Mish's Global Economic Trend Analysis Message Board

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next

To: Tommaso who wrote (29341)	5/4/2005 2:44:18 PM
From: mishedlo	Read Replies (2) of 116555

Is there any reason to suppose that in the event of a deflationary contraction, the Fed would allow the event to proceed without rescuing many institutions and even persons from bankruptcy? As we all know, there is a an enormous amount of probably unpayable debt both within the U. S. and in its obligations to central banks and others in other countries. The Fed has the power to say to any bank or person that it pleases, "Here is an unlimited line of credit for you to draw on until the crisis is over." There is no limit to the amount of money that the Fed can create. To me, it seems that the danger to prepare for is this deliberate debasing of the currency that the Fed engages in to prevent a cessation of economic activity. The FED would act to prevent the cessation of economic activity for sure, but even I am not proposing things get that out of hand. It does not seem likely even with the nonsense about tariffs. Let's go back to your opening question because that is the key to the matter. "Is there any reason to suppose that in the event of a deflationary contraction, the Fed would allow the event to proceed without rescuing many institutions and even persons from bankruptcy?" IMO the FED already did the former and I doubt they care much about the latter except as to how it may pertain to the former. Let's be a bit more clear on that. 1% interest rates and the ability to be "patient" in the face of rapidly increasing home prices and energy costs was to save corporations from going under. Those corporations owed banks plenty of money. The rescue attempt was not about preventing deflation but preventing banks from taking big losses on top of stupid loans that they made to places like Argentina. During "reflation" bank credit sheets and corporate credit sheets improved dramatically. Mission accomplished. Not so fast. Corporate balance sheets improved but in return consumer balance sheets look horrendous. To "ensure" payback we passed the "bankruptcy reform" bill that will ensure consumers stay in debt forever. Also much of the housing debt is with FNM not banks. What happens if FNM goes under? Who is at risk here? Taxpayers (via bailout) and pension plans loaded to the gills with agency debt perhaps? Hell banks probably want it to happen so they can scoop up stuff at pennies on the dollar. It is possible that major banks (after sanitizing, securitizing, and bundling up all they crap loans into debt offerings unloaded on to retail investor and pension plans) are prepared for an equity pullback and some bankruptcies. Do the major banks care if subprimes go under? Do the major banks care if anything they unloaded goes under? Who is most at risk here and who stands to gain if we have some real fallout? Does the FED care about joe consumer except as it relates to bigger corporate interests? I see ZERO incentive for hyper-inflation scenarios because that would bail out the little guys at the expense of the creditors. The problem for the FED is they think they can slowly unwind the housing bubble as they did the stock bubble. I do not think they can but it will be the little guys that get hurt the worst. Does any of this make sense? Mish

Report TOU Violation

Share This Post

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next