Option Call - By James Howard Kunstler

The seas were a might choppy off Hedge Fund Island last week after all
when the Federal Reserve started tossing life preservers of ready cash
to the Big Fund Boyz bobbing and thrashing in the swells. Now, about
that "money" -which is really a bunch of extended lines of credit
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at the Fed's artificially-low official interest rate - what actually
happens to it?

The simple answer is: it disappears into the same ocean of financial woe
that the Boyz are drowning in.

The mere $38 billion that the Fed tossed out Friday afternoon, as the
Dow was tanking down a few hundred clicks, will be used by banks and
investment houses to cover losses in the synthetic securities they
themselves created, and have been trading, during this psychotic final
blow off of cheap energy capitalism. In essence, the Fed is buying
worthless paper. The trouble is, there is so much more worthless paper
out there that all the computers at the Federal Reserve could never
generate enough pixelated cash to cover them in the life of this
universe or several like it.

An additional problem: there is a practically inexhaustible supply of
"dead" mortgages and corporate loans washing up on the pebbled beaches
of Hedge Fund
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Island. No matter how bad the mortgage-and-credit-derived racket looks
now, it is certain to only get worse as the dead mortgages and loans
fester in the sun and the tropical foliage on Hedge Fund Island starts
to wilt from the toxic fumes of all that decaying matter. This summer is
only the beginning of a cycle of adjustable mortgage interest rate
re-sets. The numbers go way up in the fall and are scheduled to continue
rising well into the winter of 2008. How long do you think the Big Fund
Boys can tread water?

What you're seeing now is a simple matter of financial sector players
trying desperately to evade the consequences of their own actions. The
fake wealth generated by the synthetic securities they created is now
being recognized for what it is: a swindle. The hallucination is over.
The collective denial that supported that hallucination is dissolving.
The losses are become manifest. Even worse, the losses are growing
exponentially because the synthetic securities were used as collateral
to leverage far greater multiples of "positions," bets, and plays in a
casino-like global electronic trading arena.

This is what happens when investment gets de-coupled from real
productive
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activity and becomes an end in itself. It has been terrifically enhanced
by computer programming. But no amount of digital legerdemain --with the
"sugar-on-top" of accounting trickery -- can now hide the fact that
there is no "value" there. What's more, the losses are going to have to
show up somewhere. If you try to suppress them in one area, they'll pop
up in another. If the Federal Reserve tries to cover the losses racked
up by the Big Fund Boyz by giving "cash" away, they'll only succeed in
destroying the value of the cash itself, i.e. the US dollar.

Now, few reasonable people can really imagine that the Fed would blunder
into hyper-inflation. But the situation is so desperate that the Fed's
mission to do what's necessary to rescue drowning banks may over-ride
the prudent deployment of cash life preservers. As that occurs, foreign
holders of the US Dollar may detect the impending loss of value of the
dollar, and there would be a stampede to the redemption windows to get
rid
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of them. That would leave the Federal Reserve (and by extension the
American Nation) in a position of stark and implacable insolvency.

In any case, the US now stands on the brink of an unprecedented
liquidation of assets. The mortgaged title holders to over-priced
McHouses will have to liquidate their positions as "home-owners." The
over-leveraged holders of credit-card
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debt will have to sell their Ford Explorers, bass boats, sports
memorabilia (good luck with that shit) and flat-screen TVs. The retired
dentists will have to dump their stocks and bonds. The corporations will
have to sell off subsidiary operations, buildings, and corporate jets.
Some colleges will just shutter. The Big Fund Boys will have nothing of
value left in their portfolios to sell. They will just drown. Their
heirs and assigns will then have to dispose of the house in Sagaponak,
the 10-room apartment on Central Park West, and the family fleet of
SUVs. The Big Boyz will take quite a few institutions with them -- the
club-like banks and investment "houses" that employed them and went
along with their mendacious shenanigans.

The upshot is that we are going to find ourselves a poorer nation. There
will be far fewer people with money. There will be far fewer buyers of
repossessed McHouses, bass boats, etc. Even the houses in Sagaponak and
the Manhattan apartments will go cheap. The effort to pretend our way
out of a financial crisis will fail. Sooner or later the recognition
will set in that all that "boo-yah" was dreamed up. The United States
swindled itself. We became a nation of such greed-crazed clowns that we
committed financial ѕυιcιdє in an orgy of self-deception.

Anyway, that's how I see it this morning. The equity markets open in a
half hour or so. The mood out there must be dark. The hands that hold
the Starbucks cups must be trembling at the trading desks. I hasten to
add that I think the turmoil and destruction can go on for quite a
while. This slow-motion train wreck is not going to play out in just a
week or two. And in case anyone forgets, in the background looms another
storm at least as potent as the one now blowing through the financial
markets: the gathering permanent global energy crisis (a.k.a. "peak
oil"). Just because some Big Fund Boyz liquidated their positions on the
oil futures market last week to try to cover their losses elsewhere does
not mean that price of oil is going to keep going down. It may rest on
the ledge in the $60 -$70 range for a spell, but you can be sure it will
take flight again. And if it does as the dollar is crashing for other
reasons, this will become a pretty disorderly nation in a very dangerous
and unforgiving world.

Ah, it is not really that bad, or so dust7 says.  The truth is that it is as bad as it can be, and we will see it play out before our eyes over the next few months.

The only real truth I can discern is that you and ChantCD will be clamoring we are heading towards disaster no matter what happens.  If there was only a market for that, I'd invest comfortably in that likelihood.  

Ah, it is not really that bad, or so dust7 says.

It's not as bad as it's been, historically. There is the scare rhetoric of the bears, who periodically are right because periodically the market coincidentally becomes a bear market.

Credit is actually still available to the wealthy, who tend to be capitalists, in a capitalist economy. The middle class are being thinned. That seems to suit various political and economic factions, as well. 'Free trade', 'open borders', and the like contribute to this recession of the middle class back into poverty. But even poverty, in the US, is a roof over one's head, a car, a tv, and plenty to eat.

What you have appears to be some needed correction, something likely to be forgotten by year's end, but which will still not hold off a cyclical recession.

What happens at that point, might be interesting, or frightening. People will make the difference, not bankers. If they have to entirely revalue the dollar, people can still make the difference between chaos, and a somewhat just order (though I wouldn't necessarily argue that what we have, today, in the US, is a just law by Catholic standards).

As you know, I've suggested here, at least, that laws might be changed to allow longer mortgage periods. I've suggested that ARMs ought to be considered premium rates, available only to the wealthiest borrowers. The poor would quality, or would not, for fixed rates, which would remain unchanged, for those on fixed budgets unlikely to be modified, or so the assumptions would be. There are other 'instruments', such as the confiscatory loans made to the elderly that allowed them to cash out on their equity, only to surrender the estate to the bankers upon their death. But the borrowing 'crisis' we see not only was predictable, but does seem to be that of consumer debt involving the use of ARMs that exploded on their borrowers who were taught is was easy to increase their income. If such had been so easy for so many, they wouldn't have looked, necessarily, at an ARM to begin with, which has been marketed to the poor - something I think ought to be reversed in future.