Get a load of this chart from DataQuick’s National Home Sales Snapshot. It’ll tell you everything need to know about housing.
As you can see, prices are flatlining or drifting lower while sales are sinking like a stone. That’s the whole ball of wax, isn’t it?
Sure, sales will increase in the spring (as they always do), but judging by the sharp dropoff in last year’s hottest markets, this could be the crappiest spring selling season since the crash.
Because prices are too high, rates are too high, “organic” demand is too weak, credit is too tight, and the pool of potential buyers has shrunk to the size of a walnut, that’s why.
The banks have reduced the percentage of distressed homes (foreclosures and short sales) on the market to roughly 11 percent from 59 percent in 2009. Fewer distressed homes mean higher prices, but higher prices mean fewer sales. It’s a trade-off. The banks get their money, but the market goes to hell. That’s how it works. According to most estimates, there are roughly 4.5 million homes in some stage of foreclosure. That means that –at the present pace–we should get through this Housing Depression a few weeks before Judgment Day. But don’t hold me to that.
Did you catch this gem on Bloomberg last week? It’s about the big private equity guys exiting the market. Take a look:
“Blackstone Group LP is slowing its purchases of houses to rent amid soaring prices after a buying binge made it the biggest U.S. single-family home landlord. Blackstone’s acquisition pace has declined 70 percent from its peak last year, when the private equity firm was spending more than $100 million a week on properties, said Jonathan Gray, global head of real estate for the New York-based firm…
“The institutional wave has passed,” Gray, who oversees almost $80 billion in property investments, said in a telephone interview. ‘It’s at a much lower level than it was 12 or 24 months ago.’
Private-equity firms, hedge funds, real estate investment trusts and other institutional investors have spent more than $20 billion to buy as many as 200,000 rental homes in the last two years. They snapped up properties after prices fell as much as 35 percent from the 2006 peak…
American Homes 4 Rent and Colony American Homes, the second- and third-largest single-family landlords, also have been scaling back as bargains dry up…
“We’re going to have to probably slow down a little bit on our acquisition pace until we have a better view or actual certainty of the capital being available,” (Chief Executive Officer David ) Singelyn said.
Colony Financial Inc. (CLNY), a REIT that invests in Colony American Homes, slowed its funding for acquisitions last year to focus on improving operations, CEO Richard Saltzman said in a November conference call…
American Residential Properties Inc. (ARPI), a landlord with 6,000 homes, slowed acquisitions by almost half in its latest quarter ending Dec. 31. It invested $104 million in 633 homes compared with $204 million on 1,251 homes in the previous quarter, the Scottsdale, Arizona-based company said in a statement.” (Blackstone’s Home Buying Binge Ends as Prices Surge, Bloomberg)
Okay, so the speculators are getting out of housing. How’s that going to effect the market?
No one really knows yet, but it can’t be good, after all, all-cash deals amounted to nearly 50 percent of all homes sales in many of the hotter markets last year. That’s why prices went up even though the economy was still in the shitter, because the fatcats were loading up on cheap real estate. Now it looks like they’re headed for the hills. That’s NOT going to be good for sales.
Did you know that existing home sales have dropped for six months straight, dipping below trend to the same level they were at in 1998?
But how can that be, you ask, when everyone’s blabbing about the recovery? How can that be when the Fed has purchased more than $1.4 trillion in mortgage-backed securities (MBS) and rates are a measly 4.5%? How can that be prices have been climbing higher for more than a year?
Sales are dropping because millions of people are underwater on their mortgages and can’t afford to move. Millions more are stuck in their homes and aren’t paying anything at all. Millions more have student debt up to their eyeballs and will probably never own a home. And millions more still can’t find a job. That’s why home sales are plunging, because the economy stinks. It’s that simple. Sure, the market got a nice little bump from Bernanke’s $4 trillion liquidity-surge. Big whoop. Besides, that was 2012-2013. Today things are different. Today the Fed is winding down QE and there’s even talk of rate-hike. How do you think that’s going to impact sales?
Now get a load of this from Redfin:
“Home sales continued to be sluggish in February, and decreasing affordability is holding back would-be buyers, according to Redfin…. Slow sales have been largely attributed to low inventory for months, but many markets have now seen inventory rise while sales continue to fall. Several markets along the West Coast have seen sharp increases in inventory, yet home sales in the West fell 13.4 percent year over year, hitting their lowest point in five years in the first two months of 2014, while prices rose 19.1 percent year over year…
West Coast Sales Hit Lowest Point in Five Years
– In Redfin’s West Coast markets, sales fell 13.4% from February 2013, and hit a five-year low in the first two months of 2014. Sales fell most dramatically in Las Vegas (-22.7%), Sacramento (-21.8%) and Ventura (-20.8%). Across 19 markets, sales fell 10.3%, with markets east of the Rockies taking a less dramatic hit and a few even seeing modest increases.” (Redfin)
Did you catch that part about “inventory rising while sales continue to fall”?
For months, the media has been using the “low inventory” excuse for the rotten sales figures. Now they’ve moved onto “bad weather” to pull the wool over people’s eyes. Talk about a lame excuse. It’s been in the 70 and 80s in California for most of the winter and sales are down by a whopping 13 percent. Are potential buyers staying at home because they’re afraid of getting skin cancer? Is that it? (That’ll probably be the next excuse.)
So why ARE home sales tanking?
It’s because you can’t buy a house if you’re working graveyard at Freddie’s Burger Bar for $8.50 an hour. It’s because you can’t put together a 20% down-payment if you’re camped out on Mom’s sofa in the attic along with Uncle Murray’s trombone and your Dad’s photo collection of soup cans. It’s because you can’t qualify for a mortgage when 100 percent of your weekly paycheck goes to paying the VISA, filling the gas-tank, and buying a few groceries at Danny’s Discount Foodmart. It can’t be done.
That’s what’s really going on. That’s why the share of firsttime homebuyers is currently at its lowest level ever. That’s why purchase applications are at an 18-year low. That’s why the homeownership rate has slipped to levels not seen since 1995. And that’s why mortgage originations were down almost 60 percent year-over-year. It’s because the economy sucks. Everyone knows it.
Now take a look at one last chart. It’s by Logan Mohtashami at dshort.com. from an article titled,Mortgage Purchase Applications Running Out Of Time.
As you can see, there’s a pretty close connection between incomes (the green line) and the mortgage purchase applications index. (The people who can afford to buy homes.)
Of course not, because most people assume there’s a relationship between ‘what a person earns’ and his ‘ability to buy a home’. After all, we haven’t always lived in this bizarro credit-addled world where anyone who can sit upright in a chair and sign his name on the dotted line can buy a $450,000 rambler in Orchard Hills. That’s a fairly new development.
And that brings us to the point of this article, which is to show that all the monetary hocus pocus has achieved nothing. The Fed’s Koolaid infusions have been a dead-loss. The market is still flat on its back. Kaput. Which shows, that if you want to fix housing, you have to fix the economy. And if you want to fix the economy; you have to put people back to work and pay them a fair wage. It’s that simple.
So why can’t anyone in Washington figure it out?
(Note: As this article was going to press, the latest “existing home sales” data was released.) According to USA Today:
“Existing home sales slowed again in February, falling to the lowest pace in 19 months.”
So February was even slower than the coldest month of the year, January?
The tradeoff for cheap goods and financial cronyism is coming back in a big way…
There is always a tradeoff in economics. The adage about a free lunch comes to mind to the rise of low wage capitalism in America. It is a complicated web driven by financial cronyism and a system largely driven by ignoring the plight of the working class. The story of US manufacturing is probably one tiny example of how we exported our middle class in exchange for cheaper goods and a massive amount of income inequality at the top. Yet there is a winner here as well. While the US middle class is shrinking the middle classes of China and India are growing and so is ourincome inequality. This trend tends to grow the economies overseas bus has placed a large burden on the unskilled and working class in the US. This is possibly an inevitably given the global nature of our markets. When you get addicted to low cost goods, you may find yourself in a race to low wage capitalism. In the US and Europe people would not take on the jobs that pay near wage-slave levels and have terrible working conditions in countries that are now booming. While the top wage earners in the US are doing fantastic protected by Wall Street and Washington D.C. (many are diversified across the world), those who get paid in US dollars and come from the working and middle class are having a tough time adapting. The tradeoff has been coming home to roost in a big way.
A low wage bias
While the recession ended in the summer of 2009, the jobs that have been added since then have largely tended to favor low wage employment. Hard to export cashiers and food service workers (although the industry is getting closer to automating those jobs as well). Nothing happens at once. The gradual erosion of the working and middle class goes back a generation. So it is no surprise that this recovery has largely been one of low wage employment. This is why young American workers are in such a tough position with student debt, wages, and being able to purchase a home.
The low wage hiring bias is evident:
A large amount of hiring has come in the form of lower paying and temporary work. You might say this is simply the modern way of things. Yet the massive financial bailouts during the crisis have protected the financiers of Wall Street to the point that they are fully recovered. The crisis occurred largely because they systematically gambled America away by creating instruments of debt to implode the economy. Some hedge funds actually made wealth by betting America’s economy would fail and encouraged the pushing of additional bad mortgage debt to increase their gains when things went bust.
The problem of course is that we have a system where austerity is the new game in town for working and middle class Americans while the financially connected get to fail and put the bill on those who least can afford it. Take a look at the drop in manufacturing jobs and the growth of our financial sector:
In 1960 you had roughly 8 manufacturing jobs for each one in finance. Today this is less than 2 manufacturing jobs per each job in finance. In the real economy, we still purchase goods that have to be made (i.e., cars, real estate, etc). Yet we have a giant industry that for the most part, is rent seeking. Is high frequency trading making things better? What about the crazy unrestricted derivatives market? With real estate most of the recent sales are going to investors. In other words, the shifting of current real assets in the world into the hands of fewer people.
Even in the once stable construction field, we see weak job growth in spite of a booming real estate market.
Why? Because most of the trading is going to investors looking for deals, not new families pushing for new demand on new homes. New home sales are still weak. Of course that should be expected when the typical American worker is making something like $27,000 a year and the median household income is $50,000 a year. Adjusting for inflation, this is now back to levels last seen in the 1980s:
The tradeoff has been tough but people like cheap goods. It is easy to offshore this development and have workers on the other side of the world work for menial wages so people can buy cheap goods. Yet at a certain point, the market hits an equilibrium and the pain comes back home. Once this happens it can be very quickly as we are seeing now with the middle class being hollowed out. At least we’ve done a good job exporting our middle class outside of the US.
Source: My Budget 360
“I’ve gotten some of my best light from bridges I’ve burned.”– Don Henley
What does it take, in an era dominated by progressive identity politics, to be accepted as a fully qualified member of the Left?
Jane is a London lawyer who identifies politically ‘as a woman,’ and marches enthusiastically for human rights. Can she join? I think the answer is yes, she can.
George is a medical doctor who happens also to be a black man and identifies as ‘Black middle class.’ Can he subscribe to a progressive email group and contribute to the discussion? I hope and suspect that he can.
And what about Julie? She runs an estate agency on the posh side of town but she also identifies as a ‘gay lesbian,’ can she join the parade? What a question! Of course she can.
Now Abe is an accountant and very attached to his Jewish heritage. Abe identifies as a ‘secular Jew,’ can he join the anti-war movement? More than likely he can, in fact he may even, within hours of his joining, find himself in a position of leadership.
But what about Hammed, a metal worker from Birmingham? Hammed identifies as a ‘Muslim’ — can he join a Left demonstration against the War in Syria? It’s a good question and the answer is not immediately obvious at all because it’s no secret that many of those who subscribe to ‘progressive’ ideology and indeed, activism, are rather troubled by religion in general and Islam in particular.
So, while Hammed is identifying with a universal and humanist precept, Jane, ‘the woman’, Julie ‘the Gay Lesbian’ and George ‘the Black’ openly subscribe to biologically-determined political identities. Furthermore, Abe, Identifying as a secular Jew, affiliates himself with a blood-based ethnocentric tribal identity. Clearly, the Left has no problem with such marginal and exclusivist political identities.
So, how is it possible that the contemporary Left discourse is sustained by people who, themselves subscribe to biologically-determined identity politics, yet so often reject similar, though often working class folk, who actually support equality and human rights issues? Could it be that the Left has in fact, drifted away from working class politics into some vague and inconsistent pseudo-empathic discourse primarily engaged in sectarian battles?
And there’s more.
Uri is an Israeli peace activist and writer who also identifies as an Israeli Leftist. Is Uri welcome within the progressive network? The answer is unreservedly, yes. But John Smith, an English bus driver from Liverpool is proud to be English and ‘as an Englishman’ he opposes the war because John actually believes that peace is patriotic. Can he join an anti-war protest and, while he’s at it, carry a Union Jack to demonstrations? I leave the answer to you.
Tony is a ‘Jewish Socialist’ – certainly not religious but an ethnic Jew who identifies ‘as a Jew’ racially and ethnically. And by the way, Tony also operates politically within Jews-only anti-Zionist groups. Now Tony is hugely welcome at most Left and progressive gathering. But can the same be said for Franz who identifies as an ‘Aryan socialist’? Again, I leave the answer to you.
The point is that yet again we detect a critical discrepancy in Left or progressive thinking. While Jewish ethnocentrism and even Jewish racial exclusivity is accepted, other forms of ethnocentrism are bluntly rejected. Is this a contradiction? You judge.
And, while we’re at it, what about Laura? She’s a Muslim convert who often hides her face behind the veil. Does she feel comfortable in ‘progressive’ gatherings? Not really. But Laura certainly supports human rights and equality almost as much as she loves Allah. But the Left’s and progressives’ tolerance towards Allah worshippers is particularly limited while, on the other hand, worshippers of the Talmud who are willing to oppose Israel are, not only tolerated, they are positively welcomed. Torah Jews, for instance, are often invited to progressive gatherings though, it must be said, they also encounter some resentment, especially from Jewish activists (This surely is because progressive Jews don’t like to be associated with people in caftans).
