We’ve been quite busy the past few days, so here’s a quick summary with links of articles with more details.
The Fed and the world’s central banks are now well aware they’ve got a global credit crisis on their hands that is far nastier than they expected. So to work they go!
In the U.S. we are seeing what the authorities have in mind with their $700 billion package, which is the first of many to come — never mind the assurances that this is all it’ll take. It looks like we’ll be seeing a great deal of nationalization in banking. Paulson, no doubt, appears ready to use the full authority granted him as U.S. Treasury Secretary. We worry about the blank check Congress has just obligated taxpayers and dollar holders to. As we noted in a post a few days ago, the Monetary Base suggests the flood of freshly minted cash is to be hitting our shores soon.
In the U.K. things have gone from bad to worse. Socialization has even less of a stigma in Europe, so as in the U.K. you’ve got all sorts of intervention falling in line to bail out the banking system. Meanwhile, Iceland is in such bad shape, it appears the small nation could be hit with insolvency fairly soon.
So much for the shell game at the Federal Reserve:
For the better part of a year the Fed and Treasury used just about every trick in the book to keep a lid on the credit crisis without actually expanding money supply. The problem with those various attempts was that it did nothing to help the markets clear its problems. On one hand a great many of the major players overextended themselves with leverage into securitized assets that are plummeting in value. Faced with the reality that their balance sheets could not support the assets they’d leveraged into, combined with a fact that many of the assets they’d invested in were theoretically plummeting… Well, the game has has largely been to prevent these institutions from actually having price discover on those toxic assets, thus forcing a mark to market value on the rest of the mess.
This game of playing Ostrich on price discovery, it was hoped, would buy enough time for the crisis to blow over and for the institutions to recapitalize. In the past two weeks time has run out. The markets are slowly coming to accept that this is not merely a crisis in credit, but a crisis of insolvency — from homeowners unable to meet their mortgage and credit card obligations, to banks who were able to hide their fractional reserve inverse pyramid of finance during good times. Banks, we remind you, never have assets sufficient to back their obligations given fractional reserve systems are based entirely on confidence — that depositors will not decide to remove their demand-deposits at the same time.
So now the liquification begins as the chart above indicates plain as day — a 65% increase!
Oct. 3 (Bloomberg) — BlackRock Inc., Pacific Investment Management Co. and Legg Mason Inc. informally advised the U.S. Treasury in the days leading up to passage of its $700 billion financial-rescue plan and will seek to manage some of the assets, according to people familiar with the matter.
The Treasury will choose five to 10 money managers to help it acquire troubled assets from financial firms, officials said today. In the past few weeks, Treasury officials sought out executives at BlackRock, Pimco and Legg Mason’s Western Asset Management unit for guidance, said the people, who asked not to be named because the discussions were private.
These companies would have had major losses on their books if the bailout hadn’t been passed. PIMCO alone bet the farm that Freddie and Fannie would get a government bailout, and made $ billions on the bet. Now they want to get paid to help rescue the economy.
Oct. 3 (Bloomberg) – The temporary increase on bank deposit insurance signed into law by President George W. Bush today may simplify savers’ lives even if it doesn’t fatten their account balances.
Bank customers will receive $250,000 in Federal Deposit Insurance Corp. protection per depositor through Dec. 31, 2009, under legislation the House of Representatives passed today.
The bill makes it easier for customers to keep their money at a single institution, financial experts said. That will mean fewer maneuvers to keep cash protected. The current $100,000 limit on deposit insurance was set in 1980.
If you thought people didn’t give two hoots about bank financials with the old $100,000 FDIC insured guarantee on their banks, just wait with it upped to $250,000. Recall, the last temporary increase (which this one is billed as) raised the FDIC from $30k to $100k “temporarily” back amid the last major crisis in the 1970s. Continue Reading »
From 3 pages to 700. Pork laden and far worse than its original decrepit form than when the House rejected it, today it passes and it is signed into law.
By signing onto this bill, Congres and the President have guaranteed the U.S. will sink into a slow, long depression. Expect more good money to be thrown after this $750 billion fails in order to to “save” this initial $750 billion from being wasted. No doubt it will make the politically connected on Wall Street very happy, but it will come at the expense of the already crippled productive economy.
I’m going long pitchfork and torch manufacturers. They’ll be in high demand in about 3 years. I joke, of course, but not so much.
