FedUpUSA

Archive for February 12th, 2010

— Illustration: Bill Mayer

Time to fix Wall Street’s accountability deficit.

— By Monika Bauerlein and Clara Jeffery

MAYBE WALL STREET should open a casino right there on the corner of Broad, because these guys simply cannot lose. After kneecapping the global economy, costing millions their homes and livelihoods, and saddling our grandchildren with massive debt—after all that, they’re cashing in their bonuses from 2008. That’s right, 2008—when amid the gnashing of teeth and rending of garments over the $700 billion TARP legislation (a mere 5 percent of a $14 trillion bailout; see “The Real Size of the Bailout“), humiliated banks rolled back executive bonuses. Or so we thought: In fact, those bonuses were simply reconfigured to have a higher proportion of company stock. Those shares weren’t worth so much at the time, as the execs made a point of telling Congress, but that meant they could only go up, and by the time they did, the public (suckers!) would have forgotten the whole exercise. It worked out beautifully: The value of JPMorgan Chase‘s 2008 bonuses has increased 20 percent to $10.5 billion, an average of nearly $6 million for the top 200 execs. Goldman‘s 2008 bonuses are worth $7.8 billion.

And why are bank stocks worth more now? Because of the bailout, of course. Bankers aren’t being rewarded for pulling the economy out of the doldrums. Nope, they’re simply skimming from the trillions we’ve shoveled at them. The house always wins. Indeed, 2009 bonuses are expected to be 30 to 40 percent higher than 2008′s. And don’t forget AIG, which paid the same division that helped cook up collateral debt obligations and credit default swaps “retention bonuses” worth $475 million, in some execs’ cases 36 times their base salaries.

As anyone who watches Dog Whisperer knows, rewarding bad behavior produces more of the same—so it’s no surprise that Wall Street is back to business as usual. Derivatives are still unregulated (thanks, Congress!), exotic sliced-and-diced securities are being resliced and rediced, and the biggest offenders in peddling subprime mortgages? They are raking in millions in federal grants to—wait for it—fix subprime mortgages. And the worst part? These fat-cat recidivists don’t even have the decency to fake contrition. The New York Times‘ Andrew Ross Sorkin says that whenever he asked Wall Street CEOs “Do you have any remorse? Are you sorry? The answer, almost unequivocally, was no.” When asked by MoJo‘s Stephanie Mencimer if he regretted helping to bring down the economy, former AIG CEO Hank Greenberg said flatly, “No. I think we had a very good record.” Lloyd Blankfein, Goldman Sachs’ CEO (his haul between 2006-2008: $157 million) went so far as to tell the Times of London, “We help companies to grow by helping them to raise capital. It’s a virtuous cycle. We have a social purpose.” Bankers like him are “doing God’s work.”

 This is blasphemy worthy—along with usury—of the 7th circle of hell. And while Goldman’s PR minions, visions of pitchforks dancing in their heads, coaxed Blankfein into coughing up a lame apology, the comment perfectly distilled the Kool-Aid Wall Street has forced down our throats. MoJo‘s Kevin Drum sums it up in his investigation of Wall Street’s outsize influence in Washington: Political payola—$475 million in campaign contributions just in the 2008 cycle—is only part of it. Something more insidious is at work. “Unlike most industries, which everyone recognizes are merely lobbying in their own self-interest, the finance industry successfully convinced everyone that deregulating finance was not only safe, but self-evidently good for the entire economy, Wall Street and Main Street alike,” he writes. Some call this phenomenon “intellectual capture,” he adds, but “considering what’s happened over the past couple of years, we might better call it Stockholm syndrome.”

 Sure enough, as our Washington bureau chief David Corn reports, pollsters have been surprised to find that while Americans are angry about the economy, they often blame not the bankers, but politicians—and even themselves. We spent too much, the logic goes, and now we’re reaping the rewards. There’s some validity to that—we all played along as if the good times would never end. But who sold us this crock? Wall Street and its troubadours, from faux regulators like Alan Greenspan to so-called financial journalists like Jim “Mad Dog” Cramer.

 And actually, when it comes to restraint and humility, consumers seem to be the only ones learning their lesson. Personal savings are up for the first time in decades; spending is down. Why? Because we, the little people, actually felt the pain of the crash. New incentives, new behavior. Not so on Wall Street; not so in Washington.

