FHA's Mortgage Delinquencies Soar

The mortgage market appears to finally be stabilizing -- as long as you ignore loans backed by the Federal Housing Administration. Increasingly, FHA-insured loans are falling into foreclosure or serious delinquency, moving in the opposite direction of loans guaranteed by Fannie Mae and Freddie Mac or those held by banks, which are all showing signs of improvement. And taxpayers could ultimately be on the hook for FHA's growing number of troubled mortgages. The agency's finances are already on shaky ground, and additional losses from loans going sour could prompt the need for a federal bailout, experts said.

"We can't escape this one," said Joseph Gyourko, a real estate professor at the University of Pennsylvania's Wharton School. "This is an arm of the U.S. government." The share of government-guaranteed loans, a majority of which are backed by FHA, that were 90 days or more delinquent soared nearly 27% during the year ending March 31. Foreclosures jumped nearly 17%, according to a report published recently by federal regulators.

At the same time, bank loans saw a dramatic improvement, with delinquencies shrinking by 39% and foreclosures declining by nearly 10%. Fannie and Freddie's portfolio also improved as delinquencies dropped by nearly 15% and foreclosures slid by more than 6%, the quarterly report issued by the Office of the Comptroller of the Currency said. Read more >>

Fannie, Freddie execs score $100 million payday

Image by Getty Images via @daylifeMortgage finance giants Fannie Mae and Freddie Mac received the biggest federal bailout of the financial crisis. And nearly $100 million of those tax dollars went to lucrative pay packages for top executives, filings show.

The top five executives at Fannie Mae received $33.3 million in 2009 and 2010, while the top five at Freddie Mac received $28.1 million. And each company has set pay targets of as much as $17 million for its top managers for 2011.

That's a total of $95.4 million, which will essentially be coming from taxpayers, who have been keeping the mortgage finance giants alive with regular quarterly cash infusions since the Federal Home Finance Agency (FHFA) took control of the companies in September 2008.

Fannie CEO Michael Williams and Freddie CEO Charles Halderman, each received about $5.5 million in pay for last year, and they could receive more when their final deferred compensation for 2010 is set. All the executives receive a significant portion of their pay in the year or years after they earn it. More...

U.S. financial bailout hits $3.7 trillion

(Reuters) - Increased housing commitments swelled U.S. taxpayer infusions into the nation's financial system by $700 billion in the past year to around $3.7 trillion, a government watchdog said Wednesday.

The Special Inspector General for the Troubled Asset Relief Program said the increase was due largely to the government's pledges to supply capital to Fannie Mae and Freddie Mac and to guarantee more mortgages to the support the housing market.

Increased guarantees for loans backed by the Federal Housing Administration, the Government National Mortgage Association and the Veterans administration increased the government's commitments by $512.4 billion alone in the year to June 30, according to the report.

"Indeed, the current outstanding balance of overall federal support for the nation's financial system…has actually increased more than 23% over the past year, from approximately $3.0 trillion to $3.7 trillion -- the equivalent of a fully deployed TARP program -- largely without congressional action, even as the banking crisis has, by most measures, abated from its most acute phases," the TARP inspector general, Neil Barofsky, wrote in the report.

The total includes Federal Reserve programs and a myriad of asset guarantees, including Federal Deposit Insurance Corp. protection for bank deposits.

The increased government commitments more than offset about a $300 billion decline in the U.S. Treasury's TARP commitments in the past year as programs have closed and banks have repaid taxpayer funds. More...

The "right to own a home" has become synonymous with the "right" to lose $25K a year

Image via Wikipedia

The Automatic Earth
Over the weekend, I wrote about Fannie Mae and Freddie Mac, and how they form the core of the biggest fraud and crime ever perpetrated upon the American people. And even though that was already the umptieth time I have addressed this particular topic, I want to return to it again.

After all, we're not talking about Jesse James or Billy the Kid or Charles Ponzi or Kenny-Boy Enron or any of that petty kiddy wannabe criminal stuff, this is the number one way Americans have ever been fleeced right across the entire nation. Maybe that status is best recognized by the fact that people to this day keep on begging for more of the same. Either that or another little fact: the government is at the center of the scheme.

In the July 11 post at TAE, there was an article by Michael David White, a Chicago area real estate broker who a few years ago started calling on his clients to NOT buy a home. I’ve featured many of White's articles since; I like that kind of attitude. In last week’s piece by White Pending Homes Sales Crash in a Record Fall to a Record Low as Tax Break Expires, though, something was missing. There was a line that said "see the graph below", but there was no graph. Since I had a hunch which graph he meant. I sent him a mail. And yes, he came back to me with the graph (some 6 weeks old) that can hardly be surpassed in its definition and clarity of the depth of the US housing and credit crisis.

Take a look at this baby:



That is, what Americans' homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion-, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that's right: US homeowners lost more, by a factor of 26, than they "gained" through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333.

Good morning America!!

And your own government is still trying to encourage homeownership? Now why would they want to do that in the face of numbers such as these? How much thought have you given that question? Over the past 4 years, the "right to own a home" has become synonymous with the "right" to lose some $25,000 a year. Why does Washington, through Fannie and Freddie, Ginnie Mae and the FHLB, continue to guarantee guaranteed losses for American citizens? More...

Fannie-Freddie Bailout Could Cost Taxpayers $1 Trillion

Image by kkennedy via Flickr

Courtesy of CNBC
For American taxpayers, now on the hook for some $145 billion in housing losses connected to Fannie Mae and Freddie Mac loans, that amount could be just the tip of the iceberg.

According to the Congressional Budget Office, the losses could balloon to $400 billion. And if housing prices fall further, the cost to the taxpayer could hit as much as $1 trillion.

Two things are clear: Taxpayers don't want to foot the bill, and Fannie and Freddie, taken over by the government in 2008 to stanch the financial bloodletting, need a major overhaul.

"Some of us who don't even own homes are paying to support others and their home ownership, and they ask 'why?' said Robert J. Shiller, a Yale University economics professor and co-creator of the S&P/Case-Shiller Home Price Indices.

The indices measure the US residential housing market by tracking changes in the value of residential real estate both nationally and in 20 metropolitan regions.

Shiller added that the mission of Fannie and Freddie should be severely cut back "so that they're not helping middle-class homeowners, [but] they're helping poor people get into the housing market."

At the crux of the financial crisis, the government took over Fannie and Freddie to avert possible massive losses for banks, money-market funds and, perhaps, most importantly, foreign institutions that purchased billions of Fannie and Freddie debt because of its implied government guarantee.

The Chinese, for example, had invested heavily, and the US decided it didn't want them to take a loss on their investment.

One possible scenario for the entities is to turn them into utilities, said Sean Dobson, CEO and chair of Amherst Securities.

