Denninger is not pleased with Obama's Economic Strategy thusfar...

Get the feeling that all the bluster over the economy, all the "remedies" and "bailouts" are missing the point and failing to address the core issues? So does Mr. Denninger...

Obama: The Market Is Issuing You A WARNING

Tuesday, February 10. 2009

Posted by Karl Denninger at 06:56

in The Market Ticker:

[. . .]

Treasury is sitting on several trillion in backstops and financing of loans to cover "assets" that are in fact worth zero. It winds up eating the entire face value, while the Hedge Funds have made off with all of the coupon money in the meantime!

The risk here is that Treasury is backed into a corner due to ramping yields and perhaps even inability to roll over this debt at all and we find ourselves forced into immediate cash accounting as a nation. This in turn causes the instantaneous cessation of Social Security and Medicare payments, as that is the only bucket big enough to cover the shortfall.

Do you really want to go down that road Mr. President, because that is precisely what's at the end of it, and it may be only a year or two out!

If you think nobody beyond your vaunted administration has figured it out YOU ARE WRONG.

If you think Americans will pay taxes to an institution that intends to knowingly allow Hedge Funds to make hundreds of billions of dollars in profit while sticking the taxpayer with upwards of $2 trillion in losses and destroying all entitlements in a few years' time I suggest you have a mental examination and get your lithium dose adjusted.

Your approval rating and in fact American's tolerance of this blatant fraud, theft and chicanery is about to go straight down the toilet.

If you have an interest in having a successful Presidency (not to mention any chance of a second term or even a stable, sound America to be President of) you must immediately do all of the following:

• Revoke ALL of the so-called "23A Exemptions." Bernanke issued them, you need to direct him to revoke them. Safety and soundness of the banking system must come before any one firm or group of firms. There are literally hundreds of banks that are perfectly sound. There are also a bunch of big campaign contributing banks that are bankrupt and have been for the last eighteen months. Americans know this - the secret is out and its time to quit LYING.
• Send in the examiners. Yeah, I know, you're talking about "stress tests". Uh huh. Let's have those examinations now and forevermore in the future be public information. If a bank wants to operate under our laws and have the privilege of fractional reserve banking, they can open their books and examinations at all times to the public. Period.
• No more conduits, no more SIVs, no more games. If your "assets" are worth 20 cents on the dollar today that is their price. If that makes you insolvent then you are - period. We have an FDIC and we have the authority to "cram down" failed institutions for a reason. Use it.
• Send in the cops. The actions of major institutions up and down the line since this crisis began in mid 2007 and in the years leading up to it is at best grossly negligent and at worst felonious. We the people are done with being the patsies of a handful of thieves and frauds enabled by the 535 crooks in our Capitol. STOP IT NOW and start jailing the crooks or be judged as one of the felons. Your choice.

We are approaching yet another market implosion just like the one in September and October.

While it may come today or tomorrow, I wouldn't take that bet. In fact I expect that people will "rejoice" that you didn't wipe every common stockholder's equity stake in firms like Citibank, Bank America and Goldman Sachs - even though you should. Because I expected you to do the wrong thing, I actually bought some Citibank stock a short while ago. Were you to do the right thing my position would be worthless. It should be worthless. I'll bet its not - at least not immediately (and that I'll make a profit as a consequence of your idiocy.)

When and if this dislocation comes, however, it will destroy what is left of the American Banking System, it will expose that Bernanke has over one trillion dollars of garbage on The Fed's Balance Sheet, and that in turn will destroy the international market for United States Treasury Debt.

In the best case we wind up like Japan and have a bunch of zombies sucking up capital and doing nothing of value for our economy. In the worst case we get much higher yields in the bond market and the near-immediate bankruptcy of hundreds of midsize and larger firms, including virtually all financial firms in the S&P 500 and DOW, along with all major multinationals that have a captive financing function.

The Government cannot backstop it all. If you try the government fails outright. The market is bigger than you, it is bigger than The Fed, it is bigger than Treasury. You are subservient to The Market, not the other way around. Go ask Bill Clinton about The Bond Market when he tried to ramrod his Hillarycare plan through and what the reaction was. That's 1/100th of what you're about to experience.

If Bernanke tries to "cap" yields into such a dislocation (he has threatened to) he will cause everyone who owns Treasury debt to tender it to him with the consequence that he will be forced to print five trillion dollars in "new money". This will result in an eighty percent devaluation of the dollar almost instantaneously; gasoline will go to $10/gallon, Milk to $15/gallon, a loaf of bread to $10 and a hamburger at McDonalds will likewise be $10. Due to global wage arbitrage wages will not increase; this will as a consequence immediately render 50% or more of Americans homeless, hungry and jobless. What do you think happens next Mr. President?

The disease in our financial system is lying, too much leverage, outright fraud and hidden bankruptcy - all of it perpetrated through and with the explicit permission of government agencies including Congress, The Executive and The Fed. We have lived beyond our means through fraud for nearly 20 years and this is no longer possible. As a direct consequence trust has been destroyed and private capital has fled our credit markets and will not return so long as these diseases remain in the system.

Hiding the facts cannot cure the disease; the excessive debt must be defaulted; you cannot fix it by transferring where the leverage goes, such as to Treasury or The Fed. The liars and frauds must be exposed, charged and locked up, not protected and bailed out. Standards of living will contract and people must learn to live within their ability to earn, including the government, irrespective of politicians that think they can promise to borrow ever-increasing sums forever.

President Obama, this next crash in the markets, if it occurs, is your sole responsibility.

It will come as a consequence of your policies where you intend to try to shift the BANKRUPT institutions' losses to The Taxpayer - a debt that America cannot finance and which foreign governments and investors WILL NOT cover.

I'm well-aware of the Washington DC policy called "kick the can" but the can is now full of cement and if you think you'll get through your term before this all comes home to roost you are, to be polite, nuts.

You must stop the stupidity and you must stop it NOW.

The game of obfuscation and literally violating investors both foreign and domestic as a consequence of fraud countenanced by our government is over.

Both Americans and foreigners know about the lying and fraud; it is pointless to continue to dissemble and obfuscate as you are merely making a fool of yourself.

If you do not understand this and are being led by your "advisers", many of whom are the very people who advocated the changes in policy over the last 20 years that brought us here, you need new advisers, and you need them today.

By tomorrow it may not matter, and it will certainly be your fault.