Friday, April 24, 2009

Geithner's Lies - A Preview

The famous “bank stress tests” are in their final stages right now. On May 4, Geithner is going to present the results, and those are certainly rather predictable.

The tests were created in order for the Treasury to be able to paint as rosy a picture as possible, of the situation that the country’s banks are in. This has not been denied, and in fact, it has been confirmed, although using different words.

The point of doing this is to avoid a panic, not cause one”, said Geithner recently.

What happens if the government finds something that is worthy of a panic (which it probably has)? That’s where Geithner’s lies and acting skills come in.

Early this week, results of the tests started to leak out. The rumor on Wall Street is that 16 of the 19 major banks are actually insolvent. If that shouldn’t cause a financial panic, I don’t know what should.

I don’t know if this is true, but it certainly could be. Like I said, it’s a rumor.

The government released the details of how the tests were conducted today. This is how the stress test works:

The banks have to figure out what would happen to them if:

1. unemployment went up to 10.3%,

2. home prices fell an additional 22%, and

3. the economy contracted by 3.3% and remained flat in 2010.

Note that the banks are conducting these tests themselves, and it is not exactly in their interest to tell anyone that they’re insolvent. Supposedly, if the government does not find the information coming from the banks to be credible, the banks will have to explain themselves.

In short, there is no independent auditor, only two vested parties who both want to paint a rosy picture and reveal as little as possible.

So, Geithner’s speech on May 4th is rather predictable, no matter what the government finds. In fact, I can give you the short version right here right now, so you won’t have to spend time listening to it on May 4th.

Dear members of the press, (this is Geithner speaking)

For three months, the U.S. government has been conducting stress tests on the nation’s major banks. I’m here today to present the findings of these tests.

The tests were conducted in the most stringent of ways, in order to make sure that the nation’s banking system can hold up in our current economic times. We tested the banks under fictitious, harsh economic scenarios that are very unlikely to become a reality.

Our findings show that despite continuing difficulties in our economic system, and even under a scenario of significant further deterioration, our nation’s banking system remains safe and well capitalized.

In recent months, the banks have taken unprecedented steps to shore up their liquidity positions by writing down legacy assets and by attracting new capital. This, along with an apparent improvement in the overall economic condition of the country, makes it clear to us that our financial system is on the road to recovery.

Blah, blah, blah, banks are great and Wall Street should love me…

Thank you, and no questions please.

I have a strong feeling that the actual speech that Geithner will give, is going to consist of absolute rubbish. Everybody on Wall Street knows he’s lying, but they don’t care, they only care about how convincing his lies are, because that is what will move the market in the weeks to come.

For ordinary people, all this means that even more vital information is being swept under the rug in order to preserve the financial oligarchy, which is the mission that Geithner seems to think that he was given by the American people.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Tuesday, April 21, 2009

Wall Street Calls Bank of America's Bluff

On Monday, Bank of America presented a fantastic first quarter result with a profit of $4.2 Billion! In the face of insolvency, losses that amount to 20 years of profits, and purchases of Merrill Lynch and Countrywide that very likely doubled the bank’s exposure to toxic assets, how is this possible??

With such great news, Wall Street must have gone crazy, because Bank of America’s stock went down by 24% the same day. What happened??

The answer is as simple as it is predictable: Bank of America’s report is utterly fraudulent.

I looked at the SEC report myself, and found that a little over $2 Billion of the “gain” is a result of the fact that Bank of America has decided, with no basis in reality, that its toxic assets are now worth a hell of a lot more than what they were only a few weeks ago. They can do this because the rule known as mark-to-market has been repealed.

Also, Bank of America makes reference to other new GAAP rules (rules that govern accounting), which apparently (according to them) enables them to put assets in “special purpose entities”, away from the balance sheet. This is what Enron pioneered, and it is what eventually brought down that company.

I could find no numbers concerning how much had been hidden away from the balance sheet this time, but the bank obviously doesn’t want that to be found. This makes me believe that the real number is very big.

Think of Bank of America as a regular guy. This guy has a yearly salary of $30,000. He has a credit card debt of $2,000. He also owes a loan shark a further $10 Million, and he lives in his aunt’s house.

