The political witch-hunt that is now being fomented related to the SEC's charges against Goldman is a minefield that threatens to blow up the GOP for the next 20 years - if not permanently.

The full-court press by right-wing talking heads such as Limbaugh and Hannity, who appear to have not bothered to do a bit of research into the matter before spouting off absolute nonsense, are piling on in a fashion that will just do further damage to the Republican brand.

The premise here is that the SEC action was "concocted" in some fashion.  Well, if that's true, how come the key trader involved, Tourre, has been de-registered in London?

Fabrice Tourre – the bond trader at the heart of Goldman Sachs' fraud case – was on Tuesday barred from working in the City of London in the first 'victory' for financial regulators on both sides of the Atlantic.

That's not what you do if you did nothing wrong - or your employee did nothing wrong, conference call by Goldman with many "ahs" and "uhms" notwithstanding.

It may get much worse.  Zerohedge is reporting that the infamous C-BASS, the company formed by MGIC and Radian (and over which their pending merger blew itself to bits a couple of years ago), may be intertwined in the Goldman mess.  There may be a story here - or maybe not.  We'll see as time passes.

In the meantime there are a few Democrats that are not waiting around.  Marcy Kaptur (D-OH), among others, sent a letter to Eric Holder, US Attorney General, in which she said:

If both global and domestic confidence in the integrity of the U.S. financial system is to be regained, there must be confidence that criminal acts will be vigorously pursued and perpetrators punished.

While the SEC lacks the authority to act beyond civil actions, the U.S. Department of Justice (DOJ) has the power to file criminal actions against those who commit financial fraud. We ask assurance from you that the U.S. Department of Justice is closely looking at this case and similar cases to further investigate and prosecute the criminals involved in this, and other financially fraudulent acts. .....

Exactly.

So precisely what are the Republicans trying to argue for here?  That the sort of misconduct that is alleged to have occurred here beyond the boundaries of the law, and that which does not rise to a criminal standard of conduct but which is exploitive of Americans, should be permitted to slide - either "because it's in the past" or for more sinister reasons - like permitting the same looting to continue and be expanded in the future?

Don't feed me this crap about "expanding credit for Americans" - we've done that and it was a freaking DISASTER!  Liar loans, 0 down, totally irresponsible HELOC and other lending policies, people tying small businesses to their houses and personal fortunes all so the bankers could skim off a huge piece of everything - and it all blew up.

Now "they're back" and making billions in bonuses - but what are they doing to earn that money?  Banking and finance generally is a parasitic function.  It's a necessary function, but only to a point.  Yes, we need to match those with capital with those who want to borrow capital, and that's what banks do - but we don't need to feed an insatiable monster that "demands" products that are unsound, unsafe, and crooked at their inception, nor do we have to permit these same bankers to continue to lie about their asset valuations.

Yet we are.

Let me be clear: The system will not hold together on the path we are on now.  It can't.  It is demanding to be fed with ever-greater interest payments and ever-larger slices of the economy siphoned off, and the real economy can't withstand that sort of attack.

Look at consumer confidence - it came in at -50 today, just off record lows, .vs. projections of "improvement."  Improvement?  Where?  The real economy is choking to death under 29.9% interest rates as the bankster monster sits on it and plays vampire, sucking the blood from the economy.

And Mayor Bloomberg has the chutzpa to tell the NYC Congressional delegation that they have to "fight" for NY.  Fight?  For what?  For the ability to steal even more? 

Jefferson County Alabama funded NY's fat-cat bankers and taxes - with a bribery scheme that sent several officials to prison. WHERE ARE THE INDICTMENTS OF THE BANKERS INVOLVED?  The banks involved included in the swap deals that were both overpriced and may have been entered into in exchange for bribes include JP Morgan, Bear Stearns, Bank of America and Lehman Brothers.  Two of the four are now dead, of course, but the other two are not.

Oh, Mr. Langford?  He got 15 years.  How many years have the bankers gotten?

NOT ONE DAMN DAY.

Oh, Bill Blount (who did the bribing) went to prison too - he pled guilty.

The bankers - and the banks themselves - that profited from this crooked set of deals?  Not one penny has come back to the citizens of Birmingham, Alabama, nor has one bank executive been indicted.  Never mind that Matt Taibbi has alleged that Goldman was effectively bribed to the tune of $3 million to stay out of the deals - by JP Morgan!

Oh, and before anyone tries to hide behind a claim that "they didn't know", you might want to read this:

Here you can see a trail that leads directly from a billion-dollar predatory swap deal cooked up at the highest levels of America's biggest banks, across a vast fruited plain of bribes and felonies — "the price of doing business," as one JP Morgan banker says on tape — all the way down to Lisa Pack's sewer bill and the mass layoffs in Birmingham.

Didn't know eh?  That dog won't hunt.

We can't stop it?  Like hell.  Bill Black did stop it.  Listen up:

The banksters threatened to kill him by the way.  Literally.

To Congress and President Obama: Stop lying.  You can put a stop to the scams - you're refusing.  You're not unable, you're unwilling.  But this position you've adopted - the making of excuses and continued sponsorship of the scams and frauds of these "bastions of banking" has us moving ever-closer to the cliff, and once we go off it, there is no coming back.

Let me make this clear.  I'm a man of peaceful protest and I've called for legal and legislative remedies.  100 years of hard time with Bubba in the slammer for these clowns will do just fine.  In fact I prefer it to violence, in that hard felony prison time will both last longer and hurt more.

But I'm not the only one out here, and a lot of the people in this country are tired of the crap and within a hair of deciding that it's time to roll up judge and jury into one, passing sentence personally.  Howard Fineman, writing for Newsweek, sees the problem but as with most "pundits" refuse to identify the culprit, as pissing off half your advertisers (every big bank in the land) can impact tenure with the publication you write for.

The people are done with being robbed, looted, bent over the table and violated repeatedly, while our nation's corporations - banks included - are fined with wrist-slaps instead of hard time or worse, their actions are IGNORED and they're even bailed out!  Witness Pfizer, who I've written about - in  2009 the firm pled guilty to a criminal felony and paid $2.3 billion as a fine.  What did the various agencies say at the time?

“Today’s landmark settlement is an example of the Department of Justice’s ongoing and intensive efforts to protect the American public and recover funds for the federal treasury and the public from those who seek to earn a profit through fraud. It shows one of the many ways in which federal government, in partnership with its state and local allies, can help the American people at a time when budgets are tight and health care costs are increasing,” said Associate Attorney General Tom Perrelli. “This settlement is a testament to the type of broad, coordinated effort among federal agencies and with our state and local partners that is at the core of the Department of Justice’s approach to law enforcement.”

What did Pfizer do?

American pharmaceutical giant Pfizer Inc. and its subsidiary, Pharmacia & Upjohn Company Inc., have agreed to pay $2.3 billion, the largest health care fraud settlement in the history of the Department of Justice, to resolve criminal and civil liability arising from the illegal promotion of certain pharmaceutical products, the Justice Department announced today.

This was a first offense, right?  The company did a bad thing, got caught, and had been a good corporate citizen.  It was an "isolated incident", yes?

Uh, no, it was not.

A division of Pfizer Inc., the world's largest drugmaker, has agreed to plead guilty to two felonies and pay $430 million in penalties to settle charges that it fraudulently promoted the drug Neurontin for a string of unapproved uses.

In an agreement announced by government prosecutors Thursday, Pfizer unit Warner-Lambert admitted that it aggressively marketed the epilepsy drug by illicit means for unrelated conditions including bipolar disorder, pain, migraine headaches, and drug and alcohol withdrawal.

Same offense, five years previous - in 2004.

There wasn't anyone involved in both of these illegal acts, right?  Different people that just happened to be in the same company?

Wrong again.

Jeff Kindler, who became Pfizer’s general counsel in 2002, supervised the lawyers who made the promises to prosecutors. By 2004, Kindler increased the compliance budget 12-fold. He became chief executive officer in 2006. In Pfizer’s ethics guide, he says stories about misbehaving companies and executives abound.

“Pfizer truly stands apart,” he says. “I am proud of our record.” On Oct. 1, Kindler was elected to the board of the Federal Reserve Bank of New York. Kindler declined to comment.

Not only was the same guy the general counsel in 2002 when the first offense happened he had been promoted to CEO when the second occurred. 

Mr. Kindler's "penalty" for being involved in not only one but two felony criminal violations of the law at Pfizer?  He was elected (by the banks, of course) to the board of The Federal Reserve Bank of New York.  Oh, and he's "proud" of Pfizer's record - a record he was responsible for.

Perhaps you can explain why the people should sit still while our government, which is supposed to enforce laws, allows not just one offense but corporate recidivism - with an offense that includes aggresisvely peddling drugs for unapproved uses.  Out here in the real world we call that "drug dealing" and when the drug is heroin or PCP, and we catch them, we lock people involved up for life. 

But when you run a big pharmaceutical company and in essence commit the same offense you get your hand slapped, get promoted for the first offense and then when you do it again you get elected to the board of the institution that executes monetary policy for the entire United States!

I keep brining up the Pfizer case - and the Jefferson County one - because they are outrageous in their impact on ordinary people and the brazen nature of what occurred.  There's also no doubt that criminal acts were involved, since in both cases the parties (or corporations) either were found or pled guilty. 

That is, these felony aren't allegations, they're facts.

But in each case the prime actors go free.  Nobody does hard time and nobody even loses a business license.  Pfizer wasn't shut down nor did it lose the ability to do business with the government.  The banks involved in the Jefferson County Alabama swap deals were not prosecuted, they didn't lose their banking licenses, they didn't have to return any of the money they "made", and the people of the county still got screwed.  Then those very same banks jacked up half the nation's credit card interest rates to 29.9% - while The Fed lent them our money at zero.

The latter is important, by the way.  If I steal a car and then sell it to you, when you're caught with the stolen car you don't get to keep it.  It doesn't matter if you're out lots of money as a consequence - you never had a right to the car in the first place, as it was the fruit of a poison tree.  Why haven't these banks been forced to disgorge every penny that Jefferson County paid them, since the funds they got were likewise the fruit of a felonious series of events?

Oh yeah, there was allegedly a probe on the Jefferson County (and other municipalities that got scammed too) matter - in 2008. 

Before the election. 

WHAT CAME OF IT AND WHY HAVE THERE BEEN ZERO INDICTMENTS?

Nearly two years later, all we know is that there "was" an investigation... but we also know why the banks got involved in these slimy deals.  Read it right here:

``Swap deals were more numerous and higher fees available,'' Snell said in the interview. ``In addition, swap transactions have much more flexibility for payment because there is no requirement, as there is in new money transactions, that the fees be disclosed.''

Hide the cost, hide the fees, don't disclose any of it, and, in the case of Jefferson County, if some of the officials there get involved in a little bribery, well, it's nothing that a higher fee won't take care of covering!

Or shall we talk about book-cooking?  Oh hell, why not, let's do Wells Fargo, which has a grand-pappy popping $1.76 trillion freaking dollars in QSPEs off balance sheet!  The alleged "maximum exposure to loss" (according to them)?  A mere $43.5 billion - that is, the claim is made that a minuscule 2.4% could possibly - in the worst case - be lost, but not one penny more!

Oh, what's in the black box?  Well, we can start with a cool $1.1 trillion in "conforming" mortgages, including Ginnie-guaranteed paper.  The latter, by the way, has an actual guarantee from the Federal Government - but note that the breakdown between the two is not specified.  Why not, given that Fannie and Freddie paper is not legally guaranteed - even though it is currently "backstopped."  Given how little Ginnie did in originations prior to the FHA ramping up in the last couple of years why do I suspect that "conforming" might not even actually mean "wrapped by Fannie or Freddie"?  After all, the legal term of art "conforming" in this case merely means it qualified to be sold to the GSEs - not that it was, or that it was wrapped by them!

Then there's $251 billion in non-conforming mortgages.  How many of those are Wachoiva "Pick-a-Pay" monstrosities that Wells swallowed?  Hmmmm...  Oh, and let's add in $345 billion in commercial mortgage securitizations (not whole loans - securitizations!) which, if you remember, FITCH said 10% of the total outstanding would be in default by the end of the year.

If that's not enough for you the unconsolidated VIEs are also in the mix off balance sheet, and in there we find $56 billion in CDOs (heh, how are those performing, and what sort of CDOs are these?  Are there any synthetics in there?) and, of course, just to round things out, a cool $23.8 billion in CLOs (collateralized loan obligations.)

To put this all in perspective for the company to hold the "standard" 4 and 8% Tier Capital against this the bank would have to have almost $160 billion in Tier Capital (for the 8% standard) in addition to coverage for the formal, on-balance sheet debt that the company has - and this assumes that all those "carrying values" accurately reflect the actual value of these securities.  Anyone care to bet on what the market price is on this box-chock-full-of-god-knows-what should they want to - or have to - sell it?

Of course Wells doesn't have the capital behind that nor can we see what's actually in the box, other than their "category list." The "off balance sheet" games permit this sort of thing - a dandy arrangement right up until the belief that the maximum value at risk of $43 billion turns out to be a wild-eyed fantasy. 

Then the taxpayer gets tapped on the shoulder and told that tanks will roll unless we fork up $700 billion tomorrow - again.

We learned exactly nothing from ENRON and MCI, or for that matter from Lehman and the 2008 debacle - did we?

Why did I pick on Wells?  Besides the fact that they make it reasonably easy to find this crap in their financial statements, for no particular reason.  The other banks aren't quite as bad, but when we're in the hundreds of billions off-balance sheet - does it matter?

No.

We desperately need politicians who will cut the crap and put a stop to all of this, right here and now.  No more flim-flamming, no more off-balance-sheet crap, no more hidden fees, no more bribery and no more extortion.  Do any of the above, go to prison - period.

If you need someone with experience in the matter, call Bill Black.

Will this "constrain credit"?  Not among those who are truly qualified to borrow.  Note that our local community banks didn't pull any of this garbage - bribing people, holding a trillion in so-called "assets" off balance sheet and running complex derivative books intended to make price discovery and fair dealing impossible.

Force the big banks to stop all of it right here and now.  If they can't survive with everything they hold consolidated on their balance sheet, that's too bad.  We have thousands of community banks that would be happy to have the business, and that will make sound loans.

Demand that The Fed cut the "below zero" real interest rates.  Get rid of the Clinton-era machinations in the CPI, and mandate that the short end of the rate curve be held above the true rate of inflation.  Why?  Because it must always cost something to borrow in real terms or you get monstrous malinvestment, bubbles and crashes.  If Bernanke won't put a stop to this garbage right here and now then The Fed's charter must be revoked.

Why aren't you doing this?  Because you're being bribed, that's why:

Democrats and Republicans have held at least three dozen fund-raising events with Wall Street bankers and lobbyists for companies such as Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley.

Invitations to some of the fund-raisers highlight access to lawmakers. "This unique program provides benefits designed to give you quality time with Republican policy makers through small gatherings," wrote Sen. John Cornyn (R., Texas) to Wall Street executives in an invitation to join a business council of the National Republican Senatorial Committee, which he heads.

The donation requested: $10,000. The group held discussions with GOP senators in February and March.

Democrats raising money from the financial-services industry include Senate Majority Leader Harry Reid of Nevada, who went to New York this year for a fund-raising event with several executives from Goldman Sachs.

Maybe Congress can explain why the 535 criminals in the District of Corruption shouldn't all be in prison?

Time to choose 'Dems - and 'Pubs.  No more obfuscation and no more lies.  You're either going to act on the fraud, or you're not.  November is coming and before you think you'll skate on this one, I suggest you harken back to 2008, when everyone thought the same thing after Bear Stearns blew up.

How did that work out, exactly, and why do you think you can stop the next collapse when it comes?

If you don't act, and soon, it most certainly will.

In 2001, we had a recession, right?

We recovered, right?

Are you sure?

Are you curious as to why manufacturing has continued to shift to China, why the only "good jobs" in this country seemed to be centered on ripping someone off in some way (e.g. subprime or "liar loan" mortgage brokers, stock brokers, guys selling bogus CDS against money they didn't have, etc) and why employment never really recovered - with the employment rate of the population failing to move materially higher after the 2000 recession, you might want to read the rest of this missive.

And by the way, the employment trend of the previous month?  Revisions made that worse - here's the previous month's graph:

If you remember last month I said that changes in this data were "encouraging."  This month however the revisions caused some negative impact on the previous month's data; this is what that same chart looks like now:

Oops.  That's still below zero, isn't it?  So despite all the cheerleading in the media about the positive report in point of fact we are, on balance, below where we were last month as that big positive spike got revised away!

