Geithner just reaffirmed this, though not in so many words, in an interview with Charlie Rose.

Asked about the possibility of letting a major bank fail, he said, “I’ll say again, they play a critical role in our markets, in our financial system. We want to continue to make sure they play that role. Now, where they need temporary assistance through the government to get through that, we’re going to make sure it comes with appropriately tough conditions so that they emerge stronger and that we’re providing a level of conditions and accountability that’s appropriate in this context.”

Translation:  They can continue screwing up indefinitely, and we’ll still come to their rescue.

The “stress tests”?  That’s just a sham to make it look as if the banks are being held to some sort of standard.

Working from the same playbook, Fed chief Ben Bernanke said yesterday, “We have reiterated the U.S. government’s determination to ensure that systemically important financial institutions continue to be able to meet their commitments.”  And if it that means the Fed has to buy up Treasuries (and print money for that purpose), so be it.

Consider yourself warned.

Consider also that the Zombie Policy isn’t even achieving its stated aims.  Weren’t we promised that if the Fed and Treasury kept pumping money into these banks, the banks would lend more freely, and businesses could borrow more easily, and so businesses could create more jobs?

Well, not so much.  “Banks that have received billions of federal dollars to encourage them to make loans — JPMorgan Chase & Co., Goldman Sachs Group, Citigroup Inc. and Bank of America Corp. — are lending money to Pfizer and Merck” so they can buy out Big Pharma competitors, according to the Los Angeles Times.  The mergers could result in 35,000 jobs lost.

Source:  Zombie Policy Reaffirmed

Geithner just reaffirmed this, though not in so many words, in an interview with Charlie Rose.

Asked about the possibility of letting a major bank fail, he said, “I’ll say again, they play a critical role in our markets, in our financial system. We want to continue to make sure they play that role. Now, where they need temporary assistance through the government to get through that, we’re going to make sure it comes with appropriately tough conditions so that they emerge stronger and that we’re providing a level of conditions and accountability that’s appropriate in this context.”

Translation:  They can continue screwing up indefinitely, and we’ll still come to their rescue.

The “stress tests”?  That’s just a sham to make it look as if the banks are being held to some sort of standard.

Working from the same playbook, Fed chief Ben Bernanke said yesterday, “We have reiterated the U.S. government’s determination to ensure that systemically important financial institutions continue to be able to meet their commitments.”  And if it that means the Fed has to buy up Treasuries (and print money for that purpose), so be it.

Consider yourself warned.

Consider also that the Zombie Policy isn’t even achieving its stated aims.  Weren’t we promised that if the Fed and Treasury kept pumping money into these banks, the banks would lend more freely, and businesses could borrow more easily, and so businesses could create more jobs?

Well, not so much.  “Banks that have received billions of federal dollars to encourage them to make loans — JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group (NYSE:GS), Citigroup Inc. (NYSE:C) and Bank of America Corp. (NYSE:BAC) — are lending money to Pfizer (NYSE:PFE) and Merck (NYSE:MRK)” so they can buy out Big Pharma competitors, according to the Los Angeles Times.  The mergers could result in 35,000 jobs lost.

Heckuva job, Timmy.  Heckuva job, Benny.

Source: Zombie Policy Reaffirmed

But minefields abound.  For starters, the derivatives exposure of the biggest banks exploded during the last quarter of 2008.

“Citibank (NYSE:C), Bank of America (NYSE:BAC), HSBC Bank USA (NYSE:HBC), Wells Fargo Bank (NYSE:WFC) and J.P. Morgan Chase (NYSE:JPM) reported that their ‘current’ net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31,” according to McClatchy Newspapers. “Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.”

Oh, and those numbers don’t yet account for the derivatives risk that BofA took on by acquiring Merrill Lynch, because that deal closed January 1.

“Because of the trading in derivatives,” says McClatchy, “corporate bankruptcies could cause a chain reaction that deprives the banks of hundreds of billions of dollars in insurance they bought on risky debt or forces them to shell out huge sums to cover debt they guaranteed.”

