Government spending surged 4.6% in the third quarter, the fastest annual rate since the fiscal stimulus days of 2009. That came mainly from a huge spike in military spending, which some analysts attributed partly to the U.S. bombing of Islamic militants in the Middle East.

But there has been no budget increase for additional military spending, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

“This is capacity that was otherwise sitting idle,” he said. “The blip in spending will probably be reversed” in the current quarter.

This is important because the Federal Reserve Board now is ending its Quantitative Easing — that is, inflation — program. For a while, anyway.

The so-called economic recovery since 2009 has been fueled by a succession of QE’s. This flushed more money into the economy, increasing spending.

But there has been a big problem: Interest rates also have been kept at 0 percent. So with inflation at 2 percent or more (check food and housing prices the last couple of years?), common folks saw their “savings” accounts at banks actually lose money.

No wonder the middle-class has been hit hard, and has shrunk, even during the recovery. Average folks have been hit hard by the Fed’s assault on savings, by Fed inflationism, by massive tax increases and by bureaucratic government assaults of increasing ferocity.

Rich folks saw their stock and property values rise due to the Fed QE series. They got the gold mine, while the middle-class got the shaft.

And that’s before the next recession hits.

By John Seiler

Gov. Jerry Brown and the California Legislature have been congratulating themselves for passing a budget on time and with a surplus. It’ll likely be the last time they do so for a long time.

I can’t embed this video featuring Peter Schiff, the investment guru; but click here for it. A decade ago he predicted that the bubble economy of that day soon was about to pop, which it did in 2007-08.

He makes similar comments to what I have been writing here: That the current “recovery” is based on the Federal Reserve Board printing trillions of dollars of funny money, while keeping interest rates near zero percent. The policy destroys the savings of the middle class, ripping up the whole economy. The rises in the stock market and housing prices are Fed-pumped illusions about to burst, as they did in 2007-08.

As he points out, housing interest rates already have risen from 3 percent to 4 percent, and soon will rise to 5 percent. When that happens, the housing boom will crash.

Meanwhile, the national debt keeps rising, now to $16.7 trillion. Even worse, the unfunded liabilities of the federal government now stand at a staggering $222 trillion, according to the calculations of Boston University economist Leonard Kotlikoff.

The next recession could be as bad as, or worse than, the Great Recession we supposedly “recovered” from.

Bad economic policies always hurt us in the end.

Make preparations for your own personal and business finances. Don’t be as irresponsible as the federal, state and local governments.

By John Seiler

Here’s a heartening story.

From the time they go to preschool until the day they graduate from professional school three decades later, kids these days suffer relentless politically correct indoctrination. Their K-12 teachers and their university professors almost unanimously give them this message: “Government is good. Government is wonderful. Government will solve all your problems.”

Yet a new poll shows that 61 percent of college-age students want the government out of their lives.

Why? Well, kids are bearing the brunt of government tyranny. They’re being forced into Obamacare, whether they want to or not, which means they’ll be taxed heavily to pay for the ailments of older folks.

They pay massively into Social Security and Medicare. Yet I remember a poll a few years ago which showed more youngsters believe in UFOs than believe they’ll ever get an FDR dime out of these bankrupt socialist systems.

The kids run up college debt of as much as $200,000 — then can’t find jobs in the worst “recovery” in 70 years. Housing is so expensive they have to stay at home with Mom and Pop well into their 30s.

It’s hard to save enough money to get married and have kids. The Federal Reserve Board has kept interest rates at zero percent the past five years, even as inflation eats up the dollar’s value. “Savings” means the money in your savings account goes down in value 2 percent a year. The stock market is setting “records,” just over 15,000 for the DJIA, only because of inflation.

The wars of the federal government, which youngsters have to fight on the front lines, are inconclusive and seem pointless. And why are we spending trillions on hundreds of overseas bases to fight a Soviet Union that died so long ago no kid under 25 even remembers it?

But the kids have the Internet. So unlike my late 1960s, 1970s generation, which had few news sources beside the Main Stream Media, kids can find out what’s really going on from alternative Web sites; or at least get a contrasting point of view from what they’re fed by the military-industrial-Congressional-media-university complex.

This gives me hope for the future.

Next on the agenda: to get it out of their lives, the kids need to begin dismantling this monstrous government.

