Livinglies’s Weblog

You can argue all you want on paper with equations and philosophical arguments, but a simple human fact remains true — if people do not feel any moral sense of accountability they will not act in accordance with a reasonable standard of good character. Without character the entire society, and of course the economy, goes down the crapper. The U.S. Treasury plan is not merely “more of the same” it seeks to institutionalize all that is bad and wrong with our society and our economy. Some immediate thoughts about the reports on the new plan to be unveiled on Monday by Secretary Paulson:

• There is being nothing being reported that indicates the plan seeks to help out anyone now: soften the meltdown, slow the foreclosures, stop the evictions, restore confidence in the financial markets, restore consumer confidence, restore balance sheets, increase liquidity without enlarging the money supply, reverse the slide of the dollar, or reverse the rising tide of inflation. It is all about future bubbles and busts which may or may not look like the one we have, the one before (.com bubble), or the one that is in process (foreign exchange and commodities).
• There is nothing being reported that indicates the plan seeks to increase transparency for the public so that they are well-informed and educated about “new” financial products whose design is to create confusion through complexity and profit through back-doors that undermine the American Citizen, U.S. Economy, and U.S. foreign policy.
• There is nothing being reported that indicates the plan seeks to enhance the fundamentals of our economic system, which is currently based upon profligate consumer spending, pressures to increase consumer debt, and steering citizens away from savings. It is interesting that the very same people who “ideologically” plead for less government and more personal responsibility are lining up behind a plan that institutionalizes to an even greater extent all the economic forces that prohibit or inhibit the ability to provide fro their own security and prosperity.
• There is nothing being reported that the plan is willing to even address the current disparity of wealth, the current trend toward a deepening divide between a few people who have wealth and the rest who don’t. It is interesting that the very same people who plead for a free market economy line up behind a plan that would allow precedent to stand on socializing losses and expenses for big business, thus undermining entrepreneurship and innovation (the hall mark of all prior economic progress in the United States). 
• While these people tell us that windfall profits are part of the game that will even out in the end, they give us plans that prevent leveling the playing field by covering losses with access to tax dollars, covering expenses by shifting the risk onto public programs, and covering deception by legalizing slight of hand reporting in which both the methods of business and the financial results are completely misstated (that would be “lying”) or even reversed converting actual losses to the company and damage to the society into reported profits, higher per share earnings, higher price earnings ratios, higher stock prices, and “benefits” of bringing new products and services to the downtrodden members of our society (like tricking them into signing papers to “buy” a house) enabling the lender to sell the paper at a profit without regard to the quality of the paper, thus tricking investors, undermining pensions, social services etc.)
• What is being reported is more centralization of highly complex political and economic subjects into the hands even fewer people of dubious talent, leadership, training, education or creativity —thus decreasing the pool of available talent and decreasing the discourse on economic policies all contrary to the basic constitutional premise of checks and balances, division of power, prevention of tyranny and promoting policies for the health, wealth, safety, security, and benefit of United States citizens.
• Centralization of banking and deregulation of banking has produced a boondoggle of problems that will take decades to reverse. There is no doubt that the Federal Reserve should have greater control over any process that creates “money” in the marketplace so that monetary policy will mean something. But it is the Federal reserve itself that needs re-structuring to provide for greater transparency, more checks and balances, and greater de-centralization of decision-making. The open-market committee is simply not set up to deal with today’s marketplace, today’s money, the prospect of a declining dollar and the possibility of a rising Euro in the United States. 
• Centralization of banking has led to the flow of money away from where it is deposited into places that have no relationship to the depositors. Loans are made in foreign countries from deposits made in Springfield, Illinois. The depositors are deprived of the economic benefit of having that money loaned or invested in their locale, thus improving liquidity and growth prospects for those depositors and all the citizens of their town or city. With no safety net, the slightest ripple can and does cause blight to replace what were once vibrant or at least promising communities.
• Centralization of banking has led to indexing of loans as the exclusive basis on which to grant them — replacing the old fashioned relationship of person to person. This has resulted in hyperventilating the prospects for fraudulent lending by lenders, the entire CMO/CDO market, and fraudulent borrowing by borrowers. JP Morgan was asked at a senate hearing 100 years ago what was the primary criteria, the essential quality for granting credit; his answer was that it was “character,”(not balance sheets, income statements or track record) which is exactly what is not part of the equation now with the total reliance on FICO scores, other computer algorythms etc. 
• By removing “Character” from the equation we removed accountability. You can argue all you want on paper with equations and philosophical arguments, but a simple human fact remains true — if people do not feel any moral sense of accountability they will not act in accordance with a reasonable standard of good character. Without character the entire society, and of course the economy, goes down the crapper. The U.S.Treasury plan is not merely “more of the same” it seeks to institutionalize all that is bad and wrong with our society and our economy.

