Last February, when the Asian markets collapsed overnight and led to a 500 point loss in the Dow Jones, we heard that there was a minor "subprime" problem, but it would not spread to housing in general, or to the broader economy.
Through the spring and summer months, we were told that the economy was doing fine and housing was going to recover in the back months of the year.
There was no risk to the markets or the broader economy.Bear Stearns disclosed punishing losses in two hedge funds, wiping out their investors assets in those funds. The market began a precipitous decline.
The Federal Reserve, facing a potential waterfall collapse in the stock market, launched a "surprise" cut in the discount rate on the morning of options expiration, trapping thousands of index option owners - and arresting what was destined to be a certain plunge.
But they told us there was no risk to the markets or the broader economy.Into the fall, we continued to hear that the housing market was getting worse - much worse - and dozens of lenders folded their tents, going out of business wholesale. Countrywide Financial's stock slid day after day, and the stock market underwent a sickening series of lurches higher and lower. Oil climbed higher as the dollar went lower.
But they told us there was no risk to the markets or the broader economy.As the holidays approached the markets rallied as is usual, but it was more tepid than we had seen in past years. Evidence of consumer slowdown was all around us, but the cheery-eyed commentators on national television continued to predict good times ahead. Oil continued its climb, while the dollar continued to tank.
But they told us there was no risk to the markets or the broader economy.On December 26th the markets began a precipitous slide, with daily news items of monoline insurers potentially going bust, lenders having billions of dollars of exposure to bad mortgage and other paper, and billions of dollars of losses related to complex instruments like CDOs were reported. The DOW lost nearly 2,000 points in the space of one month, or almost 100 points a trading day.
But they told us there was no risk to the markets or the broader economy.Then Bear Stearns blew up and The Fed "rescued" them, forcing the firm into the hands of Jamie Dimon and JP Morgan, all at our (the taxpayer's) expense.
But they told us there was no risk to the markets or the broader economy.Since then we have seen a ferocious rally in the markets. Is it over?
Let me point out a few things that you, as Americans, need to be aware of.
First is the general principle that desperate men will take desperate measures.
Look around you. You may know someone who was a "home flipper" or "speculator" in the real estate market, and if you don't, you certainly can find the stories in the media. As these people got closer and closer to imploding financially, they took more and more risk - levered up higher and higher in a desperate attempt to pull the
one ace remaining in the deck to avoid the certainty of bankruptcy and ruin.
We've all seen the stories of people who take their last $1,000 and go to Vegas, betting it all on "00". Or the lady who, facing foreclosure, buys $100 worth of Powerball tickets - with her last $100.
Or how about John DeLorean, who set up an "upstart" car factory and got into trouble? His version of "desperation" turned to putting up $1.8 million to bring 100 kilos of cocaine into the United States, a deal that promised (had he not been caught!) $24 million in profits - and the salvation of his company. He, of course, got caught, although he was later acquitted.
But it seems that wasn't the limit of his desperation. He was indicted and charged with income tax evasion, mail fraud and wire fraud and, while not convicted, was ordered to reimburse investors to the tune of $9 million. In 1995 he was hit with unpaid legal fees of $10.3 million, and in 1998 a New York Jury ruled that DeLorean's accounting firm owed DMC investors $46 million, plus $65 million in interest.
Funny how that $1.8 million "mistake" multiplied itself nearly 50-fold as desperation festered and, ultimately, consumed John DeLorean.
Why do I recount all of this, and point it out?
Because we, as Americans, face a critical choice at this juncture.
We know that there is much desperation out in the markets today.
You see it in your daily life.
The housing speculators and families facing foreclosure; those who took on more leverage than they should have, those who lied outright about their incomes, or those who in some other way were less than honest about their financial and personal circumstances.
The "financial media" continues to pound the table for you to "buy" - but why? Do they have your best interests at heart? Or do they know that should you not have a reason to buy, you also don't have a reason to watch, and will turn off the Boob Tube? Who runs advertising on Bubble TV?
Bank CEOs confidently claim they do not need more capital, and then, within days, issue more stock, more debt, more "convertibles" and other financing instruments to prop up their balance sheets - in short, doing exactly what they said they did not need to do.
Corporations, such as Linens-N-Things, hang on by a thread, negotiating furiously trying to stave off bankruptcy. Some succeed, some fail. Some, like DeLorean, might even cross a line or two.
Hedge Funds, facing margin calls, lock themselves down, refusing withdrawals from investors in a desperate attempt to prevent liquidation.
Hank Greenberg as just one example has filed a lawsuit against AIG,
accusing the firm of intentionally hiding losses. Their claim is that "if they knew they would have sold their shares" ahead of the bad news that tanked the stock. Desperate?
Now sit back and contemplate this.
If we, as citizens of the United States, allow our Federal Government in any way, shape or form to bail out the people who are now
desperate for a solution to their problems, then
The Federal Government will have transferred that desperation onto itself.Consider that we already know that Hank Paulson, Ben Bernanke, and others in the government are well aware of the risks in the broader economy. The FDIC has been hiring and "calling back" bank examiners like madmen. Chris Cox at the SEC is now making noises about forcing investment banks to disclose to investors what they hold, and initiating "probes" into various firm's exposures in "subprime."
Treasury published a damning report last week pointing out that we are - right here and now - going to run a $500 billion deficit this fiscal year.
We know that people like Bernanke and Paulson are and have been lying about the risks to our financial system and our economy. Paulson often stutters when on TV at a rate that would make a woodpecker bow in awe.
