" economic minds to play make believe? I guess it seems like a good idea right now, but can this kind of kicking the can really provide for a real recovery?

The root cause of all this is that our economy is now prefaced on runaway consumer spending. The years of 2002-2007 were 5 years of credit binge gone wild. Even if banks were helped out, even if we dodge a big bullet, lending cannot go on at a rate anywhere near where it was those 5 years. Everyone that wanted money got it. The only good borrowers left do not need any money. There is no way to make lending the driver of our economy unless we pursue the same wild lending practices that got us here.

I think Hank and Ben should take this weekend and do something more useful with their time. Your homework assignment boys is to flesh out a system where the velocity of credit and debt runs at about 1/3 of what it did during 2002-2007. Extra credit will be given for charts or funny cartoons. Have at it.

Have a good night.

Pandemonium of the Clueless

Hello out there in financial reader land! Have you been having fun? Have you been on the edge of your seat with crazy disbelief at the rapid developments? I know I have been overwhelmed with information and news! Loyal reader G asked that i post if/when the proverbial sh#t hit the fan, and I say "ask and you shall receive".

Did Anyone Notice this Little Tidbit in the Mainstream Media?
Now I will say upfront that with all the drama going on, it could be possibly forgiven for the mainstream media to skip over this little item, but seriously has there been a more ominous headline anywhere this week?:

Russia suspends stock trading to stop market meltdown
by Dario Thuburn
Wed Sep 17, 2:05 PM ET
MOSCOW (AFP) - Russia suspended trading on its two main stock markets for a second day Wednesday as shares nosedived and officials pledged 44 billion dollars to fight collapsing investor confidence.

After a 50 plus % drop over two days, Russia says "No Mas" and pulls the plug. No word yet on when it will reopen, but this may be the scariest thing I saw this week. This bears your attention.

Gold Rallies Back
While still quite a ways off from the old highs, Gold has made a nice move, and today it made it's biggest one day run ever. Why? Well, with all the crap paper out there and with trust evaporated, only treasuries (why trust those?) and the good old yellow metal will do for many. This reminds me of a story that was told to a young Conan the Barbarian by his father. Conan's father related to him the story abut the "riddle of steel", but I have put in GOLD instead of steel to make my point:

Once giants lived in the earth, Conan, and in the darkness of chaos, they fooled Crom, and they took from him the enigma of steel [GOLD]. Crom was angered, and the earth shook, and fire and wind struck down these giants, and they threw their bodies into the waters. But in their rage, the gods forgot the secret of steel [GOLD] and left it on the battlefield, and we who found it, are just men, not gods, not giants, just men. And the secret of steel [GOLD] has always carried with it a mystery. You must learn its riddle, Conan, you must learn its discipline, for no one, no one in this world can you trust, not men, not women, not beasts, this you can trust.

While this whole mess can turn on any assets class at any minute, I still love gold's fundamentals going forward. Just be careful out there!

A Brief Statement of Truth
Senator Harry Reid (D-Nevada) had a rare honest moment today and I will direct you towards Mish for full coverage here:
http://globaleconomicanalysis.blogspot.com/2008/09/senate-majority-leader-reid-no-one.html

Quick summary "Nobody knows what the hell to do about this mess!" You hit it out of the park Mr. Reid, Bravo!

Pandemonium of the Clueless
There is simply too much going on for me to be able to cover all the bases. I refer you to the blogroll to the left. Naked Capitalism, Calculated Risk, Minyanville, and Mish have been doing unbelievable real-time analysis of all the news and their material is the best anywhere, anyplace.

With all that has been going on my main focus has been on the whole moral hazard issues. Not in the sense of "should we be doing this, it may be a moral hazard" because the hot to trot leadership we have has already made the choice to wade in. I mean just what in the world is Ben Bernanke and Henry Paulson thinking about as they make the off the cuff moves with billions of taxpayer dollars? Sadly the folks we all sent to congress are unable due to limited mental ability to ask any questions or to get some kind of fix on the FED and Treasury's thinking process. In the spirit of goodwill, I thought I might put together a few questions that our elected representative may, just maybe, want to get answered by the "Toxic Twins" of Bernanke and Paulson before any more bailouts/conservatorships/liquidity injections etc are done. Hopefully one of them will read these and try to get a response.

1. What is a "Systemic Risk" exactly and in no uncertain terms?

2. If indeed the US financial system is "Fundamentally Sound and Secure" as you have stated on numerous occasions, how does that square with the idea that a Bear Stearns or a Fannie Mae, or an AIG bankruptcy would cause a "systemic risk" to the entire financial system? Can those two ideas be reconciled?

3. While Lehman Brothers employees are filling cardboard boxes and leaving their jobs, how can Merrill Lynch workers and Freddie Mac employees be supported? What would you say to the Lehman folks right now?

