Couldn’t pass this up…
MG signing off (to buy more 50lb bags of rice)
Brought to you this one day only in true order of importance
MG signing off (not really)
“Screw you, AARP” – Ben Bernanke and Tim Geithner, March 18, 2009
The AP wind up:
With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy. To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
Fed Chairman Ben Bernanke and his colleagues wrapped a two-day meeting by leaving a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most — if not all — of next year.
The decision to hold rates near zero was widely expected. But the Fed’s plan to buy government bonds and the sheer amount — $1.2 trillion — of the extra money to be pumped into the U.S. economy was a surprise.
Surprise, surrprise, surrrprise.
You heard that right, boys and girls – the government is now exchanging its debt for money that it prints, and buying bonds from wholly-owned subsidiaries in exchange for yet more cash. Never has anything struck a resemblance closer to taking money out of the right pocket and sticking it in the left. I guess the Chinese weren’t particularly impressed with the government’s assurances.
A premonition from Guy Kawasaki that may just be humor, but might not be too far from becoming reality:
Going down to the casino to eat. May cost me $500.
The bullishness at the printing press may put a temporary halt to the wealth destruction we’ve become accustomed to, but creating $1.2 trillion out of thin air has a high probability of turning inflation worries into nightmare.
If you thought you were now retirement-poor as a result of the decimation your IRA/401k endured in the last few quarters, imagine what already retired folks who live on fixed incomes are going to think when a loaf of bread costs $15. What home value they have left, now being extracted in bulk through the magic of reverse-mortgages, is being used to pay jacked-up supplemental insurance premiums and co-pays.
If universal coverage doesn’t wind up killing them, now starvation will.
Global finance sans a single unemployed investment banker
From the comments section at Calculated Risk comes this summary regarding the Fed’s expansion of lending to AIG:
Wait.. it goes like this…
1. AIG makes bad investments
2. Company execs make millions
3. Stock gets wiped out
4. Company gets wiped out
5. Billions lost
6. Company and execs get 85 billion bailout
7. Execs and sales force go on $400,000 weekend retreat
8. Congress cries OUTRAGE!
9. We give them another 38 billion.
That about covers it.
The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.
They got the “reduction in inflationary pressures” part right, but I’m not sure this is going to increase economic activity (unless you consider a few banks lending to each other to keep capital ratios in line for another 24 hours economic activity).
Personally, I believe jobs and rates partially decoupled from their “Econ 101” inverse relationship back in 2001. Then, rate cuts resulted less in job creation and more in speculation (mostly in the housing market). Sorry that yet more intermediaries (i.e. real estate agents, mortgage brokers, and investment bankers) may lose their “jobs”, but at this stage it might make more sense to let rates rise, setting off spectrum-wide price adjustments that turn stagnant real wage towards the upside.
Marc Faber uses choice analogies, and cuts to the chase as well:
Other sources of funding, such as foreign reserves of resources-rich countries, are also likely to dry up, Faber said. “I think sovereign wealth funds are going to be very busy supporting their own markets, they won’t have much money to buy assets around the world.”
(h/t The Big Picture)
As the press goes, last week Fed Chairman Ben Bernanke told ‘congressional leaders’ that the US faced an imminent meltdown. We heard from the horses’ mouths that this was scary. It couldn’t have been written any better for a movie. Surprise – now we have yet another bailout plan.
You can find the full proposal (for now) at the end of this post. The first thing you’ll notice is that it is pretty short, and the second thing you’ll notice are some of the egregious terms. The press and the blogosphere were quick to point out the latter, and various conspiracy theories were quickly generated around Section 8, which deals with the Treasury’s unilateral and unobservable authority, included protection from litigation. Amateurs, each and every one of them.
You don’t go to the negotiating table with a proposal, particular one that outlines to a country full of people how weak they’ve become without a game plan. And you especially don’t bring such a proposal to a band of lawmakers that you know have a penchant for changing things to directly benefit themselves, and who, while complicit in the problem to begin with, will do everything in their power to try and convince said country’s people that they are there to help them. The sticking points in the proposal are nothing more than “throwaways” – terms purposely put there only to create a little unrest and be caved on later – terms designed specifically to make those on the far side of the negotiating table think they won something.
