Hair of the Dog: The only thing we have to fear is easy credit

On March 4, 1933, President-elect Franklin Roosevelt was greeted with grey, cold, overcast skies. The feeling of despair and hopelessness in Washington was so palpable in the air that First Lady-to be Eleanore Roosevelt later said she felt like crying during the Inauguration Parade down Pennsylvania Avenue.
No one realized it at the time, but the Great Depression was at its nadir. That nadir was marked by what was to be the greatest inauguration speech ever given. It was a message of hope, leadership, and fairness, as well as a denunciation of the "money changers" and the need for regulating the financial markets.

But mostly it was a call to do the exact opposite of what Congress chose to do this week.

Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.
- FDR, 1933

You would think that people might learn from the mistakes of past credit abuse. You would be wrong. We are doomed to repeat the failures of history again and again.

Low interest rates, easy money and malleable accounting rules are what plunged Wall Street into crisis. Yet it is low interest rates, easy money and malleable accounting rules that top the list of federal fixes. The unifying theme of the new bailout bill, all 451 pages of it, is the hair of the dog that bit you.
...
inflation and debasement are the very policies being put in place. The Federal Reserve, not waiting for Congress, embarked last month on a radical program of money-printing. Reserve Bank credit -- the raw material of bank lending -- is growing at the year-over-year rate of 61 percent.

Credit growing at a 61% rate may sound pretty scary, but that's a y-o-y number. If you look at the year-to-date number its growing at a 77% rate, almost all of it in just the last month.

It took the Federal Reserve 95 years to build about $850 Billion in reserve assets. It took only a single month to add another $515 Billion.
Nothing like this has ever been done in America. Never before has the Federal Reserve, which was chartered in defending the integrity of our currency, decided to print money without limit.
The consequences are beginning to show up in the credit-default swap market, and it will soon show up in the price of goods.

Speaking of the CDS market, a Day of Reckoning of sorts is about to arrive.

The $54,000bn credit derivatives market faces its biggest test this month as billions of dollars worth of contracts on now-defaulted derivatives on Fannie Mae, Freddie Mac, Lehman Brothers and Washington Mutual are settled.
According to dealers, insurance companies and investors such as sovereign wealth funds, which are widely believed to have written large amounts of credit protection through credit default swaps on financial institutions, could have to pay out huge amounts.
...
The "auction season" starts tomorrow, when the International Swaps and Derivatives Association has scheduled an auction for Tembec, a Canadian forest products company. This is followed by Fannie Mae and Freddie Mac auctions on October 6. Then, Lehman is settled on October 10, and Washington Mutual is scheduled for October 23.


This enormous settlement of these CDS contracts could blow up in a big way. The derivatives market, of which credit defaults swaps are a big part of, was completely deregulated in a procedural move by Phil Graham in 2001 called the Commodity Futures Modernization Act. With no regulation, there was no one to say that parties that owned the swaps had to have the capital to cover the losses in the event of a default.
Many CDS holders just flat out don't have the capital to cover the losses in the event of a credit default. They hedge for this in their models by shorting the stocks that they own the swap on. At least that was the way it worked before the SEC ban on shorting stocks.

Comments

Bush's speech was the exact opposite of FDR's

as in, "Have Fear!"

I know of two unrelated people, perfectly sensible middle class save/investors, who listened to Bush's speech and decided they had better batten down the hatches and forego any large purchases. I wonder how many other people decided the same thing?

That's how you get a consumer collapse.

Good move as usual, W.

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how else can you rob the taxpayer blind

now that the financial sector sucked out all of their coin ...beyond simply creating a massive fear panic, hile one yells fire in the Theater and then steals their money as the crowd runs for cover.

Positively incredible.

Even more incredible...the talking heads are now describing how you the consumer will soon benefit from the bail out.

I mentioned that on keyword search statistics....hundreds looking for how to get out of foreclosure...thinking this bill does that...

