Archive for January 27th, 2011
Shut Down The Federal Reserve, Break Up The Big Banks And 16 Other Ideas Barack Obama Could Have Proposed If He Actually Wanted To Fix The Economy
How do we fix the economy? That is a question that tens of millions of Americans are asking right now. Republicans are harshly criticizing the empty economic proposals being put forward by Barack Obama and the Democrats, but the Republicans don’t seem to have any real solutions either. There is talk of cutting taxes a little bit more, reducing federal spending a little bit and getting rid of a few useless federal regulations but doing any of those things would essentially be like spitting into Niagara Falls – the effect would not really be noticeable at all. As this column has documented over and over and over, the economic and financial problems that we are facing are so enormous that radical solutions are needed. In essence, what we need is not an “economic bandage” or two – what we need is major reconstructive surgery. If dramatic action is not taken, our economy is going to completely collapse.
Is anything that Barack Obama is currently proposing going to help fix the economy? No, of course not. As I wrote about the other day, Obama’s address to the nation was packed with empty promises and a whole lot of inspirational nonsense. There were no real solutions to the very real problems we are facing.
So is there anything that we could do to actually start fixing things?
Yes, but the solutions are radical. They would cause quite a bit of chaos. They would not be easy for people to accept.
But the truth is that our economy and our financial system have terminal cancer. If something radical is not done quickly we are going to lose the patient.
The following are 16 ideas that Barack Obama could have proposed if he actually wanted to fix the economy….
#1 We Must Shut Down The Federal Reserve
If you are not willing to accept this, you may as well not read the rest of the solutions. The truth is that the U.S. government will never be able to solve the national debt problem until the Federal Reserve is shut down. The U.S. government should nationalize all Federal Reserve assets and start issuing currency that is completely and totally debt-free.
Under such a system, it is conceivable that U.S. budget deficits could be eliminated entirely and that over time the entire U.S. government debt could be retired.
One of the biggest threats of going to such a system would be inflation, but remember, the United States has only had a major, ongoing problem with inflation since the Federal Reserve was created back in 1913. The U.S. dollar has lost well over 95 percent of its value since the Federal Reserve was created, and so it is hard to imagine that we would do even worse without the Federal Reserve.
In any event, it is the fundamental right of any sovereign nation to be able to issue and control its own currency. This right was given to the U.S. government by the U.S. Constitution and it is time for the U.S. government to reclaim that right.
#2 We Must End Trade With All Nations That Allow Their Citizens To Be Paid Slave Labor Wages Or That Do Not Respect Basic Human Rights
This would dramatically reduce the “outsourcing” of our jobs and our industries almost overnight. The truth is that it was never a good idea to put American workers in direct competition with hundreds of millions of workers that are making slave labor wages on the other side of the globe.
Trading with nations that have a similar wage structure to ours and that respect basic human rights (Canada, for example) is a very good thing. However, all of the “free trade” agreements that politicians from both parties have been pushing down our throats for decades are literally wrecking the U.S. economy.
Since 2001, over 42,000 factories have been shut down in the United States. This proposal would go a long way towards stopping the bleeding, and if some of these countries are willing to raise their wage levels significantly then we would be able to resume trade with them in the future on a much more level playing field.
#3 We Must Radically Reduce The Size Of The Federal Government
Our big, fat government is a big, fat drain on our economy. We have millions of paper pushers that don’t contribute much of anything of real value.
Not only that, but some of the things that the U.S. government wastes money on are absolutely mind blowing. There is a reason why our founders insisted that we have a very limited government. It is time to get back to those principles.
The Congressional Budget Office is projecting that the U.S. government budget deficit for this year will be nearly $1.5 trillion.
Talk about ridiculous!
I estimate that we could easily cut the size of government in half without hampering how effective it is.
We could start by abolishing the Department of Education. After that, there are several dozen other government agencies and institutions which are worthy candidates for elimination.
#4 We Must Provide Temporary Jobs For The American People During The Economic Transition
If the Federal Reserve is shut down and the size of the federal government is cut in half, it would cause quite a bit of economic chaos. During this transition it will be important to help people survive.
