G
Gandalf Grey
Guest
Bernanke's Warning: "Everyone to the bunkers"
By Mike Whitney
Created Jan 13 2008 - 1:14pm
On Thursday, Fed chairman Ben Bernanke gave the keynote address on the state
of the economy and financial markets at a luncheon in Washington, DC. The
tone of the speech was decidedly somber and could have easily been
accompanied by a funereal dirge and 8 black-suited pall bearers. Bernanke
avoided the opaque, hieroglyphic-filled language of his predecessor, Alan
Greenspan, and gave a clear presentation of the facts. Unfortunately, the
facts are bleak. The economy is in very bad shape.
"Financial market conditions...have produced a volatile situation that has
made forecasting the course of the economy even more difficult than usual.
(We have seen) continued increases in the prices of energy (as well as) a
sharp and protracted correction in the U.S. housing market. According to the
most recent available data, housing starts and new home sales have both
fallen by about 50 percent from their respective peaks."
Bernanke made no effort to conceal the gloomy facts:
"Currently, about 21% of subprime ARMs are ninety days or more delinquent,
and foreclosure rates are rising sharply ...Fraud and abusive practices
contributed to the high rates of delinquency that we are now seeing in the
subprime ARM market, the more fundamental reason for the sharp deterioration
in credit quality was the flawed premise on which much subprime ARM lending
was based: that house prices would continue to rise rapidly. (This) will
have adverse effects for communities and the broader economy as well as for
the borrowers themselves."
Bernanke was equally blunt about the credit crunch that resulted from the
excesses in subprime lending:
"One of the many unfortunate consequences of these events, which may be with
us for some time, is on the availability of credit for nonprime
borrowers...The far-reaching financial impact of the subprime shock is that
it has contributed to a considerable increase in investor uncertainty about
the appropriate valuations of a broader range of financial assets, not just
subprime mortgages. (As a result) the problems in the subprime mortgage
market may lead overall economic growth to slow."
Bernanke went on to give a very detailed account of how the banks
"underwrote many of the loans and created many of the structured credit
products (MBS, CDOs, ABCP) that were sold into the market. Banks also
supported the various investment vehicles in many ways, for example, by
serving as advisers and by providing standby liquidity facilities and
various credit enhancements."
As the problems in subprime have grown, the banks have been forced to take
on more and more of their struggling "off balance" sheet operations which
dramatically increases their debt-load and further impairs their capital
base. This explains why the banks have been reporting huge losses from their
deteriorating collateral while their market value has dropped sharply. Now
banks have become more restrictive in their lending and credit has become
more expensive and less available.
When the banks are unable to issue loans; the economy suffers.
Bernanke added ominously: "The market strains have been serious, and they
continue to pose risks to the broader economy."
Amen, to that. Since the troubles began in late summer, the Fed has slashed
rates by a full percentage point to 4.25% and opened a Discount Window to
provide billions of dollars directly to the banks. The Fed has also opened a
Term Auction Facility (TAF) which has distributed $40 billion in 30-day
repos to over 100 under-capitalized banks. The Fed is planning to loan
another $60 billion in the next month. These repos are issued secretly (so
depositors and shareholders don't know how bad things really are) and the
Fed is accepting a "wide range of collateral", which means that they are
taking "structured investments" (MBSs, CDOs, ASCP) the same garbage that no
one will buy on the open-market. In other words, the Fed has established a
multi-billion emergency fund which features permanently-rotating loans for
banks that made poor investments and are, for all purposes, already
bankrupt. This is moral hazard at its absolute worst.
As Bernanke knows, 'permanent-rotating loans' is just a clever euphemism for
nationalizing the banks and monetizing their debts at the taxpayers'
expense. Many of these institutions are already insolvent. The Fed is just
ensuring that there are no consequences for their leveraged bets and
reckless speculation. Once again, it's socialism for the rich and capitalism
for the poor.
But even these unprecedented measures do not really solve the basic problems
of credit quality or the serious constraints on lending. For that, the Fed
will have to aggressively slash rates hoping to revive the sagging economy.
