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I have tried to warn people since the summer of 2007 that you cannot "print" your way out of a credit over-expansion, nor can you deny the ultimate contraction in the economy and assets.

Bernanke and other policymakers, including both the Bush and Obama Administrations, have tried to deny reality.

You can't.

The Bond Market has had it with the games, and despite a "good" auction today signaled its disgust with the lies, the unending deficits and both bonds and stocks sold off at the same time:

I know I keep pointing out this chart, and what it means, but you can't ignore it.  It is, in fact, everything.

This chart is not signaling economic recovery when on the same day the TNX jumps by 5% the market declines by 100 DOW points.

Guys, this is the start of the bond market dislocation that I have written about for the last two years.  It may stop or it may accelerate, but this much is certain - even if it stops here the dream of a 4% mortgage that Bernanke has hawked as the "key" to housing stabilization is not going to happen.

When we got down into the mid 4s I told people close to me to either lock or refinance and do it now.  Some did, some were holding out for that 4% number.

How's that look now?

Let me show you what happened on eRATE's real-time mortgage rate quoter this afternoon:

(click for a bigger image in a new window)

This was precipitated by a near-collapse in MBS paper about the same time the /ZN (10 year Treasury futures) took a huge dump.

You saw that right - the 30/fixed is now being quoted at 6.5%, up nearly 30% in one day.

I'm sure this will "settle down" a bit, but that sort of dislocation is what happens when you transfer the risk of insolvency to the Federal Balance Sheet and start playing games at The Federal Reserve. 

By the way, this makes the payment for a $200,000 note at 5% worth only $170,000 at 6.5%. 

Bluntly: Bernanke's screwing around just cost you 15% of the value of your house IN ONE DAY.

When the Treasury Market dislocates risk premiums go to the moon and EVERY sort of duration credit gets more expensive all at once.

The market calls all bets, Bernanke went all-in with 2-7 off suit, the flop came up A-A-K and the bond market is grinning.

Anyone care to bet what the bond market has for hole cards?

This will translate into corporate funding costs and when it does you're going to see a staggering impact on Corporate America, triggering another monstrous wave of bankruptcies.

THE GOVERNMENT MUST STOP THE STUPIDITY NOW; WE ARE HEADED FOR A NEAR-EXACT REPEAT OF THE 1930s WHEN FUNDING ESSENTIALLY DISAPPEARS. 

BERNANKE'S TAMPERING HAS DONE NOTHING BUT MAKE THE PROBLEM WORSE!

Disclosure: Getting short everything and soon will be shorter than a mosquito if the government keeps this crap up.

Oh do come on:

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program.

I predicted this a couple of months ago, if you remember.

I was too optimistic - I figured they'd try to hide it through some "side deal" with some company they funded:

I have already covered how you can get it in both holes a fourth time - that is, all the bank has to do is fund the "so-called private party" that is going to buy these "toxic" assets with an intentionally-written-off loan, thereby guaranteeing no more than a 5% loss.  It is impossible to prevent this from occurring, by the way; money is fungible so who's to say which dollar came from where?

And since the banks will apparently get paid (by you the taxpayer) any difference between internal marks and the sale price, not only get to prevent more than a 5% loss off the market price, they do even better as they get to guarantee no more than a 5% loss off their internal mark!

We just keep adding scams on top of scams; if $170 billion stolen from taxpayers to "bail out" banks via AIG isn't bad enough, this program will be some $500 billion (or more), and that's not even the total value since some banks have been buying up "distressed" ALT-A liar loans with TARP money in front of this program's announcement!

I didn't think they'd be so brazen as to do it in their own name, which is nothing short of a direct instance of theft of public funds.

Most of the time when you rob someone (including the Treasury) you wear a ski mask so your identity is at least somewhat obscured.  This has gone well beyond that; the banks are now robbing the public out on the open with the full complicity and cooperation of the government.

Do you intend to let this continue America?

No, this does not "fix" the economy.  It can't.  All it does is shift the loss from them to you, and those who must buy our Treasury debt so your Social Security and Medicare checks can continue to go out are not stupid enough to allow this to continue in perpetuity while tax receipts crash due to you losing both your job AND home.

It does, however, appear that The American Public is dumb enough to sit back and let themselves get robbed for several trillion dollars while at the same time getting evicted from their foreclosed home and laid off from their bankrupt company's job!

At least for now.

