Heh folks, how do you like fear?

Or, if you're on the other side, thrill?

You know how this works if you've been to Six Flags, King's Island or any other amusement park.  You get on the 'Coaster, you get to the first hill, and the "clack-clack-clack-clack-clack" starts.

You know what's coming.

Is it scary?  Or cool?

That depends - is your safety bar lock working? :)

Those who claim that we're "almost done" with the "credit crunch" - show me a market that has cleared.  Show me where price discovery is working.  Show me spreads coming in and stabilizing at normal levels.  Show me a system that doesn't need excess liquidity. Show me a strong consumer with plenty of discretionary income.  Show me leverage ratios on consumer balance sheets that show lots of room to expand leverage and thus spend.

You can't, because none of those things exist.

The market rallied off the January and then March lows because the premise of "The Fed has our back" was accepted at face value.  But now Bernanke has blown all but $25 billion of his short-term treasuries supporting this mess, and it didn't get any better.

Nor can it, really.  The Fed is just a bank folks.

Congress, as usual, has done its level best to make things worse.  "Stimulus" checks that can't, because such a give-out doesn't add to GDP; it just moves money from your taxes (which you pay) back to your hand, forcing higher taxes (to recover the funds) or more borrowing.  They are a net lose because they force more interest to be paid, ultimately.

The lender bailout that The Senate passed and which, absent someone with stones standing up and Parliamentary-Proceduring it to death (hope springs eternal!) will become law, even over The President's veto, is just more of the same - arm waving that will make the problem worse, not better.

Now The House has come up with a bill that will "restrict" commodity speculation, never mind that a commodity speculator provides liquidity and price discovery, not price setting or forcing.  This is obvious to anyone with more than two firing neurons, but it doesn't matter - the people are demanding that someone be "to blame" for high oil prices, and its not acceptable for Congress to say "well, we did that and so is The Fed, and we won't stop them", so they blame "commodity speculators."

The truth on commodity futures (e.g. oil) is simple - if I buy a futures contract that tends to force the price upward, but as expiration approaches if I do not want to take delivery of that oil I must sell that contract and buy the next month's out.  In doing so I drive the price of the front month down at the same rate I drive the forward contract up - the net effect is zero.  Further, you can determine the total impact of these contracts as they are unwound every month when the futures expire, and the last expiration (which just passed) we saw that the true impact is just a few dollars - under $5/bbl.

Reality is that we have allowed our Federal Reserve to devalue our currency by making dollars not scarce but plentiful and injecting unwarranted amounts of liquidity into the system.  This has been done in an attempt to allow banks to hide their losses instead of recognizing them and being forced to swallow hard.  The problem with such a strategy is that it doesn't get rid of the loss; rather, it hides it in the hope that it will "go away" on its own.

But in a circumstance where excessive leverage is present in the system these losses never go away; they in fact get worse over time!  When you have a system that is over leveraged and debt that cannot be serviced is present the best loss is the one you recognize today; the longer you wait the worse it gets!

The only solution to this mess is to force those who have losses to recognize them and for the market to clear under natural forces.  We must remove the ability of people to refuse to recognize those losses, which means removing artificial "liquidity" facilities from the marketplace.  Congress has to do its job in regulating the banking and mortgage system, enforcing leverage limits, not expanding them.

This means a return to 20% down payments, 36% "back end" (DTI) ratios, and 30 year fixed rate mortgages. It means revoking the "expanded" limits on FHA, Fannie and Freddie.  It means forcing the GSEs to dramatically increase capital reserves and/or sell down their credit book until their leverage ratios contract to something reasonable, certainly no more than 10:1.  It means the end of all off-balance sheet games and OTC derivatives contracts held in or traded by regulated entities.

These are all things that I have preached since this blog began, and yet nobody wants to listen and take that action, because then their campaign contribution gravy train would cease.

Well, which is more important here?  The gravy train or the stability of our financial system?  Your ability as a consumer to access credit or some fat cat's "Friends of Angelo" loan?  The lies of our political candidates and Wall Street or the truth that you personally and our nation as a whole must stop spending more than we make?

Today a group of Tickerforum members are protesting over exactly these points in Washington DC.  You can find more information at http://fedupusa.org; to those who say "there's nothing you can do", these folks are proof that you're wrong.

But its harder to act than it is to sit and whine about $4 gas, yes?

Do you want things to remain as they are (or even get worse) or do you want to make a difference?  That's the question - and your answer to it will determine the outcome in the coming months and years for America.