What is more frightening, then the loss of your money. Since most people have, some meager amount held in some form of a financial institution, the prospect of the banksters’ cabal placing a charge against your account for the mere privilege of maintaining a deposit, is horrible. The Business Insider warns, In The Future, You May Have To Pay The Bank To Hold Your Money, and raises a very dreadful prospect.
“In recent weeks, economists have discussed the idea of how to implement a negative interest rate while preventing people from hoarding paper currency. Economist Miles Kimball has discussed creating an electronic currency and having an exchange rate between it and dollar bills. Others have discussed going cashless and eliminating paper currency altogether.”
Negative interest rates simply mean it will cost you, in fees or service charges, to hold money in banking accounts. Examine Professor Kimball’s ivory tower justification for seizing the value and purchasing power of your savings.
“University of Michigan economist Miles Kimball has developed a theoretical solution to this problem in the form of an electronic currency that would allow the Fed to bring nominal rates below zero to combat recessions. He’s been presenting his plan to different economists and central bankers around the world. Kimball has also written repeatedly about it and was recently interviewed by Wonkblog’s Dylan Matthews.”
Now dig deep into the mind of a mentally ill pseudo intellectual to see just how far from rational money policy such monetary eggheads go to provide cover for the fractional reserve central bankers.
“If we repealed the “zero lower bound” that prevents interest rates from going below zero, there would be no need to rely on the large scale purchases of long-term government debt that are a mainstay of “quantitative easing,” the quasi-promises of zero interest rates for years and years that go by the name of “forward guidance,” or inflation to make those zero rates more potent.”
This threat is a continuation from the initial trial balloon that appeared in the Financial Times. A video rant about, Banks to Start Charging You on Deposits, goes ballistic with outrage that the money-centered banks are emboldened as to telegraph their intentions of raiding the nest egg savings of depositors. While the justifiable emotion is understandable for a beleaguered public, the economic aftermaths of interjecting massive QE reserves is explained well by Zerohedgein recent reports with the accompanied chart.
“Furthermore, contrary to what the hypocrite banker said that ”the danger is that banks are pushed into riskier assets to find yield“, banks are already in the riskiest assets: just look at what JPM was doing with its hundreds of billions in excess deposits, which originated as Fed reserves on its books – we explained the process of how the Fed’s reserves are used to push the market higher most recently in “What Shadow Banking Can Tell Us About The Fed’s “Exit-Path” Dead End.”
What the real danger is, is that once the Fed lowers IOER and there is a massive outflow of deposits, that banks which have used the excess deposits as initial margin and collateral on marginable securities to chase risk to record highs (as JPM’s CIO explicitly and undisputedly did) that there would be an avalanche of selling once the negative rate deposit outflow tsunami hit.”
Hence, this move to prepare the bank customer for another hosing by imposing negative rates actually is a desperate attempt to keep the derivative “day of reckoning” from hitting. This strategy will not work. In the Negotium article, Low Interest Rates Impoverish Savers, makes the point: “Designed lowering of our standard of living is visible at every turn. The money-centered banks recapitalized their balance sheets at the expense of the passbook accounts customers.”With the expectation that bank accounts will actually experience debit fees for parking money will result in a massive outflow of capital. Where will the money go? Will the banks allow the return of your deposits in cash or will they impose significant costs and delay withdrawals?
Consider that under a banking system, which automatically reduces your balances, the acceleration of stripping your net worth goes into high gear. No sane individual would accept this theft willingly. However, the transition to a cashless economy might well inflict a call back of cash (Federal Reserve Notes) in circulation for an enforced substitute legal tender. Or else some variation of the “killer” Kimball electronic compulsory account may be imposed under strict governmental supervision.
Under such a circumstance, the mandatory medium of exchange strips all personal ownership from the individual. Money, in whatever form it takes, no longer will be your own property.
Negative interest rates institutionalize systemic inflation into every transaction. Throughout history, usury is condemned for charging interest on lending. What term should be used for paying no interest on capital saved? Anthony Migchels argues in Our Chains are Forged by Usury, that the objective is to create an interest-free money supply. Much like the Kimball electronic currency, the Migchels alternative resides in his own twisted hermitage, read accordingly.
“The problem is not the creation of money! Quite the opposite: it’s marvelous that we never need to have a shortage of money. The problem is when the bookkeeper starts raping the debitor with interest for no other reason than the associated minus.”
While debt is the central issue in all financial bubbles, the solution is not to destroy wealth creation through capital saving. Until a universal model of wizardry or alchemy is adopted that creates a stable store of value, independent from work, ingenuity or greed; expectations of an interest free currency are pipe dreams.
The benefits from negative interest rates all go to the banksters. The borrower never sees FREE interest loans, nor does the saver earn a fair rate of return. The maxim remains, Those with the Gold, Make the Rules, is no different in the age of the New World Order of central banking. Starving the saver is negative for the rest of us.
As U.S. corporate profits soar to record highs, food stamps for the neediest were quietly cut. The politicians who are demanding endless cuts to social programs — Democrats and Republicans alike — insist that the U.S. is broke, all the while conveniently ignoring the mountains of tax-free wealth piling up in the pockets of the super rich.
This newest flood of cash for the nation’s wealthiest 1% is a blatant government subsidy: the Federal Reserve continues to pump out an extra $75 billion a month, the vast majority of which fattens the already-bursting overseas bank accounts of the rich. Since Obama has been president this pro-corporate policy has helped funnel 95 percent of the nation’s new income to the wealth-soaked rich.
And while it’s true that the global super rich have an estimated $32 trillion [!] stashed away abroad in off shore tax havens, an even newer way to avoid taxes has gripped the endlessly-greedy minds of U.S.-based billionaires.
Instead of shielding themselves behind the classic ‘C’ corporation structure — and all the burdensome taxes and regulations associated with it — two-thirds of new corporations have “evolved” into pseudo-legal “partnership” structures, commonly referred to as “pass throughs,” the idea being that the corporate-partnership instantly passes the profits through to the shareholders, no corporate tax necessary.
The most common form of pass throughs are “innovative” variations of a Limited Liability Company, a tax structure created in 1975 for narrowly regulated purposes. But now rich investors are performing accounting and legalistic somersaults to exploit the tax structure, practices that were illegal before the regulators were “captured” by the big banks.
The pro-billionaire Economist magazine recently discussed the pass through fad:
“A mutation in the way companies are financed and managed will change the distribution of the wealth they create…The corporation is becoming the distorporation…More businesses are now twisting themselves into forms that allow them to qualify as pass throughs.”
So, for example, imagine that nine rich guys get together and call themselves a pass through corporation of some variety. They do this because they want to avoid personal liability in case things go awry. Their partnership only buys and sells stocks and goes on to make billions, while paying zero corporate taxes. When their risky bets go bust and the partnership is sued by hoodwinked investors, the company instantly declares bankruptcy, since all profits were quickly “passed through.” The partners (the nine guys) cheerfully go home to swim through their sea of cash.
In real life shady pass throughs make massive wealth. Richard Kinder, who co-founded the biggest pass through, named Kinder Morgan, personally received $376 million in dividends last year alone [!], according to the Economist.
The pass through fad is on track to becoming the dominant way that the super rich get together to make huge amounts of money — pass throughs were 63 percent of all corporate profits in 2008, and are likely higher now, since many of the big private-equity companies making a killing by the cheap fed dollars are organized under pass through umbrella structures.
There is a huge society-wide risk for this type of behavior, which resembles the reckless gambling that destroyed the economy in 2008. As an ever-larger share of wealth is poured into these risky, non-regulated vehicles, the potential grows for them to self-destruct and pull down the broader economy with them. Pass throughs — which include most private-equity firms — function “efficiently” when the government is handing them cheap money; when interest rates go up, the pass throughs go bust, with predictable outcomes.
“But wait,” the billionaire will protest, “we pay individual taxes, which help fund social services.” Not necessarily. If the billionaire investor paid their legal obligation of “capital gains” taxes, they’d already be paying far less than the average worker. But the pass-through billionaires excel at avoiding all taxes. The Economist again:
“For a [pass through] partner a payout can be considered merely a return of capital rather than a profit, and consequently no tax is due until the sale of the underlying security. When tied to nuances of estate law, this may mean no tax at all.”
This type of blatantly criminal behavior used to be actually illegal, but as Wall Street bought Congress, the rules were either bent or ignored.
The Economist explains:
“The limitations on becoming [a pass through] seem to be tied more to legal dexterity [!] and influence [buying politicians] than any underlying principle. Politicians want to extend the benefits of [pass through] partnerships to industries they have come to favor either on the basis of ideology [of the corporate type], or astute lobbying [bribery], or a bit of both.”
The rest of society is affected because public services are being starved of funds, while these new pass throughs face vastly less regulation than the standard C corporations, and push wealth inequality to new heights while threatening a deeper recession.
Historically, government began regulating corporations because everyone realized the profound effects these institutions were having on the rest of society; the nation was becoming more unequal, the labor force more exploited and the environment torn to shreds.
As the super wealthy organized themselves into corporations they took most of society’s wealth with them; government realized that a semi-functioning country would need to tax these institutions and regulate their behavior, since the “natural” behavior of the capitalist — greed — was capable of pushing the rest of society into the dregs.
The new pass through fad is also indicative of the current state of U.S. capitalism; instead of investing profits in a company to buy machines or hire new workers, all the cash is either sitting in overseas bank accounts, or is being instantly funneled, via pass throughs, into the hands of ever-richer billionaires, who are proving to everyone that there is no bounds to the amount of cash they can accumulate. Where there are barriers to accumulation (regulations and taxes), they will supersede them while paying politicians of both major parties to ignore it or make it legal.
This dynamic occurs, in part, because the wealthy are basically refusing to invest in the real economy, as they fear the unstable economic conditions are not safe enough to make long term investments, which they believe won’t yield long term higher rates of profits. Safer to speculate on risky stocks, pocket the money and be the first one out when things go bust, as they did in 2008.
Of course the big name C corporations are up to their eyes in fraud too. Apple made big news when it only paid 2 percenttaxes on $74 billion in profits, by “declaring” its profits in Ireland, a corporate tax haven.
