The Fraud of Banking and the Educational Smoke Screen

I wrote this post as a response to an article I find much agreement.  While not dispelling the comments about Fractional Reserve banking, my attempt is to center the discussion on what banking actually is, a system of liabilities all of which involve the bank, in that in truth they have no assets other than what they can post as true capital.  

http://www.acting-man.com/?p=6891

The sad point Pater is the worse this situation gets, the more actions the governments of the world take to cover up the fraud. I don’t even believe in the term fractional reserve, as it is even more extreme than that. The term is actually deficient, as the reserves in the banking system are nothing but credits of other banks. The cash represented by the Fed balance sheet doesn’t even exist in the banking system, but has already been paid out by the banks and is in hoards around the world. This doesn’t mean it is not available for deposit, but that it doesn’t exist on the balance sheet.

The only way a true run on a bank would be successful is if the runs were universal, thus the money not redeposited somewhere. But, absent a guarantee, anything that had to be cleared through the system likely would be demanded by the receiving bank in cash and the liable bank couldn't pay. Reserves follow credit, not precede it. In fact, as long as there is not a second bank involved, the originating bank can merely shift money from one account to the other as it changes hands between customers. I suspect that within 10 years, only interbank transactions will be allowed and the idea of pay to the order on demand will be lost. Such is the lure and power of a perpetual fraud.

In truth, I don’t believe reserves exceed the capital of a bank. In order for there to be any legitimacy in banking at all, the banker has to have skin in the game. Otherwise, he is merely lending his own IOU’s. I have a document somewhere that was filed in Federal court which lists the court cases in the US that forbade a bank from lending its liabilities. The rulings mentioned on bailment border on absurdity, as the money on deposit at the bank is clearly a liability of the bank and not an asset. The great secret is the entire balance sheet is nothing but liabilities. The bank is liable for its asset in that if they don’t perform, the bank has to perform. They made themselves liable when the created the loan. They are liable for the loan, not the customer. The customer has merely pledged his credit or his collateral.

The banks assets are only good to the extent the borrowers on these loans can acquire the liabilities of the banking system. There is no other species in circulation other than the coin of the United States or whatever other country is involved. If the Fed is creating new deposits by financing the treasury directly, then these are also bank liabilities. This runs a lot deeper than the nonsense that the problem with banks is a mismatch of maturity and runs directly to the solvency of assets on the balance sheet. These assets represent the banks liabilities and if the bank can’t be liable for the losses on the assets, then under any imaginable form of law, they aren’t a legitimate business, but a Ponzi scheme.

The system of credit doesn’t bother me as much as the fraud that is going on about the solvency of the banking system. That any regulated industry that is likely short of capital should be allowed to engage in partial liquidation of its capital positions disturbs me. They call these stock buybacks, but what they are in truth is a liquidation. Lets see what happens when the FDIC serves its purpose of guaranteeing deposits and not the other sources of financing in the banking system when a partial liquidation is undertaken? In a free market, I have to believe that the bond holders of the banks would get nervous. They maybe already have.

The incapacity of the regulators to enforce haircuts in the system, as opposed to bailouts is astonishing to me. For all practical purposes, the 4 or 5 largest banks in the US should have failed. The shareholders should have absolutely no interest in these institutions and the officers of these institutions and their financial practices should have been investigated. The bondholders should have owned the banks in reorganization and in most cases, the deposits wouldn’t have been touched.

I bring this last point up because the only way to have saved this ponzi system was to destroy its components in the short term. The haircuts are not optional and it is clear they are planning on taking the losses out of the side of the depositor and not the banker. The entire rule of law has been stood on its head in this instance, going back to the cases that Rothbard mentioned in his book, the mystery of banking. I need to read the remainder of that book, but then again I have read the modern story too many times.

One more thing. The only truth in the money and banking courses taught in college is that commercial banks create money when they make loans. It absolutely astounds me that the focus of these courses is the nonsense about reserves and the fed doing this nonsense and that nonsense when the only truth that can be gleaned out of this course is that banks create deposits and thus money supply when they make loans. They all get back to what account the bank takes the money from when there isn’t any account. The guy that wrote that rebuttal mentioned above seems to totally miss that idea. Those that talk about fractional reserve miss the point as well. Banks don’t keep reserves, as it is a total nonsense to keep people talking about something. They borrow back what leaves the bank. There are no reserves.

The Knee Jerk Society

Recent disasters, the US/World Banking crisis and the recent atomic/earthquake/tsunami disaster are 2 examples of the head up your butt, knee jerk reactions that are compounding to put the worlds economies and to an extent the survival of civilization itself at risk.  When the dust settles, nothing will be solved and we will face a problem much larger than we had to start.  The banking crisis was met with something called TARP, a huge stimulus bill and monetary tricks by the US Federal reserve that will do nothing but leave us with an unsolved problem that will come back with more force next time.  The reactions over the atomic accident in Japan are just as absurd.

