Paul Krugman gives Bill Maher religion

It could get much worse

Exerpt from http://www.baltimoresun.com/news/opinion/oped/bal-op.economy21sep21,0,1400702.story By Rolfe Winkler – The Baltimore Sun

 

If the U.S. financial system relies on government funding to borrow, what will happen if the federal government's creditors take a walk? Consider Argentina, which in 2002 devalued its currency to pay off a crushing debt burden. Foreign capital fled the country, the banking system collapsed, inflation hit 80 percent and unemployment reached 25 percent as the economy sank into a depression.

 

That could never happen here, argue some. The $10 trillion national debt is "only" 70 percent of GDP, leaving the government plenty of borrowing capacity. But that ignores $60 trillion of projected liabilities for Medicare and Social Security, according to economist John Williams.

 

What's true of companies is true of countries: The more they borrow, the more they operate at the mercy of creditors. The more they borrow, the more violent their inevitable failure.

 

Under no scenario can Uncle Sam raise the trillions it needs to meet all these obligations. No tax rate is high enough, no discretionary spending cuts draconian enough. And there is no creditor of last resort for the U.S. Treasury. If default implies an Argentina-like scenario, that would leave us with only two options. The first is to print money; Mr. Williams says this would lead to "hyperinflation on the order of 1920s Germany." The other option is to eliminate Medicare and Social Security.

 

 

Why the market will crash next week

Voltron says: There is opposition building to the bailout proposal because it is a blatant power grab.  It’s in line with my prediction of the government nationalizing the banks.  Since – despite gyrations – the market ended basically flat last week, I expect the government to engineer a major crash next week before the legislation comes up for a vote to “force” congress’ hand.

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=ae6b6P1L8E_E

Changing the rules

Voltron says: The problem with changing the rules of the game is that next time, no one will want to play.  In order to delay disaster for a few weeks (at best) the government is ensuring that the market will never recover.

http://www.nytimes.com/2008/09/20/business/worldbusiness/20markets.html

SRS

Voltron says: of note in the proposed bailout:

(1) Mortgage-Related Assets.—The term mortgage-related assets means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

Why are commercial mortgages included?  They aren't even in trouble yet.  Especially if you look at the price of SRS.  What does the government know about commercial mortgages that the market doesn't know or has not admitted yet?  If this bailout is passed SRS may get crushed.  If it fails it will go through the roof, especially if they ban shorting all stocks.  SRS is at the mercy of congress now.

Mother of all bailouts

voltron says: here's an analysis of the proposed bailout: http://market-ticker.denninger.net/archives/587-The-Mother-Of-All-Frauds.html

It allows the Treasury to purchase mortgages, but at what price?  The problem is that there is no bid for this toxic waste in the market.  It is rumored that the treasury will conduct a reverse auction.  I've also heard it will be a dutch auction, but that makes no sense because no two mortgage securities are the same, just as no two houses are the same.  If the government pays to much, the taxpayer gets screwed.  If the government doesn't pay a premium, the banks are still insolvent anyway.  This confirms my forecast that government will attempt to nationalize the banking system.

It also does nothing to solve the "root problem" of house prices falling.  I say that in quotes because the real root problem is that instead of borrowing to produce, we borrowed to consume (houses), so of course we can't pay it back!

The real cost of this could be more that 700 Billion, it's essentially a blank check on top of the blank check that the Treasury got to bail out Fannie and Freddie.  There is no practical taxpayer protection.  This confirms my forecast that the government will continue to double down, at least until the election.

Foreign companies are excluded.  Is this a way to "get back" at hedge funds? 

Well the government is firing all guns at once so congress will be under pressure to add bailouts for auto makers, airlines, "main street" and homeowners.

It's expected to be voted on next week.  You don't get to vote.

New Disclaimer

Voltron says: All bets are off . . . it's every man for himself.

