Dumbfuck Of The Year

They grow 'em stoopid in Tin-ass-cy:

SO HERE’S A QUESTION: Would a default on Treasuries accomplish what the Balanced Budget Amendment was supposed to achieve, by forcing the government to spend no more than it takes in?

I dunno, Glenn...would shoving a stick in your ass make you smarter than wood?

Bruce Bartlett goes over the reasons this latest moronic trope floated by the Right Wing Talking Trash Elmo doll won't work.

1. The Treasury can never default on the debt
[...]
2. Even if the Treasury somehow defaulted—that is, failed to make a timely interest payment—it would not achieve what Reynolds and other conservatives wish: an end to all federal borrowing and de facto imposition of a balanced budget by cutting all spending in excess of revenues.
[...]
3. The disruption to financial markets, commerce and the well-being of all Americans from a Treasury default are really beyond my ability to fully describe. But here are a few points to ponder. Interest rates would skyrocket to unprecedented levels, which would cause a collapse of private borrowing and massive capital losses for all bond holders, which include pension funds, insurance companies and foreign central banks, among others. It might be impossible for pension funds to make payments to millions of individuals depending on them for life itself.
[...]

...Bartlett goes onto mention that the cost of borrowing for the United States would skyrocket, since our Treasuries are back by "the full faith and credit" of the US government, which of course would default as quickly as the bonds.

Reynolds, of course, backpedals in the face of such an exhaustive and detailed analysis of what one can only hope was an opiate nightmate.

But since this has become a fairly common trope among the chattering monkeys on the right wing porch as it ties in neatly with the Teabaggers and the Paulists, you need to be aware of it.

First off, we've already been through a dry run of an American bankruptcy: the stagflation of the late 1970s, early 1980s, caused in large part by the OPEC nations holding the rest of the world hostage: de facto, we were operationally bankrupt as a nation.

How? When the Fed tried to loosen up the economy, there was no proportionate increase in economic activity. The money went to oil. This created an inflationary spiral and next thing you know, we've raised interest rates (the prime reached not only double digits, but approached 20%, a rate usually associated with third world military juntas).

Which only served to dampen down the economy.

By the way, we are currently in the middle of yet another stagflationary period. Oil, again, played a large part in it. Remember $5 a gallon gas? It wasn't that long ago.

Odd, considering we had two oil men running the country at the time it kicked off.

Monetary policy hasn't worked this time, either, as the money supply was pretty much dried up going in, due to low interest rates and the availability of cheap mortgages drying up investable cash reserves.

But I digress into territory not suited for a blog devoted to snarcasm.

Too, defaulting on national obligations is not like going to bankruptcy court because you can't pay your mortgage anymore. China (which has started dumping Treasuries, so beware) isn't about to accept pennies on the dollar in exchange for a clean bill of health.

We will be forced to pay it back in some form or other. If you don't believe me, just think of how we've bullied and badgered third world nations to repay their debts to us, funds that could have been used to improve infrastructure, or for economic development.

You'll note the Bushies only got involved because they wanted Iraqi war debts forgiven, and Iraq sits on the second largest oil reserve in the world.

If anything, defaulting on American treasuries would force even more spending on domestic social programs, while forcing the United States to cut back on its defense programs.

Hm. Maybe it's not such a bad idea, after all!

Cut The Losses

This headline is perhaps the scariest business headline of the past six months:

May 6 (Bloomberg) -- Regulators have determined that Bank of America Corp. requires about $34 billion in new capital, the largest need among the 19 biggest U.S. banks subjected to stress tests, said a person with knowledge of the matter. Bank of America fell 9 percent in trading before U.S. exchanges opened.

Citigroup Inc.’s shortfall is more limited because the company already plans to convert government preferred shares to common stock, people familiar with the results said. JPMorgan Chase & Co. doesn’t need a deeper reserve against losses, according to people familiar with that company’s result.

