Monday, September 28, 2009

U.S.S. Entitlement a Sinking Ship

According to our own government, we're just a decade away from the next two fiscal mega-crises.

"We suffer from a fiscal cancer and if we don't treat it, it could have catastrophic consequences for our country. This is not only an issue of fiscal irresponsibility; it's an issue of immorality."— Former US Comptroller General, David Walker

In May, the trustees of the Social Security and Medicare programs announced some rather bleak news: the Medicare fund is expected to run out of money in 2017, two years sooner than projected last year. And the Social Security trust fund will be exhausted in 2037, four years earlier than previously predicted.

Social Security is the main source of income for more than half of older Americans.

Spending on the two entitlement programs totaled more than $1.4 trillion last year, accounting for more than one-third of the federal budget. Medicare-Medicaid cost $739 billion and Social Security accounted for $700 billion of federal spending.

And those enormous expenditures will soon exceed revenues.

Due to high levels of national unemployment, the government is collecting less of the payroll taxes that finance Medicare and Social Security.

Compounding the problem, unemployed seniors are now choosing to claim early retirement benefits, which will force Social Security to pay out more in benefits than it collects in taxes for the next two years. That hasn't happened in a quarter century.

Applications for retirement benefits are up are 23 percent from last year, while disability claims have risen by about 20 percent. That will result in deficits of $10 billion in 2010 and $9 billion in 2011, all of which will be tacked on to already bloated federal deficits.

Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year.

According to the Social Security Administration, applications for disability benefits—including Supplemental Security Income—are on pace to reach 3 million in the budget year that ends this month and even more are expected next year. In a typical year, about 2.5 million people apply for disability benefits.

Social Security is projected to begin temporarily generating surpluses again in 2012 before permanently returning to deficits in 2016 — unless Congress acts to shore up the program again as it did in the early 1980s. That will ultimately result in higher taxes and lower benefits.

A resumption of economic growth is not expected to close the financing gap. The trustees’ bleak projections already assume that the economy will begin to recover late this year. However, future economic growth may be limited and any optimistic projections are highly speculative.

The government claims that the Social Security trust fund — reflecting a $2.5 trillion surplus that Uncle Sam borrowed, spent and promised to pay back — will be tapped out by 2037. Barring any changes, it claims that is the point after which the system would only be able to pay out 78% of benefits promised to future retirees.

However, there is no actual trust fund. The money has already been spent. Recouping that money will require taxing workers all over again, or making drastic cuts to other federal programs in order to return that money to retirees.

The trust fund was callously raided by Congress over the years as it spent future retirees money on other government programs. The fund is now represented by government bonds, or IOUs, that will have to be repaid as Social Security surpluses are permanently exhausted.

The government already owes trillions in bond obligations to public and private investors, including foreign governments. You could say that Uncle Sam's obligations are ocean deep.

And Medicare presents its own pressing, and more immediate, problems.

Last year was the first year in which Medicare collected less in taxes and premiums than it paid out in benefits.

In coming years, the trustees said, Medicare spending will increase faster than either workers’ earnings or the overall economy.

The trustees predict a 30 percent increase in the number of Medicare beneficiaries in the coming decade, to 58.8 million in 2018, from 45.2 million last year.

There are 76 million Baby Boomers at present, consisting of people born between 1946-1964. They represent 25 percent of the US population.

Those born in 1946 will turn 65 in 2011 and become eligible for Medicare for the first time. Many will also begin retiring and subsequently collecting Social Security as well.

The Boomers will continue becoming eligible for both Medicare and Social Security in each of the subsequent 18 years, placing huge demands on both systems.

The shortfall will be so great that years ago our nation's chief accountant foresaw an impending disaster.

David Walker, the former US Comptroller General, urgently sounded the alarm to anyone who would listen; our nation is in deep fiscal trouble and no one is doing anything about it.

But Walker was ignored by the Bush Administration and Congress. He warned about our $53 trillion obligation for entitlements — with zero dollars set aside for them.

Ultimately, Walker quit in frustration in March of last year. No one in government was listening, or responding, to his urgent warnings and pleas.

