Good day… And a Marvelous Monday to you! A very nice, but hot weekend here… But hey! It’s August, it’s supposed to be hot! Friday was an awful day for most of the currencies, and there was a HUGE surprise in the Jobs Jamboree (according to the BLS, of course!)… And, at the end of updates, I’ve got a story for you about stealth QE, you’ll not want to miss a minute of that! So… Let’s go!

Well, Friday’s Jobs Jamboree was quite interesting to say the least… I had already told you about the forecasts for a HUGE drop in job losses for July from 467,000 to 325,000… But the number, according to the BLS, was 247,000!!!!!!! Way to Go Corporate America! Geez Louise, I wish it were that full of seashells and balloons! This smells of yesterday’s fish folks… OK, let me get this straight… The forecast was for 325,000 job losses, and an unemployment rate of 9.6% (up from 9.5% in June)… And the jobs lost were 247,000, a difference of 78,000, and the unemployment rate fell to 9.4%… So, the BLS is telling me, and you, that 78,000 jobs not being lost, was equal to .2% (9.6 to 9.4)? Come on! I didn’t just fall off the turnip truck!

So… You know what? I’m not even going to go down the road I usually travel of digging into the numbers, and pointing out what buffoons the BLS people are… No! I’m going to take the road that tells me to smile, and be happy about the fact that the job losses have peaked, and maybe, just maybe, we’re on the road to recovery… How about that?

Of course the little guy on my other shoulder is telling me to say something about how Corporate America rushed to the exit doors with jobs cuts to prepare for the tough row to hoe, which was to be 2009, and therefore maybe, just maybe, cause you never know, all the jobs that can be cut have been cut, there are no more to cut, without going out of business!

But you won’t hear that from U.S. officials, who took Friday’s Jobs Jamboree as an opportunity to remind everyone that this wouldn’t have happened without the stimulus… Hmmm The current administration is in real bad need of a “win” , you know something that makes them look like they know what they are doing, so they can get the Health Care shoved down our throats… I won’t say anything else about this, because it’s not for this discussion… But in my backyard with neighbors all around, I let them all know how I feel, for sure!

So… Last week, I told you that given the way currencies and stocks had traded together as risk assets for the last 9 months, that should the Jobs Jamboree print as forecast that the it would be negative for the dollar. I WAS WRONG! OK… Let me play this out for you… For the last 6 months, any time a piece of data gave the impression that the U.S. could weather the recession / depression, the dollar got sold… Remember, the only reason people / investors were holding dollars was as a “safe haven” play with Treasury purchases… So, if things were looking brighter there was no reason to hold the “safe haven” purchase. Treasuries were unwound, and dollars were sold…

But… Friday’s Jobs Jamboree, played out differently! The strong (I know, there were still 247,000 jobs lost, it’s not like it was 0!) data caused this HUGE dollar buying binge, and it went fast, and furious, and all day on Friday! The euro traded through the 1.43 and 1.42 handles like a hot knife goes through butter… Japanese yen fell through 2 big figures too, along with pound sterling… It was ugly for the Big 3… The selling carried over to the Swiss franc, and Canadian dollars… Not as ugly as the Big 3, but a noticeable loss just the same…

Not all currencies got sold though… The high yielders like Aussie, and kiwi, Brazil, all held onto and in some cases added to gains VS the dollar… I have to clarify something I wrote about on Friday, as I had more than a few questions about what I was saying… In speaking about the Australian Gov’t issuing inflation-indexed bonds again after a 6-year hiatus, I said that it was a sign… Well, I should have gone further and explained that if the Australian Gov’t is going to sell inflation-indexed bonds, then they see the need to do so based on their inflation projections, and if they see inflation, the Reserve Bank of Australia (RBA) will see inflation and adjust interest rates higher accordingly… Higher interest rates for Australia is like manna from heaven for the A$…

So… Risk asset appetite is changing… It’s getting picky… And only wants yield… Tired of the paltry yields that Treasuries provide, or most Gov’t bonds for that matter! Our Foreign Bond Trader, Don Ries, tells me that he is swamped with calls for Brazilian bonds, that have a nice yield advantage.

