Let’s juxtapose two stories. First, from Bloomberg:
Aug. 14 (Bloomberg) — More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.
Ok. Now how about this one?
WASHINGTON (MarketWatch) — Delinquency rates for loans and leases at U.S. banks increased to a record 6.49% in the second quarter from 5.58% in the first quarter, the Federal Reserve announced Monday.
So let me see if I get this right.
At 5% of non-performing loans a bank is at risk of being insolvent.
But the entire banking system in The United States had its non-performing loan ratio increase from 5.58% in the first quarter to 6.49% in the second, a record, and higher than the 5% level at which the survival of a bank(ing system) is threatened with collapse.
Hmmmm…. So should we take from this that the entire US Banking System is about to collapse?
This much we know for certain - you’re being screwed – systematically – to cover the sins of these banksters who made loans to people who they had no reason to believe could pay:
Being in debt is about to get a lot more expensive for millions of Americans. Credit card issuers have been rushing to raise rates in advance of this Thursday, when the first provisions of the Credit Card Accountability Responsibility and Disclosure Act (CARD) will go into effect, with other protections starting in February 2010.
Right. Including those who are good credit risks.
This is the problem with allowing the blatant and outrageous fraud in our system to continue: Those who are prudent, who have done only good and not bad things, get reamed repeatedly and are forced, at gunpoint, to pay for the sins of those who committed that fraud.
Yet we, as Americans, permit this.
We absorb 20, 25, 30% interest rates (while the banks borrow at zero) so the bank executives who knowingly granted credit to those who could not pay, then sold worthless securities to investors, do not go to prison for fraud.
We pay more than $30 billion in overdraft charges and allow banks to “shuffle” deposits and withdrawals to generate the maximum in these fines so that the bank executives who are knowingly mis-marking “assets” at higher than their true values can “cover” their sin and do not go to prison for fraud.
We pay the FDIC “assessments” and “loans” from Treasury, as taxpayers and banking customers, so that the FDIC can repay depositors after it absorbs a loss that it should not have incurred – a loss that happened because OTS, OCC and the FDIC failed to close banks in a timely manner that were cooking the books when they either knew or will willfully blind to the control fraud taking place at these institutions.
The Fed says that:
Demand for loans continued to weaken across all major categories except for prime residential mortgages.
The American people are wising up, but only to a degree. They are refusing to take on new credit (as they should, seeing as they’re being charged not only for their own legitimate level of risk, but also for their next door neighbor who was intentionally given a loan that the bank knew he could not pay) and demanding in some small way that The Bezzle be eradicated.
The people recognize they’re being violated repeatedly by the scam artists on The Beltway and Wall Street, but they’re not quite sure how to stop it. Certainly, hollering at Congress hasn’t done any good. The Fed has refused to enforce consumer protections, as has Treasury, and both have done their damndest to overrule state regulations and even State Attorney Generals whenever possible.
Here’s reality folks:
The system still has too much non-performing debt in it, and that percentage is going up, not down.
It is getting worse, not better.
The only reason we have any “resemblance” of a functioning credit system at all at the present time is that the government and Fed are pumping upwards of $250 billion dollars a quarter – that is, $1 trillion a year – into the system to subsidize bad credit risks and keep those who have been and are getting screwed by these frauds – so long as they’re other banks and businesses – from having to bear the cost of these acts.
Instead of locking up the bank robbers (who wear a $3,000 suit instead of a kevlar vest and a gun) we are covering their theft with taxpayer money.
Instead of removing the embezzlement from the system and forcing fraud into the open, we are sweeping it under the rug.
Instead of demanding that people do business honestly and punishing those that refuse, we are allowing them $100 million dollar bonuses – after they run the price of your Granny’s Heating Oil up once again.
Tired of it yet?
It appears not.
But there is a mathematical limit to this sort of papering over of control frauds. It cannot go on forever; we do not have the ability to tax or borrow an infinite amount of money. Unemployment will not ease and true production and consumption cannot resume at a normal level when a trillion dollars or more is being stolen every year to cover up these scams.
Ultimately the tax base and borrowing capacity will both collapse.
We will come to the end of this rope, and before we do we had better flush the system of these shysters and con artists or our economy will disassemble itself in a spectacle far worse than what you saw last fall and into March of this year.
Of that I am certain.
16% of our working-age population is unemployed but looking for work. Nearly 30% of people 16 to 19 years of age are out of work but desire a job.
