Yesterday, the Federal Reserve lost a big decision regarding it’s transparency. Bloomberg, a financial news organization, filed a Freedom Of Information Act last year to get records to find out where the Fed spent trillions bailing out big banks in the financial crisis. When the Fed refused the request, Bloomberg sued and now won. Every American should want to know what the Fed is doing and who it is helping by printing trillions of dollars out of thin air. After all, the Federal Reserve is ultimately responsible for the value of every dollar you save and spend. Look for the Fed to fight giving up it’s secret information to the death! I predict it will appeal the case. This story is not being covered today in the mainstream media. Not covering this type of important story is part of the reason why the public is in the dark about what is going on with their money. More about this case and why the mainstream media is not fully informing the public in “The Soft Truth” posted below. Meanwhile, here’s more on the Fed losing it’s case to keep you in the dark.
In July comedian Jon Stewart, anchor of the Daily Show on Comedy Central, was voted the “Most Trusted” Newscaster. He had almost as many votes as Charlie Gibson and Brian Williams combined. Katie Couric, according to the Time Magazine poll, came in dead last. Boy, if that is a not a wake up call to mainstream media I do not know what is.
I don’t think it’s as much of a put down of the anchors as it is what they put on the air for news content. The Daily Show is comedy but it also can be hard hitting, reveal conflicting statements by politicians and hold people accountable for their actions. Look at the now famous exchange between Stewart and Jim Cramer from CNBC’s Mad Money. The public has lost a fortune in the stock market and the “experts” telling us to buy, buy, buy are never held accountable. What the Daily Show does with comedic license has taken a back seat in the mainstream media bandwagon.
You see, what the media heads have done over the years is cut expenses. For example, look at the “Fleecing of America” segment that used to appear regularly on NBC Nightly News. It’s now, according to the company web site, “a continuing occasional series.” NBC is simply not doing much of this kind of reporting. “Fleecing of America” was very good government watchdog reporting that took time and money and no one in the government was your friend after one of these revealing segments. Now, Brian Williams got what he called “unprecedented access” to the President in June and, as far as I can tell, Williams never asked a single tough question. The interview was so light that President Obama made Williams the butt of a joke at the Annual Correspondent’s Dinner.
Obama said, “I have to admit though, it wasn’t easy coming up with fresh material for this dinner. A few nights ago, I was up tossing and turning trying to figure out exactly what to say. Finally, when I couldn’t get back to sleep, I rolled over and asked Brian Williams what he thought.” If Williams would have done his job, there would not have been any jokes. In June, 60 Minutes did an updated profile of Fed Chief Ben Bernanke. Good time to do this story because we are suffering through what former Fed Chief Paul Volker says is “the mother of all crises.” The Fed has denied Freedom of Information requests by two different news networks to get the Fed to reveal which banks got trillions of dollars to avoid systemic collapse. When U.S. Senator Bernie Sanders asked Ben Bernanke in a March Congressional hearing, “Will you tell the American people to whom you lent $2.2 trillion of their dollars?” Bernanke simply said, “No.”
Who got 2.2 trillion dollars is a secret and, according to Bloomberg, that is not the only one. It has also been reported and discussed in Congressional hearings that there is an additional 9 trillion dollars in off-balance sheet transactions that the Fed can not or will not account for. When asked about the trillions the Fed wants to keep secret, the Federal Reserve Inspector General fumbled for answers. Why 60 minutes did not press the Fed Chief about the secrecy of vast sums of money is troubling to me. Should the American taxpayer expect the Fed to “fix” the system behind closed doors without public scrutiny? We did get to see Bernanke’s childhood home in the CBS story and that is what’s really important!
Doing superficial event type news programming is something I call “The Soft Truth”. It is more or less superficial news and is cheap, fast to produce, and you will not make enemies. The news in mainstream media has mostly become just the stuff between the commercials. Then, there is what I call “The Hard Truth”. This story is not cheap, it ties up the company lawyers and management and, if done right, you will piss some people off. And even if there are cutbacks because of advertising shortfalls, you can still ask hard questions. It seems to me the reporters have gone soft or stupid or have been told not to rock the boat.
Take, for example, the July press conference at the White where the last question was about Harvard Professor Henry Gates getting arrested in his own home. I was shocked to see the President even answer it. I don’t blame the President; he just answered a question he probably should have passed on. I blame the Press for bringing up something so trivial to a nation with huge geopolitical and financial problems. We are fighting two wars. We’ve spent or committed nearly 13 trillion dollars in an ongoing financial crisis. The Special Inspector General claims it will take 23.7 trillion to fix the problem caused by reckless bankers. (By the way, a trillion bucks is a stack of 1,000 dollar bills 67.9 miles high.) There are serious risks to the nukes in Pakistan and Israel is dying to drop a Daisy Cutter on Iran’s head!!! So we get this stupid Henry Gates question that the mainstream media covers for days! WHAT!!!! The Gates incident is hardly a “Rodney King moment” in America. Most people have probably already forgotten this non- story. I do have few questions that the White House Press Corps should have asked:
Mr. President, July was the highest month for American causalities since the Afghanistan war started. Can you tell us why the United States should shoulder this cost in lives and money?
