Big Lie of "Credit Crunch"

Market Says We Need LESS Credit but Government Continues Its Force-Feeding to Cram Debt Down Your Throat

The Wall Steet Journal's 12/11/08 "Freight Haulers Slam on the Brakes --Expecting the Weakest Year in Three Decades, Truck, Rail and Ocean Shipping Firms Are Cutting Back" (hat tip: CR):

“In a normal year, Gordon Trucking Inc. might replace 20% of its fleet of 1,500 big rigs with new trucks. But given the bleak outlook for the freight business, the Pacific, Wash., hauler doesn't intend to buy a single new truck next year.”

“’We're settling in for nuclear winter in the first half of 2009,’ says Steve Gordon, operating chief for the company, which hauls everything from paper products to electronics.”

"Some industry executives and analysts predict that 2009 could be the worst year for freight-transportation volume in three decades or more." (emphasis added)

Less VOLUME is less DEMAND.

• The companies do not NEED more trucks.
• The companies do not NEED more credit to buy trucks.

Business-investment increases typically signal economic recovery but the current investment reduction is healthy because demand for trucks is less.

• The problem of business overinvestment (overcapacity) is solved by less investment.
• The problem of overconsumption is solved by less consumption.

American consumers apparently do not need to replace their 30" TVs with 35" TVs after all.

Government/media propaganda about “lack” of credit is false.

We need LESS credit SUPPLY because we have LESS credit DEMAND--as in truck companies needing less credit because they need fewer trucks because they have less freight to move.

This is not rocket science.

We DO need transparency and price discovery, which is the exact solution that the government bailouts are designed to prevent.

Obama=Bush: Infrastructure Alternative-Energy Bubble Economics

Obama Essentially Pledges To Be Bush’s 3rd Term and Perpetuate Bushonomics "Guns & Butter" Bubble Economy

Barack “Bubbles” Obama follows his bellicose, chest-thumping "We will kill bin Laden. We will crush Al Qaeda" announcements to escalate the “Global War on Terror” and order his own troop surge in Afghanistan and raise a massive "civilian national security force that’s just as powerful, just as strong, just as well-funded [as the military]" with a hundreds-of-billions-of-dollars deficit-spending “infrastructure” stimulus to perpetuate the ponzi bubble economy at all costs and bury you in hyper-debt.

Old Wine in New Bubble:

Obama Incubates a New Host for the Ponzi Parasite

Do you believe “it’s different this time” as long as we say “infrastructure” and “alternative energy”?

• We just finished the largest infrastructure-building bubble in history. It was called the housing bubble. It was government policy. It caused the current global financial crisis. It indicates that the government is horrible at picking worthy infrastructure projects (leading to impoverishing malinvestment). Obama wants to do it all over again like it is a Disney ride.
• We just finished a PUBLIC/GOVERNMENT infrastructure-building bubble fueled by the housing/finance bubbles, as state/local coffers overflowed with property/income/sale taxes.
• Governments just finished proving the waste of public infrastructure programs. The always pork-ridden federal transportation bills reached new infamy with the Ketchikan Alaska "Bridge to Nowhere." The state of Minnesota raked in $13 Billion in surpluses 1997-2001 (during the dot.com bubble) and another windfall during the housing bubble, including a $294 Million surplus in the end-of-session 2007, the same year that 13 people died when the 35W St. Anthony Falls Bridge collapsed (8/1/07) after the cash-flush state government ignored “clear warning signs -- such as corroded, buckling gusset plates.” The federal and Louisiana state governments similarly botched New Orleans levee infrastructure with catastrophic and deadly results during the 2005 Hurricane Katrina. People died while governments spent their bubble revenue on “infrastructure” projects similar to more teachers' lounges (will they soon add granite countertops and stainless-steel appliances?), high-school "senior balconies," swimming pools, Maryland Department of Natural Resources (DNR) Project Open Space (POS) for “conservation areas” or Portland Oregon Bureau of Parks and Recreation’s $250,000 study for a 4-mile scenic bike path (the quarter-million dollars does not build anything, it just “studies”).
• Obama’s alternative-energy Green Bubble (the Grubble?) is a Trojan Horse to misrepresent more consumption as conservation (saying the US government "pays the highest energy bill in the world" and then demanding yet more spending on government buildings--"greenwashing" spending--instead of downsizing) (Update: Obama gives lip service to fuel-efficient vehicles but then uses his first major press conference as president to push gas-guzzling 5mpg RVs) and a recipe for malinvestment (subsidizing inefficient but politically-correct boondoggles) and pork-barrel spending for politically-connected, insider, special interests. Venture capitalist Bob Metcalfe embraces the dot.com bubble as a business model and recycles erstwhile dot.commers into the new Green Bubble, “there is a bubble. And it’s great.”
• Obama’s final attempt to assure the public that his policies will remain unsullied by reason is his “use it or lose it” criterion to force ill-considered spending decisions. Crash-spending programs cause massive waste, such as 1980s Defense Secretary Caspar “Cap” “the Ladle” Weinberger’s profligacy, the infamous $436 hammer and $640 toilet seat, and the post-9/11 security bubble including Newark NJ buying air-conditioned garbage trucks with Homeland Security money.
• Obama might be giving away your tax dollars to support drug-trafficking, prostitution, and human trafficking because of mob/mafia ties to construction. "Organized crime controls 75 percent of the construction industry in New York City through its control over the concrete industry and construction unions, an admitted mob captain told Senators [in 1988]." "New York Public Works Projects Saddled with ‘Mob Tax’." FBI investigations implicate the Gambino crime family in a 21st Century I-95 interstate highway construction project.
• Expect all the housing-bubble excesses (waste, fraud, cronyism, etc.) to continue, since Obama's "let's take this party back to my place" announcement merely shifts the bubble from residential infrastructure (housing) to non-residential infrastructure (schools, roads, or anything allegedly "civic").

