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Fed Up? Article By: John Schettler “I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.” – Woodrow Wilson, Regarding the creation of the Federal Reserve, which he supported at the behest of powerful bankers in 1913.
The bankers played the music, and Wall street danced. A whole assortment of clever “loan packages” were created to lever otherwise unqualified borrowers into homes. Loans were made without adequate documentation, with teaser rates that would reset to higher numbers in 18 months, with that amazing option to pay only the interest on the loan, leaving the principle completely untouched, (a de facto long term rental agreement masquerading as “home ownership.”) The men who devised these loan packages were not stupid. They knew exactly what they were doing, and the icing on the cake was the method they concocted to try and avoid any possible negative consequence of their actions. Is it any wonder that Thomas Jefferson said: “I believe that banking institutions are more dangerous to our liberties than standing armies.” People flocked to get their share of the low interest money pie, and a massive speculation began in the real estate business . The number of people in that industry literally doubled in five years to serve up the debt, as agents and brokers chased the commissions. Homes were sold, flipped and resold. Home Depot and Lowes made a killing on fixer-uppers. Prices began to skyrocket, with the hottest markets seeing dizzying appreciation in the value of homes. This is a fundamental flaw in so called “free markets.” There is no reason whatsoever why prices should have increased so dramatically. It’s as if you went into the market one day and found a loaf of bread had jumped from a dollar-fifty to over five dollars, when there was no bread shortage, in fact, a glut of bread on the market, plenty of product to satisfy demand. All the “housing boom” did was create massive debt through speculation, along with huge inventory of unsold houses. People raised prices because they could; because appraisers working for banks simply added “value” to existing homes at the stroke of a pen; because banks stood ready to loan for those inflated prices, and because the expectation of continued house appreciation prevailed, when anyone could see that the boom simply had to end in a bust. The short sightedness of people astounds me. By 2005, when I called the peak of the boom, anyone stupid enough to be buying a home was paying the highest price in decades, a price that was artificially inflated by pure greed and speculation, and all that easy money. But the game had another angle. As housing prices inflated, a vast pool of artificially created “equity” appeared from thin air. A house that was once valued at a modest $200,000 in 1998, suddenly shot up in appraised value to $500,000, creating an ephemeral pool of equity in the amount of $300,000. People were urged to go in and refinance, drawing out huge sums very real money based on this artificially created value in their home. They took second mortgages, equity loans and lines of credit. The banks wrote the paper night and day, pocketing commissions, fees, points, closing costs. The customers: not just subprime folks, but Mr. & Mrs Everywhere. Therefore the damage from this will cut across many economic income levels, right through the heart of prime middle class borrowers. In August of 2005 I wrote: “This economy is not running on real earned dollars, but on credit, from home equity loans and credit card companies. And credit based purchases are nothing more than massive, accumulating debt. The economy is roaring along. Everything is fine--just like things are fine on a train before it hits that ugly, jagged boulder that has fallen across the tracks. They are fine on a river right before you hit the falls. Well all of this apparent normalcy around us is a mirage.” Now that mirage has been seen for the great swindle it actually was. The debt that was foisted off on all these “homeowners” is now the greatest debt bubble in history, far exceeding the debt load the nation bore during the Great Depression. The banks doubled or tripled the price of houses, sold them all off to people who’s wages barely ticked up 5% a year, in effect doubling or tripling the amount of debt these folks were obligating themselves to pay. You all sat through the ads on TV: cadres of bald headed bankers in your sitting room, all waiting their turn to compete for your business, and frustrated brokers whining that they’ve “just lost another loan to DiTech.” What an amazing scam. People looked at the escalating “value” of homes and thought, as they always do, that it would always continue to go up. They never once thought about what would happen if the boom went bust—if the “value” of their home went down. My plaintive protest in 2005 was dead on: “But what happens when that market falls? When prices come tumbling down, all that imagined value in the houses will evaporate, taking the perceived wealth of millions of American and converting it quickly into more debilitating debt, higher interest and mortgage payments, and a cascade of defaults, foreclosures and bankruptcies.” And the