Picking Apart the Geithner Bailout Plan, and A Real Solution

A few words come to mind when trying to understand the Bailout Plan announced by Treasury Secretary Geithner today: incomplete, clueless, odd, potentially devious, lacking in details.

It should not come as any surprise that major stock indexes slumped after Geithner unveiled the plan.

The Dow Jones industrial average dropped 381.99 points points, or 4.6 percent, to close at 7,888.88. The Dow had fallen as much as 420 points in the last half hour of trading.

The broader Standard & Poor’s 500-stock index fell 4.9 percent or 42.73 points, to 827.16.

Every sector of the market was trading lower, with the Standard & Poor’s financials index falling by more than 8 percent,and shares of Bank of America slid 19 percent.

It's clear that we now not only have a man at the Fed that is tone deaf to the markets, but also one at the Treasury.

What Wall Street wanted to see was something along this line:

There are x billions worth of bad paper out there, we are going to do y to take this off the books of banks so that these banks can function again. 

I rush to add that this would not be my proposal in a free market world view without political pressures. However, in the world of realeconomik where political matters are sadly taken into consideration, this is what was needed to be taken care of. Geithner failed.

Let's take Geithner's outline apart piece by piece.

He said:

First, we're going to require banking institutions to go through a carefully designed comprehensive stress test, to use the medical term. We want their balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions which need it.

Here's the problem with this. Wall Street and investors see the problem as banks holding bad paper. The banks know what the bad paper is and they want someone to take it off their hands. A stress test sounds too much like politics still trying to kill off some players. Who and how at this point is unknown.

How would a stress test kill off some players? By defining some kind of paper as bad paper that would result in that paper being dumped by banks immediately onto the markets. Who knows who and how such paper would be defined? When the government wanted to kill the junk bond market, it ruled that banks and S&L's couldn't own junk paper even if it was sound paper unlikely to ever go bad. The junk market crash dived, good paper and bad--never too recover.

Banks are not going to hold paper that the government for whatever reason wants to declare a non-passing security in a stress test--it will be gone and muck up the markets as that type of security is sold by banks and other financial institutions across the country.

Thus,the Stress Test is a bad idea, with no real purpose.

Geithner goes on:

...alongside this new Financial Stability Trust, together with the Fed, the FDIC, and the private sector, we will establish a Public-Private Investment Fund. This program will provide government capital and government financing to help leverage private capital to help get private markets working again. This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions.

By providing the financing the private markets cannot now provide, this will help start a market for the real estate related assets that are at the center of this crisis. Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets.

We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it. We believe this program should ultimately provide up to one trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works.

There's all kinds of problems here. When Geithner says "We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it." He is telling everyone that he doesn't have a clue as to how he is going to do this. And yet, in his next breath on a clueless program, he says the program will ultimately need a trillion dollars! But since he is clueless about the program he is only going to start spending a half trillion--until, I guess , he gets a clue!!

Do you get why Wall Street might be worried?

Further what's this "private sector" stuff Geithner continues to talk about? It's the Carlyle Group and other insiders, trying to get their piece of the action. How this could possibly work is beyond me. Here's the problem, banks need to get the bad paper off the books at some kind of reasonable price so it doesn't bankrupt them. This is likely a price above market value. The players, like Carlyle Group's co-founder David Rubenstein, don't pay up for anything. Rubenstein is the type that would rather go hungry, than have to pay full price for food off of the McDonald's dollar menu.

All of this, no matter how it plays out will be very inflationary, and,  so now we have  Geithner's final element to his proposal, which is nothng but inflation at the consumer level:

...working jointly with the Federal Reserve, we are prepared to commit up to a trillion dollars to support a Consumer and Business Lending Initiative. This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again.

In our financial system, 40 percent of consumer lending has historically been available because people buy loans, put them together and sell them. Because this vital source of lending has frozen up, no financial recovery plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses – large and small.

This lending program will be built on the Federal Reserve's Term Asset Backed Securities Loan Facility, announced last November, with capital from the Treasury and financing from the Federal Reserve.

We have agreed to expand this program to target the markets for small business lending, student loans, consumer and auto finance, and commercial mortgages.

All Wall Street hear's from Geithner here is Federal Reserve, when the Fed is involved you are talking major inflation creation, and for what? Student loans? Auto loans? Let people drive their cars a year or two longer than risk the chance of hyper-inflation.

