While politicians bicker about debt ceilings and government spending, American families suffer under an increasingly hefty debt load.

There are only two ways to retire debt:  Pay it off….or default.  What is becoming more and more apparent is that Americans’ wages will not sustain the debt load that has been foisted upon them through our government’s inflationary monetary policy.  Prices of things we need continue to increase at a rapid rate while wages are falling precipitously.  In Michigan the median wage has fallen by over $12,000 per year!  At the same time, prices have gone up an average of 4% per year.

It’s pretty clear why more and more people who understand that the math doesn’t work here are advocating for a massive bankruptcy for all of America.

As I write this the DOW is down 178, the S&P is down 19, and the Nasdaq 100 is down 32, all well more than 1%.  In addition volume is more than 10:1 down on the NYSE and about 8:1 on the Nasdaq.

It’s a bloody day in the markets.

But one problem is apparent – the TNX, or 10 year Treasury bond interest rate, is actually up about 0.2% on the day, and the 30 year is up 1% in yield.

They shouldn’t be.

When investors get nervous about stocks, they usually flow to bonds.  Today, they’re not.  They’re buying Gold instead which is up just under 1%, or silver, which is up 3.2%, both on the day.

These correlations have been solid for a long time.  Now they’re failing.  This failure is telling you something – that our Congress and President had better get their heads out in the daylight instead of up their respective asses, and they better do it soon.

Oh sure, we’re not seeing the sort of out-of-control ramp in government bond rates that Italy has seen the last few weeks.

Yet.

But remember the 1930s.  A bank called Creditanstalt turned what was a nasty stock market crash and credit contraction into a global Depression.

Regulators then, as now, ignored the crash’s warnings and refused to force those who were not properly capitalized to close.  They allowed people to double into bad bets.  Those bad bets compounded, and when the economy started to slip for real, instead of just on paper, the leverage they were carrying, both that which everyone knew about and that which people did not, ultimately blew them up.

Now we have a “little bank” in Italy that is teetering on the same edge – Unicredit.  It is too big to bail out – it holds hundreds of billions in liabilities.  There’s no money available to bail them out and the time to resolve them, as with our banks, was two and three years ago.

The risks are extremely high here folks.  I know many have laughed at my warnings for the last three years and have hooted and hollered as the stock market “recovered”, buoyed by yet more cheap money.  But during this the coverage of government debt with employment has not recovered at all – in fact, it’s worse now by far than it was in 2008.

So now what’s available in terms of policy tools?  There’s no funds available to bail people out, and a bank of that size isn’t able to be bailed out anyway in reality – all you can do is lie and hope people believe it.  But the market is calling all the bluffs now, one after another.

Remember 2008?  Buffet was going to buy the world.  Then it was Korea’s Development Bank.  Both, and many more yarns that were spun, were lies.  Those who believed got skinned alive in the collapse that followed.

If you think it can’t happen again, you’re wrong.  It both can and will, and nobody will be held to account for the lies they tell, just as they weren’t the last time.

Our government isn’t helping.  We should have taken all the big banks into receivership and went through every one of their alleged “assets” in 2008, forcing them to prove by independent valuation that they were holding them at reasonable valuations and that their “credit insurance” was backed by someone with 100% of the actual cash required to pay.  We didn’t, because Paulson and Geithner both knew that under such a standard not one of the big banks would survive.

So instead of forcing bondholders to eat it, which is what should have happened, they rolled the dice.  They bet that there would not be another Creditanstalt.

This is now looking like a bet they are going to lose.

S&P seems to think that when you effectively stick a gun in someone’s mouth and threaten to blow their brains out unless they take your alleged “voluntary” deal that still counts as a default.

Standard & Poor’s said today a rollover plan serving as the basis for talks between investors and governments would qualify as a distressed exchange and prompt a “selective default” grade. That may leave the bondholders unwilling to complete the exchange and the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks.

That’s because it is a default.  “Take this exchange on less-favorable terms or we’ll screw you” is still a screwing.  There is no material difference between the two; differences are in degree, not kind.

Greek government bonds rose following the finance ministers’ authorization of the payout, pushing the yield on the 10-year bond down 2 basis points to 16.3 percent as of 11:35 a.m. in London. Two-year yields dropped 86 basis points to 25.9 percent.

Wow, 25.9%?  That is not an interest rate, it is an imputed recovery.

“Consultations with Greece’s creditors are under way in order to define the modalities for voluntary private-sector involvement with a view to achieving a substantial reduction in Greece’s year-by-year financing needs, while avoiding selective default,” euro-area finance chiefs said in a statement after their July 2 conference call.

Voluntary?  Yeah, right.

Those who believe the Greek problem is “resolved” may have a few surprises in store for them yet.

