Archive for May 2010

THE ABC’s OF FINANCIAL CRISIS

May 23, 2010

I’m old and slow and have to simplify things down to there lowest common denominator till I can understand exactly what went on. The mortgage crisis that none of the big wigs saw coming , was as easy to spot as lipstick on the wrong end of a pig. You only had to look at a few simple everyday facts most of which were yelled and screamed and touted ofter in the MSM. House prices never in history have gone up 15 to 20% a year. A quick look at a chart on the average price of a house clearly showed a deviation from the normal 3% average increase per year. The frosting on the cake was that nobody can afford a house that cost more than 3 times your average wage. So exactly how did they pull this off.

Keep in mind , this bubble was created to hide the effects of the Dot Com Crash. The Fed used their most popular took, they lowered interest rates to zero. Even though this is often touted as the cause it’s not. If everybody had stayed hones a lot of folks could have bought and kept a house because of the low rates but that’s not what happened.

1.The Mortgage brokers because of deregulation and the knowledge that the government wouldn’t interfere started making all kinds of loans most of which they knew would fail in the first few years. They didn’t care how long they lasted as long as it was longer than the 30 milliseconds they took to unload them to banks. Meantime they collected handsome fees.

2. The banks gladly took the loans off the brokers hands knowing they were bad, but didn’t care as they were going to package them and hawk them to the Investment Houses.

3. The Investment Houses sent the packages to the ratings agencies to be rated as to investment grade (AAA the preferred rating)

4.The Rating Houses would rate 80% of the packages AAA making them of the quality that Pension Funds and Retirement Accounts were looking for. It is known now they didn’t really look very hard at the quality of loans in the package they just gave them the required rating. They normally sent 20% back as low quality , which were repackaged with other dogs, with a few good ones thrown in for luck and 80% of this junk package was rated AAA. This process was repeated over and over till there contents could be properly labeled JUNK OF JUNK.

5.The Investment Houses then sold these packages world wide and essentially turned the mortgage packages (about 7 Trillion bucks worth) and there derivative packages into a 600 Trillion dollar bomb. That you now see blowing up.

6.But wait that’s not all . Eventually the banks and investment houses knew these were pieces of crap and were buying bets they would fail while selling them as AAA investment grade instruments. In the beginning of the bubble they were betting long and did this for several years and during this time almost nobody was betting that housing prices would ever go down so they were buying derivatives packages betting the market would continue up.

7.One loan guy sitting in a darkened office running a small fund and known for his ability to pick good stock buys by carefully reading the quarterly reports . Suddenly he realized that these mortgage packages were based on the incorrect idea that housing prices would never fall. He called some of the biggest banks to see if he could buy a bet they would fall. Almost nobody was interested but a couple took the bait and sold him his shorts. This is all detailed in his book “THE BIG SHORT” a fast reading tell all tale of what started the crash. No it wasn’t his fault that it crashed as no more than 20 people knew and took advantage of this vehicle. When it became apparent because of the high number of these mortgages inside a package were failing (it took about 8% failure rate) to make a package fall like a rock from a tower. Ok , for all you Newton fans (an apple from a tree).

The above is a simple version of what took the mortgage market to hell. Don’t be fooled, we are only about half way through the residential mortgage mess with 2010 and 2011 forecasted to be as bad as we have already seen.

Another big factor in the downsizing of America is the tactics of Hedge Funds and the lack of government interest in controlling them or for that matter enforcing the laws already on the books. Naked short selling by these funds have driven a lot of companies stock to prices that allow the funds to buy the company for pennies on the dollar. (Naked short selling is illegal because it allows companies to bet stock they don’t own or rent, which sometimes throws more stock on the market than actually exists.) After they own the company one of first acts is to downsize the work force (they don’t like to say fire) , then it’s bust the contracts that control wages and benefits (aided by the courts) which often takes away health care and pensions from not only current employees but retirees too.

In the every day market these huge funds because of their piles and piles of money can drive commodity prices anywhere they want. Take a look at a oil price chart, or money, or corn, or just about any damn thing and notice the prices swing widely. Most know now they are artificially swinging the prices so they can make huge profits up or down and exercise huge control of our economy itself by deciding where we would have to spend our money. Will it be on gas, or food, or health care, you got the picture by now I’m sure. The song and dance they do to explain all the price moves are wearing thin now days and most just scream bullshit , put have to pay the piper anyway.

70% of the market today is controlled by what they call “FAST TRACK TRADING” , just a fancy high priced bunch of computers and software that control the market. Did you like the 1000 point swing the other day, all started by a bet of 7.5 million that the DOW would fall, to buy a bet somebody has to be on the long side, they were , and realized they better cover their asses with a fall bet too, somebody had to be on the other side and on and on it went . When the first execute button was pushed (no fat finger mistake) a deliberate bet , the shit hit the fan. They jumped on the panic button and sent the market the other way…Somebody made a shitpot full of money and of course somebody lost. One thing for sure we didn’t have time to do a damn thing but watch and take an extra dose of heart medicine .

The bottom line is this, how can us commoners plan for investment vehicles to provide for college for our kids , or retirement funds for ourselves with this kind of bullshit taking place. Don’t think for a minute that the Financial Reform package will do anything for us, we ain’t got the bucks to buy that kind of deal. Did you notice the shit storm caused by Angela Merkel banning naked short selling in Germany caused, ever some of my favorite economic writers criticized her for it. It’s those kinds of sudden moves that can bust these hedge funds and this automatic trading nonsense overnight. Sounds like a hell of an idea to me. Don’t hold your breath for those kinds of changes happening here, it won’t.

