FedUpUSA

Archive for January 15th, 2010

Is America’s financial collapse inevitable?

Bankers Apologize to Congress

By Bill Bonner

01/15/10 Baltimore, Maryland – The public spectacle continues. Bankers appeared in Congress yesterday.

‘Yes…we sold a lot of toxic, explosive stuff to our clients,’ they said.

‘Yes, we used our own money to bet against them…’ admitted Goldman’s top man.

‘Yes, we blew up the whole world economy. We’re sorry.’

Associated Press reports:

“The bankers – whose companies collectively received more than $100 billion in taxpayer assistance to weather the crisis – offered no regrets for executive pay that is now likely to increase as a result of their survival…

“Lloyd Blankfein, the chief executive of Goldman Sachs, took the brunt of the questions, especially on his firm’s practice of selling mortgage-backed securities and then betting against them.

“‘I’m just going to be blunt with you,’ Angelides told him. ‘It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.’

“Blankfein replied: ‘I do think the behavior is improper. We regret the consequence that people have lost money in it.’ Later, though, he defended the firm’s actions as ‘exercises in risk management.’”

This is not the first time we’ve seen this show. We’re not old enough to remember the Pecora hearings of the 1930s. But they shared the same story line: captains of industry and finance make blunders; they cause Great Depression; politicians save the day.

Back in the ’30s, the guys hauled before Congress generally refused blame. They were just doing their jobs. By and large, they were right.

This bunch today is more media savvy. They realize that their power and money come at a price. The feds have to pretend to punish them; they have to pretend contrition.

And the rest of us can only enjoy the show. After all, it’s the greatest show on earth. We love every minute of it. But it’s only entertaining when you understand the real plot.

What’s the plot?

Well, you already know it. After the bubble blew up, the feds swung into action to repair it. But you can’t really fix a bubble…at best you can only create a new bubble.

The real economy is still deflating. Just look at the jobs situation. Far from slowing or stabilizing, 2009 was the worst year yet for job losses – ’07…’08 …and ‘09…each year has produced greater losses. Even James Grant, who predicted a “barn burning recovery” now admits that his forecast has gone up in flames. He was “either early or wrong,” he says.

And just look at the real estate market. “Home prices are softening again,” says David Rosenberg. As for commercial real estate, here’s Kenneth Laub, who’s been in the business for 50 years, as reported by Bloomberg:

“He says the current downturn will overshadow all of the others…

“‘It won’t be a typical part of a cycle where we’re down for two or three years and things recover,’ says Laub, 70, whose New York firm, Kenneth D. Laub & Co., says it has handled more than $40 billion of real estate transactions since its inception in 1969. ‘It will be longer than we’ve gone through before.’

“As in past slumps, the weak US economy is curbing demand for commercial space, increasing vacancies and causing rents and property values to fall. The key difference today is the explosion in debt financing and related derivatives that fueled a run-up in commercial real estate prices in the 2000s, Laub says. That’s left property owners struggling to make mortgage payments. The overhang of debt will delay any recovery, he says.

“‘It’s not a supply-demand thing; it’s an overleveraged condition,’ Laub says.

“Laub expects a wave of restructurings by troubled commercial borrowers as hundreds of billions of dollars of loans come due annually during the next few years. Commercial real estate may still be recovering a decade from now, he says. ‘What you’re going to see is a tremendously long workout period unprecedented in commercial real estate in this country,’ Laub says. ‘That’s where we’re going, and it’s just beginning.’”

Bad property market. Weak employment market. That’s the background. And it will probably last for years – until the extraordinary debt in the private sector has been worked down to more comfortable levels.

Against this natural process of de-leveraging and depression struggle the feds – our heroes…making the situation worse!

Instead of blaming themselves for their silly theories…for causing the bubble with artificially low interest rates…and then failing completely to understand what they had done…they blame Wall Street.

Sure, the bankers, more knave than fool, took advantage of the situation. But they didn’t cause it.

