Blog

Week of July 28, 2008

Sunday, August 3, 2008, 2:21 PM

07/28/2008

The
USA announces that the next President starts with the largest deficit
on record (and that’s assuming some rosy predictions), the Washington
Post finally notices that there’s a structural mismatch between oil
supply and demand, business loans are drying up, and the Fannie/Freddie
bailout numbers are calculably ridiculous.


July 29

Record deficit expected in 2009 (July 27 – USA Today)

The White House has increased its estimate for next
year's deficit to nearly $490 billion, a record figure that will saddle
the next president with deepening budget problems in his first year in
office, a report due out Monday shows. The projected deficit for the
fiscal year that begins Oct. 1 is being driven higher by the continuing
economic slowdown and larger-than-anticipated costs of the two-year,
$168 billion fiscal stimulus package passed by Congress, said two
senior administration officials with direct knowledge of the report. In
February, President Bush predicted the 2009 deficit would be $407
billion.

The budget update shows this year's deficit headed
under $400 billion, at least $10 billion less than projected, according
to the two officials. That's partly because tax revenue held up
reasonably well despite the weaker economy.

The announced
deficit that (I presume) will face the Obama presidency next January is
the largest on record. Of course, that will limit the next president’s
maneuvering room to a very large degree. It is important to note that
this number is only the cash basis deficit for those items that
actually appear on the budget.

“Off budget items” typically include such things as the wars, the stimulus payments, and the housing bailouts.


It is also
well worth noting that the accrual-based deficit will be roughly 80% to
100% higher than the cash-based deficit, as that includes the value of
‘borrowing’ the temporary year surplus Social Security payments that
currently exist. That comprises about $170 billion a year, taken from
your paycheck, that is *not* included in the projected deficit figures
cited above.

But even worse,
the reported deficit does *not* include or report the increase in
forward obligations (i.e. Social Security and Medicare/caid), which
have been averaging about $3-$4 trillion a year for the past ten years.
That is, the actual deficit as you or I (or an accountant who wished to
avoid jail) would report it, would be roughly 10 times larger than the
what is actually reported.

Remember, your
continued freedom is vitally dependent on a 100% level of accuracy in
your IRS reporting, but the same government that demands that precision
is perfectly comfortable reporting at a 10% accuracy level.


This Time, It's Different (July 27 – Washington Post)

The two events, half a world apart, went largely
unheralded. Early this month, Valero Energy in Texas got the unwelcome
news that Mexico would be cutting supplies to one of the company's Gulf
Coast refineries by up to 15 percent. Mexico's state-owned oil
enterprise is one of Valero's main sources of crude, but oil output
from Mexican fields, including the giant Cantarell field, is drying up.
Mexican sales of crude oil to the United States have plunged to their
lowest level in more than a dozen years.

The same week,
India's Tata Motors announced it was expanding its plans to begin
producing a new $2,500 "people's car" called the Nano in the fall. The
company hopes that by making automobiles affordable for people in India
and elsewhere, it could eventually sell 1 million of them a year.

Although
neither development made headlines, together they were emblematic of
the larger forces of supply and demand that have sent world oil prices
bursting through one record level after another. And while the cost of
crude has surged before, this oil shock is different. There is little
prospect that drivers will ever again see gas prices retreat to the
levels they enjoyed for much of the last generation.


This
article, in the Washington Post of all places, is pretty good as far as
it goes in explaining that world supply and world demand are, at least
for the moment, seriously out of balance. Where the article could go
further is in explaining the role of massive monetary and fiscal
stimulus, as well as the inflationary impacts of war spending, in
helping to drive prices both from a monetary and demand standpoints (as
in, the US military is the largest oil consuming government body in the
US and in the world). Okay, the article fails to go there even to the
slightest degree, but this is not unexpected for an establishment
newspaper. At least they are now, albeit a decade or three late,
talking about Peak Oil.

The important
part, though, is in public recognition that this oil shock is unlike
past ones. Where this shock is structural, the prior ones have been
political. This one is fixed by geology while the prior ones were
resolved with words. Big difference.


