Monthly Archives: September 2008

Finally, a little bit of outrage.

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Jim Grant (of the excellent but pricey, Grant’s Interest Rate Observer) penned an essay for the Wall Street Journal this past July, in which he lamented the indifference citizens were showing as bankers repeatedly helped themselves to tax dollars, during a crisis that they brought upon us.

“Raise less corn and more hell,” Mary Elizabeth Lease harangued Kansas farmers during America’s Populist era, but no such voice cries out today. America’s 21st-century financial victims make no protest against the Federal Reserve’s policy of showering dollars on the people who would seem to need them least. …

Possibly, there aren’t enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people’s money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people’s wrath? …

The American people are famously slow to anger, but they are outdoing themselves in long suffering today. In the wake of the “greatest failure of ratings and risk management ever,” to quote the considered judgment of the mortgage-research department of UBS, Wall Street wears a political bullseye. Yet the politicians take no pot shots. …

Wall Street is off the political agenda in 2008 for reasons we may only guess about. Possibly, in this time of widespread public participation in the stock market, “Wall Street” is really “Main Street.” Or maybe Wall Street, its old self, owns both major political parties and their candidates.

Grant goes on to suggest that the reason there is no outrage is that the populists of the early 1900s won the battle over the role of government in monetary policy. This system of paper money, easy credit, government-sponsored loans, inflation and debt forgiveness is exactly what the fire-breathers (and bankers, I would add) wanted.

Well, the bailout to end all bailouts is finally inspiring a bit of anger, though most of those expressing it seem to be among that narrow segment of the population that knows what a central bank is. The responses to a recent WSJ.com blog post were overwhelmingly negative, although at a fairly high level of sophistication, sort of like the crowd that chimed when any major news outlet to mentioned Ron Paul last year. Here are some excerpts:

If I could only get the Treasury to buy my lottery tickets that didn’t pan out, at what i paid for them!

I’m sick of this!!! Wall Streeters are behind the scenes pulling every lever they can find to get themselves out of this mess at OUR (i.e. the TAXPAYERS) expense under the guise of “saving the economy”. Lenders WILL lend money when they think they will be paid back…period. All of housing will, going forward, be federally related and subsidized. All the big lenders and banks are going to offload the bad loans and securities collateralized by same onto the Government, i.e. the TAXPAYERS so equity investors can salvage investments, directors and officers can minimize lawsuits, and Goldman Sachs and Morgan Stanley can keep their stock price up…so for God’s sake, let’s spend a trillion of our money..

Essentially, it’s a game of hot potato. The mortgage and credit industry created a huge lot of bad debt. They didn’t want this risk, so they sold it to investment banks as complicated financial instruments no one really understood. The financial companies passed this risk to their investors, who are in many cases cash rish foreign governments. Now, when everybody came to the realization this debt was not going to be paid, the US government didn’t want to pi$$ off the foreign governments paying for our little credit party, so they passed the “hot potato” to the U.S. taxpayer. The U.S. taxpayer, essentially powerless, now holds the potato. Is that about right?

Bernanke, Bush, Cheney, Paulson, “The Four Horsemen of the Apocalypse’ and my homeboys, go forth pillage, plunder. You have obeyed your masters the international global fascists! The people are broke but you don’t care!

This is completely outrageous. ‘Bailout’ Bernanke and his cronies are inflicting the biggest scam on the US taxpayer in history. Why are we destroying our economic health to bail out some rich cats whose fraud caught up with them?

Interesting that the first bailout attempt, “the Entity”, never materialized because private capital did not want to purchase toxic assets. Never fear, the most recent bailout, aka the Treasury Garbage Machine, ignoring the precedent suggested by The Entity, will purchase these very same assets. If Credit Suisse is even close in its forecast of $6 trillion in foreclosures, have pity on the US taxpayers.

Gee, I wish I knew six months ago that I could have left all my cash in a more volatile money market and be just as secure as when I transferred into a Treasury based fund at 150 less basis points. Stupid me. I’ll never make that mistake again. I should have known that Mssrs. Paulsen, Bernanke, Dodd and Co. would come to the rescue. That’s why I call them the Dukes of Moral Hazard.

Welcome to the USSA. The free market is no more.

when time names its man of the year it should not be a human being

it should just read

THE BAILOUT-THING OF THE YEAR

ps you forgot barney franks housing bailout bill

what a sad day to be a responsible american

Nothing new. The idiots in government are buying idiotic loans made by the idiots in banking so the idiots who can’t afford the loans they got from the idiots in banking will be foreclosed on by the idiots in government. The real idiot is the guy who doesn’t leave the country.

