THE POTHOLE – HOLY COW!!!

Americans have been on the escalator of life for the last 30 years. The escalator has been going up for the vast majority of that time. Since Ronald Reagan was President, the escalator has been moving upwards with only a few momentary breakdowns. We wanted it all. We believed it was our right to have it all. Americans did whatever it took to have it all. That meant an explosion of household debt promoted by bankers, the Federal Reserve, politicians, the media, and Presidents. We were dancing on the escalator of life for decades but our shoelace got caught in the escalator last year and severed our foot. We are bleeding to death as the escalator heads relentlessly downward. There are millions of Americans who have a guilty feeling about how they have lived their lives.

They had their cake and tried to eat it too. Americans are now repenting by dramatically reducing their spending. The U.S, government is desperately attempting to convince Americans to get back on the escalator. The ridiculousness of these efforts brings to mind a comedy sitcom.

      

[Jenna’s Apartment: Bathroom]

Jerry is standing by the sink, preparing to brush his teeth. Jenna (his latest lady friend) enters.

Jenna leaves the bathroom. Jerry brushes his teeth. He clearly doesn’t like the taste of the baking soda, and leans over the sink to spit. He puts his hand on the counter and knocks Jenna’s toothbrush off the edge. The brush falls into the toilet bowl.

There is a shot from beneath the water in the toilet, looking up. Jerry’s face looking down into the bowl, with an expression of shock and horror.

Jerry looks behind him, to see if Jenna has spotted him. He rolls up the sleeve of his dressing gown, grimaces, and plunges his hand into the toilet. He grabs the brush out, drops it on a shelf beside the mirror and immediately begins
frantically washing his hands. As he completes this task, he raises his head and finds Jenna has returned. She is standing behind him, smiling as she brushes her teeth with the brush he just retrieved from the toilet.

JERRY: Ooh-ooh

In the last nine years U.S. financial institutions became extremely creative with their financial “products”. They were encouraged by Federal Reserve Chairman Alan Greenspan who was sure that any regulation other than self-regulation would be counterproductive. In the bully pulpit was our first Harvard MBA President George Bush, proclaiming the benefits of free market capitalism while not being able to pronounce or spell derivative, let alone understand them.

Watching over the creative bankers was the eagle eyed SEC, which had just received accolades for the Enron and WorldCom scandals. This trusting bunch of morons, hoping to one day get cushy jobs on Wall Street, decided that the investment bankers should be allowed to leverage their assets 30 to 1, rather than the overly restrictive 12 to 1 that had been in place for decades. Their models, created by cock sure MBAs, assured them that nothing could go wrong. The final piece of the puzzle was obtaining a AAA rating for these new “products” from the staid old rating agencies Moody’s and S&P. These two companies had a very predictable boring revenue stream. Their CEOs wanted a little excitement in their lives, and maybe just maybe, big bonuses and stock options. They decided to jump head first into rating the new indecipherable products. They also had their cock sure MBAs creating models which assured them that all was well. Surprisingly, after being paid billions in fees, the rating agencies provided AAA ratings across the board to all of the new investment products.

The Wall Street geniuses peddled MBSs, CDSs, and CDOs, to pension plans, cities, states, foreign banks, foreign villages, and anyone else who wanted to get in on the easy money. With AAA ratings, no one bothered to conduct due diligence and understand what could go wrong. The amount of derivatives outstanding rocketed from $40 trillion in 2000 to $684 trillion in 2008. It has been reported that 80% of all Credit Default Swaps outstanding in 2008 were speculative. There was no hedging going on. Wall Street had become a Las Vegas casino. Credit default swaps totaling $440 billion were written by AIG. These were pure speculative bets and the American taxpayer is still paying off. The bill is up to $160 billion so far. The executives at AIG must have exceeded their loss goals, because the American taxpayer is paying $165 million in retention bonuses to executives of the unit that nearly collapsed the worldwide financial system. Why would anyone want to retain these executives? If these people were asked, “How do you sleep at night?” they would respond, “On a big pile of cash”. 

The economy juiced by low interest rates, mortgage brokers handing out loans like candy, investment banks packaging thousands of worthless subprime loans into AAA products, auto companies putting deadbeats in Cadillac Escalades with no money down, and consumers sucking $3 trillion of equity from their ever increasing home values, appeared unstoppable. Home values doubled in five years. The Dow Jones reached 14,000 in October 2007, Treasury Secretary Hank Paulson was touting the fundamentally sound American economy, and Federal Reserve Chairman Ben Bernanke said there might be a minor blip from slight weakness in the housing market. As the economy was sailing along at seventy miles per hour it hit something in the middle of the road. A Bear Stearns hedge fund blew up. The Wall Street gurus and government bureaucrats assured the public that all was well.

