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The addicted gambler

December 1, 2011

From: Stock futures soar after central banks act globally

NEW YORK (Reuters) – Stocks surged on Wednesday after major central banks agreed to make cheaper dollar loans for struggling European banks to prevent the euro-zone debt woes from turning into a full-blown credit crisis.

The Dow posted its best day since March 2009 after the Federal Reserve, the European Central Bank and other major central banks stepped in to head off escalating funding pressures that threaten the key arteries of the world’s financial system.

The S&P 500 scored its best daily percentage gain since August.

The central banks’ liquidity move touched off a buying frenzy in financial shares. The S&P financial sector index gained 6.6 percent, with Bank of America the most actively traded stock. The stock jumped 7.3 percent to $5.44 on more than 420 million shares traded.

For many years my point has been that our exponential growth of debt, leverage, risk, exceptionally complicated investment products and very short-sighted economic policies, which only encouraged all of the above into an increasingly bad cycle, was becoming a ticking time bomb.

The worldwide economy is now a mega-ton bomb that we seem to enjoy pouring gasoline on while smoking cigars and lighting off fire crackers.

Our monetary policy reminds me of an addicted gambler. In the 1980’s and 1990’s the casino bankrolled our penny-anti gambling, but we got just enough of a taste of winning that we started increasing our bets (risk-taking). In the 2000 dot com bust the casino showed its true colors and scraped the table clean-almost.

Any casino worth its salt knows you have to entice the gambler into believing he can win back his losses. “Look,” says the pit boss, “you are playing roulette, everyone knows those are bad odds. Come over to my craps table and flip houses—everyone wins here.” (After all, real estate prices never go down).

Oops, it seems the pit boss might not have been too honest. It seems some of the casino customers aren’t buying the pit boss advice and they are not in the game the way the casino owner wants them to be.

On November 20, the casino owners all got together and said, “Look we are going to give you free money, it all grows on trees anyway (this, by the way, is the official definition of “liquidity”).

Now if you owned a casino that could print cash, that would be a really cool thing to do.

The Federal Reserve owns the cash making machine and they seem to only have an “on switch.”

My point in this whole analogy is this: What would our economy look like if we had resisted pouring massive amounts of liquidity into the economy through our financial initiatives?

Might some pain in 2000 avoided bigger pain in 2008? And what if we accepted Mr. Economy’s rebuke of 2008, might we have cleaned the financial system of some horrendous practices and maybe be edging towards a real recovery instead of chasing after the very same debt, risk, leverage and perverse incentives that got us in trouble in the first place.

“The move in (U.S. stock) futures is justified. Whether this solves our long-term problems remains to be seen, but when you flood the market with liquidity, risk assets go much higher,” said Sal Catrini, a managing director for equities at Cantor Fitzgerald & Co in New York.

Let me put Mr. Catrini’s comment in Hamm-speak: “Shoving massive amounts of liquidity into the economy will move markets higher, but there is also long-term considerations to these actions that might just prove to be devastating.”

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