Bubbles Obama seems intent on copying FDR’s folly of wasting scarce resources on parks and wall murals while people starved.

The New Deal failed to end the Great Depression.

The Greaty Society failed to end poverty.

Entombing Japan in concrete failed to end Japan's 1990s "lost decade" (more like 2 lost decades now).

Why would anyone believe today's Keynesian stimulus-addicts who promise, "but this time it's different"?

Obama's concrete will build America's mausoleum.

• The solution to a debt crisis is NOT a spending spree.
• The solution to a debt problem is NOT more debt.
• The solution to a bubble is NOT another bubble.

Is spending less money, both as an individual and as a nation, such a crime that Obama will destroy America’s finances to avoid the “horror” of spending less?

Consumer Credit Hits Record HIGH, Belying “Credit Crunch”

The “Credit Crunch” that Wasn’t

US total consumer credit hits record HIGH after a year of the so-called “credit crunch,” according to the Federal Reserve’s latest provisional figures released November 7, 2008.

The graph shows that 3rd-quarter 2008 total US consumer credit grew 3.7% above 3rd-quarter 2007, when the “credit crisis” began.

Not only did consumer credit not shrink, it grew.

September 2008 consumer credit is higher than the same month of any year prior, higher than the housing-bubble peak.

Index of US total consumer credit, growth year-over-year (YoY), September-September:

1998 = 1.00
1999 = 1.08
2000 = 1.19
2001 = 1.30
2002 = 1.40
2003 = 1.47
2004 = 1.54
2005 = 1.62
2006 = 1.69
2007 = 1.79
2008 = 1.85

Consumer credit expanded to 4 TIMES the Fed’s claimed 2% per year target for core inflation, which, after 10 years, would be a 2008 index of only 1.22.

A 2% growth rate will not double the initial amount until 36 years yet consumer credit nearly doubled in 10 years and continued its nearly relentless expansion during a year of what was supposed to be the worst credit crunch in memory.

• “Current” (2008Q3p) consumer credit would have to crash 12-13% simply to return to the 2005 level near the housing-bubble peak.
• “Current” (2008Q3p) consumer credit could crash almost 1/4 (24%) and still be higher than the 2002 level during Greenspan’s slide toward 1% Fed funds benchmark interest rate (dropped 50 basis points (bp) from 1.75% to 1.25% on 11/6/02).
• “Current” (2008Q3p) consumer credit would have to crash over 1/3 (34%) simply to reach the 10-year trend line for 2% annual growth from 1998 (22% higher than 1998--and we already were awash in credit in 1998).

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Update

Latest figures show total outstanding US consumer credit of $2.564T (2/09) at less than 1% from the highest point in history set at $2.583T (9/08) during the so-called "credit crunch," higher than any month before the so-called "credit crisis" began at $2.481T (8/07), and higher than any month during the massive credit boom.

8/07 "Credit Crunch" allegedly begins
2/09 Total outstanding US consumer credit is 3.3% higher than 8/07

Lending Keeps Growing, Growing, Growing

Total credit of all commercial banks (TOTBKCR), percent growth, Year over Year (YoY), remains well above 0 at about 2.5% growth (similar to the 1990s and 2001 recessions):


Total credit of all commercial banks (TOTBKCR), absolute levels show recent volatility but so far remain well above the pre-"Credit Crunch" levels of the massive global credit bubble:

Fed TOTBKCR

Even if consumer or bank credit does decline, does it decline by more than government debt increased or by more than money increased?

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The notion that we lack credit now is madness.

I explained over a year ago that we have no credit-supply crunch, but we do have a number of other crunches that policymakers ignore or misread.

The government continues its misguided bailouts and hyper-debt policies.

What This Means for Inflation Vs. Deflation

How To Vote Today: Last-Minute Information

Bi-Partisan Threats to You

What to do when both major candidates make a mockery of “change” and “reform.”

