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  1. “Sheila Bair’s Bank Shot”

    This NYT article well worth reading. It goes a long way toward explaining why the mortgage crisis continues. While the government sits on tens of billions of dollars intended to assist homeowners in mortgage trouble under the failed HAMP program, trillions have been shoveled out the door to help “too big to fail” financial institutions who still haven’t given up their seat at the casino, or their obscene bonuses. The fact that the mortgage crisis is a long way from resolved at the homeowner level has a huge impact on the general economy through the damage it does to consumer confidence (driving down aggregate demand).

    Money quote from the article: “Even so, there are many people who remain convinced that the government will never have the nerve to let an important institution actually fail. Indeed, the big banks currently have a much lower cost of capital than their smaller brethren precisely because the bond market doesn’t believe they will ever be allowed to fail.”

    This quote is the piece I really don’t understand. Why do well-run, responsible local and regional banks, which by virtue of government practice face risks that the market assumes the big banks do not, stand by and say nothing while they continue to be gobbled up by behemouths with an unfair competitive advantage?

    The government made a decision to attempt to resolve the financial crisis exclusively at the level of large financial institutions, leaving a huge unresolved mess at the consumer level. Similarly, the Obama Administration has shifted the focus to government debt and deficit reduction while unemployment remains very high. No one seems to care that middle-class consumers are twisting in the wind as long as the stock and bond holders are happy. Deficit hawks have been predicting for three years that debt-averse major bond holders will abandon the market, drastically driving up interest rates. But rates remain historically very low. But action must be taken!!!!! This phenomenon is known as “placating the invisible bond vigilantes.” Deficit hawks also posit that lowering the debt will create market certainty and confidence that will inspire businesses to expand. This phenomenon is known as “summoning the confidence fairies.” No one talks about who will buy all the products produced by this expanded economic activity, or why such expansion on the production side would not be swallowed up by idle capacity rather than driving capital spending. Consumer spending is still 70 % of the economy. Consumers are terrified. They are not spending. And when the middle class gets a cold, the poor get tuberculosis (This is not just a metaphor. The CDC has set up a special task force to deal with alarmingly high rates of TB in homeless populations:

    The weak economy is driving hundreds of thousands of families toward homelessness. On Wall Street profits and bonuses have soared. On mainstreet the mortgage crisis continues, exacerbated by a disastrous job market. Adding insult to injury the government (both parties) seems intent on cutting social programs which are designed to support low income people in trouble and which also prop up aggregate demand. And now they want to throw reductions in Social Security, which has absolutely nothing to do with the current deficit, into the mix just to show those “invisible bond vigilantes” how serious they really are.

    I have to recommend homelessness as a growth industry in general, and I am issuing an unqualified buy recommendation on all cat food related industries.

    If any of this makes any sense at all to you, please contact your elected representatives and tell them to get their focus back on job creation. That means more economic stimulus through expanded fiscal policy spending and resolving the mortgage crisis at the consumer lever. The “inside the beltway” debt and deficit reduction fetish will not drive jobs, will not help the middle-class, and will crush poor and homeless children.

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