Era of finance as profit center is over~ Wolf FT

"In recent research, Thomas Philippon of New York University’s Stern School of Business and Ariell Reshef of the University of Virginia conclude that the financial sector was a high-skill, high-wage industry between 1909 and 1933. It then went into relative decline until 1980, whereupon it again started to be a high-skill, high-wage sector.* They conclude that the prime cause was deregulation, which “unleashes creativity and innovation and increases demand for skilled workers”.

Deregulation also generates growth of credit, the raw stuff the financial sector creates and on which it feeds. Transmutation of credit into income is why the profitability of the financial system can be illusory. Equally, the expansion of the financial sector will reverse, at least within the US: credit growth and leverage masked low or even non-existent profitability of much activity, which will disappear, and part of the debt must also be liquidated. The golden age of Wall Street is over: the return of regulation is cause and consequence of this shift.

Yet Prof Johnson makes a stronger point than this. He argues that the refusal of powerful institutions to admit losses – aided and abetted by a government in thrall to the “money-changers” – may make it impossible to escape from the crisis. Moreover, since the US enjoys the privilege of being able to borrow in its own currency it is far easier for it than for mere emerging economies to paper over cracks, turning crisis into long-term economic malaise. So we have witnessed a series of improvisations or “deals” whose underlying aim is to rescue as much of the financial system as possible in as generous a way as policymakers think they can get away with.

I agree with the critique of the policies adopted so far. In the debate on the Financial Times’s economists’ forum on Treasury secretary Tim Geithner’s “public/private investment partnership”, the critics are right: if it works, it is because it is a non-transparent way of transferring taxpayer wealth to banks. But it is unlikely to fill the capital hole that the markets are, at present, ignoring, as Michael Pomerleano argues. Nor am I persuaded that the “stress tests” of bank capital under way will lead to action that fills the capital hole.

Yet do these weaknesses make the US into Russia? No. In many emerging economies corruption is egregious and overt. In the US, influence comes as much from a system of beliefs as from lobbying (although the latter was not absent). What was good for Wall Street was deemed good for the world. The result was a bipartisan programme of ill-designed deregulation for the US and, given its influence, the world.

Moreover, the belief that Wall Street needs to be preserved largely as it is now is mainly a consequence of fear. The view that large and complex financial institutions are too big to fail may be wrong. But it is easy to understand why intelligent policymakers shrink from testing it. At the same time, politicians fear a public backlash against large infusions of public capital. So, like Japan, the US is caught between the elite’s fear of bankruptcy and the public’s loathing of bail-outs. This is a more complex phenomenon than the “quiet coup” Prof Johnson describes.

Yet decisive restructuring is indeed necessary. This is not because returning the economy to the debt-fuelled growth of recent years is either feasible or desirable. But two things must be achieved: first, the core financial institutions must become credibly solvent; and, second, no profit-seeking private institution can remain too big to fail. That is not capitalism, but socialism. That is one of the points on which the right and the left agree. They are right. Bankruptcy – and so losses for unsecured creditors – must be a part of any durable solution. Without that change, the resolution of this crisis can only be the harbinger of the next."

The "Disaster Stage" of the "Great Unwind"

Thx to Jesse for this one

Thirty to forty years ago, the early fruits of financialization in this country - the first credit cards, retirement accounts , money market funds and ATM machines - struck most Americans as a convenience and boon. The savings and loan implosion and junk bonds of the 1980s switched on some yellow warning lights, and the tech bubble and market mania of the nineties flashed some red ones. But neither Wall Street nor Washington stopped or even slowed down.

In August, 2007, the housing-linked crisis of the credit markets predicted the arriving disaster-stage, the Crash of September-November 2008 confirmed the debacle, and now an angry, fearful citizenry awaits a further unfolding. There is probably no need to fear a second coming of nineteen-thirties Depression economics. This is not the same thing; the day-to-day pain shouldn't be as severe.

Indeed, for all that the 1930s evoke national trauma, that decade was in fact a waiting room for national glory and wellbeing. World War Two ushered in American global ascendancy, the "Happy Days" of the 1950s and an unprecedented middle-class prosperity.

Today's disaster stage of American financialization - the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the U.S. economy by a rabid financial sector -- won't be nearly so kind. It is already ushering in the reverse: a global realignment in which the United States loses the global economic leadership won in World War Two. The ignominy deserved by Wall Street after 1929-1933 is peanuts compared with the opprobrium the U.S. financial sector and its political and regulatory allies deserve this time.

My 2002 book, Wealth and Democracy, in its section on the "Financialization of America" noted that the "finance, insurance and real estate (FIRE) sector overtook manufacturing during the 1990s, moving ahead in the national income and GDP charts by 1995. By the first years of the next decade, it had taken a clear lead in actual profits. Back in 1960, parenthetically, manufacturing profits had been four times as big, and in 1980, twice as big." Hardly anyone was paying attention. By 2006, the FIRE sector, its components mixed together like linguine by the 1999 repeal of the old New Deal restraints against mergers of commercial banks, investment firms and insurance, had ballooned to 20.6% of U.S. GDP versus just 12% for manufacturing. The FIRE Sector, now calling itself the Financial Services Sector, lopsidedly dominated the private economy. A detailed chart appears on page 31 of Bad Money. Some New York publications and politicians try to insist that finance per se is only 8%, but the post-1999 commingling makes that absurd.

This represented a staggering transformation of the U.S. economy - doubly staggering now because of the crushing burden of its collapse. You would think that that opinion molders and the national media would have been probing its every aperture and orifice. Not at all.

Thus, it was pleasing to read MIT economics professor Simon Johnson's piece in the April Atlantic fingering financial "elites" who captured the government for the latterday financial debacle. This is broadly true, and judging from my e.mail, even some conservatives accept Johnson's analysis and indictment. After the furor over the AIG bonuses, the public and some politicians may be ready to start identifying and blaming culprits. This would be useful. Having an elite to blame is a often prerequisite of serious reform.

Nevertheless, the extremes of financialization, together with the havoc we now know it to have wrought, represent a much more complicated historical and economic genesis, one which U.S. leaders must be obliged to confront if not fully acknowledge. Elite avarice and culpability has multiple and longstanding dimensions. It has been fifteen years since Graef Crystal, a wellknown employment compensation expert, brought out his incendiary In Search of Excess: the Overcompensation of American Executives. The data was blistering. Over the last decade, New York Times reporter David Cay Johnston has published two books - Perfectly Legal and Free Lunch - describing how the U.S. tax code, in particular, has been turned into a feeding trough for the richest one percent of Americans (especially the richest one tenth of one percent).

