Headlines
Unemployment is not better. Nope, not better.
Pension funds are not better.
Real estate is not better. Oh no, not better.
But the banks, boy howdy. They are making a killing.
(Of course, it’s not hard when you can borrow a virtually unlimited amount of money at zero percent interest and turn around and buy securities that pay a guaranteed 3%. Even I could make money that way!)
Today’s article of doom: oh yeah, and the government is not better also.
The Wile E. Coyote Moment Hovering Over The Cliff
As readers of this blog know, I have maintained in previous posts such as this the position that all the bailouts, which were sold to the US under the guise of buying up bad mortgages and then immediately switched out to saving big banks, credit card companies, insurance companies, etc, will fail until the underlying problem of overpriced mortgages is addressed. There will be no economic recovery until either peoples’ mortgages are reduced to reflect the worth of their house, or their housing values recover, because the mortgage is the single biggest expense/investment a family in this country makes. No talk of recovery is meaningful absent this.
Lo and behold this article comes out. Wow. Half of US homes will be worth less than is owed on the mortgage by 2011. If this prediction is accurate, that is when the bottom of this depression will occur. Who will continue to faithfully pay their mortage year after year knowing all that money is going down the drain and they could be renting for half as much? How will the banks, absent another series of taxpayer handouts, be able to pretend their mortgage “assets” are worth anything?
Despite all the news about the bottom possibly being in we have horrific facts like the fact income tax revenue is down by almost a fifth, the total bailouts could cost $23 trillion, Fanny Mae needs a (third? fourth?) bailout to the tune of another $10 billion, and the market is saying California is seen as having a higher risk of default than Russia, which actually did default 11 years ago.
Green shoots! Hahaha!
Today’s article of doom: The Iraq and Afghanistan wars, originally estimated at a cost of $50 billion, are hovering around the $3 trillion mark.
Promote the Greatest Failures (Or Is It Criminals?)
A post from the very informative Zero Hedge blog summed up some of the more noteworthy comments from the Federal Reserve and the Treasury during this economic debacle:
April 20th, 2007 – Paulson: “I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained. All the signs I look at show the housing market is at or near the bottom.”
June 20th, 2007 – Bernanke: “(the subprime fallout) will not affect the economy overall.”
October 15th, 2007 – Bernanke: “It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions.”
May 16th, 2008 – Paulson: “In my judgment, we are closer to the end of the market turmoil than the beginning.”
June 9th, 2008 – Bernanke: “Despite a recent spike in the nation’s unemployment rate, the danger that the economy has fallen into a substantial downturn appears to have waned.”
July 20th, 2008 – Paulson: “It’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”
August 10th, 2008 – Paulson: “We have no plans to insert money into either of those two institutions.” (Fannie Mae and Freddie Mac)
February 29th, 2008 – Bernanke: “I expect there will be some failures. I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.”
September 19th, 2008 – Paulson: “We’re talking hundreds of billions of dollars – this needs to be big enough to make a real difference and get at the heart of the problem,” he said. “This is the way we stabilize the system.”
September 19th, 2008 – Bernanke: “most severe financial crisis” in the post-World War II era. Investment banks are seeing “tremendous runs on their cash,” Bernanke said. “Without action, they will fail soon.”
And now, the Obama team’s brilliant idea is to give the Federal Reserve sweeping new powers, in tandem with the Treasury, to regulate the banking system. The very ones who were purportedly clueless about what was unfolding, as well as being the ones who caused it (by artificially lowering interest rates to encourage mortgage lending, thereby bypassing the effects of the dot com bubble bursting), are now going to be in charge. After, of course, they engineered the transfer of wealth of the entire future generation to the bottom line of the richest banks. Bravo.
It’s like taking the executives from General Motors and then creating a regulatory agency for all motor vehicles and putting them at the helm. In short, it’s absolutely ridiculous. Let’s not forget also, that the Federal Reserve, the organization that controls our money supply, and will soon control the entire regulatory system, is a private corporation. Like “Federal” Express. If you aren’t aware of these factors, I suggest checking out this week’s episode of Freedom Watch, which is one of the very view shows on mainstream TV that talk about these issues.
Or, read this book:
But, since we all know the Federal Reserve has more cumulative power than the US president and his staff, dating back several decades from the point in which the US was arguably effectively bankrupt (though this fact was disguised) and real wealth – gold – was outlawed from public ownership and transferred to pay off international debts and the income tax was established to pay interest on our remaining debts… well, we all know this legislation will pass and the central banks won’t have to rule from the shadows any more. No one wants to be seen as undermining our magical new President’s will, therefore, it will pass.
