The Market Ticker

It really is rather simple:

WASHINGTON (AP) -- It's something any bank would demand to know before handing out a loan: Where's the money going?

But after receiving billions in aid from U.S. taxpayers, the nation's largest banks say they can't track exactly how they're spending the money or they simply refuse to discuss it.

"We've lent some of it. We've not lent some of it. We've not given any accounting of, 'Here's how we're doing it,'" said Thomas Kelly, a spokesman for JPMorgan Chase, which received $25 billion in emergency bailout money. "We have not disclosed that to the public. We're declining to."

The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings, and what's the plan for the rest?

None of the banks provided specific answers.

So you've had all this money stolen, orchestrated by Congress and the US Treasury, and the thieves took it in plain sight and are now refusing to tell you where it went.

America, do you intend to sit for this?

Why are there not 500,000 Americans in Washington DC right here and now, in the streets, shutting that town down and refusing to leave until and unless every penny of the money stolen is returned - and both Paulson and Bernanke are run out of town on a rail?

After all, the banks have all admitted they didn't do what was intended by Congress with the money and are refusing to tell us where it went!

Here's a list of famous people who have engaged in a given activity over the years (from Wikipedia, natch):

This is an uncomfortable reality, but it is reality.

Mr. Madoff stands accused of (in his own words) running "a Ponzi Scheme."

In fact, our entire economy over the last ten years, and really back to at least 1987, has been roughly equivalent to what Mr. Madoff was doing.

So has our government.

Let's go down the list of things that have been inflated beyond their natural boundaries, and look at how each and every one of them was destined to collapse - and why they're all collapsing at once:

• The Internet Bubble.  While there were companies that made a real pre-tax operating profit (and a real net profit), mine included, the vast majority of the firms in the Internet space did no such thing.  They reported "pro-forma" earnings, used EBIDTA (that's earnings before interest, depreciation, taxation and amortization, as if none of those things count) while levering up (meaning: interest was going to continue to rise!) as their primary profit gauge, and in fact operated with leverage ratios (total assets deployed to tangible equity - that is, value) that were in the stratosphere.  In short they borrowed to pay back their previous loans and make payroll, and when the lenders (which were in some cases equipment manufacturers) realized that they'd been had, the entire house of cards came tumbling down.
• The Housing Bubble.  Homes, as a place to live, must be able to be purchased for a reasonable percentage of one's income.  What's "reasonable"?  History says that this is 28% of your pretax income for all your direct household expenses (principal, interest, taxes and insurance plus mandatory spending such as utilities and a maintenance reserve) and 36% of your pretax income for all debt service including household and other.  Note that at the "maximum leverage" that is sustainable you have only 8% of your pretax income available for "other debt service"; how many people can meet that?  Think folks - if you have a $100,000 income, this means you have only eight thousand dollars for all payments on other debt.  Two modest car loans and their insurance will exceed this limit for someone who makes $100,000 - and we're talking Ford's here (small sedans too, not SUVs), not Benz's or Lexii.  As these ratios were exceeded in order to remain "affordable" increasingly exotic terms were required, starting back in 2001 when the car makers were cajoled by the Bush Administration to put forward their "Drive America" program with zero-percent interest for three years.  As this crept further and further into our economy mortgage programs that were in fact not mortgages (as there was absolutely no possibility of the borrower paying them off on the original terms) were pushed in order to keep property values climbing.  In 2007 the limit of this insanity was reached, the "last sucker" was found, and the pyramid collapsed as these so-called "mortgages" were exposed for what they really were - a serial-refinancing scheme designed to strip equity and transfer it to the bankers.  The entire scheme collapsed and along with it our markets and economy.
• The Stock and Credit Markets Generally.  The Internet Bubble and Housing Bubble were the externally-visible symptoms of what was going on behind the scenes.  The S&P 500 was posting "earnings" of more than $100 a share, but those "earnings" were a phantom.  "Private Equity" and "Hedge Funds" were buying companies and essentially flipping them using debt backed by bank credit that was, like in the housing and Internet markets, backed by nothing other than vapor.  Commercial Real Estate deals were being done at "cap rates" that were unbelievably optimistic, essentially not even paying the interest due, banking on the ability to roll the debt as "property values never go down."  Anyone remember "M&A Monday" on CNBC through all of 2006 and the spring and summer of 2007?  What was that all about, if not flipping companies like speculators flipped houses? 
• Our Government's Finances.  We put into place Social Security and Medicare, two schemes that have accumulated fifty three trillion dollars in forward liabilities with zero in assets behind them.  These liabilities are growing at a rate several times that of GDP.  Then, as if this wasn't enough, we passed "Medicare Part D" which has now added even more to the liability side of the balance sheet but which was and is totally unfunded by assets.  This both can and will collapse just as did the Housing and Internet bubbles.  Our government has been spending money it doesn't (and never will) have for a very long time, but we have now entered the phase (just like the Internet and Housing Bubbles) where debt is increasing at an exponential rate compared to assets.  We have, in the last year, nearly doubled the outstanding public debt commitments on the United States ($8 trillion added against a $10 trillion base), with the previous $10 trillion itself having doubled from $5 trillion in the space of just a bit more than a decade.