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THE WEDGE (CHECKBOOK ECONOMICS)

May 8, 2010

Some moons ago I started calling common sense economics Checkbook Economics, however , now thinking it needs a more catchy name I will call it the WEDGE which is the simplest tool ever designed by man.  That’s exactly what this economics system is about SIMPLE.

The basic premise  what  can the average family realistically expect on their $46K/yr income.

The blog My Budget 360 lays out item by item what you can do on this budget.

Here http://www.mybudget360.com/how-much-does-the-average-american-make-breaking-down-the-us-household-income-numbers/

What is starkly laid out in the above post is a long ways away from what we are told we should do.

What has prompted me to explore this subject is the repeated media drumming of how screwed up we are and that we have built our own nest and now must lie in it.  Total Bull.  When 50% of the families earn less than 50K they are not going to have health insurance, or a retirement fund or much fun either.  As My Budget 360 says up front you can find fault on a line to line  dissection  of his budget but it does give you a basis to compare your own experiences.  You can plainly see that you are not going to live up to the guidelines given us.  For instance you are not going to save a lot of money, you are not going to have health  insurance, you are not going to have a retirement account and above all you will probably have to work till you drop.

A few articles on where we are actually at in the retirement savings race.

http://www.zero2rich.com/average-retirement-savings.html

http://www.bargaineering.com/articles/average-retirement-savings-by-age.html

About 7% of workers are union members and have retirement programs and some companies do also.  The companies with plans are disappearing rapidly and those that do exist are having benefits lowered .  Is some cases of late companies are just cancelling the retirements they are paying their retirees.  So realistically you are looking at what you will get from Social Security and your meager savings.  Note: Social Security is under attack as we speak.  Before Social Security 80% of seniors lived in poverty and it looks like they are trying to put us back in poverty in the future.

THE WEDGE (SOME BASIC PRINCIPLES)

If you work for wages you are not going to be rich.

Your house is not an investment, it’s merely a place to live.

You will not be able to save a lot of money.

You most likely will not have a college fund for your kids.

Your wife will work.

You will never retire. (unless you work  as a union member)

You will have credit card debt, there’s no way you can avoid it.

You will have to adapt a “Can I afford it by the month”?  attitude. Saving to buy a car, or a house is out of the question.    Doctor and dentist bills are a  waiting terror for every family without insurance.   A trip to the dentist can put you in hock for years.

You will have to figure out what the Rich Folk will let you have and be happy with that.  That is actually not as bad as it seems.  If you can enjoy the simple things in life you’ll be fine.  Only if you keep up with the Johns will you get in trouble.

If your above average in income with your wife working you will average $67.800/yr. Check this chart comparing a 1973 family to today’s family from My Budget 360

This little chart is depressing as hell, it how takes two people working with the same $17K after basic expense, housing, insurance, taxes, cars and daycare.  $17K to do everything else , roughly $1400/mo  dollars to do everything else.  Good luck with that.  This should plainly show you the expectations laid on us by the Media and the Powers That Be are totally unrealistic.

Even if your in the top 15% in wage earnings ($100,000) and you live in a high rent district like California you will barely be making it.  Check out this My Budget 360 post “Going Broke on $100,000/yr.

http://www.mybudget360.com/family-budget-how-to-go-broke-on-100000-a-year-why-the-middle-class-has-a-hard-time-living-in-expensive-urban-areas/

As shown by the budget links provides that there is a long, long way between the median income and the top 15% wage earners.

The single purpose of “THE WEDGE” is to restore your self confidence , you are not as screwed up as the Politicians and the Media make you out to be.  You hear daily how you are responsible for the current financial crisis because you bought a house you couldn’t afford, or you bought those two SUV’s,  or all you do is watch TV and go to the Mall to shop.

The average family was suckered into a huge trap by the housing bubble and easy credit.  You were told hey, just buy this house , look you can afford this low, low payment and in a few years you can flip it or refinance into a more affordable loan, meantime you can take any gained equity out of a Equity Loan and spend it. Alan Greenspan didn’t see any bubble he says and thought that real estate would go up forever.    It’s your money use it.  And then the Merry Go Round stopped and the sky fell.

Meantime back at the DEAR OLE BANK , that screwed you to begin with, they jack your credit card interest up to 30%, change the due date so they can charge you late fees, impose all kinds of fees that didn’t exist before and of course get several million bucks per year in their fat greedy little hands.  The hell of it is , they packaged and sold your mortgage and now they don’t get nailed when you get foreclosed on.

So the bottom line is quite simply this.  Quit believing everything your told about this being your fault.  Sure you bear some of the blame, but you were suckered in.  Plenty of rich guys were suckered along with you, pension funds, investment advisors, foreign buyers of our funny money derivatives .   The Bernie Madoff’s of the world took no prisoners, they screwed everybody , friends and enemies alike.  The average guy was screwed by the biggest crooks of all times,  BANKS.

An old saying comes to mind, DON’T GET PISSED , GET EVEN.

Mike Malloy (a wild eyed talk show host) suggests we just stay home from work.  He figures it will only take one day if we all do it.  It might just work.  Work a day, stay home a day till the changes we need take place.  The hell of this idea is it doesn’t take a big organization, it just takes you and me and somebody to name a starting date.  It’s in our hands , it’s obvious no politician will come to our rescue.  If it’s going to get done, WE HAVE TO DO IT.