Inflation on it’s way

December 8, 2008

The $7 trillion question

Do expansive federal bailout plans doom Americans to an inflationary future?

By Colin Barr, senior writer
December 8, 2008: 12:45 PM ET

NEW YORK (Fortune) — A billion dollars here, $7 trillion there: How long till Uncle Sam has to cry “uncle?”

For now, frightened investors worldwide continue to gobble up U.S. Treasury bonds, and they aren’t much concerned about the impact of all the obligations the U.S. government is taking on to try and head off economic catastrophe.

But the government printing money, lending money to shaky corporations and guaranteeing debt that may never be repaid all could have troubling consequences in the not-too-distant future.

The No. 1 concern: Even if actions taken by the Federal Reserve and the U.S. Treasury succeeds at stabilizing the global financial system, and an economic recovery takes hold, a brutal inflationary spike will be right around the corner.

“Inflation is the 8,000-pound gorilla in the room,” said Gary Hager, president of Integrated Wealth Management in New Jersey. “We’re sitting in the room with the coffee cups vibrating.”

In that environment, long-term interest rates would soar, the value of the U.S. dollar would plummet, policy makers would face a whole new set of challenges.

“Everyone is going to lose something,” said Will Hepburn, president and chief investment officer of Hepburn Capital Management in Prescott, Ariz. “The winners will be those who end up losing the least.”

Focus on deflation

Even those who have backed the blizzard of emergency spending on the grounds that it’s necessary to prevent an economic catastrophe are worried about the size of the tab that will be left to taxpayers.

Hepburn gives federal officials “bonus points” for concocting innovative responses to the credit crunch. The ongoing collapse of U.S. stock market and real estate values, he said, has slashed U.S. household wealth by at least $10 trillion – and those paper losses could go much higher before the swoon ends.

So far, given the eye-popping sums being offered up by government officials, the markets have responded with surprising nonchalance. Yields on Treasury securities have tumbled to historic lows as investors fly to the safety and liquidity of U.S. government bond markets. The dollar has benefited from the move away from risky assets as well, trading at levels last seen earlier this decade.

Hepburn thinks the process of financial institutions and major investors unwinding massive bets may be further along than people believe. But while that could mean less volatility in the markets and a reduced risk of financial calamity, it could also whipsaw people who have moved their money out of stocks and into low-yielding assets like Treasury bonds.

“The capital preservation strategy will work till the recovery sets in,” Hepburn said. “But we don’t have the resources to pay off all these obligations – so the government’s going to have to try to inflate it away.”

An inflationary spike may seem unlikely, given that governments around the world are currently doing their best to head off the opposite threat – deflation, with falling price levels that would hamper economic growth by increasing real interest rates. The Bank of England and the European Central Bank slashed interest rates Thursday morning in a bid to bolster economic activity and prevent inflation from turning sharply negative in coming months.

Fast-changing climate

But Hager notes that it was only four months ago that oil cost $100 a barrel more than its recent $47, which shows how quickly market dynamics can change.

What’s more, he said, while people are still struggling to figure out the costs tied to starting up and overseeing the government bailouts, no one seems to have put much thought to an equally important endeavor – how the government withdraws the massive support it has offered the markets in the event its efforts start to bear fruit.

While efforts to thaw the credit markets are taking effect slowly, Tom Sowanick, chief investment officer at Clearbrook Financial, sees a risk that they could suddenly become much more effective, leading to a jump in prices and a selloff in the dollar.

“The economy’s in a bit of a slingshot,” said Sowanick. “We are looking at a high probability of inflation issues ahead.”

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Our Fearless Leader

December 6, 2008
Bush reported to be drinking heavily
By Wayne Madsen
Online Journal Contributing Writer


Dec 5, 2008, 00:25

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(WMR)With less than two months remaining in office, George W. Bush, witnessing a devastating defeat for the Republican Party, worse favorability ratings than those of Richard Nixon at the height of the Watergate scandal, and the most devastating economic situation since the Great Depression, is reported by a number of well-placed sources in Washington as drinking heavily.

After having tried to explain away the collapse of several Wall Street brokerage houses by saying, �Wall Street got drunk,� it appears that it is Bush who is suffering from bouts of drunkenness.

