December 22, 2024

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

February 27, 2009 by 1 Comment

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.

Filed Under: California, Confidence, Deleveraging, Economy Tagged With: , , , , , , , ,

Economic Reality Crushing The American Dream

February 23, 2009 by 1 Comment

Reality Becoming Impossible To Ignore

There still appears to be a serene sense of calm by the American public.  They hope that the government will be able to solve our economic crisis in short order and restore to us the American dream of nonstop prosperity.

For those who have lost their jobs, the American dream is over.   For those who have seen their equity and real estate wealth disappear, there is growing uncertainty that asset values will recover any time soon.  Those who have ignored or denied reality will lose the most since they are the least prepared to deal with the extended economic nightmare we are facing.

Can the world’s governments put Humpty Dumpty back together again?  For further consideration of where we are and where we might be headed, the following links are well worth the read.

False Hope To Reality

It appears as though we are on the cusp of the next (of several) phases in this global economic crisis. The phase we just went through lasted roughly from August of 2008 through the first of this month.  This phase included identifying our problems, getting through the smoke and mirrors, initial false promises of recovery, and the beginning of finger pointing among the nations. It was a phase where the crisis was centered on the banking system and the financial economy. It was a phase where the majority (but not all) of the problems that we are facing was revealed.

It is time now for the next phase. This is the phase where the people of this country and of the entire world begin to awaken to the reality of our present situation, and that reality begins to find its way into world markets. This is the phase where the depth and breadth of the problems we face will be revealed. With this revelation, any remaining hopes of a quick recovery will be dashed on the rocks of reality, and people will begin to actually deal with the crisis. It is a phase where the crisis deepens, not just in the financial economy and the banking system, but in the real economy and in the very life blood of all economic activity – the currency markets.

It is during this phase where the character of the nation will begin to be tested.

Increasingly I am becoming aware of a growing group of people who are ready and willing to stand for the principles given to us by our Founding Fathers. These include our national sovereignty, the rights of the states, limited federal government, sound money, the ability of people to express their faith openly, and the very idea of freedom and liberty for “we the people.”  We are entering a time period where the DNA will be set for how this battle will be fought as new leaders arise within this group.  And how it is fought will be the determining factor of whether or not it will be successful. This is the history we are poised to begin making in the months ahead.

Debt Addiction Depression Destruction

America is so hopelessly addicted to credit that unlike the family that understands its addiction to heroin has destroyed everything they once had, Americans don’t even yet understand they are addicted.

Americans today view the on-going credit contraction much as heroin addicts view the disappearance of heroin—with anxiety, dread and fear. Americans are so addicted to the flow of credit from the Federal Reserve that they no longer believe they can live without it.

The unnatural availability of credit causes an unnatural expansion of economic activity. This “economic expansion” is later followed by an “economic contraction” wherein the debts introduced by the unnatural availability of credit cannot be repaid. The business cycle is as unnatural as the monetary system upon which it is based.

While it is now too late to undo what has been done, it is not too late to prepare for what is about to happen, a financial collapse that will exceed even the suffering caused by the Great Depression. History is now moving quickly and the end of this epoch is near.

Although the economic collapse is now in motion, there is still time to preserve what savings you still have. This is the end of a three hundred year system of credit and debt based on the debasement of money, a system now in its final stages. As the crisis moves forward, the time left in which to act will disappear. Soon, it will be too late to do so.

Today, two years later, although the collapse has started it has only just begun and cannot be stopped until it has fully run its course; and when it has done so, the global economic, social and political landscape will be dramatically altered. Wall Street was first, Main Street is next and, soon, everyone’s street will be affected.

The Long and the Short Of It

Several years ago – I don’t remember the date – I read an interesting comment: “The great boom that the world is enjoying, is in effect an enormous shorting of cash and going long on debt. Eventually, there will be a short squeeze on cash which will have to be covered by going long on cash and shorting debt.”

Deflation and Depression are actually a manifestation of a massive short squeeze on cash in an attempt to reduce a gross and unsustainable long position on debt.

The Deflation and Depression will continue until the long position on debt is reduced. The long position on debt in the world is so massive, that it will only be reduced by equally massive defaults.

