Economic Roadkill

Why the Fed's Consumer Credit Report is Rotten to the Core

by MIKE WHITNEY

If you really want to know what’s going on with the economy,  you should take a look at the Fed’s Consumer Credit Report that was released on Thursday. Yes, it’s a real snoozer, but it does reveal the truth behind all the “recovery” hype. So, let’s cut to the chase: When unemployment is high and wages are stagnant, the only way the economy can grow is through credit expansion. That’s why economists pay so much attention to the credit report, because it lets them see if we’re making progress or not. Right now, we’re not making any headway at all. Of course, the cheerleading media see things differently. Here’s a clip from an article in Bloomberg that puts a positive spin on a truly dismal report:

“Credit increased $12 billion after a revised $11.3 billion rise in June, the Federal Reserve said today in Washington. Economists projected a $6 billion gain, according to the median forecast in a Bloomberg News survey. The rise in non-revolving loans was the most since November 2001.” (“U.S. Consumer Borrowing Rose by $12 Billion in July, Twice Amount Forecast”, Bloomberg)

Hooray!  The US consumer is off the canvas and borrowing again. Let the celebration begin!


Not so fast. The uptick in credit spending is entirely attributable to subprime auto loans and government-backed student loans, both of which are a mere extension of the same Ponzi-finance scam that put the global economy into cardiac arrest. Every other area of credit expansion is on-the-ropes. Commercial banks, finance companies, credit unions, savings institutions, nonfinancial businesses, and pools of securitized assets are all flatlining. No progress at all. In other words, the only way to induce tightfisted consumers to spend money they don’t have is by either seducing them with “No-down, easy-pay, 60-month-no-interest” financing or by hoodwinking them about the 6-figure income they’ll net after they finish their college education at Lunkhead U.

Case in point; check out this article on subprime auto loans in Reuters:

“Lenders are making more subprime auto loans again, reversing the cautious approach they adopted after the credit crisis, an industry research firm said on Tuesday. The portion of car loans made to subprime borrowers rose to 40.8 percent in the second quarter from 37.2 percent a year earlier, according to Experian Automotive, a unit of credit bureau and research firm Experian Plc.

The data shows how keen lenders are to boost their loan books amid a sluggish economy….

Average credit scores for borrowers declined and the average term for their loans extended by one month to 63 months on new cars and 59 months on used cars, according to Experian.

“We are continuing to see growth in subprime, both new and used, and loans are becoming looser,” Melinda Zabritski, director of automotive credit for Experian, said in an interview.

Executives at Ally Financial said in May that subprime car lending had become “very attractive” because profit margins on the loans more than cover the cost of expected losses from borrowers who fail to repay what they owe. Making the loans is part of Ally’s strategy to grow by lending on more used cars….

Industry veterans have said that while the loans have been attractive recently, more lenders are entering the market and competing for business by lowering prices, a trend that could lead to higher losses in the future.” (“Lenders making more subprime car loans: report”, Reuters)

Bigger profits off lower credit scores. Now where have we heard that load of malarkey before?


Can you believe it? I mean, we haven’t even paid for the last subprime meltdown, and we’re on to the next? Do you think a little regulation might be a good idea here, like maybe some standardized loans so the banksters running these loan-laundering operations don’t blow up the system again and come around begging for more bailouts?


Oh no, of course not. That would be an intrusion on the divine workings of the free market.


Bottom line: Yes, it is possible to boost credit if one is willing to lend gobs of money to anyone who can fog a mirror, but is that really an indication of “economic recovery” or just more proof that the system is staggeringly out-of-whack?


And then there’s the student loan biz, as big a fleecing operation as ever existed. This is where the real pros hang-out now, luring their prey with promises of hefty salaries after they graduate and then loading them up with enough debt to make their eyes pop out.   But, hey, let’s not forget the upside of all this chicanery; all that fleecing beefs up the Fed’s Credit Report and makes it look like the economy is bouncing back. That’s got to be worth something, right? And, besides, everyone is “doing it”; fleecing college kids, that is. Here’s an excerpt from an article in The Atlantic:

“How do colleges manage it? Kenyon has erected a $70 million sports palace featuring a 20-lane olympic pool. Stanford’s professors now get paid sabbaticals every fourth year, handing them $115,000 for not teaching. Vanderbilt pays its president $2.4 million. Alumni gifts and endowment earnings help with the costs. But a major source is tuition payments, which at private schools are breaking the $40,000 barrier, more than many families earn. Sadly, there’s more to the story. Most students have to take out loans to remit what colleges demand. At colleges lacking rich endowments, budgeting is based on turning a generation of young people into debtors.

As this semester begins, college loans are nearing the $1 trillion mark, more than what all households owe on their credit cards. Fully two-thirds of our undergraduates have gone into debt, many from middle class families, who in the past paid for much of college from savings. The College Board likes to say that the average debt is “only” $27,650. What the Board doesn’t say is that when personal circumstances go wrong, as can happen in a recession, interest, late payment penalties, and other charges can bring the tab up to $100,000. Those going on to graduate school, as upwards of half will, can end up facing twice that.”  (“The Debt Crisis at American Colleges,” The Atlantic)

Do you think these pillars of rectitude would ever dream of warning our kids that they might they might be getting in-over-their-heads, that they might want to reconsider what they’re doing so they don’t spend the rest of their lives trying to get out of the red?


Nah. It’s not my problem, they figure. Besides why rock the boat. If these kids ever figure out that they just flushed $100,000 down the latrine for a mid-level management job at Herfy’s that pays $22K per year with no-time-off, they might just go ape and torch our lovely new sports pavilion. We can’t have that, now can we?

Here’s more from another article in The Atlantic:

“Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

How does the housing bubble debt compare? If you add together mortgages and revolving home equity, then from the first quarter of 1999 to when housing-related debt peaked in the third quarter of 2008, the sum increased from $3.28 trillion to $9.98 trillion. Over this period, housing-related debt had increased threefold. Meanwhile, over the entire period shown on the chart, the balance of student loans grew by more than 6x. The growth of student loans has been twice as steep — and it’s showing no signs of slowing.

Obviously the number of students didn’t grow by 511%. So why are education loans growing so rapidly? One reason could be availability. The government’s backing lets credit to students flow very freely. And as the article from yesterday noted, universities are raising tuition aggressively since students are willing to pay more through those loans.

All this college debt could put the U.S. on a slower growth path in the years to come. As Americans grapple with high student loan payments for the first few decades of their adult lives, they’ll have less money to spend and invest. All that money flowing into colleges and universities is being funneled away from other industries where it would have been spent in future years. Of course, this would be a rather unfortunate irony: higher education is supposed to enhance a nation’s growth, but with such an enormous debt burden, graduates might not be able to spend and invest enough to allow that growth to occur.” (“Chart of the Day: Student Loans Have Grown 511% Since 1999″, The Atlantic)

Anyway, you get the picture. Young people are just the latest subset of victims in Big Capital’s endless search for roadkill. No sense getting all huffy about it. But it does help to shed a little light on underlying condition of the economy vis a vis the Fed’s Credit Report.


Indeed, credit is expanding, but only in the areas where the sinister lifting of consumer protections (deregulation) has allowed finance vultures to do their dirtywork. As for the economy, it still stinks. But, then, you already knew that.

The Government Is Still Paying Banks Not To Lend

Henry Blodget | Aug. 27, 2011

One of the most outrageous "open secrets" of U.S. government policy these days is that the Federal Reserve is still paying big banks not to lend money.

And it's doing that while screwing average Americans who have been responsible and lived within their means.

Huh?

Seriously:

The Federal Reserve is quietly continuing with one of the many outrageous bank-bailout programs it initiated during the financial crisis--the one in which it pays big banks interest on their "excess reserves."

What are "excess reserves"?

Money that the banks have but aren't lending out--money that banks are just keeping on deposit at the Fed.

The Fed is paying banks 0.25% interest on this money.

0.25% interest may not sound like much, but it's more than the banks are paying you to keep money in your savings or money-market account. It's also more than you'll earn if you lend the Federal government money for 2 years.

Oh, by the way, why, exactly, are you earning so little interest in your savings accounts and money-market funds?

Well, because, thanks to another one of its bank-bailout programs, the Fed is keeping short-term interest rates at zero.

In other words, the Fed is paying banks not to lend money and screwing you, American citizens, because you're dumb enough to have saved money.

This is just so bass-ackwards it's not to be believed.

Why on earth is the Fed paying banks not to lend? Well, back in the financial crisis, the Fed wanted to find ways to secretly bail out the banks without it being screamingly obvious to every American that that was what it was doing. And this particular bailout program was one of the more successful ways it discovered of doing that. Over the past few years, this program has secretly funneled about $10 billion in risk-free cash (rough estimate) directly to the banks, just for being banks and not lending. Don't you wish you could get in on that game?

How much money are banks keeping in "excess reserves" that they might be encouraged to lend if the Fed weren't paying them not to?

Money for nothing.

Image: St. Louis Fed.

Oh, only $1.6 trillion. (See chart)

The Fed pays banks about $4 billion of interest a year on that money--the money the banks aren't lending. And bankers get big bonuses based on that interest, for being so smart as to not lend money and instead just take the free interest from the Fed.

