Sunday, March 29, 2009

Something Wicked This Way Comes

Obama's Toxic-Asset Plan: End-Run Around Congress?
The Obama administration's complex plan to deal with toxic assets may have answered Wall Street's questions about shoring up the balance sheets of financial firms but it is raising other serious ones about the government's approach to funding and oversight.

The plan, known as the Public-Private Investment Program for Legacy Assets, is the latest initiative on the part of the executive branch to rely on loans and guarantees, as opposed to budgeted funding, and also asks the same government entities running the programs, to essentially oversee them.

"They've been extending their authority for the last year," says Washington-based economist Dean Baker, co-director of the Center for Economic and Policy Research. "This is really a stretch."

In particular, the PPIP will use a small, amount of money from the second round of the TARP ($75 billion to $100 billion) money approved by Congress and use the Federal Reserve's emergency lending powers to leverage that by as much as a 6-to-1 debt-to-equity ratio.

"This is an end-run around Democracy," Rep. Brad Sherman (D-Calif.) told "No one even imagined we would see trillions of dollars shifted from Washington to Wall Street that no member of Congress ever voted for."

Sherman is referring to the PPIP and other recent Fed lending programs, including the recently launched Term Asset Lending Facility.

Though the Fed's authorized to use its balance sheet for such lending activity under "unusual and exigent circumstances", according to section 13.3 of the Federal Reserve Act, lawmakers and analysts alike have become increasingly concerned about the consequences.

One of the program's two main components-the Legacy Loans Program-calls on the FDIC, which operates the government insurance fund that insures bank deposits, to "provide a guarantee for debt fund asset purchases."

Both members of Congress and former regulators call this worrisome.

"I do not like the use of the FDIC funds for this purpose; it is a deposit insurance fund, not a loan guarantee fund," says former FDIC Chairman William Isaac.

The FDIC's insurance fund is already under-funded and its resources are expected to be further taxed as the pace of bank failures picks up amid the deepening recession."I'm somewhat fearful of the FDIC being called upon to backstop this effort at a time its insurance fund is pressed to its limits," Rep. Jeb Hensarling (D-Texas) told CNBC.

"I think you're jeopardizing the FDIC," Rep. Mike Capuano (D-Mass.) snapped at Geithner during the House hearing.

Though the funding structure of the PPIP has raised the most alarms thus far, oversight issues may not be far behind.

The FDIC will participate in the funding of the program and also "provide oversight for the formation, funding and operations" of these funds.

More broadly, the Obama administration appears to have given the Fed, Treasury and FDIC potentially conflicting roles in executing the PPIP.

"It's a real trade off between complexity and transparency," says Baker, the economist. "Its not clear who's watching."

Save the Big Banks, Trash the Dollar [must read]
By: Gary North, Mises on Money
Unless American businesses reverse the present slide of profits, there will be no economic recovery.

Until there is economic recovery, the stock market will not be able to sustain its recent upward move, which has come only because the Federal Reserve last week promised to create $1.2 trillion in fiat money, and the Treasury has now promised to offer half a trillion dollars' worth of leveraged grants if investors buy the banks' toxic assets. If this isn't enough money, it will later offer another half trillion.

How will the plan work? The banks will get off the hook 100%. This is the central fact. The FDIC will guarantee the packages of loans sold by banks. That means Congress will guarantee it. A bill introduced by Senate Banking Committee Chairman Christopher Dodd seeks a $500 billion line of credit from Congress. The FDIC will get what it asks in a crisis.

The FDIC will allow highly leveraged guarantees of up to 6 to 1. That takes most of the risk out of the deal for investors. Taxpayers will foot the bill if there are losses. Then these packages of loans will be auctioned off to investors. The investors can borrow up to 50% of their investment money from the Treasury. You think I'm exaggerating? Here is the official press release.

The "new economics" of the Bernanke era (since September 2008) is based on one gigantic bailout after another, either by the Federal Reserve or the Treasury. It also rests on a perpetual bailout offered by the People's Bank of China. The PBOC is expected to create new yuans (inflationary), use these newly created yuan to buy U.S. dollars, and then use these dollars to buy U.S. Treasury debt, enabling the Treasury to fund its rapidly escalating debt at T-bill interest rates no higher than 0.25% per annum.

How realistic are these assumptions? Not very. Yet they are the foundation of the investors' recent hope of a new bull market in stocks.

The rise in the stock market has been based on short-run factors that will inevitably undermine the profitability of U.S. businesses. Businesses need a currency unit that is predictable. For long-term profitability, interest rates must reflect the underlying conditions of supply and demand: supply and demand for capital, not supply and demand for digits called money. Digits do not make workers more productive. Capital does. Capital must come from investors who forego consumption in order to lend money to businesses, or else provide capital through the purchase of shares.