According to informed sources who spoke to WMR, Bush was visibly drunk at the recent G-20 economic summit in Washington and at the Asia Pacific Economic Cooperation (APEC) summit in Lima, Peru. Russian President Dmitry Medvedev, Japanese Prime Minister Taro Aso, Chinese President Hu Jintao, South Korean President Lee Myung-bak, Indonesian President Susilo Bambang Yudhoyono, Mexican President Felipe Calderon, Australian Prime Minister Kevin Rudd, and Canadian Prime Minister Stephen Harper were among the world leaders who had the chance to witness an inebriated Bush both at the G-20 and APEC summits.

WMR has long reported on Bush�s heavy drinking. On July 31, 2007, WMR reported: �WMR has learned that the January 13, 2002, incident in which President Bush claimed to have choked on a pretzel and passed out briefly was a cover story designed to divert the media�s attention away from Bush�s heavy drinking. A well-placed White House source has confirmed a previous account of another well-connected White House source that Bush had been drinking while watching a Sunday NFL playoff game between Baltimore and Miami.

The White House nurse on duty examined Bush after he passed out from drinking at around 5:35 pm and took a blood sample ostensibly to check his blood sugar levels. The blood sample reportedly showed Bush�s blood alcohol content at a level considered to be legal intoxication.

Bush fell from his couch bruising his cheek and cutting his lip. His eyeglasses also cut the side of his face. Bush blamed the incident on his failure to heed his mother�s advice and chew all his food before he swallowed.�

On June 6, 2005, WMR reported: �A well-heeled Republican donor to the Republican Party was very frank about George W. Bush�s mental and physical condition. Attending a May 17 Republican National Committee $1500 a ticket fundraiser at Washington�s Grand Hyatt Hotel, the Bush supporter commented that he and others in attendance were talking the entire evening about Bush�s strange appearance. The donor and GOP supporter said that Bush �looked like he was on crystal meth,� a reference to the illegal drug crystal methamphetamine, a hallucinogenic stimulant.�

On September 22, 2005, WMR reported: �The White House press corps has been whispering about Bush�s drinking over the past few years. None dare write or speak about it lest their credentials are lifted and further access cut off by the most vindictive White House in American history.�

On March 13, 2007, WMR reported: �Our White House Press Corps sources report further disturbing news about President George W. Bush. Our sources have witnessed a clearly inebriated Bush approaching members of the press corps and making rude comments, including one particularly crude remark about First Lady Laura Bush. In that case, Bush, nodding toward Laura, called her a �c**t.� While Bush�s drinking is no secret to the White House press contingent, that particular comment was reportedly the worst they have heard uttered by Bush. Our sources also report that Laura Bush�s stays at the White House are less frequent and that her overnight trips to the Mayflower Hotel often coincide with the president�s drunken binges.�

Comments on Citi Statement

December 6, 2008

Glenn Beck: Disenfranchisement growing

December 3, 2008 – 12:30 ET

GLENN: Welcome to it. I’m glad you’re here. This is my favorite season of the year and it’s, this is an important time for America to renew herself and to reconnect. Please, please find the real meaning of Christmas this year. Don’t make it about the stores and the buying of stuff and everything else. Please use this to reconnect with what the real meaning of Christmas is and that is helping others, serving others, finding yourself, starting all over again. You know, you may lose everything, I may lose everything but we still have each other and we still have our families, and tomorrow we’re going to do a special show just on the real meaning of Christmas and I want to tell you some of the amazing stories that I have heard in the last couple of days from people that will, holy cow, if they can do it, you can do it. Overcoming our hardest obstacles. That will be on tomorrow’s program.