Ron Paul is perhaps the only politician (other than Bob Barr, Libertarian Presidential Candidate) who speaks the truth about this bailout. Doing something is alwasy more politicaly viable than doing nothing, even if doing nothing is the right thing.
Democracy is indeed the theory that the voters deserve to get what they want, and good and hard!
It is the largest in the world, with expected initial capital of $700 billion. It has a free and unlimited credit line should it need more. It has no fixed mandate, though it is expected to initially focus on mortgage-backed securities. And it is the only fund backed by the full faith and credit of the U.S. Government.
What an excellent video to demonstrate the intellectual gap we’re dealing with. Theory vs. application: Listen how out of touch with reality Swank is here. The Fed’s job is not to fight asset inflation, therefore money supply is irrelevant? Well, heck! Schiff lays out how they’re causing it, and yet she remains completely in denial! They’re experts in creating inflation!
I love productivity in the auto plant comment. Mind you, quietly earlier this week the auto industry was bailed out to $25 billion. And what of the productivity?
By the way, consider this was on CNBC in June of 2006! Who was right? Mind you, gold was trading at $569/oz and oil at $67/barrel!
Here’s a nice video of the authorities cheer leading the economy in an attempt to keep investors confidence in the system. If creating false rumors or using false statements to cause a companies stock to remain high is against the law, why is not the same act to hoodwink investors into thinking the economy is more healthy than it really is?
Of course, this begs the questions --Is this deliberate obfuscation for political purposes to maintain a system that is inherently insolvent? Or are Bernanke and Paulson (et. al.) really that out of touch with reality??
Either way, then why on earth should anybody be so crazy as to trust them with a bailout plan?!?
Confidence Game or Incompetence Display: Bernanke, Paulson, Bush Video
Above is a video for your kids and/or those folks who just don’t seem to get it. That’s an oversimplification, of course — in the real world, not only can prices go up, the wealth contained in money is dislocated from productive activities in an economy and transferred into a phony, unsustainable economy, ala our housing bubble and Ponzi finance bubble on Wall Street.
As for the real world, below is the expansion of raw cash money supply as measured by the Austrian School that predicted this bubble and crash with the help of tracking the vast expansions over the years. Note the massive inflation started early this decade. All that wealth was ripped from the real producers in our economy and vented into areas now crashing. Meanwhile, Congress haggles over how to repeat such an activity in support of the phony economy.
On top of explaining the how’s and why’s, Paul asks the valid question: why don’t we ask those who predicted this was coming with near exact prescience to provide us the solution?
Who predicted this? Those with an understanding of the Austrian School of Economics, like Ron Paul and your editors here at Vigilant Investor.
Note Bernanke’s wiggly answer on fighting inflation — defining inflation as prices rising vs. the printing of money. Absent is any acknowledgment that stock and bond prices are massive beneficiaries of inflation.
JPMorgan Chase & Co. became the biggest U.S. bank by deposits, acquiring Washington Mutual Inc.’s branch network for $1.9 billion after the thrift was seized in the largest U.S. bank failure in history.
Customers of WaMu withdrew $16.7 billion from accounts since Sept. 16, leaving the Seattle-based bank “unsound,” the Office of Thrift Supervision said late yesterday. WaMu’s branches will open today and depositors will have full access to all their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on a conference call.
This is really no surprise to anyone. WaMu has been in an identifiable death spiral for well over a year, during which its stock price plummeted 95%. About 6 weeks ago the sign of desperation was visible in its comparatively high CD rates vs. its competition — always a sign of desperation (let that be a warning to you!). It was facing $19 billion mortgage losses. When it’s credit rating was dumped to junk, that was it. At seizure time, its stock traded after hours at 45 cents.
The bigger news is that David Bonderman of private equity group, TPG, just lost its $2 billion cash infusion from earlier this year.
On the other hand, JPMorgan just bought a ton of bank branches for its new bank holding structure on the cheap. With bailout in the air, it would seem the House of Morgan (at least 1/2 of it) is still alive and well, thriving through collapse, buying assets on the cheap — living up to its historic reputation.
Another sobering interview from Marc Faber. Marc was one of the few who predicted this mess was coming years ago, and he was laughed at by others supporting the mainstream view that all was well. Don’t buy the excuse “nobody saw this coming.” It’s folks like Faber who should be listened to for solutions to this crisis, not the boneheads who 1) didn’t have a clue it was coming; 2) participated in its creation; and 3) are now claiming to have all the answers for how to fix it when the fixes look more like a) what caused the problem; and b) that the FIX is in!