"Freddie and Fannie could be used to standardize the mortgage product," Dobson said, "to completely describe what the risks are and then act as a conduit for the capital markets to take the risk."

Five Lies About the American Economy

The Obama team’s favorite slices of fiscal baloney
Tim Cavanaugh from the April 2010 issue

The ongoing recession has raised a troubling question for otherwise resurgent Keynesian economists: How can the American economy keep getting worse under the intensive care of an interventionist economic team almost universally praised for its brilliance? The answer may be that the Obama administration is dealing with a fictional economy, one that bears little resemblance to the economy the rest of us inhabit. And when the difference between fact and fiction becomes too apparent, they just make stuff up. Herewith, five big lies the administration loves to tell and the mainstream media (with some notable exceptions) love to repeat:

1. Bold government action staved off a Depression, saving or creating 1.5 million jobs.

“Just remember,” Treasury Secretary Tim Geithner said on November 1, 2009, “a year ago today, last year, you had markets around the world come to a stop. Economic activity just stopped, came to a standstill, like flipping a switch.”

Geithner implies that the American business climate improved substantially in the first year of the Obama administration. In fact, nearly every indicator, from employment to freight transport to rents to retail sales to real estate, has headed steadily south. In some cases, such as unemployment, the numbers have been far worse than the Obama economic team’s worst-case projections. In others, such as real estate, the weakness of the market is masked by expensive government support, including but not limited to the unkillable First-Time Homebuyer Credit, an assault on loan underwriting standards (see Lie No. 2) by the Federal Housing Authority and the government-run mortgage giants Fannie Mae and Freddie Mac, and the completely opaque $75 billion Home Affordable Modification Program (HAMP).

The $787 billion in stimulus spending authorized by the American Recovery and Reinvestment Act of 2009 is now best known for its inflated and unsupportable job creation numbers. At press time, Council of Economic Advisers Chairwoman Christina D. Romer (who, confusingly, made her academic reputation proving that fiscal stimulus did not help the U.S. economy during the Great Depression and World War II) was giving the stimulus credit for 1.5 million American jobs in 2009. All efforts at checking her claims, however, have turned up very different numbers. The Associated Press, the Boston Globe, the L.A. Weekly, and local papers around the country have failed to find actual jobs to match up with those being reported at Recovery.gov. The administration’s only concession to this reality has been rhetorical: After claiming that hundreds of thousands of jobs had been “created” early in 2009, the Council of Economic Advisers turned to the phrase “saved or created” by mid-year. In December the Obama administration again changed its measure to jobs “funded” by the stimulus.

Of all the government interventions since the start of the real estate decline, only one—the rescue effort for too-big-to-fail Wall Street players, which predates Obama—has had a measurable effect. The Troubled Asset Relief Program, the Federal Reserve’s promiscuous use of discount windows and dollar-destroying low interest rates, and the Treasury Department’s open wallet for incompetent financial institutions have cumulatively ensured the survival of the biggest, failiest financial institutions, including such devourers of the commonweal as Citigroup, which managed to lose $7.6 billion in the fourth quarter of 2009 despite an infusion of tens of billions of taxpayer dollars over the year.

2. “No one wants banks making the kinds of risky loans that got us into this situation in the first place.”

President Obama made this claim following a December meeting with big bank officials, then contradicted himself by urging bankers to take “third and fourth” looks at rejected business loan applications. But the administration has been even more enthusiastic about encouraging another type of credit: the precise risky loans that got us into this situation in the first place.

Mortgage lending standards have declined, and the amount of risky debt taxpayers are underwriting has rapidly increased, under Obama’s guidance. A 2009 audit found that the Federal Housing Authority (FHA) was failing to vet lenders, ignoring missing borrower documentation, and declining to consider negative information prior to guaranteeing loans. More important, the FHA still guarantees mortgages with a minimum down payment of only 3.5 percent, despite abundant evidence that a borrower with low equity is more likely to default than any other type of borrower. (See Lie No. 3.) Defaults on government-approved loans continue to rise, as do redefaults on mortgages refinanced under HAMP.

Undaunted, the administration wants to give unpromising borrowers greater access to debt. At press time, the Treasury Department was considering allowing borrowers to get HAMP modifications by using only pay stubs, rather than tax records, to prove their financial status.

3. The economic crisis is a “subprime crisis.”

“We believe the effect of the troubles in the subprime sector on the broader housing market will be limited,” Federal Reserve Chairman Ben Bernanke said in May 2007, “and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

To understand how Bernanke could be so wrong on something so important (see Lie No. 4), note that the real estate bust was not a problem with self-identified “subprime” loans (mortgages that are made to borrowers with bad credit and not backed by Fannie Mae and Freddie Mac). In fact, the rapid expansion in subprime lending was a late phenomenon that occurred in the last 18 months of a decade-long real estate bubble. Subprime defaults are actually slightly below their worst-ever historic records, and the explosion of subprime defaults that began in 2005 was accompanied or slightly preceded by a statistically equal explosion in prime defaults.

How is this possible? The period going back to the mid-1990s has seen a massive increase in mortgages that look prime (and are backed by Fannie and Freddie) but in fact feature dangerously low down payments, tricky interest-only and adjustable rate mechanisms, and other inadvisable debt schemes. Late in 2008, Fannie Mae admitted in a footnote that its portfolio had for years been stuffed with alt-A, negative amortization loans, and other junk debt.

Statistically speaking, the only reliable gauge of default probability is how much equity the borrower has as a share of debt. Fannie, Freddie, the Department of Housing and Urban Development, the Federal Housing Administration, and all other federal real estate concerns have been working since the 1990s to increase the loan-to-value ratio of mortgages. They have succeeded: Americans now own a smaller percentage of their homes than at any other time in history.

4. Ben Bernanke is a heroic leader.

“The man next to me, Ben Bernanke, has led the Fed through one of the worst financial crises that this nation and the world has ever faced,” Obama said when nominating Bernanke for a second term as Fed chairman. “As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

Seconding that emotion, Time anointed Bernanke its 2009 Person of the Year, swooning over the Fed chairman’s cranial power, his “tired eyes,” and such bold action as lowering interest rates to zero and paying banks to keep deposits in the Fed’s vaults—none of which has translated into noticeable economic health during the last two years. (See Lie No. 5.) “He wishes Americans understood that he helped save the irresponsible giants of Wall Street only to protect ordinary folks on Main Street,” Time wrote.

