The Ben Franklin Report: Leave the Spigot Open

While workers in GM's Janesville, Wisconsin SUV plant are getting a lesson in freemarket economics, Ron Paul is trying to spread the word about an economic malady of a slightly different nature: the ballooning and out of control federal debt that we've been covering here on the Fringe Element. As if the near vertical climb that is growth in the monetary base weren't already enough, the Federal Reserve is going to go ahead and provide unlimited amounts of funding in return for collateral to central banks from around the world. One could say that this is a very selfless act of a benevolent and intelligent Chairman, but more likely, this is an effort to return monetize US Government debt as Dr. Paul points out in the above article. This move by the Federal Reserve will have, perhaps, unintended consequences, as Central Banks return bonds originating in the United States, such as those issued by Fannie Mae and Freddie Mac, to our shores. After all, in a liquidity crisis, why would an institution choose to hold onto assets that are, at best, potentially troublesome?

The rest of the world is also responding to the crisis in ways similar to the United States. After weekend meetings of the IMF and World Bank in Washington, D.C., financial leaders from around the world agreed to initiate a coordinated response, and the markets seem to be enjoying the show. In Japan, the Central Bank is ready to assist any effort negotiated by the IMF, but has so far not announced any support of particular amount of money to domestic banks and financial institutions. In Europe, markets surged amid a flurry of announcements from various national governments laying out plans to guarantee their financial sectors in various degrees, ranging from total guarantees of interbank lending and capital infusions in Germany to bond lending programs in Portugal. In China, the weather is a little less rough, with currency reserves recently surpassing $1.9 trillion in value, the People's Bank's chief Yi Gong, while promising cooperation with the other members of the IMF,  has expressed full confidence that China will weather the financial turmoil. Perhaps not coincidentally, the central government in the same weekend announced plans to double rural disposable income by 2020 to create a domestic consumption base as a way to offset falling exports to the U.S.

While some lament the appearance that Capitalism has become the newest whipping boy in the arena of economic philosophies, Treasurer Henry Paulson took bold steps in ushering in a whole new era of American socialism, essentially seizing portions of the nine largest lending houses in the United States.

Cleveland, Clinton, and Capitalism, That's a Twisted Trifecta

The courts are now being called in to help arbitrate the ramifications of the subprime crisis. Cleveland, one of the worst cities, or was it the worst, is now suing 21 different lenders that "knowingly created a public nuisance by exploiting the city of Cleveland." The city is seeking hundreds of millions of dollars "at least" to help cover the cost of demolishing thousands of abandoned homes. The plummeting population of Cleveland is putting the city in a budgetary squeeze to maintain services. Baltimore, on Thursday, beat them to the punch, though, and filed suit against Wells Fargo Bank NA, subsidiary of Wells Fargo & Co. Of these two suits, it's easier to see the Baltimore suit going farther because of its limited scope, but I'm not a lawyer. The Cleveland suit seems more like a shot in the dark, but may get much more interesting if the suburbs become involved in a class action type action.

Washington is all abuzz with talk of an economic stimulus package to help offset the downside pressures in the market. Bipartisanship is a word that's hardly mentioned without a curse, but congressional leaders are falling over themselves trying to say it the most. As well they should, because any deal will have to accord with the wishes of our King, I mean, President. Treasury Secretary Paulson says that Bush has yet to decide, but stresses that any stimulus package should be temporary at best. It should make Bush's State of the Union Address more interesting.

The Democrats, for their part, are now faced with breaking their "pay as you go" promise, and could potentially borrow billions more to help finance their version of an economic stimulus package. In a bipartisan fashion, everyone agrees that the measure should be permanent and it needs to be felt by the general population very quickly. With the coming Presidential election, the stakes are much higher, and Hillary Clinton is trying to be one of the first in the field to offer a plan to offset the downside risks. Ben Bernanke is going to pow wow with the Democrats at a policy retreat later this month, to consult with them as they try to find a way out of this fiscal nightmare. The Fed Chairman's words are being parsed for hints at the January board meeting and what moves the Fed will take. Most economists are betting on a rate decrease of at least half a percentage point, down to 3.75%. Ben will meet with Nancy Pelosi on Monday for what will amount to little more than a photo opportunity and a chance for the Speaker of the House to appear as though she's doing something in the midst of growing signs that the economy might be in real trouble.

Among these signs are the rising price of gold, which is expected to hit $900 per troy ounce, as investors seek reliable shelters in the face of market uncertainty. Another sign of troubled times in the economy are the anemic holiday sales at all of the major retailers, with the notable exception of Wal-Mart. Considering Tiffany's was also subject to the slow down, the upper echelons of earners no longer appear immune to these downward risk pressures. Another interesting note is that the Treasury Department's last issuance of inflation protected securities fell to 1.65%, down from October's rate of 2.36%.

The difference in response between the Federal Reserve and the European Central Bank couldn't be more stark. Whether the glass is half full of half empty, it would appear that the philosophical difference lies in whom the stimulus package and the results are directed at. The Federal Reserve, in lowering rates, makes it more appealing for businesses to earn money and to help money move through the economy, hopefully in the form of capital investment. The European Central Bank, on the other hand, appears to be betting that keeping rates up will encourage people to save money in depository institutions, which will then be on a much sounder footing to issue new loans and securities. The question remains to be seen whether investors will respond to this strategy, but so far it would appear not.

