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The Stakes Are Raised

Posted by Larry Doyle on May 28, 2009 7:46 AM |

The move higher in rates and lower in the U.S. dollar is nothing more than the market response to Ben Bernanke, Tim Geithner, and ultimately Barack Obama for the cards that they have already shown.

Managing one’s personal business and finances is anything but a game, but the manner in which Wall Street and Washington address economic and financial issues incorporates many aspects of “game theory.” As such, we need to adapt our own thought process and financial management accordingly.

Our leaders in Washington have shown many cards, including:

1. $780 billion Stimulus

2. proposed $3.5 trillion budget

3. multiple trillions in backstops to the financial industry (Sense on Cents’ link to Subsidyscope provides a wealth of info)

4. a trillion dollar plus commitment to quantitative easing targeted over a 6 month time horizon.

Be mindful that the “Washington wizards” are at the “table” and “playing the game” with borrowed funds. Each of us is also in the “game” whether we know it or not. We, along with foreign participants, are funding the window from which the wizards have to get the cash to stay in the game. The move higher in interest rates on the long end of our yield curve is nothing more than market participants (investors) “raising” the stakes on the “wizards.”

How quickly, strongly, and emphatically will Geithner and Bernanke respond? Will “Big Ben” announce that he will aggressively purchase more Treasury and mortgage assets at this juncture to keep interest rates from ratcheting even higher?

Bloomberg addresses this quandary and aspect of “game theory” in Fed May Buy More Assets to Bolster Balance Sheet:

The Federal Reserve may step up asset purchases to prevent its balance sheet from contracting until policy makers are convinced an economic recovery has taken hold, Fed officials and analysts said.

Fed officials have said their Treasuries buying isn’t designed to target any specific yield levels. Last week’s release of minutes of the April 28-29 Open Market Committee meeting showed some members were open to bigger purchases to spur a more rapid recovery.

Bonds slumped yesterday on concern surging debt sales will overwhelm the Fed’s strategy. The yield on the benchmark 10-year bond increased 19 basis points to 3.74 percent, the biggest increase since Jan. 19. It slipped 6 basis points today. A basis point is 0.01 percentage point.

I am convinced we will see government officials “talk” about how strong their hand is and how well their “game” is going. Be mindful, they are at the table and attempting to display a strong position.  Meanwhile, investors and market participants have just “raised” them.

I personally believe government officials should very calmly and methodically display a “business as usual” response to being “raised.” That said, this administration has shown a predilection for talking too much to the audience in grand and eloquent fashion.

The stakes have been raised. Let’s see how Ben and Tim play their hand from here. Sense on Cents will be monitoring their every move.

LD

  • fiscalliberal

    On another site it was mentioned that a little inflation is good to stop foreclosures and stimulate the economy because held money looses value. Krugman speculates that some inflation would help Japan get out of their lost decade.

    That said, I would postulate a lot of uncertainty in the leadership. This is in part due to the history of John Snow, Alan Greenspan and Chris Cox. I personally have a lot of apprehension about Geitner and Schapiro. I have a little more faith in Bernanke and he is key in managing inflation.

    I truly believe that the last thing our government wants to do is run companies. Both Finance and Auto management and failed miserably in assessing, taking and managing risk. In the case of auto the right path is being taken to allow bankruptcy. In Finance, we have them to close to the regulators who have gone native.

    Some how I have a little more faith in Bernanke , versus the other players.

  • Pingback: Posts about Barack Obama as of May 28, 2009 » The Daily Parr()

  • Fiscal…a little inflation is one thing. My concern is, given the amount of fuel ($$) the Fed and Treasury have injected, that the inflation spikes even in the midst of a weak economy.

    If the administration was not taking such a large bite of the apple with the grand and massive programs, the money injected could be more impactful and less inflationary.

    Will be very interesting!! Let’s see how the U.S. Treasury auction of $26 billion 7yr notes are received today.

  • THE BANK BAILOUT SONG

    (sing to Natasha Bedingfields “Pocketful of Sunshine”

    We got a bailout, pockets full of money

    We got the last laugh and its so funny oh, oh, oh, oh

    Say what you want but we got the bailout

    Obama and the Fed gave us the payout oh, oh, oh ,oh

    We got away, we’ll never pay

    Just gotta say, “Thats banks today!”

    Taxpayers say, “It’s just a shame!”

    Whatever it takes, they’ll get their way

    We got a bailout, pockets full of money

    We got control and we’ll use it honey oh, oh, oh, oh

    Think what you want but you’re never gonna top us

    mark to market sure didn’t stop us, oh, oh, oh, oh

    All those politicians that we paid off

    All those employees that we laid off oh, oh, oh, oh

    All those emails Kung Fu Pandit sent out

    We own the United States and there’s no doubt oh, oh, oh, oh

    We got away, we’ll never pay

    Just gotta say, “Thats banks today!”

    Taxpayers say, “It’s just a shame!”

    Whatever it takes, they’ll get their way

    There are places at Vegas we go, our homes away from home

    where the money flows, and nobody knows

    And we can tell “little lies” like “The Banks Are All Fine!”

    And the market climbs, they’re all buying that line!

    We got away, we’ll never pay

    Just gotta say, “Thats banks today!”

    Taxpayers say, “It’s just a shame!”

    Whatever it takes, they’ll get their way

    We got away, we’ll never pay

    You have to say, “Thats banks today!”

    Taxpayers say, “It’s just a shame!”

    Whatever it takes, they’ll get their way

    We got away

    (We got a bailout, pockets full of money)

    We’ll never pay

    (We got the last laugh, and its so funny)

    Just gotta say “That’s Banks Today!”

    (We got a bailout, pockets full of money)

    We got away, we’ll never pay

    (We got the last laugh, and its so funny)

    Just gotta say, “That’s Banks Today!”

    The government’s on our side, we take them for a ride

    The taxpayers smile and say, they know it’ll be ok

    The markets are on our side, we take them for a ride

    Investors smile and say, they know it’ll be ok






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