As of the last report, U.S. Commercial banks had about 1.25 trillion dollars in treasuries and agencies.

Apparently, Fed Chairman Ben Bernanke wants it all.

Getting to know the wild, Austrian-schoolish, Libertarian culture of goldbugs has been really interesting for me. We disagree on so many things but see the same crisis - an existential threat to the world's money system. Goldbugs make government deficits to be the first-order threat because of absolute size and inflationary primacy. I join those who make the collapse of credit institutions to be the first-order problem. Some goldbug share this latter view, Mish Shedlock notably among them. Although I'm not a goldbug, Shedlock's writings are part of the reason I am a so-called “deflationist”.

Clearly the “short dollars on imminent hyperinflation” trade has fallen apart. The yen is getting crushed. Paper gold has been acting oddly. I'm sorry, but I happen to be one of those people who think ETFs can overwhelm futures markets a bit. Thought so with oil this summer. Many knowledgeable people disagree. But the real value of gold is something reasonable people can debate. In fact, it's debated every day in London, New York, Sydney and Hong Kong. Right now, the consensus is: “not so valuable as we thought last week”.

I saw Mr. Santelli's CNBC rant on Thursday. A “tea party” on Lake Michigan? Rather than inviting them to tea, why doesn't Mr. Santelli call “capitalists” to account? He's happy to throw the mortgage holder into the drink, but is he “carrying the water” for a failed industry? We've heard enough about borrowers, let's consider these facts before we talk about “personal responsibility”:

1. Hold-to-maturity mortgage writers are the only ones left standing.
2. There is a direct, positive correlation between the likelihood a mortgage of any grade will default and the intention of the writer or packager to sell it to a distant investor.
3. Even where borrowers were found to have lied about their incomes, judges have found that mortgage writers were making loans based on collateral, not income.
4. Mortgage writers colluded with crooked and captive appraisers to inflate the prices of that collateral, increasing loan risk.
5. Mortgage writers asked for less and less income documentation, even avoiding documentation to which they had ready access, increasing loan risk.
6. Mortgage packagers regularly ignored instances of mortgage fraud, including fictitious properties and fictitious borrowers.
7. Mortgage writers and packagers barely acknowledged drastic increases in default rates among FICO cohorts and kept lending, faster than ever.
8. The largest mortgage writers and packagers have become insolvent, every CEO lying about his firm's viability until and even after the day it crashed.
9. The largest mortgage writers and packagers have already been forced to pay reimbursements for deceptive loan practices and selling fraudulent loans.
10. Mortgage packagers and reluctant customers have indicated that bond insurance claims on private-label RMBS are uncollectable, clearly implying fraud.
11. Both Fair Isaac and the ratings agencies have been forced to completely overhaul their systems, which hid massive misconduct.
12. Thousands of mortgage-backed securities are inarguably worth less than the underlying credits.
13. The mortgage-backed securities market is now a Market For Lemons, indicating extensive securities fraud.
14. The catastrophic performance, failed structure and unsaleability of thousands of tranches of mortgage-backed securities rated AAA constitutes prima fascie evidence of extensive fraud.
15. We have discovered that every area of the securities industry – from commodities to clearing to CDS – is riddled with record-breaking manipulation, tax cheating and fraud.
16. The proud “capitalists” at banks, broker-dealers and insurance companies have, in a single year, become the biggest recipients of government welfare in human history.
17. The richest, most-powerful capitalists in human history consistently blame everyone but themselves, spinning preposterous tales to excuse their malfeasance and incompetence.
18. The only top executive in the securities industry - the only one - who has accepted full personal responsibility for his actions is Bernie Madoff.

Nassim Taleb said the first sign of recovery would be the ouster of the failed “capitalists”. I agree. Rick calls himself an “Ayn Rander”. He's claimed he wants the whole system to crash. Does he really? Is he really calling out the failed “capitalists” or just singing their tune in a different key? I'm no Ayn Rander, but I would love for Atlas to shrug these jokers into Lake Michigan before it's too late.

When you buy a used car, one of the first questions you ask is: “Hey, if this car is such a honey, why do you want to get rid of it?” If the answer is: “I have too many cars” or “I want to get a new car” or even “Hey, I need the money” – that’s okay. But if the answer is: “I’d like somebody else to be driving it when it catches on fire” – that’s not so good.