And there you have it a clueless, inflationary plan, incomplete with plenty of room for monkey business.

Here's how I would handle the situation under realeconomiks, i.e. taking into consideration current day political pressures, rather than the type of proposal that I would recommend in a truly free market world.

I would send an announcement to every bank in America. That would read as follows: The United States Government is forming the Trash Can Bank of America. You hereby have the right to dump any trash loans you have at this bank. Send the loan to us, and as an offsetting entry, you must also send us deposit liabilities equal in dollar value to the trash loans you send us.

In this way, every bank in America would be a sound bank, since the only loans they would keep are performing loans. End of bank crisis.

As for the Trash Bank of America, the FDIC (backed up by the Federal Reserve would guaranty all the deposits). The FDIC would no longer guaranty loans at any other bank after one year. The Trash Can Bank of America would not be allowed to accept any new deposits. When someone withdraws funds, that's it they can't put it bank in that bank. The bank would pay interest equal to the average of the rates paid by the top 25 other banks in the country plus 50 basis points. As for the trash paper the Trash Can Bank of America received, it would be required to held  until maturity. However, bidders would be allowed to bid on any mortgages that are 90 days or more passed due.

Krugman Gets It Right

Yes, Paul Krugman does it.

His analysis of the "bad bank" idea is spot on:

The idea of setting up a “bad bank” or “aggregator bank” to take over the financial system’s troubled assets seems to be gaining steam. So let me go on record as saying that I don’t understand the proposal.

It comes back to the original questions about the TARP. Financial institutions that want to “get bad assets off their balance sheets” can do that any time they like, by writing those assets down to zero — or by selling them at whatever price they can. If we create a new institution to take over those assets, the $700 billion question is, at what price? And I still haven’t seen anything that explains how the price will be determined.

I suspect, though I’m not certain, that policymakers are once more coming around to the view that mortgage-backed securities are being systematically underpriced. But do we really know this? And how are we going to ensure that this doesn’t end up being a huge giveaway to financial firms?

Krugman might deny this, but what he is saying is that the free market is best at pricing assets. In fact, he sounds a lot like his fellow Nobel Laureate Friedrich Hayek. Hmm.

Greenspan: Banks Are Going to Need Larger Capital Cushions

Alan Greenspan has written a guest column for The Economist and details what he expects to occur in the banking system.

Writes Greenspan:

For decades, holders of the liabilities of banks in the United States had felt secure with the protection of a modest equity-capital cushion, allowing banks to lend freely. As recently as the summer of 2006, with average book capital at 10%, a federal agency noted that “more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.”

Today, fearful investors clearly require a far larger capital cushion to lend, unsecured, to any financial intermediary. When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily.

Much more here.

German Economist Blames 'Fiat Money' for the Current Financial Crisis

Dr. Thorsten Polleit, Chief German Economist for Barclays Capital and Honorary Professor at the School of Finance & Management in Frankfurt gets it. In the online edition of the Handelsblatt, a major German business newspaper, he writes that government-created ’fiat money’ is responsible for the current financial crisis.

His solution for the crisis is 100% Austrian. He proposes a return to the gold standard, as a first step. And, ultimately, free banking.

Kristian Niemietz has more details of his analysis and recommendations, here.

The Housing Crisis Explained

Larry H. White has a great blow-by-blow on why the crisis occurred, here.

CDO's Explained

Paulson Hedge Fund Buys Into Mortgage Securities

John Paulson, the hedge fund manager (not to be confused with Treasury Secretary Henry Paulson), who was called before Congress last week to discuss the huge profits ($3.7 billion) he made by foreseeing the collapse of the subprime mortgage market and shortng mortgage backed securities, has started to buy securities backed by residential mortgages.

US residential mortgage securities fell in value last week after Hank Paulson, Treasury secretary, said that the federal government had decided against buying toxic assets as part of its $700bn troubled asset relief program.

Paulson has told his investors that he started buying troubled mortgage-backed securities at the end of last week, hoping to capitalise on price falls that followed the Treasury announcement,according to FT.

Martin Feldstein On The Money Supply and Current Crisis

Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan and the George F. Baker Professor of Economics at Harvard University, recently penned a WSJ Op-Ed calling for a program to stop a downward overshooting of house prices and the resulting mortgage defaults. A mortgage-replacement loan program may be the best way to achieve that, he wrote.

