Tag Archives: bailouts

So, where are we now?

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When I started this blog in early August, I was living near the equator in a city overlooking the Pacific, having packed up and shipped out of New York just after Bear Stearns blew up.  18 weeks ago, the Dow was solidly over 11,000, the 30-year bond was 4.6%, gold was $900, oil was $120 and the latest CPI figures were showing double-digit annualized inflation. I was holding a huge array of LEAPS and ETFs that put me massively short equities (including mining and energy), net short gold, and long Treasuries.

I was then constantly emailing friends and family with my latest reasons to get out of stocks, miners included, and to buy into Treasury MMFs and index puts. For the previous nine months I had been endlessly explaining the logic of deflation and its implications, having been dissuaded of Schiff-esque conclusions by the likes of Mish and Prechter, and I wanted to go on the record more publicly with my calls. Besides bragging rights, I wanted the pressure to dig deeper and get the details right.

I called for a depression worse than the 1930s. I said that the Dow was on its way to below 3500 (under 9500 by Christmas, I suspected), that commodities would tank, that gold would fall well under $700, that there would be huge bailouts for the crooks who blew the bubble (though I never thought we’d see anything like $9 trillion by the end of ’08), that Obama would win and back a “new New Deal” and that the long bond would yield less than 3% anyway.

Let it be known…

I believe that the only market call that I got wrong was my early preference for the Swiss Franc over the dollar, but I switched out of that on the first real signs of dollar strength. Please call me out if you know of any others. I also sold my Proshares inverse ETFs very early in the crash (over the week or two following the late September shorting ban), and of course they did not proceed to fail from a swaps default, but given the lack of disclosure regarding counterparties and collateral, that was the right call, especially for a portfolio stuffed to the gills with puts anyway.

Living history.

And so this is Christmas, and where are we now? Well, I’ve ditched the volatility of Latin America for frosty and gorgeous Zurich, and the world is falling apart more or less on schedule.

I haven’t traded much since November, other than to close some more shorts on dips. I’m not a short-term trader. Starting in mid-2007, I recognized a rare opportunity to catch a tidal wave, and positioned myself for the big move. I wound down my business by early ’08. I got out of all long positions. I put most of my eggs in one basket, and I watched that basket!

By August I was glued to the computer, tracking dozens of data streams. At times this fall I was sleeping 4 hours a day, waking up at 3AM to watch the crash wash around the globe and plan out the day’s orders for several different accounts. Naturally, this blog was a big part of that routine, as it helped me to organize my thoughts. It was also fun to see all of the traffic come in, 600 visitors a day at times.

Man, the action was fantastic, wasn’t it? What thrills! The weekend that Lehman was thrown to the dogs; the desperation and collapse of Wachovia; the ETF scare when AIG folded (swaps mayhem!); the 4% TED spread; even worries that the Options Clearing Corporation might default. This was uncharted territory. Nobody knew exactly how fragile the system was — clearly, it had been built by schmucks who hadn’t read history and wouldn’t give a damn anyway, and we didn’t know how much stress each component could take.

So for now “the system” still stands, though I have a few more gray hairs.

Politics is (really) theater.

Team Obama is of course the same Team America that has been running this show for time immemorial, the face change being a tried and true steam release for public discontent. But this time around, with the internet allowing any inquiring mind to look behind the curtain, it is still astounding to me how even intelligent people are relieved to see a ‘change’ in the White House, even as well known made men line up for posts at Treasury and such.

The Who knew this game:

We’ll be fighting in the streets
With our children at our feet
And the morals that they worship will be gone
And the men who spurred us on
Sit in judgement of all wrong

They decide and the shotgun sings the song
I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again

The change, it had to come
We knew it all along
We were liberated from the foe, that’s all
And the world looks just the same
And history ain’t changed
‘Cause the banners, they all flown in the last war

I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
No, no!

I’ll move myself and my family aside
If we happen to be left half alive
I’ll get all my papers and smile at the sky
For I know that the hypnotized never lie

Do ya?

YAAAAAH!

There’s nothing in the street
Looks any different to me
And the slogans are replaced, by-the-bye
And the parting on the left
Is now the parting on the right
And the beards have all grown longer overnight

I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again
No, no!