By John Seiler

It’s not just the recent economic and political nonsense by both parties that’s hurting the middle class. It’s more than four decades of it. A new study finds:

“The median net worth of American households has dropped to a 43-year low as the lower and middle classes appear poorer and less stable than they have been since 1969.

“According to a recent study by New York University economics professor Edward N. Wolff, median net worth is at the decades-low figure of $57,000 (in 2010 dollars). And as the numbers in his study reflect, the situation only appears worse when all the statistics are taken as a whole….

“Fully 85 percent of self-described middle-class adults say it is more difficult now than it was a decade ago for middle-class people to maintain their standard of living. Of those who feel this way, 62 percent say “a lot” of the blame lies with Congress, while 54 percent say the same about banks and financial institutions, 47 percent about large corporations, 44 percent about the Bush administration, 39 percent about foreign competition and 34 percent about the Obama administration.”

Typical of these polls, the real culprit was not fingered in the question: The U.S. Federal Reserve Board. In 1968, Richard Nixon — native of Orange County, Calif. — was elected to protect the “silent majority,” as he called it, a/k/a the middle class. In 1971, the fool took us off the gold standard.

Since then, the Federal Reserve Board has waged an unrelenting assault on the middle class by debasing the currency, with the dollar’s value dropping from $35 an ounce of gold in 1971 to $1,711 today. That’s a loss of 98 percent of its value.

In the 1970s, tax rates remained the same — meaning the middle-class was jammed up into higher-income tax brackets, where they remain. Reagan indexed the rates to inflation, but only as of 1985. It wasn’t retroactive.

So, in 2012 Mr. & Mrs. America  pay the high tax rates of millionaires of 1971.

Reagan’s tax cuts, although needed, mainly went to the wealthy. The middle class got tax cuts from the Gipper. But he also increased the FICA/Socialist Security tax as part of the Greenspan Commission in 1983. Those tax increases essentially repealed Reagan’s middle-class tax cuts.

And inflation is why the middle-class in California pays the staggeringly regressive state income tax rate of 9.3 percent, which in the 1960s only affected millionaires.

Greenspan later, of course, became the inflationist head of the Fed, his policies especially destroying the dollar when he panicked after the 9/11 attacks in 2001.

Today, President Obama, Democrats running the Senate and Republicans running the House don’t really care about the middle class. If they did, they would take retiring Rep. Ron Paul’s advice to “End the Fed.”

And they would roll back middle-class tax rates to 1971.

If you’re in the middle class, as I am, here’s your future:

Editor’s Note: This is the 11th in a CalWatchDog.com Special Series of in-depth articles on municipal bankruptcy.

Nov. 14, 2012

By Chriss Street

Up through September 2011, Wall Street underwriters, bond counsels and other assorted securities industry camp followers were gloating over the supposed failure of predictions in late 2010 by Meredith Whitney and me that there would be a coming surge of state and local bond defaults.  These camp followers had been hitting the public airways to crow there were only 24 municipal defaults in the first half of 2011. That was down from 60 defaults in the first half of 2010. And it was down substantially from the 144 defaults in the first half of 2009.

But all the giddy glee state and local government were exempt from the Great Recession came crashing down on Oct. 12, 2011 when the city of Harrisburg, the state capital of Pennsylvania, filed the second largest bankruptcy in U.S. history with more than $500 million in liabilities. And on Nov. 8, 2011 when Jefferson County, Ala., filed the largest bankruptcy inU.S. history with more than $3.1 billion in liabilities.

Most Americans cannot fathom that state and local (“municipal”) governments in 2011 spent $2.89 trillion and commanded 20 percent of the American economy. To fund this muscular economic intervention, municipalities collected $2.62 trillion in revenue and borrowed hundreds of billions of dollars by selling municipal bonds to the public.  Over the last 10 years, the outstanding amount of municipal bonds more than doubled from $1.197 to $2.8 trillion.

Then there’s debt. According to a June 25, 2011 report by James E. Spiotto, “The debt of state and local governments has more than doubled in the last 10 years, from $1.197 trillion in 2000 to $2.8 trillion at the end of 2010. (Some [Citicorp] contend that the market is actually $3.7 trillion with individual holders being $1.8 trillion [rather than $1 trillion] or 50 percent of the market but hard to verify.)

