 | | The Daily Reckoning | Tuesday, November 2, 2010 |
- Some friendly advice for voters on Election Day...
- 4 possible explanations for the hold-up in bank failures...
- Plus, Bill Bonner on the Fed's "enchanted" easing and a movie review...
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|  | | | Vote With Your Feet | | How to avoid being complicit in government criminality | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
We begin this Election Day issue of The Daily Reckoning with a reminder to all those trigger-happy voters out there: Remember, a vote of no confidence is still a vote and, for true freedom lovers, perhaps the most important one of all.
To this editor's mind, the only way to avoid being complicit in the crimes the victorious party will inevitably commit is to wash your hands of the whole affair today. Vote with your feet, in other words...by walking away from the ballot box and tending instead, as Voltaire might say, to your own garden. That way the next time the Republocrats decide to dip into your kiddies' savings account to prop up this or that corrupt financial institution or to start a greasy war to "win hearts and minds" in some far off land, at least you'll know they didn't do it with your implicit backing.
As Doug Casey pointed out recently, "I think it's like they said during the war with Viet Nam: suppose they had a war, and nobody came? I also like to say: suppose they levied a tax, and nobody paid? And at this time of year: suppose they gave an election, and nobody voted?
"The only way to truly de-legitimize unethical rulers," the International Man went on to say, "is by not voting. When tin-plated dictators around the world have their rigged elections, and people stay home in droves, even today's 'we love governments of all sorts' international community won't recognize the results of the election."
Those looking to affect real change in the system, therefore, might wish to start by refusing to support the existing one. Just a thought...
But by wading into politics we've digressed from our non-stated mandate; strayed from our usual beat.
Wait! No we haven't!
More and more these days do the spheres of politics and economics overlap. Both can and do seriously impact your money. And that's what these pages are about: your money and, at least of equal importance, your money as a means to achieve your personal freedom.
Welfare/warfare states aren't cheap to run, Fellow Reckoner. There are bombs to make, bases to build and banks to bail out. Then think of all the people the government pays not to work...the 42 million mouths- worth of food stamps...the money to bribe people to trade in their old cars for new ones...and, of course, the cash to hand directly to the auto companies themselves!
This is by no means an exhaustive list, of course. A "good" politician is never short of something to sell. A new scheme, scam or the like. Let this racket run long enough and pretty soon plasma television ownership becomes a "basic human right" and the overreaching arm of the state takes to telling you what you can and can't watch on the thing.
Society is full of busybody do-gooders and naval-gazing morons who are happily eating up a larger and larger share of the nation's once- productive capital. And, as this group grows and grows, they eventually shift from a disheartened minority down on their luck to taking full control of Congress. That's when the taxpayer checkbooks really come out.
"Just look at what has happened in the last three years," observed Bill Bonner recently, "total US government spending has gone from $2.5 trillion to $3.4 trillion. Take out this extra government spending and you see that the real economy is smaller today than it was in 2004. All the increases in GDP since then have been increases in government spending - most of which are completely unproductive. The longer this trend continues, the less able the economy is to 'grow its way out' of its debt hole...and the closer it gets to final insolvency."
Initiatives that begin as "state services" invariably end up making us servants to the state. And, in the end, voters only have themselves to blame.
| | | | Exclusive Offer from Mayer's Special Situations - Ends at Midnight on Thursday! |
Did You See The Video About The American Nuke Bomb LOST Under Ancient Ice Fields?
Way back in 1968, an American B-52 crashed in northwest Greenland...
Unfortunately, the nuclear bombs on board got forever swallowed by an ancient ice sheet...
But there's an unknown penny stock set to rise 2,000% from this sorry situation.
Sound unbelievable? Watch this presentation for proof...
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| | The Daily Reckoning Presents | | Bank Failures in Slow Motion, Part II | |  | | Douglas French |
[Speech given at The Economic Recovery: Washington's Big Lie, the Supporters Summit for the Ludwig von Mises Institute, October 8, 2010 (Cont'd from yesterday). Click here to view Part I.]