Worried Banks Sharply Reduce Business Loans (July 28 – NYT)

Banks struggling to recover from
multibillion-dollar losses on real estate are curtailing loans to
American businesses, depriving even healthy companies of money for
expansion and hiring.

Two vital forms of credit used by
companies — commercial and industrial loans from banks, and short-term
“commercial paper” not backed by collateral — collectively dropped
almost 3 percent over the last year, to $3.27 trillion from $3.36
trillion, according to Federal Reserve data. That is the largest annual
decline since the credit tightening that began with the last recession,
in 2001.
The scarcity of credit has intensified the strains on the
economy by withholding capital from many companies, just as joblessness
grows and consumers pull back from spending in the face of high gas
prices, plummeting home values and mounting debt.

"The second
half of the year is shot," said Michael T. Darda, chief economist at
the trading firm MKM Partners in Greenwich, Conn., who was until
recently optimistic that the economy would continue expanding. "Access
to capital and credit is essential to growth. If that access is
restrained or blocked, the economic system takes a hit."


Every time I
check the credit growth numbers, they are up, and I can’t figure out
why. The reason I am so diligent in checking them is because every time
our extremely sophisticated financial system encounters something as
simple as a failure to expand credit, it threatens to expire. So as I
peer across the landscape and see fewer mortgages being made, fewer
home equity lines of credit being tapped, and fewer business loans
being made, I ask myself, “What’s left? Where is all the new credit
demand coming from that keeps the credit figures relentlessly rising?”
I am stumped. I have to assume that the borrower of last resort is a
gigantic, and somewhat desperate, outfit, to keep borrowing more and
more in this environment.


At any
rate, this is pretty big news, because it shows that the consumer pain
is now being reflected in the corporate numbers. It won’t be long now
before corporate defaults and bankruptcies follow along – just like
they always do in a downturn. It’s just that this time they are going
to do it with extra credit.


Bagehot's Rule and the Cost of Being "Technically Insolvent" (July 28 – Hussman Funds)

The larger problem with the bill is that Fannie Mae
and Freddie Mac were given open-ended government guarantees through
January 2009. This open-endedness is a big mistake, because the
potential costs are being as vastly understated as the pre-war
estimates of the Iraq invasion. The Congressional Budget Office and
Treasury Secretary Paulson suggested that probably only $25 billion in
emergency funding will be required. They estimated that chances are
even that none of the funds will be required, with less than a 5%
chance that the companies would need $100 billion. These estimates
threw the needle of our BS meter so violently into the red zone that
we're still trying to pry it loose.

William Poole, the former
head of the St. Louis Fed, calls the $25 billion figure a "place
holder." I couldn't agree more. Already, Fannie Mae is currently most
likely operating on infinite leverage, because all of its shareholder
equity has probably been wiped out. I expect that we will hear more
about this within the next few weeks.

Contrast that with the
facts. As of June, 2.5% of U.S. mortgages were in foreclosure, and 6.4%
of mortgages were delinquent, according to the Mortgage Bankers
Association. Given still-high rates of default for sub-prime and Alt-A
(low-document) loans, it is reasonable to expect that at least 4% of
the mortgages held or guaranteed by Fannie Mae and Freddie Mac will
ultimately fail by 2009 (when the open-ended commitment of the
government sunsets). Assuming a 50% recovery rate, which is about what
banks are running on foreclosure recoveries lately, the losses on the
retained mortgages and the guaranty books of Fannie and Freddie would
already exceed $100 billion. That, not the unrealistic $25 billion
figure, is a plausible and possibly conservative lower-bound of what
the government's open-ended commitment to these institutions will cost.


I truly
respect John Hussman’s intellect and market knowledge, and often find
myself in violent agreement with him but wishing I could write as well
and knew as much. Here he states that it is completely unthinkable to
suggest that the government’s initial “estimate” of a $25 billion price
tag is anything other than pure fantasy. As I wrote recently, I
expected that the CBO’s estimate of $25 billion would be roughly 10x
too low. John Hussman calculates that it is 10x too low. I would guess
that neither of us would be surprised to discover that it ends up being
25x too low. Hang onto your wallet.



