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I've been slack-jawed a couple of times during this debacle of an economic mess, but this has to take the cake:

Here is the real stunner. A senior person at Treasury said to a small group of us that it is now official Treasury policy to extend and pretend on real estate loans. In other words, the policy statement from last week says, if you can make an analysis that says even if the current value is less than the loan, if you can do a spreadsheet that shows if you extend for 3-5 years, and if the economy gets better, and if the loan can be amortized down to where the loan is no longer more than the value, then the lender does not have to take an impairment -write down. Loans are to be modified by rate reductions, deferral of reserves, deferral of amortization or what ever.

Did 'ya read all those "ifs" in there?  What if one of the "ifs" doesn't?

It gets better:

Giant make believe. The free market seeking an equilibrium price is no longer economic policy. In short, the working of the free market is suspended. She went on to say it was administration policy that they will create new employment and by doing so they will boost the economy, and so then real estate values will return to old levels. There were 50 of the most senior and smartest real estate people in the room. They ripped her to pieces. It looked like one of the town hall meetings of August, except everyone there was a very senior, polished professional. At one point everyone was calling out or moaning at her. It was clear to all she had been given a few talking points and she was told to stick to them no matter how foolish she looked. The group told her in no uncertain terms this is terrible public policy. They said for jobs to be created you need to lower rents so the cost of occupancy was at a level to encourage more hiring. If the loan is kept at old levels and building values not reduced, then landlords can't reduce rents to where they need to be to make taking space by tenants economically viable. Retailers costs remain higher than they should be making it harder to lower prices to induce sales. So there is a massive make believe going on.

The pros get it (as have I and a few others.)  What's more they communicated it.

When I pressed the issue of political interference she said - what do you want us to do, bankrupt all the banks.

That is the choice.

What does this tell you?

A. The problem is going to take much longer to solve than it should,

B. The banks are still very weak, so lending will not return anytime soon,

C. A massive refi problem is getting deferred to 2013-2015.

D. The administration is playing politics with the economy to a degree that is dangerous. There has to be a massive value reset for real estate. We are deferring the inevitable.

Actually, it tells me something else.

What are the odds that all those "ifs" pan out?

Statistically?

Uhhhhh.

What happens when they don't?

The banks all go bankrupt anyway, and the economy has been further trashed by the destruction leveled on employment as a consequence of this policy.

What's even worse is that this jackass Treasury Representative, assuming the conversation reported really happened, told a bunch of professionals that if all of those "ifs" don't pan out the banks are all going to blow up.

What do you think those professionals will be doing when, not if, it becomes apparent that they're right - that the economy is not recovering at a reasonable pace and that the "extend and pretend" game is not only not working but is inhibiting recovery?

And by the way, I'm curious how you all think this is going to work out, given this little ditty (find the source here).....

These pros are going to short the ever-loving hell out of anything that has a ticker symbol as soon as the turn-down is evident!

There is only thing worse than being stupid - it is admitting that you're stupid by putting a bankrupt and unworkable "policy" in front of a bunch of professionals who have the acumen to analyze what you're up to, tell you that you're nuts, and then act on it to profit while grinding the banks and indeed all of America into dust - but you stick to it as "policy", even though those who are smarter than you are have told you point-blank that it won't and in fact can't work.

Thank you Barack and Turbo Timmy - you own it, this is your policy, this is your legacy.......

......and this will be your political obituary.

This jives with what I posted over on Tickerforum:

Preliminary sales data show shoppers spent $10.66 billion when they hit the malls on the day after Thanksgiving. That's only 0.5 percent more than last year.

The figures were compiled by ShopperTrak RCT Corp., a Chicago research firm that tracks sales at more than 50,000 stores.

Remember 2007?

ShopperTrak did their usual pump job yesterday and got people all excited that "Black Friday" really was. Unfortunately for them, the National Retail Federation posted actual numbers, not "boots on the ground" - and of course counting the "cha-ching!" is what really counts.

