Livinglies’s Weblog

There was an interesting study published in the Economist (March 15, 2008 pp 83-85), a conservative news magazine read around the world, that disclosed an incredibly close correlation between the “rule of law” and the health of the economy. It turns out that laws, rules and enforcement create a culture of integrity, civility and good faith. The epiphany is that those societies that follow morality, as we commonly know it around the world, have the strongest economies and greatest purchasing power. 

It’s true. Go read it yourself and research it all you want. Von Mises and Rothbard,  largely ignored but highly respected economists, came up with the same conclusion decades ago from a slightly different approach. (They are ignored because they sought truth rather than power. They believe the premise of modern economists is essentially skewed. History, particularly economic history proceeds from the motivation of people in public office or personal lives to change their current situation to something better. Reporting history relies on people who seek to be seen in the best light and thus their reports, whether of facts or indexes like the GDP, CPI etc., are skewed to mislead the reader. The theories used to explain economic history are therefore always based upon measurements of inaccurate reports. The policies based on those theories work only by happenstance — i.e., if consensus or conventional wisdom is created around the theory and policy, not the other way around).

The corollary is more disturbing and quite obvious in the context of today’s news stories of a collapsing economy.  Stray from morality as a matter of policy and practice and you undermine your economy, your society, your ability to achieve, and you gut the basis of your own happiness and contentment, as well as the prospects of future generations. 

All politics and all economics is about income distribution in some way or another. When we are out of touch with our own Godliness, we become out of balance in our society and our economy. By having no rule of law, secular or otherwise, govern the actions of those with power to do what they wanted, we have undermined our foundation, cut our societal fabric and diminished our moral high ground at the same time as losing our purchasing power in world commerce.

While Americans have pursued the dollar with religious zeal, other countries have been pursuing happiness, morality, civility, and integrity - albeit with the usual human imperfections.  The resulting changes in the purchasing power of the U.S. dollar and the relative strength of the U.S. in the marketplace of ideas and commerce can thus be explained. 

The fundamentalist in any major religion has a point: that societies, especially U.S. dominated societies, have lost their way. There is a growing sense of senselessness and lack of meaning in such societies. 

American men are dropping out of the work force and discarding goals and plans for their future, American children are not being educated nor are they taught to think critically, make moral judgments, build character, know their personal and world history and geography, please themselves and the world with their talent in the arts, or acknowledge the obligation and rewards of doing good deeds. 

Of course fundamentalists of all sects violate their own standards when they create inequality between women and men, when they impose a rule of a leader in lieu of a rule of laws, and so forth. But even from the most obvious perversity of fact and good sense, we can gleam some truth about ourselves, our society and where we are heading.

Today’s Torah reading talks about removing the ashes from the alter, an almost janitorial task. Yet the ancient Rabbi’s rushed to perform this task, competing for who would be first. Yes for fun but also to Honor the higher sense, the higher power we have the capacity to follow, if we are willing. My lesson in this world has been worship the riches and become poor regardless of how much money you have. Worship goodness and you become rich regardless of how much money you have.

Competition is fine if we follow our best instincts, our higher calling which all of us know we have inside. When we step onto the track and enter the secular race, make your goal the altar of your own Godliness. 

“There is much in life that people value, yet is utterly meaningless. There is equally much in life that people do not value - that is very meaningful and good. Do not judge by wealth. Do not judge by what others think. Judge by what you honestly believe to be good. And do it, no matter how belittling and ‘dishonorable’ it might seem to others. In the end, that’s what is truly worthy of praise.”

Whether we look to leadership to inspire us, or we simply change our minds and take the high road in our lives regardless of what others do, we rebuild our American experiment, we strengthen our society and reassert ourselves in the marketplace of ideas, morality and commerce. 

If we want to finish the American experiment, rejoin England and the European Union and give up our role as leaders, we are certainly on the right track. 

It won’t be long before the currency of choice becomes the Euro, a currency of consensus from countries actively seeking to do good things for their citizens. 

The U.S. dollar, including those bills in your pocket and those numbers in your bank and securities accounts, are being undermined by you and what you allow in your little corner of the marketplace. 

Only you (all of us in our own worlds) can turn it around. But it takes real faith rather than faking it or just giving lip service to it.

The American Economy: Vapor without Value

My effort here has been to point out that we are creating a fraudulent environment, much like an embezzler, that requires more fraud and more lies each time to cover up the last fraud and the prior lies. Our economy is now one which runs on boom and bust and cannot run any other way unless fundamental changes are made in the paradigm of American politics, econometrics and economics.