Why aren’t those people in Washington DC? Whether they have to hitchhike, carpool, take a bus – why aren’t they on the steps of the Capitol? Why aren’t they on The Mall? Why have these millions of individuals who have been screwed, blued and tattooed by the thieving ways of the banksters and fraudulent accounting that our government and “business interests” have engaged in not shown up to press their demand for redress of grievances?
Have we really turned into Prozac Nation? Is American Idol really that powerful? Have we become so immune to being ripped off over the last 30 years that when a bank re-orders our transactions to turn a $30 overdraft charge into $300 worth of fees on $50 worth of checks we’re willing to simply bend over the table, place a stick between our teeth and take it, then ask “please Sir, may I have another?”
Or will we witness America turn to something more destructive – events that I’m hearing about more and more – civil unrest?
This has not yet turned to rioting, but in Chicago neighborhoods there are now crimes happening in areas – such as Lincoln Park – that were unheard of just a year or two ago (and when I lived there) - men being mugged, from behind, by gangs, being robbed and severely beaten (hattip Janet Tavakoli for bringing this to my attention.)
There are a few people who are taking notice. Like this gentlemen:
No, that’s not someone about to commit an act of lawless violence. It is a man exercising his lawful Second Amendment right in a state that recognizes same - the right to keep and bear arms. He demonstrated, lawfully, while President Obama gave a speech in Phoenix. There was no violence, no shooting, just free speech coming from signs and mouths – and a polite society in which ideas were exchanged, backed up by the indelible yet unspoken statement:This demonstration WILL be and remain peaceful and I pledge my honor and, if necessary, life to guarantee every man and woman’s right to same.
As expected “the mainstream media” considered this gentlemen “a threat.” Perhaps he is, but not in the way they’d like you to believe. Certainly, he’s a threat to anyone who might commit an act of random (or not-so-random) violence in that crowd! Certainly, he’s a guardian of freedom and the right to peaceable assembly and speech. Would you try to mug him walking down a street in Lakeview? Oh hell no. But you’ll never see that gentleman in the Lakeview neighborhood in Chicago because Chicago, unlike Phoenix, refuses to recognize your right to defend not only yourself but others as well, and as a consequence only the criminals are armed.
Certainly this gentleman is a threat – to a government that would run roughshod over people and ignore The Constitution and the lawful limits to its power, to a corporatist culture that has become imbued with fraud, deceit and lies, and to the heathens in Washington DC, all of them, who have knowingly and willfully cooperated with the lawless behavior of those who not only got us into this mess but refuse to this very day to put a stop to it.
Folks, wake the hell up. If you’re going to get mad and swear to “get even” with “the man”, do so in a constructive fashion and channel that anger where it will do some good!
Do you want an America where your children cannot go to college without taking on $100,000 in debt? Where you can be taxed not by a government but by a bank to cover your neighbor’s bad loan – when the very same bank gave him that loan knowing he couldn’t pay it back? Where so-called “regulators”actively conspire to cook the books of a major thrift (IndyMac) which then fails, costing you – via FDIC assessments – billions of dollars? Where none of these acts of control fraud are prosecuted and in fact they are defended by our government going to court to block state law enforcement from protecting your rights?
What sort of nation do you tolerate, America? What sort of nation are you willing to live in?
Will you finally rise from your chair and demand that it stop when unemployment reaches 20%?
30%?
When you have no food in the pantry and no money to buy some?
When you are mugged and beaten, with the thieves stealing your cell phone and a mere $20 while walking home from the subway stop, or as you leave your local watering hole after a friendly drink? Or will you wait until you’re walking home from the corner grocer with a loaf of bread, purchased with your last $2, and are mugged by marauders who are hungrier than you – in a city that refuses to recognize your right of self-defense.
How high does your interest rate have to go on your credit cards – while your bank borrows the money it lends you at zero percent – before you cut ‘em all up and send ‘em to the bank with a picture of your erect middle finger instead of a payment?
How long will you sit while both Democrat and Republican lie to you about how the “bailouts” and “handouts” will help the economy. Has all this grift helped? Did the “stimulus” keep unemployment from going higher as was promised? Did you really get help with your mortgage or were you offered a scam “forbearance” that amounts to the back-end loading of your balance, turning it into a balloon note or worse? Have you enjoyed watching JP Morgan and other big banks that got tens of billions of taxpayer dollars lease tankers and then bid up the price of oil – causing it to double - with your tax money? How about The Fed and Treasury funneling tens of billions in taxpayer money through AIG to a literal “who’s who” of big banks so they could in turn pay billions in bonuses?
All of this obviously meets with your approval as demonstrated by your actions: You still sit back and pop a beer, you go about your daily routine, you refuse to rise from your chair and demand: STOP THE LOOTING AND START PROSECUTING, finally willing to back that up with your sacred honor – or more.
