Tuesday, March 18, 2008

The Great Depression (v2.0) Starts Now

Brown Bear. San Diego Zoo.
Brown Bear. photo San Diego Zoo. Click for LARGE.

Neo-Cons Cause Current Exploding Depression

Let me start, by saying clearly that I am speaking for myself. This is my assessment. You should make your own assessment and act as you see fit. I am not a lawyer, stockbroker, or financial adviser. What actions you take, are your own, including any tax consequences. I am not responsible for what you do in any way.

The next year will continue the U.S. slide into the worst depression since the Great Depression of 1929.

The Neo-Cons caused this.

Bush, Cheney, Karl Rove's political boys, Rumsfeld's war in Iraq, and the Administration's failure to adequately regulate the markets let Wall Street run wild, bubbles inflate, and the greatest wealth transfer in history happen. Money flew from people like you and I into the pockets of the richest 1% in the world.

Now the real-estate bubble, built on lies (the homes and land were never worth what they were said to be worth; had the Bush/Cheney regulators done the job they are sworn to do, this could not have happened) is collapsing, indeed, imploding and the financial markets world-wide are imploding with the collapsing real-estate bubble.

At the bottom of the real-estate markets are the stock-markets. After the stock-markets are the banks. After the banks is the United States Government and the Federal Reserve Bank, determined not to let the banks fail, determined to not let the stock-markets fail. If for no other reason than to --literally -- prevent armed revolution in the streets and neo-cons hanging from lamp-posts, which would no doubt happen were the banks and the stock-markets to fail. Even Bush/Cheney, living in bubbles, know that.

Which is why Chairman Ben Bernanke has stepped in and saved Bear Stearns. That is, allowed someone else to purchase its assets at a fire sale, while guarantying its liabilities through the government.

What matters to us is that the Great Depression I have been speaking of in these pages since the start of Group News Blog, has arrived.

The Agonist

by Numerian

Bear Stearns collapsed because it was as highly leveraged as any hedge fund – roughly $30 in assets for every $1 of capital. It only takes a 5% loss on the assets to wipe out all of the capital of the firm. Bear Stearns succumbed because its assets were especially prone to losses since they consisted of mortgage related securities. But losses are now occurring on much safer assets, and since all Wall Street firms have leverage to the degree Bear Stearns did, all of them are exposed to failure.

There are hundreds of companies in the same position. In the past 15 years the credit worthiness of corporate America has deteriorated to the point that 70% of all corporate bonds are now junk debt, meaning these companies have excessive amounts of debt. Less than 10 companies in the U.S. carry a Aaa rating. As those companies with excessive debt are unable to roll over or replace their debt, and as the economy slows, they are going to have a hard time surviving.

This problem is already going global, hitting the U.K., Australia, and other countries that experienced housing booms. Ultimately the credit implosion will fell China and India, two countries that have built their economic engines on highly shaky debt pyramids. Already the stock market in China has begun a collapse that looks remarkably similar to the fall of the NASDAQ in 2000.

Deleveraging is a term economists are using for this process of shedding assets to avoid more serious market losses eroding one’s capital. As hedge funds, banks, corporations, and individuals increasingly rush to deleverage, the losses are exacerbated, and many just won’t make it. This is how systemic risk is bred and how it destroys credit creation. Without credit, a modern economy starves.

Ben Bernanke certainly knows this and has put Bear Stearns on life support in order to stop the contagion from spreading. Bear Stearns – which isn’t even a commercial bank and is not under the Fed’s jurisdiction – is too big to fail in the view of the Fed. It has too many relationships with all the rest of the market to be allowed to go into receivership.

But is this a losing battle? History certainly suggests that systemic crises have a way of rumbling on until all the excess debt is wrung from the system, resulting in enormous economic pain. One of the characteristics of a systemic crisis is the loss of confidence in the financial system, and we saw this on display in the Bear Stearns collapse. Early in the week executives at the bank were saying their liquidity situation was sound despite all the market rumors. Suddenly on Friday it was announced by these same executives that their liquidity situation had deteriorated markedly “within the past 24 hours.”

Perhaps this is true – executives face severe personal penalties for lying publicly about their company’s situation. But the market was understandably skeptical, which means that the next bank which says publicly it is highly liquid will have to overcome widespread suspicion and doubt. Already rumors are cropping up about other Wall Street firms and large global commercial banks. This is the real battle Bernanke is facing – the confidence battle. All banks exist only to the extent the public is confident the banks can meet their obligations – this is the Achilles heel of leverage. Once confidence is lost, many banks can fail not because their balance sheets are riddled with bad loans, but because of a bank run.

