The Bailout Bailout

After all those shenanigans around the Bailout Rescue Plan, the market has spoken: down 20%+, huge spread between LIBOR and the 90 day T-bill, frozen interbank lending, frozen commercial paper market.  Government at its best!  Lots of noise, no solution.  Why?  The bailout is too slow acting: it requires the Government to bid and buy toxic debt at a discount, and the banks are reluctant to sell.  Although this bailout hasn't really gotten started, we had a similar bailout over the summer - the now forgotten $300B homeowner rescue plan, which had a similar buy-out-at-a-discount focus.  Well, the mortgage holders aren't selling at a loss.  So that plan has barely gotten off the ground.  Time for Plan B: recapitalize the banks.

The banks' problem is that mark-to-market of their bad assets, or worse actually selling them to the government at a loss, puts their balance sheet at risk of being technically insolvent, and puts the whole bank at risk of bank runs and regulatory takedowns.  The solution is to provide more capital.  After all, in our reserve banking system, each $1 on the balance sheet can support $9 of loans.  (Or more, since in one of the egregious and little noticed actions of the Fed under Greenspan, he gave room for money center banks to go beyond the 10:1 reserve requirements by allowing them to sweep accounts and offer money market funds.) 

The likely way this will emerge is for the Treasury to sell more bonds to the Fed, who can then use them to provide capital to banks.  In a fiat money system, why not issue more debt!  But this may not solve the problem, just begin to call into question whether the US Government can really afford to shore up the whole global banking system. 

An alternative is for the Fed to issue gold-back bonds, and provide them to banks who raise new capital, perhaps on a 2:1 or 3:1 basis (for every $3 from, say, Warren Buffet, the bank can pull in $1 of gold-backed securities).  We have a lot of gold sitting in the NY Fed and in Fort Knox.  Why not use it, and keep the taxpayers off the hook?

I suppose a lot of mainstream economists would be loathe to go back to gold, even in this narrow way.  But then again, a lot of them were Keynesians until the '70s showed the failure of Keynesian Economics.  And a lot became Monetarists; but I daresay that this fiasco has disproven the core idea of Milton Friedman that floating exchange rates can act as good as gold.  Monetarists will soon be as scarce as Supply Siders. 

Fiat money has the obvious flaw that governments induce their central banks to cheat via inflation, and the currency cheapens.  The Dollar is now worth about what 2c bought in 1913. 

In a banking crisis as now, it has an even worse flaw that both sides of the balance sheet are based on confidence, not reality.  The Fed has already cheapened its reserve by swapping Treasuries for Toxic Debt, and if it continues to try to offer layers of debt to shore up banks balance sheets, at some point the monetary system will cry out "The Fed has no clothes"!"  The Fed's reserves can be liquidated down to - nothing.  In contrast, its new gold=backed bonds would be liquidated down to - gold.  In the end the banks can take the gold and save themselves from ruin. 

Comments

[Bollinger]

When looking at FED data from commercial banks (given in the table below) one can see that the banks still increase debt rather much. Just for the last week they increase borrowing for Real estate with 4%, and that is only in one week.

If banks actually had problems with weak reserves one could expect them to keep debt at current level or even reduce debt. Instead it seems as if they go on as before and all the money from FED is just used to increase/defend market share. I.e., this is just a farse.

Maybe someone with better insight can explain this.

(Hopefully the table below will readable)

The Federal Reserve's H.8 release provides an estimated weekly aggregate balance sheet for all commercial banks in the United States (in billions of dollars, seasonally adjusted)
..........................................................................YEAR AGO
.................................10/1/2008..Chg from 9/24/2008..Chg..% Chg
Assets
Loans/leases in bank credit.....$7,258.3..$209.3....$663.0....10.1
Commercial and industrial loans 1,576.9.....21.9......194.1....14.0
Loans to individuals.................861.6.......9.4.......79.9....10.2
Real estate loans..................3,799.8....167.4......310.4....8.9
Home equity loans...................574.3.....39.1......102.3...21.7
U.S. Government securities......1,175.9.....12.3.......18.7.....1.6
Other securities including municipal issues
......................................1,430.3.....66.9......200.5....16.3

[Bull]

Why the flight to US dollars? It's counterintuitive. Help me understand!!!

[Hank Wernicki]

FREE FRACTAL WEEK : This Week Only !

VISIT http://www.elliottfractals.com in order to register and claim the password

Enjoy

Hank Wernicki

[yelnick]

Bollinger, in this climate the sound banks should be supported and the bad ones liquidated. Overall numbers could be up even as the divergence of good and bad widens. The high spreads between LIBOR and Fed Funds or 90-day t-bills shows severe problems in bank-to-bank lending. The banks don't trust each other! The faster we triage good vs bad, the faster financial markets recover.

[yelnick]

Bull, flight to quality. US still has massive credit reserves to use up.

