They Were Making It Up as They Went Along - And Still Are

"Mr Kashkari admitted that he plucked “a number out of the air” when deciding with Mr Paulson how much funding to request from Congress for the Tarp."

A telling memoir of the financial crisis by neo-mountain man Neel Kashkari, soon to be maven of what he hath wrought at bond insiders firm Pimco. Where did the $700 Billion Paulson Plan come from? Neel simply made it up.

They not only did not know then, as should have been painfully obvious to anyone who looked at the ten page request for $700 billion or else, but they also do not know now. When you do not have the facts to support your case, employ fear, uncertainty and doubt (aka FUD factor).

There is an all too human tendency to give credit to planning and forethought to experts, particularly those in key positions, in both government and corporate life.

One of the most surprising things I learned as a young man working his way from the hinterlands of a multi-national behemoth into the lofty towers of headquarters is that quite simply, they do not know. They are too often just frightened people making it up as they go along. Decision making too often comes down to verbal acuity, cults of personality, tides of emotion, and totemistic tribalism.

And the scary part of course is that the same can be said of the Bernanke's Gamble today. They just do not know, but can only hope for the best, and make corrections as they go along. Ben is just doing what worked last time, with a modification for what has been perceived as the 'one big error' the Fed made in deepening and extending the Great Depression.

It is, after all, the best that can be done with what is hardly a science, more akin to medieval medicine than geometry. Bernanke, Master of Leeches.

But these modern day monetary witchdoctors are wielding enormous power over the people and the nations of the world, and they are most likely making it up as they go along, with all the avenues of corruption, groupthink, self-interest, and self-delusion that this implies.

It is hard to think of a better characterization of the Obama Administration than a dysfunctional US corporation led by a high profile CEO surrounded by mediocre functionaries with enormous egos and retinues, bounded by special interests, losing its long-time monopoly status, foundering on the unyielding rocks of change. The decline of the Soviet Union redux, writ larger.

Then as now, the world is giving 'the experts' far too much credit for knowledge and forethought, and most sadly, wisdom.

In February 2008, Mr Kashkari was charged with drafting an emergency plan in case the credit crunch became a full-blown financial crisis. By October the crisis had arrived and his ten-page plan became the blueprint for the banks' bailout that Mr Paulson presented to Congress.

Mr Kashkari admitted that he plucked “a number out of the air” when deciding with Mr Paulson how much funding to request from Congress for the Tarp.

He told The Washington Post that he used his BlackBerry to calculate the bailout figures: “We have $11 trillion residential mortgages, $3 trillion commercial mortgages. Total $14 trillion. Five per cent of that is $700 billion. A nice round number.”

Recalling a conversation with Mr Paulson, he said: “It was a political calculus. I said, ‘We don't know how much is enough. We need as much as we can get . What about a trillion?' 'No way,' Hank shook his head. I said, 'Okay, what about 700 billion?' We didn't know if it would work. We had to project confidence, hold up the world. We couldn't admit how scared we were, or how uncertain.” The American Bailout Nightmare - Times London

Gold Daily Chart

A fairly brutal correction from an overbought condition.

Ben relieved the downward pressure today when he dispelled the myth that the US will be raising interest rates any time soon.

What seems a little funny is that so many are commenting on the US economy and markets as though this has been an ordinary cyclical recession and it is done.

We think this is something obviously a little more 'consequential' given the years of reckless excess and malinvestment that have led up to where we are today.

The crisis is not over, not by a long shot. What we have seen so far is prelude.

US Dollar Very Long Term Chart

Three Reasons Why Ben Bernanke Should Not Be Confirmed as Fed Reserve Chairman

Chris Whalen does his usual good job of cutting through the fog of crisis to get to the bottom line of how Ben, Larry and Timmy have failed to discharge their responsibilities adequately.

This does not speak to motives for their failure. Are they merely the pampered products of the government and educational sectors, inadequately prepared for high positions, untempered by the push and pull of private industry and the commercial world? What some might call the new useful idiots of state corporatism?

Is the Obama Administration the product of the Clinton wing of the Democratic party and the Chicago political machine, or just the Children's Crusade, a reform movement movie staffed by the casting agency of Spineless and Clueless?