This occurs while other giant companies simply use clever accounting tricks to pay zero taxes, including giants like WellsFargo, Boeing, Verizon and General Electric. In fact, General Electric even finagled a rebate.
When it comes to oversea tax havens, it’s estimated that the U.S. national budget is annually starved of $280 billion in tax revenue.
Politicians have been struggling with ways to deal with the problem, since even in their mind some amount of tax collection needs to happen, if only to fund the military, provide more subsidies to corporations, and please the public by appearing to try to reduce the billionaire’s obscene behavior.
One popular idea among the politicians is to declare a corporate “tax holiday,” where the trillions of off-shore profits can be ceremoniously brought back to the U.S. while the feds look the other way. The idea is that, once the money is actually back in the U.S., the wealthy will want to spend it on something which will eventually help the economy — trickle down economics at its finest.
What seems certain to happen is that lowering corporate taxes will be a central piece of any “grand bargain” that eventually emerges, since there is a clear bi-partisan consensus that corporations need to pay lower taxes.
Some argue that if corporate taxes are low enough — and regulations removed — the corporations will reward the nation by not stockpiling their profits abroad and not creating pass through loopholes.
Of course all of this implies that the wealthy have a stranglehold over the U.S. economy. It’s telling that politicians want to deal with corporate tax evasion by lowering the corporate tax rate, instead of actually sending the IRS after them and throwing them in jail, as they do with working and middle class people.
The above dynamics create an ever-increasing wealth inequality that claws at the thinning strings holding society together. The bankruptcy and social disintegration of Detroit is a foreshadowing event for the rest of the country, unless this dynamic is stopped.
When the next crash happens the nation will have learned its lessons: the big banks and wealthy investors who destroyed the economy in 2008 are back at it, encouraged by Obama’s pro-corporate behavior and the Federal Reserve’s money flooding.
It’s becoming increasingly obvious that breaking the power of the super wealthy is the first step towards balancing the budget, job growth, protecting the safety net, and creating a semblance of a rational society. Until then the U.S. will lurch from one crisis to another, while blaming everyone but the real culprits.
A Flimsy Piece of Worn Out Script…
“If the dollar does indeed lose its role as leading international currency, the cost to the United States would probably extend beyond the simple loss of seigniorage, narrowly defined. We would lose the privilege of playing banker to the world, accepting short-term deposits at low interest rates in return for long-term investments at high average rates of return. When combined with other political developments, it might even spell the end of economic and political hegemony.”
– Economist Menzie Chinn, “Will the Dollar Remain the World’s Reserve Currency in Five Years?”, CounterPunch 2009
Barack Obama’s economic recovery has been a complete bust. Unemployment is high, the economy is barely growing, and inequality is greater than anytime on record. On top of that, inflation has dropped to 1.2 percent, private sector hiring continues to disappoint and, according to Gallup’s “Economic Confidence” survey, households and consumers remain “deeply negative”. More tellingly, the Federal Reserve’s emergency program dubbed QE– which was designed to mitigate the fallout from the 2008 stock market crash and subsequent recession–is still operating at full-throttle five years after Lehman Brothers defaulted. This is inexcusable. It’s an admission that US policymakers have no idea what they’re doing.
Why is it so hard to get the economy up and running? Everyone knows that spending generates growth, so if the private sector (consumers and businesses) can’t spend the public sector (the government) must spend. That’s how sluggish economies shake off recession, through growth.
Spend, spend, spend and spend some more. That’s how you grow your way out of a slump. There’s nothing new or original about this. This isn’t some cutting-edge, state-of-the-art theory. It’s settled science. Economics 101.
So is it any wonder why the rest of the world is losing confidence in the US? Is it any wonder why China and Japan have slashed their purchases of US debt? Get a load of this from Reuters:
“China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries….
China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows.” (“China, Japan lead record outflow from Treasuries in June”, Reuters)
While things have improved since August, the selloff is both ominous and revealing. Foreign trading partners are losing confidence in US stewardship because of policymakers erratic behavior. Here’s how former Fed chairman Paul Volcker summed it up:
“We have lost a coherent successful governing model to be emulated by the rest of the world. Instead, we’re faced with broken financial markets, underperformance of our economy and a fractious political climate.”
Naturally, this loss of confidence is going to hurt the dollar vis a vis its position as the world’s reserve currency. But don’t kid yourself, China and Japan want to be the top-dog either. They’re fine with the way things are right now. The problem is, it’s looking more and more like the US is not up-to-the-task anymore given the irresponsible way it conducts its business. And we’re not talking about the government shutdown either, although that circus sideshow certainly lifted a few eyebrows in capitals around the world. Foreign leaders have come to expect these tedious outbursts from the lunatic fringe in Congress. But, the fact is, the government shutdown fiasco had very little effect on the bond market. The benchmark 10-year US Treasury shrugged off congress’s screwball antics with a wave of the hand. No big deal. Not so the talk of “tapering” by the Fed, which sent 10-year yields soaring more than 100 basis points to 3 percent in less that a month. Tapering put the fear of god in everyone. The sudden jolt to mortgage rates was enough to put the kibosh on new and existing homes sales putting a swift end to Bernanke’s dream of reflating the housing bubble. The rising long-term rates threatened to push the economy back into recession and wipe out five years of zero rates and pump priming in the blink of an eye. That’s why China and Co. started to jettison USTs. They figured if the Fed was going to scale back its asset purchases, rates would rise, and they’d be left with a whole shedload of US paper that would be worth less than what they paid for it. So they got out while the gettin’ was good.
So don’t believe the media’s fairytale that Bernanke postponed tapering because the economy still looked weak. That’s nonsense. It was the selloff in USTs that slammed on the brakes. The Fed actually wants to reduce its purchases because there are humongous bubbles emerging in financial assets everywhere. But how to do it without triggering another crash, that’s the question. The Fed has distorted prices across the board, which is why the main stock indices are climbing to new highs every day on the back of an economy that has less people in the workforce than it did 10 years ago. What a joke. And people wonder why foreign lenders are getting nervous?
What China wants from the United States is simple. They want proof that the US hasn’t lost its mind. That’s all. “Just show us that you still know how to fix the economy and run the system.” Is that too much to ask?
Unfortunately, Washington doesn’t think it needs to answer to anyone. We’re Numero Uno, le grand fromage. “What we say goes!”
Okay. But the only thing that’s going is the US’s reputation, it’s economic dominance, it’s behemoth debt market, and its reserve currency status. Not because the world is rebelling, but because the US is imploding. “Stupid” is a disease that has spread to every part of the body politic. The country is run by crackpots who implement counterproductive policies that weaken demand, boost unemployment, shrink growth leave the rest of the world scratching their heads in bewilderment. This is from Bloomberg:
“While government debt was a haven as the U.S. endured the worst recession in seven decades, primary dealers such as Barclays Plc (BARC) and Goldman Sachs Group Inc. say the gains this month show the Fed’s $85 billion of monthly bond purchases are masking the risk of owning fixed-income securities as the recovery in America takes hold.
“Treasuries are just not worth the risk,” Thomas Higgins, the Boston-based global macro strategist at Standish Mellon Asset Management Co., which oversees $167 billion of fixed-income investments, said in a telephone interview on Oct. 23.” (Bloomberg)
Not worth the risk, indeed, which is why the dollar is getting pummeled mercilessly at the same time. This is from Reuters:
“The dollar fell towards a nine-month low against a basket of currencies on Monday, with more investors selling on growing confidence the Federal Reserve will keep policy accommodative….
Most expect the central bank to delay withdrawing stimulus until March 2014…. The longer the Fed keeps policy accommodative, the more U.S. yields stay anchored, making the dollar less attractive to hold.” (Reuters)
So the dollar isn’t looking too hot either, is it, which is why China and Japan have started to reconsider their holdings. This is from Businessweek:
“U.S. government debt has already lost some of its appeal among foreign investors. They were net sellers of Treasuries for five-straight months ended August, disposing of $133 billion in that span, last week’s Treasury data showed.
The streak is the longest since 2001 as China, the largest overseas U.S. creditor, reduced its holdings to $1.268 trillion, the least since February….With the economy recovering from the depths of that recession, Treasuries may be more vulnerable to a selloff this time.” (“Treasuries Risk Shown as Fed Distorts Correlation to Stocks”, Businessweek)
Of course, there’s going to be a selloff. Why wouldn’t there be? And probably a panic too to boot.
Look, it’s simple: If the biggest buyer of US Treasuries (The Fed) signals that its either going to scale back its purchases or reduce its stockpile of USTs, then what’s going to happen?
Well, the supply of USTs will increase which will lower prices on US debt and push up rates. Supply and demand, right?
So, if the other participants in the market (aka China and Japan) think the Fed is about to taper, they’re going to try to sell before other investors race for the exits.
The question is: What’s that going to do to the dollar?
And the answer is: The dollar going to get hammered.
The US gov going to have to borrow at higher rates which could tip the economy back into recession. Also, the US could lose the ”exorbitant privilege” of exchanging colored pieces of paper for valuable goods and services produced by human sweat and toil. Isn’t that what’s really at stake?
Of course, it is. The entire imperial system is balanced on a flimsy piece of worn scrip with a dead president’s face on it. All that could change in the blink of an eye if people lose faith in US stewardship of the system.
But, what exactly would the US have to do for foreign countries to ditch the dollar? Here’s how economist and author Menzie Chinn answered that question in an interview in CounterPunch in 2009:
“If the US administration were to pursue highly irresponsible policies, such as massive deficit spending for many years so as to push output above full employment levels, or if the Fed were to delay too long an ending to quantitative easing, then the dollar could lose its position.” (“Will the Dollar Remain the World’s Reserve Currency in Five Years?” An Interview With Economist Menzie Chinn, Counterpunch)
Funny how Chinn anticipated the problems with winding down QE way back in 2009, isn’t it? His comments sound downright prophetic given Wall Street’s strong reaction.
But we keep hearing that China is stuck with the US and has to keep buying Treasuries or its currency will rise and kill its exports. Is that true or will China eventually split with the dollar?
