The material living standards of US rich vs poor, and the politics of envy.

I’ve lived on both continents, and poor people in the US have what middle-class europeans do, but they eat more and on average are far dumber. What this video makes clear is that most of their fundamental problems do not arise from a lack of purchasing power.

In praise of bank runs, the only regulator we need

Graphite here. Mike has asked me to join up as a guest blogger, and since I’ve always loved the spirited mix of finance, politics, and righteous anger of The Sovereign Speculator, I’m happy to come aboard.

If you needed another sign that this deflationary crash is just getting started, take a look at this blog post over at The Baseline Scenario. It’s stunning that in August 2009, with the FDIC in a state of de facto bankruptcy, anyone can write “the FDIC works” with a straight face. Just because it’s not the kind of horrible fascist “solution” that the current pack of knaves in Washington would pursue, doesn’t mean it’s some kind of brilliant idea.

The FDIC’s explicit purpose is to bail out imprudent depositors at the expense of prudent ones. If it wasn’t for the FDIC, all those people strutting into Corus’s Chicago branches to put their money in CDs yielding 0.25% more than the competition might have been just a little bit more concerned that it was going to fund condo development projects in Florida. Instead, they got a free lunch — why look at where your money’s going when Uncle Sucker (sorry, Sam) gets to eat the losses?

The idea that the FDIC “self funds” out of the banking system is nothing but a polite fiction. It has nearly always had to rely on taxpayer bailouts when resolving banking crises. Meanwhile, the banks that stayed prudent, made reasonable loans, and kept their reserve deposits in more liquid holdings are being slammed with huge assessments and fees, which are preventing them from recapitalizing themselves or offering better rates to their customers — in effect, spreading the stress and weakness of America’s worst banks to its best ones.

Yeah, this is a great solution to the problem of bank runs. Let’s see what happens when we really do get a full banking panic and the FDIC needs to go draw on its $500 billion line of credit with the Treasury. If you think that story ends with American depositors happily riding off into the sunset with their cash, I’d love to have some of whatever you’re smoking.

People talk about bank runs as though they’re some kind of unmitigated evil, just because some people lose money. As a matter of fact, they impose discipline and order on both banks and depositors, and ensure that the banking system as a whole remains diverse and resilient to major shocks. The moral hazard created by the FDIC was one of the most important drivers of the concentration of deposits at a few mega-banks, which (all carping about the “unregulated shadow banking system” notwithstanding) were the primary source of the awful lending binge which precipitated the credit crisis.

Look for a bottom after people finally start to dismiss, ignore, and ridicule the FDIC and its absurd apologists.

File under Western Civilization, Decline of: Krugman wins Nobel

The market has been severely hamstrung for decades, and now that it is fainting from loss of blood, its vampire captors point to it and say, “see, markets need to be restrained or else they fail.”

I won’t actually comment on Krugman, other than to say that he is a socialist, and like many of his breed who do not actually implement collectivist scams (as opposed to Raines, Paulson, Mozillo, Congress, et al.) but provide intellectual support for them, he seems to have a soul, albeit a lost one.

Anyone who understands the principles of the market and defends them in public these days must feel the way I do: that we are simply narrating the decline. You can’t argue with history. You can just put it down as you see it, now in the hope of carrying a few embers of common sense through or out of the West as it enters some kind of dark age.

It is astounding that after recently observing Hitler, Stalin, Mussolini, Mao, Peron, Castro, Chavez and a hundred other tin-pot dictators destroy or hobble their nations through various forms of collectivism, the entire West is now leaping headlong in that same direction, with hardly a second thought. No credit is given to the principles of individualism, private property and freedom of contract, nor the great market economy that created the prosperity these societies are so eager to squander. The market has been hamstrung for years, and now that it is fainting from loss of blood, its vampire captors point to it and say, “see, markets need to be restrained or else they fail.”

This episode will play out over generations, and it will end with tens of millions dead and the end of the very civilization that codified respect for the individual.

The end of the Enlightenment means the end of freedom and the end of freedom means the end of centuries of increasing living standards, from food and health care, to travel and communication, to privacy and personal security.

The West is simply finished. It’s best hope is balkanization, in case any regional pockets of common sense remain, though I can’t think of any that are physically and culturally strong enough to withstand the violence to come. Perhaps Switzerland, for a while.

No thank you, Mr. Keynes. America’s infrastructure does not need a bailout.

I’m sick of hearing the phase “America’s crumbling infrastructure” from the press and politicians. They have been pushing this theme for at least 18 months now. Observers should look for the motive behind all such recurring news themes, because nothing gets on the air on into print without one.

In this case, we are clearly being prepped for New Deal #2, involving at least the following programs:

  • Public works projects. A resurrection of the Works Progress Administration (aka WPA or “We Piddle Around”).
  • Green energy waste. The Tennessee Valley Authority with a touchy, feely twist. Al Gore, administrator?
  • Neverending War in Asia. That’ll lick unemployment for good!

From Bloomberg, here are the latest brilliant ideas from the Senate:

Sept. 25 (Bloomberg) — Senate Democrats proposed a $56 billion economic stimulus package that would increase government spending on unemployment benefits, food stamps, infrastructure projects, aid to state governments and heating aid to the poor.

Senate Majority leader Harry Reid, a Nevada Democrat, said today that the legislation is needed to help millions of Americans struggling with the slow economy.