Instead of just passing out a bunch of handouts, a better alternative would be getting the American people working on something constructive.
During this time, the U.S. government could use all of the untapped labor of the unemployed to build massive infrastructure projects.
According to the American Society of Civil Engineers, we need to spend approximately $2.2 trillion on infrastructure repairs and upgrades just to bring our existing infrastructure up to “good condition”.
So there is certainly a lot to do.
These jobs would just be temporary until new manufacturing facilities are set up and jobs in private industry are plentiful again.
Having the American people produce something of value is better than just handing them endless unemployment checks.
#5 We Must Ban All Short Selling
When you allow greedy individuals the opportunity to make lots of money by betting against the U.S. economy, it gives those individuals an incentive to make sure that those bets pay off.
Yes, this proposal is controversial, but it just makes sense. If people want to make money, it should be because a company is doing well and not because someone is failing.
#6 We Must Ban Virtually All Derivatives
Once upon a time, derivatives were for hedging risk, but that is not what they are primarily being used for anymore.
Now derivatives are being used to bet on almost anything that you can possibly imagine.
Our financial markets have been turned into a gigantic financial casino.
The derivatives bubble is somewhere in the neighborhood of one quadrillion dollars and it could burst at any moment.
These weapons of financial mass destruction must be banned.
#7 We Must Break Up The Big Wall Street Banks
The big Wall Street banks have far too much power and far too much control. They have come to dominate our entire financial system.
In a capitalist system, too much power concentrated in too few hands is not a good thing. The corruption that has gone on at many of these institutions is absolutely unbelievable.
These banks need to be broken up into much smaller pieces for the good of our country.
#8 We Must Initiate A Massive Law Enforcement Crackdown On Our Financial Markets
As noted above, the corruption that has been going on down on Wall Street has been absolutely sickening. We need a massive law enforcement crackdown on all of this fraud in order to restore faith in the financial system.
Just one small example of this corruption happened during the recent housing crash. Goldman Sachs sold mortgage-related securities that were absolute junk to trusting clients at vastly overinflated prices and then made huge profits betting against those exact same securities.
So do you think that Goldman Sachs or any of the other major players on Wall Street will ever receive more than a slap on the wrist for all the things that have gone on in recent years?
Of course they won’t – unless the American people start demanding it.
#9 We Must Order U.S. Oil Companies To Use Untapped Oil Reserves In The United States And We Must Aggressively Develop Alternative Energy Sources
Right now, the price of oil is pushing up towards 100 dollars a barrel. If oil passes that mark, it is going to put tremendous inflationary pressure on the entire global economy.
Sadly, there is no need for such a high price for oil. There are vast, vast reserves of oil that are virtually untapped inside the United States. These are mostly in the western states and up in Alaska. We have enough to supply very cheap oil to the entire country for decades.
The U.S. government needs to order these oil companies to quit playing games and to start pumping this oil.
However, it is undeniable that we also need to develop alternative energy sources. In fact, we should set up a “Manhattan Project”-style team to aggressively pursue this goal.
In the past, U.S. oil and car companies have blatantly repressed alternative energy projects. The U.S. government should tell U.S. corporate executives that if they ever even think of doing such a thing again that they will be locked away so fast that it will make their heads swim.
#10 We Must Stop Paying Farmers Not To Grow Food
Instead of paying farmers not to grow food, we need to find ways to encourage them to grow as much food as possible. A horrible global food crisis is coming and we are going to need huge stockpiles of everything.
#11 We Must Secure The U.S. border With Mexico
Illegal immigration costs the U.S. economy tens of billions of dollars (conservatively) every single year. We need to secure the border and make sure that all of our immigrants are coming through the “front door”.
#12 We Must Shut Down The IRS
Did you know that the United States has only had an income tax for less than 100 years? For most of our history, the U.S. government got along just fine without taxing personal income.
