PPIP Killed the 2008 Bear

by: William Cowie

Nobody's supposed to know when we've hit the bottom until well after the fact. This bear, though, has just been killed with a super-weapon never seen heretofore: PPIP.

PPIP adds profits to the banks, as pointed out by several people (see here for an example).

We all know the TARP rules: banks had to repay that money, and while they had it, there could be no more $67.8 million CEO compensation packages. The big banks, naturally, did not like that program. In its place, the government duly created another, better, program called PPIP. The banks love this program. It allows them to trade toxic assets back and forth among each other. When they make a profit on those trades, they get to keep those profits. When they lose money on those trades, the ever-generous taxpayers pick up that tab. The mechanics are explained in the article above and here.

Add to that the wonder of the accounting change which no longer requires the banks to account for their deadbeat loans like before. Bottom line: big banks suddenly make much more money. Earnings rise. When a company's earnings goes up, it stock follows. When this happens to a few Dow stocks, the Dow rises. When the Dow rises, trading programs kick in and buy more. More buying pushes up the Dow even further. Hello, bull!

So now we have a weapon the world has never seen before: a pipeline directly from your wallets to the Dow: Uncle Sam pumps money from your wallet into a few big banks to cover their losses and increase their earnings. In turn, those earnings push up the Dow, as we just explained above. What bear has a chance against such a potent weapon?

The Obama administration took a lot of heat for the drop in the Dow after the inauguration. They just discovered this pipeline and how it makes the Dow go up. It's not their money, and it takes the heat off the administration. In fact, the world will probably begin heaping priase on said administration in the near future for the remarkable "recovery" they engineered. Does anybody think they're going to lift their foot from the pedal?

This is not a political commentary. It's just a description of the gun that killed the bear. R.I.P. buddy.