Dark Skinny

So, as we breath a small sigh of relief and trust,  the bail-out remedy has been dissolved into the financial institutions — still fizzing –  and we wait for its effect. My blind and shaky faith in both Paulson’s and Bernanke’s economic capabilities reminds me of the Marx Brother’s film Monkey Business, wherein  Groucho quips, “Sure I’m a doctor, where’s the horse ?”.

The secretive, adhoc and shadow-agenda-tilted remedies of these two “government employees” does not stir any faith from my bowels whatsoever. Their continued verbal flatulence - telling us nothing really - makes me wonder whether the coming Depression is, indeed, stoppable - or is it like those multitude of assured and very expensive allopathic cancer “cures”, where it is so difficult to determine whether the poor and trusting cancer patient was - in the end - killed by the cancer or the vicious “cure”. Meanwhile, the advising doctors and drugs companies get fatter and richer. I’m sure even Hippocrates himself would shudder with disgust and horror at this sick ruse…

First Paulson. His background and pure essence is Wall Street. He was an Ivy Leaguer, East coast, and was a star wrestler and footballer at college.  He has a B. A. in English from Dartmouth College. Disappointingly, I can’t find any learned references to Economics within his education at all. Paulson began his work in government, moving up to work as assistant secretary to Jon Ehrlichman in the Nixon administration from 1972 - 73. From here he joined Goldman Sachs, eventually succeeding Jon Corzine to become CEO in 1998. In Wikipedia his achievements may be further summed up:

“His net worth has been estimated at over US$700 million.^[9] Paulson has personally built close relations with China during his career. In July 2008 it was reported by The Daily Telegraph that: “Treasury Secretary Hank Paulson has intimate relations with the Chinese elite, dating from his days at Goldman Sachs when he visited the country more than 70 times.”"

Just before the bailout vote in the senate, Goldman Sachs (together with other major financial institutions) contributed significant funds to both McCain and Obama as well as to other major players including Senator Dodd, Head of the Senate Banking Committee. Perhaps they did this to assure safe passage of the Bailout Bill through the Senate ? See it here :

Here is evidence of who Paulson really works for :

[youtube:http://www.youtube.com/v/BEumrdHOq0w]

Evidence of Political Manipulation by Goldman Sachs:

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve System. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Here is a fairly simple description of how - by the wondrous banking mechanism known as “Fractional Reserve Lending” - $700 Billion(The Paulson Plan) turns into $70 Trillion by a simple wave of the Fed’s magic wand.

Fractional Reserve Lending(FRL) is used by all banks these days - but usually with strict discretion. This is how banks make so much money. However, The US Treasury and particularly The Fed and its printing presses continually over-uses this banking mechanism to the extreme. The Fed can do this because they keep the interest rates low artificially. It’s quite simple and works like this - Say China wants to buy $1 million of US debt in the form of Bonds, T-Bills etc. So the Treasury issues the T-Bills via the Fed. The Fed gets the Chinese payment and is then allowed by US banking law - and the mechanism of fractional reserve lending -  to generate 9 X $1 million out of thin air via the use of their over-worked printing presses. The money generated from the T-Bills and T-Notes is supposed to be used to pay back the massive US Fiscal Debt. Nope, doesn’t happen. Instead the now $10 million is lent out at artificially low rates to all the US banks and financial institutions - and when these banks get their share, they can also multiply it a further ten times using the same FRL mechanism - for personal and business loans to the public at much higher lending rates.

So now let’s now talk about the $700 billion Bail-Out. The minute The Fed gets that $700 Billion, it then - with staunch help from their printing presses and their magic wand (FRL) - gets multiplied by 10 and becomes $7 Trillion. Ah, but then when the Fed gives out this money as a low interest “loan”, the receiving financial institutions can also multiply this by 10 again using FRL - so the final Bail-Out will suddenly become $70 Trillion dollars. Hey Presto !! Easy credit isn’t dead is it ?

To give you an idea of how big the $70 Trillion is - The current unmanageable US fiscal debt is only about $60 Trillion now.

Oh…and The Fed charges the government about 2.2 cents on the dollar to produce these greenbacks - so The Fed makes a clear profit (since The Fed itself pays not one cent in govt  tax) off the government and therefore the taxpayer of about $13.9 Billion dollars for creating all these federal notes off the taxpayers own money !! It’s almost laughable isn’t it ? Almost.

And so what will the effect be through the inevitable inflation on the ordinary Mainstreet citizen when the US markets and economy is suddenly flooded with $70 trillion ? Yet another huge “inflation tax” on its people ? And Wall Street is saved ?

It’s a Mainstreet massacre.

I quit.

Today, in their usual manner, the Fed gave away $630 billion to the markets. Without permission, they just did it. They are unstoppable aren’t they? And look what effect this has had, world markets have plunged and hit new lows. The single American Bank Wachovia has assets of nearly $700 billion. So is the US government going to save just that bank with its loose change of taxpayers money ? It certainly couldn’t afford to save anyone else. Truly laughable. This is a wonderful example of The Fed “pissing against the hurricane”. Again.

From the PFXGlobal Site:

“I am usually anti-conspiracy. Not because I think policy makers are morally above it, rather I think it is because they are intellectually below it. However, you have to agree that this particular issue was definitely under-reported today. While everyone watched the Democrats and Republicans in a slap fight, the Fed slipped several hundred billion USD (or at least made it available) into the market. What do you think; was the drama on Capitol Hill a red herring? Either way, I still say there is a ton of opportunity for traders.

If you think the Fed/Treasury team was stymied in their efforts to flood the market with $700 billion today you would be mistaken. The fed increased swaps with just about every central bank out there to $620 billion from $300 billion and increased lending limits to $75 billion for 84 day loans.

A swap with another central bank is essentially a currency pair trade. The Federal Reserve in the US is acquiring foreign exchange reserves through the swap by selling USD to other central banks. Obviously the Fed does not usually enter into transactions like this and does not keep the same size of an FX reserve like most other central banks do. This shift in behavior is supposed to help the other central banks distribute more USD to their domestic banks to prevent global liquidity problems.

What that means is that the Fed is injecting a lot of cash (specifically USD) into the market to try and ease liquidity pressures. In order to keep rates this low, commercial and private lenders have to be willing to loan at low rates. Increasing the supply of the USD should (in theory) decrease its cost and therefore increase credit flow. Unfortunately, based on today’s movement towards a stronger USD and JPY, the plan does not seem to be very effective yet. This is not a big surprise. Fundamentally changing the risk environment in the market is no easy task and that is what the Fed/Treasury team is trying to do. The capital markets are massive and composed of millions of individual participants. Forcing them all to accept your view that risk is overstated right now is not going to be easy.

This has implications for the deal that is floundering in the US House of Representatives. If this injection was not enough will another $700 billion help? What about another $700B after that? Are they merely digging the proverbial hole deeper? In light of current market behavior I think the USD and JPY still look like strong buys whether congress passes a bailout or not.”

The compounded difficulties of an inflating and volatile dollar, the US fiscal debt, the cost of oil, the sub-prime credit problems and market turmoil are all contributing massively towards America’s coming bankruptcy. These problems are all incestuously connected to each other, fueling and interferring with each other’s effects.  At the moment, in order to pay back America’s current total fiscal deficit, Americans would have to pay it’s government $400,000 each. Americans appear to be living on borrowed time as well as too much borrowed credit. I’m a European, and I am very aware that if the US goes bankrupt, then Europe must inevitably follow in this collapse.

I am also of the opinion that the $700 billion will have a very short term revival effect on the markets, - if any,  after all the US has a growing fiscal debt of about $59 trillion dollars now which is growing like a cancer at $1.3 trillion a year. So a $700 billion injection seems pretty useless as a band-aid fix. Below, I present two videos - one a Dutch video looking at the US problem - there are some easily understood stories and metaphors that Peter Schiff - a well-known American investor - tells on this video to illustrate the economic effects of the dollar and America’s fiscal path now. The other is an interview by Marc Faber - a successful European investor who knows the current American economic status intimately.

Bernanke and the Dollar Collapse

[youtube:http://www.youtube.com/v/GvtlyYN8LUw]

Marc Faber on the £700 Billion Bail-Out

[googlevideo:http://video.google.com/googleplayer.swf?docId=5099213542448858322]

Section 8 of The Paulson Plan simply reads thus:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

In effect this simple clause of Paulson’s Plan completey and utterly absolves Paulson, The US Treasury and The Fed of any reponsibilty, accountability or indeed any legal judgement over its implementation or its effects. In his madness, Paulson is saying - “Well who knows, this plan might work, but I don’t want any legal, judiciary or executive comebacks from the government or anyone else.” He wants carte blanche permission — with no oversight — to do what he likes with the $700 million of taxpayers money with no challenges, no opposition, no accountability, no transparency and no responsibility to the government. This also means that it will be completely safe for him to use legal or illegal means to achieve his ends. And Bush Jnr is pressing Congress to rush this Act though.

My God, I never thought that Financial Capitalism would ever defeat the will of the US people and their duly elected government but if this plan gets through Congress, then you may as well throw away The Constitution and kiss Democracy good-bye…

In a biting article, Robert Kuttner writing in ‘The American Prospect’ does not hold back:

“The deal proposed by Paulson is nothing short of outrageous. It includes no oversight of his own closed-door operations. It merely gives congressional blessing and funding to what he has already been doing, ad hoc. He plans to retain Wall Street firms as advisors to decide just how to cut deals to value and mop up Wall Street’s dubious paper. There are to be no limits on executive compensation for the firms that get relief, and no equity share for the government in exchange for this massive infusion of capital. Both Obama and McCain have opposed the provision denying any judicial review of decisions made by Paulson — a provision that evokes the Bush administration’s suspension of normal constitutional safeguards in its conduct of foreign policy and national security. [...]“

“The differences between this proposed bailout and the three closest historical equivalents are immense. When the Reconstruction Finance Corporation of the 1930s pumped a total of $35 billion into U.S. corporations and financial institutions, there was close government supervision and quid pro quos at every step of the way. Much of the time, the RFC became a preferred shareholder, and often appointed board members. The Home Owners Loan Corporation, which eventually refinanced one in five mortgage loans, did not operate to bail out banks but to save homeowners. And the Resolution Tru

st Corporation of the 1980s, created to mop up the damage of the first speculative mortgage meltdown, the S&L collapse, did not pump in money to rescue bad investments; it sorted out good assets from bad after the fact, and made sure to purge bad executives as well as bad loans. And all three of these historic cases of public recapitalization were done without suspending judicial review.”