Livinglies’s Weblog

That’s Trillion with a “T”

• Most people agree that we can’t correct the problems that are still unfolding unless we admit the severity of the problem. The current estimates of a maximum of $450 billion damage are absolute lies designed to give reassurance to people who could and probably should cut and run. As long as we deny what is really happening, the real solutions will not emerge. The current group of proposals can be be all logged in under one word : patchwork. 
• The real solution is comprehensive political action together with regulatory reform that goes in an entirely different direction than allowing money to be controlled more by political force of individuals in power with their own private agendas.
• Here is a one page summary of the measurements of the actual damages caused by the sub-prime mortgage crisis, coupled with the effect of the sub-prime mortgage crisis on all mortgages and housing, coupled with the effect on inflation and private losses rippling out from the collapse of liquidity, credit, jobs, and social services. Some fo this information was taken from the BBC News Website.
• Mortgage Meltdown: The real measurements and statistics 

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.

What we know is that nothing constructive is happening now, the usual ideological gridlock is preventing progress, and that the curiosity about a brilliant new face might just get the right people to the right table at the right time.  

Bernanke is completely right that the ONLY way out of this mess is not throwing more money at it, further damaging the credibility and value of the dollar. The real answer, the one that that actually reverses the crisis is admitting the simple fact that a $250,000 house was sold for $400,000. 

And the solution lies not in legislation but in executive leadership. The key component of the solution is a reduction of the principal balance of the mortgage loans out there — and that includes virtually all loans that were initiated over the last 5 years. All homes were affected by the appearance of rising prices that turned out to be false.

The only way this is going to happen is with persuasive executive leadership. Teddy Roosevelt said speak softly and carry a big stick. That is pretty much what need to happen here but somehow you need to get all the players into the room and sitting at the same table. 

McCain won’t do it out of stubborn ideology. Clinton can’t do it because of resistance just to her name let alone credibility in her policies. That leaves Obama — an untested but brilliant strategist who not only survived but prospered in highly contentious environments consisting of diverse antagonists and rivals.  His credentials are necessarily sparse but still solid in this respect. If Obama can’t get everyone to the table, nobody will. And if they don’t come, the economy will sink like a stone. 

Bernanke could be the one but he isn’t. Paulson could be the one but he isn’t. And of course Bush is in the right position, but is so out of touch with the reality of the situation that he is worse than useless.  

Consensus that offers olive branches and incentives to everyone CAN solve these issues. Lower the mortgage balance but give the lenders a chance to participate in the comeback on a contingent basis. State the reduction as a contingency so the capital requirements of banks can be met without begging for money around the world. This will also minimize the write-downs of investment banking houses and restore investment value to balance sheets.

Avoid criminal and civil prosecutions and even offer immunity of there is cooperation. Strengthen regulation and abandon the new round of loosening regulations in Basel II in favor of tighter standards with oversight on risk assessment. Strengthen disclosure requirements and enforcement of violations by the SEC using the methods employed in the CDO fraud as the template.

These are the a few of the important things that need to be done. In order for Republicans, Democrats, Independents, businessmen, Wall Street executives, Bankers, borrowers and investors to play nice together though, it will take executive leadership of a type we haven’t seen since Jack Kennedy talked down steel prices. 

There is no guarantee that anyone including Obama will be successful at staunching the bleeding. What we know is that nothing constructive is happening now, the usual ideological gridlock is preventing progress, and that the curiosity about a brilliant new face might just get the right people to the right table at the right time. 

Obama, like any president, will need advice and counsel dealing with the complexities of currency, derivative securities, arcane, conflicting mortgage laws and provisions in notes that defy explanation. 

He has an advantage in perception, however, His campaign is clearly not owned by one large interest group over another. And there is no perception that runs to the contrary. Enmity between ankle biting bankers and investment bankers won’t be mixed with suspicion that they are being led into a trap. 

It will be 10 months before Obama can use his powers of the Presidency to start this process. But there IS something he can do now. Start acting like a President and fill the void. His backing includes people of enormous political power who can help invite the decision-makers to secret meetings now. Win or lose, he should do that now without regard to whether it is politically expedient. 

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: Get Out of Jail Free Card from Paulson

In the usual way of floating trial balloons before committing to anything, and without the whole hearted support from any of the many entities and people who have a dog in this fight, Paulson is “outlining” the proposal for “subprime relief.”

All information points to another intentional diversion from dealing with and getting disgorgement of money from hundreds, perhaps thousands of investment bankers, mortgage brokers, lenders, “retailers” and institutional sellers who converted assets to fees in a very simple scheme — churning, covered over by the complexity of “creative” derivative securities. 

Anyone can sell something if the cost is zero and the buyer actually thinks he is getting value. In fact, the sky is the limit because at no time is the market saturated with such a product. That is precisely why the “subprime mess” got so out of hand. And as Krugman points out today in the New York Times, we don’t know where or how how much toxic waste is buried. 

Paulson’s outline presents a plan that does little for the borrowers. It creates the illusion of a bailout when the investment world will not accept our word for anything (and so the illusion is doomed to failure). And the new wrinkle is that it puts the burden on the states and cities to do something about it, which in classical Washington political terms meaning that they are creating someone else to blame. 

Cities and states, already struggling are going to see significant declines in tax revenues and investment income, the value of investment funds and their assets specifically as a result of this mess. And it isn’t just a “subprime mess.” It is about the whole credit market. “Innovation” is just a code word for saying that we are going to create the illusion of money, everyone is going to buy into it because it looks free, and we will collect real fees while everyone else goes into the toilet.

And while we are all sleeping, CDOs and similar securities have been sold for 20 years based upon mortgages, credit card debt and dozens of other exotic theories of risk, none of which have any Triple-A merit but all of which have mysteriously been given the extremely high ratings as risk instruments. They have converted junk bonds to Triple A bonds with a stroke of the ratings pen. 

Meanwhile the co-conspirators, the U.S. Government and Wall Street innovators together with lenders with plausible deniability, and retailers of derivative securities that were sold not just deceptively but with outright lies and fraudulent ratings — they all get a free pass.

The sad truth is that investors are beginning to suspect that most of our market indexes are a hoax. They are probably mostly right. Vapor has been sold with the clothing of kings and queens. Unsuspecting people, government finance officers, financial institutions, fund managers, have been misled into destroying the value of what were real assets until they were invested into these exotic derivative securities, with the fraudulent ratings. 

The economy has been driven by consumer spending. Without liquidity offered by these exotic plans to lend money on credit cards and other consumer debt, whether securitized or not, the economy can’t run. Liquidity is drying up. Pumping more “money” into the system is not a long-term solution, it is a suicide pact for the dollar and for inflation. 

If we REALLY want to save our economy and its place in the world, we need to do something real, own up to the mistakes, hold the people who did it accountable, and make amends to the world as best we can.