Musings

I have reason to suspect that the "monetary transmission mechanism" is full of rocks (again), and we are about to have another instance of what could colloquially be called "fun." (Yes, that's sarcasm.)

Here's what we know and what I can deduce from it:

• JP Morgan's "cash position" was analyzed by a writer who published on SCRIBD, which showed that actual cash held has deteriorated radically.  By more than half in the last year.  The deterioration is continuing, not slowing.
  
  
• I am hearing repeated anecdotes from multiple areas that foreclosed property held by banks with multiple full-price offers that include a financing requirement are being sold instead to people with actual cash at radical reductions from that price.  This implies that these financing contingencies are regarded as not only potentially no good but factually no good, as if the banks know for a fact that the credit pipeline will (not might), within weeks or months (in the time required to close), disappear.  There is no other rational explanation for this behavior.
  
  
• Citibank's credit-card terms change implies a willingness to accept and even provoke a complete and intentional destruction of their credit card business as a very high probability outcome, given that nobody in their right mind will accept a 30% interest rate who has an alternative.  The obvious implication is that only those who can't transfer balances out will remain and if your credit is that impaired there's a good chance you will default - either intentionally or otherwise.  This too implies foreknowledge of a near-complete impending freeze in the credit markets.
  
  
• The change in terms on credit accounts is NOT confined to Citibank.  I have received a fax from a customer of Infibank with substantially identical terms, in which both the standard and penalty rate was adjusted to 29.99%.  This strongly implies that whatever Citibank smells the problem is not confined to them.
  
  
• Both of these credit card "adjustment" letters are of course marginal rate changes.  That is, they are both based off the PRIME rate.  The importance of that is missed by many.  Don't be one of them (more on that below.)
  
  
• I recently received a back channel communication indicating that The Fed is aware that this has been and still is a solvency problem and has so briefed certain members of Congress.  This from a source believed reliable, but which cannot be independently confirmed.

This data is not conclusive.  But - if you are dependent on credit access and these anecdotes are in fact indicative of actual knowledge of an impending lock-up you are at grave financial risk.

Note that "margin" type rates that are based on the PRIME rate could hurt you far worse than you believe.  With PRIME at historic lows should any such dislocation spike the prime rate your interest rate could go much higher with little or no notice or ability to do anything about it.

IF this is going to manifest as a dislocation of some sort it will probably occur within the normal closing window for real estate transactions, since the anecdotes related to that have the best-defined "reach", and the discounts being accepted to avoid this risk are massive to the point of denoting near-certainty of this event in the minds of the market participants who are electing to accept these cash-discounted offers.

Therefore, if you are dependent on such credit access I would take immediate action to do whatever is necessary to mitigate, to the extent you are able, the consequences of such a dislocation.

Consider how you survive returning to what essentially amounts to a cash economic posture in your business and personal life.

Note that the indications above are far stronger than what we saw going into last fall before the wheels came off.  As a consequence if these actions are those of people with real knowledge (and this is not a guess on their part) I would expect the outcome to be worse than what we saw last fall in terms of economic impact.

Those who are short dollars (synthetically or in the actual market) need to beware - if I am reading this correctly you're about to get a really ugly surprise.

If you want to speculate on this outcome levered bets on radical dollar appreciation look like one of the best choices out there, followed closely by bearish levered bets on commodities.  I would not consider such a speculative play that is not characterized by defined risk, as this analysis is based on nothing more than observation of behavior by market participants that all point toward their foreknowledge of an event that might happen in the reasonably-near future and is not, at present, backed up with actual significant credit-spread widening or other objective criteria.

Disclosure: Initiated a small speculative, defined-risk play LONG the US Dollar (UUP CALL options for March 2010)

On this Columbus Day, when Columbus "discovered" The New World (Really?  Native Americans weren't already here?) one should, I believe, ponder the following.

"What Defines America?"

Is it a defined political hierarchy centered in Washington DC?
Or is it The Constitution?

Is it a symbol (e.g. the flag)?
Or is it A Republican Form of Government, as allegedly guaranteed by our Constitution (as amended)?

Is it an organized looting operation centered in NYC and Washington DC?
Or is it this?

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. - US Declaration of Independence.