These comments are from straight down the line, hardly skipping a post. If only the majority of the country didn’t get more from the government than it gave, we might just have a quorum.

But that’s what you get with democracy (we were given a republic, but couldn’t keep it): start with a few handouts, and you create a class that grows bigger and dumber with every generation, until it is so easy to control that the leaders only have to maintain the illusion of democracy.

How about a little George Carlin?

Trading note: I’m not buying the anti-dollar rally.

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Crash Proof vs. Conquer the Crash

I was thrilled to see Peter Schiff on Bloomberg TV this afternoon, since I knew he’d be all fired up and really let loose on the bailout. I was not disappointed, as he advised Americans to get all of their assets out of the country, and, maybe in a slip, ended by saying “get out of America.” He and I couldn’t agree more on politics (Ron Paul) and about the future of the land that used to be America — currency failure, war, Fascism, and all-around ugliness — and I used to basically believe his investment thesis (get out of the dollar ASAP!) until Mish and Prechter’s more nuanced analyses won me over to the deflation first then inflation camp about 12 months ago.

The crux of the matter is the difference in scale and pace between the Market’s deflation and the government’s inflation, and fact that the bankers’ credit inflation machine is broken.

Dollar carry trade still unwinding.

I turned bullish on the dollar vs the euro and pound a few months ago, and have been short-term bearish on oil, gold and other commodities since this spring. Shorting oil and gold last June was as contrarian as you can get — that is, contrary to the contrarians, since their views on a dollar flameout had become mainstream (see Mainstream Contrarianism Crushed).

Since then, commodities have tanked across the board as America’s script made a huge breakout rally against everything on the other side of the dollar carry trade. After a move like that, you have to expect some retracement, and that is what we have been getting for the last few trading days, as oil, gold and the Euro have each made up roughly half of their losses against the dollar.

Play it again, Bob.

I am still going against the grain here and using this as another chance to make the very same play. Anti-dollar sentiment feels almost as strong as this spring, as you would expect on the news that hundreds of billions to trillions more of our government’s notes to pay nothing will be issued to finance this bankers’ coup. The reason for my position is partly trading psychology (the WSJ reports that “Large speculators were net short more than 40,000 contracts in the euro and 49,000 contracts in the British pound, the most negative they’ve been on those currencies in the last 52 weeks”) and partly the fact that the carry trade has a lot further to unwind, since dollars were being handed out in buckets for so long against so many asset classes. He who sells what isn’t his’n must buy it back or go to prison, and there are still buckets and buckets of dollar debt out there that must be repaid or go to money heaven. Either way, it increases the value of the surviving dollars as people desperately need them to pay off debt and keep the lights on.

The US government will have the strength to enforce its legal tender laws for some time to come, if it can do nothing else, so the dollar will still be good for all debts public and private. And now that people are going broke left and right (broke means no money), those who still have some dollars safe in Treasuries or mattresses will find that they can get more and more for them, commodities included, at least through this initial phase of the depression.

Gold: don’t leave home without it.

The speed and magnitude of the bailout at this early stage of the depression is surprising, even though nothing about the substance of Paulson’s (and by Paulson, I mean the cabal that he represents) actions surprises me in the least. It will be interesting to see if these programs can speed us through deflation in a year or two, rather than the two to five years I had been assuming (Japan’s deflation lasted nearly a decade, but they were not as hell-bent on destroying their currency as Paulson and Bernanke are ours). At any rate, when the next inflation comes, it is the big one, so I would not want to risk being completely without hard assets at any time from now on.

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Disclaimer — I have no idea how, if at all, Prechter and Mish are playing the dollar and commodities or anything right now, so just because I cite their ideas here don’t assume mine are in sync with theirs. And, as always, don’t trade like me! Don’t trade at all! It’s too dangerous out there. I’m not an investment advisor, and I may have long or short positions in any of the securities, commodities or currencies mentioned on this site. See disclaimer page.

Prime brokerage clients stand to lose assets in Lehman bust

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This is why everyone needs to be extremely careful about their brokerage, banking, counterparty and business relationships. What would a bankruptcy of any of these entities do to your finances? From Bloomberg:

Lehman Won’t Return Prime-Broker Assets for `Months’ (Update2)

By Tom Cahil

Sept. 22 (Bloomberg) — Lehman Brothers Holdings Inc. will take “considerable time” before it returns assets stranded by the world’s largest bankruptcy to hundreds of hedge fund clients, according to PricewaterhouseCoopers.

“Our current view is that this process could take several months to conclude,” PwC, Lehman’s bankruptcy administrator in London, said in a statement today.

