Sunday, September 23, 2012

Bernanke's Bargain

In my last post I asserted that the policy of "Extend and Pretend" is a Faustian Bargain and that the bill is now long overdue.  Here's what I mean...

We all know that Ben Bernanke is a student of the Great Depression.  He wrote his PhD thesis on the Great Depression so he is a leading subject matter expert on the underlying economic/monetary conditions that existed at that time.  Therefore, as the World and U.S. sank deeper into deflationary recession throughout 2008, he already had a long considered plan in mind for how he would prevent another Great Depression - in other words it was the mission of his life time and one he had long prepared for.  It was Bernanke along with Hank Paulson who were the primary architects of the myriad banking programs and bailout schemes that "supported" the financial system in that period.  

Dr. Bernankenstein
For that effort, Bernanke was named Time's Person of the Year in 2009 for what Time describes as having prevented an economic catastrophe.   So far, so good.  The problem is that, Bernanke forgot about the basic economic concept of moral hazard which will not only reverse any perceptions of him as an economic hero but cast full blame on him for having saved a corrupt banking/speculation model, thereby putting the entire world financial system at even greater peril.  Because in reality, Bernanke did not prevent economic catastrophe, he merely saved Wall Street from itself and thereby further validated their business model and emboldened them to take even greater risks in the future (which is now).  Meanwhile, in the event, all of the debris from 2008 was conveniently shifted from the private sector speculators to the public sector governments.  Therefore, the final result is to allow the underlying imbalances to accumulate further since 2008 while at the same time putting entire nations at risk financially.  During that same period, global Central Banks (Britain, Canada, ECB, China, Australia) etc. followed Bernanke's lead and put similar bailout programs into effect that not only propped up their banks but also gave a free pass to their respective governments to continue borrowing as much as possible to support their economies.  A free pass that is implicitly in place to this day, giving rise to ever increasing national debts.  So, global central banks created yet another moral hazard by subsidizing fiscal deficits.

Don't Fight The Fed
So what we can expect from this next impending 'event' is that instead of banks being at risk of failure, entire nations will now be at risk of failure.  Meanwhile, Bernanke and his brethren at the Global Central Banks who followed his lead will be totally unprepared and incapable of dealing with another much greater meltdown since they have squandered their resources and credibility by propping up an unsustainable system.  And owing to the Moral Hazard Bernanke has created, Wall Street has 100% faith in the Fed's ability to levitate the markets and keep them levitated - on Wall Street they call it the Bernanke "put" (as in put option) aka. downside insurance contract.  Recall that Wall Street also referenced the Greenspan put, so this notion of Wall Street seeing the Fed as saviour is fully ingrained going back dozens of years.  Yet for all that, apparently, major investors have already forgotten that the Fed was in major easing mode back in 2008 during the Lehman crisis which didn't prevent that fiasco from occurring.  Granted, this latest QE3 stimulus program is the ultimate temptation - an open ended commitment by the Fed to do "whatever it takes" to get the economy moving i.e. a blank check to Wall Street from the Fed to pour unlimited amounts of money into risk assets.  In other words the Fed now makes no secret that the economy has now become a second derivative "wealth effect" play i.e. their first goal being to help Wall Street get those million dollar pay checks rolling again.  Whether or not any of that Fed-sponsored payola actually trickles down to the masses or instead ignites commodity inflation further annihilating the middle class - is a story for another time.  Lastly, as I mentioned in my last post, despite massive quantities of monetary stimulus, the boyz on Wall Street are somehow vastly underperforming the overall market year to date, facing a major redemption deadline at the end of this month.  So they are heads down, all asses and elbows trying to save first their funds and then their bonuses i.e. systemic risks are not on their radar.

Moral Hazard On Full Display In Europe
Meanwhile, the ultimate example of moral hazard is playing out even as I write.  Back in mid-summer the headlines were dominated by the Spanish debt crisis as yields on Spanish debt breached the critical 7% level.   Mariano Rajoy, Spain's PM was running around like Manuel asking everyone in Europe to help his country.  Finally Mario Draghi stepped up and made the statement that the ECB will do whatever it takes to save the Euro.  That one public message intended for the markets, kicked off the mother of all short covering rallies in the Euro which is only now starting to reverse.  And of course, Spanish bonds rallied as well since they instantly became Wall Street's new "no brainer" trade of the year given that the ECB was going to print money to buy Spain's bonds.  Fast forward to today and Spanish yields are out of the red zone, so now Rajoy is claiming that Spain no longer needs ECB assistance (which would require a bailout with attendant stipulations).  As always, you can't make this garbage up.  Full Retard on every level.  As ZeroHedge states in the linked article, now the markets need to take back all of those gains, just to teach Manuel a big fucking lesson as to how the real world works.

As I have said many times throughout this shit show, what we are ALREADY witnessing in real time is a lurching, slow motion clusterfuck that gives the illusion of stability even as it slowly becomes unglued.  When we hit the acceleration phase, the time to prepare will be long over and unlike 2008 will take the vast majority by surprise.