America has given indications that it has reached its peak and is on a downward slope. The U.S. government has taken measures in the last 11 months that appear to be a desperate attempt to keep our dysfunctional corrupt financial system propped up.
The phrase “Jumped The Shark” comes from the 1977 episode of Happy Days where Fonzi jumps a shark on water skis. It was so far outside the 1950s nostalgia realm of the show that it marked the peak of the great sitcom. It was all downhill to its ultimate cancellation.
Have the extreme socialist schemes implemented by the President, Treasury, Federal Reserve, and Congress marked the climax of our great capitalist experiment? There is still time to get our Republic back on its original capitalist path, but time is running short. It will take straight talk from our leaders, intense political pressure from common citizens, politicians scared of losing their jobs, and Americans willing to change their ways and sacrifice for the good of the country.
DYING TO SPEND
Another media created consumer fraud called Black Friday has passed again. The media and retailers have created a false sense of necessity and urgency to drive sales on this particular day. Americans are so consumed with materialism on this day they are willing to trample an innocent man to death so they can get a deal on a flat screen TV. When did Americans turn into savages to the point where they will murder an innocent man in their desperate pursuit of a bargain at Wal-Mart? On the same day, two men shot each other to death in a Toys R Us after their women got into a fight. Why does anyone carry a gun when you go toy shopping? I guess you need some extra leverage to get an Elmo Live doll. Happy Holidays!!!
On Monday, the depressing stories of death were cast aside with the marvelous news that weekend sales were 3% higher than last year. The pundits on CNBC were thrilled that clueless Americans ignored the worst recession since the 1930’s by spending more money they don’t have, for things they don’t need, with credit cards charging 23% interest. Over 2 million people have lost their jobs this year, with another 3 million likely to lose their jobs next year. If ever there was a time to cut back and save, now is the time. But, the government and media are encouraging consumers to keep the spending ponzi scheme going for as long as possible. God bless us, everyone!
ARE WE SAVING THE RIGHT BANKS?
According to the FDIC, there were 8,384 banking institutions with $13.6 trillion of assets as of September 30, 2008. Hank Paulson has dished out $180 billion to the largest 30 banks in the country in an effort to keep them solvent. It has now become quite clear that the largest banks in the country, with the “smartest” MBAs, took excessive risk, created and then bought their own toxic derivatives, and lied to the public and their shareholders about their true financial position. So, we had about 8,000 banks that loaned money to people they knew in their local communities, kept the loans on their books and generally acted like George Bailey. A handful of large banks did all of the damage to our global financial system and these are the banks who are receiving all of the TARP billions. Maybe just maybe we should be giving the TARP money to the 8,000 conservative banks run by George Bailey type bankers rather than the horrible, too big to fail, banks run by Mr. Potter type bankers. Badly run banks need to be replaced by well run banks. Every time a bell rings, another bad banker gets a billion dollars. I see many Potterville’s in our future.
The honorable professor from Princeton, Federal Reserve Chairman Ben Bernanke, couldn’t have been any clearer in his November 21,2002 speech:
U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.
The U.S. dollar is a green piece of paper. The only thing that gives it any value is confidence and trust. Confidence and trust are the only thing that distinguishes a U.S. Buck from a Schrute Buck. The more that we print, the less valuable they become. The government certainly appears to be printing money and distributing it willy-nilly. In 2002, Mr. Bernanke honestly admitted he had no idea what the economic effects of injecting money into the system would be. I guess we will find out.
Following is a chart put together by Barry Ritholtz that details what the Federal Reserve and Treasury have accomplished in the last 10 months with your money. This hodgepodge of frantic programs has committed you, your children and grandchildren to a maximum of $8.5 trillion in bailouts for dreadfully run financial institutions. Our government officials have already dished out $3.1 trillion or $300 billion per month. It was only a year ago that President Bush submitted a budget that showed surpluses by 2012. Ho Ho Ho. That President Bush is a real card. He should have submitted that budget with a Mission Accomplished banner behind him. These programs have been rolled out non-stop during 2008 and the result has been a stock market that is down 37%. The Federal Reserve has been printing dollars in mass quantities. Famed investor Jim Rogers observed that, “Bernanke’s gonna keep printing money ’til they run out of trees”.
Columnist Robert Samuelson points out Mr. Bernanke’s dilemma in a recent column.
