...from Dr. John

..."I continue to believe that the primary drag on the economy is not "uncertainty," or taxes, or budget concerns, or health care reform, or regulation. No. What is weighing the economy down, and what will continue to weigh the economy down, is bad debt that our policy makers are transfixed on making whole rather than restructuring. This will eventually happen, because it has to happen. Yet even with that expectation, it will be an extended process, and meanwhile, I believe that we'll have numerous opportunities to take constructive investment stances amidst it all.

It's probably worth noting in passing that 1-year yields in Greece hit 40% last week, while 2-year yields are up to 30%. The can seems to be getting harder to kick.

In case you haven't read the New York Times piece yet, I thought it would be appropriate to end with some comments from outgoing head of the FDIC, Sheila Bair (see Sheila Bair's Exit Interview ):

On Bear Stearns: “Let's face it,” she said. “Bear Stearns was a second-tier investment bank, with — what? — around $400 billion in assets? I'm a traditionalist. Banks and bank-holding companies are in the safety net. That's why they have deposit insurance. Investment banks take higher risks, and they are supposed to be outside the safety net. If they make enough mistakes, they are supposed to fail. So, yes, I was amazed when they saved it. I couldn't believe it. When they told me about it, I said: ‘Guess what: Investment banks fail.' ”

On restructuring: By the spring of 2007, she was holding meetings with industry executives, pushing them to raise their lending standards and to restructure — that is, modify — abusive mortgages so homeowners wouldn't lose their homes when the housing bubble burst and large numbers of loans were bound to default. “There is nothing unusual about this,” she told me. “Restructuring is one of the tools the banking industry has at its disposal.” ... The banks, she says, “fought us tooth and nail.” She lost.

On bailouts: “Why did we do the bailouts?” she went on. “It was all about the bondholders,” she said. “They did not want to impose losses on bondholders, and we did. We kept saying: ‘There is no insurance premium on bondholders,' you know? For the little guy on Main Street who has bank deposits, we charge the banks a premium for that, and it gets passed on to the customer. We don't have the same thing for bondholders. They're supposed to take losses. What was it James Carville used to say?” Bair said. “ ‘When I die I want to come back as the bond market.' ”


http://www.hussman.net/wmc/wmc110801.htm