Collapse of the U.S. Economy

U.S. Avoids Technical Default By Three Days

January 5, 2010

Zero Hedge - On December 24, the Senate passed a vote by a razor thin margin (with not a vote to spare) to raise the Federal debt ceiling from $12,104 billion to $12,394 billion. The actual debt ceiling increase took effect on December 28. And as the chart shows, the Treasury's cash flow projections were spot on: 3 days later, and the debt subject to limit surged to $12,254, a jump of over $200 billion in 2 days, and a whopping $150 billion over the old debt ceiling.

Three days is all the buffer the administration's reckless spending spree has afforded this country to avoid bankruptcy. Had one more Democratic vote dissented from the stopgap measure, the US would now be in technical default.

There is just $140 billion left before the revised debt ceiling is breached. We hope for the country's sake that Bill refunding in January is massive, because as we already pointed out, on January 7th we expect another ~$130 of new Treasuries to be announced for auction by January 15th. And then there are two more weeks in January... Which is why the Treasury better be using that TARP money to pay down all it can, because if the general population understands how close this nation was to the fiscal brink, many more answers may be demanded out of the ruling party as to how it could allow things to get so out of hand ...

U.S. to Lose $400 Billion on Fannie, Freddie, Wallison Says

December 31, 2010

Bloomberg - Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.

“The situation is they are losing gobs of money, up to $400 billion in mortgages,” Wallison said in a Bloomberg Television interview. The Treasury Department recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two government-sponsored enterprises, he said.

The U.S. seized the two mortgage financiers in 2008 as the government struggled to prevent a meltdown of the financial system. The debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks grew an average of $184 billion annually from 1998 to 2008, helping fuel a bubble that drove home prices up by 107 percent between 2000 and mid-2006, according to the S&P/Case- Shiller home-price index.

The Treasury said on Dec. 24 it would provide an unlimited amount of assistance to the companies as needed for the next three years to alleviate market concern that the government lifeline for Fannie Mae and Freddie Mac, the largest source of money for U.S. home loans, could lapse or be exhausted.

Lax regulation of Fannie Mae and Freddie Mac led to the mortgage companies taking on too many risky loans, Wallison said.

“It turns out it was impossible to regulate them,” he said. “They were too powerful.” He said no one knows how much will be needed to keep the companies solvent...

String of Investment Bubbles Mark One of the Worst Decades for Stocks

A LOST DECADE

The Dow fell 9.3% for the decade.
The S&P 500 index dropped 24.1%.
The Nasdaq plunged 44.2% over the past 10 years.

December 31, 2009

Associated Press — A string of exploding investment bubbles that started with the dot-coms and ended with mortgages and oil dominated the years from 2000 to 2009. And some say the next decade may be no different.

It doesn't seem to matter to many hedge fund traders and other professional investors that the Standard & Poor's 500 index has turned in its first losing performance over the course of a decade, having fallen 24% from 1,469.25 at the start of 2000 to its 2009 closing of 1,115.10. Or that they or other investors helped create and then destroy the bubbles that left stocks worth $2.5 trillion less today than when the decade began — and that's before adding in the effects of inflation.

A mix of investor hubris, ignorance and piles of easy money created the bubbles. New ideas about where to invest seemed foolproof and greed crowded out doubts. Many investors looking for the best returns failed to see the potential problems with an Internet business that had no sales plan, or that thousands of expensive homes bought with no down payment might end up in foreclosure.

Now, these investors who fled the last blowups risk running smack into others. The Federal Reserve is keeping borrowing costs low to help revive the economy, and that means there's still plenty of easy money around, helping traders to inflate the price of everything from stocks to commodities such as gold.

"They've put out the biggest punch bowl in U.S. history and people are guzzling from it," said Haag Sherman, chief investment officer at Salient Partners in Houston.

It begs several questions: What will be the next bubble? Or is it already here? And, how do individual investors protect their savings?

Some analysts have already been asking if the stock market formed a bubble with its huge rebound this year. The S&P 500 is up 68.9% from the 12-year trading low of 666.79, its best performance since the 1930s.

BANNER YEAR: Stocks post biggest rebound in 2009 since Great Depression
2009 FUND WINNERS: Technology, materials boost investor returns
OIL ENDS YEAR WITH A BANG: Surges $10 in two weeks

Gold is also suspect. It's at $1,097 an ounce and up 24% in 2009. Other possible sources of bubbles include stocks in emerging markets such as China, where the Shanghai index is up 76% this year.

Analysts say it's in the DNA of markets to let ambition cloud good judgment and that even when investors learn or relearn a lesson about excess, many still forget it.

Moreover, investors still have $3.2 trillion in money market mutual funds that's waiting to be invested, according to iMoneyNet. With so much cash available and investors hankering after big returns, analysts warn that bubbles may be inevitable.

The signs of effervescence can be hard to spot.

"Pets.com was going to have a market cap larger than ExxonMobil," said David Darst, chief investment strategist for Morgan Stanley Smith Barney in New York, referring to the website that collapsed in November 2000, nine months after raising $82.5 million from investors.

He says investors will keep getting tripped up as they find new ways to invest.

"Human nature doesn't change," Darst said. "Market mechanisms change but human fear, human greed will be like this decades and centuries hence."

The numbers from this decade tell a stunning story...

Bankers Get $4 Trillion Gift From Barney Frank

December 30, 2010

Bloomberg - To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill.

Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan. The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders.

I quickly discovered why members of Congress rarely read legislation like this. At 1,279 pages, the “Wall Street Reform and Consumer Protection Act” is a real slog. And yes, I plowed through all those pages. (Memo to Chairman Frank: “ystem” at line 14, page 258 is missing the first “s”.)

The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt.

If you’re a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises.

Nuggets Gleaned

Here are some of the nuggets I gleaned from days spent reading Frank’s handiwork:

-- For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.

-- Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.

-- Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.

More Bailouts

-- The bill also allows the government, in a crisis, to back financial firms’ debts. Bondholders can sleep easy -- there are more bailouts to come.

-- The legislation does create a council of regulators to spot risks to the financial system and big financial firms. Unfortunately this group is made up of folks who missed the problems that led to the current crisis.

-- Don’t worry, this time regulators will have better tools. Six months after being created, the council will report to Congress on “whether setting up an electronic database” would be a help. Maybe they’ll even get to use that Internet thingy.

-- This group, among its many powers, can restrict the ability of a financial firm to trade for its own account. Perhaps this section should be entitled, “Yes, Goldman Sachs Group Inc., we’re looking at you.”

Managing Bonuses

-- The bill also allows regulators to “prohibit any incentive-based payment arrangement.” In other words, banker bonuses are still in play. Maybe Bank of America Corp. and Citigroup Inc. shouldn’t have rushed to pay back Troubled Asset Relief Program funds.

-- The bill kills the Office of Thrift Supervision, a toothless watchdog. Well, kill may be too strong a word. That agency and its employees will be folded into the Office of the Comptroller of the Currency. Further proof that government never really disappears.

-- Since Congress isn’t cutting jobs, why not add a few more. The bill calls for more than a dozen agencies to create a position called “Director of Minority and Women Inclusion.” People in these new posts will be presidential appointees. I thought too-big-to-fail banks were the pressing issue. Turns out it’s diversity, and patronage.

-- Not that the House is entirely sure of what the issues are, at least judging by the two dozen or so studies the bill authorizes. About a quarter of them relate to credit-rating companies, an area in which the legislation falls short of meaningful change. Sadly, these studies don’t tackle tough questions like whether we should just do away with ratings altogether. Here’s a tip: Do the studies, then write the legislation.

Consumer Protection

-- The bill isn’t all bad, though. It creates a new Consumer Financial Protection Agency, the brainchild of Elizabeth Warren, currently head of a panel overseeing TARP. And the first director gets the cool job of designing a seal for the new agency. My suggestion: Warren riding a fiery chariot while hurling lightning bolts at Federal Reserve Chairman Ben Bernanke.

-- Best of all, the bill contains a provision that, in the event of another government request for emergency aid to prop up the financial system, debate in Congress be limited to just 10 hours. Anything that can get Congress to shut up can’t be all bad.

Even better would be if legislators actually tackle the real issues stemming from the financial crisis, end bailouts and, for the sake of my eyes, write far, far shorter bills.