Bail out No. 3 coming

The markets this last week have been acting very much as they did in both the run up to Congress approving the TARP (bail out No. 1) and the agreement of the European bail-out fund (bail out No.2).

In both cases the markets were not just falling, but in between outright nose dives, were whipping up and down. The markets have been doing exactly the same this week. Financial reporters keep referring to ‘market uncertainty’. They then explain how the markets are uncertain about whether we are in a double dip or just a hiccup in the recovery. And so each piece of news knocks market sentiment worldly one way then the other. I think this is completely wrong .
I think the market, the market makers at least, are are not uncertain at all, about our economic situation. It’s the politics they are getting seriously worried about.
The Big Banks are, I think, quite sure we are already in, or on the cusp of, a double dip. What they are worried about, is exactly what worried them, before the first bail-outs – would the political class do what they were told to do?
I don’t think there is much uncertainty in our economic situation. It seems to me, economic events to have unfolded almost exactly as many, myself included, said they would. We were not gifted savants. I do not believe for a second the bankers and financial class did not see what we saw. The difference was what they wanted done about it. I wanted them to suffer the consequences of the debts. They made sure they did not.
For them not to suffer any losses, their banks had to be bailed out and their losses taken on by the public.
When the financial class was not sure their policy would be followed the markets fell because the big market players made sure they did. Not in some conspiratorial way, but simply because if they were not sure of being saved, they would not lend to anyone especially other banks, would not invest, and told everyone loudly, everyday, that the end was nigh. And so quite naturally no one else bought anything either and so stock markets collapsed.
Once the politicians capitulated and remembered who they served, and the bankers were sure they would get the service they had paid for – then markets stabilized. It was not just the money that stabilized sentiment it was knowing the political class was going to be obedient.
We are at a similar juncture today. The bankers are once again worried that the political class may not listen carefully enough. If they do not, then the banks will once again become very shrill indeed. In the US it will be from now until the U.S. mid terms.
What the Banks want is for the taps of free money to open. There is concern now over whether it should be borrowing or printing and concern also over making sure all the politicians are kept in the same line. The German political class in particular have angered the Americans. All this austerity was not in the bankers plans.
The US wants to pressure both Japan and Europe to follow America’s lead more closely. Europe is going to be the most resistant. Japan has had its flirt with saying no, and is getting its whipping as we speak.
Japan will now almost certainly QE soon. Japan’s own financial class and banks want it to happen and are already applying pressure to the government. The sudden emergence of a leadership challenge in the government is not a coincidence. The President Mr Kan is seen as not willing enough to QE when he’s told to. The challenger Mr Ozawa is more the financial class’s man.
In the US pressure is also being applied where it counts. Yesterday it was calls from the Leader of the House Republicans for Obama’s economic team to be fired. Today the CEO of Loewe’s Corp said lack of faith in Obama’s economic policies was hurting the recovery.
We are seeing a re-run of the run up to Bail Out 1 and 2. The market’s are uncertain because they are not as sure as they want to be, that the political class remembers who they work for. Until the politicians re-assure them and kiss the ring, the markets will be jittery.
At Jackson Hole I expect the Germans and the Americans to be very unhappy with each other but to paper over the cracks. I expect a strained form of words about the CB’s standing ready and together to take concerted action to steady markets and respond to any sudden crisis.
I expect there to be tension over who opens the taps first. No one wants to get picked off by the Bond Market speculators. The U.S. will argue safety in numbers. I suspect Japan will go first. Then the US. Then we will see how long the German’s can hold out.
There will also be tensions over how much should be borrowed versus how much QE’d. It could also be that the taps will not be opened for a direct bail-out but held ‘ready to open’ as a back-stop for guaranteeing whole classes of Assets currently not backed by the government. Such as Commercial Real Estate or car loans or Helocs. In this case it would be more a promise of bail-out rather than an actual immendiate bail out. But don’t be fooled, it would still put the public finances firmly on the hook for whatever vast amount the bankers say they need.
Last number I heard was a trillion.
But all these details, the bankers will take in stride once the uncertainty of who the Politicians are loyal to is settled once again.
As for us. We will watch as we are betrayed and sold deeper into debt.

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