Category — Economics

President-elect Obama’s promises to create budgetary savings by eliminating waste.  Let me start out by saying this goal conflicts with the earlier hints coming from his team that we need a huge FDR style budget busting stimulus.  Additionally, it looks a lot like Deval Patrick’s promises when he became governor, and like his friend Governor Patrick, it’ll go nowhere when the rubber meets the legislature.  The Pelosi/Reid Congress couldn’t even get the origional TARP done without a hefty load of earmarks and that bill was supposedly needed to avoid a financial Pearl Harbor.

I’ll remind the president-elect, as John McCain should have during the debates, that he doesn’t have a line item veto.  Therefore, I wish him loads of luck in finding the wasted billions, but it won’t do him much good since Congress controls the purse strings.  There’s not a snowballs chance in hell that he gets his party to comply with its 2006 promise to cut earmarks and pork.

“Never underestimate the power of human stupidity.”

Robert Heinlein

Lede in today’s NYT trumpets the flight of investors into “safe” places for parking money.
Like T-bills, which were paying about 1.5%, but now in demand, pay under 1%. Revisiting the golden age of the Weimar Republic, our fearless leaders busily reproduce history by fabricating the “Weimar T-bill” just in time to crush the economy ending 232 years of successful existence. After this last round of bailouts, the inflationary spiral will start.

As soon as these idiots realize they aren’t making any money in T-bills, out of the “safe” place the money comes and back into the market it goes where it is at risk.
NOW, where does the government get the money it is using to pay off the incurred debt? Remember no T-bills; does the government jack up the interest rate, which slows down the housing market or does it default on the debt?
Neither, the Treasury just prints more money, boosting inflation.
Oil is back over $100 a barrel. Food is not coming down in price, thanks to the clowns putting corn in gas tanks. Now the government is giving the taxpayer all the toxic debt and the fat cats their money back. We are the proud owners of some where north of a half trillion dollars of crap.
Personally, I rather see the fat bastards jump out windows after they lost everything.

Excerpt from Paper Money by “Adam Smith,” (George J.W. Goodman), pp. 57-62.

Before World War I Germany was a prosperous country, with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery. The German Mark, the British shilling, the French franc and the Italian lira all had about equal value, and all were exchanged four or five to the dollar. That was in 1914.[snip]

Germany abandoned the gold backing of its currency in 1914. The war was expected to be short, so it was financed by government borrowing, not by savings and taxation. In Germany prices doubled between 1914 and 1919. [snip]

America is off the gold standard too since 1971. We’re on a system of fiat money. So much for full faith and credit, since that change, we too have become a debtor nation,

But the bourgeois habits were very strong. Ordinary citizens worked at their jobs, sent their children to school and worried about their grades, maneuvered for promotions and rejoiced when they got them, and generally expected things to get better. But the prices that had doubled from 1914 to 1919 doubled again during just five months in 1922. Milk went from 7 Marks per liter to 16; beer from 5.6 to 18. There were complaints about the high cost of living. Professors and civil servants complained of getting squeezed. Factory workers pressed for wage increases. An underground economy developed, aided by a desire to beat the tax collector. [snip]

The nervous citizens of the Ruhr were already getting their money out of the currency and into real goods — diamonds, works of art, safe real estate. Now ordinary Germans began to get out of Marks and into real goods. [snip]

The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items — bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren’t safe. Gasoline was siphoned from cars. People bought things they didn’t need and used them to barter — a pair of shoes for a shirt, some crockery for coffee. Berlin had a “witches’ Sabbath” atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug. In the cabarets the newly rich and their foreign friends could dance and spend money. Other reports noted that not all the young people had a bad time. Their parents had taught them to work and save, and that was clearly wrong, so they could spend money, enjoy themselves, and flout the old. [snip]

Sound familiar? Put it on plastic, live for now. In debt to the eyeballs and no hope of paying it off.

