What I am seeing and hearing on the news — the reappointment of Bernanke — is too hard for me to bear. I cannot believe that we, in the 21st century, can accept living in such a society. I am not blaming Bernanke (he doesn’t even know he doesn’t understand how things work or that the tools he uses are not empirical); it is the Senators appointing him who are totally irresponsible — as if we promoted every doctor who caused malpractice. The world has never, never been as fragile. Economics make homeopath and alternative healers look empirical and scientific.  (emphasis by Inthon)

No news, no press, no Davos, no suit-and-tie fraudsters, no fools. I need to withdraw as immediately as possible into the Platonic quiet of my library, work on my next book, find solace in science and philosophy, and mull the next step. I will also structure trades with my Universa friends to bet on the next mistake by Bernanke, Summers, and Geithner. I will only (briefly) emerge from my hiatus when the publishers force me to do so upon the publication of the paperback edition of The Black Swan.

Bye,
Nassim

Bingo.

I would go one step further; rather than blaming the Senators, blame the voters who elected these Senators (all of whom are ignorant of the dangers of fiat currencies, central planning and central banking).

The U.S. has never been this fragile.  An economy reliant on consumption, cheap energy/commodities, easy credit, entitlements, corporate welfare and social welfare is not durable or sustainable.

The years ahead will require deleveraging on a large scale and small scale.  Those grounded with an awareness of our current unsustainability will be more apt to mentally weather the future slowdown/economic pain.

Takeaway: Borrowing money to spend on entitlements, wars and handouts cannot go on forever.  Prepare yourself for the consequences of our current financial immaturity.

Here are some gems just from the last week alone:

1. Perot Systems FrontRunning – ZeroHedge.
2. Blatant reinflation of housing bubble – Denninger.
3. Corruption at HUD – Karl Denninger.

The SEC was not able to catch a ponzi scheme even after Harry Markopolos delivered it to them on a silver platter. 

Paulson and Bernanke have been incredibly incorrect on their assessment of the health of the US economy.

Choose your sources of information/facts/news very carefully.  Stick with those that are honest enough to state their opinions openly and publish their predictions.

Read what you disagree with before drawing your conclusions.

There is a difference between loyalty and blind loyalty.  Blind loyalty to anything (religion, government, ideology, spouse) is deadly.

Takeaway:  Perpetual reliance on someone else’s seal of approval will rot your brain.  Complacency kills.

Amazing how Mr. Hope and Change is opposed to auditing the Fed and fully supports those who fed us a massive spoonful of corporate welfare.

Takeaway:  Governments are power structures which are abused/manipulated.  Giving up power/money to the government to fix our economy, environment, schools or anything is a mistake.  Audit the Fed.

For those “economists” who’ve lately been singing his praises on CNBC, all I have to say is this…

It takes a special kind of system (government) to screw up this badly and still be resoundingly supported by its leader.

In his reappointment speech Obama also pledged support for the continued secrecy independence of the Federal Reserve.

How foolish of citizens to inquire where trillions of dollars are being spent… clearly we should trust the former bankers running the Federal Reserve that regulate the banking system. After all, they obviously know what they’re doing.

Instead of perpetuating the broken system financed by politically embedded financial organizations, Obama could have attempted any of the following:

• Raise awareness of the ghastly unaffordable pension schemes which will inevitably crumble
• Strictly enforce FASB mark to market accounting standards instead of allowing companies to use “judgment” to value their toxic assets
• Clamp down on High-Frequency Trading
• Require the FDIC to close and wind down insolvent banks before the government taxpayer-funded safety net has to be used
• Eliminate alphabet soup bailout programs which are forms of corporate welfare
• Demanded transparency for toxic assets which traveled from insolvent banks to taxpayers
• Slash parts of a budget (military, NASA, HUD, etc.) that are so bloated we must borrow billions from foreigners to stay afloat.

Would that severely correct the housing and stock markets? Yes, probably. Can we continue on our current path? No. Will we eventually face unbearable consequences for our decisions? Yes.

Ironically, neither Bernanke nor Obama nor either political party seem to care about the following message:

It is not the responsibility of the Federal Reserve–nor would it be appropriate–to protect lenders and investors from the consequences of their financial decisions. – Ben Bernanke

So, Obama reappointing the guy who didn’t see any of this coming, who bailed out the irresponsible, who continues to provide cover for banks in the hopes that things will return to normal still makes Obama the “man of the people”? Why aren’t those who voted for Obama clamoring that this Bush appointee is more of the same? Why do horrible decisions not matter when *their* party is in charge?

