FedUpUSA

Archive for September 17th, 2011

I suspect things are about to get a bit warm over toward Athens….

Geithner preached the lessons of the emergency banking support provided by the Treasury and Federal Reserve in reaction to the collapse of Lehman Brothers Holdings Inc., mixing it with criticism of Europe’s crisis-management coordination.

Uh huh. And those lessons are?  Has our economy recovered?  Has debt contracted to appropriate and manageable levels?  Has the federal government’s “temporary” support program of borrowing and blowing 12% of GDP concluded?

Or is the truth, Timmy, that fraud as a business model has now been extended to government and you’re smugly patting yourself on the back for preventing an explosion by pulling the burning wick out of the box a bit further, forgetting that (1) you’re still carrying the box and (2) there’s a dozen pounds of TNT in there and the wick still goes inside!

The imagery that comes to mind when Turbo speaks of such things reminds one of Wile-E-Coyote and his inveterate attempts to blow up, smash and otherwise kill the Roadrunner.  But like the cartoon although Wile-E is often seen with dining apparel in hand nobody every explains how he’s going to actually eat a blown up, smashed to dust, or buried under tons of rock Roadrunner, should he some day succeed despite his repeated display of “genius.”

Europe projects an image of “ongoing conflict” between national governments and the central bank, hampering efforts to put the economy on a sounder footing, Geithner said at a banking conference in between euro meetings.

“Your financial challenges in Europe are eminently in your capacity to manage financially, you just have to choose to do it,” he said.

And how would that be?  See, this is the problem – Germany exports lots of hard goods (like cars, for example) to Europe which then consumes them.  But Europe has consumed them by borrowing, not by producing.  Greece, for example, has a monstrous welfare state, as does the United States.  But consumption in those European nations is how Germany manages to put up the numbers it has economically.

Unfortunately Germany has stoked it’s “growth” with false expectations, as has most of the rest of the western world.  Rather than build a sustainable model in which people produce, pay taxes from that production for government services (that’s redistribution – let’s call it what it is), spend however much of the rest they wish on consumption and save some part of the remainder (that’s called “capital formation“) the entire European continent joined the rest of the western world in believing that we could continually borrow more and more money to sustain consumption!

The economic term for this is malinvestment.  That is, rather than invest from saved capital (the economic surplus from produced goods and services) people were provided incentives to instead borrow on the promise of producing more tomorrow.

The problem is that not everyone can produce more tomorrow and nobody can do so on a compounded growth rate into the indefinite future.

Consider the athlete.  He runs a 4:10 mile.  He might be able to improve his time by 4% or so in the next year with training, and in doing so cross the “magical” 4 minute mile barrier.  But he cannot continue to improve at a rate of 4% a year forever; that is a physical impossibility.

This, however, is what we’ve been sold.  We’ve been sold it in investments (the “8% annual return” meme that is still being run today) we’ve been sold it in terms of economic growth (the mythical “5% GDP”) and we’ve been sold it in virtually every other phase of our life.

This cannot continue for the simple reason that it’s physically impossible.  Yes, there will be major improvements from time to time in productivity.  We know of many throughout the last couple hundred years – first the introduction of large-scale steam power into industry, then electrification, then communications (e.g. telephone and telegraph), mechanization of farming and transport (e.g. the development of practical internal combustion engines of various sorts) and data processing (e.g. first large-scale computing through several iterations, then combining that with communications via the Internet.)

These have all “shrunk” the apparent size of our world.  This is good, not bad.

Have you ever noticed that the worst credit bubbles tend to come at the same time as we experience these improvements in productivity?  There’s a simple reason for this, of course: The growth in output occurs and people are led to believe that’s a durable change and will continue – not in fits and starts, but on a continual and annual basis.

They’re wrong, of course, because that’s not how the physical world works.  The monster growth spurt in the Internet occurred with the release of Windows 95 in August of that year.  The “monster” part was over within 12 months.  It then tapered off, but that was sufficient to produce a bubble in stocks that took nearly four years to pop, and when it did it destroyed the apparent wealth of millions.