The backstop to avarice provided by a wealth culture and market mania from the late 1980s through the Clinton years to the George W. Bush administration, prompted another set of indictments that still resonate: William Greider's Secrets of the Temple: How the Federal Reserve Runs The Country (1987), Robert Kuttner's Everything For Sale (1997), Thomas Frank's One Market Under God (2000) and John Gray's False Dawn (1998). More recently, Paul Krugman's books have been equalled or exceeded in timeliness by his New York Times columns blasting the perversity of the Obama-Geithner financial bail-out and the malfeasance of the financial sector. James K. Galbraith, in his 2008 book The Predator State, has elaborated the valid point that too many conservatives over last few decades betrayed their free market rhetoric by supporting a relentless use of state power and government financial bail-outs to advance upper-income and corporate causes. On the other hand, some conservative economists of the Austrian school make related indictments of liberal bail-out penchants.

This could be a powerful framework. All of these critiques have merit, and ideally they might converge as earlier indictments of elite and governmental abuse did during the Progressive and New Deal eras. But I have to return to whether the public will ever be given full information on the fatal magnitude of financialization, who was responsible, and how it failed and crashed in 2007-2009. So far, political and media discussion has been so minimal that the early 21st century American electorate has much less readily available information on what took place than did the electorates of those earlier reform eras.

Towards this end, my initial emphasis in the new material included in the 2009 edition of Bad Money is on what techniques, practices and leverage the financial sector used between the mid-1980s and 2007 to metastasize early-stage financialization into an economic and governmental coup and, ultimately, a national disaster. Perhaps not surprisingly, I found that the principal building blocks that the sector used to enlarge itself from 10-12% of Gross National Product around 1980 to a mind-boggling 20.6% of Gross Domestic Product in 2004 involved essentially the same combination of credit-mongering, massive sector borrowing, highly leveraged speculation, reckless, greedy pioneering of new experimental vehicles and securities (derivatives and securitization) and mega-trillion-dollar abuse of the mortgage and housing markets that became infamous as hallmarks of the 2007-2009 disaster. During Alan Greenspan's 1987-2006 tenure as Federal Reserve Chairman, financial bubble-blowing became a Washington art and total credit market debt in the U.S. quadrupled from $11 trillion to $46 trillion.

To try to put 20-30 pages into a nutshell, the financial sector hyped consumer demand - from teen-ager credit cards to mortgages for the unqualified - to make credit into one of the nation's biggest industries; nearly $15 trillion was borrowed over two decades to leverage de facto gambling at 20:1 and 30:1 ratios; banks, investment firms, mortgage lenders, insurers et al were all merged together to do almost anything they wanted; exotic securities and instruments that even investment chiefs couldn't understand were marketed by the trillions. To achieve fat financial-sector profits, the housing and mortgage markets might as well have been merged with Las Vegas.

The principal inventors, hustlers , borrowers and culprits were the nation's 15-20 largest and best known financial institutions - including the ones that keep making headlines by demanding more bail-out money from Washington and giving huge bonuses. These same institutions got much of the early bail-out money and as of December 2008 they accounted for over half of the bad assets written off. The reason these needed so much money is that they government had let them merge, speculate, expand and experiment on dimensions beyond all logic. That is why the complicit politicians and regulators have to talk about $100 billion here and $1 trillion there even while they pretend that it's all under control and that the run-amok financial sector remains sound.

This is a much grander-scale disaster than anything that happened in 1929-33. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland (back when New York was New Amsterdam). I will return to these little-mentioned precedents in another post this week.

But for the moment, let me underscore: the average American knows little of the dimensions of the financial sector aggrandizement and misbehavior involved. Until this is remedied, there probably will not be enough informed, focused indignation to achieve far-reaching reform in the teeth of financial sector money and influence. Equivocation will triumph. This will not displease politicians and regulators leery of offending their contributors and backers.

---

Kevin Phillips's 2008 book Bad Money: Reckless Finance. Failed Politics and the Global Crisis of American Capitalism has just been published in a new post-election edition by Viking Penguin


http://tpmcafe.talkingpointsmemo.com/2009/04/07/the_disaster_stage_of_us_financialization/

The real deal, more or less, is common sense

http://prudentinvestor.blogspot.com/2009/03/capitalism-socialism-and-democracy-and.html


