Elaine Meinel Supkis
The differences between Obama and Clinton accumulate. Obama has Volker in his camp. Clinton has Rubin in her camp. This is an obvious difference that matters to me. Greenspan endorses Clinton over Obama because she, like him, wants the funny money solution to fix our financial collapse. But all candidates want to keep the housing market set at the bubble rate and not decline like it always does after a feeding frenzy at the Well of EZ Money. This is impossible. Housing prices have fallen in the past and will do this in the future. This is a fact of life we have to live with and learn from, lord help us. Eventually we will figure this out. And we also visit the Federal Reserve LLP to see what the new lending window is all about and incidentally, visit the Derivative Beast who is a Dragon in the Cave of Death. And I marvel at how stupid we are to not slay that beast 10 years ago when it was 55 times smaller than today. Also, the credit crisis continues to hammer Europe. This is a global meltdown. And Lehman Brothers is the victim of a Japanese rip-off scam to the tune of $250 million in loans.
Clinton named former Treasury Secretary Robert Rubin as representative of the quality of an economic team that Americans and markets will trust.
``People like former Secretary Rubin are pretty hard to beat when it comes to managing the economy,'' Clinton, a New York senator, said in an interview on Bloomberg Television's ``Political Capital with Al Hunt,'' to be aired today.
Obama, in a separate interview as he campaigned in Pennsylvania, noted that former Federal Reserve Chairman Paul Volcker, a supporter, was advising him on the financial crisis and said he also speaks to billionaire investor Warren Buffett ``on a regular basis.''
Clinton, 60, and Greenspan have praised each other over the last year, although the former Fed chairman has indicated he will vote for Republican candidate John McCain in a general election.
Obama didn't call for reinstatement of the Glass-Steagall Act. Instead, he said, there is a need to ``build new regulatory systems that are flexible and reflect new realities.'' He has called for the Federal Reserve to have more regulatory authority over financial institutions, which would have to increase capital reserves held to protect against losses.
Clinton also acknowledged that deregulation may have gone too far in 1999, saying conditions have changed. ``The global economy when Glass-Steagall passed was not what it is today,'' she said. ``We have to deal with things now that didn't exist, like sovereign-wealth funds.''
OK: I support Obama. At least he doesn't have a totally insane economic advisor who wants to feed the Derivatives Beast more money! At least his advisor isn't talking about creating infinite wealth by having the government take over all our banking, financial and housing systems. Volker is a grim man. He knows the only way to slay this monster that was bred by his successors is to raise interest rates until all the bad loans, cheap money and wild spending is replaced by savings and then more savings. Hillary's advisor wants to have more of what poisoned our well poured into the ground. And note that Greenspan is Hillary's ideal. And she thinks the most important economic issue facing us is...get this....SOVEREIGN WEALTH FUNDS????? HAHAHA. Right! We ain't got none. That is the crisis.
No, she wants to control other people's funds that they got fair and square. She wants to order our creditors around. She wants to be the dictator of the wealth we squandered. This is so beyond childish, it shows clearly she doesn't have the maturity to be our ruler. Not that ANY of the last 4 Presidents have been anything but utter children! The US people chased out Jimmy Carter because he was an adult. He wanted to balance the books. He wanted to stop inflation. And he wanted us to save money, turn down the thermometer, build alternative energy systems, etc. Sort of like what Gore wanted, I dare say.
Americans want Santa Claus and Bernanke helicopters. The only people yelling about all this, I fear, are the dwindling numbers of savers in our economy. Everyone else is screaming for 0% loans at 0% down and no verification of anything. This desire to have eternal easy money is at the root of our economic and moral collapse. I will note here that all the charts and graphs clearly show that outside of Japan, any nation running on this 'free money all the time' system usually goes BANKRUPT. And is flooded with imports. And the government runs up huge debts. Indeed, it has been proven that people who get access to easy money don't get out of debt, they ALWAYS increase their indebtedness. They go deeper into the hole. The easier the money's terms, the deeper into the hole they go. This is why the era of easy lending as rates fell during the last 4 Presidencies, the deeper the US government debt and the worse our trade deficit.
Japan can have easy rates because they are a Fortress that keeps out outsiders. And as we shall see, the temptation to rip off outsiders who come into that country to do business is very great. Back to the election:
``We have to try to stem the foreclosure crisis that is at the root of our credit and market challenges,'' she said.