Is it "merely" a conglomeration of 50 alleged "States", or is it the bargain struck between each of those 50 States and The Federal Government.  Specifically:

Section 4. The United States shall guarantee to every state in this union a republican form of government, and shall protect each of them against invasion;

An official policy of "all illegal immigrants are welcome to come and loot our Treasury and people" is contrary to these requirements, and a Republican Form of Government requires actual representative government - not purchased, bribed legislators.

Is The Fed and Treasury's explicit and declared policy of dollar devaluation, which is exactly what "Quantitative Easing" (aka "monetization") is, lawful?
Or does The Constitution specify that Congress has this power, not The Executive or an "independent" Central Bank (Article I Section 8), specifically:

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

Is not The Constitution (as properly amended) a Contract between the people, the States and The Federal Government?

I argue that it is. 

Contracts require performance by all parties. 

Has The Federal Government met its burden of performance?

If not, who's seceding from whom?

Is there not an argument to be made that Secession has already happened - without a shot fired - and it was Washington DC and Wall Street that did the Seceding from our Constitutional Form of Government?

Note that under 18 USC Chap 115 Sec 2381-2385, for a crime to be committed an act of secession must involve violence.  A "mere" renouncement of the Constitutional Principles that allegedly bind our nation together by The Federal Government and its handmaidens both at The Federal Reserve and on Wall Street, accomplished without violence, is, by all appearances, lawful.

So here's your homework for the day - ponder this:

Does America, bound and defined by The Constitution with the rights and duties of each party defined, still exist, or has Washington DC and Wall Street already seceded over the previous two decades? Is this, in point of fact, not the root of the problems we now face in our economy and nation, whether they be runaway debt, financial frauds perpetrated upon the people, the counties and states, or blatantly-fraudulent entitlement promises that are mathematically impossible to sustain?

I'm going to go back to this quote by Barney Frank of the US House, because it says everything those in state and local governments need to know:

Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

Got it?  It's a policy to screw the state and local governments.

Huh, you say?  It's simple, really: State and local governments rely on property tax revenues.  Yet defaulted mortgages don't pay property taxes.  Yes, there's a lien on the property but this doesn't help the municipal budget now.

And suffer they are:

Tax revenues used to pay teachers and fuel police cars continue to trail even the most pessimistic expectations, despite the cash from the economic stimulus plan pouring into state coffers.

"It's crazy. It's really just unbelievable," said Scott Pattison, executive director of the National Association of State Budget Officers, and called the states' revenue situations "close to unprecedented."

These shortfalls are a direct consequence of the intentional action of not only refusing to prosecute financial fraud and the making of unsound loans for years, but of continuing the game-playing even now as an official federal government policy.

This game goes back to the former Fannie accounting scandals, as a recently-discovered set of documents from a law firm that threatened a discrimination and whistleblower retaliation suit show:

"There is no explanation which I can see which justifies amortizing beyond 100% of an asset's value.  Having made those arguments with Janet and Dick and having lost, I have to hope their knowledge of the factor generation and cash flow modeling processes includes expertise which I do not have."  (Roger Barnes, internal email, October 2002.)

Well I don't understand a reason for justifying amortizing an asset beyond 100% of it's value either, but when we get down to 2 + 2 = and the answer is something other than "4".....

We have a regulatory environment where The Federal Government has intentionally left out of the Federal Legal code strictures on operating a bank while insolvent, when many states explicitly define such an act as a felony, thereby giving The Federal Government cover in allowing banks to operate long enough to generate 20, 30, 40 and even 50% losses as measured against their asset base before being closed.  To date nobody has been criminally charged in relationship to these events.

We have banks that are intentionally sitting on "NODs" (Notices of Default) and foreclosure actions, with many people in bubble areas not having made a payment in more than a year.  There are those who view this sort of thing as "good" for the economy (since those individuals continue to spend in the local economy instead of being evicted.)  Banks are doing this to avoid having to take the "mark" on the defaulted asset; by refusing to recognize the current value of those assets as the recovery value and instead holding the note at "par" or near to it, they effectively cook their books and appear healthier than they are.  Government is allowing this and claiming that it is "for the good of the economy" to keep these blown-up banks in business but along with the default on the mortgage comes a default on the impound account (if there is one) which means state and local governments are not receiving their property tax revenues.

We also have banks that have homes that have either "jingle mailed" or otherwise been left empty, and the banks are refusing to sell these properties off for the same reason - maintenance of these "assets" at unrealistic values on the books of these firms.  This also results in the property tax bills not being paid as there is nobody living in these homes and nobody making the payments to state and local governments.

