naked capitalism

doc holiday says:

I just listened to that bullshit hearing and all you have is a few pre-designed questions, with pre-designed answers to placate a few people that have no clue as to whats going on. The hearing ends with slaps on the back and the hope that Bernanke can get back to work, solving imaginary issues and mitigating a few kinks in the bailout — meanwhile, the only person pushing a little seemed to be Ron Paul, but if America is to survive this period, Paul will have to push a much sharper attack and not back down!

I never watch or listen to this type of hearing, but it proves to me that our elected reps, are idiots!

Anonymous says:

Our financial system is one gigantic tapeworm with the Federal Reserve as it’s head. This disease will not go away until and unless we remove the head. Unfortunately, the vast majority of the population has no understanding of this matter. As for Bernanke, liars lie, thieves steal and crooks break the law. Thanks for your great Blog.

doc holiday says:

1. Re: "There may not be inflation –just a substantial devaluation… "

>> What about just substantial deviation from the norm?

2. Below are selected lyrics from The Poetry of Donald Rumsfeld.
http://www.npr.org/templates/story/story.php?storyId=1761585
The Unknown
As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don't know
We don't know.

Department of Defense news briefing
Feb. 12, 2002
A Confession
Once in a while,
I'm standing here, doing something.
And I think,
"What in the world am I doing here?"
It's a big surprise.
Interview with The New York Times
May 16, 2001

Anonymous says:

well, ladies and gentlemen…

we all know there’s a backroom deal going on as even as the ‘boys’ were speaking to congress, loosening on restrictions was being brokered (see this mornings NYtimes). That goes down as a “how’d they do that?” moment in my book…kinda like the teenager sneaking out in the middle of the night…

my elected officials will loose my vote to be sure if this thing gets passed.

i keep writing my elected officials every day.

((sigh))

FR says:

1) I wouldn’t put too much weight on what the initial market reaction to the announcement was

2) This is financed from treasury debt, which will be issued, it’s not money that will be printed by the Fed (ie neutral effect on USD liquidity)

3) Even if you worry about monetary aggregates rising too fast, remember Keynes’ equation MV=PT where M is amount of money, V its velocity, P inflation and T number of transactions. In order for inflation to rise, M has to go up, but T has to be rising or stable to impact P. In the current environment the number of transactions is dramatically falling – that’s not inflationary. (Look at Japan, they pumped in trillions of Yen and it’s still in deflation). In simple terms, money is not enough, you still need people to use it to create inflation.

4) We’re in an asset price deflation environment. That’s very dis-inflationary with employment falling, house prices falling etc. It’s not inflationary. In fact a few days ago (when crude was hitting 90) 2-year break-evens were pricing deflation for the next two years. I wouldn’t worry about inflation here.

Matthew Dubuque says:

Matthew Dubuque

The bailout will go on the Treasury’s book, not the Fed’s. The two are not isomorphic.

The markets disagree with your moral certainty as to inflation. Treasuries are selling like hotcakes as a hedge against deflation.

Also, Bernanke expressed an expectation, not a certainty. He said, “I expect”, not “I am sure”.

Big difference. He is obviously not framing it in Manichean terms.

Those who continue to fight the last war against inflation risk plunging us into a Depression. In behavioral economics (which won a recent Nobel for Kahnemann) this is known as false anchoring.

Matthew Dubuque
mdubuque@yahoo.com

Anonymous says:

FR — I agree that we are in deflationary times. Yet at the same time, we have a massive public/private debt that is denominated in dollars. Deflation is awful for a debtor. Inflation is a much better alternative for a debtor. Sure, trying to reverse deflation hasn’t worked in Japan, but that does not mean it won’t work here. The system will gravitate toward inflation because that is the going to be the path of least resistance to solving our massive debt problems. At the very least, policies with massively inflationary tendencies will continue to be brought forth. I would not be so certain that they will all fail.

Anonymous says:

This just in from an insane CR Blogger (probably not Matt):

Essentially, taxpayers are being forced to buy JDSU shares @ $1000 per share and then suggesting that in 7 years, those shares that will be worth $15.00, someday, will be worth $1000, and thus stagnate from infaltion and not make a cent, while the insiders continue to profit from option grants!

>> Maybe right on, huh, huh??

