Can The Financial System Really Be Fixed? Some Say No.

By Greg Hunter’s

Every time I see a speech on the economy, such as President Obama’s on Monday, I rarely see someone cut to the heart of the problem.  There is too much debt!  That is the simple answer to what is wrong with the economy.   The President really did not address that issue.  He basically just scolded Wall Street for needing a bailout.   We have spent or committed 13 trillion dollars and we are nowhere near out of the woods.

Here are a few examples of  the debt problems American is facing that I have talked about in a previous post.  Let’s review:  We just paid people $4,500 a pop to trade in their “clunker” and buy a new car because it was the only way to pull the auto industry out of a tailspin.  America is in the hole and going deeper by the day.  The second week in September, the government sold 70 billion of our national debt.  That is 70 billion dollars in Treasuries in a single week to finance our needs!  2009 will produce a record deficit of 1.58 to 1.84 trillion dollars of red ink.  That’s nearly 4 times what the Bush administration ran up in 2008.  The Treasury Secretary also thinks we will not be coming out of this economic mess anytime soon, and he admitted as much in early September at a Congressional Hearing on TARP spending.  Foreclosures are up, and it’s forecast by the Treasury Department that “millions more are coming.”   Speaking of real estate, those lucky enough to stay in their homes are going to continue to be hit with falling prices.  Commercial real estate is in free fall.  Banks are failing at a rate we haven’t seen since the Savings and Loan crisis.  The government is printing money to buy its own bonds to artificially suppress interest rates.  Finally, unemployment is at 21% and rising (using computations).  There is no way the worst is behind us, quite the opposite.  That said, the President has to try to put lipstick on this pig of an economy.

When President Obama  entered office, he installed Tim Geithner as Treasury Secretary.  This was the guy who sat at the top of the New York Fed and watched silently as all the big banks took on enormous amounts of debt.  In many cases, leverage at the banks was 40 to 1.  In a word, insane.  Geithner’s punishment for letting that happen on his watch?  A promotion to Treasury Secretary!   Ben Bernanke was just reappointed by the President for his job as Chief of the Federal Reserve.  The Fed and Bernanke basically caused the debt meltdown problem with their interest policies and guidance.  The Fed Chief  has been hailed as the man who saved the system from financial collapse.  That is like a drunk driver causing an accident with a bus full of children.  After the crash, the drunk stumbles over and pulls the kids out of a burning bus and is then hailed as a hero!

How did these banks  load up on way too much debt?  It was done with a security called an Over the Counter derivative or OTC derivative.  Over the Counter means from a seller to a buyer and not done on an exchange.   Wall Street bundled up debt like car loans, credit cards, and mortgages into securities and made big commissions selling these bundles of debt around the planet.   Currently, there is no public market for OTC derivatives, contrast that with the Chicago Board of Trade.   That is a public market.  Take for example what happens when a bushel of corn is sold on the CBOT.    There are standards for how much a bushel weighs.  You cannot pour dirt, ball bearings or water into the bushel to make weight.  There are rules and regulations that guarantee a “clean” delivery with universal value.  Remember OTC derivatives have no public market.   That means there are no standards, no guarantees, no regulation and most importantly, no price discovery.  A pricing mechanism is the hallmark of a bid/ask public market.

The price for an OTC derivative is whatever the seller says it is.  There was little equity in most of these “securities” because, after all, there were no regulations.  Why put money into a security when the seller could put money in his pocket instead?  When the economy went sour, many people stopped paying  their car loans, credit cards and mortgage payments.   What do you suppose happened to the value of  OTC derivatives when people stopped paying their bills?    According to the Bank  of International Settlements, or BIS, there are 592 trillion dollars of OTC derivatives.   What do you suppose would happen if there was a public market now?   We would find out what this stuff is really worth and it would not be pretty!   According to famed investor Jim Sinclair at , there is no way most of the 592 trillion dollar ball of debt can be priced.  Sinclair thinks the BIS is underestimating the size of the OTC market.  Sinclair contends it is really more than a quadrillion dollars.   (A quadrillion is a thousand trillion!)

Sinclair recently wrote,”Unless financial contracts have standards there is no way to clear them.
Unless financial instruments have accurate means of daily valuation, there is no way to clear them.
OTC derivatives outstanding from 1991 to 2008 have no standards.
OTC derivatives outstanding from 1991 to 2008 have no sound means of true valuation in any time frame…”

Sinclair goes on to say, With this being the incontrovertible set of facts: The Bank for International Settlements is for the first time proposing the world’s central banks take over the financial risk of the entire mountain of more than one quadrillion one hundred and forty four trillion dollars (valuation before the change to “value to maturity” method valuation of nominal value of OTC derivatives) of OTC derivatives created from 1991 to 2008.  The reason is simple. This unchanged in size mountain of weapons of mass financial destruction as still sitting there ready to explode in the second chapter of the greatest double dip depression of 2007 – 2009.”

So, now the BIS is proposing that central banks backstop the entire global OTC derivative market.   It was recently reported by Bloomberg News,” Regulators are pushing for much of the $592 trillion market in over-the-counter derivatives trades to be moved to clearinghouses which act as the buyer to every seller and seller to every buyer, reducing the risk to the financial system from defaults.”

Still, the debt is not really going away under this plan or any other we have seen so far.  The mistakes of  greedy bankers are being transferred to the public by massive  money printing on a scale never seen before in history.  Who knows how this will turn out.    My predictions: it will not end well for the U.S. dollar and most people will suffer from enormous inflation.

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  1. Alex

    Obama undoubtedly has added to deficit. Did you know the Congressional Budget Office (CBO) projected that, based on actions taken by President Bush and economic conditions at the time, the deficit for fiscal year 2009 would reach $1.2 trillion? I seriously doubt that McCain or any other candidate would have done differently. Before the last election, some astute Republicans believed the election would be a good one to lose.’ They were spot on.

    No one in the media is talking how Governments (Republican or Democratic) don’t really run the country, or how Big Money/Vested Interests are pulling the strings. Frankly, the differences between the two political parties, rhetoric aside, is about the same as the difference between Tweedledum and Tweedledee. Take your pick, but the change we really need will not happen!

    • Greg

      Bravo! I have always said the Democrats and Republicans are one big body and 2 ugly heads that take turns ripping us off! Thank you for your comment!!
      Greg Hunter

  2. Jim in GA

    We should face facts and just move the oval office into Goldman Sachs headquarters, thereby saving lots of communication effort.

    • Greg

      If this wasn’t so true it would be funny! Thank you for supporting USAWatchdog!

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