How Wall Street Gamed the TARP

Through a report from a special investigative body appointed by the US Congress, Sovereign Man’s Simon Black explains how Wall Street cronies in cahoots with the US Treasury gamed the $700 billion bailout Troubled Asset Relief Program (TARP)

In the wake of the bailout, Congress created a special position to oversee how the funds were spent. Like anything else in government, they used an unnecessarily long name followed by a catchy acronym–

Special Inspector General for the Troubled Asset Relief Program, or SIGTARP.

(The first SIGTARP was a former federal prosecutor who had previously indicted 50 leaders of the Revolutionary Armed Forces of Colombia… just the right man to keep a watchful eye on bankers.)

SIGTARP just released its quarterly report to Congress… and it’s scatching, suggesting that “the toxic corporate culture that led up to the crisis and TARP has not sufficiently changed.”

There are some real zingers in the 518 page report, including:

• “[F]raudulent bankers. . . sought TARP bailout dollars to have taxpayers fill in the holes on their fraud-riddled books.”

• “Some bankers cultivated a culture of self dealing, criminally concealing that the bank was funding their luxury lifestyles, believing they were entitled to the finest money could buy. . .”

• “They were trusted to exercise good judgment and make sound decisions. However, they abused that trust. Many times they abused that trust for their own personal benefit.”

Moreover, the report calls into question the Treasury Department’s administration of the bailout.

For example, many banks have been delinquent in making TARP payments, or payments to one of TARP’s sub-programs.

Yet while many banks are delinquent by 1-2 quarters, according to the report, roughly 3% of the banks who received funds under the Community Development Capital Initiative are more than –two years– behind in their payments.

Yet the Treasury Department has done nothing to enforce terms on behalf of taxpayers.

Most alarmingly, though, the report throws a giant red flag on the Treasury Department’s deceit.

In 2011, the report states, 137 banks took in billions of dollars of funding from the Treasury under the Small Business Lending Fund (SBLF). They then used those funds to repay their TARP loans.

In other words, they repaid taxpayer money with more taxpayer money.

But the Treasury Department still reported that TARP was being repaid, suggesting in a May 2013 press release: “Taxpayers have already earned a significant profit from TARP’s bank programs.”

Total BS, says the report.

SIGTARP writes that “Treasury should not. . . call these funds “repayments” or “recoveries”. Treasury owes taxpayers fundamental, clear, and accurate transparency and reporting on monies actually repaid.”

Something tells me this woman isn’t going to have a particularly long career in government.

And given the Obama’s administration’s track record against whistleblowers, SIGTARP had better start booking her flight to Moscow. Or better yet, marry a Brazilian.

Soaring stock markets, induced by the Fed's easy money policies, has been part of such implicit bailout-transfers in favor of Wall Street and other cronies

Warren Buffett’s Political Entrepreneurship Investing Paradigm

Warren Buffett has been unabashed crony for the Obama regime, to the extent that has even spited on the principles embraced by his Dad, Howard.

From an erstwhile venerable “value” investor, today Mr. Buffett’s investing formula has pronouncedly shifted into rent seeking.

Peter Schweizer of Reason reckoned in his March exposé on Warren Buffett that this folksy fellow “needed the TARP bailout more than most.”

Let’s run through the numbers. Berkshire Hathaway firms in total received $95 billion in TARP money. Berkshire, you’ll recall, held stock in Wells Fargo, Bank of America, Goldman Sachs and American Express. Not only did these companies receive TARP funds… they also dipped into the FDIC’s treasury to back their debt. Total bailout: $130 billion. TARP-enabled companies accounted for 30% of the Oracle’s publicly disclosed stock portfolio.

He’s definitely one of the top beneficiaries of the big bank bailout. And to sharpen the sting, he even got a better deal to help ailing Goldman Sachs than our own government. Buffett got a 10% preferred dividend while the Feds got all of 5%. He cleaned up with $500 million a year in dividends. Without the bailout, you can bet many of his stock holdings would have gone near-zero instead.

