Editorial

From The Forum:

Bond Cusip                    60+
ACCR 2007-1 M2 00438QAF1      35.8
CARR 2007-RFC1 M2 144526AF7   48.5
CMLTI 2006-WFH3 M1 17309QAE4  40.3
CWL 2006-10 MV2 12666PAW4     61.0
CWL 2006-18 M1 23243WAE8      60.5
CWL 2006-20 M2 12667HAG6      62.4
CWL 2006-22 M2 12666BAG0      60.2
CWL 2006-25 M2 12667TAG0      62.9
CWL 2006-26 M2 12668HAG5      60.0
CWL 2006-3 M1 126670WC8       57.4
CWL 2006-BC4 M1 12667NAE8     64.6
CWL 2007-1 M2 23245CAG5       64.4
CWL 2007-10 2M1 23246BAM3     56.6
CWL 2007-10 2M2 23246BAP6     56.6
CWL 2007-10 2M3 23246BAR2     56.6
CWL 2007-10 M5 23246BAT8      56.4
CWL 2007-11 2M3 23247LAK4     56.6
CWL 2007-11 M5 23247LAM0      56.3
CWL 2007-7 M1 12669VAF5       56.2
CWL 2007-8 M1 12669WAG1       57.0
CWL 2007-8 M5 12669WAL0       57.0
CWL 2007-9 M1 12670FAF7       57.9
CWL 2007-9 M2 12670FAG5       57.9
CWL 2007-9 M3 12670FAH3       57.9
CWL 2007-9 M5 12670FAK6       57.9
JPMAC 2006-CH1 M2 46629TAG5   37.6
JPMAC 2006-CH2 MV3 46629QAZ9  47.5
JPMAC 2006-CW2 MV2 46629BAU3  65.5
JPMAC 2007-CH2 MV2 46630MAY8  42.2
JPMAC 2007-CH2 MV4 46630MBA9  42.2
JPMAC 2007-CH3 M1 46630XAG3   46.5
JPMAC 2007-CH3 M2 46630XAH1   46.5
JPMAC 2007-CH3 M3 46630XAJ7   46.5
JPMAC 2007-CH4 M1 46630CAF1   42.9
JPMAC 2007-CH4 M2 46630CAG9   42.9
JPMAC 2007-CH4 M3 46630CAH7   42.9
JPMAC 2007-CH5 M2 46631KAG0   46.6
JPMAC 2007-CH5 M4 46631KAJ4   46.6

A random assortment of 2006 and 2007 securitizations from our friends at JP Morgan and Countrywide (mostly.)

The last number is the 60+ delinquency percentage.

A lot of this is Home Equity lines.

Remember my Ticker yesterday and my rant on Blogtalk regarding Barney Frank and the outrageous hidden losses being carried by our banks?  That none of this is being pursued, yet every week we see proof of it in FDIC bank seizures and the loss ratios?  That this sort of book-cooking, were you or I to engage in it in a public company, would lead us to be criminally charged, and in fact this is exactly what Ken Lay and Jeff Skilling were charged over doing?

Folks, this is endemic through the financial system.  The best performing issue in that list has a 60+ delinquency rate of 35.8% and a material number of them have more than half the loans in hard default.

Every home equity line behind an underwater first that is also not being paid is worth zero.  There is no recovery.  This is not like most bonds, where there is a meaningful recovery percentage after the default happens.  This is subordinated debt that is worth exactly bupkis if the senior lien cannot be fully satisfied from a foreclosure on the property.

These bonds are literally everywhere.  They're in pension funds.  They're on bank balance sheets.  They're held by The Fed through the garbage Fannie and Freddie paper they bought.  Foreign governments and foreign banks hold them.

Yet we have banks that are carrying very similar portfolios of loans on their books - second liens, either home equity or "silent seconds" used to get around various ratio requirements such as PMI on loan origination, and essentially none of them are being carried at anywhere close to these levels of loss.

There has been no - and I do mean no - recovery of balance sheets in the United States when it comes to financial companies, pension funds or anyone else holding this crap.  Zero.  Zip.  Bupkis.

Servicers have in some cases, it appears, even co-mingled funds in order to advance coupon payments, which has the effect of hiding these delinquency rates from investors.

For a while.

Cash flow always wins though folks.

I continue to hear "look, the market has a year under its belt now from the low, this means that it's a long-term bull market and will go higher for years to come."

