How Bernanke and Geithner String Along the Rally 24/7

Bravo. The government’s handling of the financial crisis and recovery should be recognized as a masterful performance. At least, so long as you don’t look too deeply into the numbers… 
Bernanke and Co. have managed to restore confidence to the point that economist Paul Krugman has joined the ranks of those who think we are only a couple months away from actual GDP growth. 
And they’ve accomplished this remarkable feat by stringing investors along with one carrot after another… 
*****The first carrot was bailouts and stimulus packages. There was a time when stimulus spending was going to save or create 3.5 million jobs. Now, states are wondering where the stimulus money is. And the president is now promising 600,000 jobs will be created by stimulus spending. 
But layoffs have slowed considerably according to the most recent non-farm payroll report. And Americans, feeling more secure in their jobs, may not notice that stimulus jobs won’t be there, even if they need them. 
*****The Public-Private Investment Program (PPIP) was supposed to remove toxic assets from bank balance sheets. Never mind that the banks probably never had any intention of selling at fire-sale prices and investors weren’t thrilled with paying unreasonable prices, no matter how much of the transaction would be funded by the Treasury. 
Geithner’s "stress tests" resulted in banks raising their capital bases. That has helped remove the incentive to dump those toxic assets.   
And as for the $74 billion banks have raised so far, do not misunderstand all the talk of "green shoots". These green shoots were not economic recovery per se. Rather, the green shoots were the banks stock prices shooting higher after accounting rule changes allowed them to show a profit where there was none. 
In other words, the economic recovery is something akin to an illusion — those inflated stock prices have allowed the banks to raise enough capital to appear healthy and last a little while longer… 
*****Now that investors have breathed a sigh of relief that the problems with the auto industry are being resolved, the Chrysler sale to Fiat has been put on hold. Funny, I would swear a couple weeks ago, Chrysler would go bankrupt and millions would lose their job if Fiat didn’t buy Chrysler right away. 
*****And then there’s TARP – the $700 billion boondoggle. Some banks have been asking to repay the money for months. But ever-sensitive to the all-important timing element of a good comedy, the Treasury has been unwilling to accept payment. 
After all, why spoil the party by letting all the good news out at once? Why not wait until the rally is looking weak to release the news that, hey, maybe we’ll accept TARP repayments after all? And maybe those payments will be more than anyone expects? 
But let’s make sure we string the announcement out as long as possible and let the threat of good news keep the bears at bay… 
*****Of course, you can only fool all of the people for a while. Eventually, without a real pickup in economic activity, the millions of Americans who are barely keeping their head above water will sink. And then all the issues the "stress tests" glossed over (higher unemployment, rising foreclosure rate, etc.) will cripple the banks once again. 
As economist Joseph Stiglitz of Columbia University recently told Bloomberg: "There’s a chance that it might work…If it does, then they’ll look like the brilliant general. But all these efforts also bank on the economy recovering and housing prices not falling too much further. Those are not safe assumptions." 


P.S. I normally don’t like to be the guy who says "I told you so", but for today I will. Back when the PPIP was first floated by the Treasury my diligent research in my Top Stock Insights advisory service spotted three stocks that would profit big time if the PPIP went through and profit modestly even if it did not. We did it. In a matter of weeks – not months or years – we profited on Legg Mason (NYSE:LM) for 8.16%, BlackRock (NYSE:BLK) for 9.1%, and AllianceBernstein (NYSE:AB) for 12.77%. Top Stock Insights readers booked these gains DESPITE the collapse of Geithner’s PPIP plan. To find out how you can see steady and consistent gains no matter what happens, check out Top Stock Insights at

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