Well it is the weekend again. Our political class is performing its usual theatricals, with the show promised to reach its finale “before the Asian markets open.” I suppose we need to learn to endure this as it will recur time and again. How anyone can believe that a crisis that has been many years in the making can be resolved by a bailout put together in a few days of pre-election panic is beyond me. Thanks to naked capitalism, who points out a new IMF study on the management of banking crises:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

There’s a lot more good information in the paper, but at the end of the day the conclusion is that, as usual, government intervention generally does more harm than good. An upheaval is needed, the whole political system is rotted by corruption and self-interest. These interventions will ensure that the coming depression is deep enough that we will get our upheaval.

I see a lot of people saying, well, Ben Bernanke is a really smart guy and must be better-informed than me, so we should go with his plan. I don’t know what Ben’s IQ is, but it is irrelevant. The intellectual framework in which he works, Keynesian economics, is deeply wrong. It is not only an incomplete model, having no notion of a business cycle, but, more fundamentally, assumes a mechanical nature to society that does not exist. Accordingly, Ben’s policy actions will not yield the results that he expects.

Bloomberg:

I suspect that part of what we’re seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout,” said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory. 

Ron Paul’s email points out: F.A. Hayek won the Nobel (Myrdal - see previous comments) Prize in Economics for showing how central banks’ manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end… It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

An interesting reader comment at naked capitalism:

I understand that the explosion in the OIS spread is a reflection of the fear banks have for each others solvency. And it makes sense that it exploded right after the bankruptcy of LEH–it was not the bankruptcy per se, IMO, but the that $110b of senior LEH debt went from trading .95 to .12 in a matter of days that concentrated the market’s attention. If you include the less senior debt that is trading at essentially zero, LEH had $110b hole in its balance sheet. And just days before this, the market was being told and was believing that the $10b disposition of Neuberger was going to solve their funding problems.

Edit: Same thing at WaMu:

J.P. Morgan is going to inherit $176 billion of the home loans. “We think there are $30.7 billion of remaining losses,” Scharf says. “So as of close, we’re going to take on $176 billion of assets, we’re going to mark them down $29.9 billion, and then we have another almost $1 billion of marks to the other portfolios, so we’re recognizing $31 billion of marks related to the loan portfolios.” If it’s a severe recession, expect $42 billion or so of losses. And if it’s a really severe recession, expect $54 billion of losses, Scharf says.

Looks like the valuation set by these outfits on the assets are way too high. Anecdotally, I hear there a lots of buyers for these assets, many hedge funds specializing in distressed debt and others. The banks think they can get a better price from the taxpayer, so they are trying to intimidate the government into overpaying with taxpayer money. It is not that the paper is illiquid, it’s all about the price and believing that Hank, Ben and Congress can be suckered. Which is probably correct.

The usual strategies to start a rally were tried.

1. Jam the futures in the runoff (the 4 to 4:15 time after the cash market closes but futures and index options still trade).
2. Start a rumor of a Fed rate cut.
3. Pump up the tech stocks in the pre-market.

We’ll see if they work. In the meantime, GE warned of a poor quarter, unemployment claims jumped to nearly half a million and durable goods orders dropped by 4.5%. Rate cuts are really working, eh? In the meantime the bailout package is getting done, despite massive public opposition, to keep the “campaign contributions” flowing. If as much attention was paid to the real economy as is being paid to Wall Street and maintaining stock prices, we might make some progress.