So it seems that membership of a progressive club is no straightforward matter because here we are here dealing with a discourse that is far from being open or inclusive. On the contrary, it is a pretty selective operation and far from being principled, coherent or universal. No longer is it committed to ‘members’ of the ‘working class’ - unless they first demonstrate adherence to a predetermined tablet of ‘correct politics’.
So what are these ‘correct politics’? Where are they defined and by whom?
In order to address this question we have to first delve into the peculiar ‘progressive’ threshold that leaves the Muslim and the nationalist out yet happily embraces other biologically-determined political, and even racial categories. Strangely enough, the mix that forms the Left alliance is suspiciously similar to the mix that sustains Liberal Zionist political power.
Is this a coincidence? Is it really that surprising that the Left, traditionally defined as a universal humanist discourse, is now supported politically and financially by a mixture of political identities that also lend their support to Israel and its rabidly nationalist, capitalist and ethnocentric ideology? No, it’s not, so I guess that the growing similarity between the Left and Liberal Zionism alliance demands some explanation. I’ve managed to come with three possible answers.
1. The Spin – The similarity between the Liberal Zionist alliance and the Left compound is a complete coincidence and reveals nothing about either Zionism or Left ideology.
2. The Observant – The Left and Liberal Zionism are basically two faces of the same coin.
3. The Forensic – By following the money trail, we see that most Left groups and liberal Zionism (a la J-Street and practically the entire progressive network) are funded by the same organizations, leading amongst them being George Soros’ Open Society Institute.
If the last is true (and I think it is) it may as well mean that a large part of the ‘dissident’ network is sustained by….wait for it… a Wall Street hedge fund. In other words we are dealing here with an institutional and well-funded controlled opposition apparatus. This may explain, what so often seems on the part of the Left and Progressive discourse generally, like complete dysfunction and utter impotence – whether in labour matters, domestic politics, foreign affairs, global wars and, of course, Palestine.
If the Left sees any reason to rescue itself — and this is indeed a big ‘if’ – it would first have to redeem itself from its greed and attachment to ‘big money.’ It may have to redefine for itself exactly what labour and ‘working class politics’ means for the workless.
Of course, it may just be that the Left has ended its political and ideological role, that basically, it belongs to the past. In other words, our capacity to think universally and ethically is now completely liberated from dialectical materialism or class division.
In the end, I doubt whether anyone within the progressive network possesses the intellectual capacity and ideological stamina to endure such a serious discussion.
I guess we’d just better move on.
“Repo has a flaw: It is vulnerable to panic, that is, ‘depositors’ may ‘withdraw’ their money at any time, forcing the system into massive deleveraging. We saw this over and over again with demand deposits in all of U.S. history prior to deposit insurance. This problem has not been addressed by the Dodd-Frank legislation. So, it could happen again.” – Gary B. Gorton, Professor of Management and Finance, Yale School of Management (lifted from Repowatch)
Subprime mortgages did not cause the financial crisis, nor did the housing bubble or Lehman Brothers. The financial crisis originated in a corner of the shadow banking system called the repo market. That’s where the bank run occurred that froze the secondary market, sent prices on mortgage-backed assets plunging, and pushed the financial system into a death spiral. In the Great Crash of 2008, repo was ground zero, the epicenter of the global catastrophe. As analyst David Weidner noted in the Wall Street Journal, “The repo market wasn’t just a part of the meltdown. It was the meltdown.”
Regrettably, the Federal Reserve’s nontraditional monetary policies (ZIRP and QE) have succeeded in restoring the repo market to it’s precrisis level of activity, but without implementing any of the changes that would have made the system safer. Repo is as vulnerable and crisis-prone today as it was when the French bank PNB Paribas stopped redemptions in its off-balance sheet operations in 2007 kicking off the tumultuous bank run that would eventually implode the entire system and push the economy into the deepest slump since the Great Depression. By failing to rein in repo, the Fed has ensured that financial crises will be a regular feature in the future occurring every 15 or 20 years as was the case before banks were more strictly regulated and government backstops were put in place. Repo returns us to Wild West “anything goes” banking.
Why would the Fed be so reckless and pave the way for another disaster? We’ll get to that in a minute, but first, let’s give a brief explanation of repo and how the system works.
Repo is short for repurchase agreement. The repo market is where primary dealers sell securities with an agreement for the seller to buy back the securities at a later date. This sounds more complicated than it is. What’s really going on is the seller (primary dealers) are getting short-term loans from money market funds, securities firms, banks etc in order to maintain a position in securities in which they’re suppose to make markets. So, repo is like a loan that’s secured with collateral. (ie–the securities) It is a “funding mechanism”.
What touched off the Crash of 2008, was the discovery that the collateral that was being used for repo funding was “toxic”, that is, the securities were not Triple A after all, but subprime mortgage-backed gunk that would only fetch pennies on the dollar. So, when PNB Paribas stopped redemptions in its off-balance sheet operations on August 9, 2007, the rout began. Cash-heavy investors (like money markets) turned off the lending spigot, which reduced trillions of dollars of MBS to junk-status, precipitated massive fire sales of distressed assets that were dumped on the market pushing prices further and further down wiping out trillions in equity and reducing the financial system to a smoldering pile of rubble. That’s why the Fed stepped in, backstopped the system with explicit guarantees for both regulated and unregulated financial institutions and set about to reflate financial asset prices to their precrisis highs.
Newly appointed Fed chairman Janet Yellen summarized what happened in the panic in a speech she gave earlier this year. She said:
“The trigger for the acute phase of the financial crisis was the rapid unwinding of large amounts of short-term wholesale funding that had been made available to highly leveraged and/or maturity-transforming financial firms.”
In other words, the crisis began in repo. Unfortunately, Wall Street has fended off all attempts to fix the system, because repo is a particularly lucrative area of activity. And we are talking serious money here, too. Tri-party repo alone–which is a small subset of the larger repo market–represents “about $1.6 trillion in outstanding repos daily.” That means that the prospect of a big dealer dumping his portfolio of securities on the market at a moment’s notice igniting another panic, is never far away.
Why do banks borrow in the unregulated, shadow system instead of conducting their business in the light of day where regulators can check the quality of the underlying collateral, oversee the various transactions on public trading platforms, and make sure that capital requirements are maintained?
It’s because the banks want to deploy all their capital, leverage up to their eyeballs and play fast-and-loose with the rules. Here’s what the New York Fed has to say on the topic:
“One clear motivation for intermediation outside of the traditional banking system is for private actors to evade regulation and taxes. The academic literature documents that motivation explains part of the growth and collapse of shadow banking over the past decade…
Regulation typically forces private actors to do something which they would otherwise not do: pay taxes to the official sector, disclose additional information to investors, or hold more capital against financial exposures. Financial activity which has been re-structured to avoid taxes, disclosure, and/or capital requirements, is referred to as arbitrage activity.” (“Shadow Bank Monitoring“, Federal Reserve Bank of New York Staff Reports, September, 2013)
In other words, the banks are conducting their operations in the shadows because it’s cheaper. That’s what this is all about. Here’s more from the same report:
“While the fundamental reason for commercial bank runs is the sequential servicing constraint, for shadow banks the effective constraint is the presence of fire sale externalities. In a run, shadow banking entities have to sell assets at a discount, which depresses market pricing. This provides incentives to withdraw funding—before other shadow banking depositors arrive.”
Okay, so when there’s a run on the local bank, the bank may have to offload some of its illiquid assets (real estate, commercial property, etc) to meet the increased demand of depositors who want their money, but they can also rely on government backing. (deposit insurance). But with shadow banking–like repo– it’s a bit different; the problem is fire sales. For example, when repo lenders–like the big money markets–demanded more collateral from the banks in exchange for short-term funding; the banks were forced to dump more of their assets en masse pushing prices lower, eroding their equity and leaving many of the banks deep in the red. This is how the panic wiped out Wall Street and cleared the way for the $700 TARP bailout. It all started in repo.
The point is, had the system been adequately regulated with the appropriate safeguards in place, there would have been no fire sales, no panic, and no crisis. Regulators would have made sure that the underlying collateral was legit, that is, they would have made sure that the subprime borrowers were creditworthy and able to repay their loans. They would have made sure that repo borrowers (the banks) had sufficient capital to meet redemptions if problems arose. And regulators would have limited excessive leveraging of the securitized assets.
Regulation works. It provides safety, stability, and security as opposed to panic, bankruptcy and severe recession which is the scenario that Wall Street’s profiteers seem to prefer. Now check this out from the NY Fed:
“While leveraged lending collapsed in 2008 from a peak of $680 billion in 2007, it has rebounded very quickly, and is now at record levels of volume, projected to be larger than $1 trillion in 2013…” (NY Fed)
How’s that for progress, eh? So, Bernanke’s reflation efforts have effectively restored the same shabby, poorly designed system to its former glory putting all of us at risk again. Here’s more:
“One area of concern, however, is the significant increase in the fraction of covenant lite loans, which have increased dramatically from 0 percent in 2010 to 60 percent in 2013. This deterioration in loan underwriting has come hand-in-hand with an increased presence of retail investors in the leveraged loan market, through both CLOs and prime funds, as relatively sophisticated investors, like banks and hedge funds, are exiting the asset class.” (New York Fed)
Great. So now we are seeing the same problems that emerged in 2004 and 2005 with subprime mortgages, that is, there’s so much liquidity in the system–thanks to the Fed’s zero rates and QE– that investors are dabbling in all-types of risky garbage that you wouldn’t normally touch with a 10 foot dungpole. Check this out from Testosterone Pit:
“Shadow banking loans are estimated to have reached $15 trillion in the US. And among them is a particularly hot category: lending to highly leveraged companies with junk credit ratings. … the NY Fed found that these loans are increasingly issued in a loosey-goosey manner, with low underwriting standards. And issuance has soared…
Layered into these crappy and risky loans are the crappiest and riskiest of all loans, namely “covenant-lite” loans. Their covenants are so watered down and so full of holes that investors have few if any protections in case of default. If the Fed ever allows reality to set, and these companies stumble under their load of debt or can’t refinance it at ridiculously low rates, investors can kiss their money goodbye.” …
these desperate small investors…have unknowingly made a quantum leap in risk – allowing the smart money, which hears the hot air hissing from the credit bubble, to bail out. This must be one of the proudest moments in Chairman Bernanke’s glorious tenure.” (“Fed: Hedge Funds, Banks Sell Crappiest Debt To Small Investors (Before Credit Bubble Blows Up) ” Testosterone Pit)
Nice, eh? So the big boys are planning to vamoose before the whole house of cards comes tumbling down. Meanwhile, Mom and Pop are about to get reamed for the umpteenth time when the Fed “tapers” and these covenant lite IEDs blow up in their face taking another sizable chunk out of their retirement savings. Way to go, Bernanke. Here’s more from the NY Fed report:
“Shadow credit transformation increased from only 5 percent of total credit transformation in 1945 to a peak amount of 60 percent in 2008 before declining to 55 percent in 2011.”
So now the shadow players are generating more than half of all the nation’s credit via their dodgy, unregulated operations. Why? So a handful of ravenous banks can make bigger profits.
According to the Financial Stability Board (FSB) “credit intermediation that takes place in an environment where prudential regulatory standards and supervisory oversight are either not applied or are applied to a materially lesser or different degree than is the case for regular banks engaged in similar activities.” (FSB, 2011).
Read that over again. What they’re saying is that it’s a completely ridiculous, insane system. We’ve given the banks this outrageous privilege of creating private money out of thin air, (credit) and they spit in our face. They won’t even follow a few simple rules that would make the process safer for everyone. Keep in mind, that Dodd Frank does nothing to remedy the problems in repo.
One last thing (from the NY Fed):
“Intermediaries create liquidity in the shadow banking system by levering up the collateral value of their assets. However, the liquidity creation comes at the cost of financial fragility as fluctuations in uncertainty cause a flight to quality from shadow liabilities to safe assets. The collapse of shadow banking liquidity has real effects via the pricing of credit and generates prolonged slumps after adverse shocks.”
Repeat: “liquidity creation comes at the cost of financial fragility as fluctuations in uncertainty cause a flight to quality from shadow liabilities to safe assets.”
Can you believe it? The Fed doesn’t even try to deny what’s going on. They admit that letting the banks ratchet up their leverage increases “financial fragility ” which could precipitate another crash. (“flight to quality from shadow liabilities to safe assets.”) In other words, the Fed KNOWS the system is nuts, just like they know that it’s only a matter of time before the whole bloody thing blows up again and the economy goes off the cliff. Still, they’re not going to lift a finger to change the system.
You know why.
Because a few fatcats at the top like the way things are now, that’s why.
If that doesn’t make your blood boil, I don’t know what will.
The Federal Reserve presently lends money at a lower rate than anytime in history. In fact, the rate at which the Fed lends money is more than a full percentage point below the current rate of inflation. That means the Fed is subsidizing borrowing. Naturally, zero rates create price distortions which are greatly amplified by the Fed’s asset purchase program called Quantitative Easing. During its three rounds of QE, the Fed has ballooned its balance sheet by more than $2.8 trillion inflating the prices of financial assets across-the-board while establishing itself as the world’s biggest buyer of US Treasuries, the benchmark asset class upon which every financial asset in the world is priced. Those prices are now grossly distorted due to the Fed’s presence in the market. (Note: Fed chairman Ben Bernanke set the Federal funds rate in the range of zero to 0.25% in December, 2008 and has kept it there ever since. The policy is called zero-interest-rate-policy or ZIRP.)