When someone has such a intuitive grasp of how the economy works, it is believable that he can pluck a fix out of the hat to cure our woes, clean up the sub-prime and soon prime congressionally caused debacle, and drive energy prices down to 1932 levels.

Here is the first result in Obamanomics as taught everywhere except the Milton Friedman Institute.

If this doesn’t sound familiar your name’s been in the obits.

Markdown of dong, the Vietnamese currency, seen as act of desperation

Vietnam lurched closer to a currency crisis yesterday as the Government cut the official exchange rate to a record low. UBS analysts said that the country’s economic profile was more extreme than that of Thailand on the eve of the 1997 Asian financial crisis.

As well as severe concerns over prospects for the dong, some observers see signs that Vietnam faces the growing risk of a banking crisis. They say that investors should be aware of a potentially drastic blow to sentiment when views on the entire region are fragile.

Edward Teather, UBS economist, said that if Vietnam were to unravel, investor sentiment and financial markets in Malaysia, Singapore, Thailand, the Philippines and Indonesia could all take a knock. [snip]

Analysts said that the rising risk of a sudden and crippling depreciation comes as the cracks in Vietnam’s vaunted “economic miracle” have grown too large to ignore. Only 18 months since Vietnam entered the World Trade Organisation, inflation is running above 26 per cent and the country is facing a swollen trade deficit that dwarfs those of its SouthEast Asian neighbours. [snip]

Investors have deserted Vietnamese shares, sending the benchmark index down more than 60 per cent since January and giving it the status of the world’s worst performer in the past year. Soaring commodity inflation, particularly in food and fuel prices, has hit Vietnam many times more fiercely than it has the rest of Asia. Now, Vietnamese lured from villages by the promise of work in booming new factories are finding the pay inadequate and are striking for better salaries.

In the above para, change Vietnam to the United States. Sometime, from August to next April the food and fuel inflation will hit hard. If the GOP keeps control of the Senate it’s going to be bad, if the Democrats win it will be ruinous.

The Logo of Efficiency Vermont is Camel’s Hump as seen from the western side. After reading this article it looks more like a shark cruising for idiots.

We’re From Efficiency Vermont And We’re Here To Help You

I recently contacted my electric company concerning high electrical usage at my residence. After converting from an 80-gallon electric hot water heater to a 95 percent efficient propane indirect unit, my usage went up. My electric company said to contact Efficiency Vermont and they could “help” me. I thought, “Great, finally I will get some value for the extra money being paid out of my electric bills.” Upon review of this government’s Web site, I realized they offered up to a $ 1,000 incentive for converting from electric hot water to other efficient fuels. I contacted the organization and asked if I qualified. [snip]

Each parcel of assistance caused by government trepidation prolongs the problem. Strewing capitalism’s path are the financial statements of failed businesses. The demise of the weak merely reinforces the rest.

The bankers’ profits went to the stockholders; the losses must reside there as well.

Uncle Subprime

Mortgage foreclosures haven’t yet hit their peak, it’s an election year, and Congress is back in session. Hold onto your wallets because a housing bailout is moving forward unless the White House says no.

Senators from both parties agreed late yesterday to throw about $11 billion more at the housing market, and we’ll have more to say about that later. But think of Uncle Sam as the subprime lender of last resort and you are getting close to what the Beltway is contemplating. In the name of preventing foreclosures, House Financial Services Chairman Barney Frank wants to transfer the risk of further declines in home prices to taxpayers from lenders and borrowers.

Mr. Frank’s idea is that, for mortgages originated between the start of 2005 and mid-2007, a lender and borrower would be able to agree on a federal refinancing plan. Lenders would have to write down their loan to no more than 85% of the current appraised value of the property – which means the banks will use this opportunity to unload the biggest stinkers in their loan portfolios.[snip]

The only thing similar is a proctologic examination and finding both the doctor’s hands on your shoulders.

