A good discussion of what’s in the report and what comes next from Ratigan and Spitzer.
Posts Tagged ‘government’
Dylan Ratigan, Eliot Spitzer on the Lehman Report
Sunday, March 14th, 2010So Let Me Get This Right: Lehman & Geithner & Fraud Oh My!
Friday, March 12th, 2010How much more evidence does it take to get any ACTION around here?
It is not getting better. It is getting worse. The facts are falling out onto the streets and no one is doing a single thing about them. (Other than ignoring them and adding more piles of dung to the propaganda machinery of the major media outlets, bla bla bla). At what point do we finally say enough is enough? Is there anyone left out in our public sector/goverment willing to DO anything??? It appears the answer is no. Pretty amazing. Pretty sad. Pretty much makes it plain that the corruption is so deep and wide spread that we are Done. D – O – N – E. Stick a fork in us.
NY Fed Implicated in the Accounting Fraud at Lehman
Quite a bombshell from Yves Smith of Naked Capitalism tonight.
I wonder if the US mainstream media will ignore and dismiss it as they did the exclusion of the Wall Street banks from European debt sales in response to their fraudulent CDO sales. Is there a ‘reverse gear’ on the Voice of America?
In response, let’s see if Chris Dodd puts the Consumer Protection section of the financial reform legislation under the control of a private organization,the Fed, which is owned by the institutions it is supposed to be regulating, and which is now implicated in the failure and fraud that helped to trigger the recent financial crisis.
The senior Republicans on the committee have insisted that it be. Originally Senator Dodd seemed to be going along with that in the spirit of bipartisan support for the monied interests and the financial lobbyists. That would be the perfect Orwellian twist to an increasingly surreal decline in the observance of the Constitution and the rule of law.
And then of course there is Turbo Tim, knee deep again in messy conflicts of interest and crony capitalism. The “CEO defense” claiming attention deficit disorder and blissful aloofness is in fashion among highly paid US executives. Considering Mr. Geithner’s record, even in the execution of his own tax returns, the incompetence defense might be plausible. But it then calls into question the judgement of the person who subsequently appointed Tim to be the head of the most powerful financial organization on earth, the US Treasury.
Call the New Yorker. Time for another media PR blitz, but this one is for the Chief.
Naked Capitalism
NY Fed Under Geithner Implicated in Lehman Accounting Fraud
Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were such that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.
Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.
We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counter parties.
This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.
And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately…
Read the rest of the story here.
Karl Denninger Sounds Alarm on Lehman Report: Evidence of Financial Insolvency
Friday, March 12th, 2010This conversation has been going on in our more local circles for months – it is clear from our own observation of situations in the local communities we know that the banks are insolvent – that the game playing over ‘remedy’ for homeowners is getting more crazy, not less… And that the other shoe is going to drop sometime soon – Thanks Karl for putting it in perspective – the comparison to the Tech Bubble is very clear.
What The Lehman Report Proves: Financial Insolvency
The Lehman Report on which I wrote last night regarding deeply troubling issues surrounding the Lehman Bankruptcy, has laid bare some very ugly facts relating to our financial system, corporate governance, and our government’s active complicity not only in the Lehman collapse, but in ongoing balance sheet shenanigans and the current investment picture.
The conclusions I am forced to reach, after much reflection and sleeping on this article overnight, are not pretty.
They compel me to advise that, in my opinion, the market is now trading both technically and on a fundamental basis, exactly as the Nasdaq was in 1999.
I recognize this is a serious charge and has implications that are most unpleasant, in that it implies a probable detonation ahead at some time in the next year – one that will not only destroy all of the gains made since March of last year but go beyond that – indeed, perhaps as far as the banner on The Market Ticker has for the major indices.
The technicals of the last month leave no doubt what’s going on – the market is moving in a parabolic upward fashion, exactly as was the case for the Nasdaq in ‘99, and indeed, we are approaching the sort of gains in the broad market that Nasdaq saw in 1999.
For those who need a refresher, here it is:
Now let’s look at the S&P 500 since the March lows:
And if you need a refresher on what happened to the Nasdaq after it topped in early 2000, here’s that unfortunate reality:
Not only did the entire ramp in 1999 disappear, more than another 50% was lost beyond that.