Obama's plan includes $10 billion for homeowners facing foreclosure, aid for state and local governments to prevent service cuts and expanding unemployment insurance to cover more workers.
``We can create a floor in the housing market that will help restore some confidence in the overall credit markets, which has to be our No. 1 priority,'' he said.
There is no floor here. The roof fell onto the floor and the floor is buckling and will collapse into the basement. I build houses and know that if termites eat away at the sills and the rafters, the building will fall. And $10 billion isn't anywhere big enough a support to prop up a collapsed house. Maybe, $10 trillion will do it. But I have lived through more than one housing collapse in my life. You have to take the hard knocks. People who defrauded banks or bankers themselves must be arrested, put on trial and put in prison. Government officials should be fired. And politicians must be fired, too. And replaced with new people. The pain of this process is obvious. But the need to do it is even more obvious. If we keep propping up collapsed housing markets, we end up living in a SLUM for crying out loud! So we can't do this.
The government's role here is to provide life-support services to the people made poor by all this. The rest of us have to bite the bullet. I have lost tremendous sums this way and don't regret it. I did swear to not be trapped in such a grinder again. Lessons are learned! And passed onto the children. Which is the only service I can provide.
But evading the truth of a collapse is dangerous. People think, 'Why should I save for a rainy day? Why should I be careful? Why should I pay for all this?' when the rescue of reckless debtors is enabled. The value of housing was grossly inflated. Why on earth should we be stuck FOREVER at these price levels? The ONLY way out if we do this is HORRID INFLATION and we have tried this trick before...and...it...doesn't...work in the bitter end. Period. We know this for a fact. History tells us this. Her bloody pen has scratched across the pages of time and it is a grim story. Yet if we face reality and do the right thing, after a short period of pain, all is well. We thrive. We are saved. But getting there is the problem.
The 'surge' in Iraq has collapsed. As the picture at the top of this story shows, the surge has utterly failed. As saner people recognized and as I said back last year, the surge could not work and would only provide time for Sadr and others to rearm, reorganize and reset their strategic goals. As usual, doubters were right and the neo cons were totally wrong. The failure of our military strategic planners to understand simple war theory is amazing and discouraging. Just like our top economists refusing to understand simple economics. This is rooted in their dream world: they DESIRE outcomes but can't accept the hard work and losses that lead to profits and victories. So we muddle along, going down hill rapidly. Just as Sadr is lobbing rockets and missiles into the heart of the Green Zone and hitting more and more targets better and better, honing in his sights, so it is with the Destroyer of Wealth. This invisible foe represents 'Market Risk'. And who is that?
MIZ RISKY! The charming, reckless female, daughter of Death. She cannot be defeated or stopped except in one way only: we have to take care of and listen to Miz Safety. She is the one who saves money, is very careful and who faints if she sees numbers suddenly taking off to infinity.
Fannie Mae and Freddie Mac regulator on Friday said it is up to the housing finance companies to determine how much money they must raise to buoy the U.S. housing market.
The regulator, the Office of Federal Housing Enterprise Oversight, said it was clarifying an earlier statement made by its director indicating the combined amount could be as high as $20 billion, more than twice what many analysts had expected.
Ofheo this month eased constraints on the government-chartered companies in an agreement that prods them to raise "significant" amounts of capital. The move allows the GSEs to boost their support of the housing market through the purchase of hundreds of billions of dollars in loans or mortgage securities.
See how the salvage of the collapsing US housing market is already over $20 billion. Even as Obama struggles to explain this business, the amount DOUBLED. And trust me, it will double again and again. Recently, a neighbor of mine wanted to fix his foundation of his 200 year old house. I explained the financially sound way to do this. He didn't want it to look like a cement wall. He wanted rock. So he hired someone who built him a stone wall basement. Only the problems accumulated as they always do when one tinkers with foundations. The work went on and on. All Fall and then today, it continues. I know that a day of three guys working in this way equals well over $400. So, if we look at more than a month of $400 days, the cost of rebuilding this foundation could end up costing more than the house itself. 60 days at $400 a day is $24,000. This is why one has to be cautious about taking on such projects.