The Market-Ticker

This guy doesn’t know when to quit:

NEW YORK (AP) — Treasury Secretary Timothy Geithner said Tuesday that if Republicans insist on passage of their budget plan as a condition for approving an increase in the nation’s borrowing limit, they will be responsible for the consequences.

Speaking to a New York audience, Geithner said that Republicans would bear responsibility for the first debt default in the nation’s history if they insist they will not vote for an increase in the $14.3 billion borrowing limit unless they win approval of a House Republican budget plan.

Your administration has known full-well what the debt limit has been for a very long time.  So has CONgress.  Both bodies were well aware that raising the limit is discretionary.

You seem to believe that playing the “Armageddon” card is something that can be done with impunity, mostly because your predecessor Hanky-Panky Paulson did so and Bernanke was a party to that.

The fact of the matter is that you seem to think that there’s no limit to the nation’s credit card.  You’re wrong.

Yes, I know, the bond market hasn’t cared (yet) about all this idiocy.  Then again it didn’t care over in Greece either, right up until it did.  Same with Iceland, Ireland and Portugal.

In fact, it seems to work the same way with most personal bankruptcies too.  People think they can push things a bit further, a bit more, they get another credit card, they play the balance-transfer rollover game, they feel the pressure and make some sort of maneuver and then breathe easier.

All this works for a little while, right up until it doesn’t in dramatic fashion.  And then, once again, we hear “nobody could have seen it coming.”

Well Timmy, lots of people saw this coming.  I did.  Hundreds of others who write on economics did.  The only people who “couldn’t see it coming” are those who are so arrogant as to think they can play Global Thermonuclear Financial Armageddon whenever their social spending and military adventure bonanza is threatened and who have their heads firmly buried up the bankster’s asses.

Let’s cut the crap: That’s exactly what this has been.

The jackbooted games are completely out of control.  The Federal Government has doubled in size since 2000.  Have we gotten twice as much service from the government?  No, we’ve gotten serviced instead.  And 2000 was a bad time in that regard as the government was dramatically overblown and overbloated at that point in time.

That was the last time I ran a mid-sized business and had to deal with that crap.  I will never do it again, so long as that “mass” is amassed against me.  And it will forever be, until the government shrinks.

The Feral Government is like a vampire that has gotten to weigh 500lbs.  It loves to suck the blood out of the nation and consume it.  Government employees like the TSA folks think that virtually rape-searching people with X-rays is “cool” and “for our safety” – including sticking their hands down a baby’s diaper.  What sort of sick bastard engages in that sort of act?  The fact is that it was never about safety – it’s entirely about shielding airlines from the risk of failing to secure their own aircraft and terminal facilities. We can’t have certain “favored” businesses risk failure when they blow it; rather, we have to make sure the boot of the government presses ever further on the people’s necks.

The vampire needs to be put on a severe diet.  Yeah, it will scream and holler, like every fat man does when told that he can’t gorge at McDonalds’ any more.  But just like the 400lb man that needs two seatbelt extensions if the government doesn’t cut this crap out the nation is going to have a heart attack and die.

I say chain the 500lb vapire to its chair and cut its rations by 50%.  When it screams, and it will, wear earmuffs and slam the door shut.  In short, Geithner, here’s my response to your threats: Pound sand.

We’re well-beyond the time where we should be neutering the government, not enabling it.  Emasculating the Federal Government with a nice, sharp knife, feeding its former pair of testes to the closest shark would do more to help this nation’s economy than anything else that could be undertaken.

Ronald Reagan used to talk about “rugged individualism.”  He was right in that regard, although he sure didn’t believe it when it came to certain personal choices.  He thought it was great if you wanted to drink a beer (boosts the economy) but smoking a doobie was good for 10 years in the slammer.  Like most statists he was a hypocrite when it came to that true “rugged individualism” and to add to his hypocrisy the “deal” he made on cutting taxes and slashing the size of government had no verification on the second half – which didn’t happen.  Instead he sat back, patted himself on the head and then watched the vampiric Feral Government pack on another 50lbs.

Well, Timmy, it’s time to go cold turkey.  You have enough tax revenue to avoid a default.  You can pay principal and interest, easily, with the tax money that comes in.  You then get to choose – do you send Granny her check (after you blew her contributions over the last 30 years in a puerile display of idiocy) or do you continue to fund the magical oil “reserves” that we “defend” with our $750 billion a year in defense expenditures rather than having a cogent and defensible energy policy?

Choices, choices.  They’re tough.

But default, in the legal sense, is in fact a choice, as the government’s income does exceed it’s actual lawfully mandated debt service.

Remember Timmy, Social Security and Medicare are not “obligations” – they’re entitlements.  Your very agency has argued this, successfully I might add, in court.  The Federal Reserve does not count those “obligations” as actual debts as a consequence.

