CASE CLOSED

This about sums it up ...

- Mark 

I'M GLAD MY DAUGHTER DOESN'T HAVE TO WORRY ABOUT THIS

From Upworthy we get another interesting story that demonstrates how far we've all come over the past 50 years ...

- Mark

FINANCIAL ENGINEERS WORKING ON OUR NEXT FINANCIAL TRAINWRECK

It appears that the financial engineers learned nothing from the market stupidity that led to the 2008 market meltdown. They're setting us up for another financial train wreck. Check this out ...

BACKGROUND
One of the biggest problems we saw with the market meltdown was tied to market players (they're not investors) who thought they were masters of the universe because of the "brilliant" debt drenched money making schemes they developed.

At the heart of the money making plans were easy money and flimsy investment instruments - derivative products - that only paid out if millions of debt laden consumers kept their jobs and made regular payments on their debts. To convince themselves that they had a sure thing market players got the ratings agencies to give their products AAA ratings, then went out and purchased insurance (Credit Default Swaps) from unregulated groups that, as it turns out, didn't have the money to pay out claims when the s**t hit the fan.

With flimsy investment instruments backed by a faux insurance regime market players proceeded to borrow lots of money, which they could do in an era of deregulation, to make trillions of dollars in market bets.

And why not? Then Federal Reserve Chair Alan Greenspan had blessed the debt fueled financial engineering, bragging that the wizards on Wall Street had created a "new paradigm of active credit management."

Then, in 2008, the market collapsed on its own nonsense. Oops.

TURNING STRAW INTO GOLD, AGAIN
The global firms and institutions that got caught up in the 2008 market collapse lost hundreds of millions, with larger institutions losing many billions more. Fortunately for the financial institutions who lost money from around the world the skewed bailout culture (that was led by the United States) also included favorable legislation and generous tax write-offs from their home countries.

Perhaps one of the biggest favors was allowing the foolish market players, who got caught up in the debt and derivatives mess, to deduct their losses from future earnings. This saved many firms from bankruptcy, and many more individuals from financial ruin.

Among the many firms and institutions that got caught up in the debt drenched mess were banks in Spain. They borrowed from international markets and fueled the Spanish real estate bubble, which popped in 2008. But the banks in Spain now have a problem. As part of the larger global effort to clean up the market mess, Spanish banks - per Basel III - are supposed to have more cash reserves on hand. The banks don't have the money.

This is where it gets fun.

Spanish banks want to take the losses that they absorbed after 2008 and convert them into hard cash assets. How do you convert a monetary loss into hard cash, you ask? Simple, you get the government to sign off on turning your future tax deductions into hard cash today. Banks in Spain are currently petitioning the Spanish government to "advance" them future tax deductions with billions in credits.

All of this will be paid for by the Spanish taxpayer, of course.

Specifically, with about $65 billion in losses (a little more than €50 billion Euros), Spanish banks are asking the government to turn about two-thirds of their $65 billion in losses into bank credits. For this to happen the Spanish government will have to credit each private bank account with billions out of government accounts. Call it Financial Engineering Dos Punto Zero.

At issue here is whether the Spanish government - which has serious financial problems of its own - can afford to credit the banks the money they want.

If you're looking for an analogy to what the Spanish banks are asking for think of an average home owner in the U.S. who's paying off their mortgage. Tax law in the U.S. allows homeowners to deduct a large portion of the interest they pay on their mortgage loan. If a homeowner deducts $2,000 per year in interest over the next five years the homeowner will receive $10,000 in deductions. If we use the plan outlined by the Spanish banks, instead of asking for deductions over the next five years the mortgage payer in the U.S. could ask the government to front them $10,000.

And just like that the homeowner gets $10,000 because of a neat accounting trick that turns a tax asset into a bank credit.

But wait, if we cross the Atlantic, the creativity behind the financial engineering only gets better.

DERIVATIVES 2.0
Remember the flimsy investment products I discussed above? You know, the bundled up mortgage contracts with the faux insurance plans that only pay out if the debtors in the financial pyramid actually makes regular payments. As we know, the debt drenched derivative system didn't work out so well.

Still, in spite of crashing the market with derivative laced bets in 2008 the financial engineers on Wall Street now want to bundle up monthly rent payments, and turn them into new and improved derivative products that they want to sell as securities.

In effect, the financial mandarins of the world are saying to the taxpayers, "So what if the derivative contracts we stacked on top of one another and sold as securities took us into the financial crapper in 2008. We'll have more luck with securitized rents this time because we've worked on the debt-laced kinks ... and yeah, we think you're that stupid."