You fired the head of General Motors. Why have you not fired a single banking CEO; after all, aren’t they the ones that caused the financial crisis?
Do you approve of the bankers paying themselves big bonuses after a taxpayer bailout while so many Americans are losing their jobs?
Do you approve of the Federal Reserve keeping secret the trillions of taxpayer dollars given to the banks to avoid financial collapse?
What is America prepared to do if the Taliban is successful in gaining control of the nuclear weapons in Pakistan?
If Israel attacks Iran’s nuclear sites, what is America prepared to do?
Of course we did not hear any of those questions at the press conference and probably never will. When my Dad was disgusted with someone he would say, “He doesn’t know sh*t from shinola.” My favorite poster ever hung in the Programming Office of a Beaumont TV station I worked at in my early days. It was a blow up of a Shinola Shoe Polish bottle. The caption at the bottom of the poster simply said in bold letters, “There’s a Difference.” I think people can see the difference between the “Hard and Soft Truth.” One is good and is the real thing and the other is, well, crap and people can tell the difference. Maybe that’s why Jon Stewart is the most trusted newscaster in America.
Glen Beck’s problems with his advertisers started on “Fox & Friends” the morning of July 28th when he said President Obama has “a deep-seated hatred for white people,” adding, “This guy is, I believe, a racist.” Since then, it has been reported no less than 20 advertisers have asked The Fox News Channel not to place their ads in his show. Colorofchange.org is taking credit for the ad exodus from GB. It’s a group that says it “exists to strengthen Black America’s political voice.” I would not have said what Beck said because I do not believe The President is a racist but that is not really the point. What is important is preserving the right to say what is on your mind no matter who gets angry or disagrees. Shaming, threatening or coercing advertisers not to advertise on a particular TV show because you do not like what the host says about the guy you voted for is nothing more than an end run around the First Amendment.
I remember back in the early 90’s there was a Ku Klux Klan march in Lexington, North Carolina, and I was sent to cover the event as a young reporter. I begged my news director not to send me but he did anyway. It became an opportunity for me to really see the First Amendment in action. The streets were lined with African Americans looking on as a group of 30 or so Klansmen were marching and shouting things like “I hate N…s!” I thought what the Klan yelled out was repugnant but that is the beauty and the ugly of freedom of speech. There was not a single fight and the whole thing ended peacefully. There was no way to punish the Klan for what they said even if most people thought it was wrong. In America, even if someone doesn’t like what you are saying, you can still say it.
After Kanye West made his now famous accusation that, “George Bush doesn’t care about black people” during a Hurricane Katrina telethon, there was not a push to boycott his records.
Many people thought that comment was over the top. After all, there was plenty of blame to go around for the way that disaster was handled. West’s comment implied that President Bush was a racist. I don’t believe that either, but I do defend West’s right to say it without having some group organize a boycott to shut him up.
I’m sure the folks at Colorofchange.org think that they are doing the right thing by trying to shut Beck up by getting his ads pulled. I am equally sure Beck’s comment offended plenty of people, but preserving the right of free speech without physical or economic reprisal takes a higher precedence. If we lose sight of how important freedom of speech is to our Republic then we will weaken all of America’s political voice.
I keep hearing the constant drone of real estate being “at a bottom” or “finding a bottom.” I started to really notice this chatter by the talking heads of financial television in the middle of June when I heard Jim Cramer declare that “real estate has bottomed!” Yes, we just got some good news on the home front about exsisting home saIes jumping more than 7 percent in July. It is the 4th consecutive increase in sales. However, factor in 31 percent of all sales are foreclosures and short sales and that yearly median house prices have dropped 15 percent and there is not that much to celebrate. Also, the numbers are being artificially pushed up because of an 8 thousand dollar first time home buyers credit that will expire in November. I wish as much as the next person that the worst is behind us and better days are ahead, but that does not square with the facts. They say a picture is worth a thousand words and the one below from Credit Suisse says plenty about where we are in the real estate downturn.
It could not be any clearer that there is a tsunami of mortgages that are going to reset to higher payments between now and mid 2112! There will no doubt be families that will be able to pay increased monthly payments, but there will undoubtedly be many who will not. This will not help the foreclosure problem or support prices!!