There are many who say that our government debt-bubble will not collapse, and they list a whole host of reasons.

Why would you believe that?

Can you show, through history, one speculative bubble that has not popped? 

Can you find one time - just once - that such a bubble was able to be grown without limit?

Simply put: No.

Americans have, as a nation, become fat, dumb, "entitled" and lazy.

Our Declaration of Independence lists the following rights that are endowed to us by our creator:

Life, Liberty and the pursuit of Happiness.

Note that nowhere in this list are:

• Free anything, including wealth, food, health care, shelter or even a job.
• Happiness itself (only the right to pursue, but not achieve, happiness is endowed)

America as a nation was founded by a group of rugged individuals who understood all of this.  They were not necessarily religious, although they believed in divine providence; that is, that "from somewhere more powerful than they their original seed was formed."  Some believed that source was a Christian God, some believed it to be the earth herself, some believed it to be some vague spiritual force. 

But all believed and understood that the fundamental rights that flowed from that original creation did not involve deceit, trickery or theft, irrespective of how it was accomplished.

Unfortunately deceit, trickery and theft all feed on themselves.  They are uniquely human vices; when they first appear they seem innocuous.  "Social Security" was originally called "OASDI"  (that is, Old Age, Survivors and Disability Insurance) and still legally is.  Think about that for a minute - two of the components were put into that bill to guarantee that children would not starve, and those who became permanently disabled (usually through work) would not be cast into the streets to die.  A noble cause to be sure, but what has Social Security become?  While the "SDI" portions still remain and are both important and, one would argue, necessary, that's not where all the money goes - it goes instead to the "Old Age" portion, where nearly everyone who receives it made choices during their working years to spend all, or nearly all, of their earnings.

There are many who argue that those who live "hand to mouth" don't have that choice.  Really?  Here are two statistics that make clear that this is simply false:

• In 2003 there were 159 million cell phone subscribers in the United States, and the average monthly bill was $49.91.  Penetration has since grown to approximately 70% of the population (from ~60% in 2003.)  Since 25% of all persons are under the age of 18, the majority of the non-subscribers to cellular services are in fact children under the age of 10.
• In 2002 58 percent of persons age 18 and over were overweight, and 23 percent were considered medically obese.

So in fact we have two "inconvenient facts" that contradict the claim that those who live "hand to mouth" and yet are working could not save for their retirement and old age if they decided to do so - the first being that they spend nearly $600 a year on cellular service - a luxury, and the second being that nearly 6 in 10 are consuming significantly more food (and paying for it) than their body demands for metabolic balance.

This sort of "self-deceit" is how it begins.  You're now considered "poor" if you live in a 1300 square foot house and don't have a cellphone. 

Yet in the 1960s and 70s, decidedly-middle-class Americans - myself included - grew up in homes like this that featured three small bedrooms, one bathroom, one living room of about 150 square feet and an eat-in kitchen.  We had one black and white television in the living room with rabbit ears on top and one telephone on the wall, and we could not afford to make long-distance phone calls with the exception of a couple of very short calls to relatives over the Holidays.  We did not have air conditioning nor all manner of electronics chewing at electricity day in and out and thus our electrical consumption was a fraction (in kilowatt-hours) of what people consume now.  McDonalds' was considered a luxury, as it was (and is) cheaper to cook up something at home - say much less other restaurants.

My father was a CPA for Howe-Martz Glass in Detroit during most of my youth - a decidedly middle-class, white-collar career.

Today, the way we lived would be mocked as "destitute."

Don't get me wrong - improving standards of living are not a bad thing.  In fact, they're a very good thing, and we have come a long way since 1776 in that regard.  Indoor plumbing, flush toilets, electrification of homes allowing lighting and machinery, telephones, personal computers, the Internet and the automobile (and its larger cousin the truck) all have brought great strides forward in our society. 

But somewhere along the line we decided that transparency in our financial dealings, both as a government and privately, were not essential elements of fair dealing and computation of risk.

And therein lies the problem.

See, evil requires secrecy.

Theoretically, banks are supposed to hold reserves of about 8% against their deposits, and therefore are limited to roughly 12:1 leverage against their asset base.  Investment banks had a similar limit explicitly codified in the law, because as non-depository institutions they had no deposits against which to measure these ratios.  In fact, up until 1998, all such "demand accounts" - that is, those in which you could walk into the bank and demand your money immediately (e.g. checking accounts and similar) were subject to these reserve requirements.  This put an effective cap on leverage and thus risk - and the otherwise-unbridled growth of commercial and bank credit.

