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Masters of the Truth


Power loves to stay in power.

As I watch Congress question the CEOs of various money-center banks, I get the feeling they're playing footsy under the table. There's a little outrage from some -- albeit misplaced -- but what we're watching is the lions questioning the wolves. We're witnessing masterful subterfuge.

Power loves to stay in power. Money enables that; the more money, the more power. We long ago gave government the power to create money from nothing, but the government needs a fractional banking system to turn the key and lever that money up. Over time any attempt by the markets to correct imbalances created by this was met by more money, and more schemes to keep that money flowing.

I'm not conspiratorial, because I don't give them that much credit. It started in earnest in 1987, when Alan Greenspan met the crash with massive amounts of stimulus. He lowered rates (put the printing press into action) and lowered margin requirements at banks (turned the key).

He met every subsequent recession, which is an attempt by the marketplace to correct imbalances (like too much debt), with more stimulus and more debt. Ben Bernanke has taken on that mantle.

Congress did their part in several ways: The 2 most important were excess government spending and the continued backing of the GSEs. Very simply, banks would probably have not been able to keep lending without Fannie Mae (FNM) and Freddie Mac (FRE) guaranteeing and buying up debt from banks, which encouraged them into moral hazard: lending to people that, in even a modest downturn, could never pay back their loans. I'm not at all absolving banks from responsibility. If they'd been run by risk managers and not salesmen, the leverage would never have gone this far.

Government-enabled banks, even implicitly encouraged them to lend irresponsibly (Mr. Frank not so implicitly).

I only blame to make it clear. The government isn't the solution since they're the enabler. They'll enable until the currency is literally destroyed. A former Chinese bureaucrat already stated that the US needs to guarantee its debt. That's code for you now work for us.

That will happen unless we just stop and let the markets correct the problem. There's too much debt, and creating more debt is no longer an option. This is sad, but economics is like physics: You can't expect to jump out of a window and go up.

There are those that want to get into stocks because the current market capitalization is low relative to GDP. But don't underestimate how much GDP can drop. The reason stocks might rise a lot is a hyper-inflation (destruction of currency), but that's not bullish, and is fraught with peril.

Risk is high.
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