Meanwhile, you earn next to nothing (or nothing) on the money you've saved.

We don't think GOP presidential candidate Rick Perry should have threatened to kill Ben Bernanke the other day, but we can certainly understand his frustration.

God, it's great to be a banker.

Boy, does it suck to be an average responsible American.

The State and Local Budget Crisis

August 24, 2011
The Ultimate Sacrifices
by MICHAEL HUDSON

The cost of the 2011 cutbacks in federal spending will fall most directly on consumers and retirees by scaling back Social Security, Medicare, Medicaid and social spending programs. The population also will suffer indirectly, by lower federal revenue sharing with U.S. states and cities.

Now that federal aid is falling – along with revenue from sales and income taxes – local budgets are falling into deficit. But for many cities and states, their constitutions and regulations prevent them from running deficits. So they face a number of hard choices.

It is hard to raise property taxes back toward earlier rates, because the rental income already has been pledged to the mortgage bankers.

Untaxing real estate has served mortgage bankers by freeing more rental income (the land’s site value) to be paid as interest. Property taxes have not absorbed anywhere near the rise in debt-leveraged housing and commercial prices. However, this has not lowered the cost of housing for most people. New buyers must pay a price that capitalizes the property’s rental value. Less and less of this payment has taken the form of local property taxes. More and more has been paid to mortgage lenders as interest. So cutting property taxes has simply left more revenue to be capitalized into higher debt-financed prices.

While homeowners saw their carrying charges rise, they nonetheless felt more affluent as real estate prices rose – inflated on easier and easier credit terms. Prices rose faster than mortgage debt as long as (1) interest rates were declining; (2) loan maturities were stretched out (ultimately reaching the point of zero amortization rather than the old-fashioned 30-year self-amortizing mortgages); (3) down payments were shrinking toward zero (rather than requiring 20 percent equity as used to be the case) and indeed as “liars’ loans” led prices to be bid up recklessly; and finally (4) cities refrained from raising property taxes as fast as market prices were rising. This left more revenue to be capitalized into higher prices, providing capital gains that home owners were encouraged to treat like “money in the bank” – by taking out home equity loans. This rising mortgage debt was increasingly important in enabling people to maintain their living standards, especially as they had to pay more for housing. So what appeared to be affluence and rising net worth from the value of one’s home on the asset side of the balance sheet found its counterpart in debt on the liabilities side.

From the local fiscal vantage point, these debt-leveraged price gains represented uncollected user fees for the site value provided by public infrastructure and rising prosperity. The bankers ended up with the rising flow of rental value, not the cities. This obliged tax collectors to look to other sources of revenue. So homeowners paid out what they seemed to be saving in modest property taxes in the form of rising sales taxes and income taxes.

By 2008 these financial system’s easing of credit terms had reached its limit. No more room for credit inflation remained, so speculators began to withdraw from the market. (They accounted for about one-sixth of demand for housing.) When the credit spigot was turned off, prices plunged – leaving the debts in place. (So taking out a home-equity mortgage was not really like drawing down money from a piggy bank after all. Years of future income had to be diverted to spend for past shortfalls.)

To tax heavily indebted property would lead to more foreclosures and abandonment. And the Obama Administration’s hope that banks somehow will use the Federal Reserve’s tsunami of cheap (0.25 per cent) reserves and credit to re-inflate a new real estate bubble is in vain, because bankers have little interest in lending to property that is still sinking in market price. It is easier to speculate on interest-rate arbitrage with the BRICS and get a foreign-exchange premium as well, or simply to play the market. Banks report winnings in the derivatives trade day after day, with nary a loss – an indication of how poorly their hapless customers and other outsiders must be doing! So the path of least resistance for most cities and states is to cut back spending on public services, and above all on pension plan contributions.

The ultimate sacrifice (and the aim of financial predators) is to sell off public land and buildings, roads and other transportation services, sewer systems and other basic infrastructure. In this aim, the investment bankers are being aided and abetted by the credit ratings industry, threatening to downgrade cities that do not sell off their public domain. In this respect the financial end-game of privatization is similar in the United States to pressures by the European Central Bank to force the indebted PIIGS economies to engage in privatization sell-offs, Third World and post-Soviet style.

Just as in Europe, when revenues are squeezed and something must give – either debt service, payment to pensioners or current payments to labor – the financial sector is seeking to take all the available surplus for itself. This puts creditors in the forefront of today’s class war against labor.

On the eve of the September 2008 financial crash, cities such as Birmingham, Alabama and Chicago already were looking for ways to cope with the fiscal squeeze imposed by political pressures from the major local campaign contributors – the real estate and banking sectors – to cut property taxes. One seeming path of little resistance was to gamble in the Wall Street financial casino, hoping to make easy gains rather than making landlords, wage earners or consumers pay higher taxes.

Landlords and bankers encouraged this speculation as an alternative to taxing property. Landlords wanted to pay less in property taxes, and banks knew that whatever rental value buyers could save in the form of lower taxes would end up being used to bid up prices to capitalize into debt service for mortgages to buy properties up for sale.

Here is the dilemma that states and cities now face: So much urban property is sinking into negative equity territory that a rise in property taxes will lead to even more foreclosures and abandonments, and hence even lower fiscal returns. To avoid this, cities are seeing Chapter 9 bankruptcy as the main route to free themselves, especially from problems that stem from an unwarranted trust in bankers to help them out of the earlier fiscal squeeze by putting them into losing financial gambles. Orange County in California successfully sued Merrill Lynch to recover damages, and Birmingham also was awarded recovery payments from JP Morgan Chase.

Birmingham and Chicago as microcosms of the national debt squeeze

Now that financial fraud has been decriminalized for all practical purposes, most financial victims are obliged to sue for reimbursement in civil court without much help from prosecutors. Alabama’s state capital Birmingham is a case in point. After a predatory financing arrangement to upgrade its sewers in 2008 forced its Jefferson County into bankruptcy, the Securities and Exchange Commission (S.E.C.) negotiated $75 million in fines and reimbursement of fees to be paid by JP Morgan Chase as lead lender and negotiator for the complex interest-rate swaps they had advised the country to take, ostensibly to protect its economic interest. The banks also forfeited nearly ten times this sum ($647 million) in termination fees. But the court-appointed receiver grabbed the $75 million settlement for payment on the debts the country still owed.

As usual, the banks had paid the fine and made reimbursement without admitting any wrongdoing. To the financial sector, deception and fraud is part of the game, after all, not a tactic that can be prosecuted as criminal. They paid their fines without admitting any wrongdoing, and without even admitting the S.E.C. charges. They merely paid up and kept silent – while the Justice Department and Internal Revenue Service were still in the time-taking process of ruling on legal claims brought by Jefferson County. The case prompted bankers and bondholders to bring pressure on the state of Alabama to take responsibility (that is, take on the debt liability) all on behalf of statewide taxpayers, and to demand that all lawsuits brought for financial fraud to be dropped.[1] “Responsibility” is supposed to be only for debtors, not for the financial sector itself. This is how the banks have managed to rewrite the laws, after all.

Jefferson County is now debating whether to declare Chapter 9 bankruptcy to free itself from debts that can be paid only at the cost of disrupting economic continuity and living standards. The city’s debt quandary is a microcosm for the U.S. economy as a whole. Its lowest-income residents are burdened with financialized charges for sewer-system debt payments so far beyond their ability to pay that they face the same fate as Latvians, Irish and Greeks: As the local economy shrinks, they must move in order to find jobs – in places less debt-burdened and hence lower-cost. The “free market” choice is to emigrate to flee the debts imposed on their economies and on themselves personally.

Well-to-do Birmingham families have yards large enough to have their own septic tanks as an alternative to paying for access to sewers, but lower-income families living in small houses or apartment buildings lack this option. One county commissioner asked: “Why should the poor have to pay for the ill-gotten gain of some of these banks who poisoned the well in the very first place?” Other commissioners demanded that bondholders “bear the entire cost of a $20 million fund that is being created to help low-income residents pay their sewer bills.”

But the government usually provides relief only for creditors – above all, relief from criminal prosecution for their business plan that involved making loans beyond the debtors’ ability to pay. Some states have fraudulent conveyance laws to prevent this, as well as to prevent banks from misrepresenting the quality of their loans to outside investors. There are laws to punish appraisers who give false appraisals, and mortgage brokers who fill in false income reports to qualify for loans. But the S.E.C. has seen its staff and budget slashed and deregulators appointed to oversee its affairs. It has no authority to prosecute, only to make recommendations to the Justice Department, where Attorney General Eric Holder has followed the Obama Administration’s support of Wall Street, feeling no obligation to live up to the promises to make that a change from the Bush Administration’s similar lax behavior.

The financial sector recognizes a dimension of economic behavior that textbooks politely refrain from citing: the ability to capture regulatory agencies, gain control of the courts and buy control of politics. The Supreme Court has ruled that corporations have the same rights as individuals to contribute to campaigns, a euphemism for buying the loyalty of politicians and judges, and obtaining veto power over regulatory appointees. Corporations pay lower income-tax rates and are free of value-added and excise or other sales taxes paid by consumers.

