June 27, 2007
by John Galt
CNBC News, Friday June 22, 2007: Bear Sterns has some interest in the assets of one faltering hedge fund but the other one is receiving bids as low as 10 cents on the dollar.
CNBC News, Friday June 22, 2007: Brookstreet, an Irvine, CA brokerage has shuttered it's doors after becoming illiquid and unable to continue operations. Over 650 independent brokers were laid off. The brokerage failed due to the collapse of it's investments in derivatives based on CMO's (CollateralizedMortgage Obligations).
For the last 6 months, with the blessed ignorance of our financial mainstream media and the world press, the United States has entered into what I once called "reverse leverage" or the withdrawal of credit availability to the markets. This excess credit and "liquidity" was slowly being cut off and quietly, so the excessive expansionism in risky investments and inflation could be cut off at the pass. Well, as usual, the Federal Reserve was a day late and a dollar short. Too many people look at the Fed Funds Rate of 5.25% and assume that that is the only method they undertake to insure the flow of liquidity and credit remains constant. They also operate by manipulating other government instruments and banking operations to do the same and have been draining the excess credit from the markets in a quiet fashion.
The scary part of this operation is that while they did this, the real estate market took the long predicted swoon as I've been saying it would. The excess speculation, just like the dot-bomb fiasco, could not and has not had a happy ending. Now, as we move into the "summer buying season" after the "spring buying season", the realization that the real estate market has not bottomed (duh) and that the computer generated bankster toys known as hedge funds and derivatives are starting to implode. The Bear Sterns fiasco is nothing but the tip of the iceberg. The crisis is just a hint. And the following is something that everyone had best pay attention to, or ignore at your own risk.
The relaxation of laws implemented after the 1929 Stock Market Crash and Great Depression which restricted the investment activities of the banksters was considered a great feat by those in political and economic power. The theory was that by enabling the banks to play at the casino with the customer's money (here on referred to as "OPM" or "Other People's Money") and restructuring the bankruptcy laws to eliminate the millions of dollars in losses from that consumer loophole (their term, not mine), the stability in the system would allow for them to participate in the exotic investments, generate higher returns and therefore continue to expand capital investment domestically and overseas.
Whoops.
Blood, meet Turnip
Well, the theory of forcing everyone to keep the banks afloat, by either denying the avenue of bankruptcy or guarantees from the U.S. government is quite sound. This theory all but guaranteed that no matter the activity, legal or not, would result in a positive or zero net loss return for the banksters. When you're playing with OPM, you don't care if you're making money or not, but if you can generate a nice nine percent return and increase the fee structure on the customers you deserve a bonus and pay scale some 400 percent more than the lowest employee's salary as a CEO and CFO. This is all sound as long as there is a desire to gamble by every participant in world financial markets. The first hint that "we have a problem Houston" happened in Thailand and Iceland, yet was ignored.
Whoops again.
The theory was violated though when the bellwether states of Florida, Texas, California and Arizona disrupted the real estate boom by "gasp" guess what gang? That's right, giving mortgages to unqualified individuals to simply move the product based on the assumption that natural wage inflation would keep pace with any increases in commodity and monetary inflation in the system. Unfortunately for Wall Street and the banksters, the monetary inflation game outpaced their desire to create bigger and bigger Ponzi schemes, as if four hundred and twenty trillion dollars was not enough, and the implosion started much more rapidly than they could ever imagine. The illegal aliens actually had the nerve to just walk out of the houses they purchased with their no document loans for hundreds of thousands of dollars and leave a mess behind financially not just for the banksters, but for the poor souls who Social Security numbers they stole. While they made the payments on time and in full, every
thing was great. But as the economy started to slow and fruit pickers and janitors needed thirty dollars per hour to keep up with the payments, well, what did they care. They never had their income verified anyways. So as the banksters started to see that the illegals walked away from their "gift" from the American financial community (what ingrates!), then they found out that the poor and lower middle class could not afford monthly payment increases of eight hundred dollars more a month when their pay only increased seventy-five dollars a month. Sheesh. Cut back on the Velveeta people and make those property tax, insurance and mortgage payments.
Don't bother eating, take one for the Wall Street folks won't you?
As you can see, the decline in subprime was considered an inevitability by many of us, but that is just the tip of the proverbial iceberg. The question was never asked as to what happened when China bailed on our debt, being the bankster of last resort and all that, and forced an increase in interest rates and making life basically miserable for Helicopter Ben and the minions at the Fed. The Pirates of the Caribbean could not buy any more because Ben took their VISA card away and all of the sudden the concept of buying worthless paper from a bankrupt nation did not seem so thrilling to the world. This is not the first time in history this has happened, but it will be the most devastating.
Be sure, we will never default. We might sing. We might dance. We might even print more (yes even more) digidollars so the Fed can buy our own debt which seems like a suicidal mission but heck, someone has to do it.
Inflate or Die
That will be our future, a dim, dire wheelbarrow laden America where your magnetic stripe will reveal that your pay has not increased yet a gallon of milk went up another $2.00 today to bring the price to $197.50 per gallon. You laugh, you chuckle, you say it can not happen. It is happening in Zimbabwe. And you're about to move there. Just remember one important thing as the economy shudders, shakes and unwind:
The downward, or deflationary slope of a hyperinflationary explosion is much more devastating than the hyperinflationary ascension.
Welcome to the United Zimbabwean States of America.
Pssst, buddy; can I borrow your wheelbarrow to buy a pack of cigarettes? I don't have a credit or debit card and have to pay in cash............