Still, they’re very sorry they almost brought modern civilization to an end…but, hey, business is business…

Oh the roar of the greasepaint…the smell of the crowd! What a circus!

The Biggest Financial Deception of the Decade

By Jeff Clark

01/12/10 Stowe, Vermont – Enron? Bear Stearns? Bernie Madoff? They’re all big stories about big losses and have hurt a lot of employees and investors. But none come close to getting my vote for the decade’s most dastardly deception…

First came Enron, with $65.5 billion in assets, going belly-up and becoming the largest bankruptcy in US history at that time. The stock went from a high of $84.63 in December 2000 to a whopping 26¢ one year later. And what had we been told by the media? Fortune magazine dubbed Enron “America’s Most Innovative Company” for six consecutive years.

Next came WorldCom filing for bankruptcy in 2002, their assets of $103.9 billion dwarfing Enron’s. Tyco, Adelphia, Peregrine Systems…also made headlines for their acts of fraud and mismanagement.

A few years later, Bear Stearns set us all up for the Big Meltdown of 2008. It was B.S. (no, I mean Bear Stearns) that pioneered the asset-backed securities markets, and we all know how that turned out. Later we learned that as losses mounted in 2006 and 2007, the company was actually adding to its exposure of mortgage-backed assets. With net equity of $11.1 billion supporting $395 billion in assets, Bear leveraged itself up to an astonishing 35-to-1.

And during it all, Bear Stearns was recognized as the “Most Admired” securities firm in a survey by Fortune magazine (there’s that Lower Manhattan tabloid darling again). Frequent sightings of company executives on country club fairways assured the public that all was well. And CEO Alan Schwartz told us there was “no liquidity crisis for the firm” and insisted he “had the numbers to back it up.” His company was sold four days later to JPMorgan Chase at $10 per share, a 92% loss from its $133.20 high.

Lehman Brothers, the 158-year-old investment bank, was next and still today holds the title as the largest bankruptcy in US history. L.B. succumbed to 2007’s Word of the Year, “subprime,” and its $600 billion in assets all went poof! In just the first half of 2008, before the meltdown, Lehman’s stock slid 73%.

And what did CEO Dick Fuld tell us in April of that year? “I will hurt the shorts, and that is my goal.” He must have been referring to the attire of his tennis club buddies, because the ones who actually got hurt were numerous other banks, money market funds, institutions, hedge funds, REITs, brokers, private and public trusts, foundations, government agencies, foreign governments, employees, and investors.

Moving on to the largest US government bailout recipient by far, AIG’s troubles spawned my favorite placard of the decade: seen outside their Manhattan offices stood a sign that simply read, “Jump!” Maybe its creator heard what I did from AIG’s financial products head Joseph Cassano: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.”

Oops!

Topping off our list of the infamous debacles of the decade is Bernie Made-off (er, Madoff), who scammed $65 billion over 20 years from unsuspecting institutions and wealthy investors…

By now you are probably wondering… What’s bigger than all these debacles? He’s covered the major frauds and scams of the past decade – what could possibly be left?

To quote my favorite sleuth, Hercule Poirot, “When all the facts are laid before me, the solution becomes inevitable.”

Here are a few clues…

Federal Reserve Chairman Ben Bernanke said on July 16, 2008, that Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.” Then-Secretary Treasurer Henry Paulson declared on August 10, 2008, “We have no plans to insert money into either of those two institutions.”

– Both Fannie and Freddie were nationalized 28 days later, on September 8, 2008.

Ben Bernanke claimed on February 28, 2008, “Among the largest banks, the capital ratios remain good and I don’t expect any serious problems of that sort among the large, internationally active banks…” Henry Paulson added on July 20, 2008, that “It’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”

– Since the recession started in December, 2008, 144 banks have failed.

Paulson informed us on April 20, 2007, that “All the signs I look at show the housing market is at or near the bottom.”

– The number of foreclosures skyrocketed shortly thereafter and will now any day surpass those during the Great Depression.

