FedUpUSA

Archive for June 2nd, 2011

Max Keiser, Paul Craig Roberts and Richard Becker On The US Economy

While the government of the United States rules over the people, the biggest corporations and the banks rule over the government.  The government does what they tell them to do.  It’s amazing that there are virtually no indictments.

The big banks’ loans to Greece were predatory by design.

There is only one ethically defensible choice for Greece: default now. Before you flame me with emails about the “responsibilities of debtors,” please read the entire entry.

Let’s look at credit (offered by lenders) and debt (sold to borrowers) from the point of view of predation.

Would you borrow $1 billion if it was offered to you at zero interest, with no collateral required? I would, without hesitation, and I would buy various assets which offered a reasonable return above zero with the “free money,” because the lender has no recourse if my investments fail to return the capital.

Who would be dumb enough to make such a loan? The Federal Reserve, of course, and they do so only to their special buddies, the “too big to fail” banks as a way of diverting the national income to recapitalize the banks without directly transferring taxpayer funds.

What does it take for a transaction to become predatory?

1. The lender (if they had sufficient leverage) could change the terms after the fact, for example, demanding more collateral. This would be predatory because the terms of the loan were “too good to be true” and were designed to fail–i.e. a lead-in to a carefully planned predation.

2. The borrower misrepresented his financial circumstance, i.e. committed fraud, which is a type of predation on unwary lenders.

But there is a quantitative difference between the borrower seeking to defraud an unwary lender and a lender planning a predatory loan:

1. The lender is in effect marketing the debt. If a potential borrower declines a loan, life goes on. If a lender doesn’t sell loans, it dies. Therefore the incentives to push “too good to be true” or otherwise misrepresented loans are asymmetrically on the lender side.

2. The lender is an institution that is built upon risk management and risk appraisal. The borrower is not, and thus the skills of assessing (and thus of pawning off) risk are asymmetrically on the lender side.

There is an unsavory analogy to lenders offering under-collateralized, low-interest loans with “gotchas” built into the terms: Pushing these types of loans at interest rates which do not reflect prudent risk management is akin to offering an inexperienced young maiden a large sugary drink that is heavily spiked with a tasteless alcohol, with predatory designs.

So when the maiden wakes up groggily the next morning sans clothing in a strange bed, is it really fair to say, tsk, tsk, she should have known better? Doesn’t this ethical symmetry miss the reality that the risks of predation were masked and asymmetrical by design?

The banks that lent vast sums to Greece were in essence offering “too good to be true” loans at rates of interest that did not reflect prudent risk management. Anyone who glanced at Greece’s history of defaults might have wondered if Greek rates should have been almost as low as those in Germany.

Was the “collateral” any sounder than that offered in the many previous instances of default?

We’re left with only two possible conclusions:

1. The big banks which lent stupendous sums of money to Greece at low rates of interest were hapless incompetents when it came to risk assessment and management, or

2. The loans were predatory from the start.

#1 is patently absurd, and so we are left with #2: the banks designed and offered these loans with predatory intent. Now the banks are offering their political lackeys a menu of predation to choose from:

1. Deliver the wealth of the Greek nation directly to the banks via transfer of national assets

2. Deliver the wealth of the nation over time via “austerity” programs that in essence divert the surplus national income to the predatory banks

3. Increase taxes on the “core” Euroland nations’ taxpayers to fund a “bailout” of Greece that is in essence a direct transfer of those taxpayers’ wealth to the big predatory banks; the “bailout” is just a pass-through to the banks.

If you think this through, there is only one ethical thing for the maiden to do: toss the spiked sugary drink in the face of the predator and deliver a swift, hard kick between his legs “where it counts.”

Greece should respond to this planned predation with complete and total default: not a “haircut” or “extended terms,” a complete and total refusal to pay any of the debt.

We are constantly warned that the resulting collapse of the “too big to fail” banks would trigger a global implosion. That is false; life would go on after the predators declared bankruptcy and were liquidated. What the predators fear most is an awareness that any disruption in normal life would be brief and relatively painless compared to the vast suffering imposed to render them their pound of flesh.

The banks are in effect imposing Droit du seigneur–”lords rights”– on Europe. Someone needs to take the predators down, and it might as well be Greece.

I have covered this before in regards to Ireland: Ireland, Please Do the World a Favor and Default (November 29, 2010).

Of Two Minds

As the U.S. economy starts to slow down once again, global financial markets are beginning to tremble.  Over the past couple of weeks, all kinds of bad economic news has been pouring in.  The ADP jobs report was a “disaster”, the housing numbers are dismal, manufacturing has slowed way down and consumer confidence is dropping like a rock.  The Democrats and the Republicans are bickering over the debt ceiling and this is causing a lot of uncertainty as well.  All of this bad news is starting to spook investors.  On Wednesday, the Dow was down 279 points and the NASDAQ was down 65 points. It was the worst day of the year for the Dow, and many are wondering what is going to happen next if we see even more bad economic data.  QE2 is slated to end at the end of the month, and already the bond markets seem to be anticipating QE3.  If the U.S. economy enters another significant downturn during the second half of 2011, it seems quite likely that the Federal Reserve would attempt to do something to stimulate the economy and that would probably mean more money printing.