Bear Stearns failed because it hadn’t the resources to survive a bank run. The odds are reasonably high that it will be joined by other Wall Street banks, whatever Ben Bernanke does. He can keep these firms on life support to protect the market, but in doing so he is transferring the risk and the losses to the federal government, thereby nationalizing these banks. It is not difficult to imagine that when all the excess leverage and all the bad debts are eliminated from the system, the federal government will own most of the Wall Street banks, many large commercial banks, and also Fannie Mae and Freddie Mac. As this becomes evident to the markets, the dollar will not survive on the international exchanges, and U.S. Treasury rates for long term debt such as bonds will rise sharply. The U.S. will almost certainly lose its Aaa rating for its debt.

Which brings us back to the question of a Depression. As the banking system is nationalized, and credit dries up, growth in the economy will cease. Already the U.S. is in a recession, but the decline in GDP is about to accelerate significantly to Depression levels of 10% or higher. Unemployment will soar. The true unemployment rate in the economy, counting all the workers who want jobs but are currently being left out of the statistics because they haven’t sought work for awhile, is probably around 8% to 9%. This rate will easily double. The asset deflation that is now ravaging home values will spread not only to other physical assets, but to services and commodities. Nothing will be safe from the pressure to reduce prices and costs. As this process unfolds, the stock market will finally come to terms with the economic reality, and a stock market crash will ensue. This Depression could last somewhat over a year, or be much more prolonged if the Fed keeps too many firms on life support. The Japanese did that in the 1990s during their bout with deflation, and it took at least ten years before the economy started to grow again.

There's more...
The Bonddad Blog

Bear Stearns had a stock-market value of about $3.5 billion as of Friday -- and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm -- at any price -- to a big bank willing to assume its trading obligations or file for bankruptcy.

"At the end of the day, what Bear Stearns was looking at was either taking $2 a share or going bust," said one person involved in the negotiations. "Those were the only options."

I was listening to Bloomberg this morning and someone commented that Bernanke is a student of the great depression and that knowledge was serving him well. I agree with that sentiment. I have made a great deal of fun at Bernanke's expense over the past few months. Frankly, I feel a great deal of empathy for him because he is between a rock and hard place.

However, I understand his reasoning for taking these moves. Simply put, Bernanke is trying to prevent a financial sector meltdown.

The central problem the Fed faces right now is their tools are not designed for the problems we face. What we have right now is a collateral and counter-party crisis. That means two things.

1.) The collateral crisis means that collateral on bank's balance sheets isn't performing as well as advertised. Basically, any bond backed by mortgages is in trouble because homeowners aren't paying their mortgages. That means banks who hold mortgages aren't getting the payments they should be getting. As a result, banks balance sheets -- which serve as the basis for their ability to extend credit -- are in serious trouble. That means...

2.) Anyone who might take out a loan might not pay it back. This is called counter-party risk. It simply means that everyone is at risk of defaulting on a loan right now. That means loans aren't getting made. In an economy like the US economy where credit is a prerequisite to everything, that is the kiss of death.

The Fed can provide plenty of money. Over the last 9 months they have flooded the market with cash. But that does not good if people aren't willing to use it. And right now, no one wants to loan anybody any money. That's the central problem -- and so long as that exists there will be a mis-match between the Fed's policy tools and the market's problems.
The Agonist

by Stirling Newberry

The Neo-Conservative Plutocracy

For years economists in the US thought that US policy makers had learned from Japan and we would not repeat the results of their "Bright Depression." However, this view was excessively optimistic, and rooted in a time when there was a bipartisan liberal consensus in Washington that the good of the public came first. When the right wing came to believe that it could have a military machine without mass mobilization, but instead with a high tech smaller force, it also did not see the need to keep most Americans happy. Instead, their new vision was of a small, permanent and highly mobilized base, which included a core of military-industrial contracting, supported by a security apparatus and getting votes from a combination of resource extraction, disorganized labor, the wealthy, franchise owners, and theocrats. Their idea was expressed in the Project for A New American Century, and in Karl Rove's political apparatus. People who were a danger to this thesis were removed by whatever means necessary. While being a heavily socialist enterprise, in the right wing sense of being a national socialism, it relied on a propaganda of libertarianism. This propaganda relied on creating the meme of the late 19th century as the legendary golden age, where laissez-faire economics combined with piety, plutocracy, and military empire, in that times case the conquest of the West to create a rising America. In truth America during the late 19th century was far from its peak, and much of the gleaming apparatus of capitalism came much later. People were made to, by means of framing, impose the gleaming rise of the City skyline, with a time when there was no building taller than 12 stories in the US other than a few church spires and the Brooklyn Bridge.