Sometimes I wonder what our nation will stand for – exactly where the breaking point is where we finally force the right things to be done. The right choices. Whether the time will come where we force the barons both inside the beltway and out to face the music for their sins.
Is it 10% unemployment? 15? 20? 1/3rd of our nation out of work and hungry?
Is it 2 million foreclosures, three, six, ten, thirty?
Is it credit card rates at 20%, 30, 50?
Will we submit to the jackbooted foot of the scammers and frauds on our collective necks, both in business and in DC, until our children starve and our grandmothers, mothers and fathers are shoveled in the hole, dead and cold?
Does America still truly have the capacity, as a people, as a nation, to get angry? To demand redress of grievance? To call, support, and honor a general strike? To take up, keep and bear arms not to commit violence but to stand shoulder-to-shoulder as our Constitution recognizes as our God-given right toprevent violence against not only ourselves but our neighbors – any and all of them? To peacefully occupy The Capitol and shut it down – not to loot, pillage or destroy, but to force the cessation of all commerce in an unmistakable and singular statement: This far you have gone, and you shall take not one step further until each and every guilty man and woman is under indictment, the institutions and businesses responsible are closed, and the ill-gotten gains returned.
Do we still have what it takes to make that happen? Do we have any more Rosa Parks’ in America? Any Dr. Kings?
Or is all we have left in us a descent into random lawlessness – civil unrest, or even full-scale riots where the looting and burning is not of the banks and others who have robbed America, but of the random store-owner, house or car – simply because it’s there?
I fear for my nation and her future.
I fear we have too few men like that gentleman in Arizona and too many muggers in Lakeview.
We live in a nation where our government’s founding documents formally recognize the supremacy not of the government, but of the people. Where government exists only by the consent of the governed.
Not of, by and for the corporation, but of the individual.
Not by the rule of man, but the rule of law.
But those are just words on parchment, over 225 years old.
Does the will and the desire to bring those words to life still exist? To render them something more than dry, old, cracked ink?
233 years ago there was.
Does it still exist in America today?
————————–and now the next days response———————————
Yesterday’s headline Ticker generated quite a bit of heat.
It also generated some email: Some direct, some not-so-direct.
One self-described policy wonk in DC had the following to say:
This author’s anger is overcoming his common sense, and at this point in time we need to find ways to expand the economy, rather than exhibit some kind of psudo-russian worldview that finds the failure of your enemy more rewarding than your own success.
Really?
Let’s examine this sender’s foolish premise: at this point in time we need to find ways to expand the economy.
That’s the problem, you see, given the current environment: We can’t.
We can cheat, but we can’t generate true growth.
Last quarter we cheated. The government increased its spending at a 15% annualized rate – an actual, no-BS outlay of close to $200 billion dollars – to produce the “improvement” in GDP.
But that money wasn’t real. It hadn’t been collected in taxes, it was printed up as Treasury Bills, Notes and Bonds. It was a chimera, just as it is if I go to the bank, take a cash advance against my VISA for $30,000, and then proclaim that “I’ve generated positive personal wealth!”
In fact, I have not.
Worse, The Federal Government is spending more than $250 billion in addition to that every quarter simply propping up the fraud and grift. Not by subsidizing it – by standing in place with “guarantees” valued, according to Mr. Barofsky, at some $23.7 trillion dollars.
Oh yes, these are guarantees, not expenditures. Yet. But they are the only reason “the financial system” is functioning right now. Take them away, either because we are unable to fund continuing their actual cash-flow cost (which is running some 1% of the guaranteed amount per quarter) or because those responsible for a huge part of it (e.g. The Fed) realize that it is futile to continue and we are left with making good on those guarantees or the entire economic system instantly implodes.
We live in a credit-based – that is, debt-based – monetary world. All modern monetary systems are debt-based. But debt-based transactions depend entirely on trust: the normal commercial flow of business credit depends on me being able to ship you a good and expecting to be paid for it in some form or fashion. While we’ve made our financial system much more exotic than the basic “letter of credit” trade system of yore, the fact remains that it all comes down to the same fundamental truth – if I cannot trust you I will not ship until I have cash in hand, and the entire credit-based system on which we rely comes to a screeching halt.
This is what Bernanke and Paulson feared in September of 2008.
What they failed to tell Congress and The American People is that the reason the system was threatening to shut down and revert to “cash on the barrel” – a system that would implode GDP by 90% instantly – was because everyone in the financial system had been and was continuing to lie about their ability to pay!
