Wow, what a day? I honestly think that we are days away from financial Gotterdammerung. We are quickly approaching the point where we all look at each other and say, "Sorry pal, I have no idea what to tell you. I have no idea what to do." It's kind of like the financial equivalent of one of those movies where an asteroid is hurtling toward Earth and there's just nothing in our scientific tool box to stop it from hitting us. Think about what has gone on in the U.S. the last few weeks.
- The Fed is pouring money into the banking system as fast as it can.
- Congress has given Treasury the authority to buy up to $700 billion of "troubled assets".
- The government has bailed out Freddie Mac, Fannie Mae, AIG (and therefore Goldman Sachs).
- The banking system has managed to take out Wachovia and Wamu without having to hit the FDIC.
- Warren Buffett helped save GE from a funding heart attack (by the way, I have seen analysis that shows after valuing the stock options WEB got, his preferred status and his fat coupon he essentially bought the equivalent of GE common at $9.30 !!)
I know that the rescue bill has just passed, but when you combine its passage with these other events and it still doesn't inspire one grain of confidence, it's bad. Psychologically, no one trusts anyone in an institutional sense. This feeling has been prevalent for weeks now, intensifying every day. This is what guys like Ben Bernanke mean when they say, "The system can't take much more of this." He's talking about the disintegration of faith. This is what depressions are made of. They are not just about dollars and cents. They are about a loss of hope. I wasn't here for the 1930's. I was however, here for the mid to late 1970's. Jimmy Carter is scorned for his speech about "A malaise" enveloping the country. People can mock all they want, but he was right. We had lost faith in our institutions back then and the real scary thing was the 1970's weren't even ten percent as bad as the 1930's. I guess the point I'm making is that group psychology is very powerful and can't be exercised easily. Just ask the Japanese about the 1990's. And remember, for at least a good part of the 1990's the rest of the world was prosperous. Now we could be talking about things on a global scale.
I think the Fed and Treasury have one or two more chances to blow the asteroid off-course. This is time for good old "Bobby Layne" style playmaking. Bobby Layne was a Hall of Fame quarterback who used to draw up plays in the dirt. The Fed can't make banks lend money but now they can take deposits and pay a rate on them. If that $900 billion Term Auction Facility cash is getting hoarded, the Fed has to get the cash rich institutions to lend it back to the Fed and that money has to go directly into the commercial paper markets. Treasury has to try a program with their new powers to buy the first $100 billion of loans in danger of default and foreclosure from banks, who won't voluntarily participate in the $300 billion Housing Recovery Program (why the hell should they right?), take the hit and make a new FHA loan that the borrower can pay. It's time for dramatic action. Maybe I'm off the wall, but I think it's time to be as creatively off the wall as we can. Be glad to hear your thoughts or ideas. I don't think letting it all meltdown is the answer.