Bernanke's behavior is worrying me a great deal.  It's, at least to me, pretty clear that he's going to take rates down again at the next FOMC meeting.  The Fed has gone from looking asleep at the switch to looking absolutely panicked.  That can't be helping.  And rates are already pretty damned low.

He seems to be hoping that, by injecting massive amounts of liquidity in, people can refi their way out of foreclosure.  What's to say he doesn't simply create another bubble in gold, oil, euros, etc?

Be nice to America. Or we'll bring democracy to your country.

We are now in a position where consumer debt will unlikely be allowed to grow, in fact shock horror it will have to be repaid. And unfortunately energy and food prices are rising and the falling pound will make all imports more expensive.

So between the rock and the hard place wages will have to rise and that will underpin an inflationary spiral that will eventually wipe out debts and pensions.

Before that, property will fall 35%+ before getting sucked up into hyperspace.

The ramp up in consumption of key natural resources is not great enough to account for the huge rise in prices. In addition supply has been stable to increasing as well.

This is actually false. The ramp up in demand has been enough to slowly eliminate any spare capacity. In normal times, with some spare capacity, prices will only increase to the production cost of the remaining marginal production - but when you get in a situation when demand can temporarily outstrip supply, the price will be driven by the cost of destroying demand - a much level price level, as oil is so convenient that it needs to be a lot more expensive to be given up (think about what kind of price level will push someone to give up their car for your commute and walk 10mn to wait for a bus, change to another, and walk to their office).

With a tight market, prices are very volatile. Speculators can accelerate an underlying trend, but cannot cause it on their own - or not for very long. We're now in the 6th year of steady oil prices increases - that's not driven by speculators.

In the long run, we're all dead. John Maynard Keynes

the two year treasury yield fell to 1.45% on Friday.
Everyone is trying to prop up the dollar and the banking system in America.  Maybe they will succeed, but I am skeptical. No one but foreign governments are willing to supply cash or buy debt in the states.  The problem is the lack of transparency with the various debt packages. No one is willing to buy any debt except the best quality  debt because no one knows what the real risk involved in those packages are. The banking issues will become increasingly dire and be more of a catalyst for real economic problems than the inflation of natural resources.

Jerome definitely has a great solution for the woes facing America.  But the truth is I don't see it happening until its too late. The times are gonna have to get real bad before Americans become that progressive again and its no guarantee they will go left.  I think the times will get real tough every where. If the great depression went world wide in the 30's with so little worldwide trade what will happen now? All the economies are so inter-linked. So far it has been an orderly slow decline because everyone is trying to keep the US propped up. But it can't go on for ever. along with Jerome's suggestion, basic changes in the banking system  need to be put in place, but its probably already too late.

"Looking for my Lo and Behold" The Band

All I can say, is that those who have a 5-10 year investment horizon and who have a strong stomach can probably make a killing if they buy sound, but oversold financial firms.

It's one thing to run up the price of gold, the amount bought because it is shiny far exceeds the amount needed for industrial purposes, so many buyers (or "speculators") can quickly cause a bubble, but the situation with oil and gas isn't the same. I can hoard gold, I can't hoard oil.

Repurchase agreements and covert nationalization

"Monetary policy on the asset side of the balance sheet" is a bit too anodyne a description of what's going on here though. The Fed has gotten into an entirely new line of business, and on a massive scale. Prior to the introduction of TAF, direct loans from the Fed to banks, including the discount window lending and repos, amounted to less than $40B, the majority of which were repos collateralized by Treasury securities. By the end of this month, the Federal Reserve will have more than $200B of exposure in its new role as Wall Street's genial pawnbroker. Assuming the liability side of the Fed's balance sheet is held roughly constant, more than a fifth of the Fed's balance sheet will be direct loans to banks, almost certainly against collateral not backed by the full faith and credit of the US government (and beyond that we just don't know). This raises a whole host of issues.

(...)

Which brings us to the more postmodern issue of what credit risk even means to a lender with unlimited cash and an overt unwillingness to let those it lends to default. In a way, I agree with Baum. Until the current crisis is long past, I think it unlikely that any large bank will default and stiff the Fed with toxic collateral. Why not? Because for that to happen, the Fed would have to pull the trigger itself, by demanding payment on loans rather than offering to roll them over. Since TAF started last fall, on net, the Fed has not only rolled over its loans to the banking system, but has periodically increased banks' line of credit as well. In an echo of the housing bubble, there's no such thing as a bad loan as long as borrowers can always refinance to cover the last one.

(...)

I do not, by the way, object to nationalizing failing banks. There are (unfortunately) banks that are "too big to fail", whose abrupt disappearance could cause widespread disruption and harm. These should be nationalized when they fall to the brink. But they should be nationalized overtly, their equity written to zero, and their executives shamed. That sounds harsh. It is harsh. One hates to see bad things happen to nice people, and these are mostly nice people. But running institutions with trillion-dollar balance sheets is a serious business. Accountability matters. These people were not stupid. They knew, in Chuck Prince's now infamous words, that "when the music stops... things will be complicated.", and they kept dancing anyway.

But accountability has gone out of style.

That last sentence is the most important one, of course.

In the long run, we're all dead. John Maynard Keynes

There are a couple of interesting points here.

Firstly, by extending what is essentially indefinite credit on the basis of collateral they have no intention of calling in, the Fed is covertly taking Equity in these banks, in respect of which it is taking a rate of interest. Essentially a form of preferred equity, but totally opaque.

ie the Federal Reserve is injecting quasi equity into failing banks while calling it debt.

As Waldman

put it in a comment.

By the way, it's quite possible for the Fed to bear large losses (on behalf of the banks) without anyone noticing. They can print money for free, but that does show up as increased liability on their balance sheet. Luckily, the Fed earns a spread from the interest bearing securities it holds against the no interest currency with which it finances purchases.

So long as the losses it bears are smaller than this spread, losses can be hidden in reduced profit rather than showing up as embarrassing balance sheet holes.

That amounts to tens of billions in loss-bearing capacity per year. By timing the recognition of losses, the Fed can finance very large losses over a period of years without politically awkward balance sheet issues.

This is the "financial pornography" of Central Bank money creation and seignorage, which Tim Congdon trespassed into in the FT a while ago.

The Bank of England has quietly used this power in the past, for instance in the First World War when the banking system had given massive loans (which would have wiped most banks out, and by extension, the rest) to Germany and Austro Hungary, which the BoE discreetly took on to its books and wrote off.

The basic fact is that the Fed is doing opaquely by the back door - and on a massive scale - what the BoE/Treasury have done by the front door re Northern Rock.

"The future is already here -- it's just not very evenly distributed" William Gibson

Taking looks from other angle: who profits from the notoriously swelling US national debt? As governments customarily go in debt to wage wars, who may take in the interest rate of the Iraq war? Do we comprehend the stupendous costs and even more stupendous interest growth? Could soon all banks (and peoples?..) become owned... not really by a government, but by a financial band?

Margin calls are bad: the forced sell-offs they induce are a key mechanism behind market crashes.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris

Spanish banks seem to have been smart enough to avoid the subprime crisis, and to have diversified their bubbly assets into other, maybe more real assets (foreign banks, foreign companies); ditto Spanish companies which have been on a rampage throughout Europe.

So, I really don't know. We'll find out soon enough, I suppose.

In the long run, we're all dead. John Maynard Keynes