07/30/2008

Richard Viguerie: Bush White House Hides True Scope of Federal Deficit (July 29 - PR Newswire)

"Under accounting trickery that would probably
land the top officers of a publicly traded company in jail, the money
borrowed from the Social Security Trust Fund -- and spent on anything
and everything except Social Security payments -- is not counted
towards the budget deficit, although it is part of our $9.49 Trillion
National Debt.

"It's way past time for Washington politicians to have their own Sarbanes-Oxley."

"But this is how corrupt Washington has become. Besides the dangerous
practice of massive deficit spending, which will saddle our children
and grandchildren with trillions of dollars of debt, the Bush White
House and Congress are conspiring to conceal the true nature and scope
of the problem."

"This year's budget deficit will actually be
$307 billion worse than the politicians are saying. This fraud on the
American people is a conspiracy of silence by both major political
parties.”

True conservatives are
hopping mad about the financial fraud that is being perpetrated on the
American people. I remain both surprised and perplexed that both
political parties seem intent on completely ignoring this growing
problem. Surprised because the problem is simply too obvious to ignore,
and perplexed because I am certain that the cause has political
traction. Given that DC can be found pandering to some very small
special interest groups for what can only be described as pathetic
amounts of money, why is it that this issue remains completely taboo?
Beats me, but I like reading that others are concerned for the future
of our country like I am.

As an anecdote, one of
the most successful articles I wrote (The US Is Insolvent) was picked
up and trumpeted by Daily Kos on the left, John Birch on the far right,
and libertarian sites as well. This tells me that there is considerable
opportunity here to unite some groups that would ordinarily be bitterly
opposed to each other. So I wonder if the primary reason that DC does
not pick up this issue stems from a desire to keep such groups apart.
Just a thought….


FASB votes to delay off-balance sheet rule change (July 30 - Reuters)

WILMINGTON, Delaware, July 30 (Reuters) - The
Financial Accounting Standards Board, which sets U.S. accounting rules,
voted on Wednesday to delay accounting changes that would affect
trillions in off-balance sheet assets at banks and financial companies.

What is this yawner of
a headline all about? It is just another late-in-the-game rule change
designed to allow US financial companies not have to properly account
for their losses and liabilities. It goes along with this next (very
important) yawner…


Federal Reserve Actions (July 30 - Federal Reserve)

Actions taken by the Federal Reserve include:

• Extension of the Primary Dealer Credit Facility (PDCF) and the Term
Securities Lending Facility (TSLF) through January 30, 2009.

• The introduction of auctions of options on $50 billion of draws on the TSLF.

• The introduction of 84-day Term Auction Facility (TAF) loans as a complement to 28-day TAF loans.

• An increase in the Federal Reserve's swap line with the European Central Bank to $55 billion from $50 billion.

Here the Federal
Reserve has very quietly slipped onto its website the news that it is
extending all the past ‘loans’ to troubled institutions and expanding
the program in a few ways. I have always maintained some concern that
the Fed would make its “temporary” programs of lending into permanent
actions, thereby ‘monetizing debt.'

This news *should*
have been very dollar-and-stock unfriendly (along with the federal
deficit news and the profit declines and warnings), but for some reason
it has been taken as the exact opposite by the market. I maintain that
all of these late-in-the-game rule changes and liquidity injections are
indications of weakness, not strength, and I draw little comfort from
them. It seems to me that the path to health will involve actual
recognition of losses, instructive failures, and an admission that
mistakes were made. At present I count most official acts as attempts
to cover up and gloss over the painful and shameful actions of the past
few years.


Even the pros may be stuffing the mattresses (July 29 – Chicago Tribune)

"I am officially scared," GMO investment manager
Jeremy Grantham told professionals from as far away as Abu Dhabi and
Malaysia. "In 2000, we had a technology bubble. But this is massive, a
massive credit crisis and a bubble in global housing, global equity and
global land."

