Swans Commentary » swans.com April 20, 2009  



Blips #85
 From The Martian Desk


by Gilles d'Aymery





"By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are."
—Evan Thomas (in "Obama's Nobel Headache," Newsweek, March 28, 2009).


(Swans - April 20, 2009)   GLIMMERS OF HOPE: You have to hand it to Mr. Obama; our president is a wordsmith who seems to instinctively calibrate his message with exquisite precision. A glimmer, says my dictionary, is 1. A dim or intermittent light; flicker. 2. A faint manifestation or indication; trace. Though we are not out of the woods yet, there are telltale signs that maybe, just maybe, the worst is over. Our modern oracles are not looking at the crows any longer to predict the future. Instead they go over mountains of statistical data -- spreadsheets and balance sheets, indexes, etc. -- to figure out the state of affairs at any given time, then use complex algorithms to model their findings before tentatively uttering various predictions. The "Market" (read Wall Street) appears to have liked the Public-Private Investment Partnership that the US secretary of the Treasury unveiled. It led to a rally in the stock markets. The big banks announced a profitable first quarter. Credit remains tight but imports are down (good for the trade imbalance but not helpful to our trading partners), consumer spending was almost flat, generating hopes that with spring coming the situation won't deteriorate further. While layoffs are expected to continue until next year and the housing market remains in shambles, officials noted that at long last the subprime mortgage crisis had finally been handled thanks to the huge financial bailouts devised by the Fed and the Treasury. The business court-jesters gleefully celebrated the end of the recession or depression, and CNBC, rejoicing over its 20th anniversary on the air, began to peddle the latest tirade: It's time for the "ownership society" (a figment of the imagination) to begin investing again.

EVIDENTLY, one should expect a few (or a lot depending on the day) soothing words from our communicator in chief. Just imagine what would happen if President Obama kept saying that the country and the world were so far over the cliff that they had nowhere to go but fall into the abyss. I am sure it would invigorate Rush Limbaugh and his cohort of demagogues as well as the millenarian prophets of doom who merrily applaud the forthcoming ineluctable collapse of "civilization" -- you know, the folks I covered in my Blips #81: Dmitry Orlov, James Howard Kunstler, Jay Hanson, Jan Lunberg, Dale Allen Pfeiffer, Michael Ruppert, Matt Savinar, and I could have added, among quite a few others, Bart Anderson of Energy Bulletin or the congenial Jason Bradford -- but it would not do the rest of us much good, would it? I have so far refrained from criticizing our new president under the thinking that he should be given some time to present his vision for the future and to put in place a set of policies to reach that future -- he, after all, has been handed a seriously flawed deck of cards. Not that I haven't cause for concern -- and that is to put it mildly. The speech he gave during his secret trip to Baghdad was particularly troubling. To tell the troops that they "have given Iraq the opportunity to stand on its own as a democratic country," that it was "an extraordinary achievement," that "it is time for us to transition to the Iraqis," and that "[the Iraqis] need to take responsibility for their country" was particularly galling to this Martian. A country that we have been bleeding to death for decades; that had nothing to do with 9/11; that we invaded illegally and unilaterally and in so doing utterly destroyed -- the burning of the national library, the looting of the national museum, the obliteration of countless archaeological sites, the killing of over one million people, the displacement of over four million citizens, the internal ethnic cleansing of the Kurds, Shiites, and Sunnis, the decimation of the Christian community, the exodus of the professional polity, the eradication of women's rights, the rise in cholera and other diseases, the shortages of drinkable water, electricity, and sewage-treatment plants, the huge increase in cancer related to the inordinate use of Depleted Uranium ammos, and on, and on -- all in the name of controlling oil, benefiting the military-industrial-congressional complex, and abiding by the whims of our sclerotic governing elites. What an "extraordinary achievement," indeed!

BUT I AM DIGRESSING and keep wanting to avoid going after Mr. Obama, who could not care less anyway -- I never supported him, remember? -- and who is dealing with a series of crises that is far beyond my pay grade and for which, the series of crises, nobody, absolutely nobody has come up with an alternative...NOBODY! So let me get back on track. The subprime crisis may have finally been digested by the financial sector with the help of the taxpayers, but it does not mean that the crises are over. Maybe one should look at the cumulus accumulating on the horizon...

