Fed Bail-Out: “Throwing Gasoline on The Fire”

September 20, 2008


Reuters posted this article today, reporting on financial analysts’ reactions to the emerging details of the proposed financial bail-out plan.  (Just so you know, this article contains many typos and grammatical problems – uncharacteristic of a Reuters article.  It seems clear that it contains unedited transcripts of phone conversations with these analysts.) 

First of all, here’s some sketchy details of the plan:

KEY POINTS: According to a draft of the proposed legislation obtained by Reuters: * The government could purchase as much as $700 billion in mortgage-related assets from U.S.-headquartered institutions. * Decisions by the treasury secretary related to the buyback program could not be reviewed by any court. * In a related move, the U.S. government’s debt limit would be raised to $11.315 trillion from $10.615 trillion.

The following are excerpts from the analysis of Michael Pento, Senior Market Strategist at Delta Global Advisors in San Francisco.  I’ve singled out his remarks because they’re right on the money (no pun intended). 

“The plan is pretty much what I thought it would be and it is a very poorly crafted plan. When you go into negotiations the last thing you want to do is assure that you will purchase the assets — now the bargaining power of the Treasury is left on the curb. So the banks will be able to negotiate a much better deal than they would normally have got.

“Another poorly crafted bit of this: when you plan on issuing $700 billion that amount is accrued the already skyrocketing annual deficits. Now these skyrocketing annual deficits will put pressure on the federal reserve to monetize the debt away. If the Federal Reserve refused to monetize the debt, the sharply rising annual deficits will lead to sharply rising Treasury yields which will counteract and negate all what Treasury is trying to do to reignite the housing market. When you have the national debt at $9.6 trillion and you are adding a trillion plus a year to the debt then the amount of debt outstanding outstrips the tax base.

“What is the end game? You are trying to recapitalize the banks by exchanging non viable and non performing assets putting them on the balance sheet of the tax payer and recapitalizing the banks by sending them cash. Here is where the plan has faults: you are trying to compel the banks to make more non performing loans at a time when the banks are over leveraged and consumers are overleveraged.. Trying to get these banks to lend more money to a consumer who already is overleveraged, its like throwing gasoline on the fire and it is kicking the can down the road a few feet and the problem is going to be a lot more pernicious the next time.

These are exactly the points I’ve been trying to make.  The government isn’t interested in restoring responsiblity to the financial system.  It’s only interest in all of this is to re-ignite the debt machine and resume making bad loans – whatever it takes to drive demand for housing, reinflate the housing bubble and maintain the status quo.  And the Fed has no choice but to begin printing money at a furious pace, to prevent the rates on Treasury bonds from soaring through the roof, which is exactly what would happen when foreign buyers decide that they’re practically worthless. 

Mr. Pento closes his analysis with this:

“In the long run this is an extremely poorly crafted plan and it will be much worse than it was. You’re just kicking the can down the road and we have to deal with the a much worse problem further down the road. This is what lies in store for this country: higher inflation, slower growth, higher taxes, just because you didn’t allow the free market to work.

“We are just rolling asset bubbles. There’s no magic here.”

There’s lots of other interesting analysis and opinions in the article, but Mr. Pento’s is dead on.

Fed Bail-Outs Set Stage for Hyper-inflation

September 20, 2008

 Since the announcement of the federal government’s plan to purchase all bad debt from ailing financial institutions, my head has been spinning. I’ve started and stopped this post more often than a driver with a manual transmission in a ten-mile traffic backup. How did it come to this? What does it mean going forward? How much influence did foreign creditors have on this decision? Like the writer with writer’s block portrayed in old movies, I now sit waist deep in the cyber equivalent of crumpled sheets of paper yanked in frustration from my typewriter.

Finally, I’ve realized that there’s no way to do this justice in one post. This fed action has spawned a series of posts that will probably dominate this blog for some time to come. There’s no way to comment on just how this can possibly work because, as I heard Mitch Albom explain on yesterday’s radio broadcast, that’s like trying to analyze how well the toilets flush before the blueprints are even drawn. But what I can tell you already is that it’s a blueprint for a house of cards.

