Velkomin to the United States of Foreclosure
By Mike Whitney
03/17/07 "ICH" -- -- 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 façade. Other disruptions are bound
to follow. Another jolt from the Yen “carry trade” or a sudden
blip in the Chinese stock market could send Wall Street
sprawling and put the economy on a fiscal-respirator. A
substantial dip in securities could trigger a liquidity crisis
which would traumatize our credit-dependent society. If consumer
spending slows down, the economy will grind to a halt and living
standards will sharply decline. The sub primes are just the
first domino.
These are some of the things that Fed chief Bernanke will have
to consider before resetting interest rates: Does he keep rates
where they are and turn away foreign investment or lower rates
and try to salvage the faltering housing market? Either choice
will result in a certain amount of pain.
A cloud of uncertainty has descended on the over-leveraged
United States of Foreclosure. The storm is just ahead. The
stewards of the system--Paulson, Bush, Bernanke--could care less
about the public welfare. All their energy is devoted to
building a lifeboat for themselves and their fat-cat buddies.
Once, they’ve robbed the last farthing from the public till
they’ll be gone, and we’ll still be marching along the path to
national calamity.
High-flying US fund manager Jim Rogers summed up the impending
crisis like this:
“You can’t believe how bad it’s going to get. It’s going to be a
disaster for many people who don’t have a clue about what
happens when a real estate bubble pops. Real estate prices will
go down 40-50% in bubble areas. There will be massive defaults.
And it’ll be worse this time because we haven’t had this kind of
speculative buying in U.S. history.”
Then he added ominously, “When markets turn from bubble to
reality, a lot of people get burned.”Click here
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