Insanity defined: Doing the same thing over and over but expecting different results.

Here we go again.

Bernanke and pals have over the last two days rolled out some $1.3 trillion in new so-called "facilities", including buying agencies and consumer debt.

While there are many screaming about the agency purchases, this is permitted under The Federal Reserve Act (actually an amendment passed in the 1960s, although it has never before been used.) 

But consumer credit obligations are a different matter.  They are both unsecured and not federal instrumentalities at their source, and there is absolutely no authority for Bernanke to do this.

Loan against them, yes.  Buy them?  No.

Obviously, the smashing of the TNX along with agency spreads came of this; gee, is this a surprise?  But how does this help the banks?  Remember, banks borrow short and lend long.  They ain't doing any lending with that sort of spread. 

Of course we already knew that, right?  So what is this?

Its a raw attempt to support house prices - an attempt that will (just as have the others) fail.

I come back to first principles - the root of the problem is that banks and others made loans to people who could not pay.  That is, on balance there is too much debt in the system overall, and the quality of it is too poor.

It might be nice to think you can "unring" this bell, but you can't.  Nor can you solve anything by shifting who has or is guaranteeing the debt.  All that does is change who eats the default - it does not change the fact of the default, nor the credit quality.

The unfortunate second-order effect of all this bad credit is that it pumped consumption - that is, GDP - by about 15-20% from where it would have been without it.  That is, the majority of the GDP increase over the years from 2003-2007 was due to the granting of bad credit, not organic growth in wages and productivity.

Now we can deny this for as long as we'd like, but until we face this truth we will not solve the problems that ail this economy.  Sustainable growth will not return, jobs will not "come home" and productivity will not mount a sustainable increase.

Attempting to drive down the cost of money (credit) to "restart" lending is a fool's errand.  That simply extends more bad credit into the economy which of course puts on the table even more defaults over time.

Down this rathole lies Japan's experience of the 1990s, and ours to come - or worse.

You can only drive asset prices in a sustainable fashion by driving up real wages through productivity and new technologies.

If you do it through protectionism you get the 1930s.  If you instead depress wages through illegal immigration economic "growth" reverses unless you start making unsound loans, which is exactly what we did in the 2000-2007 timeframe.  The latter always blows up in your face, and once it does, you can't reverse it.

I am happy that Volker is on Obama's economic team.  I am not happy with the idea that we're going to play FDR, because any dispassionate analysis of the "New Deal" infrastructure and "make work" programs shows that they were quite counterproductive to economic recovery (never mind the other things FDR did like burning farmer's fields and shooting their livestock to "boost prices"!)

Paulson needs to be fired and Bernanke sacked - or he needs to resign.  Today.  These "promises" have no more ability to be kept than do promises that everyone can have free unlimited health care from 65 years of age onward. 

Paulson and Bernanke are effectively writing checks that President Obama is going to have to cash.  I suspect he is going to find that this will get extraordinarily difficult some time in 2009, and when it does, that's when the real trouble will come.  Just as President Clinton discovered that he's not really the "guy in the charge", so will President Obama - one way or another.

Enjoy this bounce in the market and if you're trapped long use it to raise cash, and for God's sake, don't do anything stupid shopping over the holidays.

More when I'm back from vacation.....