So I’ll begin with the basics, keeping in mind the mission of this blog – to explain these events in light of the theory I’ve presented in Five Short Blasts. How did it come to this? How could we ever have arrived at a point where our federal government repudiates the very principles upon which our economy was built – hard work, investment, risk and reward? Now we learn that it was all meaningless. In the end, good old Uncle Sam will be there to dump a load of cash in your lap, regardless of how lazy or stupid you may have been. It’s as though we’ve all been like Lot, living among the Sodomites while avoiding their wicked ways, in anticipation of our final reward. But in this twisted version of Genesis, upon revealing to the angel his devotion to a good life, Lot receives a one-word reply from the angel: “Sucker!”

How have we come to this? It all goes back to the effects of overpopulation and low per capita consumption – both home-grown and imported through free trade with overpopulated nations. (If you’re new to this blog, the only way you’ll understand this is to read about the new economic theory I’ve presented in Five Short Blasts.) As millions upon millions of our best-paying manufacturing jobs were steadily lost to misguided trade policy, the government looked to the housing sector to take up the slack. Immigration was used to prop up demand. But, as unemployment worsened and dragged down the real median income, lending standards had to be loosened to stoke the supply of “eligible” mortgagees.

As long as this Ponzi scheme was sustained – driving home values ever higher by increasing the supply of buyers, everything would be alright. But, of course, it was never possible that the least qualified of these buyers would ever be able to keep up with their mortgages. The sub-prime mortgage crisis was born and the effects spread like a cancer, slowing the economy, driving unemployment still higher and picking off the next layer of stressed home buyers. Foreclosures escalated, home prices began falling and the assets on the banks’ books began vanishing. An unstoppable downward spiral had begun.

Unstoppable but for one temporary fix: the government had to step in, shovel up the mess, and toss it on the curb for someone else to deal with. That “someone else” is your children and grandchildren. The mess they’re being left is over a trillion dollars, the combined total cost of the bail-outs of the past two weeks – the figure admitted to by the government – which means it’s very likely that it’s at least ten times that amount. The government is now flooding the nation and the world with dollars. Not boat-loads of dollars. Not truck-loads of dollars. But container-ship-loads of dollars. The idea is to restore “confidence,” that false sense of prosperity that potential home buyers need to jump back in the market. This may work for a while, but the exponential growth in the money supply has set the stage for hyper-inflation. Just look at what happened to the price of oil when this deal was announced. It made the biggest one-day jump on record. In the meantime, median income will continue its slow decline, and the downward spiral will soon resume. Then what?

The government’s action has done nothing to address the root cause – the steady drain of wealth from our economy by a $2 billion per day trade deficit. Until this is addressed – until the trade deficit is completely eliminated – the downward spiral of our economy, though temporarily interrupted by the government’s bail-out, will resume and intensify. Bank on it.

More to follow.


Immigration Legislation Alert

September 19, 2008

I received the following from FAIR, regarding Harry Reid’s unwillingness to allow the E-Verify program to come up for a vote, and also regarding proposed legislation that would grant amnesty to illegal alien family members of servicement, even if those family members are criminals.  Contact your Senators and Congressmen to let them know that you want E-Verify passed and to express your opposition to the amnesty legislation. 

Federation for American Immigration Reform Action Alert

Congress Ignores Your Priorities

URGENT: The Senate Must Act to Pass E-Verify

The economy is ailing and many Americans are out of work, yet the
Senate leadership remains unwilling to protect American workers from
having their jobs taken by illegal aliens. With time running
out, Senate Majority Leader Harry Reid remains unwilling to even bring
an E-Verify re-authorization bill to the floor. This critical
program will end in November if the Senate does not act before their
upcoming target adjournment date. The House overwhelmingly voted
407-2 to re-authorize E-Verify last month, and it’s time for the
Senate to do the same thing. However Reid – bowing to special
interests and Senator Robert Menendez’s insistence on hundreds of
thousands of cheap foreign workers – is refusing to even bring
H.R.6633 to the floor.

