Last night’s Frontline documentary Inside The Meltdown was a dud. It was mostly a series of headlines we have already read as well as some very scarey, after the fact, rationalizations for actions taken by government/political and business leaders.
Nothing in last night’s presentation was a surprise to us. Indeed, what we saw last night reinforced our opposition to the dissolute practices we now witness daily. We have been a voice crying out in the wilderness since April 2007 warning of calamities to come. Many listened to us, but many more were bamboozled. One person who possibly sympathizes with us is Scott B. MacDonald.
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Regular Big Pink readers know we are resolute in our opposition to the piecemeal, uncoordinated flim-flammery which masquerades as Obama economic plans. We insist that without a coordinated and comprehensive economic plan, and a grasp of history, the “stimulus” and its corollaries are doomed to not only failure but likely to make things much worse. Larry Summers on temporary, targeted and timely:
First, to be effective, fiscal stimulus must be timely. To be worth undertaking, it must be […] based on changes in taxes and benefits that can be implemented almost immediately.
Second, fiscal stimulus only works if it is spent so it must be targeted. Targeting should favour those with low incomes and those whose incomes have recently fallen for whom spending is most urgent.
Third, fiscal stimulus, to be maximally effective, must be clearly and credibly temporary – with no significant adverse impact on the deficit for more than a year or so after implementation. Otherwise it risks being counterproductive by raising the spectre of enlarged future deficits pushing up longer-term interest rates and undermining confidence and longer-term growth prospects.
In short, the “stimulus” money spent will not accomplish what it is supposed to do and instead will lead to backbreaking deficits and debt and the horrors thereof. The horrors might be worse than any imagined, especially by spend-happy Dimocrats not cognizant of the differences between the economy of FDR’s time and the economy in this debt ridden age.
This is a debt ridden age. In late October 2007 Scott B. MacDonald, a financial analyst and advisor wrote about the recent past and of things to come. From 2007 – Globalization and the End of the Guns and Butter Economy
Over the past 30 years, the United States has sought and to some extent achieved a guns and butter economy; that is the pursuit of both political-military objectives and an affluent lifestyle. [snip]
But in July, the US financial system signaled that the era of cheap money and lax standards was over. Two Bear Stearns hedge funds collapsed and panic hit credit markets, pounding the stock and bond values of any company associated with mortgage lending and housing. By August the rout filtered into the derivatives market (especially those structured financial products that contained exposure to US subprime debt), negatively impacting European and Asian bank and insurance investment portfolios.
The contagion eventually rippled into London’s inter-bank market, forcing central banks to inject considerable amounts of liquidity to keep the system running. Even then, nervousness about the standing of banks, especially those dependent on short-term commercial paper for mortgage lending, forced Britain’s Northern Rock into a government rescue. This was the downside of globalization.
MacDonald wrote the above in 2007, well before the calamitous financial blows hit one year later. Frontline did not mention the political three ring circus taking place at the time of the “meltdown” nor the lessons history teaches about “guns and butter” economies.
Nouriel Roubini saw the future financial crisis back in late 2006. However MacDonald, along with others, saw what was coming and provided a larger canvass of the economic challenges ahead. McDonald first documented what the big financial players were doing at the time:
The housing sector is hitting depths associated with the 1930s. The Federal Reserve’s September 18 cuts in the discount window and in Fed Funds gave markets a temporary relief, a situation helped along by private sector actions to consolidate the financial sector. This is reflected in Bank of America’s purchase of Countrywide Financial shares and Citigroup’s stepping up with credit lines for GMAC. But there remains a long distance to the shore of economic safety.
A shadow is being cast by a deficit of unresolved problems in an economy overloaded with debt, a retreating federal responsibility for national infrastructure, and large (and seemingly unending) overseas burdens. In the short term, the problem that looms is that the housing meltdown is finally chipping away at the consumer, who in the butter part of the US economy accounts for about 70% of gross domestic product.
MacDonald pitches the problems: Housing problems, home equity problems, savings problems, large inventory problems, adjustable rate mortgage problems, Why save when you are penalized (taxed) on savings amid an unrelenting society-wide pitch to consume?
And then the other big problem:
On the longer-term side of the equation, the economic landscape is chilling, considering the massive structural problems. The guns part of the economy is a concern – the war in Iraq and other missions (Afghanistan and Africa) cost somewhere between US$3-5 billion a day.
In August, the Congressional Budget Office (CBO) estimated as of June 2007 up to $500 billion has been spent on combat operations in Iraq. The CBO also noted that if the United States were to maintain 75,000 troops in Iraq over the next five years, the nation would have to pay an additional $900 billion. Moreover, there are further costs attached to training police and ground forces in Iraq and Afghanistan as well as long-term health costs associated with wounded personnel.
There are other structural problems – a long-term imbalance between government expenditures and revenues (related to ongoing pressure for tax cuts). There is a massive problem with national infrastructure – it is aging rapidly and needs to be upgraded with a price tag of $1.6 trillion. That includes roads, bridges, ports and other public utilities.
