Tag Archives: 2008 crisis

Living a Lie, from The Burning Platform

From the administrator at theburningplatform.com:

“Above all, don’t lie to yourself. The man who lies to himself and listens to his own lie comes to a point that he cannot distinguish the truth within him, or around him, and so loses all respect for himself and for others. And having no respect he ceases to love.” – Fyodor Dostoyevsky, The Brothers Karamazov

The lies we tell ourselves are only exceeded by the lies perpetrated by those controlling the levers of our society. We’ve lost respect for ourselves and others, transforming from citizens with obligations to consumers with desires. The love of mammon has left our country a hollowed out, debt ridden shell of what it once was. When I see the data from surveys about the amount of debt being carried by people in this country and match it up with the totals reported by the Federal Reserve, I’m honestly flabbergasted that so many people choose to live a lie. By falling for the false materialistic narrative of having it all today, millions of Americans have enslaved themselves in trillions of debt. The totals are breathtaking to behold:

Total mortgage debt – $13.6 trillion ($9.9 trillion residential)

Total credit card debt – $924 billion

Total auto loan debt – $1.0 trillion

Total student loan debt – $1.3 trillion

Other consumer debt – $300 billion

With 118 million occupied households in the U.S., that comes to $145,000 per household. But, when you consider only 74 million of the households are owner occupied and approximately 26 million of those are free and clear of mortgage debt, that leaves millions of people with in excess of $200,000 in mortgage debt. Keeping up with the Joneses has taken on a new meaning as buying a 6,000 sq ft McMansion with 3% down became the standard operating procedure for a vast swath of image conscious Americans. When you are up to your eyeballs in debt, you don’t own anything. You are living a lie.
The lie was revealed as housing bubble burst and national home prices plummeted by 30%, resulting in millions of foreclosures, the worst recession since the Great Depression and homeowners equity falling to an all-time low of 38%. The Fed induced 2nd housing bubble has convinced millions to believe the lie again. The Fed easy money, Wall Street buy and rent scheme, with the FHA acting as the new purveyor of 3% down mortgages, has artificially boosted homeowners equity back to 57% just in time for the next housing collapse. Living a lie will result in more pain and suffering for those who didn’t learn the lesson last time.

To continue reading: Living a Lie

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US Banks Are Not “Sound”, Fed Report Finds, by Simon Black

From Simon Black at sovereignman.com:

Late last week, a consortium of financial regulators in the United States, including the Federal Reserve and the FDIC, issued an astonishing condemnation of the US banking system.

Most notably, they highlighted “continuing gaps between industry practices and the expectations for safe and sound banking.”

This is part of an annual report they publish called the Shared National Credit (SNC) Review. And in this year’s report, they identified a huge jump in risky loans due to overexposure to weakening oil and gas industries.

Make no mistake; this is not chump change.

The total exceeds $3.9 trillion worth of risky loans that US banks made with your money. Given that even the Fed is concerned about this, alarm bells should be ringing.

Bear in mind that, in banking, there are three primary types of risk, at least from the consumer’s perspective.

The first is fraud risk.

This ultimately comes down to whether you can trust your bank. Are they stealing from you?

MF Global was once among the largest brokers in the United States. But in 2011 it was found that the firm had stolen funds from customer accounts to cover its own trading losses, before ultimately declaring bankruptcy.

It’s unfortunate to even have to point this out, but risk of fraud in the Western banking system is clearly not zero.

The second key risk is solvency.

In other words, does your bank have a positive net worth?

Like any business or individual, banks have assets and liabilities.

For banks, their liabilities are customers’ deposits, which the bank is required to repay to customers.

Meanwhile, a bank’s assets are the investments they make with our savings. If these investments go bad, it reduces or even eliminates the bank’s ability to pay us back.

This is precisely what happened in 2008; hundreds of banks became insolvent in the financial crisis as a result of the idiotic bets they’d made with our money.

The third major risk is liquidity risk.

In other words, does your bank have sufficient funds on hand when you want to make a withdrawal or transfer?