That’s from Addison Wiggins of the Daily Reckoning.

As I previously wrote, I think Mr. Buffett has been desperate about preserving his popularity, social privileges and political clout which seems to have mainly been latched on the sustenance of his track record, where the scale of his portfolio may have met the law of diminishing returns using his traditional "value" methods.

So instead of admitting reality, egoism has motivated him to radically shift strategies and to sacrifice principles for convenience.

Why The US SEC-Goldman Sachs Hoopla Is Likely A Charade

``In discussing the situation as it developed under the expansionist pressure on trade created by years of cheap interest rates policy, one must be fully aware of the fact that the termination of this policy will make visible the havoc it has spread. The incorrigible inflationists will cry out against alleged deflation and will advertise again their patent medicine, inflation, rebaptising it re-deflation. What generates the evils is the expansionist policy. Its termination only makes the evils visible. This termination must at any rate come sooner or later, and the later it comes, the more severe are the damages which the artificial boom has caused. As things are now, after a long period of artificially low interest rates, the question is not how to avoid the hardships of the process of recovery altogether, but how to reduce them to a minimum. If one does not terminate the expansionist policy in time by a return to balanced budgets, by abstaining from government borrowing from the commercial banks and by letting the market determine the height of interest rates, one chooses the German way of 1923.-Ludwig von Mises, The Trade Cycle and Credit Expansion: The Economic Consequences of Cheap Money

Goldman Sachs, one of the top ‘too big to fail’ pillars of Wall Street have recently been sued by the US Security and Exchange Commission for allegedly intermediating mortgage securities that allowed several investors to ‘short-sale’ the housing market and for the buyers of the said securities a market that supposedly ``was secretly intended to fail”[1].

In my view, this is a bizarre case from a fait accompli standpoint.

From the news reports, unless there are signs of blatant manipulation or misrepresentations or procedural deviations or deliberate indiscretions, Goldman Sachs only acted as “market maker” or a bridge for parties that intended to bet on the opposite fence of the housing industry. This means that if there was a willing buyer and a willing seller, then obviously one of the two parties was bound to be wrong. Ergo, if the property boom had continued until the present and where the buyers benefited, would the SEC have sued the Goldman Sachs for the same reasons with respect to the losses incurred by the seller, particularly led by the popular hedge fund manager John Paulson, who allegedly orchestrated the creation of the controversial instruments?

Outside the technicalities of the suit, we can only sense political maneuvering out of the SEC-Goldman Sachs row.

Unless one thinks that regulators are divine interpreters and hallowed dispensers of the law, laws can be (or are many times) used as instruments to extract political goals, for the benefit of the regulator/s and or the political leadership and or some vested interests group in cahoots with the regulator/s.

Or unless President Obama is recast into a Thomas Jefferson, which means the next strike will be against the US Federal Reserve, only then, upon this new setting should we rethink of a vital shakeup in how things will be done. But this would seem hardly the case.

This brings us to the possible reasons why the Obama administration has resorted to such actions and if the attack on Wall Street will take the sails away from today’s inflation based markets.

It’s All About Politics

It’s public knowledge that following the forced passage of the highly unpopular Obamacare or President Obama’s signature health reform program, Obama’s job approval popularity rating has plunged to its lowest level[2], where the odds for his reelection is now in jeopardy[3], and worst, in a hypothetical match-up between libertarian champion Texas Congressman Ron Paul and President Obama, the odds appear to be dead-even[4]!

And if we are to interpret actions of politicians as a transfer of the “rational actor model of economic theory to the realm of politics”[5], then this only implies that as human being with a career to contemplate on, President Obama’s actions as seen through the SEC are merely designed as means to extend his tenure as well as expand the scope of his power.

As this LA Times article rightly argues, ``White House officials can't bank on a sudden surge in the economy coming to their rescue for the midterm elections. So they are hoping they can redirect voter anger by accusing the GOP of coddling large banks.[6]”

In short, it’s all about politics.

