The New 5 Year Boom/Crash Cycle

Elaine Meinel Supkis

Stocks went up and everyone who put us in this economic mess now are convinced old Santa Bernanke will follow in Greenspan's footsteps. We will now enter a foolish cycle of sudden rises and sudden falls in interest rates that have no connection with reality. And indeed, I will prove that this has been so since the middle of the Vietnam war when Americans voted for Guns and Butter. We have been dining on this toxic dish nearly all my life. And it is bankrupting us gradually. This slow descent into financial death is now going to speed up if Bernanke pretends inflation is less than 4%.

Just to review today's astonishing news, here is Bloomberg:

The Federal Reserve will probably cut its benchmark interest rate to 4 percent as slowing U.S. economic growth restrains inflation, said Edward Hyman, chairman of International Strategy and Investment Group.

The worst housing slump in 16 years is weakening the economy after the Fed raised borrowing costs 17 times from June 2004 to June last year. A mortgage-market survey conducted by Hyman's firm showed conditions are ``pretty bad'' and ``among the lowest ratings we have ever gotten,'' Hyman said.

``They will start to ease in a measured way, 25 basis points every meeting,'' he said in an interview in New York. ``I think the economy will react favorably to it'' and probably avoid a recession, he said.

Hyman said he sees a ``better economy next year,'' with stocks and Treasury yields rising. Slacker growth this year will ``put inflation aside'' as a concern for the central bank, he said.

What has irritated me for many years now is the belief that spending is our economy. This is false. Only after we deduct our trade deficit, can we see if we 'grew' an economy and the answer is a resounding 'NO'. We are not growing anything except an ocean of red ink. Consumer spending is driving America into a very deep hole. We should NOT be encouraging spending, we should be encouraging SAVINGS. Debt has ballooned and savings has collapsed. Ergo, we need to rebalance them with each other.

This 'Golden Mean' is true conservativism and I am rather conservative. The sober mean is important because it is all about balance. When the rich get too rich while the poor languish, this is not the Golden Mean. This is people with gold being mean. Great differences between rich and poor leads to tyranny, revolution and coups. The great middle class leads to stability and democracy. As our nation follows policies that are extremist leading to extreme ups and downs in our finances, extreme solutions to financial problems caused by extremely wild investments, extreme wealth being pampered and cared for while many millions go without health insurance or even housing, this extremism is not good for any democracy and we see tyranny already raising its head as the millionaires in Congress and the billionaires in the Senate and the multimillionaire govenors all join hands in making extremist policies that make them all richer along with the Secretaries of the Federal government and the multi-multi-millionaire/billionaire President and Vice President richer...this can end with a historic explosion at home when these traitors hand us over to foreign powers who hold the mountain of debts rung up by the super-rich rulers.

The war debt climbs relentlessly as we see here with Prison Planet:

U.S. President George W. Bush is preparing to ask Congress for as much as $50 billion in additional funding for the war in Iraq, The Washington Post reported on Wednesday, citing a White House official.

A desire to save the banks who gave bad loans, to save a million hedge fund hell hounds, to fix the affairs of the very rich, they need to confiscate all the wealth by granting themselves endless 'free' loans. Loans that will be yanked from our hides as they strive to kill inflation by killing all social services, wages, benefits and infrastructures of the working class.

I remember when the government pretended they controlled inflation via the Wage/Price controls: I was working already.

Here is a basic chart courtesy of Yahoo finances: Click on image to enlarge

As usual, I modified this chart by inserting important events and the ups and downs of the IRX 13 week funds the government uses to sell its bonds which pay for things like money we use or misuse. In bad times, the rate the Fed charges drops because everyone rushes to the Fed for protection, in good times, it drops really low. But there is a much more important force at work: the Federal Reserve!