In other words, the credit-default swap monster still looms large out there.  “Trading in credit-default contracts has sparked investor fears because they are bought and sold in a murky, private market that is largely out of the reach of federal regulators. No one, except those holding the instruments, knows who owes what to whom. Not even banks and insurers can accurately calculate their risks.”

Doesn’t exactly inspire confidence, does it?

Which brings us to the matter of credit-default swap king AIG.  We now learn that AIG scored its fourth bailout “by telling regulators the company’s collapse could cripple money-market funds, force European banks to raise capital, cause competing life insurers to fail and wipe out the taxpayers’ stake in the firm,” according to a memo dated February 26 and obtained by Bloomberg.

Knowing this, what are we to make of Ben Bernanke’s statement to Congress last week — after he no doubt read the memo — that, “If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG.  AIG exploited a huge gap in the regulatory system, there was no oversight of the financial- products division, this was a hedge fund basically that was attached to a large and stable insurance company.”

Of course, Bernanke himself had oversight of the banks that lent money to AIG’s financial products division.  But he was MIA.  And as long as he wants to draw the hedge fund comparison, it’s worth pointing out that hedge funds are likewise unregulated, but Bernanke has oversight of the banks that lent them money too.  And again he was MIA.

Doesn’t exactly inspire confidence, does it?

And on top of all that, Tim Geithner says it’ll be a few more weeks before we know more details about his bank “rescue” plan.  During which time there will endless leaks and trial balloons to see what might stick to the wall and what might not.

No matter.  The Dow’s up 122 points as I write, and we might well be at the start of a rally.  A bear-market rally, but a rally nonetheless.

More telling of the longer term picture is a forecast from UBS that sees $2500 gold “as some hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks,” according to the Financial Times.

Yup, that sounds more like it.

Source: Inspiring Confidence

You can actually do something about it.  And I don’t mean write your congressman or buy a bumper sticker.

You can stop paying your own mortgage, free of fear that you’ll be kicked out of your home, provided you play it right.

And that’s not me making the suggestion.  In fact, it was all over the place just last fall.

You say you missed it?  You find the suggestion morally offensive?  Just hang with me a bit.

In October Peter Schiff wrote an op-ed for the San Diego Union-Tribune titled, simply enough, “Stop Paying Your Mortgage.”

After supposedly bailing out the fat cats on Wall Street, no politician wants to be accused of evicting struggling families. Once you understand this, all of your anxiety should melt away. Why pay your mortgage if foreclosure is off the table, and if you know that lower payments, and possibly a reduced loan amount, would result? A tarnished a credit rating is a small price to pay for such a benefit…

If your mortgage does become the property of Uncle Sam, the growingly popular impulse to “just walk away” should be replaced by “just stay and stop paying.” No one will throw you out. After a few months, or years, of living payment free, you will get a call from a motivated government agent eager to adjust your loan into something affordable.

One could argue Schiff was being tongue-in-cheek.  But Karl Denninger, writing the same month, was dead serious, offering an explicit and audacious justification for stiffing your mortgage holder:  If the mortgage holder was benefiting from TARP money, you’re essentially reclaiming some of your own tax dollars.

Since our government continues to pursue the idea that everyone from the imprudent speculator and even the fraudulent buyer who overstated his income, along with the bankers who literally stole billions, can and will be allowed to rip off the public treasury, creating tax burdens forever for ourselves and our children in a futile attempt to prop up home prices along with screwing future buyers by keeping homes unaffordable, I am forced to advocate that you, The Prudent American, do back to the bankers and your neighbor what the bankers and your neighbor did…

I know, its a radical step.  And one more time, you need to consult with both a CPA and attorney before taking any such step – spend the couple hundred bucks to get both in the same room and go over exactly what this entails and what sort of impact it may have on you.

But it would appear to me, at this time, that this is the only way you can recover at least some of the tax burden that you have been thus far and will be in the future assessed for our government’s idiocy and pernicious theft of taxpayer dollars.

