FedUpUSA

Archive for January 24th, 2010

More Ponzi Failure: Stuyvesant

Posted by Karl Denninger

Doug Noland: Just Say The Words!

Posted by Karl Denninger

Doug Noland over at The Prudent Bear has written a piece that everyone, in my opinion, should read – particularly the section on “The Volcker Rule”:

While certainly not without faults, the financial system back in the Volcker era was more stable.  The ABS market barely existed.  The Wall Street firms and their marketable debt instruments were not major factors in system Credit creation.  The banking system dominated the extension of private-sector Credit.  Derivatives markets were in their infancy – and certainly didn’t dominate the financial world.  Outside of some GSE MBS, mortgage Credit was in the form of bank loans.  There were only a handful of hedge funds – not thousands.  Leveraging marketable debt instruments wasn’t The Game.

….

One of the big problems today is that there are tens of Trillions of marketable securities out there – and their value depends greatly on the ongoing creation of Trillions more.  Our system needs major financial reform – no doubt about it.  From today’s Wall Street Journal:  “The White House’s relationship with Wall Street is close to the breaking point.”  A war on Wall Street would put Credit growth, asset markets and economic recovery all at risk.  

Just say it Doug: It’s a Ponzi Scheme and thus ultimately must fail, as do all Ponzi Schemes.

I find it amazing how far people will go – describing the essence of the scam, go through it in detail, laying it all out right in front of your eyes – and then they walk right past the obvious (and indeed the only) statement that sums it all up.

All such schemes of creation or maintenance of “wealth” that rely not on the underlying value but on creation of more of the same are Ponzi Schemes.  They all must fail because in each and every instance you must continue to find a way to make “more” of whatever you started with in order to maintain value, and as time goes on this “more” grows geometrically in support of what already exists.

This cannot occur forever as a consequence of basic mathematics, which is why all such schemes are supposed to be unlawful.

That is the underlying reason why we must have reform.  It is not a matter of one means of profit being “good” or “bad”, nor of whether the financial sector is “too big.”  It is that the structure of finance in this country, and indeed the world, has grown into a blood-sucking vampire that creates more vampires, and thus has turned into a Ponzi Scheme.  Eventually it must run out of blood sources simply due to the fact that it continues to expand in size at a rate faster than the productive economy and yet the productive economy upon which it feeds has a limited amount of blood that can be extracted without dying – just as is portrayed in the movie Daybreakers.

We reached that limit in 2007 and that is the root cause of the trouble we got into – and remain within.

Doug is just the latest of many who walks right up to the truth, stares it in the face, and then ignores it.

Wake up Doug.

The Rise of the Cashier and Retail Salesperson Economy – Employment and the Evolving Job Market of the United States – 8 Million Jobs Lost in this Recession but Deeper Financial Changes are Coming.

Posted by mybudget360

The recession that started in December of 2007 is still causing jobs losses even after 25 long and agonizing months.  Most Americans still feel that the economy is deep in the midst of a serious correction.  Since the recession started non-farm employment has shrunk from 138.152 million to 130.91 million.  Officially over 7.2 million jobs have been lost but a coming revision next month will show that 8 million people have fallen off the non-farm payroll figure.  Many are trying to figure out how the bailout of Wall Street and the banking sector has improved the underlying system holding up the economy.  Recent political movements show that Americans are still not satisfied with how the economy is being handled.  One thing not being covered by the media is that anger among the population is coming from the poor state of the economy.  Other factors are important but the economy is the number one topic on the minds of most Americans.

If we look at where the jobs losses are coming, we will see that manufacturing has taken another major hit in this contraction:

Every industry has seen significant job cuts.  It is interesting to look at the financial sector and see how well it has done in comparison to other sectors.  No wonder why Wall Street since March of 2009 has been on a historic rally.  Fascinating how in the last few days when mention of breaking up the too big to fail banks was brought about that we had our first major correction in nearly a year.  Could it be that the only way banks are making money in this current economy is by gambling in the stock market?  Absolutely.  In fact, most of their profits aren’t coming from making loans to average Americans but by trading and acting like pseudo-hedge funds except the banks are using taxpayer money as their safety net.  If you truly believe in capitalism then you understand that too big to fail should not even exist.  Creative destruction is part of a capitalistic system.  Right now banks are operating in a system that offers them different rules from typical Americans who are seeing their jobs disappear.  It is a two-tiered system.

