FedUpUSA

Archive for the ‘Depression’ Category

 

By Jeff Sommer

WITH the stock market lurching again, plenty of investors are nervous, and some are downright bearish. Then there’s Robert Prechter, the market forecaster and social theorist, who is in another league entirely.

 

By Michael Pento

If policymakers do not understand the real cause of a problem, they will in all likelihood be unable to provide a genuine solution.

Messrs. Barack Obama, Benjamin Bernanke and Timothy Geithner do not understand the real cause of this debt crisis. They are politicians first and economists or students of the market second–if at all. Therefore, it is not wise to count on them to tell us when the Great Recession is over, or to provide a plan to prevent another one in the future.

The cause of the Great Depression in the 1930s, and the Great Recession beginning in 2007, was one and the same: an overleveraged economy. Excessive debt levels are the direct result of the central bank providing artificially low interest rates and of superfluous lending on the part of commercial banks.

The easy money provided by banks eventually brings debt in the economy to an unsustainable level. At that point, the only real and viable solution is for the public and private sectors to undergo a protracted period of deleveraging. The ensuing depression is, in actuality, the healing process at work, which is marked by the selling of assets and the paying down of debt.

Unfortunately, our politicians today are focused on fighting this natural healing process by promoting the accumulation of more debt.

During this latest economic contraction, the Federal Reserve took interest rates to near 0%, and the Obama administration is leveraging up the public sector to record levels in a bid to re-leverage the private sector. The government’s philosophy is tantamount to sticking a frostbitten man in the freezer so he won’t have to suffer the pain associated with the thawing of his extremities.

During the Great Depression, real gross domestic product plummeted 32%. The Great Recession, which we are still struggling through, began in December 2007, according to the National Bureau of Economic Research. In contrast to the 1930s, GDP during this recession shrank only 3.6% from the fourth quarter of 2007 through its low point in the second quarter of 2009. Between the fourth quarter of 2007 and the first quarter of this year (the most recent period for which data is available), GDP contracted a mere 1.1%.

The contraction in GDP during the Great Depression was the direct result of consumers paying down debt and selling off assets. Household debt as a percentage of GDP reached nearly 100% in 1929. To put that number in perspective, household debt did not go back above 50% of GDP until 1985. It was not until the first quarter of 2009 that household debt once again approached the Great Depression level of 100% of GDP.

Between the start of the Great Depression and the end of World War II, household debt fell from 100% to just above 20% of GDP. Getting there was a painful process, but such de-leveraging was the only real cure for an economy swimming in debt. Thanks to government efforts to carry on our debt-fueled consumption binge, during today’s Great Recession household debt has barely contract at all; it fell to 92.5% of GDP in the first quarter of this year.

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To make matters even worse, during this current crisis our government’s response has been to dramatically increase its own borrowing. At the start of the Great Depression, gross federal debt was 16% of GDP. It peaked just below 44% when the Depression ended. While the national debt did increase significantly during that period, it was still relatively benign when viewed from a historical perspective.
The U.S. entered the current Great Recession with gross national debt equal to 65% of GDP. It has since exploded to 90% of GDP! Comparing the relatively innocuous level of the 1930s with today’s pile of government debt clearly illustrates the perilous state of the economy.

National debt did rise dramatically during World War II, topping out at 120% of GDP in 1946. But consumer debt plunged concurrently. So while the nation was adding debt to fight and win a global war, households were taking the necessary steps to ensure their balance sheets were well prepared for the aftermath of the battle.

Today, gross national debt and household debt are both at or above 90% of GDP for the first time in our history.

Many observers–unfortunately including most of those in power–have concluded that the government must spend more while consumers rein in their debts. Their strategy is based on the belief that once the economy perks up they can unwind that debt.

There are two problems with this Keynesian theory. One is that government spending doesn’t increase GDP; it only chokes off private-sector growth. The other is that politicians never regard the present as a good time for the government to pay off its debts.

The result is that the country is left with a private sector reducing a massive overhang of debt. As households curb spending, GDP slows, and the ratio of debt to economic output grows even further.

Since we have yet to address the real cause of this recession, we are moving inexorably closer to causing The Greater Depression. If policymakers do not understand that the progenitor of a depression is debt, they will also be unable to provide a genuine solution.

Michael Pento is chief economist at Delta Global Advisors and a contributor to greenfaucet.com.

Forbes

Pictures of a Market Crash: Beware the Ides of March, And What Follows After

There are a fair number of private and public forecasters with whom I speak that anticipate a significant market decline in March. As you know I tend to agree, but with the important caveat that we are in a very different monetary landscape than the last time the Fed engaged in quantitative easing, the early 1930′s.

The biggest difference is the lack of external standards. This introduces an element of policy decision that has been discussed here on several occasions. In other words, the Fed retains the option, albeit with increasing difficulty, to create another bubble, and levitate stock market prices in the face of deteriorating economic fundamentals.

The dollar was formally devalued by around 40% in 1933. We may yet see that done this time, but more gradually and informally. This is what makes gold controversial today; it exposes the financial engineering. So they feel the need to manage it, to denigrate it as an alternative to their paper. They want to have their cake, and eat it too.