Moreover, it also seems ridiculous to perceive of a sustained path of attack, considering that Goldman Sachs has been more than a political ally to the Democratic Party. In fact the company has constantly played the role of key financier of the Democratic Party (Figure 4)

Figure 4: Opensecrets.org: Goldman Sach’s As Key Political Financier Of America’s Ruling Class

Goldman Sachs had even been the second largest contributor to Obama’s 2008 Presidential campaign[7]!

In addition, where action speaks louder than words, Goldman Sachs has been a key beneficiary from the US government’s bailout to the tune of $10 billion from the US Treasury’s Troubled Asset Relief Program (TARP)[8] which the company had fully redeemed in mid 2009[9].

More to this is that Goldman Sachs had also been a key beneficiary of the AIG bailout from which the company also recovered $12.9 billion out of the $90 billion of taxpayer funds earmarked for payment to AIG counterparties[10].

And these rescues merely demonstrate that as part of the “Too Big Too Fail” cabal, Goldman Sachs evidently has been operating under the protective umbrella of the US Federal Reserve.

As Murray N. Rothbard defines the principal roles of the Central Bank[11],

``The Central Bank has always had two major roles: (1) to help finance the government's deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm's advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks' inflationary expansion credit.

So would President Obama afford a “possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit” from one of its major cartel member banks? The most likely answer is a BIG NO!

My guess is that the assault on Goldman Sachs seems likely a sign or an act of desperation, hence possibly miscalculated on the unintended impact on the markets via Friday’s selloff. Nevertheless, as noted above the markets appear to be extremely overbought and had been readily looking for an excuse or a trigger to retrench.

Yet even if under the scenario where President Obama may be politically desperate to shore up his image, a continued legal barrage on Wall Street that would send markets cascading lower betrays the populist ideals of a rising markets=rising confidence=economic growth, which is unlikely to achieve the intended goals.

It’s a silly thing for the perma bears to naively believe and argue that President Obama is on a warpath against the forces which brought him to power and against the oligarchy that has a strategic stranglehold on key US institutions and the US political economy.

Fighting Wall Street is essentially waging a proxy battle against the US Federal Reserve! And fighting the Fed is a proxy battle for Congressman Ron Paul, who not only wants an audit[12] of the Federal Reserve but also has been asking for its abolishment[13] (Yes, I am in Ron Paul’s camp!).

And this is why President Obama is shown to be quite in a tight fix where his actions could be read as publicity stunt or political vaudeville or an outright charade that is meant to be eventually unmasked.

The worst part is for the dispute to set a precedent and generate incentives from the losers of 2008 to lodge similar legal claims not only against Goldman Sachs but on different institutions. This will be tort on a massive scale, the unintended consequence.

Legal Actions As Counterbalance To Commodity Market Whistleblowers?

Yet there might be another angle to consider. It’s a conspiracy theory though.

Over the past weeks, there had been two accounts of whisteblowing[14] on the silver markets, where the precious metals have allegedly been under a price suppression scheme or have long been manipulated so as not to reflect on its market value, by a cabal of major institutions such as JP Morgan.

Since the exposé at the end of March, gold and silver has been on the upside (see figure 5)

Figure 5: Stockcharts.com/reformedbroker.com[15]: Counterattack on Whistle Blowers?

Could it be that the surge in gold and silver prices has put tremendous pressure on the precious metal naked shorts of major financial institutions that they have asked the US government to intervene by declaring an indirect war against the whistle blowers via the SEC-Goldman Sachs tiff as a subterfuge?

Remember the key personality involved in the political squabble is John Paulson, who currently owns more gold in tonnes compared to Romania, Poland, Thailand, Australia and other nations (based on Oct 2009).

Although Mr. Paulson isn’t part of the lawsuit, his involvement could be designed to put pressure on his investors so as to force him to liquidate on his gold holdings, and thereby ease the pressure on the colossal exposure of the clique of financial institutions on their “short” positions.

Unless the government can pin Mr. Paulson down to be part of the wrongdoers in the proceedings, this precious market “Pearl Harbor” isn’t likely to be sustained.

