Economists will scoff at the question in the title. But that’s because they are trying to fit the present into the past.
In the past recoveries were routine, because recessions were temporary restraints resulting from the Federal Reserve putting the brakes on an overheating economy. By restraining the supply of money and credit, the Fed caused inventory buildup, layoffs, and a halt to price rises and union wage demands. With the economy cooled by unemployment, the Fed would take off the brakes. Interest rates would decline, money would flow, consumer demand would rise and workers would be called back to the factories.
In those days, when workers borrowed to spend, they were borrowing against rising real wages from rising productivity. In economic downturns, few workers actually lost their jobs. They were laid off from their jobs for temporary periods. Workers seldom lost their homes or cars, thanks to union funds and unemployment benefits.
Today the situation is different. In the 21st century real wages have not risen. Workers have spent more by accepting deteriorating household balance sheets. They have maxed out their credit cards and spent the equity in their homes. Imitators of the US government, American consumers borrow to pay their bills.
The expansion of household debt relative to income created the illusion that the economy was sound. But the consumer economy was as much of a credit-based bubble as the real estate bubble and the financial sector bubble. The economy has lost its real basis.
Today it is difficult to stimulate consumer demand by lowering interest rates. Consumers are too heavily in debt to borrow any more. Financial institutions are too impaired to want to lend to anyone except those who don’t need to borrow. As the Keynesian macroeconomists used to say: “You can lead a horse to water, but you can’t make him drink.”
And there’s another problem. Much of what American consumers purchase today is made offshore. Stimulating consumer demand in America puts factories back to work, but those factories are located elsewhere in the world.
How does an economy consume more than it produces? Previously, this question applied only to poor Third World countries. These countries would consume by the grace of World Bank loans. From time to time they would pay for their consumption by being put through an IMF restructuring program that would curtail their consumption to make them repay their loans by forced saving.
The United Statess has so far avoided such humiliation, because its currency is the world money. The US has been able to borrow endlessly, because it can pay its debts in its own currency.
This ability might be coming to an end. The US has been using up the bulk of the world’s supply of saving for years in order to finance its consumption. Considering the outlook for the US economy and dollar, the productive nations of the world and those with oil have more dollars and dollar-denominated assets than they want. The US, with its collapsing economy, its bailouts of financial institutions, and its wars, is facing the largest government budget deficit in its history, both in absolute amount and as a percentage of national income. The easy monetary policy, which the Fed hopes will arrest deflation, threatens inflation and further deterioration in the dollar. Foreigners simply do not want to lend more large sums to a country that, from all appearances, has no way to close its trade and budget deficits. They certainly do not want to lend when the interest rate offered is close to zero and the reserve currency status of the dollar is in doubt.
Economists and the policy-makers they advise are thinking in the past, a time when low interest rates stimulated consumer and investment demand, thus lifting the economy. Today the low interest rates threaten the dollar, discourage foreigners from lending more to the US, and deprive Americans of interest income necessary to their ability to pay their bills.
In the second half of the 20th century, American economic supremacy was a gift of World War II, which destroyed the productive capacity of the rest of the developed world. American economic supremacy also owes much to communism in Russia and China and to socialism in India, which rendered these large countries economically impotent. The United States did not have to compete for its economic hegemony. It simply inherited it from the choices made by the rest of the world.
The situation is different today. Unlike the US, other countries are free of the hubris of being the “indispensable nation.” They know how hard it is to be successful and do not treat success as their birthright. They do not give away their economy for nebulous foreign policy goals or for short-term profits. They look ahead 20, 30 years while America’s CEOs look to the next quarter’s profits.
The United States is walking on quicksand. It is dependent on foreigners for the funding to conduct the day-to-day operations of its government. Its economy is a hollow shell reduced to dependence on a financial sector that is discredited worldwide. America’s government believes that its foreign wars of aggression are more important than any domestic needs, including the health care of its population.
Now that its supply route to feed its war of aggression in Afghanistan is threatened, the American government has the delusion that it will be able to supply its army in Afghanistan through thousands of miles of Eastern Europe, Russia, and Central Asia. Only a government totally oblivious to reality would imagine that Russia’s Putin, whose nose is rubbed in excrement every day by the US government, will permit America to transit Russian territory to resupply US imperial legions in Afghanistan.
What we are witnessing is a once great power engaging in fantasy to disguise from itself that it is a failed state.
How we got to where we are today, who’s to blame, and where we’re going in 2009. (5-Jan-2009)
Summary Most people are hoping that 2009 will be a much better year than 2008. What they overlook is that the same Generation-Xers and Boomers who created the world wide financial crisis are still in charge. Unfortunately, this means that 2009 will be much worse than 2008.
It’s widely believed that Barack Obama will “heal the world” when he becomes President of the United States on January 20.
In particular, it’s widely believed that he’ll solve the country’s economic problems by means of “stimulus package” of $600-700 billion dollars. In fact, the public expects Obama to spend any amount of money necessary to heal the economic crisis. Obama and his advisers have done everything possible to encourage that view. All I ever hear from Obama and his advisers is that high unemployment “is unacceptable,” and that “as much money as necessary will be spent” to reverse the situation.
The plan is a “stimulus package” of hundreds of billions of dollars. As I wrote in “One, Two, Three … Infinity,” these dollar amounts are constantly increasing, sometimes on a daily basis, so the amount may very well reach $1 trillion. (As I’m finishing up this article, I hear that the Obama has doubled the planned amount from $600-700 billion to $1.3 trillion.)
From the point of view of Generational Dynamics, none of this makes sense. The same people who have destroyed the world’s financial system are now supposedly going to heal it by spending a trillion dollars, with little or no fiscal discipline. This is a recipe for total disaster.
In order to know where you’re going, it helps to understand how you got here. For that reason, we’re going to go into a lot of detail to answer this question: Who’s to blame for the current financial crisis?
Once we’ve established the generational answer, it will be easy to see exactly why we’re headed for an even worse crisis in 2009.
Who’s at fault?
What we’re seeing today is a lot of finger pointing. Nobody blames himself, but everyone has a favorite other person to blame.
I’ve been writing about this crisis for years, and one thing that’s clear is that there’s no simple answer to the question, “Who’s at fault?” Deception and fraud have been the norm for several years now, across entire industries, and at every level.
Even Alan Greenspan, in testimony before Congress, said that he was shocked that almost everyone in the financial industry appears to have been committing fraud. In his testimony (PDF) to the Government Oversight and Reform committee, he said:
“As I wrote last March: those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined. …In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.”
Greenspan’s statement makes it clear that something has changed in the last ten years. Things are happening that never happened before — at least in Greenspan’s memory.
Let’s make a list of the groups of people who committed widespread deception and fraud, leading to the current financial crisis:
Individual homeowners who lied on applications to get a mortgage. These are the “liar loans.” People lied about their income and assets, to qualify for a loan that they had no chance whatsoever of paying off. There were many cases of people with no jobs, no assets and no income who lied and obtained mortgage loans where they couldn’t even make the first payment. Even worse were speculators and investors who got mortgage loans with no intention of ever making the first payment, since their only intention was the “flip” the property quickly (selling it at a higher price), and get out with the profit. Nobody was verifying the facts on these “liar loan” applications.
Home construction firms and builders who lied about the appraisal value of a new home in order to get a higher profit. Nobody was verifying these appraisals.
Mortgage brokers who recommended loans with low “teaser rates,” took fat fees and commissions when the loan was approved, and then got out of town before the teaser rates ended.
Collusion: Homeowners, homebuilders, real estate brokers, real estate appraisers, and mortgage brokers who all colluded with one another. These people colluded with one another to lie about home values. These people colluded with one another to lie about homeowner income. These people colluded with one another to lie about the facts on mortgage applications. There have been many published examples of mortgage lenders who modified loan applications, unbeknowst to the applicant, to increase income claims.
