FedUpUSA

Archive for the ‘Government’ Category

It was interesting to see the spin regarding the FDIC quarterly report this week.  The report was largely a reflection of the way we now categorize profits in the banking system.  Banks made a nice amount of profit through trading securities (on bailout leverage) while at the same time cutting back the amount of capital available to the American public.  The number of institutions decreased by 104 but interestingly enough, the number of employees grew in this sector.  Why?  The too big to fail banks are simply getting bigger and stepping in where other smaller banks have failed.  The amount of assets held at the 7,830 institutions is a stunning $13.2 trillion and who really knows if it is even that amount.  To a bank, a loan is an asset and with mark to market suspended they can value these things at absurd bubble level prices.

Let us look at some key details in the report:

Source:  FDIC

First, you’ll notice that the amount of assets backed did decrease by over $100 billion.  If the economy is supposedly growing, you would expect this number to increase as well.  Next, you will see the incredible amount of commercial real estate and industrial loans (this is the bailout that is currently occurring but the government and banks don’t want you to know about).  How can an industry that has lost 104 institutions add employees?  Simple, when you have the U.S. Treasury and Federal Reserve bankrolling your finances you have more capital.  Over 95 percent of all mortgages made this year are backed by the Federal government so why do we even need banks serving as middlemen here to skim additional profits?  Why not let the public borrow directly from the government for say a 30 year fixed mortgage?  The underwriting is already computerized and IRS data is already in the government’s hands (heck, at least you’ll know the government will check this as opposed to the no-doc fraud of the too big to fail banks).  Either way, the report is more of a reflection of banks not realizing losses and pretending all is well.

The big 4 banks control a large amount of banking assets in the system:

So even though we have nearly 8,000 banks, the bulk of the assets sit with a small number of banks.  I’m not sure why the report was spun as being good especially when the Deposit Insurance Fund (DIF), the fund that backs the assets of the banks is actually in the red for $15 billion:

This is the fourth consecutive quarter of it being in the red yet it is perceived as being good.  Keep in mind that this also has to do with programs like HAMP and also CRE delays because banks are basically ignoring bad loans with these stop-gap measures so this helped here.  After all, if you didn’t have to recognize the actual value of an asset then you can still claim the inflated price and boost your assets.  For those that were pushed into HAMP, banks were able to shift toxic loans onto the taxpayer bill.  As we now know, over 50 percent of these loans re-default so instead of them going bad on the bank’s books, they will now go bad and the taxpayer will have to cover the entire bill.  The FDIC report title should have included “shell game” somewhere.

Banks also are making a tremendous amount of money through their security divisions:

Banks have increased their securities gains by 345 percent in the last year.  Charge-offs are up because in the real economy, middle class Americans are having a tough time paying bills with such a weak economy.  Banks continue to speculate on Wall Street and make money with taxpayer leverage.

Solutions?

We all accept that banking is a necessary part of the economy.  Yet no other industry has the ability to pause accounting rules to suit its needs or has such control over the government.  There is a deep need to separate commercial and investment banking.  Since the Great Depression, we have seemed to avoid falling into another major economic calamity for over 60 years.  Yet as time went on, regulators were thinned out and regulations were stripped away.  Each crisis progressively got bigger.  So today, we now have a crisis that is the largest since the Great Depression but banks have learned well from that time.  They have learned how to mitigate public anger by pumping out propaganda (i.e., if you don’t bail us out we won’t make loans etc) and at the same time have consolidated power in the hands of a few banks.

Commercial banking should be treated as a utility.  We all need banking and banks wouldn’t survive without the government.  So there is a social contract here.  Liken this to water, electric, or any strictly governed industry.  This component should include mortgages (95 percent are already government backed), debit cards, checking, savings, and credit cards.  Since these industries are protected by government and taxpayer money, they should be incredibly over regulated and have a strong enforcement branch protecting consumers.  People will point to Fannie Mae and Freddie Mac as big failures.  Well who was doing the gate keeping?  The banks.  After all, you can’t go to the corner to get a Fannie Mae checking account.  But all the big banks including BofA, JP Morgan, Wells Fargo, and Citi currently pump out mortgages that are backed by the government.  We seemed to do well for many decades when banks made these loans but under strict underwriting (i.e., big down payments, income verification, etc).