Alas, no sooner had the year turned than Bernanke’s reality distortion field began to fail. His reappointment, though inevitable, turned out to be a bigger challenge than expected, with a left-right Senate coalition rising up to make hay out of Bernanke’s abundantly documented record of wrong bets and absurd predictions. Had Bernanke limited himself to defending fictions about his own career, he might have stayed out of trouble. Yet he continues to maintain, in one of many examples, that former Fed Chairman Alan Greenspan’s artificially low interest rates in the early part of Decade Zero did not contribute to the real estate bubble. The hapless banking chief’s performance may have been summed up best by the financial blogger Mish Shedlock: “Bernanke did not get a single thing right.”

5. The worst is behind us.

“Here is what I know,” Larry Summers, Obama’s top economic adviser, told ABC in December. “We were talking about Depression; we were talking about the financial system collapsing. Today, everybody agrees that the recession is over, and the question is what the pace of the expansion is going to be.”

Shortly after Summers made that comment, third-quarter GDP numbers were revised downward substantially. (They have traveled from 3.5 percent to 2.8 percent to 2.2 percent so far.) Former Fed Chairman Paul Volcker told Der Spiegel in December 2009, “You know, people get very technical about these things. We had a quarter of increased growth, but I don’t think we are out of the woods.” In January regional unemployment rates, which had shown some signs of improvement, began moving up again. The unwinding of consumer and homeowner credit continues. Christmas spending turned out to be only slightly higher (around 1 percent, according to MasterCard’s Spending-Pulse unit) in 2009 than in 2008—when, according to Summers and others, the United States was flirting with depression and financial collapse. The only good news: a return to GDP growth in the second half of 2009, based largely on inventory investment and nonresidential fixed investment, not a return to demand or underlying growth.

But the truly dire evidence is in real estate, the market that drove both the bubble and the bust. A record 7.6 percent of U.S. homeowners are at least 30 days late on payments, according to Equifax, and delinquencies continue to rise at an increasing pace. About 1.2 million loans out there are in limbo: The borrower is in serious default, but the bank has not started the foreclosure process. Another 1.5 million are in the early stages of the foreclosure process, but the banks haven’t yet taken possession of the homes. By a conservative estimate, there may be 3 million to 4 million foreclosed homes coming onto the market in the next few years. This is the inevitable, and salubrious, reaction to many years of real estate inflation, and it will continue to happen no matter how hard the government pretends it can control economic outcomes. See Lie No. 1.

The Great Recession of 2011-2012

Image via Wikipedia

James Srodes
Are you ready for the Great Recession of 2011–2012? You should be, for it is getting under way even as you read this. Just as the 2009 “greatest economic crisis since the Great Depression” actually began back in 2007, so we are in the early days of the next cycle. Only this recession is going to be a doozy. And the aftershocks will be felt long after President Hillary Clinton leaves the White House in 2024.

The coming crisis should be no surprise, for we all have had plenty of advance warning. If it is a surprise, blame those chat-show economists who have become so politicized that they ignore the truths of their own science in order to acquire celebrity. Nor should we forget those politicians who deliberately suborn national interest for the security of zero-sum pork-barrel politicking. Combine it all with a news media largely made up of self-referential ignoramuses and it is small wonder that most of the world has been diverted as Dorothy was in Oz by the lightning bolts, explosions, and billowing smoke screen being generated by the men behind the curtain. The truth is our wizards dare not admit that the levers they pull are not really connected to the true crisis that confronts America or its place in the global market.

Despite the self-congratulatory assurances from the White House, Congress, and part of Wall Street that we have been saved from a slide into a 1930s depression, our most serious trials still lie ahead of us. We are unlikely to be able to get back to those halcyon days of perpetual prosperity and optimism that Americans (and most of the industrial world) enjoyed for the last 50 years. A tectonic shift is occurring beneath our feet and the world’s economic climate has shifted. We face not just a few abrasive years of getting back to normal, but a generational hard slog of constricted markets, limited resources, and rolling setbacks. And in each episode of crisis, some will prosper, the weak will suffer most, and radical visions propounded by political snake-oil salesmen of all persuasions will make rational discourse nearly impossible to conduct.

This is not to say that the Apocalypse is upon us, as morally satisfying as that might be to some. Nothing so dramatic is going to happen. The future offers no therapeutic collapse of civilization, with roaming bands prowling the rubble for Soylent Green. Folks will try to live just the way they have been but those lives will be more pinched, the opportunities more limited; caution and bitterness will replace the open-handed optimism that made it a wonder to be a 20th-century American, or even a Western European. If the stolid Swiss now quake at the sight of a minaret in Zurich, it is just one of the many new worries for all of us to fret over in the years to come. Civil privileges now considered “rights” will be up for renegotiation.

One has to feel a twinge of sympathy for the people who have chosen careers of service in government—not just in Washington but in all the capitals of the industrial West. Life just is not going to be as uplifting as it once was back when policy innovations were both credible and idealistic. But it must be especially hard for the crowd of wizards in Washington these days. Building consensus is hard when no one will talk to anyone else. Little wonder then that so much of the dramatic rescue being claimed by the White House in reality turns out to be merely putting rouge on the patient’s cheeks and exclaiming how well the poor soul looks.

Underscoring the difficulty in charting a new economic course is the truth that the government’s own statistics have become so distorted by age and the dynamics of change that they really don’t reflect the depth of the crisis that is upon us. So the wizards continue to twiddle the levers of stimulus and regulatory rules changes without realizing that the dials and barometers have long ago broken connection with what is going on. Houston, we have a problem.

CONSIDER JUST A FEW of the economic bellwethers one hears about on the evening news as proof that the crisis has been stabilized and recovery is imminent. Stock prices are up, true. But trading volume is way down and that is because retail investors—citizens making real investment choices— are on the sidelines. The price rises that swell the Dow Jones Industrial and other indices reflect almost pure speculation by Wall Street’s investment houses that are soggy with Washington’s cash injections. Just as Cash for Clunkers inflated Detroit’s hopes last summer, so the share price recovery is more of a sign of a new bubble inflating than it is of real value returning to share market prices.

The same for housing prices, only more so. It was headline news recently that house prices in “some” areas of the country had stopped declining quite as fast, while in some fewer areas there were even tiny increases in prices of houses sold, if not much increase in the volume. Yet there are uncounted hundreds of thousands of vacant houses, condominiums, and commercial office space for which there is no rational prospect of a buyer during 2010 or perhaps ever.

It will get worse. Of the 47.4 million home mortgages in place today, nearly 10.7 million are “underwater,” that is, the money owed on the loan is greater than the value of the house. And that’s not counting the 2.3 million other mortgages that are “near-negative equity.” Most of these latter will face sharply higher upward ratcheting of their interest rates in 2010 and 2011 and that will automatically plunge those debts below the surface.