To prove this further… Gold and Silver were sold, along with the currencies I already talked about, that have no yield! Shoot Rudy! Even the Mexican peso is on the rally tracks, and that they don’t even have a huge yield advantage! But they have a yield advantage, and that seems to be the line in the sand right now… So, currency traders should be wearing shirts that say: Got Yield?

Speaking of Australia… I also noticed that they had a bond issue last week… They did a 4+ year Treasury auction of $800 Million 6.5% bonds… The reason I mention this is to point out the difference of the auction size between Australia and the U.S. and the yield… Hmmm…

I guess I can’t avoid saying this, so I might as well get it out there… Equities are certainly the choice of investors right now too… I just can’t help but think this is a one HUGE trap for equity investors… But that would involve more conspiracy theory, and I’m not going there today…

There is no data scheduled to be printed today, so the markets will deal with Friday’s trading, and begin to look at the Central Bank meetings this week, which are dominated by the Fed meeting on Wednesday… Norway’s Norges Bank will also meet on Wednesday. It will be interesting to hear what the Fed has to say after their meeting on Wednesday…

And then there was this… I call this: Stealth QE… Let me see what you call it after reading…

Well… Have you ever wondered who was buying all those Treasuries that the U.S. keeps forcing on the markets? If we follow the results of the auctions we know they were all bought… And the markets continue to think… “I guess deficits aren’t anything to worry about”… BUZZZZZZZZ! Wrong! Thank you for playing, there’s a nice parting gift for you at the door… Johnny… Tell them what they won! You see…

It was uncovered this past weekend by a guy named Chris Mortenson that the past auction of $28 Billion in 7-year Treasuries had a twist to it… A large chunk was purchased by Primary Dealers to the tune of $10 Billion worth of the auction, and then, very quietly, without fanfare, and right under the noses of the currency traders and media that are supposed to be following up on this stuff… The Fed bought it all back from the Primary Dealers… That’s Quantitative Easing folks, they monetized the debt, and with all the fanfare of being more transparent, they did it under the dark of night in a back alley… Shame, Shame, Shame!

Is this not a sad state of affairs, that not only did the Fed HAVE to monetize the debt, they did so in a way to manipulate the markets, and pull the wool over the eyes of the public! Would this have been a “failed auction” if the Fed hadn’t worked out this deal with the Primary Dealers? I think so! And the Fed, dealt a blow to currency holders by pulling off this shell game! And the calls for the current administration to be transparent, along with the Fed… All comes back to haunt them… So… I hope the major media picks this story up… I know for a fact that some of them read the Pfennig, and laugh at my claims of market manipulation… Let them all laugh, one day they will be crying…

I shake my head in disgust… Oh, and for all you who think I’m trying to tell you something that isn’t true… I’ve got facts, so don’t even think about calling me out on this!

OK… Enough of that! OH! I see that Paul Krugman thinks that Big Ben Bernanke should be approved for another term as Fed Chairman… If I were Big Ben, I don’t know how I would take that… Hmmm… I better think about that one!

Of course, if I had any say in the matter, I would fire them all! Anyone that had anything to do with the bailouts, stimulus, brokering banks and broker deals, deciding who remains open and who closes their doors… Fire them all I say! I won’t even go down the road regarding the politicians…

Data this week will include the Trade Deficit, Productivity, Unit Labor Costs, Monthly Budget statement, which ought to be something to see… We’ll also see Retail Sales, which you would think would be better, but given the Chain Store retailers report last week, Retail Sales would certainly be a question mark…

Currencies today 8/10/09: A$ .8425, kiwi .6765, C$ .9255, euro 1.4205, sterling 1.6630, Swiss .9250, rand 8.02, krone 6.1220, SEK 7.1770, forint 189.65, zloty 2.9025, koruna 18.14, yen 97.10, sing 1.4410, HKD 7.75, INR 47.8225, China 6.8343, pesos 12.88, BRL 1.82, dollar index 78.82, Oil $70.81, 10-yr 3.86%, Silver $14.49, and Gold… $954.35

Chuck Butler

Source: A Big Jobs Surprise!