 It’s not too late. If nothing else, last summer’s tea parties showed that politicians will listen to popular outrage—when it seems to threaten their jobs. What if, as Nobel-winning economist Joe Stiglitz suggests, we foreclosed on bankers and politicians who are morally bankrupt? What if people started showing up at town halls demanding accountability from those who gambled away their jobs and homes? There is plenty of blame to go around. Let’s start putting some of it back where it belongs.

 Monika Bauerlein is coeditor of Mother Jones. For more of her stories, click here. You can also follow her on Twitter.

 Clara Jeffery is coeditor of Mother Jones. For more of her stories, click here. You can also follow her on Twitter.

3000 Dow In 2010: Is He Mad?

Dan Dorfman - Financial Columnist, Market Commentator

In early March of 44 B.C., a soothsayer warned Julius Caesar about the Ides of March. Unfortunately, Caesar ignored the warning, and we all know the rest of the sad tale.

Harry Dent Jr., a former consultant to Fortune 100 companies and presently publisher of HS Dent Forecast, a monthly investment newsletter in Tampa, Fla., sees a similar kind of fate for the stock market, although he has expanded the time frame of his Ides of March scenario to somewhere between early March and late April.

In brief, Dent sees the stock market–currently benefiting from upward momentum and peppier economic activity–headed for a very brief and pleasant run that could lift the Dow to the 10,700-11,500 range from its current level of about 10,093. But then, he sees the market running into a stone wall, which will be followed by a nasty stock market decline that will drive down the Dow later this year to 3,000-5,000, with his best guess about 3,800.

A forecast of a possible 3,000 Dow this year might strike you as crazy. It does me. But Dent is no whack-o.

Actually, this interview with Dent, who has written several books, one in 1992 about the boom in the 1990s, and more recently, another about the coming depression, comes on the heels of some remarks he made in a piece I did on January 18. In it, I quoted several market pros, a couple of whom briefly expressed concerns about the economy and the stock market. One was Dent.

In response, a HuffPost reader e-mailed me, complaining that I failed to spell out Dent’s bearish case. In reaction to that complaint, I decided to do a follow-up and detail his
gloomy reasoning.

Basically, Dent sees a series of “ticking time bombs,” both here and abroad that will intensify world-wide financial turmoil.

Let’s start with one of the stock market’s biggest current worries, European debt fears, which embrace such countries as Greece, Portugal, Spain, Ireland and Italy.

Dent takes these financial concerns a couple of frightening steps further. He not only sees massive debt crises in the U.S., Europe and east Asia, but a series of defaults, as well, in Latin America, the Middle East and Africa due to a commodity bust which he believes will worsen into at least early 2013 and possibly into early 2015.

That commodity bust, as he sees it, could knock down the price of gold (now around $1,085 an ounce) to $250 to $500 over the next year. Gold, he says, won’t save investors from this crisis. Correspondingly, he envisions a hefty drop in the price oil, with the per-barrel cost plunging from about $74.15 currently to around $30-$35 by year end.

Dent also expects rising geopolitical pressures to ignite growing problems, especially in Iran and the Middle East in general, as well as sharply increasing terrorist strikes in Europe and the U.S. in the spring and summer of 2010. Noting that we have already seen growing terrorist alerts in the United Kingdom and two failed terrorist airline attempts in the U.S., he believes there is very likely more to come.

Dent also voices concern about fast growing China, which is tightening credit to slow what a number of observers see as overheated economic growth. His chief worry: China’s excessive overstimulation of its economy, which he predicts will fall hard when the global boom fails in the second half of 2010. He also thinks its excess manufacturing policy will contribute to deflation, as well as to debt deleveraging around the world.

Turning to the U.S., Dent sees housing in for another severe hosing. Despite renewed economic strength here, home prices, he contends, are not recovering due to rising defaults and foreclosures. “Consumers are not buying homes, only speculators are,” he says.

Dent looks for rising defaults and foreclosures in residential real estate (spurred by mortgage resets) and growing defaults in commercial properties to put the kibosh on any sustained economic recovery. In turn, he expects the resumption of a sagging economy that will boost the unemployment rate (now 9.7%) to 15% to 16% by the first quarter of 2011, spur a banking meltdown, and clobber the market.

