Livinglies’s Weblog

Virtually ALL of the the decisions concerning money supply and “regulation” are being made in the private sector which is devoted to one thing by mission and by intent: transfer of wealth to the big dogs in the private sector. This clearly government function, as specifically expressed in the U.S. Constitution has been abandoned by government and usurped by the private sector.

By allowing tainted money into the political system, actions that had been plainly illegal, immoral and unethical have become a way of life, legalized by laws passed to satisfy legislator’s obligations to lobbyists. Obama’s call for reigning back the forces of money from the private sector is a call to arms and a call for alarms — to regulate and disclose the billions of dollars spent by credit/financial industries, oil and gas, coal, drugs, healthcare and crime (yes, crime because close examination shows that some private sectors will ONLY make money if the jails are full).

The purpose of government — to be the referree between capital and labor in a market allowing forces of supply, demand and innovation to determine outcome — has been abandoned and must be re-asserted. If not, we become a third world country where the rich live in electrified bunkers with their own security staff and the rest of the population remains hopeless poor and in debt. The risk of violent revolution, food riots and knee-jerk policies generated from fear or anger will be the rule rather than the exception. This is hardly the result intended by the framers of our constitution.

As the comments indicate, the Fed policy-making apparatus is in tatters.

• It lowers the Fed overnight rate and interest rates go up — something that was thought impossible by many people. 
• It confronts hyper-inflation with a mixture of mentioning how serious the issue is and then lowers rates again, which we all know means increasing the money supply and increasing inflation. But then lenders still refuse to give loans to small business, homeowners and other key parts of the credit cycle that spur the economy. 
• The plain fact is that the Fed is not having much effect at all on anything. 
• It missed the opportunity to regulate and increase its influence to thwart the bubble in housing because politically it was expedient to do so in a Repiublican administration. 

We all pay the price as the economy and our society commences the wrenching process of remaking itself with a solid foundation of productivity, more even distribution of purchasing power, less impulse purchasing, more saving, and the prospects of slower growth and recession here and abroad.

The FED is diminished, probably permanently. Up until now nobody has addressed the issue head-on that neither the Fed nor the U.. Treasury, nor the Bureau of Engraving and Printing are having much impact on money supply, interest rates, prices or economic growth.

Virtually ALL of the the decisions concerning money supply and “regulation” are being made in the private sector which is devoted to one thing by mission and by intent: transfer of wealth to the big dogs in the private sector. 

Pianalto: Fed’s strategy compatible with low inflation rate

By William L. Watts

Last update: 7:04 a.m. EDT May 13, 2008

LONDON (MarketWatch) — Cleveland Federal Reserve Bank President Sandra Pianalto said Tuesday that inflation remains a top risk to the economic outlook, but that the Federal Reserve’s rate-cutting strategy likely wouldn’t stoke inflationary pressures. In a speech prepared for delivery in Paris, Pianalto said she finds herself in a “challenging environment” as a policymaker. “While even the core price measures in the United States are rising somewhat faster than I would prefer, and inflation presents a key risk to my outlook, I believe that the Federal Reserve’s policy strategy remains compatible with a low and stable inflation rate,” she said. Pianalto said it was important to distinguish between inflation and relative-price pressures. 

TIME TO WAKE UP. EVEN IF YOU ARE NOT IN DEFAULT THE MORTGAGE MELTDOWN IS GOING TO HURT YOU UNLESS YOU ACT NOW. GET INVOLVED! THERE IS NO “MIDDLE GROUND”

Most projections put the number at over 20 million homes, which means that over 95% of the people negatively impacted by the mortgage meltdown either didn’t purchase or refinance their homes or if they did are not in default and think this situation will pass them by — after all “I’M NOT BEHIND IN MY PAYMENTS. I’M FINE!” No you are not!!! 

If this mess is not cleared up by aggressive government intervention you will permanently lose equity in your house, see your real estate taxes soar, and watch as inflation eats up that comfortable margin you think you have in income. 

Bernanke is no give-away liberal. He wants this because it is absolutely necessary and at that only a partial step. 