YAAAAAAAAAAH!

Meet the new boss
Same as the old boss

Travel, sleep, extracurriculars.

I apologize again to those of you who miss the active posting. Everything is fine. I’ve just been away from the markets (relatively speaking) since November, since I’ve been on a lot of airplanes and have lately been taking some time out to attend a German course.

Besides, I never really intended for this to be a news blog. I don’t have much new to say on each bailout measure or report of economic distress, since they are all just color at this point. They shouldn’t surprise anyone now, nor should they change anyone’s expectations. This is a depression and the government is only making it worse. It will last for years, and the US will become much less free in the meantime. At some point in the next few years, the Treasury market will buckle. Things will get very interesting when the government has to default on its promises. In the process, the global paper money system may change dramatically, from a fracturing of the EMU to unprecedented inflation in the US. We don’t know how or when these things will happen, but we do know that holders of all kinds of government paper will get stiffed, so we just have to keep buying gold at a measured pace — less now, more later, much more under $600.

So here are some new predictions for the next 24 months:

Unemployment as reported will hit 12%. Real unemployment (U6 — see shadowstats) will be 25%, as in the ’30s.

GDP will fall at least 15% from peak 2007-2008 levels. GDP is a bogus stat (why are consumption and government expenditures included?), but I’ll defer to convention.

The Dow will have breached 3000, with a few 20% rallies along the way, a couple of which lasting a few months.

Home prices will continue to drop, and Case-Schiller will register a 40% decline from peak by the end of 2010.

Trading notes

As far as trading goes, nothing is very compelling to me at the moment. I’m still holding a large, though much smaller, basket of 2010 puts on the S&P and various and sundry industrials, retailers, REITs and miners. I’m still holding real money of course, though I still have some hedges on it via GLD, and I have put the bulk of my shorting profits in T-bills, where they will sit until I am compelled to go more heavily short by a more heartfelt equities rally or heavier into the heavy metal at the right price.

Agriculture, as I have mentioned, is interesting. Grains never go out of style, depression or not, and prices are not in bubble territory anymore. Except for the last couple of years, farming has not been very profitable for decades, so the sector could be in need of investment. Also, a less free global market and greater political tensions (both a consequence of government responses to depressions) could mean shortages.

Energy is also getting tempting. Crude production peaked in the first half of 2005 — we will never again get as much out of the ground as we did then. The stuff is really, really, cheap. It was also cheap at $147, but I still shorted Suncor. $25 is not out of the question, but really, waiting for the bottom of the bottom is a fool’s game. I’ll be looking for ways to scale into oil and uranium slowly over the next couple of years.

No final bottoms.

I don’t think we have seen bottoms in anything yet: neither grains, nor metals, energies, foreign currencies, corporate bonds, munis nor equities (other than those at zero already). We have only seen the first move, but this move tipped the market’s hand.

All the same, I don’t like to be in the way of such a compressed market. Make no mistake — a rally and general improvement in mood could last a year! At all points in this bear market, consider what would happen to your portfolio if prices were higher 12 months out. Being right but early is being wrong if you lose so much that you compromise your ability to trade within the limits of prudence. Look for the layups and buy yourself as much time as possible. If you are going to short, find far-out LEAPS and buy them cheaply. Be a miser. The profits (and losses) are all in the buy.

Two contemporary libertarian greats talk about the crisis.

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Mises Foundation founder Lew Rockwell interviewed blogger Mike “Mish” Shedlock on his podcast series:

Link here.

Topics include bailouts, ‘stimulus’ plans, the benefits of deflation, and Mish’s campaigns to end bailouts and abolish the Fed.

Mish is really pushing hard politically. I’m 100% behind him, but I worry a bit about how the gangsters might respond to him now that he is getting so popular.

Also check out Lew Rockwell’s podcast archives and look for Jim Rogers’ interview yesterday.

—

PS — Sorry again for the lack of posts. I’ve been a bit unsettled of late, having been in the middle of a transoceanic move.

Listen to the people who predicted this: No bailouts, no New Deal, no serfdom.