In Nevada already the amount of mortgages outstanding is estimated at $132.6 billion against property worth $116.7 billion, a loan-to-value ratio of 116 percent. Even another slight decline in prices in areas such as California (loan-to-value ratio of 72 percent), Arizona (91 percent), or Florida (87 percent) will swamp Washington’s promised next round of mortgage subsidy relief. The government’s own rescue agencies, Fannie Mae, Freddie Mac, and FHA, are dead in the water, and the government’s bank deposit insurance agency, the FDIC, says it has no more reserves to offset the coming next round of failing banks.

EVEN WHEN WASHINGTON ADMITS to a worrying 10-plus percent unemployment rate the real numbers are so far from reality as to be laughable. The recent headlined dip in the jobless rate turns out to have been caused by more than 50,000 already jobless people simply giving up and dropping out of the workforce. This has the statistically absurd result that the percentage of people deemed to be unsuccessfully seeking work is judged to have improved. When labor data is closely parsed for the measure known as “U-6,” which includes people forced to work part-time, those “discouraged” from seeking jobs, and those “marginally attached,” the rate trends above 17 percent.

But even that fails to accurately gauge the cold reality of the hopelessness facing folks at either end of the workforce demographic—the very young (where unemployment is trending above 60 percent) and those 55 and older who are forced back into job quests because their nest eggs vanished in the storm. Two-thirds of the job losses across the country have happened to the very blue-collar workers the Democratic Party has claimed for its own. For those Americans who still have hourly-wage jobs, their employment week would be the envy of a Frenchman—33 hours, on average. Sectors such as manufacturing, construction, and even retailing continue to shed workers; the only consistent gains over the last two years have been, no surprise, in government employment.

The policy response of all Western governments is to follow the failed Japanese model of trying to inflate one’s way out of a downdraft, pumping up another bubble. The theory is that if interest rates are forced low enough, and the money supply increased enough, and the government ramps up deficit spending to redistribute more wealth from the supposed rich to the supposed poor, a “multiplier effect” of economic growth will be sparked by consumers buying more, businesses investing more, and more jobs being created with prosperity spreading and growing. But if interest rates are already at zero, and the value of the dollar has been halved by doubling the supply of it, and the debt service burden of government spending is already suffocating the capital markets, how can one expect consumers to buy more (to buy more of what?), or businesses to invest more (for a new machine to do what?), much less to hire old workers back when the jobs they used to have are vanished, not to some Third World haven, but just vanished?

No one in Washington can say with a straight face just what the U.S. gross domestic product is except that we have been pushed back at least a decade and will probably be more than a decade in just getting back to where we were in 2006 (when GDP rose by an anemic 2.7 percent) just before the bubble burst the next year. Meanwhile new bubbles are forming all around us, in the commodity markets, in Hong Kong real estate, in the troubling data coming out of China and other Asian economies, all just waiting to buckle. Can you say Dubai? Greece? More...

The Clouds Are Gathering, Time To Be Fearful

Doug Kass
Yesterday, the following clouds gathered:

1. renewed fears of populism as the administration considers launching a tax on financial institutions.

2. a disappointing Alcoa (AA Quote) earnings release;

3. China guided the one-year bill higher to curb lending and this morning raised bank reserve requirements; and

4. we experienced a different sort of market close.

My responses?

1. I remain fearful of the ramifications of populism in 2010-2011 on economic growth and on the market's prospects.

2. The industrials trade is far too crowded.

3. China is setting the stage for a rise in benchmark interest rates in the first half of 2010 (something included in my surprises for 2010 list).

4. And I know that when things look too good to be true (read: the markets persistently rise), they usually are!

I am not a Cassandra, and I have suggested on RealMoney Silver that, while there are numerous market positives in place as we enter 2010 that could produce favorable economic and corporate profit growth outcomes, there are also many probable outcomes that are less benign.

Often, the irrational is rationalized in such strong market settings, and arguably, this has been the case over the past six months, as headwinds (e.g., still sluggish labor markets, rising populism and marginal tax rates, commodities pressure, higher interest rates, etc.) are too easily ignored and perception becomes readily detached from reality.

In markets and in life, we are consistently bamboozled by appearance and consensus. Too often, we are played as suckers as we just accept the trend, momentum and/or the superficial as certain truth without a shred of criticism. Just look at those who bought into the success of Enron, the financial supermarket concept at Citigroup (C Quote), the uninterrupted profit growth at Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote), housing's new paradigm of noncyclical growth and ever-rising home prices in the early to mid 2000s, Saddam Hussein's weapons of mass destruction, the uncompromising principles of former New York Governor Elliott Spitzer, the morality of our politicians (e.g., John Edwards, John Ensign and Larry Craig), the consistency of Bernie Madoff's investment returns (and those of other hucksters) and the clean-cut image of Tiger Woods.

"Do you want to know the truth or see me hit a few dingers?"

-- Mark McGwire

And, even the heroic home-run production of steroid-laced Major League Baseball players such as Mark McGwire is ignored until the facts are made public in black and white.

Over the Christmas holiday a nasty thing happened

Matt Taibbi
Fannie, Freddie, and the New Red and Blue

It has become conventional wisdom, perhaps even cliche, to pin the origins of the credit crisis on the big banks or, AIG or even the practice of financial modeling. Certainly, these actors have received the most play in the media, and have now endured the focus of populist ire for more than a year. We now think that the analysis leading commentators to focus blame on these entities is fatally flawed.

via Origins of an American Kleptocracy | zero hedge.

Over the Christmas holiday a nasty thing happened: Tim Geithner’s Treasury Department decided to lift the cap on aid to the Government-Sponsored Entities, Fannie Mae and Freddie Mac, apparently in response to Obama administration fears that the two agencies would become insolvent. The cap was raised from $200 billion on each and government backstopping of the mortgage market will apparently now extend into infinity for at least three years, through 2012.

The move has already inspired a mini-firestorm, with several outlets delving deeply into the recent history of the GSEs and uncovering some disturbing new facts. Chief among those were an analysis of the GSEs by a former chief credit officer of Fannie named Edward Pinto, who found that Fannie and Freddie routinely mismarked subprime or Alt-A (a sort of purgatory class of nonprime risky mortgage, resting between subprime and prime) mortgages as prime. The Wall Street Journal explains:

In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.

This is a damning fact and if true certainly supports the Journal claim that the GSE actions were a “principal cause of the financial crisis.” But having established this, the Journal then goes in this direction:

Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks.

Sometimes I’m amazed at the speed with which highly provocative information like this GSE business can be converted into distracting propaganda in this country. In the right hands Pinto’s analysis of the GSEs — just like the revelations in the past few years about practices at AIG, Moody’s, Countrywide, Goldman Sachs, the Fed, and, hell, let’s add the offices of Senator Chris Dodd — would have been a starting point for a deeper investigation into a financial system that is clearly a complex and intimate symbiosis of state and private corruption.