Banks and lending institutions who sold “predatory loans” that permitted people to pay low “teaser rates,” and made no attempt to verify the application information — homeowner income and assets, or the home’s appraised value. They simply approved the loans, got their money by selling residential mortgage-backed securities (RMBSs), and then collected fat fees and commissions.
Financial engineers at investment banks (like Bear Stearns), who used computer models to transform large packages of RMBSs into collateralized debt obligations (CDOs). These were transformed into AAA rated securities, even if the underlying RMBSs were much lower rated. (See “A primer on financial engineering and structured finance” for an explanation on how this was done.) The computer models assumed that there would never be another recession and that real estate prices would always go up.By 2006, or early 2007 at the latest, it was evident to everyone that the assumptions were failing, and that the AAA ratings were invalid. However, the financial engineers fraudulently did not change the models, and the sales departments fraudulently sped up and increased their sales, in order to make as much money as possible before problems became evident.
Securities ratings agencies (like Standard & Poor’s, Moody’s Investors Service and Fitch Ratings), who supported the investment banks by taking fat fees and commissions from the investment banks in return for fraudulently supplying AAA ratings without doing any due diligence. These activities continued long after it was known that the securities were failing.
The “monoline” bond insurance agencies (like MBIA Inc., Ambac Financial Group Inc., Financial Guaranty Insurance Co. (FGIC), and ACA Capital Holdings), who supported the investment banks by taking fat fees and commissions in return for fraudulently providing insurance on the defective securities. These activities continued long after it was known that the securities were failing.
Sales departments at investment banks, and investment advisors and brokers at other institutions, who sold these defective securities long after it was known that they were defective. In fact, they increased sales in order to make as much money as possible before problems became evident.
Top level economists, such as Robert Engle, 2003 Nobel Prize Winner in Economics, and Joseph Stiglitz, 2001 Nobel Prize Winner in Economics, who provided the theoretical basis for CDOs and other structured finance vehicles, and made their own fortunes from doing so. These people are now pretending they had nothing to do with it. Stiglitz in particular has been appearing frequently on television, blaming everyone but himself. I even saw him blame the financial crisis on the Iraq war, rather than admit his own complicity.
Government regulators and politicians who looked the other way, and did nothing to stop the deception and fraud. In fact, many of them actively encouraged deception and fraud. I’ll discuss this subject more below.
Journalists, analysts and pundits who have purposely closed their eyes to what’s going on. These people are supposed to have their jobs because of their financial expertise, but people like Greg Ip of the Wall Street Journal and Maria Bartiromo of CNBC are totally clueless about economics and the world. Furthermore these media outlets have a policy of not presenting bad news, for fear of losing advertising revenue.
What’s astonishing about all this is the ubiquity of fraud and deception. It seems that there is no place where honesty, decency and ethics still prevail. Instead, every person has been out for himself or herself, no matter how many other people get screwed.
I’ve been writing about and analyzing this situation for six years now, and you wouldn’t believe how furious I am at this situation and these people. I’ve been criticized for frequently calling these people “total morons” on my web site, but the only reason I’ve been doing that is because I didn’t want to call them “total crooks.”
Boomers and Generation-Xers
I’ve written many times about how the lethal combination of Boomers and Generation-Xers led to the current financial situation. I’ll give a brief summary here:
The survivors of World War II (the GI and Silent generations) did some great things — they created the United Nations, World Bank, Green Revolution, World Health Organization, International Monetary Fund, and so forth. They created these organizations and managed them for decades with one purpose in mind: That their children and grandchildren would never have to go through anything so horrible as the Great Depression and World War II.
The Baby Boomer generation, born after the war, rebelled against their parents, and spent the 1960s and 1970s rioting and demonstrating. The Gen-Xers, born during the tumult of the 1960s and 1970s, growing up in the shadow of the Boomers, came to hate the Boomers and Silents, and their values.
By the 1990s, almost all of the survivors of the Great Depression had disappeared (retired or died), and Boomers were the senior managers in all organizations, including financial organizations. Having spent their lives rebelling against and arguing with their parents, they had no idea how to lead or govern. Starting in 1995, all fiscal discipline was lost, and the Boomers allowed the dot-com bubble to occur.
7
By the early 2000s, the dot-com bubble had burst. The Gen-Xers reached their 40s and took middle management positions. Their hatred and contempt for Boomer and Silent values came to the fore, and they replaced the dot-com bubble with the real estate and credit bubbles by developing structured finance vehicles that turned out to be fraudulent.
The Boomers, who had spent their lives complaining and whining, were used to have everything taken care of for them, originally by the Silents. When the Silents were gone, the confused, hapless Boomers looked around for someone to tell them what to do, and the Gen-Xers took up the job. The typical Gen-X view of Boomers is that Boomers are full of crap. When Gen-Xers pursued nihilistic, destructive activities, their Boomer bosses simply acquiesced.
In the end, the current financial crisis was caused by a lethal combination of nihilistic, destructive, greedy Gen-Xers, working for stupid, arrogant, greedy Boomers.
I’ve had people complain to me about this characterization of Boomers and Gen-Xers, but nobody who’s complained has ever provided any other explanation for the ubiquity of fraud and deception in the last few years.
There’s a widely held view that the financial crisis was caused by lack of oversight by regulatory agencies and politicians. Here’s a succinct statement of this view by Chrystia Freeland of The Financial Times, appearing on “The NewsHour With Jim Lehrer” on January 1, 2009:
Chrystia Freeland of The Financial Times (Source: PBS)
“There was a belief that markets could self-regulate absolutely perfectly. One of the lessons of this crisis is that that’s not true. Mortgage markets clearly CAN’T self-regulate themselves perfectly. You can’t trust, it turns out, the lenders to always lend prudently. You can’t trust the borrowers always to borrow prudently. And that turned out to not just the case with uneducated people taking out subprime mortgages, but it turned out to be the case with some of the smartest guys, people who were earning huge salaries, people who developed complex mathematical models that turned out to be very, very bad at valuing risk.”
Statements like this only repeat the problem — that no one was acting “prudently.” This statement offers no solution, but implies that the crisis could have been avoided with more regulation.
What this overlooks is that the regulators and politicians are exactly the same Boomers and Gen-Xers that caused the crisis.
There were plenty of regulations passed in the 1930s, to prevent a repeat of the 1920s bubble that led to the Great Depression. When I was growing up in the 1950s, my teachers all knew what had caused the Great Depression, and they talked about it all the time. It was caused by the greed of bankers and investors, who broke all the rules and harmed millions of people. It was caused by the lack of ethics and morals by the people in charge. It was caused by a complete lack of discipline.
I particularly recall my mother was always furious at bankers and politicians, whom she considered to be greedy and vicious. I never understood why she felt that way, but I do now, when I see what’s been happening on Wall Street and in Washington in the last few years. Things have come full circle.
The SEC (Securities and Exchange Commission) was explicitly formed in the 1930s to prevent another bubble; the SEC had totally failed in its mission by the time of the dot-com bubble in the late 1990s.
But nobody even cared. By the late 1990s, all the survivors of the Great Depression were gone (retired or died). Macroeconomists, led by current Fed Chairman Ben Bernanke, had “proven” that there was no need for discipline, after all. Bernanke had “proven” that the Great Depression was caused by a simple accounting error by the Fed. (See “Ben Bernanke’s Great Historic Experiment” and “Bernanke’s historic experiment takes center stage.”)
All forms of regulation and discipline were repealed, starting mainly in the 1980s in the Reagan administration, and continuing through through the father Bush, Clinton, and son Bush administrations.
Thus, for example, we had the repeal of the Glass-Steagall Act, originally passed in 1933. It’s purpose was to keep commercial banks and investment banks as separate institutions. It can be debated how effective the Glass-Steagall act was, but the way to think of it is that it was just one of a million different laws and regulations that introduced discipline into the financial markets, in order to prevent and expose fraud and abuse.