There is also no doubt in Dent’s mind that the “stimulus recovery,” as he calls it, is not sustainable and will very likely peter out between the summer and fall.

But what about growing bullishness and the recent outbursts of investor enthusiasm, as reflected in an expanding number of triple-digit daily gains in the Dow? Isn’t that indicative of expectations of a stronger economy?

Dent pooh-poohs these stock gains, noting investors are in “major denial,” which means, he says, “a major crash when reality sets in.” He expects the next stock collapse will likely be as strong as the first one (meaning a decline of at least 50%), but he looks for it occur in a shorter period of time, with the greatest damage likely between late May and late September.

Elaborating on the point of “major denial,” he takes note of the latest reading from the American Association of Individual Investors, which is considered a solid contrary indicator. At present, the association reports its membership is 46% bullish. “At 50%, we’re at the top and we’re almost there,” he says.

His wrap-up advice to his newsletter subscribers is ominous. In brief: “Get ready for the most extreme two years of your lifetime–the debt crisis of late 2010 to late 2012. If you raise cash by selling assets, cutting costs and focusing on your business (or selling it), you will be highly rewarded.”

He never says it in so many words, but Dent’s message is clear: Get ready to run for the hills.

What do you think? E-mailme at Dandordan@aol.com.

The Gods Are Laughing

Lately, the opening quote that adorns the pages of The Automatic Earth is from John Kenneth Galbraith. It says:“In economics, the majority is always wrong”. And, well, since everybody talks about the same thing these days, namely Greece, perhaps it’s time we should take Galbraith to heart. Perhaps when everyone is looking in the same direction, the smart thing to do is to look where they don’t. Nonetheless, the whole thing certainly takes the herded blindness of the investor crowd and puts it in a bleak light, in the same way that Hugh Hendry exposed Joe Stiglitz.

Hendry showed us all a painful truth, that economic policies are crafted by a clueless ensemble of theorists who will swear on their mothers’ graves that their theories should work. And in theory they will. Just like in theory Greece could go bankrupt soon. The money managers of the planet are all anxiously waiting for a salvation signal to come from Germany and France, a signal neither is in any hurry to provide. In the past year, German and French export industries have been hammered not only by a weakening market, but even more by a rising Euro. The commotion surrounding Greece is a gift from heaven for them, and they’ll use it for all they’re worth, only to say the word at the very last minute.

Meantime, while everyone’s focused elsewhere, in the American part of the real world Elizabeth Warren warns that $1.4 trillion in commercial real estate loans that need to be rolled over by 2014 will endanger 3000 smaller US banks. Half the loans are underwater, while the government has hardly any idea how healthy these banks are. Also in an adjacent corner of the field, Fannie Mae and Freddie Mac have announced they will buy up delinquent mortgage loans they have written securities on, to the tune of at first glance $200 billion. Which is in turn of course only the first batch they’ll purchase, since it’s not exactly as if the rest of their portfolios are seeing better days .

You know, just in case you were wondering why they needed that Christmas Eve blank cheque from the Treasury. Remember, their loan portfolio’s are north of $5 trillion, and the latest Case/Shiller prediction calls for another 20-odd percent drop in home prices just this year, so get yourselves ready, party hat and all, to become the proud owners of a $1 trillion or so “worth” heap of failed junk, with more, much more, on the way. Don’t forget that mortgage debt valuations have come down much less than home prices, and while they may never arrive at par, the former has a long way down to go just to catch up.

Oh, and that of course still leaves open the question of the manner in, and the extent to, which Fannie and Freddie (plus Ginnie Mae, FHA and FHLB) are exposed to securities written on the failed and failing loans. An indication could possible come from the fact that the Federal Reserve has approved the backstopping of $25 trillion worth of derivatives, another grab-bag of garbage that may soon need to be expanded if and as conditions continue to deteriorate. In short, matters are rapidly getting worse back home while the gazes of the masses linger on the Acropolis. How convenient.