The stock market crashed in ’29. The market then bounced. After a few months almost everyone was persuaded that the “worst is over.” But the worst was just beginning. It wasn’t until 1932 that the stock market finally hit bottom. By then, it beginning to seem like a depression… and only years later did economic historians tag it as a ‘great’ depression.

This depression is still wet behind the ears… We’re still in the bounce phase. On Friday, the Dow went 113 points higher. And as the bounce continues, more and more investors will come to believe that stocks are in a new bull market and that the economy is back in growth mode.

Neither will be true.

The stock market is in a bear market rally, not a genuine bull market. The economy is entering a long depression… possibly a ‘great’ one.

How can we be so sure? Well, we’re not sure of anything. But all the signs point in that direction. Household debt as a percentage of disposable income hit a low of about 2% just at the end of WWII. It’s been going up ever since. By 2005 it nudged against 15% — 7 times higher than it had been 60 years earlier. Household debt represents spending that has been taken from the future.

But you can’t take an infinite amount from future earnings. You reach a point when the future can’t handle it. As more and more future earnings are absorbed by past consumption, pretty soon there’s not enough left to live on. At some point, so much of earnings are devoted to paying the interest and principle on past borrowings that the poor householder cannot to pay his expenses. And imagine what happens if his disposable income goes down.

Guess how many jobs the US private sector has added over the last 10 years? Almost none. Private sector employment is back to levels of 1999. There are more jobs in restaurants and health care… but many fewer in manufacturing. Net gain: zero.

The only job gains have been in the parasite sector – government. On the evidence, this trend is going to continue. Now, the feds have a new post called “pay czar.” As near as we can tell this is a busybody who undertakes to control salaries in the industries that the feds have bailed out.

There will be a lot more jobs running the regulatory/bailout apparatus. Then, too, there are all the make-work jobs of the shovel ready boondoggles the feds began in an effort to replace private spending.

Back in the private sector, 72 banks have failed so far this year. And a record 34 million Americans are getting food stamps.

Naturally, incomes are falling. Now, imagine the consumer… he’s already paying 15% of his disposable income to debt service… and then his income is cut in half! This means that 30% of his remaining income must be used just to service the debt. Impossible to do without big cuts in spending…

The poor consumer hit the wall in 2007. He was spending all he earned… and paying more of his income in debt service than at any time in the last 60 years. He couldn’t continue to live on future earnings – there just weren’t enough of them. That is why the finance industry has topped out. It loaded Americans up with enough debt already.

And it’s why the credit cycle has turned. All of a sudden savings rates are back up to 7%. Consumers are cutting back… raising chickens in their back yards… driving less… planting gardens and squeezing their nickels. The private sector is de-leveraging. And there won’t be any durable economic boom or lasting bull market on Wall Street until this process is finished.

How long will that take? Read on…

*** Harvard professor Ken Rogoff says it will take 6-8 years for households to reduce their debts to a more sustainable level. Let’s see. We reported on Friday that the big upswing in credit over the last 60 years added about $35 trillion in excess debt to the system. But not all of that is private debt.

Taking the period of the bubble years, in 2000 total debt in the US came to $26 trillion. Now, it’s twice that amount — $52 trillion, of which $38 trillion is private… or more than 2 and a half times GDP. At this level, the private debt absorbs roughly one out of every 7 dollars in consumer earnings – in interest and principal payments.

If the private sector undertook to reduce debt back to 2000 levels, it would mean eliminating all the debt accumulated during the bubble years – or about $19 trillion. How long will it take to pay down, write off, inflate away and otherwise shuck $19 trillion?

Well, inflation is running below zero – so that is not now a source of debt reduction. Between write-offs and pay-downs, about $2 trillion has already been cut – over, very roughly, the last 2 years. At least the math is easy. At that rate, it will take 19 years.

Now, let’s go back and look at the Japanese. How long have they been deleveraging. Gosh all mighty… 19 years. From 1990 to 2009.

