Category Archives: Debt

Auto Industry Bailout!

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While we all have our eyes on Bernake, Paulson, Bush and $700,000,000,000,000.00 what is another $25,000,000,000,000.00 for some automakers. There were signs of distress and as the Financial Times reports (article) they have been lobbying Washington for sometime for a “loan”.

The continuing resolution provides funding for $7.5bn, which is the estimated subsidy on the loans – in other words, the cost to the government of providing them at well below market rates.

Well it is a loan after all so we are only giving them $7.5bn instead of $25bn because they have to pay it back.  Where I ask did we get in the business of bailing out private industry? No it isn’t anything new unfortunately. 

Most American cars are crap.  They are ugly, fall apart, and aren’t worth the steel they sit on.  Would I choose to spend my tax dollars on helping out a flailing industry?  If the auto industry didn’t foresee higher gas prices, and thus a slowing of SUV sales well then they deserve to go out of business.

I’m leaving out the part about the autoworker.  This isn’t about Ford or GM it is about the laborer who would lose their job.  I think I’m going to have to do an article about Econ 101, but from and Austrian and NOT Keynesian perspective.  All we are doing by subsidizing and bailing out all these corporations is encouraging mediocracy and unnecessary risk taking.  

If I started an auto company and nobody liked my cars then I go out of business, my employees find other jobs, and life moves on.  Instead we take taxpayer dollars that we have no choice in providing to the government and prop up failing industry.  It is an easy sell because as Shelly Lonbard, and analyst at Gimme Credit, a corporate bond research company, told clients this week that

“blue collar workers are more sympathetic victims than ‘rich’ investment bankers. So it’s easier to defend loans designed to save close to 100,000 jobs in the shrinking US manufacturing industry.”

Question: Why is the US auto industry shrinking?  

Answer: Labor unions, pension benefits, poor products, and government subsidies.  Please add to this list in the comments as it isn’t all inclusive.  

Who is next?  Biotech, Johnson and Johnson, Microsoft, Amazon, Etrade… let’s just sprinkle some money to anyone who lobbies enough.  I’m sick.

Copperfield & Houdini for Presidency!

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I’ve attended a few performances by David Copperfield and he has performed the unbelievable.  Before my very own eyes a group of thirty people vanished into thin air.  Where did they go?  I watched the unbelievable made real right in front of me.  How could this be an illusion created to fool me into belief?  I ask you… HOW?

David Copperfield and Harry Houdini would probably be a better pair to run the government at this point.  At least they would give us a good show.  The current officials in office make my gut wrench.  We have migrated from the land of the free to nationalization of private property in the name of free markets.  Whoa… okay let’s get something straight.  WE DO NOT HAVE FREE MARKETS… NOT EVEN CLOSE  

If we actually had a system that represented free markets the Federal Reserve (a PRIVATE bank made up of member banks that are also PRIVATE) would not exist, we would still be on the gold standard, and the government wouldn’t even consider a bailout of the taxpayer’s funding, and the United States Treasury would not be proposing this amazing relief package for those who are mainly responsible for getting us into this mess.  

So, I mentioned two masters of illusion… Why?  What is being pulled off at the moment is happening in front of our eyes and for some like me is atrocious.  However, for others they think it is essential to the integrity of financial markets, financial institutions, and YOUR house.  The entire bailout is being purported as a bailout for the helpless homeowner, the saver, the middle class.  

The problem is that nobody knows how much any of this debt is actually worth.  Say the government buys $700,000,000,000,000.00 worth of debt at $0.20 on the dollar, which is great discount.  If that debt is in reality worth less than that we have a problem.  When will these notes be paid back, and in what form are the notes?  

Chris Martenson managed to grab part of an article that later disappeared from Bloomberg that said:

“The Treasury’s thinking is to make it as big and wide as possible so they have the flexibility to act if need be,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. “There have been losses on a whole range of U.S. debts and as the economy deteriorates in response to the housing slump those losses could escalate.” 

Treasury officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

This effectively means any type of debt.  Let’s take a moment to see what forms of debt exist:

  • Credit Card DEBT
  • Mortgage DEBT
  • Automobile DEBT
  • Bond DEBT

………. and the list goes on ………….

So, we have the United States government wanting to take on all this debt in the name of saving the financial markets.  Let’s just take the debt from the banks to clear up their balance sheets so they don’t have to write it off, which would cause them to have to increase their reserves because their assets are now below the minimum.  We could lower that further, but it has already been lowered to 3% of total assets.  That means they most likely loaned out the other 97%.  

As the Fed creates money our dollar is worth less and less.  Where is the Federal Government going to come up with $700 Billion dollars?  They will create it from nothing, which the Federal Reserve is great at doing.  Inflation will not solve the problem, only exacerbate it.  Newt Gingrich opposes it, and admits that if he is wrong in not supporting it that it is the lesser of two evils.  

If this bill passes please say goodbye to the dollar as we know it.  Foreigners might finally reach the breaking point to where they are afraid to purchase dollars and realize that buying them to keep their currency less expensive is futile.