In short Turbo, your “Armageddon Card” is frayed around the edges and doesn’t work any more.  Multiple attempts at a balanced Federal Budget have been circumvented and fraudulently avoided.  It is time to pull the rug out from under this game and throw the board on the floor; balancing the budget by refusing to raise the debt ceiling is the right way to do it, and now is the time.

The Market-Ticker

Unlike the Keynesian and Monetarist academic clowns that rule US academia German academics push for EU sovereign default plan

Almost 200 German economics professors have signed a declaration rejecting current proposals to resolve the eurozone debt crisis, instead calling for a way for distressed countries to declare bankruptcy.

More than 200 professors were invited to sign the document, and 189 did so, including prominent figures such as Manfred Neumann of the University of Bonn and Justus Haucap of the University of Duesseldorf, both in western Germany.

Instead of the collective support mechanism set up last year that could be made permanent in a modified form from 2013, the economists argued it would be better to let countries restructure their debts.

“Restructuring allows the countries concerned to reduce their debt and start over,” said the economists.

The solution being mulled at present and likely to be approved by European leaders next month would amount to “a permanent guarantee” of some countries’ debt, with “very serious consequences,” they added.

The signatories also doubted the effectiveness of measures to reinforce the competitiveness of weaker eurozone countries and control members’ public finances owing to the European Union’s “limited firepower.”

The document was published as lawmakers from Chancellor Angela Merkel’s ruling coalition sent her a clear message ahead of negotiations on a permanent EU rescue plan to take place in Brussels.

The German deputies said the future European Stability Mechanism should not be allowed to buy eurozone government debt, as the European Commission and European Central Bank would like.

Those 189 academics simply want the ECB to admit that the debt owed by Greece, Ireland, Spain, Portugal, cannot possibly be paid back. What cannot be paid back, won’t, and pretending that it will just makes problems worse. It is refreshing to see a large group of academics on the right side of an economic issue.

Axel Weber, once heir apparent to ECB presidency to replace Jean-Claude Trichet, resigned as president of the German central bank over the issue of the ECB buying sovereign debt. He did not want the ECB to buy debt, most of the rest of the ECB did.

Academics in Germany are disregarded even though they make economic sense. Keynesian and Monetarist academics in the US make no sense but are revered.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

The Mortgage Bankers Association strategically defaults on its loan after shaming homeowners who do the same.

By Mark Whitehouse

122%: U.S. household debt as a share of annual disposable income

U.S. consumers are paring down their debts faster than many economists had expected. To understand what that means, though, it helps to know how they’re doing it.

As of the end of March, the average U.S. household’s total mortgage, credit-card and other debt stood at 122% of annual disposable income, meaning it would take a bit more than 14 months to pay it all off if everyone stopped spending money on anything else. That sounds like a lot, but it’s better than it was before: At its peak in the first quarter of 2008, the debt-to-income ratio stood at 131%. Economists tend to see 100% as a reasonable level, so we’re almost a third of the way there.

The falling debt burden conjures up images of a nation seeking to repent after a decade of profligacy, conscientiously paying down mortgages and credit-card balances. That may be true in some cases, but it’s not the norm. In fact, people are making much more progress in shedding their debts by defaulting on mortgages and reneging on credit cards.

Since household debt hit its peak in early 2008, banks have charged off a total of about $210 billion in mortgage and consumer loans, including credit cards. If one assumes that investors suffered at least that much in losses on similar loans that banks packaged and sold as securities (a very conservative assumption), then the total — that is, the amount of debt consumers shed through defaults — comes to much more than $400 billion.

Problem is, that’s more than the concurrent decrease in household debts, which amounts to only $372 billion, according to the Federal Reserve. That means consumers, on average, aren’t paying down their debts at all. Rather, the defaulters account for the whole decline, while the rest have actually been building up more debt straight through the worst financial crisis and recession in decades.

In a sense, people who default on onerous debts — including the “strategic defaulters” who still have jobs and could pay — are doing the economy a favor. They’re freeing up cash to spend on other things, which can boost demand and give companies the confidence they need to start hiring again. If everybody just hunkered down and tried to pay their insurmountable debts, we might never have gotten out of the recession. Defaults are bad for the banks, but taxpayers already covered the cost of the losses through federal bailouts.

The bigger question, though, is what we as a society will learn from the experience. The lesson seems to be that the way to get ahead in the world is to take huge risks — buy a house you can’t afford with no money down, or invest huge amounts of borrowed money in risky loans — but let somebody else pick up the bill if things go wrong. As the growing U.S. federal debt demonstrates, that’s not a sustainable way to run an economy.

