Posted by Michael A. Kamperman on June 22, 2010
Here we go again. China once again throws us a bone to pacify the barking dogs calling for reform. First China “pretended” to run a trade deficit right before the Treasury had to declare whether or not China was a currency manipulator. Predictably, Geithner took a pass. The next month China once again ran a huge trade surplus. Now China has decided to adjust its currency, the yuan, to a basket of currencies including the euro and the yen as well as the dollar. This decoupling of the dollar is nothing more than a smoke and mirrors trick. China still plans to go “slow.” In fact, Nouriel Roubini pointed out this new structure would allow China to actually weaken its currency against the dollar in the event the euro and yen were to fall significantly against the dollar. What is actually happening is having the yuan tied to the dollar has stuck China with the unintended consequence of seeing its currency rise in value against the euro, whose countries represent its largest trading partner. Despite all the talk about China being concerned about our fiscal position China never took the step to diversify away from the dollar when the dollar was weakening against other currencies. Now that it is strengthening they suddenly want diversity. And predictably, this move occurs right before the G-20 meeting next week where pressure was about to be ramped up on China to reform. Now they can wink and say they already did.
China’s policies are destabilizing the global economy to the benefit of China. Currently China purchases only one dollar worth of goods from us for every four dollars it sells us. Even Japan is only at a two to one ratio vs China’s four to one ratio. Additionally, China has horrific working conditions for little pay. The time has come for the U.S. to tell China the free ride to development is over. Not only must China begin to import more goods, but it must also begin to improve working conditions and raise workers pay. If this costs it some exports, then so be it. There is a direct link to the debt crisis in the West and China’s flooding Western market with cheap goods based on a manipulated currency on the back of all but slave labor. Workers in the West that are forced to compete are being forced to take big pay cuts. Less income reduces their ability to pay their debts.
The upcoming G-20 summit represents an opportunity for President Obama to stand up and be counted. He should not tell others simply what they want to hear. He should not concern himself with America’s likability by the rest of the world. he should tell China the jigs up and gradualism they crave is unacceptable. He should tell Europe, particularly Germany and the U.K., that austerity will solve nothing and will ultimately trap the Western World in a prolonged debt induced depression. He should stand up for Radical Keynesianism. It’s actually comical that the Great Depression of the 1930’s demonstrated Keynes was right and the Austrian Economists were wrong. So who is the world turning to during the next debt-induced Great Depression but the Austrian Economists. Finally, he should then turn the microphone to the U.S. Congress and admit the stimulus bill he championed was too small, not too big. He should lay before them another stimulus bill for 2011-2012 of more than one trillion dollars. This time he should he include massive infrastructure spending, which will improve America’s productivity. He could show real leadership. While not holding my breath, I remain hopeful.
Posted by Michael A. Kamperman on June 12, 2010
The federal government of the United States does not owe $13 Trillion. It owes $8.5 Trillion. The other $4.5 Trillion is owed primarily to the Social Security and Medicare Trust Funds, along with some smaller Trust Funds. The Trust Funds are compromised of U.S. Treasury Bonds. Basically, the U.S. Government has printed an I.O.U. to itself. The higher than necessary payroll taxes collected all of these years to fund Social Security and Medicare have been spent. In truth, both of these programs are line items of the federal budget and the taxes collected specifically for these programs have been thrown into the general operating revenues of the federal government since they started collecting them. We are suffering from the unintended consequences of rhetorically establishing the Social Security and Medicare Trust Funds. It is time to officially end them. Those Trust Funds are nothing more than a smoke and mirrors sham and they were established for the express purpose of providing political cover for politicians who voted to establish the programs. Now that rhetoric is leading to new rhetoric that the U.S. government owes $13 Trillion and the debt burden is the biggest threat the country faces. This in and of itself is odd considering the U.S. Government owes everyone dollars, which it has the legal power to print.
