Peter Schiff on The Fed & Your Money

It appears that as the United States’ citizenry continues to learn in increasing numbers about the shenanigans of the privately-owned and unconstitutional Federal Reserve, about the Nazi roots of the Pharmaceutical companies; about the communist origin of major tax-exempt foundations and their collectivist ‘educational’ purposes; about the scientific study out of the University of Copenhagen unequivocally proving the presence of nano-thermite high-tech explosives within the dust of the rubble of the World Trade Center; about the continued confirmations coming out of ‘The Iraq Inquiry‘ hearings ongoing in London that the entire U.S. incursion into Iraq was based on lies; about the opium industry so protected by U.S. interests in Afghanistan that it is booming under U.S. watch care; about the bill in Congress to further restrict gun ownership; about the socialist agenda still attempted to be inculcated within Healthcare reform; and about the undaunted coasting of international leaders to the “Climate Conference” to be hosted by the U.N. in Copenhagen beginning December 7th in spite of the worldwide fraud of man-made “Climate Change” that was exposed last month, to sign a spurious document that sets up the structural framework for global economic governance based on that fraud and which is the precursor to the subjugation of our Constitutional Republic to a tyrannical World Government, our nation’s citizenry and consequently all the world will soon experience the repercussion of an orchestrated acceleration of economic implosion geared to extort our cooperation with and participation in the NEW WORLD ORDER. (And there are still more blockbuster revelations waiting in the wings.)

Read the stunning news from the International Forecaster:

Potential for Fed to Hyperinflate

Reposted from The International Forecaster November 28th, 2009

Always the question about what the Fed will do, more pressure on small and medium banks, municipal bond meltdown, bailouts cant go on indefinitely, looking at the banks, and recalling the French Revolution, the truth of fractional banking.

The following information may be the most important we have ever published. One of our Intel sources, highly placed in banking circles, tells us that on 1/1/10 all banks that have received TARP funds have been informed by the Federal Reserve that they must further restrict any commercial lending. Loans have to be 75% collateralized, 50% of which has to be in cash, which is a compensating balance.

The Fed has to do one of two things: They either have to pull $1.5 trillion out of the system by June, which would collapse the economy, or face hyperinflation. This is why the Fed has instructed banks to inform them when and how much of the TARP funds they can return. At best they can expect $300 to $400 billion plus the $200 billion the Fed already has in hand.

We believe the Fed will opt for letting the system run into hyperinflation. All signs tell us they cannot risk allowing the undertow of deflation to take over the economy. The system cannot stand such a withdrawal of funds. They also must depend on assistance from Congress in supplying a second stimulus plan. That would probably be $400 to $800 billion. A lack of such funding would send the economy and the stock market into a tailspin. Even with such funding the economy cannot expect any growth to speak of and at best a sideways movement for perhaps a year.

We have been told that the FDIC not only is $8.2 billion in the hole, but they have secretly borrowed an additional $80 billion from the Treasury. We have also been told that the FDIC is lying about the banks in trouble. The number in eminent danger are not 552, but a massive 2,035. The cost of bailing these banks out would be $800 billion to $1 trillion. That means 2,500 could be closed in 2010. Now get this, the FDIC is going to be collapsed before the end of 2010, which means no more deposit insurance. This follows the 9/18/09 end of government guarantees on money market funds. Both will force deposits into US government bonds and agency bonds in an attempt to save the system.

This will strip small and medium-sized banks and force them into shutting down or being absorbed. This means you have to get your money out of banks, especially CDs. We repeat get your cash values out of life insurance policies and annuities. They are invested 80% in stocks and 20% in bonds. Keep only enough money in banks for three months of operating expenses, six months for businesses.

Major and semi-major banks are being told to obtain secure storage for new currency-dollars. They expect official devaluation by the end of the year.

We do not know what the exchange rate will be, but as we have stated previously we expect three old dollars to be traded for one new dollar. The alternative is gold and silver coins and shares. For those with substantial sums that do not want to be in gold and silver related assets completely you can use Canadian and Swiss Treasuries. If you need brokers for these investments we can supply them.

The Fed also expects a meltdown in the bond market, especially in municipals. Public services will be cut drastically leading to increased crime and social problems, not to mention the psychological trauma that our country will experience. Already 50% of homes in hard hit urban areas are under water, nationwide more than 25%. That means you have to be out of bonds as well, especially municipals.

As you can see, the Illuminist program is going to come quicker than we anticipated. That in part is because they have had to expedite their program, due to exposure in the IF, other publications and especially via talk ratio and the Internet. There is no doubt we have the elitists on the run.

We are reaching the masses. On TalkStreamLive.com we were on the Rumor Mill this past week and out of 50 talk radio programs we were 5th behind, Rush, Hannity, Dr. Laura and we were tied with Beck. On the Sovereign Economist on Wednesday night we were 5th behind Beck and Savage and ahead of Hannity. Both these programs are not well known and the Sovereign Economist is only about a month old. It shows you what you can do if you work hard enough at it.

The latest favorable events we are told are the seeds of recovery. The green-shoots of spring are to be harvested before winter sets in. We are skeptical of the strength and duration of such a recovery.

The underlying problems are still not being addressed. The US government and the Fed cannot bail out banking, Wall Street, insurance and government indefinitely via monetization. Impaired corporations, no matter what their size, have to be allowed to fail. Stimulus cannot be used indefinitely. Both have to be reigned in, because the longer this charade continues the worse the final outcome is going to be. As we predicted six year’s ago, Fannie Mae, Freddie Mac, Ginnie Mae and FHA are the wards of American taxpayers, as is AIG. All their financial conditions worsen every day. They have again been insuring subprime mortgages by the thousands and when they begin to reset next year, we will be back to 60% failure rates. Even government admits already they’ll see 20% failure rates. This, so that housing inventory can be cut from 11-1/2-months inventory to 7-months, again in order to bail out the lenders at the expense of taxpayers. Government and the Fed have no exit plans for these sinking ships, particularly Fannie, Freddie, Ginnie and FHA, never mind their meddling in the economy guaranteeing everything is sight. Benito Mussolini would be very proud of what they have done.

Then we have those on Wall Street, banking and corporate America who believe they are doing God’s work by looting the American public making outrageous profits by in part using taxpayer funds, and allotting themselves disgraceful bonuses as unemployment hovers at 22.2%. Haven’t these people heard of the French Revolution? Their arrogance has no bounds. The credit crisis hasn’t ended; the Fed has extended it by throwing money at problems. We have a mortgage market that is worse than it was a year ago, only kept from sinking by a tax credit 3% down. As a result now we have more than $1 trillion of new mortgage failures on the way.

Our monetary base has more than doubled. Interest rates will probably stay where they are for 18 months or more and we even have a dollar carry trade. The 2009 fiscal budget deficit was $1.5 trillion and 2010 will be worse. Government is not cutting expenses. They are increasing expenses.

In addition making matters worse corruption is flourishing via the incestuous revolving door between Wall Street, the Treasury, in a multiplicity of other appointments and with the Fed. Is it any wonder 75% of Americans want the Fed audited and investigated. That said, the present set of circumstances cannot be allowed to go on indefinitely. We cannot keep insurance, Wall Street and banking on life support forever. Not when we finance two occupations and an ongoing war, never mind our unfunded liabilities of Medicare, Social Security, etc. most all of these problems are being financed by debt to be paid by our great, great grandchildren. We just created $12.7 trillion for bailouts and the Inspector General tells us we are presently on the hook for $23.7 trillion. What happens if all the recipients need another $20 trillion?

The situation is still dire and the solution is temporary and unworkable and Washington and New York are well aware of this. The game will play out over the next few years. In the meantime the dollar will move lower and inflation, gold and silver higher.

Economics is not complex; it is very simple. Professors and economists would like to have you believe it is complicated when in fact they make it opaque, so you cannot understand it. The same is true with banking. In normal times through the century’s bankers using the fractional banking system usually lent 8 times their assets, or deposits. It was only until recently that the privately owned Federal Reserve told banks within the system to lend 40 times assets or more in order to accommodate the system.

