Every day seems worse than the previous day. Five hundred thousand people are getting laid off every month. Our banking system is on life support. Retailers are going bankrupt in record numbers. The stock market keeps descending. Home prices continue to plummet. Home foreclosures keep mounting. Consumer confidence is at record lows. You would like to close your eyes and make it go away. Not only is the news not going away, it is going to get worse and last longer than most people can comprehend. The Great Depression lasted 11 years, but the more pertinent comparison is Japan from 1990 until today. A two decade long downturn has a high likelihood of occurring in the United States. There are many similarities between the U.S. and Japan, but in many areas the U.S. has a much dire situation. If the next decade resembles the Japanese experience, there will be significant angst and social unrest.

 

The talking heads on CNBC were almost unanimously predicting a second half recovery for the economy in the 1st week of January. Most of these people manage money and only earn money if dupes invest their hard earned dollars in their funds. Their analytical case for predicting recovery is that it was so bad last year that it has to go higher in 2009. This is what passes for analysis on Wall Street. The market is already down 7% in four weeks. These “experts” fail to see the big picture and have no sense of history. It took 28 years to get to this point and it will take at least a decade to repair the damage. If the politicians running this country try to take the easy way out (very likely), add another decade to the recovery timeframe. Some indisputable facts will put our current predicament in perspective:

 

* The U.S. National Debt was $930 billion in 1980, or 33% of GDP. Today it is $10.7 trillion, or 76% of GDP. The National Debt has grown by 1,150% in 28 years. With the planned fiscal stimulus (taxing future generations), the National Debt will reach 100% of GDP during the Obama administration. When Argentina’s economy collapsed in 1998, their National Debt as a percentage of GDP was 65%. The Great Deniers say we are not Argentina. They say we are safe because the U.S. dollar is the reserve currency of the world. This is like jumping off a 20 story building and as you pass the 10th floor someone yells out the window asking how you are doing. You answer, “Good, so far”.

 

 

http://www.financialsense.com/editorials/quinn/2009/0128.html

Bitter Medicine Needed

 

I know that many Americans are looking for President Obama to solve this crisis in a sound bite way, with no pain and no sacrifice. They want this to end like an episode of CSI with the murder solved within a one hour time slot. Instead we have a Jonestown massacre that will never be fully understood or solved. Was it mass murder or mass suicide? We have experienced a mass hysteria of debt accumulation by consumers, banks, corporations and the government. There is no easy way out. The debt must be paid off and/or written off.

 

The politically unpopular steps that need to occur are as follows:

 

* From an overall standpoint, when you have entered a recession due to fiscal irresponsibility, you don’t get out of it by becoming even more fiscally irresponsible.

* Housing prices need to drop another 15% to 20% to reach fair value. This will result in more foreclosures. When prices fall far enough, the houses will sell and inventories will fall. If you cannot afford the payment on your home, you should become a renter. Not everyone should own a home.

* The government and Federal Reserve need to shine a bright light on the bad debt within the financial system. The collateral or lack thereof backing up the government loans needs to be revealed by Treasury and the Federal Reserve. Covering up the worthlessness of these assets is contributing to the frozen system.

* The remaining mega-banks that have caused this crisis need to be put out of our misery. The shareholders and bondholders of Citigroup, Bank of America, Goldman Sachs, Morgan Stanley and any other insolvent banks need to be wiped out. The bad banks should go out of business. The prudent banks that did not take financial system destroying risks should be allowed to succeed based on their merits.

* Failed companies with failed strategies must go bankrupt. If the American auto industry is propped up by taxpayer money the capitalist process of rationalizing manufacturing capacity to final demand will never happen. Allowing companies to fail brings about restructuring and the remaining healthy companies buy the good assets.

* Only infrastructure projects that benefit the citizens of the country should be undertaken. These would include water pipe replacement, electrical grid upgrades and repairing structurally deficient bridges. If the money is spent on worthless make work projects, good investments will be crowded out.

* Tax rebate checks are just a redistribution of wealth from future generations to the spend thrift generation of today. A tax decrease today that is borrowed is a tax increase on our children. They will not stimulate spending.

* Keeping interest rates at zero in an effort to force savers to borrow and spend is penalizing the frugal to benefit the profligate. Borrowing our way out of a debt crisis will never work.

* Consumers should be encouraged to pay down their debt loads and increase their savings rate. The sooner this can be accomplished, the sooner the country can resume growth. Savings will lead to investment.

* The median 401k balance was $18,942 at the end of 2007, with 39% of workers having a balance below $10,000. Approximately 8,000 Americans turn 65 every day. By 2012, 10,000 people will turn 65 per day. Twenty percent of the U.S. population will be over 65 by 2030. An aging population with virtually no retirement savings must increase their savings and cut their consumption dramatically.

* The CEO’s who brought down the entire financial system need to be brought to justice. Angelo Mozilo, Dick Fuld, Charles Prince, Jimmy Cayne, John Thain, Stanley O’Neal, Ken Thompson, Robert Steele, Martin Sullivan, Hank Greenberg, Richard Syron, Daniel Mudd, Kerry Killinger, Raymond McDaniel, Terry McGraw and probably a few I’ve missed, need to be investigated and prosecuted for lying to shareholders about the true financial condition of their firms.

* Fannie Mae, Freddie Mac, and AIG are wards of the state. The U.S. taxpayer is obligated to pay $150 billion to AIG and $200 billion to Fannie Mae and Freddie Mac. AIG is using these funds to undercut other insurance companies in pricing insurance policies. This will result in insurance companies that did nothing wrong being put out of business by the government supported goliath that almost brought down the financial system. Fannie & Freddie are being pushed by Barney Frank and his distinguished colleagues in Congress to provide more 3% down loans to people who won’t pay them back. The Fed then buys the loans and pretends they are good collateral, while not revealing the true value to the public. Sounds like good policy to me. These companies need to be euthanized and any decent assets sold to viable companies.

* Moody’s and S&P should be banned from the rating business. They proved that a AAA rating could be bought. Pension plans, governments, companies, and individuals relied on their ratings. They colluded with the investment banks and must be punished. Their monopoly needs to be ended.

* The SEC needs to be disbanded. We need to push the start over button. They are in bed with Wall Street. They are unable to enforce their vast array of regulations, ignore proof of ponzi schemes, and are a revolving door to top Wall Street jobs. The organization has failed miserably. An agency that does not work needs to be scrapped.