At the end of the day, whether it is an attempt to spruce up Mr. Obama’s image or an attempt to contain the sharp upside movements of the precious metal market, all these, nevertheless, reeks of dastardly politics in play.

The worst part would be to see the unintended consequences from such political nonsense morph into full scale disaster.

Revaluation of Asian Currencies and Market Outlook

So while we see financial markets, perhaps, may be looking for an excuse for a recess (anywhere 5-20% on the downside or a consolidation instead of a decline), it is not likely a crash in the making.

Politicians and bureaucrats, who watch after their career and status, more than we acknowledge, aren’t likely to roil the markets that would only defeat their goals.

Figure 6: IMF Global Financial Stability Report: Global Liquidity and Interest Rates

Under such conditions, we see global markets as likely to continually respond to the massive inflationism deployed by global authorities. And there could be rotational activities in the global asset markets instead of a general market decline.

With the recent revaluation of Singapore currency[16], we see this as a further positive force and a cushion on the markets as other Asian currencies will be under pressure to revalue and this applies to China too. Along with the Singapore Dollar, Philippine Peso surged 1.2% this week to 44.385 against the US dollar.

Though a global financial market may stem this dynamic out of the corrective pressures, any reversal would prove to be temporary.

So yes, we expect the markets to possibly look for opportunities to rest. But no, we don’t expect market to crash, not at this stage of the bubble cycle yet.

Finally, the Philippine Phisix nearly shares the same record with the US markets, of having gains in 6 out of 7 weeks, which only proves that the Philippines has not moved in an isolated manner, but rather in sync with region's markets, if not the worlds' markets. This also goes to show that Philippine elections have been eclipsed by global forces.

So like the rest of the markets, until we can establish self determinism, we see global dynamics to prevail due to the linkages of inflationism.

In my view any correction should pose as a buying opportunity as we are still in the sweetspot of inflationism.

---

[1] New York Times, S.E.C. Accuses Goldman of Fraud in Housing Deal

[2] Gallup.com; April 12,2010 Obama Weekly Approval at 47%, Lowest Yet by One Point

[3] Gallup.com April 16 Voters Currently Divided on Second Obama Term

[4] Rasmussen Reports: April 14, 2010; Election 2012: Barack Obama 42%, Ron Paul 41%

[5] Shughart, William F. II, Public Choice

[6] Nicolas, Peter; Goldman Sachs case could help Obama shift voter anger, Los Angeles Times

[7] Opensecrets.org; Top Contributors, Barack Obama

[8] Wikipedia.org, Goldman Sachs

[9] Reuters.com, Goldman Sachs redeems TARP warrants for $1.1 billion

[10] Reuters.com, Goldman's share of AIG bailout money draws fire

[11] Rothbard, Murray N. The Case Against The Fed p. 58

[12] RonPaul.com Audit the Federal Reserve: HR 1207 and S 604

[13] Paul, Ron; End The Fed

[14] Durden, Tyler; Exclusive: Second Whistleblower Emerges - A Deep Insider's Walkthru To Silver Market Manipulation, Zerohedge.com and

Durden, Tyler; Whistleblower Exposes JP Morgan's Silver Manipulation Scheme, Zerohedge.com

[15] See Chart of the Day: John Paulson's Gold Holdings Bigger Than Reserves Held By Many Central Banks

[16] Businessweek, Singapore’s Revaluation May Spur China, South Korea, Bloomberg

Central Bank Policies: Action Speaks Louder Than Words, The Fallacies of US Dollar Carry Bubble

``The cause of waves of unemployment is not “capitalism” but governments denying enterprises the right to produce good money”-Friedrich August von Hayek

In last week’s outlook [5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects], we proposed that the recent market volatility had most likely been a government mounted attempt to put a rein on “animal spirits” having gone berserk. We also posited that markets, having been overstretched, may have likely reached a snap back point or analogous to the breakage of the crosslinks elasticity as seen in the dynamics of a Rubber band.

