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The NY Times got cute last week in an article advising the Average Joe out there reading the headlines not to panic. They supposedly polled a panel of “financial experts” to advise us all on what to do when we learn the full magnitude of the financial black hole that has been opening beneath Wall Street the last 6 months. Their friendly guidance, as mirrored in the article headline was: “Resist the Impulse to Panic Over Finances.” We were told to sit fast, review our finances, consider our options and: “Don’t do anything rash based on what you see in the news.”
And what you might be hearing in the news is getting positively apocalyptic these days. Issues that have been discussed and written about for the last five years or more in intelligent Internet circles have finally penetrated the minds of main stream media reporters. The real “news” is actually managing to find column space in the papers and segments on the airwaves, pushing aside more weighty matters like the fate of Brittney Spears, lost girls on Aruba, Dog the Bounty Hunter, celebrity glitz, and the things that keep fluff news hosts like Nancy Grace on the air each night.
Listen to this nonsense from the NY Times article: “Don’t abandon the stock market,” said John C. Bogle, founder and former chief executive of the Vanguard Group. David B. Tysk, a private wealth adviser with Ameriprise Financial, said the recent financial upheaval might offer some opportunities. Too many people buy stocks when they are going up and sell when they are going down, he said….” By all means, let’s not buy the stocks before they go up, we might make money. And of course, one must hold on to our stocks while we watch them fall into oblivion, losing money week after week. What kind of advice is that?
Later Mr Tysk chipped in with this winner: “This is precisely the wrong time to move to safer options.” (So we should stay with the risky ones?) Given the momentous event of late March, when the Fed invoked 1930s Depression era clauses in its charter to broker a rescue of the insolvent Bear Stearns, one might get the idea that this is precisely the right time to move to safer options. Most people do not know just how perilous the Bear Stearns “incident” was. Think of it as the China Syndrome of finance. America’s 5th largest investment bank was leveraged up to their eyeballs in questionable securities. When banks leverage, they use a small fraction of their actual assets to “acquire” 10, 20 or 30 times as much in securities. Then they tell the public their assets are actually 30 times what they really have, presenting a false front of financial strength.(Try walking in to your bank with $1000 bucks as collateral to borrow $30,000 and see how far you get.)
One of the most shady and questionable “assets” banks leverage to acquire are called “derivatives,” so named because they derive their value from something else. In real terms, they have no value at all, and a great deal of speculation surrounds trading in this area. It turns out that much of Bear Stearns “wealth” was in fact made up of this phantom asset class. The UK Telegraph reported: “Bear Stearns had total positions of $13.4 trillion. This is greater than the US annual national income, or equal to a quarter of world GDP - at least in "notional" terms. The contracts were described as "swaps", "swaptions", "caps", "collars" and "floors". This heady edifice of new-fangled instruments was built on an asset base of $80bn at best.”
So what happened as March came in like a lion was that a single investment bank, inflated by over $13 trillion in phony baloney derivatives, nearly caused a pandemonium in the financial system. Why? Why not just let the Bear fall? Because every other financial institution of note is also leveraged heavily in this derivatives market, an exponentially expanding charade dreamed up by Wall Street MBAs that now exceeds $500 trillion. J.P. Morgan alone had $77 trillion in derivatives on its books before the deal. Now they “own” $90 trillion, a sum that exceeds the entire US Gross Domestic Product for the next eight years.
In effect, the traders are just dreaming up these things and trading them willy nilly, reaping enormous profits and avoiding equally enormous losses by crying to the Fed when things go bad. Stack up all real wealth in the world: real estate, gold, precious metals, diamonds and the like, and you don’t come close to a sum equaling $500 trillion. This is the extent of the great sham perpetrated in the financial markets from Greenspan on. It is now threatening to topple the entire edifice that created it, for as one asset class goes sour, and investors lose confidence in it, it topples to bring down others. By rescuing Bear Stearns, the Fed was desperately trying to slip in control rods to prevent a cascading runaway meltdown. Scott Thill of AlterNet has an even dimmer view of recent Fed actions: “not only bailing out obvious criminals, but also taking on their worthless debt as collateral. The move makes zero sense to anyone outside of those who understand the back channels of America's tangled financial networks, which are beginning to look more and more like Ponzi schemes by the minute.”
