December 2, 2022

California’s Crash Omen of Nation’s Future

Borrow and Spend = Crash and Burnbig bag of indeterminate money

California has always been the trend setter for the nation but never more so than today as it totters on the edge of insolvency.  The theory that States or Nations cannot go bankrupt due to their unlimited taxing powers has reached its limits as California voters have resoundingly rejected further tax increases.  Without a Federal bailout, the State of California will be forced to make massive budget cuts.  The illusion of a free lunch, paid for with borrowed money is now replaced by the harsh reality of a mortgaged future.

California may be in the spotlight today as the first major state to collapse financially, but most of the Nation’s other 49 states are not far behind.  Tax revenues have declined in 45 other states by almost 13% in the first quarter and are likely to continue declining as both corporate and personal incomes decline.  For the first time ever, the biggest source of revenue for the States is from the Federal Government.  Almost all 50 States are at the precipice.

Given the absolute financial disaster occurring in almost every State, how long can it be before the ability of the US Government to pay its debts is called into question?  The United States is not an abstract construction with a separate economic destiny,  immune to events in the rest of the nation.  The United States are 50 States joined as one.  If nearly every one of the 50 states is an economic train wreck, the conclusion for Uncle Sam  is obvious.  Can the whole be greater than the sum of its parts?

Numerous doubts are being aired daily about the credit rating of the United States.  Consider some comments from today:

Britain’s Debt Omen

For a warning about America’s fiscal future, consider yesterday’s news from Britain. United Kingdom stocks, bond futures and sterling all fell after Standard & Poor’s lowered the country’s credit outlook.

But in both the U.K. and U.S. today, the politicians in power equate government spending with growth. So on present course, Britain’s credit future could well be America’s in the coming years as U.S. spending soars.

Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone

Several policy missteps suggest that investors should stop trusting — and lending to — the U.S. government.

“All currencies are being debased dramatically by their central banks at extraordinary speeds and so in relative terms it appears there is no currency problem,”  In reality, however, paper money is highly vulnerable to a public catalyst that serves to acknowledge it is all merely vapor money.”

For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.

David Walker, a former U.S. comptroller general, wrote in the Financial Times on May 12 that the U.S.’s top credit rating looks incompatible with “an accumulated negative net worth” of more than $11 trillion and “additional off-balance-sheet obligations” of $45 trillion. “One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate,” he wrote.

Flip-Flops and Governance

Mr. Obama campaigned on “responsible fiscal policies,” arguing in a speech on the Senate floor in 2006 that the “rising debt is a hidden domestic enemy.”

However, Mr. Obama’s fiscally conservative words are betrayed by his liberal actions. He offers an orgy of spending and a bacchanal of debt. His budget plans a 25% increase in the federal government’s share of the GDP, a doubling of the national debt in five years, and a near tripling of it in 10 years.

US Officials Vow Fiscal Vigilance

Treasury Secretary Geithner and President Obama both acknowledge that out of control spending could eventually lead to default, credit market rejection and a lower standard of living as the cost of debt servicing destroys our standard of living.

Geithner Pledges To Cut Deficit

May 21 (Bloomberg) — Treasury Secretary Timothy Geithner said the Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade.  He added that the target is reducing the gap to 3 percent of gross domestic product or smaller, from a projected 12.9 percent this year.

– the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Obama Says US Long-Term Debt Load “Unsustainable”

May 14 (Bloomberg) — President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

The Future Reality

The President and Treasury Secretary say what they have to say.  The reality is that the present course of unlimited credit expansion, quantitative easing, bailouts  and massive deficit spending will continue in an attempt to re-inflate asset values and stimulate spending.   The Government will not accept  alternatives that they view as being worse – deflation and a collapsing economy with civil unrest.  California will be bailed out like everyone else.

The course of action for long term wealth accumulation under the present circumstances seems obvious.   Avoid  an over concentration in paper assets (debt) that can be produced by governments in infinite quantity at zero cost.   Diversify into assets backed by 1) real services or goods that there will always be a demand for and 2) natural resources such as commodities, oil and gold.