Delaying the inevitable will only drag out the agony of Deflation and Depression for many years. Bringing all the massive liabilities of the banking system onto the Treasury’s indebtedness – while the corresponding assets are worth far, far less than these liabilities – will solve nothing.

Debt must be reduced by defaults and bankruptcies. There is no other solution!

There’s Only One Cure For A Depression

In contrast with a depression, a recession is relatively easy to bring to an end. The genesis of a recession is caused by excessive credit creation on the part of banks and the Fed.

However, the only cure for a depression is time. Not the abrogation of the free market. The seeds of a depression are sown when an extreme over supply of money and credit is allowed to continue for a protracted period of time.  When this phenomenon occurs, it produces a pernicious level of debt to pervade throughout the economy. All sectors of the economy become overleveraged and the need to reduce debt becomes paramount. The economy then experiences a severe contraction in GDP. In a depression, the pull back in borrowing is not caused by interest rate increases from the Fed but an inability of the economy to take on further debt. A depression can last for many years as consumers, banks and the government goes through the painfully long and arduous process of deleveraging.

Unfortunately, the kneejerk response on the part of the government and central bank is to stimulate the economy by spending money and reducing interest rates. That is the very same strategy used to combat a recession. However, their response fails to produce the desired result because it ignores the root cause of the problem—debt levels that have become unsustainable. It is not lower interest rates on borrowed money that the consumer seeks, it is less debt. If fact, all attempts by the government to mollify the depression tend to exacerbate the situation by force feeding more debt when it is least capable of being serviced.

What does history say about the effectiveness of government intervention? In Japan, the Nikkei Dow hit a high of 39,957.44 on December 29th 1989. Then it’s epic real estate and equity bubble burst. The composite average is trading below 7,600 today. Even after two decades of trying to turn their market around, their government’s barrage of stimulus plans and a near zero percent interest rate policy has done little to ameliorate the malaise.

A similar result was experienced by both Herbert Hoover and Franklin Delano Roosevelt after they deployed a plethora of government interventions to combat the Great Depression. After four years of Hoover’s wealth distribution and trade wars, and five years into the New Deal, they both failed to bring the economy out of the depression. Unemployment reached 20% in the years 1937-1938 and the percent change in GDP dropped 18.2%. It wasn’t until we fought and won WWll that the economy began to enjoy a sustainable recover.

Unfortunately, we see the same playbook being deployed today as was used under the Hoover/Roosevelt regime. President Obama is following George W. Bush with the signing last week of his own stimulus plan that totals $787 billion. And of course, this is probably the first in a series of spending plans that are intended to help bring the economy back on track.

The reason all the government’s efforts fail to solve the problem is clear. Time is needed to allow asset values to retreat back to historically normal levels that can be supported by the free market. And time is necessary for debt levels to be attenuated to a level where the can be serviced without having the Fed artificially forcing interest rates down. Any and all attempts to prevent deleveraging and to prop up asset prices will cause years to be added to the healing process. Additionally, all government efforts to “help” end up becoming a huge misallocation of resources as they take capital from the private sector and redistribute it in the most inefficient manner. What’s worse is that the increased government spending adds yet more public sector debt to an economy already reeling from a mountain of liabilities.

This buildup in debt levels was unprecedented in history, thanks to a Real Estate bubble that was used to bail out an equity bubble. It would stand to reason that if the government continues to try to manufacture a recovery, it could take more than a decade to return to prosperity. The question is, do we have the patience to let the free market function and endure several years of hardship, but then emerge as a much stronger country. Or will the compulsion to intervene just propel us yet deeper into the abyss.

Filed Under: Deleveraging, Economy, Government spending, Interest Rates, Japan Tagged With: , ,

The Humpty Dumpty Economy

February 19, 2009 by 1 Comment

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.

Filed Under: Bailout, Confidence, Deleveraging, Government spending, Stimulus Plan Tagged With: , , , ,

Is There A Safe Place To Put Your Money?

February 19, 2009 by 1 Comment

Stanford Financial, with as much as $50 billion in customer assets,  was accused by the SEC of defrauding its investors.  Where does one put his money today, without worrying that it may not be there tomorrow?

