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Fed Feigns Control


Bernanke pretending banks are solvent.

There is a ton of pretending going on. The rating agencies are pretending the monolines are worthy of an AAA rating. This is nothing new. I have talked about this many times, most recently in California calls muni insurance waste of taxpayer money.

And in a bury your head in the sand move, MBIA (MBI) is still pretending it has a rating to protect. Amazingly, late last week MBIA asked Fitch to stop rating its debt.

However, the above pretending takes second fiddle to the biggest pretending of all. I am talking about the Fed pretending banks are well-capitalized even as the Fed resorts to desperation tactics in the misappropriately named Term Auction Facility, or TAF, soon to become the Permanent Auction Facility, or PAF.

I discussed this idea in the Fed's New Role as Pawnbroker over the weekend. Here is the conclusion but inquiring minds will want to check out some interesting charts on LIBOR and a "wonk" discussion by Krugman.

Zombification of Banks

Bernanke clearly has some new innovations, but the name of the game itself has not changed much: Banks are so capital impaired they cannot lend. They refuse to write down assets to reasonable levels because to do so would bankrupt them.

Thus with each passing day, the more asset values plunge, the more zombified our banking system becomes. Zombification of banks is exactly what happened in Japan. Bernanke could cut interest rates to zero tomorrow and it would not change matters much if at all. Academia is meeting a real world test, and Bernanke has met his match.

The Name of the Game is Pretending

  • The rating agencies pretend the monolines deserve an AAA rating.
  • The Bush administration pretends we are not in recession.
  • The Fed pretends we are not in recession.
  • The Fed pretends the TAF is temporary.
  • The Fed pretends it knows what the collateral it is accepting is worth.
  • The Fed pretends it is in control.
It's Time For A Song

With a tip of the hat to the Platters and a big salute to Bernanke I present The Great Pretender.

"Oh yes I'm the great pretender
Just laughing and gay like a clown
I seem to be what I'm not; you see
I'm wearing my heart like a crown
Pretending that you're still around."

Substitute "liquidity's" for "you're" in that last line and you have a perfect match.

I hereby proclaim Bernanke to be the "Great Pretender". Does anyone object?

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