Archive for May 23rd, 2010
The New York Times article Padded Pensions Add to New York Fiscal Woes has been making the rounds. At least 20 people sent me the link. Let’s take a look at few snips, then a look at a followup Times article on addressing the problems.
In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year.
It’s what the system promised, said Mr. Tassone, now 47, adding that he did nothing wrong by adding lots of overtime to his base pay shortly before retiring. “I don’t understand how the working guy that held up their end of the bargain became the problem,” he said.
According to pension data collected by The New York Times from the city and state, about 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes. The data belie official reports that the average state pension is a modest $18,000, or $38,000 for retired police officers and firefighters. (The average is low, in part, because it includes people who worked in government only part time, or just a few years, as well as surviving spouses getting partial benefits.)
Some will receive the big pensions for decades. Thirteen New York City police officers recently retired at age 40 with pensions above $100,000 a year; nine did so in their 30s.
The Times article is 4 pages long so please give it a closer look.
Undoubtedly Mr. Tassone is not as stupid as he sounds. He knows full well he gamed the system, but it was legal.
Tassone argues he held up his end of the bargain. Excuse me for asking what end is that? Public unions are legalized mobs. They coerce votes from corrupt politicians willing to buy there patronage.
There is no “public end” because there is no one working on the public’s behalf. Indeed the public in general has been crucified with never ending tax hikes to support union thugs who pack every school board in the country, and promise Armageddon if police or firefighters get laid off.
The public is fed up and rightfully so. But what to do about it.
Can States Fix Their Pension Problems?
Inquiring minds are reading a follow-up New York Times article Can States Fix Their Pension Problems?
The Times interviewed 9 people.
Alicia H. Munnell, Center for Retirement Research says. …The only real option is to wait for the market and the economy to recover.
Excuse me for asking but what if it doesn’t. What if the stock market is no higher 5 years from now, or 10? What happens to pension assumptions at 8.5% a year?
I have news for you Alicia, the stock market does not always go up. It can and has gone sideways for 20 years before and it is highly likely to do so again.
Alicia H. Munnell is a former member of the Council of Economic Advisers and professor of management sciences at Boston College’s Carroll School of Management and director of the college’s Center for Retirement Research.
She is also completely unfit to advise on economic matters. She should be fired for incompetence.
Teresa Ghilarducci, New School for Social Research says … “Most public employees have pensions plans most every worker wants and should have.”
Teresa Ghilarducci, director of economic policy analysis at the New School for Social Research, is the author of “When I’m 64: The Plot Against Pensions and the Plan to Save Them.”
If there is a plot against public defined benefit pension plans I am all in favor of it. In fact, I am against all public unions.
Ghilarducci has not yet figured out that public pension plans have essentially bankrupt most major cities in the country. We simply cannot afford the benefits offered by public pension plans.
Joshua D. Rauh, Kellogg School of Management says …
The federal government should cut a deal with states. They should allow a state to issue tax-subsidized bonds for the purpose of pension funding for the next 15 years — if and only if the state government agrees to take three specific measures to stop the growth of unfunded liabilities:
The state must close its defined benefit plans to new employees and agree not to start any new defined benefit plans for at least 30 years.
The state must include its new workers Social Security, and provide them with an adequate defined contribution plan, again for at least 30 years. To this end, the federal government should start a Thrift Savings Program for state workers and operate it alongside the existing Thrift Savings Program for federal workers.
The tax subsidies for these new Pension Security Bonds would work like Build America Bonds, with the federal government paying 35% of all coupon payments directly to the state. The cost of this subsidy will be in large part offset by the gains to the Social Security system of bringing in new state workers. On net, this plan would cost the federal government $75 billion today, and would prevent a trillion dollar crisis in less than a decade.
Joshua D. Rauh is an associate professor of finance at Kellogg School of Management, Northwestern University.
We don’t need a “Thrift Savings Program for state workers”. What the hell is so special about state workers? Why not a Thrift Program for farmers? or computer programmers? or landscapers?
No, we don’t need programs for them either.
While I applaud the idea of closing defined benefit plans, the rest Rauh’s proposal is silliness if not outright lunacy.