I bet you the Fed and the Treasury are very familiar with this chart. Officials must be scared to death that resets and possibility of rising rates would kill any long term recovery. The Fed is spending (or printing) 300 billion dollars to buy their own notes to create demand and that is what is holding rates down! This is called Quantitative Easing or QE, but what will happen when the program expires this fall? What will happen to housing prices if the 30 year fixed mortgage, which is now around 5.5 percent, rises to say just 7 percent? Prices would definitely go down.
Some other recent news about real estate points to anything but a bottom. A little more than 13 percent of residential mortgage holders nationwide were at least one payment overdue or in foreclosure last quarter, according to the Mortgage Bankers Association.
A Deutsche Bank report claims that 25 million homeowners will probably owe more than their mortgage is worth by 2011. That will be nearly half of all homeowners in the U.S. The bank estimates 26 percent of homes are currently underwater.
Also, there is the recent news from Realty Trac where foreclosures are up 32percent nationwide from July of last year. In fact, home foreclosures failed at a record pace despite the ongoing state and federal programs to help people to stay in their homes. Finally, commercial real estate is another 2 to 3 trillion dollar meltdown and that is not going to end well either.
This does not mean there are not bargains out there in the market, but let’s not confuse a plateau on a downward trend as a bottom. Please keep the picture above on your “favorites” and every time you hear “the real estate crisis has bottomed” take a long look at it. When I gaze at the Credit Suisse chart, I do not see a bottom until at least 2012. I hope I am dead wrong!
“Eat the Bankers” was written on a sign I saw in the background of the media coverage of the G20 meeting in London. To me the sign embodies the outrage working people have with the bankers. Not because there is an economic downturn but because the bankers are being put on a pedestal while the working stiff is being thrown under the bus. Nothing gets the attention of working people more than their jobs, income, pensions and savings being destroyed. It’s been reported that global financial assets lost 50 trillion dollars last year. Meanwhile, the bankers get unlimited bailouts and backdoor payouts for removing toxic assets from their balance sheets. For the most part, these are worthless or near worthless securities they themselves created and profited from. Bill Gross of PIMCO recently said that the Federal Reserve would have to expand its balance sheet to “5 or 6 trillion dollars.” The Fed currently has 2.2 trillion in these toxic assets bought from the banks to clear their balance sheets of bad debt. In total, the U.S. has already spent or committed in the neighborhood of 10 trillion dollars to “fix” the financial crisis. That’s enough money to just about pay off every mortgage in America!! Even with this massive amount of money spent or committed, the “powers” still say the credit markets are “clogged.” Is that like a giant log jam of money that needs to be blown up to get credit flowing again? My question is simple: How many more trillions will it take before the greedy incompetent bankers, who wrecked the world economy, will loan us our own money back? The answer is– no one really knows and even if they did know, they would not tell you because the number is just way, way too scary.
Tuesday President Obama said this, “We can not continue to excuse poor decisions. We can not make the survival of our auto industry dependent on an unending flow of tax payer dollars.” The White House asked GM CEO Rick Wagoner to step down. (Don’t feel bad for Mr. Wagoner, he will get more that 20 million in accrued compensation.) On top of that, President Obama even threatened bankruptcy for GM and Chrysler. Some speculate that was a ploy to get the bondholders and the UAW to take a haircut and keep GM from the taint of filing Chapter 11. Right on Mr. President! Now apply that kind of tough love to the financial institutions. But that is not what is happening to the folks who caused this mess. Instead of taking insolvent financial institutions into receivership, the banks, insurance companies and brokerage firms are getting TARP money from Treasury and toxic assets taken in trade for Treasury Bills from the Fed. No tough love there, just an… “industry dependent on an unending flow of taxpayer dollars.”
Meanwhile, back in the streets of London a protester holds a sign that says, “Capitalism isn’t Working.” Philip Jennings, UNI Global Union General Secretary, whose group represents 20 million workers, told CNBC that, “It isn’t working people that got us into this mess but it is working people paying the price.” Jennings predicts 50 million new unemployed and 200 million more will go into poverty. If that happens, civil unrest could breakout on a global scale and the financial crisis will morph into a catastrophe where no one, especially the bankers, will be safe.