The IRS is massive waste of time, energy and resources. There are many alternatives that could easily replace the income tax and the ridiculous tax code that we have right now.
For example, a flat tax or a national sales tax could both potentially work, although both have their problems.
Personally, I am convinced that we could have a system that would not require any taxation of income by the U.S. government whatsoever.
Just imagine how much time, how much energy and how many resources would be saved!
#13 We Must Slash Red Tape And The Miles Of Ridiculous Regulations
In the United States today, you almost have to be insane to start up a new business. When you consider all sources of taxation, U.S. businesses face one of the highest overall levels of taxation in the entire world. Not only that, but U.S. businesses face miles and miles of absolutely ridiculous regulations and red tape.
As I wrote about in a previous article, if you want to do business in the United States today, you better be prepared for a regulatory nightmare….
If you plan to start a business in America today, you better get a hold of a good lawyer. In fact, if you want to be safe, you better get a small army of lawyers. You are going to need an expert on the federal regulations that apply to your business, you are going to need an expert on the state regulations that apply to your business and you are going to need an expert on the local regulations that apply to your business.
There are going to literally be thousands of regulations that apply to any business started inside the United States today. There is no way that you will ever be able to learn them all. Not only that, but the truth is that your lawyers will only be aware of a small fraction of them.
Until the regulatory environment in this country dramatically changes, companies are going to continue to be motivated to leave the United States.
#14 We Must Conduct A Massive Law Enforcement Crackdown On The Health Care Industry
It should not cost $30,000 for a one day stay in the hospital in this country.
The truth is that the American people are being ripped off big time.
We need to conduct a massive law enforcement crackdown on all the big hospitals and all the big health care companies.
We need to conduct a massive law enforcement crackdown on all the big health insurance companies.
We need to conduct a massive law enforcement crackdown on all the big pharmaceutical companies.
We also need massive medical malpractice reform.
Not only that, we also should end the monopoly of the AMA immediately. We need to reintroduce honest, legitimate competition back into the medical system.
In addition, we need to make sure that natural health practitioners are able to compete on a fair and equal basis in this country.
As I have written about previously, the health care industry in the United States has become all about making as much money as possible.
That must change.
#15 We Must Stop Trying To Police The World
We will always need a very strong military force, but it is absolutely ridiculous that we have troops stationed in approximately 130 different countries today.
This is a tremendous drain on our national resources and we are spread way too thin militarily. It is about time that many off these other countries started protecting themselves for a while.
#16 We Must Pull Out Of The United Nations And We Must Dramatically Reduce Foreign Aid
The United Nations is a massive waste of time, energy and resources. We should have pulled the plug on that ridiculous globalist organization long before now.
In addition, we need to dramatically cut back on foreign aid until we get our own house in order. We should only help the most desperate nations until we get our own economy back on track.
#17 We Must End All Of The Ridiculous Police State Measures Which Are Chasing Tourists Away From Our Soil
Tourism is a very, very important industry to the United States. But today, all of the incredibly intrusive police state measures that the past few administrations have introduced are chasing millions of tourists away and are ruining our national reputation.
For example, there are many cultures around the globe where it would be unthinkable to have anonymous security goons feel up the private areas of women and children before they are allowed to get on an airplane. Rather than put up with such nonsense, millions of tourists are simply going to choose to spend their money somewhere else.
#18 We Must Seize The Assets Of The Ultra-Wealthy Individuals And International Banks That Have Been Committing Fraud Against The U.S. Government For Decades
Once the Federal Reserve is shut down, it will be important to hold those that have been defrauding the U.S. government responsible. Once a full audit of the Federal Reserve is conducted and evidence of criminal activity is uncovered, those involved should be arrested and all of their assets should be seized and frozen pending trial.
If the things that have been going on inside the Federal Reserve are ever fully exposed, it will make the whole Bernie Madoff scandal look like a nickel and dime operation.
But that is why there has never been a full, comprehensive audit of the Federal Reserve since it was created back in 1913. The American people are not supposed to see what happens inside that institution.
