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Forum--Economic and Political Issues

Moderator will post articles and comments on Political and Economic Issues. Comments and discussion is invited

Members: 15
Latest Activity: Feb 14, 2012

Dear Members:
I want to start this discussion by emphasizing a very important contributor to our current economic crisis, namely; the dramatic rise of debt. I am of the view that in societies with developed financial markets (ie non-indigenous based societies) patterns of human behavior tend to repeat themselves over time. This is why much can be learned from reading and understanding economic history in conjunction with the cycles of human interaction. I will discuss this more as the council develops, but I wanted to leave you with a chart to ponder. The chart is of debt in the US to GDP. We are at the end of a long cycle of increasing debt with much effort being made to maintain asset prices and stimulate even more debt. Unfortunately, we have reached the point where the existing debt cannot be serviced out of income much less repaid. We must either increase incomes substantially, default on the debt,, restructure the debt radically, or create enough inflation to diminish the value of this debt over time.
We are locked in a great battle between the forces of inflation and deflation. All great debt bubbles have ended in deflation. The US government and the Federal Reserve are determined to not permit deflation to occur. This will be the major economic issue we face over the next several decades and will result in the evolution of a new values regime and hopefully the start of a new golden age of human interaction. This could also end in tragedy. The choice is ours. I will write more about this later.
Sorry--but I couldn't figure out how to attach the chart. I have a lot to learn.
Sylvia.

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Greetings 1 Reply

At the suggestion of Phil Lane I am trying to add this council to an ongoing list serve that I maintain that covers a variety of topics but mainly focusing on Economic and Political Issues. I cover a…Continue

Started by Sylvia Demarest. Last reply by Carol Petersen Jan 14, 2010.

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Comment by Carol Petersen on January 24, 2010 at 10:55pm
Iceland could be leading the way, an example for the rest of us on how to pull out of the corporate world bank/debt system. Go Iceland!

http://www.redicecreations.com/radio/2010/01jan/RIR-100124.php

Listening time what's happening in Iceland how they are fighting back!

http://www.voltairenet.org/article163488.html#article163488
Comment by Phil Lane Jr. on January 22, 2010 at 10:56pm
Another Zinger from Sylvia for those who are willing to dig and think DEEP!

This is from Tom Iacono's blog "The Mess That Greenspan Made" please note the books he recommends and the conclusions he reached from reading those books.
The points are similar to what I have argued here. The depression came after a couple of decades of easy money and credit that resulted in an explosion of dedt and financial speculation resulting is substantial overcapacity. The odd thing is that; not only is this rarely mentioned , we also don't seem to have learned the lessons of this past history--no economist talks about this history nor did any economist warn during the huge debt buildup and financial deregulation of the last 30 years that we were building the foundation of anouther crash and depression--least of all the so called expert on the depression our current Fed chair--Ben Bernanke. Finally, Iacono sets out how Roosevelt mostly continued policies that had been put in place by Hoover but did better because of WHEN he became President ie the worst was past. Looking at it from this perspective we can see that, unless the worst is past--which I doubt, Obama could end up being the next Hoover and maybe the Democrats the next Republicans due solely to the timing of Obama's election. I doubt this result only because the Republicans are even more incompetent than the Democrats and will probably totally screw up any opportunity they are given unless they radically change their ideology and funding base. Please realize that the beautiful equations that noe-classical economists are so proud of do not take into consideration debt levels or leverage in determining future economic events. Muey stupido!!!!!

A few thoughts on the Great Depression
THURSDAY, JANUARY 21, 2010
In the weeks ahead, there should be at least another item or two here on the subject of the Great Depression as I've taken to re-reading a couple of very important books on the topic after not having touched them for years.

Today, it seemed like a good idea to share a few thoughts.

Anyone with a similar interest is encouraged to have a look at these two works as they seem to cover all the essentials - the 1920s run-up to the late-1929 stock market crash and then the Great Depression in the 1930s.

Both were written decades ago, having been updated a number of times since, and there appear to be a slew of more recent offering on the subject over at Amazon, though I've not looked into any of the newer ones. Some time ago, I selected these two as being the best of the bunch:

Murray Rothbard - The Great Depression
Robert McElvaine - The Great Depression: America 1929-1941

(Note: You can read Rothbard's book online at Mises here(.pdf).)

