Federal Reserve Branches Out into Retail Lending

November 25, 2008


I’ve been wondering how long it would be before the Federal Reserve became impatient with banks’ reluctance to return to their irresponsible lending of the pre-housing bubble days.  It seems that day has arrived and, although there’s no details yet, the Federal Reserve has announced plans to make loans directly to consumers – auto loans, student loans, credit cards – whatever. 

U.S. Treasury Secretary Henry Paulson plans to announce on Tuesday the formation of a program to increase the availability of auto loans, student loans and credit cards, the Wall Street Journal reported, citing people familiar with the matter.

The lending facility, which will be operated by the Federal Reserve, is expected to provide loans to investors who want to buy securities backed by credit cards, auto loans and student loans, the people told the paper.

Are you kidding me?  Securities backed by credit cards, auto loans and student loans?  Unless the interest rate on such securities is somewhere around 100%, I think I’d feel much safer buying credit default swaps backed by sub-prime loans!  Who in the world would buy such a risky security?  Oh, wait, I know!  The Federal Reserve will buy them!  They’ll sell them to themselves and then, taking a cue from Wall Street, will slice them and dice them, get some patsy ratings agency to give them a AAA rating, and then sell them China, Japan, Europe and Saudi Arabia.  Brilliant! 

Is it just me, or does anyone else get the feeling when hearing Paulson speak that our Treasury Department isn’t run by the sharpest tool in the shed?  When he and Bush meet to discuss the economy, how much of the conversation is spent exchanging long “uuhhhhh”s?  What does Bernanke bring to the table aside from the keys to the printing press? 

It’s unclear whether there will be restrictions on the types of investors who are able to borrow money, how the Federal Reserve will judge their credit worthiness and how the government will ensure they are using the loans to buy the intended assets, the Journal said.

I think it’s safe to say they’ll give the money to anyone for any purpose.  They don’t give a damn what happens to the money.  It’s just taxpayer money.  It’s not as though it’s something they have to treat responsibly. 

I’m seriously considering moving all my investments to an off-shore account somewhere, safely out of the reach of these idiots.  Hurricane season is over.  Grand Cayman Island would be a nice place to spend the winter.

Taxpayer Money Used to Eliminate American Jobs?!?!

October 30, 2008


It’s being reported today that the details of the GM-Chrysler merger have been settled between GM and Cerberus Capital Management, owner of Chrysler, and that the deal may be done by Tuesday. Just one small detail stands in the way – financing. GM doesn’t have the money to pull it off. That’s where the federal government comes in. The governors of six states have signed a letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, imploring them to quickly provide federal assistance, without which it is feared that all domestic automakers will go bankrupt, with catastrophic consequences for the entire American economy.

Although GM is selling this merger to the government as the best way to salvage jobs in the domestic auto industry, claiming that both companies will go under without it (which may very well be true if nothing is done), its real interest (beyond mere survival) is in eliminating a competitor while increasing sales and cutting costs.

Projections are that, if this merger takes place, approximately 35,000 Chrysler jobs will be eliminated and that nearly five times that many jobs will be lost in total when parts suppliers and other ancillary companies are included in the impact – a total loss of about 165,000 jobs. Yes, GM will improve its sales volume slightly by the elimination of this competitor, but the vast majority of Chrysler’s sales volume will be lost to foreign competition. What this means is that, if the federal government provides the funding for this merger, billions of American taxpayer dollars will be used to facilitate the elimination and outsourcing of 165,000 American jobs! Then, billions more will be spent on unemployment payments and billions more will be added to the national debt when the income taxes collected from those 165,000 workers falls to zero.  So far, I’ve heard no discussion of this snake-eating-its-tail scenario, where taxpayer money is used to eliminate taxpayers’ jobs.  This should be a pitchforks-in-the-street moment!  Where is the outrage? 