All this is to cover to confuse and hide the truth of fractional banking. Bankers’ indebt borrowers with money they made up out of thin air. Debt is enslavement by the bankers upon the people by buying almost everyone off. In the final analysis banking is a fraud unless money is interest free. The Fed, and all the other banks are a fraud.

The game as we know it today began in 1694 when the Rothschild’s formed the privately owned Bank of England and the production of bank notes began and circulated along with sterling silver coins. The end result has been that the bankers own the world. The system today is based on confidence and trust, something that has been worn thin. A reflection of the loss of trust and confidence is that 75% to 80% of Americans want HR1207 and S604 passed by Congress, so that the Fed can be audited and investigated. The public no longer trusts the Fed and the banks. As a result the con game may well be coming to an end. Fifty years ago we and a handful of other conservative warriors set out to inform the public of the giant scam that the Fed really was. It has been a long hard road. Gary Allen and Alan Stang are gone and of the originals all that are left are G. Edward Griffin, Stan Monteith, Anthony Hilder and us. During our lifetimes we now probably will see the end of the Fed. Because the people have finally been awakened. It was a long hard battle that may soon come to fruition.

The final step will be the termination of the Federal Reserve and its monopoly on financial theft. Unfortunately it will mean the demise of the only financial system we have known for 315 years. We do not know as yet what the new system will be like, but the con game is over and most of the world’s inhabitants are broke. The debt that is owed simply cannot be repaid. Japan, the US, the UK and Europe will be the first to go followed by most of the rest of the world.

You ask who will be the big winners? Gold and silver of course. Just as we have been telling you they would for 9-1/2 years, since gold was $252.00 and silver $3.80. Look at the gains for those who listened. And, we still have a long, long way to go to preserve our wealth. Over all those years the gold suppression cartel fought to hold down gold prices by selling gold, using derivatives and futures and in collaboration with good producers such as Barrick Gold and others. Hopefully HR3996 (HR-1207) will now pass unchanged and we can take a look at what the Fed and the Treasury were doing and who aided them.

What we are witnessing in the US and world economy is the result of the greed of central banks to make as much money as possible before they have to collapse the system to bring about World Government.

Manufacturing activity in the Federal Reserve Bank of Kansas City’s district improved in November.

Politics seems to be hard guessing work based on trials and errors. An example may be seen in today’s news (November 12, 2009) by Huffington Post reporter, Shahien Nasiripour. Mr. Nasiripour reported that when the administration decided on spending the tax payer fund of $75 billion on a plan to reduce troubled-homeowners’ monthly mortgage payments and, therefore, housing foreclosures earlier this year, Pres. Obama should have listened to economists, John D. Geanakoplos and Susan P. Koniak’s suggestion that the administration should reduce the principals that troubled homeowners owed to banks and mortgage servicers instead of trying to reducing their interest rates as a way of reducing homeowners’ monthly payments. As a result, the government plan of reducing interest rates has not been successful in reducing the rate of housing foreclosures up to now. The report by Mr. Nasiripour can be found at below website.

http://www.huffingtonpost.com/2009/11/12/the-economist-the-obama-a_n_355022.html

This blog post consists of my comments to the article by Mr. Nasiripour at Huffington Post.
__
Economists Geanakoplos and Koniak’ proposal to help troubled homeowners sounds convincing.

I am not sure whether it is reasonable to put the blame of current not-working program of easing foreclosures purely on President Obama. Although he is in the spot to take all blames, including those for others like ex-president, his advisors / staffs, or skimmers of housing market. The blame should rather go to the dominant voices, primary policy advisors that surrounded Mr. Obama and led him to take the current path. As Mr. Obama himself had not been an economist or financier, he must have relied on dominant voices, opinions around him to make the decision.

What I wish is, at that time of making the decision of plan for solving foreclosure problem and hearing different economists’ different approaches to solve the problem, President should have hold intensive forums / discussion panels with many economists to debate, weigh the pros and cons of different approaches in order to reach the final choice (or did he do that?). Of course, even if he had done so, if the voice of economists who support Prof. Geanakoplos and Koniak’s approach had been dominated by the voices of opposing groups, still the result would have been same. In politics, the power of persuasion seems to be more lethal weapon than that of “truth, justice.”

Now, at least before spending more housing money, the administration may conduct the mid-term, or staged evaluations of the program and make adjustments / amendment to the program to make it work better.

Ideally, I wish the administration to create a “Law,” titles as “National Emergency Act” or something like that. The law may dictate that, in case of national emergency such as depression or natural disaster, the government should have the power of interfering, regulating, and rewriting the codes of corporate business activities in order to recover from emergency situations to normal conditions, especially when corporate acts damage public / national interests and trigger national emergency situation. Under this law, the government can temporarily or permanently freeze or decrease corporate profits and/or executive compensations until the emergency situation recovers to normal, healthy economic condition or if there are dangers of recurring situations of the same emergency / disaster¬. And the government can ban any lobby activities by the offending corporates/industry against the government’s intervention.
At the same time, economists should “Re-Write” the text book economic assumption of human being as “reasonable decision makers” in “Free Market System.” This understanding on the nature of human beings has been proved by the fact that many corporate executives (and/or their lawyers?) have proved to be very insanely, excessively-greedy, dangerously risk- taking, toxicaly harmful existences to the society. By changing this economic assumption, it may discourage some people from praising their love for “Free Market System” when others are dying without medical care, losing jobs or houses, or don’t have food on their dinner tables because of these corporate villains. No individual or corporate interests should be allowed to go against the interests of majority of country.

Mr./Ms. Learneddemocrat commented to my comments as below.
“Lim, there are countries that do exactly that, even without a “disaster”. Venezuela comes to mind as well as Cuba…..even Russia. Perhaps you should consider taking up residency there. I am pretty sure once you spend quality time living in such a place, you will consider the free market system and the true meaning of capitistic society the better choice. Been there, lived that.”

Initially I was confused that this comment is complementary. But now I consider that this commentator may not have quite grasped the essence of what I said. My reply to him/her was as below.
“In Asian countries, such as Japan or South Korea, the governments had crafted and guided their economic / industrial developments. Their government interventions on industries and promoting competitive industries have contributed to these countries’ rapid economic developments, success stories, calling them East Asian Tigers. In the midst of U.S. economic disaster and chaos, why not learn from the lessons of these Asian success stories?”

Sometimes, government intervention can be very productive if it is designed carefully. It doesn’t have to be called as socialism. Thesedays, the word “Socialism” seems to be the most popular name calling for any kind of policies or ideas, regardless of their true nature, that some people don’t like.

I WAS IN NEW YORK earlier this week for the Value Investing Congress, reports Chris Mayer of Capital & Crisis.

Among the more valuable presentations were those of Sean Dobson at Amherst Securities and Whitney Tilson and Glenn Tongue of T2 Partners. They were valuable because they helped frame where we are in the US mortgage crisis, which has been the main shark in the water over the past couple of years.

You should know where that shark is and whether or not it is hungry. This chart shows you the ferocious fish may still have an appetite.

As you can see, we are past the vicious subprime crisis, when the shark chewed through the balance sheets of a number of banks and financial institutions, in some cases devouring them whole.

However, it is not yet safe to get back in the water. There are other slices of the US mortgage market that are not quite as risky as subprime, but which will reset – and force the debtors to face higher rates – in the next couple of years. Years 2010 and 2011 face big resets in so-called Alt-A and Option ARM loans. What this means is more write-downs and more losses for banks and others who hold these mortgages.

Making all this worse is the fact that the housing market itself has not yet recovered. The duo from T2 Partners speaking in New York made the case that the current “stabilization” of the housing market is a head fake. Mostly, it’s due to huge government support of the housing market. But there is still a large inventory of homes out there. And with these resets coming due, we’ve still got a large amount of foreclosures on the horizon.

And all the while, the unemployment numbers are still poor. The T2 duo calls the unemployment situation the “most severe since the Great Depression.” The US economy has shed over 8 million jobs in this recession and unemployment – officially – is nearly 10%.

