The End of the Beginning

[Daveparts]

The End of the Beginning
By David Glenn Cox


This is not the end this is not the beginning of the end but it is perhaps the end of the beginning. (Winston Churchill) As always Sir Winston nails it, CNBC was holding a contest this week to name the current stock market calamity, Mortgage meltdown? Like the lookouts on the Titanic, “Know any good iceberg jokes?” But it’s all designed to try and bring calm to the naysayers who are outnumbered four to one.

How about Wall Street Watusi? It’s a dance it’s has an orchestrated character to it.
George Herbert Hoover Bush rules out helping homeowners as the commerce secretary insists the Fed won’t bail out Wall Street. But first thing Friday morning it did just that.

After the Titanic hit the iceberg Bruce Ismay and Captain Smith knew from the damage reports that the ship was doomed. Just as Fed Chairman Bernanke knows the economy is sinking as well. Captain Smith ordered the watertight doors closed and the bilge pumps to full throttle hoping against hope that a rescue ship would arrive in time to save them all.

But chairman Bernanke knows that there is no rescue ship coming. By cutting the discount rate he is opening the pumps to full throttle. The discount window allows banks and thrifts to exchange mortgage backed securities temporarily for cash. Originally intended as a day to day measure the maximum allowed was thirty days. But the Fed has decided to extend those terms virtually for ever. Bernanke will allow the loans to be renewed every thirty days at the desecration of the borrower.

On Thursday CountryWide mortgage the nations largest originator was being quoted credit rates between 12% and 15%. Working on a business model of lending to her customers at 8% it was obvious that a giant white monolith was lying dead ahead and the helm wasn’t responding. They could have gone to the discount window before the rate cut but 6.25 didn’t leave enough margins to keep the pumps running and would only buy them 30 days.

The Feds two pronged approach like any dance is all about timing, you can’t just dip you have to dip at the crescendo. Friday was the crescendo; the market was set to melt down, CNBC’s Jim Cramer rated the chances of a crash at 50/50. Those who trade for a living follow the market closely enough that they are very rarely ever surprised. The market was full of traders selling short expecting stocks to continue to go down. Bernacke pulled the rug out from under them; the ½ % rate cut meant the market was going up every one selling short was going to get hammered.

Their only chance to save themselves was to change direction and run with the heard and buy, buy, buy and hope the run up would offset the losses. But Bernanke’s real message was that the Fed would move to prevent bank failures. But he knows like Captain Smith they can only forestall the inevitable, the economy like the Titanic is losing buoyancy. New home starts are at their lowest level in a decade, lenders are returning to 20% down criteria and the watertight doors are being breached and bulkheads buckled by record home foreclosures. Or does the Fed think the lenders began originating nothing down mortgages with balloon interest rates because it just sounded like cool idea. The pools of buyers with 20% down had been outsourced and down sized the lenders were just trying to tread water themselves.

Bernanke’s move has been hailed by some traders as giving him rock star status but its nothing but bilge water. The Fed is trading cash for bad paper trying to bail out a sinking ship. Buying time then issuing calming words to the crowded decks while lowering the lifeboats. And George Herbert Hoover Bush has already made it clear there is no place in the lifeboat for you.

Sooner or later the Fed will have to decide who is going to get wet because there aren’t enough lifeboats for all the lenders. The little lenders, the unimportant are already over the rails and treading water but the move won’t help them they don’t have enough paper or customers to make it worth while to pull them from the icy waters back into the boat. The crew may raid the purser’s safe and drink the champagne but all on board know that the final destination has been altered.

Bernanke's move doesn’t change the fundamental dynamics of the problem, billions of dollars in bad loans predicated on inflated collateral values and purchased with an overvalued currency. As foolish as running full speed through an ice field on a moonless night and for the same reason. To get the business; the fastest steamship got the lions share of the business, the greatest returns in the stock market gets the lions share of the global capital.

During the 1920’s the majority of Americans lived on farms and rising commodity prices and increased industrialization meant farmers could farm more acreage. The demand caused land prices to rise and farmers were encouraged to buy today as you might not be able to afford it tomorrow. But then as European farms began to produce and it’s economy revived the need for American commodities collapsed.

Land prices collapsed as well, land selling for $400 an acre was going for $100 but no one had the $100. Herbert Hoover (the original one) encouraged the farmers to tighten their belts while he played medicine ball on the White House lawn. He ate fresh fruit and drank fruit juices for breakfast as farmers were eating dogs and cats. Despite the reports Hoover refused to believe, he offered incentives and loans to business AKA the Bernanke plan.

