fuTuRe sHOcK

Congressman Paul gives his thoughts on the testimony of Paulson and Bernanke, the New International Reserve Currency; the failure of the dollar standard, gold and where the global economy could go from here.

The original quotation comes from the 1948 film The Treasure of the Sierra Madre with Humphrey Bogart, adapted from B Traven’s 1927 novel upon which the movie was based. In one of the scenes in the movie a Mexican bandit leader is trying to convince Fred C Dobbs (played by Bogart) and company that they are the Federales.

Dobbs: ‘If you’re the police where are your badges?’
Gold Hat: ‘Badges? We ain’t got no badges. We don’t need no badges! I don’t have to show you any stinkin’ badges!’

ILARGI
THE AUTOMATIC EARTH
All The Rage
The reason the Fed and Treasury refuse to reveal details about the assets they bought, and are still buying, is not, as they claim, that it is sensitive information, or that it could negatively affect valuations of participating banks, insurers and lenders. We know this because the true reason is revealed in the new and not-improved deal the US government reached last night with AIG. If it would be revealed what is going on behind the doors of the Washington and New York casino bathrooms, a lot of people would get very angry. The AIG accord spells out what will be paid, with taxpayers’ funds, for hundreds of billions of toxic securities and derivatives that are worth zero, close to zero or less than zero (yes, that is possible).

The bail-out plan will pay 50 cents on the dollar for paper that has no value. Perhaps paying 5 cents on the dollar would have been deemed acceptable and defensible (albeit under protest), but paying 10 times or more the realistic remaining value, and using taxpayer money to do it, is simply fraudulous. Keeping AIG alive was already an incomprehensible decision from a long term point of view. Stuffing the carcass with US taxpayer dollars, in order to support the other walking dead, is perverted necrophilia. And I don’t think having intercourse with corpses is all that popular among Americans.

Bloomberg’s court case, which seeks to force Paulson and Bernanke to reveal the assets, the sellers and the valuations, may seem to be valid under the Freedom of Information Act, but don’t forget that one of the stipulations in the original Paulson plan is that Hank the Panky can’t be sued for anything he decides under the plan. The case is perhaps a good test to see how much democracy is left in the US, but one that is by no means certain to lead to a favorable outcome. Don’t forget, the Treasury snuck in a tax change that favors, to the tune of $140 billion, the same parties that profit from the AIG asset valuation outrage. Paulson feels pretty invincible these days. And so do his friends. More

envast.blogspot.com
In a recent Business News Network interview, Amanda Lang talks with John Embry, Chief Investment Strategist at Sprott Asset Management, about his position on precious metals (bullish) and base metals (bearish). While hesitating to make a definitive prediction in the midst of such widespread asset destruction, Embry nonetheless looks beyond the carnage to what he suggests could be the seminal event for gold—the possibility of default on physical delivery for the December futures contract. He also explains why gold has failed to rise to the occasion of the worst-case financial scenario in history. Below are some excerpts from the interview, edited for length and clarity.

Amanda Long: People say gold really should be doing better than it is now and that actually becomes a justification for not buying it. It’s not doing what it should be doing in a crisis and, therefore, I don’t want to own it.

John Embry: That is a wonderful analysis because that is exactly the mindset the guys who are driving the price down are trying to create. Gold doesn’t work so keep away from it. They’re able to control the price quite easily in the paper markets because the paper markets are so huge in comparison. “The guys” – the central banks and their bullion bank accomplices—have a lot of power and a lot of money, so they can overwhelm the other side. But what’s happening is that the physical supply is diminishing dramatically. It’s getting harder and harder to purchase gold and silver through traditional avenues. You can’t get it in coin shops to any extent. You can’t get it through your banks. The physical side is really constricted by supply. That, to me, is the reality. The paper stuff is just the illusion.

AL: Now the problem, of course, for investors is that the paper market is the one you’ve got to play and, for the most part, it affects the price. How will that be resolved?

JE: What will have to happen is the people that are on the long side of the paper market in, say, on Comex, are going to have to call for delivery. When they call for delivery and there isn’t enough gold available to meet that call, the game changes. That is probably going to be the event that changes the perception. There’s a suggestion that something may happen around the time of the maturity of the December contract.

AL: Would you expect them to do that out of fear? In other words, they’d literally want to take delivery so that they have gold in their vaults?

JE: I would think that would be the best reason to do it for the simple reason that I want physical gold today. I mean that is the one thing you can trust. Paper gold, who knows? You may have a force majeure in the sense that people in the end will settle for paper and you won’t have the gold protection you think you have. You’ll get your money’s worth, but you’ll have paper. So that to me is the reason why I think somebody’s going to say, wait a minute, I want the gold. [Ed. Note: Force Majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as war, strike, riot, crime, act of nature (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract.]

AL: In that transaction people ask for delivery. Will that trade crush a lot of people? Are there a lot of people who are short this market?

JE: Yes, without question. For the people who are short this market, there will be a force majeure and they will have to settle in paper because they can’t meet the requirements of gold. That is going to be the seminal event that defines this whole situation. More

Jerry Mazza
Online Journal
Let me not keep you in the dark. As Wikipedia states, our money supply has three large components. M1 is physical currency circulating in the economy plus demand deposits (checking accounts). This measure is used by economists to try and quantify the amount of money in circulation. M1 is the most liquid measure of money supply since it only contains cash and assets quickly usable for conversion to currency. Hang in.

M2 is MI + time deposits, savings deposits and non-institutional money-market funds. M2 is a wider category of money than M1. It’s also used to quantify the volume of money in circulation and to explain economic conditions. M3 is the biggie. It’s M2 + M1 + large deposits, institutional money-market funds, short-term repurchase agreements, and other larger liquid assets. It’s the broadest measure of money used to estimate total supply of money in the economy.

The Fed used to publish data on all three money descriptors. But for some strange reason (couldn’t be saving money as they claimed because they never save money), the Board of Governors of the Federal Reserve discontinued publishing data on M3 (which contain all data on M1 + M2 =M3) on March 23, 2006. M3 also included balances in institutional money funds, repurchase liabilities issued by depository institutions and Eurodollars held by US residents at foreign branches of US banks, in fact at all banks in the United Kingdom and Canada.

In other words, M3 tracked what the fat cats were doing with their bucks. You have to think, why would the Fed do this? Of all three categories, M3 was your best bet to track inflation, i.e., to monitor what the Free-Market’s “Invisible Hand” was picking from your pocket through inflation, sometimes called “the hidden tax” because that’s just what it is. When the government runs off some extra funny money rest assured it’s to spend it. And you get the tab.

It would be, as InflationData.com editor Tim McMahon described it, “like writing checks from an account that was empty.” You would end up in the slammer. Nevertheless, that’s what the criminal Fed (and the government) is doing when it creates money out of air. To see the result, go back to Wiki’s Money Supply and scroll down to “Money Supplies Around the World,” the United States chart for M1, M2, M3 since 1959. You will see the widest expansion of dollars is in M3. You might ask yourself where were all the big bucks going.

Also of interest at Wikipedia’s Money Supply is to scroll down to “Bank Reserves at Central Bank,” which discusses how a central bank can ease the flow of money by purchasing government securities in the open market, or tightening the flow by selling securities on the open market and pulling in money. Also, along with that control, up until the 1970s, the government said that banks had to keep a fraction on deposit of what they loaned out. Let’s say that would be $1 on every $10 dollars. This was to prevent a total freeze-up in case of a run on banks, like the one in 1929.