Now let's not be too negative - the situation has improved - from the bottom.  For example, the "not in labor force" chart now looks like this:

But last month it looked like this:

You wouldn't know this from the orgasmic response on CNBS Friday.  But the data is what it is, and despite actual improvement this last month the improvement in the situation last month not only revised away all the improvement from this month, it revised away even more!

Leave it to government to report a number that's "good", then is revised away the next month beyond the improvement in the next month in the series, meaning that in point of fact you've moved backward, not forward.

But that's not the reason for this missive.  Oh no.  This Ticker is dedicated to exposing what we did in the 2000-2009 decade at a macro economic level, and why those who are calling "end of recession" need to go drink a bottle of arsenic-laced gin before they wind up really hurting people making real decisions in the economy - that is, you, I, and every business person in America.

If you remember in 2001 we had a recession.  I put forward the following (rather confusing) base graph of federal debt expressed as month-over-month change, going way back to the 1990s.  Click for a big copy, and have a big monitor:

The reason I'm going to confuse you with the above is that I am shortly to bring light to this matter.  That is, I'm going to reduce this raw squiggle to something understandable - that is, the annual rate of change of federal debt (all-in, including on-sheet transfer payments) since the early 1990s.

Notice something: Federal debt additions through the 1990s actually shrunk - that is, the "rate of change" was negative.  But look what happened when we went into the recession in 2001 - The Federal Government began spending a lot more money (on balance sheet) and despite the putative recovery beginning in 2002 they never stopped doing so.  That is, the "Keynesian" stimulus that is allegedly necessary to lift the economy from recession was never retracted from the economy. And, as you can see, in the last two years this "stimulus" has gone nearly-vertical.

How much of the economy did this amount to?  That's easy:

Note that post-recession in 2001 federal spending exceeded the Euro-zone target of 3% continually, hovering between 4-6%.  This is in stark contrast to the years prior to 2001, when it was in fact falling - that is, private industry was supporting the economy.

Also note what has happened during the last two years - Federal Deficit spending was 9.65% and 12.11% of GDP, respectively.

Here's the problem - deficit spending like this produces false final demand, in that it implies the ability to do so forever.  We of course know this not to be true - witness Iceland and Greece, neither of which were able to continue the charade ad-infinitum.  Nor will we be able to; we have survived thus far without "feeling the consequences" because others are willing to loan us ever-increasing amounts of capital at ever-lower rates of interest. 

So what does this look like overlaid?  That's pretty simple too:

Your green line is nominal (as reported) GDP.  Deficits are in blue, and actual private economic GDP - that is, the total output generated by private business activity, is in red.

Remember when I said "we will have a Depression" - that given what the government did in 2001-03 timeframe it was inevitable?

We're in one now.

So why has the market rallied so strongly?  For the same reason it did in 2003 - the Federal Government has stepped in to replace final demand by consumers and private enterprise.  That "stabilization" is neither permanent or healthy - indeed, it always causes malinvestment, where capital is put not into productive enterprise but rather tries to "chase" some sort of speculative return because that is the only game left in town.

In the 1990s there was plenty of speculative froth and lies, but at least people were trying to speculate on something that was real - The Internet and the rise of the personal computer in American Business as more than a tool for word processing in lawyers' offices.

But in the 2000s Government interference in what should have been a 10% drop in GDP prevented it - and resulted in massive malinvestment in the speculative froth in housing.  Fact is that the actual economic value of a home does not rise or fall - it is a place to sleep, hang your hat, take a shower and cook dinner.  The "multiplier" beyond that - that is, all alleged "value" beyond shelter, is pure malinvestment.  Government and The Fed encouraged and stoked it with a "free money machine" - not from The Federal Reserve but from the fiscal side of the table - that is, from Treasury and Congress.

Now we're doing it again, writ large.

Consider this - we're spending nearly 12% of GDP in borrowed money that we don't have.  Last month we borrowed and spent $333 billion - that is 28% of GDP!

Got that yet?  Government borrowing was nearly one third of the economy last month! 

Now I'm quite sure that next month will show marked improvement.  It always does, being April (tax day) and all.  But marked improvement doesn't change what's going on here, nor the actual GDP of the economy - not what the BEA reports, but what private supply and demand produces.

If you believe that we can continue to hold GDP at a positive "reported rate" while spending 12% of it via deficits, or even half of that, you're welcome to believe that.  But history says that the crash that comes as a consequence when the imbalances build to the point that something breaks takes the market and economy lower that it would have gone had the intervention not been applied.

What we're doing now is unprecedented, other than during a global war (e.g. WWII) when it was literally "buttholes and elbows" together with the entire nation laboring for one purpose - to avoid obliteration.

To apply such extraordinary "stimulus" via borrowing other people's capital simply to avoid having those who made malinvestments being forced to declare bankruptcy, thereby resetting valuations of all items in the economy to sustainable levels, is both outrageous and doomed to fail.

We can argue time frames, but what can't be argued is the outcome.  We must stop this insanity, as we are building up even greater distortions than we had in 2006 and 2007 - indeed, we have managed to take five years of insanity (2003-2007) and compress it into two! 

Does this mean we're due for it all to blow up now?  Not necessarily, although it might.  But it does mean that the damage when it does come apart will be at least as bad as it was in 2008 - and this assumes we stop today.

We will not, of course, which is why one needs to be prepared for what is inevitably to follow when the government's ability to continue this charade is interrupted, whether by forces within or without.

.... before our citizens - and government - wake up?

If you remember in October of 2008 I put forward the following:

See, I told you so....

In the report, the panel, that includes Rob Johnson of the United Nations Commission of Experts on Finance and bailout watchdog Elizabeth Warren, warns that financial regulatory reform measures proposed by the Obama administration and Congress must be beefed up to prevent banks from continuing to engage in high risk investing that precipitated the near collapse of the U.S. economy in 2008.

The report warns that the country is now immersed in a "doomsday cycle" wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.

As the report says:

I'm going to write today about a very somber subject.  It will be, as it usually is here in one form or another, about math.

First, some background.  If you believe that we have "escaped" from the mess that gripped this nation in 2008 and 2009, or that said mess "suddenly appeared" and "nobody saw it coming", stop reading now and have your Thorazine dosage checked.  It's way off.

Assuming you accept the truth - that this mess was 20 year or more in the making, that it involved creating credit (that is, debt) which the debtor could never pay, and that it still exists because our government policy has been to extend, pretend and allow lies that should be considered accounting fraud and result in prison sentences, then you're on the right page to understand the rest of this missive.  Again, if not, go check your Thorazine dosage.

Yes, I know all about the stock market rally from last March.  I know all about the claimed GDP "improvement."  But I also know that we got both by adding more than $2 trillion in debt to the United States - or roughly 14% of GDP - over the space of the last 18 months.  That's about 10% of GDP annualized, and incidentally, a 10% GDP contraction is the common economist's definition of an Economic Depression.

So let's cut the crap - we are in a Depression right now.  We are pretending we are not, just like you can pretend you didn't really lose your job so long as your credit card does not reach its limit.  We have been in that depression for about 18 months and there is no evidence that we will exit it, as we have yet to find a way to pull back the deficit spending without an instantaneous collapse in the economy.

Yet at some point we must and will stop.  We will either do so of our own volition, or we will do so when the cost of borrowing skyrockets, as others get tired of funding our profligacy.  If we attempt to "print" our way out of it the cost of petroleum products will shoot the moon and destroy our economy anyway.

You haven't seen the half of what happened though - not yet.  It appears that AIG - the company we have bailed out (thus far) to the tune of some $100 billion plus, in fact isn't done.  It appears they may have written credit protection on Greece.  If this allegation by the German equivalent to The New York Times is true Americans are going to be asked to pay billions of dollars - or more likely, hundreds of billions (since Greece is almost certainly not the only place - try Spain, Portugal, Ireland, etc) to bail out a bunch of FOREIGN NATIONS.

Do you both think Americans can and will pay that bill?  A bill that has been forced on us, and yet benefits not The United States economy, but foreigners? 

Wars - big wars - start over much less, my friends.

Oh, and let's not forget - some 30% of Greece's workers went out on strike to protest their "austerity measures."  That's right - one in three.

The Fed and our fabulous Treasury Secretary already gave tens of billions of our hard-earned money to foreign banks to prop them up via AIG.  That was just a down payment; now we all get to - quite literally - buy all their houses over in Europe.  They get to keep living in them.

If you do not believe it is going to get much worse than it is now, economically and otherwise, you once again need to go have that Thorazine dosage adjusted.

A recent Rasmussen poll disclosed that only 21% of the voters in this country believe that the government enjoys the consent of the governed.  Put another way, only 21% of the voters in this nation consent to what Washington is doing. 

More ominously, 61% say the government does NOT have consent.  The remainder (18%) are not sure.

May I remind you that in 1776 less than that 21% of the population (19%, actually) were loyal to Britain?

If you do not believe this nation is wound tighter than a clock spring, you need to have that Thorazine dosage checked again.

You are in denial. 

After denial comes anger, then bargaining, and finally acceptance.

Let's not do anger on a mass scale in this country, ok? 

Neither I or my daughter will appreciate it if it happens; shall we skip that and go right to "acceptance"? 

Let's assume your answer is "yes."

Now let's talk numbers.

There are approximately 150,000 federally-attached law enforcement personnel.  Another 750,000, roughly, state and local cops are employed by our various government arms.  Of those various officers well more than half sit behind a desk and haven't left one gram of shoe leather on a street or in a cruiser in the last year.  The majority of you fire your weapons for periodic qualification and they have never been warm or dirty besides.  You've never faced death, you've never had a weapon pointed at you in anger, and you've never drawn your service weapon in the line of duty.  Those are facts.

Now consider the "bad side" of America.  The Justice Department estimates there are at least one million gang members - active gang members - in America.  These people, mostly young males, have nearly all drawn or fired weapons in anger.  They are responsible for more than three quarters of all crime in this country, and some eight out of ten violent crimes.  Those gang members have families - younger males who are "coming up", "friends" (if you can call a murderous thug a friend) and others.  Between all of those "loosely attached" folks and the hard-core inner circle itself we probably have somewhere between 5 and 10 million people in this nation who, given the wrong sort of provocation, might decide that "Zombieland" wasn't just a movie.

Our politicians created most of these monsters so the "finest" would have something to do.  A nearly-100-year obsession with what consenting adults put in their bodies is largely responsible for this, and an intentional policy of allowing an effective invasion of illegal aliens over our southern border provides some the most-violent core of this group.  The illegal drug trade has fueled international wars, international gangs, and virtually all of the organized violent crime in this nation going back to Prohibition.  Essentially every automatic weapon in the hands of criminals (and there are plenty of them) comes into the US through this same intentionally-left-open border as do the gangbangers, lies of this (and previous) administrations notwithstanding.  Those of you in the Law Enforcement business may not want to accept these facts, but if you reflect on it you cannot escape reality: weapons, ammunition and other means of street thuggery all cost money, and without these drugs being illegal there would be no profit in it, and thus a huge part of the criminal gangland element would not exist.  You've cheered on the War on Drugs as it has meant more cops being hired and more, better, fancier toys for you to play with, along with $200,000+ pensions (in some areas.) You've been fools and even self-destructive assholes for having done so.  But that, today, is water over the dam - the bad guys are here, they're not leaving, and there's no evidence that the political class is going to suddenly legalize these substances tomorrow, cutting the source of funds for the thugs off at the knees - after all, you won't rise up and demand it happen.  So we must deal with reality on the ground as it is (and as you have cheered on the creation of), whether we like it or not.

As I'm sure you're aware all of America sees some of our "finest", not to mention our politicians, in various forms of misbehavior virtually on a daily basis.  A girl beaten on a train platform while uniformed rail security stands and watches.  A young man who appears to have been executed by a different rail security officer, even after he was subdued, face-down, without a weapon and easily able to be cuffed.  The infamous Rodney King incident.  The false accusations against the Duke Lacrosse team that threatened young men with many years behind bars for something that never happened.  Our current Treasury Secretary who cheated on his taxes, not to mention the chair of the House Ways and Means Committee who did as well (that's the committee that writes tax law, if you're not up on your American Government.)  And now, in the latest bit of ignobility we're expected to swallow, we have accusations that a school district has been taking pictures of kids in their bedrooms using state-issued laptops that said kids were required to accept in order to pass their high school classes.

Here's the problem: We the people increasingly don't trust you, the law enforcement community, and we definitely don't trust Washington.  It's not just beating a black man within an inch of his life, or shooting a prone, subdued suspect in the back. 

Oh that's bad enough, don't get me wrong, but it gets worse. 

Much worse.

See, our economy wasn't ruined by accident.  These crimes of economic activity were every bit as destructive, if not more so, than the bank robber, rapist or even murderer is.  These economic offenses have literally dispossessed millions of Americans of everything they once owned.  They have destroyed the hopes, dreams, and lifestyles of entire cities, sent tens of millions of jobs overseas into slave labor camps and stripped off the wealth of our nation through the issuance of securities that were worth nothing, just to add insult (and yet more profit for these banksters) to injury.  Take a drive through Detroit if you doubt me, if you dare, and are appropriately armed to defend yourself (you'll need the latter, especially if you're white.)

As I noted above the bad news is nowhere near being over.  We're denying as a nation, as corporations, as politicians and as people.  You've drank your coffee and eaten your donuts, but what you haven't done is taken the initiative and marched down onto Wall Street and K Street (in DC), along with the myriad bankers, mortgage brokers and yes, even borrowers who were lying and cheating at the same time.  You should have broke out the handcuffs by the crate-load and frog-marched these people into the dock en-masse over the last two decades, but you didn't.  You should do it today, but you won't.

I know, you don't make the laws and you just follow orders from above.

But you're who we see.  You're "The Badge" or "The Squad."  And what we, the people don't see is perp walks of those people who richly deserve it - who have in fact broken the law and destroyed our nation's economic vitality for their own personal profit.

Remember, ladies and gentlemen, no matter what branch of law enforcement you hail from, your primary oath was not to a person.  It is not to your commander, your captain or your squad. 

Your oath is to The Constitution.  You swore to defend that Constitution against all enemies, foreign and domestic.  You swore to God and countryman alike, and your oath does not have a "use by" date at which point it expires.

Now consider this: the unspoken "social contract" says that the good guys go about their business without harming other people, and the occasional miscreant commits some offense, gets arrested and put in the dock by you.  There they face their twelve, and in many cases subsequently do their time.

But what really inhibits the miscreant from his deed?  Is it that you will show up and take a report after the stereo is stolen, the car burgled or the bank robbed, and attempt post-hoc to have them face the music?

No.

It is the possibility that he will break into or attempt to rob a home or business that has an armed citizen in it who is prepared and willing to defend him or herself.  Armed not only with the ability to fight back but the weapon of familiarity of surrounding, said homeowner or shopkeeper might well splatter the brain of said felonious thug all over the far wall - in righteous and perfectly-legal defense of one's person (except in places like Chicago, of course.)  The truth of this is clear on its face - those places where citizens are "restricted" (illegally, I might add, under the clear language of our Constitution) from mounting their own defense to rape, robbery or murder the bad guys pretty much take turns "at will", as opposed to places like Kennesaw Georgia which mandate instead that every homeowner have a firearm and ammunition.

One last thing to consider, and I will leave you be, as I have others to address this fine day.

If it gets bad, and I believe both history and the math says it will, who's going to help you?  Do you really think the entirety of the 150,000 Federal Officers will come to your aid?  Or will they sit in Washington DC and in their big black Suburbans (armored, of course) issuing orders for you to go into the streets in your (unarmored) Crown Vics and die in their place?  Remember that the "bad guys" in such a circumstance outnumber you 10 or even 20:1 and not only are they probably armed as well as you are, they've actually shot - offensively - at other human beings.  Unless you're one of the "bad cops" you've never done that, and few of you have had to fire in self-defense.  Your only realistic advantage in such a situation is that most of the gangbangers are pretty poor marksman.

What's the outcome of such an event likely to be?  Remember, we may distrust you,  but the bad guys hate you to the core and would BBQ and eat you for dinner if they thought they could get away with it.  If things get bad they might deduce - en-masse - that they can get away with it.

Let's face facts: while today we all count on being able to pick up the phone and call "911" if we need an officer to take a report on our stolen stereo, if the bad times come you will need us, not the other way around.  We the people will, under such a circumstance, have the luxury of determining whether your oath of office has been faithfully discharged, or whether the only difference at that instant between you and the gangbanger is that you've got a fancy hat and a nicer car.

