Dear Jim,

In your commentary earlier today you made the observations, “The economy is not improving, but is in reality bouncing along the lows. The only improvement is in Management of Perspective Economics [“MOPE”].”

Let’s see if we can find an example of that in today’s headlines.  Ah, no need to look further than the Associated Press.

In various sections of the article below, we are told:

(1) There is money “left over” from the Troubled Asset Relief Program (“TARP”).

(2) This is a “windfall.”

(3) It “reflects faster repayments by big banks and less spending on some of the rescue programs as the financial sector recovered from its freefall more quickly than expected.

(4) As a result, “the administration now estimates that the TARP will cost about $200 billion less than the $341 billion the White House estimated in August.”

(5) “Many of the nation’s largest Wall Street institutions have roared back to health with the government’s helping hand…”

(6) The unused TARP “windfall” is now available to be used to create jobs.

(7) If not, the “windfall” can be used to reduce this fiscal year’s deficit, currently estimated by the administration to be $1.5 trillion, to an estimated $1.3 trillion.

A captive press dutifully acts as a channel for MOPE by reporting the administration’s statements without questioning their logic or attempting to provide relevant context. Otherwise, the AP article might have brought considerations such as the following to the readers’ attention:

a. In the context of a government that is running deficits, the failure to spend money previously allocated does not create a “windfall” (extra money available for expenditure). That would only be true if the government were on budget or running a surplus.

b. TARP funds do not become a budget item until they are spent or repaid. Any “unexpected” funds repaid prior to October 1, 2009, reduced last year’s budget deficit (to a mere $1.42 trillion). If the administration has concluded that less TARP funds will be expended or more will be repaid, that is already included in its current fiscal year budget deficit forecast.  It will not “reduce” it.

c. Wall Street financial institutions are not healthier than they were at the beginning of the year.  All of the so-called improvement in their balance sheets results from their unconscionable write-up of worth-less assets made possible by the FASB’s suspension of mark-to-market accounting requirements.

d. TARP never became the instrument of choice to prop up Wall Street institutions because Congress foiled Treasury Secretary Paulson’s original plan, which was to use the TARP money to purchase toxic assets from banks at the banks’ “mark-to-fantasy” valuations. Once Congress required oversight of the fairness of TARP purchases this became impossible. Instead, the Federal Reserve stepped in to bring about this goal by permitting banks to put up RMBS, CMBS, CDOs and other toxic securities as collateral and lending up to the banks’ full “mark-to-fantasy” valuations against them.

e. If the Wall Street banks were really healthy and ready to be removed from life support, they would be taking these toxic securities back on their balance sheets and paying back the Fed loans. This is undoubtedly why the Fed will do anything to keep secret the kinds of toxic waste it accepted as collateral and how much it has loaned against the toxic waste. For example, we have no idea whether the Fed has required banks to substitute better quality toxic waste (an oxymoron, I know) when existing collateral is downgraded. The inviting conclusion is no; otherwise, the Fed’s balance sheet should have kept decreasing as the quality of the underlying assets kept deteriorating.

f. The most likely reason the Wall Street banks paid back TARP is because of the laws passed after the fact regulating compensation of executives at banks that have TARP loans. The only reason these banks had the ability to pay back these loans is that the FASB capitulated to political pressure and suspended mark-to-market accounting for the worth-less securities on the banks’ balance sheets.

g. Assuming the reality of politics makes it impossible to not spend funds that have previously been allocated, the most reasonable use of the remaining TARP funds would be to replenish the FDIC. The administration makes no comment on the frightening string of bank failures this year, and neither the author of this article nor any other reporter asks how this affects the administration’s deficit projections. We know the administration never predicted the FDIC would go broke this year, or that it would already be burning through the “emergency” funds it is trying to raise by requiring banks to pre-pay three years’ worth of premiums. The appropriate question to ask is, how does the fact that the Treasury will soon be footing the bill for the FDIC’s inestimable future liabilities affect the administration’s estimate of coming budget deficits? A captive press makes sure not to ask.

h. Using the $200 billion in unspent TARP money to create jobs is new, additional fiscal stimulus, plain and simple. However, what makes people think that $200 billion will do anything substantial when the prior $787 billion stimulus package at best slowed the pace of catastrophic job losses?

One could go on, but the point is economic conditions continue to deteriorate and Washington’s response is to find ever more imaginative ways to distort the truth to make conditions sound better than they are. No doubt the authors of this MOPE are true believers who are convinced this strategy will help to improve conditions. However, the most sophisticated investors understand this kind of information is nonsense and will not alter their actions because of it.

That leaves the least sophisticated investors – the people who are depending on their elective representatives to guide them through these difficult times – to make terrible mistakes should they believe the message their elected officials are sending them. These are the ones who will sell hard assets and buy paper, thinking the coast is clear.

Respectfully yours,
CIGA Richard B.

Obama eyes repaid gov’t bank loans for jobs help
Obama eyes bailout funds to create jobs, help businesses get loans; speech on Tuesday
Tom Raum, Associated Press
Monday, December 7, 2009

WASHINGTON (AP) — Under heavy pressure to get Americans back to work, President Barack Obama on Monday suggested using a suddenly available pot of money left over from the government’s bank bailout to help create more jobs.

Obama, who will address the subject in a speech on Tuesday, has been struggling to trim the nation’s painfully high unemployment rate, now at 10 percent, just below a quarter-century high.

He said there may be "selective approaches" for tapping into the money that was to go for propping up seriously ailing financial institutions. The administration and its allies on Capitol Hill would have to get around a provision of the 2008 bailout legislation that requires money that is paid back by banks or left over to be used exclusively for reducing the federal deficit.

With a tough election year coming up, Obama and congressional Democrats want badly to do something about jobs. Turning a highly unpopular financial rescue program, known as the Troubled Asset Relief Program (TARP), into a potentially popular one with new jobs attached has strong political appeal — although Republican critics have depicted such an approach as a backdoor way of putting a second economic stimulus package into force.

The administration now estimates that the TARP will cost about $200 billion less than the $341 billion the White House estimated in August.

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Dear Jim,

Amid talk of the "fictitious MOPE recovery" is that gold is in a bubble… Do you think I am right in saying that credit is the bubble that has popped and that gold is only responding to this huge MESS!

How can there be a meaningful recovery if there is very little credit available to consumers?

18% APR! Something stinks here.

Best,
CIGA BT.

"In January this year, the average APR was 17.06 per cent, but this has now risen to 18.22 per cent. This means that for those only making the minimum payments on their credit cards with a balance of £2,500 it would take a further nine months to pay off the card with the new rate, with an additional £213.33 in interest."

More…