“This does not include over $1 trillion of unfunded pension liabilities and in addition OPEB liabilities over $200-300 or more billion plus the needed debt financing over the next five years to bring infrastructure up to acceptable standards of $2.5 trillion.”

Add it all up, and municipalities look like subprime borrowers.

Since the Great Recession began in 2007, Americans have personally cut spending, reduced debt and increased savings, while their local governments have increased borrowing to increase spending.  With municipal government revenues now falling fast and economizing voters mostly opposed to higher taxes, thousands of over-leveraged municipalities appear doomed to default on their debt and be forced into bankruptcy.

About 71 percent of municipal bonds are purchased by wealthy individuals who often loathe the government cronyism and inefficiency, but have been willing to invest huge amounts of their net worth in “tax free” municipal bonds. Armed with a tax-advantaged ability to borrow for 20 percent to 30 percent cheaper than taxable borrowers, municipalities went on a borrowing binge and have increased their bond debt from $1.2 trillion to $2.62 trillion over the last 10 years. This red hot 8.9 percent compounded growth rate for debt far out-distanced the American economy’s annual growth rate of 4 percent.

U.S. Treasury Loses $40 Billion

According to Congressional Joint Committee on Taxation, this rapid growth of tax exempt municipal bonds now costs the U.S. Treasury $40 billion per year in lost taxes. Although the U.S. Supreme Court ruled in 1895 that there is no constitutional prohibition against taxing municipal bond interest, Congress authorized an exemption with the Revenue Act of 1913.  But with the U.S. credit rating recently downgraded, President Obama is trying to reduce or eliminate the exemption.

Unlike the U.S.equity and corporate bond markets that are tightly policed by the U.S. Securities and Exchange Commission, the municipal bond markets have been collegially self-regulated by the brokers that sit on the Securities Industry and Financial Markets Association and have dominated the Municipal Securities Rulemaking Board.  But the Dodd-Frank Wall Street Reform and Consumer Protection Act on Oct. 1, 2010 required the MSRB to be independent of SIFMA. Furthermore, MSRB was given expanded jurisdiction and enforcement authority to protect the interest of municipal entities and “obligated persons” — better known as taxpayers.

To review the potential impacts Dodd-Frank would have on investors, Bloomberg Television held a seminar in lower Manhattan in early October 2010.  As the treasurer of Orange County, Calif., and the whistleblower who helped expose the county’s $2 billion investment loss that forced the county to file for bankruptcy in 1994, I was invited as the token speaker to warn about the risks to the economy from potential municipal bond defaults.

Each panel session consisted of strident reassurances by underwriters, bond counsels and other assorted securities industry camp-followers that the municipal bond market was financially strong. Then I would reiterate why a combination of collapsing property tax collections, huge debt leverage and unfunded pension obligations would doom the muni bond market to years of defaults. After the sessions, we would gather for coffee and conversation.  The same panelists who had vociferously argued in public the muni bond markets were safe, fretted in private about their firm’s professional liability for future defaults. Several stated, “I hope it doesn’t blow up too soon. I still have to pay for kids in college.”

Two months later, the CBS “60 Minutes” television show aired a 14-minute piece about U.S. state and local finances. Correspondent Steve Kroft interviewed Wall Street banking analyst Meredith Whitney, who in 2007 correctly warned that losses from sub-prime mortgage bonds would devastate the solvency of the U.S. banking industry. Whitney pessimistically noted that state and local governments were minimally facing collective annual operating deficits of $500 billion per year and a least $1 trillion more in un-funded pension obligations. The show closed with Whitney projecting a wave of defaults by counties and cities: “You could see 50 to a hundred sizable defaults, [maybe] more.” 

A rattled Steve Kroft asked her when people should start worrying about local finances.  Whitney answered: “It’ll be something to worry about within the next 12 months.”

The next morning all hell broke loose on Wall Street as municipal bond prices plunged by 10 percent. Over the next two months, prices fell another 10 percent to 15 percent as the shock and awe of the market disruption fueled panic among bondholders and froze out all but the highest rated municipalities from borrowing money in the public markets.

