market-ticket.denninger.net

You have to love this.  Here is the story as originally posted on Bloomberg:

“Sept. 25 (Bloomberg) — Dallas Federal Reserve Bank President Richard Fisher said the proposed $700 billion rescue of financial institutions backed by Fed Chairman Ben S. Bernanke would plunge the U.S. government deeper into a fiscal abyss.

The plan by Treasury Secretary Henry Paulson to buy troubled assets from financial institutions would put “one more straw on the back of the frightfully encumbered camel that is the federal government ledger,” Fisher said today in the text of a speech in New York. “We are deeply submerged in a vast fiscal chasm.”

Now here is how it reads after “Update 1″

“Sept. 25 (Bloomberg) — Dallas Federal Reserve Bank President Richard Fisher said the U.S. Treasury’s proposed $700 billion rescue of financial institutions would be “a critical first step” toward calming markets even while adding to the U.S. government’s fiscal burden.

The plan by Treasury Secretary Henry Paulson to buy troubled assets from financial institutions “is an incremental addition to the federal government ledger,” Fisher said today in a speech in New York. Existing federal obligations in Medicare and Social Security mean “we are deeply submerged in a vast fiscal chasm,” he said. “

Hmmm.

The actual speech is here; this is what it says:

“Even before tackling the task of cementing capital adequacy, we need to bear in mind that the TARP places one more straw on the back of the frightfully encumbered camel that is the federal government ledger.”

The words “a critical first step” do not appear in the speech.  Anywhere.  The Bloomberg reporter made them up and removed his actual words about a camel’s back.

The rest of Mr. Fisher’s speech should be required reading.

He has, in essence, endorsed my view of this crisis and how we get out of it.  He said:

“But I digress. The problem that has been ailing capital markets and, by extension, the economy has not been the fed funds rate. It has been and remains risk aversion and uncertainty about counterparty risk and capital adequacy.”

Exactly. 

Again, for the peanut gallery:

1. Level III assets must be fully disclosed along with all formula and models for their marks, quarterly, in the 10Q/10K.
2. Derivatives must all be moved to a regulated exchange with a central counterparty to guarantee margin supervision.  No exceptions.
3. Leverage must be reduced to no more than 12:1 across the system.  No exceptions.

Encode these three points into law or regulation and what Mr. Fisher has identified (correctly) as the root of the problem disappears.

Oh, and let’s not forget:

“Since the beginning of the year, I have been worried about the efficacy of reducing the fed funds rate given the problems of liquidity and capital constraints afflicting the financial system. As I see it, the seizures and convulsions we have experienced in the debt and equity markets have been the consequences of a sustained orgy of excess and reckless behavior, not a too-tight monetary policy.”

A sustained orgy of excess and reckless behavior that neither The Fed nor Congress has been willing to address. 

Now we are out of time while both Ben Bernanke and Henry Paulson have attempted to exploit a crisis of their own making in order to ram-rod a haphazard coronation of a new King under the guise of “fixing the problem” when in fact following their prescription - or anything like it - will make the situation markedly worse.

Never mind the intentional drain of the slosh the last several days which, as I predicted, exposed a dead body - Washington Mutual, which was “assisted” into a new life under JP Morgan.  How convenient!  But some Senators - apparently including Mr. Shelby, have figured it out as he in particular made a comment to that effect this afternoon. 

Thank God for the Internet and a few intrepid bloggers.

To our Senators and Reps - do the right thing.

That “right thing” is not to pass a $700 billion bailout or anything like it, irrespective of what Paulson tells you.  Secretary Paulson was one of the architects of this mess when he was at Goldman Sachs, creating the very debt instruments that are now blowing up and threatening our economic security.

The right thing is to address the root cause of the problem as identified in the three points above, then for any firm that cannot make it on their own, force it through involuntary receivership and execute the conversion of debt (bondholder stakes) to equity.

For most of these firms this will leave them standing but with the common and preferred stock wiped out.  The bondholders become the new equity holders at whatever haircut comes from satisfying creditors.  For the few firms that cannot survive this (the bondholder equity is an inadequate cushion against liabilities) they are liquidated and leave the scene.

Yes, we are going to have a nasty recession.  This is unavoidable.  We’ve been in recession since the 4th Quarter of 2007, whether the politicians want to admit it or not. 

But if we act prudently we will get through this with less pain and less debt for ourselves, our children and grandchildren than if we take the alternative and do something foolhardy that fails to address the cause of this mess.

Down the alternative, foolhardy road lies the potential for a deflationary credit collapse and a lack of funds to protect the government and citizens, as we will have expended them “liquefying” the Wall Street crooks who caused this in the first place. They will literally take the $700 billion and run from the United States with it before we know what happened, saddling us with both the nasty recession and an inability to spend what we need on America, within America, and on Americans, to cushion the blow.