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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Americans Suckered into Bailing-out Investment Banking Drug-pushers

Stock-Markets / Credit Crisis 2008 Sep 21, 2008 - 06:46 PM GMT

By: Alex_Wallenwein


Best Financial Markets Analysis ArticlePOOF! Ashes to Ashes, Debt to Dust
Question: What happens when you destroy a negative? Is that a bad thing, or a good thing?

Answer: It depends on how good of a liar you are. If you can get everybody to believe that the negative is something of positive value, its destruction will be seen as a catastrophe.

That is what we are seeing in the global financial system today. Our financial overlords have potty-trained us to believe that debt is money. National governments rushed in to help them cement the lie by (ab)using their law-making powers to make debt ‘legal tender'. Now, those who would play god in their own financial universe are having their heads handed to them, left and right.

Surprising? No. The only surprise to many is the suddenness with which it is happening. That' however, is more a lack of preparation than a genuine surprise. The writing has been on the wall ever since John Law perpetrated his little fraud on the country of France, ruining both himself and the country whose legal system he learned out to abuse, in the process.

The only difference between now and then is that his disciples have somewhat perfected the art of delay – until now, that is.

… And Then There Were Two

Bear Stearns, Lehman Brothels, Merrill Lynch – and now, only the two kingpins of the old investment banking drug-pusher cartel are left. Poof! Gone.

Of those, Morgan Stanley is already looking to ‘merrillize' itself to another stellar financial icon, Wacked-ovia, which along with Whammo (aka ‘WaMu') has long been on the list of ‘next-to-fail' banks. Soon to go 'poof.'

That leaves Goldman Sachs, which spawned such laudables as Mr. Hankie, Secretary of the United States Department of the Trashury. That explains why GS is still huffing and puffing as if it had some real value backing it up – but, alas, thanks to GS and its consorts, there is no such thing anymore in the world of financial insecurities. There is only debt – and the growing realization that confusing liabilities with assets does not a solid foundation for general prosperity make.

An Upside-Down World

In the disorienting world of modern-day banking, loans are assets and deposits are liabilities. (In a banker's twisted logic, a customer's deposit is owed to him and therefore a liability, while made-up money loaned to someone else is an ‘asset' because that someone is expected to pay it back with interest – hopefully, at least.) Yet, despite being liabilities, deposits constitute the required ‘reserves' that allow the banker to pyramid further loans onto them. Under banking regulations, assets (loans) can only be created if they are ‘backed' by sufficient liabilities (deposits). Makes sense? Go figure.

No wonder this entire structure is coming down as you read this.

Yet, this ridiculous structure assumes an air of unquestionable solidity when compared with credit derivatives – private contracts, traded over the counter, that are supposed to ‘insure' the future creditworthiness of banking institutions built on this quicksand-like debt-foundation.

While the financial world is quickly burning itself out in this fashion, the major central banks of the world are combining forces in shoveling more fuel into this all-consuming furnace by ‘swapping' yet another 190 billion dollars into the interbank lending markets. You see, banks, which normally thrive on making loans (creating debt), are now afraid to lose whatever debt (deposits) they already have out of fear the banks they are lending to might not be able to cough that same debt back up if they go under. Without the deposits, they can't lend (get more people into debt). Poor banks.

The really sad part in all of this is that if you, a customer, put money in the bank for safekeeping purposes, you have legally speaking already lost it. It is no longer yours. It becomes part of the bank's property. All you have left is a legal claim for the return of a like sum, plus whatever measly little interest the bank may agree to pay you for your confidence in its terminal instability.

‘Fedman' Swoops in for the Rescue

What? Banks are in danger? Oh boy, now Mama-bank must protect her young. Since Mama-bank (the Fed) owns the government, this is rather easy to do. Twist some arms in high places, and you get a taxpayer-sponsored bailout package for your devil's spawn, uhm, tender offspring.

In essence, what the Fed has been trying to do so far was to swoop in like Superman, wrap the atomic toxic debt bomb in his indestructible cape, and fly out to space to release it, or let it explode in his cape and leave the people unharmed. The question, of course, is how indestructible is Fedman's cape? But, that was then.

Now, the Fed is taking so-called ‘assets' that have potentially zero value and pays ‘real' money for them – sweet, fresh, recently created out-of-nothing cash – in the form of ‘non-recourse loans'. (The loans that collateralize these debt obligations, called CDO's have no value if the borrowers walk away from them - and nobody can know how many or which ones will be walked away from). Essentially, non-recourse means it's free money to the banks. The Fed can't force them to pay that money back if they don't want to. All the Fed can do is to get ‘the collateral' – the toxic slime represented by these ready-to-implode loan assets.