Cynthia B. Green, ex-Governmental Accounting Standards Board member says … “The only solution is to end the unaffordable defined-benefit pension plans for public employees once and for all.”
That was one of the most sensible comments in the who article. However, she blows it with “The total actuarial cost of these benefits must be funded annually and jurisdictions should be prohibited from ever again celebrating a pension holiday.”
I am sorry Cynthia, but that would be excruciating to taxpayers, especially if I am correct about where the stock market is headed. Something has to be done about projected costs for those currently in the system.
Steven Greenhut, author of Plunder! says …
California voters are going to have to take matters into their own hands, through the state’s clumsy initiative process.
Courts have ruled that current pension deals are vested benefits that cannot be reduced, but there’s no reason not to fix the problem going forward. No initiative has so far gotten the backing necessary, but that’s only a matter of time. When unions complain about their vilification in a coming battle, they and their political allies will only have themselves to blame for ignoring the words of progressive Democrats like Willie Brown and David Crane.
Plunder! is a great book. For my review, please see Book Review: Five Thumbs Up for Steve Greenhut’s Plunder!
Liam Dillon, voiceofsandiego.org says …
Overall, the city hasn’t made fundamental changes to its cost structure, nor has it tried to raise taxes. Instead, change has been incremental, including a heavy dose of one-time budget fixes.
The horizon remains bleak. As it stands, in 15 years the city’s annual pension bill will eclipse $500 million.
Where’s the “B” Word?
Even though a couple of the interviewees have a grip on the problem, I am disappointed in not seeing the “B” word once.
One potential solution is bankruptcy, tossing the mess in the courts and hoping for the best. LA, San Diego, Houston, and many other cities are walking dead. In time, bankruptcy may be the only way to escape these absurd pension plans.
Another possibility I have not seen discussed is to tax the hell out of pension benefits. Give everyone the benefits they have earned, just tax benefits exceeding some amount, say $100,000 at 90%. This would need to be done at the state level, and under my proposal it would apply to anyone collecting benefits in that state.
Moving out of state would not help as the pensioners get a check from the state. The state could return money back to the cities.
For cities that have the ability to levy taxes, it could also be done at the city level. Under my proposal, the tax would automatically be withheld from each check.
Of course, cities should immediately kill defined benefit plans for new employees. Cities should also privatize everything under the sun including police and fire departments.
Small cities are already cutting costs by using sheriffs associations, there is no reason larger cities could not do the same.
The ultimate goal is to eliminate public unions totally, not just public pension plans.
America’s wealthiest 25 percent of households own 87 percent of all U.S. wealth. How the middle class face growing income inequality in the new era of the psychopath corporatocracy.
Posted by mybudget360
A true measure of economic vitality is measured by wealth. We can look at incomes or other measures of productivity but real wealth is measured by net worth. Who controls wealth in the U.S.? According to a study from the Joint Center for Housing Studies the top 25% of U.S. households control 87% of all wealth in the country. That number comes out to a nice hefty sum of $54.2 trillion. If we look even closer at income distribution, we will find that the top 1 percent in our country control 42 percent of all financial wealth. By all measures being able to acquire a piece of financial wealth was the hallmark of the middle class of previous years.
Today we have a society largely in debt to credit cards, auto loans, student loans, and immense mortgage debt. Net worth is measured by looking at assets minus liabilities and many Americans are lucky to break even while many have a negative net worth.
Even after the current wealth destruction of the recession, our country has grown wealthier and wealthier over time and the trend is clear:
Yet more and more of this added wealth is filtering its way to a smaller group and not necessarily the most productive in our country. In the first quarter of 2010 some of the biggest banks in this country made continuous profits without really adding any benefit to our economy or society:
Source: ABC News
In fact, many of these banks simply made money by hoarding money and actually lending it back to the U.S. government (who actually bailed them out to begin with). These weren’t successful companies that produced a solid product. These are the companies that failed but had politically bought out the right connections. The U.S. Treasury and the Federal Reserve are designed to protect the top bracket of our society while allowing the systematic dismantling of the middle class. They call the current process the “free market” but this doesn’t apply to the biggest corporations in our country. In fact, many have leveraged the current recession to squeeze out every ounce of productivity from their current workers. Buying out politicians through lobbyist is merely another line item expense on their balance sheet.