Unlike real people, corporations cannot be sent to jail. Corporate shells shield owners and managers from criminal prosecution for the wholesale frauds that have left Countrywide Financial, Bank of America, Citibank, JP Morgan Chase and other pillars of the banking community free to make civil settlements for deceptive policies without admitting wrongdoing. And whereas individual crooks need to pay their own lawyers, corporations pick up the tab for their managers, while contributing generously to politicians who rewrite the laws to decriminalize fraud and deceptive business dealing. The corporate-backed media applaud politicians who insist that families “take responsibility” for their unemployment risk, debts and health care – while bailouts free the wealthy from having to suffer losses on bad loans.

Rhode Island recently rewrote its laws to place bondholders ahead of other creditors, including pension recipients. Under the new law, “city officials who intentionally fail to pay bondholders can be removed from office or held personally liable for the payments.”[2] In contrast to the pro-debtor trend of legislation since the 13th century, wealth at the top of the pyramid takes precedence over retired schoolteachers and other public employees. The effect has been for the city of Central Falls, Rhode Island, to seek Chapter 9 bankruptcy protection to avert a 34 percent cut in pensions to its retirees in order to pay bondholders.

Rhode Island is not alone in giving legal priority to bondholders. “Illinois has some of the strongest bondholder protections anywhere, which explains how a state that began its fiscal year with $3.8 billion in unpaid bills from last year – and whose pension system has less than half of the money it needs – is able to keeping selling bonds. State law requires Illinois to make ‘an irrevocable and continuing appropriation’ of tax revenues into a special fund every month that can be used only to pay bondholders.” (Mary Williams Walsh and Michael Cooper, “Faltering Rhode Island City Tests Vows to Pensioners,” The New York Times, August 13, 2011. The article adds that: “The federal bankruptcy code says pensioners and general-obligation bondholders are both unsecured creditors, stuck at the back of the line and treated as equals. But there is maneuvering room in the welter of state and federal laws.”)

Chicago has balanced its budget not by taxing finance and real estate gains, but by selling off its roads and other basic infrastructure. Much as in feudal Europe, the leverage is financial. Privatizers are charging tolls and even installing meters on the city’s sidewalks to charge cars by the minute for parking. New York City has slashed is public subway and bus service, extending commuting times and making life harder. It has privatized its television and radio, replacing public airtime with commercial advertising.

The ending of federal revenue sharing will exacerbate local budget constraints. The fact that many cities and states have constitutional requirements of balanced budgets – just as Republicans advocated for the federal government in the 2011 debt-ceiling agreement – requires that taxes be raised, public services cut, or assets sold off. California’s Proposition 13 prevents the state from raising property taxes in keeping with market prices, tying its hands fiscally and obliging it to commercialize its once-great university system. Students must now take on enormous education debt for what formerly was free or subsidized. New York City’s real estate tax likewise favors large investors and wealthy homeowners, at the expense of co-ops and condominium owners in apartment buildings. The rising rental value that local tax collectors relinquish does not lower housing costs; it merely enables the land’s site value to be paid to bankers. Rising debt-inflated housing prices have priced the city out of the market as the manufacturing center it formerly was. Its textile buildings and other industrial properties have been gentrified, leaving it a one-industry (finance) town focused on Wall Street.

At the international level, Irish voters confirmed the policy of taking bad European Central Bank advice to put the interest of bondholders first by taking bad bank loans onto the government’s balance sheet and taxing the population to make up the losses, even at the cost of imposing a generation of debt-strapped depression on their economy. This is the self-destructive road to debt peonage that the IMF and World Bank forced Third World countries to follow for many decades. The fact that this ethic reverses centuries-long social values promises to make the great debate of the 21st century over the issue of which debts are paid and which will not be – and how much debts should be written down.

What the S&P Downgrade Really Means

The S&P Downgrade
By PAUL CRAIG ROBERTS

On Friday, August 5, the credit rating agency, Standard & Poors, downgraded US debt from AAA to AA+.

Gerald Celente’s view that S&P’s downgrade of the US Treasury’s credit rating reflects a loss of confidence in the political system was confirmed by the rating agency itself.

S&P explained the downgrade as the result of heightened political risks, not economic ones. The game of chicken over the debt ceiling increase and the GOP’s ability to block tax increases indicate that “America’s governance and policymaking is becoming less stable, less effective, and less predictable”

The reduction in the government’s credit rating to AA+ from AAA is a cosmetic change. It remains a very high investment grade rating and is unlikely to have any effect on interest rates. It is revealing that despite the downgrade, US bond prices rose. It was stocks that fell. The financial press is blaming the stock market decline on the bond downgrade. However, stocks are falling because the economy is falling. Too many jobs have been moved offshore.

Interest rates could fall further as investors flee into Treasuries from the euro because of sovereign debt worries, flee equity markets as they continue to tumble, and as large banks charge depositors for holding their cash. Indeed, the latter policy could be seen as an effort to drive people with large cash holdings out of cash into government bonds. Japan has a lower credit rating than the US and has even lower interest rates.

More hard knocks are on their way. As the economy weakens and the economic outlook darkens, new deficit projections will elevate the debt issue.

The psychological effect of the S&P’s downgrade is likely to be larger than its economic effect. Many will see the downgrade as an indication that America is beginning to slip, that the country might be entering its decline.

There is no danger of the US defaulting on its bonds. The bonds are denominated in US dollars, and dollars can be created without limit. Moreover, the problem with the debt is less with the size of the national debt, which remains a lower percentage of GDP than during World War II, than with the large annual budget deficits. If equities continue to fall, if flight continues from the euro, if bank fees drive people out of cash, it is possible that the inflows into Treasuries can finance, for awhile, the large annual deficit, removing the need for the Federal Reserve to monetize the deficit via Quantitative Easing.

On the other hand, the weakening economy, given traditional policy views, will likely lead to a renewal of debt monetization or QE in an effort to stimulate the economy.

Continued debt monetization threatens the dollar. Investors will move out of Treasuries and all dollar-denominated assets not because they fear default, but because they fear a fall in the dollar’s exchange value and, thus, a fall in the value of their dollar holdings.

Debt monetization can cause domestic inflation (and imported inflation for those countries that peg to the dollar) as, and if, the new money finds its way into the economy. This has not happened to any extent so far in the US, because the banks are not lending and consumers are too indebted to borrow. But the fall in the dollar’s exchange value results in higher prices of many imports. So far the inflation that the US is experiencing is coming from the declining exchange value of the dollar. However, there is little doubt that asset prices, such as those of Treasuries and stocks, have been inflated by the Fed’s monetization of debt.

To flee from the dollar, there must be someplace to go. There are not alternative currencies large enough to absorb the dollars, especially with China pegged to the dollar and the euro experiencing troubles of its own because of the sovereign debt crises in Greece, Spain, Ireland, Portugal, and Italy. Dollar flight has driven up the prices of bullion and Swiss francs. Despite the Swiss government printing francs to absorb the dollar inflow, the franc continues to rise in value. As of time of writing, one US dollar is worth only about 76 Swiss centimes or cents. In 1966 there were 4.2 Swiss francs to the dollar or 420 centimes to the dollar.

The rise in the franc is crippling Switzerland’s ability to export. The loss in the dollar’s exchange value from dollar creation causes other countries, such as Japan and Switzerland to inflate their own currencies in order to hold down their rise. The Fed’s dollar policy has resulted in Russian leader Putin declaring the US to be a parasite upon the world and the Chinese to call for other countries to control how many dollars can be printed.

In other words, the US policy is seen as adversely impacting other countries without doing any good for America.

What I have explained can be comprehended within existing ways of thinking. Within this way of thinking, as the debt ceiling imbroglio made clear, the policy choices are between eliminating Social Security and Medicare or eliminating wars and low tax rates on the mega-rich in order to eliminate the annual budget deficits that are threatening the dollar’s exchange value and enlarging the national debt.

However, it is often the case that more is going on than traditional thinking can know about or explain. It is always a challenge to get people’s thinking into a new paradigm.
Nevertheless, unless the effort is made, people might never comprehend the behind-the-scenes power struggle.

A half century ago President Eisenhower in his farewell address warned the American people of the danger posed to democracy and the people’s control over their government by the military/security complex. Anyone can google his speech and read his stark warning.

Unfortunately, caught up in the Cold War with the Soviet Union and reassured by America’s rising economic might, neither public nor politicians paid any attention to our five-star general president’s warning.

In the succeeding half century the military/security complex became ever more powerful. The main power rival was Wall Street, which controls finance and money and is skilled at advancing its interests through economic policy arguments. With the financial deregulation that began during the Clinton presidency, Wall Street became all powerful. Wall Street controls the Treasury and the Federal Reserve, and the levers of money are more powerful than the levers of armaments. Moreover, Wall Street is better at intrigue than the CIA.

The behind the scenes fight for power is between these two powerful interest groups. America’s hegemony over the world is financial, not military. The military/security complex’s attempt to catch up is endangering the dollar and US financial hegemony.

The country has been at war for a decade, running up enormous bills that have enriched the military/security complex. Wall Street’s profits ran even higher. However, by achieving what economist Michael Hudson calls the “financialization of the economy,” the financial sector over-reached. The enormous sums represented by financial instruments are many times larger than the real economy on which they are based. When financial claims dwarf the size of the underlying real economy, massive instability is present.

