FedUpUSA

Archive for January 28th, 2010

The Wall Street Journal

The Senate voted 70-30 to reappoint Ben Bernanke for a second four-year term as chairman of the Federal Reserve.

Earlier, senators voted 77-23 to end debate, clearing the way for a final vote. During more than two hours of debate on the Senate floor, Bernanke backers warned that voting him down risked sparking turmoil in U.S. and foreign markets and thwarting a budding economic recovery. They said the Fed chairman deserved an opportunity to finish what he started.

Critics assailed him for his record ahead of the crisis, from bank supervision to mortgage regulation to the financial rescue. “Bernanke fiddled while our markets burned,” said Republican Sen. Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee. “I believe that it is the duty of this body to hold accountable those regulators whose poor oversight of our financial institutions and markets helped produce the greatest economic crisis this country has experienced in eighty years.”

Republican Sen. Jim Bunning, one of Mr. Bernanke’s fiercest critics, said “a vote for Ben Bernanke is a vote for bailouts,” and added, “If you want to put an end to bailouts and send a message to Wall Street, this vote is your chance,” he said.

Jim DeMint (R-SC)  had this to day at the re-confirmation hearing today:

And Bernie Sanders (I-VT) said this:

It isn’t often these two men agree on something and for good reason: Sanders is a self-described socialist and DeMint is a conservative Republican.  However, both of these men today represented the People of the United States to the best of their ability.  What Bernanke and his cohorts have done is criminal.  It has been nothing short of the orchestrated theft of taxpayer dollars to prop up insolvent institutions; the very same institutions that caused this mess in the first place.

FedUpUSA says thank you to Senator Bernie Sanders and Senator Jim DeMint, along with the 30 other Senators that voted Nay today.

“Sell and Fold” the New “Buy and Hold”

By Bill Bonner

01/28/10 Paris, France – Where we are now is a matter of great debate: Are we in recovery? Or is the depression deepening?

No one knows for sure. Investors stumble around in the dark, bumping into data and knocking over lamps. It would be nice if someone would turn on the lights. But that’s not how it works.

The best we can do is to try make out the shapes of the biggest pieces of furniture in the room. What else is out there? We don’t know.

Broadly speaking, the period we are in is deflationary. It is a period of credit contraction (at least in the private sector), de-leveraging and depression. How can we be sure? Well, let’s turn on the lights…

Take a look at this chart, for example. What it shows is not a ‘jobless recovery.’ It shows no recovery at all.

This slump is worse than any since World War II because it is correcting an expansion that dates all the way back to 1945! Credit began increasing right after the war. It kept increasing until 2007. Then, in the private sector, it began going the other way.

That trend continues.

It makes sense from a theoretical point of view, too. Every big credit expansion is followed by a big credit contraction. As credit expands, more and more mistakes are made. You can see how this works by looking at the mortgage industry. The first borrowers were solid. Subsequent borrowers were not-so-solid, but they were still generally reliable. The last borrowers – at the height of the frenzy in 2006 – often had no jobs, no income, and no plausible way of repaying their mortgages. Those mistakes are now being corrected.

Overall, credit is still expanding – thanks to the US federal government. But credit is contracting sharply in the private sector…where it counts most. Business lending is falling at a 16.6% rate… the steepest plunge since 1948 (when businesses stopped borrowing for war production). But government borrowing is more than making up for the shortfall in private borrowing. Overall, credit-market debt is up 5.5% in the seven quarters since the business cycle peak in December 2007.

Private sector credit down. Public sector credit up. What to make of it?

We can presume that eventually the government will run into the same wall the private sector hit in 2007-09. Looking through the history of economic crises, so well documented for us by Carmen Reinhart and Ken Rogoff, we see that crises in the private sector typically lead to crises in the public sector. As the private sector sobers up… the public sector goes on a spree. It won’t be long before it, too, crashes and burns.

We can anticipate how this crash in public debt will come about. This passage, from a brief account of French financial history called The Undying Debt by Francois Velde, is a story of the past. It may also be a story from the future:

With the opening of hostilities [in WWI], the Bank of France suspended the link between francs and gold, and part of the war was financed with large issues of paper currency. When France’s prime minister Poincare re-established the link in 1928, he could only do so at 20% of its pre-war parity.

