The Quiet Coup

Here’s a very good article written by the former chief economist for the International Monetary Fund dealing with how the US has been more or less captured by the financial elites while offering a way out of this mess.   It won’t be pleasant reading to many folks, seeing how the current US economic crisis neatly compares to past ones from countries we would make fun of in the past over their financial improprieties.  If you know people who still think we’ve hit the ‘bottom’ and that recovery is on the way, this article would be a good corrective.

Mr. Johnson’s proposed plan isn’t fun, but it sounds like it would provide the ‘come to Jesus’ moment that this country really needs to start clearing this mess off the books.  Naturally it’s therefore political dynamite to our two major political parties who thrive on donations from the financial sector.

The Quiet Coup

Hail to the Chief

It’s been a busy January for me, so I apologize for the lack of posts.

Today is a momentous day in America.  We inaugurate a new president.  He’s well-spoken, educated, telegenic, has an attractive wife, two cute kids and a mandate for change.   The main differences from past presidents?  The color of his skin and an exotic name.

If nothing else, Obama’s installation as president should give hope to every child that they can achieve pretty much anything they want to if they are willing to work hard enough to get it.

I approach today’s transfer of power as a good thing and as a historic event, but without the sense of jubilation that many in this country have.   I’m very glad to see Bush gone.  From the standpoint of the average American citizen, his policies have ranged from mediocre to terrible.  The best thing one can say about his administration is that there was not another terrorist attack on US soil after 9/11.  How much of that is due to his policies is a matter open for debate.  With Obama as president, it will be hard for him to not improve foreign relations with most of the rest of the world.

My main worry with the incoming Obama team deals with the economy.  We’re still in serious trouble here, and I don’t think continuing to shovel debt at the problem will work.   That is the approach being forwarded by the Obama economic team, though.   We may see a short-term economic bounce, but over the longer haul I don’t think it will have lasting effect.   The measure of the man will be in how fast Obama recognizes this and changes policy because of it.  If he follows the Bush/Paulson plan of just continuing to throw bad money after worse money, then I will be sorely disappointed.    I voted for Obama because under all of the ‘change’ claptrap he seemed to be thoughtful, intelligent, and pragmatic.  If he cannot break out of the Keynesian economic approach if that fails to work, then we’re all in for a turbulent ride.

I fear that the historic impact of Obama’s election may be swept away by both current events and extremely elevated expectations for his administration.  Some folks are simply happy to have a new face in the White House while others seem to be expecting that we’re all going to have  our money problems magically go away and we’ll get a free pony to boot.  We have dug ourselves into a deep hole, and getting out will be long, hard and messy.

Those are worries for another day, though.  For today, I’m content that the old regime is being swept out and we have a chance to move forward in many areas.  Enjoy the day.

Looking at 2009

Time again for another predictions post looking at what I see ahead for the new year that’s approaching rapidly.   I do these posts more for my own amusement rather than to engage in any serious attempt at prognostication.    For a more in-depth listing of doomer-ific predictions, please check out Kunstler’s latest post.  Lots of good stuff in there.

I’m picking up on a number of the same vibes that Kunstler and others are and think that 2009 will indeed bring in change, although it will not necessarily be the type that people voted in favor of when they elected Barack Obama to the presidency.   I’m thinking more along the lines of the old intro tagline for the fourth season of Babylon 5… the year “everything changed.”

Obama’s Environmental Team: Status Quo We Can Believe In?

If anyone needs a reminder that despite the rhetoric, President-Elect Obama is still beholden to the Democratic Party and it’s benefactors, I think this week’s picks for his environmental team should clear things up.

I’ll preface this by saying up front that I know little about either person, but from what I’ve been reading & hearing, environmentalists are unhappy with Obama’s nominations of Tom Vilsack for Ag Secretary and Ken Salazar for Interior Secretary.   Publicly, they are giving hesitant support while hoping that they will be willing to work with them.    Their actions in the first year will probably determine how long a honeymoon Obama has with the green wing of the Democratic party.

Looming Trade War with China?

It appears that China is slowly starting to devalue the yuan in an attempt keep it’s export economy humming along.     As the article notes, the Chinese are behind the 8 ball to a certain degree.  If they devalue their currency enough to make a difference, it could trigger even more deflation around the world, pissing off both their neighbors and their trade partners (read: the USA, among others).   If they don’t the internal rioting and strife affecting inland China right now will only continue to worsen.

So, the Chinese are looking to make the best of a bad situation and are trying to save their own bacon… which is exactly what we’ve been trying to do as well with regards to our financial woes.     The actions they take to try and make their situation better ends up making ours worse.  One possible result?  A new trade war.

For those into economic bear porn, the Ticker Forum has a nice long thread filled with both insight and angst over this new situation.  The consensus among the financial bears there is that this is a “very bad thing” and will only get worse if tariffs and new trade laws get thrown up.  Like it or not, we rely on China for both ample supplies of cheap manufactured crap and their ability and willingness to buy up boatloads of Treasury debt.   A new trade war could lower both the inflow (goods) and outflow (bonds) of crap from here.