Stanford Lured Clients With ‘No Worry’ Promise on Top of Rates

Feb. 19 (Bloomberg) — Stanford International Bank Ltd., accused by U.S. regulators of defrauding investors, relied on more than high interest payments to sell $8 billion of what it called certificates of deposit.

The Antigua bank, founded by Stanford Group Co. Chairman R. Allen Stanford, attracted clients with assurances that its CDs were as safe as U.S. government-insured accounts, if not safer, investors said.

“Security was the key aspect,” said Pedro, a 62-year-old software engineer in Mexico City who invested $150,000 in CDs issued by Stanford International.

“They told me that they had insurance. The broker told me not to worry and that the bank was safe,” said Pedro, who asked that his last name not be used because he didn’t want to anger bank officials.

Most U.S. certificates of deposit are insured for as much as $250,000 by the Federal Deposit Insurance Corp. CDs issued by Stanford International, a foreign company, aren’t FDIC-protected.

A Stanford International training manual obtained by Bloomberg instructed financial advisers to tell clients that “the FDIC provides relatively weak protection.”

The U.S. Securities and Exchange Commission on Feb. 17 said that Stanford, 58, ran a “massive, ongoing fraud” through his group of companies and lured investors with “improbable if not impossible” claims about investment returns. Stanford Group, Stanford International and Stanford Capital Management LLC were named in the SEC complaint.

Beware The Experts

By the time this financial crisis is resolved, the winners will be those who can keep what they have.   Any investor not doing his investment homework is severely at risk.   I have followed Ray Dalio, chief investment officer of Bridgewater Associates, for years.   Mr Dalio has been warning of an economic crisis due to excessive leverage since early 2007 and in 2008 produced returns of over 8% for his clients.  Definitely someone to pay attention to.  Mr. Dalio recently gave an interview to Barrons and it is well worth the read.

AN INTERVIEW WITH RAY DALIO: This pro sees a long and painful depression.

Dalio: Let’s call it a “D-process,” which is different than a recession, and the only reason that people really don’t understand this process is because it happens rarely. Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. Most people didn’t live through any of those experiences, and what they have gotten used to is the recession dynamic, and so they are quick to presume the recession dynamic. It is very clear to me that we are in a D-process.

Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.

I can easily imagine at some point I’m going to hate bonds and want to be short bonds, but, for now, a portfolio that is a mixture of Treasury bonds and gold is going to be a very good portfolio, because I imagine gold could go up a whole lot and Treasury bonds won’t go down a whole lot, at first.

Definitely worth considering is that Mr. Dalio’s preferred choice of investments at this point are gold and treasury bonds.

Filed Under: Deleveraging, Gold Tagged With: , ,

Notable Links

February 19, 2009 by 1 Comment

Straight Talking Common Sense

Obama Must Destroy Detroit, So America Can Live – Evan Newmark

Dear President Obama,

Who said life was fair?

You’re in office less than a month and the markets already hate your presidency, your Treasury secretary and your economic stimulus plan.

It’s time for you to destroy Detroit, so that the rest of America can live.

Mr. President, it’s time for the bankruptcy of GM and Chrysler.

Now that may seem harsh. But you really have no choice. Look around you. Everybody in America has his hand out — California and the movie industry, New York and Wall Street, homebuilders and the millions of mortgage deadbeats.

You need to send a message to all America — and fast. No more Mr. Nice Guy and no more money. Reinventing America doesn’t mean bailing everyone out. It means stopping those things that just don’t work anymore.

But such a bold gamble could mark a turning point early in your term.

It would get Republicans behind you. It would get Wall Street and America’s trading partners behind you. And it would get even more Americans behind you. Americans know when something makes sense.

Remember Ronald Reagan and the air traffic controllers’ strike of 1981?

That’s how he reinvented America. Now, it’s your turn.

Some good thoughts – worth a full reading.  Only problem is it won’t happen because there is no common sense in Washington and Mr. Obama is not Ronald Reagan.