Fortunately for muni bondholders, the U.S. Federal Reserve Board took action in spring 2011 to force down long-term interest rates. The higher rate of interest on depressed municipal bonds attracted high-yield investors who drove the prices of municipal bonds back to just below when prices collapsed.  But tax-exempt municipal bonds that once yielded 20 percent to 30 percent less than U.S. Treasury bonds now yield a whopping 20 percent to 30 percent more.

Threats to Bondholders

The higher yield for municipal bonds represents the level of risk bondholders are taking. If the economy improves, interest rates will rise rapidly and the price of municipal bonds will crash again.  If the economy contracts, tax collections will continue to shrink and municipal bond prices will be crushed over fears of potential defaults. Under either economic scenario of good or bad times, municipal bond prices seem precariously doomed to fall. Add in the probability that Congress takes back the $40 billion tax exemption and bondholders face huge threats.

For Harrisburg, Chapter 9 bankruptcy filing is the only strategy that might allow the city to escape from being a permanent debt slave. The city was once a mixed use community of heavy manufacturing, food processing and state government. But after the private-sector industries pulled out, the property tax base collapsed, because all the state government property is tax exempt.  To subsidize operating deficits and generate revenue, the Harrisburg city council sold $463 million in municipal bonds to invest in upgrading a huge trash incinerator, constructed parking lots and built a Wild West Museum.

For a working class city of 49,000 with a near poverty line median household income of $26,920, Harrisburg has a bloated municipal bond debt per household of $23,734.Harrisburg residents also pay some of the highest fees in the country to support what’s called The Incinerator, rather than hauling trash to a lower cost landfill. To fully service the city’s debt burden, each household would have to pay another $1,104 in taxes.  With The Incinerator running negative cash flow, parking lots featherbedded and the museum defunct, residents of Harrisburg are now debt slaves.

Given this ludicrous indebtedness, Harrisburg would have seemed an excellent candidate to file under 11 USC § 904 of the U.S. Bankruptcy Code (“Chapter 9”) when the city announced in September 2010 it would miss a payment on its general obligation bonds and incinerator bonds.  In bankruptcy, the city would have turned The Incinerator over to the bondholders, restructured city operations and negotiated down its debt burden to a manageable level.

But the Harrisburg mayor had fought against a filing for bankruptcy to protect her own political future. And the state of Pennsylvania was adamantly opposed to a Chapter 9 bankruptcy for fear of a daisy-chain of defaults across Pennsylvania as other municipalities and their taxpayers tried to escape similar debt-slavery.

Pennsylvania’s Act 47

To stave off an immediate bankruptcy in 2010, Pennsylvania’s then-Gov. Ed Rendell advanced $3.3 million in future state grants to pay bondholders. In July 2011, new Gov. Tom Corbett offered another grant advance of $3.6 million if the city would enter Pennsylvania’s Act 47 municipal recovery program by turning control of the city over to the state. Essentially, the state’s plan would have raised taxes, then sold off The Incinerator, city garages, parking meters and any other city property to pay bondholders in full.

After racking up millions of dollars in consultants and legal bills, a taxpayer-supported coalition elected to the Harrisburg city council voted 4-3 to file for bankruptcy on Oct. 12, 2011.  The state Legislature screamed foul and voted to put Harrisburg into receivership. The city remained in federal Chapter 9 bankruptcy until a bankruptcy judge on Nov. 23 voided the bankruptcy, but decided the state had the right to take over the city and appoint a receiver.

Corbett then appointed attorney David Unkovic as the city’s receiver, setting off howls that Unkovic’s former law firm, Saul Ewing, actually represents the city’s largest creditor, Assured Guarantee Municipal Corp. Harrisburg listed $458 million in creditor claims when it filed its bankruptcy petition. City council attorney Mark Schwartz said the Chapter 9 filing was aimed at giving the city “bargaining power” with creditors and the state of Pennsylvania.  In addition to its debt and state buildings not paying property taxes, the city also is also being battered by the state’s unfunded pension crisis.

Ten years ago the Pennsylvania State Employees’ Retirement System claimed its pension plan was “substantially over-funded” based on an assumption its investments would earn an 8 percent rate of return forever. State lawmakers then spiked public employee pension benefits and PSERS cut employers’ (including Harrisburg’s) contribution rate to just 5 percent of their payroll.

