If you consent to it, its not a crime

Interesting juxtaposition of headlines in the WSJ yesterday:

States Post Widespread Job Losses
Morgan Stanley Breaks a String of Losses
Wells Net Rises Despite Loan Losses

Rising unemployment. Big banks making tons of money and paying huge bonuses. Does this make any sense?

The U.S. Government is bought and paid for by the NY bankers. The government operates for the benefit of these banks. The bankers are raping us, and the government is the one providing the rope and duct tape.

The most profound insight on the nature of government comes from the Declaration of Independence: ...all government derives its just powers from the consent of the governed.

If you continue to consent to this type of government, then it is not rape, it is merely kinky, consensual sex.

Why the SEC will never rein in Goldman Sachs

Seriously, do you still believe this is a government "of the people, by the people, blah blah blah"?

From Bloomberg: The U.S. Securities and Exchange Commission hired Adam Storch, a 29-year-old former employee in Goldman Sachs Group Inc.’s business intelligence unit, as the enforcement division’s first chief operating officer, according to people familiar with the decision. The COO, who started Oct. 13, has “a great deal of background” in technology and managing processes and the pace of work, Robert Khuzami, head of enforcement, said yesterday in Washington. Storch, who worked since 2004 in a unit at Goldman Sachs that reviewed contracts and transactions for signs of fraud, will be charged with making the unit more efficient. Storch, reached by telephone at the SEC, declined to comment.

That's right - the chief enforcer for the SEC is a wet-behind-the-ears Goldman Sachs puppy. He worked at G-S since 1984 which means "since they hired him out of college." Yeah, that is some serious experience there.

I continue to assert that Goldman Sachs owns the government and runs things for their own benefit. How else to explain the fact that this time last year, the big banks - led by G-S - were begging for a government bailout and this year G-S is set to pay their biggest bonuses ever?

Remember: government derives its just powers from the consent of the governed. As long as "We the People" continue to assent to this government, then the crime syndicate that runs the biggest banks and by proxy the government will continue stealing from us and say it is for our own good.

What Happened to Global Warming?

That bastion of reactionary, luddite, head-in-the-sand hyperconservatism - the British Broadcasting Company, (yes, I am attempting to be sarcastic) - wants to know what happened to Global Warming.  Good story and worth your time.

Have you noticed that the Do-Gooders who always worry about things that cannot be changed have switched the object of their worry to Climate Change and away from Global Warming? Back in the mid 70s, the same nincompoops were up in arms about the coming New Ice Age but they had to change their tune in the late 80s because the Ice Age they predicted with such confident certainty was manifestly failing to... well, manifest.

That's when they changed to worrying about Global Warming.

I suppose after another 20 years of the Climate not Changing, they'll worry about The Sky Falling, or something equally unlikely and unpreventable. These people would be objects of pity and derision if they didn't wield so much power to harm the rest of us with their baseless schemes.

DOW at 10000? Whoop Tee Doo

The Dow Jones Industrial Average closed above 10,000 today for the first time in a while. It first crossed the 10,000 in 2000.

What does "Dow 10000" mean today?

In 2000, you'd need more than 30 ounces of gold to buy the Dow. Today, you'd need less than 10 ounces.

In 2000, your dollar would buy almost 30% more than it will today. (Check out the Bureau of Labor Statistics Inflation Calculator linked here on my site.) That's what inflation does to you.

In other words, the Dow at 10,000 today is equivalent to the Dow at about 7500 in 2000.

Whoop Tee Freakin' Doo.

Imagine how bad it would be if STUPID people were in charge..

The date is July, 2005. Can you guess who is answering the questions?

Q. "Can you give us your view of whether there is a housing bubble out there?"
A. "I don't know whether prices are exactly where they should be but I think they are supported by the strength of the economy."

Q. "So tell me, what is the worst case scenario, if in fact we were to see prices come down substantially across the country? "
A. "I don't buy your premise. It is a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis. I'm confident in the fact that the bank regulators will pay close attention to the kinds of loans that are being made, making sure that underwriting is being done right... I do think this is mostly a localized problem and not something that impacts the national economy."

In hindsight, it sounds like this person was not very well informed, doesn't it? But who could blame him?

