Money Matters

America's Teetering Banking System: "Where did all our deposits go?”

January 31, 2008

by Mike Whitney

Somebody goofed. When Fed chairman Ben Bernanke cut interest rates to 3% yesterday, the price of a new mortgage went up. How does that help the flagging housing industry?

About an hour after Bernanke made the announcement that the Fed Funds rate would be cut by 50 basis points the yield on the 30-year Treasury nudged up a tenth of a percent to 4.42%. The same thing happened to the 10 year Treasury which surged from a low of 3.28% to 3.73% in less than a week. That means that mortgages—which are priced off long-term government bonds---will be going up, too.

Is that what Bernanke had in mind; to stick another dagger into the already-moribund real estate market?

The Fed sets short-term interest rates (The Fed Funds rate) but long-term rates are market-driven. So, when investors see slow growth and inflationary pressures building up; long-term rates start to rise. That's bad news for the housing market.

Now, here's the shocker: Bernanke KNEW that the price of a mortgage would increase if he slashed rates, but went ahead anyway.

How did he know?

Because 8 days ago, when he cut rates by 75 basis points, the ten-year didn't budge from its perch at 3.64%. It just shrugged it off the cuts as meaningless. But a couple days later, when Congress passed Bush's $150 "Stimulus Giveaway", the ten year spiked with a vengeance---up 20 basis points on the day. In other words, the bond market doesn't like inflation-generating government handouts.

So, why did Bernanke cut rates when he knew it would just add to the housing woes?

Some critics say that he just wanted to throw a lifeline to his fat-cat investor buddies on Wall Street by providing more liquidity for the markets. But that's not it, at all. The fact is, Bernanke had no choice. He's facing a challenge so huge and potentially catastrophic; that cutting rates must have seemed like the only option he had. Just look at these graphs and you'll see what Bernanke saw before he decided to cut interest rates. NEGATIVE BANK RESERVES; The banks are busted.

In the first graph (Total borrowings of Depository Institutions from the Federal Reserve) shows that the banks are “capital impaired" and borrowing at a rate unprecedented in history.

The second graph (Non borrowed reserves from of Depository Institutions) shows that the capital that the banks do have is quickly being depleted.

The third graph (Net Free or borrowed reserves of Depository Institutions) is best summed up by econo-blogger Mike Shedlock who says: “Banks in aggregate have now burnt through all of their capital and are forced to borrow reserves from the Fed in order to keep lending. Total reserves for two weeks ending January 16 are $39.98 billion. Inquiring minds are no doubt wondering where $40 billion came from. The answer is the Fed's Term Auction Facility”. ( See: Mish's Global Economic Trend Analysis;) So the only reserves they have is capital they borrowed from the Fed.

The forth Fed graph illustrates the steep trajectory of the ever-expanding money supply. (Monetary base)

A careful review of these graphs should convince even the most hardened skeptic that the banking system is basically underwater and insolvent. We are entering uncharted waters. The sudden and shocking depletion of bank reserves is due to the huge losses inflicted by the meltdown in subprime loans and other similar structured investments.

HOW CAPITAL IS DESTROYED

“When US homeowners default on their mortgages en-mass, they destroy money faster than the Fed can replace it through normal channels. The result is a liquidity crisis which deflates asset prices and reduces monetized wealth,” says economist Henry Liu.

The debt-securitization process is in a state of collapse. The market for structured investments—MBSs, CDOs, and Commercial Paper---has evaporated leaving the banks with astronomical losses. They are incapable of rolling over their their short-term debt or finding new revenue streams to buoy them through the hard times ahead. As the foreclosure-avalanche intensifies; bank collateral continues to be down-graded which is likely to trigger a wave of bank failures.

Henry Liu sums it up like this: “Proposed government plans to bail out distressed home owners can slow down the destruction of money, but it would shift the destruction of money as expressed by falling home prices to the destruction of wealth through inflation masking falling home value.” (“The Road to Hyperinflation”, Henry Liu, Asia Times) It's a vicious cycle. The Fed is caught between the dual millstones of hyperinflation and mass defaults. There's no way out.

The pace at which money is currently being destroyed will greatly accelerate as trillions of dollars in derivatives are consumed in the flames of a falling market. As GDP shrinks from diminishing liquidity, the Fed will have to create more credit and the government will have to provide more fiscal stimulus. But in a deflationary environment; public attitudes towards spending quickly change and the pool of worthy loan applicants dries up. Even at 0% interest rates, Bernanke will be stymied by the unwillingness of under-capitalized banks to lend or over-extended consumers to borrow. He'll be frustrated in his effort to restart the sluggish consumer economy or stop the downward spiral. In fact, the slowdown has already begun and the trend is probably irreversible.

The financial markets are deteriorating at a faster pace than anyone could have imagined. Mega-billion dollar private equity deals have either been shelved or are unable to refinance. Asset-backed Commercial Paper (short-term notes backed by sketchy mortgage-backed collateral) has shrunk by $400 billion (one-third) since August. Also, the market for corporate bonds has fallen off a cliff in a matter of months. According to the Wall Street Journal, a paltry $850 million in high-yield debt has been issued for January, while in January 2007 that figure was $8.5 billion---ten times bigger. That's a hefty loss of revenue for the banks. How will they make it up?

Judging by the Fed's graphs; they won't!

Bernanke's rate cuts sent stocks climbing on Wall Street, yesterday, but by early afternoon the rally fizzled on news that Financial Guaranty, one of the nation's biggest bond insurers, would be downgraded. The Dow lost 37 points by the closing bell.

The plight of other major bond insurers, MBIA and Ambac, could be known as early as today, but it is reasonable to expect that they will lose their Triple A rating. According to Bloomberg:

“MBIA Inc, the world's largest bond insurer, posted its biggest-ever quarterly loss and said it is considering new ways to raise capital after a slump in the value of subprime-mortgage securities the company guarantee”. The insurer lost $2.3 billion in the fourth-quarter. Its downgrading from AAA will “cripple its business and throw ratings on $652 billion of debt into doubt.” Many of the investment banks have assets that will get a haircut.

The New York State Insurance Department tried to work out a bailout plan but the banks could not agree on the terms (ed note: "They don't have the money")

“Bond insurers guarantee $2.4 trillion of debt combined and are sitting on losses of as much as $41 billion, according to JPMorgan Chase & Co. analysts. Their downgrades could force banks to write down $70 billion, Oppenheimer & Co. analyst Meredith Whitney said yesterday in a report.”

The bond insurers were working the same scam as the investment banks. They found a loophole in the law that allowed them to deal in the risky world of derivatives; and they dove in headfirst. They set up shell companies called “transformers”, (The same way the investment banks established SIVs; structured Investment Vehicles) which they used as “off balance” sheets operations where they sold "credit default swaps" which are derivative instruments where one party, for a fee, assumes the risk that a bond or loan will go bad”. (“The Bond Transformers”, Wall Street Journal) The bond insurers have written about $100 billion of these swaps in the last few years. Now they're all blowing up at once.

Credit default swaps (CDS) have turned out to be a gold-mine for the bond insurers and they've given a boost to the banks too, by freeing up capital to use in other ventures. “The banks profited on the interest rate difference between the CDOs (collateralized debt obligations) they bought and the payments they made to transformers...The banks sometimes booked profits UPFRONT on the streams of income they expected to receive.” (WSJ)

Neat trick, eh? Who wouldn't want to enjoy the profit from a job before they've done a lick of work?

Even now that the whole swindle is beginning to unravel---and tens of billions of dollars are headed for the shredder---industry spokesmen still praise credit default swaps as “financial innovation”. Go figure?

POLITICIANS STILL GETTING THEIR MARCHING-ORDERS FROM WALL STREET

The leaders of Europe's four largest economies (England, France, Germany, Italy) held a meeting this week where they discussed better ways to monitor the world's markets and banks. They did not, however, push to create a new regime of oversight, regulation and punitive action that would be directed at financial fraudsters and their structured Ponzi-scams.

Politicians love to talk about “greater transparency” and “watchdog agencies”, but they have no stomach for establishing the hard-fast rules and independent policing organizations that are required to keep the carpetbaggers and financial hucksters from duping gullible investors out of their life savings. That is simply beyond their “pay-grade”. And that is why even now---when the world is facing the most serious financial crisis since the Great Depression---—corporate toadies like British Prime Minister Gordon Brown merely reiterate the script prepared for them by their boardroom-paymasters:

"If these agencies don't reform themselves, the Europeans would turn to regulatory response to enforce change.”

Right-o, Gordon. Right-o.

The Unicorns Of Derivative Deliriums

January 30, 2008

Elaine Meinel Supkis

Time again to talk about history, magic and money. My favorite cocktail. The Europeans who created this wealth fund for the Arabs call it 'Unicorn Investment Bank'. So we must look at a great European painting by the Master, Bosch. We can see in it many lessons for today. This painting was done just as Europe discovered the New World and right after Portugal discovered how to circumnavigate Africa and thus, get through to China. And all the wealth in Europe began to flow to China which led to the Europeans attacking China. And we discuss derivatives. That fabulous mythical beast created by bankers to protect themselves from risk. In the US, it is now 6 times bigger than our entire collective debts. As well as our entire yearly GNP. And indeed, it is now greater than our collective national WORTH! Wow.