Ben Bernanke announced on June 20, 2007, that “[The sub prime fallout] will not affect the economy overall.”

– Less than one year later, the stock market crashed, losing 53% of its value, and is still down 25% despite one of the biggest bounces in history.

Those in charge of our country’s finances not only failed to see the crises developing and then bungled the handling of the recovery, they’ve deliberately misled us about what they’re doing to our currency. In spite of emphatic promises, flowery speeches, pat-on-the-back assurances, and continual reassurances, here’s what they’ve actually done to the dollar:

• Since September 1, 2008, the monetary base has ballooned from $908 billion to $2.0 trillion. The current monetary base is now equal to bailing out General Motors 23 times.

• Bailout funds in 2008 and 2009 total $8.1 trillion. That’s almost 78 WorldComs. It’s over 123 Enrons.

• US debt has risen sharply, from $6.2 trillion in 2002 to $12.1 trillion today. That’s over $39,000 per citizen.

• David Walker, the comptroller general of the Government Accountability Office from 1998-2008, warned that the US is on the hook for $60 trillion in unfunded liabilities. Independent analysts peg the figure at near twice that. Whatever the number, it is incomprehensibly large. The only way we will meet these liabilities is to print the money and inflate them away.

We’re bailing out corporations that should fail, making financial promises we can’t keep, and adding layers of debt we can’t possibly repay. And the real killer is, if we don’t have the cash, we just print it. It is, by any reasonable account, the “blunder that will plunder” the next several generations. It is changing America permanently, and the problems will persist long after you and I are laid to rest.

Bottom line: after all the bailout programs, housing initiatives, rescue efforts, stimulus schemes, bank takeovers, wars, unemployment benefit extensions, and numerous other promises, the biggest financial deception of the decade is what the US government is doing to the dollar. Nothing else even comes close.

This reckless activity has spooked our foreign creditors, weakened our global standing, diluted our currency, is punishing savers and retirees, and ultimately sets us up for a level of inflation this country has never seen before.

Yet, what is the guardian of our economy and money telling us now?

“Will the Federal Reserve’s actions to combat the crisis lead to higher inflation down the road? The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so. In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here.” (Ben Bernanke, December 7, 2009).

This is pure rubbish. If inflation could be controlled by just thinking stable inflation thoughts, then Ben should be able to grow a full head of hair by just thinking scalp follicle thoughts. This is so ridiculous, it’s insulting.

Government actions make a mockery of their words; what they say and what they do are diametrically opposed. It’s clear that inflation is not a question of “if,” but “when.”

Any level-headed individual has to conclude that there will be a steady – and likely accelerating – decline in the dollar’s purchasing power. It’s inevitable.

The great masses don’t quite understand it yet, but they will. There will be no escape from the cold, hard slap in the face citizens will receive when a high level of inflation arrives. And when it does, it will make a mockery of any opposing viewpoint.

So the question before you is simple: Will you be a prepared survivor for what lies ahead, despite what our government leaders tell us, or will you be a complacent victim of the biggest financial deception of the decade?

For me, there’s only one solution. Don’t kid yourself into thinking a man-made asset will protect your purchasing power. This is the time to be overweight gold and silver. I advise letting them serve their purpose for you.

Regards,

Jeff Clark
for The Daily Reckoning

Why Not Let the Whole Banking System Collapse?

By Bill Bonner

01/11/10 Bethesda, Maryland – The news this morning tells us that markets are rising. Investors are bullish because China’s exports are recovering, says the new analysis.

Meanwhile, celebrated short-seller Jim Chanos says China is going to blow up. It’s going to be “Dubai times 1,000,” he says.

Our old friend Jim Rogers disagrees. He thinks Chanos hasn’t looked long enough or deeply enough into the China story. He thinks China is a buy.

And what do we think?

We don’t think. We listen:

“Something like 50% of Chinese economic growth – if you can believe the numbers – is based on capital investment,” said a dinner companion last week. “You can’t invest that kind of money without making some pretty major mistakes.”

