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The art of deception: Hank Paulson speaks

Tuesday, November 18, 2008, 1:22 PM

The key problems that we face are all expressions of the fact that our monetary system is based on debt, and this enforces an exceptionally short-term investing and planning horizon, along with the need for continuous exponential expansion.

Thus our primary ailment today is a failure of our money system. Practically everything else that we read about today – bank failures, foreclosures, rapidly depleting resources, etc – are merely symptoms of this failure.

We are facing a money crisis, not a banking crisis. We are not experiencing a failure of our credit markets, but a failure of our money system. The apparent inability of our policy makers to understand this crucial distinction all but assures that their attempts to “fix things” will do more harm than good.

This OpEd piece by Hank Paulson, published today by the NYT, is a monument to wasteful, off-target thinking.

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State finances in disarray

Monday, November 17, 2008, 3:02 PM

I had a most pleasant weekend off - the first in a very long time - and spent some of it pondering an unusual recent event.

We are raising turkeys, five very large, gorgeous bronze birds.  Last Thursday they started making their alarm sounds, meaning that something was not right.  Rushing out, I saw that "Skunky McGee", our ancient resident neighborhood skunk, was in their pen toodling around. He's nearly all white, we know his habits quite well, and his appearance at 9:30 in the morning was a bit late for him to be out and about.

It took me far too many beats to realize he wasn't toodling around looking for errant food scraps, he was chasing our turkeys in an unbalanced, tippy version of the skunk waddle.  As I stared in wonder, he caught one, and began, well, chewing on it.  You see, skunks are not usually predators of anything larger than a lawn grub, so he was incapable of really doing much more than begin a long process of gnawing.  He started near the tail. 

It was at this time that the word finally popped in my head: "rabies". » Read more

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Fannie & Freddie insolvent and losing money

Friday, November 14, 2008, 12:25 PM

I want to recall that, at the time of the Fannie and Freddie bailouts at the beginning of the summer, Hank Paulson, backed up by a compliant Congressional Budget Office, made the claim that any bailout of Fannie and Freddie was largely symbolic and not likely to cost the taxpayers much, if anything at all.

Here's a blast from the past from the July 22 issue of USA Today:

Fannie, Freddie could cost us $25 billion
WASHINGTON — Congress' top budget analyst says a federal rescue of troubled mortgage giants Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion.

But Peter R. Orszag, director of the Congressional Budget Office, predicted in a letter to lawmakers Tuesday that there's a better than 50% chance the government will not have to step in to prop up the companies by lending them money or buying stock.

Paulson went on to reiterate those claims.  At the time I found those claims to be ludicrous, as they would require loss ratios for Fannie and Freddie that were not just smaller, but a tiny fraction of the losses that the rest of the mortgage industry had already booked. » Read more

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Financial Distress

Thursday, November 13, 2008, 12:25 PM

The broad stock market is now testing the recent lows.  But the real story is in the financial stocks themselves.

This is as close to an all out breakdown as I can imagine.

For starters, I have been keeping a close eye on Citigroup because they hold massive amounts of both derivatives and so called "Level III assets", those unknowable piles of junk assets that management gets to park off to the side at whatever value they want to put on them because there is no open market for them.  

This chart says "bankruptcy coming soon." » Read more

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A peek at the new Crash Course promotion plan

Wednesday, November 12, 2008, 9:17 PM

We're about a week away from releasing the master for the DVD version of the Crash Course. At the same time, we'll be announcing our new overall plan for spreading the messages of the Crash Course far and wide. The thrust of this plan is to make it really easy for everyone in the community to help spread the word, and we've even included a way for those of you who are so inclined to make money by distributing the Crash Course DVD.

Here's a glimpse of what will be contained in our new Crash Course promotion plan that will be announced next week when the Crash Course DVD is complete: (more...)

» Read more

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Bait and Switch? TARP funds turn to CCRP

Wednesday, November 12, 2008, 2:04 PM

Well, that didn't take long.

First Paulson wanted unlimited funds, sorry funds limited to only $700 billion at any one time, to buy troubled assets, then he used the funds to give directly to banks with no meaningful strings attached and now he's saying that the funds will be used in another way entirely.

He wants to use the funds to unlock the consumer credit markets turning the program into CCRP, I suppose.

On the one hand I suppose it is a good thing that he's willing to admit when a program isn't working.  On the other hand it makes it look like they really don't have a very good handle on the crisis at all and are just flailing about. » Read more

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Deflation still winning the day

Tuesday, November 11, 2008, 11:04 AM

As fast as the Federal Reserve and US government have shoveled money into the Wall Street machinery, it has been disappearing even faster.

The evidence is contained in the falling prices of:

  • Houses
  • Stocks
  • Most bonds
  • Commodities
  • A rising dollar

The problem with deflation is that it is a certified bummer.  Falling asset prices mean a negative "wealth effect," which depresses both additional borrowing and spending by consumers.  Less consumer spending means falling revenues and falling profits, and then falling employment. » Read more

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US Taxpayers are Violated - the Looting Operation Continues

Monday, November 10, 2008, 4:31 PM

I am trying to maintain a very level-headed approach to the changes that we are seeing. However, from time to time the looting operation becomes just a bit too obvious, a bit too overt, and I find my level of cool slipping.

This is one of those times. 

Here are the dots that I am connecting that have me concerned, if not angry.

Remember, even prior to its passage, I called the bailout the greatest looting operation of our time. I did so because the language of the Bailout Act, as originally proposed by the former CEO of Goldman Sachs, er, I mean the Treasury Secretary, requested three things: unitary power, no review, and no limits.

Frankly, it was the most plainly-worded document of theft that I had ever seen, and probably ever will see, in my life (because it was too blatant and such mistakes are rarely made again). » Read more

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Stunned Icelanders Struggle - A parable for Americans?

Sunday, November 9, 2008, 8:15 AM

There is a world of difference between a tiny island nation of 300,000 souls and the world's largest economy and reserve currency.

But the precise conditions being experienced by Iceland right now are definitely within the realm of possibility for the US.  Therefore this next story is highly instructive as a possible, if remote, road map for the US and other overleveraged countries. » Read more

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Jobs report shows 240,000 losses and more Fuzzy Numbers

Friday, November 7, 2008, 10:44 AM

The Dow Jones is up roughly 225 points on the news that 240,000 people lost their jobs in October.  This perverse sort of reaction defines how Wall Street works.  Wall Street cheers this sort of news, because it implies that another rate cut is on the way.

So the logic boils down to this: The worse the news, the greater the chance that the Fed will shower us with even more cheap money.

In a more perfect monetary system, good news would be rewarded and bad news would be punished but that is just not how Wall Street works.  Quite the opposite. » Read more