"'Deposit insurance' is simply a fraudulent racket." - Murray Rothbard
Sheila Bair, the Chairman of the US Federal Deposit Insurance Corporation (FDIC), has said many times that the peak in bank failures would not occur until the latter part of this year. What's the holdup? Why aren't more banks being closed more quickly?
1. Maybe there's nobody left at the FDIC who knows how to make a deal.
After all, the FDIC's main dealmaker, Joe Jiampietro, left suddenly in August. Jiampietro came to work at the deposit insurer after working at JP Morgan Chase and UBS. He and his partner Jim Wigand sold more than $508 billion in assets including WaMu and Corus. The New York Times reported that Wigand and Jiampietro did good work for the government, "by acting like bankers, not bureaucrats."
Wigand worked at the FDIC for a couple decades. The fresh blood was Jiampietro. He was the eyes and ears in the markets and advised on the biggest and most complex deals, meeting with bank execs, hedge-fund managers and other big investors to get their feedback on deal terms and other agency policies.
These two started hatching deals with companies like Rialto (a division of homebuilder Lennar). Rialto bought a 40 percent share of $1.2 billion in loans from failed banks for 40 cents on the dollar, with the FDIC carrying a loan for $1 billion at zero interest for seven years.
They also came up with the FDIC's Securitization Pilot Program. Barron's reported that the FDIC has $37 billion of bad bank assets to sell, but that the loans would only fetch 10 to 50 cents on the dollar. But US-guaranteed FDIC senior certificates enable "the FDIC to push much of the losses off its books, thanks to the US guarantee of principal and interest." The notes are backed by loans (remember the ones worth 10 to 50 cents on the dollar) but ultimately the losses could be absorbed by Uncle Sam.
Ex-Federal Savings and Loan Insurance Corporation regulator William Black says the FDIC is selling the equivalent of Treasury bonds without Congressional approval while the deposit insurer should instead be selling off its bad assets. "[This program] hides the economic substance of what's really happening - an unlimited taxpayer bailout," Black contends. The FDIC disagrees.
2. Maybe it's politics.
Bill Bartmann, publisher of the Bartmann Bank Monitor Report, says the FDIC isn't closing banks faster because of politics.
"The FDIC is waiting until November to drop the other shoe," Bartmann claims. He says 500 banks will be closed in 2011 after the mid-term elections have been completed.
Are bank failures political? Shorebank in Chicago was kept alive for months: "Senior Obama adviser Valerie Jarrett served on a Chicago civic organization with a director of the bank, and President Obama himself has singled out the bank for praise in lending to low-income communities." But the politically connected bank was finally seized on August 20th, when the FDIC finally found a single buyer for the failed bank - Urban Partnership, which includes "American Express Co., Bank of America Corp., Citigroup, Ford Foundation, GE Capital's equity investments arm, JPMorgan Chase & Co., Key Community Development Corp., Morgan Stanley, Northern Trust Corp., PNC Investment Corp., Goldman Sachs Group Inc., and Wells Fargo & Co. Former First Chicago executives who joined ShoreBank in recent months will run the bank."
3. Maybe the number of bidders for bad banks has dried up.
The juicy deals Jiampietro and Wigand were making last year are over, The Wall Street Journalreports. According to Keefe Bruyette & Woods (KBW), acquiring banks were booking 4.5 percent capital gains on deals done in 2009. That is now down to 2.5 percent.
Investors are halting efforts to bid on the failed banks, saying the economics no longer make sense. A group led by former FDIC Chairman William Isaac recently ended a push to raise $1 billion for bidding on failed banks in the US Southeast, in part because of lower returns on potential deals. Likewise, a group of former Wachovia Corp. executives hoping to launch Charlotte, N.C.-based Union National Bank, recently pulled its federal charter application because bank-failure bargains are becoming tougher to find.