GM is pushing frantically for this deal to be done by Tuesday. Why Tuesday? What’s so magical about that day? The election. If Obama is elected, as appears likely, GM fears that it will then have to deal with an administration that will take a dim view of using taxpayer money to destroy so many American jobs. An Obama administration will still do a deal to salvage the domestic automakers, but will be far less likely to do a deal that eliminates Chrysler as a separate entity. GM would much rather close the deal with the Bush administration, Henry Paulson and Ben Bernanke – people who don’t give a rat’s behind about American jobs.

There are much better ways to save all of the domestic auto industry. Loan GM the money it needs to survive a bit longer and take a stake in Chrysler, perhaps even all of it. Couple that with some new protections of the domestic auto industry, like tariffs on imports, and within a couple of years we’d have an explosion in domestic sales. The government would soon be able to sell Chrysler at a handsome profit for taxpayers. The time is past for timid steps. Without the protection afforded by tariffs, the domestic auto industry will be doomed regardless of what other measures the government or the carmakers may take.

G7 Finance Ministers in Washington: Host, Fleas and the Missing Leech

October 11, 2008

This weekend, there is a meeting of parasites in Washington to discuss the host’s shortage of blood.  The finance ministers of the G7 (“group of seven” major economic powers of the world) are meeting in DC to discuss the global economic collapse brought on by the U.S. finally being sucked dry of all its assets through the trade deficit.  Conspicuously absent from this group of mites is China, the six-inch-long bloodsucking leech that’s been latched onto a main artery of America’s economy. 

Every once in a while, the head of the host, Bush, pops up to reassure us all:  “Everything’s OK!  We’re workin’ on it!  It’s hard work!  We’re all in this together and we’ll get out of it together!” 

Although I’m making light of it, this meeting is significant because it may be a crucial turning point for our economy if the talks break down.  Although the statements emanating from the meeting express unity and resolve, don’t be fooled.  The other six of the G7, our parasitic trade “partners,” came to town mad as hell.  Although Russia isn’t included, Putin has been very open about blaming the U.S. for this global crisis.  European leaders have been more muted in their criticism, but generally agree with him.  All are angry that the U.S. assets they’ve purchased with our dollars are proving to be worthless.  They want their money back.  In the meantime, the U.S. is making a case for them to put even more blind faith into our bankrupt economy. 

These talks are doomed to collapse or, at the most, to produce one more statement of “unity” and “resolve,” crafted to mask the behind-the-scenes vitriol.  The problem is that all sides enter into these talks believing in their own B.S., to put it rather indelicately.  Our trade “partners” believe that free trade and globalism works, because the surplus they have with the U.S. does a very nice job of propping up their bloated labor forces, and they want to keep it going.  The U.S., on the other hand, believes that if we just stick with it long enough, things will turn in our favor in a big way.  All ignore the reality of the situation, that trade deficits are simply unsustainable for any protracted period of time, and America’s is now thirty-three years long and growing.  Another problem is that the worst economic parasite of them all, China, isn’t even represented at this meeting. 

One of two things will happen.  Either the other six of the G7 will capitulate and agree to invest blindly in American banks and other institutions, ignoring their own well-being  and their well-founded suspicions that such investments are worthless, or the talks will devolve into a shouting match, probably led by Japan and Germany demanding that we make good on their investments, while Paulson and Bernanke demand more blind faith in their endless bail-outs.  In a best-case scenario, the angry discussion may turn toward trade, with the U.S. blaming the others for not meeting their obligations.  If that happens – and it very well could – we may finally have reached a turning point in our decades-long economic nightmare. 

As much as this economic turmoil hurts, especially the huge drop in equities, it may work out for the best.  There may be a bright light at the end of this very dark tunnel – the dawning of the realization among America’s leaders that huge trade deficits can’t be sustained, and that positive steps must be taken to restore a balance.