Menzie Chinn again:
“It is true that each Asian central bank stands to lose considerably, in the value of its current holdings, if dollar sales precipitate a dollar crash. But we agree with Barry Eichengreen that each individual participant will realize that it stands to lose more if it holds pat than if it joins the run, when it comes to that. Thus if the United States is relying on the economic interests of other countries, it cannot count on being bailed out indefinitely.” (Counterpunch)
Well, that sounds a bit worrisome. But maybe China won’t notice that we’re governed by morons who’ve forgotten how to fix the economy or generate demand for their products. Any chance of that?
No chance at all, in fact, China already has already started its transition away from the dollar. Here’s the scoop from former chief economist for Morgan Stanley Asia, Stephen S. Roach:
“China has made a conscious strategic decision to alter its growth strategy. Its 12th Five-Year Plan, enacted in March 2011, lays out a broad framework for a more balanced growth model that relies increasingly on domestic private consumption. These plans are about to be put into action….
Rebalancing is China’s only option…..With rebalancing will come a decline in China’s surplus saving, much slower accumulation of foreign-exchange reserves, and a concomitant reduction in its seemingly voracious demand for dollar-denominated assets. Curtailing purchases of US Treasuries is a perfectly logical outgrowth of this process…..
For China, this is not a power race. It should be seen as more of a conscious strategy to do what is right for China as it confronts its own daunting growth and development imperatives in the coming years.” (“China gets a wake-up call from US”, Stephen S. Roach, Project Syndicate via bangkokpost.com)
In other words, “No hard feelings, Uncle Sam. We just don’t need your fishwrap currency anymore.”
No matter how you cut it, the dollar is going to be facing stiff headwinds in the days ahead. If Roach’s analysis is correct, we can expect a gradual move away from the buck leading to a persistent erosion of US economic and political power.
The end of dollar hegemony means America’s “unipolar moment” may be drawing to a close.
“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.
Pat Buchanan recently wrote an intriguing column titled, “Is Red State America Seceding?” His column clearly reveals that an independence/secession movement is spreading globally. Pat rightly observes that in just the last few years some 25 nations have broken free of mother countries and formed their own independent states. And, no, most of these separations did NOT require violent revolution. In addition, talk of secession is currently going on in at least six other regions of the world. And, as Buchanan correctly observes, the spirit of secession is very much alive and well in the United States.
Buchanan writes, “The five counties of western Maryland–Garrett, Allegany, Washington, Frederick and Carroll, which have more in common with West Virginia and wish to be rid of Baltimore and free of Annapolis, are talking secession.”
But people in Maryland are not the only ones talking secession. Buchanan continues to write, “Ten northern counties of Colorado are this November holding non-binding referenda to prepare a future secession from Denver and the creation of America’s 51st state.”
Furthermore, people in northern California are also talking secession. Again, to quote Pat Buchanan: “In California, which many have long believed should be split in two, the northern counties of Modoc and Siskiyou on the Oregon border are talking secession–and then union in a new state called Jefferson.”
Buchanan goes on to say, “Folks on the Upper Peninsula of Michigan, bordered by Wisconsin and the Great Lakes, which is connected to lower Michigan by a bridge, have long dreamed of a separate state called Superior. The UP has little in common with Lansing and nothing with Detroit.
“While the folks in western Maryland, northern Colorado, northern California and on the Upper Peninsula might be described as red state secessionists, in Vermont the secessionists seem of the populist left. The Montpelier Manifesto of the Second Vermont Republic concludes:
“‘Citizens, lend your names to this manifesto and join in the honorable task of rejecting the immoral, corrupt, decaying, dying, failing American Empire and seeking its rapid and peaceful dissolution before it takes us all down with it.’”
Pat concludes his column saying, “This sort of intemperate language may be found in Thomas Jefferson’s indictment of George III. If America does not get its fiscal house in order, and another Great Recession hits or our elites dragoon us into another imperial war, we will likely hear more of such talk.”
See Pat Buchanan’s column here:
Buchanan’s analysis is right on the money. The spirit of independence is far from dead in the United States. In fact, the spirit of independence (otherwise known as the Spirit of ’76) has already begun driving people to separate from states and cities in which they have lived for most or all of their lives. The biggest recipient of these many thousands of freedom-minded people seems to be the Rocky Mountain States of America’s Northwest.
Faithful readers of this column know that my entire family, including five heads of households and some 18 family members, relocated to the Flathead Valley of Montana after having lived a lifetime–or the better part of a lifetime–in the southeastern United States. And during the last three years, I have witnessed scores of families also relocate to northwestern Montana from all over the country.
But it’s not just Chuck Baldwin’s move or the people from around the country who have decided to join us here in the Flathead Valley: thousands of people are relocating to what is now commonly referred to as “The American Redoubt.” This area includes Montana, Idaho, Wyoming, eastern Washington State, and eastern Oregon.
By the way, to read a compilation of articles as to why my family and I chose the Flathead Valley of Montana to which to relocate, peruse the material here:
Just recently, Pat Robertson’s Christian Broadcasting Network (CBN) did a television report on the growing numbers of people who are relocating to The American Redoubt. See the report here:
The mood all over America is one of intense uncertainty and uneasiness. More and more Americans are waking up to the reality that Washington, D.C., is hopelessly broken (financially and morally), and it’s only a matter of time before something catastrophic happens. They see the way America’s major cities are becoming more and more tyrannical and crime-infested.
In the major cities, public schools more and more resemble prisons; police departments more and more resemble the German Gestapo; local governments more and more try to make criminals out of honest gun owners and more and more attack the Christian values that were once revered in this country. Add any major disaster (natural or man-made) to these growing concerns and the prospect for a normal life in the big cities is practically zero. People are yearning to be more self-reliant, more independent, more secure, and, yes, more free. In fact, for a host of people today, the longing for liberty trumps the desire for wealth and pleasure. What used to attract people to big cities now repulses them. And they are more than willing to downscale their incomes and living standards in order to live simpler and breath freer.
In reality, secession is not a future event; it has already started. People all over America are separating from their homes and families, from their jobs and livelihoods, from their cities and states, and from their very way of life in order to find even a semblance of what America used to look like. This trend will not diminish anytime soon. In fact, I am convinced it has not yet begun to peak.
So, don’t despair my friends. The Spirit of ’76 is alive and well–and not just in America but in many regions around the world also. The smell of independence is in the air. It smells so sweet. Take a big whiff. Then prayerfully decide to what and to where that wind is leading you.
Pat Buchanan’s analysis of the modern independence movement just might be more of a prophecy than anything else.
I cannot help but think of the speech John Adams gave to the Continental Congress as it contemplated the Declaration of Independence. When one thinks of fiery speeches for independence, one normally thinks of Patrick Henry, Sam Adams, or James Otis. But John Adams’ speech to the Continental Congress ranks up there with the greatest of them. So, for all of my freedom-loving brothers and sisters in America and around the world who are already, in their own way, engaged in the independence movement, I conclude this column with the concluding words from that immortal speech:
“Sir, I know the uncertainty of human affairs, but I see, I see clearly, through this day’s business. You and I, indeed, may rue it. We may not live to the time when this Declaration shall be made good. We may die; die, colonists; die, slaves; die, it may be, ignominiously and on the scaffold. Be it so; be it so! If it be the pleasure of heaven that my country shall require the poor offering of my life, the victim shall be ready at the appointed hour of sacrifice, come when that hour may. But, while I do live, let me have a country, or at least, the hope of a country, and that a free country.
“But whatever may be our fate, be assured, be assured that this Declaration will stand. It may cost treasure, and it may cost blood, but it will stand, and it will richly compensate for both. Through the thick gloom of the present, I see the brightness of the future, as the sun in heaven. We shall make this a glorious, an immortal day. When we are in our graves, our children will honor it. They will celebrate it with thanksgiving, with festivity, with bonfires and illuminations. On its annual return, they will shed tears, copious, gushing tears, not of subjection and slavery, not of agony and distress, but of exultation, of gratitude and of joy.
“Sir, before God, I believe the hour is come. My judgment approves this measure, and my whole heart is in it. All that I have, and all that I am, and all that I hope, in this life, I am now ready here to stake upon it. And I leave off as I began, that, live or die, survive or perish, I am for the Declaration. It is my living sentiment, and by the blessing of God it shall be my dying sentiment, Independence now, and INDEPENDENCE FOREVER!”
Amen and Amen!
President Barack Obama is determined to prevail in his battle with GOP congressional leaders on the debt ceiling issue, but not for the reasons stated in the media. Obama is less concerned with the prospect of higher interest rates and frustrated bondholders than he is with the big Wall Street banks who would be thrust back into crisis if there is no resolution before October 17. Absent a debt ceiling deal, the repurchase market–known as repo–would undergo another deep-freeze as it did in 2008 when Lehman Brothers defaulted triggering a run on the Reserve Primary Fund which had been exposed to Lehman’s short-term debt. The frenzied selloff sparked a widespread panic across global financial markets pushing the system to the brink of collapse and forcing the Federal Reserve to backstop regulated and unregulated financial institutions with more than $11 trillion in loans and other obligations. The same tragedy will play out again, if congress fails lift the ceiling and reinforce the present value of US debt.
Repo is at the heart of the shadow banking system, that opaque off-balance sheet underworld where maturity transformation and other risky banking activities take place beyond the watchful eye of government regulators. It is where banks exchange collateralized securities for short-term loans from investors, mainly large financial institutions. The banks use these loans to fund their other investments boosting their leverage many times over to maximize their profits. The so called congressional reforms, like Dodd Frank, which were ratified after the crisis, have done nothing to change the basic structure of the market or to reign in excessive risk-taking by undercapitalized speculators. The system is as wobbly and crisis-prone ever, as the debt ceiling fiasco suggests. The situation speaks to the impressive power of the bank cartel and their army of lawyers and lobbyists. They own Capital Hill, the White House, and most of the judges in the country. The system remains the same, because that’s the way the like it.
US Treasuries provide the bulk of collateral the banks use in acquiring their short-term funding. If the US defaults on its debt, the value that collateral would fall precipitously leaving much of the banking system either underwater or dangerously undercapitalized. The wholesale funding market would grind to a halt, and interbank lending would slow to a crawl. The financial system would suffer its second major heart attack in less than a decade. This is from American Banker:
As banking policy analyst Karen Shaw Petrou describes it, Treasury obligations are the “water” in the financial system’s plumbing.
