The Market Ticker

I wish this was about economics.

It is only tangentially so.

No, this is about the war in Afghanistan.  The FT reports:

Some time in the next two weeks, Mr Obama is likely to bring months of agonised deliberation to a close when he decides how many more troops to send to Afghanistan. The number, which could be as high as the 40,000 recommended by Stanley McChrystal, the general in charge, will be analysed minutely for what it can achieve on the ground in Afghanistan.

But as Mr Cheney’s contrasting observations illustrate, the more influential war is being fought politically on the ground in America. Somehow, the compulsions of US politics have brought the candidate who electrified America by promising to pull out of Iraq to a position where many of his most ardent backers fear he may be about to get America into another Vietnam.

We have already done that.

We must as a nation choose whether we are going to prosecute this as a war, or leave.

We have not fought a war since WWII.  None of the engagements we have entertained as a nation since with our military power have been wars, irrespective of what someone has called them.

There is only one way to fight a war.  You commit your nation's resources - material and the most precious of all, human - to the complete obliteration of your enemy.

You mass those resources against each objective in turn, without reservation, without holding back, without care for collateral damage or world opinion.

You do so until your adversary sues for peace, not because it is the political thing to do, not for expedience, but for one and only one reason: they're tired of dying.

There is no "armistice" or "cease fire" in a war.  There is only victory or defeat.  There is only death or life.  Collateral damage, including the loss of innocent life, is a known price that will be paid, although the toll is not of concern in that regard - only the certainty that it will occur.

If we are justified in utilizing military force - the last resort of any nation in the resolution of grievance - then we are justified in utilization of every bit of force we can muster, without mercy, without limit, without fear or favor.

If we are not justified in doing so we have no business placing our nation's resources, including and most especially the lives of our men and women in uniform, in harm's way, since each such excursion guarantees that some of them will not come home to their families and friends.

This nation once knew these facts.  We fought two World Wars, the first of which was arguably without risk of invasion or damage to our territory, the second of which began the same way but escalated dramatically on December 7th, 1941.  In both cases we mobilized not just our men and women in uniform but also every man and woman at home - we realigned factories to produce the machines of war, we rationed goods and services in our nation, we sacrificed.  We applied the full force of this country and its people to the task at hand, and we were victorious.  In the process we all honored those who fought, for behind each infantryman on the ground or airman in the sky there were a hundredfold more at home building the guns, ammunition and fighting machines - day and night - that they required.  When each of those who died on the battlefield fell, they gave their life knowing that our nation and her resources - all of them - were behind each and every fallen soldier, without limitation or exception.

If we are to press a military engagement in Afghanistan or elsewhere we owe it to our fighting men and women to approach that engagement with no less vigor than we did in World War I and II. 

We dishonor those who serve in our uniform when we ask them to fight and die with less than a full commitment of our national resources to the task we set before them. 

These fighting men and women, each and every one of them, takes an oath to uphold not an office, nor a person, but our Constitution - the defining difference between America and all other nations.

We must honor them in return, in that when our President and Congress determine that the use of military might is our right and duty as a nation, we the people must demand and our President and Congress must make a full declaration of war and the commitment of every resource within our nation, both military and civilian, without reservation.

President Obama, do what your predecessors did not in Korea, Vietnam, Kosovo and Iraq.

Either fully commit our nation to war with all of her resources or bring our troops home.

I am speaking of the notion that went up the flagpole on allowing banks to refinance commercial real estate loans at more than 100% LTV - and having this "overlooked" by regulators.

Oh, but they are!

Regulators, in a significant step, also said they won't penalize banks for performing loans where the value of the underlying property is now worth less than the loan balance.

Who did this?

The guidelines, released on Friday by agencies including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency, provide guidance for bank examiners and financial institutions working with commercial property owners who are "experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties."

Their comment?

"Financial institutions that implement prudent [commercial real estate] loan workout arrangements after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts," the agencies said in a policy statement.

One of the definitions of "prudent lending" is not to lend beyond the current value of a given asset, with any such "excess amount" requiring a dollar-for-dollar reserve of the bank's own capital.