I don’t think any of the idiots in DC understand what’s coming. Take P.J. O’Rourke’s advice. “Never let the people with money and the people with guns, be the same people!”

No matter who’s elected president,
the debt party’s over

Talk about Enron type accounting, our federal books are well done, closer to charred. Here’s some of the hidden bills:

• Supplemental financing bills, outside the budget
• No veterans health-care estimates included
• No equipment replacement costs to restore our military
• Nothing about increases in state and homeland security

The real price is $3 trillion; and growing like Topsy, add to the outlay these goodies.

• Interest on the ever-increasing $9.3 trillion federal debt
• Damage to our credibility from a weak dollar
• Out-of-control inflation in energy

Let us add some more items such as bailouts for mortgage writers and lenders, putting the taxpayers on the hook by nationalizing the banking system and all the unfunded entitlement programs that congress won’t cut. The worst are:

Welfare for Wall Street
J.P. Morgan Chase buys Bear Stern’s equity. Taxpayers get the junk debt totaling billions of dollars. With fresh money it’s the samo-samo speculation Monte game. Why not, they’re playing with your money.

A Third World Financial Industry, Nationalized Banking
The sports on Wall Street played fast and loose, inflating bad debt values and embroidering profits. The Fed’s allowing them to gloss over losses to prevent alarm; talk about hiding a sunrise.

Under and unfunded Social and Entitlement Programs, the Untouchables
Medicare and Social Security entitlements soar to $50 trillion to $65 trillion within a generation. Entitlements will consume the entire budget in a generation. Note how concerned Congress is about this!

Pork and the Lobbying Machine, DC’s biggest busiess
35,000 lobbyists will loiter right after the 2009-2012 first term of the next president, screaming for government largess. The Democrats need them. McCain pledges to veto earmarks, look at his campaign staff, the altruistic ones that are working for “gratis.” All sorts of special interest lobbyists “donating” their time.

Bush’s Free Market Policies
“We’re on top of it,” Bush stated in his New York Economics Club speech in March. Probably like Spitzer got on top.

Roads, Bridges, Water, Sewer: The Appian Way is in better shape
Right! Taxes and more taxes on fuel and real cutbacks in services.

Consumer Savings?
They don’t exist. Big TV’s to luxury vacations, welcome to Hedonist Central where there is no waiting.

Recession Reality
We’ve been dancing to a low 1% Fed rate; the tune was bubble up and flip for loot.
Who’s that knocking at the door? It is the meltdown fiddler; he stopped playing and will have his pay.
All those who pooh-poohed Gramp’s hardship tales will get to live them. Call it a repeating verbal history. Yup, you’ll repeat it.
For all the rad-chic ’60’s anti-capitalists, it couldn’t happen at a better time. Kiss your retirement good-bye!

Remember, the government gave us OSHA, that organization which spent a great sum of your money ordering auto manufacturers to make hood ornaments that folded out of the way. All to protect you from cuts by said ornament when you are struck by a vehicle resulting in your passing over the hood.

Ask yourself a couple of questions. What does Congress know about making shoes? How about airplanes? Canoes? Trains? (Amtrak anyone) Interstate trucking?

Given this, why is Congress involved in controlling and regulating any of these businesses? Government interference costs us untold dollars through added costs to businesses which are passed on to the consumer.

Introducing the following ideas will reduce costs mostly by getting the government out of business.

In a previous post, I mentioned deregulation is good; no regulation is a fiasco. Safety is the primary consideration. Beyond that, let companies use equipment they like and pay prevailing wages. Return On Investment (ROI) to the shareholders determines size and scope of operations.

Markets scrutinize themselves with a Darwinian progression that cleans the bones of the weakest.

One item that goes with deregulation is ending all subsidies. Make it or fall down. Someone will step over the corpus and fill the slot.

Regulate Public interstate transportation for safety. All security devolves on the corporations with failures of the aforementioned piercing the corporate veil, putting all management’s, junior through top level, personal wealth as well as personal freedom in jeopardy.