“However,” as Wiki says, “in the 1970s [the Nixon Era] the reserve requirements on deposits started to fall with the emergence of money market funds, which require no reserves. Then in the early 1990s [the GHW Bush era], reserve requirements were dropped to zero on savings deposits, CDs, and Eurodollar deposits. At present, reserve requirements apply only to “transactions deposits“ — essentially checking accounts. The vast majority of funding sources used by private banks to create loans are not limited by bank reserves. Most commercial and industrial loans are financed by issuing large denomination CDs. Money market deposits are largely used to lend to corporations who issue commercial paper. Consumer loans are also made using savings deposits, which are not subject to reserve requirements. These loans can be bunched into securities and sold to somebody else, taking them off of the bank’s books.” Call that the beginning of the end.

“Therefore, neither commercial nor consumer loans are any longer limited by bank reserves. Since 1995 the amount of consumer loans has steadily increased, while bank reserves have generally remained constant . . .” Here, too we find the blueprint for disaster, which actually occurred in the Savings and Loan debacle,” beginning in the Reagan Era, 1981, ending in the GHW Bush era, 91-92. I leave that fiasco for your perusal. The point of it all has to do with Free Market deregulation of bank lending rules and the lack of lending transparency.

Hiding the growing debt

Returning to March of 2006, McMahon points out the US Trade deficit was running about $800 billion annually, meaning we were spending that much more in foreign markets than we were taking in for our exports. We were shipping billions extra overseas, mainly to China, in return for Wal-Mart’s everyday low prices, or, as Wal-Mart currently says, “Live well. Save money.” Sure. McMahon points out the Chinese weren’t buying our goods to lower our trade deficit. Instead they were saving half their GDP (gross domestic product), which would have been about half of $1.1 trillion a year.

The US only tucks away about 13 percent of its GDP (that is government, business and personal) earnings. But Chinese households tuck away about 30 percent of earnings while US households save less than zero. We’ve actually been spending .4 percent more than we earn every year. So, if you wonder what the Chinese have been doing with all the extra bucks, they’ve been buying back our debt, that is in the form of US government Treasuries. In doing that, they’re actually loaning us the money to buy more stuff. So, the big reason to stop publicly tracking M3 was not to advertise that fact.

The M3 went up an annualized 9.4 percent back in 2006 in the first quarter and 17.2 percent by the fourth quarter. Why would the Fed want to deal with it when it could bury it? I’m sure Mr. Greenspan must have felt shocked and terrible about it, but the pain we’re feeling now didn’t come yesterday, out of the blue, with the phony bailout. We’ll be once again bailing out the M3 types, not the M1s or M2s, when the derivative bomb hits. And, after paying the “hidden inflation tax” we’re being served up deflation, recession and a “once in a lifetime economic tsunami” for dessert. Jolly-o!

Nice going Greenie. I hope you and all your pals enjoy buying up our pensions’ bonds and securities, devalued real estate, subprime mortgages, and going to the Cote D’Azur for a few years to get away from it all. This could get really ugly. Or will it be to the Caymans, to those stashed offshore, tax-free accounts, frosted Daiquiris and Caribbean sunshine. But don’t worry. The lynch mob will be here when you get back.

The thing is you could have loosened up the M1 money supply, as my economist friend Dick Eastman says, to ease the purchasing power on that overpriced gasoline and food, that is, while your friends in the club lived high on the hog, sucking up the good times. And, at the same time, we have your good buddy Hank Paulson lining the pockets of his banker friends, hedge fund managers, derivative devils, short-sellers, long-in-the-tooth elites like the Rockefellers, the Rothschilds, and even foreign princes.

Yes, with great sleight of hand, we’ve enabled the stock market to bring us Black Friday with Black Monday, and the volatility of the Perfect Storm, ironically the great liquidity crisis. And our latest $700 billion in tax money paying for all the high rollers to stay high and dry, while we scuffle in steerage, just waiting for the Titanic to hit the iceberg, and to see who gets into the lifeboats. Yes, Mr. Greenbacks, you did a great job of outpacing inflation and debt with obfuscation. The Wizard of the Fed has turned out to be just another felon-in-waiting, along with Dennis Koslowski, the maybe not-so-dead Ken Lay, hopefully Mr. Bernanke and Mr. Paulson, as well.

The disaster dream team

There are others worth a quick mention, the Chinese-speaking New York Federal Reserve Bank President, Timothy Geithner, ex Henry “China Opener” Kissinger’s protégé. Then there’s Goldman sacker John Alexander Thain; Dr. Gerald Corrigan, chairman of Goldman Sachs Counterparty Risk Management Policy Group, actually in charge of creating the risks and fiascos; BlackRock’s former manager of $1.2 trillion in assets, Ralph L. Schlosstein; BlackRock CEO and co-founder Larry Fink, who pioneered mortgage-backed securities (let’s hear it for this genius); John Pickel, president of the International Swaps and Derivatives Association, et al. [Included is an explanation of Securitized Mortgaged Lending and a lovely diagram].

Forgive me if I’ve missed some names, like Mario Draghi, Bank of Italy’s governor, former Goldman sack; or even Joshua Bolten, current White House chief of staff from Goldman.

With a dream team like this, it’s not surprising Goldman Sachs missed the shock of the securitized mortgage collapse and actually showed a 79 percent rise in profits. In fact, back when Paulson was an economist for Goldman, he was outraged that the Chinese had only 4 percent of their capital coming from organized capital markets, when elsewhere two-thirds of capital came in from the usual suspects’ capital markets. The Ultimate Sacker is even encouraging Chinese peasants these days to sell off their hard-won land and move to the cities to work in the slave labor palaces of Wal-Mart’s everyday low-prices.

On and on it goes, including that fact that our shocked Mr. Greenspan (along with Goldman’s Lawrence Summers) was being investigated in September of 2001 for illegal gold transactions, specifically for selling Federal Reserve Gold to friendly Wall Street financiers at below market prices at that time. And wait, what about all that gold that disappeared in the collapse of the World Trade Center’s north tower on the 11th of that month?

So it goes, everything into the rabbit hole, no longer published like the M3 reports, more razzle-dazzle from the folks that brought you today’s mayhem, which was another controlled demolition of our economy, not just a matter of some bad mortgages. By the way, those “bad mortgages” were estimated by Paul Craig Roberts, in his “The Bailout and the Smell Test” to be no more than 10 percent of all the mortgages issued in that time frame.

Feel used, feel abused, feel like someone pulled the plug from your life? The answer is yes, yes, yes. But don’t let it disable you. Be strong. Suck it up. Fight back with the truth. We can’t let these vandals take the beachhead of the economy and gobble up the country we live in and love. There will come a time and you will be asked to act. So be ready, patriot. It’s coming, and not at a local theater near you, but in the streets and on the barricades.

MIKE WHITNEY
Counterpunch
There are signs that the credit crunch is easing. Interbank lending in dollars has fallen for a ninth straight day. The various indicators of stress in the market–Libor, the TED spread, and the Libor-OIS spread–are all gradually returning to normal, but the damage to the broader economy has been substantial. Major corporations have had to stretch their credit lines just to get the money they need to cover routine operating expenses and a lot of retailers have not been able to get funding for their inventories for the holiday season, so they’ll either have to hire fewer workers or simply shut their doors for Christmas. Also, corporate defaults have increased as businesses have been unable to turn over their short-term debt. According to Fitch Ratings, the “crisis will cut growth in credit this year by 50 percent as financial firms reduce leverage, investors’ appetite for risk declines, and the worldwide economy slows.” When credit is less available, there’s less business activity and the economy slows. Unemployment goes up and quarterly earnings go down. It’s a vicious circle that starts with speculation and ends in panic. The financial system has to reestablish its equilibrium by purging the excessive credit that developed through low interest rates and lax lending standards. Financial institutions everywhere are in the process of deleveraging which is putting downward pressure on the main stock indexes and creating turmoil in the currency markets.