4. Is there a dollar figure at which taxpayer backed bailouts will have to stop? If yes, what is that number? If no, do you see a problem with that?

5. With the FED and the Treasury backing down on the AIG "bridge loan" or whatever you call it, is it even remotely reasonable to expect private firms (still standing banks, foreign wealth funds, etc) to put up any money towards helping failing businesses? Why indeed should they if the US government will assume all the risks? Do you see the underlying issue here?

6. Secretary Paulson; as a former head of Goldman Sachs would you have recommend to your board to extend the AIG bridge loan? If not, why is the US taxpayer not given equal consideration?

7. If the only thing keeping the banking system afloat right now is the delaying tactics aimed at keeping assets related to real estate and their associated derivatives form being valued at their realistic price, how long can that go on? Do you have a plan that takes into consideration those items being marked to current market? If you do not, why not?

8. While the SEC has targeted short sellers as of late, what is being done about CNBC anchors reporting on phone calls they are having on air in the midst of this market turmoil? Is one more disruptive than the other? If so, how?

9. Have you thought further ahead than 5-10 days over the last 6 months? Be honest.

10. Are you two on Dope?

There are 10 questions that need to be answered before Hank and Bennie make any more moves. Somebody has to answer for the debacle that is currently underway. That not one serious or revealing question has been asked or answered says alot about both our journalists and our leaders.

Final Thoughts
This is the big time. There are things at work here that are huge. Yes, I can agree that the system is at stake. But you have to ask yourself, if we can delay a real day of reckoning for all the troubled debt that is out there, will it just go away? Or will it only come back later? I can understand the yearning to kick the can down the road, but that mentality got us into this mess after the Tech bust. At some point you have to face your own monsters. Hiding and pretending they are not there only gets you so far. It should be time to face ours.

Hedge Fund Bailouts
I have it on good authority, insider information actually, that the next in line for a bailout is the hedge fund below:

more animals

Have a good night.

Bernanke Gets Too Cute By Half

The ankle was less swollen and less painful, so I was able to go to work today. Late in the afternoon it seemed a very bad idea to have gone to work! Oh well, pain reminds you how good you have it when things do not hurt. I am warning in advance of today's post; I was close to attacking the computer screen with the absurd lines that were spewing forth from financial players all over the spectrum. The post may be more like a rant, you are warned.

Bob Toll Makes Me Sick
I cannot stand Bob Toll, CEO of homebuilder Toll Brothers (TOL). This spectacular buffoon was the man that stated the good old "dancing on a bottom" of the housing market LAST YEAR. With brains like his doing the homebuilding I can only recommend checking your Toll home roof for leaks, regularly. After reporting results that were shameful (but beat the street, whoopee!) Mr. Toll sadly was part of a conference call where he had the nerve, the balls, and the lack of any shame to put out the following bailout plan idea:
"We believe Congress should jump-start demand for new homes with an initiative that will bring buyers off the sidelines and into the market, and thereby stop the downward spiral of home prices. As we have said before, we favor a tax incentive for all those who buy homes within nine months of the Bill's passage; this would create a sense of urgency. Interest rates are low, supply is abundant and a buyer's market prevails. With a little motivation, the new home market could turn around, which would have a very positive impact on banks, bond prices and many other areas of the economy. Once home prices stabilize, Congress could then more successfully address mortgage issues; however, without stabilization of home prices, trying to address mortgage issues may be difficult at best."

Sickening. Shameless. Disgusting. Mr. Toll now favors a regulated home buying industry. He would no doubt love some kind of artificial stoking of home demand. At what level would the "fix" be set at? 2005 bubble heights levels? 2003? 2000? Who knows.

I wonder if Mr. Toll would have been receptive to government regulation of home prices and home demand if they were limiting both during the boom, but we know the answer to that. Here is another good idea Bob, and one you can control all by yourself; You and your brother can take your enormous stock sale profits from the 2003-2006 time frame and subsidise home sales all you want! You will not even need approval of congress or anything. Come on Toll, save the economy already! Oh, that money belongs to you? How does it feel to have some fool deciding how to spend YOUR MONEY MR. TOLL? If you do not like it, then please stop telling the government how to spend my tax dollars.

Bernanke Gets Too Cute By Half
Whenever I get to see Ben Bernanke talk, his smugness really irks me. You can tell he thinks he is very smart, but really how smart can you be if you work for the government? Bernanke gave a little speech today and while the entire thing is worth a look, one snippet in particular set me off to an angry place. Take a read of this one:

"A rough stabilization of commodity prices, even at high levels, would result in a relatively rapid moderation of inflation, consistent with the projections of Federal Reserve governors and Reserve Bank presidents for 2009 and 2010"

Mr. Bernanke is an academic, and as such we cannot expect the man to have any real world experience or any ability to be able to apply knowledge in any practical way. Read the line again, and then reread it.

