Yesterday I reviewed key sections of Obama's speech on Wall Street here: Obama On The Street.

In general I liked the speech, but think that the steps he has proposed are, at best, only a good first step. I hope that the proposals are strengthened in Congress, but have zero hope of that happening. More likely they will be watered down significantly. The end result is that we will face another market meltdown in the future; the only question is when.

Regulation of the financial industry is one of those extremely important, yet dry and dull subjects, that the general public will ignore, and the lobbyists will own. The bank lobby is extremely powerful and is going to fight things tooth and nail. Obama got a distinctly cool reception from the financial executives in the audience, with only a single round of applause.

However, one year after the government spent hundreds

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This post provides links to a number of thought-provoking articles I have read over the past few days that you may also find of interest.

• Andy Kessler (The Wall Street Journal): The Bernanke market, July 16, 2009, We won’t get real growth until Congress and Treasury get policy right.

• Irwin Stelzer (Times Online): American account: Barack Obama’s cures may just kill any recovery, July 12, 2009.

• Paul McCulley (Pimco - Global Central Bank Focus): What if?, So what should Washington do, if and when - and I stress “if and when”; I’m not making a forecast here! - private sector aggregate (nominal) demand growth looks like it’s going to languish in Japan style for the indefinite future? The answer: Take one cup of Krugman’s advice for Japan and two cups of Bernanke’s advice for Japan - responsibly

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We are now in June 1930, according to trader/author Ron Coby, a friend and neighbor of one of our favorite underground investors Dan Ferris. (Ferris is a member of the Stansberry & Associates Investment Research team and editor of Extreme Value. ) Ron believes stocks are going to plunge – just as they did from June 1930 to July 1932 when the crash that began on October 24 1929 finally bottomed.

This from an email Ron sent Dan on Tuesday after the market closed (hat tip, The S&A Digest ):

It’s over, man. We are now in June 1930… repeat, just like we repeated 1929 in 2008 and repeated the 40 plus percent rally in Nov 1929 to April 1930… Now the real pain begins… The DJIA collapsed 89% over the following 2 years until July 1932 bottom.

We sincerely hope Ron is wrong. But the similarities between the recent sucker’s rally and the Nov

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This morning, the Obama Administration outlined its proposals for tightening financial regulations in an Op-Ed article by Tim Geithner and Larry Summers in The Washington Post. The key sections of it are below, and I have interspersed my reaction and commentary:"This current financial crisis had many causes. It had its roots in the global imbalance in saving and consumption, in the widespread use of poorly understood financial instruments, in shortsightedness and excessive leverage at financial institutions. But it was also the product of basic failures in financial supervision and regulation."Put another way, the U.S. consumed too much and saved too little, and it stopped innovating to the extent it had in the past, with the exception of financial innovations. The vast majority of those innovations had no real social utility, they just served to make transactions more opaque and complicated. Investors bought into them ...

Accountants are changing the rules governing most of the shadow banking system and almost no one is noticing. About 10 days ago the Financial Accounting Standards Board confirmed that by year end “securitization accounting” will be different and the changes are likely to have a bigger effect on financial institutions than mark to market accounting. The new accounting rules will make it much harder for financial institutions to count securitizations as “off balance sheet” transactions and will reconsolidate, i.e., put onto the balance sheet, a large number of transactions that are currently accounted for as off balance sheet.

When financial institutions securitize assets and elect off balance sheet accounting treatment they are pretending that neither their securitized assets nor their related secured debt exists. Like a deadbeat dad denying paternity, securitization accounting is designed to avoid admitting responsibility by securitization sponsors.

Most securitizations are a form of secured borrowing executed by

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This post provides links to some thought-provoking articles I have read over the past few days that you may also find of interest.

• Paul McCulley (Pimco - Global Central Bank Focus): The shadow banking system and Hyman Minsky’s economic journey, May 2009. As we look for answers about the current financial crisis, it’s clear that creative financing played a massive role in propelling the global financial system to hazy new heights - before leading the way into the depths of a systemic crisis. But how did financing get so creative? It didn’t happen within the confines of a regulated banking system, which submits to strict regulatory requirements in exchange for the safety of government backstopping. Instead, financing got so creative through the rise of a “shadow banking system,” which operated legally, yet almost completely outside the realm of bank regulation. The rise of this system drove

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By now, you have surely heard that our elitist banks passed their recent government sponsored “stress test”? Forget about it! Relying on this incestuous bunch to grade themselves is like putting Madonna in charge of screening convent applicants. Take no comfort in shams of this nature.

There are bigger fish being fried. The entire American nation is in the crosshairs and will be severely tested like never before.

Very few people comprehend the scope of the problems that continue to unfold. The Dow is up a couple of thousand points so everything must be normalizing, no?

No! Look deeper.

The US Hits the Treadmill

The core of our problems lies deep in the roots of the overall system.

The US economic model has been extremely flawed for more than an entire generation. Our “money” holds no intrinsic value. We follow the consumption mantra instead of the production model. ...

Over the next decade, the critical element in any investment portfolio will be the correct call regarding inflation or its antipode, deflation. Despite near term deflation risks, the overwhelming consensus view is that “sooner or later” inflation will inevitably return, probably with great momentum. This inflationist view of the world seems to rely on two general propositions. First, the unprecedented increases in the Fed’s balance sheet are, by definition, inflationary. The Fed has to print money to restore health to the economy, but ultimately this process will result in a substantially higher general price level. Second, an unparalleled surge in federal government spending and massive deficits will stimulate economic activity. This will serve to reinforce the reflationary efforts of the Fed and lead to inflation.

These propositions are intuitively attractive. However, they are beguiling and do not stand the test of history or economic theory. As a consequence, betting on

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And this is the assigned reading for a good start of the second one: Market condition: volatile bear Time to blame the quants? Bouncing along the bottom? An economic bestiary How a modern depression might look False hopes that recovery is around the corner People fear that Paul Krugman is right Bulls get corralled? The end of excess - is this crisis good for America? Bankruptcy is economic stimulus Reviving the shadow banking system The great flaw in the Geithner plan explained Q&A with Timothy Geithner Some banks need large amounts of assistance Congress is hiding a mountain of debt Barack Obama as Herbert Hoover? Government action is unconstitutional Foreign companies try for stimulus cash Rampant fraud in SBA program Popular magazines meet the financial crisis March winners are actually the biggest losers Best Buy as a worst-case indicator A 50% cut in free cash flow Inflation looms over deflation ...

Citi sets a record… how it could signal a market bottom by June…Dan Amoss on a “rescue” program that might work as advertised — and even touch off a stock rally… Buffett dispenses more pearls of wisdom… highlights of his annual letter to shareholders… Byron King on the energy crisis the government must solve… soon… U.S. still doesn’t have it that bad… the new Iron Curtain forming in the EU

1.87 billion shares of Citigroup exchanged hands on Friday. That’s easily a record, not just for Citi, but for any stock in the history of the New York Stock Exchange. Shares in the company dropped almost 40%, to $1.40.

The former record holder WorldCom traded 1.5 billion shares on July 1, 2002. The S&P 500 set a bottom three months later.

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