This is another step up, yet, from its ‘term lending facility' under which it swapped bad CDO's for US treasuries. Of course, these treasuries were swapped for toxic slime on a loan-basis only, so that means ‘Fedman' was wrapping the bomb into his cape only for a time and then planned to unwrap it again. Since nobody knows when the bomb will go off (least of all Fedman), how good of a strategy was this? It's little more than window dressing, really. What's more, ‘Fedman' doesn't appear to realize that the bomb is wholly made of kryptonite. The longer he is exposed to it, the higher then chance it will end up killing Fedman himself.

Hit Me with the Enron-Stick, Hit Me, Hit Me!

At the end of the day, the Fed has created new money to ‘buy' bad debt that will be carried on the Fed's balance sheet. Of course, the Fed makes the rules, so it will surely make new rules that will make the reporting of its balance sheet sound far better than what it carries.

In other words, the Fed is putting Enron and its accounting firm Arthur Anderson to shame in terms of who can get more ‘creative' with accounting rules. The American taxpayer is being sodomized with an Enron-stick.

Treasuries Deflate – Somewhat

As a result, we have a situation brewing that will be of great interest to gold investors. Treasuries took a huge one-day hit on Friday. The press spins it as a relief-rally for stocks. In the world of financial reporters where government actions are always effective and never fail, now that money markets are ‘safe' again, people don't need to run to treasuries for safety anymore.

That's a bunch of BS. In truth, because the US government/Fed conglomerate is taking on worthless trash as collateral for soon-to-be worthless cash, the government's debt becomes a bad (or even worse) investment. But, the crowds will not recognize this anytime soon. Dumb people are so much easier to (mis)lead, aren't they?

The Debt-Slaves' Rebellion

Government/Fed policies have sucked regular Americans deeper and deeper into debt so they can consumer more junk food and invest in junk stocks and bonds and make the bankers more money. With real interest rates below the real inflation rate, you have to invest, or you lose money. While our parents and grand-parents still saved money, we spent our inheritance and borrowed money to invest. Sure, profligacy has something to do with it, but so did ultra-low interest rates.

Money was ”cheap” (to borrow) so, hey, why not? The financial firms were laughing all the way to (their own) bank – but now, who's laughing? The debt slaves are walking off the plantation, leaving the bankers paper-empires in shambles in their wake. Poetic justice, that's all it is, really.

After all, if my finances are so messed up that paying my mortgage costs me more than paying rent, especially when my ARM payment balloons into the stratosphere, why should I hold on to that house that I couldn't afford to begin with? Even people with top-line credit are walking off the plantation, now.

What's more, the slave owners were so remiss in their already minimal duties that they messed up their paperwork. Many buyers of mortgages never took the time to make sure they got all of their little ducks in a row. Now, homeowners threatened with foreclosure are finding out that fighting back pays – big time. Courts are getting annoyed with lazy mortgage holders who can only produce an “affidavit of lost records” in court – and the judges are starting to rule in favor of homeowners.

It is estimated that more than half of all mortgage holders fall into this category. They may not even be able to get the property if the borrowers leave the plantation. Ha! What effect do you think that will have on the Fed's efforts to buy all of this slime up with newly created dollars while sticking hardworking Americans with the inflation tax? The Fed's balance sheet will implode! That's why it wants ‘authority' from Congress to tell Congress how much it must borrow from the Fed so the Fed can restock on treasuries. Double ‘Ha!'

It's time for Americans to tighten their belt-buckles a little bit. We have sold our inheritance to the bankers in return for a nice, gleaming set of debt-shackles – but the shackles don't fit anymore, and they are brittle. Very brittle! Shake them off, take your lumps, and rebuild a new government, new banking system, and a new economy to boot.. Buy gold, silver, food, water, and some lead to protect it all, and let your masters go ‘poof!' Easy come, easy go - so what? Shake off your shackles and use them to slap those who put them on you. It works like magic: poof – and they are gone! Without the toil they extort from you, they starve - you win!

Got gold?

Alex Wallenwein
Editor, Publisher
In this multi-decade gold bull market, the old investment maxim of "know when to buy and when to sell" has been replaced by "know when NOT to sell!" Euro vs. Dollar & Gold Monitor subscribers know when not to sell.

Copyright © 2008 Alex Wallenwein - All Rights Reserved

Alex holds a B.A. degree in Economics and a juris doctorate in Law. His forte is research. In late 1996, he began to research how money is used by some to exert political and economic control over others' lives. In the process, he discovered that gold (along with silver) is the common man's antidote to this effort. In writing and publishing the Euro vs Dollar Monitor, he explains the dynamics of this process and how individuals can harness the power of gold in their efforts to regain their political and financial autonomy.

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is the golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

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