How the Fed/Treasury bypassed Congress

Good article from John Hussman

http://www.hussmanfunds.com/wmc/wmc10012....

How to spend $1.5 trillion without Congressional approval

Step 1: Federal Reserve purchases $1.5 trillion in Fannie Mae and Freddie Mac securities, creating $1.5 trillion of monetary base to pay for these purchases.

Step 2: U.S. Treasury quietly announces unlimited 3-year support for Fannie Mae and Freddie Mac on December 24, 2009, exploiting a loophole in a 2008 law that was originally written to insure a maximum of $300 billion in total mortgage principal (not losses, but principal).

Step 3: Within that 3-year period, we can expect the U.S. Treasury to issue $1.5 trillion in new Treasury debt to the public, taking in the $1.5 trillion in base money created by the Fed in Step 1.

Step 4: U.S. Treasury then hands that $1.5 trillion in proceeds from the new debt issuance to Fannie Mae and Freddie Mac.

Step 5: Fannie Mae and Freddie Mac use the proceeds to redeem the $1.5 trillion in mortgage securities held by the Fed, thus reversing the Fed's transactions in Step 1, without the need for any other "unwinding" transactions (watch). The base money created by the Fed comes back to the Fed, and the mortgage securities purchased by the Fed disappear, by burdening the American public with a new, equivalent obligation in the form of U.S. government debt.

Outcome: The Federal Reserve closes its positions in Fannie Mae and Freddie Mac securities, the quantity of outstanding Fannie Mae and Freddie Mac liabilities declines by $1.5 trillion, thus allowing their remaining assets repay the remaining liabilities without a $1.5 trillion hole of insolvency, and the outstanding quantity of U.S. Treasury debt expands by $1.5 trillion in order to protect the lenders, while ordinary Americans continue to lose their homes and jobs.

A Blueprint for Financial Reform

1) Immediately vest the FDIC (or other regulator that has a strict consumer-protection mandate) with the authority to take receivership / conservatorship of distressed bank and non-bank financial institutions, including bank holding companies, in the event of insolvency.

2) Require a significant portion of the capital of bank and non-bank financial institutions to be in the form of convertible debt (contingent capital).

3) Abandon the misguided and dangerous notion of "too big to fail" by making regulatory receivership / conservatorship a credible threat, and encouraging insolvent financial institutions to exercise the option of voluntary debt-equity swaps as an alternative to regulatory intervention.

4) Approve the Volcker Rule.

5) Prohibit the use of credit default swaps except for bona-fide hedging purposes.

6) Require the originator or arranger of securitized mortgage loans to retain a substantial unhedged equity exposure to every securitization deal.

7) Recognize that "toxic assets" remain on bank balance sheets. They have merely (and most probably temporarily) been written up, in an environment where FASB rules provide "significant discretion" in the valuation of these assets, and where "off balance sheet" assets will not be required to be brought onto balance sheets until first quarter reports are released.

8) Discharge and replace Ben Bernanke and Timothy Geithner.

Ecosystems and finances

Interesting article.

http://theautomaticearth.blogspot.com/2010/01/january-1-2010-fractal-adaptive-cycles.html

Stimulus money screwing the states

Good read on how the stimulus money is hurting the states more than helping them.

http://www.financialarmageddon.com/2010/01/unintended-contraction.html

For example, the stimulus offered $80 billion for Medicaid to cover health-care costs for unemployed workers and single workers without kids. But in 2011 most of that extra federal Medicaid money vanishes. Then states will have one million more people on Medicaid with no money to pay for it.

A few governors, such as Mitch Daniels of Indiana and Rick Perry of Texas, had the foresight to turn down their share of the $7 billion for unemployment insurance, realizing that once the federal funds run out, benefits would be unpayable. "One of the smartest decisions we made," says Mr. Daniels. Many governors now probably wish they had done the same.
Second, stimulus dollars came with strings attached that are now causing enormous budget headaches. Many environmental grants have matching requirements, so to get a federal dollar, states and cities had to spend a dollar even when they were facing huge deficits. The new construction projects built with federal funds also have federal Davis-Bacon wage requirements that raise state building costs to pay inflated union salaries.

Worst of all, at the behest of the public employee unions, Congress imposed "maintenance of effort" spending requirements on states. These federal laws prohibit state legislatures from cutting spending on 15 programs, from road building to welfare, if the state took even a dollar of stimulus cash for these purposes.

One provision prohibits states from cutting Medicaid benefits or eligibility below levels in effect on July 1, 2008. That date, not coincidentally, was the peak of the last economic cycle when states were awash in revenue. State spending soared at a nearly 8% annual rate from 2004-2008, far faster than inflation and population growth, and liberals want to keep funding at that level.

Pessimistic piece on 2010

More pessimistic than Karl Denninger, but hard to refute his points:

http://theautomaticearth.blogspot.com/2009/12/december-19-2009-death-taxes-and-mr.html

There is no recovery

http://theautomaticearth.blogspot.com/2009/12/december-11-2009-there-is-no-recovery.html

Until I see old, crappy 500 sq ft houses selling for $50K in California like they were 10 years ago instead of $500K+ I won't agree with anyone that housing has stabilized. There is a lot more pain ahead and I'm tired of the manipulated numbers coming out of Washington (e.g. "seasonally adjusted BS") showing how things are improving. They aren't. Sales tax receipts are way, way down. Rail/truck traffic is down y/o/y. Personal income tax receipts are way down. Property taxes are down. Travel is way down y/o/y. Corporate tax receipts are essentially zero. Greece, Italy, Spain, Baltic states, Ireland, Japan, etc. are all running into big trouble. Dubai is cratering. There is no recovery and things are really much worse than they were last year.

Hey, let's spend our way out of the recession

The insanity increases - Obama actually said that we "must continue to spend our way out of the recession" (but I thought Obama said the recession was over . . .). Craziness abounds. Give the drunks more booze until they are sober. Logic is dead.

http://theautomaticearth.blogspot.com/2009/12/december-9-2009-desperate-thing-to-say.html

http://market-ticker.org/archives/1713-Insanity-Doing-The-Same-Thing-Obama.html

And while we're at it why don't we greatly expand Medicare and Medicaid and call it "Health Care Reform" - where is all that money (trillions) going to come from?

Washington DC has become more and more unhinged.

Another case for deflation

Scary interview. Similar to thoughts of Karl Denninger. We are in a lot of trouble.

http://theautomaticearth.blogspot.com/2009/10/october-30-2009-interview-with.html