Thursday, October 09, 2008

The Reichstag fire of the financial world

Wake up, people!

I haven't seen anyone compare today to 1933 Germany, but I told a friend on Tuesday -- i.e. before the latest developments that only proved me correct -- that what we're looking at really is a Reichstag fire: an excuse for government to declare an "emergency" and assume totalitarian powers in response to the "crisis," with the vast majority of the people so blind to the real story that they wholeheartedly embrace the new tyranny.

The simple truth: there is no liquidity/credit crisis, other than what's been engineered. But the U.S. and several European governments want us to believe this myth of a "crisis," so that we'll turn to them as our saviors.

Their motive is so obvious now: the U.S. and these European governments have the ultimate goal of nationalizing their respective banking systems. Iceland has already nationalized its three largest banks, while Germany and the other major economies have already established "shields" that are ostensibly to protect account holders. And now the U.S. Treasury might start "injecting liquidity" into banks -- in exchange for ownership. This article has a nice picture of Chuck Schumer, who knows all about spreading rumors to spur the collapse of an otherwise solvent bank -- so that the feds could take it over in the name of "protecting" depositors. George W. Bush and Hank Paulson have now taken that to a new level that even FDR would envy.

As I've explained here and here in comments at friends' blogs, there is in fact no shortage of money to lend, only a lack of lenders' willingness to lend it out -- that might seem semantics, but there's a big difference!

It won't matter who wins the election. Under Bush, we've already trudged enough on the road to nationalization of education, health care, energy and now finance. Soon it will all be complete. Good heavens, people, wake up.

Sigh, sometimes I feel like the few of us who understand are Cassandras, who won't be believed until too late. But I did reach someone tonight, a friend who's been wondering about these economic happenings and asked for my opinion. Now he sees. But we aren't enough.

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12 Comments:

Blogger Oldsmoblogger said...

I found my way here via a link from Billy Beck.

I think we're gonna need a lot of copies of Economics in One Lesson to clean up this mess.

III

Friday, October 10, 2008 10:11:00 AM  
Blogger Concerned American said...

Ditto from Beck.

Good job, Perry.

Reichstag Fire

Thanks!

Friday, October 10, 2008 10:27:00 AM  
Blogger mike18xx said...

I don't buy it. Sorry, but I call conspiracy BS.

-- Libor spreads are hideous, and I can't fathom the US govt. remaining solvent for more than another year at this rate. The bail-out bill was prompted by China making a margin-call on its US paper.

These banks in question can hardly be described as assets that anyone would want to own -- why do you think the market was "shorting them to zero"? Banks worldwide hold collective mortgage derivatives exposure of over $50 trillion dollars which is likely worth less than ten cents on the dollar. Why the hell would the government want to own this toxic sewage?

The mere act of sucking up the poisonous AIG instantly killed the value of US long-term bonds (this, in turn, prompting China's margin-call).

If the "Reichstag Fire" scenario were true, the government would be attempting to seize the Federal Reserve (which is not, as many assume, a government institution), not these debt-bombs.

After all, the Fed owns gold bullion reserves, not toxic sewage.

Friday, October 10, 2008 10:54:00 AM  
Blogger mike18xx said...

Addendum:

...there is no liquidity/credit crisis, other than what's been engineered....

Did you see Bernanke's speech the other day? He had a look of animal panic in his eyes. These guys did not anticipate international margin-calls.

The cunning plan of Goldman-Sachs and JP Morgan (and their cronies who've revolving-doored into government positions) to off-load their toxic-waste onto the taxpayer backfired severely backfired, as now Treasury finds its vault completely empty, with nothing left to do but print funny-money into a hurricane of rising short-term credit rates while 30-yr notes grow cobwebs.

IMO, Denninger still has the best handle on this.

-- Whatever these monumental morons thought they might have been doing with this, all they've managed to do is set off the Mother of Financial BLEVEs.

Friday, October 10, 2008 11:30:00 AM  
Blogger Ron said...

In a nutshell: The capital everybody is worried about is still all out there. This is just a fight about who gets to keep/control it, and--if it's the government keepin' it--how much they get to pretend it's worth.

Friday, October 10, 2008 12:51:00 PM  
Blogger mike18xx said...

"Capitol" isn't out there; debt-instruments are out there; and, thanks to Mssrs. Paulson and Bernanke, the entire global economy has been rocked on its heels as everybody suddenly realized that the problem has spread from lending-firm insolvency to government insolvency.

*That* is why Iceland's money collapsed yesterday -- The government nationalized toxic-waste-holding banks....and now their currency is as poisonous as Zimbabwe toilet-paper. Much of Eastern Europe and the Far East is all set to blow up as well.

Raise taxes? Roosevelt raised the top pains to over 90% during the last great depression. Guess what? People who are out of work don't pay. Tax Revolt '09 is going to be a doosie; people everywhere are simply not going to file.

==//==

A dozen short-funds with billion-dollar warchests eagerly awaiting a DOW "v-spike" to cover and go long are a mouse-fart in a hurricane compared to the $50+ trillion dollar derivatives monster that has everybody and their great aunt bailing out of mutual funds they've held for decades. Speaking of mouse-farts, Warren Buffet sunk a boatload into G.E., which is now trading substantially lower than when he went in. (Buffet also wrote a lot of calls on the S&P500, btw, and could theoretically go bankrupt if it declines enough.)

Until all this uncollectible debt is written off, and corporate balance-sheets can be trusted again (i.e., "transparency", with no "level 3" shenanigans), we will enter a global economic depression.

We'll probably get a nice bounce soon, lasting weeks or months, but 2009 is looking ugly as sin.

-- The derivatives Ponzi has BLEVE'd. Next up will be the government bonds Ponzi.

Friday, October 10, 2008 2:29:00 PM  
Blogger jonathan said...

i don't really have a blog, and if i did it probably wouldn't be too popular, which is why you haven't heard me screaming about 1930s germany for the past six months. rest assured, someone else out there is.

Friday, October 10, 2008 3:57:00 PM  
Blogger Perry Eidelbus said...

Mike, no offense, but I would take you more seriously if you knew the difference between "capital" and "capitol."

LIBOR and money supply indicators all prove that there's plenty of liquidity out there. So tell us why the government is claiming there isn't a problem?

-- Libor spreads are hideous, and I can't fathom the US govt. remaining solvent for more than another year at this rate. The bail-out bill was prompted by China making a margin-call on its US paper.

Please elaborate on what you think the mechanics are of China's "margin call" (such as who forced it), and how you think the U.S. government could actually collapse. Do you realize that governments hold areas (villages together by force? They always have and always will.

Even if the U.S. collapsed monetarily, it could still be a wealthier (for the nonce) form of Zimbabwe: ruled by a military dictatorship, sustained by its own food producers, with a broken financial system and hyperinflation.

These banks in question can hardly be described as assets that anyone would want to own -- why do you think the market was "shorting them to zero"?

First: it's not the banks as assets, but that controlling stakes means controlling the nation's financial system. That's the point.

Allowing short selling, up to a point, was to make it even cheaper for the federal government to take them over. Once they got too cheap, the SEC instituted the ban on short-selling. The ban simply fed short-sellers' mania by implying that, since the government is banning short-selling, the shares are in fact worth even less. So while private investors are waiting for a ban to expire, or otherwise waiting to figure things out, the feds are stepping in to nationalize everything.

Banks worldwide hold collective mortgage derivatives exposure of over $50 trillion dollars which is likely worth less than ten cents on the dollar. Why the hell would the government want to own this toxic sewage?

Much of the outstanding derivatives cancel each other out and/or will not collapse. Regardless, it's still not about value, but control.

The mere act of sucking up the poisonous AIG instantly killed the value of US long-term bonds (this, in turn, prompting China's margin-call).

Actually it was the beginning of the nationalization of the insurance industry.

If the "Reichstag Fire" scenario were true, the government would be attempting to seize the Federal Reserve (which is not, as many assume, a government institution), not these debt-bombs.

Uh, do you really think the Fed is independent of the federal government? It always has been just an arm, no matter how "private" it's called.

After all, the Fed owns gold bullion reserves, not toxic sewage.

And a lot of U.S. Treasury bonds, which are intrinsically worthless except for the compulsion of the U.S. taxpayer to make good on them.

Did you see Bernanke's speech the other day? He had a look of animal panic in his eyes. These guys did not anticipate international margin-calls.No, I never bother to watch these fuckers. And are you really willing to judge the situation by how you think Bernanke looked?

The cunning plan of Goldman-Sachs and JP Morgan (and their cronies who've revolving-doored into government positions) to off-load their toxic-waste onto the taxpayer backfired severely backfired, as now Treasury finds its vault completely empty, with nothing left to do but print funny-money into a hurricane of rising short-term credit rates while 30-yr notes grow cobwebs.

Is the Treasury's vault anything BUT empty? The feds spend money as quickly as it comes in.

And note what you said: the Treasury is printing money? But that's the Federal Reserve, right? In fact, there's no difference between the two.

This is a form of Pascal's wager. Are you willing to drop your vigilance in exchange for the possibility that we're looking at full-blown totalitarianism?

On the other hand, vigilance costs nothing -- well, an Austrian like me should properly say, cost very little.

"Capitol" isn't out there; debt-instruments are out there; and, thanks to Mssrs. Paulson and Bernanke, the entire global economy has been rocked on its heels as everybody suddenly realized that the problem has spread from lending-firm insolvency to government insolvency.

If only governments really were going to collapse, allowing us to sort out civilization so we can rule ourselves legitimately, but governments aren't going away anytime soon. Governments don't collapse because of money problems. They collapse because of force. Even the Weimar Republic didn't collapse; it was taken over.

*That* is why Iceland's money collapsed yesterday -- The government nationalized toxic-waste-holding banks....and now their currency is as poisonous as Zimbabwe toilet-paper. Much of Eastern Europe and the Far East is all set to blow up as well.

Not if people still want euros, which you need to buy things from most Europeans.

Raise taxes? Roosevelt raised the top pains to over 90% during the last great depression. Guess what? People who are out of work don't pay. Tax Revolt '09 is going to be a doosie; people everywhere are simply not going to file.

If only that would already happen! But it won't, because Americans have been bred into good sheep. Obama is already siccing the Secret Service on people for unfounded reports that they wish him "dead on a hospital floor." You don't think we'll have armies of jackboots hunting down people who don't file? And they'll be good jobs, too. If high taxes destroyed your job, no problem, just become a tool of the state. People do similarly in the Third World, joining the military to feed their families.

That, or it will be like the Mark of the Beast: some sign indicating you've paid your taxes and can be permitted to move about. Otherwise, you'll be detained (and worse) at the next checkpoint, if not on sight.

A dozen short-funds with billion-dollar warchests eagerly awaiting a DOW "v-spike" to cover and go long are a mouse-fart in a hurricane compared to the $50+ trillion dollar derivatives monster that has everybody and their great aunt bailing out of mutual funds they've held for decades.

Again, a lot of derivatives cancel each other out. There's $50 trillion worth of liability only on paper, but it would never happen all at once. It's like the human brain, which would die if 100% of its neurons fired at the same time, but they never do.

Speaking of mouse-farts, Warren Buffet sunk a boatload into G.E., which is now trading substantially lower than when he went in. (Buffet also wrote a lot of calls on the S&P500, btw, and could theoretically go bankrupt if it declines enough.)

So Buffett wants to pump money into GE when he thinks the share price will drop. Your point?

Now, if it's true he's been writing calls on the S&P 500, that will hurt him only if the S&P 500 rises, not falls. If share prices are lower than the strike price, a call is not exercisable.

Until all this uncollectible debt is written off, and corporate balance-sheets can be trusted again (i.e., "transparency", with no "level 3" shenanigans), we will enter a global economic depression.

But the very problem right now is that government is skewing information, and everyone is having a hard time valuing securities and companies. And nobody knows what the feds will do next, so nobody wants to lend significant sums.

We'll probably get a nice bounce soon, lasting weeks or months, but 2009 is looking ugly as sin.

Longer than that, I fear.

Friday, October 10, 2008 11:09:00 PM  
Blogger mike18xx said...

I'm posting this at 3am just before I crash, so I'm going to make it quick.

LIBOR and money supply indicators all prove that there's plenty of liquidity out there....

(See end of this comment.)

Regards the conspiratorial business, it simply fails at the premise level: Why would a government need or want to own SOME banks (specifically, insolvent banks), when it has a whole Department of the Treasury which, if recent events are any indication, can get away with doing pretty much anything it wants (although it occasionally has to grovel to Congress)?

After all, if you're going to heist a bank, wouldn't you pick one with money in it?

....a lot of derivatives cancel each other out. There's $50 trillion worth of liability only on paper, but it would never happen all at once.

Saying "(It's) only on paper" doesn't make them legitimate contracts between parties -- because they are. Lehman's credit default swap price was set at auction today at 8.625 cents on the dollar, considerably less than the 12-30 cents expected. This means that 91.375% is due the purchaser of the swap from the seller, with less than a tenth of it written off.

As the housing bubble deflates thoroughly over the eighteen months, it's projected that nearly ten million people in the US will fall into default on their mortgages as rising short-term interest-rates jack their ARMs into orbit (goes back to inverted Libor); in eastern Europe and the Baltic, where the housing bubble was even more acute, it will even be even worse.

