Bernanke doesn't know what to do...but the plunges ahead anyway

Straight from the "frequently wrong but never in doubt" school of thinking, our esteemed chairman continues on his endeavor to make us just like Japan by avoiding repeating the mistakes of the Japanese.

As the prepares to deploy his latest weapon "Operation Twist", some are already pointing out that it will not help the unemployed (Bernanke’s Next Easing May Not Aid Jobless Americans ). 

So, why is he doing this? Because he wants you to buy stocks, that's why! The fact is that, for all their technical econometric babble about interest rates, the Fed manages monetary policy by targeting not M1, M2, or any monetary aggregate as one would think by reading their explanations.  Instead, since Alan Greenspan tasted success in 1987, the Fed has been targeting the stock market.

As fate may have it.  The creators of the model Bernanke is following  have also done the same, to no avail.

Here is how the Japanese did it, we are right on track:

1) Ignore a real estate bubble.  No matter the size, everyone is happy.
2) After the bubble burst, save the banks at any cost.  Pretend is the only way.  The bankers are happy.
3) In order to let the banks recover, drive rates to zero on account that it will spur economic growth (a few bankers and financial agents are happy)
4) Give up all pretense of a capitalist system and authorize the central bank to buy anything.  Forget Bonds, Bank of Japan Buys Stocks

In case you think people who own stocks in Japan are happy with (4) above, I suggest you take a look at the following chart:

Suprise?

Bottom line: The IMF has "discovered" that the Greeks will not meet the 2011 deficit targets.  As the article says:  "Greece blames a deeper-than-expected recession..."

You have to wonder where this people studied macroeconomics.  Greece had a (known) deficit of 15% in 2009 which they aggressively cut to 10.5% in 2010  by implementing a tough austerity program during a deep recession.  Apparently, however, nobody in the Greek government or the troika considered the possibility that the economy would slow down, thus, pushing the targets further away.  In addition, many of the so-called reforms, like selling government property for 50 billion euro seem right out of imaginary-land.

Although nobody knows the future, the most likely scenario is that the IMF team returns in 10 days and grants Greece a "waiver."

If you haven't read our back to the future link I suggest you do now.  It will save you time.

Yes Mr, Krugman, it has worked...

On Iceland exiting IMF program,


"Iceland is no longer under an IMF program... And it has done with very heterodox policies - debt repudiation, capital controls, and currency depreciation. It was as close as you can get to the polar opposite of the gold standard. And it has worked."

http://krugman.blogs.nytimes.com/2011/09/01/iceland-exits/


Well Mr. Krugman, America seems to be following the same path thanks to the advocates of unlimited stimulus (you among them). Currency depreciation? Done. Debt repudiation and capital controls are next? Now we know you believe that this can work, still I hope you are not right and those are not the next steps to follow... Regarding your choice of Iceland as an example of what to do, please note that Iceland is a tiny country (population 320.000, GDP 12 billion $). They broke the rules and they got away with it. Try to do the same in Spain or Italy, just try it.  Things are rarely that simple.

Deflation or Inflation: That's the question

Hoisington: Quarterly Review and Outlook

Black Hole Continues to Implode

Irish Deficit Widens On Bank Recapitalization (Bloomberg)

Remember Ireland? A model country with low debt and high productivity that decided they had to save their banks.  The bank creditors received 100% of the money they gambled by lending to the banks who gambled on Ireland's property boom.  Private gains vs. socialized losses.

Let's Help Our Greek Brothers

So, why are Merkel and Sarcozy working so hard to help the Greeks? After all, the Greeks lied to everyone, they can never pay that debt back, and they (gasp) do not even seem to appreciate the help.

It is to keep the euro-dream alive, correct?

Apparently the same French and German bankers who stuffed their employers' balance sheets with Greek bonds (with the help of very cheap money from the ECB) are now making amends in the midst of a religious pan-European awakening

European Banks Are Hard-Selling Greek Bailout Plan (NYTimes)

Yes! they are hard-selling the deal because it is the best for the people of Greece...

The Truth About European Banks (FT and others)

As in any farce eventually the comedians have to show their true colors. IMF and eurozone clash over estimates The IMF, believing they are supposed to tell the truth, have discovered that the European banks lie about the true value of their holdings.  Why not? Their own regulators don't seem to care that they hold their Greek bonds marked at 80% of face value when they trade at close to 50%.

Furthermore, as we can see from (Spanish finance minister) Elena Salgado, the politicians give the regulators, the auditors, and other overseers good legal cover against future discontent ("Look, the government said it was ok to price Spanish mortgages at par even though we KNEW the chances of recovering 100% were close to zero).

In essence, everything is fair in love, war, and finances.  So much for the illusion of a well regulated banking system.