Plus, it’s not like the average US consumer is in a good position to sail through this crisis. Household liabilities are still high.

US consumers need to save and rebuild their financial strength. This is why the savings rate is on the rise. This is why, for the first time since the 1950s, household credit debt declined.

As investors, it seems clear that any idea that depends on discretionary consumer spending – say, buying trendy new sweaters or watches or expensive shoes – faces some big head winds. Better to the stick with the necessities, I say.

Also, it looks like the bounce in the stock prices of overleveraged banks and financial institutions is premature. Most bank stocks should be sold, not bought. The bounce in home building stocks looks ridiculous in light of what they have to look forward to.

The T2 duo actually recommended shorting the home building stocks, and betting the stock prices of the home builders will go down. They made a compelling case, of which I will highlight a few things.

Exhibit A would be the fact that the average new home has been on the market for 12.9 months. Exhibit B is that we have about 2-3 years of existing home sales just to absorb the vacancies that exist. According to T2, about 6% of all homes built this decade are vacant.

Exhibit C is that the home builders themselves have too much debt and too much inventory relative to their thin equity cushions. The home builders are in the position of trying to hold up a bowling ball with a sheet of paper…in the rain.

Lastly, the home builder stocks are almost universally expensive on a price-to-book basis.

Stocks that are stuck with lots of debt, too much inventory and an awful market don’t deserve premiums over book value. Discounts are more like it.

So there you go. I like the idea of shorting the home builders. At the very least, I wouldn’t buy one. I’d also stay away from banks and financial institutions that hold mortgage assets, too. American real estate is not worth zero, as Dobson said, but it can be worth a lot less than today’s price.

I recommend staying with the sorts of companies that own essential assets and/or sell essential items. As I like to say, stick with what keeps civilization a going concern. And avoid any stock that is dependent on regular access to the credit markets. As we saw in 2008, a mortgage crisis can shut down the credit markets. We don’t want to be held hostage by lenders in that situation, so stick with excellent financial conditions.

Ready to Buy  Gold…?

Chris Mayer, 06 Nov ‘09

A keen student of financial history, Christopher W. Mayer gained an MBA in finance before beginning his banking career in corporate lending.

He soon launched Capital & Crisis, a monthly newsletter now excerpted by leading financial publications including the Mises Institute, LewRockwell.com, PrudentBear.com, Grant’s Investor and Individual Investor Magazine.

Chris’s unique brand of “value” investing has earned him a strong reputation as an analyst and writer. You can learn more here…

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Why the Crisis Isn’t Going Away

By MIKE WHITNEY at CounterPunch

Size matters. And it particularly matters when the size of the financial system grossly exceeds the productive capacity of the underlying economy. Then problems arise. Surplus capital flows into paper assets triggering a boom. Then speculators pile in, driving asset prices higher. Margins grow, debts balloon, and bubbles emerge. The frenzy finally ends when the debts can no longer be serviced and the bubble begins to crumple, sometimes violently. As gas escapes, credit tightens, businesses are forced to cut back, asset prices plunge and unemployment soars. Deflation spreads to every sector. Eventually, the government steps in to rescue the financial system while the broader economy slumps into a coma.

The crisis that started two years ago, followed this same pattern. A meltdown in subprime mortgages sent the dominoes tumbling; the secondary market collapsed, and stock markets went into freefall. When Lehman Bros flopped, a sharp correction turned into a full-blown panic.   Lehman tipped-off investors that that the entire multi-trillion dollar market for securitized loans was built on sand. Without price discovery, via conventional market transactions, no one knew what mortgage-backed securities (MBS) and other exotic debt-instruments were really worth. That sparked a global sell-off. Markets crashed. For a while, it looked like the whole system might collapse.

 The Fed’s emergency intervention pulled the system back from the brink, but at great cost. Even now, the true value of the so-called toxic assets remains unknown. The Fed and Treasury have derailed attempts to create a public auction facility–like the Resolution Trust Corporation (RTC)–where prices can be determined and assets can be sold.  Billions in toxic waste now clog the Fed’s balance sheet. Ultimately, the losses will be passed on to the taxpayer.

Now that the economy is no longer on steroids, the financial system needs to be downsized.  The housing/equities bubble was generated by over-consumption that required high levels of debt-spending. That model requires cheap money and easy access to credit, conditions no longer exist. The economy has reset at a lower level of economic activity, so changes need to be made. The financial system needs to shrink.

The problem is, the Fed’s "lending facilities" have removed any incentive for financial institutions to deleverage. Asset prices are propped up by low interest, rotating loans on dodgy collateral. While households have suffered huge losses (of nearly $14 trillion) in home equity and retirement savings; the financial behemoths have muddled through largely unscathed. The Fed handed Wall Street a golden parachute while ordinary working stiffs were kicked to the curb. That’s why household spending has plunged while the big brokerage houses are gearing up. Here’s an excerpt from an article by former Morgan Stanley analyst Andy Xie which explains what’s really going on:

First, let’s look at the most basic objective of deleveraging the financial sector. Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding. (Andy Xie, "Why One Good Bubble Deserves Another", Caijing.com)

See? The financial Goliaths are still leveraged to their eyeballs.

Fed chair Ben Bernanke has bent-over-backwards to preserve the system in its present form. That’s why the lending facilities should be viewed with a degree of skepticism. They weren’t set up merely to rescue the system from disaster, but to keep asset prices artificially high so institutions could continue to maximize profits via risky investments. And, it’s worked, too. The S&P 500 is up over 60 percent since March 9. Still, even though Bernanke has succeeded in resuscitating the flagging financial sector, investors remain pessimistic. According to Bloomberg News:

An eight-month, 68 percent rally in global stocks failed to convince investors and analysts that it’s time to take on more risk or dispel their concerns about U.S. economic policies and its banking system.

Only 31 percent of respondents to a poll of investors and analysts who are Bloomberg subscribers in the U.S., Europe and Asia see investment opportunities, down from 35 percent in the previous survey in July. Almost 40 percent in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.

The doubt and the pessimism just won’t go away,” says James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. (Bloomberg News)

Few people seem to believe in the much-ballyhooed economic recovery. And even though the media triumphantly announced the "end of the recession" last week (when GDP came in at 3.5 percent) a closer look at the data leaves room for doubt. Goldman Sachs analysts put it like this:

"How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far?  Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter."

Positive growth is an illusion created by government spending. In fact, the economy is still flat on its back. Consumer spending and credit are in sharp decline. Unemployment is steadily rising (although at a slower pace) and wages are flatlining with a chance of falling for the first time in 30 years. Deflationary pressures are building. The talk of a "jobless recovery" is intentionally misleading. Jobs ARE recovery; therefore a jobless recovery merely points to asset-inflation brought on by erratic monetary policy. Surging stocks shouldn’t be confused with a real recovery.

Bernanke is a scholar of the Great Depression. He is familiar with Hyman Minsky and Minsky’s "Financial Instability Hypothesis", which states that, "A fundamental characteristic of our economy is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles."

Boston Globe correspondent, Stephen Mihm, summarized Minsky’s theory in his article "When Capitalism Fails":  

"In the wake of a depression,” he noted, “financial institutions are extraordinarily conservative, as are businesses.” With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”

As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers – what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment – what was later dubbed the “Minsky moment” – would create an environment deeply inhospitable to all borrowers.

The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that depended on the now-collapsing financial system.

Stability leads to instability.  By zeroing in on capitalism’s genetic flaws, Minsky countered the prevailing orthodoxy that markets are fundamentally efficient and rational. He not only showed that capitalism was inherently crisis-prone, but also, that it was most vulnerable during those periods which seemed to be most stable. (Like during Greenspan’s "Great Moderation".) Stability invites speculation and risk-taking. Investors are buoyed by market euphoria and fat returns; borrowing to purchase dodgy equities turns into a mania which distorts prices and leads to massive credit bubbles. Eventually, the foundation cracks and debts cannot be rolled over. Then markets tumble.

