Warning to Fed: Allow Patient to Fully Recover Before Administering More Toxic Stimulants

Citigroup (C) announced plans to use $36.5bn of the $45bn in TARP funds it received for the purpose of lending in the following areas: $25bn in mortgages; $5.8bn for credit card loans; $2.5bn for consumer loans; $1.5bn for corporate loans; and $1bn for student loans.

CEO, Vikram Pandit, issued this statement: “Our responsibility is to put these funds to work quickly, prudently and transparently to increase available lending and liquidity.”

Furthermore, Pandit stated “The government, on behalf of the American taxpayer, has invested in Citigroup…. We have an obligation to repay in ways that go well beyond the $3.41bn Citigroup will repay the government each year in dividends associated with its TARP investment, and a separate loss-sharing agreement.”

It is reported that none of these TARP funds would be used for compensation, bonuses, dividend payments, lobbying, marketing, advertising, and corporate sponsorship.

On the surface, this seems appears to be a positive development. Could it be that other banks will follow Schitty Group’s lead? Most likely, the answer is yes. Banks make money when they lend it and these loans are resold or repaid and right now the financial markets are struggling to re-establish a healthy equilibrium of cash flows.

The TedSpread has come down considerably to suggest that the trust level amongst banks has improved. Actually, banks still do not trust each other, but they do trust the U.S. Treasury which is willing to insure almost $400bn of illiquid assets on banks’ balance sheets with OPM (other people’s money), e.g. taxpayers. To a certain degree, some of these perceived and real risks have been mitigated.

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The lender of last resort has stepped up and right now no one seems concerned about the fact that there is no back-up plan for the back-up. Actually, there is a back-up plan. If you examine any form of U.S. currency, it clearly states “In God we trust” and apparently this is the real secret to operating and managing a fiat currency. God help us all, should this system ever collapse.

Now just about every criminal act of any great magnitude has its accomplice(s), intended or unwitting, unless you are Bernie Madoff (of course). In this instance, irresponsible greedy bankers have the immediate-gratification seeking American consumer as its accomplice in the current financial crisis.

However, the word on the street from the man on the street (latest Gallup polls) is that consumers are currently enrolled in a twelve step program and it may be premature to expect them to fall off the wagon anytime soon. Consumers are still too painfully aware of hitting rock-bottom and not enough progress has been made or enough time has passed to induce a false sense of self-control over their addiction to credit.

Yesterday’s Personal Income and Outlays economic report shows that consumers are holding on to their precious dollars. December 2008 spending declined for its sixth consecutive month, falling -1% after the previous month’s -0.8% reading. Faced with shrinking income and the prospects of rising unemployment trends, borrowing money without certainty of the means to repay it may curb the cravings for more debt. The American consumer has learned a hard lesson and the tuition for this education has been expensive, i.e. depleted home equity, foreclosures, bankruptcies, and ruined credit.

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Therefore, one must ask if it is realistic for an economy that derives 3/4 of its GDP from consumer activity to recover in the midst of a such a consumer confidence crisis just because banks may be willing to lend again. Not!

This crisis in confidence will come to an end, but there needs to be a different catalyst. Perhaps the catalyst will come in the form of a stimulus package that creates sustainable new employment opportunities. This will take time and so will any other positive forces driving a recovery.

Furthermore, the global economy will need to recover as well as it is clearly evident that the American consumer is vulnerable to another overdose of credit if other economies are not willing to indulge in a “moderately” excessive consumption habit.

Sources: Bloomberg, Reuters, Gallup and AP news

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