It is also leading to rhetoric, depending on who does the counting, that the federal government also has unfunded Trust Fund liabilities of anywhere from $45 Trillion to $99 Trillion. This is based on calculations of assumed growth in Social Security and primarily Medicare spending for the next 75 years over and above the payroll taxes designated to fund the programs. These calculations are not worth the paper they are printed on. Either health care expenditures will slow down or we will raise the taxes to fund them. The world will not stay static for the next 75 years. The real danger is the concept the U.S. Government should have assets set aside to pay all future expenditures. We have exactly zero dollars set aside and no Trust Fund established for defense. The defense budget is more than $200 billion greater than the current Medicare budget. I don’t here anyone saying we have an unfunded defense liability and the U.S. will be unable to defend itself in the future. The reason is we have never had a defense Trust Fund. We simply expect to pay as we go and borrow if necessary. The same should hold true for Social Security and Medicare.
This anti-debt/anti deficit rhetoric has risen to a fever pitch. Hence, our already all but lame duck President is unable to get large majorities of Democrats in either chamber of Congress to pass an extension of health subsidies for the unemployed until the end of this election year. I never have believed this would be true, but it is. Without increased deficit spending the economy will stay mired in a deflationary depression. The logic that a nurse working for the VA, a public sector job, is not as valuable to the economy as a nurse working for a private non-profit hospital treating Medicare patients is simply another myth. Public sector jobs help the economy just as much as private sector jobs. The key is to have a way to make sure public sector programs are run efficiently and effectively. The spreading belief in these myths are killing any chance we have of escaping the depression we are in. The only solution is to end the Trust Funds and end the illusion that Social Security and Medicare have a future funding source other than federal taxes, borrowings, and if necessary money printing. Sadly, we have met the enemy and he is us. No wonder Rome fell from within.
Posted by Michael A. Kamperman on June 5, 2010
The supposed V-Shaped recovery the U.S. economy had entered has been shown by the recent unemployment report to be non-existent. Just because business is better than it was 12 months ago coming out of the depths of the financial crisis doesn’t mean the economy is on strong footing. We only created 20,000 non-census jobs and once again people are being pushed out of the labor force to keep our unemployment rate at a phony 9.7%. This is the best we can do after we threw a TARP Too-Big-To-Fail life-line to the Zombie Banks, spent 75% of the stimulus money, and juiced the housing market a second time with an $8,000 first time home buyers tax credit combined with an open spigot of FHA mortgage credit. Now the tax credit is over and the states are assembling 2011 budget plans without the stimulus funds used to smooth over the depression of the last couple of years. And the unexpected BP blowout is rapidly shredding the economies of the people of the Gulf. The recent unemployment report does not include any of the aftershocks of these events. The next one will. The seeds of the poorly named double dip recession (what recovery?) that have been sown the last few weeks have sprouted. Europe is in disarray. Geithner’s message to stress test their banks and continue stimulus spending has fallen on deaf ears. The Summer/Volcker/Geithner strategy to have America consume less, save more, produce more, and export more has found no takers. We need a new plan. Yet I fear none is coming.
What I also fear is the Obama Presidency is imploding right before our eyes. Regardless of one’s political persuasion this is very bad news. At the very moment our country desperately needs visionary leadership we are on the verge of going rudderless. The failed BP blowout preventer has apparently blown apart the Obama Presidency. Night after night of images of oil soaked marshes with no sign of the cavalry charging to the rescue have exposed the President to be out of touch with the people and unable to get on top of the situation. For some odd reason the President continues to allow BP to stay in charge of the cleanup efforts of our Gulf rather than turning the effort over to our all-hands-on-deck military. The people get it that BP has to find a way to seal their well one mile under the ocean. The people don’t get why BP is dictating the pace and the effort of the clean-up of our Gulf. Neither do I. The ramifications of this are best explained by liberal talk show host Chris Mathews who stated “if the oil keeps flowing into the Fall the Democrats could lose 100 seats in the House.”
