Tuesday, December 16, 2008


wouldn't even pretend to say it better than this:

Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or cross dressing or found to be perverts these Bush hypocrites who spewed for years the glory of unfettered wild west laissez faire jungle capitalism (and never believed in any sensible and appropriate regulation and supervision of financial markets) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world.

Those words appeared in an article written yesterday by professor Nouriel Roubini. He also appeared on Charlie Rose two nights ago in what I think was a rarefied TV event.

As of last Sunday afternoon, the United States has passed into a new phase which some are calling a State Capitalist society. There is some outward truth to this label, but I think we will see that like a complex chemical reaction, we are just passing through a short-lived phase via a catalyst toward something else, and that something else is completely toxic.

I've read the rules here, and I think I know a crazy person when I read one, so I hesitated for a moment for fear of acting like one, but then I remembered that I couldn't even make up something like what I just saw in a mainstream article called Washington Wants Oil Down, Stocks Up Before Election. In the weird world of coincidence, one fantastic event is a long shot, but as you start adding additional fantastic events, all of a sudden things don't look so fantastically improbable. There has been a lot of head scratching on the fall of commodities prices because nothing in the fundamentals really pointed to causality. Sure, events can be induced to fit the data in retrospect, but those theories get swamped when you find out that the Central Bank itself impeccably timed the precipitous drop in gold and silver when it switched its position from long to short on the commodities. It's almost like they knew something in advance. Also, another head-scratcher in isolation was the disparity between the announced GDP growth of 3.3% and the GDI which came in at 0.3%. These numbers should track ALOT closer, so expect GDP to be greatly revised downward.

I have thick skin and a numb brain now, so nothing really surprises me anymore. Here I was thinking that we have gone from a plutocracy to a cleptocracy and... so what? Just another day under Bush. The problem is, it's much worse. I'm trying to write an economic diary without knowing or using economics, I'm not really sure many people understand the magnitude of what happened with the Failie and Fraudie bailout. We have been told they were "Too Big to Fail", and the government reluctantly had to step to prevent a systemic meltdown of the financial system.

This was the 5th government intervention in the last several months. In each of the past 4, the effect was that the market popped higher, and by the following Friday, the market found a new low. Every time.

For 8 years, we have been told that tax cuts are vitally important to a robust and healthy economy, and congress went along. It also went along with pretty much every single economic proposal, including deregulation everywhere, and we have seen zero evidence that any of it worked, and lots of evidence that it didn't.

We are told this one will be different, and I will tell you that this is the only truthful thing they said. First, a giant Fuck You! goes out to Bill Gross at Pimco who wrote an article only hours before the government announced its intentions, and that article implored the government to open up the treasury and convert all his F&F paper at 100% or he might wipe out all those retirement accounts he controls. This of course prompted China and Tom and Dick and Peg Bundy to demand the same treatment. His article probably embarrassed Paulson and Bernanke, and made their pitch to the public ring a bit hollow.

Paulson made a big show of the fact that common and preferred stock would not be protected in the takeover, and that was to prove the government had the taxpayer in mind. The goal was to not only protect the taxpayer, but it was to have the effect of lowering the interest rate on mortgage loans and provide needed capital to write new loans. "Sounds great!", so many said, and even Barney Frank said it was a good move that shouldn't have been needed if only people would have had faith in F&F's solvency and liquidity.

Which is interesting. What did trigger the takeover?

How about mark-to-market valuation of F&F assets? Hmmm. It seems a lot of their stuff was valued at zero. If there are any fund managers reading this, then your heart will start beating uncomfortably fast and you will get a cold sheen of sweat when I mention that you all have the same problem, don't you? The off-balance-sheet liabilities of all these big banks would crush them if they were held to the same accounting standards that F&F just had to use as an excuse to take them over.

That's right; I'm saying this was engineered by the government on purpose. Being quasi-government to begin with, and in deep trouble like every other firm, the government has used them as a vehicle to start soaking up debt. By far the largest amount of securities by value were F&F bonds, not their stocks. The F&F mortgage-backed securities (MBS) were explicitly backstopped by the government at 100% market value. This means the anyone holding these MBS's can cash them in to the government, and that made a lot of countries and companies such as Pimco very happy. Here's what else it means:

  • The taxpayer is paying China, Russia, and Bill Gross vast amounts of money.

  • The taxpayer is paying quarterly dividends to private investors.

  • The taxpayer is paying ever larger amounts of money as the value of their houses decrease.  The more your property goes down, the more you will pay.

This is not State Capitalism. There is no known name for what this system is. It is something so obscene, Wiki doesn't have a name for it.

Now here is a fact that will make you happy for just a moment: you will not pay any higher taxes for this just yet. What will happen is the money being paid out will come from the infrastructure, from health services, from schools, from the military, from tuition assistance, and even from housing loans. This will of course lead to monetization of the debt and really ugly levels of inflation will ensue. There is no end in sight to the deflationary asset cycle we are in, it is creeping into the overall economy, and monetary inflation could end up coinciding with this. They would call this one not the Great Depression, but the Very Bad Depression.

Here is another thing that it did: when someone buys a US treasury, they are saying, "I will loan you the money you need to run your government". When the government turns around and gives that money to failing private institutions, the people buying treasuries will say, "Hey! I could have loaned that money to them, but I didn't like the risk. I am not loaning you anymore money because you are reckless."

It also could drain liquidity from the market because other countries will be less inclined to invest in a private bank when they can just buy MBS's, which the government is allowing F&F to continue issuing until December of next year. They will have the backing of the US government.

Don't believe me? When Lehman fails today, tomorrow, or Friday, ask yourself if S. Korea pulling out of investing with them had anything to do with the government's announcement last weekend.

And that is the excuse Lehman will use when they come begging hat in hand to the government. The government once again will say, "yes, my friend; you are too big to fail."

There are many, many unknown side effects to this new rigging of the system. For instance, people are still trying to figure out how $1.4 trillion in CDO swaps were unwound starting last Monday... or if they were unwound. Also, how exposed are other banks to their off-balance sheet holdings? Citi is said to be insolvent if they have to bring their stuff onto their books.

Make no mistake; this is what the republicans demanded all along. That other party, the pathetic democrats, went along, but they didn't engineer it. Every mantra the republicans hang their hat on has been nailed to a cross. All those people who are cheering wildly for McCain and Peg Bundy are not republicans. They are brainwashed idiots, and they are dangerous. They have no idea what a conservative is; they only respond to keywords and can be whipped up to follow a turd right into the swimming pool.

I want you to think about something; another site that I don't want to embarrass seriously suggested that we all take our money out of the banks. That money is earning next to nothing anyway, the banks want you to use their ATM's and debit cards in the hope that you will make a mistake that they can pounce on, and they are just using your money to seek gains for themselves. If there is any way you can unwind yourself from them, then do it.

Also, I have to tell you; I pay quarterly taxes, and there is one of two things that I am thinking of doing: the first is to take a picture of the money I owe them and send it in with instructions to make as many copies as they want. The second is to remove long stretches of guard rails and pieces of bridges and sell it for scrap to raise my taxes. I'm just telling you in advance.

I'm going to leave you with a couple of things I found on this amazing site.

There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

Every penny has been swept out and lent out (10 times over) thanks to the Greenspan Fed and fractional reserve lending. What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.

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