Monday, January 14, 2008

January 5-14, 2008

No S....t

Yesterday, in a bid to reassure nervous investors, Federal Reserve chief, Ben Bernanke, announced that the central bank was going to try to put the toothpaste back into the tube.

The markets weren't impressed by Bernanke's hint that the Fed is ready to cut half a precent off the Fed Rate at the end of this month. There was a time, a couple of years ago, when the Fed could have made a difference, not by cutting rates, but raising them to cool the overheated housing market. But the Fed (and Federal banking regulators)  succumbed to pressure from the lenders, builders, Security dealers and Realtors who were feasting off the bubble easy credit had created.

Back then no one was interested in lectures from the Fed on sustainability or risk. Then was the time to reel them in, kicking and screaming and accusing the Fed of driving the economy into the tank with higher interest rates. If they had the market would not be in the tank, and heading into recession today.

Here's why Fed rates cuts now will not -- cannot -- work.

First here are the only choices the Fed has to choose from now:

1) Avoid a recession by sparking inflation

2) Avoid inflation by causing a recession

3) Have both at the same time -- stagflation.

Option 1) The Fed could try to avoid a recession by lowering interest rates and increasing the money supply. The idea would be to encourage more borrowing and another round of consumer spending. That would do it, at least in the short run. But that would just put things back where they were before the housing bubble burst. Consumers are already burdened by more debt than they can manage. And the combination of more borrowing and an economy awash in printed money would surely ignite raging inflation.

Once that happens everyone starts chasing their own tail. Workers demand a raise to keep up with the cost of living. Those higher wages spark more inflation. Consumers can feel their cash losing value in their wallets and purses and therefore exchange (spend) them for "stuff" because "stuff" at least is increasing in value. The demand for "stuff" thusly drives the price of "stuff" even higher .. and on and on it goes. (Gold hit $900 an oz. today, not because gold is intrinsically worth that, but because gold is the "stuff" of choice for investors when paper money starts losing value.)

Option 2) The inevitable surge in inflation would eventually force the Fed to increase interest rates. But raising rates would drive already debt-burdened consumers even deeper into trouble. Credit card companies tie their rates to benchmark rates, like the prime rate. Then they add their usurious mark up to that. So, when the Fed raises it's rate it trickles through the entire system. Credit card rates jump from an already unconscionable 20% to $25%. Be one day late on paying your monthly minimum payment and that rate can soar above 30%. (Eat your heart of out John Gotti.)

And then there's the already moribund housing market. Higher interest rates now would be like trying to cure a guy with cirrhosis of the liver by putting him on a straight moonshine diet.

Option 3) Stagflation is often described as getting hit with the worst aspects of a recession and runaway inflation at the same time. I lived through the last bout of stagflation, during the Carter administration. His predecessor, Gerald Ford, had left things in quite a hash, and it only got worse during the Carter administration. All Ford did was have a few lapel buttons printed up that read: W.I.N. -- which stood for "Whip Inflation Now!" Somewhere in the bowels of the Capitol or in a dark corner of the White House basement are boxes full of rusting and dusty WIN buttons.

At this point in time, stagflation this looks like the most likely outcome of the troubles that face the economy. If we get out of this mess with just a three or four years of stagflation, we should consider ourselves lucky because, with Options 1 & 2 clearly not a solution, stagflation is the only option standing in way of an old-time depression.

The markets know that too. Which is why Bernanke's rate cut promise yesterday was met this morning with a resounding vote of no confidence from Wall Street. That should be no surprise since Wall Street firms, having had a big hand in creating this mess in the first place, may be the only folks on earth who know where all the investment zombies they created are hidden.

As for Bernanke's promise that the Fed is ready to do whatever it can to head off recession, it's not that it's too little,  it's that it's too late. Fed inaction when they really could have had a meaningful impact, had now made the Federal Reserve all but irrelevant.  Bernanke is now just  another captive rider on the roll coaster with the rest of us. 

I wonder if he'll scream?

January 10, 2008

Ooooooh  S...T!

I am beginning to get the same feeling in my gut that I get when the roller coaster nears the top of the first drop.