In the words of Kurt Vonnegut: so it goes.
Today’s article of doom: political correctness is way out of hand when people are arrested to make up a “fair” quota of racial balance completely at odds with established crime statistics.
California: DOA
Soaring deficits, reduced income, over-burdened infrastructure, over-burdened health-care system, mountains of unfunded pension liabilities, a politically-correct atmosphere of entitlement (even among non-citizens), and a populace that wants no new taxes. All of these things define both the Federal Government of the United States and the State of California. There is one crucial difference, however, which assigns the image of green shoots to the former and tumbleweeds to the other. California doesn’t print its own money. Therefore, the state can only spend money it either has or borrows, and no one is stupid enough to lend them anything anymore. Absent this crucial difference, California is a microcosm of the USA. Unfortunately, this difference is unimportant in the long run for the Federal Government, because inflating the currency is not a solution; it’s a delay tactic.
So, what can be done for California? Well, cuts need to happen, taxes need to be raised, money needs to be borrowed (courtesy of the Federal Government guaranteeing the debt, like a parent co-signing on their delinquent teenager’s car loan), or the State needs a Federal bailout. In my opinion, each of the four options is equally likely, and probably a combination of all four will be the solution.
The cuts needed are mind-boggling, such as eliminating welfare, college funding, and state-funded medical insurance entirely. And closing state parks. And letting people out of prison early. And even eliminating textbooks. Some people are very, very upset. But hey, the populace just shot down an emergency increase in taxes, so what’s the state to do?
Obviously, politically pander and beg for handouts from the Federal Government, of course. With all the chains and conditions such funding will inevitably come with. In the meantime, as an angry citizen as you most surely are, you can play with the budget yourself and see how you’d plug the gap with this interactive tool. It’s educational at the very least. Who’d have thought money didn’t just fall out of the sky over Sacramento?
Almost certainly, some amount of money will get passed down from the Obama administration. But keep in mind this fact: the Federal Government is in far worse shape than California. In fact, if California’s debt to GDP ratio was the same as the Federal Government’s, its debt would be 230 billion instead of 25 billion!
Today’s article of doom: Idiotic mainstream media tries to link Nazi shooter with people who oppose the Federal Reserve, fiat money (rather than the Gold Standard), and unconstitutional Income Taxes by claiming the United States never existed without them.
Where Is The Reckoning?
We live in Limbo Land. Everything in the news is the same, day after day, so we wonder: have we hit the bottom? Are things really that bad? Things are still the same in Pakistan. And Iraq. And Gaza. Europe still fears summer riots. The US government is still giving money to GM. Unemployment continues to climb. And mortgage defaults keep increasing:
But the world hasn’t ended yet. The four horsemen haven’t shown up to the party. In fact, no one has heard hide nor hair of them for as long as most people remember. Rumor has it they never existed. Malls are still open with their flat, tinkling music. Restaurants are still steaming. Gridlock is ever-present. What’s the deal? If a person didn’t read the news, they could easily not know anything has changed in the last year. Does this mean we’re able to absorb so much more instability than we ever expected? Was Cheney right when he said “deficits don’t matter?”
No, I think people like John Michael Greer have it right when they talk about “The Long Descent.” It’s not going to be abrupt, and civilization won’t disappear overnight. But things will decline steadily, and things won’t return to the way they were before. We’re so used to instant gratification, we don’t even like to wait for our apocalypses. It’s been six months and I haven’t had a single blackout — Armageddon is boring!
I’ll admit, I would like things to happen sooner rather than later, mostly so we don’t end up pushing off our problems to our children’s generation. I would rather face the consequences head-on. Pushing them off in order to compound them later is what we’ve been doing for decades. But there is plenty of time for disaster. In the meantime, there are still a lot of things even the most paranoid person hasn’t done yet to prepare. This summer should be a particularly nice season for gardening. Time to kill the useless lawn? This cycle will last a long while, so we might as well enjoy the beginning of it as well as the end.
Today’s article of doom: if you live in Contra Costa County, sleep soundly knowing due to budget cuts, burglaries, assaults, and thefts will no longer be prosecuted.