The coupons are also marked “completely transferable” allowing anyone to trade or re-sell them if they so desire…which is exactly what people do. As game time nears, evidence emerges that other people are printing their own coupons, and selling them in batches as well. People are trading the coupons in a kind of bartering market, and actually using them to buy other things. A guy goes into a store for new shoes and says, “well, I don’t have the $80 bucks for the shoes, but I’ll give you ten, hundred-dollar Yankee game coupons. The deal is made. Other people swap the coupons for gasoline, or the right to buy gasoline at some future date at a nice low price. The coupons you created have become a strange new currency, at work in an unregulated shadowy black market of intense speculation.
The insiders who dreamt up the scheme are pocketing real dollars on their coupon sales, and just exchanging printed paper that has no real worth at all. The coupons can only be redeemed if the Yankees win, so their perceived value is derived from something else, some event in the future that people are speculating on. As the game proceeds, and Jeeter hits a home run in the third, speculation increases. The demand for coupons gets a big push, and thousands are being sold and exchanged. By the ninth inning, with New York ahead 5-4 in a close game, no one really knows how many coupons are now in circulation. In actual fact, coupons worth several billion dollars are floating around out there, exceeding the accumulated wealth of the entire city of New York (and a few chunks of New Jersey as well), but the pool of real dollars that was established by their sale is only a few $1000 bucks. The coupons have changed hands so many times that no one knows who is holding the pool money now. Even if they did, that paltry sum could never hope to compensate even a fraction of the “winners.”
This is the derivatives market in a nut shell. People have simply agreed that these financial “instruments” have some kind of trade value. They have traded them for other futures contracts, swapped them for commodities, bonds, treasuries and any number of other deals. Therefore the value of all these other asset classes is heavily dependent on these derivatives being good, paying off, being redeemable for real cash some day.
Who pays off the losses if they fail? From whom do the counter speculators collect? Nobody knows. The original creator of the scheme has sold off all interest in the deal and moved on. (Or perhaps, like Alan Greenspan, he quietly retires and says he regrets nothing by creating the scheme). In fact, in a recent interview he claimed it was all done “very professionally.” Yes, by professional hucksters in suits. There is no reliable paper trail to track down the liability. The derivatives, like the coupons in the example above, are suddenly realized to be completely worthless. All the gasoline, groceries, shoes, clothing, services and dollars spent in exchanging them have simply been lost.
As the UK Telegraph explained it: “One side would suddenly be trapped with staggering losses on their books. Yet the winners would be unable to collect their prize from the insolvent bank (you) in the middle. It would take years to unravel all the claims in court. By then the financial landscape would be a scene of carnage.”
Speaking of the derivatives threat, Financial Sense.com stated: “This is a systemic threat, given the huge quantities of derivatives at play in the system; it is very likely that when the ‘daisy chain – domino style’ reaction is finally over, we will all look back and wonder how such a monster could have ever been created.”
This is what almost happened when Bear Stearns went down in March, but none of this was really reported to the Average Joe, who remained blissfully ignorant of the dire nature of the emergency. Average Joe was simply told not to panic, to keep his money in the market, not to buy stocks before they go up, not to sell them before they go down, and not to seek a safer option for his or her dwindling nest egg. Tisk, tisk, Mr. Tysk! The market we are exhorted to invest in by these “experts” has only lost a tad over 20% of its value in the last year or so. You can make a safe bet that more losses are on the way, in spite of the Bear rally that started off the second quarter on April Fools day. And the diminished dollars invested in stocks have also lost 20% of their value, so the net effect is a severe loss indeed. By contrast Euros appreciated dramatically, and gold, just $650 an ounce last year, recently topped the $1000 dollar mark.
