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

 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.

Treasury Expands Taxpayer-Funded Bail-Out to Entire World!

http://www.reuters.com/article/newsOne/idUSN2053279320080920

I knew it!  In my previous post, I almost predicted that the government’s bail-out of the financial system would expand to cover foreign financial institutions as well, but was afraid of coming across as alarmist, ruining my credibility.  Well, it’s here, folks!  This Reuters article contains a “clarification” by Treasury Secretary Paulson, explaining that, while the intent is to purchase “mortgage-backed securities and whole loans” from American-based companies, the plan also gives Paulson and Bernanke the power to extend its purchases to non-American based entities with “significant operations” in the U.S. and beyond!  In other words, the plan gives them the power to bail out every financial institution in the world with American taxpayer money!  Clearly, this plan will expand from $700 billion to trillions of dollars.  This won’t save America’s economy.  It’ll destroy it forever! 

I’ve warned repeatedly of the danger of the sell-off of American assets used to finance the trade deficit – that it also meant foreign control.  Now the worst case scenario is being realized.  As the American financial system crumbled, foreign banks refused to help and have instead demanded that the American taxpayers keep them whole.  American policy is now being dictated by our foreign owners including, now more than ever, our trade policy.  Still, even now as I write this, the arterial bleed of $2 billion per day of our wealth continues to fund The Global Trade Welfare State. 

As far as I’m concerned, this part of “The Plan” makes it a deal-breaker.  Enough is enough.  It’s time to draw a line in the sand.  I strongly urge all of you to contact your senators and congressmen and implore them to vote “no” on this plan.  If you’ve never contacted them before, just click the “Write Your Congressman” link on the right side of this web page, listed under “Important Related Web Sites.”  Yes, I realize that failure to pass this plan may result in a depression, but the alternative is much worse – the end of the United States as a sovereign entity.

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

http://www.reuters.com/article/idUKREE07459420080920?sp=true

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

 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.

 

It’s The Trade Deficit, Stupid!

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!

Global Financial Melt-Down Gathering Steam

http://www.reuters.com/article/newsOne/idUSN0927996520080915?sp=true

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

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.

Subprime Mortgage Meltdown / Credit Crisis

In Five Short Blasts, I spoke about the federal government’s penchant for working on symptoms instead of real problems. This is a good example. Too many people begin to default on their mortgages, and so what does the government do? The Federal Reserve tries to pump more liquidity into the credit markets and Congress and the White House begin to work out schemes to offer better credit terms to unqualified buyers. The symptom is that the average person can no longer afford an average house without resorting to credit terms they can‘t really afford. The real problem is that wages haven’t kept pace with the cost of housing. Certainly, the run-up in housing prices (fueled by money pouring into real estate as it fled the stock market beginning with the market crash in March, 2000) is a factor, but so too is the steady decline in wages and benefits over the past three decades.

The real underlying root cause is our trade deficit, now over $700 billion per year. We give away a huge piece of our economy and finance it by selling off American assets. For example, whatever portion of your home is financed, which for most people is almost all of it, your home is owned by your mortgage company, right? Probably not. Although you make your payments to your mortgage company, in all probability they have obtained their financing by rebundling your mortgage into some type of mortgage-backed security and selling it to some foreign entity. Where will all of this end if the government doesn’t take action to balance trade? As more American assets are sold off, their value slowly declines until they will become worthless. (Thus, the rapidly declining value of the dollar we are experiencing today.) What happens when something an investor owns reaches that point? Do you continue to pour money into operating it? No. You shut it down and abandon it. If that happens – if our foreign investors walk away – the entire global economy could collapse. We won’t have money to buy their products – shutting down their factories which will shut down their economies just as quickly – a nightmare scenario. Will it come to that? Maybe. Maybe not. Stay tuned.

Pete