How to Avoid Another Depression
"Great Depression" is a strong term, but what exactly does it mean? Depressions are a normal part of a business cycle that are now often called recessions, downturns, or corrections. They occur in any economy where the financial markets are based on fractional-reserve banking.
Depressions only become "great" when normal to severe depressions are used as excuses for massive increases in government intervention. Murray Rothbard's America's Great Depression clearly demonstrates this phenomenon. The three great depressions in the history of the United States are the Progressive Era (1907–1922), the Great Depression (1929–1945), and the Great Stagflation (1970–1982).
The year 2008 marks the beginning of the next recession, correction, or depression. All the statistical indicators are pointing in that direction. All market indicators point in that direction as well. Ask any noneconomist and you will get that same answer. We only have to wait for the folks at the National Bureau of Economic Research to officially confirm what we already know.
The reason for the depression is the bust in the housing market — we all know that too. Austrians reported on the housing bubble throughout the boom. Beginning in early 2003, Frank Shostak, Christopher Meyer, Lew Rockwell, Robert Blumen, Jeff Scott of Wells Fargo Bank, and others, including this author, were writing and lecturing about the housing bubble. We identified the cause of the bubble as the Federal Reserve and its inevitable consequences of a bust in the housing market and the overall economy.
Homebuilder stocks peaked in mid-2005 and it's been like watching a train wreck in slow motion ever since. When the overall stock market peaked one year ago we could finally celebrate the beginning of the correction phase of the business cycle even though most of us suspected it would be a severe one. Several mortgage dealers went bankrupt in 2007 and the increased number of foreclosures signaled that the correction was finally under way.
By late 2007 there were definite signs of major corrective forces acting in financial markets. However, whenever such corrections seemed to be ready to take place they were circumvented by government intervention. On December 12, 2007, the Fed announced the Term Auction Facility which would auction reserves at the Discount Window for a "broader range of counterparties" and against a "broader range of collateral" than open-market operations and without identifying the borrowers. This was the first extraordinary intervention.
Then in March, Paulson and Bernanke orchestrated the weekend purchase of Bear Sterns by J.P. Morgan, providing Morgan with a $30 billion, ten-year loan. This certainly was an extraordinary intervention. It also helped set a pattern of intervention that sends exactly the wrong signals to the market. Government officials at the Fed, Treasury, and elsewhere have been telling us that everything is fine in the economy and then, when bad economic news is announced, they claim that "it's not as bad as we anticipated." Then, when markets react to this misinformation, government comes in with some massive bailout in the form of a brand new, extraordinary intervention.
In July, Secretary Paulson told Congress that he saw no need for additional legislation to address problems at Fannie and Freddie and then, less than one week later, he announced that the Treasury would "backstop" the two megamortgage lenders. This essentially reversed what Treasury secretaries have been saying for decades, that they do not stand behind or guarantee the securities and debts and obligations of these government-sponsored entities.
Now an even more radical step by the Treasury has essentially nationalized Fannie and Freddie. Of course this does not help troubled homeowners or prospective buyers. It does not help homebuilders. Essentially, it hurts all those people because it puts them as taxpayers at risk for several trillion dollars in potential losses.
Most commentators think this takeover of Fannie and Freddie was the right thing to do: unfortunate, but necessary to prevent a financial crisis. This is all wrongheaded. It might delay a financial crisis, but it only makes the overall economic crisis even worse. History has well demonstrated that government intervention only lengthens the economic crisis and increases its overall cost. Just ask the Japanese about their experience.
Given the extraordinary nature of interventions that have been taken so far and the precedents that have been set, we have all the makings of the next great depression...
Saturday, September 13, 2008
Ludwig von Mises Inst.: How to Avoid Another Depression
Friday, September 12, 2008
The 'Japanification' of Wall Street
The ‘Japanification’ of Wall Street
Some old Tokyo hands have that creeping feeling of déjà vu when they look across the Pacific at events in the US.
The unfolding crises at Lehman Brothers, Washington Mutual – and before, , at Bear Stearns — have some eerily familiar patterns that evoke those days when Japan’s banks seemed physically incapable of calling a bad loan a “bad loan”, when absurd schemes were hatched in the belief they would reassure investors; and when the dead hand of Japanese bureaucracy seemed to be move silently, ninja-like, behind every financial crisis.
Of course there are always dangers in drawing parallels, not least because ultimately, no two situations are identical and the assumption that one can apply a solution from one problem to another – especially in the world of finance - can lead to both the wrong conclusions and the wrong remedy.
But at this point, some similarities are too striking to ignore, on how officials and executives in the west are approaching problems in today’s investment banking world – everywhere, from Germany to the US - compared with the attitude in Japan around the time of the bubble-era implosion and subsequent bank failures of the early 1990s.