If the Fed rate is very low, the rate here is low. And if the Fed tries to kill inflation long after inflation raced past the interest rates of return, it rises rapidly. The chart above doesn't cover the 1945-1960 era which saw great stability and medium interest rates. The sudden surge upwards from 1975-1985 were supposed to be a one time event that was due to oil wars and not because something was fundamentally wrong with our entire system. Inflation was supposed to be 'cured' and the fiat currency, secure. At home, inflation did moderate but this was due to OPEC pumping oil like crazy again.

After the Plaza Accords debased the fiat dollar further, the US continued its over-all plan of overspending in the government and letting Japan hammer us in trade. Today, everyone hammers us in trade and we overspend like fiends and the accumulation of both are now many trillions in the red. So looking at this chart, one thing is painfully obvious: in 2002, the rates plunged below the lowest rates set back in the good old days of the first Kennedy year, 1960. Did inflation vanish for the first time since the beginning of the Vietnam War? Obviously, not. For in 1960, the USA was a creditor nation, it was in the green all around. And taxes on the rich were very high. It was understandable, money was cheap because everyone was saving and you could buy a house with $3,000 down and a twenty year mortgage and pay it off by 1980. Between then and 1980, all hell broke lose. But in 2002, we were not at peace, not in the green and most certainly not a creditor nation. So how could we charge so little for interest? Of course, it was a gift from Greenspan. Pure and simple. And he began giving long before 9/11. On the chart, the interest rates dropped the most BEFORE 9/11!

From Bloomberg:

``Concerns about upside inflation risk and their credibility will play a role in tempering how aggressively they will be willing to ease,'' said Brian Sack, vice president at Macroeconomic Advisers LLC in Washington and a former Fed economist. ``It won't prevent them from easing in September.''

The central bank did signal greater concern about the threat to the economic expansion from credit markets than it showed in the statement after the Aug. 7 meeting. A deeper deterioration in financial markets ``might require a policy response'' depending on the effect on the outlook for growth, the minutes showed.

When there is a hole in the bucket, a rip in the balloon, no matter how hard one tries to fill it up again, everything dribbles out. Every other day, the stock market swings wildly between extremes. Today, it went up the same degree it went down the day before. Talk about instability! And it rises on rumors and falls on facts and eventually, hard facts will prevail. I always reacall, the happiest day on Wall Street before the Great Depression was in mid-September after it yo-yo-ed up and down for three months.

It is pure wishful thinking that inflation will magically vanish in six months. And the capacity of the Chinese to believe us when we set super-low rates is not where it was when they were trying to penetrate our markets in 2002. They have penetrated and poked a hole right through the other side already.

From Market Watch:

In his letter, Bernanke called for creative thinking to get the nation out of its subprime mess.

"It might be worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance," Bernanke wrote.

"Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms," Bernanke wrote. "They might also contain features to improve affordability, such as variable maturities or shared-appreciation provisions for example."

My theme for this week: the Death of the Classic Mortgage.

The 20% down, 20 years to pay mortgage died some time ago. It was replaced by higher-interest rated, 10% down, 30 years to pay mortgages. Then this was slowly replaced by the strange new Alt-A and sub prime mortgages that were much closer to credit cards, the sub-prime being basically glorified credit cards where you don't even pay interest, you slip deeper and deeper into debt after the first payments! So what do we need? Even more credit-card like instruments? Huh? When 45% of the market was these credit-card clome mortgages, I could sense we were turning yet another dangerous corner on this long winding road downhill.

In the Middle Ages, peasants would swap land and pay each other money for the right to use various strips of land but they could NOT buy their land outright, it always remained in the hands of the overlords. If the overlords had bad luck or were reckless, they might have to gain money but they still didn't SELL the land. They handed out 'mortgages' which meant the peasant didn't have to do service but the lord still held the land, so to speak, as part of his or her estates. Smart or lucky peasants could then assemble large mortgaged bits of land scattered about the big estates. Consolidating this to make money, they sold the right to farm these strips to brokers who would then treat them as tranches and collect profits off of a variety of peasants needing strips of land close to home. So a farmer might hold the tilling rights to ten different mortgaged strips of land which happen to be close at hand and paying for all this was passed through a broker who was the ancestor of the art of real estate developer.