What I am hearing now is that Germany is going to shut down its entire program and Obama isn't going to renew permits to run plants in the US.  There is no assessment, merely knee jerk.  Obama's policy with oil drilling in the Gulf of Mexico, the result stripping the US of its most promising and most productive oil resource over a blunder by British Petroleum is just another example.  The safety record of offshore drilling in shallower waters for the past 50 plus years has been pretty good.  Knee jerk with a 44 magnum in your hand and you can shoot your toes off.  The US doesn't have many toes left and Obama and the bankers are taking aim.  Now our oil rigs are on the other side of the world and a country that is rapidly going broke is looking at cold winters and no gasoline once the end game starts.

Lets start with the Great Financial Crisis and what it really entailed.  Paulson had the country over the barrel and he chose the Japan solution.  Bernanke is choosing the Japan solution.  There is absolutely no recognition of what the real problem is, merely put a plug in it.  The US government had the power to resolve the entire banking crisis, but there aren't many of us that would have liked the immediate result.  Instead, leave the crooks in power at the various institutions, change the rules to allow accounting fraud and throw in $700 billion and let them keep looting.  In the meantime, the real problem, societal insolvency and a lack of a mathematical solution to the problem prevails.  We are being told capitalism failed when in fact capitalism hasn't prevailed for years.  Instead we have an economy managed by social engineers who take very little in the way of reality in consideration.  If capitalism was in force, these failures would have been taken out of the system, the system reorganized, the investors in the failed institutions wiped out and anyone engaged in criminal activity with other peoples money would have been tried and jailed.  The knee jerk was the status quo.  The truth is we are in a serious problem that the knee jerk will only make worse.

The US government has been in a managed insolvency since the Great Depression.  The managed part depends on keeping the on the book debts within reason.  We elect Superman and a group of socialists and what happens?  We have a $788 billion stimulus bill that will keep unemployment at 8% and be a 1 time event.  Truth is we had a $1 trillion a year bill that is going to put the US in permanent bondage.  Just the mention that 10% of this money is going to be taken back and the socialists threaten to shut down the government.  The knee jerk became the norm and the bill was for nothing more than to pump money into public unions.  Nothing was done with the debt situation in the US other than make it worse.  Nothing was done to stop unemployment at 8%, as it went to 10% and only hedonistic adjustments in the employment base and some twisted figures have brought it down from there.  They merely had a couple of clowns and Wall Street crooks come forward and announce a recovery that most of the country has yet to embrace.  The real problem, a pile of unresolved debt in the financial intermediary system, remains.  In the meantime, the Fed has produced more and more funds with which the frauds can continue to write checks and kept interest rates at a level that has induced many to move into junk bonds.  Emboldened by stimulus money, States took actions that now put most of them on the path of insolvency as well.  The spending can't be reversed.  In reality, it will be.

Now we have the accident in Japan.  I am really at a loss to imagine why they would build a plant that could withstand an earthquake and not plan for a tsunami.  This isn't the Gulf Coast, but the land which gave the tsunami its name.  In addition to the damage done by this accident, Japan is going to suffer horribly from a shortage of electricity, the elixir of modern economies.  What is the reaction from this tragedy?

First, the NRC in the US is run by a man whose intent is to destroy the atomic energy industry.  Second, the result of destroying atomic energy will be the end of modern economies and the mass starvation of people in other economies around the world.  We are dealing with a policy of genocide and  are being scared into it.  There isn't a solution to the void that would arise should atomic energy be shut down around the world and the result over the intermediate term will be a world war with widespread atomic exchange and the death of probably 1 billion people or more around the world.  This will come only after hundreds of millions have starved to death in the dark.  Thus the fate we are being frightened with will become the reality as survival will depend on acquiring the energy to run economies and the division of labor and modern agriculture.

The scream has been all of us in the US are going to die from this accident in Japan if we don't take some Iodine pills.  Back in the 50's they blew up atomic bombs like they were fire crackers on the 4th of July and yet there was no widespread death.  Japan survives.  The results are overblown.

I am not here to minimize an atomic accident, but to look at the other extreme.  If we shift to coal, what are the damages?  To produce the electricity these reactors in Japan produced with coal, it is highly likely the entire side of the Island would have already been poisoned.  There would be miles of strip mined land, trillions on tons of carbon foot print, if the nonsense is to be believed and the land around the plant would be poisoned with the emissions from the plant.  This is a guarantee.  This is the choice we make if we close down the atomic industry.

