Is Government Stimulus the Answer?

Is the Oh!Bama spending spree going to get us out of this economic mess, or have we seen this movie before and know the ending?

FDR's Treasury secretary and close friend, Henry Morganthau, conceded this fact to Congressional Democrats in May 1939: "We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!"* link

How about Five Myths About the Great Depression.

Could I be wrong about the Stock Market?

How could I be so wrong in my thinking about where the markets should be heading? I have been bearish, awaiting a retest of the lows (and possibly lower than that) of March. I have been in and out of several individual equities with short term trades, on both the long and short side...but have held out of committing a significant amount to anything close to a "buy and hold" trade.

I mean, really, wars in Iraq and Afghanistan, many major banks for all practical purposes operating while insolvent, two auto makers bankrupt, massive unemployment, foreclosures on homes, the coming foreclosures on commercial real estate, health care costs rising, insurance costs rising, budget deficits with numbers to big to grasp...why would buy and hold be a good thing?

Maybe the March lows won't be retested because the fear of the financial markets meltdown has diminished. The government's involvement has backstopped that fear, and that low was caused by the panic preceding the "guarantee" that our banking system will survive.

But even with that backstop, and the rise of 30% or more off of that low, what compels this stock market to go higher. With the reasons listed above, how does this thing keep going up? Talking heads are attempting to convey optimism through the "green shoot" and "second derivative" arguments, so I can see not going DOWN, but why up more and more? The wall of worry is being climbed in the markets, but the vines they are clinging to are precarious.

For now I dabble with a few trades and make do. After suffering through the losses after the dotcom bust, and the first portion of this recession-induced decline, I continue to live by the thought, "I'd rather be out of the market wishing I was in, than in the market wishing I was out".

Goldman Sachs looking out for Number One

At least Goldman Sachs admits they are out to screw the world (link):

Goldman Sachs CFO David Viniar, 53, told analysts on April 14 that his firm took advantage of a reduced number of competitors to charge more for executing trades, even in some of the most liquid securities. The bank booked $6.56 billion of fixed-income trading revenue, 34 percent more than its previous record and five times Morgan Stanley’s.

and

Wall Street made money in the first quarter from traditionally unprofitable corporate loans and trades for their customers, as the gap between what banks pay to buy fixed-income securities and what they sell them for, the so-called bid-ask spread, almost doubled.

I am wondering who takes their business to GS now, and why? Bend over if you do.

RIP Pontiac

With the anticipated announcement from GM, Pontiac will be no more. RIP Pontiac.

My second car was a 1972 Pontiac Grand Prix. Loved it. While it was not one of the muscle cars, like GTO or Firebird, it had plenty of power. A 400 cubic inch, 200 hp V-8 moved it along at top speeds in excess of the speedometer...bwahaha.

It was solid as a rock, had nice chrome and was a pretty classy ride for a teen.

I wish I still had it.

A couple more blasts at Government Sachs...

First, a really good article entitled "The Quiet Coup", written by Simon Johnson who was former chief economist with the IMF. While not fingering GS explicitly it doesn't take a stretch of the imagination to read between the lines and know who the players are in finance in the US. Here are some bits from the article:

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector.

and this:

the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Next, from this:

You better read "The Usual Suspects," Matthew Malone's brilliant article in Portfolio magazine: He "exposed" the "Goldman Sachs 'conspiracy' to take over the U.S. financial system." Read it in this context: America's financial sector has exploded from 19% of corporate profits in 1986 to 41% today, becoming a magnet for every wannabe billionaire. They know why Wall Street must control Washington.

Malone focuses on the incestuous "conspiracy" of Goldman alumni in Treasury, Bank of America, Merrill Lynch, AIG, Citigroup, Washington lobbyists and politicians.

And, from the first article, how might this mess end...

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

Financial stocks defying gravity

Despite a huge run-up in recent weeks, and despite ample hokus-pokus behind their "earnings" numbers, and despite numerous talking-heads daily calls of tops and impending pullbacks, and despite volumes that can only be called moderate, and despite outlooks that are still bearish....

...the financial sector stocks are continuing to rise. I smell a rat, or maybe a rat pack? A Goldman Sachs lead rat pack. Apparently GS has been trading much more for its own account (principal trading) of late, and maybe after hours in lighter trading volumes. Could this continued rally in financials be self-induced, or at least perpetuated by insiders? That wouldn't surprise me in the least.