The problem has only worsened since then. The federal government assumed $6.8 trillion in new debt last year—a 12 percent increase—pushing its total debt to a record $63.8 trillion, according to USA Today. That amounts to $545,668 for each household.

Clearly, our government has obligations that it will never be able to honor. That will be the bitter pill that all future retirees will have to swallow.

"The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon." — David M. Walker, former US Comptroller General

Wednesday, September 23, 2009

Housing Crash Will Crush Millions of Homeowners

The US housing crisis isn't over — not by a long shot. In fact, federal and state officials are bracing for the next tidal wave of foreclosures — adjustable rate mortgages (ARMs), particularly option payment ARMs.

Option ARMs let borrowers choose to make very low payments for the first five years. During that initial period, borrowers can pick their payment option.

That's where option ARMs differ from other ARMs; borrowers have the option to pay interest only, or a minimum monthly payment that doesn’t even cover the interest. This results in a rising loan principle, or what's called negative amortization.

When the balance of the loan reaches a certain level, or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan's interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but can then reset to a new higher level.

Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, most of these borrowers are eventually overwhelmed. In most cases, borrowers owe much more than their homes are worth, so they cannot refinance their way out of trouble.

According to Fitch Ratings, 94 percent of option ARM borrowers elected to make minimum payments only. That portends the trouble that lies ahead.

We are already in the midst of the worst housing downturn since the Great Depression, and things are about to get worse.

Next year, many option ARM payments will begin to readjust, slamming borrowers with dramatically higher monthly mortgage bills. That will unleash the next big wave of foreclosures.

Option ARMs became widespread starting in 2005, which is why the recasts and higher payments will pick up steam in 2010, five years later.

The bulk of option ARMs recast dates are spread out from 2010 through 2012, meaning the foreclosure waves could drag on for the next few years.

Option ARMs tend to be "jumbo," or for significantly large amounts, making it even harder for borrowers to avoid foreclosure. Even though most option ARMs have not yet adjusted higher, many borrowers are already defaulting anyway. That's an ominous sign of what's to come.

There are 2.8 million active interest-only loans nationally, worth a combined total of $908 billion. In the next 12 months, $71 billion of interest-only loans will reset. Even after mid-2011, another $400 billion will reset. California will be particularly hard hit; in 2004, nearly half of all Golden State buyers took out an interest-only loan.

Banks never gave out loans with 10 percent unemployment in mind, and the massive losses will continue to burden their balance sheets.

Nationally, home prices have already declined by nearly one-third, peak-to-trough, since 2006.

However, respected banking analyst Meredith Whitney predicts that high unemployment will result in a further 25 percent drop, resulting a total decline of about 50 percent.

“I think there is no doubt that home prices will go down dramatically from here; it’s just a question of when,” Whitney told CNBC on September 10. “If you look at the drivers for unemployment, I don’t see that reversing very soon.”

There is already a huge supply of unsold homes on the market. Adding a glut of additional foreclosures will likely depress home prices for years to come.

Moody’s now forecasts that some home prices may not return to their pre-recession levels until 2030. This means that hundreds of thousands of Americans may find it impossible to sell their houses without paying off banks for underwater home loans.

At a minimum, Moody's says that many states (i.e. NY, IL, CA, FL) will not recover until sometime between 2018-2024.

If it does indeed take 15-20 years for housing to recover, that amounts to a lifetime for many older Americans.

The new reality is that Americans are going to have to return to a more traditional view of a house; a place to lay your head and make your home.

Houses will no longer be viewed as investments, much less get rich quick schemes.

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Sunday, September 20, 2009

Bull Markets or Bull Shit?

The Stock Market Could Aptly be Described as Schizophrenic or Manic Depressive

(Consider the following as you read: Since 1965, U.S. economic growth has averaged 3.2 percent.)

On November 21, 1995 the DJIA closed above 5,000 (5,023.55) for the first time.

On March 29, 1999, the average closed above the 10,000 mark (10,006.78) after flirting with it for two weeks. This prompted a celebration on the trading floor, complete with party hats.

