Wednesday, March 25, 2009

America in Crisis

The current financial crisis we are in is escalating out of control, I question whether the current administration has anyone who understands what is happening, why it is happening and is operating without some vested interest; never mind whether they have the correct answers as to how to solve it. The creation of a new entity "The Public-Private Investment Corporation" to purchase toxic debt funded by some $1 Trillion of taxpayer money is going to buy up mortgages, car loans, credit cards loans and other toxic debt off balance sheets for banks and other lenders....... If these assets are sold to large investor groups, hedge funds and other such entities at 5cents on the dollar then it is an open admission that the tax payer will never see any return on its investment and those in power will have scratched the backs of many who put us in this position in the first place. This is the definitive version of the AIG bonuses being paid and we will unwittingly agree to this, not that we have any say, because of the language and structures used to deceive us.

We are talking about a quarter of the total bail out funds which will never even be attempted to be recouped, it would be impossible for it ever to be returned and it will be small component of the $10 Trillion of additional debt that will be created by the Obama plan. The question is will the repayment of this money be handled as cavalierly. At least in Europe the governments have taken shares and stakes in the banks they bailed out so they will get share growth and dividends, the lack of commercialism and understanding in the US government is a strong indicator of how we got ourselves in this mess in the first place. If our representatives can sign the patriot act without reading it and give away our civil liberties why would we expect them to have read how the money will be used and where it will come from.

We the people need a voice, we need to speak out and someone needs to derail the coming travesties and injustices that are about to occur.

The Institutions

The financial institutions essentially walk away scot free and start business anew with and unblemished and untarnished record as a result of the bailout. Now I wish I had been running an unethical business where short term bonuses were put ahead of the interests of the company and its shareholders. I could have leveraged up and paid off my leveraged loans with new loans from another institution without ever having developed an additional cent of cash flow. The price of the underlying asset having undergone a paper increase so someone could write the new loan, pocket the commission and sold it on to an unsuspecting third party who was blinded by the supposedly independent rating of the supposedly impartial credit rating agency who was charging $50,000-$5,000,000 for the pleasure. Lets be honest this is in truth what has been happening for the last 10 years or so.

Government Regulation has missed the point entirely - why haven't they taken over the Rating Agencies

The government claims it will tighten regulations to ensure that such situations will never occur again but there are fundamental changes that need to occur for this to happen that will not happen without a broader scale collapse of the existing system and with the maintenance of status quo. The entire ratings system requires not just revamping and overhauling but a new and different uncorrupted system, "power corrupts and absolute power corrupts absolutely." With so much blame being directly attributable to the rating agencies who were evaluating investments and attaching to them double and triple A credit ratings. Kudos to their PR and PM firms who are keeping them out of the press and are enabling them to fly under the radar at a time when they should be chastised and probably shut down entirely.......

Corporate Ownership/ Responsibility

Current executives are being paid enormous amounts and quite clearly do not have any great degree of competence, a few such as HSBC and Porsche stand out. These executives are being paid in proportion with people who built and created businesses and who really created or earned their rewards, which often took a lifetime of effort and much financial hardship along the way. As a salaried employee you have minimized your risk and therefore should not be paid proportionately to someone who has ownership and therefore carries all the risk. If you are paid after all others and are paid out of profit and profit alone then fair enough. Obviously there will be some leeway to tax planning in this situation. 

The corporation has to return to private ownership, or some semblance of this, when the Rockefellers, Carnegie, Gates and Buffett owned a business they pocketed the profits at the end of the year and they funded the losses, these were actual figures to them that affected how they were paid and how their managers were paid. In the modern world the accountability of ownership doesn't exist, everyone is milking the huge amorphous entities so big and diverse that no one really knows what is going on, they are managers taking the salaries and benefits of owners and that is very wrong. They have always had the security of a salary and never staked all or nothing on the success of the entity, with this reduction of risk should come the reduction of remuneration. With international taxation and offshore tax havens these entities are so complex that it takes a degree of genius to understand it. That kind of genius is found in someone who establishes and builds a company (Rockefellers, Carnegie, Gates and Buffett ) not in some employee who has risen through the ranks. If he had the capability to run the organization properly he would have done it himself.... look at the ultra successful hedge fund managers, the Bill Gates and Warren Buffets', they are not out running someone else's company. 

