The Truth Would Cause "Irreparable Harm"

In its effort to maintain the cloak of secrecy that conceals financial wheeling and dealing at the Fed, the consortium of private bankers has won a temporary stay of execution on the order to reveal who it's been lending money to. The misnamed "Fed" now has 30 days to appeal the ruling that it must reveal details of how and where it lends money to other financial institutions.

In its argument at court the Fed pleaded: "Immediate release of these documents will cause irreparable harm to these institutions and to the board's ability to effectively manage the current, and any future, financial crisis." So what we have been told, in effect, is that if we tell the truth about the banks the system will suffer "irreparable harm." If we know why banks need Fed funds, the damage would be so severe that is could not be reversed. That's pretty sobering talk. The argument itself is blatant testimony to all I have been saying about the inherent insolvency of the banking system. It is a system that has been running on liberal loans from Fed programs, government bailout money and a healthy dose of secrecy and lies. Yet all this money, in trillion dollar truckloads, has failed to really restore balance or solvency. According to the Fed's own admission the mere knowledge of the real condition of bank balance sheets would cause "irreparable harm."

I predict the Fed will lose its appeal, a resolution in congress will demand an audit , and the movement to eventually end this gargantuan institution that has caused such grievous harm to the nation will gather momentum. Think otherwise? Consider the value of the dollar today compared to where it was when the private bankers calling themselves "the Fed" took over control of managing the money supply with a pledge to protect the dollar in the process. The Fed's appeal is an effort to conceal truth, perpetuate denial, and protect the secret collusion of banks that has ruined the nation. When you ask for a loan these days you are now almost asked to give blood and submit to DNA typing in addition to the many intrusive questions about your income, assets and financial status. But when banks ask for money their real financial condition must remain a secret, carefully guarded, lest "investors" learn the truth and invest elsewhere.

This basic unfairness is beginning to register as a slowly simmering anger on Main Street; slowly filtering down through the rank and file of "the people." On a recent road trip I came across this bumper sticker mounted prominently on the back of a burly cyclist's rig. The old men on fast motorcycles have it right. Nuff Said.

Vanishing Equity

As a sign of the pain bankers still see rolling in from the dark horizon of residential real estate, banks across the nation have been reducing or simply canceling outstanding home equity lines of credit. In many cases this has nothing to do with the borrower's credit standing. The banks simply see, or know something, that the mainstream media fails to perceive--that the housing market is far from the bottom news outlets are all to quick to call.

California based Contra Costa Times reported: "Last week, San Francisco-based Wells Fargo was named in a class-action lawsuit claiming it illegally reduced the size of customers' home equity lines of credit. The suit, which was filed in Illinois, claims Wells Fargo failed to accurately assess the value of customers' houses before deciding to pull their credit lines, according to the Associated Press. Wells Fargo is accused of using unreliable computer models that valued home prices too low, and then did not properly notify customers about the credit-line reductions."

Isn't that lovely? These are the same banks that also use their own internal computer models to drastically overvalue the worth of mortgage backed securities on their books, asserting in many cases that they have nominal values still equal to their worth at the apex of the housing bubble. So...for the bank your house is still worth its full boom time value so they can report phony "profits"--but for purposes of calculating your equity the bank uses a different metric to deliberately push the value lower. Equity? What equity? We don't see any equity around here.

The State of California also bit the bullet and lowered the overall assessed value of property statewide for the first time in 76 years. How much did they lower it? Values fell an average of 2.4% across the state, a number that seems ridiculously low considering the chart below showing property value losses in California counties. Look at the carnage:


So it looks like the banks have justification for lowering their estimate of a home's remaining equity. But by the same token they should also have to lower the value of securities resting on this property by an equal measure, and the state tax assessors need to ponder the enormous gap between their measly 2.4% drop in assessed values given the data above. And why can't the homeowner pull the same trick the bank does, and argue that since "mark to market" accounting rules have been suspended for banks, their home is still worth what it was when they bought it in 2005? Why is it that all these "decisions" and assessments always favor the big financial institutions and the taxman, and consistently slam the poor middle class "homeowner?" Equity remains on the bank's books, and on those of the tax assessor, yet vanishes for the homeowner, along with their last remaining access to substantial credit.