The other part should be the investment banking component.  If banks want to leverage their own capital in the stock market and operate like hedge funds, so be it.  But absolutely no bailouts no matter what.  The example that is currently set is basically that if you become too big, the government will bail you out no matter what.  And why do you think the number of smaller banks are disappearing all the while bigger banks are growing?  This is the current reward system.  Until this changes, you can rest assured another gigantic bailout is around the corner.  After all, no one saw the flash crash day in May coming and we still have no explanation for it.  Dose that instill confidence in the banking system or even our capital markets?

My Budget 360

Again, I must say……

The same principal has left the nation’s public and private pension funds badly underfunded.

“We are actually more underfunded than we were at the end of 2008 because of the drop in interest rates since then,” said John Ehrhardt, who tracks fund performance for benefits consultant Milliman.

That “same principal” is The Fed’s ZIRP policy.

By picking winners – in this case the banks who made imprudent loans and should have been forced out of business, along with “protecting” the imprudent buyers of bonds in institutions that made those imprudent loans, the prudent are getting hammered.

There is no solution to this other than to stop doing that.  And this means withdrawing liquidity and forcing the borrowing of money to have a reasonable cost, so that those who lend money through the purchase of bonds can earn a reasonable inflation-adjusted return.

The initial “impact” of low interest rates appears seductively good.  It’s not – it’s always bad.  It forces people to take imprudent risks (how do you think we got a housing bubble in the first place?) and destroys the prudent investor, lender of capital and saver.

As these people are eviscerated their ability to contribute positively to the economy is likewise destroyed, and in particular, capital formation is critically damaged.

This is the real story on how Japan lost two decades. 

We will follow them unless we stop this insanity, and soon.

(PS: Are the unions still sheep on this issue, more than two years after I started sounding this alarm?)

The Market-Ticker

Not everyone has been doing badly during the economic turmoil of the last few years.  In fact, there are some Americans that are doing really, really well.  While the vast majority of us struggle, there is one small segment of society that is seemingly doing better than ever.  This was reflected in a recent article on CNBC in which it was noted that companies that cater to average Americans are doing rather poorly right now while companies that market luxury goods and services are generally performing exceptionally well.  So why aren’t all American consumers jumping on the spending bandwagon?  Well, it seems that there are a large number of Americans who either can’t spend a lot of money right now or who are very hesitant to.  A stunningly high number of Americans are still unemployed, and for many other Americans, there is a very real fear that hard economic times will return soon.  On the other hand, there is a significant percentage of Americans who are blowing money on luxury goods and services as if the economy has fully turned around and it is time to let the good times roll.  So exactly what in the world is going on here?

Well, in 2010 life is very, very different depending on whether you are a “have” or a “have not”.  The recent article on CNBC referenced above described it this way….

Consumer spending in the U.S. has turned into a tale of two cities in 2010, with an entire segment of consumers splurging confidently on the finer things in life, while another segment, concerned about unemployment and with little or no discretionary income, spends only on bare necessities.

So why is this happening?

It is happening because the rich are getting richer and they have plenty of money to buy stuff and the poor are getting poorer and have less money to spend than ever.

In case you haven’t been paying attention over the past couple of decades, what we have in America today is a system that is designed to funnel as much wealth into the hands of the elite as possible.

This isn’t capitalism that we have in America in 2010.  Instead, what we have created is a system where the laws are set up so that the power elite and their big, dominant corporations always win. 

Why do you think so many of America’s largest corporations pay so little in taxes? 

Why do you think so many of them are showered with government subsidies, tax breaks and bailouts?

It’s not about competition anymore.