So this is how Bernanke sees things:
Say Oil spikes to $200 a barrel and gas goes to $7 a gallon and stays there, in Bernanke's world inflation has moderated simply because the price has stopped going up! With those set high prices, would you feel that inflation has moderated?

Bernanke is basically absolving the FED from any need to answer for a complete failure of their job, namely to keep inflation low. Bernanke is saying high prices are here to stay, but that they should stop going up super fast, so the FED has succeeded, and the mythical "moderation over the coming quarters" for high inflation is now pushed out to late 2009-and 2010. What a complete f%cking charlatan this guy is. I am convinced Bernanke is every bit as lost in the job as Greenspan was, and time will show this to be true. Just a total shocker of a line that I cannot let go of. Vote in the new poll for leader of the dumb statements so far this year.

Another Economic LOL Shows People May Have Half a Brain
Like last night I am including a LOL Cat that has economic overtones. The point again, in addition to being funny, is how widespread the idea that things are bad has become. If you think things are going to continue to slowdown as a function of psychology getting bad, these small signals are important. Enjoy.

more cat pictures

Also check out this post of mine from October 9th, 2007 which has some choice FED inflation quotes which make them even worse now:
http://economicdisconnect.blogspot.com/2007/10/moving-goalposts-for-goldilocks.html

Have a good night.

Bernanke Says Banks Must Foresee the Risk the FED Ignored

I swear that I think the days are getting shorter or something. Maybe traffic is worse or I am moving slower, but it always seems I am running out of time. Reader Gawain had suggested Omaha Steaks in response to last nights inquiry. They are headquartered in Nebraska, which made me think of the film "Unforgiven" quote by little Bill Dagget: "Hell, I even thought I was dead 'til I found out it was just that I was in Nebraska." It was not clear if and how long they dry age their beef. I am ordering on Saturday, so I have to decide soon.

Loyal reader Watchtower says he has a Jon boat, and so I would like to know Watchtower if that boat is pretty stable on a river? I am of course in the market for a boat, and I plan on fishing a medium size river quite a bit. Let me know! And where is loyal reader G? I hope he is not working too hard.

Bernanke Says Banks Must Foresee the Risk the FED Ignored
Today was a good day. I love it when everyone, even the guys in the cheap seats, get an up close view of how clueless and broken the system is. Today Ben Bernanke, the FED Chief, gave a speech at a conference of reserve bankers (must be a wild crowd!) in Chicago. In the speech Mr. Boom Boom Bernanke tries to layoff the total failure of the FED to regulate banks in any way as it relates to mortgage issuance on those banks because they did not foresee the risks that the FED is tasked with regulating. Got all that? That is the translation in real terms. Bernanke's actual wording was a bit different:
AP
Bernanke: Banks must get better at foreseeing risk
Thursday May 15, 11:36 am ET By Jeannine Aversa, AP Economics Writer
Bernanke: Banks need to beef up their ability to foresee risks like credit, mortgage troubles
WASHINGTON (AP) -- Commercial banks and other financial institutions need to beef up their ability to detect and protect themselves against risks like the credit and mortgage debacles, Federal Reserve Chairman Ben Bernanke said Thursday.
The trio of crises -- housing, credit and financial -- have exposed weaknesses in financial firms' so-called risk-management practices. That is their ability to sufficiently detect and hedge against risks. Banks and other financial players have racked up multibillion-dollar losses when investments in complex mortgage-backed securities soured with the collapse of the housing market. Credit problems in housing quickly spread to other areas, intensifying the turmoil.
"Improvements in banks' risk management will provide a more-stable financial system by making firms more resilient to shocks," Bernanke said in a speech to a Federal Reserve banking conference in Chicago.
"It is clear that supervisors must redouble their efforts to help organizations improve their risk-management practices," Bernanke said. "We have focused on the institutions in most need of improvement, but we will continue to remind the stronger institutions of the need to remain vigilant, particularly in light of the ongoing fragility of market conditions," he added.

OK. Basically Mr. Bernanke is saying that the "supervisors" must get better at risk assessment? What supervisors are these? Who is responsible for the banking system through money creation, bank overnight lending, interest rate setting and other tools? Is that not the FED itself?

Bernanke is pointing the finger at the banks here, and surely the banks are fully to blame for chasing risky investment ideas and flooding the markets with cheap credit. Guilty as charged. But where in the F#ING WORLD does Mr. Bernanke think this easy money came from? The tooth fairy? A pot of gold at the end of a rainbow? A scratch ticket?

No, the easy money from an ultra accommodating FED was the flood source. With interest rates so low for so long, money was forced to chase any return and thus here we are. The FED is trying to point a finger, but when you point a finger at someone, there are 4 fingers pointing back at yourself. The tone of the speech made me think that Bernanke thinks that worse things are down the road and he is trying lay blame off early. What a tool.

Leave Friday Night Rock Blogging suggestions in the comments!

Have a good night.