Unfortunately, even though economic times are a little rough, things are still good enough that the vast majority of Americans are not ready to start demanding the kind of radical changes listed above.
Not only that, but the kind of radical changes listed above would be fought against by the establishment every step of the way. Those with money and power are not going to step aside just because “justice” demands it.
What is probably going to happen is that the “establishment politicians” that the establishment has bought and paid for are just going to continue to propose half-baked solutions to our problems as this country continues to tumble towards economic oblivion.
From the New York Times:
A Reservist in a New War, Against Foreclosure
Sgt. James B. Hurley on a bridge near the property he lost to foreclosure while serving with the National Guard in Iraq.
While Sgt. James B. Hurley was away at war, he lost a heartbreaking battle at home.
In violation of a law intended to protect active military personnel from creditors, agents of Deutsche Bank foreclosed on his small Michigan house, forcing Sergeant Hurley’s wife, Brandie, and her two young children to move out and find shelter elsewhere.
When the sergeant returned in December 2005, he drove past the densely wooded riverfront property outside Hartford, Mich. The peaceful little home was still there — winter birds still darted over the gazebo he had built near the water’s edge — but it almost certainly would never be his again. Less than two months before his return from the war, the bank’s agents sold the property to a buyer in Chicago for $76,000.
Since then, Sergeant Hurley has been on an odyssey through the legal system, with little hope of a happy ending — indeed, the foreclosure that cost him his home may also cost him his marriage. “Brandie took this very badly,” said Sergeant Hurley, 45, a plainspoken man who was disabled in Iraq and is now unemployed. “We’re trying to piece it together.”
In March 2009, a federal judge ruled that the bank’s foreclosure in 2004 violated federal law but the battle did not end there for Sergeant Hurley.
Typically, banks respond quickly to public reports of errors affecting military families. But today, more than six years after the illegal foreclosure, Deutsche Bank Trust Company and its primary co-defendant, a Morgan Stanley subsidiary called Saxon Mortgage Services, are still in court disputing whether Sergeant Hurley is owed significant damages. Exhibits show that at least 100 other military mortgages are being serviced for Deutsche Bank, but it is not clear whether other service members have been affected by the policy that resulted in the Hurley foreclosure.
A spokesman for Deutsche Bank declined to comment, noting that Saxon had handled the litigation on its behalf. A spokesman for Morgan Stanley, which bought Saxon in 2006, said that Saxon had revised its policy to ensure that it complied with the law and was willing to make “reasonable accommodations” to settle disputes, “especially for our servicemen and women.” But the Hurley litigation has continued, he said, because of a “fundamental disagreement between the parties over damages.”
In court papers, lawyers for Saxon and the bank assert the sergeant is entitled to recover no more than the fair market value of his lost home. His lawyers argue that the defendants should pay much more than that — including an award of punitive damages to deter big lenders from future violations of the law. The law is called the Servicemembers Civil Relief Act, and it protects service members on active duty from many of the legal consequences of their forced absence.
Even though some of the nation’s military families have been sending their breadwinners into war zones for almost a decade, some of the nation’s biggest lenders are still fumbling one the basic elements of this law — its foreclosure protections.
Under the law, only a judge can authorize a foreclosure on a protected service member’s home, even in states where court orders are not required for civilian foreclosures, and the judge can act only after a hearing where the military homeowner is represented. The law also caps a protected service member’s mortgage rate at 6 percent.
By 2005, violations of the civil relief act were being reported all across the country, some involving prominent banks like Wells Fargo and Citigroup. Publicity about the violations spared some military families from foreclosure, prompted both banks to promise better compliance and put lenders on notice that service members were entitled to special relief.
But the message apparently did not get through. By 2006, a Marine captain in South Carolina was doing battle with JPMorgan Chase to get the mortgage interest rate reductions the act requires. Chase eventually reviewed its policies and, earlier this month, acknowledged it had overcharged thousands of military families on their mortgages and improperly foreclosed on 14 of them. After a public apology, Chase began mailing out about $2 million in refunds and working to reverse the foreclosures.