Ok, let me ask you one question, and I will not provide the answer: You will, by doing your own work, because if you don't, then you won't take responsibility for your own outcomes - and if you're in that camp then stop reading The Ticker right now and start watching Jim Cramer on CNBS.

In every previous recession and market swoon post WWII by the time we have gotten a year from the bottom whatever it was that ailed the economy going in had been resolved.  Let's go through a few of them:

The S&L crisis, at this point, was under control - the S&Ls were under FDIC control, people were being sent to prison by William Black (and others), and we had a dimension on the losses and who had done what to whom (those loss estimates turned out to be way low, but at least we knew where they were.)

In the 1970s by this time oil prices had relaxed and the risk of the embargo was over.

Post-1981 recession interest rates were on their way down; the back of inflation had been broken.

Post early-1990s the California military bubble had popped and was mostly mopped up.

By the end of 2003, most of the Internet companies that had no business being in business were gone and buried; their bogus claims had led to their demise, and they had filed bankruptcy.

Now let's contrast this with today:

The credit default swap monster has not been caged.  In fact, there has been no change whatsoever in how these are traded and written.  Nor has anyone in the banks been indicted even when there is evidence of blatant bribery (as in the case of Jefferson County Alabama.)

All of the large banks, and a lot of mid-sized banks have enough second line exposure on their balance sheets written in the bubble states, carried at or near full value, to severely damage their capitalization ratios if not outright force them into receivership.  Not one of these institutions is marking their second line exposure anywhere near what the delinquency rates in these securities implies about their recovery values.  Yet these losses are both real and the overwhelming evidence says that impairment is permanent.

Existing home sales numbers have flattened at an extremely low level, even with the $8,000 tax credit.  This implies that the value of this credit has been reached in the marketplace, and that no actual recovery in housing is or will take place in the near term.  Yet the entirety of the premise that the economy has turned the corner - some 20% of GDP is housing related - rests on the belief that it has.

We are told that the auto industry has "recovered" with an estimated annual sales rate of 11 million cars.  The peak of the auto production cycle was seventeen million.  Even if half of that is recovered it will leave some 17% of that capacity idle and those people who used to man it unemployed.  Where are they going to go for jobs?

The labor employment rate (of all employable adults) is back to levels last seen when we had less than half the consumer and industrial debt in the system we have today as a percentage of income.  This sort of job loss into ramping debt has never happened before in the post-Depression era.  How are the interest payments going to be made?

The lockup in credit markets and economic malaise that followed occurred as a direct result of fraudulent balance sheets - that is, claims that firms had liquidity and assets that in fact were false.  When that falsehood was unmasked they failed instantly, as occurred with ENRON and MCI.  Do we, today, have balance sheets that accurate reflect the valuation of all assets by firms across the economy - not only in banks, but also in firms like GE and CISCO?

The government is literally providing 9% of GDP via deficit spending that exceeds the records set during the 2003-2007 years.  That is, they've replaced a full nine percent of the economy's final demand since 2007, and despite the claim that the economy is recovering the amount of replacement activity they're supplying has increased since the spring of 2009 and continues to do so.  If the government is going to supply this replacement for the indefinite future and that is necessary to avoid the recognition of an instantaneous economic Depression (defined as a 10% contraction in GDP) can the government continue to do so on an indefinite forward basis?

The entirety of the market rally from March of 2009 to today, and its sustainability on a forward basis, is dependent on the above - especially the government being able (and willing) to continue in its new role of providing 9% or more of GDP (beyond what it used to provide!) along with the continuing ability to mark assets that are worth little or nothing well above their actual market prices.

DO YOU BELIEVE that this can and will occur on an indefinite forward basis?

If you do, then you should be fully invested here and now, because indeed, profits will continue to advance, revenues will continue to advance, and the market will continue to advance.  We have a new bull market predicated on The Government legalizing balance sheet fraud and indefinite forward support of nearly half of GDP all-in (add up State and Federal spending - its close to 50% of GDP), with the additional 9% added for the last two years continuing into the indefinite future (and likely expanding too, especially with "health care" reform.)

If you do not then you should be hiding under the desk, because just as occurred in 2000 and 2008 when the breakpoint comes it will occur without warning, without recourse, and without the ability for you to get to the exit in time, and since the amount of the fraud and bogosity exceeds both the 2000 and 2007 levels by far so will the reaction - when it occurs.