bankers? They saw the handwriting on the wall long ago. As I said, these are not stupid men and women. They all have college degrees in finance, MBAs, healthy IQs. So they began finding clever ways of getting rid of the loans they made should they ever go bad. They packaged them up in CDOs, SIVs and other financial doublespeak, and sold them off to other banks, investors, insurance companies, hedge funds and the like. These institutions and investors relied on fraudulent ratings assuring them that this was grade A paper. In fact, as the loans began to reset from teaser rates to higher levels this year, and borrowers were unable to pay, the bad loans began to pile up like a train wreck. The securities and CDOs became all but worthless. And banks who leveraged their acquisitions of this stuff, putting forward $10 to “buy” $1000 in CDOs now carry massive liabilities as well. If these liabilities and “obligations” were actually put onto the bank balance sheet the institution would be deemed insolvent. So the accountants came up with a special category called “Level Three Assets” where they have hidden these liabilities masquerading as “assets” to keep them off the books. Nothing like the time honored trick of having two sets of books, eh? But money loaned out is money gone. In fact, it’s all your savings deposits, money market account balances and most of your checking account balances as well. Yup. You think the money you put into your bank is just safely sitting there waiting for you to use it. Wrong. All money in savings and money market accounts has been lent out—all of it. And banks started another little nifty trick in recent years—again, a brainchild of Greenspan. They initiated a practice called “Sweeps” where a computer program would sweep the deposits made to checking accounts and re-categorize them as savings. Since checking deposits are “demand accounts,” meaning that you can walk in and demand the money at any time, and write a check against it at any time, banks had to maintain reserves to meet that demand. But they cleverly analyzed that people rarely ever demanded the whole of their checking account balance, and so they came to think of the unused portion as a de facto “savings” account—and simply treated it as such, (without asking you anything about that.) Now that money has been lent out as well. Banks only carry enough real cash to cover perhaps 30% of the actual checking account balances they administer! Heaven forbid if there is ever a real crisis and people demanded their money—like they did at Countrywide and Northern Rock Bank recently. The money is just not there. And the vaunted FDIC only carries enough actual cash to “insure” a fraction of balances currently on the books—only 1%. A lot of people would suddenly be broke if banks had to really account for all their deposits. In actual fact—a lot of banks are already insolvent. Their liabilities exceed their assets by wide margins. Only financial sleight of hand keeps the system running. What Went Wrong? The wheels keep turning, generating nice fat interest profits, as long as the borrowers keep paying. But when the borrowers stop paying, all the bank has is a worthless lien, or an empty house—a pile of bricks and boards that is only really worth what a potential buyer will offer—and the buyers aren’t offering much these days. In time, the number of foreclosures became significant enough to add up to some real money. Banks realized they were still holding billions in bad loans, and quietly moved the liabilities off their accounting books into that column reserved for “Level Three Assets.” It was suddenly understood that the “Collateralized Debts” were being secured by an empty house that was now depreciating rapidly in value. Now the banks were holding property that they could not sell at anything near the amount of money they had loaned the borrower years ago. There was an inflated first mortgage loan along with one or two re-fis on top of it to be accounted for. The “buyer” took the refi money to Mervyns and Circuit City, and then defaulted, simply walking away from the house when the payments got too high. The bad loans became hot potatoes that were passed back and forth from one institution to another, hidden away by clever accounting tricks, packaged into fraudulently rated “securities.” (What a misnomer that is!) And the Fed sat idly by and watched all this as if they were too dumb to figure out what was going on. The boom went bust. The house that was financed at $500,000 in 2005, now began to plummet in value. In some markets prices have fallen 40%. Now the house is only “worth” $300,000 and the bank is holding a bad loan for a cool half million. Multiply this thousands of times, millions of times, and you get the “housing bust.” Two million more loans are scheduled to reset to higher interest rates, and higher payments, in the next 6 months. (The subprime Lt Green below). But this is just one of a series of great waves about to crash on the shores of our financial institutions. Credit Suisse offered this chart out to 2012, and look at the next great waves of potential trouble, optional adjustable rate loans and Alt-A paper. It affects some 20 million home loans yet to reset.
