Several years ago I fulfilled a childhood dream of becoming a Pilot. While completing the various requirements I had the occasion to attend a seminar on “risk avoidance”. I’ve forgotten much of the details of that day although, one ascendant message of that course has become inveterate to my life compass.
The course spoke to risk avoidance by reviewing some of the more tragic aircraft accidents in U.S. Aviation history. Tracing each of the final outcomes to one single trigger event that, if preemptively/properly addressed, the nascent tragedy would/could have been avoided.
We’ve all heard the common anecdotal references to cause and effect and that every action has an equal and opposite reaction etc., but for some reason, this particular fundamental precept (from the “risk avoidance” seminar) struck me as profound! Perhaps it was due to the “loss of life” component that made it so, well, lasting.
Life rarely offers a chance at “do over” as the consequent effect of our choices is, all to often, permanent. Once the idea breaks the ethereal boundary of thought, the maturation processes of action takes hold and takes over! In effect, it becomes a bridge that once crossed, can never be traversed again for the first time!
A curious preamble to a dialogue that will ultimately carouse about a discussion of economics and the inevitable political commentary but as my growing “wing” of followers have learned, it always leads to a “wrap” that nicely ties it all together. However, before moving on, I must address a comment that came from the “field” recently whilst (I love that word) speaking at a gathering. “…it must be easy being a Monday morning quarterback…” of which I summarily dispensed with this deciduous intellectual by simply saying, “…I’m neither a quarterback nor a calendar and I find that commenting on the obvious is neither second guessing nor evidence of a thallic mind,…when mistakes are made particularly with the prescient advantage of history as a guide, should we not ask the obvious question, why?” Shouldn’t we collectively call a time out, if providence will allow, and say ‘it’s a do over’ ?” It may be that what I should have said was, shouldn’t we INSIST on a “do over”!
I’ve written economic/financial commentaries many times before. I’ve studied economic history with equal vigor. With this perspective as a ballast I can tell you that there are no economic unknowns. There are however, economic fundamentals that have a habit of rearing their “I told you so” banners at the most inopportune times. Then we witness the inevitable gaggle of Reporters with an “…oh so tempered brow and erudite way…” quizzing the various Officials with banal questions which yield equally weak responses.
Look at it this way. Present day economics is a case study in Marketing on many levels. Granted, I’ve greatly simplified the analysis however, I’m confident the essence of the message is not diluted by/through the absence of details. So, here goes:
Accept for the moment (I’m narrowing the discussion to refine the point) that demand is created by culturing a hunger for (largely) product that add no value nor function, still, successfully, we’re compelled to buy. These products are made in another Country with/at slave-wage levels. From the Social Engineering stand point, the Government enters in to the Marketing Plan by introducing its own Vote Mining process by creating it’s own form of implied demand and that is through the elixir of Entitlement. In other words, it creates the presumption of demand by mandating/legislating it. “Affordable Housing”, “Fuel Efficiency Mandates”, “Farm Subsidies”, “Taxes” and the list goes on and on. And, don’t think for a minute that these have no affect on the Financial Markets! (2.) The Government (abdicating its Constitutional Mandate) through its accomplice, the Federal Reserve (the “System”), creates money (literally out of thin air) which it funnels through the Banking System. This currency/banking system is known as a Fiat system as the Paper Currency has neither a fundamental or supported value (other than the Makers “good faith and credit”). (3.) With each stroke of a Pen that creates each subsequent and seemingly unending supply of Paper, those that have gone before it become worth less. This result forces the printing of even more Paper as the System attempts to maintain a sufficient supply of Currency to offset its diminishing purchasing power (also known as systemic Inflation forces). I’ll offer you a mental image. Picture a dog chasing a progressively smaller tail! (4.) Now, the unfortunate Consumer is placed in a uniquely precarious position. Due to the fact that combined with a decreasing wage base and purchasing power, the Individual, if they are going to play the Consumer Game, is forced to borrow money from the System for which they pay (interest).
This is classic “inflationary forces” at work!
OH,…it gets even better!