1. The government is changing the rules of the game as they go along.  Moral Hazard concerns are out the window.

2. The government is preparing to throw $700,000,000,000 into the market to bail out their cronies and screw you.

3. There are Armageddon scenarios so dire, that no matter what your portfolio has, you will never recover any of the value.  These scenarios now have non-zero probabilities.

I'm going to continue blogging, but keep in mind that it's no longer a free market.  It's politics now.  I know what the government should do, but that has nothing to so with what they will do.

Good Luck.

Paulson Goes All In

By Peter Schiff – Europacific Captial

 

Just three days ago, after looking at the prospect of bailing a string of distressed financial institution in the country, the government seemingly drew a line in the sand, and refused to bail out Lehman Brothers. The authorities clearly saw Lehman’s demise as a trial balloon to see how the markets would react if the government stayed on the sidelines. That trial balloon quickly turned into the Hindenburg. Immediately reversing course, the Government has decided to go “all in” and bail out every institution with financial exposure to U.S. mortgages. Simply put, Americans will not be allowed to visibly suffer losses after the greatest asset bubble in U.S. history. But make no mistake, the losses are real and Americans will pay one way or another.

 

Moving beyond the guided munitions of selective bailouts, the Government is now trying the financial equivalent of carpet bombing (for AIG, Merrill Lynch, and especially Lehman Brothers, this gives new meaning to being a day late and a dollar short). To continue with the military analogies, Paulson’s bazooka turned out to be a nuclear tipped ballistic missile.

 

By committing trillions of tax payer dollars (not the “hundreds of billions” that Paulson predicts), the plan will save commercial and investment banks from certain bankruptcy. In his statement today, Paulson made clear that Congress must pass new legislation to allow the Government to acquire even those loans too poorly collateralized to currently qualify for GSE or FHA absorption. The losses baked into these mortgage products, which Wall Street has been reluctant to even estimate, will now be borne wholly by taxpayers.

 

In his press conference, Paulson assured us that this plan was designed to safeguard our savings. But in typical government fashion, the plan will have the reverse effect as savings will be wiped out through inflation. He also claims that the plan will safeguard home equity by keeping real estate prices high. Since when did high home prices become a strategic national priority? If the plan succeeds, the gains for home sellers will simply be matched by losses for homebuyers, who end up paying inflated prices, and taxpayers, who get stuck with the losses when those buyers default.

 

Paulson’s distress and confusion was clearly evident when he fielded questions from reporters. The first asked Paulson to describe his fears regarding the probable economic consequences of government inaction. Paulson provided no answer and promptly exited stage right.

 

When the U.S. government owns all mortgages, the real estate market will be completely subject to political, rather than financial, concerns. Will foreclosures be outlawed? Will loan term easements and principal reductions become standard campaign issues?

While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put “significant amounts of taxpayer dollars on the line,” they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution.

 

The government has also decided to insure all money market funds, adding trillions more in unfunded liabilities to the Federal balance sheet in the blink of an eye. Of course, since bad real estate loans are not the only toxic assets on the balance sheets of financial institution, we will also need to absorb other classes of asset-backed securities, such as those backed by credit card debt and auto loans. So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value. Is the trade-off really worth it? Washington thinks so.

 

Further, since I assume the plan will apply to all mortgage debt, U.S. taxpayers will also be on the hook to bail out foreign institutions that loaded up on the financial sludge. However, once the government takes them off the hook, do not expect them to re-invest the windfall back into other U.S. dollar denominated assets. This get-out-of-jail free card will likely scare them straight. The global mass exodus from the U.S. dollar and Treasury debt is about to begin: do not get caught in the stampede.

 

Although gold initially sold off as the apparent need for a financial safe haven ebbed, look for a spectacular rally to commence as its traditional role as an inflation hedge returns with a vengeance.