Look closely at the chart above. That was the ”big surprise” bankers had for the borrowers when they wrote the loans. Like a credit card that offers a low teaser rate and then resets above 20% interest, the pale sub-prime green and option adjustable gold in the chart above was what got all those bankers rubbing their hands together with glee. It represented the interest rate hikes they were going to pull off on the borrowers and, in effect, all the profit they were planning to make, locking borrowers in to much higher payments. The greatest percentage of this profit is taken by the bank in the first 7 years of the loan. But guess what: the borrowers did exactly what I said they would do when I first wrote about this in 2005- -they simply walked...and more will walk as times get tougher in the years ahead. They will have no other choice. Now all the planned “gotcha” interest rate hikes and hoped for profits have become massive liabilities for the banks holding the bad paper. The “system” has realized that the CDOs are worthless and they can no longer be refinanced and sold off to “secondary markets.” In short, there is no financial landfill out there now willing to take the trash. But the ticking time clock of loan resets to higher rates continues, triggering more defaults, foreclosures and empty, depreciating houses that will be owned by the banks and institutions that hold the paper. A huge percentage of these “resets” will soon expand out from sub -prime to alt-A credit borrowers and even loans originally categorized as “prime.” It is a mistake to think that the housing bust only affects the subprime borrower. The banks now have huge exposure, and they are desperately looking for a way out, not to help the hapless borrowers, but to help the bankers. They could have avoided this by offering fair, fixed rate loans in the first place, loans the borrower could afford and pay. Instead they choose to play the game of fees, points, and interest rate hikes, thinking they could cleverly hide the loans in a security. Now they want the Fed to help them find a way to prevent borrowers from walking away from these badly written loans. They want to find a way to strap the borrowers in for that sweet first 5 to 7 years when they make nearly all their interest on the deal. The crisis of 2007 may have started in the subprime green above, and it will continue to play out in 2008. It will involve all the exotic loan products realtors and banks created: adjustable rate mortgages (ARMs), Option ARMs or Pay option adjustable rate mortgages, Hybrid interest only adjustable rate mortgages, Negative Amortization Mortgages, where the borrower paid less than the normal amount of interest each month, and had the excess tacked on to the principal. There is now no market where these products can be refinanced, no bonds where they can be bundled and sold. It is bad enough that these junk mortgages were offered as legitimate products in the first place. Now that they have been seen as little more than toxic waste, the terrible realization that our entire financial system is now polluted is finally hitting home. The crisis of 2009 to 2011 will ripple through Alt-A and Prime loans as well, (the gold in the chart above), all customers who are used to getting financing whenever they want it, financing they use to keep the wheels of the economy turning with massive consumption. But the damage caused to the financial credit markets thus far has closed those credit venues down. Financing is getting difficult to obtain, and this simply must spill out into the “real” economy in a massive recession, or worse. The “Teaser Freezer” A deal is in the works to try and stop the foreclosures by freezing interest rates on these loans for, (guess what!) 5 to 7 years. This “Teaser Freezer” is a desperate attempt to paper over the gross incompetence and greed of the banks, where lax standards and near criminal underwriting methods in the interest of profits has created a blowback of immense proportions. They served up the bad loans to those least able to handle them. Now the defaults are biting their bottom line. Banks are holding liens of homes that are rapidly depreciating in value, so they want to chain the borrower to that hunk of lead for as long as possible. This is the “hope” the Bush administration holds out with its bailout program--the hope the damage to the banks can be forestalled as long as possible--until 2012. Buyers who took the loans on such unfavorable terms must also bear part of the blame, but in many cases they were hoodwinked, offered these shoddy loan products as an only option, when in truth the bank could have offered much more generous terms, but simply chose not to do so. The saddest thing about all of this is that it could have been avoided with a little integrity on the part of both buyers and lenders. Why is it that the people who will struggle most to make a high interest mortgage payment, the poor and middle class, get the worst possible terms and loan products, while the wealthier folks get the best? Most bankers would answer with something called “risk based pricing.” They charge more to higher risk borrowers...as if the overt sins of a sub-prime borrower who defaults on a loan or credit card balance could ever hope to measure up to the massive covert wrongdoing of the wealthy--who steal politely, with all sorts of clever accounting and investment schemes.