We understand that Senate staffers are negotiating with leadership
today regarding whether to bring the re-authorization to the
floor. Please call your Senators and Senator Reid’s office today
and tell them to bring E-Verify to the floor with no strings attached.

URGENT: Stop House Leadership from Granting Amnesty under the Guise of
Helping Our Military

The House Judiciary Committee, under the pretense of supporting our
troops, voted late Wednesday afternoon to grant amnesty to the illegal
alien family members of servicemen, even if these individuals have
committed serious crimes. H.R.6020 does not reward servicemen,
but instead grants broad amnesty to any extended family members who
may be illegal aliens. Additionally, it gives immigration judges the
discretion to waive deportation orders for those family members who
have committed a crime. Although members of the committee were
able to exclude a few serious crimes, the bill gives broad discretion
to immigration judges to waive deportation of a criminal alien.

The American Legion, which has expressed opposition to the bill,
testified in May: “This would seem to reward law breakers and –
possibly – illegal immigrants with a short cut to citizenship that is
nothing less than an official pardon for illegal acts: an

Please call your Representative today and tell them to oppose all
efforts to bring H.R.6020 to the floor.

More information about E-Verify and H.R.6020 is available on FAIR’s

Contact Your Representative

Learn More About FAIR

Join or Donate to FAIR

Appeals Court Upholds Arizona Immigration Law

September 19, 2008


More good news from the front lines in the battle against illegal immigration.  A U.S. appeals court has upheld the “Legal Arizona Workers Act,” a new Arizona law that allows the state to revoke the license of any business that employs an illegal alien.  Arizona is now free to begin enforcing this new law. 

This may clear the way for other states who were considering similar legislation.  Please contact your state legislators and encourage them to propose and vote for such laws for your states! 

A U.S. appeals court on Wednesday upheld an Arizona law that targets employers who hire illegal immigrants by revoking their licenses to do business in the state.

Arizona attorney general Terry Goddard welcomed the ruling, and said his office would “continue to defend the statute should there be an appeal to the highest court.”

Arizona passed the employer sanctions law after a federal immigration overhaul died in the U.S. Congress in June 2007.

The United States: A Financial White Hole or An Empty Well?

September 17, 2008


This Reuters article has some interesting global reaction to the government’s bail-out of AIG.  But what I find really rich is the following excerpt:

“The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States,” Shi Jianxun, a professor at Shanghai’s Tongji University said in the overseas edition of The People’s Daily.

So now the parasitic, overpopulated economies of the world who prey on America’s market to support their bloated labor forces have the gall to complain about the side effects.  Just exactly what did they expect would happen when they had finally drained every last drop of blood from America’s economy?  Did they think that the United States is like a “white hole” of dollars – a financial equivalent of the theoretical astronomical phenomenon that gushes matter into space from an invisible and seemingly limitless supply? 

In my 2008 Predictions, I forecast another Asian financial crisis like the one in the late ’90s.  As the recession is beginning to spread across the globe, currencies in Asia are falling as the competition for the shrinking American market intensifies.  The following excerpt from this same article may be an indication that it’s begun: 

Bank of Korea Governor Lee Seong-tae said the credit crisis triggered last year by U.S. mortgage defaults would drag on and hurt the global economy.

“We need to prepare for potential foreign fund outflow from the bond markets in the medium term,” he said.

Capital has been fleeing emerging markets as investors stung by the upheaval on Wall Street shun risky assets. Seoul has spent more than $30 billion this year to support the won, which has tumbled 17 percent in 2008 against the dollar.

India’s central bank has sprung regularly to the rupee’s defense, buying it in the currency market and exacerbating a shortage of local currency. After the rupee’s biggest one-day fall in a decade on Tuesday, the central bank said it would make it easier for banks to get cash. On Wednesday, it injected 47.36 billion rupees ($1.01 billion) into the banking system at the first of its tenders.

Those who believe that last night’s government bail-out of AIG has averted a global financial calamity are in for a rude awakening.  It’s done nothing to address the fundamental problem – that the global economy is predicated upon the United States functioning as a financial white hole, gushing money endlessly into the rest of the world.  Now, perhaps too late, we can peer down into that hole and see that the well has run dry.