Since the latest leg of the downturn in the mortgage market, and now the overall economy, seems to be the result of the fact that the Federal Reserve crashed money supply growth over the summer, I have often wondered what Feldstein's take was on the Fed's activities this summer. I got the chance to ask him. Feldstein was a part of a panel that included Wilbur Ross Jr., Juan Williams and Ron Insana, before 4,000 at the AFP conference.

During the panel discussion, Feldstein stated that the Federal Reserve was doing an excellent job providing liquidity to the system but it wasn't working and that is why further measures, such as his "mortgage-replacement loan program" needed to be implemented.

During the Q & A, I asked him how he could say that the Fed was providing liquidity to the system since M2 growth crashed over the summer from a March peak of 12.5% annualized growth to growth of only 1.5% annualized in September. I further stated to him that, in addition, over the summer the Fed was sterilizing the cash infusions they were making by selling off Treasury securities, thus maintaining a net liquidity neutral stance as part of its various rescue operations.

Feldstein did not answer the question about where he saw liquidity coming from the system over the summer( How could he, since there wasn't any net liquidity added to the system?), but he did address the fact that money growth slowed over the summer. He said it likely occurred because of the problems in the economy (which in his view apparently took time for the Fed to adjust too.) He then said that money supply M2 was back growing at an annualized rate of 4.5%, which was correct. He said that this was about the correct growth rate given current GDP growth. This is a hoot, since money supply in September was at 1.5% annualized, and it then jumped to 2.3%, and now is at 4.5%, the Fed clearly has its foot on the monetary accelerator. I don't believe money supply at 4.5% is anything but a very brief transition point. Within weeks money supply growth could be at double digit rates. Indeed, the money supply numbers due out this Thursday could show M2 growth much higher than 4.5%. Feldstein clearly hasn't figured out that Ben Bernanke's Fed is clueless. When he does, I wonder what his prescription for the economy will be?

Barney Frank: We Should Have Done Things Differently

Yesterday, Congressman Barney Frank also spoke before the AFP conference, via video hook up.

The good news is that it is clear that Congressman Frank understands it was a mistake for government to drive the nation towards a housing market that resulted in more people buying homes than would otherwise occur, and that things should have been done differently..

The bad news is that he thinks the mistake was that not enough money was directed by government into the rental market!

The thought that the free market could handle both housing and rental market does not seem to have ever crossed his mind. The man is a regulationist. And, of course, he has no clue about the business cycle. He never even mentioned it.

Although, he took questions from the audience, questions weren't allowed by reporters, thus I was turned away when I reached the microphone.

This is the question I wanted to ask: Given that this weekend the Wall Street Journal reported that it is a dirty little secret that Paulson's Plan to buy up mortgages would not work and indeed would cause more problems for banks, and that is why Treasury shifted to infusing capital directly into banks, at what point was Congress notified of this situation, if at all? Further, given this huge error in the design of the $700 Billion Paulson Plan, do you think Secretary Paulson should resign?

I will be submitting these questions to Congressman Frank's office.

It's Not A Frozen Credit Market, It's A Sane, Getting Back To Basics, Credit Market

JPMorganChase Chairman Jamie Dimon on a conference call yesterday:

The [mortgage] origination business, and I think it's true for a lot of people in the industry, ...people have gone back to old fashioned 80% LTV, real verified income, more disciplined appraisals, and then in some areas they won't even go to 85% LTV because of expected home decreases so we are not at 85% in California, Nevada, or Florida we're at 65. So that's why it's down. I think it's true for us and everybody else.

Banned Saturday Night Live Skit On the Sub-Prime Mortgage Crisis

Here's the link to an online version of the SNL skit, about the sub-prime mortgage crisis, that NBC has yanked off of YouTube. The economics are off just a bit, but what it is lacking in economic understanding is made up for with great wit and courage.

Note: This video has gone viral so you may have to hit the refresh button a few times before the video runs.

France Said to Seek Emergency G8 Meeting

France is proposing through diplomatic channels that the Group of Eight industrialized nations hold an emergency summit to contain the U.S.-triggered financial crisis, according to a published report in the Japanese business daily Nikkei.

Since the solution to the crisis is to allow the markets to work things out, there is nothing positive to expect from a G8 meeting, only the possibility of international market manipulation and rigging.

