The Crisis Is Over

Remember Hank Paulson’s US$ 700,000,000,000 boondoggle way back when the financial crisis was at its height?

Well just guess how much money the US has committed in the past year to supporting the financial system? US$ 700 billion…

The more impressive figure follows in the Reuters article:

“The current outstanding balance of overall federal support for the nation’s financial system… has actually increased more than 23% over the past year,” wrote TARP inspector general Neil Barofsky this week, “from approximately $3.0 trillion to $3.7 trillion — the equivalent of a fully deployed TARP program — largely without congressional action, even as the banking crisis has, by most measures, abated from its most acute phases.”

This is exactly why the first bailout shouldn’t have happened. Now the economy relies on government backing.

Unusually Unusual

Ben Bernanke described the economic outlook as “unusually uncertain” at a Senate Banking Committee meeting this week. Considering he missed the biggest financial crisis since the Great Depression (which he is supposed to be an expert on), it is not a revelation that Ben can’t see what’s coming.

Sarah Hunt, research analyst at Alpine Mutual Funds in Purchase, pointed out that “People were waiting for some, ‘By the way, we’re going to make some announcement that we’re going to fix the world.'”

Instead, they got a bunch of mumbo jumbo, causing media outlets to report on what Bernanke didn’t say instead of what he said.

Even The Age is substantially confused about what the future might hold. This homepage headline didn’t seem to match the article well:

Economic indicators point to slowdown
11:28am | Australia’s economy looks set to expand briskly in coming months, according to a leading index of activity, which also pointed to quickening growth in the quarter just gone.

But back to Bernanke and his inflation crusade. Reuters outlines what “ammo” the Fed has left in the face of a slowdown, as well as the “exit strategy toolkit” in case things improve rapidly. Regarding “ammo”, Ben came up with this:

“[Bernanke] said the central bank could bolster its language committing to hold interest rates low for an extended period, lower the rate it pays on the reserves banks hold at the Fed and either stop letting securities run off of its balance sheet or make additional asset purchases.”

But the market didn’t like Bernanke’s comments. Markets fell.

Some traders had expected the federal funds rate to fall lower after the Committee hearing. That’s lower than the 0% to 0.25% which is the current target.

We would say this is unlikely, but then there was Japan’s stint below 0 and underestimating Ben Bernanke doesn’t seem wise.

The Election Begins in Earnest

Glenn Stevens has been unusually busy lately. He is making a nuisance of himself all round.

Tony Abbott’s announcement of budget cutting measures due to excessive public sector debt was met with a defiant “[Australia has] virtually no net public debt” from Stevens.

Someone has it wrong because Abbott mentioned the following:

“Debt and deficit is probably the critical issue of this campaign. The government is borrowing $100 million a day, every day, over the course of this campaign, debt will increase by $3.5 billion because of the spending spree of the Rudd-Gillard government.”

And Stevens retorts:

“The most recent figures out of Canberra was a peak of 5 or 6 per cent of GDP. So far from that being the highest in history, it is closer to the lowest.”

Well, isn’t this fun?

Gillard isn’t exactly enjoying the spectacle either. It seems her stimulus program, which got some analytical mention last week, has bitten her on the backside in more ways than one.

Mr Stevens indicated the Reserve would raise interest rates at its meeting on August 3 – less than three weeks before the election – if circumstances required it.

But Nobel Laureate Joe Stiglitz reckons Rudd and Julia were spot on with the stimulus. Even if Stevens goes on a rate rampage to deal with the consequences.

Supposedly the stimulus was “one of the most impressive economic policies [Stiglitz has] seen, ever”.

And Stiglitz was equally enlightened on the mining tax: “I have to say that I’m completely puzzled at the ability of the iron ore companies to seemingly win or at least partially [win] on that issue.”

Needless to say, Stiglitz spent his time at institutions including the World Bank. He also wrote the worst book your editor has ever read part of. We won’t even name it.

Jessica Irvine, economics editor at The Age adds her own analysis to the article on Stiglitz:

“Such heavyweight endorsement of Labor’s stimulus spending is a boost to the party’s economic management credentials amid allegations from the Opposition that the stimulus money was ‘wasteful spending’.”

But if anyone examines what the money went into, it was unarguably wasteful. As Dan often mentions, Rudd’s stimulus program even managed to kill people.

Bipolar Euro Depressing

The Euro fell and markets fretted. Now, the Euro rises and markets fret…

Ken Wattret, chief euro-area economist at BNP Paribas SA in London:

“The worst-case scenario for the euro area is you have a sustained exchange-rate appreciation because it would snuff out the recovery.”

Whether its solvency issues or export profitability, there is always something to whinge about. But who would have guessed that the Euro staged a 9.5% gain against the US$ since June 7th?

Regardless of how informed you are about currency futures, there are more fundamental things to worry about. Currencies change in value relative to each other. That’s the market at work. But the market isn’t the only thing at work these days.

The European bank stress tests are due this week. The regulators have been deciding who has been naughty and nice. And they’ve supposedly caught one of the naughty ones.