The point is, Bernanke knows that a bloated financial system poses unnecessary risks to the  economy; just as he knows he should wind-down existing lending programs (which just encourage more speculation) and focus on rebuilding household balance sheets. The only way to put the economy back on a solid foundation is by helping struggling workers get back on their feet so they can create more demand. The objective should be full employment and broad, sustained wage growth, which is precisely what Minsky’s recommended.

Stephen Mihm again:  

The government – or what Minsky liked to call ‘Big Government’ – should become the ‘employer of last resort,’ he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else’s wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.  ("Why Capitalism Fails, by Stephen Mihm, Boston Globe)

Minsky’s analysis not only sheds light on the causes of the current crisis, but also provides a practical way to fix the system. Too bad Bernanke’s not paying attention.

Mike Whitney lives in Washington state, He can be reached at fergiewhitney@msn.com

Bankruptcy filings are up this year in northeast Nebraska, including the Omaha area, but the increase has been far higher in the rest of the state.

Although job losses and the slumping economy contribute to the bankrupty increase, economists and lawyers aren’t sure why there’s a difference within the state, which is split between U.S. Bankruptcy Courts in Omaha and Lincoln….(read more)

Capitalism gets a bad rap. People point to the thieves and say that capitalism created them. Thieves will exist in any kind of system so you can’t necessarily blame it on capitalism. Capitalism was just the tool. The capitalism haters have pointed to communism as a viable alternative. It’s funny that it’s mostly the silver spoon crowds that advocate this shit, well them and backwards ass negros. The silver spoon set is accustomed to being catered to and they feel guilty. They think it would be great if everyone could be catered to but fail to understand that someone has to do the catering and be rewarded for it. They truly underestimate the amount of greed that it took for their family to get where it is. You can’t own a significant amount of Wells Fargo stock and complain about the number of pawn shops, check cashing businesses, and subprime mortgages in poor communities. That shit is their bread and butter.

I’m not sure if I’ve said this before, but their are actually only two isms, capitalism and communism. All other isms are just defined by who gets to be a capitalist and who has to be a communist. Racism says that whites have the option to capitalists, and non whites have obligation to be communists. This is why the black community has the issues that it does. Too many people have absorbed that bullshit, especially my parent’s generation. They’ve pretty much destroyed everything that my grandparents’ generation fought for. I’ve been meaning to make a post about this but it’s such a massive topic that I can’t break it down in a way suitable for a quick blog post.

Feminism is a social system that advocates men being forced into communism while the women run free. The first time I said this, which was years ago, many doubted me or just nodded their heads in faux agreement. They listen to me now, especially this month. It seems to be anti-male slander month which is funny because it seems to be female recklessness month as well. You’ve got all  these stories about negligent mothers killing their own kids as well as the children of others, and violent women too. If you see something on the news it’s only a quick blurb about how some women fucked up. NBC has made some kind of mission to promote women on the Today show. You barely see the male anchors anymore and all they do is pump male bashing and pussy worshiping stories.  They run these stories two or three times a day. Then their guests travel out to other networks after the Today show gives them exposure. I can’t remember which show it was, but a male anchor checked a feminist Today Show schill hard. She was bragging about how women were so superior and that corporations were started to recognize them. That they were gaining jobs as men lost them. He pointed out that the recession destroyed many male dominated jobs and that most of the women were taking low paying BS jobs, not executive ones. She backed up real quick!

The funniest thing about the Today Show is that it caters to  women because they spend the most time at home and make 85% of purchases. More men are at home and watching this shit due to job loss. They see the shit for what it is. There will be fallout from this shit one way or another because many of these men will resume their status one day. Dudes are waking up from this shit. They are tired of working for the common good while women get to work for their own benefit. This female run society is still dependent on the work done by men and men don’t work for peanuts. As long as the majority of women are whores, the majority of men will desire capitalism. A feminist society can’t work without being subsidized by capitalist men who are sympathetic or feel trapped. Men are losing sympathy and the have been booted from the corporate system. Hopefully this unjust feminist society will collapse before it destabilizes the country. We can’t compete against countries like China or even the drug lords of Latin America otherwise.

Bankruptcy filings are up this year in northeast Nebraska, including the Omaha area, but the increase has been far higher in the rest of the state.

Although job losses and the slumping economy contribute to the bankrupty increase, economists and lawyers aren’t sure why there’s a difference within the state, which is split between U.S. Bankruptcy Courts in Omaha and Lincoln….(read more)

America’s economy is drowning in a quagmire of subprime mortgages. But blame for its suffocation should not end with the greedy loan officers who originated them.  Responsibility for this debacle has to be shared with every facet of the housing industry. 

To maintain confidence in the American economy after 9/11, the Federal Government did its best to stimulate spending when they lowered the discount and federal funds rates. And as expected, the housing industry took advantage of those historically low rates. But it went overboard: Banks and private lending institutions relaxed their underwriting criteria, which allowed borrowers with weak and poor credit to qualify for mortgages using spurious documentation, and in many cases, none at all; yet, culpability did not end there. Those in the real estate industry played a blameworthy role that helped the house of cards to tumble down into the financial logjam now strangulating not just the housing industry, but the general economy as well.

 Unknown to most Americans, it was often real agents who pressured loan officers to fudge the numbers on loan applications. Also hidden behind the curtain were the real estate appraisers, who cowered after being threatened with loss of business from mortgage companies and banks if they failed to “hit the number.” But they were never held accountable for inflating the values of home that languish on the market today.

 There is a common thread running through all involved, including the home owner or purchaser; that commonality is greed. Avarice is an American as apple pie. But someone forgot to remind those constantly reaching for the fruit hanging from the highest the branches that the tree was slowly dying. Now credit availability is all but barren except for those with excellent credit. No longer is good credit enough to realize the American dream. The party that seemed to have no end has run out of liquor and ultimately out of money.

 Our unique form of capitalism encourages those with the audacity and cunning to outwit the public and in many cases empty their pockets. This economic disaster is not only an indictment of our financial industry; but more importantly, it is a testament to some of the lingering social ills still plaguing our society. Getting ahead in this country is still rewarded, even if it means stealing the life savings of some unsuspecting borrower.

One of the earliest defense mechanism a child learns is through pain.  If something hurts, the child avoids it.  This most basic of responses has yet to be learned in Washington.

One catalyst for the current recession was the housing bubble and related sub-prime mortgages.  Through a combination of teaser mortgages and the federal government’s program of promoting home ownership, the demand for housing increased.  With increased demand, prices increased rapidly.  This led to the belief that home prices would continuously go up, creating a bubble mentality with speculators buying homes and people who couldn’t afford homes buying them.  When housing prices stopped rising the bubble popped, nearly bringing down our entire financial system.

Given the severity of the meltdown you would think that our government would avoid repeating the same mistake, at least anytime soon.  No, Washington is right back at it.  The Obama Administration is about to commit $35 billion to help state and local housing agencies provide mortgages to lower and middle income households in effort to prop up the market.  While there may be some short-term benefit to this intervention, the ultimate result is likely to be similar to the economic disruptions caused by the last governmental intervention in the housing market.

Some of the same people involved in the previous (current) housing mess are back at it again.  First, while Treasury Secretary Timothy Geithner was unable to figure out his own taxes, he is now will to intervene in the highly complex housing market.  Also, much of the “new” funds for mortgages will go through Fannie Mae and Freddie Mac, the two government guarantied corporations that required huge bailouts last year.  Finally, there is Representative Barney Frank, Chairman of the House Financial Services Committee, one of the most vocal supporters of governmental assistance for the housing market.  And these folks expect different results to this intervention, this time?  Really!

In more sensible times Americans would have asked where the $35 is coming from.  But with trillion dollar deficits, a mere $35 billion doesn’t seem to matter.  It happens that these funds $are coming from the authority granted under the “2008 Housing Economic Recovery Act“.  Assuming the congressmen read the act, would they have committed to making the same mistakes that caused the last meltdown?

