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The Greatest Looting Operation in History

Wednesday, September 24, 2008, 10:14 PM


"See, you know the way a bailout works? Here's the way a bailout works. A failed president and a failed Congress invest $700 billion of your money in failed businesses. Believe me, this can't fail."

~ Jay Leno


The recently proposed bailout of failed Wall Street banks represents the most brazen attempt at grand larceny ever in our nation’s history. Some have even likened it to financial terrorism, because Wall Street went so far as to repeatedly say; “Either we get this bailout or the entire system goes under.

This echoes, more or less precisely, what happened in the years after Ronald Reagan deregulated the S&L industry in 1982. Within a few short years, excesses and fraud were rampant within the system, and taxpayers were forced to cover the inevitable bust that followed. Many well-connected individuals made out like bandits on sweetheart deals meted out by the Resolution Trust Corporation (RTC).

But this crisis, which has been presented as if it caught everyone by surprise, was no surprise at all. It was years in the making, and the response was carefully planned over the past year. The bailout proposal, as originally presented (on Sat. 9/20/08), was shocking.

First, there was the sneaky language that the $700 billion figure was the most that could be spent at any one time, meaning that there was no limit on the spending at all. Second, the right of review by any court of law or other administrative body was to be stripped away, a distinctly unconstitutional and anti-American provision if ever there was one. Third, the Treasury Secretary was to be embodied with complete unitary power in selecting who was to be empowered with an open-ended taxpayer checkbook.

No review, no limits, no questions.

So what happens when you have vague language and an unlimited budget? Fraud and self-dealing, that’s what. Mark my words, this is the largest looting operation ever in the history of the US, and it’s all spelled out right there in the delightfully brief bailout document that Paulson and Bernanke are attempting to ram through a scared Congress.

Folks, if it looks like a looting operation, smells like a looting operation, and acts like a looting operation, it is a looting operation.

There are some in Washington DC who ‘get it,’ including Bernie Sanders, who recently stated:

Quote:

“While the middle class collapses, the richest people in this country have made out like bandits and have not had it so good since the 1920s. […] The wealthiest people, who have benefited from Bush's policies and are in the best position to pay, are being asked for no sacrifice at all. This is absurd. This is the most extreme example that I can recall of socialism for the rich and free enterprise for the poor.”

Hopefully, for the sake of justice, the bailout will be significantly modified prior to passage.

However, it won’t really matter much in the end, because there is no possible way for any bailout to succeed, no matter how it’s configured.

Instead, there are three simple truths that have to be recognized, if we are to navigate our way through this crisis:

  1. The United States government is insolvent.
  2. The entire US financial system is insolvent.
  3. There is no combination of new debt/borrowing schemes that can possibly correct #1 and #2.

The first rule of life is, “When you are in a hole, stop digging.” The past 25 years have witnessed the greatest accumulation of debt ever recorded by our nation. That is our hole. Yet our current leaders have ordered a backhoe and promised to use it.

Figure 1: This chart compares total debt (or ‘credit’) in the US to GDP (or Gross Domestic Product) on a percentage basis. Current total credit market debt stands at more than 340% of total GDP. As we can see on this chart, the last time debts got even remotely close to current levels was back in the 1930’s, and that bears a bit of explanation. The debt-to-GDP ratio back then didn’t start to climb until after 1929 (solid arrow), because debts remained relatively fixed in size, while it was the GDP that fell away from under the debts. With the exception of the Great Depression anomaly, our country always held less than 200% of our GDP in debt (gray dotted arrow). In 1985 we violated that barrier and never looked back. What each of us knows to be “just how the economy works” is really a historically unusual experiment with debt that is barely 25 years old. In the sweep of economic history, this barely qualifies as a blink.

This 25-year-long borrowing binge has so badly distorted our collective sense of right from wrong that we no longer seem capable of setting simple priorities. The consideration by Washington DC of a $700 billion bailout proposal in the same week that it passed a record-setting $612 billion defense budget is a perfect example of this dynamic. No trade-offs mentioned; “Yes, we’ll have one of everything” is the reigning mentality.

Our first challenge in confronting this crisis

This crisis is fundamentally one of insolvency (definition below), not a failure to have enough dollars floating around, which means that it is not a liquidity crisis.

Quote:
Definitions:

• Insolvency. A condition where one’s assets are exceeded by one’s
liabilities to an insurmountable extent. Distinct from bankruptcy, which
is a legal event precipitated by a final inability of cash flow to
continue to carry an insolvent entity any further. Insolvency nearly
always precedes bankruptcy.