There is more to this.  Where do they get the oil, gas and coal to replace the atomic energy to run the grid.  Oil is already in short supply.  Coal is an ecological disaster and gas is still being developed with new technology.  Plus, the anti atomic people are the same group that are the global warming group and the carbon tax people.  They are most likely also the bankers of the world.

Residential energy is a given, so the slack would have to be taken up by energy used in the production economy.  Get ready for rolling blackouts, massively higher electric bills and a declining standard of living around the world.  These same bastards are going to attempt to manage that side of the disaster as well and most likely use it to establish themselves among the privileged.  While we are cowering under our beds, they are stealing our birthright and crowning themselves with our resources.

Paulson said there would be tanks in the streets.  This is the same story told over and over again.  Give us what we want or we will go broke on you.  It appears the average American has watched so much reality TV and seen so many Hollywood movies that he buys into anything.  I was on a site a few days ago and the solutions being proposed for the emergency in Japan were right out of fictional Superman/Rambo type flicks.  There is nothing to be said for the haircuts that are going to have to be taken.  The question is who takes them.  The bankers have had 30 months to continue looting and to shift the losses to people other than themselves.

Who is going to benefit if we shut down atomic power?  I would venture the same folks that own the electric grid.  They are the same folks that in some fashion own the construction companies and the resource companies and we, the people will pay massive hikes in electric rates to funnel more money into their pockets.  When they are done with the building, we will then pay them carbon credits and the bondage in Egypt will be ensured.

Pubic Pensions and the Tooth Fairy

It looks like the entire country is being gamed by politicians, unions and Wall Street. This is a prime 3 way example. Who manages the money? Some Wall Street group most likely. What do they get? A percentage. What is the plan? To sell the states overpriced stock. Who is going to gain? Probably no one, as the system is going to go broke. If it doesn't go broke, the above groups, save maybe the politicians who haven't arranged bribes, are going to be unjustly enriched.

So, we have a group that is having 30% of its income saved without any effort. The payout is based on ending salaries. If we have inflation, the ending salaries will go up with the CPI, if not faster. This eliminates the inflation part of the return on stocks. You can't inflate yourself out of these debts, but with 5% inflation, 8% should be available on bonds. This would work if there are no COLA's in the pension plans.

But, inflation increases volatility in the system, because it is the expansion of debt in excess of the growth in the economy. Interest rates will always normalize, Fed or no Fed and the assumptions of expenditures always comes up short of actual expenses. Debt always has to be paid or the principal lost.

The 8% assumption cannot be met without 5% inflation. As stated above, if that occurs, the payout side goes up and you have the snake swallowing his tail. I know stocks are supposed to yield something over time, but this is one more compound equation that cannot work. The financial valuation of stocks relates to what stock pay the shareholder, not what the market will pay for them at any given time. The later of these examples will show up from time to time, but this is what tops are made of, not what returns are made of. We have been in the later to some degree since 1987, with a blow between 87 and about 1992. 3% dividends are historically peak values that are followed by bear markets, as shown from 1929 and 1966. Real returns are dividends plus 1% on the bullish side and history is worse than that.

The point being we have a market that is valued in excess of GDP. GDP grows 3% plus inflation, the valuation of the market cannot grow more. If we are on a bottom and dividends are 6%, then we might be looking at a market valued at 40% of GDP. In that case, GDP can expand at a 3% real rate and the compound formula favors the market. The peaks in 29 and 66 were at 80% of GDP. The 2000 peak was over double GDP. At that point, potential growth would be limited to 1/2 nominal GDP or about 2.5% to 3%. This is not the path to the pearly gates of prosperity.

What is a stock but an open-ended bond with a variable payout? You are promised back zero and because you are promised back zero, there has to be an additional risk factor. Because this is an open-ended security, you can't use a valuation method that centers around the present and instead have to incorporate risk factors that encompass forever. This is especially true of one isn't a professional speculator (very few ever come out of that game intact)and have an investment philosophy of buy and hold. Thus, you can't compare stocks to 10 year treasuries or CD's or any of the sort. If you could find a 70 year treasury bond and add 3% to the rate, this would be a good discount for stocks.

I hope you guys are following this, as I am sure Karl is. A market with a value in excess of GDP cannot grow in excess of GDP forever. This would favor stocks only if the dividend yield was the actual return. But, the valuation model in stocks is dividend plus the rate of growth in dividends, not PE ratios, which are creations of accounting and other nonsense. Earnings do not flow from stocks, dividends do. Earnings go into the reinvestment formula of stocks, but nothing is guaranteed on investment and we are still looking at economic growth at best.