At the end of the day the financial engineers are at it again. They're still trying to turn straw into gold. In reality, bit by bit, they're setting up our next financial train wreck. And no one seems to care.

- Mark

40 WAYS OBAMACARE IMPROVES LIVES

So the GOP has now voted to repeal Obamacare 40 times. To mark the occassion the White House just released the 40 ways Obamacare is working to improve lives in America. You'll understand why I italicized #16 below when you click here ...

1. Say goodbye to lifetime limits: Insurance companies will no longer be able to place an arbitrary cap on coverage.
2. Children can no longer be denied health insurance because of a pre-existing condition.
3. Starting in 2014, adults will no longer be denied health insurance because of a pre-existing condition.
Free preventive care, including:
4. Annual check-ups
5. Contraception
6. Vaccinations
7. Gestational diabetes screenings
8. Mammograms
9. Screening and counselling for HIV
10. Cholesterol screenings
11. Colonoscopies
12. Blood pressure screenings
13. Cancer screenings
14. Osteoporosis screenings
15. Young adults can stay on their parents' insurance plans until the age of 26.
16. If insurance companies aren't spending your premium dollars on your health care—at least 80 percent—they've got to give you some money back.

17. Insurance companies can't raise your rates by double-digits without justification.
18. Insurance plans can’t require higher co-payments or co-insurance if you get emergency care from an out-of-network hospital.
19. Women will no longer be charged more than men just because they're women.
20. The health insurance marketplace will be ready to go in every state starting October 1 of this year.
21. No-hassle comparisons: The online marketplace provides easy access to information on all available plans, so you can do a side-by-side comparison and find a plan that works for you.
22. Many Americans will be eligible for financial assistance to help them buy health insurance on their own, so you can afford a plan that will be there if you get sick.
23. When you buy insurance through the marketplace, premiums can be determined based only on these four factors: where you live, how old your are, how large your family is, and whether or not you are a smoker.
24. In the marketplace, you can choose a plan that matches your budget and needs: Platinum, Gold, Silver or Bronze.
25. By 2020, the Medicare prescriptions drug "donut hole" will be closed for good.
These are the essential benefits that all health plans in the marketplace must cover:
26. Ambulatory patient services
27. Emergency services
28. Hospitalization
29. Prenatal care
30. Neonatal care
31. Mental health services
32. Prescription drugs
33. Rehabilitative services and devices
34. Laboratory services like bloodwork
35. Preventive care
36. Wellness services
37. Chronic disease management
38. Pediatric services, including oral and vision care
39. Lower prescription drug costs for people on Medicare.
40. These states are already foreseeing dramatic drops in premiums: New York, California, Nevada, Connecticut, Oregon.

If you couldn't make it through all 40 just imagine what's (not) happening in our GOP-led Congress, where their obstructionism has them preparing to vote against Obamacare for the 41st time.

 - Mark 

FIVE REASONS WHY FINANCIAL REFORM IS A SHAM

Want to know why financial reform, also known as the Dodd-Frank Act, hasn't done much to slow down the gambling on Wall Street? Money Morning's Garrett Baldwin discusses the reasons here. I've synopsized Baldwin's arguments below. In brief, Dodd-Frank isn't effective because ...

1. Ex Post Facto Power: Dodd-Frank creates rules - like the FDIC's "resolution authority" - that kick in after a crisis happens, while postponing or watering down rules that would prevent a crisis in the first place. 

2. Too Big To Fail (still): Together JP Morgan Chase, Citibank, Wells Fargo, and Bank of America have enough assets under their roof that it equals 97% of the GDP of the U.S. in 2012. Dodd-Frank does nothing to alter this.

3. No Glass-Steagall Firewalls: The commercial and investment activities of each of these banks remain under one roof. Because of propietary trading, interconnectedness, and repo activities, a collapse in one area of the bank could drag the rest of the bank(s) with it. 

4. Volcker Rule Neutered: While the Volcker Rule was designed to prevent banks from using client accounts and FDIC insured deposits for their financial benefit the Volcker Rule has been so watered down as to render it toothless. 

5. Bank Lobbying Dominates: Banks get far more face time with lobbyists than do reform groups. To date Goldman Sachs has had 222 meetings with regulators while JP Morgan has had 207. This is one of the reasons why the Volcker Rule was neutered and only 159 of 389 Dodd-Frank rules have been finalized.  

To this I would add that even when the financial sector gets caught they're allowed to pay fines rather than have anyone go to trial, let alone get convicted.