Barack Obama married into the infamous Chicago political machine (his wife Michelle was a Mayor Richard M. Daly staffer), built his career on corporate-welfare tax subsidies (the Annenberg Foundation, Chicago Annenberg Challenge (CAC), pushed the risky mortgages that contributed to the current global financial crisis, put former Freddie Mac chief executive and corporate lobbyist in his inner circle (vice-president (VP) selection advisor James A. "Jim" Johnson), picked a Republican John McCain clone for his VP (Joe Biden, an elderly, entrenched, establishment figure with some foreign-policy credentials), pushes Republican Mitt Romney’s health-care socialization, pushes his cousin George Bush’s tax cuts for "95%" (instead of "100%"), pushes his cousin George Bush’s wars in Afghanistan and the global war, and Obama thinks your biggest problem is that he has not been regulating you enough while he rejected regulations on himself and evaded federal campaign finance regulations (one rule for you, a different rule for him).

John McCain is one of the Keating Five scandal from the housing bubble and Savings & Loan (S&L) banking bailout of 20 years ago, sat and watched it happen all over again with the current mortgage/banking/financial crisis, picked a vice-presidential (VP) candidate (Sarah Palin) who rode the gravy train as mayor by hiring a lobbying firm to funnel your money to her small Alaska town of Wasilla (why not go all the way and pick "bubbles are for bathtubs" Kendra Todd as your VP?), talked about fiscal discipline and balanced budgets while he spent like a drunken sailor on the budget-busting $700 Billion Wall Street bailout—and the only thing that happened after he raced to DC to ram the bailout through is that his (and Obama’s) Senate larded the bill with even more pork (including rum, racetracks, and tax breaks for wooden arrow shafts), attacks Obama for being a socialist while comrade McCain pledges to socialize American housing by having the federal government go around the country buying houses--spending another $300 Billion of your money on bad mortgages, and he admitted he knows little about economics (neither does Obama) but that does not stop him from monkeying around with your economy, from the vast economic regulation of campaign-finance "reform" to the 2008 bailouts and nationalizations that will reverberate in your wallet for decades.

Libertarian candidate Bob Barr at least had the common sense and fortitude to take a stand and properly declare the McCain-Obama corporate payoff as “the bailout from hell."

It looks like people are even voting for Ron Paul (who warned us of Fannie Mae and the housing bubble at least as early as 2002) as a write-in candidate (check your local laws), where Ron Paul this morning won 7% in Hart’s Location, NH (AP, 11/4/08).

Financial Bailout, Hyper-Debt, Preemptive War, Bankruptcy

Dark Helmet: "Light speed is too slow... We're gonna have to go right to... LUDICROUS SPEED!"

(The video is down farther.)

Ben Bernanke Goes to Plaid:

Central Banks Will Provide Unlimited Liquidity (Ludicrous Liquidity)

"In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets. . . ."

"Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets." ( Board of Governors of the Federal Reserve System press release, 10/13/08 )

Into the Hyper-Space of Hyper-Credit and Hyper-Debt: The Great Global Monetary Easing

Our global leaders' complete abdication of responsible finance has been planned at least for months. Not satisfied with the $516 Trillion in derivatives in the world (several times larger than total world GDP, which itself would be more properly called GDC for Consumption), Morgan Stanley's London co-chief economist Joachim Fels said back in March 2008:

"We're inching closer to the great global monetary easing."

German Totalitarianism Ascendant

NPR's appallingly biased coverage labeled the stock market's long overdue move downward toward realistic pricing as "irrational" (implying that the "mark to fantasy" bubble pricing was normal). Abandoning any shred of journalistic scrutiny, NPR obediently and unquestioningly repeated the world governments' spin that they "have no choice but to intervene for the good of the world economy."

Perhaps the translators butchered the language of Goethe but German Chancellor Angela Merkel issued this chilling declaration:

"In a social market economy, the duty of the state is to have control. The state is the guardian of order."

"An offer you can't refuse": Bailout Mafia force companies to take bailout.

Europeans Push Bush Doctrine of Preemptive War on Savers

The "crisis" does NOT justify the planned government ownership of companies, even if we accept the premise that people spend more carefully when they are not sure of price accuracy (which simply will not do, according to the bailout mongers):

• The preliminary necessary step of price discovery eliminates the purpose of the $700-Billion bailout’s existence before government buys a single mortgage.
• The governments' growing list of insurance guarantees against losses in case an asset/stock fails eliminates the purpose of government preemptively buying questionable assets/stocks before the asset/stock fails.

"Free To Choose": Sovkhozy Shares or Kolkhozy Shares?

• If I had wanted to buy stocks, I would have bought them. I do not need Bush and Merkel hacking into my E*trade account to buy stock for me.
• George Bush, Barack Obama, John McCain, Barney Frank, Gordon Brown, and Angela Merkel ran the global financial system into the ground and now they fancy themselves to be "masters of the universe" who can outsmart the market by actively trading and timing stock picks. I would ask if you are ready to bet your own money on their abilities but the bailout means that you already are betting your own money on their stock wizardry.
• The completely unnecessary expansion of government ownership will leave the stock market comprised of 2 components, the sovkhozy (government owned shares), and the kolkhozy (ostensibly non-state shares but yoked to the "public good" of governments' hyper-debt policy).