Unicorn Investment Bank raises $125m

Unicorn Investment Bank has raised $125 million in a three-year syndicated loan.

This move is seen as a remarkable achievement both for the Bahrain-based bank and for Islamic banking industry.

The bank's move to raise $100m through its first debt financing venture saw global support at a time when Western banks are refusing to lend to each other.

With more than 50 per cent of support coming from financial institutions from outside the GCC, the offer was significantly oversubscribed and attracted investment from Europe and Asia.

Oh, I do so love it when the bankers get fantastical! They often can't help but harken back to their real roots. The Garden of Earthly Delights has many residents. I discovered Bosch's famous, beautiful painting when I was living with a surgeon and his wife while recovering from surgery while my parents were overseas, messing around with history. Not the naked men riding the unicorns, filled with sexual joy. The unicorn is like Pegasus or the three headed hell hounds and a host of other divine critters who dwell on the other side of reality, our dream world. The global growth in magic money which has been fueled by the sudden emergence of the great, ancient empire, China, into the world financial/trade stream is a tremendous historic force. Click on image to enlarge.

This great painting was made at the behest and paid for by the first Northern European secular bankers. Previous to this, the Church via intermediaries such as the Venetian money changers charging fees for shipping crusaders around, were the 'bankers' in the most primitive meaning of the concept. The Venetians did re-introduce money to the former Roman Empire which lost this tool during the barbarian invasions. But to pay for the Fourth Crusade, for example, no money was exchanged. Instead, Venice used the warriors as pirates and instead of attacking Muslims, they looted and burned the biggest and richest Christian city at that time, Constantinople. Which, incidentally, killed the Crusades and destroyed Christian power in Asia but this goes under 'unintended consequences'.

Back to this wonderful artwork: it was painted in around 1500. The New World was discovered at the same time this picture was painted. Religious schism was erupting at the exact same time, no coincidence. Europe was about to be flooded with an epic amount of gold and silver. Trade with China which had fallen to virtually nil during the Dark Ages and the Islamic revolution that cut off direct trade with the Middle East, was now taking off again due to the King of Portugal encouraging explorers who rounded the Cape of Good Hope in Africa to reach the riches of the East. The 1,000 year depression in Europe was ending in a thunderclap!

I updated this painting by suggesting we could read it as a map of today's 'wealth world'. Japan is one stream of wealth and China, the other. Both circumnavigate the planet. The West is pretty much isolated from this since the flow is ONE WAY. Even if the West manages a flow back, it is much, much smaller than the twin flows from Asia. Asia, as we can see, is working hard. There is no sex going on there, no wild Roman orgies, no mass parties, whooping it up. Note also, the bankers and speculators as well as the entertainers, the prostitutes of both sexes and the debtors are all riding around and around in a merry-go-round of new goodies. The top prostitutes and ruling elites stand in the Pool of Wealth itself and admire each other. Note also, they are of all races and religions.

The next panel in this painting is Hell. And we have to recognize how this dream world interfaces with the real world. For they are two sides of the same coin just as the sleeping world is the other side of the waking world. Understanding money, human psychology, history and religion is the key to predicting the future. People who want to look ahead by only a day or a week cannot see beyond the Garden of Earthly Delights.

I look into Hell. The dark underpinnings of wealth lie in this realm. Avoiding falling into this Darkness is important and as humans perfect their demonic abilities to destroy things, avoiding this is of rising concern. The news this year is dark indeed. For the despair and arrogance of the Rulers always is finally expressed via war. The Long Depression of 1873-1912 was resolved in one of the biggest and bitterest of wars. The shorter depression of 1929-1939 was also ended by an even nastier and more vicious war that killed far more civilians than WWI.

Indeed, the painting above was made right on the eve of a long and bitter struggle for power and wealth which came out of the Reformation. And the battle over the Bible was due to the very sudden collapse in the value of gold and silver as the flood of these metals from the New World swamped the just-emerging banking system of Europe.

Kings and Popes had money for killing and used it. The psychotic King Henry VII of England, desiring to slay all those near and dear to him, joined this mad orgy of blood and the equally insane King of Spain and his even more insane children like Pedro the Mad joined in this auto-de-fee of murderous religious sectarianism. One third of the people of the formerly prosperous Bohemian kingdom were slaughtered. The German trading combine on the Rhine and North were destroyed. The Netherlands, where Bosch lived, became a perpetual battlefield between Protestant and Catholic.

My own ancestors were sent out into the world due to all this. The Pettits were bankers/traders in Paris who became Huguenots. When the Cathollic Queen from Italy took over the Throne, she decided to kill all of them. My ancestor was in Brussels on business with the bankers there when the St. Bartholomew's massacre happened without warning. This was my own family's early 'Holocaust.' Why did this happen?

Well, the Crown needed money. And my ancestor had gold in his bank vaults. And he had picked up the knack of charging INTEREST on these loans and the Crown was reckless with wars and wild spending so they...they took it the usual way: by taxes or murder. People seeking shelter today wish this weren't so but I must warn everyone, it is certainly so. Right now, the wars we are seeing here are being paid for by the Chinese and Japanese. But not for much longer. Our rulers will turn on us suddenly when they need to and the best excuse is to let someone attack us and thus, trick us into supporting the looting of our reserves by war mongers.

Back to the Pettits: my ancestor got funding from Protestant bankers in Amsterdam to outfit his ships with cannons. He then joined the looting of the rulers and became a pirate protected by the Dutch. He specialized in raiding shipping in the Caribbean. When he amassed enough wealth, he settled down with his new wife and their offspring flourished. In the Americas, not Europe. Where the Long Arm of the Law could not reach them. They believed in separation of Church and State for obvious reasons. All the settlements of my Pettit ancestors are named either 'Peru' or 'Lima' and there a number of towns and cities in America that bear that laconic reference to our founding ancestor, the pirate of the Caribbean.

As I was writing all this, I was crying. The woman that should have been my ancestress died when she was rudely yanked from her bed in her fine home as soldiers ran through the house, her servants screaming as they were either cut down or raped. She was probably raped, too, and forced to watch her babies and children dismembered. Then their bodies were thrown into the Seine. The new trade with China opened up a fountain of chaos in both Europe and China. For China didn't have ships with cannons. The long collapse of China dates from this time. Even as gold and silver poured into China from the newly opened trade with Europe, China's power base eroded. China refused trade as usual and wanted only gold, silver or fabulous raw materials. As the gold hoard grew, the eyes of Europe were upon China and from 1600 onwards, they plotted China's destruction and looting. This was every bit as violent and ugly as the attempt to exterminate my ancestors. Lord alone knows how brutal my ancestor, the pirate, was. He hated Catholics with a passion that was understandable, he knew how his wife died. I suppose he showed little mercy. Alas, I think, knowing how I can be vengeful, he probably took certain pleasure in his new occupation.

He was also not stupid. He kept on the good side of Queen Elizabeth I. And in turn, she let him into the English colonies as a reward and gave him lands in the Northeast where the shipping was and the clan ended up doing the Europe/Caribbean/New York/Boston shipping lanes.

Back to the news at the top, the news from today: the Europeans hired by the Arab kings have an obvious sense of magic and humor. I don't see 'Unicorn Investments' lasting any longer than 'Pirates LLP' which sank with all hands aboard last fall. When the names of these organizations hove too close to the misty shores of magical beings, they often don't last long. Also note that this new entity was OVERSUBSCRIBED. When I see this, alarm bells go off. Everyone, evidently, hopes they can latch onto the Arab oil overlords and use them as a life raft. Note also, much of this over-subscription to this strange bestiary of fabulous magical animals is a sign of yet another bubble that leads to more panics. The price of oil is set to drop due to the inability of Americans to use infinite energy forever. We are being forced to cut back, reluctantly.

The pool of cheap energy is now a burning lake and it is eating up our financial resources. So far, we paid for this since 1970 by piling on endless debts or fighting oil soaked wars featuring rapine and murder most awful. We have done all this quite ineptly. Now we are back to trying to make money deals with the Muslims in the hopes that this will allow us to continue to import the manufactured wealth of the East while not trading with them much at all.

The Asians know from history that one-way flow of trade and wealth means they end up on top so long as they have the guns to protect their wealth. The Chinese are handling this by strengthening their military, their space programs and nuclear arms. Japan has dealt with this by using the US itself as its shield and weapons. But this will backfire on them when the wealth drains from the US and we go bankrupt and our military is mothballed. Japan can't support both Europe and the US in this regard. Europe, of course, is being simply cynically lazy and using the US as their military arm but unlike Japan, have taken care to pile up some of their own nuclear missile forces. Which they control.

Back to the banking mess in the West and how reckless our own bankers are as they seek to profit from this one-way trade:

The Trillion Dollar Secret
By John Riley

According to the Comptroller of the Currency, total Derivatives in the top 25 banks in the US amount to about 180 Trillion dollars. Not billion, trillion. 1000 times a billion.

