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Best of the Exchange: Consumption Crisis, Ambac's Woes, the Fed Vs. Inflation


Minyans make sense of ongoing credit problems.

With the launch of The Exchange, Minyans now have a forum in which to express their viewpoints, comment on articles and meet other like-minded financial souls. Minyanville publishes "A Best of the Exchange" each Friday to highlight the many insightful posts and discussions going on behind the scenes.

Become part of The Exchange and let your voice be heard!

(Editor's Note: Some of the following posts may have been modified slightly from their original form.)

Minyan Peter discussed the ramifications of the ongoing consumption crisis as more and more classes and groups are affected by fallout from the credit crunch.

Minyan Cynthia: The Federal Reserve might be able to fix subprime/credit crisis, but they can't fix the consumption "addiction" that the American Dream prescribes. Just look at the rebate check. Is this supposed to be good for America?

Minyan Jack: More importantly, will the Fed be able to fix the greed of the banker, hedge fund and the mortgage industry who sold loans to people who could not afford them and help create this problem? When the government policy is to let people who can't afford a house loan to get one with no money down and walk away with cash in there hand, there must be a problem with the system.

Minyan Terry (in response to a shift in topic to taxes): You can theorize all you want about higher taxes or lower taxes, inflation, deflation but the bottom line is complacency. Western civilization has had it too easy and we have all become complacent. "Easy" was created by cheap debt. Complacency was created not being challenged on the applications. Complacency was created by yearly bonus checks instead of stock options dated several years out.

Prof. Jeffery focused on Ambac (ABK) and its issues, saying that the risk goes far beyond its own business to the general markets in the form of returning fear about counterparty risk.

Minyan Bill:
Ambac is clearly a doomed company with an irreparably broken business model. New business is now non-existent as municipalities realize that Ambac's financial guaranty is essentially 'worthless'. It is also interesting that S&P re-iterated its AAA rating of the firm even after the horrific earnings reported this week.

Minyan Dean: Why do Ambac and MBIA (MBI) retain their AAA credit ratings? Isn't this a rather obvious case of everyone closing their eyes and letting an obvious lie pass because the ripple effect of admitting the truth is too painful?

Prof. Shedlock gave the opinion that it will be impossible for the Fed to stop the credit contraction going on currently, especially through the use of inflation.

Minyan Jim:
This article fails to reconize money supply created by leverage. Many banks and financial institutions are levered upwards of 30 times and as deflation hits asset values the leverage multiples will go up. It's hard to imagine where the leverage ratios would be if banks were force to value at market price versus their personal best guess book value. I agree with Prof. Shedlock's summary conclusion. We are in for some hard times.

Minyan Joe: The Fed can monetize debt. And as long as the Fed doesn't fear a major dollar devaluation, what's to stop them from monetizing debt? Will we even know it's happening until it's being done on a massive scale?

Minyan Royal: Great article, Prof. Shedlock. So what happens as the dollar devalues and dollars chase other currencies. How can that be factored into the equation? The same amount of dollars exist, yet they are devalued against other currencies that come from countries that provide commodities and manufactured goods, thus causing what the layman thinks of inflation.
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