Yes. It’s the lies and the manipulation that are part of the cause of this.
http://market-ticker.denninger.net/archives/601-CONgress-Wake-Up-NOW.html
CONgress: Wake Up NOW
I repeat: It is time for Congress to lock up the children in their playpen and allow the adults to have a discussion with them regarding solutions to the economic problems we face.
If CONgress fails to do so, you will see The DOW at 5,000 and the S&P 500 at 500 within the next 12-24 months.
Guaranteed.
This morning Bernanke’s Fed “decided” to essentially enter the realm of unsecured lending through the creation of a “SPV” (a “SIV”, or as I and others have called it, a “SIeVe”) that will buy 3-month commercial paper.
While they claim that these borrowings are “secured”, the fact remains that in essence they are not, protests to the contrary notwithstanding.
Read that new alphabet soup description carefully, and pay special attention to the rating requirements. It is narrowly targeted - perhaps so narrowly as to permit a very small number of firms to roll their commercial paper.
Academia, including most particularly Bernanke, posits that one must “increase liquidity” into a seizure in the markets such as we have now, lest we have a Depression.
The failure of this so-called economic “theory” is that it fails to recognize the root cause of the problem and therefore misses the forest for the trees. It is akin to trying to put out a forest fire by peeing on it and has precisely the same end result.
In point of fact we are now running out of names for Bernanke’s “liquidity facilities”; TAF/PDCF/TSLF/TARP/ABCPMMMF and now this new SPV (does it have a name yet?)
The truth is that this crisis occurred under Greenspan and Bernanke’s watch precisely because these two “gentlemen”, along with our Treasury Secretary Paulson and other government officials, presided over the granting of credit to people who could not pay it back.
The false premise these folks all proceed from is that credit is equivalent to money.
It is not.
Credit spends like money but it is not money. It is in fact debt and comes with the millstone of interest, which must be repaid along with the principal.
The commercial paper market for non-financial, non-asset-backed entities has not frozen. Nor will it. Those firms have not abused the market and thus have nothing to fear.
It is in fact those firms that have abused this market that have problems, just as occurred with municipalities with “auction-rate” securities.
Borrowing short-term (to lower the coupon required) for long-term requirements is fundamentally unsound. When you do so you place the very life of the entity that does so at risk.
If I am an aircraft manufacturer and require two years to build an airplane, to borrow for less than a two year term in order to fund completion of that airplane for delivery to the customer is idiotic. Yes, doing so means I pay less in interest, but it also means that at any time if the market perceives my firm to be “unsafe” I risk instantaneous bankruptcy of the enterprise.
This is just one more example of how “levering up” has gotten so out of hand, and why we are in this mess in the first place. This particular form of idiocy is not limited to one firm - in fact, it is common across huge parts of the S&P 500 and even many smaller firms, along with state and local governments. It was and is intellectually bankrupt and those who engaged in this behavior should be run out of town on a rail.
“More liquidity” will not solve the problem no matter the form. This has now been proven correct through more than a year’s “grand experiment” by Bernanke and friends.
The credit markets, along with consumers and banks, are literally choking on all the liquidity being shoved down their throats. It has done exactly nothing to address the problem and won’t because:
* Banks and other financial institutions have been repeatedly proven liars in terms of their financial strength and balance sheets. Pick a financial institution and you will find that almost without exception they have claimed “exposure” to bad debt that is a tiny fraction of what is later shown to be accurate. Nobody can fairly evaluate a firm’s financial strength so long as this continues; ergo, nobody can have a reasonable degree of trust to lend to such an institution. In addition even settled black-letter law in some regards has been shown to be wantonly (and perhaps feloniously) ignored; Lehman, as an example, is alleged to have transferred segregated customer funds and securities to a Cayman Islands subsidiary shortly before it went under, effectively locking up funds and securities that are supposed to be safe from a bankruptcy proceeding.
* Consumers are tapped out. The House-cum-ATM machine is empty and cannot be refilled. Consumers will retrench severely, even though they have had to be dragged kicking and screaming into that mode. Nearly 18 months ago I detected the trend in the consumer credit data. This recession cannot resolve until the over-leveraged state of the consumer is rectified. That requires that the bad debt be defaulted and thus cleared. Consumers are more than 2/3rds of the economy.
* It is not possible to reflate the credit bubble. We must deal with the reality that the bad debt in the economy - no matter who holds it - must be defaulted.
* There is no “liquidity trap” into which to fall; we are already in the hole as there is no more capacity to borrow; we have exceeded the maximum safe amount of lending that can be accommodated in the economy. When one is in a hole, the first rule is to stop digging.