“They’re the global reserve currency and they are perceived to be the most secure thing you can own,” said Petrou, managing partner of Federal Financial Analytics. “That is why it is pledged as collateral. … The very biggest banks fear that a debt ceiling breach breaks the pipes.”….
Rob Toomey, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said institutions are concerned about whether Treasury bonds that default are no longer transferable between market participants.
“Essentially, whatever the size is of the obligation that Treasury is unable to pay, that kind of liquidity would just disappear from the market for whatever time the payment is not made,” Toomey said.”
By some estimates, the amount of liquidity that would be drained from the system immediately following a default would be roughly $600 billion, enough to require emergency action by either the Fed or the US Treasury. Despite post-crisis legislation that forbids future bailouts, the government would surely ride to rescue committing taxpayer revenues once again to save Wall Street.
Keep in mind, the US government does not have to default on its debt to trigger a panic in the credit markets. Changing expectations can easily produce the same result. If the holders of US Treasuries (USTs) begin to doubt that the debt ceiling issue will be resolved, then they’ll sell their bonds prematurely to avoid greater losses. That, in turn, will push up interest rates which will strangle the recovery, slow growth, and throw a wrench in the repo market credit engine. We saw an example of how this works in late May when the Fed announced its decision to scale-back its asset purchase. The fact that the Fed continued to buy the same amount of USTs and mortgage-backed securities (MBS) didn’t stem the selloff. Long-term rates went up anyway. Why? Because expectations changed and the market reset prices. That same phenom could happen now, in fact, it is happening now. The Financial Times reported on Wednesday that “Fidelity Investments, the largest manager of money market funds… had sold all of its holdings of US Treasury bills due to mature towards the end of October as a “precautionary measure.”
This is what happens when people start to doubt that US Treasuries will be liquid cash equivalents in the future. They ditch them. And when they ditch them, rates go up and the economy slips into low gear. (Note: “China and Japan together hold more than $2.4 trillion in U.S. Treasuries” Bloomberg)
Now the media has been trying to soft-peddle the implications of the debt ceiling standoff by saying, “No one thinks that holders of USTs won’t get repaid.”
While this is true, it’s also irrelevant. The reason that USTs are the gold standard of financial assets, is because they are considered risk-free and liquid. That’s it. If you have to wait to get your money, then the asset you purchased is not completely liquid, right?
And if there is some doubt, however small, that you will not be repaid in full, then the asset is not really risk free, right?
This is what the Fidelity flap is all about. It’s about the erosion of confidence in US debt. It’s about that sliver of doubt that has entered the minds of investors and changed their behavior. This is a significant development because it means that people in positions of power are now questioning the stewardship of the present system. And that trend is going to intensify when the Fed begins to reduce its asset purchases later in the year, because winding down QE will precipitate more capital flight, more currency volatility and more emerging market runaway inflation. That’s going to lead to more chin scratching, more grousing and more resistance to US stewardship of the system. None of this bodes well for Washington’s imperial aspirations or for the world’s reserve currency, both of which appear to be living on borrowed time.
The media has done a poor job of explaining what’s really at stake. While, it’s true that higher interest rates would make consumer loans more expensive and put the kibosh on the housing recovery, that’s not what the media cares about. Not really. What they care about is the looming massacre in shadow banking where USTs are used as collateral to secure short-term loans by the banks so they can increase their leverage by many orders of magnitude. In other words, the banks are using USTs to borrow gobs of money from money markets and financial institutions so they can finance their other dodgy investments, derivatives contracts and ancillary casino-type operations. If there’s a default, the banks will have to come up with more capital for their scams that are leveraged at 40 or 50 to 1. This systemwide margin call would trigger a deflationary spiral that would domino through the entire system unless the Fed stepped in and, once again, provided a giant backstop in the form of blank check support. Here’s how Tim Fernholz sums it up over atDaily Finance:
“…Many informed people are worried” (about) “A freeze in the tri-party repo market, akin to the cascade of troubles that followed the Lehman Brothers bankruptcy in 2008.”….
In 2008, more than a third of that collateral was mortgage-backed securities. When Lehman went bankrupt, its lenders began a “fire sale” of the securities it used as collateral, which drove down the value of other mortgage-backed securities, which led to more fire sales. This dynamic would eventually lead to a freeze in the repo markets, which, at the time, provided $2.6 trillion in funding to the banks each day…..
Today, most of the collateral in use is U.S. Treasuries and “agency securities” — mortgage-backed securities guaranteed by the U.S. government:
… if the ugly day of a default comes, lenders may simply stop accepting U.S. debt as collateral. That will have the effect of sucking some $600 billion in liquidity out of the banking system. Unable to get funding for Treasurys, securities dealers would be pressured to sell them-or other assets-to find new funding, creating a fire sale dynamic…..
And, of course, this scenario is only about how the Treasurys work in the repo markets. U.S. debt is used as collateral for derivatives swaps and numerous other transactions; if they are suddenly worth less than expected, lenders can be expected to demand more collateral up front, putting even more pressure on the financial system. That’s why pressure is building to raise the ceiling before the world’s largest economy enters a scenario with so much uncertainty.”
Repeat: “That’s why pressure is building to raise the ceiling before the world’s largest economy enters a scenario with so much uncertainty”.
So the Obama team isn’t worried that Joe Homeowner won’t be able to refi his mortgage or that the economy might slip back into recession. They just don’t want to see Wall Street take it in the shorts again. That’s what this is all about, the banks. Because the banks are still up-to-their-eyeballs in red ink. Because they still don’t have enough capital to stay solvent if the wind shifts. Because all the Dodd Frank reforms are pure, unalloyed bullsh** that haven’t fixed a bloody thing. Because the risks of another panic are as great as ever because the system is the same teetering, unregulated cesspit it was before. Because the banks are still financing their sketchy Ponzi operations with OPM (other people’s money), only now, the Fed’s over-bloated balance sheet is being used to prop up this broken, crooked system instead of the trillions of dollars that was extracted from credulous investors on subprime mortgages, liars loans and other, equally-fraudulent debt instruments.
Can you see that?
This is why the media is pushing so hard to end the debt ceiling standoff; to preserve this mountainous stinkpile of larceny, greed and corruption run by a criminal bank Mafia and their political lackeys on Capital Hill. That’s what this is all about.
These Dates Forever Changed America For The Worse…
Well, Obamacare is now in effect. The decision by Congress to pass Obamacare into law back in 2010 ranks among the most draconian, most egregious, most horrific actions ever taken by the central government in Washington, D.C. This bill rocks the principles of liberty and constitutional government to the core. It changes fundamental foundations; it repudiates historic values. The same flag may fly on our flagpoles, the same monuments may grace our landscape, and the same National Anthem may be sung during our public ceremonies, but it is not the same America. For all intents and purposes, our nation now more resembles the socialist countries of the old communist East Bloc than it does the constitutional republic of the old land of the free.
I was honored to have been invited to be the keynote speaker at the annual meeting of the Association of American Physicians and Surgeons recently in Denver. It was a very large gathering of physicians from all over the country. And I can tell you that the doctors I spoke with are all very, very concerned about the future of healthcare in the United States. Take a peek at the condition of healthcare in socialist countries throughout the world or take a peek at the condition of healthcare in our VA clinics and hospitals, and you will get a little feel for what healthcare is going to quickly look like in America.
On March 21, 2010, Congress passed, and on March 23, 2010, President Barack Obama signed the dreaded national health care bill into law, and as such, these dates join a list of dates that have contributed to the destruction of a free America. Of course, there are several such dates, but, in my opinion, the following are the most draconian.
April 9, 1865
This is the date when General Robert E. Lee surrendered the Army of Northern Virginia to U.S. Grant at Appomattox Court House, Virginia. Regardless of where one comes down on the subject of the War Between the States, one fact is undeniable: Abraham Lincoln seriously dismantled the Jeffersonian model of federalism in America. Ever since, virtually every battle that free men have fought for the principles of limited government, State sovereignty, personal liberty, etc., has stemmed directly from Lincoln’s usurpation of power, which resulted in the subjugation and forced union of what used to be “Free and Independent States” (the Declaration of Independence). In fact, the philosophical battles being waged today regarding the current health care debacle (and every other encroachment upon liberty and State autonomy by the central government) have their roots in Lincoln’s autocracy.
July 9, 1868
This is the date when the 14th Amendment was ratified. This amendment codified into law what Lincoln had forced at bayonet point. Until then, people were only deemed citizens of their respective states. The Constitution nowhere referred to people as “US citizens.” It only recognized “the Citizens of each State.” Notice also that citizenship was only recognized among the “several States,” not among people living in non-State territories. Until the 14th Amendment, people were “Citizens of each State.” (Article. IV. Section. 2. Paragraph. 1.) The 14th Amendment created a whole new class of persons: “citizens of the United States.” This false notion of “one nation” overturned the Jeffersonian principle that our nation was a confederated republic, a voluntary union of states.
February 3, 1913
This is the date when the 16th Amendment was ratified, and the direct income tax and IRS were instituted. This was a flagrant repudiation of freedom principles. What began as a temporary measure to support the War of Northern Aggression became a permanent income revenue stream for an unconstitutional–and ever-growing–central government.
April 8, 1913
This is the date when the 17th Amendment was ratified. This amendment overturned the power of the State legislatures to elect their own senators and replaced it with a direct, popular vote. This was another serious blow against State sovereignty. The framers of the Constitution desired that the influence and power in Washington, D.C., be kept as close to the people and states as possible. For example, the number of representatives in the House of Representatives was to be decided by a limited number of voters. In the original Constitution, the ratio of “people of the several States” deciding their House member could not exceed “one for every thirty thousand.” (Article. I. Section. 2. Paragraph. 3.) And when it came to the US Senate, the framers also recognized the authority of each State legislature to select its own senators, thereby keeping power and influence from aggregating in Washington, D.C. The 17th Amendment seriously damaged the influence and power of the states by forcing them to elect their US senators by popular vote. The bigger the State, the less influence the State legislature has in determining its US senator. Senators who answered to State legislators, each answering to a limited number of voters, were much more accountable to the “citizens of the several States” than those who were elected by a large number (many times numbering into the millions) of people. For all intents and purposes (at least in the larger states), US Senators are more like “mini-Presidents” than representatives of sovereign states.