My wife and I were out to lunch with a friend of ours and she asked me,”When is the economy going to get better?” If you saw Fed Chairman Ben Bernanke’s testimony in the Senate yesterday, the answer is 2010. Of course that answer came with big caveats such as the 787 billion dollar stimulus package works to revive the economy. Many say it will not work but I hope it does. My answer to,”When is the economy going to get better?” is “It’s not going to get better; it is going to get different.” Meaning, the economy will not return to what we have grown to consider “normal.” There is going to be a new “normal.” This is not a recession, a dip or a temporary very bad economic condition. We are witnessing a “hard right turn” in a new direction on a global scale. Many of the jobs lost in this downturn will be gone forever. A couple of changing industries I can think of are financial services and the automotive sector. The good news is that people are going to be forced to live within their means. Almost everybody rich and poor will consume less and save more. There is going to be a new age of frugality and that, as Martha Stewart says, “Is a good thing.” Thrift is the new black and this mindset is going to be in vogue for a generation or more!
Most people I come in contact with do not understand what is unfolding right in front of them. You can’t really fault them because, after all, look at the recent conflicting message President Obama sent out. He just signed the biggest spending bill in history and is now calling for the return of a Pay as you go Policy. This bill was passed without budget cuts or increased taxes. On top of that, the Treasury has a trillion dollar plan to “fix” the banking sector. Where are we getting the money for all of this spending? We are borrowing and printing it at the moment. In Senate testimony yesterday, Chairman Bernanke was asked a simple question, “How much money will it take to fix the banks?” Bernanke said that the Senator would have to ask, “The Treasury or the FDIC.” This was the answer from the man who is in charge of monetary policy for the United States. In my opinion, he either does not know or is afraid to give a number. My guess is the amount of money it will take to “fix” the banks will be many trillions of dollars and that is a down right scary repair.
I am not the only one who is concerned. George Soros, renowned billionaire investor, recently said, “We witnessed the collapse of the financial system…It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.” I do not profess to be able to forecast the future but I do know that given the circumstances surrounding the biggest economic mess in history, one thing is for sure. Forget about the economy you saw in the past, we are not going back there. Everything in the future is going to change and that includes the value of our money.
As I watch the News out of Washington today, I see the heads of our nation’s biggest banks being grilled in Congress on the causes of the economic problems we are facing. None of those guys can say they are there because their bank is flush with cash and great investments. The banks and the economy are in the shape they are in because of greedy incompetent bankers who paid lobbyists to erase all regulation to allow them to make reckless highly leveraged investments into toxic assets. Now taxpayers are being asked to clean up the mess and pick up the tab. Many people are asking what is going to happen next?
One of my jobs as a journalist is to break things down so people can understand what is going on. I don’t always hit the mark, but I can sure appreciate people who can do that task well. What is going to happen next was brilliantly summed up recently by Martin Armstrong an investment pro. He says, “We are headed into the debt tsunami that is of historical proportions unheard-of in history.” Succinctness and clarity all rolled up into one sentence. That is the simple truth.
A lot of that tsunami is coming from distressed homeowners facing resets of mortgage payments. Last year while I was working for CNN, I asked a 76 year old woman whose mortgage was resetting to higher payments why in the world she agreed to an adjustable rate mortgage when she knew the resets would force her into foreclosure. She told me the mortgage lender promised when the higher payments came she could simply refinance. Multiply that logic by millions of Americans and you can see where the flood of bad debt is coming from. The simple truth is best summed up by Richard Benson,” We got here because far too many loans were priced based on the probability of being refinanced and not the ability of being repaid! As long as liquidity was flowing, bad loans could be rolled over into bigger bad loans, but now the music has stopped for refinancing these loans.”
To address the economic crisis we are facing, the new Treasury Secretary Tim Geithner is proposing the taxpayer to commit up to a trillion dollars for the Fed to guarantee more illiquid loans. He admitted to Brian Williams this week on CNBC he did not know how much money it would take to fix the financial problem. Geithner has been widely criticized for announcing a “plan” this week with few details on how it would work. I did not find the simple truth in anything Geithner said this week. I just saw deep black water.
At the same time the bankers were being grilled to well done on Capitol Hill, the House and Senate were putting the final touches on a “stimulus bill” that is now headed for the President’s desk. Susan Collins the Republican Senator from Maine was one of three who broke ranks with the GOP and negotiated a compromise with the Democrats. She announced the bill was only “789 billion dollars” which was billions less that the House or Senate versions. Then with a straight face, she said the bill was “fiscally responsible.” Fiscally responsible is how the biggest single spending bill in history is characterized. I hear water.