To put this in perspective, the US GDP for the 3rd quarter of 2007 was about 11 Trillion dollars. So they are playing a game with a pool of fictional money that is 16 times bigger than our economy.

The reality of derivatives is a topic that puts most people to sleep but it is the makings of a massive nightmare that already is lurking near the waking world, about to burst through the time/space continuum. When this monster rips apart the fabric of our economic belief system, out will come a genie, a demon of vast proportions that can devour not only all wealth on earth but much of the future wealth. Wealth can disappear!

This means everything. When the Roman Empire fell, Rome and Greece were both filled with fine artwork, many hundreds of thousands of books of the highest quality literacy. The greatest libraries on earth were in China and Egypt. The accumulated knowledge of thousands of years. The temples and statues and paintings were of the highest quality. Virtually unsurpassable, in the case of Greece.

It wasn't just destroyed, the destroyers thought all this was WORTHLESS. The collapse in value of all these precious assets that emperors and lords paid the highest prices and compliments to all became ashes and broken arms and legs. The active destruction of once-precious assets is astonishing to see. Anything which was possibly approachable was smashed or burned. And not in one spasm. For 1,000 years, this went on.

When Bosch painted his charming pictures, the broken remains of these art pieces were being dug up and examined and copied by people like the young Michelangelo, for instance. Even as the greatest artists of the West began to rediscover the great art of the past that was considered worthless for 1,000 years, there was an orgy of destruction of equally great artwork: the Medieval arts. All over Europe, stained glass windows were brutally smashed, paintings adorning Churches were whitewashed away or smashed. Every sort of lovely art work was cruelly destroyed.

In the West today, we revere all the past artworks and even the works of 'primitive' people who were destroyed by Westerners who sailed over and gave them diseases or shot them dead or enslaved them. But we also have the power to destroy all our museums and great holdings of humanity's treasures.

These charts show not only how derivatives have grown at an astonishing rate, look at the numbers! Just in the US alone, the nation with the greatest amount of debt in the world, bar none, look at it! 20 years ago, derivatives were less than a trillion dollars. During the years the US economy, government and populace amassed $9 trillion in government debts and over $30 trillion in other debts, derivatives grew from $1 trillion to...$180 trillion??? What the literal hell is this? Derivatives went from less than 5% of our debts to 6 times our collective debts? And each year, has grown more than the year before at an astonishing +10% rate? Talk about insanity! This is IMPOSSIBLE. I am more likely to look out the window here and see a unicorn instead of my old horse, Sparky.

These damn, stupid derivatives are hedges set up by the same people putting us increasingly into debt to the East. They are translating our entire culture from wealth into debt and to protect themselves while doing this, they constructed an alternative economy that grows TEN TIMES FASTER than our own. In about 2003, this alternative, this shadow world, this Garden of Earthly Banker's Delights overtook the Real World and now dwarfs it in size.

This, dear readers, is the REAL BALLOON. Understanding how the streams pouring out of Japan and China and the other Asians are feeding this balloon which is PURE SPECULATION AND PURE DEBTS is key to understanding how to fix things so we don't die in WWIII when this stupid bubble pops. As it inevitably shall.

Derivatives are private contracts (bets) between financial institutions. They can be on the direction of commodities, the stock markets or currencies, but the banks’ favorites are interest rates. (You can go to the Comptroller of the Currency website to get their quarterly reports and see for yourself what Wall Street hopes you never see.)
*snip*
Derivatives have barely any regulation on them. For years, Congress tried and Greenspan stood in the way. Banks barely mention them in the annual reports except for a footnote.

Thanks to the lack of regulation, derivatives have grown dramatically. There has been a 473% increase in the Notional Value of derivatives at the top 25 banks since 1999.

The numbers make the mind reel. Is this fact stopping our bankers? HAHAHA. Nope. Not only are they trying to continue this, they are desperate to transfer this derivative bubble to the Arab kingdoms, Japan and China! The efforts in this regard are hysterical at this point. Both China and Japan are very, very big on the concept of Fortresses. They like lots of protection from the Western invaders. They have long institutional memories going back many centuries. They also don't like what we did to them in the past. Then there are the other banking entities who are international. Just as my own family has a group memory of much of the past which colors our thinking today, so it is with the Jewish community. They were, after all, during the Dark Ages, the only ones who were forced to survive by their wits alone and who could not do normal business or normal farming and so they kept alive the embers of banking knowledge. For this, they were persecuted.

Today, the hedges and evasions created by Jewish bankers due to anti-semitism and especially, Hitler, has driven them into creating this golem we call 'derivatives'. This shadow banking world is a way of moving in and out of markets and banking systems in emergencies. Unfortunately, like all shadow worlds with no rules or restrictions, this one grew into a monster that no one in Asia, Europe or America can control. Strangling it once and for all is required by impossible. So instead of controlling it or stopping it, the rulers of the world have held meetings this year, increasingly hysterical meetings. The latest Davos meeting had them literally screaming at each other. They are in a total panic worthy of the Great God, Pan.

They have no way of slaying this beast. It amuses me that they are all calling on the bankers of the world to make this beast more visible. One thing about money and the Outer Darkness: when the demons there are revealed, they scare people to death. Already, our bankers and speculators are so frightened, they are jumping at their own shadows! If even they can see the Beast they created, they will scream and run into walls. And outsiders, seeing this newly-hatched monster slip out of the cracks of Doom will try to hid their own wealth from it.

How does this work? The Beast will eat the wealth equal to its size and vanish. This is called 'balancing the books.' The derivatives side of the ledger is NOT balanced at all! So when this happens, it will cause a backlash. As I point out, history is full of such backlashes. And governments have one handy tool for this: war.

Look at this chart, now! Wow. I color in charts and add data to see relationships. Everyone can see how we went through an epic bell curve of interest rates which peaked in 1980. But hark! When I add the information about when oil and gold were shooting up in tandem and then we see how this operates, we see a MIRROR IMAGE! The early, upside of the interest rate bell curve shoots up when oil and gold shot up! Then all three peaked a the same instant!

The downslope featured cheaper and cheaper oil and gold vis a vis inflation. And inflation 'vanished'. Where is it go, anyway? If we compare the second half of this graph with the one above showing how derivatives were born on the downslope of the bell curve, we note that as the curve continues to drop, derivatives shoot up to the levels and higher, relatively speaking, as the previous rising oil/gold/interest rate charts rose! In other words, we bought 'cheap credit' via creating massive derivatives, I might suggest. They are secretly connected via the darker chambers of the Underworld of Money where Death rules.

So we have this FAKE world where oil/gold go up and up and up, massively but interest rates go DOWN! This is not healthy, of course. They should be rising together. But denial is at work here. Note that yesterday, the Fed dropped interest rates again. The 1.25% decline in four days is EPIC. It is HUGE. It is also the hand of the Beast breaking through the barrier that separates the Derivative Monster from the Waking World where we are laughing and drinking and having sex.

S&P Lowers or May Cut $534 Billion of Subprime Debt

The downgrades may extend losses at the world's banks to more than $265 billion and have a ``ripple impact'' on the broader financial markets, S&P said.

The securities represent $270.1 billion, or 47 percent, of subprime mortgage bonds rated between January 2006 and June 2007, S&P said today in a statement. The New York-based ratings company also said it may cut 572 CDOs valued at $263.9 billion.

The downgrades may increase losses at European, Asian and U.S. regional banks, credit unions and the 12 Federal Home Loan Banks, S&P said. Many of those institutions haven't written down their subprime holdings to reflect their market values and these downgrades may force their hands, S&P said.

``It is difficult to predict the magnitude of any such effect, but we believe it will have implications for trading revenues, general business activity, and liquidity for the banks,'' S&P said. The ratings company will start reviewing its rankings for some banks, especially those that ``are thinly capitalized.''

Bond Insurers May Lose AAA Ratings Before a Bailout

The bond insurance industry stands to lose $41 billion on securities linked to subprime and other mortgages, according to JPMorgan Chase & Co. analysts. Efforts by New York Insurance Superintendent Eric Dinallo, 44, for a $15 billion fund to bolster insurers' capital are likely to be overtaken by events, independent research firm CreditSights Inc. said today.

``Given the number of competing interests and levels of commitment of participants involved, we think it is unlikely that an agreement sponsored by Dinallo could be hammered out within the appropriate timeframe,'' CreditSights analysts Rob Haines, Craig Guttenplan and Joe Di Carlo in New York wrote in a report. ``In the offchance that any deal could be solidified, the rating agencies are likely to have already taken action.''

Yikes. They try to fix the widening rift. But there is no magician on earth that can make this overhang of about $350+TRILLION vanish! And it hasn't stopped growing, either. It grows and grows. The Evil Kerviel mess is part of this monster. He could trade more than the entire worth of the entire banking group in France, one of the biggest on earth, using FAKE MONEY he invented out of thin air! He used FAKE everything to make up numbers which were then fed into the system and turned into REAL money! And we wonder why there is inflation? Aside from the other monster no one dares stop, the Japanese carry trade!

