We all know both the US government and the Federal Reserve are going full bore with one tweak after another to “save” the banking system and supposedly, thereby the economy. At least, that’s their argument to Congress and the American people. Hank Paulson and Ben Bernanke on news talk shows or testifying in front of Congress are constantly using the tired refrain of “helping the American public”.

The real truth is all this government and central bank meddling will do very little to help the average American. And in all likelihood, the economy will actually suffer from it.

Let’s take a look at some trends since Hank and Ben have been hard at work.

1. Unemployment is up…and getting worse…hurting those looking for work.
2. The stock market is in the tank hurting pensioners and others who live off of equities or dividends.
3. The price of gold is steadily declining as of March this year hurting those who were counting on this safe haven instead of stocks to provide for retirement.
4. Real estate prices are still falling hurting anyone wanting to sell or refinance and draining government coffers which depend on property taxes.
5. Consumer confidence is at all-time lows meaning retailers are screwed in the coming Holiday shopping season and the economy in general since consumer spending is what drives it.
6. All of the above is getting replayed in Europe and around the world.

Great job guys!

After months of governmet tweaks from Billion Dollar Stimulus Packages to Billion Dollar Bailouts to Billion Dollar War Spending…the economy is heading where it was always heading…south.

The cold, hard truth is government is not bigger than the economy. Government is not bigger than consumers. Yet those in power would have us all believing they are.

At the Fed meeting next week, Ben will lower rates again showing us just how much control over this economy he thinks he has. But this latest lowering of interest rates will do nothing to kick-start the economy…and in all likelihood is responsible for the stock market sell off this past week.

Every time Bernanke or some foreign central banker lowers rates he is signaling his disregard for future inflation. There is nothing more devastating to the real economy, the average worker, or the retiree than even modest inflation.

Be prepared. Many economists, pundits, and market watchers (including myself) believe a bigger stock market crash is coming since this massive inflation effect is already baked into the cake…it’s just a matter of time.

Of course, one silver lining of an inflation tsunami…real estate prices go up!

Photo Credit: hansol

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Tags: bernanke, Central Bank, economist, Economy, housing, inflation, markets

Paulson’s $700 Billion bailout bill passed the House on a 263-171 vote and the President signed it into law. Last week I promised a discussion (assuming Congress would pass the bill) on whether or not the Bill would work. So let’s get to it..

Will the Bailout Bill Work?

First, this is a false question. Paulson and Bernanke scared Congress who in turn attempted to scare the voters by painting a picture of Main Street catastrophe…businesses going bankrupt, unemployment spiraling out of control, and no lending to consumers of any kind.

To discuss whether Paulson’s bailout will work to solve these calamities is to accept the premise they exist.

They do not.

Businesses today have availability of credit. Consumers with decent credit scores can get mortgages, car loans, and credit cards as easily today as last month or last year. Returning to sound credit underwriting principals should not be mistaken for a credit freeze due to lack of liquidity.

As a matter of fact, the only institutions that can’t get credit are commercial banks seeking overnight lending from other commercial banks.

That’s it.

That overnight bank-to-bank lending is the only “frozen” credit market …and many believe it was Bernanke himself who drained the liquidity out of the market intentionally leading up to the first vote so every news story would be about the TED spread and a “frozen banking system”.

Bernanke drained $125 Billion of liquidity as evidenced by the Slosh Report from September 18th to September 24th at exactly the time he should have been adding.

Huh?

Why would Bernanke do this?

The Fed MANUFACTURED a crisis for Paulson to fix. Fix with $700 Billion of tax payer money that is. The Fed will pump liquidity back into the system once the bill is law.

This bill was nothing more than economic extortion. If I make you think I’ve kidnapped your child when I haven’t (giving you self-created “evidence” to support the claim) and convince you for the safety of your child to pay me a ransom, I’ve committed a serious crime.

Bernanke and Paulson have done nothing less…

If Paulson and Bernanke knew the American economy was NOT headed for collapse but simply used it to lay their hands on $700 Billion, the question arises…

“What is the real reason Hank and Ben want $700 Billion?”

That question will get answered next week….and you ain’t gonna like it!

Tags: $700 billion bailout, bailout, bernanke, paulson

In a July 14, 2008 AP article titled: Fed adopts plan to curb shady mortgage practices , Fed chairman Ben Bernanke is quoted as saying:

“Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower.”

Keep that in mind as you read these two sections taken directly from Title 12 (quoted as 12USC) of the United States Code:

Sec. 354. Transactions involving gold coin, bullion, and certificates

Every Federal reserve bank shall have power to deal in gold coin and bullion at home or abroad, to make loans thereon, exchange Federal reserve notes for gold, gold coin, or gold certificates, and to contract for loans of gold coin or bullion, giving therefor, when necessary, acceptable security, including the hypothecation of United States bonds or other securities which Federal reserve banks are authorized to hold.

