Banking System Collapse Gathers More Steam

August 20, 2008

Elaine Meinel Supkis

A year ago, it was obvious that the US could not sustain its present position as the consumer of all global resources and manufacturing. The dislocations we are suffering today are part of this collapse in our ability to be the top global consumers. Fannie Mae and Freddie Mac are about to collapse totally. Japan's government is about to collapse due to their cruel methods of killing inflation by destroying working wages and allowing global inflation to rage out of control at home. Obama and McCain talk about wealth, taxes and Santa Claus. More hedge fund hell hounds in trouble with the SEC. Got to return all that loot they swindled people out of, you see. And major banks are about to go belly up. Not so easy to fix, Mr. Bernanke.

Dangerous World Trade/Banking System Reset To Continue

Investors have been abusing liquidity like mad. They have not been using it to build factories and to improve the infrastructure. They used it to build inappropriate housing much of which needed lots of gasoline for commuting to work. The #1 industry in the US was to build housing and the #2 industry was to finance housing and business take overs. Namely, our dynamic part of our nation's economy is to churn money and generate increasing levels of debt.

The debt load has a limit. Obviously, we reached this with the housing business since the proportion of people taking non-traditional loans went from less than 3% to more than 45% in less than 7 years. Home buyers no longer had the income or the status to qualify for traditional loans which were set in place after the Great Depression. It is pretty amazing to me to watch everyone and I do mean, EVERYONE celebrating this obvious capitulation of the Federal Reserve to the present system.

This is a friendly reminder that I figured out, the essential, most important aspect of the evolving global banking break down was to deal with the business of the US importing far, far too much and spending far, far too much on global imperial domination. Until this is fixed, the international banking and trading systems will continue to destroy itself. No one can revert to the pre-destructive system or they will be destroyed by a flood of free funny money that is still trying to pour out of the US and Japanese banking systems. The central bankers of both Japan and the US are trying to solve this imbalanced system by dropping interest rates! Yet both are the ultimate cause of global inflation.

The global banking system is desperate to be recapitalized. But we can't do this at 0.5% or 2% rates! Since the two entities trying this scheme are the world's top two economies, this dooms all other efforts to correct this mess by raising interest rates to attract savings. Instead, as Europe and China discovered, this attracts fake money churned out by the US and Japan and it ends up causing huge inflation surges and a collapse of one's ability to trade. So we are now seeing a global push to drop interest rates and destroy currency relative values! This is a spiral into nothingness. As my cartoon from last year show.

Fannie, Freddie Bailouts May Hinge on Debt Rollover

(Bloomberg) -- Fannie Mae and Freddie Mac's success in repaying $223 billion of bonds due by the end of the quarter may determine whether they can avoid a federal bailout.

Fannie, based in Washington, has about $120 billion of debt maturing through Sept. 30, while McLean, Virginia-based Freddie has $103 billion, according to figures provided by the government-chartered companies and data compiled by Bloomberg.

Rising borrowing costs and evidence that demand for their debt was waning last month led Treasury Secretary Henry Paulson to seek the authority to pump unlimited amounts of capital in Fannie and Freddie in an emergency. Their interest costs are again increasing amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies.

Directors and controllers are supposed to direct and control. We have set up a system of barriers, hedges and systems designed to prevent wild lending leading to a Great Depression. All of these were overturned or burned to the ground so the system could run riot. Fannie Mae and Freddie Mac were emergency systems set up temporarily to fund lower class housing during the Great Depression. After WWII, the government expanded these systems to house the GIs who were having sex like hot rabbits with their wives, creating the baby boom generation.

Since the US was now definitely the world's most powerful manufacturing giant, this was OK since the working classes now had a thing we call 'jobs'. And this made export stuff as well as things we consumed at home. I vividly remember when Japan began to outstrip us. It started very, very small. The US was boasting about our space program, our nuclear bomb program, our big car business. Japan came out with the very first transistor radios. Which came in bright colors, too! I remember because a rich kid in my school bought one right away so he could listen to the Pirates/Yankee World Series game in 1960 which was pretty close to when these radios became available to the general American public.

I was 10 years old and agitating to join the Little League. My older brother was a pitcher and I played catcher for him when he practiced. So I hung out with the boys at the far corner of the school playground, listening to the Games which were during the day, not evening like we see today. Sony was created thanks to the US manufacturers clinging to big systems and refusing to manufacture transistor radios at all. This is 'innovation' for you!

The US has gone down this road because of the need to make big, expensive things due to labor costs here. The Japanese dealt with all this was easy: they cheerfully crush their own workers no matter what. The US, on the other hand, had to compete with communism and so it had to allow unions and improving worker's living conditions. This, in turn, created the Golden Age of Unionism. But it also doomed our manufacturing systems here. As we see with GM and Chrysler, our system is sort of like the old Soviet Union's manufacturing: big, obese, poorly engineered manufacturing that is mostly sold internally.

