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Frank Barbera,
Financial Sense
The phrase ‘systemic collapse’ is rarely used in financial
circles, but with housing collateral values in continued decline, there is an
enormous financial margin call rippling through the system. In the OTC
derivative market, values are unable to be quantified as increasingly spreads
are widening and illiquidity becomes more acute. An accident is at hand.
U.S. Senator Jim
Bunning, addressing Ben Bernanke and Hank Paulson
Second, the Fed is asking for more power. But the
Fed has proven they cannot be trusted with the power they have. They get it
wrong, do not use it, or stretch it further than it was ever supposed to go.
As I said a moment ago, their monetary policy is a leading cause of the mess
we are in. As regulators, it took them until yesterday to use power we gave
them in 1994 to regulate all mortgage lenders. And they stretched their
authority to buy 29 billion dollars of Bear Stearns assets so J.P. Morgan
could buy Bear at a steep discount.
Now
the Fed wants to be the systemic risk regulator. But the Fed is the systemic
risk. Giving the Fed more power is like giving the neighborhood kid who broke
your window playing baseball in the street a bigger bat and thinking that
will fix the problem. I am not going to go along with that and will use all
my powers as a Senator to stop any new powers going to the Fed. Instead, we
should give them less to do so they can do it right, either by taking away
their monetary policy responsibility or by requiring them to focus only on
inflation.
Third
and finally, since I expect we will try to get right to questions in the next
hearing, let me say a few words about the G.S.E. bailout plan. When I picked
up my newspaper yesterday, I thought I woke up in France. But no, it turns
out socialism is alive and well in America. The Treasury Secretary is asking
for a blank check to buy as much Fannie and Freddie debt or equity as he
wants. The Fed’s purchase of Bear Stearns’ assets was amateur
socialism compared to this.
And
for this unprecedented intervention in the markets what assurances do we get
that it will not happen again? None. We are in the process of passing a
stronger regulator for the G.S.E.s, and that is important, but it allows them
to continue in the current form. If they really do fail, should we let them
go back to what they were doing before?
I
will close with this question Mr. Chairman. Given what the Fed and Treasury
did with Bear Stearns, and given what we are talking about here today, I have
to wonder what the next government intervention in private enterprise will
be. More importantly, where does it stop?
Ted Butler,
Investment Rarities
Much like a parasitic tapeworm or tumor that has
grown larger in mass than its host victim, the removal or resolution of the
silver short position threatens the very existence of the silver market. Or
more precisely, the resolution of the short position threatens the continued
existence of the silver manipulation and guarantees sharply higher prices.
Richard
Daughty, the Mogambo Guru
And don't get me started at what in the hell is going on at the commodity
exchanges, mostly because I have no idea what in the hell I am talking about,
but it seems that the commodity exchanges routinely allow their little
buddies to sell fictitious commodities, like "paper" silver, for
example, until we are talking about a short position in silver that is
(according to Theodore Butler) "an amount of silver equal to all the
known silver bullion in the world." Talk about what is effectively a
huge naked short position! I bring this up because even now, the one-month
lease rate for gold is zero, and is staying at zero! Borrow gold at an interest
rate of zero! I gotta tell ya that the Federal Reserve loaning out gold for
free makes me angry as hell, because it drives down the price of gold as all
this free gold gets borrowed and dumped on the market, upsetting the demand/
supply balance, making a nice piece of change for anybody who is already
short gold, who are, I assume, mostly the guys who are dumping the gold in
the first place.
Ambrose Evans- Pritchard, Telegraph UK
It feels like the summer of 1931. The world's two biggest financial
institutions have had a heart attack. The global currency system is breaking
down. The policy doctrines that got us into this mess are bankrupt. No world
leader seems able to discern the problem, let alone forge a solution.
The International Monetary Fund has abdicated into schizophrenia. It has
upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning
of a "chance of a global recession". Plainly, the IMF cannot or
will not offer any useful insights.
Its "mean-reversion" model misses the entire point of this crisis,
which is that central banks have pushed debt to fatal levels by holding
interest too low for a generation, and now the chickens have come home to
roost. True "mean-reversion" would imply debt deflation on such a
scale that would, if abrupt, threaten democracy.
My view is that a dollar crash will be averted as it becomes clearer that
contagion has spread worldwide. But we are now at the point of maximum
danger. Britain, Japan, and the Antipodes are stalling. Denmark is in
recession. Germany contracted in the second quarter. May industrial output
fell 6pc in Holland and 5.5pc in Sweden.
The coalitions in Belgium and Austria have just collapsed. Germany's
left-right team is fraying. One German banker told me that the doctrines of
"left Nazism" (Otto Strasser's group, purged by Hitler) had
captured the rising Die Linke party. The Social Democrats are picking up its
themes to protect their flank.
