A very interesting Wednesday, yes? Plenty to cover today.
Full Employment is Directly Related to Bubbles
Up front any long time readers know that I think the Fed should be abolished. I do not want to re-hash all of my reason for thinking that way.
That said, say I did believe a central bank was a necessity. The mandate as stated by the Fed is "Stable prices and full employment" or a balancing act of those two. Of course the Fed has a hand in many more pies than this, but say I believe them.
The following graph lifted from The Mess That Greenspan Made should be required reading for the Fed:
Notice that the information technology jobs dropped and kept dropping after the dotcom bust and have been depressed ever since. This contributed to the last "jobless recovery". The construction jobs outlook will follow the same path as well.
This is one of the biggest dangers of malinvestment during bubbles. Not only do asset prices eventually crash, but a host of related industries (and hence jobs) crash as well. The Fed should indeed target bubbles if their mandate includes full employment. Of course we really know their prime concern is fiat credit expansion, but I thought I would play devil's advocate today.
I am not talking about the great 1980s band. If I was I would say "The Flame" rocks.
"I'm going crazy, I'm losing sleep...."
Many market watchers have been surprised to see "investors" gobbling up government debt like challenge winners eating food rewards in the late stages of the show "Survivor". Why would anyone stash cash at the Fed either for no return or even negative returns as the 1 month T-Bill goes negative? The answer is complex if you like or very simple. I prefer simple so I offer this from Zero Hedge:
Suspending Money Market Redemptions Is Now Legal; SEC Approves New Money Market Regulation In 4-1 Vote
You can read the whole thing but in summary:
-Money Market funds can suspend redemptions as long as some definition of "extraordinary circumstances" are met, which are not spelled out so they may as well be any reason
-Strict limits on assets in funds steer all cash towards government debt
This of course will force MM funds to buy government debt by the boatload or even cause investors to just bypass the middle man and buy it themselves.
Did I mention how much debt the US has to sell this year?
PS for "investors":
What makes you think the government will return your money under "extraordinary circumstances"? Answers welcome in the comments section.
Lying or Incompetent? You Decide!
The big news of the day had to be the AIG bailout hearings in Washington. I am not going to recap the entire day's events. There are many great takes in my blogroll. Some items worth a closer look include:
-Update: Unredacted AIG Schedule A Released And Initial Data Spread
Seems less than stellar collateral was accepted by the Fed during all this, shocking I know, as by law they cannot do so.
-AIG, Paulson and Geithner
Lots of good nuggets by Market Ticker.
To me the whole thing boils down to this:
Between the AIG full par payouts and then the move to keep disclosures from being made public we have been told by the players themselves no less that:
All had either NO role in these matters or never had a direct involvement in discussions for some or all of the biggest bailout in the history of the world.
This presents us with an easy decision to make and the players themselves fell into an old chess trap (Mish has used this term before, I know):
Zugzwang (German for "compulsion to move"), is a term originally used in chess which also applies to various other games. The concept finds its formal definition in combinatorial game theory. It describes a situation where one player is put at a disadvantage because he has to make a move – the player would prefer to pass and make no move. The fact that the player must make a move means that his position will be significantly weaker than the hypothetical one in which it were his opponent's turn to move.
This can also be described as "any move sucks".
This applies to the current fiasco in that the players involved would have you believe one of two things, either of which is grounds for immediate dismissal and charges if possible (Hanky P has a get out of jail free card, remember that beauty of a move):
1-Bernanke, Paulson, and Geithner in their respective places at the table at the time, had no direct influence on the AIG decision process. They all cite various reasons for this.
2-They are all lying.
If you buy option #1, then the trio are clearly incompetent and had no idea what their own people were doing in regards to the biggest bailout in history. I guess it is easy to let Goldman (GS) just do what they want directly.
If option #2 fits your mind, then we will need a clear smoking gun to catch them. As they are all loaded for bear with regards to lawyers, I would doubt any such damning evidence exists.
I will leave it at that. What else do you really need to consider? I have a poll up where you can vote your opinion, so try it out.
EconomicDisconnect loves chess. I will always open as white with the Barcza, and will defend as black with either the Sicilian Scheveningen or King's Indian Defense.