News like this just reinforces the feeling I have that the economic fun times are just getting going now.   With the economy visibly slowing down, possible bankruptcy for the big auto manufacturers, more financial implosions, falling tax revenues, rising entitlements and other obligations, and a possible run on the US dollar, 2009 is going to be interesting in a bad way.

Citi Will Not be the Last Bank Bailed Out…

More bailouts for large banks, and more burden put on taxpayers… Happy Thanksgiving!

The government has guaranteed around $300 of bad debt in Citibank and has also given them $20 billion in a direct capital injection.  And, from the sounds of it, this will not be the last bailout of this sort.  From the linked article:

Citi and the US government made it clear that the Citi arrangement would be extended to other banks that pose risk to financial system stability, if need be. That is why the arrangement included broad swathes of Citi’s assets but was not tailor-made to suit Citi alone.

Anyone else think the other major banks aren’t going to line up, hands held out, asking for similar treatment?   This is particularly interesting coming right after Congress showed some spine and told the Detroit auto makers to get a valid plan in hand before coming back to ask for funding.  If there were any doubts about what the pecking order is with regards to who gets money from DC, this should help clear things up.

Looking at the largess being handed out right now, I can’t wait to see what kind of stimulus package will be delivered to Obama when he takes office in January.  Anything south of a trillion dollars or so won’t be seen as game-changing I’m thinking.

Congrats… Now DO Something…

For the first time in 20 years, my preferred presidential candidate has won.   It’s an odd feeling of sorts, to be honest.

I voted for Obama because I feel he was the better candidate.   I felt that his pragmatism and his self-control will be assets in the rough years ahead.   He never seemed to lose his cool no matter what situation he found himself in.   Impressive.

John McCain was more eloquent and gracious in his concession speech than he had been for most of his campaign.  Had we seen more of that side of him and less of the Rovian-crafted side, this might have been a closer election.

October Surprises

A short update here… life has been busy.

Wall Street continues to gyrate wildly.  Some folks are calling for a bottom, some aren’t.   Personally, I think things are so hosed up that even the best & brightest out there have no real idea where the market is at.    On some levels, the current activity of the stock market may not be all that important.

The real action is in the credit markets, where banks are still very leery of lending money to each other.   If you’re not familiar with LIBOR or TED spreads, this would be a good time to become at least acquainted with the terms.  LIBOR rates have eased somewhat, but it still appears that the banks are scared.  Until banks start lending money freely again, the economy will continue to slow down.  And if the price of freeing up the credit market is pumping tons of liquidity (i.e. digital dollars) into the system, that will eventually result in higher interest rates on Treasury bonds and, eventually, all other  forms of credit.  We may keep Wall Street afloat, but if mortgage rates rise to 10% or higher, that will crush the housing market.

Some good news for all of us is that the wipeout in the stock market has forced many hedge funds and speculators to deleverage their holdings.   One side affect of this is the general drop in commodity prices.  Wheat, Corn, Sugar, Oil, Gold, you name it, they all are either falling or staying stable.   For the short term, this means we will be able to enjoy lower prices on many staples for a while.  Gas has fallen to $2.60 in my area and shows no signs of stabilizing.  This is scaring the crap out of OPEC, who was really enjoying selling oil at $125 per barrel or more.    Seeing the price of your product drop by 50% or so will do that to you.

This forced deleveraging in the commodities market is giving us a good look at just how high prices got due to the influence of speculators.    Oil prices have ‘dropped’ to around $70 per barrel right now.   While this seems incredibly low to all of us right now, a few years ago $70 oil was unthinkable.   Short term market influence made the price go crazy for a while, but the underlying struggle between supply and demand is still out there.   If nothing else, a prolonged economic downturn may keep the production peak for world oil output away for another few years.   I would welcome this, wouldn’t you?   Enjoy lower prices for now, but don’t expect this to be a permanent situation.

I’ve been watching the presidential debates… I’m not sure why sometimes, but what the hell, it makes me feel informed.   Barring a sudden resurgence in the markets, I think Obama’s going to be the winner.   The race may tighten, but I don’t think McCain has done enough to convince Americans that he’s the right guy for the job.  Irascible assholes are useful in legislative bodies, but aren’t so attractive in the executive mansion.

One thing for folks to keep in mind… both candidates are talking about no new taxes, or only raising taxes on the rich & big business.  This is typical election year boilerplate.   The fact is that the bills have already been rung up, and they will have to be paid.   If we cannot convince the rest of the world to keep buying Treasury bonds like they’re going out of style, we’ll have to find some way around that.  It might mean raising taxes, cutting spending, eliminating entitlement programs, raising interest rates on treasury bonds, or a combination of those things.  I doubt we will be able to continue functioning the way we are right now for much longer.   The sky may not be falling, but we also will not be able to continue partying on someone else’s dime.

Sic Transit Gloria Wall Street

One slip, and down the hole we fall
It seems to take no time at all
A momentary lapse of reason
That binds a life for life
A small regret, you won’t forget,
There’ll be no sleep in here tonight

-Pink Floyd

The US Government is pulling out all the stops to try and stop the hemorrhaging of cash that is occurring across the globe.   The problem is not contained, and every trick the Fed pulls to try and get around an obstacle is only leading to yet another obstacle.