In brief, first, you get denial – banks that were foundering insisting they were in a fine state of health. It’s a common - and, we suppose, understandable - syndrome: Why let your share price tank if you can support it with soothing words?
Then there is obfuscation, the stage at which weasel words, born of great creativity with the truth, are wheeled out – (a la “things are not necessarily going in our favour”). Think, Nippon Credit Bank, Long Term Credit Bank of Japan and – well, here’s a neat list to refresh the memory...
More: Financial Times
Thursday, September 11, 2008
Gold: 'Money and Markets'
With events changing daily ... with the government takeover of Fannie and Freddie ... with important news coming out almost hourly — I'm sure you're often wondering: "What does Larry think here? How do I make money in these crazy markets and economic environment?"
Indeed, I'm receiving more questions about the markets ... more doubts about the commodities bull market ... more inquiries about inflation versus deflation, than I have in years.
That's not surprising, considering the extreme, wild swings in the markets. Emotions are running deep. Confusion is everywhere. Even the most experienced investors and traders are having quite a spell with the current economic and market environment.
So I'm going to convey as many of my views as possible in this report ... and the reasons behind them. That way you'll know exactly what I'm thinking ... why ... and how to both protect your money and reap gobs of profits to boot.
I'll do it via questions and answers. So let's get started ...
Q: Larry, is the bull market in gold over?
A: No way, no how. What we've seen is merely a major pullback in gold, a healthy pullback that will renew the bull market and lead to much higher gold prices down the road.
My basis for that view ...
First, the charts and technical analysis. As you can see from this long-term chart on gold, the recent pullback has retraced less than one-third of gold's bull market gains since the low of $256 in February 2001.
Does it look to you like gold is in a bear market? Heck no!
Even if gold were to break the first uptrend line on that chart, it has major system support (not shown) between $735 and $763.
While it's true that gold has fallen a bit further and faster than I expected, that does not change the fact that the pullback is merely a retracement on the charts.
What to do about your gold investments?
For your core gold holdings, remember you are investing in gold for the long-term. And I believe gold is headed much higher. So it does not pay to try and side-step the correction. By trying to do so, you risk getting whipsawed by the market, and almost always end up paying more to get back in.
I recommend holding on to your core positions. And if gold declines any further, look to add to those positions.
For short-term trading, it's a different story. Make use of the stops I give you if you're following myReal Wealth Report. And if you are a subscriber to my trading services, don't be afraid to take my put option or inverse ETF recommendations to profit from short-term declines...
... Second, gold's inflation-adjusted price — $2,270 — has not yet been reached, indicating the price of gold can nearly TRIPLE from current levels.
If history is any guide, and I believe it is, then I hold that there is nearly a 100% certainty that gold will reach $2,270 before gold's bull market is over. And quite possibly, even higher!
Keep in mind that throughout history, asset classes always reach their inflation-adjusted price. They wax and wane, falling behind the inflation curve at times, and at other times, catching up and exceeding their inflation-adjusted prices.
That's true of all asset classes, be they bonds, stocks, commodities.
This is especially true in the post-1971 period when paper money's relationship with real money has been severed via the elimination of the gold standard.
Third, the bear market in the dollar, one of the principal forces behind gold's bull market, is not over. I'd like to believe that it is, but it's not — the dollar has much more to go on the downside.
You can see it in this long-term chart of the dollar index.
Notice how the index is merely bouncing back a tad. Yet it remains deeply embedded in a bear market and way below levels seen just last year.
In other words, the dollar's recent rally is nothing more than a bear market bounce.
Fundamentally, I believe the U.S. economy is much weaker than Europe's. While the euro zone is certainly having its problems, Europe is NOT the epicenter of the current crisis. The U.S. is.
Moreover, I have absolutely no doubts whatsoever that our Federal Reserve, led by Chairman Ben Bernanke, will do everything in its power to "inflate away" the debt and credit problems in the U.S. — by continuing to sacrifice the value of the dollar...
More: Money and Markets
Monday, September 8, 2008
World War III Closer Than the Elections
This editorial appears in the September 5, 2008 issue of Executive Intelligence Review.
World War III Closer Than the Elections
In a statement issued Aug. 21, former Democratic Presidential candidate Lyndon LaRouche warned that the world is closer to World War III, than it is to the November Presidential elections in the United States. Nothing that happened in Denver during the Democratic Convention, or which is likely to happen during the Republican Convention this week, changes that reality.
"November is a far distance away," LaRouche said. "The world situation, and recent events, show that we are at the point of breakdown of the world system, and the threat of a thermonuclear World War III is immediate. The provocations against Russia, via George Soros and British intelligence's Saakashvili government in Georgia, are but one leading edge. Despite the focus on the Caucasus in the past weeks, the Iranian issue is very much on the table. Do not put it past Vice President Dick Cheney and his British controllers to orchestrate a major provocation there."
In fact, as LaRouche has stressed in subsequent statements, the British—for whom Cheney is simply a stooge—are determined to escalate their efforts against Russia in the immediate period ahead. The British, and the forces under their control, are locked into the same kind of mentality that characterized Robert McNamara and Gen. William Westmoreland on the eve of the Tet Offensive in January 1968. They are signalling their intent to escalate against Russia on all fronts, but have not faced the fact that, as with Tet, they cannot possibly win—although they could create a confrontation with thermonuclear implications.
Cheney's upcoming trip to Azerbaijan, Georgia, Ukraine, and Italy—to begin Sept. 2—threatens to be a major point of escalation in this lunatic onslaught against Russia. The Vice President, who bears primary responsibility, along with British Prime Minister Tony Blair, for having manipulated the Bush Administration into the disastrous Iraq War in 2003, is known to be hell-bent on provoking a new war, most likely against Iran, in the months before he leaves office. The confrontational stance which Cheney, Bush, and the British have taken against Russia, helps create the conditions for such an action, which would bring horrific results.
Unfortunately, both of the current Presidential candidates can, at present, be expected to fall in line with the British-steered provocation that could lead to a World War III confrontation between Russia and the United States. Obama's close ties with British agent Soros, who functions as a kind of godfather to the Saakashvili regime, make it unlikely he would break from the British script. In the case of John McCain, he is ideologically susceptible to precisely such a British-orchestrated provocation...
Regulators close down Nevada's Silver State Bank
Regulators close down Nevada's Silver State Bank
SAN FRANCISCO (MarketWatch) -- State and federal regulatorsshut down Nevada's Silver State Bank late Friday. It was the11th bank to fail in the U.S. so far this year.The bank, which was overexposed to risky real-estate loans, had almost $2 billion in assets and 17 branches in Nevada and Arizona.Until six weeks ago, Andrew McCain, the son of Republican presidential nominee Sen. John McCain of Arizona, was a member of Silver State's board and also its three-member audit committee. Andrew McCain left the Henderson, Nev., bank July 26 after five months on the board, citing "personal reasons." He is Sen. McCain's adopted son from his first marriage.There is no evidence that Andrew McCain, 46, committed any wrongdoing, nor is there any indication that Sen. McCain had any knowledge of or involvement in Silver State's problems.The Wall Street Journal reported in its online edition that McCain spokesman Taylor Griffin said Andrew McCain joined the bank's board in April but stepped down from the board and audit committee when he realized that the obligation would require more time and attention than he was able to give.According to the Federal Deposit Insurance Corp., Nevada State Bank, based in Las Vegas, will assume all the insured deposits of Silver State Bank. (SSBX:0.56, 0.00, 0.0%) Nevada State Bank agreed to purchase the insured deposits for a premium of 1.3%. At the end of June, Silver State Bank assets of $2 billion and total deposits of $1.7 billion...More: Market Watch
Fannie and Freddie’s Bust and Deeply Flawed Government Bailout
Fannie and Freddie’s Bust and Deeply Flawed Government Bailout
Nouriel Roubini | Sep 7, 2008
The government takeover of the two insolvent GSE’s – Fannie and Freddie – is no surprise to the author of this blog. Two years ago – in August of 2006 – this forum argued that the biggest bust in housing since the Great Depression would lead to a systemic banking crisis, a financial crisis, a severe credit crunch, as serious recession and the bust of Fannie and Freddie .
As we wrote then:
The scariest thing is that the gambling-for-redemption behavior…are not the exception in the mortgage industry; they are instead the norm. There are good reasons to believe that this is indeed the norm as lending practices have become increasingly reckless in the go-go years of the housing bubble and credit boom.
If this kind of behavior is – as likely – the norm, the coming housing bust may lead to a more severe financial and banking crisis than the S&L crisis of the 1980s.
The recent increased financial problems of … sub-prime lending institutions may thus be the proverbial canary in the mine – or tip of the iceberg - and signal the more severe financial distress that many housing lenders will face when the current housing slump turns into a broader and uglier housing bust that will be associated with a broader economic recession.
You can then have millions of households with falling wealth, reduced real incomes and lost jobs being unable to service their mortgages and defaulting on them; mortgage delinquencies and foreclosures sharply rising; the beginning of a credit crunch as lending standards are suddenly and sharply tightened with the increased probability of defaults; and finally mortgage lending institutions - with increased losses and saddled with foreclosed properties whose value is falling and that are worth much less than the initial mortgages – that increasingly experience financial distress and risk going bust.
One cannot even exclude systemic risk consequences if the housing bust combined with a recession leads to a bust of the mortgage backed securities (MBS) market and triggers severe losses for the two huge GSEs, Fannie Mae and Freddie Mac. Then, the ugly scenario that Greenspan worried about may come true: the implicit moral hazard coming from the activities of GSEs - that are formally private but that act as if they were large too-big-to-fail public institutions given the market perception that the US Treasury would bail them out in case of a systemic housing and financial distress – becomes explicit.
Then, the implicit liabilities from implicit GSEs bailout-expectations lead to a financial and fiscal crisis. If this systemic risk scenario were to occur, the $200 billion fiscal cost to the US tax-payer of bailing-out and cleaning-up the S&Ls may look like spare change compared to the trillions of dollars of implicit liabilities that a more severe home lending industry financial crisis and a GSEs crisis would lead to.
The main, still unexplored issue, is where the risk from mortgages is concentrated: among the sub-prime lenders …or among commercial banks or among hedge funds and other financial intermediaries that purchased mortgage backed securities (MBSs) or among the GSEs (Fannie and Freddie)?
Commercial banks claims that they have transferred a lot of their mortgage risk to other financial intermediaries – such as asset managers, hedge funds or insurance companies – who purchased large amounts of MBSs. But banks have still lots of mortgages on their books and, on top of it they have tons of consumer debt exposure (credit cards, auto loans, consumer credit) that may go really bad in a recession. If part of the housing risk has been off-loaded to hedge funds, the risk is not just of some of these hedge funds going bust but also their prime brokers (i.e. large investment banks) getting into trouble; counterparty risk will become serious once the hot potato of mortgage risk is pushed from one counterparty to the other.
And finally, a large part of the housing risk is also in the hands of Fannie and Freddie. How much are the GSEs at risk is a complex issue…Either way, a serious housing bust followed by an economy-wide recession implies serious financial risks for the entire financial system, not just risks for the real side of the economy. A systemic risk episode triggered by a housing bust cannot be ruled out...
Sunday, September 7, 2008
Guarantees Are Worthless When the System Is Bankrupt
Guarantees Are Worthless,
When the System Is Bankruptby John HoefleWhile the Federal Deposit Insurance Corporation (FDIC) has gone to great lengths to assure the public that their bank deposits are safe—at least up to the insured limit—it is obvious that the agency lacks the capital required to back up its claims. As long as the FDIC closes only small banks, it can meet its responsibilities, but it does not have the resources to even begin to deal with the magnitude of the crisis it faces.
The same is true of the Federal Reserve, which is running out of room on its balance sheet to continue the escalating bailout process it began last December, and also true of Fannie Mae and Freddie Mac, whose role as a dump for the toxic waste of the banking system means that they will not survive on their own. All of these players, the FDIC, the Fed, Fannie and Freddie, and others like the Federal Home Loan Banks, can always turn to the Federal Government for cash, but the Federal Government itself is operating at a deficit, already borrowing money to meet its spending requirements. Thus, while there is no shortage of guarantees, none of the players actually has the money it needs to satisfy those guarantees, in anything approaching a worst-case scenario.
The Federal Government, it is assumed, can always borrow more money, but under our current unconstitutional central banking monetary system, it borrows that money by issuing bonds, which are sold through the Fed into the financial markets. That is, it is borrowing money from the very financial markets it is attempting to bail out. One does not have to be a professional economist to spot the flaw in such a scheme (in fact, it appears, the only people who fail to see the glaring flaw in the scheme are professional economists, bankers, and their pet regulators, who have a vested interest in ignoring the obvious).
In the end, whatever the Federal Government does manage to borrow, becomes the obligation of the taxpayers, most of whom are themselves dependent upon borrowed money for their survival, and living in an economy which has been operating below breakeven for some four decades, and falling further behind by the day. Ultimately, the guarantees are worthless, because there is nothing backing them.
Shrinking Banking System
For those who would prefer to believe that the banking system is sound, the FDIC's just-released second-quarter report is not encouraging. For one thing, the net income reported (read: claimed) by FDIC-insured commercial banks and savings institutions was just $5 billion, the second-lowest figure since 1991, and a whopping 87% below the second quarter of 2007. This is not surprising, given the huge losses the banks have been reporting of late, and while we believe that the reported income figures are seriously overstated, the plunge from the consistent $30 billion plus quarters of recent years shows a trend which cannot be ignored. The FDIC also reported a small drop in the total assets of the 8,451 institutions it insured, to $13.30 trillion from $13.37 trillion in the first quarter. Such drops are uncommon—it is the seventh quarterly drop since 1987—but it is also the largest, and a sign of things to come. The asset drop was also accompanied by a small drop in equity capital...
