Debt Creation Approaching Escape Velocity?

It was a beautiful Friday here. 70 degrees and very sunny. Seems Spring is upon us once again. I assembled the new grill I mentioned yesterday and now I am chomping at the bit to use it!

A few notes, a small post and then off to the Entertainment!

Profiles of a Healed Economy
As you all well know, the economy is just aces right now and things are so bright we have to wear shades, maybe even at night!

Here are a few headlines that cover all the good news:
Bank Failures 31-37; Busy Day for the FDIC
Banks often fail in good economic times. Often.

GSEs Green Light $200bn Buyout of Seriously Delinquent Mortgages
Barclays says so and they would know! Great note:

One of the GSEs, Fannie Mae said in a press statement earlier in March that it expects to continue purchasing delinquent loans in subsequent months until the seriously delinquent loan population is “substantially reduced.” Analysts at Barclays Capital remarked that Fannie will likely begin “buying out loans on a coupon-by-coupon basis, for all products including 10/20s, ARMs, starting with the highest coupons in the April report, and then proceeding to lower coupons in subsequent reports.”

In case you don't know, you are on the hook for these things.

Fed Must Disclose Bank Bailout Records As Court Of Appeals Upholds Historic "Mark Pittman" Decision
I have it on solid inside info this will be fixed by amending the law on page 12,897 of the Health Care Bill.

Debt Creation Approaching Escape Velocity?
This is going to be short because of two factors:
-I simply do not have command of the subject enough to describe or explain the mechanics at work
-The topic deserves a full on post or even a series of posts that I cannot do at the moment

That said, I can point you in some directions and open a debate.

The discussion is about money creation and banking systems. This is important for many reasons and not the least is that the entire foundation of our financial structure is based on assumptions, confidence, and group subscription and these things can go away in a hurry.

Most can understand fractional reserve banking and I often use it as an example because it is easier to grasp than how money gets created in our system. I think if people really knew how things ran they would all panic because the whole thing is a sham. That said, the relevant posts:
German Central Bank Admits that Credit is Created Out of Thin Air
George Washington posts at Zero Hedge and has some great reporting. Read the entire thing as it really helps, but an small excerpt:

Private banks don't make loans because they have extra deposits lying around. The process is the exact opposite:
(1) Each private bank "creates" loans out of thin air by entering into binding loan commitments with borrowers; then
(2) If the bank doesn't have the required level of reserves, it simply borrows them after the fact from the central bank (or from another bank);
(3) The central bank, in turn, creates the money which it lends to the private banks out of thin air.

It's not just Bernanke ... the central banks and their owners - the private commercial banks - have been running the printing presses for hundreds of years.

Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won't even have to borrow from the Fed or other banks after the fact to have reserves. Instead, they can just enter into as many loans as they want and create endless money out of thin air (within Basel I and Basel II's capital requirements - but since governments keep overtly and covertly throwing bailout money, guarantees and various insider-get-rich-quick schemes at the giant banks, capital requirements are meaningless).

The system is not based on assets. It is based on creating new debts, and then backfilling from there.

Not quite what you thought, huh?

Kid Dynamite offers more on yesterdays post today:
More on Bank Reserves and their Potential Meaninglessness
The comments section is where the meat is. It is worth some time.

My take was left in the comments section at Kid's site and I offer it here to frame how I see things:

What the summary here seems to be is that:
-As long as "liquidity" is available than money is fungible because you never really have to have it all at once.

Of course in the end the FED has a printing press so the argument is that liquidity can never be an issue.

While true in the lawyer/legal sense of the argument, it is also bullshit.

In essence the banking system is built on the idea that money once in motion, stays in motion and there is never a "called all in" to borrow a poker term. Of course back at the apex of the crisis when money markets were being drained this was a partial call and the FED/Treasury wet their pants in fear over the removal of a small (relative to the "liquidity" out in the system) amount of real money from the system.

The evidence would make the pie in the sky argument that reserves are meaningless and money can be created from nothing as long as loans (credit) are made a failure because why did they bother to do anything if everything was all set?

Sorry to simplify but all the tangled paths of this make something so simple very complicated.