Let us examine the “what happens if” scenario should the Consumer want to Purchase a Home. (1.) Well we already know that inflation (due to the explosion in the amount of currency in circulation) is forcing prices upwards. (2.) The System has massive demands from the Government, Consumer Lending/Banking, Industry etc. to continue the supply of Paper Currency and it is clearly aware of the consequent effect of its practices. Accordingly, it attempts a measured response to these Demands. (3.) The Mortgage Lending Industry, in order to accommodate the limitations of the Systems ability to provide an unending supply of Paper for Mortgage purposes created its own sort of Fiat paper System with the willing accommodation of the Government and the silent acquiescence of the System. In effect, what it couldn’t get from the System it obtained from the markets by compiling a group of Mortgages into various “units”. The Units became known as Instruments and sold to Investors through the various Financial Markets. The proceeds of these sales went back in to the system to fund more Mortgages and the process repeats itself. (4.) However, the cycling of the Instruments doesn’t stop there. There’s a second tier and here’s were the multiplier effect comes in. Investors, in this first tier, are Fannie Mae & Freddie Mac (Government Sponsored Agencies) and various other Investment Firms, e.g. Shearson Lehman, Bear Sterns, created funds that held these Instruments. These Funds became known as “derivatives” shares of which were then sold to other Investors. These Investors are typically Foreign Owned Commercial Banks, Foreign Central Banks (similar in stature the Federal Reserve) and Private Equity Funds are just a few examples. These Private Equity Funds are particularly interesting as often they represent tremendous wealth as they are likely fronts for wealthy Middle Eastern Oil Interests (e.g., The Saudi’s) or Governments Directly ( The Chinese Communist Government/Party). Again, as before, this money flows back in to the pool of funds available to the Mortgage Industry and the process, yes in deed, starts all over again. What makes these examples so potentially volatile is that they are “derivatives” of the actual Mortgage Instruments and not the actual Security. They are only fractionally secured by the Mortgage Instrument which is already pledged to the original Investor who bought it in the first place. In other words, a house of cards a “ponzi scheme”!
As a side note, there is also another component of the Mortgage Markets that continues to fly under the radar. It is the single largest dirty little secret of all. It is the, de facto “off the book” lending of Fed Funds to Banks. These practices funded massive amounts of money in to the Mortgage Markets simply by the use of a slight of hand accounting method. Banks are required to maintain statutorily established reserves. The amount of money they are able to borrow is controlled by these limits which are based on liquidity as a function or ratio of the aggregate loan balances. Clearly, the Banks are suffering from very low reserve levels which, in turn, affect the amount of money the can borrow from the Fed. So, you ask, how do they get more money? They simply take large blocks of “debt”, typically those they’ve already borrowed from the Fed, and simply take these “off the Books”. Anyone wonder why Bank of America quietly stepped in and took over Countrywide? Better still, ask from were did Countrywide obtained much of their funding commitments. I’ll drop this particular subject for now, I trust you’ve got the point.
It’s not that I have a crystal ball. I don’t! I am certain however that the very same triggers that have occurred several times before are in play once again. We’ve already had one round of bailouts that I said would occur (11/07) and they are not over. The real problem that I see in our present situation is that the trail has migrated around the World. The interconnectivity of the Markets and their Investors have reach very influential parties. This time, it will be seen that the Government will have no choice but to intervene, albeit selectively, but it will have to none the less. Not doing so will likely send the Dollar to irretrievable depths and the U.S. Economy and Financial standing to the level of a third rate Nation.
Whatever the outcome. This Nation needs a Financial System “DO OVER”! Let’s have a frank and honest discussion about the Financial/Money System. Let us, at the least, be clear why the System is the way it is! One reason and One reason only. A fiat money system exists to enable the creation of dept unchecked by the need for fundamental and secure collateral. It, in effect, allows the Government to spend as it pleases to fund any/all programs it pleases and the consequent effect of which is to straddle the People with the eternal/life long burden of DEBT! And because you’ve been convinced that the Government is serving you by doing so, you are blinded by the very poison that is killing you and those that follow! The Federal Reserve was created in 1913, it has now survived nearly three generations. It’s ideologies have blended so effectively in to the financial culture of this Country that even those who should know better no longer see the damage it causes. Pay close attention to the Presidential Politics of the season,…not a word it mentioned! NOT A WORD!
DO OVER? Yes, LONG OVER DUE!
Curtis C. Greco, Founder