New Twist On Stimulating Economies – Work Less

Desperation Produces Silly Suggestion yen

Governments worldwide are obsessed with pushing consumers to spend more.  From Japan we now have a new twist on how to stimulate spending.   Government bureaucrats (with obviously too much time on their hands) are mulling the stimulus  impact on Japan’s economy if workers were forced to take more vacation time.    Consider the logic as described in Businessweek:

Some 92% of Japanese workers don’t use up their vacation time, a recent global survey by travel site Expedia found. On average, they use 7 of an allotted 15 days each year. Prime Minister Taro Aso’s administration says the vacation law could spur $121 billion in spending and generate 1.5 million jobs. Critics say it may hurt struggling companies—and fail to loosen up outlays for leisure. Many Japanese “live to work,” says Toshihiro Nagahama, senior economist at Dai-ichi Life Research Institute, “and wouldn’t know how to enjoy more vacations.

Whether the Japanese are workaholics or simply like to spend time away from home is up for debate.  The issue not up for debate is whether this silly proposal will create new jobs.  Companies do not conduct new hiring to make up for employee vacations, and economies produce less wealth when there are fewer people productively employed.   The Japanese government simply seems to be out of intelligent options after attempting to stimulate the hell out of Japan for the past two decades with little success.

Big Picture

The Japanese bureaucrats are missing the big picture.  The Japanese worker (as in many other countries) does not need more vacation time to spend money they don’t have; they simply need more income.   The Japanese saving rate as a percentage of income has been high by necessity.  With real estate and stocks prices lower than they were 20 years ago, the Japanese cannot rely on asset inflation to increase their net worth.  Savings can only come from incomes which have been stagnant for decades and now dropping sharply due to the recession in Japan.

Bloomberg — Japan’s wages dropped at the steepest pace in more than six years in March as manufacturers slashed overtime pay to cope with a collapse in exports.

Monthly wages, including overtime and bonuses, dropped 3.7 percent from a year earlier, the most since July 2002, the Labor Ministry said today in Tokyo.

Overtime payments slid an unprecedented 20.8 percent as manufacturers cut extra working hours by a record 49.5 percent, the report showed. The government has been tracking the figures since 1990.

Governments Shooting At The Wrong Target

Governments world wide are obsessed with pushing customers to borrow and spend.  They are all shooting at the wrong target.  The borrowing and spending will come naturally to most people if they are confident in their job security and confident of increases in real wages.  Right now their is scant confidence for either outcome with job losses in the millions and widespread salary reductions or freezes.

Making matters even worse for the thrifty Japanese is that the interest earned on their savings is virtually zero at the short end and a paltry coupon of 1.3% on 10 year Japanese government bonds.   Savers like to see their savings increase every year and the only way to accomplish this is to save more and spend less.  Bringing rates to virtually zero to help the over leveraged has ironically resulted in punishing the savers who theoretically provide capital to borrowers.

Japan’s economic mess will not improve  without addressing the lack of real growth in incomes and jobs and the low return on savings.  Fix these problems and the rest will take care of itself.

Are Geithner’s Days Numbered? Banks And Investors Have Zero Confidence

First Impressions Hard To Reverse

The old saying in the recruiting business is that one is judged in the first 15 seconds of a job interview.  Irregardless of what happens for the rest of the interview, that first impression cannot be changed.  No doubt, Treasury Chief Geithner wishes that he could take back that first big interview on February 10 when he announced his Financial Stability Plan.  The plan was so lacking in details that one could only wonder why Mr Geithner did not postpone his grand announcement.   Investors on Wall Street rendered prompt judgment on Mr Geithner with the Dow plunging almost 400 points.

Forget The Learning Curve

A month later, Mr Geithner has still not come up with anything of substance to deal with a broken banking system, which by some estimates could cost upwards of $4 trillion dollars.  In fairness to Mr Geithner, he is tasked with solving a problem that only time and the free markets may ultimately cure.   There are no quick and easy answers to the banking and housing crisis, but we cannot afford the luxury of allowing Mr Geithner a multi month learning curve period.    Mr Geithner’s delay in coming up with a detailed plan after his disastrous first attempt may have destroyed his credibility to the point where it doesn’t really matter what he does for an encore.

Banks Burning Mad As Geithner Fiddles

“As Americans recover from the shock and disgust of this latest [AIG] revelation, they will justifiably ask who got us into this mess,” writes Henry Blodget. “The answer, in part, is the same man who has yet to come up with a coherent plan to get us out of it: Tim Geithner.”

Geithner told Bloomberg TV this weekend he will “move quickly to lay out a new financing program” to help banks deal with their toxic assets.