Disclosure: None material

PS: One of the forum folks "monikered" this as BLO - for "Brazen Looting Operation."  Yep.  Now consider this: You aren't the one getting the BLO-Job America, but you sure as hell will be getting the bill!

GM (NYSE:GM) is essentially done as a "public" company in the stock sense, and is headed for Chapter 11.

May 27 (Bloomberg) -- General Motors Corp., the largest U.S. automaker, failed to get 90 percent of its bondholders to swap their claims for stock ahead of a government-imposed June 1 deadline to restructure or file for bankruptcy.

The principal amount of notes tendered was “substantially less than the amount required by GM” and as a result “the exchange offers will not be consummated,” the company said in a statement today.

Chatter on the street yesterday was that "substantially less" was literally single-digits.

It appears that the bondholders preferred to take their chances in bankruptcy court, much like Chrysler's got steamrollered, instead of a guaranteed 90% loss.

My best guess is that they'll get the guaranteed 90% loss anyway, this time from the government who will ram it up everyone's backside.  Whether Obama and friends will be as successful in screwing the bondholders as they were with Chrysler remains to be seen.

Here's the problem:

After GM announced the exchange offer on April 27, the ad hoc committee of institutional bondholders said in a statement that the swap was “neither reasonable nor adequate” and showed “political favoritism of one creditor over another” because the United Auto Workers retiree health-care fund was originally offered about $10 billion in cash and as much as a 39 percent equity stake for $20 billion in claims.

Yep.  And that health-care fund, according to law, is subordinate to the bondholders.

Not that this has bothered Obama.

But I've opined on this before, and rehashing things over and over is for CNBC.

Instead, I want to leave everyone this morning with the following thoughts to muse over, since we no longer follow the rule of law in The United States:

1. If President Obama can "ex-cathedra" change the priority of creditors in a bankruptcy action, effectively engaging in selective default of debt, why should governments and private investors - such as China and Saudi Arabia - believe we might not do the same thing after using the money we borrow from them, when we find that we cannot pay our debts, just as GM can't pay theirs?
2. If these foreign creditors come to this conclusion, what is likely to happen to bond market yields on Treasury debt?
3. What leads anyone to believe that The Government can operate with a $3.6 trillion budget and a $2 trillion annual deficit?
4. What leads anyone to believe that we can close that gap, when our government is engaged in game-playing with claimed "reductions" in the budget, claiming that fractions of a single percent of the total are "meaningful"?

Oh, and before someone in the Administration thinks that jobs will recover, they might want to read this:

May 26 (Bloomberg) -- Americans may have to get used to unemployment greater than 8 percent for the first time since 1983 and an economy that won’t grow much beyond 2 percent as a consequence of the lost confidence in consumer credit that shattered financial markets.

By this time next year, “the market will realize that potential growth for the U.S. is no longer 3 percent, but is 2 percent or under,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview with Bloomberg Radio.

"Potential growth" was never 3%; that was a fiction created through pulled-forward demand - that is, through debt.

Now that Ponzi Game has collapsed, it cannot be restarted, but the debt service remains as we have refused as a nation to force those who made the bad bets to eat them.

El-Erian is wrong.

If the "pulled forward" demand represented a 3% GDP growth rate, and without that the growth rate is 2%, the actual maximum potential growth rate is closer to 1% because we refused to default the bad debt, and as such the carrying costs remain.

This is rather close to 0%, of course, which means instead of "recovery" what we are going to suffer through is an "L" shaped economic move.

This, in turn, will make it impossible to cut the structural deficits, which will lead those foreign creditors to start asking the four questions above sooner rather than later.

We have not avoided The Depression that I was talking about two years ago.

All we have done is delay it (again) and make it worse (again), because we have continued to add to that debt instead of extinguishing it.

As I have said repeatedly we were facing a 10% GDP contraction in 2000 to clear the bad debt.

As of the summer of 2007, we were facing somewhere between a 15 and 20% contraction.

We are now looking at a top-to-bottom contraction between 20-25%, and if we keep this up and our creditors pull the rug out from under us, it could be as bad as 50%.

That would return our economy to roughly 1994 levels, well before the Internet boom really got going, and, in fact, one year before Microsoft released Windows 95 (remember that?), and the longer President Obama tries to prevent this adjustment the worse it will be.

Welcome to the New America.

Disclosure: No position in GM, long ammunition.