Substituting “Uncle Sam” for “Crapbank” doesn’t make Crapbank solvent. It simply means that if Crapank has been lying about the value of its assets, and thus is not solvent, then “Uncle Sam” will stroke a check to make up the difference.
This presumes that Uncle Sam is solvent himself.
What if he’s not?
But more importantly, Uncle Sam is the tail. Yes, 30% of GDP is important, but Uncle Sam himself doesn’t create money – or credit. That’s done in factories, its done when you program a computer or design a new gadget. It is done when you plant a crop, tend and harvest it. And it is done when you dig iron ore out of the ground, or stick a straw into the earth and suck out the oil therein.
We have written checks we cannot cash for the last 30 years and have been kiting them over and over in a desperate attempt to claim that we’re solvent, when in fact we’re not. We accumulated trillions of dollars of alleged “assets” in financial institutions that are in fact worth 20, 30, 40, even 90% less than the valuations that they are being carried at on the books.
This is a fact, it is not conjecture.
We know it is a fact because the FDIC is supposed to seize banks before (or just at) the point where their assets become less than their liabilities – that is, when they become bankrupt. By doing so the FDIC takes no (or very little) loss to their deposit insurance fund, which is how they (allegedly) can get away with having less than 1% of the insured amounts in capital.
But that’s not how it has been working out.
Instead, we have repeatedly seen the FDIC “estimate” 10, 20, 30, even 50% losses against the entire asset base of a bank when it is seized and these announcements come at the time of closing!
That is, this is not a surprise that suddenly appears when the FDIC goes into a bank, closes it, and then examines the books. No, they’re aware of it – months or at least weeks beforehand – that these “assets” are worth nowhere near what they’re being carried at in alleged valuation.
There’s the problem, in a nutshell, and why the government has stepped in and done what it has done: instead of treating the intentional over-valuation of these assets as an offense (it is: Fraud, in all its forms, is generally a felony) the government and Federal Reserve are “papering over it.”
This has two highly-negative effects that cannot be gotten around:
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I can’t borrow anything against an asset that is “carried” on the books somewhere at higher than its actual value; nobody in their right mind will lend against collateral that’s underwater already.
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The institution cannot trade that asset and free up its alleged balance sheet because if it does it is forced to recognize the true value and doing so would instantly expose the fact that the firm is (and has been!) insolvent.
Remember back up at the top when I said that we were a credit-based monetary system?
Now you understand (I hope!) why the path we are on can’t fix what ails our economy: the transmission mechanism for expansion of the economy – that is, the expansion and maintenance of credit – is broken.
This sort of “extend and pretend” fraud is exactly what Japan did when they got in trouble. Instead of forcing all their financial institutions to tell the truth (under penalty of imprisonment) and shutting down the insolvent they wrote government guarantees and turned an intentional blind eye to the cheating. Their credit transmission mechanism locked up and still is locked up; the consequence is a moribund economy that is now going on 20 years in duration.
But Japan had an advantage we do not: They were and are a net exporter. That is, they can hobble along while relying on the credit of other nations; the buyers of their goods in fact are the ones asking for credit in the course of trade. Thus, their locked up transmission allowed them to continue, albeit with no real economic growth, as they were able to sell into the world markets, tapping everyone else’s credit transmission system to support the distribution of their goods.
We do not have that luxury as we are a huge net importer.
Our monetary transmission mechanism has to work; we are both the world’s largest economy and absolutely dependent on imports for critical resource requirements, including energy (oil.) Without the ability to clear those transactions our economy implodes.
We cannot return to true economic growth until and unless the fraud is purged from the system. Every dollar we spend – and we’ve spent well over $3 trillion thus far that we do not have – is another dollar of debt ladled onto a broken monetary transmission mechanism for the express purpose of hiding someone else’s lie – the lie that bought their house and yacht in The Hamptons, or the grift that went into some Senator’s or Representative’s campaign fund.
In 2007 and 2008 The Government should have (as I urged) forced all the marks into the open and seized all the insolvent banks. It would have had to seize a lot of them, including a lot (maybe all!) of the really big ones. So what? This would have cost a trillion dollars (most of it to backstop depositors under FDIC limits), but then it would have been over, there would have been hundreds if not thousands of bank executives awaiting trial on various charges, the sound banks would take over the deposits and market shared from the failed, and we would be in a position to rebuild our economy with a sound and working credit transmission system.
If we do it today it will cost twice that, plus all the money we’ve already spent papering it over, because asset values have continued to deteriorate. But there is still time to do the right thing – including frog-walking the executives.