Just three days ago, after looking at the prospect of bailing a string of distressed financial institution in the country, the government seemingly drew a line in the sand, and refused to bail out Lehman Brothers. The authorities clearly saw Lehman’s demise as a trial balloon to see how the markets would react if the government stayed on the sidelines. That trial balloon quickly turned into the Hindenburg. Immediately reversing course, the Government has decided to go “all in” and bail out every institution with financial exposure to U.S. mortgages. Simply put, Americans will not be allowed to visibly suffer losses after the greatest asset bubble in U.S. history. But make no mistake, the losses are real and Americans will pay one way or another.

Moving beyond the guided munitions of selective bailouts, the Government is now trying the financial equivalent of carpet bombing (for AIG, Merrill Lynch, and especially Lehman Brothers, this gives new meaning to being a day late and a dollar short). To continue with the military analogies, Paulson’s bazooka turned out to be a nuclear tipped ballistic missile.

By committing trillions of tax payer dollars (not the “hundreds of billions” that Paulson predicts), the plan will save commercial and investment banks from certain bankruptcy. In his statement today, Paulson made clear that Congress must pass new legislation to allow the Government to acquire even those loans too poorly collateralized to currently qualify for GSE or FHA absorption. The losses baked into these mortgage products, which Wall Street has been reluctant to even estimate, will now be borne wholly by taxpayers.

In his press conference, Paulson assured us that this plan was designed to safeguard our savings. But in typical government fashion, the plan will have the reverse effect as savings will be wiped out through inflation. He also claims that the plan will safeguard home equity by keeping real estate prices high. Since when did high home prices become a strategic national priority? If the plan succeeds, the gains for home sellers will simply be matched by losses for homebuyers, who end up paying inflated prices, and taxpayers, who get stuck with the losses when those buyers default.

Paulson’s distress and confusion was clearly evident when he fielded questions from reporters. The first asked Paulson to describe his fears regarding the probable economic consequences of government inaction. Paulson provided no answer and promptly exited stage right.

When the U.S. government owns all mortgages, the real estate market will be completely subject to political, rather than financial, concerns. Will foreclosures be outlawed? Will loan term easements and principal reductions become standard campaign issues?

While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put “significant amounts of taxpayer dollars on the line,” they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution.

The government has also decided to insure all money market funds, adding trillions more in unfunded liabilities to the Federal balance sheet in the blink of an eye. Of course, since bad real estate loans are not the only toxic assets on the balance sheets of financial institution, we will also need to absorb other classes of asset-backed securities, such as those backed by credit card debt and auto loans. So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value. Is the trade-off really worth it? Washington thinks so.

Further, since I assume the plan will apply to all mortgage debt, U.S. taxpayers will also be on the hook to bail out foreign institutions that loaded up on the financial sludge. However, once the government takes them off the hook, do not expect them to re-invest the windfall back into other U.S. dollar denominated assets. This get-out-of-jail free card will likely scare them straight. The global mass exodus from the U.S. dollar and Treasury debt is about to begin: do not get caught in the stampede.

Although gold initially sold off as the apparent need for a financial safe haven ebbed, look for a spectacular rally to commence as its traditional role as an inflation hedge returns with a vengeance.

By. Peter Schiff / President of Euro-Pacific Capital

Just three days ago, after looking at the prospect of bailing a string of distressed financial institution in the country, the government seemingly drew a line in the sand, and refused to bail out Lehman Brothers. The authorities clearly saw Lehman’s demise as a trial balloon to see how the markets would react if the government stayed on the sidelines. That trial balloon quickly turned into the Hindenburg. Immediately reversing course, the Government has decided to go “all in” and bail out every institution with financial exposure to U.S. mortgages. Simply put, Americans will not be allowed to visibly suffer losses after the greatest asset bubble in U.S. history. But make no mistake, the losses are real and Americans will pay one way or another.

Moving beyond the guided munitions of selective bailouts, the Government is now trying the financial equivalent of carpet bombing (for AIG, Merrill Lynch, and especially Lehman Brothers, this gives new meaning to being a day late and a dollar short). To continue with the military analogies, Paulson’s bazooka turned out to be a nuclear tipped ballistic missile.