Here's Bernanke's grim (but realistic) forecast:
"Financial conditions continue to pose a downside risk to the outlook for
growth....The financial situation remains fragile, and many funding markets
remain impaired. Adverse economic or financial news has the potential to
increase financial strains and to lead to further constraints on the supply
of credit to households and business...Incoming information has suggested
that the baseline outlook for real activity in 2008 has worsened and the
downside risks to growth have become more pronounced. Notably, the demand
for housing seems to have weakened further, in part reflecting the ongoing
problems in mortgage markets. In addition, a number of factors, including
higher oil prices, lower equity prices, and softening home values, seem
likely to weigh on consumer spending as we move into 2008."
"The baseline outlook for real activity in 2008 has worsened and the
downside risks to growth have become more pronounced." That says it all.
We're headed into recession and it's going to be a doozy.
Bernanke's assessment is only slightly different from the bleakest
predictions of the doomsday web sites. Unemployment is on the rise which
will continue to be a drag on consumer spending. Inflation is also likely to
be a concern as the Fed slashes rates and food and energy prices go through
the roof. Even so, the listless economy is so hobbled by the collapse in
real estate and the subsequent meltdown in the financial markets, that the
Fed will be forced to ease rate by at least 50 basis points at the next
Board of Governors meeting followed by further cuts all the way down to
2.5%. (According to Goldman Sachs and Merrill Lynch) If that's the case, we
can expect to pay 4 to 5 dollars for gas by the end of 2009.
Although Bernanke's candor is a welcome relief from Greenspan's circuitous
"Fed-speak", his dark prognosis does little to address the problems facing
the markets. It's hard to tell whether we are entering a new era of Fed
transparency or if Bernanke has simply taken the attitude that "When all
else fails; tell the truth". That's hardly a sign of personal virtue.
The bad economic news is now cascading-down from all sides. The dollar is
steadily weakening which sent gold to a new-high of $900 on Friday. Hours
earlier, the Commerce Department reported that the trade deficit had
skyrocketed 9% to $63.1 billion in November. That puts more pressure on the
greenback as foreign investors will continue to flee the US to markets with
greater growth-potential.
Also, the nation's largest brokerage firm, Merrill Lynch is expected to
report losses of $15 billion on soured mortgage-backed securities. The
nation's largest bank, Citigroup, is expected to report even bigger losses
of $25 billion on similar investments. The nation's largest mortgage-lender,
Countrywide, will (allegedly) face bankruptcy if Bank of America's $4
billion bid for the ailing company is not accepted. And, the nation's
largest bond insurer,MBIA Inc., may need to raise $10 billion in capital to
keep its AAA credit rating. (said William Ackman, president of Pershing
Square Capital Management)
Get the picture? The giants of the financial industry are either on the
brink of annihilation or they have joined the long conga-line of haggard
CFOs who are on their way to Beijing with begging bowl in hand. Battered
banks and corporations are increasingly forced to get capital in the only
place it is still available; China and the oil producing countries. Thus,
the life's-blood of capitalism now surges through a communist artery. How's
that for irony?
On Friday, the RBC Cash Index reported that consumer confidence had fallen
to an all-time low. The US consumer is over-extended, underpaid, and worried
about everything from his soaring energy bills, to diminishing job security,
to the mass foreclosures. The report was released just hours before the Dow
Jones Industrial Average took a 246 point swan-dive in heavy trading. The
prevailing mood on Wall Street is gloomy and the feeling is that the worst
is yet to come. Judging by the extraordinary steps taken by the Fed; we
could be facing a Force 5 fiscal-hurricane.
Economic soothsayer Doug Noland summed it up like this:
"The Mortgage Finance Bubble is a bust, Wall Street finance is imploding,
and foreign financial institutions are keen to cut and run from the business
of providing U.S. Credit... Worse yet, the economy is quickly succumbing to
recessionary forces. With a high degree of confidence we can proclaim that
the Mortgage Crisis has now evolved into a Corporate Debt Crisis - and this
crisis will not be resolved anytime soon - by rates, by helicopters, or by
bailouts." (Doug Noland "Mortgage Crisis to Corporate Debt Crisis", Prudent
Bear)
Thanks for your honesty, Ben, but all the exits appear to be bolted-shut.
We'll have to ride this storm out from inside the bunker.