The reappointment of Bernanke does have a silver lining. All the people that bought into the hope proffered in eloquent speeches that government can provide jobs, clean energy, healthcare, education and other goodies will eventually learn a valuable lesson. The love affair Americans have with celebrity, good looks and good speeches and a lack of discourse/intellectual honesty will finally meet its match against a tidal wave of financial reality.

We are witnessing firsthand government selling Hope while funding Grift.

A generation will learn that our government system, like all systems which redistribute power and wealth, is one that is relentlessly gamed and manipulated for the benefit of those in charge.

Takeaway: Strip away the external validation that media/family/friends give to people and institutions and think for yourself.

The obfuscation via government intervention in all its forms (stupendous deficits, subsidies to failed corporations/business models, pork barrel handouts) is one of the factors seducing people into a false sense of complacency that our economy is just fine.  Borrowing money to keep your bills paid might seem ok, until you realize the borrowed money must be paid back with interest.

In less government-dependent/credit-fueled times, a major decision like raising a child was saved up for and anticipated.  Healthcare was funded out of pocket or with straightforward insurance.  Retirement required savings.  Nowadays, our government promises us all these goodies with borrowed money, which we will eventually pay for with interest (assuming the dollar doesn’t collapse first).

In less government-reliant times, there were fewer entitlements, senses of entitlement or bogus lawsuits which now haunt would be doctors and entrepreneurs. Why bother using your MIT degree to start a new business when you can day trade and make the “market more efficient”… hah!

Even the stock market used to be a reasonable measure of future economic value.  Now it is a game profitable game to be played/manipulated with enormous  leverage.  The S&P PE ratio is over 100 according to S&P and the graphical evidence is stunning.  Anyone with their 401(k) invested in stocks is asking to be smoked.  Meanwhile, insiders are bailing out.

I have no desire to go back to days of extreme hardship or give up technology, but it seems the more government obfuscation we allow to seep into our lives, bit by bit, the further we get from the truth and honest consequences of our lifestyles.  A single woman with three kids who is reliant on the state for breakfast and lunch year-round is in a worse off position since the true costs of her lifestyle are not borne by her, but rather, the taxpayer, who is under increasing pressure to stop paying them.  This “help” that the State provides via welfare, subsidized housing and other giveaways are not sustainable and ultimately dangerous for its beneficiary.

If you want to ruin a man, give him everything he wants.  Never let him fail, struggle, grow or mature into a man. – Inthon.com

As a result of government encroachment on all levels of life we are living in delusion about how much things *actually* cost and how they function.  There are now entire families dependent on the government for food assistance, educational assistance, medical assistance and job placement assistance.  This is neither normal nor sustainable.

As the credit-fueled economy inevitably slows down and inflation spike or benefits are cut, there will be a lot of disillusioned, angry and unprepared people.  There have been numerous chances to come clean from politicians, media and leaders.  Instead, all we hear are happy bromides about how things will be back to normal.  The only voices sounding the alarm that the debt-fueled economy is unsustainable are drowned out.

Takeaway:  I hate to be so closed-minded as “government bad” “free market good”, but it is obvious to anyone paying attention that the more we cede our power and money to the government, the less reliant, intelligent, capable, stable and robust we are as a society.

The most successful heists are the ones that occur every day that we are not even aware of.  The Federal Reserve, the quasi-governmental agency run by ex-bankers, that controls the money supply, interest rates and manages the economy is an agency very few are familiar with.

Given the trillions of taxpayer dollars on the hook and the delicate state our economy is in, H.R. 1207 aims to audit the ongoing Federal Reserve activities.

For years, the author of this bill, Ron Paul, has spoken up and drawn attention to the importance of sound money (money with tangible value, like gold and silver) and an economy which is not micromanaged by ex-bankers or manipulated in a secretive fashion. Paul has always been a political outsider and it is good to finally see his attempts to uncover the truth finally gain some momentum.

Since politicians, like all of us, are self-interested, we need to exert our influence and let them know we expect this bill to pass.

Since this bill would expose a great deal of financial/governmental/corporate connections, it would not surprise me if there is another financial panic/disaster and this bill is pushed aside to give even more power to the Fed and Executive Branch.

The above video speaks volumes about the shape of our economy and the level of dishonesty that is fraught in our financial and economic system.

Takeaway:  As a man, it is imperative to be ever-inquisitive, curious and non-complacent.  Reading and questioning your beliefs can help you generate an Accurate Model of Reality and prepare better for your future.  Think for yourself and stand up for what you believe in, even if you stand alone.

hat tip:  Zero Hedge

My initial reaction of skepticism was confirmed when many reputable bloggers (with their own capital on the line) expressed similar qualms over the weakness of government’s test.  The two short articles I have quoted are well worth the read.