We can only arrest the people who set up and ran this system. This is mostly the people at the top these same people will cheerfully shove us into WWIII rather than lose their grip on the fake wealth they have generated for themselves. This is why NO ONE at the top dares talk about reality or explain things. They want us to believe they can keep the Beast at bay via wand waving. We are to sit here and watch the show. And not worry.

The history of banking reserve ratios from the Federal Reserve:

Two Billionaires Describe Our Outlook

Financial speculator and billionaire, George Soros states in his FT.com commentary :

“the current crisis is the culmination of a super-boom that has lasted for more than 60 years.” In June's Higher Rates Reflect Default Risk we described the end of the last credit boom: “In 1928, the U.S. Treasury Bond similarly broke out of the channel and rose to a higher yield. This coincided with the end of ‘easy' money which forced the deleveraging of the economy and concluded with the financial crisis of 1929-1932.” Compare the two Treasury Bond Yield charts below. In 2005-2006 higher bond rates “broke out of the channel” and inflicted damage on the housing market. This marked “the end of ‘easy' money.” Similarly since 2006, there has also been a flight to quality.
*snip*
George Soros explains what happens next: “if federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.” As we described last June, we expect 10 year Treasury Bonds to be sold for cash in the panic, just as occurred at the end of the last credit cycle. Billionaire investor Julian Robertson agrees. As he revealed to Fortune : “the biggest bet that Robertson has in his own portfolio at the moment” is “long the price of two-year Treasury and short the price of the ten-year Treasury.”

Soros knows the Beast. He won't talk about it. He wants to prop up the dollar so the Beast won't appear in public. But if they do this, our economy collapses and the Beast will appear. We call this, 'The Horns of Dilemma.' Out of the frying pan and into the fire. Between a rock and a hard place, as desert folk in Arizona liked to say. The 'hard place' is the desert floor. Which has no top soil. All choices are bad. But staying the course is the worst of all choices. The status quo is dying. Changing it in our favor is important. But we can't do it without first seeing and slaying the Beast of Derivatives Past and Future. And we let it grow to a size so big, it will crush us when we kill it.

Wall Street Blocked By Buyout Debt

Wall Street banks have failed to unload $220 billion of debt, which financed a wide range of major corporate buyouts initiated over the past two years, and that backlog is choking the credit markets despite recent efforts by the Federal Reserve and Treasury to invigorate the economy.
*snip*
The institutional loan market, where buyout loans are priced and traded just like stocks on an exchange, has remained frozen far longer than top private-equity investors predicted. Last summer, some of these investors said it would take about six months for the credit markets to clear the logjam of buyout debt.

Instead, loans for deals as old as Clear Channel Communications, which was swung in 2006 for $18.7 billion, are still getting the cold shoulder from debt investors.

"Six months ago, we were saying it's going to take six months to work through this debt," said Christopher Donnelly, vice president of Standard & Poor's Leveraged Commentary & Data. "Well, what happened was none of this paper was sold . . . and now we think it's going to take much longer to clean this up."

The bankers are stuck with the tail of this beast. Remember the excited news about buy outs? This propelled our stocks higher and higher. Since they ended abruptly when China and Japan began their battle over their currencies, these one-lucrative deals are vanishing. The stocks are increasingly worthless which is why markets are falling. As they fall, these useless and stupid bonds that are merely tons of stupid debts dumped onto whatever entity they could find, now these are worthless, too. Eventually, worth $0 if everyone does the Trump Walk Away. Bankruptcy kills these debt beasts. As well as lots of other things.

If interest rates drop to zero, why, these worthless bonds will be worth more than interest rate returns! Even if they are only worth slightly more than zero. Then Soros will buy them up, I suppose. Time to visit Japan:

INSIDE VIEW: Japan's Future Lies In Financial Sector

TOKYO (Nikkei)--Pessimism about Japan's economic outlook appears to be growing among investors around the world as well as Japanese themselves. That is not surprising given the country's demographic decline and tougher competition from emerging economies, but the nation still has the ability to generate decent growth.
**************************************************
Stocks: Up Nearly 2%, Lifted By Carmakers, Eased Credit Concerns

TOKYO (Kyodo)--Tokyo stocks reversed earlier losses on Thursday, closing nearly 2 percent higher as upbeat earnings outlooks for Japanese automakers and a capital infusion for a major U.S. bond insurer lifted market sentiment.
***************************************************
Nomura Profit Tumbles On Global Market Weakness

TOKYO (Dow Jones)--Nomura Holdings Inc. (8604) said Thursday its net profit fell sharply in the October-December quarter as global financial market weakness hurt its securities brokerage, investment banking and merchant banking operations.

They are already the wellspring for much of international debt generation. They want to be our bankers but they are crummy bankers. They bank at near 0%. This is the most wretched level of banking. It is positively medieval. The Jews of medieval Europe didn't give out 0% interest loans. My ancestor in Paris didn't accumulate enough wealth by charing 0% interest, to tempt the D'Medici Queen into a homicidal rage. If a banking system is able to create infinite debts at 0% interest we get a giant derivative monster bubble on the other side of the ledger. So far, very, very, VERY few economics writers can see this connection because it is more mystical and magical than easily traced. But they operate on the mirror principal: one side must balance the other. And if both debt generation and derivative savings schemes are set on 'infinity' both will rise to that level or whatever level leads to a complete break down and the balance 'resets' at zero!

The scheme today is to keep the carry trade from Japan NO MATTER WHAT. I was not invited to Davos to talk about this. Everyone would boo me. They would toss me out. This is not what they want to hear. And many of these same people who tried to crush the gold/oil matrix are now feeding that beast! They WANT higher gold prices! They are buying gold futures to protect themselves from the Beast of Derivatives Past and Future! Which they created and fed.

But then, few people believe me. Time to saddle up my unicorn, Sparky, who grew a horn in the last few hours.

Culture of Life News Main Page

The Great Credit Unwind of '08

January 30. 2008

By Mike Whitney

"The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars.'' '' George Soros, World Economic Forum in Davos, Switzerland. ``

Global market turmoil continued into a second week as stock markets in Asia and Europe took another tumble on Monday on growing fears of a recession in the United States. China's benchmark index plummeted 7.2% to its lowest point in six months, while Japan's Nikkei index slipped another 4.3%. Equities markets across Asia recorded similar results and, by midmorning in Europe, all three major indexes---the UK FTSE “Footsie”, France's CAC 40, and the German DAX---were all recording heavy losses. It's now clear that Fed Chairman Bernanke's 'surprise' announcement of a 75 basis points cut to the Fed Funds rate last Tuesday has neither stabilized the markets nor restored confidence among jittery investors.

At the time of this writing, the storm clouds are swiftly moving towards Wall Street where markets are likely to be roiled on the very day that President Bush will give his farewell State of the Union speech.

In Monday's Financial Times, Harvard economics professor, Lawrence Summers, made an impassioned plea for further government action in addition to the Fed's rate cuts and Bush's $150 billion “stimulus plan”. Summers believes that steps must be taken immediately to mitigate the damage from the sharp downturn in housing and persistent troubles in the credit markets. He suggests a “global coordination of policy”, which is another way of admitting that the Fed has lost control of the system and cannot solve the problem by itself.

Summers is right, although it's easy to wonder why he remained silent while the markets were soaring and the investment banks were reaping trillions of dollars in profits on a “structured investment” swindle which has left the global financial system teetering on the brink of catastrophe. Now that the US economy is sliding towards recession; Summers is calling for “transparency”. How convenient.

“Financial institutions are holding all sorts of credit instruments that are impaired but are difficult to value, creating uncertainty and freezing new lending. Without more visibility, the economy and financial system risk freezing up as Japan'’s did in the 1990s.”

Right again. The banks are “capital impaired” because they are holding nearly $600 billion in mortgage-backed assets which are declining in value every month. This is forcing many banks to conceal their real condition from investors while they scour the planet for the extra capital they need to continue operations. As long as the banks are in distress, consumer and business lending will dwindle and the economy will continue to shrink. The main gear in the credit-generating mechanism is now broken. The rate cuts can provide liquidity, but they cannot bring insolvent banks back from the dead. Summers is expecting too much.

The United States has led the world into the greatest credit bust in history, and yet, few people even know what has transpired. The US massive current account deficit (nearly $800 billion) has been recycling into US Treasuries and securities from foreign investors. Up to this point, American markets were an attractive place to put one's savings. The dollar was strong, and the stock market had a proven record of profitability and transparency. But since President Bill Clinton repealed Glass-Steagall in 1999, the markets have been reconfigured according to an entirely new model, "“structured finance"”. Glass-Steagall was the last of the Depression-era bulwarks against the merging of commercial and investment banks. As a result banking has changed from a culture of “protection” (of deposits) to “risk taking”, which is the securities business. Through “financial innovation” the investment banks created myriad structured debt instruments which they sold through their Enron-like “off balance” sheets operations (SIVs and Conduits) Now, trillions of dollars of these subprime and mortgage-backed bonds---many of which were rated triple A---are held by foreign banks, retirement funds, insurance companies, and hedge funds. They are steadily losing value with every rating's downgrade. Here is a graph which illustrates how the scam works.Click on image to enlarge.

