The Plunge Protection Team Blog

Bernanke and the FOMC sent more helicopters of money skyward today with the latest 75 basis point drop in the Federal Funds Rate.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.

Unsurprisingly, there were commentators on CNBC who were whining that the Fed didn't cut 100 basis points. Don't worry, they'll get there.

We now know where the Bernanke Put lies for the investment banks: at $2 a share. I'll have to do a little research, but this devastating fall seems to be faster than most of the fly-by-night internet companies in the 2000 dot-com crash. And this is an 80+ year old Wall Street institution.

As part of the transaction, the Federal Reserve, which engineered last week's emergency bailout of Bear, will provide up to $30 billion of Bear Stearns' less liquid assets. "JPMorgan Chase stands behind Bear Stearns," said Jamie Dimon, chairman and chief executive of JPMorgan. "Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk. We welcome their clients, counterparties, and employees to our firm, and we are glad to be their partner."

Congratulations Bear Stearns' shareholders. The Plunge Protection Team has stepped in and backstopped JP Morgan to make sure you still have a little value left in those shares. I bet that isn't giving BSC shareholders much comfort this weekend as they wait to see the decimation in their accounts in the morning. Of course, if you still hold shares of BSC after all the very public warning signs, we can't say we have much sympathy for you. Most other companies would have been allowed to go out of business, so you should be thankful for the $2 the PPT let you keep.

Meanwhile, the rest of us who are crazy enough to keep some of our assets in US Dollars are also seeing our account decimated by the socialization of downside risk and the mad money printing going on. The dollar is making fresh lows against Gold, the Euro, and many other currencies.

In other news, I'm sorry about the massive spam attack this site had while I was on my business trip. I've installed some spam trapping software, so hopefully we'll be fine until the new site is up.

The UK Telegraph continues their tradition of being better able to report on America's fiscal problems than our own media with today's story on the failure of the Federal Reserve to fix the credit mess:

The verdict is in. The Fed's emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed.

t is hard to imagine a more plain-vanilla outfit than the Port Authority of New York and New Jersey, which manages bridges, bus terminals, and airports.

The authority is a public body, backed by the two states. Yet it had to pay 20pc rates in February after the near closure of the $330bn (£166m) "term-auction" market. It had originally expected to pay 4.3pc, but that was aeons ago in financial time.

"I never thought I would see anything like this in my life," said James Steele, an HSBC economist in New York.

The problems in the Muni market are still there and getting worse. Also, well respected lender Thornburg Mortgage can't meet it's margin calls today and it's stock is crashing as I write this. Analysts aren't optimistic about the future of the company and are cutting it to a SELL (late as usual, I see) even at these low prices.

No sane mortal needs to know what term-auction means, except that it too became a tool of the US credit alchemists. Banks briefly used the market as laboratory for conjuring long-term loans at Alan Greenspan's giveaway short-term rates. It has come unstuck. Next in line is the $45trillion derivatives market for credit default swaps (CDS).

Last week, the spreads on high-yield US bonds vaulted to 718 basis points. The iTraxx Crossover index measuring corporate default risk in Europe smashed the 600 barrier. We are now far beyond the August spike.

Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007 fell to a record 12.72pc of face value on Friday. The BBB tier fetched 10.42pc. The "toxic" tranches are worthless.

Why won't it end? Because US house prices are in free fall. The Case-Shiller index for the 20 biggest cities dropped 9.1pc year-on-year in December. The annualised rate of fall was 18pc in the fourth quarter, and gathering speed.

And here is the truly scary part:

UBS says the cost of the credit debacle will reach $600bn. "Leveraged risk is a cancer in this market."

Try $1trillion, says New York professor Nouriel Roubin. Contagion is moving up the ladder to prime mortgages, commercial property, home equity loans, car loans, credit cards and student loans. We have not even begun Wave Two: the British, Club Med, East European, and Antipodean house busts.

We all know how the Federal Reserve will continue to respond to this: lower rates, lower rates, print more money, print more money. Is it any wonder that Gold and Oil hit all time highs again this morning?

