Stress Tests and Chrysler

First, the stress tests.

Bloomberg has verified my prediction. The banks need capital, but they can cover the shortfall by converting government preferred shares into common shares. This is a farce, but will give the Obama administration what it wants: control of the banks. I don't think this is a bullish development at all. Government run banks are rarely good for an economy.

We see more accounting nonsense from Citibank. Part of their plan is to sell 51% of Smith Barney to Morgan Stanley, so they can write up the holding value of the rest of it. Citi will keep crumbling until there's nothing left. And BAC needs $34 billion, supposedly. We're going to need more bailouts.

The rally in stocks doesn't help the economy, because it's not stabilizing any of the collateral that banks have lent against. Wages are falling. In the UK, they've fallen -5.8% from last year and in Japan, its -3.7%. Over here, withholding taxes have collapsed. Part of this is exaggerated by the tax breaks, but part of it is also job losses. Can you say deflation?

This would be good for Treasuries, and may yet be. However, I suspect that quantitative easing is the only thing holding them up right now. What backs the Federal Reserve Note? Not gold. In the Depression, when the dollar was backed by gold, what did they do? They devalued the dollar against gold. Now what's the dollar backed by? Treasuries. So if they want to devalue the dollar again, what do they do? Buy Treasuries. Treasuries up, dollar down. Or, more likely, just dollar down. And at some point people will realize that Treasuries are in dollars and they will go down too, as the government can make an endless supply.

And Chrysler? The solution is to sell Chrysler to Fiat? Are you kidding me? The French think they can run Chrysler when the Germans failed. This will be a fiasco. The only thing the French are good at is letting unions destroy companies. It looks like the bankruptcy judge will let this buyout take the fast track, but I think by the end of the year, Chrysler's back for more bailouts.