On May 3, 1999, the Dow achieved its first close above 11,000 (11,014.70)

On January 14, 2000, the DJIA closed a record high of 11,722.98; this record would not be broken until October 3, 2006.

March 20, 2001, Dow closes at 9720, the first time since 1992 it closed below the previous year's low.

September 17, 2001, the Dow closes at 8920 after experiencing it's biggest one day fall (685 points).

December 31, 2001, the DJIA closes at 10,021, up 21.7% from September low, but still down 7.2% for year.

By mid-2002, the average had returned to its 1998 level of 8,000.

On October 9, 2002, the DJIA bottomed out at 7,286.27, its lowest close since October 1997.

On October 31, 2002 — just 22 days later — the Dow is back up to 8397.

By the end of 2003, the Dow returned to the 10,000 level.

On January 9, 2006 the average broke the 11,000 barrier for the first time since June 2001.

In October 2006, four years after its bear market low, the DJIA set a new record for the first time in almost seven years, closing above 12,000 for the first time on the 19th anniversary of Black Monday in 1987.

On April 25, 2007, after months of volatility, the Dow closed above the 13,000 milestone for the first time.

On July 19, 2007, the average passed the 14,000 level, completing the fastest 1,000-point advance for the index since 1999. One week later, the Dow fell below the 13,000 mark, down about 10% from its highs.

On October 9, 2007, the Dow Jones Industrial Average closed at the record level of 14,164.53. Roughly on-par with the 2000 record when adjusted for inflation, this represented the final high of the roller coaster market.

On July 2, 2008, the Dow Jones Industrial Average closed at 11,215 — more than 20% below its October 2007 high. Two weeks later, it closed below the 11,000 mark for the first time since 2006. This was soon followed by a 500-point rally.

On November 20, 2008, the index closed at a new six-year low of 7,552. The market proceeded with a modest rise to close the year near the 9,000 level, still its worst annual performance since the early 1930s.

On February 20, 2009, the DJIA closed at a new 6 1/2-year low of 7,365.67.

On February 23, 2009, the DJIA closed at a 11 year low of 7114.78, last reached in October 1997.

On March 2, 2009, the DJIA dropped below 7,000 for the first time since 1997 — more than 50% below its October 2007 high.

By March 9, 2009, the DJIA reached a closing low of 6,547, its lowest close since April 1997, and had lost 20% of its value in only six weeks.

On March 6, 2009, the DJIA closed at 6469, it's lowest level since November, 1996.

On September 18, 2009, the DJIA closed at 9820, more than 50% above its March low.

Tuesday, September 15, 2009

Irrational Markets, Irrational Investors, Irrational Exuberance

"How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?" - Fed Chairman, Alan Greenspan, 1996

Is the stock market really an accurate measure of the health and strength of the economy? Or is the stock market average often misleading? Might it simply be reflective of irrational bubble economics?

The fact is, the majority of Americans don’t have any direct investments in the stock market.

In its 2002 study, the Mutual Fund Industry group, Investment Company Institute, found that only 21 million households (less than 20%) owned individual stocks outside an employee sponsored retirement plan. Employees in such plans are typically invested in mutual funds that give them no voting control.

In 2004, the Economic Policy Institute reported that the percentage of American households invested in the stock market in any form — either directly or indirectly through mutual funds or 401(k)s — was 48.6 percent.

However, the percentage of households with more than $5,000 in stock was just 34.9 percent.

So Wall St. is not a true reflection of how the average American worker, or the average family, is faring.

In reality, Wall Street is a pretty poor barometer of the economy’s performance since it is simply a bet on the future performances of a select group of companies listed on a few stock exchanges.

Regardless of the health or profitability of various companies, many investors will still buy.

During the tech run-up, people bought stock in unprofitable hi-tech companies with the belief that those companies would one day be quite valuable.

And people futilely bought the doomed stock of Enron and WorldCom, believing they were buying into solid, profitable companies that would continue to deliver great returns.