The economy desperately needs a much bigger dose of stimulus than it has received so far. It’s not going to get one. The President is already weakened to the point that he was unable to get the Senate to extend unemployment benefits to the end of this election year. Normally a no brainer for a Democratically controlled Senate. They will try again this week. The deficit hawks have gained control of the debate. After this election cycle many more of them will swarm the Halls of Congress. It was especially disheartening to hear President Obama praise the unemployment report yesterday as good news and continuing signs of progress. He is clinging to hope and a prayer that his economic programs will work eventually. Importantly, he has failed to articulate the case for more stimulus spending. Now it is too late. We’re “Slip slidin’ away-slip slidin’ away-you know the nearer our destination-the more we’re slip slidin’ away.” It’s now all up to Ben Bernanke and the Fed to lead us to the economic promised land. The number of people pleading for quantitative easing from the ECB has grown exponentially in the last few weeks. Soon the chorus of those calling on the Fed to print money will grow exponentially as well. There is no other way out.
Posted by Michael A. Kamperman on May 26, 2010
Unfortunately our Treasury Secretary has misread our recent financial history’s cause and effect. He believes his bank stress test is the reason confidence was restored to the financial markets. Nothing could be further from the truth. Most people now know, and knew at the time, that the assumptions in the stress test were too weak. Yet few care, or cared at the time. For example, the unemployment rate and the decline in home prices have well exceeded the worst case scenario of the tests. The reason confidence returned to financial institutions is that it was made clear that there would not be either the nationalization of a bank or a chaotic ’Lehman’ style shutdown. It was the policy of TOO-BIG-TO-FAIL that restored confidence in conducting business with and investing in large financial institutions. These companies were endowed with a defacto full faith and credit of the U.S. government. The markets fully accepted the capacity of the U.S. government to backstop all of these institutions. It also helped tremendously that the Federal Reserve stepped up to the plate and purchased over $1 trillion of mortgage paper. The European banks are probably in worse shape than the U.S. banks were. The markets will not accept another smoke and mirrors sleight of hand trick. And there is not a person I know on the planet that believes Greece can backstop its banks no matter how high the losses may be. Hence, if a sham stress test is conducted ala the U.S. version the markets will ignore it. If a real stress test is applied the markets will cough up blood over the inability of most European governments to stand behind these institutions. President Obama needs to fire Geithner, and once again for the record he needs to quit listening to Volcker.
In an austerity mania Geithner is also taking a message to European governments (Germany) that their governments need to spend more to bolster economic growth. While he is right on the priciple of the issue, his proposal will be dead on arrival. Apparently he is tone death and lacks the powers of persuasion. There is a solution to the crisis. The European Central Bank needs to expand its balance sheet and conduct massive purchases of Greek, Italian, Irish, Spanish, and Portuguese debt. Importantly, it needs to not sell any assets to offset the purchases. The ECB has the power to drive down the interest rates all of these governments are paying and it needs to get on with it. What Geithner should tell Europe is if the ECB conducts quantitative easing, then the U.S. will correspondingly purchase in the open market as many German and French government bonds as necessary to push the Euro back above 1.25 to the dollar. This will alleveiate misplaced German fears of a collapsing currency leading potentially to hyper-inflation.
Ultimately the buck stops with President Obama. He now owns the double-dip we are entering. He needs to surround himself with advisers who have the vision to lead us out of the crisis. Instead he clings to the same advisers that assured him the unemployment rate would not rise as high as it has. There is no doubt there is an environmental disaster unfolding in the Gulf of Mexico that demands the President’s immediate attention. Ditto the shenanigans of Iran and the crisis unfolding on the Korean Peninsula. Beyond that there is no reason the economic crisis is not job number one for the President. But he continues to treat it as a nuisance. Our states are being forced into the same austerity mania sweeping European governments. Yet the President remains silent. At this rate it is almost a certainty the historians will talk about the economically failed Hoover/Obama Presidencies.