GLG Partners Inc., a $24 billion hedge fund, and CQS U.K. LLP. are among those that used Lehman as a prime broker for borrowing stock and clearing trades. They may now join a line of creditors trying to recover money after Lehman filed Chapter 11 bankruptcy on Sept. 15 listing $639 billion of assets.

“There’s a short queue to recover assets and a long one,” said Jerome Lussan, founder of Laven Partners LLP, a hedge fund consultant and investor in London. “If your hedge fund assets have been included with Lehman’s, you’re in the back of a queue that’s quite long.”

Lehman had the right to lend prime-brokerage clients’ securities as collateral in the stock-loan and repurchasing markets, PwC said. Securities used for these purposes were mingled with Lehman’s, PwC said.

“The assets, once `used,’ were no longer held for the client on a segregated basis, and as a result the client may cease to have any proprietary interest in them,” PwC said in the statement.

Margin account holders at any institution should beware. Read about SIPC and assess your risk. Is margin really worth it?

Questionable Value

Hedge funds with assets tied up with Lehman probably will have to write down the value of those assets when they report net asset values to investors or restrict redemptions, Lussan said.

“What’s the market value of, say, $100 million that’s owed to you by Lehman?” he asked. “I’d say it’s not that great, and it’s going to have to be written down.”

Any hedge fund managers who allowed Lehman to lend out their securities were asking for a world of hurt, and in my opinion, were not qualified to handle other people’s money.

Bailout not just for mortgage debt. Paulson wants to take any “troubled assets.”

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Better brush up on your Sun Tzu and Machiavelli if you want to survive in this investment climate, because now we know what rules they are playing by.

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Jeez. I wrote the following this morning, but I thought I was months ahead, not hours, and who knew they would use US tax dollars to bail out foreign banks? That is a surprise, but they don’t call it the international banking cartel for nothing.

I wrote: “The plan is to have the government take banks’ bad mortgage debt (will they add credit card, auto, student and corporate debt?)…”

Now I find this on Bloomberg this evening:

U.S. Treasury Widens Scope of Bad-Debt Plan Beyond Mortgages

By Dawn Kopecki

Sept. 21 (Bloomberg) — The Bush administration widened the scope of its $700 billion plan to avert a financial meltdown by including assets other than mortgage-related securities.

The U.S. Treasury submitted revised guidance to Congress on its plan, referring to its proposal to purchase so-called troubled assets, a change from its original plan for investments tied to home loans, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset.

Firms that are headquartered outside the U.S. will now be eligible, in another change from the guidance sent to Congress yesterday, according to the document. The size of the plan remains unchanged.

“If you must break the law, do it to seize power: in all other cases observe it.”

– Julius Caesar

They have long since crossed the Rubicon, and are playing winner take all.  Who know our bankers were such good students of history?

I can already hear the pro-Obama suckers saying, “what can you expect from the Bush administration and the Republicans? They are such fascists, always ready with a handout for their wealthy buddies.”

Well, take a look at Obama’s top donors and see if it isn’t a bunch of bankers who happen to be favoring him over the straw man from Arizona (here, here, and here). Besides, who better to enact a New Deal and get us into a really big war (Wilson, FDR, Johnson) than the Democrat wing of the ruling party?

Why bailouts will not stop the depression

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The market is a force of nature, like gravity. To use it is prosperity. To fight it is misery.

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By bankers, for bankers.

This is a bailout of bankers. The Fed was created by bankers, and the Treasury is run by a banker, so there are no surprises here.

The plan is to have the government take banks’ bad mortgage debt (will they add credit card, auto, student and corporate debt?), so that they are no longer insolvent. Solvency has always been the issue, not liquidity — that is a red herring. By no means will all of the bad debt (out of $50 trillion in total domestic financial and non-financial sector private debt) be absorbed by this program, which is going to move $700 billion at a time.

The fact that the government still relies on a market for its bonds puts limits on the pace at which debt can be socialized. There has been a great demand for Treasuries of late as safe havens, so the first tranche or two should be absorbed easily. Bonds may even rally more as assets prices continue to plunge.

Later, after the bulk of the deflation has passed and the bond market is saturated, this demand will ease and the Fed will have to buy greater and greater amounts of bonds with newly created dollars. The government’s spending needs are infinite, but the tax base and bond market are finite, so this phase of inflation can lead to currency failure. That can be chaotic, because contracts become meaningless when currencies are worthless. Out of such episodes arose Napoleon and Hitler.

Econ 101: Savings = Investment.  Lesson: reward savers with deflation.