Until then it had been all anticipation, anticipation that builds as the cars --- click,click, click -- inched up the steep incline towards the first crest. Then there's that singular moment, when the cars reach the top and I get the first look down the drop inches ahead. At that moment the cars seem to pause for second -- before they hurtle downward in an uncontrolled rumble.

That's how I feel right now about the economy. I've known for a long time that a helluva drop was coming. But the ride to the top has been so slow, so unthreatening and comfortable that the inevitable drop seemed more theoretical than than anything I had to worry about immediately.

But suddenly here I am -- here we are -- paused at the top for, who knows how long, peering down an abyss without a clear bottom in sight. And like that same roller coaster moment, we know it's too late to change our minds, too late to turn back. We are on for the ride -- the ride of our lives.

Okay, so enough with the metaphores. The roller coaster thing is really quite insufficient. At least on a roller coaster you know it'll all be over in a a couple of minutes and that no one is likely to get hurt. Not so when the economy goes bust. When an economy goes bust, "hurt" is the rule, rather than the exception.

Over the past couple of weeks the signs that "the end is near" have been abundant and clear. And this time, thanks to globalization, the pain will global as well.

UN Says U.S. Economy's Housing Slowdown Risks Global Recession

Jan. 9 (Bloomberg) -- Erosion of the U.S. housing market and a weaker dollar might drive the American economy into recession this year and stall world economic growth in 2009, United Nations economists said.

``There is a clear and present danger of the world economy coming to a near standstill,'' the UN's Department of Economic and Social Affairs said in an analysis released today in New York. ``The domino effect of a U.S. recession would be to knock down export growth from China, Europe and Japan, in turn reducing their demand for exports from developing countries.'' (Full)

 I'm not going to waste ink trying to convince neo-con dead-enders still in denial, because those folks will never admit the mess their careless and greed-driven ways are about to cause:

"Some argue that the push back against market forces is a momentary pause in a steady march toward unfettered capitalism. The libertarian Cato Institute recently issued a report in which it found that economic freedom — shorthand for smaller government and fewer regulations — has never been greater." (NYT: The Free Market: A False Idol After All? )

I have no beef with capitalism, per se. But unfettered capitalism is another matter. By "unfettered" folks like those at the Cato Institute and The Heritage Foundation, mean government should butt the hell out.  This is especially true when a bubble is forming, like it was during the 1980's after they succeeded in getting the feds to deregulate the savings and loan industry.

Later they advised the feds to keep their noses out of the dot-com boom of the 1990s. They claimed the feds were wrong to be nervous about all billions of dollars pouring into startups that lacked explainable revenue models. They said it was not a bubble but rather that the old business cycle had been eclipsed by this "new paradigm." What no one had the guts to say at the time is that there was nothing new about bullshit and wiseful thinking.

When the Bush administration came to office they crowed that the good Clinton economy had only been an illusion created by the dot-com bubble.  And that the nation was in recession because it went bust.

So, what did they do -- they loosened lending and oversight of banks and brokers and created a housing bubble to replace Clinton's dot-com bubble.

Now that bubble has burst, as all bubbles must.

In each case those hauling the big bucks in during those bubbles argued that government intervention would only gum up the works. They complained that government-types always wanted to fix something that wasn't broken in the first place.

And everyone would back off and let the "good times" roll on. (Remember when Greenspan had a moment of clarity, worrying outloud that he feared the dot-com boom was being fueled by "irrational exuberance?" Remember too how fast he back-peddled when Wall Street bankers, who were feasting off those dot-com losers dumped on him like a ton of gold bricks.)

In each of these bubbles the players would play the "let the markets work their magic" card until the bubble burst. Then they elbowed the naysayers away from the Capitol steps and began rattling their tin cups for help... government help.

They begged the Federal Reserve to pump more money into the system, to low interest rates. They begged  federal agencies to intercede in their behalf with creditors. They begged the federal judiciary to side with them against screwed shareholders. Claiming hardship, dumped their pension obligations on the federally run Retirement Benefit Guarantee Fund. And, when all else failed, the sought sanctuary in federal bankruptcy court.

Once the dust has settled and the victims limped off into obscurity, and memories faded, they dragged the old hymnal back out and, without a sign of irony or embarassment, returned to signing their "Oh Lord, give us tax cuts for the rich," and got right back on the old message again -- "Protect us from the evils of government regulation,"neo-con standards.