Posted by Michael A. Kamperman on May 19, 2010
Germany befuddled markets yesterday by acting unilaterally to ban naked short selling of all European Government Bonds and in the stocks and bonds of its 10 largest financial institutions. Angela Merkel has been behind the curve and wrong on most of the decisions she has made so far regarding the credit crisis. Finally, she shocked me and a lot of other people and did something right. Many hedge funds are screaming bloody murder this morning claiming banning naked short selling will solve nothing. They are only talking their book and their wallet. Banning naked short selling prevents people betting against something in quantities greater than the underlying asset itself. If their are 200 billion euros of Greek bonds, then the market can still short 200 billion euros of Greek debt. But it cannot short 500 billion euros of Greek debt creating an artificial market that overwhelms the long side of the traded and pressures it to the downside. Hedge funds will claim banning naked short selling hurts liquidity and increases risk. Then perhaps they should practice diversification and fundamental research if they want less risk in an asset. The bottom line is our societies need our governments to be able to access the bond markets on reasonable terms. Allowing speculators to raise champagne glasses in triumph while riots run wild in the streets is insanity. The German ban should become permanent and it should extend to all asset classes. And it should extend to all markets outside of Germany. The Germans acted unilaterally on their own for two reasons; the French refused to go along, and the Germans have the power to act without getting someone elses permission. This message will not be lost on the rest of Europe. Merkel has made the current crisis much worse than it should have been. It is about time she did something right.
Protecting the debts markets is one thing. Coming up with a strategy to repay the debts in a deflationary world is quite another. The April U.S. CPI just printed a negative .1% overall and a core rate of zero. Since the end of April oil prices have collapsed by 20%. The negative CPI was in spite of higher oil prices. Additionally, the mortgage purchase applications fell by 27% last week. The expiration of the first time home buyers tax credit will lead the housing market down once again. In other words, inflation was negative in April before the impact of these two very deflationary trends in May.
The ultimate solution to solving the sovereign solvency crisis and deflation is the same. The central banks of the world need to start printing money and start buying up their own government bonds in very large quantities. The deflationary environment is giving all of these governments a chance to hit the reset button. Yes, monetizing the debt is the solution to our credit problems and our deflation problem. To really defeat deflation we still may have to mail out money allowing the private sector to reduce its debt levels as well. While Germany has been right about naked short selling, they have been wrong that inflation is a near-term threat and that austerity is the solution to the crisis. As events over the last few weeks have shown the Euro is an ungovernable entity. Therefore, it is up to the Fed to step up in the midst of this new credit crisis and resume its quantitative easing program. Everyday they wait allows confidence to whither further away.
Posted by Michael A. Kamperman on May 12, 2010
As predicted the ECB caved and has started to print money to buy up European Government bonds (Greek, etc.). They never really had a choice and should have acted much sooner to the avert the crisis. However, quantitative easing should be pared with a long term glide path to fiscal sanity. Instead, the Europeans in their clear lack of wisdom have embraced a combination of buying just enough government debt to keep the “Wolves” at bay. Meanwhile, they are trying to combine this strategy with demands for fiscal discipline requiring significant short term cuts in budget deficits. On the surface it sounds great to require people to retire later in life and to cut wages and to cut jobs. In reality this will only deepen the debt-induced depression and delay the inevitable. The Fed, the ECB, the Bank of Japan, and the Bank of England need to coordinate an all out monetization of government debts. This will hit the reset button and buy time for nations and economies to adjust holding societies together. By both cutting jobs and requiring people to work longer we are killing job opportunities for people in their 20’s. Is this what we really want? Younger workers without seniority will take the brunt of the axe to be swung. And, they will be out of luck a long time as retirements are delayed keeping existing jobs closed to newcomers for a long time. The austerity religion sweeping the globe is utter madness. The riots in Greece could be a harbinger of all of our futures. Today Spain announced it will cut another 6 billion euro form its current budget to show solidarity with the austerity mania. This in a country with official unemployment rates already over 20%.
