A day that shall live in infamy

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1

I am literally stunned.

Let me see if I can collect my thoughts.

First, the notion that the Federal Government has made the world safe again by offering to absorb all the toxic debt out there in an RTC-style entity is absurd. (Note: Resolution Trust Corp = the government entity that ate all the bad S&L debt back in the 1980's). Assuming this idea even gets off the ground, all that will have happened is that private debts than have gone sour will have been transferred to the public.

Will the debts be reduced? No, just transferred.

But a number of $500 billion has been bandied about as "the right size" to get the job done.

My friend Gunter has a different view (he works for a major financial institution overseas):

[quote]

Hello Chris,

I have not seen a number yet but here is my quick and dirty calculation

Worldwide Credit Losses & Write Downs as per 9/19/2008............USD 516.7 bln

Capital Raised....................................................USD 362.8 bln

Capital Shortfall.................................................USD 153.9 bln

For this calculation I assume that financial institutions are leveraged by a factor of 10. In reality I think the multiple may be even higher.

If we assume that equity capital markets for financial institutions remain closed the existing capital shortfall of USD 153.9bln requires the sale of (mostly troubled) assets in the amount of......................USD 1.539 trillion

Assuming that an estimated amount of USD 1.300 bln in total credit losses and write downs will hold (risk is on the upside in my view) there are at least another USD 783.30 bln (1.300 minus 516.7) to be realized which will result in another........................USD 7.833 trillion and in total USD 9.372 trillion

to to be sold to:

- government(s)
- dislocation investors and/or
- remaining sound financial institutions (if any)

Let me know what you think and feel free to use it on your blog.

Guenter Leitold
www.highyieldblog.com

[/quote]

It is against this (possibly very) conservatively stated $7.8 trillion shortfall that we need to assess the $500 billion US bailout.

Also we had:

[quote]

WASHINGTON (Reuters) - The U.S. Senate on Wednesday overwhelmingly approved a $612.5 billion defense spending bill for fiscal 2009, including $70 billion for operations in Iraq and Afghanistan.

[/quote]

Link to article

So no obvious sense of spending restraint showing up in DC yet. I guess the mood down there is that we can have a $600 billion + military budget and a $500 billion bailout and everybody will be fine with that. No sense of priorities, sacrifice, or tradeoffs yet. It's still a version of "Yes, I'll have one of everything" at the old taxpayer buffet table.

And:

[quote]

The Federal Reserve Board on Friday announced two enhancements to its programs to provide liquidity to markets. One initiative will extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP markets and broader money markets.

To further support market functioning, the Federal Reserve also plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

[/quote]

Link to article

And:

The SEC extending the ban on short selling to 799 companies. This is going to backfire on the SEC, big time. Short selling has been used for many decades and is an embedded part of many trading strategies. Removing short sales will certainly do two things; (1) provide a 'pop,' as short sellers cover their positions and less selling pressure comes into the market, and (2) assure that the next bottom will be far lower, deeper, and longer than past bottoms. Short covering is the #1 reason that bottoms are found. Remove that, and the bottoms are less crisp, more like a boggy pond than a concrete pool.

And:

[quote]

Sept. 19 (Bloomberg) -- The U.S. government will set aside as much as $50 billion to temporarily protect investors from losses in money-market mutual funds caused by the meltdown of financial markets.

[/quote]

Link to article

And:

...I could go on and on. The main point is this: Rules are being broken and changed so fast that I cannot possibly analyze them all fast enough.

And the bottom line is this: The US has just announced close to three quarters of a trillion dollars of new spending/borrowing, while the Federal Reserve is now accepting everything from auto loans to commercial paper, to equities, to Fannie debt.

The dollar *should* be getting killed here. It is not, yet, but markets have a way of settling themselves out, and I have little doubt about the long-term direction of the dollar, given everything that has happened this week. In my assessment, this entire stock-market propping of the last 24 hours is a fake rally designed to buy some time.