• Liquidity. A measure of how much money exists in a useable form. A
person with a $10 million house but no money in the bank is said to be
“illiquid,” not “poor” or “broke." A “liquid” market, like the stock
market, offers a reliable and fast way to exchange assets for money.
When the Fed is said to be adding “liquidity,” they are taking assets
from banks in exchange for cash.

The institutions in question are as insolvent as a minimum-wage janitor trying to make payments on a $2 million beachfront house using only his earnings. The aggressive lowering of interest rates by the Fed in their attempt to help provide liquidity to the banks was like assuring that the janitor’s checks cleared at the bank a little faster. But improving liquidity did not help. It couldn’t, because the problem was one of solvency, not liquidity.

But if liquidity won’t do the trick, what will?

Here we must face the hard truth that merely transferring the failed loans from the insolvent banks to an insolvent nation will do nothing but forestall the problem until a slightly later date (when it will be larger and more severe, by the way). The fact that both candidates for president are openly supporting the bailout says that reality has not yet penetrated the inner beltway.

So the first challenge will be recognizing that it really is not possible for an insolvent nation to bail out an insolvent financial system by borrowing more money. This is an absurd notion, and in total it really is no more and no less complicated than that. One cannot solve a crisis rooted in debt by issuing more debt.


Our second challenge in confronting this crisis

On September 23rd, 2008, before the Senate banking committee, Bernanke said, “I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover.”

The palpably strong desire by the current politicians to “get the economy back on track” and to immediately return (if possible) to maximum consumption is absolutely the wrong response at this moment in history. We do not need to return to our borrow-and-borrow-more ways of the past. We desperately do need to demonstrate awareness that the future is loaded with challenges that only grow larger and more urgent with time. None of these challenges, ranging from energy dependence, to population, to a broken entitlement and pension system, will be helped by a return to our former credit-dependent ways. In fact, they will be exacerbated.

So our second challenge is to recognize that our first instincts to repair a broken system are wrong.

Instead, we need to have an honest accounting of our current economic condition, matched against the very real warning signs that our consumptive lifestyle is due for a radical overhaul. If we miss this chance to level with ourselves, we will have squandered an enormous opportunity.

Your biggest challenge



Recently, Senator Chris Dodd (CT) stated, “[W]e’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.

I know that the temptation is to trust that somehow these big players on Wall Street and in Washington DC have this all under control, or that they will fashion something workable to tide us over for a while. While they might be able to limp this along for a while longer, it might also fail sometime next Tuesday, and it will certainly fail sooner or later. When our economy finally suffers a complete meltdown, the resulting calamity will be as individually dramatic to each of us as if our homes burned to the ground.
Your challenge is to accept that this crisis is fundamentally “unfixable” and that wherever the future takes us, it will not be a simple continuation of the past. With this acceptance, the challenge becomes assessing what might happen and what you can do about it.


OK, so now what?

The immediate risk that I see here centers on a collapse in the international value of the dollar, which will rapidly morph into a massive financial crisis for the federal government. When all is said and done, I fully expect the federal government to be half its current size, with states, to varying degrees of success, picking up the slack as best they can.

The chance that the US dollar will go into a steep decline from here is very high. I personally place the risk that a major dollar decline will ensue within the next 6 months at 50%. Here’s how that would play out.

In its full wisdom, while times were good, the US government opted largely to finance itself with short-term debt in the form of 3 month and 6 month “T-Bills.” In essence, because these T-Bills ‘roll over’ every 3 or 6 months at whatever the current interest rate is, the US government opted to finance itself with an Adjustable Rate Mortgage (ARM). Hold onto that thought.

Now that the government has embarked on a course of massive deficit spending that is sure to top $1 trillion next year (and possibly go as high as $2 trillion), this money will have to either be borrowed from overseas or printed out of thin air by the Federal Reserve. In either case, there is a very high probability that either/both of these actions will cause interest rates to climb, possibly quite steeply and suddenly.

And here is where the “vicious spiral” comes into play, exacerbated by the short-term (ARM-like) borrowing stance described earlier. The more the government needs to borrow, the higher interest rates will go. The higher that interest rates go, the greater the need to borrow. So more borrowing begets higher interest rates, which beget more borrowing, which beget higher interest rates, which….ah, you get the idea.

If (or when) this dynamic gets started, its self-reinforcing nature will cause both the dollar to collapse in value and interest rates to shoot upwards. Either of these effects alone would provide a serious hit to our debt-based way of life, but together they promise to deliver earth-shaking changes to those who are unprepared.
Concurrent with this death-spiral for the dollar will come massive (hyper?) inflation of imported goods, the most important of which, to our daily lives, will be oil. Gasoline at $10 or even $50 per gallon is not unthinkable.