Let’s review where we are today.

The Bear Market of 2007-2009, marked by the Crash of 2008, has been a massive decline in equity prices precipitated by the bursting of the credit bubble centered around housing prices and packaged debt obligations of highly questionable valuations. The cause of the bubble was easy Fed monetary policy and the loosened regulation of the financial sector, which reopened the door to old frauds with new names.

Even today, I think most people do not appreciate the sheer magnitude of the decline, and the damage it has done to the real economy. This is the result, I believe, of three factors:

1. An extraordinary expansion of the Monetary Base by the Federal Reserve not seen since the aftermath of the Crash of 1929, and a swath of financial sector support programs from the Fed and the Treasury, resulting in a spectacular fifty percent retracement rally from the stock market bottom. This is the narcotic that permits the country to not notice that a leg is missing.

2. A comprehensive program of perception management by the government in conjunction with the financial sector to sustain consumer confidence and reduce the chance of further panic. In other words, a web of well-intentioned deceit, subject to abuse.

3. An understandable preoccupation by the individual with the details of breaking news, and a short term focus on particular events, diversions, and controversies, bread and circuses, without a true appreciation of the ‘big picture,’ in part because of some very effective public relations campaigns and a natural human reluctance to face hard problems.

This is resulting in a remarkable case of cognitive dissonance in which some of the victims of a spectacular man-made calamity are opposing remedies and aid as too costly and impractical, even as they walk around amongst the bleeding carnage.

For those who read the contemporary literature in the early Thirties, this is nothing new. In the early Thirties there was no sense, except for a few notable exceptions, of the magnitude of what had so recently happened. There was the sense of life goes on which seems almost eerie now to a modern reader. Indeed, Herbert Hoover could dismiss a delegation of concerned citizens with the advice that they were too late, the crisis was past, and all was well. Sound familiar?

The parallels with the Thirties and the Teens (today) are many, and uncanny.

There is the reformer President, elected to redress the extremely pro-business policies of his Republican predecessor. In the Thirties they had FDR who was a decisive and experienced leader. In the Teens the US has a relatively inexperienced community organizer, more influenced by the Wall Street monied interests, and a past history of ‘playing safe,’ who is trying to manage through indirection and persuasion.

There is a Republican minority in the Congress which opposes all new programs and actions despite giving lip service in order to delay and debilitate. In the Thirties the Republicans were over-ridden by a powerful, activist President, who created a “New Deal” set of legislation, much of which was later overturned by a Supreme Court which had been largely seated by the previous Republican Administrations.

Indeed, the remaining New Deal programs that were successful, the reforms of Glass-Steagall and the safety net of Social Security, are being overturned or are under attack in an almost bucket list fashion.

So what next?

Another leg down in the economy and the financial markets is a high probability.

Although one cannot see it just yet in the fog of corrupted government statistics, the economy is not improving and the US Consumers are flat on their back, scraping by for the most part, except for the upper percentiles who were made fat by the credit bubble, and are still extracting rents from it through officially sanctioned subsidies.

This was no accident; there is a consciousness behind it.

There are far too many otherwise responsible people who are not taking the situation with the high seriousness it deserves. Some would even like to see the US economy collapse, inflicting serious pain and deprivation because it may:

1.suit their investment positions and feed their egos because they think themselves above it all,
2. satisfy their ideological and emotional needs to see punishment administered, almost always to others, for the excesses of the credit bubble, especially if they are relatively weak, unwitting victims, and
3. the sheer nastiness and immaturity of a portion of the population which wallows in stereotypes, childish behaviour, and disappointment with their own lives. They tend to find and follow demagogues that feed their bitter hatreds.

They know not what they do, until they do it, and see the results. It is often a good bet to assume that people will be irrational, almost to the point of idiocy and self-destruction. And some of them never wake up until they are overrun, and then will not admit their error out of a stubborn sense of pride and embarrassment.

It seems likely that there will be a new leg down in financial asset valuations, as reality overcomes often not-so-subtle propaganda and disinformation. It may start in March, or it may be a ‘market break’ that provides a subtle warning for a large decline that begins in September 2010, with multi year progression to lows that are, as of now, almost unimaginable, at least in real terms. I cannot stress this issue of nominal versus real enough. As inflation comes, it will initially be in a ‘stealth’ manner, with the backing of the currency eroding slowly but steadily, and largely unrecognized for some time. It is not enough to try and count the dollars; one also has to consider the value behind them, the quality of the wealth, and its vitality. This is the case for stagflation.

The Fed is acting to mask quite a bit of this. One would hope that they would also not re-enact the policy error of their predecessors and raise rates prematurely out of fear of inflation before the structural healing can occur.

The debt incurred during the credit bubble cannot be paid and must be liquidated. So far we have largely seen transference of debt obligations from insiders to the public. Ironically these same insiders are lobbying to maintain these subsidies and transfers, and also to take a hard line against any further remediation of the consequences of the collapse, which they caused, on the public, to have more for themselves. Their greed and hypocrisy know no bounds.