This neo-conservative plutocracy was intended to take the place of the Liberal Democracy. It had a war without end as its mandate, a Christianist ethnocentrism as its meaning to create context, and a monetary system which would, after the invasion of the Middle East, be based on a direct imperial control over oil. The oil would be sent back to the US, indirectly in the sense that it would be sold to other nations, thus freeing up supplies closer to the US for our consumption, along with the enormous free cash flow that the oil business creates. Iraq was to be annex of Texas.

The Adventures of Captain Carnage

In 2001, as soon as he was made the economic advisor to Bush, I stated repeatedly that Ben Bernanke would be made the Federal Reserve Chairman after Greenspan, and that he would be a disaster. This was based on a reading of his academic work, which was, essentially, a series of attempts to prove that such a neo-conservative system could avoid the collapse that lead to the Great Depression. No Great Depression, no FDR. No FDR, no situation where the rich would have to accept regulation and restriction in return for bailing out. In essence the first problem is the "Great Contraction." The United States and other nations, to attempt to re-impose the Gold Standard after allowing it to lapse for the First World War, had to at a certain point accept prices at the new levels, or had to dramatically reduce the money supply. They chose the later, creating a massive contraction of the money supply. This was done in the face of a downturn, because it was feared that a downturn would lead to easy money, and this to hyper-inflation of the kind witnessed in Germany, or very high inflation, as seen after the First World War. For them, coming after a two generation period where deflation was the norm during the classical gold standard and the consolidation of the first Conservative Era, globally, inflation was a horror.

Bernanke and others, argued that the Great Depression was not in any way a structural event, but strictly a macroeconomic monetary event. That strictly macroƫconomic policy measures could have been used to effect the bailout. There were two major intellectual problems. One of them is the point where monetary policy is "pushing on a string." Or what Bernanke called "the zero point". The "bold" steps turn out to be the same sort of maneuvers used in the first decade of this century: finding deep pockets and hiding the losses.

Bernanke's failures begin as economic advisor to the President and continue in his time on the Federal Reserve. The culminate with his failure to either deal with the liquidity crisis, or to face inflation head on. By allowing the housing bubble, and the financial bubble built on it, to explode he set up the very circumstances. By dragging his feet on raising interest rates, and then by ignoring the expanding monetary crisis, Bernanke has set the stage where neither he, nor anyone else, is in a position to act. With a President who is content to give imaginary orders to imaginary armies, there is no center of power that can move. It also indicates that the opposition party has made a series of gross miscalculations about the situation, believing the rhetoric that things were going well, and that they were getting the best deal they could. They were facing people who were bluffing all the way, and are now realizing that there is no rush to give way on anything.

The "slow" rate raising campaign was a double disaster, it neither headed off inflation nor did it keep credit easy enough. This is because the problem was not the level of interest rates, per se, but what we were spending the money on. As many, many, many commentators, many, many times have pointed out, the US was consuming too much, and exporting too little. The Neo-Conservative happy monsters said that this could go on for ever, giving other people our paper for their oil and goods.

While it is possible that we will emerge from this functional, the likelihood is that we are going to see a continued fall for the next 9 months, as the crisis deepens, a die hard illegitimate executive burns his last brands on our skin, and a feckless opposition folds its cards over and over and over again, allowing ordinary people to bear the brunt of the continued contraction.

We are riding this bucket down a ways farther, because there is nothing to right the equilibrium, and without the stimulus from war spending, on which we are so dependent, there will be no pick up in business activity soon. There will be some increased exports, but not sufficient to take the place of the cratering of housing.

What needs to be done? Regregulation is obvious. Making the Fed serve elected policy makers is a no brainer. Restating numbers to prevent the white washing of bubbles is essential, a public sense of ownership of the financial system as part of the "high ground of the economy" seems essential. Firing Ben Bernanke is a pink do this to day post it note.

But most essentially there needs to be a change in the basis of money, simply because the obvious stability of real estate assets in the United States will no longer be enough.

There's more...
We've told you before, the feces are hitting the oscillating rotator. Stock up on food, water (a good water filter with extra filters), medicines, fuel, essential clothing. At least a six-month supply of everything, and a year's supply would be smart.

If your home is underwater, sell now. A year from now will be too late. Slash your debt to the bone.

I expect in one year, including everyone who has given up looking for work, one in six to one in five Americans will be out of work.

If you can legitimately and legally leave the U.S. for the next five years, move.

The Great Depression of our life, is here.