Most banks only hold a very small portion of their portfolios in cash or cash equivalents.

I’m not just talking about physical cash, I’m talking about high-quality liquid assets and securities that banks can sell in a heartbeat in order to raise cash and meet their customer needs to transfer and withdraw funds.

For most banks in the West, their amount of cash equivalents as a percentage of customer deposits is extremely low, often in the neighborhood of 1-3%.

This means that if even a small number of customers suddenly wanted their money back, and especially if they wanted physical cash, banks would completely seize up.

Each of these three risks exists in the banking system today and they are in no way trivial.

To continue reading: US Banks Are Not “Sound”, Fed Report Finds

Profits From Stupidity, by Robert Gore

Most people who encounter economics do so in college. They take microeconomics first, and if they’re not completely turned off, they take macroeconomics. Unfortunately, there’s no such thing as macroeconomics separate from microeconomics. The idea that there’s one economics for individual entities and markets and another for government-directed aggregate behavior has led to an unmitigated stream of statist disasters stretching back over a century. There’s plenty of competition, but it ranks as one of recent history’s more insidious academic frauds.

Macroeconomic policy prescriptions rest on the belief that governments have special properties and powers that allow them to transcend reality. The unique essential of government is that it can legally initiate force against its people. Coercion gives governments no transcendent magic, any more so than it does for criminals (there is substantial overlap between the two groups), it only gives them the ability to force people to do things they would not voluntarily do. Governments legally tax, spend, issue debt, and in conjunction with a central bank, force acceptance of that debt as the medium of exchange.

The analyses of these activities are straightforward exercises in microeconomics. If government takes money from taxpayers and redistributes it to government employees, contractors, or beneficiaries, that’s money the taxpayer can’t spend, save, or invest that will be spent, saved, or invested by the government’s payee. The propensities to spend, save, and invest may differ between taxpayers and government payees, but all three activities are necessary in an economy and governments have no special insight into the optimal mixture. They don’t even know beforehand what those propensities are, although many studies in abstruse economics journals have tried to determine them. The studies amount to high-toned guesswork, a search for an answer to a question that doesn’t need to be asked unless one believes that governments are better at deciding how much people spend, save, and invest than the people themselves.

Debt funds current spending, saving, and investing from the future, and again, nothing changes when a government or central bank does the borrowing. Governments and central banks create fiat debt that can only be redeemed for more debt, and mandate acceptance of such debt as a medium of exchange. Imagine a neighborhood where a gang of hoodlums printed up their own scrip and made everyone accept it as payment for goods and services. Obviously their ability to bully has given the hoodlums an economic advantage, but their scrip is in no way an economic plus for the neighborhood. As the gang prints up an ever increasing amount of scrip, its value declines and only the gang receives any benefit from it. Coercion cannot produce economic value and it doesn’t matter whether it’s a neighborhood gang or a government gang doing the coercing.

The macroeconomic cover for central banks is that they serve as a lender of last resort during financial panics and smooth fluctuations in the business cycle. In reality, central banks have ushered in the transition from precious metals-backed money to fiat scrip. Precious metals cannot be created from thin air. Central bank fiat scrip can, and it can be used to buy a government’s debt. Whatever temporary stimulus such debt-fueled spending produces, it eventually runs head first into two microeconomic facts, often ignored in macroeconomic models that treats government debt as a consequence-free “exogenous” variable. Debt, like most everything else, has diminishing returns, or progressively less bang for the buck. Debt also carries an interest cost and it must be repaid, even if it is only repaid with more debt.

Diminishing returns and the interest and repayment burdens of debt means that the marginal value of an additional unit of debt can become negative, which is where we are now. The lender of last resort function has devolved into the Greenspan, Bernanke, and Yellen “puts”: injections of fiat debt meant to stop financial market perturbations. As with forest fire suppression, the perturbative underbrush builds up until it fuels unstoppable financial conflagration: the crashes of 2001, 2008, and the next one, coming soon. Fiat debt injection has reached record highs and interest rates record lows after the 2008 crash, not just in the US but around the world. However, the subsequent “recovery” has been abysmal, making a mockery of both governments’ and central banks’ claims of smoothing fluctuations in the business cycle—and the brands of macroeconomics on which such claims rest.