But starting in 1998 this changed.  This Treasury Department OTS memorandum outlines a number of bills that were put forward by Senators and Representatives that, in many cases, still sit in our Congress.  Senators Shelby, Hagel and Reid are explicitly named, along with the infamous Representative Leach of Gramm-Leach-Bliley.  That memorandum also effectively eviscerated the reserve requirements that formerly kept our banking and thrift system safe and sound.

Between this change in policy, The Federal Reserve's intentional refusal to act to stop what amounted to infinite leverage, Treasury Secretary Paulson's (successful) entreaty to ease leverage limits on investment banks in 2004 (when he was running Goldman Sachs) and other similar actions taken by our government, we have in fact created the largest bubble ever blown in economic history throughout our banking and credit systems.

Now that bubble has popped.

In 2000, the damage done by the 1998 and 1999 decisions (which just happened to coincide with the final "blow off" top in the Nasdaq!) put our GDP approximately 10% "out of balance" with our actual productive capacity.

That is, the debt taken on during that bubble in excess of GDP growth represented about a 10% "premium" to a sustainable GDP level.  Were we to simply wave a wand and make that debt (credit) disappear, GDP would have been 10% below where it was in 2000. 

2000 GDP was approximately $10 trillion, so we would have suffered a $1 trillion contraction in GDP to bring the system back into balance, along with whatever business and banking failures which would have come along with that adjustment.  Those failures would have resulted in an "overshoot" of some amount - perhaps another $500 billion.

Note that a total "peak to trough" contraction of 10% is generally thought of as a Depression.  Not a "Great Depression", but an "ordinary" Depression.

Therefore, the economy in 2000 faced an economic Depression.  To put this in perspective, in the post-war era the worst Recession on record was the 1973-75 event which recorded a 4.9% contraction in real GDP.

George Bush, our Congress and Alan Greenspan, however, refused to accept their responsibility in 2000 and 2001 for the economic policies of this nation and its banking regulators that led to the final blow-off top in the Internet Bubble. 

In fact, Gramm-Leach-Bliley along with the sweep account changes were responsible for about half of the excess leverage of the Internet Bubble, and thus about half of the economic correction made necessary by its final blow-off top.

That's right - had those changes not been made we would have faced a 1973-74 style recession, but with those changes we were guaranteed a depression as the economic "just desserts" of the Internet Bubble era.

Being that this was deemed "unacceptable" Alan Greenspan along with Congress and the other regulatory bodies in Washington DC responsible for banking (and general credit system) safety and soundness undertook an intentional course of action to "paper over" the losses.

But wait!  How can you do that?

You can't - except through fraud.

That is, you cannot prevent a loss from appearing and being recognized unless you allow people to lie about the value of securities, place them off-balance-sheet in opaque containers where nobody can see what's inside (and thus how they're performing) and "lever up" to issue yet more debt (credit) to cover the cash flow that should be happening but isn't.

As the embedded (and fraudulently-concealed) debt continued to mount banks and other institutions found themselves performing a Madoff - that is, issuing new credit (debt) to be able to "show earnings" that in fact were a phantom.  Unlike Madoff they did not have to go find someone new to put money in to be able to issue the checks to existing investors, since a bank that can operate with no reserve requirements imposed on it is capable of issuing as much credit as it wants, effectively "printing money."

Regulations and leverage limits are supposed to prevent this, but they were systematically and intentionally dismantled in the name of "financial innovation."

In truth they were dismantled in the name of a massive financial fraud that permeated every corner of our credit system, from credit cards to student loans to automobiles to housing.

This ponzi scheme even extended to individual consumers - that is, you. 

If you HELOC'd out money and paid down your credit cards with it, then charged anew or cash-out refinanced, you were a Madoff.  If you bought a house with an Option ARM, knowing full well you could not make make a fully-amortized "recast" payment, you were a Madoff.  If you played the balance transfer game with your credit cards, rolling balances from one zero-interest offer to another, you were a Madoff.  Tens of millions of Americans did one or more of these things - and each and every one of them - if not you then someone you knew - was running a personal version of Madoff's scheme.

Every organ of our government and regulatory system was involved in this knowing deceit and the complicity required for it to occur - Congress, The White House, Treasury, The Federal Reserve - and still is.

So why did the bubble collapse, if these institutions are able to continue to literally "print money" and the regulators were intentionally ignoring all of it?

The fundamental problem with all Ponzi Schemes, even those in which the operator is able to issue credit at will, is that it relies on people not challenging the books. 

It requires "belief" - that is, confidence.

Thus the phrase "con game".

When Bear Stearns two hedge funds collapsed, the house of cards began to shake.  People started looking at balance sheets and asking lots of very inconvenient questions, including exactly how one can have a mortgage-backed security rated "AAA" when 40% of the loans in it are either delinquent or in foreclosure.  A few people started to listen to those who had analyzed the math, such as myself and Mish, and the light came on in their head - "Oh My God, they're right!"

See, while credit spends like money, it is not money. 

