Debt Crisis

I recently wrote a piece on the world’s economy ... see: World Economic Growth ... in which I predicted that the continued stimulus of many countries’ economies through the generosity of their central banks would not work out well. And today I read that China has been propping up its economy with enormous debt ... see: CNBC Article ... with its total debt at 300% of its GDP.

Now, to me it is understandable that China has dug this hole for itself ... after all it’s new to this capitalism thing ... so it has a lesson to learn about debt. But, what about the rest of the world? It is not our first rodeo! Yet, central banks around the free world are encouraging enormous borrowing with effectively zero interest rates ... or below. What can be wrong with this if this stimulates a vibrant economy?  OK maybe “vibrant” is much too strong a word given that Germany is in an economic contraction with negative half-point interest rates.

So then what are the “dark days ahead” of what I have suggested? Well, it seems obvious to me that, if it costs nothing to borrow money, countries, corporations and people are going to borrow money ... lots of money ... money that they cannot possibly pay back.

This eventually spawns a “debt crisis” which will be a banner headline in the few newspapers that are still publishing when this event occurs. How soon will this occur and what will be the consequence? Boy, I have bitten into a big Pennsylvania hoagie on this question! Honestly, I don’t really know, but I suspect a bit of lunch-meat indigestion will be involved. These events, from the little I have gleaned are a social-psychological phenomena ... where lending logic and rational rules go out the window. ... like they did in the sub-prime mortgage crisis of 2008 ... which actually was the genesis of our current predicament. Somehow large amounts of debt gets erased by the courts and by fiat ... and the lenders generally end up the losers. So, be careful lending money ... but borrowing might not be a bad idea.

Many banks around the world will disappear as will some governments I suspect. Maybe the US will be forced back on the gold standard. But, after a great deal of dislocation and pain, things will normalize and we will start lending and borrowing again. Sorry, that’s all I got at the moment. I’ll muse on it some more later.

I Agree with Bernie

In last night's Democrat debate, Bernie Sanders made a few points with which. I concur:

- Wall Street was mainly responsible for the housing and financial collapse in 2008. The fact that no one has been indicted for this travesty proves that Washington ... in particular the Obama administration ... is beholden to Wall Street money.

- The repeal of the Glass-Steagall Act in the late 1990's (under Bill Clinton's presidency) is the primary reason that America's big banks have gotten too big to fail and required huge government bailouts in 2008 and 2009. Glass-Steagall needs to be reimposed.

- The Dodd-Frank financial reform bill has not fixed this problem ... in fact, these banks have even gotten bigger since the collapse and would require another bailout the next time around.

- Hillary Clinton and Barack Obama have taken huge campaign contributions and speaking fees from the Wall Street banks ... particularly Goldman Sachs ... and this is why things are so cozy between these parties. Hillary Clinton cannot be relied upon to sever her relationship with Wall Street.

Now, am I a Socialist because I agree with Bernie? Not hardly, in fact what Bernie didn't and couldn't say was that the Democrat party ... in particular Barney Frank and Chris Dodd ... are another primary reason for the financial collapse in 2008 ... because they forced banks to give sub-prime mortgages to poor credit risks and then had these mortgages purchased by Fannie Mae and Freddie Mac, two Democrat-controlled honey pots.

Here We Go Again

The sub-prime mortgage fiasco of 2008 should have taught us a lesson. With the encouragement of Barney Frank and other political cockroaches, the banking industry and mortgage brokers gave mortgages to hundreds of thousands of people who didn’t have the wherewithal or the intention to pay them off. They used these houses like an ATM machine … pulling out cash whenever crooked appraisers or cozy transactions made it look like these houses were worth more … which most often they weren’t.

And the mortgage originators went along with this fraud because they could offload these mortgages onto Fannie Mae as fast as the documents could be created … collecting large origination fees in the process. This mortgage bubble was also compounded by another grifting scheme … the packaging of bunches of mortgages into “securities” which were sold like bonds and given premium ratings when they were clearly undeserving. It got even more complicated and dangerous with the insuring of these mortgage securities … which I won’t go into here.