Examples of “Kooks” We Should Pay Heed

September 22, 2008


 No sooner did I finish my previous post, suggesting that our next president needs to begin listening to economists who, until now, have been dismissed as “kooks” and “weirdos” by the now-discredited high rollers like Paulson, Greenspan and Bernanke, when along comes this Fortune article with a perfect example – economist John Williams of http://www.shadowstats.com/, who coined the term “Pollyanna Creep” to describe the phenomenom of revising economic data to make things appear rosier than they are. Williams contends that today’s economic melt-down has roots that go back much further than the mortgage crisis, that we’ve been deluding ourselves for many years that the economy is in much better shape than it really is.

No shortage of villains stand accused of igniting the brushfire raging across Wall Street: greedy lenders, gullible home buyers, negligent regulators, numbskull credit ratings agencies, and vicious short-sellers, for starters. Maybe they share the blame. But what if the underlying problem goes deeper? What if the reality is that the US economy has been a lot worse than was thought for a long time, and now the chickens are finally coming home to roost?

That’s the dark thinking beyond what is known as “Pollyanna creep,” a phrase coined by an economist named John Williams and supported by a cadre of other macroeconomic dissidents.

Williams, who lives in California, runs a Web site called Shadowstats.com that trades in the idea that key government statistics have become so optimistically misleading as to become essentially useless. Yes, this sounds a bit like the thinking of the black helicopter crowd, or the plotline of a Matrix movie. But given what’s gone on in the financial sector of late, it doesn’t sound quite so fringe.

The article singles out GDP (Gross Domestic Product) and CPI (the Consumer Price Index) as a couple of macroeconomic statistics that are especially worthy of scorn – overly optimistic to the point that they have been rendered useless, the very point I made in the first chapter of Five Short Blasts. If you’ve followed this blog for any length of time, you know that another favorite of mine is unemployment. To suggest that our unemployment rate is only 6.1% (the current “official” rate) is ludicrous when the annualized rate of weekly jobless claims is closer to 16%. In the past, while still chairman of the Federal Reserve, Alan Greenspan claimed that unemployment rates of 5% or less represented “full employment” and worried about the inflationary potential, all while weekly jobless claims still hovered above 300,000 and while thousands of people in manufacturing were losing their jobs ever week.

Another fringe economist cited in the article is Kevin Phillips, former Nixon advisor and author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.

In his recently-published and rather depressing book “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism,” onetime Nixon White House adviser Kevin Phillips discusses Pollyanna creep as part of an era of “Bullnomics: the pied-piping of America toward a misleading financial ideology (the efficiency and reliability of markets), buttressed by a spectrum of dubious thinkers, doctrines and enablers.”
Phillips contends that some of the biggest changes to CPI calculation took place between 1997 and 1999, “while the public and the politicians were preoccupied by bull market euphoria and the actions in Congress to impeach Bill Clinton.”
In their effort to reduce Social Security outlays – and buttressed by a belief that CPI overstated inflation – government economists with backing by Federal Reserve Chairman Alan Greenspan implemented controversial modifications to CPI that, among other things, tried to measure increased satisfaction from goods.


This Fortune article may be a good sign that, already, the Paulsons and Bernankes of the world are being pushed aside while we begin to look to the “fringe” economists, the “macroeconomic dissidents,” for real answers.

The Pollyanna creep crowd ….  may have some currency. Amid the talk of hundreds of billions in financial market clean-ups, a debate over the accuracy of economic bellwethers may be a can of worms worth opening.

Advice for Next President: Listen to “Kooks” and “Weirdos”

September 21, 2008

 Only weeks ago, we were assured by both Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke that all was well. To hear them tell the story about the financial crisis, no one could see it coming. This is true only if you count as “nobodies” the thousands of people labeled by these globalization cheerleaders as “kooks,” “wackos,” “weirdos,” “alarmists,” “nut cases” and “protectionists” – the people who have been warning us for many years that our trade, economic and monetary policies were heading us toward financial disaster.