The global markets are now wise to Bernanke's game. The US Dollar is in freefall mode against all major currencies including the Japanese Yen, which had formerly been the weakest currency. We've hit all time lows against a number of currencies and major multi-decade lows against others. Is this what Paulson meant by our "strong dollar" policy?

Now this is the truly scary part: markets are pricing in 75 basis points of easing by the Fed's next meeting in mid-March. Are you serious? 75 basis points more after the major freakout emergency cutting we've already gotten? If the Fed does go through with this, I will have lost what little respect I had left for them.

Do they honestly expect inflation to stay "well contained" as they print money non-stop? Judging by global commodities prices, their sham game is up. We truly are on our way to being the next Zimbabwe.

Hank "Strong Dollar" Paulson was out trashing our currency again today. In a radio interview he said that he would support getting rid of the penny since it is "worth less than any other currency":

Asked Friday whether he thought the penny should be eliminated, Paulson agreed that it would make sense, saying, "The penny is worth less than any other currency."

However, he quickly added that he didn't think it was "politically doable" to eliminate the one-cent coin and it wasn't something he planned to tackle in the final year of the Bush administration.

Mr. Paulson, who exactly is responsible for the penny becoming "worthless"? Do you feel that you had anything to do with it? What about your friends Bernanke and Greenspan? The penny used to be worth something. The value didn't disappear by magic.

So, instead of admitting that they've destroyed the value of our currency by eliminating the penny, what are they planning? Why, to make the production of the penny cheaper. Because, when it costs more than a penny to make a penny, even the government doesn't like that sort of profit proposition:

Asked about Paulson's penny comments, Treasury spokeswoman Brookly McLaughlin said that Treasury has not taken any steps to eliminate the penny but is considering changing the metal content to lower production costs.

"To address the growing cost of producing the penny, we have asked Congress for the authority to adjust the metal content in our coins," she said.

For those of you who weren't watching yesterday, here is Bernanke's testimony.

To sum it up, he's not worried about inflation even as the dollar probes new lows and oil and gold probe new highs as he gives his speech. He's in an "inflate at almost all costs" to get the economy moving. Anyone holding US dollars is being taken for a ride and many aren't even aware of it.

This is one of my favorite parts of the speech:

Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future. Accordingly, in the months ahead, the Federal Reserve will continue to monitor closely inflation and inflation expectations.

The federal reserve's monitoring of inflation is curious. I wonder just how bad it would have to get for them to actually raise rates? They've been "closely monitoring inflation" all the while as it skyrockets higher, and yet they continue to cut rates. Where do they draw the line? Or are they just feeding us a line?

Turn on CNBC if you can stomach it and watch the value of your dollars vanish.

A month after we blogged about the possibility of the United States becoming the next Zimbabwe, Barron's picks up on the same theme this weekend in "Zimbabwe, Here We Come!" (subscription required):

RECORDS, THE RUSTY OLD SAW GOES, ARE MADE TO BE BROKEN. So, incorrigibly jingoistic as always, and fully aware it still has a ways to go, we have every confidence that the U.S.A. can ultimately break Zimbabwe's record, set only this year, of an annual inflation rate of 100,580%.

Scoff not, please. We know that, at least by the official count, our own inflation rate remains in single digits. But, if a rapidly undeveloping country like Zimbabwe can lift its rate nearly 35,000 percentage points in a single month, our vaunted American know-how with a little concentrated effort can surely top that.

It also looks like the lie of core cpi is starting to catch fire outside of economics blogs. If the government loses control of this one, they are in for some serious inflation pain.

An obvious prerequisite to making a serious run for the No. 1 spot is to drop pronto the fiction of "core" inflation. A handy if crude device aimed at befuddling the masses here at home by craftily eliminating any commodity whose price is rising from our yardsticks of inflation, it's totally counter-productive if we truly intend to surpass Zimbabwe.

Looks like I was wrong earlier. The Fed gave in to Jim Cramer and his friends on Wall Street by deciding to cut the Federal Funds Rate 50 basis points on top of the 75 basis points they cut last week. That brings us down to 3%.

That's a nice SCREW YOU to those Americans who have been diligently saving money in their savings account. Now, the rate you'll get paid won't even cover the government's stated inflation, and you'll have to pay taxes on the measly gains as well.

