Thursday, August 16, 2007

Not That This Was Unexpected, But...

...yer an idiot, Paulson:
TOKYO (Reuters) - U.S. Treasury Secretary Henry Paulson said the turmoil in global markets will "extract a penalty" on growth but the financial system and economy was strong enough to withstand it without provoking a U.S. recession.

"The economy and the markets are strong enough to absorb the losses," Paulson told the Wall Street Journal in an interview published on its Web site on Thursday.

Paulson also said the repricing of risk in markets should not surprise anyone and was inevitable, and that nothing should be done to guarantee market players against losses or restrain them from taking risks.
All this article really needs is a video of someone whistling past the graveyard. Or maybe this:So many reasons Paulson is an ass here, so little bandwidth.

First, he has a point: easy credit is no different than any other economic bubble and economic bubbles burst. Period. But here's the thing: this was a bubble the Fed could have AND SHOULD HAVE done something about years ago.

I find it hard to believe that Alan Greenspan (and now Ben Bernake) don't watch TV from time to time. Hell, you can't turn on the TV but for coming across and ad for or Countrywide Home Loans, advertising "No money down, no principal payment" loans at rates that make the prime interest rate look like a high-yield bond. Did it not occur to them, the way it occurred to me, that there might be something wrong in an economy where it's worthwhile for a predatory lender to run commercials hawking a dangerous financial product 24/7? So you bump up interest rates a bit, and you save a few people from making the biggest mistake of their lives.

You know, Alan, Ben, and now Hank, it's OK to do a little thinking about work while you're away from the office. Most of us have to do that, from time to time.

And now here's ol' Hank talking up the economy, you know, don't worry, everything's going to be fine, as the Fed pumps $50 billion dollars into the monetary system to shore up the credit markets.

OK, so a basic economic lesson here: when a government is forced to pump that kind of money into the system, where does it come from, in a nation running hundreds of billions in deficit spending each year?

Here's a hint: It ain't from a savings account.

There are two ways for the Fed to get their hands on that kind of dough that quickly: borrow it (meaning it will have to be paid back and then the question is, from whom was it borrowed?) or print it.

If it's just printed, then simple supply and demand will tell you what happens to the value of the dollar in your pocket: more supply lowers the "price" of that good, so by extension (and yea, I know, the analogy has holes in it, but it fits the argument more clearly than a real analysis), more money drives the value of your dollars down, meaning it will take more money to buy something.

In other words, inflation. Which the Fed tames by raising interest rates, thus stifling the demand for money.

If the money has been borrowed (ignoring for a moment from whom, tho I have my suspicions), then all this does is shift the risk off the original badder debts from the lenders (rapacious bankers and sub-prime mortgage companies) to, well, us.

In effect, the money the Fed has pumped into the credit markets is a guarantee that the government will stand behind the loans out there already (although not all of them, to be sure...I doubt we can get our mitts on something like $7 trillion to finance all the mortgages out there), meaning the ultimate responsibility for repaying this money isn't on the lenders, but on the guarantors, and since the Fed has authority but no responsibility, that privilege falls on our shoulders.

Where has this money come from?

Well, the make-up of the Fed is a bunch of money center banks, like say Citibank, Chase, Bank of America, who created and run the Federal Reserve System. No one knows for sure who precisely is on the Fed board, but these three are a safe bet.

These money center banks, which also sit on the central bank boards of nearly every other major nation in the world as well as the World Bank, would have the resources to finance, short term and at a rate of return commensurate with the critical nature of the emergency (in other words, usury) the hundreds of billions of dollars needed to stem the global economic collapse that is threatening the world.

As I said, for a price. They get us coming and going here, because who do you think funds the money to the mortgage markets to lend to people like you and me at attractive rates to pay off the credit cards (that they've issued) to try to get solvent by borrowing off our salaries in perpetuity? And now who's funding the bailout of those same sickening loans?

All this, so we could buy a new computer. Or car. Or second home.

So why is Paulson an idiot? He's bluffing, of course, and it's not a particularly good bluff this time. He sees (or he should) what should be evident to anyone after reading this far down: there's an enormous risk involved in the game the central bank is playing.

All it takes is one of the members to say "basta!" and the house of cards falls, forever. You've heard stories about The Great Depression, but you might (and I think you will) be living through something far worse in the very near future. And mind you, we were able to grow out of the Great Depression only by getting our asses into a world war, something we can't afford to do right now, because we've exhausted our financial and materiel supplies on this ill-starred and ill-fated invasion of Iraq, along with the more justifiable but still tragic war in Afghanistan.

Many of the 25%ers, the folks who still support George W Bush thru thick and thin, believe an apt comparison can be made to Harry Truman. It's clear from reading this, they're two Presidents too close.