It’s about rigging the game in your favor.

The power elite and the giant corporations they control spend millions and millions on lobbying and campaign contributions and they expect a big return on that investment.

Let’s take a look at one example.  Many people think that Barack Obama and the Democrats are supposed to be anti-business, right?

Well then why are some of Barack Obama’s biggest donors the very same corporations that are receiving giant bailouts, making record profits and paying their employees billions in bonuses?

Goldman Sachs was Barack Obama’s second biggest donor.  Microsoft was number four.  Citigroup was number six.  JPMorgan Chase was number seven.  Time Warner was number eight.

Are you starting to get the picture?

Every single year, the U.S. Congress passes law after law after law that makes it easier for big corporations to dominate and makes it easier for the rich to get even richer.

America’s economy is not about competition anymore.

It is about eliminating competition.

And unfortunately for middle class Americans, the giant predator corporations that now dominate our economy are realizing that they don’t really need nearly as many American workers anymore.

Instead, they are slowly but surely shipping our jobs off to the other side of the world where workers are willing to work for about a tenth as much.

And yet we still run out to the “big box” stores and fill up our carts with a bunch of plastic crap made on the other side of the world by these giant corporations.

Meanwhile, those giant corporations are taking the profits they make out of our communities and they are taking our jobs and are shipping them overseas.

So in the final analysis, is it any wonder why the income inequality gap is growing?

Without small businesses having a legitimate chance to compete and without good jobs for American workers, the middle class in America is going to continue to get chewed up and spit out.

The following are 30 statistics that prove that the elite are getting richer, the poor are getting poorer and the middle class is being destroyed in 2010….

The Rich Are Getting Richer

1 - As of 2007, the top 1 percent of all Americans was taking home 24 percent of the national income.  This was a level that had not been seen since the days of the Great Depression.

2 – Incomes have been growing in the United States, but those at the very top of the pyramid have been gobbling up almost all of the income growth.  According to Harvard Magazine, 66% of the income growth between 2001 and 2007 went to the top 1% of all Americans.

3 – Even official government figures bear out the fact that the rich are getting richer.  An analysis of income-tax data by the Congressional Budget Office a few years ago found that the top 1% of all American households own nearly twice as much of the corporate wealth as they did just 15 years ago.

4- Most Americans have suffered during the last few years, but not the boys and girls down on Wall Street.  New York state Comptroller Thomas DiNapoli says that Wall Street bonuses for 2009 were up 17 percent when compared with 2008.

5 – Even as the number of Americans living in poverty skyrockets, the number of millionaires just keeps growing.  In fact, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million during 2009.

6 – The amount of money some of these Wall Street hotshots are making is incredible.  Back in 2005, the top 25 hedge fund managers earned a total of 9 billion dollars.  That would be bad enough, but even in these hard economic times the rich just keep getting richer.  One year after the recent financial collapse the top 25 hedge fund managers earned a total of approximately $25 billion.  That breaks down to an average of $1 billion each.  The truth is that the United States has been experiencing uneven prosperity for quite some time and things just seem to get worse with each passing year.

The Poor Are Getting Poorer

7 – Government anti-poverty programs are exploding in size in response to the recent economic difficulties.  USA Today is reporting that a record one in six Americans are now being served by at least one government anti-poverty program.

8 – Over 50 million Americans are on now Medicaid.  That figure is up more than 17 percent since the beginning of the recession.

9 – The number of Americans in the food stamp program rose to a new all-time record of 40.8 million in May.  That number is up almost 50 percent since the beginning of the recession.

10 – The number of Americans who cannot afford even the basic necessities is absolutely staggering.  A whopping 50 million Americans could not afford to buy enough food in order to stay healthy at some point over the last year.

11 – Compared to other industrialized nations, the United States is doing very poorly.  The U.S. poverty rate is now the third worst among the developed nations tracked by the Organization for Economic Cooperation and Development.

