FedUpUSA

Yes.  Funding terrorism.  Funding nations that are on the restricted list.

No, really.

Nine banks have been caught up in the probe, and some are in discussions to settle, according to a person familiar with the case. Three have already. Last month, Barclays PLC in London agreed to pay $298 million and admitted to allowing payments on behalf of clients in Cuba, Sudan and other countries. Lloyds Banking Group in London and Credit Suisse Group in Zurich—banks that operated extensive transfer systems for Iranian clients—have agreed to settlements totaling $350 million and $536 million, respectively.

Settle?  SETTLE?

Let me guess – this was some rogue banker in some satellite office, and there was no systemic knowledge or involvement by the banks involved, right?

Uh, wrong:

These weren’t rogue operations. The investigators discovered that the banks ran dedicated units to systematically aid the undetected transfer of money through the U.S. banking system. They did that by removing identifying coding on fund transfers so they could evade automated U.S. bank computer systems designed to spot money flowing from a sanctioned state.

These are serious criminal acts folks.  This money gets people killed.  Literally.  It buys guns, it buys missiles, it buys bombs.  Bombs, guns and missiles that are then used to shoot at our troops and those of our friends.

Credit Suisse, according to court records, removed Iranian names, addresses, telephone numbers and identification codes from payment messages sent to U.S. financial firms. In some cases, the bank then replaced the information by using names such as “Order of a Customer” or “Credit Suisse.”

Why do these institutions still have US banking charters? 

Why do their executives not stand on indictments?

Why do we, the people of this country, permit this?

This isn’t the first time crimes like this have been talked about in the media or the Ticker over the last few years.  Indeed, we’ve had banks laundering money for Mexican Drug Cartels, we had banks that were involved in elaborate scams to rip off taxpayers in Jefferson County Alabama, and we have had other unsavory acts by these institutions.

If I pull something like this I don’t get fined, I go to prison.  I get a felony record to go with it.  I don’t get a fine that amounts to a tiny fraction of one percent of my market cap. 

Hell, if I could traffic in money to pay for missiles in Iran and if caught I’d be fined, say, $200 - a tiny little fraction of a percent of my net worth – sure, I’d do it.  I could make hundreds of thousands or even millions doing this for years, and eventually, well, I’d have to pay some “tax” for my sins in the form of a fine to the widdle liddle gubbermint.

This sort of crap makes a mockery of our justice system and our laws.  We have sat back as citizens and watched these institutions not only do things like this, but rip off the taxpayer with dodgy municipal finance deals that ultimately land the other people involved in the hoosegow, while they, when they get caught, simply pay a tiny little fine (in comparison to the value of the firm) and nobody that works for the bank goes to prison.

You want to know why these things keep happening?

It’s because we the people refuse to insist – and back it up with strong political action – that the banks involved in these sorts of scams be charged and that every single employee and officer involved in either doing it or covering it up goes straight to jail, while we revoke the US charter of any foreign institution involved in this sort of crap.

When will you wake up America?

This amused…..

“I believe that monetary accommodation alone cannot buy happiness,” Fisher said in the text of remarks to the Greater Houston Partnership.

What if it fails to buy anything at all?

It might not, you know.  Just like drugs always feel good when you first do them, monetary distortions – negative real interest rates, which The Fed freely admits are occurring – always lead to hangovers.

We had a housing bubble because of The Fed’s actions in 2001-2003.  It wasn’t an accident.  It was an easily-foreseen result.  Now we’re going to do the dumb again, because, well, we need to be dumb I guess.

The problem with negative real borrowing costs is that they destroy capital formation over time.  It’s like taking steroids.  At first they make you bulk up fast, and are “easier” than working out harder and longer.  But their impact is insidious – at the same time they damage the rest of the body’s systems.

They also encourage you to do other dumb things at the same time.  Maybe you “roid-rage” out.  Or maybe you just get a wild hair up your butt, buoyed by testosterone, and do something stupid.  In the intermediate term ZIRP leads to dumb investments, like it did in 2003-2005 with houses.