You'd need to actually know what was going on inside the banks to realize that they were making loans they knew couldn't be repaid - and the only people who knew that were the bankers themselves.

And you'd need to know what was going on with the bank regulators to realize they weren't doing a thing about it - and the only people who knew that were the Bankers responsible for watching over the banks. No, the only possible way you could expect someone to know what was really happening with the banks would be the people in charge of the Federal Reserve. They were really the only ones who could possibly know, right?

So you could hardly blame this guy for being so completely clueless.

Good thing we have really well informed, intelligent and ethical individuals deciding how to save the economy.

/sarcasm

S&P 500 now trading at 140 Times Earnings

Greetings readers,

I will be away from my computer over the weekend for a much-needed vacation, so my "Weekly Update" will not be published. But I do want to pass along this news to you:

As of September 30, the S&P 500 was trading at 140 times earnings. Here's the link to the Standard and Poors website confirming this information.

The S&P 500 is an index of the 500 largest public companies in America. It is considered the most reliable proxy for the overall state of the entire stock market.  For comparison, over the last 80 years, the S&P 500 has traded at an average of 15 times earnings.

What does this mean to you?

It means that the rise in values in the stock market since March is not the result of improvements in business; it is the result of the government dumping a little over a trillion dollars into the five biggest banks. The banks were supposed to use that money to lend, but they have instead used it to speculate in the market. (Goldman Sachs is the worst offender. The others are Morgan Stanley, JP Morgan Chase, Bank of America and Citigroup.)

This is NOT the time to be putting money into the market. It is time to make sure your investments are protected from a stock market reversal. It is also time to be saving and getting out of debt.

See you all next week.

Mid-Week Update

Hello faithful readers,

Just a brief note to let you know why you have not heard from me in the last month. I am hard at work changing this update from a text-based to a video-based update. It's taking longer than I anticipated, but we will get there.

In the meantime, I want to share with you a couple of things:

The first is a video I just found today. This is from Dylan Ratigan's show on MSNBC back in July. (Don't know why it took me so long to find it.) Dylan is one of the very few people in the MSM who asks good questions and doesn't kow-tow to his corporate masters. I have the utmost respect for him. (When he left CNBC, I quit watching it.)

This video is the clearest, simplest explanation of what happened with the banks and the Fed in the last year. If you're not angry, you're not paying attention.

Of particular interest is the presence of Eliot Spitzer, the disgraced former governnor of New York who was forced to resign in March 2008 when it was discovered he had paid for sex. Spitzer was the most powerful public figure fighting corruption on Wall Street. His forced resignation occurred exactly one week prior to Bear Stearns being forced to sell itself to JPMorgan Chase. This was no coincidence.

The second is to recommend to you Matt Taibbi's article in the most recent issue of Rolling Stone. Taibbi is an investigative journalist of the highest quality. He has authored two of the best pieces I have read on the banking crisis. (Link is here.) It actually amazes me that he is still walking around, because he exposes malfeasance at the highest levels of our government and banking system. Please do yourself a favor and read it either online, (once it is posted) or pick up a copy at the newsstand today. It is the issue with U2 on the cover.

"I Gotcher Green Shoots Right Here"

One of the most reliable indicators of world economic conditions is shipping traffic. Here's a story in the UK's Daily Mail about the unprecedented decline in the amount of shipping world wide and - most shocking to me - the precipitous decline in the cost of renting a container ship.

This entire story is worth a read, but some of the highlights - if you are in a hurry are:

• A massive fleet of empty container ships sits idle in the waters off Singapore. Apparently, world ship owners are just parking them there
• The cost of chartering a bulk freighter has plunged from $300,000 last summer to $10,000 earlier this year.
• It takes 3 years from the time a new ship is ordered till it is delivered. Come 2011, the world's biggest ship-building companies in South Korea will have nothing to work on, because no one is ordering new ships.

Here's a sea-level photo of some of those idle ships:

The Impending Doom of the US Dollar

Here's a fascinating story from Larry Edelson at Money and Markets about the US Dollar.  He writes from Asia:

We are now the laughing stock of Asia. Our dollars are no longer respected; our ambitions, no longer mimicked. Our way of life, often based on consuming far beyond our means, is being flat-out rejected.

I can’t even exchange a $100 bill on the street here anymore: Most of the street money changers will take euros, Singapore dollars, even Chinese yuan. But fearful of losing their shirt with sinking exchange rates, they don’t want U.S. dollars. Not long ago, I never traveled without my American Express card. Now, it sits in my office safe. Many in Asia no longer accept the card anymore. MasterCard and Visa are still OK, but they’re also losing market share to locally grown cards like Aeon.

The running joke in Singapore, Hong Kong, Bangkok, and Kuala Lumpur is that the U.S. is the place where even your pet could get a credit card or a home mortgage. So to Asians, the crisis we’re going through is our own fault. And although it was also caused by blunders in Western Europe and other regions, truth be told, they are mostly right.

When foreigners hold dollars, and those dollars lose value against their home currencies, then they lose purchasing power. The US Dollar has lost of 15% of its value since March. That means a street vendor who accepted dollars in March can now buy 15% less with those dollars than he could just six months ago. And what happened six months ago to trigger this decline? The Federal Reserve began dumping something north of $700 billion freshly created-out-of-thin-air dollars into their member banks.

The dollar is doomed unless the government slashes spending, but you can bet every last depreciating dollar you own that will not happen.

Rights & Responsibilities

According to the wisdom of the day, healthcare is a universal human right. When the term "universal right" is used, I cannot help but think of the Bill of Rights, where rights such as free speech, freedom of assembly and freedom of religion are enumerated. However, as best as I can tell, the people who use the term "universal right" as applied to healthcare mean something different than what I think of when I hear the term.

As I understand it, every right possessed by Person A implies a responsibility on the part of Person B. For example:

- my right to speak my mind means you have the responsibility to NOT prevent me from speaking my mind.
- my right to freedom of assembly means you the responsibility to NOT prevent me from assembling with whomever I want.
- my right to worship as I see fit means you have the responsibility to NOT prevent me from worshiping as I see fit.

However, there are also limits to your responsibility:
- you are not responsible to publish my speech
- you are not responsible to drive me to my meeting place
- you are not responsible to contribute to my religion

In other words, your responsibilities to my rights are negative - you are obligated to NOT PREVENT me from doing something. This is the simplest way to test whether something is really a universal right. The cool thing about this system of universal rights and obligations is that it requires no effort on my part to NOT PREVENT you from doing something. I don't have to take action nor do I have to spend time or money or effort to allow you to exercise your rights. My responsibility to you is to do nothing.

Does "universal healthcare" pass this test? Nope, not in the slightest.

In the current debate, if you have a right to healthcare, it obligates someone else to provide that care, does it not? If you have a right to be treated for cancer, then obviously some doctor has an obligation to treat you for cancer. If you have a right to diabetes medicine, then some drug company has the obligation to provide you that medicine, some doctor has the obligation to write the prescription, and some pharmacist has the obligation to prepare the medicine. And if the doctor, pharmacist or drug company somehow fail to provide that care, treatment and medicine properly, then apparently you have the right to sue them for malpractice which service - no doubt - some schmuck lawyer will be obligated to provide you.

Whatever else this may be, it is not a universal right. It sounds a lot like slavery to me: forcing someone else, against their will or their best interests, to provide time, labor and/or money for your wishes, wants and desires.

Those who claim that everyone has a "right" to universal healthcare obviously mean something different by the word "right" than the Founders meant when they penned the Bill of Rights.

Forgive me, but I fail to see how you have any right to obligate me to provide you healthcare. I just don't see it.

How much is a trillion?

Very well done slide show demonstrating the kinds of money required to keep Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo and Citibank from collapsing.

A Private Swiss Bank Is Pulling Out of America

This is a long read, but worthwhile. Wegelin & Co is a private Swiss bank founded in 1754. It is divesting itself of all American securities and will no longer act as an intermediary for clients who wish to own American securities through them.

What Does It Mean: The IRS is making it ever more difficult and complex for foreigners to invest in America. The IRS is trying to increase tax revenues, but the effect of these new policies will be a decrease in foreign investment in America. Wegelin & Co estimates the US will need an additional $2 Trillion in tax revenues to make up for the losses from foreign investors.

This is a terrific paper with a lot of very good information. It is well worth your time to read.

One of the most damning quotes comes in  the first few paragraphs. Remember, this is a Swiss bank's view of America:

...let us briefly recall the sort of tax authorities we are dealing with, and the sort of state they serve: a country that, over the last 60 years, has unquestionably been one of the most aggressive nations in the world. The USA has fought by far the largest number of wars, sometimes with, but mostly without a UN mandate. It has broken the international laws of war, maintained secret prisons, and fought an absurd war against drugs, with serious consequences both abroad (Columbia, Afghanistan) and at home (according to reliable sources, the tentacles of the narcotics mafia now reach well into political circles). With breathtaking moral duplicity, the USA maintains enormous offshore havens in Florida, Delaware and others of its states. The moralizers have joined sides with a nation that still makes extensive use of the death penalty, and that has a legal system under which lawyers can get rich on the misfortunes of their clients. Liability cases often end in verdicts with exorbitant damages, which makes business activity extremely risky, for medium-sized enterprises in particular. The moralizers provide intellectual support for a country that allows its infrastructure to collapse, and then stuffs convicts into hopelessly overfilled jails, after what are not infrequently dubious proceedings. They fund a nation that tolerates – or rather, causes – regular crises in the global financial system that it manages. A country whose underclass enjoys neither the benefits of an adequate education, nor a halfway functional health care system; a country whose economic system is increasingly inclined to over consumption, and in which saving and investing have increasingly become alien concepts, a situation that has undoubtedly been one of the driving forces behind the current recession, with all its catastrophic consequences for the whole world.

What Can You Do: The Declaration of Independence declares that "government derives its just powers from the consent of the governed." Once we - the people of these united States - cease to consent to this government, it will cease to possess any just powers, and will in fact be nothing more than a criminal organization, exactly like the mafia. What we can do is cease to consent to this government.

But Is It Right?

Graham Summers has a terrific article at Seeking Alpha that asks a simple question about the Goldman Sachs bailout:

Never mind the legality of this issue… it’s simply NOT RIGHT. End of story.



Some animals are more equal than others...

If Insiders Know What's Happening, What Does It Mean When They Sell?

Because executives in public companies have access to data that the rest of the public does not have, any time they buy or sell their own stock, they are required to file notice of those transactions with the SEC. This lets the rest of us know what the insiders are doing, and - by extension - be able to make informed guesses about what those transactions mean.

Multiple news sources report that insider selling - as reported to the SEC - outnumbers insider buying by a 30:1 margin.

Here, Trim Tabs CEO Charles Biderman discusses what it means for the retail stock purchaser. (Trim Tabs actually tracks this data for investors.)

You DO have Stop-Loss orders in place now, don't you?

Income Up and Tax Receipts Down. Huh?

According to this chart from the Department of the Treasury, income tax receipts were down substantially in July. In fact, it's the 4th straight month of declines and we are now well below levels seen at the bottom of the 2002 recession.

According to this report from the Bureau of Economic Analysis, personal income was up in July, albeit marginally.

How can income be up marginally while income tax receipts are down significantly?

I guess it makes sense in a world where the cure for a hangover is more whisky.

Weekly Update 29 August 2009

Before I get to the meat of today's update, I want to bring your attention to an article at Zero Hedge regarding the price of the S&P 500 as a ratio of money in the economy. Here's the link to the article.

For those of you who don't get off on all things financial-geeky, here's the gist of it:

The Federal Reserve is responsible for "...conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates,".

The S&P 500 is a proxy for the entire stock market, because it is an index composed of the 500 largest publicly traded companies. You can see the exact make-up here.

When the value of the S&P 500, (and by extension - the overall value of the stock market), is expressed in terms of the money supply, (which is controlled by the Federal Reserve), then the market has actually done nothing since the crash of 2000 and is in fact significantly lower than it was during the depths of the 2002 recession. In other words, all the extra money that the Federal Reserve has pumped into the economy has done NOTHING for real values.

On to the News Of the Week

WHAT IT IS: As I mentioned last week, the S&P 500 is currently trading at about 143 times earnings. At the height of the dot com bubble in the late 90s, the highest the S&P ever traded was 45 times earnings.
WHAT IT MEANS: Historically, the S&P trades at an average of 15 times earnings. In other words, this market is grossly overheated and a massive correction is due.
WHAT YOU CAN DO ABOUT IT: Many of you lost a lot of money in your portfolios last fall, and have watched in relief as the market has regained some of that lost ground. I want you to protect yourself this time, and not make the same mistake when the market collapses again. Here's how: You must place a "Stop Loss Order" for every stock you own. So what is a "Stop Loss Order"?

A Stop Loss is an order to sell the stocks you own IF and ONLY IF the price falls to your Stop Loss price. So for example, if you own 100 shares of FroBozz Corp, and it is currently trading at $45 a share, you might want to enter a Stop Loss order for 100 shares at $40.50, which would be 10% below the current price. If the price falls to $40.50, then your Stop Loss will be executed. If it doesn't fall that low, then you will continue to own the stock.

How do you calculate the price at which to enter your Stop Loss? That is a matter of personal preference. William O'Neill, in his classic book How to Make Money in Stocks, recommends using an 8% stop. Another way to calculate a stop amount is by looking at a chart and finding historical support levels, then placing your stop just below those levels. A more sophisticated form of stop-loss is the trailing stop. A trailing stop trails the price of the stock as the price rises, but does not move if the price of the stock falls.

Returning to our previous example of FroBozz Corp, let's again assume it is trading at $45. You could place a $4.50 Trailing Stop Order. If FroBozz rose to $50, then your Trailing Stop would rise with it, and would now be at $45.50. If the price of the stock then falls back to $45, your Trailing Stop would be executed at $45.50.

The subject of Stops is a little more complex than this, but that should give you some idea of how to protect your profits rather than take a huge loss. Make no mistake - a massive correction is coming in this market. Don't get caught this time.

Monday morning - call your broker - place Stop Loss orders. Don't let him talk you out of it.

Till next time.

DHS - Surfing to Protect Us

Some of you may remember that last spring, the Department of Homeland Security issues a threat assessment about rightwing extremism. The title of the report was alarming all by itself: Rightwing Extremism: Current Economic and Political Climate Fueling Resurgence in Radicalization and Recruitment.

Your federal government, diligently looking out for your safety. And how did they arrive at their conclusions?

[wait for it]

[wait for it]

By surfing the web!

That's right, kids. The same people who can give $700 billion dollars to Hank Paulson so he can make sure his buddies on Wall Street still get their bonuses can't spend any more than the cost of a web connection to research threats to the republic. Thanks to a Freedom of Information Act request, we now have a list of all the "research" Janet Napolitano's DHS did before labeling half of America "security threats".

Don't these people have the CIA, FBI, NSA, ICE and god-knows-what-other police and paramilitary forces at their beckon call? And they best they can come up with is a list of websites?

This is what it has come to: Government of the clowns, by the clowns and for the clowns.

[Janet Napalitano on a bad hair day]

The Stratified US Consumer

The money quote from a post at Zero Hedge today:

...so far the lower and middle classes have borne the brunt of the recession. Is it safe to say that the wealthy have managed to game the system yet again and avoided a significant loss of wealth, while maintaining sufficient access to credit?

You bet it's safe to say that.

Other interesting facts from this report:

A sobering observation is that while 90% of the population holds 50% or more of its assets in residential real estate, the Upper Class only has 25% of its assets in housing, holding the bulk of its assets in financial instruments and other business equity...The other observation is that only 10% of the population has truly benefited from the 50% market rise from the market's lows: those better known as the Upper class.


And to add insult to injury, the segment of housing that has been impacted most adversely in the current downturn, is lower and middle-priced housing: that traditionally occupied by the lower and middle classes. The double whammy joke of holding a greater proportion of net wealth in disproportionately more deflating assets is likely not lost on the lower and middle classes.

Weekly Update 22 August 2009

About That Bull Market...

Hello folks. I hope this note finds you well. I literally have too much news to summarize this week, so I am going to give you lots of appetizers instead of one big entree'. Here's the headline we will start with.