Anyone who may also happen to crack these two open would be well advised to repeat the process that I'm about two-thirds of the way through now - start with McElvaine's book and read until you reach 1931, then switch to Rothbard's that covers the period from the early 1920s up until 1931, then switch back to McElvaine for the years after 1931.

Since McElvaine's account is more focused on the political and social details it provides a good setup for Rothbard's book that deals more with financial markets and monetary policy. In this way, you'll get the full treatment in what is mostly chronological order.

Anyway, a few thoughts that are worth sharing at this juncture:

1. The 1920s and the last 15-20 years have some shocking similarities

In reading about the 1920s, there are striking similarities between that period and the last 15 or 20 years regarding productivity gains, credit expansion, and the rise of the consumer culture - what should be looked back upon now as seminal developments that were predecessors to both the 1929 crash and the one in 2008.

Back in the 1920s, it was advances in electricity, automobiles, home appliances, and farming equipment that produced radical changes in the economy, changes that were misconstrued by the central bank as being a "green light" to err on the side of monetary policy that was "too easy".

The rapid expansion in consumer credit was another attribute that the two periods shared as the 1920s marked the first decade in which advertising became commonplace in American culture. Consumers were prodded to "buy now and pay later" for any number of new products that came with the technological advances of the time such as radios, refrigerators, washing machines, and - most importantly - automobiles.

In many ways, the changes that resulted from the widespread use of autos in the 1920s were like the changes that came from the widespread use of computers in recent decades.

This was the first economy-wide instance of credit-enabled pulling of consumer demand forward, a case of creating (what was believed to be at the time) a new era of prosperity that ultimately proved to be fleeting, as appears to be the case today.

2. The Fed's role in sowing the seeds of destruction is under-appreciated

While the Federal Reserve isn't credited with doing all that much from the time that it was founded in 1913 until after World War I, that changed in a big way in the 1920s. As recounted in great detail by Rothbard, continuous "inflationary" policies by Chairman Benjamin Strong from the early-1920s up until about 1928 played a key role in the crash.

Money and credit were simply allowed to expand too quickly - faster than ever before with the exception of periods when the nation was at war - and, when masked by productivity gains that kept consumer prices from rising, this "stimulated" other parts of the economy to inflate asset bubbles of one sort or another, like real estate in Florida or stocks in New York. Another major reason for the inflationary policies of the U.S. central bank in the 1920s was that it was helping Great Britain to get back onto the gold standard in the aftermath of the first world war.

It shouldn't come as too big of a surprise that a focus on stable consumer prices rather than the growth of money supply and credit first became popular amongst economists during this decade. Of course, to anyone looking back at the era now, the results are seen to be both unsurprising and disastrous, but, what is even more astonishing today is that most economists still view the Great Depression as almost materializing out of thin air with the October 1929 stock market crash. You'll hear a few comment on ill-advised tightening by the Fed in 1928 and early-1929, but it was the expansion that ran from 1923 to 1927 that did the real damage.

3. The role of Roosevelt continues to be misunderstood

In the nation's collective conscience, Herbert Hoover continues to be the primary culprit for the severity of the depression from 1929 to 1932 and Franklin Delano Roosevelt is often times seen as a White Knight who came in to save the day in 1933. In reading the history as told by both McElvaine and Rothbard, with few exceptions, FDR policies were simply a continuation of those that were put into place by Hoover, however, the results were much better from 1933 on for a number of reasons, the most important being that the depression had already had three years to "run its course".

It was Herbert Hoover, not FDR, that broke the mold of what had been a Laissez-fare approach by government in regards to the economy, a dramatic change from the Coolidge years when the president is said to have made little use of his office yet, to this day, is credited with fostering "Coolidge Prosperity" for most the decade.

The combination of central bank policies in the 1920s and an over-active engineer in Herbert Hoover were what fostered and prolonged, respectively, the worst economic period in American history and, while Roosevelt was much more effective in restoring confidence than his predecessor, the most important part of history was made before his arrival.