The Burning Platform

The $787 billion 1,074 page stimulus bill has been passed. President Obama has signed it. The market immediately dropped 500 points. It will have no impact on the economy in 2009. The bill will stimulate nothing but the National Debt. Within months, plans for another stimulus plan will be demanded by the Democratic led Congress because speed and the appearance of action are how politicians get reelected. When I see Senator Charles Schumer of New York make a speech on the floor of the Senate saying, “And let me say this to all of the chattering class that so much focuses on those little, tiny, yes, porky amendments, the American people really don’t care”, I want to throttle him.Only a U.S. Senator would consider $100 billion a little tiny pork. His words prove that our leaders are so corrupted and disconnected from real Americans that they are running this country for their own self interest and the interests of their corporate money backers. Abraham Lincoln, an honest and wise man by most accounts, knew that calling pork spending stimulus doesn’t make it stimulus.

The definition of unsustainable is, not able to be maintained or supported in the future. To me, a picture is worth a thousand words.

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Source: Robert Shiller

As Congressional moron after Congressional moron goes on the usual Sunday talk show circuit and says we must stop home prices from falling, I wonder whether these people took basic math in high school. Are they capable of looking at a chart and understanding a long-term average? The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%. You will know we are at the bottom when the top shows on cable are Foreclose That House and Homeless Housewives of Orange County.

Instead of allowing the housing market to correct to its fair value, President Obama and Barney Frank will attempt to “mitigate” foreclosures. Mr. Frank has big plans for your tax dollars, “We may need more than $50 billion for foreclosure [mitigation]”. What this means is that you will be making your monthly mortgage payment and in addition you will be making a $100 payment per month for a deadbeat who bought more house than they could afford, is still watching a 52 inch HDTV, still eating in their perfect kitchens with granite countertops and stainless steel appliances. Barney thinks he can reverse the law of supply and demand by throwing your money at the problem. He will succeed in wasting billions of tax dollars and home prices will still fall 20% to 30%. Unsustainably high home prices can not be sustained. I would normally say that even a 3rd grader could understand this concept. But, instead I’ll say that even a U.S. Congressman should understand this.

Another common sense analysis by James Quinn well worth the entire read.  Markets are larger than any government and ultimately cannot be manipulated by government over the long term.  The United States Congress will waste trillions trying to support a housing market that will ultimately stabilize based on free market factors – not government manipulation and price supports.  If the government had the power to control the housing market, they would not have let it crash in the first place.

Greenspan Backs Bank Nationalization

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

The one man who is probably the most responsible for creating the debt bomb explosion and global collapse has more advice for us.  Mr Greenspan, enjoy life with your $150,000 per speech fees along with your fine government pension.   But PLEASE stop giving us your damn advice.

The mad attempts to avoid any and all foreclosures is counter-productive. The foreclosure process is how an over-priced market returns back to normalcy.

Today at 12:15 am, we shall learn of the Obama administration’s new housing plan. I suspect it will have many of the same doomed features as all the other misguided housing plans floating around.

Before getting to those specifics, let’s revisit and recognize several truths:

• Home prices remain elevated;

• Artificially propping up prices is counter-productive;

• Home owers (No equity, 100%+ debt) who are in houses they cannot afford are going to have to move to homes or apartments they can afford;

• Foreclosures/REOs are often costly to banks; The lenders that made these bad loans to unqualified borrowers will suffer write-downs;

• It is not the responsibility of Taxpayers to bailout borrowers who are in over their heads, or lenders that made bad loans.

What are we likely to see from the White House today? I expect to see an over emphasis at stopping foreclosures; a reliance on foreclosure moratoriums; Involuntary loan modifications a/k/a cramdowns; and last, Interest rate deductions;

More sound, common sense advice from Barry Ritholtz.  The government’s constant stream of ridiculous “new plans” for solving the housing crisis with their Rube Goldberg mechanisms is sure to postpone any recovery or bottom in housing for decades.

Sovereign Default –  Which Domino Falls First?

It’s no longer a question of if, but where.  Will the first sovereign default occur in Eastern Europe or Asia?  The debt levels of many countries are no longer sustainable due to collapsing economies, destruction of asset/collateral values and the inability to obtain more credit.  Of the $5 trillion in loans made to emerging market countries, almost 75% of the lending was done by Western European banks.

Many countries no longer have the economic ability to service their debts.  Debts that cannot be paid, by definition, will be defaulted on.  The larger question is will the first sovereign default trigger a domino of defaults, resulting in a catastrophic series of defaults worldwide?