But with employees retiring early with lush benefits and the stock market losing 43.2 percent after inflation over the last 10 years, PSERS recently admitted it has a $30 billion unfunded liability. Today only 109,000 public sector workers are now supporting 111,000 retirees. To prevent the liability from jumping to $55 billion in six years, PSERS ordered Harrisburg to increase its employer contributions to 28.1 percent of payroll.

Muni bond advocates stress that there have only been 625 Chapter 9 municipal bankruptcies since 1937, versus 58,322 business bankruptcies in 2010 year alone. This conveniently avoids the fact that eight states and one territory defaulted in the 1840s. Thirteen states repudiated their debt entirely in the 1870s. And approximately 4,770 municipalities, or 18 percent of the entire municipal bond market, defaulted during the Great Depression.

Bankruptcy: Good or Bad?

The municipal bond industry has always screamed that a bankruptcy filing will deny municipalities any access to borrowing.  But given that over-barrowing by state and local governments is the primary risk for default, this is just seen to be the cost of tough love.

Historically, the results of Chapter 9 bankruptcy filings seem beneficial to municipalities and their taxpayers. Orange County, Calif. filed in 1994 after losing $2 billion in speculative investing.  After county supervisors tried and failed to convince voters to raise taxes, the county issued layoffs to 4,000 employees (20 percent of staff). And it collected $600 million in a legal settlements from Merrill Lynch, KPMG and others.

Surveys demonstrated that most residents could not identify any lower levels of service and today the county has a stellar AA credit rating. The city of Vallejof iled for bankruptcy after being overwhelmed by municipal bond debt, high wages and pension liabilities. After cutting police and fire by 50 percent, the city discounted $500 million in bond debt and other claims for $6 million.

Only municipalities in 11 states are specifically authorized to file for Chapter 9 bankruptcy. And another 13 states authorize Chapter  9 after approval by some state official or commission. But Harrisburg filed for bankruptcy without “permission” when it became clear the state’s plan was to take over the city, quickly sell the assets and raise taxes to pay off bondholders.

The day after Harrisburgfiled bankruptcy, the Jefferson County, Ala. sewer district board met to consider filing Chapter 9. After defaulting on $3.14 billion in municipal sewer district bonds, JP Morgan had already offered $647 million to settle bribery charges. But even after the settlement, the district would still need to permanently raise local sewer bills from $63 to $395 a month to pay off their municipal bond debt.

When the county’s bankruptcy lawyer, Ken Klee, was asked by Alabama lawmakers what would be the negative if the sewer district filed for bankruptcy, he could not see a negative for the sewer district, but he did believe it “would be like Chernobyl” for other districts’ bond ratings in Alabama. But since the bankruptcy filing, high credit quality issuers in Alabama have already sold billions of new municipal bonds to investors.

State and local governments have been living in a fantasy world where borrowing money was deemed a responsible way to operate huge organizations. Wealthy local individuals fed that fantasy by lending irresponsible amounts of money to bureaucrats. In a post-Lehman Brothers world, corporate bondholders of insolvent companies have had to suffer “cram-downs” of part of their debt to establish a more sound financial position for the company to survive.

The bottom line for over-indebted and over-taxed municipalities is they need to stop borrowing money. If they are insolvent and need to consider filing for Chapter 9 bankruptcy, the key question they ask is: “Are we better off continuing as debt slaves?” The answer will be usually be no.

Street was treasurer of Orange County, Calif. and blogs at Chriss Street And Company. His recent book is, “The Third Way: Public-Sector Excellence Through Leadership and Cooperation”

By John Seiler

The evidence keeps rushing in that the U.S. and California economies have stagnated for about 15 years. Obviusly, there are bright spots, such Apple, Google and the other Silicon Valley nerd factories.

But for anyone with IQ < 180, there has been no “growth,” only fake booms and real busts. Some numbers appear to be up, such as the stock market or housing prices; but those numbers don’t take into account inflation.

The following chart does factor inflation. It shows that the Dow Jones Industrial Average is in the same position it was in the late 1990s. That is, there’s been no improvement. Total stagnation.

No wonder middle-class families feel squeezed. They have been squeezed. They work hard and save, but interest rates are near zero. They work harder, and their “incomes” rise, but so do taxes. If they run small businesses, federal, state and local regulations keep getting tougher and more costly. The Federal Reserve Board keeps debasing the currency through the inflation called QE3.