It has become clear during the last two years that despite the royal screwing that is imposed on state and local governments as a direct consequence of these actions Federal regulators, lawmakers and administration officials will not step in and put a stop to it, as they are fully bought and paid for by the financial industry. 

As a direct consequence of this intentional blindness state and local governments are being forced to lay off school teachers, firefighters, police officers and severely curtail other normal activities for lack of funds.  The Federal Government in turn is plying the States with "stimulus" money but that amount is nowhere near the amount of the shortfalls being generated by these policy decisions.

Make no mistake: This is not about protecting "the broader economy."  It is about one and only one thing: covering up the bogus accounting and embedded losses these firms are carrying so they can pay their bonuses and indeed remain in business while the local, county and state governments are serially violated by the bankers and organs of the federal government.

States must stand and say "no more!" to these policies.  Fraud is fraud and papering it over doesn't make it less crooked.  The states are entitled to their funds irrespective of whether the federal government wants to protect big banking interests on Wall Street, and must not be used as a scapegoat in this latest game of "hide the truth."

State governments must rise and demand an end to the banking and balance sheet games.  Failing such an attempt they must pass 10th Amendment recognition laws with the full force of law behind them and then begin to bring criminal charges against those institutions that are improperly holding defaulted property off the market or allowing people who remain in homes who are not paying their mortgages - or taxes.  If The Federal Government will not investigate and bring charges then The States must indict under their own consumer protection and anti-fraud laws and issue 50-state Governor's Warrants as required.

I believe it is time for State Governments to openly question whether The Federal Government has violated the contractual limits and stipulations of the US Constitution on an ongoing basis for more than two decades, and whether The States should remain within a Union where one party violates the rights and privileges of the Other Parties with impunity and malice aforethought. 

Despite the calls of some who scream "racism!" and similar echoes of the 1860s this debate is not only proper now it is proper at any time; all parties to a contract are charged with continual assessment of whether the terms are being met, and it is never "over the line" to raise the question or hold an open debate on this account.

Many claim that The War Between The States was "only" over slavery.  But contemporary documents of the time make clear that this was not the case; to wit, Georgia:

The manufacturing interests entered into the same struggle early, and has clamored steadily for Government bounties and special favors. This interest was confined mainly to the Eastern and Middle non-slave-holding States. Wielding these great States it held great power and influence, and its demands were in full proportion to its power. The manufacturers and miners wisely based their demands upon special facts and reasons rather than upon general principles, and thereby mollified much of the opposition of the opposing interest. They pleaded in their favor the infancy of their business in this country, the scarcity of labor and capital, the hostile legislation of other countries toward them, the great necessity of their fabrics in the time of war, and the necessity of high duties to pay the debt incurred in our war for independence. These reasons prevailed, and they received for many years enormous bounties by the general acquiescence of the whole country.

Hmmm... perhaps slavery was an excuse rather than the actual cause?

The Constitution is in fact the contract under which each State entered the Union.  All contracts may be renegotiated, but none may be violated unilaterally.  By refusing to comport with equal protection under the laws of the land as demanded by same and by stepping into what are clearly intrastate matters with judicial and legal activism, as was done with Bush's interference with state predatory lending laws and other similar abuses, along with government refusing to stop bogus accounting that threatens state tax revenues and fiscal health The Federal Government is acting not as a party to The Constitution in concert with the States of this Union but rather as an insane monarch who has used The Constitution as toilet paper and then discarded it into the trash.

The States must demand that these violations be immediately cured and should the Federal Government refuse the States must both indict on their own initiative the bad actors in this economic mess and consider declaring themselves free of the bonds imposed by the Constitution, not by virtue of their desire to violate its' letter and intent but rather as a consequence of the other side's refusal to recognize that the original agreement still exists.

(And by the way, for those who can't read English very well, nowhere within this Ticker - or anywhere else - have or will I advocate violent overthrow or activity of any sort.  Not only is such an act unlawful but I am fully aware of the fact that it is highly likely that any such action will not lead to a "more free" nation, but rather a Hitler-style fascist dictatorship - simply based on the lessons of history.)

We were promised one, you know.

