Busted: Bankers and The Global Economy

February 8, 2009

Toxic Debt Bailout by Wall Street?

bailout-can-of-wormsWall Street was instrumental in producing the global economic crisis as well as the economic crisis at home. Now the Obama administration is looking for private investment to bail out U.S. banking with a U.S. Federal Guarantee. In exchange for a guaranteed bottom dollar value on toxic derivatives and bank assets, the federal government wants to entice buyers like private investors and investment entities: hedge funds, private equity funds, insurance companies and the like.

The federal government has stubbornly insisted that toxic banking instruments that have brought the global economy crashing down still maintain some value and will increase in value some day. In the bailout last year, the federal government paid almost double the estimated value of toxic debts purchased from banks. The value of securities and toxic debt tied to subprime mortgages and other dubious loans has plunged as the financial crisis has intensified. To avoid similar criticism in the future, the federal government wants to establish guarantees for investment. The Obama administration is depending on Timothy Geitner to get the job done with a workable approach.

In a federal bailout, toxic asset valuation is questionable at best, raising political questions about whether purchase prices are fair to both banks and taxpayers. The system is ‘too big too fail.’ As toxic assets remain on the bank balance sheets, they continue to decline in value, producing more multi-billion dollar losses for banks. Bank securities are complex and hard to evaluate. There is little information about which assets are owned by each bank. To make matters worse, banks have refused to cooperate with outside buyers. The Obama administration expects that federal investment guarantees will be a good short-term fix that is worth the risk of declining assets even though the U.S. taxpayer will be left holding the bag. The government stands ready to absorb losses at a base value, while providing some of the financing for the purchases as an incentive.Transparency is still the #1 issue behind the whole idea making the actual workability of any plan questionable.

Lap dog economists are finally admitting that the U.S. doesn’t have a functioning banking system, a measured requirement for a future ‘self-sustaining capitalist economy.’ The lack of trust has destroyed the system. The government hopes to restore that trust. As far as a functioning banking system, lap dog economists and government specialists haven’t determined that the American people can’t continue to borrow their way to economic health with stagnant wages, job losses and inflated prices. The credit bubble for the U.S. economy has burst with the result that millions of formerly prosperous Americans no longer can qualify for loans. Now, the Feds are hoping on investors to make the difference. ~ E. Manning

November 3, 2008

Admission of Recession Before the Election?

consumer business crisis

consumer business crisis

Corporate results and outlooks have worsened. Automotive companies worldwide declared October figures were the weakest in 20 years. Economies have continued to weaken and as consumer credit and cash have dried up. Why wouldn’t they? Corporations, with the blessings of the U.S. Congress have sent a treasure trove of jobs overseas, milking the economy and American citizens for everything of real value for years while using the credit carrot to support spending. The federal government has added to the damage with heavy taxation and irresponsible governmental overspending. The mortgage crisis, compounded through a heavily compromised banking system has ensured an early downward trend in the national, if not global, economic cycle.

Before the election, no one wants to admit the evidence or the reality that the United States is in a recession. The European Union readily admits their recession. The U.S. government and its house of paid economists proudly hang onto false hope as if a recession is the end of the world.

Americans cannot deny the effects of the current economic crisis. Admitting a recession is likely to do little where the election is concerned, but there is always hope for the current administration. What most Americans do realize is that the economic crisis is a national security issue that was brought about by politicians in Congress and compounded by short-sightedness.