Corporations are holding many working class Americans financially hostage. And if you look at our big trade partner in China, you will see that income disparities are also rising there:
“(China Daily) He said the income difference measured by certain indexes such as Gini coefficient might not reflect the real situation in China as it fails to take the local social welfare system and wealth disparity into account.
“Things could be even worse if we consider all these aspects,” warned Li, citing although the index of the United States is also above 0.4, but expenditure on social security and welfare accounts for about 50 percent of its total fiscal outlay, 40 percentage points higher than in China.
In addition, the assets of the richest 10 percent of the population account for 45 percent of the total residential assets in China, while the poorest 10 percent own just 1.4 percent of the total assets, according to an official report released in 2004.”
Think of those banking profits in the first quarter of this year. It would be one thing if banks were lending to Americans and small businesses making local communities stronger. Instead, they are gambling on the rigged stock market which really has become disconnected from every typical American. Trillions of dollars in bailout funds have been diverted to protecting the banking interest which in turn looks after the interest of the corporatocracy:
Source: It Takes a Pillage
When you break it down like this, you can see why most Americans have felt very little impact from the historical amounts of bailouts that have gone into the system. The quarterly profits from the banks should tell you exactly what is occurring. As local small businesses struggle with the recession and have difficult times accessing loans, big corporations and banks have no problem getting funding because they already have control of most of the wealth in our country.
And contrary to the propaganda out from Wall Street, most Americans earn money from their jobs and not investing or speculating on stocks:
Source: Survey of Consumer Finance
90 percent of all households earn 70 percent or more of their income from wages (presumably from actual work). But take a close look at the capital gains line. The vast majority of Americans get 2 percent or less of all their income from capital gains. You have to get into the top 10 percent to see any sizeable amount. And even here, you would have to break into the top 1 percent to see real sizeable gains. So this idea that the stock market reflects the health of Main Street is bogus but is a form of consumer manipulation to get more people into the rigged stock market to continue to fund the corporatocracy hunger for more capital. Now that they have control of the government, they don’t care if average Americans jump into the game. It is easier to rob it directly from bought off politicians.
Even as the recession has put our underemployment rate to 17 percent and has wiped out trillions of dollars in aggregate wealth, those at the top have actually become richer relative to most Americans. You see many of these banking PR representatives with their sob stories of how much money they have lost. It is nonsense because money is worth what you can buy with it. So now, that millionaire banker won’t have to spend $20 million for that private home, he can have it for $10 million. So his salary might be off by 10 or 15 percent but his buying power just increased because most people are struggling with wealth destruction if they work in the real economy. Or these large banks can hire cheap labor since so many people are unemployed and use bailout funds to turbo-charge their bonuses. This is how America is looted by the corporatocracy.
The corporation in the eyes of the law is seen as a person. Yet it is driven by:
-The bottom line
-Disregard for workers long-term stability
-Ignores long-term objectives
In fact, it is a casebook psychopath. Yet under the law it is treated as a person and presumably, is acting under a moral obligation to society. If you went out and robbed a bank, you will go to prison. If a corporate bank robs the U.S. Treasury, it gets even more money with the threat of “we are too big to fail.” So it should be no shock that banks are raiding the public trust and buying out politicians even though the current Wall Street structure is damaging to the health of America. These people are so delusional preaching their “all things are great” mantra and forget to see that the current structure has led us to the biggest economic calamity since the Great Depression. Clearly something has failed here.
If we keep allowing the current structure to play out the middle class will slowly fade away and be replaced by an even stronger corporatocracy. The growing income disparity should give you a quick hint where things are heading. The fact that you can’t pay for college without going into massive debt through the banks is another hint of where we are going. This falls into the new paradigm of corporate rule because they would love nothing more than a giant population of mindless drones who simply go out and purchase their goods without questioning the system.
Posted by Karl Denninger
Hattip to the forum for the pointer to this one…. yes, I know the original post was written in 2008. It’s still relevant, and should be required reading to understand exactly how screwed people’s opinions in the “homebuilding” space are.
