Fed to markets: Let the bubble blow David Callaway – MarketWatch

Fed to markets: Let the bubble blow David Callaway – MarketWatch

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The US Financial Crisis: Confidence or the Lack of

There’s an old saying that goes, “If it ain’t broke, don’t fix it”. The irony of this statement, in today’s broken financial system,

Bernanke and Paulson testify before Congress

is the concept that what is broken here is the system, when in fact what is broken is confidence in that system.

According to Secretary of Treasury Henry Paulson and Federal Reserve Chief Ben Bernanke the banking system needs more liquidity in order to restart the banks ability to loan to each other. The belief is that they are not lending due to earlier commitments called Drawdowns, prearranged loan agreements to businesses.

The fact is that banks are not loaning to each other for two entirely different reasons. One, the possible write downs from their Subprime Mortgage Security positions, and two, the possibility that anyone of these banks could collapse at anytime. Hense the lack of confidence.

What really needs to be solved in this situation are the things that are truly broken. The biggest break I can see is the continuing collapse of homeowners. Something like 2 million Americans are at risk of loosing their homes this year, either through variable rate mortgages they were sold, or unemployment. This is the foundation of the bigger problem that has led the US to this position and crisis, and it is no longer exclusive to the US. Fannie Mae today announced 29 Billion Dollars in 3Q losses due to foreclosures or delinquencies.

Giving the banks more money to shore up the loses from their overwhelming risk taking won’t solve the problem, as Japan found out after 14 years of recession. What needs to happen is transparency. Banks need to write-OFF all these Subprime Securities and the SEC needs to force them to do it. There is no way they will volunteer to do it on their own for fear of stock holder sentiment being lost, but which is the bigger threat.

Th US Government also needs to do it’s part in a real way, instead of buying shares and Nationalizing companies, or buying up all the bad paper. This kind of give away of American Tax Payers money is reckless and ignorant. This direction is Paulson’s, who actually led the way to giant risk taking out of greed and now he wants to fill the empty coffers of the guilty. read more

The double edged sword of Bailouts sends the message that there is something gravely wrong. It may solve the immediate need for the banks, which by the way are hording this money, but creates it’s own monster. That being loss of confidence. In fact it may be motivating banks to do nothing to solve their own mistakes in order to get their cut. Greenspan may have been guilty of bad decisions, but he was never guilty of bad PR when it came to sending out news.

According to Adam Smith, the father of theoretical economics based on Free Enterprise, nothing in this economic system is really broken. Economics is similar to Natural Selection. If economic systems become outdated, something will rise out of the collapse to take it’s place. He called it supply and demand, that if were left alone it would naturally define itself. What is not in demand, in this instance, is the heavy risk taking that led to this crisis. You can see this in the Libor to Over Night Spread.

So, should we seek to stabilize it and prolong it’s lack of usefulness, by stimulating it like a heart patient who has flatlined, or let it collapse and allow Natural Selection to have it’s day. Personally I believe that America and the World for that matter have the resilient strength to arise from the challenges to be stronger, wiser and better than the past it was created out of.

Risky Business: Playing the Blame Game

It really seems like Congress is spending more time worrying about how to avoid any direct responsibility for the Subprime Mortgage Scandal as they work out the details of a Mortgage Bailout Bill, then taking the time to look at lawmakers shortcomings in what has always been a highly regulated industry.

When Senators, like McCain, sight the fault in the pitfalls of housing prices as the irresponsibilities of buyers, when it was the Mortgage industries themselves who were required to investigate the details of the contracts, for indiscretions in the facts like income and assets, it leaves us all feeling a little cheated.

Now Congress is going to put the ‘Keepers of Mortgages’ at risk in order to NOT use tax payers money to solve the problem, requiring Freddie Mac and Fannie Mae to flip the bill for the Bailout.

This will put a something like $7 Trillion safety net at risk for the tune of $280 billion worth of trouble, while the Fed freely loans the banks an unlimited amount of money just to keep them alive and loaning, regardless of their risky loaning practices.

This entire outcome could have been avoided had the Fed put their initial efforts into nipping the entire thing in the bud by shelling out the 200 Billion, they force fed the banks, directly to the families and individuals who got caught up in the Subprime loaning frenzy. It would have halted the collapse and allowed the banks to recover on their own and kept the lid on inflation by slowing down spending as the banks sought to recover liquidity.

Instead Bernanke denied any risk (from the fallout) to the economy until it hit the front pages of the Media, making the Fed look like a nervous investor holding penny stocks instead of the reigns of the economy.

The problem with delay in the Fed’s actions is that the limited tools available to them have put inflation at a roar and the Dollar in the drain, sending investors into Oil, Gold, and Food Commodities which are spiraling out of control and stoking inflation like a billow, while the Labor Department feeds us huge lies like the price of Gas actually fell in May by 0.2 percent after it was “adjusted for demand”. WTF…

Everything these geniuses are doing now are insane if you ask me, like they want to help create the biggest collapse ever just to make the history books. The only problem is that there wont be any paper left by the time its over if we stay the course on this, let alone a printer…

The Risks of Rescuing Borrowers
Limits Weighed for Commodities Investors

So Many Home Owners, So Little Time

Shiela C. Bair – chairman of the US Federal Deposit Insurance Corporation wrote an OpEd entitled “How the State can Stabilise Housing Market” in which she is suggesting to the White House a plan involving loaning $50 billion to home owners with unaffordable mortgages as a way to stop the decline in housing prices, which is pushing some home owners with prime mortgages to jump into foreclosure as a way to shed their negative equity holdings.

It seems that the real problems, with the housing price declines we’re seeing across the country, have little to do with just the few (1 million) Subprime investors that her plan will effect. Currently there are 4 million borrowers holding adjustable rate loans that have either already jumped to higher interests or will soon.

It would cost the Federal Housing Authority approximately $200 billion to pay-down 20% of their loans and add a partner to their profit taking if they were to sell their house before any FHA loan could be fully paid.

Former economic adviser to President Reagan and current Harvard professor Martin Feldstein, in his own Editorial has offered a similar plan that will make $300 billion available to the FHA to loan to home owners, but has more stringent rules then the plan offered by the FDIC. It extends the duration of the loan to 15 years instead of the 5, Shiela is suggesting, but in the end its just another loan with more complicated strings than a simple foreclosure.

The Fed has thus far loaned several hundred billions directly to the banks that have used it not to turn around and loosen up on the tight reins of liquidity we’re seeing, but rather they have continued their momentum of tightening.

It would have made more sense to have given the funds they made available to the home owners who have been caught in this trap instead of the lenders who created the problem in the first place through extremely poor lending practices. It may have even stopped the collapse in house prices if it had been done in the timing of the bank bail-outs.

The real losers in this fiasco are the families that have refinanced their homes in the last 5 years, when home values were high, and are now sitting on negative equity, and none of them qualify for any kind of relief.

Neither plan seems to be a shoe-in for Congress or the White House, which believes that any bailout should be done privately. The essential question of the day seems to be timing. If action on this matter waits then what some people are calling an adjustment may over shoot the bottom, either that or the momentum will be too much to stop at all. A lesson we should have learned from Japan in the 90’s.