The Bernanke Monarchy

The Federal Reserve now holds 4 trillion dollars worth of Treasury’s. Do you get the feeling that a lot of stuff that would have hit the fan, got bought by the Fed? All of Goldman Sach's bets with AIG were paid. Fannie and Freddie are GSA’s that should have dropped dead and didn't.

It is the Congress who spends our taxes but the Federal Reserve can spend the cash it creates with Treasury securities, without Congressional approval. They can buy bad debts and hope they get the money back later (It isn’t going to happen). The Fed is spending money at a faster rate than our Congress ever could. Of course it is not really spending; it is just a loan from the Treasury which they will buy back.

It is noble that  Ben wants to save the financial system. He can spend the money on wine women and song or bad real estate loans, it makes no difference, the money is not coming back. He has borrowed money, he has no right to access. Hail Ben Bernanke, our King, Sovereign ruling over all, Congress be dammed.

This is one guy that will never be out money as long as he has a pen.  And we thought we had to worry about Congress--forget them, they are asleep at the switch or more probably text messaging a girlfriend to renew their Viagra prescription.

Inflation ”An Old People’s Disease”

I can't remember how many times my grandpa told me; when he was a kid, the price of a loaf of bread was a nickel and how he worked in the oil fields for 50 cents a day. When I graduated from high school in 1964 gold was at $35 per ounce and our coinage was silver. At the age of 17, inflation had no real meaning. I had no past to compare it to. When I went shopping, I had no idea of what was a fair price for hamburger per pound. By the time I was 30, my perceived values of what things should cost were well rounded. Inflation was still not an issue. When I got to be 50, I started to take notice of the price my father paid for our house when I was a kid, $28,000. Then I remembered back to my first car in 1969, a brand new Lemans’ convertible, only $3,000. With the comparison, inflation seems rather obvious.

If you talk to the average guy on the street, inflation might as well be nuclear physics. The idea that government spending without matching taxes creates inflation, makes the listeners eyes glaze over. The general public takes price increases for granted; prices and wages always go up (just like housing). The worker’s wages increase each year and this gives everyone the feeling that they are making more money (it’s the carrot on the stick). The government doesn’t even have to raise taxes, inflation does it for them.

The milestones for government induced inflation are rather subtle if not embarrassing. In 1964 it cost the mint $1.29 to purchase the silver to make 5 quarters. Needless to say, that 4 cent loss was eliminated. In 1965, the government reduced the silver content in the coinage from 90% to 0% silver, and no one blinked an eye (the half dollar and dollar went to 40% silver up to 1969).   In the next 5 years, the bad money chased out the good. Silver disappeared from circulation.

At that point, you’d think the story is over. Well, in 1982 our government had another “mark to reality moment.” It was now costing them 2 cents to buy the copper for a one cent coin. They then introduced this new copper cladded zinc cent.

Our currency is no longer backed by anything except the “full faith and credit of our government.” The churches in this country work on the same principle—a lot of faith and prayer. In government, it’s called “Winging it!”  (It involves a lot more prayer than the religious model).

We have traveled from the gold backed currency’s of 1930’s to the Silver backed currency’s of the 1950’s to the Copper  currency’s of the 1970’s. It kind of makes you wonder what has really happened to our monetary system since the last conversion 28 years ago, when we went off the “copper standard” onto the zinc.

Today’s generation of high school grads is no different  from ours forty years ago. At the checkout counter the other day, a young girl (21) in front of me bought a pack of cigarettes for $6.50. They have always been that price for her (I can remember paying a quarter a pack). I now understand my grandfather’s irritation over the price of bread increasing.  It's not hard to catch on to what the government is doing, it just takes time.  Inflation is a little like sawing a quarter inch off of grandpa's favorite walking cane each week. It's good for a few laughs until he catches on.

Real Estate the Tip of the Iceberg (Reprinted)

The following, is a reprint from April of 2008 for those who missed it. Nothing much has changed, except for the guy in charge.

On one side you have the upside down home owner, who is about to walk away and give the bank the keys. But the other side, the bank paid the seller real money for the house and the new owner signed a note to pay the debt. Many suggest that this serves the banks right for loaning the money so carelessly in the first place. Think twice about that, the money paid wasn't the bank's, it belonged to a depositor. Banks don't lose money, people do!
If we can agree that real estate is only the tip of the iceberg, then it becomes apparent that the financial banking system, is in a very precarious position. Throw in hedge funds and the visual aid is no longer to scale, it's not big enough (use your imagination). The Iceberg represents real money borrowed from someone who works for a living or has money in an investment vehicle. It doesn't belong to a hedge fund, bank, IRA or 401k, it belongs to real people.

Industries are downsizing and laying off people. The big auto companies and the airlines have reset their pay scale to be more competitive. The housing industry has [fill in the blank]. More people are looking for work. These major events should raise some alarm, but curiously no one seems to notice. The unemployment numbers are starting to add up.

Look for a major bankruptcy's like the one in 1932 when Ivar Kreuger the famous Swedish Match King committed suicide. The guy was the "Warren Buffet" of his time.

This is a slow but methodical meltdown. Real estate is where all of the castles have been built, and the stock market is our sand box to play in. Maybe Icebergs are a little like our government, most of it is hidden from view.

To a majority of Americans "The Economy" is just a concept, little understood. Most people have never studied basic economics. The "Group Think" is that Congress can fix what is broken. Congressional solutions are a little like trying to use your clothes dryer to dry the kitchen dishes and glassware. When the buzzer goes off, you can rest assured that everything is dry! You end up getting what you were promised, but it's not quite what you had in mind.

How to Start Your Own Investment Fund (Reprint)

This is a reprint from July 31, 2008. Bernie Madoff comes to mind. We have witnessed the plundering of the real estate market with no doc loans. As things get worse, the offshore uninsured investment vehicles could be the next big fiasco. It is not illegal to pay yourself 100k to manage a mutual fund while it goes broke.

Cayman Islands are probably where to start. It’s about $2,300 to get set up with the proper paperwork. About 8,000 of the world’s hedge funds and about 5,000 mutual funds work off of that island. Here is a how to link for the really serious at heart. This is kind of boggles the mind. The islands cover an area about 1 ½ times the size of Washington DC with a population of 50,000 people and has 500 billion in the bank. The thing I really like about this is that it doesn't involve duct tape or a handgun, and there is no jail time, it's all above board.

The total cost is under $3,000 in fees and that includes the cost of a post office box, such a deal! Advertising for clients will be your biggest expense. A printing of 1,000 to 2,000 prospectuses might cost around $10,000. Figure about 5 bucks apiece (copy someone else's that looks slick). The lead pipe cinch rule gives you an automatic 3% return on the mail out. So that would be about 30 to 60 new clients. Then as fund manager, you would mail out monthly statement telling everyone how much money they made. [Hint: pick investments for the news letter that went up for the month, a subscription to the WSJ wouldn’t be a bad idea.] The more earnings the client sees in their monthly statement, the eagerer they are to invest more ( tell your friends, we can all get rich). All that is needed is some decent software and a high end color printer, you can retire tomorrow. Balance the redemptions against new subscriptions. Gold, Silver, oil, and market shorting seem to be good areas of concentration lately. This isn’t a Ponzi scheme, because you can close up the post office box at any time and move away. Here is a more serious link about the mess if you are interested.

You can pretty well guess how this will all end up. The hedge funds will fade away worthless and the mutual funds could drop to 10% of their value like they did in 1930’s. Are you feeling lucky? Give it a try. It feels better when the money you lose belongs to someone else. Believe it or not investors are waiting in line to send you their cash so they can avoid paying taxes. Just maybe there is some poetic justice here.

The FDIC Christmas Break

Christmas was an easy time for FDIC regulators; there were six bank closings for December 18th and none for the following two weeks. Believe it or not, there was only ONE for January 8th of 2010. The year 2009 had 140 bank closures. This year could have 10 times that amount, which comes out to about 1,400 or about 30 a week (Just an educated guess on my part).

Here is a quote from “The Thirties America and the Great Depression” c1967,by Fon W. Boardman, Jr. page 26

Perhaps most ominous of all was the increase in bank failures. In 1929, 659 American banks had failed: in 1930 the number rose to 1,352, and in 1931 to 2,294. Just before Christmas, 1930, the Bank of the United States in New York City collapsed. It had 400,000 depositors, many of them recent immigrants, and its failure, the worst in the country’s history, affected a third of all the people of the city. A bank panic in the Middle South closed 129 banks. As usual, people began to withdraw their money and it is estimated that by 1931 they had taken $1,000,000,000 from the care of the bankers and had hidden it away in everything from safe deposit boxes to old mattresses. And just at the time when the people were losing jobs and money, states and other governmental units imposed new taxes to make up for declining revenues from other sources. Thus the depression was chiefly responsible for the introduction of the sales tax, Kentucky being the first state to have one, in 1930. Other states and cities followed suit.

FDR took office in 1933 and there were 4,000 bank failures and 1,500 saving and loan failures. Here is a graph I "borrowed" from Calculated Risk. (Double click for a larger view)

Our last banking fiasco in the late 1980's had over 531 banks going bust in 1989 alone. The question arises is there more to this mess than meets the eye? Common sense suggests that the current banking crisis should be a lot worse.