Repeat Soviets' Price Policy, Repeat Soviets' Fate: Fantasy to Oblivion

The bailouts completely cut the economy loose from its moorings and cast you adrift in a sea of unknown values. Ludwig von Mises wisely predicted that the Soviet Union would collapse because its centrally-planned fantasy prices destroyed the information about value that market prices provide to you throughout your day, whether it is to buy a soda or a house.

Once the bailouts' unlimited liquidity (cash, credit, and debt) and unlimited insurance (increasing bad risks by hiding their costs) destroy price accuracy, wealth destruction and malinvestment will run rampant (as they did in the Soviet Union).

If you think a free-market bubble correction is risky, wait until you have experienced the government's continued enforcement of "mark to fantasy," Ponzi-scheme, bubble price-fixing.

Bank Wall Street Bailout Unnecessary: You Lose

• PT Barnum must be laughing at us. There’s a sucker born every minute: Never buy something you don’t understand. People ignored that advice with complicated mortgages and--learning nothing--now repeat the mistake on a national scale by buying a complicated government bailout that they don’t understand.
• The Blind Leading the Blind: Congress does not understand the problem any better than the Wall Streeters. Many Congresspersons probably do not understand the bailout that they voted for. Senator Chris Dodd (D-CT) and others cry lack of regulation, except that Dodd incriminates himself, because he as Chairman of the Senate Banking, Housing, and Urban Affairs Committee is the very one who was supposed to have been doing the regulating and oversight all these years, except Dodd, Congressman Barney Frank (D-MA), and others were too busy pocketing cash from the banking/financial lobbyists. President George W. Bush said that "Wall Street got drunk" but his bailout pours whiskey down the drunkard's throat (the problem was too much cheap money in Wall Street, and the bailout pumps more cheap money into Wall Street). Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry “Hank” Paulson suddenly declared the need for a government takeover of Fannie Mae and Freddie Mac only a couple months after declaring them fit as a fiddle. I would not trust them to change a light bulb, much less tinker with the world’s largest economy.
• The World’s Most Expensive Telegram: So what then is the purpose of the $700 billion bailout? House Speaker Nancy Pelosi explained her intent, "Please be assured that we will have a package that will speak to the issue in a very substantial way to send a message to the markets of our seriousness." As movie mogul Samuel Goldwyn said about misusing a medium, "If you want to send a message, call Western Union." Ms. Pelosi, next time you want to send a message, get your hands out of our pockets and type an email.
• Guaranteeing that You Overpay: The bailout’s government purchase of risky mortgages with your money is a classic case of asymmetric information where the seller knows much more about what is being sold than the buyer does (as NPR noted today). That observation should result in “no sale” until the seller discloses sufficient information—but it won’t with these people at the helm. Not only is the bailout not going to require sufficient disclosure, one of the reverse auctions designed by University of Maryland professors for the bailout intends to rig the results so that the government does NOT pay the lowest price. That’s right, the plan is not only to force you to buy bad mortgages, the plan is to force you to OVERPAY for bad mortgages, on purpose.
• Bailout’s Own Premise Disproves the Need for Bailout: The bailouters allege that we need the government takeover because banks won’t buy/lend because banks don’t know the value/price of each others’ mortgages, so the bailouters claim that the government has to buy/lend in their place. The fundamental flaw in the whole bailout logic is that government doesn’t know the price either, so the bailout solves nothing (if banks can’t buy because there is no price, then government can't buy because there is no price). Therefore, the bailouters--without any inkling of their own absurdity--declare that the bailout cannot work until we know price, so the first step is a massive program to determine prices before the government can buy anything. However, once the government determines the price, the government bailout is no longer necessary, by its own premise. The preliminary necessary step of price discovery eliminates the purpose of the bailout’s existence before government buys a single mortgage.
• The government is not ending the scam. The government is taking over the scam: Dodd’s, Frank's, and others’ bailout sales pitch that you will make a killing in the real estate market when prices turn around should sound awfully familiar because it is the same "housing can only go up" pitch used by the hustlers shilling risky mortgages, except re-packaged on a vast national scale. Scams appeal to the victim’s greed or self-interest so it is no surprise that the pro-bailout crowd tell you that they are only looking out for your best interests and you have to bailout the banks for your own good and you have to buy now or lose out forever (the oily saleman's high-pressure sales tactic) and besides you will make a profit from the bailout--the only thing they didn't promise is to include a set of free steak knives if you "act now!" The bailout is NOT solving/preventing the bad practices. The bailout magnifies the bad practices exponentially. The only thing worse than the door-to-door huckster is when the real-estate huckster is the federal government. If you were smart enough to have avoided the bubble, you lose because the government is forcing you to participate in the bubble by funding the bailout. You are now the sucker in the newspaper who fell for the bad deal. If wannabe-real-estate-tycoons Dodd, Frank, and Paulson want to play Donald Trump, they should do so with their own money, not yours.
