November 30, 2009

Light at the end of the tunnel?

Goldman Sachs recently published a report indicating that the American economy is about 2/3rds of the way through the financial crisis, beginning its analysis with the concession, "bad loans = big losses." The losses so far are about $1.6 trillion, with total losses estimated in the range $2.1 to $2.6 trillion and about 70% of these losses are connected to real estate, one way or another. This estimate is more or less in line with quantitative analysis Nouriel Roubini performed much nearer the outset of the crisis, when he estimated that the total losses from bad loans would be in the neighborhood of $3 trillion.

Of course, that's still a lot of barbecue patios and breakfast nooks. However, I hope GS is right and its many detractors wrong. For example, Zerohedge immediately went on the attack, noting that Goldman had failed to take into account the FASB (accounting) changes (FAS 166-167) that are coming up which will force banks to bring hidden loan losses residing off-balance sheet up onto the deck where they can be seen. I didn't read, however, that Zerohedge and the witty Tyler Durden were really taking into account that Goldman is allowing for nearly a trillion more in recognized losses, which might encompass that delta between where we are (visible) and where we're going, including slimy creatures that might crawl out from under the rocks when 166-67 are operational.

Such prognostications are a severe test, emotionally, for the Selbstschadenfreudeners such as Zero Hedge, Karl Denninger and others. Their stock in trade is financial doom: dollar implosion, sovereign debt default, chaos and murder in the streets. Partly their hidden agenda is the cultivation of their cherished personal beliefs in gold, as in the mineral Au; they reassure themselves that fiat currency regimes always crash, and that gold, which they're flogging and which the Comment Cowboys (h/t: Dan) on their threads buy a lot of, is the only real depository of value. Naturally, this raises questions: can you actually eat the stuff, or burn it to keep warm? (The answers to the same two questions about greenbacks are, (1) Yes, but pointlessly; and (2) Sure, for a little while.) Nouriel Roubini, usually a favorite of the Selbst-essers because he's known as Dr. Doom and successfully predicted the financial crisis about two years in advance [so did I, but did I sell my house? No-o-o-o-o-o-o-o-o-o-o-o.], recently went on their scheisse list because he refused to recommend gold as a hedge.

It is increasingly apparent that Ben Bernanke's basic operating premise is buying time, or as those in the SS say, extend-and-pretend. The Fed itself has essentially become the secondary market for all mortgage-backed securities (MBS) guaranteed by FannieMae and FreddieMac. Its balance sheet, in the course of about a year, went from less than $800 billion to its present $2.2 trillion, and most of the increase is the purchase, by the Fed, of these distressed securities. Bernanke's strategy is to hold these mortgages long enough to give the housing market a chance to reflate, thus putting these instruments back in the money. In the meantime, and as a complement to this approach, the Fed has been hyperactive in the secondary market for Treasuries as a means of holding interest rates down to (a) add a knock-on depressant effect on mortgage rates and (b) keep the vast deficits being run up by the government under control.

The SSers contend that Bernanke's real aim is "to destroy the middle class by destroying the dollar." This is fatuous, of course, as a statement of volition or intention. No, he isn't. Actually, what he's done (whether it works as well as he hopes or not) is borderline brilliant. Semi-smart, as Burt Reynolds might have said in "Semi-Tough." It's the one way out of this bad loan fiasco that doesn't result in massive bank failure (in the 2,000 + range) and further ruination of the housing market.

Zerohedge, The Market Ticker, et alia, need Bernanke to be wrong because that is their stock-in-trade: the day by day prediction of the Apocalypse. Thus, the attribution to Gentle Ben of these nefarious, Dr. Moriarty-like predilections. We're a society now so drenched in class warfare, and so traumatized by the Depression-like miasma hanging over the country, that it's hard to be reasonable anymore. But in fact, if Bernanke succeeds, as difficult as that might be, it redounds to the benefit of every strata of society.

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