“Hypo Real Estate didn’t pass a stress scenario on its capital that assumes an economic slowdown and sovereign-debt losses, said the people, who declined to be identified …”

Of course, unlike with Santa, the naughty will be receiving the presents. Cash, cash lines, swaps (for cash) and cheap cash are said to be on the wish list this year.

Photoshopping a Santa hat onto Trichet seemed like a lot of effort. Maybe we should get the guys at BP to do it for us.

Deja Vu?

Another week, [insert] more bank failures in the US. This brings the total to [insert].

Another week, another downgrade from our steadfast bastions of financial wisdom – ratings agencies. [insert] falls victim this time.

But what is new this time around is the latest be-ratings agency kerfuffle. Markets and Money guest editor Dr. Alex Cowie discussed Obama’s latest move to stir the proverbial in the world of credit here. It’s a comical one.

The United Shambles of America (2)

What does an insolvent government look like?

But don’t worry, the municipals wont default on their debt any time soon. “Even in a Draconian scenario such as the Great Depression, we believe that there is no out-sized risk in the municipal bond market,” said Bijan Moazami from FBR Capital Markets (holders of US$369 billion municipal debt).

“States and municipalities are so dependent on capital markets for their financing needs that they would not want to risk financial suicide and would default only in most extreme circumstances.”

Sounds like they are missing the point and the news. Extreme circumstances began months ago when banks foreclosed on loans for police cars and repossessed them. And dependence on funding does not determine whether you can meet your payments. Having cash does.

All these public sector funding issues put a whole new angle on Karl Marx’s prediction of how capitalism would destroy itself:

“Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”

– written by a person claiming Karl Marx wrote it in Das Kapital, but it’s not there.

So it seems there was something to Marx’s prediction. At least the amended version. He just got his definition of capitalism wrong. And he, like Keynes, forgot to mention where the funding for all this socialism/stimulus would come from.

Ironically, it’s the US that leads the charge in proving Marx partially right. Municipal governments and cities will have to outsource their increasingly collectivist services to cheaper and more efficient private companies, as described in the articles above. Because they can’t pay for them. Oops.

The UK, the world’s next biggest touter of capitalism, follows the US with the same development on a national level:

“Cameron said he will press ahead with a proposal set out in the coalition government’s program to establish a “Big Society Bank” to finance moves by charitable groups and not-for-profit companies to take over jobs currently done by the government.”

This is what austerity looks like. It’s not communism that comes after crony capitalism. Communism is too expensive. What does come after crony capitalism is something we can only guess at. History says hyperinflation. For now, the Road to Serfdom continues under the guise of a “citizen’s assembly“.

Governments can Multitask

The best way to simplify the tax code is, apparently, to appoint a tax lawyer to do it. In other words, ask the guy who made a living out of the complexity of tax law to simplify it. That’s what the Brits are planning. Just like asking the fox to guard the chicken coup, it’s going to work.

Meanwhile, Cameron and his cronies are raiding dormant UK bank accounts. Yes, if you have an account in the UK, it might pay to send your banker a postcard that you are still alive. Otherwise you will be funding the British Empire’s exploits.

Even Bogus Profit is Gone

Shocking news from the US: “Goldman Sachs Profit Drops 82%“.

Oh, sorry, we forgot the more important bit: “Goldman Sachs Profit Drops 82%, Missing Analysts’ Estimates“.

It turns out that Goldman’s traders couldn’t keep their winning streak. But this is seriously concerning news. If Goldman can’t make money in this market, what kind of self respecting decent businessman can?

Ben Bernanke of course! He can always make more money. He is Time’s man of the year after all. And money really is funny in his world.

Who Has the Power?

China surpassed the US as the world’s largest power consumer recently. Dan discussed where all this power came from here.

Closer to home, power companies are the latest to whinge over uncertainty on Australia’s policy future. What will carbon be under the new government? An externality or source of tax revenue? For now, those questions have cost the country $10 billion in spending plans being slashed.

And both political parties have it wrong anyway. Everyone knows about carbon emissions by now. And if power consumers are aware, but don’t change their polluting habits, then it’s because they don’t care enough. Thus, implementing a bureaucratic and legal nightmare to do what consumers will do when they want to is not a winning policy move.

Ah, perhaps the political mind works differently, as Dan points out. It’s not about decreasing pollution anyway, it’s about being elected. So if you can create a fear in people’s minds, and claim to be the only one to provide a way out, then people will vote for you.

Germans Commit to Europe Again

The German Finance Minister seems like quite a guy. And with Germany leading by example in Europe, this is quite important. Supposedly, Schaeuble cannot become Chancellor because he stepped down as his party’s chairman over a donations scandal. This is what made way for the current chancellor.

More importantly though is the fact that Schaeuble considers his own health second to Europe’s. The wheelchair bound Euro visionary did the “heavy lifting” in getting the Euro off the ground in the 1990s, according to his biographer. He was even the one who negotiated Germany’s reunification. Then recently he defied doctors and attended the Greek bailout meeting shortly after an operation. So it seems the Germans have a commitment to the Euro from one of their key politicians.

Until next week,

Nickolai Hubble.
Markets and Money Week in Review

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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