The US Treasury and Federal Reserve are now underwriting the entire financial system. The free market has been abandoned altogether. Everything from commercial paper to money markets is now backed by the “full faith and credit of the United States”. Without that explicit government guarantee, the credit markets would still be frozen and the system would crash. But government guarantees do not address the real problem, which is toxic assets that must be accounted for and written down. All it does is take hundreds of billions of dollars in mortgage-backed garbage onto the nation’s balance sheet and undermine the creditworthiness of the United States. Eventually, foreign central banks will see the folly of this maneuver and refuse to buy more US debt. When that happens, there will be a run on the dollar and a major dislocation in the bond market. Then, the financial system will grind to a standstill once again.

Secretary of the Treasury Henry Paulson’s $125 billion capital “giveaway” to nine of the country’s largest banks has helped to calm the credit markets, but it won’t last. The “real economy” is beginning to stumble and the stock market is gyrating more wildly than anytime in history. Wall Street is consumed with fear and investors are ducking out the exits as fast as their feet will carry them. According to the New York Times, the banks probably won’t even use Paulson’s money to extend loans to consumers and businesses (as intended), but will hoard it to make sure they are sufficiently capitalized when their mortgage-backed assets are downgraded. Even worse, the banks may use the money to gobble up smaller local and regional banks. On Tuesday’s Jim Lerher News Hour, New York Times journalist Andrew Ross Sorkin put it like this: “The other thing that some of them may do with that money is go out and make acquisitions and buy other banks, (which) means that you will not be getting this money into your pocket anytime soon….I think the larger issue is the economy and these banks, in terms of lending, are not going to start lending real money until the economy turns.”

Paulson knows what the banks are up to; after all, these are his friends. The truth is, the $125 billion was not given to the banks to soften the effects of the recession or increase lending. It was given to make the strong banks even stronger so they could monopolize the industry. Paulson’s real plan is “more consolidation” and less competition, or as economist Michael Hudson says, “Big fish eat little fish”. The Treasury Secretary is using his authority to reward his friends rather than doing what is best for the country.

In the last few weeks, the broader economy has deteriorated faster than anytime in the last 70 years. That’s why Fed chief Ben Bernanke has given the nod to another stimulus package of $150 to $300 billion dollars. The gears are rusting in place and the desperation in Washington is palpable. Calculated Risk web site provided a transcript of a conference call by MSC Industrial Supply (MSC) which summed up the prevailing mood in today’s business world:

MSC: “In the last several weeks, customers’ sentiment has turned dramatically downwards. Here are a few of the things we have recently heard and I’ll quote a few of them. One quote is our new orders are down substantially in the last few weeks. Another is that corporate has told us to reduce inventory. What we have also heard is make due with what you have. And finally, another quote is capital expenditures are on hold. Customers are concerned about the economy and the lack of available credit. They’re reducing inventories, orders, and order size and there has been a trend toward deferring capital expenditures…”

MSC: “David, we view this time as unprecedented in history. The economy is undergoing a huge change, how that is going to shake out all remains to be seen, but I think what is important to know is it’s a huge change that, frankly, no one had a chance to see coming, so we than specifically in our customer base there is a tremendous amount of fear that is gripping customers and evidenced by what we have seen the last couple of weeks in October, almost buying paralysis, that is really the way that we think about it, and frankly, in speaking with so many customers what we see happening…. What is has happened here with the credit crisis is while the economy was by no means booming, it was kind of rolling along and we almost think that what typically would have taken six, seven, eight, 9, 12 months to start to come down happened almost literally overnight.” (Calculated Risk)

Events are now unfolding so quickly, they’re impossible to follow. But this much is clear, the wheels have fallen off the cart. The Fed has lost control of the system. On Monday, Bernanke announced the creation of the Money Market Investor Funding Facility (MMIFF), which will provide $550 billion in liquidity to U.S. money market investors. It is another in a long list of steps to try to provide liquidity to a system that is burning through trillions of dollars of credit via the deleveraging hedge funds and asset downgrades. Of course, the Fed does not really have the money it has committed. It will have to expand its balance sheet, issue more Treasurys, and hope that foreign central banks do not see that the US financial system is headed for the rocks.

“It is essential we preserve the foundations of democratic capitalism,” Bush bellowed on Monday.

All that’s left of the free market is the threadbare rhetoric of our lame duck President. The world’s biggest creditor is now the most ardent defender of market fundamentalism.

Last week, banks borrowed a record $437 billion per day, topping the previous week’s $420 billion per day a week earlier. Hundreds of banks cannot meet their capital requirements without regular low interest loans from the Federal Reserve. The banking system is in shambles. The FDIC needs to determine which banks can be saved and which need to be shut down, otherwise the insolvent banks will use the money they get from the Treasury on risky bets to dig their way out of bankruptcy. Without restrictions on how they can issue credit, many of the banks will engage in the same reckless behavior and speculation that brought on the current calamity.

92 year old Anna Schwartz, who co-authored “A Monetary History of the United States” with Milton Friedman, said in a recent Wall Street Journal interview that Paulson and Bernanke “should not be recapitalizing firms that should be shut down.” Rather, “firms that made wrong decisions should fail…. By keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis.” At the same time, they have not alleviated the uncertainty among lenders “that would-be borrowers have the resources to repay them.” This is the very heart of the matter; the distrust will remain until the bankrupt institutions are shut down and confidence is restored. The good banks have to be strengthened, the bad banks have to be closed, deposits have to be insured, foreclosures have to be reduced (to stabilize home prices), and consumers need immediate stimulus (including food stamps, extended unemployment insurance, infrastructure spending and aid to states) to rev up the economy. All of these have to be done as quickly as possible to avoid further damage to the economy and greater personal suffering. According to an estimate by the UNs International Labour Organisation (ILO) “Twenty million jobs will disappear by the end of next year as a result of the impact of the financial crisis on the global economy…Construction, real estate, financial services, and the auto sector are most likely to be hit, according to the ILO’s estimate which is based on International Monetary Fund projections for the world economy.” It could be worse if the Bernanke and Paulson botch the rescue.

The FDIC’s Sheila Bair has been the one “bright light” in the present financial train-wreck. She has done a first-rate job of closing “sick” banks and renegotiating mortgages. Last week, Bair blasted Paulson for focusing all his attention on the banks and financial institutions instead of homeowners, many of who are now facing foreclosure. In an article in the Wall Street Journal, she said: “We’re attacking it (the crisis) at the institution level as opposed to the borrower level, and it’s the borrowers that are defaulting. That is what’s causing the distress at the institution level…So why not tackle the borrower problem?”

Unlike Paulson, Bair seems to grasp that the hemorrhaging in the financial sector cannot be stopped unless the rate of foreclosures is slowed and housing prices stabilize. The FDIC chief has taken a sensible approach to the crisis by writing down the face-value of mortgages and putting homeowners in conventional 30-year fixed rate loans that make it possible for them to avoid foreclosure. According to Bloomberg, “(Bair) now has the authority to offer loan guarantees that could encourage modifications by mortgage-servicing companies in an effort to avert foreclosures. The new financial rescue plan “allows the government to set standards for mortgage changes and offer guarantees for loans that meet the standards.” This gets to the root of the larger problem which is stopping the slide in housing prices so that the mortgage-backed securities market can normalize.

The actions of the Fed, the Treasury and the FDIC are likely to cost in excess of $2 trillion. That does not include the trillions in market capitalization that are wiped out by plummeting home and stock prices. Nor does it include the incalculable suffering from rising unemployment, falling living standards, or personal hardship. Eventually, the Fed’s emergency measures will result in higher taxes, soaring deficits and slower growth. As America’s “consumer-based” economy flags and the recession deepens, capital will flee US Treasurys and securities and create a funding crisis. This may be hard to imagine, now that the dollar is strengthening and US Treasurys appear to be in great demand, but the handwriting is already on the wall.