McCain’s Folly

The solution to the liquidity crisis continues to be a political agreement between government, business, borrowers and investors in which the obvious factors are directly addressed — overvaluation of home values, overvaluation of creditworthiness, and overvaluation of CMOs. Any plan which does not address those factors will merely be an attempt to sweep this one under a rug that isn’t big enough to hide the dust. All current plans are partial swings at a moving target, based upon the political points the author or speaker wishes to score rather than being based on the health, safety and welfare of the citizens of the United States of America.

The plain fact is that is the practically nobody in government anywhere knows, understands, or has developed any proficiency in developing an understanding of the economic world of their constituents. Upon cross-examination they would fold like a house of cards. 

Yet in an odd irony (redundant, I know) it is true that all economics is actually political and that all political decisions result in economic consequences. Hence we have put ourselves in the hands of a bunch of people, most of whom lack either the intelligence or the motivation to know what they are doing, and who are responding to the “information” given to them by their staff which gets most of its information from lobbyists, and the resulting legislation is passed without ANYONE ever reading it. 

Senator McCain is unfortunately one of the offenders for lack of actually reading the printed word. He reads nothing. He gets summaries orally on the run, and that is why he makes so many mistakes in his speeches. He spends no time in analysis or contemplation, not that he isn’t capable of it. He just doesn’t do it. And in our political world he has proven by getting the Republican nomination, that you don’t actually need actual policies in mind that serve as stepping stones to a better future — you just need votes, endorsements and money (not necessarily in that order).

In an effort to score political points, John McCain, presumably with the advice and counsel of prehistoric economic advisers, hawks the idiotic notion that government regulation is a bad thing in and of itself. Economists from all sides of the political spectrum admit that is wrong. Without a referee in the “free market place” we would all return to slavery or the dark ages of serfdom. We have recently gone too far in that direction, a fact which is obvious to about 80% of the American citizenry and even to young adults who ordinarily don’t even think of such things. The necessity of a referee (i.e., government) is completely unknown to McCain either in concept or reality. John McCain is decidedly not an idiot — but like most of his colleagues, he acts like one.

He said yesterday which much fanfare that it is not government’s job to bail out people, big or small. True enough — and it certainly plays well to those who blame the victims, as long as they are small victims rather than big companies whose stock is publicly held. 

According to the founding documents of this country, which are the Supreme Law of the land, it is government’s business to protect the health, safety and welfare of its citizens; and that means doing something to stop the current financial bleeding and slowing the American and worldwide tailspin that is destroying the paycheck of most American citizens increasingly each day, as the U.S. dollar reaches lower into the abyss and the price of gas now approaches 25% of the net paycheck of many workers. 

Bailout is one of the tools on the table and it is a good short-term and very small part of a total solution. The actual solution to the present crisis can only be reached through political consensus which thus far has not been the subject, much the less the focal point of discussions in the current emergency. To that end only Obama (and recently endorsed by Clinton) has proposed establishing an emergency commission not unlike the 911 Commission. 

A major bailout to everyone will only put the dollar, and thus the purchasing power of each citizen in further jeopardy. That is why Obama is right about limiting the resources applied to the bailout part of the equation. Stopping the foreclosures and evictions through political consensus is also a urgent requirement. Again Obama is right on the approach of consensus but probably wrong in his opposition to the 90 day freeze on foreclosures and evictions proposed by Clinton. 