Grantham is sometimes referred to as a
"perma-bear" because he's a stickler about avoiding overpriced stocks.
Two years ago, he warned his audience that U.S. stocks were too
expensive, even after recovering most of the ground lost from the 49
percent drop to correct the bubble in technology stock prices in 2000.
But back then, Grantham was cautious; not fearful. While he was
avoiding U.S. stocks, he thought fast-growing emerging markets still
held promise.

He confessed to the group that "I bought my first
gold last week, and I hate gold. It doesn't pay a dividend. I would
only do it if I was desperate."

Jeremy Grantham has
been branded a “perma-bear” here, but his track record is impeccable. I
think it’s a disgrace that he is considered “devoid of optimism”
(that’s what it means to be a perma-bear) when his standards rest on
refusing to overpay for financial assets.

At any rate, I got a
charge out of the gold quote. Not because I am happy to have Jeremy in
the gold camp, which I am, but because gold ownership is still
something that has to be “confessed to.” That means the gold bull has a
long way to go and is nowhere near bubble territory. One of my signs to
get the heck out of gold will be when CNBC has two guests on and they
both agree, breathlessly, that gold is the place to be.



07/31/2008

Surprisingly
the official story remains that the GDP is still positive (thanks to a
minuscule rate of inflation), covered bonds are being touted as the
latest way to either help the beleaguered mortgage market or to
transfer all the risk to taxpayers (one of the two...), and GMAC
reports dismal earnings.

July 31

GMAC Reports $2.5 Billion Loss on Auto, Housing Slump (July 31 - Bloomberg)

GMAC LLC, the auto and mortgage finance company
majority owned by Cerberus Capital Management LP, reported a $2.5
billion loss as car leasing shrank and the housing slump boosted
foreclosures.

The second-quarter loss, GMAC's fourth straight,
compares with profit of $293 million a year earlier, the Detroit-based
company said today in a statement. Losses at the Residential Capital
LLC home lending unit jumped to $1.86 billion from $254 million a year
earlier, and ResCap suspended almost all production outside the U.S.


If GM, as it is said, is a finance company with a car company bolted to it, the above is dismal news.

Because now the
car company AND the finance company are both bleeding red ink. For
GMAC, part of the problem is, of course, all the bad mortgage loans
made by GMAC subsidiary ResCap, better known as the parent company of
Ditech (“Where getting a loan is easier than getting a pizza!”).

However, auto
leases are a new problem, with people returning gas guzzling SUVs in
record numbers, SUVs which are now worth less than the residual value
of the lease. Which means GM is losing money, first when it makes the
car and later on when it takes it back.

Oddly enough,
GM’s stock price is mildly green today. Whoever is buying that stock
today is not reading the same news that I am. Nor, apparently, are the
bond investors.


GM's debt protection costs hit new record (July 31 - Reuters NEW YORK)

The cost to insure the debt of General Motors Corp
(GM.N: Quote, Profile, Research, Stock Buzz) hit record highs on
Thursday after finance company GMAC LLC reported a $2.48 billion loss
for the second quarter and one day before the automaker reports its
second-quarter results.

GM's benchmark long bonds hit a record low below 50 cents on the dollar, pushing their yields past 17 percent.

Five-year
credit default swaps on GM's debt jumped to 41.5 percent of the sum
insured, from 38.35 percent on Wednesday, plus annual premiums of 500
basis points, according to Markit Intraday. This means it would cost
$4.15 million in a lump sum to insure $10 million in debt for five
years, in addition to annual payments of $500,000.

Now this is the
sort of reaction I would have expected from the terrible GMAC news.
What this article is saying is that the holders of GM bonds that want
to insure themselves against the possibility of a bankruptcy or default
event by GM over the next five years have to pay 41.5% of the bonds'
face value up front PLUS an additional 5% each year. This means that
the bond holders, who are first in line for repayment in the event of a
bankruptcy, are taking the prospect of a GM bankruptcy very, very
seriously.

On the other hand, we
have the GM stock buyers calmly buying up GMs stock, despite the fact
that they’d lose everything with no recourse in the event of a
bankruptcy. Something is very odd here…could it be that the general
public pays more attention to stock prices than bond antics and that
keeping the stock price elevated is a means of keeping confidence in
the marketplace at a dicey time? Either that, or there are a whole lot
of very unintelligent stock buyers out there...