This is "the system" in a nutshell.

Fun in the Casino

The great gaming house we call the stock market is alive and well these days as traders, relieved to hear that Ben Bernanke has saved the world, return to their gaming tables to shake those securities dice, spin the stock wheels, and pull on the levers of the grifting machines.

I've always been confounded by the antics and ploys of the "insiders" who run the markets. They engage in a whole range of behaviors that, on the surface, look to be entirely illegal. Case in point: big firms have groups of select clients that receive quietly whispered telephone tips. These movers and shakers can weigh in to move markets and fill up commission baskets in no time at all. Think of Charlie Sheen playing trader Bud Fox from the movie Wall Street as he whispers "Blue Horseshoe loves Anacott Steel..."

Ping pong is another favorite game, when a couple of traders start buying a lot of shares, trading them back and forth at breakneck speed with a computer. This creates what looks to be a huge uptick in volume and liquidity in the stock to entice unwary buyers. Then the gamers dump their offers and, as there is no real volume behind a 1000 shares changing hands over and over, the real supply and demand dynamics assert themselves and the sucker who just placed a big buy sees the price of the stock suddenly jump before his order can be processed. More commissions.

"Bear Raids" are another favorite. You short a stock to death, making money when the bears pile on and drive the stock down. But you have to be careful not to start a stampede or trigger the kind of panic in the casino we saw last year. Market shaky? No problem Prohibit short selling on the big loosers and then pump up the futures market after hours to herd the Bulls back into the pen. The old "pump and dump" never fails to amuse and delight. And they say there's no "plunge protection team." Right?

Then we have the game Goldman was running with its nifty trading algorithims that were apparently being used to front run the ticker by a few milliseconds and give GS the edge that has kept it #1 in trading volume for years--until a man named Sergey Aleynikov ripped off their secret code and exposed the trick. Suddenly Goldman doesn't even make the top 15 for trading and the NYSE decides to conveniently stop reporting those volume data points.

And speaking of #1, the former head of the NASDAQ itself is presently "sitting on ice" in the cooler--old Bernie Madoff of the $50 billion ponzi scheme fame. They still haven't found out where the money went, who lost it all, and who gained it all. But according to Gordon Gekko of Wall Street, "Money itself isn't lost or made, it's simply transferred." I might beg to differ with Gordon--it gets made first, out of thin air, then it gets transferred.

In recent months we've seen how the great money transfer works as the private consortium of banks deceptively called "The Fed" has created and quietly "transferred" over $9 trillion to .... unknown parties. Thankfully Bloomberg won a freedom of information law suit that threatens to force the Fed to reveal just who got the money and why. It's that "why" that was the cause of all the secrecy. Truth has been sold short for decades in this market. Keeping the fat cat counterparties secret is all a part of the game as well. It's the same secrecy and deception that the banks engage in when they hide withered "assets" off balance sheet and pretend they are all worth 100 cents on the dollar. Why tell the truth when lying and deception is so much more convenient, and profitable?

Isn't capitalism wonderful?

What will it take this time?

The deflationary depression of the 1930s took over 10 years to unfold it's misery, and it was only the enormous expenditure of WWII, and all the jobs it created, that turned the economy around. After the war, the 1950s again saw the economy flounder, only to be revived by massive public works programs like the Interstate Highway System and yet another war in Korea. This time we are again in a massive deflationary depression.

Jobs continue to decline and the work force is shrinking.
Housing prices continue to fall, destroying equity as they do so.
40% of mortgage owners, (not homeowners), are now "underwater."
Factory orders are declining world wide. Shipping indexes at all time lows.
There is enormous overcapacity in housing here and in manufacturing in China.
National debt and deficits are at all time highs.
Credit remains severely constricted and consumers cannot easily borrow.
People are finally saving taking even more money out of the economy.
Discretionary spending is s thing of the past.
Small businesses cannot get finance to expand or even continue current operations.
There is a massive wave of commercial loans resetting and threatening to default.
Vacancy rates at office complexes and shopping malls are skyrocketing.

Show me any sign of a recovery in those facts. And this is the state of affairs even after we have already seen the Feds commit more money to saving the "system" than was spent in every American war to date.