In my region in America in the depression of the 1840's, we had a rent war whereby the newly-freed Americans resented this style of landholding which the Van Rensselaers carried over from Europe. The battle over who held the land was not about mortgages but about owning the land outright. The laws in New York, thanks to this uprising, state, I own the land I sit upon from the surface to the center of the Earth. And 1000 feet into the sky. And my land is my castle if I keep it free and clear.

The 'new' mortgages are really old, old ones. The people living in houses will be allowed to mess around for a while and so as they please but over the years, the right to use it in any way will be, like in many 'gated communities', severely restricted. Eventually, homeowners will be mere supers, forced to maintain their properties and pay for all repairs and inspectors will insure the bank's ownership isn't debased by mishandling or misuse. These homes won't be castles, they will be hovels.

From Charlotte, NC:

In three weeks, Charlotte's Emergency Winter Shelter will close its doors to 53 women, and Carmen Adams has started to worry where she will spend the night.

Adams, 46, has been homeless since October. A store manager at Family Dollar for 20 years, she says hasn't worked in the past year because of chronic pain and an array of illnesses. She used to spend nights in her car, but now it might be repossessed, she says.

"I don't know where I'm going to go," Adams said.

Each housing busts has homeless. My family was homeless in the sense, we didn't have a house. But we had a property, free and clear. So even while we lived in a tent complex, we were anything but homeless. I even had a sign on the kitchen area saying, 'Home is where you pitch your tent.' The poor people stuck with credit-card houses are mostly one paycheck away from homelessness. Illness can swiftly lead to eviction! This is absurd. I keep saying, it tis far better to have high interest rates, low housing values and be able to buy houses the old fashioned way! You can't flip housing but then housing won't flip you back into the gutter.

From the Market Oracle:

I am not really one of these people who believe in conspiracies, but that does not mean that the Working Group on Markets is not what is seriously mitigating things. Hey, they admit they do it. They certainly have the horsepower and brains to pull it off, with Paulson and so on, market traders par excellence.

The only trouble is, how many times can this work? I think it is rather clear that, now that mortgage derivatives have been scattered world wide, and are being written down to 10 cents on the dollar, some more anarchy must ensue. We may have sort of weathered the first real test, but at great cost, and likely many hidden losses out there. We are not out of the woods yet by any imagination. The bad derivatives are about $2trillion worth of subprime and Alt A (one level higher). 20% of these are in arrears. Then we have the trouble spreading to even good mortgage derivatives, as investors flee these regardless of quality. That has caused jumbo loans (exceeding 400k US) to become hard to get and at 9%! Good luck to the high end real estate market.

The magic of saying, 'Hocus pokus, low interest ratus, stock markets go up!' is easy, isn't it? Child's play. The fact that this might cause a dragon to come and burn down the place doesn't occur to these childish magicians. They tried and tried to get Santa Bernanke to say this magic spell and so far, he hasn't. But they have shoved him aside and spoke the spell themselves and like magic, up went stocks. These same people buy houses costing more than a million bucks. They HATE paying 9% and they want Bernanke to say, 'Hocus pokus, million dollar mortgages appear!' And there they are! 3% a year! How delightful.

From Bloomberg:

Standard & Poor's said business conditions for securities firms are worse than in the second half of 1998 and revenue from investment banking and trading could fall 47 percent in the final six months of this year.

The rating company said it conducted a ``stress test'' designed to measure the ``ability of investment banking businesses to withstand such scenarios.'' The conclusions don't constitute a forecast, S&P said in a statement.