It’s The Trade Deficit, Stupid!

September 16, 2008

Bill Clinton, in 1992, made famous the campaign slogan, “It’s the economy, stupid!”  It wasn’t that he was calling anyone in particular “stupid.”  Rather, it was intended to serve as a reminder to himself and his campaign staff that the economy was the critical issue of the day and to not waiver from keeping it front and center.  (The economy was mired in a recession at the time.)

So please don’t take offense.  I’m not calling my readers “stupid!”  The term does apply to our nation’s economic leaders, however.  The root cause of our snow-balling economic collapse is right under their noses.  And I think they know it.  But they can’t bring themselves to admit that the golden calf they’ve created – “globalization,” gilded with unfettered free trade – is nothing more than a false idol.  The dream of turning the rest of the world into American-style consumers who, once they became wealthy enough, would begin to buy from us as much or more than we pumped into their economies, never came true.  Instead, we have unleashed an enormously bloated global labor force, eager to prey on the American market.  They’ve destroyed our domestic industries and drained our bank accounts.  Since 1975, the year of our last trade surplus, we’ve amassed a cumulative trade deficit of $9 trillion and shed five million manufacturing jobs.

“Just be patient,” we’re told.  “Markets will naturally re-balance themselves.”  “Currency valuations will swing our way.”  “The trade deficit is a non-issue,” they tell us.  “All of those dollars are re-invested in the U.S.”

Yeah, right.  “Re-invested.”  It’s like playing poker with your neighbor every night and losing, night after night.  “Don’t worry,” he says.  “My savings account is in the same bank as yours.”  Great for the bank, but it doesn’t do a damn thing to help your financial predicament.  How long do you think that bank will continue loaning you money to finance your poker addiction?

The globalization cheerleaders stand fast as the economy collapses around them.  “It’s not the trade deficit, it’s falling housing prices that are the problem,” they will tell you.  And why are housing prices falling?  Because Americans’ incomes are falling, thanks to the loss of millions of high-paying manufacturing jobs to the trade deficit.  The economists tried to cover up this simple relationship by cutting lending standards, ignoring the fact that these new buyers would soon begin to default.  “Things will get better when the housing market stabilizes,” they say.

Here’s how you’ll know when things will really begin to improve:  when you visit your local Hyundai dealer and see that the price has suddenly jumped 50%.  Looking more closely at the window sticker, near the bottom, you see a line that reads “import duties – $10,000.”  So instead, you opt for a much cheaper Chevy, Ford or Chrysler.  You pick up a paper on the way home, open to the classifieds, and find it loaded with ads from Chevy, Ford and Chrysler trying to fill the new shifts they’ve just added.  That’s when you’ll know that this economy is turning around. 

In the meantime, we stand at the brink of total financial collapse.  And our economists stand in denial.  Every night, we lose another $2 billion to our trading “partners” in the global poker game.  We’ll never solve this problem until we look it square in the eye and say “enough is enough.”  We can’t continue to fool ourselves.  It’s the trade deficit, stupid!

Obama Getting It Right on Trade Policy

September 15, 2008


This Reuters article reports more detail on the candidates’ economic policies – specifically their policies on trade with China – than I’ve seen so far.  There is no more crucial issue in this election than trade policy, especially our policy toward trade with China, where our trade deficit continues to grow and is approaching $300 billion per year, nearly half of our total trade deficit.

The following excerpts summarize the candidates’ positions.  First, Obama:

“Central to any rebalancing of our economic relationship must be change in currency practices,” Obama said in his policy paper.

“I will use all the diplomatic avenues available to seek a change in China’s currency practices,” he said.

Obama said China pegs its yuan currency at an “artificially low rate,” making its exports unfairly cheap.

He has backed legislation that would define currency manipulation as an illegal subsidy so that the United States could slap duties on more Chinese goods.

