Good news on the Street is that Lehman Bros “met expectations” which means it hadn’t folded as of Tuesday noon.

And I’m glad to know that as an American taxpayer who didn’t particpate in the Liar-Loan Industry, that I’m now the proud owner (indirectly of course) of $30 billion of these babies courtesy of “Bail-Us-Ben”. Of course, this is only for 6 months (unless there’s an extension), and the goal here is to get out of this bad paper by severely loweringrates on the massive amount of resets on variable-rate mortgages due during the remainder of 2008. Hmmm…, is the next Bubble going to be residential real estate, or can we really get Back-to-the -uture with Dutch tulip bulbs ??

Shares traded on Warsaw Stock Exchage have bounced back and resurged enormously today above 5%). Maybe this bold and so alleviating move will restore confidence in emerging economies. This lack of confidence was really terrifying and umdermined not so liquid markets like polish market, regardless of their economic strong basis. Such a frustration was triggered off by fear of US market to collapse. Since that binge started I have strongly belived that it would came to an end with US support. I belived that strong emerging economies would pluck stock exchanges from obscurity sooner than in United States, but essentially the strong consecutive tremors (shocks) was required from US – like cutting rates. So cheering this FED’s move, I expect another drop which would equalize half percentage point or one more time – three quarters; but no sooner than next scheduled meeting. Don’t make markets too anxious Ben!

But what worries me in the long-haul is weakening dollar, whose stability for decades was substancial for developing world. Now plummeting of greenback fuels fears for future of exports from emerging markets, of course, in the long-haul.

When Secretary of the Treasury Paulson talks about “a strong dollar policy”, his nose must be getting longer! For crying out loud, the federal government alone bears outstanding liabilities in the 60 – 73 Trillion dollar range! We’re on an economic Titanic headed for an iceberg.

None of the candidates for president have dealt publically with the serious issues we will soon be facing. Ethinol produced from food stocks is a joke and is a reason why food prices are climbing.

More importantly, it seems that our so-called leaders are asleep at the switch as we will soon face the great uncertainty of global peak oil production. This event could bring havoc to the world economy unlike any other. Why? It means that we cannot grow an economy anymore with petroleum production. Should oil availability fall, due to geologic limitations, we will fall into a problem with no known solution. Some oil fields are falling in the double digit percentages per year and will some countries will no longer have crude available for export.

Why should oil producing countries boost production and depress prices? After all, they can sell every drop they pump.

Why would OPEC or non-OPEC nations ship the US oil if our currency is collapsing and may be rendered worthless over time if Chairman Dr. Bernanke has his way.

Historically, Arab oil producers have reinvested much of their oil proceeds in US investments and US paper. Why would they want to continue this practice if the currency is on the road to distruction?

My reaction to the post first — followed by the excerpted posting I am reacting to.

I don’t know what good it would do to know what is going to happen. If things turn out worse than we expect, the only “good” thing that might come out of this is to have the academics and intellectuals write more papers at the FED to rationalize why it is not the FED’s fault.

The Austrian School the writer is referring to has been saying for a century, that for every ‘joyous’ artificial boom created by so-called easy credit, there will be an equally ‘painful’ bust, as the credit artificially injected into the financial system is unwound.

I agree in principle with the many writers below that perhaps this time, easy and looser credit standards will not help, and may make things materially worse. As Paul R. La Monica’s article suggests “Time may be the Fed’s only ally.”

But time may be all of our ally in this struggle and not in the way Mr. La Monica intends. This time it may really be different. This time, only time and not any of the Fed’s short-term interest cuts, nor any of its other interventions, may be what will help.

The allusion to drugs is appropriate. In the 1920’s when Benjamin Strong of the Federal Reserve, boasted to a French central banker that he had goosed the U.S. economy with a “Coup de Whiskey” (of easy credit) he thought he had done a good thing. That was part of the Roaring Twenties and its mentality. It led directly to the Great Depression.

Today, easy money seems to be the only drug the FED can administer. It is the only “weapon” in its arsenal. Of course the FED can apply this first-aid in many ways, some quite “unconventional” by its own admission. These include the direct purchase of “assets” — where otherwise such assets are not worth much to anyone, like the now gone-bad MBA’s (mortgage-backed assets) and other types of credit “paper”.

