Worst Theft in U.S. History, Notes & Quotes

by: fairleft

Thu Oct 02, 2008 at 14:44

The LIBOR Card

Probably the major corporate media lie is the credit freeze lie, pushed all day long by all the big corporate media. The sophisticated believer in those lies plays his LIBOR card and what is an advocate for 'duh people' to do? Well, if you are reading Dean Baker, you'd know that in fact the LIBOR is actually not at a very high level right now:

Bloomberg reports that the three month London Interbank rate (LIBOR) closed at 4.05 percent on Tuesday. In the same chart, we can find that it was 5.23 percent a year ago. Those interested in a little more history can find that the LIBOR rate was over 8.0 percent for most of 1990 and actually topped 9.0 percent on some days in September of 1989.

Also, as Baker points out, while it's true the overnight interbank lending rate is at a 'record' level now, records have only been kept since 2001! And then there's the relevance of the bailout to loosening credit, but that's another note.

The Big Picture

Horrifically, the bill does nothing for the big economic picture, pulling a severely distorted economy out of what looks like a severe recession. Here is that big picture as described by Paul Craig Roberts, with a key focus on how financial assets are now a way overboard multiple of the real economy:

Over the last 20 years the US has made a collection of serious mistakes that may yet prove fatal. With the collapse of the Soviet Union, the US government launched a policy of world hegemony for which it lacked the means. The US government permitted much of its manufacturing base to be located offshore to the point of even being dependent on imports for its military capability. The US government deregulated the financial sector and permitted the rise of new highly leveraged financial instruments whose failures currently threaten the US with economic collapse.

University of Maryland economist Herman E. Daly points out that the current crisis is really one of the "overgrowth of financial assets relative to growth of real wealth." Daly believes that "financial assets have grown by a large multiple of the real economy" and that "paper exchanging for paper is now 20 times greater than exchanges of paper for real commodities." Exploding debt liens have simply outgrown the wealth.

The problem, in other words, cannot be bailed out.

Housing Prices Won't Stabilize at Inflated Level

One of the main selling points of the bailout is that, somehow, it will stabilize housing prices. How, I don't know. Money will be provided to banks, WHICH THEY ARE FREE TO DO ANY DAMN THING WITH, but we hope they'll spend it lending money in a deepening recession to people who want to buy houses. And, about stabilizing housing prices, they are still severely out of whack with people's income levels. Remember the old rule, the house you buy should be no more than 4 times your income? Here's Dean Baker plus an exactly on point comment:

We had a housing bubble. . . . Prices get over-valued because of irrational exuberance and do not reflect fundamentals. After the bubble collapses, prices fall back to levels consistent with their fundamentals.

In the current case, the bubble is about half deflated and house prices are falling rapidly. They are not falling because of the credit crisis. They are falling because of an enormous over-supply of housing. The vacancy rate for ownership units was already 50 percent higher than its previous record in the fall of 2006. This was before there was any credit crunch.

. . . Anyone who still does not understand that the root problem is a bursting housing bubble should not be allowed near the [bailout] negotiations . . .

COMMENTS

The fundamental reason house prices must go down is that incomes cannot support current prices. In the aggregate, families with gross income $80K/year cannot live in $600K houses (median numbers representative of parts of California). This house-price to income disparity is the primary cause of the credit crisis. Making more credit available will not help with the primary cause.

Posted by: Tortoise | September 28, 2008 11:33

King Henry Paulson

And still, there stands King Henry Paulson, one of the prime purveyors of the grossly irresponsible mortgage-backed securities explosion, as the man who will still (nothing in this respect was changed in the Senate's arrogant version of the bailout bill) have complete discretion over distribution of the $700 billion. An 'everybody knows' soon to be re-employed on Wall Street Henry Paulson. Here's Counterpunch's Mike Whitney:

This is a terrible bill, and it confers absolute authority on one of the central players in the scandal, Henry Paulson, who was the Chairman of Goldman Sachs at the time this MBS garbage was being peddled around the planet to credulous investors. Now Paulson will be in a position to buy up any "troubled asset" that he believes could pose a threat to "financial market stability".