On another continent still, questions about China are persistent and growing in number and loudness. The same Hugh Hendry who needed to explain economics to the Stiglitz who got that Fauxbel prize for his mastery of the field, sketches Beijing’s (and the world’s) core issues in a few lines today:

China has become the world’s biggest creditor, after amassing nearly $2.3 trillion of foreign exchange claims on us. However, the spectre of a creditor nation running persistent trade surpluses has ominous historical portents. It has happened only twice before, with the US economy in the Twenties and with the Japanese economy in the Eighties.

Economics is a cruel master and in both of the previous examples a failure to allow exchange rates to adjust to the new reality created a large speculative pool of credit that, in turn, led to overvalued domestic assets and, eventually, an economic crisis. Never forget that in economics, first can become last.[..]

A country that represents just 7% of global GDP is now responsible for 30% of global aluminum consumption, 47% of global steel consumption and 40% of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment.

Sometime down the line, and it could come soon, China’s lending binge will need to slow; indeed, banks are already being ordered to rethink their ways. But that will slow growth as well, and it will hit global commodities markets square on the nose, as among others Marc Faber notices. The Chinese can keep doing what they do until they don’t.

The overall drift of what Hendry’s saying, of course, is that China is not producing wealth, it’s merely producing numbers. Just like the Obama administration in its report on unemployment, which contains predictions as far out as 2020, something Washington can foresee maybe, just maybe, as accurately as Punxsutawney Phil can tell the weather 6 weeks out. Not. Have they nothing better to do? Sort of like Nero and Rome, as the country burns, the commander in chief and his staff engage in folklore.

In the skies over the Acropolis, the gods are laughing.

PS : If you have time and stamina left after all this, I would urge you read the following over at ZeroHedge:

Just How Ugly Is The Sovereign Default Truth? How Self Delusions Prevent Recognition Of Reality

Bank of America Forecloses On House That Couple Had Paid Cash For

By Tony Marrero, Times Staff Writer

SPRING HILL — Charlie and Maria Cardoso are among the millions of Americans who have experienced the misery and embarrassment that come with home foreclosure.

Just one problem: The Massachusetts couple paid for their future retirement home in Spring Hill with cash in 2005, five years before agents for Bank of America seized the house, removed belongings and changed the locks on the doors, according to a lawsuit the couple have filed in federal court.

Early last month, Charlie Cardoso had to drive to Florida to get his home back, the complaint filed in Massachusetts on Jan. 20 states.

The bank had an incorrect address on foreclosure documents — the house it meant to seize is across the street and about 10 doors down — but the Cardosos and a Realtor employed by Bank of America were unable to convince the company that it had the wrong house, the suit states.

“Their own real estate agent told them, and nevertheless Bank of America steamrolled right ahead,” said Joseph deMello, an attorney in Taunton, Mass., who is representing the couple. “This is a nightmare for anyone, and it affected my hard-working clients a lot.”

The Cardosos are seeking unspecified damages from Bank of America. The company showed negligence, trespassed and caused the couple emotional distress and financial hardship, especially because a tenant renting the home at the time got worried and left, according to the complaint. It’s still unclear if the couple’s credit rating has been affected, deMello said.

The suit names other defendants listed as “John Doe” who could include “employees, agents, contractors or other persons, ordered, hired, or told by BOA to trespass on the plaintiffs’ property and to dispose of the plaintiff’s personal possessions.”

The suit also charges the company with defamation and libel. DeMello said the Cardosos are part of a Portuguese community in the area, and the foreclosure tarnished their reputation.

Charlie Cardoso is an unemployed construction worker, and his wife is disabled. They paid $139,000 for the three-bedroom pool home in the tidy neighborhood a few blocks south of Spring Hill Drive, records show. It was Charlie’s life savings, the complaint says.

“We have a lot of friends there, and all the time we’ve been telling them the house has been paid (for),” a tearful Maria Cardoso said in an interview with WCBV-TV in Boston last month.

The couple, reached at home in New Bedford, Mass., referred a St. Petersburg Times reporter to deMello.

According to the complaint, here is what happened:

Last July, the couple’s tenant called the Cardosos in a panic. The single mother of two teenagers accused the couple of lying when they told her she could rent the house as long she wanted. Three men were there to clean out the house and change the locks, she told them.