U.S. Economy: Growth Rate Falls Short of Forecasts (July 31 - Bloomberg)

The U.S. economy shrank at the end of 2007 and grew
less than forecast in this year's second quarter, signaling that the
country is in worse shape than investors had anticipated.

"We're in a recession," Allen Sinai, chief economist at Decision
Economics Inc. in New York, said in a Bloomberg Television interview.
"It's going to widen, it's going to deepen."

Gross domestic
product increased at a 1.9 percent annualized rate, the Commerce
Department said in Washington, compared with the median projection of
2.3 percent in a Bloomberg News survey. The Labor Department said
separately that more Americans filed claims for unemployment insurance
last week than at any time in more than five years.


Yes, we’re
in a recession, and, yes, corporate profits are going to fall, and,
yes, corporate bankruptcies are going to rise as a result of the twin
pressures of reduced economic activity and tighter credit conditions.
Somehow, through all of this, the S&P 500 is up 75 points over the
last 15 days. Either the stock market knows something I don’t (very
possible), or it is behaving irrationally.
At any rate, this was
about as ugly a report as could be expected. As you know, the GDP
report is so heavily massaged with imputations and the use of an
alternate inflation measure (that is itself a fraction of the widely
discredited CPI measurement) that it is hardly useful as a barometer of
anything more than the extent to which statistics can be tortured. Even
with all the fluffing and buffing, this report reads very poorly, which
tells those of us who read between the lines that the real economy is
shrinking at a disturbing rate.

My theory here
is that the stimulus checks and Fed-sponsored liquidity party are not
going to boost the real economy at all. And I think this way mainly
because I see daily shenanigans in the marketplace that lead me to
believe that the vast majority of the money injections are siphoned off
before they ever have a chance to get out into the real world where
they could do some good.
I believe the SEC is fully aware of these
shenanigans but has opted to look the other way, preferring to look
busy on small-time matters of no relevance while the same game that
brought us to this spot continues to be played.


Covered Bonds, Exposed Taxpayers (July 30 – Business Week)

Treasury Secretary Henry M. Paulson Jr. is
promoting covered bonds, a mortgage-financing vehicle popular in
Europe, as a safer way to raise money for home buying in the U.S. The
question is, safer for whom? If covered bonds catch on, they will
magnify the losses the Federal Deposit Insurance Corp. suffers in the
case of bank failures, thus exposing taxpayers to the risk of more big
bailouts.

To put it bluntly, covered bonds wouldn't reduce
risk as much as transfer it from bond buyers to the U.S. taxpayer.
Surprised? No wonder, since this hasn't been a big theme of the
Treasury Dept.'s publicity blitz.

Here's where the risk to
taxpayers comes in: If a bank goes belly-up for whatever reason, owners
of the covered bonds stand in line for payment ahead of the FDIC. The
FDIC must pay off the bondholders in full even if that means there's
not enough money left to pay insured depositors. The FDIC has to make
up the difference out of its own insurance fund. And, of course, if the
insurance fund runs low, taxpayers have to ante up.

"Promoting
covered bonds is really a way to compartmentalize and shift risk to the
FDIC and uninsured depositors," argues Robert A. Eisenbeis, a former
Federal Reserve and FDIC official who is chief monetary economist at
Cumberland Advisors, a Vineland (N.J.) money manager.

No wonder Wall
Street cheered the Covered Bond news with a big rally. It is just one
more way for Hank Paulson, a former Wall Street Exec with Goldman
Sachs, to help transfer risk to taxpayers. What a gross abuse of the
public trust. I’ve got an idea:  Why don’t banks issue mortgages and
hold them as assets? It’s a wacky idea, but it would work like this: A
bank would be fully on the hook for the success of the loan, and so
would be incentivized to assure that it was a safe investment. Hence,
they’d probably make safer loans, and there would be less chance of the
loans going bad and a better chance of the bank not going into FDIC
receivership. You know what? That’s pretty much how it used to work.

