The Little Guy

I'm tired of doom and gloom. It's demoralizing. But what are we to make of this (from http://jessescrossroadscafe.blogspot.com/) :

The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago. (But there is no money for Social Security, for Medical programs, for real industry, for people - Jesse)

Could someone intentionally trying to bring us to ruin do any worse?

Somehow my ancestors managed to survive Europe's system of serfdom. America was supposed to be something better. But this, this is not feeling better. This is feeling suspiciously similar to being in thrall to the lord of the manor. The little guy is now waking up to this sorry situation.

Armagedepression

My grandmother was Mrs. McScrooge. Like most people who were young during the 1930s Depression she knew every dollar was precious. Deflation does that to people. All my grandparents accumulated nice piles of cash but you would never know it from the way they lived.

A lot of people in the old neighborhood were like that. Many of them were a generation or two at most from immigration. Nothing was ever wasted. There was an old guy in my neighborhood who collected hubcaps that fell off into the street and lay abandoned at the curb. He displayed them on his chain link fence where they caught the sun. It looked cool, like folk art. Do-it-yourself was a form of entertainment. My great-grandmother made floor rugs by cutting old coats and jackets into strips of fabric and braiding them together.

Paul Farrell on Marketwatch lists dozens of reasons why we are rapidly heading toward Armagedepression. Reason 29 jumps out at me: "Social Security, Medicare with $60 trillion in unfunded liabilities". Unfunded? Gee, what's that social security tax you pay every week? Oh, yeah, forgot, Congress borrows against that so the money isn't actually there. (Sound familiar?)

$60 trillion dwarfs all the other debt out there, I believe. Think, if every one over 55 conveniently dropped dead in the next few years, problem solved! Is this financial "crisis" designed to stress us into an early grave? Sometimes I wonder.

This is a good time to rediscover living in the moment. My grandparents' generation lived like that by necessity first, and then by habit. I think I have such clear memories of them because they were so consistent in their lifestyles. Every summer we picked blueberries in my grandmother's backyard, every Christmas we decorated the tree with the handmade ornaments she saved from the previous year, every time we visited in winter she brought out heavy ceramic mugs filled with hot chocolate, and every visit in summer she dished out the same brand of orange sherbet and poured grape juice into the cartoon glasses they gave out free at the gas station.

My grandparents were a consumerist's nightmare. Their certainty in taste sometimes veered into bigotry, I think, and may have been rooted in fear of the new. They travelled outside their comfort zone infrequently, and with the attitude of children visiting the circus freak show. I would have liked them better if they could have moved their center leftward a bit.

But without some sort of center you end up constantly seeking balance. You become vulnerable to flattery and manipulation by con men. The problem, as I see it, isn't with acquisition, or loans, or new things and new ideas, or with wanting more and better. If we face Armagedepression now it is because my generation never found our center over the last 30 years. If we are forced to slow down and reflect, this may not be such a bad thing.

I've been thinking I might even braid a rug like my great-grandmother used to. But the hubcap fence, probably not. Hubcaps today are not what they used to be.

Pinball Wizard Goes Tilt!

In today's news: Nov. 12 (Bloomberg) -- "U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

'Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,' Paulson said in the text of a speech today in Washington. ' This is creating a heavy burden on the American people and reducing the number of jobs in our economy.' "

Gee, wonder why Paulson got religion all of a sudden? Now that he and his banking buddies filled up at the taxpayer trough he suddenly cares about credit cards, student loans, and car loans? This is going to get interesting.

Last week I noticed a Phoenix 3 bedroom, 2 bath house that was listed for sale at $87K. It's a cute place on a mountainside with great views. Noticed yesterday that it was now listed at $75K. It's a bank-owned foreclosure so I looked it up to see if there was any history on the property. Looks like this place was "bought" in August by Fannie Mae for $105K. I'm guessing the new lower asking price means Fannie Mae is dumping this place as quick as it can. This sudden drop in price, which was mirrored in other properties just in the last few days, indicated something interesting going on behind the scenes.

Then this morning I hear Paulson announce the bailout is no longer for buying "toxic" mortgage assets (as if it ever was). Instead the bailout is now for credit cards. Hmmm, sounds like a whole lot of houses are going to be on the market at freefall prices now that the government is no longer pretending it can set a floor beneath property values.

The government is freaking out because people are no longer buying stuff. People are no longer borrowing to buy stuff. They can't. The entire economy is stalled out. People are losing jobs. I have no idea how the government is planning on getting people to charge up their Visa and Amex cards for Christmas.

On top of this, the banks are now requiring 20% down to buy a home. This means that to get into the $75K house a buyer has to have 15,000 dollars as a down payment, plus assorted closing costs. Most people buying a $75K starter home don't have $20,000 to get into a house.

What I'm also seeing is $45K foreclosure homes showing up in $200K neighborhoods. These cheap homes become comps for the neighborhood. The person who thinks they own a $200K home and goes to sell will discover that no bank will lend a buyer anything close to $200K. The banks will pull up the $45K sale as a comp. If I interpret what Paulson is saying correctly we are going to start seeing foreclosure properties dumped en masse all over the Valley. The spiral down effect on home prices will be devastating, as if things weren't bad enough already.

This also means that Phoenix never really recovered from the S&L crisis which kept prices here stagnant through the 80s and 90s. The drop back towards 1990s residential prices will inevitably effect commercial property, too.

The bailout was sold as a means to salvage the mortgage market. Of course that didn't happen at all. Money was handed to big banks who said thank you and put the money, where else, in the bank.

Still, the fact that the Powers That Be are giving up all pretense is scary. I'm looking at what this does to the Phoenix market but the entire country is hurting as people lose jobs or cut back on spending, afraid they may lose their jobs. Giving up on houses in order to prop up credit card spending sounds desperate to me. Paulson, the financial Pinball Wizard, might as well admit, "Game Over!"

While we were sleeping...

Last week I was so spun up by the impending election I couldn't sleep. By election night I'd accumulated at most 9 hours of sleep over the previous 4 days. While switching channels through the parade of network anchors droning on in front of the electoral map I dozed off for a bit. Suddenly I sat bolt upright as my subconscious mind processed these words: "Barack Obama has won!" I started to cry. I could see Oprah was crying. People in New York City were crying. People in Chicago were crying.

I think a collective sigh of relief was shared by everyone who voted for Barack. What I feel now is that we can't slack back and expect him to do all the heavy lifting. There's too much that needs to be fixed.

During my sleepless hours I've been working on a blog observing how the real estate meltdown impacts my hometown of Phoenix. Until I complete that here's some food for thought regarding the ongoing global financial mess. Ellen Brown's book, The Web of Debt, describes some recent history for our neighbors to the south when they received a "bailout". Though a wealthy country with its own oil reserves Mexico got snared in international currency traps that cost them big-time:

In 1994 when President Ernesto Zedillo suddenly announced a 13 percent devaluation of the peso, the peso eventually dropped by 300 percent – 15 times the predicted fall. What followed sounds familiar (my bold):

The Mexican bailout was engineered by Robert Rubin, who headed the investment bank Goldman Sachs before he became U.S. Treasury Secretary. Goldman Sachs was then heavily invested in short-term dollar-denominated Mexican bonds. The bailout was arranged the very day of Rubin's appointment. Needless to say, the money provided by U.S. taxpayers never made it to Mexico. It went straight into the vaults of Goldman Sachs, Morgan Stanley, and other big American lenders whose risky loans were on the line.

Straight into the vaults? Gosh, that sounds familiar. Huh. Hey, wait a minute! Is that the same Goldman Sachs where Henry Paulson worked until recently?

And now consider what happened next:

The austerity measures that the U.S. government and the IMF forced on Mexicans in the aftermath of last winter's assault on the peso by short-sellers in the foreign exchange markets have been something to behold. Almost overnight, the Mexican people have had to endure dramatic cuts in government spending; a sharp hike in regressive sales taxes; at least one million layoffs (a conservative estimate); a spike in interest rates so pronounced as to render their debts unserviceable (hence El Barzon, a nation-wide movement of small debtors to resist property seizures and to seek a rescheduling of their debts); a collapse in consumer spending on the order of 25 percent by mid-year; and, in brief, a 10.5 percent contraction in overall economic activity during the second quarter, with more of the same sure to follow.