It may also be the case that the system is learning to make do with part-time employment:

You rarely here that employment is a lagging indicator from reputable sources because of the cynical nature of this old economic mantra.  This line is as old as saying real estate prices never go down.  Sure, in previous recessions you would see the economy bounce right back up after a correction but this isn’t one of those typical recessions.  This is a generational correction and old rules of economics don’t play anymore.  Temporary help hiring has increased but the system isn’t hiring any full-time workers either on a net-basis.  In other words, we are still losing full-time jobs.  Businesses have learned to tweak their employment base to a much finer degree so the need for full-time workers with all additional benefits and compensation may not make financial sense.  In the end it is the average American that is thrown under the bus.

Our employment base has also shifted to a major focus on service orientation.  If we rewind to the 1940s and 1950s a large part of our economy revolved around manufacturing.  This isn’t to say that having a large manufacturing base is necessarily good or bad but a large part of Americans had a job that was stable and also provided an income that would make it easy to pursue the American dream.  What did this mean?  Being able to buy a home and support a family without going into massive debt that would put you at risk for bankruptcy and foreclosure down the road.  The rise of the two income household is a positive but it is also an economic necessity for many.  The typical American household brings in $52,000 per year.  Considering this is the median for a household, you can see how quickly losing one job can send a family into a financial tailspin.

And if we look at the top jobs in our country, we realize that we have replaced manufacturing with a near obsession with service oriented jobs:

Source:  BLS

I find it amazing that the two biggest occupations include retail salespersons and cashiers.  If you consider that a family might have one worker in each of these fields, they wouldn’t even come close to meeting the median annual household income of $52,000.  And go down the list.  The vast majority of the jobs above pay slightly above the federal poverty level if someone were to have a family.  It is no wonder that many households went into debt using toxic credit cards that change fees at the drop of a hat.  I find it amazing how quickly some people are to judge these people for financially mismanaging their budgets but at the same time, remain silent on the financial shenanigans of the banking sector that is largely responsible for this financial mess.  The cognitive dissonance is palatable but it is clear that the vast majority of Americans see this distinction and are lashing out at Wall Street and rightfully so.

And when we say Wall Street, we mean the financial sector.  Keep in mind that what I would view as core capitalistic companies like Google or Apple actually provide a service and added value products and these companies aren’t even asking for a government handout.  In fact, they are adding real wealth back into the economy instead of siphoning it off.  How many companies failed trying to be like Google or Apple?  Remember the search engine Alta Vista?  It once reigned supreme and is no longer here.  Companies come and go and that is part of our system.  The idea that banking is somehow immune to this is troubling.  And that is exactly what we did.  Well, not exactly “we” per se because the vast majority of American don’t support the bailouts but this is what was done by those representing us.  What we have now is a full functioning corporatocracy.  The recent Supreme Court ruling allowing corporations to contribute to candidates unlimited sums of money only cements this structure further.

If we look at the S&P 500 and compare it to companies back in the 1950s, approximately 50 companies still remain on the top 500 list.  Many have failed or dropped out or have simply been surpassed by companies that are fairly new (i.e., Google, Apple, Microsoft, etc).  This is the beauty of our system.  Ideally we wouldn’t favor one industry over another.  Yet our slow process into favoring the banking sector is disturbing because we are allowing the financial sector to govern our country.  And clearly we are seeing that what is best for Wall Street isn’t best for Main Street.  Even Henry Ford despised Wall Street and it should be clear to most Americans why.  Wall Street has its place but when it starts becoming a revolving door to D.C. and has Congress on speed-dial we have bigger issues.

44 states recorded increases in their unemployment rates last month.  And what is even more troubling is the length of time people are remaining unemployed:

Nearly 6 million Americans have been unemployed for over 27 weeks, the highest number we have ever seen on a percentage basis.  But on the other side of the coin, we have seen part-time employment for economic reasons spike to over 9 million during this recession.  This group is made up of people looking for full-time work but only being able to find part-time employment.  Add these two together and you start getting a sense of where our economy is heading if things don’t change.  Japan during their lost decade(s) followed a similar path to the one we are going down.  They bailed out their banking sector allowing zombie banks to remain and slowly over a grueling generation, one-third of their population was classified as part-time workers.  Japan also had major fiscal programs but nothing has helped.  Just look at the Nikkei average over this time:

The Nikkei is down 71 percent over 20+years.  So the banks are still there in spirit but what about the overall economy?  Japan has been lagging over the past two decades and bailing out the banks had a lot to do with this.  It is no coincidence that their part-time employment sector makes up one-third of their employment base.

And tying this all together including with the commercial real estate bust, we see that demand for commercial space is absolutely at the bottom:

Source:  Atlanta Fed

And why would you expect this number to be anything else?  Banks needed more and more demand even if the market didn’t demand it so they could keep on expanding and making further and further bad bets.  What did they care?  Ultimately they were bailed out by the taxpayers and government.  Yet we are now seeing deep anger in our country because nothing infuriates a society more than having a large unemployed population especially when aid was given to the banking sector that actually created this employment disaster in the first place.  Apparently Americans are still hungry for change.

