Thursday, May 14, 2009
Date: Thursday, October 2, 2008, 5:49 PM
Upon having a chance to digest my thoughts yesterday I realized a few mistakes including a couple things left out of the piece I wrote.
President Bush actually came out in 2006-7 hyping the high percentage of home ownership in the country. Correct me if I am wrong. In 2003-5 President Bush pushed the idea of more home ownership. The Bush administration this year stated that the institutions were healthy. Maybe Mr. Paulson didn’t read the FASB 157 statement on defining the accounting of Mark to Marketing as of November 15, 2007 and going forward.
Going back to the Clinton era, the issue of the “balanced budget” needs addressed. The way they were able to put the credit card expansion on the books and cut rates was due to that perception. When in fact there was no balanced budget. An agreement to increase spending by 8% on the federal budget constituted a balanced budget. Anything over 8% spending then qualified as a deficit. Trying to get the Clintons or a hard core Clinton supporter to understand that is very difficult. In addition, that was a product of a republican congress held by Newt Gingrich and a democrat President named William Jefferson Clinton. Most people do not really know where to assess credit and/or blame for the economy making economics a big part of the political game.
When the republicans blame the democrats for deregulating Fannie and Freddie is quite ludicrous. The democrats didn’t take over both houses of Congress until 2007. In 2003, the investment banks now causing the spread of the trouble asked for permission to leverage 40 to 1 dollars. They did that under the premise they were not FDIC insured and didn’t take actual checking and savings accounts. I would say that the 2003 expansion of leverage needed the 2005 deregulation of Freddie and Fannie. Otherwise, neither could pump up the asset and cash flow of their respective financial statements.
This also gives rise to all the new construction in the past 6 years enough construction for 25 years. With low interest rates pushing up property values new construction boomed. Developers need that kind of environment for it to be worth building even though at the end of the cycle people are paying too high of a price for the construction.
Thus, as prices go down the asset value of inventory starts slipping on the financial statements of these builders. Most CEOs have taken their stock options and bonuses over the years. In the next year will probably leave with high cash payments. Along with them cashing in stock options as these companies claim loads of cash which leaves less attractive financial statements. Less cash flow and lower asset values will be the problem as long term debt becomes due after their departure.
One more thing about the new construction, most did not contribute to the communities in which they built. Such as they did not contributing to the roads, schools, and utilities. Leaving the communities to issue bonds and raise property taxes. Of course being a low interest environment many communities did issue bonds. Which is why strengthening the economy for wage earners is very important.
In regards to 401k plans, my problem was in it not properly being explained to people. Using that money to buy products from businesses would have gone a long way to lessen the effect of the Fed Beige book credit widening in the economy. Yet, politics of privatizing Social Security was and is the driver for the 401k. Not to mention the actual wanting of privatizing Social Security in order to get rid of it by the Republicans since the conception of Social Security.
401k’s are just units of ownership of common stock. Common stock in a failure never recoups money. Unless, one gets enough shares for a vote and convertible bonds as did Mr. Buffet with GE and GoldmanSachs. Common stock is just a way of borrowing money and having really no responsibility to the lender. Unless one is running a good company and wants the company to survive long time.
In addition, the institutions in charge of the holding of the assets of 401k’s are considered the shareholder. They receive the shareholder information and voting rights. Those rights are not regulated to the unit holders. The managers of these funds get their pay if they play the game that was going on. And for the most part these mangers do not calculate outstanding stock options that will be taken out in the future. Just because that information is not released does not mean that can’t take a guess. Such as using how high the P/E is and if the company isn’t part of a hostile takeover.
The attempt to give the wage earner a share of the profits within the meaning of 401k’s created problems. People losing money in pension is why the idea was born. Like too many cooks in the kitchen. 401k’s creates too many owners. Thus, putting pressure on the management to cut other perks and pay increases in order to create the illusion of more profits to pump up a 401k.
Some people who in the middle 90’s who had pensions when their companies were sold to corporations had their pensions turned into 401ks. Over the next few years it looked really nice on paper. Yet, some knew the increases were just too large to fast. Some people believed the hype and wanted to borrow on it.
In this new “wealth economy” the selling of mortgages skyrocketed. With a high principle and low interest rate gave more collateral then truly was there. Bank A sells the mortgage to Bank B pretty much after writing it. Bank B pays for the principle and percentage of the amount of future interest. Bank B sells to Bank C and so on. Obviously the amount of interest to gain in profits during the sale gets lower the more times it is sold or the bank is taking a loss. I know of good mortgages being sold 4 or 5 times.
