THE BARRICADE

D-E-B-T. Debt? Oh yeah, debt.  Its still out there, isn’t it?

Green shoots? Laughable.  I’m afraid our “long emergency” is still on.

Commercial real estate is headed for a depression just as prime loans and jumbo loans blow up.  Meanwhile, oil is being bid up by speculators (mostly TARP-receiving financial institutions) and the electronic economy is ignoring fundamentals.  This all bodes for a summer crash.  Expect higher unemployment as small and large businesses go bankrupt–further weakening spending and consumption.  Consumer confidence may be reported as high, but their actual spending will not be.

Pressure will increase on the Dollar, as the Fed buys debt so the Treasury can sell debt.  Alas, foreclosure deserts will continue to spread across much of the Sun Belt suburbs, as business gradually grinds to an even slower pace than what we already see.  The Rust-Belt slouches towards Thunderdome.

The upshot: standard of living will decline.  And as it does, we should call it a positive thing when 20% to 30% of indebted individuals and small business owners throw themselves on the mercy of the Bankruptcy Court.  How the Bankruptcy dockets will  swell after our debtor-country realizes that having a pristine credit score is not what its cracked up to be, which is part of the related epiphany that the solution to too much credit and debt is not more of it.  All this credit-score, credit report business was a bunch of nonsense cooked up by the big, crooked banks to keep the little man in debt-fear slavery, wasn’t it?

As this debt gets written off and some of it paid off, the country, ere the world, will have a chance to rebuild wealth on a sustainable basis and perhaps escape the boom-bubble-bust cycle that has afflicted us for so long.

Doubt this? Look here:

Yes, those are trillions folks–which, apparently, has become the new billion.

(This remind you that perhaps you need bankruptcy counsel? If so, and you are in the Gulf South, I recommend you go with Kervin & Young–they may be able to save you some money.)

Let’s also check in on the Four Bad Bears as we remind ourselves of this debt reality:

If anybody thinks that the blue line is going to trend up over the next 24 months, and that we are not in for a summer or early fall crash, please comment here and tell me why–in light of the preceding debt charts.

Bernanke Housing Re-inflation Plan Faltering (Bloomberg)

Federal Reserve Chairman Ben S. Bernanke’s efforts to bring down borrowing costs to revive the housing market and help the economy are stalling. Mortgage rates are almost back to where they were in March before the 30-year rate fell to a record and sparked a refinancing boom. Mortgage delinquencies rose to a record 9.12 percent of U.S. home loans and house prices dropped the most on record in the first quarter, industry reports show.

“Housing is not going to be the engine to get us out of this recession,” said Robert Eisenbeis, chief monetary economist for Vineland, New Jersey-based Cumberland Advisors Inc., and former research director at the Federal Reserve Bank in Atlanta. “They’ve squeezed a lemon and now they’re trying to squeeze some more, but you can only get so much juice out of a lemon.”

Is There Any Limit to Bank Arrogance (Seeking Alpha)

Incidentally, if the government were to truly follow the rule of law, they are required to fight this idea. The money for the public side of the public private partnership comes from the TARP program. The authorizing legislation for the TARP states:

(e) Preventing unjust enrichment. In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. 12 USCS § 5211(e).

This would seem to be a clear-cut case of unjust enrichment that Congress was trying to prevent when it put this language into the law. I know that the rule of law has become “quaint” when it comes to the bailing out of the banks, but there has to be a limit somewhere. After all, if the banks participated in kidnapping for ransom, would we allow that to happen simply because the proceeds would help out their balance sheets?

Oil Prices Are Feuled By Speculation, Mini Bubble (Huff Post)

Goldman Sachs and Morgan Stanley for example, have received TARP bailout money. The implication being that not only are the taxpayers underwriting “the impending bubble,” they are going to pay more at the pump too, because “these unregulated banks” use all the crude oil trading vehicles for their own selfish means. As far as I know, caveat emptor is omnipresent. The “speculator,” if that’s what you call CalPERs et. al., has the right to “not participate,” one of the most powerful tools in the speculator’s toolbox.

Some Redefault Rates May Reach 75% (WSJ)

Yesterday’s Journal reports that Fitch Ratings looked at mortgages bundled into securities between 2005 and 2007 and managed by some 30 mortgage companies. Fitch found that a conservative projection was that between 65% and 75% of modified subprime loans will fall delinquent by 60 days or more within 12 months of having been modified to keep the borrowers in their homes. This is an even worse result than previous reports by federal regulators. Even loans whose principal was reduced by as much as 20% were still redefaulting in a range of 30% to 40% after 12 months.

The reasons for the high redefault rate aren’t surprising. Many of the borrowers never could afford these homes in the first place, yet the political pressure has been strong to modify loans even for these borrowers. As home prices continue to fall in some markets, borrowers remain underwater and many of them simply walk away from the home and thus redefault.

Bank Profits and the Choice America Has Made (Ian Welsh)

The US has made the choice of continuing to put its primary efforts into pursuing a chimerical paper economy which promises easy alchemical gold, rather than fixing the real economy.

But there’s no such thing as free money, not on aggregate over the long run.

And the long run is here, and by “aggregate” I mean “you aren’t an executive with the power to pay yourself millions in bonuses for destroying the US’s economy.  But you will have less money because of them.”

Support the Federal Reserve Transparency Act

The Federal Reserve is too powerful and unaccountable.  Leaving monetary policy and bank regulation in the hands of these interested few over these many decades has contributed to our long emergency.

“Fellow citizens, we cannot escape history. We of this congress and this administration will be remembered in spite of ourselves. No personal significance or insignificance can spare one or another of us. The fiery trial through which we pass will light us down in honor or dishonor to the latest generation. We, even we here, hold the power and bear the responsibility.”

Eliot Spitzer may love hookers, but he knows a conflict of interest when he see one (Slate):

The New York Fed is the most powerful financial institution you’ve never heard of. Look who’s running it.

Economist Calling for Sustained 6% Inflation–Bernanke Does Not Care (PBN)

Kenneth Rogoff, former chief economist of the International Monetary Fund, and Gregory Mankiw, former chairman of President George W. Bush’s Council of Economic Advisers, told Bloomberg News the economy would benefit from a higher inflation target than the Fed’s traditional annual target of 1.5 percent to 2 percent. Both men are now professors at Harvard University.

“I’m advocating 6 percent inflation for at least a couple of years,” Rogoff, who has been a prominent expert during the financial crisis, told Bloomberg. “It would ameliorate the debt bomb and help us work through the deleveraging process.”

“There’s trillions of dollars of debt, in mortgage debt, consumer debt, government debt,” Rogoff said. “It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation?”

Do You Want 6% Inflation? (Blogging Stocks)

This sounds like a good idea, but 6% inflation would surely hammer the dollar. We must keep in mind that the dollar is the linch pin that keeps the economy on an even keel. Interest rates would surely rise and markets sell off. Markets look for a stable economy not one reeling from uncertainty. Such a move would shatter confidence in the Federal Reserve’s ability to keep the economy from falling apart.

Obama’s Magic Bubble Deflator (Von Mises)

Everyone knows Bad Things happen in the economy because of wicked speculators and grasping businessmen. If someone were to ask whether the Federal Reserve’s creation of $8 billion out of thin air every week on average for four solid years might have had a tiny bit to do with the housing bubble, well, we’d have to remind such a cynic that the Fed was created in order to give us macroeconomic stability. Our present crisis was caused by excessive “leverage,” you see — though we won’t bother asking where major economic actors managed to get all this credit in the first place. That might lead people to ask hard questions about the Fed yet again, and as we’ve seen, the Fed is our Wonderful, Stabilizing Friend.

Pakistan Rapidy Growing Nuke Stockpiles–why? (NYT)

The dimensions of the Pakistani buildup are not fully understood. “We see them scaling up their centrifuge facilities,” said David Albright, the president of the Institute for Science and International Security, which has been monitoring Pakistan’s continued efforts to buy materials on the black market, and analyzing satellite photographs of two new plutonium reactors less than 100 miles from where Pakistani forces are currently fighting the Taliban.

China Continues Gradual Moves Away From Dollars (Reuters)

China has engineered a subtle yet significant shift in the investment of its foreign exchange reserves, a sign of how it is willing to act on concerns about financing an explosion of U.S. debt.

World’s Natural Gas Supply Set to Continue Strong Growth

Saudi Aramco has enlisted help from foreign companies to search for gas, including joint ventures with Royal Dutch Shell Plc, OAO Lukoil, China Petroleum and Chemical Corp., and Eni SpA and Repsol YPF SA. The four ventures completed 18 of 27 exploration wells in 2008, and four of the remaining wells were being drilled at the end of year, Aramco said.

The kingdom plans to boost gas-processing capacity to 12.5 billion cubic feet a day from 9.3 billion, according to Aramco.

