Mortgage Meltdown: New Treasury Blueprint for Greater Disaster

You can argue all you want on paper with equations and philosophical arguments, but a simple human fact remains true — if people do not feel any moral sense of accountability they will not act in accordance with a reasonable standard of good character. Without character the entire society, and of course the economy, goes down the crapper. The U.S. Treasury plan is not merely “more of the same” it seeks to institutionalize all that is bad and wrong with our society and our economy. Some immediate thoughts about the reports on the new plan to be unveiled on Monday by Secretary Paulson:

  • There is being nothing being reported that indicates the plan seeks to help out anyone now: soften the meltdown, slow the foreclosures, stop the evictions, restore confidence in the financial markets, restore consumer confidence, restore balance sheets, increase liquidity without enlarging the money supply, reverse the slide of the dollar, or reverse the rising tide of inflation. It is all about future bubbles and busts which may or may not look like the one we have, the one before (.com bubble), or the one that is in process (foreign exchange and commodities).
  • There is nothing being reported that indicates the plan seeks to increase transparency for the public so that they are well-informed and educated about “new” financial products whose design is to create confusion through complexity and profit through back-doors that undermine the American Citizen, U.S. Economy, and U.S. foreign policy.
  • There is nothing being reported that indicates the plan seeks to enhance the fundamentals of our economic system, which is currently based upon profligate consumer spending, pressures to increase consumer debt, and steering citizens away from savings. It is interesting that the very same people who “ideologically” plead for less government and more personal responsibility are lining up behind a plan that institutionalizes to an even greater extent all the economic forces that prohibit or inhibit the ability to provide fro their own security and prosperity.
  • There is nothing being reported that the plan is willing to even address the current disparity of wealth, the current trend toward a deepening divide between a few people who have wealth and the rest who don’t. It is interesting that the very same people who plead for a free market economy line up behind a plan that would allow precedent to stand on socializing losses and expenses for big business, thus undermining entrepreneurship and innovation (the hall mark of all prior economic progress in the United States). 
  • While these people tell us that windfall profits are part of the game that will even out in the end, they give us plans that prevent leveling the playing field by covering losses with access to tax dollars, covering expenses by shifting the risk onto public programs, and covering deception by legalizing slight of hand reporting in which both the methods of business and the financial results are completely misstated (that would be “lying”) or even reversed converting actual losses to the company and damage to the society into reported profits, higher per share earnings, higher price earnings ratios, higher stock prices, and “benefits” of bringing new products and services to the downtrodden members of our society (like tricking them into signing papers to “buy” a house) enabling the lender to sell the paper at a profit without regard to the quality of the paper, thus tricking investors, undermining pensions, social services etc.)
  • What is being reported is more centralization of highly complex political and economic subjects into the hands even fewer people of dubious talent, leadership, training, education or creativity —thus decreasing the pool of available talent and decreasing the discourse on economic policies all contrary to the basic constitutional premise of checks and balances, division of power, prevention of tyranny and promoting policies for the health, wealth, safety, security, and benefit of United States citizens.
  • Centralization of banking and deregulation of banking has produced a boondoggle of problems that will take decades to reverse. There is no doubt that the Federal Reserve should have greater control over any process that creates “money” in the marketplace so that monetary policy will mean something. But it is the Federal reserve itself that needs re-structuring to provide for greater transparency, more checks and balances, and greater de-centralization of decision-making. The open-market committee is simply not set up to deal with today’s marketplace, today’s money, the prospect of a declining dollar and the possibility of a rising Euro in the United States. 
  • Centralization of banking has led to the flow of money away from where it is deposited into places that have no relationship to the depositors. Loans are made in foreign countries from deposits made in Springfield, Illinois. The depositors are deprived of the economic benefit of having that money loaned or invested in their locale, thus improving liquidity and growth prospects for those depositors and all the citizens of their town or city. With no safety net, the slightest ripple can and does cause blight to replace what were once vibrant or at least promising communities.
  • Centralization of banking has led to indexing of loans as the exclusive basis on which to grant them — replacing the old fashioned relationship of person to person. This has resulted in hyperventilating the prospects for fraudulent lending by lenders, the entire CMO/CDO market, and fraudulent borrowing by borrowers. JP Morgan was asked at a senate hearing 100 years ago what was the primary criteria, the essential quality for granting credit; his answer was that it was “character,”(not balance sheets, income statements or track record) which is exactly what is not part of the equation now with the total reliance on FICO scores, other computer algorythms etc. 
  • By removing “Character” from the equation we removed accountability. You can argue all you want on paper with equations and philosophical arguments, but a simple human fact remains true — if people do not feel any moral sense of accountability they will not act in accordance with a reasonable standard of good character. Without character the entire society, and of course the economy, goes down the crapper. The U.S.Treasury plan is not merely “more of the same” it seeks to institutionalize all that is bad and wrong with our society and our economy.