Brad Setser explains the dollar’s surprising reversal in his latest blog-entry: “The dollar’s rise since July is part of a reversal in longstanding investment trends that prevailed during years of plentiful borrowing, strong growth and low financial-market volatility. “Essentially, every large trade that built up a head of steam in the go-go years has blown up or is in the process of blowing up,” wrote Alan Ruskin, chief international strategist at RBS Greenwich Capital, in a report to clients. “That goes for almost every asset class.”(Brad Setsers Blog)

The recent surge in US Treasurys is also misleading, much of it having to do with terrified investors that are dumping their shares in stocks, mutual funds and hedge funds for the percieved safety of US debt. Foreign investors, however, seem to be losing their enthusiasm for Treasurys as America’s future continues to darken.

The net foreign purchases of long term securities in August was a mere $14 billion following an even more dismal $8.6 billion in July; not nearly enough to meet $55 billion per month the US needs to balance its consumption of foreign goods. Even worse, the purchases of long-term US securities “went negative” by for foreign private investors (by $8.8 billion) which means that the dollar is being artificially propped up by foreign central banks to avert a disorderly unwinding of the currency.

Foreign investors and central banks are no longer providing the capital to support the US $700 billion current account deficit. They have lost confidence in America’s ability to bounce back from the credit crisis which has swept through the financial system and is now hammering away at the broader economy. That means the demand for US debt will fall and the prospect of hyperinflation will grow. Even if the dollar is able to weather the storm ahead (and the nation can avoid a funding crisis) the massive deficits brought on by Bernanke’s “emergency” spending spree will force interest rates upwards and tighten credit even more. As Michael Panzer, author of “Financial Armageddon” says:

“While the U.S. may not suffer from a funding crisis in the immediate future, the voracious money-raising appetite will make life much more difficult for the private sector, in the sense that, they will be ‘crowding out’ increasingly desperate borrowers who will find their options are more and more limited.”

The Fed now faces the daunting task of trying to maintain America’s dominant place in the global system while the economy contracts, deficits skyrocket and the pillars of US-style capitalism come crashing to earth.

The Mogambo Guru
“It is estimated that there is a 10x multiplier for every dollar the government puts into the banking system”, which translates into the result that this new “$2,250 billion does not equal $2,250 billion in benefits to the economy. It equals $10,000 billion - $20,000 billion….”Every dollar that goes into the banking system will then get lent out to someone, who will then use that dollar to buy goods from someone, who will then use that dollar to hire people.”

Although this ignores the ugly effect of taxes, which inexorably grinds the original dollar down to zero as it goes from hand to hand, it is also a good example of the velocity of money (the number of times per year that a dollar changes hands) and with overtones of the multiplier inherent in fractional-reserve banking, as banks are allowed to loan out a multiple of every dollar of deposits! So a measly 10x multiplier makes me laugh at the estimate of an effective $20 trillion addition to the money supply because the actual reported reserves in the banks of the USA have been, month after month, year after year, the same piddly little $42 billion or so for over a decade! Hahaha!

In the meantime, as those years and years rolled by, bank assets went gigantically up, bank liabilities went gigantically up, but the reported reserves held against those liabilities and assets in the banks hardly changed a dime! Hahahaha! Talk about a multiplier! Hahaha! Of course, this means that another $2.25 trillion shoveled wholesale into the USA economy is actually fodder for an infinite increase in the money supply, just like all the other increases. And it also means that I am NOT coming out of this bunker, except to buy more gold, silver, oil or tasty victuals. Maybe wave to the wife and kids, but that’s it! More

Wall Street Journal
Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. [Anna] Schwartz, 92 years old, is one of the exceptions. She’s not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, “A Monetary History of the United States” (1963). It’s the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.

Since 1941, Ms. Schwartz has reported for work at the National Bureau of Economic Research in New York, where we met Thursday morning for an interview. She is currently using a wheelchair after a recent fall and laments her “many infirmities,” but those are all physical; her mind is as sharp as ever. She speaks with passion and just a hint of resignation about the current financial situation. And looking at how the authorities have handled it so far, she doesn’t like what she sees.

Federal Reserve Chairman Ben Bernanke has called the 888-page “Monetary History” “the leading and most persuasive explanation of the worst economic disaster in American history.” Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.

To understand why, one first has to understand the nature of the current “credit market disturbance,” as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads — the difference between what it costs the government to borrow and what private-sector borrowers must pay — are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. “The Fed,” she argues, “has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.”

So even though the Fed has flooded the credit markets with cash, spreads haven’t budged because banks don’t know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is “the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue.”

In the 1930s, as Ms. Schwartz and Mr. Friedman argued in “A Monetary History,” the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they’d lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: “If the borrowers hadn’t withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress,” deepening the crisis and causing still more failures.

But “that’s not what’s going on in the market now,” Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers — “all these exotic securities that the market does not know how to value.”

“Why are they ‘toxic’?” Ms. Schwartz asks. “They’re toxic because you cannot sell them, you don’t know what they’re worth, your balance sheet is not credible and the whole market freezes up. We don’t know whom to lend to because we don’t know who is sound. So if you could get rid of them, that would be an improvement.” The only way to “get rid of them” is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson’s original proposal to buy these assets from the banks was “a step in the right direction.”

The problem with that idea was, and is, how to price “toxic” assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.

Ms. Schwartz won’t say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he’s shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. “They should not be recapitalizing firms that should be shut down.”

Rather, “firms that made wrong decisions should fail,” she says bluntly. “You shouldn’t rescue them. And once that’s established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich.” The trouble is, “that’s not the way the world has been going in recent years.”

Instead, we’ve been hearing for most of the past year about “systemic risk” — the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.

Ms. Schwartz doesn’t buy it. “It’s very easy when you’re a market participant,” she notes with a smile, “to claim that you shouldn’t shut down a firm that’s in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that’s their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn’t have to save them, just as it didn’t save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what’s been going on.”

It takes real guts to let a large, powerful institution go down. But the alternative — the current credit freeze — is worse, Ms. Schwartz argues. More

Karl Denninger
The Market Ticker
America’s House and Senate, just a couple of short weeks ago, passed a law that was denounced by The American People, where representatives and senators were receiving calls 50:50 against - 50% “No” and 50% “Hell No”.

In response, Wall Street banks employed spam-call-banks to “counter” this outpouring of public opinion and CEOs of Fortune 500 companies broke the law by sending out emails and other communications that essentially threatened their employees with loss of their job if they did not lobby for this horrible bill to be passed.

The bill passed after Henry Paulson and Ben Bernanke threatened Congress with the imposition of Martial Law. Yeah. Tanks in the streets stuff. Literally.

This was disclosed in the well of the house by a few brave representatives, including Representative Sherman.

Were you told this was how Congress was browbeaten into passing this law? Were you told that Congress was essentially threatened that tanks would be deployed into our cities and towns if Congress did not pass this bad law that Paulson and Bernanke demanded?

Well, yes you were. Representative Sherman disclosed this fact in an impassioned speech in the Well of the House.

Did CNBC or CNN report that? No, but CSPAN did carry it.

If you watched.

But the law was in fact to allow the buying of $700 billion of “troubled mortgages” and related assets.

Or was it?

See, buried in that bill was a nasty little catch-all “any other asset the Treasury says promotes financial stability.”

One little sentence, with which you surrendered forever the principles of economic capitalism and replaced them with government totalitarianism.

Fascism.

And a week later half of that money was instead spent on a massive bailout of Wall Street through the injection of perpetual preferred stock, saving every single nickel of executive stock and options. No dilution of existing shareholders, nor any haircut for their bondholders, thereby preventing the capital structure of the firms from absorbing the losses as is intended and required under the law.