The question I have is this: if massive Federal spending won't kick start the economy again, then what will it take to reverse the decline this time? Is there another war looming on the horizon, a resource war where nations struggle for control of the last remaining resources of oil, fresh water, food, and vital commodities? Considering that it took WWII--the closest we have come to world wide insanity--to get us out of the last depression, I shudder to think what it will take this time around.

I once wrote we were entering a time when Americans would cease being concerned about trivial things like American Idol and whether or not to super-size their MacDonalds order, and start being concerned about things like food, fuel and freedom. Another blogger has taken my three Fs and upped them to three Gs--Gold, Guns and Groceries. We might also try three Cs--Community, Cooperation and Commonwealth, but adversity tends to bring on a period of "me first" survivalism in people's souls.

It doesn't have to degenerate into more mass insanity. It's possible to simply start over and build something new together. But we have to want that common good more than our own selfish interests. So I guess the key question is how many of us will be willing to pull for the common good...and when will we get started?

The Shoppers Have Dropped

The old American mall mantra, "shop until you drop," has reached its inherent conclusion. The shoppers have dropped. I first visited this issue last February in my article The Little Engine That Can't, and explained how rising unemployment, contracting credit and loss of home equity--let alone the home itself--would basically kill consumption in the Main Street economy. And so it is.

Last Christmas shopping season was one of the worst in decades. Now the much hoped for "Back to School" shopping has failed to show in the malls. Families and households are simply too cash strapped to indulge in the new laptop and a new wardrobe for their student herd this year. The Wall Street Journal reported: "Discounter Target Corp. reported that sales at stores open at least a year were down 6.2% from a year earlier in the quarter ended Aug. 1, while luxury purveyor Saks Inc. reported a 15.5% drop in same-store sales over the past quarter as shoppers stuck to buying basics. Building-supply chain Home Depot Inc. saw total sales drop 9.1% in the quarter ending Aug. 2, and it reaffirmed expectations of a 9% sales drop this year."

And retailers are not optimistic that the traditional Black Friday buying binge and Christmas sales will reverse this trend. This Christmas will most likely see another sharp decline in sales after a year of heavy job loss and further erosion in home values--let alone the fact that millions of people have seen their credit lines cut or simply had their accounts closed by the banks. We were a nation accustomed to spending 125% of annual income each year--the extra 25% using OPM--other people's money in the form of credit and loans. With bank lending down in record setting levels, credit tighter than ever, jobs vanishing, incomes shrinking, the fabled American shopper has finally been decked, and may be down for the count.

Even though deflation is pushing down prices people continue to spend only for necessities and try to save as much as they can. They are deep in debt and struggling just to meet their minimum payments while paying the bills each month. Here is the chart the Wall Street Journal used to illustrate the problem:

End of Summer

Insider trading on Wall Street has reached a two year high, with those in the know dumping shares like they were radioactive. The Bear market rally is running out of steam about as fast as the Cash for Clunkers car bonanza. Do any reading on the net and you will perceive a general consensus that the false front happy talk of the "recovery" is really only something that was manufactured for public consumption. Since the public isn't consuming much of anything else, they have been fed a raft of phony profit reports, job loss statistics, and badly interpreted numbers on housing. The general media meme has been that happy times are just around the corner, yet anyone with real money tat risk has been bracing for the next inevitable evolution of the collapse now underway and wondering which banks will remain standing.

The so called "fundamentals" are all dark gray. Housing continues to lose value, foreclosures remain at an all time high, job loss remains staggering, and there is a pipeline of pain coming in the commercial sector that will make the first "sub-prime" loan loss wave look anemic. The people who read and think know what is coming. You won't find any of them on TV working for the news outlets. For truth these days you have to dwell in the blogosphere, and here is the consensus of thought there...

September and October will bring these fundamentals home to roost in the stock market like a flight of crows from a popular Hitchcock film. As the dog days of summer end, and the kids head back to school, the nation will head back to reality like a line of weary vacationers slogging their way along a crowded freeway. The last bit of happy green shoot talk will blanche into the autumnal ochre and amber of reality. The collective illusion that has characterized these last few months will give way, and we will finally be face to face with the stark realization that this Great Recession has now become a Great Depression. If Ben Bernanke doesn't want to be the Fed Chairman who presides over it, he had best resign soon and start writing his memoirs.