During my 62 years I've lived through three of these cycles, and "they" have gotten away with it each time. I don't just blame them. I blame everyone for it. Doesn't the driver who leaves the keys in a unlocked, parked car share the blame if the car is stolen?

And then there's the "Fool me once, shame on you. Fool me twice, shame on me," thing. "They" get us every time. We fall for the promise that, eventually we will all share in the goodies, if only we let the people who know what their doing, do it unfettered by bothersome rules and regulations.


The flaw in the "unfettered capitalism" theory is so obvious that it staggers. Those who peddle it claim variations on this theme:

An unfettered capitalist will always do the right thing, because it's in their long-term self-interest to keep the economic system healthy and growing. So why burden businesses with a bunch of bureaucrat-cops who couldn't run their own businesses if their lives depended on it?  Why, they ask a successful business foul its own nest by abusing it?

Three times in the last 30 years we've gotten an answer to that rhetorical question:

Way too many of those folks will vigorously and enthusiastically abuse the system when it dawns on them that the enormous short-term gains they can make abusing the system eclipse anything they would make over the long-term toeing the line.


During the 1980s they looted their own savings and loans into insolvency, forcing the feds to step in and replace nearly $200 billion in stolen, federally-insured deposits.

During the 1990s they stuck shareholders with hundreds of billions in worthless dot-com stocks peddled by some of the largest brokerage companies in the country on behalf of venture capital clients.

And now a "credit crunch" has pulled the vail away form the phony-baloney housing bubble. Of course housing is actually just one card in a much larger credit house of cards that's about to tumble in a heap. Credit cards, auto loans, student loans, reverse mortgages, payday loans.

But wait, there's more. This time around government itself has finally actually lived up to the Cato types description as part of the problem. Since 2001 the federal government has been run by the Cato types. As a result its embraced the "unfettered" part of that philosophy. Borrowed money spent just the same as earned money, so what the hell, borrow away. And so it has come to pass.  Our federal government has become the biggest credit junkie on earth.

Things aren't much better here in the Golden State. Last night I listened as Gov. Arnold Schwarzenegger describe California's budget mess. And what a mess it is. After convincing voters a couple of years ago to let him borrow $38 billion to make ends meet, he seems to have come up $14 billion short for this year's bills. Now he wants voters to let him borrow a few more billion to keep the lights on, fund schools and pay for a healthcare insurance plan for the state's uninsured.

Maybe we need to change the way we describe borrowed money. Instead of calling it "borrowing" we could call it "renting." Because that's what credit really is -- renting money. People borrow stuff they never return all the time. But when you "rent" something you are keenly aware that if you don't pay the rent, shit happens. Imagine if the a governor, or company CFO announce he/she was "renting $40 billion." How would voters or shareholders react to that? Differently, I am sure. After all, no business class I ever took taught that a person could borrow themselves to (sustainable) wealth.

Anyway, it's too late now to do anything about what's already been done. We are at the top. Up til now, life's been good-- though fueled by borrowed money and on borrowed time. But time's up. The rent's due on trillions of dollars of this and that -- some of it real, way too much of it little more than wishful thinking.

There's a part of me that hopes this time the consequences will be so painful that ordinary Americans will finally get it. I hope that, once dust settles from this crash, we all can agree that, just as we need cops to keep people from speeding, we need federal regulators to keep "fetter" the unfettered capitalist just enough to assure they can no longer profit at the expense of everyone else. That they are only allowed to profit when they create real wealth, not hot air.

Mankind has been slow to learn this lesson though. Seems this has been going on long before the the term "capitalism" was even coined. St.Thomas More wrote over 400 years ago, words as true today as they were then:

"I can perceive nothing but a certain conspiracy of rich men procuring their own commodities under the name and title of the commonwealth. They invent and devise all means and crafts, first how to keep safely, without fear of losing, that they have unjustly gathered together, and next how to hire and abuse the work and labour of the poor for as little money as may be."

 St. Thomas More

So it's not capitalism that's the problem, but simple, and entirely predictable, human nature. Leave stuff laying around for the picking and, unless there's a cop on the beat to keep an eye on it, you'll discover there's no shortage of pickers waiting to relieve you of it.