Write your congressmen and senators. We cannot afford stick our heads in the sand on this one on some ideological grounds protecting taxpayer bailouts or whatever. It doesn’t matter whether or not the mortgage meltdown started with borrowers being stupid or Wall Street being greedy. It happened. And now it’s a train wreck headed your way.

Anatomy of a Fight

Over Mortgage Bill

By JOSEPH SCHUMAN

THE WALL STREET JOURNAL ONLINE

A surge of partisanship has placed in jeopardy a bill aimed at helping homeowners who are at risk of foreclosure. But the political resonance of the issue could prompt the measure’s Republican critics and Democratic backers to find middle ground.

The bill would try to lower risks for both the lender and the borrower, by offering government-backed insurance to lenders willing to reduce the principal for loans made to some people who owe more on the property than the home is now worth. It passed through the House Financial Services Committee with 10 Republicans joining Chairman Barney Frank and the panel’s other Democrats. But after President Bush yesterday came out and threatened to veto the bill, Republicans threw up legislative roadblocks to keep the measure from the House floor, as the New York Times reports. Mr. Bush says the bill would “reward speculators and lenders” without making a big dent in the country’s mortgage and housing-market crisis. Moreover, Republicans argue, it means taxpayers could be stuck with bad loans newly insured by the Federal Housing Administration. But the issue is more complicated than that.

Wall Street Journal columnist David Wessel boils down the debate to a question of whether Washington should push the lenders to help Americans whose home values sank below the size of their mortgages “even if it may cost taxpayers some money,” with the White House saying “No!” and Mr. Frank, quietly backed by Federal Reserve Chairman Ben Bernanke, saying “Yes!” Citing research from Economy.com, Mr. Wessel puts the number of families with such “underwater” mortgages at about four million, and notes that number is predicted to reach around 12 million by early next year. While many of those families will keep paying their mortgages, “many won’t, and are at risk of losing their homes,” he says. Since “no one in Washington wants to help the ’speculators’” who bought homes as investments, and most there agree people who bought houses they can’t afford are probably beyond aid, “the debate revolves around the ‘preventable foreclosures,’” he adds.

And no one, from the homeowners to the lenders to the politicians and economists like Mr. Bernanke, wants to let “preventable foreclosures” go unprevented. The bill, while crafted to exclude people who don’t need the help or wouldn’t benefit, “could allow some homeowners to get a deal they don’t deserve; that’s the unfortunate byproduct of any rescue,” Mr. Wessel notes. But the Treasury and Fed, he argues, “surrendered the let-the-market-work-it-out high ground when they agreed to risk nearly $30 billion of taxpayer money to shield Bear Stearns, its creditors and counterparties from losses.” Democratic legislators yesterday were mentioning the Bear Stearns bailout again and again.

The housing downturn is an economic problem with as much political resonance as gas prices, and if no relief is provided, it could be a poignant issue ahead of November’s elections. Even as Mr. Bush was threatening a veto yesterday, Keith Hennessey, director of the White House National Economic Council, was saying the differences between congressional Democrats and the administration aren’t “insurmountable,” the Journal reports, adding that this leaves the door open for an eventual deal.

The latest change in Fed policy sounds good. You get that warm fuzzy feeling that credit will loosen up and that things are getting better. But the fact remains, that this is ANOTHER transfer of the power to create money to the PRIVATE sector, it is another green light for PRIVATE TAXATION, and worst of all, it comes at a time when inflation is already running high and threatening to become worse than at any time in recent history.

Flooding the market with more dollars is simple: it reduces the value of those dollars. as the value goes down some businesses will appear to prosper, but when those business owners go to buy something, they will realize they lost profit even though their accountants report they made more. In nutshell, if it costs $25 to buy a loaf of bread or $15 to buy a gallon of gas, the fact that your sales went up won’t do you any good.

Beware the earnings figures from public reporting companies. There is no FASB directive that requires real disclosure of real earnings in constant currency. This will become painfully obvious as the next 12 months unfold.

NEW YORK (MarketWatch) — The Federal Reserve, along with other central banks, said Friday that it was increasing the funding it is providing to banks and announced that, for the first time, it was willing to accept bonds backed by auto loans and credit cards.

“In view of the persistent liquidity pressures in some term funding markets, the European Central Bank, the Federal Reserve and the Swiss National Bank are announcing an expansion of their liquidity measures,” the Fed said in a statement.