This is the healthy part of Europe. Further south, we are not far away from
civic protest. BNP Paribas has just issued a hurricane alert for Spain.
Finance minister Pedro Solbes said Spain is facing the "most
complex" economic crisis in its history. Actually, it is very simple.
The country was lulled into a trap by giveaway interest rates of 2pc under
EMU, leading to a current account deficit of 10pc of GDP.
A manic property bubble was funded by foreigners buying covered bonds and
securities. This market has dried up. Monetary policy is now being tightened
into the crunch by the ECB, hence the bankruptcy last week of Martinsa-Fadesa
(€5.1bn). With Franco-era labour markets (70pc of wages are
inflation-linked), the adjustment will occur through closure of the job
marts.
China, India, East Europe and emerging Asia have all stolen growth from the
future by condoning credit excess. To varying degrees, they are now being
forced to pay back their own "inter-temporal overdrafts".
If we are lucky, America will start to stabilize before Asia goes down.
Should our leaders mismanage affairs, almost every part of the global system
will go down together. Then we are in trouble.
Bill Fleckenstein, Fleckenstein Capital
Mountains of hot money have been hiding out in tech, as demonstrated by the
conclusions of various opinion polls: that the Goldilocks contingent has been
betting on a second-half rebound and that tech would be the place to be. It's
going to be the place to be, all right, but only for those seeking major
pain.
Finally, a word on the world of hurt known as the financial arena. "It's
about to blow" is how a friend I've dubbed the "Lord of the Dark
Matter" began a call to me last week. Behind the scenes, many parts of
the credit/mortgage market were "offered only," with no buyers in
sight for troubled loans. My friend said the problem had nothing to do with
the end of the month or the end of the quarter. Instead, he believed it had
to do with the enormous amount of inventory that would be looking for a home
in the next quarter. He said the equity market was "miles behind what
was occurring in the mortgage-backed/credit markets." Though he noted
that he'd said it before, he repeated: "It's never been this bad."
David Galland,
Casey Research
At this point, our bet remains that the Feds will go to default mode which
means cranking up the printing presses into the red zone, letting the dollar
move ever closer to its intrinsic value: zero. That they’ll follow this
route is suggested by two inputs. First, a depreciating dollar means a
reduction in the trillions of dollars in obligations now owed by the U.S.
government. And, secondly, foreign holders don’t vote.
Peter Grandich,
Grandich Letter
Americans are mostly either in the shock or denial phase at this moment. Tens
of millions of Americans are literally being stretched to the limit if not
beyond just by the dramatic costs in fuel. Soon, they will enter the angry
stage as some already have around the world protesting and demanding
something be done. Sadly, despite all the political bantering you hear now,
governments like the U.S. can do little. This will lead to the frustration
phase when the realization is that there’s indeed little in the way of
relief for as far as the eye can see. That will lead to the final phase which
is either acceptance (not many will want or be able to live with this) or
dismay and radical changes to lifestyle and a forever change to the economic
landscape.
As unimaginable as it seems, we could be in just the first half of the worst
stock market decline in all of history.
Eric Janszen, iTulip
Inflation leads to hoarding, too, such as the gold
bubble of the late 1970s. No one is thinking, "I'll buy gold and get
rich" then. Everyone is thinking, "The purchasing power of my money
is evaporating. At this rate, I won't have enough money to buy the things I
need. Better convert my cash to gold now."
This
has not yet occurred to most Americans, but at this rate eventually it will.
This is why the Bureau of Labored Statistics (BLS) manages the inflation data
as they do: there was no Internet in the 1970s. In the Internet age the
inflation meme will spread like wildfire driving precious metals hoarding
behavior like nothing before. Keep 'em guessing is better than that making
the true inflation rate official. Meanwhile, use interest rate derivatives to
suppress interest rates so there is no confirmation there. Is the guessing
game over?
James Howard Kunstler
The US economy is crumbling because the way we
conduct the activities of daily life is insane relative to our circumstances.
We've spent sixty years ramping up a suburban living arrangement that has
suddenly entered a state of failure, and all its accessories and furnishings
are failing in concert. The far-flung McHouse tracts are becoming both
useless and worthless in the face of gasoline prices that will never be cheap
again. The strip malls and office "parks" are following the
residential real estate off a cliff. The retail tenants of all those places
are hemorrhaging customers who have maxed out every last credit card. The
lack of business is now leading to substantial layoffs. The airline industry
is dying and will probably cease to exist in its familiar form in 24 months.
The trucking industry is dying, threatening the entire just-in-time
distribution system of things that even people with little money to spend
still need, like food.
These conditions will now get a lot worse, no matter whether the banks
continue to conceal their problems. All of it leads to an inflection point that
coincides with the November election. By then, I expect that quite a few
banks will be toast, job layoffs will rise spectacularly, foreclosures and
bankruptcies will be raging across the land, and homeowners north of the
magnolia belt will be shattered by the cost of staying warm this winter.
