FedUpUSA

Archive for March 4th, 2010

So Much For Universal Default Disappearing

Posted by Karl Denninger

Gee, how do you like the rape job that the banks just served up on you?

(Click to enlarge)

Read that white part carefully, and then make sure you read the inverted part.

If you:

• Exceed your credit line.
• Do not pay on time (even once)
• The bank believes you will be either unwilling or unable to pay because of “information they receive” (like, for instance, because your credit report discloses you didn’t pay someone else?)

The bank can immediately close your account without notice AND DEMAND YOU PAY THE ENTIRE BALANCE ON THE ACCOUNT IMMEDIATELY.

Oh, and when you can’t (because you thought you had time to pay) you are then in default again for not paying “on time” and they can sue and add attorneys fees and costs.

I thought this crap was going away?

This, by the way, is from Chase, I have the entire section of the statement (all pages), and is claimed to be effective on 22 February.

So much for the CARD act banning practices like this, eh?

TELL THE BANKSTERS TO SHOVE IT UP THEIR BUTTS – WITHDRAW YOUR MONEY AND REMOVE YOUR BUSINESS – ALL OF IT.

It’s Called DEFLATION Folks

Posted by Karl Denninger

Never mind the man behind the curtain, who won’t utter the word:

The Labor Department reported Thursday that productivity jumped at an annual rate of 6.9 percent in the fourth quarter, even better than an initial estimate of a 6.2 percent growth rate. Unit labor costs fell at a rate of 5.9 percent, a bigger drop than the 4.4 percent decline initially estimated.

In the real world this means:

• Work harder and get more done.

• Get paid less.

• Suck it up, don’t complain, or you’re fired.

That’s all.

And by the way, reduced pay per unit of work spells DEFLATION.

Now here’s the problem: We have huge public-sector labor unions that are resisting this force.  Yet this force is exactly what has to happen in order to bring the economy back into balance.

We have “advanced” promises made to these people – $200,000+ pensions and other similar obscenities – even though doing so is a ponzi scheme that is impossible to maintain.  We have continually cow-towed and pandered to these unions, including educators, police and fire and all other manner of public sector employees with wage increases that exceed growth in aggregate output per-person when one counts both salary and benefits.

This, of course, cannot continue.  It is yet another example of the expanding gap that opens up between two exponential functions – for those who have forgotten my favorite pair chart, here it is again:

I understand that everyone wants to avoid taking the pain.  I understand that everyone claims that “its not fair!”

None of this changes the facts.  You cannot continually offshore your better-paying labor to China for the purpose of being able to have a $30 DVD player, destroying the $40/hour skilled job base and replacing it with $7/hour burger flippers and espresso-shot-pullers, and maintain the ability to commit compound annual growth rates of 5, 6, 7% or more to public-sector employees.  Doing so inevitably destroys the tax base necessary to meet those commitments, and once the destruction has occurred it cannot be un-done.

You cannot falsely-report “growth” that is in fact no such thing, but rather is simply the addition of more debt, thereby creating false demand that never existed on an organic basis, and continue this process forever.

The person who loses their job can continue to spend as if they have not – for a while.  They can run up the credit cards – for a while. 

They can do so until the credit card company discerns that the ex-employee has no money, and thus will never pay them.  Once that happens the credit card is cut off.

States, municipalities and nations are no different than people in this regard.  We have played this game for 30 years.  We have promised people they could have unlimited health care, unlimited prescription drugs and unlimited, compound increases in salaries and benefits.  At the same time we have permitted our corporations to send their labor base overseas, destroying the income base to purchase these products and the tax base required to pay those benefits.  All of this has been “facilitated” by a financial system that grew from about 7% of the marketplace to well north of 20% (in 2007) before it all fell apart.

Instead of allowing it to fall apart and return to a 5-7% of the market, which would be sustainable, politicians instead created false final demand of about 9% of GDP (~ $1.2 trillion annual increases in deficits on a $14t GDP) and then added $13 trillion of “guarantees” in the form of funny money to the financial system to prevent it from imploding (roughly equal to the entire financial debt in the system, which currently stands around $16 trillion.)  This “prevented” the immediate recognition that the derivatives written by these firms were nothing more or less than a gigantic fraud, as there was no ability to pay – not at origination, not at maturity, not ever.

But none of this game-playing changes the mathematical fact that:

• The money to pay these bets never existed, and never will.  It was a fraud, but our politicians refuse to direct law enforcement (which reports to them) to enforce the law against fraud, as that would “hurt” their campaign donors (they’d go to jail!)
• The offshoring of our production has destroyed both incomes and the tax base.  “Replacing” that with more borrowing is exactly identical to an unemployed person using their credit card to maintain their standard of living.  It will fail – we are simply arguing over when, not if.
• Public sector employees are inherently parasites.  It cannot be otherwise.  The policeman, fireman and teacher do not directly produce anything.  Their employment and the wages and benefits they can collect must therefore inexorably track the actual productive output of the nation.
• Finance in all it’s forms, whether banking or insurance – produces nothing either.  Every dollar of such “activity” comes about only as a parasitic drain on production.  It cannot be otherwise.  Further, speculative activity in all of its forms produces losers in exact proportion to winners – if Goldman makes $100 million speculating on oil prices, someone else loses the same $100 million.  The net benefit to our nation’s economy?  Zero – we merely moved money from one hand to another.