Charlie Cardoso talked to a real estate agent for Bank of America, who said he would inform the company that it had the wrong house. The couple thought that was the end of the ordeal.

It wasn’t. A landscaper Bank of America hired in August to mow the grass on the property broke a fence to bring in his equipment. The tenant got spooked and moved out just before Christmas.

On Jan. 5, a friend of the Cardosos who was helping the tenant pick up belongings found men putting a lock box on the front door. The workers said the house belonged to Bank of America. The friend called the Cardosos.

When Charlie Cardoso called the bank, a representative told him there was a mistake, the problem would be fixed, and he would get a return call. The call never came. The lock box remained.

Four days later, Cardoso and his son drove to Florida, missing the homecoming of another son who was returning from Iraq for a two-week leave.

Cardoso had to prove to police that he owned the house. The next day he broke in through a back door and used bolt cutters to remove the lock box. The water and electricity had been turned off, and pipes had frozen.

The couple filed suit 10 days later.

Possessions the couple had stored at the home, including photos, clothes, tools and small appliances, had been removed and are presumably lost, the complaint states.

In September, three months after Bank of America started foreclosure on the Cardosos, it also foreclosed on the nearby home, records show.

The bank declined to comment to the Times beyond an e-mailed statement.

“We have reached out to the Cardosos’ representatives and hope to have the opportunity to work with them to properly assess and address their allegations,” the statement said. “We are reviewing the allegations in the lawsuit, the actual events that led to them and the causes of those events, and will consider any hardship that resulted.”

Beyond financial damages, the Cardosos want something else.

“Bank of America or somebody should apologize,” Charlie Cardoso said during last month’s television interview.

At least one bank has acknowledged the record number of foreclosures from the mortgage meltdown has increased the likelihood of such mistakes.

Citi-Residential started the foreclosure process on a home in Kissimmee in 2008 — changing the locks and emptying the pool — even though the owner, who lives in London, didn’t have a mortgage with the company, according to a report by Orlando TV station WFTV. Company officials said the high number of foreclosures they were dealing with in Central Florida contributed to the error.

DeMello said he has been fielding calls from other homeowners throughout the country with similar complaints.

As for the Cardosos, they still want to retire in Florida.

“They just don’t know if they’re going to be able to be in that neighborhood because of the uncomfortable feeling they have right now,” deMello said. “Hopefully that will change.”

Times researcher Shirl Kennedy contributed to this report. Tony Marrero can be reached at tmarrero@sptimes.com or (352) 848-1431.

Albert Edwards: At 500% Net Liabilities To GDP, It Is Too Late To Prevent The Collapse Of The G-7; Greece Is Irrelevant, We Are All Now Insolvent

Submitted by Tyler Durden

For Greece, with on and off balance sheet liabilities at over 800%, it’s game over. For the Eurozone, with the same ratio at about 500%, it is also game over. For the US, at 500%+, it is, you guessed it (sorry Joseph Stiglitz), game over, but since we have the printers, it will simply take a little longer. Following up on yesterday’s popular post on prevailing delusions as captured by Albert Edwards’ colleague Dylan Grice, we present Albert’s latest outlook. Please don’t read this if you want to keep believing there is any hope left for the (developed) world.

But first some aeral photography from Dylan Grice, indicating just how far the US government is willing to go to get the population stoked about owning fixed (shouldn’t it be called broken really?) income. With British QE over, and the country still to implement the same criminal annuitizing of 401(k)s that Uncle Sam is contempltating in order to make “Buy Bonds” a “voluntary” option one can’t really decline, maybe letters on modern architecture building blocks is all that would works. As Edwards says: “I’m not sure leaving man-sized building blocks around the City of London is really going to make an awful lot of difference, but I suppose when your public sector deficit is around 13% of GDP, every little bit helps!”

So back to Greece, the Eurozone, and policy response in general, Edwards places the causes (and “solutions”) of the escalating problem precisely where it belongs: at the core of the Keynesian systemic outlook flaw.

A major divergence of views in the market at the moment concerns what governments should be doing with their outsized fiscal deficits. Economists seem to be polarised between those who think governments should be rapidly cutting fiscal deficits to avoid impending insolvency and/or a surge in bond yields, and those who believe this will be totally counterproductive and that deficits should stay very large. Behind this controversy probably lies the key to the economic outlook.