As a Builder, I am extremely interested in the current debate about the home building and mortgage finance industry. One comment I have heard repeatedly over the past several weeks is the need to return to “sound mortgage standards” based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment. But just how realistic is this?
Ah, the old “let’s appeal to what people deserve” game.
According to the U. S. Department of Housing and Urban Development, the median household income in the U.S. in 2007 was $59,000. If we return to sound mortgage standards, median home values would have to be $147,500 (2.5x) to $177,000 (3x).
So under “sound mortgage standards,” a household earning the median income would have to save $29,500 (2.5x) to $35,400 (3x) – 50% to 58.5% of their annual household income – for their down payment before they could purchase a home. Is this realistic?
“Realistic” (as defined by “what someone deserves”) is irrelevant. What matters is mathematics. You know, that ugly science that says that some things you want are just not achievable? Yes, that.
According to the U.S. Census Bureau, the median home price in the U.S. is $231,000, so median home prices would have to drop 37% to 48%. Is this realistic? Even those homeowners who purchased their homes using “sound mortgage standards” would owe more than their home is worth.
You helped create a massive bubble and support the mispricing of the homes in that bubble, and thus YOU are partly responsible for the above condition.
Now you wish to argue that it shouldn’t exist, because, well, people “deserve” something better. Wish in one hand and wipe your butt with the other; it won’t change what’s in or on either.
As a Builder, I would love to be able to build and sell new homes for under $148,000. But is that realistic?
According to the National Association of Home Builders Economics Department Construction Cost Survey, the average new home built in the U.S. in 2007 was 3,340 sq.ft, was built on an 11,968 sq.ft. lot, and had a total sales price of $454,906.
According to the NAHB the “average” new home built in 2007 was nearly three times the size of the one I grew up in and was built on a lot that was ten times the square footage of that same home.
Oh, and by the way, my family was decidedly middle-class. My father was a CPA for a glass company. Not exactly a “pedestrian” or “lower blue collar” income. Both he and my mother have college degrees; his in accounting, hers in education. She decided to stay home and raise a family, he went to work every day, driving 25 miles one way to do so.
We had three bedrooms for four of us (the adults obviously shared), one bathroom that had a toilet, a tub and two sinks, a living room and an eat-in kitchen. One story with an unfinished basement (containing the laundry gear, furnace, hot water heater and electrical panels); that’s it.
No air conditioning, one telephone on the wall, one black-and-white TV (we couldn’t afford color) which sported rabbit ears and, later in my youth, I helped my father install on the chimney an external antenna with a rotator.
According to the Idaho Department of Labor 2007 Occupational Employment and Wage Report, the median hourly wage for construction trades workers in the Boise City – Nampa MSA $13.85 plus 21% for payroll taxes and insurance equals $16.75 per hour.
That’s funny. I remember quite vividly that the glaziers in the shop my father worked at were union boys and earned about $31/hour gross – that is, before payroll and other taxes and such, and of course before overtime. This, I will remind you by the way, was in the 1970s. So if the actual cost of “labor” in Boise City is $16.75, I’d say you’re getting a hell of a deal, inflation considered and all.
In conclusion, how realistic would it be to return to “sound mortgage standards” based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment? Not very. Doing so would certainly change the home building industry which historically accounts for 10% to 15% of the gross domestic product of the U.S. We would build fewer new homes and the ones we do build would be much smaller homes on much smaller lots. And home buyers would certainly have to adjust their expectations.
Maybe I should start building apartments
Maybe you should pull your head out of a place the sun does not shine and take responsibility for helping to bankrupt this nation.
You, and those like you, have led people to believe they can have something for nothing. That they can violate the laws of mathematics with impunity and never pay for it.
You are just like my father, who, after he retired, decided he would “get his” and thus supported (strongly) Medicare Part “D” – despite full and certain knowledge, since he’s a CPA and understands compound interest, that it would be impossible to sustain the program on an indefinite forward basis and HIS GRANDDAUGHTER would INEVITABLY get screwed as a consequence.
I don’t really give a good damn what you think you should be able to build and what people should be able to have. It’s not relevant.
What’s relevant is the mathematics of leverage and compound interest. These are mathematical laws, not suggestions. Violating them with wild abandon and willful intent is why the nation is in the mess it finds itself in now.
