midtowng's blog

America's Addiction

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“A moderate addiction to money may not always be hurtful; but when taken in excess it is nearly always bad for the health.”
- Clarence Day

America needs an intervention.
Like any addict, America can't see the dependency problem that is killing it. President Bush tells us that we have an addiction to oil, and he's right. But that isn't the addiction that is killing us.
The monkey that we need to get off our backs is the dependency on other people's money. If we don't kick this habit it will ruin us for sure.

"Money doesn't mind if we say it's evil, it goes from strength to strength. It's a fiction, an addiction, and a tacit conspiracy."
- Martin Amis

Who will get bailed out next?

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Take a load off, Fanny
And you put the load right on me
- "The Weight" by The Band

Now that Fannie Mae and Freddie Mac have been bailed out by the taxpayer at the cost of hundreds of billions of dollars that we simply don't have, we can now start the next round of the most popular game on Wall Street today -- which group of thieves will get bailed out next?

The Great Taxpayer Bailout is a wonderful game. For instance, Richard F. Syron, the departing chief executive of Freddie Mac who ran that company into the ground, will be getting a severance package of $14.1 million taxpayer dollars. Syron has taken home about $17 million since 2004.
Daniel H. Mudd, the departing CEO of Fannie Mae will be collecting $9.3 million taxpayer dollars on his way out, after destroying a 70 year old institution. Mudd collected about $12 million in pay since 2004.

It must be nice to be in a rich Republican family

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On Friday we saw some pretty awful economic news. Unemployment spiked to over 6%, and the word is out that the taxpayers will be bailing out the massive mortgage giants of Fannie Mae and Freddie Mac.

With news like that it would be pretty easy to miss a much smaller item with huge political implications for the presidential race.
The news I speak of is that regulators have seized Silver State Bank.

"When the casinos treat you poorly, let Silver State treat you like a valued customer."
- the Silver State Bank motto (I kid you not)

The economy is GREAT!...if you don't count inflation

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Let's say one month you spend $100 on groceries. The next month you spend $120 for the exact same groceries. According to the government we all became richer because you are spending more for the exact same stuff.

Durable goods orders beat expectations with a 1.3% month-on-month increase in July. But the apparent strength is due to higher prices, not stronger activity. In fact, deflating orders by the producer price index for durable manufactured goods shows a 9.4% year-on-year drop in real orders, the worst since early 2002.

Am I picking out one little report to try and make a big point? Nope. Allow me to dig through pretty much every single economic report the government releases.

Fannie Mae and Freddie Mac: The Game Is Over

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I don't think that the general public realizes how the impending collapse of Fannie and Freddie is a game-changer. Bear Stearns, Enron, IndyMac, those are all small potatoes in comparison to the massive size of the GSE's.
The inevitable failure of these institutions is so epic that when the epitaph of the American Empire is composed it will be Fannie and Freddie that are written large.

However, some people are shouting warnings now.

"If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic," Yu said in e-mailed answers to questions yesterday. "If it is not the end of the world, it is the end of the current international financial system."

Obama isn't going to save you

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You are going to have to do it yourself.

The one thing I've consistently seen on the progressive web sites whenever someone points out an economic problem is an attitude of, "Just wait until Obama gets in. Then he'll fix this."

This is delusional thinking! It's as bad as the mindless, head nodding of the Republicans when Bush told them that people hated America "because of our freedom."
For instance, there is talk of a "New New Deal". Obama is promising universal health care.

Where exactly is this money going to come from?
First of all, we need to get a grip on what we are facing.

An Economic Time-Bomb

Selling our independence one dollar at a time

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"The rich rules over the poor, And the borrower becomes the lender's slave."
- Proverbs 22:7 New American Standard Bible

On the night of July 12, Fannie Mae Chief Executive Officer Daniel Mudd was having a quiet night with his wife and a glass of wine when his phone rang. The person calling was Treasury Secretary Henry Paulson and he was very worried.
Fannie Mae, the biggest mortgage finance company in the history of the world, was in trouble. It's stock prices had dropped 45% since the start of the year. It's borrowing costs were rising as creditors became worried about the chances of Fannie Mae defaulting on its debt. "We're trying to solve a crisis of confidence," Paulson told Mudd after he explained the taxpayer bailout designed by the Bush Administration. "Would this do it?"

The third season of recession

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The headline GDP numbers this week said the economy grew at a 1.9% rate in the second quarter. Like most government numbers, things aren't nearly so rosy once you get past the headlines.
The first thing you have to understand is what the GDP Deflator is.

the GDP deflator (implicit price deflator for GDP) is a measure of the change in prices of all new, domestically produced, final goods and services in an economy.
[...]
In practice, the difference between the deflator and a price index like the CPI is often relatively small.

When Wall Street Alchemy Failed

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Our nation's politicians like to lecture us about free markets whenever we lose our jobs. So maybe the news from yesterday surprised you a little.

The Financial Accounting Standards Board, under pressure from lawmakers, will reconsider its timeline for a controversial rule change that may force banks to bring trillions of dollars in off-balance sheet assets onto their books at its Wednesday meeting.

The rule changes would have put about $5 Trillion of off-balance sheet assets, mostly consisting of mortgage-backed securities, onto the books of the nation's financial institutions. It now appears that the start date for these new accounting rules won't go into effect until after November 15.

After years of efforts by regulators to force financial institutions to open their books to investors, why the sudden change of heart?

The dollar and the Prisoner's dilemma

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In 1971 America had a currency crisis. Other nations had stopped accepting our paper dollars as payment for our debts and were demanding gold instead. The problem was that America didn't have enough gold to cover the massive debts being run up because of the war in Vietnam.

What did we do? We simply defaulted on our debt by repudiating the promise to back our currency with gold. The situation was epitomized by Nixon's Treasury Secretary John Connally, when he responded to the complaints of 29 trading and banking allies:
“It may be our currency, but it's your problem.”

37 years of massive budget and trade deficits later it is still our currency and it is still someone else's problem. However, every game must someday end. Eventually the costs of playing the game become so great that the benefits of not playing become attractive.
The world is now approaching a point where it is being forced to make a choice.

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