Aware of its predicament, Wall Street has sent a shot across the bow with the S&P’s downgrade of the US credit rating. Spending must be reined in, and the only obvious chunk of spending that can be cut without throwing millions of Americans into the streets is the wars.

Credit rating agencies are creatures of Wall Street. Just as they did Wall Street’s bidding in assigning investment grade ratings to derivative junk, they will do Wall Street’s bidding in downgrading the US credit rating. Wall Street might complain about downgradings, but that is just to disguise that Wall Street is calling the shots.

The struggle between the military/security complex and the financial sector comes down to a struggle over patronage. The military/security complex’s patronage network is built upon armaments factories and workforces, military bases and military families, military contractors, private security firms, intelligence agencies, Homeland Security, federalized state and local police, and journalists who cover the defense sector.

Wall Street’s network includes investors, speculators, people with mortgages, car, student, and business loans, credit cards, real estate, insurance companies, pension funds, money managers and their clients, and financial journalists.

As the financial sector has over-extended and must shrink, Wall Street is determined to have access to public funds to manage the process and determined to maintain its relative power by forcing shrinkage in its competitor’s network. That means closing down the expensive wars in order to free up funds for entitlement privatization and to keep the dollar’s role as reserve currency. Wall Street realizes that if the dollar goes, its power goes with it.

What insights can we draw from this analysis?

The insight that it offers is that although economic policy will continue to be discussed in terms of employment, inflation, deficits, and national debt, the policies that are implemented will reflect the interests of the two contending power centers. Their struggle for supremacy could destroy the rest of us.

Wall Street opened the game with a debt downgrade, implying more are to come unless action is taken. The new Pentagon chief replied that any cuts to the military budget would be a “doomsday mechanism” that “would do real damage to our security, our troops and their families and our military’s ability to protect the nation.”

Will Americans be so afraid of terrorists that they will give up their entitlements? Will false flag terrorist events be perpetrated in order to elevate this fear? Will Wall Street provoke crises that are perceived as a greater threat?

From whom do we need greater protection than from Wall Street and the military/security complex and from our government, which is the tool of both?

S&P head: Agency may downgrade U.S. again

By David Edwards - RAW Story
Sunday, August 7th, 2011

The head of Standard & Poor's sovereign ratings said Sunday that the agency may downgrade the U.S. again.

"Given the economic and political situation in the U.S., which will we see, an upgrading back to AAA or further downgrades?" Fox News' Chris Wallace asked David Beers.

"We have a negative outlook on the rating and that means we think that the risk currently for the rating are to the downside," Beers said.

While explaining what the U.S. could do to get its AAA rating back, the S&P official mentioned entitlement cuts but ignored the agency's call to raise revenues.

"Does any compromise have to have entitlement reform and revenue increases to be credible?" Wallace wondered.

"The key thing is, yes, entitlement reform is important because entitlement is the biggest -- are the biggest component of spending and they are the part of spending where the cost pressures are greatest," Beers replied.

"The White House as you know is not happy with this decision and they have accused S&P of amateurism. They went through your numbers and found a $2 trillion overstatement of what the debt would be and when they pointed that out to you, you simply changed the rational and continued to downgrade the debt," Wallace noted.

"That is a complete misrepresentation of what happened," Beers claimed. "Here we are talking about highly technical assumptions about projecting budget base lines far in the future. We made the motifications that we did after a conversation with the Treasury, it doesn't change the fact that in our estimation, that even with the agreement of Congress and the administration this past week, that the underlying debt burden of the U.S. government is rising and will continue to rise, most likely, over the next decade."

"The haste with which S&P changed its principal rationale for action when presented with this error raise[s] fundamental questions about the credibility and integrity of S&P's ratings action," Treasury assistant secretary for economic policy John Bellows wrote last week.

White House chief economic adviser Gene Sperling added that S&P's actions "smacked of an institution starting with a conclusion and shaping any arguments to fit it."

"The magnitude of their error combined with their willingness to simply change on the spot their lead rationale in their press release once the error was pointed out was breathtaking," he said.
Beers told Wallace that he did not expect "that much impact" from the downgrade when the global markets open on Monday.

Watch this video from Fox's Fox News Sunday, broadcast Aug. 7, 2011.

Manufacturing a Double-Dip Recession

(Crooked, clueless or both. There's no way these are smart honest politicians legislating with the people in mind. No way.--jef) 

Congress and Obama are Making Things Worse
By DAVE LINDORFF

The chief economist at ratings agency Moodys is warning that the U.S. could be headed for a renewed recession.

Calling the current situation "very perilous," John Lonski adds that the politicians in Washington, where both parties are vying to present budgets featuring massive cuts in spending, could help bring on that recession--just as the new Conservative Party-led government in Great Britain brought on a return to recession this year through its aggressive cutting of public spending. Worse yet, they could create a new shut-down in credit or "liquidity" in the financial industry that "could be more serious even than what caused the collapse of Lehman Brothers" in 2008.

Lonski, in an interview with ThisCantBeHappening!, said, "What scares me is that, because of the weakened condition of the federal government, there is less confidence in the philosophy of `too big to fail'-- the idea that the government will come in and back up any financial company that runs into trouble." He said the government is probably no longer in a position to make trillions of dollars available to prop up failing big banks as it did in 2008 and 2009, and that fearing this, financial institutions may pull back, drying up lending.

Lonski and his colleague Ben Garber, another economist at Moody's Capital Markets Research Group, today released a new report titled "Double Dip Risk Rises as DC Standoff Continues," in which they warn that the U.S. "may be closer to a double dip recession than commonly thought."

The two men note that the US economy "continues to soften," and say that evidence is "proving elusive" of any recovery in the second half of of this year. And that's "assuming a reasonable resolution of the debt standoff" between Republicans and Democrats in Washington, and increasingly even among Republicans themselves.

"Even with a market-friendly resolution of the debt standoff," they write, "a double-dip recession is far from unlikely."

The new Moody's report comes out on the same day as new data from the U.S. Commerce Department, which is also alarming. The new government data show that growth in the last quarter of 2010 was actually running at only a 2.3% annual rate, not the more robust 3.1% rate initially reported. Annualized growth rates for the first and second quarters of this year were also revised downward by the Commerce Dept. to 0.4% and 1.3% respectively. Ryan Sweet, a senior economist at Moody's Analytics says, "The economy essentially came to a grinding halt in the first half of the year."

Of course, the over 20% of Americans who are out of work or who are working part-time because they cannot find full-time jobs, and the millions who have been out of work for so long that their unemployment compensation checks have been exhausted, already knew this. They've been in a recession ever since 2007, and they represent one in five of American workers. The 40 million living on Food Stamps or going hungry--almost one-seventh of all Americans, also knew this.

It is getting hard to find any good economic news, write Lonski and Garber, especially with regional manufacturing statistics "hinting of stagnation," and with housing markets still unable to "find a bottom."

They two economists note that the Chicago Federal Reserve's National Activity Index (CFNAI), in its latest three-month moving average for the last quarter, registered a figure of -0.60. They warn that 5 out of the last 9 times that the CFNAI fell that low, "recession was often impending, or was already present."

The U.S. cannot expect much help this time from the rest of the world, either, because which most other countries are experiencing a slowdown in growth, though not as severe as the U.S.

Many economists, and not just those on the left, worry that politicians in Washington from both the Republican and Democratic Parties, focused as they are now in competitive cutting of the budget deficit, could make things worse.

As Lonski says, "Even [Fed Chairman] Ben Bernanke has said it's very important not to bring on budget cuts until we can be reasonably certain that the U.S. economy is self-sustaining."

These days, in what Lonski calls a "political theater," many politicians, as well as President Obama, are calling for immediate cuts in social spending programs like Social Security, Medicaid, Welfare, Education, etc., but Lonski warns, "The problem with the U.S. budget is not what is being spent now," but what is being spent over the longer term.

The irony, he noted, is that if government inaction on raising the debt ceiling, or government action in the form of overly-aggressive near-term budget cutting, helped usher in a double-dip recession, it would have the perverse effect of just worsening the debt, as tax receipts would plunge.

Credit Error? It Pays to Be on V.I.P. List

May 14, 2011

Credit Error? It Pays to Be on V.I.P. List
By TARA SIEGEL BERNARD
 
The credit rating bureaus, whose reports influence everything from credit cards to mortgages to job offers, have a two-tiered system for resolving errors — one for the rich, the well-connected, the well-known and the powerful, and the other for everyone else.

The three major agencies, Equifax, Experian and TransUnion, keep a V.I.P. list of sorts, according to consumer lawyers and legal documents, consisting of celebrities, politicians, judges and other influential people. Those on the list — and they may not even realize they are on it — get special help from workers in the United States in fixing mistakes on their credit reports. Any errors are usually corrected immediately, one lawyer said.

For everyone else, disputes are herded into a largely automated system. Their complaints are often electronically ferried to a subcontractor overseas, where a worker spends, on average, about two minutes figuring out the gist of the matter, boiling it down to a one-to-three-digit computer code that signifies the problem — “account not his/hers,” for example — and sending a dispute form to the creditor to investigate. Many times, consumer advocates say, the investigation translates to a perfunctory check of its records.

