Crash Warning

After repeatedly saying there was no timeline to tap the second half of TARP Bush has requested it and apparently intends to blow it before he leaves office. While it would appear that there isn’t time to tap it before he leaves office he has an ace up his sleeve just like when TARP was initially proposed.

Recall that on September 19th when Paulson proposed TARP the SEC banned short selling at Paulson’s insistence leading to a squeeze on shorts. They had to buy back the shorted securities regardless of whether or not it made sense to do so, predictably the markets spiked but this wasn’t explained in the news which attributed it to Paulson’s plan. Then over the next few days as congress dithered over Paulson’s ridiculous three page request for 700 billion, short sellers had exited their positions and the markets resumed their downward slide which was blamed on congresses inaction.

It appears that the current charge will be lead by Citigroup, J. P. Morgan and Bank of America. Citi has had repeated bailouts, is seeking to sell any assets it can and has now moved it’s earnings report from January 22 to Friday morning. J. P. Morgan has also moved up its earnings report and eager to get in on the act BOA has requested more money because of losses at Merrill Lynch and Countrywide which BOA just acquired in a merger sponsored by the Federal Reserve to prevent them from going bankrupt.

While I have no ideal what will happen tomorrow but I have an inkling how the markets will behave after the earnings reports Friday morning and I reckon more banks will pile on; after all, their giving away free money.

When banks don’t lend

The problem with a drop in lending is that under fractional reserve banking as debt is paid off the money is destroyed and removed from circulation unless new loans are written, and thus new money created, to pump it back up. The current crisis is not from debt being paid down but from being charged off but the effect is the same.

When there is less money its value goes up and loans are harder to pay off leading to further defaults amongst those with debts; as our monetary system is presently set up it either expands or collapses. It is a house of cards and the reason for the obsession with growth but growth can’t go on forever. Eventually wealth becomes too concentrated and debts become too high to service.

I read somewhere, but don’t recall where that someone calculated that a penny invested at 4% interest at the time of Christ would, by 1750, have been worth a ball of gold the size of the Earth.

By my calculations 1 Oz of gold, or $20.00 at the time of the last depression, invested a 4% interest compounded monthly would accrue a mass of gold equal to the weight of the earth annually after 1,600 years While there are plenty of savers the gold is nowhere to be seen; as the debt burden gets too high society continually crashes and the illusory wealth is wiped out.

Today we have a fiat currency so the Fed could just print the money but that creates its own problems. The imbalances will be eliminated one way or another.

Clowns in congress duped again

From the Washington Post:

Under the emergency rescue legislation approved by Congress in October, the administration must inform lawmakers that it wants access to the second installment of $350 billion. Unless Congress passes a resolution rejecting the request within 15 days, the Treasury can begin to tap the funds. If Congress turns down the request, the president could veto the resolution and then the Treasury could proceed. The money would be blocked only if Congress overrides the veto, which would require a two-thirds majority in both chambers.

Got to hand it to Paulson setting up the TARP legislation so instead of authorizing the funds congress is stuck voting to deny the funds and congress will need a veto proof majority to deny it is one slick piece of work.

On the other hand congress wants to approve the money without getting blamed for it so perhaps they were willing dupes. I expect the money will be approved not be denied and will promptly be squandered on bonuses to the unworthy, just like the last half.

In like flint

It seems even the dregs of society have got the word- their giving away free money! From the NY daily news:

Is the porn industry up next for a bailout? If porn titans Joe Francis and Larry Flynt have anything to do with it, it will.

Yes, ladies and gentleman, the titans of pornography are begging for a bailout.

Joe Francis, creator of the "Girl's Gone Wild" video series, and Larry Flynt, founder of Hustler, will ask Congress for a $5 billion bailout…

And so it goes.

Just print the money you need

From Bloomberg TV just past 13:50

"The Fed is now expanding its balance sheet by printing money." William Poole former president of the Federal Reserve Bank of St. Louis

If these clowns keep this up we will move from a deflationary depression to an inflationary depression replete with monetary reset once the dollar is not worth a continental. If you are wondering what that looks like here is a peak; wonder if Bernanke understands why Zimbabweans are not the most prosperous people on earth?

This will go very poorly.