I have been hearing about how we as in “We the people…” have to fix the banks so they can lend money again. Many options have been discussed and it looks like the President is strongly leaning toward a “Bad Bank” type of rescue where toxic securities will be dumped into a newly created institution. It’s a magical place where bad debt bets will disappear like tears in the rain, of course, with taxpayer help. This has never been done before on a scale this large, so no one really knows exactly what the consequences will be or if it will even work. NYU economics professor Nouriel Roubini predicts that the losses for the banking system could be 3.6 trillion and is “effectively insolvent.” Just about a year ago Roubini said the bank losses would be 2 trillion bucks. Fact is, no one knows for sure how much this may end up costing because the toxic securities (OTC derivatives) are very, very difficult to price. In many cases they could be worthless or worth a lot less then they can ever get on the open market. In a year from now the number could be 7 trillion in bank losses, who knows! The toxic asset picture is a moving target but, one thing is for sure, it will be many trillions in losses by the time it is finally cleared up.
My question is if the banking system is “insolvent” and it’s unknown how much this will cost then why is the “default option” not in play here? Famed investor Jim Rogers says the insolvent banks should be “allowed to fail.” Then the assets would go from the incompetent to the competent. There are hundreds of small and medium sized banks that did not invest in toxic securities and are financially sound. In short, the incompetent banks would be liquidated and competent banks would take over the assets that are left behind. Instead, the pundits of Wall Street are basically telling America,” You make us (the banks) whole first and then we will lend you your money back!” That is simply outrageous because we are rewarding the incompetent!!!!!!!
Remember, incompetent and foolhardy bankers are the cause of this “credit crisis” in the U.S. and the rest of the world. Letting those banks take the hit for their ill advised, reckless investments based on greed will do many things. Here are just a few. Letting the reckless banks fail will limit taxpayer exposure and preserve our capital and our credit rating as a country. Bank failure will wash bad debt out of the system once and for all and protect the dollar from free fall. Finally, I think in the end it will be cheaper and more effective than what has and will be done in the future to “fix” the credit crisis.
In default, the incompetent banks, the bond holders and the share holders will get completely wiped out. Yes, there will be plenty of pain to go around but that is coming anyway. All the capital injections and bailouts and “Bad Banks” just put off judgment day and make things worse for the country. The idea that somehow we as a nation do not have to pay for our financial sins is a farce. The only people that should be protected with taxpayer money (even though it will cost trillions) are the depositors. Without depositors you do not have a banking system. Depositors are savers and that is what is needed for capital formation. We do not need anymore debt formation. Warren Buffet wasn’t able to get 10 percent interest for loaning billions to Goldman Sachs or GE because he had a good credit score. He got preferential treatment because he had capital (yes… cold hard cash) to invest. The way I see it, the less time we drag this problem out, the faster we can truly put it behind us. Right now the “default option” is voluntary, but if we get this wrong and do not really fix this problem, then default may be forced on a lot more people than just the incompetent bankers.
While I was watching the wall to wall Inauguration coverage of Barack Obama there was a “man in the street” segment on one of the networks where people were being asked “What should the new President do about the troubled economy?” One man said “He should give money to all the homeowners who are in trouble and give some money to other homeowners too.” I think the idea of bailing out anyone and everyone is now in the vernacular of American society. How do you suppose people are getting the idea that everyone should get a financial rescue? Could it be story after story in the news everyday about how Citigroup, Bank of America or a variety of other banks are getting hundreds of billions of dollars in cash and government backing to keep them afloat? Maybe it’s the 200 billion given to AIG to keep it from causing systemic failure. It just couldn’t be the nearly 18 billion given to GM and Chrysler to keep them in business. Bailout fever is spreading like kudzu. The list of businesses and industries in need of a lifeline are like snowflakes in Colorado. Home builders, airlines, insurance companies, money market funds, states (41 are in financial trouble) and hundreds of cities around the nation are facing big budget shortfalls. Is that going to turn into some sort of bailout too? I was in North Carolina two weeks ago. While watching local television I heard the new Governor, Bev Perdue, say the state was 2 billion dollars in the red and that without federal bailout money there would have to be drastic cuts to the state budget. She was in Washington trying to get a piece of the TARP money and, why not, every other state governor is doing the exact same thing!!! Governors from around the country are asking the Federal government for a trillion dollars so they’ll not have to make some very hard choices.
With all this bailout talk, another word is starting to make it into the vernacular…Inflation!!! Before the Geithner confirmation hearing, former Fed Chief Paul Volcker, who I like to call “the Real Maestro,” gave a short testimony to vouch for tax dodging “Turbo” Tim Geithner. (He used Turbo Tax to do his returns.) The most newsworthy thing said were the few lines Volcker slipped in about his concern about inflation because of all the bailout money being created for the banks. No news organization I know of reported that little tidbit. Volcker’s fear of inflation should have been the real headline for the hearing because “Turbo” Tim was already a lock for Treasury Secretary. Later that night on Bloomberg Television, former SEC Chairman Harvey Pitt said he saw “no way” that there is not going to be inflation given the massive amount of money that will be spent for bailouts and economic stimulus. You won’t see that sound bite anywhere in the news either. When you talk about inflation you are really talking about consequences to monetary policy. Inflation was so feared by the founding fathers they wrote in the constitution that money shall be of “Gold and Silver.” That meant no fiat currency for economic stimulus packages and of course bailouts. We are a long way from the founding fathers and their kind of thinking. Today the government can print money until it runs out of trees, but what most people do not realize is there is an aftereffect for that kind of financial engineering. America has swept aside any talk of moral hazard and is embracing the toxic idea of a “bailout nation” for which the consequences risk our very survival as an independent country.