“The legal responsibility of the credit reporting agencies and of the creditors is well established,” said Leonard Bennett, a consumer lawyer in Newport News, Va. “There is a requirement that they do meaningful research and analysis, and it is almost never done.”

Consumers who have trouble fixing errors through the dispute process can quickly find themselves trapped in a Kafkaesque no man’s land, where the only escape is through the court system.

“You are guilty before you are proven innocent in a situation like this,” said Catherine Taylor, 45, of Benton, Ark., who said she had been denied employment and credit because her filing was mixed up with a felon who had the same name and birthday.

Judy Johnson of Bossier City, La., was confused with a less creditworthy Judith Johnson, with a similar address and Social Security number. For nearly seven years, Judy Johnson, a 63-year-old credit manager for a building supply company, said she tried to remove the black marks from her credit report. But when she was denied a credit card, she knew the problem had returned — a third time. “This time, I was livid,” she said.

She ultimately brought a suit against one of the bureaus, and recently settled for an amount she cannot disclose. But the problems still linger. A deputy sheriff recently came to her door to serve her papers for a debt she says she does not owe.

The credit rating bureaus, private-sector companies that each attempt to track all American consumers’ credit use, have grown much more powerful over the last couple of decades as credit has become a crucial cog in the nation’s financial system. Their reports are used to formulate the all-powerful credit score, which lenders use to determine creditworthiness.

But as the bureaus’ work has become more important, consumer advocates say, regulation has not kept up, in large part because their overseer, the Federal Trade Commission, lacks broad authority. That could change once responsibility for the credit bureaus shifts to the new Consumer Financial Protection Bureau, which will be able to write rules and examine the credit agencies’ policies.

The bureaus, meanwhile, do not have an economic incentive to improve the system, consumer advocates say, because their main customers are the creditors, not consumers.

“There is no neutrality in the credit reporting agencies,” said John Ulzheimer, who has been an expert witness in more than 80 credit-related cases and is president of consumer education at SmartCredit.com. “They work for the lenders who buy credit reports from them, and anyone who suggests otherwise is not being intellectually honest.”

When asked about the V.I.P. category, TransUnion said all consumers “have the ability to speak to a live representative.” Equifax said consumers who received a free copy of their credit report were provided with a number for customer service.

Experian denied that it had V.I.P. lists. But a spokeswoman did say that prominent people deemed high risk — like politicians in an election year — might have their credit files taken offline so that creditors or other companies making inquiries could not get access without the bureau’s permission. Experian said those people did not receive any other special handling.

David Szwak, a consumer lawyer in Shreveport, La., who has handled dozens of credit cases, said that the V.I.P. designation and preferential treatment did exist at Experian, and he provided sworn testimony from former Experian employees that the category existed.

Estimates of credit reports with serious errors vary widely, anywhere from 3 to 25 percent. A recent study, paid for by the Consumer Data Industry Association, the trade group for the bureaus, found potential errors in 19.2 percent of reports, but said that less than 1 percent of them had disputes that, when settled, resulted in a meaningful increase in scores. Even 1 percent translates into millions of consumers, since there are at least 200 million files at each of the bureaus.

The F.T.C. is expected to deliver a nationwide study on credit report accuracy next year that could provide more clarity. It could also include recommendations for legislative action.

The volume of disputes has been rising as consumers borrow more and gain greater access to credit reports. The automated system was a response to that. A spokesman for the trade group said most consumers received an answer within 14 days.

Experian is the only bureau that still processes disputes in the United States, experts said, though most complaints wind their way through the same online system — unless the dispute involves a V.I.P.

“They get a lot more high-end treatment,” said Mr. Szwak, the lawyer, who has read the bureaus’ internal procedure manuals and deposed or cross-examined employees. The biggest difference at TransUnion and Equifax, lawyers said, is that V.I.P.’s disputes are specially handled domestically. Regular consumers’ files, meanwhile, may get priority treatment if they involve a time-sensitive issue, like a mortgage pending, or if the consumer is represented by a lawyer or dealing with fraud.

Last year, new rules went into effect to strengthen existing regulations on the accuracy of reports. The rules also allow consumers to dispute errors directly with the creditor. But critics say the rule lacks any teeth because consumers don’t have the right to sue the companies. (Individuals can, however, sue the bureaus and creditors after lodging a dispute through their system.)

But the problem, advocates say, is that consumers cannot vote with their feet. “They cannot remove their information from the bureaus,” said Chi Chi Wu, a staff lawyer at the National Consumer Law Center, who wrote a report on the automated dispute process in 2009, “or take their business elsewhere.”

Economy Hanging by a Thread

Party Like It's 1929
By MIKE WHITNEY

A bleak jobs report sent stocks and commodities tumbling on Wednesday, while new signs of distress gripped the service industries index. An updated report from the ADP showed that private sector hiring slowed more than expected from March to April as companies struggled to meet rising raw material costs and flagging consumer demand. The service industry index (ISM) --which "ranges from utilities and retailing to health care, finance and transportation"--slumped to its lowest level since August signaling widespread deceleration and a progressive deterioration in the fundamentals. The turnaround has forced economists to rethink their projections for 2nd Quarter GDP and to watch more vigilantly for signs of contraction. This is from the New York Times:

"The economy lost steam in the first quarter. Growth in personal consumption — the single largest component of the economy — slowed markedly. Business-related construction cratered and residential construction fell. Exports stumbled. The only unambiguous plus was continued business investment in equipment and software, which is necessary but not sufficient for overall growth.

In all, economic growth slowed from an annual rate of 3.1 percent in the fourth quarter of 2010 to 1.8 percent in the first quarter of 2011....

When lauding the economy, Mr. Bernanke and many other economists and politicians point out, correctly, that the unemployment rate has declined from a recession high of 10.1 percent in late 2009 to 8.8 percent now. That would be encouraging news if it indicated robust hiring for good jobs. It does not.

Over the last year, the number of new hires has been outstripped by the masses who have either given up looking for work or who have not undertaken a consistent job search, say, after graduating from high school or college. Those missing millions are not counted in the official jobless rate; if they were, unemployment today would be 9.8 percent. The rate would be 15.7 percent if it included those who took part-time jobs in lieu of full-time ones." ("The Economy Slows" New York Times)

So, even the New York Times agrees that unemployment would be nearly 16 percent if the figures were correctly calculated. Those are Depression numbers. 14 million people are out of work (with 11 million underemployed) and record numbers of people are on food stamps (44 million)

Wednesday's down-market sent commodities plunging as signs of emerging deflation pushed investors into Treasuries. Gold and silver fell sharply. Troubles in Japan, China and the eurozone have intensified fears of a global slowdown and perhaps another bout of recession. The dollar strengthened for the third straight session, in spite of the Fed's zero rates and $600 billion bond buying program. Trillions of dollars in monetary and fiscal stimulus have jolted stocks back to life, but debt-deflation dynamics in the broader economy are as strong as ever. 

Unemployment remains stubbornly high, consumer retrenchment has reduced discretionary spending, and housing continues its inexorable nosedive. The stock market continues to inch higher buoyed by central bank liquidity and margin debt, but investors are increasingly skittish and searching for direction.

The soaring price of gas has shifted consumer spending from retail to energy consumption, the opposite of what the Fed had intended. This from Early Warning:

"I doubt energy prices can go a whole lot higher without triggering another recession, so it depends on whether the world can scrape up a few more mbd of oil to keep growth going without prices rising too much more. We will be watching oil production statistics closely...

...We are in an era where the availability of natural resources is not sufficient to support the wealth levels that the developed world has grown accustomed to, along with the speed of growth with which the developing world is trying to approach those same levels..... the global economy keeps trying to grow in a way that is inconsistent with the resource constraints, and then some part of the system tears and gives way....

I would argue that this data is at least consistent with the narrative that, in the post 1973 era, energy is consistently in somewhat problematic supply, and you can think of many of the recessions as showing a pattern in which energy prices are rising as the world overshoots what can currently be supplied, or what can currently be supplied drops as a result of geopolitical events, and energy prices rise until some pre-existing weakness in the global economic fabric tears in the course of a recession, and prices fall back again...." ("Energy prices and recessions", Early Warning)

Welcome to Peak Oil; the era of resource scarcity has begun. Today's troubles will to be a recurrent theme in the years ahead as the economy goes from boom to bust and previous levels of growth become more short-lived and unsustainable. Naturally, our leaders have settled on a strategy for addressing the impending energy shortages; endless war disguised as humanitarian intervention. This is the type of shortsightedness that passes as policy.

The main economic indicators are still turned up, but just barely. The economy is hanging by a thread. Loan demand is weak, wages are flat, and markets are on a knife-edge. Here's a clip from The Big Picture:

"...the real problem is loan demand (confirmed while speaking to bank organizations in half a dozen states over the past year). Loans have to be repaid, meaning that the money must be used to finance the acquisition of employees or equipment that will "pay back" the loan. Common sense. But record numbers of owners (as high as 28%) have reported that "weak sales" is their top business problem while only 4% reported "financing" as a top problem..... Ninety-three percent reported all their credit needs met in March, including 53 percent who said they were not even interested in a loan. No customers means no need for a loan to finance hiring, inventory purchases or expansion (only survival – not a good bank loan!).