Of course the others are knowing that the borrower can pay, which they appear to be covering.

But just as in residential real estate when you lend in commercial real estate beyond asset value you're doomed, because it is not possible to have a reasonable expectation that the borrower will continue to perform!

Why?

Primarily because demanded rents cannot be maintained.

Take two strip malls across the street from one another.  Both started with a "value" of $10 million.  Both now have a "present value" of $5 million.  Both are identical - in the same location, on opposite sides of the same road, both have the same square footage and amenities.

One loan is foreclosed and the property sold - for $5 million.  That buyer finances the $5 million purchase.

The second is "worked out" instead of demanding that the borrower either be foreclosed or pony up the other $5m (which he doesn't have), and the bank rolls the note at a negative equity position of $5m.

What happens?

Tenants start to go out of business.  As space opens in the $5m note mall, those in the $10m note mall see the open space.  So do potential new tenants. 

Is the rent in the $5m note property going to be higher or lower than the rent in the $10m note property?

How many of the $10m note property spaces will be rented one, two, three or five years from now, compared to the $5m property?

What is going to happen to that $10m loan?

This is an out-and-out scam that is simply going to end up costing the FDIC even more money, because the banks will be even further underwater when the note on that "worked out" property inevitably blows up.

Every time I see the government come up with some hair-brained scheme that will (1) never work and (2) will explode in the taxpayer's face, I maintain that I've seen the dumbest thing yet.

Unfortunately the FDIC and other regulators keep outdoing themselves.

This is ridiculous and anyone who believes it deserves to eat The White House Dog's used food:

The administration's blog post argued that Clunkers helped to lower auto prices on the rest of the vehicle market as well, a fact the administration said Edmunds ignored.

What a total load of crap.

First, I personally walked into dealerships during the "CFC" program time, and every single one of those dealers was literally screwing everyone who walked into the door.

Normally, you can buy an American car for $100 or so over invoice price.  I have, in fact, not purchased one vehicle for more since I started buying cars!  My last "new" American vehicle, a 2002 Suburban, was bought during the 0% "craze" following 9/11 and even with the 0% financing I bought it for $1,000 UNDER factory invoice.  I saw no dealer willing to sell at anything approaching that number this time - they were all selling at full sticker, and two had their own "supplemental rip-off stickers" on the windows that they refused to negotiate on yet were full of junk (the usual "undercoating" and "fabric protection" for $250 garbage.)  People literally got robbed to the tune of $2,000, $3,000 and sometimes more than the rebate was worth on these so-called "deals."

Second, this "program" destroyed the low end resale market.  It literally took all those cars and crushed them!  If you were in the market for such a clunker as the only car you could afford they all disappeared for the duration of that program.  This did severe damage to sections of the used-car market and the consumers dependent on it.

This program was nothing other than a royal screwing of the American Consumer and a sop to the UAW, and that's a fact.  Edmunds got this exactly right and the White House is pissed off that they got called on their incessant lies by a very influential auto industry publication.

Well, boo-freaking-hoo Barry.

Time to drag this out.... from quite some time ago.....

I was wondering how long it would take before the threats really started to show up in earnest..

Kansas City Fed president Thomas Hoenig is circulating a book titled “The Balance of Power: The Political Fight for an Independent Central Bank.” Charles Plosser of Philadelphia said on Sept. 29, “we must preserve” the Fed’s structure.

Must?  That implies that there is an "or else" in there somewhere... let's see.... can I find an "or else"?

U.S. stocks, bonds and the dollar would collapse if investors perceive Congress violating the independence of the policy-setting Federal Open Market Committee, said Former Fed Governor Laurence Meyer, now vice chairman of Macroeconomic Advisers LLC.

There it is!

Let's see.... stocks and bonds eh?   Which stocks and bonds would be "threatened" if The Fed was forced to account for its actions, like, for instance, to show us all what it bought, with what it bought, and to provide us with CUSIP's so we could look at the current market value (if any!) of these stocks and bonds?

