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Main Street to Wall Street...Calm down and go home.
With all the dramatic news
of the last two weeks the nation has been on edge…at least those in the nation who read, because the news has been uniformly bad. About 100 days after Bush takes office we get treated to 9/11. Now about 100 days before he leaves office, we get treated to this--instead of collapsing concrete and precisely cut steel in a smoldering heap on Manhattan, now the collapse is a virtual one--securities and derivatives all neatly collapsing into their footprints like the World Trade Center. President Bush gave a rare crisis speech Sept 25th saying “without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold.” He warned that the banks wouldn’t lend anymore. Heaven forbid! The banks want us to absorb all their losses, and if we don’t, they just won’t lend any more. Odd how a voluntary choice made by a bank now poses such a dire threat and requires that we absorb all that bank’s irresponsible losses. Solution: stop with the panic, then start lending--responsibly.
But no...the banks have voluntarily frozen their own credit markets in lock-step fear and mistrust. This was their choice, just as the disastrous lending before this was their choice. Now we have to spend $700 billion so that they’ll trust one another again and start lending?
Economist David Levine agrees: “I suspect that part of what we're seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who
stand to benefit from the bailout.” They can fix their LIBOR spreads and unclog their credit pipelines as easily as the oil companies can restart a refinery and get fuel moving to the Southeast again if they
wish. They simply choose not to, and so now congress has to hem and ha and say how much they regret their vote to pay for all the bad debt with our taxes. For us, of course. They were all talking about
teachers and small businesses, and students and poor homeowners--who will still not see a dime after the bill passes. The banks won’t lend to anyone but the Angel Gabriel now. Don’t think the $700
billion will change that one bit.
Well, if they want to persist I say we call their bluff. Go ahead Mr. Banker, stop lending. Let’s see how long you can hold your breath, because that’s how you make your
money, isn’t it? By lending out the deposits we give you—our money. Go ahead and panic my disturbed little Rich Dads. We all know the game is over, and insolvency is your middle name. It was something you engineered from the every first, foolishly thinking you could escape the consequences of your actions. Time to take your medicine now. You can go the way of Bear Stearns, and Lehman Brothers, Fannie, Freddie, AIG, IndeMac, WaMu and Wachovia if you choose. We’ll stop by and pick up our money before you close up shop. And somehow, we’ll get by without you. Or you can get back to work in the service of this nation, and stop with the “I’m not lending until I get my money” panic thing. In fact, I’ve got a better plan... Let’s give each of the 150 million families in the US a nice fat “stimulus” check of $10,000. That’s about what the bailout would buy...and they could pay off all their credit card debt. How nice. Then the banks would lose their most profitable line of business-- interest on credit card debt.
 The image of all these Wall Street
investors, traders, bonds magicians in a panic is not too hard to conjure up. A normal day in any trading pit looks like a controlled panic all the time. Last week a beleaguered trader admitted we
were 500 trades from oblivion. There were $500 billion in sell orders with no buyers in sight. The Fed “injected” over $620 billion more into the failing system, according to Bloomberg.com.
Banks lined up at the short term Fed auction windows and soaked up an average of $184 billion per day that week. A “bailout” of another sort was quietly going on beneath the hullabaloo
of congressional wrangling. Where was this money coming from?...Currency swaps from foreign central banks. Good old M3, and the rest was undoubtedly just printed. But realize this is an amount equal to all currency now circulating in the United States! What will this do to the value of
our dollars? The corporations and banks receiving the cash now will be using it at today’s dollar value. They get the most bang for the buck. As it begins to circulate and “trickle down” it slowly
dilutes in value. By the time it reaches the pocket of a Poor Dad on Main Street, is is worth considerably less. As usual, the Rich Dad’s reap the greatest benefit by getting the money before
this immense sum dilutes our dollar’s buying power. The Poor Dads get the table scraps. Has it ever been otherwise?
In the short run, however, the banks will just sit on their bailout cash. Don’t expect a gush of new
lending. So deflation in the credit markets will not be solved by this bailout bill, because deflation is a voluntary choice being made by the banks now--it’s a behavior, (hoarding), just like the
extreme opposite behavior (irresponsible lending) that created the mess. The crisis is entirely the doing of the banks, at both ends, boom and bust.