This article is essentially the second part to an article I wrote yesterday about how we are seeing warnings about the next financial collapse all over the place right now.  Panic is building and a lot of investors are trying to figure out where to put their money.  Suddenly everyone seems a whole lot less optimistic than they were a couple of months ago.

Michael Sheldon, the chief market strategist at RDM Financial, believes that all of the bad economic news we are seeing right now is clear evidence that we are entering an “economic slump”….

“Initially, we just had bad news from the weekly jobless claims data, but now we’re starting to see a broad-based economic slump.”

So what are some of the numbers that have investors so concerned?

Mike Riddell, a fund manager at M&G Investments in London, recently explained to CNBC why he is so alarmed right now….

“US house prices have fallen by more than 5 percent year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, first quarter GDP wasn’t revised upwards by the 0.4 percent forecast, durables goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were all very disappointing.”

The bad economic news just keeps rolling in.  It is almost as if someone has slammed on the economic brakes.

The following are a few more examples of the bad economic numbers that have come out over the past couple of days….

*According to the latest ADP Employment Services report, private employers in the United States only added 38,000 jobs last month.  That number had been expected to be somewhere around 175,000.  This jobs report is being called a “disaster“.

*Manufacturing activity in May was much lower than most economists were projecting.  The following is how CNBC described the newest numbers from ISM….

The Institute for Supply Management (ISM) said its index of national factory activity fell to 53.5 in May from 60.4 the month before. The reading missed economists’ expectations for 57.7.

*Moody’s downgraded Greek debt again on Wednesday, and stated that they believe that there is a 50/50 chance that Greece will default.  This time Moody’s downgraded Greek debt by three levels all the way down to Caa1, and that caused the euro to fall like a rock.

To get an idea of just how imbalanced the European financial system has become at this point, just check out this article.

*Earlier this week it was announced that U.S. home prices have declined 5.1% from a year ago.  Sadly, U.S. home prices have now fallen more than they did during the entire Great Depression.

*As I mentioned yesterday, the consumer confidence index fell from 66 in April to 60.8 in May.

So what is causing all of this?

Well, the truth is that the “sugar high” that the U.S. economy has been enjoying is coming to an end.

QE2 is almost over and the vast majority of the federal “stimulus money” has been spent.  Now the federal government is talking about getting spending under control and we are seeing austerity programs being implemented on the state and local level from coast to coast.

But without massive intervention by the Federal Reserve and by the U.S. government will the U.S. economy be able to stand?

Douglas Borthwick, a managing director with Faros Trading in Stamford, Connecticut is not optimistic….

“The sugar high that has buoyed the U.S. economy over the past six months is wearing out, and there is little in economic growth or foundation to show for it.”

The truth is that the Fed and the U.S. government went all-out in an attempt to keep the economy from falling into a total depression.  The U.S. government has been running budget deficits well in excess of a trillion dollars and the Fed has been printing money like mad.  If these measures are removed, the economic crisis we are experiencing might just get a whole lot worse.

How much worse?

Well, just check out what Peter Yastrow, a market strategist for Yastrow Origer, recently told CNBC….

“Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything,” Yastrow said. “We’re on the verge of a great, great depression. The [Federal Reserve] knows it.”

Ben Bernanke and Barack Obama keep talking about the “economic recovery” but most Americans know better.

According to one new poll, 66% of Americans believe that we are still in a recession.

Perhaps this is a sign that the American people are starting to wake up to the new economic realities that we are facing.

The U.S. economy is being ripped apart and shredded.  Thanks to our short-sighted trade policies, the Chinese economy has roared to life while the U.S. economy continues to ship jobs and factories overseas.

But instead of facing up to our economic problems and coming up with some solutions, our nation has been on a horrific debt binge over the last couple of decades in a desperate attempt to maintain our standard of living.

One of the reasons why I pound on the economic news day after day is so that more people will really understand what is going on and will start to wake up.

In fact, if you have a family member of a friend that just doesn’t get it, the following is a great article to share with that person: “50 Things Every American Should Know About The Collapse Of The Economy“.

Look, even Barack Obama says that the present state of affairs is “unsustainable” and that changes have to be made.

But if the U.S. government decided that it was going to go to a balanced budget tomorrow, that would suck approximately a trillion and a half dollars out of the economy.

What do you think would happen if that came to pass?

Of course by going into even more debt we are destroying the economic future of our children and our grandchildren.

We have piled up the biggest mountain of debt in the history of the world and we expect future generations to pay it off.

It is absolutely disgusting what we have done and it is thievery on the highest level.

Everyone knows that we are living in the greatest debt bubble in the history of the world and that at some point it is going to pop.

Perhaps the best we can hope for at this point is for a little bit more time before economic disaster strikes.

Unfortunately, all of the latest economic news seems to be pointing toward another economic slowdown.

Hold on to your seats.