In other words, Geithner still hasn’t put the finishing touches on the “Financial Stability Plan” he announced in mid-February to rousing condemnation because it lacked detail. More to the point, Geithner still doesn’t have a coherent plan he’s willing to share a year after the Bear Stearns-JPMorgan shotgun wedding.

Similarly, Geithner & Co. have yet to unveil their new blueprint for regulating banks. But, again, it’s coming soon

Recipients Of Bailout Cash Stage Revolt

The original TARP bailout plan which was supposed to save the banking industry from collapse has turned into a disaster.  Many banks are saying that they were forced to take expensive TARP money that they did not need or want and now want to return the money – see Banks Push Back On Bailout Plan – Wells Fargo Calls Stress Test Asinine.   The Chairman of Wells Fargo voiced some remarkably blunt criticism of the TARP plan yesterday when he called the governments plan to “stress test” banks asinine.  Relations between the banks and Geithner’s Treasury seem frayed beyond repair at this point.

Effective Leadership Needed

Mr Geithner seems to command zero confidence or respect at this point – he should be replaced by someone who can get the job done.

The Economic Collapse Continues – Logical Minds See No Signs Of A Bottom

No Signs Of A Bottom

The market continues its massive sell off in a resounding vote of no confidence on the measures being taken to reverse the economy’s downward spiral.  A contrary investor buying the dips over the past two years has seen nothing but huge losses.  Recent news on the economy continues to indicate that things are getting worse, not better. The impact of estimated losses of over $100 trillion in stocks, bonds and real estate over the past two years will not be offset by stimulus plans.

The trillions of dollars being borrowed to prop up the system are being overwhelmed by a loss of confidence and a loss of wealth that many fear may never be recovered.  The massive deficit in the national budget (12% of GDP) is causing a sell off in the long treasury market, with yields rising above 3% today on the 10 year bond.  The scary question in many people’s minds is how many more trillions of government debt and guarantees will be needed to support a collapsing banking and insurance industry?

Bernanke Confident – Reality Denied

Chairman Bernanke of the Federal Reserve recently expressed his optimistic view that the recession would be over this year – see Do Bernanke and Obama Talk To Each Other? Many others with far superior track records do not agree with Bernanke.

Paul Volcker – former Federal Reserve Chairman – “I don’t remember any time, maybe even in the great depression, when thing went down quite so fast, quite so uniformly around the world”.

George Soros – successful hedge fund investor – the financial system “was placed on life support, and it’s still on life support.  There’s no sign that we are anywhere near a bottom”.

Nouriel Roubini – economist who correctly forecast the financial collapse – “We are still in the third and fourth innings and it’s getting worse”.

Logical minds would have to strongly doubt Bernanke’s optimistic view, especially in view of his previous calls that proved to be ridiculous, such as:

“We will follow developments in the subprime market closely.  However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.”
—June 5, 2007

Horrific Economic News Continues – Notable Links

California’s Jobless Rate Exceeds 10%

California’s unemployment rate climbed to 10.1% in January, the highest since 1983, as employers in the nation’s most-populous state cut 79,000 jobs in the month.

There were 3.3% fewer jobs in January 2009 compared to January 2008. The report said there were 1,863,000 unemployed Californians in January, up by 754,000 a year earlier.

The first half of 2009 will continue “to be pretty ugly,” said Howard Roth, the chief economist for the state’s finance department.

The state is threatening to pass the 11% jobless rate of late 1982, the highest since the Great Depression. “All we need is another month like this,” Mr. Roth said.

The Dangers Of Turning Inward

Yet if historians look back on today’s severe downturn, with its crumbling markets, rising unemployment and massive government interventions, they could well be busy analyzing how globalization — the spread of trade, finance, technology and the movement of people around the world — went into reverse. They would likely point to the growth of economic nationalism as the root cause.

The last time we saw sustained economic nationalism was in the 1930s, when capital flows and trade among countries collapsed, and every country went its own way. World growth went into a ditch, political ties among nations deteriorated, nationalism and populism combined to create fascist governments in Europe and Asia, and a world war took place.

It’s no accident that the European Union has called an emergency summit for this Sunday to consider what to do with rising protectionism of all kinds.

There are a number of reasons why economic nationalism could escalate.

As happened in the 1930s, economic nationalism is also sure to poison geopolitics. Governments under economic pressure have far fewer resources to take care of their citizens and to deal with rising anger and social tensions. Whether or not they are democracies, their tenure can be threatened by popular resentment. The temptation for governments to whip up enthusiasm for something that distracts citizens from their economic woes — a war or a jihad against unpopular minorities, for example — is great.