To Edwards, and to ever more hedge fund investors judging by the jump back in Greece Bund spreads which just broke the most recent technical resistance level of 300 bps, Greece is nothing more than Russia and LTCM (or Bear Stearns as the case may be).

The situation in Greece following hard on the heels of similar solvency issues in Dubai feels to me very much like the Russian default and LTCM blow-up in 1998. For the blow-ups that year were a direct follow-on from the Asian crisis a year earlier a different chapter in the same book. There will be more crises to follow Greece, both inside and outside of the eurozone.

The outcome of broken Keynesian policy (by definition) will be ugly, and will destroy the eurozone. We said it some time ago, and SocGen has now also confirmed this bearish perspective.

My own view of developments, for what it is worth, is that any “help” given to Greece merely delays the inevitable break-up of the eurozone. But, for me, the problem is not the size of the government deficit and the solvency or otherwise of the governments in the PIGS (Portugal, Ireland, Greece and Spain – we deliberately exclude Italy).
The problem for the PIGS is that years of inappropriately low interest rates resulted in overheating and rapid inflation, even though interest rates might well have been appropriate for the eurozone as a whole. Rapid inflation has led to overvalued bilateral real exchange rates (they do still notionally exist) for the PIGS and in most cases yawning double-digit current account deficits. With most trade done with other eurozone countries, the root problem for the PIGS is lack of competitiveness within the eurozone – an inevitable consequence of the one size fits all interest rate policy. Even if the PIGS governments could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Hence the PIGS public sector deficit will inevitably remain large as a direct consequence of this weak growth outlook.

As noted earlier on Zero Hedge, in Europe the population is a little less brainwashed by the moronic happenings on prime time TV, so while in America the destruction of the economic system, as trillions are transferred to the kleptocracy which knows fully well the end game is nigh, results in some sighs of desperation at best, in Europe the outcome will be somewhat more violent.

In my opinion this will not be tolerated by the electorates in these countries. Unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain. Consigning the PIGS to a prolonged period of deflation is most likely to impose too severe a test on these nations. And the political “consensus” within the PIGS to remain in the eurozone could falter in the face of another of Europe’s unfortunate tendencies -the emergence of small extreme parties to take advantage of any unrest. My own view is that there is little “help” that can be offered by the other eurozone nations other than temporary confidence-giving “sticking plasters” before the ultimate denouement: the break-up of the eurozone.

And in case you were wondering why all European leaders are powerless to provide a bailout proposal that actually has a snowball’s chance in hell of doing something/anything to help Greece, read on. Alternatively, if you want to find out why any plan suggested on Monday will be thoroughly useless and once digested by the market will cause another major crash, read on as well.

The pressure to tighten fiscal policy from current nose-bleed levels of deficits is not just an issue for crisis hit Greece. It is an issue for virtually all economies. It is a particular issue for the US and UK with structural (cyclically adjusted) general government deficits of almost 10% of GDP (according to the OECD)! There is a ferocious debate ongoing between those who believe there needs to be a rapid reduction in these deficits to avoid some combination of insolvency/default/rapid inflation and those who believe that there should be even more fiscal stimulus. The debate is loud and opinions are tending to be polarised.
My own view on this is that obviously we should never have got into this wholly avoidable mess in the first place. But having got here, there really is no way out that does not trigger a major market-moving upheaval. Ultimately economic prosperity over the past decade has been a sham: a totally unsustainable Ponzi scheme built on a mountain of private sector debt.GDP has simply been brought forward from the future and now it’s payback time. The trouble is that, as the private sector debt unwinds, there is no political appetite to allow GDP to decline to its “correct” level as this would involve a depression. So burgeoning public sector deficits and Quantitative Easing are required to maintain the fig-leaf of continued prosperity.

And here is the topic that will dominate over all pundit round table discussions in the next weeks: the entire world is insolvent, although some are more insolvent than others. Greek total net liabilities (on and off balance sheet) to GDP are 800%! EU: at 470%, the US, at over 500%. There is no way out but default.

Edwards’ poignant summation.