This brings us to the real conclusion that should be drawn out of this assumption. If the market is performing so well, where is the economic growth? China? Who owns the means of production in China? Is it corporate USA? If it is, then the foreign reserves of China actually belong to corporate USA. If it is the USA, where is the growth? Europe is a shrinking market and so is Japan. Thus if earnings are as high as stated, the investments being made are not paying off and we fall back into the compound formula and historical corporate profits, which are now being claimed to be among the highest in history against the GDP. The last record in this factor was the late 1920's. We all saw what followed.

To straighten out what I have written to layman's terms, Return equals dividend plus a maximum of 1% plus inflation. The return in stocks is a straight discount of the dividend with the growth factor subtracted out. To make 8% on the SPX, we would need 6% nominal GDP growth multiplied by the percentage of market value to GDP. Thus if the market was 50% of GDP, we would need 3% growth. If it is 120% of GDP, we would need 7.2% nominal growth. I would venture we are right about 100% at the present, but I also suspect GDP is on shaky ground.

I have thought about a scenario of where dividends would be 8%. For one, arbitrage would scrub that factor out, as long term the risk premium on stocks is 3% above risk free. 8% is about 3% above this factor. Also, 8% would take 75% off current valuations, so the growth would have to come from a lower level, using the current model. Also, corporate profits would have to be around 16% to 20% of GDP in order to support a market valued at 100% of GDP. I doubt this could be supported without there being a more population wide distribution of stock ownership.

Karl used 3% and I support that figure, if for no other reason than that is the dividend plus real growth number. Inflation is a zero factor, as it adds and subtracts at the same time and as I stated above, increases risk. If you are my age, you can recall the start and stop economies of the 1970's, where we had 2 recessions like the one we just had and a couple more in about 14 years. People under 40 haven't seen this mess before, but those of us between 48 and 60 came of age in this mess.

If someone wants a model that would support a proposed 5.5% real rate of return, they probably need to wait for stocks to trade at about 50% of current values and for the debt problem to be cleared out. This means the 2009 bottom was the buy point and nothing above that, save for some very select shares. What is going on now is nothing but pump and dump and it would be wise if the States kept their money out of the market, instead of the forced buying at double the price to achieve the return. Time won't fix this, as the purchase of stocks are a purchase of an open-ended security where you buy a return at the time of purchase and the tooth fairy doesn't show up to fix your mistake. At some time, the market is going to revalue, most likely when the world economy is going to be forced to deflate or collapse. Then it takes 14 years to break even on a 50% loss at a 5% growth rate. When we leave these valuations, it will be another generation before we see them again.
http://market-ticker.org/akcs-www?post=178634&findnew#new

Welcome to the financial circus of lies

I have read books like Manias Panics and Crashes. I never understood what the banks were doing back in the 1800's until I saw this. This is bigger than subprime. Bernanke will be hiding under his desk in a PTSD fit when this one hits. We just think Paulson looked like he was about to go to jail. 

Charles Smith at Oftwominds wrote a parody the other day. He was using Bush's quote, "This sucker is going down". We are about to see the biggest bust in history. It isn't only the banks, but the governments and the corporate buyout guys. I heard a bull on CNBS this morning say how you could get more for a company with borrowed money than it was selling on the market. That should always be true, but that is beside the point. It is true for 2 reasons. There is no broadbased dividend return in the market and the risk premium on stocks is higher than the risk premium on the bonds of the same corporations (unless they have adopted the GM bankruptcy model). The point here is the higher up crooks are using Ben Bernanke dollars to loot the best deals. Hot pressed money! Michael Hudson said this was what EBIDA meant, how much can you borrow and take out? To hell with the real losses!

I wonder how the banks are going to bank this next sub-prime crash, the junk bond insolvency? The Fed posted a 2010 profit to the government of nearly $80 billion. Think Congress is going to take their punchbowl away? Of course, they are hiding their own losses in Maiden Lane and the mortgage pool they bought. When we going to find out about that? It is clear to me that the Fed is moving out on the yield curve to produce income as much as to support the economy. You can't earn any money at zero and I would hate to believe these guys want to be left out of the party and would like some credit for sending the government a big check. But, this is $80 billion that now can't be paid by other parties and probably $80 billion for Wall Street in the end. 