 

This is a companion discussion topic for the original entry at https://peakprosperity.com/a-day-that-shall-live-in-infamy-2/

2

i am not political but i really think mccain is missing a grand opportunity here.i think he should leave the republican party and restart the bullmoose party.(he does have a running mate who can field dress a moose) he would leave all the toxic trash of the bush administration. he could then reinstate glass -steagall(which his #1 economic advisor did away with in 99) after all he is now in favor of more regulation. he could then put the new veep in camo at the head of our new invasion of dubai. because it really wont be about oil. we will be just going in to get our money back. talk about shock and awe.
we will then be in possession of the worlds largest indoor ski slope. which will be great for paulson and bernanke because they will need new jobs soon. they can sell lift tickets and remind people that the ride up takes a lot longer
than the slide down. and that they should be careful because it is a very slippery slope. sound absurd? anyone reading the paper?

3

Very good.

4

Hi. Great website. But a question. You keep saying you’re stunned by the actions of the Fed and Treasury, but you don’t say how you would manage things differently. Forget for a moment about how we got here. The situation is what it is. What would you do as Fed chief, or Treasury sec, or even President? Surely you would not go on TV and tell everyone to make a run on the banks and buy gold. Seriously, how would you manage it? Wouldn’t you, too, break some rules? Thanks.

5

 

Nice touch!

Laughing

Chris Martenson

6

I have been reading your site for several weeks and one of the themes that has stuck with me is that it is better to be a year early than a day late. It looks like I’m a day late! Or am I??

7

Chris fantastic site, love it.
The US govt. is buying time and this should be seen as a VERY BAD sign.
As you say, this is a totally unrealistic plan, and the stock market rally is hysterical (in both senses of the word)
Check out this link to the BBC Business Correspondent (I am a Brit)
http://www.bbc.co.uk/blogs/thereporters/robertpeston/
If an unfunded, “back of a cigarette packet” plan can cause the markets to react so violently than all rationality has been bled from the process.
Why buy time with a hopelessly unrealistic and unaffordable plan: because the future is going to be very black indeed
I think we could be looking at Meltdown Monday as the day the money markets freeze.
Keep up the good work

8

 

...it like this. My goal would be to get the rot out of the system as rapidly as possible and not prolong the misery. A bottom exists and getting there rapidly assures we can begin rebuilding sooner. At no point would I risk the US dollar's reserve currency role.

  1. I'd let AIG go under in search of a rapid bottom rather than a long prolonged affair.
  2. Beware the predators. I would be cognizant of the fact that any money dumped into the market is far more likely to be immediately ripped out of the market by the predator class of black-box market participants that exist than it would to end up in a helpful spot.
  3. Begin a return to accountability. I'd make a very public example out of a whole host of CEOs and other executives. Forget Martha Stewart, Mr Fuld needs to go to prison. So does Mr, Raines, the entire CFC executive staff and about 100 other guys I could mention.
  4. Instead of pouring money into financial firms, which is already destroyed so where's the gain(?), I would immediately announce a large program of government spending on energy and transportation infrastructure with slightly above market pay rates (to begin the long process of raising salaries up towards the collapsing house prices). I mean, if the government is going to spend the money anyway, why not get something for it? Trust me, we get absolutely nothing out of the Wall Street bailout. Nothing. Those who would trade future prosperity for temporary market relief deserve neither.
  5. I'd protect the dollar at all costs. Most are unaware of the exorbitant privilege that's been afforded by reserve currency status. Risking a sudden unwinding of 30 years of excess spending risks the entire social and economic fabric of this country. That's precisely what this sudden flurry of lavish bailouts places at risk. Instead of annoucning untold hundreds of billions of dollars of bailouts AND full maintenance of all other spending programs is simply reckless fiscal polciy of the highest order. Sure, it's an emergency but later, when it's not, politicians will simply try to forget about it all and move on to new additional deficit spending. It has to stop at some point and if not now, then when? My concern is that these programs all indicate that the mindset is "we're not going to stop until we crash this thing".

Chris Martenson

9

Explain how the rush to buy gold is not the same manic/greedy get rich thinking that has us on the ledge of a very tall building. ~M

10

Buying gold in this environment is not to get rich but to have a reserve of value after the value fiat money has evaporated

11

 

This party is going to go on for a while. On the one side will be those who desperately wish to preserve the status quo.

 

On the other side are the swelling number of folks who now realize the status quo neither can, nor should, be preserved.