All this is a vast and daring monetary experiment, global in scope and fraught with hazards. The new money and credit issued by the Fed are created out of thin air. But too much money and credit might someday boomerang as higher inflation. Considering the consequences of being wrong, Bernanke faces an enormous intellectual challenge and no less an agonizing personal burden.
click to enlarge
When I take a gander at this chart I can’t help but hear Wagner’s Ride of the Valkyries playing in the background as Bernanke and Paulson fire up the Helicopters and prepared to drop dollars rather than napalm.
One helicopter won’t do when there is $8.5 trillion to drop. Colonel Kilgore explained why he was taking that particular beach with, “Charlie don’t surf”. Colonel Paulson could explain his latest bailout with, “Citi don’t lend”. If these efforts to revive our economy follow the plot of Apocalypse Now, it will end with Timothy Geithner gasping, “the horror, the horror”, when the hyperinflationary bust eventually brings our existing financial system down.
HAVE YOU LISTENED TO AN EXPERT LATELY?
Our great country was founded upon Trust; trust in our government leaders, trust in our commercial system, trust in our currency, and trust in each other. Without trust, a Republic will fail. A Republic is ruled by the people, not power hungry politicians, lifetime bureaucrats, or corporate interests. Our currency is imprinted with the words, “In God We Trust”. It is not imprinted with “In Ben We Trust” or “In Hank We Trust”.
Over time, trust in our government, financial leaders and corporate leaders has declined to the point where Americans cannot and should not trust anything they are told. It is essential that every citizen do their duty and skeptically assess everything they are told by politicians, bureaucrats and corporate CEOs. They will continue to speak authoritatively like they know exactly what will happen in the future. They are lying. None of these experts can even predict what will happen next week, let alone next year. If you don’t think my advice is applicable, just read what these “experts” have said in the last few years:
George W. Bush, Sept 2007:
The Federal government will not bail out lenders — because that would only make a recurrence of the problem more likely. And it is not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.
Christopher Dodd, Chair, Senate Banking Committee, Financial Post, July 12, 2008:
These institutions [Fannie and Freddie] are fundamentally sound and strong. There is no reason for the kind of [stock market] reaction we’re getting.
Phil Gramm, July 10, 2008:
Misery sells newspapers. Thank God the economy is not as bad as you read in the newspaper every day.
Barney Frank regarding Fannie & Freddie, 2005:
I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing.
Barney Frank regarding Fannie & Freddie, 2007:
I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.
Alan Greenspan, October 2004:
Improvements in lending practices driven by information technology have enabled lenders to reach out to households with previously unrecognized borrowing capacities.
Alan Greenspan, 2005:
There is a chance that housing prices could fall, but its effect on the economy will be limited.
Alan Greenspan, May 2005:
The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions .... Derivatives have permitted the unbundling of financial risks.
Alan Greenspan, October 1, 2006:
I suspect that we are coming to the end of the housing downturn, as applications for new mortgages, the most important series, have flattened out…I think that the worst of this may well be over.
Henry Paulson, January 2007:
The market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades.
Henry Paulson, April 20, 2007;
All the signs I look at show the housing market is at or near the bottom. The U.S. economy is very healthy and robust.
Henry Paulson, March 2, 2008:
I’m not interested in bailing out investors, lenders and speculators.
Ben Bernanke during Congressional Testimony March 2007:
At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
Ben Bernanke, May 5, 2007:
We will follow developments in the subprime market closely. However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.
Ben Bernanke, October 15, 2007:
It is not the responsibility of the Federal Reserve—nor would it be appropriate—to protect lenders and investors from the consequences of their financial decisions.
Timothy Geithner, May 15, 2007:
Changes in financial markets, including those that are the subject of your conference, have improved the efficiency of financial intermediation and improved our confidence in the ability of markets to absorb stress. In financial systems around the world, the capital positions of banks have improved and capital markets are becoming deeper and playing a larger role in financial intermediation. Financial innovation has improved the capacity to measure and manage risk. Risk is spread more broadly across countries and institutions.
Warren Buffett, on Bloomberg TV, May 3, 2008:
The worst is over.
Moody’s internal email:
Sometimes, we drink the kool-aid.
S&P internal email:
It could be structured by cows and we would rate it.
S&P internal memo:
Let’s hope we are all wealthy and retired by the time this house of cards falters.
MikeThomson, Financial Post, April 25, 2007:
Chairman Bernanke has succeeded; the economy has been positioned on a sustainable track for manageable expansion: A Goldilocks scenario that is neither too hot nor too cold.
Jim Cramer regarding Bear Stearns, June 22, 2007:
And I believe there will be NO FALLOUT whatsoever beyond the funds, despite the innate desire by so many people to rumor and panic the marketplace.