Why is the government offering incentives for people who cannot afford homes to take on more debt to own them?  Should the economy remain soft and housing prices continue to fall it will create hardships for the mortgage holders.  It seems the government is attempting to create another housing bubble to improve Americans’ balance sheets.  This will likely fail since consumers now know that housing prices go down, as well as up.

The $35 billion intervention will not only increase our national debt, but also lead to unintended consequences as did the previous intervention.  For example, consumer funds that would have been spent on appliances other manufactured goods will now be directed to paying for the mortgages, prolonging the recession in various industries.

The government is out of control.  Their methodology is akin to serving up drinks to alcoholics to steady their nerves.  We the people must take away the government’s ability to spend money they do not have.  There are those that say that this type of financial discipline will be too painful.  Given the economic meltdowns that we are facing with increasing frequency, that argument no longer holds water.

Quote of the day, from Nancy Nall, on the subprime-mortgage scandal: “When you open a store giving away free crack if you sign here and here and initial there, and if anyone expresses reservations you say, ‘Don’t worry, this is the special non-addictive crack we’re giving away’ — when that happens, you really can’t complain that the neighborhood is suddenly full of crackheads.”

And she’s right. You can’t.

By Michelle Malkin

There’s one thing more shocking than the illegal alien smuggling advice that an ACORN official in San Diego gave undercover journalists James O’Keefe and Hannah Giles. It’s the illegal alien home loan racket that ACORN has already been operating with the full knowledge of the U.S. government.

On Wednesday, O’Keefe and Giles published the fifth in a series of BigGovernment.com sting videos. ACORN official Juan Carlos Vera coached the pimp-and-prostitute-posing pair on how best to pull off a border-busting smuggling operation. It would be “better from Tijuana,” he counseled on videotape. Vera then generously offered the investigative couple his Mexican “contacts” to bring 12 illegal alien girls into the country for prostitution.

GOP California Gov. Arnold Schwarzenegger now wants an investigation. But neither the Terminator nor any other California public official raised a peep when the very same San Diego ACORN office publicly announced a partnership with Citibank to secure home loans for illegal aliens.

In 2005, Citibank and ACORN Housing Corporation — which received tens of millions of tax dollars under the Bush administration alone — began recruiting Mexican illegal aliens for a lucrative program offering loans with below-market interest rates, down-payment assistance and no mortgage insurance requirements. Instead of the Social Security numbers required of law-abiding citizens, the program allows illegal alien applicants to supply loosely monitored tax identification numbers issued by the IRS.

The San Diego Union-Tribune reported that “undocumented residents” comprise a vast market representing a potential sum of “$44 billion in mortgages.” Citibank enlarged its portfolio of subprime and other risky loans. ACORN enlarged its membership rolls. The program now operates in Miami; New York City; Jersey City, N.J.; Baltimore; Washington, D.C.; Chicago; Bridgeport, Conn.; and at all of ACORN Housing’s 12 California offices. San Diego ACORN officials advised illegal alien recruits that their bank partners would take applicants who had little or no credit, or even “nontraditional records of credit, such as utility payments and documentation of private loan payments.”

The risk the banks bear is the price they pay to keep ACORN protesters and Hispanic lobbyists from the National Council of La Raza screaming about “predatory lending” off their backs. These professional grievance-mongers have turned the 1977 Community Reinvestment Act — which forced lenders to sacrifice underwriting standards for “diversity” — into lucrative “business” opportunities. Or rather, politically correct blackmail.

As the Consumer Rights League noted in a 2008 report on the group’s successful shakedowns of financial institutions, “an agreement with Citibank, a significant ACORN donor and partner, showed that some activists become less active when deals are in place.”

In the wake of the sting videos, ACORN officials are making a great show of clamoring for “reform.” ACORN chief executive Bertha Lewis blamed the debacles across the country on the “indefensible action of a handful of our employees.” But the corruption is systemic. ACORN has long thrown rank-and-file operatives under the bus to cover for its management’s indefensible conduct. And ACORN’s highly touted advisory watchdogs include inherently conflicted foxes guarding the henhouse:

ACORN advisory council member Henry Cisneros resigned from his post as Clinton HUD Secretary after lying to FBI agents about payments to a former mistress.

ACORN advisory council member Andy Stern is president of the SEIU, the Big Labor organization plagued by embezzlement scandals and inextricably linked to ACORN’s disgraced founder Wade Rathke.

And ACORN advisory council member Eric Eve of Citigroup is a champion of the ACORN/Citibank illegal alien loan program
that openly undermines immigration laws and integrity in banking.

The truth is more sordid than any fictional scenarios caught on tape: ACORN is a corrupt enterprise.

FamilySecurityMatters.org Contributing Editor Michelle Malkin is the author of Culture of Corruption: Obama and his Team of Tax Cheats, Crooks & Cronies (Regnery 2009).

The housing bubble and subprime mortgage mess has been “ground zero” for the financial collapse that led to current recession.  While greed played a role in the financial collapse, government intervention was certainly fuel for the fire.  This intervention included artificially low interest rates pursued by the Federal Reserve and the availability of low-cost and teaser mortgages that required little or no down payments.

Fannie Mae and Freddie Mac are government backed corporations who play significant roles the mortgage markets.  Like many other entities when the government is involved, Freddie and Fannie started as good ideas, but lead to bad and unintended consequences as they supported the special mortgages that we now call sub-prime.

While charged with financing the mortgage markets, Fannie and Freddie were supposed to do so using sound business practices.  The sound practices began to unravel when the Community Reinvestment Act of 1977 was made law.  It encouraged commercial banks and savings associations to assist borrowers in all segments of communities, including lower-cost neighborhoods.  This lead to loans being made to people who could to afford them and then increased housing demand that led to inflated prices.  This politicization of Fannie and Freddie’s missions without regard to economic consequences was the slippery slope that led to the financial meltdown.  The rest, as they say, is history.

Politicians on both sides of the aisle backed the Community Reinvestment Act of 1977.  Washington politicians find it hard to say “no” to a supposed free lunch for constituents.  One strong backer over the years of Fannie and Freddie has been Congressman Barney Frank of Massachusetts.  His backing continued even after signs of potential problems became evident.  For example, in January 1999, the director of the Office of Federal Housing Enterprise Oversight (OFHEO), James B. Lockhart, informed the Senate via letter of questionable accounting practices at Freddie.  Even after that and other warning signals, Frank made the following statements:

• In 2000, then Representative Richard Baker proposed a bill to reform Fannie and Freddie’s oversight.  Mr. Frank dismissed the idea, saying concerns about the two were “overblown” and that there was “no federal liability here whatsoever”.
• In 2002 Representative Frank said “I do not regard Fannie Mae and Freddie Mac as problems,…” and “I regard them as great assets.”  This was in response to further attempts at reform of the two corporations.
• In June 2003, Frank assured the American people that “there is no federal guarantee” for Fannie and Freddie.  But now the American people are stuck with backing over $5 trillion of their liabilities.
• At a September 10, 2003 hearing before the House Committee on Financial Services in which the Bush administration proposed further regulations on Fannie and Freddie, Frank stated: “I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis.  That is, in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis.  We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate.  I do not think at this point there is a problem with a threat to the Treasury.”

At best, Frank doesn’t know what he is taking about when it comes to Fannie, Freddie, mortgages and sound business practices.  In the business world we call for the scalps of executives who cost shareholders far less than what Frank’s vision cost US taxpayers.  But, not with Washington politicians who through their Parties maintain power at any cost.

You would think that Representative Frank’s record would have humbled him just a bit.  Not a chance.  Instead he is pressing for more authority in the housing market.  It is reported that Frank seeks a cabinet post involved with housing.  In a recent statement reported in The Hill, Frank said “I want at least two years with President Obama and a solidly Democratic Senate so that we can get the federal government back in the housing business.”  Incredible!

If there ever was a story that epitomizes the need for term limits, this is the one.  In the meantime Mr. Frank, you’ve done enough damage.  It’s time to think about retirement.  Even with your blunders you will take home that huge pension and other benefits that your colleagues have voted themselves over the years.