Now, the reason why I am so impressed and I believe that the clock is ticking and I have a renewed sense of urgency. I want you to listen to this. I want you to listen to this news story. I’m going to read it verbatim and I want to see if any of this sounds familiar. Citigroup says gold could rise over $2,000 next year as the world unravels. Again, Citigroup says gold could rise over $2,000 next year as the world unravels. Gold is poised for a dramatic surge and the blast through $2,000 an ounce by the end of next year as central banks listen carefully as central banks flood the world’s monetary system with liquidity. This is according to an internal client note from U.S. bank Citigroup. The bank said that the damage caused by the financial excesses of the last 25 years was forcing the world’s authorities to take steps that they had never tried before. This gamble was likely to end in one of two extreme ways, with either a resurgence of inflation and trust me, gang, trust me they’re not talking about regular inflation or a downward spiral into Depression, civil disorder and possibly wars. Both outcomes will cause a rush for gold. Quote: They are throwing the kitchen sink at this, said Tom Fitzpatrick. The bank’s chief technical strategist. Quote: The world is not going back to normal after the magnitude of what they have done. When the dust settles on this, the world will, it will see that it will either work and the money they have pushed into the system will feed through an inflation shock, or it will not work because too much damage has already been done and we will see continued financial deterioration causing further economic deterioration and the risk of a feedback loop. We don’t think that this is the more likely outcome. I do. But each week as it passes and each month passes, there is a growing danger of a vicious circle as confidence erodes. This will lead I’m still quoting from Citigroup: This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders remember, Citigroup is talking about the crazy edges of Europe. But see if any of this sounds familiar. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest starting with strikes because people are feeling disenfranchised, end quote. May the heavens open up and sing praises, hallelujah, finally someone with some credibility is talking about disenfranchisement. Quote: What happens if there is a meltdown in a country like Pakistan, which is a nuclear power? People react when they have their backs against the wall. We’re already seeing doubts listen to this: We are already seeing doubts emerge about the sovereign debts of developed AAA rated countries, which is not something you can ignore. So you know, developed AAA rated countries are countries like America. Gold traders are paying close attention to reports from Beijing that China is thinking of boosting its gold reserves from 600 tons to near 4,000 tons in a way to diversify away from paper currencies. What does that mean? Whose paper do they hold? Ours. They hold our currencies. If they are talking about going from 600 tons of gold to near 4,000 tons of gold, they need to sell their currencies and their treasuries. What does that do to the American dollar? “Oh, no one will ever do that because they need us.” Everyone is in survival mode. Mr. Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between ’99 and 2000. People have started to question the value of government debt, end quote. Meanwhile, our leaders are saying pay no attention to debt. Meanwhile, the Fed which unbeknownst unfortunately to a lot of people, the ones who hold our treasury notes, the ones who it’s backed by the Fed that is a treasury note, a promise the Fed will not release any information on how much gold it holds. The Fed won’t allow any accounting on what they actually have. Citigroup said the blastoff was likely to occur within two years and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off the all time peak of $1,030 in February, but has held up much better than other commodities over the last few months referring to its historic role as a safe haven store of value and a de facto currency. Gold has tripled over the last three years in value, vastly outperforming Wall Street and European, it says bonuses here but it can’t be bonuses, stocks.

Okay, look, here’s the thing. Citi does this sound familiar? Does this, have you heard this maybe a year ago from anybody? This is a huge, huge development. This is Citigroup saying this and when somebody like Citigroup says this, it causes a shock to the system. It causes a shock to the market. So hear me clearly. They are not telling you the full truth, just like the President won’t tell you the full truth because they know what it means if they panic. They know what it means if they say something that causes people to panic. This is the next level in getting people prepared for what’s coming.

Let me go through this piece by piece. Gold could blast through $2,000 an ounce by the end of next year. It is going to blow through. You mark that down, Stu, if we’re still on the radio in 12 months, it will go through $2,000 an ounce. The bank says it’s caused by the financial excesses of the last 25 years. That is true. The gamble is going to end in one of two extreme ways: Either with a resurgence of inflation they are not talking about inflation. Study the Weimar Republic. They are talking about hyperinflation. You cannot inflate the world’s money supply to the point that we have. They are lying to you. They are trying to take this down let’s look at them in the best possible light. They are trying to take this system down as slowly as they can so you can prepare, but I’m telling you you are running out of time to prepare. You must prepare your household, you must prepare your children, you must do logical, well thought out things to be able to prepare your family and please do not do them in a panic fashion. I don’t tell you these things to panic you. I tell you this with a sense of urgency so you may move with a sense of urgency and it is the same reason why CitiBank is telling you this today. They say it’s either going to be inflation or a downward spiral into Depression, civil disorder and possible wars. They are talking about this on a global scale. They don’t say that this is the United States but, gang, there’s trouble coming. They are throwing the kitchen sink at this. This is what I told you a year ago. I said there’s going to come a point to where they’re going to open up these valves so far that nothing will react. The stock market won’t react, nothing will. And they’ve got to turn those valves the other way because if they don’t turn them the other way and shut this money supply off and do it quickly, you are going to have massive inflation. Well, not only have they not shut those valves off, they’ve opened them up even more. You cannot do these things. No matter what our arrogance tells us that, “oh, well, we’ve got it under control; oh, well, this will happen or this will happen,” these people are trying to change the course of a hurricane and they’re making it worse, unless you prepare. I told you a year ago, I told you when I pulled out of the market, I got a phone call, this is over a year ago and I said I pulled everything out. And I got a phone call and they said, you’re telling people to pull out of the stock market, you are only making things worse. I said nobody’s listening to me, nobody’s listening to me at this point. I’m just telling you what I’ve done, you make your own decision. But you know what and I prayed about this because I felt I almost felt in a way like a betrayer of my country because I thought, how am I pulling my money out? We need to be able to have jobs, we need to be able to build. And it came to me, there must be someone with something left to be able to restart. You must protect your family. You must protect these things because you’re going to need to be able to restart. There’s got to be somebody left to be able to say, “Okay, let’s pick ourselves back up.” The world is not going back to normal. This is a quote: The world is not going back to normal after the magnitude of what they have done. That’s Citigroup: The world will not go back to normal after the magnitude of what they’ve done. This is what I told you three weeks ago when I said the G20 were meeting. I said they’re dropping framework. It’s a new world order. They know. They know what’s coming. They are saying, “We just need to see what we can do.” No, they are not. They are dropping in the new world order. If I know it, if my sources are good enough and I’m smart enough, a guy who never took an economics course in my life, can look at all of these things and say, wait a minute, wait a minute, wait a minute, no way out, you’re blocking all the exits, you know they do. They see it. This will lead to political instability, and they talk about European countries like Hungary, there is risk of domestic unrest starting with strikes.