We should embrace deflation, not fight it, because it restores sanity. The irresponsible go broke, and the prudent are rewarded. When money is tight, prices need to come down, and this encourages the savings that will turn to investment after the dust settles. Those who were smart enough to go into this crisis with savings are the ones you want allocating the capital for rebuilding, not the swindlers who beg for newly printed ‘stimulus’ money for their pet projects.

Your neighborhood, a government housing project.

Let’s assume the program actually removes all bad debt from bank’s balance sheets. Once again, they are fully capitalized and ready to issue loans, with assistance of course from an accommodating Fed. That will ‘fix’ one side of the reflation machine. On the other side, borrowers will still be choking on their existing debt and in no condition to take on more.

So the next step on the road back to inflation city will have to be debt relief for borrowers. As the owner of huge amounts of mortgages, the government is likely to be a very accommodating creditor. Can’t handle $2000 a month? Well, just pay $1000, but promise to spend the rest, ok! Or it could offer a quickie default: we take the house, but you can rent from us for cheap. In either case, the government has title to an enormous amount of housing stock, so all of America takes on the air of an inner city housing project.

(A side note: Once government becomes your landlord, it has a lot more leverage to force the installation of whatever it wants in your home, from ugly fluorescent lighting and those ‘efficient’ toilets that clog, to monitoring devices for your ‘safety’.)

The Crash is the Market, and It cannot be stopped.

Crashes are the market’s way of correcting the perversions of bubbles blown by bankers and governments. They are not market failures. The Market never fails. It is a force of nature. Bankers and politicians can shackle us with their guns and laws, but they cannot change the way the universe organizes itself. Any scheme but freedom, the absence of force (such as theft, a form of which is inflation), will be thwarted by the Market. Tax cheats, corrupt politicians, crooked brokers, smugglers and prostitutes are as plentiful as the laws that create them. In the absence of force (as George Washington said, “government is not reason; it is not eloquent; it is force”), the Market will reward honesty and industry above all else. When force is used liberally, society rewards George Bush Jr and Angelo Mozillo.

The government has tried to thwart the Market for so long, from the New Deal to the S&L crisis and beyond, that the distortions have become too big to support, and this time the Market is taking its revenge. Saving some big banks and some borrowers is certainly possible with bailout programs (rent seekers should call their lobbyists ASAP to get on that list!). But $50 trillion is way, way beyond anything the government can handle, so there will still be massive debt deflation left and right, and asset prices will continue to crash.

Debt revulsion is the fly in the reflation ointment.

To reflate, we need willing and able borrowers and lenders (inflation is the net increase of money and credit, deflation is their net decrease). Even if all bad debt is taken off the books of both borrowers and lenders, can the Feds rekindle America’s affair with debt? The answer is yes, eventually, but it won’t be any fun this time.

If the government forces the issue before the Market has cleared the way for growth, people will only be willing to borrow again to protect against the decline in the value of currency. During the crash, currency will continue to gain in value, so for at least the next couple of years, borrowers are going to be very wary of debt. They don’t want to repeat this nightmare, and besides, with asset prices crashing, the economy in a tailspin, and new regulations restricting commerce, where on earth can investors profitably deploy this capital? China? Not so fast — investing abroad may be restricted. Even with a 0% loan, can borrowers generate any return at all in this environment? With poor investment prospects and no need to protect against inflation, few will be willing to borrow.

This is why the traditional reflation machine will stay broken. This is the machine that Greenspan operated for the bankers with such mastery. But try as Bernanke might, this machine will not start up again until money or credit is somehow flooded into the economy through other means.

¡Chavismo!

In Hugo Chavez’s Venezuela, people borrow not for productive uses, but to speculate in any kind of asset that will lose value at a slower rate than inflation plus interest. It is a sickening thought, because it totally perverts all economic decisions and leads to staggering waste. We have just experienced a milder version of this in the US, but at least we built a few useful things with the credit, though most will go to waste.

In Venezuela, people invest in new automobiles, sometimes fleets of them, because the sum of interest and depreciation on the vehicles is less than the rate of general price increases. Hence, cars bought new appreciate in Bolivars as they rust in driveways. Venezuelan society is in a later stage decay than the US, but it may resemble our future.

The new New Deal, and the Neverending War

So how do you get that stubborn price level (the rearward looking indicator, CPI, was negative in August — expect more and bigger negative numbers for many months to come) to start ticking up again with gusto? After a general asset price crash, which I emphasize cannot be prevented at this point, the government can spend and spend and spend.

