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Five Things You Need to Know: Federal Enablers Inject Liquidity; "Deal Junkie" Demands 100 Basis Point Rate Cut; The French Connection; Like All Enablers, They "Didn't Know"; The Seven Signs of Credit Addiction


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Federal Enablers Inject Liquidity

The Federal Enablers responded to market concerns over the growing liquidity crisis by injecting $35 billion into financial markets in two separate enabling operations this morning.

  • Too bad. Because what markets really need is not a Fed enabling, but a Fed intervention.
  • We read a couple of headlines this morning - "Fed Intervenes in Markets" and "Federal Reserve Intervenes, Inject Liquidity" - and just shook our heads.
  • That's not an intervention!
  • An intervention occurs when family and friends get together to force someone to seek professional help for an addiction.
  • The opposite of an intervention is an enabling.
  • So the Fed further enabled financial markets this morning in two separate operations; the first was the addition of $19 billion in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash, and the second was an addition of $16 billion.
  • Just as fueling an addict's addiction must, necessarily, end in destruction, so too must the Fed's enabling of credit addiction.
  • As we've seen, credit expansion - like, say, heroin abuse - can forestall for longer than may seem plausible the inevitable destruction, but it simply cannot continue unfettered forever.
  • Indeed, that is the Fed's gambit.
  • Austrian economist Ludwig von Mises summed it up many years ago:

    "Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness... Accidental, institutional, and psychological circumstances generally turn the outbreak of the crisis into a panic... The final outcome of the credit expansion is general impoverishment... Some people may have increased their wealth... but the immense majority must foot the bill for the malinvestments and the overconsumption of the boom episode."
  • And as if on cue...

2. "Deal Junkie" Demands 100 Basis Point Rate Cut

With the Dow Jones Industrial Average struggling to hold onto its 5% year-to-date gain, real estate mogul Donald Trump took the unprecedented step of appearing on television (via phone) and demanding Federal Reserve Chairman Ben Bernanke cut interest rates by 100 basis points. One hundred basis points!

  • Trump, a self-described "deal junkie," also told homeowners who may be in foreclosure, "don't leave," and "fight like hell" with banks.
  • "The banks don't want your homes, so renegotiate, fight like hell," Trump said via phone on CNBC.
  • What do you get when you enable credit addiction?
  • Deal junkies.
  • Which leads us to today's Number 3...

3. The French Connection

It's not just the Federal Enablers pushing to the "deal junkies." The European Central Bank warned today that a slowdown in the European leveraged buyout market could pose a "substantial risk" to European financial stability and hit the banking sector "in several
phases," according to Bloomberg.

  • Interesting. Now why would a slowdown... the ECB didn't warn of a collapse, but merely a slowdown... in leveraged buyouts pose "substantial risk" to European financing stability?
  • Because a credit-induced "boom" can only last as long as credit expansion accelerates.
  • What's key is the acceleration.
  • A credit-induced boom ends when either 1) the credit expansion slows, or 2) the appetite for credit - due to any number of factors, diminishes.
  • As Bloomberg noted, "Until last month, demand from investors was so strong that
    buyout firms were able to borrow with fewer restrictions, using so-called covenant lite securities and pay-in-kind bonds that allow companies to pay off debt by issuing new debt."
  • This is how a credit-induced boom ends, when it is no longer to expand credit to facilitate further expansion.
  • And this leads us to today's Number 4... why was the subprime issue so underestimated by so many?

4. Like All Enablers, They "Didn't Know"

It's not that those who insist subprime is (was) "well contained" are unintelligent, or (we hope) intent on deceiving us, it's simply that they disagree with what the subprime issues really are, which is a warning of malinvestments and overconsumption.

  • That they disagree with this is unsurprising.
  • They are, after all, inflationists.
  • As recently as Tuesday the FOMC warned of the continuing risks of inflation.
  • The European Central Bank, in its monthly report noted in Number 3 actually said its monetary policy is still "on the accommodative side."
  • Yes, that's the same report that was released a day after the ECB injected a record amount of liquidity into the banking system.
  • A day after the Bank of Japan, which maintains it has successfully defeated its bout with deflation, pumped 1 trillion yen into the money market in coordination with the U.S. and European central banks.
  • So what's next? The same thing that happens whenever any junkie reaches the end of the ability to expand his or her addiction.
  • A deflationary cutback.
  • What does it mean for a junkie to enter a period of "deflationary cutback"?
  • Well, consider for a moment how an addiction begins. Ordinary, normal people in the early stages of addiction are typically able to service both their habit and their outside obligations - family, work, etc.
  • In the final stages of addiction, all those obligations - to family, to work, to friends - are sacrificed in order to service the addition.
  • If the addiction is to credit/debt, then everything must be sacrificed to service that debt. The ability to expand the addiction has concluded.
  • We know what happens next: enabling (and the negative consequences) or (real) intervention (kick the habit).
  • Neither are pretty, which is what makes the choice between the two so hard.
  • Until the end, even among friends and family, the path of least resistance is to enable the addict.

5. The Seven Signs of Credit Addiction

Are we addicted to credit? Let's take this quiz and find out.

  1. Have we ever substituted one form of credit for another, thinking that one particular type of credit was the problem? You mean, like, buying corporate junk while avoiding mortgage-backed-securities? Cause corporate junk is "ok."
  2. Have we ever manipulated or lied to a lender to obtain credit? Hmm, like overstating our income on a loan application, or if loaning money, overlooking reasonable lending standards?
  3. Have we ever used one form of credit to overcome the negative effects of another type of credit? Does the Fed injecting $60 billion the past two days count?
  4. Do we avoid people or places that do not approve of our use of credit? Are there such places?
  5. Have we ever used credit without knowing what it was or what it would do to us? Haha, isn't that what credit default swaps are? Hahaha. Uh. Ha. Ahem. Yes.
  6. Do we put the purchase of loans ahead of our financial responsibilities? No, we need the loans to meet our financial responsibilities.
  7. Does the thought of running out of credit terrify us? Apparently.
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