Back to today: the US needs desperately to recapitalize our entire systems. As we saw in yesterday's stupid CNN story about 'thrifty' rich kids deep in debt, thinking they can retire at 40, the economics writers and our representatives as well as the top 2% of this nation seriously think that wealth is debt. I warn people, when they use 'leverage' to get rich, when a downturn happens, all the people doing this get crushed to death by economic forces! So it is with our nation: our debts are NOT assets. They are destructive like cancer which also can grow at an amazing speed.

Fed's Lacker Clashes With Paulson on Fannie, Freddie

(Bloomberg) -- Richmond Federal Reserve Bank President Jeffrey Lacker called for ``demonstrably'' privatizing Fannie Mae and Freddie Mac, becoming the first Fed official to publicly clash with the Bush administration's strategy of keeping them as federally backed firms.

``I would prefer to see them credibly and demonstrably privatized,'' Lacker said today in an interview with Bloomberg Television. He agreed with former Fed Chairman Alan Greenspan's view that the two largest U.S. mortgage finance firms ought to be nationalized, then split up and sold off.

Um, they were 'privatized' roughly at the same time our government launched the catastrophic Floating Currency regime. All our present woes go right back to that time, 1974. All charts and graphs detailing the last 35 years of whatever history we choose to track all show the same dynamics: things started to grow, swell, shoot upwards beginning with this momentous experiment of the global empire deciding to use ONLY fake funny money! It doesn't matter what the graph is tracking: it shoots upwards or downwards with tremendous and gathering strength. Scientists know that any system whether it be gerbils or galaxies, when systems are set to shoot upwards or downwards at faster and faster speeds, this always ends in collapse or explosions. The Big Bang is just such an example. Bam!

Childishly, many of our systems operators mistake all this as 'good news.' If something is shooting upwards including their precious profits and bonuses, this is 'good', not a sign of a system heading towards collapse. Indeed, as these bonuses and benefits shot upwards for the top 2% of the global systems, the wages of workers in the older democracies and empires began to collapse. This collapse is equally fast as the rise in incomes of the top 2%. The spread between the top 2% and the bottom 60% of the G7 and allied nations is very striking and extremely dangerous as global inflation takes off.

Splitting apart the behemoths of Fannie Mae and Freddie Mac fixes ABSOLUTELY NOTHING. The problem is at the other end: the US homeowner has stupidly gone off a cliff. As we saw in yesterday's story about Mr. and Ms. Thrifty, they sold their condo for a huge profit due to the California real estate market taking off. Then, they used this money as a down payment for buying several properties in other states. These are now 'underwater' and unsellable except at a very bad haircut financial loss and the rents are too small to cover the overhead so they are losing over $7.000 a year holding these dying investments. Housing was bid up far, far too high. Between the illegal aliens flooding the housing market due to the insane idea that no one should have to prove finances, citizenship or anything to buy a house as well as multiple house buyers seeking easy profits flipping properties, we overshot any reasonable valuation for housing.

The lenders who sucked up the mortgages handed out like candy are now dying rapidly because none of the people who bid up houses from 2004-2006 are capable of paying for all this! The US has a huge overabundance of housing. And a shortage of JOBS. Jobs that pay incomes to pay for the mortgages on existing houses is even scarcer. No matter what size the new 'entities' created from the dying Fannie Mae/Freddie Mac systems, they will all go bankrupt, big or small. The hazard here is great: our trade rivals have bought huge hunks of our housing debts. Trillions of dollars of this debt. They are increasingly angry about this matter.

If the US tries to weasel out of this and wipe out trade profits garnered by our trade rivals, this will cause them to retaliate. If they cease trading with us, this will be a mixed blessing. The US has to regain its manufacturing base. And change the way we live. We must all be 'thrifty'. And not like that goofy couple in the earlier story.

Fannie, Freddie subordinated debt CDS hit record

(Reuters) - The cost to insure the subordinated debt of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) hit new highs on Monday, a day after Barron's reported an increasing likelihood the U.S. Treasury may essentially take over the mortgage finance companies.

Merrill Lynch analyst Kenneth Bruce also said in a note to clients that Freddie Mac may have to raise $5.5 billion in capital as early as the third quarter, instead of the second quarter of 2009.

The only place they can raise $5.5 billion is to go to that magic window run by Bernanke. This is super-funny money. It is created very much out of thin air. And very inflationary. If this was a one-time thing, OK. But we can see from my stories exactly a year ago, beginning in August, 2007, the G7 central bankers began to gush huge sums of funny money. Indeed, it is now well over a trillion dollars. Virtually no strings attached. And at ridiculously low interest rates well below the rate of global inflation. As I expected last year, this inflation took off exactly when this flood of free money began to pour outwards. It migrated rapidly into commodity markets.