[Jenna’s Apartment]

Jenna is at the sink in her bathroom, using an electric toothbrush which Jerry has bought her. It’s loud.

JERRY: It’s a hundred thousand revolutions a second. It’s the most powerful one they make.

JENNA: It’s like I’m holding a blender.

JERRY: The engine’s made by McDonnell-Douglas.

Congress, the Treasury, the Federal Reserve, and two Presidents have tried to convince Americans that the financial system is no longer infected with toxic germs. They have committed $11.6 trillion of your tax dollars to try and make the system kissable again. It hasn’t worked. They can pour another $11 trillion into the system, and probably will, but the trust in gone. The American public will no longer trust anything they are told by Wall Street, the Treasury, the Federal Reserve or Congress. We’ve been lied to, fleeced of our retirement savings, and now told to foot the bill for the criminals on Wall Street – for the good of the country. Enough is enough. The ruling elite from government and big business urgently want Americans to regain confidence and return to borrowing and spending. They again missed the train. Saving, frugality and living within your means are back. This will destroy entire industries built upon a foundation of overspending and debt. Too bad. Good old fashioned American individuality and love of liberty will revive the country, not TARP, TALF and whatever other programs the government tries to peddle.  

Source: Barry Ritholtz

We know what has happened in the last eighteen months. We still don’t know what toxic assets still remain in the system we don’t know about. The banks’ balance sheets are a black box, they have billions in off-balance sheet “assets”, and the commercial real estate market is just starting to collapse. The ever optimistic cheerleaders on CNBC would rather extrapolate four up days in a row into a new bull market, than examine the facts staring them in the face. No wonder Jon Stewart had such an easy time obliterating Jim Cramer and the whole network. Banks were handing out construction and land development loans between 2004 and 2007 at twice the rate of residential mortgage loans. With Americans losing jobs at a record pace, corporate bankruptcies soaring, and retailers bearing the brunt of consumer deleveraging, commercial real estate loans will begin to go bad late in 2009 and through 2010.

Bad mortgage loans have been the primary driver of the financial crisis so far. The nice little pie chart that follows shows that residential mortgages make up only 26 percent of bank loan portfolios. Commercial, non-residential real estate and construction loans total 40 percent of bank loan portfolios. These loans will provide the next leg down in this death spiral. Anyone who can’t see this coming is just not looking.

The credit card losses are confined to a few major players. Citicorp, Bank of America, American Express and Capital One will face the music when the credit card debt bubble bursts all over their faces. U.S. credit card defaults rose in February to their highest level in at least 20 years.  AmEx, the largest U.S. charge card operator by sales volume, said its net charge-off rate, debts companies believe they will never be able to collect — rose to 8.70 percent in February from 8.30 percent in January. Citigroup’s default rate soared to 9.33 percent in February, from 6.95 percent a month earlier.  Analysts estimate credit card charge-offs could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008. In that scenario, such losses could total $70 billion to $75 billion in 2009.Meredith Whitney estimates that Americans’ credit card lines will be cut by $2.7 trillion, or 50 percent, by the end of 2010. The pain has only just begun. Prepare to bailout more banks with your tax dollars.

JERRY: Toilet brush, oh (he pulls a ‘Damn, shoulda guessed!’ face). Alright, I can replace that.

Even though we know that adjustable rate mortgages were a major cause of the financial crisis, the storm has not passed. Just because the problem is obvious, doesn’t mean it is not a problem. The chart from T2 Partners produced about one year ago shows that we are now in a lull for adjustable rate mortgage resets. There will be another crescendo of resets in 2010 and 2011. When banks ask for more taxpayer money to sure up their balance sheets in 2010, Timmy Geithner will be wearing his best “shoulda guessed” face when he gets the call from Citicorp.

[Jenna’s Apartment]

In the bathroom, Jenna is peering curiously at her rattling toilet, wondering what’s wrong. She leans toward the bowl. Jerry is in the living room, still talking to her.

JERRY: Anyway, I’m a new man, and I’m looking towards the future. Clean, dirty, whatever.

There is the sound of a wet explosion and splashing water, followed by Jenna screaming in the bathroom. Jerry leaps to his feet and rushes to see what has happened.