Economy In Worst Fall Since 1982

A broad measure of the U.S. economy plummeted in the fourth quarter — to levels far worse than previously thought — underscoring how quickly the economy has soured and casting doubt that things will get better this year.

With falloffs in consumer spending and exports, gross domestic product declined at a 6.2% annual rate in the fourth quarter of 2008, according to a Commerce Department report Friday. The agency’s first estimate for GDP, reported in January, was for a 3.8% decline. GDP is a key measure of a country’s economic performance.

Big Numbers

Does $65.5 trillion terrify anyone yet?

As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.

Failure To Save Eastern Europe Will Lead To Worldwide Meltdown

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria’s finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria’s GDP.

“A failure rate of 10pc would lead to the collapse of the Austrian financial sector,” reported Der Standard in Vienna. Unfortunately, that is about to happen.

Europe’s governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

The New Depression

We are living through a crisis which, from the collapse of Northern Rock and the first intimations of the credit crunch, nobody has been able to understand, let alone grasp its potential ramifications. Each attempt to deal with the crisis has rapidly been consumed by an irresistible and ever-worsening reality.

Yet what if such a crisis were to be no longer confined to the peripheries of global capitalism but instead struck at its heartlands? Now we know the answer. The crisis has enveloped the whole world like an uncontrollable virus, spreading from the US and within a handful of months assuming global proportions, at the same time mutating with frightening speed from a financial crisis into a fully fledged economic crisis.

As General Motors Goes, So Goes The Nation

General Motors was founded in 1908 in Flint, Michigan and grew to be the largest corporation in the world. Its market capitalization reached $50 billion in 2000. In the past week its market capitalization dropped below $1 billion to levels last seen during the 1920’s. The story of General Motors is the story of America.

“I think it is important to recognize that General Motors is a canary in this country’s economic coal mine; a forerunner for what’s to come for the broader economy. Their mistakes have resembled this nation’s mistakes; their problems will be our future problems. If the U.S. and General Motors have similar flaws and indeed symbiotic fates, they appear to be conjoined primarily by the un-competitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities. Perhaps the most significant comparison between GM and the U.S. economy lies in the recognition of enormous unfunded liabilities in healthcare and pensions.

Do Bernanke And Obama Talk To Each Other?

Bernanke Gives Upbeat Assessment On Economy

Chairman Bernanke predicted today that the recession would end in 2009.  Some of his upbeat, optimistic comments included:

“If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability — and only if that is the case, in my view — there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery”.

“I would anticipate some stabilization in the housing market going forward.”

“I do believe that once the economy begins to recover, we will see improvement in the financial market.”

The Big Question

The really big question is, was the President listening to him?

The Bloomberg report that follows is really tough to reconcile with Bernanke’s comments earlier in the day.  Do these guys talk to each other?  There does not appear to be a consistent message or plan for dealing with the greatest economic chaos since the 1930’s.

Feb. 24 (Bloomberg) — President Barack Obama will tell the public tonight the “day of reckoning has arrived,” and that pulling the U.S. out of a recession will mean sacrificing “some worthy priorities” the nation can no longer afford.

“We have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election,” Obama will say in his first address to a joint session of Congress, according to excerpts released by the White House.

“The only way this century will be another American century is if we confront at last the price of our dependence on oil and the high cost of health care; the schools that aren’t preparing our children and the mountain of debt they stand to inherit,” he will say

Obama is seeking to convince lawmakers and voters that his plans to revive growth will succeed while cautioning that the recovery will take time. The president has spent his first month in office focused on three initiatives — a $787 billion stimulus bill, a bank-rescue plan and an effort to limit home foreclosures — while warning of economic “catastrophe” if the government doesn’t take aggressive action.

With all the warnings about the severity of the economic crisis, Obama now must look for ways to boost public optimism, analysts and economists say.

“It’s a real balancing act,” said Stuart Rothenberg, a Washington-based political analyst. “The president’s got to walk this fine line between reminding people of the difficult situation we’re in and emphasizing the inevitable victory.”

“It’s all about confidence,” said Bruce Foerster, a former Lehman Brothers Holdings Inc. managing director and now president of South Beach Capital Markets in Miami. “That’s the heart of what is going on. We have problems but they are being exacerbated because there’s no confidence in the capital markets.”