Summers, of course, understands the enormity of the swindle that has taken place beneath the noses of US regulators, but chooses not to hold any of the main actors accountable. Instead, he draws our attention to a little known part of the market which will probably lead the way to a stock market crash and a system-wide meltdown.

Here's Summers:

“It is critical that sufficient capital is infused into the bond insurance industry as soon as possible. Their failure or loss of a AAA rating is a potential source of systemic risk. Probably it will be necessary to turn in part to those companies that have a stake in guarantees remaining credible because they have large holdings of guaranteed paper. It appears unlikely that repair will take place without some encouragement and involvement by financial authorities. Though there are many differences and the current problem is more complex, the Long-Term Capital Management work-out is an example of successful public sector involvement.”

Some of the largest bond insurers are are currently unable to cover the losses that are piling up from the meltdown in mortgage-backed securities (MBS) and collateralized debt obligations (CDO). Their business model is hopelessly broken and they will require an immediate $143 billion bailout to maintain operations. The largest of the bond insurers is MBIA.

Stock analyst Michael Lewitt, quoted in Bloomberg:

"MBIA's total exposure to bonds backed by mortgages and CDOs was disclosed to be $30.6 billion, including $8.14 billion of holdings of CDO-squareds (eds note; pure garbage). MBIA was being priced as a weak CCC-rated credit when it issued its bonds last week; it is now being priced for a bankruptcy. MBIA's stock, which traded just under $68 per share last October, dropped another $3.50 this morning to under $10.00 per share.”

Barclay's estimates that the investment banks alone are holding as much as $615 billion of structured securities guaranteed by bond insurers. If the insurers default, hundreds of billions will be lost via downgrades.

So, in practical terms, what does it mean if the bond insurers go under?

It means that the system will freeze and the stock market will crash. Here's how TV stock guru Jim Cramer summed it up last week in an interview with MSNBC's Chris Matthews:

“But, Chris, there is something I would urge all the candidates to think about and our Treasury Secretary, which is that there are a group of insurance companies which insure all these bad mortgages and, Cris, I think they are all about to go belly-up, and that will cause the Dow Jones to decline 2,000 points. They've got to be shut down and the insurance given to a New Resolution Trust. This is going to happen in maybe two or three weeks, Chris, it going to on the front of every newspaper and no one in Washington is even willing to admit it.

Chris Matthews: “So who are you including in these mortgage companies that are going to go belly-up; give me a description?

These are MBIA and Ambac remember the companies that Merrill Lynch and Citigroup wrote down a lot of stuff the other day? All these companies are relying on insurance to save them. The insurers don't have the money. There's also personal mortgage insurance; that's PMI, is one company; MGIC is another. Chris, I am telling you that these companies do not have the capital to “make good”. And when they do fall, and I believe it is when---if the government does not have a plan in action; you will not be able to open the stock market when they collapse.” No one is even talking about the fact that these major insurers, who insure $450 billion of mortgages are all about to go under.”

CLICK HERE TO SEE CRAMER VIDEO

Cramer is correct in assuming that the market won't open. And yet, so far, nothing has been done to avert the disaster which lies just ahead. Maybe nothing can be done?

So, how did things get so bad, so fast? How could the world's most resilient and profitable markets be transformed into a carnival sideshow peddling poisonous “mortgage-backed” snake-oil to every gullible investor?

Author and stock market soothsayer Pam Martens puts it like this:The Free Market Myth Dissolves into Chaos

“How could a layered concoction of questionable debt pools, many of dubious origin, achieve the equivalent AAA rating as U.S. Treasury securities, backed by the full faith and credit of the U.S. government, and time-tested over a century of panics, crashes and the Great Depression?

How did a 200-year old "efficient" market model that priced its securities based on regular price discovery through transparent trading morph into an opaque manufacturing and warehousing complex of products that didn't trade or rarely traded, necessitating pricing based on statistical models?”

How, indeed?

The answer to all these questions is “deregulation”. The financial system has been handed over to scam-artists and fraudsters who've created a multi-trillion dollar inverted pyramid of shaky, hyper-inflated, subprime slop that they've sold around the world with the tacit support of the ratings agencies and the US political establishment. (wink, wink) Now that system is about to collapse and there's nothing that the Federal Reserve can do to stop the Great Credit Unwind of '08.

As economist Ludwig von Mises said:

"There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Walking Away Fad Will Destroy Entire Economy

First snow storm in weeks on our mountain!

January 30, 2008

Elaine Meinel Supkis

Everything can be turned into assets and all things including gold can suddenly turn into debits. I see a need to explain this since people imagine there is some rock-solid form of asset that always gains in value no matter what and can be used as 'money' at all times. Nothing is that easy or we would all be trillionaires. Recently, there has been a madcap belief in using our houses as assets rather than necessary evils that drain our incomes. The crash of the housing asset bubble has returned housing to its traditional role as a necessary overhead COST rather than as a positive money flow. Time to talk about 'jingle mail' where people are not honoring their promises and are walking away from foolish 'investments'. This has a high social and economic cost we will all be forced to pay.

From Mish:

If banks can make "business decisions" to ignore risks, to lend money with no down payment, and fire people at at the first sign of trouble without any remorse, why shouldn't consumers be able to do the same?
*snip*
Will Deutsche Bank and the other 20 lenders attempt to walk away from this mess as a business decision? You bet. The business of walking away is going to be booming for a long time to come. This is yet another reason why Things That "Can't" Happen are about to.

This isn't 'walk away'---this is SKIPPING OUT OF TOWN. I hate this sort of thing. I had a rich neighbor who used his mansion and other properties in this area to gamble in the Dot Com markets. He played derivative games and when that crashed in the scandals we saw back then, he lost everything he bet. Since he did this by signing promises with banks that he would pay back and he used the value of his properties to do this, when the crash happened, he went belly up. He dealt with this by skipping town. After vandalizing his mansion.

Now I live next door. About a quarter mile away. We both share this part of our small mountain outcropping. When he did this act, he lowered the value of my own house. Not to mention, I was now worried about his mansion burning down due to the teenagers in the village below us. Recently, the poet, Frost, had his museum farm house totally vandalized by drunk teens. So it is a constant worry. as it was, another family below the mansion also abandoned ship and teens raided the garage for drunk parties.

So the irresponsible gambling of my rich neighbor turned into a crime when he vandalized his house significantly. Then this leads to the temptation to commit arson, etc. A cascade of criminal actions ends up destroying the community. This is why 'skipping out' is frowned upon.

I am a traditionalist. I happen to believe that old ways of doing things is often the best. Actually, most 'get rich quick' schemes are not new at all but often were figured out hundreds if not thousands of years ago. These thing flourish in 'boom' or 'bubble' times which always are times when there is 'easy money' being lent. Many bubble schemes are launched by governments seeking money for wars but reluctant to tax the populace. Traditionalists want harmony, peace and simple pleasures. We plan for the future, we look forward to a ripe old age where we can be surrounded by loving children and grandchildren. I suspect much of the fear we see these days is due to people ceasing to have children and so they rightfully fear being able to afford to be old. More about that thought, later.

The most precious investment is the family. This has been breaking down for the last 40 years as we sank into collective debt. There is no mystery that the destruction of the family has run right alongside the increase in debts. Both national as well as individual. The prime economic powers on earth are all seeing a collapse of the family. In Japan, the family has ceased to grow to an astonishing degree with the children never leaving home and the marriage/child bearing rate continues to fall. In some minority communities in America, 80% of the children are born out of wedlock and don't ever know their fathers. This is due to the collapse of working wages and increasing debts of society.

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Unshackle yourself today from a losing investment and use our proven method to Walk Away.

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It's important to act now before it's too late!

Wow. Live for FREE by stiffing the banks! Live for FREE if you don't honor your word! Hey, the people at the very top do this all the time! And they do.

Let's review why our banking system, our governments and our families are collapsing: it's OK to lie, cheat and steal. And to be dishonorable. And to play risky games like having sex outside of marriage or children out of wedlock. I did this in my wayward past. But then, men were not interested in marriage. I discovered that when I got property and built up capital, men wanted to marry me. When I was in college and got pregnant, no one wanted me. When I was an old hag at 40 years of age and had property, I had guys down to the age of 25 banging on my door with the parson in tow.

I had girlfriends of 90 years old who, when a husband died, had marriage offers. But at the other end of the scale, people are struggling. Children are expensive to raise, I have done this more than once. They can be viewed as generational investments. If raised properly. It is the obligation of the elders to help them get into property. I started off with rental/owner properties when I was my kid's age. Now they are doing it, too, with the family nest egg invested in their home/rental combos. These are held until the kids can live with a token mortgage for tax deduction purposes. Then they can buy a house for themselves only.

The entire clan looks after each other's properties to insure all are run properly. I know many tight immigrant families who do this. They end up jointly owning a dozen properties, half of which are rent generating properties, often in poor neighborhoods where the rents are higher than the cost of the buildings. One has to be tough to be a landlord in these places, of course. I filed my fangs being a landlord of a good property which was well run but in a slum. I would sweep the sidewalk of the entire block, hassle tenants of other landlords for 'airmailing' their garbage and I ran a street patrol that grew increasingly powerful and successful as we improved the crime stats. Today, that neighborhood is called 'Park Slope' and is very wealthy.

