Home We have nothing to fear but (the) Fed itself

We have nothing to fear but (the) Fed itself

user profile picture Chris Martenson Sep 24, 2008
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Sorry to have been out most of the day – it was a day of non-stop phone calls and meetings. 

At this point, I am about to ready to charge Ben Bernanke under the anti-terrorism law.

How else to explain these comments that came across the newswire today?

12:28 Bernanke: Standard of living, GDP to shrink due to inaction
12:29 Bernanke: Very likely stocks would decline if plan rejected
12:27 Bernanke paints grim picture if Congressional rejects plan 

Translation:  If you don’t give my banker friends exactly what they want, I will make sure your people suffer.

Really?  If we don’t immediately swallow your plan, our standards of living are going to fall, stocks will take a ride down the log flume, and things will turn grim? Good gracious.  If that message were delivered by Bin Laden, the FBI would be involved.

In his defense, Bernanke did look suitably grim when he delivered these remarks.

Oh, wait.  Wrong picture, I think.

All (semi-)joking aside, the real issue I had with Bernanke’s remarks was this:

[quote]The key to the plan, Bernanke said, was that if Treasury was able to buy the mortgages, it will be able to hold them to maturity. As a result, the fire-sale price could be avoided.

This would remove uncertainty, return liquidity, and credit markets should be able to unfreeze, Bernanke said. [/quote]


What is this "Held to Maturity" thing of which Bernanke speaks?

Quite simply this: A "held to maturity" methodology for valuing a bond or asset  explicitly assumes that all the embedded cash flows will materialize, and then values that asset on the basis of that cash flow.

Is this realistic?  No.

In the current enviornment, the failed mortgages and other "troubled" assets that the Treasury is proposing to buy have been falling in price almost daily.  This is partly because of the fear that nobody is quite sure what they are worth.  But it is MOSTLY because the default rates on these assets have been extreme and are climbing with each passing period.  

In short, the sooner that Bernanke can "freeze" this process by immediately taking a snapshot of the current value (based on current default rates), the faster he can shovel money back to his banker friends and cut their losses.

The faster he can transfer these losses to the taxpayers, the sooner he can protect the banking industry.

Left completely unasked:  Is an industry so prone to such grand mistakes worthy of our very best efforts at shouldering their losses? 

In an election year, this becomes tricky.  Senators and Congressmen are going to have to face constituents, some of whom may have lost their houses due to completely unforeseen medical emergencies.  How to explain that their random loss is somehow less worthy of attention than a self-inflicted wound, 10,000 times larger, of an over-compensated financial industry?  That, my friends, is a tricky political ‘sell.’

In short, the fact that this entire bailout package is being rammed down the throats of Congress in the last few days preceding the last recess of a presidential election year makes me completely suspicious of the timing and the motives of the ‘pushers.’

Why is the Fed hard-selling fear and loathing right now?  I can only conclude that they are trying to sell us something they know is not in our best interest(s), or else they are trying to pull a fast one for other reasons. 

I literally don’t know which explanation I fear most.