May I remind you that of those who have completed “HAMP” modifications find themselves with DTIs – that is, mandatory debt service payments – over 60% of their pre-tax income. If you then add into that things like automobile insurance, medical insurance and bills, fuel for said vehicle, utilities for the home, food and similar necessities both to live and continue to be able to earn an income, along with taxes (yes Matilda, everyone pays FICA and Medicare irrespective of income) you find that this so-called “beneficiary” of your profligate pumping of “home values” finds himself eating dogfood and being a literal leaking water heater away from family bankruptcy.
I simply don’t care if people are unrealistic about land values – that will change out of necessity, irrespective of what those people – or you – might want.
But to claim that the “average” family should be buying a 3,000 square foot house is simply outrageous. It speaks directly to the idiocy of “pump it up” finance and ridiculous and outrageous statements from people like Chuck. “We all are owed McMansions and by God, we’re gonna have ‘em – whether we can pay for them or not!”
Yes, that posting was from 2008. But Chuck hasn’t stopped. No, just a few months ago he’s played “buy now or be priced out forever!” once again, citing, of course, the earthquake in Chile:
Are you waiting for the price of that new home you’d like to build to drop further? I wouldn’t.
That was copper, remember, along with oil (which goes into a lot of things, like, for example, asphalt shingles)
How’s that worked out the last few months?
It was “going to the mooooooon!” through 09 remember? Now, not so much:
And oil? Remember, Goldman (and others) told us it was going well over $100 soon (again.) Yes, I noted that it might, on a technical basis. Well, so much for that:
This looks more like “don’t be a sucker and buy into the hype” to me than “buy now or be priced out forever!”, when one looks at the issues analytically.
Make good choices folks, and kick to the curb the asshats who have, for the last two+ years, tried to goad you into doing something that will leave your bereft of your labor and accumulated wealth.
A “nice big house” isn’t yours unless it’s paid for – if you have a big fat mortgage on it the bank owns it and your future labor. You in fact own nothing other than debt.
Don’t let Chuckie talk to you into doing something stupid – when homes are 2-3x average incomes and you have saved that 20% down payment, then and only then do they make a moderate amount of sense to buy – and then as a place to live, not as an “investment” that you expect to appreciate in value.
Remember, Chuckie’s certifications (self-claimed, I’m not making this up) include Certified New Homes SALES Professional and Certified New Home MARKETING Professional.
That is, he’s certified in the art of separating you from your money by selling you something.
That, incidentally, just might be adverse to your interests.
Posted by Karl Denninger
We’re now about a month into the BP Oil “blowout” incident in the Gulf.
We still don’t know exactly what caused the blowout, but that’s not the important factor from my point of view.
We know that a gas “bolus” got into the drill pipe and expanded as it rose, and that was the proximate cause of the blast and sinking of the Deepwater Horizon.
What we don’t know is why the blowout preventer failed to close.
There have been several theories and claims, among them:
- The Blowout Preventer’s hydraulic system has one or more leaks in it, and as such it couldn’t close. If this is true then the question becomes who knew of the leak, if anyone, as it would have caused the preventer to fail routine tests.
- There are also claims that the well failed a negative pressure test a few hours before the incident. That would imply that there was a problem with the casing integrity (or the cement job done to lock it in place) and work continued without addressing this first.
Let me provide some context here: I live in the Florida Panhandle and in a “worst case scenario” the value of my home is likely to be destroyed. On April 30th I wrote a piece called “Drill Baby Drill“, and I stand behind it today, even with the increased knowledge we now have.
I want answers to the above two questions, and I want the firms and persons responsible for those two breaches of protocol and common sense (along with safety measures) tarred, feathered and bankrupted, in that order, with every penny they personally and corporately possess confiscated to perform whatever remediation we can.
What I do know is this: A deepwater rig like the Horizon costs about $500,000 per day to have on site and operate. There was obviously a decision taken by someone that halting operations to pull and repair or replace the blowout preventer stack would cost millions (such an operation would result in significant downtime, of course, during which the rig would be sitting idle) and thus it was not done.