After a mortgage can no longer be sold for the interest it will earn. The banks started issuing what has become known as “complex financial securities”. I would call them instruments.
A better way of explaining them is the bank issued a type of bond on their holding of these mortgages to investors. Which as the public now finds out was not regulated or properly accounted for. Actually, the whole problem is not just bad loans. It is that all assets are losing value and the over sale of good mortgages. The holders of these “complex financial securities” have used these instruments to pump up their financial statements in order to take the real money out of the company. This money should be used to cover the company during the downturns. As the old saying goes, the crap just hit the fan.
As the wind blew, the Paulson plan was proposed to the Congress. The Executive Branch can not write legislation. The idea Mr. Paulson would submit something other than a proposal that he could then deal from is just not realistic. It does though give enthusiasm to arguments that the Treasury Secretary wants too much power. An assertion coming from people who want to go back to an antiquated banking, mining, and coining metal system of money wealth control that they rule over. In addition, they feel that the Federal Reserve and Treasury shouldn’t exist to begin with.
"A people without reliable news is, sooner or later, a people without the basis of freedom." Harold J. Laski: A Grammar of Politics
Wednesday, May 6, 2009
Analytical & Intelligence Comments] RE: The Political Nature of the Economic Crisis
This is a response to Mr. Friedman's article at Stratfor.com
Very good, Mr. Friedman,
I like your article. It is certainly a discussion starter.
There are several issues as to what it is Mr. Paulson is trying to do verses what the RTC. Senator Schumer wants an FRC. Then it became an RFC. R means reconstruction. F is for financial. C equates corporation. The problem with Senator Schumer's idea is the same as the old RTC. Who is going to be making fortunes from this situation that both parties created over 20 years?
First one needs to address Mr. Paulson's objectives. His idea is to create a floor be that a sub floor for financial instruments to be able to sell them in a reasonable market place. A concept lending itself to the FASB 157 statement that "mark to market" has to be in regards to an "exchange price is the price in an orderly transaction between market participants" and "trades in an active market". Meaning the instruments cannot be sold for "firesale" prices.
My initial viewpoint that this "plan" is a sub floor in these instruments stands correct. Nobody can say for sure that these instruments if held for any amount of time will make a profit. The risk is surely on the default side. It appears that the risk aversion comes from trying to sell them in an orderly fashion hoping to slowly deleverage these instruments. It is hard to analysis "hold to whatever time frame to turn a profit" if one doesn't know the risk. Some of these instruments may recover turning a profit that then is used against the ones that don't and take a loss.
Which brings up the question of why Senator Schumer wants so much to make a corporation to deal with this paper? The problem with this FRC or RFC is it will take too long to create. From what I understand they are buying bad assets not good assets.
Paulson wants to put a floor in to make an orderly market. This could mean that some people are pushing down the prices of these assets to buy at firesale prices. They may be the ones who have been selling these instruments and now know they aren't worth holding. Some of these instruments will probably default. I think there is a provision in the bill to use newly authorized financial institutions into federal entities to take control of these properties. They will be held to no golden parachutes and the other regulations.
At this time, news that Warren Buffet is going to buy in interest in GE is being released. Same deal as he had with Goldman Sachs. I will reserve comment at this time.
Back to the subject at hand, how did the RTC make money? Well, Mr.Greenspan became Federal Reserve Chairman in 1987. His plan to lower interest rates in order to spur an economic recovery had a few branches involved. One part was to create a market in which to sell the RTC properties into a good economy or as they say a growth economy.
The first is that one had to create a consumer to buy and a cheaper way to produce products. Basically by having a currency that would be cheaper to exchange with and tax incentives to make the imports profitable to companies involved with the production. American workers were not as cheap and had labor laws. The experiment of lifting developing economies began. Greed was in and ethics was out.
Free trade agreements ruled the world. Becoming part of the WTO was the carrot. The new "Service Industry" was born. Logic being that a person could lose their higher wages to lower wages and not have a decrease in purchasing power due to low imports. They created a backstop in the bleeding of the losses in personal incomes merely as a facade.
In addition, in order to account for higher property values in the purchasing power the imports had to be real low. Thus, leading to an economy where a person used more of their income for their mortgage and rent. Thus, low wage earners were forced to have many people living in a single housing unit in order to pay the rent or mortgage. This situation created more divorces and relationship problems. Of course that led to many social jobs for the court system in order to recommend as to who was at fault by a sociologist.