"In the current environment our view is that FDIC-assisted transactions are not really attractive entry points," the Union National spokesman added.
Meanwhile, many of the early investors who were able to grab bargain deals in the beginning of the crisis say they are done for now. Sunwest Bank in Tustin, Calif., for example, snapped up assets from three failed institutions with discounts as high as 44%. The deals doubled the bank's assets to $658 million and increased its head count from 68 to 140. Chief Executive, Glenn Gray, said he doesn't expect to be a bidder again anytime soon, acknowledging how the pricing has changed.
4. Or maybe the FDIC just doesn't have the money to close banks.
The FDIC Deposit Insurance Fund has already spent over $19 billion this year, which is well above the $15.33 billion prepaid assessments that it collected from banks for all of 2010.
The situation is probably worse than the FDIC is letting on, according to ex-regulator William Black, author of The Best Way to Rob a Bank Is to Own One. "The FDIC is sitting there knowing that it has both the residential disaster and the commercial real estate disaster [and] knowing it doesn't have remotely enough funds to pay for it."
Black is not surprised there aren't more failures, but he says that we should be upset there are not more bank failures. The industry has used its political muscle to get Congress to extort the financial accounting standards board to gimmick the accounting rules so that banks do not have to recognize their losses.
Recent FASB rule changes allow banks to value assets at inflated bubble values that have nothing to do with their real value. As a result, reported bank capital is greatly inflated. According to Black, even insolvent banks are reporting lots of capital. Furthermore, he contends that the FDIC is "intentionally keeping foreclosures down because it knows it does not have enough money to pay off depositors who are insured by the FDIC."
Maybe that's why suddenly the expected losses on some of the bank closures in the third quarter were considerably below historical norms. The FDIC estimated the expected losses as a percentage of assets for three banks that were seized on August 20th - Sonoma Valley bank, Los Padres Bank and Butte Community Bank - to be 3 percent, 1 percent and 3.5 percent respectively - a fraction of the average expected percentage loss for 2009 closures, which was 22 percent, and for 2010 closures, which was 23 percent.
Black believes that delaying the seizure and liquidation of insolvent banks will make ultimate losses grow. It's a "Japanese-type strategy of hiding the losses," which will result in a lost decade or two.
The FDIC is required to maintain a Deposit Insurance Fund (DIF) of 1.25 percent of insured deposits. As of June 30 of this year, the DIF held negative $15.2 billion, standing behind $5.4 trillion in insured deposits. That's negative 0.28 percent. In its second-quarter banking profile, the FDIC noted the 10 basis-point improvement in the DIF from the first quarter, when the DIF was at negative 0.38 percent.
However ValuEngine's Richard Suttmeier calculates that the DIF is currently $33.66 billion in the hole or negative 0.62 percent
But don't be afraid, Chris Dodd and Barney Frank have taken care of everything. The Dodd-Frank Wall Street Reform and Consumer Protection Act not only made the increase in deposit insurance of $250,000 permanent, but it requires the FDIC "to take steps necessary to attain a 1.35 percent reserve ratio by September 30, 2020."
So, in a decade, the FDIC will have $1.35 standing behind every $100 you have in the bank - promise - you have Chris' and Barney's word on it.
Regards,
Doug French,
for The Daily Reckoning
Joel's Note: Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his master's degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. French teaches in the Mises Academy. This article originally appeared in the Mises Daily.
| | | | Dan Amoss' Strategic Short Report Exposes... |
How you Can BEAT THE BANKS At Their Own Game...
Hidden Gov't Documents Let You Predict Their Moves
Imagine what you could do with this intelligence...
Roger Barnes of Colorado used one of these hidden documents to bank $237,000 in just 6 days... It's all perfectly legal and you can do this too!
Don't fall for banks' phony-baloney earnings reports and goldilocks optimism...
Click here to watch this shocking presentation right now.
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| | | | Bill Bonner | | Private Sector Debt Burden About to Get More Burdensome | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Guess what happened yesterday?