What all these methods have in common is exactly what got us here in the first place — more easy (paper) money. The bailout of Bear Stearns will be followed by many more such bailouts “as circumstances dictate”. What the FED has many times in the last decade encouraged all of us to think — and it has changed popular mentality in so doing — is that the FED stands ready like some Super Hero, a Zorro or a Superman, to create ‘liquidity’ when and where it is needed. The ultimate financial moral hazard.

The FED says it will never bust a growing asset bubble, but it will “mop up” after the bubble explodes. This is because it believes that “no one can recognize an asset bubble in the making”. But it says the asset bubble can be recognized once it blows up and blows a lot of the rest of us up with it.

The FED’ policy is ludicrous. The Economist magazine has written many cover stories over the last decade from the Technology bubble through to the Housing bubble warning of the perilous state of such bubbles and the likely, very damaging, outcomes from the eventual natural bursting of such bubbles.

As many have indicated in this web log, the last thing the consumer needs to be encouraged to do is to take on even more personal debt. In the “good old days” bankers and politicians would encourage us to save. What went so horribly wrong?

For a Central Banker, Mr. Bernanke has said some really bizarre things. The European Central Bankers for example are probably too polite to say it in public, but for them Ben Bernanke is not a bona fide Central Banker. When Mr. Bernanke wrote in 2002 for his now famous (or infamous) “Helicopter Ben” speech that any determined government and central bank can force the people to spend more of their money, he did not sound like any bona fide central banker that the Europeans could recognize. Please see the link for the text of his full fascinating speech: http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

Ben Bernanke in essence said that if the American people were not prepared to spend enough of their own money — or other people’s money, in the case of that part of the population who had no money to spend and would have to borrow — he could force them to do so. He had at his disposal an invention called the ‘printing press’. Mr. Bernanke was prepared to destroy the currency to save the economy (but in so doing, he would of course destroy them both).

He claimed in his speech that by threatening to so debase the American Greenback, no one would want to hold it, and would naturally spend it for anything they could buy. Thus came to be born the “Bernanke Machine to Increase Aggregate Demand at Any Cost and By Any Means”. This is part of our Modern World and its morals.

And this guy is the head Central Banker of the leading nation in our world. Is this somebody’s idea of a joke?

Sad to say, Bernanke is reflecting popular attitudes. Who created those attitudes is a subject for sociologists, but let’s just say that this type of thinking is exactly what prevailed in the Roaring Twenties. And we know how and what changed those attitudes. That may be what it takes this time — although this is a ‘lesson’ that I would not wish on my worst enemy.

The other thing is that Bernanke operates within a system that is faulty. The paper money system is open to abuse, far too easily. It has few checks and balances. It is man-made and can be man-unmade. The fiat money and fractional-banking system, along with the modern financial system, with its creative ‘geniuses’ who strive for ever-newer financial instruments and techniques, with little or no oversight from regulators and regulations, have to take their share of the blame. Any paper money system is open to just so much such abuse and artificial manipulation. The incentives are just too strong to resist.

If we could just recognize, as an example, that huge money is made from Foreign Currency Trading, or Bond Trading, activities that at their core add nothing to our mutual lives, and employ people who could actually be doing useful things with their lives and helping to solve society’s pressing problems. Why do these activities (and many more like them) need to happen today? Because we use paper money and different national governments choose to inflate their currencies (that is, debase them) at different rates.

As far as easy-money goes, if that was the answer to our current problems, then Zimbabwe would be the poster child of how to solve one’s economic problems with its “printing presses” running “red-hot” as the writer below mentions.

One defense that should be made for the FED is that it has an almost impossible mandate. The European Central Bank does not have its hands tied by such a mandate. Namely, the FED has not only the value of the U.S. currency to defend as one of its primary mandates. It also has as an equal and polar-opposite objective — namely, to keep the American economy humming to ensure full employment. This is laudatory as far as the statement of such goals could be faulted by no one. But these conflicting goals may unachievable in reality by a single institution. The other Central Banks in the developed world do not shackle their Central Banks with these 2 conflicting “job descriptions”.

Modern economic experience has shown that a Central Bank operating with a paper currency can only realistically hope to achieve the maintenance of its currency’s purchasing power, and even that, probably not very well. When the FED is asked to both ensure that the economy operates at full employment and then is also asked to maintain the purchasing power of the U.S. currency, it will at times, be in conflict with itself. It cannot achieve one goal without jeopardizing the achievement of the other. It may even be reluctant to burst obvious economic bubbles, because then it will be going against one of its mandated objectives.