I applaud the President’s honesty on the challenges we face and I wish him the best of luck. The stock market, however, has lately been registering a resounding vote of no confidence in the actions taken by Washington.  The nation is searching for a thoughtful, workable plan to solve the economic problems we face.  A coherent and unified message from Washington would be good for starters.

Predicting an end to the recession in 2009 while concurrently describing the economic situation as “catastrophic” and a “day of reckoning” does not project a coherent message.   But it could have been worse – at least they didn’t let Tim Geithner say anything.

The Humpty Dumpty Economy

The Big Black Hole Expands As Asset Values Collapse

Not even a month in office, Mr Obama has spent trillions on bailouts, stimulus plans, bank recapitalization and loan guarantees.  The markets have spoken with a resounding lack of confidence.  The asset destruction caused by recent world wide drops in stock and bond markets exceed and effectively negate the government’s desperate spending and borrowing efforts to put Humpty Dumpty back together again.  The continued destruction of consumer confidence is being caused by the whacko “plan a day solutions” coming out of Washington.

The markets are bigger than any government’s ability to artificially prop up all asset values, as the example of Japan demonstrates. The destructive self reinforcing cycle of deleveraging will continue until debt levels decline to the point where debtors have the cash flow to service debt payments.   The process of achieving equilibrium between income and debts will be especially difficult as massive job layoffs, salary freezes and pay reductions make debt repayment more difficult.  Expect a long and painful deleveraging.  The debt bubble that has been building for decades will not be quickly reversed.

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Source : Barrons

Some Further Insight From The Web Worth A Read

Gold Climbs As Economic Catastrophe

The feeling that the government has no idea how to proceed has created palpable panic. In response, pragmatic investors are seeking the ultimate store of wealth. In 2009, as has occurred countless times throughout history, that store will be stocked with gold. Thus, whether the Federal government’s interventions will succeed or fail will be anticipated by the price of gold. Right now, the market is screaming failure.

Despite massive Government spending on rescue and stimulus, the American consumer clearly is becoming increasingly nervous, and the credit markets show few signs of recovery.

Not only have gold spot prices risen in the face of such selling pressure, but the price of physical gold is now some $20 to $40 per ounce above spot. This would indicate that investors are now so nervous that they are insisting on taking physical delivery.

Make no mistake, the economy will not turn around soon. When the recovery fails to materialize, look for governments around the world, and especially in the U.S., to send another massive wave of liquidity downriver. When it does, the value of nearly everything, except for gold , will diminish. Don’t be intimidated by the recent spike in gold. Buy now while you still can.

Collapsing Dreams

It almost seems amusing that we are still discussing the “coming” depression because of the fact that it is already arrived and settling in.  Really, what this entire new “era” is all about is watching our dreams deteriorate right before our eyes.

It seems that the majority of us are just not destined to move forward.  How many thousands of thousands of heads of households are looking at the devastation of their 401K portfolio?  It’s not easy to forget the glory days of the past as they lose their home and lose their savings.  I see eventually Hooverville shacks lining vacant lots.  Made up of cardboard and bits of old trash taken from local garbage.  This is our future?

Fiat World Mathematical Model

Day of Reckoning

The day of reckoning comes when asset prices start falling, defaults soar, and the value of credit on the books starts plunging. That day of reckoning has arrived.

Why Obama’s Home Owner Rescue Is Bound To Fail

Is there anything more heartless than foreclosing on a home and throwing a family out on the street?

How about taxing the family next door into penury to pay for the reckless borrowing of its neighbors?

meanstreet

Welcome to the Obama Homeowner Affordability and Stability Plan — a complicated wealth redistribution scheme dressed up as a cure for the nation’s housing woes.

It is almost certainly bound to fail.

Now, there is no doubting that Obama’s heart is in the right place. With foreclosures at record highs, the American white picket fence dream is crumbling.

And the impulse of any caring President must be to do something, almost anything to keep the dream alive.

But the experience of politicians tinkering with the U.S. housing market is not a happy one. Fannie Mae and Freddie Mac, anyone?

Real estate is simply too complex to be manipulated by anything but the “invisible hand” of the market.

A Powder Keg – Debt and Unemployment

When times are good, some people still struggle to keep up with their credit and debt payments. In a downturn, bad gets worse because for some, there’s less money to devote to debt.