12 – The saddest part of this is what we are doing to our children.  According to one recent study, approximately 21 percent of all children in the United States are living below the poverty line in 2010. 

13 – But the American people cannot provide for their families if they don’t have jobs.  Today there are not nearly enough jobs for everyone.  In 2010, it takes the average unemployed American worker over 8 months to find a job.

14 – Approximately 10 million Americans are currently receiving unemployment insurance, which is a number that is nearly four times higher than what it was at back in 2007.

15 – The truth is that we are creating a permanent underclass of Americans that cannot get jobs.  The number of Americans receiving long-term unemployment benefits has increased over 60 percent in just the past year.

16 – Increasingly, the wealth of the United States is being held in fewer and fewer hands.  One study found that as of 2007, the bottom 80 percent of American households held about 7% of the liquid financial assets.

17 – It is not a good time to be living in “the bottom half” in America.  The size of “the pie” being divided up among those at the low end of the wage scale is becoming really, really small.  In fact, the bottom 40 percent of all income earners in the United States now collectively own less than 1 percent of the nation’s wealth.

The Middle Class Is Being Destroyed

18 – Even those Americans that still do have decent jobs are seeing their wealth fade rapidly.  For example, U.S. families have $6 trillion less in housing wealth than they did just three years ago.

19 – Home ownership used to be a sign that one had arrived in the middle class, but in 2010 an increasing number of Americans are finding out that they simply can’t afford their homes anymore.  One out of every seven mortgages were either delinquent or in foreclosure during the first quarter of 2010.

20 – The reality is that incomes have just not kept up with housing costs.  This has put an incredible amount of pressure on the middle class.  Just how much pressure?  Well, only the top 5 percent of all U.S. households have earned enough additional income to match the rise in housing costs since 1975.

21 – The debt binge middle class Americans have been on over the past couple of decades has drained many of them completely dry, and now more Americans than ever have bad credit scores.  Over 25 percent of Americans now have a credit score below 599, which means that they are a very bad credit risk.

22 – A rapidly rising number of Americans are actually choosing bankruptcy as a way out of their financial problems.  Nationwide, bankruptcy filings rose 20 percent in the 12 month period ending this past June 30th.

23 – The middle class manufacturing jobs that once defined so many American cities are rapidly disappearing.  Despite the fact that the U.S. population has dramatically increased, less Americans are employed in manufacturing today than in 1950.

24 – These days it seems like almost everyone is looking for a good job, but very few people are finding them.  According to one recent survey, 28% of all U.S. households have at least one member that is looking for a full-time job.

25 – Even many of those Americans that still have decent jobs have been hit hard by this economic downturn.  A recent Pew Research survey found that 55 percent of the U.S. labor force has experienced either unemployment, a pay decrease, a reduction in hours or an involuntary move to part-time work since the recession began.

26 – The number of jobs that are evaporating is absolutely stunning.  According to one analysis, the United States has lost a total of 10.5 million jobs since 2007.

27 – So where are the jobs going?  It doesn’t take a genius to figure it out.  China’s trade surplus (much of it with the United States) climbed 140 percent in June compared to a year earlier.

28 – The truth is that “globalism” and “free trade” have put middle class American workers in direct competition with the cheapest labor in the world.  This is what middle class American workers must now compete against: in China a garment worker makes approximately 86 cents an hour and in Cambodia a garment worker makes approximately 22 cents an hour.

29 – Due to these difficult economic conditions, the middle class is being squeezed as never before.  According to a poll taken in 2009, 61 percent of Americans ”always or usually” live paycheck to paycheck.  That was up significantly from 49 percent in 2008 and 43 percent in 2007.

30 – So what kind of future do our young people have in front of them?  Unfortunately, things don’t look pretty.  Many fresh college graduates can’t even get a job that will allow them to be independent.  One recent survey of last year’s college graduates discovered that 80 percent moved right back home with their parents after graduation.  That was up significantly from 63 percent in 2006.

The Economic Collapse