The dirty little secret of all those macroeconomic policy prescriptions is debt: governments issue it; central banks monetize it and suppress its cost. However, the microeconomic facts remain. Debt borrows from the future, imposes costs that can outweigh benefits, and has to be repaid. The biggest glut facing the world now is not oil, iron ore, steel, shipping capacity, or even coal, it’s debt.

That makes debt a short. The most heavily leveraged governments and companies relative to their revenues and profits will be the first culled, and SLL has advised conservative investors to stay away from all corporate and municipal debt (see “Neither a Borrower Nor a Lender Be,” SLL, 8/26/15). The more adventuresome may want to consider the speculative implications of the debt reversal and contraction. While credit spreads are widening, that move is in its infancy and there’s plenty more to come. Companies, indeed entire industries, have ridden on the debt wave, what happens when the tide comes in? One obvious example would be the automobile industry, where ever more lenient credit standards and loan terms have enabled robust car sales. Thinking about cars may lead you in the direction of consumer discretionary and finance sectors. Credit is the life’s blood of both. There is no shortage of overly indebted companies whose securities are good short sale candidates for imaginative and intrepid speculators willing to do their financial homework.

Compared to the years, even decades, in which debt builds up, it unravels with lightning speed, and as we’ve seen in 2001 and 2008, the effects on financial markets are calamitous. Volatility is the barometer of upheaval. If you own a broad portfolio of stocks and bonds, you are implicitly short volatility. In other words, you are betting that nothing is going to radically upend the apple cart. Conservative investors should reduce that implicit short bet. A small subset of knowledgeable investors with discretionary speculative funds and access to top-flight financial intermediaries may want to consider going long volatility, which is a bet on generally unanticipated upheaval. There are options strategies and Exchange Traded Funds that are ways to so speculate, but this is for people who can afford speculation and know what they’re doing, and should only be done in consultation with an expert financial advisor.

Unsustainable debt is contracting and the macroeconomic “theories” that blessed it stand exposed, once again, as hogwash. The powers that be will, once again, bluster about “unforeseen” consequences and their own blamelessness. The rest of us must do our best to stay out of harms way, and perhaps avail ourselves of the short-debt, long-volatility opportunities they’ve unwittingly bestowed upon us. Just because you can’t stop stupidity doesn’t mean you can’t profit from it.

BACK WHEN PEOPLE PROFITED FROM INGENUITY

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Something Happened, by James Howard Kunstler

James Howard Kunstler takes well-aimed shots at Ben Bernanke. From Kunstler at kunstler.com:

Ben Bernanke’s memoir is out and the chatter about it inevitably turns to the sickening moments in September 2008 when “the world economy came very close to collapse.” Easy to say, but how many people know what that means? It’s every bit as opaque as the operations of the Federal Reserve itself.

There were many ugly facets to the problem but they all boiled down to global insolvency — too many promises to pay that could not be met. The promises, of course, were quite hollow. They accumulated over the decades-long process, largely self-organized and emergent, of the so-called global economy arranging itself. All the financial arrangements depended on trust and good faith, especially of the authorities who managed the world’s “reserve currency,” the US dollar.

By the fall of 2008, it was clear that these authorities, in particular the US Federal Reserve, had failed spectacularly in regulating the operations of capital markets. With events such as the collapse of Lehman and the rescue of Fannie Mae and Freddie Mac, it also became clear that much of the collateral ostensibly backing up the US banking system was worthless, especially instruments based on mortgages. Hence, the trust and good faith vested in the issuer of the world’s reserve currency was revealed as worthless.

