The two economies...The Corporate economy and the Public economy
There were two economies in 2009 the corporate economy and the public economy. One was going up at the expense of the other.
The corporate economy benefited because mark to the market accounting was suspended as TARP money stabilized the derivative market. The 0% fed money then went straight to the bottom line because the banks kept the money bypassing the saver and the loan payers.
In the Public economy, the saver, relying on bank interest, was not payed last year. The loan borrower did not have their interest rates reduced or their debt forgiven. The wage earner lost their jobs or saw their hours cut and benefits reduced.
In the Corporate economy, the corporations enhanced profits by cutting hours, cutting benefits and eliminating jobs. The lower interest rates allow them to profit by trading their own stock and to sell their debt at cheap prices to a public saver that was being starved by lower interest rates.
The rules governing direct Fed intervention into the stock market were revised to allow for a 4000 point rally in the stock market. This rally was engineered to bailout the system. Banks and corporations became liquid again and as their stock and bond prices rose.
In other words, the bailout was a bailout of the system and not the economy. Through the magic of creative accounting, earnings "improved" as cheap money allowed officers and corporations to trade their own stock and bonds and to sell both to the public starved for higher interest rates. The corporate aristocracy thrived as public money was redirected to "save" them.
Last year did nothing to improve the public economy. Last year was a bailout for the very people that caused the problem. The message to the corporations and banks was we are going to give you this money but don't do it again. The it, was of course, do not loan money to irresponsible people(the public).
The funny thing is that public money is being loaned to irresponsible corporations and not to the public. The same folks that should be put in prison for breaking the law are back in the drivers seat. The same group that ran the economy during Bush are running the show under Obama. Nothing has been done to solve the problem. They are trying to put Humpty back together again and that cannot be done.
The system that in 2007 was in denial about derivatives and was telling a story about world growth to cover a Ponzi scheme much bigger than Madoff is back at it again. The story at the end of last year was the same old BS about a bottoming economy and inflation that they told in 2007.
The derivatives market is still there and the banks don't want to disclose their participation in it. The year 2009 was a cover up for problems that are so big that will take years to fix if ever. Just like 2007, the story will end with big financial failures many of which will be outside of the US.
The Corporations and banks are now liquid enough to withstand the next round of failure that will hit in 2010. The public is not. In its most recent policy statement, the Fed said, "In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010". To me that means they are going to put risk back into the market.
The Corporate economy cannot stand alone because at some point the bottom line will crack as they can only cut costs so much. Revenues will continue to decline as the public economy declines. In other words, 2010 is the year when both economies act the same.
The expectations at year end 2009 were for inflation, higher interest rates, and a bottoming economy. I expect that we are going to have a replay of 2008. The disconnect between their story and reality is widening and is becoming laughable. I expect this year to be a year where the chickens come home to roost. You can't put Humpty Dumpty together again. That egg is fried.
Mikey
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