No regulation of fares, let them charge what they want; let the public travel as they wish. Those that cannot control their bottom line soon are food for the bottom feeders.

Regulate utilities the same way, with the public able to buy from the cheapest company regardless of where they are. Only charges that one company may bill another for line usage come to scrutiny.

Sell insurance (Life, Health, Casualty) across state lines. Today, the Feds as well as the states regulate the financial strength of companies as well as policy wording for coverage. Surprised you’ll be at the rate differentials when one buys a basic policy and add the coverage one needs. Requirements like acupuncture and aromatherapy added to the policy as perqs for constituents, drive up premiums for all. Most persons need a Major Medical policy to cover catastrophic costs, a $10,000 deductible keeps premiums reasonable.

International companies comply with the regulations or shut them out of the market, no exports period. MFN trading status is a powerful club to get conformation with national trading conventions.

Unrestrained Capitalism is ferocious, a thing to be avoided. Liberal Joe Investor knows nothing of how brutal the corporate world is. They believe all should be fair, equal and of course green and sensitive, which is why Socialist economies always fail. Also, those convinced markets should forever go up fit the above definition of clueless.
In the days of the Gould, Mellon, Carnegie, Rockefeller and Vanderbilt dynasties, lying and cheating each other was routine business practice. Only after small investors involved themselves in the market did some laws come about to control the more rampant thievery. That is Capitalism, not pretty but it works.
A small-scale example is the bakery business in NY for hard rolls (A crusted roll shaped like a Kaiser-sold for breakfast and sandwich service). Profits per roll are measured at ¼ to ⅛ of a cent delivered to the business.Could you make a go of business in this fashion? All food stores work on the same margins.
All well run corporations pay COO and CFO’s to maximize profits while controlling expenses. Would you do that for $15.85/hour?

Insiders Selling at Bear Stearns

As news broke yesterday that the chairman of Bear Stearns, James Cayne, sold his entire stake in the brokerage earlier this week for $61.3 million, experts were reminded of an earlier stock sale, when nine insiders sold nearly $50 million worth of shares just three months shy of the firm’s near collapse.

According to documents filed yesterday with the Securities and Exchange Commission, Mr. Cayne sold 5.6 million shares at $10.84 a share on Tuesday.

Bear Stearns’s fall has been brutal, with the firm’s shares tumbling from a 52-week high of $159.36 to a recent low of $2.84 following the March 16 announcement that JPMorgan Chase & Co. would buy the bank for just $2 a share. [snip]

The other Bear Stearns insiders who sold stock in December were Jeffrey Mayer, executive vice president; Samuel Molinaro, chief financial officer; Michael Minikes, treasurer; Jeffrey Farber, comptroller, and directors Paul Novelly, Vincent Tese, and Alan Greenberg.

The heavy December selling took many pros by surprise. “It was a clear sign of bearish insider activity,” according to Jonathan Moreland, who has been tracking the buying and selling actions of corporate insiders for nearly two decades and currently heads up research at InsiderInsights, a weekly New York newsletter that monitors insider activity. The sales “relayed a message that Bear Stearns was a stock to avoid or to short,” he said. [snip]

Wall Street has been abuzz with talk that the SEC is looking into Bear Stearns’ December insider transactions, but a knowledgeable source at the brokerage tells me the agency has not contacted the firm. The SEC declined comment.

Insider trading is legal. Owning stock in a company for which you work isn’t a suicide pact with that company. Published insider transactions are on the financial sites of most Internet portals. Pick your company and engage in research. I agree with this.

What is unlawful is trading on information that isn’t available to the investing public. I agree with this also. The balance of regulation is government meddling, to wit, the Sarbanes Oxley Act which stopped foreign investment in America, causing many companies to buy up their stock and go private. The rest raised their prices to cover the cost of this legislation.