I wonder what Hank "Strong Dollar" Paulson thinks about this move? The dollar plunged even more after the announcement hit the markets. Too bad we don't have a Plunge Protection Team to support our currency. All they seem to care about are asset prices (i.e. housing and stocks).

More info on the rate cut at Bloomberg. I'll be back later tonight with more analysis.

A timely story from Zimbabwe today (via BBC) should serve as a reminder to the Plunge Protection Team and their friends in Congress that printing money doesn't solve problems, it just creates new ones:

Zimbabwe's central bank is to introduce new higher-denomination banknotes in an effort to ease the critical shortage of cash in the country.

Zimbabwe has been in economic decline for the past eight years, with annual inflation widely thought to be in excess of 50,000%.

The highest value note that will go into circulation on Friday is worth 10m Zimbabwean dollars.

But that is worth less than US$3.90 (£2; 2.60 euros) on the black market.

Is this a future we can look forward to here? A 10 MILLION DOLLAR BILL which is really worth only US$3.90?

The government's only response is to print more money - and that is seen as the main reason for the hyperinflation.

There have been no official inflation figures published for the past three or four months.

Yes, it may be crazy to compare the USA to ZImbabwe, but after today's stimulus news and the continual bailout news, how much different are we really? And what direction are we headed in?

Zimbabwe's Reserve Bank governor, Gideon Gono, has called on the business community not to increase prices every time new measures are taken to adjust the currency.

Hmmm.... Sounds eerily familiar.

Dow 13,000 acts kind of like a bat signal for the PPT to come to our rescue. Everytime it's been breached, the fed shortly follows with some sort of emergency statement or action. That's why we here at the PPT blog have been so surprised by this last breach of Dow 13,000.

It happened on 1/4/2008, and it's taken the PPT a whole SIX DAYS to come to our rescue. Will they bring the DJIA back to 13,000 or is this one plunge protection too many?

Today, Bernanke let the "Women in Housing and Finance" know that the Fed is about to unleash a torrent of money printing:

The Committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

Can anyone say.... INFLATION? A couple of markets got this speech figured out right: "Gold rallies to new record high on Bernanke comments", "Crude reduces losses after Bernanke comments"

I wonder if Bernanke owns any gold? He sure has been good for gold prices.

Paulson has been busy this weekend working out the details on the non-bailout, bailout. This is surely an interesting exercise in government intervention if I ever saw one. Paulson has answered my question on who will pay from my last post (via Bloomberg):

He stressed no government money will be involved. Homeowners who can afford an increase on their mortgages, as well as those who don't ``have the financial capability to own a home'' won't be offered a ``freeze'' on their interest rates, Paulson said.

Somehow I doubt we'll escape this mess without a massive bailout involving government (hence yours and my) money involved. Paulson can play this charade for now. It'll be interesting to see how much longer he can juggle these balls in the air before the markets collapse around him. Can we make it through Bush's term and pass the buck to Hillary?

Mr. Paulson just can't seem to give up on the one currency that the dollar refuses to weaken against due to huge government intervention: the Chinese Yuan/Renminibi. Not to be content until the US dollar has crashed against every currency and commodity on the planet save maybe the Zimbabwe dollar, Mr. Paulson was out again this morning telling the Chinese to give up their foolish game of pegging the Yuan to the dollar:

"The issue with the renminbi is simply that it's not market determined, and I don't think anyone I talk to is arguing that China is ready to have a market-determined currency," he said in answer to an audience question at an event organized by the China Institute of New York.

"But I think everyone I talk to about this essentially agrees that they should be taking steps very quickly to get to the point when they could have a market-determined currency," Paulson added.

"In the meantime, they should be appreciating the (yuan) more rapidly so that it will reflect underlying fundamentals."

Now, a word of wisdom to the Chinese: these men -- Paulson and Bernanke -- mean business. If you think you can weaken your currency faster than they can weaken ours, why... you obviously haven't met them. No one runs a printing press as fast as they can. No one!

So, you might as well just let your currency appreciate. I suggest buying some more gold or maybe a few Manhattan skyscrapers with the proceeds.