Douglas A. McIntyre at 24/7 Wall St. is a little cynical that the government is up to the task of turning the economy around:

“After the GDP numbers were released, the Fed put out the minutes of its two-day Federal Open Market Committee. At the core of the statement was one of the greatest hedges in recent memory:

“the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”

It is the Fed’s way of saying, in terms that are hardly subtle, that if its programs to improve the credit markets, the Treasury’s plans to help banks and the auto companies, and the Administration’s budget and stimulus package works, then the American economy will walk away from the worst recession in memory. It is a preposterous statement which implies that, left alone, the financial health of the country would be in ruins. The sole salvation of the production, housing, and employment sectors of the United States rests in very few hands, all of them in Washington.

People who believed in the power of institutions like the Fed and Treasury will lose their faith and become embittered as time passes and the economy does not show signs of substantial improvement. That is a shame because it means that they will have needlessly turned their back on the concept that there is power in self-sufficiency.”

The real question is WHEN the economy turns around, will the government really have had anything to do with it?  Few argue that pure laissez faire should be followed. Even Nouriel Roubini argued that laissez faire was dead:

“To paraphrase Churchill, capitalist market economies open to trade and financial flows may be the worst economic regime–apart from the alternatives. However, while this crisis does not imply the end of market-economy capitalism, it has shown the failure of a particular model of capitalism. Namely, the laissez-faire, unregulated (or aggressively deregulated), Wild West model of free market capitalism with lack of prudential regulation, supervision of financial markets and proper provision of public goods by governments.”

However, Mr. McIntyre is arguing the idea that centralized planning embodied in the actions of the FED and Treasury without reference to free market principles AND the rule of law, is equally ineffective.  Roubini too, holds to this concept:

“But the design of the new system should be robust enough to counter three types of problems with rules. A tendency toward “regulatory arbitrage” should be kept in mind, as bankers can find creative ways to bypass rules faster than regulators can improve them. Then there is “jurisdictional arbitrage,” as financial activity may move to more lax jurisdictions. And, finally, “regulatory capture,” as regulators and supervisors are often captured–via revolving doors and other mechanisms–by the financial industry. So the new rules will have to be incentive-compatible, i.e., robust enough to overcome these regulatory failures.”

The regulatory capture risk is, with little doubt, not a risk- but a certainty, under the current management of the FED and Treasury.  Mr. Geithner is a prime example.  Can we actually think of giving credit for the recovery, when it comes, to such ineptitude?

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Doug Kass has a level-headed piece on The Street.com.  Doug argues the market is behaving too optimistically about “second derivative green shoots”:

“On a valuation basis, equities are no longer on sale. On a fundamental basis, we have not distanced ourselves and perhaps are too readily dismissing the substantive nontraditional headwinds that will frame the lumpy and inconsistent economic recovery I envision in 2009-11.

Some of those nontraditional headwinds include the following:

  • the broad geographic reach of the current recession;
  • the increased burden and cost of regulation;
  • the economic impact of the obliterated (but previously important) shadow banking system and the associated reduction in securitized lending market capacity;
  • the more important role of government in the private sector;
  • the possible impact of protectionism and trade barriers;
  • the degree to which individual and institutional investors have become risk-averse and have been “turned off” to equities; and
  • most important, the unusual causes of the current economic downturn and uncertainty of business confidence that follows from the deleveraging of debt on bank and consumer balance sheets.

I am growing increasingly concerned that the same investors/traders that panicked in January to early March are now panicking in the opposite direction in a market that too often worships at the altar of price momentum and that the aforementioned challenges to economic recovery are being ignored.”

Swamp Report agrees.  The market is getting carried away. Zero Hedge has another piece wherein Contrary Investor compares a “real bull market” to the current one that is behaving more like a  “casino”.

UBS Financial Services director of floor operations, Art Cashion suggests a “sharp move by the end of the week”, but which direction? …the dribble about swine flu at the beginning can be ignored.

CNN suggests AIG is too far gone to ever come out of “pseudo” bankruptcy.  Duh… The government has been keeping the brain dead company alive so it can harvest body parts from the carcass and transplant them into the banks… a kidney to Citi, another to BofA, a liver to Goldman…

FT reports that Goldman Sachs sold $2billion in notes yesterday before the announcement of stress test results:

“…pushing the boundaries of the bank’s agreements with regulators to keep the outcome of the tests confidential. Corporate governance experts questioned Goldman’s timing. “It is an odd day to raise debt. Out of an abundance of caution, Goldman should have waited until all material information was in the public domain,” said Charles Elson, director of the corporate governance centre at the University of Delaware.”

Think the government will punish their Goldman boy?

A post at The Economic Populist suggests unemployment from GM will get much worse:

I just had a truly frightening experience. During a conversation about the auto industry one of my colleagues who researches the auto industry told me that according to his calculations, the GM shutdown is going to send 250,000 off the job in Ohio.

This includes only the multiplier effect at auto suppliers, not any macro economic effect. For example, job losses at retail stores resulting from drops in spending are not included, nor are any further drops from other problems.

The post goes on to suggest that Indiana will see over 100,000 and Michigan a whopping additional 1 million in unemployment!

Mike Shedlock comments on the WSJ’s reporting that the Fed Pushes Citi, BofA to Increase Capital:

The most likely ways for the banks to raise capital are via dilution of Treasury owned preferred stock at taxpayer expense and via the Public Private Investment Plan (PPIP). The latter is a scam to heist taxpayers to the tune of hundreds of billions of dollars.

Government officials stated today “that banks directed to raise more capital shouldn’t be viewed as insolvent.

What else can it possibly mean when taxpayers have to pony up hundreds of billions of dollars every other month just to keep the banks running?

However as Rolfe Winkler points out, converting preferred to common will not raise the total amount of capital -just increase TCE.  The government will, as Mike says, have to put more in… unless they can sucker some private investors.

A Bloomberg report (or rather a Sueddeutsche Zeitung report) from April 24th deserves way more attention than it seems to have received. The key is that the leaked memo is true:

“German banks’ total risks from problem loans amount to 812 billion euros ($1.1 trillion) according to calculations by the BaFin financial-market regulator, Sueddeutsche Zeitung said, citing a confidential memorandum.”

With German banks needing to deal with $1.1 trillion, how much does that indicate for American banks, on a pro rata basis?  Wait til there’s a similar “internal memo” leaked about American banks…

Market Watch reports on the bank upgrade from analysts at Fox Pitt:

BOSTON (MarketWatch) — Fox-Pitt Kelton in a research note Wednesday upgraded its group rating on U.S. banks to market weight from underweight, where they had been since April 2004 based on credit — specifically non-performing assets and loan loss reserves — as well as valuation and capital. Bank stocks “historically have rallied off down-cycle lows about two or three quarters before non-performing assets peak, and we now believe they will peak near year-end 2009,” the analysts wrote. “Another intangible behind our upgrade: we believe the upcoming stress-test results will be more benign than expected and dilution-risk is already priced into relevant stocks,” Fox-Pitt said.

That’s an incredible assertion. But then again, you can’t exactly say Fox Pitt is independent of banking influence…  See “Bank Equities are Worthless” for a more unbiased opinion.


Dr. Jim Walker, founder & CEO at Asianomics tells CNBC’s Martin Soong (with a neat Scottish accent) that we are probably in the horizontal part (that’s the level part) of an L-shaped recession. Swamp Report thinks we are still falling (that is… in the vertical part).

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