When rates are cut to zero, it means that the demand for credit is weak. If the economy was growing at a faster clip, then the demand for funds would increase and the Fed would raise rates so they were closer to their normal range. But the Crash of ’08 triggered deflationary pressures (particularly massive deleveraging by homeowners who saw their home equity go up in smoke during the downturn) unlike anything experienced since the Great Depression. For the Fed to adequately address the sharp drop in demand, it would have had to set its target Fed funds rate at minus 6 percent which is impossible since the Fed cannot set rates below zero. (This is called ZLB or zero lower bound problem.) Thus, the Fed has implemented other strategies which are supposed to achieve the same thing.
Bernanke’s asset purchase program, QE, is an attempt to push rates below zero by reducing the supply of risk-free assets. By loading up on US Treasuries (USTs) and agency mortgage-backed securities (MBS), the Fed tries to lure investors into stocks and bonds hoping to push prices higher. Higher prices create the so called “wealth effect” which paves the way for more consumption and investment. Hence, soaring stock prices create a virtuous circle which boosts demand and jump-starts the flagging economy. That’s the theory, at least. In practice, it doesn’t work so well. Five years after the policies were first implemented, the economy is still sluggish and underperforming (GDP is below 2 percent for the last 12 months), the output gap is still roughly $1 trillion per year, and unemployment is still sky-high. (Unemployment would be 14 percent if the people who have dropped off the unemployment rolls and who are no longer actively looking for work were counted.) For all practical purposes, ZIRP and QE have been a bust .
The traditional antidote for a “liquidity trap” (that is, when normal monetary policy doesn’t work because rates are already at zero) is fiscal stimulus. In other words, when monetary policy can’t gain traction because consumers and businesses refuse to borrow, then the government must use its balance sheet to keep the economy growing. That means widening the budget deficits and spending like crazy to increase demand until consumers and businesses are in a position to resume their spending. Bernanke’s monetary policy is the polar opposite of this time-tested remedy. The Fed’s policy provides zero-cost reserves to poorly run zombie banks who refuse to pass on the savings to their customers via credit cards or mortgage rates. If the Fed was serious about expanding credit and strengthening growth, it would require the banks to cut their credit card rates and mortgage rates so that consumers benefit equally from the Fed’s cheap money. (In other words, if the Feds funds rate dropped from 6% to 0% then credit card rates should be slashed from 18% to 12%. That would stimulate more consumer spending.) But the Fed has made no demands on the banks. Instead, all of the gains from the wider spreads have gone to the banks, which is why ZIRP and QE have had virtually no impact on lending at all.
The main beneficiary of the Fed’s policies has been the investor class. While low rates have helped households reduce their debtload more easily, low interest lending coupled with the ocean of liquidity provided via QE has triggered a long-term stock market rally that has increased equities funds inflows to new records, boosted margin debt to precrisis levels, quadrupled stock buybacks from their 2008 lows, buoyed covenant-lite loan sales to $188.7 billion (“far surpassing the record of 2007″), and sent all three major indices to new highs. Unable to find profitable outlets for investment in the real economy, investors have taken their lead from hedge fund manager Ben Bernanke, snatching up stocks and bonds in a ravenous, yield-crazed flurry of speculation. Indeed, they have done quite well too, raking in sizable profits even while the real economy is still flat on its back. The bottom line: All the gains from ZIRP and QE have gone to Wall Street with precious little trickling down to the workerbees.
After 5 years of monetary policy that has failed to produce a strong, sustainable recovery, reasonable people have begun to wonder if Bernanke’s real objectives are different than those in his official pronouncements. After all, the Dow Jones and S & P 500 have more than doubled in the last 4 years, corporate earnings just hit an all-time high of $2.1 trillion, the banks announced record profits of $42 billion in Q2, and–according to a new study by Emmanuel Saez, an economics professor at UC Berkeley— the top 10% of earners in the US captured 50.4% of total income in 2012, a level higher than any other year since 1917.” (LA Times) Meanwhile, 47 million people are scraping by on food stamps, labor’s share of productivity gains have never been smaller, median household income has plummeted by 7.3 percent since the end of the recession, (Sentier Research), and 46.5 million Americans now live in poverty. (US Census Bureau). Inequality– which is already at levels not seen since the Gilded Age–continues to widen at an accelerating pace while the battered and rudderless economy drifts from one crisis to another.
To pretend that the objectives of ZIRP and QE are different than the results they’ve produced (ie–greater concentration of wealth and political power, and the crushing of the middle class) is laughable given the fact that they’ve been in place for more than 5 years without any significant change. This suggests that the Fed’s policies are doing what they were designed to do, shift more wealth upwards to the uber-rich while political leaders dismantle vital safteynet programs which protect ordinary working people from the ravages of unregulated capitalism. The Central Bank and the political establishment in Washington are working hand-in-hand to restructure the economy along the same lines as they would any third world banana republic. And that’s the real goal of the current policy.
Fed chairman Ben Bernanke shocked the world on Wednesday when he announced there would be no change in the Fed’s $85 billion-per-month asset purchase program dubbed QE. The announcement sparked a buying frenzy on Wall Street where all three major indices shot to record highs. The Dow Jones Industrial Average (DJIA) climbed 146 points to 15,676 while the S & P 500 logged another 38 points to 1,725 on the day. Bonds and gold also rallied big on the news with the yield on the benchmark 10-year US Treasury dipping sharply to 2.69 percent (from 2.85 percent the day before) while gold rose more than 4.1 percent to $1,364. The US dollar was hammered savagely on the news, dropping to a seven-month low against a basket of major currencies. According to Reuters, the buck “saw its biggest one-day slide in more than two months” and “has fallen to levels not seen since well before Fed Chief Ben Bernanke first floated the idea of reducing the stimulus in May.”
Bernanke attempted to justify his reversal (some are calling it a “head fake”) on continuing weakness in the economy, particularly high unemployment and tightening in the financial markets. He also implied he was worried about the possibility of a government shutdown and the impact that would have on the anemic recovery.
While Bernanke presented a rational defense for his pet program, he was not convincing. The truth is, the Princeton professor is out on a limb and doesn’t know how to get down. That’s why he didn’t trim his bond buying by even a measly $5 billion per month, because he’s afraid the announcement would trigger a selloff that would unravel his $2.8 trillion reflation effort. So he decided to stand pat and do nothing.
But standing pat is not a long-term option, eventually the Fed will have to end the program and wind down its balance sheet. Investors know this, which is why Thursday’s giddiness quickly morphed into somber reflection and head scratching on Friday. Everyone wants to know “what’s next”, especially since QE’s impact is diminishing, financial markets are getting frothy, and improvements in the economy are marginal at best. Can the Fed really inflate its balance sheet by another 1 or $2 trillion hoping that the economy picks up in the meantime, or will Bernanke simply call it quits and let the chips fall where they may? Who really knows? This is the problem with unconventional policies; it’s impossible to predict the downside risks because they’re, well, unconventional, and haven’t been thoroughly tested before.
In the case of QE, we can see now that Bernanke forged ahead without developing a coherent exit strategy. That’s a big no-no; you never want to paint yourself into a corner especially when trillions of dollars and the stability of the financial system are at stake. But that’s where Bernanke finds himself today four years after embarking on a policy path that has boosted corporate profits to all-time highs, widened income inequality to levels not seen since the Gilded Age, and pushed Dow Jones Industrial Average up by 146% since its March 2009 low.
And that’s what made QE such an irresistible policy, because the upside rewards were so great. QE created a vehicle for transferring incalculable wealth to the investor class while concealing its real purpose behind public relations blather about lowering unemployment and strengthening the recovery.
As we have pointed out before in this column, QE has no effect on unemployment. The swapping of Treasuries for bank reserves does not create a transmission mechanism for increasing demand that leads to additional hiring. As Lee Adler of the Wall Street Examiner says:
“Job growth has not accelerated as a response to the flood of money printing…The growth rates were actually stronger before the Fed started pumping money into the economy in November when it settled its first MBS purchases in QE3…Money printing works to inflate asset prices, but it does nothing to stimulate job growth…
House prices and stock prices have inflated, thanks to too many dollars chasing too few assets. But job growth has been slow–steady, but slow, growing at slightly above the rate of population growth…..” (“Here’s How BLS Data Proves QE Has Had Zero Effect As Jobs Growth Plods Along”, Wall Street Examiner)
QE does not lower long-term interest rates either, in fact, long-term rates have edged higher during QE1, QE2 and now QE3. (Presently, rates are a full percentage point above what they were when the program was first announced on 13 September 2012) Similarly, rates should fall again when Bernanke finally settles on an exit strategy and stock holders pile back into Treasuries acknowledging the feeble state of the economy. Long-term yields will fall because the demand for funds remains weak. When the demand for money is weak, the price of money decreases which means that rates fall. It’s another sign that we are in a Depression. Now check this out from Reuters:
“Since the bottom of the recession just over four years ago, commercial bank loans and leases have grown 4.0 percent, one of the weakest post-recession recoveries in terms of borrowing since the 1960s, according to Paul Kasriel, the former chief economist of Northern Trust Company. For comparison, over the same period after the July 1990-March 1991 recession, loans and leases grew over four times faster…..” (“Time to taper? Not if you look at bank loans”, Reuters)
Once again, credit expansion is weak, because the economy is still on the ropes.
Consumers and households aren’t borrowing because they are still deleveraging from the big bust of ’08 that wiped out their home equity and a good part of their retirement savings. They’re not borrowing because their wages have stagnated and their income is falling. Also, they’re not borrowing because they’ve lost confidence in the institutions which they used to think were governed by regulations and the rule of law. They know now that that’s not how things work, so they have become more cautious in their spending.
QE doesn’t even increase inflation which is why the Fed is still unable to hit its target rate of 2 percent. The fact that inflation has stayed so low (The Consumer Price Index was up just 0.1% in August) while stock prices have more than doubled at the same time, proves that Bernanke’s nearly $3 trillion in liquidity has not “trickled down” to the real economy at all. The injections have merely boosted profits on inflated asset prices for financial parasites and speculators.
Even hedge fund managers like Duquesne Capital’s Stanley Druckenmiller are now willing to admit that QE is a farce. Here’s what Druckenmiller said in an interview with CNBC following Bernanke’s announcement on Wednesday:
“This is fantastic for every rich person. This is the biggest redistribution of wealth from the middle class and the poor to the rich ever.”
Indeed, while the dwindling middle class faces deeper budget cuts and tattered safety net programs, the rich have never had it so good. And much of the credit goes to Ben Bernanke and his bond buying program, QE.
As economist Anthony Randazzo of the Reason Foundation wrote last year QE “is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality.” (“Druckenmiller: Fed robbing poor to pay rich”, CNBC)
Morality is a highly misunderstood component of human nature. Some people believe they can create moral guidelines from thin air based on their personal biases and prejudices. Some people believe that morality comes from the force of bureaucracy and government law. Still, others believe that there is no such thing; that morality is a facade created by men in order to better grease the wheels of society.
All of these world views discount the powerful scientific and psychological evidence surrounding Natural Law — the laws that human beings form internally due to inherent conscience regardless of environmental circumstances. When a person finally grasps inborn morality, the whole of the world comes into focus. The reality is that we are not born “good” or “evil.” Rather, we are all born with the capacity for good AND evil, and this internal battle stays with us until the end of our days.
Every waking moment we are given a choice, a test of our free will, to be ruled by desire and fear, or to do what we know at our very core is right. When a man silences his inner voice, the results can be terrible for him and those around him. When an entire culture silences its inner voice, the results can be catastrophic. Such a shift in the moral compass of a society rarely takes place in a vacuum. There is always a false shepherd, a corrupt leadership that seeks to rule. Rulership, though, is difficult in the face of an awake population that respects integrity and honor. Therefore criminals must follow these specific steps in order to take power:
Pretend To Be Righteous: They must first sell the public on the idea that they hold the exact same values of natural law as everyone else. The public must at first believe that the criminal leaders are pure in their motives and have the best interests of the nation at heart, even if they secretly do not.
Pretend To Be Patriotic: Despots often proclaim an untarnished love of their homeland and the values that it was founded upon. However, what they really seek is to become a living symbol of the homeland. They insist first that they are the embodiment of the national legacy, and then they attempt to change that national legacy entirely. A corrupt government uses the ideals of a society to acquire a foothold, and when they have gained sufficient control, they dictate to that society a new set of ideals that are totally contrary to the original.
Offer To “Fix” The Economy: Tyrants do not like it when the citizens under them are self sufficient or economically independent. They will use whatever methods are at their disposal including subversive legislation, fiat currency creation, corporate monopoly and even engineered financial collapse in order to remove the public’s ability to function autonomously. They will begin this process under the guise that the current less-controlled and less-centralized system is “not safe enough,” and that they have a better way to ensure prosperity.
Offer To Lend A Hand: Once the population has been removed from its own survival imperative and is for the most part helpless, the criminal leadership moves in and offers to “help” using taxation and money creation, slowly siphoning the wealth from the middle class and raising prices through inflation. Eventually, everyone will be “equal”; equally poor that is. In the end, the whole nation will see the rulership as indispensable, for without them, the economy would no longer exist and tragedy would ensue.
Create External Fear: Once in place, the criminal leadership then conjures an enemy for the people, or multiple enemies for the people. The goal here is to create a catalyst for mass fear. When the majority of people are afraid of an external threat, they will embrace the establishment as a vital safeguard. When a society becomes convinced that it cannot take care of itself economically, little coaxing is required to convince them that they are also not competent enough to take care of their own defense. The government not only becomes caregiver and nanny, but also bodyguard. At this point, the establishment has free reign to dissolve long cherished liberties while the masses are distracted by a mysterious threat hiding somewhere over the horizon.
