Testifying after former Fed Chairman Paul Volcker, Geithner told the committee the United States is facing “the mother of all financial crises.” Geithner also urged Congress to quickly pass a robust stimulus plan, Bloomberg News reported.

“If our policy response is tentative and incrementalist, if we do not demonstrate by our actions a clear and consistent commitment to do what is necessary to solve the problem, then we risk greater damage to living standards, to the economy’s productive potential, and to the fabric of our financial system,” he told the committee at a hearing on his nomination.

The credit crunch and housing market collapse require a “comprehensive plan” that must be coordinated with international partners to effectively relieve global economic conditions, Geithner said.

Promising to reform the TARP program, Geithner said the Obama administration will require banks receiving government money to provide proof of increased lending. Some Senators sitting on the panel are upset at how the Treasury-administered financial rescue program has been run.

“We have to fundamentally reform this program to ensure that there is enough credit available to support recovery,” Geithner said.

He said the administration is considering expanding the system to help small businesses and families that are losing their homes and jobs. Former Treasury Secretary Henry Paulson, so far, has limited the program to injecting capital into banks.

The Obama team is also considering further steps to shore up the banking system, including the possibility of having the government take bad assets off banks’ books, according to people familiar with the thinking of the Obama team, Reuters reported.

Geithner, currently president of the New York Federal Reserve Bank, said it was possible the administration could establish a “bad bank” to soak up toxic assets held by banks that are discouraging them from lending.

Banking Regulations Should Change

Geithner also called for “comprehensive” regulatory changes to prevent a future economic crisis of this magnitude – the worst since the Great Depression – from happening again.

“We need to move quickly to build a stronger, more resilient system now, with much greater protections for consumers and investors, with much stronger tools to prevent and respond to future crises,” he said. “Well-designed financial regulations with strong enforcement are absolutely critical to protecting the integrity of our economy.”

His statements echoed the sentiments of our own Shah Gilani, who provided guidelines on how to implement effective regulatory reform in Monday’s edition of Money Morning.

“The inability of the present system of regulation to deal with the complexities of expanding capitalism and protect us from inordinate concentrations of systemic risk has been tragically demonstrated. It is time that the crumbling walls of regulation are replaced with a new singular, transparent, effective and dynamic regulatory apparatus,”Gilani wrote.

Geithner, president of the Federal Reserve Bank of New York, was also grilled by lawmakers about his failure to pay $34,000 in taxes over several years in the first half of the decade. That issue – as well as a second, regarding the employment of a housekeeper without a work permit – fueled the doubts of some Republicans, who were blocking efforts to fast track Geithner’s nomination.

Geithner said his tax errors were “careless” and unintentional, and he apologized to the committee for the toll they have taken on his confirmation process. As reported by Money Morning on Jan. 19, Geithner actually placed phone calls to individual senators, hoping to persuade them his tax problems were the result of innocent errors.

Apparently it worked. Confirmation appears to be a fait accompli as several Democrat and Republican senators on the Finance Committee voiced strong support for Geithner.

Senate Finance Committee Chairman Max Baucus, D-Mont., said Geithner made “disappointing mistakes” that shouldn’t derail the nomination.
“After discussing them with Mr. Geithner, I believe them to be innocent mistakes,” Baucus said.

Source: Geithner Promises TARP Overhaul, Regulatory Changes to Solve “Mother of All Financial Crises”

This from Taipan Daily:

“Widespread property foreclosures have led to bank failures, and further to much unemployment and a disastrous decline in manufacturing and agricultural production.” Sound a tad familiar?

No, it is not another of my dreary “ripped from today’s headlines” quotes. Rather, it is a contemporaneous description of the chain of events that lead to, and resulted from, the Panic of 1819.

And while the storyline may be some 189 years old, the circumstances are eerily familiar. Washington (the place, not the man – our first president had passed away 20 years earlier) had borrowed heavily to finance the War of 1812, severely depleting bank reserves.

Free Money and Real Estate Bubbles, 19th Century Style

To cope, Washington and Wall Street did what they have done so many times since: they simply changed the rules. This time around they suspended specie payments – a complete violation of depositors’ contractual rights.