If we wait too long and the spiral of ever-increasing demand for more printed and borrowed money exceeds our ability to fund the bolus necessary to perform the takeover and shutdown of these insolvent institutions then the “sudden stop” outcome is assured.
In that instance commerce returns to actual cash on the barrel – no credit available at any price - and up to 90% of GDP could disappear almost overnight.
If you think this outcome is impossible, you haven’t looked at the math and you don’t understand how debt-based monetary systems work.
If you think this outcome is improbable, then explain why two years after the government allegedly “had it all under control” nothing has worked to restore prosperity, the PPI reported yesterday recorded crude good price contraction of 44.8% annualized and intermediate goods at the PPI level recorded a 15.1% decrease – all records on a 2008 to 2009 basis.
This is the mark of a severe deflationary spiral – the collapse of actual commercial credit and thus economic activity – in its formative period.
This is precisely what Bernanke said he could avoid two years ago through his policy prescriptions and the verdict is now in: those policies are proved failures and must be abandoned NOW.
Do not be fooled; while there remains time to do the right thing, it is drawing short.
Let me remind everyone of the last time we played this game with unbridled, fraudulent credit creation: The 1920s.
After the ‘29 crash things seemed to stabilize. By the middle of 1930 all of the economists of the day predicted that the worst had been avoided and growth was just around the corner. The stock market had recovered to early 1929 figures and it appeared that we had stared into the abyss – but had “saved ourselves”. Among them:
“I see nothing in the present situation that is either menacing or warrants pessimism… I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress.”
- Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929
“I am convinced that through these measures we have reestablished confidence.”
- Herbert Hoover, December 1929
“[1930 will be] a splendid employment year.”
- U.S. Dept. of Labor, New Year’s Forecast, December 1929
“For the immediate future, at least, the outlook (stocks) is bright.”
- Irving Fisher, Ph.D. in Economics, in early 1930
“…there are indications that the severest phase of the recession is over…”
- Harvard Economic Society (HES) Jan 18, 1930
“There is nothing in the situation to be disturbed about.”
- Secretary of the Treasury Andrew Mellon, Feb 1930
“The spring of 1930 marks the end of a period of grave concern…American business is steadily coming back to a normal level of prosperity.”
- Julius Barnes, head of Hoover’s National Business Survey Conference, Mar 16, 1930
“… the outlook continues favorable…”
- HES Mar 29, 1930
“… the outlook is favorable…”
- HES Apr 19, 1930
“While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.”
- Herbert Hoover, President of the United States, May 1, 1930
“…by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent…”
- HES May 17, 1930
“Gentleman, you have come sixty days too late. The depression is over.”
- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930
“… irregular and conflicting movements of business should soon give way to a sustained recovery…”
- HES June 28, 1930
“… the present depression has about spent its force…”
- HES, Aug 30, 1930
Notice anything similar to the pronouncements of Krugman, Cramer, Kneale, President Obama, Geithner, Bernanke and dozens more?
In 1930 they could not have been more wrong; by failing to immediately force the bad debt and bogus asset claims out into the open, clearing the system, government set the stage for a grueling decade that would prove the most difficult economically our nation has faced to date.
We are headed directly for the same outcome, for the same reason. History will repeat, not because it is destined to, but because in response to lying, cheating and fraud the same errors are being made today that were made then.
The view of all of the “great pundits and policy wonks”, including Bernanke, Geithner, Paulson, Summers and more is that if we “backstop” the credit system we can “muddle through.” The problem with such a thesis is that doing so requires a continual injection of borrowed money and leaves the system on life support, unable to spur the very economic recovery you need to get out of the hole.
Much of this error in thought process comes from the fact that all of these people going back to Rubin, Greenspan and more, had their hand in the creation of the policies and acts that led to the problem in the first place, including the lying – and therefore you’re asking someone to repudiate a policy they have espoused for 20 years or more.
That’s darn unlikely.
Unfortunately the math is never wrong and debt-based monetary systems require a sound and trustworthy web of intermediaries to function. We cannot obtain a strong, durable recovery without clearing the credit transmission mechanism, and doing that requires honest marks. That, in turn, mandates the closure of all the insolvent institutions, a colossal but inescapable task.
Yet it must be done if we want to return to economic prosperity, and if we fail to do so then we are simply one “event” away from a “sudden stop” outcome that nobody with half a brain wants to see occur. While it certainly is possible that we could “avoid” this and wind up with an outcome more akin to Japan, is it worth the risk of a full-on meltdown so the modern-day robber barons can keep their mansion in The Hamptons and not go to prison for their sins?
I think not.