Trillions of dollars in bailouts have avoided a banking collapse. Congress is eagerly seeking to make things right by spending more taxpayer money than American taxpayers don’t have in the form of a fiscal stimulus package. Congress is remaining very independent before the election, scarcely mentioning the upcoming global summit in New York City. A public date for the summit hasn’t been set as the nation and much of the globe looks in the yawning chasm of a recession of unknown breadth and depth. The current administration is doubtful that anything real will come from the summit. ~ E. Manning

October 1, 2008

Economic Bailout Drumbeat: Securities, Transparency & Housing Value

The White House, Treasury Secretary Henry Paulson, Congressional leaders coupled with candidates McCain and Obama, kept up a steady drumbeat of support for the ultimate bailout plan that has yet to materialize. For the moment, the U.S. political perception is that the world markets are stabilized. The reality is that on the surface, stability is a mirror on the pond of finance. Economists discuss among themselves that the reality of life in America remains that the nation is living way beyond its means. Political ideology in the States coupled with irresponsible spending has brought the nation to its knees. Generally, economists long for a pragmatic economic policy that is not driven solely by politics and special interests. An enlightened public is necessary to drive true reform to force politicians to do what they should.

Cutting bankers some slack by buying their bad securities is a bad idea. Is this not like overpricing the junk in your basement to resale as new? Garage sale junk rarely goes up in value. Depending on failed securities to magically increase in value when they are currently worthless is self-deception. Expecting financial junk to appreciate in value when there is no market for it because the premise of that junk is fatally flawed is no less deceptive. Failed banking securities are not wine.

The technical aspects of buying out bad securities is equally problematic. What is worse, depending on Congressional oversight to save the world is an exercise in futility. The lack of “transparency” is the chief issue behind the entire process. There is still no transparency in the process. Designing that transparency on many levels is probably mythical. Nobody within the brightest barrel of economists truly knows how to accomplish this transparency, but readily admit that the possible solution is highly technical.

The basis of the last several decades of wealth creation has been based on the foundation that housing prices could only increase. If U.S. economists had spent any time looking at Japan, most of us  would know the likelihood of truth. A few of us do. Since the crash of the 90s, housing prices in Japan have continued to move downward with no prospect of increase. Real estate is no longer the quality investment that it was in Japan and this nation is looking at the same scenario. ~ E. Manning

September 30, 2008

Financial Collapse: Fear & National Resentment

monetary whirlpool

monetary whirlpool

Global reports state that the global credit crisis has deepened. Banks have stopped lending to one another. Britain and Europe are encountering many of the same problems as the United States. Central bankers are dumping cash onto the market and playing the same game as the Federal Reserve through auctions to keep commercial banks on life support. Who is to blame? Today, the blame is being cast on the collapse of Lehman Brothers, but the reality is a tragic loss of confidence brought on by bankers themselves. Some of the best educated men and women on the planet have been powerless to improve the situation.

Commercial bankers have locked up the market and the only option central bankers think they have is to dump money into banks, in effect, satisfying the “need for cash.” The need for cash and credit is a symptom of the larger problem: panic by bankers because of their poor choices.

Economists publicly expect the longest recession in a quarter century with or without a bailout plan to rescue the battered banking industry. Most say the next six months are going to be very difficult. Market scare tactics say that if a bailout is not approved, a depression is likely as credit freezes up and markets collapse. The global consortium of central banks dumped an additional $630 billion into the global financial system, which will fuel both inflation and devalue currencies simultaneously. Central bankers are doing the same thing with other major currencies, portending a global debacle in an effort to keep the cash and credit flowing. On the other hand, the central bankers don’t want to be caught holding devalued cash, so now is the time to cleanse their palates. Central bankers only collect and horde gold among themselves since that is how they settle their accounts against each other.

stormy economic skies

stormy economic skies

Whether disaster can be averted or not, the United States has a right to do nothing, even to fail. The reality is that this is already what has happened as politicians and money managers stubbornly cling to the hope of sustaining what currently exists in the current power structure. The problem remains as a global crisis that even central bankers are ill-prepared to deal with.

George Bush warned Congress that they must act or damage to the U.S. economy will be painful and lasting. Congress seems to have rejected that notion. What the nation really has is a credibility crisis. Authorities seem to be more interested in their reputations than possible solutions. Meanwhile, many American scrimpers and savers are in a panic and most American voters resent the bailout efforts, convinced that the rescue effort is for the good of Wall Street and not the average man in America. Considering the decline in the U.S. living standard over the last few decades, the popular opinion to let banks fail and allow the system to unwind naturally is seen as likely to have little effect on meaningful personal assets in the eyes of most Americans. The real problem that panics bankers and politicians lies in the market correction and pricing standards in a bankrupt economy as values fall through the floor, creating still more bankruptcy and poverty for business and citizens.