In other words, you, The Taxpayer, have been intentionally looted by the puppet-masters at Treasury (Hank Paulson) and The Fed (Bernanke, Geithner, et.al) to the tune of $250 billion dollars, while these folks in the so-called “private sector” keep each and every nickel of the money they stole from you while peddling their fraudulently-sold and packaged subprime and Option ARM mortgages.

Law standing for more than 200 years intended to guarantee that the stockholders and bondholders of a firm stand in a carefully-chosen capital structure as the cushion when a firm becomes incapable of providing for itself was destroyed not through the operation of law or statute, but by executive fiat. Instead of being forced to accept the loss that should have come from the imprudent and even felonious acts of these firms and their executives, we, the taxpayer, are instead having our pockets picked, with our children and grandchildren, along with those not yet born, being forced to absorb the bill. Instead of those stockholders being expected to shoulder the loss as a direct consequence of their refusal to hold management accountable for its bad conduct, we the people are handed that loss in the form of foreclosures, higher interest rates and insane inflationary spirals.

Unlike in Sweden, which had a similar banking crisis, no disclosure of balance sheet “asset values” has been required, no executives were fired, compensation was not clawed back and no executive stock or options were voided. Those who “invested” in these firms were “protected” from the just cost of the foibles and even felonies committed by any and all up and down the chain, and the executives have kept their homes and yachts in The Hamptons - not because they earned them, but because our so-called “government” granted to them a monstrous bailout check written on your wallet, your children and your grandchildren.

You, on the other hand, will get exactly nothing out of this. Not one job will be created. House prices will continue to fall and foreclosures will continue to mount. The “bankruptcy reform” law remains, meaning if you can’t pay you will be turned into a perpetual debt slave. The real economy will get nothing from this. Bridges, roads and schools will receive not one nickel from this massive transfer of your money to the wealthy bankers who robbed, cheated and stole from you. States will get nothing, even though their budgets are squeezed as well.

In short, none of the money is going to help you, the consumer, the real economy, or the state in which you live. All of it is being spent to bail out the institutions, shareholders and executives in the firms that intentionally created this mess in the first place by screwing people up and down the line for the previous ten years.

What’s worse, by guaranteeing interbank lending if a bank goes down now the government will be on the hook for what could be hundreds of billions of dollars overnight - with no means of escape.

The talking heads all speak this morning about “regulation and oversight”, but the implementation of this law is nothing of the kind.

This is in fact a looting of the American Public and Treasury by a law passed under fraudulent pretense and then redirected under even more fraudulent pretense to directly benefit those who just extracted hundreds of billions of dollars from your wallet after robbing you, your children, grandchildren, aunts, uncles, grandmother and grandfather of everything.

If we had an honest government in Washington DC this would result in an instantaneous Bill Of Impeachment for both Paulson and Bush in the House of Representatives and we’d have two candidates for President vowing to reverse all of this on Inauguration Day, irrespective of which one of the two clowns wins.

But we do not - we have a government in Washington DC that has been bought and paid for by the same bankers who just looted you to the tune of $350 billion dollars by literally putting a gun to Congress’ head, and they said “sure!” More

…these people are still at the helm. And despite their proven and repeated inability to understand the situation, they are for some reason expected to successfully lead us out of it. Every pundit on Earth is playing the game of picking the various bailouts apart and proposing their own improved bailout schemes. But I think that most of the conversations going on out there miss a critical point: that this bailout and the ones that will in all likelihood follow it fail to address the root cause of the problems. That root cause, in my opinion, is that the vast majority of political leaders, regulators, and pundits zealously cling to a deeply flawed analytical framework. To put it more simply: the people and principles that blithely led us into this mess are absolutely the wrong people and principles to lead us out of it. More

Clusterfuck Nation
Jim Kunstler
God knows what manner of deals went down this past weekend in the Hamptons wine cellars and below-decks among the Chesapeake Bay sailboat fleet. All these hidey-holes must have been dank and fetid with the sweat of mortal fear. Will the US Government declare itself a subsidiary of General Electric? Will Vlad Putin be roped in to save Goldman Sachs? Meanwhile, the whole noisome rat maze of international counter-party deals was taking on sewer water and rodents of every nationality were seen leaping for daylight all over the fusty old motherlands of Europe. A cascading collapse of international finance is underway. While many fixers may jump heroically into the tumbling wreckage hoping to rescue this-and-that, the outcome by Friday is liable to be an unrecognizable smoldering landscape of the G-7’s hopes and dreams.

Some big questions for the week: will the Euro survive as a currency? Will the rush into the US dollar continue even as the US financial system dematerializes in a Fibonacci fever of accelerating de-leveraged infinitude? Will the remaining Big Boyz, Goldman Sachs and JP Morgan succumb to the counter-party hemorrhagic fever? Will great rows of lesser banking dominoes now start clacking onto their faces? Will all fifty states follow the leads of California and Massachusetts and line up at the US Treasury’s hand-out window. Will the entity that calls itself the civilized world be left at week’s end with anything resembling money?

Your guess is as good as mine. We’ve entered the realm of phase change, where everything is slipping and nothing has settled. The final result, when the dust settles — and that may not be for weeks to come — will certainly be a poorer western world. Will it be so poor that it can no longer afford to import anything? Including oil from the land of the date palm? If so, we are really in for a rough ride, poised as we are at the edge of the heating season here in the temperate regions. Notice, by the way, that the $700 billion just approved by congress to bail out Wall Street is exactly the same sum of money that we send to the oil exporting nations this year.

Will millions stop receiving paychecks due to the turmoil in banking? It’s certainly possible, starting with the poor drones in Mr. Schwarzenegger’s motor vehicle bureau and eventually ranging to every payroll office in the land. Will Sarah Palin’s fellow Six-packers line up around the parking lagoons of the suburban banks trying desperately to withdraw the last seventy bucks in their checking accounts? (And will their thoughts in the event be: this economy is fundamentally sound….) Will the supermarket shelves of chipoltle-flavored crunchy snacks and power drinks go empty as truckers refuse to deliver their loads without up-front payment? And how long does it take a hungry public to turn mean?

We could see a parallel problem in the motor fuel supply sector. So far, gasoline shortages have only appeared in parts of the Southeast USA, due to interruptions caused by two hurricanes. If the oil tankers quit offloading now for lack of credible payment, then the whole nation will get an interesting lesson in the shortcomings of the suburban development pattern.

The candidates’ debate Tuesday night should be interesting. I don’t expect too much give-and-take on the subject of East Ossetia this time around.

Even at this point, the current crack-up in world finance makes the 1929 crash and the events of the 1930s look in comparison like an orderly small town auction of somebody’s grandmother’s effects. Back in that sepia day, America had plenty of everything except ready cash. We had, especially, plenty of our own oil, and — you’re not going to believe this but it’s true — the stuff was selling for as little as ten cents a barrel, it was so abundant. And yet still, America in the 1930s plunged into a dark depression of inactivity, loss of confidence, and impoverishment.

This time around, things could get more disorderly. Personally, I think we may be beyond the reach even of fascist authoritarianism, because unlike the programmed industrial masses of the 1930s, we are unused to regimentation, to lining up at the factory gates and the movie theaters. Back then, society was so regimented that everybody wore uniforms in-and-out of the military. Look at movies from the 1930s. Every man-jack wore either a necktie and hat or overalls. The industrial masses behaved like termites. Once unemployment hit, they were waiting to be told what to do, to line up for something. It worked fabulously for Hitler, who took every advantage of this mentality. Luckily, the US went for Roosevelt (both FDR and Hitler entered office the same winter of 1933, by the way). FDR was more like everybody’s kindly Uncle Frank, and his reassuring persona enabled Americans to suck up their bad luck and altered circumstances. Many of them retreated to the family farm (which still existed then) and waited things out — and, anyway, the melodrama of the Great Depression soon resolved in the Second World War when Hitler’s love of regimentation led him into military misadventure. He shouldn’t have picked a fight with someone who had so much petroleum — end-of-story.