The bailouts are restoring the balance sheets of the big banks by taking bad debt off these balance sheets. These debts are being transferred to taxpayers. These are trillion-dollar subsidies to the largest banks.

Investors in stocks assume that these subsidies to the narrow financial sector will solve the problems facing the banks. This assumes that all of the bad loans have been registered. This is not the case. The fact that the worst of the subprime crisis is behind us is irrelevant. The re-sets of Alt-A mortgages and option adjustable rate mortgages will continue to escalate through 2011.

There will have to be additional purchases of toxic assets by the Treasury. The FED will have to exchange additional Treasury debt assets for bad mortgages if there is not going to be a replay of the last six months. One of the reasons why the FED is trying to push down 30-year mortgage rates by buying Freddie and Fannie debt ($500 billion) is to make possible the rollovers of the Alt-A mortgages and option adjustable mortgages. The problem will be the credit worthiness of the signers of these loans. Rates are low, but only for solvent home buyers.

If the bailouts continue, as they will, at some point these large banks will stop holding money as excess reserves at the Federal Reserve at 0%. The stock market is anticipating this. What it is not anticipating is a return of fractional reserve money multiplication. What seems good to stock investors – banks returning to lending – is in fact the engine of inflation.

One Small Problem With Geithner's Plan: It Will Bankrupt The Banks
The big problem with Tim Geithner's plan to fix the banks is the same as it ever was: The gap between what banks say their assets are worth and what the market says they are worth.

When a bank says an asset is worth 60 cents and the market says it's worth 30 cents, someone has to cover that spread. The genius of Geithner's plan is that it pawns most of the cost (and most of the risk) off on the taxpayer without the taxpayer noticing.

But unless the taxpayer gets stuck with the entire spread, which is probably what Geithner is hoping, banks that sell assets will have to take massive writedowns. This will start the whole cycle of violence again.

This risk to the banks is particularly acute when dealing with whole loans that the banks currently say they have no plans to sell. These loans are often carried at 100 cents on the dollar, because loans classified as held to maturity don't have to be marked to market. Even subsidized buyers won't likely be willing to pay anywhere near 100 cents on the dollar for these loans. So, here, the writedowns could potentially be huge.

And then there's another problem:

If the banks go through the exercise of putting assets up for sale only to have the bids come in at, say, 40 cents instead of the 60 cents on the books, the banks' accountants and/or federal regulators might notice. So even if the banks recoil in horror and refuse to sell at 40 cents, someone somewhere might insist that assets now carried at 60 cents be written down to 40 cents (after all, they won't have the "temporary illiquidity discount" excuse anymore, will they?). This will blow another huge hole in the banks' balance sheets.

Given this, banks would probably be wise not to participate in Geithner's plan. Which is why the government is already talking about forcing them to...

Is the Bail Out Breeding a Bigger Crisis?[must read]
By PAUL CRAIG ROBERTS, Assistant Secretary of the Treasury in the Reagan administration
At his March 24 press conference President Obama demonstrated that he is capable of understanding issues as presented to him by his advisers and able to pass on the explanations to the press. The question is whether Obama’s advisers understand the issues.

Obama’s advisers are focused on rescuing banks and the insurance company, AIG. They perceive the problems as solvency and paralyzing uncertainly or fear. Financial institutions, unsure of their own and other institutions solvency, hoard cash and refuse to lend. Credit is needed to get the economy moving, and the Federal Reserve and Treasury are doing their best to inject liquidity and to remove troubled assets from the banks’ books.

This perception of the problem and the “remedies” being applied, might be causing a greater problem for which there is no solution. Obama’s approach, and that of the previous administration, requires massive monetization of debt by the Federal Reserve and massive new debt issues by the Treasury.

The unaddressed question remains: Is the US dollar’s status as world reserve currency threatened by the debt monetization and multi-year, multi-trillion dollar issuance of new Treasuries?

The United States has become an import-dependent country. The US is dependent on imports for energy, manufactured goods including clothes and shoes, and advanced technology products. If the US dollar loses its reserve currency status, the US will not be able to pay for its imports. The ensuing crisis would dwarf the current one.

A New Monetary System for the USA [must read]
There is a lot of talk, openly and behind the scenes, about the new global monetary system proposed by the Chinese that will be taken up at the G20 meeting next week. I expect the U.S. to reject this system as it would destroy the US Dollar as the world’s reserve currency, defy the US Constitution and end our country as a free and sovereign state.

The problem now is that if the U.S. rejects the plan, the rest of the world will surely revolt and go about either dumping US Dollars or implementing this new monetary system WITHOUT the cooperation of the U.S. thus destroying the dollar anyway.