If you think the bridge to nowhere was ridiculous, you haven’t seen anything yet. Our sociopathic leaders, with hearty encouragement by esteemed professors, seem to have no problem with the old Keynesian theory of burying bottles stuffed with cash and letting people dig them up. Hey, it puts people to work and raises the price level! Let’s all pray for more hurricanes while we’re at it. Think of the boost to GDP!

Expect lots of pork for ‘green’ energy projects, and expect those projects to cost more than they produce and have all kinds of perverse effects. Expect national ‘service’ programs (if mandatory, they are national enslavement programs) such as have been touted by Obama, Hillary and the media wing of the Fascist party (now the only party in power in the US).

We were all taught in school that although FDR’s valiant efforts helped put Americans back to work, what really saved the US from sinking into a big hole the earth was War, glorious War. How lucky of us to already have two of them going and plenty more enemies lined up just in case!

Take it from Murray Rothbard; this is no market failure.

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Austrian economics has the answers to all your boom-bust questions (and can make you money — try that with Keynesianism or whatever they are calling today’s brand of socialist economics).

I am just going to quote the incomparable Murray Rothbard here (source):

 

“We can only sum up the correct answer to the problem of the business cycle. We have already seen a hint of the solution: that inflation and the inflationary boom are caused by bank credit expansion generated by governments. In fact, government’s central banking system provides the key causal element for all business cycles, a cause exogenous to the market economy. Continuing government intervention sets in motion business cycles by generating inflationary booms. Because these booms distort the signals of the market place in interest rates and in relative prices they bring about grave distortions of production and prices, which must be corrected by recessions and depressions.

In short, government intervention cripples the market economy, and recession or depression is the painful but necessary adjustment by which the market reasserts itself, and liquidates the distortions committed by the government’s inflationary boom. After each depression, the government generates inflation once again, because it is the government’s natural tendency to inflate. Why? Quite simply, whoever is granted a monopoly of printing money (e.g., the Fed, the Bank of England) will use that monopoly and print – to finance government deficits, or to subsidize favored economic groups. Power will tend to be used, and the power to create money out of thin air is no exception to the rule.

And so we see – and this is the great insight of the “Austrian” theory of the trade cycle – that micro and macro economics are in harmony after all. The free market does tend to adjust harmoniously without boom and bust, without incurring clusters of severe business losses. It is government intervention in the market that creates the business cycle, and unfortunately makes the corrective adjustment of recessions necessary. The cause of the boom-bust cycle is not some mystical periodic Force to which man must bend his will; the fault, dear Brutus, is not in our stars but in ourselves, that we are underlings.”

Murray was a fearless enemy of the state and prolific writer. You can find tons of good stuff from him here on LewRockwell.com.

Debt ceiling to be raised for 3rd time in 12 months. Now $11,315,000,000,000.

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This little provision was slipped into the bailout bill (published on nytimes.com):

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

The last raise was only in July, to $10.6 trillion. Before that it was increased in September 2007 to $9.815 trillion. With the new limit, we have a 15% increase in 12 months, but that pales in comparison to the annualized rate of increase since July.

So those are the debt issuance figures: in the ballpark of $1 trillion extra for now, but surely to rise greatly as the panic deepens, tax receipts dry up, and a new New Deal is enacted. Not to mention any extra war expenditures, also no doubt on the way.

Note that these figures only refer to the sum of Treasury bonds outstanding, not the discounted future cost of entitlements, which adds another $90 trillion to the tab. It is a pretty safe bet that the US will never have a balanced budget again and default on its promises through failure to deliver services and inflating away its Treasury debt.

But before you go and put everything in gold juniors, remember that Japan ran massive deficits all through its lost decade of the 1990s, and they still experienced sustained deflation and had very low Treasury bond yields. The reason is that the debt issuance and public expenditures could not make up for the massive wealth lost in the aftermath of their real estate and stock bubble of the late 1980s. The Nikkei is still down 69% (and falling) from its high two decades ago.

Wall Street Journal has no problem with bailouts and more regulations.

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As Jim Grant remarked yesterday, we should all observe a moment of silence for the passing of capitalism. This morning’s Journal, on the other hand, would have us believe that capitalism was too much trouble and always needed help from the government anyway.

The paper today contains a sly push for public support of the socialization of banking losses. The message: Paulson HAD to do it. Relax, bailouts are no big deal. We need them from time to time (to correct ‘market failures’), and they work out fine in the long run. Heck, they’re a tradition.

Lets look at the headlines and some snippets:

Article: “Shock Forced Paulson’s Hand”

“When government officials surveyed the flailing American financial system this week, they didn’t see only a collapsed investment bank or the surrender of a giant insurance firm. They saw the circulatory system of the U.S. economy — credit markets — starting to fail.”