But most of the house buyers in this last bubble were irresponsible and foolish and note this web site urging 'walking away' after living for free for almost a year: they show pictures of smiling, happy, intact families. I assure everyone reading me, the families playing this game of cheating banks, cheating the neighbors and living like deadbeats will lead to DESTRUCTION. They teach their children bad morals and will cheat each other. I have seen this all my life. When the lights went out in NYC in the middle of our city's bankruptcy in the 1970's, many of my neighbors thought this was a grand opportunity to loot. They burned down the neighborhood and I moved out. It remained a horrible shell of empty, crime-filled ruins for 30 years. Before this looting, it was poor but intact and vibrant! All the stupid things they looted didn't improve their lives. They lost everything to gangs and drug dealers who moved into the ruins. They lost everything.

Morals matter. The attitude, 'I'm skipping out on America/devil take the hindmost' is dangerous. Thinking, 'all the rich steal, I will steal' leads to anarchy.

A message to other ruling elites: YOU BASTARDS. LOOK AT WHAT YOU ARE DOING, YOU ARE DIGGING YOUR OWN DAMN GRAVES! My family has a long institutional memory. We know that if we screw up, the price will be paid by our heads in revolutions, riots, wars and insurrections. Heads can roll. The need for the rulers to set a good example is life and death. When they fail, all fails and this is highly explosive. Treating the working class well is primary. Indeed, it should be of highest concern, not lowest regard. Yet we are in a culture where people with lots of money and power are setting a very bad example to everyone else. The Moral Majority has become the Amoral Walk Away Majority.

When the honest, good people of the land ape their 'betters' when these betters are the worst, we get social chaos and a collapse of the government as well as the economic life. Roman orgies, anyone?

This chart is from the Walk Away web site. Note how bankruptcies are relentlessly climbing. More liquidity can fix this only if housing rises in value. And it can't rise if incomes are being eaten alive by inflation and the collapse of rewards to the working classes who moved into the middle class for the first time right after WWII.

Mish: Things that 'can't' happen.

The party is over once the ability and willingness of banks to lend, or ability and willingness of consumers and businesses to borrow is exhausted. Those signs in place today for all but ostriches.

One thing I want to be clear on is that I am not calling for another "great depression". We could have one, but I am inclined (at least right now) to doubt it. Japan went through 18 years of deflation and the world did not end. The US will survive deflation as well.

However, we are likely to see something the US has not seen since the great depression: a falling standard of living and a declining middle class. Many things will be A Matter Of Choice but no one alive knows exactly what choices government will make.

Comparing Japan's fake depression to our looming real one is a mistake many economists make. Japan never had a true depression! This is not when prices fall. It is when INTERNATIONAL TRADE COLLAPSES. Far from it, Japan's trade has shot upwards like a rocket, an unprecedented 6 years of huge increases every year! They are #1 in trade profits! They are #2 in trade surplus. Far from a depression, this is a roaring economy. One proviso: it is based on keeping prices in Japan low as possible so they have depressed wages and this has caused the collapse of working class families. Japanese families were famous for loving children and being very strong with no divorces. Well, divorces are on the rise but what is more telling is, NON-MARRIAGE is rising much faster! There is no marriage in the first place, anymore.

Japan's elites are marrying. And they can afford children. But the workers are not able to buy much of anything including the ability to have children.

Interest wanes in cars, once a must-have for young people

Some men cannot afford the costs of owning a car, while others simply have no interest, raising concerns among auto industry officials in the nearly saturated domestic market.

"I usually ride a bicycle to go out shopping, and there's my parents' car at home, so I don't have any particular interest in having my own car," said a 22-year-old man in Nagoya who has a driver's license.

The man, who quit a full-time job late last year, says few of his friends have their own vehicles.

Full time jobs are hard to find if a man is young in Japan. They are living at home. The Japanese call men like these, 'NEETs'. They play video games online and work only in the most desultory fashion if at all. Auto sales in Japan are now lower than in 1983 and dropping. The depressed workers are giving up even on the dream of owning a car. The rest of the world can't sell Japanese imported cars if the entire market is collapsing there. But Toyota doesn't give a hoot. They are selling like crazy and making increasing profits overseas and this depends on a weak yen and the only way to get that is to depress wages at home which kills the home markets but makes powerful sales abroad.

A fatal choice, I would say, in the long run just as the US turning our culture into a pro-deadbeat culture is fatal to us.

A survey by the Japan Automobile Manufacturers Association (JAMA) also found that the ratio of those who do not own a car jumped from 21.3 percent in 2001 to 32.1 percent in 2005 among men in the first half of their 20s.

The percentages for those in their 30s and older showed little changes during the same period.

JAMA officials attribute the decrease in ownership among young men to the widening income gap.

We are copying Japan! Depressing worker's wages. Killing the ability to have families. Degrading everyone into deadbeats. Rich deadbeats are protected in various ways by their fellow elites. Working class deadbeats die. Often, in prison. Rich people like Donald Trump can lose everything and then get it all back really fast, making deals. Workers who hit rock bottom seldom rise and their children pay a very heavy price. If American males follow the path of the Japanese males, we will see a contraction worse than the 1930s. Back then, there was a desire to own a car, to build a family despite the depression, there was this hope.

This time around, has that died? Will young men dream of marriage, family and love? Or even fast cars? Or will they lose all their dreams? Anyone who can tap into this future potential is very dangerous. We can see tiny bits of this with the Ron Paul energy that is now rapidly fading due to the ruling elites removing him from view and letting us know he won't be allowed to even address these issues. One funny thing here: Guilliani, when he quit last night, admitted that Ron Paul was the only good person in the debates and was right! I grind my teeth, hearing this sort of thing.

Saving becomes a campaign issue

Concerns are fueled by a combination of events that affect millions of households. Traditional pensions that paid a set amount for life are being phased out in many workplaces. The 401(k) savings plans that have replaced them do not assure enough to retire on, except for those who have saved carefully for many years. They are also vulnerable to the kind of sharp market downturns that rattled Wall Street last week.

Almost 1 in 2 workers -- 48% -- has less than $25,000 in savings, and 71% have less than $100,000, according to a 2007 survey by the Employee Benefit Research Institute.

On top of that, more than 75 million Americans, or about half the workforce, have no opportunity to participate in a retirement plan. Experts say many of them are headed for a bleak future.

Too many people were thinking their houses which are money machines---which they are NOT unless they include a rental, they are money sinks, not profits unless one manages to pay off all debts. All housing has a big overhead in the form of repairs to mechanicals and structures, yard work, etc. Ever call in an electrician or plumber? Replace roof shingles? We are talking many thousands of dollars here. Out of pocket.

Holding gold is the same. You have to protect it and care for it which is why it ends up in vaults in caves.

The withdrawal of pensions from workers has been insidious and long run. Many can't afford to put money in 401k programs due to inflation and others who do can end up being burned by dishonest dead beats who infest the investment arms of the banking system. An army of Evil Kerviels screwing up everything. People will walk away from houses they bought last year but walking away from a lifetime home is hard and the downside will show up over time as rootlessness and despondency builds up. The fall from grace will be hard and last years. The loss of flower patches or front porches where one hung out with friends will torment the night hours. Moving to some faceless town in another community will not heal these social wounds.

In Arizona, I used to watch this at work. People would give up on real communities in Detroit, say, and move to Tucson. At first, they imagine they are in paradise. But they fall apart because there is no community unless they join the university community or the military community. Building a new life is not as easy as people imagine. This is why families matter. You build them and they can expand near and far and still be a community. This is why immigrants are stronger than people atomized by economics. They tend to cling to one neighborhood. Bit by bit, they buy up neighboring houses and commune together. When I was Mrs. Levy in NYC, my husband's family lived all around us, aunts, uncles, cousins, grandparents. All within walking distance.

Here in upstate NY, we forged another family which includes the Levy family and some of them moved up here so we are together in a community up here and this is how it works. But you need family connections. The people 'walking away' from new-bought homes too expensive to hold were atomized by moving into houses they couldn't buy, often far from work and friends. And now they will be rootless as well as far from home.

Bond ratings set to drop on insurers tomorrow

Wall Street bond rating agencies are poised to downgrade two big bond insurers, Ambac Financial Group and MBIA, even though New York state insurance regulars would like to get a postponement until the state can develop a bailout package, CNBC has learned.

Losing a Triple A rating could be devastating for the bond insurers, preventing them from drumming up new clients -- and possibly forcing them out of business.

Barring some last minute agreement on a bailout package, the downgrades could come as early as Wednesday.

And why are they going bankrupt? They insured loans to people who couldn't possibly pay any ARM, etc, loans. The spread of deadbeat destruction is moving outwards, sucking in all systems. We are in a debt crisis that was started by both easy money loans and 100% financing. Over the centuries, bankers figured out that if a home buyer doesn't plonk down at least 20% of the value of the house, the temptation to 'walk away' is irresistible. And they don't resist it.