Gang, Amy just called in 15 minutes ago. She was a caller. She just called in, and I specifically and I didn’t point it out then. I hadn’t read this article. I didn’t point it out then and I wasn’t wildly overt. Anybody who has ears heard. I said, listen to her voice. I said that for a reason, because I want those who are listening, those who have ears to listen and eyes to see. I needed you to hear Amy, a regular person just like you, so angry and so sad on what’s happening. She knows it. Americans, your gut is telling you this. Don’t dismiss it. Follow your gut. If China would make that one move, no one’s lending us any more money. So all of the things that we borrow has to be purchased with something else. You want prescription drugs? Okay, we can’t borrow the money from China anymore. We need $500 billion more, half a trillion dollars more for a stimulus package so we can train people to go out and buy a new television set to keep the economy going? No one is going to borrow no one is going to lend us that $500 billion. We’re at the end, gang. We’re at the end of that game. So how do they pay for it? They print it because governments can do that.

The credit card industry will be the next crisis.

December 3, 2008

Credit-card industry may cut $2 trillion lines: analyst

(Reuters) – The U.S. credit-card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.

The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.

“In other words, we expect available consumer liquidity in the form of credit-card lines to decline by 45 percent.”

Bank of America Corp (BAC.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N) represent over half of the estimated U.S. card outstandings as of September 30, and each company has discussed reducing card exposure or slowing growth, Whitney said.

Closing millions of accounts, cutting credit lines and raising interest rates are just some of the moves credit card issuers are using to try to inoculate themselves from a tsunami of expected consumer defaults.

A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity, Whitney said.

Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.

“We are now beginning to see evidence of broad-based declines in overall consumer liquidity.”

“Already, we have witnessed the entire mortgage market hit a wall, and we believe it will, for the first time ever, show actual shrinkage over the next few months,” she wrote.

The credit card market will be 18 months behind the mortgage market and will begin to shrink by mid-2010, Whitney said.

Whitney also expects home prices to continue falling another 20 percent hurt by lower liquidity. They are down 23 percent from their peak, she said.

“In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices,” Whitney wrote in a note dated November 30.

She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.

“Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view,” the analyst said.

Most of the solutions to the situation involve government intervention, and all of them require more dilutive capital to existing lenders, she said.

“Accordingly, we continue to be cautious on our outlook on US banks.”

SUGGESTIONS

In a column in the Financial Times, Whitney suggested four adoptable changes to make a difference.

The first would be to re-regionalize lending, which has gone from “knowing your customer” or local lending, to relying on what have proven to be unreliable FICO credit scores and centralized underwriting, due to the nationwide consolidation since the early 1990s, she wrote in the column.

Expanding the Federal Deposit Insurance Corp‘s guarantee for bank debt will also help as the banks need to know they can access reasonably priced credit for an extended period to continue to extend new credit lines, she wrote in the column.