Money is in fact production; you gain it only three ways - by growing something, mining something or making something.  That is, by producing a thing (whether it be a car, apples, a barrel of oil or software) that did not exist before.  In the most-basic of terms, all money ultimately comes from the energy imparted upon the earth by the Sun.

Yet money backs all credit at some ratio, and the higher the ratio, the more that credit is subject to destruction if those people with money (that is, production) decide to take their ball and go home.

This, at its root, is why all schemes like this must and will fail.  It is a mathematical certainty that confidence will eventually be lost as the math and truth of what is going on will eventually become evident to a sufficient number of producers and they will "take their ball home"; once that happens the credit they are underwriting is no longer backed by production.  This leads to a rapidly-increasing leverage ratio which in turn leads even more people to "take their ball home" and the scheme thus must and does collapse.

You would think that Bernanke and Paulson would recognize what is going on - and that they are unable to stop the inevitable collapse.

Here's the problem - they do recognize it, but they are two of the architects of it, and admitting the truth means taking responsibility for what they have done.

That's not going to happen so long as they believe they can manage to keep the "con" going with someone.

The group of "someone's", however, is shrinking rapidly.  Commercial and Investment bank loans, then Fannie and Freddie, then commercial paper issuers, and now various sorts of consumer loan products such as credit cards, automobile financing and student loans are all being shunned by those with actual money as they start to peek under the kimono and find not a pleasant sight but rather something both ugly and hairy staring back at them.

Thus, the transfer of all of this "credit" (really bad debt) no longer backed by money (as the producers have taken their ball and left) from the institutions that created the ponzi scheme to "the sovereign" - the Government - in all of its forms, whether it be Treasury or The Fed directly.

The latest announcement came on Friday, when The Fed loosened the terms of the TALF (one of its alphabet soup programs) and effectively allowed hedge funds to borrow from it.

This, incidentally, is why Bloomberg has had to sue The Fed to try to get disclosure of the crap they have taken on their balance sheet, and why Fox News announced that it is suing Treasury to gain disclosure of what they have taken on.

It is also why Markit has announced that they're "postponing" the listing of performance data on "Prime" mortgages - they were pressured to do so (by their own admission) because a published price means no more lying about values, and that could mean immediate (and monstrous) new writedowns for banks which hold trillions of dollars of "Prime" mortgages yet are valuing them pretty much "however they want."

As I said before, evil requires secrecy. 

There is real (and justified) fear that should the truth of what is being held in these "Fed and Treasury programs" be disclosed in full that those with money (that is, producers) would flee United States Treasuries (and dollars.)

This is not an unjustified fear; it is, in fact, fear of exactly what has happened thus far and led to the collapse of AIG, Lehman, Bear Sterns and the near-collapse of Fannie and Freddie.

And what is The Fed using for its "credit grade"?  Ratings from the same agencies that graded as "AAA" toxic subprime debt that all blew up.

If this last gambit fails so does our government's ability to deficit spend.

There is a near-100% probability that it will fail - we are simply arguing about the "when", not the "if".

See, without evidence that the debt (not deficit) they are asked to back will be paid down at some date-reasonable in the future, eventually the people with money will flee. 

It is simply a matter of exactly when their confidence fails (that is, at what leverage ratio do they say "screw this!"), not if it will fail.

Removal of the ability to deficit spend, when the government will be running a $1 trillion+ deficit next year, would result in a roughly 25% instantaneous reduction in the government's budget - assuming tax receipts will be maintained.  The problem is that they won't - with unemployment skyrocketing and GDP collapsing, tax receipts are likely to fall 30% or more, meaning that in all probability the government will find itself having to cut its budget in half on an immediate basis.

Since a goodly part of that budget is in fact interest and it cannot be cut (without causing a general default) the consequence would be a requirement to slash all government programs immediately by approximately 60% - including Medicare, Social Security, the military, education, other social programs (e.g. Title I) and everything else.  In addition The Fed would be forced to immediately disgorge all of its bad assets into the market at whatever price they could be sold for, lest The Dollar become "de-currencied" almost instantaneously.

Think about Iceland and how quickly their situation unraveled.  It can - and may - happen here.

Now to the next question - how bad would it be if we were to take the proper steps today to bring our economy back into balance?  And how bad will it be if we wait a while longer, and/or are forced to do so by a confidence problem with our government debt and/or currency?

To bring our economy back into balance, as of August 2007, we would have required a 20% GDP correction as a direct consequence of the actions of the 2000-2007 time frame.  While this is "twice as bad as 2000" in terms of percentages, it is actually three times as bad in terms of dollars, since GDP went from $10 - $14 trillion during those years.

That is, as of August 2007, we would have had to suffer a $3 trillion contraction in GDP, essentially wiping out all of the gains since 2000.

In the last year we have spent - not committed, spent - another $2 trillion dollars we do not have.  That is another 10% GDP contraction, for a total of 30% - or roughly equivalent to the Great Depression.