By the following month, November, the suggestion had gone mainstream.  “Should you keep paying your mortgage?” asked Kathleen Pender, the San Francisco Chronicle’s personal finance columnist.  “If you have significant equity in your home, absolutely.  If you don’t, it’s getting harder to answer that question, especially when our government keeps giving people who owe more than their homes are worth so many reasons not to pay.”

Pender went on to quote Schiff and to outline precise, practical steps a homeowner could take.

Now again, all of this was last October and November.  So here’s my question:  Now that the Obama administration has rolled out a $275-billion “homeowner rescue” plan, why aren’t we hearing more about this?

What Schiff and Pender and Denninger laid out is a concrete plan of action in which you can reclaim what’s rightfully yours.

But we don’t hear any of that now.  All we hear instead is what might be called “resentment rhetoric.”  A long, dragged-out whine, and a misdirected one at that — targeting not the banksters, but solely the irresponsible homeowners.

Typical of this is the Tennessee Republican Party, which has begun selling bumper stickers saying “Honk if you’re paying my mortgage.”  4000 have been sold in five days, at $5 each, or three for $12.

This is the source of my frustration with Rick Santelli’s infamous “rant.”  It really doesn’t matter whether he nailed it last fall on the insolvency of the banks.  In popping off about the homeowner bailout, without taking the banksters to task at the same moment, he took his eye off the ball.  Especially because the plan doesn’t even help the people it claims to help — because it won’t enable them to build equity in their homes.  Indeed, they’ll likely end up further in hock to their lenders.

Imagine if someone could harness the frustration of these underwater “homeowners” (glorified renters, really) with the frustration of the people who’ve managed to keep up with their payments… and directed all that outrage toward the banks and the Federal Reserve that created the whole mess.

Instead they’re divided along red state-blue state lines — resentful right-wingers fed up with “deadbeat” homeowners who only followed the advice of esteemed leaders like Alan Greenspan and can’t understand why they’ve become an object of such vitriol.  Just look at the comments thread in the Wall Street Journal blogpost about the bumper stickers to see what I mean.

If I were more conspiracy-minded, I’d think it was all a bankster plot.  Divide and conquer.

It’s a sorry state of affairs in this country when they don’t even have to resort to such efforts.

On another matter: The Fed just told Bloomberg to go jump in the lake.  Bloomberg sued the Fed under the Freedom of Information Act to find out just what sort of toxic “assets” it was taking onto its books, and from whom.  The Fed’s rationale is fascinating — that the New York Fed, where most of the relevant documents sit, is not subject to FOIA requirements.  Is that because it’s not really a government entity?  The mind reels.

The Treasury can’t make that argument.  It’s under court order to comply with a similar FOIA filing by Fox Business.  The deadline is March 23.  We shall see.

Source: What Happened to the ‘Stop Paying Your Mortgage’ Meme?

The sound bite that got all the play yesterday was this: “What I’m looking at is not the day-to-day gyrations of the stock market, but the long-term ability for the United States and the entire world economy to regain its footing. And, you know, the stock market is sort of like a tracking poll in politics. You know, it bobs up and down day to day. And if you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.”

Leave aside the particulars of his economic policy, and that’s a fair enough statement.  But then, what prompted him to say this in the next breath?  “On the other hand, what you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.”

This sounds like someone trying to have it both ways: “I don’t give a flip about the stock market… but you know what, there are some mighty good buys out there right now.”  Mixed messages, if not necessarily a blatant contradiction.

There, in a nutshell, is the reason the S&P has tanked 30% since Election Day, and roughly 13% since Inauguration Day.

The scholar Robert Higgs sums up this phenomenon with the delicious expression, “regime uncertainty.”  It’s when investors choose to sit on whatever money they have rather than put it to work creating wealth, because they have no idea what the rules are going to be day to day.  Higgs applied the term primarily to the New Deal, but we’re seeing the phenomenon at work today.

We see it when the administration chooses to run up record deficits, but then Tim Geithner says it’s “crucial” to bring deficits under control.

We see it in every speech Geithner gives about the shape of TARP II, in which the parameters change as quickly as those of TARP I under Hank Paulson.

We see it in Geithner’s commitment to go after “tax cheats,” a declaration shorn of any self-awareness or irony.