But the policy error might not be caused by the Fed’s direct action, but replicated by a governmental failure to stimulate the economy effectively AND to reform the highly inefficient and impractical financial system. The purpose of stimulus is to provide a cushion for structural reform and healing to occur, after an external shock, or even a period of reckless excess and lawlessness. The natural cycle can be disrupted beyond its ability to repair itself. But stimulus without reform is the road to further deterioration and addiction.

As it stands today the global trade system is a farcical construct that favors national elites and multinational corporations. Public policy discussion has been trumped by a handful of economic myths and legends that, even though disproved every day, nevertheless remain resilient in public discussions and reactions. This is because they have become familiar, and because they are the instruments of deception for certain groups of disreputable economists and policy influencers.

A more serious market crash might cause people to recognize the severity of their problems, and the thinness of the arguments of the monied interests for the status quo which is most clearly unsustainable. But a sizable minority of the population is always highly suggestible; demagogues rely on this.

The eventual outcome for the US is difficult to forecast with any precision now because there are multiple paths that events might take at several key decision points. Some of them might be rather disruptive and upsetting to civil tranquility. Game changers.

But as the dust continues to settle, the probabilities will continue to clarify.

“Suffering can strengthen our endurance. Endurance encourages strength of character. Character supports hope and confidence even during hard times and trials. And hope does not disappoint us in the end, because God has given us the Spirit and filled our hearts with His love.” Romans 5:3-5

It is right to be cautious, and it is human to be afraid. But let us not allow our fears and trials to turn us from our genuine humanity in God’s grace no matter how dire the day, even if it may drive some of the world once again into the jaws of desperation and madness. And if you stumble, gather yourself up and go forward again without turning from the way. For what is the profit to gain some small and temporary advantage in this world, but to lose your self, forever.

 

How Long Before You Wake Up, Politicos?

Posted by Karl Denninger

I’m going to write today about a very somber subject.  It will be, as it usually is here in one form or another, about math.

First, some background.  If you believe that we have “escaped” from the mess that gripped this nation in 2008 and 2009, or that said mess “suddenly appeared” and “nobody saw it coming”, stop reading now and have your Thorazine dosage checked.  It’s way off.

Assuming you accept the truth – that this mess was 20 year or more in the making, that it involved creating credit (that is, debt) which the debtor could never pay, and that it still exists because our government policy has been to extend, pretend and allow lies that should be considered accounting fraud and result in prison sentences, then you’re on the right page to understand the rest of this missive.  Again, if not, go check your Thorazine dosage.

Yes, I know all about the stock market rally from last March.  I know all about the claimed GDP “improvement.”  But I also know that we got both by adding more than $2 trillion in debt to the United States – or roughly 14% of GDP – over the space of the last 18 months.  That’s about 10% of GDP annualized, and incidentally, a 10% GDP contraction is the common economist’s definition of an Economic Depression.

So let’s cut the crap – we are in a Depression right now.  We are pretending we are not, just like you can pretend you didn’t really lose your job so long as your credit card does not reach its limit.  We have been in that depression for about 18 months and there is no evidence that we will exit it, as we have yet to find a way to pull back the deficit spending without an instantaneous collapse in the economy.

Yet at some point we must and will stop.  We will either do so of our own volition, or we will do so when the cost of borrowing skyrockets, as others get tired of funding our profligacy.  If we attempt to “print” our way out of it the cost of petroleum products will shoot the moon and destroy our economy anyway.

You haven’t seen the half of what happened though – not yet.  It appears that AIG – the company we have bailed out (thus far) to the tune of some $100 billion plus, in fact isn’t done.  It appears they may have written credit protection on Greece.  If this allegation by the German equivalent to The New York Times is true Americans are going to be asked to pay billions of dollars – or more likely, hundreds of billions (since Greece is almost certainly not the only place – try Spain, Portugal, Ireland, etc) to bail out a bunch of FOREIGN NATIONS.

Do you both think Americans can and will pay that bill?  A bill that has been forced on us, and yet benefits not The United States economy, but foreigners? 

Wars – big wars - start over much less, my friends.

Oh, and let’s not forget – some 30% of Greece’s workers went out on strike to protest their “austerity measures.”  That’s right – one in three.

The Fed and our fabulous Treasury Secretary already gave tens of billions of our hard-earned money to foreign banks to prop them up via AIG.  That was just a down payment; now we all get to – quite literally – buy all their houses over in Europe.  They get to keep living in them.

If you do not believe it is going to get much worse than it is now, economically and otherwise, you once again need to go have that Thorazine dosage adjusted.

A recent Rasmussen poll disclosed that only 21% of the voters in this country believe that the government enjoys the consent of the governed.  Put another way, only 21% of the voters in this nation consent to what Washington is doing. 

More ominously, 61% say the government does NOT have consent.  The remainder (18%) are not sure.

May I remind you that in 1776 less than that 21% of the population (19%, actually) were loyal to Britain?

If you do not believe this nation is wound tighter than a clock spring, you need to have that Thorazine dosage checked again.

You are in denial. 

After denial comes anger, then bargaining, and finally acceptance.

Let’s not do anger on a mass scale in this country, ok? 

Neither I or my daughter will appreciate it if it happens; shall we skip that and go right to “acceptance”? 