Below is a PLAN to save the people of our nation from the destruction of the global US dollar based system. It also punishes the paper money banking crowd that got us in this mess in the first place!


Many believe that the US Congress has been ready to implement this Act for years only waiting for the conditions to be right. A few years back, I laughed off this bill saying "it could never happen", but after all that has transpired in the past 18 months it is clear that we need a NEW PLAN. Now the conditions are right for NESARA.

Dollar Slams Up Against a (Great) Wall
Move over Ben Bernanke. Step aside Tim Geithner. There's a new power in international finance: Zhou Xiaochuan, governor of the People's Bank of China, the $2 trillion central bank of China. It has the tools and the financial interests to be the new power player on the global financial stage.

Zhou Xiaochuan--better learn how to spell it and pronounce it--threw down the gauntlet this week at the Obama-Geithner-Bernanke financial regime. His remarks can only be interpreted as a slap in the face of U.S. policy during the severe financial crisis that has swept the world. His prescriptions are bound to be debated in London next week at the G-20 parley and for years to come.

Boldly stated, Zhou--backed by Russia, Brazil and India--wants to break the dollar's hegemony in global finance. In a paper grandly called "Reform the International Monetary System," Zhou has called for the creation of an international currency unit that he admits will require "extraordinary political vision and courage." He suggests that we start with a blend of the dollar, pound, yen and euro--the so-called Special Drawing Rights (SDR) created by the IMF in 1969 that borrowed a concept first recommended by famed economist John Maynard Keynes.

Zhou has surprised the experts by suggesting that international financial institutions such as the International Monetary Fund should manage some nations' currency reserves. The IMF uses its funds to prop up nations in financial crisis. Expanding the SDR would give the IMF the potential to "act as a super-sovereign reserve currency" and to increase the IMF's resources, Zhou emphasized. "The scope of using the SDR should be broadened so as to enable it to fully satisfy the member countries' demand for a reserve currency," adds Zhou.

This would be a shocking change in a system where central banks maintain control over their reserves and many keep their operations entirely secret and non-transparent. Zhou makes a telling point when he insists that "the centralized management of part of the global reserve by a trustworthy international institution will be more effective in deterring speculation and stabilizing financial markets." In other words, Zhou is saying that the recent vicious meltdown might have been avoided if the world's financial system was not tied solely to the American dollar, the currency at the focal point of the global economy.

"For a country like China that prizes its sovereignty and to date hasn't even been willing to report the currency composition of its reserves to the IMF [something most other countries do], this would be a big step," says Brad Setser, a fellow of the Council on Foreign Relations and former Treasury official in the Clinton administration.

The Fault Lines Emerge
By Peter Schiff
Given the size and scope of the remedies that the Obama Administration is cajoling the world to adopt, it is likely that the unease will grow until many countries emerge in open revolt to America's plans.

President Obama and the majority of our leadership on both sides of the aisle are confident that the right mix of monetary and fiscal policy can restart the spending party that defined America for a generation. And as the bleary-eyed revelers wisely reach for a cup of black coffee or stumble into a rehab center, Obama is pouring grain alcohol into the punch bowl hoping to lure the walking zombies back onto the dance floor. Europe and Asia fully understand that Obama will ask them to lend the booze.

Washington is telling us that our problems result from a lack of consumer spending. Therefore, the solution is for government spending to pick up the slack. However, if Americans are too broke to spend, then how can our government spend for us? The only money they have is taken from us through taxation. To postpone immediate tax hikes (adding interest for good measure), Washington plans to borrow more from abroad. However, if our foreign creditors refuse to pony up, much of the money will simply be printed instead.

Printing money is merely taxation in another form. Rather than robbing citizens of their money, government robs their money of its purchasing power. Many people assume that if government provides the funds we can spend our way back to prosperity. However, it's not money we lack but production. If the government simply prints money and doles it out, we will not be able to buy more stuff; we will simply pay higher prices. The only way to buy more is to produce more. It is production that creates purchasing power, not the printing press!

Our current predicament resulted in part from our efforts to maintain consumer spending at unsustainable levels, primarily by the reckless extension of consumer credit. Pushing up consumer credit to levels not supported by market realities required government subsidies and guarantees. In addition, Wall Street pitched in with securitization and credit default swaps, which created a false sense of confidence among our creditors that high risk consumer loans could actually be repaid. However, now that all those gimmicks have blown up, the entire farce has been exposed. There is simply no way to sustain an economy based on consumer credit.

The Administration argues that more debt will restore growth which will then allow the repayment of borrowed money. First, our government has never, and will never, repay anything. Second, the assumption that additional borrowing and spending will restore growth is flawed. In fact, more consumer debt and government spending will undermine our economy and restrain growth.


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