Financial Markets and Economic Crash, the Next Leg Down Will be Worse

Collapsing home prices and credit markets continue to put downward pressure on consumer spending, forcing the Federal Reserve to take even more radical action to revive the economy. Last week, Fed chief Ben Bernanke raised the prospect of further monetizing the debt by purchasing more than the $1.75 trillion of Treasuries and mortgage-backed securities (MBS) already committed. The announcement sent shock-waves through the currency markets where skittish traders have joined doomsayers in predicting tough times ahead for the dollar. Foreign central banks have been gobbling up US debt at an impressive pace, adding another $60 billion in the last three weeks alone. That's more than enough to cover the current account deficit and put the greenback on solid ground for the time-being. But with fiscal deficits ballooning to $3 trillion in the next year alone, dwindling foreign investment won't be enough to keep the dollar afloat. Bernanke will be forced to either raise interest rates or let the dollar fall hard.

Export-led nations are looking for an edge to revive flagging sales by keeping their currencies undervalued. But the strong dollar is making it harder for Bernanke to engineer a recovery. He'd like nothing more than to see the dollar tumble and reset at a lower rate. That would reduce the debt-load for homeowners and businesses and send consumers racing back to the shopping malls and auto showrooms. Perception management is a big part of stimulating the economy. That's why the financial media has been air-brushing articles that focus on deflation and shifting the attention to inflation. It's an effort to kick-start consumer spending by convincing people that their money will be worth less in the future. But deflation is still enemy number one. Rising unemployment, crashing home prices, vanishing equity and tighter credit; these are all signs of entrenched deflation.

Bernanke faces three main challenges to put the economy back on track. He must remove the hundreds of billions in toxic assets from the banks balance sheets, reignite consumer spending to offset the sharp decline in aggregate demand, and fix the wholesale credit-mechanism that provides 40 percent of the credit to the broader economy. Treasury Secretary Timothy Geithner has taken over the distribution of the remaining TARP funds, and created a new program, the Public-Private Investment Partnership (PPIP), for purchasing toxic mortgage-backed assets. The PPIP will provide up to 94 percent "non-recourse" government loans for up to $1 trillion of assets which are worth less than half of their original value at today's prices. The Treasury's plan is an attempt to keep asset prices artificially high so that the losses will not be realized until they've been shifted onto the taxpayer. Here's how John Hussman of Hussman Funds summed up Geithner's PPIP:

"From early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount - the remainder being "non-recourse" financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficiently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.

Make no mistake - we are selling off our future and the future of our children to prevent the bondholders of U.S. financial corporations from taking losses. We are using public funds to protect the bondholders of some of the most mismanaged companies in the history of capitalism, instead of allowing them to take losses that should have been their own. All our policy makers have done to date has been to squander public funds to protect the full interests of corporate bondholders. Even Bear Stearns bondholders can expect to get 100% of their money back, thanks to the generosity of Bernanke, Geithner and other bureaucrats eager to hand out the money of ordinary Americans." (John Hussman, "The Fed and Treasury - Putting off Hard Choices with Easy Money, and Probable Chaos, hussmanfunds.com)

Continued>>>
http://www.marketoracle.co.uk/Article10904.html

Let's repeat that last part.......

Make no mistake - we are selling off our future and the future of our children to prevent the BONDHOLDERS of U.S. financial corporations from taking losses...

THE BONDHOLDERS THE BONDHOLDERS THE BONDHOLDERS........

The teabaggers are leaving out the most important part. That's probably because they're STOOPID.

At this link:
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=5749157&mesg_id=5749157

Therefore, the only way you can have a job is to do the "service economy" nonsense. And since there aren't enough service jobs to employ everybody at a living wage, the only solution is to find a way to kill a whole lot of Americans until we can have full employment.

And so, it's stupid for us to ask for universal health care, because the more people that die, the better our economy will be.

and the price will be hyperinflation.

5-10 years of mid-teens to low twenties inflation rates.

elimination of the gold exchange standard in 1971 for inflation to get fully roaring. He took us off the gold exchange standard in order to increase the money supply by double digit percentages for the Vietnam War. And Jimmy got blamed for Nixon's mismanagement...Grrr.

the dollar is falling

http://money.cnn.com/2009/05/29/markets/dollar.reut/

five month low.......

"We'll soon find out whether an organism the size of the United States can run an economy based on one family selling the contents of its garage to the family next door."


Looks like the powers that be have decided a hard fast Depression is in order.

picking up and the jobless rate hasn't increased. It was originally thought that we would see improvement in July but now it's looking more like October. There are more orders of goods out there.

I'm not so sure it's all gloom and doom.

http://www.hussmanfunds.com/wmc/wmc090601.htm

....

"Presently, however, the debate about the long-term economic fallout from this defense of bank bondholders is anything but academic. I recognize that I have been on a virtual rant about it in recent months, but the reason is that it is literally the most important fiscal and bureaucratic event that we are likely to observe in our lifetimes, and is very possibly the precursor to enormous future economic difficulties. You simply cannot have an economy lend out trillions of dollars in bad debt, and then make the lenders whole with public funds (while still facing a massive second wave of probable mortgage defaults) without destructive repercussions. There is very little chance, in my view, that the current downturn is over. We have enjoyed a nice reprieve – if over a trillion dollars in redistribution could not accomplish even a reprieve, it would be a surprise. It's clear that investors are hopeful that we can simply return to rich valuations, debt-financed economic expansion, and abnormal profit margins based on excessive leverage. From my perspective, this hope is as thin as those that we observed at the peak of the internet bubble, the housing bubble, and the profit margin peak of 2007."


They've reblown a smaller bubble...using even more debt to do it.....will it hold?

for the wealthy, given them enough time to get their affairs in order before the wheels come off.

We second and third class passengers (citizens), are locked down in the bowels of the ship.

But the second leg down is far steeper with no money to throw at it.

Waiting to see how the ARM's reset here in the next few months.

I am not wearing a financial tinfoil hat.
All I know is that the financial people I have been reading for the last 4-5 years have been accurate in describing what is really happening and in predicting the result.
Kunstler is one of the people I read.
The information given out by the MSM and Gov't mouthpieces ( like Cramer, et al ) to the general population is designed to keep the game going.
God forbid anyone should have asked for their retirement/stock funds be moved out of GM
over the last 5 years.
Or AIG ( that's where mine was, but I got it all out in time, thanks to what I was reading ).

no matter what, in order to keep exporting.

If the Chinese won't revalue, then none of the Asian export countries will allow their "floating" currencies to float much upwards against the dollar.

Also, if the consumers stampede to the malls, they won't be buying goods manufactured here. They will be supporting a sales and distribution organization, but not a manufacturing one. The paradigm has changed dramatically.

Even sales tax revenues are up.

Guess I need to go hide and shake in fear.

Our law firm hired another employee today, even though the legal business is in its worst throes in 20 years.

Get off your butts and do what you can. Fear is fear and is for the afraid.