$12.8 Trillion
Just to put things in perspective, let’s look at the latest figures of money spent “fighting the credit crisis.” Bloomberg puts the figure at $12.8 trillion. Oddly enough, it seems the most concentrated rage of the public has been over AIG bonuses; something Congress even passed a bill on in order to confiscate. Now, while I am just as outraged as anyone that these employees of failed banks are getting millions in bonuses straight from the taxpayer, let’s remember these are only millions. As in one thousandth of a billion, which is itself one thousandth of a trillion. Here is the total money spent on the bailout. Since it’s so massive, each unit represents one billion. In other words, $1.00 on here means one billion (or one thousand million for the numerically illiterate). All the AIG bonuses everyone screamed over was about $170 million, so here it would be represented as $0.17:
==================================================
— Amounts (Billions)—
Limit Current
==================================================
Total $12,798.14 $4,169.71
——————————————————————————————
Federal Reserve Total $7,765.64 $1,678.71
Primary Credit Discount $110.74 $61.31
Secondary Credit $0.19 $1.00
Primary dealer and others $147.00 $20.18
ABCP Liquidity $152.11 $6.85
AIG Credit $60.00 $43.19
Net Portfolio CP Funding $1,800.00 $241.31
Maiden Lane (Bear Stearns) $29.50 $28.82
Maiden Lane II (AIG) $22.50 $18.54
Maiden Lane III (AIG) $30.00 $24.04
Term Securities Lending $250.00 $88.55
Term Auction Facility $900.00 $468.59
Securities lending overnight $10.00 $4.41
Term Asset-Backed Loan Facility $900.00 $4.71
Currency Swaps/Other Assets $606.00 $377.87
MMIFF $540.00 $0.00
GSE Debt Purchases $600.00 $50.39
GSE Mortgage-Backed Securities $1,000.00 $236.16
Citigroup Bailout Fed Portion $220.40 $0.00
Bank of America Bailout $87.20 $0.00
Commitment to Buy Treasuries $300.00 $7.50
——————————————————————————————
FDIC Total $2,038.50 $357.50
Public-Private Investment* $500.00 0.00
FDIC Liquidity Guarantees $1,400.00 $316.50
GE $126.00 $41.00
Citigroup Bailout FDIC $10.00 $0.00
Bank of America Bailout FDIC $2.50 $0.00
——————————————————————————————
Treasury Total $2,694.00 $1,833.50
TARP $700.00 $599.50
Tax Break for Banks $29.00 $29.00
Stimulus Package (Bush) $168.00 $168.00
Stimulus II (Obama) $787.00 $787.00
Treasury Exchange Stabilization $50.00 $50.00
Student Loan Purchases $60.00 $0.00
Support for Fannie/Freddie $400.00 $200.00
Line of Credit for FDIC* $500.00 $0.00
——————————————————————————————
HUD Total $300.00 $300.00
Hope for Homeowners FHA $300.00 $300.00
——————————————————————————————
So, about one dollar out of every seventy-five thousand dollars or so went to AIG bonuses. And yet that lone dollar is the only one that’s generated sufficient rage. What about the rest?
The truth is we are such a competitive (and some might say spiteful) group of people, that we’re fighting over the pennies while truckloads of cash are being stolen. It’s the same reason people are upset about bailing out GM. Again, I’m not a fan of bailing out anyone; least of all a company who arrogantly refused to develop fuel-efficient vehicles until the last moment, but the total money given to GM so far is about 18 billion, and another 6 billion for GMAC. So, 24 billion. That’s less than 0.1% of the total bailout money. And mortgage owners who took on too much debt — similar situation. We have 300 billion set aside for that, or 2.3% of the total money spent. Huh? If this whole problem is based upon bad mortgages, why have we only spent 2.3% of the bailout money on the problem?
These three issues are the hot button issues for the public. People hate seeing their neighbor down the street (i.e. peers) getting a good deal on taxpayer money. But when bankers, CEOs, and Wall Street get a good deal multiplied by a factor of a million or so, well, no harm no foul. Those people are invisible to us so it’s not real money, right? I mean… you know… “we gotta do something.” And, “our economy depends on these banks.” And, uh, “credit is the lifeblood of our economy”… right? But my neighbor’s job or house or car or food is subsidized. What a jerk. We’re so easy to bamboozle.
Speaking of subsization and bamboozling, did you know that every time you use the USPS to mail something, you’re subsidizing companies that send you junk mail?
Today’s article of doom: banks will sell their” toxic” (read worthless) assets at the price they determine in a “partnership” deal where the government assumes 93% of the risk.
The Mortgage Elephant In The Room
“When will the housing market stabilize?” everyone wonders. It’s very simple, actually. When the government forces holders of mortgages to reduce the principal owed. Let me explain.
First of all, at the end of 2008, 1 in 5 mortgages were “underwater,” meaning the cost to pay off the mortgage was more than the house was worth. Since this is March of 2009, the number is probably closer to 1 in 4. Being as it is cheaper to rent than own in all 50 states, even considering the interest tax deduction, this means the underwater homeowner has only two reasons to keep paying.
1) They don’t want to ruin their credit.