Doug Noland, Prudent Bear
The harsh reality is that Starbucks is a microcosm of scores of enterprises
that have come to comprise the core of the U.S. Bubble economy. The
economic viability of so many businesses – and even industries –
will be in jeopardy in the unfolding Credit and financial landscape.
The stock market is still in the early stage of discounting the unfolding Credit
and economic bust. And I’ll reiterate that we expect the
unfolding economic adjustment to be of such a magnitude as to be classified
as an economic depression.
Today, there is
little liquidity in the securitization or
corporate bond markets. So, the multi-Trillions of strategies relying
on shorting securities for hedging and speculating purposes have gravitated
to the relative liquidity of U.S. equities. And, when it comes to
hedging against or seeking profits from heightened systemic risk, one can
these days see rather clearly how incredible selling pressure can come down
hard on the 19 largest U.S. financial institutions. And when one
considers the scope of derivative strategies that incorporate “delta
hedging” trading dynamics – where the amount of selling/shorting
increases as the market declines (systemic risk increases) – one
recognizes the possibility of a marketplace dislocation along the lines - but
significantly more systemic - than the “portfolio insurance”
fiasco that fueled the 1987 stock market crash.
Importantly,
this issue of acute systemic risk has taken a turn for the worst with the
recent deterioration in the conventional mortgage market. The highly
exposed GSEs, mortgage insurers, and leveraged speculators are positioned
poorly to withstand a bust in prime mortgages. The fate of the U.S.
Bubble economy today rests on the ongoing supply of low-cost
"prime" mortgages. Any meaningful tightening in conventional
mortgage Credit – including the lack of availability of mortgage
insurance, required larger down payments, and/or tougher Credit standards
– would have a major impact on Credit Availability for core housing
markets throughout the country (many that have thus far held together fairly
well). Such a tightening would put significant additional downward
pressure on prices, exacerbating already escalating problems for the GSEs,
Credit insurers, and speculators.
Ron Paul, Texas
Congressman
There are two choices that people can make. The one
choice that is unavailable to us is to limp along with the status quo and
prop up the system with more debt, inflation and lies. That won’t happen.
One
of the two choices, and the one chosen so often by government in the past is
that of rejecting the principles of liberty and resorting to even bigger and
more authoritarian government. Some argue that giving dictatorial powers to
the President, just as we have allowed him to run the American empire, is
what we should do. That’s the great danger, and in this post-911
atmosphere, too many Americans are seeking safety over freedom. Real fear of
economic collapse could prompt central planners to act to such a degree that
the New Deal of the 30’s might look like Jefferson’s Declaration
of Independence.
The more the government is allowed to do in taking over and running the
economy, the deeper the depression gets and the longer it lasts. That was the
story of the 30s and the early 40s, and the same mistakes are likely to be
made again if we do not wake up.
Nouriel Roubini, RGE Monitor
Indeed, my initial estimates of $1 to $2 trillion dollars of losses from this
financial crisis did not include the bailout of Bear Stearns' creditors, the
bailout of the GSEs bondholders, the fiscal costs of the Frank-Dodd bill, the
fiscal costs a severe U.S. recession that is mushrooming an already large
fiscal deficit, the fiscal cost of bailing out – a' la Bear Stearns -
the last four remaining major independent broker dealers (as the time for
such independent broker dealers is now gone as – given their wholesale
overnight funding - they are subject to bank-like runs much more severe than
for banks), the cost of bailing out the Federal Home Loan Bank system
(another GSE system that pretends to be private and that has been happily
propping up or bailing out – to the tune of hundreds of billions of
liquidity support – illiquid and insolvent mortgage lenders). Switching
the informal guarantee of GSEs debt to a formal government guarantee would by
itself increase the US gross public debt by $5 trillion and effectively
double it.
Thus, soon enough, if we fiscalize all of these losses the U.S. may fast lose
its AAA sovereign debt rating and eventually end up like an insolvent banana
republic.
Steve Saville, Speculative Investor
Even though the dollar is just a piece of paper or a
number inside a computer with no physical form whatsoever, it would be a fine
currency IF its supply could not be increased. The main reason it and the
other fiat currencies of the world are not good forms of money is that their
supplies can be increased ad infinitum. And what's worse, their supplies can
be increased ad infinitum at virtually zero cost at the whims of governments
and banks.