For armed forces in a war zone, a foreclosure back home is both a family crisis and a potentially deadly distraction from the military mission, military consumer advocates say.
“It can be devastating,” said Holly Petraeus, the wife of Gen. David Petraeus and the leader of a team that is creating an office to serve military families within a new Consumer Financial Protection Bureau.
“It is a terrible situation for the family at home and for the service member abroad, who feels helpless,” Mrs. Petraeus said. “I would hope that the recent problems will be a wake-up call for all banks to review their policies and be sure they comply with the act.”
Chase’s response, however belated, is in sharp contrast to the approach taken by Deutsche Bank and Saxon in the Hurley case.
I don’t usually swear in the header. But this time it’s appropriate.
The head of JP Morgan has delivered a furious tirade against “banker bashing”, complaining that the entire industry is being tarred with the same brush and implying that bankers have become political whipping boys.
Oh on the contrary.
There are a lot of local banks and credit unions that did nothing wrong, and they are in fact honorable people. I bank at one of them, a local credit union.
I single out for my criticism financial institutions that do things like attempting to prevent disclosure of a lawsuit alleging fraud and double-dipping, the latter amounting to theft of investor funds.
Former Bear Stearns mortgage executives who now run mortgage divisions of Goldman Sachs, Bank of America, and Ally Financial have been accused of cheating and defrauding investors through the mortgage securities they created and sold while at Bear. According to e-mails and internal audits, JPMorgan had known about this fraud since the spring of 2008, but hid it from the public eye through legal maneuvering.
Remember that…. from two days ago?
The lawsuit’s supporting e-mails, going back as far as 2005, highlight Bear traders telling their superiors they were selling investors like Ambac a “sack of shit.”
From the actual traders?
Telling their superiors that they were selling Ambac “A sack of shit“?
We shouldn’t “criticize” or even “bash” bankers for doing things like that?
Screwing people is supposed to be beyond reproach?
And we definitely shouldn’t bash bankers for trying to cover up that lawsuit, because, well, the people who were alleged to be responsible might still be working in the mortgage business, right?
They say senior traders under Tom Marano, who was a Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally’s mortgage operations, were pocketing cash that should have gone to securities holders after Bear had already sold them bonds and moved the loans off its books.
Mike Nierenberg, who ran the adjustable-rate mortgage trading desk at Bear and is now the head of mortgages and securitization for Bank of America, was a key player ensuring the defaulting loans Bear was buying would move off their books right after they bought them, with little concern for the firm’s due diligence standards. He was joined in this scheme by Jeff Verschleiser, his peer and Senior Managing Director on the mortgage and asset-backed securities trading desk and head of whole loan trading. He is now an executive in Goldman Sachs’ mortgage division.
Aw crap, it appears, if The Atlantic’s reporting is correct, that it is true!
If I rob a bank, can I get a job as a bank teller after I get out of prison? After all I’m a very trustworthy person who can work industriously in a banking environment…. as proven by the fact that I already know how to rob banks!
If not, can you explain why your bank tried to keep the public – and investors – from knowing that the people alleged to have robbed the bank’s clients are still working in a banking capacity all over Wall Street?
It’s just a question Jamie.
I don’t expect that you’ll answer it.
The downsizing of America – Oil production off 1980s peak and manufactures learn creative methods of repackaging inflation.
There is a slow burn going on and it is happening in your wallet and also in the gas tank of your car. The US Treasury and Federal Reserve have made it their mission to slowly cut the value of each one of those green dollars you have. Since many Americans are struggling to make the monthly bills, many producers realize that they cannot up the price on regularly bought consumption products. Places like Target have long learned to add a large section of produce and perishables in their stores since people have shifted from buying wants (HDTVs) to needs (bread and butter). What is interesting though is how the big jump in commodity prices was hidden for consumer goods. You may have noticed this merely by your own observation but creative packaging has hidden a large part of this inflation.