This increase in the severity of the necessary re-balancing of the economy was brought about as a direct result of the actions of Ben Bernanke, Hank Paulson and Congress.  That's right - fully 1/3rd of the damage that now must be taken was voluntarily taken on and put on your head in the last year by the people who claim they are "protecting" the American economy.

If we allow the programs promised thus far - totaling $8 trillion - to be spent, plus Obama's expected $700 billion+ "stimulus" package to be put into the mix, we will get very close to and may exceed 50% GDP contraction required to bring the economy back into balance.  That is, the total damage will be five times that which was necessary in 2000 and more than twice that necessary in August of 2007, and all of that increase will be due to the intentional acts of our government officials.

I have high confidence that we won't get to that level of destruction simply because the producers with money won't allow it to go that far before they pull the rug out from under us.

I rate the odds of a forced cessation of these programs, either via a bond market dislocation or a currency crisis somewhere before that $8+ trillion number is realized in excess of 80%.

The important thing to keep in mind is that the sooner we stop this idiocy the less damage we will take. 

That the damage will be serious, that unemployment will be rampant, that our economy will contract dramatically - this is now all assured and cannot be avoided.

But the more money we spend that we do not have, and the more risk we transfer to our nation's balance sheet (instead of leaving it where it is and allowing it to sink the imprudent) the worse the inevitable will become. 

We are buying rapidly-decreasing amounts of time before the dislocation and dramatically increasing the amount of damage that will occur with our present policies.

This is mathematics, not conjecture, and irrespective of the government's attempt to claim otherwise 2 + 2 still equals 4.

Finally, before one says that "FDR did this and it helped" in the 1930s note that the "Great Depression" was actually two separate events, with the first (1929 - 1933) being a contraction of about 33%, and the second, from 1937 to 1938 where GDP declined by 18.2%.

The second contraction was entirely caused by the government's response to The Depression (and The Depression itself was caused by government's refusal to perform its regulatory role!), and it was only WWII that truly put a stop to it by killing off competition for jobs and destroying huge amounts of capital equipment that then had to be replaced.

Unless you're rooting for several million of our young people to be killed in the next World War, this lunacy must stop now.

Specifically:

• President Obama must not try to stop the unwind.  In fact, quite to the contrary - we must cease taking on more debt (that is, funding more bailout and "stimulus" programs) because they simply make the matter worse.  In short President Obama must force the unwind to take place by withdrawing the artificial support.  I'm well-aware that from a political popularity point of view this may well be impossible - nonetheless, if we are to avoid catastrophe it must be done as the damage now is much smaller than the damage that will occur if we don't stop the insanity.
• The Fed must be told to either place back into full force and effect all leverage and reserve requirements and police them or the US Government will act to force them to do so.  This must happen right now.
• Full, 100% transparency for all - including Treasury and The Fed - must occur immediately and be maintained in perpetuity.  We must not lose the confidence of those who fund our debt and to do so we must prove on an immediate and continuing basis that we have changed.
• We must accept the contraction in our GDP that will and must occur.  In short, we must stop lying and papering over the inevitable which has done nothing but make what is to come worse.  There will be massive numbers of bankruptcies, including large banks and other institutions, that will come from this.  We have no choice but to accept this reality as it is far less damaging than the alternative.
• The human suffering that is and will occur will be tremendous no matter what we do.  The one place we can and should spend is on essential human needs; that is, food, shelter and clothing.  We can provide barracks-style shelter, cafeteria-style food, basic medical care and donation-based clothing for millions of Americans for a song compared to these "bailouts" and we both can and must.  Every state should have these centers established in major cities and at least one at or near its geographic center (or the closest reasonable place to it) in which all United States Citizens (but no illegal aliens) can come, reside, eat and obtain basic clothing and medical care at no cost to them.  This can be done at a cost of single-digit dollars per day per person, and we must.  This is a social imperative and we simply have to be prepared to provide it.

We can rebuild our economy, but we must do so from a stable base.  The GDP contraction that is to come must be accepted, and we can no longer fund false GDP "growth" with an ever-increasing debt load.

Our choice is to accept this now or have it forced upon us in the future, with that future date approaching at a rapid rate and the amount of damage increasing with every day we delay.

No balls.

Or does he?

Well, ok, one ball.

"The money will be drawn from the Troubled Asset Relief Program and the automakers will get an additional $4 billion from the fund in February, according to a statement from the Bush administration. The money would allow GM and Chrysler to keep operating until March.

Under the terms of the plan, if the companies can’t demonstrate financial viability by March 31 the loans will be called and the money must be returned, the statement said. "

Or maybe its half a ball.

See, by March 31st Obama will be in office, and guess what - he can change the deal, including not requiring the labor contracts be fixed.

And of course, the details are leaked an hour before options expiration, with Bush to speak a half-hour before the bell.