Whitney also advised delaying the introduction of new accounting rules, which would bring off-balance-sheet assets back on balance sheet, until 2011 or 2012, as the primary assets that will come back are credit card loans.

Whitney suggested amending the proposal on Unfair and Deceptive Lending Practices that is set to be adopted in 2010, saying restricting lenders’ ability to reprice an unsecured loan will cause them to stop lending or to lend less.

(Reporting by Neha Singh and Amiteshwar Singh in Bangalore; Editing by Vinu Pilakkott, Jarshad Kakkrakandy)

One World Order

December 2, 2008

700 Billion. Try 7.7 Trillion.

November 25, 2008

U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit (Update2)

By Mark Pittman and Bob Ivry

Nov. 24 (Bloomberg) — The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”

Too Big to Fail

Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.

The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.

William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.

‘Credit Risk’

The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer.

Citigroup received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.

“No question there is some credit risk there,” Poole said.

Congressman Darrell Issa, a California Republican on the Oversight and Government Reform Committee, said risk is lurking in the programs that Poole thinks are safe.

“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”

The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms.

Markets Down

The Dow Jones Industrial Average through Friday is down 38 percent since the beginning of the year and 43 percent from its peak on Oct. 9, 2007. The S&P 500 fell 45 percent from the beginning of the year through Friday and 49 percent from its peak on Oct. 9, 2007. The Nikkei 225 Index has fallen 46 percent from the beginning of the year through Friday and 57 percent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to $53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75 percent this year.

Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy.

Most of the spending programs are run out of the New York Fed, whose president, Timothy Geithner, is said to be President- elect Barack Obama’s choice to be Treasury Secretary.

‘They Got Snookered’

The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.

“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”

President Franklin D. Roosevelt’s New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government’s current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office, now called the Government Accountability Office.

‘Worst Crisis’

The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.

The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. and a former economist at the New York Fed. U.S. financial firms have taken writedowns and losses of $666.1 billion since the beginning of 2007, according to Bloomberg data.

“This is the worst capital markets crisis in modern history,” Harris said. “So you have the biggest intervention in modern history.”

Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.

Collateral is an asset pledged to a lender in the event a loan payment isn’t made.

‘That’s Counterproductive’

“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”

The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Corp. and a former research economist at the Federal Reserve Bank of Chicago.

“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.

Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”

Fed Rescue Efforts

The Fed’s rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns’s collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.

In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion.

The failure of a second securities firm, Lehman Brothers Holdings Inc., in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF. The two programs, which have pledged $2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.

Lehman Failure

“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”

The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.

Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 11.5 percent.

The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.

Federal Guarantees

Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.

Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.

Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac, a pledge that hasn’t been allocated to any agency. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.

Automakers Struggle

The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.

Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.

“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.

In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.

“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.

A haircut refers to the practice of lending less money than the collateral’s current market value.

Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.

‘Mark to Market’

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”

“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.

Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.

“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.

The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.

House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.

“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money.

Great Depression 2?