Mortgage Meltdown: Paulson is wrong on bailout

Paulson’s comments yesterday were inappropriate. He just doesn’t get it. He is arguing for hitting the iceberg and then let the deadly water take care of the problem. The ship is the American economy. And the waters are a legal system that assumes, all things being equal, that the process of foreclosure, eviction and losses on CDO investments will eventually find a state of equilibrium from which the economy will rebound. He is wrong.

All things are not equal because of the scale of losses, the scope of the economic effects, and the deadly despair descending upon the American consumer in a consumer driven economy. Take away the spending of consumers, and the United States is a third world economy. Maybe it doesn’t need to be that way, but it is now. 

On the other hand he is right in one respect — that a bailout, using federal funds, will not alone solve the problem. More fiat funds pushed into a marketplace where the dollar is already declining in a virtual free fall will cause problems of its own — continuing devaluation of the U.S. dollar, other countries severing their currency ties with the dollar, a huge increase in U.S. debt, spiraling inflation at a level not seen before in our lifetimes, and a sea-change in life-style as virtual ghost towns dot the landscape consisting of abandoned homes. 

The answer is a combination of remedies and rewriting the rules so all things ARE equal. A relatively small Federal bailout along the lines of the Barney Frank proposal will provide some breathing room. 

Republicans and Democrats need to get together under the leadership of their standard bearers in this election year and refuse to pass any legislation for funding or otherwise until this credit crisis is addressed in an immediate comprehensive way. 

Federal and state agencies and judicial systems, should bend their rules as much as possible to provide a de facto moratorium on foreclosures and evictions — re- routing cases into mediation procedures and providing for mediation reports in 90 days before the cases can continue.

Attorney Generals of each state should intervene in each foreclosure case, basically alleging that the lender participated in a vast conspiracy to defraud the borrower and with reckless disregard to the damage their behavior would cause to the economy of the state and the nation, not to speak of cities in other countries who are now decreasing social services because the cash they thought they had evaporated with the diminution of value “Safe” “cash equivalent” CDO investments they thought they had. 

See the previous post, for details plans on remedial legislation which Congress and each of the states can pass to aggressively put down this crisis. If Federal authorities fail to act, then states, individually and collectively should encourage their state chartered banks to start issuing bank notes as an alternative to U.S. currency. Agreements with Forex and precious metals traders should be reached to back up these new currencies. A radical solution to a radical problem. Failure to act will leave every American citizen bereft except those who are already taking hedge positions in foreign exchange and precious metals and other commodities. 

Economy Meltdown: The Virus is Spreading — Remedy=TRUTH

The bottom line is that the Federal reserve is fast becoming irrelevant for reasons described below (and foecasted by Alan Greenspan in 1996), proprietary currencies already out number fiat currencies worldwide, and a return to local government chartered bank currencies and other trusted issuers is probably the only way we can restore order to the markets. Holding onto the current assumptions and policies is like holding onto the railing of the Titanic.

It is becoming apparent that two things are true about derivatives and their current pernicious effect (actual and perceived) on the financial markets and world economies: (1) the true total of derivatives held in the marketplace actually approaches $500 trillion and (2) all $500 trillion of them are suspect now because of the unconscionable actions of a few people who used their creativity with as much concern for consequences as a three year old playing with matches.