The seriousness of this cannot be overstated. Anyone who bought into the start of the decline in 2000 was wiped out by doubling into a decline that took a literal 85% off the NDX from the peak. Worse, today, nearly a decade later, we remain more than 50% below the peak valuation that the NDX reached.
The Nasdaq is not alone in this behavior. The Nikkei 225 reached 38.957 in 1989. Today it trades around 10,000 – a nearly 75% loss from it’s all-time highs, and despite 20 years it has not healed.
An analytical look at history says that when markets rise on fraudulent accounting and false claims - that is, the booking of asset values that is fictional, the claim of profits that were never really made, the hiding of losses off-balance sheet – the losses, when they come, are not recovered for a generation or more.
When this happens to individual companies, they go bankrupt.
When it happens on a broad basis in a market index, the result is utter destruction.
Such happened in the 1930s as well. The DOW’s high of 1929 was not recovered until more than 20 years later, and due to FDR’s devaluation of the currency it was another decade before, on a purchasing-power basis, your original values were seen again.
So the seminal question for this alleged recovery has been whether or not the recovery is real – that is, whether the asset class at the core of the original problem, the banking system, now has clean balance sheets and it can be reasonably assumed that what is reported in terms of assets, liabilities and earnings is in fact real.
If you cannot be reasonably certain of this then you simply cannot, as an investor, be in this market. The reason for this is clear on its face – we will, at some point in the not-distant future, have a point where the insolvency of these institutions rises to public consciousness.
When (not if) that happens the market will collapse.
This is not conjecture.
It has occurred in each case through history where markets have been pumped through fraudulent balance sheets and similar game-playing, and when it happens the typical losses are in the 75-80% range. Those losses are maintained even a decade or more later.
Now let’s examine the evidence on whether the core of the reason for the collapse – bogus accounting that led to the failure of Bear Stearns and Lehman Brothers – is in fact resolved and no longer present.
Tim Geithner and the Obama Administration understand this risk. That much was made clear last year when they ran their so-called “Stress Tests.” The market understood this too, in that the promulgation of those “results” was a large part of the underpinning for the rally in the markets that has followed.
Is that reliance reasonable?
The evidence says it is not.
As was made clear in the article I wrote last night, Lehman failed multiple stress tests externally, and yet they were repeated with ever-looser standards until an internally-conducted test passed – at which point Tim Geithner’s NY Fed proclaimed them healthy:
After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.
Unfortunately the precise same practice took place with all of the other major institutions when Geithner ran the famous “stress tests” that were hung out in front of investors to “bring them confidence.”
It was physically impossible for The Federal Reserve to actually perform the testing on its own – so instead, they provided metrics to the firms and asked them to run them.
This is the precise same process that was used to produce a “passing” grade by Lehman after the Bear Stearns failure and that process was administered by the same person who was responsible for the false Lehman outcome.
Now add to this that Diane Olick of CNBC has confirmed what I’ve been saying since the crisis began: If the banks really accounted for all the losses in the home loan market, they’d all be insolvent.
Wait a second. If the “stress tests” were valid, then the capital raises that were done were sufficient and none of the banks are insolvent.
Indeed, Diane Olick called this exactly as I have:
That’s why the Obama Administration has created this kind of shell game in the first place.
Shell game?
Further, the fact that these loans have no economic value isn’t just mine. It’s also Barney Frank’s, who is the lead guy in Congress on the House Financial Services Committee. He said:
Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: “Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans.”
Accounting rules that Congress caused FASB to modify by literally pointing a gun at them.
I’m sorry folks, but the weight of the evidence is overwhelming on this point.
Whatever gains you think you’re chasing in the stock market at this point in time, you’re doing so against a risk of an 85% loss. The idea that Government can prevent this sort of collapse if it initiates is fanciful – remember that in the summer of 2008 the common belief was that we’d never see a crash right in front of an election, as “they” would not allow it to happen. If you bought into that belief, you lost half your money.
The risk here is even more severe. If, in point of fact, those “Stress Tests” provided false confidence (and I believe the evidence is strong that they have) then it is simply a matter of when the market comes to realize that these losses in the large banks are still present but being hidden.
If we apply the FDIC’s own metrics to the expected losses from such a revelation that would “immediately appear” we get a number between $2 and $3.5 trillion that would have to be paid to depositors of the failed institutions - equal to somewhere around one full year’s Federal Budget and dramatically exceeding what the FDIC and Treasury could cover – by more than 10 times.
The consequence of such an event would be literally catastrophic. Having squandered over $3 trillion in the last two years in new borrowing by The Federal Government to prop up the economy (instead of clearing this bad debt through resolving the bankrupt financial institutions) it is highly unlikely that The Government would be able to, on short notice, raise another $3 trillion.
I’m out of all long positional trades as of this morning and will not be back in them until this issue is resolved. Even if there is a potential 10 or 20% advance that I will miss by doing so, the downside risk of 85% is so extreme and the facts that we now have available strongly suggest that not only are all the large banks insolvent but that the government has been and is complicit in covering it up – not just temporarily, but as an ongoing practice, just as occurred with Lehman.
I’m sure many will call me crazy for this analysis.
We will see if you still think so in a year or two.
And this piece which followed helps to clarify that the evidence of the banking stress tests being bogus are supported by evidence of what is going on in the real world of bankrupt banks and unemployed underwater homeowners:
A Disturbing Pattern? (Bank Loans / Helocs)
In conjunction with what I wrote on this morning, the potential for massive hidden losses in our banks, I keep getting the following sort of anecdotal reports, all in relationship to the banking giants.
“My property foreclosed in <bubble state> and <Big Bank X> had written a $200,000 HELOC, which was drawn down. The first lender foreclosed and is holding the property in inventory (it is not listed.)
<Big Bank X> reported the account as charged off in my credit report, but has a notation that “debtor has an arrangement to make partial payments.”
I have not even spoken with <Big Bank X>.
Then there’s stuff like this from the forum:
“My home in CA was purchased for $685k in May 2006. Because of 14 months of unemployment, a mortgage payment hasn’t been made in months. Mortgage holder just had the property appraised and the value came in at $319k. After the appraisal was completed, I was told by the mortgage holder not to worry about foreclosure proceedings beginning. I’ve also been told by the mortgage holder that they have “many” internal plans for modifying loans and that they would continue to work with me until we found a suitable “solution” enabling payments to resume.”
That’s the general gist of these emails. Another said that they were “offered” payments on a massively-delinquent first that were well under 1% on an interest-only basis. Like under $100/month on a loan that should have even an I/O payment of several times that amount.
The obvious question is whether these “charged off” and “How about you pay us $50/month, which is a tiny fraction of even an I/O payment” loans are being manipulated so that they can be considered performing assets on these bank balance sheets.
And if that is the case, then the obvious next question is how many of these loans are there, and what sort of material misstatement does this all add up to when one looks at these balance sheets as a whole?
If I had received one or two of these sorts of anecdotes over the last year or so I wouldn’t be so alarmed. But that’s not what’s happened. Instead, I’ve received a bunch of these over the last few months and I suspect I’ll get even more now that I’m “outing” that I’m getting these emails on a regular basis.
Unfortunately I can’t verify any of this since I can’t pull someone’s credit - but why would borrowers send me these sorts of claims if they weren’t true?
If they are true then the obvious question is whether the sort of “Repo 105″ deal Lehman was running is just a tiny bit of the balance sheet fraud that is going on in these big banks?
Folks, this sort of thing makes no sense. Reporting payments that aren’t being made to credit bureaus in the “comments” field (while showing “charged off”) has no probative value for the bank – unless it’s to please an auditor or government official who is questioning whether that loan is in some way “performing” and/or has some sort of recovery value, thereby supporting an intentionally-false mark!
Folks, this whole cesspool stinks like dead fish, and the disclosure of what Lehman was up to makes clear that the banks believe they can pretty much do whatever they want when it comes to balance sheets and get away with it – provided they can find someone will will give them an opinion that its legal (even if the “someone” isn’t in the US!)
My Budget 360: How About we let the Average Aerican Borrow from the Federal Reserve at 0 Percent and Cut Out the Loan Shark?
Wednesday, March 10th, 2010Oh yeah – this is just exactly right. Thank You MyBudget360.com for this excellent piece. And yes, it does boggle the mind. Indeed it does…
Breaking the American Bank – Banking Propaganda and Using the American Middle Class as a Credit Card for Wall Street Excess. How About we let the Average American Borrow from the Federal Reserve at 0 Percent and cut out the Loan Shark?
from My Budget 360 by mybudget360
Banks are showing their true colors and what little regard they have for the average American. As they advertise with cute and friendly faces assuring consumers they are looking out for their best interest, behind their backs they send in a locust of lobbyist onto Washington to do everything in their power to gut any sensible financial regulation. The vultures are picking off every piece of what used to be the middle class. This is the model of the new banking and financial system that many will have to contend with. Americans have seen their access to loans and credit contract at the fastest pace in history while banks have now opened up an unlimited credit card with the taxpayer paying the bill for too big to fail. Banks are doing their best to create a narrative that “if we didn’t bailout the banks then the world would have ended storyline” but the vast majority of Americans did not support the banking bailout.
If you want to see how quickly credit is contracting take a look at this:
The chart above merely highlights what you already know. Banks no longer trust the average American. While they based all their bailouts on the idea that taxpayer money was needed to keep banks lending this has been a lie. In fact, banks need the money to plug the hole that their toxic assets are burning on their balance sheets. You can also look at the amount of credit card offers you are getting in the mail to gauge how quickly the market has changed. No longer do banks want to give credit out (that is, unless it is government backed like mortgages which they are all the more willing to lend out).
The U.S. has over 8,000 banks with the large concentration of assets in 10 banks. These banks continue to use bailout funds to plug the problems from the boom years. But this is not in the best interest of average Americans. If Wall Street and politicians were honest, the bailouts would have been labeled as a massive charity to the elite of the country who made disastrous bets over the past decade. The public takes the lumps while Wall Street actually gets richer. While banks don’t want to reel in their spendthrift ways, Americans are pulling back:
Americans are now having to save more and more of their money as is expected in a tough economy. Yet banks are back to gambling in the stock market while shutting down lending to consumers. Banks are playing the poor me card by arguing that with too much tight regulation, they can’t make loans because they are worried about future balance sheet problems. Thanks for telling us after you took the public money under false pretenses! But this is all a political ploy to steal from the working class. With so many people just unable to even service the debt and rising bankruptcies, banks are now going after good customers who pay their bills on time each month just because they are running out of “options.” Don’t be fooled. They are reaping billion dollar profits because they are using excuses to squeeze the golden goose dry. How about we allow the typical American to borrow at the subsidized low rate from the Federal Reserve directly? Why in the world do we need banks to operate as loan sharks in between? What we need is to transform the banking industry into a utility model. A model designed to serve the people, not the banks. After all, why should they get the privilege of borrowing at criminally low rates while everyone else has to pay the interest and subsidize their gambling adventure?
Even after all the correction in the market American households still carry an inordinate amount of debt:
A giant portion of income simply goes to pay off debt. A large part of the debt is interest or money the banks can suck out of the neck of middle class Americans. Banks live off this margin. Take for example a $100,000 30 year fixed rate mortgage at 6 percent:
Principal: $100,000
Total Interest: $115,838
In the end, you are paying more than the initial cost and all that interest goes to who? What purpose does it serve? Banks are delusional and want the public to believe in the propaganda that they need to charge a higher rate because of “risk” in the loan. Are they kidding? We already know that they are being supported by the entire Federal Reserve and U.S. Treasury. They can make the most insane kind of bets and ultimately the taxpayer will eat the bill. And keep in mind many of these banks are borrowing at low levels from the Federal Reserve. Why not allow the public to keep some of that interest? How is this bad? If banks were lending their own money it would be a different story but they are not. They are creating a dishonest narrative and most Americans are not buying it because they operate in reality and not some parallel universe where you can create something out of nothing.
Just think of the billions charged in overdraft fees. This is criminal. Why not just default debit cards to stop once the account is dry? Instead they want people that charge a $2 burger a $39 over draft “convenience fee” for this nonsense. Are you kidding? Most people don’t want this. They find out the hard way and now billions have left the wallet of consumers for this nice little loan shark fee. $39 can buy you lunch for a few days so this is nothing to laugh at when 38,000,000 Americans find themselves on food assistance. The bulk of the billions are paid by the poor. Good job banks for helping your fellow Americans. Yet banks are leeches sucking the productive life blood out of the economy with gimmicks like this. Time to break the banks up and turn them into utilities.