By committing trillions of tax payer dollars (not the “hundreds of billions” that Paulson predicts), the plan will save commercial and investment banks from certain bankruptcy. In his statement today, Paulson made clear that Congress must pass new legislation to allow the Government to acquire even those loans too poorly collateralized to currently qualify for GSE or FHA absorption. The losses baked into these mortgage products, which Wall Street has been reluctant to even estimate, will now be borne wholly by taxpayers.

In his press conference, Paulson assured us that this plan was designed to safeguard our savings. But in typical government fashion, the plan will have the reverse effect as savings will be wiped out through inflation. He also claims that the plan will safeguard home equity by keeping real estate prices high. Since when did high home prices become a strategic national priority? If the plan succeeds, the gains for home sellers will simply be matched by losses for homebuyers, who end up paying inflated prices, and taxpayers, who get stuck with the losses when those buyers default.

Paulson’s distress and confusion was clearly evident when he fielded questions from reporters. The first asked Paulson to describe his fears regarding the probable economic consequences of government inaction. Paulson provided no answer and promptly exited stage right.

When the U.S. government owns all mortgages, the real estate market will be completely subject to political, rather than financial, concerns. Will foreclosures be outlawed? Will loan term easements and principal reductions become standard campaign issues?

While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put “significant amounts of taxpayer dollars on the line,” they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution.

The government has also decided to insure all money market funds, adding trillions more in unfunded liabilities to the Federal balance sheet in the blink of an eye. Of course, since bad real estate loans are not the only toxic assets on the balance sheets of financial institution, we will also need to absorb other classes of asset-backed securities, such as those backed by credit card debt and auto loans. So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value. Is the trade-off really worth it? Washington thinks so.

Further, since I assume the plan will apply to all mortgage debt, U.S. taxpayers will also be on the hook to bail out foreign institutions that loaded up on the financial sludge. However, once the government takes them off the hook, do not expect them to re-invest the windfall back into other U.S. dollar denominated assets. This get-out-of-jail free card will likely scare them straight. The global mass exodus from the U.S. dollar and Treasury debt is about to begin: do not get caught in the stampede.

Although gold initially sold off as the apparent need for a financial safe haven ebbed, look for a spectacular rally to commence as its traditional role as an inflation hedge returns with a vengeance.

 

Short sale ban - answers

Voltron says:

 

Existing short positions are grandfathered.

 

Right now, you may not short to hedge options.  As a result options have started becoming more expensive (spreads widening).  The option market may seize up next week.  The SEC may grant an exemption for option market makers (link) but it certainly opens the door to abuse of the rule.

 

The Short financials ETF (SKF) was halted shortly after it opened for trading on Friday.  Trading resumed, but no new shares will be created.  I expect it to go up because now it is the only way to short financials and supply is limited. (link)

 

Credit Default Swaps (the white elephant in the room) are still completely unregulated.  The SEC has no plans to address them.

 

 

SEC bans short selling of financials

In a 2am press release, the SEC has banned short selling on almost 800 financial stocks.

Interestingly Moody's is not on the list.  Vindictive, much?

How does it affect existing short positions?  How does this affect options?  Can people hedge options?  Can market makers still short?  How does it affect the short ETFs?   How does it affect credit default swaps?   I'm sure the SEC has carefully considered all of this.  

http://calculatedrisk.blogspot.com/2008/09/sec-bans-short-selling-of-financial.html

For your guide, you can create a short position using options.  So if option trading is not curtailed, this does nothing.

http://www.voptions.com/bearish_strategies_synthetic_short_stock.htm

this is the mother of all desperation moves and is going to massively distort the market.