I’m no expert when it comes to matters of high finance, but from what I’ve been reading, the main action is going to be in credit markets and the whole derivatives mess that is yet to come.    The markets will continue to move up & down violently… it’s the nature of things these days.   The world of paper currencies and debt markets is based on confidence and trust… and usually little else.  When no-one trusts anyone else to repay debts, the credit market freezes up, which is exactly what we have been seeing over the last week or more.  Who knows when it will end?

Some data points for everyone to follow:

• We’ve promised to bail out everyone and their brother.  Depending on who’s math you choose to follow, this will cost the US taxpayer somewhere between a ton of cash and a whole shitload.   We will finance these bailouts by issuing more Treasury bonds.     The problems I am reading about these days are that long-term Treasuries (i.e. the 10 & 30-year bonds) are not attracting a lot of interest from potential buyers.   That is because the current coupon (i.e. interest rate) isn’t high enough to get people to invest in our debt.  If we can’t sell Treasuries, we will not be able to finance the daily workings of the government.   If we jack up the interest rate on Treasuries, that means very bad news for the housing market, among other things, as interest rates for mortgages will climb.
• The government if Iceland has come out and stated they are close to bankruptcy.  This will not be the last government that will have to approach the confessional in this way.
• The financial mess that has swept through Europe may mean the death of the Euro.   Again, this is not the first fiat currency to go into a potential death spiral, and it may not be the last.   Paper money has value because people think it does… the minute they stop thinking that, any ‘value’ it may hold disappears in a puff of logic.

There’s plenty of other stuff, but I’m at work right now and aim to keep that job.  The main point is this: the financial storm that’s sweeping across the globe is just the beginning.  We still have trillions of dollars in credit default swaps and other derivatives out there, and the US government is going to be faced with the decision to either raise treasury bond interest rates or save the housing market.

On a plus side, the price of oil has fallen off a cliff.    It will be interesting to see how far down it goes, though OPEC is already stating their lack of amusement with recent market events.    Locally, some gas stations are selling regular unleaded for under $3 per gallon again.   Enjoy what silver linings you can in the current economic dislocation.

We have lived off of credit for a long time, and the bill is now coming due.  The process of paying that debt down is going to be painful for most of us sooner or later.   For what it’s worth, both presidential candidates are promising either tax cuts or no new taxes for all except the wealthy.  I personally think they’re lying.  We have been able to finance our expansion of government through raising the debt ceiling and selling Treasury Bonds like nobody’s business.   We appear to be reaching the end of the line for the ‘buy now, pay later’ method of financing government.   I fail to see how we will repay these debts short of  (much) higher taxation, hyperinflation of the currency or outright debt repudiation… all of which are dangerous.

Should be an interesting 4 weeks until the elections… keep your eyes open.

Bailout a Done Deal

Some pork was added, some threats and strong-arming was performed, and Congress has now allowed pretty much any bank in the world to dump their toxic sludge at our doorstep.

The bill just got passed, but already there are some ugly Easter eggs popping out.

Remember, this entire paragraph 12 was not supposed to go into effect until 2011.

Foreign banks were not in the definition of depository institutions until they changed the effective date from October1, 2011 to October 1, 2008.

If we rewrite the opening of the paragraph to use the words “foreign banks” it reads

Balances maintained at a Federal Reserve bank by or on behalf of a foreign banks may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.

So, to summarize, by changing the effective date the following is now in effect.

Banks don’t have to have cash on hand.

The Fed does not have to maintain an Earnings Protection account for the supplemental reserve fees they charge banks which means they don’t have to give any of the money back to those banks.

They now include foreign banks as institutions they can pay earnings to. Let’s not forget, earnings is really just more American debt. Federal Reserve Notes are really debt, but that’s a topic for another monster blog entry.

link

And another:

The basic plan is to set up a federal money laundering operation. Bad assets come in, get laundered by the Treasury and put in a new AAA “wrapper” (as it’s termed on the call), and good assets go out, issued as Treasury guaranteed securities. Whether the final value of the legislation this week is $700 billion or $150 billion is irrelevant as long as the laundering operation can accommodate the throughput, as that number is only a cap on total extensions at any one time.

Link

So we’ve basically opened up the magic money machine for anyone holding crappy derivatives or pretty much anything else they don’t want anymore… and now we taxpayers are guaranteeing it all.  So much for letting the ‘free market’ work things out.  Some businesses have been tapped to survive, and the rest will be eaten.

I wish I could muster the outrage to be mad about this.  Unfortunately, it’s the way things are.  All the voter outrage that was mustered earlier this week accounts for naught.   If you’re truly pissed off about this, the best thing you can do is vote against your incumbent rep or senator if he or she is up for election this fall.  Blame falls equally on both sides, and is further proof to me that both parties are working together to support a certain group, and it sure ain’t the average citizen.

There will be more surprises coming out of the bill… just wait.  This is just like the Patriot Act… don’t read, just vote for it… we are always acting in the best interests of America… right?