But they don't get it in Washington D.C. And not understanding the problem produces bad policy, and there has been plenty of that. If lending is picking up, it is because customers are showing up and there is a reason to invest and hire. The reverse doesn't work – you can't force feed the credit to owners and have more customers suddenly show up ....That's "pushing on a string". Just ask the banks." ("Loan Demand, Not Credit, Is the Problem", The Big Picture)

There's no demand for credit because consumers are in the red and need to balance their accounts. ("93 percent reported all their credit needs met in March.") It's pointless to focus on getting the banks to lend, when people are broke and don't want to borrow regardless of rates. Just like its pointless to dump monetary stimulus into the stock market if it pushes up food and energy prices (headline inflation) reducing consumers ability to spend on other things. This isn't hard to figure out; it's Econ 101. So, why is the policy upside-down?

That said, the stock market should continue to trend upward for another couple months until the Fed's bond buying program ends and investors realize that the real economy is stuck in the ditch. But, for now, it's "Party like it's 1929". Bernanke's punch bowl is overflowing and there's still plenty of time to make money. The hangover comes later.

The Corporate Stash

Sitting on Top of $1.9 Trillion 
By MIKE WHITNEY

Two and a half years have passed since Lehman Brothers collapsed and US consumers are still digging out.

Last Thursday, the Fed released its "flow of funds" report which showed that households had trimmed their debt to $13.3 trillion in the forth quarter (4Q). But the crucial debt-to-income ratio remains significantly above trend at 120.9%. That means that consumers will have to cut back spending even more. 

During the boom years, (2000 to 2007) households more than doubled their debt by taking advantage of cheap, easily-available credit for purchasing mortgages, refinancing homes and maintaining their standard of living. Homeowners were able to drain (roughly) $500 billion per year from their rising home equity to spend as they pleased. The credit-binge stimulated demand, increased employment, and created a virtuous circle of profitability and growth. But now the process has slammed into reverse triggering a wave of foreclosures, bankruptcies and defaults. Consumers have been retrenching for 11 straight quarters trying to patch their balance sheets after sustaining heavy losses during the crisis.

Household deleveraging can have a devastating impact on the economy because consumer spending is 70% of GDP. Fortunately, the Obama administration initiated a $787 billion fiscal stimulus package to make up for the shortfall in private sector spending, otherwise the economy would have slipped into a long-term slump. Government spending (the deficits) pulled the economy out of recession, reduced the gaping output gap, and increased employment by an estimated 2 million jobs. 

Economists look to the flow of funds report to gauge the health of consumers, but sometimes the data can be misleading. For example, household net worth increased by $2.1 trillion to $56.8 trillion by the end of 4Q, but virtually all of the gains were in the stock market so it won't effect the spending habits of people who aren't invested in equities. As Barron's Randall Forsyth notes, "You have to be in the lottery to win it." 

Still, Fed chairman Ben Bernanke sees rising stock prices as a sign that his bond purchasing program (QE2) is working. Like former Fed chairman Alan Greenspan, Bernanke believes that the "wealth effect" can boost spending and lead to recovery. Regrettably, the facts do not support Bernanke's claims. While the administration's fiscal stimulus increased economic activity and employment (according to 2 separate reports by the nonpartisan CBO), QE2 has merely inflated stock prices. There's nothing in the flow of funds report that suggests anything more than a normal cyclical recovery following a deep recession. In other words, QE2 is a bust. 

The Fed's main policy tool is interest rates. QE2 is an attempt to push rates below zero by large-scale purchases of Treasuries. The goal is to spark investment in riskier assets. And, to some extent, it works. Thanks to Bernanke's QE drip-feed into the banking system, stocks have climbed 12% in the 4Q. But higher stock prices haven't led to greater investment or spending, just more liquidity sloshing around the financial markets. The problem is that QE2 has no transmission mechanism for getting stimulus into the real economy. It doesn't increase wages, expand credit, or remove the red ink from household balance sheets. It just adds a few more gusts of helium to the equities bubble. This is apparent in last week's Consumer Credit report as well as the flow of funds report. The Fed's Credit Report showed that --apart from student loans and subprime auto loans--consumer credit is still shrinking. In fact, lending either stayed flat or dropped off at the commercial banks, finance companies, credit unions, savings institutions, nonfinancial business and pools of securitized debts. Bottom line: There's no indication that the Fed's policy is helping households reduce their debt or to resume spending at precrisis levels. In other words, QE2 is not paving the way to another credit expansion.

And then there's this from Bloomberg Businessweek:

"Those ordinary Americans who have jobs worry about holding onto them, and they expect few if any increases in pay as the recovery inches forward. For upper-income households, it's a different story, says Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase in New York: "They're the ones benefiting the most from the stock market rally, and they're spending."

..... Feroli estimates the top 20 percent of income earners account for about 40 percent of spending. Dean Maki, chief U.S. economist at Barclays Capital in New York, puts the figure at closer to 50 percent."

So, yes, rising stock prices have been good for the rich who have resumed their trips to Tiffanys and their dinners at high-end restaurants. But for everyone else, it's been a wash. The only thing that could change the situation is if QE2 pushed wages higher or lifted housing prices out of the doldrums. But it doesn't work that way.

Here's a clip from an article in the Wall Street Journal which sheds a little light on a part of the deleveraging story that's missed by most of the media:

"U.S. families shouldered a smaller debt burden in 2010 than at any point in the previous six years....Defaults on mortgages and credit cards played a large role in bringing down household debt, underscoring the extent of the financial distress still afflicting U.S. families. Commercial banks wrote off $118 billion in mortgage, credit-card and other consumer debt in 2010, the Fed said. That's over half the total $208.8 billion drop in household debt, which also includes new mortgages and credit cards....

Many consumers still have a long way to go to get their finances in order. Some economists believe a healthy household-debt-to-disposable-income ratio would be 100% or lower." ("Families Slice Debt to Lowest in 6 Years", Wall Street Journal)

So households are reducing their debt, but, what's interesting, is how they are doing it. They're defaulting. This is from an earlier Wall Street Journal article by Mark Whitehouse:

"The falling debt burden conjures up images of a nation seeking to repent after a decade of profligacy, conscientiously paying down mortgages and credit-card balances. That may be true in some cases, but it's not the norm. In fact, people are making much more progress in shedding their debts by defaulting on mortgages and reneging on credit cards......on average, aren't paying down their debts at all. Rather, the defaulters account for the whole decline, while the rest have actually been building up more debt straight through the worst financial crisis and recession in decades." ("Number of the Week: Default, Not Thrift, Pares U.S. Debt", Wall Street Journal)

Uh oh. So consumers are defaulting rather than paying-down their debts. That means more foreclosures and bankruptcies leading to larger losses at the banks and, perhaps, another bailout. It also increases the likelihood that stock and commodities prices will drop sharply when activity slows triggering another bout of deflation. So, can QE2 reverse the trend and ignite a flurry of investment and spending by tweaking the yield curve on US Treasuries? Don't bet on it. Just take a peak at this article by Mark Whitehouse and it's easy to see what's going on:

"U.S. companies' cash hoard keeps getting bigger, a trend both good and troubling. After hitting new highs in five of the last six quarters, nonfinancial corporations' cash and other liquid assets reached $1.9 trillion at the end of 2010, according to the Federal Reserve. That's 7% of all their assets, the highest level since 1963....the persistent growth of companies' cash hoard suggests a problem: Businesses appear to lack the confidence in the recovery needed to plow the money back into new projects and hiring..... companies are giving some cash back to their shareholders through stock buybacks,....hardly a sign of optimism." ("Companies' Cash Hoard Grows", Mark Whitehouse, Wall Street Journal)

So, why aren't corporations reinvesting their $1.9 trillion stash when the Fed has lowered rates to 0% and Bernanke is supporting the markets with QE2? 

It's because of the lack of demand. Financial alchemy and waves of speculation have papered over the dismal performance of the underlying economy which grows more anemic with every business cycle. Businesses are no longer able to find productive outlets for investing their surplus capital, so the whole system is slowing down. And, when corporate savings are not recycled into the economy via investment, demand dries up. That's what's happening now. 

Reformers can divert attention from the central problem by pointing at deregulation, low interest rates, and a foreign "savings glut", but the fact remains that the recoveries get weaker and weaker, unemployment stays higher for longer, and the crashes get more catastrophic. All these point to a sclerotic and unstable system blighted by overproduction and underconsumption that is gradually succumbing to stagnation. The persistent slowdown is deepening inequality, inciting class antagonisms, and fomenting social unrest. Marx said that "the real barrier of capitalist production is capital itself." The $1.9 trillion sitting idle on corporate balance sheets proves that Marx was right.

Try Printing a Recovery

An Emerging Bubble Alert 

By MIKE WHITNEY

Counterfeiting is an effective way to stimulate the economy, but the costs can be quite high. For example, if trillions of dollars in fake cash was injected into the financial system (undetected), we'd probably see the same type of thing that we see when a credit bubble is inflating; asset prices would rise, unemployment would fall, economic activity would increase, and GDP would soar. But when people figured out what was going on, investors would panic, the markets would crash, and the economy would go into a deflationary nosedive.

