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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
March 15, 2010
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After the bursting of the technology Bubble, the Federal Reserve was content to live with mortgage excesses as it worked toward its objective of systemic reflation.  The post-Bubble focus was to make sure the bad guys were punished (Enron, Worldcom, Arthur Anderson, etc.) and that accounting rules were significantly tightened up.  The causes behind the system’s proclivity toward dangerous financial excess – the root of the problem – were so easily disregarded.  The Greenspan/Bernanke Fed’s overriding objectives were to ensure abundant cheap liquidity and foment reflationary forces.  I am unsympathetic to Federal Reserve President Jeffrey Lacker’s assertion this week that the Fed is “being made a scapegoat.”

Today, the Fed’s overriding objective – understood in the markets more clearly than ever - remains ensuring abundantly cheap liquidity.  This period’s bad guys – the bankers – are under the spotlight, as the focus for this round of reform turns to ensuring that the banks are not the instigators of future crises.  And I expect the “Volcker rule” to be about as successful as the Sarbanes-Oxley Act when it comes to protecting the system from financial excess and devastating Bubbles. 

March 4 – Bloomberg (Rebecca Christie and Phil Mattingly): “The Obama administration’s legislative draft of the so-called Volcker Rule incorporated exemptions that may ease the impact on financial markets should it be enacted.  President Barack Obama… sent Congress the five-page proposal to ban proprietary trading and block mergers that give banks more than a 10% market share… It also would bar banks from owning or investing in hedge funds and private equity firms. The rule, which is aimed at reducing the risk of another financial crisis, exempts mergers that exceed the market-share limit in cases when a firm acquires a failing bank with regulators’ approval. Also left out are trading in Treasury and agency securities, including debt issued by Ginnie Mae, Fannie Mae and Freddie Mac.”

Throughout the post-tech Bubble reflationary period, mortgage Credit expansion was viewed as integral to the solution.  Mortgage finance was basically off limits from a regulatory standpoint, with this dynamic providing major impetus for historic Credit and speculative excess.  Rather than recognizing an unfolding mortgage finance Bubble as a systemic risk, policymakers were content to feed the excess and look the other way.  Of course, a speculative marketplace figured this all out and took full advantage.  The government’s multifaceted (Fed, GSEs, Treasury, etc.) support of mortgage finance fanned speculative excess and directly fueled the Bubble.

These days, the Administration’s watered-down “Volcker rule” – which will likely be diluted to water-like reform legislation in Congress – excludes the government debt markets from proprietary trading restrictions.  Government finance is today’s unfolding Bubble and, not surprisingly, this Bubble is off limits for regulatory reform.  Government deficits are integral to the Bubble, and there will be no serious effort to rein them in.  The Fed’s balance sheet is a serious Bubble issue, but it also remains untouchable.  Treasury, GSEs, and Federal Reserve Credit are viewed as the solution, and a historic Bubble is emboldened and builds momentum.

The markets’ perception of “too big to fail” has for years been an integral facet of Bubble dynamics.  And despite all the talk of trying to rid the marketplace of this notion, the markets remain more persuaded than ever:  the unfolding global government finance Bubble is much too gigantic for policymakers to risk letting it come anywhere close to failing.  Massive U.S. deficits and near-zero interest rates ensure a steady flow of finance (newly created as well as an ongoing exodus out of low-yielding instruments) to debt markets around the world.  Confidence runs high that ultra-loose U.S. financial conditions will continue to underpin Credit expansions globally.  Politicians may talk tough, and they do put on a good show.  Meanwhile, markets function with reticent aplomb, knowing they’ve got policymakers right where they want them.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is