The correction in the U.S. housing market bore a decline of more than 16 percent in July 2008 alone as the accounting totals have come rolling in. Americans are quickly becoming “upside-down” on mortgages on their homes, encouraging more defaults and foreclosures, even as more Americans lose their employment from an already failing economy.

The public line is that business must have a huge amounts of credit available. Business, like consumers have become increasingly dependent on credit while overpaying executives and paying stockholders instead of reinvesting in themselves. With credit becoming increasingly tight, businesses may find it tough to obtain short-term loans to meet payrolls or purchase inventory. That may lead to job layoffs, which could ripple through the economy in a matter of weeks. The bottom line is that solvent businesses do not need large amounts of credit for everyday business. In the “old days,” business used to borrow for expansion purposes only. Business needs were met by the influx of cash coming in from clients and customers. Have business standards declined so dramatically in the name of personal profit taking or is this statement simply a political red herring to generate urgency?

Increasingly, Americans have become more and more detached from the wealth and prosperity of Corporate and Political America. They have become beasts of burden for the affluent. Considering the circumstances, it isn’t hard to see why many Americans don’t favor a bailout, even if they risk losing a few thousand in a retirement account they may never see anyway. There is an underground pessimism and resentment that has come to rest in much of mainstream America. ~ E. Manning

June 12, 2008

Uncle Ben and the Inflation Demon

On June 9, our Uncle Ben, venerable Federal Reserve chief, provided a note of honesty with a conference of buddies. He blithely admitted that he doesn’t know it all, that the Fed doesn’t know it all and that he needs the opinions of others in the field. That has to be pretty refreshing. Knowing that Uncle Ben struggles at anything is a wonder to consider. “In the spirit of this conference, my remarks this evening will highlight some key areas where additional research could help to provide a still-firmer foundation for monetary policymaking.” Hey babe, that is as close as you are going to get for an admission of fallibility.

He has changed his tune about the recovery of the U.S. economy to a more realistic model. “Over the remainder of 2008, the effects of monetary and fiscal stimulus, a gradual ebbing of the drag from residential construction, further progress in the repair of financial and credit markets, and still-solid demand from abroad should provide some offset to the headwinds that still face the economy.” This isn’t going to be a one-quarter gas attack any more.

“Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities.” Uncle Benny, it just can’t be! Inflation is high at 3%? How is 3% inflation today higher than 3% inflation a year ago or thirty years ago? Now the collective economy knows that Uncle Benny and his cohorts have been handing us a zinger for the last thirty years about the eternal 3% inflation rate.

What’s more, he’s decided that globally traded commodities are to blame for high prices. For anyone that knows what he is talking about, the admission is stunning and revolutionary. Well, perhaps only to the less ingeniously-minded. The brains of America have began to pick up on the gross corporate and investor profit-taking that has magically and mysteriously appeared on the scene, almost as if by divination.

Uncle Ben is more than comforting in his analysis. The FOMC (that’s the Federal Open Market Committee to you) will strongly resist an erosion of longer-term inflation expectations. Are you happy to have someone so determined at the helm? “Economists within the Federal Reserve System and at other central banks have made and will continue to make important contributions in these areas.” It almost takes your breath away.

Now the good news of recognition comes to play. “Rapidly rising prices for globally traded commodities have been the major source of the relatively high rates of inflation we have experienced in recent years.” He is all about forecasting and understanding what mysteriously drives those changes outside of the desire to make lots of money.

Any takers on what drives “the factors” aside from monetary glee? Please share your thoughts on this one! “Policymakers and other analysts have often relied on quotes from commodity futures markets to derive forecasts of the prices of key commodities.” I would suppose that Uncle Ben and his friends have been looking at the wrong keys in the hopes that they wouldn’t be found it. It’s too late now. The futures markets are in control.