Remember, we were told repeatedly that Bernanke’s Fed and Treasury’s actions would prevent a recession. We were told that the TAF would free up bank lending. We were told that the TSLF and PDCF would prevent more blowups in investment banks after Bear Stearns yet Lehman blew up and the two remaining IBs (after the essentially-forced merger of Merrill) were forced to reorganize as commercial banks to prevent their own implosion.
None of these claims and predictions has proven out.
As this crisis has deepened instead of forcing the liars into the open and shining the bright light of truth upon them, along with arresting and prosecuting the fraudsters, we have instead seen yet more obfuscation and falsehood both explicitly condoned and even perpetrated by the government.
Bernanke’s thesis has been proven incorrect.
It is time for Americans to demand that the children, Ivory Tower Savants and those with clear conflicts of interest who are trying to game Congress and regulators to strip hundreds of billions of taxpayer dollars for their own enrichment be locked in their playpen beyond both sight and hearing while adults are admitted to the sacred halls of Congress.
We must come together as a nation to put forward a sensible set of policies that will:
* Force into the open the bad actors, fraudsters and liars, dealing with them in accordance with the law and allowing the credit markets to clear.
* Place into force regulations and legal strictures that will prevent this sort of game-playing from happening in the future.
As I have repeatedly said, there are multiple plans out there to do this. I happen to like what I have proposed as “The Genesis Plan”, but I’m not married to who proposes it or who takes credit for it - only that all three of the underlying causes are remedied. The rest is, in my view, a detail of implementation and not the underlying requirement.
We CAN clear the markets. To date, they have not cleared because our government and regulatory agencies have steadfastly refused to force the bad actors into the open, to force reduction of leverage, and to force an end to the game of “financial pick-pocket” that was intentionally constructed via off-exchange CDS “contracts.”
All three of these decisions are intentional. They have been made by Henry Paulson and Ben Bernanke, along with Congress.
Never mind the SEC which censored a highly-critical report of its intentional inaction in the Bear Stearns debacle:
“Oct. 7 (Bloomberg) — U.S. Securities and Exchange Commission Chairman Christopher Cox’s regulators stood by as shrinking capital ratios and growing subprime holdings led to the collapse of Bear Stearns Cos., according to an unedited version of a study by the agency’s inspector general.”
These decisions have been made because without permitting the outright fraud that is embodied in the crooked practices of the last twenty years there isn’t nearly as much profit in being a banker. If you are “limited” to making the spread on performing loans and can’t gear up more than 12:1 then your gross margins are, by necessity, limited to 30-50% - it is simply impossible to do better as the natural limit of spreads across an entire portfolio of risk is in the 3-5% range; nobody in their right mind will pay more on a risk-adjusted basis.
If these decisions are not reversed in the immediate future we will have an economic Depression, because that outcome will be the only way for the market to clear - forcible exposition of the fraudsters and deleveraging via bankruptcy instead of via law and regulation.
Either way the bad actors will go down. The difference is what impact we will suffer as Americans.
Our choices are now limited to a deep and prolonged recession, in which those individuals and firms that took on too much debt go bankrupt, but those who were prudent are able to maintain their standard of living and prosper, or continued attempts to pump more debt into a market that is already super-saturated, resulting in the eventual bankruptcy of the United States Government, default on the federal debt and, ultimately, a hyperinflationary depression that brings with it a high risk of the failure of our political system, not just overlevered firms and consumers.
For an example of how law and regulation can work and does result in tangible benefit, look at the settlement of the Countrywide lawsuit yesterday. This will result in tangible benefits to 400,000 homeowners who were harmed by alleged fraudulent loan practices:
“``Countrywide must now bail out homeowners it recklessly misled into mortgages doomed to fail,’’ Connecticut Attorney General Richard Blumenthal said today in a statement.”
If you’re wondering how we appropriately punish those who offended during the previous five years and provide restitution to those who were harmed, there’s your template.
Demand that Congress implement it, along with the other portions of The Genesis Plan (or something similar) and the markets will clear.
Until that approach is adopted we will continue to push on a string, Americans will continue to lose their jobs, and your wealth will continue to be destroyed in the stock and credit markets.
Excellent post which summarizes why investing is such a problem right now: analyzing the fundamentals is useless. What you need to know is who is on the “Friends of Hank and Ben” list.
What a wonderful time for the creation of the North American Union and our *new money*, the AMERO.
Which merely shows that the CNBC commentator doesn't understand the dangers of extrapolation. A $0 valuation would require some rather extraordinary conditions, involving large numbers of companies going out of business; people are unwilling to invest even in profitable companies; or both.
Only hysterical silliness (in which CNBC has apparently invested heavily) could explain such a comment.