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IT’S EASY TO FIND FAULT…especially if you’re clueless!!

Posted by Larry Doyle on December 11, 2008 10:10 AM |

Given the pressure applied by the general public on elected officials who passed the $700bln dollar TARP (Treasury Asset Repurchase Program) it is not surprising that those very elected officials are now openly critical of Treasury. Nothing like casting a few aspersions to keep the crowd back home somewhat at bay. This statement is not to say that Treasury has not fumbled in certain aspects of this program. That said, as I  have tried to highlight, there are so many holes to fill that one single, albeit massive, “tourniquet” is not going to cover an entire body riddled with life threatening wounds.

Read how  “Watchdogs Chide Treasury on Bailout“…

For Congress to think that the economy would see near “immediate” positive reaction to the injection of capital into the system is both naive and ignorant. I am going to guess that most Congressmen failed Economics 101.

IMO Treasury should not have played “whack a mole” but should have proactively highlighted the areas of need throughout the system. In properly managing expectations it is always better to be as comprehensive as possible and simultaneously “under-promise and over-deliver”. Paulson and Bernanke along with Paulson’s boy wonder, Neel Kashkari, have played way too much defense and not enough offense. The risk they ran in this regard, though, is that they may have “spooked” the markets and “scared” the public.

Additionally, Treasury lacks the intellectual capital in terms of sufficiently intelligent and market savvy financial pros to stay ahead of the game. Paulson should have known that right from the get go and “retained” human capital from Wall St. under terms of a temporary contract to stay ahead of the curve.

That said, in defense of the Treasury and the Fed, it has been two months since they received TARP funds. To think that there would be material change in that time frame is the equivalent of expecting the Titanic to be turned around on Park Avenue.

It keeps getting back, though, to the fact that the current situation as well as our future situation under any reasonable economic scenarios highlight the fact that the Wall St. banks are sitting on enormous embedded losses and expected future losses (continued increasing defaults on residential mortgages, credit cards, commercial loans, corporate loans). The money is not flowing through because:

  1. banks need to replenish capital against these losses; and
  2. consumers and corporations have limited demand for credit as they look to pay down debt.

The next plan that is being discussed is truly revolutionary in nature.

Our government has always been financed by the Treasury issuing bonds (fiscal policy) while the Fed monitors and manages the economy via changes in interest rates (monetary policy). In a potentially revolutionary move the idea is being bandied about that for the first time in the history of our country the Federal Reserve would issue long term debt and use the proceeds to aggressively purchase a variety of mortgage, consumer, and corporate assets which would hopefully bring the interest rates for those assets down thus igniting further demand for credit.

The markets think the Fed is proposing this idea given the fact that with the Fed Funds rate already at 1% they have limited “monetary policy” ammo left. The markets also think that there is concern that the Treasury’s deficit has already exploded so far so fast that they need another entity to issue debt.

This seems ridiculous but the Treasury has regularly scheduled debt auctions so given the cash needs, they seemingly need another governmental entity to raise LOTS of cash. Enter the Fed. The commodities market today is taking this proposed plan as a likelihood that the money supply will grow way too fast and thus ignite inflation. To that end, most commodities today are up 4 to 5%. Gold is back over $800.

This story bears watching.

Now if we could just get these Congressmen into a remedial Economics class maybe we might get somewhere.


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