The pretend and extend that is going on in Europe is going to eventually infect the core, Germany and France. This is nothing but another case of bank socialism. Japan joined in, isn't that funny? Black Swan at Mish said it was a move out of the dollar. Bullcrap. See these charts linked to default swaps on the JGB.

http://www.acting-man.com/?p=6057

We have a series of back scratchers here. The Japanese are buying into the Euro rescue because when this stuff is going on, the world recognizes how far in debt Japan is. It is noted they have a little over $1 trillion in foreign reserves, but they have a $5 trillion haircut coming in their debt. If you look at the first portion of the chart on the JGB (the light colored line on the second chart), it is revealed that this isn't the first trip up the scale for Japan. You might recall the last trip was to even higher rates. Care to venture what effect systematic risk in the JGB would present, as we are looking at a 70BP swap on a security that yields around 1.5%? Does anyone actually believe China bought the JGB's in the spring and summer because they wanted to move out of the dollar? We all know how much the Chinese and Japanese love each other. Of course not. They judged it cheaper to take the haircut later than take the shock at the present with their overbuilt, over extended economy. 

All these governments are fucked. As much money as Ben bernanke is printing, it can't get to the right places and is instead laying there for financial thieves to convert to their own. The banks are banking uncollected income, which we all know is none at all. The leaders in Portugal are pretending they are solvent. The bankers are goading the other governments in Europe to bail these guys out in the name of the Euro. What the hell is the Euro? It is a bank note.

Now we enter the ultimate paradox. The broke have to pay higher interest rates. You might recall the TED spread and how the idiots on CNBC kept talking about it. Banks won't lend to other banks. Would you lend to Citi without a government guarantee? Chase, Goldman? Japan is 200% of GDP in debt on their government bonds and they are borrowing for next to nothing. What happens when the swaps go to 3%? Well, their entire tax income is dedicated to paying interest. Is this the goal of the financial crooks, to place the income of the world to paying interest to them? If this is the case, then we have only genocide to follow, as there will be nothing left for food or consumer goods and the entire scheme collapses.


http://market-ticker.org/akcs-www?post=177125&ord=2354930#2354930

In Response to Pater Tenebrarum's Economic and Monetary Conditions in the US

http://www.acting-man.com/?p=5725&cpage=1#comment-407
You wrote plenty here Pater. The main deflationary force would hit financial assets if they allowed it to actually occur. The value of money, whether it be gold, silver or paper is in its payment of debt, something you mentioned far exceeded the money supply. The debt in the banking system includes the capital of banks which comes at the front of the line, as it is the imaginary amount on the credit side which stands between the deposits liabilities of banks and their inability to pay them. Reserves or not, the banks have no capacity to make loans and create deposits in what would be a good faith, conscionable manner. That is to be surety of what one cannot be surety of is fraud on its face.

I appreciate the comments about the currency being a reduction of reserves. The reserves were reduced when the currency was drawn. You might note how much total reserves were supposed to be in the banking system when this mess began. It was hardly above the amount of currency. Do you think the banks were sitting on $800 billion in currency and drawing no interest or do you believe the logical, that the reserves as described by most people were already out of the banking system? I believe this to be key as to what we have seen over the past few years and the true nature of the credit crunch, the circulation of liabilities of bankrupts in lieu of cash.

The true inflation in the system has manifested itself in high asset valuations and high corporate profits. The stock market, at least the stocks evidenced by the SPX, pays a 2% dividend roughly. No only would these dividends deflate in a deflation, but the credit expansion that has created this excess value would cease as well and the result would be a liquidation of value. I believe this to eventually be an inevitable situation that is merely being postponed. I can see a 50% reduction in dividends and a move to the historical 3% dividend peak value, meaning peak value of the SPX falls by 2/3. Normal value, a dividend yield in the 4.5% range would reduce value over 80% and the entire pension fraud would be exposed.

Where is the currency? Banks don’t put out currency for the hell of it. People are holding it here and around the world because some of us have enough sense to know the banks are broke. The illegitimate debts of banks that have circulated for years have been replaced by the QE. This round of QE merely states that they need more cash to allow bankrupts to write bad checks and little else. If you marked to market the assets of the big 4 US financials, I doubt any of them would be solvent. This factor not only allows the fraud to continue, but it allows the banks that receive the excess reserves an avenue that doesn’t include lending the cash back to the bankrupts. Remember, if you examine the amount of cash, it is clear there were no reserves whatsoever left in the banking system when this mess started.

The system of debt, credit and banking is so paradoxical that it is impossible to predict what will happen. But, in general, all debts must be paid, extended or defaulted. It is cold outside and people can’t pay their rent. Gasoline is going up without demand and I suspect it is the use of excess credit directly. Credit is being used to game the system and support unsupportable liabilities.