• Inviting the Foxes into the Henhouse for Another Feast at Your Expense: The government probably will hire the same highly paid mortgage/financial people who made the mistakes during the bubble and caused the credit crisis as the ones who will decide the prices in the bailout—and this time they are spending your money.
• The Money Pit: The 1980-90s Savings & Loan (S&L) bailout final cost of $125 billion was 4 times the first estimates of as low as $30 billion (contrary to recent media propaganda to try to burnish the S&L bailout's reputation). If Paulson’s $700 billion underestimates the final cost by a similar factor, the current bailout will cost almost $3 TRILLION.
• Monopoly Money: The government does not have the money. It was running deficits and putting you in debt to foreigners before the $700 billion bailout. Bush ridiculously claimed that "government is the only institution with the patience and resources to buy these assets at their current low prices and hold them until markets return" but everyone with a 401k has the patience to wait decades, the government has no patience as its instant gratification is what put us deeply in debt and caused the problem, and its only "resource" is the ability to borrow and put us deeper in debt. The federal government matched its short-term impulsiveness with shorter-term debt. The FDIC insurance increase from $100k to $250k is grossly irresponsible because, not only does the FDIC insurance subsidize insolvency and make zombie banks by design, the FDIC does not have enough money to pay for coming bank failures at the $100k level, much less $250k, so they might as well have completed the fantasy and raised the promise to $250 Trillion per depositor. Your head should be spinning that your leaders arranged/are arranging to add an astonishing $2 TRILLION to the national debt in little more than a year (original deficit, stimulus packages, bailout, and they’re not done with you yet). Add to this crushing debt its inflation (counter-deflation) and dollar depreciation.
• For the Children: Someone out there must have a little daughter named Suzie so, given politicians’ penchant to exploit children to shill bad policy, you can call the bailout the How To Financially Ruin Suzie Act of 2008.
• Irony: "Ownership Society"=Government Ownership: While Fidel Castro’s communist Cuba begins to privatize, Comrades Bush and Pelosi continue to Sovietize the American economy, centrally planning the price of individual houses, taking over the real estate market, seizing banks, nationalizing mortgage giants Fannie Mae and Freddie Mac, etc. Viva Hugo Chavez.
• Government Should Do Nothing. It Has Done Enough Damage Already: Reject the propaganda that the economy will stop. The same greed that caused the problem will solve the problem. No one can make money if the economy stops. Therefore, the economy will not stop. Even if credit did stop, that would not stop the economy. People who saved (yes, there are more than a few) can buy houses. Millions with home equity can buy houses any time they please, as long as the new house does not exceed the equity in the current house (no trading up but plenty of trading sideways if you need to move for your job). Developers who overbuilt will be selling houses one way or the other (bankruptcy liquidation). Houses will become affordable to millions as long as the government does not prevent prices from falling (trying to stop houses from getting cheaper is as stupid as trying to stop gasoline from getting cheaper). If a business cannot make payroll without a loan, it does not need a loan, it needs a better business model (What happened to the revenue? Hint: revenues should exceed costs. Subsidizing money-losing businesses does NOT help the economy). Moreover, credit has not stopped, despite the hoopla about frozen credit markets (hat tip: Joe), according to the Fed's own FRB Volume Statistics for Commercial Paper Issuance. Further, the Fed's 10/7/08 G.19 Consumer Credit report shows that consumer credit continued to GROW during the "credit crisis"--still at a 2.4% annual rate in July 2008--and the decrease of 3.7% finally showing in August 2008 still puts total consumer credit AT BUBBLE-YEAR LEVELS. The misleading 10/11/08 media headline "Lenders say Days of Easy Loans Are Over" leads to an article which warns that car-dealership "tight" standards "often can mean a downpayment"--you MIGHT need a downpayment, but you still might need nothing more than to scratch your X on a scrap of paper to get a shiny new automobile. Media claims about inter-bank lending that "Banks won't lend to banks" is incomplete when the full statement is, "Banks won't lend to banks for garbage collateral." Bring good collateral to the table. In the days of better loan standards, a bank understandably would refuse to loan to an applicant who refused to disclose financial information. Likewise, banks now are understandably refusing to lend to other banks that refuse to disclose financial information about their MBS or their solvency. Simple, if you want a loan, show your books. Buyers will buy and lenders will lend when the price seems right. Warren Buffet recently bought $3 billion of GE. Wells Fargo and Citigroup recently engaged in a $11.7 billion bidding war and lawsuit over who would get to buy Wachovia. Cerberus Capital management might buy GMAC Financial Services. General Motors (GM) might buy Chrysler (hat tip: CR).

Government Prevents the Solution: The dirty secret is that we still have super-lax credit, but the government prefers mega-super-lax credit, which is why the federal government nationalized GSEs Fannie Mae and Freddie Mac to stop a prudent deleveraging runoff--effectively making that smart market solution illegal until 2010--and instead ordered those 2 GSEs combined to buy $40 Billion of "toxic waste" mortgages per month (hat tip: Mish) to add to the bailout's and the Fed's desperate attempts to pump-up the mega-bubble at your expense.

