Thursday, January 28, 2010

Warning: Capt Bernanke's sinking U.S.S. Titanic Commentary: Cheap money's again blowing new 'icebergs'

ARROYO GRANDE, Calif. (MarketWatch) -- Let's call it "Titanic II," a classic remake. The Fed's the new Titanic. Bernanke, the egomaniacal captain.

His character reminds me of Bogart playing the paranoid, obsessive Captain Queeg in "The Caine Mutiny." Remember that threatened Navy captain who navigates into a fog, panics, nearly rams a battleship? That's "Capt. Ben" in "Titanic II." And given his handling of our banking system and the global economy, he'll sink the Titanic. Capt. Ben's a tragic figure.

Worse, Obama's giving ol' Capt. Ben a second chance to pilot into new icebergs dead ahead. The Economist calls them "asset bubbles." Problem? Capt. Ben can't see through his ideological Greenspan/Reaganomics goggles, clouded by his obsessive allegiance to Wall Street's "fat cat bankers."

Nothing new: He failed to see warnings of "icebergs" back in 2007. Yes, and he'll miss any new icebergs, sink the global economy and plunge the world into the eerie depths of the Great Depression 2.

Ideally the Senate will deny Capt. Ben's reconfirmation, Obama's "biggest domestic policy blunder." And last week we even heard Obama hint to possible changes when he announced the new "Volcker Rule," a de facto revival of Glass-Steagall separating commercial banking from the fat-cat, high-risk gambling with derivatives trading and investment banking.

Great PR move, but Wall Street lawyers, lobbyists and traders love their mega-bonuses. So they'll get around any new rules fast. Besides, fat cats really don't need any new Supreme Court cases (like last week's unrestricted political donations) to buy votes in the Senate. Glass-Steagall or not, the fat cats will just double up on their tools for lying, cheating, stealing and manipulating Main Street's 95 million investors.

So assuming the Senate fails to torpedo Capt. Ben, we're stuck with this weird "Captain Queeg." And it's only a matter of time before Capt. Ben runs the U.S.S. Titanic into a battleship, a new iceberg or another black swan.

Capt. Ben's "Titanic" was no unpredictable black swan

This "Titanic" sequel was exactly what Jeremy Grantham, founder of the $100 billion GMO money managers, had in mind a couple months ago in his letter to investors: "Lessons Not Learned: On Redesigning Our Current Financial System." Listen to his thriller plot:

"Imagine the company representatives on the Titanic II design committee repeatedly pointing out that the Titanic I tragedy was a black swan event: utterly unpredictable and completely, emphatically, not caused by any failures of the ship's construction, of the company's policy, or of the captain's competence. 'No one could have seen this coming' would have been their constant refrain.'"

Sound familiar? You bet. Capt. Ben's "Titanic II design committee" would include his ol' buddies, Alan Greenspan, Henry Paulson, Lawrence Summers and Tim Geithner. "Their response would have been to spend their time pushing for more and improved lifeboats," says Grantham. However, "by working to mitigate the pain of the next catastrophe, we allow ourselves to downplay the real causes of the disaster and thereby invite another one."

Grantham's not hopeful, but his dialogue rivals the best of James Cameron's "Avatar" and Paul Volcker's Glass-Steagall speeches: "After a crisis ... begin with an open and frank admission of failure. The Titanic, for example, was just too big and therefore too complicated for the affordable technology of its day. Given White Star Line's unwillingness to spend, she was underdesigned" so "the passengers bore the risk of unnecessary speed and overconfidence in 'too big to sink,' while the captain stood to be rewarded for breaking the speed record."

And thanks to Capt. Ben, that describes why fat-cat bankers like Lloyd Blankfein made $410 million the past three years during the meltdown, why his Goldman Sachs staff got average $500,000 bonuses last year, and why one of six Americans are unemployed. Capt. Ben is a lousy, dangerous pilot.

So, absent the Senate rejection or Capt. Ben's withdrawal, we see four huge plot points dead ahead for the "Titanic II," four icebergs still out there from the last fiasco he created to protect the fat-cat bankers using the discredited Greenspan "cheap money" ideology that piled on $23.7 trillion debt.

See the four mega-icebergs flashing: "Crash! Dead ahead!"