Nothing. The Dow rose 6 points. Gold fell $7.
Investors are holding their breath. Why? Because Ben Bernanke is scheduled to make history on Wednesday. Everyone sits on the edge of his chair and wants to know what kind of history he'll make.
"Some Enchanted Easing," is how The Financial Times describes it.
The FT thinks the latest quarterly growth figures - 2% - are simply too low for the nation to live with.
"US recovery remains sluggish," was their headline. "Case for fresh quantitative easing cemented."
The problem with 2% growth is that it is not enough to lift employment rates. The economy needs to create about 50,000 jobs per month just to keep up with population growth. That's about what you can do at 2% GDP growth.
But when you're at nearly 10% unemployment, you need to do better than that. It's not enough to stay even. Otherwise, you have to live with the drag caused by millions of people without work. These jobless people need to be housed, and fed, and medicated. So you end up with an economy that actually gets poorer.
Yes, that's part of the problem. The way the economy is rigged up, the private sector has to support a big public section...one that gets heavier every day. If growth is sluggish, the whole economy slips, even with positive GDP numbers. Without powerful growth the feds don't collect much in taxes...and run huge deficits. This increases the debt burden on the few people who are carrying all the load - people working in the private sector at non-zombie, wealth-producing activities.
And here's a shocker... The debt level per private sector worker - the people who have to pay the bills - will nearly double between 2007 and 2015. Yes, a new study done by a former IMF economist found that government debt levels are soaring - in the "rich" nations. They are soaring at a particularly fast rate in the USA, which will go from the 11th heaviest debt per private sector employee in 2007 to the third heaviest by 2015.
What's going on? The Baby Boomers are retiring. They're making a big transition from being a source of financing to becoming a source of spending. Instead of paying the bills, in other words, they're becoming the people for whom the bills are paid.
And that will leave the typical private sector worker in 2015 with $68,500 as his share of the government debt. We're not talking fiscal gap here. This is debt...interest bearing debt.
It doesn't include, for example, state level pension liabilities...which now tote to over $5 trillion alone. Nor does it include all the other unfunded liabilities and promises of state, local and federal governments - which, according to Laurence Kotlikoff - come to more than $200 trillion.
Without robust "growth"...those liabilities too are going to come crashing down on the heads of the feds...and everyone else.
Which brings us back to poor Ben Bernanke. His seat must be so hot it scorches his derriere.
"Fed poised for biggest decisions in decades," says another FT headline.
"Given the committee's objectives, there would appear, all else being equal to be a case for further action," Ben Bernanke said himself a few weeks ago.
And so, he's going to go for it. How much? Probably open-ended. How soon? Probably right away. How effective? Whew...you're asking too much, dear reader.
But what the heck, we'll take the bait. How effective will the Fed's new money-printing be?
It will be a total failure. A disaster.
And more thoughts...
A movie review: The Social Network
We don't go to see many movies. Unless they have a lot of nudity or violence, they bore us.
But The Social Network is not a boring movie. We went to see it because our daughter, Maria, has a small role. It is her major motion picture debut. We went to see her. But what we discovered was an unusually engaging film.
The movie tells the story of the founding of Facebook. It is a "social network," designed by students at Harvard to make it easy for people to keep up with each other.
"You mean, it will help us get laid," says one of the characters in the movie...or words to that effect.
Occasionally, we get an email that tells us "so and so invites you to be a friend..." Once, we tried to follow up...we went to Facebook. There, we found a page of questions. We quickly lost interest and gave up. Henceforth, when asked to be a friend, we respond in the negative.
"Dad, you're making a big mistake," Jules, 22, opined. "I know a lot of people who don't even check their email anymore. They communicate exclusively through Facebook. This is a big, big thing. And it's not going away. E-mail could disappear."
Maybe he is right. Maybe, in the future, we will publish The Daily Reckoning only on Facebook. But we hope not. We don't like the concept. We don't like the company. And we don't like its shareholders.