December 23, 1913
This is the date when the Federal Reserve Act was passed. This Act placed oversight of America’s financial matters into the hands of a cabal of private international bankers, who have completely destroyed the constitutional principles of sound money and (for the most part) free enterprise. No longer would the marketplace (private consumption, thrift, growth, etc.) be the determinant of the US economy (which is what freedom is all about), but now a private, unaccountable international banking cartel would have total power and authority to micromanage (for their own private, parochial purposes) America’s financial sector. Virtually every recession, depression, and downturn (including the one we are now experiencing) has been the direct result of the Fed’s manipulation of the market. 1913 was not a good year for the United States.
June 26, 1945
This is the date when the United Nations Charter was signed and America joined the push for global government. Ever since, US forces have spilled untold amounts of blood and sacrificed thousands of lives promoting the UN’s agenda. Since the end of World War II, in virtually every war in which US military forces have been engaged, it has been at the behest of the UN. And it is also no accident that America has not fought a constitutionally declared war since we entered the UN–and neither have we won one.
Furthermore, it is America’s involvement in the United Nations that has spearheaded this devilish push for a New World Order that George H. W. Bush, Henry Kissinger, Tony Blair, Walter Cronkite, et al., have talked so much about. The United Nations is an evil institution that has completely co-opted our US State Department and much of our Defense Department. It is an anti-American institution that works aggressively and constantly against the interests and principles of the United States. But it is an institution that is ensconced in the American political infrastructure. Like a cancer, the UN eats away at our liberties and values, and both major political parties in Washington, D.C., are culpable in allowing it to exert so much influence over our country.
June 25, 1962, and June 17, 1963
These are the dates when the US Supreme Court removed prayer (’62) and Bible reading (’63) from public schools. At this point, these two Supreme Court decisions were the most serious affront to the First Amendment in US history. Think of it: from before a union of states was established in 1787, children had been free to pray and read the Scriptures in school. We’re talking about a period of more than 300 years! Of course, the various State legislatures–and myriad city and county governmental meetings–still open their sessions in prayer, as do the US House and Senate, and even the US Supreme Court. But this same liberty is denied the children of America. There is no question that America has not recovered from these two horrific Supreme Court decisions. In effect, the federal government has expelled God not only from our public schools, but also from our public life. And America has not been the same since.
October 22, 1968
This is the date when President Lyndon Baines Johnson signed the Gun Control Act of 1968. Before this Act, the 2ndAmendment was alive and well in the United States. The Gun Control Act of 1968 turned a right into a privilege and forever forced the American people to bow at the altar of government when seeking to arm themselves. Interestingly enough, this Gun Control Act mirrored Nazi Germany’s Gun Control Act of 1938. In fact, the Gun Control Act of 1968 is almost a verbatim copy of Hitler’s Gun Control Act of 1938.
Our Founding Fathers could never have imagined that the American people would ever allow their right to keep and bear arms be infringed. In fact, it was the attempted confiscation of the firearms stored at Concord, Massachusetts, that triggered the War of Independence in 1775. That the people of Massachusetts would be denied their right to keep and bear arms, as they are today, could not have been foreseen–and would never have been tolerated–by America’s founders.
The hundreds and hundreds of draconian gun control laws that have been inflicted upon the American people have all come about as a result of the Gun Control Act of 1968.
January 22, 1973
This is the date when the US Supreme Court issued the Roe v. Wade and Doe v. Bolton decisions, which, in effect, legalized abortion-on-demand. These two decisions expunged the Jeffersonian principle that all men are endowed by their Creator with the unalienable right to life (Declaration). Since then, more than 50 million unborn babies have been legally murdered in their mothers’ wombs. Abortion is, without a doubt, America’s national holocaust. It has opened the door to a host of Big Government programs and policies that have resulted in the wanton destruction of human life both in the United States and overseas. It has created an entire industry whose express purpose for existing is the destruction of human life. It has desensitized the conscience and soul of America. Furthermore, it has forced men of decency and good will to finance–with their tax dollars–the unconscionable act of killing unborn children.
And once again, another Jeffersonian principle was eviscerated. He said, “To compel a man to furnish contributions of money for the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.” The Roe and Doe decisions violate this principle in the most egregious manner possible.
October 26, 2001
This is the date when President George W. Bush signed the USA Patriot Act, and the federal government’s war against individual liberty began in earnest. Most of the unconstitutional eavesdropping, snooping, wiretapping, phone call intercepting, email reading, prying, financial records tracking, travel watching, ad infinitum, ad nauseam, by federal police agencies began with the implementation of the Patriot Act. The Department of Homeland Security and the “war on terrorism,” which have resulted in the deaths of tens of thousands of innocent people worldwide, and the usurpation of federal power at home, have all come about as an outgrowth of the Patriot Act. The Patriot Act has forever shifted the focus of American law and jurisprudence against constitutional government and individual liberty, toward a police-state mentality.
October 17, 2006, and October 9, 2009
These are the dates when President G.W. Bush signed and President Barack Obama re-signed the Military Commissions Act. This Act is the outgrowth of the Patriot Act and has, in effect, terminated the fundamental protections of individual liberty, which are found in the US Constitution and Bill of Rights. For all intents and purposes, the Patriot Act and Military Commissions Act (along with the NDAA) eviscerated the 4th and 5th Amendments, and do serious injury to several others. The Military Commissions Act also expunges the constitutional right of Habeas Corpus.
March 21 and 23, 2010
These are the dates when Congress passed and President Obama signed into law the “Patient Protection and Affordable Care Act,” the so-called “health care reform” bill that we spoke about at the beginning of this column. While Social Security and various Welfare programs have toyed with socialism in the United States, this bill is the largest and most expansive endorsement of socialism in American history. This bill socializes some 18% of the US economy by socializing the health care industry in America. The fallout and ramifications of this bill are going to be horrific.
When future historians review the demise of our once-great republic, they will observe that the above dates were the dates that destroyed America. The American people have been far too tolerant for far too long.
After five years of Obama’s economic recovery, the American people are as gloomy as ever. According to a Bloomberg National Poll that was released this week, fewer people “are optimistic about the job market” or “the housing market” or “anticipate improvement in the economy’s strength over the next year.” Also, only 38 percent think that President Obama is doing enough “to make people feel more economically secure.” Worst of all, Bloomberg pollsters found that 68 percent of interviewees thought the country was “headed in the wrong direction”.
So why is everyone so miserable? Are things really that bad or have we turned into a nation of crybabies?
The reason people are so pessimistic is because the economy is still in the doldrums and no one’s doing anything about it. That’s it in a nutshell. Survey after survey have shown that what people really care about is jobs, but no one in Washington is listening. In fact, jobs aren’t even on Obama’s radar. Just look at his record. He’s worse than any president in modern times. Take a look at this graph.
More than 600,000 good-paying public sector jobs have been slashed during Obama’s tenure as president. That’s worse than Bush, worse than Clinton, worse than Reagan, worse than anyone, except maybe Hoover. Is that Obama’s goal, to one-up Herbert Hoover?
Obama has done everything he could to make the lives of working people as wretched as possible. Do you remember the Card Check sellout or the Wisconsin “flyover” when Governor Scott Walker was eviscerating collective bargaining rights for public sector unions and Obama blew kisses from Airforce One on his way to a campaign speech in Minnesota? Nice touch, Barry. Or what about the “Job’s Czar” fiasco, when Obama appointed GE’s outsourcing mandarin Jeffrey Immelt to the new position just in time for GE to lay off another 950 workers at their locomotive plant in Pennsylvania. That’s tells you what Obama really thinks about labor.
What Obama cares about is trimming the deficits and keeping Wall Street happy. That’s it. But the people who elected him don’t want him to cut the deficits, because cutting the deficits prolongs the slump and costs jobs. What they want is more stimulus, so people can find work, feed their families, and have some basic security. That’s what they want, but they’re not going to get it from Obama because he doesn’t work for them. He works for the stuffed shirts who flank him on the golf course at Martha’s Vineyard or the big shots who chow down with him at his $100,000-per-plate campaign jamborees. That’s his real constituency. Everyone else can take a flying fu** for all he cares.
Then there’s the Fed. Most people don’t think the Fed’s goofy programs work at all. They think it’s all a big ruse. They think Bernanke is just printing money and giving it to his criminal friends on Wall Street (which he is, of course.) Have you seen this in theNew York Times:
“Only one in three Americans has confidence in the Federal Reserve’s ability to promote economic growth, while little more than a third think the Fed is spinning its wheels, according to a New York Times/CBS News poll….
The Fed has been trying for five years to speed the nation’s recovery from the Great Recession by reducing borrowing costs to the lowest levels on record….
Most Americans, it would appear, remain either unaware or unpersuaded.” (“Majority of Americans Doubt Benefits of Fed Stimulus“, New York Times)
“Unpersuaded”? Are you kidding me? Most Americans think they’re getting fleeced; unpersuaded has nothing to do with it. They’re not taken in by the QE-mumbo jumbo. They may not grasp the finer-points, but they get the gist of it, which is that the Fed has run up a big $3 trillion bill every penny of which has gone to chiseling shysters on Wall Street. They get that! Everyone gets that! Sure, if you want to get into the weeds about POMO or the byzantine aspects of the asset-purchase program, you might detect a bit of confusion, but –I assure you–the average Joe knows what’s going on. He knows all this quantitative jabberwocky is pure bunkum and that he’s getting schtooped bigtime. You don’t need a sheepskin from Princeton to know when you’ve been had.
And that’s why everyone is so pessimistic, because they know that the Fed, the administration and the media are all lying to them 24-7. That’s why–as Bloomberg discovered–”Americans are losing faith in the nation’s economic recovery.” Because they don’t see any recovery. As far as they’re concerned, the economy is still in recession. After all, they’re still underwater on their mortgages, Grandpa Jack just took a job at a fast-food joint to pay for his wife’s heart medication, and junior is camped out in the basement until he can get a handle on his $45,000 heap of college loans. So where’s the recovery?