So, with our Used Bond Buyer in Chief Geithner announcing his intention to get us some new, financial wheels with a big, big price tag, I’m taking time out of the great gold debate to ask readers a question to which I have yet to receive a satisfactory answer. Until it’s answered I will be very worried that if we do a deal with the banks, our nation’s financial wheels may fall off.

When there was a lot of response to my last posting, I felt I should devote some extra time to the opposing view. I want to be fair and thorough and I always find it useful to try and look at a question from different vantage points.

I only found one argument for the pro-gold case that holds any “promise”. As of this writing, nobody knows all the details, but I have to admit that - potentially - it's a real doozy. Despite days of wading knee-deep in strict, “Austrian School” screeds and wild, Hyper-Monetarist predictions of crumbling currencies, I still believe that gold shows every sign of being in an anti-bubble, deflation is still the predominant economic threat, and the structural place of gold in a fiat money world has not changed and is not likely to. But I sure saw a reason somebody might want to bet on gold. I'll bet you saw it, too.

As I wrote in my previous posting, I am confident that unless gold can crack the anti-bubble it seems to be in, the 8-year bull run is over and much-lower prices are in store. While the most important dynamic in gold's fall is probably the bursting of the commodities bubble, deflation is the gold-killing fundamental behind the trend.

I have read that the risk of stagflation is greater than deflation. I have also read a lot of reasoning along these lines: “what the government has done already will cause inflation and if deflation gets really strong, the government will do more of it so that will cause inflation.” In other words, even deflation is inflationary?

Ask your barber about gold. He or she will tell you it's a good investment.

He or she will explain to you that the dollar is terribly weak because the Federal Reserve is printing huge amounts of money so gold is the only safe investment these days. He or she heard it on a commercial on AM radio - actually, not one commercial, but dozens. A bunch of his or her friends and relatives sent him or her emails about how gold was going to rise to $2,000 or maybe even $5,000 or even $10,000 per ounce. It was even on TV. Wow, if he or she had any money to invest he or she would sure buy gold.

If only. Yesterday's turn in the dollar and thus gold seem like a possible watershed. Maybe it's all working the way it's supposed to. Maybe the stimulus has finally put the hydraulics under inflationary forces and we can pull back from the abyss of deflation to the rocky-but-familiar world of stagflation. Gold is smack up against the top of the downward channel...

There is a consensus out there: Gold is going up and the U.S. Dollar is toast. Like most consensus opinions about financial markets, it's dangerously wrong.

You'd think it would be simple. The market has been very clear. But when it comes to changing people's long-held assumptions, I guess an excess of information is necessary. Never fear. It's coming.

Recently, I pointed out that the people who had taken the other side of Berkshire's (BRK.A) disastrous sale of index puts had already put the money into their pockets. The people who bought these options were clearly sophisticated traders and, via Andrew Clavell of Financial Crookery, Felix Salmon explains just how it's probably already been done.

Most readers got the idea that the money in those traders' pockets had to come from somewhere, but few accepted that – in some manner – that money had to come from Berkshire. The traders have put the cash in their pockets. Warren Buffett has only booked a “paper” loss. Again, unless the Buffett buffet serves an economic free lunch, the real cash gain and the paper loss have to come together somehow.

There has been a lot of talk about how it's okay that Warren Buffett has lost billions on his 2007 equity put options, because somehow this loss is just a “loss”. It's not a real loss, just a hypothetical loss.

Okay, then where did the money come from?

By 2004, the FICO system was gamed.

It was the final step in the destruction of Wall Street, a destruction engineered by the rapacity and dishonesty of American mortgage and fixed-income firms. Here, on Portfolio.com, Michael Lewis reveals that destruction in the best article I have yet read on the origins of the Credit Crisis. Mr. Lewis hasn't hipped to the FICO story yet, but he'll get it. He covers all the rest. The article is absolutely a must-read for anyone who wants to understand what really happened.