I am persuaded by my colleague Dylan Grice’s analysis that, including unfunded liabilities, most governments are already insolvent with debt to GDP ratios closer to 500% of GDP instead of around 100% for most G7 countries . It is too late.
Nor were Dylan and I persuaded by recent comments from Nobel Prize Winner Joseph Stiglitz that it is absurd to suggest that the US and UK governments might default on their debts as they could just print money. Indeed. But a client pointed out to us that Weimar Germany did not default on its debts during its hyper-inflation. How reassuring!
I am persuaded though by Richard Koo’s book about the lessons from Japan’s balance sheet recession. The crux of his analysis is that governments have no option but to stimulate aggressively all the while the private sector is de-leveraging. ANY attempt at fiscal cuts simply results in renewed recession and a further loss of confidence, thus making it even harder and more costly to sustain any subsequent recovery – and hence the budget deficit ends up bigger than before (e.g. see chart below). This is exactly the outcome I expect.

The take home is very, very simple: we can delude ourselves that the game can be won (it can’t), or we can prepare for the imminent collapse when delusion finally fails.

Partisan Attacks WILL NOT Solve The Problem

Posted by Karl Denninger

Ann Coulter, one of the most-partisan commentators out there in the media, had this to say recently:

How about just punishing the guilty? The Democrats can’t do that because the list of Wall Street’s biggest offenders may turn out to be eerily similar to the list of Obama’s biggest campaign contributors.

How about punishing the guilty Ann?  How about punishing one JOHN JACKASS MCCAIN, who Henry Paulson personally credits for being the reason TARP passed?

 “As he was falling behind in the polls it would have been very easy for him to demagogue that issue, playing the populist card,” he said. “And if he had come out against what he were trying to do we wouldn’t have got it I believe. We wouldn’t have had the TARP legislation passed and we would have been left defenseless.”

Oh wait!  Henry Paulson was a Republican Treasury Secretary too!

Employees from Goldman Sachs gave more to the Obama campaign than any other organization except the University of California — with Citigroup and JPMorgan Chase quickly following in sixth and seventh place.

Absolutely correct.  Goldman gave money to the winner.  Big stinking surprise – NOT.

Whatever Obama has in mind for punishing the financial industry, I promise you, he won’t punish his friends. After JPMorgan CEO Jamie Dimon took a $17 million bonus this week, and Goldman CEO Lloyd Blankfein got a $9 million bonus, Obama said he didn’t begrudge them their bonuses, saying, “I know both those guys.”

Well that may well be true, but can you point to anything that Republicans did in their eight years in office prior to President Obama that actually reined in the outrageous fraud and abuse served up upon the world’s investors – not to mention everyday Americans - by Wall Street?

Let’s see…. I think I’ll list a few things that the Rethuglicans have done to our nation, since Ann has done such a great job of bagging on the Democraps.

“Bankruptcy Reform” – but only for “the little people” – that is, you and I.  We can’t declare bust if we have a good income and discharge all our debts – but corporations still can!

State laws prohibiting predatory lending: Who directed their justice department to file suit to block these laws?  That would be George W “I hope you get bit by a snake on your ranch” Bush, right?  Yep. Ann charges:

Obama, like the rest of his party, is an ideologue who doesn’t understand or particularly like the free market. He fundamentally believes in the efficacy of the welfare state, whether the beneficiary is a layabout single mother or a rich Wall Street banker.

Oh really?  Obama voted against the bankruptcy screw job Ann while he was a Senator.  You forget that, right?  Yes, he didn’t have much Senatorial record, but he did have that to his credit.

Further, “the free market” that Ann promotes under “Rethuglican” administrations turned into “I can rape you so long as I wear a ski mask and you can’t identify me.”

That’s the Republican’s view of a “free market.” 

I’m not saying that the Democrats have a particularly better view of it, by the way.  They’ll just stick you up face-first, stuffing the gun up your nose while having their way. 

In either case you get violated but at least with the Democrats it seems you get kissed first – even if the kiss is delivered by cold steel.

But instead of AIG going bankrupt and Goldman taking a hit, the U.S. taxpayer made good on AIG’s securities insurance. In a deal arranged by former Goldman CEO and current Obama BFF, Hank Paulson, Goldman ended up being paid — by you — an astonishing 100 cents on the dollar.