Among the companies named in the city of Cleveland's law suit are some of the most troubled financial institutions in the U.S. Countrywide Financial, the biggest mortgage dealer which helped spur the growth in subprime mortgages is being purchased by the Bank of America. Citigroup is turning towards Kuwait and China to seek billions more in capital infusions to stay afloat. Merrill Lynch is looking at a much larger loss in the fourth fiscal quarter in attempting to move stock options issued to its employees off of its balance sheet.

All of this talk of moving the economy out of recession through a temporary spending measure, as Ron Paul said in the debate on Thursday night, would be productive in that it would inject capital into the economy in a way that the Fed cannot, but would be counter productive in that the United States government has no money to pay for anything that it would want to.

Taxpayer Exposure

Treasury Secretary Henry Paulson is scheduled to give a speech today, outlining the administration's efforts to ameliorate the effects of the ongoing financial crisis. In mentioning the investor reluctance to fund mortgages, Sec. Paulson also seems to depend on "market discipline" to restore confidence in the markets. He also plans to use the occasion to defend a freeze in subprime borrowing costs. Although the author of this article, Jeanne Sahadi, seems to believe that there are two exclusive camps surrounding the crisis, one camp that feels that the Treasury's plan is too little, and another that feels that free market principles should prevail and those who took on risk should learn the meaning of risk, I find merit to both arguments.

Regardless, some are wishing that they had agreed with Ron Paul in 2005 when he wanted to remove the implicit taxpayer backing for the GSEs, such as Fannie Mae and Freddie Mac, to avoid a government bailout after the housing bubble burst. After a closer look at the liquidity figures of the Federal Reserve and the European Central Bank and the regulatory options available to forestall the crisis, "Mish" Shedlock says that there is no possible rescue plan, and clears up the mistaken notion that liquidity is capital, which can be used to underwrite shaky markets, which it is not.

"Raghu" offers up some advice through his new book, on how the subprime crisis can be further averted, although I have to wonder how he thinks the government will find the money to bail out the market, for even 1%, nonetheless 20%.

IndyMac Bancorp Inc. is looking at darker days as Fannie Mae and Freddie Mac have raised fees and surcharges to securitize risky loans.

Ripple Effects

As closing the port of Mombasa in Kenya because of the post-electoral violence could potentially cause severe economic contraction in surrounding countries, so too goes the unfolding story of the financial markets. With the announcement that 2007 was a horrible year to try to find a job, the "r" word is on the lips of many experts. The most important note of the Employment Situation is that if one discounts government jobs and those in the service sector, the number of jobs fell by several thousand during 2007.

The Federal Reserve and the European Central Bank are more worried about inflation tying their hands as the crisis further unfolds.

On a positive note, the price of oil went down based on projections of lower demand in the U.S.! I'm sure that this is going to be more than lost considering that the violence in Kenya and its consequent economic ramifications will cost the U.S. far more than getting crude for a couple of bucks cheaper on the barrel.

Shifting Sands Would Make a Better Foundation

In the wake of the economic troubles roughly centering around 9/11, the United States and the European Union enjoyed explosive growth, propelled mostly by the housing sector of the economy. Flash forward to the present when this entire trend of growth is amounting to so much nothing, and one must consider how much this growth really amounts to. Was this entire boom created by the Federal Reserve, the European Central Bank, and other prime lending institutions as a way of creating growth from nothing?

What would you do if you realized that everything you've done for the past six or seven years did not add any value to anything? If you realized that all of the work you had done was so much busywork?

Some are openly talking about recession, and some are talking about the "d" word. Considering the way that ECB dropped $500 billion in capital into the financial markets, they must be worried about the huge bubble that they've helped develop in Spain and the southern Mediterranean.

That Sucking Noise

Apparently, the confluence of record oil prices, a financial fallout in our primary sector for economic growth for the past decade or so, and creeping inflation is too much for the U.S. Economy to bear. The main indicator of the turbulence, the poor dollar has in the past day tumbled to a new record low against the Euro, as well as for the most part falling back to pre-Clinton exchange rates against other world currencies, notably the Canadian dollar. The Chairman of the Federal Reserve, Ben Bernake, one of the masterminds behind this rapid currency devaluation, has signaled that he expect the economy to slow for the rest of the year, and regain momentum in the beginning of 2008. What might be slightly worrisome is that he mentioned that they have not even calculated for even the possibility of a recession. The European Central Bank, for their part, are worried about the potential impact of cheap American exports on the world market, with Bush's new best friend Nicholas Sarkozy going so far as to mention the phrase "trade war." All of this makes me wish that the Fed still published statistics about the growth of money supply.

Oil, on the other hand, is not nearly as interesting, it only hit an amazing high just over $96 per barrel, as opposed to actually eclipsing the $100 price range. Between the price of oil being up 42% since August and "I think the market is due for a correction," I would say that we need to start car pooling more, or perhaps look into public transportation.

In other news, the primary builder for expensive homes in the U.S., Toll Brothers announced that their sales are going into tailspin, bringing up the question of whether the leg that is consumer spending is wobbling... Hopefully, it's only wobbling.

The New York Stock Exchange and most other world indices were pushed down today by poor results in the tech sector.

By far the most worrying aspect of all of this is the mention by Cheng Siwei, Vice Chairman of the Standing Committee of the National People's Congress and the other mastermind, that the American dollar is losing its status as a world currency.

I hope the managers at brokerages are telling their people to lay off the coke.