The law responded to the problems at Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. Laws exist(ed) to cover this malfeasance via fraud through the IRS and the SEC; state fraud laws are on the books too. Notice how well they stopped the fraud. Companies that went private are now doing business with no SEC oversight.

Liberals believe corporate officers are overpaid; they rant over corporate greed, corporate welfare or any profit making operation except candle makers, macramé shops and other cottage “industries.” Most of those close their doors just for being worthless without contributing to the community employment.

If Barack Obama is a leader and atypical politician, I’m still waiting for him to demonstrate it.  For example, look at this quote from a speech he gave on economic issues and the sub-prime mortgage crisis today:

“If we can extend a hand to banks on Wall Street, we can extend a hand to Americans who are struggling through no fault of their own,” he said. 

No fault of their own?  He sounds like the average, cowardly politician to me.  A leader would point out that people who didn’t consider what higher interest rates would do to their adjustable rate loans bear responsibility for their own financial problems.  Instead, like a typical politician, he shifts responsibility from the culpable to the rest of us who got smaller houses and reasonable loans.  Now our families get to do with less so we can bail out the investment banks and irresponsible borrowers.

Far from being a leader, Barack is the worst type of liberal politician.

Bear Sterns collapse has sparked a lot of discussion about executive pay. Liberals, ever eager to stoke the class warfare fire, seize on the latest headline to bemoan excessive executive payouts. Sadly, in many cases, they do have a point. You’d be hard pressed to find a bigger capitalist and believer in free markets than yours truly. But how can you justify CEO James Cayne and his top brass leaving with $917.2 million in compensation while stockholders and employees are left holding the bag?

Executives shouldn’t be walking away from companies with 100s of millions win, lose, or draw. The market rewards performance, and that’s how an executive should be rewarded too. But few executive compensation committees, some might argue the board in general, are fulfilling their fiduciary responsibilities to the shareholders. Instead, most boards focus on overall compensation, a keep up with the Jones philosophy, with little thought for providing incentives and rewards to encourage executive performance.

If the regulations and taxes come, the executives and boards have nobody to blame but themselves. They need to start designing compensation systems that more closely link company performance with executive pay. A good way to snare CEOs like James Cayne would be vesting his pay in 1 year increments over a 5 year period after he retired based on Bears’ performance. That’d provide a large incentive for executives to keep an eye on the future as well as today.

Liberal economic equality indubitably delivers one item: universal suffering.
Contrary to the unremitting rant from the politicians blaming the President for the economy, all are getting a hearty peek at just how little control he has over the market.
Congress, on the other hand, does make monetary policy since all fiscal legislation starts in the house. Here is the result of their meddling in business affairs.

Bernanke expects bank failures

Federal Reserve Chairman Ben S. Bernanke yesterday said for the first time that he expects some bank failures as a result of the spreading financial crisis, while consumers as well as banks will bear the brunt of what could be a protracted economic downturn.

J.P. Morgan Buys Bear in Fire Sale,
As Fed Widens Credit to Avert Crisis

Pushed to the brink of collapse by the mortgage crisis, Bear Stearns Cos. agreed — after prodding by the federal government — to be sold to J.P. Morgan Chase & Co. for the fire-sale price of $2 a share in stock, or about $236 million.

Bear Stearns had a stock-market value of about $3.5 billion as of Friday — and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm — at any price — to a big bank willing to assume its trading obligations or file for bankruptcy.
“At the end of the day, what Bear Stearns was looking at was either taking $2 a share or going bust,” said one person involved in the negotiations. “Those were the only options.”

The lowering of interest rates causes a bigger problem than it fixes. When interest rates on T-Bills and bonds drop, investors move to positions paying higher returns more or offer a “flight to safety.” To buy metals or energy such as gold or oil, they shed USD, which increases supply and ebbs value.

Americans are feeling this as they get lower interest of savings/investments while commodities rise in price. Look at gold, oil gas and food for the results. Beyond the current travails are the future adjustments as inflation rips through the financial system.
I want the reader to speak to what they think will occur. I might be wrong after all.