2) They feel the housing prices will rise in a short enough timeframe to justify paying all the interest in the meantime, and will rise steadily thereafter enough to (after factoring in inflation and the value of lost investment opportunities with the lost interest payments) eventually sell and make a profit.
There is no third reason, such as “they intend to pay off the mortgage in full in 30 years and don’t care about the current price.” The people who fall into that category are the ones who bought at a reasonable price and are satisfied with their purchase because they are not upside-down.
So, let’s look at the first reason. Nobody wants to ruin their credit — unless, well, it costs thousands of dollars a month in wasted money to maintain. Or perhaps unless credit no longer matters, since no one is lending anyway. Or if everyone around them has trashed credit, making trashed credit not a problem. Eventually, many people will find that the savings of not paying on a losing mortgage outweigh the credit loss.
The second reason is hinged upon a relatively quick economic recovery which no one anywhere can give any indication will happen. The vote of no confidence in this is shown by the fact that, at the end of 2008, 1 in 8 mortgages were behind on payments. Again, since this is March, that number is likely closer to 1 in 6.
So then, what could possibly motivate people to hang on and resume payment? Only one thing: a stake in the eventual profit. If all the upside down people were no longer upside down, and actually had some equity, or at least no negative equity, they would be motivated to keep paying (providing they had the means of course — some simply won’t be able to pay no matter what).
Therefore, the only solution is loan modifications that adjust the principal owed. This article explains the fact eruditely, speaking of the much-touted (and reviled) mortgage rescue:
The Obama administration’s failure to close the negative- equity gap means that its plan “will likely join the dud parade of federal rescues,” says John Kiff, an International Monetary Fund economist in Washington.
DellaCamera, 55, the principal of DellaCamera Capital Management LLC, says that government reluctance to force banks to write down the value of distressed loans and securities to prices that buyers are willing to pay creates “gridlock,” delaying bad-debt workouts and an eventual recovery.
That’s exactly right. The banks don’t want to reduce the principal, nor the interest rates, because then the cat is out of the bag and there is no more maneuverability: the mortages are not worth what they say they are. And since all the major banks are still on the edge, after all the baoilouts, acknowledging reality might be the same as acknowledging insolvency. So, of course, the inevitable outcome, like it or not, will be that the government does one of three things:
1) Force the banks to lower the principal, and bail them out or buy their preferred stock as much as necessary to keep them afloat
2) Force the courts to allow bankruptcy judges to force the banks to lower the principal, with the same effects
3) Nationalize the banks in one form or another and modify the mortgages themselves.
This is beyond the debate of right or wrong, smart or stupid. It’s going to happen. It is the only thing that will stop housing prices from continuing to fall, because as more mortgages fall underwater, and more people see no recovery is forthcoming, more will stop paying. And please don’t think anyone in charge cares enough to ask the question whether we should simply let housing prices fall back. They don’t care what you think.
These guys get it. They worked for the failing banks that are still pretending they are solvent and their mortages are worth the money they lent. They know it’s all fake. Now they’re buying mortgages the government was forced to own, through takeovers of failed banks, at pennies on the dollar, adjusting the principal for the homeowner, and pocketing the difference. This is the way of the future. The government (therefore taxpayer) loses, the bankers win, and we all live… whatever ever after.
Today’s article of doom: Think I’m negative? Check out this guy.
When Paranoia Becomes Mainstream
Recently, George Soros said the financial system had effectively disintegrated, and the problem is more like the collapse of the Soviet Union than the Great Depression. Since the Great Depression is an American term for a semi-worldwide phenomenon, and since he was talking to an American paper, I’d have to assume he was talking mostly about the United States. When the Soviet Union collapsed, it broke up into 15 entities. Is he saying the United States will similarly break up? What happens when we discover the bailouts are actually like pouring gasoline on a fire?
Rupert Murdoch recently said something of interest as well: that nations will be redefined and their futures fundamentally altered. Rather provocative. Which nations would those be, Rupert? Ireland with its impending collapse? Britain with its projected “summer of rage?” Latvia with its junk status? Maybe Ukraine, where depositors can’t withdraw from their bank accounts. What about the US with its economy contracting at an astonishing rate and its ballooning budget deficit?
Today’s article picture of doom:
$75 Billion Out Of $9.4 Trillion To Actually Attack The Problem
Remember AIG, the insurance giant the US government bailed out several times last year? First it was $37 billion, then $85 billion, then ultimately $150 billion. After all that, they need another… $60 billion. It appears they have more “financial challenges.”
Oh and remember when GM and Chrysler needed billions in emergency aid just two months ago to stave off collapse? Turns out they need $21.6 billion more. Maybe that will last another two months.