And Any "Troubled Asset" Means CDS

Since Paulson is allowed to, he will free range to get the worst possible deal for the taxpayers and the best possible deal for his once and future employers. There will be no oversight except by 4 Bush appointees, also we can be sure future employees of the financial titans. For Paulson, 'worst possible' means dumping CDS on us. You don't know about CDS? Unlike mortgages, CDS are completely unregulated and probably pure leverage with no connection to physical assets. Read on (emphasis added):

The $55 Trillion Question
By Nicholas Varchaverand Katie Benner
September 30, 2008: 5:38 AM ET

If Hieronymus Bosch were alive today to paint a triptych called "The Garden of Mortgage Delights," we'd recognize most of the characters in the bacchanalia and its hellish aftermath. Looming largest, of course, would be the Luciferian figures of Greed and Excessive Debt. Scurrying throughout would be the Wall Street bankers who turned these burgeoning debts into exotic securities with tangled structures and soporific acronyms - CDO, MBS, ABS - that concealed the dangers within. Needless to say, we'd see the smooth-tongued emissaries of the credit-rating agencies assuring people that assets of lead could indeed be transformed into investments of gold. Finally, somewhere past the feckless Fannie Mae executives and the dozing politicians, one final figure would lurk in the shadows: a hulking and barely recognizable monster known as Credit Default Swaps.

CDS are no mere artist's fancy. In just over a decade these privately traded derivatives contracts ballooned from nothing into a $54.6 trillion market. CDS are the fastest-growing major type of financial derivatives. More important, they've played a critical role in the unfolding financial crisis. First, by ostensibly providing "insurance" on risky mortgage bonds, they encouraged and enabled reckless behavior during the housing bubble. . . . Second, terror at the potential for a financial Ebola virus radiating out from a failing institution and infecting dozens or hundreds of other companies - all linked to one another by CDS and other instruments - was a major reason that regulators stepped in to bail out Bear Stearns and buy out AIG (AIG, Fortune 500), whose calamitous descent itself was triggered by losses on its CDS contracts (see "Hank's Last Stand").

And the fear of a CDS catastrophe still haunts the markets [due to] two fundamental aspects of the CDS market - that it is unregulated, and that almost nothing is disclosed publicly. . . . "The big problem is that here are all these public companies - banks and corporations - and no one really knows what exposure they've got from the CDS contracts," says Frank Partnoy, a law professor at the University of San Diego and former Morgan Stanley derivatives salesman . . . "The really scary part is that we don't have a clue." Chris Wolf, a co-manager of Cogo Wolf, a hedge fund of funds, compares them to one of the great mysteries of astrophysics: "This has become essentially the dark matter of the financial universe."

Dumping a Huge Deficit on the Real Economy While Attempting to Correct the Incorrectable

I commented as follows, about the intense effort both to prevent more steep declines in the vastly overvalued stockmarket and the meaningless noise about how this bailout is an effort to stabilize not nearly deflated enough housing prices. $700 billion thrown at the areas of the economy where we know, except for a very brief spurt in market confidence, it will have virtually no effect. The 'repave all the roads' idea is only half-to-a-third facetious:

Everyone's focused on correcting the uncorrectable

Overvalued assets will devalue. After that's done good stuff can be done for the housing sector. Why renegotiate a mortgage to 60% of what you paid for a house when you still 'know' the market value of the home will eventually drop to 40-45%?

Meanwhile we have the rest of the economy and the rest of us that need stimulating badly! How 'bout something simple: repave all the roads, which have been incredibly neglected since the Ron Reagan era. Remember those smooth California highways of the early 70s? They're pretty damn horrific here in Chicago too. You add value to the economy by lengthening the life of cars while employing zillions of union laborers.

'. . . a man for whom a dollar, when held close to the eye, often shuts out any impression that other people have rights.'

by: fairleft @ Thu Oct 02, 2008 at 11:29:27 AM EDT

It's a Pump & Dump Scheme

Finally, and I apologize if I'm repeating myself , here's Mike Whitney with the best one-paragraph description of the bailout bill:

...the $700 billion is just part of a massive `pump and dump' scheme engineered with the tacit approval of the US Treasury and the Federal Reserve. Once the banksters have offloaded their fraudulent securities and crappy paper on Uncle Sam, they will do whatever they need to do to pad the bottom line and drive their stocks up. That means they will shovel capital into hard assets, foreign currencies, gold, interest rate swaps, carry trade swindles, and Swiss bank accounts. The notion that they will recapitalize so they can provide loans to US consumers and businesses in a slumping economy is a pipedream.

Your $700 Billion, in gold, oil (jacking up its price) and foreign bank accounts. And how does that help you or the economy? I know it is very hard to do, but it's time for people to overcome their manipulated fears and think, which includes thinking beyond their 401Ks and their houses.