Let’s assume your answer is “yes.”

Now let’s talk numbers.

There are approximately 150,000 federally-attached law enforcement personnel.  Another 750,000, roughly, state and local cops are employed by our various government arms.  Of those various officers well more than half sit behind a desk and haven’t left one gram of shoe leather on a street or in a cruiser in the last year.  The majority of you fire your weapons for periodic qualification and they have never been warm or dirty besides.  You’ve never faced death, you’ve never had a weapon pointed at you in anger, and you’ve never drawn your service weapon in the line of duty.  Those are facts.

Now consider the “bad side” of America.  The Justice Department estimates there are at least one million gang members – active gang members – in America.  These people, mostly young males, have nearly all drawn or fired weapons in anger.  They are responsible for more than three quarters of all crime in this country, and some eight out of ten violent crimes.  Those gang members have families – younger males who are “coming up”, “friends” (if you can call a murderous thug a friend) and others.  Between all of those “loosely attached” folks and the hard-core inner circle itself we probably have somewhere between 5 and 10 million people in this nation who, given the wrong sort of provocation, might decide that “Zombieland” wasn’t just a movie.

Our politicians created most of these monsters so the “finest” would have something to do.  A nearly-100-year obsession with what consenting adults put in their bodies is largely responsible for this, and an intentional policy of allowing an effective invasion of illegal aliens over our southern border provides some the most-violent core of this group.  The illegal drug trade has fueled international wars, international gangs, and virtually all of the organized violent crime in this nation going back to Prohibition.  Essentially every automatic weapon in the hands of criminals (and there are plenty of them) comes into the US through this same intentionally-left-open border as do the gangbangers, lies of this (and previous) administrations notwithstanding.  Those of you in the Law Enforcement business may not want to accept these facts, but if you reflect on it you cannot escape reality: weapons, ammunition and other means of street thuggery all cost money, and without these drugs being illegal there would be no profit in it, and thus a huge part of the criminal gangland element would not exist.  You’ve cheered on the War on Drugs as it has meant more cops being hired and more, better, fancier toys for you to play with, along with $200,000+ pensions (in some areas.) You’ve been fools and even self-destructive assholes for having done so.  But that, today, is water over the dam – the bad guys are here, they’re not leaving, and there’s no evidence that the political class is going to suddenly legalize these substances tomorrow, cutting the source of funds for the thugs off at the knees – after all, you won’t rise up and demand it happen.  So we must deal with reality on the ground as it is (and as you have cheered on the creation of), whether we like it or not.

As I’m sure you’re aware all of America sees some of our “finest”, not to mention our politicians, in various forms of misbehavior virtually on a daily basis.  A girl beaten on a train platform while uniformed rail security stands and watches.  A young man who appears to have been executed by a different rail security officer, even after he was subdued, face-down, without a weapon and easily able to be cuffed.  The infamous Rodney King incident.  The false accusations against the Duke Lacrosse team that threatened young men with many years behind bars for something that never happened.  Our current Treasury Secretary who cheated on his taxes, not to mention the chair of the House Ways and Means Committee who did as well (that’s the committee that writes tax law, if you’re not up on your American Government.)  And now, in the latest bit of ignobility we’re expected to swallow, we have accusations that a school district has been taking pictures of kids in their bedrooms using state-issued laptops that said kids were required to accept in order to pass their high school classes.

Here’s the problem: We the people increasingly don’t trust you, the law enforcement community, and we definitely don’t trust Washington.  It’s not just beating a black man within an inch of his life, or shooting a prone, subdued suspect in the back. 

Oh that’s bad enough, don’t get me wrong, but it gets worse. 

Much worse.

See, our economy wasn’t ruined by accident.  These crimes of economic activity were every bit as destructive, if not more so, than the bank robber, rapist or even murderer is.  These economic offenses have literally dispossessed millions of Americans of everything they once owned.  They have destroyed the hopes, dreams, and lifestyles of entire cities, sent tens of millions of jobs overseas into slave labor camps and stripped off the wealth of our nation through the issuance of securities that were worth nothing, just to add insult (and yet more profit for these banksters) to injury.  Take a drive through Detroit if you doubt me, if you dare, and are appropriately armed to defend yourself (you’ll need the latter, especially if you’re white.)

As I noted above the bad news is nowhere near being over.  We’re denying as a nation, as corporations, as politicians and as people.  You’ve drank your coffee and eaten your donuts, but what you haven’t done is taken the initiative and marched down onto Wall Street and K Street (in DC), along with the myriad bankers, mortgage brokers and yes, even borrowers who were lying and cheating at the same time.  You should have broke out the handcuffs by the crate-load and frog-marched these people into the dock en-masse over the last two decades, but you didn’t.  You should do it today, but you won’t.

I know, you don’t make the laws and you just follow orders from above.

But you’re who we see.  You’re “The Badge” or “The Squad.”  And what we, the people don’t see is perp walks of those people who richly deserve it – who have in fact broken the law and destroyed our nation’s economic vitality for their own personal profit.