Why are there no lemon laws against bad legislation?

Why did the public buy the bailout?

Abolish the Federal Reserve Central Bank: Declaration of Financial Independence

The US Federal Reserve central bank does the OPPOSITE of fundamental central-banking principles.

A central bank should:

• Remove the punchbowl before the party gets started (tighten monetary policy before inflation/bubbles start). Instead, both Greenspan and Bernanke spiked the punchbowl with whiskey, cocaine, and LSD, kept everyone’s glasses overflowing, and injected any flagging raver with amphetamines to keep the party going at the cost of long-term health. Greenspan and other Fed apologists repudiate this basic tenet of good central banking when they argue that they cannot foresee and cannot prevent bubbles.
• Raise interest rates during a credit crunch to protect the currency. Instead, the Fed LOWERED interest rates to UNDERMINE the currency (US dollar). The 2007-2008 credit-DEMAND crunch (savings/solvency crunch) is about pricing and transparency (solvency) and the market will clear at a HIGHER interest rate, which is exactly what the effective funds rate began to do in August 2007 before the Fed intentionally SHORT-CIRCUITED the free-market solution and crashed the dollar, repudiating Baghot’s classic solution and basic tenet of good central banking.
• Lend freely at HIGH interest rates for GOOD collateral. Instead, the Fed is doing the OPPOSITE of both criteria by lending freely at LOW interest rates for BAD collateral: (1) setting the target Fed funds rate and lending to banks at NEGATIVE real interest rates and (2) taking BAD (“toxic”) collateral such as questionable Mortgage-Backed Securities (MBS). The Fed created new “facilities” precisely to take the toxic collateral that other banks would not accept as collateral in the open market. The Fed is taking bad collateral and in exchange is handing out “good” collateral (Treasuries, which other banks will accept in the open market . . . for now).
• Protect price stability. Instead, the Fed practices intentional price INstability with planned price "inflation" and planned currency depreciation. Expanding the money supply in perfect relation to the economy would yield 0% real price growth (if productivity increases, individual product prices should DECREASE while the money supply matches the new total of all production--the legendary "get more for less"). A 2% price-growth target rate is PLANNED INSTABILITY that intentionally destroys half your purchasing power every 36th year (by the "Rule of 72")—even if everything goes according to plan. The fact that today’s dollar is worth less than a 1913 nickel proves that the Fed failed disastrously at price stability.
• Reduce risk. Instead, Fed intervention is one of the greatest sources of risk in the markets. The Fed CREATES financial instability. The Fed’s very existence creates political risk as markets waste productive resources in the Kremlinology of Fed-watching. The Fed INCREASES risk during crisis because, rather than mitigating the higher than normal risk of a crisis, it ADDS risk by engaging in unpredictable behavior (emergency cuts between scheduled FOMC meetings, arbitrary bailouts for some companies and not others, sudden use of arcane powers not used in generations such as lending to non-banks, novel experiments of dubious legality).
• Increase transparency. Instead, the Fed actively thwarts transparency and increases opacity. A basic tenet of rational-actor economics and even Fed recommendations for the economy is transparency--yet the Fed does the opposite with its own operations and books, and Fed opacity further increases risk and instability. Presidential candidate Ron Paul noted that conducting Congressional oversight of the Fed is even more difficult than conducting oversight of some secret intelligence agencies. President George W. Bush blocked the International Monetary Fund’s (IMF) Financial Sector Assessment Program (FSAP) audit of the Fed to guarantee that the IMF FSAP audit results would not appear until after he left office (due 2010). When the 2007-2008 solvency crisis looms and the need for transparency is even more urgent than usual, the Fed again REDUCES and OBSTRUCTS transparency and price discovery by its new mortgage-laundering operations (TAF, TSLF, PDCF, etc.) so insolvent firms can bury the bodies in the Fed’s garden. When the markets vitally need to know the mark-to-market values of the MBS, the Fed strikes with surgical precision to PREVENT the precise solution needed. The Fed is to transparency as lead is to X-rays. (UPDATE: As if on cue to mock the American public by screaming accounting chicanery, the Fed hires ex-Enron lobbyist Linda Robertson for its Congressional liaison and, by extension, public-relations image.)
  

The Fed’s repudiation and violation of basic best practices for central banking and economics mark the Fed as a failure even by the standards of central banking, and mark the Fed as one of the greatest dangers to a healthy economy.

Inflation creates profit opportunities for a favored few speculators in churning and pump-and-dump schemes that put average people on the hamster wheel of trying to earn X% just to break even after inflation, fees, commissions, market risk, political risk, and taxes. However, the average Joe and Jane’s financial and political independence requires stable money, as defined by stable prices of 0% change over the business cycle. An American should be able to stick his/her nest egg under his/her mattress (the assets insured by homeowner’s insurance if desired, no FDIC needed), and a $100 bill should be worth a $100 even 50 years later. That system would avoid the information asymmetry, risk, moral hazard, malinvestment, and wealth destruction of unnecessary middlemen and would achieve predictable stability for long-term planning in the rational-actor school of economics.