 

My peronsal motto is: I'd rather be prepared and wrong than unprepared and right.

 

Chris Martenson

12

 

It's not that I love gold, it's that I hate how my paper money is being managed. There is nothing inherently wrong with a fiat currency as it is possible for them to be managed properly. Ours is being mismanaged to a staggering degree and its odds of failure are high.

 

My entire stance on gold is to simply preserve my wealth, not to 'get rich'.

 

And before anybody says "yes but you can't eat gold" I'd just like to say that I tried eating a $10 bill and it tasted just as bad and was just as unfilling as the $5 bill I ate earlier.

 

Chris Martenson

13

Does anybody know what GW thinks about the whole affair!!!I’m sure he could give us a laugh or two as there does’nt seem to be anything left in the kitty to laugh over. Great website once again Chris.

14

“I’d protect the dollar at all costs. Most are unaware of the exorbitant privilege that’s been afforded by reserve currency status. Risking a sudden unwinding of 30 years of excess spending risks the entire social and economic fabric of this country.”
Presumably the rest of the world pays for this “exorbitant privilege”? And you’d prefer that they continue doing so?

15

 

I was specifically asked "if I was the government or Fed" what would I do?

 

If the question was "what would you do if you were suddenly made the autocratic ruler?" I would have a different set of answers.

 

But the more important question for the rest of the world is "why do you continue to allow the US to abuse its privilege?". Make no mistake, the dollar should be swirling the bowl right now but it is not for reasons that I must conclude are based on the actions of foreign central banks.

 

I truly think it would be better for all concerned if this support was weaned off as rapidly as possible. This will mean the end of Bretton Woods II, but that was a mathematical certainty anyways so we might as well begin as soon as we can determining the replacement system(s).

 

The enabling of the dolalr by the BoJ and the ECB is only masking the signals we need to begin this period of readjustment and, while I appreciate the effort, it is only going to make things worse down the road.

Chris Martenson

16

if they get approval for the RTC bailout it will be interesting to see how it affects these 2 stocks which have been in the news of late with Moody’s downgrading them yesterday.

17

Hey Chris,
My first time to comment. Great work. Thank you.
Isn’t the real cause of all of this mess the fact that about 30 years ago our national leaders bought into the economic theories of one Milton Friedman (U. of Chicago) often called “trickle down economics”, which says: (1) privatize government functions and assets, (2) set policies and practices that shift wealth upward to the powerful elite corporations and away from working folks,
(3) de-regulate business and operate as a so called “free-market” economy, and (4) take advantage of “disasters” to frighten folks, and if none occurs, then create them.
These were tried in upward of dozen other countries before us, and resulted in disaster for all of them. They came in under Reagan, and continued through all administrations, reaching its apex with the present administration.
I’m wondering if anyone will ever acknowledge this, and explain to the general voting population how it has worked, rather than just pointing fingers at each other.
Ben
P.S. I don’t ignore the fact that many Americans spent their private funds recklessly and acquired too much debt, as well as the severe cost of ill-conceived war.

18

“I was specifically asked “if I was the government or Fed” what would I do?” Point taken.
“But the more important question for the rest of the world is “why do you continue to allow the US to abuse its privilege?”.” Why indeed. Presumably, because having done so for so long, it will be very difficult (and for the major creditor nations, extremely costly) to stop. From my reading of your articles (and those of other commentators) I suspect that ‘events’ will eventually force everyone’s hand.
Thank you for taking the trouble to reply to my post.

19

Check this out on Bloomberg…Paulson’s big announcement to fix this mess. What’s the acronym for Troubled Asset Relief Program…TARP. What do you use a tarp for? Hmmmm to cover things up.
http://www.bloomberg.com/apps/news?pid=20601087&sid=akDKPN1hzMZg&refer=home

20

Today in his speech he said that those responsible for fraudlent activity will be persecuted. I believe he meant Prosecuted. But perhaps we will just harass them and call them names. Maybe drag them by their feet down Wall Street or stone them in the city square. Better yet, have them battle Lions in Yankee Stadium - that’d be a good send off for the House That Ruth Built. Persecute…what a reknob.