I’m having a difficult time reconciling the new found bank profitability driving more executive bonuses to this article at the WSJ. It’s called “Troubles for ‘Prime Borrowers Intensify” and it has some startling data. First there’s these numbers on prime mortgages which are undoubtedly creating some of the problems at the FHA that’s fueling rumors of the need for yet another bailout.

The mortgage-delinquency rate among so-called subprime borrowers reached 25% in the first quarter but appears to be leveling off, rising only slightly in the second quarter. The pace of delinquencies for prime borrowers is accelerating. Since prime loans account for 80% of U.S. bank exposure to mortgages and credit cards, these losses could ultimately exceed those from weaker borrowers.

Losses are also mounting in that group for credit card debt. This is because of the increased duration of unemployment for many folks. They basically are tapped out and don’t even have their home equity as a source of potential liquidity. Since unemployment, and especially duration is not really on the mend, how long can this go on before bank capital takes a hit again?

In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings accounts, reducing contributions to retirement plans and turning to family members for money. They also are typically slower than subprime customers to seek help for financial problems because they are concerned about the stigma associated with such assistance, credit counselors say.

About 40% of the strapped consumers seeking help from the OnTrack Financial Education & Counseling center in Asheville, N.C., are prime borrowers, up from 15% last year, says Tom Luzon, director of counseling services at the United Way agency. Many of these clients already scaled back their lifestyles after losing their jobs or seeing their salaries slashed. Some are small-business owners whose companies foundered as a result of the recession.

“They have made adjustments and made adjustments, but then you get to a point where you can’t adjust anymore,” says Mr. Luzon, who is a former banker.

“People who are middle-class wage earners initially may have severance pay and think they have plenty of time to find a job, but then they start using credit cards to support living expenses,” he says.

So, my question is this. If some of the original bank profitability recently has been due the availability of cheap funds through the FED, TARP, and other government sources, if prime borrowers are now having increased difficulty paying their obligations, what happens to bank profitability if the government funds dry up? How long do we have to keep propping the banks up while they merrily repeat the same portfolio decisions that can’t work once the market rates are back at market levels? Also, how are they going to absorb these increasing level of loan losses?

I frankly can’t see the end to banks requiring cheap sources of funds like the Fed window. I can’t believe the economy is going to recover fast enough for this to change. How long will we have to infuse the banks with tax payer dollars and on-the-cheap loans through the discount window? I don’t think most of these institutions could function without it.

Go back and check that July article showing how bank profitability at the moment is pretty clearly linked to government programs. Also, consider how we haven’t changed regulations or done anything with how executive pay is determined (unlike our European cousins who are all over these behaviors).

To estimate the savings that will flow to the eight largest users of FDIC guarantees, the Journal compared the interest being paid on each slice of $238 billion in medium-term debt issued under TLGP with the trading level of existing bonds having a similar maturity. Fees and surcharges were subtracted. The difference represents what the companies likely would have paid had the debt not been backed by the FDIC.

For GE Capital, the GE unit that issued about $50 billon in guaranteed medium-term debt, more than any other company, the savings likely will reach $3.3 billion, according to the calculations. A GE spokeswoman said in an email that the difference is “something much less” than that amount. Representatives at the seven other companies either declined to discuss the matter or didn’t return calls seeking comment.

One example of the lower financing costs made possible by federal assistance: On Nov. 25, Goldman issued $5 billion in debt maturing in June 2012. The debt has an annual interest rate of 3.25%. On the same day that the government-backed bonds were sold, outstanding Goldman debt maturing in September 2012 was yielding 8.51% in the open market.

Based on the gap between the two interest rates, Goldman will save about $754 million over the life of the FDIC-guaranteed bonds. It will reap lower interest costs of about $2.33 billion for all the corporate debt sold under the government program.

At J.P. Morgan Chase & Co., the total reduction in financing costs is likely to be $3.1 billion, or $246 million per quarter. In the second quarter, J.P. Morgan made a profit of $2.7 billion.

An executive at one of the largest issuers of FDIC-backed debt says market rates for bank debt surged when the guarantees were most popular, largely because investors were dumping bonds to raise money.

I’m sorry but I managed bank assets long enough in my career to know that when the liabilities reprice, this is not going to be a pretty picture. The Europeans get this. I’m not sure we do. There’s not much discussion about the G-20 finance minister meetings in London. Perhaps it’s because the Europeans are pushing to actually solve the systemic problems as well as cap bank executive pay because none of their pols get donations from the likes of Goldman Sachs and their chief economic advisers don’t consult there. Treasury Secretary Timmy-in-the-Well-Again Geithner is there with his usual lackluster performance. Geithner’s solution to everything appears to involve some form of procrastination.

The communique said that work will continue on the possibility of introducing a cap mechanism for financial sector bonuses but did not commit to the measure after U.S. and British objections to the French-German proposal.

Instead, the G-20 proposed clawback mechanisms to ensure that bonuses are linked to the long-term success of deals and could be forfeited if they fail to deliver over a period of years.

Darling said the new measures would make sure that institutions ”are focused on long-term sustainability and long-term strength.”

Darling said banks must realize that ”they would not be here had it not been for the efforts of countries, underwritten by the taxpayer,” and there must be no more cases in which ”people are being rewarded for reckless behavior.”

The Financial Stability Board, an international body established at the London Summit of G-20 leaders in April, was given the task of drawing up practical proposals for implementation at the Sept. 24-25 leaders meeting in Pittsburgh.

The United States had tried to put the focus of the London meeting, which is a preparatory gathering for the leaders summit, on its proposal for a new international accord to increase banks’ capital reserves. The U.S. wants to establish stronger international standards for the reserves banks are required to hold to cover potential loan losses.

Going into the meeting, U.S. Treasury Secretary Geithner wanted to reach agreement on an accord by the end of 2010, with implementation by the end of 2012.

The communique did not directly address that plan, but called for rapid progress in developing stronger prudential regulation, including a requirement that banks hold more and better capital once recovery is assured.

I just don’t get this at all. We and the Brits are holding off on ’stronger prudential regulation’ until the recovery takes hold. Meanwhile, the banks are scurrying around making the same stupid portfolio mistakes because they’ve got subsidized liabilities with which to do so. If we’re serious about restructuring their capital, then we should be forcing them to do it now since they’re using our funds. From everything I can see, this isn’t happening. The executives of the banks (especially those who just repaid the TARP funds) will scoop up their bonuses shortly and we’ll be stuck with the same mismatch of assets and liabilities. With clawback provisions, the executives have to clean up their balance sheets or risk loosing these short term boosts from the availability of cheap money. It makes them more likely to achieve a proper long term match.

The big concern that I have is the high probability that we won’t really have a strong recovery and we will repeat this situation for some time. We’ll continually infuse cash into banks that won’t change their investing behavior. Somebody needs to force these guys to identify and price their Toxic Assets and be realistic about their potential loan losses. They’re not going to do this as long as they get their low priced government loans. We’ll just continue to fund increasing loan losses and we’ll continue to bleed the FDIC of capital. This won’t solve anything. We’re just pushing the problem along and hoping a good economy will cover it up again. I suppose a good part of politics, however, is giving most people a false sense of security. Since the Europeans aren’t buying it, however, I’m not sure how that’s going to work in the real world. This is especially true when the real world is one of perfectly mobile capital. Oh, I forgot, we’re not relying on private capital right now, we’re relying on public treasure.

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Nothing better represents the Congressional orgy of wasteful spending of the people’s money than the perks Congress rewards on itself or takes from others.  This article focuses on only two examples.

Flying First Class

Recently Congress proposed spending $550 million to buy eight new “comfy” jets to be added to the current fleet of 24 used to transport federal officials.  This is a dubious expenditure of the people’s money made even more obnoxious given that just a few months ago Congress berated auto executives for similar excessive spending.

The requested purchases include Gulf Stream V’s at a cost $66 million each and specially prepared Boeing 737’s that will cost $70 million each.  These special passenger jets are maintained by the Air Force for the Administration, Congress and high-ranking military personnel.  Are they necessary? Absolutely not.  In fact the eight planes go beyond the requested two planes included in the Air Force’s annual appropriations request.