But the lesson has, unfortunately not seem to have been learned. What should every deserving con-artist get for free next? Why a car of course. So now car dealers (mostly used-car dealers) are giving car loans to buyers who do not really qualify for such credit … sub-prime borrowers if you will. And these car loans are then being packaged up and sold to lenders seeking higher yields than can be had most other places … see: CNBC Story for the gory details. And as long as hanky-panky in the rating of these auto-loan securities does not occur ... like it did with mortgage-backed securities, things should be OK. But I’m not sure that I would have as much faith in this process as Apple, Google and 3M apparently have.

Robbing the Bank

Permit me an indulgence … I offer here an analogy to try to explain our sub-prime mortgage meltdown in late 2008 that cost the United States at least one trillion dollars and likely elected Barack Obama to the Presidency. This analogy will use a simple bank-robbery scenario to try to explain the actors and their roles in this (to me) criminal enterprise. Here is the cast:

- The Master Planners – Barney Frank and Chris Dodd whose drive for universal home ownership was the diabolical felonious scheme behind this travesty (with the template of the Community Development Act of 1974.)

- The Bank Robbers – Countrywide Finance, GMAC, Quicken and the myriad of other bucket-shop mortgage origination companies that sprung up during the last years before the meltdown … along with the complicity of the hundreds of thousands of homeowners who got these no-documentation mortgages using chicanery and mendacity.

- The Money Launderers (legitimizing the pelf acquired in this robbery) – Fannie Mae and Freddie Mac abetted by all those financial institutions (e.g.s: Morgan Stanley, Goldman Sachs, Citigroup, etc.) that packaged up these mortgages (Collateralized Debt Obligations -- CDOs) to sell to these fences … AND all those players in the Credit-Default Swaps casino (AIG, Goldman Sachs, Lehman Brothers, Deutsche Bank, etc.)

- The Get-Away Car Drivers – the Credit Rating Agencies that gave these CDO’s unrealistically high credit ratings

- The Bank’s Security Force – those myriad Federal financial regulatory agencies who spent the period during the actual robbery lounging in the bank’s break room playing pinochle and watching porn on the bank’s security-system screens.

- The Bank’s Depositors (who lost their money in the robbery) –ordinary United States’ citizen-schlubs.

Ditch the Republicans?

Yesterday at a Democrat fundraiser, our august prexy, Barack Obama, gave his partisan argument as to why a Democrat Congress deserves to win the elections in November. Basically, he said that Bush and the rest of the Republicans drove our economy into the ditch in 2008. Obama was subsequently elected and thus he [sigh] was required to patch up this accident. With that sly grin of his, he went on to say that the Democrats have gotten the car (our economy) out of the ditch and back on the asphalt. And he added with a snide guffaw … now the Republicans want the keys back. In his best sophomoric manner, he said, “No! You can’t drive. We don’t want to have to go back into the ditch. We just got the car out.”

Perhaps what he said has a modicum of metaphoric truth to it, however please allow me to modify and extend his remarks with the following observations:

- The Republicans were not alone in driving our economy into the ditch. Clearly, by insisting on the irrational expansion of sub-prime mortgages, Barney Frank and Chris Dodd and their cronies in Fannie Mae and Freddie Mac did their share of reckless driving. The major sin that Bush and his Republican compatriots in Congress can be accused of is not pushing back hard enough.

- Yes, the Democrats have stopped our economy from sliding further into the ditch. But to say that we are back on the asphalt is, at best, political hyperbole. At worst, it is demagoguery. Economic growth is clearly anemic and unemployment still hovers around 10%. In fact, we are in serious jeopardy of slipping back into negative GNP growth. And this is occurring after monstrous government deficit spending that cannot be sustained. Such a Keynesian economic experiment has once again been proven misguided … and if the Bush tax cuts are left to expire this coming January, it is quite likely that Obama’s stretch limo will also end up back in the economic ditch.

- Even public opinion has now decided that it is Obama’s recession. See: Obama's Fault. After 18 months in office, Obama needs to stop pushing his ultra-liberal agenda at the expense of job seekers and economic growth. He is rapidly losing Bush as a scapegoat and would be advised to start accepting responsibility for our economic malaise. Perhaps, as Obama was decrying at the fundraiser, the Republicans might make an equivalent mess of things if they win back majorities in Congress this fall, but then we would still have some hope that things will finally change. I kind of suspect that if the tea partiers have anything to say about it, things will.