The banks may outline their strategies to add capital, or in other cases buy out government stakes, after the Federal Reserve publishes the stress tests results tomorrow. Companies requiring more capital could raise all the funds through conversions of preferred shares if they choose, the people said.

Sources I've spoken to who have some limited knowledge of the results of the stress tests tell me that roughly half the banks tested will need further bailouts, but BofA is the largest eyesore on the horizon.

Mr. President, Chairman Bernanke, Secretary Geithner, the time has come for triage. Bank of America, for example, has already benefitted from bailouts to the tune of $45 billion dollars. It's clear that it cannot possibly raise another $35 billion on its own, it will rely heavily on government help.

And other banks similarly positioned will be chomping at the bit for a handout. It is time to look at a guided bankruptcy, similar to the one Chrysler filed last week and GM will likely file before long.

This will mean, in the case of BofA, writing off the $45 billion dollars. Better to take the hit now, and work out an arrangement with the new owner of Bank of America for an equity stake over a longer term than anticipated.

Bank of America is a singular case in this instance. Had it not been greedy and purchased Merrill Lynch (at the complicit urging of the Bush administration, we should point out), it likely would have survived its earlier greedy decisions to consolidate the purchases of MBNA, Fleet Bank, US Trust, and its most questionable purchase, Countrywide Financial, just ahead of the sub-prime mortgage crisis of which Countrywide was a, if not the, main player.

It's one thing when a bank gets its clothes dirty playing in the mud of securitized debt obligations and unhedged risk plays. It's another when a bank goes out of its way to collide with the earth.

Or to put it in a clearer idiom, it's one thing to get behind the wheel when you've had a beer, quite another to get behind the wheel drunk and carrying a six pack to consume on the way.

My sense is that Bank of America needs to be reorganized and then recapitalized with a different charter. Indeed, perhaps we ought to rethink the entire banking industry so that there is some safe place for the average American to put his money.

The Rest Of The Iceberg

It should come as no surprise to anyone who's read my pieces for even as little as a year that the real economic crisis is still to come: credit card debt:

“The administration — which scheduled the meeting at the request of some issuers — has promised to address credit card practices that Summers recently blamed for coaxing consumers ‘into paying extraordinarily high rates that they wouldn't have paid if they knew what they were getting themselves into.’”

The trouble is this. People ran up their credit cards, secure in two pieces of information. First, they could always get a home equity loan to pay off the credit cards, which would also allow them to deduct mortgage interest. Second, the price of houses would always go up, so there would always be more room to refinance the house, and gather in more cash to pay off bigger credit card balances.

Keep in mind that a lot of the problem with the mortgage industry was that people who simply shouldn't have had mortgages got mortgages because banks wanted to throw money at them.

Why? It's not just the interest income, you see, but the fees a bank can charge. Late with a payment? We'll tack on $50. Missed a payment? That's $100.

And then they tightened the rules about when a payment was late and when it was missed. It used to be, if your payment was postmarked before the due date (like when you file your taxes, still) you were presumed to have made a payment to an agent of the company (e.g. the post office).

Now, payments have to physically be received in the office of the lender, and usually by some arbitrary time (say, 2 PM). Doesn't matter if your payment is in the office, so long as they haven't recorded it, they didn't receive it.

You can imagine what that's created.

And that was mortgages. For credit cards, it gets even worse.

A decade or so ago, I held a Fleet Bank Mastercard. I had a really nice rate, 4.9%, and made payments faithfully. One day, I dunno, it was raining or maybe we had a blackout, anyway, my payment was delayed in the mail and was late.

My 4.9% rate climbed up to 26.99%! Now, I was lucky. I had a good record, good credit history, and was able to point out it was a one time occurence, so they dropped my rate. The only reason I noticed it, to be honest, was that on my next statement the late payment fee was charged and as I was disputing that, I looked at the rate information.

Now, banks can do that to me even if my payment record is perfect. Even if ALL my payments to all my cards and on all my loans is perfect.

How? I could be late paying my phone bill. Or electricity. Or cable, even.

Here's a pro economic tip: when a bank starts tacking on fees like there's a sale on them, you can bet your boots that sector of their business is hurting badly. Which means credit card defaults are alarming the hell out of the guys in the pinstriped suits.

There's roughly $1 trillion in credit card debt out there. There's $6.5 trillion or so of mortgage debt.

The rub is, the $6.5 trillion is secured by a house. A piece of property. Something of value. The total losses if every loan collapsed might be something on the order of $500 billion (assuming all the houses eventually get sold).

That $1 trillion in credit card debt is unsecured. If every credit card suddenly became a bad debt, that's a trillion bucks out the door.

You see the problem, I'm sure. In fact, credit cards are even riskier than mortgages because every and any damned fool was offered one, even college kids.

The banks will not give this up easily, and certainly not without a fight.

Run, Bank, Run!

Many of you are familiar with bank runs only from the movie "It's A Wonderful Life," a particularly syrupy little piece of treacle your parents made you watch a billion times as a kid around Christmas:So George Bailey dips into his own pocket and rescues his bank with his honeymoon money.

Yea, that would happen. But bank runs were a significantly contributing factor to the Great Depression, which is why that scene had to be put in the movie.

Which brings us to today. Despite the attempts at reassurance by the central banks of both American and European governments that the sub-prime lending crisis is contained, there are many who are not getting the message, and rightfully so. It is NOT contained, and banks are working feverishly behind the scenes to put out this wildfire before it spreads.

The defaults on subprime mortgages and the subsequent defaults on securities that are derived from those shaky, questionable loans, will mean less liquidity for some major institutions in the world. Less liquidity, less cash, and suckers people like you and me who deposited money with these institutions stand to lose our investments.

Thus, today's story has some very ominous overtones:

LONDON (Reuters) - Fears grew on Saturday that panic among savers at British bank Northern Rock will see a run of withdrawals after reports that 1 billion pounds ($2.01 billion) had already been taken out.

The Bank of England stepped in on Friday to rescue Northern Rock, Britain's fifth-biggest mortgage provider, pledging to provide emergency funds after a global credit crunch hit the bank's ability to raise cash in money markets.

Saturday's Financial Times said customers had withdrawn 1 billion pounds on Friday, or about 4 percent of deposits.

Citing a source familiar with the situation, the paper said a quarter of that amount was withdrawn from branches and more via the Web site, despite problems accessing online accounts.

It will be impossible to even gauge the impact of this run for some days. The fact that people can electronically move their money out means they can't even easily stop the flow or limit it. Northern Rock could go bone dry on Monday, and no one would know until Wednesday.

And this is after the Bank of England has stepped in to do a George Bailey!

Bank runs have their own unique momentum, fueled by rumour and truth in a volatile mixture. The conservatives have played this paranoia for their own benefit for seven years now, and I suspect we're about to see it blowback big time on them. Just try to stop Americans from withdrawing money, and you'll realize that all those terror rumours and anti-liberal, anti-human, anti-gay, anti-immigrant ghost stories took their toll on our psyches.

This won't be the last bank run, nor will it be the worst. And this depression could be worse than anything we've ever seen.

Money. Money, Money, Money Moneyyyyyy!

Sorry, gang, it's Sunday, I know, and hardly the day you want to think about mooney and markets and economics...hell, my hangover has me hating writing this more than you hate reading it.

But it's important:

Global central banks, including the European Central Bank and the Bank of Japan, added more than $300 billion of extra cash to the banking system over the last 48 hours to stabilize credit markets.

"Central banks like the Fed and ECB are adding liquidity, and that has done a lot to calm the markets," said Rafael Martorell, chief dealer at BNP Paribas in New York.

That helped U.S. stocks recover from an early plunge, sending currency traders rushing to sell their newly acquired yen.

Recently, the Japanese currency has slipped when equity markets rose because investors could borrow in low-yielding yen to finance purchases of other risky assets. When stocks slid, the yen firmed as investors unwound those carry trades and bought back yen.

The Dow was down nearly two hundred points Friday morning, even after the Fed injected $19 billion. When that barely bumped it up to a hundred point loss, the Fed funneled another $16 billion. That made the markets go into positive ground, briefly, and it took an additional $3 billion to keep them about flat for the day.

$38 billion. About the cost of the Iraq invasion for a month and a half.

Shove it, Bush, seriously. This isn't the only news of the week that should be deeply tied (literally) to Bush's psychotic obsession with warmongering. The heavy price we've paid to secure perhaps ten percent of the known oil reserves could have basically bought us 25% of them without any military intervention whatsoever. Oh, but then there's the Republican obsession with not signing international treaties to contend with, but let's face facts: a trillion dollars buys a lot of goodwill.

Back to the stock markets. The Fed will have exhausted its ability to intervene in the markets probably by Wednesday. My guess is Bernake spent much of the weekend on the phone with the banks who control the Federal Reserve with his hat in hand, trying to find bail out money. All it will take is one banker to say no, and the entire house of cards collapses by Tuesday.

Why is this happening?

Two words: housing woes. Last year, 46% of home sales returned to the seller less than five percent equity. Since most mortgage require at least that much in a down payment, 46% of Americans either lost money or barely got back their down payment in selling a house.

I'd estimate maybe another 30% got back between 5 and 10% in equity, so about 3/4 of Americans who sold a house last year broke even. Maybe. It might be much much higher.

People have financed this recent economic growth, as feeble as its been, on their credit cards and home equity loans. Now, there will be no more home equity loans and credit card growth.

And you know who will be bailed out? Not the home owners, but the banks, who will keep lending money faster and faster and just get deeper and deeper in debt. Meanwhile, watch as people try to file bankruptcy only to find out that they can't, that they'll have to pay back each and every penny they borrowed...

A Novel Approach

One thing I value in my quest to seek the office of NotPresident (see sidebar to the right to make campaign contributions) is novel ideas to solve stubborn or impopsing problems. As you are no doubt aware, I've put you to sleep bored you to tears spent many days talking about mortgage defaults and the plight of the middle and working classes who are loaded up with debt and have very shaky incomes to pay them off with.

So when the latest Democracy Journal was delivered to my inbox this week, I found an amazingly simple idea from Elizabeth Warren, the nation's premier expert on middle class bankruptcies: a Financial Products Safety Commission

I t is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner. Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?

The difference between the two markets is regulation. Although considered an epithet in Washington since Ronald Reagan swept into the White House, the "R-word" supports a booming market in tangible consumer goods. Nearly every product sold in America has passed basic safety regulations well in advance of reaching store shelves. Credit products, by comparison, are regulated by a tattered patchwork of federal and state laws that have failed to adapt to changing markets. Moreover, thanks to effective regulation, innovation in the market for physical products has led to more safety and cutting-edge features. By comparison, innovation in financial products has produced incomprehensible terms and sharp practices that have left families at the mercy of those who write the contracts.

Sharp practices such as raising your interest rate on one credit card because you were a day late on another one, and raising it to some usurious rate of near 25%, only because some states in the nation allow that (most do not, but it's based on the state where the card company operates. Hullo, South Dakota!).

Why do people go into debt? Basically, debt is an advance on your income, with the promise to pay it back over time. Usually, you do this when you need to buy something, like a house or a car, that will last a long time and costs a lot of money.

But credit is also a trap, more so for people who get addicted to the feeling of wealth one gets from being flush with cash and able to buy things.

Consumers can enter the market to buy physical products confident that they won’t be tricked into buying exploding toasters and other unreasonably dangerous products. They can concentrate their shopping efforts in other directions, helping to drive a competitive market that keeps costs low and encourages innovation in convenience, durability, and style. Consumers entering the market to buy financial products should enjoy the same protection. Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, we need the same for consumers of financial products – a new regulatory regime, and even a new regulatory body, to protect consumers who use credit cards, home mortgages, car loans, and a host of other products. The time has come to put scaremongering to rest and to recognize that regulation can often support and advance efficient and more dynamic markets.

Isn't my credit rating at least as important as the fact that my house might burn down from a faulty toaster?

Particularly given the recent changes to the bankruptcy law that make it less likely that a consumer will ever be discharged from his debts if he gets in too deep over his head, this proposal is now more vital than ever. Things are only going to get worse for people as banks compete harder in a tighter mortgage and credit market for consumer dollars.

Americans are drowning in debt. One in four families say they are worried about how they will pay their credit card bills this month. Nearly half of all credit card holders have missed payments in the past year, and an additional 2.1 million families missed at least one mortgage payment. Last year, 1.2 million families lost their homes in foreclosure, and another 1.5 million families are likely headed into mortgage foreclosure this year.

Families’ troubles are compounded by substantial changes in the credit market that have made debt instruments far riskier for consumers than they were a generation ago. The effective deregulation of interest rates, coupled with innovations in credit charges (e.g., teaser rates, negative amortization, increased use of fees, cross-default clauses, penalty interest rates, and two-cycle billing), have turned ordinary credit transactions into devilishly complex financial undertakings. Aggressive marketing, almost nonexistent in the 1970s, compounds the difficulty, shaping consumer demand in unexpected and costly directions. And yet consumer capacity–measured both by available time and expertise–has not expanded to meet the demands of a changing credit marketplace. Instead, consumers sign on to credit products with only a vague understanding of the terms.

Indeed. To most of us, the language in a credit card agreement may as well be Sanskrit, for all we understand of it. The Schumer box, which is supposed to summarize the rates included in the agreement in plain English, can't possibly cover all the contingencies that are spoken about in the small print in which those rates may change.

Will this proposal ever see the light of day? I doubt it, without a concerted effort on the part of consumers and advocacy groups. Banks and other financial institutions make enormous contributions to politicians of both parties, precisely to keep regulations as lax as possible.

But something needs to be done and soon. Consumer debt to the United States is as big a problem as global warming is to the planet: it could cause the entire meltdown and collapse of the US economy, which is run on the fuel of consumer spending. For sure, the economy is going to take massive hits over the next several years as the mortgage market contracts, which will create opportunities for the fleecing of Americans, both legally and fraudulently, by legitimate financial concerns and, to put it politely, shady lenders and Nigerian princes whose money is trapped in Lagos.

It currently costs the American consumer $89 billion just to make the interest payments and fees on credit card debt. That doesn't include auto loans and mortgages, you'll notice. That's money that could be spent on shoes, books, clothing and laundry. Pretty essential stuff, and I chose those because they rank only slightly higher, in toto, than credit card servicing costs to the average Amerian family.

Yet, most people can tell you who makes quality clothes and shoes, or writes books worth reading.

We need an agency, not to protect Americans from falling into bankruptcy, that would be way too hard to do, but to help Americans understand what they are getting themselves into long before they get into trouble. Loan and credit language is deliberately obtuse, and that's the equivalent of putting rat poison into a teddy bear.

And poison is precisely what this language is designed to sugar-coat, or at least obscure. Most card companies will do as they damned well please, no matter how much you beg or complain, and the legal recourses you have are usually stacked in the lenders favor. You can't take them to court, you have to go to an arbiter that they get to choose. And so on.

I could go on, but Ms. Warren states the case more plainly than I could. What troubles me most about this is, its such an obvious solution to a pressing problem that it should be getting much more attention than some backwater webjournal and blog.

Spread the word, folks. We need this. Now.