Remember Citi? They received $45 billion in cash last year, along with hundreds of billions more in guarantees on their assets. They are now worth approximately $13 billion. But not to worry, the government can always give them more money! Bank of America is in similar straights, having recieved $50 billion in cash and along with Citibank, $400 billion in guarantees on potential losses, and is now worth less than the last injection of cash.
Seriously, when does it stop? When do we realize these companies are bust, and they cannot be fixed? How much money needs to be flushed down the toilet to feed our addiction to denial? Well, apparently we’re all mistaken and everything is going to be fine, because the head of the Federal Reserve thinks the recession could end in a few months. If that isn’t proof the people in charge are either stupid or liars, I don’t know what is.
Meanwhile, it’s business as usual in Washington. Just weeks after approving a $787 billion spending bill, Congress has a new $410 billion spending bill ready to go.
The government’s official story is that overpriced mortgages caused this meltdown. Now, I personally think the problem can be blamed on the irresponsible practices of the Federal Reserve, with regards to its monopolistic ability to change interest rates and thereby directly inflate the money supply. But, if you believe the government’s story, it’s all due to bad mortgages. Mortgages people bought but couldn’t afford. The banks assumed these assets were worth more than they were, and the realization they were worth less caused a domino affect throughout the world and here we are at the bottom of the cliff. $9.7 trillion in bailouts later, they’ve actually decided to throw some money directly at the problem. According to bloomberg, if the government had spent that $9.7 trillion on bad mortgages, it could have paid off in full 90% of the nation’s mortages. No matter how bad those other 10% were, there would be no mortgage problem anymore. But instead, we threw the money away on everything but the mortgages.
Now Obama seems to want to change that, and redirect some money to the problem. But only $75 billion. Peanuts. $75 billion to help struggling homeowners is half of what we gave to the bankrupt insurance company AIG. It won’t make a dent. Housing prices are almost 20% lower across the board then they were last year, and last year they were almost 20% lower than the year before. One in three homeowners owes more on his or her house than it’s worth. How many of those people will keep paying their mortgage? This pathetic “rescue,” target of anger, villification, and self-righteousness all over the country, is nothing; an empty pathetic gesture at addressing the official problem.
It’s funny how people are suddenly so upset at having to “pay for their neighbor’s mortgage” but not at all that upset for having to pay for their neighborhood banks, pay for the car companies, pay for the insurance companies, not to mention allow their children and grandchildren to pay for all the government’s warmongering and pet projects, which dwarf the proposed mortgage bailout by 100 times. Nope, none of that is too upsetting, but damn all those people getting subsidized mortgages! Damn them straight to hell!
Today’s article of doom: Dow at 1997 levels. And don’t even try to factor in inflation.
Riots — Coming Soon to a Theater Near You!
The worldwide depression is beginning to take hold. People can live only so long on hopes and promises, and then they get angry. Quickly. It seems Bulgaria and Lithuania are at that point, and so is Iceland.
None of this is surprising, and this is just a foreshadowing. Many media outlets are admitting what just last year was dismissed as paranoia: that widespread unrest and rebellions are coming. People blame the bankers and the governments for the economic collapse, and they’re correct to do so. The wealthy have spent the last decade siphoning everything of value, inflating bubble after bubble and then cashing out. Wealth, like energy, is never lost nor gained; it only changes form. Massive wealth is sitting on the sidelines, in discreet accounts, part of derivative agreements, waiting to buy everything in the world at pennies on the dollar. The demise of the troublesome, demanding, mouthy, worldwide middle class is imminent. Only peasants will remain afterward.
As the swindlers scurry back into the shadows, leaving the commoners to deal with the aftermath, the commoners’ supposed representatives debate about how much more money we should give to the perpetrators to fix the problem. Now we hear talk about sacrifice, yes — someone has to pay for the mess, and it won’t be the ones who caused it or benefitted from it.
Now, lest anyone think this will be limited to small European states, the US military reports a sudden collapse of Mexico is possible. In fact, Mexico rates on par with Pakistan as far as stability! Wow, did you see that one coming? How would the US absorb the inevitable wave of refugees? The explosive power of the cartels and gangs? The instability of a major source of our oil? I shudder to think. What will happen in the UK when the country defaults on the pound?
And here at home of course, 44 states have a projected shortfall this year (the other 6 are in denial). California can’t afford to send out welfare payments, disability for the blind, or tax rebates. California has no money and no one wants to loan it any, either. And for good reason.
Today’s article of doom: let’s face it, the banks aren’t suffering from toxic assets; they are simply bankrupt.