Conventional wisdom has it the broad stock market won’t recover its losses for three to six years.  But if this administration continues to take its cues from the New Dealers, we’re looking at another 16 to 23 years.  Figure it this way: The Dow finally returned to its 1929 levels in 1954 — a 25-year gap.  Assume the market topped in 2000 and the 2002-07 runup was a bear-market rally, then we’re looking at a recoup of the losses by 2025.  If the top came in 2007, then it’s 2032.  A “long-term perspective” indeed, Mr. President.

And if the president is focused on P/E ratios, perhaps he should ponder this: If P/Es are near historical norms right now, and if Q4 earnings are about to take a major hit, doesn’t that imply P/Es are about to grow?  And prices will have to fall further to come back in line?  Just asking.

Source: Regime Uncertainty

What makes him so confident?

The answer might lie in a fascinating article in the Moscow Times, an English-language daily.  Now I can’t speak to the publication’s credibility; according to Wikipedia, it’s under foreign ownership and isn’t afraid to take an anti-Kremlin line.  But the Wikipedia article is thin, to say the least.  So if all of what follows turns out to be a crock, I won’t be too surprised.  But it’s too intriguing to ignore.

The paper reports the president of Sakha Republic, in Siberia, came calling on Putin recently.  Vyacheslav Shtyrov brought ill tidings: The swoon in world energy markets has hit Sakha hard.  But rather than continue to paraphrase the article, l’ll let the rest of the story unfold on its own:

Sakha is having trouble keeping up with its investment goals for 2020 and the region’s labor market is suffering, Shtyrov said at the meeting.

Putin listened and then took a breath.

“Vyacheslav Anatolyevich,” he said, addressing him by his patronymic, “the global prices of coal, gas, metals and even diamonds have fallen. But the price of gold is rising — and gold is mined on your territory.”

When Shtyrov called attention to miners’ problems with creditors, he was once again rebuffed. “We’ll solve the problem with gold mining,” Putin said. “Especially since — I’ll say it again — I’m well aware that the price of gold is rising on world markets.”

The paper attributes this account to a transcript of the meeting released by the Kremlin.  Assuming this is correct, and the transcript is accurate, Putin is making a remarkable bet here, not just for Sakha, but for his whole country: What low energy prices have taken away, high gold prices will restore.

According to the article, Russian mining firms have been at least as attractive since last fall as names more familiar to Western goldbugs’ ears.  Shares in Polyus Gold have risen 172% since bottoming on November 18; Polymetal is up 207% since its low on November 20.  By comparison, the HUI index is up a little under 80% since its lows last October, the XAU up a little over 65%.

I have no idea whether Putin’s big bet is true, or whether it’s plausible.  But it’s out there.  And it’s fascinating.

Source: Putin’s Fascinating Bet

Item: GDP contracts an annualized 6.2% in the fourth quarter.

Comment: Let’s break down the four major components of GDP.  Consumer spending?  Down the worst since 1980.  Business investment?  Down the worst since 1975.  Exports?  Down the worst since 1971.  Government spending?  Up slightly.  Lots more where this came from, I’m afraid.

Item: U.S. government taking 36% stake in Citi.

Comment: I love how in journalistic shorthand, these sorts of stories become, “U.S. taxpayers will soon own a big share of Citigroup (NYSE:C).”  Like hell I do.  If I own a piece of it, where do I sign up for the dividend checks?

Item: War spending no longer to be done off-budget.

Comment: As much as the new president’s first budget proposal is an abomination, let’s at least give him credit for declaring an end to the practice of “supplemental” appropriations for Iraq and Afghanistan.  Doing so accounts partly for the mind-bending $1.75 trillion deficit.

Of course, the officially-announced deficit is never the number to watch anyway.  It’s the year-over-year increase in the national debt that really matters.  By that measure, there never was a “balanced budget” during Clintontime.

Item: SEC had a heads-up about Allen Stanford’s shenanigans in 2003.