Anonymous says:

I am guessing that Bernanke thinks it won’t be inflationary because he has the assurances of foreign Central Banks that they will support him….. for now.

I am amazed that even if this were profitable, in whatever machination, who are the taxpayers going to earn this ‘profit’ from.

doc holiday says:

This bailout is a matter of future cash flow and the reason warren the crook has his fingers in the register, is because he smells future cash flows, and so why do we have a situation where warren invests cash and gets future cash flow, but taxpayers are to sit and wait and get nothing but a a tax increase, which goes into warrens pockets as cash flow! That is the question, i.e, if taxpayers are going to pony up cash and invest in junk securities, they need to be repaid with dividends, just like buffeet — in other words, there should be no difference in asset classes where a crook makes off with taxpayer cash, while the taxpayer waits twenty years to watch inflation destroy value in this bailout investment!

This is like JDSU and a stock worth $1000 in a bubble, which is no worth $15, i.e, how long will it take taxpayers to break-even alongside inflation? The obvious issue is that CEOs or people linked to this debt, will continue to be compensated and then as with JDS, enjoy the full benefits of option grants, while shareholders eat crap — these reckless crooks will continue to enjoy future cash flow, while taxpayers are destroyed by inflation!

Does that make sense to anyone!!

I’m pounded this out standing up, so, I hope so!

SlimCarlos says:

Anon @ 2:12 is correct, although the comparison w/ Japan does not wash, for Japan was not a supplicant for external funding.

At the end of the day, this problem will be inflated away — there is no other choice. The monies lent were allocated in a manner such that the debt cannot be serviced, let alone repaid. Cosy up to the hard facts, for all else is noise.

Of course, as cover, we shall hear of the constant dangers of deflation and how it must be avoided at all costs. This has been the pattern for the last eight years and only now is it getting a head of steam.

SlimCarlos says:

>> Deflation in assets we own namely Bonds, Stocks, Houses, Cars & Boats… Inflation in the things we need Food & Energy. This makes the most sense to me.

When the money goes poof!, all that it measures goes whoosh! Boats in Zimbabwe have no doubt done quite well of late, though food has probably outperformed. Treasuries will go the way of Lehman paper.

I am not sure why this end game isn't more obvious. I mean, if this crisis were playing out in A Far Away Land, I don't we'd have the microscopes out analyzing the finer details of the proposal before Congress, would we?

Some Guy says:

I watched that hearing, and it was apparent that Bernanke’s starting to realize that people aren’t buying his BS anymore. Ron Paul was very gentle with him, but you could still hear a tremble in his voice as he perjured himself with that line about the bailout not having an inflationary effect.

Anonymous says:

Will the rest of the world fund our massive, limitless deficits when their own people are suffering, I think not. We will be faced with higher borrowing costs and drastically reduced living standards. This is what makes sense to me…

Anonymous says:

Watching these clowns on CNBC one has to conclude they're clueless. They just want bullets for their bazooka. That's the level of sophistication we're dealing with here. We have a problem guys, so give us some ammo so we can shoot it with a big gun. How very American!

What's notably missing is any talk about HOW these bad loans are going to be priced. I can understand why that might be, considering one has to talk to the likes of Maxine Waters and Barney Frank – they can't balance their checkbook let alone understand finance.

If the real problem is that home prices are still too high then we can expect more foreclosures and defaults. The extent of falling prices is more based on uncertainty than risk – it can't be predicted or modelled. Therefore there is no way to rationally decide the value of home equity based loans. We just have to wait and see.

It's common sense that the monthly cost of owning a home has to be paid by wages. If that's so then we have at least twenty or thirty percent more downside.

Some believe we're on the peak of a liquidity molehill and others believe we're on the precipice of a mountain of debt. H&B Inc. think the former. They believe that unfreezing the markets will restore liquidity and order. Pretty optimistic guys.

An interesting question is just how much long term damage is being done to the dollar by having these public hearings about how broken our system has become. What little money I have is now in alternative currencies, energy and precious metals.

Lewis B. Sckolnick says:

What has McCain bought?

John McCain’s Remarks on the Economic Crisis
New York, NY
Wednesday, September 24, 2008

America this week faces an historic crisis in our financial system. We must pass legislation to address this crisis. If we do not, credit will dry up, with devastating consequences for our economy. People will no longer be able to buy homes and their life savings will be at stake. Businesses will not have enough money to pay their employees. If we do not act, ever corner of our country will be impacted. We cannot allow this to happen.