In short, we argued that the recent downside volatility could have embodied a “bear trap”- a bearish signal that turns out to be false or a trap.

Market performance, this week, appears to have validated us anew. While short term direction is less of a concern to us as markets can go or gyrate bi-directionally, what matters most is the strategic context of the risk-reward or market analytical framework fused with a tactical approach in portfolio management.

And strategical analysis should consist of objective interpretations of all available facts, underpinned by appropriate definitions and realistically functional theories, and not the selective collection of facts (data mining) that are designed to fit (usually ideological) biases and stamped as “analysis”.

And from this standpoint, we argued that government’s present pronouncements, which recently spooked markets, will eventually be unmasked in the face of grinding realities from the cumulative and prospective political actions and from the prevailing economic and financial conditions.

As we previously said, ``So the Fed’s communiqué and the real risks appear to be antithetical. One will be proven wrong very soon.”

It would seem that this vindication partly happened so soon.

Policy Statements And Actions Diverge

The Fed declared last October 29^th, the end of its Treasury purchase program, ``The Federal Reserve completed its $300 billion Treasury purchase program today amid signs the seven-month buying spree helped stabilize the housing market and limited increases in borrowing costs” (Bloomberg).

I don’t know what the Federal Reserve’s definition of today is, but to my understanding the self-imposed limits of $300 billion and October 2009 has been met yet the Treasury purchase program seems ongoing (see Figure 1).

Figure 1: Federal Reserve of Cleveland: Credit Easing Policy Tools

The Federal Reserve bought nearly $2.8 billion of US treasuries by November 4^th!

So if there is any short term validation, it is that the political actions of the US government have been to continually undertake quantitative easing or further inflationary activities regardless of its official pronouncements.

This only validates our postulation that the US banking system represents as the first order of priority among the many issues of concern by the incumbent US political and non-political leadership. Hence, the massive redistribution of wealth from the real economy to the financial sector and the corollary of accruing of structural imbalances in the pursuit of immediate resolution from short term oriented policies.

The same goes with the Bank of England, which recently declared a continuation of its own version of quantitative easing but at a “slower” pace (Telegraph).

Moreover one shouldn’t forget that equities have also been qualified as an eligible collateral as part of the TARP program.

To quote Mr. Practical of Minyanville (bold highlights mine), ``Under TARP, the fine print allows dealers to REPO stocks to the Fed as collateral (holy cow is right).

``What if there were an arrangement where large dealers buy stocks and stock futures through the day and REPO them to the Fed at the high closing prices? The dealer would book the profits derived from the difference at no risk.

``If you look at the trading patterns of the largest dealers, one in particular lost money trading in only one day last quarter. Statistically that's like finding a needle at the bottom of the ocean.”

What this implies is that the TARP program could be one of the many instruments used to prop up the equity markets.

As we have long been argued, markets today don’t act on the norm or as “traditional” forward indicators, which has essentially flummoxed the mainstream, but as policy instruments engineered primarily to keep the banking system afloat and secondarily to manage the “animal spirits” in order to jumpstart the economy.

As we noted last week, ``The underlying fundamental malaise is that the ‘bank as trader model’ has been a product of the collusion between the banking system and the US government to inflate the economy to the benefit of the elite bankers!”

So if market response this week appears favorable, that’s basically because money isn’t neutral- or money from these governments actions have filtered into equity and commodity assets-regardless of what has been happening in the real economy.

The Fallacies Of The US dollar As The Mother Of All Bubbles

This similarly shows that the allegations that the US dollar carry trade is now the “mother of bubble” isn’t generally true.

That’s because it hasn’t been the carry trade, but direct government liability accumulation via the quantitative easing aside from other government programs designed to reinforce the banking system that has kept the global financial markets at hyper-animated conditions.

Moreover, we take on the cudgels for investment guru Jim Rogers, in his debate with celebrity guru Mr. Roubini over the latter’s thesis that the US dollar signifies as the “Mother of ALL Bubbles” [see Jim Rogers Versus Nouriel Roubini On Gold, Commodities And Emerging Market Bubble].