To this day, it striking to me that perhaps the greatest lessons of the Great Depression have still not yet been learned.
Comment by Phil Lane Jr. on January 22, 2010 at 10:52pm
This is directly from Sister Sylvia, the best inside source, by far, that I know!!!!!!!!

So this is how John Paulson and other billionaires "made" $5+ b--he (they) stole it with the help of certain Wall Street banks especially Goldman Sachs--who also made a killing. Read this carefully--the people who got robbed should sue the bastards and the banks that cooperated with his scam--but they probably can't thanks to changes in the securities laws that make even egregious cases like this hard to prove. So if you were robbed--that was the intent. The fraud inherent in this is staggering in it's implications. Basically, once Paulson had requested the creation of CDO's he could short it created the need to generate poor quality debt that would fail. Once entities like Goldman put out the word that they would by debt from any debtor who could fog a mirror the economic incentive was overwhelming. Then, the creators of these CDO apparently gave Paulson a say in what debt to include!!!! Shouldn't this be illegal????

Categorized | Featured Stories, The Deep Capture Campaign, The Mitchell Report

John Paulson’s “Greatest Trade Ever” — Something of a Scam
Posted on 20 January 2010 by Mark Mitchell

Tags: ABX index, collateralized debt obligations, credit default swaps, David Fiderer, Huffington Post, John Paulson, Markit Group, naked short selling, short selling

By now, everybody knows that the market for collateralized debt obligations was riddled with fraud in the lead-up to the financial crisis. What is less known is the fact that hedge fund managers helped create and inflate the market for these toxic securities specifically so that they could bet against them and profit from the inevitable collapse.

An example of a particularly sordid scheme, orchestrated by hedge fund billionaire John Paulson, was discovered some time ago by David Fiderer, a blogger for the Huffington Post. The information in Fiderer’s blog is rather incriminating, and, of course, the mainstream media is not on the case, so I think it bears repeating.

In a close reading of Wall Street Journal Gregory Zuckerman’s book, “The Greatest Trade Ever”, an otherwise starry-eyed account of Paulson’s bets against the mortgage market, Fiderer discovered this nugget:

“Paulson and [partner Paolo Pellegrini] were eager to find ways to expand their wager against risky mortgages. Accumulating it in the market sometimes proved to be a slow process. So they made appointments with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other banks to ask if they would create CDOs that Paulson & Co. could essentially bet against.”

As Fiderer explains, Paulson asked the banks to create those CDOs “so that they could be sold to some suckers at close to par. That way, Paulson’s hedge fund could approach some other sucker who would sell an insurance policy, or credit default swap, on the newly minted CDOs. Bear, Deutsche and Goldman knew perfectly well what Paulson’s motivation was. He made no secret of his belief that the CDOs subordinate claims on the mortgage collateral were close to worthless. By the time others have figured out the fatal flaws in these securities which had been ignored by the rating agencies, Paulson could collect up to $5 billion.

“Paulson not only initiated these transactions, he also specified the terms he wanted, identifying which mortgages would be stuffed into the CDOs, and how the CDOs should be structured. Within the overall framework set by Paulson’s team, banks and investors were allowed to do some minor tweaking.”

It is not clear which banks ultimately participated in Paulson’s scam, but Fiderer quotes Bear Stearns trader Scott Eichel as saying that his bank refused. “It didn’t pass the ethics standards;” Eichel said, “it was a reputation issue and it didn’t pass our moral compass. We didn’t think we could sell deals that someone was shorting on the other side.” Bear Stearns’ moral compass was usually pointed towards the darker regions, but perhaps this is why Paulson subsequently became one of the more eager short sellers of Bear Stearns’ stock.

Fiderer continues: “Prior to 2006, there were not many opportunities for naked short selling on subprime securitizations. But in January of that year, investment banks launched a new product, which enabled Paulson to place those bets on a large scale. The ABX index, a sort of Dow Jones Average of subprime mortgage securities, facilitated benchmarking the price of credit default swaps.”

In fact, it was a black box company called the Markit Group that created the ABX index. The banks were minor shareholders in Markit Group and provided data. I have noted in a previous blog that the Markit Group is a dubious outfit to say the least, and there is good reason to suspect that the direction of the ABX index was influenced by hedge fund managers and their allies at the big banks. I do not have evidence that Paulson was one of those hedge funds, but authorities ought to be asking questions.