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Here is a list of popular personages who predicted this credit implosion and depression while the bubble was still being blown:

  • Robert Prechter. In 2002, he published Conquer the Crash, How to survive and prosper in a deflationary depression. So far right on the money except gold hasn’t fallen hard (yet).
  • Jim Rogers. The man has good timing when it counts. He bought a NYC townhouse for 107k in 1977 and sold it for 16 million last year and got the heck out of Dodge. He moved his family, business and money to Singapore and shorted the US market. Missed the turn in commodities, though, and refused to sell China out of some kind of principle.
  • Peter Schiff. Published Crash Proof in 2006, which has been pretty accurate other than Schiff’s missing the deflation stage and holding commodities and foreign stocks too long. The results of the New Deal and bailouts are likely end with the currency failure he predicts.
  • Mish Shedlock. Publisher of a popular blog, Mish has been warning of a deflationary depression since 2005 or 2006, and now has the best record of predicting its course (deflation, bailouts, gold and the dollar doing well).
  • David Tice. Manager of the Prudent Bear Fund, BEARX, which is performing spectacularly.
  • Doug Casey, the original international speculator, and publisher of the Casey Research newsletters. Missed the deflation part, also burned by commodities, but spot on about fascism.

There are countless others who saw this coming, including Congressman Ron Paul, who’s own studies of monetary policy inspired him to first run for office.

What do all of these men have in common that allowed them to see around the corner? They understand money and the credit cycle. How did they learn it? Not in college, that’s for sure, because colleges teach perverse Keynesian claptrap. They have all read the Austrian economists, in particular Ludwig von Mises and his American pupil Murray Rothbard. Their explanation of the business cycle as the credit cycle is both elegant and extremely powerful.

And what do all of these followers of the Austrian School think we (meaning our governments) should do, now that their worst fears are coming true? In a word, to a man, nothing.

Don’t fear the crash. Fear fascism.

You see, the very worst fear of Austrians is not a crash or a depression, which is actually the healthy restoration of sanity after a credit-fueled mania, but the expansion of government that seems to follow these events like day follows night. Frederic Hayek laid out these fears in The Road to Serfdom, and that is exactly where we are going: utter economic collapse. The government is going to hamstring the markets and drain our resources for its pet projects and wars, all for our own good. Their aim is to stave off a proper accounting of the losses that have already taken place, and to preserve the power of those who inflated our way into this mess.

The damage from the bubble is already done. Government adds new damage.

What not one person in 10,000 understands is that the losses have already taken place. The losses were the waste of resources and labor for doomed endeavors that never made sense: think McMansions in the desert, and the roads, power plants and strip malls that served them. The price declines that we are now experiencing are necessary to restore valuations that reflect true values, because proper pricing clears markets — it allows people to accurately assess the worth of certain items against that of others.

A 5000 sqaure foot house on a dry hillside 20 miles outside of Phoenix is a money pit, not a million dollars. It was never properly valued in terms of the labor and raw materials that went into it. But because bankers, backed up by the Fed and various government programs and guarantees, would lend $1 million to buy it, those resources were drawn out into the desert instead of to sustainable productive uses.

An honest, gold-backed monetary system and a free-market banking system with no government support would never have allowed bankers to misprice assets so greatly. Any that did would face severe difficulties inducing the public to trust them with deposits. But with FDIC, who cares what your bank does with your money? And bankers say, “with the Fed to bail me out, who cares if all my loans blow up?”

What will happen if government doesn’t lift a finger?

The owners of McMansions will lose them to the banks or other mortgage holders, and those mortgage holders, if they bought the paper with loans of their own, will lose them to others, and so on. Almost every bank in the world will fail. They have all come to depend on deposit insurance and central banks to cover for the fact that they have been reckless and insolvent from nearly day one. There will be no bank lending at all.

What will happen to the depositors? Well, almost all of their money will be lost.

So, that is what we are looking at: every bank failing, zero bank lending, almost all the money in the world going to heaven. How is that not the end of the world? Simple: It is a reverse split. In 2006, let’s say, there was a million dollars in total bank deposits. Then in 2008 all the banks go under. All that is left is the cold cash in people’s pockets, let’s say $100,000 in all.