The rest is here in my Aug 15th article: "Collective Ignorance"

False Optimism

The happy talk continues, as otherwise reputable news outlets continue to spew nonsense about the recession ending. A quarter of a million jobs were lost last month and, since more losses were expected, this is taken as "good news." What was not roundly reported was the fact that hundreds of thousands more were simply dropped from the unemployment count because they gave up looking for work and joined millions of other "discouraged" workers out there. The news media obscenely characterized that pain as "people taking the summer off from their job search." They touted the official fudged U-3 unemployment stat dropping from 9.5 to 9.4 and called an official end to the recession. Yet nothing could be farther from the truth. In fact, I would go so far as to say that if you get your news from most major news outlets you are broadly misinformed. You cannot add a quarter million more job losses to 9.5% and have that number decrease to 9.4%. And the 9.5% is in itself a completly juryrigged number that in no way attempts to truly measure the real number of people who are out of work, as I explained here.

By the same token, "analysts" are also calling a bottom in the real estate crash. What they are seeing, however, is the trough between two waves. The first subprime wave was enough to topple half of Wall Street's most prominent investment houses, along with a raft of banks. That wave has broken, but behind it comes a wave of massive resets in ALT-A and Option Arm loans. It extends from now until 2012, and will continue to swamp the housing market and cause more and more defaults and foreclosures. In fact, 40% of all homes are already "underwater" from just the leading edge of this economic storm. There is more to come, particularly in the massive commercial real estate wave just off shore, a $6.7 trillion market that is crashing fast and dwarfs the subprime wave we have already endured. Consider these facts reported by "From the Wilderness:"

"Strip malls, neighborhood centers and regional malls are losing stores at the fastest pace in at least a decade, as a spending slump forces retailers to trim down to stay afloat.” In the first quarter of 2009, retail tenants “have vacated 8.7 million square feet of commercial space,” which “exceeds the 8.6 million square feet of retail space that was vacated in all of 2008.” Further, as CNN reported, “vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008.” Of significance for those that think and claim the crisis will be over by 2010, “mall vacancies [are expected] to exceed historical levels through 2011,” as for retailers, “it's only going to get worse.”

So, as job losses mount, consumer credit continues to shrink, small business loans are near non-existent, forclosure rates and defaults at all time highs, the news media is calling an end to the recession. Unfortunately they can't even get the name right. It's a depression, not a recession, and it is just beginning. The massive debt at every level of the "system" cannot be explained away by a cheery, misinformed newscaster. We have not even begun to face the real heart of the crisis that is now upon us, a reckoning and settling of accounts that have been decades past due.

The manipulation of bank profits, stock markets, the liquidity injections and quantitative easing, the phoney unemployment stats are all just false optimism and wishful thinking on a national scale. And like all illusions they will be stricken down by stubborn facts that newscasters simply cannot wish away.

Closing the Landfills

An interesting story crossed the BBC news last night that most Americans won't care much about. It seems the Muslim majority in the Egyptian government trumped opposition and ordered the slaughter of every pig in the country last May, which is now complete. The spin on the story was about the Christian garbage collectors, known quite literally as the "Zabaleen" (Garbage People), who had used the pigs for decades. The animals would eat the refuse of Egyptian society, fatten up, and then be sold for profit for the struggling garbage people.

In this country some of the great financial landfills created in the boom years were a lot like those pigs. The Garbage People on Wall Street used agencies like Fannie Mae and Freddie Mac, and insurance giant AIG, to dump billions in toxic mortgages over the years. The banks would write the loans, then have them backed up by Fannie & Freddie, and their securities insured by AIG. Over 50% of all US mortgages were backstopped by the two great landfill pigs, Fannie & Freddie. Together these three institutions have already received over a quarter of a trillion in bailout money provided by the US taxpayer. Much of this was then funneled to the banks who bought insurance all across the world, and the fat cat bond holder investor class. The wealthy don't like losing money when they make a bad bet, so you and I were tapped to pay them off.