It’s the last paragraph above that sets Obama apart.  Consider McCain’s policy:

“(China’s) commitment to open markets must include enforcement of international trade rules, protecting intellectual property, lowering manufacturing tariffs and fulfillment of its commitment to move to a market-determined currency,” McCain said.

First of all, both candidates rely far too much on currency valuation.  It won’t work.  A good example is contained right within this same article:

The yuan has appreciated a further 18.47 percent since it was revalued by 2.1 percent to 8.11 per dollar in July 2005, and freed from a dollar peg to float within managed bands. Now one U.S. dollar buys about 6.85 yuan.

During this time frame in which China’s currency strengthened by almost 20%, the trade deficit has continued to soar, rising nearly 50%.  While China’s currency rises, they simply cut prices (in terms of the yuan) to maintain their dollar pricing in the U.S. market.  Decades of experience has also proven that other approaches which rely upon the trading partner (regardless of the country) to take action are equally ineffective.  “Enforcing trade rules.”  “Protecting intellectual property.”  “Enforcing labor standards and environmental standards.”  All of these approaches have been abysmal failures.  Only actions which place control in America’s hands have any chance whatsoever of succeeding.  Folks, this means tariffs. 

And, judging by that standard, only Obama has expressed a willingness to do it.  I’m concerned that he will waste time waiting to see the effects of currency valuation, but at least he’s got the tariffs in his tool bag. 

Our enormous trade deficit, approximately three quarters of a trillion dollars per year, is by far the most critical issue of our time.  It lies at the very heart of our escalating economic melt-down.  We should be supporting candidates who express a willingness to take positive action to restore a balance of trade.  Regardless of which candidate you support, it’s imperative that you challenge him or her to clearly state what proactive steps they will take to eliminate our trade deficit and put America back on a solid financial footing.

Global Financial Melt-Down Gathering Steam

September 14, 2008


It appears that efforts to prevent the failure of Lehman Brothers are failing as well.  As I’ve said repeatedly, the Federal Reserve itself is bankrupt and unable to do any more bail-outs.  And I’ve also been saying that our foreign creditors will start getting cold feet when they recognize that American investments are worthless.  The liquidation of Lehman could trigger a whole daisy-chain of writedowns, leading to more failures.  The following excerpt reveals the level of desperation to avoid a global panic:

The focus on Sunday had initially been on whether talks between regulators and Wall Street’s top bankers could lead to the sale of Lehman, which until recently was the fourth-largest U.S. investment bank.

However, those talks faltered when Britain’s Barclays Plc, which had appeared to be front-runner to take over Lehman — excluding its toxic mortgage-related assets — said it had pulled out of the bidding.

That triggered expectations the investment bank is heading into bankruptcy and prompted a rare emergency trading session on Sunday to allow Wall Street dealers in the $455 trillion derivatives market to reduce their exposure to the firm.

It’s easy to predict that matters will only grow worse.  Even as this is happening, economists remain incredulous that the toxic effects of America’s trade deficit lie at the root of the problem.  So, with each passing day, another $2 billion of American wealth is drained away.  There isn’t much left and, when it’s gone, watch out!

Architect of Globalization Befuddled by Financial Crisis

September 14, 2008

This morning, Alan Greenspan, former chairman of the Federal Reserve, appeared as George Stephanopoulos’ guest on ABC’s “this week” Sunday morning political talk show. He had more of a “deer in the headlights” look about him than I’ve ever seen. It’s clear that he’s completely befuddled by the breadth and depth of the current financial crisis, and admitted that it’s a much worse situation than he ever faced during his tenure at the Fed. He spoke of the crisis as a “hundred-year event,” a financial crisis the likes of which may only arise every hundred years or so. He suggested that, perhaps, it’s just a natural correction in the process of globalization, a road bump in the golden highway to global nirvana.

Stephanopoulos questioned Greenspan about the imminent collapse of Lehman Bros. and whether or not the Fed should bail them out like they did for Bear Stearns, Fannie Mae and Freddie Mac. Greenspan’s response was “no,” explaining that “it’s unsustainable” for the Fed to continue bailing out these huge financial institutions. (At least he understands that much.) When asked when we could look for this financial crisis to end, Greenspan said that it would end when the housing market stabilized, perhaps sometime early next year.