The government is doing everything it can to

1. prevent price discovery
   
2. prevent transparency
   
3. prevent you from protecting yourself
   

Cali home prices down 35% for the year

http://www.breitbart.com/article.php?id=D939E5SO0&show_article=1

Fed losing control

"We have lost control . . . We cannot stabilize the dollar. We cannot control commodity prices." - Federal Reserve Bank Chairman Ben Bernanke as quoted here

They also cannot control short term interest rates (link)

The Fed: sugardaddy of last resort

http://www.nytimes.com/2008/09/18/business/18fed.html

Comrade Bernanke Does it Again

By Peter Schiff - EuroPacific Capital

By nationalizing nearly 80% of AIG for $85 billion, the Fed is doing a lot more than simply flushing taxpayer money down the toilet. The greater wrong is allowing the agency that has the power to print money to take control of a private enterprise, especially without the approval of the company’s shareholders. The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America’s once vaunted free market economy. Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire.

The “line in the sand” that the Government seemed to draw by refusing to bail out Lehman Brothers was erased in just two days by the very next wave of financial panic.

While Fannie and Freddie were arguably quasi-government agencies that deserved special protection, no such status exists with AIG. Where does the Fed get the authority to use the money it prints to take over private companies? Congress never gave such authority and, even if it had, it would be unconstitutional, as Congress itself has no such authority to delegate. What about the shareholders? Why didn’t they get to vote on this acquisition? Whatever happened to private property rights?

Where does this stop? What other troubled companies will the Fed nationalize, and how much will it cost? Why stop at troubled companies? If the Fed can buy into a sick company, why not a healthy one? Now that we have allowed the Fed to take over any asset it wants, private property rights are meaningless. When oil prices get really high, why bother with a windfall profits tax when the Fed can simply nationalize Exxon-Mobil with a few cranks on its printing press. Who needs Bolsheviks when you have the Fed?

AIG is not a bank; it is not even an investment bank. The “lender of last resort” power was supposed to apply only to banks, to prevent runs. It was not meant to apply to any company that had been declared “too big to fail”.

I suppose the Fed is trying to get around some of the more obvious illegalities by having the new AIG shares issued on behalf of the Treasury. What happened to the concept of an independent Fed? Here you have the Fed seizing a private company and ceding control to the U.S. Treasury. Rather then acting independently, the Fed and the Government are merely partners in crime.

On the economic side, the Fed expects us to believe this is a smart investment. Does anyone really think that officials at the Fed and Treasury are suddenly private equity experts? These are the guys who missed both the tech and housing bubbles, and who assured us that subprime problems were contained. I would not trust them to run a lemonade stand, let alone one of the largest insurance companies in the world.

The idea that this bailout was necessary given that the alternative would be worse should by now be fully discredited. All of today’s financial problems are the direct consequence of Fed policy that was designed to weaken the recession that followed the bursting of the tech bubble and the shock of September 11th. Of course, the tech bubble itself resulted from the Fed’s actions to sooth the pain following the collapse of LTCM, the Russian debt default, the Asian crisis, and Y2K.

I suppose the precedent for all of these actions was established back in 1979 when the government guaranteed Chrysler’s debt. It sure would have been a lot better and a whole lot cheaper if we had simply let Chrysler fail. The road to financial hell, or in this case socialism, is certainly paved with “good” intentions. Today's historic surge in the price of gold shows that at least a few investors are refusing to march in the parade.

Gold posts biggest one day gain - ever!

Voltron says: Gooooooooooooooooooooold!

http://www.breitbart.com/article.php?id=D938L2E83&show_article=1

Gold ETF: GLD
Double Gold ETF: DGP
Gold Certificates: EuroPacific Capital

Congress has no idea what to do

Voltron says: do nothing, you’re just making it worse

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDXSrZc6VWYw&refer=home

Feds shopping WaMu

http://news.yahoo.com/s/nm/20080917/bs_nm/washingtonmutual_dc

Welcome to Desperation

Government is bailing out AIG

Good Summary

http://seekingalpha.com/article/95668-wall-street-s-category-5

 

 

FED: the writing is on the wall

Voltron says: want to see what the FED will do?

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm