The Populist Pub is Open. Let's Talk Worst Case Scenarios!

 

Petit Julien welcomes you back to the Populist Pub.  

Nearly 18 months into this recession, skepticism is growing about what "recovery" might look like. We hear talk of "green shoots" in an economy that is being remade into another bubble economy, this time based on "government finance". Is it really "stimulating" to the real economy to inject massive amounts of liquidity into the financial system? This unprecedented intervention includes Federal Reserve Credit, Treasury borrowings, agency debt, mortgage-backed securities issued by GSEs, as well as increased involvement of the FDIC. The latest estimates of the size of this bubble is around $14 Trillion which, amazingly, dwarfs the mortgage finance bubble it replaces. The question many analysts ask is whether the FED will be able to withdraw liquidity from the system in the proper amounts and at the right time in order to avert the inevitable inflation when it begins. Ironically, the FED will then find itself in the familiar position of being trapped by the risk of bursting another historic bubble!

Few economists or financial experts agree with the course of action the government has been taking. Criticism has recently become more frequent, more numerous and much more pointed. The appearance of cronyism, conflict of interest and outright corruption in all branches of the government, on Wall Street and in the MSM are evident on a weekly, if not daily basis. Yet, the policies remain in effect; real oversight and reform are nowhere in sight. There is little transparency with respect to actions already taken and we are told no plan B is in place because none is needed.

I think the May 8th editorial from The Automatic Earth sums up the situation fairly well.

In the beginning, there was the Glass-Steagall repeal, rejection of securities regulations, ultra-low interest rates, the president talking up homeownership. Then there was light, and with it came $14 trillion in taxpayer funded alphabet soup support (equity, loans, guarantees). First through the Treasury, and when that became tough, through the back door steps of the Federal Reserve and FDIC. Along the way, Fannie Mae and Freddie Mac were used to buy up mortgages and AIG to gobble up derivatives’ risk. All three are now part of the taxpayer alphabet soup. The $23 billion loss Fannie announced today is on you, America. And there is nothing in sight that says the annual loss for 2009 will be below $100 billion. For Fannie alone. But don't get all excited just yet, the combined Fannie and Freddie mortgage portfolio's contain some $6 trillion in goodies, and they're by law required to add $40 billion more each month, almost half a trillion per year, to keep the bankers' profits flowing. And all of it is yours. Even though both are still publicly traded and Obama didn't include them in his budget, claiming they're private companies and "their securities are not backed by the full faith and credit of the Federal Government"(that would be your faith, and your credit). That way he can try and fund the losses, with your money, outside of Congress, I guess. After all, only $400 billion of your cash has been promised to the F&F black hole cabal that keeps home sales going, and prices elevated, in the US. And, yeah, I know what you're saying, I’m not so sure I want to know the whole picture on their securities portfolio either. That could be real ugly. Regulator, anyone? Obama wants the Federal reserve to be the one and only overseer on the financial industry. The whole set-up has had only one thing in mind since the get-go: don't let the banks lose any money, if only because if they shed any more of it, some goat herder in a dress will pick them up for chump change on a drizzly Monday afternoon just to have something to do. Plenty's been said about the stress tests, and it all boils down to two points. First, there's no mention of valuing bad assets, and why should there be with accounting standards out the window and PPiP waiting in the wings? And second, under the tests, the required Tier 1 common stock amounts to 4% of the risk-weighted assets. Which means that all the biggest US banks, including those that hold most of your deposits, are allowed a 25 to 1 leverage ratio. Which sounds more like a hedge fund or a casino to me. Only 5 years ago, investment banks needed 8% in Tier 1. And then, of course, the golden calf was born. Now that the poor beast has been slaughtered, the only prudent way to go forward, prudent as in looking out for the man in the street, would be to a 10 to 1 ratio, if that, at least until the system has been cleared of its problems. But that won't happen. Because it would show all US banks to be insolvent. I've said it before: there's no need to game the plan. The plan is the game. The heads of government were once the heads of the banks, and the other way around. The banks have virtually unlimited losses, and the government has virtually unlimited access to capital, that of its citizens. You have to admit, it works like a charm. But not for you.