But this does not change my base view, which is that we have no valid alternative to drilling in the Gulf and elsewhere – indeed, everywhere we can find oil and gas.
What alternative would you like?
Here’s a couple of inconvenient facts for those who say “shut it all down and hang ‘em high”:
It is rumored this weekend that Saudi Arabia’s government is trying to figure out who leaked a document that proves that they’ve been funding Al-Qaida in Iraq. This is the same nation we send tens of billions of dollars to every year in exchange for oil. If this proves to be factual then we are in fact funding the very people who blew up our own Twin Towers and killed 3,000 Americans, as well as those who are shooting at our men and women in Iraq right here, right now. Isn’t it awesome that when you stick that gas nozzle in your fuel tank you’re buying the ammunition, weapons and IED’s that are being used to kill our GIs?
Venezuela, of course, is run by a murderous madman. Beyond seizing property for grins and giggles he also likes killing people. You can fund him when you stick the nozzle in your tank, if paying for bullets to shoot our GIs doesn’t tickle your fancy.
Or we can simply crush all our cars. That’s an option too. But don’t forget that it’s not just cars, it’s trucks and trains that bring the goods to your local grocery store that you’d like to eat. They run on that same oil, and since you eat, you are (again) funding the murderous thugs either in Iraq or Venezuela – every time you shop for everything you buy.
These are facts folks, and no amount of “happy talk” changes them. Nor does the “environmental greenie weenie” stuff change these facts.
We have had and squandered nearly 40 years since the 1970s oil shocks during which we could have put in service hundreds of nuclear reactors and wired every rail line with overhead power, eliminating the need to use petroleum for rail transport and replacing a large number of our base load coal-fired power plants at the same time. We refused because we were afraid of a nuclear accident. In exchange for this we have hundreds of thousands of people who have died of asthma over those 40 years aggravated by the coal plant stack output and several oil spills, including the current one. France, which went the nuclear route, has not had one of their civilians die as a consequence over the same time frame.
This is called a decision to allocate risk; we went one direction, they went the other. You tell me: who made the better choice?
The facts are that about twice as much oil is used for gasoline (read: cars) as for the next two largest consumers: distillate (diesel fuel, 2/3rds of which is used for transport in trucks and trains, mostly) and industrial (plastics and other polymers mostly.) A decision taken 40 years ago to build nukes by the boatload could have replaced perhaps a third of the distillate consumption and some of the gasoline, but little beyond that. To eliminate our “foreign oil” dependence we would have to get rid of all of our distillate and gasoline consumption. Cutting industrial use means eliminating a lot of polymer (plastic) use – have a look around your home or office and tell me what it would look like without them.
Fat chance on that.
Oil leaks out of the seabed every year through entirely natural causes. This is not something we can stop and it has been going on for millions of years. Yes, this “volcano” is bad, and yes, it is now oiling marshes in Louisiana, but the fact remains that our options are to either drill for oil and gas here or send hundreds of billions of dollars overseas to people who then use that money to murder people – in many cases, our own soldiers.
I choose to drill here, even though doing so comes with risks. I also demand that the people responsible for violating known and necessary protocols hang for it and the companies they work for be bankrupted.
Those two demands are not incompatible.
I ask that people who are driven to emotional and irrational expectations and demands take a look in the mirror and around their homes first. Come talk to me about halting drilling here when you’re willing to go door-to-door with all the dead GIs that come home as a consequence of our shipping that money to Saudi Arabia, you’ve sent your cars to the crusher, you’re either riding horses or using a golf cart (plugged in of course) to get around, and have ceased buying anything that has plastic or rubber in it.
Then – and only then – do you have a case to make for what you want our nation to do.
Those are the facts, whether they’re inconvenient or not.
Posted by Karl Denninger
So Friday we had a “flash rally” in the last 20 minutes of the day – about 20 handles (S&P points) straight up. Will there be an “investigation” to see why that happened?
Of course not, even though I have no evidence (or belief) that it was anything nefarious. But boy, when the bids disappear (instead of offers), that’s worthy of a Presidential Commission!