Hope you weren't short overnight; while this doesn't look like one of those "straight up 40 handles" deals like August 07, the day is young and the imbalance indicators are all higher.

All the local drugstores will be sold out of Preparation H this morning - those who shorted GM into the hole yesterday afternoon need two large tubes each.

Shapiro was tapped by Obama to head the SEC.  Bloomberg hails her as someone who can "overhaul" the SEC.  I see her as "more of the same."

Why?  Well, let's just keep it simple - she's a top brokerage regulator - a former CFTC head and FINRA CEO.  How did Madoff manage to get under her radar, specifically, as CEO of FINRA?

Nor does it stop there.  It appears that Shapiro appointed one of Madoff's sons to a position that oversaw disciplinary actions made by FINRA!

So there you have it.  The hand-jobs under the table in politics have certainly not changed with the election of a new President.

Of course the media is fawning all over her, as is Schumer.  And why wouldn't Schumer - after all, where the hell has he been in this scandal?  As the head of Congress' Joint Economic Committee, he's got a few questions to answer too - not that I think he ever will.

Next up - Paulson's lies.  I am counting the days until that butthat is gone from Washington DC - now there are rumors flying around that he does intend to try to grab the other $350 billion in the EESA/TARP while Congress is on recess - after explicitly saying he wouldn't.

Oh, and don't think that ZIRP means your credit card rates will be going down any time soon.  That's ain't happening, according to Bloomberg:

Dec. 18 (Bloomberg) -- Credit-card companies, facing an increase in defaults and a decline in consumer spending, are raising some rates, adding fees and cutting credit lines as the Federal Reserve is poised to make the most sweeping changes to the industry in 30 years.

Right.  See, The Fed is due to announce new rules that would prevent some of the worst abuses, such as "universal default", raising rates on existing balances and other similar games.  The banks have been cutting back lines, boosting rates and adding junk fees ahead of this decision, fully-aware that they're going to be forced to behave in at least a slightly less outrageous fashion in the future.

In truth, I have mixed feelings about all of this.  The idea that credit is a right is outrageous, and a big part of why we're in this economic mess.  To those Americans who are unable to manage their money and use credit cards as an ever-increasing means of financing that which they can never pay off, I say "you are an economic child and need a spanking."  How do I define that?  If you routinely run a balance on your revolving lines, you qualify. 

Simply put, there's no reason to do that if you live prudently.

Using credit as a means of financing the purchase of a new refrigerator when your old one blows up is marginally reasonable, assuming you can manage to pay it off within a year or so.  I say its "marginally reasonable" because were the banks prudent they would not make available credit to someone who has zero reserves and lives "hand to mouth" - that customer is very high risk, and as such you'd either pay a usurious interest rate or be denied entirely. (Of course that hasn't happened over the last few years, has it?)

Using credit as a means of not having to carry cash, paying off the balance every month is entirely reasonable.

Using credit as a short-term (couple of months) means of bridging extraordinary expenses while retaining reserves is very reasonable - and prudent.  You're trading paying interest for keeping your emergency fund intact - that's a business decision.

Using credit as a means of rolling balances from one card to another, hoping you can tap "increased wealth" via speculative investments such as your home or the stock market?  That's manifestly unsound and if you do it for long enough you will go broke.

Forcing people in the latter group to recognize the idiocy of their lifestyle choices is, in the end, a good thing. 

It won't be easy and it won't come without much wailing and gnashing of teeth, but in the intermediate and long term it is exactly what our economy needs - forcing people to put out additional productivity into the economy if they want to spend additional money.

Remember - the only true economic growth is found in the increased productivity of people - not shuffling paper.

Expanding on yesterday afternoon's Ticker.....

First, let's look at the TNX, which is the 10 year Treasury yield; we'll do two charts, the first being the 20 year Weekly:

Note that we've not been here before (within 20 years anyway); here's the daily for the last year:

Yesterday we closed at a historic low, and early indications today are even worse, at 21.20  The IRX, or yield on the 13 week T-Bill, is essentially zero.

One cannot argue one simple fact - Bernanke hasn't yet started buying the long end of the curve to any material degree.  But he's been threatening, and today the FOMC statement made explicit what had been whispered before.

The mouth-breathers were all over CNBC and elsewhere yesterday and today claiming that this would "stabilize" the credit markets and make credit (and the economy) better, with the most outrageous displays of stupidity being put forth by Cramer and McCulley of PIM(p)CO.

Yeah, right.

Now let's take a more cynical, but realistic, view.

Remember last year.  Oil went from $60 to $150 in the space of a few months.  Why?  Because it was no longer profitable to buy CDOs and RMBS, as they were imploding.  The money has to go somewhere, and so traders bet in front of what they believed Bernanke would do - crank down interest rates at an insanely-accelerated rate, which would spike prices in commodities, as the economic slowdown had not yet occurred - and wouldn't for several months.

They were right.  Bernanke did it, oil shot the moon and Goldman (and a few others) made a whole bunch of money.