Anyway, as I said above, it's too late to get off this ride now. So my friends,  keep your hands and arms inside the ride until it comes to a full stop. It's gonna be a wild ride.

January 4, 2008

Greased Pigs

Gee, I'd really like to let bygones be bygones, but recent events make that quite impossible. I want everyone to stop looking forward to January 21, 2009 just long enough to settle an old score.

This week it happened -- oil topped $100 a barrel. Back in early 2001 when Dick Cheney pulled together secret meetings with the nation's top energy producers to plot out the new administration's energy strategy, oil was selling for $26 a barrel.

What happened? And why? And whom do we have to blame for it? We still don't know.

Most of the activities of the Energy Task Force had not been disclosed to the public, even though Freedom of Information Act (FOIA) requests (since 19 April 2001) have sought to gain access to its materials. The organizations Judicial Watch and Sierra Club launched a law suit (U.S. District Court for the District of Columbia: Judicial Watch Inc. v. Department of Energy, et al., Civil Action No. 01-0981) under the FOIA to gain access to the task force's materials. On 5 March 2002 the US Government was ordered to make a full disclosure; this has not happened, pending appeal. In the Summer of 2003 a partial disclosure of these materials was made by the Commerce Department. This resulted in the release of documents, maps, and charts, dated March 2001, of Iraq's, Saudi Arabia's and United Arab Emirates' oil fields, pipelines, refineries, tanker terminals and development projects. That case eventually went to the Supreme Court and the ruling was to send the case back to the Court of Appeals.  (Wikipedia: Full article here)

We still don't know the "who, what and why" of those meetings. All we know is the result -- $3 gas and heating bills that will shove millions of Americans into deeper debt this winter.

There are only two conclusions we can draw from that, and neither reflects well on Cheney, et al.

1) This is what they intended all along. Oil company profits have soared, and will now go even higher. If this was the intended result, it worked. The administration has allowed oil companies to pillage and plunder, not only the American people, but other, less well-connected industries and small businesses now saddled with astronomically high energy bills.

Rise in oil prices a boon to drilling-equipment companies

Bloomberg News -- December 18, 2007

HOUSTON: Oil prices hovering around $90 a barrel are doing a lot more for shareholders of Cameron International and Baker Hughes than for investors in Exxon Mobil and Chevron. Halliburton, a large oil field contractor, will gain 30 percent in the next 12 months in New York trading, and Baker Hughes will advance 26 percent, according to the average of analyst forecasts compiled by Bloomberg. Exxon, in Irving, Texas, and Chevron, based in San Ramon, California, will appreciate less than 4.4 percent, the data show.An investor who took $10 million out of Exxon to buy Halliburton would increase his returns sevenfold to about $3 million (Full)


2) This was not the intended outcome of the energy policies they cooked up behind closed doors, meaning that they not only failed the American public, but did so in the most spectacular fashion.

Either way, someone needs to pay. But before we can begin building the gallows, we need to know who had a hand in creating this mess. And, since this administration has proven good at one thing --- keeping inconvenient information out of the hands of journalists and even Congress, there seems only one way to get it out of them -- indictments. An indictment for conspiracy to fix prices, defraud consumers and investors and whatever else a room full of wingtip wearing class action lawyers can dream up,  naming Cheney and 100 John and Jane Does should be brought immediately. What grand jury of ordinary Americans wouldn't relish slapping their John Hancock on such an indictment?

Then send the FBI to interview Cheney, who will likely not have forgotten what happened to his former aid, Scooter Libby, when thought lying to the FBI was a no-brainer. Let Cheney spend some of his own money on high-price DC lawyers, like Robert Bennett, who've become rich defending political scum caught red handed up to no good.

And there's work for Congress to do as well. Before Democrats regained control of Congress hearings were held on surging gas prices. But at the time Sen. Ted Stevens, R-Alaska, chaired the Senate committee. Stevens is not only one of the most crooked politicians in DC -- he's currently under investigation for taking bribes from energy producers in his home state -- but he is also in the pocket of Big Oil. Consequently he would not allow the swearing in of any of the oil company execs who testified. In other words they had a liars free card.

