The Fed and the world’s central banks are now well aware they’ve got a global credit crisis on their hands that is far nastier than they expected.  So to work they go!

In the U.S. we are seeing what the authorities have in mind with their $700 billion package, which is the first of many to come — never mind the assurances that this is all it’ll take.  It looks like we’ll be seeing a great deal of nationalization in banking.  Paulson, no doubt, appears ready to use the full authority granted him as U.S. Treasury Secretary.   We worry about the blank check Congress has just obligated taxpayers and dollar holders to.  As we noted in a post a few days ago, the Monetary Base suggests the flood of freshly minted cash is to be hitting our shores soon.

• Fed, ECB, Central Banks Cut Rates in Coordinated Move
• White House considers ownership stakes in banks
• Fed eyes plan to fund short-term business loans
• Fed Considers Plan to Buy Companies’ Unsecured Debt
• More Treasury Bonds on Way to Ease Crisis
• Paulson Says U.S. to Use All `Authorities’ in Crisis

In the U.K. things have gone from bad to worse.   Socialization has even less of a stigma in Europe, so as in the U.K. you’ve got all sorts of intervention falling in line to bail out the banking system.  Meanwhile, Iceland is in such bad shape, it appears the small nation could be hit with insolvency fairly soon.

• Darling unveils bank rescue
• U.K. Banks Get Unprecedented Government Bailout; Stocks Fall
• In Flailing Iceland, Disbelief and Regret
• Icelandic Regulator Takes Control of Kaupthing Bank
• Barclays, RBS in Talks on U.K. Government Funding
• Russia Lends Iceland 4 Billion Euros to Save Banks
• Belgium, Luxembourg scramble to sell Fortis

Still, policy traction is a problem.   It would seem the rush for the exits is more important to investors than any promise from a central bank or government authority.  Likewise, while there’s plenty of cash out their to be loaned — just not at rates that will prevent the overextended financial sector form further collapse.

• Libor Dollar Rate Jumps to Highest in Year; Credit Stays Frozen
• U.S. Stocks Drop, Erasing Early Gains, as Banks Slump on Libor

Meanwhile, the problems are drifting now to the states and municipalities. This is a situation we warned would develop years ago, and now it is hitting the fan.  Given that governments can never seem to cut a dime from their budgets, let alone the many millions, hundreds of millions or $ billions required to balance a budget, they’ve gone to the profligate credit markets to cover their shortfalls while appeasing the last bastion of unionism — their own workers.  Well, that model is simply collapsing under itself since it is terribly inefficient and all consuming.

But never fear, governments will not go down gladly: they’ll saddle taxpayers with more of the costs so long as we keep voting to allow it to happen, and consequently we’ll further encumber ourselves with future tabs for free lunches — much like the ones that are coming due right now on Wall Street.  Hence, the Governator is leading the way with hand out to the U.S. Government for a bailout.

• California Seeks $4 Billion Notes, Retail Demand, Lockyer Says
• California May Point Way for U.S.
• Massachusetts Leads States, Cities Looking to Revive Debt Sales

Just think… The economy is going into the tank, and we’ve not even discussed the implied insolvency of the U.S. Government.   Don’t forget, we just crossed the $10 trillion mark by $200 billion in a matter of weeks in terms of Federal Debt.  (As noted by our debt clock, top right of our website!)

Amid the hubub of bailouts on Wall Street, few noticed that key election state, Michigan, got its main industry bailed out last week. Compared to the $700 billion bailout that drew everyone’s attention, the Detroit $25 billion bailout was hardly a footnote or worth covering.  Yet the mere idea of this bailout is far more egregious than even that of Wall Street.

While the powers that be argue that without saving banks and Wall Street our economic world comes to an end, what’s the justification for saving Detroit?  Its not like the U.S. consumer is going to be without cars they are not very happy with considering how Honda and Toyota and other non-Detroit producers make cars that are far more appealing.   Meanwhile, the auto unions sill have their insane fund paid for by the Big 3 that pays unneeded workers to come to work and watch TV or sit around for years.