Wall Street Journal

What Took You So Long? (Put-Backs and Blow-Ups)

Posted by Karl Denninger

IRA put forward a nasty report on the “putback and blowup” risk issue related to the banks and fraudulent mortgages:

The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat one another. The GSE’s are going to tear 50-100bp easy out of the flesh of the banking industry in the form of loan returns on trillions of dollars in exposure, this as charge-offs on the several trillion in residential exposure covered by the GSEs heads north of 5%. The damage here is in the hundreds of billions and lands in particular on the larger zombie banks, especially Bank of America (BAC) and Wells Fargo (WFC).

….

The action “arises out of the alleged fraudulent acts and breaches of contract of Countrywide in connection with fifteen securitizations of pools of residential second-lien mortgages” Take particular care to savor the fact that these are second lien pools and that, where defaults have occurred on the primary mortgage, loss severities on the seconds will tend to be 100%. Or the cost could be more than par if you count the cost of remediation and recovery efforts.

Sigh…. how long does it take folks?

On April 20th, 2007 I wrote the following:

Why? Because every last one of the stated income loans that has been made can be PUT BACK ON THE LENDERS IF IT DEFAULTS.

And by the way, this is not limited to Countrywide (CFC). It applies to IndyMac, Downey, AHM, Washington Mutual and every other lender in the ALT-A space.

Let me restate that again so that everyone gets it – every single ALT-A lender is at risk of having every defaulted loan – no matter how long it has been since it was securitized and sold off – PUT back on them if there is any material misstatement in the paperwork!

To those of you who are claiming that this is a “Subprime” problem, that it is “contained”, that it is limited to “poor people who can’t pay their bills” or anything like that, let me point out that you are one hundred percent full of crap.

Emphasis in the original.

And on April 17th:

So while mortgage companies may maintain that they have “little” exposure to defaults because they sold these loans off to the bond market without recourse, if in fact 60 percent of the ALT-A stated income products have incomes fraudulently inflated by 50% or more those mortgage companies can probably be forced to take back each and every one of those loans.

HALF of all stated-income loans?

This will BANKRUPT every single one of these companies if it happens.

Now go look at the big bank’s balance sheets for second line (HELOC, silent seconds, etc) exposure.  70% of the outstanding dollar volume was written in California, Florida, Nevada and Arizona – on bubble houses.  The clear majority of those have a first that is underwater and thus the recovery value on those HELOCs, if they default or are “put back” due to fraud, IS ZERO.

When you look at these large banks balance sheets and then take out of their capital the likely losses under this sort of analysis you find that every single one of them will be driven into regulatory capital trouble at best.

This is just one of the issues we have ducked instead of facing.  The other big one is commercial real estate securitizations – S&P put out a report the other day in which it essentially said “if the banks have to eat the reduced value now they’re all insolvent.”

We in fact have fixed none of the underlying issues that brought down Fannie, Freddie, AIG, Bear and Lehman.  The only reason we have seen supposed “improvement” in the markets is that the government has given permission to lie to financial institutions in the exact same form and fashion (that is, hiding actual liabilities and probable losses) that brought down ENRON.

But the underlying loss is still real, still present, and still out there.  Refusing to recognize it doesn’t make it go away.  It just sweeps it under the carpet with the hope (wish really) that the institution will be able to screw you, the consumer, out of enough money to cover the shortfalls before they’re forced to recognize the already-occurred losses and thus declare bankruptcy.

If this was all “the government” that was stuck with these bad loans that were unmarketable (since they have a zero recovery value under legal collection methods they truly can’t be sold for more than a few pennies to one of those “shark” companies that cheats on the law when it comes to those rules) we might have a situation where the government could try to shift it onto the taxpayer through opaque bailouts of Fannie, Freddie and The Fed.

But a good part of this debt was in fact securitized and distributed.  Those holders, such as the FHLB that recently filed suit, aren’t the government and have no reason to sit there and absorb a loss that occurred as a consequence of allegedly-fraudulent underwriting.  For that matter neither does Fannie and Freddie, as despite their “conservatorship” they remain a publicly traded corporation and intentionally absorbing losses caused by other party’s frauds could open their directors and officers up to a derivative action (read: lawsuits a-plenty.)

No folks, these losses won’t be “buried and monetized.”  They will travel back up the chain to the last remaining standing organization that touched them, which just happens to be the zombie banks, since all the “independent brokers” that fed the bilge into these securitization factories are long gone, dead and buried.  Thus the ticking bomb will wind up exploding on the balance sheets of those “too big to fix” institutions we refused to resolve last year because we lacked the political will to go in a close one or more of these banks, and when it happens….. it will rock our world.

You’ve had nearly three years warning Washington – and investors.

When – not if – this goes off I don’t want to hear “nobody saw it coming” from The Halls of Congress and elsewhere in DC because I will be happy to run a campaign advertisement against anyone who so bleats with a copy of my TICKERS from 2007 documenting that in fact some people did see it coming – and were intentionally ignored.

(The Supreme Court recently made such speech legal…. and for that I must extend my heartfelt thanks!)