_______
Mike Whitney
--
NOTICE: This post contains copyrighted material the use of which has not
always been authorized by the copyright owner. I am making such material
available to advance understanding of
political, human rights, democracy, scientific, and social justice issues. I
believe this constitutes a 'fair use' of such copyrighted material as
provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson
By Mike Whitney
Created Jan 13 2008 - 1:14pm
On Thursday, Fed chairman Ben Bernanke gave the keynote address on the state
of the economy and financial markets at a luncheon in Washington, DC. The
tone of the speech was decidedly somber and could have easily been
accompanied by a funereal dirge and 8 black-suited pall bearers. Bernanke
avoided the opaque, hieroglyphic-filled language of his predecessor, Alan
Greenspan, and gave a clear presentation of the facts. Unfortunately, the
facts are bleak. The economy is in very bad shape.
"Financial market conditions...have produced a volatile situation that has
made forecasting the course of the economy even more difficult than usual.
(We have seen) continued increases in the prices of energy (as well as) a
sharp and protracted correction in the U.S. housing market. According to the
most recent available data, housing starts and new home sales have both
fallen by about 50 percent from their respective peaks."
Bernanke made no effort to conceal the gloomy facts:
"Currently, about 21% of subprime ARMs are ninety days or more delinquent,
and foreclosure rates are rising sharply ...Fraud and abusive practices
contributed to the high rates of delinquency that we are now seeing in the
subprime ARM market, the more fundamental reason for the sharp deterioration
in credit quality was the flawed premise on which much subprime ARM lending
was based: that house prices would continue to rise rapidly. (This) will
have adverse effects for communities and the broader economy as well as for
the borrowers themselves."
Bernanke was equally blunt about the credit crunch that resulted from the
excesses in subprime lending:
"One of the many unfortunate consequences of these events, which may be with
us for some time, is on the availability of credit for nonprime
borrowers...The far-reaching financial impact of the subprime shock is that
it has contributed to a considerable increase in investor uncertainty about
the appropriate valuations of a broader range of financial assets, not just
subprime mortgages. (As a result) the problems in the subprime mortgage
market may lead overall economic growth to slow."
Bernanke went on to give a very detailed account of how the banks
"underwrote many of the loans and created many of the structured credit
products (MBS, CDOs, ABCP) that were sold into the market. Banks also
supported the various investment vehicles in many ways, for example, by
serving as advisers and by providing standby liquidity facilities and
various credit enhancements."
As the problems in subprime have grown, the banks have been forced to take
on more and more of their struggling "off balance" sheet operations which
dramatically increases their debt-load and further impairs their capital
base. This explains why the banks have been reporting huge losses from their
deteriorating collateral while their market value has dropped sharply. Now
banks have become more restrictive in their lending and credit has become
more expensive and less available.
When the banks are unable to issue loans; the economy suffers.
Bernanke added ominously: "The market strains have been serious, and they
continue to pose risks to the broader economy."
Amen, to that. Since the troubles began in late summer, the Fed has slashed
rates by a full percentage point to 4.25% and opened a Discount Window to
provide billions of dollars directly to the banks. The Fed has also opened a
Term Auction Facility (TAF) which has distributed $40 billion in 30-day
repos to over 100 under-capitalized banks. The Fed is planning to loan
another $60 billion in the next month. These repos are issued secretly (so
depositors and shareholders don't know how bad things really are) and the
Fed is accepting a "wide range of collateral", which means that they are
taking "structured investments" (MBSs, CDOs, ASCP) the same garbage that no
one will buy on the open-market. In other words, the Fed has established a
multi-billion emergency fund which features permanently-rotating loans for
banks that made poor investments and are, for all purposes, already
bankrupt. This is moral hazard at its absolute worst.
As Bernanke knows, 'permanent-rotating loans' is just a clever euphemism for
nationalizing the banks and monetizing their debts at the taxpayers'
expense. Many of these institutions are already insolvent. The Fed is just
ensuring that there are no consequences for their leveraged bets and
reckless speculation. Once again, it's socialism for the rich and capitalism
for the poor.
But even these unprecedented measures do not really solve the basic problems
of credit quality or the serious constraints on lending. For that, the Fed
will have to aggressively slash rates hoping to revive the sagging economy.