Be a signer of the Declaration. Put your John Hancock in comments.

Misleading GAO Report of Corporate Taxes Paid

The vast majority (2/3 to 3/4) of BIG US corporations DO pay taxes, contrary to 'glass half-empty' impressions given by recent media headlines. ("Most Corporations Don't Pay Income Taxes: GAO" Congressional Quarterly CQPolitics CQ Today Online News Richard Rubin 8/12/08)

The United States Government Accountability Office (GAO) released Tax Administration: Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998-2005, GAO-08-957, July 24, 2008.

GAO graph Figure 1 shows that most large US-controlled corporations (USCC) did report tax liabilities.

Remember that a corporation might not have a profit every year. Note the graph's correlation to the 2001 recession.

45.1% of large USCC reported tax liabilities in all of the 8 years studied 1998-2005.

97.3% of large USCC reported tax liabilities at some time during the 8 years studied 1998-2005.

Remember that "corporations" include "pass-through" corporations such as "S corporations," Real Estate Investment Trusts (REIT), and Regulated Investment Companies (RIC). These pass-through corporations are not supposed to pay "corporate" taxes because they usually end with zero "corporate" profits because the profits pass through to the owners' individual income taxes. Taxes are paid on profits but the taxes on the profits show up on "individual" taxes rather than "corporate" taxes. "No corporate tax liability reported" might be misleading if the corporation owner paid the taxes as individual income.

Remember that Section 501(c)(3) corporations are non-profit. These non-profit corporations are not supposed to pay taxes because they are not supposed to have taxable profits. The government created the explosion of these no-tax corporations by requiring/encouraging people to create them to comply with government regulations and/or qualify for government grants.

Every "loophole" is there because a Congressperson put it there.

FDIC Fails. WaMu Bank Refuses to Cash Federal Check Backed by US Treasury?

The FDIC (Federal Deposit Insurance Corporation) fails across the board.

• The FDIC benefits the federal government--not the public--because the FDIC enables an inflationary monetary policy's inflation tax to be palliated by paltry bank interest. If the public distrusted banks, it would demand a sound, stable, non-inflationary money supply (and would use banks only occassionally for transfers (e.g. checks) a la Western Union, rather than as a desperate attempt to preserve the real value of personal savings against the inflation thief).
• The FDIC makes us poorer. Markets work best when people act rationally but the FDIC encourages people to keep pouring money into failing banks, making the final taxpayer cleanup more expensive. The FDIC subsidizes wealth destruction and moral hazard, financed by you (FDIC charges banks an insurance premium, a cost which banks pass on to customers). You get to pay TWICE, first through FDIC-imposed higher banking costs, and second through taxpayer-funded bailouts.
• The FDIC is supposed to impose these costs on us in exchange for the stability of preventing bank runs, yet the FDIC's takeover of IndyMac bank CAUSED a bank run (or at least worsened a run), so we get the worst of both worlds, first the risk-blind malinvestment of funding failing banks, followed by a destabilizing bank run anyway, with police being called to restore order.
• The FDIC's preemptive-war policy DEstabilized the market. The FDIC did NOT takeover a failed bank. It took over IndyMac BEFORE it failed, which means it took over a non-failed bank. The FDIC's heavy-handed tactics shocked and steamrollered customers by seizing and shutting IndyMac's main branch 3 hours early in the middle of normal business operations, "leaving customers stunned and upset. One woman leaned on the locked doors, pleading with an employee inside: 'Please, please, I want to take out a portion.' All she could do was read a two-page notice taped to the door." Even if IndyMac would have failed eventually, the FDIC's preemptive-war policy not only raises concerns about causing unnecessary problems but also creates a pernicious "crowding out" effect by preempting market solutions/buyouts with government hostile takeover of market share.
• The FDIC undermines the rule of law with vague, arbitrary changes and double standards that echo Watergate-style abuse of power. The FDIC warned banks that federal Regulation Z of the Truth in Lending Act might prevent banks from protecting their depositors and shareholders by preventing banks from issuing blanket freezes on borrowers' Home Equity Line Of Credit (HELOC) (FDIC letter Financial Institution Letters FIL-58-2008 6/26/08). Then, FDIC seizes IndyMac and one of its first actions is a blanket HELOC freeze BEFORE beginning case-by-case reviews. The FDIC apparently operates under the Nixonian Watergate-scandal I'm-above-the-law principle that, if the FDIC does it, it's not illegal.
• The FDIC failed as depositor insurance when it began trying to subsidize debtors at savers’ expense. FDIC Chairwoman Sheila Bair pushed partial defaults (“debt forgiveness” or “mortgage modification with principal write-down”) instead of preventing foreclosure by offering lower payments over a longer term at the price of a higher total paid. FDIC spin that giving away your savings is for your own good is professional fraud (fiduciary fraud or defalcation), like having your own defense attorney working for the prosecution to convict you. FDIC veered further into guaranteeing debt rather than savings with its new corporate welfare to subsidize corporate debt (FDIC backs Goldman Sachs’ $5 Billion in bonds, hat tip: Comrade Swan to Anonymous Monetarist). Why is FDIC insuring debtors instead of depositors? Sheila Bair does not even know what agency she works for and does not understand that the D in FDIC stands for deposit(s) (savings), not debt (not bond investors either). Someone should tell her at her exit interview after she is fired.
• The FDIC is supposed to police banks into prudence but the FDIC is itself a subprime lender. FDIC seized Illinois Superior Bank FSB in 2001 yet the FDIC continued to sell subprime loans. According to Wall Street Journal (WSJ), "It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court. . . . With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data. . . . Hundreds of borrowers who took out Superior subprime loans on the FDIC’s watch — some with initial interest rates higher than 12% — have lost their homes to foreclosure, data on the loans indicate."
• The FDIC is now trying to muscle in on the payday-loan market with a pilot program of interest rates up to 36%, an interest rate that many laws and consumer advocates consider/considered usurious or predatory. (e.g. Section 687.02(1), Florida Statutes, provides that contracts for the payment of interest exceeding 18 percent per annum are usurious.[2] Interest exceeding 25 percent per annum is criminal usury).
• The FDIC failed in its psychological purpose of preventing animal-spirits speculative panics by offering government guarantees, as evidenced by (1) customer ignorance, confusion, and frustration about what is or is not insured, and (2) other banks refusing IndyMac checks even after the FDIC takeover: "MacPhee said a WaMu manager told her that under a new corporate policy, the bank was not accepting IndyMac checks. If a customer insisted on depositing the check, it could be eight weeks or more before the full amount would be accessible, she said she was told."
• The FDIC's guarantee failed because WaMu refused to cash the FDIC's check. The private bank IndyMac ceased operations on Friday 7/11 and the US federal government absorbed and replaced it with a new government entity, IndyMac Federal Bank: "'Come Monday morning, it will be business as usual for all insured customers,' said [FDIC Chief Operating Officer] John Bovenzi, who was placed in charge of IndyMac -- now named IndyMac Federal Bank -- after regulators seized the firm Friday." If Ms. MacPhee got her check Tuesday 7/15, she got a FEDERAL bank check--and WaMu refused it.