The Economic Collapse

The Wall Street Journal discovers today that the banks have hit what they call a “foreclosure hurdle.” Just a hurdle, just something to be jumped with Edwin Moses-like effortlessness. Not “the effective destruction of the land recording system in America,” just a hurdle.

Here’s what they’re talking about:

…some delinquent borrowers are successfully arguing that their mortgage companies can’t prove they own the loans and therefore don’t have the right to foreclose.

These “show me the paper” cases have been winding through the courts for several years. But in recent months, some judges have been siding with borrowers and stopping foreclosures after concluding that banks’ paperwork problems are more serious than previously thought and raise broader ethical questions.

This year, cases in California, North Carolina, Alabama, Florida, Maine, New York, New Jersey, Texas, Massachusetts and others have raised questions about whether banks properly demonstrated ownership.

I’ll give you the quintessential version of these cases, of which dozens have been forwarded my way over the past several weeks. In a recent case in Oregon, a US district judge stopped a foreclosure proceeding because of questions about MERS. The judge also mused whether Oregon, a non-judicial foreclosure state, needed judicial supervision to determine the extent of the improprieties in the mortgage system.

(Judge Owen) Panner specifically warned of problems in cases involving the Mortgage Electronic Registration System. MERS was set up by the banking industry to rapidly package and sell mortgages as securities without recording each sale in county recorder offices.

The “MERS system raises serious concerns regarding the appropriateness and validity of foreclosure by advertisement and sale outside of any judicial proceeding,” he said Wednesday in a 16-page ruling.

“Given the numerous problems I see in nearly every non-judicial foreclosure case I preside over, a procedure relying on a bank or trustee to self-assess its own authority to foreclose is deeply troubling to me,” he wrote [...]

“MERS makes it much more difficult for all parties to discover who owns the loan,” Panner wrote. “When a borrower on the verge of default cannot find out who has the authority to modify the loan, a modification or a short sale, even if beneficial to both the borrower and the beneficiary, cannot occur.”

Here’s how the banking industry reacted. They sought refuge with the Oregon legislature, pushing a bill that would retroactively legalize MERS in Oregon and change the recording requirements needed in the state for MERS to foreclose. None of the transfers of the loan in question in the court case were recorded in the county office. This legislation would legalize that current violation of the law in Oregon, and would “relieve lenders of ensuring a property’s ownership history is properly recorded in public records before foreclosing outside a courtroom.”

So far, the legislation has been delayed in committee, but if it passed, it would set a standard for how the bank lobby could proceed in states where MERS has come into question. They would merely get the state legislature to legalize whatever illegal practice has been signified by the courts. Consumer and housing advocates are fighting this in Oregon with everything they’ve got, given the precedent it would set.

Hopefully they will succeed. Because this is really the last gasp for the industry, appealing for a “get out of jail free” card. The evidence is clear: banks flubbed mortgage assignments in MBS deals, and are backdating, fabricating and forging documents to cover it up. They split with accepted practice for hundreds of years and did not engage in the careful system of land transfer that is an essential component of modern society. Judges who actually see the evidence cannot deny this.

The investors are finally peeking in on this and seeing that mortgage servicers are not acting in their interests with their rush to foreclose. State Attorneys General have finally begun investigating all these associated practices from the industry, and even in a conservative state like Utah, the AG unequivocally told Bank of America that one of their units is engaging in illegal foreclosures.

So this all makes the Oregon case very important, as it represents a safety valve for the banks. A denial there means that they will simply not be able to foreclose on a growing number of borrowers. As foreclosure defense attorney Thomas Ice says, “This is a huge assault on our legal system,” and judges have caught up to it. The question is whether the banks can manipulate the other branches of government to get out of it.

FireDogLake

… and “extraordinary rendition” while we’re at it.

We can use it on Goldman Sachs and their executives!

Goldman Sachs Group Inc. (GS) won’t face criminal prosecution related to sales of mortgage-linked securities because such a move could threaten the U.S. financial system, according to Brad Hintz, an analyst at Sanford C. Bernstein & Co.

That sounds like someone’s saying that Goldman has effectively extorted the United States Government.

Isn’t that the definition of terrorism?  Do what I want or unbridled Hell (of some form) will be visited upon your nation.

Hmmm…. that’s terrorism, isn’t it?  And isn’t The Patriot Act supposed to stop terrorists?

Well?

In all seriousness folks, can someone explain why the American public tolerates businesses that are able to behave in this fashion, and fails to demand that they be closed down?

It’s not enough to have the risk of making bad decisions and losing your shirt; that’s something everyone who is involved in business has to deal with.  But there’s a huge difference between that and a firm that effectively has a license to steal, in that irrespective of its behavior it will never face criminal prosecution.

How many times would your local convenience store be robbed (per hour) were there no criminal prosecution, and the robber was only required to pay a fine that was no larger than their loot were they to be caught?

That’s what we are allowing in our “financial system” (and elsewhere, particularly in the pharmaceutical industry) and that we the people have allowed this to occur is an outrage.

The difference between sex and rape is consent.

When it comes to being “financially sexed” the American public has and continues to consent.

The Market-Ticker