... suddenly politicians "get religion" about making damn sure it has no bullets in it:

“We’re of the opinion that a quick implementation of actions in the area of CDS has to happen,” Merkel said. Citing “ongoing speculation against euro-region countries,” she called for the “fastest possible” implementation of new rules. Europe must “do everything to avoid unhealthy speculation,” said Juncker, who heads the euro-area finance ministers group.

Where 'ya been Angie?

Oh, and you too Papandreou:

“Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system,” Papandreou said yesterday in a speech in Washington.

And, of course, Sarkozy.

Note that I've been calling for these things to be either exchange-traded with central counterparty "blinding" (on purpose) as is the case with the regulated option and futures markets or be torn up since The Ticker began publication.

Why?  Because it is my position and remains so that unless you have this sort of market these contracts are all a scam. 

They are a scam because:

1. The counterparty cannot pay in aggregate for the exposure they have on.  This, in turn, "allows" them to write these swaps at an uneconomic price, which means that in effect these are all "side letter" deals.  That is, they're intended to cheat regulatory capital requirements as everyone involved knows there is no possibility of actual performance.  In these cases everyone involved should be rotting in prison - the buyer for purchasing a knowingly-bad "insurance policy" against an event that they know can't pay off for the singular purpose of defrauding a government regulatory agency (and/or the shareholders!) and the seller for putting forward a contract they know they are incapable of performing on.
   
   
2. The entire purpose of off-exchange trading of these instruments is to severely-damage the purchasers of these swaps in the retail market by obscuring the essentials of the transaction, including the bid and offer from other participants.  This also has the effect of allowing collusion, either active or passive, among sellers - nearly all of which are big banks and financial institutions.  This collusion, by the way, either is or should be a felony violation of anti-trust laws.  Finally, concealment of the market's opinion on price and activity allows outright bribery and other very-unlawful acts such as allegedly occurred in Jefferson County, Alabama.

The solution to this is simple, it's elegant, and I've been railing about it since The Ticker began publication, but there's no time like the present to re-state the demands and make sure they're clearly communicated to everyone.

In short, we must make all of these derivatives, including interest rate, currency and credit swaps:

1. Trade on public exchanges where blinding of counterparties takes place.  This is exactly identical to what is done with the OCC for listed options and the CFTC for listed futures.  If I buy a PUT on a company I have no idea who sold that PUT in the market, and further, if I exercise a long PUT the person who originally sold it may not be the one who gets assigned - that's handled by lottery among all who are short that contract.  This makes abuse of these contracts by the buyers, who then seek to destroy the sellers, extremely difficult as they have no idea who to target.
   
   
2. Have the exchange is the buyer for every seller and the seller for every buyer.  Since the transaction is effectively "blinded" from the counterparties the exchange is thus in the position where it must make certain that anyone who is short has the capital posted and held as margin to guarantee performance or the exchange will wind up insolvent.  The exchange has nothing to gain and everything to lose by allowing people to "game" collateral and margin requirements - thus, it doesn't happen.  Further, as volatility rises the exchanges tend to increase margin requirements in order to protect themselves against sharp and unexpected moves - exactly what would be expected of a prudent counterparty.  In short this process makes the market "safe" for both buyers and sellers, and even in times of extreme stress such as the 1987 crash nobody has ever had a regulated futures or options contract fail to be honored.
   
   
3. Break up those "custom" contracts that are so esoteric that only a handful of people want to trade them into standardized contracts that a lot of people want to trade.  Let's say that someone wants a custom derivative that is comprised of the price of oil and the price of John Deere's stock.  Perhaps they're a major farming interest that is concerned not only about the possibility of Deere failing (they have combine orders stacked up that would be VERY expensive to replicate on the spot market) but also the price of oil since they have to fuel those combines.  That's a custom contract that almost nobody would want to trade, but it can be deconstructed into a PUT on John Deere and a short on the oil futures.  In essentially every case these "custom" contracts can be deconstructed into two or more things that lots of people will want to trade, which immediately destroys the argument for "custom" OTC contracts.

For those financial parties who "resist", the solution is simple: either relent or those contracts which you refuse to migrate to such an exchange are torn up as void ab-initio as you have refused to demonstrate both ability and intent to perform.  They are thus not valid contracts - end of discussion.  If the buyer wishes they can (and should) go sue to seller for return of their premium, since they bought something that was sold under false pretense.

