Bernanke bluffed and the bond market called it. He cannot monetize several trillion in new issue plus the entirety of the 10 and 30 year bonds out there to stop a bond market sell-off. In addition, the market no longer believes him, as evidenced by today's price action. A serious bond-market sell-off will ramp the cost of all credit, including mortgages and commercial loans. If he tries to monetize the result will be current bondholders tendering into his buying, forcing him to essentially "consume" the entire float. That stunt will cause the dollar to implode and we wind up exactly like Iceland. Overnight. Ben knows this; ergo, he is screaming like a petulant child while the market laughs at him just like the market forced Paulson to do what he said he wouldn't with Fannie and Freddie. Bernanke had better shut the hell up before he precipitates a bond market dislocation; traders can and will try to force him to make good on the threat. This caution goes double for Congress which seems to think it can blow money like crazy. Never mind Schumer talking about a $4 trillion tab for the "bad bank." We don't have $4 trillion and we can't raise it. That's simply off the table due to inability and thinly-veiled threats to attempt such a foolish action risk causing the very market crash that everyone says they don't want. Yesterday Steve Liesman from CNBC "reported" that the Administration had a "bad bank" plan that was momentarily going to be rolled out. Tonight we learn that just as with the original "Super-SIV" from 2007 (which was essentially the same thing), the un-resolvable problem is that the banks will not sell for the mark-to-market price (or anything near it). The unspoken reason is if they were to take the market price they'd be rendered instantaneously bankrupt. (This, by the way, is an admission that they are intentionally mis-marking these "assets" on their book now, or they'd have already been seized!) The government will not buy at "par" or anything near it because to do so will cause the taxpayer to suffer a trillion dollar loss; Goldman (and Schumer) both said this is a potential $4 trillion problem. Ergo, its a Mexican Standoff and there is no solution. This means that nationalization is still on the table. It also means that we're back to the days of AMBAC and MBIA - whenever the market was selling off hard on their "rumored" bankruptcy, Charlie Gasparino was trotted out by CNBC to claim that some sort of deal was imminent - and the market would instantly rally. These rumors all were false, by the way, and nobody took responsibility for that, nor will they this time. The "dirty secret" behind a lot of these "assets" is that they are literal zeros. A lot of the debt issued in the last few years was in fact fully synthetic - that is, it was not backed by an actual mortgage or other actual debt instrument - it was created out of swaps and other derivatives that "acted like" the real thing. The problem with this sort of model is that it relies on the ability of the counterparty who wrote the swap to pay - if they can't pay then what you have is a worthless piece of paper since you can't even foreclose on the underlying property and seize the collateral! With no meaningful margin supervision a lot of these so-called "counterparties" in fact can't pay. This means these "synthetic" instruments are in fact worth nothing. The pattern of our government since August of 2007 is to "dare" the market by making outlandish and unsupportable claims (such as Paulson's famous "Bazooka" threat) and effectively stare it down. The market calls all such bluffs with an "all-in" raise. It always has, and it always will. This is simply a function of how markets work; that we have people in positions of regulatory oversight over the Capital Markets that don't understand this fact given the hundreds of years of history on the matter is a mark of incredible arrogance. I had hoped that Obama would reverse this insane course of action and stop "bluffing"; the last two days have made clear that no such "change" came to power in Washington on January 20th. cont on link.. http://market-ticker.denninger.net/archives/756-On-The-Edge-of-The-Abyss.html
The "author" sure "likes" to use quotation marks. I wonder is he "thinks" this gives his "story" more "impact." I love the "blogospher."