What about the stock market boom of this decade, you may ask? Much of it was an illusion created by the financial sector, which doesn't actually produce anything — except debt.

From 1948 to 1985, the financial sector accounted for around 12 percent of American corporate profits, never reaching 20 percent nor dipping below 5 percent. After 1985, however, the profits of the sector rose dramatically, going from 19 percent in 1986 to 41 percent in 2000.

That meant that more than 40 cents out of every corporate dollar of profit was paper profit, not created by actual wealth-generating activity, but by corporate gambling and debt creation.

The truth is, the stock market is highly irrational. The buying and selling reactions to quarterly reports are understandable. But there are continual up and down movements between these reports that seem to be tethered to nothing.

The daily fluctuations in the market are not linked to fundamentals, but rather to fear, greed, Wall St. hype, and a herd mentality marked by ignorance and unfounded optimism.

Noted economist Robert Shiller came to the rather obvious conclusion that stock markets jump around a lot more than corporate fundamentals do. He’s considered a genius for his uncanny ability to grasp the obvious.

And renowned MIT economist Paul Samuelson promoted the absurd notion that a rational market is a random one. He’s also considered a genius for advocating this blatant oxymoron.

However, things that happen randomly are by their very nature irrational. And investors can be equally irrational.

Investors often behave like sheep, following the herd, as well as the money. Whereas ideas and investments traditionally chase money, right now, as in most of this decade, money is chasing ideas and investments. That’s a bad development, and a dangerous sign.

Over the past 10 years, stock returns are negative 5.4%. Adjusted for inflation, $1 invested in stocks in March 2000 is now worth just 60 cents.

Despite this, the US stock market is still over-inflated and built on speculation, not fundamentals. As of June, stocks were still selling at more than 20 times their expected earnings for 2009.

Can you say, “bad investment”?

This rampant speculation has led to highly inflated bubbles that have burst one-by-one.

The mainstream media machine — exemplified by CNBC and Fox Business Channel — is a big part of the problem. It helped perpetuate Wall Street's smoke and mirrors act.

The financial news media have served as nothing more than cheerleaders for Wall St. and corporate America. They are the insiders who seek to curry favor with, and access to, the powerful. Far too often, they have fallen short in their role of objective, skeptical, inquisitive outsiders. The media has continually neglected its duty as stewards of the public trust, failing to serve as a genuine, trusted, check and balance on power.

No one in the mainstream media ever seemed to doubt Wall St. or its inflated numbers, the housing bubble, stated-income loans, no-money-down loans, interest only loans, negative amortization loans, adjustable-rate loans, and all of the other collective madness.

As the stock market was continually pumped up with new money this decade, everyday investors were being conned and duped by Wall St. and its financial media cronies.

The stock market is simply a type of Ponzi scheme that relies on constantly luring new investors to inflate the market, not on sales and profits. These new investors pump up the market by continually infusing it with new money, giving it the the false appearance of growth built on fundamentals.

Savvy, professional investors — the biggest market movers — know this and use it to their advantage, taking profits when the market advances. Who would sell their positions in an allegedly strong, profitable company? Only an experienced investor who knows that it's all just the smoke and mirrors of a market being influenced by Wall St. and the herd mentality.

By issuing stock, the nation's biggest corporations are essentially able to print their own money. And they also sell bonds (or debt) to raise additional money. In this sense, Wall St. issues its own fiat currency. Like the dollar, common stock has no physical backing. It's just pure, unadulterated risk.

Many average investors didn't learn a thing from the collapse of the tech bubble, or from the corporate scandals at Enron, WorldCom, Arthur Andersen, Haliburton, Tyco etc. Instead, they just went headlong into the irrational market surge that followed later this decade.

What should have been learned is that corporate America—particularly Wall St.—is perversely corrupt and contemptible.

All confidence seemed to have been lost by March of this year, when the Dow surrendered its euphoric 14,000-point highs of 2007. Stunningly, the market was more than halved, dropping back down to around 6500.

At that point, no one trusted Wall St., government regulators such as the SEC, or the credit-rating agencies.