Congress must take this action now, and if it will not, then the executive must by whatever means are necessary - including executive order.  It's all the better if Merkel, Sarcozy and others on the world stage have finally come to realize what I've been saying now for the last three years when this mess first began:

These over-the-counter derivatives are an outrageous-destabilizing force and, in many cases, are outright fraudulent instruments as the selling entity lacks the capacity to perform as agreed.

The essence of the AIG mess was that the company lacked the financial capacity to perform.  It really is that simple.  Knowingly entering into hundreds of billions of dollars of financial commitments without the ability to perform should be treated as a felonious act, but apparently we have no cops anywhere in the world interested in massive and outrageous acts of this sort, as I have yet to see hundreds of perp walks up and down Wall Street.

Well, if the next-best thing is to prevent it from ever happening in the future, I guess we'll have to settle for that - even though it is, on balance, wholly-insufficient when one considers the damage that these people have caused to the global economy and financial system.

In this case, on Galbraith father's foreskin.  We would have been spared this intellectually-bankrupt and fallacious bit of spooge:

The Simpson-Bowles Commission, just established by the president, will no doubt deliver an attack on Social Security and Medicare dressed up in the sanctimonious rhetoric of deficit reduction.

....

But what would be the economic consequences if they did? The answer is that a big deficit-reduction program would destroy the economy, or what remains of it, two years into the Great Crisis.

Now that is Grade "A" hyperbole.  Let's examine it and see if there's any reasonable basis behind the claim.

To put things crudely, there are two ways to get the increase in total spending that we call "economic growth." One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that's basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors--public deficits or private loans--has to be in action.

Well, no.

There is only one way to get an increase in total spending that is sustainable: you must increase net production of "stuff", whether that is goods or services.

Wealth is not debt.  It is production.  It can only be mined, manufactured or grown. The only free lunch that is available is the power of the Sun, and that's only 'free" because we are too puny to measure in astrophysical time scales (if we weren't we'd realize that even the Sun's energy is in fact neither free or inexhaustible!)

With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand.

.....

But no government can ever be forced to default on debts in a currency it controls. Public defaults happen only when governments don't control the currency in which they owe debts--as Argentina owed dollars or as Greece now (it hasn't defaulted yet) owes euros. But for true sovereigns, bankruptcy is an irrelevant concept.

That's the biggest load of bilge I've read in years.

While it is technically true that a government that has control of its own currency can print as much as it wants, it is not true that printing that currency with wild abandon is cost-free, and the more inter-connected one's economy is with other sovereigns that also have control of their currency the more dangerous unbridled printing is.

Weimar Germany had control of their own currency, and we all saw what happened to them.

Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid.

This is true but also intentionally misleading.

The issue is not whether the debt will be paid off - it is that the interest payments are not under the issuing nation's control.  Demanded rates are a function of perceived ability to tax from the citizens the revenue necessary to cover that interest coupon.

Due to inefficiency in the economy (again, back to thermodynamics principles - no transfer of anything is ever 100% efficient) the money "printed" will fail to be entirely transmitted to the citizens in a form and fashion that can be taxed.  Indeed, they must spend some of it in order to survive.  This leads less than all of it available to be taxed away to cover those interest payments.

Nor is that interest a solvency threat. A recent projection from the Center on Budget and Policy Priorities, based on Congressional Budget Office assumptions, has public-debt interest payments rising to 15 percent of GDP by 2050, with total debt to GDP at 300 percent. But that can't happen. If the interest were paid to people who then spent it on goods and services and job creation, it would be just like other public spending.

Galbraith assumes that the interest is owed to US Citizens.  It is, to a large degree, not.  Those interest payments drain the economic vitality and future of the nation to foreign nations, as a vampire drains its victims blood.

So the fact that we're buying a lot of goods from China simply means we have to be more imaginative, and bolder, if we want to create all the jobs we need.

Really?  How does one compete with a wage of $1/day (in yuan, of course)?  Why by destroying one's standard of living, that's how.  This in turn destroys the tax base and we're right back where we started - without the ability to pay interest except by destruction of the currency, which in turn forces the cost of imports higher.

That in turn ruins the citizen's discretionary purchasing power as the most-sensitive import to currency depredation is petroleum, which we (due to our own idiocy over the course of more than 30 years) are effectively forced to purchase from foreign interests. 