Are we looking at a 20-year period of on-again, off-again deflation… of bear market rallies followed by real bear markets… of weak employment and weak or no growth? That’s what we argued, along with Addison Wiggin, in our first book, Financial Reckoning Day. Then, the stock market took off… and the bubble years came. It looked like we were dead wrong. Maybe we were just early. Or maybe those bubble years were just a feint… a fake-out that convinced the entire world to invest in stocks and property, just before the biggest crash in history.

In that book, we guessed that the crash in the tech sector marked the beginning of the end. By 2005, it didn’t seem at all as though we were in a down-cycle. But adjusted for inflation, stocks never beat their January 2000 high. And outside of government, the economy has no more jobs than it did in 1999. We’ve had wars against terror, bubbles in practically every sector, trillion-dollar boondoggles, bailouts, bamboozles and Michael Jackson’s tragic cooling… but what is the only durable thing to come out of the last 10 years? Just Google and debt.

*** “When you have a big family there is always someone in the family who is in trouble,” said another friend.

“I thought that when the children left home to go to college, we’d be more or less free from problems. They’d be on their own. We could turn our attentions to other things.

“Well, it didn’t turn out that way. There’s always one of them that has a problem. And we spend a fair amount of time worrying about them… even if there’s nothing we can do to help. Or trying to help them if we can…

“And then the grandchildren come… and then we worry about them. It just goes on and on. It’s not disagreeable, of course. I’d rather have children and grandchildren to worry about than not have them. But there doesn’t seem to be any end to it… ”

Source: Still in the Bounce Phase

The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it’s déjà vu all over again — literally.

For this is the third time in history that a major economy has found itself in a liquidity trap [...]

The first example of policy in a liquidity trap comes from the 1930s. The US economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.

Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while FDR tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.

The second example is Japan in the 1990s. After slumping early in the decade, Japan experienced a partial recovery, with the economy growing almost 3 percent in 1996. Policy makers responded by shifting their focus to the budget deficit, raising taxes and cutting spending. Japan proceeded to slide back into recession.

And here we go again. […]

To sum up: A few months ago the US economy was in danger of falling into depression. Aggressive monetary policy and deficit spending have, for the time being, averted that danger. And suddenly critics are demanding that we call the whole thing off, and revert to business as usual.

Those demands should be ignored. It’s much too soon to give up on policies that have, at most, pulled us a few inches back from the edge of the abyss.

Although we’re are on the other side of the economic divide from Krugman (we don’t believe the government can borrow and spend its way out of a debt crisis), he makes an interesting point about the difficulty of reversing course once the government puts an entire economy on fiscal and monetary life support.

Now that the feds have become such large players in the economy (backstopping over 80% of GDP and pouring trillions of dollars of liquidity into the system), the next challenge is for them to exit the market without causing another severe leg-down.

Considering the government mucks up everything it gets its fingers on, this “grand exit” should be no different. The feds will either pull liquidity out too fast, pushing the economy into protracted slowdown, or they will fail to reabsorb liquidity fast enough, triggering a great inflation. Here at Notes, our hunch is it will be the latter…

With the old “drinking from the fire hose” routine being extra intense as of late, and Tuesday being a rare travel day for yours truly, I haven’t had time to digest the finer points and nuances of Tim Geithner’s new bank plan just yet. I’ve got my stack of stuff printed out, though, and should have a proper state of fulmination worked up by Friday.

Here’s my quick take: Clearly the market liked the plan, based on Monday’s action – or maybe the market just liked ANY semblance of a plan – and just as clearly a number of commentators did not. Paul Krugman hated it, for example. So did the guy over at LOLFed.

And by the way, speaking of Tim Geithner – how come he hasn’t picked up a nickname yet? Ben Bernanke has “Gentle Ben” and “Helicopter Ben”… Hank Paulson had “Hammerin’ Hank”… even the Prez has “Barackstar” and “No Drama Obama.” I keep thinking of Timmy from South Park (Timmay!), but that’s probably not appropriate given the recent news flow.

Probably the most surprising comment, as relating to the Geithner bank plan, came from John Authers over at the Financial Times. I like John Authers – by and large he tends to be sharp and clearly knows his stuff.