So here's the point: Deregulation allows the banks to create as much bogus money as they want in the form of credit. When a bank issues a loan to someone who can't repay the debt, it's counterfeiting, which is the same as stealing. This is what the banks did in the lead-up to the Market Meltdown of '08; they issued trillions of dollars of mortgages to people who had no job, no income, no collateral, and a bad credit history. The banks abandoned all the standard criteria for issuing loans, so they could increase the quantity of loans they produced. Why? Because bankers get paid on the front-end of the transaction, which means that when they make a loan, they mark it as a credit on their books so they can draw a hefty salary and a fat bonus at the end of the year. In other words, there are powerful incentives for bankers to do the wrong thing, which is why they act the way they do.

Now that the economy has begun to stabilize, there are signs that the whole process is starting over again and another bubble is already emerging. Check out this clip from an article in The Tennessean titled "Auto lenders approve more subprime borrowers":

"As the auto industry continues to make a slow recovery from tough times of the past two years, lenders are finally loosening credit restrictions and approving car loans for customers with less than prime credit ratings. In the third quarter last year, for instance, the share of new vehicle loans to "credit-challenged" consumers rose 12.7 percent compared with the same period in 2009, said Experian, one of the nation's major credit reporting agencies. 

Loans to borrowers with subprime credit scores as low as 550 were among categories that grew the most....Credit restrictions were the biggest reason people stopped buying new cars during the recession, but "that's not a problem anymore," said Marty Horn, sales manager at Nashville's Crown Ford. 

"We're not having any trouble finding financing for anyone with a score in the 600s," he said. "We can get most people financed through Ford Credit, and if that's not available, we have other lenders ready to step in."... 

"We're seeing loans of up to 140 percent of value from some lenders, and Capital One is by far our best lender for the subprime customer, which is below a 620 score," said Michael Creque, general manager of Alexander Chevrolet-Cadillac in Murfreesboro." ("Auto lenders approve more subprime borrowers", The Tennessean)

Can you believe it? Auto finance companies are lending up to "140 percent of value" of the loan to "credit-challenged" consumers? And this is going on just two years after the biggest meltdown since the Great Depression.

Keep in mind, that the housing/credit bubble cost ordinary working people $12 trillion in lost retirement savings and home equity while the perpetrators on Wall Street have seen their profits skyrocket. Bubblenomics is not "innovation" and it certainly does not increase productivity. It merely transfers wealth from one class to another via credit manipulation.

Consider the recent reports about improvements in the economy. While it's true the data is looking better (retail sales, personal consumption, manufacturing, car sales etc) it's also true that the credit cancer is spreading again. Consumer demand is still weak because unemployment is nearly 10 percent and wages remain flat. So the only reason spending is up, is because credit is expanding. But that means more lending to people who are incapable of repaying their loans which will inevitably lead to another bust. Here's an excerpt from an article titled "Zero-down mortgages endure in rural areas" from bankrate.com which proves my point:

"The zero-down mortgage is still alive in the form of the USDA home loan....People buy houses without down payments or mortgage insurance under the Department of Agriculture's rural development housing program. The catch? The property must be in a designated rural area. The surprise? Some eligible properties are in places that most people would not consider rural.... 

The borrower pays an upfront guarantee fee of 3.5 percent of the loan amount, which most opt to roll into the loan. Under some first-time buyer programs, borrowers can have their closing costs paid....Unlike most low or no-down-payment loans, Defngin points out, USDA loans do not require mortgage insurance...... USDA does not set a minimum credit score, and lender minimums vary." (bankrate.com)

So a mortgage applicant can purchase a home with no down payment, no mortgage insurance, and no minimum credit score from the USDA? What the heck is the USDA even doing in the real estate business? This is just a sneaky way of creating another asset bubble. It's just more counterfeiting.

Now take a look at this from torquenews.com. Same thing. It shows that the big auto manufacturers are jumping on board the credit bandwagon, too. Here's a clip:

"Major auto makers and dealers will start the day after Christmas by pushing their zero percent down deals and hopes toward more year-end car sales....TorqueNews' screening of five top U.S. and Japanese automakers' year-end offerings shows all of them having some type of zero down deals to attract more car shoppers.... 

The U.S. luxury automobiles are offered with zero down year-end sales deals. All of the GM's products on its website are offered at with zero percent down-payment. GMC has no monthly payment until spring and $1,500 total allowance if the shopper finances with Ally. The 0% APR apply to qualified buyers on any GMC...." (torquenews.com)

"Zero down"; Weeee! "No monthly payment until spring", Weeeee! "$1,500 total allowance if the shopper finances" with us; Weeeee! Free money, never pay, borrow your way to prosperity; Weeeeeeeeeeee!

Haven't we seen this movie before? Is Congress really so lazy and corrupt that they're willing to let the economy drop back into the shi**er just so some shifty bankster can buy a few more baubles at Tiffanys?

Then there's this from yesterday's news: Allstate vs. Bank of America. Allstate wants to get its money back from B of A on toxic mortgage-backed securities. Here's the drift from the LA Times:

"The case pits insurer Allstate against Bank of America and Countrywide, the giant mortgage lender that Bank of America bought in 2008. The suit claims that Countrywide misrepresented the risks posed by the bundles of mortgages it sold to investors such as Allstate, which sank $700 million into the securities from 2005 to 2007. After the housing bubble burst, the mortgages in those securities started defaulting at a torrid pace, causing the value of the securities to plummet. 

.... A Bank of America spokesman suggested that Allstate was "a sophisticated investor....looking for someone to blame." But Allstate's examination of a sample of the mortgages in each bundle found that Countrywide's disclosures consistently understated such important indicators as the percentage of mortgages with low down payments or with no proof of the borrower's income (so-called liar loans). And by Allstate's analysis, Countrywide's disclosures weren't off by a little bit. For example, in 11 securities that were supposedly free of "underwater" mortgages, up to 14% of the loans turned out to be larger than the value of the house."

("Housing Shocks", editorial, Los Angeles Times)

The "sophisticated investor" defense is an excuse that fraudsters use when they've just ripped you off. They say, "I thought you were smarter than that. I thought you were a "sophisticated investor."...which just dumps a little salt in the wound.

The truth is, Countrywide clipped Allstate for $700 million in garbage loans and now claims that it procured the money "fair and square". Right. But they do have a point. In a system where there are no rules, anything goes. Allstate might lose their suit simply because the laws now mainly protect the interests of the predators rather than the victims. The banks are free to whip-up their junk debt-instruments (comprised of liar's loans etc) and peddle them to anyone who is gullible enough to invest their money. It's a con-game.

One last example. Many people have noticed that there was a slight uptick in credit in the Fed's latest report. That's good, right? But, as it turns out, the only area where credit really improved was student loans which grew about 80% year-over-year, or roughly $120 billion. So why the sudden and explosive growth in student loans? The answer appeared on an economics blog called benzinga.com via firedoglake. Here's an excerpt:

"The Federal Family Education Loan program (FFEL) allows private financial institutions to provide students with loans, but the government assumes the risk of default, and pays the financial fees while the student attends college. This amounts to privatized gains combined with socialized loans.... 

Under the FFEL program, financial institutions like Sallie Mae, Bank of America, National Education Loan Network, JPMorgan Chase, Wachovia, and Wells Fargo would originate these FFEL loans with students, and then sell them on the secondary credit market. In 2008, the credit market dried up, and the private lenders had nowhere to sell these government guaranteed loans. So, the government stepped in to buy up these loans and protect a program that was already a massively wasteful corporate boondoggle.

The bailout was authorized with HR 5715 Ensuring Continued Access to Student Loans Act (ECASLA). The bill allowed for the Department of Eduction to produce three different programs, the Loan Purchase Commitment Program, the Loan Participation Purchase Program, and a buyer-of-last-resort Asset-Backed Commercial Paper Conduit. 

This purchase program — which amounted to the department of education buying privately-originated student loans that were intended to be securitized but now could not be — was radically expanded in 2009 and 2010, with a purchase amount target of about (you guessed it) $120bn. ("The hidden message of the consumer credit release")

So, there is no improvement in credit. Not really. It's just more backdoor bailouts that are dolled up to look like things are getting better. But things aren't getting better; we've simply restored the same crisis-prone wholesale credit system ("shadow banking") with trillions of dollars of government subsidies, bailouts, stimulus and guarantees, and now we are speeding towards the next big collision. That's not what I'd call "economic recovery". I'd call it stupidity.

Time for a New Theory of Money

We as a community can create our own credit, without having to engage in the sort of impossible pyramid scheme in which we're always borrowing from Peter to pay Paul.
By Ellen Brown, YES! Magazine
Posted on December 21, 2010

The reason our financial system has routinely gotten into trouble, with periodic waves of depression like the one we’re battling now, may be due to a flawed perception not just of the roles of banking and credit but of the nature of money itself. In our economic adolescence, we have regarded money as a “thing”—something independent of the relationship it facilitates. But today there is no gold or silver backing our money. Instead, it’s created by banks when they make loans (that includes Federal Reserve Notes or dollar bills, which are created by the Federal Reserve, a privately-owned banking corporation, and lent into the economy). Virtually all money today originates as credit, or debt, which is simply a legal agreement to pay in the future.