The Fed took the move in an attempt to flood the market with supply and lower short-term lending rates, such as the London interbank offered rate, or Libor.

The U.S. central bank announced an increase, to $75 billion from $50 billion, in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility, beginning with the auction on May 5.

This increase will bring the amounts outstanding under the TAF to $150 billion.

The move to expand the TAF was widely anticipated because of strong demand for loans through the program.See full story.

“The program is now reaching a magnitude where it can play a significant role in plugging the gap between the remaining demand for unsecured term funding in the bank market and the latest decline in supply following the run on Bear Stearns,” wrote Lou Crandall, chief economist for Wrightson ICAP.

The expansion was “probably marginally disappointing because there was a widespread expectation … that the Fed would extend the term of at least some TAF auctions to three months,” wrote Stephen Stanley, chief economist for RBS Greenwich Capital.

The TAF, announced on Dec. 12, was followed in March by the creation of several other Fed lending programs targeted at different sectors of the credit markets.

All told, the Fed has now offered to lend up to $462 billion in cash and Treasurys to the markets, in addition to the nearly unlimited funds available through the discount window and the primary credit dealer facility.

The three-month Libor rate — a benchmark for lending between banks — was 2.78% on Thursday, well above the 2% federal funds rate. Crandall said extra supply from the Fed in the next three weeks should tighten the spread between the Libor and fed funds rates.

Deeper cooperation

The Federal Open Market Committee also has authorized further increases in its existing temporary currency-swap arrangements with the European Central Bank and the Swiss National Bank.

These arrangements will now provide dollars in amounts of up to $50 billion and $12 billion to the European Central Bank and the Swiss National Bank, respectively, representing increases of $20 billion and $6 billion.

The FOMC also authorized an expansion of the collateral that can be pledged by bond dealers in the Fed’s Schedule 2 Term Securities Lending Facility auctions of Treasurys.

Primary dealers may now pledge AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial-mortgage-backed securities and agency collateralized mortgage obligations.

Accepting asset-backed paper could help provide money to the student-loan market, Crandall noted. 

Steve Goldstein is MarketWatch’s London bureau chief. Washington Bureau Chief Rex Nutting contributed to this report.

The latest reports show that devaluation of the dollar combined with other economic factors has launched what will be the worst round of inflation we have seen in our lifetimes. And it will most probably feed itself into a frenzy despite all efforts to soften the blow. The 1.1% increase in production costs is only the tip of the iceberg.

• All businesses are feeling the pinch of rising “costs” (more dollars) against consumer reluctance to pay higher “prices.” 
• Price baskets that reflect reality (actual impact on the life of an ordinary American family) show something in the range of 15%-25% average. 
• Job growth has been non-existent for years despite data to the contrary: the reports count ANY job to replace a job that paid 4-10 times as much as “job creation.”
• Purchasing power has been declining since before this latest round of hyper-inflation.
• Debt is at an all-time high for the country and for individuals.
• Taxes and other “private taxation” deductions from U.S. individual income  have steadily increased when compared to other nations
• The Fed is stuck between an economy diving into recession and an economy that is virtually ruined by its own currency. If it raises rates to try to curb inflation, it won’t succeed because most of the money supply is created from Wall Street. Raising rates also has the added factor of decreasing confidence in the U.S. economy, which will only deepen the recession. If it lowers rates to counter the recession it won’t succeed for the same reason. Lowering rates has the added factor of creating a new bubble to cover-up the old one. 

When will we finally get the message and bubble and bust is not a very good way to do business?

• Fundamentally, the first line of attack should be on staunching the bleeding and stopping the foreclosures and evictions. Just taking control of that and putting it under management, will have an enormous impact on our currency, our World position, and our financial markets. 
• restoring confidence in the financial markets is the first priority. The ONLY way this can be done is by stopping foreclosures and evictions, restoring value to balance sheets, and providing a path to full recovery, even if it is not totally assured. 
• The perception that the U.S. financial markets cannot be trusted can ONLY be overcome by establishing international oversight, at least for transparency and reporting purposes. In order to retain national sovereignty, obviously, regulation in the United States can only be by U.S. agencies.
• But in the global economy, other countries and economic unions have the same rights we do when it comes to regulating money supply and whether to permit certain actions in their part of the pond. We have now painted ourselves into the corner of submitting our own regulatory authority to the decisions of other nations. It’s fact that we are just going to have to live with.