Create Internal Fear: They move the threat from over the horizon, right to the public’s front door, or even within their own home. The enemy is no longer a foreigner. Now, the enemy is the average looking guy two houses over, or an outspoken friend, or even a dissenting family member. The enemy is all around them, according to the establishment. The public is sold on the idea that the sacrifice needed in order to combat such a pervasive “threat” is necessarily high.
Sell The People On The Virtues Of Moral Relativism: Now that the populace is willing to forgo certain liberties for the sake of security, they have been softened up enough for reprogramming to begin. The establishment will tell the people that the principles they used to hold so dear are actually weaknesses that make them vulnerable to the enemy. In order to defeat an enemy so monstrous, they claim, we must become monstrous ourselves. We must be willing to do ANYTHING, no matter how vile or contrary to natural law, in order to win.
Honesty must be replaced with deceit. Dissent must be replaced with silence. Peace must be replaced with violence. The independent should be treated with suspicion. The outspoken treated with contempt. Women and children are no longer people to be protected, but targets to be eliminated. The innocent dead become collateral damage. The innocent living become informants to be tortured and exploited. Good men are labeled cowards because they refuse to “do what needs to be done,” while evil men are labeled heroes for having the “strength of will” to abandon their conscience.
Thus, the criminal leadership makes once honorable citizens accomplices in the crime. The more disgusting the crime, the more apt the people will be to defend it and the system in general, simply because they have been inducted into the dark ceremony of moral ambiguity.
The actions of the state become the actions of all society. A single minded collectivist culture is born, one in which every person is a small piece of the greater machine. And, that which the machine is guilty of, every man is guilty of. Therefore, it becomes the ultimate and absurd purpose of each person within the system to DENY the crime, deny the guilt, and make certain that the machine continues to function for generations to come.
Though we have already passed though most of the above stages, Americans are still not yet quite indoctrinated into the realm of moral relativism. This, though, is swiftly changing.
The Current Sales Pitch
Just take a look at the attitude of the Obama Administration and the mainstream media towards Edward Snowden and his recent asylum approved by Russia.
The White House, rather than admitting wrongdoing in its support for the NSA’s mass surveillance of American citizens without warrant, or even attempting to deny the existence of the PRISM program, is now instead trying to promote NSA spying as essential to our well being while wagging a finger of shame at Snowden and the Russian government for damaging their domestic spy network. Obama has lamented on Russia’s stance, stating that their thinking is “backwards.”
Did I miss something here? I’m no fan of the Russian oligarchy, but shouldn’t Obama and most of the NSA (let alone every other Federal alphabet agency) be sitting in a dark hole somewhere awaiting trial for violating the Constitution on almost every level? Yet, we are instead supposed to despise Snowden for exposing the crime they committed and distrust any country that happens to give him shelter?
Due to public outcry, Obama has attempted to pacify critics by announcing plans to make NSA mass surveillance “more transparent”. First, I would like to point out that he did NOT offer to end NSA spying on Americans without warrant, which is what a President with any ounce of integrity would have done. Second, Obama’s calls for more transparency have come at the exact same time as the NSA announces its plans to remove 90 percent of its systems administrators to make sure another “Snowden incident” does not occur.
Finally, when the public called for an investigation into the NSA and the Director of National Intelligence in the handling of the Snowden affair and the PRISM program, the White House appointed none other than James Clapper, the Director of National Intelligence, as part of the team that would “investigate” any wrongdoing. The Obama Administration insists that Clapper, a documented liar who told Congress that the NSA was not involved in mass domestic spying, was not going to “head” the panel of investigators, even though a White House memo specifically named Clapper as the man who would form the so-called “independent group”. The White House still admits that Clapper will be involved in the process.
So, just to reiterate, the people who perpetrated the criminal act of warrant-less surveillance on hundreds of millions of Americans, and who were caught red-handed lying about it, are now appointed to investigate their own crime.
Does this sound like a government that plans on becoming “more transparent”?
Ask yourself, would Obama have called for ANY transparency over the NSA whatsoever if Snowden had never come forward? Of course not! The exposure of the crime has led to lies and empty placation, nothing more.
In the meantime, numerous other political miscreants have hit the media trail, campaigning for the NSA as well as other surveillance methods, bellowing to the rafters over the absolute necessity of domestic spy programs. Fifteen years ago, the government would have tried to sweep all of this under the rug. Today, they want to acclimate us to the inevitability of the crime, stating that we had better get used to it.
Their position? That Snowden’s whistleblowing put America at risk. My questions is, how? How did Snowden’s exposure of an unConstitutional and at bottom illegal surveillance program used against hundreds of millions of innocent Americans do our country harm? Is it the position of the White House that the truth is dangerous, and deceit is safety?
I suspect this is the case considering the recent treatment of military whistleblower Bradley Manning, who has been accused by some to have “aided Al Qaeda’s recruiting efforts” through his actions. How did Manning do this? By releasing information, including battlefield videos, that were hidden from the public containing proof of U.S. war crimes in Iraq and Afghanistan.
Perhaps I’m just a traditionalist and not hip to modern diplomatic strategy, but I would think that if you don’t want to be blamed for war crimes, then you probably shouldn’t commit war crimes. And, if you don’t want the enemy to gain new recruits, you should probably avoid killing innocent civilians and pissing off their families (there is also ample evidence suggesting that the CIA has done FAR more deliberate recruiting for Al Qaeda than Bradley Manning could have ever accomplished on accident). Just a thought.
So, to keep track – U.S. government funds and trains Al Qaeda, but is the good guy. U.S. government commits war crimes, but is the good guy. U.S. government hides the truth from the American people, but is the good guy. Bradley Manning exposes war crimes, and is the bad guy. Moral relativism at its finest. Moving on…
The shift towards moral bankruptcy is being implemented in the financial world as well. Investors, hedge funds, and major banks now surge into the stock market every time the private Federal Reserve hints that it may continue fiat stimulus. When bad news hits the mainstream feeds, people playing the Dow casino actually cheer with glee exactly because bad economic news means more QE from the Fed. They know that the Fed is artificially propping up the markets. The Fed openly admits that it does this. And, they know that our fiscal system is hanging by a thin thread. And you know what, very few of them care.
The Fed created the collapse with easy money and manipulated interest rates, and now, some people cheer them as the heroes of the U.S. financial structure.
The American narrative is quickly changing. There has long been criminality and degeneracy within our government (Democrat and Republican) and the corporate cartels surrounding it, but I believe what we are witnessing today is the final step in the metamorphosis that is totalitarianism. The last stage accelerates when the average citizen is not just complicit in the deeds of devils, but when he becomes a devil himself. When Americans froth and stomp in excitement for the carnival of death, and treat the truth as poison, then the transformation will be complete.
Source: Brandon Smith | Alt-Market
Wall Street is cooking up another crisis—making shoddy loans and selling worthless securities to investors hungry for higher yields than CDs and government bonds offer.
Dodd-Frank banking reforms imposed very costly regulations on mortgage and commercial lending. Regional banks, which have solid knowledge of smaller businesses, could not bear these costs and sold out to large Wall Street institutions. Now a handful of money center banks control more than half the deposits and lendable money.
Although big banks have branches everywhere and are flush with funds, they don’t know much about which businesses are likely to repay what they borrow.
Banks aren’t carrying many mortgages on their books—they are merely conduits for Fannie Mae—but business loans have recovered to pre-financial crisis levels. And the bank examiners at the Office of the Comptroller of the Currency, the FDIC, and Federal Reserve are alarmed about their lending standards.
Too often loans are made to businesses with inadequate cash flow—paper profits are important to stock investors but banks focus on cash flow to evaluate whether an enterprise can pay up each month. Also, many loans carry weak covenants and collateral.
Banks are lending at today’s low interest rates with alarmingly long maturities. That is troublesome because banks’ cost of funds go up and down as the Federal Reserve tightens and loosens monetary policy.
Many economists expect GDP growth to pick up the latter half of this year and next, and for the Federal Reserve to start pushing up interest rates. Then banks will lose money—lots of it—on 5- and 10-year loans made today. If the economy doesn’t pick up—economists have been known to be wrong—then loans made on questionable cash flow and weak collateral will fail.
Either way, banks are at the casino again!
But alas banks are shunting off a lot of their risky bets onto witless investors—thanks to the new boom in derivatives trading. Remember those nifty bonus generating contraptions that made 28-year-old MBAs millionaires and wrecked AIG and Citigroup.
Manhattan financiers are once again bundling questionable corporate bonds and bank loans into investment securities—Collateralized Debt Obligations—for sale to wealthy individuals and retirees through hedge funds and unethical brokers.
When the losses on shaky bonds and loans come, big banks, bless their generosity, will spread the headaches around. Wrecked personal finances and broken dreams will follow, and consumer spending will slow, taking the economic recovery into the drink.
Not to be out done by their predecessors, today’s modern bankers are also writing lots of “synthetic securities.” Those generate returns to investors, not from the cash flow on loan repayments, but rather from bets made by third parties about whether loans will succeed or fail. Those have as much place in sound banking as nepotism does in government employment.
As in pre-crisis days, the total value of derivatives outstanding is many multiples of the actual value of the U.S. economy. When the loans and derivatives fail, many who have made promises to pay up won’t have the cash—just like 2008.
Look for bank balance sheets to be rocked, lots of wealthy folks to file for bankruptcy, and the economy to suffer another migraine.
Depressing? They don’t call economics the dismal science for nothing.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist.
Source: Epoch Times
Soon the Foreclosure Floodgates Will Open and Prices Will Plunge…
Anyone who buys a house in today’s market should be aware of the risks. They should know that current prices are not supported by fundamentals, but by unprecedented manipulation by the Fed, the Obama administration, Wall Street Private Equity investors, and the nation’s biggest banks. If any of these main-players withdraws or even reduces their support for the market (in other words, if the banks release more of their distressed inventory, if rates rise, if PE firms buy fewer homes, or if the Congress curtails current mortgage modification programs), housing prices will fall. Given the increasing volatility in global stock and bond markets in recent weeks–which is likely to intensify as the Fed implements its exit strategy from QE– interest rates will continue to fluctuate putting downward pressure on housing sales and prices. The impact the Fed’s policy will have on markets and the economy is unknown. The Central Bank is in uncharted water. That makes it a particularly bad time to buy a home. Caveat emptor.
When we say that fundamentals are weak, it means that the factors that typically drive the market are not strong enough to boost sales or push up prices. In a normal market, “first-time homebuyers” and “move up” buyers would represent the vast majority of sales. In today’s market, these two “demand cohorts” are actually quite weak, which is to say that current prices are not sustainable. Consider this: According to Lender Processing Services (LPS) Mortgage Monitor for April, there are “4,699,000, or 9.76% of home loans delinquent or in foreclosure as of April 30th”…” (“Mortgage Delinquencies Down….But a Record 843 Days to Foreclose“, Naked Capitalism)
So, nearly 5 million homes are either seriously delinquent or in some stage of foreclosure. This unseen backlog of distressed homes makes up the so called “shadow inventory” which is still big enough to send prices plunging if even a small portion was released onto the market. In other words, supply vastly exceeds demand in real terms. Now check this out from Zillow:
“13 million homeowners with a mortgage remain underwater. Moreover, the effective negative equity rate nationally —where the loan-to-value ratio is more than 80%, making it difficult for a homeowner to afford the down payment on another home — is 43.6% of homeowners with a mortgage.” (Zillow)
This might sound a bit confusing, but it’s crucial to understanding what’s really going on. While many people know that 13 million homeowners are underwater on their mortgages, they probably don’t know that nearly half (43.6%) of the potential “move up” buyers (who represent the bulk of organic sales) don’t have enough equity in their homes to buy another house. Think about that. Like we said, housing sales depend almost entirely on two groups of buyers; firsttime homebuyers and move up buyers. Unfortunately, the number of potential move up buyers has been effectively cut in half. It’s simply impossible for prices to keep rising with so many move up buyers on the ropes.
So, if “repeat” buyers cannot support current prices, then what about the other “demand cohort”, that is, firsttime home buyers?
It looks like demand is weak there, too. According to housing analyst Mark Hanson: “First-timer home volume hit a fresh 4-year lows last month and distressed sales 6-year lows”.
So, no help there either. Firsttime homebuyers are vanishing due to a number of factors, the biggest of which is the $1 trillion in student loans which is preventing debt-hobbled young people from filling the ranks of the firsttime homebuyers. Given the onerous nature of these loans, which cannot be discharged through bankruptcy, many of these people will never own a home which, of course, means that demand will continue to weaken, sales will drop and prices will fall.
The banks have countered this weakness in demand by withholding distressed inventory. According to Realty Trac, foreclosures are down 33 percent in May year-over-year. There’s no reason for this reduction in foreclosures because there are nearly 5 million homes that are either seriously delinquent or in some stage of foreclosure. The banks are simply manipulating distressed supply to push up prices and avoid losses. To better understand what the banks are up to, check out this article on Marketwatch666:
“As of April, the average seriously delinquent homeowner has not paid on their mortgage for 503 days, and that the typical home in foreclosure has been delinquent for 843 days; in general, those who are seriously delinquent (more than 90 days past due) are not being foreclosed on, and those who are in the foreclosure process are not having their homes seized. Since this metric seems to be increasing an average of ten days a month, and new foreclosure starts are being added each month which should be bringing the average days down, we can only conclude that the foreclosure process is damn near frozen.” (“Mortgage Delinquencies Down….But a Record 843 Days to Foreclose“, Naked Capitalism)
“843 days”! That’s a new record, which means that the banks are actually dragging the process out longer today then ever before. This has had profound effect on prices which have soared by more than 10 percent in the last 12 months creating the illusion of a sustainable recovery. Keep in mind, that the banks have little choice in the matter. They are still sitting on more-than one trillion dollars worth of non performing loans leftover from the recession. If they simply dumped their backlog of distressed homes onto the market all at once, the deluge would push prices below their 2009-lows leaving bank balance sheets in tatters. That’s the scenario they want to avoid at all costs. Now get a load of this article in last week’s Reuters:
“Well over a million U.S. homeowners are months behind on payments on government-backed mortgages, raising the risk federal housing agencies will end up facing the cost of managing a fresh flood of foreclosed homes, two government watchdogs said on Thursday.
