The Float

Bernie Madoff understood the concept of the float. He had fun with it for 30 years. A bank at any one time doesn’t have the cash to pay off all deposits and there is little worry that it will have to unless there is a run on the bank. What brought Bernie down was the fact the money coming in was less than the money going out.

Let’s travel back in time.

The FDIC insurance fund was established in 1934 to give the people confidence in the banks when there was none. If your bank had a good balance sheet that was up to par with Fed standards they were given the opportunity to become FDIC insured. Nine banks went under that first year, but that wasn’t close to the 4,000 that closed in 1933. The FDIC was pretty much collecting insurance premiums from the banks and paying out very little in claims.

Fannie Mae was created in 1938 to help stimulate the “depressed” housing market. Banks were not interested in investing in home loans. So this government program supplied the banks with federal money to finance home mortgages. Notice here too, the damage to the housing market had already occurred. Fannie wasn’t really sticking its neck out to insure the market.

Then we have the IRA retirement plans that started in 1974. These plans allow a wage earner to shelter income from taxes. Once you put it in the plan, it is no longer yours, the government tells you when you can spend it. Pay in hard earned dollars today and get back watered down whiskey when you retire.

Fast forward back to today.

If we examine the savings of our nation, It is somewhere around 20 trillion dollars. Probably between 8 to 14 trillion of that has vaporized. So going back to the Ponzi scheme, two things have happened that were not anticipated. The FDIC is insuring the bad decisions of bank managment, bank credit became very easy to come by. Also our government is insuring investors against loss for home loans that were written to just about anyone. It could be argued that the government programs encouraged this mess.

Madoff's Ponzi scheme collapsed when funds withdrawn exceeded those being deposited, and it ruined a great many people. Now we have a Ponzi scheme that depends on the Federal Reserve printing currency to cover the bad home loans and cover the failed banks. There is no concept that the Federal Reserve can run out of money or go to jail.

Now if we take this one step further, there was no excess money for Congress to spend during the prosperous years. But they found ways to increase spending. Now we have a financial crisis and funds are being found in abundance. We know that Congress never saved for that rainy day. Just look at the national debt at 12 trillion dollars. Do you get the feeling that somewhere along the line people are going to want real money, not this stuff that Bernanke is printing?

Presently if the dollar were to be revalued, 1:10 –--which seems pretty plausible, the government would be confiscating 90 percent of the savings of the people that have money, and issue a new dollar. Of course if you had no savings, you lost nothing. This could be the final game plan.

What you need to examine, is what would make banks lend again? There is no real profit incentive if the currency gets revalued every 10 years. There has to be a link to gold for real stability, but in lieu of that, you get very high interest rates to compensate for the risk. The real question to ask is how much of our retirement funds are really there? Since there is no real urge to spend it all today, the concept that half of our savings is gone is not apparent.

In just one day, the news of Madoff's failed escapades, turned millionaires into paupers. The sad thing is, they were millionaires until they were told otherwise. Their lifestyle underwent a drastic change. Bernanke and Geithner have tried to create real money out of nothing, trying to replace what has been lost. Money is usually a measure of a man's labor. Printing currency is not a measure of the labor used to build cars, bridges or produce food, no product was created. Its rightful name is counterfeiting

The government can't print gold and silver. I've given my retirement plan the boot. I'm going with silver from here on out, gold is too expensive. I might pay more in taxes, but you have to ask one question: "If toilet paper goes to $200 per roll, did you really enjoy a tax savings by shoving it into an IRA or 401K?

The TARP Hoodwink

Here is a bit of pure speculation on my part. When Congress came to the aid of the banks with the TARP money, things were not quite as they appeared. At that time, bank accounts were Federally insured for 100K. A person with 20 million dollars in cash, would need 200 banks to deposit the cash for the FDIC insurance coverage. Most likely the 20 million was in one bank. What we could have been looking at here was the flight of big money out of the banks, not the small deposits.

Back in the 1980’s we had a bank called Continental Illinois that the FDIC deemed too big to fail. Here is an interesting link to that fiasco: Continental Illinois and “Too Big to Fail.” The Fed ended up covering all deposits to stem the run on the bank. Of course they ended up owning it in the end.

The FDIC has no problem coming to the aid of the banks. AIG (a non bank) was another story, a black hole for over 200 billion in TARP money. Now the banks have stabilized and the word is out, all of the banks "Too Big to Fail" are FDIC insured for ANY amount, no matter how large. The big money is returning back to the banks. The banks no longer need the TARP money and can return it to the Fed. This eliminates the TARP restrictions on large bank employee bonuses.

The banks are thumbing their noses at the FDIC, look at Citigroup’s stock offering the other day to raise money to pay off their TARP debt. The Fed previously gave them 25 billion dollars in return for stock valued at $3.25 a share. Then Citigroup goes out and issues 20 billion more of stock to pay off the TARP loan at $3.15 a share. What the government should have done was dump their shares before the Citigroup offering. Not only does the government now have a smaller slice of Citigroup, it is worth less on top of it. Doesn’t it feel like the Fed just got "had" by a used car salesman named “Slick?”

The whole thing smacks of a Fly-By-Night-Airline. Imagine your airplane flight landing at an airport midway to the destination and then the pilot passes the hat among the passengers for gas money? Here's a bank selling stock, to pay off a TARP loan! Is it because they’re broke????

"Too big to fail," is the Modus operandi for the Fed and the players know the rules to that game. The bankers get their bonuses and they did it right under our noses; irritating to say the least.

An Educational Letter From An Educator

The following email was sent to all of the Poway Unified School District Supervisors by Dr. Don Phillips Superintendent of Poway Unified Schools, November 16, 2009. It left me with a very heavy heart. This gentleman is fully focused on his job and what has to follow to accomplish his goals. It is a preview of what the schools in California have to deal with. These problems are not invisible and they are not going away. It is hard to address problems that the general public doesn't fully comprehend. Read and enjoy, it is well written.

Dear Staff,

As you know very well already, the Poway Unified School District has faced two years of extreme fiscal challenge. The nationwide recession has affected California more than most states and has led to dramatic cuts statewide to K-12 education funding. For the 2008-09 and the current 2009-10 school years, Poway Unified has been faced with budget shortfalls totaling approximately $48 million. To keep our district fiscally solvent, we have made spending reductions totaling over $22 million, meaning real cuts to personnel and programs. In addition to these spending reductions, we have applied one-time federal stimulus funds to balance the general fund, implemented state-approved flexibility transfers of categorical funding, and utilized voluntary salary rollbacks of 2.7% from most district staff members to address the remaining $26 million budget shortfall These strategies have allowed us to minimize class size increases through the retention of teaching positions, maintain programs for students, and retain many support staff positions.

Through it all, we have worked together to provide our students with the very best education possible with fewer resources. Few, if any, districts have had the can-do attitude to make this happen, and I feel honored to serve as superintendent in this amazing organization.

Unfortunately, our financial woes have not gone away, and economic experts are telling us that, while it took two years to reach this point in the recession, it will likely take five years for the economy to fully recover and for state funding to education to return to 2007 levels. Though some economists are declaring the recession has bottomed out, California’s very high jobless rate, the absence of major capital gains taxes on income, and the predictable lag in tax revenue that always follows an economic downturn all suggest a slow rebound for state tax revenue and therefore funding for K-12 public education.

The dismal state economic picture will sadly have an additional impact on the District’s budget for the 2010-11 school year. Our challenge is further compounded by the fact that most of the federal stimulus dollars, as mandated by law, must be spent by 2010. In effect, we are currently spending significantly more than our ongoing revenue would allow, given the use of one-time funding from various sources.

We currently estimate that PUSD will face a budget shortfall of approximately $17 million for the 2010-11 school year. This assumes that we face no additional budget cuts from the state, which is unlikely given that state tax revenues are already falling $5 to $7 billion behind the updated projections for the current fiscal year. The only helpful relief on the horizon is the possibility of a second wave of federal stimulus dollars that could be as much as $2 million, but this is just a possibility at this point.

These state budget cuts and potential loss of one-time federal funds place us in a most challenging position. Our programs for students, and staffing levels that have survived the last two years of cuts, are the highest priorities in our budget. Reducing any of these high priority programs will be most difficult. However, the size of these state cuts requires us to consider options we would never have considered before. We will need to make reductions at every level in the organization, and we will need to explore combinations of very difficult cuts to reach the needed $17 million in reductions.

Finally, as a school community we are going to have to make choices none of us like or feel are best for students. However, I am confident we will get through this period and continue to meet the educational needs of our students in the best way possible.

While it is still early in the 2010-11 budget-building process, the financial picture does appear bleak. I provide this information not to alarm unnecessarily, but to share with you the size of the challenges facing our district and allow time to discuss and think about how we can best meet these challenges as an educational institution.

Sincerely,
Don

Can You Afford a Dentist?

I had a dentist appointment yesterday to get a tooth filled. This is a medical group office with three dentists and a dozen support assistants. So when I pulled in at 7:50 for my 8 am appointment the parking lot was pretty empty. I was figuring that I must have gotten the time wrong. But sure enough they were open.

My simple filling turned out to be a ceramic inlay with 2 surfaces. My share was $395 with insurance. They are up front with the costs, you pay first and then they do the work. I balked at the price (choked is a better description). I pointed out that I had already spent $1200 on one root canal and two crowns so far this year. The secretary doing the financing dropped the price down to $250 and let me use a $100 dollar off coupon they had sent me. Between me and my insurance, they got about $450 (the insurance paid $300).

So they "owned" me for two hours. During that time only one other patient came in to my area (there are 4 stations), and that was for an estimate. It was just me, the Doc and three hygienists. After they finished, I got up and went into the outer office and noticed that there were only two people waiting in the lounge. It saddened me, the lounge use to be full of people.

I should have guessed what was happening when I called for an appointment and they wanted to schedule it the next day (I need at least a week to mentally prepare for dental work). People are cutting back. It is all very invisible; you won’t read about it in the morning paper, but you will read it here. Save a dentist and "stimulate" the economy, go get that tooth filled.

Dubai the land of Plenty

This city-state has to be the poster child for stupid opulence. Below is a picture of a British jet on a flyby over a man made island shaped like a palm tree, Palm Jumeirah. Real estate on that island isn’t moving as expected.

Believe it or not, there are three Palm Islands and another group called "The World."

Then you have the Dubai Ski resort. This kind of gives you an idea where the money, we pay for gas, goes.

How about the world's tallest building the Burj Dubai? Notice the foreground is a replica of Venice, Italy (to show it all would take another 15 pictures).

These things are visible, want to guess at what can’t be seen? The “Cash for Hookers Program," is working quite well in the Arab world; better so than the "Cash for Clunkers" plan here in the States. These girls are bringing our oil dollars back to us (God bless them).

Dubai is a house of cards. It is beyond being absurd. The UAE is stepping in to bail them out. (they had a change of heart) It tends to be obvious that something is out of whack from an investment perspective when you see a ski resort in the hot desert; it is not a mirage. The estimates are around 90 billion dollars to contain the damage (multiply that by a factor of 10 for a more realistic estimate).

Now if the Arabs have been storing their reserves in our banks--- and Ben has spent it all--- and they need to make a large withdrawal,- - - hmmmm.

The next time you go to get gas, think "Ski Dubai." You might mispronounce the word "Ski" and that is understandable.

Raising Taxes Generates Less Revenue

This health care plan being pushed through Congress is pretty much nothing more than a tax hike on the young paying for the benefits of the old. The additional funds raised and not paid out could be "borrowed" by Congress, just like our Social Security taxes were.

Look at the picture below. 23 percent of our budget is for Medicare, 21 percent is for Social Security, 10 percent is other, and interest on the debt is 8 percent. The only things Congress can "adjust" (cut) are the 21 percent for defense or the 17 percent of discretionary spending. Good luck there.

In the second chart look at the sources of income; Social Security provides 36 percent of tax revenues. Notice, the government is only paying out 21 percent in benefits to Social Security recipients; the other 15 percent is "budget money." Note: FDR claimed that Social Security would only amount to a 1 percent tax (Democrats seem to have a problem with math and that goes hand in hand with voters having a bad memory).

This is where the health care tax will be the new revenue generator. Just like Social Security was during the Great Depression. But this time it will back fire on them. Congress in its infinite stupidity thinks this will solve all of our country's budget problems. They raise taxes and the taxpayer gets “free” health insurance. But there is one little item, that right now is insignificant, but will rise up to bite them. It is the assumption that most families will continue to have two wage earners.

The government has failed to realize the game rules have changed. We are in a depression with high unemployment and decreasing tax revenues. Your dollar has to go further when you have less of them to spend. Government spending has to be cut drastically, how likely is that to happen? Many families now only have one wage earner and it looks as if it will get worse. The government needs to raise taxes by 25% and health care will do just that. The real health insurance costs are for those over the age of 60 and that program is already “funded.”

The younger generation may be able to beat this tax. When our son was born, I became Mr. Mom. My wife had a real good job and at the time, my real estate career wasn’t setting the world on fire. My wife wanted me to get a “real” job and put our son in day care. I mentally figured it out, day care would cost about $18,000 per year and gas to drive to my job would probably be $2,000 per year. Plus we would both have to do the cooking, cleaning and shopping; figure that has to be worth about $5,000 per year. Add it up and it totals up to $25,000 (after tax income) so in reality, you need to earn $30,000 (before taxes)to justify getting a job. On an hourly basis, that figures out to about $14.42 per hour (figure $15.50 if health insurance passes). Being a house wife, may be a big positive for family financing especially if the prospective employer is only offering $9.00 per hour.

Government health insurance would be one less worry for the wife and kids. The husband could come home for “lunch.” Their actual standard of living would be better than the family with two wage earners. The net effect of this health insurance could inadvertently reduce the number of working women (with young children), which would be a reduction of taxpayers paying into the system.

Any way you look at it, there will be more people “not working,” or working under the table. Social Security collections as well as the new Health care tax could probably decrease well below anticipated government expectations.

Tax increases did not work during the Great Depression, including the Social Security tax. I read history, I don't interpret it. Congress needs to share a cell with Bernie Madoff. They both played the same game, the only difference, Bernie knew his investors.

Geithener Sends US Gold to China???

The IMF just sold 403 metric tons of gold, this amounts to 12,965,649 fine troy ounces. 200 tons of it went to "India." In order to sell gold, the IMF has to have an 85 percent approval of all of the members and from what I can surmise the US has about 17% of the voting rights, the toys were ours so no one objected to this transaction.

To the IMF and the countries of the world, gold has no real value. Each country can purchase gold from citizens with their own currency. It used to be that a currency was backed by gold and could be redeemed at the gold window. President Nixon closed the gold window for the US. So in essence, gold has little meaning as far as trade goes. With the financial markets, options can be bought to cover currency fluctuations. Gold has been removed from the equation.

One factor not often considered is that there are security considerations for storing gold. You have to keep it in a secure and controlled environment. In third world countries that is just about impossible. Several countries have “gold rooms.” This is where gold is stored in different locations around the world. So if the US was to transfer gold to Brazil in the New York office, it would go from room 10A to 12b. If the room 12b got filled up, Brazil would send a boat to pick up the surplus. This is how it worked when the world was on a gold standard; that all ended 35 years ago.

Figure that the IMF doesn’t deal in gold, it deals in currency. It loans money not gold. Gold is not a commodity that is useful in lending, it is not bad as collateral, but to a bank, it has to be sold for currency before they can use it. The IMF doesn’t need gold, it needs currency. Gold has no value to them. It is like a person in the desert with 1000 ounces of gold and no water, you can’t drink the gold.

I contend that the IMF never had any gold and doesn’t need any; it has no functional purpose to them. They have the rights to currency valued with gold for each country, based on their current conversion rate and that is all they need to operate as a bank lender. Our representatives at the IMF are Tim Geithener and Ben Bernanke.

So what are we looking at here? Figure that India was just the middleman. Let me suggest that China wanted some assurances that the money loaned to us was not just paper. I am suggesting that the US transferred to the Chinese 403 metric tons of gold as a down payment on our 1.5 trillion dollar tab with them. That figures out to be about a 10% 1% cash payment on debts owed. Can you imagine the headline “US gives China 12 billion in Gold.” Let’s face who else has 403 tons of gold and a need to back the paper they have already printed?

I could be dead wrong on this, but something smells funny here.

Unemployment, the Invisible Nightmare

A hat tip to Tyrone of the Housing Bubble Hall of Shame for this link to a time animation of Unemployment by county <--(Click on the "Unemployment" link to the Left, not the pictures below, to view) ------------------------------Before------------------------------------------------



------------------------------After (It ain't over yet!)---------------------------

Unemployment benefits have been extended to 99 weeks, (93 if you are in Kalifornia). If I was 40 years younger, I'd buy a surf board and a gallon of suntan oil.

You know times are tough when you hear on the radio that the Mexicans are sending money to the US for illegal aliens out of work.

The National Debt an Interest Only Loan

The good news is that the country can still afford to pay the interest on the national debt. Notice that it is also figured as a percent of Gross Domestic Production [GDP = private consumption +gross investment + government spending + (exports-imports)]. So as a percent of GDP, you have the ratio Debt to GDP. It kind of obfuscates the dollars and cents/sense.

The red check mark at the bottom of the chart points to the sentence; “The United States ranked as the 23rd-largest in the world as a percentage of GDP. It gives the reader the warm and fuzzy idea that 22 other countries are messing up worse than the US.



Here we are with visual aid number two. This shows standings according to public debt as a percentage of annual GDP. Japan is almost at the top, beaten out by the small country of Zimbabwe. Take your pick of whose figures work best for you. No surprise here, the US is way down the list, just like the claim from the chart above.


Look at the next chart below. Here the countries are listed by the dollar amount of external debt. The US is at the top. This is where you ask the waiter for your check and choke. What happened to Zimbabwe? Note that Japan is a special case. They have 7 trillion in debt but most of it is internal.


The last chart is more or less a financial report card for the major world players. Ireland looks like is has run out luck. As long as interest rates remain low, these governments can keep the punch bowl full.

Take away Australia, Hong Kong and the US, and the rest are members of the European Union that is tied to the Euro. Some of these countries have real good health care plans. It looks like it just gets put on a "bar tab" AKA National Debt.

Right now the US government doesn’t even have two pennies to rub together and they are busy printing money to stimulate the economy. By god, everyone will have a home, a car and health care ("A chicken in every pot and a car in every garage" sounds kind of familiar--Hoover comes to mind). Worry about getting a job after the handouts stop! Congress is in too much of a hurry to spend the country out of this “Recession.” It’s a little like dropping a frozen turkey into a hot deep fat fryer. You mise well attach a radio beacon to it, so you can track it, after lift-off.

The Impending Banking Disaster

If we summarize the present banking problems (including Fannie and Freddie), it is pretty obvious that the Federal Reserve and Treasury have bought all of the bad housing. No depositor has lost a dime. The last 16 bank closings have had absurd balance sheets. Oddly enough U. S. Bank Corp took over the last nine closings. In my opinion, this isn’t really the time to expand your market share in the banking industry. The absorbed banks just might make U.S. Bank Corp too big to fail and I imagine any losses from the assumed loans are insured by the FDIC or put on the books at a marked to market value (some sort of "can't lose" deal).

If you simplify all of this, the FDIC is cashing out the failed housing loans written by the closed banks. Then they avoid further losses by folding the rest of the failed bank’s loans into the buyer bank.

In the normal market of the 60’s and 70’s, a home mortgage included a 20% down payment. So if there was a problem with the market, the bank was not out of pocket until the home values decreased 20%. With the 100% loan, the bank is the real owner of the property the minute the note is signed. With the drop in property values of 40%, the banks are left holding the bag. The words “Road Kill” come to mind.

The picture below displays the info on the last failed nine banks, assets to deposits should match in value. Some of the values are so out of whack, it questions whether or not you really need a book keeper to tell you that your broke!


Now we have a new FDIC ruling that commercial loans can be carried on the books at original price for bookkeeping purposes. They don’t have to be marked to market. I would call this “Creative Financing.” Common sense suggests that this is wrong, and I am just pointing it out.

If you thought housing loans were bad, commercial loans are toxic. If a 10 million dollar shopping mall goes into bankruptcy and is sold for 5 million, the buyer might only have to come up with a 5% down payment (250K--- insurance companies do this all the time). So to the person with an expiring lease can probably get a real rent reduction by switching malls. What happens next? Retailers vote with their feet. The irritating thing here is that more commercial property falls into bankruptcy. It’s not a fast process; it will take about 5 years (In our area, this was evident 2 years ago). So I guess we have a head start. I just don’t know if winning a bankruptcy race is the sort of race we really need to win.

So far there have been 116 banks that have failed this year, 10 times more could fail over the coming year. Transferring the assets from small banks to larger banks, doesn’t make the problem loans any more secure, it just passes the problems into the future.

It is very comforting to know that the FDIC has everything under control--We get to watch them paint themselves into a corner.