“As the “crisis” played out, the banks then tried to pass these shaky loans, almost certain to fail, on to another bank or insurance company in a “security.” Those they continued to hold, or purchased from other institutions were then hidden by accountants, like old boxes stowed away in the cellar. News of the massive losses was carefully controlled, until the CEOs of the big sub-prime lenders could offload their stock in “previously arranged sell orders.” Large finance houses cleverly saw the crash coming and began go to “short.” Making profit on the pain of others is something the men and women in suits do oh so very well. Kate Kelly of the Wall Street Journal reported that Goldman Sachs was serving up CDOs to its shareholders and investors like hot cakes earlier in the year, while at the same time, a small group of traders within the company were moving huge amounts of the firm’s money to go “short” on these same CDOs--in effect, they were betting the products they sold investors would tank. The firm netted $4 billion on the pain of others when the CDOs were found to be all but worthless. Lehman Brothers sold $8.6 billion in “AAA rated” bonds to the State of Florida, and the bonds went bad within 4 months. The firm was then “hired” to sort th emess out, all overseen by an “advisor” named Jeb Bush. Morgan Stanley just declared another 4th Quarter loss of $9.8 billion...then went begging to China for a $5 billion dollar loan to cover the next few weeks. The Chinese now hold nearly 10% of the firm’s stock! Investors took a big dividend cut, ten times worse than the “expectation” on the street. But you can bet the Christmas bonus checks will still be fat. The wealthy do things like this, and reap immense rewards. They tag us all with a FICO score to see how well we follow Suzi Orman’s advice. Try to get cute with your visa bills, perhaps using Discover card to pay Mastercard and the little guy gets slammed when the “system” catches on. Who’s tagging the wealthy? The lack of oversight and regulation has been a severe part of the problem from day one.” The Real Threat: Stagflation Well, there is nothing like two trillion in bad debt, a scheme gone bust, to make a banker suddenly get religion. Banks have so little in real cash assets now that they have been scrambling for money like pigs rooting out truffles. Credit has been tightening because, in spite of Fed and massive ECB cash infusions, there just isn’t enough liquidity in the system to keep lending. Banks can no longer package loans up and sell them off in securities. Result: they stop making loans. No one will touch these SIVs and CDOs now, because they are still trying to figure out whether the securities they already own are really worth anything. Citigroup had to sell nearly 5% of the company to a rich sheik in Dubai for a $7.6 billion loan at 11%. Wow… they gained short term liquidity to try and cover massive quarterly “writedowns,” but can only lend that money out at perhaps 6.5%. The system is now in severe jeopardy. The wheels have stopped turning. Oddly, the crisis at hand is hard to define. It has explosive threats in all directions. Rising energy costs have put upward pressure on many other core prices, so inflation is at work, the fever that often accompanies milder economic maladies like a “recession.” The weakening dollar contributes, as it loses purchasing power. Normally the Fed tightens money flows to curb inflation, through higher interest rates, but the finance markets are screaming for just the opposite--more liquidity. The situation seizing the credit markets looks a lot like the deflationary threat that caused the great depression of 1929. Look at this Wikepedia entry on deflation in light of what has been happening to the credit markets recently: Wikepedia: “In modern credit-based economies, a deflationary spiral may be caused by the (central bank) initiating higher interest rates (i.e., to 'control' inflation), thereby possibly popping an asset bubble or the collapse of a command economy which has been run at a higher level of production than it could actually support. In a credit-based economy, a fall in money supply leads to markedly less lending, with a further sharp fall in money supply (since debt is money), and a consequent sharp fall-off in demand for goods. Demand falls, and with the falling of demand, there is a fall in prices as a supply glut develops. This becomes a deflationary spiral when prices fall below the costs of financing production. Businesses, unable to make enough profit no matter how low they set prices, are then liquidated. Banks get assets which have fallen dramatically in value since the (mortgage) loan was made, and if they sell those assets, they further glut supply, which only exacerbates the situation. To slow or halt the deflationary spiral, banks will often withhold collecting on non-performing loans. This is often no more than a stop-gap measure, because they must then restrict credit, since they do not have money to lend, which further reduces demand, and so on.” That sounds eerily like the current credit crunch. The asset bubble was the housing boom, clearly running at a higher level of production than actual market conditions would have warranted, being driven by borrower speculation and lender greed instead of sound lending practices. The actions the Fed has been taking, easing interest rates and injecting funds into the system in conjunction with other world banks, seem to be more