Political corruption has been in vogue for the past twenty years or so in the US. As others have suggested, this is just a further example of the regulatory capture that ensnares the administrators and thinkers of big government, education and media with promises of grants, lobbying donations, and fat consulting positions to reward their cooperation with the corporate elite.

Whatever the cause, it is quite obvious to anyone who is looking at the big picture, the system as a whole, that prolonging the status quo is no sustainable solution, and is just painting a thin coat of whitewash over pervasive rot.

The banks must be restrained, and the financial system reformed, and balance restored to the economy, before there can be any sustainable recovery.

Institutional Risk Analytics
Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP
7 December 2009

To us, the confirmation hearings last week before the Senate Banking Committee only reaffirm in our minds that Benjamin Shalom Bernanke does not deserve a second term as Chairman of the Board of Governors of the Federal Reserve System. Including our comments on Bank of America (BAC) featured by Alan Abelson this week in Barron's, we have three reasons for this view:

First is the law. The bailout of American International Group (AIG) was clearly a violation of the Federal Reserve Act, both in terms of the "loans" made to the insolvent insurer and the hideous process whereby the loans were approved, after the fact, by Chairman Bernanke and the Fed Board. The loans were not adequately collateralized. This is publicly evidenced by the fact that the Fed of New York (FRBNY) exchanged debt claims on AIG itself for equity stakes in two insolvent insurance underwriting units. What more need be said?...

The second strike against Chairman Bernanke is leadership. In an exchange with SBC Chairman Christopher Dodd (D-CT), Bernanke said that he could not force the counterparties of AIG to take a haircuts on their CDS positions because he had "no leverage." Again, this goes back to the issue of why the loan to AIG was made at all.

Having made the first error,Bernanke and other Fed officials seek to use it as justification for further acts of idiocy. Chairman Dodd look incredulous and replied "you are the Chairman of the Federal Reserve," to which Bernanke replied that he did not want to abuse his "supervisory powers." Dodd replied "apparently not" in seeming disgust....

The third reason that the Senate should vote no on Chairman Bernanke's second four-year term as Fed Chairman is independence. While Bernanke publicly frets about the Fed losing its political independence as a result of greater congressional scrutiny of its operations, the central bank shows no independence or ability to supervise the largest banks for which it has legal responsibility. And Chairman Bernanke has the unmitigated gall to ask the Congress to increase the Fed's supervisory responsibilities....

No, It Is Not Entirely Different This Time - But It is More Insidious

There are some differences and they are significant.

The US is not on a gold standard, so the devaluation of the dollar does not have to occur in a stepwise function with an official restatement of value. This time the Fed can simply monetize debt and provide more dollars as it wills. That is fiat.

The US is not a net exporter to the world, as it was then. This is why Smoot-Hawley was harmful to the US recovery. The major nations of the world, such as Germany, Italy, and Japan, became engaged in their own domestic industrial recovery including rearmament. Today the US is the consumer for the world's exporting nations. And it also owns the reserve currency.

The New Deal was a bottom up Jobs Program. The Deal this time is a new version of trickle down. The second wave down in the Great Depression caught many of the professionals who had made millions shorting the initial market declines, or at least survived the Great Crash by selling early. The next wave down in the current credit collapse is going to boil the middle class, a few degrees at a time.



Geither: None Would Have Survived - Rolfe Winkler

US Dollar (DX) Daily Chart

The dollar rallied today on slightly higher interest rates, and hopes that the Fed will be able to raise short term rates more quickly than expected next year. The August Fed Funds futures ticked up a bit, raising the probability to 40% of a raise in the second half of 2010.

It is going to be interesting to see how Ben achieves this change in policy beyond the jawboning. Raising the interest paid on Excess Reserves is one way to do it, without actually draining funds directly from the real economy.

There is sort of a cocky smugness at the Fed that they believe they have inflation all figured out, given the Volcker experience. Just keep raising rates until you break it, and run a bluff on expectations as you go. We'll see how easy it is when the time comes.



As for the dollar, this appears to be a technical reversal of the low end of the downtrending channel, at least for now. Bucky has its work cut out for it. Without structural reform, the economy cannot build a recovery on low paying temporary jobs.

Timmy and Obama were on the airwaves today, touting programs to create jobs for next year. This will take money, and a resolve in the Congress that we do not yet see. Programs must be accompanied by reforms, or this is just The Credit Bubble, Part Trois.