Uh huh.  ShopperTrak has a history of putting forth claimed "results" that bear no reasonable resemblance to reality.  How bad?

November 2008: Sales during the day after Thanksgiving rose 3 percent to $10.6 billion, according to preliminary figures released Saturday by ShopperTrak RCT Corp., a Chicago-based research firm that tracks sales at more than 50,000 retail outlets.

This claim of course turned out to be a monstrous bust, and that's being polite.  Now they're claiming a 1/2% increase.  Three years in a row of being "way off"?  Hmmmm.... maybe.

Notice "Coremetrics" claim too:

Web marketing analyst Coremetrics says the average amount online shoppers spent on Black Friday rose 35 percent.

That's nice.  Now how many baskets of products were sold compared to last year, and why isn't that number in there?

Anecdotally I did notice slow response times on some major online sites Wednesday night in particular, as many web stores tried to "jump" the Black Friday game by releasing their sales early.

My own anecdotal report includes a photograph from Destin Commons, an open-air mall here that is rather "haughty" in their store mix.  That is, there is plenty of high-priced stuff mixed in with some regular old retail (such a BassPro.)  I have watched traffic levels here in this mall since it opened soon after we moved here. 

Friday afternoon and evening were nothing to write home about, as you can see here.

I wouldn't call this a disaster - you can't shoot a howitzer down the street, as has been the case here at this mall in recent weeks - but I also wouldn't call this "strong shopping turnout."

The photo was taken at about 6:00 PM - right in the middle of the evening shopping period.  If this is any sort of indication as to what we can expect around here for the remainder of the season I predict many more store closings in January.  Weather was excellent - nice and crisp, as expected this time of year, comfortable with a light windbreaker.  No rain or significant wind can be blamed for the lack of people.

A quick drive by the local Best Buy shortly after this photo was taken showed a parking lot filled to the normal level expected on any Friday night.  There were parking spots available within 30' of the door, and the lot space directly in front of the store was about 30% full.  Normal weekend traffic - no indication of "black anything."

Bag count was light as well.  The vast majority of people held no bag.  Of the remainder those with two or more could be counted on your fingers - using only one hand.  The "sale" signs were prominent in the second-tier retailers, but the "haute price" folks seem to have pulled in their discount fangs - a calculation that may prove cataclysmic if they've guessed wrong on demand among those with "means" - or guessed wrong about how many people who once had "means" no longer do.

The CNBS pumpers had two mall operators on Friday morning with both claiming "strong" traffic.  Uh huh.  They were both inside their respective malls, and the traffic level looked more akin to a Wednesday lunch hour than Black Friday just after opening.  But heh, what do I know - maybe they just had a bad location.  And maybe I'm Santa Claus.  Really!

The culprit in all of this is almost certainly going to be constrained credit.  29.9% jacked interest rates don't exactly promote consumer spending, and neither does having your card limit decreased to $100 over your outstanding balance.  Both have been the primary mantras of the banks the last two months, right in front of the holidays.  While one can certainly make the argument that from a business perspective this is smart - they're trying to prevent huge losses from people who charge up to the moon and then skip on the payment part of the deal, the fact remains that you can't spend what you don't have or have access to, and if we revert to a primarily-cash transaction model for the holidays the balance sheet impact is likely to be "interesting."

All-in I'd say that my preliminary read here is that the season is off to a start roughly equivalent to last year - which was certainly not "good".  I didn't detect any meaningful upswing in terms of shoppers and certainly not in terms of what they're buying. 

I'm sure there are places in this country where there were mob scenes.  There always are.  But that doesn't reflect on the nation as a whole; Washington DC, for example, is stuffed full of people sucking on the government teat, and I'm willing to bet that malls in that immediate area were stuffed to the rafters with people spending Uncle Sam's largesse.

But in the real world out here where most of us live, the "economic growth" meme looks to be rather stunted - and that's being generous.

