Give Credit to the Fed

Amidst all the Fed bashing and Bernanke trashing, we should give the Fed a lot of credit for doing what Congress and the President fumbled badly: bailing out the banks. TARP was urged as the only way to stop a meltdown, but by the time it got approved, the crisis had passed, and it was used for other purposes. 

Instead, the Fed provided a huge dollop of liquidity, to prevent runs on the banks, and then began buying up their toxic assets using swaps via their Maiden Lane facility. (For those not of NYC, Maiden Lane is a cute little street down by Wall Street.) The Fed abated the immediate crisis. 

TARP was badly designed, and inexplicably so, unless you join Martin Armstrong in the bank-robbery conspiracy theory that TARP was one of several mechanisms used to bail out Goldman Sachs. 

TARP looks a lot like a failed Hoover effort called the National Credit Corporation rather than the more successful Reconstruction Finance Corporation that was replicated in the 1980s as the Resolution Trust Corporation to take care of the S&L crisis. Give Hoover credit for quickly abandoning the NCC and pushing for the FRC. Later FDR improved the FRC to allow it to buy bank stock, and eventually the FRC merged into the new FDIC. 

The lesson learned was to use a resolution process as an alternative to bankruptcy or a slow zombie-like state for troubled banks. The resolution process is essentially a rapid and forced recapitalization of a failed bank, done swiftly enough to avoid defaults and the domino effect of defaults. As the 2008 crisis peaked, Kenneth Rogoff of Harvard had just finished his study of recent financial crises, and had lauded Sweden for using a rapid resolution process. Having learned this during the Great Depression, and applied it successfully during the S&L crisis, and just relearned, how did we overlook it this time around? 

Think about this: we could have used the rapid resolution process to avoid the Lehman bankruptcy, and possibly avoid a 500 pt meltdown in the S&P: between that fateful Friday night and the disatrous Monday morning, Lehman could have been completely recapitalized by eradicating equity, forcing unsecured creditors to become new equity, decreasing the value of the secured creditors to the impaired value of their security, and issuing new options to new management. A lot of work, sure, but by Monday morning, Lehman stays in business, and the complex counter-party risk would have stayed in place.  

Comments

[Anon]

Daneric ripping off the chart that I sent him over a year ago. I guess my channels weren't so "wrong" after all. What a thieving little pissant. If you follow him, you should know what you are getting.

His chart: http://3.bp.blogspot.com/_TwUS3GyHKsQ/S7VH1QeuaZI/AAAAAAAAEpo/kL2-TVUo8jI/s1600/2010-04-01-PROPHET.png

My chart (note the date): http://tinyurl.com/yz6vad8

His reply email and my intro:

From: [email protected]
Subject: Re: Couple Charts
Date: Thu, 2 Apr 2009 20:26:52 -0400

I would say they are creative but likely wrong, They violate many basic tenets of EW theory such as channeling. I follow generally Robert Prechter's view of the long term wave count That I have posted from time to time.

I am open to other views, but as a member of EWI, their evidence is overwhelming and they present much more stuff than just price charts of the indexes to support their counts.

----- Original Message -----

To: [email protected]
Sent: Thursday, April 02, 2009 2:21 PM
Subject: Couple Charts

Daneric, really like your work and I would appreciate your comments on these charts.

The key one is the Dow of course. The others just add background how this may be the right count. This, at this point in time, would be my alternate count but I'm starting to favor it as I've had a nagging feeling that the principle of alternation may apply i.e. if wave 2 was indeed the Great Depression, then we are preparing for the Great Inflation that will be the 5th wave book end to wave 2. (Bernanke is going to make sure there is no deflation and perhaps he's going to be right beyond his wildest dreams).

Forgive the color of the USO chart as IB won't allow a change of the stock colors. Also, note that the 1929 high was actually a B wave throw over (even Elliott himself believed that) so my wave I is actually out of place as labelled.

All of this may also explain why we've had such a powerful move off the 666 low (perhaps a very fitting low if your religious). We may in fact be in 3 of 1 of V already where we only achieved a 23.6% retracement of wave 1 of 1 indicating the power of the next move.