Fiderer goes on to suggest that bad loans to homeowners were a significant cause of the financial crisis. Certainly, some mortgage lenders were unscrupulous, and there was a certain amount of predatory lending. Moreover, it is true that house prices were far too high and bound to tip over. But this was not the direct cause of the monumental crash in the market for mortgage securities, nor the subsequent collapse of Bear Stearns, Lehman Brothers, and the American economy.

At the time that the mortgage securities markets began to go south in 2007, defaults on subprime loans had increased only slightly month-to-month, and were in fact considerably lower than in earlier years. In the second quarter of 2007, for example, only 7.7 percent of subprime loans were 30 days past due, slightly up from 6.76 percent in the second quarter of 2006, but considerably lower than the 9.9 percent in the second quarter of 2001.

The problem lied not in the loans themselves, but in the fact that the loans had been packaged (apparently, to a large extent, at the behest of John Paulson and perhaps other bearish billionaires) into fraudulent securities that were traded and probably manipulated by a select number of hedge funds and large banks. In a somewhat similar scheme, hedge funds often pump up the stock of public companies before initiating short selling attacks aimed at demolishing those same companies.

The economy was brought to its knees by a few powerful and eminently dirty players on Wall Street, not by poor people who had the temerity to buy themselves houses.
Comment by Kristin Amber Dawn Maire Hill on January 22, 2010 at 8:48pm
Oh my gosh Syvia I never knew those new light bulbs have merucury in them how creepy thank you for shareing that !
Comment by Phil Lane Jr. on January 22, 2010 at 4:31pm
Beloved Relatives,
There is no one like Sylvia, if you really want to take the time to dig deep!!!!!!!
In more than 10 years she has never been wrong in her guidance, which includes,"I don't know!"
Warm and Loving Greetings,
Brother Phil

I have complained repeatedly about what seems obvious, the markets are corrupt, replete with insider information, front running of client positions and outright manipulation. I keep pointing out the leak in the case of Bear Sterns where "someone" left a meeting at the NY Fed dealing with Bear Sterns and spent $2.7m to buy deep out of the money puts on Bear stock and "made" $270m within one week as Bear stock cratered. Why is that person or persons not in jail? Could it be that this is a high ranking official who's been protected in return for protecting the other crooks in the system? The article below deals with all of the insider leaks coming from the NY Fed--run by Geithner before he became Treasury secretary and filled with Goldman people including one guy who also served on the Goldman board!!!! Great--especially since Fed buying of not only Treasuries but mortgage and other securities has totaled over 1.5 trillion and provided the primary support for these markets and these operations were run out of the NY Fed.

In the meantime about 50% of market liquidity has been lost, pulled out of the markets as people have fled and volume has declined. Classic trading now only accounts for some 30% of the markets. The rest, maybe as much as 70%, is dominated by Goldman and other HF T's, grants, hedge funds, and other essentially government controlled (manipulated?) entities? So how do you manage risk? You can't. In this artificial market all models are compromised.
Tell me which of the problems that led to the 2008-09 crash have been dealt with? How about none. Very unhealthy and so is this market. We're in trouble folks but this time the one shot we had to fix the financial system--rather than saving the banks-- has been wasted along with any hope of political support. Not a good record for someone who was supposed to be an "expert" on the last depression. Basically, Bernanke, Paulson, and the Bush Administration blew it and the Obama Administration adopted the same course and has now lost credibility and has essentially blown it as well. This is what happens when you listen to the wrong advisers as Obama did by sticking with Geithner, Summers and Bernanke.

Our two major political parties lack credibility in my view. This Scott Brown guy--what a scam!!! The same Republican big boys raised the money for him, developed his strategy and supplied him with staff and then stayed totally out of sight while he pretended to be someone else--based on the same truck strategy Victor Morales used in Texas 15 years ago!!!! Thanks to the incompetence of the Democrats and the Coakley campaign--he got away with it. Not that Coakley deserved to win--the more I see of her the more I am reminded that just because you call yourself a Democrat doesn't mean you think like one. What does it say about our democracy when you can predict who will win by whether or not they are good looking and drive a truck???? Not much.