Take for example JP Morgan. They announced a Q4 profit of $3.28 billion. Where did they make their money?
“(Huff Po) JPMorgan’s biggest trouble spots were in consumer banking and credit card lending. The bank’s retail financial services division, which includes its mortgage operations, lost $399 million. That was worse than the final quarter in 2008, when credit markets had essentially shut down because of the collapse of banks including Lehman Brothers.
The company reported increases in mortgages that were charged off, or classified as uncollectible, including prime mortgages, the highest quality home loans. It also reported an increase in home equity loan charge-offs.”
Wait. So mortgages are being charged off as foreclosures remain high. And this has spread to so-called prime mortgages as the unemployment and underemployment rate remains at 17.9 percent. So let us write off mortgages to average Americans. Where in the world did they get those billions? Maybe they made good money in their credit card unit:
“The credit-card lending division lost $306 million during the final three months of 2009. Results would’ve been worse had the bank not had a payment holiday in the period.”
More losses here? So we’ve ruled out credit cards and mortgages which have become the life blood for Americans. We’re running out of places to look for where they can make a $3 billion profit:
“Despite the ongoing problems with consumer banking, JPMorgan is still performing well because of its robust investment banking unit. As long as stock and bond markets continue to improve, the bank will be able to churn out profits and reward its employees handsomely.
JPMorgan’s investment bank earned $1.9 billion during the fourth quarter, while its asset management division generated $424 million in net income.
Fees from financing debt and stock offerings continued to surge in the fourth quarter. Debt financing fees jumped 58 percent to $732 million from the same quarter a year earlier, while stock financing fees climbed 66 percent to $549 million.”
And there you have it. We are financing Wall Street’s wonderful gambling casino once again while the traditional banking model has collapsed. How this isn’t the number one priority for the government and the people to fix is simply astounding. How we have had no serious financial reform after 26 months of the Great Recession boggles the mind.
Bank Balance Sheets: The ‘Hidden Cause’ of What Looks Like Irrational Behavior by Lenders?
Tuesday, March 9th, 2010Whenever I try to explain off book accounting to people – to tell them what it is the banks are doing – or, for instance, why they would rather not take the short sale, do the loan mod or ‘help’ the homeowner…
I get blank looks, blank stares and shrugging shoulders. It’s not so easy to understand because it is so blatant that it just doesn’t seem as if something like this could really be going on in the good old US of A…
People say things like “Well, they can’t do that can they?” or “Isn’t that illegal?” or, one of my personal favorites: “Why hasn’t the government done anything to stop this?”
Of course the answer is that the government is the one who told the banks they could play this game – back in Spring of ‘09 when they allowed the banks to ‘adjust their accounting’ for the ’stress tests’. Uh huh. Yeah, that… so that they could continue to show defaulting mortgages at PAR (that means being paid as expected and current, up to date payments on book) even though they had not received payments, in say, two years…
This is the underlying truth about why no one can tell what is happening with their own mortgage by looking at their neighbors’ houses or mortgages. The answer depends on how the bank has decided to handle the books on each individual loan and they clearly handle them differently for reasons no one can fathom from the outside.
The latest interesting wave of these odd ball experiences of homeowners is the Notice of Cancellation and Rescission of Notice of Default – this new creature began showing up just before the end of 2009 in the mail of homeowners who were still behind, had no loan modifications completed, were still trying to work out how to save their homes or do short sales or what have you – and in cases where the homeowner had made no significant change in their status as behind on the subject loan(s).
Turns out there was another way the lenders could get paid – through insurance policies, and homes in default got a smaller insurance payoff than those that were not marked with the big red D.
This little piece by Mr. Denninger sheds some light on the bigger picture to help everyone see it more clearly:
ADMISSION By FDIC: Massive Balance Sheet FRAUD
Remember this Ticker from a few days ago?
I am constantly amused by those people who claim there is some vast “conspiracy” in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.
There is no conspiracy.
It is, in fact, “in your face” fraud.
Well, one of the people on the forum emailed The FDIC to ask about what I had alleged. This was their response:
That’s the value the bank had them on their books on their year-end financials, but the true value is much less. It is similar to someone in Las Vegas saying that their house is worth $300,000 because that’s what they paid for it three years ago, but the reality is, if they had to sell it in today’s market, they’d only get $250,000 for it. The FDIC has to sell assets in today’s market.
–db
Or tomorrow’s market.
The simple fact of the matter is that there it is, right in front of you.
A raw admission that the banks are carrying these loans at dramatically above their actual value.
Yes, this means that essentially all balance sheets must now be considered fraudulent, and thus the valuations assigned by the market to them are also fraudulent.
Extending this to the stock market as a whole you now have a market that is intentionally overvalued as a direct and proximate consequence of fraud, permitted and endorsed by the government, of somewhere between 25-40%.
Now you know why the market rallied off the SPX 666 lows to where it is now. 1139 (where we are now) * .60 (a 40% haircut) = 683.40, or awfully close to that 666 bottom.
Of course this “valuation” expressed in the market can only be maintained for as long as the fraud is. If the ability to maintain that fraud is lost for any reason then values will instantly collapse back to reflect reality.
Still sleeping well with your investments?
Albert Edwards – Central Banks Complicit in Robbing Middle Classes
Saturday, January 30th, 2010If you’re a middle aged middle class American or Brit who is thinking to yourself that earning a living has become extremely more difficult for yourself than it was for your parents, you are more than a little correct. In fact, you are exactly right.
This January 21, 2010 Zero Hedge article and Fred Harrison’s Interview at the end of The Keiser Report in the previous post bring stark contrast to the mass media economic commentary telling us we are in a ‘jobless recovery’ . Rather, Mr. Harrison’s observations, as well as this piece below show precisely that the standard of living in the US has been completely stripped out over the last three decades.
Consider that the level of discretionary income has dropped precipitously in this time frame, that homes today cost approximately 20% more of the middle class wage earners’ median income than in the 50’s and 60’s. Consider that your children, if aged 20 to 40 in today’s economy are twice as likely to have financial crises and lose their homes (if they have managed to be able to afford to buy a home) as did your parents, even if your parents were blue collar wage earners in their day, and your children are white collar professionals…
This eye opening piece begins to paint a very different picture of what housing bubbles and tech stock bubbles help make invisible to the average citizen: the stripping of wealth from the middle class and syphoning of that wealth to the top of the top 1% of the wealthy:
Scandal: Albert Edwards Alleges Central Banks Were Complicit In Robbing The Middle Classes
Submitted by Tyler Durden on 01/21/2010 11:02 -0500
We apologize in advance for the NY Magazine-style headline, but this is a report that has to be read by all Senators who are preparing to reconfirm Bernanke for a second term. When voting for the Chairman, be aware that all of America will now look at you as the perpetrators who are encouraging the greatest inter and intra-generational theft to continue, and as prescribed by Newton 3rd law, sooner or later, an appropriate reaction will come from the very same middle class that you are seeking to doom into a state of perpetual penury and a declining standard of living.
Theft! Were the US & UK central banks complicit in robbing the middle classes?
America spoke in Massachusetts, and will speak again very soon if you do not send the appropriate signal that you have heard its anger – Do Not Reconfirm Bernanke.
You have been warned.
We present Albert Edwards’ latest in its complete form as it must be read by all unabridged and without commentary. These are not the deranged ramblings of a fringe blogger – this is a chief strategist for a major international bank.
Theft! Were the US & UK central banks complicit in robbing the middle classes?
by Albert Edwards, Societe Generale
Mr Bernanke’s in-house Fed economists have found that the Fed wasn’t responsible for the boom which subsequently turned into the biggest bust since the 1930s. Are those the same Fed staffers whose research led Mr Bernanke to assert in Oct. 2005 that “there was no housing bubble to go bust”? The reasons for the US and the UK central banks inflating the bubble range from incompetence and negligence to just plain spinelessness. Let me propose an alternative thesis. Did the US and UK central banks collude with the politicians to ‘steal’ their nations’ income growth from the middle classes and hand it to the very rich?
Ben Bernanke?s recent speech at the American Economic Association made me feel sick. Like Alan Greenspan, he is still in denial. The pigmies that populate the political and monetary elites prefer to genuflect to the court of public opinion in a pathetic attempt to deflect blame from their own gross and unforgivable incompetence.
The US and UK have seen a huge rise in inequality over the last two decades, as growth in national income has been diverted almost exclusively to the top income earners (see chart below). The middle classes have seen median real incomes stagnate over that period and, as a consequence, corporate margins and profits have boomed.
Some recent reading has got me thinking as to whether the US and UK central banks were actively complicit in an aggressive re-distributive policy benefiting the very rich. Indeed, it has been amazing how little political backlash there has been against the stagnation of ordinary people?s earnings in the US and UK. Did central banks, in creating housing bubbles, help distract middle class attention from this re-distributive policy by allowing them to keep consuming via equity extraction? The emergence of extreme inequality might never otherwise have been tolerated by the electorate (see chart below). And now the bubbles have burst, along with central banks? credibility, what now?
After reading Ben Bernanke?s speech, once again denying culpability for the bubble, I really didn?t know whether to laugh or cry (remember that Ben Bernanke, like Tim Geithner, was a key member of the Greenspan Fed). I feel like Peter Finch in the film Network, sticking my head out of the window and shouting “I’m as mad as hell and I’m not going to take it anymore!” Although criticism of the Fed (and the Bank of England) has now become louder and more widespread, I feel my longstanding derision for their actions during the so-called ?good years? puts me in a stronger position than some to offer further comment.
Opening my 2002-2005 file of old weeklies I did not have to go any further than the first paragraph of the top copy (end of December 2005). “As far as Alan Greenspan’s tenure at the Fed is concerned, we have spared few words of derision. We have made plain our views that the supposed US prosperity that has accompanied his tenure has been based on a grotesque mountain of debt. We have likened the economy to a Ponzi scheme which will ultimately collapse. He has allowed the funding of strong economic activity by mortgaging the US’s future against one bubble (equity) and then another (housing), which is now beginning to implode”. These are almost consensus thoughts now, but not then.
The pigmies that populate the political and monetary elites prefer to genuflect to the court of public opinion. Blaming the banks is simply a pathetic attempt to deflect the public fury from their own gross and unforgivable incompetence. We have stated before that banks are not the primary cause of the bust. Just as in Japan, a decade earlier, bank problems are a symptom of the bust. It is the monetary and regulatory authorities that are responsible for this mess. And it is not just obvious in retrospect. It was perfectly obvious from the beginning.
I was shocked by a recent survey of Wall Street and business economists, published in the Wall Street Journal (see Bernanke View Doubted 14 Jan? link). Asked whether they agreed or disagreed with the proposition ‘excessively easy Fed policy in the first half of the decade helped cause a bubble in house prices’, some 42, or 74% agreed with the proposition. So unbelievably there are still 12 economists surveyed who did not agree! Even more incredible, a majority of academic economists did not agree with the proposition. Maybe they have sympathy for a fellow academic or maybe they actually believe the preposterous proposition that the western central banks were not in control of the bubbles which were primarily due to tidal waves of surplus savings washing across from Asia.
John Taylor shows this to be nonsense. There was no global savings glut (see chart below)
John Taylor is well known for his famous ?Taylor Rule? for the appropriate level of interest rates and he has been very vocal in his criticism of Fed laxity in the aftermath of the Nasdaq crash in his paper ?The Financial Crisis and Policy Responses: An Empirical Analysis of What Went Wrong’, Nov. 2008 and elsewhere – link. His thesis is simple. Lax monetary policy caused the boom in housing upon which euphoric credit excesses were built. The subsequent bust was an inevitable mirror image of the boom. This simply would not have occurred had the Fed (and the Bank of England) acted earlier to tighten policy as shown in the Taylor?s counterfactual profiles (see charts below).
More recently, the San Francisco Fed published a paper this month showing that those countries which saw the steepest run-up in house prices over the last decade also saw the largest rise in household sector leverage (see charts below and link). Of course the causality runs both ways. Loose monetary policy generates higher borrowing which pushes up house prices. Subsequently this prompts other households to borrow against the rising value of their houses to finance consumption via net equity extraction.