Uncle Ben is the master of ten dollar words when he wants to be. However, he does speak one truth. “Investors in commodity futures can expect to earn supernormal risk-adjusted returns.” Touché, Uncle Ben! It’s time to get rich quick!

Here is the absurd part. Uncle Ben wants to forecast greed and profit in the market. In essence, he is predicting another bank scandal with CDOs and the like, except with market futures. He admits that “futures prices may not effectively aggregate all available information.”

Uncle Ben then discusses the theoretical analyses about economic outcomes. Insanity has been coined as doing the same thing over and over and expecting a different result. The only problem here is that Uncle Ben wants a different result with the next new investor foray into “economic bubbles”.

He has one idea of truth on his side. Behavior in the market is idiosyncratic to supply and demand factors. In other words, you can safely believe that “the law of supply and demand” has nothing to do with out-of-control prices and investor profits.

Ben Bernanke is convinced that he can do it all with the Phillips curve, if he can just get enough information. Like a scientist, if he can know more, he can come up with all the answers before the problems happen. Does that sound likely?

Essentially, Bernanke has admitted that central bankers have been all wrong about inflation, especially where labor has been concerned. With uncertain times comes the uncertainty of real time policymaking. He isn’t sure, but wants to “ignore noisy output gap measures.” For years, Fed politicos have ignored the importance of energy costs and the price of food in their economic equations and inflationary measurements. Now, Uncle Ben is working on deciding what the Fed should ignore next as they build new policy.

He is desperately seeking the core inflation rate so that economists can continue to manipulate the figures into a nice clean 3% inflation rate that won’t hurt anyone. The only problem is that you see the difference in your life. Are you willing to bite off on this years’ version of 3% inflation or do you finally see the light? Can you take being manipulated and lied to by economic theorists and “our government”?

Uncle Ben and his cohorts are counting on the possibility that you won’t notice the difference.

Comments? You can make them here!

March 12, 2008

Good News for Bankers and Investors

Filed under: banking, central bank, federal reserve, government, investment — Tags: , , , , , , , , — digitaleconomy @ 9:01 pm

In an unprecedented move yesterday, the Fed was credited for the best day in the U.S. stock market for quite some time. The Federal Reserve is in the minds of bankers, economists and government officials, bankrolling the largest economic bailout of all time. The bankers are elated because it would seem that the payback for their impropriety will be completely dismissed and forgotten forever. Whether this is true or not, the financial services world feels very good and the market once again has a spring in its step.

The bailout is an amazing volume of temporary bank financing for bad securities, bonds and bank instruments. This provision is known as the Term Securities Lending Facility or TSLF, operating much like the TAF. The TAF auction is being extended from $50 billion to $100 billion. This should enable the Fed to cover a huge volume of problem bank securities and liquidity shortfalls while virtually eliminating the problem of future bank failures. The FDIC reported the closure of a small bank this week. The huge Federal Reserve system protection should protect the banking system from failure and the dreaded loss of confidence that would result from extended failures in banking. This appears to be a win-win situation for the commercial banking and financial community and would seem to allow for a large margin of safety for the U.S. economy. This is especially important politics for desperate politicians in an election year. Payback for the illusion may be more difficult.

The biggest news was apparently overlooked completely. The credit that the federal reserve was placing on the table with its sister central banks was noted by the Fed as the “G-10 central banks” . What does this move of solidarity show? Are the central bank branches just a loose, separately-owned confederation of financial corporations or something more? Does it matter? Whether it matters is a question that you will have to ask yourself. Rest assured that these new processes are being created for multiple reasons and shows the truly dangerous economic state in place. This time, enormous creativity has been brought to the table.

The good news is that this website covers that central banking corporate angle extensively that the world ignores. If you are curious, have a look around in the topics section. As usual, there will continue to be more exploration and discovery to come as more details are revealed.

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