The guy prepares a loan application to buy his own house, and in it he states that his income is $100,000, that he has a credit card debt of $2,000, and that he already owns his own home.

The only thing that’s accurate in his application is the credit card debt. The reason for that is that it can be checked by the bank. Everything else is pure fantasy.

It is the same way with SEC filings. You can bend the rules so much that SEC reports hardly mean anything anymore. You can’t trust ratings agencies or auditors either, because they get paid by the companies that they are supposed to be scrutinizing.

All this makes Wall Street look at a certain metric: quality of earnings.

“Quality of earnings” is not mentioned very often in financial journalism, probably because it seems to suggest that not all profits are actually a reflection of a company doing well. Quality of earnings describes to what degree the earnings of a company can be attributed to actual sales, as opposed to accounting wizardry.

I have over the last year argued that there has been an alliance between politicians, Wall Street, banks, regulators and the media to cover up the true extent of the financial crisis in order to preserve the financial oligarchy. By doing this, they have been able to uphold the illusion that everything is fine.

Even though Wall Street traders are not saying it out loud, they seem to be breaking ranks. They can no longer push up the prices of bank stocks and other financial stock in the face of such obvious and rampant fraud.

Expect stock markets to go much lower in the coming months.

Moreover, I advise that the winner-takes-all voting system should be destroyed.

Tuesday, April 14, 2009

What Actually Caused the Great Depression?

During times of economic crises, wacky theories concerning the origin of the crisis tend to spread like wildfire. That was the case during the great depression, and that is the case now. Some people might include my theories in that category, but that is, of course, purely based on ignorance.

At present, there are literally hundreds of theories about the crisis out there, and discussions about the great depression have also resurfaced.

With respect to the great depression in relation to the current crisis, almost all the arguments can be boiled down to the following question:

Was the great depression caused by the easy access to cheap money?

As President Obama has noted, the discussion about the great depression is far from over. The factors behind that crisis are very complex, and far beyond the understanding of most politicians. Obama recently spoke in disbelief about the continued disputes over this.

There are a few things that I believe are beyond discussion:

- The stock market crash set off the depression because so many had so much invested in the market.

- The stock market crash was caused by overly inflated values of stocks.

- The overly inflated values of stocks were caused by an unprecedented amount of speculation with borrowed money.

Following this line of reasoning, the question remains: what causes speculation? If we can nail down what causes large-scale speculation, we might be able to answer what causes depressions.

More specifically, circling back to my initial question, “was the great depression caused by the easy access to cheap money?”, the question becomes:

- Does easy access to cheap money cause large-scale speculation which in turn causes depressions?

The answer to this question can be found more easily than one would think. If you can identify periods of time in history when money was cheap and abundant, and ascertain that rampant speculation always occurred during such times, you have your answer.

A quick look back in history tells us that this is not so. There have been many periods in history when borrowing money was cheap, but when speculation was minimal. This is noted in what is widely considered to be a standard work on the depression, “The Great Crash”, by John Kenneth Galbraith.

During several periods in the 19th century, cheap money was available, but without the result of large-scale speculation. This was also the case in the 1950s and 1960s. So, to say that cheap money alone causes large-scale speculation would be erroneous from a scientific standpoint.

I tend to believe that speculation can trace its roots to something far more basically human. I believe that speculation does not occur just because it CAN occur, but because there seems to be a reason to for people to speculate.

Greed is a human emotion that can never be extinguished. Everyone is guilty of it, and when a human sees an opportunity to make a quick buck without effort, whether this is prudent or not, he or she often takes that opportunity.

The most classic example of speculation is the tulip bulb speculation in Holland in the 16 Hundreds. This business went so far that a single tulip bulb could be worth an entire year’s salary at the time. What this speculation frenzy also featured were contracts with rights to buy bulbs in the future, trading fictitious bulbs that had not yet been grown, and all the other classic speculation behaviors that we see again today.

We may think we’re so advanced today, but greed, this inescapable human emotion, has already conjured up the complicated schemes of speculation many times before in the history of man.

If you can buy a tulip bulb and sell it the next day, and then not have to work for the rest of the year, who wouldn’t do that? If you can buy a house in Florida, sell it within weeks for a comparable profit, how could you resist?

