Wednesday, October 1, 2008

Pulling Rabbits Out Of Hats

In the realm of magic, as Penn Jillette has pointed out, the key elements in getting an audience to believe are willingness to be tricked, and misdirection. When a rabbit is pulled out of a hat, or a baton changed into a dove, no one really believes that such physical transformations happen. Yet, because of the magician's skill and deftness, even when we watch the illusion up-close and step by step, we often have no idea how he fools us.

Tonight, the whoring magicians in the U.S. Senate will very likely overrule the wishes of their nominal constituents, the American taxpayers, and pass a bill handing over the [initial] amount of $700,000,000,000.00 to the Secretary of the Treasury, Hank Paulson. Paulson will, according to the plan, use that money to "free business credit" and "absorb toxic debts" of the major investment banks remaining, and of other institutions. We have been told ad nauseum by the government-scripted, controlled media that it must be passed "for Wall Street or terrible things will happen on Main Street". Seven-hundred-thousand-million dollars, mortgaged against the future earnings of working Americans to pay off bad investments.

Several years ago, I made a choice to put money into a property when I should have walked away. A series of disastrous happenings landed me in front of a municipal court, facing environmental violations which had been accruing for seven months at the rate of $310 per DAY, seven days a week. These fines emanated from an agreement to abate a problem which the contractor reneged on. Three days from the court date, I found a buyer who could handle the abatement and unloaded the property to him. The court agreed to drop the accrued fines which totaled almost $70,000. However, I still lost almost $20,000 over that time. Yet, no one offered to pay off my debt, and no Senator pleaded my case. My bad business decision was mine alone, as it should be.

In the 1980's, a group of banking-type institutions, the Savings & Loans, which had been a backbone of American community finance for almost 100 years, began to get into trouble. As deregulation proceeded, the S&L's, in order to compete with banks, began to extend mortgages to riskier buyers. In the mid-80's, the mortgage market softened, and a chain reaction of failure spread. The American taxpayers were socked with a bill for over $125-billion, and it did not stop the crash. The FSLIC, which was the FDIC for Savings & Loans, was destroyed. In the end, the industry was swallowed by the banks.

During Bill Clinton's presidency, an effort began to get "every person into an affordable house", a ridiculously naive idea by the ridiculously naive Left. The problem was, low-income and no-income people weren't in houses for a good reason: they couldn't handle debt, couldn't hold jobs that paid decent wages, and were almost entirely financially unreliable. There was, in the minds of the social engineers, a solution for this: the Subprime Mortgage, which began to be used in re-urbanization projects in 1994 and gained more traction over time.

Subprime mortgages are those with initial rates below the prime rate banks themselves pay for borrowed money, financed for subprime borrowers, those who would not normally qualify for a home mortgage. The hook is, the buyer can now afford a home, or a home which he couldn't afford under normal circumstances (either in terms of size or neighborhood), and was seen as a way to break minority families into predominantly-White neighborhoods. And for 1 to 3 years, normally, the rate of payment stays nice and low.

There were two assumptions built into these loans. The first was, the buyer would most likely be doing better financially after the pre-adjustment period, and so would be better able to afford a higher payment. The second, which was the backbone of the plan, was that the price of housing, and therefore the equity in one's house, would continue to climb over time. If that happened, a new fixed-rate mortgage could often take over the adjustable-rate note and everything would be normalized.

There was a push by the Clinton Administration to hand out these loans, but the banks were understandably reluctant to do so, having the S&L debacle fresh in their greedy minds. But the government gave them assurances and authorized private mortgage insurance carriers (such as AIG) to handle coverage for the banks, and other government-backed entities (FNMA/"Fannie Mae" and FHLMC/"Freddie Mac") to carry loans directly. The Federal Reserve also agreed to push out funds if banks needed short- to mid-term carrying capital. However, things didn't heat up until 1999, when Clinton made the housing issue a priority and began to pressure banks, taking a page from the Community Reinvestment Act of 1977 and its favoritism toward low-income minority borrowers.

The banks worked hard to lend as much money as possible under the subprime scheme, and began to open more capital for the program. As this happened, demand for homes began to rise. Housing, which had previously been seen as a fixed asset, began to be viewed as a commodity. Housing began to be played like stocks, and the price began to rise, geometrically in many markets. People also began to borrow against their newfound equity, using their homes as ATMs, which in turn devalued them overall. This added to the boom of the late 90's and into the 21st Century, but took down ownership interest which had built up over years.

By the time of 9/11, the market was so pricey in many locations that buyers were beginning to decrease. However, people continued to believe in the growth factor, so the market remained strong. By 2002-03, most observant economists saw the coming end of the bubble. The market was largely tapped out in terms of growth, and the traditional buyers were thinning. So again, the push was on to get "asses in the seats", to get existing homes sold, and to keep the new construction market pumped. The only way to do that was a massive push to get those otherwise-unqualified buyers in, in record numbers. The insinuation to get these loans made was that, because the vast majority of subprime borrowers were Black and "hispanic", anyone who opposed the idea was "racist".