FAR AWAY FROM THE ENSCONCED main media, cable news, and the commentariat, exist other liabilities beside the subprime mortgage crisis, which may (or may not) have been quenched. Other shoes are falling. Think about Alt-A loans, the Jumbo mortgages, the Securitized Option adjustable rate mortgages, and even the prime papers. Their delinquency rates are soaring. In light of the bankruptcy filing of General Growth Properties last week, the second largest mall operator in the country (of 200-plus malls, 158 have also filed for Chapter 11), take a look at the increasing delinquencies in the market of Commercial Mortgage Backed Securities (that's commercial real estate -- if you want to learn about them, please read Jordan Crouch's family-friendly explanation). They all are going through the roof.

CHECK OUT THE ANALYSIS of T2 Partners L.P., a New York City-based Registered Investment Adviser, "An Overview of the Housing/Credit Crisis and Why There is More Pain to Come." That's another $1.5 trillion shoe readying itself to drop. Don't forget, either, the credit card debt of over $1 trillion that is defaulting over 10 percent. And, if this is not chilling enough, take a look at our "quant geniuses" and what their mathematical algorithms are up to -- another black swan in the making? (We'll find out toward the end of April or first half of May.) In other words, I would not bet on the famed market just as yet, whatever the glimmers of hope our "leaders" sell to the news-hungry and psyche-depleted populace.

YOU'LL RETORT that with all the positive statements coming from the White House, the Fed, and the financial TV channels (Bloomberg, CNBC) our experts cannot be off-mark. Perhaps, perhaps, but take a look at what our experts were saying just over a year ago around the time Bear Stearns, becoming insolvent, was taken over by JP Morgan Chase on March 16, 2008. Anselm Waldermann compiled a series of citations in "The Worst Financial Predictions, One Year On," Der Spiegel, April 10, 2009. Here are a few:

"There will probably be some bank failures. There are some small ... banks that have heavily invested in real estate in locales where prices have fallen. Among the largest banks, the capital ratios remain good, and I don't expect any serious problems among the larger banks."
February 28, 2008
Ben Bernanke, Chairman of the Federal Reserve

"One thing is for certain, we're in challenging times. But another thing is certain: We've taken strong, decisive action. ... The United States is on top of the situation."
March 17, 2008
George W. Bush, then president of the United States

"The outlook for the 2008 budget is excellent."
March 19, 2008
Angela Merkel (CDU), German Chancellor, according to a spokesperson

"We don't see any signs there will be any collateral damage to the German economy. The federal government doesn't see any need to intervene at this point."
March 19, 2008
Peer Steinbrück (SPD), Germany's Finance Minister, according to a spokesman

"I'm not counting on any major effects on the German economic cycle. Despite the financial crisis in the US, the German economy is still robust."
March 19, 2008
Bert Rürup, then chairman of the German government's economic advisory council

"The financial institutions in the EU zone are in good shape. The financial market turbulence hasn't really worsened financing opportunities in the euro zone."
March 26, 2008
Jean-Claude Trichet, head of the European Central Bank

"We don't have any indications that the problems in the US will impact the German economy. I would counsel against any hasty calls for increased regulation."
March 27, 2008
Michael Glos (CSU), then German economics minister

"I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years."
March 31, 2008
Henry Paulson, then US treasury secretary, according to a speech manuscript

COMPARE THEIR statements with the content of my Blips during the same period! Waldermann, to be fair, added a handful of people who saw the crisis for what it was (a disaster), including financier George Soros, who was shorting the financial sector as I showed in my last Blips ("The situation is much more serious than any other financial crisis since the end of World War II." January 23, 2008), Alan Greenspan ("The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the Second World War." March 17, 2008), Hans-Werner Sinn, the president of a German economic research institute ("Lots of people think that the recession in the US won't have any impact on the world's economy, but that's an illusion. The party's over." March 18, 2008), and economic historian Werner Abelshauser ("This crisis reaches deeper than all the previous crises in the market since 1929. This is a market failure, and a problem like this can only be solved by the state." March 19, 2008).

