My best friend Al is responsible for this particular blog entry. It was he who asked “Is there any hope for the new year?”
Where the Congress touted itself to be the most ethical Congress in decades and the President openly proclaims they will be open, transparent and accountable, we can all see that these are nothing more than political lies. Simply put, our government, as it is presently constituted, cannot be trusted to promote the welfare of American citizens over their self-interest in power politics and continued pandering to their special interest friends.
Deceiving the American Public …
Once again, we are seeing the Obama Administration’s Treasury Department, acting in concert with the Federal Reserve, deceiving the American public about the amount of money that is being used to bail out “too big to fail” financial institutions. And telling bald-faced lies about their legislative initiatives; be they pork-laden funding bills, healthcare reform, cap-and trade or the re-formulization of the Administration’s financial regulatory agencies. Simply put, they are lying about the cost of these programs and how they are to be funded. Thus moving the United States further down the road to financial ruin – and the type of restrictive recovery policies which can only be implemented under an authoritarian socialist regime.
What ever happened to TARP?
Rather than forcing the financial institutions to use Congressionally-mandated funds, such as those allocated for TARP (Troubled Assets Relief Program), for their intended purpose, we find that the TARP funds have been almost silently re-purposed to support other government initiatives and activities. Money that was to be returned to the Treasury as repayment of the taxpayer’s loans are already being considered to expand other government entitlement programs. Since neither the Congress nor the Administration is acting as an honest broker in these matters, it is the taxpayer and law-abiding citizen that loses.
About the Fed’s artificially low interest rates …
Complicit in re-capitalizing the financial institutions, we find that the Federal Reserve is maintaining the Federal Funds target interest rate at an artificially low interest rate of zero percent to a maximum of one-quarter of one percent. Thus allowing financial institutions to borrow funds from the Fed at these artificially low rates and then turn around and purchasing risk-free Treasury instruments paying a much greater interest rate. Creating tremendous profits for the financial institutions with little or no risk. Profits on which certain key executives will earn bonuses for little or no work. The institutional shareholders are getting screwed as these financial institutions struggle towards faster re-payment of TARP funds so they can earn their executive bonuses without further government involvement.
Refusing to lend in an era of growing economic uncertainty …
If this artificial method for re-capitalizing insolvent or near-insolvent financial institutions appears odious – in fact, stinking to high heaven, consider that these same financial institutions refuse to lend funds to legitimate businesses due to the unsettled nature of our economy and the uncertainty surrounding the Administration’s taxation, healthcare and cap-and-trade plans which creates additional uncertainty for the economic future of any business. It is far easier to earn risk-free profits than actually trust loan funds to a corporation subject to the vagaries of future government actions. An almost insurmountable Catch-22.
Suspicious accounting rules …
Adding to the instability of the financial system is the government’s allowance of fancy accounting policies governing “off balance sheet accounts” and “mark-to-market” valuations which produced an instantaneous re-valuation of an institution’s assets with no corresponding change in real asset value. Government-sanctioned “book cooking” if you will. This is the same government which continues to promote the technology leading to space flight and other great technological feats, but refuses to implement a decent accounting system that would prevent the loss of BILLIONS of dollars in the system while providing the transparency and accountability that all American citizens should demand of their government. After all, the government has no money of their own – it is all our money, derived from taxes, fees and permissions.
Regulation or something quite different?
But the final straw is the government’s interference in the regulatory mechanisms which appear to enlarge the number of financial and corporate institutions which will be designated as being “too big to fail,” thus putting the economy and taxpayer at further risk – and allowing the government to exert even greater control over American business and the economy. If the government’s regulatory agencies had done their job to diligently enforce anti-fraud legislation on the books, the current fiscal crisis could have most certainly been avoided.
Why did this “crisis” happen?