Take for example this article from Consumer Reports:
“Georgia reader Brian Petrino looked at his Angel Soft toilet tissue, labeled “our thickest ever,” and fumed. The old roll had 352 sheets per roll; the new one had just 300 sheets, and they were narrower. “It should say ‘our smallest,’ ” he groused.
From toothpaste to tuna fish, hot dogs to hand soap, companies have been shaving ounces and inches from packaged goods for years, usually blaming it on rising costs for ingredients and energy. They’ve got a point: Higher commodity and fuel costs are expected to cause a spike in food prices by as much as 3 percent in 2011. But if manufacturers are skimping when costs go up, why aren’t they more generous when costs hold steady or fall?
No one likes a price hike, but what riles readers are the ways manufacturers hide their handiwork: indenting the bottom of containers (a favorite trick among peanut butter processors), making plastic wraps thinner, or whipping ice cream so that you pay for air instead of ingredients.”
This is absolutely true. Manufactures have developed creative packaging that maintains the same costs but the amount being given has decreased. In the end this amounts to inflation but is a more discrete way of it showing up. This is similar to how the US dollar has been slowly declining for many decades.
So how does this inflation show up?
“(Country Consultant) Tropicana orange juice: 64 oz. container is now 59 oz. – a 7.8 percent reduction.
Ivory dish detergent: 30 oz. bottle is now 24 oz. – 20 percent reduction
Kraft American cheese: 24 slice package now holds 22 slices – 8.3 percent reduction
Scott toilet tissue: 115.2 sq. ft. now 104.8 sq. ft. – 9 percent reduction
Chicken of the Sea salmon: 3 oz. can now 2.6 oz. – 13.3 percent reduction”
You have to read between the lines in the current crisis. From examining the BLS figures it doesn’t seem like they factor in packaging and look more at individual items (i.e., one bottle of orange juice, one package of Kraft cheese, etc). In the end this hits those on a fixed income hard like many of the millions on Social Security. They are feeling poorer because their purchasing power is slowly slipping away.
Another key factor to examine is that oil production is far off the peaks of the 1980s:
All this is happening while oil consumption is still relatively high and growing economies like China and India are demanding more and more fuel to power their growing middle class:
The recent dip is because of the financial crisis but signs are pointing to increased usage. There is little to believe that oil consumption is going to decrease anytime soon and the world still heavily relies on the black gold that comes out of the ground. You already are noticing the cost of oil once again increasing in the US through the visible price at the pump. I actually saw a place that listed premium gasoline at $3.99 per gallon. It brings back memories of $4 a gallon gas but many places in the world have that and more. As we all know, oil pretty much lubricates our economy and any spike can put the economy back in a tailspin.
It is hard to see where prices are falling outside of the crashing housing market. Wages are stagnant or declining so this makes a slight move up in prices that much more painful. We’ve gotten good at hiding the reality of things and creative packaging and branding is only another way hiding the declining purchasing power of the US dollar.
Well, it’s out.
The “long-awaited” FCIC report has been published, and counts 662 pages.
Our task was first to determine what happened and how it happened so that we could understand why it happened. Here we present our conclusions.
And here the FCIC fails. But we’ll get to that.
• We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public.
No. The financial crisis was avoidable, but it was not about the ignoring of warnings by captains of finance. One does not sell “protection” in the form of a credit default swap (CDS) without any capital behind it by accident. That is done with intent – the intent to collect a premium and never pay.
The buyer of such a CDS has one of two purposes. He either intends to conceal a loss that he would otherwise have to mark on his books, or he intends to hold up the taxpayer at a later date when the seller cannot pay. His action is not undertaken due to ”inattention” either.
Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs.
The crisis was not only mathematically certain to occur it was foreseen and known to be occurring by the very firms that nearly collapsed. This is now a matter of public record in the form of testimony under oath by Citibank’s former Chief Underwriter. Lehman’s insolvency was known by Citibank and others weeks before it occurred, as has been disclosed by the bankruptcy investigation. Both industry and government regulators intentionally concealed these facts from the public. It is no longer speculation that “they knew”, it is now a documented fact.
The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.