What we experience will soon feel like austerity cuts. I must have remarked a dozen times in recent weeks on the disconnect between prices and value here in central Phoenix. Downtown homes are located close to the city government, public parks, shopping centers, and a new light-rail transportation system. Yet in many cases these houses are selling for pennies on the dollar. Ellen Brown notes: "As in the U.S. depression of the 1930s, the actual value of Mexican businesses and assets did not change during this speculator-induced crisis." Welcome to our newly deflated market and the wondrous effect this will have on government revenues.

Describing the Mexican bailout as the Tequila Trap, Asia Times writer Henry C.K. Liu mentions some now familiar names in an article titled "The Fed and the Strong Dollar Policy":

The ESF (Exchange Stabilization Fund) was the conduit used by the Clinton administration to provide assistance to Mexico to avoid default in the peso crisis of 1994 to prevent huge losses to US lenders after Congress rejected the proposed Mexican Stabilization Act. The crisis was triggered by an abrupt devaluation of the Mexican peso by newly installed president Zedillo to reverse the former Salinas administration’s tight money policy...

Bear Stearns chief economist Wayne Angell, a former Fed governor and advisor to then Senate majority leader Bob Dole, first came up with the idea of using ESF funds to prop up the collapsing Mexican peso. Bear Stearns had significant exposure to peso debts that would cause significant losses in the event of a peso collapse.

Senator Robert Bennett, a freshman Republican from Utah, took Angell’s proposal to the Fed Chairman Alan Greenspan and Treasury Secretary Robert Rubin, both of whom rejected the idea at first, shocked at the blatant circumvention of constitutional procedures that this strategy represented, which would invite certain reprisal from Congress. Congress had implicitly rejected a rescue package in the form of Mexican Stabilization Act earlier that January when the initial proposal of extending Mexico $40 billion in loan guarantees could not get enough favorable votes. Greenspan advised Bennett that the idea would only work if Congressional silence could be guaranteed. Bennett went to Dole and convinced him that the scheme would work if the majority leader would simply block all efforts to bring this use of taxpayers’ money to a vote. It would all happen by executive fiat.

The next step was to persuade Dole’s counterpart in the House, Speaker Newt Gingrich. The two congressional leaders consulted several state governors, notably then Texas governor George W Bush, who enthusiastically endorsed the idea of a bailout to subsidize the border region in his state. Greenspan, who historically opposed bailouts of the private sector for fear of incurring moral hazard, was clearly in a position to stop this one. Instead, he used his considerable independent power and congressional influence to help the process along when key players balked. The controversial 2008 bailout of Bear Stearns by the Fed was not the first.

Looks like practice makes perfect, or maybe not.

Henry C.K. Liu goes on to observe this dangerous trend to the Fed's behavior:

Financial markets are not the real economy but its early dawn shadow. The shape and fidelity of that shadow are affected by the position and intensity of the light source that comes from market sentiments on the future performance of the economy and by the contour of the ground shaped by data on leading economic indicators. Yet the institutional bias of the Fed over past decades has been drifting toward more allegiance to the speculative effects on the financial markets than to the health of the real economy, let alone the net benefit to long-term investors or the welfare of all the people.

The Fed's liquidity joy ride has been to reward speculators rather than investors, and to favor transactions rather than growth. Further, the economy is not homogenous throughout. In reality, some sectors of the economy and segments of the population, through no fault of their own, may not, and often do not, survive the down cycles to enjoy the long-term benefits, and even if they should survive the down turn, they are permanently put in the bottom heap of perpetual depression. Periodically, the Fed has failed to distinguish a healthy growth in the economy from a speculative debt bubble in the financial markets.

It seems if you feel like you've been punked by the Federal Reserve and the banking elite, you're in good company. Misplaced faith that we are uniquely blessed by Providence has led Americans to be complacent as a financial storm built up towering waves on our own shores. We didn't see it coming our way because we didn't think it could happen here.

President Obama will have to deliver the wake-up call that some Americans still won't want to hear. Fortunately it is clear he knows that the young people are already wide awake and listening.

To our conservative friends I would say clinging to the appearance of success isn't going to help us now. But I do see real value, not just in homes, but in our creativity and productivity, struggling to survive beneath the weight of the speculators' economic rubble. We need to rescue that value now before it is suffocated by confusion, indifference, or despair.