The simple answer is that the monetary policy of the Federal Reserve, created to prevent recessions, continues to create asset bubbles and the debilitating economic solutions when the bubble bursts. As the global pool of capital continues to seek higher returns from a smaller pool of profitable investments, there will be those who will artificially engineer financial instruments, such as derivatives, to satisfy the demand while hiding the true risk. This monetary manipulation will continue to create asset bubbles and the subsequent recessions and/or inflation when the market requires stabilization.
Witness the dot com boom where companies could raise significant amounts of capital from investors for unproven and unproductive business models. Those venture capitalists and Wall Street investors earned a ton of money until someone noticed that companies could not continue to sustain their cash-burning run rates without at least the appearance of profits. When the house of cards came tumbling down, the Fed stepped in to help the financial institutions who lost heavily on these investments by keeping the Federal Funds Interest rate artificially low.
The global pool of capital, especially nation-states with significant oil revenue could no longer earn high yields in trustworthy securities or even safe Treasury bonds, they went looking for higher yields in the mortgage marketplace.
When all of those creditworthy borrowers received their loans, the financial community kept lowering the loan standards to keep generating loans which could be sliced and diced into even more securities to be sold to investors. When the next level of borrowers was satisfied, they once again lowered their lending standards. Wall Street invented new securities and new hedging strategies – not once considering that a drop in the real estate market could end the continuous re-financing supported by rising property prices. Being able to re-finance out of a loan you could not afford only bought some additional time for the buyer – but placed the financial community at an increasingly dangerous risk. Even the ratings agencies got it wrong: they were using the old models of mortgage performance which did not take into account continually re-financing a non-performing loan held by an insolvent borrower.
Imagine this … a borrower could not continue to make his home payments, so they were allowed to re-finance the existing loan at an even higher rate. Sometimes being allowed to take cash out of the transaction to make home improvements, buy a car or go on a vacation. Some unscrupulous loan officers actually set aside a portion of the cash from the new loan to make at least four monthly payments on the new loan. An act which insured that the lender could not demand that the loan originator repurchase the loan due to non-performance within the first few months. With this shift in risk, from the originator to the lender, the originator was incentivized to originate crap loans (so-called liar loans which did not require the lender to verify income, employment or assets) and pass then to the lender. The lender, in turn, passed the loan and the risk to either Fannie Mae or Freddie Mac (in government conservatorship) or on to Wall Street loan packagers who sold the combined investments to those who managed the expanding global capital pool.
The best way I can describe the current situation is thusly: take thousands of mortgages and run them through a shredder. Take each individual strip and sell it to an investor for a portion of the future cash flow generated when the combined borrowers pays their monthly mortgage payment. If the borrower doesn’t pay or the property is foreclosed, the investment heads downward.
Those who attempted to control risk by hedging their mortgage loan purchases using credit default swaps and other such strategies forgot the first rule of hedging – you can not hedge against pure fraud and deception. Ask those who invested in Bernie Madoff’s Ponzi scheme.
What is not being addressed …
While everyone is focused on the subprime lending meltdown and the collapse of the underlying real estate market, the government is doing little or nothing to hold those financial institutions which purchased more assets than could be supported by their balance sheet and which almost instantly rendered their institutions technically insolvent, to account. Giving a free pass to those executives and institutions whose corruption or complacency violated their fiduciary duties to their investors – and whose accounting practices deceived the auditors, regulators, shareholders and counterparties. Institutions which should have been allowed to fail – were bailed out. Ostensibly to prevent a cascading spiral of defaults by those who invested in these institutions. Considering that the average prudent person lost approximately 30-% 40% of their net worth in the debacle and sees their risk-free savings earning little or nothing in interest, one is hard-pressed to see how it could have been much worse.
