”Sometimes, and only rarely, markets discover that what they had believed to be a miracle cure was, in fact, a placebo. The crisis is so serious that there is little or no response to the easing of policy; in these circumstances panic is followed by capitulation. Seven months into the credit crunch, we have now arrived at the fork in the road.

As ever, the assumption is that the world economy will take the road to rapid recovery. History suggests that this is a reasonable assumption, since few slowdowns end in recession, and recessions that turn into slumps are once in a lifetime occurrences. It is a sign of how serious the current situation is that those who argue that there is a risk of a 1930s-style slump are no longer treated as stark, staring mad. Indeed, the argument in the US is not over whether there is going to be a recession, but how long and deep the recession will be.”  Read column (2/25 Guardian):  http://www.guardian.co.uk/business/2008/feb/25/economics  

Hunger line during 1930s       ”There’s no way like the American way.  World’s highest standard of living”

Reality in South Africa, as told to Jim Kunstler, perhaps offers a glimpse of a future U.S. scenario and the surprising complacency of the general public in the midst of it:

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Today IMF released its latest report on global financial markets (well worth a read - see link).  Financial markets have worsened as evidenced by pressure on bank balance sheets, and problems will broaden as credit deterioration widens.  IMF recommends transnational stabilization efforts.  Direct link to report:

    imf01292008.pdf

HUD is offering at least 120 houses in Cleveland for sale at $1 each.  I don’t think fiscal stimulus will fix this, but it does help to answer the question of how low can home prices really go.

http://blog.cleveland.com/metro/2008/01/the_foreclosure_crisis_what_it.html

Interested in a glimpse of things to come?  Cleveland’s housing bust started early - read here Mother Jones’ “Prime Suspect” — a compelling description of life in Cleveland’s Slavic Village area was already like in 2006.  This may be what neighborhoods all over the U.S. will be like as housing prices decline:  http://www.motherjones.com/news/feature/2006/09/prime_suspect.html

Way back when he was “just” a Fed Governor, in 2002, Bernanke gave an amazing speech detailing what he would do to prevent or cure deflation.  I read him as saying that he doesn’t think the U.S. will go into deflation because our financial system (banks and household balance sheets) are so healthy (forget that now!).  The other reason he gives is that the Federal Reserve can itself prevent or cure deflation.  Bernanke gives a list of the steps he would take — and it looks as if he’s already several steps down on the list with the TAF auctions.  But never fear, as a bottom line Bernanke thinks we should all be comforted by the fact that if all else fails, he’s got a printing press (oops, a copy machine) to print lots of dollar bills and reinflate the economy. 

It’s true, and worth another close read: 

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/#f8

This is the nightmare scenario:  pension funds invested in CDOs and/or other derivatives are swamped by the massive unwinding process underway.   Where then does the money come from to pay retirees? 

This great unwinding has potential consequences not only for U.S. pensioners, but certainly the U.K. and possibly beyond.  Here is a terrific and concise explanation of the relationship between CDO downgrades and U.K. pension funds by Ken Griffin and Jeff Moskowitz: (more…)

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Update:  What About the Munis?  → good article:   http://wallstreetexaminer.com/blogs/winter/?p=1348

Is the current credit crisis and resulting loss of asset valuation having an impact on pensions and healthcare benefits?

Yes - see two preliminary reports below.

pew.pdf     ← The Pew Center on the States released a report in December 2007 highlighting the perilous footing of  the states’ funding of their long-term retiree benefits (both pension and nonpension).  Click through to full report.  

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comptroller.pdf 

The Honorable David M. Walker, Comptroller General of the United States, has been loud and clear in warning Congress, the administration, academia, and the public that the US economic situation requires urgent and radical measures.  “The status quo is not an option.”   (more…)

http://www.huffingtonpost.com/linda-keenan/bernankes-message-to-ame_b_82160.html

Mainstream media reporting via Steven Pearlstein in “Caught in Downdraft and Starting to Panic” (Washington Post) -  we’ve moved through the various stages of economic grief and moved into panic mode?  Hattip Reggie Middleton

• Willful blindness. (“Bubble, what bubble?”)
• Denial. (“House prices never fall. It’s only those speculators in Las Vegas and the Gulf Coast.”)
• Rationalization. (“Maybe subprime did get out of hand, but it’s really a small part of the market.”)
• Fantasy. (“Things should be pretty much back to normal by the second half of ‘08.”)
• Anger. (“If it weren’t for those yahoos up in structured finance…”)
• Capitulation. (“We might as well take these write-downs now and get it over with.”)
• Depression. (“This is going to get worse before it gets better.”)

and then….PANIC..culminating in unraveling of CDO situation.

My comment:  Never fear:  According to CNBC, this is all simply a self-fulfilling prophesy, not reality-based — and all we need is another Wall Street “innovation” like a new kind of CDO! 

Watching this testimony live, without benefit of transcript, Bernanke incredibly is saying there will NOT be a recession!  Forecasting slower growth picking up in late 2008.  Some decent questions from Congresspeople re: why would a rebate actually improve economy?  Shift from pro-savings economy to pro-debt, etc.

Comments? 

Why is Bernanke talking so optimistically (yet looking terrible)?

What will Congress do on fiscal side?

Will Bernanke lower rates on 1/30 and if so why?

Cheers!