But petroleum is in literally everything.  It is not only in things that are obvious (e.g. gasoline and fuel oil) but is an essential component of literally everything we buy.  Our modern food production system is dependent on petroleum for planting, fertilization, irrigation, harvest, processing and transportation.  Every item in your home or office that contains plastic or rubber contains petroleum, from the wrapper for your meat at the grocery store to your computer monitor, television set, the shingles on your roof and the tires on your car (not to mention its interior!)

But right now, we don't have functional big banks. We have a cartel run by an incompetent plutocracy, with its long fingers deep in the pockets of the state. For functional credit to return, we'll have to reduce the unpayable private debts now outstanding, to restore private incomes (meaning: create jobs) and collateral (meaning: home values), and we'll have to restructure the big banks.

You can't restore that which wasn't there.

Home values were false - fraudulently so.  They were pumped by charlatans pushing cheap credit and bogus appraisals.  The utility value of a home is to give you a place to hang your hat, take a dump and stick your bed where you won't be eaten by mosquitoes while you sleep.  This value is, and should be, able to be purchased for an average family for the price of somewhat near or less than one year's family wage, free and clear, without ongoing tax encumbrance.  Consider this: What did the settlers of this nation have to pay for their house?  On the prairie they were "raised" by the local community in a day or two, then finished by the family over time.  Were there 250 man-days that went into raising such a house?  Nope.  Yet that's the definition of one year's family income, right?

Over time we have thought of homes as financial assets, but they're not.  They're shelter.  They perform an essential function and as such allowing the nation's banks and other financial wonks, like Galbraith, to get their teeth into them has been incredibly lucrative - for the wonks.  For the rest of the nation it has spelled ruin every time it has occurred - 1873 (and before), 1929, and now in 2007.  In each case "real property" became the object of monstrous speculative froth unrelated to the utility value of the asset, and in each case economic malaise inevitably followed.

We need to break them up, shrink the financial sector overall, expose and prosecute frauds, and create incentives for profitable lending in energy conservation, infrastructure and other sectors.

That indeed is necessary.  But doing so will inevitably cause the speculative froth to come out in all of these asset classes.  Homes will contract to no more than 3x incomes on average, and likely lower.  If we contract homes to utility value they'll shrink in price to between 1x and 2x incomes, and property taxes will disappear. 

This, of course, is anathema to federal, state and local governments, not to mention the very institutions that were responsible for the speculative froth and fraud.  It is therefore perhaps a bit disingenuous to call for that which you know must happen while at the same time stating that we must restore bubble values to certain asset classes, for both cannot happen at the same time.

Either way, until we have effective financial reform, public budget deficits are the only way toward economic growth.

Deficit spending is not economic growth.  If I lose my job and use my credit card to sustain my lifestyle, I have not experienced "economic growth."  Quite to the contrary, should I represent to anyone - including myself - that my economic situation is stable or improving through such a display of abject stupidity all I have done is perpetrate a fraud upon those who I communicate such a claim to.

The sort of vacuous nonsense that Galbraith displays is why we're in this mess.  For the good of our nation this sort of stupidity must be banished in favor of embracing the truth: we have not lived in a nation of economic progress based on innovation and production for three decades, and we cannot return to a stable economic condition until the speculative froth - and the debt it engendered - is removed from our financial and economic system.

So now we have Senator Dodd saying:

"I can't write regulations, this is way beyond the competency of Congress"

Really Mr. Dodd?

How about "Bankruptcy Reform"?

How about the CARD act, which as you can see from my Ticker yesterday, was instantaneously circumvented by the banks.  Instead of "jacking interest rates" they simply put a CALL feature into their account disclosures, which now means you get raped by having the entire balance on your card due and payable literally on demand.  (As an aside, how hard would it have been to say "no adverse actions" as a consequence of universal default, instead of what  was actually done?  Oh, and did banking lobbying interests recommend the language you did adopt?)

"The business community needs certainty on this issue," he said. "We ought to leave it to them to make the recommendations."

Really?  Like the business community "recommended" OptionARMs, automated underwriting, blacklisting appraisers that didn't participate in outright fraud on property valuations, bankruptcy "reform", Credit Default Swaps, Synthetic CDOs and more?

Who's on the other side of the table?  What other voice is there on input into this process?

None.

Now let's look at results.  I would have no quarrel with a wildly business-friendly environment if it produced prosperity.

But it did not.

It instead produced asset-stripping, fraud, scams of various dimension, a huge housing and credit bubble and threatened the nation, if Hank Paulson is to be believed, not just with economic depression but literal martial law.