November 21, 2008
PAUL B. FARRELL

30 reasons for Great Depression 2 by 2011

New-New Deal, bailouts, trillions in debt, antitax mindset spell disaster

By Paul B. Farrell, MarketWatch
Last update: 11:53 a.m. EST Nov. 19, 2008
ARROYO GRANDE, Calif. (MarketWatch) — By 2011? No recovery? No new bull? “Hey Paul, why do you keep talking about a bigger crash coming by 2011?” Readers ask that often. So here’s a sequel to my predictions of 2000 and 2004, with a look three years ahead:
First. Dot-com crash
We pinpointed the dot-com crash at its peak, in a March 20, 2000 column: “Next crash? Sorry, you won’t see it coming.” Bulls-eye: The dot-com bubble popped. The economy went into a 30-month recession. The stock market lost $8 trillion.
And today, over eight years later, the market is still roughly 40% below its 2000 peak.
Video: Discussing the Great Depression Dorothy Womble and William Hague survived the Great Depression. They share their stories of living during that time as children. (Nov. 14)
Factor in inflation and the average stock has lost well over 50% of its value. Stocks have proven to be a very big loser, a bad investment for Americans, thanks to Wall Street’s selfish greed, plus the complicity and naiveté of politicians, press and public.
Second. Subprime meltdown
We reported on warnings of another crash coming as early as 2004, wrote a sequel, also titled “Next crash? Sorry, you won’t see it coming.” Yes, we were early, but in good company. We wrote many more warning columns. Few listened.
Subsequent events, notably former Fed Chairman Alan Greenspan’s admission of his failures in congressional testimony, prove that if he and other Reaganomic ideologues weren’t so myopic and intransigent about proving their free-market deregulation theories, they could have acted earlier and prevented today’s colossal mess. Instead, their ideology kept the bubble blowing, delayed the pop, making matters worse.
So once again, as history proves over and over, ideology trumps common sense, reality and the facts. Greed drives ideologues to blow bubbles. They pop. Crashes happen. The public is collateral damage.
Third. Megabubble cycles
We also detailed the broader, accelerating macroeconomic sweep of cycles last summer in columns like “20 reasons new megabubble pops in 2011.” We summarized a long list of major warnings from financial periodicals — Forbes, Fortune, the Wall Street Journal, Economist — and from the voices of Warren Buffett, Bill Gross, a sitting Fed governor and a former Commerce secretary. Multiple warnings “hiding in plain sight,” beginning with a Fed governor warning Greenspan in 2000 about subprime risk.
But the big shocker came from the new Treasury secretary two years before the meltdown: Bloomberg News reports that shortly after leaving Wall Street as Goldman Sachs’ CEO, Henry Paulson was at Camp David warning the president and his staff of “over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street’s face and affect the whole economy.”
Yes, they knew. And still both Paulson, a Wall Street insider, and Greenspan’s successor, Ben Bernanke, a Princeton scholar of the Great Depression, stayed trapped in denial and kept happy-talking the public for months after the meltdown began in mid-2007. Get it? While they could have put the brakes on this meltdown years ago, our leaders were prisoners of their distorted, inflexible views of conservative Reaganomics ideology.
As a result, once again the “best and the brightest” failed America and now they and their buddies in Washington and Corporate America are setting up the Crash of 2011.
Now it’s time for my 2008 update, a look into the future where things will get far worse during the next presidential term. And given human behavior, especially in the deep recesses of Wall Street’s “greed is good” DNA, it seems inevitable that no matter how well-intentioned the new president may be Wall Street and Washington’s 41,000 special-interest lobbyists will drive America into the Great Depression 2.
30 ‘leading edge’ indicators of the coming Great Depression 2
Every day there is more breaking news, proof Wall Street’s greed is already back to “business as usual” and in denial, grabbing more and more from the new “Bailouts-R-Us” bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas — anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.
Scan these 30 “leading indicators.” Each problem has one or more possible solutions, but lacks unified political support. Time’s running out. We’re already at the edge. Add up the trillions in debt: Any collective solution will only compound our problems, because the cumulative debt will overwhelm us, make matters worse:
  1. America’s credit rating may soon be downgraded below AAA
  2. Fed refusal to disclose $2 trillion loans, now the new “shadow banking system”
  3. Congress has no oversight of $700 billion, and Paulson’s Wall Street Trojan Horse
  4. King Henry Paulson flip-flops on plan to buy toxic bank assets, confusing markets
  5. Goldman, Morgan lost tens of billions, but planning over $13 billion in bonuses this year
  6. AIG bails big banks out of $150 billion in credit swaps, protects shareholders before taxpayers
  7. American Express joins Goldman, Morgan as bank holding firms, looking for Fed money
  8. Treasury sneaks corporate tax credits into bailout giveaway, shifts costs to states
  9. State revenues down, taxes and debt up; hiring, spending, borrowing add even more debt
  10. State, municipal, corporate pensions lost hundreds of billions on derivative swaps
  11. Hedge funds: 610 in 1990, almost 10,000 now. Returns down 15%, liquidations up
  12. Consumer debt way up, now at $2.5 trillion; next area for credit meltdowns
  13. Fed also plans to provide billions to $3.6 trillion money-market fund industry
  14. Freddie Mac and Fannie Mae are bleeding cash, want to tap taxpayer dollars
  15. Washington manipulating data: War not $600 billion but estimates actually $3 trillion
  16. Hidden costs of $700 billion bailout are likely $5 trillion; plus $1 trillion Street write-offs
  17. Commodities down, resource exporters and currencies dropping, triggering a global meltdown
  18. Big three automakers near bankruptcy; unions, workers, retirees will suffer
  19. Corporate bond market, both junk and top-rated, slumps more than 25%
  20. Retailers bankrupt: Circuit City, Sharper Image, Mervyns; mall sales in free fall
  21. Unemployment heading toward 8% plus; more 1930’s photos of soup lines
  22. Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists
  23. China’s sees GDP growth drop, crates $586 billion stimulus; deflation is now global, hitting even Dubai
  24. Despite global recession, U.S. trade deficit continues, now at $650 billion
  25. The 800-pound gorillas: Social Security, Medicare with $60 trillion in unfunded liabilities
  26. Now 46 million uninsured as medical, drug costs explode
  27. New-New Deal: U.S. planning billions for infrastructure, adding to unsustainable debt
  28. Outgoing leaders handicapping new administration with huge liabilities
  29. The “antitaxes” message is a new bubble, a new version of the American dream offering a free lunch, no sacrifices, exposing us to more false promises
Will the next meltdown, the third of the 21st Century, trigger a second Great Depression? Or will the 2007-08 crisis simply morph into a painful extension of today’s mess to 2011 and beyond, with no new bull market, no economic recovery as our new president hopes?
Perhaps some of the first 29 problems may be solved separately, but collectively, after building on a failed ideology, they spell disaster. So listen closely to “leading indicator” No. 30:
At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan’s Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America’s problems will take years and will burn trillions.
He sees “nothing but large increases in the deficit … I think it would be worse than the depression. … Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of U.S. government bonds.” It’ll get worse because “the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government.”
Reuters concludes: “Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes. ‘I just want to get people thinking about this, and to realize this is a road to disaster,’ said Whitehead. ‘I’ve always been a positive person and optimistic, but I don’t see a solution here.'”