Now that the Democrats chair the relevant committees it's time to haul those executives back up to the Hill, and this time put the little bastards under oath, just as Rep. Waxman did with the tobacco executives over a decade ago.

I've said it before, but it needs to be repeated and repeated -- America cannot let the evil-doers in this administration simply slip out of town next January as though they didn't do anything wrong. Their list of misdeeds reads like something you'd expect in some third world banana republic, not America. At least not my America. They must face the music. They must.

Otherwise the message sent ahead to future administrations will be that if you bury the evidence deep enough, stonewall long enough and dissemble well enough, do whatever the hell you want while in office. Because once you leave town no one will bother coming after you.

Relevant Quote of the Day

"So God help me, I can perceive nothing but a certain conspiracy of rich men procuring their own commodities under the name and title of the commonwealth. They invent and devise all means and crafts, first how to keep safely, without fear of losing, that they have unjustly gathered together, and next how to hire and abuse the work and labour of the poor for as little money as may be."

Of the Religions in Utopia, St. Thomas More

January 2, 2008


Victims or Accomplices?

Capitol One asks, "What's in your wallet?" Of course, they really don't care what's in your wallet, as long as it's a Capitol One credit card -- and only that. The less real cash in the wallet the better. That way you'll have to use their credit card to buy the stuff they know you'd buy if only you had the dough.

Who needs cash anyway when they'll lend it to you, at 18%. Be late on  a payment and they'll jack you ass up to 32% annual interest. (That's $320 annual interest on every $1000 owed, for the math-impaired.)

Over the past decade those offering fast, easy and expensive credit have proliferated faster than Indian Casinos. Everyday they crowd our mail and email inboxes with pre-approved lines of credit in the thousands of dollars.

As a result Americans now owe these plastic peddling John Gotti's an average of $8000 per household. Meanwhile the American savings rate has dropped to minus 1%. Which means a shocking percentage of Americans no longer even live paycheck to paycheck. They have to borrow before that next paycheck.

Then there are the mortgage lenders from hell. Thanks to the Capitol Ones of the world, all those cash-strapped Americans were still able to load up on wide-screen TVs, all kinds of furniture, leaf blowers and surround sounds systems, they now also "deserved" their own home to put them in.

But first lending standards that had, since the end of WW II, had made America the homeowners capitol of the world, had to be chucked. Lenders didn't want the herd culled down to just traditionally "qualified borrowers." No siree, they wanted to lend to all comers.

When we bought our first home back in 1971 no bank would loan one cent more than 80% of the appraised value of the home. That required the buyer to have a 20% interest in the property the day the loan closed. Why? Duh!

But such rules limited the pool of borrowers that could qualify for a loan. So the lending industry sent healthy doses of dough to Washington and got the rules loosened, then loosened again, then again. After all, the Republicans were in charge now, and they believed "government was the problem." And, next to the taxman, federal banking regulations and the regulators that enforced them, were the biggest drag on the economy of all -- or say they said.

The first offspring of those efforts were so-called "low-doc" loans. The industry had argued that all the paperwork required before the advent of computers was clogging up their automated systems and slowing loan fundings. So the low documentation loan was born. Borrowers were required to provide fewer and fewer documents supporting their contention that they could actually afford, and are likely to repay, a loan.

Once the housing bubble began to really puff up, lenders even bristled under the minimalist restrictions of low-doc loans. They whined about it and, once again, Bushite banking appointees shrugged and said, "what the hell."

And so were born "No-doc" loans... referred to in the lending industry itself as "liar loans," because a borrower could claim anything and not have to prove it.  It was the lending industry's version of "don't ask, don't tell."

The rush was on. Home sales boomed. Online applications allowed borrowers to refinance their homes on a whim, while drunk or on the toilet. Lenders hauled in lending fees by the billions.

But another limiting obstacle loomed.  Once they lent to finance a home purchase, lenders could no longer actively milk that borrower. That's when lenders decided that the old "home improvement" loan needed some modernizing as well. In the "stupid old days" lenders required that borrowers use home improvement loan money on -- are you sitting down? -- home improvements. That way if the borrower defaulted the lender would have security for their loan in the form of capital improvements.