The U.S. shares in the austerity mania as exemplified by the Tea Party. These well intentioned but misguided people believe they are saving society. In fact, they are most likely causing the fabric of our society to disintegrate. In my state of Texas the legislature is facing a projected $11 billion budget shortfall. One solution gaining popularity is to raise the student teacher ration in elementary schools. The current cap is 22 pupils per teacher. They want to save money by cutting teachers and forcing more kids into the classroom. They also are considering shortening the school week from 5 days to 4. Young teachers will be cut loose and elementary education graduates will find no room at the inn. Texas is in the best shape of all the large states in the U.S.
What the peddlers of austerity fail to grasp is many innocent hard working individuals will find themselves out in the cold through no fault of their own. Why? So those who were irresponsible will be punished? So those who are afraid of hyper-inflation will be pacified? Inflation occurs when too much money is chasing too few goods. There is no shortage of almost anything in the world. Furthermore, with global unemployment well above 10% it is doubtful demand will overtake supply even if all federal debt is monetized globally. Yes gold will go up in the short term. Probably a few other commodities too. But it will not lead to shortages. It will however push capital further out on the risk curve which could perhaps lead to global unemployment falling back below 10%. What most people miss is a large portion of global government debt is held by banks and hedge funds. The real money, capital, backing these bonds is not nearly as high as the outstanding amount of the bonds. Most banks and hedge funds are allowed to mark government debt at par and are allowed to leverage this debt with little capital. When they move out on the risk curve the leverage will greatly diminish. In the meantime young teachers could teach and young children could learn.
Posted by Michael A. Kamperman on May 4, 2010
The Chancellor of Germany has misplayed her hand. In a deference to domestic politics she has allowed Greece to twist in the wind demanding tougher and tougher concessions. The markets have figured out under the microscope of daily careful observation that Greece cannot repay its euro denominated debts if it falls into a deflationary depression. Neither can Portugal. Neither ultimately can Italy, Ireland, or Spain. Neither can most other debtor nations that lack the ability to print money. The grand scheme to bring Greece to its knees begging for mercy has back-fired. At this point the European Central Bank (ECB) either starts a quantitative easing program focused on printing money and purchasing the government debt of all member nations, including Greece, or the euro will implode as an unworkable currency. The risks go far beyond economics. A withdrawal from union will push Europe back to nationalism. That hasn’t worked out so well over the last millennium. It will be highly ironic if the ECB is pushed into quantitative easing when they have resisted kicking and screaming up until now. Hopefully we have all learned never say never.
Make no mistake there is no other way out of the global debt-induced deflationary depression but to print money. Tonight the head of the ECB Trichet is staring at the cold hard facts. But we in America should not be smug. Our states are imploding over the same forced austerity that Greece and the other too deep into debt nations are facing. We need to stop worrying about the deficit and we need to start worrying about our children who are being crammed into classrooms where budgets take precedence over learning.
We have reached the point globally where the rubber meets the road. There is no more opportunity to sweep the dust under the rug. The Maginot Line the Europeans set up to stop the Greek debt crisis from advancing has been breached. The only question is does the ECB have the guts to stand up to the failed policy of austerity? I don’t know the answer. But we will find out on Thursday when the ECB meets. When the Fed stopped quantitative easing it was inevitable the dike would spring a leak from the weakest points. It turns out the weakest point is Greece. But once a dike springs a leak the next weakest point usually pops due to enhanced pressure. That point has been Portugal. Unless the leaks are plugged soon the whole dam could burst causing a Lehman style credit crisis. President Bush was forced to back away from his free market ideology when Lehman imploded. The ECB is now faced with the same Faustian bargain. Hopefully President Obama is paying attention and will back away from his ill conceived and contrived Deficit Commission.