Some Americans, Underwater but Ineligible, Are Riled Up

President Barack Obama’s new foreclosure-prevention plan is already sparking outrage from some Americans who won’t qualify for federal aid — and from those who resent having to foot the bill for those who do.

“What do you expect from the government?” said David Newton, 46 years old, proprietor of DJN Management LLC, which owns 232 rental apartments in the Atlanta area. “The government isn’t out there to help people who obey the law and follow the rules.”

Mr. Obama “told everybody, ‘I’m going to spread wealth around,’ and that’s what he’s going to do,” Mr. Newton said.

The housing measures have also upset a range of homeowners who say they shouldn’t have to subsidize those who bought more than they could afford. “We’ve lived a conservative life,” said Tim O’Brien, 61, a retired CPA from Los Angeles. “We’ve paid our house off and saved our money, so you kind of find yourself on this issue not agreeing with everything.”

Brenda Gilchrist said she feels like she is being punished twice, first by watching foreclosures depress the value of her three-bedroom condominium in Santa Rosa, Calif., and now by subsidizing borrowers who bought more than they could afford.

Others are skeptical that the plan will work. “Twelve months down the road they’re going to say, ‘We’re going to need to throw another $50 billion at the problem,’ ” said Mr. Newton, the Atlanta property owner. “They should just foreclose on the properties, auction them off on the courthouse steps and see who buys them.”

Common Sense Eludes The Government

Financial Sense

“You cannot legislate the poor into freedom by legislating the wealthy out of freedom.  What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”

Assessing the Mortgage Plan

The president’s new mortgage-relief plan contains clever elements that might indeed help homeowners. However, the superfluous threat of inviting judges to rewrite contracts must dilute the collateral behind troubled mortgage-backed securities. That, in turn, would jeopardize the endangered capital of banks, pension funds and other holders of such securities, including the Federal Reserve, Fannie Mae and Freddie Mac.

In sum, allowing conforming loans to be refinanced without a big equity position seems promising. Trying to bribe lenders to trim monthly mortgage bills to 31% of income would help those lucky enough to get in on the deal before the money runs out. But all of this potential good could be undone by the systemic risks to mortgage-backed securities caused by the unpredictable legal risks of a judicial cramdown.

Jet Age “Run On The Bank” In Antigua

Stanford Depositors Head To Antigua

Depositors from as far away as Colombia have begun arriving in the island nation of Antigua, seeking to withdraw their money from an offshore bank under investigation by U.S. state and federal authorities.

Reached by telephone on Monday afternoon, the chief financial officer at Stanford International Bank, James M. Davis, declined to comment when asked if investors are having difficulty obtaining redemptions. “I don’t have any comment, but I appreciate your call,” said Mr. Davis, the longtime top aide to Mr. Stanford.

A Stanford spokesman said because of the holiday he was unable to comment on the mutual-fund product.

Mr. Stanford said in a conference call to employees Tuesday there would be a temporary moratorium of two months on early redemptions for CDs, according to one Stanford financial adviser who has worked at the firm for about five years. Several depositors say they have been told the same thing.

In Antigua, anxious depositors have flown in from overseas to seek their money from Stanford International Bank, housed in an imposing neo-Georgian building beside Antigua’s international airport.

Just over three months ago, Mr. Stanford paid out $20 million in prize money to the winners of a single cricket match in Antigua. Mr. Stanford announced his inaugural tournament by descending on Lord’s Cricket Ground in London in what was described as a gold-plated helicopter. According to the Times of London, Mr. Stanford now plans to continue the tournament but in reduced form.

My take here is that many innocent people will sustain losses on their investments – See Stanford Financial Investigated. The SEC has been investigating Stanford since at least 2007.  After seeing the SEC in action with Bernard Madoff, investors should have zero confidence in the SEC’s ability to protect investors.

Notable Links – Gold’s Tipping Point, US Follows Japan’s Failed Strategy

Some Clear Thinking On Credit And Government Policies

Confidence More Important Than Gold

by Axel Merk | February 11, 2009

In a rare interview with Western media, Wen Jiabao, the Chinese premier, told the Financial Times (see http://www.ft.com/wen),

‘Confidence is the most important thing, more important than gold or currency’

Why is it that such wisdom comes from the leader of China, but is absent from the leaders of other countries? Do other presidents and prime ministers intentionally play a backstage role, letting their Treasury secretaries or finance ministers communicate with the public to avert blame when policies fail? That suggests that the leadership may not have all that much confidence in the programs they are promoting; or more likely, the leadership does not understand the issues.