Fannie Mae and the other Fed agencies are all supposed to sop up all the bad loans generated by the lending machines we call 'banks' and 'financial institutions.' They don't want to hold this junk, they want the Fed to 'buy' it as if it is worth something. And to do this, the Federal agencies have to raise money. And they can't do this by going to savers and investors for funds. These people, burned by the losses so far, are not giving a penny. So everyone in the government is lending to each other to bail out these guys who made billions in profits and fees while making these reckless, stupid and obviously dangerous loans! And will they stop doing this in the future?
No! Since they will all be bailed out and not bankrupt or in prison or jumping out of windows, they will keep their palaces and yachts and get to start all over again, scheming as to how they can leech even more money out of the systems! How goofy is that? Time to visit the Federal Reserve LLP:
The restructuring of the Discount Window at the beginning of 2003, including repositioning the discount rate from below the FOMC's target rate to above the target rate, was designed to improve the window's operation as a mechanism for implementing monetary policy and as a backup source of funds for individual depository institutions.
The primary credit program aids the implementation of monetary policy by: (1) making funds readily available at the primary credit rate when there is a temporary shortage of liquidity in the banking system, thus keeping the actual federal funds rate from rising much above the primary credit rate, (2) making the process of borrowing from the Discount Window administratively easier, and (3) promoting consistency in the lending function across the Federal Reserve System. By minimizing the administration of and restrictions on the use of Discount Window credit, and by limiting extensions of credit to generally sound depository institutions, the primary credit program reduces depository institutions' reluctance to borrow, thus making the Discount Window a more effective policy instrument. The secondary credit program makes credit available, when appropriate, to meet backup liquidity needs of depository institutions that do not qualify for primary credit.
The new rules below are for the 'lending window' that had to be fixed so no one would be 'harmed' if they use it. The biggest financial houses have rushed to the window while loudly declaiming that they are not going to be hurt by using it and they grabbed at the easy funds with both fists. Their stocks went up, not down. This made them immensely happy and they declared this window raid a success. From now until...ETERNITY...they will go to this window for cheap loans you or I can't get. And they will use these loans to lend us money at a much, much higher rate. And they will happily sop up their 10-20% handling fees! HAHAHA. Can't lose! So let's explore the rules of this new window of opportunity:
Here is the old chart from before last week.
Note several things here: the length of time has been elongated greatly. So 'emergencies' can be very long term, not overnight or for a few days. Note the other deals here: NO QUESTIONS ASKED. HAHAHA. I would LOVE a bank that has that! No one glowering and demanding what I am going to do with the money they are lending. 'I need to buy tickets to Argentina. Give me a loan for $1 million. No, make that $20 million. I need it for my living expenses down there!' Right! No questions. Also, NO RESTRICTIONS. Wow. Argentina, here I come! Whoo hoo! Maybe I should make this a loan for $200 million. No, $200 billion. Hell, why not go for it all: $200 trillion. And now we can see dimly where the Derivatives Beast feeds. The 'no restrictions/no questions asked' loot may be used to buy federal funds.
And here is the snake eating its own tail: the Fed has to sell bonds to fund money growth at all times. And the Federal government has been running in the red ever since the Vietnam War except for one year and one year only! And the entire system has been reset to reflect the needs of this 'totally in the red all the time' system. Note that both Obama and Clinton don't talk about this. And McCain wants to bomb, bomb, bomb our way to hell as his nostrum for all this.
Federal Reserve emergency rates:
How is the primary credit rate set?
On March 17, 2008, the primary credit rate was reduced to 25 basis points above the FOMC's target for the federal funds rate. This spread will remain in place until the Federal Reserve determines that market liquidity has improved.
The Federal Reserve Act requires Reserve Banks' boards of directors to establish the discount rate, subject to review and determination by the Board of Governors, at least every two weeks. Reserve Banks' boards of directors establish the level of the primary credit rate, not a spread relative to another rate. Though the spread between the primary credit rate and the FOMC's target for the federal funds rate has been 100 basis points, the spread could vary. Policymakers sought a rate spread that would give most depository institutions the incentive to obtain regular funding from market sources rather than from the Discount Window. Experience with the above-market-rate Y2K Special Liquidity Facility, information about the pricing of correspondent lines of credit, and information from other central banks that have above-market-rate lending facilities indicated that a spread of 100 basis points is appropriate to accomplish this goal.