Dennis Kneale, Larry Kudlow, hell, name a "mouthpiece" on ToutTV or in the sell-side of Fraud Street and you'll find someone claiming that "the recession is over."

But if it is, how can this be true?

Lockyer’s spoke before Controller John Chiang said state general fund revenue fell $1.1 billion below estimates during the first three months of the fiscal year that began July 1.

Let's boil this down a bit: Sales tax revenues came in at $99.8 million, or 4.5% lower than expected.

Income tax revenues were also off big, but remember that income taxes are (usually) progressive, so a loss in income translates into a larger drop in tax revenues (as an aside this, my friends, is why "tax the rich" only works when the rich are getting richer - when they start to get poorer as a consequence of your redistribution schemes and move down the tax ladder, your income tax receipts collapse!) while sales taxes are a straight percentage of sales, often with the only exception that would skew on an income basis being food.

This strongly implies that California saw gross consumer sales off about 4.5% from where they expected; this, of course, raises the question "what was expected?"

What we do know is that for the three months ending in June they had expected a 14.4% drop - and got an 18.75% one.

It's not just California either:

"It's crazy. It's really just unbelievable," said Scott Pattison, executive director of the National Association of State Budget Officers, and called the states' revenue situations "close to unprecedented."

Most states had been pessimistic in forecasting their tax revenues for the 2010 fiscal year, Pattison said. So far, collections have fallen below even those low targets.

The bubble economics games have severely damaged everyone for the benefit of only a very few, whether you participated in the purchase of a home during the boom or not.  States were led to project budget numbers that were totally fraudulent and everyone who moved into (or within) a bubble area during those years was forced to participate by either having to rent or buy at artificially-high prices. 

This wasn't limited to real estate either.  Medical care, insurance, college costs - all were inflated dramatically by the obscene "bubblenomics" for the benefit of those "securitizing" that debt and selling it off to rubes - so-called "investors" who were defrauded on a grand scale by "models" that promised the mathematically impossible. 

All of this was not only cheered on by Washington but deliberately enabled through perversions such as Barney Frank, who was caught admitting that having the FHA make bad loans on purpose was "a policy."

The markets generally cheered a "better than expected" initial unemployment and continuing claim number last week, but those numbers don't necessarily provide a good signal in an economic environment like this.  For one, they completely ignore anyone who isn't eligible for unemployment compensation - which includes the self-employed.  They also don't measure how hard it is to find a replacement job, which of course is the key metric if you find yourself unemployed.  The employment report provided less-than-encouraging news in this regard, particularly the household survey which strongly suggests that we've lost a hell of a lot of jobs and are not, at present anyway, turning that corner:

Note that this indicator turned upward right near the end of the last "official" recession - and it also led the "official recession" beginning calls by about 12 months.  There's no indication of recovery in this number - yet.  Indeed, the flattening of this curve for a couple of months is probably a big part of what led a whole bunch of people to make those "bottom" calls, yet that is increasingly looking not like dawn approaching but rather an incoming meteor.

Then there's consumer credit, which contracted at a rate of about $10 billion last month.  Most of it was in revolving (credit card) debt, which is no big surprise.  Nor is it a surprise that September had a moderation of the decline in non-revolving (mostly car loan) debt outstanding.  But "cash for clunkers" is now known to have massively pulled-forward demand and left a vacuum behind, as the most-recently posted auto sales were disastrously bad.  This of course portends a resumption of credit contraction next month, never mind what may come from those who bought "clunker deals" but can't afford them.  If you're looking for a new(er) car the best time to buy may well be in the late winter and spring of next year, when the lates have turned into repossessions and the lots are rather likely to be full of six-month-old cars with a few thousand miles on them clogging up dealer lots, destroying not only the poor fools who took on debt they can't afford but adding further punishment to new car sales (after all, why buy new when you can buy a six-month old vehicle at 30% - or more - off!)  We won't get another Fed Z1 report until December 10th, but I strongly suspect that when we do it will show further deterioration, confirming credit contraction that is being reported by banks themselves (28% annualized contraction rate to businesses, 19% annualized across all segments of the economy.)