This means that you, individually, need to begin thinking about ways to economically insulate yourself from this possibility, as does each state in the union.

My advice to you is the same as it has been for months.

  • Trim your expenses as far as humanly possible.
  • Don’t take on any more debt for any circumstances, unless you are speculating and can manage the risks.
  • Hold gold and silver, physical only. How much? That depends on how many of your US-dollar-denominated holdings you’d like to be absolutely sure do not go to zero.
  • Keep cash out of the bank. Three months' living expenses, if you can.
  • Develop a sense of community, and get to know the people you can count on and who will count on you.
  • When you can, keep things topped off around the home.
    You never know.

Your faithful information scout,
Chris Martenson

Copyright 2008 Chris Martenson. All rights reserved.

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16 Comments

joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
sweden
i am not an ideologue. i grew up with capitalism so like a fish it is the water i swim in. but if socialism will work even in the short term to solve a problem i am ok with that. i have been in business for almost 50 years. some simple adages have served me well"buy low sell high" for one. barclays hinted they might be interested in lehman then walked. then after bankruptcy bought the assets and left the toxic debt behind. our govt wants to buy the toxic debt and leave the assets behind. then i hear the shrub tonite say something about the wonderful democratic capitalist system we have. so i have reached a much higher level of confusion. if we are a democratic capitalist country why are we not letting the markets work? so i think lets bail them out take the assets along with the debt for a short time. lets just say we will "borrow" your bank get it straightened out then give it back to your successors because you are going to jail. oh and we the people will keep the profit this time. see in real estate, agents have what is called a fiduciary relationship with their client. if the agent violates this principle he loses his license to do business. or we could do it the way sweden did it. http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em but that would be asking too much for our reresentatives to comprehend. thank you chris and everyone i appreciate all your input. i think we have a pretty good community going right here.
bongo's picture
bongo
Status: Member (Offline)
Joined: Aug 31 2008
Posts: 2
appreciate it
Thanks for making this article public. I really really appreciate it.
FWIW's picture
FWIW
Status: Member (Offline)
Joined: Sep 9 2008
Posts: 2
Thank You
Chris, Just wanted to say Thank you for releasing this report. You are one of very few people that clearly understands what is going on and is able to explain it. I am genuinely frightened for our future and especially for my young daughter - I have prepared as you have said as well as I can, although I feel a little bit helpless as I live in the UK. In England, we had Robin Hood who robbed the rich to give to the needy. In the USA, you have have the Government who rob the poor and give to the rich! “This is an impressive crowd -- the haves and the have mores. Some people call you the elite -- I call you my base.” -- George W. Bush Will the honest, god-fearing American's out there let this theft happen? I really hope not. Anyone for tea? This time I am with you. All the best from England.
damien12's picture
damien12
Status: Member (Offline)
Joined: Sep 8 2008
Posts: 2
Interesting
I think that the speed of events will be quicker than you, CM, anticipates. Realy who is going to buy the T-bills? Who dares? And if they start to print money they will scare teh living daylights out of investors. It will be the ultimate sign of weaknes and down we go and fast. Today you can read in CNN about risk of a falling dollar and higher interestrates due to the bailout and when mainstream opiniond starts to talk about it you know it is going to happen. Less than half a year ago I read about the remote, very remote, chance of Fannie and Freddie going down and that it could cause a siginificant presssure on the dollar. What happened
xeroid's picture
xeroid
Status: Member (Offline)
Joined: Sep 1 2008
Posts: 9
The Fed & Treasury clearly expects failure now.
Bernanke and Paulson by asking for 'No review, no limits, no questions - and do it right now or we are doomed' are admiting thet the game is up - we are in the endgame. They know that those demands will not met in a timely fashion, therefore when the failure comes they won't be to blame - this proposal is about avoiding blame, nothing more.
miranda's picture
miranda
Status: Bronze Member (Offline)
Joined: Apr 29 2008
Posts: 28
Am invited to a bday party