Given the ability to create new money "out of thin air", which can,
in turn, be used to buy votes, the average politician will succumb to the
temptation to create the money irrespective of the long-term effects of the
resulting inflation. In fact, for a politician to be successful it is almost
a prerequisite that he/she be prepared to make full use of the inflation tool
to garner votes. This will always be the case, which is why it is important
that politicians do NOT have this ability. Moreover, the only way to ensure
that they don't have this ability is to use money for which the supply is
subject to a rigid physical limitation. Gold and silver fulfill this
requirement because they are elements that can neither be created nor
destroyed by humans. We can change the location of the gold -- for example,
by shifting it from below the ground to above the ground -- but we can't
create more of it. Furthermore, we can't even shift the gold from below to
above the ground without expending considerable resources.
Peter Schiff,
EuroPacific Capital
The grim reality is that trillions of dollars were
borrowed and spent that will never be repaid. No government program can alter
that fact. Someone is going to have to pay the piper for all those granite
counter tops and plasma TVs. The price tag is staggering and for all the
bailouts and stimulus packages, all the government can do is exacerbate the
losses and shift the burden through inflation. Nor can the government
resurrect bubble home prices and the fantasy of real estate riches that went
along with them. One way or another, rational home prices will be restored
and the myths of our asset-based, consumption-dependent economy will be
finally discredited.
Darryl Robert
Schoon, SurviveTheCrisis.com
Compounding debt, the wellspring of bankers’ profits, will eventually
destroy the economy on which it lives. The time it takes to do so is
dependent on the strength and productivity of the underlying economy. No
economy, however, no matter how strong initially, can out run the constantly
compounding debt of credit-based money—not even the United States.
Mike Shedlock, Mish’s Global Economic Trend Analysis
Businesses do not want to lend, consumers do not
want to spend, financing approved projects (even large projects in supposedly
"recession-proof" Las Vegas) is difficult. Unemployment is soaring,
demand for credit ratings is dropping, there is no driver for jobs, the
service sector is shot and that is going to put still more pressure on
consumer discretionary spending and business borrowing. The credit crunch is
not only pervasive, it has now reached critical mass where it will start
feeding on itself. The Fed is powerless to stop it.
Expect to see corporate bond yields soar and treasury yields to drop as the
credit crunch picks up steam. Those looking for inflation can find it in
their rear view mirror.
James Turk, Freemarket
Gold and Money Report
I am therefore now prepared to say that gold will never again go back below
$850. Gold is just too cheap and the dollar is being inflated away too
rapidly for their exchange rate (what we call the “gold price”)
to ever again return to that level, regardless of the determined efforts of
the gold cartel to cap gold’s price, which brings up one last important
point. Ludwig von Mises warned us that governments will destroy free-markets
long before they ever understand how they work. I would like to add that
governments will destroy free-markets if they do not like the message of the
market. Government intervention after all is nothing but a blatant attempt to
change the market’s message about the price of some good or service. We
have seen this intervention time and again by governments around the world,
including the U.S. government. Sen. Lieberman’s bill to prevent
institutional investors from buying commodities is a good example of this
penchant to destroy the market process rather than put the blame on the real
culprit, which is the US government itself and its mismanagement of the
dollar, which itself is an un-Constitutional currency.
Christopher Whalen, Institutional Risk Analyst
The implosion of houses such as Bear, Stearns, LEH
and, yes, eventually even Goldman Sachs suggests that this pure
"agent" institutional dealer business model may be doomed. Are the
other heavy users of leverage residing in hedge fund land next?
We know that the larger universal banks are looking for ways to add value,
looking at what business lines make sense and those that don't in the post
subprime world. Many of those answers are negative, sad to say, judging by
the rising tide of redundancies flowing down the Street. Indeed, many of
the systemic, market structure issues upon which we harp endlessly call into
question entire business models in the financial sector. The data is
telling us that the adjustment of bank credit loss experience is still mostly
ahead and that loss rates, like recent flooding in the midwest, could exceed
50-year highs.
Jim Willie,
Golden Jackass
We are witnessing the destruction of the US
financial foundation to its very core, with most of its appendages wrecked as
well. The bankers cannot offer any solutions except for the public till to
rescue them before they become abject paupers. Amazingly, today Bernanke and
Paulson each were on the receiving end of bootlicking by Congressmen, when
they should have been vilified. They propose taking more control of the
system, when they have destroyed the system. They act as authorities still,
when they should be defendants in grand larceny and grand fraud cases before
the world court.
John Rubino
DollarCollapse.com
John Rubino is co-author, with GoldMoneys James Turk, of The Coming Collapse of the Dollar and How
to Profit From It (Doubleday, December 2004), and author of How to Profit from the Coming Real Estate
Bust (Rodale, 2003) and Main
Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA
from New York University, he spent the 1980s on Wall
Street, as a Eurodollar trader, equity analyst and junk bond analyst. During
the 1990s he was a featured columnist with TheStreet.com and a frequent
contributor to Individual Investor, Online Investor, and Consumers Digest,
among many other publications. He now writes for Fidelity Magazine, CFA, and
Proto.
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