Expect nothing, live frugally on surprise.

Thursday, November 13, 2008

US Economic Meltdown - Part 1 The Problem

Presidents Reagan, Bush Sr., Clinton and Bush Jr. jointly increased the national debt by over six trillion dollars. Clinton by passing NAFTA and accelerating the de-industrialization of America started the movement of manufacturing jobs to countries with cheap labor and no environmental laws. The technology bubble blown by Greenspan’s reckless policies led to overbuilding of fiber-optic transnational cables. Manufacturing which had migrated to Mexico left North America for China and services for India.
The seeds of stagflation were sown to undo the Herculean efforts of taming inflation by honest Volcker. The collapse of the tech bubble and the dastardly 9-11 terrorist attack brought the economy to its knees and one trick pony Greenspan, the enfant terrible, resorted to his favorite nefarious pastime by blowing another bubble (real estate). He kept the Fed Funds rate at 1% to jumpstart the economy and rescue banks from the Argentinean bankruptcy and default. He had done the same during the Russian default to help LTCM hedge fund and brokerages in the late nineties.Kennedy and Johnson began the profligate spending of the Vietnam war that led to beginning of the demise of the Bretton Woods agreement and the dollar. Reagan with Alzheimer’s and a monomaniacal paranoia about the already crumbling Soviet Union, increased the national debt by over a trillion dollars with his defense buildup and star wars fantasies. He cut taxes without fulfilling his promise to cut spending and American trade deficits with Japan ballooned to fifty billion dollars. Many Republicans because of their limited mental abilities have a single repertoire and obsession with increasing defense expenditures and cutting taxes with total disregard for fiscal responsibility as the idiotic statements of the current president, vice-president and many Republican contenders for the presidency in 2008 prove. Bush Sr. practiced the same voodoo economics despite condemning it.Clinton, whose ambition overwhelmed his formidable intellect and meager behavior ethics, was a closet Republican who enacted NAFTA in betrayal of his labor support to enrich his business elite donors. Their greed for money and plan of enrichment by stock options to the detriment of working Americans’ salaries and well being, led to factories and jobs moving to China and services to India. The above follies were topped by the current idiot in the White House by the same policies and invasion of Iraq under false pretexts of WMD, spreading democracy and other lies to capture Iraq’s oil. Saddam was a despicable tyrant but a former ally and protégé whose overthrow could be camouflaged as humanitarian intervention to hide the oil grab.The US Federal Reserve has two mandates, price stability and economic growth. It has been a Trojan horse for the financial behemoths. During the earlier irresponsible lending behavior of big banks to Latin America, it reduced the Fed funds rate low and long enough to make Citibank and others whole. Similar favors were done by Treasury Secretary Rubin in collusion with Greenspan in the Clinton era to bail out bad loans of US banks to Mexico and brokerage houses during the Reagan era in the 1987 market crash. Reagan who was a spokesman for GE had pushed through legislation to allow Savings and Loan Banks to indulge in reckless speculation and used 500 billion of taxpayer money to set up a Resolution Trust to rescue these institutions and enrich fat cat donors. US government policy is socialism for the rich and merciless capitalism for the poor. A similar policy is being proposed to bail out bond insurers, banks (crooked lenders) and irresponsible, ignorant and foolish borrowers. Bernanke is slashing interests again to rescue the stock markets and financial institutions to the detriment of the savers and taxpayers.The sub-prime mess arose because Bush Jr. boasted about making America a homeowner’s society. Financial institutions had learnt to securitize home mortgages, credit card and automobile loans receivables and sell them to high yield hungry investors like pension plans, hedge funds and European and Chinese banks and insurance companies with the connivance of equally greedy and irresponsible rating agencies (Moody’s, S&P, Fitch etc. graded them as triple A) and monoline insurers (FGIC, MBIA, Ambac etc.) who insured them without setting up adequate reserves for loan losses. Mortgage brokers and lending institutions executives desiring large commissions and big year end bonuses encouraged borrowers to fudge or falsify income data and abandoned due diligence. The borrowers wanting to be home owners and investors convinced that house prices were on a perpetual one way upward trajectory, cheered on by their irrational exuberance took the imprudent and false advice of Federal Reserve Chairman Greenspan to take out low adjustable rate mortgages without reading the fine print that the rates would skyrocket once the short teaser period was over. The unethical greed of CEOs (Enron, Worldcom, Tyco etc.) kept the American workers’ earnings stagnant and job security poor. Two income couples mortgaged themselves to the hilt and could not meet payments if one lost a job (Read the book – Two Income Trap) or if the interest rates rose. The repeal of the Glass Steagall act has erased the barriers between commercial banks and investment banks, setting the stage for a re-occurrence of the market crash of 1929. Structured Investment Vehicles which were off the books and balance sheets like the two trillion dollar cost of the Iraq and Afghanistan wars which don’t figure in the national budget and its deficit will have to be put back on the balance sheet books of financial institutions. The losses they have taken so far (150 billion) are a mere tip of the iceberg. Eventually they may amount to half to one trillion. In addition the losses reduce bank capital and restrain commercial lending which is the lubricant of the economy. The US government is so much in hock that the top Federal employee (comptroller of the currency David Walker) has been shouting from rooftops that we are heading for bankruptcy and mortgaging our children’s future. The unfunded government liabilities over the next 50+ years are 70 trillion dollars. The financial institutions have a derivative exposure of nearly 500 trillion dollars. No wonder the credit markets have clogged up and Bernanke is slashing rates every few days. He seems to have forgotten that no matter how much you flog a dead horse it won’t get up and run. The government, similar agencies and corporations have been funding their money needs with short term paper in the money market instead of long term bonds to keep their interest expense low. Last week the Port Authority of New York which owns bridges, ports and toll roads in New York and is not a credit risk, was compelled to pay an interest rate of 20% per annum to finance it short term money needs. Many municipalities and hospitals have lost access to borrowing money. The dollar is sinking and metals, oil and food prices soaring, thanks to Reagan, Clinton, the two Bushes, Greenspan and the corrupt, stupid and do nothing Congresses (House & Senate) of the last 30+years.

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