Am invited to a bday party on Saturday to which also invited is the (former) Global Head of the Securitized Products and CDO Group at XXX Giant Global Bank * this fellow apparently a wunderkind innovator in the Securitizations field and made a gargantuan pile of money * I'm polling for suggestions from this community about what message to bring him. Here are my ideas so far: 1) Be a polite social creature and say and do nothing - Hey, he's a nice guy and everybody was doing it; 2) Glare at him menacingly from across the room all night; 3) Greet him with a hearty handshake and say "Great work on that securitizations stuff - it's worked out good for the rest of us. So glad to hear you haven't had to sell any of your houses"; 4. Earnestly ask him "What were you thinking? Did you enjoy being at the top of a great big Ponzi scheme - or was it all just an interesting mathematical problem to you?"; 5. Punch him in the nose.
Susan's picture
Susan
Status: Member (Offline)
Joined: Jun 22 2008
Posts: 14
Thanks for your site Chris
You have done an excellent job putting the big picture into a clear and concise format everyone should see. Have you seen this and could you comment. Thanks! Fed drains 125B in liquidity from system http://market-ticker.denninger.net/archives/590-FLASH-Fed-Speaking-Out-Both-Sides-Of-Mouth.html
Gwentan's picture
Gwentan
Status: Member (Offline)
Joined: Sep 25 2008
Posts: 8
Bailout
The FBI getting into Wall Street "lends" the bailout a look of being a money laundering operation on steroids! So if it sounds like a money laundering operation, smells like a money laundering operation ..... I suppose the legality, or not, of most things depends on who has the key to the court house in their pocket at any given time.
ajparrillo's picture
ajparrillo
Status: Bronze Member (Offline)
Joined: Sep 7 2008
Posts: 72
Cowboy up!
I don't know about any of you, but I am towards the bottom of the ladder even though both my wife and I have graduate degrees and are employed. We, the bottom rungs of the ladder, have become all too complacent in all aspects of society...we have accepted what have been shoveled to us and many refused to heed the warnings of those ‘evil intellectuals' that could have been that counter balance. Most of these guys see themselves of self-made cowboys likening themselves to characters such as John Wayne. WWJWD (What would John Wayne do)? This is easy...slug the bastard. I vote for 5...at the very least. Maybe wrap a peice of your own shit as a gift if you prefer to be snarky. Make some type of statement or you will beat yourself up for missing the opportunity. Be the visible hand of society! Overall, we the people should be in the streets making our desires known and frightening the economic and elected elite. But, alas, we are too ignorant on these issues and too disconnected as a society for this to happen en masse.
ajparrillo's picture
ajparrillo
Status: Bronze Member (Offline)
Joined: Sep 7 2008
Posts: 72
Oil and water.
Please remember that capitalism is not synonymous with 'markets'. This economic system uses markets very well to its wealthy actors' advantages, where the endpoint is a very few owning everything. Further, unregulated capitalism is not compatable with true democracy becasue the essence of democracy is protection of minority rights not winner take all voting. This is exactly why regulations and gov interventions were introduced after the great depression. This is where the debate should be...the EXTENT of gov regulation and intervention on a REGULAR basis. We should never fall into the trap of deregulation or we end up without a working democracy.
ajparrillo's picture
ajparrillo
Status: Bronze Member (Offline)
Joined: Sep 7 2008
Posts: 72
Be Aware!
This stage is not the endgame; this is only the setup! The dominos are clear to me. This is providing more capital for elites to buy up public possessions in a couple of years when all levels of government will be huge debt and their 'only option' will be to sell/privatize everything. People will go right along because this will be the only alternative to increasing taxes on an already highly under/unemployed population. Bye bye public infrastructure, public utilities, public water resources, public schools, social security, medicare....list continues. This is the same system and individuals who turned Mexico, then a social democracy, into a corrupt corporated government where income disparities exploded. This is described by David Harvey in his book A Brief History of Neoliberalism. Strap the gov for cash and they will be forced to privatize and even change their constitution to do so.
EndGamePlayer's picture
EndGamePlayer
Status: Platinum Member (Offline)
Joined: Sep 2 2008
Posts: 546
SWASTIKAS FOR CAMPAIGN SIGNS. . . . . .
Ron Paul's got it right.
and here's the truth:
Wall Street needs to fail and the stock in the companies who actually have value will survive. People will survive.