“Huddled in his office Wednesday with top advisers, Treasury Secretary Henry Paulson watched his financial-data terminal with alarm as one market after another began go haywire. Investors were fleeing money-market mutual funds, long considered ultra-safe. The market froze for the short-term loans that banks rely on to fund their day-to-day business. Without such mechanisms, the economy would grind to a halt. Companies would be unable to fund their daily operations. Soon, consumers would panic.”

“Mr. Paulson and Federal Reserve Chairman Ben Bernanke sped to Congress to seek approval for the biggest government intervention in financial markets since the 1930s. In a private meeting with lawmakers, according to a person present, one asked what would happen if the bill failed.

“If it doesn’t pass, then heaven help us all,” responded Mr. Paulson, according to several people familiar with the matter.”

My response:

Don’t let Mr. Paulson scare you. That’s how government always gets its subjects to grant it more power.

To let it all come crashing down is exactly what the country needs right now. Let the bad debts bankrupt the bankers and speculators. It is sickening to reward their kind of behavior, and it perpetuates the boom and bust cycles that hurt all of us. Innocent victims would learn a lesson in trusting bankers and regulators, and would not be as easy to swindle in the future.

To do nothing is the only honest and fair response, and it would be natural justice. It would set us up for a powerful recovery on a solid foundation, as we would remember the lessons for ages, as an earlier generation remembered the lessons of the 1930s.
Let asset prices crash. This is not real wealth anyway, this financial wealth people think they have.  The real wealth will still be here in our companies, roads, trains, farms, communications cables, water treatment plants, brains and personal networks.
Those who are afraid of free markets have no faith in mankind and no understanding of how the US became such a great place to live in once upon a time. It can be great again in no time at all if we throw off the shackles.

But it seems that most people’s minds are too far gone. A century of socialist propaganda in media and schools has poisoned even the sharpest minds of the nation, and I believe we will stay this tragic course until we reach Animal Farm.

Article: “In Turmoil, Capitalism Sets New Course”

“This past week marks a decisive turn in the evolution of American capitalism.”

“Gone is the faith, shared by the nation’s leadership with varying degrees of enthusiasm, that the best road to prosperity is to unleash financial markets to allocate capital, take risks, enjoy profits, absorb losses. Erased is the hope that markets correct themselves when they overshoot.”

“The Depression triggered, among other things, sweeping new rules governing the financial system — including the 1933 Glass Steagall law that separated commercial and investment banking until its repeal in 1999. The inevitable result of this crisis, once it ends, will be more government control of the financial system. The only questions now are how much tougher the new oversight will be, what form it will take and how long until the restrictions are loosened or evaded?”

“The shift in strategy reflects the realization by Mr. Paulson and Federal Reserve Chairman Ben Bernanke that the financial crisis was intensifying in recent days, endangering the entire economy. Confidence deteriorated markedly. Distrust spread. Credit markets weren’t functioning and lending dried up. Normal business wasn’t getting done. The two remaining free-standing investment banks were under severe pressure. The panic was spreading to ordinary Americans, who were beginning to pull money out of money-market mutual funds.”

“The government has bailed out financial institutions — and particularly their creditors — and taxpayers will pick up the tab for many of the institutions’ bad decisions. That could encourage bad behavior in the future. So, the government needs to craft a new regulatory regime to reduce those incentives.”

Article: “Government Bailouts: A US Tradition Dating to Hamilton”

My comment:

It’s no surprise to see this founding fascist’s name come up. Banker and president Alexander Hamilton was libertarian Thomas Jefferson’s ideological nemesis, but he has always been a hero to corporatists.

“The bubble pops. Lenders freeze. Depositors lose faith. Panic spreads. And the government steps in because nobody else will.”

“…a short walk through U.S. history demonstrates the point made by Alex J. Pollock of the American Enterprise Institute: “If you would like an empirical law of government behavior, it is that in a panic or threatened financial collapse, governments intervene — every government, every party, every country, every time.”"

The Journal on the Panic of 1792:

“Hamilton engineered an innovative response. The Treasury borrowed money from the banks and used it to buy government bonds, lifting the market price. He also told banks to accept bonds as collateral for loans to securities brokers, with the government guaranteeing the collateral.

“What Hamilton did in 1792 is just like what Paulson and Bernanke are doing now,” said Mr. Sylla, who teaches at the Stern School of Business at New York University.