Would that, per chance, be the stocks and bonds of banks that are holding hundreds of billions of dollars of HELOCs on their balance sheets at or close to PAR (100% of face value) when the first mortgage hasn't had a payment made on it in a year, the house is worth 50% of the first mortgage's outstanding balance, and the home is in BubbleVille, CA?

Or would it be the stocks and bonds of institutions that have (between them) well north of a trillion dollars of off-balance sheet "stuff" in a big black box labeled "good as gold", when "gold" really refers to the fact that it is "used dogfood" and has the same color - but not the same mass or consistency?

Would it be all those myriad institutions that The Fed was (along with OTS, OCC and the FDIC) responsible for overseeing and enforcing the strictures of Prompt Corrective Action (12 USC Chap 16 Sec 1831o), a law that has been entirely ignored when it comes to the larger banks in the financial system for more than a decade?

Would it be the institution (Goldman Sachs) linked to the NY Fed who has had board members who also served as the former Chairman of the company that isn't a commercial bank but managed to finagle itself a bank holding company charter - with the permission of the very same NY Fed?

The central bank has also come under fire for granting a waiver allowing a former Goldman Sachs Group Inc. chairman to remain on the board of the New York Fed after the company opted to come under Fed oversight.

What did Dodd have to say?

Allowing banks to select their supervisors is “absolutely backwards,” Dodd said this month, without mentioning Fed interest-rate policy.

Really Chris?  That didn't seem to bother you for the last how many years?  Why now?  A bit short on campaign contributions this cycle?

Some legislators want to “make the institution more political, and I think that’s terribly unfortunate,” Hoenig, 63, Kansas City’s president since 1991, said in an Oct. 9 interview.

Oh, I disagree Mr. Hoenig.

If the process becomes more political it will be by your own hand, and that of the rest of the Fed Governors, and it will be a side effect, not an intended outcome.

You really ought to go stand in front of a mirror, along with Bernanke, Plosser and the rest, and glance thereupon.  There you will find the cause of this little mess.

Let's see, shall we count the ways (although I'm sure I'll miss some of them!)  I think so.

• Greenspan rubber-stamped a blatantly unlawful merger of Travelers and Citibank, then lobbied for the passage of Gramm-Leach-Bliley, retroactively making it legal.  That (bad) law was the first of the last line of nails in the coffin of bank regulation that had kept the system sound and functional for more than fifty years.
  
  

• Brooksley Born warned of the danger of an unregulated CDS market and was literally stomped into the ground by the rank derision of both Greenspan and Larry Summers.  She was right, they were wrong and this nonsense allowed the AIG mess to unfold - a mess that was effectively sanctioned by Greenspan and Summers.  Where are the apologies and corrections?  Missing - the obfuscation continues in this regard!
  
  

• Bernanke ran his "Depression Avoidance Playbook" to a "T" following the original subprime meltdown.  However, he has failed to explain how he can be excused for (1) claiming that house price appreciation was "a reflection of strong fundamentals" in light of the fact that it was driven by dangerous and even fraudulent lending, (2) the nation "was unlikely" to suffer a recession, and (3) failing to detect or get in front of any of the failures prior to them happening.  In fact, Bernanke and The Fed granted many Federal Reserve Policy Waivers (the infamous "23A" waivers) that in fact concentrated and increased risk while the crisis was unfolding. 
  
  
• The policies of The Fed were allegedly to "help lending"; in point of fact what Bernanke missed is that while he can provide all the printed money he wants he cannot control where it goes.  And "go" it went, right into oil and other commodities first in late 2008 and then again in the summer of 2009, causing not one but two doubles of oil prices off the bottom - first from $70 to $140 and then again this spring and summer from $35 to over $80.  This, despite demand collapsing for oil and refined products.
  