And make no mistake, we stand at the precipice of the worst economic catastrophe in the history of the world, one that would make the Great Depression pale by comparison. This morning, I watched Senator Dodd and Representative Boehner on ABC’s “This Week” with George Stephanopoulos. Dodd recounted that he and Boehner and other congressional leaders have been briefed on many scary things over the years, but nothing like what they heard from Paulson and Bernanke. When Stephanopoulos pressed them for details about what exactly Bernanke said, they refused to answer. They were so mindful of the the fear and panic that could be provoked in the general population that they wouldn’t paraphrase, summarize or even characterize what was said. But Dodd did say this: “When Bernanke finished speaking, there was a stunned silence for 10-15 seconds. It was as though all the air had been sucked out of the room.”

I can take a good guess at what he said. I believe Bernanke revealed that, within days, if nothing was done, everyone in America would be bankrupted and the economy would grind to a complete halt. Our foreign creditors were on the verge of pulling their money out, a sum of money that exceeds the cumulative net worth of the entire population of the U.S.

Now we see that the Henry Paulsons, the Alan Greenspans, the Ben Bernankes and all of the globalization cheerleaders and fans of deregulation have been ultimately proven wrong. Their theories and philosophies have been atrocious, abysmal failures. Now, in a panic, they’re ready to trade it all away for a Grand Plan that smells an awful lot like socialism or something worse, something more akin to a corrupt communist state or a dictatorship, set up to benefit the ruling class, at the expense of the proletariat.

They had their chance. They’ve failed badly. It’s time to give all of the “kooks” and “weirdos” out here in the blogosphere their due. They got it right. It’s time to consider that it is they who are the real economists we should be listening to, and cast aside the buffoons who have held sway for far too long. Our next president would be well-advised to gather a meeting of the minds of the best of these people and hear them out. Study their blogs and give careful consideration to what they’ve been saying for years. It’s time to pay attention to the people who had it right all along. History can either mark September, 2008 as the beginning of the end of American prosperity, or as the turning point in economic philosophy that pulled our nation from an economic abyss and propelled it to new heights.

More Useless Trade Negotitations with China

June 15, 2008


Once again, the U.S. sends unarmed combatants into a battle of wits with Chinese trade negotiators.  Treasury Secretary Henry Paulson and Fed chief Ben Bernanke will meet with Chinese leaders to discuss rising protectionism and currency valuations.  Discussion of both topics is a complete waste of time and represents more of the same trade dilly-dallying we’ve witnessed for decades.  Currency valuation has almost nothing to do with the trade deficit in manufactured goods.  There’s more proof in this article:

Washington thinks the Chinese currency, which has risen about 20 percent against the dollar over the last three years, should appreciate further as part of exchange rate reforms that could also be helpful to control inflation, a politically sensitive issue in China where half of family incomes go for food.

The result of those three years’ of 20% yuan appreciation?  Our trade deficit with China has soared, not declined.  Negotiations to lower China’s barriers have yielded the same results.  The trade deficit isn’t declining because, without implementation of tariffs by the U.S. – tariffs that would compensate the U.S. for China’s inability to offer an equivalent market in exchange for access to ours – it’s impossible for it to decline.  The deficit is due to the gross disparity in per capita consumption between the U.S. and China – a disparity that’s due to China’s gross overpopulation, something that isn’t going to change any time soon. 

Perhaps this situation will begin to improve next year:

“If this tendency of protectionism grows unchecked, it may become a threat to the global trade and the multilateral trading system,” said Sun Zhenyu, China’s ambassador to the WTO.

Adding to the concerns is the prospect of a US rollback of market opening measures under a Democratic president, amid concerns over the US trade deficit with China, which ballooned to a record 256.2 billion dollars last year.

Democratic White House candidate Barack Obama has promised to review US free trade policies if he wins the presidential election in November.

If Obama is a man of his word, we may finally start to see some real action.  Does he have the courage to take on the Chinese and the WTO?  Time will tell.  But he’d better.  It’s our only hope.  The time has come to stop relying on currency valuation and the vague promises of our trading “partners.”  It’s time for the U.S. to take matters into its own hands to begin the rollback of the enormous trade deficit that is drowning our economy.