Naturally, the Oligarchy will be well represented at such a gathering. For starters, Carlyle managing director Oliver Sarkozy is the half brother of France's President Ncholas Sarkozy.

MUST SEE: 60 Minutes On The Mortgage Crisis and Credit Default Swaps

60 Minutes has a must see report on the Mortgage Crisis and Credit Default Swaps. As a long term critic of econometrics and its role in the sub-prime crisis, I certainly consider the remark made by Frank Partnoy, a former derivatives broker and corporate securities attorney, who now teaches law at the University of San Diego, and carried in the 60 Minutes report, as one of the most important remarks I have heard from MSM on the current crisis (our emphasis)

These complex financial instruments were actually designed by mathematicians and physicists, who used algorithms and computer models to reconstitute the unreliable loans in a way that was supposed to eliminate most of the risk.

"Obviously they turned out to be wrong," Partnoy says.

Asked why, he says, "Because you can't model human behavior with math."

"How much of this catastrophe had to do with the instruments that Wall Street created and chose to buy…and sell?" Kroft asks Jim Grant [Of Jim Grant's Interest Rate Observer].

"The instruments themselves are at the heart of this mess," Grant says. "They are complex, in effect, mortgage science projects devised by these Nobel-tracked physicists who came to work on Wall Street for the very purpose of creating complex instruments with all manner of detailed protocols, on who gets paid when and how much. And the complexity of the structures is at the very center of the crisis of credit today."

"People don't know what they're made up of, how they're gonna behave," Kroft remarks.

"Right," Grant replies.

This was exactly my point when I wrote just yesterday:

This is a point we have been emphasizing for years. The problem consists in the fact that econometricians can't design equations without at least one constant. Since there are no constants in the world of human action, econometricians take a variable that has held fairly constant over some period of time and assume it is a constant. This works fine, and can for long periods of time, until Wenzel's Observation #1 comes into play: Any variable has the potential to eventually start to dance. A dancing variable is one that no longer acts like a constant and moves considerably outside its previous assumed range of movement.

Congratulations to Steve Kroft and Producer L. Franklin Devine for an excellent overall report, and for finding and reporting on the role of econometricians in the sub-prime disaster.

The video and transcript of the report are here.

Obama-ACORN Root Causes of Mortgage Crisis?

A Republican front organization, AmeriPac, is sending an email out linking Barack Obama to the mortgage crisis. The email is a bit of a stretch, but not a complete stretch. The mortgage crisis was chiefly caused by the easy money printed by the Federal Reserve during the Alan Greenspan era and the early-Ben Bernanke era, and by the econometricians who used faulty equations to justify the financing of sub-prime mortgages. That said, the banking industry's heavy focus on sub-prime mortgages was also influenced by heavy lobbying pressure by left wing groups to provide mortgages to minorities and the poor. Chief among the agitating groups was ACORN, which is an extremely powerful group that the general public has little awareness of.

Obama has ties to ACORN as a "leadership" teacher for the organization, and he seems to keep an eye out to ensure that funding heads their way whenever he is in a position to influence such funding.

Here are key excerpts from the AmeriPac email:

The high-risk subprime mortgage social engineering community service experiment by left-wing ACORN and Obama has created the largest financial crisis since The Great Depression. The full reach of the corruption and scandal may never be known but those who created it must not be rewarded. The architects, primarily left-wing Democrats, created laws, took donations, looked the other way and instead were too busy overseeing donations to their own presidential campaigns and robbing main street blind. Now these same left-wing Democrats blame everyone else and get up on their high horses and say, "we are here to save you" from the crises they created.

Yes, Mr. Obama knows a great deal about the mess. He is a central figure in the left-wing ACORN exploitation of financial institutions and pressuring them to make high risk loans. The very same left-wing ACORN was guilty of voter fraud in the last presidential election.

Now these same Democrats want to do another high risk "community service," social engineering experiment. They want to elect a high-risk, low experience, socialist one of the same community organizers that created the mess to be our next president...

Fannie and Freddie acted in response to Clinton administration pressure to boost homeownership rates among minorities and the poor. However compassionate the motive, the result of this systematic disregard for normal credit standards has been financial disaster. ONE key pioneer of ACORN's subprime-loan shakedown racket was Madeline Talbott - an activist with extensive ties to Barack Obama. She was also in on the ground floor of the disastrous turn in Fannie Mae's mortgage policies.

t would be tough to find an "on the ground" community organizer more closely tied to the subprime-mortgage fiasco than Madeline Talbott. And no one has been more supportive of Madeline Talbott than Barack Obama.

