HI-TRANSFER

Last night’s “job bill” speech was nothing short of a travesty, a decisive and freakish reminder that America has been taken deeply down the worst possible path.

While somewhat surprising, I suppose it just makes sense that both the Federal Reserve and the Federal Government have simultaneously lost all credibility and that both are seemingly exhausted of policy tools.

When the window of reality opened briefly in 2008 with colossal failures and crisis in every direction, many Americans got a brief and uncomfortable sense of what it feels like to be truly concerned about their current wealth and future prosperity… a sharp contrast to the heyday of the housing boom era where levering up on residential real estate was all the rage.

With a host of broken, deteriorating and dysfunctional markets, stocks down over 50%, a few notable public bank runs and several earth shaking “buck breaking” money market events, the Feds panicked and abruptly snapped into a mode of propping and bailing using creative accounting trickery, blanket guarantees and boat loads of massive Keynesian boondoggles.

What we are now seeing, I believe, is the clear recognition that the propping and stimulus action was an unmitigated failure and further that the political process and institutions that brought us these “solutions” are as weak and phony as the “recovery” they attempted to manufacture.

Bernanke’s speech yesterday at the Economic Club of Minneapolis revealed this somewhat in his recounting of events of the past few years and his recognition that the massive housing slump has made all the difference to the severity of the recession and the lackluster “recovery”, a fact that the Federal Reserve appears to have underestimated at every turn.

With a litany of platitudes and talk of the “enduring strength” of the American economy, Bernanke concluded his speech by assuring listeners that the long term prospects of the U.S. economy does not have to be materially affected by the ongoing financial crisis so long as we take the necessary steps to “secure that outcome”.

President Obama did no better last night when he outlined a list of futile fiscal policy gimmicks that could have been borrowed right from the “American Recovery and Reinvestment Act” a 2009 policy action carrying over twice the supposed Keynesian punch that we all know did little to nothing to build a durable long term recovery.

It’s over folks… By hook or crook the Feds did their best to reassemble our Humpty Dumpty economy but it can’t be done… you can’t paper over the serious mistakes made by millions of households or the bad policy created by generations of Washington DC vote peddling hucksters.

The Commercial Paper (CP) market is essentially a private debt market used by corporations as a generally cheaper means of funding typical recurring operations than drawing on a line of bank credit.

Commercial paper, as financial instrument, is by no means a recent innovation and, in fact, you can read about how the CP market was affected by the many historic financial shocks experienced by the U.S. (read Panic on Wall Street: A History of America’s Financial Disasters)

Although the Federal Reserve was able to artificially bring CP rates down significantly since the shocking 615 basis point spread blowout (A2/P2 spread) of late 2008, they had not been successful in preventing an overall contraction in the CP market.

The Federal Reserve calculates and published the total amount of CP outstanding every week and for August commercial paper outstanding presented a serious pullback dropping from a recent high set back in July and expanding at a meager rate of 3.16% on a year-over-year basis to $1097.80 billion, a level that is still notably lower than even the worst periods of the last two recessions.

QE3 is in the offing…

Consensus expectations just seems to demand it as a generation of gambling speculators, swindlers, government policy junkies and others with short attention spans and a psychopathic indifference for the soundness of the financial system panic at the least sign of slowdown and line up for another dose of the Feds easy money.

Looking at some of the latest trends, a slowdown of sorts would not be so surprising.

The economy is still being seriously impacted by the evolving housing decline, unemployment remains at 9%, oil prices are near $100 a barrel with gasoline prices reflecting that fact, the Federal Government is toying with the debt ceiling, China is likely overheating as it inches ever closer to parabolic residential real estate prices and likely an ugly crash, other notable leading emerging markets like India and the Russian Federation are continuing to slow, Greece and other European countries are moving closer to debt restructuring… the list of negative externalities runs long yet they all carry the telltale ring of the Great Recession about them.

This is the point at which one, having been schooled by the Fed over many years, must begin to ask the question “What will the Feds response be?”… as if a response by the Federal Reserve is nearly a reflexive action to a consensus expectation of looming slowdown.

The answer to that question should not require such a stretch of imagination… the simple short answer is QE3… no more, no less.

Why would the Fed stop now? Should a slowdown materialize, it will ultimately been seen as an offspring of the Great Recession and treated as such.

Recognize that during last month’s historic Fed press conference, “Helicopter” Bernanke made no quibble of the fact that the Fed will continue the principle reinvestment function that they have been carrying out ever since they acquired such a sizable bounty of mortgage securities, a clear sign that pumping liquidity is not only the response de jure but the de facto response.

Like a pair of dysfunctional sweethearts, the Fed knows no different course of action then easing and the consensus expects it, so easing it will be.

But as we move further and further from the point where the Feds intervention is viewed as “pump priming” and nearer a more accurate perception of it as the “pump”, one has to wonder when consensus will begin to lose faith and worry that this scheme has no merit.

Only then will we ultimately realize the true consequence of the years of Fed actions.