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LARRY MAYER/Gazette Staff



American Police Force's president Michael Hilton addresses the media during a press conference at the Two Rivers Authority jail Saturday, September 26, 2009

As expected, they are not giving too much away about the car, but Nicholas Trotta, their Assistant Director for the Office of Protective Operations is quoted in their news release:

"Although many of the vehicle's security enhancements cannot be discussed, it is safe to say that this car's security and coded communications systems make it the most technologically advanced protection vehicle in the world."

Here is my
favorite:

"The problems
we're witnessing today developed over a long period of time. For
more than a decade, a massive amount of money flowed into the
United States from investors abroad because our country is an
attractive and secure place to do business."

And here is
his description of the grave calamity we face:

"As uncertainty
has grown, many banks have restricted lending, credit markets
have frozen, and families and businesses have found it harder
to borrow money."

September
26, 2008

Llewellyn
H. Rockwell, Jr. [send him
mail] is founder and president of the Ludwig
von Mises Institute in Auburn, Alabama, editor of LewRockwell.com,
and author of Speaking
of Liberty.

There are differing but parallel
interrelated worlds and universes, each having an endless number
of streams relating to individual entities.

They hope investors will flock back to Fannie and Freddie bonds.

They hope investors will resume lending them money at a rate that's much closer to the Treasury rates.

And they hope Fannie and Freddie will again be able to feed that low-cost money into the mortgage market just like they used to.

In other words, they hope the U.S. Treasury will lift up the credit of Fannie and Freddie.

To understand the magnitude of this dilemma, just look at the numbers ...



• Mortgages owned or guaranteed by Fannie and Freddie: $5.3 trillion.
• Treasury securities outstanding as of March 31, according to the Fed's Flow of Funds (report page 87, pdf page 95): Also $5.3 trillion.

And it's actually worse than that:



• Foreign investors, the most likely to dump their holdings if they lose confidence in the United States, hold an estimated 20% of the Fannie- and Freddie-backed mortgages outstanding. But ...
  
  
• Foreign investors own 52.7% of the Treasury securities outstanding (excluding those held by the Fed).

"It's no good. The benefit of our plan to the stock market is a spit in the ocean. On the other hand, to the government bond market, it's a potential hydrogen bomb. The quality spreads are narrowing — and in the wrong direction."

The president didn't know much about quality spreads. "What are the causes and what are the consequences of changes in quality spreads?" he asked.

"I am referring to the difference in yield between a Treasury bond and a corporate bond. A big corporation [like Fannie or Freddie] always has to pay more than the U.S. Treasury to borrow money. Typically, the difference has been about one full percentage point.

"Then, several months ago, when the full threat of corporate bankruptcies was first apparent, the yield on medium-grade corporate bonds went up by 2 1/4 percent, but the yield on the governments went up only 1/4 percent. In other words, the spread increased by two full percentage points. It was a red-hot flashing signal of trouble. It revealed that confidence in all corporations — no matter how creditworthy — had collapsed. But that was before our rescue package was announced."

"And now?"

"Now the opposite is happening. Corporate bond yields [like Fannie's and Freddie's] are back down sharply, but government bond yields are actually up sharply. The spread between them has narrowed to practically nothing — a very bad sign." The Treasury secretary felt satisfied that he had put forth a very clear and straightforward explanation.

The secretary certainly didn't know how. He spent the next half hour going over the events in the marketplace until finally, after considerable effort, the president developed an image of bond markets that looked similar to the chart below.

"Now I see," the president said finally. "We wanted to bring the corporate bonds up to the level of the government bonds. What's happening is precisely the opposite. The 'governments,' as you call them, are falling down to the level of the 'corporates.' In short, we are not lifting them up; they are dragging us down."

The president thought for a moment before he spoke. "The question is, Why? Don't they believe we're serious? Why haven't we restored confidence? At the meeting, it was said that we can create cash, that the law gives us the authority to funnel this cash wherever we please."

"The answer is that we can create cash. But we cannot create credit."

"What's the difference?" the president queried.

The president was getting impatient. "So what's the point?"

"The point is that you can create cash; you can't create confidence."

"It would seem to me that the more money we give 'em, the more confidence they'd have."

"No, no! It's exactly the opposite. The more we spend the government's money recklessly, the less confidence they have and the more they fear our government bonds will go down in value."

"Oh? But why can't we just buy more corporate bonds? That should convince them we mean business!"

"No, it just convinces them we're throwing more good money after bad — their good money after bad."

"But what about the new law?"

"The law gives us the on-paper authority to buy private securities. It does not give us the actual power to create real economic wealth."

"Why didn't we recognize this when we discussed the rescue plan?"

"We did. But you overrode us, and we consented. We hoped that the marketplace might swallow it. We seriously underestimated the sophistication of U.S. and foreign investors — very seriously underestimated."

The president hesitated for a few seconds before responding, but it seemed like hours as the tension built.

"Then what?"

Good luck and God bless!

Martin