We need some breathing space to show the world we are still in control here and that we understand the root problem — which is that prices became artificially inflated by high pressure sales tactics getting people to sign mortgage documents that could be sold to satisfy the last group of deals that were sold on terms that were impossible to sustain on their own. 

No bailout at all is government failing to do what it is there for — to referee between competing groups and interests and intervene when it gets out of hand.  

McCain is advocating (or more specifically parroting) the economics and the politics that got us into this mess. We had a Federal Reserve with no power to monitor or regulate the creation of money supply by the private sector. Paulson announced today he wants to change that and expand the Fed’s authority to acknowledge the obvious fact that investment banks have been creating more money supply than all the central banks put together. As a result, worldwide money supply from derivative security sales skyrocketed beyond the imaginable, with some estimates putting it at as much as $500 trillion.

That is why we keep saying here that the answer to the crisis lies in political consensus — as Obama preaches, and not in ideological fixed constructs like McCain and Clinton promote for political points. Paulson’s proposals will be helpful 30 years from now. Partisan solutions produce partisan fights resulting in gridlock. Americans need action now. Obama’s proposals should be looked at far more closely, and used as a point of discussion. We need help today, this minute.

Paulson’s comments yesterday were inappropriate. He just doesn’t get it. He is arguing for hitting the iceberg and then let the deadly water take care of the problem. The ship is the American economy. And the waters are a legal system that assumes, all things being equal, that the process of foreclosure, eviction and losses on CDO investments will eventually find a state of equilibrium from which the economy will rebound. He is wrong.

All things are not equal because of the scale of losses, the scope of the economic effects, and the deadly despair descending upon the American consumer in a consumer driven economy. Take away the spending of consumers, and the United States is a third world economy. Maybe it doesn’t need to be that way, but it is now. 

On the other hand he is right in one respect — that a bailout, using federal funds, will not alone solve the problem. More fiat funds pushed into a marketplace where the dollar is already declining in a virtual free fall will cause problems of its own — continuing devaluation of the U.S. dollar, other countries severing their currency ties with the dollar, a huge increase in U.S. debt, spiraling inflation at a level not seen before in our lifetimes, and a sea-change in life-style as virtual ghost towns dot the landscape consisting of abandoned homes. 

The answer is a combination of remedies and rewriting the rules so all things ARE equal. A relatively small Federal bailout along the lines of the Barney Frank proposal will provide some breathing room. 

Republicans and Democrats need to get together under the leadership of their standard bearers in this election year and refuse to pass any legislation for funding or otherwise until this credit crisis is addressed in an immediate comprehensive way. 

Federal and state agencies and judicial systems, should bend their rules as much as possible to provide a de facto moratorium on foreclosures and evictions — re- routing cases into mediation procedures and providing for mediation reports in 90 days before the cases can continue.

Attorney Generals of each state should intervene in each foreclosure case, basically alleging that the lender participated in a vast conspiracy to defraud the borrower and with reckless disregard to the damage their behavior would cause to the economy of the state and the nation, not to speak of cities in other countries who are now decreasing social services because the cash they thought they had evaporated with the diminution of value “Safe” “cash equivalent” CDO investments they thought they had. 

See the previous post, for details plans on remedial legislation which Congress and each of the states can pass to aggressively put down this crisis. If Federal authorities fail to act, then states, individually and collectively should encourage their state chartered banks to start issuing bank notes as an alternative to U.S. currency. Agreements with Forex and precious metals traders should be reached to back up these new currencies. A radical solution to a radical problem. Failure to act will leave every American citizen bereft except those who are already taking hedge positions in foreign exchange and precious metals and other commodities. 

Mortgage Meltdown: Smoke and Mirrors Bailout

It is obvious that the “snooty” U.S. bankers, as the Europeans are openly referring to them, still think the world is stupid. The message is out. A massive fraud has ben perpetrated by creation of complex derivative securities that looked better than they were, were rated better than they were (bought and paid for ratings), the creation of funny money, and the apparent loosening of credit that was fictitious, as the many people who are now distressed borrowers can attest. 

