Joseph Cambria in his own words:
“Those with cool heads that understand how the current system works will, I believe, come to the realization that Ben Bernanke and Sec Treasury Paulson have done an outstanding job in fulfilling their responsibilities by acting intelligently and with foresight so as to avoid the possibility of a full on depression both in the US and the rest of the world.”
Great work. Leave the economics prediction to those who understand economics. The US has been in a depression ever since Ben and Henry went on their stealing spree. Unemployment is around 20%. Inflation around 11%. Real GDP has been falling all that time. Nor is there any sign of recovery. Nor CAN THERE be any recovery without reform. Here is the fools entire screed:
“[Joe Cambria – our in-house trader – takes a hard look at the arguments swirling around government intervention and buyouts in the recent finance fooferaw. It’s not as simple as it looks...]
No one needs another blog post telling him or her what’s been going on in the financial markets. I also don’t need to tell anyone about the caning the Fed and the US Treasury have been getting for the “bailouts” (AIG was a nationalization etc) and how the US is practicing ‘socialism’.
Free market types have been caning the US government for its intervention while the left is suggesting the interventions are being carried out to socialize losses and privatize profits. This is despite the fact that shareholders in these failed firms have lost almost all their investment (ignorance is bliss I guess).
Free market types and intelligent lefties need to understand that the Federal Reserve System was actually created to ensure security for the US financial system and to be a lender of last resort. It is the job – in fact it is a prime function of the Federal Reserve – to prevent during times of financial stress the deflationary impulse that could lead to a very serious recession or depression as a result of debt deflation. The Fed is carrying out its duties in the way meant to assist in liquefying the system, ensuring that institutions which are unable to borrow money can borrow through short term Fed loans during the crisis. In other words the Fed and other major central banks are trying to provide ample liquidity to the system during such times of stress.
Those with cool heads that understand how the current system works will, I believe, come to the realization that Ben Bernanke and Sec Treasury Paulson have done an outstanding job in fulfilling their responsibilities by acting intelligently and with foresight so as to avoid the possibility of a full on depression both in the US and the rest of the world. I think given time the history books will judge these two men very highly.
People have suggested that the US authorities are in the process of creating new levels of moral hazard, which in my mind is frankly hard to see and doesn’t hold up to close examination. The Equity owners in all these firms have lost their capital. Sure the bondholders come out a little better but imagine having to sit around wondering if your loan money will be returned while the Fed’s managers liquidate AIG; people forget the Fed now ranks ahead as creditor. The management of all these firms have lost their jobs and most of their net worth. I can’t see an argument for moral hazard through the way the Fed and Treasury have conducted their activities. In fact I see the US taxpayer walking away with a big profit as a result of the Fed’s AIG loan terms and conditions.
However, I am quite conflicted with the Resolution Trust type bailout that was announced on Friday and which we should hear more about early this week. I believe the basics of the deal is that the Treasury will create a structure whereby banks and some other financial institutions will sell the toxic waste held on their books through a reverse auction process. The main objective is to clear the banking system of nearly all the radioactive crap so as to help the banks start lending again. I can understand the misgivings free market types have about this arrangement and I can also see how lefties would argue this is a bailout of the rich and wealthy Wall Street types.
Even so, the cost of this proposed rescue package would be quite small if the US and the world went into depression. And that’s the trade off: act now and contain the costs or act when the US and possibly the rest of the world is in depression.
People are now suggesting we need to look at ways of adding more regulation – even more than before. The inference is that somehow more bureaucracy than we have at present will somehow rescue us from future financial crises. It won’t and the suggestion is pure nonsense. Financial crises will be with us forever. In any event Wall Street is about to be history, as Morgan Stanley and Goldman Sachs will not exist in their present form; they will merge or die. It’s clear that the Fed and the US Treasury prefer to see universal banks rather than investment banks in the post crisis world. Ironically investment banks came about as the result of depression era regulation that demanded a separation of traditional commercial banking and investment banking businesses. Universal banks will likely be much more capitalized and carry less risk than before. However both Citigroup and UBS (a Swiss bank) – which are both considered universal banks – have suffered huge losses too.
If people think speculation will be curtailed in a post crisis world think again. Traders will simply move to boutique type operations funded through equity such as hedge funds. We’ll still hear about a 30-year-old making a 50 million dollar bonus in a year, although not at banks so much. They will simply be operating out of hedge funds.”
Now just as an alternative here is someone who actually knows what they are talking about.