Remember, ladies and gentlemen, no matter what branch of law enforcement you hail from, your primary oath was not to a person.  It is not to your commander, your captain or your squad. 

Your oath is to The Constitution.  You swore to defend that Constitution against all enemies, foreign and domestic.  You swore to God and countryman alike, and your oath does not have a “use by” date at which point it expires.

Now consider this: the unspoken “social contract” says that the good guys go about their business without harming other people, and the occasional miscreant commits some offense, gets arrested and put in the dock by you.  There they face their twelve, and in many cases subsequently do their time.

But what really inhibits the miscreant from his deed?  Is it that you will show up and take a report after the stereo is stolen, the car burgled or the bank robbed, and attempt post-hoc to have them face the music?

No.

It is the possibility that he will break into or attempt to rob a home or business that has an armed citizen in it who is prepared and willing to defend him or herself.  Armed not only with the ability to fight back but the weapon of familiarity of surrounding, said homeowner or shopkeeper might well splatter the brain of said felonious thug all over the far wall - in righteous and perfectly-legal defense of one’s person (except in places like Chicago, of course.)  The truth of this is clear on its face – those places where citizens are “restricted” (illegally, I might add, under the clear language of our Constitution) from mounting their own defense to rape, robbery or murder the bad guys pretty much take turns “at will”, as opposed to places like Kennesaw Georgia which mandate instead that every homeowner have a firearm and ammunition.

One last thing to consider, and I will leave you be, as I have others to address this fine day.

If it gets bad, and I believe both history and the math says it will, who’s going to help you?  Do you really think the entirety of the 150,000 Federal Officers will come to your aid?  Or will they sit in Washington DC and in their big black Suburbans (armored, of course) issuing orders for you to go into the streets in your (unarmored) Crown Vics and die in their place?  Remember that the “bad guys” in such a circumstance outnumber you 10 or even 20:1 and not only are they probably armed as well as you are, they’ve actually shot – offensively – at other human beings.  Unless you’re one of the “bad cops” you’ve never done that, and few of you have had to fire in self-defense.  Your only realistic advantage in such a situation is that most of the gangbangers are pretty poor marksman.

What’s the outcome of such an event likely to be?  Remember, we may distrust you,  but the bad guys hate you to the core and would BBQ and eat you for dinner if they thought they could get away with it.  If things get bad they might deduce – en-masse – that they can get away with it.

Let’s face facts: while today we all count on being able to pick up the phone and call “911″ if we need an officer to take a report on our stolen stereo, if the bad times come you will need us, not the other way around.  We the people will, under such a circumstance, have the luxury of determining whether your oath of office has been faithfully discharged, or whether the only difference at that instant between you and the gangbanger is that you’ve got a fancy hat and a nicer car.

Most of us, should we determine that you’re just the thug with the fancy hat will hide under the desk.  We won’t shoot at you – that’s not our way.  We’re law-abiding citizens, for the most part, and while we will shoot back, we won’t shoot first.  But what we won’t do is help you, because your time – your opportunity to help us prevent this catastrophe – will have expired.  We will protect our neighbors, our friends, our fellow citizens.

But that’s all. 

You will get to deal with Zombieland, and in the back of your mind as you’re literally consumed will ring that old saw you laid on us for the last two decades: “I just follow orders; I don’t make the rules.”

Be honest with yourselves: Is this where you want to be, or would changing things now be worthwhile?  Would regaining the trust of the people be a good thing?  Would replacing the large percentage of law-abiding citizens who now would spit on your shoes with those who will stand shoulder-to-shoulder with you, weapons facing the oncoming zombie hoard, be a good thing?

If so you have some work to do and there’s still time left to accomplish it.

To the politicians who are reading this, your Thorazine dosage needs adjustment as well.  The math is irrefutable.  If, in point of fact, AIG has entangled itself with the European Continent there is no escape from what is to come.  There is only destruction, and our only two choices are to cause as much of it as we can to occur there, by pulling the plug on these clowns now, or risk a literal World War.  We may get one anyway, but if we bring the bulk of the damage here we’ll be dealing with a civil collapse at the same time, and have no chance of being able to deal with the geopolitical implications.  We must not allow that to happen.  You must not allow that to happen.

We understand you give the orders to the people I’ve been talking to (mostly) up above.  But you have less excuse than they, when it comes to oaths.  You all took an oath to uphold The Constitution as well.  You’ve used it as toilet paper, and that’s on a good day.  The rest of the time we see you gleefully burning it in the Wells of the House and Senate, dancing around the smoke and fire like some odd pagan ritual.

It’s time to stop.  Not because you want to, not because you fear us (even though you should – after all, we’re your employers and can fire you) but because if you don’t there won’t be a nation worth governing left.  You know who the crooks are – including those among you. 

Let’s talk taking this nation back.

It starts with declaring all CDS written against sovereign debt, directly or indirectly, void as contrary to public policy.  Yes, that cuts Europe off from any prospect of a US bailout.  So be it.

Next, all the banksters who were involved in these bogus securitizations need to be hauled into the dock.  Now.  William Black and his merry men sent over 1,000 people to the slammer in the S&L crisis.  There are ten times that many who need to go this time.