In other words, the French got into a fix. They got out by defaulting on 80% of their obligations. The history of French financial management is not so different from that of any other nation. Time after time, France found itself a little short. And time after time, it defaulted…devalued…and reneged on its promises. Over nearly three centuries, a government debt equal to ten ounces of gold – with a present value of about €7,850 – was reduced, says Velde, to €1.20. That’s about “enough to buy a café crème at the bistro on the way out from the Treasury.”

(I don’t know what bistro Velde is talking about. A café crème usually cost me twice as much!)

Returning to the image we led off with, investing is not just like trying to find your way through a room in the dark. It’s like trying to find your way through a room in the dark…when the furniture is all moving! Trouble is, in the here and now there is so much furniture moving around, it is hard to make a move without tripping over something.

Under these conditions, I’m not sure we can come to any useful conclusions about how one price will move relative to the others. Which will go down most, the dollar or the euro? Will copper rise in dollars? Or fall against cotton? Will bond prices go up before they go down? We can’t say.

But we can say that governments are very good at borrowing…and not so good at re-paying. So even if credit-contraction and deflation is the trend of the moment in US financial markets, government credit-creation is rapidly expanding…and that’s inflationary.

That’s why we are wary of government debt. We own no US Treasuries…or any other form of government obligation. Shorting US and European government bonds is probably a good speculative play.

Just a day after the hearings investigating the taxpayer bailout and subsequent cover-up of the beneficiaries of taxpayer largesse up on Capitol Hill, AIG apparently needs more money.  It appears they are burning through taxpayer money at the rat e of $1 Billion a week!

AIG Draws $2.4 Billion From Fed Credit Line, Most Since October

Jan. 28 (Bloomberg) — American International Group Inc., the bailed-out insurer whose borrowing through a U.S. commercial paper program was set to expire this month, increased its draw on a Federal Reserve credit line by the most since October.

AIG owes $25.8 billion on the line, about $2.4 billion more than last week, according to Fed data released today. The draw has increased for six straight weeks. The company said in November that it may borrow additional funds from its five-year Fed credit line to make payments on maturing commercial paper.

“This helps to highlight the risks we’re exposed to as citizens standing behind AIG,” said Bill Bergman, an analyst at Morningstar Inc. in Chicago. “While there’s much more liquidity in markets as a whole, lenders are still being selective.”

AIG, which got a $182.3 billion government bailout, had relied on the U.S. commercial paper program as firms including MetLife Inc. and General Electric Co. reduced their use of government-backed funds. New York-based AIG said it lost access to its traditional sources of liquidity after its 2008 rescue.

Commercial paper is used by companies to finance daily expenses such as payroll and rent. The Fed, which started a program in October 2008 to bolster the market after the Lehman Brothers Holdings Inc. bankruptcy, said it may wind down the facility in February. Lending through the program peaked a year ago at $350 billion.

Mark Herr, a spokesman for the insurer said the increase was fueled by the need for funds to repay expiring commercial paper. He declined to comment further.

Life Insurance

AIG paid down its Fed line by about $25 billion in December by handing over stakes in two non-U.S. life insurance units. The company has said it plans to sell American International Assurance Co. and American Life Insurance Co. to rivals or private-equity buyers or in initial public offerings “depending on market conditions.”

AIG said in November that it will need to repay $23.2 billion in maturing debt, excluding commercial paper, in the four quarters ending September 2010. The insurer said it will make the payments with revenue from its businesses, proceeds of asset sales, dividends from subsidiaries and the Fed credit line.

MetLife, the largest U.S. life insurer, had no borrowing through the commercial paper program at the end of the third quarter, compared with $1.65 billion on Dec. 31, 2008. GE, which competes against AIG in the plane-leasing business, used the program in the fourth quarter of 2008, and didn’t expect to tap it again, the Fairfield, Connecticut based company said in a filing.

Plane Leasing

AIG has tapped a separate Treasury Department facility for $4.2 billion to help restructure its money-losing mortgage guarantor and the plane unit it was trying to sell, the insurer said in November. AIG got the $29.8 billion facility in April as part of its fourth bailout.

The insurer’s rescue includes a $60 billion Fed credit line, a Treasury investment of as much as $69.8 billion, and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company.

AIG said in a November filing that it may “borrow additional funds” from the Fed credit line to make payments on the $5.8 billion in commercial paper that matures in January.

The draw has climbed by $5.9 billion in the past six weeks. The latest increase marked the biggest weekly gain since the end of October, when it surged by about $3.6 billion.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net;