Nobody needs Bloomberg to point out how grim things are for the ordinary people. They see it firsthand every damn day.
Did you catch the news on Wal-Mart this week? It’s another story that helps explain why everyone’s so down-in-the-mouth. Here’s what happened: Wal-Mart’s stock tanked shortly after they announced that their “inventory growth …had outstripped sales gains in the second quarter…. Merchandise has been piling up because consumers have been spending less freely than Wal-Mart projected….” (Bloomberg)
Okay, so the video games and Barbie dolls are piling up to the rafters because part-time wage slaves who typically shop at Wal-Mart are too broke to buy anything but the basic necessities. Is that what we’re hearing?
Indeed. “We are managing our inventory appropriately,” David Tovar, a Wal-Mart spokesman, said today in a telephone interview. “We feel good about our inventory position.”
Sure, you do, Dave. Here’s more from Bloomberg:
“US. chains are already bracing for a tough holiday season, when sales are projected to rise 2.4 percent, the smallest gain since 2009, according to ShopperTrak, a Chicago-based firm. Wal-Mart cut its annual profit forecast after same-store sales fell 0.3 percent in the second quarter. …
Wal-Mart’s order pullback is affecting suppliers in various categories, including general merchandise and apparel, said the supplier, who has worked with Wal-Mart for almost two decades and asked not to be named to protect his relationship with the company. He said he couldn’t recall the retailer ever planning ordering reductions two quarters in advance.” (“Wal-Mart Cutting Orders as Unsold Merchandise Piles Up”, Bloomberg
So we’re back to 2009?
Looks like it. When the nation’s biggest retailer starts trimming its sails, it ripples through the whole industry. It means softer demand, shorter hours, and more layoffs. Get ready for a lean Christmas.
The Walmart story just shows that people are at the end of their rope. For the most part, these are the working poor, the people the Democratic Party threw overboard a couple decades ago when they decided to hop in bed with Wall Street. Now their hardscrabble existence is becoming unbearable; they can’t even scrape together enough cash to shop the discount stores. That means we’re about one step from becoming a nation of dumpster divers. Don’t believe it? Then check out this clip from CNN Money:
“Roughly three-quarters of Americans are living paycheck-to-paycheck, with little to no emergency savings, according to a survey released by Bankrate.com Monday. Fewer than one in four Americans have enough money in their savings account to cover at least six months of expenses, enough to help cushion the blow of a job loss, medical emergency or some other unexpected event, according to the survey of 1,000 adults. Meanwhile, 50% of those surveyed have less than a three-month cushion and 27% had no savings at all..
Last week, online lender CashNetUSA said 22% of the 1,000 people it recently surveyed had less than $100 in savings to cover an emergency, while 46% had less than $800. After paying debts and taking care of housing, car and child care-related expenses, the respondents said there just isn’t enough money left over for saving more.” (“76% of Americans are living paycheck-to-paycheck“, CNN Money)
Savings? What’s that? Do you really think people can save money on $30,000 or $40,000 a year feeding a family of four?
Dream on. Even an unexpected trip to the vet with pet Fido is enough to push the family budget into the red for months to come. Savings? Don’t make me laugh.
The truth is, most people are hanging on by the skin of their teeth. They can’t make ends meet on their crappy wages and they’re too broke to quit. There’s no way out. It’s obvious in all the data. And it’s hurting the economy, too, because spending drives growth, but you can’t spend when you’re busted. Economist Stephen Roach made a good point in a recent article at Project Syndicate. He said, “In the 22 quarters since early 2008, real personal-consumption expenditure, which accounts for about 70% of US GDP, has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War II era.” (It’s also a) “massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.” (“Occupy QE“, Stephen S. Roach, Project Syndicate)
So the economy is getting hammered because consumption is down. And working people are getting hammered because jobs are scarce and wages are flat. But we live in the richest country in the world, right?
Right. So what’s wrong with this picture?
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)
In government, failure is success. That’s what I call DiLorenzo’s First Law of Government. When the welfare state bureaucracy fails to reduce poverty, it is rewarded with more tax dollars and more responsibilities. When the government schools fail to educate children, they are rewarded with more tax dollars and more power to meddle in education. When NASA blows up a space shuttle, it is rewarded with a large budget increase (unlike a private airline which would probably go bankrupt). And when the Fed caused the worst depression since the Great Depression in 2007, it was rewarded with a vast expansion of its powers.
DiLorenzo’s Second Law of Government is that politicians will rarely, if ever, assume responsibility for any of the problems that they cause with bad policies. No one group in society is more irresponsible than politicians. There are a few exceptions, but in general they will always blame capitalism for our economic problems even when capitalism is not even the economic system that we live under (economic fascism or crony capitalism would be more accurate). Nothing is more irresponsible than knowingly destroying what’s left of our engine of economic growth with more and more governmental central planning, even if it is given the laughable name of “public interest regulation.”
DiLorenzo’s Third Law of Government is that, with few exceptions, politicians are habitual liars. The so-called “watchdog media” is more appropriately labeled the “lapdog media,” for pointing out the lies of politicians is the best way to end one’s career as a journalist. Do this, and your sources of information will cut you off.
One of the biggest governmental lies is that financial markets are unregulated and in dire need of more central planning by government. Laissez-faire is said to have caused the “Great Recession.” Fed bureaucrats have lobbied for some kind of Super Regulatory Authority to supposedly remedy this problem. This is all a lie because according to one of the Fed’s own publications (“The Federal Reserve System: Purposes and Functions”), the Fed already has “supervisory and regulatory authority” over the following partial list of activities: bank holding companies, state-chartered banks, foreign branches of member banks, edge and agreement corporations, U.S. state-licensed bank branches, agencies and representative offices of foreign banks, nonbanking activities of foreign banks, national banks, savings banks, nonbank subsidiaries of bank holding companies, thrift holding companies, financial reporting procedures of banks, accounting policies of banks, business “continuity” in case of economic emergencies, consumer protection laws, securities dealings of banks, information technology used by banks, foreign investment by banks, foreign lending by banks, branch banking, bank mergers and acquisitions, who may own a bank, capital “adequacy standards,” extensions of credit for the purchase of securities, equal opportunity lending, mortgage disclosure information, reserve requirements, electronic funds transfers, interbank liabilities, Community Reinvestment Act sub-prime lending “demands,” all international banking operations, consumer leasing, privacy of consumer financial information, payments on demand deposits, “fair credit” reporting, transactions between member banks and their affiliates, truth in lending, and truth in savings.
In addition, the Fed also engages in legalized price fixing of interest rates and creates price inflation and boom-and-bust cycles with its “open market operations.” In addition, financial markets are just as heavily regulated by the Securities and Exchange Commission, Comptroller of the Currency, Office of Thrift Supervision, and dozens of state government regulatory agencies. All of this is the Washington, D.C. definition of “laissez-faire” in financial markets.
DiLorenzo’s Fourth Law of Government is that politicians will only take the advice of their legions of academic advisors if the advice promises to increase the state’s power, wealth, and influence even if the politicians know that the advice is bad for the rest of society. The academics happily play along with this corrupt game because it also increases their notoriety and wealth. A glaring example of this phenomenon is the fact that, in the aftermath of the onset of the “Great Recession” there was almost no discussion at all by government officials, the media, or op-ed writers about the vast literature of economics that documents the gross failures of government regulation over the past century to promote “the public interest.”
There has always been some kind of government regulation of economic activity in America, but the federal regulatory state got its first big boost with an 1877 Supreme Court case known as Munn v. Illinois. The two Munn brothers owned a grain storage business and the powerful farm lobby in their state wanted to essentially steal their property by having the state legislature impose price ceilings on grain storage. Such laws had previously been ruled unconstitutional as a violation of the Contract Clause of the U.S. Constitution. But the plunder-seeking farmers prevailed, and it was hailed by statists everywhere as a victory for “the public interest.” Thus, the very first major example of “public interest regulation” was unequivocally an act of legal plunder that benefited a very narrow special interest at the expense of the public, which would have benefited more from a free market.
Either because of ignorance or corruption (or both), the statist academics of the time sang the “public interest” tune with regards to regulation, creating the myth that markets always “fail” and that the remedy is benevolent and wise government regulation in the public interest. The academics did this despite the fact that there was glaring evidence all around them that regulation was always and everywhere a special-interest phenomenon, as indeed almost all governmental activity is.
As historian Gabriel Kolko wrote in his 1963 book, The Triumph of Conservatism, big business in the early twentieth century sought government regulation because the regulation “was invariably controlled by leaders of the regulated industry, and directed toward ends they deemed acceptable or desirable.” Government regulation has generally served to further the very economic interests that are being regulated. Chicago School economists labeled this phenomenon the “capture theory of regulation.”
Most academic economists, seduced by the prestige, employment, and money that came from being governmental advisors, ignored all of this reality and instead spent roughly fifty years—from the pre-World War I years to the 1960s—inventing myriad factually emptytheories of “market failure.” A popular book at the time was entitled Anatomy of Market Failure, by Francis Bator. This literature was (and is) based on the fraudulent technique of comparing real-world markets to an unobtainable, theoretical, Utopian ideal (“perfect competition”) and then condemning the real world for being “imperfect,” all the whileassuming that the politics of government regulation would perfectly “correct” these imperfections. Economist Harold Demsetz labeled this charade “the Nirvana Fallacy.” Comparing real-world markets to “Nirvana” will always cause one to conclude that markets are “imperfect” by comparison. The market failure theorists never once compared government to Nirvana to subject interventionism to the same criteria. The Austrian School of economics is the only school of thought within the economics profession that never participated in this farce.
To its credit, the Chicago School of economics joined with the Austrians in exposing many of the market failure/regulation—is-always-good fallacies. Hundreds of journal articles and books were published that rediscovered the old truth that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit,” as Nobel laureate George Stigler wrote in 1971.
This kind of research was expanded over the years to show that large corporations often support and lobby for onerous government “safety” and environmental regulations because they understand that the regulations will be so costly to enforce that they will likely bankrupt their smaller competitors while deterring others from entering the market in the first place. Businesses long ago discovered that the only way to have a long-lasting cartel is to have the cartel agreement enforced by the government. Privately-enforced cartels always break down because of cheating by the cartel members. The railroad and trucking industries were cartelized by the federal Interstate Commerce Commission (ICC) for many decades, for example. The ICC set monopolistic prices in these industries and prohibited genuine competition. The Civil Aeronautics Board (CAB) cartelized the airline industry by prohibiting price competition until it was deregulated in the late 1970s. There was vigorous competition in the electric power industry in the U.S. until it was ended by government regulation in the early twentieth century by the creation of monopoly franchises by state and local governments. AT&T enjoyed a government-sanctioned monopoly for many decades as well.
During the period of history when government-sanctioned monopoly was increasingly the norm, the Fed was created to facilitate the creation of a banking industry cartel. As Murray Rothbard wrote in A History of Money and Banking in the United States,
the financial elites of this country … were responsible for putting through the Federal Reserve System, as a govemmentally created and sanctioned cartel device to enable the nation’s banks to inflate the money supply … without suffering quick retribution from depositors or note holders demanding cash.
In other words, giving the Fed more regulatory authority is not unlike giving an alcoholic another bottle of whisky, a murderer another gun, or a bank robber a ski mask. It is bound to make things worse, not better.
There’s the old saying that if the government fears the people, there is liberty, but if the people fear the government there is tyranny. The criminals in Washington not only do not fear us, they do not respect us. Washington looks upon Americans as stupid sheeple.
Washington believes that it can tell the population anything and the people will believe it. For example, the official line is that the recession that began in December 2007 ended in June 2009. Many Americans believe this even thought they have not personally experienced economic recovery. Indeed, they are sinking further into poverty and near poverty.
And don’t forget those nonexistent weapons of mass destruction that Saddam Hussein was alleged by Washington to possess. Or the Gulf of Tonkin fake event when Washington claimed that its warship was attacked by North Vietnam. Really, the list of official lies is very long. Anyone who believes anything that Washington says is too naive to be let out of the house alone. But Americans believe the lies, because that is what they think patriotism requires.
Relying on the proven gullibility of the bulk of the US population, Washington claims to have uncovered an al Qaeda plot to attack US embassies across North Africa and the Middle East. To foil the plot, Washington closed 19 embassies for the past week-end and for this week also.
Washington has not explained how closing the embassies foils the plot. If al Qaeda wants to blow up the embassies, it can blow them up whether they are open or closed.
If al Qaeda wants to kill the embassy personnel, they can kill them at home or on the way to work or later in the embassies when the alert passes.
I only check in with the presstitute media in order to ascertain whether my current estimate of their prostitution for Washington is accurate. Possibly I missed some expression of skepticism about the latest terrorist threat. But I did hear NPR’s account. Back in the Reagan years, NPR was an independent voice. Today it is part of the presstitute media. NPR lies for Washington with the best of them.
The US media has ignored the obvious fact that as soon as the American population, Congress, and Washington’s puppet allies, such as Germany, made an issue over the NSA’s clearly unconstitutional and totally illegal universal spying, the Obama regime pushed the Fear Button and hyped a new terror plot in order to shut up critics and bring Congress and Germany back in line.
Washington proclaimed that a “threat” was discovered that al Qaeda–an organization that Washington is using in Washington’s effort to overthrow the Assad government in Syria and one that is enriched by US military contracts to affiliated groups in Afghanistan–was going to blow up US embassies in the Middle East and North Africa. Washington did not explain why al Qaeda, a recipient of Washington’s largess, was going to turn off the money spigot by attacking US embassies.
I am surprised that bombs haven’t been set off in the embassies in order to prove the value of the National Stasi Agency’s spying, thereby shaming those in Congress and among the puppet states in Europe who object to the spying.
Once you give a moment’s thought to Washington’s claim, you see that Washington is proving its impotence by hyping such non-existent threats. Officially, the US has been at war with al Qaeda since October 7, 2001. The “superpower” has been battling a few thousand lightly armed al Qaeda for almost 12 years, and what is the result?
Despite Washington’s claims to have killed al Qaeda’s top leaders, including Osama bin Laden himself, Washington has lost the war. Al Qaeda has grown so powerful that it not only fights in Syria, with Washington’s help, against Assad, but also has prevented the US military from occupying Afghanistan. Moreover, in addition to al Qaeda’s military success against the “superpower” and the chaos that al Qaeda continues to produce in Iraq, al Qaeda now is so powerful that it can shut down US embassies all across the Middle East and North Africa. The “threat” which was supposed to boost the NSA’s position actually proves Washington’s powerlessness.
We an only pray that soon al Qaeda shuts down Washington itself. Imagine the sense of American liberation if Washington simply was shut down, or even better if Washington could be put under Punjab’s magic blanket and disappeared. For the 99 percent, and the rest of the world, Washington is nothing but an oppressor.
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
A record breaking stock market is distorting a frightening reality: The U.S. is being eaten alive by a horrific cancer that will ultimately destroy the economy and impoverish the vast majority of its citizens.
That’s according to Peter Schiff, the best-selling author and CEO of Euro Pacific Capital, who delivered his harsh warning to investors in a recent interview on Fox Business.
“I think we are heading for a worse economic crisis than we had in 2007,” Schiff said. “You’re going to have a collapse in the dollar…a huge spike in interest rates… and our whole economy, which is built on the foundation of cheap money, is going to topple when you pull the rug out from under it.”
Schiff says that, despite “phony” signs of an economic recovery, the cancer destroying America stems from a lethal concoction of our $16 trillion federal debt and the Fed’s never ending money printing.
Currently, Bernanke and company is buying $1 trillion of Treasury and mortgage bonds a year. That’s about $85 billion per month against a budget deficit that is about the same level.
According to Schiff, these numbers are unsustainable. And the Fed has no credible “exit strategy.”
Eventually interest rates will rise… and when they do, Schiff says, stocks will tank and bonds dip to nothing. Massive new tax hikes will be imposed and programs and entitlements will be cut to the bone.
“The crisis is imminent,” Schiff said. “I don’t think Obama is going to finish his second term without the bottom dropping out. And stock market investors are oblivious to the problems.”
“We’re broke,” Schiff added. “We owe trillions. Look at our budget deficit; look at the debt to GDP ratio, the unfunded liabilities. If we were in the Eurozone, they would kick us out.”
Schiff points out that the market gains experienced recently, with the Dow first topping 14,000 on its way to setting record highs, are giving investors a false sense of security.
“It’s not that the stock market is gaining value… it’s that our money is losing value. And so if you have a debased currency… a devalued currency, the price of everything goes up. Stocks are no exception,” he said.
“The Fed knows that the U.S. economy is not recovering,” he noted. “It simply is being kept from collapse by artificially low interest rates and quantitative easing. As that support goes, the economy will implode.”
A noted economist, Schiff has been a fierce critic of the Fed and its policies for years. And his warnings have proven to be prophetic.
In August 2006, when the Dow was hitting new highs nearly every day, Schiff said in an interview: “The United States is like the Titanic, and I’m here with the lifeboat trying to get people to leave the ship… I see a real financial crisis coming for the United States.”
Just over a year later, the meltdown that became the Great Recession began, just as Schiff predicted.
He also predicted the subprime mortgage bubble burst, nearly a year before the real estate market fully crashed.
His recent warnings, however, have been even more alarming. Will they also prove to be true?
In his most recent book, The Real Crash: America’s Coming Bankruptcy — How to Save Yourself and Your Country, Schiff writes that when the “real crash” comes, “it will be worse than the Great Depression.” Unemployment will skyrocket, credit will dry up, and worse, the dollar will collapse completely, “wiping out all savings and sending consumer prices into the stratosphere.”
Schiff estimates this “cancer” could consume a trillion dollars from consumers this year.
“Today we’re the world’s greatest debtor nation. Companies, homeowners and banks are so highly leveraged, rising interest rates will be devastating.”
According to polls, the average American is indeed sensing danger. A recent survey found that 61% of Americans believe a catastrophe is looming — yet only 15% feel prepared for such a deeply troubling event.
Is Devastation The Ultimate Cure?
Despite its bleak outlook, Schiff’s book has become a real wake-up call for millions of readers.
While Schiff’s predictions can be grim, he also offers step-by-step solutions that average Americans can follow to protect their wealth, investments and savings.
According to Schiff, “the crash and what follows” can be beneficial. But only for those who understand beforehand what is happening and have time to prepare for the devastation.
“All we can do now is prepare for the crash,” Schiff said. “If we brace ourselves properly and control the impact, we will survive it.”
American citizens are paying an increasingly higher percentage of taxes as effective corporate tax rates fall during a period of soaring profits. The key word here is effective, as in taxes actually paid by corporations to the federal treasury. (Advocates for cutting corporate tax rates cite the official government levies, not what corporations actually pay for the right to do business as US companies.)
What this means in plain English is that you and I are paying more to the government, on a relative basis, than big business, a lot more.
Long-time friend of BuzzFlash, Pulitzer Prize winning economic reporter David Cay Johnston explains how we are being hoodwinked by the “America can only remain competitive with lower official corporate tax code” arguments (made by DC politicians “rented” by corporations, according to Johnston):
Individual income tax payments have been rising fast since the economy began to recover, even though wages have hardly budged. But the same isn’t true for taxes for most corporations.
For the vast majority of America’s 5.8 million corporations, profits soared in 2010 — up 53 percent compared to 2009 — when the recession official ended at mid-year. Despite skyrocketing profits, however, their corporate income tax bills actually shrank by $1.9 billion, or 2.6 percent.
In an article in the National Memo entitled “Corporate Tax Rates Plummet As Profits Soar,” Johnston elaborates:
The effective tax rate paid by 99.95 percent of companies fell to 15.9 percent in the robustly profitable year of 2010, from 24.9 percent in the half-recession year 2009.
Those figures do not count the 2,772 companies that dominate the American economy. These giant firms, with an average of $23 billion in assets, own 81 percent of all business assets in America.
Their combined profits soared 45.2 percent to a new record in 2010, but their taxes rose just 14.8 percent, new IRS data show. Profits growing three times faster than taxes means their effective tax rates fell.
In 2010 these corporate giants paid just 16.7 percent of their profits in taxes, down from 21.1 percent in 2009. The official tax rate is 35 percent.
The Washington Chamber of Commerce meme is that corporations are being kept from helping to expand the US economy by high taxes that make them non-competitive in the world market. However, the stock market continues to flirt with record highs because big businesses are making big profits, distributing them to shareholders and in the form of executive compensation. The excess profits are generally not being spent to expand plants or staff in the US because individual Americans — squeezed between relatively stagnant wages (adjusted for inflation) and an increasing percentage of the tax burden (as compared to companies) — can’t afford to increase consumption. So the Chamber of Commerce meme is malarkey.
Many of the largest corporations sit on their profits (Apple being a prime example of this) or throw a bone of investment to the American economy for public relations purposes.
US corporations, in general, don’t need lower tax rates; they need to pay higher actual taxes given that the biggest of them don’t pay anywhere near their IRS codified tax percentage.
Johnston is not optimistic that the burden will start shifting from individual citizens to big business anytime soon. As he writes in his recent article:
Going forward, the Obama administration predicts that Washington will rely more on individual income taxes and less on corporate taxes.
Between fiscal 2010 and fiscal 2018, individual income taxes will rise from 41.5 percent of federal revenues to 49.8 percent, an increase of 8.3 percentage points, the president’s proposed fiscal 2014 budget shows. Corporate income taxes – assuming current statutory rates – are expected to grow by only 2.4 percentage points from 8.9 percent in 2010 to 11.3 percent of federal revenues in 2018.
What this amounts to is corporations, as a result of their bought and paid for elected officials in DC, are skimming from the Sunday donation plate as others put in their hard-earned dollars to pay the price for the infrastructure that allows US-based corporations to flourish.
It is vital to never forget one important fact. Although, the mainstream corporate media covers the economy as if it were one monolithic force, it is not.
The rich are richer than ever now. Their economy is growing more gluttonous by leaps and bounds as the working and middle class, in essence, subsidize them with tax loopholes.
Johnston explains the revolving door and politician for rent game in DC:
Those rents – er, donations and perks – also ensure that those appointed to regulatory agency boards do well after they leave office, provided they have been good servants to corporate interests. Tricks like making customers paytaxes to monopolies that are exempt from the corporate income tax are one way that those appointed to regulatory boards will do well when they leave the government payroll, as my book The Fine Print revealed.
The corporate giants quietly lobby for laws and regulatory rules that get little to no attention in the mainstream news.
GE spent $39.3 million just on Washington lobbying in 2010, more than $73,000 per senator and representative.
ExxonMobil has spent on average almost $23 million annually lobbying Washington in 2008 through 2010. Walmart has spent between $6.2 million and $7.8 million lobbying Washington each year since 2008.
Lobbyists for these and other corporations have lawmakers on speed dial. As for you, just try to get a face-to-face appointment with your senator or representative.
Many years ago, the late US Senator Paul Simon (D-Illinois) announced that he was not going to run again. I was with him at an event and asked him why he had decided not to seek another term. His answer was telling.
“Mark,” he said (to the best of my memory), “I spend 70% of my time fundraising and 30% of my time legislating. There’s nothing I can do. You get elected to a six-year term and immediately your staff has you fundraising for the next election. If some interest gives my campaign $20,000, my staff is going to make sure I answer if they call. If a guy in a union with a lunchbucket calls, he’ll get routed to an intern. I’ve tried to change that, but it just seems to end up returning to the fundraising scramble and attention to the big givers. I’m just sick of the little guy or woman not being able to get through to me.”
Simon was the last of a generation and retired with dignity. (He died in 2003.)
Now you can probably count on one hand the number of senators who don’t wear a “for rent” sign on them.
And corporations continue to see their effective percentage of tax liability shrink as we continue to see ours rise.
What’s Really Driving The Crashing Markets?
Normally, stocks don’t fall off a cliff unless the economic data suddenly turns south or there are signs of an emerging crisis, like a run on the shadow banking system or threat to Middle East oil supplies. But neither of these played a part in this week’s equities massacre where the Dow Jones Industrial Average (DJIA) plunged 560-plus points in just two sessions and indices around the globe dipped deep into the red. What triggered this week’s selloff was an announcement from the Federal Reserve that it was planning to scale down it’s asset purchases (QE) in the latter part of 2013, and probably end the program sometime in the middle of 2014. Here’s the offending paragraph in the FOMC’s statement that lit the fuse:
“If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains, a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program.” (FOMC)
Now–unless you think that Fed chairman Ben Bernanke is a complete idiot–then you can assume that he knew what the reaction on Wall Street would be. After all, stock prices have more than doubled in the last 4 years mainly due to the Fed’s lavish liquidity spree. So any announcement that the program is “going away” was sure to send traders racing for the exits. Which it did. Traders were not having a “hissy fit” as many in the financial media have said. They were acting rationally. Absent the Fed’s turbo-charged monetary stimulus, stocks will go down, there’s no question about it. Current prices do not reflect fundamentals nor do they reflect the true health of the economy. They reflect a couple trillion dollars worth of UST and MBS purchases that have goosed stock prices dramatically. Traders know this, which is why they cashed in and walked away when Bernanke announced the prospective end of the program. They acted rationally.
But why would Bernanke want to throw a bucket of cold water on the markets now? Is it because he really believes that the economy is gaining momentum and the labor market is steadily improving?
Hell no, that’s pure baloney. Again, Bernanke is not a moron. He sees what everyone else sees, that the headline unemployment number (7.6%) is rubbish that doesn’t reveal the rot beneath the surface; the abysmal participation rate, the sharp uptick in part-time workers, and the lousy starvation-wage positions that have replaced the good paying jobs. Trust me on this; Bernanke knows how to read a freaking jobs report. He knows the economy is crap and that people still can’t find work. Just look at this clip from the SF Fed’s own report on the condition of the economy. It will help you see that Bernanke really doesn’t believe the green shoots hype at all:
“Federal fiscal policy during the recession was abnormally expansionary by historical standards. However, over the past 2½ years it has become unusually contractionary as a result of several deficit reduction measures passed by Congress. During the next three years, we estimate that federal budgetary policy could restrain economic growth by as much as 1 percentage point annually beyond the normal fiscal drag that occurs during recoveries….
CBO projections and our estimate based on the countercyclical history of fiscal policy suggest that federal budget trends will weigh on growth much more severely over the next three years. The federal deficit is projected to decline faster than normal over the next three years, largely because tax revenue is projected to rise faster than usual. …The rapid decline in the federal deficit implies a drag on real GDP growth about 1 percentage point per year larger than the normal drag from fiscal policy during recoveries.” (“Fiscal Headwinds: Is the Other Shoe About to Drop?”, FRBSF)
See? So things are bad and they’re going to get worse. This isn’t a secret. Fiscal policy is DESIGNED to make things worse. It’s deliberate! It’s all there in black and white, read it again.
So what’s really going on here? Why is Bernanke pretending that the future is looking so rosy, when the exact opposite is closer to the truth? Why is he announcing the end of a program that may never end? Just look at the rate of inflation, fer chrissakes! We are in a deflationary cycle. Inflation has been dropping for 3 straight months and–according to Bloomberg–” is at 53-year low, the lowest inflation since JFK was in office.” That means that the Fed will not hit its 2.5% inflation target and the bond buying will continue indefinitely. Guaranteed. Now, no matter how stupid or incompetent you may feel Bernanke is, I assure you, the Fed watches inflation like a hawk, and when the arrow starts to point down, they do everything in their power to get things going in the right direction again. They are always looking for the sweet spot because that’s the rate at which their constituents can rake in the biggest profits. In other words, they take inflation (or deflation) seriously.
But if that’s so, then why did Bernanke hardly mention inflation in the FOMC’s announcement?
He didn’t mention it because he’s trying to buffalo investors into thinking that QE is going to end sometime in the near future. But how can he end it, after all, unemployment is still high (and likely to go higher when the budget cuts kick in), GDP and output are weak, wages are flatlining, capital investment is non existent, corporations and financial institutions have money piled up around their eyeballs with nothing to invest in, middle class households have seen nearly half their wealth wiped out in the last five years, and the banks have a couple trillion more in deposits than loans because no one in their right mind is borrowing money in the middle of an effing Depression. If any of this sounds like an economic rebound, then maybe Bernanke is actually telling the truth and really plans to terminate QE next year. But I think that’s pretty bad bet, all things considered.
So let’s cut to the chase: The reason Pavlov Bernanke took away the punch bowl on Thursday and put markets into a tailspin, was because stocks are overheating and because his goofy printing operations have generated all kinds of risky behavior. Keep in mind, that it was Bernanke who said that he thought that goosing stock prices would create the “wealth effect” that would lead to a broader recovery in the real economy. Just as it was Bernanke who signaled that he would keep stocks from breaking lower. (The “Bernanke Put”). In other words, investors have just been following their Master’s lead, which is why they loaded up on stocks to begin with. And that’s why junk bond yields dropped to record lows. And that’s why margin debt climbed to record highs. And that’s why all the big corporations have been buying back their own shares hand over fist. And that’s why the financial markets are riddled with bubbles. It’s because Bernanke tacitly implied that he would support rising stock prices with lavish infusions of funny money NO MATTER WHAT.
Well, guess what? Now Bernanke is worried. He’s worried that the real economy is still in the doldrums while bubbles are popping up everywhere in the financial markets; in stocks and bonds, CLOs, CDOs, MBS and every other dodgy debt instrument, derivative or swap. It’s all getting very frothy thanks to the Bernanke.
So, how does the Fed chair intend to “contain” the emergent asset bubble until he retires at the end of the year and returns to blissful academia?
He’s going to keep doing what he’s doing right now; cherry-picking the data so he can rattle Wall Street’s cage every so often and keep stocks from zooming too far into the stratosphere. That’s the plan. Of course, he could just tell the truth–that QE has been great for Wall Street but done jack for anyone else. But I wouldn’t count on that.
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.