Indeed, the temptation of businesses, investors and homebuyers to 'walk' grows as the insurance covers ever-closer to 100%. Here is some thoughts from an email sent by a reader who wishes to remain anonymous:

OK, let’s expose this magic money and prove the Emperor has no clothes. A simple example will show how this works. Let’s take 26 people and call them Mr. A, Mr. B, Mr. C, etc. Each of the 26 are identified by the letters of the alphabet.

Mr. A writes on a piece of paper, "I.O.U. one million dollars" and signs his name. Everyone else writes out an identical note. Mr A. then hands his I.O.U. to Mr. B. Mr. B hands his signed note to Mr. C., and everyone else hands his piece of paper to the person on his right.

What we have just created are 26 instant millionaires. Each person is the recipient of a million dollar asset–a note promising to pay him a million dollars. The fact that he does not tell anyone that he also has given his promise to pay someone else a like amount is not revealed. It is called on "off balance sheet" liability. He knows he owes it, but he does not fess up to it. From a realistic standpoint, nothing has changed. Every person is the same off as before he became an instant millionaire. In fact, he could take the note to a bank and have it discounted and added to his checking account. Now the bank has the basis to make 10 million dollars worth of loans to other customers. There is nothing backing up the I.O.U. each person gave to his neighbor. Neither is there anything backing up the cash that Mr. A received when he gave the note to his bank in exchange for cash. The pieces of cash in various denominations have nothing backing them up except that they can be redeemed for other pieces of paper that are backed up by the promise to be redeemed by other pieces of worthless paper.

As we can see so far, nothing of value has changed hands. There are trillions and trillions of pieces of paper mixed in with I.O.U.s from people all over the globe. If someone said to the 26 people in our original example, "on the count of three, everyone destroy your neighbor’s I.O.U. that he gave you," in reality nothing would change. No one would suffer any negative consequence. They all might feel a little poorer, but it was all "paper profit" just like when a stock goes up and then falls back to the price one paid for it. It’s all fantasy.

The bank, on the other hand, gave out pieces of paper called cash to Mr. A for the I.O.U. he claimed as an asset. But it was worthless. The bank can seize the balance of the funds in Mr. A’s checking account and request that he pay the difference. If Mr A already spent most of that money, the bank is out of luck and has to write it off, and that will reduce the profit it makes from collecting interest on the money it gives out to other people bringing in phony I.O.U.s. Since the bank collects interest on phantom I.O.U.s, it doesn’t hurt it when it has to give some of that up. The banking system has no skin in the game, so they should not complain when they don’t collect as much ill gotten gain.

The moral of the story is that the whole money, currency, securities, CDO, SIV, etc., system is based on nothing. So when some of this nothing disappears, there is no real loss either–only a psychological loss as in the case when Mr. A. had to destroy the I.O.U. his neighbor gave him. But he also gained in the sense that his I.O.U. to Mr. B became worthless also. It all balances out in the end.

The cascade of problems caused by the loss of profits is considerable. I keep pointing out that FLOW matters when we talk about either trade or finances. When the EXPECTATION of future profits dies, many other things attached to the possibility of future prospects also die and we get a negative flow. This cascades out of control if too many people destroy too many expectations of future earnings too fast.

UBS Reports Record Loss After $14 Billion Writedown

UBS AG, Europe's largest bank by assets, had a record loss after raising fourth-quarter writedowns on assets infected by U.S. subprime mortgages to $14 billion.

The Zurich-based bank announced today a net loss of 12.5 billion Swiss francs ($11.4 billion) for the fourth quarter, almost double the median estimate of analysts surveyed by Bloomberg. The annual shortfall was about 4.4 billion francs, the first since UBS was created through a merger a decade ago.

UBS fell as much as 4.1 percent in Swiss trading as its loss exceeded those reported earlier this month by Citigroup Inc. and Merrill Lynch & Co. The collapse of the U.S. subprime mortgage market has led to more than $130 billion of losses and markdowns at securities firms and banks since June.

The banking crisis continues. The US is floundering and the rise in 'walk aways' is dangerous if the walkers are part of the world's #1 economy which happens to also be the #1 destination of world trade. The flow of trade will shift and change but we will pay a price. We can look to Japan to see what that means. It means the end of the 'American Dream.' And the beginning of the 'American Nightmare.'

Culture of Life News Main Page

Rate Cuts Fuel Gold Speculation

January 29/2008

Elaine Meinel Supkis

The Federal Reserve was set up to support asset markets and protect speculators. Of course, the more they are protected, the more they do stupid things. Right now, in the last 7 years of fiscal recklessness of historic proportions, the US has also suffered through a Federal Reserve regime where interest rates are used to create first a Dot Com Bubble then a Housing Bubble and now a GOLD Bubble. Every time rates are cut by the Fed, the price of gold shoots up. Time to explain speculative bubbles and their many dangers.

Gold, platinum off record highs, eyes turn to Fed

Gold and platinum slipped on Wednesday as investors booked profits ahead of an interest rate decision by the U.S. Federal Reserve, which may determine the direction of the precious metals market.

-- Spot gold fell to $921.50/922.50 an ounce from $928.60/929.30 an ounce on Tuesday, when gold rallied to another record high of $933.10 an ounce on expectations of more rate cuts in the U.S. and fears about South African output.

There are three forces at work here.

1. The global supply of gold for sale.

2. The rate of global inflation and instability of currencies.

3. Cheap liquidity used as loans to support gold sales.

The gold sales now show every sign of being a bubble. Gold is not money. It is not even a replacement for money. It is an ASSET. It is no different from housing or stocks. Its value fluctuates with markets since it has to find buyers in order to be used. Money is in lieu of assets. You don't cart some gold to a store and then bargain with the seller over the relative value of the gold. If gold is used as coins, one can only haggle over the price of the thing being bought with the gold coin but the seller can't argue about the denomination of the coin. If a coin is stamped '$10' then it is ten dollars. Of course, prices do waver a lot depending on how many buyers are willing to put out money. For example, Super Bowl tickets to see the Patriots pound the Giants into midgets are now going for over $1,400 in scalper sales.

Why anyone wants to pay this baffles me. Either they are from Boston or masochists or New Jersey commuters who want to dig up Hoffa's corpse in the Meadowlands and heave it at the Patriots. Enough with sports! Back to money!

I have some $20 bills from 1927 that are 'Gold Certificates' put out by the Treasury, not the Federal Reserve. This supposedly gave my husband's grandaddy the right to get around 2/3rds an oz at Fort Knox. Only in 1933, this was terminated and so even though money was valuable back then and few people could find $1, much less, $20, this ancestor kept the money to prove to people, the government can't be trusted as far as you can kick them to the curb. It pays to remember this harsh lesson.

In today's case, gold has been rising rapidly as hedge funds, Evil Kerviel clones and assorted speculators rush to place orders for gold futures. They aren't doing this because gold is any better than the previous bubbles. They are doing this because they are getting access to nearly unlimited funds via cheap loans that are below the rate of inflation via the Federal Reserve and the Bank of Japan!

When there is a flood of 'free' money or in this case, two of the world's biggest banks are PAYING people to take money from them, the only question is, where can one park these loans where they can grow like magic mushrooms after a heavy rain of liquidity? Can't be properties, both residential and commercial are grossly over-done, worldwide. Countrywide is sinking like a rock and people are dumping their dumps that have huge debts.

Everyone who played the Dot Com market with loans have been destroyed and even though Google was bid up to the sky, it is now finished and can't rise one more inch no matter how much free money is floating by. Emerging markets are now falling along with the US markets. So piggy-backing on the rush of buy-ups we saw for three years is no longer a sure fire bet, either.

This leaves gold, the old standby and usually, the last bubble in all bubble economies. After gold and silver go blotto, someone will come along and stop the mad liquidity and we get a Volker high interest rate hike regime, people put their money into ordinary banks and bonds and are happy and all the people who want cheap or super-cheap money will go bankrupt. Gold is rapidly reaching a peak and if interest rates were going up even by only 2% in Japan and the US, gold would cease its relentless climb. Proof of this comes from India, the world's biggest buyer of gold:

Housewives cash in as India learns that even gold has its price

India's love affair with gold is waning as high prices deter casual buyers in the world's largest gold importer and savvy housewives try to sell their spare jewellery to capitalise on rocketing prices.

As gold, which traditionally is viewed as a safe haven in uncertain times, hovered close to record highs yesterday, Suresh Hundia, head of the Bombay Bullion Association (BBA), said that Indian consumers were deferring all but the most essential purchases. “Households are selling spare gold. There is zero demand at these prices in India,” he said.

In India's bazaars, prices have surged past 10,000 rupees (£128) per 10g, a key level for retail buyers. Yesterday, gold for February delivery was being quoted at 11,615 rupees per 10g on the Multi Commodity Exchange of India. According to the BBA, which tracks market activity, sellers of scrap gold in India are cashing in at prices only about 3 per cent below those quoted in the trading pits of London and New York.

About three quarters of the 800 to 900 tonnes of gold estimated to have been imported into India last year was used for jewellery.