The following is from an article, that appeared in the Saturday Evening Post, CCV (November 5, 1932), pp. 3-4 titled" What about the Banks." It was written by Frank A. Vanderlip, former president of the National City Bank of New York. Bear in mind that 1932 was three years into the Great Depression.

The present economic disturbance has been so severe that it as make even some changes in our language. No longer is it an apt metaphor to say that anything is “as safe as a bank.” The word “securities” has almost become obsolete. An investment that drops in price to a tenth or, perhaps, even to a twentieth of its former range is not a security; it is a jeopardy. The page of stock-and-bond quotations might well be headed Quotations of Risks and Hazards. To call them securities in the light of their fluctuations is ironical.

In 1720, a financial debacle added to the English language a phrase which has persisted in common world-wide use for two centuries. A hopelessly exploded financial venture is to this day called a South Sea Bubble.

The South Sea Company in its time was the rival of the Bank of England. It was the ambition of the Tories that it should supplant the Bank of England. When the bubble burst, the extreme decline in the price of the stock was from 1,000 to 135. The company withstood the shock, however and continued in business for eighty years.

Here is an example from out own times: United States Steel and General Motors stocks, the two leading industrials of the country, declined from the high quotations of 1929 to 8 per cent of that price. The decline in the stock of the South Sea Company was only to 13 ½ per cent of its highest quotation. Take another: The stock of what has long been one of the premier banks of the country declined from 585 to 23 ½. That is to say, it fell to 4 percent of its highest quotation. The decline in the market price of this great American banking institution was therefore more than three times as severe as was the fall in the stock of the South Sea Company.

That illustration is by no means a unique one. There were innumerable American bank stocks which made a more distressing record. Between October 1, 1929, and August 31 1932, 4,835 American banks failed. They had deposits aggregating $3,263,049,000. . . . .

The decline in the price of bank stocks was only a minor phase of our debacle. The quoted value of all stocks listed on the New York Stock Exchange was, on September 1, 1929 $89,668,276,854. By July 1, 1932, the quoted value of all stocks had fallen to $15,633,479,577.

Stockholders had lost $74,000,000,000. This figure is so large, that not many minds can grasp it. It is $616 for every one of us in America. It is, roughly, three times what we spent in fighting the World War (WWI). . . . . . .

Not only did our investments shrivel in the last three years but we even frequently lost our pocketbooks. Cash in hand, left for safekeeping in a bank, often went the way of our investments, and worse. Almost $3,000,000,000 of our daily-used cash funds were sequestered in the doubtful assets of the 4,835 insolvent banks. Widespread communities were left with only the mattress as a safe depository, and with little to put into it. People became so frightened in regard to the safety of the banks that they locked up in safe-deposit vaults, or secreted elsewhere, more than $1,500,000,000.

I expected a lot more bank closures January 8th and there was only one. Do you get the feeling that everything is OK now and we can stop worrying?

Is the “Recession” Really Over?

Let’s just lay things out in a very basic simple form.
1. Housing is underwater
2. Unemployment is high
3. The banks are in bad shape
4. The national debt is skyrocketing
5. Credit card rates are doubling
6. State governments are running out of funds
7. Congress has tripled spending
8. The consumer is broke
9. Fannie and Freddie need another 200 billion
10. The FDIC insurance fund is just about out of funds
11. The Federal Reserve owns 4/5’s of all the Treasury’s issued
12. Car production is way down
13. The stock market is up 20% from last year?????
14. Interest rates for home loans have never been lower?????

Then we have Congress trying to save the world from a financial meltdown. Not to mention unemployment benefits are now at 100 weeks. Banks are no longer foreclosing on homes that have been stripped. Congress has agreed to give Fannie and Freddie another 200 billion. The ”No upsided-down-homeowner-loan left behind” program is failing miserably. If you lied on your application to begin with, that problem is not going away.

I tend to agree the recession is over. From here, we start to feel the real pain of a full blown depression. My crystal ball has been fully functional with a miss or two since 2006, but in order to sell newspapers, you have to push the rosy outlook. People need to be told that things are getting better to cheer them up. Here's some "good news" from today's front page of the San Diego Tribune. The bad news is; there are a lot of people not buying into this. (Double click for a larger view)

Somebody lost an awful lot of money and it wasn't the homeowner with zero down. The San Diego tax base will also take a big hit.

The government's buy back of Freddie and Fannie real estate could be the straw that breaks the camel’s back. These government programs to get us back on track are like a hooker with VD—you get what you want today and end up getting what you hadn’t bargained for later. "Beware of Greeks Congressmen bearing gifts."

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.