Some 1.7 million borrowers have missed several payments on mortgages backed by the U.S. government, the inspectors general of the Federal Housing Finance Agency and Department of Housing and Urban Development said in a joint report.
These loan delinquencies represent a “shadow inventory” of homes that could hit the market if foreclosed on, which would need be managed by government-run Fannie Mae (FNMA.OB) or Freddie Mac (FMCC.OB), or some other federal housing agency.” (“Shadow’ homes could burden U.S. housing agencies”, Reuters)
Actually, the numbers are much larger that Reuters indicates, but it’s good to see someone in the MSM finally acknowledging the magnitude of the problem.
It would be interesting to know how many of these 1.7 million non-performing loans were shunted off to Fannie and Freddie in 2009 and 2010 by cagey banksters who knew that they were essentially worthless. We’ll probably never know for sure. The fact is, the vast majority of toxic mortgages weren’t created by the GSE’s but by crooked bankers who pooled the dreck into private label securities and sold them to gullible investors around the world. Now, much of that securitized sewage is festering on the Fed’s bloated balance sheet. The Fed has replaced the shadow banking system as the place where bad loans go to die. Here’s more from Reuters:
“Once seized, these so-called real estate owned properties, or REOs, present significant financial challenges to these government agencies, the report said.
“Not only are current REO inventory levels elevated … they may rise over the next several years depending on the number of shadow inventory properties that are ultimately foreclosed on,” the report stated….
The report said the shadow inventory, which is made up of loans that have been delinquent for at least 90 days, is more than seven times the inventory of REOs that Fannie Mae, Freddie Mac and HUD currently own.” (Reuters)
So, the number of seriously delinquent mortgages IS MORE THAN SEVEN TIMES the inventory of REOs that Fannie Mae, Freddie Mac and HUD currently own?!? What the hell kind of shell-game are these guys playing? Do you get the impression, dear reader, that the government is pulling the wool over your eyes? 7X is a bit more than a rounding error, I’d say.
Okay, so the government has been fudging the numbers to make things look better than they really are. (What a surprise) But why would the GSE’s try to hide what’s going on, after all, Fannie and Freddie have implicit government guarantees, so they don’t really have to worry about falling prices. And, as far as the red ink, well, Uncle Sugar will take care of that, right?
Not exactly. It looks to me like Fannie and Freddie are tailoring their policies to meet the needs of the banks. As Reuters reluctantly admits, “Even a fraction of the shadow inventory falling into foreclosure could considerably swell … inventories of REO properties.”
It’s simple, really; more foreclosures mean lower prices. Lower prices, in turn, mean heavier losses for the banks. That’s why Fannie and Freddie are playing hide-n-seek; it’s another giveaway to the banks.
Reuters again: “Fannie Mae and Freddie Mac owned about 158,000 REO properties at the end of September 2012, while HUD had about 37,000.” (Reuters)
Huh? The author has already admitted that the real number is at least 7 times that amount (“Well over a million.”), so why the sudden reversal? Is he trying to downplay the bad news to slip it past his editor?
Many of the experts still anticipate between 3 to 6 million foreclosures in the next few years, so it is doubtful that the current strategy will work. Eventually, the floodgates will open, distressed supply will be released, and prices will drop.
And distressed inventory is just one of many headwinds facing the housing industry today. There’s also this: “Rising Prices Lead to Fewer Investor Purchases, Longer Holding Times“, DS News:
“Close to half—48 percent—of the investors surveyed in May said they will purchase fewer properties in the next 12 months than they did in the past year.” (DS News)
And this from CNN Money:
“Say goodbye to ultra-low mortgage rates.
In the past month, rates have been on the rise and they are expected to continue to climb. This week, the average rate on a 30-year fixed-rate mortgage jumped another 10 percentage points to 4.07% and are up from 3.3% in early May, according to mortgage giant Freddie Mac.
“It’s unlikely that rates will ever be that low again,” said Doug Duncan, Fannie Mae’s chief economist. “Those who didn’t take advantage of record-low rates have missed the boat — at least for now.” (“Why 3% Mortgage Rates Are a Thing of the Past”, CNN Money)
Application Volume Stumbles, Sales to Suffer, OC Housing News
“Mortgage application data for May lends credence to analysts’ predictions of a slowdown in the year’s second half, Capital Economics says in its latest US Housing Data Response. According to Capital Economics’ data—compiled from statistics offered by the Mortgage Bankers Association (MBA)—total mortgage application volume fell 2.0 percent from April to May, the first monthly drop since February and the biggest decline since January.” (“Application Volume Stumbles, Sales to Suffer“, OC Housing News)
And, finally, this from BusinessWeek:
“Hedge fund manager Bruce Rose was among the first investors to coax institutional money into the mom and pop business of single-family home rentals, raising $450 million last year from Oaktree Capital Group LLC.
Now, with house prices climbing at the fastest pace in seven years and investors swamping the rental market, Rose says it no longer makes sense to be a buyer.
“We just don’t see the returns there that are adequate to incentivize us to continue to invest….There’s a lot of — bluntly — stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.” (“Carrington Stops Buying U.S. Rentals as Blackstone Adding“, BusinessWeek)
I could go on, but why bother? You get the point. The fact is, is that this is a uniquely bad time to buy a house. There’s too much uncertainty about rates, inventory, demand and investors. The risks far outweigh the rewards. Anxious buyers should hold-their-horses and wait for the market to normalize instead of chaining themselves to sinking asset that will cost them a bundle. Remember, patience is a virtue. It can also save you a lot of dough.
Edward Joseph Snowden follows a noble tradition. Others before him established it. Daniel Ellsberg called his NSA leak the most important in US history. More on him below.
Expressions of patriotism can reflect good or ill. Samuel Johnson said it’s the last refuge of a scoundrel. Thomas Paine called dissent its highest form. So did Howard Zinn.
According to Machiavelli:
“When the safety of one’s country wholly depends on the decision to be taken, no attention should be paid either to justice or injustice, to kindness or cruelty, or to its being praiseworthy or ignominious.”
“In our day the feeling of patriotism is an unnatural, irrational, and harmful feeling, and a cause of a great part of the ills from which mankind is suffering; and consequently, this feeling should not be cultivated, as is now being done, but should, on the contrary, be suppressed and eradicated by all means available to rational men.”
Philosophy Professor Stephen Nathanson believes patriotism involves:
special affection for one’s own country;
a sense of personal identification with the country;
special concern for the well-being of the country; and
willingness to sacrifice to promote the country’s good.
Socrates once said:
“Patriotism does not require one to agree with everything that his country does, and would actually promote analytical questioning in a quest to make the country the best it possibly can be.”
The best involves strict adherence to the highest legal, ethical and moral standards. Upholding universal civil and human rights is fundamental. So is government of, by and for everyone equitably. Openness, accountability and candor can’t be compromised.
When governments ill-serve, exposing wrongdoing is vital. It takes courage to do so. It involves sacrificing for the greater good. It includes risking personal harm and welfare. It means doing what’s right because it matters. It reflects patriotism’s highest form.
Daniel Ellsberg, Bradley Manning and Julian Assange are best known. So is Mordechai Vanunu. More on him below. Few remember Peter Buxtun. He’s a former US Public Health Service employee.
He exposed the Tuskegee syphilis experiment. About 200 Black men were infected. It was done to watch their progression. They were left to die untreated. Whistleblowing stopped further harm.
A. Ernest Fitzgerald held senior government positions. In 1368, he exposed a $2.3 billion Lockheed C-5 cost overrun. At issue was fraud and grand theft. Nixon told aides to “get rid of that son of a bitch.”
Defense Secretary Melvin Laird fired him. Fitzgerald was a driving force for whistleblower protections. He fought for decades against fraud, waste and abuse. He helped get the 1378 Civil Reform Act and 1389 Whistleblower Protection Act enacted.
Gregory Minor, Richard Hubbard and Dale Bridenbaugh are called the GE three. They revealed nuclear safety concerns. So did Arnold Gundersen, David Lochbaum and others. At issue then and now is public safety over profits.
Mordechai Vanunu was an Israeli nuclear technician. He exposed Israel’s secret nuclear weapons program. He paid dearly for doing so.
He was charged with espionage and treason. In 1386/87, he was secretly tried and sentenced. He was imprisoned for 18 years. He was confined in brutalizing isolation. He’s been harassed and deprived of most rights since.
Daniel Ellsberg called him “the preeminent hero of the nuclear era.” In July 2007, Amnesty International (AI) named him “a prisoner of conscience.” He received multiple Nobel Peace Prize nominations.
Vanunu said “I am neither a traitor nor a spy. I only wanted the world to know what was happening.” People have every right to know.
Mark Whitacre was an Archer Daniels Midland senior executive. He exposed price-fixing, wire and tax fraud, as well as money laundering.
He had his own cross to bear. He was prosecuted and imprisoned. He lost his whistleblower immunity. After eight and a half years, he was released on good behavior.
Jeffrey Wigand was Brown & Williamson’s research and development vice president. He went public on 60 Minutes. He exposed deceptive company practices. He was fired for doing so.
B & W enhanced cigarette nicotine content. It was done without public knowledge. At issue was increasing addiction. Wigand told all. He received death threats for doing so. He now lectures worldwide and consults on tobacco control policies.
Gary Webb was an award-winning American journalist. His investigative work exposed CIA involvement in drugs trafficking. His book “Dark Alliance: The CIA, the Contras, and the Crack Cocaine Explosion” told what he knew.
New York Times, Washington Post, and other media scoundrels assailed him. They did so wrongfully and viciously. Then and now they support CIA crimes. They abhor truth and full disclosure. They ruined Webb’s career. They did so maliciously.
In December 2004, Webb was found dead at home. He died of two gunshot wounds to the head. Reports called it suicide. Critics believe otherwise. Two wounds suggest murder. Doing the right thing involves great risks. Webb paid with his life.
Swiss lawyer Marc Hodler was International Ski Federation president and International Olympic Committee member.
In 1398, he exposed 2002 Salt Lake City winter games bid-rigging. Olympism profiteering, exploitation and corruption is longstanding.
Deceptive hyperbole promotes good will, open competition, and fair play. Olympism’s dark side reflects marginalizing poor and other disenfranchised groups, exploiting athletes and communities, as well as sticking taxpayers with the bill for profit.
Harry Markopolos exposed Bernie Madoff’s hedge fund operations. He called them fraudulent. He obtained information firsthand. He got them from fund-of-fund Madoff investors and heads of Wall Street equity derivative trading desks.
He accused Madoff of operating “the world’s largest Ponzi scheme.” Large perhaps but not the largest.
Wall Street firms make money the old fashioned way. They steal it. They do so through fraud, grand theft, market manipulation and front-running. They scam investors unaccountably. They bribe corrupt political officials. In return, they turn a blind eye.
Compared to major Wall Street crooks, Madoff was small-time. Others mattering most control America’s money. They manipulate it fraudulently for profit.
Coleen Rowley’s a former FBI agent. She documented pre-9/11 Agency failures. She addressed them to Director Robert Mueller. She explained in Senate Judiciary Committee testimony. She now writes and lectures on ethical decision-making, civil liberty concerns, and effective investigative practices.
Joseph Wilson’s a former US ambassador. He exposed Bush administration lies. He headlined a New York Times op-ed “What I Didn’t Find in Africa.”
“Did the Bush administration manipulate intelligence about Saddam Hussein’s weapons programs to justify an invasion of Iraq,” he asked?
“Based on my experience with the administration in the months leading up to the war, I have little choice but to conclude that some of the intelligence related to Iraq’s nuclear weapons program was twisted to exaggerate the Iraqi threat.”
Bush administration officials accused Wilson of twisting the truth. So did Washington Post, Wall Street Journal, and other scoundrel media editors. They front for power. Wilson explained what people have a right to know. He was unjustifiably pilloried for doing so.
Wendell Potter was a senior CIGNA insurance company executive. He explained how heathcare insurers scam policyholders. They shift costs to consumers, offer inadequate or unaffordable access, and force Americans to pay higher deductibles for less coverage.
Sibel Edmonds is a former FBI translator. She founded the National Security Whistleblowers Coalition (NSWBC). She did so to aid “national security whistleblowers through a variety of methods.”
The ACLU called her “the most gagged person in the history of the United States.” She knows firsthand the consequences of secret, unaccountable government operations.
Her memoir is titled “Classified Woman: the Sibel Edmonds Story.”
Previous articles discussed Mark Klein. He’s a former AT&T employee turned whistleblower. He revealed blueprints and photographs of NSA’s secret room inside the company’s San Francisco facility. It permits spying on AT&T customers.
Karen Kwiatkowski’s a retired US Air Force lieutenant colonel. She exposed Defense Department misinformation and lies. She discussed how doing so drove America to war.
Ann Wright’s a former US Army colonel/State Department official. In 1397, she won an agency award for heroism.
She’s more anti-war/human rights activist/person of conscience than whistleblower. In 2003, she resigned from government service. She did so in protest against war on Iraq.