In a few words, when it comes to addressing the issues that led to the 2008 market collapse big loopholes remain. So, yeah, white-collar crime still pays.

- Mark 

INTERESTING READS FOR THE WEEK (Aug. 4, 2013)

Drunk Goldman Sachs employee knocked out after screaming racial slurs, black patron arrested for punching the idiot (Zero Hedge).

FBI was aware of plan to use snipers on Occupy Houston movement (Chron).

No more free sun ... Arizona's biggest utility wants to tax solar energy that's sent back into the grid (Tree Hugger).

Scientist discover cause of bee deaths, and it's really bad news (Tree Hugger).


OUR EVOLVING NATIONAL SECURITY STATE

Senator Ron Wyden (D-OR) on NSA spying: It's as bad as Edward Snowden says (Alternet).

NSA XKeyscore surveillance tool collects "nearly everything a user does on the internet" (The Guardian).

The White House is unable to confirm whether they briefed Congress on XKeyscore (The Guardian).

The worldwide surveillance and privacy war, which you already lost (Testosteronepit).

There goes our privacy ... SWAT team raids home because of two separate Google browser searches (Alternet).

Google engineer wins NSA award, then says NSA should be abolished (Alternet).

NSA spying absurdity ... fake PR Skype account created to help NSA, then taken down after outcry, and then put back up with "parody" disclosure (Zero Hedge).


BY THE NUMBERS

Six ways Rabid Republicans are declaring war on America (Alternet).

Eight shocking ways the United States lead the world (Alternet).

The 10 hungriest places in America ... and Bakersfield is #1 (Take Part).

- Mark 

THE REPUBLICAN BUBBLE

From Bill Maher. This is what it's like when I try to explain reality - or "irrefutable facts" - to my conservative friends on Facebook. And, yes, you know who you are ...

- Mark

WALL STREET: A BRANCH OFFICE OF THE FEDERAL RESERVE

Since March 2009 the total amount of goods and services produced by the U.S. (or GDP) has increased by $2.3 trillion. However, the total capitalization of the U.S. stock market has grown by $12.3 trillion.

So what's happening? In a few words, the growth in the market is tied to low interest rates and regular money dumps from the Federal Reserve. Artificially cheap money has allowed market players to both game and energize the system in ways most Americans don't understand, which explains our surging stock market in a recession drenched economy.

Commenting on these developments former Reagan budget director David Stockman makes it clear that our markets aren't real because they are "medicated" with low interest rates from the Federal Reserve. In the process of institutionalizing the Greenspan Put we've also destroyed capital markets.

Worse, Stockman adds, because the stock market is so dependent on the Federal Reserve capital markets in America are now "dead" while Wall Street has effectively become a "branch office - branch casino - of the central bank." The end result is that there is no free market in America because "you can't have capitalism if the capital markets are dead."  

- Mark 

WHAT'S WRONG WITH DETROIT ... AND AMERICA

Contrary to what you've heard, the fiscal problems of Detroit, and the challenges that confront America, are not so simple, or the result of unions. The 79,500 Michigan jobs/workers that were displaced or shipped to China between 2001 and 2007 didn't happen because of mysterious "magic of the market" forces. Nor did Detroit's tax base suddenly disappear because of incompetent political leadership (though the incompetence didn't help).

Michigan's jobs and manufacturing picture worsened - as did the nation's - because of policies taken by the federal government over the past 30 years. These policies rewarded companies for shifting manufacturing jobs around the world.

When jobs leave so does the tax base. Pretty simple.

Now, someone reading this might be screaming at their screen right now that unions priced the American worker out of the global labor pool by demanding too much. Think again.

Germany produces twice as many cars as the United States. Their unionized auto industry pays workers significantly more than what the U.S. auto industry pays. Indeed, when you take out what it costs for health care (Germany has universal health care) we find that German auto workers make about two times what their U.S. counterparts earn, while benefits for German workers are substantially more rewarding (8 weeks paid vacation, free day care, etc.).

So, the big question is if German auto workers make far more than their U.S. counterparts, why is it that Germany hasn't experienced collapsing industrial cities like Detroit? Why is it that Germany - with its higher salaried auto workers - is seen as the key to Europe's economic stability, while the U.S. is still languishing in a 2008-induced market zombie walk?

SO, WHAT HAPPENED TO DETROIT?
While I could write about the government escorted financialization of America's economy - which is a big problem - for our purposes there are three other developments that help us understand what's happened to Detroit's, and America's, manufacturing base.

The first development is pretty simple. For the longest time no one wanted to buy U.S. automobiles. Beginning in the early 1970s America's auto makers began producing crap. Remember the Gremlin? The Corvair? The Pinto? The Chrysler Imperial LeBaron Two Door? The AMC Pacer? The Chevy Chevette? This wasn't the workers fault. This one is on management. When auto manufacturers in America were forced to shut their doors jobs disappeared too.

The second answer is a bit more complex, but still relatively simple too.

Germany's constitution and social culture embrace unions, worker councils, and the right to strike. This helps shape Germany's union-management relations so that they are collaborative, as opposed to being adversarial (the case in the United States). It's the primary reason that Germany didn't experience wholesale layoffs in the auto industry after the 2008 market collapse (offering "extended vacations" instead). Unions and management worked together to keep people employed.

Finally, apart from producing crummy automobiles and going after unions, the United States has gone out of its way to encourage its auto industry and manufacturing base to leave, while doing little to protect American workers. Think about the following.

As I noted above, between 2001 and 2007 Michigan lost 79,500 auto jobs to China. This happened because of specific government policies, both here and in China.

1. Free Trade Agreements: The U.S. has entered into numerous trade agreements that facilitate moving manufacturing jobs overseas, especially to low paying regions of the world.
2. Currency Manipulation: China has been allowed to manipulate its currency, which enables it sell more goods in the United States.
3. Labor Rights Abused: China regularly suppressed labor rights, which lowers manufacturing wages by as much as 47% to 86%, and attracts manufacturers from the U.S. 

Throw in generous U.S. tax credits for business expenses - which include credits for shipping jobs overseas - and it's easy to understand why almost 3 million jobs in the United States were outsourced or were displaced by government policies between 2001 and 2007 (the German government, on the other hand, appears to have had a role in saving VW from a hostile takeover in 2008 by orchestrating the largest hedge fund loss in history).

By sending taxpayer funded trade representatives to negotiate trade deals, while ignoring currency and labor abuses, the U.S. government has effectively told Detroit and America's industrial base - and the middle class - we don't care about you. The end result is that millions of American jobs have been sent to countries all over the world.

Overseas profits and executive pay in the United States has climbed, but workers and America's middle class are left scrambling for what's left.

WHAT AMERICA'S WORKERS ARE COMPETING WITH
The interesting thing about these developments is that while negotiating trade agreements the private sector has been adamant about protecting proprietary rights and corporate patents. Forcing governments around the world to go after street vendors and protect intellectual property rights is part of our larger free trade negotiating position.

Worker rights, however, are an entirely different matter.

Forced or slave labor? No problem, send the products here. Child labor? No problem, send the products here. Unsafe working conditions? No problem, send the products here. All of this has made it easier to go after labor here in the United States.

To be sure, there's no doubt that German auto makers produce cars in China. But they don't do so as part of a larger policy goal of driving down wages in Germany. The idea that we're all in this together is rooted in Germany's historic approach to economics, and is not simply a shop floor poster in Germany.

Forcing the American worker to compete with laborers who have few protections and can't defend themselves undermines the moral justification of capitalism (the idea that you can work hard and get ahead). It also defeats the spirit of democracy that we fought two wars in the 20th century to promote.

At the end of the day, as I wrote three months ago, if we wanted to demand global labor rights we could. But we don't. This encourages firms in the United States to go abroad, which helps explain what's happened to Detroit and in America.

- Mark

UPDATE (Aug. 2, 2013): And let's not forget that some of the largest economic subsidies and tax breaks -  which erodes a states tax base - were given out by Michigan ($7.1 billion) ...

UPDATE, II (Nov. 4, 2013): This review from the Detroit Free Press is an impressive work that helps us understand the managerial incompetence in Detroit that made the impact of American-led globalization and outsourcing worse than they should have been ...  http://www.freep.com/interactive/article/20130915/NEWS01/130801004/Detroit-Bankruptcy-history-1950-debt-pension-revenue

WE'RE #1, WE'RE #1 ... 8 NOT SO GOOD WAYS THE U.S. LEADS THE WORLD

From Alternet.org, the 8 shocking ways the U.S. leads the world ...

1. Most expensive place to have a baby.

2. Obesity.

3. Anxiety disorders.

4. Small arms ownership.

5. Most people behind bars.

6. Energy use per person.

7. Amount of GDP dedicated to health care (17.6).

8. Cocaine use.

To this I would add having the most misinformed news watchers in the free world, courtesy of Fox News. This would change, of course, if we throw in North Korea and other tyrannical states.

- Mark