They are desperate men, and their desperation arises just from observing what may happen in the private portion of the economy.We know that more than half of all "ALT-A" loans had some element of fraud in the claimed "income" of the borrower, that fraudulent appraisals were as common as fire ants in Florida, and that this bad paper is spread through the system.
We know that Fannie Mae is "offering" to refinance
underwater mortgages - where the owner has negative equity. Why would Fannie do such a foolish thing? Because in many states a purchase-money first mortgage is "no recourse", but all refinances are recourse loans. They won't tell you this up front, but if you refinance such a mortgage you throw away all protection for your future earnings power in that they can (and then will!) come after you if your attempt to keep your home fails in the future.
These are desperate men and are taking desperate measures, refinancing unsound loans on their books in a crass attempt to get borrowers to sign away their legal protections against wage garnishment!If we allow the Federal Government to proceed with their mission of bailing out the private economy then we run a very real risk that Washington DC becomes the "desperate man" to top all others, as foreigners increasingly shun our US debt and pull away from what they correctly perceive to be a Ponzi Scheme that is destined to end very badly.
The Federal Government spent $430 billion on interest in 2007 and is projected to spend $500 billion or more in 2008. To put this in perspective, in 2000 the government's interest expense was $361 billion, and in 1990 it crossed $250 billion for the first time. In December of 2007 alone it spent more than $100 billion - on interest payments.
It is absolutely critical for the fiscal stability of the United States that the government be able to finance its debt on attractive terms - meaning that government debt costs
must come down, not go up.Should the government take on an attempt to "bail out" people in the markets there is a very real risk that a rapid and uncontrollable rise in the government's funding costs will result.
There are already signs in the market that this shift may be starting, with Treasury Auctions finding decreasing bid-to-cover ratios and foreign ("indirect") interest over the last six months, and rumblings of organized protest (e.g. a "national moratorium" on paying mortgages) that are likely to take root should further injustices be heaped on the 80% of America that neither profited from or committed fraud during the bubble years.
As government debt costs rise increasing desperation will take hold and basic social programs - Medicare, Social Security, Food Stamps and others - will be unable to be funded.
In the end someone not-yet-known will inevitably appear and proclaim that they have the answer to end all the pain.
But, they will announce, there will be a necessary compromise.
The "compromise" is likely to be our American way of life.
History is replete with examples. Wiemar Germany gave birth to a politician who claimed to have a solution for all that ailed Germany. He had one all right - "the final solution."
How about Benito Mussolini? He too was hailed as a hero of "the people." After being invited to form a government and placed in power by Parliament, he altered the electoral process and imposed strict censorship. The rest is history.
Now of course nobody can be certain that such a negative outcome is in store.
But desperate men turn to desperate measures; should we, as Americans, take the risk that our government becomes desperate?What is the alternative?
We must choose, as Americans, to "circle the wagons" around our government when it comes to this economic crisis.
We must make clear to our Congressmen and women, daily if necessary, that they
must not commit any public funds, in any way, shape or form, to bailing out any part of the private and commercial credit markets.
We must stop the Housing Bill that was reported out of the House.
We must not have any more "stimulus" bills.
We must not allow The Fed to commit one more dollar to bailing out financial institutions, and in fact we must insist that they withdraw the "TAF", the "TSLF" and other similar "alphabet soup" machinations, forcing banks to hold real reserves, recognize losses, and allow interest rates for private debt to float to wherever they are most appropriate, based solely on perception of risk.
We must insist that financial firms report all Level 3 assets, what they are, and how they are valued, without exception.
If that results in some firms being declared insolvent, then so be it.
We must make clear our demand that fraud be prosecuted vigorously, irrespective of how much money the fraud-committing party might have "given" to political action committees.
In short, the federal government must insure that it too does not become a "desperate man", and therefore compelled to search for desperate measures - even as portions of the private economy are and do.
We must pester our Representatives and Senators
daily until we have confirmation in the form of bills and votes, not platitudes and barely-on-topic form letters, that they not only heard us, but that America is and shall steer this course.
The choice is ours.
We can insist that the Government "ring fence" itself, refusing to bail out any element of the housing market or the knock-on effects in the greater economy. Those firms, including banks, that are "bust" will go under. Homeowners will lose homes they cannot afford. Businesses will see spending contract and, should they be unable to meet their obligations, they will fail. Private borrowing costs will rise and may rise dramatically, especially for weaker firms.
But our American way of life will go on.
The government will remain a safe place to invest one's money, and the system, as a whole, will survive.
The Federal Government will be able to finance its operating needs.
Or, we can either insist The Government step in and provide bailouts or remain silent while others advocate for that option.
We can transfer the desperation of the American Speculator, whether they be a house flipper, investment banker or corporate executive, many of whom made millions from fraud and deception and are now facing "tough times", to The Federal Government.
Down the latter road lies the very real possibility of a credit market dislocation that will cut off the government's ability to fund the programs that we, as citizens, find essential.
This will, in turn, lead to calls for "a solution."
At that point, someone yet unknown will emerge with the promise to "fix it all."
History says this is
inevitably what happens when desperation replaces optimism and hope.
Is this a risk we are willing to take in order to provide "help" to those who made millions during the preceding years by intentionally abusing our trust and ripping us off?
I say the answer to that must be "No", and that we, as Americans, must rise now and give our Representatives and Senators one simple message:
"We will not tolerate one dime of public money being spent to 'bail out' the housing crisis, irrespective of who gets the bailout or why. This is a private market matter and, other than prosecuting wrongdoers, of which they are many, the government must stand back and stand tall as the safe and secure place where money can be invested."
The future is in our hands, and time is running short to make our decision and act.
Those howling for bailouts have made their demands known.
What is your response?