Our passion for dominance should be replaced with a passion for fairness and stability.

In both cases — housing prices and CDO/CMO prices, there was no intervening factor that caused the decline. No meteor hit the earth, no world war broke out, no material event occurred to account for these changes. It is therefore impossible to come to any conclusion except that the fair market values of the houses and the CDO/CMO market were falsely represented in a systematic, intentional manner. 

Any remedy for this situation must first address that basic fact before moving on to anything else. Addressing the valuation issue allows all the other pieces to fall into place. In the interest of preserving U.S. sovereignty and the American lifestyle, we have proposed here amnesty for everyone, showing favoritism to nobody. Everyone must share in the loss. And everyone must participate in the recovery. But in all cases it starts with ending the foreclosures and ending the evictions.  

Anyone can go to www.wsj.com and see a multitude of articles on the effects and causes of the mortgage meltdown. You don’t have to be a subscriber to see the first page. It all boils down to finger pointing and a series of tricks that are being played out to stretch out the effects of the meltdown and avoid an economic collapse. Periodically G7 or its equivalent has met and historically come to some agreement to prop up or devalue the U.S. currency. This weekend they won’t prop it up yet, which pretty much means that the junk sale includes our beloved American dollar.

While the effort to stem the effect of the mortgage meltdown is a worthwhile endeavor, and spreading out the losses over a larger period of time is also a good idea to provide breathing room from a panic and collapse, the methods being employed are contrary to common sense, and are so out of balance that they are contributing to a collapse of larger proportions. It is a “NEXT BUBBLE” strategy. The overall effect will be to increase government and personal debt, increase the number of derivatives on the market, increase the effect of private companies on money supply, increase inflation, decrease employment in the U.S., decrease the financial resources of every household, decrease quality of life ands standard of living for the American Citizen, increase stress on the lower and middle class,  and thus continue the pattern of crating ever larger bubbles to cover up the last one. 

Our economic policies have been, continue to be and will apparently be maintained despite adherence to what is clearly a massive Ponzi scheme, illegally depriving the American Citizen of property, life, liberty and the pursuit of happiness all without any real notice to the public and obviously without the coveted due process of law required by our constitution. 

When you tally up the the various costs and expenses that have been socialized (including the bailouts of corporations and financial institutions for the benefit of a few at the expense of the many), the intentional devaluing of the dollar, and all of the other expenses that are charged “privately” (PRIVATE TAXATION) and add in the excise, sales and other taxes that people pay in addition to property, income and other standard revenue-producers for government, you can easily see that the effective tax rate on American Citizens is the highest in the world. It is masked by calling the taxes different things and spreading the imposition of taxes through channels of private companies. You need not be an economist to prove this. At the end of the month, citizens of much “poorer” countries have more money and less debt than we do. It’s basic arithmetic not advanced economic theory. 

Nowhere on top of the political agenda, is there any hope of widespread relief for everyone who fell victim to falsely inflated property values — including the homeowners who were tricked into signing papers based upon the apparent condition of the market, the appraisal of the property, the rating of the securities, the underwriting risk (none) of the lender. 

What home buyer would have closed the deal if they knew that the lender was not taking any risk, that the appraiser was validating a price based upon economic incentive rather than fundamentals, and that the mortgage broker and lender had no interest in protecting the buyer even though they were bound by law to do so? Nobody.

What investor would have purchased a collateralized mortgage obligation if he knew that the rating agency had issued ratings based upon negotiation and relationship with the issuer? Nobody.

Without tricking everyone who bought a home between 2001 and 2007 into believing the values were real, the scheme would not have worked. Now these people who bought those homes are seeing their largest investment, and in many cases, their only investment, pulled out from under them, while they are pulled out from having a roof over their heads, and remaining more deeply in debt than before the transactions started. 