If I in concert with others took actions that threatened the destruction of our government by force, and thus gave rise to an argument that martial law would have to be declared, I would (justifiably) be held on charges of seditious conspiracy.  Can someone explain why firms and individuals, acting between themselves in a fashion that leads them to effectively demand a $700 billion bailout lest the tanks roll, fails to meet this definition under the law?

We keep talking about how the government "saved us" from the depths of Hell - literally - with their "extraordinary measures."  Whether it is Congress, The Administration or The Fed, all are credited with keeping the nation (and perhaps the world) from going over the cliff and straight down into the land of brimstone and sulfur.

But are we actually standing on terra firma, or are we playing Wile-E-Coyote dangling in the air?

Let's look at the facts.

• We claim to have "decent" growth now, running about 3.5% (expected) for the full year of 2010.  But that growth is false; Government is borrowing and spending an additional 9% of GDP beyond what it was before the disaster began, it has been doing so now for two years, and there is no inclination that it is going to slow down or stop.  Indeed, there is every reason to believe that the government can't stop, lest the economy instantly implode, as final, true demand simply has not recovered.  It is, in fact, at depression levels - right now.
  
  
• We supposedly prevented a monstrous cross-default credit default swap explosion.  Or did we?  Did we get rid of the credit-default swaps?  Have we proved that everyone currently "short" them has the ability to pay?  Can I reasonably expect that if there is a default in some bond issue that the counterparty is good for it?  Nope - none of the above.  In fact we have every reason to believe that the threat of a cross-default explosion is larger today than it was in September of 2008.
  
  
• The centroid of this mess is claimed to be housing.  Has housing recovered?  No - yesterday's existing home sales figures strongly suggest that the recent "tax incentives" have in fact worn off - they no longer do anything to spur sales!  The scary possibility, of course, is that they are effective, which means when they expire later this year sales will utterly collapse.  We'll find out which is the case here in a few months.
  
  
• Do we have reasonable transparency in bank balance sheets?  Nope.  Not only do we know that Wells and Citi have over $1 trillion in off-balance sheet exposures each (and we have absolutely no clue how much either of those exposures is worth "at the market" today) we also know that the Federal Home Loan Bank of Seattle, the poster child for mark-to-model which claimed only about $10 billion of expected "loss" on what was a mark-to-market loss of $300 billion is now suing for the entire $300 billion.  In other words, the "model" folks were wrong, and those such as myself who insisted that we had to mark to the market and that market prices reflected actual loss levels were (and are) right.  If that "ten times worse than we claimed" projection for embedded losses is anything close to typical the entire banking system is still insolvent.
  
  
• The states are going broke.  Fast.  California is "firing" 15,000 San Francisco employees, then "re-hiring" some of them but holding down hours.  The Illinois and California university systems are imploding, and major protests are occurring (apparently the students involved failed their middle-school math classes.)  The states have made pension promises they are bound by state constitution (in many cases) to keep, but which mathematically can't be kept, and some of them result in payouts of $200,000 or more annually with retirement permitted at 55 (for the math-impaired this results in a likely pension of more than $6 million smackers!)  New York and New Jersey have critical state funding shortages.  Sales tax receipts remain in the toilet, despite the repeated claims of "a turnaround in economic activity."  Public-sector unions, including police, firefighters and teachers have responded to calls for them to take the same sort of 20% or more cuts in pay and benefits that have been widespread throughout the private sector with threats.  We have allowed public sector employees to define for themselves growth in their costs that exceed growth rates in the productive economy.  Mathematically, this cannot continue.
  
  
• Treasury yesterday claimed "There is no government guarantee for big financial firms."  This is a lie.  By definition any bank that can come to the government and say "help us or the economy will suffer critical damage" has such a guarantee, whether Treasury admits it or not.

Now consider this: There is neither the capital or the political will to go through another bailout cycle.  Not now, not any time in the foreseeable future.

IF a sovereign nation starts a chain-reaction default (e.g. Greece, Spain, etc), IF there is a massive fraud discovered at one of the big banks, IF there is a speculative attack on a currency, any of a thousand IFs.

We won't be able to stop it.

Not The Fed, not The Government, not anyone.

We have been given the ability - a gift really - to pull the fuse on this mess.  To lock up the nuclear financial weapons away from the kids.  To let the adults in the room.

So far, we've not only done none of the above, we've gone further to concentrate and increase systemic risk.

We cannot withstand another attack.