Merry Grinchmas.

It appears that Ben Bernanke has his knickers in a bit of a bind this morning....

For many Americans, the financial crisis, and the recession it spawned, have been devastating -- jobs, homes, savings lost. Understandably, many people are calling for change. Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

That's correct Ben.  Indeed, the only people who aren't calling for change are those who have abused their power to loot, pillage, and violate Americans over the last thirty years or so.  They're quite content with how things are now, and indeed, have gone so far as to threaten Congress with events that will lead to martial law if they don't get their way.

There is some history behind this, is there not?

The American Bankers Association secretary James Buel expressed the bankers attitude well in a letter to fellow members of the association. He wrote: "It is advisable to do all in your power to sustain such prominent daily and weekly newspapers, especially the Agricultural and Religious Press, as will oppose the greenback issue of paper money and that you will also withhold patronage from all applicants who are not willing to oppose the government issue of money. To repeal the Act creating bank notes, or to restore to circulation the government issue of money will be to provide the people with money and will therefore seriously affect our individual profits as bankers and lenders. See your congressman at once and engage him to support our interest that we may control legislation."

That would be 1890 Mr. Bernanke.  More than 100 years ago.  Once a viper, always a viper.

I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers.

You should not have bank regulatory powers.  The reason is simple: You have abused them and willfully ignored the abuses served upon the people, specifically:

• The marketing of trash securities with alleged "AAA" ratings that you either knew or should have known were backed by no ability to repay on the original terms - indeed, the only hope of payment was the continued appreciation of property values.
  
  
• The abusive practices of banks with regards to overdraft fees and costs - fees and charges that amount to the imposition of interest rates of hundreds of percent on terms that customers not only did not opt into but could not opt out of.  This has generated more than $30 billion in illicit profits in the last year alone.  Your belated half-hearted actions in this regard in the last two months come only after decades of abuse and threats to impose that which you would not do as a regulator by statute.
  
  
• Likewise, the "rate jack" operations of credit card issuers has not come under attack or regulation by The Fed.  Indeed, it was once again Congress that had to step in after years of willful blindness on your part.
  
  
• Finally, The Fed refused to regulate various predatory lending practices - including but not limited to those targeting minorities and low-income persons in general.

In short, The Federal Reserve is one of the primary architects of the current economic malaise and indeed the credit bubble that led to it.  For you to come to The People of this Nation and ask for more power and authority, say much less keeping that which you have had but refused to exercise in the best interest of the people, is an outrage.

The Fed played a major part in arresting the crisis.

You "arrested" the crisis through lies, chicanery and papering over the truth of insolvency.  Not one step has been taken by The Fed since the inception of the crisis to address the root causes of the collapse, which are:

• Excessive leverage - specifically, dodges and cheats on reserve ratios and Tier Capital, including but not limited to Sweep Accounts (first put in place by Greenspan), off-balance-sheet vehicles (Citibank alone has nearly a trillion dollars of alleged "assets" hidden in them) and advocacy of mark-to-myth rather than a strict standard of mark-to-market.
  
  
• Shifting of apparent risk via derivatives purchased and sold without proof of ability to pay in the event of default.  This was the proximate cause of the near-collapse of virtually all of the major banks in this country.  While you did not have the authority to prohibit AIG (and others) from transacting in these instruments without sufficient capital to pay dollar-for-dollar of exposure, you did have the authority to prevent banks under your regulatory umbrella from transacting in them and counting them as valid "hedges" against other positions.  You willfully and intentionally failed to do so, and still are willfully and intentionally failing to exercise your existing regulatory power to demand that each and every derivative be either with a counterparty that is proven to be able to pay or is disregarded as being "money good" by the bank under your jurisdiction.

In short The Federal Reserve has willfully and intentionally allowed the seeds of this crisis to be sown and grown while blithely reclining in somnescence,  smug in the belief that it will be able to paper over any failures by shifting the cost thereof to the citizens of The United States.