But the long-term damage is where the real problem is.  With ZIRP that damage comes from encouragement of structural deficits and destruction of the incentives for capital formation.  We had the light version of that in 2003-2003, as this chart shows, but now we’ve got the turbocharged, Cat-5 hurricane style:

So where does it end?  Well Dallas Fed President Fisher says it doesn’t.  He says it’s now up to the “government” to do the rest with fiscal policy.

And what policy might that be?

Why crank that graph up even further.  Tax less and spend more.  After all, we have ZIRP to protect us.  And what does he think of the cost-benefit analysis of further Fed action?

“For me, the ball is in the fiscal court for now,” he said. “Any further action by the Fed must be subject to the kind of rigorous cost-benefit analysis that Ben Bernanke cited in Jackson Hole. One of the variables that must be taken into account is whether fiscal and regulatory policies are conducive to growth.”

Let me see – rising entitlement spending, new programs that must lead to either higher structural deficits or higher taxes, and more regulations such as the EPA trying to regulate CO2 emissions.  This is all “good for business”, right?

Christina Romer, who is leaving Obama’s administration tomorrow, incidentally, thinks so:

Congress is divided over further action. “Concern about the deficit cannot be an excuse for leaving unemployed workers to suffer,” Ms. Romer said. “We have tools that would bring unemployment down without worsening our long-run fiscal outlook, if we can only find the will and the wisdom to use them.”

What would those tools be Christina?

“The only surefire ways for policy makers to substantially increase aggregate demand in the short run are for the government to spend more and tax less,” Christina Romer, the departing White House chief economist, said in a speech in Washington yesterday. “We should be moving forward on both fronts.”

Really?  How much more would you spend?  We’re $1.6 trillion in the hole on an annualized basis, or about 12% of GDP, and we have been for the last three years.  Has this worked?

How much less would you like to tax?  Tax receipts are down tremendously since 2006.  Again, has this worked?

The problem is this – nobody believes you can keep doing that sort of thing indefinitely.  Yet if you can’t convince people you are able to they don’t alter behavior.  The Bush Tax Cuts were “successful” in altering behavior because they were “date certain” things over an intermediate time period.  They thus had the desire effect, but at what cost?  We took a structural balance in our budget and trashed it to the tune of $600 billion a year.  That would have been ok if it was temporary, but it clearly was not, as it continued right up until we threw the engine into “full power plus maximum afterburner” in 2007.

The practice of spending more than you make, whether by a person, a corporation or a government cannot continue forever.  It can, and has, gone on for a while.  It might even go on for quite a while – witness all the people who pulled billions collectively out of houses in the 2000s and blew it on anything from Hummers to boats to vacation spots and expensive trips along with baubles of all sorts.

But ultimately the check you write has to be backed up with the production you emit from your fingers or mind if you’re a person, or with the funds you tax if you’re a government.  It cannot be otherwise.

So how do we get out of this pattern of “spend more and tax less”?

I’ve yet to see any credible suggestion for doing so.  We have not forced the banks to take their writedowns, houses are still too expensive (proved by the fact that they’re not selling without $8,000 tax credits) and now automobile sales are in the toilet on top of it, right after everyone said – just a month earlier – that we were “recovering.”

Inventory builds are happening, but are they voluntary or are we (again) building inventory into flagging demand?  If the latter, we’re in for an ugly surprise in a few months, and I think that’s exactly what’s coming.  Anecdotal evidence is that the Christmas shipping season is off to a crap start, truckload backlogs are soft (and that’s being generous) and we have warnings from the likes of Intel on processor demand, which strongly implies that PC sales are going to bite this holiday season.

The problem with the government was always on the spending side of the ledger.  The solution is for government to bugger off about all the things it really has no Constitutional basis for doing in the first place, and to “bugger on” about those which it does.  We do neither.

For example, Social Security and Medicare are a mess largely because there is no accountability for either.  If the States ran them there would be.  Why?  Because you’d insist on it – you might want to move.  Without accountability and transferability, that is, honest fiscal accounting under your own name, you couldn’t get that.  This you would not accept, ergo, it would happen.  But as long as it’s “off budget” then it’s just a worm hole that emits “magic benefits” for people – or at least that’s the appearance that Washington has managed to foist off on you.