This morning, Paul Farrel wrote an article that is precisely on point, in explaining the bust we had in the 1990’s, explaining the bust we are having now, and explaining the next bust which is already in the making. 

The only thing I would add is that I think the policy makers are going to try the same thing again right now to “bail out” the current economic collapse.

If you want to protect your wealth, your retirement, your nest egg your rainy day fund, read this carefully and start thinking about it. 

The American economy is now a house of cards trading in vapor that is “rated” with value. There isn’t enough  real “money” in existence that will bail us out of the funny “money” that has been created. A major shift in our perspective must occur, and it starts with telling the truth. Here, reprinted from this morning, is the best summary of the unvarnished truth that I have found. 

PAUL B. FARRELL

A mind-blowing machine

In America, land of the bubbles, the next pop will be the biggest

By Paul B. Farrell, MarketWatch

Last update: 7:32 p.m. EST Jan. 28, 2008

ARROYO GRANDE, Calif. (MarketWatch) — Three cheers! Wall Street’s got a new rally song: “I’m dreaming dreams, I’m scheming schemes, I’m building castles high.”

Actually it’s the 1919 tune that launched the roaring run-up to the ‘29 crash and the Great Depression. Remember the lyrics: “I’m forever blowing bubbles. Pretty bubbles in the air. They fly so high, nearly reach the sky. Then like my dreams they fade and die.”

And it still fits today! Listen to venture capitalist Eric Janszen’s scary new paradigm in “The Next Bubble,” a Harper’s Magazine report: “That the Internet and the housing hyperinflations transpired within a period of 10 years, each creating trillions of fake wealth, is, I believe, only the beginning.”

Translation: The next bubble is already expanding. Now listen very closely as Janszen makes the single most dangerous prediction of 2008: “There will and must be many more such booms, for without them the United States can no longer function. The bubble cycle has replaced the business cycle.”

After the collapse of the 1990s dot-com bubble we laughed at all the hype they had spewed: “This time it’s different.” “New paradigm.” “New economy that only went up.”

Well, stop laughing: The new, new came true, says Janszen. Seriously, the economy and the stock market can no longer function without an ever increasing series of bubbles, one after another, rapidly expanding then bursting, with all the manic trading, risk, uncertainty, hypervolatility and distortions that come with it.

Janszen traces bubbles through history: From the 1720’s South Sea Bubble to the housing-subprime bubble. Bubbles are accelerating, becoming more frequent, a frenzy feeding on itself: “Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble fully deflated, a new mania began to take place.”

What’s so scary is not that the subprime bubble was happening so fast on the heels of the dot-com bubble, not that the pundits, the public and the policy makers all appeared to be ignoring it. What’s really scary is that our best and brightest leaders in Washington, Wall Street and Corporate America wanted to create a bubble! They even threw jet fuel on this raging fire with cheap money, favorable taxes and minimal oversight.

Of course the Treasury and the Fed will never admit it, but they saw the housing bubble as a healthy economic necessity in their warped ideology! In their myopic minds, the housing bubble was the messiah “saving” America from a big, bad bear/recession.

Publicly they denied the bubble’s toxicity, dismissing it as “regional froth.” Privately, they conspired to create a massive new bubble driving America deep into debt.

‘New economy’ morphs into out-of-control robot

This new ideology is extremely dangerous: It assumes the American economy can no longer be managed by politicians or Wall Street quants. The “new economy” has a life of its own, a “Terminator” from a dark future, an “I, Robot” from Asimov’s sci-fi world.

Yes, our economy has become a self-sustaining “bubble-blowing machine” inventing new bubbles at warp-speed even before the last is buried, in endless reincarnations of Schumpeter’s “creative destruction” cycles.

What’s next? More asset-backed bubbles. The dot-com ’90s created $7 trillion in market value. The housing boom created $12 trillion in “fake wealth.” Janszen predicts the next great bubble will be a $20 trillion “alternative energy” bubble. In fact, Wall Street’s already hustling biofuels, solar, wind, nuclear, geothermal and hydroelectric as the new alternative energies destined to replace oil, gas and coal in this next new economy.

Timing? The new “alternative energies” bubble will last about 8 years, from a 2005 launch till a peak around 2013, when it will “creatively destruct,” when all possible “fake wealth” is squeezed out, when investors wise up to the scam, when that new bubble pops.