I say “apparent” because that “wealth” was never real.  Oh sure, there were people who did produce durable wealth from that time, myself among them.  But MCSNet never took a nickel in forward financing of any sort.  Saul (the bank President where we did business) kept lamenting the fact that I refused to borrow money from him, choosing instead to grow the company from retained earnings – that is, excess capital after all costs of producing the services we sold were paid.  That growth was real, it was durable, and it was “mathematically” less than it would have were we to have employed massive leverage – if I had been wise enough to know exactly when the bubble would pop and get out first.

Ah, there’s the problem grasshopper – are you smart enough to know with certainty when that is?  No you’re not, and the wise man recognizes this fact and therefore chooses not to play.  The inveterate speculator on the other hand risks blowing up everything he built every day by entering that casino and it is luck, rather than skill, that allows him out before his head takes its turn in the economic guillotine.

The real problem that the Eurozone faces is that it has allowed banks to lie about the value of bonds on their balance sheet, just as we have.  It has not forced them to mark those instruments to the market nightly, just as we have not.  The market has correctly deduced that in the event these “temporary” and “market-based” losses represented by current offered price crystallizes into actual economic loss, such as through a Greek default, many of these financial institutions will be rendered instantly insolvent.

The error is not in failing to bail out Greece, or bailing out Greece.  The error is in a continued promotion of economic policy that violates the laws of the physical world we live upon.  The premise of borrowing to consume and speculate must always end badly, because continued compounded growth is mathematically impossible on a sustainable basis, and yet this is what the system requires to operate perpetually when it is allowed to run in this fashion.  Rather than build economic progress on capital formation – that is, the economic surplus of individuals after they pay the expenses of their lives, we have instead turned the world on its ear and bought into the bankster’s siren song that one can have today and produce tomorrow.

Without explicit government support of fraud these excesses cannot happen over an extended period of time.  If you force honest accounting and reporting to take place under penalty of criminal sanction and deny these firms the ability to claim their assets are “covered” when there is no proof of ability to pay all of the gamesmanship disappears and the bubbles cannot expand to dangerous levels.

Oh sure, there will always be speculation, and people will make or lose money predicated on that speculation.  There’s nothing wrong with that in the general sense.

But there’s plenty wrong with Geithner’s claims that we can keep playing this game on an indefinite forward basis and never have to pay the check engendered by doing so.  That has never worked over time because it mathematically cannot, and yet our government refuses to accept and acknowledge that fact.

It appears that Europe is starting to “get it.”  They’ve come to the conclusion that nations cannot run deficits on a perpetual basis that exceed economic growth.  The “3%” rule appears reasonable assuming that economic growth can reach 3%, and it probably can over material periods of time.  While a better rule is “0%”, simply because the natural evolution of all economies is a mild deflation (due to productivity improvements) this is certainly better than our situation today – or theirs.  Such a rule would limit the United States to a $450 billion deficit inclusive of financing costs, which means that functionally our operating deficit limit would be about $200 billion today, dwindling toward zero the longer we kept it up.

Greece, for its part, appears to know the gig is up too.  Papandreou has apparently decided not to meet with the IMF and Geithner this weekend, choosing instead to return to Greece.

The pyramid that has sustained the “rally” in risk-asset prices over the last two years appears to be about to have its legs cut out from under it.  A couple of weeks ago I said that I expected you’d have one more chance to get out of the market if you were stuck long risk assets.

That opportunity may in fact be about to expire.

For a moment, imagine that there is a privately-owned organization in the United States that can create U.S. dollars out of thin air whenever it wants and can loan that money to whoever it wants to.  Imagine that this organization is able to act with the full power of the U.S. government behind it, but that nobody in the organization is ever elected by the American people, and that for all practical purposes the organization is not accountable to the president or to Congress.  Imagine that the organization is able to make trillions of dollars of secret loans to banks, to foreign governments and even to their close friends without ever having to face a comprehensive audit.  Does that sound preposterous?  Well, such an organization actually exists.  It is called the Federal Reserve, and today we found out that once again the Fed is going to be taking huge piles of your money and loaning it to commercial banks in Europe.  The Congress cannot overrule this decision.  Neither can Barack Obama.  Because it has so much power, many refer to the Federal Reserve as “the fourth branch of government”, but unlike the other three branches of government, there are basically no significant “checks and balances” on the Federal Reserve.  If you don’t like the fact that the Federal Reserve is racing in to help big foreign banks survive the European debt crisis that is just too bad.  The Federal Reserve pretty much gets to do whatever it wants to do, and the folks over at the Fed simply do not care whether you like that or not.