Okay, what happens here and now? To this point (9:am Monday October 6, 2008) events have been proceeding under a veneer of still-just-barely-credible authority. We (as represented by congress) have allowed Mr. Paulson to advance and activate his remedies. As things unspool further, he will be out of credibility, perhaps in a few days, and it’s unlikely that his successor will have any either. Mr. Bernanke has simply gone AWOL. Notice, he has vanished from the media landscape. We may soon be hearing the declaration of various “emergency” measures involving the allocation of food and the rationing of oil products. The Big Bailout of last week may be partially rescinded as it becomes obvious that it has had no effect — I believe about half the $700 billion has already been allocated, which is to say: lost. I realize these things sound pretty extreme. But forces have been set in motion and momentum rules. One thing for sure: the American public is about to undergo a severe mood adjustment. There will be fewer American Idol fans and worshippers of Donald Trump by the close of business on Friday.

William Cox
Dandelion Salad
On this date, October 3, 2008, the American people were betrayed by those whom they had elected to represent them. The members of Congress who voted for the Wall Street “bailout” violated their oath of office to “support and defend the Constitution” … “that I will bear true faith and allegiance to the same” … “and that I will well and faithfully discharge the duties of the office on which I am about to enter: …”

Without holding any meaningful hearings or public discussions and listening only to those most responsible for the economic disaster, Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Henry Paulson, Congress abdicated its responsibility to the American people.

Locking out most members from all discussions, the congressional “leadership” emerged from their backrooms with legislation that grants Secretary Paulson the ability to spend at least $700 billion to “take such actions as [he] deems necessary” … ” to promote financial market stability.”

Entrusting tremendous political and financial power (and a ton of borrowed money that taxpayers will have to repay with interest) into Paulson’s sole discretion, members of Congress must have been aware that, prior to his cabinet appointment in 2006, Paulson worked for 32 years at Goldman Sacks, one of the Wall Street firms that stands to benefit greatly from his “actions.”

Paulson, who cashed out his Goldman stock valued at $575 million to become the Secretary of Treasury (without having to pay any taxes on the sale), earned more than $53 million in pocket change during just his last two years at Goldman Sacks for innovations such as a new line of “Mortgage Backed Securities.” Gambling more than a trillion dollars on risky subprime second mortgages, Paulson cleverly converted them into AAA-rated “secure” investments by purchasing guarantees from the American International Group.

AIG, coincidentally, was just “bailed out” two weeks ago by Secretary Paulson for $85 billion (of borrowed money that taxpayers will have to repay with interest), averting a devastating loss by Goldman Sacks, who was holding more than $20 billion in otherwise worthless second mortgages.

Is it surprising that Lloyd Blankfein, Goldman’s current CEO, was present with Paulson when the decision was made to bailout AIG?

The bailout’s $700 billion price tag is only an arbitrary guess by Paulson and is most likely just the first installment of many more to come. Other economists, with more successful track records, believe the total will be much greater, perhaps $5 trillion, as concealed losses are uncovered and foreign companies dump their toxic investment waste into their American offices.

In passing the “Emergency Economic Stabilization Act of 2008,” Congress ignored the “great concern” expressed by almost two hundred of the nation’s leading economists who pleaded with Congress “not to rush, to hold appropriate hearings, and to carefully consider the right course of action,…” In addition to its ambiguity and long-term effects, the economists believed the bailout plan to be “a subsidy to investors at taxpayers’ expense” and to be “desperately short-sighted.” Ultimately, more than 400 top economists, including two Nobel Prize winners, voiced opposition to the bailout.

The economists were not alone in being ignored by the politicians. It is widely reported that calls and emails to Congress from constituents were running as high as 300 to one against the bailout. Mike Whitney reports one analyst saying that “the calls to Congress are 50 percent ‘No’ and 50 percent ‘Hell, No’.” The percentages adjusted as the stock market tumbled, but public opposition to the bailout remains strong.

An AP poll only identified 30 percent of the public in favor of the bailout, and a CNN Money opinion poll found 77 percent of the people believing the bailout would benefit those most responsible for the economic downturn.

Who Benefits?

The Latin adage, Cui bono, asks “to whose death are you going?” Law enforcement investigators quickly learn that the guilty party can usually be found among those who stand to gain from a murder or other crime.

There is no doubt the bailout will most benefit some of the richest and highest paid individuals in the American economy. But, why did the politicians betray the wishes of those who elected them in favor of the criminals who committed the fraud? Perhaps the answer can be found in another Latin phrase, quid pro quo, meaning “what for what; something for something.”

Individuals working for Wall Street finance, insurance and real estate companies and the companies’ political action committees have contributed more than $47 million to the campaigns of Senator Obama (three of top five sources) and Senator McCain (top five sources), both of whom voted for the bailout.

More to the point, Wall Street has contributed more than $1.1 billion dollars to congressional candidates since 2002. Nine of the top ten House recipients of Wall Street largesse, who each received an average of $1.5 million, are on the financial oversight and taxation committees.

Even more telling, the bipartisan Congressional “leaders” most responsible for pushing the bailout through Congress, Senators Dodd and Gregg and Representatives Frank and Blunt have taken almost $20 million from Wall Street sources during the last 20 years. Dodd recently received $6 million in contributions during his presidential primary campaign, and Frank has collected $720,000 this year.

Other key players also have been well compensated this year: Congressman Kanjorski received $755,000 and Congressman Bachus banked $704,000.

Who Loses?

The ordinary, hard-working voters, who were opposed to the bailout, and their children and grandchildren, will be the ones who will ultimately have to repay, with compound interest, the money that will have to be borrowed to give away to Wall Street bankers.

The bailout was “sweetened” in the Senate by another $110 billion in tax relief and renewable energy incentives to get enough House votes for passage; however, only the temporary one-year slowdown of the Alternative Minimum Tax offered any succor to the middle-class workers affected by it.

The bailout raises the debt ceiling to $11.3 trillion, or about $37,524 for each man, woman and child in the United States. How is this burden ever going to be repaid? Workers already know their wages are falling, their jobs are at risk, their health care, food and fuel costs are skyrocketing, and they are being kicked out of their apartments and homes because they can’t pay the rents and mortgages.

Didn’t each member of Congress have a sworn duty to rescue the millions of Americans suffering from the reckless gambling of Wall Street moguls, rather than to reward an obscene excess of greed?

Foreclosure Rescue. At least six million homeowners will probably default on their mortgages this year and next, and millions more will have their equity wiped out by declining property values. More than 770,000 homes have been seized by lenders since 2007, and 91,000 families were just kicked out of their homes in August.

These American homeowners were betrayed by their elected representatives!

The only provision in the bailout legislation to remotely “benefit” homeowners whose homes are being foreclosed upon only “encourages” mortgage service companies to modify mortgages. Paulson is required to “maximize assistance for homeowners … and minimize foreclosures”; however, he also has to ensure that the government doesn’t incur any additional costs. Thus, there’s little or no hope of any meaningful benefit to distressed homeowners resulting from the bailout.

The legislation could have required the government to directly purchase the defaulting mortgages and to adjust them to the reduced value of the property, as was done in the Great Depression. Instead, Paulson is authorized to purchase the complex derivatives (Wall Street’s gambling debts) piled on top of the original mortgages. The difference is whether homeowners or Wall Street receives the benefit of the bailout.

Bankruptcy Rescue. More than 4,476 Americans filed for bankruptcy every day during August, the highest number since changes in the law in 2005 made it much more difficult, and even impossible in many cases, to obtain debt relief. More than a million, increasingly elderly, people will petition for bankruptcy this year.