The 'market forces' have collapsed. So it is the Fed or nobody. And the way the dollar is faring, there will be nobody from overseas. The US has grown accustomed to soak up nearly all of the planet's financial lending. The flow of 'funds' into America has been even faster than the flow of red ink as we misspend. This is due to our ongoing fire sale. Everything is for sale in America. And we are recklessly inviting foreign powers and competitors to relocate here so they can garner profits here and send it home or use it to expand their base of power here. This means we have been losing sovereignty at a mad rate. The more we do this, the more we lose sovereignty.
Now that we have utterly collapsed our banking system, the Fed has to lend and to lend means to produce money out of thin air. If this were still a bubble, this action would be causing great inflation. But money is vanishing faster than the Fed can lend it. The Fed is dropping more and more rules and has been edging into 'no restrictions/no questions asked' more and more and has expanded this from banks that are 'sound financial condition' to not only bad banks but to NON-BANKS. This insane policy will stop the collapse but only at great cost. And it will keep all the bad things going. The things that are at the base of this collapse will continue, not end. There is no resolution. Instead, there is an acceleration of the bad things as they get worse and worse.
Federal Reserve emergency window rules:
14. Is there any threshold for the size of a loan beyond which a Reserve Bank will ask the depository institution some questions regarding the loan?
No size limitations or thresholds exist. Reserve Banks use judgment to decide when, if at all, a loan request is large enough to warrant asking questions at the time of the request or after the fact.
15. In what situations may a Reserve Bank extend primary credit for consecutive days? What is the maximum period that credit can be outstanding?
Please Note: On March 17, 2008, the primary credit program was temporarily changed to allow primary credit loans for terms of up to 90 days. Also, the spread of the primary credit rate over the FOMC's target federal funds rate has been reduced to 25 basis points. These changes will remain until the Federal Reserve determines that market liquidity has improved.
Primary credit may be extended for periods of up to approximately one month to small depository institutions in generally sound financial condition that cannot obtain temporary funds in the market at reasonable terms. Credit extensions outstanding for more than several consecutive days may be subject to increased administration. The borrower may be asked to explain why it needs longer-term credit. Reserve Banks may make multi-day secondary credit loans to enable a timely return to a reliance on market sources of funding or the orderly resolution of a troubled institution. The appropriate duration of multi-day loans will be at the discretion of the local Reserve Bank. Borrowing by depository institutions when the federal funds rate rises to or above the primary credit rate is not subject to any frequency considerations.
The Fed can go to infinity. They can give loans forever. And we enter the realm of magic and death! First, let's look at more charts:
The US imports capital and consumes it. Japan is the world's biggest exporter of this. Not China, Japan. As this news service here likes to point out again and again, we must examine the actual foundation of the present banking and trade systems to see what is really going on. Japan is the heart of the 'no questions/no limits/0%' system! And the US is trying to imitate this only Japan has a huge trade surplus with the world and the US has the exact opposite: the biggest trade deficit with the entire world, totally head and shoulders above everyone else. The dynamics here are against our recovery if we continue doing what we have done in the past. We can't get the benefits of the Japanese system if we also have the world's highest trade deficits! And killing the dollar may stabilize it at a dire level but will not reverse it.
If we reverse it, the entire dynamics of our banking system will collapse. And the dollar may vanish as a currency but this won't fix our bankruptcy, it will accelerate it. Indeed, it will happen with astonishing swiftness. One day, the dollar buys things, 24 hours later, it buys nothing overseas. Already, more and more nations doing trade are refusing to denominate it in dollars. Starting with Iran.
Now, time to revisit the creature no politician dares talk about, not banker dares utter its name: the Derivatives Beast. Many people are puzzled by this mysterious and dark creature that lives in caves. I can see it only because I passed through the Gates of Death in the past, when hit by lightning. So instead of mystery, I see it for what it is: the fear of death has caused bankers to feed the creature that guards the Gates of Death. And it is very devoted to numbers and loves random chance and infinity. When we stare at it in the glittering eyes, we see the inner workings of black holes that are at the center of all galaxies. Time stops, the vortex is all-powerful and there is no escape. Let's visit the government agency that tracks these things:
• U.S. commercial banks generated $2.3 billion in revenues trading cash and derivative instruments in the third quarter of 2007, down 62% from the $6.2 billion reported in the second quarter. This decline is attributed largely to the difficult trading environment in credit markets.