That remaining cash becomes extremely valuable. It has to work where one million did before. If you had $10 in your pocket and $90 in the bank, you now treat each dollar as if it were ten. The key is that so does everyone else. The world still has its unit of account and medium of exchange, we have just moved the decimal point over on all prices. (Note: gold and silver would rapidly re-enter circulation and quickly become the preferred money, as they always do until government outlaws them).

Of course, deflation on this scale makes debts unpayable, so essentially all debt is defaulted upon, but of course most creditors are bankrupt too. Contracts have to be renegotiated or annulled. No big deal, really. The assets are all still there, just the same as before. Nothing has burned down. A car bought on credit still gets the same mileage as before its loan went bad, a house keeps you just as dry.

Trust the prudent and smart, not bankers and politicians.

Such an event brings about a massive transfer of wealth from the reckless to the prudent and farsighted, who are exactly the people you want making the decisions about what to do with money and assets after the crash. They are statistically and philosophically the best equipped to decide what will generate the highest returns with the lowest risk. Life goes on. There is nothing to rebuild because nothing was destroyed. It is all just reordered in a more sensible fashion. The house in the desert is scrapped for materials. The Lehman mortgage traders find something productive to do, like drive cabs.

But that outcome is so quaint, so 1800s, so gold standard. We’re more scientific today. Bernanke is a wise economist. Congress is benevolent. War is peace, and lies are truth.

Don’t worry about the Fed printing…yet.

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Here are a couple of charts that illustrate the significance of what the Fed has undertaken lately. First, look at the change in its balance sheet this year from about $870 billion, almost all in Treasuries, to $1.5 trillion, with fewer Treasuries, more repos and swaps, and an alphabet soup of new credit facilities:

Source: Federal Reserve Bank of Atlanta’s Macroblog (yes, a Fed branch has a blog).

For the inflation/deflation issue, what matters at the moment is that all that new credit (not much new currency, only about $30 billion more in actual notes) is just sitting in banks. Unlike in the Greenspan years, nobody worthy of credit wants to borrow the new funds, since they can’t generate positive returns on investments, and the banks aren’t lending to people with bad credit anymore.

How do we know it is not being lent out? The Fed is actually pretty transparent as far as nefarious government sponsored entities go, and provides a lot of useful data through the FRED website. Here is the sum of loans and investments at US commercial banks:

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As you can see, lending has gone flat after an enormous expansion. And this is just the past 5 years — check out the longer view for a graph that would have knocked Mises’ Austrian socks off:

When you hear “credit bubble”, think of the above.

–

Workers of America, Unite! (to fight the evil of lower prices)

Inflation, in the end, will have to come from massive government spending programs. The Greater Depression will have a scaled up New Deal. Keynesianism is still all the rage, and when the bailouts have had time to fail, expect Obama to start handing out trillions to government contractors through various new Orwellian-sounding departments and administrations.

For the dollar, the Treasury market will be the canary in the coal mine. It is rallying now from safe-haven buying, as it should, and it could even go a lot higher, but when it turns, grab your gold and run. Nothing is so damaging to an economy as government work programs and the kind of inflation that they create. This is what happened in the Wiemar Republic. The government was the main employer, and it paid workers (and foreign creditors) with freshly printed cash.

In the US, I imagine that the public finance system will continue to operate as it always has: 1) Taxes, income from which will continue to drop in the depression; 2) Bond sales, but there is a limit to the world’s appetite for notes from a bankrupt creditor; 3) Federal Reserve money creation for the purchase of bonds that the public does not want. This last part is how fresh cash gets into circulation, and how the government indirectly funds itself through printing. When public demand for Treasuries dries up, you can bet the government’s demand for funds will be greater than ever, so then we will see what Bernanke can really do with a printing press.

Bailouts will cost jobs and cause good businesses to go bankrupt.

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Bottom line: Bailouts will waste our savings and remaining credit, and exacerbate the flight of capital and talent from the US.

