Posted on 04/07/2008 3:32:18 AM PDT by ovrtaxt
Those blindsided by the recent financial meltdown are now loudly blaming the free market for its failure to police its own excesses, and are calling for greater regulation to prevent future disasters. But for those who clearly observed the problems developing (in high definition slow motion) the blame can be directed squarely at the policies of the Greenspan/Bernanke Federal Reserve. As has been the case countless times in history, the free market will now pay the price for government incompetence.
In Senate hearings this week, all parties involved completely ignored the Fed's own culpability in igniting the speculative fever. It's as if a senior prom had turned into a wild bacchanalia, and angry parents now question why the chaperones failed to notice the disrobing or why the DJ played provocative music, all the while ignoring the bearded gentleman pouring grain alcohol into the punch bowl.
A perfect illustration of the Fed's failure to take responsibility can be found in Bernanke's explanations regarding inflation, which he solely attributes to the effects of the rapid increase in global commodity prices. He failed to mention that commodity prices are rising as a direct consequence of his monetary policy, which is debasing not just the U.S. dollar, but currencies around the world. Rather than accepting the blame for creating inflation, Bernanke is shifting the blame to the free market. The Senators are happy to let him get away with it as it provides more evidence to support the "need " for more government to save the economy from the disastrous effects of unbridled capitalism.
When asked how we got into this mess, Bernanke replied that our problems resulted from an excessive credit bubble characterized by aggressive leverage, reckless lending, and extreme risk taking. Absent from his explanation was the Fed's role in irresponsibly setting interest rates below market levels, which mispriced risk, got the party started and kept it raging into the wee hours of the morning. The expressed goal of the Fed for much of this decade was, and is, to encourage and facilitate borrowing and lending.
During his testimony, Bernanke continued to claim that Bear Steams was not bailed out as shareholders only received about $10 per share. Of course, $10 is better than zero, which is what they surely would have received if the Fed hadn't thrown taxpayer money around. What about Bear's creditors though? Although the collapse of Bear Stearns would have cost bond holders dearly, the bailout essentially makes them whole. Here again, the Fed creates even greater moral hazards by encouraging excessive risk taking. By bailing out lenders who extend excessive credit, the Fed simply invites more of that behavior. The free market must be allowed to properly price risk. Lenders need to know that when they lend money, whether to highly leveraged investment banks and hedge funds, or to over-stretched homebuyers or credit card users, they risk not getting paid back. By interfering with this process the Fed simply guarantees more losses and even bigger bailouts in the future.
Also, leveraged speculators need to know that it is not "heads they win, tails the taxpayers lose". Wall Street executives amassed fortunes by making extremely risky bets. Now that those bets have soured, why is it taxpayers that have to swallow the losses? Wall Street billionaires earn their bucks on the backs of the middle class, who made little on the way up, but foot the entire bill on the way down.
While Bernanke talked about the underlying strength of our economy, he claimed necessity in saving Bear Stearns from bankruptcy as it would have brought down our entire financial system. How sound can our economy be if the failure of one investment bank could topple it? Does this now mean that no more major banks or brokerage firms will be allowed to fail? Since we routinely accused Japan of practicing "crony capitalism" what do you suppose we should call our version?
Not to be outdone in rewarding reckless behavior, earlier in the week Congress passed $15 billion in tax breaks for homebuilders, who had made their fortunes overbuilding during the bubble and unloading their shares to a gullible public. By threatening to hold back on their political contributions, these same homebuilders are awarded still more billions. The last ones we should be subsidizing are homebuilders. After all, the last thing we need right now is more homes.
The legislation also contained a provision that offers generous tax credits to individuals who buy homes out of foreclosure. While this is billed as a benefit to homebuyers, it is just another hand out to lenders, as those qualifying for the tax breaks will simply pay more at auctions as the tax breaks subsidize higher bids. The real winners are the creditors who get more in foreclosure than would have been the case had buyers not had their bids subsidized by the government.
Of course, for all the talk about taxpayer bailouts, none of the senators bothered to mention that, for the moment, no tax increases are actually on the table. Instead, the bailouts are being financed by savers, pensioners, wage earners, investors and the elderly on fixed incomes, who all suffer staggering increases in their costs of living, as the Fed uses inflation to rob Main Street to pay off Wall Street.