By the 1990s, it was the common wisdom that there was no longer any need for discipline. The lessons that the survivors of the Great Depression has learned were simply wrong. Everything they said was crap anyway — they were just doddering old fools who were so out of date that the didn’t even use iPods.
The Boomers became doddering old fools too, in their own eyes, but also in the eyes of the rising Generation-Xers. The Glass-Steagall Act was swept away in 1999, along with hundreds of other tiny regulations and rules that were no longer necessary because they were put into place by doddering old fools.
Example #1: Fannie Mae and Freddie Mac
The Federal National Mortgage Association, nicknamed Fannie Mae, was created in 1938 in reaction to the massive homelessness of the Great Depression, after so many people lost their homes through foreclosure. Its purpose was to make sure that every American family could live the American dream with his own home. In 1968, Fannie Mae was made into a private, shareholder-owned agency, since it was felt that it could make money on its own. However, it still had special privileges as a GSE (government sponsored entity) that made it a virtual monopoly. As a result, Congress created a competitor in 1970 — the Federal Home Mortgage Corporation, nicknamed Freddie Mac.
In the 1970s, housing began to be extremely politicized, with complaints that poor people and blacks were being discriminated against in the housing market. Thus, Democratic party “pro-Black” and “pro-poor” constituencies were demanding easier regulations and easier loans, while Republican party “pro-business” constituencies were slowing things down.
The political paralysis essentially gave Fannie and Freddie the freedom to do anything they wanted. And so they turned to structured financing and hedge fund techniques to fund mortgages. Fannie and Freddie management, with links to the Democratic party, reduced requirements so that they could process a high volume of mortgages, so that they could give themselves fat bonuses.
In 1999, the same year that the Glass-Steagall Act was repealed, many regulatory restraints were removed from Fannie and Freddie. Here’s how it was described in a 1999 article in the NY Times:
“Fannie Mae Eases Credit To Aid Mortgage Lending By STEVEN A. HOLMESIn a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action … will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.
”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.” …
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn….
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites. …
[H]ome ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.”
As we look back over the past 60 years, we can see that financial regulations have been gradually removed over the entire period, through Republican and Democratic administrations. But if I had to pick a particular year when things really began to run off the rails, 1999 would appear to be it.
When the Enron scandal broke in 1991, the public largely blamed Republicans, because oil and energy are Republican “things.” However, the root of the Enron problem was the same kind of structured finance that Fannie and Freddie were using.
Furthermore, after the Enron scandal, Congress passed the Sarbanes-Oxley Act, which provided the most far-reaching reforms of business practices since the 1930s. This act was supposed to make it harder for companies to lie to investors, but as it turned out, it had no effect whatsoever on the breadth and depth of mortgage fraud being pursued by Fannie and Freddie.
Many economists were getting alarmed by Fannie and Freddie, and a March, 2003, speech by William Poole, President of the Federal Reserve Bank of St. Louis, raised an alarm. (This speech gives a detailed history of US housing and mortgage policy since 1918, and is well worth reading in its entirety.)
In his speech, Poole pointed out the following issues:
Fannie and Freddie are required to keep cash on hand equal to less than 3% of their mortgage-related obligations. This is much lower than for government-guaranteed securities dealers in the private sector (5%) and FDIC-insured commercial banks (11%).
Fannie’s and Freddie’s operations are extremely complex and carry high risk. (This reminds me of an interview with Warren Buffett in March, 2008, in which he said that he had examined one CDO mortgage-backed investment, and found it to be so complex that you would have to read and understand 750,000 pages of information to properly evaluate it.)
A sudden period of market instability could bring Fannie and Freddie to a liquidity crisis within a matter of hours.
Poole’s speech contains a very interesting couple of paragraphs discussing “nonquantifiable risks.” As an aside, this entire subject area is very important to generational theory.
“Given the extensive discussion of quantifiable risks, I want to concentrate on the nonquantifiable risks. It helps to make this issue concrete by listing some examples. The failure or near failure of Penn-Central, Continental-Illinois, Long-Term Capital Management, Enron and WorldCom may not have been complete surprises to knowledgeable insiders, but the shocks were certainly “news” to market participants, regulators and the general public. No one predicted the timing of the stock market crash of 1987, or the peak of the equity markets in the spring of 2000. It is well known that even the great Yale economist Irving Fisher was caught completely off guard by the crash of 1929. Surprise legal decisions brought bankruptcy to 52 firms involved with asbestos, to Dow-Corning and to Texaco. Finally, while experts in terrorism may have understood the risks of attacks on U.S. soil, their information was not sufficient to prevent the September 11 attacks; certainly no one else had any basis for predicting the attacks. All of these cases, with the possible exception of Continental-Illinois, reflected nonquantifiable risks.The point here is not to fault the forecasting record of any person or any agency. Rather, it is to illustrate that major unforeseen events that can bring about a collapse in confidence or disruption to the normal function of financial markets without any warning can and do occur with some frequency. The history of the United States, as well as other countries, is replete with such examples.”
On this web site, when I write about “chaotic, unpredictable events,” I’m talking about the same thing that Poole is describing. In generational theory, it’s exactly these events that can trigger not only a financial crisis, but also a major war. However, they do not CAUSE the crisis; they simply TRIGGER a crisis that was going to happen sooner or later anyway.
Things began to heat up in mid-2003 when Freddie Mac disclosed that it had understated past income by as much as $4.5 billion. This was quite alarming, since it proved that Freddie’s operations were indeed so complex that Freddie’s management didn’t even know how much they were earnings. And $4.5 billion is a HUGE error.
All of that laid the groundwork for the political battle.
By September, 2003, the Bush administration proposed additional regulations and oversight for Fannie and Freddie. As reported by a NY Times article, “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.”
However, attempts at reforms were blocked by Democratic politicians, led by Barney Frank. The Times article quotes Frank as saying: “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
If you drill down into this 2003 quote, you can sense the attitude that Boomers (in this case represented by President Bush) are “full of crap.” You can also sense the contempt for and rejection of Silent generation values for fiscal discipline. Ironically, Frank himself is from the Silent generation (born in 1940), but he’s politically aligned himself with the Gen-Xers who are contemptuous of Silent values.
The political paralysis continued as the situation got worse. As the financial system really started falling apart in 2007, Fed Chairman Ben Bernanke delivered a speech calling for regulatory reform of Fannie and Freddie, but once again, the attempts were blocked by groups led by Barney Frank.
The regulatory situation remained unchanged as the international credit crisis began in August, 2007, through the Bear Stearns collapse and other collapses in 2008, until the September collapse of Frannie and Freddie.
I’ve gone into the above details because I want to make a point: There was no time when effective regulation of Fannie and Freddie was even possible.
Today it’s widely viewed that Fannie and Freddie were the major villains in the subprime mortgage crisis, and it’s claimed that if regulators hadn’t fallen down on the job, then the subprime mortgage crisis wouldn’t have occurred. (From the point of view of Generational Dynamics, this is completely untrue; if Fannie and Freddie had never existed, then the financial crisis would have been just as bad, though in a different form.)
So if you believe that more regulation would have made a difference, then please tell me exactly who would have provided that regulation, and at what time?
The toothless SEC couldn’t have done it. The SEC failed to do anything at all about the dot-com bubble, and they were even more pathetic with the Bear Stearns collapse and the Bernard Madoff swindoe, so how could they have done anything about the credit crisis? In fact, once the 1999 deregulations occurred, Democratic opposition would have prevented any regulation from succeeding.
I would stop here, but there’s more to tell.
On December 21, 2008, the NY Times published a major article blaming the entire subprime crisis and the Fannie/Freddie debacle on the Bush administration, barely mentioning the participation of Barney Frank and the Democrats.
The article was a total lie, and the NY Times reporters and editors knew it.
The Bush administration was so taken aback that they issued a statement describing the “most egregious claims,” and listing the large campaign contributions from Fannie and Freddie to leading Democrats, including Senator Chris Dodd, Senate Majority Leader Harry Reid, and House Speaker Nancy Pelosi.
As I’ve written many times on this web log, I’ve been sickened and disgusted over and over again by the widespread fraud, sleaze and deception on the part of high level financiers, politicians, analysts and journalists.
The NY Times article is just one more example of this sickening sleaze. And let’s not forget that the Times published government secrets at the height of the Iraq war and did everything in it’s power to bring about the defeat and humiliation of the United States. The NY Times was once considered to be the most respected newspaper, but today the newspaper so sickens me that it makes me gag to look at it.
The sleaze extends to Barney Frank himself, who is denying any part in the debacle.
A bit of drama occurred in early October, as Barney Frank appeared on the Fox News show hosted by Bill O’Reilly. I personally can barely stand to watch this, but if you’d like to hear O’Reilly and Frank screaming at each other, then watch this video:
As disgusting as Barney Frank is, it’s worth pointing out that O’Reilly himself has exhibited some of the lapses that he accuses Frank of, in particular not taking responsibility for his own failings. As I described in another posting, O’Reilly has been advising his listeners not to panic and sell because “the bottom will soon be reached.” Then he claimed that he doesn’t give investment advice, and that everyone is at fault but him for not seeing the coming crisis. Well, why didn’t he see it? He’s always running various exposés of all kinds of political and financial scams. Why didn’t he ever run an exposé of this one? Like all the other “experts,” he never blames himself. It’s the fault of everyone BUT himself.
And that’s the sleaziest lesson from this sleazy disaster. Not only did each person — journalist, politician, analyst, financier, “liar loan” mortgage applicant — play his part in creating this disaster, but each person was out for himself during the bubble, and is still just out for himself in the current fallout.
Example #2: Bear Stearns
There is no better example of how openly illegal activity on Wall Street was not only was not prosecuted, but was actually condoned and excused by the SEC. There’s no better example of how additional regulations would have been useless.
The first time that Bear Stearns came onto my personal radar screen in the financial crisis was when when I wrote about a court decision in February, 2007, that forced Bear to pay investors $160 million for failing to detect a fraud in one of the hedge funds that it manages.
By June, an incredible and historic event occurred. Bear Stearns was once again forced to use its own money to bail out hedge funds that it was managing. But now it was for a different reason. It was because the hedge funds had invested in mortgage-backed CDO securities that were turning out to be worthless! This was the first major investment debacle from the subprime mortgage crisis.
But why did Bear feel obligated to bail out the hedge funds with its own money? This is the most incredible thing of all: It was because of fear, among Wall Street and regulatory insiders, that if the hedge fund defaulted, then the CDO securities of other hedge funds would have to be “marked to market,” and also shown to be worthless. This would push other hedge funds to fail.
This was the first step is what can only be described as a massive criminal coverup that’s still going on today.
The only reason that Wall Street works as well as it does is because of trust. People trust their money with managers at an investment bank like Bear Stearns because they trust that the managers have done their job in evaluating the investment, and that the managers are telling the truth. And they trust that regulators will catch crooks in time to prevent investors from losing much money.
And it certainly didn’t do the world much good either. Just one month later, in August, 2007, the international credit crisis began, beginning a period when it became almost impossible at times to get any credit whatsoever.
When politicians, analysts, journalists and pundits try to explain what’s going on, they usually say that “people are acting on emotion” or that “people are panicking.” If people acted on the facts instead of emotions, then they would still be willing to invest in these hedge funds and the stock market.
I don’t know why these politicians and journalists can’t figure this out for themselves, but the reason is because the Bear Stearns debacle showed that:
A lot of people on Wall Street were lying.
In some cases, this lying amounted to criminal securities fraud.
And yet, regulators and politicians, including the SEC, didn’t seem to care about this form of securities fraud.
In fact, regulators and politicians regularly encouraged Bear Stearns to continue to lie, to continue to perpetrate criminal securities fraud, by continuing to cover up the real market value of these near-worthless mortgage-backed securities.
Even worse, the Fed became an active part of the cover-up by “printing money” and using it to purchase near-worthless mortgage-backed securities.
And so OF COURSE lenders are going to be afraid to offer credit, and investors are going to be afraid to invest.
During the subprime bubble, the major crooks were never investing their own money anyway. Lenders wrote subprime mortgages, and sold them immediately to investment banks. Fannie and Freddie were the worst offenders. Banks packaged them as securities, and sold those to poor schmucks. Ratings agencies took fat fees and commissions to give AAA ratings to these near-worthless securities. These people were always investing other people’s money, taking fat fees and commissions off the top.
But the Bear debacle made it clear to investors that it was THEIR money that was now at stake, not other people’s money. That’s when the credit crunch began, and that’s when the stock market started crashing, after reaching a high on October 9.
All the lying, fraud and coverups didn’t do Bear any good. On March 14, 2008, Bear Stearns collapsed, though it was saved from bankruptcy by a Fed bailout.
Just two days before Bear’s collapse, CEO Alan Schwarz went on CNBC and other media and declared that Bear was having no problems whatsoever. It was an out and out lie that did Bear absolutely no good, and probably made things worse because it was soon recognized as a lie.
According to the FBI, the managers believed in March 2007 that the funds were in risk of collapse, but lied to investors to keep them from withdrawing cash. The evidence also indicated that that they lied about the level of their own personal investments in the hedge funds. Their cases have not yet gone to trial.
“False rumors can lead to a loss of confidence in our markets. Such loss of confidence can lead to panic selling, which may be further exacerbated by “naked” short selling. As a result, the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price discovery process. If significant financial institutions are involved, this chain of events can threaten disruption of our markets.The events preceding the sale of The Bear Stearns Companies Inc. are illustrative of the market impact of rumors. During the week of March 10, 2008, rumors spread about liquidity problems at Bear Stearns, which eroded investor confidence in the firm. As Bear Stearns’ stock price fell, its counterparties became concerned, and a crisis of confidence occurred late in the week. In particular, counterparties to Bear Stearns were unwilling to make secured funding available to Bear Stearns on customary terms. In light of the potentially systemic consequences of a failure of Bear Stearns, the Federal Reserve took emergency action. …
We intend these and similar actions to provide powerful disincentives to those who might otherwise engage in illegal market manipulation through the dissemination of false rumors and thereby over time to diminish the effect of these activities on our markets. In recent days, however, false rumors have continued to threaten significant market disruption. For example, press reports have described rumors regarding the unwillingness of key counterparties to deal with certain financial institutions. There also have been rumors that financial institutions are facing liquidity problems.
As a result of these recent developments, the Commission has concluded that there now exists a substantial threat of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets.”
What a pathetic agency the SEC has become, publishing garbage like this. The SEC was created in the 1930s. Its purpose was to prevent any new stock market bubble like the 1920s stock market bubble, with the intention of preventing anything like the 1929 stock market crash from ever happening again.
The SEC totally failed to prevent the huge 1990s dot-com stock market, and subsequently failed to prevent the even huger 2000s stock market bubble based on the housing bubble and the credit bubble. Having failed in its principal mission, the SEC is a total failure as an agency, and is now reduced to issuing regulations that border on gibberish.
Example #3: The $50 billion Bernard Madoff swindle
This is being called the biggest Ponzi scheme (or pyramid scheme) in history. Madoff was able to convince thousands of investors to let him invest as much as $50 billion of their money.
And why not? 70 year old Madoff has been a financial manager since 1960. For a while, he was chairman of the Nasdaq Stock Market. He had an unblemished record, and he always provided good returns to his investors.
At some point, he began using one investor’s money to pay off the dividends of other investors. This worked fine, as long as he could use his charm to convince more and more investors to invest more and more money. Ponzi schemes always start falling apart when economic conditions deteriorate, and people start asking for their money back, and that’s what happened to Madoff. In December, he was arrested for fraud.
Analysts are uniform in pointing out that there were numerous red flags that investors should have noticed. Here’s how one blogger, Rick Bookstaber, described the situation:
“Did his investors really believe Madoff was doing split-strike conversions? Given that there were not enough options in the world for Madoff to do such a strategy? And given that no one in the industry heard of him as a player in that market?An alternative view is that the split-strike conversion story is the equivalent of the “it fell off the truck” story for people buying stolen goods; that investors suspected he was involved in illegal front running, and would just as soon not have had that spelled out for them while the money kept flowing in.”
The fact that the signs were so obvious (in retrospect, of course) forms the basis of lawsuits that will go on for years of investors suing their banks and investment firms.
Even worse, several whistleblowers complained to the SEC about Madoff, and the SEC conducted three investigations of Madoff, the latest one in 2007, and always gave him a clean bill of health.
According to one news report I heard, one of the whistleblowers pointed out that Madoff’s results were mathematically impossible for the reason given in the above quote — that there were not enough options in the world for Madoff to have succeeded. (I can just imagine what must have happened. The whistleblower was probably a Boomer or Silent, and the Gen-Xers at the SEC decided that he was full of crap, and so they ignored his warnings.)
One truly remarkable outcome of the Madoff scandal was that it was so huge that the SEC was unable to avoid being blamed for it. That fact alone makes this a historic moment.
Christopher Cox, chairman of the Securities and Exchange Commission, said that he was “gravely concerned by the apparent multiple failures over at least a decade” and that he had ordered “full and immediate review of the past allegations regarding Mr Madoff and his firm and the reasons they were not found credible”.
I have little doubt that this “full and immediate review” will find that the SEC was completely guilt-free. It’ll be interesting to see who else gets blamed instead.
In terms of public policy, this example shows the folly of current efforts to change regulations. Almost every aspect of Madoff’s business already violated numerous regulations and laws. The problem is that there was no will to enforce these regulations in an “anything goes” bubble atmosphere where everyone was making money. The existing regulators were considered to be extinct fossils put in place by the doddering old fools from the Depression era.
That’s why you can never use laws or regulations to defeat generational cycles:
When a new regulation is put into effect, it’s seldom really needed, it’s to correct a behavior uncovered by the recent previous crisis.
Thus, the new regulation just reflects the lessons learned from the recent crisis, and everyone is avoiding that behavior anyway, so the regulation has no effect.
As young generations replace the survivor generations, the regulation becomes ignored or repealed, because the new generations assume that it applies only to old fossils.
That’s not to say that regulations shouldn’t be tried. But no one should believe that regulations can defeat the generational cycle. There were plenty of regulations implemented in the 1930s, but by the time they became important, they were ignored or repealed.
Example #4: Thomson Reuters and earnings estimates
As regular readers of this web site know, for the last few quarters I’ve been posting the table of S&P 500 average corporate earnings growth estimates, based on figures from CNBC Earnings Central supplied by Thomson Reuters. These tables have shown sharp falls in corporate earnings estimates growth from week to week.
Here is the latest table of these earnings estimates for the fourth quarter of 2008:
Date 4Q Earnings growth estimate as of that date
------- -------------------------------------------
Feb 6: 50.0%
Jul 1: 59.3% Start of previous (3rd) quarter
Oct 1: 46.7% Start of quarter
Dec 5: 10.0%
Dec 12: 5.9%
Dec 19: 0.5%
Dec 26: -0.9% End of quarter
As you can see, earnings growth estimates were extremely high at the start of the quarter, and investors depended on those earnings estimates to make their investment decisions.
As the quarter went on, earnings estimates continued to fall, and investors who had trusted CNBC and Thomson Reuters’ earnings estimates lost a great deal of money.
The point I want to make is that this is the fifth quarter in which this has happened. Here’s the similar table for the third quarter:
Date 3Q Earnings growth estimate as of that date
------- -------------------------------------------
Mar 3: 25.0%
Apr 1: 17.3% Start of previous (2nd) quarter
Jul 1: 12.6% Start of quarter
Sep 5: 0.8%
Sep 12: -1.6%
Sep 19: -0.3%
Sep 26: -1.7% End of quarter
Oct 3: -4.8%
Oct 10: -7.8%
Oct 17: -9.1%
Oct 24: -11.0%
Oct 30: -23.8%
Nov 7: -13.9%
Nov 14: -18.4%
Nov 21: -18.5%
Nov 28: -18.7%
What we’re seeing is a familiar pattern: The earnings growth estimates are 20% to 50% at the beginning of the quarter, but fall to -20% to -25% by the time actual earnings come in. Exactly the same kind of pattern that has happened five quarters in a row.
My question is this: When can we start to assume that CNBC and Thomson Reuters are committing securities fraud, misleading investors by repeatedly publishing unrealistically high earnings growth estimates?
After all the sleaze, fraud and deception that’s already occurred as a matter of standard practice for the last few years, as I’ve documented in detail in this article, why on earth should we ever assume that CNBC and Thomson Reuters are committing fraud as well.
I know for a fact that CNBC has a policy of not reporting “bad news,” for fear of losing sponsors. I’ve commented and given examples many times, and I’ve heard anchors on the air make offhand comments to that effect. And if Moody’s could give phony AAA for near-worthless securities, in exchange for fat fees and commissions from the banks issuing the securities, then it’s natural to assume that Thomson Reuters is knowingly issuing phony realistic earnings estimates in return for fat fees and commissions from their clients.
This is something that at the very least deserves an investigation by the press or by the regulators.
The same earnings estimates have turned out to be wrong for five quarters in a row. Thomson Reuters would have to be total morons not to have noticed this. “Fool me once, shame on you; fool me twice, shame on me!” Well, CNBC and Thomson Reuters were “fooled” five times. If it turns out that they didn’t do enough due diligence — or that they looked the other way — because they didn’t want to lose their fat commission and fee checks from the companies they were reporting on, then it’s securities fraud, and they should go to jail.
This should be investigated, but of course it won’t be. Why? Because the sleaze, the dishonesty, the fraud extends from the financial firms to the press and the regulators. The same Boomers and Gen-Xers who destroyed the world’s financial system are still in place, and still committing fraud on the public and investors.
A flood of corruption
What you’re seeing, Dear Reader, is part of a flood of swindles and fraud that will be exposed in the next couple of years.
There was a great deal of embezzlement and fraud leading to the Great Depression of the 1930s. I’ve quoted this passage a few times before, but it’s worth posting again. John Kenneth Galbraith described what happened — and what will happen again — in his 1954 book, The Great Crash – 1929, as follows:
“In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in — or more precisely not in — the country’s businesses and banks. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who ned more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.The stock market boom and the ensuing crash caused a traumatic exaggeration of these normal relationships. To the normal needs for money, for home, family and dissipation, was added, during the boom, the new and overwhelming requirement for funds to play the market or to meet margin calls. Money was exceptionally plentiful. People were also exceptionally trusting. A bank president who was himself trusting Kreuger, Hopson, and Insull was obviously unlikely to suspect his lifelong friend the cashier. In the late twenties the bezzle grew apace.
Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed. Most important, the collapse in stock values made irredeemable the position of the employee who had embezzled to play the market. He now confessed.
After the first week or so of the crash, reports of defaulting employees were a daily occurrence. They were far more common than the suicides. On some days comparatively brief accounts occupied a column or more in the Times. The amounts were large and small, and they were reported from far and wide. …
Each week during the autumn more such unfortunates were reveled in their misery. Most of them were small men who had taken a flier in the market and then become more deeply involved. Later they had more impressive companions. It was the crash, and the subsequent ruthless contraction of values which, in the end, exposed the speculation by Kreuger, Hopson, and Insull with the moey of other people. Should the American economy ever achieve permanent full employment and prosperity, firms should look well to their auditors. One of the uses of depression is the exposure of what auditors fail to find. Bagehot once observed: “Every great crisis reveals the excessive speculations of many houses which no one before suspected.” [pp. 132-35]
Galbraith’s point was that there were many criminal activities going on before the 1929 crash, but nobody cared, as long as everyone was making money. But once the crash occurred, any irregularity was viewed with suspicion and led to an investigation. These investigations turned up many cases of embezzlement — people who had “temporarily borrowed” money that wasn’t theirs to invest in the stock market, and then got caught in the crash.
That’s happening again. If you’re one of the people who have committed embezzlement or fraud, then it’s time to put your affairs in order, because you’re going to get caught. A lot of others will be caught as well.
One of the most vivid historical examples of what’s going on today is the bankruptcy of the French Monarchy in 1789 that led to the French Revolution. In the Reign of Terror that followed, any person who was an aristocrat, a relative of an aristocrat, a friend of an aristocrat, a servant of an aristocrat, or even had a resemblance to an aristocrat, would be tried and quickly convicted and sentenced to the guillotine, where his head would quickly and efficientily be severed from the rest of his body.
As I’ve said before, if you’re an economics expert, journalist, investment broker, mortgage lender, analyst, regulator, pundit or politician whom the public decides is blameworthy for the major coming crisis, then I suggest that you’d better have your underground bunker picked out, because people are going to be coming after you, and the guillotine is going to seem mild compared to the punishment that they’re going to want to inflict on you.
The expectations for 2009
The stories that I’ve told in this article are so incredible that they’re too unbelievable for a novel. I guess that’s what the phrase “stranger than fiction” means.
The following has become one of my favorite quotes:
“Insanity in individuals is something rare – but in groups, parties, nations and epochs, it is the rule.” — Friedrich Nietzsche
I used to think this was a joke, but after the last few years, I realize that it’s the horrible truth.
The expectations for the Obama administration are almost beyond belief. I made a list of some of the things I heard and read on CNBC and on the web over a period of a couple of days:
“I think most of us are going to bid a fond farewell to 2008. I feel certain that 2009 will be a better year.”
“After January 20, things will change. Banks will start lending again. The new administration will raise spirits.”
“Financial stocks are so beaten down that they really snap back after they reach bottom.”
“Energy stocks are poised for rapid growth when things return to normal.”
“Obama’s stimulus package will stimulate growth across the entire economy.”
“Banks don’t want to make a loan right now – they don’t want to show loans on the books to investors — that attitude will change after the new year.”
“It will get better – we’ve seen this before – in the early 90s – I don’t know how long it’s going to last this time – in your business, just keep trying to offer the quality of service – and just survive it.”
“Looking for a rally in 2nd week in January.”
“There’ll be a change in sentiment after the new year.”
“Obama’s honeymoon rally will catch fire.”
“The recession has already lasted a year — it’s the anniversary — our forecast is for a long recession – 18-20 months.”
“We’ve seen a lot of panic selling, and historically, panic selling is a good time to buy.”
“You have to separate the economy from the stock market. The economy will do poorly, but the stock market will do well. Look at past history: In the early 1980s, unemployment was high, interest rates were high, but the stock market did well.”
“Things will return to normal soon, and then we’ll have a new bull market.”
“When things return to normal, the credit markets and leveraged buyouts will return, full speed ahead.”
“Even the gloomiest prognosticator, Nouriel Roubini, is expecting a recovery at the end of 2009.”
“My money has to work for me.”
“For the last couple of months, investors have been going on emotions rather than facts; we have to to educate investors to get back to making investment decisions on the basis of facts.”
The last one is the funniest, but all of them illustrate the insane expectations that people have after the January 20 inauguration.
The outlook for 2009
As I’ve said many, many times, starting in 2002, from the point of view of Generational Dynamics, if you go back through history, there are many small or regional recessions. But since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash.
These are called “generational crashes” because they occur every 70-80 years, just as the generation of people who lived through the last one have all disappeared, and the younger generations have resumed the same dangerous credit securitization practices that led to the previous generational crash. After each of these generational crashes, the survivors impose new rules or laws to make sure that it never happens again. As soon as those survivors are dead, the new generations ignore the rules, thinking that they’re just for “old people,” and a new generational crash occurs.
It’s now been 80 years since the last generational panic and crash, so we’re overdue for the next one. A generational panic and crash is an elemental force of nature, where millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, and not having believed it was even possible, suddenly try to sell everything in a mass panic. This will bring down computer systems for hours, perhaps even for a day or two, as people watch tv in glazed horror as their life savings disappear.
What we’ve seen in this article and in other articles describing the historical generational crashes is that they’re all characterized by massive generational fraud and deception, and an almost total lack of morals and ethics.
We’ve seen how the lethal combination of Boomers and Gen-Xers caused this fraud and deception. But these people haven’t changed. It now makes sense to ask the question of what these same people will be doing in the next year, as they continue the pattern of massive generational fraud and deception.
In a little over two weeks, America will be inaugurating Barack Obama as President. Obama is a Gen-Xer who believes that Boomers and Silents are full of crap. He will be leading a cabinet and an administration of Gen-Xers and Boomers — exactly the lethal combination that’s already destroyed the world’s financial system.
Obama himself spent years as a “community organizer,” a job that views the government’s biggest sin as refusing to spend as much money as possible on poor people, and that any kind of fiscal discipline is “ideological.”
The public expects Obama to spend any amount of money necessary to heal the economic crisis. Obama and his advisers have done everything possible to encourage that view. All I ever hear from Obama and his advisers is that high unemployment “is unacceptable,” and that “as much money as necessary will be spent” to reverse the situation.
Sooooo, we’re going to be giving almost a trillion dollars to a group of Gen-Xers and Boomers with contempt for Silent and Boomer values. This is a disaster of almost unimaginable proportions in the making.
The election of Obama has not repealed the Law of Mean Reversion. Nor will Obama’s Democratic party Congress be able to repeal the Law of Mean Reversion, even if it were to try.
Therefore, since the stock market has been far overpriced since 1995, as I described in “How to compute the ‘real value’ of the stock market,” and since the Law of Mean Reversion still applies, there must still a stock market crash in store. And with a trillion dollar “stimulus package” at hand, the crash is bound to be worse than anyone ever imagined.
Government attempts to “get credit moving again” will fail. The credit contraction (deflation) will continue even as governments and central banks do everything within the law (and even some outside) to encourage hyperinflation
Crumbling corporate earnings as consumer psychology moves away from the “gotta have it now” mentality to “it can wait until next year”
Municipal and State bankruptcies requiring federal bailouts in the US
Skyrocketing unemployment. Official figures to reach 9% or higher in the US.
Worldwide social unrest or even war as currency collapses, unemployment and falling asset prices shake people’s faith in their governments and scapegoats are made of traditional enemies
Plummeting stock markets worldwide with losses of 50% or more in major indices as hype over President Obama wanes
A wave of bankruptcies in retail, restaurants, airlines and financial services. Nationalization of the politically well-connected
A continued strength in the US Dollar vs most other major currencies as European infighting escalates
Declines in the price of gold but continued relative outperformance to other assets and most currencies
Large declines for Canadian real estate, notably in bubble areas of the west and prairies
Social “witch hunts” for those responsible for the common plight. Multiple scandals uncovered. Persecution and enormous tax increases on the extremely wealthy
An increased focus on the family, on close friends and “time” in general
This is a great summary of many of the detailed changes that will accompany the generational panic and crash, although unfortunately he’s too optimistic.
Most people are hoping that 2009 will be a better year than 2008. Generational Dynamics predicts that that hope is in vain.
P.S.: Shortly before I finished up this article, I heard on Bloomberg TV that President-elect Obama’s “fiscal stimulus” program will cost $1.3 trillion, up from $600-700 billion. Apparently the amount is doubling every 2-3 weeks. Dear Reader, we are headed for a disaster of unimaginable proportions.
(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.)
India’s Prime Minister Singh formally accuses Pakistan re Mumbai terrorist attacks
It’s one thing when a low-level official makes an accusation, and it’s quite another when the head of one government accuses another government of complicity in a terrorist attack.
“There is enough evidence to show that, given the sophistication and military precision of the attack it must have had the support of some official agencies in Pakistan.”
He added that Pakistan uses terrorism as an “instrument of state policy.”
From the point of view of Generational Dynamics, it’s surprising to see Singh being so explicitly accusatory, since he’s a survivor of the country’s last crisis war, the bloody, genocidal war that followed Partition in 1947, creating the nations of India and Pakistan.
Typically, the survivors of a crisis war, who are in the “Artist” generational archetype (like our Silent Generation), are much more conciliatory. Singh is no young kid who would simply shoot off his mouth. Singh must believe that this announcement was politically necessary to satisfy the Indian populace, especially with elections coming up soon.
By contrast, Pakistan’s president, Asif Ali Zardari, is a “young kid,” born in 1955, in the generation born after the 1947 war ended. He was thrust into the presidency when his wife, Benazir Bhutto, was assassinated, and is clearly in over his head, as he tries to deal with a recalcitrant army, with terrorist acts by Islamists around his own country, and with the new accusations by the Indian Prime Minister.
When Pervez Musharraf was President, the two leaders were able to work together to produce a détente that lasted for several years. Both leaders were in the generations that survived the 1947 war; Musharraf fled from the Delhi region to what is now Pakistan, and Singh fled from the Punjab region of Pakistan to India. Their shared memories allowed them to negotiate their détente, and their experience gave them the credibility to get their people to accept the détente. Nothing like that is true with Singh and Zardari.
If we look at the situation ethnically, it appears even more dangerous. Zardari is Sindh, with the Shia Muslim religion, and Shia Muslims have historically been allied with Indians of Hindu religion. On the other hand, the “élite” of Pakistan is Punjab, with the Sunni Muslim religion. And so it’s quite possible that the “official agencies in Pakistan” that Singh referred to are controlled by Punjabs with little respect for Zardari, and Singh’s accusations open the speculation that these agencies went around Zardari and aided in the Mumbai terrorism without Zardari even knowing.
Well, whatever the truth and speculation are, what is undeniable is that Prime Minister Singh’s direct accusation of Pakistan significantly raises the level of confrontation between India and Pakistan, and things are being said that can’t easily be taken back.
What we’re seeing is similar to the situations in Gaza and Sri Lanka that I described recently. Those regions are already deep into a war, while the India/Pakistan situation is earlier on the crisis war timeline. But what is true of all three is that each side in each of the conflicts is becoming increasingly aggressive and confrontational, evoking greater confrontation in response.
From the point of view of Generational Dynamics, a re-fighting of the massively genocidal war following the 1947 Partition is coming with absolute certainty. Both India and Pakistan are becoming increasingly polarized between moderate and extremist groups, and this polarization extends to Afghanistan, where Nato and American forces are slowly but surely being drawn deeper into the conflict.
(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Afghanistan, Pakistan and India thread of the Generational Dynamics forum.)(7-Jan-2009)
While we often discuss how much immigration and race contribute to crime, we only rarely consider their effect on our system of criminal justice. [VDARE.com Note: But see the work of the equally anonymous "Anonymous Attorney" on VDARE.com] It is a question that did not occur to me until recently when I had the opportunity to serve on an American grand jury.
The grand jury is one of the least understood features of our legal system—even though the practice dates back to medieval England. Indeed, despite the popularity of the American courtroom drama, I know of not a single film or television show that has ever depicted a grand jury in action.
Briefly, a typical grand jury consists of 16 to 23 citizens who serve for three hours a day over several weeks. Their civic duty is to indict or dismiss capital crimes and felonies, and basically act as a check on the enormous power of the government to prosecute its citizens.
Here’s how it works: A prosecutor enters the grand jury room and informs the jurors of the indictments he seeks against an accused person. He then calls in witnesses one-by-one and questions them about the alleged crime. (This can include the defendant, if he chooses to testify).
Individual jurors are then allowed to submit questions to the prosecutor who repeats them aloud for the witness. When the entire testimony is over, the prosecutor informs the jurors of how the law applies to the case, then leaves the room. The grand jurors deliberate in secret, then vote.
A grand jury is distinct from a trial jury in that it only charges individuals with crimes. Once indicted, the defendant then receives a jury trial to determine his guilt or innocence…at least in theory.
“Remember, this is not a trial,” prosecutors kept reminding us. That idea lets grand jurors off the hook quite a bit. It gives jurors the sense that, “Well, this isn’t a conviction, just a charge, so the rest gets sorted out during the trial.”
The prosecutors never told us that most grand jury indictments actually end in a plea bargain—and this includes 95% of federal indictments. A grand jury trial, therefore, is the closest thing many defendants will ever have to a genuine jury trial.
Moreover, the burden of proof for a grand jury indictment is only “probable cause“, which is certainly lower than the trial standard of “beyond a reasonable doubt.”
There is no judge present during grand jury proceedings, and the prosecutor remains the sole legal authority for the jurors. In fact, in the federal grand jury, a defendant cannot even have an attorney present while testifying.
Many state grand juries, however, do allow defendants to testify with an attorney present and even to call witnesses to testify on their behalf. But on both the state and federal level, the defense cannot cross examine witnesses. Worse, all grand jury proceedings deny a defendant his constitutional right to face his accuser.
As for the composition of the grand jury, the standard policy of most court jurisdictions is to make grand juries as ethnically diverse as possible.
In other words, grand jury service is a form of forced integration. The vast majority of people have never spent a day, never mind several weeks, closely cooperating with people of different races. But I served on a jury that consisted of a handful of whites like myself, and a mixture of blacks, Hispanics, and Asians, including several immigrants—a modern day jury of my “peers”.
The damage immigration has done to our justice system is most obvious during witness testimony. We heard immigrant witnesses testify in several languages, including Spanish, Turkish, Portuguese, and Haitian Creole.
The difficulty is that it is nearly impossible to gauge the authenticity of a witness when he testifies through a court-certified interpreter. It’s like relying on a story second-hand. Even the prosecutors seemed to struggle with this problem.
When it’s the grand jurors’ opportunity to question an immigrant witness, we had to whisper our question to the prosecutor, who then repeated the question aloud to the interpreter. The interpreter then translated the question for the witness, who then answered back in his native language. The interpreter then translates the defendant’s response back into English for the grand jury.
Sound confusing? It was. And boring, very boring.
It is obviously important to pay attention during court testimony because someone’s liberty is at stake. But most every juror yawns through testimony translated by an interpreter. One black juror never looked up from his Gameboy every time an immigrant witness testified through an interpreter.
Things didn’t get much better during jury deliberations, because some of the grand jurors spoke such poor English. Many of us simply could not understand some of the arguments the immigrant jurors were trying to make.
They also demonstrated a poor grasp of the American legal system. For example, I had to explain the concepts of “innocent until proven guilty“ and “burden of proof“ to one Latino woman several times. But she was flummoxed by the difference between “probable cause” and “beyond a reasonable doubt”.
“What do you mean, probable?” the woman kept saying. “He looks guilty to me.”
Don’t get me wrong. The immigrant jurors all seemed like nice people. But even when I did understand them, it was often clear that they did not really comprehend the facts of the case they had just heard. One Chinese juror never said a single word during the entire grand jury session. He also resisted my attempts to engage him in conversation so I was never able to verify his English competency.
On the other hand, my experience with American black jurors was notably positive. Perhaps surprisingly. I was aware of the notorious reluctance of black jurors to convict black defendants, no matter the strength of the case, and even if the arresting officer is black. So, during deliberations, whenever any black juror began to wring his hands over racial profiling, I immediately forced him to defend his accusations.
“Have you ever been pulled over by a black officer? What then was his motive?”
“Does it surprise you that when someone dresses like a hoodlum that the police might suspect him of being one?”
The black jurors were stunned to see a white person force them to defend their racial talking points. But did this make them dislike me? At first, perhaps. But I eventually seemed to develop a great rapport with them, and a few of us even went out for drinks one night after jury duty (We still keep in touch).
American Renaissance’sJared Taylor has found that when he speaks to audiences about racial differences in IQ, that the black audience members are often much more open to the subject than people give them credit for. One reason for their receptivity to Taylor is his courage to speak honestly to them. Many blacks take such racial candor as a sign of respect, which it is. Blacks have no respect for whites who ingratiate themselves to them, which they view as a form of weakness, quite rightly.
The other whites in the room, having seen my racial self-assurance, felt more confident to vote and deliberate as they honestly saw fit.
The black jurors also had a natural distrust of law enforcement that I came to see as not entirely unhealthy. They were willing to indict when guilt was glaringly obvious, but in most cases the prosecutor had to work extra hard to persuade them. We had several cases that were simply absurd and that we rightly dismissed. During those deliberations, the black jurors were my most reliable allies.
In contrast, the Hispanic jurors often seemed to gain satisfaction from indicting, even if the defendants were Hispanic (which they often were). They also had little appreciation for civil liberties.
For example, a grand jury hears a lot of “Buy & Bust“ cases. A Buy & Bust occurs when an undercover police officer poses as a drug buyer. The officer approaches a drug dealer on the street, negotiates a sale, and then arrests him afterwards.
I once asked a prosecutor why this practice did not qualify as entrapment (as Paul Craig Roberts has argued). But one Hispanic juror could not understand my concern for civil liberties.
“The guy is guilty”, he said to me during deliberations. “Who cares how they got him?”
Still, despite such constitutional obtusity, it was obvious that grand jury service was a healthy assimilative experience for these immigrant jurors. It gave them the genuine feeling of being a citizen—in short, of being an American.
Surely this kind of civic participation would be impossible in their home countries. I asked one Mexican juror how justice works in Mexico.
“Trial by judge, Man”, he told me, shaking his head. “If the judge doesn’t like you, you go to jail”.
In the end, I think most everyone found grand jury duty to be a positive experience. Many jurors had difficulty saying goodbye to each other on our final day of service.
However, the experience still left me discouraged, and for one simple reason.
I keep wondering what would happen to me if by chance I ever found myself on the witness stand—pleading my case before a group of people so very unlike myself. Would they even understand me? Or worse, would some of the jurors be predisposed against me because of my race?
This, remember, is a problem that will only get worse.
If an Obama Amnesty passes during the next four years, we could have several million foreign-born citizens added to the jury pool.
“The time for talk has ended, only course of action open to us is WAR!”
"The time for talk has ended, only course of action open to us is WAR!"
The essential American soul is hard, isolate, stoic, and a killer. It has never yet melted. — D.H. Lawrence
Ayers’ Plan to Kill 25 Million Americans
Larry Grathwol, Weathermen, William Ayers, Communism, History
line
“The most effective informer the F.B.I. ever placed among the Weathermen” (NY Times) Larry Grathwol describes how William Ayers and other Weather Underground leaders cheerfully planned to deliver the United States to foreign occupation, and proposed to murder 25 million Americans.
Grathwohl: I brought up the subject of what’s going to happen after we take over the government. You know, we become responsible for administrating, you know, 250 million people. And there was no answer. No one had given any thought to economics. How are you going to clothe and feed these people? The only thing that I could get was that they expected that the Cubans, the North Vietnamese, the Chinese and the Russians would all want to occupy different portions of the United States. They also believed that their immediate responsibility would be to protect against what they called the counter-revolution. And they felt that this counter-revolution could best be guarded against by creating and establishing re-education in the Southwest where we would take all of the people who needed to be re‑educated into the new way of thinking and teach them how things were going to be. I asked, “Well, what is going to happen to those people that we can’t re‑educate, that are die-hard capitalists?” And the reply was that they’d have to be eliminated and when I pursued this further, they estimated that they’d have to eliminate 25 million people in these re‑education centers. And when I say eliminate, I mean kill 25 million people. I want you to imagine sitting in a room with 25 people, most of whom have graduate degrees from Columbia and other well-known educational centers and hear them figuring out the logistics for the elimination of 25 million people and they were dead serious.
2:20 video
Hat tip to Confederate Yankee.
By JDZ
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Ayers’ Plan to Kill 25 Million Americans « Locust blog
[...] Ayers’ Plan to Kill 25 Million Americans [...]
06 Nov 2008 um 9:16 pm
black Locust
Bring it on! WE WILL FIGHT YOU, WE HAVE BEEN MAKING BOMBS AND BUYING LEGAL AND ILLEGAL WEAPONS FOR YEARS, AND WHEN THE TIME COMES MY FELLOW PATRIOTS AND MYSELF, WE WILL TAKE TO THE STREETS, YOU WILL HAVE TO KILL US TO TAKE THIS NATION, BRING IT!!
06 Nov 2008 um 9:20 pm
‘Man is a mammal and subject to the same biological laws as other animals. All animals, including Man, have inheritable behavioural traits. The concept of complete environmental plasticity of human intelligence is a nonsensical wishful-thinking illusion.’
The Financial collapse has its roots in the Minority Community
http://inverted-world.com/
http://michaelsavage.wnd.com/
http://vdare.com/
http://amren.com/
Banks in Majority White Midwest Doing Fine
I just came across this post at Brett Steenbarger’s stock trading blog Traderfeed. Steenbarger recently looked up bank ratings and found that there were some banks in America doing perfectly well.
There’s a story that the financial media is missing entirely, and it’s about the segment of the banking system that is working just fine. These are not the largest banks, and—for the most part—they don’t operate in the largest markets. Rather, they tend to be located in small towns that have seen neither boom nor bust in real estate markets. They did not involve themselves in subprime lending, and they did not make large real estate construction and development loans. They have never involved themselves in trading in derivatives; they take in deposits, make prudent loans, and stick to what they know best: the needs of their communities.
Those who make peaceful change impossible make violent change inevitable. --John F Kennedy
The tree of liberty is nourished by the blood of patriots and tyrants. That is its natural manure. --Thomas Jefferson
Introductory comment: I have been trying to write the present essay for some time. It is written as a sort of supplement to an earlier essay, The Militia Solution, currently posted in the Our Fight section of my website, www.thebirdman.org, which was intended to address the question of how it is possible to stop the outrageous abuses of the government in Washington which have been going on for some years and which are rapidly bringing the American nation to an end. The conclusion of that essay was that the only way to do this would likely involve violence, and that patriots should organize into militias to attain the skills and the contacts that would make violent action possible should it become necessary. Unfortunately, The Militia Solution omitted consideration of certain important questions, and perhaps for this reason did not produce any detectable reaction of the type I had hoped for. Accordingly, I have decided to revisit the issue in hopes of providing better guidance for what I believe must be done if this nation is to survive in any form resembling what the Founders intended, particularly because at the time of this writing we appear to be on the brink of war, and the claim of 'necessity' produced by wartime conditions is just the excuse which the government needs -- and likely will use -- to fasten the final fetters of totalitarianism onto its citizens, and especially onto dissenters such as myself. As Doctor Johnson so famously remarked, "When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully."
To begin, let us look at where we stand now.
Ethnic Logic
Simple Ethnic Logic, Anti-Jew=Anti-White, Anti-American=Anti-White, Raise Taxes=Anti-White, Pro-illegal immigration=Anti-White, Very easy, if its bad for white people it must be good for the world.
"What Every Christian Should Know About Islam". "Only communism rivals Islam in sheer numbers of people persecuted and killed."
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How well a nonwhite majority will perform economically in America 2042?
How well a nonwhite majority will perform economically in America 2042?
Fortunately, we already have a gigantic test case: California, which is now only 43 percent non-Hispanic white.
So what can we learn about the future of America from California, where the state government may run out of money next month without a federal bailout?
For most of this decade, the financial wizards poured hundreds of billions of dollars into mortgage-backed securities originating in California. In other words, they made a colossal bet on diversity.
And lost.
It turned out that, while California’s new diverse population could certainly consume and speculate like old-fashioned white Americans, they couldn’t produce like them.