We see the Great Depression 2. Why? Wall Street’s self-interested greed. They are their own worst enemy … and America’s too.

Greatest Hits

November 15, 2008

Peter Schiff Nails It

November 15, 2008

Shady business

November 11, 2008

The rising cost of the bailout

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Although the price tag on the Treasury Department’s Troubled Asset Relief Program is $700 billion, the full amount that the government has invested in its rescue effort for struggling financial institutions appears to be closer to $2.5 trillion.

Bloomberg L.P., the parent company of Bloomberg News, said last week that it filed a lawsuit seeking information on the collateral that a group of banks pledged for some $2 trillion in emergency loans from the Federal Reserve.

Bloomberg asked a federal court in New York to require the Federal Reserve to disclose the identity of the banks that borrowed money through certain financing mechanisms, and to disclose what assets they pledged against those loans.

Bloomberg filed the suit after the Federal Reserve said that it would deny Bloomberg’s request for the information under the Freedom of Information Act.

The financial firms that were eligible for some of the loans through the Federal Reserve included many of the same firms that split $125 billion in the first round of the Treasury Department’s relief program.

The Treasury Department has approved more than $170 billion in capital injections for banks that applied to sell preferred stock to the government. It has about $80 billion remaining for additional participants, who must submit their applications by Friday.

The Treasury Department announced Monday that it also is investing $40 billion in the preferred shares of American International Group Inc. The financing it part of a new plan to salvage an earlier rescue plan that was going awry.

The revised plan brings the total assistance that AIG has received from the Federal Reserve and the Treasury Department to $150 billion.

Bloomberg reported that the Federal Reserve made its $2 trillion in emergency loans under 11 different programs, eight of which were created in the past 15 months.

The Treasury Department also made a little-noticed change to tax policy that experts say could save banks that merge with other banks as much as $140 billion in taxes. One of the biggest beneficiaries of the change would be Wells Fargo & Co., which is absorbing Wachovia Corp. in a deal spurred by the Federal Deposit Insurance Corp.‘s concerns about Wachovia’s solvency. According to an article Sunday in the Washington Post, Wells Fargo stands to save about $25 billion in taxes.

Adding together the $170 billion that the Treasury Department has currently agreed to provide banks in additional capital, the $150 billion that the Treasury Department and the Federal Reserve are providing to AIG and the $2 trillion that the Federal Reserve has provided banks in emergency loans brings the total assistance to $2.32 trillion.

If the estimated savings from the new tax breaks are included, the assistance would climb to $2.46 trillion. That total does not include other measures not focused directly on banks, such as Treasury Department’s $200 billion in support for Fannie Mae and Freddie Mac, and the Federal Housing Administration’s $300 billion HOPE for Homeowners program.