Jim Cramer, August 4, 2008 – market is down 28% since then:
I am indeed sticking my neck out right here, right now… declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15, and I think anyone out there who’s waiting for that low to be breached is in for a big disappointment and [they’re] missing a great deal of upside. My bottom call isn’t gutsy. I think it’s just a smart call that all the evidence points toward. Bye, bye bear market. Say hello to the bull and don’t let the door hit you on the way out.
Ben Stein, August 13, 2007 – market down 40% since then:
The stock market is cheap on a price-earnings basis, profits are fabulous, both here and abroad, stocks are a lovely place to be. I have no idea what the S&P will be ten days from now, but I am confident it will be a lot higher ten years from now, and for most Americans, that's what we need to think about. The subprime and private equity and hedge fund dogs may bark, but the stock market caravan moves on.
Ben Stein, January 27, 2008;
The losses in the stock market since the highs of October 2007 are about 14 percent. This predicts — very roughly — a fall in corporate profits of roughly 14 percent. Yet there has never been a decline of quite that size for even one year in the postwar United States, and never more than two years of declining profits before they regained their previous peak.
Stanley O’Neal, former CEO of Merrill Lynch, January 2007:
We finished the year positioned better than ever to capitalize on the array of opportunities still emerging around the world as a result of what we believe are fundamental and long-term changes in how the global economy and capital markets are developing.
John Thain, another former CEO of Merrill Lynch, April 8, 2008:
We deliberately raised more capital than we lost last year ... we believe that will allow us to not have to go back to the equity market in the foreseeable future.
Charles Prince, former CEO of Citigroup, July 2007:
When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.
Angelo Mozilo, former CEO of Countrywide Financial, July 2007 after he sold $138 million of stock:
But as I do reflect on it, and I do a lot, that nobody saw this coming. S&P and Moody's didn't see it coming, but they simply just downgrade bonds, they don't take hits. Bear Stearns certainly didn't see it coming. Merrill Lynch didn't see it coming. Nobody saw this coming.
KenThompson, former CEO of Wachovia, October 2007:
I’m confident our company is in the right businesses for the long term and that our strategy of being in high growth businesses and markets, our laser focus on customer service, our expense discipline, and our commitment to strong credit risk management, will create value for our shareholders in the future.
The lesson that must be learned is that you cannot trust anything “experts” tell you. They are looking out for their own best interests, not yours. For the last two weeks I’ve watched “experts” conclude that the U.S. automakers must be saved and a stimulus package of at least $700 billion is needed to save America.
The same experts that told us everything was fine a year ago are now telling us we must spend at least $700 billion to save our economy. Why should we believe them now? Our country, our banks, our consumers, and our corporations are extremely overleveraged. We cannot stimulate ourselves out of this over leveraged situation. The debt must be paid off, and it cannot be done without much pain and sacrifice. Stimulus is just another name for more leverage.
President elect Obama says that we can’t worry about the short term impact on the deficit. When was the last time that government worried about the short-term, medium term, or long-term impact of their actions on deficits? That is why our National Debt is $10.6 trillion and we have $53 trillion of unfunded liabilities. When this crisis subsides, the government will not recapture the stimulus spending and pay down our National Debt. There will be another crisis that “must” be addressed.
SHOES FALLING EVERYWHERE
And what we have now is more dissaving, where you have got a spike in credit card usage because consumers are trying to keep up their level of consumption, when they should be reducing it and saving. So, Mr. Market is going to have to kick their teeth down their throat to change their behavior.
Colossal amounts of credit card debt and auto loans will be defaulting in 2009. Consumers currently owe $2.6 trillion of consumer debt, up from $2.1 trillion in 2004, or a 24% increase. $976 billion of this debt is revolving. This amounts to approximately $9,000 per household. According to a recent article in BusinessWeek Magazine Innovest projected that credit card write-offs would reach $41 billion in 2008 and $96 billion in 2009. This was before the recent upsurge in unemployment. With 3 million more job losses in 2009, the credit card losses will be much greater than $100 billion. JP Morgan, Bank of America, and Citigroup will sidle up to the taxpayer trough again due to these unforeseen losses. With their proven risk management models, these banks have managed to loan 30% of these funds to subprime borrowers. This is much higher than the 11% of subprime mortgage borrowers. This will surely end well.
Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders. About 30% of the loans that are originated by banks, and 100% of those issued by automaker financiers, are, like mortgages, repackaged and sold as securities, according to the Consumer Bankers Assn. Most lenders offer financing on 100% or even 125% of the sticker price, and some offer the most credit-worthy buyers loans for twice the value of the vehicle they’re purchasing. The average amount financed for new cars reached 99%, according to the Consumer Bankers Assn., up from 95% in 2005. With the average length of auto loans exceeding 5 years and the tremendous downturn in demand, there are millions of consumers underwater with their car loans. Rising home equity and easy credit are history. Losses on auto loans will soar in 2009. If there are public companies that make money by repossessing cars, their stocks should soar in 2009.
It is quite clear that consumers are collapsing. The toxic combination of reduced spending and mass layoffs will bring down the last remaining pillar of the economy, commercial real estate. According to the Wall Street Journal,
Commercial real-estate loans, including commercial mortgage-backed securities and collateralized debt obligations, total $3.7 trillion. It is only a slow burn right now: Many of those CMBS and CDOs mature in 2010 and 2011, leading Barrack to predict a “refinancing crisis” in the next three years–and with buyers drying up, egress will be difficult. “The overriding problem for all refinancing issues is that sale is not a viable option. Who stands to hurt the most? The list starts with the biggest holders of the loans, which include insurance companies, hedge funds and banks, specifically regional banks.
After the coming horrific holiday sales, weak heavily indebted retailers will be filing for bankruptcy en mass. Mall owners that had expanded hastily with generous amounts of debt in the last few years will see rents dry up and their debt payments will choke them to death. Vacant strip malls and ghost town regional malls will dot the landscape. With 2 million job losses this year and likely 3 million more in 2009, the need for office space is declining rapidly. Office occupancy will decline and rental income will tank. There are over $700 billion of commercial back mortgage securities outstanding. Banks have done their usual magic and sliced and diced junk into AAA rated securities. I’m sure there won’t be further implications to our banking system.
There are $50 trillion of credit default swaps still outstanding. The hundreds of billions in taxpayer funds that have been poured into AIG have been used to pay out CDSs. According to the brilliant bank analyst, Chris Whalen, at least $15 trillion of these CDSs will need to be paid out. All the Central Banks in the world cannot create that much paper out of thin air. He insists that the government needs to let AIG go bankrupt and get our system functioning correctly:
President-elect Obama and the American people have a choice: embrace financial sanity and safety and soundness by deflating the last, biggest speculative bubble using the time-tested mechanism of insolvency. Or we can muddle along for the next decade or more, using the Paulson/Geithner model of financial rescue for the AIG CDS Ponzi scheme and embrace the Japanese model of economic stagnation.
CAPITALISM WITHOUT LOSS IS LIKE RELIGION WITHOUT HELL
There has been much chatter about John Maynard Keynes in the last six months. Stimulus packages are based on his concept of the government stepping in as the spender of last resort when demand evaporates. I prefer to focus on these wise words of Mr. Keynes and another astute man of the Depression era.
John Maynard Keynes:
What a Government spends the public pay for. There is no such thing as an uncovered deficit.
Politics is the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies.
There is an overwhelming consensus that government must do something to save us. Whenever I see Republicans, Democrats, supply-siders, and Keynesians all agree about something, I know it will be a calamity. Haven’t they done enough already. Based on the chart below, they have committed our grandchildren to spending more than all the major initiatives in the history of our country.
Our country is now permitting government leaders to pick the winners in our economic system. Their history of picking winners is not comforting. Government chose ethanol as the winner in the alternative fuels business. It requires more than a gallon of fuel to produce a gallon of ethanol. The windfall profits for farmers gave them incentive to grow only corn. This led to rising prices for other commodities, higher feed costs which led to higher meat costs, and a frenzy of ethanol plant construction. Now that oil is $43 per barrel, ethanol makes no financial sense. Ethanol plants are closing by the hundreds. The government is now selecting which banks will survive and which will fail. They are practicing protectionism by pouring at least $15 billion into failing American carmakers, at the expense of Honda, Toyota, and Nissan. These three companies employ hundreds of thousands of Americans, make better cars, and are profitable. We are punishing them for running their companies well. Jim Rogers again hits the nail on the head. “They’re taking the assets away from the competent people, giving them to the incompetent people and saying to the incompetent: ‘OK, now you can compete with the competent people, with their money.’ I mean, this is terrible economics.”