Investors and entrepreneurs take risks in search of profit opportunities. In contrast, in times of crisis, many avoid risks and hoard cash in an effort not to lose money. Except, of course, if your bank or the currency you hold the cash in goes down the drain. When confidence even in cash erodes, gold thrives. The slogan for crisis investing so dreaded by governments is:

‘Gold is the most important thing, more important than confidence or currency’

Governments dread investors flocking to gold because it shows a lack of confidence in riskier alternatives available. Gold’s attraction is that its value cannot go to zero; that it has no counter-party risk; gold over the millennia has shown to be a store of value. But economies do not grow when gold is hoarded: capitalism requires risk seekers.

But what about all those folks who need to have a bailout? Something obviously went wrong as individuals and businesses took on too much credit. The solution, however, is not to prop up a broken system by stuffing even more credit down the throat of those who couldn’t handle the credit in the first place. The solution is to allow an orderly write off of investments and loans that have gone wrong. Most mortgages are non-recourse loans, meaning homeowners could simply hand over the keys to their homes and walk away from their debt. As a result, financial institutions would think twice before making a loan to such borrowers in the future.

What it comes down to is that just about all policies proposed deal with propping up a broken system rather than initiating the reforms necessary. Credit plays an important role in modern economies, but throwing more credit at those who are over-extended is not the solution. Quite

Present government policies are aimed at coercing the public into taking risky investments so that they don’t lose the purchasing power of their hard earned cash. The reason that’s done is so that all the debt can be served. We can do better than that. If we had less debt, we would be more concerned about preservation of purchasing power. But because the government also has tremendous debt, the interests of governments and savers are not aligned.

The U.S. economy has attracted investment for so long because it has been a fair place to conduct business in. Gaining the confidence of investors takes decades to build, but is easily destroyed. The U.S. must focus on reform to avoid some of the excesses from happening again; not simply prop up a broken system. So far, all we see is governments throwing money at the problem. We may be able to sum up our current policies as

‘We don’t know what we are doing, but we are doing a lot of it…’

This article is well worth a full reading.

Politicians do what they do to stay elected whether it makes sense or not.  We tell ourselves that we are not making the same mistakes as Japan did with its economy but we are deluding ourselves.   We are employing the same failed policies that the Japanese politicians tried.  Instead of letting free market forces work, the government is attempting to keep an over leveraged system functional by providing more credit to those who have shown no particular ability to repay what they owe already.  This strategy does nothing to build a strong economic system going forward.  The president is predicting a “lost decade”.   We will be fortunate indeed if a real turnaround comes that soon.  Japan is now close to starting  its third “lost decade”.

Courtesy Yahoo Finance

More Thoughts On Gold

Is the gold market telling us that an economic catastrophe is imminent?

It certainly might seem as though it is. By late morning Eastern time Wednesday, an ounce of the yellow metal was ahead by more than $30 from where it closed Tuesday.
But it doesn’t take much of a historical memory to appreciate that gold’s message is far more inscrutable.
Consider, for example, that gold traded for nearly $1,000 per ounce last July, compared with the $945 level at which bullion was trading Wednesday morning. That’s a very telling contrast: Though things weren’t all brightness and light last summer,
Even so, gold was higher then than now. Why?
This question becomes even more pertinent upon realizing the federal government’s actions since last July have been a textbook illustration of the inflationary behavior for which Ben Bernanke earned his nickname of “Helicopter Ben.” Yet, curiously, gold — the ultimate inflation hedge — is lower today than then.

A good point is made as to why gold is not higher than it was a year ago.  Every market price implies an equilibrium of buyers and sellers.  Despite the obvious bad news reasons why gold should be higher, in theory, it is not.  Perhaps investors are still in the denial stage from an economic perspective, preferring to believe that this is another routine recession.  There will be a tipping point where denial turns to loss of confidence and gold will be avidly sought as a refuge for capital.  At this juncture, the buyers will vastly outnumber the sellers.

Welcome To Washington Mr.Geithner – More Evidence of “We don’t know what we are doing, but we are doing a lot of it”

Feb. 11 (Bloomberg) — That’s it? That’s all Geithner had to offer?

It is amazing that this far into the financial crisis, we are still stumbling along, still so reluctant to tackle the problems facing the financial system and the economy.