The People have (rightly so) said "no f%#$ing way!" and are insisting that this sort of willful blindness and open conspiracy to defraud the public be stopped.

Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is "too big to fail" -- while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

No it won't.  Not without real capital constraints and a demand that lending only happens in a sound, secure, and collateralized environment. 

Indeed, had The Federal Reserve exercised its already existing authority to demand that banks never lend out more unsecured than they have in "owner's capital" - that is, the total amount of bond and stockholder equity - there would have been no "systemic risk" or "crisis."  Instead those who had done imprudent things would have simply gone bankrupt, as businesses do each and every day, but the banking system as a whole would have been just fine.

But The Fed didn't do that, because forcing Wall Street and other big banking interests to live within their capital would mean they would make less money when times were good.

Leverage multiplies both risk and reward.  There is nothing wrong with using it, provided that the risk you take is your own - that is, it entirely belongs to the owners of the firm (the aforementioned stock and bondholders.)  But when you allow leverage to extend beyond a firm's capital you force the risk on to other, non-affiliated and non-consenting parties.

This is an outrage, and yet it is part and parcel of The Fed's mantra for the previous twenty years or more.  We have seen repeated instances of this, beginning with LTCM, extending into the Latin American and Asian debt crises, and then again into the Tech Wreck in 2000.  Time and time again the solution has been to reduce the margins between systemic insolvency and operating leverage.

This time you went too far and the system failed.  Rather than admit this, you now come to the people of this nation and demand even more control, after proving that you're a financial arsonist with both a big can of gasoline and an insatiable smoking habit.

We the people must say "no."

Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking.

No you haven't.  The former 14:1 leverage limit on investment banks, lifted in 2004 at the behest of Henry Paulson, has not been re-imposed.  You have not removed the Sweep Account exception put in place by Alan Greenspan.  You have not demanded that all derivatives be cleared on a central exchange with a central counterparty, forcing nightly mark-to-market and posting of margin, thereby removing the ability of banks to falsely claim hedges for which the counterparty cannot pay.  During the depths of the crisis you even demanded (and got) the right to set the required reserve ratio for a bank to zero - that is, you demanded and got the right to allow banks to take on infinite leverage.  This was buried in the EESA/TARP legislation and I, along with just a handful of others, noticed it. 

All of this you could have already taken care of under your existing authorities, or you could do all of this tomorrow - but you have done none of it, nor have you pledged to do any of it in the future as a condition of your continued existence as a banking regulator.

In short you are a bald-faced liar.

There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.

The Fed's statements, including yours, demonstrate that you have absolutely no clue as to the path of the economy.  In the months and years leading up to this crisis you repeatedly proclaimed that "subprime is contained", that "we will not slip into recession" and the biggest whopper of all, that "house price appreciation reflects strong demand and sound economic fundamentals."  None of this was true.  Indeed, you are a walking contrary indicator - whatever you pronounce the market would be wise to turn on its ear in terms of actual expectations for the future.

I made most of these points in April of 2008 - but of course you won't pay attention to anyone who gets it right, yes Ben?  Nor will you answer those critics, except through Goebbels-style repetition of bald-faced lies.

Or should you read my August 2008 missive in which I cited specifics:

Just like you said "subprime is contained"? (3/07)

Or "we do not expect spillovers from the subprime markets to the rest of the economy or to the financial system"? (5/07)

Or "monetary and fiscal policies are in train that should support a return to growth in the second half of this year"? (4/08)

Or "our baseline forecast is for moderating inflation"? (7/06)

Or ".... expect energy and other commodity prices to flatten out"? (7/07, right before the insane run in these prices began!)

Or if you prefer, you can read about them right here:

Chairman Bernanke before the Congressional Joint Economic Committee on March 28th 2007, just a few days later: "Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."

Chairman Bernanke at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, May 17th, 2007: "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Chairman Ben S. Bernanke speech to the 2007 International Monetary Conference, Cape Town, South Africa, June 5th: "The troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."