The remedial action proposed is illusory just as the original loans and securitized CDOs were illusory. And the blessing they get from government and rating agencies is just a continuation of the cold, hard, calculating attempt to distract foreign government, local governments and investors all over the world from making a run on banks, investment bankers and clamoring for heads to roll.  

The current plan calls for a division of “qualified” borrowers into classes. The classes that are covered are people who (a) don’t need the help or (b) certain people who are not in default but who would otherwise qualify for a loan now. This leaves the vast majority hanging in the wind — millions of homeowners, millions of renters and tens of millions of people affected by the fraudulent issuance of CDO’s under false pretenses and misleading disclosure. That means government investment funds for cities, states and nations are in peril as well as managed funds and individual investors. 

Even the people who are in the class of “can pay no matter what” are in more peril than they think because of this debacle. They face risks of job loss, massive historical inflation, devaluation of the dollar, loss of pensions, loss of purchasing power from social security and governmental programs, investment losses from lower corporate earnings, decreased purchasing power from dividends denominated in U.S. dollars, higher taxes arising from decreasing revenues received by state and local government, medical emergencies where they find out that the coverage they thought they had is not as broad as they were told, increased sales taxes, and business, investment and property losses from storms aggravated by global climate change, where the insurance companies have either already pulled out or have inserted exceptions that will allow them to either reject claims or settle for pennies on the dollar. 

And then you have the renters who are not even included. They are being tossed out of homes where they are current in their payments but the house is foreclosed. Rents are rising and the number of homeless people and the economic status of homeless people is likely to change demographically in ways that will stun the American citizen.

Completely ignored is the issue of lender liability, securities fraud liability, and a host of anti-trust, FCC, and other violations entitling plaintiffs to recover not only compensatory damages but punitive, treble or exemplary damages. As stated by many central bankers around the world, everyone has a dog in this catastrophe. 

Here are the basic rules of engagement that should apply:

1. All classes or borrowers and homeowners should be included, except those who can’t afford to maintain the property. This will take the heat off everyone even if there are reduced interest payments or deferred payments by extensions of maturity dates. 
2. Any and every plan should allow for at least 7-10 years for correction of problems that were created.
3. Disgorgement of profits and equity by investment bankers and other parties who sold the CDOs should be part of every plan relating to every class of investor and borrower.
4. Focus not only on those who are subject to ARM resets in 2008, but also on those who have already been reset one or more times. A tiered approach would salvage consumer purchasing power and lead to a softer landing for the recession we all know will happen.
5. Start with the premise that anyone who can afford to maintain this home, even without paying anything on the mortgage in the first phase, should be allowed to do so at least for a short while. 
6. Focus on plans that allow some return to investors in the CDOs, even if those are reduced from what was expected. 
7. Remedial federal, state and local legislation requiring cooperation of all parties is protected against the ex post facto prohibition in the constitution under public policy, extreme hardship, and protection of the security of the public from economic disaster and social unrest arising from the dislocation of millions of people from their homes. Change the bankruptcy laws where necessary to protect borrowers from the obvious abuse of power that was leveraged against them. Cap credit card rates, and start reducing them. At the moment they are robbing the economy of vital consumer spending dollars that would benefit the economy as a whole. 
8. Allow developers, lenders, mortgage service providers etc to participate and get protection but reduce fees for mortgage service.
9. Prosecute high profile offenders  under securities laws, fair trade laws, truth in lending laws, etc.  Real estate brokers and mortgage brokers who steered people into teaser rate mortgages when they otherwise qualified for better, more secure loans should be required to disgorge their fees. Investment bankers who are a the source of yield spread premiums should finance the disgorgement.
10. Apply disgorgement of fees and excess profits and damages to both borrowers and investors.
11. Establish a moratorium on all tenant evictions where the tenant is less than two months in arrears. 
12. Establish short term rent control to allow people to get on their feet, provided the landlord is not taking an actual loss. 
13. Cease issuance of extra currency and liquidity into the marketplace as soon as practicable. Every dollar issued, every bond sold represents a potential to come back as five dollars worth of inflation on the U.S. economy. 
14. Establish a specialized division of the SEC to analyze exotic securities and establish whether the disclosure tends to mislead an investor. Post comments on easily navigated websites so investors can assess the risk they are taking.
15. Prohibit any credit scoring, bond rating, securities rating where there is any connection, funds transferred, or other relationship between the entity issuing the rating and the issuer of the securities, making the loan, borrowing money or buying anything. 