The era of monetary manipulation is essentially at an end and that can only mean that the forces which were restrained by the months of pouring money into the system will reassert themselves with renewed strength. If I were Bernanke I wouldn't want to be reappointed Fed Chair--it will not be a comfortable seat.

So how do you deal with all the criminality that we have seen over the last decade. Remember, the Republicans control the Supreme Court and the vast majority of the District and Appellate Courts in the Federal system. Hopefully, we have enough of a functioning Judicial system to prosecute these frauds--assuming that the Obama Administration has the guts to do it--we shall see.

In a low volume market--when the players supplying the volume exit the stage--ie shut off the computers--all that remains is a vacuum. I hope those in charge have a plan .
Have a nice weekend.
Sylvia


Observations On Inside Information Leakage By The Federal Reserve
By Tyler Durden
Created 01/22/2010 - 13:01
An interesting letter posted today by a reader on Jesse's Cafe Americain caught our attention [1]. As the reader proposes, on many occasions during the UST period of Q.E. between March and November, the Fed may have well been front-run by one or more "players" casting serious doubt on not only the integrity and propriety of the Q.E. process, but on just how much potential "leakage" may be occurring from the 33 Liberty office on a daily basis. If this occurs in Treasuries, one can be confident that it is also prevalent in equities, MBS and all other asset classes. Is it high time for the SEC to take a long, hard look at the primary source of market manipulation- the Federal Reserve Board Of New York? If not, can Mary Schapiro please approach the public with a referendum vote on whether or not she should be entitled to continue collecting hundreds of thousands of dollars in taxpayer money for continuing to do nothing.
I used to work for a BB on a prop desk until the financial crisis took hold and they fired the less senior guys on the desk. I now trade US Treasuries, for a small prop firm in xxxxx, to scalp basis trades in mostly on the run securities. Occasionally, I will also take position in the repo markets for off the runs if I see something "mispriced." Your recent article piqued my interest because we too have noticed "shenanigans," of sort, in the QE program of USTs.

What we noticed, especially in smaller issues like the 7 Year Cash is that before a Fed buy back would be announced the price would pop significantly as buyers would run through all the offers on two major electronic exchanges (BGC Espeed and ICAP BrokerTec). This occurred more than several times as the 7 Year Cash would be overvalued both by its BNOC by 20-30 ticks and its relative value to similar off the runs. This buyer(s) would lift every offer they could, driving the price substantially above its "value" for sometimes a week at a time. After this buying would occur, the Fed would then announce the purchase of that security sometimes a handle above its approximate value. This "luck" did not just occur in the on the run 7 Year sector, it also occurred in the 30 Year Cash, 3 Year Cash, and more than several off the runs. Again, it was especially prevalent in the less liquid treasury products. Often the "appetite" for these securities would begin approximately 2 weeks to 1 week before the official Fed announcement. The buying was well organized and done in such a way as to completely knock it off kilter from its relationship with like cash Treasury's and the CME Ten Year Contract. If you examine the charts of some of the selected buy backs before the official announcement, you will see a similar occurrence.

While I have not broken this down into a paper to prove it (and I see nothing positive coming out of contacting the ESS-EEE-SEE about this issue), I can assure you that it was occurring on a consistent basis across the entire curve.

A certain issuance would be bid up through the market (substantially above value, as derived by several metrics) only to be later gobbled up by the Fed at the unreasonable price. These player(s) had substantial pockets as we, the small guys (but with a decent capital base), would take the other side of what seemed to be an obvious fade. While this did not occur in every single issuance of the QE program, it occurred often enough to be obvious to any learned observer.

While I am not sure if this can be attributed to purposeful Fed policy or someone at the Fed talking to his pals, I am certain it transpired."
As Jesse points out, and as we have claimed on so many occasions, "Corruption is inevitable when the government is engaged in manipulating the markets with public monies. That portion of the Fed's activities needs to be scrutinized by the GAO on a continual basis. And the activities of the Exchange Stabilization Fund and the Treasury in market intervention should be subject to review by the legislative branch on behalf of the people."
Comment by Carol Petersen on January 21, 2010 at 8:26pm
"Indigenous peoples have the right of self-determination.