If we were forced to bet on it…we’d bet that Chanos is right. We don’t know anything about China or the Chinese economy. But you don’t go from third-world communist hellhole to the world’s second major economy without some serious bust-ups…especially when the communists are still in control.

Barely had we touched down in the USA than we were invited to a dinner party in Georgetown. In keeping with the Chatham House Rules, we won’t mention any names, but we were in distinguished company. These were America’s elite of movers and shakers, ambassadors, lawyers, policymakers, people who reflect and shape the opinions – and actions – of the US empire.

We were invited to answer questions; instead, we asked them.

We began by mentioning the failure of the economics profession. Never had an unarmed group done more damage to the wealth of a society, we suggested. Economists helped create a huge bubble, ignored it until it blew up, and then gave the wrong advice about how to fix it. Bailouts and boondoggles were all they had to offer.

But wait a minute, said a fellow diner: ‘I’m an economist…we couldn’t let the whole banking system collapse.’

“Why not?” we asked.

‘Because unemployment would go up to 14% or more…’

“How do you know what the proper rate of employment should be?” we wanted to know.

‘But you can’t just ignore people when they are out of work…and you can’t ignore an economy when it goes into a depression, can you?’

“Why not?” we repeated our first question.

What we notice in our brush with America’s intellectual and political elite is that they are very smart, very well informed, but too busy to stop and think.

They are thinkers. They are always thinking about what to do. But they cannot afford to think radically…about why they should do anything at all. If they did, they would be as marginalized as we are… How much more fun it must be to be at the center of power…pulling the levers…turning the knobs…making the world a better place!

The presumption of all elites is that they can do a better job of running things than people who are less well educated, less informed, or less intelligent. In a sense, this is obviously true. In the administration of commonly held assets, for example – such as a municipal sewage-treatment plant…or an art collection – a person with taste, culture and education is likely to do a better job than a numbskull. (We admit that even this is a dubious assertion…but we will presume it is true for the sake of this argument…)

But the elites go a major step further…they claim to be able to do a better job of administering privately held assets too…things that belong to other people.

Take the Cash for Clunker program. Auto sales went down. But so what? How many cars SHOULD be bought and sold? Nobody knows. And it’s really not for anyone to say…other than the buyers and sellers themselves. But the elite think they know better.

The fellow with an old pick-up truck may have judged his truck good for another six months of service. But with the lure of a federal bribe before him, he junked the truck six months early. Any sensible person can see that this is a waste. A valuable asset has been lost – six months of truck service.

But the elite economist thinks he has saved the auto industry. Because the “demand for trucks has been stimulated.” Jobs have been saved. Detroit has been given a boost.

What kind of nonsense is this? Not only have useful resources been sent to the scrap heap prematurely, but the auto industry has been given a bum steer, too. Resources from all over the economy – steel, oil, labor, electronics – have been diverted to the auto industry, on the basis of ‘demand’ that only exists because of federal money. The laid-off autoworker is a victim too. He might have been considering turning to another trade…instead, called back to work by the Cash for Clunkers program, he shelves his plans for retraining and relocation. He thinks Detroit is making a comeback. How disappointed he will be when the phony demand disappears!

And where did the federal money come from? It had to come from somewhere. In the event, it was borrowed from lenders who would otherwise have lent it to someone else. We don’t know what the other borrower would have done with it, but no matter what it was, it could be expected to produce a net benefit, one way or another, to the economy.

Regards,

Bill Bonner,
for The Daily Reckoning

Reckoning With a Delusional Stock Market

By Bill Bonner

01/12/10 Bethesda, Maryland – Poor Obama. The man is in way over his head. And what can he do? Few people understand what is going on in the economy…and none of them work for the Obama administration, as near as we can tell. The only one who seemed to be on the ball was his advisor, Paul Volcker. But Volcker got edged out by Larry Summers, a man with a long history of bad ideas on economic matters.