Likewise, if Washington was to “bugger on” about those nations that have slave-labor conditions and environmental poisoning as their raison-d’etre of being “more competitive” in the labor force, we would enact Wage Parity and Environmental Parity tariffs.  Labor arbitrage for the purpose of tossing your spare arsenic into the local river would go away.  Many jobs now overseas would come home.  Not all, but some.

Everyone wants to claim that unemployment compensation for 99 weeks is “compassionate.”  But is it really?  Or is it just a sop that keeps people from being entrepreneurs?  We all have skills.  Some are of more value in the marketplace than others, but we all have some.  So why do we subsidize people not employing those skills? 

And incidentally, why is it that three years into this mess we still have people on unemployment who are laid off and don’t ditch their $100 monthly cell phone and $400 A/C bills immediately?  Is that not proof positive that it’s become too easy to simply suckle off that government tit?

The fiscal and economic imbalances we put in place through intentional policy acts over the last 20 years are not going to go away easily, or without pain.  Those who made bad loans and took bad loans are going to have to suffer the consequences eventually.  We are only arguing over when, and how much more damage we are willing to inflict on our economy and citizens before we cut this crap out.

Our nation desperately needs an army of prosecutors to start at the top of every large financial institution and start issuing indictments.  We need to close damn near all of them and toss their management out on their respective ears.  We need to nationalize all the state and local pensions, turning them over to the PBGC, ridding state and local governments of this burden while at the same time cutting back those benefits, including for current retirees, to that which the funds in those pension plans will support.

We must immediately stop with the ZIRP crap and allow rates to rise so that short rates are at least at 3%, and longer-term rates commensurately higher.  30 year mortgage money should be at 6-7% in a balanced economy and financial system, 30 year government bonds 100-150 bps lower.  That’s with 20% down.  Yes, I know that crushes existing home values.  That’s the point.  You want people to be able to own homes, you make them cheaper – just like a DVD player or flat-screen TV.

Mandate that The Fed actually follow the Federal Reserve Act.  Systemic Debt must be reduced to 1960s historical percentage levels (150% of GDP, total public and private, including Social Security and Medicare) within three years, and liquidity must be pulled until it is.  Financial engineering doesn’t make more debt able to be “safely” carried, it just enables people to temporarily lie about solvency and create Ponzi Schemes through obfuscation.  Add a clause to The Federal Reserve Act mandating zero inflation on a five-year rolling basis, proved up with an actual basket of goods and services with no adjustments, hedonic or otherwise, beginning when system debt reaches 150% of GDP, and all data collection to be published and publicly verifiable.  Allow zero tolerance for deviation except in time of declared war.

If the current board of governors refuse then they are replaced with new governors who will, or The Fed is replaced wholesale.  The very threat of taking currency issuance into Treasury and telling the entire primary dealer network to bugger off should be sufficient to convince the current board that we, not they, are in charge.

The Debt Ponzi has to be deflated.  We have 50-60% more debt in the system than we can productively carry.  The excess has to go.  I recognize this will bankrupt a LOT of powerful people who are paper rich and reality poor and for this reason it’s unpopular.  The math doesn’t care if it’s popular.  Set up special bankruptcy courts – everyone can access them.  In and out in 90 days or less.  Come in, forfeit your assets save your retirement accounts (IRAs and 401ks), walk clean.  Yes, this includes student loans.  The assets get washed through public sale and we find out what they’re really worth.  If the banks are busted by this, they go through it too.  We now have “resolution authority” in theory – let’s put it into practice.

The student loan ponzi gets busted.  Most public colleges and nearly all private ones go bankrupt.  Fine – they’re not closed, they get reorganized – and the debt they were carrying is gone.  So too are the gold-plated BS games.  College becomes affordable again – I should be able to attend full-time for $6,000 a year all-in tuition and fees at any good state school, and half that in a community college.  Do that and anyone can work their way through.  That’s how it was in the 1980s, and that’s how it can be again.