aimed at this lurking threat of a deflationary spiral than at the inflation threat that is all too evident in rising prices. Why? Because the Fed is working to save the banks, not the man on the street. The collateral for all those bank loans, (houses) is in a deflationary spiral as prices and house values drop month by month, equity erodes, and demand dries up. Hence we get the ominous warning by Greenspan that what we are really facing is “stagflation,” rising prices in the “real” economy while lending freezes up in a deflationary crisis of liquidity within the artificial “financial” economy. In short, the crisis we face is worse than that which caused the Great Depression, far worse, because each threat reinforces the other. Finally seeing the threat, all these high IQ MBAs in their pressed white shirts and expensive suits are looking to the “Fed” for sanctuary, (another misnomer, as the “Fed” is really a conglomeration of private banks who were given the authority to create and issue money in 1913 in a late December congressional vote, with most senators home for Christmas.) Richard Daughty of the Smith Consultant Group penned this remark about the Fed inspired crisis: “…the Fed continues to pump excess money and credit into the economy, as if the resultant 11% inflation in consumer prices is not inflicting enough damage … which is more than enough reason to rise up as an angry mob and storm the Federal Reserve in Washington DC to throw these incompetent preening weenies out into the street and into the hands of the people who are suffering the horrors of price inflation and economic death.” Who got hurt by the housing boom? The buyers who were offered these shoddy loans, the renters paying inflated rents, the depositors losing interest on their savings, the taxpayers paying inflated property taxes…in short, the poor and middle class Americans who were the collective patsies of this banking scheme. Along with the housing prices, all the other costs associated with home “ownership” began to skyrocket as well. And all this happened while the government was constantly shouting that our number one problem was “terrorism.” Now the banks want Paulson and the Fed to make sure someone else bears the pain. The borrowers were suckered once, so why not sucker them again? Writer Stan Goff had this to say about this strange misallocation of national focus and concern, the financial dog and pony show that has caused so much harm in this country these last years: “While suburbia has had its eyes fixed on threatening images of Arabs and Persians and Latinos and deepest, darkest African America, the same establishment that makes war and builds prisons and gazes into our lives has picked suburban pockets with one hand and gripped the 'burbs as loan sharks with the other.” Never one to pull her punches, Netizen Carolyn Baker described the activity perfectly: “Some sleight of hand the ruling elite have accomplished since 9/11, namely, that while Americans were pondering the color of the government's daily terrorist threat assessments, that government and its corporate cronies was taking them to the cleaners, picking their pockets, swindling, cheating, extorting, defrauding, hustling, ripping-off, double-dealing, conning, hornswoggling, hoodwinking, fudging , gouging, bamboozling, scamming, screwing, shafting, and let's not forget bilking the American middle and working classes . Hey, look over there-see Osama hiding under your bed? And while you look, we'll steal you deaf, dumb, and blind!” Who got fat? The bankers, agents, brokers, securities traders at Goldman Sachs, CEOs of the great finance houses who were perpetrating the scam. But the pleasure was to be short lived this time. Now that they have to own up to their shenanigans, they plead that the Fed must “ease” interest rates again so they can get back to business as usual. That won’t happen easily. Mike Whitney of Online Journal described the effect of the housing crisis this way: “It is the equivalent of a neutron bomb detonating in the heart of the financial district. Yes, everyone is still milling around with their caramel Macchiatos, clutching their Blackberries just like before. But the game is over. Trillions of dollars of market capitalization will be lost and some of the biggest names in banking will be carted off to the boneyard. It will be a miracle if the Fed's interest rate cuts are enough to keep the economy sputtering along while the losses are written down and the country recovers its footing.” How will the crisis continue to play out? With housing sales all but dead, foreclosures up, an 11 month supply of existing homes now on the market, prices eroding, equity evaporating, the banks now have another little problem on their hands. They issued loads of credit card debt on top of the bad home loans, all based on this ephemeral fantasy equity. Consumer credit is the next big crisis point, because consumers are simply maxed out. You will see this as credit balances fatten up even more when people try to play Santa this year. Retail sales are starting to trend down after a modest increase for Black Friday in November. ShopperTrak indicated that national sales fell -2.7% as we entered December, and were down -4.4% by the week ending Dec 8th. The trend is easy to see in the simple chart below. People just don’t have the money for Christmas this year. It has been eaten up by huge increases in the cost of fuel, heat, electricity, food and medical care.