This is a global depression following a credit bubble crash. It won't be as bad in the US as some doom-gloomers predict, due to the ability of smart, technologically adept people to route around "damage" plopped in their way (similar to the internet routing around censorship). In the third-world, the consequences will be pretty horrific.

Buffet...

(I meant to write puts, not calls.)

But the very problem right now is that government is skewing information, and everyone is having a hard time valuing securities and companies. And nobody knows what the feds will do next, so nobody wants to lend significant sums.

The "very problem right now" is that too many people imagine the government as a monolithic entity rather than a Roman analog in which various emperors and senators all have their own schemes and are busily sharpening daggers for each other's backs.

-- There's a Goldman-Sachs/J.P.Morgan clique which their errand-boy Paulson in Treasury running 'blocker' for them. They're simply crooks who shun sunlight.

-- There's Nancy Pelosi and the other socialists in Congress. They're commie scum (but not above grabbing bribery loot with both hands).

-- There's Bush, who never met an oil-patch Arab he didn't like, but otherwise doesn't seem to treat the presidency much different than being the owner of a baseball team.

-- There's the Supreme Court, which is apparently not interested in any of this because....who the hell knows? But someday it might, and suddenly throw a monkey-wrench in everybody's plans.

-- And finally, there's the world financial markets, that herd of rampaging elephants and snarling hungry tigers that governments think they can still boss around (but which really have no fucking clue what they're dealing with in the internet age where all dirty little secrets, once uncovered, spread instantly everywhere), which has smelled the stench of putrifying mortgage derivatives and looming insolvencies for over a year, and which has been steadily dumping and shorting financial institutions it suspected had exposure. This has moved the equity markets on an inexorably accelerating downward for over eight months -- the markets *will* flush the poison out of the system one way or the other.

==//==

As far as China is concerned (and Libor spreads and what they portend), I'll direct you to Karl Denninger's tickerforum.org, where these have been discussed in considerable detail by traders.

Saturday, October 11, 2008 5:01:00 AM  
Blogger Perry Eidelbus said...

Regards the conspiratorial business, it simply fails at the premise level: Why would a government need or want to own SOME banks (specifically, insolvent banks), when it has a whole Department of the Treasury which, if recent events are any indication, can get away with doing pretty much anything it wants (although it occasionally has to grovel to Congress)?

You're talking "insolvent" when the banks are hardly going to fall apart. If a bank does go under or otherwise runs into trouble, it's bought up by another bank -- it does not actually disappear.

But again, it's about controlling the financial infrastructure, and even a teetering bank can be very useful. Bridges in World War II were often the key to European land fighting, even if they had fallen into disrepair.

Remember: control, not value. The U.S. government doesn't care how much something is worth, only that it's useful at whatever the price.

After all, if you're going to heist a bank, wouldn't you pick one with money in it?

That's just the thing, there is indeed plenty of money out there.

Saying "(It's) only on paper" doesn't make them legitimate contracts between parties -- because they are.

I think you meant "illegitimate."

An insurance company could go bankrupt if everyone filed claims simultaneously, but that isn't going to happen. Does that invalidate the policies?

A bank would go under if all depositors withdraw at the same time, but odds are that won't happen.

Life is full of examples of why things won't happen all at once, although paper liabilities seem like doomsday.

Lehman's credit default swap price was set at auction today at 8.625 cents on the dollar, considerably less than the 12-30 cents expected. This means that 91.375% is due the purchaser of the swap from the seller, with less than a tenth of it written off.

No, this isn't what the buyer is due. It's what the buyer hopes he will get, but pennies on the dollar represents the buyer's belief that he'll lose money on the deal.

And in fact we don't know if this is the true valuation. Because the feds could buy up anything for any amount, this could even be overstated.

As the housing bubble deflates thoroughly over the eighteen months, it's projected that nearly ten million people in the US will fall into default on their mortgages as rising short-term interest-rates jack their ARMs into orbit (goes back to inverted Libor);

Do you realize how extreme this doomsday scenario is? In 2007, there were 2.2 million foreclosure filings on 1.29 million properties. That would have to double for 2008 and triple for 2009 just to reach 6.5 million total.

But what you're saying is 10 million -- that one in every 30 people in the U.S. will go into default, when LIBOR rates are in fact lower than a year ago.

in eastern Europe and the Baltic, where the housing bubble was even more acute, it will even be even worse.

Mostly because of all the oil dollars flowing in, not because of monetary shenanigans.

This is a global depression following a credit bubble crash. It won't be as bad in the US as some doom-gloomers predict, due to the ability of smart, technologically adept people to route around "damage" plopped in their way (similar to the internet routing around censorship). In the third-world, the consequences will be pretty horrific.

This will be bad only if government makes it so, just like in 1929.

(I meant to write puts, not calls.)

That only makes me think more that you just don't know what you're talking about. It should have appeared nonsensical to you the very moment your fingers typed it out.

The "very problem right now" is that too many people imagine the government as a monolithic entity rather than a Roman analog in which various emperors and senators all have their own schemes and are busily sharpening daggers for each other's backs.

Things are a lot more united than you think. GWB working with Ted Kenney. Dodd working with Bob Bennett (an unthinkable Mutual Admiration Society a year ago!). The outside strife only for show. On the inside, they do much more than logrolling. They might differ on "important issues" like abortion and gay rights, which are inconsequential to the main things going on: ultimate federal control of our lives, which both parties are very united on. Note that they never argue over how much to spend, only how, and in the end it's spent the same anyway.

-- There's a Goldman-Sachs/J.P.Morgan clique which their errand-boy Paulson in Treasury running 'blocker' for them. They're simply crooks who shun sunlight.

Of course. But look at the big picture.

-- There's Nancy Pelosi and the other socialists in Congress. They're commie scum (but not above grabbing bribery loot with both hands).

There are also George W. Bush, John McCain, and other conservative socialists in Congrss. They're commie scum who redistribute wealth all the same as liberals.

-- There's Bush, who never met an oil-patch Arab he didn't like, but otherwise doesn't seem to treat the presidency much different than being the owner of a baseball team.

No, worse. He's the man who said the Constitution is "just a goddamn piece of paper."

-- There's the Supreme Court, which is apparently not interested in any of this because....who the hell knows? But someday it might, and suddenly throw a monkey-wrench in everybody's plans.

We could only wish. But look at the Kelo decision, Raich decision, and how the SCOTUS sided with the feds on the blatantly unconstitutional McCain-Feingold.

-- And finally, there's the world financial markets, that herd of rampaging elephants and snarling hungry tigers that governments think they can still boss around (but which really have no fucking clue what they're dealing with in the internet age where all dirty little secrets, once uncovered, spread instantly everywhere)

You really don't understand, do you? Even a herd of elephants can be controlled when frightened by something sufficiently large, whether real or an apparition.

And what about when the "dirty little secrets" are rumors? Look how JP Morgan name-dropped the New York Fed to propagate rumors about Bear Stearns, how Schumer caused IndyMac to fail because of his rumors, and now how the entire federal government has world financial markets in disarray because of this mythical "crisis."

which has smelled the stench of putrifying mortgage derivatives and looming insolvencies for over a year, and which has been steadily dumping and shorting financial institutions it suspected had exposure.

But the government was what promoted the mortgage problems in the first place, ever since 1936!

And you talk about shorting financial institutions as if there's something wrong with that. There's nothing inherently wrong with shorting anyone (except for naked shorting, because you're selling a product that you very well might not have to deliver). If the company is in trouble, shorting properly drives down the stock's value so it accurately reflects the company's condition. On the flip side, if you short a company that's in fact fine, you'll be punished by having to repay borrowed shares at a higher prices. If you think the company is in fact fine, shorting helps you by lowering the stock price and allowing you to buy more.

This has moved the equity markets on an inexorably accelerating downward for over eight months -- the markets *will* flush the poison out of the system one way or the other.

In a free market, yes, but government right now is sustaining the bad and preventing rational decision-making.

As far as China is concerned (and Libor spreads and what they portend), I'll direct you to Karl Denninger's tickerforum.org, where these have been discussed in considerable detail by traders.

Etiquette requires posting links. The rest of us don't have time to hunt around, ok?

Saturday, October 11, 2008 11:53:00 AM  
Blogger mike18xx said...

Tickerforum.org has a search function -- either you're willing to invest the time, or you're not. Somebody (me) has shown up to tell you that your premises and your conclusions are wrong; if you're willing to blow off analysis by others unseen, that's your call.

In any event, I'm oughta here. I have better things to do than argue.

Saturday, October 11, 2008 3:25:00 PM  
Blogger Perry Eidelbus said...

You know where the threads are, and I do not have the time to hunt around. It's hard to take you seriously when you don't know the difference between "capital" and "capitol," when you suddenly reverse on "calls" and "puts," and now when you won't do the decent thing and give me links instead of telling me to "go look." Don't take this too personally, but you sound very unfamiliar with the topic and appear to be relying on a lot of bad information that your fellow dilettantes are feeding you.

You don't have time to argue? Coincidentally, I don't have time to keep educating you. Have a nice one.

Saturday, October 11, 2008 10:03:00 PM  

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