The great triumph of Ben Bernanke was to engineer a fix that rendered trust and good faith irrelevant. That was largely accomplished, in concert with the executive branch of the government, by failing to prosecute banking crime, in particular the issuance of fraudulent securities built out of worthless mortgages. In effect, Mr. Bernanke (and Barack Obama’s Department of Justice), decided that the rule of law was no longer needed for the system to operate. In fact, the rule of law only hampered it.

To continue reading: Something Happened

Icelandic Bankers Are Not Too Big To Jail: Face 74 Years In Prison As US Bankers Bask In Bailouts, by Tyler Durden

It’s hard to believe that not one criminal act was committed by the US banking set during either the housing and mortgage finance boom or the subsequent bust and financial crisis. Yet, no bankers have gone to jail, and as far as SLL knows, none have gone to trial for mortgage or securities fraud, although such fraud was rampant, or any other white-collar crimes. Iceland has done things differently. From Tyler Durden at zerohedge.com:

As TheAntiMedia’s Claire Bernish exclaims, you could ice skate in Hell sooner than see the United States follow in Iceland’s footsteps with this move: the 26th banker was just sentenced to prison for a combined 74 years between them — each of them jailed for their roles in the 2008 economic collapse.

Five top bankers from Iceland’s two largest banks — Landsbankinn and Kaupþing — were found guilty of embezzlement, market manipulation, and breach of fiduciary duties. Though the country’s maximum penalty for financial crimes currently stands at six years, the Supreme Court is currently hearing arguments to extend the limit. Most of those convicted have so far been sentenced to between two and five years.

Do those sentences sound light to you? Perhaps. Until you consider the curious method of punishment the U.S. employed for its thieving bankers.

While Iceland allowed its government to take total financial control when the 2008 crisis took hold, American bankers — in likely the only bail handout given to criminals of mass destruction — received $700 billion in Troubled Asset Relief Program (TARP) funds.

Thank you, Congress American taxpayer.

Iceland certainly didn’t make it through the crisis unscathed. It repaid the IMF (the final $332 million owed was paid in full, ahead of schedule, earlier this month) and other lenders for funds needed to prevent a complete financial meltdown nearly eight years ago. Icelandic bankers are still being held to task for their illegal market legerdemain that nearly brought down the financial planet.

In contrast, not one banker in America has ever (nor will ever?) be held responsible for their criminal acts. Instead, essentially in addition to the $700 billion windfall — Big Banks are now raking in over $160 billion in profit every year.

Iceland’s president, Olafur Ragnar Grimmson, described how his country not only weathered the storm, but has been labeled the first European country to fully recover from the crisis:

“We were wise enough not to follow the traditional prevailing orthodoxies of the Western financial world in the last 30 years. We introduced currency controls, we let the banks fail, we provided support for the poor, and we didn’t introduce austerity measures like you’re seeing in Europe.”

If only the U.S. government were capable of employing logic.

To continue reading: Icelandic Bankers Are Not Too Big To Jail

Hobson’s Choice, by Doug Nolan

From Doug Nolan at davidstockmanscontracorner.com:

More than two months have passed since the August “flash crash.” Fragilities illuminated during that bout of market turmoil still reverberate. Sure, global markets have rallied back strongly. Bullish news, analysis and sentiment have followed suit, as they do. The poor bears have again been bullied into submission, as the punchy bulls have somehow become further emboldened. The optimists are even more deeply convinced of U.S., Chinese and global resilience (the 2008 crisis “100-year flood” thesis). Fears of China, EM and global tumult were way overblown, they now contend. As anticipated, global officials remain in full control. All is rosy again, except for the fact that global central bankers behave as if they’re utterly terrified of something.

The way I see it, underlying system fragility has become so acute that central bankers are convinced that they must now forcefully (“shock and awe,” “beat expectations,” etc.) react to any fledgling market “risk off” dynamic. Risk aversion and de-leveraging must not gather momentum. If fragilities are not thwarted early, they could easily unfold into something difficult to control. Such an outcome would risk a break in market confidence that central banks have everything well under control – faith that is now fully embedded in the pricing and structure for tens of Trillions of securities and hundreds of Trillions of associated derivatives – everywhere. With options at this point limited, the so-called “risk management” approach dictates that central banks err on the side of using their limited armaments forcibly and preemptively.