For what we’ve learned in the last few years as one scandal after another spilled onto the front pages is that the bubble economies of the last two decades were not merely monstrous Ponzi schemes that destroyed trillions in wealth while making a small handful of people rich. They were also a profound expression of the fundamentally criminal nature of our political system, in which state power/largess and the private pursuit of (mostly short-term) profit were brilliantly fused in a kind of ongoing theft scheme that sought to instant-cannibalize all the wealth America had stored up during its postwar glory, in the process keeping politicians in office and bankers in beach homes while continually moving the increasingly inevitable disaster to the future.

That is a terrible story and it is also sort of a taboo story, since we don’t really have a system of media now that is willing or even able to digest that dark and complicated truth. Instead, our media — which has always been at best an inadvertent accomplice to these messes — is basically set up to take every revelation about the underlying truth and split it down the middle, feeding half to one side of the political spectrum and one half to the other, where the actual point is then burned up in the useless smoke of a blame game.

The essentially complicit nature of the two ruling political parties was in this way covered up for decades, as the crimes of the Democrats were greedily consumed as entertainment by the Limbaugh crowd while the crimes of the Bushies became hot-selling t-shirts and bumper stickers for the Air America listenership. The abiding mutual hatred the red/blue groups shared consistently prevented any kind of collective realization about the structure of the overall scheme.

What worries me is that we’re now reverting to the same old pattern with the financial crisis story. We’re starting to see fault lines develop, where one side blames the government while another side blames Wall Street for the messes of the last two decades. The side blaming the government tends to belong to the free-marketeer class and divines in safety-net purveyors like the GSEs and in the Fed’s money-printing fundamental corruptions of the capitalist ideal, while the side blaming the bankers tends to belong to the left-liberal tradition that focuses on greed and seeming absence of community conscience among the CEO class as primary corruptors of the social contract.

In the former view the government is to blame for punting on its oversight responsibilities and for corrupting the financial bloodstream with market-altering guarantees, while in the latter view the bankers are at fault for lobbying the politicians to make exactly the same moves. The antigovernment folks like to focus on the irresponsible (and typically low-income or minority) home-borrower and their political allies in Washington as chief villains, while the anti-banker crowd looks at the massive personal profits and outsized influence of the executive class and waves the Cui bono? stick in that direction.

Both sides are right and both sides are wrong. I know that sounds like pox-on-both-their-houses pundit sophistry. But the point is that if you focus on one side and not the other, you miss the entire point. That’s why I get freaked out when I see an important story like this GSE thing come out, and have it be immediately accompanied by arguments that “market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system,” as though the irresponsibility of the government agency precluded similar (and, I might add, intimately related) abuses on the private side.

I mean, really — market observers were unaware of the number of subprime mortgages infecting the system? Are we to understand that nobody caught on when outstanding mortgage debt grew by $3.7 trillion between 2003 and 2005, nearly equaling the entire value of all American real estate in the year 1990? They didn’t notice when subprime mortgages went from 3% of all mortgage lending in 1997 to 20% of the market in 2003? They didn’t notice when the volume of Alt-A loans and home equity loans surged through the early part of last decade?

Now I know that that’s not what Peter Wallison of the Journal is saying here; he’s saying that even if the market saw that increase in subprime loans, even those numbers were understated thanks to Fannie and Freddie’s deceptions. But the inference that the market was hoodwinked by the GSEs is absurd. It was plain to most everyone in the financial services industry that there was a bubble going on last decade, that something deeply fucked up was going on with the mortgage markets — just as it was plain to everyone in the late nineties that something was wrong with the stock markets, when companies like Theglobe.com with annual sales under $5 million could have a $5 billion stock valuation.

Everyone was involved in the mortgage scam. At the lender level the deceptions were myriad; liar’s loans, fraudulent income documentation, negative amortization loans, HELOCs, etc. The rush to get as many loans written as possible and then get those hot potatoes moved to the next sucker in the line was furious and extended from coast to coast, sinking one lender after another in Ponzoid debt and indictments.

Then there were the countless deceptions that emerged from the securitization process, the bad math that allowed banks like Goldman to do $474 million mortgage deals where the average equity in the home was just 0.71 percent, and sell 93% of that deal as investment grade paper.

Are we really to believe that the people who did those deals didn’t know what total crap they were selling? That the people who used CDO-squareds to magically turn BBB investments into AAA investments didn’t know how nuts that was?

There were the ratings agencies, who accepted all that bad math and slapped AAA ratings on crap mortgage-backed securities in exchange for the continued largess of the banks upon whom they were financially dependent — the same ratings agencies that later sputtered and coughed up bullshit my-dog-ate-my-homework excuses for mismarking mortgages, with the Moody’s revelation that a computer error caused them to misapply AAA ratings to billions’ worth of MBS being the comic low point.

Then further along in the chain you had crooks like the folks at AIG, who took advantage of the basic nonexistence of derivatives regulation to issue billions in guarantees for these mortgage investments that they had never had any intention of paying off, to say nothing of actually having the ability to do so. And of course underwriting the entire enterprise was the implicit guarantee of Alan Greenspan’s Fed, which made it known time and time again that its modus operandi was to refuse to recognize the existence of bubbles until after they blew up, at which point it would rush in and clean up the mess, bailing out all the chief actors out with easy money.

Everyone had a hand in the bubble, from the congressmen who killed regulatory initiatives to the regulators who snoozed at the wheel to the GSEs to the Fed to the banks to the ratings agencies to the lenders. I don’t think it’s really controversial to say that, but it does seem like there’s an argument brewing about what that across-the-board complicity means.

My own personal feeling is that our recent bubbles weren’t much different than pyramid scams and lotteries; they’re the handiwork of an essentially regressive and deeply cynical political organization that systematically hoovers up taxes and investment money mainly from middle-class suckers, where it eventually gets eaten in short-term cashouts and mostly blown on sports cars and tropical vacations and eye jobs for the trophy wives of Wall Street executives. Crackonomics: take literally all the spare money from four square city blocks and turn it into one tricked-out Escalade.

For me the basic dynamic of the mortgage bubble is some Ivy League dickwad hawking a billion dollars of securitized subprime mortgages to a pension fund, and then Hobie-sailing off into the sunset with a bonus after they all blow up. Of course my seeing it that way might have a lot to do with my own personal psychological prejudices, and I get that some other person with different hangups might choose to focus on Barney Frank deciding to “roll the dice on home ownership” with the GSEs.

But what I don’t see is how anybody can say that all of this happened because Fannie and Freddie rigged the game to get Mexicans in homes, and then the banks and the ratings agencies just reacted organically to the corrupted market and helped the bubble along through no fault of their own. That’s just another (albeit more convincing) version of the early attempt to pin the disaster on the Community Reinvestment Act, which in turn is just another way of playing the red-blue blame game, which in turn is missing the point.