SUNDAY, MARCH 15, 2009
Capitalism, Socialism and Democracy - and Common Sense
Monitoring financial and political news has become a very depressing task recently.
While the USA enjoyed a short fairy tale period between president Obama Barack's election and his inauguration, the staccato of catastrophic news has accelerated into a crescendo of crisis since January. Financial TV gushes with appearances of the global top brass, united in the goal to fend off the consequences of 22 years of highly expansive monetary policy, free market gospel and excessive leverage on public and private levels, but clueless how to achieve this.
Europe fares still worse. What looks like a nosedive in American economic activity evokes images of a freefall in the old world at close range.
Overindebted consumers, now also fearing the increasing possibility of losing their jobs and tightening the grip on wallets thinned by rising public service fees, overshadow the progress in the East.
China's exports hit a roadblock in January with no signs of an improvement and India has to sober up from a credit financed shopping spree, now that the demand for online personal valets is on a steep decline and endangers many a call centre.
Daily closures in the Western hospitality industry clearly mirror a new mindset of frugality among consumers.
Eastern Europe is the ticking time bomb in the backyard of the Eurozone. The region currently wakes up to the devastating effects of forex borrwoing to finance consumer goods. Now the local currencies languish close to their record lows.
Major forecasters offer no relief. The World Bank, the OECD and many other institutions expect the global economy to shrink for the first time in ages. Deutsche Bank recently warned that the German economy could shrink an unprecedented 5% this year. This may still be optimistic given the recent halving of German machinery orders.
"They" Don't Have a Clue
While first being overwhelmed by the fastest contraction in economic activity in recorded history, hanging on the lips of central bankers and politicians in order to get an idea about the future, I have rescinded from this time-wasting procedure for a simple reason. "They" don't have any clue how to handle the rapid disintegration of the world's financial fiat currency system.
Memorializing financial history the current crisis finds multiple precedents. All economic crises in the western hemisphere have rooted in excessive monetary expansion that is only possible under a fiat currency system.
One cannot blame politicians for their preference of a monetary system that allows to catch voters with perks and benefits that will have to be paid for by future generations. But how could I cast a vote for them when they ultimately hang on to economic theories that have never proven to work in the last 4 centuries??
It is a fact that the purchasing power of all unbacked fiat currencies has always been wiped out by inflation. Floating currencies don't float. They only sink at different speeds.
This leads to the ultimate crux in the enduring discussion how to mitigate and solve the crisis. This is not a problem of the acting persons but a problem of the domineering theories where the supremacy of fiat money does never get questioned in the first place.
The global big-wig elite comprised of central bankers, bankers and CEOs, finance ministers and other government members, clings on to a bizarre mix of empty free market phraseology that stands in deep contrast to recent nationalizations on both sides of the Atlantic, and Keynesian attempts to jumpstart the economy with new debts on top of those that have become unbearable already, leading to the current disastrous environment.
Plunging stock markets may be a good indicator that investors correctly mistrust public promises that those in charge have a plan other than to echo the fallacies of John Maynard Keynes, who preached anti-cyclical government intervention to revv up the economic engine. But they conveniently forget the other part of Keynes' model. Keynes also talked about government savings in the fat years in order to finance the deficit spending periods.
At the same time the government's share in the economy rests well above the 40% threshold, hardly a proof that capitalism has developed according to the slogans of promoters from all political camps.
Conservative and progressive political camps apply the old standard fare. Hypocritical calls from the right that demand to let markets work their way through this crisis of epochal proportions are nothing but empty words, given the string of nationalizations initiated by comrades Henry Paulson, Britain's Alistair Darling and Germany's Peer Steinbrueck, all with a strong conservative background.
Capitalism, Socialism Converge in Their Late Stages
Current events disclose a remarkable convergence of capitalism and socialism in their final stages. A privileged few cronies enjoy the perks of power and money while the other 95% have to come to terms with policies that are beneath contempt to the true interests of the average citizen/consumer.
It is not in my interest to prop up ailing banks with my future tax payments who steered themselves into unsustainable profit expectations by rejecting common sense for years.
Peer pressure adds to the systemic problem that no banker can forego profits made by all others. Going back to 2005 there were only a handful of bloggers, economists and market pundits who stood out by warning well ahead of August 2007 when irrational exuberance vanished overnight and the credit crunch set in.
Calming official voices have failed to inform the public correctly ever since.
ECB president Jean-Claude Trichet erred especially at the beginning of the crisis, spreading the wrong word that central banks are capable of ending the crisis. By now he concedes that the end may be far off.
Fed chairman Ben Bernanke did not perform better. Both his speeches and the FOMC's monetary policy of the past 18 months are undeniable proof that the Fed has been behind the curve since the onset of the crisis, fulfilling former Fed chairman Paul Volcker's predictions that US fiscal and monetary policy would be "too little, too late."
The short breath of relief in the aftermath of Obama Barack's electoral victory has meanwhile given way to a far more somber scenario. The president's daily live appearances may show his commitment to the American people, but they lack any guiding substance. Neither he nor treasury secretary Tim Geithner have offered more than vague promises to fix the system, unfortunately omitting anything that could be construed as an effective start to tackle the worst insolvency crisis in history. Do they have a plan, it has to be asked repeatedly until they come forward with an unambiguous policy that shows a willingness to save and distribute government money to those in need.
The situation in the final era of busting fiat currencies reminds me a bit of the system wars between a sleek Apple MacBook Pro and the failure-prone Windows software architecture. Although 90% of PCs are running Windows this does not make them better computers. Remember Microsoft CEO Steven Ballmer who wrote in an email last year that he would get a Mac were he not working for Microsoft!?
The same happens on capital markets. Although the history of fiat currencies is a stream of hyper inflation tales the gold standard does not even get discussed in top circles. This will be hard to overcome as the hopeless indebtedness of the first world can only be written off via hyper inflation or war.
Also do not forget that the world has alrady turned upside down. Now it is the former paupers financing the profligacy of the western money sultans who wrongly thought that creating more paper equals more wealth.
What Happened To Common Sense?
The failure to apply common sense in a world where external business consultants direct company fortunes with their one size fits all templates appears systematic. Over-specialization has elevated many consultants to their own level of incompetence.
Take the car industry for instance. German producers still bet heavily on HP monsters capable of 150 mph top speeds. That's maybe useful for 3 AM commutes between Frankfurt and Hamburg, but in the daily traffic jam choking all metropolitan areas worldwide I would rather prefer some sort of living room on 4 wheels.
The Wrong Dogma of Ever Expanding Credit
Monetary policy has the same shortcomings. Blind to any other model than the perma-failing fiat currency ideology central banks shy away from any thought other than the current - but probably outdated - dogma of ever expanding credit.
Continuous failings of the fiat money system in the past 3 centuries have been aggressively ignored by economists and those actually involved in the economic process. Apart from Hungarian Antal E. Fekete there are no scholars researching the virtues of a gold standard that held inflation close to zero for more than a century in the USA before the Federal Reserve was formed.
Central banks have certainly done an excellent job in demon(eti)zing mankind's oldest currencies: gold and silver.
I am always appalled that the majority of fund managers still doubt the virtues of the only asset that is not somebody else's obligation.
As the whole world is about to suffer dearly from a crisis that has its roots in the irresponsible easy money policy of central banks I begin to wonder why there are no calls for responsibility. Like 9/11, where not a single military was charged with the greatest blunder in American defense policy, all those responsible for the current economic mess have been sent home with a golden parachute after proving their incompetence in the field. This is morale hazard and socialism for the rich at its best.
Who Will Be Held to Account?
While stealing an apple in a grocery store can earn a hungry impoverished evictee a life sentence if it was the third apple he grabbed to fill his revolting stomach, Ponzi schemers like Bernie Madoff are treated with silk gloves. Bankrupting thousands of investors to the tune of $50 billion, Bernie was let to enjoy his luxury condo another 3 months. What an awkward reminder of the sad truth that you are a murderer when killing one while one advances to a statesman when having killed thousands. The same seems to apply for fund managers who bet their clients money on exotic derivatives. It can be safely assumed that Madoff is only the tip of the iceberg.
The breakdown of morale at the wealthiest levels came with the markets nosedive to its current lows: When the going gets tough, everybody runs for the cover of cash.
While the banking crisis in the Great Depression took ist victims, today's Wall Streeters can only be seen jumping out of windows with fat golden parachutes. So much about the self-esteem of the posterboys who had never tired to preach the virtues of performance optimization and risk-taking.
Those few changes made at the top executive level are only window dressing a yet unsolved problem: Out goes the guy who didn't see it coming, and in comes another guy who had not see the oncoming disintegration of American (or European) banking. Is this really the needed change? I highly doubt it.
Politicians Asleep at the Wheel
Our honorable representatives in national and supra-national parliaments are asleep at the wheel meanwhile. Their ears filled with SOS calls from the banking lobbies they are not shy to announce 14-digit bailout packages as if they had only to reach into the state's coffers.
This is not the case anymore. After 4 decades of Keynesian politics all Western countries find themselves at the top of international creditor lists, meaning they have only excelled in creating more public debts instead of obeying the basic rule of commerce: You cannot live on debts forever.
American and European politicians are in for a rude awakening any day soon. China has already publicly voiced its concerns about the solidity of US debt paper in light of an economy caving inward.
The enormous self-destructive dynamics of the current economic hurricane may bring rapid change. People were trampled to death when Wal-Mart offered cheap holiday packages. What will happen if there is a food shortage?
I do not fear that there will be not enough food. But the fact that foods goes through 20 transport stations, on average, until it lands on our table, leave enough risk factors for possible supply disruptions that a recession inevitably creates.
Politicians, now still willing to throw gazillions of fresh fiat money, will very soon have to come to terms with a broadly changed capital market. Close to a billion mostly indebted Western consumers are not exactly the kind of clientele the emerging nations in the eastern hemisphere would like to have. Confronted themselves by faltering economies due to plunging exports they are more likely to use their national savings for domestic stimuli instead of feeding a Western elite that was entirely wrong in its predictions about economic developments although deteriorating indicators had written it on the wall since at least 2005.
Western States Find Themselves in the Role of Beggars
10% unemployment in the USA and not much less in the EU, at least according to official figures, will not make raising capital any easier.
While Mr. Obama certainly radiates a strong commitment to change America's fate, it can nevertheless be denied that he is the biggest beggar in the world who has to come up with some $5 billion in new funds every day, 365 days a year, in order to keep the US in its ill-fated tracks where the military's role seems only to grow.
The situation is not much different in Europe. Starting with my home country Austria that turns out to become the biggest victim of the financial recolonization of the former Austro-Hungarian empire and will probably need IMF help at some later stage, faltering property bubbles in other European parts will only serve as a precursor to a wave of corporate and personal bankruptcies.
Investors have already shed quite some fat last year. According to venture capital group Blackstone, in 2008 $50 trillion or half of the world's savings, were eradicated by crashing stock markets. Or do you know anybody who still made a good bundle last year?
This will limit lending for governments too, when even the ultra-rich have downgraded to merely ultra-rich within a year.
A Struggle of 2 Ideologies That Have Both Failed
This leads me back to my headline. As we have now witnessed the complete and total failure of both Communism and Capitalims within 2 decades the question has to be allowed why politicians still stare at the same worn out pages of their PR cook books, offering only more of the same nonsense that has brought the global economy down to its knees in the first place.
The dispute whether state management or private management is the better option is so long meaningless as we are not able to improve the safeguards that effectively block opportunities to loot the system. As we see these days it often was not a problem that authorities did not know about possible felonies among fund managers and bankers, but that the whole regulation procedures were not enacted against the respective cronies profiting illegally from it. IMHO effective regulation can only be enacted with a focus on true transparency. Why not the Swedish model, where all public documents are indeed public and accessible online?
When taking a closer look at the EU, I notice alarming trends towards more secrecy of this supra-national body that intervenes in the daily lives of some 500 million Europeans. I cannot shed the impression that current political activity serves more the ruling powers who keep telling us they are proteting democracy for us while a slew of police state like legislative shows the opposite. Do they want to save democracy from their citizens who may think very differently than the elected representatives.
As long as there is cronyism and tightly knit elites both political models mainly serve their promoters but not the voters. It is time to think about a 3rd way that combines the motivating factors of capitalism with a social security net that is an expression of the development of our civilization. After all, we should be able to talk instead of wielding ever more sophisticated sticks and stones in countless wars around the world.
Labels: central banks, credit, crisis, ecb, europe, Fed, fiat money, usa