“We must not forget Main Street as we work to address the crisis on Wall Street,” he said, adding that the plan would “create hundreds of thousands of good-paying American jobs and prevent cuts in critical services for millions of Americans.”…

The Senate plan would extend unemployment benefits by as many as 13 weeks, expand food stamp aid and provide states coping with high Medicaid costs with an additional $20 billion in federal assistance.

Highway Projects

The plan would also spend $11 billion on highway and other transportation projects, $5.1 billion for heating assistance to the poor, $1.2 billion for the National Institutes of Health and $250 million for NASA.

Will Keynesianism never die?

Politicians and bankers love this repressive and discredited doctrine because it justifies all manner of scams. Today’s professors won’t admit it, but they haven’t changed a bit since falling hook, line and sinker for Orwellian nonsense that intentionally punishes savings and private investment, maintains a dumb consumer class, and allocates full freedom and power only to a ruling class of “philosopher kings”. They tinker around the edges of this egomaniac’s* theory, but they assure us that without the State pulling the levers (following their guidance of course), the economy will crumble down to the stone age.

The last thing America needs in a Depression is more government involvement in the economy, especially not government jobs for government-designed projects. This just steals from the sensible and allocates to the connected, while wasting the capital on unneeded projects with negative returns.

Relax, go for a drive.

The highway and other infrastructure in the US is among the best in the world, especially the road system. I have driven in a lot of places, and nothing beats four lanes each way with stadium lighting, fast and even drainage, huge reflective and logical signage, and perfectly cambered cloverleafs. It is just a joy to drive when you come back after being away. And by the way, American motorists, even New Yorkers, are very safe and considerate by world standards. The are not the Swiss, but we can’t all be.


* Here is a character study (PDF) of the most-revered economist of the 20th century by one of the smartest and most honest economists of the same, Murray Rothbard, who’s writing happens to be a joy to read. How many Keynesian professors can you say that about?

There is lots more on Keynesian economics here, from America’s real libertarian think tank, the Mises Institute (not The Stato Foundation).

Finally, a little bit of outrage.

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 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


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.

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.”

*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

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:

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?

There’s a Capitalist in the Senate?

Jim Bunning, a Repuplican from Kentucky on the banking committee, has been sounding like Ron Paul lately. Bloomberg has the interview:

“I sincerely believe that Henry Paulson and Ben Bernanke should resign,” said Bunning, a Republican from Kentucky on the Senate Banking Committee. “They have taken the free market out of the free market.”

“We no longer have a free market in the United States, we have a government controlled free market,” Bunning said in an interview. Paulson, a former chief executive officer of Goldman Sachs Group Inc., “is acting like the minister of finance in China.”

Bunning, 76, criticized Paulson’s successful effort in July to obtain congressional authority to pump unlimited amounts of money into Fannie and Freddie to keep them afloat.

“When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turned out it was socialism here in the United States,” he told Paulson at a July 15 Senate Banking Committee hearing.

Following Paulson’s Sept. 7 announcement of the takeover of Fannie and Freddie, Bunning said he now feels like a citizen of China.

Former Phillies Pitcher

“No company fails in communist China, because they’re all partly owned by the government,” said the former pitcher for the Philadelphia Phillies.

Bunning accused Paulson of deception when he told Congress in July that the Treasury’s plan would instill such confidence among investors that it would never have to be used.

Paulson “saw and knew what was happening, and didn’t tell the truth to the banking committee,” Bunning said yesterday.

Mr. Bunning hits the nail on the head, but the brand of socialism ascendant in the US should more properly be called fascism, as it heavily favors an oligarchy and is served with equal helpings of nationalism, militarism and surveillance.

Will Bill Gross please shut up?

“if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury…” Bill Gross, September Investment Outlook

This guy continues to disgust me. If Americans before him had held the notions about markets that he does, there would be no wealth for him to manage, and he would not be a billionaire. This would be Venezuela.

Here is an excerpt from his latest bailout plea:

This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami. Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage. And the private market, in its attempt to anticipate a bear market bottom and snap up “bargains,” has been constructive as well. Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for “they are all underwater.” We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments.

Step 2 on our delevering blackboard therefore has stalled and is inevitably morphing towards Step 3. Assets are still being liquidated but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning. There may be a Jim Cramer bull market somewhere, but it’s primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices. …

A Depression-era bank robber named Willie Sutton once said that the reason he robbed banks was because “that’s where the money is.” Illegal for sure, but close to an 800 SAT score for logic if you were in the business of stealing other people’s money. And now, while some will compare current government bailouts to Slick Willie, citing moral hazard, near criminal regulatory neglect, and further bailouts for Wall Street and the rich, common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.

The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise.

Sorry, Bill, I’m not scared. Systemic debt liquidation is exactly what the country needs right now, and actions like this are exactly what laid the groundwork for this bubble, by absolving bankers and guys like you from responsibility for your actions. To repeat these mistakes on such a massive scale would distort our economy into a perverse and Orwellian system for the sole benefit of politically connected billionaires.

Is Gross really that cynical?

If he’s not cynical, he’s dumb, and I doubt any self-made billionaire investor could be this dense. As Carl Denninger points out, Gross bought much of this mortgage debt over the last 12 months, at a big discount, surely with the full intention of lobbying for a bailout of his positions (he has been using his column, media appearances, and certainly contacts in Washington to do just that). A man with this kind of character could only be rewarded with wealth and prestige in a society that has gone completely off the deep end. Time to drain and scrub the pool.