In Response to Ben Bernanke

He said:

We came close to a financial melt down last fall – only the coordinated global response avoided collapse.

I for one am glad he put it that way. I thought at the time we might be in a global meltdown. But everything was still working. The banks were open, the stores had lots of stuff. There were no lines or violence. The roads were full of cars. There was no evidence of a meltdown.

If we were melting down in the fall what are we doing today? Things have gotten much much worse. The slow down is rapidly affecting every segment of our society. The S&P just went through last falls lows. We are close to losing the essence of two of our largest banks. Are we still melting down?

Capital given banks has slowed down the de-leveraging pace.

Fiddle sticks. Lending has fallen by $8 Trillion from the collapse of the shadow banking system in just the last year. You slowed that down?

It may be worth looking at re-instating the up-tick rule.

What?? We have lost 10 Trillion in market cap since you eliminated the up-tick rule. It was a dumb rule for sure, but it had been there for 60 years so the market was used to it. The VIX started climbing as soon as you took it off. The S&P is at 750 for a lot of reasons. But, it would look different today if the up-tick rule had not been eliminated. The outcome of both Bear and Lehman would have been different.

Just a question. Did you share your thoughts on this matter with Cox at SEC when the debate on this was raging five months ago? I thought we were ‘melting down’.

The FED will provide up to 1 Trillion for TALF. The credit risks would be quite low.

TALF is going to buy up those “safe’ credit card and auto receivables. Student loans as well. These are low credit risks? Ben, you need to get out of DC. The talk in America is about debt repudiation. These are bad credits you are buying. Even worse, because you wear a red, white and blue suit you will never be able to collect on those IOU’s.

We are on the ‘right track’ in dealing with the financial crisis.

I might sleep better after reading these words. Lets see, so far you are spending 3 Trillion of borrowed money to fix this. You have brought 6-7 Trillion on the public sector balance sheet, and to top it off you are monetizing debt through the purchase of Agency and Treasury paper. Twenty years from now the economists at Princeton will study this period. They will opine on whether we are on the right track. It’s a little early for us to conclude that today. It narrows the options.

The Government may take sizable minority positions in several banks.

Sizable minority. Nice use of words. How about Big but not Too Big. That would be politically correct. In this case he means 40%. That is Big. Too Big would 51% and then we have socialism. We do not want Too Big do we?

40% of Citi is worth $5 billion today. The tape says so. There was $40 Billion of TARP Preff. Are we taking a loss here? Do you have a mark to market problem? You are not going to get a lot of slack on this. We all hate it. But mark to market will not go away.

Entities that “need assistance” should pay little or no dividends.

Just a clarifying question. GE did $15 Billion of term notes with FDIC backing. Is that assistance? When you said that about dividends you were talking about those folks at Citi, Not GE. Right? Tell me that is right.

Home prices will get to “fundamental” levels.

What does that mean? This is eco speak at its worst. Give us some guidance Ben. We need some visibility.

How about this equation: Fundamental value is equal to 15X the annual rent. The problem with that is that if you applied that formula you would wipe out 1/3 of the real estate values on both the East and West coasts of the United States. Let’s not get too fundamental.

No plans for anything like Nationalizing Citi.

That is not true. You have lawyers working for you and at Treasury who are burning the midnight oil coming up with contingency options for you to consider if things get tougher. We are at war, Ben. Nothing is off the table.

Comments

[kelm:]

Very nicely done!

Yes, we are in far worse shape then when Ben and Hank went in with their hair on fire (hard for them..) and said we needed the TARP. The worse part of the Fed double speak is he congresses willingness to listen to it without serious challenge.

What does "meltdown" actually look like? My take would be the banks are closed, the ATMs don't work, the credit card system has shut down, and no loans are available of any kind - but that's ok because the bankers have all been furloughed and so aren't there to collect.

Feb 27 10:19 AM

[kdo:]

You say:
I for one am glad he put it that way. I thought at the time we might be in a global meltdown. But everything was still working. The banks were open, the stores had lots of stuff. There were no lines or violence. The roads were full of cars. There was no evidence of a meltdown.

HAHAHAHAHAHAHAHA!!!!! I understand not many people really understood the events of October very well. But perhaps as you say that, you don't quite realize you just don't know what to look for and understand the details of what was going on as well as Bernanke did. The fact is, all that stuff *HAS* gotten enormously better. We dodged a bevy of cannon shots in October, the result of which would have been the real end of all those things that you mention says there was no problem. By the time all of those things you mention aren't working, it's far too late. I guarantee you the tsunami was in sight.

Feb 27 11:14 AM