WaMu perished last night, falling into the hands of JPMogenDavid. Apparently, deposits are safe, but shareholders and creditors are to get nothing.
The Paulson deal is deader than the dodo.
The House Republicans have heard loud and clear from their constituencies that they sign the $700mm blank check at their peril.
Bernanke must have told the GOP caucus last night that he’s known about this problem for a year. That’s such a bizarre statement to begin with, like saying he’s known about the existence of the sun for at least a year. Is there someone who has been paying attention who has not known about this problem?
Then, someone in the caucus must have said something like “I’m shocked! I’m shocked to learn that there is a big problem with the credit markets and with the value of securitized assets!”
Today is going to be an interesting day, in the fullest sense of the Chinese proverb.
I like this picture so much I am borrowing it from this excellent article. Be warned, though, don’t read it unless you have a strong stomach. I have added The Market Oracle to the blogroll. Thanks to Katarina.
It seems to me inevitable that the US Treasury will eventually formally take ownership of the dodgy derivatives-laced unpriceable mortgage bonds. This is going to be RTC on more ‘roids than a billion Barry Bonds.
Look for legislation in the next congress to ban the adulteration of securities with derivatives. Yes, of course, that’s crazy, but that’s never stopped Congress before.
I’m watching Jim Rogers on Bloomberg right now. This is the guy we all derided as Mr. Bowtie in the 90s. He was right, but he was early, way too early. I think he turned bearish in the early 90s and missed the whole party.
He says the Fed should have let Bear go down, should have stood on the sidelines and let the dominos fall where they may. He might be right about this. But Bernanke doesn’t have the stomach for this, just as Volcker’s predecessor didn’t have the stomach to boost the short rate to 15% to drive a stake through inflation’s heart. Who is going to succeed Bernanke, who is going to give the economy the tough medicine needed to restore the dollar and force the unwinding?
Ok, I’m off in ten minutes to gallivant with the Houston diplomatic corps, but I have to deliver a brief eulogy for Bear Stearns.
Bear Stearns died today. Helicopter Ben called up Jamie Dimon today and told him the printing presses were red hot, and he had an entire train loaded with greenbacks, and Ben asked Jamie politely if would accept several billion dollars in return for the favor of propping up the corpse for a while.
All deaths are sad, tragic, and scary, but this one is really the stuff of nightmares. When I worked on Wall Street, Bear Stearns was still Ace Greenberg’s company. Ace expected his employees to reuse rubber bands and paper clips. If a trader at Bear hit a home run, he could expect to be fired. “You might have struck out, you dumb fuck, why in goddamn hell didn’t you lay down the bunt like I told you???!!!!”
Well, goodie for Helicopter Ben. He’s got all the troops out tonight bracing themselves against all the dominos that are teetering in sympathy with Bear. I guess that’s good, but I wonder how Ben sleeps at night?
What is Trichet going to do when the first eurozone bank goes down? Will he unlock even a single centime to bail them out? Well, if he does, you know for sure that someone is holding a gun to his head.
Lenin is said to have said the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equality equity in the existing distribution of wealth…. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to become almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
John Maynard Keynes
The US Dollar recently reached an all-time low against the Euro, a point where it takes $1.52 to buy 1 euro. The all time high for the dollar against the Euro was $1 = .82 euros. Thus, since the high in 2000, the value of the dollar against the euro has halved.
Yet, during this time, the federal government would have us believe that annual inflation has averaged something on the order of 3% or so.
For the first time in recorded history, all the major currencies of the world are fiat currencies, mere symbols without any actual goods or commodities standing behind them.
The appropriate subtitles for this article would be either “The Revenge of Milton Friedman” or “Maybe Ron Paul is not such a kook after all.”
I now believe that the global system of fiat currencies cannot be sustained. Will the civilized world return to a metallic currency standard? I don’t know, but I feel pretty confident that central banks will be forced, sooner or later, to make their currencies redeemable in some kind of actual commodity.
There have been several modern cases of hyper inflation in relatively civilized places, like Brazil and Argentina. The cure for the hyperinflation in these cases ultimately rested on the discipline of a pegging their currencies at least somewhat to the US dollar. Now, the US dollar is certainly not an actual commodity, but it was relatively “hard” at that time, compared to the local currency.
The United States is headed for massive inflation. I don’t know that we will actually experience hyperinflation (and god knows I hope not), but inflation is already running at a double digit annual rate. I have added an excellent website to the blogroll, Shadow Government Stats, which provides at least some analysis of the broadest measure of the money supply, M3, which the Federal Reserve stopped reporting a few years ago. I really have no way of validating Shadow Stat’s figures, but this website claims that M3 is currently growing at a rate of about 16% annually. M3 growth doesn’t directly translate one-for-one into consumer price inflation, but as Milton Friedman points out, inflation is a monetary phenomenon, which eventually shows up in prices of goods, services and labor. The M3 growth is like a tidal wave approaching the shore–out in the deep ocean, it is a minor swell, but when it reaches the shore it towers up to 20 feet and crashes down, destroying everything in its path.
Now, here is an anomaly which is hard to explain: the 10 year Treasury note is selling at a yield around 4%. How can this be, if inflation is in the double digits? Why, why, why, please god tell me, why do investors accept a loss of at least 6% annually in order to lend the US Government money?
Update: Duh! Tentative hypothesis for the above paradox: the fed funds rate is at 2.5% and dropping like a rock. Investors can demand 13% all day long, but the Fed stands ready to operate the currency printing press until Helicopter Ben’s arm falls off, and how can a non-currency-printing-press-owner compete with that? During the soon-to-be-seen-as-comparitively-mild 70s bout with stagflation, the discount rate was much closer to the rate of inflation, eventually being boosted all the way to 14%. You could look it up.
Ok, I don’t really understand this. But, I don’t believe that this inexplicable generosity can persist. It seems to me inevitable that lenders will cease to be willing to lend at a loss. Then, it is inevitable that the 10 year rate will increase to a level higher than the rate of inflation. With inflation of at least 10% annually, the 10 year treasury note ought to be yielding at least 12%, or 13%. Mortgages should be commanding 14% to 16%. The discount rate should be at about 6-8%.
I think maybe we’re seeing the beginning of this. The Fed is down on its knees, begging the banks to lend money. The banks don’t want to do it. Helicopter Ben Bernanke is even now as I write firing up the choppers loaded with baskets of greenbacks.
A period of high inflation is excellent for debtors, and is very very bad for those on a fixed income and for those with accumulated capital.
So, I guess the thing to do is borrow as much money as possible and buy hard assets. I have been buying gold and silver. I am not happy about it. I am an emotional wreck every time I hit the button to execute a trade to buy more precious metals. I just don’t know what else to do.
Here is an interesting fact, which I learned from reading Milton Friedman’s Money Mischief: Episodes in Monetary History: the ratio between the price of gold and silver back to antiquity to relatively modern times has fluctuated in range between about 8 to 1, to as much as 30 to 1. For many centuries, since the early Christian Era until the last century or so, it fluctuated in a much narrower range, around 15 to 1. Right now, silver is trading at about $19.50 per ounce, and gold is trading at about $950 per ounce, a ratio of about 50 to 1. I leave the obvious thought to the reader.