Today, oil is beginning to climb again. The exhausted joy in the markets that all will be 'normal' and the status quo would return, is fast fading. As the banking system continues to collapse, fears that the rescue operations only made things worse, begins to dawn. This reminds me that the Three Gorgons of ancient lore lived on an island where the sun rose and set.

Five-Year Swap Spread Tops 100 on Risk Aversion: Chart of Day

(Bloomberg) -- Interest-rate derivatives are showing that investors are preparing for another round of turmoil in credit markets amid renewed concern that the U.S. will have to bail out Fannie Mae and Freddie Mac.

``Risk aversion is continuing in the market,'' said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., a unit of France's largest bank. ``These firms really may very well be closer to insolvency than we thought.''

The CHART OF THE DAY shows the five-year interest rate swap spread rising above 100 basis points in the past year ahead of the unwinding of structured investment vehicles, the collapse of Bear Stearns Cos., the seizure of IndyMac Bancorp Inc. and now mounting concern that the two-largest U.S. mortgage finance companies may need to be propped up by the federal government. The spread is the premium charged over Treasury yields to exchange floating for fixed-rate payments.

The Derivatives Beast is stirring yet again. Every time it shivers and shakes, markets roil. And markets roil because US consumers can't afford to consume or take on more debt. The flow of money is very sensitive to changes in direction. Small alterations in direction or speed have greater and greater consequences. So we have a system that is now changing rapidly. And we can't stop this force. The US cannot take on infinite debt. The super-cheap lending of the Fed is being challenged by the Derivatives Beast. And the Beast is much, much bigger than the Fed. It is global and was allowed to grow at a tremendous rate ever since it was born in desperation in 1980 at the height of the high interest rate cycle in the G7 nations.

Dollar intervention

Here's the chart of the balance of Euro in the U.S. ESF (Exchange Stabilization Fund) account, along with the USDX and Euro values themselves on the right hand scale.

The European Central bankers tried desperately to drop the euro. It will fail. They want contradictory things: a strong social base and exports to the US which is falling apart due to its social systems collapsing. This is obvious market manipulation of the dollar. All our trade partners are doing this!

Credit crunch may take out large US bank warns former IMF chief

The deepening toll from the global financial crisis could trigger the failure of a large US bank within months, a respected former chief economist of the International Monetary Fund claimed today, fuelling another battering for banking shares.

Professor Kenneth Rogoff, a leading academic economist, said there was yet worse news to come from the worldwide credit crunch and financial turmoil, particularly in the United States, and that a high-profile casualty among American banks was highly likely.

Kind of late. The IMF sat idle while the US ran up debts. The IMF knew back in 1980, there was a problem with the US trade balance. But the US was rich back then and deliberately ignored all this while chiding other nations about their own trade problems.

PAAM Hedge Fund, Founder Ordered to Pay $300 Million

(Bloomberg) -- Philadelphia Alternative Asset Management Co. and the hedge fund's founder, Paul Eustace, were ordered to pay almost $300 million by a federal court after U.S. commodities regulators accused him of defrauding clients.

Eustace consented to an order that he pay $279 million in restitution, plus a $12 million fine, the Commodity Futures Trading Commission said today in a statement. PAAM, which collapsed in 2005, must pay an $8.8 million fine and may be required to pay $276 million in restitution if Eustace doesn't.

And all the scam artists should be arrested. Certainly, they must return the wealth they defrauded from savers and investors. There should be more fear in the hedge fund world, not less.

Now we go to the recent visit of McCain and Obama to that mega-church. Modern American Christians mostly worship money. They follow the Whore of Babylon slavishly. They want Santa Claus, not Jesus. This is very clear. McCain put on his Santa Claus suit and pranced around, promising everyone 'get rich quick' schemes. He is, by the way, part of the 0.1% of the nation when it comes to wealth. The uneven tax codes coupled with easy money has made him and his wife very, very wealthy.

Obama vs. McCain on Fiscal Responsibility

WARREN: Ok, on taxes, define “rich.” Everybody talks about taxing the rich, but not the poor, the middle class. At what point - give me a number, give me a specific number - where do you move from middle class to rich?

Is it $100,000, is it $50,000, is it $200,000? How does anybody know if we don’t know what the standards are?

MCCAIN: Some of the richest people I’ve ever known in my life are the most unhappy. I think that rich should be defined by a home, a good job, an education and the ability to hand to our children a more prosperous and safer world than the one that we inherited.

I don’t want to take any money from the rich — I want everybody to get rich.
*snip*
We should not and cannot raise taxes in tough economic times.

So, it doesn’t matter really what my definition of “rich” is because I don’t want to raise anybody’s taxes. I really don’t. In fact, I want to give working Americans a better shot at having a better life, and we all know the challenges, my friends, if I could be serious.