By virtue of that right they freely determine their political status and freely pursue their economic, social and cultural development."

United Nations Declaration on the Rights of Indigenous Peoples, Article 3
Comment by Russell F Cowgill on January 21, 2010 at 4:39pm
Dear Sylvia,
Thank you! I'm hoping we can discuss environmental laws that promote wise uses of resources and also those policies and laws that serve to inhibit or thwart progress in these areas. Corporate interests too often trump the better interest of the world’s people. Knowledge and unity are our best defense and an instrument for positive change. Thank you for the work you are doing.
Russ
Comment by Sylvia Demarest on January 21, 2010 at 2:33pm
Russell:
There are technologies now to use human and household waste to generate electricity since this waste produces copious amounts of methane. The same could be done with the animal waste that cannot be recycled to produce crops. Every city should mandate conversion to these technologies to reduce surface water polution and the release of methane into the atmosphere where it is a horrid greenhouse gas. I could also potentially reduce the cost of sanititation and electricity.
Right now, the depletion of resources and the polution of the water and air are external to price and profit. We should reconsider our environmental and tax policies to increase efficiency and reduce polution. This could be a popular political strategy since it could be used to reduce income and other regressive taxes.
If we taxed carbon and returned most of the tax to taxpayers below certain income levels this would help to equalize the cost structure and encourage enviornmentally friendly technologies.
Is this the kind of input you are interested in? If so, I will add more. For example there are technologies for converting plastic waste to oil. A technology called thermaldepolymerzation will convert any carbon based item into sweet crude.
There are many exciting technologies that will be introduced in the future that will produce substantial dislocation and change. This includes the development of inexpensive LED lights that use much less energy and may never need to be replaced. Currently, incandecent lights are being phased out but I refuse to use the new florecents because they contain mercury which to me seems self defeating.
Good to see you post.
Sylvia
Comment by Russell F Cowgill on January 21, 2010 at 2:15pm
The subject of earth friendly technologies often comes face to face with fierce opposition, because of a real or perceived threat to economic interests. I’m sure that has a lot to do with the way these technologies are accepted in developing or under developed countries as opposed to wealthier developed nations. While Earth Tech's primary focus is technology we must also do the work necessary to clear the way for implementation. That may prove to be more challenging than development itself. Would you provide input to our council on these subjects? I really appreciate the insights and empowerment you are bringing to fwii. Please join us!
Comment by Phil Lane Jr. on January 21, 2010 at 1:50pm
Sylvia Demarest-I have always said that the US would not be able to sustain the political support necessary to maintain the support the economy needed to recover and that our divisions would create conditions for a crisis. The message is clear--people are fed up. The bailouts and Fed action are percieved as being for the benefit of the elites and ordinary people are hurting economically and are now totally pissed off. Whoever thought this election would be good for the economy needs to get a reality check. The only reason the market is up and there has been any growth is the huge amount of money that has been pumped into the economy by the Admin and the Fed over the last year plus. That is a "used to be"--no politician will stick their necks out now for another stimulus package--the Fed better think twice before they act. Congress created the Fed and Congress can destroy the Fed. Get ready for one hell of a ride.


Consequences of the Mass. Election
By Bruce Krasting
Created 01/19/2010 - 23:43
I was watching the election results from Mass. with some people who know history better than I. None of us could come up with a historical parallel to the development that took place this evening. This one is going to go down as one of those ‘water shed’ events that you hear about.

The TV guys are all talking about what this could mean to the health care legislation. At this point, I could care less. I thought it was dead before and I think it is deader now. What I care about is what this means for some of the other significant issues that we face.