After indulging in a bit of Social Security bashing MacDonald makes a great understatement, American politics have reached a very dysfunctional stage…. That was 2007. By 2008 American politics, controlled by Big Media, became even more dysfunctional.
MacDonald follows that on-target understatement with another direct hit understatement:
The plunging value of the US dollar and the huge sell-off in US securities by foreigners in August ($163 billion) should convey the message that not all is well and that unless there is an effort to start living more within one’s means, the rest of the world is going to stop financing the North American credit glutton.
The lesson is: The days of guns and butter for the US economy are over; what is going to replace it is a much more volatile world, with substantial questions over the US dollar as the major international currency and the ability of the US consumer to absorb the world’s exports.
Someone tell Obama.
Butter, meet guns:
The Obama administration is expected to announce on Tuesday that it will send one additional Army brigade and an unknown number of Marines to Afghanistan this spring and summer. Officials spoke on condition of anonymity ahead of the official announcement.
About 8,000 Marines are expected to go in first, followed by about 9,000 Army troops.
Guns, meet Butter:
The price tag for bailing out General Motors and Chrysler jumped by another $14 billion Tuesday, to $39 billion, with the two automakers saying they would need the additional aid from the federal government to remain solvent. [snip]
G.M., for example, said it would cut 47,000 more of its 244,000 workers worldwide; close five more plants in North America, leaving it with 33; and cut its lineup of brands in half, to just four: Chevrolet, Cadillac, GMC and Buick.
Guns and Butter, meet Barack Obama.
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Obama is on the flim-flam road again today.
Today it’s Phoenix. Phoenix, Arizona – not the sacred mythical firebird Phoenix which burns and then rises from the ashes -although that is a long-term description of the American economy which will burn before rising. And burn it will as “Obama – The Incendiary” imitates Nero and continues to light matches.
There are reports today, [HERE and especially HERE] sure to conflict with what Obama actually says and what Obama eventually does or does not do. In either case the reports will be accurate in that more money will be spent.
Already the pesky analysts ask questions:
The number of them doomed to foreclosure is growing so fast that Credit Suisse had to revise its projections twice in 2008. Its analysts now predict that some 8.1 million homes will meet that fate by 2012—an astounding one in six of all households with mortgages. [snip]
What most loan mods have done so far is dig homeowners even deeper into debt. Alan White of Valparaiso Law School, who reviewed data reflecting several million recent loan mods on high-risk mortgages, estimates that they’ve been adding $1 billion more every month to the already high total of what the nation’s borrowers owe. [snip]
Instead, the Obama homeowner bailout is expected to use government funds to supplement homeowners’ monthly payments—in the short term, a lifeline not only for homeowners, but for financial institutions, pension funds, and other stakeholders facing insolvency because their mortgage-related holdings have plummeted in value.
Then what? That’s where the picture gets gloomier. The tricks loan mods have been using to keep borrowers out of foreclosure are variations on the acrobatics lenders used during the bubble to shove customers into unpayable mortgages. A loan mod might forestall payments for a few months, then add the amount that didn’t get paid to the final years of the mortgage. Or it could reduce interest rates by a few points temporarily—but sooner or later, that interest rate must rise back up and the borrower must pay off the remaining balance as if he or she had been paying the full interest rate all along. If that sounds like an Option ARM to you, you’re catching on—many of these loans are in a state of “negative amortization,” in which the total amount owed grows instead of shrinking over time. Sooner or later—sooner, if one hopes to be able to sell the house—the total comes due. The bailout will undoubtedly lower that shocker of a final bill, but the government’s funds can only stretch so far.
Shorter: another scam gussied up.
We’ll have more on this latest Obama scheme once the actual details are published, if they ever are. But this does not look good:
The volume of anticipated foreclosures would be reduced only by half.
And realistically the number of borrowers likely to qualify for the new aid will be far lower. Millions of speculators lied on their mortgage paperwork in order to get the cheaper and looser mortgages available to homeowners, and it’s doubtful most will want to hang on to their property even if the feds are willing to help them. Among actual homeowners, spiking unemployment—some of the worst of it in the same bubble areas, like inland California, where homebuyers borrowed most excessively—will make it impossible for them to afford even the most creatively modified mortgage.
Where is Antoin “Tony” Rezko when you need him? If only bitter Americans had a Rezko to smooth the way.
Instead of liberating borrowers from the burdens of the real estate bubble, most loan mods assure them a future indentured to lenders.
Bitter Americans, meet indenturehood.
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In Part II we’ll discuss Rahm Emanuel saying the “F” word, nationalization, underwater houses, the end of the world as we know it, maybe Roland Burris?, Dean/Brazile/Pelosi/Kennedy/Kerry and the moral hazard and systemic failure of the Democratic Party, and much more.