But what’s the use of pointing out hypocrisy in D.C. when the word is synonymous with politics?

• Bailout For The Bankrupt
• Detroit Got Its Bailout
• 700 auto dealers could fail

Meanwhile the economy is clearly slowing.  As we warned again and again and again, debt and consumption don’t make an economy rich.  They make an economy poor eventually as the seed-corn of the nation slowly dwindle away.  We kept pointing out how the last recover from 2002 on was one entirely dependent on expanding credit, and that once the consumer hit his limits, and that once rates could go no lower, he’d run out of rope quickly.   Insolvency has been at the epicenter of this crisis from the earliest days of the subprime slump, and it’s spreading fast.  Expectations by some are that Christmas sales will be down 50% over last year!

• Retailers’ Sales Fall Sharply at Both High End and Low
• September Retail Sales Reflect the Slowdown
• Retailers’ sales set stage for a tough holiday
• Retailers Foresee Weak Holiday Sales
• Retailers foresee change in holiday shopping habits

Consumers are right to tuck in their horns and save, as are producers and anyone else with a dime’s worth of sense.  This is what we’re seeing. This is what will bring an economy out of a slump — savings and a restoration of sanity. There’s nothing wrong with paying with cash, never mind what the profiteers of credit wish to tell you.  But that flies in the face of every neo-Keynesian model of economic growth, and its that model that dominates policy.  Expect them to further hamper the real economy by proping up the phony one with more easy credit, more money supply expansion — even if they have to print it and drop it from helicopters.   For example:

• Fed Gives A.I.G. $37.8 Billion Loan

That’s on top of the $80 billion already handed to them a few weeks back.  Where’s that money coming from?  It’s coming from YOU – the dollar holder and the taxpayer, and mostly via the dollar holder who will see his existing dollars joined by many more freshly minted copies in the coming years!  Which leaves us with a grim reminder of why such policy in the end is stupidity, even if it is the lite version.

• Zimbabwe’s annual inflation soars to 231 million percent

For the better part of a year the Fed and Treasury used just about every trick in the book to keep a lid on the credit crisis without actually expanding money supply.   The problem with those various attempts was that it did nothing to help the markets clear its problems.    On one hand a great many of the major players overextended themselves with leverage into securitized assets that are plummeting in value.   Faced with the reality that their balance sheets could not support the assets they’d leveraged into, combined with a fact that many of the assets they’d invested in were theoretically plummeting…  Well, the game has has largely been to prevent these institutions from actually having price discover on those toxic assets, thus forcing a mark to market value on the rest of the mess.

This game of playing Ostrich on price discovery, it was hoped, would buy enough time for the crisis to blow over and for the institutions to recapitalize. In the past two weeks time has run out. The markets are slowly coming to accept that this is not merely a crisis in credit, but a crisis of insolvency — from homeowners unable to meet their mortgage and credit card obligations, to banks who were able to hide their fractional reserve inverse pyramid of finance during good times. Banks, we remind you, never have assets sufficient to back their obligations given fractional reserve systems are based entirely on confidence — that depositors will not decide to remove their demand-deposits at the same time.

So now the liquification begins as the chart above indicates plain as day — a 65% increase!

8:02 a.m. EST

Oct. 3 (Bloomberg) — BlackRock Inc., Pacific Investment Management Co. and Legg Mason Inc. informally advised the U.S. Treasury in the days leading up to passage of its $700 billion financial-rescue plan and will seek to manage some of the assets, according to people familiar with the matter.

The Treasury will choose five to 10 money managers to help it acquire troubled assets from financial firms, officials said today. In the past few weeks, Treasury officials sought out executives at BlackRock, Pimco and Legg Mason’s Western Asset Management unit for guidance, said the people, who asked not to be named because the discussions were private.

These companies would have had major losses on their books if the bailout hadn’t been passed.  PIMCO alone bet the farm that Freddie and Fannie would get a government bailout, and made $ billions on the bet.  Now they want to get paid to help rescue the economy.

Are you catching on to how this works yet?

