"Here I sit all broken hearted....."

Oh I cannot tell a lie - NOT.

The sell-off yesterday was predicated by not only the Barrons' article I cited in the weekend Ticker, but also by a Reuters follow-up and, when queried, Treasury confirmed that it had no intention of immediately bailing out Fannie and Freddie.

Now of course that wasn't Paulson who said that, and we know the game by now, right?

That is, you let the market get frothed up good on the short side, all the Bears come out and sell the beJeezus out of anything Financial, and then, out of the blue, after you call certain "friends" to tell them in advance you suddenly "JamJob" the market with some sort of "news" that you're going to fix it.

Of course you can't fix it, but the goal is really to just kick off a furious short-covering rally and give a knee in the nuts to the shorts.

How many times have we seen this?  And how many times do I believe that certain "favored people" were told in advance?

Oh, on the latter, all of them?

So what, precisely, was that nasty little rally late this afternoon, on heavy volume too?  Do you really expect me to believe it was all organic?  That there was no "whisper in the breeze"?

Uh huh.  I've gotten wise to you Paulson, you snake.

I don't trust these guys as far as I can throw them.

With that said, the credit market says that Fannie and Freddie are toast.  Nothing that the crooners have done can (or will) change that.

Let's get something straight here.  This isn't just liar loans.  Its everything securitized.  That's why nothing Paulson can do will fix it, and if he has an ounce of common sense he will not throw the taxpayer to the wolves trying to do that which is futile.

Again, our friend the CMBX, with the glorious deterioration of just the last few days:

What planet are you on if you don't think this is a big deal?  The AA and A spreads have blown out by 150 basis points over the weekend!

Something is blowing up.

Actually, that's a lie.  A lot of things are blowing up in the credit world.  In fact, its easier to list the things that aren't blowing up instead of the ones that are.

The ones that aren't blowing up (thus far) are:

• Treasuries

That's it.  A list with one item in it.

Most everything else is either at historical wides or is very close to it.

That's bad.

Paulson, of course, can remove Treasuries from that "safe" bullet list if he's stupid enough to actually try to bail out Fannie and Freddie.  That is, if instead of doing what I recommended over the weekend, throwing them into receivership and then running down the portfolio, forcing people to take whatever medicine they have coming, he could try to "buy out" $800 billion in bad paper, or worse, decide that he's going to paper over the problem (with your tax money) and hide it.  Either of those attempts has a high probability of drawing a big black line through "Treasuries" on the list above.

I hope he's smart enough not to do it, because Lord knows, we haven't got enough people in this country who "get it" and will raise hell in our streets, towns and in protest in DC to make clear that we the people will not tolerate such nonsense being offloaded onto the 80% of America who were prudent and did not make one dime in profit from this fanciful fraudulent credit binge from which all these "wonderful" Wall Street institutions - and their executives - extracted billions for themselves.

You want to know what's worse?  Inflation expectations are totally "off the reservation."  Forget about them being reasonable; there is nothing reasonable at all about what consumers expect.

After all, why should they?  Gasoline poking around $4, egg, dairy and cereal prices doubling over the last couple of years, $5/gallon heating oil "locked" pricing for the upcoming winter.  But as Bernanke says, "inflation expectations remain well-anchored."

Bullcrap.

Now we have a cute little problem.  See, Bernanke has spent the last year throwing literally half his $800 billion balance sheet into the system to intentionally drive short-term interest rates below where they should trade on a "fair value" basis, into one of the largest commodity bull markets of all time.

But just like his predecessor Greenspan, who whined repeatedly that long term rates aren't coming down as I think they should, Bernanke is seeing the same thing.

What's worse, as spreads blow out for anything but Treasuries the cost of credit over longer periods of time is ramping to insane levels.  To put this in perspective, the cost of "AA" Commercial Real Estate Credit is implied at 900 basis points (by the chart above) over the 10 year swap rate, which is currently around 5%.  This means that the actual cost of that credit is close to 14%!

How much has lowering the Fed Funds target to 2% done for those people?  NOTHING!  If anything the excess liquidity and allowing people to continue to lie about their exposure and credit risk has caused spreads to blow wider and as a consequence the real cost of money, which is all that matters to people like you and I, has gone up, not down.

The market controls the real cost of money, not The Fed, and the market says "nuts" to Bernanke!

Want a mortgage? It costs, according to Bloomberg, 6.37% right now.  A year ago?  6.24%.  But what was the Fed Funds Target a year ago?  5.25%.  So The Fed throws $400 billion into the pot to drive down short-term interest rates, and you see mortgage costs go upward, not down.

Who gets the extra?  Bernanke's buddies, who are trying furiously to get you to take out that mortgage so they can steal that extra "vig" from you and not go bust. 

But you, for your part, still can't afford the house.  Why not?  Because its too damn expensive, that's why.  It costs more than 3x your annual income, and all the "liar loans" and "exotics" that used to be available are gone, as the Ponzi schemes that were being run that made them possible have imploded and buried their proprietors.