Third, force all credit-default swaps onto a public exchange with published bids, offers, last trades, open interest and nightly margining.  In public, where we all can see it.  Either that or ban these obscenities outright.  Choose one, and only one of those two options, and do it now.  Yes, I know the banksters will howl.  Too damn bad, and while you’re at it, make it unlawful for any institution that does business in this country to transact in any way in any instrument that does not comply with that rule.  This monster, as I’ve been writing about for almost three years now, must be caged.

Fourth, reinstate Glass-Steagall.  Yeah, I know, the Senate doesn’t want to do it.  The Senate wants a nation that’s worth governing though, right?  We won’t have one if this crap isn’t stopped.  Mssrs. Glass and Steagall had it right in the 1930s.  Put it back.

Fifth, stop lying to the people – and this includes lies told through deficit spending.  We don’t have the money and can’t keep borrowing it.  If you don’t stop we will find the “knee point” the hard way, at which point once again, you won’t have a nation worth governing.  Remember the four steps above – neither I or my daughter, nor most of the 330 million Americans in this country, want to see the “anger” phase.  Our country is like a powder keg and every time you lie you’re playing with matches in the room.  Stop it before you blow us all up.

Sixth, we’re in a Depression, like it or not, and we’re not going to get out of it until the bad debt is defaulted and cleared from the system.  Your job is to make that happen and get it over with.  That’s deflationary.  Sorry; this is math, not politics.  The housing bubble was a hyperinflationary event – one hidden from the people by bogus government statistics and outright lies.  Deflation always follows hyperinflationary credit booms – it’s either that, or the destruction of the government, political system and currency.  You choose, but if you do not decide, destruction it will be.

Seventh, close the damn border and declare all the illegal immigrants as what they are – invaders.  Tell them to either leave or will expel them – and mean it.  Declare “LaRaza” a terrorist organization and lock ‘em all up.  Americans need the jobs and we cannot afford to have five or ten million thugs just waiting for opportunity in the smallest loss of civil order to swoop in and take advantage of us all.  At the same time, drop your insane “War on Drugs” and replace it with a taxation, regulation and legalization structure.  Yes, I said legalize – federally.  While we still have time we must cut off the chief funding source for the murderous thugs who otherwise, given the opportunity, will feast on you after they BBQ the local and state law enforcement crowd in our major cities.  Don’t BS me or anyone else with your claims that such isn’t a real risk – I don’t see you strolling around in your fancy suits through the bad parts of Washington DC sans security details.  Gee, I wonder why not……

Finally, to President Obama.  You can’t serve both the banksters and The American People.  You took the oath of office too.  Now you have to choose.  Not only will you lose in 2012 (badly) if you don’t start locking up the jackasses that got us into this mess but if you don’t ram the above seven points down the throats of these banksters and others in the next couple of months your party will be decimated in the November elections.  Some of your oldest allies in the Democratic Party are resigning; Senator Bayh, for example.  Illinois’ State financial health is akin to someone with terminal pancreatic cancer, and that’s where you’re going home to in 2012 if you don’t quit being nice-nice with people who have played rape-rape to the American people and economy for the last two decades.  You didn’t make the mess (you weren’t around long enough to do it) but you had damn well better clean it up, or what will be left of this nation is unlikely to be worth governing by the time your term expires.

Health care may be important but not until the above is taken care of.  Fixing the financial system is the issue you must confront and fix in its entirety.  Not half-way, not by compromise – you simply must fix it.  The seven points above are not options, they’re not discussion points - they’re mandatory.  All of them.  Don’t believe me if you don’t want to - believe Charlie Munger, one of the wisest investment professionals ever to live, and, in my opinion, the smarter half of Berkshire Hathaway (with no disrespect intended to Warren.)

The choice is yours Mr. President, but the consequences will belong to all of us.

Choose wisely.

 

WE THE PEOPLE (Have Had Enough)

STARVE THE BEAST!!!!!!!!

Posted by Karl Denninger

THE seminal question for this year – coming into the mid-term elections – is exactly that.

Have you had it?

Are you tired of being bent over the table with 29.9% credit card interest rates while these big banks borrow at zero from The Fed and use that money to speculate in the markets?

Are you tired of “too big to fail” – better stated as heads we (the banksters) win, tails you (the taxpayer) lose?

Are you enraged beyond words with the fact that this economic mess was not an accident – it was an intentional act of willful blindness and perhaps even fraud?

Do you feel helpless to do anything about the fact that Government has willfully and intentionally refused to both clean up the mess and prevent it from happening again due to the presence of huge lobbying interests in Washington DC – paid for by the very same banksters who nearly destroyed this nation?

Do you realize that we have fixed nothing – the bad loans are still there, they are still bad, that millions of Americans have lost their jobs, that the economy is not actually recovering (despite what they say) and that without resolving the actual problems odds are that within a few years, and perhaps within a few months, we will face another crash – this one likely bad enough to destroy our economy and perhaps our government?

Let’s look at the facts.