Edward Joseph Snowden continues a noble tradition. On June 8, London’s Guardian headlined ”Edward Snowden, NSA whistleblower: ‘I do not expect to see home again.’ ”
He leaked information to The Guardian and Washington Post. He exposed unconstitutional NSA spying. He served as an undercover intelligence employee.
Asked why he turned whistleblower, he said:
“The NSA has built an infrastructure that allows it to intercept almost everything. With this capability, the vast majority of human communications are automatically ingested without targeting.”
“If I wanted to see your emails or your wife’s phone, all I have to do is use intercepts. I can get your emails, passwords, phone records, credit cards.”
“I don’t want to live in a society that does these sort of things.”
“I do not want to live in a world where everything I do and say is recorded. That is not something I am willing to support or live under.”
NSA spies globally, he said. Claims about only doing it abroad don’t wash. “We collect more digital communications from America than we do from the Russians,” he said.
Previous articles said NSA works with all major US telecom companies. They do so with nine or more major online ones. They spy on virtually all Americans.
They target everyone they want to globally. NSA capabilities are “horrifying,” said Snowden. “You are not even aware of what is possible.”
“We can plant bugs in machines. Once you go on the network, I can identify (it). You will never be safe whatever protections you put in place.”
Asked what he thought might happen to him, he said “Nothing good.”
He left America. He moved to Hong Kong. He fled for his safety. He knows he can’t hide. If US authorities want him targeted, they’ll act no-holds-barred.
If they want him arrested, they’ll find him. If they want him disappeared, imprisoned and tortured, he’s defenseless to stop them. It they want him dead, they’ll murder him. Rogue states operate that way. America’s by far the worst.
DNI head James Clapper accused Snowden of “violat(ing) a sacred trust for this countryâ¤|.I hope we’re able to track whoever is doing this,” he said.
These type comments expose America’s dark side. So does unconstitutional NSA spying and much more. Washington flagrantly violates fundamental rule of law principles. It does so ruthlessly. At stake is humanity’s survival.
Snowden fears recrimination against his family, friends and partner. He’ll “have to live with that for the rest of (his) life,” he said.
“I am not going to be able to communicate with them. (US authorities) will act aggressively against anyone who has known me. That keeps me up at night.”
Asked what leaked NSA documents reveal, he said:
“That the NSA routinely lies in response to congressional inquiries about the scope of surveillance in America.”
America “hacks everyone everywhere.” he said. “(W)e are in almost every country in the world.”
“Everyone, everywhere now understands how bad things have gotten – and they’re talking about it.”
On June 9, London Guardian editors headlined ”Edward Snowden: more conscientious objector than common thief,” saying:
What’s next is certain. US authorities “will pursue Snowden to the ends of the earth.” America’s “legal and diplomatic machinery is probably unstoppable.”
Congress should eagerly want to hear what Snowden has to say, said Guardian editors. They should “test the truth of what he is saying.”
They know full well. Many or perhaps most congressional members are fully briefed on what goes on. They’re condone it. So do administration and judicial officials.
Obama could stop it with a stroke of his pen. So can congressional lawmakers. Supreme Court justices could uphold the law.
Lawlessness persists. Moral cowardice pervades Washington. America’s dark side threatens everyone. There’s no place to hide.
Stephen Lendman lives in Chicago. He can be reached firstname.lastname@example.org.
His new book is titled “Banker Occupation: Waging Financial War on Humanity.”
Visit his blog site at sjlendman.blogspot.com.
My explanation that the sudden appearance of an unprecedented 400 ton short sale of gold on the COMEX in April was a manipulation designed to protect the dollar from the Federal Reserve’s quantitative easing policy has found acceptance among gold investors and hedge fund managers.
The sale was a naked short. The seller had no gold to sell. COMEX reported having gold only equal to about half of the short sale in its vaults, and not all of that was available for delivery. No one but the Federal Reserve could have placed such an order, and the order came from one of the Fed’s bullion banks, one of the entities “too big to fail.”
Bill Kaye of the Greater Asian Hedge Fund in Hong Kong and Dave Kranzler of Golden Returns Capital have filled in the details of how the manipulation worked. Being sophisticated investors of many years of experience, both Kaye and Kranzler understand that the financial press runs with the authorized story planted to serve the agenda that has been put into play.
Institutional investors who have bullion in their portfolio do not want the expense associated with storing it securely. Instead, they buy into Exchange Traded Funds (ETF) and hold their bullion in the form of a paper claim. The largest, the SPDR Gold Trust or GLD, trades on the New York Stock Exchange. The trustee and custodian is a bankster, and only other banksters are able to turn investments into delivery of physical bullion. Only shares in the amount of 100,000 can be redeemed in gold.
The price of bullion is not set in the physical market where individuals take delivery of bullion purchases. It is set in the paper futures market where short selling can drive down the price even if the demand for physical possession is rising. The paper gold market is also the market in which people speculate and leverage their positions, place stop-loss orders, and are subject to margin calls.
When the enormous naked shorts hit the COMEX, stop-loss orders were triggered adding to the sales, and margin calls forced more sales. Investors who were not in on the manipulation lost a lot of money.
The sales of GLD shares are accumulated by the banksters in 100,000 lots and presented to GLD for redemption in gold acquired at the driven down price.
The short sale is leveraged by the stop-loss triggers and margin calls, and results in a profit for the banksters who placed the short sell order. The banksters then profit again as they sell the released gold into the physical market, especially in Asia, where demand has been stimulated by the sharp drop in bullion price and by the loss of confidence in fiat currency. Asian prices are usually at a higher premium above the spot prices in New York-London.
Some readers have said “don’t bet against the Federal Reserve; the manipulation can go on forever.” But can it? As the ETFs such as GLD are drained of gold, their ability to cover any of their obligations to investors diminishes. In my opinion, these ETFs are like a fractional reserve banking system. The claims on gold exceed the amount of gold in the trusts. When the ETFs are looted of their gold by the banksters, the gold price will explode, as the claims on gold will greatly exceed the supply.
Kranzler reports that the current June futures contracts are 12.5 times the amount of deliverable gold. If more than 8 percent of these trades were to demand delivery, COMEX would default. That such a situation is possible indicates the total failure of federal financial regulation.
What the Federal Reserve has done in order to maintain its short-run policy of protecting the “banks too big too fail” is to make the inevitable reckoning more costly for the US economy.
Another irony is the benefactors of the banksters sale of the gold leeched from the gold ETFs. Asia is the beneficiary, especially India and China. The “get out of gold line” of the US financial press enables China to unload its excess supply of dollars, accumulated from the offshored US economy, into the gold market at a suppressed price of gold.
Kranzler points out that not only does the Fed’s manipulation permit Asia to offload US dollars for gold at low prices, but the obvious lack of confidence in the dollar that the manipulation demonstrates has caused wealthy European families to demand delivery of their gold holdings at bullion banks (the bullion banks are essentially the “banks too big to fail”). Kranzler notes that since January 1, more than 400 tons of gold have been drained from COMEX and gold ETF holdings in order to satisfy world demand for physical possession of bullion.
Again we see that institutions of the US government are acting 100% against the interests of US citizens. Just who does the US government represent?
Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following. His latest book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is now available.
Source: Paul Craig Roberts
What more time-honored practice in the long history of state sponsored servitude than the institutionalization of prisoners? Incarceration for offenses against government laws is a cornerstone for power and survivability of any regime. Prisons may have been hellholes over the centuries, but seldom has the internment of convicted lawbreakers been a growth industry for private profit. It almost makes one wonder exactly who are the crooks. While most hard-pressed citizens want a safe and secure society, few ever give even a passing thought to the insatiable corporatist criminalization of the criminal justice system. Just how many Americans agree with the proposition, if you did the crime, you need to serve the time.
All loyal law and order proponents can take pride in the one area where the imperium of government discipline still ranks first among nations. A Global Research article - The Prison Industry in the United States: Big Business or a New Form of Slavery? – points out some staggering facts.
“There are approximately 2 million inmates in state, federal and private prisons throughout the country. According to California Prison Focus, “no other society in human history has imprisoned so many of its own citizens.” The figures show that the United States has locked up more people than any other country: a half million more than China, which has a population five times greater than the U.S. Statistics reveal that the United States holds 25% of the world’s prison population, but only 5% of the world’s people. From less than 300,000 inmates in 1972, the jail population grew to 2 million by the year 2000. In 1990 it was one million. Ten years ago there were only five private prisons in the country, with a population of 2,000 inmates; now, there are 100, with 62,000 inmates. It is expected that by the coming decade, the number will hit 360,000, according to reports.”
Just imagine the hidden solution to the high unemployment economy is staring in our faces without even a hint of public reaction. The ultimate entrepreneurial partnership allows for corporate security firms to house government dissenters or rebellious non-conformers.
“Private prisons are the biggest business in the prison industry complex. About 18 corporations guard 10,000 prisoners in 27 states. The two largest are Correctional Corporation of America(CCA) and Wackenhut, which together control 75%. Private prisons receive a guaranteed amount of money for each prisoner, independent of what it costs to maintain each one. According to Russell Boraas, a private prison administrator in Virginia, “the secret to low operating costs is having a minimal number of guards for the maximum number of prisoners.” The CCA has an ultra-modern prison in Lawrenceville, Virginia, where five guards on dayshift and two at night watch over 750 prisoners. In these prisons, inmates may get their sentences reduced for “good behavior,” but for any infraction, they get 30 days added – which means more profits for CCA.”
The dramatic increases in prison population are not from violent convicts or rapists and killers. The majority of offense categories are property, drug and especially public-order related. The goal of social rehabilitation is a quaint concept of another era. The pretense of reclamation from a conviction of prosecutorial discretion is a standard that few DA’s or judges ever consider. Sentencing guidelines are based upon retribution and punishment, in order to keep the prisons filled with a growing number of new inmates. The supposition is that if you are charged with a crime, the suspect will plea bargain or the jury will follow the directions of the government and convict.
For 2011, the US Department of Justice reported a 93% conviction rate. Such a record implies a culture of criminalization or a hard road for an innocent suspect to navigate. No wonder, the private company screws are such staunch supporters of the transgression and disorder society.
The video, Private prisons - the most profitable real estate in the US? – provides a distressing analysis of the consequences of incentivizing revenue return motivated companies as the jailer overseers.
From the report Prison Labor and Crime in the U.S. - Industry, Privatization, Inmate Facts and Stats – Prison Industries and Inmate Labor – section:
“Many companies are now directly involved in some form of profiting off of incarceration or the labor of inmates. Since 1980 when there was only one prison industry operating as a privatized entity, there are now thirty eight states and at least five county jails with privatized prison industry productions or factory operations. Together state and federal factories now number over three hundred nationwide with between six hundred thousand and one million inmates working in some form of manufacturing or services. Hundreds of companies using inmate labor for manufacturing, services and other duties are now partnered with these operations. This is done under the federal Prison Industries Enhancement Certification Program (PIECP) under 18 USC 1761(c).
Clearly companies, businesses and corporations have become heavily invested in, and dependent upon incarceration for cheap labor and profit. In 2009 total sales of prisoner made products totaled $2.4 billion. Some research places that figure as high as $5 billion and this is in addition to the “prison industry” figure of $34 billion used previously.”
Another RT video details the Prison labor booms in US as low-cost inmates bring billions. Is society really safer from the dramatic increase in the prison population, or is this method of crowding a growing herd of cheap labor simply a strategy to enrich politically connected companies?
As the rapid implosion of the economy accelerates, the prospect of even greater numbers of government prosecutions will surely increase. How many Jean Valjean’s are there in Les Misérables penal confines baking bread?
Now if you are sympathy challenged and are as hard as the rocks that need to be broken, why is the political class virtually exempt from accountability. Remember the once popular bumper sticker; “I’ll Buckle Up When Ted Bundy Does”. Well, no compassion for a serial killer is certainly understandable and proper.
However, where is the justice when a professional bankster felon like Jon Corzine skates after his crimes in the MF Global theft? The rules for ex Goldman Sacks predators allows for financing publicly traded private jail companies, but are exempt of ever working on the assembly line making license plates. What is next: a hedge fund totally devoted to the management of a privatized infrastructure of FEMA camps.
Michael Snyder writes in The Economic Collapse article, Private Prisons: The More Americans They Put Behind Bars The More Money They Make.
“If you can believe it, three of the largest private prison companies have spent approximately $45,000,000 combined on lobbying and campaign contributions over the past decade.
Just look at what has happened to the U.S. prison population over the past several decades. Prior to 1980, there were virtually no private prisons in the United States. But since that time, we have seen the overall prison population and the private prison population absolutely explode.
For example, between 1990 and 2009 the number of Americans in private prisons grew by about 1600 percent.
Overall, the U.S. prison population more than quadrupled between 1980 and 2007.”
Hard core criminals that violate civic community standards and endanger public safety should pay a price for their transgressions. Conversely, political prisoners that challenge the crony corruption within the governmental hierarchy do not deserve a sentence in a sweatshop.
With the abandonment of a police ethic that was dedicated to keeping the peace for an apparatus of law enforcement for arbitrary and dishonest statutes, which only serve the privileged elites; our society is sentenced to a death penalty. Slavery was eliminated a century ago, right? Thus far, that message has not filtered down to the penal plantation. An inmate deserves the solitude of solitary confinement.
The most effective private prison is the one that interns the personal guilt of wicked deeds. If public officials would act upon the moral judgments of their conscience, the perversion within the laws that they pass, adjudicate or administer, would exempt or reduce the unequal application of legitimate legislation, now deemed as criminal acts.