The FDIC has been pushing for modification of loans to stop mortgage foreclosures. The latest data shows that 50% of all the homeowners that received modified mortgages are in default again. People that cannot make their mortgage payment must be foreclosed upon. They should become a renter. If the government uses TARP money to delay foreclosures, the housing market will not recover for a decade. Ten percent of all homeowners in the country are either in foreclosure or in default on their mortgages. Letting foreclosures run their course will contribute to lowering prices and will lead people to buy homes again. The twisted form of capitalism we are currently practicing is summed up by Winston Churchill, “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” The bankers on Wall Street received the blessings of millions in compensation, and the taxpayers are experiencing the misery of bailing their companies out.
RISE AND FALL OF ROMAN EMPIRE – CRITICAL CROSSROADS
Marcus Tullius Cicero 106 BC to 43 BC:
The budget should be balanced. Public debt should be reduced. The arrogance of officialdom should be tempered, and assistance to foreign lands should be curtailed, lest Rome become bankrupt.
Even Rome had politicians with some common sense. Decisions we make in the next decade will determine whether the American Republic follows the path of the Roman Empire or can reverse course and fulfill the noble dream of our Founding Fathers. Thomas Jefferson and George Washington foresaw the hazards ahead.
Yes, we did produce a near-perfect republic. But will they keep it? Or will they, in the enjoyment of plenty, lose the memory of freedom? Material abundance without character is the path of destruction.
I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.
George Washington, Farewell Address, September 17, 1796:
As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible.
Our country was founded upon the principles of freedom, responsibility, and opportunity to succeed or fail. Government was supposed to play a limited role in our lives. Government’s function was to defend against foreign invaders, provide basic services, enforce the laws, and maintain the public infrastructure of the country. Over time government has incessantly intervened in the economic system and by successive steps has moved the country toward socialism. Millions of Americans are now totally dependent upon handouts from the government. This policy of government expansion through the use of credit at the expense of taxpayers is detrimental to the rest of society. Interventionist wars, undeclared by Congress, and maintaining military bases in 117 countries were not envisioned by the Founding Fathers. The more we consent to government intervening in our lives, the more freedom that we lose. We are now experiencing the utmost intervention by government in our 222 year history.
We are in the midst of a major recession. A $700 billion stimulus package will not eliminate our debt and will not make the recession shorter. It will be a pork filled waste of taxpayer money, but it will be spent. The 156,000 structurally deficient bridges, miles of crumbling water pipes, and antiquated power grid should be the focus of any infrastructure spending. With the millions of unemployed, funds should be set aside to keep people from being forced onto the streets. We should focus our efforts on the poorest and least able to make it through this recession. These efforts should be funded by reducing our global military empire. Propping up failing companies and artificially keeping home prices from declining to their natural level will be a miserable failure and will lead to economic stagnation for at least a decade. David Walker throws down the gauntlet and we must face up to his challenge.
We must learn the lessons of history. The Roman Republic was the longest-standing republic in the history of mankind. The Roman Empire lasted over a thousand years. There were many people that said Rome was too big to fail. I am sure that most of the citizens of the Roman Empire felt that way. The simple facts of the matter are that Rome fell for at least four reasons, and please listen carefully. A decline in moral values and political civility at home; an overconfident and overextended military; fiscal irresponsibility by the central government; and an inability to control one’s borders. Does that sound familiar? It’s time to wake up, study history, learn from it, and take steps to make sure that we are the first republic to stand the test of time.
It ultimately comes down to courage. The reason I always fall back on the wisdom of Thomas Jefferson, Samuel Adams, George Washington, and John Adams is because they showed true courage in shaping this great Republic. If they had failed, they would have been hung as traitors by the British. It takes no courage to vote for a $700 billion bailout package or a $700 billion stimulus package. Barney Frank and Chris Dodd are not Thomas Jefferson and John Adams. If our leaders do not have the courage to do what is morally right for future generations, we will have to put in place a structure that forces them to appear courageous. Some ideas are:
- Put back into place the spending limits that worked so well during the Clinton administration. Any increase in spending must be offset by a cut somewhere else or an increase in revenue. Congressmen could then fall back on this as their excuse to not push for frivolous initiatives demanded by their constituents.
- Create a bi-partisan commission that will have the authority to create solutions for our $53 trillion unfunded liability problem. Congress could not tinker with the recommendations. They would need to make a yes or no vote on the entire package.
- Limit all citizens to six years of public service as elected officials for their country. They would do what was right for their country and then go back to their regular occupation. Stewardship of our country rather than a lifelong career would be their purpose.
If we kick the can down the road for another decade, it will be too late to reverse course. The choice is ours - decline or redemption.