Why Markets Have Technical Targets Near Zero

Posted by Karl Denninger

Yes, they really do have potential technical targets in that general area.

For instance, this chart:

Or this one.

Or this one.

All show potential ”head and shoulders” patterns in process.  None are confirmed, but all will be if we head back toward March’s lows.  Note that these are patterns stretching back more than a decade and thus there is no immediate expectation that this is a “tomorrow” thing – rather, it is a longer-term problem.

All target, effectively, zero.

The Nikkei has a very similar pattern on it, as do most of the other major international indices.

What could cause such a preposterous outcome in the global stock markets?

This sort of crap:

Jan. 25 (Bloomberg) — Bank of Japan policy makers are prepared to consider expanding an emergency-loan program for banks and increasing purchases of government debt should the recovery falter, people with knowledge of the matter said.

Which “emergency” is that?

This one?

When it introduced a quantitative easing policy of pumping cash into the banking system in March 2001, it said the step would stay until prices stopped falling.

This “EMERGENCY” is A DECADE OLD!

Will the global capital markets keep putting up with this?  So far the answer has been “yes.”  But there exists some point – somewhere – that such a policy will cause a full-on collapse of the bond market.

Realize that Bernanke has already effectively destroyed the market for Fannie and Freddie securities.  He is the market; there is nobody who will buy Fannie and Freddie paper at anything approaching the price he has paid.

In the Ivory Tower-filled halls of central bankers, there are those who believe they can twist the dials without consequence.  That their acts, however insane, are confined to their own nations and within their own borders.

This is a dangerous, even suicidal fantasy.

Not all nations will be forever tied at the hip to such magical thinking.  Many may not be even now, and as time progresses those who are bent over the table the most by such fantasies (cough-China-cough) will of necessity find ways to decouple from this self-destructive paradigm.

If the nations involved in this fantasy (Japan, the United States and perhaps Britain) do not stop of their own accord they will continue to see deteriorating public finances which, of course, will prompt them to buy even more of their own debt. 

But such an exercise is at best a circle-jerk and at worst it destroys private investment through crowding out.and destruction of the free market’s pricing mechanisms.

The “over center” point where one becomes too deeply in the gravity well of the black hole at the center is almost impossible to determine in advance.  Japan may have already crossed beyond it. 

Once that point is reached it becomes quite literally impossible to prevent a full-on collapse of the monetary system involved.  Other nations will be forced to jettison their ties lest they be sucked into the vortex like two ships tied together when the first sinks below the waves.  If those ties cannot be jettisoned in time a coordinated worldwide bond collapse is quite possible.

There is no attention being paid to these risks, yet with Japan’s public debt twice GDP it is rapidly sucking private savings into the vortex along with it. 

When, not if, that private savings is exhausted it will be too late.

The United States does not have the luxury Japan has had, as we do not have the reservoir of private savings the Japanese had at the outset of their folly.  Instead, it is a near-certainty that The United States will attempt to cajole and, if that does not work, coerce private citizens to buy Treasury debt as a means of staving off the collapse.  There is several trillion dollars in pensions, 401ks and IRAs that could be effectively forced into such a program, should the government decide to get out its jackboots.

But that has no different outcome than does Japan’s mess – as with Japan it simply sucks all the private capital into the vortex along with the government.

If there is one thing we should have learned from Japan’s debacle, now well into its second decade, it is that “Quantitative Easing” does not work.  It fails to halt deflationary pressures because the root of the problem is that there is too much debt in the economy relative to productive output. 

Quantitative Easing is an attempt to avoid the inevitable pain of debt deflation and default.  It is nothing other than a sop aimed at preventing those who made bad loans from being forced to eat them, recognizing their insolvency and going out of business.

Since “Quantitative Easing” does not reduce the level of debt in the system it is mathematically impossible for it to succeed in the goal of relieving the debt overhang.  Indeed, it is virtually assured to make such an overhang worse, since by definition such a program will prompt further and more aggressive debt issuance, especially by the government.  It did in Japan and now it has here in The United States as well.

You cannot fix a drinking problem with a case of whiskey, but you sure as hell can get alcohol poisoning and die.

Japan is well on the road, and we are not all that far behind them.

Threats from the White House Press Secretary Robert Gibbs were issued this morning on Fox News Sunday.  When asked what the financial repercussions might be if Ben Bernanke failed to be re-confirmed, he stated: “The best way to not have to deal with those repercussions is to support Ben Bernanke for a second term.”  Mr. Gibbs further said that senators could support stability in the financial system by backing Mr. Bernanke.