Another aspect in the inflation numbers is called the basket of goods. My favorite example to use is bleach. My whole "doing laundry" life dealt with good old regular bleach. I knew how much to use for what kind of load. It was cheap and used for cleaning. Then, along came the sale of ultra bleach. A slimy condensed product that when adjusted as to usage didn't save any money.
Not clearly in the amounts they say it made up for. This new bleach was a more expensive product. Yet, since generic bleach and one name brand company still produced the product the new product is not introduced into the basket of goods. Even though in the grocery stores many times regular bleach would be sold out forcing one to buy the new bleach.
Nevertheless, the longer the regular bleach is sold in a limited quantity the new bleach at a higher price is not included in the basket. Thus, I find myself for the past 5 years looking for my regular bleach as the first indication to when inflation will be accounted for.
Now, when it comes to the subject of home furnishings the new economy brought even more hardship on the average worker. Once Wal-Mart became a big enough company its pricing structure was used to offset the increase in quality home furnishings. The price of their best furniture products verses the lowest of a middle quality furniture maker is where they get their median number for inflation in furniture. As there is no right for a person to be able to purchase nice things when cheap products is all they deserve as a lower class of citizens.
Now, we are in the mid 90's and credit cards are easily acquired. People had equity in their homes and savings accounts. These people were the target of the sales of new cheap imports on credit cards. As low interest rates were pushing up their property values and the new 401k retirement plans were first being started and looked good. President Bush touched on this in his speech on September 28, 2008. He stated foreign investors were taking their money out of the market. In 1998, this became the encouragement of expanding 401ks due to foreign investment in the US market place.
Then for the past 8 years the republicans who claimed they were going to clean up the problem did nothing. President Bush kept Greenspan. Even though in 2000 Greenspan was forced to take his money out of the stock market and put it in the bond market due to his conflict of interest as being the Chairman of the Federal Reserve. He did that just in time for the fall of the stock market. Not to mention that the bond market has performed well over the years for as I have not heard he could not be invested in Bonds.
The republicans had deregulated and given tax incentives to their special interests for moving more jobs overseas to build more imports and create a service sector and outsourcing. The republicans say that the democrats deregulated Fannie Mae and Freddie Mac. Yet, in 2005-6 President Bush went out in front of the cameras to state that the United States had the highest Homeownership ever.
Then, Bernanke became Chairman. At lot was said about increasing interest rates in order to encourage more savings. Well, that didn't last long.
American people are now faulted for not having regular bank savings. Yet, encouraged to have asset savings since interest rates for a bank account is so low. Therein lays the rattrap. As the no inflation economy (which was correct from a business standpoint of being unable to get a set a price for one's product) squeezed equity in homes and emptied bank accounts people wanted to borrow on their 401ks.
Bernanke attempted to raise rates, which started deleveraging of the economy. Every time he did a quick flip back to cutting interest rates. The weak dollar helped exports. In fact, there had been sightings of new life in the steel industry. Unfortunately that came with a price of loss of purchasing power. This eventually leads to an increase in wages and rising interest rates.
The more employees that non-farm payrolls show the more reserves have to be to make the payroll leading the economy into a downward spiral. As interest rates go up everything else goes down.
Take all of the past 20 years and add to it accounting fraud. The likes that make the Savings and Loan look nice. Here we are. Incompetence and ignorance being pleaded by the very people who claimed they should make multimillion of dollars because they were smarter than normal everyday people were.
Even though that multimillion was the savings account of the companies they claimed to have grown. Well, they grew the stock price using steroids. Any other growth is surely speculative. A giant is a giant. Normal size can become a giant on steroids. After the steroids, normal becomes injured.
At last the patient is in cardiac arrest and taken to the hospital. Where the 'doctors' will not cure the patient but treat the patient and send them home. Follow care is truly needed. Yet, until there is a valid discussion as to how this economy arrived where it did there is more on the horizon.
In regards to the premise that the RTC worked, I guess there is some disagreement. Clearly a lot needs to change.
"A people without reliable news is, sooner or later, a people without the basis of freedom." Harold J. Laski: A Grammar of Politics
Friday, May 1, 2009
Many men dote on the metals silver and gold with their whole souls, and know no other standard whereby to estimate their own worth, or the worth of their fellow-beings, but by the quanity of these metals they possess, thereby debasing and degrading those qualities of the mind or spirit which alone mankind ought to be estimated.
The wicked plotteth against the just, and gnasheth upon him with their teeth. The Lord shall laugh at him: for he seeth that his day is coming. The wicked have drawn out the sword, and have bent their bow, to cast down the poor and needy, to slay such as be of upright conversation. Their sword shall enter into their own heart, and their bows shall be broken.