These destitute Americans were betrayed by their elected representatives!

Under the current law, bankruptcy judges do not have the power to modify mortgages of a petitioner’s primary residence, irrespective of how the mortgages have been sliced, diced and repackaged. The bailout could have provided judges with the authority, in appropriate cases, to adjust the amount secured by the mortgage to the value of the property and to adjust the interest rate to a reasonable percentage.

Unemployment Rescue. New claims for unemployment benefits rose to 493,000 last week, the highest level in seven years. The economy has already lost 605,000 jobs thus far this year, and it dumped 159,000 payroll jobs just during September, the greatest drop in five years.

These unemployed Americans were betrayed by their elected representatives!

Although the House of Representatives passed an economic stimulus bill that would fund job creation and extent jobless benefits for long-term unemployed workers on September 26th, the Senate failed to pass its own stimulus bill on the same day. President Bush has promised to veto the legislation if passed.

The bailout legislation could have provided for an extension of jobless benefits, but it didn’t.

Homeless Rescue. More than 750,000 and as many as a million Americans are homeless today, and the numbers are increasing dramatically. The National Coalition for the Homeless reports that homelessness is growing because of foreclosures, loss of jobs, and the rising price of fuel and food.

These homeless Americans were betrayed by their elected representatives!

Homeless sites are appearing all across the country as people with no place to stay are pitching tents and huddling together for support and protection. Their plight did not receive any consideration by the Congressional leadership that rammed the bailout through Congress.

Hunger Rescue. The most recent report by the Department of Agriculture found that in 2006, 35.5 million Americans lived in households with insecure food supplies and the numbers were increasing. At risk children numbered more than 12.6 million, and African Americans and Hispanic Americans suffered at higher rates than the national average.

In 2006, 9.6 million Americans had to frequently skip meals or eat too little, and often had to go without food for a whole day. Today, as members of Congress voted to reward the richest and most greedy members of our society, they ignored those without the most basic necessity for survival. This morning, they rewarded the most powerful and best-fed members of our society, and gave no thought to the helpless children who will go to bed hungry tonight.

Food banks who serve as the last resort for the hungry are running out of food. They are having to reduce rations and to dip into emergency supplies of staple items. There are reports of a 40 percent increase in requests for food assistance and a 30 percent drop in supplies.

These hungry Americans were betrayed by their elected representatives!

The bailout could have increased the amount of federal assistance for food banks in the Emergency Food Assistance Program, but it didn’t.

The Consequences

The real estate bubble that has been driving the United States economy has now popped, and there is no replacement engine to transport America’s consumer society down the highway to happiness. Americans are facing the mother of all depressions; it will be hard and it will last a long time. What are all of these homeless, hopeless, and hungry people going to do?

Many have already exercised their First Amendment right to petition their government for the redress of grievances. A majority of the members of Congress, the two presidential candidates, and the President paid no attention to the economic experts and the thousands and thousands of voters who protested the bailout and who begged them to rescue the people rather than the rich and powerful.

The people can always take to the streets in protest, and they probably will do so in growing numbers as the economic circumstances become more harsh.

The U.S. government is already planning for the eventuality – not with the helping hand of supplemental legislation to help with mortgages, jobs, shelter or food, but with the mailed fist of military suppression. The Army Times reports the current deployment within the United States “homeland” of an “on-call federal response force for natural or manmade emergencies or disasters, including terrorist attacks.” The Army acknowledges that the Northern Command may call upon the 3rd Infantry Division’s 1st Brigade Combat Team to help with “civil unrest and crowd control.”

With almost a trillion dollars picked from their pockets to reimburse reckless Wall Street gamblers, many Americans righteously feel betrayed tonight. A majority will elect a new president one month from tomorrow, and most will wait to see who it will be, and what if anything he can or will do to alleviate their suffering.

There are others, undoubtedly, who agree with the Supreme Court’s recent decision that the Second Amendment right to bear arms is individually held, and who believe that the use of their personal weapons is justified to overthrow a government that betrays them and which destroys their very means of existence. The right of legitimate self defense is recognized by every criminal law in America.

Perhaps democracy in the United States is not dead; if not, it’s on its deathbed. Resuscitation in the form of responsible representation is possible, but time is growing short.

Henry Blodget
Do banking-system bailouts work? Yes. But some work better than others. They’re also mind-bogglingly expensive. Unfortunately the current Hanke-Panke Plan shares a few attributes with the bailouts that didn’t work so well…and its price tag is likely being vastly understated. This is why we expect Paulson (or his successor) will soon be back on Capitol Hill with a new plan, begging Congress for more money.

Analyst John Mauldin’s Outside The Box email this week features a summary of the Luc Laevan and Fabian Valencia study of 42 recent bailouts. John excerpts the work of Philippa Dunne and Doug Henwood of The Liscio Report, who analyze the study in detail. Here are the key points:

* Taxpayers are already on the hook for all those crap loans regardless of what we do. The only question is whether we pay for them via a bailout or a second Great Depression. The average bank bailout costs 13% of GDP, net of any eventual asset recoveries. This would be just under $2 trillion in the US…more than double the “$700 billion” Paulson plan.

* Speed matters. The speed with which the government acts is critical. Hank Paulson and Ben Bernanke have so far acted very quickly. It took Japan more than five years to do what the U.S. has already done.

* Denial doesn’t help–so don’t eliminate mark-to-market. Many pundits have seized on mark-to-market accounting as one cause of our problem, and they appear to have persuaded the SEC to reduce the use of it. The way to get out of a banking crisis is to take the full hit, recapitalize the banks, and then move on. Eliminating mark-to-market, therefore, is unlikely to help (and might actually hurt).

* Bank restructuring is necessary, but the core tenet of the Bernanke-Paulson Plan–crap asset purchases–is not the best way to go. Instead, the plan should recapitalize the banks with equity. Ever since Hank and Ben announced their bailout plan, we and others have been mystified as to why they want to buy bad assets instead of inject new equity into the banks. Here’s how Dunne and Henwood put it:

* Some sort of systemic restructuring is a key component of almost every banking crisis, meaning forced closures, mergers, and nationalizations. Shareholders frequently lose money in systemic restructuring, often lots of it, and are even forced to inject fresh capital. The creation of asset management companies to handle distressed assets is a frequent feature of restructurings, but they do not appear to be terribly successful. More successful are recapitalizations using public money (which can often be partly or even fully recouped through privatization after the crisis passes); recaps seem to result in smaller hits to GDP. But they’re not cheap: they average 6% of GDP, which for the U.S. would be about $850 billion.

* Successful plans have included debt relief for strapped consumers and businesses, which the Paulson plan currently doesn’t. More

The Market Ticker
STOP THE BAILOUT! SAVE AMERICA!
CONGRESS: THINK BEFORE YOU ACT!
You are being asked to pass a $700 billion “bailout” or “rescue” package and are told by your leadership that it is “necessary” to prevent a catastrophe in the financial markets and, by extension, on Main Street.

Please think carefully about the following facts before you vote:

*
Public opinion is running anywhere from 100:1 to 300:1 against passing this bill, according to sources on Capitol Hill. You must return home after you pass this package to ANGRY constituents with an election less than a month away. Given the massive size of this package, the fact that it rewards the guilty on Wall Street and does nothing to address the cause that anger is fully justified.

*
Non-financial private debt is $32.4 trillion dollars1 as of 2Q 2008. Household debt is $14.0 trillion. Households lost 400 billion dollars last quarter. You wish to add $700 billion more in losses (via government obligations that taxpayers must cover) this quarter; this package is insignificant against the total bad credit outstanding. Federal capacity to “bail the system out” is insufficient.