Without addressing the needs of these people by stopping foreclosures and stopping evictions, the problem will not end, — it will simply grow larger. Yet in true form most legislators and many Americans take up the “conservative” position that these people should have known better. Exactly how would they have known better when the essential information was being withheld from them and the government was lying, along with the industry participants, about the key factor in the real estate market: fair market value. THIS IS NOT ABOUT PERSONAL RESPONSIBILITY, IT’S ABOUT FRAUD.

Without tricking investors to buy these derivative securities through again falsely creating the illusion of fair market value and quality, the scheme would not have worked because the risk would have fallen on the perpetrators on Wall Street instead of the governments, pension funds, and other investors who bought them. 

Without addressing the needs of the investors who were duped, and the reducing the impact of various investment decisions and flows of money that ran down stream from those investments, no solution can stem the tide of inflation, dollar devaluation, and economic collapse in the the U.S. And yes this means preserving the channels of market liquidity that precipitated this crisis. We need them even if right now we don’t like them. Wall Street should get a pass on consequences but not on future regulation.

Again common sense proves it without being a lawyer, economist or accountant. How could the housing prices have dropped so suddenly if they were really worth the values that were published? In some cases, the effect was seen within days or weeks of the closing. This is not the commodities market. It is the real estate market where the volatility index has always been low. 

And again, without being an expert, how could the same “investment” instruments be rated at AAA one minute and unrated the next?

In both cases — housing prices and CDO/CMO prices, there was no intervening factor that caused the decline. No meteor hit the earth, no world war broke out, no material event occurred to account for these changes. It is therefore impossible to come to any conclusion except that the fair market values of the houses and the CDO/CMO market were falsely represented in a systematic, intentional manner. 

Any remedy for this situation must first address that basic fact before moving on to anything else. Addressing the valuation issue allows all the other pieces to fall into place. In the interest of preserving U.S. sovereignty and the American lifestyle, we have proposed here amnesty for everyone, showing favoritism to nobody. Everyone must share in the loss. And everyone must participate in the recovery. But in all cases it starts with ending the foreclosures and ending the evictions.  

From the new “Freedom” aggregation of Lehman Brothers, to the other new derivative securities created for the purpose of hiding the blow-out, the Federal Reserve is converting itself from the lender of last resort to the investor of last resort. Buried on page 14 of the WSJ, — The Senate has created a bill that rewards buyers of distressed homes with a tax credit. Bear Stearns was bailed out by the Fed with a windfall profit potential to the people who helped create this mess. The bad paper that has been circulated is being repackaged and recirculated with the complicity of the Federal Reserve, the U.S. Treasury and all of the major players in the world of financial institutions. 

It’s a junk sale, where non-investment grade securities are being rated as investment grade by Moody’s and other rating agencies. These agencies are competing for “market share” and have succumbed to the pressures of the marketplace — thus abdicating their responsibility for independent analysis and entering into negotiations and friendly deals with the “clients” whose securities they are rating. 

The fact that these people go fishing together and are building “relationships, we are told, has not compromised the independence of these “auditors” of investment quality. If accountants did these things they would lose their licenses and maybe go to jail. But when rating agencies do it — and do far more damage than any bad report issued by an accounting firm — it’s the “marketplace.” And the free marketing ideologues continue to push the agenda of controlled markets through the utility of calling it “free markets.”  

What we have here is an invisible hand, but not the invisible hand of free market balancing that Adam Smith was talking about. We have instead the invisible hand and the free hands of government and private enterprise conspiring to defraud the world around them. 

IN THIS STORY FROM THE WALL STREET JOURNAL, IT IS CLEAR THAT FLOUNDERING FEDERAL POLICY-MAKERS ARE AVOIDING THE ESSENTIAL ISSUE — WE HAVE TRILLIONS OF “DOLLARS” OF DERIVATIVES OUT THERE THAT ARE HUGELY OVERVALUED BECAUSE OF FRAUDULENT APPRAISALS SUPPORTING THE APPEARANCE OF A RISING HOUSING MARKET. And now many other securities and loan arrangements are endangered that have at least a passing involvement or basis in those faulty derivatives. 

The mere thought of the Fed issuing more of the derivatives that caused this crisis is sending central bankers into their back rooms wringing their hands. We are leading the world to the final conclusion that we cannot be trusted with money.