Debt Trap

The economy lost 651,000 jobs in three months. Auto sales have collapsed, and retail sales have “fallen off a cliff.” And there is at this point little indication that Credit Availability will normalize anytime soon for household, corporate or municipal borrowers. While the extraordinary efforts by the Fed and global central bankers have loosened the clogged up inter-bank lending market, risk markets remain hopelessly paralyzed. The unfolding collapse of the leveraged speculating community continues to overhanging the marketplace. Securitization markets are still essentially closed for business.

We can continue to analyze developments in the context of two overarching themes: First, there is the implosion of contemporary “Wall Street finance.” Second, the bursting of the Credit Bubble has initiated what will be an arduous and protracted economic adjustment. Each week provides additional confirmation of the interplay between the breakdown of Wall Street risk intermediation and the bursting of the U.S. Bubble Economy. This process has gained overwhelming momentum.

I know some analysts are anticipating an eventual return to “normalcy.” The thought is that it is only a matter of time before “shock and awe” policymaking and Trillions of newly created liquidity entice investors and speculators back into risk assets. This view is too optimistic, and history offers an especially poor guide in this respect. By and large, the unprecedented growth in Federal Reserve and global central bank balance sheets is (scarcely) accommodating de-leveraging. Between the hedge funds, global “proprietary trading” and other leveraged speculators, it is not unreasonable to contemplate an overhang of (prospective forced and deliberate sales) of upwards of $10 Trillion.

It’s popular to label Federal Reserve operations as a massive effort to “print money.” Yet it is important to recognize that, at least to this point, the expansion of the Fed assets (“Fed Credit”) is counterbalanced by the collapsing balance sheets of leveraged financial operators. The inflationary effects – the increased purchasing power created by the expansion of Credit – occurred back when the original loan was made, securitized, and leveraged by, say, a hedge fund. Today’s ballooning central bank holdings (and TARP spending) may very well stem financial system implosion. This is, however, a far cry from engendering a meaningful increase in either the market’s appetite for risk assets or the expansion of new system Credit in the real economy.

I don’t want to imply that unprecedented monetary policy measures aren’t having an impact. Overnight lending rates (Libor) were quoted at 0.33% today, down from a spike to almost 7.00% in late September. And at 2.29%, three-month Libor has dropped from early October’s 4.82%. Other measures of systemic risk and liquidity premiums (including the 2- and 10-year dollar swap spreads) have dropped dramatically over the past month.

The problem is that the “unclogging” of inter-bank and “money” markets has had little effect on the Pricing and Availability of Credit for the vast majority of borrowers operating throughout the real economy. After ending September at about 650, junk bond spreads have surged to 950 bps. Investment-grade bond spreads are also higher today than at the end of the third quarter. Benchmark MBS spreads have changed little, while Jumbo mortgage borrowing rates remain elevated. Risk premiums for municipal borrowings have been reduced only somewhat from extreme levels. Unsound borrowers everywhere have little hope of borrowing anywhere.

There are complaints out of Washington that, despite oodles of bailout funding, the banks are refusing to lend. Well, total bank Credit has expanded $575bn over the past 10 weeks, or 32% annualized. Importantly, the asset-backed securities (ABS), collateralized debt obligation (CDO), and securitization markets generally remain closed for new business.