Last Friday, I laid out my proposal and I have since discussed my priorities and concerns with the bill the Administration has put forward. Senator Obama has expressed his priorities and concerns. This morning, I met with a group of economic advisers to talk about the proposal on the table and the steps that we should take going forward. I have also spoken with members of Congress to hear their perspective.

It has become clear that no consensus has developed to support the Administration’s proposal. I do not believe that the plan on the table will pass as it currently stands, and we are running out of time.

Tomorrow morning, I will suspend my campaign and return to Washington after speaking at the Clinton Global Initiative. I have spoken to Senator Obama and informed him of my decision and have asked him to join me.

I am calling on the President to convene a meeting with the leadership from both houses of Congress, including Senator Obama and myself. It is time for both parties to come together to solve this problem.

We must meet as Americans, not as Democrats or Republicans, and we must meet until this crisis is resolved. I am directing my campaign to work with the Obama campaign and the commission on presidential debates to delay Friday night’s debate until we have taken action to address this crisis.

I am confident that before the markets open on Monday we can achieve consensus on legislation that will stabilize our financial markets, protect taxpayers and homeowners, and earn the confidence of the American people. All we must do to achieve this is temporarily set politics aside, and I am committed to doing so.

Following September 11th, our national leaders came together at a time of crisis. We must show that kind of patriotism now. Americans across our country lament the fact that partisan divisions in Washington have prevented us from addressing our national challenges. Now is our chance to come together to prove that Washington is once again capable of leading this country.

Anonymous says:

September 24, 2008

To Yves:

I have amended my usual morning financial matters routine. I used to hit the Telegraph UK, Bloomberg, and a few others then hit your site for the real scoop. As of this morning I’m hitting “Naked Capitalism” period, and forgetting the rest. You and your precious blogers are the only, repeat only, ones who know what’s going on.

Thank you,
Earl L. Crockett
Santa Cruz, CA

Anonymous says:

I believe we (main street) want to see “blood in the streets”. Therefore implement emergency “clawbacks”. No questions ask. Implement them by the end of the week. Come back Monday and tell us how much private money sitting on the sidelines was made off this mess and we (main street) collected from the clawbacks which can now be allocated to this mess. Force the private equity to fix this. It kills me this money sitting on the sidelines is just waiting to make a 50 percent return off the back of the middle class STILL !!

Anonymous says:

Speaking of Bernanke “lies” please consider his expression of “hold to maturity” values.

Alfred N. Whitehead spoke of “misplaced concreteness” as one of the major culprits if fallacious reasoning. I’d like to nominate “hold to maturity value” as a great example of this.

There can be no legitimate or rational value assigned until the risk of default is factored in.

Bernanke is suggesting that the government can coerce the prices by arbitrarily assigning a value to them.

Good luck on that, Ben. We know exactly which assets the banks will try to move first and “hold to maturity value” will be exactly zero since they will sell the riskiest tranches of the their CDO’s. The ones they could NEVER sell to anyone else because of default risk. The ones that throw a shower of sparks when the CDO blows up like the control deck used to every week on twenty thousand leagues under the sea with Richard Basehart. Guess that dates me.

What this all comes down to is that Ben and Hank are just hoping that having $700 billion dollars up their breech will convince the market that they can handle anything that comes along. Sort of a game of reverse chicken with Hank being the alpha rooster.

Anonymous says:

another lie

“when the housing market settles we can resell and almost break even.”

To do this the market has to go back to the level it was when the mortgage was made. And pigs with lipstick can fly.
What is the high side of recovery 50%?

Anonymous says:

Tonight’s Assignment? Just for fun, when the Prez. is speaking to us at 9pm…

Rewrite this document into not only words that our senators can understand, but also affords little wiggle room for fleecing.

You people are the smartest people on the planet, you’ve iimpressed to no end this week…go ahead, make my day and the day of all Americans!

http://www.ustreas.gov/press/releases/hp1150.htm

September 20, 2008
hp-1150

FACT SHEET:
Proposed Treasury Authority to Purchase Troubled Assets

Washington – The Treasury Department has submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability, and help protect American families and the US economy. This program is intended to fundamentally and comprehensively address the root cause of our financial system’s stresses by removing distressed assets from the financial system. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth. The following description reflects Treasury’s proposal as of Saturday afternoon.