The actual private sector production worker is now being forced to recognize this.  He’s being told to work harder and longer for less money (per hour) or lose his job.  That’s what the statistics say.  This sort of movement in the private labor force is unprecedented – it in fact exceeds that which formerly was accomplished with computerization in the 1980s and 1990s – and this time it’s actual labor, not the introduction of new technology.

The first step to solving problems is admitting to what they truly are.

The recent pronouncements and announcements out of both the new governor of New Jersey but also California, where they have attempted to play “extend, pretend and charge-it-up” more and worse than anywhere else in the nation make clear that the credit line has run out and we either face the facts – like it or not – or we get the clue-by-four upside the face.

As usual, the politicians thought they could extend, pretend and lie until after the election.  As in 2008, they’re wrong, and if they don’t cut it out we’ll get a repeat of the 2008 disaster but this time around it will be much worse.

Welcome to 2010.

CNBC Protects Bad Guys Who Took Huge Bailouts from Taxpayers

Janet Tavakoli, President, Tavakoli Structured Finance, Inc.

The economy is in trouble because banks borrowed massively, and they borrowed many multiples more than they could afford. CNBC acts as if over-borrowing by U.S. consumers created a global financial crisis. This myth protects Wall Street banks.

Predatory Lending: Consumers Need Protection

At times individual borrowers overreached, flipped houses, or lied about income. But those weren’t our only problems. Borrowers were often targeted and actively misled. Wall Street supplied the funds to predatory lenders. Then it packaged up those loans into phony securitizations.

In the past decade, lending fraud lawsuits against Ameriquest and FAMCO made the news. Instead of cracking down, regulators removed the brakes. America suffered an epidemic of predatory lending after that.

By the time of Wall Street’s 2008 bailout, delinquencies on subprime mortgage loans made in 2005 and 2006 exceeded 37 percent and were climbing. The brand new (at the time) 2007 loans had a default rate of almost 26 percent and climbing. The loans made in 2007 defaulted almost immediately, a classic situation for fraud. That doesn’t include other risky mortgage products made to borrowers with better credit. Meanwhile, subprime loans made by Warren Buffett’s Clayton Homes division were performing just fine. The delinquencies were in the low single digits and constant.*

Wall Street banks bear most of the responsibility for this debacle. Most of the CDOs that came to market in 2007 defaulted very rapidly. At the end of a Ponzi scheme, the schemers speed up (as they did in 2007), because they are desperate to hide losses in new securities. Wall Street banks disguised the risk on their own books, passed the problem to investors, or bet against their own trash to make even more money.
CNBC Blames Taxpayers Not Banks’ Titanic Losses and Enormous Bailouts

I appeared on CNBC on Tuesday to discuss consumer protection. Everyone else in the clip below is on CNBC’s payroll.

CNBC editor Rick Santelli wants to blame taxpayers for a problem created by Wall Street Banks (and denies predatory lending is an issue). He suggests losses are the fault of individual borrowers, yet is silent on the titanic losses and enormous bailouts for the Wall Street Banks.

CNBC contributor Bill Isaac has long been a denier of mortgage problems. In 2007, he told Mortgage Banking:

“I believe that [the housing market's] already showing signs of leveling out. I believe that over the rest of 2007 and 2008, we’ll be seeing the market stabilize and improve. Generally as a nation as a whole, I don’t have any concerns.”

By 2007, dozens of mortgage lenders had already imploded.

 Isaac is wrong again when he says banks were not involved. Here are just a few examples: JPMorgan Chase bought troubled Washington Mutual and Bear Stearns. Goldman Sachs ran Goldman Sachs Alternative Mortgage Products. Bank of America bought predatory lender Countrywide and Merrill Lynch.

Hundreds of billions of losses–not merely paper write-offs, actual losses–have subsequently occurred due to foreclosures and delinquencies. We’ve had a negative feedback cycle of falling housing prices leading to more foreclosures and delinquencies. Denial is not an option.

Give Taxpayers an Even Break: Banks were Responsible

Wall Street got bonuses, taxpayers paid the bill, America got a deep recession, and the world got the worst financial crisis in history. Financial holocaust deniers obstruct solutions that can help prevent the next crisis and would stick taxpayers with the bill again.

*More details can be found in my book on the financial meltdown for a general audience, Dear Mr. Buffett, and my book for professionals, Structured Finance.

Now Seniors Get To Feel The Bezzle

Posted by Karl Denninger