As the farmers folded the rural banks folded as the rural banks folded they took the bigger banks down with them. Half of the auto makers in the country including Ford and General Motors where shut down. Hoover’s plan was to offer the auto makers loan guarantees and the Red Cross to offer farmers seed to grow gardens.

But Bernanke and George Herbert Hoover Bush aren’t worried about getting the ship to port they know if they can just hold back the sea for seventeen months the Titanic will have a new Captain. The chances that the new Captain will be a Republican are about the same as the Titanic having a Jet Ski on board. Carl Rove is pulling for his favorite Republican Hillary, as the media try and win her the nomination before the first votes can be stolen. If they can’t get a Republican they’ll work to at least get the worst possible Democrat.

Then it will be Hillary’s depression, but until then the analysts and traders will all contend, The market fundamentals all look good we don’t see the recent volatility as affecting the global economy. The Titanic was doing quite well it’s self until it hit that iceberg or as Groucho Marx once said after bumping into a table spilling a bowl of soup on a mans white tuxedo, “It’s hardly noticeable unless you’re looking for a bowl of soup.”

[Warpy]

1. Home equity also collapsed all during the 1920s

as real estate in general got cheaper and cheaper.

What really did the economy in, though was DEBT, most of it accrued at the bottom as people who had taken a beating in everything else sought to cash in on the stock market boom by buying stocks on margin, financing up to 96% of the face value of each share.

When the stock market collapsed, they were left with worthless paper that represented debt they still owed.

Sage economists have been warning about derivative markets and hedge funds for the past 20 years, just as a few were warning about the massive debt people were assuming in risky stock ventures in the 20s.

The problem is that in economics, Scarlett O'Hara type thinking always rules the airwaves, and as long as some people are raking in a fortune and debt can still be leveraged by the rest to give the appearance of the good life, economists who should know better will simply think about the instability of such a system tomorrow.

Debt is deadly. No economy that is founded on debt at the bottom will stand for long. It will collapse. The only question is when.

[GeorgeGist]

2. Capitalism is doomed ...

to collapse over and over and over again; profit always flows to the top with only debt at the bottom to keep it flowing. Economists should be thinking of a middle class economic model!

[Warpy]

4. They did. It was called the New Deal

Greedy rich men and their coterie of brash young enablers couldn't wait to get rid of it.

The New Deal lasted a pathetically short time. It was the best deal working people have ever had and created a large and stable middle class.

[Daveparts]

3. During the Depression

My dad told me the land lady would come and beg for the rent, or any part of it. Groveling for a quarter or fifty cents in the same boat they were in just trying to get by.

[pretzel4gore]

5. maybe THIS is it!

Since mr pig put regan into the white house circa 1980, I have DREAMED of the lying criminal bastards over reaching and getting caught, humpty dumpty style. They practise a kinda loose goose anything goes polity AS LONG as it never benefits the people, the poor, the workers or the earth kittens etc, and get away with it for...well, oh they murdered John Kennedy and murdered Allende and framed Saddam...you get the idea. They got away with it cuz the news told us 'move along folks, nothing to hear here'...But since regan's era i hoped they'd pull a stunt, like murder lawmaker Senator Wellstone, or murder Margie Shoedinger, or Jimmy Hatfield, or...HUNTER S THOMPSON ferchrissake, and anyway someone who inside the plot leaked the news to cnn which hid the news but someone in cnn leaked that until finally the BIG STORY was mygod, bush caught red handed murdering some little kid! or some damn thing, but NOOOOO! History unfolded like god's got a hardon for nazipoohs, and it made ME fukking sikk, i tell you. So, IF the markets meltdown, really meltdown, economic collapse, police state etc, the suffering of innocence will boggle the minds of anyone who pays attention, we can be sure of that. The average city dweller on planet earth is 2 WEEKS away from cannibalism, and if anyone doesn't appreciate that fact, then so what? Really we should hope/pray the goddam landlubbing thieves steering titanic figger out how to dodge the iceberg, but it's tempting, truly tempting, to see... the lid tore off the lying bastards once and for all, the vast scheme to defraud humanity brought to light almost as an accident...hahaha! Wouldn't it be nice?
i'm being academic here, of course