Summers is a stalwart member of that very special club – modern economists. Never has an unarmed professional group done more damage to a society than Summers and his colleagues.

“We cannot and will not accept any speed limit on American growth,” said Summers in a 1995 speech, rejecting the idea of higher interest rates to cool speculation. By 2000, the economy with no speed limit had smashed into an abutment. But Summers never figured out what the problem was. He was too busy wrecking a great university. He went on to apply the same ‘no speed limit’ philosophy to Harvard, where his building program was so costly the university years will probably never recover from it.

Ben Bernanke gives no hint that he has any idea of what is going on either. He maintains that modern central banking can’t see when economies are getting into trouble. But when they do…he knows just what to do to fix it.

What kind of strange GPS system is this, dear reader? It failed to tell us where we were before we ran off the cliff… But now, we’re going to use it to find our way home. Good luck!

But who worries now? We’re rolling along…convinced that trouble is behind us. Recovery is on the way; that’s what the signs say.

But wait…

Joblessness at a 26-year high, and rising….

Consumer credit just took the biggest monthly drop ever…it’s fallen 10 months in a row.

Nearly half of Florida’s mortgages are underwater…

Hey…what a recovery!

But the stock market doesn’t seem to care. Or notice.

The Dow rose 45 points yesterday. Investors seem to think that businesses are going to make a lot of money in the years ahead. How? How much stuff can you sell to unemployed people? But why else would investors pay 100 times earnings for a share?

The current price/earnings ratio is a subject of much discussion. Earnings collapsed in the depression. Prices did not. So if you look just at current earnings you come to a P/E ratio in the 100+ range. That means investors pay $100 for every dollar’s worth of earnings. If they intend to earn their money back – and nothing changes – they’ll wait a century to break even.

But earnings are expected to go up. So Robert Shiller used a 10-year moving average to compute earnings…smoothing them out to a “normal” level. Still, he says, the S&P 500 is overvalued by about 27%.

The point is, stocks are expensive. So, you have to wonder: what is going on? Are stock market investors really such optimists?

Or, is the federal government manipulating stock prices? It is spending trillions of dollars to give people the impression that things are getting back to normal. Why not spend a few billion more to manipulate stock prices?

We don’t know. The feds have shown themselves willing to do any fool thing…but rigging the stock market? Who knows?

We’ve got to reckon with what we’ve got. And what we’ve got is a stock market that is either manipulated…or delusional.

Stocks could only be worth current prices if this were a normal recession. But if this were a normal recession, it would be over by now. Stocks would be moving up in anticipation of the next boom phase. But this is not a normal recession. And it hasn’t come to an end. New jobs aren’t being created. Consumer credit is not expanding. And the only prices that are going up are the prices subject to speculation.

The real reason stocks are so expensive (assuming the market isn’t rigged) is that this is the beginning of a depression, not the end of one. At the beginning, people don’t quite believe it.

“We’re climbing out of a nasty recession,” said a financial expert interviewed on the radio this morning. “And we’re all happy to put this thing behind us as soon as possible.”

Stocks are high because people think they can ‘put this thing behind them.’ They can’t imagine that the depression will last for 5…10…maybe 15 more years. Nor do they realize that the US economy is permanently impaired…that the companies traded on Wall Street will have a very hard time earning profits in the years ahead…nor that the average American family may have reached the height of its wealth in 1973!

The disappointment will come…then the disillusionment…then the disgust…then the despair. It will be like walking down a staircase…each step heavier…deeper…and more depressing the last. And with each step, stocks will fall. Investors will begin to see things in a new way. And at the bottom, a whole new outlook will be common:

“America is finished as an economic power,” people will say. “Incomes are going down – forever; we can’t compete with the Chinese. Stocks were dreadfully overpriced; now they are cheap…but who would want to buy them?”

It may not happen like that. But somehow, some day…stocks will once again trade at low P/E ratios… Below 10…maybe down to 5. Then, they will be bargains.

How will you know when it is time to buy again? When you no longer want to.