Posted by Michael A. Kamperman on May 2, 2010
I am a very optimistic person. It pains me to be such a pessimist on the economy. I look forward to the moment when I can switch from pessimism to optimism. Now is not that time. The preliminary GDP report showed growth of 3.2%. This represents a significant slowdown from the 5.6% growth rate reported in the fourth quarter of 2009. This is the roaring recovery we keep hearing about. The so-called jobless recovery. But the key to remember is this is the best we could do despite the $787 billion stimulus plan, the quantitative easing from the Fed, the home-buyers tax credit, and the stimulus spending from many foreign nations. It looks like rough sledding ahead. The Fed stopped adding cash to the economy at the end of the first quarter. The homebuyers tax credits expired at the end of April. Considering that almost 45% of all home-buyers in March were first time home-buyers, triple the normal rate, it is reasonable to assume another slowdown in home sales started yesterday. Jarringly state and local government spending dropped at an annualized rate of 3.8% in the first quarter. Most of the money from the stimulus plan was aimed at providing cash aid to state and local governments. What will happen to state and local government spending when the stimulus money stops coming at the end of 2010 since their budgets are already plummeting now? Export growth slowed in the first quarter. Not surprisingly the dollar has continued to strengthen all year hindering relative export competitiveness. And of course we are all watching the Greek Tragi/Comedy unfold day by day. Greece has forced all of Europe and many other debtor nations to tighten their belts in the last few weeks. It is impossible to see how exports can lead a U.S. recovery going forward no matter what the rhetoric is from the Whitehouse.
I was at a party last night and I mentioned that Gallup reported the March unemployment/underemployment rate was 20.3% and that in Spain the official unemployment rate is now 20%. A man I met who works in the aerospace industry said unemployment in his industry is 30%. He said he has so many friends living off of their IRA’s and 401(k)’s and that for some the money is starting to run out. A woman I met told me about her daughter in her 30’s having to move back home. The economic pain is spreading and it is not letting up.
The economy definitely needs another major stimulus plan. That looks politically impossible in 2010. The Tea Party movement believes our problems are the result of too much government spending. Their libertarian leanings are pulling the Republican party to the right. The progressive liberal wing of the Democratic party is all that will be left after the 2010 elections. Those politicians who believe in the possible, which means they believe in the art of compromise, are an endangered species. We could well be in a period in 2011 and 2012 when nothing significant is accomplished because compromise by either side will be viewed as surrender by the radicals that increasing are gaining power on both sides of the aisle. The old saying that there is not a dimes worth of difference between the Republicans and the Democrats may well no longer be true. Polarized politics will not solve America’s problems. We need the President and both aisles of Congress to focus on creating jobs for others rather than focusing on saving their own jobs for themselves.
Posted by Michael A. Kamperman on April 25, 2010
Former Sen. Alan Simpson, R-Wyo., and Erskine Bowles, former Clinton White House Chief of Staff are leading President Obama’s deficit cutting effort known as The National Commission of Fiscal Responsibility and Reform. This Commission is nothing but a Trojan Horse that offers the allusion of one thing but will deliver another. In a noble attempt to save American finances the Commission is going to prolong the current depression for decades and kill any hope of growing our way out of troubles. The Commission will try to sell us on the virtues of paying as we go, balancing the budget, and reducing our debts. They will argue this makes us safer in the long run and will be best for our grandchildren. Balderdash! Our children and our grandchildren will suffer disproportionately from such a fools errand. They are suffering now. New York City is looking to lay-off 8,500 teachers next year. Current state law requires them to honor union seniority rules. This means almost all of the Teachers let go will be in their 20’s. It also further dims the already bleak job prospects for soon to graduate and recent still unemployed college graduates. Not to mention the children in New York City Schools will be pushed into classrooms with higher student/teacher ratios despite all of the best research showing the single biggest factor in improving student performance is lower student/teacher ratios. New York Cities plans are being repeated all around the country. It is estimated that hundreds of thousands of teachers could get pink slipped this summer. Education is the most important way to make America safer, more prosperous, and more democratic in the future, not deficit reduction. And let’s face it, in the end the Commission will call for cutting future entitlement benefits while sticking our children and grandchildren with the bill for current benefits. Count me as one who already considers anything the Commission recommends as dead-on-arrival.
