Gee, that sounds familiar!
Posted on 09/14/2008 10:45:28 PM PDT by TigerLikesRooster
Is the U.S. Going Broke?
Laurence J. Kotlikoff 09.29.08, 12:00 AM ET
Now that the federal government has bailed out Fannie and Freddie, who's going to bail out the federal government? The federal government's takeover of Fannie Mae and Freddie Mac represents a huge financial tremor. These two institutions now issue 70% of Americans' mortgages. Their failure would have triggered a complete meltdown in housing and financial markets. So now Uncle Sam is on the hook for $5 trillion, consisting of corporate debt owed by those two institutions and mortgage debt guaranteed by them.
If only the government's total debt were that low. Uncle Sam, for all his righteous indignation, is, in fact, the father of all deceptive accounting. The government has arranged its budgeting to keep the great bulk of its liabilities off the books and out of sight.
The real liability facing our government is $70 trillion. This represents the present value difference between all the government's projected future spending obligations and all its projected future tax receipts. This fiscal gap takes into account Uncle Sam's need to service official debt--outstanding U.S. government bonds. But it also recognizes all our government's unofficial debts, including its obligation to the soon-to-be-retired baby boomers to pay their Social Security and Medicare benefits.
Given current policies, each of the 78 million boomers can expect, on average, to receive $50,000, in today's dollars, from these programs in each and every year of retirement. Multiply 78 million boomers by a $50,000 annual payment and you get close to $4 trillion per year. This helps you see why our nation's true indebtedness is so extraordinarily high.
(Excerpt) Read more at forbes.com ...
All Entitlements will be means tested by the time the last of the Baby Boomers hit the books.
It is not the fault of the new economy which is doing quite well.
The housing market blow up is as old as the tulip bulb craze.
Further, out of control goverment spending goes back to practically forever.
Some leveraged investment vehicles are new but that is about it.
Free trade, the internet, and service economies are doing really well.
imagine the kind of country we’d have if the government aid was used as a last resort for the poor, sick and truly disabled.
But... but... the usual suspects here told us that there is nothing at all wrong with the economy. The housing bubble didn’t exist. There was no credit bubble. Deficits don’t matter. Trade always balances. There is no cost to outsourcing large swaths of manufacturing. Global trade has made us all richer and we will continue to get richer. Yes, I’m afraid you are a Doom & Gloomer, and you are hereby excommunicated from the Church of Libertarian Economics, or whatever the hell it is that is the source of truth for these geniuses.
it’s mostly over housing bust and the fallout from bundling
..in a nutshell
meeting with bankers is a weekly deal for me as a developer and I hear this at every lunch
down here in Dixie they all wish they were US Bank or Edward Jones...neither of which had bundling exposures of consequence
Some of us have been ATTEMPTING to curtail this MADNESS on the part of the government for many years.
Sadly, over the years, the madness metastasized into the private sector with derivatives of derivatives and too many totally ephemeral and whacked out so-called “investment” and “credit” instruments to list them all. It was SO far out of control that a number of the top economic minds in the country admitted that even THEY didn’t understand them.
What the DUMMIES in the private sector failed to realize is that the GOVERNMENT has the printing press to bail THEM out. If they tried it, they’d be arrested for counterfeiting. The feds HATE competition!
Unfortunately, not many others felt any of this government and private sector insanity was – or would become – a serious problem. I can’t count how many LAUGHED at us during that period. Many of them right here at Free Republic (and you know who you are). Most of them have STOPPED LAUGHING!
And so the sheep will again be sheared.
Trust me, it is NOW A SERIOUS PROBLEM, one even the feds may not be able to print their way out of this time.
It is ALWAYS what happens when man – or SOME MEN – play god with the immutable laws of nature and economics. History teaches that they do so at great peril – and they ALWAYS fail. Insanity is doing the same things over and over while expecting a different result.
What saddens me most is that – on the government side, at least — Newt either squandered or let slip HIS chance to get a grip on it. And, no, I’m NOT picking on Newt. WE’RE ALL GUILTY!!