Need more?  What about global warming Ms. Pelosi?  The carbon footprint put out by these perks is off the charts.

Preferential Mortgages

Countrywide Financial Corporation was a major player in the mortgage market prior to the housing collapse.  They played a significant role in the sub-prime loans that helped cause the housing bubble and then its collapse.

Well, surprise, surpise; members of Congress and the Senate have been recipients of Countrywide’s “VIP” loans with preferential rates.  Of course these special rates were not made because of Countrywide’s charitable instincts.  The goal for the special treatment was to curry favor with those congressmen and senators that oversee their industry.  The recipients include Democratic Senators Chris Dodd of Connecticut and Kent Conrad of North Dakota.  Some Republican governmental figures also received the VIP loans.

Another lucky recipient of the special Countrywide loans was Representative Edolphus Towns, Democrat from New York, head of the House Oversight and Government Reform Committee.  While Mr. Towns denies any preferential treatment, he has refused to subpoena the records of those that received the VIP loans.  This is a direct conflict of interest for the Congressman.  Starting to smell fishy?  You bet.

These are but small examples of the corruption in Washington.  Until we have independent monitoring of our elected representatives, these abuses will continue.  It’s time for an oversight committee to be created to oversee Congress’s spending on itself.  This committee should be manned by citizens who will have the authority to say no for expenditures included the Congress’s operating budget.  It’s time to take the special perks away.  Let’s start by taking away their special pensions and medical plans.  Let’s force them to travel commercial airlines, like most Americans.

Some might be concerned that if we take the suggested steps that fewer people will be interested in running for public office.  This would be a positive outcome given the characters we are currently attracting.

Our founding fathers must be turning in their graves.  Members of Congress are supposed to employees of the people, not a new royalty class.

It’s time to stop letting the foxes guard the hen house!

Yuliya Demyanyk, a senior research economist at the Cleveland Fed, has done a fascinating job debunking some of the bigger memes floating around main stream media outlets about the Subprime Mortgage Market. Her Economic Commentary piece here distills the more germane information found in the research published here. Her bottom line is that it was not so much the meltdown of the subprime market with its components of interest rate resets, declining underwriting standards, and declining home values that contributed to the systemic problems creating the big financial meltdown. She argues that it was the interplay between that market and the securitization process, lending and housing booms, and leveraging

One of the biggest myths surrounding the subprime market is that subprime mortgages are given solely to borrowers with impaired credit. Demyank and her fellow reseacher Van Hemmert found that many folks actually wound up in certain subprime loans not because of their credit history (which was not impaired) but the fact that certain loans were only available in the subprime market because that was the type of loan demanded by the securitization market.

But mortgages could also be labeled subprime if they were originated by a lender specializing in high-cost loans—although not all high-cost loans are subprime. Also, unusual types of mortgages generally not available in the prime market, such as “2/28 hybrids,” which switch to an adjustable interest rate after only two years of a fixed rate, would be labeled subprime even if they were given to borrowers with credit scores that were sufficiently high to qualify for prime mortgage loans.

The process of securitizing a loan could also affect its subprime designation. Many subprime mortgages were securitized and sold on the secondary market. Securitizers rank ordered pools of mortgages from the most to the least risky at the time of securitization, basing the ranking on a combination of several risk factors, such as credit score, loan-to-value and debt-to-income ratios, etc. The most risky pools would become a part of a subprime security. All the loans in that security would be labeled subprime, regardless of the borrowers’ credit score.

Mortgage originators may have directed some folks to these loans based on the characteristics of the loan, not necessarily the characteristics of the buyer.

A second myth debunked by the research is the idea that subprime mortgages were used to promote home ownership. By slicing and dicing the lending data base, the two researchers found some interesting numbers as they relate to overall homeownership statistics.

The availability of subprime mortgages in the United States did not facilitate increased homeownership. Between 2000 and 2006, approximately one million borrowers took subprime mortgages to finance the purchase of their first home. These subprime loans did contribute to an increased level of homeownership in the country—at the time of mortgage origination. Unfortunately, many homebuyers with subprime loans defaulted within a couple of years of origination. The number of such defaults outweighs the number of first-time homebuyers with subprime mortgages.

Given that there were more defaults among all (not just first-time) homebuyers with subprime loans than there were first-time homebuyers with subprime loans, it is impossible to conclude that subprime mortgages promoted homeownership.

You can read the other eight debunked myths in the article. All of are extremely interesting. They include Myth 3: Declines in home values caused the subprime crisis in the United States, Myth 4: Declines in mortgage underwriting standards triggered the subprime crisis, Myth 5: Subprime mortgages failed because people used homes as ATMs, Myth 6: Subprime mortgages failed because of mortgage rate resets, Myth 7: Subprime borrowers with hybrid mortgages were offered (low) “teaser rates”, Myth 8: The subprime mortgage crisis in the United States was totally unexpected, Myth 9: The subprime mortgage crisis in the United States is unique in its origins, and Myth 10: The subprime mortgage market was too small to cause big problems. Myth 8 is one of my favorites since I was personally doing research between 2005-2006 showing problems then which was labeled ‘unsexy’ and ‘not really germane in today’s sophisticated markets’ by fellow researchers. Van Hammert and Demyanyk noted that the housing boom allowed the default premiums to be discounted by the market. After all, if you had to repossess the asset and its value had skyrocketed, it was a no lose situation.

In a market with rapidly rising prices, mortgage contracts that cannot be sustained can be terminated through prepayment or refinancing. Borrowers can change houses and mortgage contracts easily in a booming environment, and defaults do not occur as frequently as they would without the boom. Because of this ability to dispose of unsustainable mortgages, signs of the crisis brewing between 2001 and 2005 were hidden behind a “mask” of rising house prices. Using a statistical model to control for rising housing prices, Otto Van Hemert and I determined that default rates were increasing every year for six consecutive years before the crisis had shown any signs. This deterioration is observable now, with the help of hindsight and research findings, but it was also known to some extent to those who were securitizing subprime mortgages in those years. Securitizers seemed to have been adjusting mortgage interest rates to reflect this deterioration in loan quality. In short, lenders’ expectations of the increasing risk of massive defaults among subprime borrowers were forming for years before the crisis; most likely, it was not the crisis that was unexpected, it was its timing and magnitude.

Also, myth number 7 debunked shows that the low teaser rates were actually available in the prime market and not the subprime market which points to early research I found that said that defaults were happening just as frequently in the prime market as they were the subprime market.

Hybrid mortgages were available both in prime and subprime mortgage markets, but at significantly different terms. Those in the prime market offered significantly lower introductory fixed rates, known as “teaser rates,” compared to rates following the resets. People assumed that the initial rates for subprime loans were also just as low and they applied the same label to them—“teaser rates.” We need to understand, though, that the initial rates offered to subprime hybrid borrowers may have been lower than they most likely would have been for the same borrowers had they taken a fixed-rate subprime mortgage, but they were definitely not low in absolute terms.

The average subprime hybrid mortgage rates at origination were in the 7.3 – 9.7 percent range for the years 2001–2007, compared to average prime hybrid mortgage rates at origination of around 2–3 percent. The subprime figures are hardly “teaser rates.”

So, as usual, we have a much more complicated picture existing than most talking and blogging heads would be able to see. From this work, we see a crisis that had been building for years “feeding off the lending, securitization, leveraging, and housing booms”. This just gives more credence to the call for more regulation of the lending and securitization process. The demand for certain types of loans to be securitized should not be feeding into the market for the kinds of loans given to home buyers. I would be most interested to see what kind of pressure or incentives were given to mortgage originators to put folks into loans not based on the borrower characteristics, but the ability to package that loan for resale. This makes a good case for rewriting lending laws as well as writing laws to regulate the securitization process.