[deacon]

these sunday nite gap ups have been erased by the the time europe gets done with them lately, a better tell will be if the libor and ted spread finally do start dropping and if key financial firms like MS stop diving...friday's new lows of move on enormous volume demand a retest, hopefully done this month, so markets could resume normal patterns after the election...commodities still look like toast, as 1000's of hedge funds expected to close their doors soon and worldwide banks will not give out letters of credit that are necessary to buy product and get it shipped...full moon late day tuesday

[TObject]

Zoran Gayer's projection was below 2002 lows,
What do you guys think?
http://www.safehaven.com/pdf/022606gayer.pdf

[TObject]

>Why the flight to US dollars? It's counterintuitive. Help me understand!!!

Bull, it's easy - when baby boomers and hedge funds liquidate positions in equities they actually SELL STOCKS AND BUY dollars. That created demand for USD -> USD rises

Cash is KING, for now.

[Vikram]

The priority is restoration of a normal LIBOR rate all the rest is secondary.

The situation can be described at its most basic …

Imagine your local swimming pool club, has about a hundred members and twenty five turn out to be thieves who steal from the changing room. Now nobody feels confident to go for a swim, as there is a risk of ones clothes getting pinched. The swimming pool is in danger of shutting down.

Now the thieves can represent the bad banks and the honest members the good banks.

Along comes the club secretary (Paulson a former bandit, but now on the club committee) and offers the thieves money – this he says should neutralize the thieves; they would have no need to steal, so everybody should feel confident.

But there is only one flaw in the plan; nobody knows who the thieves are. To claim the money a thief would have to own up to how much he has stolen. Since nobody knows who the thieves are, and most of the thieves reluctant to own up, the mistrust continues – Nobody goes for a swim – The current Paulson plan fails. (LIBOR is up the creek)

Nouriel Roubini Solution

“In my opinion the police should have been called in and got everyone interrogated and the thieves (bad banks) put out of business first and expelled from the club.
This would make the members much more confident, trust in each other would develop. The club should also make money available in the form of easy repayment loans to those who clothes were stolen in order for them to recapitalize, and start swimming again.
(Normal LIBOR rate is restored)

The George Soros Solution

I have been making a lot of money often with swimming pool thieves. I have written a book. The club should have put in a CCTV camera in the changing room because we cannot trust capitalism completely. Once a camera is there members will come back. They have over-reacted – they always do these members overreact, on way or the other. I have an excel spreadsheet that calculates this, it has helped me to make a lot of money.

Warren Buffet Solution

“In this sort of situation you can always buy goggles, nose plugs, and swimming trunks very cheaply – One of the thieves Goldman Sachs had to raise money, when the game was up and I bought a pair of swimming trunks off him, unfortunately they don’t fit …too small for me and too large for Charlie Munger….This is one of the rare investing mistakes I have made. But knowing my luck I may be able to flog them for a profit years down the line…after washing to rid of stains…. Goldman is an excellent chap and very hard working and so is his wife; totally dedicated, that is why I bought the trunks …I will mention them in my nice report, which my nice investors like to read at our nice annual meetings in Omaha”.

Jimmy Rogers Solutions

“Why the fucks you are calling me up at this time of night! I am in China, everything is in China, My daughter has a Chinese nanny and speaks Chinese. Don’t you know this is Capitalism? Sure the thieves at the club should be arrested; thieves have been arrested for hundred of years and people still consume commodities. Why do you get that chap Barnanke on Bloomberg 5000 times when he has been wrong 5000 times? Selling why should I sell anything. I am buying sugar yesterday I bought Soy Sauce don’t you know eight billion Chinese will need soy sauce in 2099”.

Nassim Taleb Solution

“This is a black swan event – When people went to Australia they discovered black swans. Consequential events in history come from the unexpected; the unstructured randomness found in life which banks failed to predict, just as 9/11 was the …….” shut up! Nassim you are such a bore!!

Pundit Ajit Vasishth Solution

Amongst the darkness of Saturn and turmoil will come the one eyed man with a plan….

This has been interpreted as referring to Gordon Brown who is one eyed. His solution will be announced in a few hours time…lets see what happens first in the European markets…and then in the US markets…

[salarti]

Ha! ha!
Fine commentary and great humor - I have bookmarked this blog. Who is Pundit Ajit Vasishth? I cannot find him on the internet.

[Sandra]

Hi
I have been getting a lot of spam from Prechter's EWI, I have looked for an unsubscribe button and cannot find one.
I remember there is a recent law which says mass mailings must come with a way of unsubcribing. Does anyone know about this law.
How does one unsubscribe has anyone else had a similiar experience.
I do not wish to over react but its essential i keep my email free of spam as i download onto my mobile and this is expensive - I would not mind if the Precter's mails give information, but all they do is try and flog a subscribtion repeatedly. I do not wish to pay him for any advice, because he does not deserve it -

[SwissGuru]

Re Hank Wernicki and his fractals

Here his post from September 30 2008 at 2.02pm

Quote
MAJOR FRACTAL BUY SIGNAL HAS BEEN CONFIRMED

The NDX weekly charts for the past two years have displayed a pair of descending fractals.

Both fractals are equal in terms of time, ratio and dimension.

We can expect higher prices into Jan 2009

Again Gold has topped and equities have bottomed

Hank

I discussed this in my recent interview with Mike.