Get rid of the gargantuan tax code and replace it with the Fair Tax.  Simple, elegant, everyone knows exactly what they have to pay and how much they’re funding government with.  Best of all, it’s voluntary.

Finally, reinstate Glass-Steagall.  All 17 pages of it, unedited.  No more gambling with the government purse. Break the repo market – if you need to use it, you’re not a government-secured enterprise.  Period.  Now “trust” by the market in your institution no longer determines whether you live or die on a daily basis for those that hold the public’s deposits.  Just like it used to be.  Commercial banks go back to having $10/share stock prices and paying 7% dividends that are both stable over decades.

GDP falls by 40% if we do this and unemployment goes to 20%.

But not for long. 

When the Humongoous Bank on the corner closes, the next morning some enterprising guy or gal decides to open a new one.  Ditto for the other institutions that don’t make it.  Entrepreneurship roars.  So does repatriation of jobs.  Those who can’t find “high paying” work right now go to school and learn a new trade, working at McDonalds’ if they have to in order to meet the tuition (Note: you can do it now for $3 of your hourly wage, assuming a 2,000 hour man-year.)  The in-shoring of businesses would become an instantaneous flood, and with them come jobs – and CapEx.

If we do this within two years we would surpass our current $14 trillion GDP.  Government funding would be inextricably tied to private production, and as such the idea of doing things that are unfriendly to production would be a thing of the past.

Every person in America would contribute to the government’s funding, and see exactly how much they paid on every receipt.  More citizen involvement in exactly where our money goes is good, and can only happen when you see every dime leave your hand.

All of the “I can’t” nonsense of today would be cast aside.

America would be the place to do business.  The place to be headquartered.  The place to employ people. The place to go to school.  The place to start a company.  The place to innovate.

We can do it.

To begin we have to stop protecting those who have bankrupted this nation, and force them to face the music, while at the same time giving the common man and woman a dignified way to walk through the door, throw off all their overburdened trash (yes, including their house), and walk free of the millstone of debt they cannot possibly pay, while at the same time changing the laws so that nobody can play this exploitation game again.  We have to lock up the crooks and purge the corruption and grift. 

But we need to start now, because the longer we wait the worse the damage we must suffer on our journey of clearing the debris, both human and systemic, that is clogging the arteries of commerce, innovation, and our national spirit.

Are we up for it as Americans, and will we insist on it – starting right here and now?

That’s the only remaining question.

The Market-Ticker

Discussion (registration required to post)

Extend and pretend…

That’s the government’s way of handling the crisis. Extend credit and cash to those who don’t deserve it. Then, pretend that everything is okay…

But the problems don’t go away. They just get stretched into the future…

What did the feds do for GM? They took over the company. They extended cash and credit. They put in place a “Cash for Clunkers” program to encourage people to buy cars. Then, they pretended that the problems were solved.

But yesterday’s news tells us that “August car sales plunged.”

They hadn’t really solved the problems at all. General Motors still needed to be restructured. And there weren’t really anymore qualified auto buyers than there had been before. They had merely been encouraged to buy sooner…rather than wait until their cars were really worn out.

And look at what happened in the housing market.

July sales set a new record low. Why? Because the feds had encouraged people to buy earlier – by giving them cash incentives, via tax credits. For a while, it looked like the housing industry was picking up. But had any of the real problems been solved?

Nope.

Nearly 15% of all mortgage loans are either overdue or in foreclosure. And nearly one in four houses with mortgages is underwater. Another 5% barely have their heads above water, with equity of 5% or less.

When a house sinks under the waterline – that is, when its market value is less than its mortgage – the owner goes through the usual pattern of disbelief, denial, defeat and eventual desperation. If he loses his job or gets divorced the timeline is shortened. Either way, he ends up in the same place – desperate to get back on the surface where he can breathe again. It takes time. It’s painful. But the longer the housing market takes to recover, the more these people give up and default on their mortgages.

The US financial system is still holding hundreds of billions worth of mortgage debt that isn’t going to be repaid. Who’s going to take those losses?