At the same time The Dollar is under attack - not from external causes as many would love to lay the blame upon (there are a lot of people who hate George Soros) but rather due to our own government and Fed policies.  After all, printing over a trillion to buy likely-worthless securities in legally-questionable (at best) transactions to prop up two bankrupt companies (Fannie and Freddie) along with the administration's penchant to spend nearly double what it takes in via taxes has a habit of being currency negative.  How negative?  You judge:

Of particular problem here is that descending wedge.  It should have broken upward according to the expectations of basic technical analysis.  It didn't; instead it broke in a downward direction on extremely high volume, bounced back inside and then took a second stab at collapse.

Let me be quite clear: We are literally hanging by a thread.  There is one final support level down around 72, but I don't think it is particularly meaningful.  The "powers that be" clearly recognized the danger, as the jawbones came out in earnest overnight into Friday morning, along with some intervention in Asia.

While the Chinese might tolerate a slow deterioration of the dollar even though it screws with their export economy tremendously (never mind the Arabs and their oil) a collapse is another matter.  Lest someone think this move has been "slow", let me point out that from March to today the index has fallen some 15%.  This, of course, is about a 30% annualized rate.  To put this in perspective the dollar is suffering a pace of decline this year about equal in the degree that the stock market did last year. 

This move has been broadly supportive of stocks; indeed, stock prices are almost lock-step responsive to dollar moves intraday.  Not only do prices look "cheaper" to foreigners but exports are helped by a falling currency. 

There are only two rather large dragonflies in this ointment; not only are imports hurt (and we're a major importing nation) but worse, foreign capital suffers a direct loss when it repatriates.  History says that weakening the currency never works as a means of getting out of a credit problem or covering insolvencies because capital flees faster than you can devalue and as a consequence you lose even if you're a net exporting economy (as was Japan); for a net-importing economy such as ours the ultimate outcome is disastrous.

Of course the incessant claim of support for a "strong dollar" has echoed from TurboTimmy the last couple of weeks, and of course The Fed has (as usual) disclaimed any interest in where the dollar stands.  Both claims are flat lies.

For Treasury's part spending more than you make weakens your currency.  Why? Because you must borrow that extra money, which weakens your nation's balance sheet.  Since your currency is backed by that balance sheet, weakening it leads your currency to decline.  It's that simple.

The Fed's words are even more outrageous; there is no more certain way to cause the price of something to decline than to produce more of it without commensurate demand.  Yet that's what The Fed has done by effectively monetizing both Fannie and Freddie along with Treasury debt.  These programs have amounted to "printing money", which increases supply into what is clearly slack demand for credit origination.  Basic economic theory tells you that when you increase the supply of something while demand is falling price collapses.

Many are concerned about potential "inflation" and this has in turn driven gold to new highs in the last week.  In my opinion this concern, to the extent it is for inflation, is misplaced.  Rather, I'm quite concerned about the impoverishment of millions of Americans - those of middle class means and below, as the destruction of the currency's purchasing power is not able to be reflected back into wages due to offshoring of damn near everything.  The consequence will be that standards of living fall, but not due to hyperinflation where nominal GDP rises.  Rather the curse we've seen over the last two years looks to be poised to accelerate dramatically, with spending shifting hard into mandatory items (food, fuel, shelter) and away from virtually everything else.  This in turn will place increasing pressure on GDP and the government's attempt to support output. 

But how?  For now government can borrow all the money it wants at near-zero cost, especially on the short end of the interest rate curve, and they have taken advantage of this, shifting down the curve in a dramatic fashion over the last two years.  But there is grave danger herein; while last fiscal year's interest expense for the government was $383 billion (versus $451 billion in FY08) the deficit and outstanding debt exploded higher, with $1.743 trillion added in the last fiscal year.

The effective interest rate on the debt in FY08 was 7.7%.  This last year it was 5.1%. 

To put this in perspective the previous fiscal year saw $750 billion (or less than half as much) added and the year prior $206 billion. 

See a pattern here?

What happens if our interest expense goes back to where it was in Fiscal Year 2008?

The interest cost would be $581 billion.

Can this game continue indefinitely?  No, it cannot.

In Fiscal Year 2009 the government took in $2.1 trillion dollars (preliminary numbers from the CBO)  This is a current coverage ratio of 18% (income to cover interest), which sounds reasonable.  But should the cost of debt rise to FY 2008's level coverage would deteriorate to 28% - that is, from about one in six dollars going to interest to a bit more than one in four.