In short, humans need a reason to start speculating, and in the case of the great depression, people got excited about mainly two things which will sound familiar to everyone today: real estate and new technology.

People started buying second homes to be resold shortly afterwards, and stocks in new technologies like radio and automobiles.

Speculation frenzies will probably always exist, but when such a frenzy gets out of control, it can shake the very foundations of society. When too many people start getting in to the frenzy, perhaps even the government (by relying on the stock market to provide basic public services, such as pensions, infrastructure and, of course: jobs), the country becomes utterly dependent on the continuation of the speculative bubble.

A speculative bubble can never be upheld forever, and it can never be re-inflated, so when a bubble of sufficient proportions is created, a country will not be able to avoid a depression.

In the decade before the depression, President Coolidge repeatedly praised the wonders of the stock market. In addition, most of the powerful politicians in Washington, and the members of the Federal Reserve Board, were themselves highly vested in the stock market, and were hence not at all interested in reining it in, even though they could see ominous signs.

It seemed at this time that all of America could become prosperous without any effort on the part of Washington politicians. This is extremely similar to how the Reagan, Clinton and Bush Jr. administrations operated. Hands off, hope for the best and leave the provision of American prosperity to private corporations.

Then as now, the United States was utterly dependent on the upholding of the inflated values of the stock market.

The question then becomes whether the current speculative bubble is large enough to cause a depression. I believe that the answer is, unequivocally: yes.

Moreover, I advise that the winner-takes-all voting system should be destroyed

Wednesday, April 8, 2009

What the People Want - Crisis Management and Proportional Representation

One of the central premises of this blog is that the will of the people, the voters, is not at all realized in actual political policies in countries, such as the United States, that don’t have proportional representation.

One of the clearest examples of this in history can currently be seen in the differences in the economic crisis management between countries that have proportional representation and those who don’t.

The voters in The United States and Great Britain (which both have the winner-takes-all voting system) are outraged and disgusted by the taxpayer give aways to the financial oligarchy, whereas voters in countries with proportional representation, such as Germany and Sweden, are generally pleased with the political handling of the crisis, even though they suffer greatly in this crisis too.

The winner-takes-all voting system excludes all those voters, often more than 50% of the voters, who do not subscribe to the specific beliefs of the two only parties that exist in this country. By contrast, a system with proportional representation counts every single vote, and if a party gets 10% of the votes, it gets 10% of the seats, hence incorporating the will of all the voters, as opposed to a small number of them.

In addition to this, the United States allows huge political donations to individual politicians in a scheme that can only be described as a “policy purchasing program”. Money for policy; it’s as simple as that.

The Handling of the Economic Crisis in The United States and Great Britain

Since the current economic crisis began last year, the handling of it has been strikingly similar in The United States and Great Britain. It has been based on one central premise alone:

Protect the current financial power structure, and the individual players within it, at any cost to the taxpayers and no matter what the long-terms consequences to the economy are.

It really is as simple as that, because there is virtually no evidence to the contrary. With bailouts, loans, guarantees to AIG, Citigroup, Bank of America, Bear Sterns and many more, the U.S. taxpayers are on the line for over $10 Trillion at this point!

Enormous bailouts of Royal Bank of Scotland, Barclays Bank and many more in Great Britain will eventually cost British taxpayers Trillions of dollars too. All the while banks and other financial companies in both countries are continuing to pay enormous bonuses while successfully opposing financial regulation.

The American and British economies are at this point essentially unregulated. The people in both countries are outraged, and I personally don’t know anyone, nor have I heard anyone outside the corrupt media elite, voice support for the bailout and support of the financial oligarchy.

I don’t have any exact numbers for this, but if I, as a resident of Manhattan working in the financial industry, don’t know anyone who thinks that this is a good idea, I can only imagine what people around the country think about it.

Protesters in Britain have repeatedly smashed the windows of banks, and bank employees have had to hire body guards, so I don’t think the outrage is any smaller there.

The Handling of the Economic Crisis in Germany and Sweden

Although there have been bank bailouts recently in Germany and Sweden, it has been done on a much smaller scale. Banks in both Germany and Sweden had been over extending themselves in lending to Eastern Europe while that part of the continent was trying to re-join Europe after communism.