There can’t be a true recovery until there is a transfer if cash flow to the lower half of the income structure and a liquidation of debt. Debt is as much a part of the money supply as the deposits and currency are, the absolute paradox of the system. The true debts of a system cannot exceed the true assets. Thus, we have a pension system that is supposed to pay $X per month to its beneficiaries. If the assets, which ware debts of others, whether it be claims on the profits of corporations through stocks or bonds or mortgages, cannot pay the beneficiaries, the income doesn’t exist. A collapse of this system either leaves the retiree with nothing or a fraction of what he thought and planned he would get or place a debt on the system that probably cannot be paid. There not only is a difficulty in liquidating such liabilities, but a reluctance to allow liquidation to occur. This gives the meaning of the term “This note is legal Tender for all Debts Public and Private”, which is the only thing that keeps this stuff worth more than the ink on the paper.

There is nothing more powerful in this system than the dual columns of liabilities on the bank ledger. There are liabilities of the bank and liabilities to the bank. Most people look at these as assets and liabilities, but due to the nature of the entity, banking rests on the performance of both the debits and the credits. This is because the validity of either rests on the other. XYZ corporation can have plant and equipment on one side and debts and shareholder equity on the other and the only connection is that the plant and equipment must generate enough cash flow to pay the debts. Banking, the very existence of the cash comes from the debts and the debts can only be paid by the cash or through default.

Bernanke can do QE, but the cash still belongs to someone. The holder of the debt securities only changes hands. I believe you touch on this, that if the cash goes to a welfare recipient, it ends up in the till of a retailer who has sold his goods and services. Thus, indirectly the government owes the retailer for what he sold. The bank, instead of holding a debt instrument, holds reserves. The bank either acquires a new debt instrument or makes a new loan. If they make a new loan, they have in essence created a new bank liability and thus they are liable for 2 such accounts. The banker can also use the money to acquire commodities and other assets, but in doing so they also create a new liability and their balance sheet becomes more intangible in value, as the value of what they have purchased is less definite.

When we used gold, there was gold and bank credit. Gold was a limiting factor and that was all it was. The majority of money in circulation was bank credit, not gold and the system was insolvent immediately upon the extension of credit beyond the supply of gold. Nothing has changed in banking but the limitations and the willingness of the government to cover up the insolvency to the point that entire countries go broke covering up their banks insolvencies. This has allowed the creation of a series of IOU’s to the point those that created the debts that cannot be paid on both sides of the ledgers and are essentially bankrupts are calling the tune. I suspect QE is nothing more than a plan to allow the big banks to write bad checks until the system is looted to the point that all the debts are owed to them instead of to the people. Once one side has all the credits and the other side all the debts, game is up.

The entire system is a system of bank credit and until it can be seen as such, it cannot be understood. Watching the CPI or any other indicator bears little sense as to what is truly occurring. What is occurring is a widening gulf between what is owed and what can be paid. What is owed is so much beyond what can be paid that the debt value of currency either has to increase or collapse. I believe both will occur, but collapse only after increase. I think we will know when to move when assets represented by the SPX move to a price above fair value, which I contend is a dividend yield of 5% or higher.

The Case for Impeaching Ben Bernanke

The recent act of $600 billion in further Quantitative Easing has created another celebration in the stock and commodities market and why shouldn't it?  The Fed has come out and indicated it was going to support all the speculation the banks could bring into these markets, paving the way for more liquidation of public positions and more paying of massive bonuses to Wall Street players.  The problem is that the bubbles have already burst and it has been shown repeatedly that making money for insiders under fictional values has done nothing for the common American, nor has it increased their purchasing power.  When the end of the bubble comes, we are stuck with the collapse of former high flying entities and harm to the economy at large.  Yet, the Fed is either blind to this fact or it is engaged in conspiracy of sort against the American economy in support of otherwise bankrupt bankers and institutions.  All the while, the prime players suck more compensation out of a broken system, leaving the losses for the economy at large and Americans in general to absorb.

The real holders of the capital in the United States are being penalized to the extent their income from savings suffers or to the extent that they suffer future losses that are sure to come once the commodity corners collapse or the junk bonds seek their proper value of zero.  Also, common Americans are being sent a bill for these corners and manipulation through higher temporary prices for any commodity or good that can be squeezed by these corners.  Bernanke has done nothing more than add additional funds for bankrupts to push prices for common Americans upward, allowing the speculators to play at little or no current cost.  The delusion that one can finance something forever at zero throws out the level of debt that eventually has to be liquidated.  But, in the short term, the corners can push up the prices of what they hold and extract from the economy a toll.  The goal is to extract a fee from the use of everything from housing to food by a group that does absolutely nothing in the long term to create additional or current supply.  This stealing on the margin cannot go on without cooperation from the banking system.  Very little money of the players is at risk and the bills for failure after a temporary success will fall on the taxpayer.

The lower the return on pension assets, the more money is needed to fund pensions.  A person who has saved money all their lives will find their savings to be insufficient once interest rates are cut to zero or the risk of seeking artificial returns hits the assets.  The mortgage bubble is merely the first layer of loss that will eventually show up in stocks, junk bonds and other alternative investments.