When Obama was just a budding community organizer in Chicago, Talbott was so impressed that she asked him to train her personal staff.

He returned to Chicago in the early '90s, just as Talbott was starting her pressure campaign on local banks. In those years, he also conducted leadership-training seminars for ACORN's up-and-coming organizers. That is, Obama was training the army of ACORN organizers who participated in Madeline Talbott's drive against Chicago's banks.

More than that, Obama was funding them. As he rose to a leadership role at Chicago's Woods Fund, he became the most powerful voice on the foundation's board for supporting ACORN and other community organizers. In 1995, the Woods Fund substantially expanded its funding of community organizers - and Obama chaired the committee that urged and managed the shift.

That committee's report on strategies for funding groups like ACORN features all the key names in Obama's organizer network. The report quotes Talbott more than any other figure; Sandra Maxwell, Talbott's ACORN ally in the bank battle, was also among the organizers consulted.

More, the Obama-supervised Woods Fund report acknowledges the problem of getting donors and foundations to contribute to radical groups like ACORN - whose confrontational tactics often scare off even liberal donors and foundations.

Indeed, the report brags about pulling the wool over the public's eye. The Woods Fund's claim to be "nonideological," it says, has "enabled the Trustees to make grants to organizations that use confrontational tactics against the business and government 'establishments' without undue risk of being criticized for partisanship."

The Woods Fund report makes it clear Obama was fully aware of the intimidation tactics used by ACORN's Madeline Talbott in her pioneering efforts to force banks to suspend their usual credit standards. Yet he supported Talbott in every conceivable way. He trained her personal staff and other aspiring ACORN leaders, he consulted with her extensively, and he arranged a major boost in foundation funding for her efforts.

And, as the leader of another charity, the Chicago Annenberg Challenge, Obama channeled more funding Talbott's way - ostensibly for education projects but surely supportive of ACORN's overall efforts.

In return, Talbott proudly announced her support of Obama's first campaign for state Senate, saying, "We accept and respect him as a kindred spirit, a fellow organizer."

In short, to understand the roots of the subprime mortgage crisis, look to ACORN's Madeline Talbott. And to see how Talbott was able to work her mischief, look to Barack Obama.

Puttng Power In The Hands of Hank Paulson

From Treasury Secretary Paulson's bailout proposal that was sent to Congress:

The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States....

The Secretary is authorized to take such actions as... issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act...

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time...

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency...

-Robert Wenzel

Paulson Statement on Comprehensive Approach to Market Developments

September 19, 2008
hp-1149

Statement by Secretary Henry M. Paulson, Jr. on Comprehensive Approach to Market Developments

Washington, DC--

Last night, Federal Reserve Chairman Ben Bernanke, SEC Chairman Chris Cox and I had a lengthy and productive working session with Congressional leaders. We began a substantive discussion on the need for a comprehensive approach to relieving the stresses on our financial institutions and markets.

We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. And this morning we've taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry.

Despite these steps, more is needed. We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses.

The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. 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 have significant effects on our financial system and our economy.

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners.

A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them. These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged.

These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.

To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem.

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible. The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.

I believe many Members of Congress share my conviction. I will spend the weekend working with members of Congress of both parties to examine approaches to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies. Our economic health requires that we work together for prompt, bipartisan action.

As we work with the Congress to pass this legislation over the next week, other immediate actions will provide relief.

First, to provide critical additional funding to our mortgage markets, the GSEs Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities (MBS). These two enterprises must carry out their mission to support the mortgage market.

Second, to increase the availability of capital for new home loans, Treasury will expand the MBS purchase program we announced earlier this month. This will complement the capital provided by the GSEs and will help facilitate mortgage availability and affordability.

These two steps will provide some initial support to mortgage assets, but they are not enough. Many of the illiquid assets clogging our system today do not meet the regulatory requirements to be eligible for purchase by the GSEs or by the Treasury program.

I look forward to working with Congress to pass necessary legislation to remove these troubled assets from our financial system. When we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy, and more closely links the regulatory structure to the reasons why we regulate. That is a critical debate for another day.