Most of us here at EP commiserate daily about the unsound policy making and the adverse effects the policies have had on the real economy. We track and discuss on a regular basis the weaknesses in the economic fundamentals which underly any meaningful, sustainable recovery. We question where we are heading if/when the policies fail, or maybe even if they succeed! Either way it seems, there is a growing consensus that the ultimate outcome will be painful and will persist for a long time. That largely explains why we hesitate to ponder the details of what lies ahead.

So, it was with sober curiosity that I read The Worst Case Scenario (Someone Has To Say It) from Seeking Alpha. As the author (an investment consultant I expect) freely admits, this is not your boilerplate doom-saying. Current policies, being what they are, will lead to bad consequences and the author shows no reluctance to define the level of consequence nor the time frame in which it will occur. Whether you agree with the timing and/or the conclusions stated in the ten scenarios is less important than the reference points they provide for further discussion, debate and perhaps even action. For instance:

Prediction two. With public pension systems and tens of millions of 401k holders virtually wiped out—and with the Baby Boomers retiring en masse—there will be tremendous pressure on the government to get into the stock market in order to bid up prices.

Therefore, sometime in 2010, the Federal Reserve will create and loan out hundreds of billions of fresh dollars to the usual well-connected suspects, instructing them to buy up stocks on the public’s behalf. This scheme will have a fancy but meaningless name—something like the “Taxpayer Assurance Equities Facility”. It will have no effect other than to serve as buyer of last resort for capitulating smart-money types who want to get out of stocks entirely.

Personally, I prefer "Facility Assurance for Taxpayer Equities" or "FATE". "TAEF" just lacks that je ne sais quoi.

Prediction four. “Quantitative easing” will fail to restart previous patterns of lending and consumption. As the government sends out additional “rebate” checks and takes ever-more drastic measures to force banks to lend, hyperinflation could take hold. However, comprehensive debt relief via a devaluation of the dollar is even more likely. This would entail the government issuing one “new” dollar for some greater number of “old” dollars—thus reducing both debts and savings simultaneously. This would make for a clean slate a la Fight Club.

As there are many more debtors than savers in the U.S., the vast majority would support devaluation. The Chinese and other foreign holders of our bonds would be screaming mad, but unable to do anything. Every country that has not found a way out of dollar-denominated reserve assets by 2012 will see its reserves eliminated.

All ten are thought provoking and would make an interesting survey, I think. Ultimately, though, it is the final scenario that is the most controversial and, therefore, the one that matters the most.

Prediction ten. As an economy is never independent of the society within which it functions, the next few paragraphs will focus on social and political factors. These factors will have as much of an impact on market and consumer confidence as any developments in the financial sector.

Whether rightly or not, President Obama, having come to power at the dawn of this crisis, will be blamed for it by over 50 percent of the population. He will be a one-term president. In response to his perceived socialization of America, there will be a swarm of secessionist and extremist activity, much of it violent. Militias and armed sects will be more prominent than in the early 1990s. Stand-off dramas, violent score-settlings, and going-out-with-a-bang attacks by laid-off workers and bankrupted investors—already a national plague—will become an everyday occurrence.

For both economic and social reasons, millions of immigrants and guest workers will return to their home countries, taking their assets and skills with them. The flow of skilled immigrants will slow to a trickle. Birth rates will plummet as families struggle with uncertainty and reduced (or no) income.

Property crime will explode as citizens bitter over their own shattered dreams attempt to comfort themselves by taking what is not theirs. Mutinies and desertions will proliferate in an increasingly demoralized, over-stretched military, especially when states can no longer provide the educational and other benefits promised to their National Guard troops.

There will be widespread tax collection issues, and a huge backlash against Federal and state bureaucrats who demand three-percent annual pay raises while private sector wages remain frozen or worse. In short, the “Tea Parties” of tomorrow will likely not be so restrained.

Finally, between now and 2012, we are likely to see another earth-shaking national embarrassment on the scale of the 9/11 attacks or Hurricane Katrina and its aftermath. This will demonstrate conclusively to all Americans that their government, even under a savior-figure like Obama, cannot, in fact, save them.

By 2012, there will be a general feeling that the nation is in immediate danger of blowing up or coming apart at the seams. This fear will be justified, given that the U.S. has always been held together by the promise of a continuously rising material standard of living—the famous “pursuit of happiness”—rather than any ethnic or religious ties. If that goes, so could everything else. We were lucky in the 1930s—we may not be so lucky again.

Recognizing potential pitfalls is a prerequisite for avoiding them. Will the government find the wisdom to do the right thing for the majority of its citizens, or will the special money interests continue to rule the day?

Meta: 

Comments

retraining

I'm going to do a detailed post on this bullshit, but now Obama is claiming Americans need to "retrain". How can one retrain people with PhDs Masters degrees, years of experience that frankly are rare as it is?

This retraining blow off also happened to be straight from the corporate lobbyists press kits (along with calling everyone racist xenophobes when they try to stop this massive global labor arbitrage).

You must have Javascript enabled to use this form.

Damning

You know this morning I took my mother out for breakfast, my father wasn't feeling well but my mom invited along an elderly friend of hers who lost her children. Now this elderly lady, actually her name is Marge (and yes she once sported a beehive in the 50s) was an "Oakie." For those not familiar with the term, Oakies were essentially economic refugees from Oklahoma who were either forced off their land by the banks or abandoned them due to the entire region becoming a desert (commonly known as the Dust Bowl). Marge had 8 brothers and sisters and her story was similar to that family in the film "the Grapes of Wrath." She went to California and worked as a migrant worker earning whatever they could, similar to the foreign illegal immigrants you see today.

So why am I talking about Marge? Because she said something that made sense as we had pancakes at Ann Sathers.  "You're gonna see what happened to me happen all over."  By that she meant folks, American citizens, uproot to anywhere or anyplace to find work.  In the past we all knew someone that got that job but was across the country.  But what if everyone had to do it, and the possibility of it being a long..hell even a short term commitment was in question?  For over a century, Ireland had more emigration than imigration, scores of young people simply left because there was no work in the Emerald Isle.

We will see the same thing happen here. Be it moving from Akron to Dallas or even Calgary for that one construction job.  Americans will find that for the most part, their college degree won't mean squat.  My mother works at a McDonalds in the suburbs of Chicago, she has a chemical engineer who has gone from mixing chemicals (or whatever it is they do) to being the fry cook, from a salary of $90k/year (so he once said) to now making $7.25/hr. Yet you will see a lot of our citizens with college degrees not realize the writing on the wall, that work is work if you need to put food on the table for your kids. Mark my words, this will be the start of the American diaspora.

You must have Javascript enabled to use this form.

already happening

There is a host of "policy" at conferences which talk about "global migration" as a "win-win". I'm not making this up.

They completely ignore, communities, family, personal life, uprooting people, national boundaries, stability and the financial toll that takes.

They push continually for this idea of "trading people" as guest workers through trade agreements and "immigration reform" to allow 100% open borders or free movement of people. Even more distressing, they try to spin this as being "all good" for workers.

IBM just fired a ton of people and said they could have jobs....if they moved to India AND took Indian wages....

now this is with a PPP of the United States. i.e. Americans have American retirement, American credit card debt, American families, American tuition...

Then, many companies demand people travel and frankly a lot of it is stupid power office politics...the task can easily be accomplished with a video conference or even a phone call, but lordy, lordy, gotta get that person on a plane, flying all over hell to the point they have no life at all.

Another is commute. Demanding someone drive 2-3 hrs one way just to show up in some cube from 8-6 because some manager needs to "see" that person, it's a control thing, which becomes increasingly evident with the refusal to use modern technology...which makes the 8-6 office obsolete.

I could go on and on, but in 2001 and this story was seriously repressed. 50% of all techies were drummed out of their careers. I was there and the U-hauls lining the streets of San Francisco make it look like a modern Oakie exodus...

yet that story was repressed, not reported and seriously under reported....how? They use guest workers in unemployment statistics....so let's say you are displaced by a foreign guest worker....the actual employment statistic will not have you show up in the stats due to the aggregate numbers of counting the guest worker.

You must have Javascript enabled to use this form.

Predictions moderate, or waaaay too conservative

I would strongly suggest these predictions are rather moderate - and with the present population we have in America - things will eventually begin to get really violent (hopefully, with Senior Management pulled from their autos and disappeared - just kidding, DHS, don't come looking for me, HA...HA!!).

There were lynchings on Wall Street back in the late 1800s, and that should probably happen again. The three primary forces which are connected and are destroying any future American economy (except for the plutocrats): (1) offshoring of American jobs, importation of foreign scab workers; (2) leveraged buyouts - which leads to the aforementioned (1) item, along with the needless destruction of companies and jobs; and (3) the credit derivatives scam which has enriched a large number of CEOs and their senior managers, while royally screwing the bottom 90% of us forever.

You must have Javascript enabled to use this form.

A long range view.

There is a commenter at other blogs who is always anonymous but signs his comments "snuffy". He didn't see this post; his comments pertain to another dialog thread. His pain comes through clearly and his wisdom is to be taken seriously.

Your information about the hard times in the solar industry is noted...might be a good time to get whatever you can in the way of hard cells to squirrel away for the future...

I think we all have come to the conclusion that there is some kind of a shadow agenda in this administration...but to say that it is only "the banksters" best interest would be hard ,...or would it?. We will see...wont we? I think there is a serious miscalculation by those in power now of the degree of anger...[stone rage] at the system. This anger had one manefestation in the election. You can see another in the daily arrests of health care professionals trying to have their voices heard above the clamor of the "Money for Medicine" crowd. I think you will see more of this....and the level of rage will increase...until physical violence will be the norm.
That the doctors and nurses are leading the charge is wonderful..and frightening. They know how badly the system is broken,yet those running it are getting sooo wealthy they can not see any way of change. It will result in eventual failure of the entire system. Have your medicines,and your medical care [personal address and friendship with a physician]lined up,as its going to get worse...bad bad bad soon.
I have relaxed this morning and have had thom hartman on the radio.He has spent a lot of time spoon-feeding the economic theory to all of his listeners.

I sometimes wonder if voices like his will help at all to educate the average citizen to the massive screwing taking place as we speak,or if it will take the complete and utter destruction of the middle class ...and the poverty and want that will result before enough people understand that actions of those in power have badly hurt the lives of all of us,and will continue to as long as they have power.
Change will happen. But for it to help instead of hurt will take intelligent, dedicated people at the highest levels to have the common man's interest, instead of only the wealthy. The saying "Those who make peaceful change impossible make violent change inevitible"is still true..and will be true regardless if the administration is democratic ,or republican. Here is a prediction. If it blows up on O-mans watch,[and most regulars here are fairly sure it will]full-blown martial law will go into effect so fast it will shock everyone.
Think about it...

If it really blew up, what would be the options? Let it all disintegrate? Do you think the powers that be want to live in a mad-max world?

What will be the effect if we have a continuation of a couple percent of the population becoming "underemployed" with the continuing loss of the ability to survive of another couple of percent...monthly? Its getting real bad folks real real fast,and I dont know if those in power understand that this is where you start to see young folk deciding logically and rationally to become criminals...and hookers@ 15...and so many wasted lives. Poverty does this. They are coming close to losing a whole generation of people who will never live to their potential...due to the greed and mis-management of those in power. And remember,they are all system savvy,and will have a distrust of .gov that will stick with them all their lives. The basic distrust of .gov I developed was due to Vietnam. This generation will see starvation of family. I had many long talks with my 94 year old grandmother about the last time it all broke down. About the starvation of a firstborn child in a soddy in Oklahoma. About her deep fear of what will come if we go there again. She is one sharp old bird,and knows people so well. I have come to listen to her carefully.

I don't know whats coming down. All I see is a continuation of the attempts to re-inflate a popped balloon...an attempt to save the monied class as the entire goal of a administration. All else is fluff. The actions they are taking will fail, and are "eating the seed corn"of the future.

No one would have believed that a black man would be president 2 years before the event.

I am positive no one would believe where we are headed...2 years from now the world will be a very very different place. And no one would believe now where we will be then...

Time to go "be productive"

snuffy

I will invite him to comment here and I hope he does. This is typical snuffy (reminds me of JV!).

You must have Javascript enabled to use this form.