Uh, who’s Treasury Secretary was Henry Paulson again Ann?  Have you gone insane or did you just need to avoid bagging on the progenitor of this train wreck – George W. Bush?

More to the point, why didn’t Bush fire Paulson in September – or even sooner?  He was still President then, you know – two little words that he refused to speak Ann.  One can only conclude that Bush was perfectly happy with Hank’s looting – er – “performance.”

See, it was Bush’s SEC that admitted Hank Paulson (while he was running Government Sachs) to their august chambers and then, at his request, removed the leverage limits that formerly constrained investment banks.  Bear Stearns and Lehman Brothers both collapsed due to this excessive leverage – they each had more than double the former legal limit when they blew up.  But for the BUSH SEC decision, neither would have collapsed and, more importantly, the last three years of the Housing Bubble could not have occurred.

Those last three years, by the way, were the most toxic.  They also featured the famous Goldman “Abacus” CDOs that weren’t really backed by anything other than a hedge fund deciding it wanted to short residential subprime – of course that little fact wasn’t disclosed clearly and promiscuously to the poor bastards that were unfortunate enough to believe that Goldman was actually selling valuable securities to them in the form of those Abacus tranches!  They got violated too, courtesy of the great Republican “Free Market” that Ann feels is so defensible.

Now it’s a bit unfair to just bag on Goldman, although they’re certainly a popular whipping boy.  See, they were hardly alone.  Countrywide “Fast and Sleazy” Financial anyone?  Got a pulse?  Buy a house!  Lehman, Bear, Countrywide, New Century and dozens more – all ranged the American land, picking the pockets of millions through trickery, deceit and worse with explicit support and active legal interference run by The Bush White House.

How about Ben Bernanke?  Who appointed him?  Oh, that would be George W. Bush, right?  Do the limits of The Federal Reserve Act mean anything?  Apparently not – if you’re a Republican.

Ann finishes with this:

Republicans should defend any investment houses that never benefited from a government bailout. But anyone who took huge gambles, lost and got bailed out with taxpayer money should be tortured and then shot, miraculously brought back to life, tortured some more, then shot a few more times.

When Ann is prepared to begin her list with Hank Paulson and Ben Bernanke, along with John McCain (who Paulson asserts could have single-handled stopped the bailouts) I might tend to agree with her. 

Her web page runs an ad for a T-shirt that says “I’d rather be waterboarding.”  I can’t agree more.  We can start with the aforementioned jackasses who destroyed The American Economy, beginning with the top of the pyramid – those regulators who, under the Bush White House, watched investors and ordinarily Americans alike be serially violated by every Wall Street Bankster and their minion scammers scattered across the “fruited plain”, denuding it to feed their yachts’ thirst for fuel – and the new house in The Hamptons.

Oh, and Ann might want to consider that had RINO McCain actually done this he’d have 1600 Pennsylvania Avenue stamped on his envelopes - as his return address.

We will not solve this problem until we put away the partiscam garbage that people like Coulter run and face reality: BOTH political parties are equally guilty in this regard.  Both embraced the mathematically impossible for more than two decades as a means of disguising and justifying their profligacy when it comes to public spending (Medicare Part D anyone?), either failing to understand or simply ignoring the realities of compound growth and interest.

Now, trapped in a box of their own design and construction Republicans and Democrats alike are trying to eat one another in a partisan flame-fest that accomplishes exactly nothing other than making the problem worse.  Neither is willing to accept that we have made promises we cannot keep – and thus we must be straight with The American People and tell them we are breaking them so they can prepare to be on their own in this regard.  Neither will cut the cord from Wall Street to Washington DC – there are 200+ year old fraud statutes that are more than sufficient as the predicates to bring charges for the most-egregious acts of these “Masters of The Universe” during the bubble years – we need no new laws, the existing, old-fashioned ones would do just fine.

No, President Obama’s plans, along with those of Harry Reid and Nancy Pelosi will not make things better.  But neither will claims that The Republicans have a “better idea.” 

I’ve yet to hear either party stand up and say “if you ripped someone off during the last decade, no matter how you did it, you are going to jail!” as the central theme in their campaign, yet that is exactly what we need to hear – across this land – if we are to reclaim this nation from the brink of a financial collapse that still looms large to this day.