What will the bailout do? it will ride to the rescue of bank balance sheets, both foreign and
domestic. The language presently allows the Treasury to buy their troubled assets attached to US housing securities as well. This is why European leaders were lined up behind the bill, not to
mention the Chinese. The issue has exposed the vast gulf between the world of the wealthy and the rest of us. The notion that any of this is for the benefit of Main Street is pure fallacy. Mike
Whitney put his finger on the truth this way: “Once the banksters have offloaded their fraudulent securities and crappy paper on Uncle Sam, they will do whatever they need to do pad the bottom
line and drive their stocks up. That means they will shovel capital into hard assets, foreign currencies, gold, interest rate swaps, carry trade swindles, and Swiss bank accounts. The notion
that they will re-capitalize so they can provide loans to US consumers and businesses is just a pipedream.” The ‘powers that be’ are desperately fighting to keep their game alive, and fear and
panic are useful tools in that campaign.
On Monday, September 29th as the “bailout” plan started debate in congress, and then failed to pass the House by a margin of 228-205, the DOW was off 777 points at the close, and markets
sold off across the globe as the world awaited news on the “bailout bill.” Look at the “panic” that day on Wall Street, the greatest single day decline in history.
And just to show you that this was all nothing more than a fear based tantrum, the markets surged
up the very next day, with the DOW up 485. The beat goes on. The bankers have tied off their purse strings and refused to lend until they get their bailout. Congress will argue about it, then
cave in and give them what they want. The Senate complied with a 72-24 vote on Oct 1st.
The partisan squabbling and finger pointing was obvious on the hill again. The Republicans claimed
a partisan speech by House Speaker Nancy Pelosi given 15 minutes before the vote soured the issue for 133 Republicans. What could she have said to do that? Pelosi did the unforgivable... she
got up on the house floor and told the truth about how we got here, about the incompetence and failed policies of Bush, who inherited a budget surplus and ran up the greatest debt in history. The
Republicans didn't like it, and they voted down the proposal. They were also joined 95 Democrats. It remained to be seen as to whether this was just a head fake by the House with a second ballot
planned on Thursday that would eventually pass the bill. House Speaker Nancy Pelosi said: “What happened today will not stand,” and hinted that the bill would eventually pass. But let’s give credit
where credit is due here, House Republicans voted Nay by a 2 to 1 margin, while Democrats favored the bill by a slight margin. There was a lot of talk about this bill benefiting beleaguered
middle class homeowners, but it seems the Republicans have finally realized they believe in Free Markets instead of socialized government intervention on that score. What an astonishing turnabout for them!
Michael Moore’s take on this is that it was their one and only chance to distance themselves from
Bush before the election that could soon cost them their seat... “Watching C-Span yesterday morning was one of the best comedy shows I'd seen in ages. There they were, one Republican
after another who had backed the war and sunk the country into record debt, who had voted to kill every regulation that would have kept Wall Street in check -- there they were, now crying foul and
standing up for the little guy! One after another, they stood at the microphone on the House floor and threw Bush under the bus...it was a sight to behold.”
But their fearless leader, President Bush, was “saddened” by the news. The initial grab for treasury
loot to save failing private corporations has failed. Now the President was talking about a real panic, one where that 1% out there in the stratosphere of the super wealthy decide they don’t like the
projected returns and start yanking their money out of bonds, CDs, money market accounts. $16.9 billion was yanked out of Washington Mutual in the last 10 days, forcing the bank to finally give
up the ghost and sell off to JP Morgan Chase for ten cents on the dollar. Citigroup and Well Fargo got into a dog fight over Wachovia days later. We’ve seen huge swings in the money markets the
last few weeks, with money fleeing bonds into gold and oil futures, then coming back again in the never ending game of chasing the highest return for the smallest risk.
The Rich Dads are all in a dither! Instead of telling someone to make a few keystrokes on a computer and earning tens of millions of dollars in a few minutes, the unthinkable might
occur—they might even lose money in the amazingly over bloated, over leveraged trading schemes they created. No one on Main Street had anything to do with the Great Game that has
been underway these last ten years, other than being set up as the initial patsy. Most Poor Dads don’t even know what “leverage” means. Nope. This was all the doing of the Rich Dads, and now
their game has gone bust.
Why?
If you listened to the President explain it, he described how the Poor Dads took out loans they
couldn’t afford, forgetting to mention the Rich Dads who devised and wrote those loans, right down to clever instruments where each payment made by the borrower somehow ended up adding to the
amount owed! The Rich Dads were those responsible for prudence in lending, what we got instead was a game of leveraged greed. And the President forgot to mention the regulators who let the
Rich Dads do all this, making bets at 30-1 odds, 80-1 odds, creating derivatives out of thin air, all secured by the same mortgage paper. Try to track down the owner of a single mortgage today and
you will find it is somehow attached to twenty or thirty separate bonds, all falsely rated by complicit ratings agencies; all the busy little work of the Rich Dad’s while we’re out here actually working for a living.