*
It will not and cannot work because the issue is trust, not money. There is lots of money (and credit) but it is being hoarded throughout the system. Consumer savings have gone from nothing to the highest rate ever in American history – in the space of a few months. Money is flying into Treasuries because of lack of trust, not lack of money. You must fix the cause of the problem, not apply band-aids.

*
Commercial paper is being cited as the “lockup” that threatens an imminent financial train wreck. The truth is that commercial paper rates for “AA” rated non-financial firms is placing at a rate half that of a year ago as the Fed Funds target has been dropped from 5.25 to 2%2. With risk having increased the rate of return offered is lower? This is where the stress is coming from; at last summer’s rates this paper would roll. You are being gamed by Paulson and Bernanke; look at the table in the reference and you will see that even for “threatened sectors” rates are not materially higher than last year.

*
If you pass this bill and the market implodes you will be held directly responsible. There are records of thousands of signatures across seven petitions faxed to you (at my expense) dating back to October of 2007 on this topic. Many experts, including Nouriel Roubini, “Mish” Shedlock, Dr. Faber, The Weiss Institute and over 160 economists have warned Congress that this proposed plan will not work. Are you prepared to face a full-page ad in the Wall Street Journal and/or USA Today exposing these facts?

*
There are alternatives that will work; they all involve restoring trust and using existing market mechanisms to resolve insolvent institutions.3 While I am not particularly partial to my view on how we resolve “failed” institutions, addressing the root of the problem – lack of trust – is paramount. Three elements are involved here, they are obvious, and they must be fixed or you will FAIL.

*
We only get one more shot at this; we have spent over $1.6 trillion thus far (by some estimates; $500 billion by others) attempting the same thing over and over again and it has not worked. More

The US Constitution usurped, power has been ceded to [The Fed] fascist central bank officials — NightBlogger

From Draft Proposal for Bailout Plan

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Ilargi
The Automatic Earth
Ben Bernanke was not elected by the people. Yet, he will be handed (even more of) the power of the nation’s money. And power over the economy is power over the nation itself. No matter what grand plans Congress comes up with, if you refuse to fund them, they ain’t happening.

Hank Paulson was not elected by the people. If you think there’s no connection between Paulson being Goldman’s CEO for 8 years, and the fact the Goldman will now be able to bury an insane amount of toilet paper in the contaminated RTC composter that is being set up in the capital’s backrooms, at the same time that shorting Goldman is banned, then I want some of the drugs you’re taking.

The members of Congress are elected. But they have no idea what is going on. The New York Times quotes even the “finance experts” among them as saying they were stunned when Ben and Hank told them about the shape of things to come. The same two dudes who until now, in every single Congressional hearing, have insisted that the economy was strong, a propaganda piece incessantly repeated by everyone involved, including Shrub.

So who do the members of Congress turn to when they have to vote on issues they don’t understand? They listen to their staff, made up to a large extent of lobbyists, who are on the payroll of the same financial institutions that Congress, see the Constitution, is mandated to regulate. And of course those lobbyists have not been elected by the people.

Shrub has asked Congress for $700 billion in additional funds to buy up worthless paper from the banks. That means that every single American hands over another $2333 dollars, and can then call themselves the proud owner of what has no value whatsoever. The idea is that, as in the original RTC set-up during the Savings and Loan debacle, the paper will eventually regain some of that value. But see, now we’re back in that faith-based casino. And call it what you will, but by now the entire world will laugh in your face if you use the term democracy to address the United States of America.

As the misery among the American people increases, you may think back of when and why I talked about a potential political crisis. It is easy to fool and manipulate a prosperous people. And as the past decade has shown, it’s even easy to fool and manipulate people into thinking they’re -still- prosperous. But it is an entirely different matter to convince cold and hungry people that they are warm and well-fed.

One last thought: $700 billion doesn’t even begin to to buy a dent into to the “wealth” of stinking mob Kleenex that is out there. What are these guys thinking? I don’t know, perhaps it’s just another giving it to you piecemeal event. I sure as hell am not going to volunteer to be downwind of the smell of this operation. And I humbly suggest you don’t either. More
Also See: Text of Draft Proposal for Bailout Plan

Los Angeles Times
“It’s got to be done right away, but they won’t make any concessions in order to get it to happen,” said Rep. Brad Sherman (D-Sherman Oaks), who sits on the House Financial Services Committee. “They are playing Russian roulette in the hopes that if the economy gets shot, the Democrats get blamed,” Sherman said. Even policy analysts who are generally not averse to government intervention in the economy seemed taken aback by the apparent scale and aggressiveness of what the administration and the Fed have in mind. Robert E. Litan, an ex-Clinton administration Treasury official who is now a senior analyst with the Brookings Institution, said the new plan seemed to invite banks and securities firms to dump their very worst assets on the government with no clear way for Washington to get rid of them. “What they’re going to get is the financial equivalent of radioactive waste,” he warned. More

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke will meet with congressional leaders late on Thursday, according to congressional aides. One aide said the topic is expected to be “how to get us out of this financial mess.” Another aide said Bernanke and Paulson requested the briefing. The briefing comes amid speculation the Bush administration is looking at a Wall Street rescue package.

Peter Schiff
By nationalizing nearly 80% of AIG for $85 billion, the Fed is doing a lot more than simply flushing taxpayer money down the toilet. The greater wrong is allowing the agency that has the power to print money to take control of a private enterprise, especially without the approval of the company’s shareholders. The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America’s once vaunted free market economy. Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire.

The “line in the sand” that the Government seemed to draw by refusing to bail out Lehman Brothers was erased in just two days by the very next wave of financial panic.

While Fannie and Freddie were arguably quasi-government agencies that deserved special protection, no such status exists with AIG. Where does the Fed get the authority to use the money it prints to take over private companies? Congress never gave such authority and, even if it had, it would be unconstitutional, as Congress itself has no such authority to delegate. What about the shareholders? Why didn’t they get to vote on this acquisition? Whatever happened to private property rights?

Where does this stop? What other troubled companies will the Fed nationalize, and how much will it cost? Why stop at troubled companies? If the Fed can buy into a sick company, why not a healthy one? Now that we have allowed the Fed to take over any asset it wants, private property rights are meaningless. When oil prices get really high, why bother with a windfall profits tax when the Fed can simply nationalize Exxon-Mobil with a few cranks on its printing press. Who needs Bolsheviks when you have the Fed?

AIG is not a bank; it is not even an investment bank. The “lender of last resort” power was supposed to apply only to banks, to prevent runs. It was not meant to apply to any company that had been declared “too big to fail”.

I suppose the Fed is trying to get around some of the more obvious illegalities by having the new AIG shares issued on behalf of the Treasury. What happened to the concept of an independent Fed? Here you have the Fed seizing a private company and ceding control to the U.S. Treasury. Rather then acting independently, the Fed and the Government are merely partners in crime.

On the economic side, the Fed expects us to believe this is a smart investment. Does anyone really think that officials at the Fed and Treasury are suddenly private equity experts? These are the guys who missed both the tech and housing bubbles, and who assured us that subprime problems were contained. I would not trust them to run a lemonade stand, let alone one of the largest insurance companies in the world.

The idea that this bailout was necessary given that the alternative would be worse should by now be fully discredited. All of today’s financial problems are the direct consequence of Fed policy that was designed to weaken the recession that followed the bursting of the tech bubble and the shock of September 11th. Of course, the tech bubble itself resulted from the Fed’s actions to sooth the pain following the collapse of LTCM, the Russian debt default, the Asian crisis, and Y2K.

I suppose the precedent for all of these actions was established back in 1979 when the government guaranteed Chrysler’s debt. It sure would have been a lot better and a whole lot cheaper if we had simply let Chrysler fail. The road to financial hell, or in this case socialism, is certainly paved with “good” intentions. Today’s historic surge in the price of gold shows that at least a few investors are refusing to march in the parade.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”