Jerry enters the bathroom and sees Jenna. Only her forearm is visible to us, but it’s enough for us to know that she is wringing wet as the result of a violent eruption from the toilet bowl.

Jerry’s face registers his obvious distaste. He shrugs, sorry.

JERRY: Holy cow! Have a nice life.

He closes the bathroom door as he leaves.

After a year of frantic juvenile attempts to revitalize our financial system with your tax dollars, the government has accomplished nothing but driving our National Debt to obscene levels exceeding $11 trillion, on its way to $15 trillion by the end of Obama’s 1st term. All of the stimulus, TALFs, TARPs, TAFs, nationalizations, guarantees and printing of dollars will eventually explode in the faces of our leaders in one toxic geyser. The events of the last week show how warped the world gets when government owns private businesses. The U.S. owns AIG. The CEO, placed there by the U.S., pays out $165 million in bonuses to executives who nearly brought down the worldwide financial system. Government officials are outraged and appalled going on every TV show they can find to register their disgust. They are so used to sitting on the sidelines and criticizing the coach, they don’t even realize they are the coach. Last week, another government owned company, Freddie Mac reported a quarterly loss of $24 billion and demanded another $30 billion of taxpayer money. I didn’t hear Barney Frank on CNBC outraged at those results. As the government socializes the losses of corporations and Ben Bernanke attempts to create inflation, the deterioration and ultimate collapse of our economic system is pretty much a lock. Only the timing is uncertain.  

Americans, from the country’s founding, have always cherished liberty over dependency. Personal responsibility and self reliance had forever been the hallmarks of the American population. Since 1913 when the Federal Reserve was created and the Federal income tax was implemented, Americans have been slowly and insidiously made dependent upon the government and criminal bankers running this country. Government has taxed and borrowed to implement policies and programs that make people more dependent on them and increasing government’s control over our lives. Bankers have marketed debt as the way for Americans to live the good life. Americans have become serfs, ever indebted to the lords of the manor in Washington DC and on Wall Street. Until Americans decide to choose liberty and freedom over relying on government to solve all our problems, the country will continue on its path to socialism and bankruptcy.

[Jerry’s Apartment]

Jerry has just entered and is removing his coat. Kramer is in the kitchen cleaning highway signs in the sink.

JERRY: What’s with the signs?

KRAMER: Hey, you should see the Berkhardt, Jerry. My mile is spotless. I mean the big stuff was easy. Cinderblocks, air-conditioners, shopping carts (makes sound – fzup!), I just rolled ’em into the woods.

JERRY: Yeah, that stuff’s all natural anyway.

KRAMER: (holding up a sign) Speed limit, one hundred and sixty-five miles per hour. See? They slipped a one in there. (laughing) Those kids with the spray paint, God love ’em.

Since the start of this financial crisis, government bureaucrats, Congressmen, Federal Reserve chairmen and have tried to hide the debris of our economic system in the woods. Nothing has worked. Bad mortgage loans, bad car loans, bad commercial loans, and bad credit card debt cannot be hidden. They must be written off. Letting banks pretend it isn’t bad debt has just led to more uncertainty in the markets. The smoke and mirrors that Treasury and the Federal Reserve have used to fool the public into trusting the banking system have not worked. Now they want to change the rules of the road.

The financial system is gridlocked. Four lanes have suddenly converged into two lanes and the drivers are angry. The AIGs of the world went from selling plain vanilla insurance to making bets with every major bank in the world along with guaranteeing risky bets by these same banks. Fannie Mae and Freddie Mac went from providing liquidity to the mortgage markets so that average Americans could buy a house to a Democratic Party tool used to provide mortgage loans to poor Democratic constituents so they could win more votes in the next election. Investment banks went from investing in productive business ventures to creating fake credit instruments designed solely to generate monstrous fees and bonuses for executives. The rating agencies Moody’s and S&P went from the boring business of rating corporate bonds and generating 10 percent annual growth to giving AAA ratings to indecipherable derivative products that were then sold to pension plans and schools. Mortgage brokers went from helping match worthy borrowers with the best mortgage to criminals pushing no doc stated income adjustable rate mortgages on people who could never possibly afford a home. Consumers went from utilizing credit for just home purchases with 20% down to utilizing credit for multiple home purchases with nothing down, utilizing credit for car purchases with nothing down, and utilizing credit to buy every electronic gadget, kitchen appliance, and other toys flaunted by neighbors.

The rules of the road were changed during rush hour causing chaos and confusion. Until honesty, integrity, and morality are again restored to our financial and governmental systems, gridlock and distrust will reign. Ben Bernanke and Timmy Geithner both have the look of a worried Kramer.  

Americans are wondering where their net worth went. They can’t find it anywhere. It dissipated into thin air. It never really existed. Does that make you feel better? American households lost $11.2 trillion of net worth in 2008, and net worth is now below 2004 levels. The 17.9% drop in net worth during 2008 is mind boggling and will have a drastic impact on the future trajectory of household consumption and saving. Nearly 25% of the loss in net worth was from real estate, and equities and mutual fund shares made up 50% of the loss.

President Obama and Democrats in Congress passed a $787 billion pork filled calamity that will contribute to an explosion of our financial system. Very little of this socialist’s dream will help the U.S. economy in 2009. Vast sums will be allocated to unnecessary make-work projects throughout the country. Picture thousands of Ralphs taking their time on construction projects while six guys stand around watching one guy using a  jackhammer. Every construction project in the country will be a union job. This means 40% more expensive and a 40% longer timeline. When the majority of this stimulus hits in 2010 and 2011, along with Bernanke’s humungous printing of dollars we will hear a rumble before inflation erupts across the globe.

Oh The Humanity!!!

The American economy hit debris in the road years ago. Instead of pulling over and taking care of the problems before they became a crisis, our leaders ignored the problems. Government overspending, ignoring $56 trillion of unfunded liabilities, funding over-expenditures with money borrowed from foreigners, not addressing crumbling infrastructure, not creating a cohesive energy policy, and over-reaching in empire building were the fuel that led to our economy bursting into flames before our very eyes. President Obama and his minions in Congress scream, “Oh the humanity”, and take your hard earned money and redistribute it to the fools who created the tragedy.

It’s My Life

Tomorrow’s getting harder make no mistake
Luck ain’t even lucky
Got to make your own breaks

The American people are at a crossroads. It’s our life, not the government’s. The country is headed on a path toward government running everything in our lives. Now is the time to stand tall. Barack Obama, Ben Bernanke, and Nancy Pelosi can not make us spend money we don’t have. We can force the painful restructuring of our economy on our politician leaders. They can stimulate, print, and urge you to spend, but we don’t have to listen. We can throw them out of office in 2012. If the new set of clueless morons doesn’t do what is right, we can throw them out too. We must heed the warning of Founding Father Thomas Jefferson.

 “A government big enough to give you everything you want, is strong enough to take everything you have.”

With the help of famed financial blogger Rob Mulligan, I’ve pulled together a list of practical ideas to restructure your life:

• Bring your lunch to work. Savings of $1,000 to $2,000 per year.
• Stop buying things.
• Keep your appliances until they stop working.
• Realize that it isn’t a competition with your neighbor to die with the most stuff.
• Mow your own lawn. Better yet, if you have kids, make them do it.
• Learn to embrace dandelions and crabgrass. Who cares?
• Wash your car in the driveway. Better yet, if you have kids, make them do it.
• Buy your next car and drive it for 10 years or 150,000 miles, whichever comes first.
• Buy a car that gets at least 30 mpg, as $200 a barrel oil is a certainty in the next decade.
• Tell your kids they are lucky to have whatever you give them.
• When you walk into a room and the CNBC is on TV, switch immediately to When Animals Attack.
• Don’t answer the phone – it’s someone asking for something.
• Don’t throw out your old sneakers – you can use them to cut the lawn.
• Turn the heat down to 60 degrees at night.
• Go to the poor man’s Disney World, Wildwood, N.J. and save $4,000 for a weeks vacation.
• Eat out once per month rather than three times a week and you’ll magically save $3,000 to $4,000 per year.
• Contribute into your 401k until it hurts. Picture yourself handing out yellow smiley stickers at the age of 80 in a Wal-Mart as motivation.
• Buy some gold, just in case.
• Plant a vegetable garden, just in case.
• Instead of spending $40 at the movies, go for a hike in a National Park like Valley Forge.
• Have a catch with your son.
• Understand the motivation of anyone who is telling you anything. Most people have an angle.
• When the guy in the Mercedes or BMW in front of you is wearing their hat sideways, your taxes are probably making their car loan payment.
• When you see that same guy pushing a cart with a 52 inch HDTV out of Best Buy, your taxes are probably making the payment to Capital One.