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Psychology of Loss

Pretty rare to see our National Bank (known by the high-minded term "Federal Reserve") decide as a matter of policy to become a trader right along side the likes of Jimmy Cramer and Warren Buffet but, hey, they're the government and they know everything, right, so what could go wrong.  Needless to say I don't need to explain to the readers of this site that the statutory purpose and indeed sole obligation of "The Fed" is to provide a "stable environment" for the private market to function while introducing itself "only in times of great stress."  Clearly one could make the argument that last fall was a time of great stress but as with the Obama administration Ben Bernanke and the entire FOMC has decided "never let a good crisis go to waste."  So there you have it:  the Federal Reserve has decided to turn itself into the world's largest hedge fund. What does this mean for us the poor taxpayer now stuck in the "new normal" of speculation by government banker types?  Besides being fools for paying our taxes (as if we had a choice) let alone not defaulting on all those credit cards backed by nothing (where indeed we do have a choice and that choice is getting more and more obviuos by the day) the question before us is, with the limited information before us (due to national security considerations of course!) how do we rate "Uncle Fed" as it has morphed into "Uncle Hedge Fund Fed"?  Clearly the market's verdict is already in as the stocks of broken banks and insurance companies are bid up to nose-bleed levels.  So much for the government reducing volatility!  What do they know that you don't?  That you'll believe them and they can convince you your eyes are lying to ya.

For all the conspriracy theory folks out their they'll constantly declaim "the ability to hide losses, the ability to hide losses!!"  While certainly many a bank and without a doubt the government have no interest in telling any of us the truth behind the losses the answer and what the market is telling you is far simpler.  In short Ben Bernanke's a greenhorn when it comes to trading and once the losses on all his "sure things" start rolling in then you'll start seeing the REAL mistakes.  Anyone whose been in the business more than a day knows the routine:  "it's not my fault, the dog ate my homework, there were a million butterfies flapping their wings which caused a hurricane which wiped out new orleans and caused me to forget the assignment."  It's all part and parcel to the same concept we all see with our children:  rather than admit to a losing bet and cutting our losses to (hopefully) live to fight another day we "go all in" thus creating THE COLLOSSAL BLUNDER.   And that's what even the not so veteran traders are telling us in bidding up the likes of Citi, BofA and Freddie Mac.  YOU'RE JUST LIKE ME WHEN I WAS AN IDIOT.  In other words the so-called "insiders" are anticipating not the "ongoing blunder" of "whose idea was this to begin with" but the BIG BLUNDER of "i have no idea how to get out of this mess and you should have fired me when you had the chance instead of renominating me because I'm about to make the biggest mistake ever made by a banker."  It's the BIG MISTAKE because it's so common of course.  IT HAPPENS ALL THE TIME BEN!  The mistake is so simple that one can see the ghost of JP himself haunting Ben all the way to his grave.  The mistake is, of course, that MIGHTY BEN is not just bigger than the market,  HE IS THE MARKET.  This is far beyond just mere folly of course.  The technical term is "a conceit."  Normally we outgrow this with age since as we grow older we realize we really are an idiot after all or in failing this far too humbling narrative allow for the possibility that we might be wrong.  "Stress test" in the parlance of the adminstration.  Needless to say the Treasury Secretary is only now (belatedly) stress testing the Fed since there is no contingency for THAT in the Constitution and when Ben Bernanke's F*** UP FOR ALL TIME becomes apparent wouldn't we all love to be sitting in Tim Geithners chair wondering "what the hell am i suppose to do about that?"  Point being none of you have to be that guy.  Indeed if we follow this extaordinary message in the market we've just ran off the precipice of bond market cliff but like "wile e. coyote" we still haven't realized we're about to fall.  It's a bet to be sure--like the movie "rounders" we're we determine the hand you have in poker by reading YOU and not having to bother with the math, but it seems so painfully obvious to anyone watching "the most public fed chairman in history."  He can't imagine a scenario where his theories could possibly prove wrong so when they do there's nowhere to go but down.  Poor Tim Geithner whose job so far has been nothing more than dealing with one theory after another being obilterated by Mr. Market will no doubt scream "WHY ME LORD, WHYYYYY MEEEE!!!!!"  since it will dawn on him that this will be his only job as treasury secretary or more accurately his "lot in life."  So do you buy Citigroup as Jimmy Cramer has been exclaiming of late?  Why not?  While I must say I do take issue with bidding up Fannie and Fred (c'mon, that's just RARE, man, RARE!) since the Fed is now carreening the nation towards bankruptcy and ultimately default why not start looking at all those formerly worthless banks.  They'll soon be the only ones left with any money having successfully argued before the Fed that Uncle Sam should steal the taxpayer money so that at least they'd have something when the whole thing goes up in flames AND KEEP GIVING IT TO THEM.  I guess that's Trader Ben's "what if."  Who could have imagined?  In a democracy no less!  Take from the poor to give to the rich as public policy!  Courtesy of "the fourth branch of goverment."  Or perhaps we should say "the one."

disclosure: one position and it ain't right.