__

I was extremely surprised on Monday when the House rejected the first version of the Crime of ’08, but I remain certain that an essentially identical bill will become law. When it does, maybe as early as the end of this week, any ensuing rally (and there is no guarantee that a rally will occur) will last a few weeks at most and lead to a very powerful decline as the reality of the depression sinks in this winter. (Obama’s inauguration should be another huge disappointment, just more false hope to be sold.)

The bailout will cost the economy jobs because it is a transfer of savings from intelligent, prudent hands that are likely to deploy it productively to those that create nothing but distortions in the marketplace. The financial scamsters have balance sheets in such horrible shape that it could take up to $5 trillion to recapitalize them, so it is a certainty that this $700 billion is just a first installment to keep the lights on, but not enough to enable them to start taking risks again.

You can lead an investor to credit, but you can’t make him borrow.

On the demand side of the credit equation, the citizenry is fed up with debt. People are saddled with enough of it already, and with their homes and investments falling in price, they feel compelled to save, not borrow. Anyone willing to take a consumer loan right now is the most reckless sort of borrower and should learn to live on earnings alone. Smart car shoppers pay cash, and smart house shoppers are biding their time. It is a bad policy to finance consumption anyway, including home purchases. What’s wrong with renting and saving up?

Many companies have a need for short-term funding, but this is just to put out fires, not to invest in productive capacity. Interest rates on those loans should be high in order to justify the risk of supporting businesses that might be dependent on a bubble economy and therefore deserve to fail. The short-term commercial money market got way out of hand in recent years and contributed to a lot of wasteful expansion, so it is healthy for it to contract.

Today’s ISM numbers are just a taste of what is to come. The industrial sector will need to scale down massively because it expanded too much during the boom. Responsible executives are in no mood to borrow and build. It won’t do any good to offer them even extremely low interest rates because if they invest right now it will be hard for them to generate a positive return.

Companies will start to invest again when the contraction runs its course, when assets and labor are attractively priced and executives perceive a resuscitation in demand. There is nothing the government can do to speed along this process but get out of the way and let the reorganization take place.

Beanie Baby economy.

Think of the economy as a large corporate conglomerate with lines of business in a dozen sectors from Beanie Babies to soybean milling. The company has a line of credit at its disposal, in case it wants to take advantage of opportunities.

The Beanie Baby line was generating great profits until two years ago, but last year kids moved on to Hello Kitty, and the company has had to take some big write-downs on unsold inventory. During the mania, the head of the Beanie Baby division was the highest paid employee outside the executive suite, and the adjustment has been very hard on him. He won’t accept that Beanie Babies were just a fad, but insists that the continuity of this line of business is absolutely critical to the future of the company, and he is clamoring for more funding to make up for the losses on inventory and keep the factory running.

Of course, any CEO worth his stock options knows not to throw good money after bad, and a good executive would probably liquidate the whole Beanie Baby operation and maybe find another use for those employees.

What we have here, though, is a former Beanie Baby division head as CEO, and a board of directors that itself got caught up in the craze and won’t let go of the hope that it can be resuscitated through a capital infusion and a good ad campaign. They decide to drain the company’s accounts and draw down its line of credit so that their favorite employees can keep their jobs and the factory can restock on Beanie Baby materials.

Month after month, the company makes the division’s hefty payroll, and even issues bonds to keep going, but despite their best efforts at advertising, the public just won’t buy more Beanie Babies, even at huge discounts. They have been burned by Beanie Babies and aren’t about to get caught up in that nonsense again.

Thank you for your contribution.

The soybean division, on the other hand, is generating solid profits on account of increased demand for protein in Asia, and they make a presentation requesting funding for a line of tofu. The expected returns look great, and equipment can be bought very cheaply because of the recession. The CEO explains that he is sorry, but the company’s cash and credit have tapped out to keep the essential Beanie Baby division going. All of the soybean profits are to be channeled there as well, and he appreciates the contribution.

The ambitious managers in the soybean division get fed up with this ridiculous and nepotistic company, and decide that their talents would be better rewarded in Hong Kong. Investors eventually make the same decision regarding their capital, and the company’s bonds and shares plunge. The exectutives now see which way the wind is blowing and start embezzling funds, and eventually the heap of the company ends up in bankruptcy court.

