Re: OT OBAMA: Are you LISTENING?

kongwon...@xxxxxxxxx wrote:

So he thinks Obama's job is use tax payer's money to prop up the stock
market?



http://market-ticker.denninger.net/archives/841-The-Challenge-Before-America.html


Monday, March 2. 2009
Posted by Karl Denninger in Editorial at 07:13
The Challenge Before America

Thursday night, readers of The Ticker are aware, I gave a speech while
receiving the AIM 2009 Grassroots award in which I dealt with "The
Bezzle" within our modern finance system.

I wish to spend today's Ticker focusing on that concept - what it
means for the broader economy - and why it is absolutely critical that
our government and regulators put a stop to it - right here and now.

First, some facts - some 2/3rds of all capital in the marketplace,
whether in the form of credit or cash, is private. Some of it is
owned by people like you and I, some by sovereign funds (e.g. Saudi
Princes) and some by large foreign and domestic institutional
interests (e.g. Pension funds.)

All of this capital has one thing in common: It cannot be forced to
enter or stay in any particular market. It is, in fact, entirely
possible for that capital to decide to head straight for "the
mattress" (that is, to remain in cash) at any point in time, or to
allocate itself in any particular asset class it so chooses.

Policymakers are incapable of replacing this capital with public funds
(e.g. "new reserves", TARP or other such silliness.) To put this in
proper perspective some numbers are in order - with some $50 trillion
in total private and public debt outstanding in the United States the
debt base alone involved here is roughly $30 trillion in private
capital.

This is why The Fed's and Treasury's "commitment" of some $10 trillion
(thus far) in loan guarantees and direct spending has done nothing to
stem this crisis - and they can't possibly come up with another $20
trillion without collapsing the bond market and destroying both The
Fed and The Government.

Policymakers must realize that there is exactly one - and only one -
way out of this mess.

"The Bezzle" must be eradicated.

I fully realize that this is extremely difficult politically, but
let's face the facts here.

Every "private capital source" that has been enticed into this morass
over the last two years has been destroyed, including Warren Buffett
(Goldman Sachs and others) and The Saudis (Citigroup among others.)

Then you have Bernie Madoff and Stanford Financial, two alleged frauds
that were "known" to the government more than ten years ago and yet
were either not investigated or intentionally allowed to continue to
operate, robbing people of literal billions of dollars.

Finally, you have AIG which reported a $61.66 billion loss, or $22.95
a share - for a stock trading under two bits. Stripping out capital
losses and "accounting issues" you'd still have a loss of $37.9
billion, or $14.17/share. The government has "agreed" to provide
another $30 billion to the firm in addition to the previous $150
billion that has been sucked into a black hole. Once again AIG has
been deemed "a systemically significant failing institution" that has
to be propped up, according to Treasury.

And who were the beneficiaries? Goldman, Merrill, and now overseas
banks. Instead of putting the firm into receivership and running down
its portfolio over time, forcing the losses to be netted and taken, we
are instead rewarding "The Bezzle" by protecting those who did
imprudent and even outrageous things with unlimited taxpayer dollars.

Every last one of those "investments" has been wrecked as a direct
consequence of "The Bezzle" - that is, our government's refusal to
uphold the law and force the truth to be disclosed both publicly and
to investors. Our government and its agencies have gone so far as to
intentionally mislead in many cases, including claims related to
nationalization of banks and respect for capital structures just
before people were wiped out in investments that should have had
preference.

What's worse, in some cases such as AIGs, not only has "The Bezzle"
ripped off private investors it is also ripping off the taxpayers -
multiple times - with no indication that we're going to stop this
course of action any time soon!

The market no longer sees these "rescues" as positive - it now sees
them as what they in fact are: coverups for papering over raw fraud
and abuse, and thus when each new "rescue" is announced the market
tanks instead of stabilizing.

Fact is that intentional and willful misconduct by our government
agencies, both as acts of omission and commission, has resulted in
these firms, institutions and nations suffering crippling losses.

These acts of malfeasance and misfeasance in government agencies
include (but are not limited to):

* "23A Exemption" letters
* Willful and improper classification of funds (IndyMac) which
kept the FDIC from taking enforcement action in a timely fashion
* Willful removal of leverage limits (championed by and granted as
a consequence of Henry Paulson's request before he joined Treasury;
every one of the 5 firms that has blown up had 2x or more the formerly
legal limit)
* Willful removal of bank leverage limits and reserve ratios by
The Fed and Congress in permitting "sweeps" along with allowing The
Fed authority to set reserve ratios wherever it would like, including
to zero.
* Willful failure to police CDS margins and capital adequacy (e.g.
AIG and others) thereby leading firms to be deeply insolvent yet
continuing to operate as if nothing was wrong - until the cash ran out
and we suddenly had a systemic crisis.
* Willful failure to enforce suitability regulations on mortgage
lenders, along with intentional preemption of state predatory lending
laws.
* Willful blindness related to the blatant and outrageous false
statements made by both lenders and borrowers; the essence of "liar
loans."
* Willful blindness related to both Madoff and Stanford Financial
* Willful blindness related to ratings agency conflicts of
interest, "ratings shopping" and known-flawed ratings models.
* Willful blindness with regards to firms selling securities to
customers which they were shorting at the same time - without
disclosing this fact to the customer they were marketing to.
* Refusal to take action related to the false statements of
executives on the health of their firms on national TV networks such
as CNBC, when reliance on those statements led to complete wipeouts
(Bear Stearns and Lehman)
* Misleading statements related to the health of Fannie and
Freddie made by administration officials, leading to near-total losses
for both common and preferred shareholders.
* Most recently, misleading statements related to the intended
path for banks and capital adequacy, including Citibank.