The oldest profession is prostitution because it is hard to screw up (pun intended) and it is very profitable. The second oldest is banking for the two same reasons. Of course over time smart asses with theories have bent things around theoretical constructs so much that banking is screwed up. Classic. Remember the models and theories that said people would never, ever "walk away" from a home mortgage and never pay a credit card or car loan before a mortgage? Working out nicely indeed.

Taken as a whole it makes sense that debt is created and then some form of payment is arranged some how. The US consumer makes up 70% of the economy? They need to to keep accumulating the debts (money) issued by the banking system. No wonder no one this side of Wall Street can get ahead, everything is designed to maximize separation of you from your "money". I often wondered why the FED was so terrified of a recession and now we have the answer. Any speed bump in the debt accumulation race and things get ugly fast. Maybe debt has reached escape velocity and we cannot carry enough to backfill it. What then? Now I am dizzy.

Friday Night Entertainment
I need a drink and some fun stuff! Off we go!

WIN instead of FAIL
Let's try some WINS from the Failblog.

Reading the signs can help:


It is always the little black dress that causes trouble:

Yup!

Film Clips
Great film is, well, great!

One of the scariest scenes in a movie for me was not even in a horror film. In 2010: The Year We Make Contact there is a scene that sends chills down my spine. When HAL 9000 relays a message to Dr. Floyd and tells him to look behind him I still get those chills! (start at 1:20 mark):


Because I have seen About Last Night I know that Rob Lowe can act. The closing scene is pretty good stuff:

Under rated film.

Rock Blogging
It just might be time to let it rock. Wait, ok, now it's time!

Anon requested the Go Go's and "Our Lips are Sealed" which was strange because I had this song in my head this week after hearing it on the radio! Weird! Here it is:


Lead singer Alex Chilton of The Box Tops died this week and one of my favorite old school songs is "The Letter" so check it out:

Obviously before the dawn of email!

Loyal reader Gawians, who if you have not been checking out his real estate commentary in the comments section you are really missing out, requests "Spiral Architect" from Black Sabbath and I mean who could say no to an unsung Sabbath tune?:

Awesome tune.

One more, two more? Two more seems about right.

Of course because I love Joan Jett and I know what rocks, they decide to make a film about her early band "The Runaways" that contained a few names you may recognize. Anyways, enjoy Joan playing "Light of Day" with the man that wrote it, Bruce Springsteen:

Studio version here.

Last call! The streetlights are on, time to go home!

Closing the show is always a struggle. Do I end with a ripper? A mellow relax tune? This is harder than it seems!

Well I could not decide between these two so you get BOTH! HA!

Close the show with a Depeche Mode double feature!

"It's No Good":

Kicks ass!

My favorite Mode song, "Personal Jesus":

Unreal.

Have a good night.

Cheerleaders and Pom Poms

I had my teeth cleaned today which is never fun....SCRAAAAPPPEE! Still Economic Disconnect prides himself on his teeth (one cavity since 1995!) and a cleaning only takes about 30 minutes. Tomorrow is my Birthday and I am not sure if a Friday night post will be up as I have no idea what I may be doing.

NOTE: Gawains left a comment last post which noted that Freddie Mac offers a 2 year Home Warranty. Gawains, how does that work? What is covered? How is it paid for? I would love to have details on that item.

Isolated Case of Fraud
Look, I am 100% sure some lawyered up market savvy reader/writer can explain away the following clear case of lying, but so did OJ' s defense team so there is that.

Zero Hedge has done some work on the newly released Lehman Failure Report and finds "Repo 105" to be about what you would expect:
The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now
The post is a heavy duty one and I think it worth your time to check it out. Short version; accounting gimmicks to massage capital ratios gone wild. I am sure they were and still are the ONLY ones doing this. You Betcha!

Cheerleaders and Pom Poms
I had a post in mind for tonight and when I was making the rounds I saw that I was scooped by Mark over at The Illusion of Prosperity blog. While great minds do indeed think alike, I cannot lay claim to inventing one of the most successful computer games ever sold! Here is the post:

Credit Cards Being Paid Off?
Not really.
NEW YORK — With unemployment high and personal wealth diminished, how was it that strapped consumers were paying down their credit card debt last year? It turns out they probably weren't.
The bulk of 2009's drop in credit card debt instead came because banks were forced to write off loans consumers failed to pay, according to an analysis of Federal Reserve data.

Most headlines just ran the screamer "CREDIT CARD DEBT FALLS", but of course it helps to did a little deeper.

I was thinking along these lines as it seemed today I was inundated with cheers and cheerleading about how great a recovery is happening right now across all things everywhere all at once. After reading a few articles I was puzzled how headlines did not match up with the substance of the piece. The above catch was one example, but there were plenty of others.

From Calculated Risk:
Flow of Funds Report: Mortgage Debt Declines by $53 Billion in Q4
I picked this one because CR is too smart to not know why this is, but many others jumped to the wrong conclusion very quickly. Mortgage debt written off is not quite the same thing as paid off, like in the above credit card example. From the same CR post comes this amazing stat that is pure scary based on this graph:

The scary part:

Note: something less than one-third of households have no mortgage debt. So the approximately 50+ million households with mortgages have far less than 43.6% equity.

That is not good in case you were wondering.

Some more headline cheerleading that falls apart when reading the actual story? Next up is this one from Yahoo Finance:
Slowly, Americans are regaining their lost wealth
Sounds good. Let's dig in:

WASHINGTON (AP) -- Americans are recovering their shrunken wealth -- gradually. Household net worth rose last quarter, mainly because the healing economy boosted stock portfolios. But the gain was slight. And it was less than in the previous two quarters.

Not exactly a great opening paragraph. Plenty of qualifiers. Why mess with a great headline though? More story:

Net worth had risen by a more robust 4.5 percent in the second quarter of 2009 and an even faster 5.5 percent in the third quarter. Net worth is the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards.
Even with the gain, Americans' net worth would have to rise an additional 21 percent just to get back to its pre-recession peak of $65.9 trillion. That illustrates Americans' vast loss of wealth from the worst downturn since the 1930s.
Growth in stock portfolios delivered the biggest lift to net worth in the October-to-December period. The value of stocks rose by nearly 4 percent to $7.7 trillion. Higher home prices helped a bit. The value of real-estate holdings edged up 0.2 percent.

Stocks are not the primary vehicle of wealth for most households, homes are. The housing ATM was the engine that powered consumption to bubble highs, not stocks. See the Technology Bust for an example, but short version: the tech bust did not bother consumer spending or home equity withdrawals at all.

An illustration again from this CR post:

The 2000 Tech Bust made a slight dip but the uptrend in extracting any equity one could was in full effect.

CR notes the following:

Equity extraction was very important in increasing consumer spending during the housing bubble and I don't expect the Home ATM to be reopened any time soon. So any significant increase in consumer spending will come from income growth or a lower saving rate, not borrowing.

Income growth? Are we not in a deflationary environment? I say consumer spending may be facing headwinds, not tailwinds.

The cheerleader pom poms right now are limited to:
- A rising stock market
- Lower continued job losses
- Census hiring sure to feed headline hyperventilating over the next few months on jobs

Stock market gains do not have the same bang as other asset classes for the regular joe, but they do help. I know several people that did the old 401k loan thing to buy a home at bubble peaks and they get the full prize of:
- Paying back themselves the foll 401k loan amount after seeing the 401k drop 50% or more
- Being underwater on their home
I sure hope they get some income growth!

A final word about housing. Home prices will not return to the last peak for at least 10 years. That's TEN years. That is the minimum and it may well be longer. When thinking about the home plans floating around right now, ask if any are really workable over that time span. If I am wrong and homes reach the past peak in 5 years or less, it is likely we have had a currency issue and that is far worse.

Ok, one more housing nugget, found over at Housing Doom. When asked why I am so negative I like that I can always find a story that backs me up 100%. So the home market has bottomed and now is the time to dive in and go nuts? What about this?:
Politics, shaky economy create no rush to restructure Fannie and Freddie
Key quote:

Some analysts say it's an inopportune time to wind down the companies -- or even hint at major change -- while the housing market and economy remain in bad shape.
"Any suggestion now about future changes could destabilize the market," said Karen Shaw Petrou, managing director of analysis firm Federal Financial Analytics and a longtime observer of housing finance policy. "The U.S. mortgage market is so fragile that all Treasury needs to say is 'boo' and it could fall apart."

Nobody say 'Boo' then.

What Kind of News do You Want?
I loved this article from Ultimi Barbarorum blog:
Econobloggers need their crisis back
A well written piece that describes some reasons for the loss of interest in econo blogs after the big panic last year. Worth a read.

Along these lines I have a new poll up which asks what kind of news/stories/content you would like to see now that the recovery is in full swing and all is well in America. Please vote!

Have a good night.

Wednesday All Over the Place

Another rainy dark day. Now Friday is not looking good. Good thing I have such a sunny disposition! Short on time tonight, so some housekeeping, some feedback requests, and a few quick hits.

Blog of Interest
I recently came across the blog Accrued Interest. I find this strange for two reasons:
1. the blog has plenty of high quality, relevant content
2. How in the world did I ever miss a financial blog that uses Star Wars film quotes as taglines?????
Stop on by if interested. I will reference some work from that site below.

Facebook Feedback
What you have to understand about the author of Economic Disconnect is that I am basically "old school". I have only had a cell phone for 4 years, and I still have trouble text messaging. I will never "tweet". What I know about computers could be written on the head of a pin. I have a TV that is not a flat screen for goodness sake!

Basically I am not really into gadgets and tech toys. As of late whenever I try to get in touch with my friends I get the now common "just Facebook me" response. While I would prefer a phone call or even settle for an email, I would also not like to lose touch with about half the people I know!

That said, I would welcome reader comments regarding Facebook and any details of their experiences (good or bad) using it. I have a new poll question that can track your basic answers if you prefer to not leave a comment. Thanks in advance.

Sometimes Simple is Better
The daily market gyrations can get confusing at times, especially when one data point gets spun 10 ways till Tuesday. For comic relief I always read the Daily Reckoning's "Mogambo Guru". The author, Richard Daughty is hilarious and boils down basic macro imbalances to the core. Any article is great, tonight's is no exception:
Standing at the Gates of Economic Hell

06/10/09 Tampa Bay, Florida I look out of the periscope of the Mogambo Bunker Of Security (MBOS), and when I see my neighbor crying, and I remember that the new estimate of real unemployment is almost 20%, which comes out to one person unemployed out of every five people who need a job, which they need so that they can pay some bills and maybe have enough left over to have a little fun for a change, like maybe having a few drinks and a few laughs with my barstool buddies, just to get away from the wife and kids for just a few precious hours so that I don’t Freaking Lose It (FLI)
...And this last batch of Bad News On The Earnings Front (BNOTEF) is at the tail end of a long string of lower and lower earnings since the end of 2007, and this latest drop in earnings is down from January, when earnings were $45.95, which were down from this time last year when earnings of the S&P 500 were $62.28, which is down from September 2007 when the earnings of the S&P500 were over $85.00!
The really eye-popping result is that with the S&P 500 selling at 940, this means that the index has an astonishing price-to-earnings ratio of 130! Hahaha! Insane!
If you are not laughing in total disbelief, then an instructive way of looking at a P/E ratio of 130 is that if the company pays you all of the money it earns for the next 130 years, you will break even! Hahaha! 130 years to break even! Hahaha! Now you know why the laughter!But, then again, maybe gold, silver and oil stocks would be a good idea, since they must rise in price in response to all this new money that is being poured into the economy, and they sell at P/E ratios far less than this! Whee! This investing stuff is easy!

Great Stuff

Mixed Message
I hit the Yahoo Finance page after lunch and was treated to a headline mix that was a little mixed in message at 12:50 pm EST:

Notice headline #6-Treasury to Name Pay Czar on Wednesday
and headline #8-Obama Retreats on Wall Street Compensation

After reading it became clear the we are going to have a pay Czar who will make it a point to have companies issue voting proxies (those things you throw away when they come in the mail) which will ask shareholders to vote on compensation packages. the votes are NON BINDING of course, but hey, you have to compromise! I wish the pay Czar all the success I am sure he will have reigning in excess pay.

10 Year Treasury Auction: Was I Right or Wrong?
Last night I offered that the 10 year and 30 year bond auctions this week would go extremely well, as the FED could not allow a poor result. So how did I do?

Headline Response
All the major outlets were reporting a "poor" to "very weak" auction" which of course made me feel pretty dumb!

Results
From Bloomberg;

"The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold was 2.62. It was 2.47 last month and has averaged 2.40 at the past 10 scheduled sales."

That seems pretty good!
"Indirect bidders, the class of investors that includes foreign central banks, bought 34.2 percent of the notes, up from 31.9 percent in May. The average at the past 10 scheduled auctions is 25.8 percent."
Another solid hit!

So I was feeling vindicated. Of course there was one little problem, the higher yield;
"The notes auctioned today drew a yield of 3.99 percent, compared with the 3.975 percent forecast by seven bond-trading firms surveyed by Bloomberg News."
I mean, come on! A 0.015 miss on estimated yields!? What's the big deal?

Accrued Interest had this take:

10 Year Auction: This Place Can Get a Little Rough
The 10-year auction was horrible. Non-fixed income people don't realize how big a miss 3bps is on a 10-year auction.
The ancillary stats indicate no foreign flee. Indirect bids were the second highest this year. So people will buy bonds, they just want more yield to do it.
Meanwhile, this story on Russia is worth watching. Can they really increase their IMF holdings, and if they do, does it matter? Here are two links to read.
http://www.imf.org/external/np/exr/facts/finfac.htm
http://www.imf.org/external/np/exr/facts/gabnab.htm
Russia currently holds about $140 billion in U.S. debt. I understand none of that is in Agency holdings so I assume that's overwhelmingly Treasuries. China holds $768 billion.
Its counter-intuitive to me that the DXY is solidly higher while Treasuries sell off. I really think this sell-off has reached silly levels.

As a non-fixed income trader, I will have to take his word that a 3bps miss on a 10 year auction is a big deal. Does not seem that big. (As an aside, the tag "This Place Can Get a Little Rough" was spoken by Obi-Wan Kenobi as he and Luke Skywalker entered the Mos Eisley Space Cantina in Episode IV.)

So was I right or wrong? Seems a push at this point, I will wait for the 30 year results tomorrow to make a final decision.

A Word about Trade Size and Math
All the time I see statements across all kinds of media and forums that claim "rode this thing" to wherever or "I made a killing" doing this. Far be it for me to question anyone's claims, but sometimes you need a little perspective.

As an example, lets say you read that a person made a "killing" shorting, say silver (SLV), "all the way down" $15 to $13.50. I use silver here as an example only, it matters not that 3 large banks are short more silver than is available, I am using this purely for illustration purposes!

So in the above example, the awesome trader made a 10% gain on the "killer move".

A 10% gain.

Some math shows us that for some sample blocks of capital 10% gain would mean:
-on a $1000 position, he made $100
-on a $5000 position he made $500
-on a $25,000 position he made $2,500
-on a $100,000 position he made $10,000

So we see that unless Mr. Trader is a really big player, he is full of crap unless about $5,000 is a whole lot of money to him. I am of course leaving out various leverage plays and other instruments that may make this example a bit simplistic. I am doing that because I think the average person that reads my blog is not some crazy wild trader with an enormous arsenal of trading weapons and a huge cash position to play with.

My point is that you have to keep relative scale in mind when reading market commentary and results posting. Bear in mind a 1% move is immaterial to a small position, but may mean something different to a large one. I know, a bit nit picky, but I get tired of reading how well some say they are doing, then I look at what their stated positions are and realize they would need to have over a million dollars in play to be making a "killing". And maybe some do, but most do not. Especially nobody with the time to post on Yahoo Finance stock boards!!
NOTE: I made a blunder with the math by leaving off a zero in the original post! Sorry for the confusion. Told you I was bad a t math, and now proof reading as well.
Have a good night.

Headlines That Change

A little short on time this evening as the drive home was a bit long. On a solid personal note, I was informed by the boss today that for the year end review I am getting a promotion! Good stuff. I have done a ton or work this year, so I am glad.

Market Dips Below Retest Levels; Well Some Retest Level Anyway
By now, you the readers, know of my hatred of technical analysis and especially for all the catch phrases some market players like to use to try and make sense of things that make no sense. Terms like "retest" and "head and shoulders" especially get me rankled.

So today the DOW and S&P fell below the much celebrated lows that were successfully retested last week or something. So that is bad right? That means new lows and the retest last week was bunk?

Nope. The charty types now mean that crazy intraday low from a while back where the DOW kissed near 7800. That is what they really meant. The 8100-8200 area was a "false low" masked by volatility or something.

I bring this up because a ton of people I know, and many I respect, love talking about the markets in these terms. While I use charts myself, I use them for long term trend watching as well as historical action. Trying to say "8153 on the DOW is the ultimate low" is like trying to guess the correct interest rate the FED should be at: A waste of their time and mine.

Auto Bailout a No Go if Democrats Have to do it Themselves
So you think everything is going to change just because Mr. Bush is gone? You think now that the Dems are in control we are looking at politics by other means? From Yahoo Finance:
Senate cancels vote on doomed auto bailout

WASHINGTON – The Senate's top Democrat has called off a planned vote this week on a $25 billion auto industry bailout. Senate Majority Leader Harry Reid said that he wanted to figure out some way to help Detroit's struggling Big Three but that efforts to do so had stalled.
The White House and congressional Republicans rejected Democrats' plan to dip into the $700 billion Wall Street rescue fund to finance loans to U.S. automakers.

So the republicans (some of them, nowhere near all of them) are balking? The lame duck White House is not in love with the idea? So what? If this is the right thing to do, then make a vote. Get everyone on record, yeah or nay. What is the problem?

Simple, as always. The TARP was dogshit that the public did not want. The auto maker bailout is even more crap that the public has said NO to. While this is nice, the Congress does not care. If the auto bailout had huge support like the TARP did it would go through. But the craven democrats do not want anything to bite them, surely not another bailout with serious opposition. So no vote. New politics, same as the old. Weak and scared politicians (either side) unable to do what is right, only what is politically possible. Remember the big debate Bush promised about the "Flat Tax" if he beat Kerry in 2004? Remember the debate? Of course you don't, it never happened because the opposition was too high. Note: I am against all bailouts, but if the Dems think it is for the best, they should go for it.

Headlines That Change
Saw a strange thing today on Yahoo Finance. After the FED had given their forecasts, you the ones that have been so spot on up to now, Yahoo had this headline up:
AP
Fed sharply lowers forecasts, hints of rate cut

Later in the day when the selling got heavy, the lead headline became:
AP
Fed sharply lowers economic forecasts for this year, 2009; signals another rate cut coming

And then later tonight, an amalgam of the two:
AP
AP
Fed sharply lowers forecasts, hints of rate cutWednesday November 19, 3:13 pm ET
By Jeannine Aversa, AP Economics Writer
Fed sharply lowers economic forecasts for this year, 2009; signals another rate cut coming

Now I am not proposing that there was anything sinister going on here. I am just pointing out that the good old game of "hint of a rate cut" was changed to "rate cut coming". Take from this what you want, I just found it interesting.

As far as rate cuts go, what is the point. The effective FED rate is 0% right now, and they only have 100bps left anyway. I guess they could keep going for the hope of getting a bump, but I do not think that will fly.

What will the FED do? One cut of 100bps? Two 50bps? Four 25bps? I have no idea and it does not matter. Well, I take that back because it matters as it is the new poll question! Please vote on what you think Bernanke should do with his last 100bps of credibility!

Have a good night.

Government Bemused by Lack of Lending

I saw the Tennessee Titans play for the first time last night. They moved to a record of 7-0 after beating the Indianapolis Colts. The Titans have an amazing defense, and a solid offense. They look pretty good to me. The Colts lost back to back games for the first time in a while, and they now play my New England Patriots next Sunday night. I do not think the Colts have ever lost 3 games in a row with Peyton Manning, so I guess that is a bad omen!