We got the confirmation for an Intermediate UP trend.
unquote

UUUUUUPS

[cribrange]

Vikram... brilliant.

[Hank Wernicki]

It's the 1937 Low ..

200 points at least on the short term ... UP

Let's see what happpens today

Hank

[Donna Kline]

The comments below are from Warren Mosler at www.moslereconomics.com. They were posted October 8th. Mosler says current plans drafted over the weekend may have bought the ECB some time...however it is still contingent on a general recovery of output. Helps explain the dollar rally. FYI

"Europe is even worse off than I thought.
And it looks to me like the Fed's loan (via swap lines) to the ECB is noncollectable:


1. Seems Eurozone got caught short $ much like AIG got caught short credit.
Now the squeeze is on as the euro falls vs the $ rises.
It's an old fashioned external currency debt problem.
2. The ECB has borrowed perhaps over $400 billion from the Fed via swap lines, secured by euros, to lend to it's banks.
Functionally, this is unsecured borrowing.
And the amount approved by the Fed grows with each FOMC meeting.
To pay it back the ECB has to sell euro and buy $400b, which might be problematic, at best.
3. National budget deficits are now rising rapidly due to falling revenues and rising transfer payments.
They will soon have their hands full funding themselves, and will be incapable of funding the needs of the banking system.
4. Should a run on the banks force the euro payments system to close, the question is how it re opens
5. Reopening the ECB in euros will mean the national governments will have to repay the Fed $400 billion
6. If the national governments abandon the ECB and euro, the ECB's debt to the Fed debt is noncollectable.
The Fed's debt is only with the ECB, and not the national governments.
7. This gives the national governments a powerful incentive, and perhaps no other choice, but to abandon the euro should the payment
system fail.
8. It will also likely mean the national govts. will technically default on their euro debt, as they convert the debt to a new
currency (or currencies).

Their only hope is a large enough US fiscal package that restores demand for world output.

Like my proposed payroll tax holiday that immediately adds maybe 5% to US GDP.

But the odds of that are not promising.

And the US economy continues to weaken rapidly.

(I own some german credit default ins and which I had bought a lot more.)"

[Johnbon]

This guy is good: http://traderpro.wordpress.com/

[Hank Wernicki]

Whew, what a day !

Great call on the 10/10 Low and subsequent rally..... Ian

Hank

[Upstart]

Near perfect .382 re's of the decline from May in the DOW, and the decline from August in the S&P. Now what guys?

[george]

yelnick,
after a day like today what did the
EWI short term update have to say?
neely say anything?
george

[Upstart]

Any way this could be the a-wave of a triangle, or does this much strength, as EN implies, rule that out?

[Ham Actor]

So far it looks like a three up, implying only a correction to the downtrend. Could be just A of a 4th.

I don't buy the 1937 argument. We don't yet have a five wave sequence completed.

I'm still keeping an eye out for the Bradley low in December

[Upstart]

To me, putting EW aside for a moment, and looking at the entire structure from the top, there is no bounce near the bottom to balance what happened above. I know that in a crash the corrections at the bottom usually appear relatively small, but as it stands, we have pretty much intraday bounces down there offsetting multi-week and multi-month rallies above. Anybody else have thoughts on that?

[TObject]

george, neely is stupidly try to short this rally

Early this morning we went ¼ Short
near 942 Dec. and then ¼ Short when
960 Dec. was reached. Total capital
risk should not exceed 2% with a 1010
Dec. stop. If your risk is much more
than that, reduce your position by half
or more. So far, cash has rallied almost
exactly as forecast by the red-dashed
line. A sell-off is expected in 1-2 days.
STOP:
PROFIT Target:
DAILY Trades (for Futures markets)
Like Hourly traders, we also went Short
at 942 and 960 Dec. No matter whether
the bullish “green” scenario, or the
super bearish “red” scenario unfolds,
temporary resistance should be near
the declining, black channel. Afterward,
both scenarios require a move back
toward last week’s low. After that I think
the path forward will be clear.
STOP:
PROFIT Target:
WEEKLY Trades (Futures / Indices)
In total, we are ½ Short from an
average price of 951 Dec. Unless the
S&P breaks last week’s low, I have no
plans to add to our position. But, if
836.75 Dec. is touched this week,
increase to ¾’s Short and lower the
stop on all Shorts to 971 Dec. If Dec.

[TObject]

Neely is still struggling with Bear Market! Dude, I want my money back!

"...Consequently, the only logical conclusion is THE BEAR MARKET began much later than originally thought - not January 2, but October 3, 2008. That certainly explains the S&P's recent, incredible downside speed (the start of a major new trend is always much larger an faster than recent action). Unfortunately, this is VERY bad news for the United States, its citizens and economy. Based on the latest price evidence (see attached chart), the S&P is just days from one of its largest, fastest, scariest market declines in history!"

[elskid]

Hey TObject

Regarding this post...

Zoran Gayer's projection was below 2002 lows,
What do you guys think?
http://www.safehaven.com/pdf/022606gayer.pdf

what is the latest date? for the most recent charts?