A friend of mine, who is a crack investigative producer, just got a gig with a major network. His new job will be to cover the Madoff story. There is no doubt this is a big story and in the press been called the “crime of the century.” Madoff is a self proclaimed fraudster who puts a face on the Wall Street “banksters” as in gangsters with brief cases instead of Tommy Guns. But for most Americans this story will be nothing more than tragic theater. This story’s outcome will not matter to those in or headed for financial ruin.
The real story is what’s going on over at the Treasury, Federal Reserve and Congress. This trio has already spent, “loaned” or committed 8.5 trillion dollars to the economic problems plaguing our country. It appears the carnival of money printing is nowhere near ending. Now, there is even talk of another government bailout for the people who were ripped off by Madoff. This plan proposes to recapitalize SIPC, the Securities Investor Protection Corporation, with 15 billion dollars to augment its paltry 1.5 billion dollar insurance pool to protect investors. I guess 1.5 million does not go very far when the pool of cheated customers is 50 billion dollars deep. Where do all these bailouts stop? America, in my view, has gone from a capitalistic society to bailout nation in little more than a year.
The Federal Reserve is in the process of bailing out the country through a series of “lending facilities.” The TAF, TSLF, MMIFF, TALF and PDCF are the acronyms that are funneling money to everything from banks to brokers to money market funds and even select hedge funds. None of these “lending facilities” were around little more than a year ago. All of this bailout activity adds up to more than 2 trillion dollars and is being done in secret without the public knowing who gets money for what! The latest facility to be added to the bailout bucket is provided by the Treasury and is called the TIP or Targeted Investment Program. This one is for “Citi-style” rescue programs. The government is clearly ready to bail out just about any business that issues a W-2
Add all these “programs and lending facilities” together with the bailout of GM, Chrysler, AIG, the monetization of billions of mortgage debt from bankrupt Fannie Mae and Freddie Mac, along with the upcoming Obama stimulus package, and some people are getting worried about a little prosperity killer called inflation. In a few years, most people will not remember the Madoff story but will be living or surviving some pretty big price increases in just about everything they consume. In the end, it will all come down to a crisis in the dollar because just like Madoff it will no longer be trusted.
Back in the late 60’s and early 70’s prime interest rates averaged 6 or 7 percent. Back before 1971 it was possible to save money at a reasonable guaranteed rate of return and easily keep ahead of what little inflation there was in the U.S. economy. That was the beauty of honest money that held its value and paid a real rate of return. In 1971 all that changed when President Richard Nixon took the country off the gold standard and went to a total fiat currency. A few years later the Employee Retirement Income Security Act (ERISA) was sign into law and that made possible the 401K plan. It allowed people to save in a brand new way largely through the stock market. The stock market is an invaluable tool of capitalism. It is how many companies raise capital and create jobs and prosperity. But what most people do not realize is a 401K is not a savings plan but an investing plan. When you save money, you put it away and get a guaranteed return. In an investment plan the money is put away but not guaranteed. Most people I know do not really understand their 401K plan. Folks are repeatedly told “invest for the long term.” They are also told there is really no other way to save for the future because if you simply save your money inflation will eat up your returns. By and large, working people are pushed into 401K’s. In the right business cycle with the right demographics (as in lots of baby boomers investing in stocks at the same time such as the 80’s and 90’s when business and inflation were stable) the 401K is a not a bad deal especially when you consider that companies often match or contribute funds to make the investment plan advantageous to participants. But in the wrong part of the business cycle (aging baby boomer population and big government bail outs of every big bank) the 401K can provide some gut wrenching lessons about “investing.” People are painfully finding out with every statement that these plans have not been such a good “long term” investment deal. The S&P 500 is back at levels not seen since 1998. And that doesn’t really account for companies whose share prices have been wiped out or bankrupted. A few examples spring to mind such as AIG, WaMu, Wachovia, Bear Stearns, GM, Ford, Fannie, Freddie, Lehman, Enron and World Com. Also, factor in a nearly 30 percent drop in the U.S. Dollar Index and how are people in 401K’s making money for retirement? The short answer: They are not!!! If you would have simply invested in money markets (and taken the company match) back in 1998 with your 401K you would have been hit with inflation but at least you would have a positive nominal return. Most people did not take that route. Now, to help fund the multi trillion dollar bailout of Wall Street, the Fed has announced a new policy of “Quantitative Easing.” That means “printing money” to us simple folk. So getting any kind of return on cash will be impossible to do because the government will be printing it faster that you or anyone else can save it. Nobel Prize winner Milton Friedman said it best, “inflation is always and everywhere a monetary phenomenon.” Printing lots of fiat currency is going to produce an ugly phenomenon for most people. I see a continuing freak show of bailout and default. If you are an investor then the stock market and all its risks and rewards are for you but if you are a saver then maybe you should have other options. Wouldn’t it be easier for most people to save if we just had honest money? Someday honest money will be necessary for the county and our citizens to survive.
The uneven form the financial bailout has taken is really quite galling to me. The headline: Not a single bank president has been asked to step down or a single plan asked for from the big banks. Chuck Prince did leave on his own last November with a 38 million dollar pay package but I would call that “getting out while the getting was good.” Since then, all the major banks in this country have been at the public Fed begging bowl. The big money has come from the many “lending” facilities such as the TAF, TSLF, PDCF and many more that have been created by the Federal Reserve. This money, experts say, is necessary to keep these institutions solvent. Has Congress asked the banks for a plan to make sure these insolvency problems will not happen again? Contrast that with the big 3. These companies are being asked for detailed plans for recovery before they get somewhere in the neighborhood of 25 billion dollars. It has been reported the CEO’S of the big 3 could be asked to resign as part of the deal!!! We’ve already handed out 150 billion to A I G and recently about 325 billion to Citi!!! So far the financial rescue has cost a total 8.5 trillion dollars. The money by and large has gone to any banker with a sad story or stupid investment into derivatives. Today Meredith Whitney said on CNBC that all …”the big banks are going to need more capital!!!! ” More Capital and NO PLAN!!!!! WHAT GIVES???? Where is the outrage!!!!!!!!!!!!!
This all gets back to OTC DERIVATIVES… THE REAL UNDERLYING PROBLEM! I am talking about securitized debt. The financial wizards of the world securitized every debt imaginable…mortgages, credit cards, car loans, student loans. You name the debt and it was wrapped up into some sort of security. It is safe to say the size of the problem is somewhere between 500 and 1000 trillion dollars depending on who you talk to. Whatever the amount is the problem is BIG, VERY VERY BIG!!!! The biggest financial problem ever in the history of the world! THERE IS NO PUBLIC MARKET FOR OTC DERIVATIVES and nobody is talking about creating one as part of a solution!!! THERE IS NO WAY THAT THIS FINANCIAL CRISIS WILL EVER BE OVER UNTIL THERE IS A FINANCIAL MARKET FOR THIS CRAP. But of course, if there is a market that would provide a “price discovery” and then we would find out this stuff is worthless or near worthless. So the powers that be are just throwing good money after bad. I think the most outrageous part of the whole story is even though the taxpayer is on the hook for several trillion dollars we do not get to know which banks are getting the money and what “assets” the banks are unloading on the government. I suspect these “assets” are probably akin to candy wrappers and toilet paper. Fed Chairman Ben Bernanke has said the reason they will not disclose this information to the public is that it would not be “helpful”. THE SECRECY BEHIND ALL THIS GOVERNMENT ACTION IS OUTRAGEOUS!!!!! What in fact the powers that be are hoping for is this money printing will “unclog” the credit markets and get things back to “normal.” These toxic “securities” or derivatives can then start trading again the way they used to without a public market. No public market means trading would again be done without regulation, guarantee or standards of any kind. I say no way! We do not have a credit problem but a collateral problem and the banks do not trust the collateral. There is going to be a new “normal” and most people are not going to like what that feels and looks like. I guess then there will be OUTRAGE!!!
In April of this year former Fed Chief Paul Volcker described the problems facing the economy as the “mother of all crises.” That was a critical and amazing statement, not just because of the implications of what was said but, more importantly, by who said it. It almost seemed over the top at the time, but now everyday everyone from Wall Street to Main Street is wondering just how bad the economy will get and when it will bottom. It seems every week there is a new and even bigger crisis. This week the GSE’s Fannie and Freddie are being talked about in terms of when not if they will be taken over by the government. This is big folks because these two GSE’s hold half the mortgages in America…a staggering amount of more than 5 trillion dollars. The cost of the bailout according to the Congressional Budget Office is anywhere from 0 to 100 billion dollars. Wow!!! What a spread in price! That estimate leads me to believe that the CBO just does not really have a handle on the answer.
In another crisis, last week the Attorney General of New York and others announced the beginning of settlements to force almost all the big financial institutions to buy back hundreds of billions in “Auction Rate” securities. These “securities” were supposed to be as safe and liquid as a money market account but as NY AG Andrew Cuomo has said they were anything but safe and liquid. Cuomo has fined the biggest players in the brokerage and banking business hundreds of millions of dollars in penalties. In some cases State AG Cuomo alleged out right fraud. These folks are lucky no one is going to jail over this problem.
And let’s not forget the recurring nightmare of the continuous bank and brokerage write offs and losses due to the sub prime crisis, aka the over the counter derivative or securitized debt. This kind of securitized debt is unprecedented in history. The total amount ranges from 500 to 1000 trillion dollars. During the last decade almost every debt was packaged into a bond or security and sold. The masters on Wall Street “securitized” everything it could get its hands on: sub prime to prime mortgages, car loans, student loans and credit card debt just to name a few. This kind of debt was supposed to be a financial innovation and according to Alan Greenspan and others needed no regulation. This means there are no standards and no guarantees and plenty of other not so nice characteristics of this kind of “security.” These “securities” in most cases were sold as triple A rated or equal to a U.S. Treasury and that means “riskless.” So far those “riskless” mortgage backed securities and others have caused an estimated 500 billion in losses for the banks and brokerages. According to Nouriel Roubini, Professor of Economics at New York University, the tab for this credit crisis will cost the Banks and brokerages at least 1 trillion dollars and as much as 2 trillion dollars before it is over. Maybe that’s why former Chief of Economics at the International Monetary Fund and Harvard Professor Kenneth Rogoff predicted this week that, “We’re not just going to see mid-sized banks go under in the next few months … “We’re going to see a whopper … one of the big investment banks or big banks.” Given this backdrop, it is no wonder Treasury Secretary Paulson and Fed Chief Bernanke are floating ideas about ways to let even large and systemically important institutions go bankrupt if they are insolvent.
So, my 5 questions to Ben Bernanke are as follows:
1.) If the housing market continues to sink in the next few years, could it cost more than 100 billion dollars to bailout Fannie and Freddie?
2.) What do you think the bailout of Fannie and Freddie mean to the balance sheet and credit rating to the United States of America?
3.) Given the huge loses the banks and brokerages still face, should there be regulation in the securitized debt market?
4.) Should the rating agencies that gave triple A ratings to worthless debt be investigated?
5.) What are the criteria you will use to let a systemically important institution fail? (In other words, which companies will you let fail and which will you bailout?)
To Ben Bernankes credit, he did not cause these problems. He walked into a mess largely caused by his predecessor. Unfortunately, Bernanke is left to deal with this “mother of all crises.”
Everybody knows the date of the start of the Great Depression, October 29th 1929. It was the day of the worst stock market crash in history. Some people confuse the stock market crash on that fateful day as the Great Depression. But the Depression was not a single day but an era that dragged on through the thirties and into the forties. But the picture of what was about to happen to the lives of most Americans in the beginning was opaque at best. At the time, the general public did not realize a major change was taking place. After all, they were being told things like the economy is “fundamentally sound” by then President Hoover. A few other quotes from the beginning of that dark era include:
December 5, 1929 “The Government’s business is in sound condition.” – Andrew W. Mellon, Secretary of the Treasury
December 28, 1929 “Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.”
– Associated Press dispatch.
January 13, 1930 “Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.” – News item.
May 1, 1930 “While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.” – President Hoover
June 29, 1930 “The worst is over without a doubt.”
– James J. Davis, Secretary of Labor.
June 9, 1931 “The depression has ended.” – Dr. Julius Klein, Assistant Secretary of Commerce.
(quotes came from Illuminati News Sept. 2005)
Fast forward to today’s credit crisis. I can remember vividly in February of 2007 how all the financial experts and administration officials being brought on to CNN (where I worked as an investigative correspondent) all said that the sub prime crisis (securitized debt or OTC derivatives) would be “contained.” “Contained”? America is now bailing out GSE’s Fannie and Freddie along with every major bank and brokerage house through the Feds “Lending and Auction” facilities. There is no telling what the ultimate tab for all the bailouts will add up to, but trillions of dollars is far from a fantasy figure. After all, this so called credit crisis is not a one day event like the take over of Bear Sterns or the stock market crash of 1929 but the beginning of a new era. Many financial events and upheavals will serve as mile markers along the road that will undoubtedly shape this new era. What the country will look like in the end will take years to develop. I think where we are now is certainly not the end and not the beginning… but the end of the beginning of a new and dark era in world financial history.