We argue that the fundamental premise behind the falling US dollar hasn’t been the arbitrage leverage amassing within the private sector financial system especially in the US, which continues to reel from the lackadaisical credit growth amidst signs of surging reserves, but from global governments’ balance sheets.

Mr. Roubini oversimplistically attaches every asset class to the currency leverage, which he extrapolates as having an inverse direct causal relationship: a prospective bust in global assets as a result of delevaraging which should propel for massive rebound in the US dollar. This view has been anchored on (anchoring bias) virtually the same dynamics which made his celebrity “rock and roll star” status during the 2008 meltdown-(letting go of a success identity seems so hard to do!)

Moreover, the surge in commodity prices hasn’t just been a private sector dynamic, instead emerging market governments have played a pivotal role in the elevated state of commodity prices.

India’s recent surprise $6.7 billion purchase of half IMF’s gold’s reserves for sale serve as a major proof.

Figure 2: US Global Investors: China’s Impact On Metals

As one can observe in Figure 2, Chinese imports of metals and steel have exploded!

In addition, in 2009 China’s predominantly state owned enterprises has acquired $21.9 billion of privately owned resourced based companies (80% of which have been oil or energy while 20% have been in metals). Three more acquisitions are still in the process- Nigeria (offshore oil fields), Russia (stake at UC Rusal) and Norway’s Statoil (20 of the 451 drilling leases) [World Bank].

Emerging markets governments’ acquisition of commodities hasn’t entirely been for economic and monetary interests, but likewise has geopolitical dimensions into it. In short, the incentives that drives governments are likely political more than economical.

So it would be plain naïve to lump private sector speculation with government purchases and make a generalized conclusion based on unfounded one size fits all hypothesis.

I would like to further add that the degree of state buying advances our view that markets have been severely distorted by government interventions.

Moreover, unless one views the world as falling into an abyss from globalized deflation (which seems as a near impossibility given the fundamental nature of the paper money standard from today’s central banking and the diversified capital structure of each nation), today’s risk takers including that of governments/ government enterprises seem widely apprised of the risks from high inflation and the accompanying high interest rate regime, which could destabilize or cause heightened volatility in such arbitrages.

These have been evident from

-the numerous and growing clamor (including the United Nations) to replace the US dollar as reserve currency possibly with the Special Drawing Rights-SDR (a controversial rumor was recently publicized by the Independent which alleged that several key emerging markets and developed economies could have been attempting to a form coalition to conduct trade in oil in a basket of currencies outside the US dollar),

-increasing arrangements to conduct bilateral trade away from the US dollar (Argentina-Brazil, Russia-China, a Latin American Bloc),

-expanded currency swap arrangements in Asia, and

-importantly the proposed expanded use of the Chinese remimbi or the Yuan as the ASEAN’s currency standard [see The Nonsense About Current Account Imbalances And Super-Sovereign Reserve Currency].

Ergo, the accumulation of commodities by emerging markets could function as an insurance against currency volatility, in view of a heightened inflationary environment, as consequence to spendthrift and reckless US national policies that could incite systemic global instability. Effectively, this demolishes the core premise of the “US dollar carry trade mother of all bubble”.

True, there are maybe some parts of the marketplace that has engaged in the carry trade but the overall climate departs from the 2008 environment depicted upon by Mr. Roubini.

``A fiat-money inflation can be carried on only as long as the masses do not become aware of the fact that the government is committed to such a policy. Once the common man finds out that the quantity of circulating money will be increased more and more, and that consequently its purchasing power will continually drop and prices will rise to ever higher peaks, he begins to realize that the money in his pocket is melting away. Then he adopts the conduct previously practiced only by those smeared as profiteers; he "flees into real values." He buys commodities, not for the sake of enjoying them, but in order to avoid the losses involved in holding cash. The knell of the inflated monetary system sounds” admonished Ludwig von Mises. (bold underscore mine)

Put differently, as the public loses trust of the functionality of the prevailing money standard they either look for substitute/s (in the past-resort to barter or a foreign currency-but in this case a new currency standard) or a return to basics…commodities.