Special note should be made of the General Motors and Chrysler deals – both having finance arms and being allowed to become bank holding companies to secure government financing. Did anyone notice that the government actually interfered in the law to such an extent as to create a constitutional issue which has yet to be addressed. Whereas these organizations should have been allowed to fail, to enter bankruptcy and to have their assets sold to those who could use them profitably – the government stepped in and mandated deals which ignored the legal rights of those who held bonds in favor of the trade unions which provided campaign funding and voter support to the Administration. Bond holders, holding a secured position in the sale of any assets were given 25-30% on the dollar, and the unions which had unsecured liabilities associated with outrageous pension funds were given 50% on the dollar and a portion of the ownership in the surviving entity. In my view, this was an impeachable offense – as the subversion of our “first priority” law and manipulation/circumvention of the federal bankruptcy process amounted to outright theft, thus giving rise to high crimes and misdemeanors.
Taking advantage of this crisis …
It was Rahm Emanuel, Chief of Staff to President Obama, that claimed that his people should not waste a crisis when it comes to putting forward their own political agenda. So we see the funding of institutions which are being made on the basis of political support in 2010. We see outrageous legislative initiatives designed to obtain or maintain political power in perpetuity. And we see the rise of socialist policies involving central planning and the use of unions as political operatives. Organized thuggery and coercion with a layer of plausible deniability.
There is no healthcare crisis in America. There is no climate crisis in America or the world. And the financial crisis is still manageable – but not continuing to rely on the very same corrupt individuals and institutions which almost destroyed the economy to attempt to re-engineer a solution that simultaneously feathers their own nest. These are stage-managed events to loot the wealth of the American people, to severely curtail their personal freedoms and to insure that the party in power stays in power.
2010 and beyond …
Unless the real estate marketplace is stabilized, we will continue to see great uncertainty in financial instruments which are based on property values and/or the financial balance sheets of companies which rely on the valuation of property for a significant portion of their value. The instability of the job market will add to the increase of foreclosed properties and the declining valuation of the resultant real estate market.
Unless property values are allowed to seek their own level and financial institutions refuse to sell property at market rates (keeping their asset valuations on the books while hoping for higher interest rates and better times), the marketplace issues cannot be resolved. Additionally, keeping people attached to homes in depressed areas greatly affects the mobility of that portion of the population which would normally gravitate to better job markets, thus prolonging the depressed economy.
The system continues to be gamed by those who have little respect for the law. Consider people who are renting properties to tenants who continue to pay their rent, but fail to remit any funds to the lender in continuing satisfaction of their loan. Something that is not likely to be prosecuted, yet amounts to outright theft of property rights. Or those who simply abandon their homes, with little or no consequences, and rent properties in the very same area for a fraction of what they would have paid on the mortgage. Again, with little or no economic penalty. Given the widespread use of bankruptcy and defaults, the new credit scoring systems may penalize these people for two years. Two years in which they could be stockpiling ill-gotten cash for their next purchase. And the regulatory agencies: local, state and federal do little or nothing to curtail this ongoing fraud.
We will also continue to see an increasing instability in financial and commercial markets as government legislative actions in taxation, healthcare and cap-and-trade, all of which significantly affect business planning, continues unabated – all apparently to support a political agenda which demands central planning and a joint government-business coalition. An increasingly dangerous political position which places our free-market economic system and the individual freedom of Americans at risk.
And we will continue to see growing instability in our inner cities as legal citizens lose their jobs and support lifelines to an increasing number of illegal aliens – openly courted by the Administration to preserve their political power and by certain business interests to maximize profits by restricting wages. Note well that these inner cities are controlled by the democrats and whose politicians and other officials appear to be as corrupt as those at higher levels in the government. And we are not speaking about the distraction of sexual peccadilloes, but rampant fraud, manipulation and payoffs which are diverting funds from the repair or replacement of our crumbling infrastructure to the pals of politicians and the special interests.
Who can we believe?
Certainly not the politicians and self-interests who have brought us to this point. Certainly not the economists whose study of the naturally chaotic financial system is about as productive as those scientists studying the naturally chaotic climate system. And certainly not those outside of the United States who do not wish our people or our nation well. You need to trust in yourself, your family and your friends. We have been screwed by the politicians and the experts … and now it is time to return to common sense. Dollars and sense if you don’t mind my bad pun.