A former FX trader, “Dude”, suggests that the test is direly lacking real-world stress. He cites much more dire scenarios, which the government has not tested:

1) China didn’t show up at a Treasury Auction and bond rates jumped 3-5%
2) China started dumping US$s on the open market and our exchange rate dropped 10%
3) The Fed, under such conditions, had to raise the Fed Funds rate by 5% quickly
4) An act of war or natural disaster struck one of the big coastal cities, putting it entirely out of commission thus pushing GDP down 6-10% quickly

Admittedly, the Treasury is more interested in a longer view than I was, although given the highly leveraged derivatives positions, they might be well served to also inquire about substantial, discontinuous price changes.

I’m troubled that they don’t test for what the past suggests is possible.

What if Unemployment goes to 30% as it did in the 30s?

What if Inflation falls to -5% or rises to 12%?

What if Fed Funds goes to 17% as it did in the early 80s?

What if we can’t roll-over our foreign held debt, as has happened to most nations which have run up as large an external debt position as ours?

Karl Denninger at Market Ticker mentions:

According to The Fed’s “More Adverse” scenario prime delinquencies will reach 3-4%. Note that the PRESENT serious delinquency rate on Fannie’s credit book for single family homes is at 3.15%.  Nowhere in the “mainstream media” (e.g. CNBC, etc) has this been mentioned but it is literally right in your face while reading the Fannie quarterly report.

If we accept the above as true, we must logically draw one of two conclusions.

1. The government knows that the stress the system could endure could be much worse.  They have decided to deliberately ignore or discount this data to assuage our fears and not report the full truth to us.  In other words, they are knowingly lying to us.  If this is in fact the case and if the government is trying to deceive us, Geithner, Bernanke and Obama should be held responsible for the misdeeds, regardless of political party.
2. The government is ignorant of these facts that other individuals have adroitly discovered.  This would mean they are not the most intelligent or conscientious leaders to be running our financial system.  They are not fit to be in charge and should be removed as soon as possible, regardless of political party.

Takeaway:  There is a simple theme we can learn from the stress test and it comes from Buddha.  He says:

“Believe nothing, no matter where you read it or who has said it, not even if I have said it, unless it agrees with your own reason and your own common sense.”

Ben Bernanke has made statements such as:

“It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”

(Freddie and Fannie) “…will make it through the storm”, “… in no danger of failing.”,”…adequately capitalized”

We’ve had a $700 billion bailout and numerous corporate-welfare financial programs (CPFF, TLGP, PPIP, CPFF, TARP, etc.).  Fannie and Freddie have been nationalized.

Karl Denninger has published his remarkably accurate predictions publicly (2008, 2009) and stood by them.  People might think you’re a fool for believing a blogger, rather than an MIT-educated expert.  Look at the evidence and track-record and decide for yourself. Just because someone is a popular leader (religious, business, political) or has a popular title doesn’t mean they are any more thoughtful, intelligent or honest than someone without popularity.

For more on the crisis, read here.

To read more about the “experts” buffonery, read here.

The inane setup of our monetary system has led our problems, where government sets short-term interest rates, manipulates its currency, lets overleveraged banks borrow at below market rates via the Discount Window, engages in open-market transactions, and creates money out of thin air to fight wars for no clear reason, et cetera.

That, coupled with government initiatives like “making homes affordable” leads to such ideas like buying subprime mortgages (via Fannie and Freddie) and then having the taxpayer bail out the government entity when it inevitably fails.

The mindset that we will ease out of this crisis in a few years is delusional.  People’s expectations have been warped into believing the last six-seven years of growth have been genuine.  They haven’t.  The credit boom started after the dot-com crash and only when prices of assets (housing, equities) return to those levels will we see the start of a healthy correction.  Yes, house prices need to come down.  This happens by foreclosures and assets moving from those that cannot carry the debt burden to those that can.  Letting people who can’t afford to stay in their home stay there isn’t a solution.  Having the taxpayer buy the mortgage via Freddie Mac, then “renegotiate” the mortgage and take a loss should aggravate anyone with a sense of responsibility.  The hero-worship that President Obama is going to miraculously create compounding wealth by printing up cash and paving roads thereby returning us to the good old days is simply not going to happen.

Only a repudiation of our current banking and monetary system will solve this problem in the long-run.  A free market in money and currency is needed as well as the total separation of Economy and State.

To read more about our economic woes, read here.