G
Gandalf Grey
Guest
Velkomin to the United States of Foreclosure
By Mike Whitney
Created Mar 18 2007 - 7:05pm
The stock market is about to crash. The only question is whether it will
quickly drop down the elevator shaft or follow the jerky flight-path of a
man pushed down a stairwell. Either way, the outcome will be the same;
stocks will nose-dive, the dollar will plummet, and the bruised US economy
will be splattered on the canvas like George Foreman in Rumble in the
Jungle.
Troubles in the sub-prime market have just begun to materialize and already
38 main sub prime lenders have gone kaput. Foreclosures have reached a 37
year high, and an estimated 2 million homeowners will be put out on the
street in the next few years.
And that's just for starters.
The contagion has spread beyond the sub prime sector to other ARMs
(Adjustable Rate Mortgages) where late payments and defaults are cropping up
faster than their sub-prime counterparts. According to Goldman Sachs chief
economist Jan Hatzius, "Prime ARM delinquencies are above their worst levels
of the 2001 recession.. By contrast, sub-prime fixed-rate delinquencies are
well below their recession levels." (Barrons)
Sub prime loans and other "Prime ARMs" (alta-A loans) make up roughly 35% of
current mortgages. That means that millions of homeowners are struggling to
meet their "upwardly-adjusted" payments. If Congress does not come up with a
bailout strategy, then we will face a "downturn worse than that resulting
from the NASDAQ collapse". (Barrons)
Sub prime loans are loans that are made to people with poor credit. The
lender requires a higher rate of interest to cover his risk. For the last 5
years, the sub prime market has skyrocketed due to the loosening of lending
practices. The traditional criterion for determining whether a loan
applicant is credit-worthy has been abandoned. Now, it is not uncommon to
have mortgage lenders provide 100% financing to shaky borrowers who are
unable to provide documentation of their real earnings ("no doc" loans) and
cannot even scrimp together 4 or $5 thousand for a down payment.("piggyback"
loans)
Why on earth would the banks and mortgage lenders take such a risk?
In a word; greed.
The mortgage industry is driven by fees. Lenders (and agents) are able to
fatten their bottom line through loan origination fees and then they tack on
additional fees for shipping the loans off to Wall Street where they are
bundled into Mortgage Backed Security (MBS). Collateralized debt has become
a Wall Street favorite and these otherwise shaky loans have become staples
in the hedge funds industry. In fact, last year Wall Street purchased nearly
60% of all mortgages--ignoring the risks associated with sub prime "debt
instruments". Also, through the magic of derivatives, many of these Mortgage
Backed Securities have been leveraged to the extreme; sometimes at a ratio
of 35 to 1.
In other words, a home loan of $300,000--that may have been secured by a
young man with bad credit who makes $12.50 per hour picking up mill-ends and
bits of insulation on a construction job site--has been leveraged into a
$10,500,000 securities investment. This may explain why Treasury Secretary
Hank Paulson is trying to sooth jittery investors with words of
encouragement while he dispatches the Plunge Protection Team (PPT) to shore
up the trembling stock market behind the scenes. Every effort is being made
to keep this monstrous equity bubble from pirouetting to earth.
Currently, derivatives and mortgage-backed bonds total more than all US
Treasuries, Notes and US Bonds combined!?! The stock market is one gigantic
pyramid of debt and it's ready to blow.
Kitco.com's Doug Casey puts it like this:
"The rocket-shot rise of hedge funds and the advances in financial modeling
techniques have spawned something of a competition among the so-called best
and brightest to find ever-more-complex ways of skimming pennies from very
large piles of money. The collective result is that our financial system has
been wired up to $370 trillion dollars of privately negotiated investment
contracts. They're usually written to shift risk from one bank, pension
fund, insurance company or brokerage firm to another. And many are linked
together in long chains, with each contract providing collateral for the
next.
It's all very clever, but layering the enormous size- $370 trillion dollars,
far more than the net worth of all the financial institutions in the world -
on top of all that complexity is downright scary. In simpler times, a home
loan going bad would affect only the particular lender. Enough defaults
would put the lender out of business. And that would be the end of it. But
today a wave of defaults can send a shock through the portfolios of
financial institutions around the globe, including hedge funds, banks and
pension funds far removed from the troubled borrowers.
Imagine an electrical circuit with thousands of connections. No one designed
it. No one tested it. No one has a diagram for it. It just grew. Now,
because of its size and power and pervasiveness, everything depends upon it.
So what happens when one of those thousands of connections burns out? No one
really knows." (Kitco.com commentaries)
That's right; no one really knows what will happen, but there is growing
concern about what MIGHT happen. And, what might happen is disaster!
(Derivatives numbers are staggering. The Bank for International Settlements
estimates that the notional amount of derivatives traded on regulated
exchanges topped a quadrillion dollars last year) Ann Berg "War Drags the
Dollar Down" antiwar.com
Casey gives an apt summary of our present predicament. There is currently
$370 trillion in derivatives, hedge funds and over-leveraged marginal
investments. There is no coherent relationship between this mass of
cyber-wealth and actual deposits or investments. It is merely a fractional
banking scam on steroids; computer-generated capital with no basis in
reality. As the sub prime market comes under greater strain; hedge funds
will teeter, derivatives will tremble, liquidity will dry up and the whole
debt-plagued system will crash in a heap. The frantic efforts of the PPT
with their flimsy bits of scaffolding will amount to nothing. Wall Street is
quick-stepping towards the gallows and there's little hope of a reprieve.
As we watch the sub-prime market unwind; we should keep in mind that this
massive expansion of credit took place on Alan Greenspan's watch and with
his implicit approval. The former Fed-chief was a big fan of sub-prime
mortgages and he wasn't hesitant to extol their merits. In April 2005,
Greenspan said:
"Innovation has brought about a multitude of new products, such as sub-prime
loans and niche credit programs for immigrants. With these advances in
technology, lenders have taken advantage of credit scoring models and other
techniques for efficiently extending credit to a broader spectrum of
consumers. Where once more marginal applicants would simply have been denied
credit, lenders are now able to quite efficiently judge the risk posed by
individual applicants and to price that risk appropriately. These
improvements have led to rapid growth in sub-prime mortgage lending.
fostering constructive innovation that is both responsive to market demand
and beneficial to consumers." (Thanks Jim Willie Goldenjackass.com)
"Innovation"? Is that what Maestro Greenspan calls this fiendish,
economy-busting Ponzi-swindle?
Greenspan is like a jungle-monkey swinging from one massive equity bubble to
the next. The housing bubble turned out to be his "piece de resistance", a
bottomless black hole sucking up the nations' wealth into its dark vortex.
His "low interest" doctrine may have kept the moribund economy on life
support after the dot.com bust, but it has ruined the country's prospects
for the future. We'll be digging out of this mess for decades.
Greenspan nodded approvingly as trillions of dollars were funneled into
shaky sub primes, but he chose to cheerlead rather than slow-down the
process. He scorned the idea of government regulation preferring his own
type of Darwinian "natural selection" or, rather, survival of the shrewdest.
Now the pundits and the talking heads are trying to shift the blame to
struggling low-income wage-slaves who thought they could live the American
dream by buying a home on credit. They were seduced by the promise of cheap
money and then led by the nose to the slaughter. The whole charade was
orchestrated by Greenspan and his buddies in the banking cabal. They alone
are responsible.
Here's another tidbit which sheds light on Greenspan's culpability in the
sub prime fiasco:
"The Federal Reserve and the Office of the Comptroller of the Currency took
little action in public to police the $2.8-trillion boom in the U.S.
mortgage market -- whose bust now risks worsening the housing recession. The
Fed, which is responsible for the stability of the banking system, didn't
publicly rebuke any firm for failing to follow up warnings on home-lending
practices between 2004 and 2006. The OCC, which supervises 1,793 national
banks, took only three public mortgage-related consumer-protection
enforcement actions over the same period.
Consumer advocates and former government officials say the regulators, by
acting behind the scenes rather than openly advertising the shortcomings of
some firms, failed to discipline an industry that loaned too much money to
borrowers who couldn't repay it. Now, more lenders are being forced to shut
and foreclosures are rising, threatening to scuttle any chance of an early
recovery in housing. (Chuck Butler; "The Daily Pfennig")
The Federal Reserve knows where every dime winds up in the economy. They
even provide a detailed account of the relevant data. Ignorance is not an
excuse. The Fed looked on while trillions of dollars flowed to "unqualified"
applicants who had no chance of repaying their loans. The lax standards and
easy money kept Wall Street and the mortgage industry happy, but the
"predatory lending" hurt millions of hard working Americans who are now in
danger of losing their homes.
The End of the Liquidity Party?
All of the major investment firms are heavily invested in the $6.5 trillion
mortgage securities market. The sudden decline in the sub prime market is
shutting down the funding sources for low income people while increasing
home inventories. It is also boosting unemployment, putting pressure on the
banks, and thrusting the country towards recession.
As the housing market continues to languish, home equity loans (which
amounted to $600 billion in 2006) will shrivel reducing consumer spending
and GDP accordingly. That means that the Federal Reserve will be forced to
lower interest rates and remove the last crumbling cinder block propping up
the greenback.
When Bernanke lowers interest rates, foreign investment in US Treasuries and
dollar-based securities will drop off, the dollar will fall and we will
undergo a painful cycle of hyperinflation. These are the inescapable
consequences of Greenspan's policies.
Equity bubbles are an expression of class interest. They are a way of
shifting wealth from working class people--whose hourly wages or
fixed-incomes can't keep pace with a hyperinflationary monetary policy-to
the wealthy and powerful, who benefit from overheated markets and rampant
speculation. The investor class and their plutocratic peers are the only
ones who profit from interest rate manipulation and increases in the money
supply. For everyone else, inflation is just a hidden tax. Greenspan used
the money supply and interest rates as weapon against working class people.
It became his preferred method of "social engineering"; creating greater
division between rich and poor while ensuring the upward redistribution of
wealth consistent with his plans for a new world order. (NWO)
Greenspan is the plutocrat's champion; America's all-time serial bubble
maker.
The rest of the world is eying America's housing slump with growing
apprehension. The downturn in the sub prime market is just the first crack
in the fa
By Mike Whitney
Created Mar 18 2007 - 7:05pm
The stock market is about to crash. The only question is whether it will
quickly drop down the elevator shaft or follow the jerky flight-path of a
man pushed down a stairwell. Either way, the outcome will be the same;
stocks will nose-dive, the dollar will plummet, and the bruised US economy
will be splattered on the canvas like George Foreman in Rumble in the
Jungle.
Troubles in the sub-prime market have just begun to materialize and already
38 main sub prime lenders have gone kaput. Foreclosures have reached a 37
year high, and an estimated 2 million homeowners will be put out on the
street in the next few years.
And that's just for starters.
The contagion has spread beyond the sub prime sector to other ARMs
(Adjustable Rate Mortgages) where late payments and defaults are cropping up
faster than their sub-prime counterparts. According to Goldman Sachs chief
economist Jan Hatzius, "Prime ARM delinquencies are above their worst levels
of the 2001 recession.. By contrast, sub-prime fixed-rate delinquencies are
well below their recession levels." (Barrons)
Sub prime loans and other "Prime ARMs" (alta-A loans) make up roughly 35% of
current mortgages. That means that millions of homeowners are struggling to
meet their "upwardly-adjusted" payments. If Congress does not come up with a
bailout strategy, then we will face a "downturn worse than that resulting
from the NASDAQ collapse". (Barrons)
Sub prime loans are loans that are made to people with poor credit. The
lender requires a higher rate of interest to cover his risk. For the last 5
years, the sub prime market has skyrocketed due to the loosening of lending
practices. The traditional criterion for determining whether a loan
applicant is credit-worthy has been abandoned. Now, it is not uncommon to
have mortgage lenders provide 100% financing to shaky borrowers who are
unable to provide documentation of their real earnings ("no doc" loans) and
cannot even scrimp together 4 or $5 thousand for a down payment.("piggyback"
loans)
Why on earth would the banks and mortgage lenders take such a risk?
In a word; greed.