The feds have already made it clear – it won’t be the big banks. They extended cash and credit to the banks and pretended everything was okay. The Fed itself bought up much of the big banks’ bad mortgage debt already; it holds it in its vault and calls it an “asset.” And the US government nationalized the biggest, most reckless and irresponsible lenders – Fannie Mae and Freddie Mac. So now the taxpayer takes the losses – even if he never bought a house…and never invested a penny in the housing industry.

And we’re only talking about the domestic housing market – not about commercial loans. All together, the problem is still huge…and still there…

…and if housing prices fall – almost certain to happen as this “shadow inventory” hits the market – one out of every three mortgaged houses is likely to sink underwater, with millions of new defaults, foreclosures and distressed sales.

Extend…and pretend…and maybe the problem will go away. Or maybe the situation will become so confused that nobody knows whom to blame or what to think!

Ben Bernanke is hoping for the former and counting on the latter. He answered questions in Congress yesterday. At least one of the politicians wanted to know: “If you’re so smart how come you told us that the subprime crisis would be ‘contained.’ How come you didn’t seem to have any idea what was happening or what to do about it?”

“Okay…well… We were wrong about subprime…and we missed some signals,” said the former Princeton professor of Finance, in so many words, “but you can count on the Fed to regulate the financial industry from here on. No problem.”

Bernanke went on to describe how he thought financial problems got into the system and how they became hard to control.

“They are like bacteria…like e-coli…” he said (or words to that effect…we don’t have the transcript in front of us, just the press report). “It is always dangerous. But you can control it if you use the proper procedures. Once it is out in the bloodstream there’s not much you can do. It can be fatal.”

Once again we see the same delusion…that corrections are alien invaders that can be fought and beaten…diseases that can be controlled and cured…problems that can be corrected.

Bernanke misunderstands the most basic and simple nature of an economy. With its new regulatory powers, he imagines the Fed as the Bureau of Public Financial Health, carefully inspecting the meat and making sure the kitchens are clean. If he does his job well, he implied, we won’t have to worry about financial crises ever again. All we have to do is to get the bankers to wash their hands after making a loan!

Uh uh… That’s not how it works. The problem was the bubble economy. It was caused by miscues and phony signals coming from the Fed (along with some other circumstances over which the Fed had no control).

The solution is the correction… In other words, the correction is the good part of the cycle. The bad part of the cycle was what created the need for it.

Once the mistakes have been made, they need to be corrected. A correction is not a disease – it’s the treatment. Mistakes are inevitable…especially when you have Greenspan, Bernanke et al misleading investors and business with their phony money, artificial lending rates and crackpot theories.

Thank God there are corrections to fix them.

The correction will set things right…if it is allowed to do its work. Unfortunately, the apparatus of the feds is at work trying to block it…

Extend and pretend…

The idea now is to finance more errors – while supporting the old ones – with money from the federal government. If the feds can pretend that everything is okay…by extending enough cash and credit…then everything will BE all right…

…until the federal government itself runs out of money. Then, the whole thing blows up.

In the meantime, who can say he’s not having fun?

Here’s a thought from Bloomberg. The news couldn’t get much worse, the analyst reasons; so it must get better. How? No double dip recession:

The US economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good.

The sectors of the economy that traditionally drive it into recession are already so depressed it’s difficult to see them getting a lot worse, said Ethan Harris, head of developed markets economics research at BofA Merrill Lynch Global Research in New York. Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 40 percent below five years ago.

“It doesn’t rule out a recession,” Harris said. “It just makes it less likely than otherwise.”

The possibility of the economy lapsing into another contraction during the next year is 25 percent, he said in a Sept. 1 report. Harris cut his forecast for growth this year by 0.1 percentage point to 2.6 percent and lowered his 2011 estimate by a half point to 1.8 percent, according to the report.

We’re not so sure. So far, this correction only took 4% off the economy at its worst point. Not very much, really. Stock prices are down. But stocks still aren’t cheap. Unemployment is at 9%; it could be worse.

We ain’t seen nothing yet. So far, it looks like we are following in Japan’s footsteps. If so, the bottom won’t come before 2018 or so…

Which is why you’d better enjoy this correction. It will be with us for a long time.

Regards,

Bill Bonner
for The Daily Reckoning