You just purchased AIG… Did you have a choice?

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The Fed is Heralded as a savior.  

 

 

 

I’d like to present a dissenting opinion and it will only take a moment.  The Fed is a quasi-governmental entity — read private bank.  It is a very large private bank that oversees the money flows between banks with the exclusive privilege of creating and destroying money granted per the United States government.  I don’t know when the destroying of money has actually ever occurred since 1913 when the Fed was created.  

Tomorrow (9/17/2008) will be a grand day for the markets as they celebrate the saving of AIG, which if left alone would have hurt a many people and companies.  In the long run it would have been better for everyone and helped people realize that the income’s of taxpayers aren’t for sale <pillaging> if they were left to fail.  It would also have prevented a precedent from being created that the Fed can and will purchase anyone if need or desire be.

However, the Fed is able to say they are “rescuing” AIG, Freddie, and Fannie all in a very short period.  Here is a thought to ponder…

If I am able to create money out of nothing or thin air then why wouldn’t I want to seem like a savior and help out distressed companies in the name of helping the economy?  I don’t have a great answer why I wouldn’t.  If I can shave a few cents off of everyone’s dollar who will notice?  At first it won’t be apparent, but eventually there will be consequences, and at the end of the day I will be the savior.  The consequences won’t be traced back to me.  Like committing a crime knowing you won’t be caught… do you commit the crime?

Revisiting the notion of buying low (through fictitious money that is treated as real money)… I’m the Fed and create $85 billion dollars to purchase 80% of AIG.  Great so now I own 80% of its liabilities and assets. No, not so great because nobody knows what the actual value of the assets are. <Remember I can create money>  For someone who can’t create money this is a problem, and the exact problem AIG ran into.  However, with the ability to create money I can now continue to add more “cash” to AIG’s balance sheet helping it though the crisis.  At the end of the day AIG, Freddie, or Fannie have been saved all though Monopoly money.  They will once again be players in the “free market”, but purchased at a unbelievably low cost. FREE  

Conclusion:  You and I purchased AIG, Fannie, and Freddie… however we will never see a dime of profit in return.  Do you see a problem with this?  Yet, the Fed will be treated like a king for saving the financial markets.  Perhaps the right thing to say would be using someone else’s money to purchase a failing company and then profiting without ever returning that money to the “lender”.  

That is Default. Fraud. Theft. Robbery. 

Final thought:

Do you think that income taxes are legal and necessary according to the constitution of the United States?

Probable Future Outlook for the United States

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What concerns me most is looking at the highly probable future outlook…

The gov’t is looking to bail out the Freddie and Fannie (dependent upon congressional approval), which will help out new, but not existing home buyers. By adding their debt the gov’t is using our tax dollars and inflation adjusted dollars to secure them. However, we are projecting a $500 billion dollar short fall this year in the budget, and the national debt is at about 9.7 trillion, and growing ever so rapidly. If we tack on unfunded liabilities now we are talking anywhere from 50-70 trillion in obligations. Effectively the government is insolvent. Now what happens when the gov’t revenues begin to decline due to the slowing economy, baby boomers starting to take their retirements, baby boomers soon to be taking Medicare, and the continuation of the Iraq war / Afghan war / maybe Iran war?

I’m failing to see the light at the end of the tunnel.

Consumers purchased houses as money was cheap. Everyone felt rich so they purchased more consumables, which had no productive value. These weren’t investments into something that would have future economic value, but only immediate gratification and immediate depreciation. Look at who is producing and who is consuming… we in the USA are primarily guilty of the latter and it is all funded through the rest of the world’s savings. At some point the rest of the world is going to tire of this. Then after our HELOCs were maxed out we started to use our credit cards.

What happens if the United States dollar loses its status as the reserve currency? Then everyone with dollars will flood the markets and purchase any tangibles possible. Money is a commodity just like gold and silver, but it can easily be created. However, due to the nature of its existence it is a exchangeable commodity and considered legal tender. As people want dollars the price rises and as people desire them less the price falls. Why would anyone want dollars when you look at the future for the US economy besides necessity and political reasons.

People are already losing their HELOCs because banks are worried that consumers won’t be able to afford them. Legal or not this is happening. I also heard from a Real Estate agent in Seattle that banks are asking for 25% down on new mortgages.

In an earnings call in late January 2008, Bank of America executives said credit card delinquencies in California, Florida, Arizona, and Nevada—states with high foreclosure rates—increased five times as fast as in other states, suggesting that consumers struggling with their mortgage debt are also finding their credit card bills hard to pay. “We’re focused on getting paid for the risk we take,” said Joe Price, chief financial officer. – US News and World report 2/28/2008 — Link to the story

The GSE bailout will help to prolong the issues that the financial industry is facing. The USG will do everything in its power to support the system through its tax system. It also gives individuals and institutions more time to pull their money out of the dollar. An immediate collapse would make that very difficult and costly.