The bailout blackmail bluff.

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The bluff is not that nothing will happen to the economy if the bailout doesn’t pass, but that the bailout will do nothing to stop the depression (but lots to deepen it).

—-

Scare tactics.

All of a sudden, the economy is in dire danger of unknown horrors, we are hearing from Bernanke, Paulson, Bush, and the US press, especially the financial press. Unless the bailout passes, and RIGHT NOW, stocks will crash, your bank will fail, your home will keep losing value, and your employer will go broke and fire you. All of the bankers’ stooges who were trying to get us to look the other way since the credit markets started to freeze up 13 months ago are trying to scare the daylights out of the US public. How to avert the crisis? Give the con men who created it a blank check drawn on the US Treasury, of course.

This campaign reminded me of a spot-on comedy skit by the British Comics, Bird and Fortune, that popped up on YouTube 12 months ago, back when nearly all of my acquaintances all thought I was nuts for stocking up on put options and gold.

I recommend the whole thing, but the end (jump to 7:20 if you’re in a hurry) was particularly prescient. I transcribed it below, but it’s more fun to watch:

These are the lines was I reminded of today:

Interviewer: “But now, you see, the people are saying that now the crisis is going to turn into financial meltdown. I mean can that be avoided?”

Investment banker: “It can be avoided, provided that governments and central banks give us, the financial speculators, back the money that we’ve lost.”

Interviewer: “But isn’t that rewarding greed and stupidity?

Investment banker: “No, no. It’s rewarding what the Prime Minister, Gordon Brown, called “the ingenuity of the markets.”"

Interviewer: “I see…and, and …

Investment banker: “We don’t want this money to spend on ourselves. We want this money just to go into the markets so that we can go on borrowing and lending money as if nothing had happened without thinking too much about it.”

Interviewer: “Yes, but, if the worst came to the worst, and you didn’t get this money, what then?”

Investment banker: “Well then, there would be another market crash, and then I would say to you what people like me always say, that it’s not us that would suffer, it’s your pension fund.”

Interviewer: “Thank you very much.”

_____

George Bush, tonight: “The stock market could drop even more, which would reduce the value of your retirement account.”

Call the bluff.

I have zero hope for a sensible outcome from the US government. Politicians are not debating the concept of bailouts and moral hazard; they are debating which irresponsible parties get how much. ‘Compromises’ will be reached that allow for grandstanding all around, but the core of the bill will give bankers what they want.

The executive salary cap for bailout recipients is a red herring. Manhattanites will figure out other ways to get their hands on these trillions, ways that don’t involve holding executive titles at big banks. Those banks are dead in the water anyway — it wouldn’t surprise me if they were completely nationalized over time. Another dispute is over equity — the government will get its equity position, sure, but the equity is worthless. And of course, everyone wants to throw in money for the idiots who are underwater on their mortgages — they’ll get theirs, if not in this round, the next.

By the way, anyone else notice the tactical similarity to how seven Septembers ago we were subjected to the same kind of scare tactics and rhetorical bombardment while another huge and unconstitutional bill was being rushed through Congress?

All over but the shouting.

We will get a depression. We’ve got it already. If US still had any character, this would be a short and relatively painless lesson in giving government too much power, which really means giving power to bankers. I say painless not because nobody will go broke — they will, in spades — but the pain will be like the first weeks in fat camp or reform school, not the gulags.

There will be no reformation this time. Americans of all intelligences are confused and ethically bankrupt after 100 years of saturation in nationalist and socialist propaganda by schools and media. This lack of a moral compass or common sense assures us that this will be the worst depression in our history, and maybe the last.

As the depression deepens, a terrified populace will allow the government to grab more and more power, until society is completely transformed. Remember those emergency powers that the executive granted itself last year? You better believe they are being readied. This stuff happens, folks. This is what human beings do to themselves, with great consistency. Freedom and prosperity are the exceptions to the rule as far as history is concerned.

——

PS — Buy the bailout rumor, sell the news? If I had to pick a date for the start of the Crash, it would be the day after Congress passes this bill.

Disclosure: I’m short the equity markets with put options and inverse ETFs. See disclaimer.

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?

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.