The banks face “challenging conditions,” says Fed governor Donald Kohn. Many are watching their revenues decline as debtors fail to pay up, while the value of their collateral goes down.
Bankruptcy filings are going up, reports the LA Times, which it regards as a “grim omen.” Delinquencies in Alt-A debt, a step above subprime, are rising. Car and truck sales were down 10% in February; both Ford and GM say they’re cutting back on production.
Is the United States in recession already? Yes, says Warren Buffett. Whether it is technically in a recession or not, we don’t know. But it hardly matters. Across the board, indicators are signaling a slumpy economy. We’re just waiting for the details – how slumpy? And for how long?
The Fed’s remedy is to lend the banks more cash on better terms. The smart money is betting that Bernanke will cut rates again – a sixth time – this month. Not only that, but traders are looking for a big cut – 75 basis points.
Bernanke insists the economy is not well and needs the kind of medicine the Fed usually dispenses. But remember, the Fed is not exactly a U.S. government agency – as if that would be any comfort. It is a cartel of big banks, which regularly conspires to set the price of credit at a level that is agreeable to its members.
Of course, the Fed has a duty to the U.S. government… and to the American people… too. It is a duty that has evolved over time, from supposedly protecting the value of the U.S. dollar to supposedly maintaining full employment. The prevailing economic theory is that you need a steady rate of inflation to keep the factories humming and the shops full, so these two goals were never compatible. Now, faced with real and present danger on both fronts – rising unemployment on one side… rising prices on the other – Ben Bernanke has left no doubt as to which direction he will go. He’s fighting the slump.
Damn the inflation torpedoes! If his actions also help the big banks, by moving their losses onto the public (in the form of higher consumer prices), well, so much the better.
Yesterday, we felt a little sorry for Ben Bernanke. He’s getting blamed for everything… while his predecessor, Alan “Bubbles” Greenspan collects huge fees for kibitzing. Yesterday’s reports from Wall Street said it was Bernanke’s fault that stocks fell. Apparently, his recent remarks have not been upbeat enough. The former professor of economics at Princeton is not as good at obfuscation as the man who preceded him; but he’ll get the hang of it. Then, Ambrose Evans-Pritchard, writing in the Telegraph, branded him a failure. The Fed’s rescue attempt isn’t working, he says.
Today, it gets worse. Not only are the Fed’s rate cuts not working – they’re actually ‘doing more harm than good,’ says a report on MarketWatch. While this is undoubtedly true, we don’t like to see the press gang up on poor Ben.
Here at The Daily Reckoning, we always rise in defense of the poor… the downtrodden… the inebriated and the incompetent. Are the Fed’s efforts really futile, we ask? Are they worse than nothing? Well, the answer depends on who you are. If you have been holding euros, instead of dollars, you might want to send the Fed a ‘thank you’ note. The euro has been going up steadily, ever since Ben Bernanke began fighting recession with more cash and credit. Yesterday, it took $1.52 to buy a euro. Eight years ago, you could have bought one for only 88 cents.
Gold holders, too, should be happy with the Fed’s anti-recession program. Yesterday, the yellow metal dropped $17. But it has already added a third more value since the first rate cut last September.
And what of all the wheat farmers… and rice planters? Rice just hit a 20-year high. And the wheat growers are all buying shiny new tractors. Surely, they should be grateful. Of course, there’s the oil industry, too. Oil didn’t get to $100 a barrel on its own; it had the Fed behind it every step of the way. And don’t forget the platinum miners. Platinum has gone up 46% since the beginning of this year.
Last, but not least, there are the bankers themselves.
Among the Fed’s efforts to relieve the bankers’ pain has been a new line of credit – the Term Auction Facility. What a handy tool! It allows the banks to borrow against the same infected collateral that caused them problems in the first place. Private lenders wouldn’t touch it; but the Fed… as chump of last resort, with the taxpayers’ credit card in hand … accepts it as if it were lost Rembrandts and uncirculated gold coins.
We weren’t born yesterday. We know bakers don’t bake us bread merely because they want to see our fat, rosy cheeks. And we know bankers don’t bank merely because they want to see us with money in our pockets. So, we take it for granted that the bankers look out for Numero Uno just like everyone else.
Which is why we’re also suspicious of the latest initiatives to save homes from foreclosures. Ben Bernanke himself urged “banks to forgive portion[s] of mortgages,” says a Bloomberg report. And there is another strange beast afoot… a proposed act of Congress, whereby the government would step in and buy the distressed mortgages itself. However much these measures might benefit humanity, we’re sure that the final wording would have them tossing a small bone to the bankers too.
The Daily Reckoning Australia