In this 2 minute clip, he seems to be trying to tell us that he took a shot at it:
http://www.youtube.com/watch?v=lIo8FJJMps8
The Question is.................To who's benefit??
The complete meltdown was going to happen whether Fannie and Freddie were rescued or not. The only difference is that the liabilities of Fannie and Freddie were dumped on the taxpayers. Roubini wrote this analysis yesterday...here it is ..the complete meltdown coming now..
http://wallstreetbear.com/board/view.php?topic=50439&post=163057&ref=patrick.net
It is not just the new industry spawned by computer revolution, but also its promise, at least according to what experts saw a decade or so ago.
True strength of new industry is to be put to the test now. Would they stay resilient and do well when there is no easy credit? Of course, it will contract as do other tradition industries. However, would it remain viable? How productive would it be in terms of its share in national economy?
The real test has just begun. We can now separate hype from the real meat.
I don’t know where they get their numbers from.
A 300 billion bail out is now 70 trillion? Get real.
Every house in the USA is now financed by Fanny and Freddy?
Or were 70 trillion $$$ worth of houses financed over the last 3 years with high risk loans?
If this is the case, then lets just claim bankruptcy. So what if we have bad credit for a few years.
The Rockerfellers can kiss my @ thing.
3.5 million IT jobs since 2000 thanks to H1B and L3 visas
so the average salary for a mid to senior level guy would be about $100k (for round figures). taxes would be about 33% fed (plus 15% for fica+matching).. so about 48% of the check (i'm not going to care about writeoffs here). doing the math:
$100k * 0.48 == $48k/yr in fed taxes
$48k/yr * 3.5m IT jobs... $168 billion per year.
7 tax years since 2000... $1.2 trillion dollars in lost tax revenue
that's a few bucks
JJTrader - Sat, Sep 13, 2008 - 07:53 PM
Sep 13, 2008
It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.
Let me elaborate in much detail on these issues…
This bail-in of investors is the opposite of a bailout of investors like the one that was done in the case of Bear Stearns and Fannie and Freddie. It is thus akin to the bail-in of investors that was done in the case of LTCM in the summer of 1998 and the bail-in of the interbank creditors of Korean banks in the winter of 1997. I wrote in 2004 with Brad Setser an entire book titled “Bailouts versus Bailins: Responding to Financial Crises in Emerging Markets” that discusses these policy tradeoffs in financial crises where you have runs on the liquid liabilities of either illiquid and/or insolvent countries. Those were the international equivalent of the banks runs and financial crises that we are now seeing in the cases of Bear Stearns, Lehman and Fannie and Freddie.
Since government bailouts put at risk public money and create moral hazard Treasury and the Fed decided that they need to draw a line somewhere after the bailouts of Bear Stearns creditors, of Fannie and Freddie and all the other actions aimed at backstopping the financial system. These actions have included the creation of the TAF, TSLF, PDCF, the use of the FHLBs to provide liquidity to distressed mortgage lenders, the provision of Treasury liquidity to the FHLBs, the outright purchase of agency MBS by the Treasury, the swapping of two thirds of the safe Treasuries of the Fed for toxic illiquid securities of banks and non banks, etc. So after having created the mother of all moral hazard with their actions (including the biggest bailout of all, i.e. the rescue of Fannie and Freddie) the Fed and Treasury are playing a chicken game with the financial system. Tim Geithner told clearly to the heads of all the major Wall Street firms that if they pull the plug on Lehman and Lehman collapses they are next in line for a run on their institutions. So if a buyer for Lehman is not found (or even if it is found and the counterparty lines are still pulled) not only Lehman will collapse but the run will extend to all of the other major broker dealers and banks that are the counterparties of Lehman.
The Fed may delude itself in thinking – as its stress models suggest – that the systemic risk of a collapse of Lehman are less serious than those of Bear Stearns: afterall Lehman is less involved into CDSs than Bear was and now both Lehman and the other major broker dealers have access to the discount window with the PDCF. A collapse of Lehman instead will have as much of a systemic effect as the collapse of Bear for many reasons: Lehman is larger than Bear was; Lehman is a major player in a variety of key financial markets; all the other major Wall Street institutions are interconnected with Lehman in dozens of different types of counterparty activities; the PDCF support of the Fed is neither unlimited nor unconditional, i.e. investors cannot assume that Lehman or any other broker dealer can borrow unlimited amounts with no conditions from the discount window. Thus, a collapse of Lehman would trigger a panic and a potential run on all sort of other broker dealers and also on other distressed financial institutions like banks (WaMu) and insurance companies (AIG) and smaller member of the shadow financial system (distressed and highly leveraged hedge funds, etc.).
The reason why Lehman is having a hard time to find a buyer is that it is most likely insolvent. If you had to mark to market the value of it illiquid and toxic assets (the $40 billion of commercial real estate assets, its remaining residential MBS and CDOs, its holdings of real estate private equity funds) Lehman is most likely insolvent (i.e. has negative net worth with liabilities well above its impaired assets). So leaving aside the potential and now dubious value of its franchise (an option to the value of a much slimmed down financial institution) no financial institution should be paying even a single penny to buy an insolvent firm. That is why all the potential suitors of Lehman (such as Bank of America and others) are waiting for the government to provide another sleazy Bear Stearns deal where the government would buy at higher than market value the toxic assets of Lehman (the commercial real estate assets for example) so as to make the net worth of the remaining institution positive and worth buying. But such action – borderline illegal in the case of Bear as pointed out by Paul Volcker – would be a scandal in the case of Lehman and severely exacerbate the moral hazard problem.
But here lies the conundrum of this Lehman crisis: no one seems to want to buy for a positive price Lehman unless there is a public subsidy (taking off their toxic assets off the firms’ balance sheet). The government cannot afford to provide the subsidy as the moral hazard problems are becoming severe. But then if on Monday no deal is done Lehman collapses and goes into Chapter 11 court and you have the beginning of a systemic financial meltdown as the run on the other broker dealers will start. Thus, what Fed and Treasury are trying to do this weekend is another 1998 LTCM bailin or Korea 1997 bailin, i.e. trying to convince all the major institutions to either support a purchase of Lehman or maintain their exposure to Lehman if no buyers is found. Can this bail-in work? It is not clear as there is a major collective action problem: you can’t only convince half a dozen major Wall Street firms to maintain their exposure to Lehman. You need also to convince all the other counterparties of Lehman (including the hedge funds and the other broker dealers and banks) not to roll off their claims and credit to Lehman. This is a much more messy collective action problem and coordination game than in the case of LTCM and Korea where the number of involved counterparties was more limited (less than 20 in each case).
Paulson and Bernanke and Geithner (the troika managing this financial crisis) have all made public statements in the last few month to the necessity of finding an orderly way to close down – rather than bailout – a major and systemically important non bank financial institutions: the embarrassment and losses for the Fed that the bailout of the creditors of Bear led made it paramount to avoid another Bear like bailout. That is why they are now playing tough with Lehman and its creditors. But in this game of chicken the Fed and the Treasury may end up being the ones to blink. Faced with the risk of a generalized run on the other broker dealers they may decide that greasing again a deal for the purchase of Lehman may be less costly and less risky than testing whether the system can orderly work out a collapse of Lehman (something that is highly uncertain). Even in the case of the Bank of America purchase of Countrywide such public subsidy was significant (the FHLB of Atlanta lent to Countrywide over $50 billion and Bank of America has most likely received plenty of tacit forbearance from the Fed to support its takeover of an insolvent Countrywide). So implicitly or explicitly the Fed and the Treasury may decide – however reckless and moral hazard laden that choice may be – to provide some explicit or implicit subsidy to a private purchase of Lehman.
The trouble is that, in spite of all public statements regarding the need to provide an orderly demise of large broker dealers, the Fed and the Treasury have done nothing to create such insolvency regime for such broker dealers. So the only option for Lehman – if a buyer is not found - will be the one of ending up in Chapter 11 and trigger massive losses on its counterparties that will in turn trigger a run on such counterparties.
In February of 2008 I predicted – in my “12 Steps to a Financial Disaster” – that one or two major broker dealers would go bankrupt. A month later Bear Stearns went bust and the collapse of the other ones was avoided for a time by the most radical change in monetary policy since the Great Depression, i.e. the creation of the PDCF that extended the lender of last resort (LOLR) role of the Fed to non-bank systemically important broker dealers (i.e. all of the bank and non bank primary dealers of the Fed).
I next argued in June that such action would not prevent a run on other broker dealers such Lehman as to avoid a run you need both deposit insurance and unlimited and unconditional access to the Fed LOLR support. I also discussed why Lehman was next in line for a collapse and why the PDCF would not prevent a run on Lehman.
I also argued in follow-up pieces that, in a matter of two years, no one of the remaining independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs) would survive as: 1. their business model is now impaired (securitization is semi-dead); 2. they will need to be regulated like banks given the PDCF support and thus have lower leverage, higher liquidity and more capital that will erode their profitability; 3. Their severe maturity mismatch – borrowing very short term and liquid, leveraging a lot and lending and investing in more long term and illiquid ways – makes them very fragile – in the absence of deposit insurance and in the presence of only limited LOLR support by a central bank – to bank like run that are destructive even of illiquid but otherwise solvent institutions. Thus all such broker dealers need to merge with larger financial institutions that have a commercial banking arm and thus access to stable and insured deposits and to true LOLR Fed support. That process of unraveling of independent broker dealers started with Bear Stearns; now it is moved to Lehman; tomorrow Merrill Lynch will be on line; and Morgan Stanley and Goldman Sachs will be next. No one of them can and will survive as independent entities. So, the Fed and Treasury should advise them all to start finding a large international partner (international as almost no domestic partner is now sound to take them over) and merge with such partner before we get another Bear or Lehman disaster.
The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure so far as plugging and filling one hole at the time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.
What we are facing now if the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed). So no wonder that this shadow banking system is now collapsing. The entire conduits/SIV system has already collapsed with the roll-off of their ABCP financing; next is the collapse of the broker dealers (Bear, Lehman and soon enough the other ones) that rely mostly on unstable overnight repos and other very short term funding for their financing; next will be hundreds of poorly managed hedge funds that will face a tsunami of redemptions; and finally runs on money market funds that are not supported by a large financial institutions or other smaller member of the shadow banking system as well as highly leveraged and distressed private equity funds cannot be ruled out either.
This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the US is falling in a now severe consumer led recession. The vicious interaction between a systemic financial and banking crisis and a severe economic contraction will get much worse before there is any bottom to it. We are only in the third inning of a nine innings economic and financial crisis. And the only light at the end of the tunnel is the one of the incoming train wreck.
IIRC correctly Newt and Clinton acted together to repeal portions of the Glass-Steagall Act, which became law in the 30s to separate investment banking from retail banking. From what I see this opened the door to securitizing mortgages, an innovation that divorces mortgage creation from mortgage ownership. This removed an important factor that discourages loan fraud. Those who don’t learn from history.... We are relearning why Depression era legislation was passed in the first instance.
Bah! We’ll just have to cut back on foriegn aid, and NOT send the Un any more money.
'Crawl back into your holes, you vermin !' -- Michael Savage.
My tag line is my real message . . .
You could tell the housing market was getting out of control very easily. I was in Southern California in 2003, and it was blatantly obivous then: even professional working families couldn’t afford homes but were somehow buying.
A family with an income of $80,000 is buying a home with a pricetag of $650,000??? How? (And yes, those were the averages.) When you add in California’s already exhorbitant taxation, you just have to wonder about these people.
California was originally populated by economic forces driving men westward, a la The Grapes of Wrath. Now, thanks to government bailouts, these people are allowed to remain in California when they should be moving to Nebraska and the like where homes are more affordable.
Housing and affordability should be inherently linked to population distribution, but that is no longer the case. Our nation has lost good economic sense.
Gee, that sounds familiar!
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