Everyone wants to talk about health care.  Sorry folks, that's a misdirection.  A scam.  It is simply a way to try to get more tax revenue - right now - to stave off a possible federal funding crisis.  Treasury knows it, Obama knows it, and Congress knows it.

They won't tell you, but they know the truth.

We cannot withstand another attack.

We must break up the large financial institutions that caused this mess.  What sort of act is more anti-competitive than going to the government and threatening it with economic armageddon if it does not hand you billions of taxpayer dollars?  Whether it's a loan or a handout makes no difference - the very issuance of such a threat is a declaration of trust behavior banned under The Sherman Act, among others.  We need no new laws to deal with this situation - we simply can and must enforce the existing ones.

We cannot withstand another attack.

Stiglitz, in a remarkable display of truth, said today that The Federal Reserve System is corrupt.  He's right, of course.  What other explanation is there for an institution that literally sat back and watched more than $10 trillion in fraudulent credit creation take place - all so a bunch of banksters could make billion-dollar bonuses?  This must change - here and now. 

We cannot withstand another attack.

But we're gonna suffer one, and soon, if we don't pull the fuse.

The Credit Default Swap monster has to be caged.  I know I sound like a broken record, but it has to happen.  Now.  Today.  I don't give a damn if the banks like it or not.  I don't care if bankrupts all of them.  It has to happen now.

The off-balance-sheet crap has to be exposed and valued, along with everything else, at the market.  Yes, I know it will cause major problems for the banks.  I don't care.  It has to be happen now.

We have to get control of federal spending.  We cannot spend $1.3 trillion more a year than the government takes in via taxes.  We just can't.  We're getting away with it right now because everyone is scared that Greece is about to blow the Euro Zone to pieces.  But once that either happens or the fear recedes, the speculators will point their weapons of financial destruction here.  We have either fixed the problem before then, or we're next. 

And finally, we must know what The Fed is holding, what they've bought, what they've monetized, who got paid off and what sort of trash is hidden in the black hole known as their balance sheet.  This means full audits - now and evermore in the future.  No exceptions.

If you remember back when Paulson's "bazooka" was first discussed I said that the market calls all bets. 

It did. 

Within days.

We're there again folks, about to witness the market calling our leaders' bet again, and we are enjoying a respite only because there are other hookers in the room of nations with a worse case of crotch rot than we have.

But that's not a sign of strength - it is a sign of danger, for our own particular financial STD has not been cured.

We're running out of time to take the penicillin.

Krugman sharts once again with an amazing bit of partisan hackery:

But while the blockade is over, its lessons remain. Some of those lessons involve the spectacular dysfunctionality of the Senate. What I want to focus on right now, however, is the incredible gap that has opened up between the parties. Today, Democrats and Republicans live in different universes, both intellectually and morally.

Ah, here we go - an appeal to morals.  Why did I know - right in the second paragraph (and why did you bury the leade, Paul?)

Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.

But this makes an assumption Paul, and one that you and the rest of the Democrats have refused to face (to their credit, the Republicans haven't faced it either!): This sort of "bridge" or "pump priming" only works if there is underlying final demand that can come back.

But here's the problem - the so-called "stimluls" didn't do much in the US.  Why not?  It stimulated China!

The Senators have singled out a particular wind project in Texas for criticism. China's Shenyang Power Group, the U.S. Renewable Energy Group and a Texas company called Cielo Wind Power are involved in a joint venture to build a 648MW wind farm. The Senators says the project is on the verge of receiving $450 million in grants, despite the fact it uses Chinese-made turbines, and that the lion's share of jobs it creates are in China.

Yeah.

In point of fact, that 1603 "green" recovery act stuff has, thus far, diverted eight out of ten dollars outside of the United States.

This belies the real issue that underlies all of this.

Take Chicago.  It used to be home to the Zenith picture tube plant in Melrose Park which, as you might surmise, made television picture tubes.  It had been there for a long time.

But in 1998 it was announced that the plant would close, as the company was losing $300 million annually trying to compete with offshored production by people working in near-literal slave conditions with no environmental laws to add cost to the product.  Thousands of good-paying local jobs disappeared.

I used to drive by that plant on a regular basis, the proud sign of American manufacturing throwing its illumination on I-294.  My parents owned a Zenith television when I was growing up.

That's a microcosm of what's happened.  We've offshored our production, by and large, to places like China.  What has replaced these jobs are positions in finance, which is a parasitic enterprise - that is, it obtains the money that is "earned" not from producing things, but from siphoning off cash flow from everything it touches.