Dollar Doomsayers Draw
Signs From Bernanke Rate Cuts

March 17 (Bloomberg) — Ben S. Bernanke’s interest-rate cuts have touched off a vicious circle of doom for the dollar.

The Federal Reserve reduced the rate on direct loans to commercial banks by a quarter-point to 3.25 percent before Asian financial markets opened today. It will likely lower its target rate for overnight loans between banks tomorrow to at least 2.25 percent from 3 percent, according to futures traded on the Chicago Board of Trade. Lower borrowing costs work against the dollar by making fixed-income securities issued by the government less appealing to global investors.
The relative return on U.S. assets is not attractive enough and we have moved back into looking for dollar weakness,” said Robert Robis, a bond fund manager in New York at OppenheimerFunds Inc., which oversees $260 billion. Robis last month was betting the dollar would rally versus the euro.
If that weren’t enough to make bears out of bulls, the weakest dollar since at least 1971 based on a Fed trade-weighted index is helping push oil, grains and metals, which are priced in the U.S. currency, to record highs. That in turn is causing economists to lower growth forecasts for the U.S. and preventing central banks concerned that inflation is accelerating from cutting interest rates, further undermining the dollar.

As I type this, world markets are dropping over the Bear Sterns failure.
This too shall pass, but when it does, hyperinflation will be the 800 lb. gorilla entering the room. We certainly live in interesting times. (Ancient Chinese curse)

Prayer won’t work

Fed takes boldest action since the Depression to rescue US mortgage industry

All “real” Americans living within ones means, who save money and have little or no debt, the Fed has drawn a huge target on your back. The ammo used is freshly printed cash, replacing the principal lost in the housing bust. Doesn’t work for the capital lost in the bubble burst is gone. It does not exist for the lenders or the government.
What the bankers and lenders want now is the Government to print more money to replace the loss. Nice of them, isn’t it?
What is backing that extra money? Nothing! This money is courtesy of Gutenberg’s invention; it has the same value as if you printed it, except they won’t go to jail for the act.
So, what’s with the target on your back?
Think of this occurrence as one losing their monthly paycheck on the way home from work. When someone else finds it, that one is enriched by that amount. Creating money from air to give to you is progressive economics.
Increasing the amount of money to compensate you with no commensurate increase in value of the coinage will diminish the value of the total capital. Call it what is, debasing the currency. Your savings, house, IRA, 401(k) and piggy bank are worth what the adjusted currency is worth.

The Fed’s in a desperate race with spectre of collapse
The latest news and analysis of the UK and world economy
Read more by Ambrose Evans Pritchard

The US Federal Reserve has taken the boldest action since the 1930s, accepting $200bn of housing debt as collateral to prevent an implosion of the mortgage finance industry and head off a full-blown economic crisis.

“The agency crisis was a Tsunami event,” said Tim Bond, global strategist at Barclays Capital.

“The market was starting to question the solvency of bodies that stand at the top of the credit pile. These agencies together wrap or insure $6 trillion of mortgages. They cannot be allowed to fail because it would cause a financial disaster. The fact that this sector has blown up has caught everybody’s attention in Washington,” he said.

The Fed action set off a powerful relief rally, lifting the Dow Jones index over 340 points in early trading. Both US and European equities have been hovering on key support lines in recent days, threatening to break down through 18-month lows in a second, brutal leg to the bear market.
[snip]
Stress indicators across almost all parts of the global credit system fell from extreme levels on the Fed news. The CDX and iTraxx Europe indexes that serve as a default barometer for corporate bonds retreated from record highs, although it is too early to judge whether the latest action will start to thaw the credit freeze. The stock market rally after the last central bank intervention in December fizzled out after just one day.
[snip]
“This is not going to be enough,” said Hans Redeker, currency chief at BNP Paribas.