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Yuliya Demyanyk, a senior research economist at the Cleveland Fed, has done a fascinating job debunking some of the bigger memes floating around main stream media outlets about the Subprime Mortgage Market.  Her Economic Commentary piece here distills the more germane information found in the research published here. Her bottom line is that it was not so much the meltdown of the subprime market with its components of interest rate resets, declining underwriting standards, and declining home values that contributed to the systemic problems creating the big financial meltdown.  She argues that it was the interplay between that market and the securitization process, lending and housing booms, and leveraging

One of the biggest myths surrounding the subprime market is that subprime mortgages are given solely to borrowers with impaired credit. Demyanyk and her fellow researcher  Van Hemmert found that many folks actually wound up in certain subprime loans not because of their credit history (which was not impaired) but the fact that certain loans were only available in the subprime market because that was the type of loan demanded by the securitization market.

But mortgages could also be labeled subprime if they were originated by a lender specializing in high-cost loans—although not all high-cost loans are subprime. Also, unusual types of mortgages generally not available in the prime market, such as “2/28 hybrids,” which switch to an adjustable interest rate after only two years of a fixed rate, would be labeled subprime even if they were given to borrowers with credit scores that were sufficiently high to qualify for prime mortgage loans.

The process of securitizing a loan could also affect its subprime designation. Many subprime mortgages were securitized and sold on the secondary market. Securitizers rank ordered pools of mortgages from the most to the least risky at the time of securitization, basing the ranking on a combination of several risk factors, such as credit score, loan-to-value and debt-to-income ratios, etc. The most risky pools would become a part of a subprime security. All the loans in that security would be labeled subprime, regardless of the borrowers’ credit score.

Mortgage originators may have directed some folks to these loans based on the characteristics of the loan, not necessarily the characteristics of the buyer.

A second myth debunked by the research is the idea that subprime mortgages were used to promote home ownership.   By slicing and dicing the lending data base, the two researchers found some interesting numbers as they relate to overall homeownership statistics.

The availability of subprime mortgages in the United States did not facilitate increased homeownership. Between 2000 and 2006, approximately one million borrowers took subprime mortgages to finance the purchase of their first home. These subprime loans did contribute to an increased level of homeownership in the country—at the time of mortgage origination. Unfortunately, many homebuyers with subprime loans defaulted within a couple of years of origination. The number of such defaults outweighs the number of first-time homebuyers with subprime mortgages.

Given that there were more defaults among all (not just first-time) homebuyers with subprime loans than there were first-time homebuyers with subprime loans, it is impossible to conclude that subprime mortgages promoted homeownership.

You can read the other eight debunked myths in the article. All are extremely interesting.  They include Myth 3: Declines in home values caused the subprime crisis in the United States, Myth 4: Declines in mortgage underwriting standards triggered the subprime crisis, Myth 5: Subprime mortgages failed because people used homes as ATMs, Myth 6: Subprime mortgages failed because of mortgage rate resets, Myth 7: Subprime borrowers with hybrid mortgages were offered (low) “teaser rates”,  Myth 8: The subprime mortgage crisis in the United States was totally unexpected,  Myth 9: The subprime mortgage crisis in the United States is unique in its origins, and Myth 10: The subprime mortgage market was too small to cause big problems.

Myth 8 is one of my favorites since I was personally doing research between 2005-2006 showing problems in these markets and companies. That was labeled ‘unsexy’ and ‘not really relevant in today’s sophisticated markets’ by fellow researchers.  Van Hammert and Demyanyk noted that the housing boom allowed the default premiums to be discounted by the market.  After all, if you had to repossess the asset and its value had skyrocketed, it was supposed to be a no lose situation for the lender.

In a market with rapidly rising prices, mortgage contracts that cannot be sustained can be terminated through prepayment or refinancing. Borrowers can change houses and mortgage contracts easily in a booming environment, and defaults do not occur as frequently as they would without the boom. Because of this ability to dispose of unsustainable mortgages, signs of the crisis brewing between 2001 and 2005 were hidden behind a “mask” of rising house prices. Using a statistical model to control for rising housing prices, Otto Van Hemert and I determined that default rates were increasing every year for six consecutive years before the crisis had shown any signs. This deterioration is observable now, with the help of hindsight and research findings, but it was also known to some extent to those who were securitizing subprime mortgages in those years. Securitizers seemed to have been adjusting mortgage interest rates to reflect this deterioration in loan quality. In short, lenders’ expectations of the increasing risk of massive defaults among subprime borrowers were forming for years before the crisis; most likely, it was not the crisis that was unexpected, it was its timing and magnitude.

Also, myth number 7 debunked shows that the low teaser rates were actually available in the prime market and not the subprime market which points to early research I found that said that defaults were happening just as frequently in the prime market as they were the subprime market.

Hybrid mortgages were available both in prime and subprime mortgage markets, but at significantly different terms. Those in the prime market offered significantly lower introductory fixed rates, known as “teaser rates,” compared to rates following the resets. People assumed that the initial rates for subprime loans were also just as low and they applied the same label to them—“teaser rates.” We need to understand, though, that the initial rates offered to subprime hybrid borrowers may have been lower than they most likely would have been for the same borrowers had they taken a fixed-rate subprime mortgage, but they were definitely not low in absolute terms.

The average subprime hybrid mortgage rates at origination were in the 7.3 – 9.7 percent range for the years 2001–2007, compared to average prime hybrid mortgage rates at origination of around 2–3 percent. The subprime figures are hardly “teaser rates.”

So, as usual, we have a much more complicated picture existing than most talking and blogging heads would be able to see.   From this work, we see a crisis that had been building for years “feeding off the lending, securitization, leveraging, and housing booms”.  This just gives more credence to the call for more regulation of the lending and securitization process.   The demand for certain types of loans to be securitized should not be feeding into the market for the kinds of loans given to home buyers.  I would be most interested to see what kind of pressure or incentives were given to mortgage originators to put folks into loans not based on the borrower characteristics, but the ability to package that loan for resale.  This makes a good case for rewriting lending laws as well as writing laws to regulate the securitization process.

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While the mortgage market (and laws) here in Ontario are different than they are in the U.S., I am on numerous mailing lists and attend U.S. mortgage webinars from time to time, looking for tips and ways to better serve clients.  Over the past few months, I have been increasingly uncomfortable at what was going on in the “loan modification” business.  Many (not all, to be fair) of the people discussing this (with other mortgage professionals, remember) were obviously far more interested in how this was going to help them, the person offering the ’service,’ not whether or not the consumer was being helped.  This is pertinent today because of this story in The New York Times.

Seeing how some people were fleeced during the sub-prime debacle in the U.S. (as I’ve said before, we had, and still have, sub-prime loans in Canada; it is a legitimate part of the market now unfairly sullied, but that’s a topic for another posting), it is disgusting to me to see that many of the people who “rode that wave” are now associated with these loan modification companies.

When people have their heart set on owning a house, it’s no fun looking at their finances and credit report and telling them that now is not the time for them to buy a house.  Instead, let’s work together and improve your credit score, while you build your down payment.  I hope the people I made that suggestion to who have never been in touch with me again didn’t fall into the hands of someone handling “liars’ loans,” where the documentation said they were self-employed and made (surprise!) exactly the amount required to service the loan.

I explained to more than one would-be purchaser that I had seen far too many people lose their homes in my days as a paralegal (where one of the things I did was support a lawyer who specialized in powers of sale, the process in Ontario when people fall behind on their mortgage payments).  But, people weren’t coming back to walk the credit improvement walk.  Maybe they took my advice and consulted the books or websites I recommended (or maybe they’re reading this blog – “Call me, please!”).  Or maybe I was wrong, and they found someone who got them the loan that fit them for the house they wanted — at least, if they are in over their heads, there isn’t some loan modification shark out there (since the industry doesn’t exist in Ontario).

That isn’t to say that it isn’t possible to change a mortgage if the terms aren’t working out.  The lenders are open to working with borrowers.  But, unlike the U.S. situation, the consumer isn’t paying (often wasted) money up front to a third party to negotiate on their behalf.

Of course, if you’re in Ontario, and need counsel on your mortgage, please feel free to contact me, by e-mail, or through my website, or by phone (647-477-3826).