You want to fix housing?  Drive prices down to no more than 3x incomes on average in a given area.  Period.  The quickest and easiest way to do that is to provide federal support for only 30 year fixed mortgages with 20% in cold, hard cash (no games) down and a maximum 36% DTI.  Intentionally cut off ALL other mortgages from ANY SORT of Federal support, implicit or explicit.  Poof.  House prices come back to affordable levels because nobody will pay more and people can afford houses again with SUSTAINABLE and AFFORDABLE mortgages.

On to our next point, are you enjoying getting it in both holes as a consumer, while our government and The Fed continue to lie about the state of the economy and what's being served up next for you behind Door #1?  There's something back there making noises suspiciously like a credit collapse monster and his name begins with a "D".  While there are plenty of people who say you "can't" get either of those "D" things with price inflation screaming higher like this, they are wrong.

The way it happens is really quite simple.  First you overlever the consumer with hopeless levels of debt, telling him that his balance sheet is "strong" and his house is the center of his "wealth", when in fact you're lying to him relentlessly for your own personal profit (as a "money man" or "broker", whether of stocks or mortgages.)  You run media campaigns trying to get people to "live Richly".

Then reality strikes - the Ponzi scheme runs out of suckers.  A Ponzi scheme the bankers and government intentionally constructed and let build to knowing unsustainable levels.  At the same time, the intentional "loose money" policies of the government and banking system, from The Fed to the "fog a mirror" mortgages, create tremendous froth in commodity prices.

When it all comes apart the consumer gets it in both holes, as his purchasing power is utterly destroyed at the same time his so-called "wealth" is proven to be a phantom - but the debt he was encouraged to take on is still there!

And see, The Consumer is 70% of the economy; as a consequence when the consumer's balance sheet gets lit on both ends of the page and burns towards the center the entire economy goes in the toilet all at once.  Suddenly, credit cards (which of course the consumer was encouraged to "lever up" with too!) and car loans (125% of sticker price anyone?) implode. 

The only company left that makes money is the guy selling plywood to board up the once-busy storefronts.

Why do we, as Americans, tolerate this sort of crap? 

This was not an accident - it was an engineered scheme devised for the explicit purpose of goading you into spending money you didn't have on things you didn't actually need so the bankers and lobbyists could make BILLIONS while literally BANKRUPTING YOU, and you fell for it!

Oh, and they passed "bankruptcy reform" at the same time so if you have an "above-average income" you can't get out from under the debt either; you're stuck with wage garnishment, preventing those who gave you credit they knew you couldn't repay on the original terms from being forced to take the loss that resulted from their intentional scheme.

Now let's think about our fine Presidential candidates for a moment.

Are you enjoying Obama and McCain spar in a Church over matters religious and snipe back and forth about "tax cuts for the rich" .vs. "tax cuts for the middle class", when in fact The Federal Government is currently turning the largest budget deficits in history, and doesn't have the money to provide a tax cut to anyone!

Are you enjoying McCain claim that Obama "tried to legislate Iraqi failure", while at the same time John McCain has ignored the fact that he was in Congress during the time Glass-Steagall was repealed, he was involved in the genesis of the credit bubble and willful regulatory blindness and even today he refuses to call for the fraudsters to be indicted, tried and jailed?  How about focusing your "legislative" complaints on things like fraud throughout our financial system and Congressfolk who got $70,000 in benefit from "friends of important people" mortgages, while that same firm screwed millions of Americans out of their house?  Mr. Jefferson of Lousiana was caught with an alleged $90,000 in cold hard cash (literally - in his freezer) and is under indictment - isn't $70,000 worthy of the same treatment?

Are you enjoying Obama spending his time attacking McCain for "pandering to the rich" while he himself is ignoring the fact that States attempted to stop the subprime mess in the early part of the decade (before it got out of control) and both Congress and the Administration sat back while regulators over which BOTH have control intentionally overrode state regulators and prevented them from putting a boot on the neck of those who were preying on low-income families?

You want to talk about religion?  How about having a discussion on what the candidate's faith - or for that matter any faith - says about honest and fair dealing?  You know, what we haven't gotten from Washington DC over the last 20+ years, irrespective of whether it was a Democrat or Republican sitting in a particular chair?  Do we now have a pair of snakes from The Garden of Eden running for the White House, where all we're really choosing between is which head is on the snake and whether that head has hair or is bald?

You want to talk about national security?  Good.  So do I.  How do we accomplish it when our economy and thus our source of government funds (remember, government in the end only exists fiscally because it has taxing power, and that requires a strong economy) is impaired by reckless overextension of credit, lying, fraud and rampant thievery up and down both wall and main streets, none of which either candidate is willing to take on?

Maybe we as Americans are asking the wrong questions this election season.