And that’s why this comment from Authers at the end of a recent “Short View” video segment made me sit up and take notice:

If this plan works as hoped, then it’s quite probable we’ve seen the bottom of the whole bear market. If it doesn’t, then we probably haven’t.

Yowza. When you think about it, that’s quite a statement.

And by the way, if you ever wondered what the bears leaving town might look like, now we have a mental image (courtesy of www.englishrussia.com):

to the airport, comrade!

Since putting a bear in the back of a taxicab might strike you as slightly irrational behavior, this feels like a good segue point into today’s main topic.

Swaying to the Beat

I recently finished a wonderful little book called, Sway: The Irresistible Pull of Irrational Behavior, by the brothers Ori and Ram Brafman.

The inside jacket flap promises that Sway will “change the way you think about the way you think,” and in some regards it does just that.

The jacket goes on to summarize:

Drawing on cutting edge research from the fields of social psychology, behavioral economics, and organizational behavior, Sway reveals the many dynamic forces that influence our personal business lives, including loss aversion (our tendency to go to great lengths to avoid perceived losses), the diagnosis bias (our inability to reevaluate our initial diagnosis of a person or a situation), and the “chameleon effect” (our tendency to take on characteristics that have been arbitrarily assigned to us.

For all that, it’s actually quite a breezy little book. The contents do deliver on all that is described above, but it comes in the form of stories and anecdotes written in plain English. I found the whole thing very light and engaging – almost like an extended Vanity Fair article turned into a book.

Pants-Wearing Monkeys?

As a trader and an investor, I have always been fascinated by the human condition – in particular, the reasons why people think and do odd, perplexing, and sometimes flat-out dumb things.

Over the years, too, I have been on a quest to find out the “why” behind a true statement from one of the greatest traders of all time, Jesse Livermore, who observed: “A speculator must fight a lot of expensive enemies within himself.”

This is undoubtedly true. But how come? (Good news: the fight is winnable, but it takes time.)

Some, like blogger and money manager Barry Ritholtz, think we are all just a bunch of “pants-wearing monkeys” (himself included). Others simply shrug and accept that deep irrationality in certain areas is just part and parcel of the human condition.

But the reason I found Sway so engaging a read is because the Brafman brothers do a very good job, again, of explaining the “why” behind some of the oddball things humans do.

Or to put it another way, randomly irrational behavior is not all that interesting because there’s very little you can learn from it. But if certain surface-level irrational actions actually make logical sense as phenomena once you dig down to the roots – i.e. if there are underlying patterns and reasons as to why people act as they do – then those patterns and reasons are probably well worth finding out.

Further Down the Rabbit Hole

If you’re a fan of this type of thing – human psychology, behavioral economics and what not – then I think you would enjoy Sway. As I say, it’s a relatively light, fast, breezy read, with a lot of funny stories and some fascinating anecdotes too.

Going deeper: If you consider yourself a budding connoisseur of the rational (or should I say irrational) mind, you can also take things further with a book that is less fun, but perhaps even more enlightening: Influence: The Psychology of Persuasion by Dr. Robert Cialdini.

Here is an excerpt from an Amazon review of “Influence” I penned many years ago:

[In his book Influence: The Psychology of Persuasion] Professor Cialdini takes a refreshing look at the frailties of the human mind, and his conclusions are a reminder of how damningly automatic a human response can be.

He illustrates how the behavioral / cultural conditioning we receive from birth, designed to make us functioning members of an orderly society, also creates exploitable weaknesses within our psychological frameworks.

These weaknesses are compelling (and permanent) because the patterns are so ingrained; we can’t short-circuit them without short-circuiting beneficial social behavior patterns also….

As a trader, I bought this book to hone my understanding of human psychology and various influences on the decision making process, in the hope that Cialdini would shed a light on the complex emotional processes that lead to buying and selling. He surely did.

And for the Truly Hardcore…

If you’ve already read Influence, and you think Sway sounds like just another Malcolm Gladwell-style coffee-table-slash-beach-read book – which it kind of is, not that there’s anything wrong with that – then maybe you’re a candidate for the really hardcore stuff.

If so, you might want to check out Psychology of Intelligence Analysis by Richards J. Heuer Jr.

This one is available on Amazon.com, but you can also get it free from the CIA.

Do I mean that CIA, as in, the Central Intelligence Agency? Yep… apparently it’s required reading for analysts (or was at one time). The CIA keeps a free copy of the book online here. Obviously there’s nothing breezy or easy about this one, so be forewarned.

If you pull any good insights from these tomes, or have some good “brain food” selections of your own to share – or, heck, if you just know a good nickname for poor ol’ Tim Geithner – let me know: justice@taipandaily.com.

Source: The Irresistible Pull of Irrational Behavior

Krugman, 55, was honored “for his analysis of trade patterns and location of economic activity,” said the Royal Swedish Academy of Sciences, which selects the winners. His work showed how economies of scale influence trade and urbanization, Bloomberg News reported.

While Krugman found broader fame with his New York Times columns attacking Bush, Krugman built his reputation in economic circles by arguing that nations could achieve a competitive advantage by subsidizing key industries – a theory that helped explain how large-scale production for the global market has led to higher overall wages by attracting workers to cities.

In recent years, however, as a columnist for The Times and a self-proclaimed liberal, Krugman built a loyal following and achieved a measure of fame for hammering U.S. President George W. Bush for everything from the war in Iraq to the do-nothing tax cuts that has the U.S. economy creaking under trillions of dollars in debt.

In a May 18, 2007 column, for instance, Krugman wrote that “Mr. Bush has degraded our government and undermined the rule of law. He has led us into strategic disaster and moral squalor.”

While his journalistic jousting with the White House has brought Krugman no small measure of fame, “this award is clearly for Paul Krugman the economist, not for Paul Krugman the journalist or political critic,” Robert M. Solow, a 1987 Nobel laureate who once taught Krugman, told Bloomberg. “What’s remarkable about Paul is he manages to do everything. He’s a contributor to fundamental economic theory and a top- ranked journalist.”

Krugman said the award was “a total surprise.”

The Princeton economist’s academic work analyzed how world trade came to be dominated by countries that both import and export similar products – cars, for example, one expert explained.

Before Krugman, “all the models for trade explained why countries that are different trade: You’re a better baker, I’m a better shoemaker,” Rutgers University Economics Professor Thomas J. Prusa told Bloomberg. “Paul was one of the first to realize that those kinds of models only explained about half of the trade in the world. [He] was the first one to explain economically why it made sense that countries that are similar should trade, as opposed to countries that are different.”

It’s that kind of trade that “enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities,” the Royal Academy said in a statement today.

Solow said globalization shows the value of Krugman’s work.

“As multinational corporations become more prominent, it’s important to have a way of thinking about trade that gives them adequate attention,” he said.

Krugman isn’t merely a powerful theorist – he’s an elegant one, too, said Arvind Panagariya, the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University, and the recent author of “India: The Emerging Giant.”

“A hallmark of Krugman’s work is parsimony,” Panagariya wrote yesterday in a Forbes.com column. “His models are among the most elegant: lean and thin and transparent. They have all the required parts but no unnecessary fat. It is quite remarkable that while other scholars in the field handsomely incorporated the Krugman model into their research, perhaps the most insightful and elegant applications still came from Krugman.”

As early as 2005, Krugman was warning readers about the dangers the U.S. economy faced from ballooning housing prices and the soaring trade deficit. Indeed, in a late August column that year the economist stated that “Americans [these days] make a living by selling each other houses, paid for with money borrowed from China. One way or other, the economy will eventually eliminate both imbalances.”

Indeed, in an interview with Bloomberg Television on Friday, Krugman said the current financial turmoil had similarities with the Great Depression.

“The parallels are stronger than I thought they would be,” he said. “We developed a financial system that is out of control. The only things people want to buy are Treasury bills and water.’”

In a press conference at Princeton University yesterday, Krugman hesitated to say when the financial crisis would end

“Every time you think you’ve hit bottom, another floor opens up beneath you,” he said.

Source: Princeton Professor and NYT Columnist Krugman Wins Nobel Prize for Economics

– The Treasury says about half that figure will likely to go to buying stakes in the top nine US banks to get them lending to each other again.

– The Treasury will also consider lifting the cap on deposit insurance for certain bank accounts and guaranteeing certain types of bank lending.

– Global markets surged today. Tokyo’s Nikkei 225 shot up 14.2%. It was the biggest single-day percentage gain for the index. European markets were broadly higher in midday trading. Most major indexes were up about 5%.

– Oil prices climbed above $84 a barrel. Yesterday, however, Goldman Sachs cut its year-end crude price forecast from $115 a barrel to $70.

– Gold is also up as the dollar dipped against a basket of ten major currencies. Gold for immediate climbed 1% to $841.20 an ounce as of 8:55 a.m. in London.

– US Treasuries dropped. This sent two-year yields up by the most in almost a month. According to Bloomberg, “the decline sent the 10-year yield to the highest level in 10 weeks.”

– According to Paul Krugman, the equity-stake solution now in motion is privately favored by Fed head Ben Bernanke and most economists but not by Treasury Secretary Hank Paulson.

This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that … actually, it never was clear what his theory was.

– Taking an equity stake in return for recapitalizing banks is also the solution advoted by former Fed chief Paul Volcker. To watch Volcker talk to Charlie Rose about fixing the financial crisis, follow this link to Barry Ritholz‘ Big Picture blog. It’s one of the best takes on the crisis that we’ve heard so far.

“We need concerted action by governments, central banks and market participants to help stop this wave [of liquidations]…”
- Josef Ackerman, head of Deutsche Bank, speaking in Frankfurt on 17th March

“The government is prepared to do what it takes to maintain the stability of our financial system…”
- US Treasury secretary Hank Paulson to Fox News, March 16th

“In every country in 2008, every government has one aim – to maintain stability through the world economic slowdown. Britain with its central role in the world’s financial system is no exception…”
- UK finance minister Alistair Darling, in his Budget speech of 12th March

Not quite with it yet? Check these examples: it’s already done for you!

“The US tax-payer last week agreed to help J.P. Morgan acquire Bear Stearns after a run on Bear, once the second-biggest underwriter of US mortgage bonds. In an effort to shore up Wall Street’s other firms, you also agreed to become lender of last resort to all 20 primary dealers in Treasury notes…” (Bloomberg)

“US leveraged institutions, which include banks, brokers-dealers, hedge funds and tax-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note released late on Monday…” (Reuters)

“The [investment] banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s. And your money is rushing in to help, with hundreds of billions from the tax payer, and hundreds of billions more from tax-sponsored institutions like Fannie Mae, Freddie Mac and the Federal Home Loan Banks…” (Paul Krugman in the NY Times)

With it now? Great fun, isn’t it!

Just cut to the chase about bail-outs and financial aid by remembering what the state’s big generous hand-outs are made from – your tax payments, both current and future, plus the spending power of your savings, ripe for inflating away by elected officials and their unelected agents and staff.

This game beats playing “Spoof” any day, we reckon…which is funny again when you come to think about it.  Because Spoof – played in pubs and bars across the world to decide who buys the next round of drinks – is a game without winners, only a loser. Exactly like this game, then.

Let’s play again

“We need a continuing message from tax payers and cash savers around the world that they will do what it takes to support economic growth. That will not be easy. It may necessitate taking some risks with inflation. But the message has to be unambiguous…”

So said John Varley – or as near as damn it – in a long open letter to government, published by The Banker magazine at the start of this month.

Varley is group chief of Barclays bank here in London. According to the annual report released a couple of weeks ago, he took home £2.4 million last year ($4.8m), just down from his 2006 pay-out of £2.5m after annual group profits fell 1% to £7.08 billion “due to the global financial turmoil” as the BBC puts it.

“The privatization of profit and the socialization of loss”

Don’t get us wrong here; I have no problem – moral or otherwise – with the concept of multi-million-dollar salaries. Executive pay merely puts flesh on those inequities which life itself thrives upon. The profit motive in finance is precisely what created the joint-stock company, mortgage lending, the safety-net of insurance, credit cards, overdrafts and all the other monetary tools developed by homo economicus in the last five hundred years.