The Khursaniyah gas plant will have a processing capacity of 1 billion cubic feet a day when it is completed mid-year. The plant will be able to produce 560 million cubic feet a day of sales gas and 280,000 barrels a day of ethane and natural gas liquids, Aramco said.

To Sustain The Unsustainable (Kuntsler)

Obama’s White House mounts a campaign to sustain the unsustainable in the economic realm. Everything they’ve done for four months involving money management and enterprise policy — from backstopping hopeless banks, to gaming the bankruptcies of the big car companies, to the bungled efforts to prop up artificially-high house prices — amounts to a gigantic exercise in futility. Worse, it gives off odors of dishonesty or stupidity, since the ominous tendings of our system are so starkly self-evident…

Not least of the problems entailed in all this are the scary political consequences. It’s one thing for a business such as a bank to fail; its another thing for the public to lose confidence in banking, or their own currency, or the credibility of all the people who work in banking, or the authority of those charged to regulate these activities, or the courts and their officers who are supposed to adjudicate misconduct in them. When faith in all these things starts to go, all bets are off for even larger social constructs like democracy, justice, and the destiny of a federal republic

Whats The Matter With Bankruptcy? (The Atlantic)

America is the most bankrupt nation on Earth. Our government is for the nonce relatively solvent, its AAA rating intact…

Our leniency toward those with unsustainable debts helps not only profligate debtors, but the rest of us as well. Less onerous bankruptcy procedures boost rates of entrepreneurship: reduce the cost of failure, and people become more willing to take risks. America’s business environment is much more dynamic than that of Europe or Japan, for many reasons—and our generosity to capitalism’s losers is one of them…

Constitutional Amendment to Prevent Moral Hazard:

From the chat board at calculated risk (sorry can’t find the link):

“We can solve the systemic regulator question and the too big to fail issue with one simple, two sentence constitutional amendment:

All non-public enterprises, regardless of their asset size, potential for systemic risk, or inter-creditor relationships, shall forever remain non-public. The government shall never provide debt or equity funds for any reason to non-public enterprise.

These two sentences would prevent any moral hazard violation and the market would take care of itself.”

The Destructive Implications of the Bailout - Understanding Equilibrium

One of the features that has enabled the bureaucratic abuse of the public during the past year has been the frantic, if temporary, flight-to-safety by investors. The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured. But by transferring wealth from those who did not finance reckless loans to those who did – providing monetary compensation without economic production – the bureaucrats at the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery…

The bottom line is that the attempt to save bank bondholders from losses – to provide monetary compensation without economic production – is not sound economic policy but is instead a grand monetary experiment that has never been tried in the developed world except in Germany circa 1921. This policy can only have one of two effects: either it will crowd out over $1 trillion of gross domestic investment that would otherwise have occurred if the appropriate losses had been wiped off the ledger (instead of making bank bondholders whole), or it will result in a stunning and durable increase in the quantity of base money, which will ultimately be accompanied not by a year or two of 5-6% inflation, but most probably by a near-doubling of the U.S. price level over the next decade. As I’ve noted previously, the growth rate of government spending is better correlated with subsequent inflation than even growth in money supply itself, particularly at 4-year intervals. Regardless of near-term deflation pressures from a continued mortgage crisis, our present course is consistent with double digit inflation once any incipient recovery emerges.

Chart: Dissapearing Home Equity (Clusterstock)

For most consumers, one’s house is one’s biggest source of wealth.  Economists have demonstrated that a loss of wealth leads to cuts in spending–from psychology and necessity.  A 50%+ drop in home equity is one whopping-big loss of wealth.  And it will have a lasting impact on consumer spending.

China and Japan and Our Currency (Telegraph)

Japan beware, crashes have a habit of bringing regime change.

Et tu Tokyo? If Washington is counting on Japan to act as last-resort buyer of US dollar bonds, it may have to think again. Masaharu Nakagawa, finance chief of the Democratic Party of Japan (DPJ), told the BBC that his country should not purchase any more US debt unless issued in yen as “Samurai” bonds, akin to “Carter bonds” in 1978.

HR 1207 IH

SEC. 2. AUDIT REFORM AND TRANSPARENCY FOR THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM.

‘(e) Audit and Report of the Federal Reserve System-

‘(2) REPORT-

‘(B) CONTENTS- The report under subparagraph (A) shall include a detailed description of the findings and conclusion of the Comptroller General with respect to the audit that is the subject of the report, together with such recommendations for legislative or administrative action as the Comptroller General may determine to be appropriate.’