Yesterday, shares of the insolvent, (80% government owned), AIG surged in the trading pits. There are now whispers that shares of Fannie & Freddie may be good buys as well. The rumor is that all three institutions will be shut down in the not too distant future, though analysts say it will take years to unwind the toxic waste in the guts of those two great landfill pigs. So it seems our government has quietly decided the pigs must be slaughtered over here as well--only Wall Street, as always, has found a way to profit on calamity. Look for shares of Fannie and Freddie to surge as well, even though their 2nd quarter report will likely show massive losses. Is it just me or is there something psychotically skewed in a system that sees massive fraud and financial loss as a means of short squeezing profit in the trading pits?

The Garbage People who dragged all of us into the landfill with them are at it again. Wall Street firms are already greasing their palms and getting ready to collect billions in fees for "advice" on how best to close the landfills down. As the Wicked witch once said: "Oh, what a world, what a world, what a world."

Wishful Thinking

Just before the 1929 Market crash Andrew W. Mellon, Secretary of the Treasury sounded much like Jim Cramer cheer leading for Bear Stearns when Mellon said: “There is no cause to worry. The high tide of prosperity will continue.” As the depression started in 1930 the Washington news stories read: “Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction.”

On March 8, 1930 Washington Dispatch wrote: “President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days.” Three months later unemployment began to skyrocket as the real effect of the depression finally hit the country.

In October of that year Charles M. Schwab, another of the “elite” from that era, looked to the inevitable faith in science as a way out of the crisis: “Looking to the future I see in the further acceleration of science continuous jobs for our workers. Science will cure unemployment.” In fact, after ten years of depression it was not science but the calamity of WWII that finally reversed unemployment in 1941.

Is it any wonder that faith in our government and leaders will find itself in very short supply these days? The arc of hope and change Obama rode to the White House has now broken on the shore of reality, and the rocks on this coast are sharp. He is sitting on the shoreline contemplating how to reassemble the wreckage into something that floats and resembles, as much as possible, the old ship of state that brought us to this place, and with the same crew that wrecked the boat in the first place!

This wasted effort, and the trillions of wasted dollars spent so far, could have been better directed at building a new America from the ground up. For the fourteen plus trillion committed to the banks and their investor bets so far we could have paid off everyone’s mortgage, retired all their credit card debt to give the whole nation a clean start, and still had billions left over for roads, bridges, schools, health care, and alternative energy. As it stands, AIG got more money than most of the public works allocations in the new “stimulus package,” and all they did is piss the money away into the largest corporate loss in history, a whopping $61 billion in 3 months, which was actually just payouts to the folks who insured their securities bets with the company. Bucks for the Boyz.

The reason why people are in such psychological distress is that they perceive no benefit from any of the trillions they have been asked to pony up for the banks and big investors to save the system that has been deemed “too big to fail.” The operative state is that we are all in a kind of suspended animation while we wait for the trillions in economic medicine to try and restart the failing heart of our banking system. Then, so the logic goes, the banks will all start lending again, people will all start borrowing and spending again, securities will trade as before and we’ll all return to “normal.” Sorry folks. The soup in the bowls will be thin for a very long time. We had better get used to that fact. People without jobs cannot spend, and nearly 20% of the workforce is now unemployed if the numbers are counted correctly. The fact that Wall Street and the banks have managed to fool themselves into thinking the recession is over is typical of the ignorance that caused the collapse in the first place.

Jim Kunstler opened his post today with this: "A broad consensus has formed in the news media and among government mouthpieces and even some "bearish" investors on the street that "the worst is behind us" in this tortured economy. This view is completely crazy." And he closed it this way: "Here, in the dog days of summer, it seems to me that the situation in the USA is so fundamentally bad, so unpromising, so booby-trapped for failure, that I wonder if there has ever been a society so badly deluded as ours. We're prisoners of our wishes, living in a strange dream-time, oblivious to the forces gathering at the margins of our vision, lost in a wilderness of our own making."

I am in total agreement. We so long to return to the good old days of shopping on credit, that we will believe any good news whispered our way by the media. Yet reality tests every opinion in time. We are still in the denial stage of our grief over the diminishing prospects for our collective future. The anger is yet to come, and it will be very uncomfortable politically when it finally does come--when people realize things haven't really changed at all, in spite of what MSNBC, CNN and Fox News think.