First iceberg: Global assets bubble warning

From The Economist: "Bubble Warning: Why Assets are Overvalued ... Markets are too dependent on unsustainable government stimulus. Something's got to give ... The effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009. That's largely thanks to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets ... cheap money is driving up asset prices."

Sounds as ominous as The Economist's warning back in June 2005, two years before the last meltdown: "The worldwide rise in house prices is the biggest bubble in history. ... Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000." Values increased 75% worldwide in five short years. "Never before have real house prices risen so fast, for so long, in so many countries ... This is the biggest bubble in history." And Capt. Ben is just using Greenspan's discredited strategy.

Worse yet, at a recent conference in Shanghai, St. Louis Fed President James Bullard said America's interest rates will likely remain low for "quite some time." Yes, he loves blowing and busting bubbles. Unfortunately, with that outdated ideological mindset protecting the Fed's fat-cat members, we'll see a rapid buildup of asset bubbles across the globe, just as The Economist is warning. We can even predict that Capt. Ben will again ignore warning signs and push us blindly ahead into his fog.

Second iceberg: Gulf oil real estate bubble collapse

In "Burj Dubai: A Temple to Hubris," a Los Angeles Times critic wrote a brilliant critique of the total bankruptcy of the newest tallest building in the world, sitting in a desert metropolis: "Burj Dubai's real symbolic importance: It is mostly empty, and is likely to stay that way for the foreseeable future. Though most of its 900 apartments have been sold, nearly all were bought three years ago -- near the top of the market -- and primarily as investments, not as places to live. ... And there's virtually no demand in Dubai at the moment for office space, of which the Burj Dubai has 37 floors."

The Dubai tower "is a powerful, iconic presence in ways ... the latest, and biggest, in this string of monuments to ... easy credit, during the boom years and the sudden paralysis of the financial markets in the fall of 2008 have created an unprecedented supply of unwanted or underoccupied real estate around the world," dead monuments to "the broader notion ... that growth can operate as its own economic engine, feeding endlessly and ravenously on itself ... the tombstone -- for some ruined ideas."

Third iceberg: China's overheated real estate bubble

Worse, read "Mania on the Mainland: Think the U.S. real estate bubble was bad? China's could be worse" in Bloomberg/BusinessWeek. China's "real estate rush is fueling fears of a bubble that could burst later in 2010, devastating homeowners, banks, developers, stock markets and local governments." Then China's "economic growth will stop, warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences' Finance Research Center." Premier Jiabao even told the Xinhua news agency that "property prices have risen too quickly," pledging "a crackdown on speculators."

Fourth iceberg: Commercial real estate, a ticking time bomb

But worst of all, here at home we read in yet another Bloomberg/BusinessWeek article, "Why This Real Estate Bust Is Different," that "unrealistic assumptions, layers of investors, sky-high prices and possible fraud will make it hard to clean up the mess in commercial real estate." Yes, there's another homegrown mess far bigger than America's residential real estate. Imagine, a $1.7 trillion ticking time bomb sitting on our bankers' books, equal to "roughly 25% of the assets of the average institution." A very big iceberg.

What happened? "Overbuilding isn't the culprit in this bust. An oversupply of money is what pushed commercial real estate over the edge. It turns out the same excesses that drove the housing market's crazy rise and fall were present in commercial real estate, too -- but they have largely gone unnoticed until now.

Bankers, in their haste to make more and bigger loans, blindly accepted borrowers' wildest growth assumptions and readily overlooked other shortcomings on loan applications" to "easily sell their dubious loans to investors in the form of commercial mortgage-backed securities"

Bottom line: Avoid sinking the U.S.S. Titanic ... a Capt. Ben mutiny!

Capt. Ben can't be trusted. What'll Capt. Ben do if he's still around piloting the good ship U.S.S. Titanic? He'll hit more icebergs, or battleships, or black swans. Can't help himself, it's in his ideological DNA. Then he'll blame others, while secretly bailing out his Wall Street banker buddies, piling on trillions more debt, doing it with his usual arrogance, no transparency and no accountability.

Yes folks, if Capt. Ben's still at the helm, if Obama and the Senate keep him, you can bet our unaudited Fed will secretly ease the banks pain (again) shifting trillions more to taxpayers, the "suckers-of-last-resort." Yes, it's time for the "Bernanke Mutiny" in the Senate!

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