Market confidence has been ruined because we now know that credit-rating agencies like Moody’s and Standard & Poor’s were in cahoots with Wall Street. Instead of assigning credible, independent grades to securities that are now known as "toxic assets," the agencies were hopelessly compromised by the fees that the securities issuers paid them to issue ratings.

Here’s an actual e-mail exchange between two analysts at S&P about a deal they were examining:

“Btw - that deal is ridiculous. We should not be rating it.”

“We rate every deal. It could be structured by cows and we would rate it.”

The assorted corporate scandals of the past decade, as well as the accounting scandals, had taken their toll; investors couldn't even trust the bookkeepers. Accountants at Arthur Andersen had been paid off to keep quiet and look the other way, or worse, to participate in the massive scams at Enron.

One has to ask, how pervasive is this behavior?

The entire system is based on confidence. So it was little wonder that investors sold off their holdings and stopped putting money in a market they simply didn’t, and couldn’t, trust.

And yet, sensing an opportunity for riches, bottom feeders have swept in and pumped up the market again by purchasing millions upon millions of corporate shares. But none of the fundamentals have changed. American businesses are still struggling and consumers are not spending. And the financial sector is still teetering, despite their recent glowing reports.

Sure, some corporations are becoming more profitable right now by laying off American workers. But is that worth celebrating, or investing in?

Corporations won't solve their problems by dumping human capital. The market is over-inflated and set for another tumble. The fundamentals haven't changed at all. There will be another correction, and millions of investors will be crushed once again.

But the savvy, veteran investors see the writing on the wall, and they will exit quickly, with their portfolios largely intact. That will start the next selloff, and the herd will follow.

But it will too late for most, and their fall will be very painful. Some people just don't learn.

"What we've got here is... failure to communicate. Some men you just can't reach. So you get what we had here last week, which is the way he wants it... well, he gets it. I don't like it any more than you men." — Cool Hand Luke, 1967

Thursday, September 10, 2009

Credit Contraction Leads to Diminished Spending: Consumption Won't Drive Recovery

Earlier this year, Meredith Whitney, the prominent banking analyst who foresaw the 2008 Citigroup meltdown, predicted that credit card lenders would cut the lines of credit to borrowers by a total of $2.7 trillion through 2010.

That would amount to a 57 percent reduction in the credit they made available two years ago at the height of the boom.

Aside from being a problem for the banks (who create money through lending it), this significant credit contraction will also be a problem for the rest of us since it will continue to shrink the economy.

How? Whitney puts it this way:

"90 percent of US consumers revolve their credit card at least once a year, meaning that they won’t pay their full balance at least one time a year. So, they think 'I’m using $1,000 of my credit line, but I have an extra $4,000. So my total credit line outstanding is $5,000. And I’ve only used $1,000. That unused $4,000 is my rainy day fund – if my dog gets sick or my kid needs braces or I lose one of my jobs.' With so many Americans relying on their credit cards as a source of liquidity, reduced credit lines would be like a major pay cut."

The latest news backs Whitney's contention, and it should give pause to any suggestion that we will simply "grow our way out of this."

The Federal Reserve just reported that outstanding consumer credit fell by $21.6 billion dollars in July from June, the highest dollar-value decline since tracking of the data began in 1943.

Analysts had forecast a drop of $4 billion, but the contraction was more than 500% worse than predicted.

It continued an ongoing pattern; credit fell for a sixth month, the longest series of declines since 1991.

Consumers, facing job losses, fear of job loss, and declining personal wealth, are saving more and spending less.

The economy has lost 6.9 million jobs since the recession began in December 2007, the biggest drop in any post-World War II economic downturn.

Meanwhile, plunging home values and stock prices have fueled a record $13.9 trillion loss in US household wealth since the middle of 2007.

This latest Fed data is a very clear signal that consumers won’t be leading us out of this recession. And that is obviously a great concern to the government, which can no longer be so reliant on consumer spending to fuel the GDP.

It also provides further evidence that GDP is tumbling.

Count on this; with a limited export base and declining domestic consumption, things will continue to get worse before they get better.