This GSE story is a big one, but if it gets used as a path back to a “The Market Reacted Rationally” version of history, we’re screwed. It has to be looked at as an important part of a diabolical whole, a symbiotic scheme in which the banks and the state were irreversibly intertwined in an enterprise that on both sides was never about market economics, but crime. Because otherwise… the diversionary notion that one side or the other is wholly to blame is part of what makes the whole scam possible.

p.s. Just to get this out of the way, I love Zero Hedge, and Marla Singer has been really nice to me personally. I just don’t completely agree with this particular thing. I don’t see any reason why focusing blame on the banks and the ratings agencies and AIG was “fundamentally flawed,” because, well, shit, they were to blame. The fact that Fannie and Freddie now get to jump in the pigpen with them doesn’t change that for me.

I think in the end what we’re going to find is that all the relevant actors had their own motivations for getting involved in the bubble. Two and now three presidential administrations let the Fed overheat the economy for political reasons that should be obvious. Alan Greenspan, hell, he did it because he loves seeing himself on magazine covers and wanted to keep getting invited to the right Manhattan parties. There were congressmen that converted the expansion of cheap credit into low-income votes. The bankers and lenders went along because the system of compensation on Wall Street is fucked and rewards short-term thinking while ignoring long-term consequences.

To me all of these people were equally guilty of making bad decisions to benefit themselves in the here and now at the expense of the whole in the future. When it comes to bubbles, It Takes a Village, and blaming the whole mess on the “socialist” aims of a pair of government agencies seems off base — particularly since the Randian protocapitalists running the banks benefited every bit as much from this socialism as actual homeowners, and perhaps even more, when one considers that homeowners get foreclosed upon, while bonuses are forever.

Taxpayer losses from Fannie and Freddie top $400 billion

Bloomberg
Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.

“The situation is they are losing gobs of money, up to $400 billion in mortgages,” Wallison said in a Bloomberg Television interview. The Treasury Department recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two government-sponsored enterprises, he said.

The U.S. seized the two mortgage financiers in 2008 as the government struggled to prevent a meltdown of the financial system. The debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks grew an average of $184 billion annually from 1998 to 2008, helping fuel a bubble that drove home prices up by 107 percent between 2000 and mid-2006, according to the S&P/Case- Shiller home-price index.

The Treasury said on Dec. 24 it would provide an unlimited amount of assistance to the companies as needed for the next three years to alleviate market concern that the government lifeline for Fannie Mae and Freddie Mac, the largest source of money for U.S. home loans, could lapse or be exhausted.

Lax regulation of Fannie Mae and Freddie Mac led to the mortgage companies taking on too many risky loans, Wallison said.

“It turns out it was impossible to regulate them,” he said. “They were too powerful.” He said no one knows how much will be needed to keep the companies solvent.

From 1990 to 1999, Wallison served on the board of directors of MGIC Investment Corp., the largest U.S. mortgage insurer, including a stint on the audit committee, according to Bloomberg data and company filings.

The continued government support of Fannie Mae and Freddie Mac makes buying their debt a good investment, Wallison said.

“It was always safe to buy these notes,” he said. The U.S. government was always going to stand behind them. They’re as good as Treasury notes.”

The 2010 Food Crisis Means Financial Armageddon

Eric deCarbonnel
There is overwhelming, irrefutable evidence that the world will run out of food next year. When this happens, the resulting triple digit food inflation will lead to the collapse of the dollar, the treasury market, derivative markets, and the global financial system. The US will experience economic disintegration.

Over the last two years, the world has experience faced a series of unprecedented financial crisis: the collapse of the housing market, the freezing of the credit markets, the failure of Wall Street brokerage firms (Bear Stearns/Lehman Brothers), the failure of Freddie Mac and Fannie Mae, the failure of AIG,

Iceland’s economic collapse, the bankruptcy of the major auto manufacturers (General Motors, Ford, and Chrysler), etc… In the face of all these challenges, the demise of the dollar, derivative markets, and the modern international system of credit has been repeatedly anticipated and feared. However, all these doomsday scenarios have so far been proved false, and, despite tremendous chaos and losses, the global financial system has held together.

The 2010 Food Crisis is different. It is THE CRISIS. The one that makes all doomsday scenarios come true. The government bailouts and central bank interventions which have held the financial world during the last two years will be powerless to prevent the 2010 Food Crisis from bringing the global financial system to its knees.

Astounding lack of awareness

The world is blissful unaware that the greatest economic/financial/political crisis ever seen is a few months away. While it is understandable that general public has no knowledge of the economic pandemonium headed their way, that same ignorance on the part of professional analysts, economists, and other highly paid financial "experts” is mind boggling, as it takes only the tiniest bit of research to realize something is going critically wrong in agricultural market.

USDA estimates for 2009/10 are an insult to common sense.

All someone needs to do to know the world is headed is for food crisis is to stop reading USDA’s crop reports predicting a record soybean and corn harvests and listen to what else the USDA saying.

Specifically, the USDA has declared half the counties in the Midwest to be primary disaster areas this year, including 274 Midwest counties in the last 30 days alone. These designated are based on the criteria of a minimum of 30 percent loss in the value of at least one crop in a county. The chart below shows counties declared primary disaster areas by the Secretary of Agriculture and the president of the United States.



The same USDA that is predicting record harvests is also declaring disaster areas across half because of catastrophic crop losses! To eliminate any doubt that this might be an innocent mistake, the USDA is even predicting record soybean harvests in the same states (Oklahoma, Louisiana, Arkansas, and Alabama) where it has declared virtually all counties to have experienced 30 percent production losses. It doesn’t take a rocket scientist to realize that these conflicting accounts mean the USDA is lying.

USDA motivated by fear of higher food prices

The USDA is terrorized by the implications of higher food prices for the US economy, most likely because it realizes the immediate consequence of sharply higher food will be the collapse of the US Treasury market and the dollar, as desperate governments and central banks dump their foreign reserves to appreciate their currencies and lower the cost of food imports. Fictitious USDA estimates should be seen as proof of the dire threat posed by higher food prices, as the USDA would not have turned its production estimates into a grotesque mockery of reality if it didn't believe the alternative to be apocalyptic.

Dynamics behind 2010 Food Crisis

Early in 2009, the supply and demand in agricultural markets went badly out of balance. The world was experiencing a catastrophic fall in food production as a result of the financial crisis (low commodity prices and lack of credit) and adverse weather on a global scale. Meanwhile, China and other Asian exporters, in effort to preserve their economic growth, were unleashing domestic consumption long constrained by inflation fears, and demand for raw materials, especially food staples, was exploding as Chinese consumers worked their way towards American-style overconsumption, prodded on by a flood of cheap credit and easy loans from the government.