Both the German and Swedish governments have repeatedly stated that it would be immoral to throw away large amounts of taxpayer money, both for the immediate purposes of taxpayers and the long-term consequences to the economy.

The internal economies in Germany and Sweden were already sufficiently regulated, so in no way are the banks there causing as much of a domestic problem. One could instead look at an industry that is vital to the U.S., Germany and Sweden: the auto industry.

The U.S. has simply given away billions of dollars to companies that are clearly not competitive. Germany’s car companies are very competitive, but the car market in Germany is extremely slow nevertheless. Germany was creative in dealing with this, and gave taxpayers a few thousand dollar to scrap their old car and buy a new one. Sweden will most likely follow this idea.

Sweden refused to bail out SAAB, noting that the company had only been profitable for a handful of years during its 50-year existence. How would Sweden be able to turn around a car company when the biggest automaker in the world could not? It must be noted that the Swedish government in general is not opposed to state-owned companies.

The Swedish government owns many companies that it runs for profit, and created and maintained one of the most successful brands in the world: Absolut Vodka. Who said the government couldn’t run a business?

The Swedish and German governments have, throughout the economic crisis always had the taxpayers’ interests and the future of the country as their first and only priorities.

Small bailouts have occurred, and stimulus in the form of aid to local governments that have run short on cash because of job losses have been paid.

The public outrage that has occurred in Germany and Sweden has largely concerned bonuses, but the big difference is that those bonuses were paid by the companies themselves, not the taxpayers, as in the case of the U.S. and Great Britain.

The policy response to the economic crisis from the winner-takes-all countries has been disastrous, and I personally disagree with almost 100% of what the response has consisted of. The policy is based on the premise that the financial oligarchy must be preserved, taxpayers and country be damned.

The policy response to the economic crisis from the proportional representation countries has been deliberate, responsible, thoughtful with a long-term approach. I agree almost 100% with what has been done in those countries, even though I would not vote for any of the parties currently in power in either country.

This fact describes clearly that the will of the people is not translated into policy in the United States and Great Britain. These two countries are undemocratic and both need vast constitutional overhaul.

Obviously, I advise that the winner-takes-all voting system should be destroyed.

Thursday, April 2, 2009

Another Financial Atom Bomb

I simply cannot fathom the stupidity of American lawmakers anymore. For months now, they have been lobbying for mark-to-market accounting to be suspended, cheered on by Wall Street. On Thursday, they got their wish.

The Financial Accounting Standards Board decided on the change after Congressional hearings during which they had been severely pressured by politicians from both parties.

Mark-to-market means that banks have to value their assets at market price. When banks have worthless assets that nobody wants to buy, that used to mean bad news for the bank, as if a fruit stand were full of rotten apples. Not anymore.

Thanks to this change, banks can just make up what they think the assets “should be” worth. This will make it seem as if the banks are doing much better, and we will most likely see a big change already in the first quarter reports that are coming out soon.

This change is nothing short of ridiculous. Is anyone going to believe that the trouble that the banks were in is all of a sudden over? Did the rotten apples become red and shiny again?

Another reason for the change is that Geithner thinks he has come up with a round-about way of giving more taxpayer money to individual bankers. It works like this:

1. the banks are allowed to decide themselves what assets are worth and put that on their books

2. when the recently announced "public-private partnership" to buy toxic assets (to the utter detriment of the taxpayer) will start, the government will be able to grossly overpay for the toxic assets, because by that time these assets will have been marked up dramatically by the banks themselves.

It looks like the government is not overpaying, because they're just paying what's on the books...

3. again, an enormous transfer of wealth from taxpayers to bankers has occured.

The most significant factor in all this is not that one would be well advised to stay away from bank stocks; it is the implications for the whole economy. Until the problems at the banks are exposed, we cannot solve the financial crisis.

What the suspension of the mark-to-market rule will do is to bury the toxic assets even further away from sight of regulators and the public, and enable banks to go on with their zombie existence until its time for the next bailout.

And there will have to be more bailouts as a result of this disastrous policy.

This policy change is, in essence, a complete endorsement of the “Enron Accounting” that has already brought the world financial system to its knees. Why U.S. politicians have decided to legitimize it is totally beyond me, and it is an unbelievable outrage.

Moreover, I advise that the winner-takes-all voting system should be destroyed