• Net Current Credit Exposure increased $53 billion, or 27% from the prior quarter, to $252 billion.
• The notional amount of derivatives held by U.S. commercial banks increased $19.7 trillion to $172.2 trillion in the third quarter, 13% higher than in the second quarter. Bank derivative contracts remain concentrated in interest rate products, which represent 81% of total notionals.
• The notional amount of credit derivatives, the fastest growing product in the derivatives market, increased 19% from the second quarter to $14 trillion. Credit default swaps represent 98% of the total amount of credit derivatives.
Credit derivatives have grown rapidly over the past several years. Tables 11 and 12 provide detail on individual bank holdings of credit derivatives by product and maturity, as well as the credit quality of the underlying hedged exposures. As shown in the first chart below, credit default swaps remain the dominant product at 98% of all credit derivatives notionals.
The notional amount of credit derivatives in the third quarter of 2007 rose $2.2 trillion, or 19%, to $14.0 trillion.
Contracts referencing investment grade entities with maturities from 1-5 years represent the largest segment of the market at 43% of all credit derivatives notionals. Contracts of all tenors that reference investment grade entities are 73% of the market.
The notional amount for the 30 U.S. commercial banks that sold credit protection (i.e., assumed credit risk) was $6.2 trillion, an increase of $0.9 trillion from the second quarter. The notional amount for the 36 banks that purchased credit protection (i.e., hedged credit risk) was $7.8 trillion, an increase of $1.3 trillion.
Trillions, not billions. When I first began to read about derivatives way back in the post-Volker era, I was horrified to see the billions being created there. I argued long ago, this wasn't protecting us. And indeed, as we go through one housing bust/stock market bust/commodity market bust after another, it is painfully obvious, there is no system that can stop these collapses or protect all wealth from all collapses. These collapses always win in the end. And if they are fixed by inflating things, this makes it much worse in the long run. Yet the desire to evade responsibility for these over-runs and collapses continues. Today, this has caused the latest scheme for evading reality, the derivatives market, to expand to amazing size, far, far, far beyond anything real or useful. The fact is, the money makers and lenders have discovered a system that can be set at infinity! And tempted by this, they are rapidly moving towards infinity. In the mistaken idea, if they reach infinity, eternal wealth is theirs.
Credit Default Swaps are the vast majority of what the bankers created. The impossibility of anyone paying back anyone else in this game they creates is total. There is no way in hell any of these swaps can be honored for the simple reason, they are way, way, way too big, too vast, too encompassing. No one wanted to take any possible losses. So everything was parked in this scheme. And as always, when we see 'everything' and 'all the time' as well as 'infinite' we are looking into the swirling darkness of the Beast's malign eyes.
This chart shows the nature of the base supporting these derivatives: garbage, junk, trash and more. The trash isn't one quarter of these funds, it has now reset as ALL of the funds! We know that NOTHING held by the banks and investment houses are worth 100% value. All have to be 'haircut' and in this case, the choppers take off the entire head. Like all those jokes about haircuts during the French Revolution.
This chart, if you click on it, enlarges. It is important to read the numbers here:
10 years ago, the notional amount of these derivatives was $26 trillion. 20 years before that, it wasn't even a trillion dollars, just as a reminder of where this business is going...up! The spread between dealers and end users was around $23.1 trillion. Already, this spread was totally insane when we consider the fact that both were very close once upon a time back when this started after the gold window closed during Nixon's reign. Ten years later, just ten years----the dealer's notionals shot up to $155.3 trillion and the end users' notational was, get this, $2.8 trillion. It literally doubled while the dealer's end rose 55.5 times greater!!! Ten years ago, the spread was 'only' 17 times the base. These damn derivatives multiplied like rabbits on steroids. Each year, the rate of the spread widened tremendously. The rate of climb accelerated in the last 2 years. This is the dread Derivatives Beast. This is the creature that has been activated in the last 6 months.
Why is that?