I have said many times in this post that there is not enough money in the world to bail this thing out. The answer is “none of the above” in terms of the options the Fed is looking at. The bottom line is that houses and therefore mortgages were inflated beyond supportable fair market values. Thus the CMOs, the derivative market as a whole, the auction market and everyone else who holds an interest in these mortgages are dealing with over-valuation. 

Our current regulatory system and FASB accounting policies have not anticipated this condition and thus we have no mechanism in place to effectively deal with the problem. The solution posed by Barney Frank is actually the answer — provide an opportunity to mark down these mortgages for the purposes of the borrowers payments, along with an opportunity for everyone to share the upside when the recovery begins. If we don’t do that we won’t see recovery for 10-20 years. If we adopt his plan, the recovery can start immediately. The Fed is rearranging deck chairs on the Titanic here. Neither they nor anyone else can cover the impact on the $500 trillion derivative market out there. 

The fact that other central bankers are looking at alternatives validates our premise here that the dollar is not merely going to take a hit like it did before Volcker stepped in, it is headed toward extinction unless we act responsibly. We have undermined the governments of many countries around the world by allowing Wall Street to run wild. We couldn’t have done more harm to them if we had attacked them militarily. They can and must respond to protect their nations. Our arrogance is not going to stop them from disengaging from U.S> policy and economics. Only humility and responsible action will restore confidence in our economy and our currency. 

Go to www.wsj.com and see this article and others examining current conditions.

	April 9, 2008

Fed Weighs Its Options in Easing Crunch By GREG IP April 9, 2008; Page A3 WASHINGTON — The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail. Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed’s name rather than the Treasury’s; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011. •  The Issue: The Fed has sold or committed a lot of its Treasury portfolio to support markets. Some worry it will soon run out of room to do more. •  The News: The Fed is considering several contingency plans for getting more lending capacity so that won’t happen. •  The Bottom Line: The Fed has lots of firepower left before it has to turn to these contingencies. No moves are imminent because the Fed still has plenty of balance sheet room for additional lending now. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the availability of such options largely eliminates the risk of exhausting its stockpile of Treasury bonds and thus losing its ability to backstop the financial system, as some on Wall Street fear. British and Swiss central banks also are contemplating contingency plans. For now, the European Central Bank is reluctant to consider options that require substantial modifications of its standard tools. The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates. The Fed is reluctant to heed calls from some Wall Street participants and foreign officials for the Fed to directly purchase mortgage-backed securities to help a market that still is not functioning normally. Before the credit crunch began in August, the Fed had $790 billion in Treasury securities on its balance sheet, about 87% of its total assets. Since then, it has sold or lent about $300 billion. In their place, the Fed has made loans to banks and securities firms to assist them in financing holdings of mortgage-backed and other securities. Some on Wall Street say the potential for further declines in Fed treasury holdings could leave it out of ammunition. The Fed holds assets to manage the nation’s money supply and influence the federal-funds rate, which banks charge each other on overnight loans. When the Fed buys Treasurys or makes loans directly to banks, it supplies financial institutions with cash; in effect, it prints money. The cash ends up as currency in circulation or in banks’ reserve accounts at the Fed. Since reserves earn no interest, banks lend cash that exceeds their required minimum. That puts downward pressure on the federal funds rate, currently targeted by the Fed at 2.25%. The Fed could purchase securities and make loans almost without limit, expanding its balance sheet. That would cause excess reserves to skyrocket and the federal funds rate to fall to zero. The Fed would contemplate such “quantitative easing” only in dire circumstances. The Bank of Japan took this step this decade after years of economic stagnation. Weighing the Possibilities So the Fed is seeking ways to expand its balance sheet without causing the federal funds rate to drop. The likeliest option, one the Fed and Treasury have discussed, is for the Treasury to issue more debt than it needs to fund government operations. The extra cash would be left on deposit at the Fed, where it would be separate from bank reserves on deposit and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasurys in the open market; for legal reasons, it generally cannot buy them directly from Treasury. Treasury’s principal constraint is the statutory limit debt. Treasury debt was $453 billion below the limit Monday. In the past, Congress always has responded to administration requests to raise the limit, sometimes only after political theatrics. Fed officials also are investigating the feasibility of the Fed issuing its own debt and using the proceeds to purchase other assets or make loans. It has never done so; the legality is unclear. Some foreign central banks, such as the Bank of Japan, do so. Another possibility is seeking congressional approval to pay interest on banks’ reserves immediately instead of waiting until a 2006 law permits that in 2011. If the Fed paid, say, 2% interest on reserves, banks would have no incentive to lend out excess reserves once the federal funds rate fell to that level. Congress put off the effective date because paying interest on reserves reduces the Fed profits that are turned over to the Treasury each year, widening the budget deficit. Although preliminary explorations suggest Congress would be open to accelerating the date, the Fed is leery of depending on action by Congress. The Fed is inclined to use any additional maneuvering room to lend through its existing and recently expanded avenues. Officials are reluctant to buy mortgage-backed securities directly. They worry that such purchases would hurt the market for MBS that the Fed is not permitted to buy: those backed by jumbo and subprime and alt-A mortgages, which are under the greatest strain. Moreover, the Fed is not operationally equipped to hold MBS and would probably have to outsource their management. Such holdings wouldn’t help avert foreclosures much, since the Fed would have little control over the mortgages that comprise MBS. Write to Greg Ip at greg.ip@wsj.com1   URL for this article: http://online.wsj.com/article/SB120768896446099091.html   Hyperlinks in this Article: (1) mailto:greg.ip@wsj.com