"Now, Dad, you're getting ridiculous. Zuckerberg revolutionized how people communicate. There are half a billion people on Facebook. This is like the invention of the printing press. I guess you don't like Guttenberg either. You're just being silly. That's the point of the movie, by the way.
"Zuckerberg and Parker aren't exactly nice guys. But that's the point. You don't have to be nice to do something great. And doing something great is what is important."
The movie shows how Mark Zuckerberg and Sean Parker squeezed out - cheated, really - Zuckerberg's original partner, Eduardo Saverin. Eduardo seems like a decent fellow. He provided a crucial formula early on. Then, he put up the seed money. But he did not see the potential of Facebook in the megalomaniacal terms of Zuckerberg and Parker. Being "cool" was not enough for him; he wanted it to be profitable too. Instead, he approached it more modestly and more conventionally. (Even today, it is not clear how profitable Facebook is.)
In the early days, Eduardo tried to sell ad space on the system in New York, while the other two were going wild signing up customers and getting venture capital backing in California. Once they got big backing, Zuckerberg and Parker had no further use for Saverin, so they cut him out.
"Eduardo was useless," said Jules, sounding a bit Nietzschean. "He was not adding value. He was a loser. They were right to get rid of him. Eduardo was operating according to the wrong code. An antiquated code. Zuckerberg and Parker knew better. They understood something he didn't."
"No. They didn't really. They were lucky. The project could just as well have failed. Most do. If it had failed, then those two would look like what they really are - a pair of conniving jerks.
"That's really the lesson. Eduardo did the right thing. He was the winner. The Winklevoss brothers, too.
"And if I had the choice of doing business with Eduardo or with Sean Parker, I'd do business with Eduardo. You don't know which projects will succeed or fail. You don't know which ideas will win. But you know you never want to do business with nasty people. Even if you make a lot of money, it's not worth it."
"Are you kidding? At the end of the day, Zuckerberg and Parker were billionaires. Now they can be nice if they want to be. Being nice is not everything."
"No, now they can't be nice. You can't undo nastiness. You can confess. You can repent. You can beg forgiveness and give a $100 million to the New Jersey schools. Maybe you'll be redeemed. Or maybe you'll be a miserable billionaire all your life." Regards,
Bill Bonner
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | Rising Food and Energy Costs to Add to Retirees’ Problems
Why are food and energy becoming more expensive? Because the foreigners are buying food and energy. And there are a lot of them. Foreigners, that is. And why is that bad news? Where does that leave the typical US retiree? Without increases in the CPI the US government doesn’t adjust Social Security payments to the upside. Meanwhile, the real cost of being retired – food, fuel...along with everything else – goes up.
US Debt Crisis: What NOT to Do When Your Country is Broke
Tale of Two Cities | Health Care Costs Go Up, Up and Away
A lot of the “news” lately is about the upcoming election and how the absurd, childish Democrats are expected to be ousted by the voters, replaced by the evil, adult Republicans. As a disclaimer, I, with great relief, now happily identify with the Tea Party, although I seem to be one of the few whose Screaming Tea Party Outrage (STPO) is directed at the politicians because they allowed the Federal Reserve to create so much money...
Funny Money and the Banks that Make Us Laugh
Loss of Purchasing Power: The True Inflation-Target Bullseye | Guess What’s Coming to Dinner: Inflation! (Part Two of Two)
We have suggested in past Amphora Reports that the Fed’s eagerness to expand its current program of POMO Treasury purchases – known in the contemporary financial jargon as QE2 for “quantitative easing round two” – is perhaps best explained by an ulterior motive, that is, to weaken the dollar, thereby facilitating the importation of inflation via higher import prices, including of course commodities but also other imported goods.
One Pension-Fund Manager’s Estimate: Gold to Hit $10,000 an Ounce
Guess What’s Coming to Dinner: Inflation! (Part One of Two) | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
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