The mortgage industry is driven by fees. Lenders (and agents) are able to
fatten their bottom line through loan origination fees and then they tack on
additional fees for shipping the loans off to Wall Street where they are
bundled into Mortgage Backed Security (MBS). Collateralized debt has become
a Wall Street favorite and these otherwise shaky loans have become staples
in the hedge funds industry. In fact, last year Wall Street purchased nearly
60% of all mortgages--ignoring the risks associated with sub prime "debt
instruments". Also, through the magic of derivatives, many of these Mortgage
Backed Securities have been leveraged to the extreme; sometimes at a ratio
of 35 to 1.
In other words, a home loan of $300,000--that may have been secured by a
young man with bad credit who makes $12.50 per hour picking up mill-ends and
bits of insulation on a construction job site--has been leveraged into a
$10,500,000 securities investment. This may explain why Treasury Secretary
Hank Paulson is trying to sooth jittery investors with words of
encouragement while he dispatches the Plunge Protection Team (PPT) to shore
up the trembling stock market behind the scenes. Every effort is being made
to keep this monstrous equity bubble from pirouetting to earth.
Currently, derivatives and mortgage-backed bonds total more than all US
Treasuries, Notes and US Bonds combined!?! The stock market is one gigantic
pyramid of debt and it's ready to blow.
Kitco.com's Doug Casey puts it like this:
"The rocket-shot rise of hedge funds and the advances in financial modeling
techniques have spawned something of a competition among the so-called best
and brightest to find ever-more-complex ways of skimming pennies from very
large piles of money. The collective result is that our financial system has
been wired up to $370 trillion dollars of privately negotiated investment
contracts. They're usually written to shift risk from one bank, pension
fund, insurance company or brokerage firm to another. And many are linked
together in long chains, with each contract providing collateral for the
next.
It's all very clever, but layering the enormous size- $370 trillion dollars,
far more than the net worth of all the financial institutions in the world -
on top of all that complexity is downright scary. In simpler times, a home
loan going bad would affect only the particular lender. Enough defaults
would put the lender out of business. And that would be the end of it. But
today a wave of defaults can send a shock through the portfolios of
financial institutions around the globe, including hedge funds, banks and
pension funds far removed from the troubled borrowers.
Imagine an electrical circuit with thousands of connections. No one designed
it. No one tested it. No one has a diagram for it. It just grew. Now,
because of its size and power and pervasiveness, everything depends upon it.
So what happens when one of those thousands of connections burns out? No one
really knows." (Kitco.com commentaries)
That's right; no one really knows what will happen, but there is growing
concern about what MIGHT happen. And, what might happen is disaster!
(Derivatives numbers are staggering. The Bank for International Settlements
estimates that the notional amount of derivatives traded on regulated
exchanges topped a quadrillion dollars last year) Ann Berg "War Drags the
Dollar Down" antiwar.com
Casey gives an apt summary of our present predicament. There is currently
$370 trillion in derivatives, hedge funds and over-leveraged marginal
investments. There is no coherent relationship between this mass of
cyber-wealth and actual deposits or investments. It is merely a fractional
banking scam on steroids; computer-generated capital with no basis in
reality. As the sub prime market comes under greater strain; hedge funds
will teeter, derivatives will tremble, liquidity will dry up and the whole
debt-plagued system will crash in a heap. The frantic efforts of the PPT
with their flimsy bits of scaffolding will amount to nothing. Wall Street is
quick-stepping towards the gallows and there's little hope of a reprieve.
As we watch the sub-prime market unwind; we should keep in mind that this
massive expansion of credit took place on Alan Greenspan's watch and with
his implicit approval. The former Fed-chief was a big fan of sub-prime
mortgages and he wasn't hesitant to extol their merits. In April 2005,
Greenspan said:
"Innovation has brought about a multitude of new products, such as sub-prime
loans and niche credit programs for immigrants. With these advances in
technology, lenders have taken advantage of credit scoring models and other
techniques for efficiently extending credit to a broader spectrum of
consumers. Where once more marginal applicants would simply have been denied
credit, lenders are now able to quite efficiently judge the risk posed by
individual applicants and to price that risk appropriately. These
improvements have led to rapid growth in sub-prime mortgage lending.
fostering constructive innovation that is both responsive to market demand
and beneficial to consumers." (Thanks Jim Willie Goldenjackass.com)
"Innovation"? Is that what Maestro Greenspan calls this fiendish,
economy-busting Ponzi-swindle?