  
• In the same light this "flood of liquidity", instead of promoting economic growth, went into the stock market as well.  This has driven the S&P's P/E to one hundred and forty (as of 9/30/2009), a level never before seen in the history of the stock market, and on a historical valuation basis some seven times expected price/earnings value and more than double the previous high of approximately 60 (just before the Tech Bubble collapsed.)  Should the stock market correct to a "somewhat reasonable" P/E of 50, the S&P 500 would trade at 375!  Should it correct to a "more normal" P/E of 20, it would trade at 150!  Of course earnings could (and almost certainly will) improve, but even if they double this implies that "fair value" for the S&P 500 is something close to 300!  What are the societal and political implications of that collapse should it come, and how does Bernanke believe he can avoid mean reversion - when every other attempt to do so thus far has failed?  Bernanke has done nothing more than create more asset bubbles in a puerile attempt to avoid taking responsibility for the policy mistakes that led to this crisis in the first place.
  
  
• The Fed (along with the other regulators at the table) have been either willfully blind or intentionally complicit in the "valuation shams" of the last several years.  They, along with Congress, twisted FASB's arm into formally allowing what amounts to mythical accounting to be used to "value" assets.  This, along with willful and intentional blindness (or worse) toward the requirements of Prompt Corrective Action allowed large banks, of which The Fed is one of their primary regulators, to find themselves in a negative real asset position compared to liabilities - that is, on an accounting basis, bankrupt.  Rather than take the institutions into receivership The Fed along with other regulators have looked the other way and "recapitalized" these institutions with taxpayer money via what amounted to locking Congressional leaders in a room and pointing an economic gun at their heads.  This isn't the first time either - witness Citibank's history during the Latin American Debt Crisis, LTCM and other episodes.  By some accounts several of these institutions have been broke more than once and yet "saved" by this "regulatory forbearance."  The cost has been shoveled off to borrowers and the taxpayer generally.
  
  
• The Fed has arguably violated the black-letter law of Section 14 of The Federal Reserve Act.  Section 13(3) currently allows The Fed to make loans under "unusual and exigent circumstances" as it sees fit but nothing in Section 13(3) permits it to purchase assets by printing new bank reserves - that is, by printing money.  That function is controlled by Section 14, and a plain reading of that section does not disclose any legal authority to buy Fannie or Freddie paper, nor the assets of Bear Stearns and AIG.  Yet all of these programs were in fact put in place and continue to this day.
  
  
• Who is the real holder of all the Treasuries in "Caribbean Banking Centers"?  You don't actually expect me to believe that little islands like Antigua and Grand Cayman have the sovereign wealth to support holding nearly two hundred billion dollars of Treasuries, do you?  Is that a vehicle by which back-door monetization can (and has) taken place?  Germany, with a real economy and government, by contrast holds a mere $55 billion dollars, and even Russia (and Hong Kong!) have only $121 billion.
  
  

The Fed has promoted and in fact still is promoting through policy action the lie that credit can expand "forever" at a rate that exceeds GDP.  This is mathematically impossible and Bernanke knows it.  I do not accept that he is ignorant of this fact as he is clearly an intelligent man and in addition is a credentialed Professor with an advanced degree - therefore, I must conclude that this is not an error but rather an intentional lie.  It is, in fact, the big lie upon which all others rest, and yet as I have repeatedly pointed out the mathematical facts are not subject to dispute.  To recap, here's the graph:

And to recap on the averages:

GDP growth from the early 1950s onward has been 6.818% annually, debt growth 8.777%, for a spread of 1.959%.

From 1990 onward, GDP grew at 5.396%, debt at 7.907%, for a spread of 2.511%.

From 2000 onward GDP grew at 5.225%, debt at 8.495%, for a spread of 3.270%.

The spread is increasing and the chart above shows that mathematically it is inevitable that you WILL reach the point where debt service cannot be maintained so long as the spread either is maintained or increases.  This is the essence of the "Ponzi Finance Indicator" that I have posted before, to wit:

All of this data is from The Fed's own Z1 release and the BEA's GDP series.  

You can't argue with your own data!

The outcome of these policies is not in question, as that is a matter of mathematics.

Mathematics that The Fed has willfully and wantonly ignored.

Congress must put a stop to it before the economy and monetary system collapses - not due to "oversight" of The Fed, but rather due to The Fed's own policies, obfuscation and willful disregard of mathematics.