The products the bankers created were all cleverly designed to tease in the little guy, and then
explode like an IED a few years later. They both knew and anticipated the wave of defaults that began the problem, but they thought they had eliminated the risk by selling the loans off in bogus
“securities.” The bad mortgages didn’t bring us to the edge of this abyss. It was the shady game of leveraged bonds, securities and derivatives sitting on top of them that has created the so called
“panic” out there. People are taking their chips and leaving the table. That’s what drains the blood
from the traders’ faces now, and why the President and Secretary Paulson want us to buy all the Rich Dads back into the game with a nice $700 billion tax hike.
The first deception was rigging the loan in the first place, and designing it to explode. Then the second “imprudent act” was to sell it as a security to some other Rich Dad, or insurance company
, or municipality, or pension fund, or the Chinese. But the real fun was only starting. The Rich Dads took that single home loan for $300,000 and somehow managed to use it as collateral to
create, $9 billion in derivatives, a sum thirty times greater than the value of the loan itself! Multiply that millions of times and we get the crisis we are now faced with, where hundreds of trillions in
derivatives, bonds and other securities sit on a collateral base of a hundred billion in mortgage loans--an average of at least $9 billion in Rich Dad bets on every single loan. Imagine that
immense sum of $9 billion in fantasy securities now resting on the back of one little Poor Dad, a waiter in Pacoima, all stacked up like dishes on a platter. He makes $2500/ month before taxes,
(though he lied and said he made $3000 because of those under the table tips. So the Rich Dads winked, nodded, smiled and wrote the loan, handing over $300K of money from their depositors.
Bingo! A new “homeowner” was created, and with him a massive $9 billion dollar ponzi scheme shell game soon followed.
Surprise, surprise!
Two or three years later the loan payment nearly doubled, just like the Rich Dads planned it, and our Poor Dad from Pacoima started to fall behind on his bills. He was
supposed to be able to refi at this point, but there were too many like him in the same position. The housing market slump killed that idea—no refi, and no quick sale either. So instead of re
-shoeing their horse, working with the borrower to give him a fair and manageable mortgage, the bakers just dug in the spurs. They penalized, and FICO slammed and foreclosed until their Poor
Dad donkey was dead and gone, unable to sign for a library card with his new credit rating, and a homeowner no more. Talk about biting the hand that feeds you!
Now all those bogus securities the Rich Dads made up out of thin air were not collateralized by anything at all! They were worthless. In fact, they were always worthless, because their value
rested simply on the nice little gentlemen’s agreement made between one Rich Dad and another, and honor among thieves is thin indeed. So once the bad mortgages began to stack up on bank
balance sheets, the Rich Dads saw galactic sized chunks of their massively leveraged bond “investments” simply evaporating into dark matter. And that’s when they started to panic. Once it
became obvious that the securities were now backed by a foreclosed, depreciating asset, the Rich Dad’s thought they had better dump the securities they still held—but this time they found no
buyers. The fly was certainly dead, but the spiders were caught in their own web as well.
Without that “gentlemen’s agreement” that the paper was actually worth something, the game was
suddenly over. How easy it would have been, as the “crisis” started, to simply work out and restore
the loan that provided the initial collateral—a measly $300,000. But the tight fisted bankers, long accustomed to turning thumb screws on Poor Dads, would not work out the loans. In fact, they
could not work them out even if they wanted to, because they had attached the paper to so many bonds that no one actually knew exactly who held the string of ownership. So instead they
steadfastly pushed forward into foreclosure—applying all the traditional punishments banks have used against their borrowers for generations. What might have cost them a few hundred thousand
here, and a few hundred thousand there in lost profits or anticipated interest to nip the problem in
the bud, now will cost the nation a couple trillion in “bailout” money to buy up the “illiquid” assets clogging up the Rich Dad’s balance sheets. Tisk, Tisk.
 Study the chart here
carefully and you will see the Rich Dads have learned nothing from the mess they made in the housing securities game. Note how securities based on home equity loans (the dark blue)
slowly dried up from 2005 to 2008, because the houses were now rapidly depreciating assets. But look how the green columns have ballooned this year. They have simply moved their chips to another gambling table! Now the bankers are issuing securities backed by loans on credit cards, autos
and students! Yet if we continue down this path, all the Poor Dads presently carrying those card balances at whopping 30% interest rates may soon go the way of the homeowners and simply
stop paying. If they have a 30% interest rate now, their credit rating is already ruined, and will be for the foreseeable future. All they lose is the crushing debt, and they can just ignore collection
efforts, forcing banks to expensive legal action. When a man can’t pay, he just can’t pay, no matter what a court says. You can’t get blood out of a stone and, at least as of this moment, there
are no debtor prisons in America.