Now? Things are so far
over the edge that the Treasury Department and Wall Street cannot
figure out any other way to ‘repair’ their mistakes other than to come
up with new and more clever schemes to assure that their profits remain
private while the risk becomes public. I am still waiting for the first
ruling or proposal from the Treasury Department that does not stiff the
taxpayer while helping Wall Street. Mr. Paulson has simply spent too
much formative time working as a Wall Street insider to have any
objectivity left. He probably truly believes that each of his proposals
makes sense and is good for the country, and I can’t fault him for that.

What I can fault him
for is failing to understand that 99% of the country has no concern
over next year’s profitability for Wall Street firms and would prefer
to have all that taxpayer money back so it could be spent on winter
heating bills, bridge repairs, and alternative energy tax rebates.



08/01/2008

Unemployment rate jumps to 5.7%, 4-year high (Aug 1 - MarketWatch)

WASHINGTON (MarketWatch) - Nonfarm payrolls fell
for the seventh straight month in July while the unemployment jumped to
5.7%, a four-year high, the Labor Department reported Friday. Nonfarm
payrolls fell by 51,000 in July, led by losses in manufacturing,
construction, retail and temporary help.

This was spun as good
news by Wall Street in the early going, because the estimate was for
70,000 job losses and only 51,000 were reported. Of course, the data
did not even stand up to the most modest of scrutiny. According to the
BLS, Leisure & Hospitality saw big gains in hiring for the month, a
factoid that does not jibe with any of the economic data coming from
restaurants and hotels.


First Priority becomes eighth bank failure this year (Aug 1 - MarketWatch)

SAN FRANCISCO (MarketWatch) - First Priority
Bank was shut down by regulators on Friday, making the small Florida
lender the eighth bank failure in the U.S. so far this year.

SunTrust
Banks agreed to take on the deposits of First Priority, the Federal
Deposit Insurance Corporation said in a statement late Friday. The six
branches of First Priority will reopen on Monday as branches of
SunTrust, it added.

First Priority is not
a large bank, and it looks like WaMu will live to fight another day, or
at least another week. SunTrust is on my watch list, though, due to
their high exposure to commercial loans in the southeast...

There is a means of
ranking banks based on the number of faulty loans they have expressed
as a percent of their total capital base. It's called the Texas Ratio,
and you can see the exact formula at the bottom of this next image
(note: NPA = Non Performing Assets). I've helpfully circled today's
banking victim there, occupying the #7-from-the-top position.

And, of course,
you may recognize #5 on the list as last week's victim. If your bank is
on this list, run, don't walk, to remove your deposits to a safer
location.



08/02/2008

The
most important article of the week (maybe month), automobile sales are
already in a depression and signaling that the still-positive GDP
numbers are as fake as Donald Trump’s hair, and uninsured municipal and
state bank accounts reveal just one more way that a sinking bank could
drag down a whole slew of innocent parties.


August 2

Economic Free Fall? (July 30 – The Nation)

Washington can act with breathtaking urgency when
the right people want something done. In this case, the people are Wall
Street's titans, who are scared witless at the prospect of their
historic implosion. Congress quickly agreed to enact a gargantuan
bailout, with more to come, to calm the anxieties and halt the
deflation of Wall Street giants. Put aside partisan bickering, no time
for hearings, no need to think through the deeper implications. We
haven't seen "bipartisan cooperation" like this since Washington
decided to invade Iraq.

In their haste to do anything the
financial guys seem to want, Congress and the lame-duck President are,
I fear, sowing far more profound troubles for the country. First, while
throwing our money at Wall Street, government is neglecting the grave
risk of a deeper catastrophe for the real economy of producers and
consumers. Second, Washington's selective generosity for influential
financial losers is deforming democracy and opening the path to an
awesomely powerful corporate state. Third, the rescue has not
succeeded, not yet. Banking faces huge losses ahead, and informed
insiders assume a far larger federal bailout will be needed--after the
election. No one wants to upset voters by talking about it now. The
next President, once in office, can break the bad news. It's not only
about the money--with debate silenced, a dangerous line has been
crossed. Hundreds of billions in open-ended relief has been delivered
to the largest and most powerful mega-banks and investment firms, while
government offers only weak gestures of sympathy for struggling
producers, workers and consumers.