Isn’t Peter Schiff the perma-bear who’s often on Kudlow’s show? He makes some good points, but a perma-anything is a dangerous animal for investors to follow.
Peter Schiff .... I have his book and agree with his take on things but the mess was created by Greenspan. Ben Bernanke is doing the best he can to clean up. I would like to see Peter Schiff take Bernanke’s job and do any better. I doubt he would
It’s easy to rail against Bernanke but none of his critics would do any better. We have a very bad situation due to our love for making easy money via taking on debt and packaging and selling debt
Perma bear looks good now
He’s been a perma-bear as long as the market’s been worthy of it.
He’s been bullish on lots of stuff, just not the same stuff that’s usually pawned off by the lemmings, so they say he’s bearish. His clients are doing quite well right now, from what I understand.
But market gurus come and go. Right now, he’s a prophet. If history is any indicator, he won’t be one forever.
tend to agree. But I think that's because Schiff probably views the system itself as the problem. Rearranging the deck chairs on the Titanc, so to speak. I have big doubts about it myself.
Schiff is a movie critic. He doesn’t make movies. It’s 100 more difficult to produce and make a movie
100x more difficult
Perma bear looks good now
We've had roughly 8 months of selling with a few sharp, but brief rallies. Bear markets don't usually last much longer than that, although there's no way to be certain this one won't. Still, a toe in the water here or there isn't a bad bet at this time, I suspect.
That’s a reasonable take.
Well, that’s me- mister reasonable! Just ask my family... hehe
Here’s what Euro Pacific’s senior strategist is saying, based on cascading effects of the bailout plan:
“First, we should expect a continued erosion of the U.S. dollar as interest rates are lowered further to avert depression and as inflation subsequently morphs into hyperinflation.
Eventually, we should expect massive growth in the dollar earnings of green alternative energy companies as the confiscated largesse of the American citizen is pushed into that sector of the economy.
It remains to be seen whether Congress will authorize the required massive level of trillions of dollars in funding soon enough to avoid the present recession morphing into a depression.
Whatever the result, it is increasingly clear that the government intends to leave it for future generations to pay the ‘real’ bill for the reckless conduct of Wall Street and our Fed over the past decade.
In the meantime, investors keen to preserve their wealth should look abroad to the productive corporations and currencies of economies that continue to produce more than they consume.”
link:
http://www.dollardaze.org/blog/?post_id=00362
I would not be lowering rates. That doesn't help anyone in the short run and causes more problems in the long run. The confidence that will lower jumbo rates and other long term rates can only come from dampened inflation fears and a thorough housecleaning of bank balance sheets. Both of those are not helped by lowering short term rates. Also Bernanke said in his 2001 speech that if short term rates don't work he will monkey with longer term rates. That will just take us one step closer to hyperinflation.
As always, glad Ben is in charge and not you.
There is not much difference in that statement and a bank robber telling the cop it was his fault because he didn't stop him from stealing.
So who’s the cop? The government, or the consequences of the market itself?
At first glance, I like it. I think the control freaks among us won't go for it though. No opportunity to expand their power and importance. Plus, I think the Fed is looking forward to their new, powerful role with brokers and hedge funds.
In a sentence you’ve basically described the reason that all government eventually leads to tyranny. People who are power hungry go into government for that very reason, and you’re right, they are unlikely to pass up an opportunity like this. Still, I thought I’d put my thoughts out there all the same.
Like many in your industry, you've completely missed the point. The market (or information flow) is working fine, but the bad information is being input by the Fed. Short term rates are and were too low both here and Japan as evidenced by the carry trade and lowering of spreads. There is no reason that the market should price fake "AAA" securities in a traunche backed by crappy mortgages other than excessive liquidity and carry trade.
The answer is to let the market set the rates. Right now 2 year treasuries are being forced down by the anticipation of lower short term rates, plus the flight to quality. That drives down all sorts of other long rates (carry trade) below a realistic inflation rate plus risk premium.
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