``This is more severe than in 1998,'' when investment- banking and trading revenue fell 31 percent in the second half following Russia's debt default, S&P analyst Nick Hill said in the statement. At the time, revenue from fixed-income, currencies and commodities was negligible or even negative, he said. As in 1998, firms are likely to cut bonuses to stay profitable, said Hill, who is based in London.

And they are right. Things are bad, very bad. And getting worse, not better. Like all magic spells that go against the forces of nature, the tides of the seas, these spells will fail. The houses built on the sands of such economic insanity will be swept away by the tsunami of events just like the Boxing Day Tsunami. All it takes is an earthquake. Off shore. And there are plenty of fault lines about to blow including the very real ones in California which is way overdue for a catagory 8 or 9 earthquake!

Bloomberg:

Markets recovered quickly after the 1998 drop and favorable economic fundamentals now could cushion the impact of declines in investment banking and trading, the report said. This time, ``the source of the problem has shifted from emerging markets to the world's most developed economy.''

The problem is the death of the American Empire is going to suck everyone down a black economic hole! Note that we saved the world in 1998 by going even deeper into the red. Clinton did 'balance the budget'...for one year. And Bush then announced he would spend it all on tax cuts. So we got stuck with a trade deficit from Clinton's years AND budget deficits that swiftly quadrupled our national debt. And fixing this is harder and harder to do since we are spending like there is no tomorrow. Another reason the Fed wants to drop rates no matter what.

And the same ugly dilemma arises: to sell this debt, we must have rates that are attractive to foreigners since they are the ones buying up all our debts and they are the ones who will be our masters as we live in our own nation as if it were a house on a Master Card credit plan rather than free and clear.

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Comments

[John]

(I think you missed a closing 'blockquote' tag, right after the PrisonPlanet bit.)

[Elaine Meinel Supkis]

Yes, John. Sorry about that. When I move stuff around sometimes pieces of the template get deleted.

[John]

Oh, I wasn't complaining. It was more so you could pop back in and fix it. Heh; I can't help it, I'm a proofreading/formatting 'neat freak.'

[randal]

Actually, Clinton didn't balance the budget according to GAAP(generally accepted accounting principles). They used Social Security surplus funds to perform this feat. Do governments and big corps ever repay stolen loot?

[Carlos]

Coming from a former American colony (Philippines), it is easy to understand the dissonance between rich and "disappearing fast" middle America. My country is a poor facsimile of the U.S., a country that 90% of the population want to be. The difference is in the percentage of literacy and intelligence. Your government would have a cakewalk running things here.

Our system is a thinly veiled feudal system disguised as a democracy, while yours is the same, but well disguised. Every 6 years we have a Presidential election. It is during the four month election period that the elite "give back" to the masses. It is a "fiesta" of throwing money by the elite at the public, to get them to vote for the elite sanctioned candidates. Keeping the majority poor guarantees that their selection is "democratically elected" to continue and carry on with their agenda.

It would seem that in the case of America, the elite have forgotten how to "give back" to the sheeple they milk for a living, who pay for their wars and profits, keeping them in business. They want it all. They make the rules and are the first to break them. Because they can.

Maybe it's time for middle America to take back what they so trustingly gave away; their freedom, dignity, and the right to choose.

[Cato]

Hey Randal. Speaking of Social Security, remember the best new idea to come out of DC a few years ago was to allow the Masters of the Universe crowd to manage the Trust Fund? Think of the thrill watching your retirement go the way of the ABX-HE index. But, we stupidly turned down that privilege. Who knows? Maybe ‘the decider’ did it anyway. I can’t wait to see the look on everyone’s face.

[John]

"Speaking of Social Security, remember the best new idea to come out of DC a few years ago was to allow the Masters of the Universe crowd to manage the Trust Fund?"

Before all the leftists start, ummm, gratifying each other, remember that there have been SEVERAL attempts to change the public's crappy SocSecurity/Medicare system over to the FUNCTIONAL, SOLVENT system currently enjoyed by the Federal Employees Union.

