December, Thursday 01, 2011

DOW – 25 = 12020
SPX – 2 = 1244
NAS + 5 = 2626
10 YR YLD +.05 = 2.12%
OIL - .37 = 99.98
GOLD – 4.10 = 1746.30
SILV - .10 = 32.83
PLAT + 5.00 = 1565.00

Today was a fairly quiet day in the financial markets; I guess that is to be expected the day after the central banks saved the world! With 24 hours to reflect, the world didn’t look particularly saved. Europe still looked like Europe. The head of the European Central Bank says the ECB stands ready to act more aggressively to fight Europe’s debt crisis; that script hasn’t changed in two years.

Europe’s political leaders will meet next week to work on tighter budgets for the euro zone. They’ve been holding meetings next week for the past couple of years.

The ECB can’t legally act as a lender of last resort, so the idea du jour  is to force individual countries’ central banks to make contributions to the International Monetary Fund and the IMF will serve as lender of last resort.

Germany wants the European Commission to grant it power to veto other nations’ budgets; in other words, they want to hold a gun to the head of their euro zone partners; this is a business model that has not worked well in Europe. And I don’t know how it could work now. Is fiscal integration meant to involve some kind of democratic political control of fiscal policy? If so, one can only wonder what sort of voting scheme can be invented to give the thrifty euro zone members a permanent overwhelming majority? 

So, the new and improved plan seems to be renaming the actors on the stage and printing huge sums of fiat currency to bail out bankers who behaved badly, which is essentially the same script used in 2008, but with subtitles. You may remember the play in 2008 was a surreal farce. A minor variation comes to us from Greece where the script was re-written to a tragedy. The Greeks are having another one-day general strike. They appear upset with the idea of a lifetime of indebtedness and servitude to the financial gods.

If it all sounds hopelessly entangled and thoroughly unfixable, then you have a firm grasp of the obvious – but there will be valiant efforts. And the implosion will not happen today. I don’t expect a quick or easy solution to the dilemma, but I don’t expect the governments of the world will allow Europe to implode. Over the past 100 years, too many people shed too much blood to prevent Europe from sliding into chaos; it won’t be allowed to happen because the Greeks and Italians fell behind on their bills, or because the Germans are intractable.

Could it all fall apart tomorrow? Yes, it could but that is not the correct bet. The more accurate bet is that money will be thrown at the problems; there will be plenty of not-quite-satisfying resolutions, and lots of inflationary pressures in opposition to the deflationary forces of the ongoing global depression. The better question is whether we will follow the script from 3 years ago? If we do, then the governments of the world can throw a gazillion trillion dollars or euros at the problem and ultimately, not tomorrow but ultimately Europe and the US economies will all implode.

For 150 years - during the creation of the greatest economy the world had ever seen - finance was not a critical sector. After the Great Depression, banking was quite tightly regulated in the United States and served entrepreneurs and business very well. From the 1970's it changed dramatically. The banks became bigger, were able to take on more risk, and then were able to blow themselves up.

In a fiat money system with a central bank, if market participants believe they will be backstopped, you will get bad decision-making. And who gets bailed out? Well, beyond the  obvious buddies of Bernanke and Paulson and Geithner, of course? But mainly it was the too-big-to-fail banks. There was a great fear that if the mega banks failed, the world would end. Today, in Europe, the banking sector is a much bigger part of GDP than it was in the USSA 3 years ago.

If we don’t learn from our mistakes of 3 years ago, if we don’t break up the mega banks – we will see an ultimate, inevitable implosion. That’s what too big to fail means; we have to bail out the bankers because they are so big that their failure would result in widespread economic collapse.

There should be a hard size-cap on the size of banks relative to the economy. For example, bank total assets cannot be more than of 4% of GDP. For banks that engage in more risky activity - for example investment banks - the cap would be 2%. This has been done in other industries in the past. For example, after Standard Oil was broken up, most of the parts went on to be very successful. If a mega-bank is broken up, the smaller parts would likely be successful, and if some smaller parts fail – so what? We must all be responsible for our own actions – even bankers. The goal is no more bailouts under any circumstances.

Capitalism requires failure. Without failure, the worst actors game the system so that they are able to thrive. In the process, they deprive honest entrepreneurs of opportunities that make a capitalist economy stronger and more resilient.

So, in the European crisis, we walk a fine line – trying to avoid a collapse in an economic system that requires failure.

Unfortunately, the system we have now is not capitalism – it is something else, something that have been corrupted and gamed to the point where institutions are incentivized to direct more money and effort to lobbying for political protection, and less to competing harder and smarter. That is on display in Scottsdale Arizona this week.  The American legislative Exchange Council is schmoozing with legislators, many who were granted their travel and accommodations to attend the ALEC event.

What’s the purpose? According to ALEC statistics, their task forces have, “considered, written and approved hundreds of model bills on a wide range of issues, model legislation that will frame the debate today and far into the future. Each year, close to 1,000 bills, based at least in part on ALEC Model Legislation, are introduced in the states. Of these, an average of 20 percent become law.” In other words, ALEC, working on behalf of their corporate benefactors, writes the law of the land. In Arizona, ALEC’s corporate benefactors have put nearly $16.6 million into state campaigns since 2001. and they get results, Arizona passed 19 of the 36 ALEC model bills that were introduced in the legislature in 2010.

It’s not exactly democracy and it sure ain’t capitalism. I’m not quite sure what to call it – other than an irresistible force. Look, I’m just one little voice drifting on the desert winds. Yes, I’d like to imagine I have the courage to stand in front of a tank in Tiannemen Square, but let’s be realistic. Resistance is futile. So I went over to the Westin Keirland Resort and signed up for some model legislation of my own. And let me tell you, those guys are efficient.

I’m proud to announce the passage of Arizona S.B. 1510, whereby all legal citizens of the state of Arizona shall be required to tune all functioning AM radios to 1510 kilohertz during the 4PM hour. Any violation of this requirement shall result in a fine of not less than $5 dollars, and not more than $10 dollars for a first offense.

Now the folks at ALEC said they could write the law so that I could collect more than $10 dollars for each violation, but I like to think I’m a magnanimous kind of guy – and besides, it is the holiday season. I realize times are tough and you’re all gonna need a little extra cash this time of year…, because you still got to pay those bankers their bonuses.

The housing market has been getting hammered for at least five years, and for the past couple of years the 50 states’ attorneys general have been trying to negotiate a settlement with the big lenders over deceptive lending and foreclosures processes. The big banks have been stalling, perhaps hoping to outlast the statute of limitations for their misdeeds. Clearly the banks have been unwilling to pay for their violations, refused to accept culpability, demanded immunity, as well as broad relief from MERS related issues. .

 California dropped out of the settlement talks back in September. Today, the Massachusetts Attorney General sued five big banks charging they illegally foreclosed on homes and used deceptive lending practices. The lawsuit names Bank of America, JPMorgan, Citigroup, Wells Fargo, GMAC (now Ally) and MERS.  

The suit seeks accountability for violations in the foreclosure process, including robosiging, initiating foreclosures when they were not entitled to do so, the use of MERS (both a violation of land records requirements and what amounts to unjust enrichment via failure to pay local recording fees) and deceptive practices in foreclosure. The AG stressed how the banks didn’t care about the impact of their actions on borrowers and communities, and engaged in the same sort of reckless conduct as they did in predatory mortgage lending.

According to the October Mortgage Monitor prepared by servicer LPS, mortgage delinquencies are down from the January 2010 peak, but foreclosure inventories hit all all time high of 4.29% of all active mortgages in October. The average days delinquent for loans in foreclosure extended to a new record of 631 days since last payment. A total of 6.3 million loans were delinquent or in foreclosure in October.

Did you see that story on 60 minutes, a couple of weeks back – claiming how the politicians had finally found something they could agree on – filling up their own wallets because they were privy to inside information. Congress is finally looking at passing a bill aimed at Congressional insider trading. Unfortunately, the bill prohibits insider trading by members of Congress only if the member not only personally trades on the basis of such information but also tips the information to "another person" with intent to aid that other person to use the information to trade for personal profit. Got that?  The Congress member can trade on insider info – just can’t share that info with you or me. It would not apply in the converse situation in which somebody gives a member of Congress information with intent to assist the member to trade!

I got to figure out a new name here – it’s not democracy, it’s not capitalism – it’s some other sort of “ism”

Silver will be gone within 9 years, and the price will increase 5 fold

1 year gold 1388 to 1745

silver in 10 year has gone from 4.47 to