Great athletes, by definition, have great brains. Forget the stereotype, this is inarguably true. Great athletes may or may not be great, good or even fair-to-middling intellectuals. What they possess innately and perfect through focused effort are mental models of the physical world which give them the ability to make complex decisions impossibly quickly based on tiny, tiny amounts of information – an anomaly in the swirling pattern made by the red strings and white leather of a baseball going 90 miles an hour; a twitch in the leg muscle of a forward setting a pick as he over-commits slightly, a momentary break in the cadence of a cornerback's stride 25 yards away. Based on these fleeting hints, great athletes take actions with correctness that stuns us as we watch the ball fly over the fence, into the basket, or land like a perching dove into the outstretched hands of a sprinting receiver. Part of what they do is simply unapproachable. Great athletes regularly describe high-speed events with such detail and richness it's as though these things took place within a space-time continuum other than the one we inhabit. They just see the physical world differently.

A huge part of it, of course, is practice. They refine and refine and refine their mental models of the physical world until they are incredibly precise and sensitive. And then, as they rise through the ranks of athletics, they learn to keep placing faith in their modeling process – in that combination of endless practice and innate ability – and ignore emotion. This ability to concentrate, focus and discipline yourself to stick with what works is a tremendous asset – most of the time. So when Lenny Dykstra - formerly of professional baseball, now of TheStreet.com (TSCM) – tells his readers to stick to their guns, it's probably a good idea for them to listen – at least some of the time. As he writes in his column, Dykstra is a person who has tremendous practice ignoring emotion and sticking to what works – in athletics. But even with all its variables, the baseball field is a very controlled environment. The stock market is not and those who would try to control it by modeling do so at their peril. 

I think that, maybe, to understand the present crisis - I mean even to wrap your mind around it - you have to have been schooled in Marxism for at least some time. I really do. It's not that Marxism itself is so informative here, although highly selected and re-interpreted portions can be. It's that to understand what is happening now, you have to have learned - at some time - to look at the capitalists system from outside of it. You have to have wondered "what's next?" and tried to come up with something positive, rather than just catastrophe.

And it really helps if you have had the experience of rejecting doctrinaire Marxism and developing a deeper appreciation for capitalism. I theorize that this is why Jim Cramer has had such good instincts about this crisis. He was a red for a while back in his college days, I understand. And of course George Soros - another devout capitalist schooled, if unwillingly, in Marxism - has done really, really well.

People everywhere in the financial community know what that word is, but they refuse to say it. Instead, they are dragging America through a silly-circus.

Unpleasant as it may be, let’s start truth-telling by removing the fig leaf cynically used to cover up this mortgage mess: stated income. It is a canard. The idea that some working-class Bozos from Bakersfield walked in to the local bank; said: “tell me what numbers I need to put on them there loan papers so’s I can git me a house” and thereby hoodwinked the last 20 graduating classes of the London School of Economics does not pass the laugh test. In America’s no-doc and low-doc world, borrowers represented nothing more than a warm body, a Social Security number and a pen.

Haven’t you heard? The United States dollar is toast. That sucker is going DOWN.

Short interest rates are incredibly low, and no rational person thinks longer-term U.S. interest rates are headed anywhere but lower, given a looming, if not already-loomed recession. The American government is planning to borrow 5% of GDP on a single bailout package and that’s just one program added to an orgy of spending. The amount of dollar credit flowing out of central banks into the system worldwide is unprecedented. Gold is through the roof and the U.S. trade balance? Forget about it. It’s huge.

Make no mistake, something must be done and quickly. Let’s admit this is largely about WaMu (WM), which may be just days away from bankruptcy. We here in the Pacific Northwest appreciate the attention and the plan put forward by Secretary Paulson might even succeed in saving WaMu for as much as a year. However, I believe that banks like WaMu cannot be rewarded for creating huge pools of mortgages that were economically, if not legally fraudulent. I have been in favor of all the bailout efforts up until now, but the Paulson Plan might be the worst approach possible.

Not only will it reward misdeeds, the Paulson Plan will fail to save the very financial market it hopes to save. I can actually explain why with a single Wikipedia page.

There should now be no question that America is in a deflationary crisis. Therefore, holding gold - a commodity - is fundamental financial insanity. And yet gold is skyrocketing. I missed the fact that, psychologically, people have little choice.

One always needs to look at one's ideas from different perspectives, especially when one feels surest about them and certainly when developments call them into question. So, I know a guy who does branding and I thought about it from his perspective.