Example: Inflation …
From the Federal Reserve’s December 16, 2009 FOMC (Federal Open Market Committee) Announcement --
“With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”
I call bullshit! The classic definition of inflation is too much money chasing too few goods, thus causing prices to rise – or more dollars needed to purchase goods and services. And common sense will tell you that the decline in the value of the United States dollar means that you need more dollars to purchase goods and services. Get it! They are saying what is politically expedient so as not outrage the citizens of the United States who expect that the experts have the situation well-in-hand.
Consider that these are the very same people who caused the problem in the first place and exacerbated the so-called recovery effort -- which is still in doubt. Fed Chairman Bernanke heads the Committee and this is a portion of their current publicly-stated monetary policy.
“ The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010.”
That $1.25 TRILLION and $175 BILLION is not going to Joe Citizen who is desperately seeking a mortgage loan modification. It is going to the traders who play games with the securities they create, manage and trade among themselves in order to create artificial profits and executive bonuses. What will the financial institutions do with this money? In all probability re-invest them in safe Fed securities to earn additional profits while they wait for the political situation to rectify itself over time.
Example: Fannie Mae & Freddie Mac … How many people really know how big of an impact Fannie Mae and Freddie Mac may have on the national debt?
First, how many people really know that the mortgage investment giant Fannie Mae was created by the democrats in 1968 to keep its growing debt off the Government’s national debt balance sheet and that mortgage giant Freddie Mac was created in 1970 by the democrats to give some semblance of competition with Fannie Mae?
“On September 7, 2008, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that play a critical role in the U.S. home mortgage market, in conservatorship. … This means that the U.S. taxpayer now stands behind about $5 trillion of GSE debt.” <Source>
Not including the $5 trillion in assumed liabilities from Fannie and Freddie …
“Between September and October 2008, the Total U.S. National Debt increased by nearly one trillion dollars, or about 10% of the outstanding debt. Most of this increase is due to public borrowing to finance the Wall Street Bailout plan.” <Source>
Today … as this is written, we are looking at a debt of $12 TRILLION without even considering the impact of the $5 TRILLION guaranteed by the “off balance sheet” Fannie Mae, Freddie Mac and other Government Sponsored Entities.
And these are just the sanitized numbers, either the real numbers are held as a state secret or the experts really do not know the exact amount. Sort of like someone reporting the amount of gold being held in Fort Knox – which has never been subject to public inspection or a verifiable independent audit since the era of former President Eisenhower.
Is there any hope?
Considering the confluence of corrupt and complacent politicians and their institutional counterparts, the only hope on the horizon is to remove all democrats and republicans standing for re-election from Congress. Thus restoring a measure of the systemic checks and balances which removes the risk from one-party rule. One need only see those cities, counties and states which are run by the democrats to note that their governance is neither just nor prudent and which must be ended before any true recovery can begin.
Do not vote to return incumbents to office. A virtual unknown can hardly do as much damage to our nation as has been done by the so-called “political” elite. Be wary of those with ivy-league backgrounds, especially those of Harvard, Yale and Princeton. Be wary of lawyers who seek to confuse ordinary people with a language that allows for monopolies, loopholes, exceptions and exclusions. And be extremely wary of professional politicians who change jobs to feather their own nests – leaving behind only chaos, confusion and corruption.
Elect your friend and neighbor. And let them know this job will not be permanent as you will be voting them out of office after two terms, one if they screw up.
It’s our country and our representatives in government. We have been ill-served and it is now time for a change. Vote! Political parties have proven to be as corrupt, even more so than the politicians they promote. Vote for the candidate. Support the candidate – and do not support any political party.
Yes, Al, there is hope, but we must work hard to nurture it.
-- steve
P.S. Feel free to disagree with me. Use the e-mail link under my name or use the comment box below.
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Alena
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Thank you very much for your kind words. -- steve
Posted by: Alena | December 21, 2009 at 11:54 PM