Courtesy Wall Street Journal

Filed Under: Bailout, Banking Industry, Deleveraging, Government spending, Sovereign Default Tagged With: , ,

California & Congress Implement Discredited Depression Era Policies

February 17, 2009 by Leave a Comment

Irony Everywhere

Supposedly we learned certain lessons from the depression of the 1930’s.  Experts agree that two of the worst policy decisions during the depression were to raise taxes and erect trade barriers.

Knowing that something is wrong and still doing it are two entirely different matters.

Congress Wants a Trade War

As the world-wide recession deepens, protectionist sentiments are rising. The House of Representatives’ version of the economic stimulus bill contains a provision that only American-made steel and other products be used for the infrastructure projects. Wrapped in the cloak of “Buy American” patriotism, the Senate version of the bill contains even stronger anti-free-trade provisions.

This Buy American momentum is bad economics, and by threatening to destabilize trade and capital flows, it risks turning a global recession into a 1930s-style depression. Asked about Buy American on Tuesday, President Barack Obama told Fox News that “we can’t send a protectionist message.” He said on ABC News that he doesn’t want anything in the stimulus bill that is “going to trigger a trade war.” He’s right.

Hostility has been no less evident in Europe and China. The European Union has said that it will not stand by idly if the U.S. violates its trade agreements and its obligations to the World Trade Organization. The risks of retaliation and a trade war are very real.

In 1930, just as the world economy was sinking as it is today, the U.S. Congress passed the Smoot-Hawley Tariff Act, which essentially shut off imports into the U.S. Our trading partners retaliated, and world trade plummeted. Most economic historians now conclude that the tariff contributed importantly to the severity of the world-wide Great Depression.

Later, as one of his last acts, President Herbert Hoover made the situation even worse by signing a “Buy America Act” requiring all federal government projects to use American materials. (That act is still on the books although it was weakened during the 1980s.) We must avoid repeating the disastrous mistakes of the past.

This is beyond idiocy and provides further proof that whatever action the government takes to “help” us is certain to hurt us.  The president does not want a trade war and he probably knows that trade wars are a bad thing.   Talk is cheap Mr. Obama – show some leadership and DO the right thing; politics as usual will not help us in this crisis.  If there was any intellectual honesty in Washington, a “buy American” provision would have never been added to the stimulus bill.  Political gamesmanship may have won someone a few votes; the economic cost to the Nation could be incalculable.

California to Close Budget Gap (With New Taxes)

Democrat Darrell Steinberg, the state Senate leader, expressed confidence that another Republican senator would join the two who have committed to vote with the Democratic majority in approving a budget that would raise taxes and cut spending.

In addition to the revenue increases, it proposed cutting $15 billion in spending, including $8.6 billion from education and $1.4 billion from payroll costs, to be achieved in part by furloughing 200,000 state workers at least one day a month. The plan also called for $11 billion in borrowing and $700 million in tax breaks for large corporations.

The impasse has revolved around a bill, out of the nearly 30 in the budget proposal, that would generate $14 billion in revenue by temporarily raising the sales tax by one percentage point, increasing the gasoline tax by 12 cents a gallon, and adding a surcharge of up to 5% on income taxes, among other steps.

Despite an unemployment rate approaching 10% California raises taxes and thus implements the same failed tax policies of the 1930’s.   Considering the further impact of job cuts, pay freezes and pay cuts it is no surprise that many people can barely make ends meet.   Washington’s response is a $10 a week tax cut stimulus!  Bizzaro World economics in action here.

California has to take the worst action possible at the worst possible time because they have no options left.   The one positive in the budget bill is that spending cuts covered part of the deficit rather than higher tax increases.  Despite California’s dance on the edge of bankruptcy, few people realize the full impact that deleveraging will have on California and the nation.  It will takes years of reduced spending, higher taxes and plain old fashioned frugality to restore the sound financial footing that is necessary to launch real economic growth.   Politicians promising a quick turnaround based on social spending stimulus programs are apt to shortly discover the ugly side of impatient constituents.

Filed Under: California, Deleveraging, Economy Tagged With: ,