Generally most commentators have fallen for the populist line that the banks are to blame. Very rarely does a leading commentator pin the blame where it deserves to be ? on the central banks. Hence, I was very interested to read the Financial Times Insight column on Tuesday from the deep-thinking columnist, John Plender (interestingly his title in the print edition was “Blame the central bankers more than the private bankers” was changed to “Remove the punchbowl before the party gets rowdy” in the web edition – link).
Plender?s point is classic Minsky. An unusually long period of economic stability, also known as The Great Moderation, engineered by Central Bank laxity inevitably created the conditions for the subsequent bust. “Central banks clearly bear much responsibility for past excessive credit expansion. The Fed’s gradualist and transparent approach to raising rates in middecade also ensured that bankers were never shocked into a recognition that unprecedented shrinkage of bank equity was phenomenally dangerous. Despite the popular perception that financial innovation caused so much of the damage in the crisis, the rise in bank leverage was a far more important factor”. His point that it takes guts to remove the punch-bowl when the party is in full swing is spot on. The Fed and the Bank of England were both gutless and spineless. Their love affair with The Great Moderation meant they simply were not prepared to tolerate a little more pain now to avoid a Minsky credit bust and massive unemployment later.
But what is the relationship, if any, between this extreme central bank laxity in the US and UK and these countries being at the forefront for the extraordinary rise in inequality over the last few decades (see cover chart)? And does it matter?
I was reading some typically thought-provoking comments from Marc Faber in his Gloom, Boom and Doom report about current extremes of inequality. It reminded me that our own excellent US economists Steven Gallagher and Aneta Markowska had also written on this. To be sure, the rise in inequality has been staggering in the US in recent years (see charts below).
It is well worth visiting the website of Emmanuel Saez of the University of California who has written extensively on this subject and now has updated his charts up until the end of 2008 (data available in Excel Format ? link). The New York Times reported on the recently released Census Bureau data and showed not only that median income had declined over the last 10 years in real terms, but that this is the first full decade that real median household income has failed to rise in the US - link. What is also so interesting from Professor Saez?s cross-sectional research is how inequality has clearly risen fastest in the Anglosaxon, freemarket economies of the US and the UK (also note that France, with much higher levels of equality, saw much more subdued growth in household leverage).
Our US economists make the very interesting point (similar to Marc Faber) that peaks of income skewness ? 1929 and 2007 ? tell us there is something fundamentally unsustainable about excessively uneven income distribution. With a relatively low marginal propensity to consume among the rich, when they receive the vast bulk of income growth, as they have, then the country will face an under-consumption problem (see 9 September The Economic News ?- link. Marc Faber also cites John Hobson?s work on this same topic from the 1930s).
Hence, while governments preside over economic policies which make the very rich even richer, national consumption needs to be boosted in some way to avoid underconsumption ending in outright deflation. In addition, the middle classes also need to be thrown a sop to disguise the fact they are not benefiting at all from economic growth. This is where central banks have played their pernicious part.
I recalled seeing another article from John Plender on this topic back in April 2008. His explanation for why there had been so little backlash from the stagnation of ordinary people?s income at a time when the rich did so well was simple: ?”Rising asset prices, especially in the housing market, created a sense of increasing wealth regardless of income. Remortgaging homes over a long period of declining interest rates provided a convenient source of funds via equity withdrawal to finance increased consumption” – link.
Now you might argue central banks had no alternative in the face of under-consumption. Or you might conclude there was a deliberate, unspoken collusion among policymakers to ?rob? the middle classes of their rightful share of income growth by throwing them illusionary spending power based on asset price inflation. We will never know.
But it is clear in my mind that ordinary working people would not have tolerated these extreme redistributive policies had not the UK and US central banks played their supporting role. Going forward, in the absence of a sustained housing boom, labour will fight back to take its proper (normal) share of the national cake, squeezing profits on a secular basis. For as Bill Gross pointed out back in PIMCO?s investment outlook ?Enough is Enough’ of August 1997, “?When the fruits of society’s labor become maldistributed, when the rich get richer and the middle and lower classes struggle to keep their heads above water as is clearly the case today, then the system ultimately breaks down.”- link. In Japan, low levels of inequality and inherent social cohesion prevented a social breakdown in this post-bubble debacle. With social inequality currently so very high in the US and the UK, it doesn?t take much to conclude that extreme inequality could strain the fabric of society far closer to breaking point.
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