Paulson Protege Pellegrini on Bernanke's Fed: "Sheer Lunacy"

Posted by: Peter Carbonara on November 16

Some smart people are feeling at least cautiously optimistic about the U.S. economy at the moment—among them BW’s own Jim Cooper. Paolo Pellegrini, however, is not.

Which might be worth noting because Pellegrini is the Rome-born analyst who helped hedge fund operator John Paulson make a ton of money on the subprime crash in 2007 and 2008. Pellegrini and his colleagues crunched tons of U.S. mortgage data, concluded that housing prices were due for a collapse, and invested accordingly. Paulson made over $3.5 billion on the trade. Pellegrini, now investing his personal money via his firm PSQR Capital, was ably profiled recently by our friends (and new owners) over at Bloomberg.

Pellegrini makes no secret of his disdain for Obama Administration policy in general and Fed chairman Ben Bernanke in particular. Speaking at private equity conference in New York last week, Pellegrini called Bernanke’s low rate strategy “Sheer lunacy.”

“Bernanke et al.,” he said, “are telling us the solution to our problems is to keep rates low even as another bubble forms, threatening to lure still more retirement saving into a one-way trip to oblivion.”

Recent rallies in equity and other markets, he says, are not signs of future growth. They are bear market rallies, not unlike those that followed the stock market crash of 1929. “Ben Bernanke is this great student of the Depression. I don’t know what he learned from it.”

Further, he believe signs of growth in the real economy are illusory. Pellegrini estimates the stimulus contributed 3 percentage points of the 3.5 percent real GDP growth the Commerce Department reported for the third quarter.”We are currently experiencing a recovery in real economic activity based exclusively on the massive fiscal stimulus the government is providing.” When that rush fades, which he expects by the end of the first half next year, the economy will resume sagging.

If that double dip happens, Pellegrini says, the already weakend dollar could collapse further. Bernanke and co. will have no monetary tools to fight back with. “Right now we essentially have zero rates,” Pellegrini says, “If rates were 10 percent we could lower rates, but we used that up over the last 20 years and that’s why we’re in the fix we’re in.”

What to do? Pellegrini says the first order of business is to pay down U.S. household debt. He’s proposed a plan to use TALF dollars to restructure underwater mortgages.

Beyond that Pellegrini thinks the Fed needs to exorcise the easy money ghost of Greenspan and return to the hardheaded example of Paul Volcker. He also think Congress needs to give regulators more authority to keep banks from taking huge risks. He doesn’t expect either to happen.

Reader Comments

Strategery

November 16, 2009 09:31 PM

The comment about household debt is right on. Instead of giving bankers a blank check, for the cost of the banker bailout plus the stimulus, every American could have been given a cool $5,000. Add in the cost of the AIG, Citi, Freddie/Fannie, and all the off-the-books FED bailouts and the figure easily tops $10,000. That would be enough to keep many people in their houses and/or pay off pesky consumer debt and stimulate spending. It would shore up the banks while also helping people buried in debt. Of course, Wall Street really runs Washington, so guess who gets the bailout?

Daniel Burke

November 16, 2009 09:37 PM

Finally, someone who thinks for himself....

Jim trent

November 17, 2009 12:52 AM

Good article; bernanke is delusional. Bring
back glass steagal; scrap the bank cartel fed.

Rahul

November 17, 2009 11:44 AM

Looks like Pellegrini wants to make more money betting against the US economy. Ben Bernake is not the only one making these decisions. They have an excellent advisory team with access to huge amounts of data that Pellegrini will never have. I would look more at what constructive business investors do...Look at Warren Buffet...He is betting that the US economy will get stronger and is investing in the future of America. Think Positive guys...This is not 1929 and is 2009...we have a lot more tools at our disposal...Use them to build a stronger America and not focus these tools make money only when cycles lead to lower growth.

Harry

November 17, 2009 12:01 PM

Pellegrini is right. Look at the ETF (SEA) ; it is up more than 50% this year even when Shipping companies are going bankrupt. The current market rallies are just for speculators who would just need some return for their money instead of being eaten by inflation/bank blowups.

ravi

November 17, 2009 12:43 PM

Pelegrini is right. Every great empire ended in financial ruin due to over soending - from Roman to British. Same could happen to US. For those who think US would defy the laws of economics - John Templeton once said, " The four most dangerous words in market - This time it's different".

Bernard

November 17, 2009 12:46 PM

Agree 100% with his comment on Greenspan.

Always thought that AG's legacy is to have gotten the US used to easy money.

God, I do miss Paul Volcker.

Robert

November 18, 2009 02:10 AM

Unemployment is at around 15% if you use the methodology from the the 1930's. During the great depression, it went from 3 to 8.7 in 1930 at the start and took 4 years to get into the mid 20's. Taxes went from 25% to 63% in 1933 for the top bracket. Is this time different? Oh yeah rich own Congress, i.e. Government Goldman (Saches).

Pelegrini is right, the fed is rolling the dice on this economy with that gambit their doing. Money supply has quadrupled this last year. Wait 4-5 years and you'll have no savings whatsoever if its only going to buy 1/4 the amount of gas.

Hugo van Randwyck

November 18, 2009 05:59 AM

This is a good article. Well done. Also keeping the over-capacity in the banking sector isn't helping. With lower house prices, banks have less need to lend money. This is the first time financial irresponsibility has been rewarded with $trillions - and the housing bubble conditions are still there. The banks keeping the economy going seem to be the smaller, better managed ones - they have money to lend to growing businesses.