Who paid? 

You did, by paying $4/gallon for gasoline.

Now let's back up a bit.  2003, to be exact.  What happened?  Greenspan (and Bernanke) played the same sort of game and house prices went ballistic.  A handful of people made fortunes securitizing various mortgage and other "assets" into complex (and opaque!) securities, foisting them off on the world.

Who paid?

You did, by overpaying by 20%, 50%, 100% or more for a house.

Ok, so the housing bubble collapsed, then the commodity bubble collapsed.

Now we've got people who for the last month who are once again front-running Bernanke's playbook, which he was convenient enough to publish in advance as his doctoral thesis.  They are buying the long end of the Treasury curve not because they think that a 2.35% yield for ten years is a reasonable rate of return over inflation, but rather because they expect The Fed and Government to drive prices higher than when they bought the securities.

That is, they're after capital gains, not yield or "coupon", and are specifically gaming the government and Fed.

Who's going to get the bill this time?

You are!

How?  Simple.  Treasury seems to think they can issue essentially limitless debt to bail out banks and others, having committed nearly $7 trillion thus far.  Most of that has been issued through various short-term paper which has a near-zero (or actually zero!) interest rate - that is, up until now that debt issue has been essentially free!

What happens when this bubble bursts?

You think it won't?  Like hell it won't.  And when it does - that is, when Mr. Market calls the bet and forces Bernanke to actually make good by starting to unload all these "accumulated" Treasuries into his gaping maw, we will see "shock and awe" of another sort.

See, if the selling starts rates go up.  To stop that Ben has to take up the supply.  This causes him to print more money (expand his balance sheet) which means that the full faith and credit he relies on is further damaged.  That in turn causes more people to get the idea that they better sell now which in turn causes him to buy more which.....

Remember the waterfall in September and October in stocks? 

The same thing can happen in the Treasury market, and if it does it will force a political decision to be taken - risk the destruction of the dollar and our government or remove - by immediate statutory change (and force if that is resisted) The Fed's authority.

The argument keeps being made that "we had to do this" to save the system.  But what's not being talked about is what the real problem was, and who we're trying to save.

The political class keeps trying to tell us that "we have to do this for mainstreet" and "we have to help homeowners."

Oh really?

Let's look at a few facts, shall we?

First, total mortgage debt outstanding.  Its about $14 trillion dollars.

With the $7 trillion dollars we have committed we could have literally given every homeowner with a mortgage a fifty percent reduction in the principal outstanding.

This would have instantaneously stopped all of the foreclosures by putting all (essentially) homes into positive equity - overnight!

So why wasn't this done?

Because the goal was never saving homeowners or Main Street.

In point of fact the problem that the government is "trying to solve" is instead the unregulated bets that were made in the OTC CDS space which were backed by exactly nothing; there was no capital behind any of these bets! 

There is no fix for this problem; your leverage is effectively infinite if you have no capital behind your positions.  You are limited only by your testosterone level and there's been far too much of that on Wall Street over the last decade.

This was not an accident; in fact Henry Paulson himself lobbied for the removal of the previous leverage limits as I have noted when he was Chairman of Goldman Sachs.  Between that and the complete refusal to regulate anything or anyone by the SEC, OTS, OCC, The Fed or anyone else we have built what amounts to a pyramid scheme based on nothing other than debt.

What Bernanke and Paulson are in fact trying to do - and what they have been trying to do since this crisis began - is paper over the bad bets that companies like Citibank, Lehman, Bear Stearns and AIG made with zero (or nearly so) capital behind them.

That is why we have committed $7 trillion dollars, it is why Paulson keeps changing how the "TARP" is going to work and what it is going to do, it is why AIG has gotten bolus of money after bolus as its bets have deteriorated further and in fact it is why The Fed took the arguably-illegal step of buying the assets against which AIG wrote the bets (so it could null them out; you own both sides of a bet there is no bet at all - but the loss on the underlying is now yours!)

The problem with this strategy is that it hasn't changed a damn thing, because with the exception of Lehman (which was allowed to blow up) these contracts were never extinguished; a loss is a loss and when you own both sides you're guaranteed to be the sucker who eats the grenade.  All we have done is change where the leverage lies; we have taken the 30 or 50:1 leverage from the investment and commercial banks and moved it onto the balance sheet of The Federal Reserve!

This explains why The Fed is "resisting" Bloomberg's FOIA and has forced Bloomberg to file a lawsuit; laying bare the "assets" being held would allow independent evaluation of their value.  This is extraordinarily dangerous to The Fed because if "we the people" (or worse, foreigners who have loaned us those trillions of dollars) were to get a look inside these "assets" and found that they were in fact so-called "AAA" mortgage bundles that have forty percent default rates embedded in them (as was found in one particular WaMu securitization I and Mish Shedlock were writing about earlier in the year) fair-minded people might conclude that The Federal Reserve is in fact broke and lying about their own solvency!