Human nature being what it is; evil acts are instinctive within malevolent souls. Accepting a corrosive punitive system, that enriches private companies, is a horrible departure that prison is a valid tool that protects society. The most dangerous and violent forfeit their social freedom by their predatory actions. However, the sheer numbers of confined prisoners does not justify a structure that exploits a captured population for forced labor.
Do we really need to criminalize society as the price to coexist in the era of Guantanamo justice? America once strived to maintain a balance among competing factions. Today there are only Statists that absolve government transgressions as acceptable and the dissenters that are now in the sights for retribution and eventual arrest. The criminalization of citizens for capricious infractions is the sign of a doomed society. When the hacks patrol the halls to enforce proper public behavior, the entire country becomes a prison.
Two important events took place this week. One was President Obama’s call for a higher minimum wage, which got a lot of attention. The other was a new report which showed just how much of our nation’s wealth continues to be hijacked by the wealthiest among us.
That didn’t get much attention.
There’s a Great Robbery underway, although most of its perpetrators don’t see themselves as robbers. Instead they’re sustained by delusions that protect them from facing the consequences of their own actions.
Heads I Win …
An updated report from economist Emmanuel Saez details the loss of income suffered by 99 percent of Americans, and the parallel gains made by the wealthiest among us. Its most startling finding may be this: The top 1 percent has captured 121 percent of the increases in income since the worst of the financial crisis, while the rest of the country has continued to fall behind.
If you thought the rich recovered from the crisis just fine but everybody else got the short end of the stick, relax: You’re not crazy. And since the financial crisis was caused by members of the 1 percent – not all of them, of course, just the ones we spent so much to rescue – it’s understandable if the injustice still rankles you.
You rescued them. Now they’re drinking your milkshake.
Tails You Lose
But this wealth shift is not a new phenomenon. As Saez notes in his paper, “After decades of stability … the top decile share has increased dramatically over the last twenty-five years.” In fact, the top 10 percent’s share of our national income is higher than it’s been since 1917 - and maybe longer. (The figures don’t go back any farther than that.)
Although it began during the Reagan years, to a certain extent this wealth shift has been a bipartisan phenomenon. During the Clinton boom years (more of a bubble, actually; Dean Baker has the details) the top 1 percent saw their real income grow by 98.7 percent, while the other 99 saw a smaller increase of 20.3 percent. They lost more during the recession that followed – a little over 30 percent, as opposed to 6.5 percent for everyone else – but more than made up the difference again during the Bush years.
The same thing happened during the Great Recession: The top 1 percent lost more during the initial shock, but they’re rapidly making up the difference now. Government policy’s been designed to help them. (Meanwhile, underwater homeowners still don’t have the help they need.)
The disparities are even greater when you include capital gains. (Saez uses pre-tax income for his figures. Given the generous tax breaks for capital gains and the many loopholes used by the wealthy,the after-tax differences could be even greater.) There’s even economic injustice at the top. Gains for the one percent have far outstripped those of the top five and top ten percent.
As the old song says: Them that has, gets.
If you can remember the sixties you weren’t there … or can’t afford to remember
The minimum wage has been falling since 1968. As John Schmitt notes in his paper, “The Minimum Wage Is Too Damn Low,” “By all of the most commonly used benchmarks – inflation, average wages, and productivity – the minimum wage is now far below its historical level.”
It’s currently $7.25. What would it have been if it had been tied to a commonly-used benchmark? Schmitt ran the numbers:
Consumer Price Index (CPI-I): $10.52
Current CPI methodology (CPI-U-RS): $9.22
As a percentage of average production worker’s earnings: $10.01
And if it had been tied to productivity gains the minimum wage would be $21.72 today. But that cream was skimmed off at the top.
There’s a myth in this country that enormous wealth doesn’t come from anywhere or anyone, that it’s self-creating and self-sustaining, thriving on pure oxygen like an epiphyte or a garden fairy. In reality, highly concentrated wealth is caused by actions – human actions with human consequences.
Saez: “A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II – such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality.”
Wealth inequity is created whenever an employer lowers his employees’ wages, replaces a full-time worker with several part-timers, busts a union, cuts corners on workplace safety, or pays a lobbyist to change the rules.
It’s created whenever a job is shipped overseas, and when investments are shifted from job-producing industries to the non-productive financial sector. It’s created when GE outsources its manufacturing operation and gets into the banking (read, “gambling with taxpayers’ money”) business. Or when AIG stops insuring risk and starts betting on it.
And the process isn’t slowing down. In fact, it seems to be accelerating.
As Saez says, “We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional and tax reforms should be developed to counter it.”
President Obama’s proposal is modest, and there’s no reason not to enact it immediately. For those who believe that businesses “can’t afford” to pay higher wages, some key facts:
Most low-wage workers work for large corporations, not Mom-and-Pop businesses.
A Data Brief from the National Employment Law Project finds that 66 percent of low-wage employees work for companies with more than 100 employees. A handful of very large corporations collectively employ nearly 8 million low-wage employees.
There’s no evidence minimum wage increases mean fewer jobs.
Opponents say a higher minimum wage means fewer jobs. But the official U.S. unemployment rate in 1968, when the real minimum wage was highest, was 3.6 percent. Today it’s 7.8 percent – and the unofficial numbers are even worse. At the state level, the Fiscal Policy Institute recently concluded that “states with minimum wages above the federal level have had faster small business and retail job growth.”
Ninety-two percent of the 50 largest low‐wage employers in the country were profitable last year.
As the NELP notes, big corporations more than recovered from the recession: 75 percent are collecting more revenue, 63 percent are earning higher profits, and 73 percent have higher cash holdings than they did before the crisis.
Bringing It All Back Home
The real “job creators” aren’t the ultra-wealthy. If they could create jobs with all their added wealth, they would have done it already. The real job creators are working people with jobs.
They don’t invest their money in hedge funds or stash it in offshore accounts. They spend it: on food, transportation, their kids’ education, maybe a night at the movies … And then other people get jobs making those things possible.
We have a working model to follow: The USA in the 35 years after World War II. As Paul Krugman says, “To the extent that people say the economics is confusing or uncertain, that’s overwhelmingly because people want it to be.” We know how to do this.
Raising the minimum wage is a start. A maximum wage would help, too, by reducing CEOs’ incentives to emphasize quarterly gains over long-term growth and leaving more to be shared with employees.
We also need a national strategy for regaining the more reasonable distribution of income this country had in the 1950s. We need to ensure that the door of opportunity, which is closing every day for millions of young people, is opened again. And we need to ask the wealthiest to really pay their fair share – at something closer to the top tax rates of the 1950’s or 1960’s. (Elvis Presley’s manager “Colonel” Tom Parker once said “I consider it my patriotic duty to keep Elvis in the ninety percent tax bracket.”)
Most of all, we need to educate those around us so they understand what’s happening. That includes the well-intentioned well-to-do, who might do more to end the problem if they knew it existed. After all, you can’t stop a robbery until you know it’s happening.
The frightening prospects from a derivative meltdown, well known for years, seem to deepen with every measure to prop up a failing international financial system. The essay Greed is Good, but Derivatives are Better, characterizes the gamble game in this fashion:
“The elegance of derivatives is that the rules that defy nature are not involved in intangible swaps. The basic value in the payment from the risk is always dumped on the back of the taxpayer. Ponzi schemes are legal when government croupiers spin loaded balls on their fudged roulette tables.”
Under conventional international trading settlement, the world reserve currency is the Dollar. The loss of confidence in the Federal Reserve System causes a corresponding decline in value in U. S Treasury obligations. Add into this risk equation, derivative instruments that are deadly threats that can well destroy national currencies. One such response to this unchecked danger can be found in a Bloomberg Businessweek perceptive article, A Shortage of Bonds to Back Derivatives Bets, makes a stark forecast.
“Starting next year, new rules will force banks, hedge funds, and other traders to back up more of their bets in the $648 trillion derivatives market by posting collateral. While the rules are designed to prevent another financial meltdown, a shortage of Treasury bonds and other top-rated debt to use as collateral may undermine the effort to make the system safer.”
China And Japan Move Away From Dollar, Will Conduct Bilateral Trade Using Own Currencies, is one method to avoid the direct consequences of a derivative meltdown.
“The China Foreign Exchange Trade System, the division of the People’s Bank of China which manages currency trading, said that the country will set a daily trading rate based on a weighted average of prices given by market makers. The People’s Bank said on Tuesday that an initial trading rate would be set at 7.9480 Yuan for every 100 Yen at market in Shanghai. Unlike yuan-dollar trading, which only allows for a daily fluctuation of 1 percent in Yuan trading value, Yuan trading with the Yen will be able to move within a 3 percent range.”
Timing of a Dollar reputation is almost impossible to pinpoint with precise market foreknowledge. Yet the inevitability that The Dollar is Doomed, refers to the insight of “Hans F. Sennholz in his essay - Saving the Dollar from Destruction - we are presented with a bleak financial future. Even under optimum conditions, the alternatives are not pleasant. Now let’s ask the 64,000 dollar question. What will happen when interest rates start to rise?”
The economic havoc, with the rise in interest rates, will greatly disrupt existing worldwide trade agreements and practices. In the article How The U.S. Dollar Will Be Replaced, Brandon Smith addresses the pragmatic measures undertaken by major trade partners to protect their domestic economies from a Dollar freefall.
“To those people who consistently claim that the dollar will never be dropped, my response is, it already has been dropped! China, in tandem with other BRIC nations, has been covertly removing the greenback as the primary trade unit through bilateral deals since 2010. First with Russia, and now with the whole of the ASEAN trading bloc and numerous other markets, including Japan. China in particular has been preparing for this eventuality since 2005, when they introduced the first Yuan denominated bonds. The bonds were considered a strange novelty back then, especially because China had so much surplus savings that it seemed outlandish for them to take on treasury debt. Today, the move makes a whole lot more sense. China and the BRIC nations today openly call for a worldwide shift away from the dollar:”
“Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth.”
The derivatives time bomb lingers over every financial market on the planet. Reforms cannot remove excess and greed, from risk management fiscal contracts. When the largest foreign trading partners look to insulate their transactions from an unstable Dollar currency, the panic has already begun.
It should be self-evident that additional U.S. Treasury bailouts with unlimited Federal Reserve claims against every asset of collateral that can be attached, is obscene in its nature. Hedging is equivalent to reassigning betting risk to unfunded insurance underwriters that would never be able to pay off the claim. Governments are broke by almost any financial standard. Central banksters accumulate titles to real property and assets by hook or crook.
Nation states held hostage to financial manipulation are slaves to the central banks. With the demise of the Dollar, the fake debt obligations of the United States must be repudiated. Foreign states are prepared to sever their links to the Dollar reserve currency, by trading directly in the domestic currencies of other countries. Interacting commerce in Dollars with American companies will continue, but the yoke of Federal Reserve Notes legal tender will be rejected when the derivative meltdown explodes.
Warnings That A Massive Stock Market Crash Is ImminentIn the financial world, the month of October is synonymous with stock market crashes. So will a massive stock market crash happen this year? You never know. The truth is that our financial system is even more vulnerable than it was back in 2008, and financial experts such as Doug Short, Peter Schiff, Robert Wiedemer and Harry Dent are all warning that the next crash is rapidly approaching. We are living in the greatest debt bubble in the history of the world and Wall Street has been transformed into a giant casino that is based on a massive web of debt, risk and leverage. When that web breaks we are going to see a stock market crash that is going to make 2008 look like a Sunday picnic. Yes, the Federal Reserve has tried to prevent any problems from erupting in the financial markets by initiatinganother round of quantitative easing, but 40 billion dollars a month will not be nearly enough to stop the massive collapse that is coming. This will be explained in detail toward the end of the article. Hopefully we will get through October (and the rest of this year) without seeing a stock market collapse, but without a doubt one is coming at some point. Those on the wrong end of the coming crash are going to be absolutely wiped out.
A lot of people focus on the month of October because of the history of stock market crashes in this month. This history was detailed in a recent USA Today article….
When it comes to wealth suddenly disappearing, October can be diabolically frightful. The stock market crash of 1929 that led to the Great Depression occurred in October. So did the 22.6% plunge suffered by the Dow Jones industrial average in 1987 on “Black Monday.”
The scariest 19-day span during the 2008 financial crisis also went down in October, when the Dow plunged 2,675 points after investors fearing a financial collapse went on a panic-driven stock-selling spree that resulted in five of the 10 biggest daily point drops in the iconic Dow’s 123-year history.
So what will we see this year?
Only time will tell.
If a stock market crash does not happen this month or by the end of this year, that does not mean that the experts that are predicting a stock market crash are wrong.
It just means that they were early.
As I have said so many times, there are thousands upon thousands of moving parts in the global financial system. So that makes it nearly impossible to predict the timing of events with perfect precision. Financial conditions are constantly shifting and changing.
But without a doubt another major financial collapse similar to what happened back in 2008 (or even worse) is on the way. Let’s take a look at some of the financial experts that are predicting really bad things for our financial markets in the months ahead….
According to Doug Short, the vice president of research at Advisor Perspectives, the stock market is somewhere between 33% and 51% overvalued at this point. In a recent article he offered the following evidence to support his position….
● The Crestmont Research P/E Ratio (more)
● The cyclical P/E ratio using the trailing 10-year earnings as the divisor (more)
● The Q Ratio, which is the total price of the market divided by its replacement cost (more)
● The relationship of the S&P Composite price to a regression trendline (more)
Peter Schiff, the CEO of Euro Pacific Capital, has been one of the leading voices in the financial community warning people about the crisis that is coming.
During a recent interview with Fox Business, Schiff stated that the massive financial collapse that we witnessed back in 2008 “wasn’t the real crash” and he boldly declared that the “real crash is coming”.
So is Schiff right?
We shall see.
Economist Robert Wiedemer warned people what was coming before the crash of 2008, and now he is warning that what is coming next is going to be even worse….
