Wednesday, August 11, 2010

Where Are We?

Yesterday I for some foolish reason thought the Fed would do the right thing by doing nothing with regards to using MBS pay downs which are in itself inherently deflationary to buy treasuries which are in fact more deflationary. How stupid I was. Shame on me. The Fed yesterday just continued the same flawed policy that has done nothing to improve the general economic climate. More of the same. Extend and pretend that more debt and leverage is the cure for existing debt and leverage. It’s like the Fed has the magic cure for Lindsey Lohan’s substance abuse problems. I know! Lets help Lindsey by liquoring her up some more. By god! Let’s buy her a liquor store. For the average rational person this would sound asinine, but in the Fed’s world, supported by fancy charts and graphs by PhD’s, it’s the logical thing to do. As one gains more advanced degrees one gets to be more disconnected from reality and rational thought. They get lost in their own sordid ideologies.

The Fed’s incessant obsession over anecdotal evidence of deflation will at the end of the day bring devastating spiraling empirical deflation via fear as investors will totally lose confidence in markets. When this happens, forced selling will lead to liquidations at any price. We will have another uneven asymmetrical deleveraging of financial assets. The tragedy of Lehman was not its bankruptcy but how haphazardly it was handled. It was a Chinese Fire drill that Monday morning in September 2008. Everyone and their mother had this ludicrous idea that magically Lehman’s debts would go away over the weekend via a tax payer funded bailout. Lehman was a gone case, it needed to die, but it could have been handled a lot better. The financial system needs to restructure and deleverage. This can be accomplished in an orderly fashion if we have competent policy makers with competent realistic policies. Again, most of the policy makers have advanced degrees and incredible wealth that has distorted their thinking of what’s rational and real. If Sarah Palin had any brains she would use this to her advantage, but she is not interested in making sensible policy but furthering her own unrealistic ideological policies.

The questions remains. Who is winning the steel cage death match between deflation and inflation? I say at the moment its deflation, but deflation isn’t standing over inflation with a folding chair or have inflation in the figure four leg lock. Inflation is not tapping out at the moment. My feeling is that deflation is winning and that there is nothing wrong with that. The rational good guys are winning over the bubblicious guys. Over the long haul, no matter what the Fed does, deflationary forces will counteract any expansion of monetary policy. This has been the theme in Japan and will be the theme here. There is too much debt that needs to either restructured or defaulted on. There are too many homes that are overpriced relative to income. These are too many homeowners who are underwater on their mortgages. This problem will have a major effect on the economy for the next 10 years. What we have seen is a massive increase in government obligations to the point that the government has lost control of policy. It’s this policy that continues to reward bankers and traders with free money to speculate. Money and wealth on Wall Street are never won or lost. It’s simply transferred. This is what has happened in our society as a whole. Money from the middle class is being transferred to the elite class at breathtaking speeds. The middle class has been effectively wiped out.

Here we are 2.5 years after the recession began with underemployment in the high teens, record foreclosures, contracting credit, a slowing economy with fears of a double dip. What has this expansionary monetary policy gotten us? It’s made the income inequality more perverse than ever. The wealthy are totally disconnected from the rest of society. After raping the country blind they don’t even want to go back to a roughly 3% increase in their own taxes. This has left many people simply fed up. They want to stop the spending and make the government start an austerity program. This will tank an already weak economy because the economy runs on spending and credit, so say policy makers.

Deflationary forces are winning because they are siding with society just as inflationary forces are losing because they are siding with the Fed and Wall Street. The Fed wants inflation in the worst possible way because the value of debt is crushing during a period of deleveraging. This is what society needs to go through and the Fed is delaying it.

The country is simply overdosing over bailout fatigue. Obama has over promised and undelivered. It’s as simple as that. The Obama rhetoric and narrative are getting old by the day. The only saving grace for Obama was that at least the stock market had recovered, but this looks to be only temporary.
What we have currently is crony capitalism on the side of bailouts and still record bonuses all around for bankers. Conversely, we have massive budget deficits, a weak economy, and a weaker labor market for the rest.

Obama has to realize that no one with a brain is going to double down on this type of strategy, but this is exactly what Bernanke did yesterday. The entire policy is a fiasco not because the stimulus was not enough but that it was targeted improperly from the word go. The stimulus went directly into the black hole, directly into the most unproductive areas of the economy. Area’s that needed to restructure, regulate, and deleverage. The banking sector didn’t restructure and we got incomplete regulation via FINREG that basically ensures another banking catastrophe. The financial sector just used the crisis to reload back to business as usual.
I am always in favor of stimulus if it’s used for productive purposes. I can’t support stimulus if the goal is to prop up a rotten to the core financial system. How in the world can you create jobs by propping up the housing sector? This is another shadow bailout for the financial sector. How are new jobs going to be created if credit availability is weak? The government keeps and abets the banks in hiding their loan losses via FASB rollbacks? Trying to prop up malinvestment only lengthens the downturn.

Let’s all picture this for a moment…..

Bernanke and the Fed have bought up some $2T in MBS . The administration has extended unemployment benefits too many times to count, Treasury along with the Fed have kept long and short rates low so that again the financial sector can ride the yield curve, and we have effectively nationalized the entire housing sector. All of this has rallied credit and equity markets worldwide.

Now Fast Forward to say today or early 2011.

-What do housing prices look like?

-Are we creating jobs?

-What are real bank balance sheets looking like?

-Do we still have systemic risk?

-Is credit coming back on line?

-Are consumers spending again?

The answers are easy. NO!

We have more than doubled the Fed’s balance sheet not to keep interest rates low which is the party line, but to keep Wall Street liquid so they can play extend and pretend.

We have increased the national debt load to obscene levels and still the country and economy are in weak shape.

How are we any better off?

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