Most of us, should we determine that you're just the thug with the fancy hat will hide under the desk.  We won't shoot at you - that's not our way.  We're law-abiding citizens, for the most part, and while we will shoot back, we won't shoot first.  But what we won't do is help you, because your time - your opportunity to help us prevent this catastrophe - will have expired.  We will protect our neighbors, our friends, our fellow citizens.

But that's all. 

You will get to deal with Zombieland, and in the back of your mind as you're literally consumed will ring that old saw you laid on us for the last two decades: "I just follow orders; I don't make the rules."

Be honest with yourselves: Is this where you want to be, or would changing things now be worthwhile?  Would regaining the trust of the people be a good thing?  Would replacing the large percentage of law-abiding citizens who now would spit on your shoes with those who will stand shoulder-to-shoulder with you, weapons facing the oncoming zombie hoard, be a good thing?

If so you have some work to do and there's still time left to accomplish it.

To the politicians who are reading this, your Thorazine dosage needs adjustment as well.  The math is irrefutable.  If, in point of fact, AIG has entangled itself with the European Continent there is no escape from what is to come.  There is only destruction, and our only two choices are to cause as much of it as we can to occur there, by pulling the plug on these clowns now, or risk a literal World War.  We may get one anyway, but if we bring the bulk of the damage here we'll be dealing with a civil collapse at the same time, and have no chance of being able to deal with the geopolitical implications.  We must not allow that to happen.  You must not allow that to happen.

We understand you give the orders to the people I've been talking to (mostly) up above.  But you have less excuse than they, when it comes to oaths.  You all took an oath to uphold The Constitution as well.  You've used it as toilet paper, and that's on a good day.  The rest of the time we see you gleefully burning it in the Wells of the House and Senate, dancing around the smoke and fire like some odd pagan ritual.

It's time to stop.  Not because you want to, not because you fear us (even though you should - after all, we're your employers and can fire you) but because if you don't there won't be a nation worth governing left.  You know who the crooks are - including those among you. 

Let's talk taking this nation back.

It starts with declaring all CDS written against sovereign debt, directly or indirectly, void as contrary to public policy.  Yes, that cuts Europe off from any prospect of a US bailout.  So be it.

Next, all the banksters who were involved in these bogus securitizations need to be hauled into the dock.  Now.  William Black and his merry men sent over 1,000 people to the slammer in the S&L crisis.  There are ten times that many who need to go this time.

Third, force all credit-default swaps onto a public exchange with published bids, offers, last trades, open interest and nightly margining.  In public, where we all can see it.  Either that or ban these obscenities outright.  Choose one, and only one of those two options, and do it now.  Yes, I know the banksters will howl.  Too damn bad, and while you're at it, make it unlawful for any institution that does business in this country to transact in any way in any instrument that does not comply with that rule.  This monster, as I've been writing about for almost three years now, must be caged.

Fourth, reinstate Glass-Steagall.  Yeah, I know, the Senate doesn't want to do it.  The Senate wants a nation that's worth governing though, right?  We won't have one if this crap isn't stopped.  Mssrs. Glass and Steagall had it right in the 1930s.  Put it back.

Fifth, stop lying to the people - and this includes lies told through deficit spending.  We don't have the money and can't keep borrowing it.  If you don't stop we will find the "knee point" the hard way, at which point once again, you won't have a nation worth governing.  Remember the four steps above - neither I or my daughter, nor most of the 330 million Americans in this country, want to see the "anger" phase.  Our country is like a powder keg and every time you lie you're playing with matches in the room.  Stop it before you blow us all up.

Sixth, we're in a Depression, like it or not, and we're not going to get out of it until the bad debt is defaulted and cleared from the system.  Your job is to make that happen and get it over with.  That's deflationary.  Sorry; this is math, not politics.  The housing bubble was a hyperinflationary event - one hidden from the people by bogus government statistics and outright lies.  Deflation always follows hyperinflationary credit booms - it's either that, or the destruction of the government, political system and currency.  You choose, but if you do not decide, destruction it will be.

Seventh, close the damn border and declare all the illegal immigrants as what they are - invaders.  Tell them to either leave or will expel them - and mean it.  Declare "LaRaza" a terrorist organization and lock 'em all up.  Americans need the jobs and we cannot afford to have five or ten million thugs just waiting for opportunity in the smallest loss of civil order to swoop in and take advantage of us all.  At the same time, drop your insane "War on Drugs" and replace it with a taxation, regulation and legalization structure.  Yes, I said legalize - federally.  While we still have time we must cut off the chief funding source for the murderous thugs who otherwise, given the opportunity, will feast on you after they BBQ the local and state law enforcement crowd in our major cities.  Don't BS me or anyone else with your claims that such isn't a real risk - I don't see you strolling around in your fancy suits through the bad parts of Washington DC sans security details.  Gee, I wonder why not......

Finally, to President Obama.  You can't serve both the banksters and The American People.  You took the oath of office too.  Now you have to choose.  Not only will you lose in 2012 (badly) if you don't start locking up the jackasses that got us into this mess but if you don't ram the above seven points down the throats of these banksters and others in the next couple of months your party will be decimated in the November elections.  Some of your oldest allies in the Democratic Party are resigning; Senator Bayh, for example.  Illinois' State financial health is akin to someone with terminal pancreatic cancer, and that's where you're going home to in 2012 if you don't quit being nice-nice with people who have played rape-rape to the American people and economy for the last two decades.  You didn't make the mess (you weren't around long enough to do it) but you had damn well better clean it up, or what will be left of this nation is unlikely to be worth governing by the time your term expires.

Health care may be important but not until the above is taken care of.  Fixing the financial system is the issue you must confront and fix in its entirety.  Not half-way, not by compromise - you simply must fix it.  The seven points above are not options, they're not discussion points - they're mandatory.  All of them.  Don't believe me if you don't want to - believe Charlie Munger, one of the wisest investment professionals ever to live, and, in my opinion, the smarter half of Berkshire Hathaway (with no disrespect intended to Warren.)

The choice is yours Mr. President, but the consequences will belong to all of us.

Choose wisely.

I will probably draw comments like "you doth protest too much!" for this, but I think it's important.

My exchange in email with Jonathan Weil over my "Whistling Past The Graveyard We Be", in which he originally took umbrage over my "soft" characterization of him being late to call things what I believe they are (that is, fraudulent misconduct) rather quickly turned into my rehashing a piece of my Ticker on synthetics a couple of days ago, pointing out that this, plus the removal of leverage limits, plus generally bogus accounting and willful blindness are the primary reasons we're in this mess - and that none of this is a "mistake". 

His ultimate reply to me was that there was no point to arguing with a crazy person.

Well, if I'm crazy for my refusal to believe that any of this was an accident or mistake then I'll wear that badge with pride, because I cannot square any of what has happened thus far, nor the road to Hell we are presently on, with the generalized idea that any of this was an accident - or a mistake.

To the contrary - it is my considered opinion that nearly the entire last two decades of our so-called "Economic Progress" has been defined by parties all trying to screw one another in any form or fashion they could manage to pull off.

Back in the 1990s I saw a metric ton of this while running MCSNet.  We would get a literal dozen or more calls a day from people who wanted accounts to access the Internet - but they first asked our customer service representatives if we carried certain material that was flatly unlawful to possess or distribute, including groups linked to stolen computer software and child pornography.  We didn't, we said so, and they went somewhere else - usually after loosing a long string of obscenities at the employee who delivered the news.

Internet firms of all stripes were claiming Internet growth rates of 30% or more per quarter during the 1990s - in many cases right up until it all blew up.  It was a lie - that growth rate in the Internet was a couple of quarters in duration, corresponding with the release of Windows 95.  This is a fact that thousands of people knew because we, along with those others, had access to the Internet's "core" routing tables - we had to in order to do our job.  Yet this lie was repeated by company after company in conference call after conference call and drove much of the speculative Nasdaq Stock Bubble.  When it collapsed everyone who believed in that lie got creamed and millions of Americans lost (effectively) their entire investment account.

But let's return to the present mess, shall we?

It's not an accident when you create a security because some hedge fund manager (even if a really bright one) comes to you and wants to short something - so you give him a means to do so, and then sell the other side of that off to people without telling them how it came into existence in the first place, including how, why, and at who's behest and for what purpose you created it.

It's not an accident when you run up against leverage limits (as Goldman did) and your big cheese (Hank Paulson at the time) goes to the SEC and gets them to remove that leverage limit for investment banks - then the two investment banks that subsequently fail, Bear Stearns and Lehman, both do so after more than doubling their leverage beyond the former legal limit!

It's not an accident when a whole host of Wall Street (and Main Street!) banks willfully and intentionally ignore FBI warnings in 2004, a Corelogic credit survey in 2006 and HUD study in 2007, all of which warned of rampant mortgage fraud and lies about incomes in 50% or more of "ALT-A" loans, packaging up that debt and selling it to investors without warning them that the so-called "quality" claimed in those loans was almost certainly - in the opinion of both government agencies and private credit analysts - simply not present.

It's not an accident when the ratings agencies also ignore these warnings - if there was a group of companies that should have been the ultimate experts on such matters it is S&P, Moody's and Fitch, all of whom either had to know or should have known about the warnings by The FBI, Corelogic and HUD, never mind their (admitted) computer models that omitted any possibility of home price declines.

And it's not an accident when you have the Realtors(R) chief economist penning not one but two books claiming that the housing bubble would not bust (with an implied "ever"), even though two minutes with Excel (or a rudimentary understanding of grade-school mathematics - exponents, to be precise) will disclose that it is flatly impossible on a mathematical basis to grow debt faster than GDP on a permanent basis without a bust inevitably taking place.

Now not all of this is actionable - or criminal.  Indeed, I can write books pontificating on all sorts of fanciful things all day long, and unless I missed something being completely full of it (as many of the books on economics, business strategies and investing are!) there's not a thing wrong with doing so.  If someone's willing to pay $20 for a bunch of bound pages that contain nonsense, that's the buyer's problem in the general sense, not (usually) the author's or publisher's.  That's because I can offer my opinion all day long and as long as I'm not inducing someone to engage in some sort of action by which I will profit in some form or fashion, and am thus trying to get someone to commit (or not commit) an act as a consequence of my speech I have no obligation to be either intelligent in the presentation of my opinion - or even truthful.

This, incidentally, is part of why it's not unlawful (civilly or criminally) to lie as a politician - all he or she is after through their speech is your vote, and it's flatly illegal to buy or sell those (even though we know people do!)

But things are different when one purports to sell securities of various sorts, or for that matter when one intends to engage in commerce generally. 

We have laws about that, just as we have laws about various forms of financial statement and requirements that they be rendered honestly.

We all file statements every year that are supposed to represent the truth - they're called tax returns.  You can go to jail for lying on them, although few people do.

In the commercial world I can't sell someone a car that knowingly has a tampered-with odometer unless I disclose it.  There's a checkbox on the back of my title for that - "mileage not actual" - and if I don't check it, and I lie, I can be punished.

Under the general body of law I cannot intentionally screw someone in any form of commerce - that is, withhold information from someone on purpose or lie about what I know for the purpose of getting them to act in some fashion (like giving me money for some investment) when that which I either do know or should know and either lie about or intentionally omit would lead a reasonable person to not hand over their cash if they were informed.  If that act of intentional omission or lie leads the other person to be harmed I have committed an offense, and in many cases that offense is both a civil and criminal matter.

This sort of conduct, however, has become literally embedded in virtually all forms of our lifestyle, and I would allege that a big part of "why" is that it is almost never punished. 

How many stories about crooked used-car dealers have you heard?  Got a fax machine?  If you do you've probably gotten dozens if not hundreds of "pump sheets" for various over the counter stocks - all claiming "huge profits" to be had by buying X.  These are illegal in nearly all cases by the way in some form or fashion, but I gave up forwarding them to the SEC and FBI more than a decade ago - they don't care.  During "Cash for Clunkers" there were stories in the media (which I reported on) of dealers demanding "side letters" that would cause you to lose if they failed to properly file the paperwork and the rebate was denied - side letters that, incidentally, the government said were improper.  Was anyone led out in chains over that?  If so I didn't see it on TV.

How many "homeowners" lied about their incomes when they applied for a mortgage or refinanced?  Millions.  Many more had paperwork changed by unscrupulous brokers, and there were posts all over Internet Discussion Boards talking about how to "game" the various automated underwriting programs that were in use toward the end of the bubble.  The FBI even separates it out - "fraud for housing" (lying to get a house) which they considered unworthy of their time to prosecute, even though any lie on a mortgage - or other credit - application is a federal offense.

If we are to have an honest and productive economy this must stop in all of it's forms, and the apologists for this sort of behavior must be shown the door.

The Media's job in no small part is to report on these lies.  For each of these events of deception and screwing that takes place trust in our economy generally and our capital markets specifically is damaged.  It is one thing to place a bet in a casino knowing that the "rake" guarantees the casino will make money over time, but it is quite another to wonder whether the dice are loaded, the cards marked or the railbird behind you is secretly communicating your hole cards to the guy on the other side of the table.

When society and commerce degenerates into "screw the other guy harder than he's screwing you" then you have lost the ability to prosper through innovation and hard work, replacing it instead with a Tony Soprano world in which certain "privileged" people, either by political donations or outright grift are allowed to screw anyone they want with impunity while everyone else is forced to either risk being caught (and punished) committing their own scams or become a serial victim and have their wealth and earnings mercilessly stripped.

Elizabeth Warren's latest report was outlined on CNBS this morning as being focused on commercial Real Estate, but she also make clear her view on "tricks and traps" in all forms of finance - and on this point she is spot-on.  Pay attention about 2:50 into this clip:

Steve LIESman tries to go after Ms. Warren, but all he does is give her more opportunity to make her point - that the entirety of Wall Street, for the most part, has been focused on tricks and traps.

Gee, you mean in addition to not disclosing what was going into these securities that were sold off to duped investors (who ultimately lost their money) they were doing it to consumers too?

We cannot have a strong economy that is, at its core, all about trying to screw people.  If that's the premise on which your business rests, whether you're a commercial bank, Wall Street investment house or any other business then YOU SHOULD BE CLOSED DOWN.

Now tell me why THE MEDIA is siding with the tricksters and grilling those who are trying to put a stop to it.

While wishing for actual enforcement of these laws by the very politicians who lie to us every couple of years to get us to vote for them (cough-Eric Holder-cough!) may be asking for too much, what's not too much is for each and every one of us to REFUSE to do business not only with any firm that pulls this crap, but any firm that does business with those that do!

We the people can stop this - if we care to - it starts and ends with us.

It has taken nearly three years since The Market Ticker began publication in April of 2007.

At the time I said:

To control that risk, banks, which used to hold mortgages on their own, started "securitizing" these loans and putting in tricky features to control that risk.

That has allowed the banks to get away with this. See, banks have FEDERAL guidelines they must maintain in terms of loan safety. Why? Because the FDIC has to bail out banks that fail! Remember the S&L crisis? That was caused by S&Ls making risky loans that couldn't be repaid. Banks know all about this stuff, and they're very cognizant (since there was a blowup in their sector among the thrifts) of what happens when you do that.

So to keep their feet out of the frying pan, they figured out a trick - they shoved off the mortgages to the general debt market! Adding to this the mortgage folks figured out that they could take a "bucket" of mortgages, sift them into baskets that were categorized by loan-to-value and FICO score, assign those a risk premium and then sell them in the market as "tranches" of debt - essentially, converting the mortgage to a bond. By doing this the bank is (mostly) insulated from the risk that you won't repay the loan, because once any recourse written into the contract has lapsed, the risk passes to someone else - the bondholder.

And now The New York Times has opined with:

If economists and regulators had recalled the securitizations of the 1920s, they might have realized that the recent boom in real estate securitizations was not what they took it to be: a result of American financial ingenuity that created ways to spread risk to those who could best afford to bear it and in the process made financing more available and less expensive.

It was, instead, the same old speculative enthusiasm, even if it was wearing fancy new clothes. Investors who had seen real estate prices rise thought that trend could not end. Wall Street sharpies thought they had found a way to make lots of money while not bearing the ultimate risk if the game suddenly ended.

As it turned out, the sharpies were wrong. They too got swept up in the carnage — just as their predecessors had in the 1930s.

Uh huh.

Some of us did see this folks.  It has taken The New York Times three years to figure it out, but they're the "tout media" - mainstream newspapers who (just like Tout TV) cannot imagine actually thinking about what these "complex" securities really are.

The simple fact of the matter is that complexity isn't good, it's bad.  It's bad because it costs money.  This means that as complexity increases yield deliverable to the actual buyer of that security - that is, the earnings power of that security, decreases.

The ugly little truth as I have repeatedly pointed out is that in any lending transaction there is a fixed amount of potential profit - that being the spread between what the borrower pays and what a true risk-free transaction entails at that particular moment in time for an identical duration.  That's all there is and that's all there will ever be.

All lending transactions that are more complex than two people sitting across a table with one lending the the other money therefore must have a loser.  That is, either the borrower must overpay for the money (compared to actual risk) or the lender must be undercompensated for the risk he is taking.  In a marketplace where there are many lenders this risk will inexorably fall on the lender because the borrower will shop for the lowest possible price of the money.

The factual and mathematical reality is that if we want stable lending then we should demand an end to securitization.  The proponents claim that doing so will instantly implode capital access for those who want to borrow over long periods of time (e.g. real estate loans) but are not in the position to issue their own bonds such as mid-sized and larger corporations can do.

This is a false assertion.

There is nothing preventing a simpler structure from working perfectly well.  That is, those who have capital and want to lend it for longer periods of time (so-called "traditional" buyers of MBS and similar instruments) can just as easily buy longer-term bonds issued directly by banks and insurance companies.  Those firms can then lend directly to homeowners and commercial property developers and retain the loan on their own books.  Since they have the capital from their lender to do so duration matching is not a big deal; if they borrow the money from an investor (by issuing a bond) and their borrower prepays they can then re-deploy that capital to another borrower for the remaining portion of the term.

This, by the way, was why and how lending worked for most of the stable period in our banking system's history after The Depression.  Most lenders indeed did hold their own loans - some were sold off, but not all as is the common practice today.

What "de-constructing" securitization does is cap the use of leverage by the banks and other financial institutions to "gear up" their returns, restricting it to the the reserve ratio for banks and other financial firms.  This in turn dramatically reduces both the risk of catastrophic losses and removes the fuel necessary to drive speculative asset bubbles.

The entirety of the pronouncements thus far out of Washington DC and Wall Street is aligned with the idea that we must find ways to "re-ignite" the securitization machine.  This is not only false it is fanciful.  Securitizaton and all the complex BS "financial magic" that surrounded it was the cause of the debt-based credit bubble that enveloped the economy from the 1990s forward and it not only must not be re-ignited it can't be re-ignited as the bad debt has not been cleared from the economy and as such there is simply no more borrowing capacity at below-market rates of interest with which to play this Ponzi game any more.

A return to sound lending - where lenders hold the loan and thus the risk, and those who wish to lend but are not in the position to originate themselves place capital with those who are, is the correct way forward. 

Forcing banks to remove proprietary trading from their deposit and lending activity (e.g. "The Volcker Plan") is a good first step, but not sufficient.  Glass-Steagall kept the banking system sound for fifty years and it was only when we started tampering with it, first with the S&Ls and then by dropping it entirely, that we had major problems.

We could avoid those major problems if we would enforce the general statutes barring fraud in all its forms, but that, with a captured government and Wall Street fawning all over people like Barney Frank and the entire cadre of Senators has proved to not work.  They simply will not demand that the law be enforced and we the people are too soft and willing to be repeatedly violated to rise up and make this the single issue upon which we will demand action - instead we allow ourselves to be divided and diluted with great-sounding issues like abortion and the so-called divide between "left" and "right."

Here's reality folks: Without a fundamentally-sound economy predicated not on speculative excess but rather on honest return-for-risk acceptance and industry none of the other issues matter.

All the pressure groups and indeed the posturing of the Harry Reids, Nancy Pelosis, John McCains and Sarah Palins are designed to do exactly one thing: Keep you from talking about the single issue that has driven corruption in our political and business space for the last thirty years and upon which the entire Ponzi Scheme that we call our "economy" and "government" today rests.

If we the people were to demand and resolve that problem the entire edifice of fraud and corruption would collapse for lack of return on the "investment" of buying politicians.  That is, if the penalty for re-confirming Ben Bernanke, who we know for a fact was not only advocating for the bubble economic policies before was appointed to head The Fed (while working for Greenspan's Fed) and who has been wrong in virtually every single economic pronouncement he has made over the last five years was an immediate assembly of 3 million Americans on The Washington Mall (1% of the population) who then refused to leave until every Senator who so voted either resigned or Bernanke stepped down we would see results. 

If the result come November was that every Senate seat in contention where that Senator voted for Bernanke's reconfirmation was sent home and replaced, irrespective of all other issues, we would see results.

If the result come November was that every House seat in which a Representative voted for TARP in any of it's forms, again, irrespective of all other issues, was turned over to a new Representative and the old ousted and sent home, we would see immediate results.

We all want our cake and to eat it too.  But that's not possible.  All Ponzi Schemes must fail due to the fundamental mathematical reality that the so-called "returns" promised can only be achieved by finding a greater and more-gullible sucker who will pay more than you did.  Inevitably the supply of suckers must run out as the number of people with capital has a finite supply, and when it does the collapse ensues.

We can either continue trying to re-inflate a popped balloon and live in a world where everyone measures "success" by how many points the DOW went up or down, or we can decide that the only issue that matters to us as Americans is returning to a definition of "success" that excludes Ponzi financial activity explicitly and, if necessary, by force of law, relying instead on industry and production - that is, a return to measurement of success based on mining, growing and manufacturing.

The only "free lunch" on this rock we call Earth is the energy from The Sun, and even that will end, albeit long after we are all dead.

Wake up America.

Let's score the 2009 edition first:

• The economy will NOT recover in 2009:  I'll take this one, although some would argue I only deserve half (I said 8% unemployment U3, we actually got 10%.) 
• Deflation, not inflation, will become evident well beyond housing.  Miss.  Valid if you look at energy, but the "well beyond" includes a meaningful subset of the various things people buy.  Nope.
• Housing prices will continue to decline: Direct hit.
• The Fed's attempt to "pump liquidity" will be shown to be an abject failure: 1/2 a point.  Certainly if you look at stock prices, it's a miss.  If you look at whether credit creation was stabilized and increased, its a horrifying score.  We did get the instability in the dollar, but no bond market crash.  I didn't specify how, so I can't take credit for that which I didn't predict.
• GDP will post a 12-month negative number, Depression print. Clean miss.
• The stock market has not bottomed.  1/2 credit.  It had not bottomed but my SPX 500 @ 500 call was not achieved.  The 50% swing, however, got damn close.  Lots of money to be made if you're quick and good, but an absolute minefield if you're a long-term investor - spot on.
• Precious metals will not be a safe haven: Clean miss.  Gold and silver have both performed well.
• The Dollar will not collapse.  Correct.  It hasn't.  It ended the year of 2008 at 82, it now trades at 78, down 5% or so. 
• The pound or Euro - and perhaps both - will be where the FX dislocation initiates if it occurs.  Early, which means wrong.  Clean miss although the last month sure looks bad for the Euro.
• The US Consumer goes from negative savings to positive:  Direct hit.
• Commercial Real Estate will effectively collapse: Direct hit although the effect has been well-hidden.  Several Tickers have been written on this, including major banks walking off 50% underwater properties.  I can't take full credit as the REIT explosion I expected didn't happen, so I only get half a point.
• Along with the above, expect 10% of retail stores to close.  I don't have accurate numbers on this but it sure looks that way.
• Several states will get in serious financial trouble and the default of one or more may occur.  Point.  While the default didn't happen that wasn't a condition of the test, and the list of states in trouble is long and getting longer.
• Mortgages are not done:  No kidding.  Default/delinquency/foreclosure rates continue to skyrocket.  Point.
• If you want to refinance you may get one brief shot with long rates around 4%.  You got two, but I don't lose for multiple points of impact.  Both of those were good opportunities IF your property isn't severely underwater (in which case there is no such thing as a good deal.)
• Those who have said that the corporate bond market is being "unreasonable" will start to look like the jackasses that they are.  Maybe.  Actual defaults did in fact skyrocket but new issues are coming to market and subscribing - even for crap-grade paper.  I can't take a point on this one as my expectation when I wrote it was that issue would go in the toilet.  Miss.
• The calls for "more lending" will go exactly nowhere.  Bingo.
• GM and Chrysler will go bankrupt.  Bingo.
• Protectionism and currency manipulation: Miss, at least in the way I described it.
• Commodities will appear to be headed for a new bull market (falsely): Hit.  Soy, Wheat, etc - all looked to be going parabolic in June.  Now, not so much.  "Beans in the teens" eh?  NOT!
• Sovereign debt defaults will number at least three:  Clean miss.  Greece and a couple of others are on track but didn't happen this year.  No points for "on track."
• China will have its first large-scale rumbling of civil unrest:  Clean miss.  I have to admire how they prevented it - more capacity building into an overcapacity world.  That won't end well but for now they've stove it off.
• Foreign uptake of Treasuries will be choked off - by necessity: Hit.  Almost missed that one, but China has stopped buying as the trade imbalance disappeared.  They have, as expected, turned resources inward.
• The City will get it worse than we are:  Since the test was relative I get credit for it; they're doing things like imposing 90% taxes on banker bonuses.
• Things will get "revolting" in nations: Nope.  Riots and such in Greece don't count - "revolting" meant what it said.

I count 14 "hits" (including half-points) out of 25, for a score of 56%.  That's not so good, especially compared to last year.

Ok, so where did I go wrong?

That's pretty simple: I dramatically underestimated the willingness and ability of "the criminal class" (that would be those in DC and on Wall Street) to lie, cheat, steal, paper over insolvency and get away with it - at least for a while.

Will this ultimately lead to an actual recovery?  No.  It mathematically can't.  A short-term bounce in various metrics, yes, just like an insolvent person can spend on his credit cards until they get cut off and look like they're improving.

The S&P 500 currently stands at roughly 1120.  Most "market callers" are expecting another 20% increase next year, which would put it at 1350, just 15% off the all-time high of 1576 and fairly close to where it finished 2007 - that is, as if 2008 and 2009 never happened.  Lunacy, says I, unless leverage can return to where it was in 2007.

Can it?

No.

Let's remember what happened in 2005 and 2006 that made those things possible.  Investment and commercial banks were stuffing various sorts of securitized paper with garbage loans they knew could not be paid, then selling them off to "investors" (who would later be shown to be bagholders.)  This allowed for an unprecedented expansion in consumer and financial system credit - and that, in turn, allowed the buying of "stuff", whether it was companies playing LBO or you buying a house to flip with an OptionARM.

That was the legacy of the "expansion" in 2005 through 2007, and it is not coming back.

In short this time it really is different, and the proof is right here:

This is the first time since records began at The Fed that credit outstanding has decreased.  I have taken the liberty of breaking down the periods into 10 year chunks, which makes it easier to see:

Pay attention to this last graph, as it is the important one in terms of the 2003-2007 "recovery" - note that we went from ~32 trillion in outstanding debt to $53 trillion at the peak, an expansion of 66%. 

That's how we "recovered" from the tech bust, and to believe that we will "recover" from this one you must either find a way to expand debt by a similar amount - that is, to nearly $90 trillion all-in - or figure out how you will get $35 trillion in spending in the US economy above and beyond what we're doing now over the next three to four years.  In short, we cheated, and to believe we can do it again you must explain how we can cheat once more - and to that degree.

And by the way, for those keeping score - since our monetary system is debt-based declining credit outstanding is the definition of deflation in the monetary sense!

This is exactly what Bernanke said he could avoid.  He was wrong and there is no further room for argument on that point.

Further, I do not believe for a second that the Bernanke's "pulling back" from the monetary playing field has a thing to do with the "stability" of the markets, especially housing.  Specifically, there is no evidence to be found that housing has stabilized or is improving - quite to the contrary.  Treasury's "modification" programs have been a joke, with banks either not following through with their supposed responsibilities and borrowers unable to provide documentation of income and assets (because they didn't have the documentation required at the time of the original loan, and still don't!)  In short all these "programs" are simply an attempt to paper over the Ponzi in residential housing - with little actual success, but lots of smoke, mirrors and lies. 

Madoff got away with the same game for years - produce some false statements and keep soliciting for that new business.  All is well until the cash flow forces disclosure of the fact that you're broke - then the ugly truth, that there is no money as it's all gone - comes out.

Such is happening now.  Servicers have been passing through the interest payments on MBS but principal isn't there to be repaid.  The journal entries are being ignored - for now - because none of this trash is actually trading.  It's all being held at or near "par" (100 cents on the dollar) when in fact many of these securities will be lucky to recover anything at all.  Even the "credit supported" tranches are in trouble - nobody ever believed, especially in the "prime" space, that defaults could reach beyond 2 or 3% and recoveries be under 80 or so.  But they are.  Worse, the HELOCs and "silent seconds" are in fact worth zero where the house is worth less than the first note due to priority of claims - yet most of those are being carried at or near full value.

A big part of the reason for this deterioration is due to "misclassification" of loans.  That is, loans were claimed to be "prime" when they were not - they were either "ALT-A" or worse, Subprime in fact, but stuffed into MBS as "prime paper" and then resold onward.  Fannie and Freddie have been recently fingered as a major part of this, but unlike the author of the recent WSJ Opinion piece I believe this scam went much further than the two GSEs - and there has yet to be any honest examination (say much less prosecution) for this conduct.

There's a rather complex "prisoner's dilemma" going on at the present time, with none of the banks wanting to liquidate either securities or inventory lest they trigger an avalanche.  Yet each is eying the door, fully-aware that the first one through will be the only one who gets through should anyone bolt.  One of the more-interesting identities for the man yelling "FIRE!" could be a lawsuit - or state prosecution - over the myriad misrepresentation in this space during the bubble years.

Last year (2009) there was almost no net debt issuance between corporates and Treasuries, adjusted for Quantitative Easing.  Indeed, it was only about $200 billion.  That this sort of extreme measure was required to prevent a bond market implosion is rather telling.  But what's worse is what's on the calendar for 2010 - nearly $2 trillion of net issue, duration-adjusted.  A huge part of this is Treasury debt, and there the news is even worse, as there's a serious duration problem in this regard - nearly half (about 40%) has a maturity of one year or less.  This means that Treasury must roll over that debt - about $3 trillion worth - "or else."

Ask the asset-backed commercial paper market and auction-rate securities folks what happened to them when their short-duration paper couldn't be rolled on commercially-reasonable terms.  Then extrapolate that to what happens to Treasury if (or possibly when) they're unable to roll $3 trillion plus issue another $2 trillion on top of it to fund the deficit.  Do you really think that $5 trillion and change of Treasury paper is going to be "all ok" sans "monetization" - or will "they" foment an intentionally-engineered stock market crash to scare people into Treasury debt?  I wish Timmy the best of luck with this - he's going to need it.

Remember, the belief that foreigners will not be there to rescue us this time around is not speculation - it in fact is born out by the latest TIC data, which showed that China had bought a net zero in Treasury issue in October.  Nor did anyone else step to the plate.  In short foreign nations are chock full of their own issues and are either issuing debt themselves or need their capital internally.

The equity market loves "liquidity" no matter how it comes, whether the truth is embedded in reports or not.  Nasdaq 1999 anyone?  Those firms were not making money and never would but that didn't stop their stocks from doubling, tripling, and in some cases skyrocketing to 10x their IPO prices. 

The key point is that most of them eventually collapsed and were worth zero, but if you were quick (or lucky) you made a lot of money.  Of course the other side of that ditty is that if you weren't you lost everything.

There are many who claim that valuations are not "extended" or "bubble-like" and point to the disasters of Q3 and Q4 of 2008 as "drags" on the P/E ratio, claiming that one should ignore negative earnings.  This is kinda of like going to the casino and only counting the winning wagers when determining how well you've done.  It may look impressive when you brag to your friends but it won't change the fact that you go home broke, and ignoring negative earnings is part and parcel of the same sort of disease.

The fact of the matter is that if you look to corporate and personal income taxes they have all but collapsed.  These are of course regressive and governments have been handing out various tax breaks to corporations so this may not be a fair indication of business and consumer activity.

However, sales taxes are, if anything, going up in percentage charged - not down - and yet they are also deep in the red in terms of collections by the states.  Since some "necessities" (specifically food in many states) are not taxed this is particular troublesome since this trend points directly toward a collapse in discretionary spending - exactly what we need to power the economy forward.  Then there's China, which reported on the 27th that toy shipments to the US were down 15% year/over/year from 2008 - but we're told that Christmas sales were down "only" 1%.  Riiiiight.

So much for  "economic recovery."

Productivity has been on a tear - and no wonder.  Watching everyone around you get laid off has a way of providing a hell of an incentive to work harder, lest you follow your friends to the unemployment line.

These trends - letting employees go and demanding that your remaining workers do more for the same pay, does provide a lift to profits.  For a while.  But it also destroys the base of consumers you need to buy those products over time, and thus the lift that you enjoy from such downsizing and squeezes is short-lived.  The hangover from that speedball should be hitting in Q1 or Q2 of the coming year, and I expect it to be quite the doozy.

China, on the other hand, has outdone us.  Burdened with far too much capacity they are, of course, building even more!  That would be great except that there's no chance they can absorb the output internally.  Not that they care in the short term, as their definition of "GDP" is different than ours - they count a product when it is produced, not sold.  Gee, why are there all these products lined up unused, from cars to washing machines to - gasp - literal empty CITIES of townhouses and apartments?  How far does that bubble inflate before it blows up?  Hell if I know - the Chinese are not exactly models of transparency so the degree of game-playing they can get away with before someone yells "FIRE!" and runs for the door is more difficult to discern than it is over here. 

In the last few days the Chinese Premier has said that he won't "bow to pressure" to allow the yuan to appreciate.  This of course is code for a weak currency which China desperately wants for its export trade.  Then again, so does Japan, and so does anyone else who exports.  Competitive devaluation sounds quaint, but you're seeing it, and it is likely to continue as an attempt to play "beggar thy neighbor" in the coming year - and beyond.  Playing with explosives these nations are (including our country!)

In the credit arena few lessons seem to have been learned.  CDOs, CDO^2s and other similar loose-pin grenades aren't back - yet - but an awful lot of questionable deals are, including, believe it or not, a couple of PIK/Toggle issues.  Those, for the uninformed, are bonds that allow payment not in money but in more debt!  This sort of "debt pyramiding" is the epitome of stupidity when done by a person and a fairly reliable sign of impending default.  In the corporate world we call it "reaching for yield."  Uh huh.

Many market commentators believe that last year and through March 09 was a "financial panic" similar to 1987, from which the market recovered quickly.  Really?  Go look up the page a bit at the credit chart for the 1980s.  Do you see any contraction in 1987 and 1988 - anywhere?  Nope.  None.  In fact, credit growth continued unabated even though the stock market crashed.  The same occurred in the 2000-2003 time frame (again, look above) during the Tech Implosion.  That's the differentiating factor: This was not a market panic, it was and is a credit lock-up caused by outstanding debt exceeding servicing capacity for several years, where the premise became not paying debt through current income but rather a Ponzi-style pyramid that permitted refinancing and the appearance of solvency only so long as asset prices rose!

This is an event that last occurred in America in the 1920s and it occurred this time for the same reason it did the last time: lax or utterly absent regulation allowed people to foist off trash on people while claiming that it was "money good", just as happened with Florida Swampland in the 1920s.  The entire premise of the so-called "financial innovation" then, as now, was fraud.

The simple fact of the matter is that greed often comes with stupidity and nearly always is shortly followed by disaster.  "Rescued" by governments the "princes of finance" learned nothing, were forced to disgorge nothing, and still walk free among us instead of being either jailed or worse, strung up from a lamp post. 

So far.

Whether the people of the various nations will put up with another trip down the bailout, Quantitative Easing or "stimulus" road is another matter entirely.  Tim Geithner and others have gone too far in their grandstanding, cheerleading and claims of "Armageddon Avoided" - or if you prefer, "Mission Accomplished."  Such claims make for great sound bites but have a habit of slamming the door on future intervention, especially if the need for it appears shortly after the claimed "success."  Remember well that 2010 contains a midterm election in November, and as things stand our new President has seen his approval rating drop faster than a condemned man does through the floor when the handle is pulled.

Then there's the "HAMP", or "mortgage modification" programs generically (there have been several.)  It was claimed that HAMP in particular would prevent 4 million foreclosures by the end of 2009.  It has actually resulted in about a half-million trial modifications, but fewer than 100,000 permanent changes.  This should not surprise - the reason people got in trouble in the first place as that they bought more house than they could reasonably afford on any rational mortgage plan, using schemes such as 1.5 or 2% negative amortization "OptionARMs."  These were not actual mortgages in intent - they were predicated on ever-rising home "values" so that they could be rolled over in a couple of years and amounted to a perpetual below-market rent payment to a bank, collateralized via the speculative bet that prices would continue to rise.  When home prices stopped going up there was literally no way around the inevitable - foreclosure.

Government refuses to recognize this as all the trash paper is literally everywhere around the globe!  What's worse is that the very same banks that were making these bets along with homeowners then extended HELOC and other second-priority lines behind the first, extending the trash brigade even further.

Never mind Geithner's insanity, as displayed here:

GEITHNER: We were very careful from the beginning—but the qualifications get lost—to say that we are going to focus the bulk of the financial force on bringing interest rates and mortgage rates down to cushion the fall in housing prices and help stabilize home values, which will feed into people's basic sense of financial stability.

The reason we got a bubble in the first place was due to excessively-low rates - that is, a cost of borrowing money that did not reflect the fundamental economic realities of repayment and duration risk.

Insanity defined: Doing the same thing over and over but expecting a different result.

There is much hot air blown about how businesses and consumers have "de-levered."  Hogwash.  Again, back to the top graph - we've taken a whole $21 billion off the net credit exposure.  Oh sure, if you remove FedGov from the picture (and you arguably should) it's more like $850 billion - but let's be real here - we're talking about a fifty-three trillion dollar debt. 

Even a trillion is less than a 2% reduction in net leverage!

That's "de-leveraging"?  Like hell.

There is much, much more to go.  To get back to the leverage levels seen in 2000 - which themselves were overheated - we'd have to drop back some twenty five percent, or roughly $13 trillion dollars.

We're less than 10% of the way there, and we were overheated in 2000.

What's a more reasonable leverage level?  How about the "more reasonable" time period between 1951 and say, 1983?  175% of GDP?  That would require we cut the outstanding debt by close to half!

Will we see policies that accomplish that?  Not voluntarily!

On a more-macro (beyond one year) level, let's look at this last-decade debt chart again:

In the beginning of 2000 the total systemic debt outstanding was approximately $25 trillion.  It is now about $53 trillion, or more than double where it was in 2000. Let's look at where we were in various metrics at that time:

• GDP was at $9.7 trillion.  It is now 40% higher, roughly.  (Gee, did we really produce all that with our hands, or did we borrow the money, spend it, and then count that as "GDP growth?")
  
  
• Aggregate GDP over the 2000-2009 years was about $124 trillion; of that, about 20% (25 trillion) was increase in debt over the same period of time. Our so-called "growth" over these years was in fact a chimera in that more than half of it was not real - and that's assuming ZERO interest expense now and forevermore.  Of course interest expense isn't, in fact, zero......
  
  
• The S&P began the year 2000 at 1469.  It now stands at 1126, and that's before inflation adjustment.  The DOW was at 11,500, again, before inflation adjustment, and the Nasdaq 100 was at 3708 (it currently trades 1870.)  Again, all before inflation.  Take 30% off all of today's numbers to adjust for devaluation of the currency's purchasing power (that is, inflation) over the last decade and you're roughly in the ballpark.  The bottom line: you have lost big - more than half if you were in the S&P 500, about 40% in the Dow and a crushing 70% if you were in the Nasdaq 100 over the last ten years.
  
  
• There was no shelter to be found in Real Estate either.  Home prices are back to 2000 levels in many parts of the nation, but a huge number of homes are "underwater" on the profligacy of debt taken on by Americans: about 25% of all loans are underwater nationally and nearly half in Florida.  In 2000 that number was basically zero.
  
  
• There was no net job creation but we went from 282 million to 307 million people in America.  That means 25 million people are unemployed simply due to population growth.  Ain't that grand?
  
  
• Median household (and per-capita) income has actually declined since 2000 adjusted for inflation.  Of course gasoline is more than twice as expensive ($1.26/gal in January of 2000), eggs are more expensive (double, roughly) and such.  Never mind medical insurance and health care - double-digit escalations every year have been the rule rather than the exception with medical insurance costs being up a literal 200% or more over the last ten years.

This little game of Ponzi (faking "GDP" by taking on more and more debt), by the way, is not new.  I present for your edification the following table:

This is the aggregate GDP (that is, all GDP produced) during each decade from 1960 onward, the "DTi" (or debt increment) during that decade - that is, the additional debt outstanding in all sectors during that decade, and the percentage of "GDP" that in fact was NOT from production, but rather was "created" due to raw borrowing.

What we are facing down today is a fifty year Ponzi scheme.  Drill that into your head folks - for fifty years we have created false output gains, with the last 40 of those years having between 15-20% of each year's supposed "GDP" not created by the work of people, but by BORROWING MORE MONEY which will have to be repaid with interest.

This is why we hit the wall in 2007.

To run an increase in GDP of about 5%, as so many "pundits" are claiming we will going forward, we would have to increase the total debt in the system to roughly $90 trillion dollars from the present $53 trillion over the next ten years.

That debt would, of course, need to be serviced.  And nobody in their right mind can possibly believe that government could take on another $37 trillion - when the current oustanding public debt is just seven trillion (that is, government would have to increase its debt by 500%!)

If you take nothing else away from this Year in Review Ticker, it should be that singular chart above and a decent understanding of what it means:

To come back into equilibrium, assuming we do not decrease debt in the system at all, we would have to shrink GDP by about 20%.  But shrinking GDP means that money available to pay down debt would also decrease which would generate even more defaults. 

This is how deflationary depressions happen - years, even decades of playing Ponzi by layering debt upon debt.  Bernanke and Geithner, along with President Obama, are well-aware of these facts which is why they are all pounding the table demanding that banks "loan more." 

The problem with such a prescription is that the wise person won't borrow, for he knows what's coming.  The unwise has no collateral to pledge, and thus can't borrow.

If the government forces (either by persuasion or legislation) lending to those who can't pay they only extend the Ponzi and in doing so make the inevitable collapse WORSE.

We have made no progress economically in terms of the common weal of the average American but have added debt in dramatic amounts to paper over the deficiency.  That's the bottom line on the 2000s, and despite all the crooning that "the economy is on the mend" one has to look at the reality of the common man on the street to see what's coming around the bend for our economy and ask the following question:

How do we get positive economic growth when by every metric available the disposable personal income available to Americans has gone down, personal wealth has in fact decreased when one subtracts out debt (and you must; nobody in their right mind argues that if you go to the bank and take a cash advance for $20,000 on your credit card that you are "more wealthy" as a consequence of having done so!) and while employment at first blush looks "equal" to 2000 in fact there are 25 million more unemployed due to population growth - people who create drag on the economy due to entitlement spending rather than contributing to productive output?

So with all this said, here's what I believe we're looking at for 2010... ready or not, here it comes!

• No, this is not a new Bull Market; the market will be lower on December 31st than it is on January 4th, quite possibly by a a hell of a lot.  We may not break the March 2009 lows - but I also don't believe for a second we're going back to 1576 on the SPX.  Not without the leverage - and we can't get the leverage.  I believe we will end the year down from where we begin on January 1st.  McHugh calls it "Wave 3 Down"; I call it "aw crap."  Either way "irrational exuberance" is back for now but cash flow always wins in the end.  I'll be a "generational buyer" of stocks when dividend yields are over 5% and P/Es are in single digits.  We didn't get there last year and yet those are the historical metrics that mark true Bear Market bottoms.  With that said, I would not be surprised if we hit 1220 on the SPX some time earlier in the year - but it is by no means a lock, contrary to what virtually everyone in the "pundit community" expects (most of which are looking for 1350 or more!)
  
  
• The Long end of the Bond Curve is going to move higher on yields.  We have completed a long-term (multi-year) inverted Head and Shoulders pattern.  The probability of the targets set by that pattern being achieved is extremely high.  The target?  6.9% on the 30 year "long bond" - a rate that puts 30 year mortgage money at least to 7%.  This prediction assumes that we do not get a panic-style sell-off in the Stock Market - if we do get one (and I think it's 50/50 on that) then I withdraw this prediction.
  
  
• House prices will fall another ~20% - whether as a consequence of the rate back-up or utter destruction in the markets generally.  Sorry folks, the housing mess is not over.  The math on this is simple; a $200,000 principal loan at 4.75% for 30 years produces a P&I of $1039.18.  That same payment with a rate of 7% produces a principal financed of $157,107.95.  If, for whatever reason (engineered or not) the stock market collapses then you get your housing price crash anyway.
  
  
• Banks will "give up" on holding their real estate as rates start to backup and will dump their foreclosure inventories.  Why?  Because the regulators may let them to play games with alleged "values" when people can get mortgages at 4%, but at 7% there's just no way the numbers work and the fraud becomes too difficult to countenance.  There are rumors of major banks dumping hundreds of thousands of homes on the market next year - this is likely the backstory on "why."
  
  
• Credit will not ease for "ordinary people."  All the exhortations about "lending more" have been going on now for more than two years yet have gone nowhere.  The jawboning will continue but the results will not come, simply because there is no more good collateral left against which to lend.  This will in turn lead to.
  
  
• A massive second wave of small business bankruptcies will sweep the nation.  We've seen the first part of it.  The second will be worse - far worse.  With long rates backing up and the 30% credit card sweeping the land those who have relied on credit to operate in the small and mid-sized business world will get relentlessly squeezed.  Many will fall.
  
  
• Unemployment will appear to be stabilizing - for a while - but that will prove illusory.  We finish 2010 over 10% - no material improvement.  If things get real bad we might see 12-14%.  Yes, U-3.  I won't stick my neck out that far as a prediction but I believe ending the year at or above 10% is a lock.
  
  
• The "revolting" call for last year was early - but not wrong.  There will be at least one major coup or other violent overthrow of a government in 2010 tied to economic instability - either directly or via a war it spawns.
  
  
• The states will go to the government well for handouts, they will probably get them, but it won't matter.  They'll get some assistance at least, but in the grand scheme of things it doesn't make any difference in a world where long rates are rising precipitously.  California and Arizona are in the biggest trouble, with Michigan, New Jersey and New York right behind.  The public employee unions will have a kitten but again, it won't matter - that which isn't there isn't there, whether you want it to be or not.
  
  
• A "double dip" will be recognized by the end of the year.  Between taxes and rising rates - or an intentionally-detonated stock market to stop the long end of the bond curve going bananas - you can bet on it.
  
  
• China will lose control of their property and plant bubble - with horrible consequences.  They're good at the game, but that which can't go on forever won't.  I bet it blows up before the end of the year.  If so, Australia's property market better watch out - they're levitating on the strength of China's commodity demand and pricing there is California-style. 
  
  
• The Canadian Real Estate Market will show signs of cracking - especially in places like Vancouver.  They may have another year before it all goes to hell, but the time approaches.  Beware.
  
  
• The Fed's games will "leak" and credibility will be shaken severely.  There's too much pressure.  Something will give, somewhere.  Washington DC is too hostile a place for the "hold hands and head for the cliff together" game to work with an election coming up......
  
  
• The Democrats lose big in the House.  Time is probably too short for a viable third party to emerge for the midterm elections, and I don't expect the Democrats to lose House control.  However, I do expect them to lose their filibuster-proof majority in the Senate, and to lose enough seats in The House to trash their "steamroller" approach to legislation.  This might be bullish for the markets late in the year and into 2011 - maybe (divided government is generally good for the markets.)
  
  
• Congress continues to try to spend its way out of the recession - and runs head on into rising rates.  Watch the TBAC reports.  Those will be your "tell" along with the TIC data.
  
  
• One or more of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) either defaults technically or is forced into austerity by the ECB.  Further, Eastern Europe becomes dangerous destabilized.  There is a real possibility of outright hostilities in that part of the world next year.  Let's hope not.  The ECB has a nasty problem on their hands; I have said for quite some time that the Euro is likely to trade at PAR down the road.  This year is probably not the year for it, but the cracks in the dam that ultimately could destroy the European Union should become very apparent in 2010.
  
  
• Contrary to virtually EVERY "investment pundit" on the street today return OF capital will once again assert itself as the primary consideration.  Sentiment indicators as of 12/31, along with 52-week highs, all are at levels that have been associated with tops on a historical basis.  Treasury has to issue $2.5 trillion this year, while we all cheered when they issued $1.5 trillion last year - and got away with it.  China has housing trading at 80x average incomes, Australia and parts of Canada have housing markets at 10x or more average incomes and the banksters and "investors" alike appear to have learned nothing, with "reaching for yield" coming back in force.  Ponzi ponzi ponzi!  Add to this geopolitical event risk and things get interesting.  That which can't continue forever won't - we merely argue over timing, not outcome.  I'll lay the marker on one or more of these timers reaching zero in 2010.

Note: Subject to minor edits/revisions and perhaps an addition or two until the end of January 1st, as usual.

Edit: 1960s DTi had a misplaced divisor - corrected and paragraph referencing "nutty Ponzi" in that decade removed.

I am occasionally stunned when someone who I thought had a good grasp of reality and reason goes entirely off into left field, powered by a thesis that has run out of track.

Mish, unfortunately, has succumbed to this sin in his piece "Fractional Reserve Lending Constitutes Fraud"

He alleges (after waving his arms around):

Fractional Reserve Lending constitutes fraud. The case is irrefutable.

Bluntly: Bullshit.

Let us distinguish between two separate items: Money and Credit.

We shall first define them:

• Money: The product of either growing something, mining something or manufacturing something.  "Money" is actual wealth, and comes into being only through creation.  Ultimately, all money is traced to the only "free lunch" that exists in this solar system, that is, the power of The Sun, although in many cases (e.g. mining) the activity is in fact discovery of previously-created wealth (by the actions of The Sun) levered through human endeavor.

• Credit: The granting of purchasing power predicated upon a future promise to pay with money.

Mish's (and others) claim that "all fractional lending is fraudulent" implies that one cannot pledge money to secure credit.

That's obvious BS; let's put forward a concrete example.

I walk into the forest (grow) and cut down trees (mine) which I then process into lumber (manufacture.)  I dig up some iron ore (mine) and turn it into steel nails (manufacture.)  With these two items I now construct a house (manufacture.)

That house (and all the products that I used to make it) are in fact money.  They were the product of mining, growing, and/or manufacturing.  Each of these acts is in fact the creation of money.

That house, has a representation of money in its utility value.  That is, the shelter value that it has for a group of humans - it provides a place to eat, sleep, take a dump and take shelter from the elements.  That utility value is at its maximum at the point of completion and from that day forward requires further inputs of labor to avoid deterioration; absent that input it will eventually (over many years) crumble into dust.  That is, the house undergoes (as do all things) the natural process of entropy (the process of going from order to disorder.)  We denote that money value in a currency, in this case, "dollars."

Now I have a house, which I pledge as collateral for a loan.  That loan is credit, but that credit is in fact issued against the security of money. 

Borrowing against that house is thus fully secured, not fractionally-reserved, lending.

If you noticed in my previous Ticker I specifically referenced The Monetary Base.  This was not a mistake nor was it an "aside"; it is, in fact crucial to get this definition correct or everything from that point forward will be wrong.  To repeat:

Monetary Base: The monetary base of all credit-based monetary systems is the sum total of all unencumbered assets against which one is both able and willing to borrow.  (No, it is not "M1", "M'" or any such nonsense.)  If you run into a so-called "Economist" who claims to have letters after his name yet makes the argument that "base money" (or any such thing) is the monetary base in a debt-based system find out where he got those letters from and petition them to revoke his degree; he fails at the fundamental skill of logic and deduction, yet it is a near-certainty that he carries proof that his claimed position is wrong in his wallet (a credit card, which spends identically to the dead president it resides next to.)

The "hard money" folks (and many "fiat money" folks) are wrong because they are attached to an ideology that has been subsumed in ALL credit-based monetary systems - an anachronistic ideology that they have elevated to idolatry yet is in fact FALSE.

The ugly part of this willful suspension of mental capacity is that each and every one of these people personally proves the falsity of their foundational premise every single day with their actions in the real economy!  They buy and sell using credit, proving in their personal life the fungible nature of both, yet they reside in a home and drive a car that in fact are money - that is, the product of mining, growing and/or manufacturing.  It takes a profound level of intentional blindness and mental incapacity to refuse to admit that which is shoved in your face literally on a daily basis.

I have repeatedly said that if you start from a false premise every single conclusion you reach from that point forward will be wrong.

The false premise that all of these people adopt and defend against overwhelming proof that they're wrong is that "the monetary base" is some sort of currency, whether fiat or specie. 

This is a false belief in all credit-based monetary systems as it violates the fundamental axiom of what a "base" is - it is that which underlies or underpins what follows.

Yet it is patently obvious that the base upon which a credit-based monetary system rests is in fact the prior productive output of that society - that is, the unencumbered asset base that can be pledged as security for the issue of credit.

Currency is an abstraction; even in a "hard money" world it contains a "promise of conversion" that is in fact a promise, not the conversion itself.  Further, the "hard money" folks define "money" as that which is inexorably linked (e.g. gold and currency convertible into gold on demand) yet they ignore every other output of production as "money" - even though such outputs ARE, in fact, money!

Consider what happens when you adopt a correct view of the monetary base:

• Lending someone $9,000 to buy an $18,000 car (they put the other half down in case) is in fact not a fractional loan.  The lending is in fact fully-secured and thus bears no fractional reserve of any sort.  The same is true when one lends $200,000 to buy a $300,000 house.  The house and the car embody ACTUAL MONEY as both are the fruits of production and thus fully secure the credit issued in such an instance.  Yes, some of their "price" (in dollars) is speculative - but not all, and so long as one does not invade the actual monetary value of these created items no fractional lending has in fact taken place.

• Lending someone $9,000 on a credit card where that loan is 100% backed by excess capital is also not a fractional loan - there is exactly $1 of excess capital (actual money) against every dollar lent out.

Mish and others like him are wrong because they have their premise incorrect.  This incorrect base premise leads to shrill calls for that which will not work (hard currency) and in fact has a thousand-year plus history of not working to stop depressions and other serious economic imbalances.

Yet despite over a thousand years of history none of these people ever examine their premise to discover why these so-called "fixes" never, ever work.  They instead wave their arms and try to come up with all sorts of other "explanations" for things like the Panic of 1873 and the Depression beginning in 1929 instead of examining the foundation of their premise and recognizing it's infirmity.

Idolatry is dangerous in all it's forms, and nowhere is it more dangerous then when so-called writers and pundits fail to recognize that which is sitting right under their face.

There is an old saying that there are two constants in the universe: Death and Taxes.  To that some add a third that seems particularly appropriate in this case: willful blindness, otherwise known as idiocy.

It is time to "clear the decks" and talk about exactly what a sound banking system is - and is not.

It is time to identify that which is an exercise in capitalism, and that which is an exercise in fraud.

It is time to strip back the mask of the so-called "moneychangers" and lay bare for all to see exactly what has been going on for the last two decades, and more importantly, to identify whether or not there is a kernel of respectability contained therein.

And finally, it is time to dispense with many of the calls from all corners for "hard money" and the demise of fractional lending as nothing more than an interesting philosophical exercise masquerading as an intentional (or horribly-misguided) misdirection.

Let's first define a few terms; these should be familiar:

• Principal: The amount of money you borrow for a given term of time.
  
  
• Interest: The amount of money you pay, usually expressed as a percentage, to cover three risks and costs - the risk you will not be able to pay the principal, the risk of currency devaluation and the demanded profit on the loan by the lender.
  
  
• Collateral: The item or items you post with the lender to secure your indebtedness.  While "collateral" in the broadest sense includes anything that could be seized after a judgment should you fail to pay (including your labor at subsequent points in time), for the purpose of this discussion we will limit the term "collateral" only to that specific physical, tangible property you post to secure a specific loan, explicitly excluding anything of a speculative nature (such as your ability to earn money in the future.)
  
  
• Monetary Base: The monetary base of all credit-based monetary systems is the sum total of all unencumbered assets against which one is both able and willing to borrow.  (No, it is not "M1", "M'" or any such nonsense.)  If you run into a so-called "Economist" who claims to have letters after his name yet makes the argument that "base money" (or any such thing) is the monetary base in a debt-based system find out where he got those letters from and petition them to revoke his degree; he fails at the fundamental skill of logic and deduction, yet it is a near-certainty that he carries proof that his claimed position is wrong in his wallet (a credit card, which spends identically to the dead president it resides next to.)

Ok, having settled on definitions, we will now turn to the fundamental reality of fractional reserve banking.  Many people claim that banks "create money" or "print money."  This is not true; a bank recycles money, that is, it increases the velocity of a given amount of money in circulation, but an ordinary bank (not a Central Bank) never creates new money.

We'll start with our hypothetical bank that has no assets and no deposits, and a 10% fractional reserve requirement.  Joe walks in and deposits $10,000 and leaves.  The bank now has $10,000 in assets (cash) and $10,000 in liabilities (a book entry that says it owes Joe that $10,000 on his demand.)

Jane now walks in and wants to borrow money to buy a car.  She borrows $9,000 from the bank and posts as security the title for the car she purchased.  The bank now has exchanged $9,000 of the cash asset that it had for a piece of paper (the title to a car and a promissory note.)   Let's, for the sake of argument, agree that Jane paid half cash for the car and that it is worth far more than the $9,000 she borrowed (this becomes important in a minute.)

Now the car dealer comes in and deposits the $9,000 that Jane spent.  The books look like this:

	Asset	Liability
Assets	Amount	(Amount)	Liabilities
Cash (from Joe)	$1,000	($10,000)	Joe (Chk Acct)
Promissory/Title (Jane)	$9,000
Cash (Car Dealer)	$9,000	($9,000)	Car Dealer (Chk Acct)

This is where the complaint that the bank is "printing money" comes from; notice that there was only $10,000 in the beginning, but there is now suddenly $19,000 worth of both assets and liabilities. 

The "purists" will argue that both the car dealer and Joe can't come in and demand their money - its not there (only $10,000 is, not $19,000.)

This is false: The bank holds a piece of paper worth at least $9,000 and can sell it immediately into the market if necessary.  As such it CAN pay both the car dealer and Joe should they both demand their money by disposing of the asset it holds in lieu of the other $9,000 - Jane's loan.

This also looks ok from an accounting perspective - both sides of the ledger balance.  Let's keep going.

Steve now comes into the bank and opens a credit card account with a $8,100 credit line.  He immediately blows the entire line on an exotic cruise vacation.  The cruise line deposits the funds.  This is what we've got now (note that the $8,100 he borrowed was 90% of the deposit from the car dealer; I have grouped the transactions to make it simpler to follow.)

	Asset	Liability
Assets	Amount	(Amount)	Liabilities
Cash (from Joe)	$1,000	($10,000)	Joe (Chk Acct)
Promissory/Title (Jane)	$9,000
Cash (Car Dealer)	$900	($9,000)	Car Dealer (Chk Acct)
Credit Card (Steve)	$8,100
Cash (Cruise Line)	$8,100	($8,100)	Cruise Line (Chk Acct)

Now we have a problem.  See, the "Credit Card" loan that Steve took out is unsecured.  That is, it is nothing more than a raw promise to pay in the future, backed by nothing other than Steve's word, and what's worse, Steve immediately consumed the entire $8,100 - it's gone.

So now if the cruise line, car dealer and Joe all come into the bank and demand their money the bank has a very high probability of not being able to pay.  It may be able to sell Steve's paper (the card account) for $8,100, but that line, being unsecured, is likely going to be subject to some sort of haircut in the market - maybe a big one.  The particular "haircut" is entirely dependent on the exact state of the economy at any given point in time, along with Steve's personal financial situation.

The important point is that the asset that the bank holds from Steve is nothing more than a signature and promise.

This is unacceptable and in fact is the cause of every economic Depression featuring a deflationary credit collapse over time, as defaults begat more defaults and those defaults, uncovered with capital, cascade through the system instead of being isolated to the failed institution.  All of them.  1873, 1929 and the present mess were all caused by systemic and pernicious violation of the most fundamental rule of sound banking: One must never lend out more unsecured than one has in excess capital. 

So how could the bank have avoided this?  Simple.  Let's say that the bank had taken in capital in the form of stock issued to the public; it thus might have a balance sheet that looks like this:

	Asset	Liability
Assets	Amount	(Amount)	Liabilities
Paid In Capital	$10,000	($10,000)	Shareholder Equity
Cash (from Joe)	$1,000	($10,000)	Joe (Chk Acct)
Promissory/Title (Jane)	$9,000
Cash (Car Dealer)	$900	($9,000)	Car Dealer (Chk Acct)
Credit Card (Steve)	$8,100
Cash (Cruise Line)	$8,100	($8,100)	Cruise Line (Chk Acct)

Now everything is fine.  Why?  Because the shareholder equity can get whacked as required.  Let's assume Steve defaults; we now have:

	Asset	Liability
Assets	Amount	(Amount)	Liabilities
Paid In Capital	$10,000	($1,900)	Shareholder Equity
Cash (from Joe)	$1,000	($10,000)	Joe (Chk Acct)
Promissory/Title (Jane)	$9,000
Cash (Car Dealer)	$900	($9,000)	Car Dealer (Chk Acct)
Credit Card (Steve)	$8,100	($8,100)	Defaulted (Steve)
Cash (Cruise Line)	$8,100	($8,100)	Cruise Line (Chk Acct)
Assets and Liabilites	$37,100	($37,100)

Notice that the books balance, but the loss was taken out of the shareholder's hide.

"Paid in Capital" is one of several types of "excess capital" that a bank can hold.  A bank could also issue bonds and it can retain earnings; all three are actual hard cash.

Therefore, the fundamental rule is this:

No bank may be permitted, under any circumstances, to have outstanding more in unsecured lending than it has in actual excess capital.

So long as this rule is adhered to there is never a risk of depositor loss and "deposit insurance" such as the FDIC is irrelevant.  Indeed, the FDIC should exist only to cover the malfeasance of government officials who have failed in their essential task - that is, guaranteeing that the banks under its supervision never exceed their excess capital in unsecured lending.

The counter-argument - that one cannot quantify asset prices accurately and thus incursion of this rule will occur "accidentally" - is often raised.  This is a chimera - the standard is that it may never happen, and it is the responsibility of bank management to decide how close they want to fly to the Sun!  That is, the more leverage they take on, the lower the down payments they permit for their asset-based lending and the closer they run in today's market prices for the assets they hold to their excess capital the greater the risk that an economic dislocation of some sort will render them instantly insolvent and closed, wiping out the entirety of their unsecured bond and stockholders.

In point of fact any bank which has outstanding more in unsecured lending than it has in excess capital is at that moment insolvent, in that it has no security against the amount outstanding in loans that exceed excess capital.

Note that this has exactly nothing to do with whether you are on a Gold Standard nor does it have anything to do with fractional reserve lending.  In fact the Depressions of both 1873 and the 1929/1930s occurred while on "hard money".  A gold standard (or any other "hard" currency) will do nothing to stop this, because the problem has never been the fiat nature of currency - it is the fact that credit is being extended without collateral beyond the actual cash reserves of the institution in question.

Now here's the nasty: It is illegal in many states for a bank to accept a deposit while in this condition.  As just one of many examples (Nevada):

 1.  It is unlawful for a president, director, manager, cashier or other officer or employee of any bank to permit the bank to remain open for business, or to assent to the reception of deposits or the creation of debts by the banking institution, after he has knowledge of the fact that it is insolvent or in failing circumstances. An officer, director, manager or agent of a bank shall examine the affairs of the bank and shall know its condition. Upon the failure of any such person to discharge his duty of examination, he must be held, for the purpose of this title, to have had knowledge of the insolvency of the bank, or that it was in failing circumstances, and shall be deemed to have assented to the receipt of deposits while the bank was insolvent or in failing circumstances. A person who violates the provisions of this subsection is individually responsible for deposits so received, and all such debts so contracted, but any director who has paid more than his share of such liabilities has a remedy at law against other persons who have not paid their full share of such liabilities for contribution.

....

3.  A person who violates the provisions of this section, or who is an accessory to, or permits or connives at, the receiving or accepting of any such deposits, or the giving of such preferences, is guilty of a category D felony and shall be punished as provided in NRS 193.130.

Each and every bank officer and manager is not only civilly liable for any loss suffered (e.g. balances beyond insured limits) but is also CRIMINALLY liable for the acceptance of deposits while the bank they work for is factually insolvent in many of these states, including Nevada.

If The Federal Government will not close these institutions and will not act in this fashion then we must insist that the STATES do so in accordance with their legal code.

These laws exist for a simple reason: When you walk into a bank and deposit money you have a contractual understanding that it will be returned to you either immediately on demand or in a relatively short period of time (effectively on demand.)  This is even true for so-called "time deposits"; you will forfeit some amount of interest (sometimes all of it!) but if you cash a CD early they are still required to hand over your money.

If the bank does not have it nor can they raise it immediately as a consequence of lending out money unsecured in amounts that exceed their excess capital then they have committed the common-law crime of fraud; they have induced you to lend them money with a promise to repay that they know is entirely speculative in terms of their capacity to perform. Unless that is disclosed to you before you tender your funds to them they have committed fraud by concealing the speculative nature of their ability to return your funds on demand.  It is that simple and a number of states recognize this as a formal section of their legal code.

IF THE FEDERAL GOVERNMENT WILL NOT DO ITS  JOB THEN IT IS TIME FOR WE THE PEOPLE TO DEMAND THAT THE STATE GOVERNMENTS DO SO FOR THEM!

I have only one question for those who speak of "green shoots":

What are you smoking?

Let's start with a really ugly report from The Nelson A. Rockefeller Institute of Government:

The trend in state and local tax collections has been clearly downward from 2005 growth that was unusually high, and 2006 growth rates that were more in line with historical averages. Figure 1 shows the four-quarter moving average of year-over-year growth in state tax collections and local tax collections, after adjusting for inflation. Year-over-year change in state taxes, adjusted for inflation, has averaged negative 1.1 percent over the last four quarters, down from the 1.4 percent average growth of a year ago and 3.4 percent of two years ago.

There are a number of graphs in that paper, one of which shows that right around January (the latest for which they have complete data) there is an uptick in Goods consumption.  This is part of where the Kudlow "green shoot" brigade is getting their information from.

However, if you look at the graph, you will see that every year there is a similar tick upward in consumption, although the exact date of it does vary by a month or two. 

Why? 

It's called Christmas!

State Sales Tax Revenues tell the story.  California is absolutely cratering, for example:

Sales taxes were $452 million lower (-50.9%) than last April, and personal income taxes were down $5.7 billion (-43.6%).

Fifty percent?!  FIFTY?

California is responsible for thirteen percent of the total US GDP and if it were an independent nation it would be the tenth largest economy in the world.

The idea that we can have some sort of economic recovery while the sales tax receipts - which are a direct measurement of consumer activity - are down by half is pure insanity.  Where is the economic activity that is going to create this "recovery"? 

And let me remind everyone - sales tax receipts are not a lagging indicator, they tell you what is going on right now.

Now let's look at job losses in this recession compared to others.  As written up in the NY Times:

A bottom?  Where?

To be fair employment is a lagging indicator; there is no pickup in hiring for some time after the economy truly bottoms, usually about 6-9 months.  The reason is that people are both slow to fire (they're nice) and slow to hire (they're not convinced the recovery will "take") and as such there is a lag in both the firings when things slow down and the hirings when things begin to recover.

Nonetheless, there is nothing to suggest that we're anywhere near the bottom of this cycle.  Indeed, we've been setting records for the severity and duration of losses in the postwar era, surpassing the 81-83 duration and vastly surpassing all of the previous recessions in terms of depth.

Nor are the "programs" trotted out by Obama (and his predecessor, to be fair) doing anything.  We recently learned that "Hope for Homeowners" made a grand total of..... wait for it..... 51 loans.

FIFTY ONE?  No, that is not a misprint:

Senior federal housing officials say that of 51 loans made under the program, 50 were made by Melville, N.Y.-based Lend America, and those 50 loans are being held up pending ongoing federal investigations. The officials, who insisted on anonymity because they are not authorized to speak on the matter, declined to offer specifics except to say anything from inadequate documentation to unethical practices could be the focus of the queries.

Remember, "Hope for Homeowners" was supposed to help four hundred thousand people stay in their homes.

The net closed loan count is fifty one over a period of six months.

Oh, and the reason for that article?  The company responsible for 50 of the 51 loans is under investigation by The Department of Justice!

I would like to be optimistic on the economy and thus, the capital markets.

I refuse, however, to countenance and cheerlead for fraudulent "reporting" and false claims in the media in an attempt to prop up asset prices so that banks can issue stock into an overheated bubble market created through lies.

In my opinion, that is exactly what is going on here, and is an extension of the game-playing that occurred with the so-called "stress tests", as reported in the WSJ over the weekend:

The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.

In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits.

....

The Fed's findings were less severe than some experts had been bracing for. A weeklong rally in bank stocks continued Friday, with the KBW Bank Stocks index surging 10%. Investors were especially relieved by the relatively small capital holes at regional banks. Shares of Fifth Third soared 59%, while Regions Financial Corp.'s $2.5 billion deficit led to a 25% leap in its stock.

Right.

The original numbers weren't what the banks wanted to hear, so they complained and got them changed.  Investors were duped by this lack of disclosure of the exact nature and difference in the figures, and besides, the banks came up with the asset valuations anyway - there was apparently no independent verification. 

Some of the changes were truly massive - Citibank, for example, managed to wheedle down $35 billion to $5.5, and Bank of America managed to wheedle down their $50 billion number to $33.9.  Fifth Third's original number was $2.6 billion; the reported number $1.1.

Is it thus a "green shoot" that the results were "better" than investors expected?  No.  The results were in fact at least as bad as expected, and maybe worse.  But when the banks didn't like the results they whined and managed to get the teacher to change the grade - ex-post-facto.

Finally, we have Bernanke.  I have opined several times over the last couple of weeks that his "Quantitative Easing" is an abject failure.  I said when it was announced that it would not work, and it hasn't worked.

Blackrock is prodding Ben to increase the buyback:

May 11 (Bloomberg) -- The world’s biggest investors are increasing bets that Federal Reserve Chairman Ben S. Bernanke will boost purchases of Treasuries as the steepest losses on government debt since 1994 send mortgage rates above 5 percent.

What I find disturbing is that through this entire crisis, as I have outlined repeatedly, neither The Fed or Treasury seems to understand the first damn thing about trading.

Simply put when you prop up prices beyond where they should be everyone who owns that thing will sell into you.  The paradox is that this selling then causes prices to fall, not rise - that is, your intended move not only doesn't happen the reverse of the intended move does!

This happened with Fannie and Freddie (Paulson's infamous "Bazooka") and now it is happening in the credit market with Treasury Debt.

If Bernanke does not back off he will find himself in a tightening monetary flat spin.  As he comes to own more and more of the public float of the long end the impact of each sale into his program by private holders is magnified in the market. 

That is, if there is $1 trillion of something outstanding and you buy $100 billion of it (10% of the float) the impact is X.  If there is now $900 billion outstanding (after the first operation) and you buy another $100 billion you have in fact sucked up about 11%.  When you get to owning $500 billion another $100 billion sucks up 20% of the float.  Each tender operation of the same size thus creates an ever-increasing impact on the underlying price, and since nobody in their right mind will continue to hold something they believe is overvalued, the spiral will tighten precipitously, forcing even more purchases until The Fed owns it all.

At or before that point the long end becomes unavailable to Treasury as a funding source.  Forcing all the issue to the short end now starts to ramp short yields (supply and demand, remember - add massive supply and what happens to price?) and Bernanke will then be urged to buy down the time line.

This path leads to a singularity - and both monetary and political failure.  The bad news is that the event horizon is far before Bernanke actually winds up owning the entire float, but nobody knows exactly where it is. 

Yet once crossed, there is no escape from the outcome.

We best not go there, because if we go down that road too far Americans will be needing all those firearms that they've been buying since Obama was elected - not for a revolution, as some suppose, but rather for self-defense as our political, social and economic structures collapse.

Today President Obama delivered a speech that, on balance, was far better than many we have heard before on the economy and markets:

This recession was not caused by a normal downturn in the business cycle. It was caused by a perfect storm of irresponsibility and poor decision-making that stretched from Wall Street to Washington to Main Street.

Right.  Now let's keep going a bit:

And credit agencies that are supposed to help investors determine the soundness of various investments stamped the securities with their safest rating when they should have been labeled "Buyer Beware."

That's called fraud Mr. President. 

No one really knew what the actual value of these securities were, but since the housing market was booming and prices were rising, banks and investors kept buying and selling them, always passing off the risk to someone else for a greater profit without having to take any of the responsibility. Banks took on more debt than they could handle. The government-chartered companies Fannie Mae and Freddie Mac, whose traditional mandate was to help support traditional mortgages, decided to get in on the action by buying and holding billions of dollars of these securities. AIG, the biggest insurer in the world, decided to make profits by selling billions of dollars of complicated financial instruments that supposedly insured these securities. Everybody was making record profits - except the wealth created was real only on paper. And as the bubble grew, there was almost no accountability or oversight from anyone in Washington.

That's called FRAUD too Mr. President.

This is the situation we confronted on the day we took office. And so our most urgent task has been to clear away the wreckage, repair the immediate damage to the economy, and do everything we can to prevent a larger collapse. And since the problems we face are all working off each other to feed a vicious economic downturn, we've had no choice but to attack all fronts of our economic crisis at once.

On the contrary.  You still have not taken the first step in addressing the problem, which is to call a thing what it is.

Those who flim-flammed investors, homeowners, debt buyers and others, no matter whether they were bankers, regulators, government agencies or others, committed fraud.  They were well-aware of the fact that there was no investigation of credit quality or underwriting being performed but they did not care and stamped these securities and loans as "money good" when there was absolutely no basis in fact, law, or even reasonable belief for making such a claim.

Of course, there are some who argue that the government should stand back and simply let these banks fail - especially since in many cases it was their bad decisions that helped create the crisis in the first place.

I argue that fraud must not be rewarded.  We need a banking system but we do not need the specific banks that were involved in this mess.  Not all banks were.  Some were, some were not.  Those who were should be punished, not rewarded.  Those investors who bought these securities believing they were "money good" but were fools should lose money.  Those who were duped should sue and for those who committed an act identified in the law as a crime should be prosecuted.

Instead, your administration and the one previous both have decided to continue and promulgate policies that have amounted to looting of the Treasury and The American People.

This is also why we're moving aggressively to unfreeze markets and jumpstart lending outside the banking system, where more than half of all lending in America actually takes place.

You CAN'T succeed in this goal - at least not if the real, underlying goal is to bring long-term prosperity to America.

The debt in the system is too high and the marginal utility of new dollars of debt is exceedingly low - and may in fact be negative. 

The math is never wrong and once the marginal GDP contribution of a new dollar of debt goes negative you enter a mathematically-certain circumstance where further forced borrowing and lending, whether by government or private enterprise puts the entire economy at grave risk of all-on collapse.

That "event horizon" is dangerously close and may have been crossed.  An exact measurement of this point, and determination of where it lies, is not possible.  However, we know for a fact that a new dollar of debt has generated as little as ten cents worth of GDP as recently as the last year - and this was before you committed to pump nearly $2 trillion of new debt into the economy with your current budget.

I would like to see the Government try to "prop up" the economy with new spending and temporary deficits.  That would be a nice idea - if we could afford it and if the mathematics suggested that it would work.

Sadly the mathematics suggest exactly the opposite - that such a policy as you have adopted will bring extremely short-lived and fleeting "benefits", if it brings any benefit at all, and runs the severe and immediate risk of pushing the "contribution to GDP per dollar of debt" value into negative territory.

I understand the argument that we "must invest for the future." 

That argument is true, standing alone.

The problem, Mr. President, is that we have squandered the ability to make that investment in the present tense, and until we force the bad debt out of the system, thereby clearing the ability for new debt to contribute to GDP instead of sink it, your program cannot succeed and bring forth the benefits you seek.

Reforming Medicare, Medicaid and Social Security must happen.  But these threats are not "debts" as are the remainder of indebtedness in the economy - they are structural deficits that exist as a result of promises. 

There is a tremendous difference between a promise and a debt.  One has no force of law - the other does.  One can be addressed through legislation - the other cannot, it can only be paid down or defaulted. 

I applaud your efforts to resolve the structural issues surrounding entitlement programs.  It needed to happen 20 years ago, 10 years ago, and it still must happen today.  To the extent these are more than simple words, as every President in the last 20 years has mouthed, I applaud the effort and wholeheartedly support making these programs sustainable over the long term - something that was never part of their original intent or planning.

But this is orthogonal to the issues surrounding our economy in the present tense, which are bounded by actual debts, not political promises.

America must live within its means on a personal, corporate and government level.  We must have manufacturing in this nation and put a stop to global wage arbitrage that results in abusive conditions for workers and unsustainable international trade imbalances.

America must not allow those who defrauded to profit, and those who were defrauded must have their day in court.  Excessive debt in all parts of the economy must either be paid down or defaulted, with the latter serving as the proper and just result for a lender who makes an unsound loan, no matter whether that "lender" is someone who bought a bond or a bank that made "fog a mirror" mortgages.

The ratio of Debt to GDP must come down to sustainable levels so that the contribution that debt makes to GDP rises, avoiding the disastrous circumstance where a new dollar of debt creates a negative impact on GDP. 

This means difficult choices must be faced and made in this nation and part of that foundation must be the clearing of unsustainable debt through default.

Simply put, we must avoid the event horizon of a negative GDP contribution from new debt.  Should that "event horizon" be crossed we will enter an economic state where incredibly-severe economic contraction worse than the 1930s will become inevitable as further attempts to issue debt will result in an acceleration of defaults and further depression of GDP.

The laws of mathematics are not suggestions, and your advisers, along with those on both sides of the aisle with political aspirations and positions, have a tremendous vested interest in refusing to admit that their plans and policies of the last 20 years were mathematically unsound and over the longer term must inevitably lead to economic collapse.

Do not be the fool Mr. President; ask your "advisers" and those in your cabinet the following questions:

• For each dollar of debt that is taken on, what delta occurs to GDP?  Show your work and document it.
• What has been the trend in this number over the previous fifty years?  Has there been any interruption in that trend?
• What happens IF that number becomes negative?
• Can you prove that we are not either in that situation now, or that the course we are currently on will not result in that number becoming negative?

Think Mr. President.  You're highly-intelligent, and I'm quite certain you understand mathematics at this level - no complex understanding of Calculus or differential equations is necessary.

For your advisers' (and your) benefit I am including the chart I first published many months ago (in October of last year) showing the danger you face.

Don't blow it Mr. President; there are no "do-overs" once the "zero point" is exceeded.

CNBC has come up with a new word: "Great Recession".

Nobody, of course, wants to use the "D" word, but the "D" word is exactly what we should be using, because its what we're entering - and in fact are likely already in.

All the commentators like to talk about "monetary policy" and how it "isn't working because the credit markets are dysfunctional."

Nobody mentions that the reason the credit markets are dysfunctional is that credit has been abused by consumers, industry and government alike.

1/3rd of all homes now have mortgages that exceed the value of the house.  This didn't happen by accident, it happened due to the collapse in traditional underwriting standards, which once again are:

• 20% down payment, in saved cash (not additional credit)
• 28% maximum "front end" ratio, that is, the entirety of your housing expenses to gross income
• 36% "back end" ratio maximum, that is, the entirety of your debt service, including housing and all other debt service such as credit cards and car payments + student loans, to gross income.

Nobody wants to go back to reasonable lending standards.  Why?  Because if you do, you exclude most buyers - not because of the housing price or the "front end" ratio, but because consumers have levered up everywhere else too, including student loans, credit cards and buying a new car every three years.

The hue and cry for such silliness as seller-financed down-payment "assistance" (which ought to be outlawed as intentionally misleading, as it serves to improperly prop up the reported sale price of the house, effectively "laundering" a seller concession) FHA 3.5% "down payments" (1/5th the reasonable requirement) along with other expressions of idiocy such as allowing AUS/TOTAL automated approvals that stretch debt-to-income ratios is proof positive that we're a nation that is stuck in debt up to our necks.

There is no durable and reasonable recovery that can happen until that debt is either paid down or defaulted.  Since we continue to refuse to tighten up standards for major capital purchases (including houses and cars) we will continue to march over the cliff, one step at a time, until the transfer of the defaulting and to-be-defaulted debt is transferred to a "government guarantee" reaches a critical mass.

At that point government funding evaporates from external sources and the "job cuts" all happen there, along with forced cuts in government largess programs - whether the administration wants them to or not.

President Obama and Congress simply refuse to deal with reality and his so-called "advisers" are in fact up to their necks in the policies that got us here.  As a consequence people like Larry Summers cannot be counted on to provide impartial or even honest analysis, as it is their very policy structures and suggestions from more than ten years ago that got us here in the first place!

Obama is now said to be favoring a "prepackaged" bankruptcy for GM, allowing Chrysler to go under.  It would be nice if we would see our President realize that this same mess exists in virtually every corner of our economy, but doing that requires skewering people who he considers "trusted advisers."

It is rather amusing to hear Senators like Mr. Shelby come out and tell us how bankruptcy is "best for the taxpayer" when it comes to GM (true) but they won't say the same thing about Bank America and Citibank.  Why not?  Fact is, a bankruptcy is the correct solution to too much debt and excess capacity no matter where it is, as it is the formal structure under our capitalist system by which excessive debt (supporting capacity that is in excess of requirements and thus unproductive) is cleared through debt-to-equity cramdowns, real concessions by all stakeholders (forced by a judge) and/or outright defaults.

These same Congressfolk also don't want to repeal the so-called "bankruptcy reform" law of a few years ago that made it nearly-impossible for income-earning Americans to discharge their debts over that same Constitutionally-provided process.  Indeed over the years Congress has extended the net of "impossible to discharge" debt ever further like a creeping prickerbush; child support awards, IRS debt and privately-written student loans.  More recently for those with above-median incomes all debt became effectively non-dischargable.

Never mind that these very same bankers have effectively secured themselves a pass from prosecution for outright fraud - which they then committed with wild abandon, embezzling trillions in total from citizens, municipalities and pension funds around the world, squirreling it away for their own benefit while chortling at their "bought and paid for" immunity from prosecution thinly disguised as "campaign contributions."

This of course is what the bankers want, but it is precisely backward in relationship to what America needs.  If we are to see our debt levels contract from 370% of GDP (up from 350% last year) and not provoke a GDP collapse (which will rocket that ratio higher) we must instead:

• Reverse the "bankruptcy reform" act.
• Repeal all restrictions on debt that can be discharged in bankruptcy.
• Force all firms and individuals who are unable to pay through bankruptcy.

In short the solution to insoluble debt is bankruptcy.  It is through bankruptcy that we clear that debt from the books, which is a necessary precondition to a re-balancing of the economic output of this nation to its ability to fund consumption with production, not "pulled forward" credit-driven false demand.

The UAW and organized labor in general, long thought to be the "favored" among President Obama and the Democrats through their speeches and claims, in fact were thrown under the bus.  It is simply remarkable that the UAW hasn't literally mobilized every labor union in the United States and coalesced their memberships into a march on Washington DC, laying (peaceful!) siege to the city and demanding that the same sort of "tough love" meted out for GM and Chrysler be applied to all the financial concerns that have instead received well north of a trillion dollars of largess, forcing the rescission of all previously-allocated "bailouts" and refusing to leave until a level playing field is achieved.  One must wonder if Gettlefinger and the union "brothers" really are brothers at all, or whether the last 20 years has made them, once the most-feared political constituency in America, yet another neutered political has-been incapable of anything beyond a bad parody of carnival barking.

Real economic growth and the stabilization of the job base, along with normalization of the credit markets will not and in fact cannot happen until this takes place.

We must as a nation choose - we can either choose a continued descent into chaos that literally threatens our way of life and political system, or we can choose to force those who made bad bets, whether they be improperly-underwritten loans, naked CDS written without capital or those who speculated in the purchase of their house to go through the bankruptcy process and thus remove from the system insoluble debt via the process of bankruptcy and default.

The latter choice is politically unpalatable but it beats the loss of social order, the collapse of our economy and credit markets and ultimately the collapse in government funding that can (and will, if allowed to descend to that level) result in the loss of our government and way of life.

I keep getting "pushback" from people in the mortgage industry and elsewhere, especially related to my Youtube Videos, with all sorts of claims that "we can't go after all the fraud in the mortgage business - get over it", along with similar missives.

Folks, you need to understand something very clearly, because Bernnake and the rest of the policymakers have laid out the truth for you - if you care to listen.

Fully 2/3rds of credit provided in our economic system is non-bank lending.

That is, it is hedge funds, sovereign wealth funds, pension funds, insurance companies and both foreign and domestic private investors who have extra capital they do not need at the moment, and they are willing to lend that money into the economy.

These are the buyers of securitized debt instruments.

This market is closed.

Both ASF (American Securitization Forum) and Federal Reserve statistics say that there has been essentially no securitized debt issuance over the last six months.

None.

That market is closed because this class of investors was gang raped by the pernicious and outrageous fraud up and down the line within the market.

Arguing over whether the banks are responsible for not verifying information provided (they are), automated approvals are responsible (they are), ratings agencies are responsible for being essentially purchased rubber stamps (they are) or borrowers who fraudulently overstated income and understated debt (they are) misses the point.

The point is that all of these factors are in fact elements of fraud.

All of these are willful and knowing misrepresentation - either by omission or commission - of the risks and true credit profile of the collateral, borrower's character and capacity, market assumptions used in modeling or all of the above.

The fact of the matter is that this 2/3rds of the credit provided to our market has left and is not coming back until the misrepresentation ends and they can be assured that it will not happen again.

That is, these people are demanding their pound of flesh using the most powerful weapon they have - their checkbook.

As just one of many examples:

Feb. 20 (Bloomberg) -- Asian investors won’t buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees, similar to those given on bonds issued by Bank of America Corp. or Citigroup Inc.

And why should they?

These investors got boned.  Repeatedly.  In the non-agency market they didn't just get boned they got gang-raped, with losses in some cases on CDOs and similar being 100%.

These events are not supposed to happen, according to risk modeling.  And if the risk model actually had put into it the quality of underwriting (none), the verification of income and assets (none), a realistic model of credit growth and asset prices (ha!) and similar, it wouldn't have - because there would have been no competitive market for those securities at the prices asked.

The argument that this was all "the bank's fault" is simply not true.  The blame is spread across the curve - the fact that your local bank has no guard does not give license to someone that desires to come in and rob it; in that case we penalize the bank but we still lock up the bank robber.

But all of this belies the underlying problem: in the attempt to divert attention from one group or another - and all of the guilty parties are engaged in it at this point, including Congress and our other regulatory agencies such as The Fed - we are forgetting that the private capital is still gone and until we find a way to guarantee that another assault will not happen that capital will not return.

As I listen to Bernanke's testimony in front of both the House and Senate, and as I watched President Obama's speech last night, I remain stunned by the lack of recognition of the above facts.

While lawmakers and policymakers such as Bernanke continue to blame "understaffing" (code in DC for "we want more money") and the lack of fully-formed plans, the fact remains that unless private capital can be convinced to return, and soon, we are headed for an economic depression worse than the 1930s.

This is not some manner of conjecture or fear-mongering - it is a fact that there is absolutely no way we can maintain our standard of living or economic output at anywhere near former levels with 2/3rds of credit capacity gone, nor can we replace that 2/3rds of the former capacity via other means.

To put this in perspective we are talking about a $50 trillion (roughly) credit universe for the United States; 2/3rds of that is ~$30 trillion dollars.  It is simply not possible for the government or Fed to replace this, which is why even with a commitment of $9 trillion as has been made thus far the economy is not responding; 2/3rds of what disappeared is still gone and yet trying to actually fund $9 trillion through T-bond sales would cause an immediate implosion in the Treasury market.

We therefore have two choices, and if we do not pick #1 we will get #2:

1. Stop "the bezzle" - right here and now - punishing the fraudsters across the board and clamping down on all manner of fraud in the future with enforcement of the law both looking back and forward being the primary driver of policy.
2. Accept that we will have an economic Depression worse than the 1930s, as the continued absence of private credit provision will guarantee a contraction in GDP of at least 30%.  This will result in the bankruptcy of about 20% of the S&P 500, 25-30% unemployment, half of all private businesses in the United States going under and general economic malaise at least equivalent to the 1930s and quite possibly far worse.

Those are the only choices ladies and gentlemen.  All the handwaving in the world will not convince private capital to come back and you cannot force that private capital to return.

We can only convince private capital to return by guaranteeing that the rule of law will be upheld, that those who screwed them this time will be punished in accordance with the law and that anyone who attempts to screw them in the future will be immediately dealt with under the same provisions.

Those are the choices folks, and if we do not accept this and adopt it as policy within a very short period of time the economic contraction will continue and, once it reaches a critical point, the collapse in the equity and credit markets will accelerate and be impossible to stop until liquidation has run its course.

We are very close to reaching that tipping point and the reaction today in the markets, after being filled with "hope" yesterday, is a direct consequence of the administration's failure to follow through with concrete steps to restore trust, transparency, and the rule of law.

Until and unless you hear that message come out of Washington DC your wisest course of action is to be prepared for economic conditions at least as bad as those during the 1930s, because unless policy changes that is exactly what we are going to get.

The math is never wrong.

This morning Rick Santelli went nuclear on the entire "fraudulent mortgage" game - the culmination of a series of rants that he has (correctly) launched over the last year.

(As an aside, great minds must think alike, as we both had the "extra bathroom" thing in our morning rants!)

You can view it here (can't embed as its a CNBS video clip)

Here's the point folks, when you get down to it:

• The entire last two decades of so-called "Economic Growth" has been fueled by one fraud after another, starting with the Internet Bubble.
• This fraud has been systematic and the mainstream media has been both an implicit and explicit enabler of these frauds, instead of doing its job, which is to root them out.  The looks on the faces of the other CNBC "anchors" was one of abject fear - perhaps parts of "The Fourth Estate" is coming to realize that when the pitchforks and torches come out - and they certainly will if we hold the course we're on - they might have some trouble explaining why they shouldn't be near the head of the list of those being "sought"?
• The conflicts of interest in the media, where their advertising dollars come from those who are promulgating and profiting from these frauds means that they must choose between their job of protecting the public (their essential purpose under The First Amendment) and being a willing accomplice in the theft being performed by the prime actors in these frauds.
• With the exception of a few months around 1995 (which roughly coincided with Microsoft's release of Win/95, the first "consumer" system of wide acceptance that had a dialer built in along with a web browser) the Internet NEVER doubled in size every three months.  Yet this was paraded as the statistic to justify all the bubble companies up until the bubble burst in the spring of 2000.  I was one of hundreds if not thousands of people with access to the core of the network and KNEW this was a lie.  Nobody would report the truth.  Proof?  Read all about it:

  • And that's not the only thing Denninger feels strongly about. Though the Internet made him a millionaire -- his stake in MCS was rumoured to be worth US$12 million at the time of the company's sale -- the feisty Midwesterner has nothing but scorn for the industry overall.

    "I refused to take any stake in the acquiring firm. The shell game being played by these corporations is astounding," he said.

    Denninger has also steadfastly avoided investing any of his personal fortune in the Internet: "I refuse to have anything to do with the Nasdaq 100. There will be a shake-out, and when it comes, it will be ugly and it will happen fast."

    He might as well have been speaking of Black Week, April 10 through April 14, when the Nasdaq crashed.

    The volatility of Net stocks in the past few weeks makes Denninger seem prescient, but his dislike for the unseemly marriage of breathless hype and dubious business plans is visceral.

• When the Internet bubble collapsed it was decided to intentionally pump liquidity into the system and ignore both banking regulations and the law, making possible the housing bubble.

• When the leverage ran out Henry Paulson, who was then with Goldman Sachs, came to Congress and the SEC and asked for the ability to run what would turn into effective infinite leverage.  The request was granted.
• The very same Henry Paulson, having done this, then bailed off and became The Secretary of the Treasury.  He was fully aware of what was going on when the bubble started to come apart in 2007 because he personally lobbied for the changes in law that made the terminal blow off possible!
• Every single one of the firms that has blown up has had leverage far higher than the former 14:1 legal limit.  Fannie Mae, Freddie Mac, AIG, Bear Stearns and Lehman - all had leverage at least twice the former legal limit when they blew up.  After the first blowup Treasury and the SEC could have slammed the door on this and forced leverage to be taken back down - in August of 2007.  Government intentionally refused to take that action despite myself and others screaming about it.
• Hundreds of billions of dollars were siphoned off by the banksters and common Americans as a consequence of willfully-blind and even fraudulent "lending."

If you measure "prosperity" by stock prices we're somewhere back in 1997 or 1998.  But if the entirety of these two bubbles were fraud-driven (and they were) then a realistic expectation is that we will not only return to 1995 stock prices (about ~450 on the S&P 500) but we will over-correct significantly because the debt that this fraud created still remains in the economy!

That could easily cut the S&P in half again, which puts my 210 "oh God" print on the table, no?

Let's be clear here: There is no way out of this box, and the corruption and fraud have permeated every corner of our financial, media and governmental systems. 

We give "free" education and health care to illegal aliens, paid for out of citizen tax dollars.  Our government supports this.

We propose to give "foreclosure relief" to people who lied on their mortgage applications; how many of the so-called "rescue" programs would have ANY uptake among the public if as part of the refinance or assistance process the original paperwork was re-underwritten to discover if you lied, and if you did, you were prosecuted instead of being helped? 

We have done exactly nothing to indict and prosecute the banking executives, the housing industry executives and others in the business world who contributed to these lies and frauds, in some cases explicitly.

The Congresspeople who got "special deals" from Countrywide Financial (and others) on their mortgages remain in office and are not being charged and tried for what, in my opinion, amounts to public corruption.  The amounts involved here are not small - the "savings" in many cases ran into the tens of thousands of dollars.

It has been disclosed that several sitting Congressmen received tens of thousands of dollars in campaign contributions from Stanford Financial (now under investigation on suspicion of not only bilking investors but also money laundering!); the firm also allegedly gave eight hundred thousand dollars to the Democratic Senatorial Campaign Committee during a year that Congress was debating a bill that would have tightened anti-fraud provisions against the securities industry.  The bill was killed in a Senate committee.

We learned that government employees are also profligate tax cheats!  Not only the high-profile ones like Geithner and Daschle either - this is an across-the-board problem:

The Internal Revenue Service is trying to collect billions of dollars in unpaid taxes from nearly half a million federal employees. According to IRS records, 171,549 current federal workers did not voluntarily pay their federal income taxes in 2007. The same is true for 37,752 active duty military and nearly 200,000 retired civilian and military personnel.

Documents obtained by WTOP through the Freedom of Information Act show 449,531 federal employees and retirees did not pay their taxes for a total of $3,586,784,725 in taxes owed last year.

What?!  Oh, and with the exception of the IRS, you can't be fired as a government employee for not paying your taxes either.  You can't make stuff like this up folks - nobody would believe you.

I'm tired of people demanding that I cover the bad bets they made as a consequence of fraud throughout the system, while the people responsible, including those in industry and Washington DC go unpunished.

The fruit of a poison tree is also poisonous and if you were a victim of that fraud (that is, you didn't knowingly buy a house you can't afford, you didn't overstate your income and you didn't intentionally speculate on home price appreciation - you instead bought responsibly, you didn't exceed 36% DTI on the back end, you put significant money down and you took a conventional mortgage - not one of those fancy "Option ARM" rent-a-house products that you'd NEVER be able to pay off on the original terms) then you should be looking to those who DID commit fraud for recourse, not the government and everyone else's tax dollars.

If on the other hand you did overstate your income, you did take out an OptionARM, you did lever yourself up to your neck, you did play the "House is an ATM" game or you did speculate with your house then you deserve exactly nothing for help because you participated in an intentional attempt to game economic and financial reality and lost.

Now for those who merely speculated and lost (and there are a lot of them) I believe we should reverse the Bankruptcy "reform" act so you can access the courts and find relief, both spreading the pain to the lender who imprudently granted you credit and accepting a lot of that pain yourself in the form of a destroyed credit rating for the next seven years.

But for those who overstated their income or otherwise committed some form of fraud - and let's be clear here folks, mortgage fraud is a federal offense - what those people deserve is a long stay in prison.

Since we seem to have a shortage of prison space I recommend that we immediately decriminalize all non-violent drug possession and consensual sales between adults, expunging their sentences and releasing those prisoners.  We can then tax drug sales (and sell them in DRUG STORES, which are conveniently named), use the money to pay for treatment programs, but more importantly we will have plenty of room to jail all the fraudsters, including the banking executives and Congresspeople that got us into this mess.

Our economy must contract to a sustainable level - period.  This is not a matter of what we want, it is a matter of what is possible.

A bubble economy built on fraud cannot be reflated once it pops and the fraud is exposed at the level to which it occurred in this case.  It is simply not possible.

We must deal with the underlying rot in our financial and political systems, and until we do in a forceful and forthright fashion we will continue to see economic malaise and destruction.

Wake up America.