Bear Stearns Deal and What it Means

In the absence of someone filing the leadership vacuum now, we must use the rules of civil procedure to slow down the foreclosures, evictions and bankruptcies. We need breathing room if we are to avoid a depression, or if one is coming anyway, to at least keep it as shallow and short as possible.

The sale of Bear Stearns at $2 per share, when it was selling recently at $170 is not merely a number, or the story of one historically important company gone bad. It is the story of an industry gone bad, without any current footing, none in sight, and a complete vacuum of leadership. $2 was a gift and the money coming from the Federal Reserve is also a gift. The fact remains that these bailouts, mergers and emergency capital infusions are still part of the problem and not the solution. For 3 years, everyone has had their heads stuck in the sand pretending that nothing bad was happening. 

The issue is trust, confidence, and competence. And those issues have spread from just the public viewing the financial markets to each of the players viewing each other. As JP Morgan, the person, knew, character and trust were the key components of any successful economy and the foundation of well-functioning financial markets. JP Morgan may exist as a company, but there is no JP Morgan who can leverage the power of his person-hood against a rising tide of distrust, ankle-biting and outright fear and panic. The fact that the media is only referring to a run on Bear Stearns generically only stokes the fires of distrust, and at best sweeps deep structural problem under a carpet with no room left to hide the debris.

It was good that SOME agreement was reached with respect to Bear Stearns, but what are we going to do with the rest of the companies that are going to go under? Right now the answer is nobody knows and possibly nothing at all. We are in free fall which is otherwise known as a crash. The only hope is leadership and consensus. That there is no apparent credible leader with the power of J Pierpont Morgan, is an indication that there will be no consensus. Morgan averted a similar crisis 100 years ago — but only because he was respected, he kept his focus on the good of the country, and he exercised enormous influence over government and industry.

The leader must be someone who is known, trusted, and who has the interest of the country at heart. He or she must be competent and knowledgeable in financial instruments, and down to earth enough to understand that the agreement reaches everyone affected, not merely the financial players. Besides Warren Buffett, I don’t know anyone who can come close to that definition. And I don’t know for sure if he is actually up to the task. 

In the absence of someone filing the leadership vacuum now, we must use the rules of civil procedure to slow down the foreclosures, evictions and bankruptcies. We need breathing room if we are to avoid a depression, or if one is coming anyway, to at least keep it as shallow and short as possible. 

Or we can wait for political and legislative and judicial solutions later. If we do that, we are certainly looking at another 18 months of downward spiral. With that kind of timeframe, the dollar will lose at least another 40% of its value, oil will easily surpass $200 per barrel, at least another 25% of existing financial institutions will “go away”, the economy will slip into actual decline, joblessness will increase geometrically and inflation will not be less than 15% per month.