Chairman Bernanke to Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 3rd, 2008: "Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year."

Is it possible to be more wrong Mr. Bernanke?  I think not.

Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs.

Asset purchase programs.... do they have to be lawful Mr. Bernanke?  As I have repeatedly pointed out you have very limited authority to purchase assets and yet you act like those limits don't exist.  Specifically, Fannie and Freddie both explicitly disclaim the "full faith and credit guarantee" required under Section 14 of The Federal Reserve Act for you to buy their MBS and debt - yet you have and are willfully ignoring that requirement.

But all of this, Mr. Bernanke, belies the underlying problem - that is, mathematics.  The "Ponzi Finance Indicator" tells you (and everyone else who cares to look) exactly what is and has been going on:

This is the underlying issue you refuse to face, because doing so means repudiating decades of bad monetary policy and taking the inevitable hit to your reputation, along with that of The Fed, that would come from doing so.  It also would mean accepting an even deeper recession than we are in now - even a Depression.

But if we do not - and you do not - we will follow the path of Japan, which is staring straight down the barrel of government monetary failure.  Not today, but tomorrow for certain.

The reality of our situation is quite stark.  You cannot expand credit faster than actual GDP - that is, output.  Yet GDP is manipulated and falsely reported, with plenty of double-counting.  It thus is in fact presented as a much-more rosy figure than reflects reality.

But even with this distortion, credit is growing faster, and has been since 1953.  The "spread" has been, on average, about 3%.  And as you can see from the chart above, over the last 30 years it has gotten much worse.

The ultimate issue is that as debt grows faster than output the available money to service debt contracts.  That is, an ever-larger portion of gross output must be paid in debt service costs. 

If an attempt is made to prevent defaults, as you and Greenspan have done, you are forced to drive interest rates lower.  This is inherently backward - as one's debt-to-income ratio rises, the demanded interest rate should rise, not fall, as the risk of non-payment increases.

By intentionally tampering with the relationship between credit risk and interest rates the margin between current operating leverage and insolvency narrows.  Eventually you reach a zero interest rate.

But with a lower interest rate leverage rises exponentially.  At a 10% interest rate the maximum leverage possible is 10:1.  At 1% it is 100:1.  At 0% you are attempting to divide by zero.

This forces you into "extraordinary" measures.  But those are a chimera as well.  Dividing by zero is impossible no matter how you try to disguise it, and yet that is what you, and Treasury, are doing.

The simple fact of the matter is that debt service ratios became unsustainable as a direct consequence of your and your predecessor's willful blindness and outrageous conduct.  You don't want to admit this, because once again doing so means admitting that you have willfully ignored the math for more than a decade, but it is nonetheless true.

You cannot make a bad debt good by hiding it.  Losses happen when bad loans are made, not when they're recognized.  There is no escape from this fundamental reality of banking, and you know it.

Only by forcing the bad debt into the open and defaulting it can we clear the excessive leverage and cause debt-service ratios to fall back to sustainable levels.  The proper way to do this is to let the market set interest rates based on risk, rather than tampering with liquidity as you have done, and let the market sort out the failures.

Yes, Ben, I recognize that you face a "Hobson's Choice."  But it is one of your own making, and the lesser of the evils is to take the damage now while our government's credit is still strong enough to withstand the shock.

Japan took the other path, and they now have a real risk of an actual sovereign collapse.  We are following them down the same road, and there is no evidence that you, or other policymakers, recognize not just risk but the mathematical inevitability of where that road leads.

It is time to stop bloviating and dissembling Ben.  Our nation needs leadership and truth, not obfuscation and lies.  This is not a matter of political will and desire.  Mathematics bend to no one - not even Caesar, and should we refuse to acknowledge how and why we're here, along with taking concrete steps to address it, we shall discover that attempting to divide by zero will have disastrous consequences for our economic, monetary and political systems.