The U.S. is currently spending less than 2% of GDP on debt service. To achieve a balanced budget in the current debt-induced deflationary depression would require a combination of draconian spending cuts and tax increases that would cut GDP by 10%, or more. After we balance the budget we will still have the debt and we will still be spending 2% of GDP on debt service. Communities like New York would have to cut a lot more than just 8,500 teachers to achieve these goals. We need the national dialogue to go in the opposite direction it is now heading.
President Obama should be commended for showing leadership and appointing two well meaning leaders to tackle a difficult issue. But sheep are easily led over a cliff. Having the guts to lead and the vision to lead in the right direction are two different things. The country should be going in the opposite direction. We should be lowering the retirement age for Social Security and Medicare to 60 to open up jobs for those in their 20’s with so much to give who are left to sit at home with mom and dad. We should be lowering student/teacher ratios and setting a goal for America to have the number one primary education system in the world. We should not be worrying about paying off a 30 year mortgage in 3 years when one spouse in the house in unemployed. Especially when we have a trust fund know as the Fed that can print us a check anytime we need one. Austerity is wrong for Greece and it is definitely wrong for America.
Posted by Michael A. Kamperman on April 16, 2010
In a shocking move the SEC filed civil fraud charges against Goldman Sachs. They accused the firm of deliberately stuffing subprime CDO’s with bad mortgages, selling them to unsuspecting investors, and then arranging for bets that the mortgages would fail. If true and provable, then I imagine we will finally begin seeing someone go to jail for the massive subprime fraud. For the record Goldman Sachs denied the charges and plans to defend itself vigorously. However, the immediate and semi-permanent fallout for the economy is not good. For starters, these accusations probably just put the final nail in the coffin of the securitization market. The Federal Reserve was hoping to revive this market to bring more liquidity and leverage into the credit markets. Additionally, the enhanced risk this introduces into the market should lead to a new round of further deleveraging. All of this while the Greece sovereign debt debacle remains unresolved. The whole reason the Federal Reserve needed to print money is financial firms were delevering their balance sheets and didn’t have enough money to support the needed creation of credit. So the Fed stepped in and purchased over one trillion dollars worth of mortgages. The Fed just stopped its purchases gambling the markets could handle their exit without too big a hiccup. The SEC just pulled the rug out from under the Fed.
Make no mistake the SEC is doing the right thing. We know the subprime crisis was the result of massive fraud. Life savings have been wiped out. Millions have lost their jobs. We need to make sure those who stole from others are punished. The country will not be able to move past the subprime crisis without justice.
The SEC also just made financial regulatory reform a really hot issue. Despite the suspicions of some I do not believe the charges against Goldman Sachs are politically motivated. The SEC’s action has the very real possibility of throwing the markets into turmoil and ultimately throwing millions of more people out of work. That would not be good for the party in power come election day. Clearly the Federal Reserve wasn’t in the loop when this decision was made. Despite the constant rhetoric that the economy is much stronger than people believe and that we are in a V-Shaped recovery, the truth is consumers and small businesses are still having a very difficult time accessing credit on reasonable terms. It was reported today that the states of California, Florida, Nevada, and Georgia had record unemployment rates in the post World War II era for the month of March. That was just a couple of weeks ago. Foreclosures are continuing to go up, not down. The Obama Administration has been relying on smoke and mirrors to revive the economy. We all remember the stress tests. Well where are the loans to consumers and small businesses? Where are the jobs? This was the situation before the SEC pulled the rug out on the Fed by having the courage to call a spade a spade. It took Bernanke 18 months to start quantitative easing only after the Brits led the way and shamed him into it. Hopefully the Fed will not sleepwalk for so long this time.