If 10,000 people are being foreclosed on - who's making them move? What's the rush? Let them stay there till this is settled or the house is sold via foreclosure. OR - refinance them at a reason term loan instead over the overly greedy way they were set up.

It's the 1% of the population who own 97% of ALL THE WEALTH - LET THEM FAIL! and level the playing field. The suffering (if any will be shorter than if we keep up this charade. In 6 months - they will want more & more - the Bail Out Can Not Work. Not a single economist can say it will.
Have the Federal Reserve people (who ever they are) FINANCE THEM DIRECTLY IF IT'S SUCH A GREAT DEAL!!

Vote out every politician who votes to sell out the American people (paint a swastika on their campaign signs so others know who they are) and Vote IN someone who will:
Reduce the Size & Cost of Government by 50% in 2 years - that's where the money is!
Take away the government golden parachutes! No more wealth fare for politicians paid by the people they screw.

Give people health care.
Increase Alternative Energy Funding & tax deductions. Alternative Energy has come a long way and there are plenty of great options that will keep your hard earned money in your pockets rather than give it to oil companies. Solar heating, solar energy, wind, and many more are here and growing. People will find products to cut every single use of gas & oil as soon as humanly possible.
LET FREEDOM RING!

joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
mayberry
i was watching the tube last nite at my daughters(i dont own one) and i finally got it. i was watching financial mayberry. starring hank as andy--calm knowledgeable in control ben as aunt bea --always agreeing with andy and making the cookies. one very large segment of the american poopulace- drunk given up and in jail. that would be otis and another large segment of the poopulation who are totally oblivious --gomer pyle U.S. marine going along with whatever andy wants. then there was opie maybe it is dopie portrayed by the shrub saying gosh dad you and aunt bea sure are smart when i grow up i wanna be just like you. and of course there is barney portrayed by who else barney he is furiously digging in his pocket to find his single bullet by this weekend so he can shoot every man woman and child in this country --oh i am getting my metaphors confused that was the single bullet theory. sorry. the show is brought to you by AIG, FANNIE AND FREDDIE,GM, FORD,CHRYSLER AND WASHINGTON MUTUAL. sorry to report one of our previous sponsors INDYMAC is no longer able to come up with the cash. then i heard an all too familiar voice "you are about to enter a place beyond time. a place beyond space ...............the twilight of america zone
joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
option 6
invite him outside to meet your brothers smith and wesson
scotttherrien's picture
scotttherrien
Status: Member (Offline)
Joined: Aug 26 2008
Posts: 13
What about Deflation?
Isn’t deflation as much of a scenario as inflation?  I agree with your overall analysis and am trying to position myself accordingly, however it seems to me that deflation could happen just as easily as hyperinflation (cash is king and debt is a demon in a deflation scenario).  Financial lending institutions are hording cash and so are the wealthy; this is a full-on stop to investment.  This is unlikely to change anytime soon.  China and the sovereign wealth funds know that if they trigger a run on the dollar they will trigger an even greater financial meltdown and that is not in their interest.  This is like the Cold War in that a missile launch will result in mutual destruction; hence neither party will make a move.  Can you imagine China dumping the dollar and then seeing their exports to the US drop like a rock.   Couple that with the extensive manipulation that is done by our government in a coordinated way with other governments to “manage currencies.”  Even with our extraordinary debt level with the printing presses turn on full blast, other countries may still turn to the US dollar as a “perceived” safe-harbor as their problems may be even worse than ours.  Further, as far as currencies go, this crisis is the first real test for the Euro, which I would venture it is one that the Euro will not pass…Given this, isn’t deflation an equally likely outcome?
beyondgreen's picture
beyondgreen
Status: Member (Offline)
Joined: Sep 26 2008
Posts: 3
Our Economy and Our Energy Crisis
Our country is going to **** in a handbasket.  The high cost of fuel has driven up the production and shipping cost of everything. Consumers have nothing left over after filling the tank and paying more for the necessities of life to spend on extras, save or invest.  We need to get ourselves out from under our dpendency on foriegn oil.Just as gas prices start to fall slightly and we felt like there might be hope along comes Ike and causes them to spike to an all time high. Families everywhere are wondering where else they can cut back to cover the cost of fueling up the family vehicle to get back and forth to work and take care of the necessities of life. There is no money left for relaxation and family fun. The stress level continues to rise. Most areas of the country have seen a sharp rise in their electric bill as power companies pass their increased production costs on to consumers. The cost of every consumer product has risen sharply. Americans are stretched to the limit. Jobs are being lost, foreclosures are increasing at an alarming rate. Seems even the family pets are suffering the high cost of fuel as almost daily a sad new story is on TV about shelters being forced to euthanize record number of surrendered pets from those forced out of their homes due to foreclosure or they simply can't afford to feed them anymore. The energy crisis in our country is far reaching and needs immediate attention. Our economy is in a sorry state of affairs directly related to the high cost of fuel. We have become so dependant on foreign oil that we have neglected to fully utilize such natural sources of energy such wind power & solar power. Along with modern technology such as plug in cars, hybrid cars, v2g technology ,and regenerative braking, technology we still seem to be floundering as a nation as to devising the best plan utilize all that is available to us and lift ourselves out of this mess we are in. We need to take o ur closest look at which candidates put our economy and energy crisis at the forefront of their agenda. There is a new book coming out soon called...The Manhattan Project of 2009 by Jeff Wilson.

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