FDIC's Bovenzi cannot understand why people hesitate to take the government's Monopoly-money IOUs, lamenting that he is "deeply troubled by reports that there are financial institutions that are refusing to honor or are placing excessive holds on IndyMac Federal checks."

So much for the "full faith and credit" of the US government.
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FannieMae FreddieMac $5Trillion Bailout for Insolvency Crisis

Bernanke and Paulson Declare US Economy Doubleplusgood

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry "Hank" Paulson have tried to jawbone the financial bubble along with denials of recession and with pollyanish predictions of second-half recovery (if we are not in recession, recover from what?--oh yes, the "slowdown"). The "nothing to see here" denials continue despite all evidence to the contrary and even as they beg for expansive new powers.

"Speeches by Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and JPMorgan Chase & Co. Chief Executive Jamie Dimon gave the market some reassurance about the financial sector. . . . The market was relieved to hear Bernanke say in a speech the central bank might extend its lending efforts to investment banks . . . Dimon said "the future is very, very bright," but that "I do think we have some very serious issues to face." . . . Paulson, meanwhile, made an upbeat assessment of the government's efforts to prevent the volume of mortgage foreclosures that touched off the credit crisis last year, although he also said he expects foreclosures to continue. . . . The Treasury secretary also said he was pleased at steps taken by Freddie Mac and Fannie Mae to raise money: "Fresh capital will strengthen their balance sheets and allow them to provide additional mortgage capital, as they balance their responsibilities to their mission and to their shareholders." . . . All that helped stocks stage a late-afternoon rebound after choppy trading throughout most of the session." ("Dow ends up 152 on decline in oil, Bernanke talk," Boston.com Associated Press (AP), 7/8/08)

Ignore That Iceberg, Crashing Sound, and the Water around Your Ankles

The Fed et al. are trying to keep the music playing and delay deflation long enough for insiders to dump their toxic waste onto the American taxpayer through the Term Auction Facility (TAF), Fannie Mae (Federal National Mortgage Association, FNMA), Freddie Mac (Federal Home Loan Mortgage Corporation, FHLMC), etc.

Government tactics are akin to getting Titanic's first-class passengers into the lifeboats, while coaxing average families out of the lifeboats by telling them that the ship is merely undergoing a temporary structural adjustment in a new flotation paradigm.

Bernanke and Paulson continued the farce in 7/11/08 Congressional testimony as a $5 Trillion insolvency crisis over Fannie Mae and Freddie Mac (which they had ignored for years) reminds us that the LAST people we want in charge of financial accounting are government.

This photo of Bernanke and Paulson in Congressional testimony (hat tip: Housing Panic) inspired the image further below: