Fascinating, Shocking, and Totally Expected

Brutal cold here for the next three days. This is going to be a long winter indeed. Tonight's post will cover three different reactions I had to some information I came across. I hope you find all the topics worthwhile.

Fascinating
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.

Shocking
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.

Totally Expected
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.

More on the Deflation vs. Inflation Debate

What a crazy NFL playoff weekend! Only one home team won their game in the divisional round. The Baltimore Ravens have the same look that took them to a Superbowl win in 2000. The Phoenix Cardinals look like an entirely different team. Who knows what is going to happen this weekend, but I am sure it will be fun.

When Transparency Collides with Systemic Risk
If you can recall so far back as this Fall Treasury head Hank Paulson stated that the threat of having a "bazooka" in terms of money to bail out the financial system would be enough to smooth things over. Then we got his 3 page letter asking for an actual bazooka of 700 Billion dollars! While Congress did something at least mildly smart in only handing over half of the cash up front, Paulson said he probably would not need the other half anyway.

And so today we are informed that the president elect Barack Obama has asked Mr. Bush to request the 350 Billion from Congress so the money will be warm and ready to go when Obama takes office. That is quite a journey, but you knew we would end up here, didn't you?

Leaving aside the debate about whether the money should be released (we do not debate anymore, just act FAST!) I would point your attention to a more baloney being spoken by the incoming president who seems on a mission to become as much of a failure economically as the last guy. From Yahoo Finance:

AP
Obama promises changes in use of bailout billions
Monday January 12, 4:26 pm ET
By Andrew Taylor and Jim Kuhnhenn, Associated Press Writers
Obama pledges to change goals of bailout as Bush agrees to ask for remaining $350 billion
WASHINGTON (AP) -- Seeking to reassure wary lawmakers, President-elect Barack Obama said Monday he will fundamentally change the way the second half of the $700 billion financial bailout fund is spent, focusing some of the relief on housing and small businesses.
Obama asked President George W. Bush to submit a request to Congress so that the remaining $350 billion would be available quickly after the inauguration next Tuesday. Bush agreed to do so.
"I think many of us have been disappointed with the absence of clarity, the lack of transparency," Obama told reporters after a meeting with Mexico's president, Felipe Calderon. He said some of the money should have been spent on helping people avoid foreclosure.
"It is clear that the financial system, although improved from where it was in September, is still fragile," Obama said.
Separately, Larry Summers, Obama's choice for National Economic Council director, said the new president intends to broaden the goals of the remaining bailout package and impose tougher restrictions and oversight on how the money is spent.
Earlier Monday, Bush told reporters he would not make a request for the money form Congress unless Obama "specifically asked me to make it." Obama called Bush at 10:25 a.m. EST, after Bush's news conference ended, Obama transition officials said.
Bush's assertion that the decision to tap the money rests with Obama was an acknowledgment of what has been an extraordinary ceding of power to the incoming administration. Bush in recent weeks has let Obama be the driving force behind most recovery efforts.
A vote in Congress is likely soon, possibly this week, several senators said after a briefing from Summers Sunday on the Wall Street bailout, as well as on Obama's separate plan for roughly $800 billion more in spending and tax breaks to spur the economy.
At his news conference, Bush said, "I readily concede I chucked aside some of my free market principles when I was told by chief economic advisers that the situation we were facing could be worse than the Great Depression."
But he credited the program so far with improving the credit environment, saying that "lending is just beginning to pick up."

I have a question: How is there going to be more clarity and transparency with the second half of the TARP funds when after two lawsuits to get information have been unable to pry any data out of the FED or the Treasury? Mr. Paulson and Mr. Bernanke have both said that to tell where the money is going could pose a "systemic risk" for those institutions that have been given free cash.

So what will win out in the battle of transparency versus systemic risk? I am going to bet on systemic risk here. We will never get details on where the money was poured until way, way later. I imagine it does not matter, just assume every bank and almost any corporation has their hands in that pie and you will be about right. Mr. Obama and others in Congress want to spend the money directly by "stopping foreclosures". How many houses does 350 Billion buy anyway?

Powerful Essay on Deflation Versus Inflation
Over at The Mess That Greenspan Made today Tim Iacono excerpts and links to a wonderful piece by Rich Toscano and John Simon of Pacific Capital Associates. The entire post is a must read if you want to see both sides of the deflation/inflation debate. The logic and reason of the article is very persuasive.

I have been of the mind that the US government is in a panic stage. Deflation terrifies central banks like nothing else it seems. The policy moves to this point have not worked as yet, but there are more tricks on the way. I highly recommend the entire article as a good slow read. Full link here.

There is too much great stuff to excerpt, but I will present their summation:

Conclusion
We in the United States have been dumping our dollars into the world for years and we continue to do so. We owe a staggering amount of foreign debt denominated in dollars and we are gearing up to borrow even more. Our legislators and the stewards of our currency are rabidly hostile to deflation -- they are hostile, in other words, to the idea of the dollar gaining purchasing power. They have shown via word and deed that they will do whatever it takes to prevent deflation from taking hold. When deflation is viewed as even a remote possibility, there are effectively no limits to the amount of money the government can create nor to what they can do with that newly minted money.
Under these circumstances, we just don't believe that the dollar is going to gain purchasing power in any sustainable way. The current deflationary storm could continue for a while yet, but the longer it goes on, the more violent and severe its reversal is likely to be.
Deflation is a choice within the current monetary regime. It is a choice that our government has shown it will not make. There are serious long-term risks inherent in our dysfunctional monetary system, to be sure -- but deflation isn't one of them.

Again, read the whole thing. Leave your thoughts on the debate in the comments section.

Have a good night.