The heart of the matter is not so much that banks are refusing to extend Credit but that the entire mechanism of Wall Street risk intermediation has collapsed. After ballooning into multi-Trillion dollar avenues for Credit expansion, intermediation through the ABS and CDO markets is basically over. The convertible bond market has also badly malfunctioned, along with the “private-label” MBS marketplace. Wall Street’s “auction-rate securities” has ceased as a mechanism for Credit expansion, along with myriad other avenues for securitization. And, importantly, derivatives markets, having evolved into an essential element of contemporary risk intermediation and Credit expansion, have suffered a devastating crisis of confidence. Scores of leveraged strategies are no longer viable. Indeed, Monetary Processes essential for funding broad cross-sections of the economy have completely broken down.

Even if banks had a desire to make the same types of risky loans Wall Street financed throughout the boom (which they clearly don’t), it is difficult to envisage how bank Credit could today adequately compensate for the interrelated collapses in Wall Street risk intermediation and leveraged speculation. And unlike previous crises, no amount of rate cuts, liquidity injections, or policymaker jawboning will revive leveraged speculation. That historic Bubble and mania has burst, and it is now only a matter of waiting to dissect the devastation wrought by the unfolding run on the industry. A typical Federal Reserve-induced return to risk-taking in the Credit markets will be stymied for some time to come by an unrivaled inventory of debt instruments overhanging the markets.

The critical issue then becomes how the system can generate sufficient new Credit to keep our asset markets and Bubble economy from completely imploding. Well, we can assume at this point that the Fed will continue to accommodate de-leveraging through the ballooning of its balance sheet. At the same time, the federal government will soon be running Trillion dollar annual deficits. GSE balance sheets will likely commence a period of aggressive expansion. And, importantly, the banking system will have no alternative than to expand rapidly. At this point, timid banks equate to a Bubble Economy spiraling into depression.

If the markets cooperate, perhaps over the coming months the now breakneck economic contraction will somewhat stabilize. I fear, however, that current dynamics are setting the stage for yet another stage of this vicious crisis. Some analysts believe – and certainly it is the Fed’s intention – for ultra-low interest rates to assist in the recapitalization of the banking system. The early 1990’s provides a nice example: aggressive rate cuts and a steep yield curve provided a backdrop for troubled banks to quietly convalesce by raising cheap deposits and sitting on a safe portfolio of longer-term government debt securities. Why can’t a similar operation bail the banks out of their current predicament?

One should note the stark contrasts between today’s environment and that from the early nineties. First of all, 10-year government yields averaged about 7.8% in the three years 1990 through ’92. Bond markets back then were commencing a historic bull run and, strangely enough, the price of government debt ran higher in the face of huge deficits. There are reasons these days to fear an emergent bond bear. Second, from the Fed’s “flow of funds” report, we know that “Total Net Borrowing and Lending in Credit Markets” averaged $770 billion annually during the ’90-’92 period. “Total Net Borrowing…” last year approached a staggering $4.40 TN. The important point is that today’s Bubble Economy Dynamics were not in play in the early nineties. Sustaining the system required a fraction of today’s Credit creation, thus there was little prevailing pressure on the banks back then to lend amid their “convalescing.”

Indeed, banking system impairment and resulting Fed policymaking engendered the emergence of Wall Street finance in the early nineties – from the Wall Street firms, the GSEs, securitizations, derivatives and leveraged speculation. All were more than happy to take up the slack in bank Credit creation – relating both the overall and banking systems.

With the Bursting of the Bubble in Wall Street Finance, the banking system will today have no alternative than to lend and expand Credit aggressively. The banks provide the only hope for reflation, and there will be no room for nineties-style risk-free spread government carry trades. Instead, it will now be the banking system’s role to take up enormous systemic Credit slack and rapidly expand its portfolio of risk assets. Especially at this precarious stage of the Credit cycle, the banking system’s predicament ensures the ongoing need for hugely expensive government funded industry recapitalizations.

In today’s interest rate and market environment, massive government deficits don’t worry the bond market. I view the marketplace as quite complacent when it comes to the scope of unfolding Treasury and agency debt issuance. Actually, the Treasury, the GSEs and the banking system have in concert succumbed to Debt Trap Dynamics. With Wall Street risk intermediation now out of the equation, the system is down to four principal sources of “money” creation – the Fed, Treasury, GSEs and the Banks. It’s that old “inflate or die” dilemma that’s already smothered Wall Street finance.

The good news is these sources of Credit creation do today retain the capacity to somewhat stabilize financial and economic systems. The bad news is that going forward all four must expand aggressively – in collaboration - to forestall acute systemic crisis. All four must expand aggressively to bolster a highly maladjusted economic system, in the process sustaining confidence in the value of their liabilities. At some point, one would expect a crisis of confidence with respect to the quality of these Credit instruments. And, you know, the way things have unfolded, Murphy’s Law would only seem to dictate a destabilizing jump in market yields.

nolan

Jim Willie ~ we are all screwed for sure...

Pardon the jumpy style, not burdened by depth, preferring breadth instead. The events of the last few days continue to be remarkable, alarming, chaotic, surreal, and desperate. The globe is slowly realizing that the United States is careening toward a probable financial death experience. Nothing has worked to date, and nothing will work in the present, not bailouts, not liquidations, not nationalizations, not papered over fraud, and surely rate cuts. The stark reality contains a blur of a massive locomotive derailed, having run over the mountain ledge, heading downward in a freefall, subjected to the force of gravity, and ripping through a gigantic erected paper net designed to halt its crash. CLOWNS IN CHARGE DO NOT REALIZE THE SYSTEM IS FLAWED AND BROKEN, AS EFFORTS TO REDOUBLE THE DEVICES ARE ALL DRAWN FROM THE SAME DEFECTIVE TOOLBAG. MAJOR BANK FAILURES, BANKRUPTCIES OF MAJOR FINANCIAL FIRMS (LIKE INSURANCE), AND INDIVIDUAL MARKET DEFAULTS COME VERY SOON. Incredible events are occurring behind the scenes, the details of which would shock most people, even those who deal with the underworld. Recall Wall Street propaganda this summer? That the US will be first to emerge from the carnage? Such lunatic promotional nonsense should be recalled when it becomes clear that the Untied States cannot emerge from its broken condition. The game is over, and only the enlightened realize it! What lies ahead is the tragedy of distintegration!!! That includes the nation and its very governmental structure.