Meanwhile, the same banks also knew that these loans, which were dependent on escalating housing prices, were doomed to fail. For instance, Goldman Sachs, one of the largest investment banks and former domain of Treasury Secretary Paulson, was playing both sides of the coin. They were modestly selling subprimes while at the same time buying puts (rights to sell stock) in their competitors operations, including Lehman Brothers. They knew enough to know that they needed to hedge their bets and save their tails when the bottom fell out. And they knew it would fall out.

The entire subprime framework was a Ponzi scheme from the beginning, dependent upon impossibly constant gains in housing prices to sustain itself. It was driven to failure with the addition of millions of home buyers who should (and would) never have been given a second look for the money without the Federal guarantees in place.

As the dominos began to fall, as the banks which had (as with the S&L's) extended themselves for the quick dollar began to head for the toilet, so too did the pressure begin to build on the companies which insured those assets, including AIG. The insurors turned to the Federal government and demanded, as per their agreement, that Washington bail them out. In AIG's case, the President, who is disallowed from doing such things by the Constitution which he so disdains, bought ownership rights in the name of the American taxpayers against future gains. The price tag: $85-billion. The Bush people also gave incentives to companies that bailed out some of the failing institutions, such as Wachovia.

The problem was, and is, that there are many other "bets" on the performance of the subprime lending scam, called "derivatives". This is an unregulated market, run by small firms which spread the paper out far and wide. A total of perhaps $55-TRILLION is out there, relying on the continuation of the game. The people who've played these bets are often the same ones who run retirement and pension funds and other "straight" investment operations. The people who run the government know this and are beholden to these money people. The entire U.S. budget for 2008 is about $2.9-Trillion for comparison, so the estimated mortgage-related derivatives equal about 19 times the annual expenditures of the entire country. And the sum of all derivatives markets may involve an inconceivable $1.4-QUADRILLION.

Unfortunately, despite the threats of Wall Street to throw a hissy-fit and crash the market, this bailout is only a temporary respite even if passed in its entirety. To prove this, you may note that the FED just released $630-Billion into the banking economy to keep things afloat (on top of $180-billion last week). That money further erodes the value of the American dollar. China is getting anxious, so is Japan, and both are beginning to attach strings to the billions we borrow from them, most of which is paying for the Iraq conflict our kids are dying in for Israel's benefit, at $15-billion per month.

The foundation of the bailout plan rests on rotten timbers. The housing market bubble, like tech stocks, has passed and won't be back anytime soon. Mortgages in amounts far greater than the market value of the houses they cover are piling up. Borrowers are walking off, new buyers aren't there. We are throwing $700-BILLION into a rat-hole. It will be followed by more demands for more payments we can't make. The stock market will have, perhaps, one last hurrah to allow the swindlers to retrieve what's left of their money. Washington will probably open up bulk gold sales to allow the same bastards to convert their funds and head out of the country.

We are standing on the precipice of the worst economic storm to ever hit the United States, one which will dwarf the Great Depression, one which may completely tear the country apart. The Army has decided to station an Army division within the U.S. The Federal Emergency Management Agency (FEMA) is busy constucting detention centers across the country. Mexico's leadership has stated that they will defend their borders if we try to repatriate illegals. Our European allies, what's left of them, have no sympathy for us. What's coming is almost unimaginably bad. And ALL of the candidates for the White House are in lockstep for the destruction of our country.

The time for preparation is almost over. As a good Christian friend of mine used to say, "The time's coming to get a patch, get a gun, and get right with God". I couldn't agree more. Get together with your friends and family, get as far away from the cities as you can, get supplied, and may the Holy Ones look kindly upon you.

4 comments:

goddess of... said...

Thank you. Thank you for putting it all in perspective. Thank you for caring. Thank you for being there. Thank you for being you. If this isn't Ragnarok ~ I don't know what is! Packing for New Zealand?

Disldo said...

Unanswered political questions abound. Will voters in battleground districts punish shaky incumbents for voting for the deeply unpopular plan? Are the pay-go proponents, the Blue Dog Democrats, in for payback if they approve new tax cuts without commensurate spending curbs? And what will happen to the liberals and members of the Congressional Black Caucus who oppose the plan if the economy heads into a more severe downturn? Will fiscal conservatives remain divided on the bailout?
The White House and congressional leaders already have made up their minds. Confronted with the defeat of an earlier measure in the House this week and increasingly urgent warnings of economic hardship, they've begun rounding up votes the old-fashioned way.
They're buying them.
A revised bailout bill includes tens of billions of dollars in tax breaks for the middle class, for homeowners who don't itemize their deductions, and for property owners in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Add on the $3 billion funding dollop for rural school programs over the next five years. And another $8 billion over the same period in disaster aid, much of it for Midwestern states. And toss in unrelated legislation, far-reaching in its own right, requiring insurance plans to provide better benefits for mental health.
None of these has any direct bearing on the problem afflicting Wall Street and the entire economy. Yet in the currency of Congress, each is rapidly becoming part of the solution.
On the dominant issue of the presidential campaign, the two major party candidates are in agreement. Sens. Barack Obama, D-Ill., and John McCain, R-Ariz., both flew back to the Capitol to vote for the measure.
Whatever side individual lawmakers come down on, there is little debate about the significance of the issue.

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