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. 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 financial system has stopped functioning because no one trusts anyone else. The rules are changed by the Treasury and Federal Reserve on a daily basis. It seems like every company in America has converted into a bank so they can acquire a slice of the taxpayer funded pie called TARP. The government has been using all the tools at their disposal to dig the country out of this hole. If they dig too far, the stimulus could blow up in a torrent of inflation.er
Which Assets Are Toxic?
Ov 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.
Watching over the creative bankers was the eagle-eyed Securities and Exchange Energy Commission, which had just received accolades for the Enron and WorldCom scandals. This agency, evertone 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 cocksure MBAs, assured them that nothing could go wrong. The final piece of the puzzle was obtaining AAA ratings 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 cocksure 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 Mortgage Backed Securities (MBS), Credit Default Swaps (CDS), and Collaterized Debit Obligations (CDO) 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 percent 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?
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.
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 function again. It hasn’t worked. They can pour another $11 trillion into the system, and probably will, but the trust is 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. 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. 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.
We know what has happened in the last eighteen months. We still don’t know what toxic assets still remain in the system. 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. 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. 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. Noted financial analyst 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 bail out more banks with your tax dollars. We are now in a lull for adjustable rate mortgage resets. There will be another crescendo of resets in 2010 and 2011. Banks will ask for more taxpayer money to shore up their balance sheets in 2010.
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 first 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. 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.
Do We Need To Change The Rules of the Road?
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 implemented, Americans have been slowly and insidiously made dependent upon the government and bankers running this country. Government has taxed and borrowed to implement policies and programs that make people more dependent on them and increased 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.
All attempts by government to change the rules have backfired. The SEC outlawed short selling to stop the stock market from going down. The market accelerated downward, with no possibility for short covering to stop the fall. Hank Paulson forced banks to take billions of taxpayer dollars whether they wanted it or not. This was supposed to bring confidence in the system back. It didn’t. The government took over AIG, Fannie Mae, and Freddie Mac, deciding they could run them better than the existing horrible managements. These moves have already cost the American taxpayer a quarter trillion dollars.
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 percent 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.
Where Did I Put My Keys?
Americans are wondering where their net worth went. They can’t find it anywhere. It dissipated into thin air. American households lost $11.2 trillion of net worth in 2008, and net worth is now below 2004 levels. The 17.9 percent 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 percent of the loss in net worth was from real estate, and equities and mutual fund shares made up 50 percent of the loss.
The dramatic rise in net worth coincided with the biggest debt bubble in history. Home ownership reached an all-time high of 68 percent in 2005. Stock ownership is still in the 50 percent range, so the downturn in housing values is affecting many more people than the 2000-2001 dot-com collapse. Home values fall but the debt remains the same. With at least another year of falling home prices, the number of people underwater on their home mortgages will reach 25 million, or one-third of all the houses in the United States.
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. 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.
The American people are at a crossroads. It’s our lives, not the governments. 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. You can throw them out of office in 2012. 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."
James Quinn writes for The Cutting Edge News and is a senior director of strategic planning for a major university. This article reflects the personal views of James Quinn. It does not necessarily represent the views of his employer, and is not sponsored or endorsed by them.
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