Fancy But Unrealistic Models

Of course, one can’t help but point out on the foibles of the highly mechanical traits of analyzing markets from presumptive models utilized by the mainstream that frequently leads to severe misdiagnosis and the subsequent maligned therapeutical prescriptions or perversely flawed actions in managing a portfolio.

Figure 3: Wall Street Journal: U.S. Factories Are ‘Grossly Underutilized’

Low capacity utilization is one of the most frequently used justifications by the mainstream to argue for “low” inflation which is blamed on the deficiency in demand as responsible for “idle” resources. The fundamentally flawed premise of mainstream’s concept of inflation is due to its definition-inflation is seen as rising prices instead of as emanating from money supply growth. Secondly, capacity is viewed in the context where capital is homogeneous.

In the Wall Street Journal article we note of such differences (bold highlights mine),

``Looking beyond the headline number points to another sobering reality: Some industries were hit much harder than others — and therefore have further to go to get back to more normal utilization. Capacity utilization in primary metals plunged from 86% in December 2007 to 55% currently, mainly because of collapsing demand for some types of steel, while the utilization rate in the computer and peripherals industry fell to 58%, down from 83% in December 2007.

``Each industry got hammered by its own mix of headwinds. Computer sales suffered as businesses postponed information technology upgrades and laid off white-collar workers, while makers of big ticket items such as furniture and cars suffered because consumer financing dried up even for those still eager to buy.

``Only a few industries avoided going off the cliff. Capacity usage in the petroleum refining and coal industries fell only 1 percentage point over the last 21 months, while in the food industry, usage declined only 2 percentage points.”

The performances of capacity utilization vary across industries. This extrapolates that the current monetary policies will likely influence relative “overinvestment/s” on specificity basis on a relative circumstances or that over investments will happen in some areas more than the others.

For instance, the implosion of the dot.com bubble in 2000 didn’t put a check on the 2003-2007 US housing bubble cycle from inflating. Moreover, in the recent case of Iceland, both rising unemployment and falling output didn’t forestall inflation, which had been a consequence of the currency’s or the krona’s devaluation [see Iceland's Devaluation Toll: McDonald's].

As Brookesnew’s Gerard Jackson explains, ``Sufficient monetary growth reduces excess capacity by raising the value of the product relative to production costs. (It should be noted that this does not always mean a general increase in prices). However, where inflation is already a force and there is a great deal misallocated capital then a loose monetary policy can bring about accelerating inflation before full operating capacity has been reached and full employment restored.”

Not to mention that the massive interventions put forth by the US Federal Reserve on the banking system combined with fiscal policies aimed at propping up select industries at the expense of the rest of society or as Mr. Jackson avers, ``inflation is already a force and there is a great deal misallocated capital then a loose monetary policy can bring about accelerating inflation”, ergo, the seeds of inflation has been planted, hence inflation is what we will be harvesting.

It’s just the “degree” of inflation that will likely be debated.

In short, mainstream can’t fathom the prospects of a stagflationary environment (at the very least) because of the continued reliance on popular but fallacious models.

Overall, for as long as global political and bureaucratic authorities continue to mount a massive campaign to fillip their respective economies with reflation steroids, we should expect the “Frankenstein” market to respond accordingly. So far the favorable responses will arise from Asia and emerging markets, until the systemic leverage renders them unsustainable.

TARP's Neil Barofsky: Far More Dangerous Today Than A Year Ago

Huffington Post interviews TARP's Neil Barofsky.

From Huffington Post: ``Neil Barofsky is the man who tracks the historic bailout known as the Troubled Asset Relief Program or TARP. Named in December, the 39-year-old special inspector general monitors a dozen separate ...

The interview ends with Mr. Barofsky's chilling message on the US financial system: ``We may be in a far more dangerous place today than we were a year ago"