As the crisis proceeds, the Fed is now trying to install new sweeping powers to control the markets. Bank balance sheets are spiraling down, and the massive effect of a derivatives collapse is the real finisher. So for the first time in history the Fed is accepting these questionable securities from banks as collateral against a loan. With one auction after another the Fed has been taking the trash onto its balance sheets and and giving the banks cash to bolster their flagging reserves. Now as much as 30% or more of the Fed balance sheet is basically worthless securities. That number will increase to 50% if this goes on much longer.
In desperation banks have pulled out every trick in the book to squeeze money from their customers, while putting on a happy face with new “customer service” policies in the process. BofA recently instituted a cute new policy that has every customer greeted by a bank representative as they enter the facility. A pleasant “good morning, and welcome to Bank of America,” is nice, but what about credit card rates that remain stuck in double digits as the Fed lowers interest rates month after month? Banks weep until they get Fed policies that help them, but seldom pass on the good news to Average Joe.
The NY Times recently reported: “The major reason we’re feeling so down now is that for working Americans the boom never did come back. Job creation in the post-2001 recovery was pathetic by Clinton-era standards; wages barely kept up with inflation. Instead, corporate profits and the incomes of a tiny elite surged — sucking up so much of the growth that only crumbs were left for everyone else.”
On March 28, Mike Shedlock outlined a typical case in point on his popular financial web blog “Global Economic Trend Analysis.” As option ARM resets begin to peak this April, Citigroup has been sending out letters to its loan customers telling them now is the time to refinance to a fixed rate. A Citi insider provided documents that presented an offer to a typical customer who had an existing rate of 6.03% (variable) with 328 payments of $2312 left on the loan. (Which comes to $758,336. to be paid to retire the loan). With LIBOR falling and Citi knowing that the Fed cuts will cause this ARM interest rate to go lower, the customer was told it was likely to go higher. Citi has used prevailing sentiment about ARM resets to plant this assumption, but it is simply not true. The clincher is that Citi offered this customer a fixed rate of 6.375% which would refinance the loan to 360 payments of $2,266. Do the math… 360 x $2266=$815,760. Citigroup just offered to fleece this customer and pocket $57,424 on the deal over the life of the loan. And to add insult to injury, they would tack on an additional $4,400 refinance fee, boosting their profit to $61,824. How nice of them. This is a typical example of how banks rip off Average Joe, day in and day out. Citigroup offered a monthly loan payment that was $46 dollars lower, which is all Joe saw, but the bank also added nearly three years to the term of the loan. They sold this refi deal to the customer using fear of a higher ARM reset as the closer. Now multiply this a hundred thousand times, a million times, and you see how profitable is was for Citigroup to print that sales letter. Can anyone spell FRAUD?
Credit card rates are not changing, and many are seeing their rates increase, even if they pay on time. The bogus Option ARMs home buyers were sold cannot be refinanced, of if they are, the customer gets a “gotcha” deal like the one Citigroup dreamt up. … Banks won’t talk to distressed homeowners unless they are several months in arrears. Banks won’t work out loans, manage short sells, negotiate. As their loans reset to higher payments, frantic homeowners call Suzi Orman and ask what they can do. Suzi gives Average Joe just two choices under the rules of the game: 1) file bankruptcy, or 2) shut up and pay. Forget that you won’t be able to put food on the table any longer, or drive your car.
But Suzi forgot option #3, one that Americans are increasingly availing themselves of: “Just Walk Away.” People just mail the bank the keys and move out, abandoning their toxic mortgage and leaving another empty, depreciating home as they go. At Washington Mutual, their AAA rated mortgage pool now shows a 25.3% 60 day delinquency rate, with 13.35% of the pool in foreclosure, and 4.44% REO (Real Estate Owned by the bank). All these folks will soon be facing the three options above. Some will knuckle under and pay, struggling to make ends meet. Some will try and file BK, but that game was rigged against them in the banks favor by Republican Senators in 2005. (Don’t you think these smart folks knew all this was coming? Of course they did.) The rest will just choose door number three, and walk away. Watch those REOs skyrocket in WaMu’s very best mortgage pool. No wonder they scrambled to bolster reserves by $7 billion recently, laying off another 1200 employees and firing their CEO.