These private sources of capital have quite reasonably withdrawn from
the marketplace. They will not return until they can be assured that
losses they suffer will result only from their own poor investment
decisions and not from willful concealment of losses and even fraud by
those in whom they invest nor from changes in the rules imposed by
fiat from Washington DC. These private capital sources also want to
see indictments, prosecutions and imprisonment - along with ejection
of the parties responsible in both private enterprise and our
government.

This is a serious problem for our capital markets and economy
generally as without this private capital we are doomed to a massive
economic contraction. Conservatively speaking, assuming our
government can actually fund the $9-10 trillion they've promised,
which I believe is a pure fantasy (it would represent nearly a
tripling of the public float of US Debt!) we would suffer a 30%
contraction in GDP over the next 18-24 months.

If they cannot fund those commitments much beyond the $1 trillion
already spent, the contraction would be more on the order of 50%.

This would take us back to roughly 1994 levels in GDP terms, looking
at constant dollars, a setback of some 15 years.

The damage, however, would be much worse than it appears at first
blush, because in conjunction with the expansion in GDP state and
local governments, along with government spending, have expanded,
expecting that "GDP never goes down" (doesn't that sound familiar to
those who believe that "house prices never go down"?)

Were we to contract to a $7 trillion GDP, for example, our current
federal budget would reach nearly half of GDP! This would be
impossible to sustain as tax revenues would collapse under such a
scenario.

We have exactly one opportunity to stop this, and that opportunity is
now.

Government simply must stop "The Bezzle" in all parts of our economy
and capital markets, and must do so right here, right now, today.

If we fail to demand this as Americans or our government fails to
implement this across the board then we will suffer a Depression worse
than the 1930s.

This is not conjecture.

It is not a prediction, nor drawn from how I "feel".

This is mathematics; it is a fact that we cannot possibly maintain
anything close to our current standard of living unless private
capital decides to re-enter our marketplace - a decision that
government cannot force.

The consequences of an economic Depression of this magnitude are
almost too serious to contemplate. They include unemployment topping
20%, an average annual income decrease for Americans of some 30% (for
those who remain employed!), a 70-80% decrease in retirement accounts
such as IRAs and 401ks and the decimation of both private and public
pensions, resulting in a reduction in benefits of 50% or more.

Should government attempt to "replace" that private capital the result
will be a bond market collapse. This too is inevitable; into an
environment of falling tax receipts (down 15% already) foreign
governments and investors would have to be insane to continue
purchasing US Treasury debt.

THAT event, should it occur, would result in The Federal Government
being forced to contract to 1/3rd of its current size almost literally
overnight. The only way to accomplish this would be to entirely
eliminate all Social Security, Medicare and Medicaid funding, cut
Defense spending by 75%, and cut all remaining discretionary programs
by 50%.

Needless to say such an event would be catastrophic for our society -
far worse than a "mere" Depression. In fact, that latter outcome has
a very high probability of destabilizing our government and political
system entirely.

Let me be crystal clear: the very real possibility exists that our
government could collapse.

The time to play games and fiddle hoping for a turn in the housing
market or some other miracle has passed. Bernanke himself said if the
financial system cannot be stabilized our economy will not recover.

He is correct - but our financial system, including both credit and
stock markets, cannot stabilize (say much less recover) until and
unless private capital re-enters the market.

That simply will not happen until "The Bezzle" is driven out.

We either act now or suffer the consequences - the utter destruction
of our middle class, a collapsed stock market with the DOW headed to
3,000 or worse and the S&P 500 headed into the 400 or lower range,
unemployment topping 20% and GDP falling by 30% or more, complete
destruction of both private and state-run pension systems, and a very
real possibility that our nation collapses.

Your choice America.

This is math - not politics. Put the partisan political crap away -
it is not only inappropriate but at this time in our nation's history
it is insanely destructive - and instead do the right thing.
.

Relevant Pages

  • Re: OT OBAMA: Are you LISTENING?
    ... market in one broad stroke. ... our government and regulators put a stop to it - right here and now. ... whether in the form of credit or cash, is private. ... Fact is that intentional and willful misconduct by our government ...
    (alt.sports.basketball.nba.la-lakers)
  • Re: Libertarian cartoons
    ... Not really, no, government doesn't have a job, you know, it gets ... efficiently as the market. ... Some private security force, ... Can there be a narrow consensus? ...
    (rec.arts.sf.written)
  • Re: A little political humor...
    ... > What I've never seen addressed by anyone on the right is how private ... They think the underlying problem is government getting itself involved ... market fails, to provide everyone the basics to keep them productive. ... not adequately tax land market values. ...
    (comp.sys.mac.advocacy)
  • Re: OT-Taxpayer Surprise.
    ... time I also think that these GSEs created an enormous market ... If the value of mortgages decliness further, and if the government ... That is the main difference between government and private. ... Private can simply close the doors and stop doing business if they screw ...
    (rec.crafts.metalworking)
  • Re: Nothing to hide, nothing to fear except the sack
    ... choice of bringing up children because you are too poor". ... competitive labour market, ... As I've already stated, our government is presently ... Depends what sort of "regulation" you envisage. ...
    (uk.legal)