Sec. 411. Issuance to reserve banks; nature of obligation; redemption

Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.

Read the sentences I placed in bold print. Does anything jump out at you? When I first read these two sections in the ‘90’s I immediately called the San Francisco federal reserve bank.

I wanted to redeem my FRN’s (Federal Reserve Notes) for gold. I was told all I could get for my FRN’s was like denominated FRN’s. In other words, if I came into the bank with a FRN that was denominated with a 5, I would receive another 5 FRN in its place.

It was explained to me that these sections didn’t mean what they say. What they really mean is a person can show up at any Federal Reserve Bank and get only a like denominated Federal Reserve Note. They wouldn’t receive any gold or silver despite the plain language of the code sections.

Accepting that on face value, let’s read Bernanke’s remarks again but with a question in mind. That question being, how does a liar and deceiver expect anyone to believe any of his remarks.

The quoted sentence was from an article about the fed stepping in with new and better regulations covering mortgage lenders if you hadn’t figured that out. The first clause of his remarks is actually the smoking gun (according to me).

The many causes are actually only one – the federal reserve. This is an organization that has plundered the value completely out of our currency and is now bombarding us with smoke and clouds on how it intends to fix the problem.

Hogwash. The problem is fixable immediately and it is fixable through the above two cited sections from 12USC. Again, that is according to me.

So you don’t think I’ve fallen and knocked all the sense out of my head I call your attention to 12 USC 95(a) (Regulation of transactions in foreign exchange of gold and silver; property transfers; vested interests, enforcement and penalties). Pay particular attention to this section. It has never been repealed.

This section was used by Roosevelt in his power grab. To understand how Roosevelt used it to take over the banking system and how that takeover is still in force today, read Working Paper 9405 by Walker F. Todd, assistant general counsel and research officer, Cleveland FRB (retired).

While this one paper alone won’t provide all the answers, it will act as a blueprint for today’s banking/mortgage crisis. What is happening today has already happened during the Hoover and Roosevelt administration.

There is nothing new under the sun. Next week, I will present another solution to our current mess. That solution will be supported by U.S. Supreme Court cases which, by the way, tell us what we actually already know.

Tags: Bank notes, Ben-Bernanke, bernanke, bullion, delinquincy, federal reserve, gold, monetary policy, month

Fannie Mae and Freddie Mac, combined, own or back up some $5 trillion dollars of debt. That is about half of ALL the mortgages in the U.S. They have already lost some $11 BILLION since the current mortgage/credit crisis began, so it is easy to see why there is profound concern about their fiscal health–or lack there of.

Concern turned to horror today after the New York Times reported that the U.S. government is thinking about a takeover of the mortgage giants–placing them in a conservatorship.

Should that happen, the shares of both could be worth almost nothing and taxpayers, you and me, would have to pick up the tab, says the Times, for “any losses on mortgages they own or guarantee–which could be staggering…”

This news brought about what the AFP news agency referred to in a headline as a “meltdown” of the share prices of both Fannie and Freddie.

According to Reuters, “Fannie shares closed at $10.25, down some 22 percent but well above the session low of $6.68. Freddie closed at $7.75, down 3 percent, after touching a low of $3.89 earlier in the session.”

And, here is the most amazing part of the story. Freddie and Fannie have lost almost 90 percent of their enture value just since August, says Reuters.

Doubts about bailout

As the day drew to a hectic close, Treasury Secretary Henry Paulson sent out signals that it is not likely there will be any federal bailout–However, Sen. Christopher Dodd of Connecticut, who is chairman of the Senate Banking Committee, said he spoke with both Paulson and Fed Chairman Ben Bernanke and that they are looking at options that would include “opening access to the discount window,” Reuters reports. The discount window allows the Fed to act as an emergency lender for the banking system.

Meantime, both Fannie Mae and Freddie Mac insisted they have enough capital to keep going and Sen. Dodd said both are “fundamentally sound and strong.”

Although both were originally formed by the federal government, they now function as private corporations, though there has always been an assumption that the government would never let either go under for fear of what might happen to the entire financial system in this country and, indeed, around the world.

How they got into trouble
To understand how they got into trouble, you must first understand what it is they do. Both buy up literally hundreds of billions of dollars in mortgages–then repackage them as securities.

In some cases, they hold on to these new securities, but they also sell them to investors.

That is why when the subprime mortgage crisis hit,Fannie and Freddie were hit hard. And, says the New York Times, “analysts expect the companies to announce a new round of write-downs and possibly be forced to raise capital by issuing additional shares.”

Stocks tumble then regain

At first, the fears of a Fannie/Freddie implosion plunged the Dow Jones Industrial Average down more than 200 points…but, by the end of the trading day, it closed down “just” 128.48 points.

