Effor.com

I ran across this in today’s Daily Reckoning.  It’s a snip from Bill Bonner’s article titled

The Fall of Wall Street: Innocent Frauds and Armed Robberies

It’s good stuff!  Please take a minute to read it because it explains a lot in just a few paragraphs.

gk

From the day of its founding in 1913, the Fed’s assets – the foundation capital of the U.S. banking system – grew, reaching $1 trillion on the 24th of September, 2008. But then, something extraordinary happened. Something breathtaking. And for a classical economist – something incredibly reckless. In the next six weeks, the Fed added another trillion. And the head of the Dallas Branch of the Fed said that he expected to add another trillion before the end of the year.

How does the Fed get these “assets?” Simple. It buys them. Where does it get the money to buy them? Simple again: it creates it. It makes it up. It conjures it out of nothing.

“If it comes from nothing,” you might wonder, “what could it really be worth?” But we’re not going to answer that question. We don’t have time. Besides, it takes us in such a deep metaphysical swamp, we’re afraid we may never slosh our way out…or at least not get out in time for lunch. Instead, we’re going to answer this question:

“If it was that easy, how come the Fed didn’t do it before?”

The answer to that is simple: because when the Fed inflates the money supply it risks inflating consumer prices. People don’t like that. They like it when asset prices go up. But not when gasoline and milk increase.

But now, no one is worried about consumer prices. In fact, the Fed is worried about deflation…about falling prices. Bernanke knows what happens when consumer prices begin to fall. Consumers stop spending – knowing that they will be able to get a better deal in the future. That further depresses the economy…and pretty soon it’s the ‘90s again and you’re back in Tokyo. So the Fed has begun a huge program of monetary inflation, intended to offset Mr. Market’s price-cutting.

And now another question: Isn’t there some risk that the Fed will overdo it?

Oh, dear reader…that’s a puffball of a pitch. If we can’t hit that, you can take our laptop away…you can break our sword…and send us back to the dugout.

Remember what happened in the slump of the early 2000s? Alan Greenspan panicked…cut rates to 1%…and left them there for more than a year. He gave the market the wrong medicine at the wrong time…and then delivered such a horse-sized dose, it set off the biggest bubble in mankind’s whole bubbly history.

Now, it’s a different kind of slump…a credit slump. And once again, the Fed is on the scene, like a quack doctor at the side of a heart-attack victim. This time, he’s giving stronger medicine…not just a 1% lending rate, but actual monetary inflation. Trillions of dollars worth of it.

For the moment, Mr. Market is taking away dollars faster than the Bernanke Fed is replacing them. That could continue…for a few months…or even for several years. But it won’t continue forever.

And here, we affirm our unshakeable faith in the people who lead us. They are trying to cause inflation. Eventually, they will get the hang of it. They may shoot for 2% per year; but they are sure to overshoot. Money printers always do.

The Office of Thrift Supervision shuts down mortgage lender IndyMac and transfers the operations to the Federal Deposit Insurance Corporation.

That’s the headline from a CNN story dated 7:30pm today.  The story goes on to say “This institution failed today due to a liquidity crisis,” OTS Director John Reich said.

I just posted an article about inflation entitled “Sound Familiar” but does the quote above sound familiar?  It should, a liquidity crisis is what killed Bear Stearns, and that’s what’s caused hundreds of financial institutions to fail over the past year.

The next line of the story says IndyMac had $32.01 billion in assets as of March 31.

For comparison, here’s what Fannie Mae and Freddie Mac have according to a story on Bloomberg: Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae’s assets tumbled 66 percent to $12.2 billion and may be negative next quarter, Poole said.

The official line (in the same story) says Fannie Mae “has access to ample sources of liquidity, including access to the debt markets,” Chuck Greener, a spokesman for the Washington-based company said in a statement today. In a separate release, McLean, Virginia-based Freddie Mac said it’s “adequately capitalized, highly liquid and an essential part of the nation’s housing system.”

I know it’s getting overused by me tonight, but does that sound familiar?

Here’s a hint - the chairman of Bear Stearns said they had plenty of liquidity on a Wednesday.  The company no longer existed the next Monday.  We’ll find out in a couple of days, but I think something is going to happen with Fannie and Freddie over the weekend.  I wouldn’t be surprised to see them under some sort of special operations on Monday - with their stock basically worthless.

I wonder why the OTS waited until after the market closed to announce it?  Do you think they’re trying to bury things over a weekend and hope everyone forgets by Monday?  I know some people may be that stupid (hello Ben Stein!) but I would hope that most of us have the sense not to run back into the burning building.

In case anyone is wondering, I really don’t want the markets to crash.  I have most of my money in a 401K with very limited options.  I can’t short stocks or funds in it, and I only have about 10 funds to pick from, so I only make money when the market goes up. 

That being said, I do expect the markets to crash at some point.  Most of my 401K money is in a money market fund while I wait it out.  The longer the Fed drags this crap out, the longer I have to sit on the sidelines and watch inflation eat away at my savings. 

I want to get back into the market (I got out last year) but getting in right now would be the same as running into a burning building.  Or catching a falling knife.  Or beating my head against the wall.  It just doesn’t make sense at this time.

So if the Fed would stop delaying the inevitable, I could put my money back into the market after it crashes.  Except they keep stopping the crash, which simply drags it out and makes it more painful. 

Note to Helicopter Ben - let the fricking market weed out the bad institutions on its’ own.  The bad ones will disappear (266 and counting according to ml-implode.com) but the good ones will emerge with clean balance sheets, ready to make big profits again.  And I’ll be able to watch my money grow instead of slowly withering away into nothing because of the Feds’ inflation.

gk