Comment: Asleep at the switch on Madoff.  Asleep at the switch on Stanford.  Whatever the next one is, I’m sure we’ll hear similar revelations too.  It’s hard to root out real fraud when you’re busy pursuing “insider trading” witch hunts against Martha Stewart, Marc Cuban, and Joe Nacchio.  Nacchio, by the way, lost his latest appeal this week.  He’s running out of chances to avoid doing prison time for his heroic refusal to act as enabler for the government’s warrantless wiretapping schemes.

Item: Lefty economist nails the flaws with TARP.

Comment: An altogether remarkable speech by James Galbraith (son of John Kenneth):

“Guaranteeing bad assets will not stabilize the price of housing. It will not stabilize incomes and profit opportunities in the economy. Therefore it will not solve the credit problem.

“Meanwhile the guarantees will support incumbent management and shareholders. They will add vast sums to the public debt – directly or contingently – making achievement of the president’s other priorities more difficult. And they will distort the distribution of wealth, by guaranteeing the financial position of an elite group while that of so many others is collapsing.

“Keeping the existing management in place means that we will not arrive at clean and trustworthy audits of the banks. Therefore no one will know to what degree they actually are, or actually are not insolvent. No one will know just how bad the bad assets are, and most will (prudently) suspect the worst. This collapse of trust means that lending to the banks, including by other banks, will continue to be impaired.

You can’t fix a problem until you correctly identify what it is.  You have folks running the gamut from Galbraith to Rick Santelli (hey, I’ll give credit where it’s due) to the chief of U.S. Bank who can identify the problem, even if they’d probably come to blows over how to address it.  Contrast that with the clueless relay teams of Bush-Obama and Paulson-Geithner who actually make the decisions.  (And then change them.)

Item: Zimbabwe’s Mugabe plans $250,000 birthday party.

Comment: None necessary.  Have a good weekend.

Source: Friday Potpourri

Miller held another hand-wringing hearing yesterday on how American 401(k) plans have turned into 201(k)s since the stock market fell from its (nominal) record heights in October 2007.  Reading between the lines of reporters’ accounts of the hearing, it appears the most loopy and frightening proposals trotted out in similar hearings last fall have been shelved.  For now.

There was no talk this time about eliminating the tax deferral that was the whole raison d’etre for 401(k)s to begin with, on the theory that it’s mostly “the wealthy” who take advantage of it.  Nor was there further discussion of “Guaranteed Retirement Accounts” [.pdf] — in which everyone would have 5% of his or her paycheck withheld for investment in government bonds that would (in theory) return an inflation-adjusted 3% a year.

But lefty economist Dean Baker threw out a variation of it, “a government-managed system that would provide a modest rate of return for employees,” according to Bloomberg. “He said it would build on Social Security and allow workers a voluntary default contribution of at least 3 percent of their salaries.”

Baker’s proposal would be voluntary, but not that of former Clinton aide Alicia Munnell, which Reuters describes as “a new tier of retirement income… set up with the goal of paying out about 20 percent of pre-retirement income to retirees.”

“Participation should be mandatory, participants should have no access to money before retirement, and benefits should be paid as annuities,” said Munnell. “The system should be funded and reside as much as possible in the private sector.”

This writer was among the first to pick up on this story last fall and follow up as the story caught fire online.  Rep. Miller has more hearings scheduled in the weeks ahead.  We’ll be watching.

Source: Keeping Tabs On The 401(k) Plotters

The comments queue for my musing yesterday titled “Why I’ll Sit Out the Chicago Tea Party” was filled with people heaping invective on me because I said CNBC’s Rick Santelli failed to take a vigorous stand against bank bailouts, even as he gained fame for opposing homeowner bailouts.

Au contraire, I was reprimanded.  “You’re just plain wrong,” said one of the gentler comments.  “You might want to check on Rick Santelli a bit more carefully,” said another.

And so I have.  I’ve double-checked my homework.  I have searched long and hard for the sort of full-throated condemnation of the $9.7 trillion of bailouts, guarantees, backstops, etc. for irresponsible financiers that Santelli gave of the $275 billion bailout for irresponsible homeowners.