Scale and Timing of Asset Purchases. Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets. Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth. The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.

Asset and Institutional Eligibility for the Program. To qualify for the program, assets must have been originated or issued on or before September 17, 2008. Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.

Management and Disposition of the Assets. The assets will be managed by private asset managers at the direction of Treasury to meet program objectives. Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets. Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to Treasury’s general fund for the benefit of American taxpayers.

Funding. Funding for the program will be provided directly by Treasury from its general fund. Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly. As with other Treasury borrowing, information on any borrowing related to this program will be publicly reported at the end of the following day in the Daily Treasury Statement. (http://www.fms.treas.gov/dts/)

Reporting. Within three months of the first asset purchases under the program, and semi-annually thereafter, Treasury will provide the appropriate Congressional committees with regular updates on the program.

Matthew Dubuque says:

Matthew Dubuque

In terms of Bernanke saying that the securities would be sold at yield to maturity value, what he ACTUALLY said is that they would be sold at a price that is CLOSER to yield to maturity value than fire sale prices.

Why is it that when the Fed says something, they are regularly misinterpreted?

At any rate, although Bernanke’s comment quoted by Anon at (4:34) was not a lie, it nonetheless contained a serious shortcoming.

ONE PROBLEM with selling at or near the cash flow to maturity price is that this price is calculated using an estimation of projected default rates, which could well be seriously mistaken.

As Mishkin has pointed out, when home equity prices are 10% underwater, there is a DRAMATIC escalation in defaults, a tipping point.

So those projected cash flows face a serious risk of collapsing due to a dramatic surge in foreclosures in the latter part of 2009. Holding them to maturity would be suicidal, especially if the Treasury purchases these on margin, which may well happen.

Matthew Dubuque
mdubuque@yahoo.com

donna says:

The biggest lie? That any of these idiots ever believed in “free markets”.

Lewis B. Sckolnick says:

Under that plan, which was still emerging, Congress would approve a fraction of what Bush is asking for — perhaps $150 billion or $200 billion — to allow the government to begin rescuing tottering financial companies.

_________________________________
The CEOs still get paid and we end up with junk paper which sounds an awful lot like junk bonds. Once we start paying we will end up paying a lot for a long time with absolutely no guarantee that it will work.

Donna is right on target.

ScottH says:

“the only person pushing a little seemed to be Ron Paul, but if America is to survive this period, Paul will have to push a much sharper attack and not back down!”

Paul wasn’t pushing, he was going on about the Austrian school of Economics. I happen to think that is a solid intellectual foundation, but he just alienates everyone with his tirades about economics. If he were to set aside references to economic theories and stick to the issues, saving the economics for subsequent debate, he would be a LOT more effective. Right now he’s just a noisemaker … easy to dismiss with “oh there goes Paul again with his Austrian economics.”

Paul routinely hands his opponents/critics the very instrument that they need to discredit him. I wish he could see this.

Word for the day: “ihvirqml”

Anonymous says:

Bankers tried to stem a crashing stock market by purchasing stocks for more than their bid price in the crash of 1929. Result? The crash was stemmed for one day.

Mr Market is not to be challenged for Mr Market always wins.

Bernanke, a student of the great depression, knows that his scheme is only a purchase of a little time, nothing more. That is how these people think…One more day in the sun.

River

Thomas J. says:

Treasury yields going up due to the funding costs associated with purchasing bad debt, without the Fed monetizing debt which Bernanke will not undertake until ZIRP, will only result in further crowding out of the private sector credit markets. This is the exact recipe for a deflationary collapse.

At this juncture, it is the velocity of money not the expansion of the monetary base that is determinative. As Bernanke knows expanding the monetary base at this moment will only accelerate the fall off in the money velocity as creditors would immediately withdraw funding, thereby, accelerating the deflationary collapse.

Bernanke is seeking to protect the core banking cartel franchise, so that there is something left to reflate in the future, by engineering an orderly liquidation process.

Not sure he can pull it off.

Marsha Keeffer says:

It’s a frustrating situation – thanks to everyone for their comments. Pretty clear at this point the posing will continue. Off to write to officials again…