In his finale, Janszen admits that when the “alternative energy” bubble finally self-destructs around 2013, “we will be left to mop up after yet another devastated industry,” while Wall Street “will already be engineering its next opportunity.”

But be warned: Even before we near the end of the “alternative energy” bubble, the law of unintended consequences could trigger a meltdown, not of the bubble but of the “bubble-making machine” itself! The machine will implode, taking down Wall Street, Washington, Corporate America … and with it, the “new economy,” the “new paradigm” and the “bubble-making machine!” (e.s.)

‘Black Swan’ self-destructs ’shadow banking’ derivatives

The trigger? A “black swan” off the radar and invisible to the quants managing the world’s derivatives.

The brilliant supertrader and risk manager Nassim Nicholas Taleb says a “black swan” is an extremely rare, improbable event (like 9/11) that cannot be predicted, yet has catastrophic impact. Black swans are events outside the vision, experience and technology of the world’s derivative traders’ geniuses.

What will the black swan destroy? How about the derivatives market that spreads so far beyond subprime loan obligations.

Pimco’s Bill Gross warns that $500 trillion of derivatives are hiding in a “shadow banking system” that “craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage … with no requirements to hold reserves against a significant ‘black swan’ run that might break them.”

Derivatives have become a renegade army of “I, Robots.” “According to the Bank for International Settlements … total derivatives amount to over $500 trillion, many of them finding their way onto the balance sheets of SIVs, CDOs and other conduits of their ilk comprising the Frankensteinian levered body of shadow banks.”

Shadowy? Pyramid schemes? Frankenstein? Terminator? Black swan: Gross paints a much darker future than Janszen: “The last two decades alone have witnessed pyramid schemes involving savings and loans/junk bonds, the small investor/dot-coms, and now global bonds/subprimes … in each and every case the originator of a surefire ‘can’t miss’ concept collected huge premiums from a willing investment public, only to see the pyramid collapse either of its own merits or from the lack of additional gullible investors. There will be more to come, much like a regular university that welcomes a never-ending stream of new ’students’ who pay annual ‘tuition’ to be ‘educated.’”

Higher truth

Never-ending: Gross and Janszen agree on that. But they’re both wrong. The biggest low in Janszen’s argument: “Given the current state of our economy, the only thing worse than a new bubble is its absence.”

Wrong, wrong, wrong! Remember, this new paradigm assumes that the only way the American economy can exist in the future is if Wall Street’s greedy “bubble-blowing machine” keeps feeding on itself, creating an endless, accelerating succession of ever-bigger bubbles.

Folks, that’s one of the dumbest economic theories ever, silly “new age” magical-thinking touted as a scientific basis for the new self-indulgent ideology of Wall Street, Washington and Corporate America.

There’s a higher truth: The best (not worst) strategy would be to let the “bubble-blowing machine” implode, live with the absence of a new bubble for a while, then quietly step back and reassess our unsustainable “growth-at-all-costs” economic policies that are secretly designed to benefit the self-interests of Wall Street’s insiders who profit by endlessly blowing bubble after bubble … after bubble … after ...(e.s.)

Brave words from someone who isn’t afraid to challenge the conventional wisdom folks. Listen closely to what he says.

Strategies for Living in a Failing Economy: Break the Bond of Mortgage and Note

While You Deal with Foreclosure and Eviction: Buy time and Make Money

Time for States and People to Act Now — Don’t Wait for Federal Government

Even while the Bush administration and bell ringers on Wall Street attempt to maintain the appearance of business as usual, the underpinnings of the entire U.S. economy are coming unglued and taking the Euro Union with it. Oil prices are up in U.S. dollars by 350%, up in Euros by 200%, and up in gold by 0% — that’s right. If you held gold when the price of oil started its meteoric climb in dollars, you would be sitting in the same position as before (no loss of purchasing power, oil would cost the same as before). If you held Euro’s, you would have lost ground, but only about half the ground lost by 300 million Americans who perform commercial transactions in dollars.

Besides the obvious importance of this to investment strategies, the consequence for every day American lives has been bad and is now turning catastrophic. The net buying power of the average American has been going down persistently for more than 20 years and the loss is likely to accelerate to hyper inflation levels that were unheard of in the lifetimes of most people living today.