And I’m just not finding it.  A lot of his defenders in the online universe (and one of the commenters) point to this video from late September, in the thick of the debate over the first bailout bill.

Yes, Santelli acknowledges the big banks are insolvent, which is more than a lot of pundits were willing to acknowledge at the time.  But right there at 6:17, he says, “I do agree, something needs to be done,” i.e. government needs to do something to intervene.  He was merely offended by the pressure Hank Paulson was exerting on Congress to pass a taxpayer shakedown quickly without deliberating the precise terms of said shakedown.

I’ll repeat what I said Monday: “Where are the YouTubes of him calling for a taxpayer revolt when the banks were getting bailed out?”

Defenders of Santelli would then no doubt point to the interview he did with Kudlow yesterday, in which he said “I think the government should stay out” of the banking system.  But then he says, “There should be some type of special bankruptcy organization that the government set up so if the banks go down, they do their best to organize it – make it so that it’s not going to make the system collapse, guarantee, get the FDIC.”

OK, I don’t know how I can make this any clearer:  The mere existence of deposit insurance and the FDIC is the antithesis of the free market.  For a guy who likes to talk about moral hazard, Santelli seems oblivious to the suggestion that if Big Daddy Government will step in to make depositors whole, it only encourages the banks to take risks with depositors’ money they otherwise wouldn’t take.

Yes, Santelli recognized the emperor had no clothes.  Bully for him.  But rather than overthrow the emperor, he wants to stich new garments.

It’s painful to watch so many smart people adopt this partisan hack as the new patron saint of laissez-faire.

If Rick Santelli wants a real Tea Party worthy of the memory of Samuel Adams, he should demand an end to fiat currency and the Federal Reserve.  As it is, he can’t even bring himself to say the free market should be allowed to do its work with the banks so as to flush the rot from the system and start fresh.  And this is the guy who’s going to lead a popular revolt against the powers-that-be?  Give me a break.

Source:  Double-Checking My Homework

It’s not that I take issue with his opposition to the Obama housing plan:  Absolutely, responsible homeowners who kicked in a hefty down payment on a 30-year fixed mortgage should not have to bail out those who bought more house than they could afford.

But I won’t be taking part in any “Chicago Tea Party” he might plan for this summer.

Santelli has walked straight into a trap, one I daresay Obama aides David Axelrod and Rahm Emanuel cleverly set.

For all the popular support The Rant has garnered for Santelli, a backlash has developed.  “Watching Rick Santelli’s embarrassing diatribe at the expense of the American people made me realize that these Wall Street frat boys still don’t get it,” writes John Amato at the Huffington Post, echoing much of the left blogosphere.  “America is sick and tired of the riches they have manipulated out of the system and then be lectured by people who make more money than 100 middle class workers put together.”

That’s pretty hard to respond to — unless you actually opposed the Wall Street bailouts, thus proving your laissez-faire bona fides.

But as near as I can tell, Santelli comes up way short on this measure.  Where are the YouTubes of him calling for a taxpayer revolt when the banks were getting bailed out?  He’s a colorful enough speaker, he’d surely have eclipsed the guys we know did criticize the bank bailouts like Peter Schiff, Jim Rogers, and Marc Faber.

And so, Santelli finds himself boxed in — billions for bankers, but not one cent for homeowners.  That’s an impossible box to get out of.  Then Chris Matthews gets Santelli to fess up he voted for McCain (who like Obama, voted for TARP I).  So The Rant now looks less like a courageous stand for personal responsibility and more like a petty partisan thing, red meat for the red states.

That’s exactly how the White House planned it.  Obama didn’t announce his housing program until more than a week after Tim Geithner released the TARP II turkey.  The banksters got theirs first.  Anyone who then turned around and opposed help for “the little people” without having first opposed help for the big boyz could be portrayed as cruel and heartless.  (Never mind that by cutting monthly payments, all the housing plan will accomplish is putting homeowners in further hock to their lenders.  So the banksters get theirs on this one too.  They always do.)

“Chicago Tea Party”?  Please.  Santelli insults the memory of Samuel Adams.

Source: Why I’ll Sit Out the Chicago Tea Party