The stock market has lost all of its gains for the year as of Friday.   Coincidence this happens just before the senate convenes to vote on Bernanke’s reconfirmation?  I think not.  Long-time readers of FedUpUSA have seen enough evidence that the Federal Reserve has been the biggest force in the stock market since last March to see clearly what has happened to our ‘free market’ economy.*  It has been the Federal Reserve’s low-interest rate liquidity that has allowed the member banks through their trading desks to elevate market price on very low volume.  Take away the liquidity and……

I would encourage the Senate to refuse to bow to threats and financial terrorism.

* Long-time readers will remember this from September 24, 2008:

FLASH: Fed Speaking Out Both Sides Of Mouth

Posted by Karl Denninger

The Fed has claimed that this is a “liquidity crisis.” Really Ben?  Then perhaps you can explain this?

 Note that this is an intentional drain of “slosh”, or liquidity, from the banking system.  $125 billion in the last four days drained?

 You wouldn’t be trying to intentionally cause a bank failure or two to bolster your call for the $700 billion “bailout” plan, or perhaps intentionally lock the short-term credit markets, would you Ben?

 If the market has a liquidity crisis, why would you be intentionally draining reserves from the banking system?  Don’t you think you ought to explain that to Congress?

What was the market’s response to Ben’s pulling the $125 Billion in liquidity? 

Irrefutable proof that they used market manipulation to scare Congress into giving Hank Paulson his $700 Billion bazooka.  So yeah, they CAN do it; the question is, how long will the American People stay hostages to the reign of financial terror wrought by the Federal Reserve?  Even more importantly, exactly how long will Congress allow this power to be wielded over them and the American People?

Maybe Janet Napolitano’s time would be better spent focusing on the REAL terrorists?  Perhaps someone should inform the Department of Homeland Security?

A Message To Our Senate: Defeat Bernanke

Posted by Karl Denninger

The reaction from Wall Street and The White House should not have surprising when it comes to Bernanke’s nomination.  We heard people like Robert Gibbs say:

Asked about the potential financial repercussions of the U.S. Senate voting against Bernanke, Gibbs said, “The best way to not have to deal with those repercussions is to support Ben Bernanke for a second term.”

Gibbs said senators could support stability in the financial system by backing Bernanke’s renomination.

This is a blatant and outrageous lie.

The historical record is clear and incontrovertible.  Ben Bernanke caused, both directly and indirectly, the housing bubble and as a consequence the inevitable crash. 

He has refused to take actions that would prevent it from happening again.  Indeed, he has promoted even more concentration of risk through intentional acts of aggregation of banking interests, taking “too big to fail” to a new level of “outrageously too big to fail.”

And finally, he has argued for and fostered a ridiculously unsustainable spending binge by Congress which has destroyed The Federal Government’s ability to effectively intervene when, not if, the next market crisis comes.

The facts are simple:

Bernanke intentionally allowed the growth of credit aggregates at rates of 50% to 100% faster than GDP over the last decade, a direct violation of the law governing The Federal Reserve and the underlying and necessary predicate for the bubble to occur.  Bernanke was, in fact, the loudest Federal Reserve advocate of Greenspan’s “easy money” policies after the 2000 Nasdaq market collapse.

Bernanke has willfully and intentionally ignored basic mathematical facts related to the growth in credit aggregates – specifically, that permitting credit aggregates to grow faster than GDP always must eventually, if maintained, lead to a massive credit bust.  This is a function of basic mathematics – specifically, exponents.  All the fancy ”econometric models” in the world cannot violate the basic laws of mathematics.

Bernanke refused to regulate lending and securitization by the banks during the housing bubble despite the fact that the FBI issued a formal warning of massive fraud in 2004 and both HUD and Corelogic issued studies in 2005 and 2006 showing nine of ten borrowers in “ALT-A” loans had lied about their incomes.  Without suckers to buy these worthless securities this irresponsible lending could not have taken place.

Bernanke’s willful refusal to both conform with the law and regulate the banks fostered the environment in which they have and continue to asset-strip the citizens of this nation.  Bluntly put the big banks are paying out 1% of GDP to a few thousand people not due to hard work, industry and innovation but rather due to rank exploitation and deliberate mispricing of risk with the costs of these outrageous and intentional acts shifted to the citizens of this nation.

Bernanke has intentionally concealed the terms and beneficiaries of bailouts and handouts despite multiple requests from Congress and The Press, has fought FOIA requests, has ignored Congress outright and just recently failed to fully comply, in the opinion of Representative Darrell Issa, with the Congressional subpoena issued by the committee on which he sits.