“The financial system stabilized in April, and not a single bank failed until 1809. Mr. Hamilton’s improvisation did the trick, or at least so concludes Mr. Wright, also at NYU. He named his son Alexander Hamilton Was Wright.”

The Journal on the Great Depression

My comment: You can always count the press to laud FDR, another of the top five worst presidents of all time.*

By 1933, four years after the infamous stock-market crash, about 1,000 American homeowners a day were losing their houses to the bank. President Franklin Delano Roosevelt and Congress created the Home Owners’ Loan Corp., an ambitious government agency designed to prevent foreclosures on an enormous scale.”

The current mortgage crisis involves securities backed by subprime home loans. But during the 1930s, there was no secondary market for securitized mortgages. So the agency had to hold the mortgages for the full terms. It finally closed up shop in 1951, with about 80% of borrowers having paid their loans off on time or early.

“The agency earned the government a small profit. “You save 80% of the people from being tossed out of their homes, and it didn’t end up costing the government a dollar,” said Lee Davison, a historian at the Federal Deposit Insurance Corp., another Great Depression creation.”

The Journal on the S&L Crisis:

“In 1989, after eight months of debate, Congress created the Resolution Trust Corp. to make depositors whole, investigate allegations of wrongdoing and deal with the husks of the S&L industry.

At the time, skeptics warned that government was reaching too far into the marketplace, and predicted darkly the RTC would be saddled with bad assets for generations.”

“Mr. Davison, the FDIC historian, wrote in a 2006 journal article: “Perhaps a measure of the RTC’s success is that little more than a decade after it closed, this agency that provoked so much debate is now largely forgotten.”

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*The top five worst presidents of all time:

Hamilton. Authoritarian who opposed the republic of free states and supported a permanent president. Published Federalist Papers, a great propaganda lie. (Thank God for Jefferson and Madison.) Hamilton brought central banking to the US, and favored heavy handed regulations and taxes for the benefit of his banker cronies.

Lincoln. Corporate tool who favored taxes and handouts to the rich. In a needless and unconstitutional war, he destroyed the free alliance of independent states and killed 600,000 men. A totalitarian in war, he ordered total warfare (to that date considered immoral and barbaric) including a scorched earth policy and the killing of civilian men, women and children. Jailed newspaper editors, ran brutal concentration camps, did not free northern slaves, and wanted to ship all blacks to Liberia or Latin America.

Wilson. Megalomaniac ran on a promise to “keep our boys out of the war”. Worked tirelessly to get us in, and provoked the sinking of the Lusitania to such end. Massive wartime profits ensued for connected businesses. Signed Federal Reserve and income tax into law. Raised income tax to over 76% in war. Deficits caused massive inflation. Forcibly silenced war opposition. Pushed League of Nations, an enterprise of the international banking cartel.

Franklin Roosevelt. The father of American socialism taught bankers that it was OK to blow bubbles. Taught citizens that they didn’t have to save for a rainy day, established all manner of price and wage controls and bureaucracies. Packed the Supreme Court, took an extra term in office on the promise to keep the US “out of Europe’s war”, then worked around the clock to get us in. Provoked Germans and Japanese, knew for days that Japanese they were en route to Pearl Harbor and did nothing because the bankers and big corporations wanted war.

George Bush. Unessary war started by falsehoods, creeping totalitarianism, expanded socialism, and now the final death of any pretense of capitalism in the United States. His redeeming feature is that he is a sock puppet and too lazy to take an active interest in the horrors that he signs into law. Chronically incurious, he probably understands very little of what he has done.

A chill in the air

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Volume was downright anemic today after shorts were done covering at the open. Few were touching the market on the high plateau that formed. Look at DIA (Dow Diamonds Trust) volume:

Click image for sharper view. Source: Bigcharts.com

Isn’t that creepy? I heard a Bloomberg reporter say that the NYSE floor had an atmosphere of exhaustion this afternoon. There doesn’t seem to be any enthusiasm for stocks are these prices, save from the cheerleaders on TV. I would be very surprised if this were a lasting rally.

Where are we headed? History leads the way.

Our collective reality is going through a huge phase shift this fall. This is one of those events that sets the stage for drastic social changes. This would be a great catharsis if only the West had not lost its moral compass and embraced collectivism. Instead, our oligarchy is ensuring that the foreseeable future will be a never ending nightmare.

Collectivism always leads to economic and political horrors. Apparently Americans have learned no lessons from Russia and China’s experiences in the 20th Century, nor innumerable smaller failures at home (the Fed, FDIC, entitlements) so they are doomed to repeat their worst mistakes.

