The economy, that is.
This is a must-read from Chris Whalen. He’s spot-on, and I will reprint only the conclusions – read through for the why, what and how.
- The U.S. banking industry entering a new period of crisis where operating costs are rising dramatically due to foreclosures and loan repurchase expenses. We are less than ¼ of the way through foreclosures. The issue is recognizing existing losses ??not if a loss occurred.
- Failure by the Bush/Obama to restructure the largest banks during 2008?2009 period only means that this process is going to occur over next three to five years – whether we like it or not. Lower growth, employment are the cost of this lack of courage and vision.
- The largest U.S. banks remain insolvent and must continue to shrink until they are either restructured or the subsidies flowing from the Fed, Fannie Mae/Freddie Mac cover hidden losses. The latter course condemns Americans to years of economic malaise and further job losses.
The bottom line folks is that the fraud – massive and outrageous concealment of losses, intentionally making bad loans in the mid-2000s (now admitted to under oath by Citibank’s chief underwriter, among others) and the selling of that paper everywhere and anywhere that the banks could manage, along with holding much of it themselves, condemns us.
The opportunity to take these banks into receivership in 2007 existed. It existed in 2008 too. I counseled on doing exactly this during those years.
Instead, both Bush and Obama decided to protect those who had committed these offenses. First by attempting to bail them out, and then when it became obvious that $700 billion of taxpayer money was literally trying to piss on a forest fire to put it out they decided instead to paper it over by extorting FASB so the losses could be swept under the carpet instead of recognized.
The problem is that unlike long-run spending problems like Social Security and Medicare, which will detonate in ten year or more, this is a current account cash-flow problem and the deterioration continues month-by-month as the payments are not made. It’s like a barrel of dead fish. The next morning it starts to stink. Every day it stinks worse. Putting a lid on it suppresses the stink but doesn’t stop the decay.
We must address the problem – and the only way to do it is to send in the examiners and perform a full forensic audit. Declare a “holiday”, leaving the ATMs and check-clearing online. Send in the examiners with instructions to mark every asset to the market, and direct that no institution that is insolvent be allowed to reopen or merge – it must be taken through cramdown instead and resolved.
Obama doesn’t have the ‘nads to do it, just as Bush didn’t. They both believed their “advisors” who told them that this didn’t have to occur. They were lied to – those advisors weren’t wrong, they’re liars and conflicted as they created the problem and would have to admit it if they were to tell the truth.
Nonetheless, this lack of vision and intellectual firepower to see through the smokescreen of the banking cartel has doomed our economy. Until and unless we get a President that grows a sack and examines the facts, demanding that his “advisors” either back up their claims with math (and allows that math to be exposed to the public where it can be challenged by people like Chris and myself) or resign, there is no solution.
As I showed this morning in the GDP Ticker we have a structural deficit of nearly one trillion dollars that has been created by a decrease in tax revenues and increases in transfer payments. This structural deficit is what Bernanke monetized last fiscal year with QE, and is threatening to monetize again with QE2. That structural deficit is 7% of GDP and must be eliminated or it will consume the Federal Budget and economy.
The only way to eliminate it is to resolve the banks, forcing the bad debt out of the system.
There is no other path out – all other paths lead to, at best, a Japan-style outcome, and if Bernanke’s monetary experiments get out of control we could easily see a 1970s-style necessity-of-life price ramp into falling wages which would literally result in reducing 20% or more of the population to levels where basic survival is brought into question.
Resolve the banks and solve the problem Mr. President. You have no other choice.