So another week goes in the books with the market averages down about 5% each.
In Europe it’s much worse. The DAX was off about 10% in the last two days. Bank stocks worldwide are collapsing, with some threatening their 2008/09 lows and a few exceeding them.
The US market as a whole has lost nearly 20%, nearly straight down, with four straight weeks of losses. The entirety of the “gains” since QE2 was announced are now gone – a year of market advance destroyed in less than four weeks.
Why is your 401k and IRA being ravaged – again?
Simply put, we have not stopped financial institution lies.
Sarbanes-Oxley allegedly makes every public company CEO attest under penalty of perjury (and a separate criminal offense) that the financials they present to the public are true, correct and complete. If this law is being followed and violations prosecuted can someone explain to me why Colonial Bank, along with others, failed and then had their assets valued by the FDIC during consolidation at 20, 30, even 40% less than the publicly-presented values on those balance sheets just weeks before?
Why aren’t the executives who “signed” those balance sheets all facing federal indictment?
This is not (just) a United States problem, but the banks over in Europe that are in trouble have, in many cases, branches here in the US and trade in United States markets. Some – such as Barclays, Credit Suisse, Deutsche Bank and HSBC, are even “primary dealers” and thus participants in US Treasury auctions. Why is not US law applied to those firms that are considered “essential” to US financial stability?
Our government has turned balance-sheet games and lies into a legitimate business model. This in turn has left the markets worldwide subject to rumor and innuendo, along with fact. This is not acceptable in a financial system that is claimed to “need” these big institutions to remain stable.
The simple fact of the matter is that our entire market structure over the last 30+ years has been built on fraudulent edifice after fraudulent edifice. The premise of “Credit Default Swaps” being traded over the counter means that there’s no nightly margin position enforcement and “netting” sounds great but is by and large a scam. You cannot ask a bank CEO exactly how much his bank is underwater or to the good in his present positions across these markets and get an accurate answer, because he doesn’t know. This lack of knowledge is both intentional and structural – and it must change right now.
This is distinct from trading in the regulated markets. When I trade futures if I’m underwater by $200,000 in my positions that is tracked “by the minute” and my buying power reflects that. Each night I am forced to post cash against any underwater positions, and it is “held back” from my cash balance. If I run out of cash then an ominous number appears on my screen: Dollars to liquidation – and it means what it says; when that gets to zero the brokerage automatically closes my positions and my account goes poof!
Why don’t we implement the same thing for banks? Markets have prices for nearly everything. If there’s no price, then the value is simple: For the purpose of required reserves it’s zero. That is, you must have one dollar of actual capital against anything you claim has no market price, or for which you refuse to accept the market’s valuation.
We must also end ZIRP. Right now. Pull liquidity out of the system (start by selling down The Fed’s balance sheet until it is at normal levels) until the short end of the curve rises to at least 1% above inflation. Borrowing is supposed to come with a cost and it should be expensive enough that it is unattractive to do so for anything except productive purposes – that is, it should be unattractive to borrow to consume, speculate or try to create Ponzi schemes. Left alone the market guarantees this will be the case – if The Fed won’t stop interfering on its own then it must be forced to do so.
This stops all the BS immediately. It prevents market panics. It protects depositors without the possibility of one dime of loss of their funds. It forces bondholders to do diligence on what they’re lending money for and what institutions are doing with it. It forces all credit instruments onto an exchange or forces banks to hold one dollar of capital for each dollar of notional exposure. If they want to trade them over the counter that’s fine, but then they are by doing so refusing to accede to a market price valuation and by doing so must accept that they are unsecured credits – in full.
Oh, it also prevents banks from levering up 50:1, 30:1 or whatever, hiding risk and claiming that all is ok without strict proof.
But it is that strict proof and transparency that the market needs. It is how we prevent market panics, it is how we prevent “bear raids” and it is how we stop the insanity.
Yes, it also stops banks from looting the population and transferring huge percentages of domestic output to themselves. It prevents governments from financing their desire to deficit spend with various fraudulent artifices (such as was done in the case of Greece) in order to hide their exposures. It forces recognition that both government and private industry cannot grow credit faster than productive output and ends the Ponzi schemes.
It will result in a major, worldwide adjustment to the economy. Downward. GDP will contract – inevitably. All the big banks with these lies on their balance sheets will fail. This is good, not bad, as there will be new banks and sound banks that will take their place. Unemployment will temporarily go up, not down and tax receipts will temporarily dive. As such this path of action must come with fundamental tax and spending reform – not the crap being bandied about by both political parties, but something such as The Fair Tax or the proposal I put forward last week, not the intentionally bogus statements from people like Buffett. It must come with trade reform such that we stop allowing wage and environmental arbitrage to be used as bludgeons – both by us and by other nations. It must come with medical system (NOT “Medicare” and “Medicaid”) reform because the simple fact of the matter is that we cannot continue to support the outrageous looting that the medical industry in all its forms imposes on America. It must come with the removal of leverage from the educational system, especially the post-secondary system, as there is no defense available on an economic basis for a 20-year old taking out $40, 50 or even $100,000 in debt for an “education” that is of dubious value in the marketplace. Education must be returned to a cost structure that can be paid for by an enterprising individual willing to flip pizzas or fix computers during weekends and evenings, exactly as it was in the 1980s.
All of this has to happen now, and the first part of it – reconciling the banks and their bogus accounting – must occur today. Europe is on the brink of a funding lockup, and if it occurs then the “bare bank tits” that I spoke of quite often in 2007 and 2008 are once again going to be exposed to the market and shown to be silicone-filled fakes.
There are many who say this is not 2008. They’re right – it’s worse by an order of magnitude. We now have financial institutions that are effective elements of the state that have bought unpayable bonds from nations, and then used them as collateral to lever up against. The embedded losses at today’s market prices are enough to destroy all of these institutions and again the question arises on exactly who wrote credit protection against them and do they have the money. The answer to the latter is exactly as it was in 2008: NO.
The problem is that this time around we in the United States have not only destroyed capital formation and savers with ZIRP and thus have little or no Federal Reserve policy response available, the Federal Government has taken on $4.5 trillion in new debt in a puerile and futile attempt to “stimulate the economy” and yet has failed at the goal. Most of that money went straight into people’s pockets who had little cash and thus it should have been highly-efficient in promoting consumption and been passed back to through to sustainable production – or so the economists told us.
They were wrong: All it did was temporarily replace productive output; unemployment did not come down materially, the employment participation rate has not moved and thus the tax base has not recovered.
We tried their prescriptions, we used up our time and treasure with a path that I said at the time would not work as credit capacity within the economy had been exhausted and now we’re faced with the reality: We do the right thing and accept the consequences, here and now, or we risk a 1930’s style Creditanstalt collapse.