The biggest crime of all is the front Bernanke is providing for the big banks at the expense of their depositors. The big banks are insolvent, but the Federal Reserve money allows them to continue to write hot checks to continue the frauds they have perpetuated in the past and the new ones they are engaged in the present.  For every liability on the books of the banks in the form of deposits and bonds, there is a corresponding asset.  Calling the asset cash doesn't further increase the capacity of the banks to make their other assets good.  At best they get to play more speculative games, attempt to draw more interest out of an over-indebted world and pay their management and key employees more bonuses based on temporary gains that will turn to losses.

The point is the depositors own the big banks, not the bankers or the shareholders and the actions of Bernanke are designed, not to re-establish the banks, but to allow the bankers to resume looting their depositors.  When this all collapses, which it will, the depositors will get the bill.  There won't be a bailout, but instead a debt that only the depositors can pay to themselves.  In the meantime, speculative US credit is flowing around the world to produce more bubbles for the bankers to exploit for profits that will turn to losses.

If this was indeed a program to rescue the US economy, it wouldn't be the crime that I propose it is.  I contend that there were no reserves in the banking system when this mess began, only cashed checks and interbank credit based on the creditworthiness of the banks.  Minsky wrote in the 1980's that the assets to produce new money had been gone since the 1970's and the banks were using financial gadgets to balance their books.  These gadgets were no better than the solvency of the banks themselves.

We don't have a liquidity problem, but a solvency problem in banking.  Bernanke seems to think he can invent capital by providing credit, but at best he is taking the best assets out of the system and doing nothing to restore the balance sheets.  This provision of false solvency is making the problem worse, because the banks aren't earning what they claim to be earning, but instead are hiding losses behind this liquidity.  In the meantime he is providing a means of capital flight from the United States in search of speculative profits that will disappear as Eugene the Jeep disappeared in Popeye cartoons.

So, it is this aiding and abetting of continued criminal fraud, the looting of depositors to support continued criminal activity and the creation of another asset bubble that only a few will profit from and scores will sustain massive and in some cases, total losses that I propose Mr. Bernanke be impeached.  Acting in a capacity to continue fraud in action and to convert the property of one to another is a crime.  This act is far from covert, but is being done in front of God and everyone.  The future of the United States depends on the United States government moving to prevent such activity, not to support it.  The future of the American middle class should not be sacrificed on the altar of central bank schemes to protect bankers and their ill-gotten wealth.

It may spiral out of control

http://mannfm11.blogspot.com/2010/08/housing-bubble-post-3-years-afterwards.html

If you look on the bottom of this post Mish, you will see I beat you to the point on your article "The Worst is Yet to Come". In fact, I wrote a post called the Worst is Yet to Come that also was posted on this Chinese website.

In any case, I did my studies and I came to the same conclusion, 3 million extra homes built roughly. I used data that came out of the government and I couldn't tell you where because the links didn't come out.
The 1970's should have been near the peak in housing. The data I had only went through 2004, but I know that 2005 and 2006 were even higher because I was looking at Calculated Risk's site with all his good graphs.

If you figure 3 million extra homes, plus changing demographics and figure the government is going to cause another 400K a year to be built, we are looking at a 10 year oversupply. A 3% to 5% decline out of this is a joke, because debt is deflating and housing debt is a big part of it.

Another thing that is a lie is that current existing home sales are at an all time record. The NAR is a pack of liars who began keeping their own statistics in 2000. Home sales in 1981 dropped to 2 million and they weren't much higher in 1982. In fact, 4 million was the all time high prior to 1997.

We had a deflation in the 1980's, but it was bailed out by steadily falling interest rates and a speculative trend that supported home prices in a lot of areas. DFW had a hell of a housing bust, as it was one of the bright economic spots in the country in the early 1980's and everyone moved in to build. 200K units were built in 1983/1984 and the market suffered for 8 years, despite a growing population.

Home construction probably didn't fall to a reasonable level until early 2008, so we are only 2.5 years into this mess. Once people realize the bust has hit housing, there will be fewer piling in to get a bargain. Real estate in Japan fell 90% in some places, despite their government and central bank doing roughly the same as Obama and the Fed. DFW has a growing population or I doubt the bust would have ended prior to 2000.

We own lower end rental property, mostly in Plano, Tx. I can see the inventory building up in a lot of older areas. Plano has blue ribbon schools, so it is still a stable price area and land is running out quickly. But, we had the telecom bust in 2001, which took to top out of the market here. But, in 2007, SFR construction was running just short of 50,000 units a year. There is a huge inventory homes in the subdivisions I go through and we are at the end. Foreclosures here were running high before the bust hit and have declined significantly during the tax credit time.