Guess who stops it every goddamned time? Shitbag Teddy Kennedy, that's who. I'm counting the days until that bloated sack of monkey shit drops dead.

Yeah, the current crop of GOPers are a bunch of unrepentant, worthless fascists, and the entire Bush family ought to all be taken out back and shot. But anyone who thinks the Democrats are one whit better ain't dealing with reality.

SocSecurity as currently implemented is utter bullshit. And there is a better way that doesn't involve serving up the populace up to the hell hounds on a silver platter. But that doesn't create the serfs that the Bushies and Kennedys crave so ardently. The scum in charge don't want a solution; they want to be able to campaign on the problem. Forever.

If you've less than a nine-figure net worth, but aren't on welfare, neither side gives a crap about you, except to the extent they think they can drink your blood...straight out of your neck. And "that's the fact, Jack."

[Cato]

Jack, I agree there must be a number of better ways to manage and preserve the Social Security trust fund. Politicians do use it to curry favor and strike fear in the hearts of seniors. Three-Card Monte dealers on both sides of the aisle. What is needed first and foremost is an ethical basis for money management equal to the fiduciary care the very best trust managers provide - not the ‘wide stance’ Wall Street insists upon.

The point I wished to make was that had personal accounts been privatized they no doubt would have been pirate-ized and loaded-up with mortgage-backed securities, CDOs, high yield bonds, etc. My point may be moot because that ‘Jin-job’ may have already happened.

[John]

Yes, on this we can agree: the system BushCo was pushing would have ruined millions. Although they were only talking about 3% of FICA to begin with, it would have grown, as the bratty billionares needed more bagholders.

But now more than ever, we have to be vigilent against the "one side good, one side bad" mentality that has become so pervasive and accepted. Both sides are rotten to the core. Both sides are bought and paid for by the monitary elite. Both sides are full of sociopathic power-mongers who wish to feast upon the masses.

So by all means, criticize the GOP; they deserve every bit of it. But please try to always remember to mention the equally crappy Democrats when you do. (And vice versa, natch.) We-who-can-think have a responsibility to try to break this accepted good/bad worldview, and start spreading the meme that they're all rotten to the core, and all need to be dragged from the halls of power by their short-hairs.

[Elaine Meinel Supkis]

Social Security can't be a system run via 'investments' simply because this is impossible. It will always be an intergenerational issue. To keep it solvent, laughably easy: balance the damn budget, strengthen the FOREX reserves and keep up EMPLOYMENT!!!! Don't ship jobs to Asia!

The 'savings' set up by the REAGANITES were FAKE. Every penny of this went to red ink in our government. It doubled taxes on the working class. There WERE NO SAVINGS. And both parties have allowed this and this is why everyone in power hated Al Gore to death for talking about 'locked boxes' concerning SS money.

Seriously, I thought he would be assassinated over this and we would be handed over to Lieberman or Bush. We got Bush anyway.

[Cato]

Jack, you’re right about the proposed modest start to the privatization plan. But the Street thought they had plenty of time and in time they would see a torrent. Now the gauge is on empty and they really need the gas money.

The 'lock box' concept is the obvious solution, Elaine. Who hasn't wished they could just get back what they put in? A lot like the piggy banks you had to break open when it was full. The whole system began to go downhill around the time they put those rubber stoppers in the pig's belly.

[Elaine Meinel Supkis]

Thanks to our media deliberately confusing voters, they didn't understand the 'locked box' concept. This was merely a way to stop the Fed from overspending on all and sundry things. Note how we doubled the Pentagon's spending on top of everything else. This red ink this last 7 years has been very significant and nearly all of it flowed into private pockets, not public improvements at home.

[John]

"This red ink this last 7 years has been very significant and nearly all of it flowed into private pockets, not public improvements at home."

Yep. Bushie and all his shitty little creepy friends all got even filthier rich in the wake of 9/11.

[John]

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