The travails at Fannie Mae and Freddie Mac — once rock-solid institutions — had combined in a deadly cocktail with a fresh wave of panic over the solvency of the investment banks with heavy exposure to sub-prime debt.

Bear Stearns was forced to deny reports that it was running out of capital and may seek Chapter 11 bankruptcy protection. The spreads measuring default risk on its debt rocketed from 246 to 792 on Monday.

Mr. Bond said the mortgage agencies may ultimately need to be nationalized. Fannie Mae has already seen its stock price drop 70pc since October at a cost of $50bn in market value, even though it has an implicit federal guarantee. “There is going to have to be a very big bail-out,” he said.

So I ask you, just what do you think is going to happen?

As the politicians are so happy to tell you, ”You are the Government” translates into you are going to pay for our screwup. Starting with Carter, going through Clinton and the current Congress, all of the insane economic policies now fall on the taxpayer.

…is the way the poor get richer.

Here’s part one:

Here’s part two:

This all assumes you have some gumption to to do something for yourself.

Four score and 14 annum has passed since the passage of the Glass-Owen law. This piece of legislation rushed through a holiday absent Congress; President Wilson affixed his signature one hour later. We live with the results today.

Junk-Grade Fed?

What caught our eye in the markets last week was the verdict by Grant’s Interest Rate Observer that, by its lights, the Federal Reserve Bank of New York was no longer a “presumptive triple-A” credit but rather one of “mid-grade junk” quality. [snip]

Grant’s was reacting to the sudden appearance on the Federal Reserve’s balance sheet of $60 billion in lending under the new Term Auction Facility. The New York Fed’s share of that $60 billion is no less than $44.9 billion. The TAF is a credit facility. Its purpose is to lend to banks under stress in the sub-prime credit crisis. The banks front collateral against which the Fed advances money. “The rub,” Grant’s writes, “is the quality of the collateral.” It quotes a Financial Times interview with one financial strategist, Christopher Wood, as saying that banks “are increasingly giving the Fed the garbage collateral nobody else wants.” [snip]

The overleveraged commercial real estate market of the late ‘80’s through the leveraging of the dot com extravaganza to this housing problem is a text book example of “Better Investing Through Leveraging.” These is another name for leveraging; it’s called margin, google that and the Great Depression.

It’s a little-noted irony that the Federal Reserve, the supposed conscience of the American banking system, is itself an exceedingly highly leveraged institution. At the latest weekly tallying up, $881 billion in assets rested on just $38.5 billion in capital, As for the New York branch office, $312 billion in assets (including those $44.9 billion in TAF credits) were balanced on a little less than $10 billion in capital. The scant showing of capital was of no especial concern when the Fed owned nothing but Treasury securities. But now that it’s in the business of lending against what may well be mongrel mortgages, that extreme leverage introduces real risks. (emphasis added) As Grant’s points out, it’s not so farfetched to imagine the Fed itself needing a bailout one of these days. We wonder how a headline on the order of “Fed insolvency fears” would play in the already skittish world currency markets.

Rename those so-called assets collateral and view the Fed’s position. They cover between 3% and 4% of outstanding LOANS.

[snip]…It carries slightly more than $4 billion of gold on its balance sheet at the early 1970s price of $42.22 an ounce. At today’s prices, that works out to more than $90 billion. On that basis, as the editor of Grants, James Grant, sketched it for us, “the hometown central bank would be in the clover, credit-wise.” He goes on to say that “the Fed is unlikely to acknowledge the great bull market in gold bullion for the obvious reason that it, itself, is largely the author of it.” Or, to put it another way, if the salvation of the Fed is all the gold it has in its basement, what does that tell us about the monetary system on which the rest of the world is relying?

Now do you understand why gold is selling for close to $1000.00 a troy ounce? Two fiscal gurus named Hillary and Barack are going to spend our way out of this mess while raising taxes. Com’ere, I’ll show you how to make fast money in the Three Card Monte game.