Net Asset Values of Certain Precious Metal Funds and ETFs

Gold and Silver took some pretty stiff corrections as the jobs data provided a very temporary rally in stocks, but higher rates to the bonds, and with that some strength to the US dollar.

So far all this is well within our expectations. We bought back some of the trading positions which we sold on 2 December around 1225 when gold hit 1166 today, but will wait now to see if this support holds.

Later: Fresh update on the chart. Very quick move down to support levels. I will consider adding to the small position we bought back if gold can hit the 50 percent retracement level around 1150 on the daily.

Last: It did hit 1150 and I did execute some buys. The mining positions are hedged with SDS and TWM, but the bullion is a straight up buy.

November Non-Farm Payroll Report - It's Alive!

It's Alive! Well, Ben at least made the frog jump in response to repeated jolts of the dollar electric.

As you may have already heard, the US Non-Farm Payrolls Report for November came in better than expected with a loss of only 11,000 jobs, as compared to expectations of a loss of 111,000. And on cue, right after the Jobs Summit. The One is in Pennsylvania today claiming Economic Mission Accomplished. Now that's entertainment!

The economy has responded to Ben's monetary lightning. It has moved after an expansion of the monetary base that has not been seen since the early stage Great Depression, and a dollar devaluation which is still working its way through the system.

More importantly this sets the trend that the government wishes to sustain. Remember, we are not adding jobs, and especially permanent jobs that pay a solid living wage; we are losing jobs less quickly, and adding back marginal and temporary jobs for manufacturing jobs that continue to bleed out.

But for now that is enough for the markets it appears.



Most importantly it creates a definite bottom in the long term jobs trend.



The imaginary jobs report, aka the BLS Birth Death Model, is ticking along as a 'plug' in the numbers without a corresponding reaction to the underlying economy. The number did have an inordinate impact this month of November because of the slight seasonal adjustment. As you know the Birth Death model is added to the raw number prior to seasonality.



This chart makes the trends clear, but also shows the convergence between the raw and adjusted numbers in November. This is divergence is going to become a yawning gap as the BLS adjusts for seasonal hiring. There is a lot of temporary hiring for the holiday season in the US, and these jobs are eliminated in January. So the BLS adjusts the raw number significantly higher.



The improvement in the unemployment rate was largely due to people dropping off the radar of the government as their benefits run out. You can see this if you look at their estimate of the population of available workers. The number is shrinking, and the people drop into the 'discouraged' category.

This is revealed by what is called the "Labor Participation Rate." It dropped in November from 65.1% to 65%. Less people are working against a more stable measure of the population, civilian workers over the age of 16 that have not disappeared, at least as far as the government is concerned.



The question now is sustainability. The Fed and Treasury have jolted the corpse of the US economy back into a semblance of life. But can it sustain itself without a continuing printing of money to the point of hyperinflation?

Watch the median wage, and the actual spending numbers. This will tell us if the monster has a pulse of its own, and can be taken off the Fed's lightning. And if it is, what is it most likely to do once it gains momentum?

Deflation is rather unlikely unless there is an exogenous shock or a major policy error of tightening rates too quickly, almost deliberately. As this would be economic suicide we assume Ben will not jump off the ledge.

We also assume this will help Ben's nomination for a second term. And will make it highly difficult for Obama to wring another stimulus out of the Congress.

But, has the Bernanke Fed discovered the means to permanent prosperity for all? Is it enough to print money and through it from helicopters, if even to only a select few corporations? What are the unintended consequences yet to emerge?

The stage is being set for stagflation, if not a hyperinflation as John Williams puts forward fairly well in his latest special report from 2 December. We are still skeptical of that outcome.

Gold Daily Chart

We had a dead hit on the target of 1225, and the market seems to be withdrawing with stocks ahead of the US Non-Farm Payrolls Report.

If this is to be a normal pullback in this uptrend, then we would expect to see the 1190 level hold on the daily close. We would then look for a consolidation.

If this is to be a correction of the rally, then a pullback no greater than 50% of the breakout would be normal.

If there is to be a test of the breakout support around 1170, then it could be a rare buying opportunity if it holds and forms a bottom.

Our longer term target for gold is much higher than this.