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Bush the Fearmonger

The Bush Administration has never preached anything other than fear. They are a one-trick pony.
That's why Obama sounds so different. The problem is that I don't think that Obama has a philosophy behind his speeches of hope.

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Bush's speech was the exact opposite of FDR's

My 12 year old Ranger truck has seen better days, and I had been pondering buying a new (er) vehicle, but with the economy as it is and my income depending on the fortunes of US mfg, I decided to forego any major purchases at this time, and elected to put a grand in my old vehicle to keep it going another year or two

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anyone with a 2nd grade education can figure this out

  1. People cannot make the payments because their jobs don't pay enough
  2. High paying jobs with benefits were outsourced. New jobs have no benefits and don't pay
  3. layoffs are considered a profit boosting routine method by corporations
  4. People used their home equity and credit cards to simply eat, pay bills

Nothing is going to change until housing prices come down to levels people with these lousy wages can afford and enabling predatory credit sales put the entire situation on steroids.

In case you missed this one, credit card charge offs to be greater than foreclosures.

They have sucked the middle class dry and coming up with a plan to suck more is a joke....they have simply bled out America.

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What about the M3 money supply measure?

As I'm sure you know there's a lot of lying that goes on in the creation of economic statistics. I mean just yesterday, I'm fairly certain, that the BLS "disappeared" over a million people from the labor force in order to drop the reported U-3 unemployment rate from what would have been a 6.7% unemployment rate, to a 6.0% rate.

In 2005, the Fed stopped producing the M3 money supply measure. For the crowd, the Fed Eurodollars, dollar denominated accounts outside of the US.

While the Fed ended the measure in 2005, outside groups have reconstructed the M3 with public data, and something odd happened this year, growth in M3 measure collapsed.

What's the relationship between this and the current crisis? We've got record trade deficits which means that we're bleeding dollars, yet growth in the M3 measure plummeted. Have the Chinese and Arabs been switching out euros for dollar deposits? Is this the origin of the liquidity crisis?

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The destruction of money

Good point.
All that bankruptcies and defaults means a lot of money is being destroyed. That's why the Fed and the Treasury are expanding the money supply in such a hyperinflationary way.

The most heated debate on many economic boards is the debate about whether deflation or inflation will win. I'm still a believer that inflation will win.

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M3 has increased dramatically in the last month

Per the updated graph you can see here.

M1 is also increasing dramatically and by now may be increasing faster than the CPI (usually a sign that a recession is beginning to abate).

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CDS from BeSpoke

CDS

I found this graph on Kedrosky, a VC, focus tech blog, showing bank failure is much less at the moment.

I can't find any other information and see any correlation to our lovely "bail out" to this Bespoke CDS index but seems to be.

How all of these metrics interact and what is really means, if someone else has more insight, please enlighten.

Check out his blog too, when I saw a reference of "rodents of unusual size" when describing CDS I thought this was pretty funny insightful...although I sincerely doubt someone focused in on VC/IPOs and tech world is too worried about workers, esp. Professionals. Very interesting site though!

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Well...I don't know about you but....

...I am just so, so, so glad we've got folks like 'Bankruptcy Bill' Joe Biden to reasure folks with his folksy tale of FDR going on the TV to reassure folks in those dark days.

I'm sure as hell reassured.

People I know are talking about the varied uses of rope.

If you know what I mean.

If we, as seems certain now, descend into a Depression I would hope that the citizenry, dumb though they be, would 'get it' to the point of cleaning house in the people's House.

For me at this point it's not so much the greed...

It's the utter stupidity of the Pelosi Democrats handing over the entire Treasury to Bush.

Man, he must be laughing his ass off.

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'When you see a rattlesnake poised to strike, you do not wait until he has struck to crush him.'

yup

Believing magically a FDR will just appear and save the day is a pipe dream. There are some in Congress truly fighting hard and of course lose all of the time as they did Friday..

I think those Senators and Representatives are the ones who should be talked about and somehow try to get them more power...

It's pretty clear Goldman Sachs and lobbyists are running the country.

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