But what sticks in the craw, however, is the “privatization of profit [and] the socialization of loss” as Martin Wolf calls it in the Financial Times. Every time the bankers screw up, your money steps in to patch up the losses. Letting the crisis wear on is simply not possible, because no one has dared to try it before.

“The authorities feel compelled to intervene,” writes Charles Kindleberger in his history of Manias, Panics & Crashes. “The dominant argument against the view that panics can be cured by being left alone is that they almost never are left alone.” That’s why we get the pleading from Wall Street and Washington alike today.

Please sir, can I have some more?

“Tax-payers need to continue to supply liquidity,” Varley’s article in The Banker very nearly goes on, “and they can help the restarting of the residential mortgage-backed security and commercial mortgage-backed securities markets by being prepared to accept this paper as collateral.”  More than that, “it would have a significantly (and disproportionately) positive impact if your cash savings were to buy commercial paper.”

Ain’t you brave, gentle reader, stepping into the breach so gamely like this! And so modest, too. Thanks to you covering Wall Street’s losses with your tax-dollars, “we’re going to have maybe a mild recession, but we’re going to avoid anything worse,” reckons Jeremy Siegel, professor of economics at Wharton.

Yet the plaudits will go to somebody else, with nary a murmur from you, reckons Siegel. “[Ben] Bernanke may very well easily turn out to be a hero here,” he explains. Which I guess was precisely your aim in putting money aside to provide for your future.

No redemption without legislation

“Systemically important institutions must pay for any official protection they receive,” Martin Wolf continues for the Financial Times. “Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted.  “This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidized, casino will not allocate resources well.”

This quid pro quo – the “this for that” stated so bluntly by Varley at Barclays and Ackerman at Deutsche Bank – is fast-becoming the surest financial consensus in history. If we bail out the banks to stop their stupidity creating a second Great Depression, they must accept far tighter regulation by those governments and bureaucrats who step in to save the day. No redemption without legislation.

There’s always a new way to gear up

Thing is, of course, we’ve all been before. Across the world, hundreds of times. New regulations come in to stall the last crash…and a new complex system of finance sprouts up, thriving on excessive risk which ends up needing your money – your tax receipts and your savings – to mop up the mess when it explodes in turn.

From Barnard’s Act of 1734 – which sought “to prevent the infamous practice of stock-jobbing” that had already peaked and exploded with the South Sea Bubble 14 years earlier – through to Sarbannes-Oxley in 2002, which tried to stop Enron and Worldcom once they had crashed, new standards come in after it matters. Financial risk-taking, meantime, simply moves on to find new ways to gear up, using the latest regulations to pin-point those loopholes that will, in due course, be closed up when it no longer counts.

Just what were the FSA thinking? Or were they not thinking at all?

“After the collapse of Equitable Life in 2000,” notes a letter to The Times of London last week, “the Financial Services Authority [UK watchdog] set up a review team on the regulation of the assurance society. Among the important ‘lessons to be learnt’, identified in 2001 were – and I quote verbatim – that ‘the FSA management take steps to ensure that the supervisory team is properly constituted with persons with the necessary expertise and knowledge…. “

[Yet] from the recent internal audit by the FSA on its regulation of Northern Rock [the top 5 mortgage lender which blew up in Sept. 2007] we learn that the bank ‘was monitored by supervisors with expertise in insurance, not banking’…”

More than that, the FSA failed to conduct a proper review of Northern Rock’s operations for the entire 18-month period leading up to its collapse. Even then, prior to that last full review of Feb. 2006 – and “contrary to standard practice” as this week’s official report into the scandal revealed – “formal records of key meetings were not prepared.”

Thus the quid pro quo of bail-outs for new rules becomes, in the end, a straight swap of excessive risk for incompetence. Underpinning this long-run historical fact you’ll find the assumption that “if one cannot control expansion of credit in boom, one should at least try to halt contraction of credit in crisis,” as Charles Kindleberger concludes.

For you, the tax-payer and saver, all that means is you get to pay twice – first in higher deductions and then through inflation.

Bet you’re glad Ben Bernanke will get all the thanks.