Tags: bernanke, depression, fannie, fannie mae, freddie, freddie mac, lending, loand, loans, mortgage, Mortgages, paulson, recession

There is a law in physics that says: For every action, there is an equal and opposite reaction. The same is true is a rate cut by the Federal Reserve. Many people get excited when the Federal Reserve cuts a key interest rate. They somehow see this as a magic bullet that is going to fix what ails the economy. They are often surprised when they don’t see an instant economic turnaround.

The idea behind a rate cut is to stimulate the economy by encouraging businesses to borrow and expand. However, people have a tendency to focus on the impact that the rate cut has in their world. They don’t see the ramifications of the Fed action to the economy as a whole. If all that was necessary to promote economic growth was to lower interest rates, why not keep them at 0%?

The Good

The good part of a rate cut is fairly obvious to most. Indeed, for many, that is all that they see. The cost of borrowing is lowered. Adjustable Rate Mortgages that are tied to short-term Treasury Bills are lowered. Home equity credit lines tied to the prime rate are lowered as well as the interest rate on many adjustable rate credit cards. One of the biggest beneficiaries is the Government itself. With trillions in debt, lower interest rates have a huge impact on the Federal Budget since so much is spent on debt service. So with all of these benefits, what could be wrong?

The Bad

Tags: Ben-Bernanke, bernanke, fed, federal reserve, rate cut, real estate investing

Last week President Bush and Federal Reserve Chairman Ben Bernanke both expressed the view that the economy is not headed for recession. With the credit markets in turmoil, housing slumping badly, oil prices soaring, the dollar plummeting and inflation rearing its ugly head, how can they be so optimistic?

The reason is simple; they can’t afford not to be. An economy is nothing more than money in motion. If the money stops moving, the economy stalls. The key to the machine is consumer confidence. When people feel good about things they spend money. If they are afraid of tomorrow they stop buying. This means that the leaders in Washington can’t say, “the sky is falling,” even if it is.

If It Walks Like a Duck….

The reality is that words alone are not going to make people feel better. The average person is feeling the pain. There is pain at the pump, pain at the grocery store, pain just about everywhere. The collapse of home prices have caused people to perceive that they are not as well off as they were. Corporate layoffs lead to an uneasy feeling about their job security. People who are, or were, employed in the real estate industry are being hit especially hard. Words alone are not a balm for this ache.

The most recent economic expansion was fueled almost entirely by credit. Now that the credit party is over there is no fuel remaining to keep the economic engine running. People are feeling the crunch and they can no longer use their home as a personal piggy bank. Some people have stopped spending because they have nowhere left to get cash, while others are pulling back out of fear. The economy is grinding to a halt.

The Government’s Latest Folly

The Government’s answer to the economic downturn is to use a two-pronged attack to get the money in motion again. Step one is to aggressively lower interest rates in an effort to stimulate borrowing by easing credit. Isn’t that how we got into this mess in the first place? The second step is to provide an economic jump-start by putting money into the hands of the public. The idea is that they will spend it and the economy will heat up. Of course, if they don’t spend the money it doesn’t do any good. This is nothing more than a Band-Aid fix. The long-term consequences are enormous and we will pay much more in the end.

An Old Nemesis May Return

In a normal recession inflationary pressure tends to ease. Money is generally considered to be tight and lowering interest rates can have a stimulating effect. However lack of credit wasn’t the problem, too much was. Making credit easier is going to cause a significant jump in the rate of inflation. We are already seeing it in the price of gasoline. The interest rate cuts were a primary factor in dollar’s nosedive. The fall of the dollar causes the price of imported goods to rise and the majority of our oil is imported. Higher oil prices impact just about everything. Have you been to the grocery store lately? Prices seem to be climbing rapidly.

Couple this rise in inflation with a stagnant economy and you have the return of stagflation. Those who remember the Ford-Carter years know that this isn’t a good thing. If this downward spiral isn’t nipped in the bud there could be many years of pain ahead. Our economy, by its very nature, is extremely resilient. It has the ability to withstand almost anything if left alone. Unfortunately the Government always feels the need to do something. If only our elected officials could use some common medical wisdom: First, do no harm.

Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. - Ronald Reagan

Tags: bernanke, ecomomy, economic stimulus, inflation, stagflation

The Fed just announced that it would be cutting the federal funds rate by 1/2 point to 4.75 percent. This is the first reduction in four years and will affect everything from credit cards to adjustable rate mortgages.

Clearly this major cut is indicative of how bad the Fed thinks the economy is. It will certainly provide temporary help for many people, but I’m wondering if it is too little too late . . .

Tags: bernanke, Economy, fed, fed chairman, fed cut, federal reserve, prime rate