“The data is clear, 50% unemployment, a 90% stock market drop, and 100% annual inflation . . . starting in 2012.”
Financial author Harry Dent believes that the stock market could fall by as much as 60 percent in the coming months. He is convinced that stocks are hugely overvalued right now….
“We have the greatest debt bubble in history. We will see a worldwide downturn. And when you are in this type of recessionary environment stocks should be trading at five to seven times earnings.”
So are these guys right?
We shall see.
But I do find it interesting that some of the biggest names in the financial world are currently making moves as if they also believe that a massive financial crisis is coming.
For example, as I have written about previously, George Soros has dumped all of his holdings in banking giants JP Morgan, Citigroup and Goldman Sachs.
Infamous billionaire hedge fund manager John Paulson, the man who made somewhere around 20 billion dollarsbetting against the U.S. housing market during the last financial crisis, is making massive bets against the euro right now.
So where are these financial titans putting their money?
According to the Telegraph, both of these men are pouring enormous amounts of money into gold….
There was also news last week in an SEC filing that both George Soros and John Paulson had increased their investment in SPDR Gold Trust, the world’s largest publicly traded physical gold exchange traded fund (ETF).
Mr Soros upped his stake in the ETF to 884,400 shares from 319,550 and Mr Paulson bought 4.53m shares, bringing his stake to 21.3m.
At the current price of about $156 a share, these are new investments of about $88m of Mr Soros’ cash and more than $700m from Mr Paulson’s funds. These are significant positions.
So why would they do this?
Why would they pour millions upon millions of dollars into gold?
Well, it would make perfect sense to put so much money into gold if a massive financial crisis was coming.
So is the next financial crisis imminent?
We will see.
Most “financial analysts” that appear in the mainstream media would laugh at the notion that a stock market crash is imminent.
Most of them would insist that everything is going to be perfectly fine for the foreseeable future.
In fact, most of them are convinced that quantitative easing is going to cause stocks to go even higher.
After all, isn’t quantitative easing supposed to be good for stocks?
Didn’t I write an article just last month that detailed how quantitative easing drives up stock prices?
Yes I did.
So how can I be writing now about the possibility of a stock market crash?
Aren’t I contradicting myself?
Not at all.
Let me explain.
The first two rounds of quantitative easing did indeed drive up stock prices. The same thing will happen under QE3, unless the effects of QE3 are overwhelmed by a major crisis.
For example, if we were to see a total collapse of the derivatives market it would render QE3 totally meaningless.
Estimates of the notional value of the worldwide derivatives market range from 600 trillion dollars all the way up to 1.5 quadrillion dollars. Nobody knows for sure how large the market for derivatives is, but everyone agrees that it is absolutely massive.
When we are talking about amounts that large, the $40 billion being pumped into the financial system each month by the Federal Reserve during QE3 would essentially be the equivalent of spitting into Niagara Falls. It would make no difference at all.
Most Americans do not understand what “derivatives” are, so they kind of tune out when people start talking about them.
But they are very important to understand.
Essentially, derivatives are “side bets”. When you buy a derivative, you are not investing in anything. You are just gambling that something will or will not happen.
I explained this more completely in a previous article entitled “The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System“….
A derivative has no underlying value of its own. A derivative is essentially a side bet. Usually these side bets are highly leveraged.
At this point, making side bets has totally gotten out of control in the financial world. Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it. This system is almost entirely unregulated and it is totally dominated by the big international banks.
Over the past couple of decades, the derivatives market has multiplied in size. Everything is going to be fine as long as the system stays in balance. But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix.
Five very large U.S. banks (including Goldman Sachs, JP Morgan and Bank of America) have combined exposure to derivatives in excess of 250 trillion dollars.
Keep in mind that U.S. GDP for 2011 was only about 15 trillion dollars.
So we are talking about an amount of money that is almost inconceivable.
That is why I cannot talk about derivatives enough. In fact, I apologize to my readers for not writing about them more.
If you want to understand the coming financial collapse, one of the keys is to understand derivatives. Our entire financial system has been transformed into a giant casino, and at some point all of this gambling is going to cause a horrible crash.
Do you remember the billions of dollars that JP Morgan announced that they lost a while back? Well, that was caused by derivatives trades gone bad. In fact, they are still not totally out of those trades and they are going to end up losinga whole lot more money than they originally anticipated.
Sadly, that was just the tip of the iceberg. Much, much worse is coming. When you hear of a major “derivatives crisis” in the news, you better run for cover because it is likely that the entire house of cards is about to start falling.
And don’t get too caught up in the exact timing of predictions.
If a stock market crash does not happen this month, don’t think that the storm has passed.
A major financial crisis is coming. It might not happen this week, this month or even this year, but without a doubt it is approaching.
And when it arrives it is going to be immensely painful and it is going to change all of our lives.
I hope you are ready for that.
Source: The Economic Collapse
Skimming Profits Off Bad Loans…
We think he did, which is why we’re wondering why all the benefits from QE3 appear to be going to the banks. According to Bloomberg News:
“The Federal Reserve’s latest mortgage bond purchases so far are helping profit margins at lenders including Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) more than homebuyers and property owners looking to refinance…
Since the Fed’s Sept. 13 announcement that it would buy $40 billion more securities per month, the rates offered for new 30- year loans have fallen by just 0.11 percentage point, compared with a drop of more than 0.6 percentage point for yields on the bonds into which the loans get packaged.” (“Fed Helps Lenders’ Profit More Than Homebuyers:Mortgages”, Bloomberg)
Well, how do you like that? That means that Mr. Bernanke’s trickle down monetary theories aren’t really working at all. Instead of the savings being passed along to homeowners in the form of lower rates, the banks are juicing profits by taking a bigger share for themselves. Who could have known?
Keep in mind, that Bernanke is not some madcap scientist who doesn’t fully grasp how QE works. That’s not it at all, in fact, he’s considered one of the world’s foremost authorities on the topic and has written extensively on Japan’s deflationary woes and their “broken channels of monetary transmission”, which is shorthand for saying that loading the banks with trillions of dollars in reserves won’t do a blasted thing except pump a little ether into stock prices. (which it has done in the last 2 rounds of easing) So, Bernanke’s been down this road before. He knows what QE will do and what it won’t do, which is why he instructed members from the Bank of Japan (BOJ) to implement fiscal-monetary policies that would have a chance of succeeding. His advice was: “BOJ purchases of government debt could support spending programs, to facilitate industrial restructuring.”
Now there’s an idea. Have the Fed buy the bonds that pay for the programs that put people back to work. Brilliant! Once the new workers get their weekly paycheck, it’s off to the grocery store, the gas station, the mall etc. Spending increases, state revenues soar, and the economy clicks back into high-gear. Simple, right? So, why are we still fiddling with this crackpot QE-circlejerk that does nothing but line the pockets of crooked bankers? That’s the question.
In theory, quantitative easing is supposed to lower interest rates and spur investment. That boosts activity and reduces joblessness. But according to a survey conducted by Duke University, the CFO’s of 887 large companies found that lower interest rates wouldn’t really effect their decisions. Here’s a summary:
According to the Duke University analysts:
“CFOs believe that … monetary action would not be particularly effective. Ninety-one percent of firms say they would not change their investment plans even if interest rates dropped by 1 percent, and 84 percent said they would not change investment plans if interest rates dropped by 2 percent.(“Currency war warnings follow US Fed’s “quantitative easing”, Nick Beams, World Socialist Web Site)
Of course it won’t change their investment plans, because what businessmen care about is demand. Who’s going to buy their bloody widgets, that’s what matters to them, not interest rates. Right now, there’s no demand for more widgets because unemployment is high, wages are flatlining, and policymakers have turned off the fiscal stimulus-spigot in an effort to shrink the economy so they can pursue their lunatic idea of dismantling public services and social programs. (mainly Medicare, Medicaid, and Social Security, the “real targets.”)
The point is, spending has to increase to get the economy off the canvas, and the only party that has money to spend is the government. So, Obama should be spending like crazy. The Central Bank cannot fix this problem with its wacko printing spree.
So, what else are the banks up to besides keeping rates elevated so they can make a bigger killing on refis?
Well, for one thing, they’re using their high-powered attorneys and lobbyists to twist arms at the Federal Housing Finance Agency (FHFA) to make it easier for them to make bad loans without suffering any consequences.
How can that be, after all, wasn’t it bad loans that got us into this mess to begin with?
Yes, it was. Even so, the banks are back at it again, up to their same old tricks. Here’s the story from Reuters:
“Just four years after toxic U.S. mortgages brought the global financial system to its knees and triggered the deepest recession since the Great Depression, a U.S. housing regulator may be making it easier for banks to make bad loans without suffering losses.
The Federal Housing Finance Agency released a little-noticed rule last week that makes it harder for Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) – the government-owned companies that guarantee home loans made by banks – to hold lenders accountable when mortgages go bad.
Some experts said the new rules show that lessons of the housing crisis are already being forgotten, and could set up taxpayers for tens of billions of dollars of losses if the lending bubble re-inflates later in the credit cycle.
At issue is when Fannie Mae and Freddie Mac can press banks to make them whole when mortgages go bad.” (“Housing regulators loosen rules, but at what cost?”, Reuters)
Can you believe it? The FHFA is actually accepting responsibility for mortgages where the underwriting was either shoddy or fraudulent. This is the kind of power the banks have. The agency is also assuring that the banks will create more of these garbage loans now that they know that Uncle Sam will be picking up the tab. That’s what you call “bad incentives”! Up to now, the FHFA had been able to force the banks to repurchase the loans that showed “substantive underwriting and documentation deficiencies”. But that’s not going to happen anymore. The looser rules mean that the banks will return to their old ways and that future losses to taxpayers will tally in the hundreds of billions of dollars. According to Joseph Mason, a professor at Louisiana State University’s business school, “Fannie Mae and Freddie Mac could lose even more than they did this time around.” (Fannie and Freddie have already cost taxpayers $188 billion)
To repeat, the banks had changed their behavior because they were afraid of having to repurchase the dodgy loans they originated. (These returned mortgages are called “put-backs”) Now the rules are being tweaked so the banks can shrug off the bad loans for which they are alone responsible. Here’s more from the National Association of Realtors:
“The federal government is taking steps to ease a problem lenders have been complaining about for several years, and that’s the buy-back risk they face if they underwrite a federally backed loan that goes bad and the guarantor of the loan—whether FHA, Fannie Mae or Freddie Mac—determines that the loan was never underwritten in compliance with their “representation and warranty” requirements….
…lenders remain concerned about the risk they face, and in fact earlier this year, in February, Bank of America announced it would stop selling loans to Fannie Mae because of its concerns over the company’s buy-back policies. (“FHFA Gives Banks Reason to Revisit Overlays”, National Association of Realtors)
So B of A is threatening to “stop selling loans to Fannie Mae”? Hurt me some more.
What’s more important, is that the regulators had fixed this problem by imposing penalties on the lenders, but now they’ve backtracked and undone their progress. Now it’s business as usual where the taxpayer-pinata get’s clobbered with more toxic loans. Oh good.
And that’s not all the banks are up to. They’re also fighting “risk retention” rules because they don’t want to pony-up the small amount of capital (5 percent of the loan’s value) on high-risk mortgages that go into securitizations. It’s like an insurance company refusing to keep money on hand to pay off claims. If you think that’s fair, then you should probably be a banker. Now get a load of this excerpt from a “Letter to Bernanke on QE3″ from Moe Veissi, president of the National Association of Realtors:
“Reducing mortgage interest rates in general through MBS purchases will have diminished impact if three important rules counter the availability of mortgage credit. As you have noted, mortgage credit is already tight. A recent survey of NAR members indicates that 53 percent of loans in August went to borrowers with credit scores over 740. To put this in perspective, only 41 percent of loans backed by Fannie Mae in 2001 had scores above 740. If the forthcoming Ability to Repay/Qualified Mortgage (QM), Risk Retention/Qualified Residential Mortgage (QRM), and Basel III rules only serve to further tighten credit, the impact of QE3 is likely to be diminished and only felt among those of substantial wealth and pristine credit. In short, those who need access to affordable credit the least.
While the Federal Reserve (The Fed) is no longer the purveyor of the QM rule, we believe there is still time for the Fed to weigh in with the Consumer Financial Protection Bureau (CFPB) and ensure that this rule does not serve to further tighten credit.” (“NAR Submits Letter to Bernanke on QE3″, Mortgage Professional)
How do you like that, eh? So according to Moe Veissi, making the system safer is too expensive. We just can’t afford it. We need to make credit available to people who wouldn’t normally qualify for a loan.
Sure, Moe, what could go wrong? It’s not like we’re going to blow up the financial system by lending too much money to people who can’t repay their debts, right?
In any event, the banks and the special interest groups are trying to unwind the “Ability to Repay” and “Risk Retention” portions of the new regulations, even these are the essential firewalls that protect the general public from another disaster like the Crash of ’08?
If we heap these recent developments together (FHFA changes on “put-backs”, opposition to “risk retention” and “ability to repay”), then we see that we’re fairly close to where we were in 2007 before the two Bears Stearns hedge funds defaulted sparking the downward spiral that ended with the obliteration of Lehman Brothers on September 15, 2008 and the beginning of the Great Depression 2.
The banks are again in a position where they can skim profits off bad loans to every Tom, Dick and Harry that can sit upright and sign on the dotted line. They don’t have to worry about holding capital against their dodgy assets or whether Uncle Sam is going to get fleeced on the bogus $400,000 loan they issued to that unemployed landscaper living on food stamps. No worries. They’ve covered all the bases.
Now if Bernanke can just get that bubble-thing going, they’ll be back in the clover.