Normally, food prices should have already shot higher months ago, leading to lower food consumption and bringing the global food supply/demand situation back into balance. This never happened, because the USDA, instead of adjusting production estimates down to reflect decreased production, has been adjusting estimates upwards to match increasing demand from china. In this way, the USDA has brought supply and demand back into balance (on paper) and temporarily delayed rise in food prices by ensuring a severe food shortage in 2010.

USDA induced overconsumption leading to disaster

It is absolutely key to understand that the production of agricultural goods is a fixed, once a year cycle (or twice a year in the case of double crops). The wheat, corn, soybeans and other food staples are harvested in the fall/spring and then that is it for production. It doesn’t matter how high prices go or how desperate people get, no new supply can be brought online until the next harvest at the earliest. The supply must last until the next harvest, which is why it is critical that food is correctly priced to avoid overconsumption, otherwise food shortages will occur.

The USDA, by manufacturing the data needed to keep the supply demand in balance, has ensured that agricultural commodities are incorrectly priced, which has lead to overconsumption and has guaranteed disaster next year when supplies run out.

How much longer can the dollar defy gravity?

Image via Wikipedia

telegraph
Liam Halligan
The trade deficit of the world's biggest economy also remains huge. How much longer can the dollar defy gravity?

Last week, America's currency fell to a 15-month low against the euro, cutting through $1.5050. Against a trade-weighted currency basket, the dollar was also at its weakest since July 2008. The greenback plunged to parity with the rock-solid Swiss franc, then hit a 14-year low against the yen.

The dollar's weakness is based on fundamentals – not least America's jaw-dropping debt. It's a long-term trend. From the start of 2002 until the middle of last year, the dollar lost 30pc on a trade-weighted basis.

It was during the summer and autumn of 2008, though, that the sub-prime debacle entered its most vicious phase (so far). The rescue of Fannie Mae and Freddie Mac, America's quasi-state mortgage-lenders, followed by the Lehman collapse, sent shock waves around the world. For six months or so, Western investors piled into what they knew, liquidating complex positions and buying plain dollars. The greenback became stronger, spiralling upward during the so-called "safe haven rally".

All that has now changed. The trade-weighted dollar has lost 22pc since March. One reason is that, since the spring, the Federal Reserve has been printing money like crazy – both to bail out Wall Street and service America's rapidly growing debt.

Sophisticated investors have also been exploiting America's ultra-low 0.25pc interest rate to borrow cheaply in dollars, switch these borrowings in currencies where returns are higher, then pocket the difference. This so-called "carry trade" has flooded foreign exchange markets with US currency.

The dollar fell particularly sharply last week, though, as traders were reminded of the patently obvious – that the White House actually wants the dollar to fall. US Treasury officials have lately taken to staring into the TV cameras, puffing out their chests, then stating: "We are committed to a strong dollar." That's nonsense, of course, because a weaker currency boosts US exports and lowers the value of America's external debt.

When the minutes of the Fed's latest policy meeting were published on Tuesday, describing the dollar's decline as "orderly", the markets rightly took that as confirmation of America's "benign neglect" approach – with intervention to support the dollar unlikely. The minutes also showed the Fed's key committee members voted "unanimously" to keep interest rates at rock-bottom for "an extended period" – another reason to sell.

In addition, the Federal Deposit Insurance Corporation, the fund that safeguards US bank deposits, warned that the number of "problem" banks grew in the third quarter, leading to speculation it could seek a credit line from the US Treasury. That would mean more borrowing and money-printing, concerns which sent the dollar even lower.

Yet "benign neglect" is fraught with danger. A weak US currency makes commodities more expensive (seeing as they're priced in dollars). It was when the dollar hit an all-time low of $1.60 against the euro during the summer of 2008 that oil soared to $147 a barrel. Expensive crude damages the economy of the world's biggest oil user. And as the dollar falls, America's huge commodity imports cost more, making the trade deficit even worse.

On top of all that, a falling dollar makes it even more difficult for the US government to meet its massive borrowing needs. Just to service existing debt, America must sell $205bn of Treasuries this year, a total set to hit more than $700bn a year by 2019 – even if annual budget deficits shrink. Selling long-term sovereign debt, in a currency expected to fall, is not easy.

Almost every American economist I know dismisses these concerns. Several have contacted me over the last 48 hours, gloating that the dollar has just put on a renewed "safe haven" spurt in the midst of fears about Dubai.

Yet the state of the dollar poses enormous dangers. For one thing, America's currency depreciation trick could backfire if "the rope slips" and a steadily dollar decline turns into free fall. The cost of US imports would soar, with the Fed being forced to sharply push up rates. The world's largest economy would then be caught in a stagflation trap – a slump, but with high inflation.

A more immediate concern is that a blind rush into the US currency could cause the carry-trade to go badly wrong – with those who've borrowed in dollars suddenly owing more, while their dollar-funded investments elsewhere are worth less.

A rapid "unwinding" could cause major losses at financial institutions, posing renewed systemic dangers. Far from being a safe haven, the dollar is the likely source of the next financial crisis.

Does anyone really believe this can continue indefinitely?

Image by Mike Licht, NotionsCapital.com via Flickr

I wonder almost daily how long this dog and pony show can go on.

by Bob Chapman

The Fed’s Wall Street bubble, as we forecast in January, will need at least $2 trillion more in 2010, if the economy is to just stay on an even keel. The massive debt liquidation particularly in banking, Wall Street and in insurance demands many more trillions of dollars. $23.4 trillion is not going to be enough. Presently the Fed is in the process of monetizing $2 trillion in Treasuries, Agency paper, such as Fannie Mae and Freddie Mac and collateralized debt obligations held by lenders. It is a secret what the Fed is paying for this almost worthless paper. Is it any wonder the public has lost trust and confidence in these players and our government?

In order to escape from this global expansion of debt from government, corporations, banking, Wall Street and even state indebtedness, the bubble has to be maintained. The longer it lasts the worse will be the collapse when it bursts. Does anyone really believe that this can continue indefinitely?

People talk about robust inflationary environments in China, Asia and emerging markets In America the Fed’s game of lowering interest rates and increasing money and credit and monetizing paper will end over the next two years, maybe three. What is already in the system guarantees inflation.

Many believe American re-flation boosts real estate values. Not a chance. The recovery is not going anywhere. Americans are starting to save and pay down debt, and that means eventually consumption, as a percentage of GDP will fall to the long-term mean of 64.5%.