Let’s put this in some perspective. The pendulum is swinging too far, as it always does. Yet it is pretty obvious that it has not even hit the half way point in its swing. Debt securities of all types are going to get hammered, credit is going to dry up, and equities are going to take a massive hit, along with the U.S. dollar. Eventually the market will reach some plateau (I wouldn’t call it equilibrium) and there will be a realignment of power, privilege and values.

Just using the most obvious indicators it is clear that the first order of business is to keep people in thier homes, immune from foeclosure at all costs regardless of who is to blame. The way to do that is for all players to realize that they have a dog in this hunt and that lower returns and some write-offs are better than complete write-offs and an economic depression.

The second order of business is to take on regulatory actions in the U.S. and abroad that over time will re-assert the appearance and reality of a fairly fair marketplace. Monetary policy — loosening credit, is not going to help the lenders who are already out of balance in their capital accounts.

Restoring the nomimal value of loans, even at lower levels and lower interest rates will soften the blow that we all see coming now. The only way to do that is to forget punishing anyone, and use the channels in place to restore order to the real estate, debt markets and equty markets.

The patchwork attempted every night by senior economic players in government and Wall Street cannot work except in spurts. It should be abandoned in favor of policies and regulation that reflect more concern for the integrity of the marketplace, the welfare of the constituents, and the return of honor, character and truth.

The truth is that there is not enough money in the world to bail out anyone in the current situation. It is obvious that central monetary policies are worrisome at best. It is equally obvious that power is trending back toward the states from the Federal government that is paralyzed by competing well-paid lobbyists. There is another obvious observation: power, control, and value is trending fast to other monetary centers and currencies other than the U.S. dollar.

We are now in the same place on an even trading field, as everyone else. This means our dollar must be backed by real value, real productivity, and a real economy that runs independent of impulse purchasing by buyers going deeper and deeper into debt.

What does this mean for the U.S. Citizen? Start with safety. The number of homes at risk is now around 7 million. This presents the prospect of over 20 million people displaced, seeking, finding or not finding alternative housing. The total humer of hosueholds at risk for debts other than mortgages appears to be over 35 million, which means that there are over 100 million people whose next meal is in doubt. Social “unrest” is a certainty unless an entirely new mindset is adopted by those who purport to be leaders.

For people with money, there are options that must be considered immediately. Holding U.S. dollars or assets that can only be valued in U.S. dollar denominations, presents a far greater risk than holding even a bad investment in some other currency. Diversification has never been more important because of the uncertainties. But the probability of a U.S. dollar recovery of any meaningful proportion is dim at best. Holding non-U.S. dollar denominated assets is probably the best route even if it means taking some losses now. But remember that real esatate can be sold for any currency. It will decline another 20% or more in many places but it will also recover.

Inflation is starting to take on a hockey stick trajectory if you look at a basket of goods purchased by the bottom 2/3 of the population.  The divide between those who have investments and can take protective measures outside U.S. currency, and those who do not have that luxury will be ever widening.  The average working stiff is going to continue to get paid in U.S. dollars that are worth less and less each month, while the number of dollars he or she receives remains constant.

My radical suggestion is that states and state banks go back to issuing proprietary currency. Deals should be made with holders of precious metals and financail isnitutions to give credibility and integrity to the new currencies and a new common exchange medium other than the U.S. dollar should emerge as the balancing mechanism.

Here is a little secret for you: most of the governors sitting on the Federal Reserve Open Market committee are well aware of the probability that new currencies will emerge.

Here is another secret, the use of derivatives has created “money” in volumes far in excess of all the fiat currencies in the world — so we have alrady gone private with currency when nobody was watching.

The Federal Reserve has been reduced to an inefficient bookkeeper when the transactions happen to flow through as ACH and wire transfers.

The state governments are on the right track — taking matters into their own hands. They should get support of the people — if they do not adopt the corporatocracy rules of Washington. In some states it is too late.  But we can always hope…..

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