Monday, January 04, 2010

Deep Doo Doo -or- Does anyone really know who's dime this is?

If personal depression doesn't get you after reading the doom and gloom saturating your favorite blog sites then perhaps the real Depression will. I admit that the signs for the recovery of the American economy look rather dire right now. It's obvious that President Obama will be ideologically unable to steer us to safety. Its not in his nature to trust (real) free market capitalism which is the only thing that stands a chance of delivering us from economic catastrophe. I want to keep my chin up and keep deluding myself that everything will be alright, but its getting harder by the day.

Reading Al Fin's post "Morgan Stanley Guru: Buy a Gun & Lots of Ammo " I am being slapped into reality. Can this country really come to and end as we know it? The evidence is mounting that the answer is affirmative.

The fault lies with all of us to a certain extent, but I stop short of outright blaming the average middle class schmuck who has played by the rules, done all the right things and has done his or her part to be a a first class citizen. The fault lies with the "government" as it were and the massive money interests of the Wall Streeters and the multi-nationals for whom the regular rules don't apply.

David Paul, in none other than The Huffington Post, lays it out there:
But what if the public understood the whole story? How is it that the banks are now having one of their most profitable years ever? Given that there is not much lending going on, and that the newly increased credit card fees have only just begun to flow into bank coffers, where is all that money coming from?

It is coming from proprietary trading. "Prop trading" is the kind of betting with the bank balance sheet that was made illegal for commercial banks back during the Great Depression, when the FDIC and deposit insurance was created. The price of having the federal government guarantee bank deposits was separating the lending and depositary functions of commercial banking from trading and risk activities of investment banking. Thus, in 1935, the commercial bank J.P. Morgan & Company was separated from the investment firm Morgan Stanley.

But this separation was undone in 1999 to facilitate the creation of the megabanks that we have today. However, while the Financial Services Modernization Act of 1999 ended the separation of activities, FDIC deposit insurance remained in place. And this year, the elite of the financial world--JP, Citi, Wells, BofA, Goldman and Morgan Stanley--have finally emerged for what they are: Gigantic hedge funds backed up by the full faith and credit of the United States of America. Wall Street bankers making big bets with our money, content in the knowledge that if they win their bets, they will pocket the cash. And if they lose, we will all pick up the mess.

We should be careful to point out that not all banks are guilty, indeed thousands of community oriented banks both big and small have relied on traditional banking practices and made money on the margins just as they have for the last 60 years. But it's true that the giant "too big to fail" banks have played us all for suckers with the blessing of the Federal government.

So what does the Federal government do? Why, they threaten us that's what they do. In this piece by Tyler Durden on we learn what the Obama adminstration has in store for OUR money...

Yet new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to "suspend redemptions to allow for the orderly liquidation of fund assets." ...Money Market funds, which account for nearly 40% of all investment company assets. The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal."

This is truly unbelievable. Is this even America anymore? In saving the banks we are to bankrupt everyone else, is that right? But in a true talking out if both sides of your mouth fashion the President goes after the bankers with his harsh words. Economist Mike Norman finds the whole thing ridiculous and counter productive:

In what is becoming an all-too-familiar and nauseating scene, Obama summoned bank executives to the White House again yesterday to beg them to increase lending. The president told the CEO’s that their banks must make “an extraordinary commitment” to rebuild the nation’s economy.

From this statement we can clearly see that in Obama’s mind and in the mind of those who advise him, the vast resources of the Federal Government—the same government that bootstrapped the nation out of the Great Depression and paid for the greatest military buildup the world has ever seen—are now depleted.
Looking past the remarks, which by themselves seem unbecoming for a sitting president—the name-calling and empty threats—we see a weak leader whose ignorance of the monetary system is both mind numbing and downright scary.

So, yes, I guess America can come to and end as we know it - and in a very short span of time, maybe even yet this year. On Dennis Mangan's site they are debating "What are the odds on social breakdown?"

Will there come a point in this game of musical chairs in which the music stops? I don't know: we've become so accustomed to living a life of peace and prosperity in the USA that most of us cannot even imagine anything else.

Is it possible to estimate the chances that everything goes to hell? Or would that be more like investing or economic forecasting, when the more people that predict something, the less likely it will happen? In other words, does the fact that few people - except nuts like me - think that the odds of social breakdown are substantially greater than zero mean that the odds in favor of it happening are actually quite good?

I sure hope that all these fine people are dead wrong, but I guess it is time to consider a post "America as we know it" scenario and then acting on it.



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