GLOBAL RATE CUT: The USFed turned down a chance to cut a couple weeks ago, thinking it would look weak. Now they look desperate. Surely, to defend the USDollar, they wanted coordinated rate cuts, but gold will respond the most. The Dow futures were down 280 points before the coordinated interest rate cut was announced on Wednesday. The USFed, Bank of Canada, Bank of England, Euro Central Bank, Swiss National Bank, and Sveriges Riksbank (Sweden) all announced an official interest rate cut. Yesterday, the Reserve Bank of Australia cut by a full 100 basis points. Hong Kong is considering its own cut also. When the New York City fraudulent rigged bazaar known as the stock market opened, the Dow was suddenly down 220 points, then rallied to plus 180 points, and seemed like it could not do anything but head down, closing down 189 points. What a loud repudiation of a fleeting solution! The rate cut might have some impact on mortgage loans, almost nothing more. The S&P500 index lies below its 200-week moving average, the ultra-longterm series, which was penetrated on the downside last June, the first time in 26 years. Talk about a bear signal!!! On any day in the past twenty years, a 50 basis point rate cut would enable a complete turnaround in the stock market for months on end. What a shock. Banks are insolvent, distrust each other, as the economies are sliding into a quagmire! A great quote came from sage Rick Santelli from CNBC, who said “The Fed rate cut is like shooting arrows at an enemy that is 20 miles away.” He can speak freely only half the time.

GOLD DEFAULT DEAD AHEAD: The COMEX and London Metal Exchange are living on borrowed time in their corrupt gold game. They sell paper gold, and precious little actual gold metal. See a refreshing straightforward interview aired on CNBC of all places. It is by Jurg Kiener, CEO of Swiss Asia Capital. He points out the dual market for gold, one paper and one metal. He expects soon the US ‘gambling price’ gold market in COMEX and LME to default. By that he means a return suddenly to physical price determination. He is quoted to say THE GOLD PRICE WOULD DOUBLE VERY QUICKLY, LIKE IN DAYS AFTER THE EXPECTED METAL DEFAULT. One should expect the interview to be lifted and removed from their website within days, after they realize the explosive nature of his words.

THE FAVORABLE DISCONNECT: In August, my analysis pointed out that a disconnect was necessary for the gold price to rise independently of the USDollar. Gold is no longer just an anti-US$ trade, but rather a trade on global monetary inflation. With today’s virtual global rate cut, one can herald the transition as complete. Notice how since mid-September, the gold price has risen with the USDollar DX index, shown in the big green ellipse. Liquidations and monetizations will go hand in hand, once properly understood. Gold has begun to respond to anticipated extreme new US$ money supply growth and supply needs.



USDOLLAR RALLY AS SIGNAL OF DEATH: Few seem to comprehend that the USDollar is rallying recently as a result of the imminent death of itself and the USTreasury Bond. A vast liquidation is underway of speculative trades, and of US bank assets. For years many analysts properly understood that the USEconomy is debt dependent. Now credit is drying up, and being denied even to good credit risk customers. The USEconomy is falling off the cliff, and evidence mounts. See car sales in September, down almost 30% by Toyota, down 34% by Ford. Layoffs by the tens of thousands are next, right down the vertically integrated car industry layers. As the USEconomy and US bank system continues in death spiral, the USDollar rallies, during unspeakable ruin to US fundamentals. Recall that the tide went out along the shores in Indonesia and Thailand right before the great tsunami hit almost three years ago. Ditto here! The banking crisis and extreme distress that remains stubbornly unfixable in the Untied States urgently motivates foreigners to quickly assemble, implement, and announce a replacement world currency basket. Watch for a euro currency split soon, where Nordic version will compete viciously against the dead USDollar.

HUGE RISK OF LOSING WORLD RESERVE CURRENCY: As preface, the world banking structure rests atop a world currency foundation denominated in USDollars, with USTreasury Bonds and USAgency Mortgage Bonds serving the primary role as financial instruments. These toxic building blocks are all really bad lego blocks. Foreigners must respond very soon, to replace the US$ as global reserve currency, or else risk a similar implosion to their banking systems. Many USAgency Bonds have been replaced by USTBonds, not much of an upgrade. If the USTreasurys soon suffer in the heart attack seizures underway, foreign economies will be at risk of serious deterioration. So foreigners are working toward a solution. One might be announced soon, with a new world reserve basket announced, based upon the Euro, Russian ruble, Japanese yen, and newly crowned Gulf dinar. The common theme is these are all currencies from nations boasting export surplus. They are taking action, but behind the scenes, like in Berlin. The consequence to the USEconomy is dire. The beleaguered nation would be forced to attract foreign capital, and bid up foreign currencies in order to purchase crude oil. The word inflation would soon be replaced in the press networks with the word “hyper-inflation” as the Untied States enters the Third World overnight. It seems that the vast majority will be caught blindsided. Not the Hat Trick Letter!

THREATENED FRANCHISE OF CENTRAL BANKS: The other big powerful underlying failure in progress is of the central bank concept, and its many franchises. They essentially install central planning, Soviet Politburo style, complete with failure. The central bankers around the globe must be panicking over their common failure. They have one thing in common, overarching above trade surpluses or deficits. That common trait is they all manage debt from a fiat currency, and extend credit to inflate. They acted in coordinated style today for the first time in their history. Call it a panic! Central bankers are all scared witless.

THE BIG LIE ON THE WALL STREET BAILOUT: The historic $700 billion Congressional bailout bill had some key added provisions over the failed House bill. The new funds can buy back bonds owned by foreign investors, like those defrauded in Europe and Asia. The American public was told that the US banking system would have blockage unclogged. BS! It was a congame again, after foreign investors demanded restitution immediately, or else! The US banks will remain clogged. When almost nothing is fixed concerning US internal bank distrust due to toxin floating around, people will eventually realize the US public just paid for Wall Street fraud of foreign financial firms. It might be even worse. Foreign firms can possibly package any kind of rubbish, toxin, or acid into a bond for US swap. No end to the fraud. Oh, lest one forget, the $700 billion is only 15% to 20% of what might ultimately be needed. The overall tally will be much larger, for total bailouts, nationalizations, FDIC refills, tax stimulus, and ongoing programs to rework mortgages. The people have been ignored so far.

EFFECT OF ABSENT SHORT-TERM CREDIT: Few seem yet to comprehend the depth of the risk to the USEconomy if short-term credit continues its vanishing act. Most realize when the US banks are insolvent and lend less, the USEconomy is assured a recession. They do not comprehend that when short-term credit is denied, the USEconomy disintegrates. Imagine a man whose bones are turned into mush, trying to walk. That is the economy with insolvent banks. The man becomes a body without a heart and blood circulation when short-term credit is absent. The commercial side requires it for supply of food, gasoline, housewares, hardware, building materials, and more. Imagine riots for toilet paper, let alone gasoline and food! The financial side requires it for supply of ATM cash, credit card usage, and even payroll income. A heart attack is not a proper analogy. More like a science fiction movie where the victim is vaporized, or is burned suddenly into a heap of plasma.