Housing Gooses Stock Market

WHAT IT IS: The market rose on Friday on news that sales of existing homes jumped at the fastest rate in 10 years.
WHAT IT MEANS: The WSJ article I linked here has a side-bar with this odd headline: "...But Prices are Still Falling..." They make it sound as if the link between falling prices and increasing sales is mysterious. Quick economics lesson: When prices are too high, buyers stay away. When prices come down far enough, buyers come back. It's that whole supply & demand thing. So what this story means is that housing is finally starting to get affordable.
WHY IT MATTERS: Well, here’s where it gets tricky. The perma-bulls, talking heads and government shills say that it means that the economy is stabilizing and things are looking up. But that is deceptive. For every positive sign the economy is stabilizing, there are hundreds that say we are not nearly through the storm yet.

This week I read an excellent analysis called "The New Bull Market Fallacy". It is a lengthy read, but well worth the time. Here are some juicy tidbits I pulled from it.

Housing

• Wells Fargo, via their purchase of Wachovia, now holds about $115 billion in Option ARMs on their books. They are valuing this stuff at 85 cents on the dollar - a 15% mark down.
• The Fed took a bunch of mortgages onto their books as collateral when they swapped Treasuries for Mortgages with the big banks. They took a 30%-40% markdown on the Maiden Lane properties.
• JPMorgan-Chase has $90b of Option ARMs on their books.
• Citibank is marking their residential and commercial real estate loans at 90% of loan value.
• Housing prices nationwide have fallen an average of 50%.
• The International Monetary Fund says that there will be $4.1 trillion in real estate related losses in 2010. So far, only $1t of that has been marked.
  

If Wells values their Option ARM portfolio at $115b after a 15% mark down, in reality it is probably worth something in the neighborhood of $67b. If that were the case, Wells Fargo would be insolvent under the banking rules prior to April 1st, but since the FASB changed the rules on that date, Wells gets to carry this stuff on their books at any value they want to, rather than at market value. Thus, they get to pretend to be solvent. Same situation with JPMorgan. Same with Citi and most of the other big banks that got all the government money are in the same situation. It is nothing but accounting tricks and collusion with regulators that keeps these giant banks afloat.

Here's Professor Elizabeth Warren explaining on MSNBC how the banks cheat.

23% of all single family home mortgages are greater than the value of the homes. Deutsche Bank analysts have predicted that such "underwater loans" could reach 48% of all mortgages by Q1 2011.

Finally, the "second wave" of mortgage resets - Option ARMs and Alt-A's - is scheduled to start in 2010. The dollar amount of mortgages scheduled to reset in this second wave is actually higher than the amount of resets during the sub-prime wave.



What are those banks gonna do then? We the people have already been soaked for well over $2 trillion because these vampire banks were supposedly "too big too fail". What happens next year when they are in even worse shape?

Oh, and the FDIC - which as recently as April said they'd need no more money - is bankrupt as of last Friday with the failure of Colonial Bank. Prior to the failure, they had $641m in assets. Colonial alone had over $2b in deposits which the FDIC had to cover. Betcha didn't hear about that on the news, did you?

Jobs

The number of jobs lost in July was less than the rolling 3 month average, but the reason for the drop is that the number of people who have quit looking for a job increased dramatically. These people are not counted in the government's new unemployment statistics.

Growth?

The federal government increased spending by 11% year over year in the second quarter. Many states are bankrupt. Tax receipts at the federal level are down 28% year over year, while the federal deficit has tripled.

Over the last several weeks, as the market makes new high after new high, insider selling outnumbers insider buying by about a 23:1 margin. In other words, the people who know what is coming are selling.

The S&P 500 as of the close Friday is valued at 143 times earnings. By comparison, the historical average of the S&P 500 runs about 15, so the S&P 500 is currently valued 10 times higher than its historical average. Is this supposed to be a bottom? Historical values for market bottoms run about 8 - 9 times earnings.

According to this chart, China is starting to divest themselves of US Treasury debt. Since they are the largest holder of US debt, if the US defaults, they have the most to lose. If the US economy is strong and growing, it's kinda stupid to divest themselves of treasuries.

By every possible definition, the stock market is once again a bubble. The government and the bankers, (**cough** Goldman-Sachs 8*cough**) have succeeded in creating yet another bubble. The 90s bubble was dot coms, the early 2000s was real estate, and this one is nothing but government money. It will end badly.

WHAT CAN YOU DO: This is important. If you are invested in the market, please please please protect your profits. That means put a Stop-Loss order into the market now. When the correction comes - and it WILL come - it will be mean, nasty, ugly and fast. A lot of people lost a lot of money last fall, and it will happen again - likely sooner rather than later. Don't get caught short.

WHAT ELSE CAN YOU DO: Save like crazy. Get out of debt. Don't buy on credit. All those things our grandparents learned in the 30s, we get to learn again.

Till next time...

Whistling Past the Graveyard

Today I am laughing - yet again - at the grand farce that passes for "law" and "justice" under the federal government. The theme of today's entertainment is banking. I know, you’d probably rather gnaw off your own leg than read about banking, but trust me – you’ll get a kick out of this.

Our banks - at least the ones who took all our tax money last fall - are members of the Federal Reserve system. It's called Federal because its territory is the entire country. It's called Reserve because it is a banking system based on reserves.

Reserves is the word used to describe the money that a bank is required to keep on hand to cover the deposits made by their customers. The idea behind a reserve is that if you deposit $100 in the bank, you might want to withdraw that $100 later. If you show up at the bank wanting to withdraw your money, the bank better have money to give you. It may surprise you to know that the banks are not required to keep a dollar on hand for every dollar that is on deposit. They are required to keep some fraction of that money on hand. That is why our banking system is called "fractional reserve banking".

In the Federal Reserve system, that fraction ranges between 3% and 14%. In other words, for every $100 deposited with the bank, the bank is required to keep between $3 and $14 on hand.

(By the way, I am simplifying quite a bit here. If you are really interested in the arcana of reserve requirements, there are some interesting links here and here. And God bless you if you are.)

So what happens to all the rest of the money? The bank loans it out. This is where the alchemy of fractional reserve banking occurs. Watch carefully now - nothing up my sleeves.

Assume we have two people, you and me. I buy things and take out loans, and you sell things and make deposits. And finally assume we have a bank, Bank A, that will take your deposits, will make loans to me and has a reserve requirement of 8%.You deposit $100 with the Bank. Bank A keeps $8 on reserve, and loans me the balance, $92.

I buy $92 worth of goods from you with that money and you deposit that $92 in Bank A. Bank A keeps 8% of that money on deposit and loans me 92% of it, about $85. I buy $85 worth of goods from you with that money I borrowed. You take that money and deposit it in Bank A.

Bank A takes your $85, keeps 8% of it, and loans me the remaining 92% of it, about $78. I buy $78 of stuff from you with the money I borrowed. You deposit that $78 in the Bank. They keep 8% of it and loan me the remaining $72. I buy $72 worth of stuff from you, and the game goes on and on and on...

So from a single $100 deposit, Bank A can make over $1000 in loans. If I repay those loans, then the bank has magically created profits of over $1000 on a mere $100 worth of deposits.

Pretty sweet little business, huh?

But what happens if I don't pay those loans?

Ah, here's where the magic goes all wanky. Instead of creating $1000 in profit out of thin air, the banks have created $1000 in debt out of thin air.

Most banks require that you put up some collateral before they give you a loan. If they loan you money to buy a car, they keep title to the car until you pay off the loan. If you don’t pay the loan, they take your car and sell it to satisfy the loan. Sometimes the car fetches enough to pay off the loan, sometimes it doesn’t.

You pays yer money and you takes yer chances.

This is where the Big Banks got caught. They loaned money to people who couldn’t repay it so that they could buy houses that were overpriced in the first place. Who would have ever imagined they'd have problems?

So why did they make such stupid loans?

Greed, plain and simple. They were lusting after the profits they could create out of thin air and were ignoring the risks that they were creating debts out of thin air instead.

Of course, it wasn’t $1000. It was more like $4 trillion.

According to Federal Reserve rules, if the amount of money a bank actually has on reserve falls below the minimum required amount to cover deposits, then that bank is - by definition - insolvent and must be shut down. There is more to it than that, but that is the important part.

Last fall, the Big Banks were insolvent. But since they are big, and since they own most of Congress, most of the executive branch, and probably several judges, they maneuvered their way out of that tight spot. They arranged it so that you and I – people who had nothing to do with the loans – would bear the losses.

Like I said, it’s a pretty sweet business.

News of the Week coming up tomorrow...