Such a shift is inherently destabilizing.  We made up for it by running our credit cards to the moon, both figuratively and literally.  We blew a bubble first in Internet stocks and then in housing, which allowed people to then "access" (the true word, "extract", is so ugly isn't it) the faux value that we claimed it.  We, on balance, did so and spent it.

The error in Krugman's analysis is that he believes that all this "pump priming" will do the job and the economy will recover, allowing us to pay back what he avers is an effective loan.

My question to Paul and all those like him: How?

We can't support a financial system that consumes 1/4 of every dollar that goes into the economy, siphoning it off.  The margins are not there to permit that.  They never were, but refusing to attend to this, as Paul and his cohorts have done (and to be fair, the Republicans are no better in this regard!) is how we wound up with a debt bubble.

So what's the solution?

As much as you don't want to hear it there are only two answers:

1. Drive manufacturing back to the United States.  There is only one way you can compete with someone making $2/day unless you're willing to make $2/day, and that is government interference.  We have a constitutional mandate for such a thing - they're called tariffs.  Yes, I know all about Smoot-Hawley.  Guess what - trade imbalances are at their core behind a lot of depressions, and the founders were smart enough to leave us with the hammers to pound down those nails.
   
   
2. Accept a much lower standard of living for huge swaths of the American Population.  Essentially, if you're not a rocket scientists (or his equivalent) you're going to pound nails for minimum wage - maybe.

Both of these outcomes require that the financial system's "grift" shrink dramatically.  It cannot be otherwise.  But #2 means the end of the social program "backstop" that we currently have, because it cannot be sustained.

We cannot spend $1.3 trillion more than we take in via taxes for these "support programs" indefinitely.  Krugman thinks we can, but he's wrong.  Iceland thought this, Greece thought this, Argentina thought this.

You know what happened in the former and latter, right?  The middle nation in that list might meet the same fate.  Their so-called "austerity measures", from my back-of-the-envelope calculation, won't work.  It's nowhere near enough!

Now let's look at what did happen to Greece.  Their 10 year bond offering went off at 6% - double what Germany is paying to borrow for the same amount of time.

What happens if our bond carrying costs double?

We carry, today, $8,026 billion (that's $8.026 trillion) in publicly held debt in the United States.  Ignoring the $4.482 trillion in "intergovernmental holdings" (that's fancy speak for Social Security and Medicare "current issue" promises that we won't keep, as those "promises" back 20x that in claimed benefits for the next 75 years!) if we were financing the debt at our current 10 year rate we'd pay $289 billion a year.

Of course we don't do that - some of it is longer duration, some shorter.  Last year it cost us about $180 billion in total, mostly because of the collapse in interest rates.

Now let's assume that we have a "Greecefire" here in the US and our Ten Year rate goes to 7%.  Interest costs would go from $289 billion to $562 billion.

But that assumes we don't add to the debt, and we are.  In fact, we added $1.4 trillion last year and will add $1.7 trillion this year.  If we keep "pump priming" through the end of the decade (as the CBO says we will given their projections - and they are projecting GDP growth in the 4% range for the entire period!) we will go from the current $8.02 trillion to approximately $14 trillion in public debt by the end of the decade.

That figure, at 7%, would produce an interest cost of close to $1 trillion a year - or about half of all federal tax receipts.

So which is it Paul?

At some point we have to face the facts: We can't continue to spend more, as a nation or as individuals, than we make.  We cannot make promises that are impossible to fund, instead putting it off with more borrowing.  We must face the imbalances we have fostered in our economic system, along with the trade imbalances that we not only have fostered over the last 20 years but are feeding with so-called "stimulus" that instantaneously flows overseas instead of helping Americans.

There's plenty of blame to go around, but what is not helpful, and solves nothing, is ranting about how Jim Bunning's demand that these extensions in unemployment payments be offset with federal spending cuts somewhere else, or that they be taken from already-budgeted funds such as the TARP.

That, Mr. Krugman, was his objection.  Not that the benefits were being extended, but rather that they were not paid for.

The liberals are always quick to pull out the national credit card.  They've been doing so for the last 30 years.  But this sort of spendthrift approach to everything that ails us has left us with a severely-imbalanced economic structure that no longer produces enough to carry its own weight.

The (credit) drunk needs a stint in detox Mr. Krugman, not another bottle of whiskey.