Nathan

November 18, 2009 06:50 AM

If the Fed's have more data than any of us why did they make all the mistakes (in hindsight) since 1990's? So if you have data and "know all"; what you don't know becomes important, i.e. laws of unintended consequence. I think nobody can predict the future and control it - it is all temporary fixes and controls - This is a hard fact to swallow for all the ego driven CEO's and Govt. officials. We have transformed the economy to fiction instead of fact driven and forgot all about the word "friction"

BigRigTruckDriver

November 18, 2009 10:33 AM

All Bernanke & FED are saying is "Trust me" --- which I don't.
Nice article.
... anything the bank touched went to chapter 7... strictly cash for years to come :D

scooter

November 18, 2009 10:45 AM

Why would the United States Government borrow money from a central bank, at interest, when it was given the authority to manage an interest free monetary policy by the Constitution? End the Fed. Audit it, and then end it.

rachel

November 18, 2009 02:54 PM

This administration is incompetent in the extreme. Their inept foreign policy is surpassed only by their inept domestic and economic policy. IF they are trying to destroy our economy... then they are doing a great job of it.

The commericial real estate market is the second shoe to fall. And nothing these idiots are doing is going to stop it or create jobs to turn things around. Totally frightening incompetence.

Matthew

November 19, 2009 01:27 AM

As a neighbour of the United States, I'm becoming increasingly alarmed by what is going on in your house.
For the life of me I don't see why a country claiming to be a model democracy is run for the benefit of a privelidged elite.
Can someone explain to me - what is really going on in your house ?
You are becoming very scary neighbours.

Dr.Doom

November 19, 2009 03:12 AM

Like my grandma said,this generation is spending way beyond their means.A second great depressiomn is coming.A false economy is one than grows on too much borrowd money with stagant wages.This happened in the 1920'sThe rich got richer until it bit them in the ass in 1929.

RCharles

November 19, 2009 07:35 AM

rachel writes:

"This administration is incompetent in the extreme. ... IF they are trying to destroy our economy... then they are doing a great job of it."

Actually, the housing crisis began in 2006-2007 and the resulting financial meltdown happened in Sept 2008; all of this was under the Bush administration. Greenspan kept rates far too low right through the 2004 election; the economic boom that kept Bush in office was built on borrowed money. Finally in 2005 Greenspan started raising rates but too late and, even then, was advising home buyers to use ARMs.

Obama inherited the worst financial mess since 1929. If we had elected McCain and had no stimulus we would already be in a depression.

I am concerned with the bailout of the big financial firms, but this was mostly done in 2008 under Bush. Paulson, as former Goldman Sachs Chairman and CEO, should not have been Treasury Sec. at end of Bush admin. He bailed out Goldman and saved his own A$$. I'm not sure Geithner should be Treasury Sec. now, either.

RCharles

Stanley

November 19, 2009 08:11 AM

Here is what I think. By the way Wall Street doesn’t run Washington. Those Con-artists don’t run anything but a Con. Watch MSNBC if you aren’t conned within 10 minutes of watching it. Well then you won’t get your money back. The Banks well, you decide.

.

I get a thrill sometimes reading what people don’t understand. They struggle for some kind of clarity. I could care less. Cold but teaching the masses is for fools. Misleading them is much easier it seems.

I have never seen so many be concerned and have so much anxiety over keeping debt alive. So they can get into debt? It’s insane. So afraid that your debt based country that you want to build. So you can pay it off. Will disappear. People are running around wringing there hands saying do something.

The government is so afraid. They pacify with money. Give away all their resources. Because they are so damn afraid of being unpopular.

The country is in debt. They owe untold amounts. But to who? You have no idea. They never tell you. Stop and think. Yes our country is in debt. But to who? See most of you don’t even understand the basics.

So here is a clue. You don’t get anywhere getting it all over night. You borrow money from Big Paulie. A lot of it. He is going to want the Vig. If you don’t pay Big Paulie is going to burn your house down and throw your family out on the street. See the deal here? See how you are sub prime stupid? See how the Bank owned NYT can mislead and confuse the masses?

I am not here to teach its pointless. I will teach my dog to sit first, it’s easier.

Now before the proud and knowledgeable get puffy. You did the same things. It’s fun to watch you run for your lives to. You don’t borrow and get it quick. You work and get little by little. Over time. This gives you something very bedrock that can’t be destroyed. This is a lesson some countries can teach you. As they stare at you wondering how you can behave and live so blindly and stupidly.

repo4sale

November 19, 2009 08:43 AM

If we cannot "move" this Big USA economy in the right direction, the we must take a big profit from that "wrong direction". Every person has 1 fiduciary duty, to make a $ for their family. My goal? 1/2 billion in profits by 2020.

martin

November 19, 2009 10:20 AM

What about Rubin, Summers and the "best and the brightest" capping with Greenspan. They were the sirens of deregulation and are back in advising Obama.The average person is screwed...the two party system is a joke..money doesn't talk it swears...and all the manufacturing jobs have been outsourced while our unemployment grows..and people lose their health coverage..thats more a threat to us than some illiterate in
Afghan or Iraq!

Thrifty

November 19, 2009 12:25 PM

An interesting fact is that Paul Volcker is on Obama's economic advisory panel. Doesn't look like anyone is listening to him.

Thank you for your interest. This blog is no longer active.

 

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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