Yes, I do believe that current "creative destruction" process in the US financial sector is simply one of the normal symptoms of a well functioning capitalist society. As one of the best central bankers in the world Mr. King (Bank of England) noted "The re-pricing of risk...is not a process that we should try to reverse."

Adding ample short term liquidity in the form of 30-60 day loans into the markets as Federal Reserve and ECB have done during the last few months is perfectly normal. What's more it is precisely what the central banks are supposed to do. But reacting to normal fluctuations in the financial markets in such an aggressive fashion (125BP rate cut in two weeks) is simply wreckless in my book- so what can I say -higher inflation here we come.

But I guess while we can question the Fed's decisions, we can't really undo them. So let's simply try to do what we can to make sure we are not the ones left behind picking up the bill when it comes due. I did a little study for myself today- called several large mortgage brokers and asked them about my refinancing options. I was astounded by some of the conversations- the lending officer at Countrywide said that the refinancing volume in the group where he works has doubled during the last four weeks, the guy at BofA implied a similar increase in volumes.

That sounds like a dream come true for the battered mortgage lenders. No wonder many of them have rallied so strongly and I won't be surprised to see for example CFC's earnings to head north and may to even break even on an operating basis. So investing into the NFIs, IMBs and FMTs of the world might well be worth the risk in the short term and who knows may be we'll even see a higher takeover price for the BAC/CFC deal?

But on the other hand some of lenders also noted that many people seem to be willing to refinance even if the long term benefit is questionable. Many consumers are in effect adding $2500-3000 closing costs to their loan balances even if their payments go down by only $50 a month? That seem to confirm that consumers are quite desperate and thus discretionary spending will still be under a lot of pressure in the next few months to come...

That brings me to a final point of this discussion -how sustainable is that kind of shot in the arm is really? Haven't we seen this picture before? Is it really worth it for anyone to be a "poor dad" saving a large portion of his/her salary and putting into safe fixed income securities, if one could use borrowed money to finance a life style they do not really deserve? How about concerns for the retirees on the fixed income whose purchasing powers are being reduced by a whopping 4% inflation rate?

I thought it was just 12 months ago when we went through a period where everyone and their mother complained about budget and fiscal deficits, about Greenspan's loose monetary policies and the mess they triggered? Aren't we forgetting the $100B in losses and semi-bailout of Wall Street by Sovereign Wealth Funds? Enough said, I am simply going to borrow some money myself, you can't go wrong with 1-2% inflation adjusted "real" inflation adjusted borrowing rate. When rates go up again, as they no doubt will have to, banks will again end up holding a bunch of assets that earn less than the cost of financing this loans will be, but for now- the life might just get good enough for investors to belief that markets always go up :)

Anyone who read my blog for the last six months knows that not only I despise politics in general, but that I also believe that government can hardly do anything efficiently or effectively. I thus share the views of the von Mises Institute who says that "government intervention is always destructive, whether through welfare, inflation, taxation, regulation, or war."

P.S. One thing is clear though- if you are a short term speculator- Fed is definitely your friend so please feel free to ride the "greed" train, because if you don't- someone else will...

Trade safe and cheers,
SkepticalCapitalist@gmail.com