Tuesday, November 13, 2012 - Roll With It

Roll With It

by Sinclair Noe

DOW – 58 = 12,756
SPX – 5 = 1374
NAS – 20 = 2883
10 YR YLD -.02 = 1.59%
OIL -.20 = 85.37
GOLD – 3.90 = 1725.90
SILV +.08 = 32.60

Both sides in the "fiscal cliff" debate stood their ground today as they gathered in Washington for the first time since the elections. It's a high stakes game of chicken. The White House made clear it was ready to negotiate with Republicans on taxes and spending, but a spokesman for President Obama said he will not budge on insisting that the wealthy's tax rates must rise in 2013. The president wants to extend low individual income tax rates beyond year's end for 98 percent of Americans. On the Senate floor, Republican Leader Mitch McConnell said his party was open to discussing new government revenues, but not raising tax rates.

Groups concerned with protecting entitlements such as Social Security and Medicare are finding themselves at odds over whether an overarching fiscal deal during Congress’s end-of-year session would help or hurt their cause. A “grand bargain” to prevent the year-end onset of tax hikes and spending cuts “could cut Social Security, Medicare and Medicaid benefits, all to give tax cuts to the wealthiest Americans.” I seriously doubt Republicans have the clout, following the elections, to make a full-on attack against the entitlement programs. In fact, it seems the only one who could attack the social safety net programs is President Obama.

He may have been convinced by Wall Street that it is necessary to begin to unravel the safety net in order to save it. But the result would be to declare open season on the safety net by legitimizing the claims that the safety net is unsustainable and harms the nation. Wall Street's greatest frustration is that they have been unable to unravel or discredit the safety net. Wall Street's unholy grail is privatizing Social Security.

Wall Street salivates at the prospect of any privatization of social security. This would be the Mississippi River of cash flow. This would lead to them being able to charge tens of billions of dollars in fees annually. The banks that administered the privatized program would be Too Big to Fail; the new term is SIFI, or "systemically important financial institution." If privatization takes place, these SIFIs would not just be a threat to the financial system but to the very fabric of the country because the consequences of allowing bank failures to cause tens of millions of Americans to lose their retirement savings would require either that all such deposits be federally insured or that the failing banks be bailed out by the federal government. Privatization, therefore, is a convenient fiction. The banks' profits will be private; any catastrophic losses will be borne by the public. We've seen this story before, and it didn't end well.

There is either going to be a big betrayal or a big showdown on the horizon. We've seen that story before; it happened in 2011 with the debt ceiling debacle; we survived that one because they kicked the can down the road; it happened twice in the 1990's and the government was shut down for a while; we survived those. This might turn into a big battle; let's roll.

This story is still playing out in Europe. The latest news from the Euro-group meeting is euro-zone finance ministers agreeing to extend Greece’s fiscal adjustment period by two years but deciding to put off until next week final decisions on the disbursement of the next Greek bailout tranche and the method to make the country’s debt sustainable.

Apparently, the Grand Plan in Europe is to make debt sustainable, not to eliminate debt, not to build a righteous circle of growth and prosperity, but rather sustainable debt. Just enough debt to make sure millions of people faced with desperation will keep paying the debt and won't take desperate measures in retaliation.

Meanwhile, German Chancellor Angela Merkel visited Portugal where the mood has darkened. Portugal faces a general strike on Friday and the government there might be losing its resolve for deepening austerity.

Spain's largest banks say they've agreed to a 2-year freeze on evictions of homeowners in extreme financial need. The decision by the Spanish banking association followed the suicides of two homeowners facing eviction and a subsequent public uproar. Public uproar in Spain is probably one of the most under-reported stories of the year. Spaniards take to the streets, and there have been rallies of more than one million people. You don't hear about that because, well, they wouldn't want you to get any bright ideas.

Societies in a credit based world tend to favor rules that protect the debtor - the risk is always there of 1-2% of the population going mad and making debt peons out of everybody else. This is the great social evil everybody was afraid of throughout history — people would fall so deeply in debt they'd sell their wives, their children and themselves into slavery. The American situation isn't that different, we just rent ourselves out instead of selling ourselves into slavery - the ancient Greeks would not have noticed that much of a difference. So they set up some mechanism to make sure things didn't go crazy and everything broke down and one of these mechanisms was jubilee. The Mesopotamians used to do this, they'd say "ok, all debts are canceled, all the debt peons go home." In the Bible it was a fixed rule, every 7 years and every 49 years. And nothing bad happened, the economy kept right on growing.

Here's a bright idea. Banks sell debt for pennies on the dollar on a shadowy speculative market of debt buyers who then turn around and try to collect the full amount from debtors. Some of the tactics of debt collectors are downright ruthless, the phone calls can be full-on harassment, sometimes they try going through the courts; there have been examples of people who don't pay a utility bill; the debt is sold off; the debt collectors place a lien on the home and there have been people who lose their homes for an unpaid utility bill. If you have never had an unpleasant experience with a debt collector, consider yourself lucky because most people have. There may be an answer, and it is coming from the Occupy movement. Yep, they're still out there. The idea is called The Rolling Jubilee, and they intervene by buying debt, keeping it out of the hands of collectors, and then abolishing it.

Rolling Jubilee has already raised $115,000 — which they say is enough money to buy and cancel more than $2.3 million of debt. If you want to find out more or even donate, the website is strikedebt.org. Here's how they explain it: As individuals, families, and communities, most of us are drowning in debt to Wall Street for the basic things things we need to live, like housing, education, and health care. Even those of us who do not have personal debt are affected by predatory lending. Our essential public services are cut because our cities and towns are held hostage by the same big banks that have been bailed out by our government in recent years.

Now, they don't buy out any one individual's specific debt, instead they buy up pools of debt, usually more than a few months delinquent, and then they just forgive the debt. There are no tax consequences. The Rolling Jubilee will earn no income from the lending of money and is therefore exempt from filing a Form 1099-C under the Internal Revenue Code Section 6050P. You do not have income from canceled debt if the cancellation or forgiveness of the debt is a gift. What’s more, Strike Debt won’t report the cancellation to the IRS, and the debtor will probably not know that their debt has been forgiven. Given all that, the chances of the IRS coming after the debtor for income tax on the forgiven debt are exactly zero.

Strike Debt is trying to build what it calls “a growing collective resistance to the debt system” — and this exercise is part of what you might consider a broad politically-motivated deleveraging, a way of taking power back from the creditor classes. The scheme isn't conceptually perfect: as Strike Debt themselves say, the very fact that they can buy up debt for pennies on the dollar in the first place is “part of the scandal that we are trying to highlight”, and yet it’s also something they are ratifying with their participation.  At some point, the Rolling Jubilee will likely end up paying banks for debts which aren't legitimate at all: indeed, if they’re looking for the debt which trades at the lowest levels on the pennies-per-dollar market, they’re likely to be buying the most dubious debts.

For instance, it’s alleged that Chase systematically shredded incoming correspondence such as records of borrower payments and counter-judgments extinguishing debts, before selling those debts on to collectors. Just at Chase alone, it's estimated that billions of dollars of outstanding claims have highly questionable legitimacy. Of course, the banks know that some percentage of their loans will go bad, and, especially in the case of credit card debt, they will often have made a net profit on the account long before they sell off the dregs for 5 cents on the dollar. But even if the banks aren't being hurt at all, it might put a dent in the debt collection business, and that is a start.