So what in the world just happened today?  The following is how an article on CNBC explained it….

Just ahead of the Wall Street open Thursday, the European Central Bank, along with the U.S. Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank announced they would offer three-month dollar loans to Europe’s commercial banks, easing dollar funding constraints.

It must be nice to do whatever you want without having to get the approval of anyone else.

What do you think Barack Obama would give for such power right about now?

The Federal Reserve and other major central banks around the world decided that lending big European banks gigantic piles of dollars would be a good idea, so they are just doing it.

No debate, no votes and no democracy – they just tell us how things are going to be and that is that.

It is a bit ironic that all of this happened on the third anniversary of the collapse of Lehman Brothers.  It is almost as if the central bankers of the world are trying to send some sort of a message.

So how much money is going to be loaned out?

Well, according to an article in The Daily Mail, big European banks are going to be able to borrow an “unlimited” amount of money….

The deal announced yesterday means banks will be able to borrow ‘any amount’ of money in three separate auctions in October, November and December.  Banks will have to put up collateral, or security, to tap the emergency funds.

Wow – I wish someone would offer to lend me an “unlimited” amount of money.

But of course this really is not going to solve anything in the long run.  You can’t solve a raging debt problem with more debt.

Yes, it will help the big European banks with their short-term liquidity problems, but it will do nothing to fix the long-term structural problems that are tearing Europe to pieces.

Win Thin, a senior currency strategist at Brown Brothers Harriman, said essentially the same thing to CNBC today….

“They’re taking care of the symptoms, but the underlying illness is still out there. On the margin, it’s positive. Until Greece defaults and we clear this whole thing up, they’re still treading water”

So, no, the financial problems of Europe have not been solved.

Just think of this latest move as a temporary band-aid.

So why get upset about it?

Well, what all of this shows is just how arrogant the Federal Reserve is.

The Federal Reserve gets to throw around trillions of dollars without any accountability to the American people.

As I have written about previously, the Federal Reserve made $16.1 trillion in secret loans to their friends during the last financial crisis.

This was revealed in a GAO report, and members of Congress such as Ron Paul and Bernie Sanders tried to get people to pay attention to this.  The following is a statement about this report that was taken from the official website of Senator Sanders….

“As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world”

So how much of that money went overseas?  Well, it turns out that approximately $3.08 trillion of that money was loaned to big banks and major financial institutions in Europe and Asia.

Barack Obama can’t lend trillions of dollars to foreign banks.

So why does the Federal Reserve get to do it?

Sadly, most Americans know very little about the Federal Reserve.  In the United States today, most Americans graduate from high school without ever learning much of anything about the Fed.

But if you really want to understand what is going on with our economy, it is absolutely critical that you understand the Federal Reserve.

The following are some more reasons why you should be upset about what the Federal Reserve has been doing….

*The Federal Reserve is a perpetual debt machine.  Today, the U.S. national debt is 4700 times larger than it was when the Federal Reserve was created back in 1913.

*The Federal Reserve has recently been actually paying banks not to make loans.  Right now banks can park money at the Federal Reserve and make risk-free income without having to make loans to the American people.

*Current Federal Reserve Chairman Ben Bernanke has a track record of failure that is legendary, and yet George W. Bush and Barack Obama both backed him 100%.

*The Federal Reserve system is designed to create inflation.  The truth is that the United States has only had a persistent, ongoing problem with inflation since the Federal Reserve was created back in 1913.

*Since 2008, what the Federal Reserve has been doing to our money supply has been absolutely insane.  Eventually this is going to have very serious consequences for us.

*The U.S. government has handed over the task of “centrally planning” our economy to the Federal Reserve.  The Fed decides what the target rate of inflation should be, what the target rate of unemployment should be, what interest rates are going to be and what the size of the money supply is going to be.  This is quite similar to the “central planning” that goes on in communist nations, but very few people in our government seem upset by this.

*The Federal Reserve picks “winners” and “losers” in the financial system.  For example, when the last financial crisis hit, the Fed bent over backwards to help out the big Wall Street banks, but hordes of small banks were left out in the cold.