Logic! One thing about the magic of money and the cave of wealth where death lives, is that it can be made to go to infinity if one is using only numbers. The less grounded in reality a magic money system is, the more the temptation to go to infinity. But this is a TRAP. Infinity happens to be death! And the demons in the cave know this and wait happily for silly humans to come into the cave and begin tallying up insane numbers. They egg the humans on and rub their claws with glee, anticipating the inevitable which is when they get to 'reset' the system back to zero again! Always, the humans wail and gnash their teeth and scream curses which the demons love. Then the humans beg for help. How can they stop this process? How can they prevent infinity from resetting to zero? The demons suggest going out and killing people and openly stealing stuff. That will fix everything.
'But we are already killing people and stealing stuff! But the people we are killing are resisting us and we are losing money trying to steal stuff!' the humans trapped in the demonic cave of eternal wealth wail.
'Kill some more. Pay no attention to morals. They don't matter. We promise, we will reset at infinity as soon as you return with gold and carcasses we can devour. If you don't we will devour you,' whispers the Dragon as the demons chatter and clash their pitchforks against the pile of gold upon which the Dragon sleeps. So off the humans go, seeking loot to bring to the Dragon. Alas for the poor humans, the dragon doesn't reset the game back to infinity even after the wars. Usually, he eats everyone he can for he loves death and war. He is a Dragon, after all.
Most other 'bad news' web sites talk about all sorts of things but few talk about WWIII. This is because we all wish that the foolish humans who decided to play number games with the Dragon won't listen to this dread creature when it finally tells them how to fix things. Alas, the temptation to kill in response to economic woes is very strong in humans. Very strong. It lies at the very base of our existence as a species. We live to kill.
The European Central Bank, struggling to ease gridlock in credit markets, will lend six-month money for the first time even as policy makers warned higher interest rates may be needed to combat inflation.
The ECB said it will auction 50 billion euros ($79 billion) in emergency six-month funds to support ``the normalization of the functioning of the euro money market.'' At the same time, council members Axel Weber and Juergen Stark said Europe's economy is coping with the jump in global credit costs and the central bank may need to raise its benchmark interest rate to fight inflation.
The ECB's twin-track approach contrasts with the Federal Reserve's response to the credit crisis. In addition to emergency liquidity injections, the U.S. central bank has cut its main rate by the most in two decades to prevent the economy slipping into recession. The danger for Europe is that higher credit costs will eventually drag down growth.
``There are increasing risks that the ongoing stress in the interbank market will ultimately impact the real economy and thus force the ECB to reconsider the division of tasks that it currently defends,'' said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London.
As the Derivatives Beast comps on us here in America, the creature is dragging in all of the world's bankers and investors and devouring them and their wealth. We tried to park all risks in this cave and instead, created a risk far above, far worse than the original dangers. And the risks were all in the name of earning big profits while not creating real things but leaving that dirty business to the Chinese and Japanese. Who are extracting their price. Now we are in a panic. The West wants to punish Asia and is delirious with desire to somehow destroy the power there like we did in the past when much of the world's wealth flowed to Asia for 4,000 years. Armed with weapons of mass destruction [cannons and guns] the Europeans destroyed Asia and tried to rule it with an iron fist. And finally failed in the end.
Lehman Brothers Holdings Inc. may have been cheated out of as much as $250 million in loans using forged documents said to be from Marubeni Corp., the Wall Street Journal said, citing a person familiar with the situation.
Lehman will take legal action to recover all of the funds that were ``fraudulently misappropriated'' in transactions through one of its affiliates, the New York-based investment bank said in an e-mailed statement to Bloomberg News. The statement didn't disclose the amount of the funds.
The loan was to help finance the purchase of medical equipment for hospitals through a company affiliated with LTT Bio- Pharma, a Tokyo-based biotechnology company, the Journal said.
This is rather funny. Note who is the biggest lender on earth: the Bank of Japan. But it won't lend to JAPANESE! Only the top exporters get this lending! At 1% interest, of course. But all the others go to banks that get the Bank of Japan carry trade money which Japan generously lends to foreigners Japan wants under her thumb, and these foolish foreigners turned around and for a tidy profit, lent this money back to the Japanese who said, 'Ask no questions. We won't give answers, anyway. Just give us the money. GOODBYE, hahaha.' And now there is no one to pay the ganjin bankers! Who will have to take losses. So I suppose they will beg the Bank of Japan for more loans...or run to the US Fed LLP for no questions asked loans...hahaha. Yes. This is why the magic window exists.