The CDO (free money) scheme hatched on Wall Street where they created money and moved the risk away from those who were granting loans, opened the barn door and all the horses left. The scheme probably worked far better than they ever imagined it would — and far worse. The net effect is that tens of trillions of dollars have been moved like the water moving out from the beach before the tsunami hits. And now, like everything else, the pendulum starts swinging the other way. When the wave hits, it will bury some of the best companies along with the worst, and it will forever shake-up the way we conduct our commerce, monetary policy and political regulation of financial markets. Firing a bunch of CEOs isn’t going to cut it. Neither will sending them to jail, although they certainly deserve it.

And attempting to hold back the forces of change by avoiding the benefit to undeserving buyers/borrowers falls flat in view of the enormity of this worldwide fraud. Frankly, I don’t care if some people get an undeserved benefit and I don’t care if whether some people get fired or go to jail. What I care about is finding a way out of this mess — a solution that works, even if it means getting the people involved who created the mess or who should have known better. 

Current estimates now show a $10,000 decrease in the value of all homes that are near areas with high rates of foreclosures. So if you live in an area where there are 10,000 homes and 1500 of them are foreclosed, the 8500 other homes will sustain an $85 million loss. But the government and Wall Street reports only the loss in the foreclosures which is only part of the value of the 1500 homes that were foreclosed. So the government and Wall Street might report a loss of $5 million when in fact the direct economic effect is $85 million and the indirect economic effect caused by loss of consumer purchasing power is over $400 million. Multiply that times tens of thousands of communities all over the country and the world and you get a picture of how big this REALLY is.

So if you read the previous posts on strategies for dealing with eviction and foreclosure, here are a few pointers about why you should fight and why you will win if you take the fight to them.

IF THEY HAVE NO LIEN, THEY CAN’T EVICT AND THEY CAN’T FORECLOSE: A legal objective would be to separate the mortgage lien from the note in the transaction that you signed. This can be done in state court, bankruptcy court or by local government enforcement filing an action to help everyone stuck with this mess. By alleging fraud and other torts relating to the execution of the original documents, you form the basis of a “quiet title” action that can result in extinguishing the mortgage lien. This will still leave the note, but the note can then be adjusted downward either by negotiation, mediation judicial declaration or cram-down in bankruptcy. By separating the lien from the note, the right to foreclose and evict is permanently removed. They can’t evict and they can’t foreclose. Yes you probably need a lawyer to accomplish this, but you can probably find considerable help from a city, county or state attorney who is looking at state revenues dropping like a rock.

Reverse Negative ARM With Equity Kicker is Answer

Your only hedge against the massive inflation that is in process is the house you were cheated into buying. And the only hedge that CDO investors have against total or near total loss is to maintain a deal where recovery in full or nearly in full is possible. And this is the only hope for the intermediaries — developers, mortgage brokers, appraisers,  “lenders”, investment bankers, and retail securities brokers and institutional sales agents. The entire transaction must be recast to (1) stop the tide from coming back in caused by defaults and losses to CDO holders, (2) provide a reasonable period of time for recovery (sell-out of housing inventories), (3) provide a reasonable period of time for growth (normal demand-pull inflation), (4) provide a reasonable probability for recovery of investment in CDO securities and (5) provide a low but acceptable return to CDO holders while this mess gets cleaned up.

In order to make this happen, all the players — including culprits and ne’er do wells — must cooperate and will cooperate because they have everything to gain and nothing to lose. Lower mortgage payments to teaser rates or keep them there if they have not been reset. Keep it simple and gradually adjust it upward on a very slow schedule spanning 10 years. Eliminate negative amortization — except if the house is sold for more than the price paid. Provide an equity kicker to CDO holders that allows participation in the proceeds of sale over the adjusted principal borrowed. Adjust the original principal borrowed downward by 15% of the price of the house. 

Meanwhile, holders of gold reserves should be paid a fee for allowing issuance of gold redemption certificates that are issued as currency in the areas hardest hit by the meltdown. The spread of the new currency(ies) might occur in areas not directly impacted by the meltdown. Dollars will trade freely, but after some wild gyrations will find an equilibrium in parity with gold. Eventually a complete return to fiat money is possible but more likely, parallel currencies are likely to continue for quite some time. Hyper inflation will be mitigated, and the dollar, now headed for extinction might be saved. No guarantees, mind you, but it is worth a try. 

This writer, under the sponsorship of General Transfer Corporation has offered a prospectus to government leaders all over the country for the creation of two new entities immediately: The Interstate Finance Commission for regulation and the Interstate Currency Network, that will (a) make arrangements for issuance of gold redemption certificates as currency and (b) regulate the electronic funds networks who until now have operated as quasi-governmental entities with no accountability to the government, merchants taking electronic payments (credit, debit, ATM) or the consumers. 