With today’s extraordinary global backdrop in mind, I’m this week noting a few definitions of “Hobson’s Choice”:

“An apparently free choice that actually offers no alternative.” (The American Heritage Dictionary of Idioms)

“A situation in which it seems that you can choose between different things or actions, but there is really only one thing that you can take or do.” (Cambridge Idioms Dictionary)

“No choice at all, take it or leave it.” (Endangered Phrases by Steven D. Price)

There are subtleties in these definitions, just as there are subtleties in financial Bubbles. Importantly, over time Bubbles embody a degree of risk where they stealthily begin to dictate ongoing monetary accommodation. These days, global market Bubbles have reached the point where their message to global central bankers is direct and unmistakable: “No choice at all, take it or leave it.” “Keep expanding monetary stimulus or it all comes crashing down – and that’s you Yellen, Draghi, Kuroda, PBOC – all of you…”

To continue reading: Hobson’s Choice

Wall Street’s Latest Bounce——Ostrich Economics At Work, by David Stockman

From David Stockman at davidstockmanscontracorner.com:

It is more evident than ever that the world economy is heading into a deflationary conflagration, but today’s generation of house trained bulls wouldn’t recognize a warning if it slapped them upside their horns. They refused once again last week to exit the casino because they got another signal from Hilsenramp that the Fed is on “hold” until at least next March.

That means we are heading for 87 straight months of ZIRP. So you have to wonder if these fearless robo-machines and day-trading punters by now have come to believe that central banks have abolished time itself—-to say nothing of the law of supply and demand.

As to the latter, any rational investor should have headed out of dodge long ago in the face of the mother of all bond bubbles——a monumental worldwide distortion of debt pricing and “cap rates” which will bring down the entire financial system when it inexorably bursts.

After all, how is it possible that sovereign debt prices and yields have not been drastically repressed by $19 trillion of central bank bond-buying during the last two decades?

The central banks have vast powers, of course, but repeal of the law of supply and demand is not among them. Their big fat bid, therefore, has dominated debt pricing on the margin for most of this century. Yet all that financial purchasing power was conjured from thin air by central banks.

Stated differently, these massive central bank debt purchases did not arise from society’s legitimate pool of savings set aside from current income. Instead, they amounted to a gargantuan fraud of the state, meaning that the financial system is infected with a monetary rot in its very foundations.

Accordingly, the idea that historical (pre-1995) interest rate patterns over the course of the business cycle are relevant to today’s outlook is complete Wall Street flim-flam. Absurdly low interest rates, such as last week’s 60 basis points for two-year treasury notes or 210 bps for 10-year money, do not represent a surfeit of private savings; nor do they reflect business and household “hoarding” of cash in the face of a weak economy or near-term uncertainty, as the talking heads insist day after day.

No, they represent a giant surplus of finance—credit made from whole cloth by the central banks and collateral based Wall Street dealers and lenders. Unlike honest capitalist savings, these vast, meandering pools of liquidity slosh around in money markets, but never become permanently deployed in capital assets such as machinery or software.

Instead, they provide funding for financial market gamblers and carry traders. That is, these central bank generated finance pools provide the transient wherewithal of leveraged speculation; they are not permanent capital itself nor are they invested in long-term claims upon it. Accordingly, the price of financial assets is now artificial and wildly inaccurate—– set by speculators front-running central banks, not price discovery among investors and savers.

Mispriced debt is at the heart of the global financial bubble. That is what allowed the US business sector to raise $2 trillion of net debt since the 2008 financial crisis, yet to deploy all of it on a net basis to financial engineering, especially stock buybacks. The proof that it has not gone into real productive assets is unassailable. Real net business investment is still 17% below its turn of the century level.

To continue reading: Wall Street’s Latest Bounce–Ostrich Economics At Work