With the onerous restriction of actually repaying debt with real coin lifted, most every ambitious soul with a pen and a checkbook rushed into the banking business. The sudden increase in the “money” supply encouraged the most insane sort of speculations (real estate being a particular favorite).

Soon, the whole deal was snowballing out of control. When the Second Bank of the United States finally tried to take away the punchbowl, this hollow economy collapsed in on itself… leading to the aforementioned 1819 crash.

A Haunting Refrain

As you can see, today’s dire warnings of market collapse and recession are not quite as unique as we might hope. Rather, they are simply the latest refrain in a long, long (long) ballad.

Cold comfort, perhaps, to know that our forefathers were just as inclined as we toward such feats of over-stimulation, overextension, and excess speculation. Still, there is some comfort to be found reading through our long tale of financial foolishness.

Over the past 210 years or so, we have “enjoyed” 17 recessions, lasting anywhere from a few months to more than two decades. While the worst, the “Long Depression” of 1873-1896, lasted some 23 years, the average duration has been a mere four and a half years.

Damned Modernism

Now don’t go reaching for the bourbon just yet. We’ve put all sorts of systems in place since those bad old days. Many of you like to curse the day in 1913 that saw the birth of the US Federal Reserve, and are wont to describe Fractional Reserve Banking as “the tool of the Devil” (or at least Joe Stalin).

Damned or not, these institutions do exist. One could even argue their arrival on the scene marks the beginning of our “Modern Economy.” If we were to restrict our list of recessions to said “modern” period only, the average breakdown is reduced to just under three years.

Now dial the clock forward again. If one were to begin counting with the day in 1971 that Richard Nixon finished off the remaining tatters of the gold standard, the average duration of recessions is reduced to a year and three quarters.

Have You Heard About the “Black Widow Trade”?

Here’s how you can turn Wall Street’s PAIN into a 146% GAIN in 12 weeks. Read on now for detailed trading instructions…

Rounding Second and Halfway Home

The history may be a tad twisted, but my point here is straightforward enough. While there is certainly no guarantee that we could not invent a way to extend our little debacle another year or six, the odds are that we are already a third – if not halfway – through “the crisis of 2007-2009.”

Which brings us to what I like to call the “Window of Serenity.” Near-term, things do still look quite dreadful. And long-term, I have no doubt that we are embarked on the path of monetary ruin described so exquisitely by the Austrians.

But if you look in the middle, beginning some 18 months out, one can see where the ramp-up to the next major bubble ought to be taking place. The question is: how do you navigate the choppy waters between here and there?

How to Stay In the Game

Once again, I have to tell you that mere “trading stops” won’t work. If that’s the limit to your methodology, then perhaps you really ought to just sit things out until the next cycle is obviously underway.

But what if you are intrigued by the values that are out there (and I will grant that the survivors of this current trough are apt to double many times over come said ramp-up – especially in its earliest days)?

If that’s the case, then there is only one tactic I know of that will allow the safe accumulation of shares in current circumstances. And that is the careful matching of put option contracts on weak players to share purchases of strong players.

Buying Survivors

For example: Let’s say you wish to invest in a venerable old retailer like Macy’s (NYSE:M), currently trading under $10 for the first time since 1995.

Heck, they’ve been around in one form or another since 1924, and have weathered seven of the recessions on my list. That fact alone reassures you that they ought to still be here in another 18 months.

Now, I’m not saying you’re right or wrong with this trading theorem. But I can tell you how to survive Macy’s going to $5 while you find out.

A Cure For the Pain

Simply buy some put options on a real deadbeat low class player like, say, Kohls (NYSE:KSS). While Macy’s shares were getting cut in half over the past few weeks, select Kohl’s puts gained as much as 200%.

Your gains on Kohls’ pain become your safety line against losses on Macy’s shares. Heck, you could even use your profits to buy more shares.

These are admittedly hard times, friends. Fortunes are being lost daily. But situations like these, when everyone else has their head buried in the sand, are possibly the most potentially lucrative trading set ups you will ever see.

Source: How to Make 200% a Month Handicapping Recessions