Money as Relationship

In an illuminating dissertation called “Toward a General Theory of Credit and Money” in The Review of Austrian Economics, Mostafa Moini, Professor of Economics at Oklahoma City University, argues that money has never actually been a “commodity” or “thing.” It has always been merely a “relation,” a legal agreement, a credit/debit arrangement, an acknowledgment of a debt owed and a promise to repay.

The concept of money-as-a-commodity can be traced back to the use of precious metal coins. Gold is widely claimed to be the oldest and most stable currency known, but this is not actually true. Money did not begin with gold coins and evolve into a sophisticated accounting system. It began as an accounting system and evolved into the use of precious metal coins. Money as a “unit of account” (a tally of sums paid and owed) predated money as a “store of value” (a commodity or thing) by two millennia; the Sumerian and Egyptian civilizations using these accounting-entry payment systems lasted not just hundreds of years (as with some civilizations using gold) but thousands of years. Their bank-like ancient payment systems were public systems—operated by the government the way that courts, libraries, and post offices are operated as public services today.

In the payment system of ancient Sumeria, goods were given a value in terms of weight and were measured in these units against each other. The unit of weight was the “shekel,” something that was not originally a coin but a standardized measure. She was the word for barley, suggesting the original unit of measure was a weight of grain. This was valued against other commodities by weight: So many shekels of wheat equaled so many cows equaled so many shekels of silver, etc. Prices of major commodities were fixed by the government; Hammurabi, Babylonian king and lawmaker, has detailed tables of these. Interest was also fixed and invariable, making economic life very predictable.

Grain was stored in granaries, which served as a form of “bank.” But grain was perishable, so silver eventually became the standard tally representing sums owed. A farmer could go to market and exchange his perishable goods for a weight of silver, and come back at his leisure to redeem this market credit in other goods as needed. But it was still simply a tally of a debt owed and a right to make good on it later. Eventually, silver tallies became wooden tallies became paper tallies became electronic tallies.

The Credit Revolution

The problem with gold coins was that they could not expand to meet the needs of trade. The revolutionary advance of medieval bankers was that they succeeded in creating a flexible money supply, one that could keep pace with a vigorously expanding mercantile trade. They did this through the use of credit, something they created by allowing overdrafts in the accounts of their depositors. Under what came to be called “fractional reserve” banking, the bankers would issue paper receipts called banknotes for more gold than they actually had. Their shipping clients would sail away with their wares and return with silver or gold, settling accounts and allowing the bankers’ books to balance. The credit thus created was in high demand in the rapidly expanding economy; but because it was based on the presumption that money was a “thing” (gold), the bankers had to engage in a shell game that periodically got them into trouble. They were gambling that their customers would not all come for their gold at the same time; but when they miscalculated, or when people got suspicious for some reason, there would be a run on the banks, the financial system would collapse, and the economy would sink into depression.

Today, paper money is no longer redeemable in gold, but money is still perceived as a “thing” that has to “be there” before credit can be advanced. Banks still engage in money creation by advancing bank credit, which becomes a deposit in the borrower’s account, which becomes checkbook money. In order for their outgoing checks to clear, however, the banks have to borrow from a pool of money deposited by their customers. If they don’t have enough deposits, they have to borrow from the money market or other banks.

As British author Ann Pettifor observes: "the banking system... has failed in its primary purpose: to act as a machine for lending into the real economy. Instead the banking system has been turned on its head, and become a borrowing machine."

The banks suck up cheap money and return it as more expensive money, if they return it at all. The banks control the money spigots and can deny credit to small players, who wind up defaulting on their loans, allowing the big players with access to cheap credit to buy up the underlying assets very cheaply.

That’s one systemic flaw in the current scheme. Another is that the borrowed money backing the bank’s loans usually comes from shorter-term loans. Like Jimmy Stewart’s beleaguered savings and loan in It’s a Wonderful Life, the banks are “borrowing short to lend long,” and if the money market suddenly dries up, the banks will be in trouble. That is what happened in September 2008: According to Rep. Paul Kanjorski, speaking on C-Span in February 2009, there was a $550 billion run on the money markets.

Securitization: “Monetizing” Loans Not with Gold But with Homes

The money markets are part of the “shadow banking system,” where large institutional investors park their funds. The shadow banking system allows banks to get around the capital and reserve requirements now imposed on depository institutions by moving loans off their books.

Large institutional investors use the shadow banking system because the conventional banking system guarantees deposits only up to $250,000, and large institutional investors have much more than that to move around on a daily basis. The money market is very liquid, and what protects it in place of FDIC insurance is that it is “securitized,” or backed by securities of some sort. Often, the collateral consists of mortgage-backed securities (MBS), the securitized units into which American real estate has been sliced and packaged, sausage-fashion.

Like with the gold that was lent many times over in the 17th century, the same home may be pledged as “security” for several different investor groups at the same time. This is all done behind an electronic curtain called MERS (an acronym for Mortgage Electronic Registration Systems, Inc.), which has allowed houses to be shuffled around among multiple, rapidly changing owners while circumventing local recording laws.

As in the 17th century, however, the scheme has run into trouble when more than one investor group has tried to foreclose at the same time. And the securitization model has now crashed against the hard rock of hundreds of years of state real estate law, which has certain requirements that the banks have not met—and cannot meet, if they are to comply with the tax laws for mortgage-backed securities. (For more on this, see here.)

The bankers have engaged in what amounts to a massive fraud, not necessarily because they started out with criminal intent (although that cannot be ruled out), but because they have been required to in order to come up with the commodities (in this case real estate) to back their loans. It is the way our system is set up: The banks are not really creating credit and advancing it to us, counting on our future productivity to pay it off, the way they once did under the deceptive but functional façade of fractional reserve lending. Instead, they are vacuuming up our money and lending it back to us at higher rates. In the shadow banking system, they are sucking up our real estate and lending it back to our pension funds and mutual funds at compound interest. The result is a mathematically impossible pyramid scheme, which is inherently prone to systemic failure.

The Public Credit Solution

We as a community can create our own credit, without having to engage in the sort of impossible pyramid scheme in which we’re always borrowing from Peter to pay Paul at compound interest.

The flaws in the current scheme are now being exposed in the major media, and it may well be coming down. The question then is what to replace it with. What is the next logical phase in our economic evolution?

Credit needs to come first. We as a community can create our own credit, without having to engage in the sort of impossible pyramid scheme in which we’re always borrowing from Peter to pay Paul at compound interest. We can avoid the pitfalls of privately-issued credit with a public credit system, a system banking on the future productivity of its members, guaranteed not by “things” shuffled around furtively in a shell game vulnerable to exposure, but by the community itself.

The simplest public credit model is the electronic community currency system. Consider, for example, one called “Friendly Favors.” The participating Internet community does not have to begin with a fund of capital or reserves, as is now required of private banking institutions. Nor do members borrow from a pool of pre-existing money on which they pay interest to the pool’s owners. They create their own credit, simply by debiting their own accounts and crediting someone else’s. If Jane bakes cookies for Sue, Sue credits Jane’s account with 5 “favors” and debits her own with 5. They have “created” money in the same way that banks do, but the result is not inflationary. Jane’s plus-5 is balanced against Sue’s minus-5, and when Sue pays her debt by doing something for someone else, it all nets out. It is a zero-sum game.

Community currency systems can be very functional on a small scale, but because they do not trade in the national currency, they tend to be too limited for large-scale businesses and projects. If they were to grow substantially larger, they could run up against the sort of exchange rate problems afflicting small countries. They are basically barter systems, not really designed for advancing credit on a major scale.

The functional equivalent of a community currency system can be achieved using the national currency, by forming a publicly owned bank. By turning banking into a public utility operated for the benefit of the community, the virtues of the expandable credit system of the medieval bankers can be retained, while avoiding the parasitic exploitation to which private banking schemes are prone. Profits generated by the community can be returned to the community.

A public bank that generates credit in the national currency could be established by a community or group of any size, but as long as we have capital and reserve requirements and other stringent banking laws, a state is the most feasible option. It can easily meet those requirements without jeopardizing the solvency of its collective owners.

For capital, a state bank could use some of the money stashed in a variety of public funds. This money need not be spent. It can just be shifted from the Wall Street investments where it is parked now into the state’s own bank. There is precedent establishing that a state-owned bank can be both a very sound and a very lucrative investment. The Bank of North Dakota, currently the nation’s only state-owned bank, is rated AA and recently returned a 26 percent profit to the state. A decentralized movement has been growing in the United States to explore and implement this option. [For more information, see public-banking.com.]

We have emerged from the financial crisis with new clarity: Money today is simply credit. When the credit is advanced by a bank, when the bank is owned by the community, and when the profits return to the community, the result can be a functional, efficient, and sustainable system of finance.

• Whose Bank? Public Investment, Not Private Debt: The public bank concept is gaining ground on the state level, attracting proponents across the political spectrum.
• New Economy, New Ways to Do Finance: As mega-finance crumbles, many farsighted
• individuals are putting their money in enterprises and financial institutions that benefit working Americans and the places they live.
• Move Your Money and Save: Big banks don't just undermine local economies—they're bad for your wallet, too.