• The testimony being put before the FCIC – the investigatory panel charged with looking into how the housing and foreclosure mess came about, and how our economy was stripped clean by the vultures that infest the banking business in this nation is a matter of record.  I, and others, have been documenting this for more than two years.  READ THE MISSION STATEMENT AND TESTIMONY OF PEOPLE LIKE MIKE MAYO.
• THE FBI has been warning of an “epidemic” of mortgage fraud since 2004.  The banks knew this.  Indeed, in 2004 their lobbyists convinced The Bush Administration to SUE to prevent state regulators from protecting YOU, THE CONSUMER, from predatory and unfair loans.
• Since 2006 there have been published stories that stated income loans were laced through-and-through with fraud:
  

  One lender recently compared 100 stated-income loans with the borrowers’ tax returns and found that only 10 of the borrowers were telling the truth about their wages, according to Mortgage Asset Research Institute, a division of data firm ChoicePoint Inc.  (September 2006)

• The Wall Street and large commercial banks did not include these disclosures in their offering circulars for securitized debt. 

• Wall Street entities knew they were at risk but bought “protection” (CDS, or “credit default swaps”) from firms who they knew or should have known could not pay, including but not limited to AIG.  This “allowed” them to consider assets they knew or should have known were rife with fraud as “money good”.

• Wall Street and “big lender” loan programs in the housing market during the years 2000-2007 all “assumed” that house prices would rise forever at a rate higher than inflation.  The key point is that even if they had, which is mathematically impossible, it doesn’t change the fact that the borrower, that is you the citizen, still was going to lose their house when they reached the limit of their borrowing capacity.  The bank’s only concern was designing a program that they would be protected by – not whether it was suitable for you nor whether you would have (or continue to have) a home.

None of this was a “mistake” or an “accident”.  It was not an “unforseen event.”

Government agencies were aware of and sounded the alarm as early as 2004.  Brooksley Born, chair of a federal regulatory agency (the CFTC) raised hell on complex derivatives (“CDS” and similar instruments) in 1999.  She was attacked by everyone in the banking industry including Alan Greenspan and literally run out of town.  She was right.

The banking and Wall Street institutions, through a combination of the above, “made” billions of profits that never really existed.  They then paid that money – money that didn’t actually exist AND NEVER WOULD – out in bonuses, dividends and stock price appreciation.

Starting in 2007, it all came apart, first with two hedge funds at Bear Stearns, then Bear Stearns itself, then Fannie Mae, Freddie Mac, Lehman Brothers and AIG.

In the fall of 2008 Ben Bernanke and Henry Paulson, Chairman of The Fed and Treasury Secretary (who had refused to heed the warnings of the FBI and others for the previous four years) corralled a bunch of Representatives and Senators in The Capitol.  We were told that the government “had to bail out the banks” to prevent the financial system from collapsing.  By anywhere from 100:1 to 300:1, the American People said “let ‘em burn.”  The government refused once again to listen, and together with The Federal Reserve propped up the banks instead of forcing them to eat their own cooking.  Rather than use the money appropriated to force these institutions through bankruptcy and shut them down, paying off the depositors that were insured, these failed institutions were instead mish-mashed together into even bigger financial companies and then given government backstops.

Nothing has been fixed.

The bad debt is still there.

Unemployment has skyrocketed, the banks have cranked up credit card interest rates to 29.9% and are feasting on zero interest Federal Reserve money which they use to speculate in the financial markets, paying out well over $100 billion in aggregate in bonuses for the last year.

We are told this is and was “necessary.”

I might accept that – if it came with the closing of all of these institutions.  Each and every one of them.  If it came with the permanent barring of every executive involved from ever serving as so much as a janitor in any financial institution – worldwide – ever again.  If it came with a full forensic audit of each and every one of these institutions and officials by the FBI, with every instance of fraud that was uncovered presented to a grand jury.

But it has not.

Instead, firms like Countrywide Financial and Washington Mutual were absorbed into Bank of America and JP Morgan/Chase.  Those who were “too big to fail” not only were not dismantled, they were made bigger and more powerful.

Wall Street may effectively own Washington DC and the politicians but they do not own us.

WE THE PEOPLE ARE UNDER NO OBLIGATION TO ACCEPT THIS.

WE HAVE RIGHTS.

WE THE PEOPLE have the freedom to associate – or not.

WE THE PEOPLE have the right to demand legal tender in payment of debts owed us.

WE THE PEOPLE have the right to demand that these institutions eat their own cooking on each and every one of the loans they securitized and peddled during these years without fair and full disclosure to the buyers that these loans were rife with fraud.

WE THE PEOPLE have the right – and the ability – to take personal, lawful action with specific, lawful political and business-oriented goals, including permanent structural changes that will end “too big to fail” and “rip off the consumer on demand” policies, including the full reinstatement of Glass-Steagall which will END financial speculation and dealing in all of its forms by firms that have access to Federal Reserve credit and/or any sort of public backstop.

In the coming days and weeks I will outline specific, lawful actions that I hope each and every financial blogger, writer and columnist will take up and push as the key item for the remainder of this year and, if necessary, beyond – all with the intent of accomplishing these goals.