As well, in ensuring that a bubble is maintained over a long period of time, it can be setting itself up for future failure. That is the situation we appear to be in at the present time in history. The FED does not know what to do. If it puts the pedal to the metal it can ignite inflation; if it doesn’t it will prolong the mess we are in. My personal take on it, at this time, is in agreement with the writer below — we’re really in it, and it is going to take a long time to clean off our collective boots.

The other more germane question to be asked, is whether a Central Bank, can realistically even achieve the modest single goal of monetary stability. Milton Friedman argued that it could not. He would have used a mechanical rule (a computer in essence) to control the money supply. He saw that no humans could ever be free of conflicting emotions and reasoning, and free from political pressure, and that therefore no human or humans could do the job better.

We first abused and ultimately, over time, destroyed and threw away a good, not perfect system, under the gold standard. Return to that regime is not going to happen. In the long run we might be stuck with our Central Bankers.

“Where have you gone, America, a world turns its lonely eyes to you.”

(Apologies to Simon and Garfunkel and to Joe DiMaggio).

“History shows that Fed easing will eventually work their magic.”

Good Luck America, our health depends on yours!

Militarily we continue to control our destiny. But our futures won’t be decided on any battlefield. Our national destiny is in the hands of a people who produce less and consume more each year.

Then, there is the Economic Stimulus Act of 2008 (the IRS letter arrived today.) I’ll be pleased to accept the check but find it hard to believe that being able to buy a tank of gas each month through the end of the year will do much to excite the marketplace.

Am I supposed to feel sorry for any so-called U.S. Big Business and the so-called U.S. Stock Market? Hey, suck it up big boys, and earn your money for a change. That is what is being told to American workers trying to make a living. The only difference that I can see is that you Big-Timers will have to start shopping a Wal-Mart, and buying less expensive toys. You are the ones who keep telling us lower-level workers to live within our means, well now it might just be your turn to feel a little bit of what we live with day in and day out. You can run, but you can’t hide, and your time is coming to see what a lot of people have been living with due to your excesses.

Get a grip, and see what you are doing to the working class in this country. Spread the wealth, or suffer along with us, you snobs……….

I ain’t gonna invest another cent in your markets, until you start giving the working man a fair share of the profits. You are way to greedy, and self centered, and have no respect for the common person. We need a new President, and a new vision for this country. The way things have been handled for the last 5-8 years really sucks.

The Fed’s role in the deal suggests federal officials fear a systemic collapse of the U.S. financial system were Bear Stearns to fail. The fear stems from Bear central role in a multitrillion-dollar web of interconnecting derivative contracts.

Now we’re talking trillions!

But the CPI came in today at 3-4% per annum. So inflation is at bay! Count on the FED to cut interest rates by 50-75 basis points next week. The dollar will drop a bit more and the experts will continue to tell us that a weaker dollar is good for US. We’ll just have to limp along a few more months before the ecomony turns around and happy days are here again! Keep the faith!

The FED has embarked on a “buy time” strategy that will prostrate the economy after a Democrat is elected in November for years to come. Then the fiscal crisis will necessitate the “gutting” of Social Security and Medicare, completing the emasculation of the New Deal once and for all.

I know this won’t happen… will it?

This recession is not too much different than the other recessions. An the last one was just six years back.

Central Govts got to do two things at same time :-

- have people spend more
- at same time hold priceline

Key success factor: Govt should not hesitate to actively intervene to hold priceline. Controversial move but necessary to get over stagflation fast.

And we are facing the same issue. I am very very curious how the US/ Fed tackles this. Great learnings for us.
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Check out a detailed analysis and an active discussion at my free blog.

“India : from a slowdown to a recession – and what it might imply”

taxationindia.blogspot.com

Risking more inflation will only prolong or make worse the inevitable.

The government has allowed millions of illegal immigrants to overrun this country, providing a cheap boost to housing sales and retail spending. Now it’s all crashing down and we’ll all pay the price. Left alone, the financial markets will be forced to suffer the spoils of their gluttonous gambling – they deserve it.

We cannot continue to exist as a soceity without producing hard goods that we can sell amongst ourselves for a profit.

Wall Street, it’s WAL-MARTs, and China are the problem. The solution is to abrogate all of the _AFTAs and become America again.

Yes Feds bring the interest rate down to 0% like Japan did, which then took them 10 YEARS for recovery from what the USA Feds plan to do… not very smart for those who think they are so smart.

Bill Adams