At this point, I would have loved to be seated there next to George. “Mr. Greenspan, will housing prices need to fall to a level more consistent with Americans’ median income in order for this stabilization to take place?” I would have asked. “Yes, I suppose that’s true, and blah, blah, blah, blah, blah, blah …,” he would have responded.

“But with Americans’ median income stagnant or declining, as it has been for decades now, thanks to the trade deficit and loss of manufacturing jobs, then how can home prices ever stabilize?” I would have continued. I’m sure I’d have gotten a response that was heavy on optimism about the effects of fiscal stimulus, and equally heavy on denial about the role of the trade deficit.

Greenspan had one final slap in the face for American workers. When Stephanopoulos then questioned Greenspan about the domestic auto industry and whether the Fed should have a role in bailing them out too (since each of the “Big Three” are now pressing Congress for low-interest loans totaling billions), his answer was an emphatic “no!” Stephanopoulos replied, “But isn’t it unfair to bail out the big bankers and leave average folks like auto workers in the lurch?”  Greenspan then rationalized that the big financial institutions are extremely critical to the economy and that “even the auto workers have a stake in seeing those companies survive.” At this point, I wanted to scream at the television, “and just where the hell do you think those auto workers got the money to deposit in those institutions?!?!”

This was so illustrative of the problem with our chief economists, a problem that continues to escalate under the administration of his former apprentice, Ben Bernanke. Banks, lenders, brokerage houses – these are the only cogs in the economic machine that matter to them. They see manufacturing as grunt work, something almost unworthy of an advanced society, a nuisance to be farmed out to the unsophisticated who have nothing better to do.

There are economists out there who are challenging the premises upon which globalization is based, but the globalization cheerleaders are a close-minded bunch. They have the upper hand and the financial backing. Until that day when their failed theories culminate in a complete financial melt-down, they may continue to hold sway. But logic will ultimately prevail and history will judge Greenspan and his ilk harshly.

Arkansas Colleges and Universities Can Admit Illegal Immigrants

September 13, 2008


The good news here is that Arkansas is beginning to grapple with the problem of illegal immigrants in its colleges and universities.  Arkansas’ Attorney General has come to the conclusion that there is no legal requirement for them to determine whether an applicant is in the country legally.  Maybe not, but that’s something the Arkansas legislature can easily rectify.  And I’m sure they soon will, now that Arkansas voters have found out that they’re subsidizing college educations for illegal immigrants who are bumping otherwise-qualified Arkansas kids from their rightful positions in incoming classes.  A survey has found that 2,000 enrolled at Arkansas colleges have bogus social security numbers.  Obviously, the vast majority of these are illegal immigrants. 

It’s interesting that in today’s environment, when college applicants have to prove themselves to be almost worthy of sainthood, that universities aren’t interested in the very basics – things like whether or not the applicant has proven themselves to be a criminal by entering the country illegally.  When you have to prove your qualifications by submitting grade transcripts and SAT scores, wouldn’t you think the universities would at least check the validity of the social security number provided on the application?  It’s just astounding that our institutions of higher learning can be so dumb, so gullible and so insensitive to the damage done to our nation by these invading hordes. 

To their credit, though, there are folks in Arkansas who are trying to deal with the problem:

The state’s higher education chief earlier this year sent out a letter warning schools not to offer illegal immigrants in-state tuition, unless they wanted to give the same benefits to an out-of-state student. The department began polling the state’s two- and four-year colleges and universities after that to find out their admissions practices.

Higher Education Director Jim Purcell in May said after checking a statewide database of student information that about 2,000 people enrolled at state colleges and universities attended class under dummy Social Security numbers.

It’s time for the federal government to require access to student databases of any colleges that apply for federal grant money, so that the federal government can cut off funding of any programs at any univerities where the databases are found to contain bogus SSNs.  U.S. citizens have a right to assure that their tax dollars are not put to work at universities that are benefitting illegal immigrants.