I look at all of this in a daze at times. The Average Joe out there has no idea of the conniving shenanigans that go on at the banks. All he knows is that it is getting harder and harder to pay for food and gasoline, and increasingly, Joe is resorting to credit cards to pay for these simple necessities. Robert Sealander, Exec at Mastercard commented in a Bloomberg radio interview: “What we see is a mix change in how consumers are spending. With the price of gasoline up approximately 30 percent from where it was a year ago, with commodities prices up and working their way into prices at the supermarkets, consumers are spending more of their money now on gas and groceries.'' This is a reality Average Joe knows to be true. Milk is now over $8 per gallon! Bread is flirting with the $5 / loaf mark I predicted in earlier articles. Food prices, as tracked by the American Farm Bureau Federation, jumped 8.2% in the first three months of 2008, the latest surge in food prices that are up 75% now since 2005. In the last two weeks the price of rice has increased by 50% on world markets. Prices of other food commodities like corn soybeans, and wheat have also seen dramatic spikes. Increasing demand and commodities speculation are behind the hikes, along with a mysterious fungus infection killing off the whole wheat crop in Africa this year.
Average Joe is pressured from many fronts now. The LA Times reported: “It seems as if the cost of everything is outpacing people's pay these days. Gas, the rent, utility bills — and now food. This has resulted in significantly higher customer traffic at bakery thrift outlets, employees say, as well as a surge in people turning to food banks. "It's an alarming situation," said Michael Flood, chief executive of the Los Angeles Regional Food Bank, which distributes free groceries to about 600,000 people countywide...”
Salon reported: “A record number of Americans receiving food stamps. (Now over 28 million). Gas prices at an all-time high, and staples such as milk, eggs and bread costing a prettier penny every week. The average number of Americans filing for unemployment benefits reached its highest level in two years last week…” Yet I sit and watch the Wall Street pundits claim there is no recession and the market surge on news that Lehman Brothers had to raise capital by making a new stock offering. There is such a disconnect between Wall Street and Main Street! Salon noted that, in technical terms, we do not really see GDP numbers that spell recession, let alone the second great depression that has been in the news of late. We were growing at a 4.9% annual clip. Now the great ship of state is moving at only 0.6% growth…In short, the economy is dead in the water. This may not be a depression scale crisis yet, but Salon wisely pens the following:
“But we could get there. In fact, it would be all too easy. All we have to do is ignore what the markets and other economic indicators are telling us right now and continue down the disastrous path we've been merrily skipping along for the last 25 or so years. Want to see "The Great Depression: The Sequel"? Here's a handy three-step do-it-yourself action plan.
1. Continue to ignore growing income inequality and govern the United States for the benefit of the rich at the expense of the many. 2. Continue to whittle away at the safety nets that exist to cushion Americans from economic ill winds. 3. Continue to weaken government oversight of Wall Street.”
As we reported in 2005, the pressures on energy, food and other necessities are not going to abate, and will continue to soak up more and more of Average Joe’s income. London Times has finally gotten the message with this report: “However much you hope that the food crisis will go away, it's difficult to ignore this week's headlines warning us that the era of cheap food is over. But which of the staples in our shopping basket will be worst hit? The general picture is that most items will go up, some more significantly than others. With oil at $117 a barrel and rising, so are the costs rising of the three Fs of farming: feed, fuel and fertiliser.”
The result of these escalating costs for necessities is that spending for luxury or discretionary items will slow to a crawl. The San Francisco Chronicle recently reported on thing I have been proclaiming from my Internet soapbox for years, that the era of reckless consumer spending is now decidedly over in this country. They wrote: “It's a global shift that some are calling the Great Reckoning. For a generation, economists warned that Americans were living too large. With wallets crammed with credit cards and home-equity loans available to any homeowner who could sign his or her name, consumers went on a debt-fueled buying binge. Living rooms bulged with the latest in snazzy electronics and garages filled with shiny new cars and trucks. Restaurants were fully booked, and airlines whisked happy passengers to dream vacations around the world. Now, that shop-till-you-drop, I-want-it-all -and-I-want-it-now era may be coming to an end. It couldn't last because it was built on a mountain of money borrowed from overseas.”