America is obviously going bankrupt. We are now overspending in the government to the tune of nearly a trillion dollars this year and will be doing the same, next year. Yet the 'no new taxes' game roars onwards. McCain's popularity grows as he promises no taxes. The rich are grossly undertaxed. But the lower classes, hammered by inflation, desperately want this fixed and the rich candidate is cheerfully letting them get what he wants: no obligations to support our government military spending. And he plans to increase military spending, greatly.

He was very well received by his right wing audience. They willfully refuse to understand how they and their ilk have created this massive mess. This desire to follow the Santa Claus anti-christ is extremely powerful. Like the Christians who prayed for cheaper gas and then, when prices began to fall slightly before an election, thought God did this, not the oil overlords trying to keep the GOP in power.

OBAMA: Yes, well - depending. I don’t know what housing practices are going. I would argue that if you’re making more than $250,000, then you’re in the top three percent, four percent of this country. You’re doing well. Now, these things are all relative. And I’m not suggesting that everybody is making over $250,000 is living on easy street. But the question that I think we have to ask ourselves is, if we believe in good schools, if we believe in good roads, if we want to make sure that kids can go to college, if we don’t want to leave a mountain of debt for the next generation. Then we’ve got to pay for these things, they don’t come for free, and it is irresponsible [to act as if they come for free].

I believe it is irresponsible intergenerationally for us to invest or for us to spend $10 billion a month on a war and not have a way of paying for it. That, I think, is unacceptable. So nobody likes to pay taxes. I haven’t sold 25 million books but I’ve been selling some books lately, and so I write a pretty big check to Uncle Sam. Nobody likes it. What I can say is under the approach I’m taking, if you make $150,000 or less, you will see a tax cut. If you’re making $250,000 a year or more, you’re going to see a modest increase. What I’m trying to do is create a sense of balance, and fairness in our tax code. One thing I think we can all agree on, is that it should be simpler so that you don’t have all these loopholes and big stacks of stuff that you’ve got to comb through, which wastes a huge amount of money and allows special interests to take advantage of things that ordinary people cannot take advantage of.

Even this modest increase in taxes is hammering Obama in the polls. He has to promise us candy canes and toys, not the harsh reality of real taxing. So long as the US imagines we can spend like fiends and never pay taxes, the more likely we will end up in history's dumpster as a defunct empire.

Stimulus to come at a cost

The outline of an economic stimulus package being drawn up centers on insulating the domestic economy from stagnation and soaring gasoline prices.

But with a possible snap Lower House election on the horizon, the package--which will be finalized by the end of the month--will likely include electoral sweeteners in the form of "measures to relieve public anxiety" in daily life.

To create financial backing for the package, the government and the ruling coalition of the Liberal Democratic Party and New Komeito plan to compile a hefty supplementary budget.

During a news conference Monday, Kaoru Yosano, state minister in charge of economic and fiscal policy, indicated the government was fully committed to the budget, saying, "We cannot cancel what we have decided because we lack financial resources."

Fearful for their seats in a coming election, lawmakers within the ruling bloc are increasingly demanding dole-out measures to appeal to voters. Among the demands are income tax cuts and a bulky supplementary budget to support them, even though such moves run counter to the government's financial reconstruction efforts.

The Japanese are in the same fix: the government needs to make the workers happy and the industrialists don't want to pay higher wages so let's cut taxes and increase government spending! HAHAHA. The Japanese government is very deep in debt. But the industrialists are rolling in dough. Tax them! But nope. Savings in Japan has collapsed due to raging inflation. Public fury over this is rising. So hand out the Santa Toys. Don't fix the underlying problem which is over reliance on trade with the US.

Merrill, Wachovia in Danger of Failing: Strategist

Merrill Lynch, Wachovia and other financial companies are at risk of failure as the cost of raising capital soars at a time when the banks need to pay settlements over auction rate securities, David Kotok, chairman & chief investment officer from Cumberland Advisors, told CNBC Monday.
*snip*
The cash companies need to shore up bad investments, "is up to about $50 billion and will probably top $100 billion before it's over," he added.

The banking collapse continues. The death watch widens. Citigroup is dying, too. Place bets, who will go belly up by Xmas.

And now for Olympic news: here are some charts of the top medal winners in the past and in this Olympics. Note the relative position, over time, with China vis a vis the US:

1996 Atlanta Olympics:

2000 Sydney Olympics:

2004 Athens Olympics:

Beijing Olympics today:

China is wiping us out in the gold medal count this Olympics and tying us overall. We have more bronzes. But they are not the top super-power in sports! This is significant. It shows relative public global power. We are losing our #1 spot even there.

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Comments

[Arctec]

I have a list of banks that may fail and go bankrupt.

You can view it at my blog.

http://bankruptbanks.blogspot.com/

Thank You.