That limitation had become a roadblock, keeping lenders from tapping into the rising value of homes already owner occupied. So the home improvement loan was killed off and replaced by the "home equity loan." That put lenders were in the ATM business, encouraging homeowners to tap what equity appeared in their home to purchase whatever they felt entitled to; cars, boats, more TVs, vacations... spare the lender the details. The lender didn't care.

So the old-fashioned American dream morphed before our eyes into a frenzied binge of lend & spend, lend & spend, lend and spend. What our parents would have called a "spend-thrift" lifestyle, Republicans pointed to as proof  "the American economy is on a roll."

But rolling to where? Anyone with a measurable IQ could tell that it wasn't a sustainable path. It was something more recognizable as ski jump, than a highway. Tallyho! Sooner or later borrowers were going owe more than they were capable of repaying. Or the underlying assets securing those property loans would decline in value, becoming worth less than the amounts owed. Or, more likely, both things would happen. And now they have.

Just yesterday I was reading one of the many sob-story articles that are popping up all of a sudden, bemoaning the fate of America's debt-ridden consumers. This article told of a couple that still owed $9500 on their SUV, but really, really, really wanted a new big-cab pickup.

And, surprise, surprise, they found a Dodge dealer more than willing to help them have it their way. Yes, they drove home in their new truck and the helpful dealer and sub-prime lender arranged the whole thing. They simply took the SUV in trade and added the $9500 the couple still owed on it to their new 7-year loan.

Now the couple was now having trouble making the payments on their new $45,000 auto loan.

How am I supposed to feel about that couple? Sorry? Forget about it. The lender, dealer and their  numb-nuts victims deserve one another. The lender deserves to take the loss of a repossession, and the couple deserves to lose their shinny new, gas guzzling big-cab pickup. Darwinism demands a price for stupidity.

The same goes for the folks who bought homes with 100% financing -teaser rated- negative-amortized- adjustable-later- double-mocha- double-sugar-moron home loans. Had those people developed even a passing relationship with a pocket calculator they would have known better. So, back to being renters.

And to all those homeowners that decided it was smart to scratch every life-style itch with equity from their domicile residence, a pox on them too. Their parents and grandparents generations had mortgage burning parties the day they made their final home loan payment. They were smart. Too many of their offspring somehow did not get those genes. Instead of paying down their mortgages they increased them, then spent the money on wasting "assets." Why die with a positive bank balance when you can go out soaked in red ink. Heirs? Let-em eat cake.

Then there's America's lenders. If I were a prosecutor I'd have a great circumstantial case proving that, even as lenders were pushing loans, they knew better than to hold them themselves. Someone was going to get the mother of all screwings, and they didn't want it to be them.

Which is why they "securitized" those loans. They bundled up thousands of loans into packages, mixing in the good, the bad and the ugly, and sold them to investors in heat for higher returns. 

Of course those investors should been a little suspicious of the lenders, "take our loans, please," offer. They should have done their due diligence. Instead they couldn't see -- or didn't want to see -- past the high returns. Anyway, they figured, what could possibly go wrong with America's housing market?  (You see, in the credit world the list of suckers is not limited to just the borrowers.)

As for those lenders that filled our TV screens with ads peddling pure, unadulterated fiscal crack, let them to die -- let them die slowly, painfully and publicly. Let their shareholders sue and then scramble among lending company bones for what pocket change remains.

Lenders, borrowers, investors... I haven't an ounce of sympathy any of them. Borrowers should have done the math, and if they couldn't do simply adding, subtracting, division and multiplication, they were likely unqualified for the loan(s) they got in the first place.

Lenders should have stuck to tried and true lending standards. Instead they embraced a self-serving, "consumers are asking for it spending like that," philosophy. Once respected lenders, like Countrywide,

devolved into the equivalent of child molesters: "Hey there little girl, want a nice teaser rate?"

(An Aside: Now that the mortgage markets are in free fall, lenders have found two new pigeons to roast: students and the elderly. Which is why those "refinance your house," ads have been replaced by ads touting student loans and so-called reverse mortgages.)

All of which answers the question posed above.  They were co-conspirators - one and all. The New Year will see them all singing a new tune. No longer is it, "Happy Days Are Here Again." The new song is more like;

"Bad loan, bad loans -- whatschya gonna do,

 whatschya gonna do when they come for you?

Band loan, bad loans..."