In my opinion the vote in Mass was a vote against the status quo. It was a loud enough vote for everyone in D.C. to hear. If there was any doubt that Americans are sick of the "same old, same old", this was it. The message was clear to me, “If you want to keep your job as an elected official you have to do things differently.” This will force changes across the board. Some things outside of health care that I think may be impacted:

-The days where the Fed and Mr. Bernanke get to establish broad economic policy without taking into consideration the mood of the public is over. This is not to suggest that the Fed is going to jack up rates anytime soon. But to me it means that the possibility of QE2 is done. There was a time when you might have said, “The American people don’t understand their monetary policy and have know idea how much debt has been created in their name”. Well that was then and this is now. Americans do understand how much debt there is. They are shocked, dismayed and angered. They’re a lot of everyday citizens who are well aware that the Fed printed 2 trillion in the last year or so. The vote in Natick Mass showed their dislike and distrust of Fed policy. While I don’t think this will result in Bernanke failing to get a second term in the upcoming vote, it just got a bit more uncertain. In many ways this election will tie Ben’s hands.

-There is has been some discussion on a second stimulus bill. Those like me who see weakness before this year is over were pushing for that. Some big voices in the public and private sector are going to be disappointed. There will be no second stimulus bill. Not in 2010 at least. There is no stomach for that any longer. There are many Congressmen and Senators who are up for reelection in ten months. They are not going to stick there neck out for something the White House wants and they know the people don’t. I doubt the administration will even ask for a stimulus bill after this shellacking.

-I read the election result as being dollar positive. Somewhere inside this vote tonight is a call for fiscal conservatism. We are going to hear rhetoric to that effect in the coming months and we will see legislative steps that at least give lip service to the idea that we aught to tighten our belt a few notches. To the extent that I am right by calling this dollar positive, you have to also think that it is a gold negative development. For those that love the yellow metal and hate the dollar take heart. Any positive impact to dollar will be short lived. The inability to put a second stimulus together will show up in all of our numbers by midyear. At that point it will be more clearly understood that the US is broke and there really aren’t any viable options that don’t entail a lot time and pain.

-Tim Geithner’s ship went down in Massachusetts. I am convinced that he now must go. The Administration will have to make changes after this vote. They have to show that they are being responsive. The beating the WH took tonight was biblical. So will their response be. It will take a month, but changes and heads will roll.

-I am sure that all the stock pundits are going to read this evening’s results good for the broad market averages. I have been skeptical of this for a while. But not any longer. The stock market looks six months ahead. It will soon be sensing the next economic slowdown soon. I would not say the market is a screaming short. It is not, yet. It just got closer however.

-I can see how some health care companies might see a pop in their stocks for a few days. This group I would short. The absence of a health care deal is actually bad for them in my opinion. Give that a week at best.

-There will be no fix on Social Security this year. Mr. Goss who runs that shop has said that the issues facing SS have to take a back burner to finding a fix to health care. Well, we have not found that elusive solution. And now it is farther away then ever. Mr. Goss will have to wait at least another year. That will prove to be a devastating delay.

-There will be no significant steps to address the problems at the mortgage Agencies; Fannie, Freddie and FHA. The reason is simple. If you wanted to address the problems with these dogs you have to owe up to the fact that it is a $500 billion dollar sinkhole. Who would want to put that bad news on the table after getting your ass kicked in a crucial election? The answer to that is that no one in Washington would. And no one will. Having said that, I would not be at all surprised to see an effort to cut the outrageously rich compensation packages for the big shots at Fannie and Freddie. There may have been some belief that these two companies were in the private sector where salaries have no caps. But now there will be those in Congress that want/need an election edge. What could be a better edge than to beat up on a bunch of fat cat D.C. bankers?

-We have several states that are on the edge of a fiscal crisis. I thought that there would be some form of Federal assistance for them this year. That may still come, but it is now much less likely. You can’t just help NY and Cali. Those States will simply have to cut their deficits the old fashioned way, by cutting expenses. There is no way the folks in Texas are going to let Federal dollars be used to bail out TBTF States. And no one in Congress is going to stand up to that.

-If you were a TBTF institution you just hated this vote. This is bad for the Citi’s and BoA’s, but it just downright terrible for the likes of GS. The more successful you are, the more crap that you will have to take. Washington knows that Americans hate their banks. Now Washington is going to take sides with the people and lean on the TBTFs even harder.

-The bailout mentality is over. If GM needed a handout today, they would not get it. If a company runs into difficulty in the future they will just go down. There is no will left for the bailout thinking. If you are a legislator and you support a bailout, you will lose you right to vote in Washington. The voters will take you out back and shoot you on Election Day.
 

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