What other possible explanation is there folks? 

Why keep something secret unless disclosing it would be embarrassing - or worse?

The Fed is not an independent, private entity.  They are literally charged with maintaining the currency that represents the future output of every American.  That is, their "stock in trade" is actually your willingness to get up, go to work, earn money and thus pay the taxes that underpin our currency and monetary system.

No taxes, no Treasury, no Government and no dollar.

Now tell me again why you're willing to get up and go to work when the organization that is effectively taxing you through these policies won't tell you how much you're going to be paying and the truth about why?

Here's yet another problem on the "unintended consequences" side, beyond the fact that the market can (and will) call Bernanke's bluff to buy "everything and anything" - its that there is no longer any reason whatsoever for you, or anyone else, to keep money in a bank account or Treasuries when the rate of return is in fact negative.

That's right - as of today there are money market accounts that have negative yields, and yet those funds are critical to the commercial paper markets.

What's Ben going to do about that little problem? 

He can't force people to keep their money in an "investment" that has a negative return!  And yet that is precisely what Bernanke did today - he guaranteed that virtually every single money market account across America will be decimated with withdrawal requests in the coming days and weeks.

And why not?  Why would you be so stupid as to keep your money in an account that is guaranteed to lose not just value but actual principal?

We all "tolerate" inflation's cost on our funds - mostly because the vast majority of Americans don't understand it. 

But everyone understands seeing their brokerage statement with a so-called "money market" that is actually going down in value every month!

That's going to last all of about one day beyond when the first statements go out that contain these losses, and will cause an instantaneous run on money market accounts across the United States.  Those firms that decide to "eat" management fees to avoid this still will find themselves with a zero return which leads one to start wondering why they're giving someone use of their money for nothing and how long those firms can operate cash-flow negative before they blow up.

And that leads us to the next question - how many more Madoff's are out there?  The "bezzle", as it is called, is the underlying embezzlement that is always present in an economy. 

Bluntly, someone is always stealing - its part of human nature.

In good times this theft is just thought of as "shrinkage" and people tend to ignore it, because while it does count the total amount of money lost is small compared to the total profits.  It can be hidden and often is - nobody is the wiser (other than the thief, of course, who is doing quite well.)

But in bad times these losses compound upon economic losses, and suddenly "the bezzle" becomes evident to everyone.  The thieves try to maintain the patina of normalcy but to do so they must steal a greater and greater percentage of the principal that remains until finally the books are laid bare and there is literally nothing left.

That's what happened with Madoff and yet the SEC and other regulators were told as far back as 1999 that it was going on. 

They ignored it because, well, times were good and exposing this scam would have been "embarassing."

Is your broker a Madoff? 

How do you know?  Is your 401k safe?  Your IRA Trustee?  Your online brokerage account?  Is there any reason to believe it is, and any way to know it is, when a $50 billion apparent swindle goes unchecked and unstopped for ten years despite multiple written warnings sent to regulators?

Confidence?  What's that?  How can I reasonably know that any investment house - no matter who they are - is clean?

I can't, and that's a problem that can't be accounted for with classical "bankers theories" or "a doctoral thesis."  Confidence, once destroyed, is rarely ever fully recovered.

Ben thinks he has this economy and market problem all figured out. 

Unfortunately his thesis failed to account for all the unintended consequences thus far, and will continue to do so, because Ben suffers from the same sort of bloated-head syndrome that is endemic among academics - they believe they can say something and make it so as a consequence of their "degree."

The real world laughs at such hubris and severely punishes the fools who persist in their beliefs despite being proved wrong - especially when it happens more than once.

We are now in the end game; Treasuries are the last bubble, and when it bursts, we will find ourselves in a Depression that will make the 1930s look like a Cakewalk.

Bernanke has gone "all in", and he holds 2-7 offsuit.

He needs 7-7-2 on the board or he's dead.

You run the odds, then figure out what you need to do.

I am no longer looking at a 1930s scenario as my base case; that has shifted to the panic of 1873, which was far worse than the 1930s and included widespread civil unrest.  Go do some reading - and make sure you're sitting down.  The parallels in the foundation of how that panic occurred - industrial shifts (US >> China) and insanely-loose mortgage credit (European in particular) are stunning - and troubling.

If Bernanke won't cut this crap out Congress needs to do so, and do it now.  A replay of the 1873 Depression in today's society will be catastrophic, with unemployment reaching 30% or more and leaving essentially everyone - corporate or otherwise - carrying any form of debt wiped out.  Deficit spending will become instantly impossible; go figure out what that does to the Federal Budget.

We are running out of time to stop that outcome and if effective action is not taken before the Treasury Bubble pops it will, quite simply, be too late.  That Genie is not the friendly sort, and once he pops out there is no stuffing him back into the bottle.

There will be more on this in the Year In Review And Look Ahead Ticker, due out in a couple of weeks. 

Here's hoping the bluff doesn't get called before then.