Bernanke has in fact been dead wrong on virtually every pronouncement he has made over the last ten years on economic matters, including claims that there was no housing bubble as late as 2006, that subprime was contained, that we would not experience a recession, that his policy prescriptions would stabilize the economy and job market and that if EESA/TARP was passed the stock market would not collapse.  Each and every one of those claims was in fact wrong.  A weatherman would be fired for a predictive record far better than Bernanke’s.

Bernanke claimed, in sworn testimony, that he would not monetize the debt.  While he was speaking – almost literally to the hour – The Federal Reserve was in fact monetizing $300 billion in Treasury debt and $1.2 trillion in Fannie and Freddie Securities – securities we now know are stuffed full of fraudulent mortgages that Fannie and Freddie bought during the bubble years.

Bernanke has refused to accept responsibility for his policies.  He gave a major speech in January in which he defended not only his record but also the willful and intentional misapplication of his favored policy “pointer”, known as The Taylor Rule.  The author of that rule, a highly-respected academic professor, responded with a scathing (in academic terms) reply pointing out that “as written” Bernanke and Greenspan had held interest rates far too low for too long and thus fueled the speculative frenzy that led to this collapse.

Bernanke claims to have a plan to exit his “extraordinary measures” but has refused to explain that plan.  This is likely because he has not supported the mortgage-backed security market, he is, in fact, the market, having now bought literally more than the entire net issuance in 2009!  The reason Bernanke has not explained his exit strategy is simple: he doesn’t have one.

Bernanke has willfully and intentionally ignored obvious and clear indications of front-running in the bond market while he has been running his “quantitative easing.”  There have been inexplicable pricing moves in the Treasury Market in the very specific issues that were then bought by The Fed just hours or days later.  While there is no “smoking gun” proving that The Fed has communicated to certain market participants what would be bought, and then intentionally overpaid for those very same securities, it is impossible to look at this market’s performance in an objective, statistical fashion over the last year and not reach the inescapable conclusion that someone, or a handful of someones, have been cheating.

The people have had it with Bernanke, the banks and The Federal Reserve’s complicity and willful blindness in the looting of our nation. 

We the people are tired of being told that we not only must sit still for being looted on the way up but then must bail out those who get caught holding the bag when the inevitable bust follows the fraud-laced boom – a pattern of conduct that has been intentionally played out at the expense of Americans twice in the last ten years.

As a matter of public policy these actions are irresponsible, unacceptable and outrageous.  They constitute outright theft from the citizens of this nation both on the way up and on the way back down.

There are many who say that “there is no other reasonable alternative.”  This is outrageously false as well.  Paul Volcker is one obvious choice, assuming he wants the job.  Another obvious choice would be John Taylor - author of The Taylor Rule and a highly-respected academic.  There are others, of course but these two are clear alternatives that make sense, with Mr. Volcker being arguably the best-respected central banker of the last 100 years and the man who singularly put a stop to what could have easily been a disastrous descent into monetary hell in the 1980s.

The Senate has 1/3rd of their ranks up for election.  Every Senator standing for election this year that votes for Bernanke is at risk of losing his or her seat, as Massachusetts shows. 

Remember Senators that Massachusetts saw a more than thirty point swing from Democrat to Republican – and to a near-literal unknown candidate – in less than thirty days time.

There is not one Senate seat that can survive such a swing at the polls. 

NOT ONE OF YOU HAS A SAFE SEAT.

Massachusetts was about much more than health care.  It was about the Democrat Majority the people put into power claiming that they would bring change to Washington DC – that “captains of industry” would no longer be free to loot and steal from the common man in all of its forms, whether it be in health care, offshoring jobs, passing 2,000 page bills in secret or predatory lending.  Instead of keeping that promise The Democrats instead increased the looting of the people, with big banks now paying out 1% of GDP in bonuses – $145 billion – to a few thousand people with each of those dollars literally stolen from the rest of us.

We the people have had enough and you are on notice: What happened in Massachusetts can and will happen across this land come November.  We, not you, are the ones with the power and we WILL dispossess you of your jobs just as you have allowed the banksters to dispossess us of our homes, our wealth and our jobs.

Remember well as you vote Senators, because we the people are damn tired of being looted, financially raped and robbed, and Ben Bernanke both put in place the conditions leading to and has in fact refused to put a stop to these acts!

IF YOU DON’T PUT A STOP TO IT HERE AND NOW WE WILL FIRE YOU AND REPLACE YOU WITH SENATORS THAT WILL.

That’s a promise.