The Bankers and Banking Professionals

A whole generation of Bankers have grown up with what was always explained to me as the new model which made no mathematical or economic sense. Keeping said individuals in the job is a recipe for disaster as they cannot rectify the problem as they don't understand how the underlying system works, the principles it was established upon and they do not have ownership of the problem.

The toxic debt is not what people think it is, it is actually real assets owned by real people it isn't some ethereal accounting principle.

What is the government going to do with the toxic debt it is buying from the banks that created the loans in the first place, it is being treated as some ethereal unsubstantiated piece of paper which is what got us into this problem in the first place. There is a loan behind each number, that loan is made by someone who has been financially imprudent or had the misfortune to be laid off in the economic downturn stemming from the worlds rapid deleveraging. Will said Joe Blogs be allowed to keep the property he purchased, many of the banks have ceased foreclosure activity, or will he be foreclosed upon and evicted. If he is allowed to keep his beautiful home that he couldn't afford then the average man on the street who wasn't imprudent is being financially punished for his caution and education. This would represent one of the greatest tragedies in capitalistic history. Thus impugned for intelligence what should you do, buy a house you cannot afford as everyone else is doing it and getting away with it? No one in their right mind will buy these except at such cut down rates 5-15 cents on the dollar that they are bargain enough to justify the handling and carrying costs of defaults. No one has the liquidity to do this without gearing up again which is how the whole problem occurred in the first place.

The Media

Many in the media are making statements that are reassuring and attempting to waylay a lot of the fears of the public and the investment community. These statements are false, unsubstantiated and in my opinion down right misleading and deception. There is no way we can turn any corner or see improvements in the economy this year or next. Much of the campaign rhetoric from the presidential campaigns is just downright impossible. The nationalization of the healthcare system is too expensive for us to pursue. Effective increases in the quality of schooling is manageable but not with the current crisis and no matter which way we look at it social security is running out of money and state pensions are going to be impossible to maintain without some delusionary system with ever escalating debt that is never intended to be repaid. The knock on effect of this is no one outside the US wants to buy treasuries and the value of the Dollar collapses raising cost of living of all out China/ Asian products. Without immense increases in domestic production this will lead to Hyper inflation, which is something we should have had long ago except for Greenspan and Bernanke's artificially low rates which created this bubble.

Long Term Consequences

We live in a universe governed by cause and effect, the second that an imbalance is created in this system it moves to right itself. With artificial measures put in pace to prevent this check and balance system from operating we are causing a far greater, wide reaching and longer lasting reverse. This could well without being melodramatic mark the implosion of US global dominance as the pendulum swings back to reestablish balance. We stand in a pivotal moment as a country and as an economy where arrogance and ignorance are all that are required to mark the end of a short but bright epoch of American dominance.

Remembering that it takes about 12-18 months to foreclose on a property we haven't even seen the beginning of the impending crash, we are no where near a midpoint. The banks have held off on a lot of foreclosures and many people are only now and over the coming two years loosing their jobs and income that will bring them to the edge of bankruptcy and force them to face impending foreclosure. This could be the largest class shift we witness in the last 1000 years as so many people who formally owned their own homes are forced to rent and those who can afford to own rental properties grow their wealth dramatically (ending up with a European/ German/ French ownership structure)

Hedge Fund Managers - Not Villains just making profit in a society where profit is placed above all else

Why are we berating hedge fund managers who made billions of dollars shorting the current crisis, I believe we should complement their intelligence as they would have been vilified by investors had the market gone the other way. America was made great by saluting the greatness of those who succeed, jealous and creating laws to crush ingenuity are the antithesis of what made America great.


If the government was to decide to increase regulation on Hedge Funds we really would be in trouble as they wouldnt know what they were seeing, how to deal with it or what regulations to put in place. There isnt a single person that could figure it out as if they could they would be running their own funds. They would be unable to understand or calculate the future impact of their legislation it woul just be some knee jerk, popularist response as with almost everything the current administration has done.


Copyright Jonathan Rose 2009 - Creative Commons License

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