Wednesday, September 09, 2009

China Syndrome

China Signals Loss of Confidence, Will Move Away From Dollar

The warnings have come in stages, but they have been consistent and clear.

In March, Chinese Premiere Wen Jiabao, worried about his nation's massive commitment to US dollars and Treasuries, sent a warning to the US and shook world markets.

"We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried,” Mr. Wen said at a news conference. He called on the US to, "Maintain its credibility, honor its commitments, and guarantee the security of Chinese assets."

With about $2 trillion invested in the US, China is the world’s largest holder of American government debt. That gives it significant reason for concern.

The US has been printing and borrowing like mad, while setting interest rates near zero. These actions are worrisome to any large holder of US dollars, like China, which surely fears large losses.

With American consumers tapped out and buying much less from overseas, Chinese exports to the US have dropped considerably. That has limited US dollars from flowing into Chinese coffers. It's also left them with less money to buy additional US Treasuries.

However, it hardly matters; the Chinese are finally crying "uncle." China has been seeking ways to limit any further exposure to US dollars for quite some time.

Premiere Wen indicated that China would not be rash in making changes to its massive stockpile of foreign reserves because of the worldwide implications sudden moves could portend.

Wen also noted that China would look out for its own interests, but would "at the same time also take international financial stability into consideration, because the two are inter-related."

That same month, China’s central bank proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

Further, it also condemned the current credit-based system: China’s central bank governor said the goal would be to create a new reserve currency, “That is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.”

This was further indication of China's concerns about the Fed simply printing money—backed by nothing—and the resulting hyperinflation that will eventually follow. It was also a condemnation of fiat currencies in general.

Then, in June, the head of the economic department at China's policy research office said he believed the dollar is poised for a fall. He said that buying land in the US is a better option than US Treasuries. He also urged his government to redirect a huge portion of its foreign exchange assets to buy energy and natural resource assets.

'Should we buy gold or US Treasuries?' Li Lianzhong asked. 'The US is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.'"

China, already possessing the largest gold stockpile in the world, will soon have doubled its gold reserves in the space of six years.

And at a June summit, Brazil, Russia, India and China (the BRIC nations) said they are considering buying each other’s bonds and swapping currencies to lessen dependence on the US dollar. Russia’s top economic advisor reiterated his intention to push for the creation of a “supranational currency” to challenge the US dollar and encouraged China and the other Shanghai group members to use each other’s currencies for trade.

And now the Chinese government has given its clearest signal yet that they have lost confidence and are moving away from the dollar.

Cheng Siwei, a former vice-chairman of the Standing Committee, said point blank that the Chinese central bank was about to actively diversify new reserve assets away from the US dollar and into currencies like the Yen and the Euro, and even gold.

“We hope there will be a change in monetary policy as soon as they have positive growth again,” he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added.

Depending on the degree that the Chinese sell dollars and buy gold, Yen or Euros, there can only be further downward pressure on the US dollar.

That makes the China/US relationship a unique and critical one. If China were to dump all their US investments (known as the financial nuclear option) it would devalue their investment and crush the dollar.

Pulling all of its money out of US treasuries would mean that Americans would pay more for goods. But that’s not all.

It would also cause interest rates to spike; mortgage rates to spike; inflation to spike; the dollar to go through the floor; and the stock market to go into chaos.

Essentially, we would be in very big trouble. But the Chinese would also suffer great losses. So they will be cautious and move incrementally.

But it means the US government can no longer count on China to finance its continued deficit spending. In other words, the jig is up

The Fed will now begin printing even more money—out of nothing, of course—because it has no other recourse. Our government has obligations and liabilities that it simply cannot meet in any other way for many years to come.

Regardless of what the Chinese do, the dollar is already falling, currency inflation is spiking, and interest rates will eventually follow.

You can count on significant tax increases, as well as cuts in benefits and services.

Siwei’s comments also suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

That should signal bullishness for gold and bearishness for the US Dollar.