The Federal government has demonstrated its lack of relevance and lack of power to do anything about this mess. By the time the next president and the next congress is sworn in, the damage will be irreversible. The people an the states must act immediately under the powers vested in them by the U.S. Constitution, forming regional coalitions and cooperating groups to facilitate and if necessary coerce the parties in cooperating with these remedies.

If you agree, send a copy of this email to your local government officials and newspapers. 

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.

Enron is just one of a long series of scams starting back in the 1960’s with changes in the rules that prompted Abromoff to Write Unaccountable Accounting. The essence of the scam is simple: put the risk on some unsuspecting schmuck and take all the money. It is the middlemen — the accounting firms, the law firms, the rating agencies, the investment bankers, and yes, the banks that clean up. They never take the loss. It is the small investor and the fund manager desperate to show short-term performance that support the scam. There are several segments of the economy that are empty shells — business plans composed of smoke and mirrors. Whether it is Boston Market which gave the money to the franchisors to pay for the franchise, or Enron or WorldCom who posted huge profits in tight margin industries, or the late spate of derivative securities many of which by their very name imply high sophistication to mask their low-down fraudulent nature.Some Chinese workers get paid a total of ten bucks to make a stick of furniture. The Chinese company that employs them gets 50 bucks. The Chinese manufacturer, sells the furniture to a jobber for $75. The jobber sells the piece to an American Distributor for $100. The Distributor sells the piece to a retail furniture outlet for $150. The retail store sells the piece to a customer for $800 with no money down and no payments until 2012. The customer signs — and here is where the real fun begins — his signed document is sold by the retailer to XYZ factoring, Inc. for $425. The factoring company sells the debt to an investment banker for $500. The investment banker packages an income fund and sells it through retail brokerage to Joe Schmuck (investor) on the street for $600, as a derivative security (collateralized debt obligation, which sounds very safe), with a return of 12%. The truth is no money exchanged hands until Joe Schmuck ponied up the $600. Then it is sent down the line and everyone gets paid. But the companies are allowed under current accounting rules to report the “sale”, the income from the sale and later the write-down when some of the paper goes bad — and they do this without the first dollar put up by either the consumer who “purchased” the furniture or the investor who will purchase the CDO security. And then these “middleware” companies report higher earnings and more people buy their securities and on it goes. The frenzy continues and prices increase because nobody dares to get out, and people fool themselves into thinking they are rich from this paper trail — until it collapses, which is exactly what is about to happen in our boom and bust economy.Joe Schmuck is the one who actually bought the furniture and doesn’t even know it much less use it. Nobody cares whether the customer who received the furniture ever pays because they are not at risk (Joe Schmuck has all the risk), and nobody cares if Joe Schmuck loses all his money a couple of years later when the pyramid collapses, because he bought pursuant to an incomprehensible prospectus that is mind-numbing even to experienced securities attorneys. The disclosures are all in there, couched in language that probably nobody understands including the author who plagiarized it from another prospectus which itself was created from cutting and pasting the work of others who cared all about form and nothing about substance. Whether it is “mortgage-backed securities” or anything else if you create free money people are going to chase it and take it. Lots of people made a lot of money on this scheme and variations of it. They are all based on hiding risk, and skirting the intent of disclosure requirements. They all produce ridiculous sums of revenue and income for middlemen in exchange for merely showing up. None of the middlemen provide value added. That is the weakness of our economy and the culture behind it is what is pulling down our quality of goods and services, our expectations and even our hopes and dreams.The reason why costs have gone down and prices have gone up is not just that the companies we see and know are making more money, which they are, but because, we have institutionalized it into a feeding frenzy that invited more middlemen in to share in the bounty. The more people in the chain, the more complex it appears and the thus the more legitimate it appears (or at least, there is considerable doubt arising from the confusing array of transactions, that anyone can prove that anyone did anything wrong).The net result is that consumers and investors get screwed. Consumers are lured by “free stuff” (like houses) and investors are lured by too good to be true returns. Nobody else puts up any money. And if the Consumer actually pays part or all of the price of the furniture, then there is even more money to split up with transaction, handling and customers service fees attached. It all comes down to a simple code of marketing in the investment banking world. If you are selling, make it complicated — then you can call it whatever you want and price it anyway you sell it. If you are buying make it simple and pay only when you understand what you are paying for.