Will it work?
I’m going out on a limb here…no. First and foremost, we are talking about the purchase of fairly complex mortgage instruments, including but not limited to the over-the-counter insurance which backs them in case of default. It’s that insurance that is causing most of the problems – a market of many 100’s of trillions of dollars – and if it collapses at one point it sets off a ripple of defaults elsewhere in the transaction chain. So while this move is probably quite necessary, the problem has been known for years. The Treasury really doesn’t have a clear idea of how much these assets are worth because the bankers that presently own them don’t – the market for these assets has become extremely inefficient, with few buyers asking very low prices, and the bankers demanding higher because they paid much more just a few years back. Sound familiar?
Now a new buyer steps into the fray – this buyer has well-publicized, deep pockets, and has publicly stated it is willing to pay more. How do you expect these sales are going to go? The Treasury is going to wind up paying entirely too much for these assets, and when the obligations finally sell taxpayers are going to be looking at a loss. The cap on purchases has been initially set at $700 billion, but I say that’s a drop in the bucket – the Fed injected roughly $150 billion into the system just last week to prevent a money market meltdown. As a result of this cap, the Treasury will be forced to liquidate positions prematurely in order to buy additional product. The result – more losses. They’ll be back at the national debt trough in no time, which brings up the second problem, borrowing capacity.
It isn’t just the US markets that are roiling – this is a worldwide financial crisis. Even China, who until now has had an unquenchable thirst for US Treasury securities, is getting tired. And with the US economy slowing, even they are going to see their need for dollar-denominated government securities wane. Either they (and every other foreign creditor still standing) starts getting bonds at deeper discounts, or interest rates have to rise – either way yield is headed up. If the former happens, Congress is going to be mighty busy raising that debt ceiling. If the latter, nobody is going to be able to afford domestic credit.
This is all a temporary fix just like the last three (or is that four) bailout proposals presented over the last year, including the one which laughably sought to have Fannie Mae and Freddie Mac doing the bailing (those GSEs are now being bailed out themselves, in case you’re just joining). It’s just that this one is bigger.
Regardless of its merits (or lack thereof), I suspect this proposal will pass. There will be oversight, and there will be further help for struggling homeowners.
And there will be more proposals.
UPDATE: It looks like the proposal may now include auto loans, student loans, revolving credit lines, and other ‘troubled assets’. The price tag is getting bigger already.
UPDATE 2: Congress seems to be biting on the wrong stuff.
Bill Gross of bond fame has been whining for some time. Reason: his portfolio at the PIMCO Total Return Fund is full of GSE bonds and he knows it’s going down, down, down.
His latest blathering is veiled in an attempt at humor (more like an inane distraction, but bear with me) – the entree is some ludicrous poll comparing Louis Rukeyser with Jim Cramer. I don’t much care for “investment media”, mostly because I believe they are nothing but stock shills being compensated somewhere, someplace. In other words, a lot are frauds, skirting securities law for the dis-benefit of the gullible investing public. Added…Gross thinks Cramer is a daring pundit (because he was once a money manager himself). Sure – and a money manager that blew up (but saved his own ass via his oft-touted ‘trust’) just like Bill Gross will probably do. But Cramer does have a house on the beach with oil under it – some are impressed so I guess that makes him okay.
Bottom line – Fannie Mae and Freddie Mac were the closest thing to socialized medicine for the housing sickness of the late 80’s/early 90’s as anyone could imagine who lived through the New Deal Era. Gross became the famed bond investor while riding the wave of easy money – now management ineptitude (and basic economics) are coming back to haunt the GSEs and their investors, and Gross is begging for the US Treasury to bail him out.
If I was the CIO of an insurer or pension fund, I’d be running from the GSE-overweighted bond portfolios like you might if approached at a cocktail party by someone that was recently busted cheating on their spouse with a farm animal.
And after reading Bill Gross’s diatribe, which at once beckoned for a new bull market in bonds while simultaneously putting the onus on the Fed to make it happen, maybe he should think about a new poll – that which decides whether investing in GSE paper is more like running with bulls…or sleeping with sheep.
MORE: Barry Ritholtz asks “WTF is up with PIMCO?” and notes that the “quasi-homage to Cramer” was just plain “weird”.