Sunday, September 06, 2009

Inspector General: Financial Bailouts May Cost Taxpayers $23.7 Trillion

In July, Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program (TARP), reported that American taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies.

Barofsky was appointed by President Bush last November to represent the taxpayers and oversee the mammoth bailout of the nation's financial system. His role is to scrutinize how the money is spent, and root out graft, corruption, and the potential mismanagement of an absolutely massive amount of taxpayer money.

Last fall, Congress hastily approved the $700 billion TARP in what was deemed an emergency situation. But many legislators, and the public at large, were astonished by the sheer size of the government intervention.

Yet it was a mere fraction of all the public money that has been, and continues to be, used to rescue US banks, investment houses, and other financial institutions including AIG, one of the world's largest insurance companies.

The Federal Reserve alone doled out $6.8 trillion in aid. And Barofsky estimates additional massive government infusions including the following: $2.3 trillion in programs offered by the Federal Deposit Insurance Corporation; $7.4 trillion in TARP and other aid from the Treasury; and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs.

Taken as a whole, these various undertakings amount to a staggering sum total of $23.7 trillion, which US taxpayers will be responsible for. To put it in perspective, that is more than seven times the current federal budget.

So far, the Treasury has spent $441 billion of TARP funds and has allocated $202.1 billion more for other spending, according to Barofsky. That amounts to just over $643 billion, almost all the money originally authorized by Congress and approved by President Bush last fall.

However, in the eleven months since Congress authorized TARP, Treasury has created 12 programs involving funds that may reach almost $3 trillion, according to Barofsky.

Keeping track of it, and being sure that it is all appropriately spent, is a Herculean task. And it's all the more difficult when the agencies it is monitoring refuse to be cooperative.

Barofsky offered criticism in a quarterly report of Treasury’s implementation of TARP, saying the department has “repeatedly failed to adopt recommendations” needed to provide transparency and fulfill the administration’s goal to implement TARP “with the highest degree of accountability.”

As a result, taxpayers don’t know how TARP recipients are using the money or the value of the investments, he said in the report.

Friction between Barofsky and Treasury resulted in Congress complaining that the Obama Administration was trying to interfere with Barofsky's work. Treasury has fought Barofsky each step of the way, dragging its feet, or outright refusing, when his office requested documents.

In fact, Treasury went as far as asking the Justice Department if it actually had to fulfill Barofsky's requests, and if the inspector general's office was instead subject to the Treasury's authority.

Ultimately, last week the Treasury announced that it would not continue to challenge Barofsky and his watchdog agency.

But it shows that the Treasury is disinclined to transparency, scrutiny, and supervision. This begs an obvious question: what is it hiding?

Meanwhile, the Fed is fighting a proposed Congressional audit.

The central bank and the Treasury work in unison, like two perfectly aligned gears. Neither likes any authority— other than their own—and neither likes accountability. Having to answer the inquiries of the inspector general must feel like stooping to the dictatorial duo.

The disturbing reality is that a cavernous hole has been dug by elitist bankers and their enablers which the American people will never get out of. The taxpayers will be paying off these monumental debts in perpetuity.

A sum as large as $23.7 trillion is totally incomprehensible, and the grandest case of larceny in the history of the world has been perpetrated against the American people.

This heist, one of entirely historic proportions, amounts to nothing less than a coup de grace by the Fed and their banking brethren.

We are all now at their mercy.

Thursday, September 03, 2009

"Too Big to Fail" Should Mean Too Big To Exist

Fearing a systemic financial failure last year, the federal government pumped hundreds of billions into the US banking system.

America's biggest banks were deemed "too big to fail" and were buoyed with taxpayer dollars, even though the bankers had taken brazen risks that landed them in trouble in the first place.

The primacy of moral hazard was utterly ignored by our alleged government leaders.

Instead, the biggest, most irresponsible, most reckless banks were allowed to get even bigger.

According to a story in last Friday's Washington Post. JP Morgan Chase, Bank of America (partly government-owned due to the crisis) and Wells Fargo each now hold more than $1 of every $10 on deposit in this country.