Those looking for a bottom should be prepared to wait at least two generations. The USSR lasted from 1917 to 1989. China was only communist from the 1940s to the early 1980s. Argentina’s economy collapsed in the 1930s and has never recovered. There, kleptocracy replaces kleptocracy, because the people fail to understand that they do not need this giant racket they call a government.

Freedom is a very, very rare human condition. Those of us who experienced a relatively high degree of it in the US prior to 2001 are lucky to have those memories.

Almost by definition, not many people are likely to accept my view of affairs at this stage of history. In Russia, the government was not accepted as the big joke it was until the 1980s, when everyone had finally learned their lesson. In Stalin’s day, one did not dare laugh. The whole nation had the air of a US airport security checkpoint: very serious business, these sacrifices for the collective good.

People do not want to accept that their reality is this horrible, so most simply don’t. Willfully blind to the danger, they don’t stand up to the outrages (fight), nor do they flee (fright). So the horrors progress with no resistance, even though this is still the phase where they might be stopped, if only people had more faith in themselves and less in their government.

History is full of the futile and fatal enterprises of collectivism, and once on a path to ruin, nations seem to stay the course. Why did the French and later the Germans march all the way to Moscow? Why did Macedonia under Alexander try to conquer India? Couldn’t they see that it was madness?

Bond sell-off just a correction. Bailouts will not stop deflation.

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Bottom line: Paulson brings a bazooka to an H-bomb fight.

Bond update first:

As usual of late, today’s action in Treasuries was the exact opposite of the stock market: a massive sell-off.  High bond prices reflect fear, which hit a new high earlier this week. Today’s action was not just a short-squeeze. It was collective relief, a pause for our nerves. We will need them for what is yet to come. Here are the bonds (Bloomberg):

Click image for sharper view.

Does he even know how that thing works?

Like all of the bailouts, the planned socialization of (admittedly bad) mortgage debt puts another chain around Lady Liberty’s neck for the short-term of benefit of a few bankers. But hey, what’s another trillion or so when taxpayers are already on the hook for $100 trillion?

Here’s Paulson on the program’s ostensible goals:

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible. The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.

*Opposite rule of government action

According the rule of opposites (the most reliable indicator for predicting the outcome of government actions), we now know that the program will threaten the economy, not protect the taxpayer, cost far more than the alternative, and impede economic expansion.

The Sum of All Debts

And yes, these kinds of programs are highly inflationary, but they still pale in comparison to the size of the debt and equity that is imploding. The Fed’s balance sheet is 900 billion and growing, the deficit next year will certainly be over $1 trillion, and GDP, which used to ostensibly be $13.8 trillion, is shrinking fast. These figures put upward bounds on the payload of government’s bazooka.

To put this in perspective, Paulson’s gang is squaring up against the following:

  • Private debt is roughly $50 billion (Federal Reserve: sum of domestic non-financial and domestic financial).
  • The total capitalization of the US stock markets is roughly $15 trillion.
  • Total residential real estate has been estimated at over $23 trillion.

The amounts by which the latter figures are contracting exceeds the government’s reflation efforts by some multiple. Deflation will continue — accelerating in the near term — and not abate until so much wealth has gone to money heaven that government’s expenditures finally surpass its rate of implosion. Despite the bailouts, and what will surely be a new New Deal and probably an expanded war in Asia, that point of equilibrium will arrive years from now. In the meantime, cash is king once more.

Risk hangover

One more point on the banks: they may be relieved of their bad debt and provided with fresh reserves, but the inflation machine will remain impaired because individuals and corporations have just learned a very hard lesson about debt and will be averse to borrowing for many, many years to come. Borrowing like we have seen in recent decades requires an appetite for risk, but the stuff now makes people nauseous.

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*Rule of opposites as applied to government action: Every action that government takes results in the opposite of its stated intention. (credit to Mish for identifying this law of nature)

  • Affordable housing programs make housing unaffordable.
  • Deposit insurance makes the banks unsafe.
  • The SEC creates risks for investors but does not protect them.
  • Free trade agreements are thick books of rules restricting trade.
  • Social welfare programs create poverty and poor health.
  • The Ministry of Peace (er, I mean Department of Defense) conducts offensive wars.
  • Homeland Security makes Americans feel insecure at home and relaxed abroad.
  • FEMA inhibits recovery from emergencies.
  • The FDA keeps Americans hooked on drugs, many of them dangerous, and inhibits accurate labeling on food.

The list goes on ad infinitum.

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PPS — For a full rundown of why these bailouts won’t stop deflation, read chapter 13 of Robert Prechter’s Conquer the Crash. He predicted this exact scenario years ago.