This is the inevitable bust the Fed created with its boom time lax interest rate policies. I don’t know about you, but I’m simply “Fed-up” with all this nonsense. Mike Shedlock (aka “Mish”) had it perfectly right when he called for an abolishment of the Fed: “The Fed claims to seek "price stability" but idly stands by and lets bubbles expand to amazing proportions. Then after the bubble pops, all of a sudden the Fed claims to be concerned about "innocent bystanders." Let's be honest here. The Fed does really not care about those who were hurt. If it did, it would not have let the conditions that fostered this bubble brew as long as it did. The Fed is only concerned about a credit crunch that is affecting bank profits and bank's ability to lend. That unfortunately is the harsh reality…The only way to stop this cycle of bubble blowing is to abolish the Fed.” Abolish the Fed? Return authority to issue money to the congress where the constitution says it must reside? Back our money with something like gold? These statements are deemed to be heretical in this world of slick finance and centralized control of money. "Permit me to issue and control the money of a nation and I care not who writes its laws" said Maier Amschel Rothschild. The Rothchilds, along with Morgan, Lehman, Goldman, Sachs, and a few others were the founders of the great private banking conglomerate we now call the “Fed.” Yes, having complete control over money creation, distribution and interest rates is certainly a desirable thing—botching the job is quite another. Now no amount of Fed manipulation can save the system. Kenneth Dabkowski, Executive Director of The Arlington Institute weighs in with this frank assessment: “This is the kiss of death of a privately held Federal Reserve. For the Federal Reserve to function, its stakeholder banks (like JP Morgan Chase) must remain viable and liquid. When one of them, or any major bank in the U.S. (like Bank of America, Citibank, Wells Fargo, Bank of New York, Washington Mutual, etc.) is impaired or ceases to exist, the architecture of the Fed's capacity to respond to systemic challenges is unsustainable. If the banks have no money, they can't pump liquidity into the market. Taking half of a trillion dollars out of market in a single distressed write down becomes problematic. The US banking system does not have the liquidity to take the hit.” That about says it. The system is no longer in danger of failing. A crisis is not “impending.” We are, at this very moment, in the eye of the hurricane, and the interval of apparent normalcy will be short lived. The system has already failed, and it is collapsing in on itself because of the short sighted greed of the powerful men who created it. It is now only a matter of time before the back end of the storm blows away what remains of the illusion of the “American Way Of Life.” And the saddest thing of all is that Americans, the average Janes and Joes out there, are just not prepared for what is about to befall them. They can’t hide their debts in a column labeled “Level Three.” They can’t take a “charge off” or “writedown” when the bad times come, and go merrily about their business. The Fed won’t “inject” funds into their meager accounts, and nobody from Dubai will be sending them a check. Soon they will find that their last refuge, the credit card, will not be available. And that loaf of bread I talked about earlier? Perhaps it will cost all of five dollars soon—or even more. Are you prepared? Article By: |
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The markets have waited with breathlessly
for the murmured word of the Fed bankers as to what they will do with the massive crisis underway in the financial sector. When it came on
December 11th, a 25 basis point cut in both the discount and funds rate, the markets reacted... unenthusiastically, with a 295 point drop in the Dow, a 266 point drop in the NYSE, a 66
point drop in NASDAQ and a 38 point trim in the S&P 500. The dearest wish of the traders and stock brokers would be to simply roll back the hands of the clock to the days of cheap
money, and keep playing the game that created the biggest credit boom cycle in history. Alan Greenspan is clearly the architect of that low interest policy that was intended to rescue the
markets after the dot com bust and 9/11. By lowering interest to 1% the banks could lend it out at 6% and lock all that
interest money up for decades to come. And lend they did—to anyone with a pulse. The total outstanding mortgage debt in
this country is now $13.3 trillion—a number matching our total GDP. Just 7 years ago, that number stood at only $6.5
trillion. The housing boom doubled that debt, all on the backs of Mr. & Mrs “homeowner” who bought homes at wildly inflated prices. 