Bankruptcy laws pushed through congress in 2005/2006 were aimed to try and head off just this
eventuality. The Rich Dads have the Poor Dads corralled and saddled up with revolving interest debt, and they don’t want them breaking out of the pen. But default may soon be an economic necessity, a question of survival for many. With their cards maxed out, credit lines being
decapitated, interest rates so high they never attack the balance owed, people may just decide to stop paying. Then what will happen to all these new securities sitting atop that rapidly defaulting debt bubble?
How stupid could the Rich Dads be? They’re gambling that people are so addicted to their credit
cards and cars that they will do anything to prevent their loss. It’s a gamble that may soon collapse yet another stack of securities and derivatives, and it will all be the Rich Dads’ doing once
again. Instead of a fair interest rate, reasonable credit lines, they have issued people tens of thousands in plastic credit. Some people have more credit than their annual income, mostly
encumbered and revolving at 30% interest. Many are indebted at rates equal to between 50% and even up to 100% of their earnings! If you thought real estate was a fairly safe bet for collateral,
credit card balances as collateral for securities is a recipe for disaster. What goes through a Rich Dad’s head when he dreams up a scheme like this? Quite simply this - get it while the going is good. Make hay while the sun shines. Book as much profit as you can before the latest game
goes bust. Then just go look for another table - commodities, gold, oil futures. The game is endless.
Economist Michael Hudson from Thomas Payne’s Corner put it this way: “The banksters’ plan
now is for icing on the cake – to take Mr. Paulson’s $700 billion and run. It’s not a “bailout of the
financial system.” It’s a giveaway – to insiders, to sell out all their bad bets. Companies across the
board will get rid of their bad mortgages, and also their bad car loans, furniture time payments, credit-card loans, student loans – all the debts that any competent actuary could have told them
never could have been paid in the first place...The idea is to take as much as you can. As the saying goes: “You only have to make a fortune once in a lifetime.” They have been salting away
their fortunes year after year, mainly in hard assets: real estate (free of mortgages), fine furniture, boats and trophy art. One last $700 billion heist and they can make their getaway.”
The deception, fraud, greed, corruption is so massive, the damage to the nation so grievous, that it
is utterly laughable that these same institutions have also created a scheme to score us all on how well we get a payment of $39.95 to them each month. Why do we put up with this? It’s
astounding that we let them brand us with FICO scores, and poke and prod us with points, fees, interest and penalties, like a herd of cattle led to the pen. These private bankers, (the misnamed
“Fed”), controlling the printing and distribution of all our money, have ruined the nation! We should abolish the Fed, prohibit all issuance of derivative securities, and stop speculation in futures
markets completely. Then we must demand currency is issued exclusively by Congress, not a consortium of private banks, and issued without interest being due to the Rich Dads. (The private
banks of the Fed collect 6% on every dollar they print!) Only these draconian measures will stop the Rich Dads and their never ending game of fraudulent speculation, dressed up and called
“investment” to make it sound respectable. One has only to look at the result of all these “investments” to see what they really are. And now the investors themselves, caught red handed
with their hand in the till, are about to...panic!
The “Winter Patriot” of Uruknet commented: “The market will survive -- if it survives at all -- just like
a sick body heals itself: by purging itself of toxins, and of the parasites that produce them. This is how a free market is supposed to work; as the Republicans try to tell us all the time, it's the
ownership society and you are responsible for your decisions. If you've bought a portfolio of garbage, you're stuck with it, chump. Caveat emptor, baby, and you have no right to foist your
mistakes off on anybody else. But that's exactly what this bailout is: the government buying worthless securities at highly inflated prices from people who never should have bought them in the first place.”
Well I have another solution to the imminent investor panic that we are always a few days from… Don’t panic. Take a breath. Just calm down. Then listen up…You made your bet, and you lost.
Move on. Go home. I’m not paying your gambling tab, nor should any other US taxpayer offer up a single dollar in income taxes unless this matter is resolved to their satisfaction.
The interesting lesson in all of this? The Rich Dads have finally realized they need all the Poor
Dads out there—need them ever so desperately. They need them for someone to dupe with their bad loans, someone they can saddle up like a donkey to carry their fraudulent, overleveraged
security schemes, and now someone who will pick up the tab for them when the game has gone bust.
No thanks. I’m not paying anymore. I made the decision to shun credit and live with an all cash
budget three years ago. So all the Rich Dads and Suzi Orman with all her cute financial advice can take their FICO scores and stick them where the securities don’t shine. Their game is over,
and it’s time they admitted it and all went home to count their Krugerrands.
John Schettler - September 28, 2008
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