Bear Market Rally?

I'm sure glad to see the markets stabilizing and heading up a bit, but I can't help but think that it's just a bear market rally, and that the worst is yet to come.

I wish that Obama and his administration were a bit more forceful and a bit more clear in what they're trying to do. They seem to have taken "nationalization" of the banks off the table, but instead are going to try to make the banks solvent by buying up the toxic debt. Today, the Fed announced that it will spend $1.15 trillion on treasury securities and bad assests of troubled banks. I wonder what price they will pay for those assests and whether there will be any hope of getting back the taxpayer money. It seems to me to be the classic way to privatize profits and socialize the losses. Another thing they didn't say is that they will pay for the $300 billion in treasury securities with $300 billion of freshly printed money. Normally, China or Japan or other big holders of US currency buy the securities and have to be paid back at some point. Usually the Fed only buys enough securities (by printing money), or sells them (and takes the money they out of circulation) to set interest rates at the point they want to keep inflation under control. They don't normally hold large amounts of treasury bills in their own account. When they sell those securities (assuming they can find a buyer) interest rates will rise because there will be less money in circulation, or because they have to offer higher rates in order to sell them. If they don't sell them, the money they paid for them is still in circulation. Either way, inflationary pressures will inevitably increase. I think that Obama and his crowd's policy is to inflate away the trillions of dollars they've borrowed and then reverse course and tighten the money supply to keep hyperinflation at bay.

It's a pretty narrow path to the bottom of the cliff, and I hope they can pull it off safely. The other option is to let everything crash and sort itself out. Either way, you get to the bottom, and it's not going to be pretty, but I think a sudden crash should be avoided at all cost. American society is far more fragile and fractured than it appears on the surface.

The thing that Obama is not addressing is the structure of the banks during and after the fall. I think they have two ways to go. One option is to have a half-dozen large banks that are tightly regulated (like Canada); the other is to have a lot of small banks that are severely limited in size so that none of them get too big to fail. I think the second option would be better in that bankers could more easily innovate and experiment and regulate themselves. The caveat would be that if they fail, Big Brother wouldn't bail them out.

As for the AIG bonuses - I think the money should be confiscated and replaced with some of the Collateralized Debt Obligations those brain children thought up. If those CDO's were such a good idea in the first place, they should now be a valuable asset in the hands of their creators.