Credit quality of renters has been bad for some time, probably because the subprime mortgage boom took so many of the good renters out of the market. But what is going on now is I can see that people are having trouble paying their rent. In the meantime, speculators have bought piles of houses from lenders and distressed sellers. So, there has been an outlet for inventory at the right price for awhile. I have to believe this is about to be saturated.

I get conflicting information. One of my mothers friends, who likes to think he is the second coming of Warren Buffet says he has been told they are selling all the strip centers they can sell here. I suspected they were merely getting new names on the line for expiring loans, but I also suspect someone is lying. I have a friend that is going to law school at age 44, but he made his living building apartment projects. He says there is no work out there and not much in the way of willing buyers. There was a lot of California money came in under 1031 exchanges tha bought properties at 4% cap rates when you could get 5% on 10 year treasuries. That is not only a huge bet on inflation, but a huge bet on occupancy as well. With vacancy, taxes, insurance and maintenance, returns that low can vanish and turn negative quickly. Whether these projects were leveraged or not, I don't know, but I do know I heard some high land price quotes floating around in the middle part of the decade.

My friend that built apartments told me in 2007 that guys he knew in the real estate business who never sold anything were selling out then. Not many people live long enough to go through a cyclical real estate bust or a bear stock market and those that have and made it to the other side, don't generally get caught twice. It costs a lot of money to sell real estate, not to mention the capital gains taxes, but it costs even more to get caught in a bust. The housing boom I mentioned in the 1980's, saw the demise of a lot of properties that were producing good income prior. They had to tear the stuff down because they couldn't rent it. The same was true of commercial with landmarks like the Republic National Bank Complex and several other big buildings being mothballed and sold at bargain prices. The Republic National Bank complex was around 2 million square feet and I recall it sold for $7 million, due in part to the asbestos removal that would need to be done. But it wasn't 5 years earlier the site would have cost that.

I have thought about this and I believe the first thing that needs to be done is the GSE's refuse to finance any houses started after today. This would force people to get private financing before they built and would restrict supply. The tragedy is that we are going to lose a generation of skilled construction workers, but we are going to lose them anyhow. Many will have to go back to Mexico and that will leave the work to the remaining skilled Americans. But, there will be a dearth of labor for this purpose when the time comes, which it will.

But, the problem is even deeper, as we now have a credit problem. Witness Japan devaluing the yen. This was more than trade problems, as the Japanese were using treasuries, which are the credit of the United States to creat yen. The world has been using the dollar and the US government to expand their credit base for over 50 years now and the credit game is running out. American housing and the resulting bubble was the last credit boom of this long cycle. The lower housing goes, the less credit will be created out of equity. This is not only how deflation works, but inflation as well. The housing bubble created its own fuel, as even resales freed credit to be used to fund bank accounts and buy goods and services and other assets, including housing. This phenomenon has reversed, not because people don't want to push it forward, but because it has reversed. This doesn't make sense I know, but the mere reversal is all that is needed to keep the reversal going. This happens because the growth in credit was propelled on itself and not by any specific act. The reversal removes the fuel that was driving it the last mile.

The chicken or the egg theory is a tough one, but I believe the entire inflation we have seen over the past started with the build up of cash balances out of the 1970's housing bubble. Homes doubled here in 3 years back in the late 1970's and there was land everywhere. Those cash balances went into the 1980's where they drew mid teens interest for 3 years and the high single digits for the remainder of the decade. This then fueled not only the stock market, but the next real estate boom when rates fell. Lower payments made houses more affordable to more people and more house affordable to those that already had one. The GSE's complied by reducing down payments to the point that double contracting became legal.

I recall selling a house for a young kid when I first graduated collee in 1979 who was able to get back every dime he put into it, including payments. He had only lived there a couple of years and the appreciation paid the sales expense as well. He took the money and moved to Oklahoma to go to college.

In reading Steve Keen's recent stuff, it is clear we have a huge vaccuum under asset prices around the world. Cash balances might seem high, but we are talking around 1/2 the GDP, which falls under the old 6 months in liquid assets theory. It isn't the existence of cash that drives asset inflation, but the increase in it. What lies under this cash is a lot of bad assets, which will not only consume the capital of intermediaries, but cause the reduction in the money supply as well. There can't be any more cash than there is assets behind the cash and the mere liquidation of the bad collateral will serve to consume the excess.

So with housing we will reach the ultimate paradox, the low down payments that have supported housing and the need for security in lending that will eliminate the low down payments. As cash gets more dear, there will be even fewer people with even a low downpayment.