Government Bemused by Lack of Lending
It seems the White House and others in the government are puzzled by the fact that all the cash that has been handed out to the banks so far is still sitting there. What happened to all that credit and lending we were promised? What about the golden new era of bank lending the bailouts were supposed to provide? We were assured that a simple lack of liquidity was the culprit, and a money tsunami was just the fix! What happened? Here is the headline form Yahoo Finance (no not from the comedy site "The Onion":
AP
White House to banks: Start lending now
Tuesday October 28, 5:44 pm ET
By Jennifer Loven, AP White House Correspondent
White House tells banks getting federal aid to quit hoarding money and start lending it
"Hoping to thaw the credit freeze that has chilled the economy, the Bush administration sent banks an unmistakable message to put aside fears and open up loan windows for cash-starved businesses and consumers who have pulled back on spending.
"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said. While there are limits to Washington's power to affect banks' behavior, the White House decided it was time to use its bully pulpit.
"They (regulators) will be watching very closely, and they're working with the banks," Perino said."

Soon this administration will be gone and while I am sure the next one coming in will be no better on things economic, at least we might get statements that make sense! I mean reread this one and see if you can spot the problem:
"the Bush administration sent banks an unmistakable message to put aside fears and open up loan windows for cash-starved businesses and consumers who have pulled back on spending."

So which is it? Are people cash starved and in dire need of credit, or are they pulling back on their spending? I guess the idea is to "take a loan, it is patriotic!" or something.

What is escaping the powers that be and the smart guys running the Treasury and the FED is that we need a clearly defined and tangible bubble to put any new credit to work on. Houses are dead money for a while. The stock market is too jumpy. Commodities are busted. Bonds seem too weak. What is needed is a clear national goal of a new bubble. Maybe antique cars will do? That way GM and Ford may get a boost as well! Beanie babies? Cabbage Patch Kids? What will do the trick?

I have repeated my question about all of this bailout cash, so i guess one more time will do:
To whom and for what will all this money be lent out to?

I still hear crickets.

Opposing Headlines
While finding totally opposing statements in the text of an article is great fun, sometimes you can do it with just the headlines. Consider these two headlines on the main Yahoo Finance page:
"Dow jumps nearly 900 points as bargain hunters grab stocks in anticipation of a Fed rate cut"
and
"Treasury official says rescue operation will generate unprecedented borrowing needs"

So we have a big rate cut in the works for tomorrow, but the US government will need to borrow massive amounts of money going forward. See the issue? I thought that when you need to borrow big money, the rate on that stuff goes up, not down. So the FED is on their way to a FED rate of 0% (hello Japan!) while at the same time getting ready to sell treasuries by the cargo load. I am so sure that is going to go well and work out.

Maybe the banks can lend the US government money right back to them! Now there is an idea that Paulson needs to look at. Can the US take taxpayer money and debt, loan it to the banks, and have the banks loan it to the US in a closed loop? Maybe I should get a Nobel Prize with this kind of powerful insight.

Market Rally Banana Republic Style
Look, one cannot deny that solid, efficient markets just do not gyrate to the tune of 10% and and down on a daily basis. That kind of volatility means only bad things. Things like market participants have zero idea what is going on. Things like government intervention makes panic moves happen almost daily. Things like no underlying fundamentals to support a move up or down. Those kind of things.

A rate cut tomorrow is viewed as a positive, but the FED may have only 1 or at most 2 moves left after tomorrow. All the rate cuts to this point have done nothing, so maybe this one does the trick? Whatever. Almost all the action has been happening in the last 30 minutes of the day, and that means something. What I do not know, but I imagine it will be interesting to find out.

Good Financial Poem
James over at Bubblemeter had a great original poem up yesterday. Check it out:
Real estate was
The way to get rich.
Just buy a home
And give it a flip.

If you bought more house
Than you can afford,
Helicopter Ben
Will dump cash your door.

He's Helicopter, Helicopter,
Helicopter Ben,
The money-throwing man
Who works at the Fed.

Money from the clouds,
Money from the sky,
Manna from heaven,
Thank that helicopter guy.

Full post:
http://bubblemeter.blogspot.com/2008/10/helicopter-ben-makes-good-on-nickname.html


Have a good night.