This would all be consistent with the total devaluation of the US dollar and that would be consistent with how Rome was in its last days - devaluing its currency to sustain the crumbling regime.

All in all, pretty far fetched but then again so was 666 two years ago. Any comments you may have, in terms of what you can see in these charts and your own, would be appreciated.

Regards,

[Glenn Loser Neely]

DG's boyfriend (Neely) long??

You have to be kiddig... time to short this market!!
Long and bullish at the top!!
What a loser!!

We just need DG to defend his gay lover to have a double sell signal in place!!

I am shorting this market tomorrow morning!!

GLN

[Dsquare]

"unless you join Martin Armstrong in the bank-robbery conspiracy theory that TARP was one of several mechanisms used to bail out Goldman Sachs"

It's Goldman Sucks. And yes I do. Max Keiser says it best: Goldman Sacks are scum.
http://www.youtube.com/watch?v=VSwWy4E6I04

[Dsquare]

Jim Rogers disagrees: says Geitner Caused Crisis, Must Let Banks Fail
http://www.youtube.com/watch?v=shUXP2VU6y8&feature=related

[MHD]

That's the answer for everything....just get a fire hose that shoots out money. A country gone mad!!!!!!

[Mamma Boom Boom]

>we should give the Fed a lot of credit for doing what Congress and the President fumbled badly: bailing out the banks.<

GAG! Cough! Damn, not a good way to start the day. Now I'm nauseated. Yuck.....

[?]

"Think about this: we could have used the rapid resolution process to avoid the Lehman bankruptcy, and possibly avoid a 500 pt meltdown in the S&P: between that fateful Friday night and the disatrous Monday morning, Lehman could have been completely recapitalized by eradicating equity, forcing unsecured creditors to become new equity, decreasing the value of the secured creditors to the impaired value of their security, and issuing new options to new management. A lot of work, sure, but by Monday morning, Lehman stays in business, and the complex counter-party risk would have stayed in place."

Yelnick,

The only problem I see with this is that so much debt was hidden by Lehman with the 105s. Not sure if it would have been that easy to do.

[Michael]

"The only problem I see with this is that so much debt was hidden by Lehman with the 105s. Not sure if it would have been that easy to do."

Exactly.

Bernanke allowed Lehman to fail because he believed Lehman to be insolvent as of September 8th, and giving Lehman a loan would have then been "lending into a run". Lehman had no collateral, and the "Repo 105" crap made this situation even more dire.

I believe that Paulson and Bernanke's claims that they had no legal authority to inject capital into Lehman (that authority came later via TARP) was bogus. They knew that Lehman was incredibly toxic, and I believe that they allowed it to fail hoping that the counter-party risk wouldn't be that devastating a factor. Perhaps they were also aware of the "Repo 105" stuff, and didn't want to be found, after-the-fact to have bailed-out a fraudulent company.

http://www.dailyfinance.com/story/why-the-u-s-balked-at-bailout-out-lehman/19399313/

[cloudslicer]

Has anybody looked at the wave count for oil?

This is my try at it:

Using $WTIC I see an impulse up from 35.13 in December 2008 to 73.90 June of 2009. Then an small impulse down to 58.72 July, then a long and very sloppy choppy move up move which appears to be a collection of 3 wave moves up and down which finally terminated in January 2010 and then an impulse down into 02/10. This whole mess from 06/09-02/10 looks like a large flat corrective wave.

I can count it as a B or 2. Now I am in a C or 3 up from the 02/10 lows. If its a C wave and A=C then around 108 appears to be be a good target (104 and change is a 61.8% retrace).

This lines up well with what I am seeing on bonds which appear to be discounting rising inflation as well as credit risk.

At a 100 dollars a barrel your looking at around $2.90 gallon on gasoline by the end of this summer.

My conjecture is that this move in gasoline/oil combined with the interest rate spike should terminate this primary off the 03/09 lows.

[Michael]

"At a 100 dollars a barrel your looking at around $2.90 gallon on gasoline by the end of this summer."

Depends on where you live.
In California, they've been at $3.05 for regular for the last 6 months.

[yelnick]

?, the recap of Lehman would have given it a balance sheet to handle the mess, meaning borrow again to stave off a second default.