Porter Stansberry: The one idea that destroyed America
Tuesday, March 09, 2010Topics: 
Porter Stansberry | Government Stupidity | Boondoggle
Tuesday, 9 March 2010
By Porter Stansberry in the S&A Digest:
I have a major announcement to share with you. We are launching a very big new business – a bank. I'd always thought publishing was a great business... but I've found something much, much better – banking!
Banking will allow me to leverage my capital 15 to 20 times. It offers me guaranteed profit margins, thanks to the Fed's manipulation of interest rates. And best of all, it's completely backed by the government. No matter how many dumb loans I make to my cronies and political backers, I'll never lose a cent. It's truly the greatest business in the world. I've been working hard to think of an appropriate name for a business like this... I think The Socialist National Bank has quite a ring to it. What do you think?
I'm only kidding, of course. But a lot of entrepreneurs had the same idea over the last couple decades. And you can hardly blame them. Banking lies at the heart of our capitalist system. Bankers literally decide who gets capital and who doesn't. And yet banking relies completely on a socialist promise: The state insures all bank deposits. At the end of the day, it's really the taxpayers who own all of the banks.
Assuming you know a little bit about the history of state-run banks, you won't be surprised to learn taking all of the risks out of banking results in lots of bad loans. We've already seen how the government's guarantee of residential mortgages via Fannie and Freddie resulted in trillions of losses.
Now all of the same kinds of problems are showing up in commercial mortgage loans. These loans are the mainstay assets of regional and local banks. Most of these loans have seven-year durations. And most of these loans are interest-only. So over the next three to four years, all of the bad loans made during the real estate mania from 2004-2007 are going to come due. It's going to be a complete disaster.
Already 7.1% of all commercial real estate loans are more than 90 days overdue. That's double the default rate of a year ago. Construction and development loans are performing even worse, with a default rate of 16%. The FDIC says more than 700 regional and local banks are in immediate danger of failing. And there are a lot more to come.
At some point between now and 2012, I expect between 500 and 1,000 regional and local banks to fail. Residential loan losses have been enormous – but were borne mostly by hedge funds, large investment banks, and the two enormous agencies of the U.S. government, Fannie and Freddie, which guarantee nearly half of all residential mortgages. Commercial real estate loans, on the other hand, carry no such guarantees. They are the principal assets of regional and local banks.
It's pretty amazing the United States, which considers itself the leading capitalist economy in the world and the land of the free, has at its core a completely statist monetary and banking system. In fact, most of the real risks of our entrepreneurial system are borne by the taxpayers, not the capitalists. Think about it. Assuming you borrow money to launch a business, who is really taking the risk? The bank. And who insures the bank's depositors against the risk of loss? The FDIC. And who insures the FDIC? You and me, my friend. The taxpayers.
I've enjoyed watching so-called conservative television pundits arguing about whether or not they dare to call OBAMA! a socialist, as if using the word will tarnish their credibility. Meanwhile, as any serious economist could tell you, the United States has been a socialist country since the administration of Franklin Delano Roosevelt. Of course, we have a different kind of socialism than Europe.
In Europe's version of socialism, the government owns the means of production outright. In America, we don't like the appearance of the government owning everything, so we don't actually transfer title. We just shift all of the risks of ownership to the government. In this way, private interests can claim all the profits of enterprise, while all of the risk of loss can be shifted to the taxpayers. We ought to call our version Socialossism – because we're only socializing the losses, not the profits.
Alas, taxpayers rarely approve enormous increases to the size of the government. So to sell Socialossism to the public, the promoters claimed these policies were merely insurance schemes, which would never cost the public a dime. You've heard them do it many times. They say the government is here to help. They say the problem with socialism is government power is being used in the wrong way. They promise to deliver all of the benefits of big government with none of the costs.
There's only one problem: None of their insurance schemes are ever solvent, or even close to solvent. Like Social Security. Or Medicare. Or the FDIC. The only difference between Socialossism and Bernie Madoff is you had to be a rich New Yorker or Palm Beach socialite to do business with Madoff.
What will happen, we wonder, when the people discover what's really happened to our country over the last 30 years? We don't know, of course. We hope the promises of Socialossism are revealed for what they really are – a pile of lies that's led to an economy based on debt that will never be repaid. Haven't you wondered why there's a bank (FDIC) on every corner and a pharmacy (Medicare) on every other? We've built an entire economy around a set of promises (phony insurance schemes) that rely on the creditworthiness of the taxpayer. And he's broke. How ironic is it that the people we call "communists" (China) have been financing our love affair with socialism for the last 30 years?
What does this mean for you and me... for our investments? I have two big, obvious recommendations. One, don't be a creditor to a bankrupt nation that's promised to support an enormous array of insolvent insurance schemes. (Don't own U.S. government debt.) And two, don't hold your savings in the paper money of a bankrupt government that's promised to take care of its entire population through a series of fraudulent insurance schemes.
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