Rather than offer the kind of comprehensive solution he had promised, Treasury Secretary Timothy Geithner yesterday served up a plan for banks and the financial system that was long on platitudes and short on specifics.

And that’s being kind. There were no specifics. There were only vague promises of programs and details to come.

And the specifics? “We are not going to put out details until we have the right structure,” Geithner said.

If that’s the case, it’s not clear why Geithner bothered to speak yesterday. If his goal was to calm markets, it didn’t work, especially since investors were hoping that he would simply agree to take all the bad assets from banks and reflate the financial system in one fell swoop.

And what of the herd of ailing banks that pose systemic risks to the global financial system? Rather than euthanize those that can’t survive, Geithner plans to continue coddling them.

This is the sort of float-all-boats thinking that led to Congress’s misguided stimulus package. It represents a false hope that there is still a way for the country to muddle through this crisis without having to accept a new norm in terms of asset prices, lifestyles and expectations.

That’s not likely to happen. And it’s why the Obama administration’s first, grand effort to fix the nation’s economic ills probably won’t be its last.

Any future economic recovery will be despite the government’s actions.

No Mortgage Payments For A Year Would Stimulate Spending

Experts Predict Depression

Are we in a depression?  Jon Markman of MSN Money eloquently explains the world’s financial dilemma.

Too Late To Avoid A Depression? – MSN Money

Policymakers are quickly running out of time and room for error. And even a brilliant plan — which we haven’t seen yet — could fail without some good luck.

The problem is that the models often fail to accurately forecast human behavior, and politicians regularly screw it all up by ignoring the data and diverting funds to pet projects.

Over the past week, the world’s intellectual, business, government and philanthropic elite emerged from World Economic Forum meetings in Davos, Switzerland, with grim faces and warnings of financial doom.

Credible economic analysts now say there is still a narrow window of time in which policymakers in the United States, Europe and Asia can avoid a meltdown over the next year by immediately coordinating the injection of real financial adrenaline to banks, companies, households and local governments — not just rhetoric and indiscriminate spending. Yet that window is closing fast, and if the right steps are not taken soon it may be shut for years.

The Stimulus Money Could Pay Every One’s Mortgage Payment For A Year

The experts are predicting a possible depression and the economy needs major monetary stimulus.

The government could provide a massive shot of adrenaline to consumer spending by eliminating the consumer’s biggest monthly payment – the mortgage.  The one  trillion dollars that Congress wants to spend can cover the interest due on every residential mortgage in the country for a year.  Here’s ten reasons why the plan would work.

1.  According to the Federal Reserve, total home mortgage debt as of the second quarter of 2008 was $10.6 trillion.   Assuming an average interest rate of 6.5% the interest payments would only be $689 billion for one year.  Equivalent payments could  be made to homeowners without mortgages and renters.  The total cost would roughly equal the one trillion in stimulus spending that has been proposed by Congress.

2.  Eliminating the mortgage payment would allow consumers to strengthen their balance sheets by paying off some debt.

3.  Many consumers would effectively have a substantial pay increase since the average mortgage payment can easily consume up to 40% of gross monthly income.  It is inevitable that a significant part of the extra cash would be spent.  The increased spending would increase demand for goods and services and reduce further job losses.

4. The mortgage payment is the biggest monthly expense for most people.  Not having to pay the mortgage for a year would greatly boost consumer confidence.  Restored confidence could stimulate future spending after the one year mortgage holiday ends.

5.  Homeowners who are in arrears on their mortgages would be given an opportunity to catch up.

6.  The default problem for the banks would be temporarily eliminated since the mortgage payment would be made by the government.   Not having a mortgage payment for a year would strengthen the consumer’s finances thereby lessening the number of defaults after the mortgage holiday is over.

7.  The American consumer knows how to spend – he just does not have the money right now.  Give it to him and let it be spent with no strings attached.

8. Millions of individual consumers will spend or invest the money more wisely than bureaucrats in Washington.

9. Those homeowners who have lost their jobs and are now struggling to pay their mortgages will be given immediate financial relief.

10. This plan would allow renters to save their stimulus payments for a down payment on a home, thereby providing support to the housing market.

If the Congress wants to borrow one trillion dollars that the American taxpayer will eventually have to pay back, then put that money directly into our pockets with a Mortgage Holiday.    We do not need Congress to spend our money for us.