The Government did manage to add roughly four points and change to GDP last quarter, and it will also be adding positively this time around with Cash For Clunkers and similar "free money" schemes, but the broad question really is whether such "GDP additions" should count at all.  There are valid arguments on both sides of this debate, with one side claiming that if you go to the bank and borrow $20,000 you haven't really added to output at all (since all you've done is pulled forward spending you'd otherwise do later) while others say that the "now" counts (but so does the hangover later.) 

The latter is more mathematically defensible but the question becomes when the "hangover" will be realized, rather than drowned with yet another keg of whiskey.  That prescription seems to work just fine for a while if you're a drunk, but eventually your liver shuts down and you die.

Such may be our fate if we do not stop to take our medicine soon, as a dollar collapse that really gets some legs under it could trigger all sorts of unfortunate consequences - including a war.  I'm quite certain that neither Japan or China is going to sit by silently and watch us destroy nearly $3 trillion of their wealth, say much less what Saudi Arabia holds.  Despite the view that we have them by the short hairs in truth we both are pointing pistols at each other's heads - the question becomes whether one of us develops a tick in our trigger finger.

Americans appear oblivious to this as they cheer the stock market but let's take a look at whether you should be cheering at all.  Mathematics is a bitch and she's not being particularly kind to people in retirement accounts or, for that matter, anyone who doesn't trade actively - and guess right.  Let's take the S&P 500 which topped at 1576 in October of 2007.  It fell to 666 in March of 2009, a 58% loss.  That's horrible.

It has since risen to 1071, a 61% gain.  Great, right?

Uh, notice something folks? 

32% of your money is still gone.

The Dow is in similar dire straits.  It went from 14,000 to 6,469, a 54% loss.  It has since recovered to 9,864, a 52% gain.  Where's the rest of your money?  Almost 30% of it is still missing!

Were you better in tech stocks?  Let's look.  The NDX (Nasdaq 100) went from 2,239 to 1,018, a loss of 55%.  It has since recovered to 1,727, a monstrous 70% gain!  You're in the money, right?  Uh, wrong; 23% of your original money is still missing.

Then there are individual stocks.  Yes, there are some crazy winners, including Alcoa which has nearly tripled.  Or is it a winner?  Alcoa lost 90% of its value from July of 2007, when it sold for $48.77.  Today it sells for $14.24, an insane loss of 71%.  Yes, buying it at $5 was a screaming deal - if they didn't go to zero (and still don't.) 

The usual rubric is that "it's a stockpicker's market and you need professional advice."  Oh really?  How many of those so-called "pros" told you to get out in 2007?  "What is none, Alex?"

Now I want you to consider the following - The DOW today, at 9,864, is back where it was in March of 1999.  You've spent ten years and made nothing.  That's bad.

What's worse is what has happened to the price of eggs, milk, cars, medical care, college tuition and more during those years.  Most have doubled and some have tripled.  Yet your stock portfolio is exactly where it was then. 

In terms of purchasing power it has lost half or more over that decade, and the same story is told in the S&P 500.

Renewed economic growth?  Where?  Baby Boomers have had their retirements destroyed by the Fraud Street crowd.  The 401k is, for most people, a scam and what's even worse is the concept of "saving" in a world where we have a government hellbent on destroying every saved dollar.  We the Sheeple think this is great as our so-called "per-capita income" goes up, but has it really increased?  Has our wealth really increased in terms of spending power?  I'd argue no; we have instead been lied to about the future and about our nation and its economy, and have as a consequence been goaded into spending money we do not have and have no hope of being able to earn. 

We have now discovered that we're in a huge hole, well over our heads, and Bernanke and Obama have shovels and are trying to make the damn thing deeper, all in the name of "trying to help."

In a crisis you need to make a choice. You can choose to solve the problem and protect the innocent from the results of the firestorm. Or you can try to teach them a lesson. You can't solve the problem by teaching people a lesson. That's not a strategy for solving the crisis. It's a strategy for inflicting a lot of damage.

That's a very nice thought from TurboTimmy, but it intentionally misses the point.  Fraud Street and Washington have been running around with gasoline cans spraying gas everywhere in the financial system for more than 20 years.  Someone threw away a lit cigarette and the firestorm erupted.

Timmy and the rest of Fraud Street and K Street then showed up with fire trucks and "put the fire out" - but they did so by smothering it with more gasoline!  "Heh, if we can just get enough gas in here there won't be any oxygen and the fire will go out!"  "Great idea, let's do it!"

Now the fire's out, but instead of a bit of gasoline on the floor we're now up to our chests in it and the oxygen is coming back into the room.  Not only has nobody drained any of the gas off they're still adding more and while there are "no smoking" signs up everywhere eventually someone is going to create a spark, and this time it won't start a fire - there will be an explosion.

The fraudsters must be thrown out and prosecuted.  Lying to people about your balance sheet and the structure of deals is a crime, not a mistake.  Intentionally omitting people's incomes and plugging in "guesses" on liar loans into models is a crime, not a mistake.  Intentionally holding short-term market rates negative in real terms through various liquidity schemes for the purpose of goading people into borrowing and lending irresponsibly isn't a mistake, it's an intentional act.  Modeling indefinite 6, 7, 10% home price increases isn't a "reasonable estimate", it's an act of fraud, as a 7% increase annually (touted by many during the boom years) would mean that in a decade the price of all homes, added together, would be greater than that paid for every home cumulatively from the inception of America 230 years ago to the day that 10 year period began. 

Jimmy Carter lost his job for saying this on national television for those of you who remember.  He was referring to electricity use, which was at the time increasing by 7% a year.  He was right - whether you wanted to hear it or not.  He over-estimated the average American's intelligence; this, after all, is (really) sixth grade math.  The next Presidential Election made clear that at least 51% of Americans failed that class.

We have deadly-serious issues facing our nation.  They require serious solutions.  The nation must stop promising that which it cannot deliver.  We must stop allowing liars in our government, at The Fed and on Fraud Street in New York to run amok with impunity.  That which cannot happen over long periods of time but is sold to investors as a "long term trend" must be prosecuted as the fraud that it is.  Those who intentionally make loans they know have no reasonable expectation of being paid back must be prosecuted.  Those banks that are intentionally holding assets at above-market values when those "values" were achieved via mathematically-unsustainable practices must be forced to write down those "assets" to their market price.  If this causes them to fail, so be it.

We the people must stand up instead of sitting in front of our boob tube and watching American Idol.  If you're unemployed and pissed off about it, or if you live in a house that is worth half of what your mortgage balance is, be aware that it was not an accident.  You lost your job and your house's "value" spiked and then collapsed because of three decades of formal American policy promulgated by bankers and government officials resulting in production being offshored and the border left wide open for illegal immigrants, squeezing you on both ends. At the same time Greenspan, Bernanke and Congress all actively conspired to prop up asset values through intentionally-derelict fiscal and monetary policy decisions.  This was the only way to make the books balance and keep justifying the debt issuance that was otherwise impossible to cover. 

But now all the workers that can be offshored have been, and what's left are people making coffee at Starbucks, McJobs flipping burgers, unskilled labor cleaning rooms in hotels and of course Fraud Street "magicians" who claim to have found $105 in a $100 lending transaction through a computer model that takes the world's largest supercomputers a full day to run.  That would be great if it was real but it isn't, any more than is cold fusion, turning lead into gold by alchemy, or as was discovered just a few years ago, the "complex adjustments" that Fannie Mae applied to their deals to "manage" their earnings (and which later blew up in their face, as it was bogus from the start.)  If you're interested in exactly how ugly that was, complete with the emails documenting it, read that link - then consider that some of those referenced as allegedly "guilty" in those emails are STILL employed by the GSEs, FHFA and others in the securities and lending industry!) 

Instead what we truly have left is a mountain of impossible-to-service debt and in a mad dash to avoid recognition of the facts we are now turning to outright scams with the full sanction of the government behind them - refusing to sell properties at auction, not initiating foreclosures for a year or more after the homeowner goes into default, "re-marketing" mortgages under government "approval" to people that the government knows can't pay and pretending that commercial loans are all going to be "money good" when there is no possible way for them to cash flow.  The nearly-100 banks that have failed thus far in this crisis have proved this to be the rule rather than the exception - uncovered losses should simply never happen under our body of law, yet we continually see 20, 30, 40 even 50% losses against entire asset bases.

The game of "kick the can" has been played with a reasonable degree of success for the last 30 years, but the can is now full of cement.  We cannot choose whether to take our medicine any longer - we can only choose whether to decide to do it now and have the outcome be bad, or try to put it off one more time and have the outcome be catastrophic.

Choose wisely America.