*As mentioned above, the Federal Reserve has become way, way too powerful.  The Fed is able to do a lot of things that the three branches of government are simply not able to do.  Fortunately, there are a few of our leaders that are alarmed by this.  For example, Ron Paul once told MSNBC that he believes that the Federal Reserve is now more powerful than Congress…..

“The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress.”

As long as we continue to use a debt-based currency that is controlled by a privately-owned central bank, we are going to continue to have permanent inflation and government debt that expands at an exponential pace.

The “central planning” done by the Federal Reserve has created bubble after bubble after bubble.  Our dollars is on the verge of dying and our financial system is about to collapse.

The Federal Reserve system simply does not work.

Hopefully we can start sending more politicians to Washington D.C. that will be willing to stand up to the Federal Reserve.

But for now, the Federal Reserve is going to keep running around doing whatever it wants to do whether we like it or not.

The Economic Collapse

You just have to shake your head at this sort of crap:

Mayor Bloomberg warned Friday there would be riots in the streets if Washington doesn’t get serious about generating jobs.

“We have a lot of kids graduating college, can’t find jobs,” Bloomberg said on his weekly WOR radio show.

“That’s what happened in Cairo. That’s what happened in Madrid. You don’t want those kinds of riots here.”

Bloomberg is right about not wanting riots.  Nobody who’s sane does.

But let’s look at this a bit more analytically, shall we?

It wasn’t Wall Street, which I believe is contained within New York, that was responsible for the financialization of home mortgages and thus drove the housing bubble, right?  Making loans intentionally to people who the banks knew couldn’t pay, then trading credit protection with more people they knew couldn’t pay?  (That’s fraud twice, I do believe.)

It wasn’t Wall Street that has driven companies to incessantly offshore everything, thereby destroying the industrial and productive base of our nation, right?  (That’s intentionally trashing our job base in the pursuit of short-term profit, I do believe.)

It wasn’t Wall Street that created this sort of credit bubble over the space of 30 years, right?

And finally it wasn’t Wall Street that, after doing all of the above, pulled out every stop in not only crying “poor mouth” and demanding bailouts for their irresponsible behavior lest there be immediate tanks in the streets but also has bought off, demanded and received virtual immunity under the law from all of the outrageous actions they took during those 30 years, including but not limited to getting the Federal Government to sue states that tried to protect their citizens and cut off the credit bubble in housing, right?

Oh wait, Wall Street, located within your city, did in fact do all of that and more while you, sir jackass, have done exactly nothing to put a stop to it or bring justice to the American people and against those who committed these acts. 

In fact, you have done and advocated for precisely the opposite!

So to your bleating I reply with the following observation:

It is absolutely true that nobody in their right mind wishes to see riots in the streets, including myself.  However, if we are destined to have riots, and if the bad actors on WALL STREET are not restrained on a forward basis and punished for their former acts it is destined that we shall, there is no more fitting place in America for them to occur than right outside your mayoral residence and office along with up and down Wall Street where the centroid of all this bad behavior in point of fact has and does to this day reside.

From the Kansas City Star:

Kansas City man who marketed and sold $100 million in worthless financial  documents was found guilty of multiple federal fraud charges Wednesday.

Denny Ray Hardin, 52, who ran the Private Bank of Denny Ray Hardin out of his  home, was convicted of 11 counts of creating fictitious obligations and 10  counts of mail fraud. A judge found him guilty after a three-day trial in U.S.  District Court in Kansas City.

According to trial testimony, Hardin used his home computer to produce more  than 2,000 “bonded promissory notes,” which he claimed were backed by a U.S.  Treasury Department account and could be used to pay off debts. Hardin charged a  fee to purchase the notes, which he claimed he was authorized to sell because he  was a private banker.

Federal prosecutors said that creditors who refused to accept Hardin’s notes  were threatened with legal action.

He faces up to 30 years in federal prison. A sentencing date will be  scheduled later.

So, could someone please tell me what the difference is between what this guy did and what our large, Primary Dealer (bailout recipient) banks have done and are still doing?

* CRICKETS *

Some suggested reading if you don’t quite understand what’s happening…..

h/t Gamma & BigBluffer from the Forum