From Macro Man….

Macro Man was admonished last night not to repeat his mantra about 6% rallies. Coming so soon after the last 6% rally, there would appear to be little utility in doing so, so he won’t. Instead, he’ll cue up the Smiths’ “Stop Me If You’ve Hear This One Before”. The 23% rally off the recent lows has been impressive, but let’s remember that it’s the fourth such rally of similar magnitude of the last six months…..many of which have been centered around policy developments.

People keep trying to spot the bottom. But I don’t think you will see a bottom in the markets until people stop thinking that they are saved every time a government program is announced.

Obama’s bank bailout plan has been announced. And naturally, it is horrible. Felix Salmon has the most understandable explanation of the plan (it is his strong suit). But all you really need to know is this….

This plan is the government’s preferred solution. It decrees the TARP money to be “equity”, and then goes off to the FDIC to provide “debt”. Both of these sources of funds are US government risk capital which will be used to buy up toxic legacy assets. There’s no economic reason to make the debt/equity distinction. But there is a political reason: Congress would have to approve any more equity spending, but FDIC guarantees can be issued to an unlimited degree without Congressional approval.

The problem with this approach is that it’s needlessly expensive. What kind of yields will investors demand on FDIC-insured debt from a Public-Private Investment Fund? My guess is that they’ll be at least 100bp and possibly much more than that more than the yields on Treasury bonds. But because of all the political sillybuggery involved here, the government can’t just issue debt to fund this program, and needs to come up with a way of pretending that it’s in fact Public-Private Investment Fund debt being issued with no more than an FDIC guarantee. (I think that the FDIC will not charge any money for this guarantee, but that’s unclear.)

Mr. Salmon has lot more details that are worth reading. But just from the above you should be able to figure out how messed up the plan is. It is one big shell game. But that is not what has me in shock.

Instead, I am nearly in faint because Paul Krugman is leading the charge against this plan and doing a good job to boot. This is just a sample….

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

And that’s just the start. He has been hammering away with succeeding blog posts.

From the AP….

Over the past several years, nursing homes have become dumping grounds for young and middle-age people with mental illness, according to Associated Press interviews and an analysis of data from all 50 states. And that has proved a prescription for violence, as Jackson’s case and others across the country illustrate.

Younger, stronger residents with schizophrenia, depression or bipolar disorder are living beside frail senior citizens, and sometimes taking their rage out on them.

“Sadly, we’re seeing the tragic results of the failure of federal and state governments to provide appropriate treatment and housing for those with mental illnesses and to provide a safe environment for the frail elderly,” said Janet Wells, director of public policy for the National Citizens’ Coalition for Nursing Home Reform.

Numbers obtained through the Freedom of Information Act and prepared exclusively for the AP by the Centers for Medicare and Medicaid Services show nearly 125,000 young and middle-aged adults with serious mental illness lived in U.S. nursing homes last year.

That was a 41 percent increase from 2002, when nursing homes housed nearly 89,000 mentally ill people ages 22 to 64. Most states saw increases, with Utah, Nevada, Missouri, Alabama and Texas showing the steepest climbs.

Younger mentally ill people now make up more than 9 percent of the nation’s nearly 1.4 million nursing home residents, up from 6 percent in 2002.

From Felix Salmon…..

The good news is that the two largest corporate credit unions — cesspits of toxic waste which loaded up on mortgage-backed securities for no good reason and in violation of their raison d’etre — have been “conserved” (taken over) by the NCUA, the credit-union equivalent of the FDIC, which has finally woken up to the fact that the current management at these shops is utterly incompetent and can’t be trusted.

The bad news is that the NCUA is still committed to the disastrous decision it made back in January, to whack 56 basis points off the net worth of every federal credit union in the country, as well as reducing those credit unions’ return on assets by 62 basis points, in an attempt to bail out these selfsame untrustworthy corporates.

I don’t know enough about the issue to have any opinion. But the rest of Felix’s post goes on to make some interesting points about how this will affect credit unions. If he is right, healthy credit unions are going to take a hit in order to rescue the big irresponsible credit unions that just went under.

From New York Times….

Two top advisers to Alan G. Hevesi, the former state comptroller, were charged Thursday in a 123-count grand jury indictment that said they had turned New York’s $122 billion pension fund into a criminal enterprise. The scheme netted them and other Hevesi associates tens of millions of dollars in kickbacks from firms investing the fund’s money, the indictment said.

From the AP…

The Labor Department reported Wednesday that consumer inflation rose 0.4 percent in February, the biggest one-month jump since a 0.7 percent rise in July. Two-thirds of last month’s increase, which was slightly more than analysts expected, reflected a big jump in gasoline pump prices.

Core inflation, which excludes food and energy, rose 0.2 percent in February, also slightly higher than the 0.1 percent rise economists expected.

From Brad Setser…..

I wanted to highlight one trend that I glossed over on Monday, namely that foreign demand for long-term Treasuries has disappeared over the last few months.

This is a problem. But the Fed is going to solve it. From a Federal Reserve press release….

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

Buying agencies is old hat. The Federal Reserves started doing that around the same time foreign central banks stopped buying them. It is the long dated treasuries that are new. The Belmont Club has a round up of how various newspapers are reacting to this news.

What will the effects of this be? The Times reports in a different context….

The Bank of England believes that it may take “many months” before the full benefits of its radical strategy of creating new money to boost the economy will be felt, it emerged today.

The same could be said for any negative effects.

From Calculated Risk….

The Federal Reserve reported that industrial production fell 1.4% in February, and output in February was 11.2% below February 2008. The capacity utilization rate for total industry fell to 70.9%, matching the historical low set in December 1982.

He also has a post on the record lows set by New York’s manufacturing index.

This essay from the Atlantic presents a view of China that is different from the one generally held here at the Ethereal Voice. But facts in the article are generally the same ones that we would use to support our view. That is what makes it interesting.