Oct. 3 (Bloomberg) – The temporary increase on bank deposit insurance signed into law by President George W. Bush today may simplify savers’ lives even if it doesn’t fatten their account balances.

Bank customers will receive $250,000 in Federal Deposit Insurance Corp. protection per depositor through Dec. 31, 2009, under legislation the House of Representatives passed today.

The bill makes it easier for customers to keep their money at a single institution, financial experts said. That will mean fewer maneuvers to keep cash protected. The current $100,000 limit on deposit insurance was set in 1980.

If you thought people didn’t give two hoots about bank financials with the old $100,000 FDIC insured guarantee on their banks, just wait with it upped to $250,000.  Recall, the last temporary increase (which this one is billed as) raised the FDIC from $30k to $100k “temporarily” back amid the last major crisis in the 1970s.

This expanded guarantee guarantees two things:

1. Expanded moral hazards: Depositors (who are functionally investors) won’t bother to care if their bank is running a poor business model or not, further stunting a crucial element of the free market: accountability.  The threat of runs on a bank merely are threats to expose the reality: fractional reserve banks NEVER have enough in their vaults to cover their immediate liabilities; hence they are inherently insolvent in good times and bad — only they’re more insolvent during bad times when they can’t even meet the legal base minimum of reserves and can’t find any more suckers to loan them more money.    These problems emerged with lack of oversight at the $100k guarantee.  Imagine what we’ll get at $200k!
2. More Inflation: Already the FDIC insurance pool was woefully underfunded to cover the problems we’re likely to see going forward at the old $100k limit.    $250k limits doubles the trouble.

What they’re hoping here is that people will have confidence that they’ve got no reason to pull their money out of an otherwise insolvent bank, thus exposing the inherent fraud of banking: They’ve loaned out all your demand deposits — your checking and savings accounts that by contract you can get any old time you want via your ATM!  They’ve only got a fraction of their obligations in their accounts, and they invested the rest, much of it in crappy investments that are collapsing, leaving them in serious straights by their own poor business planning.

Today’s bailout rewards those too thick-headed in banking to understand the reality of the situation, and it will come at the expense of those who actually have money and those who produce wealth in this nation.  That’s a recipe for worse economic times.

From 3 pages to 700.   Pork laden and far worse than its original decrepit form than when the House rejected it, today it passes and it is signed into law.

By signing onto this bill, Congres and the President have guaranteed the U.S. will sink into a slow, long depression. Expect more good money to be thrown after this $750 billion fails in order to to “save” this initial $750 billion from being wasted.  No doubt it will make the politically connected on Wall Street very happy, but it will come at the expense of the already crippled productive economy.

I’m going long pitchfork and torch manufacturers. They’ll be in high demand in about 3 years.  I joke, of course, but not so much.

Ron Paul is perhaps the only politician (other than Bob Barr, Libertarian Presidential Candidate) who speaks the truth about this bailout.   Doing something is alwasy more politicaly viable than doing nothing, even if doing nothing is the right thing.

Democracy is indeed the theory that the voters deserve to get what they want, and good and hard!

About Strategery

Strategery is a unique hedge fund.

It is the largest in the world, with expected initial capital of $700 billion. It has a free and unlimited credit line should it need more. It has no fixed mandate, though it is expected to initially focus on mortgage-backed securities. And it is the only fund backed by the full faith and credit of the U.S. Government.

It was only a matter of time.  You can read more here.

What an excellent video to demonstrate the intellectual gap we’re dealing with.  Theory vs. application:  Listen how out of touch with reality Swank is here.  The Fed’s job is not to fight asset inflation, therefore money supply is irrelevant? Well, heck!  Schiff lays out how they’re causing it and yet she remains completely in denial!  They’re experts in creating inflation!

I love productivity in the auto plant comment. Mind you, quietly earlier this week the Auto industry was bailed out to $25 billion.  And what of the productivity

By the way, consider this was on CNBC in June of 2006!  Who was right? Mind you, gold was trading at $569/oz and oil at $67/barrel!