Two years ago when I was crunching data, I was startled to see that India, not Japan or China, were the biggest buyers of gold. My parents have lived in India off and on for many years and I have Indian saris and scarves lined with gold thread that is real gold thread. These are for weddings and such. Life was very uncertain there many years ago and women wore their dowery in the form of gold jewelry which was fitted onto their bodies so it could not be easily removed. This was sacrosanct. If there was a terrible famine, the wife might sacrifice her gold to keep the family alive but it would be a desperate, last move. Note also that the value of things fluctuate according to circumstance. A loaf of bread can be worth its weight in gold.

The price of gold is now so high, the major market for real gold is closing down, indeed, is now running in reverse. Women are selling their gold to buy things that are now ridiculously 'cheap' in relation to gold! Without doing a thing, women who have been wearing gold bangles for 20 years, bought when it was less than $250 an ounce can now sell it and reap the profits. We know a bubble has burst when the main buyers turn into sellers. This is a very important indicator as to the status of this bubble.

The other huge player in this game is Russia. Russia can topple the gold markets easily since they produce a lot of gold and are huge holders of gold. On top of this, there is China. China also is a gold producer! Like Brazil and South Africa. They do not mind the US and Japan pouring out endless free loans so the price of this gold shoots up. They are beneficiaries of this bubble since they are the suppliers. The European and American banking manipulators have tried, in the last 2 years, to kill the gold bubble. They alternately talked down gold or sold gold hoards. But this only fed the bubble since more and more people are pouring in as more and more loans via the US and Japan flood into the accounts of all those offshore pirates and other speculators.

Just like the little speculators in currency markets, the small-time gold bugs also feed this bubble. But they can easily be swamped by any of the giant players and we must all remember, the world has only a few of these but they are HUGE. Right now, Russia and China are perfectly happy to see the US and Japan turn gold into a massive bubble. They will leverage this in various clever ways we won't understand until it it obvious. But they will do this. Both want the price of gold to NOT collapse so I expect them to keep feeding the system so it doesn't explode too rapidly, they have plans for the future and don't want things to happen before they are militarily ready. But the gold frenzy is definitely helping them both a great deal and they really appreciate this mania.

Americans like to pride ourselves for being oh-so-clever as we cheat everyone with our real estate/stock/bond sales. But we are not mining lots of gold. We are net losers here. If gold goes up or down, it doesn't matter in the end to Russia or China, gold's value is only if it advanced their military/financial standing and if this bubble pops, it probably will mean the end of all other bubbles for the US. In other words, they swim, we sink.

Here is an older story that references to the 1970's.2006: Silver prices expected to soar past $20 an ounce

Ray Jones dumps scrap silver into a bag at Indian Jewelry Supply Wednesday. Customers at the store can sell their scrap pieces of silver back to the store for store credit or cash. Some Wall Street experts predict silver's market price to approach $20 per ounce soon. Indian Jewelry Supply manager Ed Smith said last time silver prices skyrocketted in the 1970s he saw people selling family jewelry and silverware for scrap at his store. [Photo by John A. Bowersmith/Independent]

I remember when people were melting everything down so they could buy stuff. I remember when the Federal Government made it illegal to melt down all those silver dimes, quarters and dollars. The face value was far below the real value at that point. Then the bubble popped. As usual, there were murky deals behind it just like we see today in the various panics. The Hunt brothers of Texas got into legal trouble over trying to corner the silver market.

But they couldn't, anyway. Once silver reached the 'melt all the money and jewelry' point, it was done. Jewelry has value-added labor and intrinsic beauty. When the raw material value grossly exceeds the hours of labor by goldsmiths, this is a bad sign and one that we should all note and learn from. Just as shacks in Stockton, California last year could not be worth more than my historic mansion I used to own in New Jersey which sold for $325,000 back in 1986, so it is here: overpriced beyond the most valuable thing on earth, human labor.

The Vultures Are Circling

The ratio of distressed debt soars to its highest level in five years.

It's beginning to look a lot like a recession. The U.S. distressed-debt ratio leaped by five percentage points to 11.1 percent in January, from 6.1 percent in December, according to a new report from Standard & Poor's.

The ratio is at its highest level since September 2003, and the increase from the previous month was the greatest since October 2002, according to the debt rater.

As of Jan. 15 distressed issues cumulatively affected debt worth $64.5 billion, nearly $30 billion higher than in December.

Speculators in other bubbles are being forced to sell. They desperately want 0% interest loans with no repayment schedules so they can play infinite games forever. But this is unrealistic. Hedge funds with tax-free funds that get cheaper by the minute thanks to all the major banks dropping rates rapidly, will use this windfall to buy out people to got too deep in the liquidity pool. Note how the number of distressed debts which is fancy talk for speculators using loans, unable to pay for losses, now defaulting on these loans, means fun times for anyone flush with money.

Lurking around all this is the fabulous beast they call 'Derivatives'. Here is a very good article trying to explain what this all is:

The Trillion Dollar Secret
By John Riley

The scariest part of derivatives is their leverage. Like exchange traded options, derivative contracts can control assets for only a fraction of the contract value. The banks take the leverage to an extreme and have very little in assets backing up their derivative portfolios. According to the Comptroller, the top 25 banks have assets that only amount to about 6% of the Notional Value of their derivatives. JP Morgan, the biggest player in derivatives, has assets backing up its portfolio of only 1.60%.

What happens if the value of the portfolio were to change by 2%, what happens to the banks' assets? And with all of the recent scandals in Real Estate and other "creative strategies" the banks have been employing recently, how do we even know if their asset numbers are correct? Is it possible that the $1.40 Trillion in assets JP Morgan claims is somewhat less, thanks to writeoffs and bad real estate?

Unlike the US, China has moved to force ratios upwards to over 15%. We already see that the whole bond insurance field is collapsing due to ridiculously low reserves. Indeed, the Federal Reserve has been careless and stupid since all our major trade and military rivals have amassed giant FOREX reserves while our own languishes at levels a third world nation would be embarrassed to hold. JP Morgan just hired Tony Blair, the fake 'Labour' leader of Britain infamously known as 'the Poodle'. Morgan is paying several million for Tony to tell us how great things are. But they can't afford him any more than I can afford this guy.

The whole topic of derivatives deserves more time but tonight, I am talking about gold. And this excellent article ends with the typical advice I see so often all over the place:

John Riley:

Investors need to have exposure to investments that can benefit from higher inflation. These would include gold and commodities. TIPs could also benefit from higher inflation.

It is a loud chorus. Aside from the history lessons that clearly show us that gold harbors its own dangers unique to itself, we also know how bubbles work and look. Everyone is now jumping aboard the golden wain and hoping this will be the SAFE bubble. The one that will never, ever pop.

This is impossible. There is no magic metal any more than magic money, that will always be 'valuable' forever. Gold does maintain it position as King of the Metals. But it can be dethroned temporarily by any number of other things including Super Bowl tickets. Right now, I would say, gold and these tickets are running neck to neck. But next week, they both can lose value. Just remember: there is no totally safe haven that keeps piling on value faster than all other things. This never happens. All things go up or down in value. This is why I say, I want higher interest rates and traditional banking. No one can get rich all that quick but no one plunges into poverty instantly, either. I like some predictability in life.

Culture of Life News Main Page

Cinderella's Evil Step Sisters Burn In Bonfire Of Vanities

January 29, 2008

Elaine Meinel Supkis

Finally, the main media has noticed that Japan has real inflation. I have proven in the past the only bar to inflation in Japan was to drop wages and squeeze workers to death. The workforce paid 100% the costs of inflation. The dying dollar is about to take a deeper plunge into the murky depths. The Japanese exporters want us to take on more debts so we buy more Japanese stuff. But this is killing the dollar. Evil Kerviel is still in the news. The panic of last week is wearing off but the banking collapse continues after this major hit. The Fed wants to stop this cascade of insolvencies via cheaper debts and this will fail just as it failed in Japan a decade ago.

China's Yuan May Gain More Than 10%, Sakakibara Says

The Chinese yuan may appreciate more than 10 percent this year against the dollar as China tightens its monetary policy and allows the currency to appreciate, said Eisuke Sakakibara, Japan's former top currency official.

``Chinese authorities now recognize that they need to appreciate their currency for their own sake,'' Sakakibara, 66, currently a professor at Tokyo's Waseda University, said in an interview with Bloomberg Television.

No kidding, the yuan will rise. China's stock markets were hammered by the bad news from the very bad weather. Weather does affect not only commodity markets but stock markets. The US celebrated a relatively warm winter by hoping the careless US consumer would spend more money buying goods rather than paying for heating, for example. The bear markets of 1974-1978 were made much worse by cold, wet winters and dismal summers due to volcanic eruptions and the sun at its solar minimum. There was wild talk about Ice Ages. The cold, blizzard-plagued winters and chilly summers of the 1992 recession put people into a bad humor after Mt. Pitumbo in the Philippines blew up. I remember how it went to 40 below zero here and we had over 6 feet of snow!

Right now, it is putting a chill on the Chinese. So they are gloomy. The Japanese are delighted at the thought that the yuan is rising. They hope to drop the value of the yen vis a vis the yuan so they can flood China with goods. They know the US market is increasingly difficult for them. They know that they can't keep the yen weaker than the dollar if the interest rates in the US approach