I invite all financial bloggers, mainstream media writing or broadcasting on the financial markets and products and interested politicians to contact me at “karl <at> starve-the-beast <dot> org” with the explicit purpose of joining an effort to formulate cogent and real, tangible yet lawful actions that can effect positive and necessary change.  Further posts to The Market Ticker will be made under the Category ”Starve The Beast” – so you can find them all in one place.

Make this message – this post – viral.  Send it to your associates.  Send it to the media.  Send it to politicians.  Get involved and do it now.

The opportunity is now and our responsibility is clear.  We either accept that responsibility and act or we are consenting to serial asset bubbles and ever-larger detonations, with the very real risk that the next one destroys our political and economic system both in the United States and beyond.

 

A Paper You MUST Read

Posted by Karl Denninger

Buried in the smoke and furor yesterday was the second panel in the FCIC testimony – the one CNBC did not provide any meaningful coverage of.

And right up front is the one person’s testimony you need to read.

That would be Michael Mayo.

Mr. Mayo hits on the themes that I have been hammering for the last two and a half years, absent some of the pointed allegations of knowing deception (that’s otherwise called “fraud”.)

Mr. Mayo used to work at The Federal Reserve, and was there during the previous banking crisis.  He points out, as has Bill Black, that we learned nothing from the S&L crisis when it came to lessons on control fraud and overextension of risk, and in fact we’re doing it again.

He calls out ten failures, and then puts forward three prescriptions.  I will not reproduce them here, since I maintain that everyone who reads The Ticker owes it to themselves not to read my summary, but rather to read Mr. Mayo’s original work – every word of it.

I will capture a few points however:

• It is pointed out that it is difficult to recreate the reality of a balance sheet through analysis if the numbers are not reported on a similar basis. Exactly.  I cannot, today, analyze a given bank’s balance sheet and tell you whether I believe they are in good health or bad, whether their cash flow is sufficient to service their debt, or the likelihood that their assets will perform.  This obfuscation is intentional and in no small part a direct consequence of lobbying by the banks themselves for the ability to provide other than market prices for alleged assets!
• Mr. Mayo asserts that there is such a thing as “too big to fail.”  I argue that if JP Morgan is too big to fail then anti-trust law says they’re too big to legally exist, as they continue in business with a de-facto unlawful “put” from the federal government, acquired through what amounts to extortion, that smaller institutions do not enjoy.  This is the essence of anti-trust law – that some firms, when they control too much of a market, abuse that position to gain advantage and shut out competition through collusive action.  This is what the “government PUT” for “too big to fail” entities comprises and the solution is simple: If you have to be bailed out in any way by the government you are broken up and your entire management team is permanently barred from ever serving as an officer of a public company again.  No ifs, ands or buts.
• Mr. Mayo also talks about capital and the need to be certain that there is never a question as to whether there is enough.  The simplest way to do this is to impose hard leverage limits and require that liquid and/or immediately-convertible capital be present at all times to cover any potential deficiency on carried assets.  At the same time all off-balance sheet exposures and naked derivative positions must be absolutely barred.  The simplest means to accomplish this is to restore Glass-Steagall, thereby removing the ability of commercial banks to play with levered instruments in the first place, limiting their leverage to their reserve ratio, and reinstate mark-to-market accounting performed nightly.  Bingo: We know you have enough capital in each and every case, and if you get close to the line you’re forced to divest assets or convert some of your prearranged debt to equity.

Folks, these solutions are not technically difficult.  They are politically difficult but the question we need ask ourselves in this country is this:

Are we willing to undergo another crash similar to 2008/2009?  WE WILL if we don’t stop the insanity, and it will likely come sooner rather than later.

The bad debt on the balance sheets of the banks and others has not been removed, either by payment or default.  It is being carried at values that suggest performance will occur even in instances where we know that is very unlikely, such as with second mortgage lines (HELOCs, etc) that are underwater.  When, not if, the foreclosures occur on the senior (first) mortgages these lines will be exposed as worthless, triggering another problem.

Nor is the issue confined to second lines.  Commercial Real Estate, OptionARMs and allegedly-”prime” loans that in fact were not all are deteriorating in record numbers.  These losses have already occurred and are being hidden, but that charade can continue only so long as the cash flow permits.

This is why there are no meaningful numbers of permanent modifications on mortgages nor will there be – the program cannot succeed as for it to do so the losses embedded in these institutions must be admitted to and recognized, and our government refuses to force that to happen.

The current attempt is to re-inflate house prices and thus pretend the crisis has past.  But we have destroyed our wage base over the last 18 months, which has simply compounded more losses into what were doomed loans, rather than forcing the defaults out into the open and selling them off at whatever price they would fetch.  By doing so we have literally added hundreds of billions of additional dollars in loss to what was already a horrible situation, and that loss has now been accrued and will not be able to be avoided either.

Within a few years time (before 2010) we will face a new problem – boomer retirements will go “over-center” and they will be net sellers of all asset classes to fund their retirements, while entitlement spending will ramp toward the moon.  That problem is extremely serious but on the path we are on now we will not get there before what we believe avoided smacks us.

Our choice is to take our medicine now and be able to recover before this tectonic shift occurs with boomer retirements and entitlement spending, or walk straight into that mess in the midst of a decade-long depression.