FUTILITY OF SOLUTIONS: Few pundits, analysts, Wall Street observers, and banking officials seem to comprehend that solutions are almost all flawed. Where is the motive to generate jobs for legitimate income, like infrastructure development or reversal of Asian job exodus??? Where is the connection between Asian investment since 2001, job creation there, and a delayed reaction of the complete destruction of US banks and more? Are they all stupid? Maybe not, but surely compromised, indoctrinated, and committed to a system whose foundation is built on shifting sands. Call it a corporate executive sellout of America. The solutions fail because they are all debt based, like with new USTreasury Bonds to finance bailouts, like with USTBonds in swaps to banks for cratered mortgage bonds, like with USTBonds to finance household stimulus packages, and with monetization to print money to finance whatever the idiots leave on the table on USTBond sales. The problems from debt collapse due to debt-related ills inside banks cannot be solved by more debt instruments, plain and simple. The solutions must, if they are legitimate, involve new income sources, like manufacturing returned to the US soil, like a national grand initiative for infrastructure betterment, like better agriculture management of ethanol solutions, like broader export successfully landing abroad from US firms. The dumbstruck fools running US bank policy are forced to resort to their own failed toolbag. How effective will lower interest rate be, if only another attraction to a debt device? Not much! And the failure to revive and resuscitate will shock the system very soon.

HEART ATTACK SYMPTOMS & CAUSES: To be sure, the LIBOR rates are not responding to supposed solutions, the TED (Treasury EuroDollar) spread remains wide, and the short-term USTreasury Bill yield hovers near zero. These are the symptoms of heart attack. Behind the bank lending constrictions, clogs, and refusals is lost faith, lost trust in borrowers, lost credible value in borrower collateral. The day will come soon when banks will be paid a yield to hold money outside the system, as in financial firms and corporate entities will actually pay the biggest banks and the USFed itself to hold money. See negative yield, which occurred for a brief spell in Japan a few years ago. The ultimate cause of the heart attack symptoms is the split in usury cost, never discussed. The root cause is that JPMorgan continues to push the cost of money down, using its strongarm futures contract devices, complete with more than a small amount of counterfeit additives bought in dark basement chambers. Such a low rate results in revolt among bankers, who refuse to lend at such an absurd rate in today’s risky environment. So the LIBOR spread widens, even the overnight rate. See the TED Spread here. Look like a heart attack on an EKG chart? Yep!



ACCELERATION OF EVENTS: Each week contains its disaster. Each week has included its own deadline timetable to reach agreement on resolution of this or that. Each week is replete with new signals of contagion or breakdown. Recall USFed Chairman Bernanke, the smartest idiot on the planet, who claimed a year ago that no contagion would result from the spark of the subprime mortgage lit fuse. Expect such braindead calls from a university professor, burdened by the limitations of his credentials. Absolute contagion occurred instead, in total defiance to his orthodox heresy. Yesterday the big news saw the United Kingdom nationalize almost their entire banking system with $50 billion, including the venerable Lloyds TSB. Regard these moves as firm evidence of the death of the AngloSphere. Today’s big news is that Iceland collapsed, rescued in part so far by $4.5 billion from Russia, not Europe. As time passes, the financial structures weaken further, certain to break in central connective tissue, as well as in extended sections. My analogy of the giant locomotive train hurtling down over the mountainside ledge fits here. Apply gravity as the acceleration force, and inertia to administer pain. A bright friend, not the least bit in the dark on current events, claimed that stupid American officials believe the runaway locomotive can actually fly.

ENTIRE US BANK SYSTEM JUST FAILED: It is almost totally now nationalized after failure, seemingly without recognition. If the USFed has swapped a mountain of impaired asset backed bonds from crippled US banks, and has taken over AIG obligations, while the Fannie Mae & Freddie Mac acidic office park has been placed under the USGovt aegis, and while the USGovt has bailed out the Wall Street gigantic stream of fraudulent bond sales, then the great majority of the US financial system has been nationalized after failure. This week, after acquiescing to acceptance of various types of bank assets including preferred stock, the USFed announced that it will accept all asset backed commercial paper (ABCP) in swaps. What remains untouched of the US financial system? Credit unions and corporate subsidiaries? A good slice of corporate finance arms can be managed with the ABCP inclusion. Not much remains. Oh, by the way, the AIG risk assumption will turn into a Giant Black Hole. They borrowed $85 billion three weeks ago. Now they have won approval by the clueless US Congress for $38 billion more. My forecast is for AIG to ultimately cost $1 trillion in loans and other bailout largesse, as credit default swaps will hit like a mushroom cloud. Much criticism has come already for this elite club of vipers, as the company spent $440k on a California conference at a beachside resort less than a week after it was rescued. Also, the Fannie & Freddie credit derivatives might easily cost close to another $1 trillion, including mortgage portfolio losses upcoming. To say the USGovt has made a bad investment with the US financial system is the under-statement of the millennium. To say it will turn a profit on anything it touches is cause for a deep belly laugh and thigh slap. Just a sales pitch by conmen!

FLIMSY VIEWPOINTS ON SITUATION: At the Toronto Gold Show, a few conversations involved me with smart people who seemed to have a shallow comprehension of the current situation. One from a well connected organization told me that the entire US bank system will be taken over, with all underwater firms simply given a blank check to render them solvent, in a simple but costly procedure. My eyes blinked, my head twisted, my brain squirmed. The concepts not fully factored in are that the failing machinery is often hidden from view, the assets going rapidly negative in value are not easily measured, the system contains so many functions that are far beyond control and monitor, so many unregulated and syndicate operations are intentionally kept from public view, that the system is guaranteed to crash without any conceivable opportunity to react to its many failing components in any responsible timely manner. When my questions were directed to credit derivatives, he just shrugged his shoulders, and repeated his shallow argument on solution. If an informed fellow from a fine organization cannot grasp the complex nature of any solution, then rest assured that it would go far beyond out of control. Not only are the size and scope misjudged, but so are the hidden depth and exotic complexity by architects often on cocaine in Wall Street houses. Their leverage devices make an industrial chemical plant look simple.

THIRD WORLD, DEAD AHEAD: Few in the Untied States seem to realize that what is happening is the magnificent unstoppable event whereby an inevitable shift of tectonic financial plates is underway. The result will be the Untied States entire system, financial and commercial, will suddenly find itself tragically lodged in the Third World. The chief traits will be major shortages, high prices, absent capital for credit, diverted supply of commodities, poor investment opportunities, massive flight of capital, corrupt law enforcement, widespread violence, despair among the public, horrific loss of wealth, and a severe brain drain as intellectual talent abandons the nation. Oh yes, carpet baggers will arrive soon, and perhaps even an historically unprecedented wave of colonists from Asia, Russia, and Arab nations. Those who own the failed credit during default make ALL THE RULES.