Right now, our focus is restoring the strength of our financial system so it can again finance economic growth. The financial security of all Americans – their retirement savings, their home values, their ability to borrow for college, and the opportunities for more and higher-paying jobs – depends on our ability to restore our financial institutions to a sound footing.



-30-

The State of Florida Real Estate Tonight...

as Woody from Crash Landing sees it, here.

It's Time The Fed Adopts Volcker Religion

By Robert Wenzel

Federal officials and market players are struggling with the same issues, WSJ reports.Why haven't the steps taken so far calmed the system? What can policy makers do next?

In our book, the answer is simple. The boom was fueled by the Fed's money printing under Alan Greenspan and the early Ben Bernanke.

As we have been emphasizing in lone wolf fashion--with no regulator or other commentator coming close to mentioning this most important event of the current crisis environment--the Fed over the recent months has for all practical purposes stopped printing money. That's why the market continues to struggle.  The Fed has turned this from just a mortgage crisis, to the beginnings of a major full-fledged economic crisis.

Over the last three months M2 money supply has been growing at a 1.8% annualized rate. This can be compared to earlier this year when M2 annualized money growth was over 10%. In fact, as recently as March, three month annualized money growth was at 12.7%. Few seem to recognize the dramatic shift downward.

A lot of headline watching commentators are even reporting that the Fed is adding gobs of liquidity through their bailout operations, when in fact the Fed has been sterilizing its bailout operations, including the Term Auction Facilities, by either liquidating or loaning out the Treasury securities already in their portfolio.

WSJ reflects current beliefs when it reports:

The Federal Reserve has already slashed interest rates to counteract a deepening credit freeze and instituted its broadest expansion of lending facilities since the Great Depression to keep financial markets functioning.

As mentioned the lending facilities have been sterilized so as not to increase money supply. And we should have learned from the Volcker period that you don't target interest rates to impact the economy, you target money supply. The current Bernanke Fed has seemingly, without being completely aware, slipped into interest rate targeting.

At this point we must add that ideally the Fed shouldn't be monkeying and manipulating the money supply at all, but in realworld economik if the Fed is going to be messing with the money supply, they should be good at it. This means reverting back to Volcker's rejection of targeting interest rates, and instead targeting money supply. In Volcker's case, he targeted money supply to fight inflation, in Bernanke's case, money supply targeting is required to battle economic crisis.

This economy isn't going anywhere until Bernanke gets Volcker "Target The Money Supply" Religion. Failure to do so will lead to an enormous economic crisis which in one sense can be viewed as a cleansing of the mal-investments caused by the money manipulations of Greenspan and Bernanke. However, in the land of realworld economik, the crisis is likely to lead to untold suffocating new regulations, restrictions etc., given that the two current presidential candidates, John McCain and Barak Obama, display no knowledge of the fundamental workings of an economy. 

Robert Wenzel is an economic consultant and Editor & Publisher of EconomicPolicyJournal.com. He can be reached at rw@economicpolicyjournal.com.

Rockwell: Stop The Bailout

Lew Rockwell nails it:

Let me state this very plainly: I do not believe for one second that if the government fails to nationalize Freddie and Fannie, that the world as we know it will come to an end. Those who are saying that are trying to scare the population, the same as with every other major demand by the regime. It was the same with Nafta, the WTO, the war on terror, the war on bird flu, the nationalization of airport security, and everything else.

If the government did nothing but sell off the assets of the mortgage giants, we do not know for sure what would happen, but the market has a way of finding value and readjusting. I would expect about 18 months of difficulties. Banks would fail just as many businesses in the free market fail every day. Housing prices would fall more, just as all market prices are subject to change. But the process of readjustment would be smooth and rational. Most important, we would all stop living a lie and believing an illusion

His complete column is here.

-Robert Wenzel

Fed Vice Chairman Kohn: "More Resilent Financial System Is Going To Take Awhile"

In a speech in Washington D.C. at the Brookings Panel on Economic Activity, federal Reserve Vice Chairman Donald L. Kohn warned, "that restraint on credit supplies is likely to persist because intermediaries have some way to go to rebuild their balance sheets. The process of adjustment to a safer, more resilient financial system is going to take a while."

He also stated that he encouraged that the pace of declines in housing prices abating in a number of markets. However, partly owing to the feedback of price declines on lenders, mortgage conditions have tightened some since the late spring, and the jury is still out on whether housing prices are close to finding a bottom.

-EPJ Frontdesk