The big boys were all about stepping up to the plate to hand back some of their hard-earned (make that unearned) profits with a bailout fund. First it was $75 billion, then it was $100 billion, today it is $80 billion and going down because in the final analysis it is once again about smoke and mirrors. They wanted to create the appearance of reassurance rather than the actuality. Front page of Wall Street Journal today gives a sketch of one of the feeding frenzies and that ensuing crashes that are happening all over the place. It isn’t pretty and it will get a lot worse. In the end, the people who made all the money are  going to be looking for the tax papers to bail them out of a liability that is really all theirs. Donald Trump said it right on Larry King two nights ago. People should start kicking ass — the borrowers who stand the lsoe their homes and everything in it, the banks that cannot survive the massive write-downs that will restate huge earnings into huge losses, and the investors and fund managers who have watched their wealth spiral up and then spiral down (all on paper, nothing real) as the world turns upside down and sideways.Borrowers: Stop playing the game. Renegotiate your loans.Banks: Be creative. Let the talks begin with your borrowers and be ready to fight with the people who got you into this mess. Your borrowers and their good faith are the only hope for many banks to survive this mess. Take your head out of the sand.  Investors: Stop playing the game: Demand compensation for being mislead. No surprise here. Concentrations are in Black and Hispanic communities where it was all the more likely they wouldn’t know, understand or absorb the details they were signing away their lives on. The FUND that was being negotiated between the Treasury department of a lame duck unpopular president and a greedy bunch of predatory bastards who after 10 years of doing this crap think they can get away with anything — it just might fall apart. Some players are back-pedaling. The vacuum in leadership is going to magnify the effects of black October, 2007. There are only two people in the right position to force a massive change in business methods and a bailout in proportion to the requirements of this disaster — GW and Bernanke. Neither one has the muscle or credibility to do it. The only other two people who could do it are Bill Clinton and Alan Greenspan — and neither of them has been or will be invited to try. This is going to be very messy. 

Well here it is. BOA, JPM et al are getting together a fund to “buy out (i.e.., bailout) the blood soaked securities they have been spewing out into the marketplace for years. They understand the likely response of the public. They understand disaster is just days away and they are actually trying to do something about it. While it is doubtful that the $75 billion bailout will itself stop the fall, it COULD spur others into action. The $75 billion is probably 1/10th of what is needed, and even if they get all the players in line, it will mean a series of write-offs over several years (permitted by current regulations and deals with Treasury allowing them to mis-report their earnings). The write-offs will depress earnings and the scare will decrease price earnings multiples and overvaluations of start-up companies. So the market is in for a long haul of bad returns, under the very best scenario. This is future shock and culture shock coming together in the perfect storm. Deferring the cost to future generations was the plan, a greater fool theory driving the Peter principle. Unfortunately, the excess of the last 7 years or so has drained the resources of the government, and the spending (and predatory) spree at the top echelons of corporations has sucked the life out of the purchasing power of the U.S. consumer. That leaves us with about a $2.5 trillion problem over and above the $750 billion created by the credit shock caused by free money. It looks like the piper has to be paid a little earlier than anyone had planned. Templeton, in his off-shore hideaway, is well protected from what will be one of the shakiest economies in history — not because it got into trouble, but because it got so good at getting into trouble and magnified its losses into numbers that are mind-numbing. Hopefully, real estate will not suffer nearly as much as those who are mostly invested in the securities markets. High inflation, high unemployment and high interest rates are likely. Plans like this might soften the landing or defer the crash for a few weeks at a time, but that is the best they can do.