Greenspan is like a jungle-monkey swinging from one massive equity bubble to
the next. The housing bubble turned out to be his "piece de resistance", a
bottomless black hole sucking up the nations' wealth into its dark vortex.
His "low interest" doctrine may have kept the moribund economy on life
support after the dot.com bust, but it has ruined the country's prospects
for the future. We'll be digging out of this mess for decades.
Greenspan nodded approvingly as trillions of dollars were funneled into
shaky sub primes, but he chose to cheerlead rather than slow-down the
process. He scorned the idea of government regulation preferring his own
type of Darwinian "natural selection" or, rather, survival of the shrewdest.
Now the pundits and the talking heads are trying to shift the blame to
struggling low-income wage-slaves who thought they could live the American
dream by buying a home on credit. They were seduced by the promise of cheap
money and then led by the nose to the slaughter. The whole charade was
orchestrated by Greenspan and his buddies in the banking cabal. They alone
are responsible.
Here's another tidbit which sheds light on Greenspan's culpability in the
sub prime fiasco:
"The Federal Reserve and the Office of the Comptroller of the Currency took
little action in public to police the $2.8-trillion boom in the U.S.
mortgage market -- whose bust now risks worsening the housing recession. The
Fed, which is responsible for the stability of the banking system, didn't
publicly rebuke any firm for failing to follow up warnings on home-lending
practices between 2004 and 2006. The OCC, which supervises 1,793 national
banks, took only three public mortgage-related consumer-protection
enforcement actions over the same period.
Consumer advocates and former government officials say the regulators, by
acting behind the scenes rather than openly advertising the shortcomings of
some firms, failed to discipline an industry that loaned too much money to
borrowers who couldn't repay it. Now, more lenders are being forced to shut
and foreclosures are rising, threatening to scuttle any chance of an early
recovery in housing. (Chuck Butler; "The Daily Pfennig")
The Federal Reserve knows where every dime winds up in the economy. They
even provide a detailed account of the relevant data. Ignorance is not an
excuse. The Fed looked on while trillions of dollars flowed to "unqualified"
applicants who had no chance of repaying their loans. The lax standards and
easy money kept Wall Street and the mortgage industry happy, but the
"predatory lending" hurt millions of hard working Americans who are now in
danger of losing their homes.
The End of the Liquidity Party?
All of the major investment firms are heavily invested in the $6.5 trillion
mortgage securities market. The sudden decline in the sub prime market is
shutting down the funding sources for low income people while increasing
home inventories. It is also boosting unemployment, putting pressure on the
banks, and thrusting the country towards recession.
As the housing market continues to languish, home equity loans (which
amounted to $600 billion in 2006) will shrivel reducing consumer spending
and GDP accordingly. That means that the Federal Reserve will be forced to
lower interest rates and remove the last crumbling cinder block propping up
the greenback.
When Bernanke lowers interest rates, foreign investment in US Treasuries and
dollar-based securities will drop off, the dollar will fall and we will
undergo a painful cycle of hyperinflation. These are the inescapable
consequences of Greenspan's policies.
Equity bubbles are an expression of class interest. They are a way of
shifting wealth from working class people--whose hourly wages or
fixed-incomes can't keep pace with a hyperinflationary monetary policy-to
the wealthy and powerful, who benefit from overheated markets and rampant
speculation. The investor class and their plutocratic peers are the only
ones who profit from interest rate manipulation and increases in the money
supply. For everyone else, inflation is just a hidden tax. Greenspan used
the money supply and interest rates as weapon against working class people.
It became his preferred method of "social engineering"; creating greater
division between rich and poor while ensuring the upward redistribution of
wealth consistent with his plans for a new world order. (NWO)
Greenspan is the plutocrat's champion; America's all-time serial bubble
maker.
The rest of the world is eying America's housing slump with growing
apprehension. The downturn in the sub prime market is just the first crack
in the fa