MEANWHILE, the Obama administration, desperate to get back to the status quo ante whereby banks lend and consumers borrow, keeps throwing good (borrowed) money at bad (lost) money under the credence that, in Obama's words, "the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth." Loan to the banks so that they can loan to families that are drowning in debt!

A READER ASKED how banks can multiply a one-dollar bill by such a big multiplier. Well, I addressed this question two weeks ago with the synthetic CDOs made out of thin air in "The Dirty Little Financial Secret." The same technique is used by banks. Eric Zencey, a professor of historical and political studies at Empire State College, explained the scheme succinctly in a worthy April 12, 2009, New York Times Op-Ed, "Mr. Soddy's Ecological Economy." Writes Zencey: "Banks do [create money (and debt) out of nothing] by lending out most of their depositors' money at interest -- making loans that the borrower soon puts in a demand deposit (checking) account, where it will soon be lent out again to create more debt and demand deposits, and so on, almost ad infinitum." Banking used to be a rather boring endeavor. I read somewhere that it was known as a 3-6-3 business. The banker paid 3 percent to the depositor, lent the deposit at 6 percent, and was on the golf course by 3:00 pm. He also had to keep both the deposit and the loan on the bank's book. All this went by the wayside in the past thirty years. Right now, the same banker pays the depositor 2 percent, or borrows from the government (taxpayers) at almost zero percent, and lends, when it does, at 9 to 13 percent, all the while scheming the game by pursuing Zencey's keenly described money-making mechanism. So, no one should be surprised by Obama's take. He is right on the money -- paper money created out of thin air and new debt accumulating on already overwhelming and burdening debt! The future is bright and I am glimmering with hope.

"IT DOES NOT COMPUTE" is an expression that I have used on Swans for the past 13 years. One does not need "stress tests" to understand the casino. Here again, the Obama strategy does not compute. If you want to stimulate aggregate demand, why not putting money in consumers' pockets? Here's an example: Send a check of $5,000 to all households making less than, say, $80,000 a year. I don't know the total number, but assume it's about 100 million households. Total cost to the taxpayers would be $500 billion, an amount that would have an immediate multiplier effect in the economy. Some will object that people may use that money to pay off some of their debt. Possible, but then that money would be transferred to the banks, thus ameliorating their balance sheets and at the same time diminishing the amount of debt held by consumers. In either scenario -- people spend the money or pay back some of their debt, or both -- it would help revitalize the economy at a much lesser cost to the taxpayers. How many trillions of dollars have been thrown at the financial sector without much result but for the benefit of the creditors, 8 to 10 trillion? In my example, 2 trillion dollars would bring a $20,000 check to 100 million households (hey, they could even help save GM by purchasing an Aveo!). The difference with the Obama plan is that the multiplier effect would come from Main Street, not Wall Street, and would not enlarge consumer debt -- only that of the country, but it's being increased under our nose anyway by the multiple giveaways to Wall Street. In other words, you turn the paradigm around. Instead of going through Wall Street to reach out to Main Street, you use Main Street to first reach out to itself and second to Wall Street. Inquisitive minds would like to hear from President Obama the reason(s) why, in his estimation, this approach would not work. His advisers and cabinet officers, most coming from the moneyed class -- yes, Virginia, that class does exist and has long been winning the class warfare as Warren Buffett once intimated to Ben Stein -- should be able to come up with creative answers!

I'LL BID MY GOODBYES (for today) with that little snippet about the moneyed class: Mario J. Gabelli, known as "Super Mario" and head of the mutual fund Gamco Investors, received a $46 million "wage" last year (no bonus, no stock options, and no restricted stock awards -- just salary). The firm's assets declined 33 percent; its stock declined 61 percent; its profits a miserly $25 million. Still, Gabelli felt the horror of the downturn for good reasons. He took home $71 million in 2007 and $81 million in 2002 (full story). Let's keep the best and brightest incentivized.

 . . . . .

C'est la vie...

And so it goes...


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About the Author

Gilles d'Aymery on Swans (with bio). He is Swans' publisher and co-editor.



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Swans -- ISSN: 1554-4915
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Published April 20, 2009