Here's Bernanke's grim (but realistic) forecast:
"Financial conditions continue to pose a downside risk to the outlook for
growth....The financial situation remains fragile, and many funding markets
remain impaired. Adverse economic or financial news has the potential to
increase financial strains and to lead to further constraints on the supply
of credit to households and business...Incoming information has suggested
that the baseline outlook for real activity in 2008 has worsened and the
downside risks to growth have become more pronounced. Notably, the demand
for housing seems to have weakened further, in part reflecting the ongoing
problems in mortgage markets. In addition, a number of factors, including
higher oil prices, lower equity prices, and softening home values, seem
likely to weigh on consumer spending as we move into 2008."
"The baseline outlook for real activity in 2008 has worsened and the
downside risks to growth have become more pronounced." That says it all.
We're headed into recession and it's going to be a doozy.
Bernanke's assessment is only slightly different from the bleakest
predictions of the doomsday web sites. Unemployment is on the rise which
will continue to be a drag on consumer spending. Inflation is also likely to
be a concern as the Fed slashes rates and food and energy prices go through
the roof. Even so, the listless economy is so hobbled by the collapse in
real estate and the subsequent meltdown in the financial markets, that the
Fed will be forced to ease rate by at least 50 basis points at the next
Board of Governors meeting followed by further cuts all the way down to
2.5%. (According to Goldman Sachs and Merrill Lynch) If that's the case, we
can expect to pay 4 to 5 dollars for gas by the end of 2009.
Although Bernanke's candor is a welcome relief from Greenspan's circuitous
"Fed-speak", his dark prognosis does little to address the problems facing
the markets. It's hard to tell whether we are entering a new era of Fed
transparency or if Bernanke has simply taken the attitude that "When all
else fails; tell the truth". That's hardly a sign of personal virtue.
The bad economic news is now cascading-down from all sides. The dollar is
steadily weakening which sent gold to a new-high of $900 on Friday. Hours
earlier, the Commerce Department reported that the trade deficit had
skyrocketed 9% to $63.1 billion in November. That puts more pressure on the
greenback as foreign investors will continue to flee the US to markets with
greater growth-potential.
Also, the nation's largest brokerage firm, Merrill Lynch is expected to
report losses of $15 billion on soured mortgage-backed securities. The
nation's largest bank, Citigroup, is expected to report even bigger losses
of $25 billion on similar investments. The nation's largest mortgage-lender,
Countrywide, will (allegedly) face bankruptcy if Bank of America's $4
billion bid for the ailing company is not accepted. And, the nation's
largest bond insurer,MBIA Inc., may need to raise $10 billion in capital to
keep its AAA credit rating. (said William Ackman, president of Pershing
Square Capital Management)
Get the picture? The giants of the financial industry are either on the
brink of annihilation or they have joined the long conga-line of haggard
CFOs who are on their way to Beijing with begging bowl in hand. Battered
banks and corporations are increasingly forced to get capital in the only
place it is still available; China and the oil producing countries. Thus,
the life's-blood of capitalism now surges through a communist artery. How's
that for irony?
On Friday, the RBC Cash Index reported that consumer confidence had fallen
to an all-time low. The US consumer is over-extended, underpaid, and worried
about everything from his soaring energy bills, to diminishing job security,
to the mass foreclosures. The report was released just hours before the Dow
Jones Industrial Average took a 246 point swan-dive in heavy trading. The
prevailing mood on Wall Street is gloomy and the feeling is that the worst
is yet to come. Judging by the extraordinary steps taken by the Fed; we
could be facing a Force 5 fiscal-hurricane.
Economic soothsayer Doug Noland summed it up like this:
"The Mortgage Finance Bubble is a bust, Wall Street finance is imploding,
and foreign financial institutions are keen to cut and run from the business
of providing U.S. Credit... Worse yet, the economy is quickly succumbing to
recessionary forces. With a high degree of confidence we can proclaim that
the Mortgage Crisis has now evolved into a Corporate Debt Crisis - and this
crisis will not be resolved anytime soon - by rates, by helicopters, or by
bailouts." (Doug Noland "Mortgage Crisis to Corporate Debt Crisis", Prudent
Bear)
Thanks for your honesty, Ben, but all the exits appear to be bolted-shut.
We'll have to ride this storm out from inside the bunker.
_______
Mike Whitney
--
NOTICE: This post contains copyrighted material the use of which has not
always been authorized by the copyright owner. I am making such material
available to advance understanding of
political, human rights, democracy, scientific, and social justice issues. I
believe this constitutes a 'fair use' of such copyrighted material as
provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson