THE AMERICAN ECONOMY, COUNTRYWIDE & CARLO PONZI

Wow. It looks like the leaders at Countrywide who helped build and feed the sub-prime mess are going to walk away with additional millions of dollars after Bank of America finishes purchasing the company. This comes after Countrywide directors cashed out so many millions of dollars in options that the Securities & Exchange Commission started looking into insider trading (company directors selling company stock is exactly the opposite of what happened after the last major market meltdown occurred in 1987; but that’s another story).

So, what helped make Countrywide such a bargain for BofA? Primarily three developments:

1. EASY MONEY & ASSET INFLATION: The price of Countrywide (and its industry) had to be driven up. Thank you Alan Greenspan.

2. DEREGULATION allowed investors to enter the home mortgage market. Thank you Republican Party (who apparently couldn’t imagine that good investors would yield to speculators who, with enough easy money, would become Ponzi-like sharks, depending on asset inflation and creative credit instruments to keep the mania going).

3. MARKET SUBSIDY: After getting wrapped into the sub-prime mess Countrywide secured billions of dollars in government backed loans to help cover losses.

While easy money and deregulation helped Countrywide’s stock price soar in the 2000s, federal loans helped the company bury their financial “toxic waste” because the feds, incredibly enough, accepted Countrywide’s sub-prime debt as collateral.

That’s right. In spite of company directors selling company stock like rats jumping off a sinking ship, and a boat-load of bad debt, the federal government gave Countrywide billions of dollars in loans, and then took Countrywide’s financial garbage as collateral. BofA then swoops in and purchases the troubled company at a bargain price, knowing that the federal government now has a stake in Countrywide.

You know it seems that the more details we see in these rescues-bailouts, the more it appears the only real problem in the Pyramid Schemes of Charles Ponzi was that he never had Greenspan-like easy money, nor was he able to hook the federal government into underwriting his shady deals.

- Mark

ON TOXIC WASTE & TOXIC RELATIONS

Our national debt is $9.2 trillion. A little over $8.2 trillion of that has been accumulated over the past 28 years. Ronald Reagan began the deficit-spending binge. George W. Bush, interestingly enough (given his background), turned it into an addiction. Now, we’re faced with an economy that appears to be staggering in Bush’s final year, but the Federal Reserve refuses to issue “Last Call” – choosing, instead, to hand out more free drinks to those who irresponsibly bellied up to the Subprime Bar that sold instant highs in concoctions insiders called “toxic waste.”

So, as George Bush prepares to leave office – in the process, sticking us with the tab for his rotgut-filled, deficit spending binge – I’ve been reading a couple of books that help shed light on why things may get worse before they get better.

Want to know about the “toxic waste” produced by the market? Read The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, by Charles R. Morris. It's perhaps the most accessible reading on what's been happening in markets that I've read.



If you want to understand why we won’t be escaping the political and military entanglements of the Middle East any time soon, read the appropriately titled Sleeping With the Devil: How Washington Sold Our Soul for Saudi Crude, by former CIA operative, Robert Baer.

Both of these books are highly readable, and non-technical (although the book by Charles R. Morris has to get into some jargon). At the end of the day, what we find is that the Saudis aren’t our worst nightmare … it’s the people in Washington who can’t seem to say no to Wall Street, and are captured by self-serving political and financial interests that keep us tangled up with a very corrupt and morally bankrupt Saudi regime.

- Mark

SEN. McCLINTOCK ... WARD OF THE STATE?

Yet another story of hypocrisy from those who preach from the Mountain Tops ...

State Sen. Tom McClintock, a fierce critic of government spending, has accepted hundreds of thousands of dollars in tax-free per diem payments from the state that are meant to help legislators who, unlike McClintock, live far from the capital ... The Republican lawmaker [who makes $116,000 a year] said he is entitled to the $170-a-day payments because his legal residence is a family home in his Senate district of Thousand Oaks, where he is registered to vote ... McClintock and his family live year-round in Elk Grove, 14 miles from the state Capitol ... His children attend Elk Grove schools and his wife works at a Baptist church there.

One of the arguments McClintock uses to justify accepting $300,000 tax free dollars over the years - while living in his 4,090-square-foot Sacramento suburb home - is the expense of maintaining two homes. I think I could buy into this except for the following:

The Thousand Oaks house, where he grew up, is owned by a family trust controlled by his mother, who lives there ...

Insert your own punchline here______________.

- Mark

P.S. And for the record, Democratic state Sen. Darrell Steinberg and Assemblyman Dave Jones, both from Sacramento, do not accept per diem payments. Republican Sen. Dave Cox of Fair Oaks, who lives about 25 miles from the Capitol does accept per diem (but he pays taxes on them).

A CULTURE OF BUCK PASSING ...

Condoleeza Rice, who was National Security Advisor to George Bush when the war in Iraq started, explained in an interview that she didn’t think the Iraq War would be "this tough." Rice shifts blame for what's happened in Iraq by pointing fingers at UN sanctions, Saddam, etc.

Apparently, a Ph.D. in political science, a security stint in the first Bush White House, and access to the most detailed (and up to date) information in the world no longer means anything.

You know what would make this a lot easier? If these guys would simply tell us that Iraq is what happens when you put ideology above the facts.

- Mark

EXPLAINING THE McCAIN VOTE ...

So, I’m talking politics with one of my republican friends this afternoon (who I thanked for lunch). As usual, we got around to talking about George Bush: Record deficits, incompetence in Katrina, collapsing influence abroad, the worst jobs creation record since Herbert Hoover, financial meltdowns requiring “Depression Era” tactics, etc. … He understands all of this and doesn’t even try to defend Bush. He even acknowledges that, as Lou Dobbs put it,

… This president pursues a war without demanding of his generals either success or victory and accepts the sacrifice of our brave young men and women in uniform while asking nothing of our people or the nation at a time of war … Sadly, this president has diminished a great nation and may diminish it further ...

Pretty clear, don’t you think? Still, my republican friend informed me that when November comes along he’s voting for the one person who promises to keep Bush’s Caravan-of-Incompetence going: Sen. John McCain. (What was it that Albert Einstein said about doing the same thing over and over again and expecting different results? Oh, yeah … you’re nuts).

Now, keep in mind, my friend is an intelligent, successful individual. But somehow – like most republicans who will vote for John “100-years-in Iraq-is-OK-by-me” McCain – he allows logic to be taken into a back alley, where it can be mugged by ideology.

Then I had a deja vu moment. I start thinking, “The blind, comatose pursuit of proven dead-end fantasies is not new.” I just had to figure out where I’d seen this picture before. Hmmmm … and then it hit me: Hollywood already turned meandering, lifeless judgment into a movie ...



- Mark

McCAIN'S 5 YEAR REIGN OF ERROR ...

From Perrspectives.com ...

On foreign policy as well as domestic issues, John McCain has dumped past postures as part of his presidential quest. His amnesia regarding his past belittling of key American allies is just one case in point.

In Paris last weekend, McCain adopted what the New York Times called "soothing tones" in a "love-fest" with French President Nicolas Sarkozy. And in what his campaign billed as a major foreign policy address today, John McCain declared, "We need to listen to the views and respect the collective will of our democratic allies."

Sadly, the John McCain of 2008 seems unacquainted with the John McCain model of 2003. With his vitriolic France-bashing in the run-up to the war in Iraq, John McCain stood shoulder to shoulder with the Paris-hating purveyors of "freedom fries" and "old Europe."

As President Bush prepared to pull the trigger on the Iraq war in February 2003, John McCain was at the forefront of those browbeating the Chirac government for France's refusal to back the U.S. at the United Nations. On February 11, 2003, McCain co-sponsored a Senate resolution praising 18 European nations backing U.S. enforcement of UN demands for Saddam's disarmament and echoed Defense Secretary Donald Rumsfeld in thundering at the France and Germany of "old Europe:"

"The majority of Europe's democracies have spoken, and their message could not be clearer: France and Germany do not speak for Europe...most European governments behave like allies that are willing to meet their responsibilities to uphold international peace and security in defense of our common values. We thank this European majority for standing with us."

McCain's venom towards the French was on full display two days later during a speech at the Center for Strategic and International Studies. On February 13, 2003, McCain warned of "new threats to civilization [which] again defy our imagination in scale and potency" portrayed Iraq as "threat of the first order." He proclaimed that "the United States does not have reliable allies to implement a policy to contain Iraq" and pointed the finger squarely at France:

"Compare our great power allies in the Cold War with those with whom we act today in dealing with Iraq. France has unashamedly pursued a concerted policy to dismantle the UN sanctions regime, placing its commercial interests above international law, world peace and the political ideals of Western civilization. Remember them? Liberte, egalite, fraternite."

Just days later on February 18, 2003, the Australian Broadcasting Corporation's Lateline program showed a furious McCain foaming at the mouth over France:

"They remind me of an aging movie actress in the 1940's who is still trying to dine out on her looks but doesn't have the face for it."

That the American media seem to have overlooked McCain's turnabout comes as no surprise. They have yet to hold John McCain to account for a five-year reign of error on Iraq in which he had everything - Saddam's WMD, the needed U.S. troop strength, Americans being greeted as liberators, the safety of Baghdad streets and so much else - completely wrong.

... Like I said, McCain is not fit to lead.

- Mark

WE'RE IN THE "3rd or 4th INNING" OF MELTDOWN ...

Here's a link to a pretty level-headed interview on our economic situation from noted value investor, Whitney Tilson. There's some jargon but, in my view, Tilson gets it: There's no confidence, and we're only in the "third or fourth inning" of the housing market meltdown. Tilson (following Warren Buffet's lead) sees "hundreds of billions" more to be lost in the market, and even sneaks in the threat of "depression" for good measure.

Here's some of the interest rate reset problems that's coming down the pike - and leading people to abandon their homes - in the housing market.

This is not good news for the financial firms (that are exposed) and the economy, which absorbs the ripple effects. I'll touch on this before Saturday's show.

- Mark

WHY “THE SURGE” IS NOT WORKING …

Here’s “the surge is working” logic in a nutshell: Declining U.S. military deaths in Iraq since August, 2007 means the “the surge” is working.

What the “surge is working” crowd seems to (conveniently) ignore is that the surge was designed to provide stability for national reconciliation so that specific political benchmarks could be met. Let me reiterate. the goals are national political reconciliation and meeting political benchmarks.

National reconciliation is not on the horizon. The benchmarks have not been met. Ergo, the surge has failed. And to the extent that we have seen U.S. casualties decline, we need to understand why …

1. The Moqtada al-Sadr ceasefire. The al-Sadr ceasefire began August, 2007. Let's keep in mind that al-Sadr’s father was roughed up pretty good by Saddam’s henchmen. Al-Sadr has much to seek revenge about. Don’t count on a permanent ceasefire.

2. The “Low-Hanging-Fruit-of-Death” Peak: Simply put, early and vicious ethnic cleansing in Baghdad caused Shi'a and Sunni to separate and move out of old neighborhoods by August 2007. The early low hanging fruit of death – as it were – were no longer hanging out in the old neighborhoods waiting to be shot. As a result, American soldiers no longer have to be in the middle of this mess.

3. The Wall(s) of Love: The physical separation of the Sunni-Shia combatants in Baghdad with 12 ft. high walls. Completed just in time for the surge.

4. The Anbar Awakening: In September 2006 – long before President Bush’s “surge” was implemented – a federation of Sunni tribes came together as the Anbar Salvation Council. They opposed the fundamentalist militants of Al Qaeda. The Sunni dominated council needed-wanted money and security. In return the council volunteered hundreds of tribesmen to serve as police officers and have permitted the construction of police and military outposts.

Let’s be clear here. None of the above - with the possible exception of the Wall of Love - have anything to do with the surge (which, again, has not met its goals).

LOCATION, LOCATION, LOCATION ...
But here’s another problem with “the surge is working” fairytale. While reduced GI killings in Baghdad has happened, and regular violence against Iraqis has remained relatively flat (but it’s still higher today than in ’03, ’04, and ’05), our surge has not reduced overall violence in Iraq.

One of the reasons we don’t know this is because of the way we have counted sectarian violence and civilian deaths. Check this out. It seems that if you are an Iraqi shot in the front of the head you are simply a victim of violent crime. This is a victory for the surge. To be counted as part of the sectarian violence, and to get Gen. Petraeus’ sectarian-death-stamp-of-approval, you need to be shot in the back of the head. This is not good for the surge.

So, essentially, declining sectarian violence in Iraq is a product of bullet hole location. Nice.

- Mark

i,ROBOT ... AROUND THE CORNER?

Will Smith's I Am Legend came out for purchase last week. My son loved the movie - as did I - so I will probably end up purchasing it. If you haven't seen it, and liked Road Warrior and Dawn of the Dead, check it out.



However, the Will Smith movie that I really enjoyed was i,Robot, a futuristic look at robots who are programed to live with humans. The story turns when the robots get out of control and start killing people, something they're not supposed to be programmed to do.


It looks like a future with robots embedded into our every day lives may come about quicker than we think. Check out what DARPA has been working on.

DARPA is the acronym for Defense Advanced Research Projects Agency, and is responsible for funding the development of new weapons technology. DARPA was developed in 1958, in response the the Soviet's launching of Sputnik in 1957. Its mission is to keep the U.S. technologically ahead of the enemy. And keep in mind that the DARPA robot video is a couple of years old.

- Mark

4,000 AMERICANS KILLED IN IRAQ

The 4,000th American soldier was killed in Iraq yesterday. Below is the letter of condolence President Lincoln wrote to the parents of Colonel Elmer Ellsworth. Colonel Ellsworth was shot in Alexandria, VA while removing a rather large Confederate flag from a small hotel. The flag was visible throughout Washington, including from Lincoln's second-floor White House office.

Lincoln's letter is pure eloquence.

To the Father and Mother of Col. Elmer E. Ellsworth:

My dear Sir and Madam, In the untimely loss of your noble son, our affliction here, is scarcely less than your own. So much of promised usefulness to one's country, and of bright hopes for one's self and friends, have rarely been so suddenly dashed, as in his fall. In size, in years, and in youthful appearance, a boy only, his power to command men, was surpassingly great. This power, combined with a fine intellect, an indomitable energy, and a taste altogether military, constituted in him, as seemed to me, the best natural talent, in that department, I ever knew. And yet he was singularly modest and deferential in social intercourse. My acquaintance with him began less than two years ago; yet through the latter half of the intervening period, it was as intimate as the disparity of our ages, and my engrossing engagements, would permit. To me, he appeared to have no indulgences or pastimes; and I never heard him utter a profane, or intemperate word. What was conclusive of his good heart, he never forgot his parents. The honors he labored for so laudably, and, in the sad end, so gallantly gave his life, he meant for them, no less than for himself.

In the hope that it may be no intrusion upon the sacredness of your sorrow, I have ventured to address you this tribute to the memory of my young friend, and your brave and early fallen child.

May God give you that consolation which is beyond all earthly power. Sincerely your friend in a common affliction --

A. Lincoln

This is a timeless piece of poetry. Lincoln’s letter could be sent to the parents of our fallen U.S. soldiers today. It really is a lesson in human dignity and eloquence.

It’s a shame that Bush had to pull this stunt - from the deck of the USS Abraham Lincolon, no less.


















- Mark

MEANDERING IGNORANCE & THE DRAFT

During Dick Cheney's interview with ABC's Martha Raddatz on the war in Iraq last week Raddatz pointed out: "Two-thirds of Americans say it's not worth fighting, and they're looking at the value gained versus the cost in American lives, certainly, and Iraqi lives."

Ever so thoughtful, Dick Cheney responded: "So?"

While this is yet another example of what happens when arrogance and indifference merge in the minds of the painfully mediocre, it's Cheney's response to another Raddatz question that walks away with my Meandering Ignorance award.

RADDATZ: "What sacrifice have most Americans made?"

CHENEY: Well, I think they've been asked to support the effort and the enterprise. But it's not the kind of thing, for example, where you would have wanted to institute a draft. We've got an all-volunteer force; it's one of our great assets, one of our great national assets. I suppose you could have created a sense of sacrifice if you'd gone back to the draft, but that would have, in my opinion, done serious damage to the state of our military. We built a volunteer force because that was a decision we made 30 years ago, and it's been a very good -- a good decision.

Where do I start? How about with this: "We built a volunteer force because that was a decision we made 30 years ago ..." does not explain why we went to an all volunteer military. It's kind of like George Bush saying "I lied about the reasons for going into Iraq because I didn't tell the truth ..."

Cheney's response is truly as ignorant an answer as you can get when it comes to explaining the "sacrifices" America is making in a war that Cheney has compared to World War II. And, for the record, the reason we went to an all volunteer military is because the economist studying whether we should get rid of the draft willfully ignored Congress.

Specifically, Congress wanted to know how much more the country would have to pay in recruitment costs, public relations, higher wages, better benefits, privatization, etc. if we went to an all volunteer military. The economist went out of his way to use his own methods, and argued that people not working in the private sector because they were drafted into the military meant lost national income. His methods weren't questioned (and no one took the time to ask if he was injecting his own political views) so the Gates Commission adopted the proposal. We dropped the draft in 1973. The economist? Milton Friedman.

- Mark

OBAMA

I've been meaning to post on this since Obama's speech on race in America. Simply put, Obama has an understanding of America that goes beyond smart. There's a reason he's generating the buzz that he has so far. He's good. Of all the commentary, I think this one nails it:

One of my personal maxims has been that politicians will disappoint you. The ones you like will have personal failings, while the ones you detest will fail time and time again. With Senator Obama, for the first time in my life, I have watched a political leader who I don’t worry if he’ll be up to the task ... It’s like you had Michael Jordan in his prime or Joe Montana with 2 minutes to go. It’s that feeling where you say to yourself: Ok, breathe, he’s got it.

Given the political, economic and diplomatic hole President Bush has put us in, we need a political Michael Jordan or a Joe Montana in their prime (if you missed it, the link has the video and text of the speech). Of course, the team - i.e. his cabinet - will make all the difference. But so far Obama seems so scary smart I'm not worried.





















We'll be discussing Obama at the top of the 3:00 pm hour in today's show.

- Mark

PROFILE IN MAS MAGAZINE

Leonel Martinez (no relation) can really write. Here's the link to the MAS Magazine article that profiles me and our Saturday radio program. Thanks to Leonel it almost looks like I have a life.

- Mark

MORE GOOD NEWS: "DEPRESSION-ERA PROVISIONS' AT THE FED

Why they're getting serious ...

What got people's attention was how quickly Bear Stearns, the nation's fifth largest investment bank, could go from a stock market value of about $3.5 billion ... on March 14 to being sold at the bargain-basement price of about $236 million two days later ... The Federal Reserve rushed in to take unprecedented actions. It provided a $30 billion line of credit to facilitate the sale and is employing Depression-era provisions that for the first time are providing direct Fed loans to investment banks.

Can someone remind me again ... What's the logic behind bailing out people and institutions who make stupid decisions? Oh, that's right. If things blow up Americans are going to start calling for "adult supervision" (i.e. regulation) of the economy.

And in the war of ideas between common sense regulation or corporate bailouts, we all know who's going to win that one, right?

- Mark

SPENDING OUR WAY INTO A HOLE

I know many of you don't like reading through charts and figures, so let me cut to the chase. Not only is the American consumer tapped out, but they are spending more than they earn and purchasing stuff of little or no durable value. Here's part of the story ...



A couple of weeks ago I posted this, explaining how Americans are in debt and tapped out. It turns out things are even worse than we thought.

According to Northern Trust's Paul Kasriel, not only did we go on a borrowing binge but between 1999 and 2006 but Americans spent more than they earned every year except one (2000). But here's the interesting part. American households spent more than they earned only 6 times before ... and 5 of those times were in the Depression-World War II era (see chart). Here's Kasriel:

From 1929 through 2006, there were only 13 years in which households incurred deficits – i.e., spent more in total than they earned after taxes. Two of these household-deficit years occurred during the Great Depression of the 1930s, three occurred shortly after the end of World War II and one occurred in 1955. The remaining seven household-deficit years occurred in 1999 and 2001 through 2006. Three things to note: (1) that households have run deficits in six out of the past seven years is unprecedented; (2) the magnitude of the 2004, 2005 and 2006 household deficits are unprecedented, and; (3) the household deficits starting in 1999 occurred in a period when asset prices showed extraordinary increases.

As if this isn't bad enough, it turns out that while going into debt we did not purchase anything of value ... except bigger homes (and we all know how that's going).

There's much more in Kasriel's newsletter, so check it out.

- Mark

ARIZONA VILLAGE ... MISSING AN IDIOT?

We've been in Iraq for five years now (happy anniversary) and John McCain comes out with this stupidity.

... [it] has been reported in the media that al-Qaeda is going back into Iran and receiving training and are coming back into Iraq from Iran, that's well known. And it's unfortunate.

What's "unfortunate" is that John McCain doesn't know what the hell he's talking about.

Look, Iran is helping out Shiite extremists. The al Qaeda nutjobs in Iraq - who weren't there before the war - are predominantly Sunnis, with most of them coming from states that are supposed to be our allies (like Saudi Arabia). Sunnis think Shiites are apostates.

If we left, the Iranians would help the Shiites and the Saudis would help the Sunnis in Iraq. We might even see a full scale regional conflagration, which the Saudis tell us would happen (Keep in mind the Saudis have their own motives for wanting to keep us in Iraq. Without us, the radical nutjobs would be going after their corrupt and kleptocratic regime. That's right. Our military is seen as cannon fodder by the Saudi kleptocrats. This is why they tell us the place would fall apart if we leave).

But, to be fair, why should McCain know any of this? I mean, he's only had five years to study the issues. Who could possibly bone up on the facts in such a short time span? Especially when he's so busy running for president.

In case you're wondering, it wasn't a gaffe. He made the reference more than once. And this is not the first time he's done this. He really doesn't know what's going on in Iraq, or the Middle East. This helps to explain why he thinks walking around Baghdad with a flak jacket, a contingent of U.S. forces, and Blackhawk helicopters hovering around him constitutes a secure city.

No wonder he says it's OK to stay in Iraq 100 years. He's going to need that long to figure out what's going on.

- Mark

P.S. This guy says McCain's gaffe isn't really a mistake. He's doing it on purpose. Either way, it shows McCain's not fit to lead.

HALLELEUYAH ... I THINK

OK, so I had my banking information compromised last month. What a mess. It's not a fun process. Lots of money was taken out.

Anyways, my monthly payment to Big Impersonal Financial was returned while I cleaned things up. In turn, I was charged a returned check processing fee, and a late fee (which helps validate the fee and penalty cycle thesis I describe here). I sent a note from my bank explaining the situation. The processing fee is removed, but the late fee is not. Here's a brief overview of the exchange when I called Big Impersonal Financial ...

ME: Is this India? Look, all I need ... Never, mind. Please send me back to the United States, where someone with authority can fix this ... (I'm put on hold)

ME: Hello, here's my problem ... blah, blah, blah ...

THEM: "I'm sorry, but we have a policy ... if it's not Big Impersonal Financial's fault, they won't waive the late charge."

ME: You can see my predicament ... can you imagine if every company shared your policy, and I write 10-20 checks? I'm not only dealing with compromised bank information, but I've just lost out on $250-500. Does this seem right to you? Could you please just waive the fee ... It's not like I did this on purpose, or to avoid payment ... or because I'm evil. It seems like a good mix of customer service and human decency should prevail here. How about if you let me speak to an account manager?"

THEM: "I'm sorry Mr. Martinez, but our policy is ... you are going to have to send a letter ..."

ME: "Look, the facts won't change whether I send a letter or speak to a manager now ... It seems to me that your policy is designed to create more hurdles, which will discourage people from doing the paperwork ... especially since you know many people will just blow off $25 to 50.00"

THEM: I'm sorry, but you will have to send a letter."

ME: "You're a good taxpaying American citizen. What if this had happened to you? Would you think this is a good policy? Are you a Christian? What do you think Jesus would do?" (I have to admit, I just threw that one out there)

THEM: "I'm not going to get personal ..."

ME: "That means your not a Christian ..."

THEM: "Let me see if I can find a manager ..." (I'm put on hold)

THEM: "Well, it looks like they did waive the late fee. I just couldn't see it on the computer ... there was an 'X' over the waiver ..."

ME: HALLELEUYAH ... Praise the Lord! (Well, not really. It just didn't seem right. But I was thinking it)

So, you be the judge:

(1) Was the late fee removed before our conversation, but the person speaking to me didn't see it?
(2) Did the person on the other end of the line arbitrarily remove the fee because she was Christian and felt bad? or
(3) Did my badgering pay off?

- Mark

THE FREE MARKET IN REPUBLICANLANDIA

The magic of the market at work in President Bush's world ...

... President Bush welcomed the Federal Reserve’s sweeping intervention in the financial markets ... [but] faced accusations Monday that it supported the bailout of a prestigious investment bank while doing little to address the hardships faced by Americans facing foreclosures on their homes.

But let's not be too hard on the president. I mean, you can't talk about rugged individualism and accountability if EVERYONE gets bailed out of a financial jam, right?


- Mark

P.S. Jim Cramer assured "Mad Money" viewers that Bear Stearns was doing "fine" one week ago. Check out his rather lame clarification.

BAGHDAD: A CITY OF WALLS

Hey, if it worked in Berlin ...

In the first of Ghaith Abdul-Ahad's extraordinary series of films to mark the fifth anniversary of the Iraq war, he investigates the claims that the US military surge is bringing stability to Iraq. By travelling through the heart of Baghdad he exposes how, by enclosing the Sunni and Shia populations behind 12ft walls, the surge has left the city more divided and desperate than ever ...

What's next? An official policy of segregation?

- Mark

THE ROOTS OF MARKETS & WEALTH

From time to time I have been posting sections from my book project, The Roots of Markets & Wealth. The section below (which may not make the final cut) contrasts the financial challenges empires face as they try and maintain their position in the global arena. In line with this post, Don Quixote is to the left ...


... After conquering the gold-laden Aztec and Incan Empires the Spaniards went on a spending binge. What they didn’t do was develop the capacity to produce goods that would make them competitive during the commercial and industrial revolutions of the 18th and 19th centuries. Why should they? With an “unlimited” source of gold and silver in the mines of Guanajuato, Potosi, and Zacatecas they had found El Dorado. This enabled Spain to purchase what they needed and to conduct affairs as if tomorrow would never arrive. Rather than turning to commerce and industry, as bullion-deprived North American colonialists did, Spaniards focused on extracting resources, purchasing useless titles, and acquiring assets of questionable commercial utility.

By the end of the 17th century, after recklessly spreading their wealth across Europe, Spain retained perhaps 5 percent of the bullion they had extracted from the Americas. Like Don Quixote, the mythical character created by Cervantes, when the Spaniards finally came to their senses it was too late. Inflation arrived in Europe, making the goods Spain sought more expensive. Worse, Spain faced the prospect of competing commercially with their more industrious neighbors – specifically England and France. No amount of commercial treaties, taxes, or other gimmicks could make up for generations of ignoring industry and squandering their economic trump card on castles, monasteries, and global adventures. Like Don Quixote, the Spanish Empire would tilt at the “windmills” of war and debt – finally collapsing at the feet of the Americans in the Spanish-American War.

Fast forward one hundred years. Another empire is in trouble. Believing the sun would never set on its capacity to spread gold-backed dollars across the globe, successive American administrations spread credit and deficit dollars around the world. And why not? After WWII the dollar was considered “as good as gold” and actively sought by allies and traders alike in an American-led trading regime. No longer were the sketchy claims and promises of a John Law, or the convoluted sorcery of scheming alchemists, necessary to create wealth through paper (or other materials).

As long as America paid for the defense of the West, and no viable currency alternatives emerged, dollars would be accepted on demand. This was an arrangement the Spaniards, with all their bullion, could not match. But then again, they never leveraged their gold in an effort to build an international trading regime that others sought to join. Perhaps more importantly, Spain never built a credit superstructure that would allow it to borrow so liberally from its neighbors. These arrangements worked so well that an American vice president would dismiss the idea of paying down deficits (to help support the value of the dollar), claiming “deficits don’t matter.”

By ignoring how its wealth was spread at the beginning of the 21st century – via borrowing and commercial deficits – America now finds itself tilting at the same windmills that confronted Spain ...

- Mark

THE FOX VIRUS

It looks like FOX News is at it again. Check out the most recent Obama bashing from FOX.

- Mark

TWILIGHT ZONE MOMENT REVISITED

President Bush continues to push for telecom immunity from prosecution. Recall, the industry bought into the president's fear-mongering early on, and helped the president spy on ordinary Americans. Here's President Fear-Mongerer doing what he does best ... crowing like Chicken Little:

Unfortunately, instead of holding a vote on the good bipartisan bill that passed the United States Senate, [the Democrats] introduced a partisan bill that would undermine America's security. This bill is unwise ... Yesterday the Attorney General and the Director of National Intelligence sent a leader [sic] to the Speaker explaining why the bill is dangerous to our national security.

Again, as I pointed out several weeks ago, here’s our Twilight Zone Moment on the issue: The Bush administration asked the telecom industry to help them spy on Americans … back in February 2001.

And, again, if we do the math, this is seven months before 9/11. Can anyone explain, What was the national emergency in February of 2001?

- Mark

P.S. Let's keep in mind that the Bush administration also asked Qwest to help them spy on Americans, six months before 9/11.

BANKRUPTCY REFORM ... OR INDENTURED SERVITUDE?

When personal bankruptcies hit 1.5 million in 2002, and went to 1.6 million in 2003, one of the goals of bankruptcy “reform” in 2005 was to reduce the number of bankruptcy filings. After climbing to 2 million in 2005 (the surge was caused, in part, by those attempting to preempt new and stricter filing laws), filings dropped to 600,000 in 2006. Problem solved, right? Wrong.

Bankruptcy filings are on the rise as we start the new year, and are slated to hit 1 million by the end of December. How do we explain the surge in bankruptcy filings today? Several developments are at work here.

TREATING THE SYMPTOM, NOT THE DISEASE
According to noted bankruptcy attorney Leon D. Bayer, in addition to making it more difficult to file for personal bankruptcy, the principle reasons that people file for bankruptcy were not addressed in the 2005 legislation. How could they be? Consider this. Over 90% of all personal bankruptcies are filed for three reasons: Job loss, divorce, or catastrophic illness. There is no legislation on earth that our credit industry-pandering Congress can pass that can do anything about these life events.

Because no provisions were made to work with people hit by these real life incidents in the 2005 bankruptcy bill debtors soon found that “broke and in debt” was no longer good enough. The newly divorced, the medically recovering, and unemployed would have to wait until they hit “distressed debtor” status to qualify for bankruptcy. Debtors, after all, had to be taught a lesson. This explains why military personnel in the National Guard were not given special consideration either. A deadbeat is a deadbeat according to the industry – no exceptions.

So, rather than solving the bankruptcy challenges in America, the new legislation simply deferred and, more realistically, compounded the situation for those confronting uninvited real financial problems.

“VIVA LAS VEGAS”
Now, you’re probably scratching your head and asking, Why didn’t our guys in Congress anticipate this? Couldn’t they see that disqualifying people who needed bankruptcy for a fresh start only put off the inevitable? Good question. To start, we need to acknowledge that the credit companies aren’t run by dummies. They may be greedy, which compels them to make dumb decisions as a group over time. But they’re not run by inherently dumb people.

The credit card industry saw that bankruptcy filings were going through the roof in 2005. They also understood there was a bubble waiting to burst around the corner (hey, if I saw it they darn well should have too). As well, they realized they needed to protect themselves and their “fees and penalties” gold mine (average household credit card debt earned the industry $1,700 a year in finance charges and other fees in 2002).

To be sure, the industry also knew that the vast majority of debtors filing for bankruptcy were placed in that situation by uninvited life circumstances – job loss, divorce, or illness. But the details of the debtors’ lives were viewed by disengaged industry lobbyists as “unfortunate” as they were unimportant. Like on the Vegas strip, the goal of The House (i.e. the credit industry) is to get people in the door, at the table, and to keep them there. If they’re not "at the table" you can’t get debtors – no matter what their circumstances – in the fee and penalty cycle. And like Vegas in the early days, the industry went to their muscle (i.e. Congress) to make it more difficult for debtors to qualify and pay for bankruptcy. And they got their wish.

This is where the hypocrisy of the credit industry, and the shortsightedness of Congress, may have made things even worse.

THE CREDIT CARD GUYS GET GREEDY(ER)
By helping the industry reduce filings after 2005, Congress helped insure that the credit card companies would have more money on the books for 2006 (I’m not sure I would label this additional money as “earnings”; does favorable legislation that effectively puts more money in your pocket count as something you earned in your book?). The industry was emboldened. You would think that the industry would have learned a lesson from being just one year removed from record bankruptcies (and the fact that Americans have a savings rate that is effectively zero). Think again.

In 2007, according to Laurent Belsie at the National Bureau of Economic Research, the credit card companies then …

“… started lending more, even to consumers with bad credit. Credit card debt increased more quickly during the past two years than at any time during the previous five years."

Put another way, comfortable in the knowledge that it was more difficult for borrowers to enter into bankruptcy proceedings the credit industry determined it was in their financial interest to lend more. Teaser rates, cashable checks, and other industry gimmicks filled our mailboxes. And why not? By raising the bar necessary to file for bankruptcy the industry knew that fees, penalties, and other charges would add significantly to their client’s debt load.

According to Robert D. Manning, author of The Credit Card Nation, all of this is a good thing for the industry because ...

[i]n the old days, the best customer was someone who could pay off their loan. Today the best client of the banking industry is someone who will never pay off their loan.

Indeed, why settle for half on a $8,000 account this year when you can settle for half on a fee and penalty bloated $12,000 debt two or three years later? Distressed debtors, who can be kept in the game longer, can do more for the bottom line than a debtor in bankruptcy proceedings.

WHAT WOULD ADAM SMITH DO?
By keeping borrowers on the hook the industry is able to keep America’s working class toiling away, paying off debt for longer periods of time. While some market analysts might argue “No one told them to take out these cards … they knew what they were getting into …” the posture is full of hubris and ignorance.

Again, the vast majority of bankruptcies occur because of unexpected and uninvited life circumstances. To create a piece of legislation that punishes misfortune because of idealized notions of accountability (which Corporate America’s CEOs increasingly do not share), or because of the 10% of filers who are actually bad apples, is not commensurate with what Adam Smith envisioned when he wrote about market capitalism. More specifically, the 2005 legislation does not fit with the “laws of justice” that Adam Smith believed should govern markets (and for the Conservative Christians who supported this bill, don’t get me going about what Jesus would have done in 2005).

In fact, when any industry moves to take advantage of situations like this Adam Smith was very clear on what the state needed to do – intervene on behalf of those who have had misfortune visited upon their house. How many Americans do you believe actually look to “take advantage” of catastrophic illness, divorce, or a forced layoff? In my world, at least, none of these qualify as shrewd life opportunities or good business strategies.

Forcing those who have just lost a job, separated from a spouse, or suffered catastrophic illness into the same category as legitimate deadbeat debtors does little to enhance the integrity of the market Adam Smith spoke about. Not to mention what it does to our sense of community. It’s also not very Christian. At its worst, some might even argue that the 2005 bankruptcy reform bill has served to create a new form of indentured servitude ... and just in time for the looming mortgage meltdown.

¡Viva! Las Vegas.

- Mark

P.S. For those interested in more, here's an excellent article from the FDIC on the relationship between deregulation, credit card debt, and personal bankruptcy filings. It's long, but worth the read.

SHOW ME DOOR #3?

Remember Monty Hall and "Let's Make a Deal"? The program always had some ridiculously dressed person picking between three doors, all of which had cash and prizes. Since it looks like there's no way either Obama or Clinton are going to win the nomination out right, we may be heading for "Let's Make a Deal" land - and Door #3.

Because he's the front runner, Obama is Door #1. This makes Hillary Door #2. The Dem's Super Delegates become, by default, the always suspenseful Door #3. For the Democratic party's sake, I hope we don't end up with Door #3. We'll discuss my thinking on this Saturday. For those of you still unclear what the Super Delegates are all about wikpedia (incredibly enough) has a half-way decent overview right here.

- Mark

THE ROOTS OF MARKETS & WEALTH

As I noted a few weeks back, from time to time I will post snippets from my book project, The Roots of Markets and Wealth, here on my blog. The goal is to have the book finished and shipped off to the publisher by the end of this month. The photo to the left is Juan Peron, president of Argentina from 1946 to 1955, and from 1973 to 1974.


... Soon after the Japanese attack on Pearl Harbor in 1941 “Argentina blatantly obstructed efforts by the United States to persuade the Latin American nations to break relations with the Axis” powers. Because of this and other Argentine activities, throughout World War II many in the United States believed Argentina’s war time neutrality was little more than political cover for deeper pro-Nazi sympathies. In line with these sentiments, statements made by Secretary of State Cordell Hull during WWII suggested Argentina was hiding German spies and escaping Nazis. U.S.-Argentine relations took a turn for the worse after 1946 when, in an effort to undermine Juan Peron’s presidential bid, the State Department issued a “blue book”. The book detailed collaboration and links between successive Argentine governments, the military, and the Axis powers.

Later, in 1948, the United States decided Marshall Plan dollars could not be used to purchase Argentine goods. The U.S. effectively punished Argentina by mandating American Marshall Plan dollars only be used on U.S. farm products and those of favored allies. The Agricultural Act of 1948 cemented these policy goals. Specifically, America’s “federal government would increase grain production by subsidizing American farmers and would finance grain sales in Europe” through the Marshall Plan. The impact was both immediate and devastating for Argentina. By 1952 Argentina’s share of world wheat markets dropped from 23 percent to 9 percent while the United States’ share of wheat markets grew from 7 percent to 46.1 percent. By the early 1950s not only were American grain exports to Europe eight times greater than before the war, but its global share of corn markets grew from 9 percent to an astounding 63.9 percent!

Denied access to “Marshall Markets” Argentina was forced to sell to smaller markets, which deprived them of needed dollars. While Argentina’s post-war problems were no doubt compounded by Peron’s populist policies, the decision to shut Argentina out led to lost market share, compounded their dollar shortage, and helped precipitate a balance of payments crisis. These dynamics undermined Argentine development and fomented civil unrest. Both would help force Peron from power and bring military dictatorship by 1955. Today, many will argue competitiveness and the logic of the market are sufficient to explain America’s post-war agriculture fortunes. The reality is quite different. Expanded market share after WWII also depended on U.S. military victories and the subsequent divvying up of the spoils of war – which speaks as much too economic nationalism as it does to free market competition.

- Mark

LET THE MARGIN CALLS BEGIN ...

More good news from the financial front …

According to Reuters, “Wall Street banks are facing a ‘systemic margin call’ that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages.” Now this might not be such a bad deal if it weren’t for the fact that U.S. banks have spent the last year borrowing from the Federal Reserve’s “slush fund”, while corporate icons like Countrywide have secured over $50 billion in advances from the federal government.

On their own, borrowing and margin calls are not a problem. But with a collapsing dollar, rising fuel costs, the subprime mess, record debt levels, a collapsing housing market, and major bank write downs, among other developments, history tells us one thing: Margin calls and major institutions using the fed’s money to squirrel away cash reserves or prop up profits are probably not a good thing.

- Mark

WORSE THAN WE THINK?

So I'm reading through one of the many market analyst newsletters I subscribe to - the Motley Fool - and I came across this: "It's So Much Worse Than You Think". Here's a snippet ...

If you owe more on your house than it's worth, deliberately pursuing foreclosure can be a rational -- if unethical -- decision. It isn't surprising that this is happening. For years, lenders have been using legal fine print to gouge borrowers by raising the interest rates on credit cards and charging obscure fees seemingly whenever the mood struck them. Borrowers are now playing the same game ... But this is happening with only with an 8.4% fall in the housing market. What happens with a 15% or 30% fall? ... If a recession develops -- which, frankly, seems likely to me -- and the market falls 30%, then nearly two of every five mortgages will be under water.

But don't trust me, read the article - especially the accompanying chart.

- Mark

TRIAL LAWYERS ... OUR NEW 4TH ESTATE?

Once upon a time, when the Kings, the Church, and the peasants made up the vast majority of society, we had three “estates”. Then a group of malcontents with a printing press came upon the scene … and "the press" was born. The press became the 4th “estate” that would help keep balance in society. Unfortunately, the press has become an extension of corporations whose interests are tied to those in power …

This is why I love trial lawyers, and why the vast majority of conservative market players don’t ...

Law firms are gearing up to go after the ethically-challenged firms who worked to undermine the integrity of our national economy. In the process, if the legal firms do this right, they will show that the sub-prime disaster is only a symptom of a larger disease that infected and undermined the logic of the market.

Now, I have no doubt that the big players – as we saw with the Savings & Loan disaster, and the Alan Greenspan supported LTCM bailout – will find loopholes and politicians to protect them. And the usual arrogant and reckless players, along with a few sacrificial lambs, might even face some kind of prosecution. But these cases will end with the usual wrist slap sentences (it pays to be white … collar criminals).

And I’m even prepared to watch as the CEOs - who watched as their companies walked into this financial mess - saunter away with unearned hundreds of millions of dollars. Shame is not a prelude to decent behavior when money is to be made (does anyone remember when performance and accountability were once linked to pay in Corporate America?). But make no mistake about it; trial lawyers will play a big part in bringing balance and integrity back into the market.

What will come out of the lawyers entering into the current economic melt-down you ask? In real simple terms, because the corporate-driven media has abandoned its watchdog position the lawyers pursuing the ethically challenged will help bring us, or help induce, the market “correction” that the politicians and the press will not.

If they get this right, they might well become the new Fourth Estate.

- Mark

INCREDIBLE, OR JUST UNBELIEVABLE?

I'm working on another post that will have this link. But I just had to stop and give this story some individual attention. Specifically,

Washington Mutual’s board of directors have found a way to keep bonuses heftier in a year of extraordinary mortgage-related losses: moving the goalposts by excluding consideration of the losses in the bonus calculation.

Washinton Mutual's Human Resources Committee is telling us that executive bonuses will "not take into account the huge losses the financial services giant has suffered from the housing crisis" because ... well ... Who cares what the reason is for this stupidity? At the end of the day, and once again, reward is not being linked to performance.

If this isn't reversed, or if someone doesn't get sued over this, we deserve whatever befalls a collapsing empire. But be sure to read the article. It offers insight into the demented business ethics that appear to govern many parts of Corporate America today - even as the economy moves deeper into a financial firestorm.

Wait, I think I hear Nero's fiddle now ...















- Mark

IT GETS WORSE ... U.S. CONSUMERS ARE TAPPED OUT

Since the 1970s American consumers pursuing the American Dream have found an increasingly rough line to hoe. Inflation, declining and stagnant wages, and the challenges of every day life have not been kind to the American consumer. So, how have American consumers coped with growing costs and stagnant wages over the past 35 years? Let’s take a look …

* CHANGING DEMOGRAPHICS, 1970s: With the women’s movement came the rise of two income households. Two working parents increased household income significantly.

* CHARGE IT, 1980s: We began racking up some serious personal debt when, as Alan Greenspan put it, “innovation and deregulation” worked to “expand credit availability to virtually all income classes.” 

* DECLINE OF LEISURE, 1990s: While divorce and personal debt put a dent in disposable income, Americans began working more hours and even surpassed the Japanese in 1995.

By the time George Bush entered the White House the pursuit of the American Dream was becomingly increasingly that … a dream. To keep the pursuit alive Americans began using their homes as ATMs and went on a refinancing binge. This bloated personal debt loads across the country, and helps explain why home owner equity was less in 2005 (at the height of the housing boom) than seven years earlier.

Now that the refinancing boom has been stalled by plummeting housing prices Americans have found another source of cash. Incredibly, though not surprisingly, more and more Americans are tapping into retirement funds to keep up with expenses.

Let’s recap. To keep consumption up we have seen the rise of two income households ... deregulation and “innovative” credit programs ... more hours at work ... a refinancing binge ... increased personal debt loads ... and retirement fund raids.

Does any of this spell "American Dream"?

And did I mention that personal savings in America are effectively at zero?

My friends, American consumers are tapped out of money, and options. Because of this, Bernanke’s Fed rate cuts and President Bush’s economic “stimulus” plan are little more than smoke & mirrors. The American economy is in deep trouble. The best President Bush can hope for is to kick the coming economic debaclypse into the next administration.

- Mark

NEXT POST: I will provide an overview of the reasons why personal bankruptcies are on pace to set national records … again.

WE ARE NOT AT WAR ...

The five year anniversary of the start of the war in Iraq is fast approaching (March 20, 2003). I have a few thoughts ...

Whatever happened to the dire comparisons between the war on terror and the threat levels represented by World War II and the Soviet Union? As it turns out, in spite of what he has claimed about the war on terror (WOT), President Bush’s dramatic declarations have turned out to be more political theater than substance. Even the very conservative CATO Institute found the time to point out that Bush’s WOT-WWII comparison “ignores history” and conflates reality.

The point is, if we really are a country at war on the magnitude of World War II we need to ask ourselves a few questions. For example, Why haven’t we raised taxes to pay for this great and decisive national moment? Why aren’t we making sacrifices like we did during WWII? (And, No, yellow magnets and flag lapels don’t equate sacrifice or patriotism). Why have we not implemented, or even considered, a draft?

Instead, we are treated to the folly of those who claim that serving as an aide to a conservative war monger, or that toiling on the front lines of the “culture war”, are significant personal contributions to the "war effort" (let’s be blunt, these people are cowards and probably need help).

On another level, if we were living in such "perilous times" one would think that our national press might actually be dedicating some time to covering the current two great wars of historic importance. Even if we whittle the WOT down to just Iraq, we have to ask why the “central front in the war on terror” is only given casual references in our national news outlets today – and usually only when the president needs to scare up a vote for his domestic spying initiatives.

Instead our national media highlights sharks off the Florida coast, or feels compelled to cover the "dramatic" outing of Prince Harry in Afghanistan.

However, we do need to acknowledge the following. Our military is at war. The families of our military personnel, with the burdens they are forced to endure, are also at war. When it suits his political agenda, our president is also at war. And, because President Bush is “paying it backward” (as it were), our grandchildren’s financial future is also at war.

As a country, however, I find it difficult to say we are a nation at war.

- Mark

IRAQ COSTS WILL SURPASS WORLD WAR II

The war in Iraq will cost more than World War II, according to economist and Nobel laureate Joseph Stiglitz. Making matters worse, the gains many economists say we should expect from waging war will not appear.

In Stiglitz’s new book, The Three Trillion Dollar War, he and co-author Linda Bilmes argue that the real costs of the war in Iraq are $3 trillion. World War II, adjusted for inflation, cost the United States $5 trillion. Stiglitz said the $3 trillion figure is "conservative” and was made deliberately low to offset political criticism that, as a former Clinton adviser, he might be motivated to exaggerate the costs. And the effects of the spiraling war costs are already being felt.

In an interview with the NY Times Stiglitz said, "To offset that depressing effect, the Fed has flooded the economy with liquidity and the regulators looked the other way when very imprudent lending was going up"

Initial comments on the news from the Military.com forum is not good for President Bush ...

For that cost back in the 40's, we thrashed three global powers, in a war fought all over the world, and forced them into unconditional surrender. And, in about half the time. Today, we've overthrown two regimes in two relatively insignificant countries and can't even consolidate those gains or ensure that equally evil regimes don't come along and replace them. Not much to show for all that, is it?

And the commentary at Military.com only gets worse.

- Mark

TURKEY PULLING OUT OF IRAQ

Turkey is now leaving northern Iraq ...

If we accept the reasoning offered by officials in Washington, or Ankara, either the PKK has decided to be nice after getting beat up, or Turkey's military has one heck of a terrorist fighting machine. How do we come to this conclusion? Because Turkey's government made it clear that "[a]ny influence, either foreign on domestic, on this decision ... is out of question" because "the start and end dates of the operation were decided by us solely based on military reasoning." Put another way, the U.S. had nothing to do with getting Turkey out of northern Iraq. End of story.

And if you believe this I have a bridge to sell you, in Iraq (send cash).

Look, the Kurds in northern Iraq have been a better ally in Iraq than Turkey. Heck, the Turkish government wouldn't even let us launch the war in Iraq from their soil (for several reasons).

Kurdish counterinsurgency forces, however, have a storied history and have proven to be invaluable to U.S. efforts in Iraq. Can you imagine what would have happened if President Bush didn't cave in to the Iraqi Kurd's demands to get Turkey out? The question now is, "What did we offer/threaten Turkey with to get them to leave?"

With President Bush's desire to keep his military house of cards in Iraq somewhat stable, you can bet the farm we're going to pay through the nose on this one.

- Mark