El-Erian of PIMpCO had an interesting piece this morning in The Journal; some of the tidbits seemed to be worthy of comment. A few notables:
It’s hard to forget those “Sunday night specials”—long hours spent anxiously waiting to hear from Washington on topics like Bear Stearns, Fannie and Freddie and Lehman Brothers.
Uh huh. The parallel to a “Saturday Night Special” is unintentional, right? Oh wait – it’s not. There’s never any attention paid to the fundamental reasons for problems in the economy, or in the banking system. That might be because Washington (and other governments) are inept, or it might be because fixing the problems means that we’d have to indict some banksters and break up the crony econo-fascism that has reigned over virtually the entire western world for the last 20 years.
It is absolutely critical to understand how we end up in the midst of these unsettling weekends. It’s a failure of both crisis prevention and crisis management. It happens because structural problems like excessive budget deficits are allowed to fester.
Certainly spending 11% of GDP that you don’t have, by printing up bonds and selling them, wouldn’t have anything to do with that would it? Where has PIMpCO been in this regard over the last two years? “Shake hands with the government“, remember? Uh huh. You sure those are hands you’re shaking sir?
First, is the Greek problem being treated for what it is (namely, a solvency problem) as opposed to what people wish it to be (a liquidity problem)?
Was our financial mess over here with the banks treated for what it was (and stil is), that is a solvency problem, as opposed to what people wish it to be? Can anyone defend the FASB changes as anything other than flatly lying about solvency? I think not.
The unwind of unstable investor positions is still in its early stages. Having over-romanced the cyclical bounce, some investors are now scrambling to reposition their over-extended portfolios now that structural problems are undeniable. The resulting unwinding of overleveraged trades will inevitably disrupt a very wide range of other assets as the good gets contaminated by the bad.
Refusal of governments worldwide to force financial institutions back into the old 12-14:1 leverage models, banning off balance sheet games entirely, forcing all credit instruments onto an exchange where cash margin must be posted and maintained is no accident. It is an intentional act of deception played upon investors and while El-Erian may write pretty editorials he certainly doesn’t bother to come right out and say it: The entire rally off the 2009 lows was an engineered fraud predicated on covering up insolvencies and permitting the asset-stripping that banks had practiced for the previous decade to not only continue but accelerate!
Back in the early 1980s we had a similar event to today’s fun and games that occurred in Latin America. Brazil, Argentina and Mexico all borrowed huge sums of money for various industrialization projects, much of it from large American banks. The total outstanding reached 50% of GDP, or about $315 billion.
Mexico officially kicked off the “game on” period with an announcement that they would not be able to make service on the debt. This formally put several large American banks in a position of being in violation of their capital ratios, since defaulted debt cannot be counted as “good” – at least not if your honest.
Volcker, who was at the time Fed Chairman, decided to allow the big banks to fudge, much as we’ve done this time. But he attached one important condition – they had to raise capital and not pay it out in bonuses and other dilutive tactics, because his forbearance was not permanent and when it ended, if they had not cured themselves, they were finished.
Bank executives believed his threat and thus we survived to fight another day.
Now contrast this with what has happened this time around.
Banks have taken the forbearance and used it to continue to pay out huge salaries and bonuses – over $100 billion between them in 2009.
How important is this? Quite. See, one of the arguments against spinning off the swaps business from the big banks is that they would have to raise $250 billion in new capital. If that’s not an admission that “we’re undercapitalized” (otherwise known as “insolvent”) “and if you force us to do this that fact will suddenly come to the fore” I don’t know what is.
Of course there’s the argument made that:
Clients who want to buy protection will see a European bank as a stronger, better-backed credit than a U.S. derivatives subsidiary, Hintz said.
Uh huh. You mean a European bank with an unknown (and unknowable) leverage ratio that is sitting on a few trillion in derivative notional value with god-knows-what behind it? Oh sure, if they continue to have access to bailouts whenever they want or need them, that argument might work – for a little while.
But isn’t this entire debate about the claim of illiquidity when in fact the problem is insolvency?
So when do the lies stop?
Only when the liars are exposed and driven from the public debate, to be replaced by adults in the room who will enforce the rule of law and allow business balance to return.
The only question remaining is whether we will do it voluntarily and accept the damage that must be recognized and be worked through, or whether it will happen by force via a market collapse.