The stock market and major market players are again highly leveraged even after 50% gains. They do not seem to understand that the sustained injection of trillions of dollars in money and credit is not going to work. It is not creating anything. Wild speculation is fine; it’s the leverage that kills. As a broker I never had a margin account. The market is not discounting a rosy future, but the players do not understand that. Prices are simply disconnected from reality. Short covering and the reversal of derivative positions cannot go on indefinitely. Market performance is led by second and third tier companies that are in serious positions, some on the edge of bankruptcy. This is a very frustrating but temporary phenomenon. You are short failing companies, and good companies languish. This is one of the unpredictable parts of the market. All we can say is that current stock market action is a reflection of the current dysfunctional financial chaos that we are trapped in. Mis-pricing is legion. All we can say is it is not going to work. Your only alternative is to back in the safety of gold and silver related assets.

The same elements that were responsible for the collapse of the market in 2000 are at work today. Incidentally we recommended selling in the second week of April, two weeks after the top. Only 2% of analysts accompanied us. Then again, we called the top at 14,100. That element was interest rate carry trades. The players are taking advantage of the ability to borrow cheap dollars, yen and euros to buy other higher yielding currencies, which in turn strengthens their currencies, making their exports uncompetitive. South Africa and Turkey are such examples. Thus, currency appreciation caused by differing interest rates is reigniting third world countries. Free trade and globalization are having some unintended consequences. The dollar is headed down and at the G-20 meeting in London on September 4-5; the US will ask China and others to cut it more slack, because they cannot now reverse the reversal of fortune.

When we called the top on the dollar at 89.5 on the USDX a few months ago we never expected its decent to be as sharp as it has been. As we write it is 79, up from 77.60 in a normal bear market rally assisted by a temporary manipulation by the US government that will be of no lasting consequences. You might call this a normalization process, as a result of the unwinding of dollar gains in the de-leveraging process. The speculators got out and the banks are still upside down. The unwinding process is only half complete and that means the dollar will test 71.18 on the USDX by yearend and probably by the end of October. The banks have to reduce leverage and that makes it a lock. They are still leveraged 40 to 50 times deposits. You talk about stupid. Even Mr. Bernanke tells us tightening by raising interest rates is a long way off. In addition, world central banks are dollar sellers, even if only in a minor way. As long as the US Congress refuses to enact tariffs on goods and services the dollar will remain chronically and perpetually weak. As an aside, the further the dollar weakens the more expensive it will be for the US to purchase foreign goods, which will lead to higher inflation. That will force further dollar selling. Thus, you can more clearly see how this combination of events, accompanied by others, will continue to suppress the dollars value.

The result has been that second and third world currencies are strengthening against G-20 currencies, a result of unintended consequences in the elitists grab for profits and power. What they have done via free trade and globalization, offshoring and outsourcing is to allow China, Brazil, India and Russia to take their places at the head of the table. The developed economies have dug their own graves as they experience staggering unemployment and dollar depreciation simultaneously. It may not be evident now but it is every man for himself sooner than you think. Already officially manipulating their currencies are Sweden, New Zealand, Australia and the Swiss. This does not create a fair playing field and it pulls the underpinnings out from under the WTO, the World Trade Organization, which is the major element in the destruction of the industrial power of Japan, Canada, the US and Europe. All it really was created for was a redistribution of wealth from the first to the second and third worlds in the early 1960s. We wrote about this in the American Mercury in 1967, but, of course, no one was listening. A massive socialization process, a leveling if you may, so that the inhabitants of the world, and particularly the citizens of the more powerful nations, would accept world government. This did not just happen. It was done deliberately by design. As a result of this plan currently these second and third tier nations are growing 50% faster than the G-20, or more specifically Canada, the US and Europe.

We are going to see strong resistance to currency appreciation in the future and increases in subsidies in many nations – first, second and third tier currencies. Perhaps even currency wars. The damage done via free trade and globalization is vastly underestimated when related to the first world, which brings us back to the dollar and other carry trades that are a result of this. It is not only the dollar that will be destroyed, but also all major currencies. That accomplished, the elitists will then attempt to implant world government. That is what this is all about and few have the foresight to listen. Most do not even recognize the enemy at the Council on Foreign relations or at the Bilderberger meetings, because he or she wears a $3,000 suit and they look like nice people. When are people going to wake up and stop allowing themselves to be propagandized? Is the fog so thick that they cannot see what is being done to them? Do they not understand why they are unemployed; have to take mandatory swine flu shots; why socialized medicine will destroy our medical system; why Cap and Trade is a scam by Goldman Sachs to increase their taxes 20% or that our privately owned Federal Reserve is totally corrupt? This is part of a major plan to destroy the major nations, as we now know them. The carry trade, derivatives and massive injections of money created out of thin air are but nails in our coffins and if we do not stop these evil people it will mean destruction.

Last March net wealth declined from a peak of $22 trillion to $12 trillion and due to a bear market rally it has moved back to about $15 trillion. During the past two years consumer debt is about the same, but the market has gotten hit hard. Household equity is off about 90%, and had it not been for the personal stimulus package it would have fallen much more.

What is surprising to most but not to us was that the money in money market funds increased as the market fell. That means that leverage via borrowed money was what has driven the market rally, along with short covering and government manipulation. The Fed was the biggest factor in rigging this bear rally. We have probably seen all the public investor buying we are going to see. The US and European banks were probably given the funds by the Fed with strict instructions to push the equity market higher and use as much leverage as possible. This rally has not enticed the public to spend more and in fact, retail sales are off 6% and still falling, thus, no recovery except in the minds of Wall Street and Washington.

Further to the unemployment figures, the birth/death ratio should have been 113,000 job losses higher or about 350,000. This year the B/D model has added 879,000 jobs and that figure should be 992,000, during the worst employment environment since the ‘Great Depression”, which is simply beyond belief. Then to have short-term unemployment fall from 9.5% to 9.4% is incredulous. You ask how did they do that? It was due to the fact 637,000 people were dropped from the labor force, not from an increase in employment, but they did end up on the U6, which officially is 16.8% unemployment, but if you extract the B/D ratio you end up with unemployment of 20.8%. What we have witnessed is more lies and propaganda, as the administration tries to use smoke and mirrors to regain public confidence to get them to increase spending. Barry and advisors, it isn’t going to work. They are not that dumb.

Home prices continue to fall nationwide. Portland, OR is a good example. It reported a record decline in home values for the 17th straight month in May and month-on-month saw a 16.3% fall, the biggest decline in the index’s 22-year history. Since the July 2007 peak prices have fallen 21% and that is the lowest level since May 2005.

We see the summer pause as natural and as unemployment rises, now by U6 at 20.8%, they’ll be more foreclosures and lower prices. The depression is only pausing to catch its breath.