Tax Day. Revolt.

Tax Day 2009. Obama wants to raise taxes, local and state taxes and fees will also be rising, no doubt, due to shortcomings from property tax losses and falling sales tax numbers. I say, eff 'em all. Hide what you can, barter, trade, disguise income and pay as little as possible. The way that our government has rewarded malfeasance on Wall Street and mortgaged our grandkids futures with debt...and with no end in sight...why should we willingly contribute? We overwhelmingly told them to not bail out the banks, many had the count at 100:1 against the bailouts. Yet they did, and it sounds like they will continue to give them more and more. So, lets cut them off.

Find that income you SOB's...I may have made a few bucks, but you'll never know it.

Reading links:

Here and here

Government Sachs, errr Goldman

This is covered in great detail on many other sites and blogs, but I am going to get it in here as well...it is important for everyone possible to know the degree that our government and Goldman Sachs are in bed with one another...a scandal/conspiracy IN PLAIN SIGHT.

Here are some assorted clips from other sites regarding Goldman Sachs, PIMCO, TARP, TALF PPIP and other related topics:

‘Government Sachs’ Is Back

Who's designing Geithner's rescue plan? Goldman guys, of course.

As it was in the beginning, so shall it be in the end: Goldman Sachs will be there.

Back in the '90s and through the mid-'00s, major figures from Goldman Sachs such as Robert Rubin, Gary Gensler and Hank Paulson stood fast against derivatives regulation (Rubin and Gensler) and lobbied successfully for higher leverage ratios so they could bet more of their capital on the market boom (Paulson). When those policies came to grief and Wall Street imploded, and the Feds scrambled to rescue stricken insurance giant AIG, Goldman CEO Lloyd Blankfein was reportedly the only bank executive invited to an emergency meeting at the New York Federal Reserve (convened by then-Fed president Tim Geithner).

Now Treasury Secretary Geithner—a Rubin protégé, of course—has assigned two more ex-Goldman men to fix the vast mess their colleagues helped to create.

They are Steve Shafran, a former favorite of Paulson's, and Bill Dudley, Goldman's former chief economist and now the successor to Geithner as head of the New York Fed
Link to above

One on PPIP:

The PPIP is potentially a subsidy for a variety of financial institutions, many of whom have been seen in the markets buying toxic waste at 30 cents so that they may sell it to Tim Geithner’s Treasury at 80 cents. Some large bank CEOs will protest being “forced” to sell assets, but they will eventually rollover rather than be “Rick Wagonered” by Geithner et al. But the big payoff could be for the likes of our friends at PIMCO, Blackrock (NYSE:BLK) and the other asset managers who will be called upon to maintain this floating superfund site.
Link to above

How about reading Taxing grandma to pay Goldman Sachs, which includes the following:

Many retirees depend on interest from certificates of deposit. Those rates are down dramatically, and as CDs expire retirees are compelled to reinvest their savings at lower rates and live on less. They can take comfort that their sacrifices are helping pay off Wall Streets losses from the lavish bonuses paid bankers. For example, the $70.3 million Goldman doled to CEO Lloyd Blankfein in 2007.

Some other good reading on GS "earnings" for Q1 here. And a good blog to follow for this kind of stuff here. A link to a blog on Wells Fargo stress test.

Major Disconnects in Financial areas

It certainly seems like there is major conflicting information in the areas of this countries financial industry's health.

On the one hand the equity markets have made large percentage gains based around a financial sector rally on positive earnings statements by Goldman Sachs and Wells Fargo...made possible through taxpayer handouts and funky accounting through the shifting of their fiscal calendar. (and here as well)

On the other hand we have:

• continuing rhetoric by Geithner that further bail out funds may be necessary
• numerous pundits that made the originally correct calls on this mess saying that things are not okay
• the talking-head rhetoric that conditions getting worse less rapidly is somehow said to be "getting better"
• changes in mark-to-market accounting that will allow a shell game for banks to hide behind as far as their real financial well being
• "stress tests" that will not be made public that will allow banks to hide their real financial well being
• commercial real estate is still getting worse
• consumer credit is not getting better

And, why would Goldman Sachs need to contemplate a stock offering to raise funds to repay debt if things as as robust as they claim? Probably still have ample cash laying around from ransacking taxpayers over AIG?

Other good reads, here, here, and especially here.

No, it doesn't add up if we have a healthy financial system...it only adds up if D.C. and Wall Street are basically one and the same.