The Federal Reserve, by its own publications, knew that the economy was adding 10, 20, even 30% of GDP in debt on a annual basis. This is not “unsustainable”, it is fraud and an abuse of the currency power granted by The Constitution to Congress.
But Congress knew this too. This publication is not secret. Congress has the power – then and now – to put a stop to it. But Congress decided not to. Not then, not now.
This crisis was not a couple of years in the making. The roots of it go back to the 1980s, when Continental Illinois was bailed out. At that time the FDIC did an unlawful thing – it decided to bail out bondholders, which it has no statutory authority to do. The deposit insurance fund exists to bail out depositors. But having exceeded its authority and gotten away with it, the standard was set for The FDIC to make sure that no large institution would be allowed to actually lead to loss by its bondholders.
The record of our examination is replete with evidence of other failures: financial institutions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective;
Those are not failures, they’re fraudulent activities. The institutions that made, bought and sold those securities represented to buyers and writers of swaps against them that they had specific qualities.
They LIED, as is now being shown and documented in the myriad lawsuits, along with FCIC testimony.
They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun.
Unsecured lending beyond your capital is a naked short on the currency. Since no bank has the authority to issue currency, such an action is an act of counterfeiting.
Writing a swap you have no ability to pay on, as happened at AIG, is the writing of paper worth nothing in exchange for money. If the party you sell it to actually expects to collect, you defrauded him. If he does not really intend to collect and used the paper he bought at under-market rates as a ruse, he defrauded whoever is relying on his assertion that his position is protected. Either way, someone committed a crime.
Where are the cops?
Our examination revealed stunning instances of governance breakdowns and irresponsibility. You will read, among other things, about AIG senior management’s ignorance of the terms and risks of the company’s $79 billion derivatives exposure to mortgage-related securities;
Who cares what their exposure was? The real scandal is that they had $79 billion in exposure with effectively zero capital behind that position. That is, they sold $79 billion in exposure with no ability to pay. Yes, the government was complicit in allowing this by exempting these transactions from insurance regulations through the CFMA. But that doesn’t change the essential element of the deception – if the buyer knew the swaps were worthless, he committed fraud. If he didn’t know they were worthless and truly believed AIG had the capital to pay when it did not, then AIG committed fraud.
You cannot sell something you have no ability to deliver and not have someone who committed fraud somewhere in that transaction.
Either the transaction was a sham or the buyer was scammed. Pick one.
In the years leading up to the crisis, too many financial institutions, as well as too many households, borrowed to the hilt, leaving them vulnerable to financial distress or ruin if the value of their investments declined even modestly.
So when are we going to force this bad debt out of the system?
Oh that’s never, right? There’s nothing – literally nothing – in this report that demand that occur.
The reason is that doing so bankrupts all the institutions that were responsible. Yet without defaulting this debt and clearing it there is no way to get out of the crisis, only to pile more fraud upon the existing fraud.
Housing values have fallen by $7 trillion, if you believe the reported numbers from various sources. How much does the Z1 claim housing mortgage debt has fallen by, systemically? $504 billion.
Where’s the other $6.5 trillion?
Sure, some of it was “equity” that is now gone. But not all of it. The rest – most of it - is unbacked credit and constitutes a continuing naked short on the currency of The United States. It also constitutes massive systemic risk, in that should it be forced into the open (and it will eventually be so-forced by the market) it exceeds the total capitalization of the ten largest financial institutions in the United States by several times over.
The crisis is not over and the leverage has not come out. At all.
The fraud that led to this has not been exposed and referred for prosecution. At all.
The FCIC not only failed to do what it was charged to do, it did so with intent. The word “fraud” is peppered through the report, appearing dozens of times. Yet nowhere do we see recommendations for prosecution.
Fraud is a crime.
We cannot resolve what’s broken in the economy without forcing the bad and un-payable debt into the open. I’m well-aware that doing so will cause a major sell-off in the markets and reduction in GDP.
But this outcome cannot be avoided. We can only choose to take the damage now, or have it continue to compound.