The economy is already dead in the water…Will the nation share the fate of SS Titanic after striking the subprime mortgage iceberg? Let Average Joe decide. Will it be easier or more difficult to fill your gas tank and drive a car in the years ahead? Will food prices miraculously reverse their upward spiral and come down 75%? Will your mortgage suddenly reset to a lower payment? Will the heating and electric companies suddenly decide you need your rates reduced? If you get sick, will you get free medical care? Are Visa, Mastercard and the others going to suddenly lower your interest rates by 10 or 15 points, (like they hiked them in recent years)? Is your boss going to wake up tomorrow and tack on a nice 20% pay hike to your next check?
You get the point. The “recession” isn’t numbers in a spreadsheet, it is the daily struggle in real people’s lives. No matter what Bernanke does to save the big banks, the end result is that Average Joe still has to go out to the market each week and buy that loaf of bread or $8 gallon of milk. Average Joe has to pull up to the pump and shell out $60-$75 bucks to fill up the car before he can drive to the market. And Average Joe will have to do this indefinitely, because there is no alternative in place. There aren’t enough busses and subways to get people around, and there is no light rail to speak of in this country. We have chained our economy to the car, which is chained to Exxon Mobil and the other big oil companies. And it doesn’t take a genius to understand why Bush and Cheney, both oil industry guys, sent the US Army to Iraq in 2003. (Hint, it wasn’t to spread the same kind of “democracy” that got them into office in a jury rigged election in Florida, decided by hanging chad and the Supreme Court.)
And speaking of being chained to a car, a nifty new device is being installed in vehicles sold to “subprime” borrowers, (which will be just about all the Average Joes out there soon). The gimmick? It disables your vehicle if a payment is not made on time. Yahoo news reported: “A light on the plastic box flashes when a payment is due. If the payment isn't made and the resulting code punched in to reset the box, the vehicle won't start. The next step is a visit from the repo man.”
Banks get billions for their worthless securities at the Fed—Average Joe gets a box on his car to make sure he pays. Next year even the television signal will require a new box installed. The national rollout to an all (fully editable) digital signal is mandatory. Your analog TV won’t work any longer without the box, or you’ll just have to bite the bullet and go out to Circuit City to buy that flat screen digital TV every American must now own. What’s next? A debtor’s lock box installed on your front door? Miss a mortgage payment and the door won’t open? Will the cable companies be sending us reminders to pay our bills in the text crawling along the bottom of our digital screens? This is all starting to feel just a little like Winston Smith’s ordeal before the telescreen in Orwell’s classic 1984.
Can you spell revolution? I think it starts with an R. And if you think this a remote possibility, you aren’t a senior member of congress. The Wayne Madsen Report is circulating a story claiming: “WMR has learned from knowledgeable sources within the US financial community that an alarming confidential and limited distribution document is circulating among senior members of Congress and their senior staff members that is warning of a bleak future for the United States if it does not quickly get its financial house in order.” The bleak future is war with China over our bad national debt, or intense tax hikes to service this debt, and a revolution here at home.
Amazingly, no one in the media even begins to scratch the surface of another alternative—like changing the way we live in this country. We tell Detroit that they must design all cars with a minimum 50mpg and a target of 100mpg if we are going to continue with the three cars per family model. Better yet, we could change that model. We could build light rail and mass transit options, revitalize our river waterways and small coastal ports, decentralize our distribution to create local economies, and create jobs, jobs, jobs in the process. How’s that for the next “bubble” to get the economy moving again? We start building something new instead of trying to patch up and sustain the old, unsustainable way of life we have now in this country. Let’s begin.
Article by: John Schettler – April 1, 2008
Readers may be interested to follow the progression of this economic crisis in these articles as well: Food, Fuel & Freedom, Clueless, Fannie & Freddie, Stormfront, USSA
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