Forget Bank Stress Test---Watch Treasuries
Forget the bank stress test, leaked in carefully monitored drips, so that investors and the public will actually think the financial system is in good shape because"only" ten of the major banks need to raise additional capital (to the tune of $75 billion) inorder to theoretically survive in an economy with an unemployment rate which we may hit by the end of the month.The real story is in Treasuries. The market has now pushed the yield rate on ten year notes to 3.34 and they are easily headed for 3.5—some analysts are even saying 5.00 is not an unrealistic expectation. The auction yield on 30-year bonds was 4.29%, a six-month high and well above the 4.19% the market had anticipated.
This will, of course, ruin the administration's grand plan to keep mortgage rates low. It also means hello inflation. Oil is going up, and after the very brief respite, so will prices at the supermarket—something the growing number of unemployed are sure going to notice.
The cause is Ben Bernake's Quantitative Easing—the current euphemism for a particular manipulation of monetary policy through the creation of more credit.Of course, The Fed will attempt to control the problem with the purchase of more debt. Despite Bernanke's assurances to Congress that inflation is not a problem, this week the Fed attempted to cram down interest rates by purchasing $10 billion of T- bills. Obviously it didn't work.
And it is not going to start working. In the end the bottom will fall out—the Fed can not indefinitely play the lever-up-by-purchasing-more-debt
game to get us out of this economic mess.But they also can't politically get out of the quantitative easing business— it is the only thing (other than government cheerleading, minor permissible accounting adjustments to the way the banks are allowed to do their books, and the illusive “green shoots” the TV analysts like to talk about) which has sustained the two month rally in the equity markets. If the Fed pulls out, equities will crash.
The thing that would help this economy the most is if the government would quit lying, and trying to cover up old mistakes and lies, with new lies and repackaged versions of the old mistakes.
Tim Geithner talks about the need for transparency in the markets. And I could not agree more. But, instead of fostering that openness they lie and manipulate. The Fed continues to resist opening their books. The stress test is released in a piece meal and incomplete manner, to prevent the public from panicking. To alleviate any fears that things aren't all that rosy, they just tell us that the banking system is sound—but offer no proof.
They have the nerve to tell us these whoopers even as the FDIC
is asking
congress to increase their line of credit from $100 billion to $500 billion.A friend of mine, who is a banker in the Pacific Northwest, told me about a regional bank with half their loans in default. The FDIC is going slow on bank takeovers, only as part of the overall campaign, to make the public think that everything is hunky doory.
For the last two months the equity markets have believed the governmental hot air—because it is what they want to hear.But doesn't it seem peculiar to anyone, that the financial institution that got this dead cat bounce going, was a report from Citigroup that they had been profitable for the first two months of the year?
Citigroup is one of the financial institutions, which according to the stress test, needs to raise capital.
That doesn't make any sense.
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