And Gary North just posted this lovely article that illustrates that nobody has a clue as to the extent of what is really going on. Link to the article Unfortunately this is for members only, which I highly recommend subscribing to. I don’t get paid a dime on referrals.

I’m getting the sense that things could get a whole lot worse than any of us imagine. In that case I’d consider moving out of the county. Sure the dollar is rallying, and commodities are falling, but how long will this last? Peak oil has passed so we are biding our time before demand outstrips supply. Without oil or with really expensive oil life becomes much more difficult. Panic would ensue in the streets.

For those of us who believe in the concept of revision to the mean take a look at the Case Schiller index since 1890. Looking at the graph we have never seen housing prices rise so dramatically so quickly. Every boom period was followed by a bust or contraction and revision to the mean. We are beyond the mean… we are in outer space. Thank you Fed for the cheap money, and for removing banking reserve restrictions, and inflating the money supply. Hey it had to go somewhere and housing seemed the place to be. Then it went to commodities, which are now taking a fall as well. However, I see no reason that the long term forecast for commodities won’t be higher. The commodities I speak of in this case are precious metals, petroleum, and food. Essentially all the necessities to keep the world moving.

As for housing it will have to come back down to reasonable values. If we encounter a period of hyperinflation then housing will be a good asset to hold onto. However, if we have a depression I could argue the opposite. In a depression the purchasing power of your dollar increases. Depression means contraction of the money supply, which isn’t necessarily a bad thing. In fact part of the Fed’s charter is to contract the money supply when needed, but that hasn’t been the case as of late.


Full Story from Mises.org

And what’s next? Commercial Real Estate?
NEW YORK: U.S. commercial real estate prices are likely to tumble over the next 12 to 18 months as more borrowers default on their loans and regulators crack down on banks, pushing even more properties onto the market. Since the market’s peak in 2007, the availability of debt – the lifeblood of commercial real estate – has dried up and choked off sales.

Borrowers have resisted selling because of falling prices. Banks have not sold off their troubled loans, fearing a huge write-down of all commercial real estate loans. But it looks as if the clock is running down. “We’re going to see a whole lot more trouble going forward,” said Peter Steier, vice president of Inland Mortgage Capital in New York.
Link to the article

It continues:

Commercial real estate sales in the United States are expected to fall 66 percent this year from $467 billion to an estimated $159 billion. This is because debt, especially securitized debt in the form of commercial mortgage-backed securities, or CMBS, is either unavailable or prices are too high and the terms too strict for borrowers, Reis said.

“One of our biggest problem areas is pretty much the state of Ohio,” said Kevin Donahue, senior vice president Midland Loan Services, a CMBS servicer that steps in when a loan is showing signs of imminent trouble. “If we keep going, by the second quarter of 2009, I think the entire state of Ohio will become a subsidiary of Midland.”

I discoved this last bit from Chris Martenson @ www.chrismartenson.com.

Fannie Mae and Freddie Mac… A governmental department

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I was originally going to write a post about how we always hear about the “New World Economy” prior to any boom / bust period.  This time I think the rules have finally changed as the United States is losing if it hasn’t already lost its status as the number one superpower, we are now the largest debtor in the world, and continuing to bail out thee who fails.  

Whether or not this time is different and we will recover is debatable.  What concerns me is the continuation of the Feds backing up private industry.  Had the United States government let Fannie and Freddie fail what would have happened?  Well, the stock market would have surely taken a tank, interest rates would have gone up versus dropping about .5%, and the dollar would have probably fallen dramatically.  

So what do we get?  – The Dow rises 290.04 points or 2.58%, the NASDAQ rises 13.88 or 0.62% and the S&P rises 25.48 to 2.05%.  Wait a minute here… The taxpayers meaning you and I get to foot the bill for this.  At a minimum the treasury is ready to pump in $100 billion into each company… oh wait are they really companies or departments of the government.  I guess that is up for the next presidency to decide.  Nothing like passing along the responsibility of the crisis.  

So, I present a question about all of this.  This being the cancer’s on the balance sheets of financial companies, a negative GDP that is still positive according to the gov’t, a extremely high CPI, and declining production and consumption.  

– Is it possible that we are going to see extreme volatility in the markets until the elections?  Probable, but as we have seen with every governmental intervention since 2007 there is a quick boom, and then continuation of the contraction.  Contraction meaning declining stock market prices.  The USG lagged in making a decion on the Fannie and Freddie debacle due to the upcoming election.  The longer they take the closer the election takes place.  Due to the recency effect people recall things closer to the present then the past.  Let’s just say that the economy looks somewhat okay going into the election.  What are the odds that McCain will have a better chance of winning over Obama?  Considering the past two elections…

I didn’t mean for this to go into a conspiracy theory or that I believe there is manipulation in the markets, but nothing seems to make sense at the moment.  What does make sense is that my dollar is losing its purchasing power, my condo is declining in value, prices are rising, and the US is bankrupt.  Oh but wait we can continue to print dollars like in the Posted in Debt, Economy, Federal Reserve, Finance, Investing, News, United States Dollar | Tagged , , , , , , , , , | Leave a reply