LOST INTEGRITY OF US FINANCIAL MARKETS: The revived short rule restriction has contributed to yet another severe black eye to the reputation of the Untied States. Its financial markets are already considered the playground for Wall Street syndicates, with criminal behavior protected by the system. Foreigners mock our markets for their grotesque unfairness. Insider trading, 3pm rescues, program trading, naked shorts, controlled news sources, conflicts of interest between news networks and advertisers, justification of fraudulent accounting under pretense of national security, these all contribute to the cesspool image. The list of financial firms protected by short rule restrictions included far too many stocks. What really really angered me, as in really really angered me, was the exemption given to Goldman Suchs. They are permitted to short financial firm stocks. At least the short rule restriction ends on Wednesday tonight. When one examines the Mussolini Fascist Business Model, be sure to include the criminal aspect of rules changes to the corrupt model that assures destruction of the system. Now these corrupt clowns want to eliminate ‘Mark To Market’ accounting for bank assets. Calling them worth original parity value will not improve anything for the lending risk, and surely will not lift the systemic faith. The Japanese could pull off the ‘Vampire Banks’ trick where they walked around insolvent, since their financial system, if not culture, contained ten times as much integrity per capita versus the US. The Untied States relies heavily upon faith for the system. Faith is almost all gone!

FLIGHT TO QUALITY RUSE: JPMorgan is the primary usher orchestrator to the phony movement, called a ‘Flight to Safety’ or a ‘Flight to Quality’ as seen with the movement to USTreasury Bond. Absolutely nothing denotes quality of the USTBond complex. The description of safety seems to ignore, deny, and defy the rapid deterioration of all US financial fundamentals. They seem as safe as a spiked chamber slowly closing in the “Lara Croft: Tomb Raider” movie. The image of out of the frying pan and into the fire seems to fit. A USTreasury Bond default appears a total lock guarantee in the near future. A blight on the US financials grows worse with each passing month, as the total cost for bailouts, nationalizations, stimulus packages, and federal deficits mounts. Foreigners own 52% of all USTBond debt. They will eventually say NO MORE! A powerful vortex is building, with ultra-strong low pressure zones colliding with ultra-strong high pressure zones to create a hurricane. It is bigger and more powerful than anything ever having formed on planet earth. The flight to quality or to safety is pointed directly into a black hole. Look for staggering events to come with USTBonds on the supply side, which cannot support the upcoming funding needs.

THE LEHMAN FAILURE WAS A SIGNIFICANT CON JOB: It was planned, calculated, designed, and executed like a criminal act. The Wall Street criminals needed to test the system on credit default swap risk, needed a sink hole from which to hand $138 billion to JPMorgan on a reloaded. It was carried out pre-dawn on a weekend before a hapless bankruptcy judge who found no objection. He probably did not look hard, maybe even bribed. The criminals were able to observe the consequences from senior bond holders who were illegally denied due process in the bankruptcy procedure. The event was a failure called a merger, complete with a huge handout given to JPMorgan so it can continue its illegal enterprise. The real big deception is that JPMorgan was probably within a hair from its own bankruptcy, and therefore required a sacrificial lamb to feed from elaborate entrails. The sad fact is that the Wall Street consolidators need another Lehman-type event soon, since more reloads will be required. The French finance minister publicly decried the Lehman bankruptcy, saying letting it go was a major error. He might not be aware of the Wall Street crime syndicate need to cover up evidence, or the need to create a sink hole for a concealed JPMorgan reload, or the need to illicitly pack printed money into the massive credit default swap crater. Recall that numerous boxes of documents were hurriedly removed from Lehman offices that crucial fateful weekend. No watchful eye by police, no cordon yellow tape to protect a crime scene, nothing. Another Fascist Business Model privilege that does not make America strong.

CITIGROUP ACTUALLY FILED A LAWSUIT TO ACQUIRE WACHOVIA: Sorry, but Wells Fargo is in line to win this ugly pig prize. Citigroup must have lusted deeply for the opportunity to pull off the same trick that Bank of America did, to seize the Merrill Lynch deposits and toss the impaired bond assets into the JPMorgan ‘Garbage Can’ powderkeg. JPMorgan had the great advantage to seize the Washington Mutual deposits and toss the impaired bond assets into their own ‘Garbage Can’ powderkeg. What a sight to behold! The American financial system manages garbage that it keeps in secret mountains of some of the most disgusting ruinous rotting sewage ever known to mankind. The gall of Citigroup to even attempt a bold coup when it is bankrupt, insolvent, and running on the vile fumes of phony accounting. They acquired a bank with HQ in San Salvador (branches in Panama) in recent months that really angered me, since opening an account there was on my list. My guess is that Citigroup has assimilated deposits from Banco Cuzcatlan, much like the Borg of Star Trek fame.

REALITY CHECK ON THE DESTRUCTION IN PROGRESS: The Dow Jones Industrial index should get hit time after time after time until some good economic or banking news emerges. The stupidity evident out there is to expect the Dow stock index to lead on asserting stability, when it must come from housing prices and the solvent condition of leading banks. The ultimate key to the US bank destruction has been a powerful decline in housing prices, not the Dow. It will follow news of things being ultimately repaired. The US banks are destroyed, and that should kill the entire USEconomy in the foreseeable future. Few seem willing to accept this stark ugly fact. Housing prices continue down, and that assures continued lethal pressure on bank assets. That keeps the destructive process relentless and very powerful, like deep knife cuts to a patient lying on a hospital gurney, while being shuttled from room to room for futile treatment. Much more destruction lies ahead, like with at least two more Wall Street firms, many regional banks, and a few insurance companies. Few seem willing to accept this stark ugly fact. Instead they look like idiotic children gazing upon the wrong traffic lights, as truck after truck runs them over in the middle of the road. Little do they realize, PEOPLE ARE ROADKILL.

REALITY CHECK, INVESTMENT ALTERNATIVE: If you had purchased $1000 of Delta Airlines stock one year ago, you would have $49 today. If you had purchased $1000 of AIG stock one year ago, you would have $33 today. If you had purchased $1000 of Lehman Brothers stock one year ago, you will have $0 today. However, if you had purchased $1000 worth of beer one year ago, drank all the beer, then turned in the aluminum cans for recycling, you would have received $214 today at redemptions. Based on the above, the best current investment plan is to drink heavily & recycle. It is called the 401-KEG Plan.

US PRESIDENTIAL ELECTION: We as Americans must vote for the next chief engineer for the locomotive that is running 100 miles per hour (=160 km/hour) into the bottomless chasm, in a vertical descent, without any semblance of controls. Every train needs an engineer, complete with hat, striped shirt, and a whistle at the ready! Be sure that almost no agenda will be the privilege of any new president, that is if the corrupt powers permit the election without disturbance, delay, or deletion. This president has done such a bangup job that he might deserve to be emperor. Expect some of his henchmen to escape into exile,

THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.