Here’s your
weekend reading! Grab a cup of coffee and read one the most important
and best summaries I’ve yet read on where we are and how we got here.
Our ‘leaders’ are busily compounding mistakes while rewarding those who
brought you this mess and punishing innocent people everywhere. We will
not get to a national solution until this culture is exposed to bright
light and made to retreat. That’s what this article does and that’s why
you should read it.


U.S. Vehicle Sales Fall 13.2% Amid High Gas Prices and Tight Credit (Aug 2 – NYT)

Vehicle sales in the United States fell last month
to their lowest level in 16 years, as consumers continued to shun large
trucks because of high gas prices, and tight credit kept less
creditworthy customers off lots.

Sales were down 13.2 percent, at a time when the companies had expected to begin seeing an improvement.

Instead,
the five largest automakers each reported sales declines on Friday.
Sales fell 26.1 percent at General Motors, the largest car company,
while Chrysler, which used to be the third-largest, reported a 28.8
percent decline and came within a few thousand sales of falling to
sixth place. The Ford Motor Company posted a 14.7 percent decline.


These sales
are much worse than expected (at least by the ever hopeful Wall Street
crowd) and speak to the fact that the US GDP reports, which show we are
still in positive territory, are in serious error. It is simply not
possible for autos, one of the larger individual segments of our
economy, to be down this much in a still-expanding economy. As you
know, the reason our economy is still being reported as expanding is
due to a fraudulently low measure of inflation used by government
statisticians.


One way we
could fix that issue is to peg all government budget expansion against
the inflation number. No special off-budget spending. No incremental
spending of any sort, no matter what, that exceeds the pace of
inflation. All of a sudden, I predict, the methodology would change,
and we’d get proper readings for inflation.


Billions in tax deposits uninsured: State, local accounts secured, so loss unlikely (July 31 – Columbus Dispatch)

Your bank account is insured up to $100,000, but
you still have a lot at stake in the event of a major failure: hundreds
of billions of state and local tax dollars in accounts nationwide that
are not insured by the Federal Deposit Insurance Corp.

Losses
aren't likely, says a state official, but government treasurers are
keeping a close eye on the funds. Franklin County currently has $300
million of taxpayer money in banks; the city of Columbus easily has
tens of millions; and local school districts hundreds of millions more,
officials said.

By Ohio law, the uninsured portions of these
accounts are backed by collateral purchased by the banks. But many
might be backed by bonds of agencies that are in trouble themselves,
namely government-sponsored mortgage behemoths Fannie Mae and Freddie
Mac.

I’d been wondering
about state and municipal bank accounts and how those were protected,
and then this article comes along and clears up the mystery. Thanks! 
It would seem that the “insurance” on these deposits rests with the
fact that they are backed by collateral. So the towns/states place cash
in a bank, and then the bank buys something with that money that is
worth something that presumably could be sold in the event of an
emergency. But it turns out that not all the deposits are so “covered.”
In fact, only 24% out of some $290 billion was determined to be
covered, in a 2006 study by the FDIC. But the real irony here is the
thought that banks are “covering” deposits with Fannie Mae bonds…and
here’s where we get to the song about how the hip bone is connected to
the thigh bone…

If a bank goes down at
the same time that Fannie bonds are getting hit, even the 24% that is
insured will suddenly be worth a lot less than advertised. Lots and
lots of uncovered losses would mount for various local school
districts, towns, and states if the contagion was wide enough. And if
that happens, Muni bonds will take a big hit, raising borrowing costs
for towns and states even as their financial conditions worsen. Which
will lead to more bank stress and probably failures. The hip bone is
connected to the thigh bone…

It is this level of
interconnected complexity that is at the heart of our current crisis.
It is the main reason why I am secure in my belief that the Fed and the
Government will do everything in their power to prevent this sort of
deflationary spiral from coming to pass. Unfortunately, their options
are few, and they cannot possibly operate to this effect without
employing the very same bankers and financiers that created the mess in
the first place. Sort of like being forced to reuse the doctor that
botched your first operation.

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