This means that just three behemoth financial institutions now hold an aggregate of 30% of all US bank deposits.

What's more, according to federal data, those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards.

That clout and market share give them distinct advantages over their competitors.

New data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors falsely assume these large institutions have less risk of failing.

Large banks with more than $100 billion in assets are borrowing at interest rates 0.34 percentage points lower than the rest of the industry. Back in 2007, that advantage was only 0.08 percentage points, according to the FDIC. Such differences can cause huge variance in borrowing costs given the massive amount of money that flows through banks.

Does all of this sound like a dangerous monopoly to you? Does it seem that our once sacred anti-trust laws (the ones our government so famously used to break up the monopolistic giant Standard Oil) are plainly being violated?

If you said yes, we're in agreement.

The government is responsible for the arranged marriages of B of A / Merrill Lynch, JP Morgan Chase / Washington Mutual, and Wells Fargo / Wachovia. Most outrageously, the government also provided extraordinarily bountiful dowries too boot, amounting to billions of taxpayer dollars.

And it did all of this despite a blatant violation of existing US law.

JP Morgan Chase, B of A, and Wells Fargo were each allowed to hold more than 10 percent of the nation's deposits despite a rule barring just such a practice. Federal Reserve documents show that in several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice's antitrust guidelines typically allow.

It makes you wonder; what's the point of these laws?

Last October, when the Fed was arranging the merger of Wells Fargo and Wachovia, it identified seven metropolitan regions in which the combined company would either exceed the Justice Department's antitrust guidelines or hold more than a third of an area's deposits. Yet the merger was allowed to proceed anyway.

"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's "You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive."

"The oligopoly has tightened," he added.

Hooray for capitalism. Hooray for the rule of law.

Government Projects Grim Fiscal Outlook

The latest projections for both federal deficits and the national debt can be described as nothing but grim.

On August 25, the White House Office of Management and Budget and the nonpartisan Congressional Budget Office each predicted exploding federal deficits and mounting debt over the next decade.

Both project the budget deficit for this year swelling to a record of nearly $1.6 trillion.

The White House revised its projected budget deficit to be $2 Trillion higher over the next decade than its previous May estimate. It now foresees a cumulative $9 trillion deficit from 2010-2019.

However, congressional budget analysts put the 10-year figure at a lower $7.14 trillion.

Either way, the news paints a bleak picture of America’s deteriorating debt position.

“If you include the administration’s fiscal plans, this implies a deficit increase way in excess of $10 trillion over the next decade – the numbers are deeply alarming,” said Bill Gale, a senior economist at the Brookings Institution.

The difference in the two government estimates is due primarily to the CBO's assumption that all of the Bush tax cuts will expire as scheduled by 2011, as dictated by current law. Yet, the White House intends to maintain the tax cuts for families earning less than $250,000 a year.

Regardless, 10-year projections can be highly inaccurate; any number of foreign and domestic challenges could make actual deficit figures very different from the estimates.

Beyond the 10-year forecast, the nation will face the additional challenges of rising health care costs and an aging population, the CBO said. "The budget remains on an unsustainable path" over the long-term and will require some combination of lower spending and higher tax revenues, it said.

Both estimates envision the national debt nearly doubling over the next decade. As of August, the total national debt stood at a staggering $11.7 trillion.

Congressional Budget Office director Douglas Elmendorf said if Congress doesn't reduce deficits, interest rates will likely rise, hurting the economy. But, he said, if Congress acts too soon, the economic recovery – whenever it arrives – could be thwarted.

"We face perils in acting and perils in not acting," Elmendorf told reporters.

The White House said the economy would shrink by 2.8 percent this year, more than twice its previous 1.2 percent estimate. It also expects unemployment to pass 10 percent and stay higher than 8 percent until the end of 2011.

White House budget director Peter Orszag said the government will have to spend more on unemployment insurance and food stamps due to the extended recession.

According to Orszag, continuing stresses will increase the cost of the economic stimulus package – most of which will be spent in fiscal year 2010 – by tens of billions of dollars above the original $787 billion.