Phil's Stock World

The US Stock Market Crash of 2007 – 2010 expressed in percent decline from the market top in October 2007.

A trading day by trading day comparison of the Great Crash of 1929 – 1932 with the current market decline from its October 2007 top.

The classic profile of a collapsing bubble.

The economic policy of the early post-Crash period was heavily influenced by what was later called Liquidationism epitomized by prevailing views of the Hoover Administration. The idea was that allowing companies and banks to fail as quickly as possible, in a relatively uncontrolled manner, was the appropriate response. This view is still held by the Austrian School of economics.

The flaw in this theory would seem to be that the decline of a crash is not like a natural decline in a business cycle or a severe demand contraction, but the result of a precipitous collapse from a Ponzi-like monetary and credit expansion.

One can argue this point, endlessly if they wish to ignore history and economic reality, but again we need to remember that the outcome in several other nations embracing this theory was the rise of militant, fascist political regimes in response to societal dislocations.

Obviously the best cure is prevention, in not allowing monetary bubbles in the first place. Duh. But one has to play with the cards in one’s hand, and not the hand they wish to have.

But there is a lesson in this for our current ‘cure’ in that blowing yet another asset bubble from a monetary expansion, and little else, will not work. We ought to have learned this from the Fed’s policy responses in 2003-2006 which led to the US housing bubble.

Systemic reform and rebalancing is absolutely essential to a sustained economy recovery, and needs to be measured by an increasing median wage and a reversion to manageable income – debt ratios.

The headwinds against this remedy from an outsized financial sector that in many cases has coopted the political process makes a sustained economic recovery less probable without a significant shock to the political and economic structures of the US at least.

Bernanke’s wager

Being a student of economic history, Ben Bernanke believes that he can inflate the currency

In a sign of the upcoming TALF-subsidized apocalypse, none other than Moody’s is now complaining that issuers are shopping for ratings, or seeking ratings only from those agencies they know apriori will provide the highest rating (AAA) needed for TALF inclusion. Yes, Virginia, we have gone full circle to 2005, and now the government itself is promoting the same vicious rating loop that got us into this credit mess in the first place. Zero Hedge wrote about this more than a month ago – we are happy that Moody’s has finally taken the time to confirm our observations.

Luckily, consumer confidence is so high and bank stocks haven’t plunged in over 2 months, so TALF will not be needed. Really? I guess Sheila Bair forgot that this really has to revert at some point, and when it does, have fun gluing the pieces back together without the mad dash Frankenstein creation that was the PPIP.

According to Bloomberg:

The need to have a AAA rating to be eligible “for government programs raises the specter of rating shopping,” Andrew Kimball, head of the global structured finance business at Moody’s Investors Service, said during the company’s investor day today. “Those programs don’t differentiate on the quality of the rating. Rating shopping becomes a problem.”

As a result, New York-based Moody’s hasn’t been included in some recent transactions, Kimball said on a conference call broadcast from the event. Under TALF, the Fed provides low-cost loans to investors to buy AAA rated securities backed by auto, credit card, equipment, education and other kinds of loans. Companies sold about $15 billion of eligible asset-backed debt ahead of the fourth deadline for the Fed’s TALF on June 2, up from about $13.5 billion in May, according to Bloomberg data.

…

The Obama administration and Bernanke are counting on the TALF as a cornerstone of plans to revive credit and end the recession. While the program is on pace to fall short of its $1 trillion official ceiling, Bernanke said in a letter to a lawmaker last month that the TALF has helped create “improved conditions” in the asset-backed securities market.

Cabela’s Inc., a Sidney, Nebraska-based

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