The middle class are rats on a treadmill.

Both parties are to blame. Republicans and Democrats pretty much have split power in Congress and the White House the past 15 years. Third party alternatives are kept out of power by a system rigged by the two major parties.

In Thursday’s VP “debate,” here were the “solutions” of the two candidates:

Democrat Joe Biden: Increase taxes and spending even more.

Republican Paul Ryan: Cut spending by increasing defense spending to defend West Germany from the Soviet Union, both of which countries don’t exist any more.

It doesn’t add up and it hasn’t added up for 15 years.

In California, things are even worse because our state suffers intensified chapters of the major parties: Democrats who hanker to be Kim Jong Un and feckless Republicans just wanting to cash in, while blabbing small-government rhetoric to fool the Tea Party.

By Chriss Street

Last week, we first reported first that “Permanent Link to Calif. sales tax revenue nosedives 33.5%,” then that “Moody’s warns of mass Calif. municipal bankruptcies.”

During the Great Recession of the last four years, the California private sector was forced to slash employment and infrastructure spending, but the public sector made only modest cutbacks. Much of this state and local spending was funded by selling municipal bonds to elderly investors who were told the “muni market” was safe because the default rate is very low.

Now a new Federal Reserve Board study, “The Untold Story of Municipal Bond Defaults,” debunks the belief that municipal bonds are safe investments and blames the Moody’s and S&P credit rating agencies for deceiving the public. This is sure to fan the flames of the growing panic among holders of California municipal debt. According to the August 15 report:

“The $3.7 trillion U.S. municipal bond market is perhaps best known for its federal tax exemption on individuals and its low default rate relative to other fixed-income securities. These two features have resulted in household investors dominating the ranks of municipal bond holders.”

Individuals own three quarters of all municipal bonds; with $1.879 billion held directly and another $930 billion through investments in mutual funds.  The Fed report emphasized that the perception of a low historical default history of municipal bonds has played a key role in “luring investors” to buy huge amount of municipal debt.

The Fed specifically points out that the perception of low default rates is due to widely advertised reports of low default rates by credit-rating agencies.  But the Fed determined the credit-rating agencies have not told the whole story about the level of municipal bond defaults.

Default records

Moody’s Investors Service and Standard and Poor’s (S&P), the two largest bond rating agencies, provide annual default statistics for the municipal bonds.  S&P reported that its “rated” municipal bonds defaulted only 47 times from 1986 to 2011.  Similarly, Moody’s indicated that its “rated” municipal bonds defaulted only 71 times from 1970 to 2011.  This compares much more favorably to the record of thousands corporate bond defaults during the same period:

But when the Fed tracked default listings from 1970 to 2011 through the Mergent and S&P Capital IQ data bases available to institutional investors, the municipal default rates during the same periods skyrocketed from 71 to 2,521 for Moody’s and 47 to 2,366 for S&P.  The Fed calculated that there were a total of 2,527 municipal bonds that defaulted from the late 1950s through 2011 — confirming that the real rate of municipal bond defaults was 36 times higher than Moody’s and S&P reported to the public.

The Fed warned that information regarding municipal bonds tends to be “self-selected.”  Issuers stop seeking an annual rating from Moody’s and/or S&P, if their bonds are likely to not receive an “investment grade” rating.

The Fed also determined that “the municipal market is bifurcated into general obligation (GO) bonds and revenue bonds.”  GO bonds carry a full faith and credit pledge of a state or local government, but revenue bonds are backed by a pledge of revenues raised from a specific enterprise, such as an airport, hospital, or school.  According to the Fed, over the past 16 years, 60 percent to 70 percent of newly issued municipal bonds were revenue bonds.  Many of these projects appear to be politically justified to bankroll crony capitalist “sustainable” investments as industrial development bonds.  IDB financings often involved new technologies or projects with no historical track record. The Fed wrote:

“the services offered by an alternative energy plant, pollution control facility, or other corporate-like entity may not be considered essential, because of the availability of other energy sources. Thus, these enterprises may have less potential to generate revenue.”

Culpable

The bottom line of the Fed report is Moody’s and S&P are culpable for understating the risks to investing in the municipal bond market.  Within 48 hours of the release of the Fed report, Moody’s acknowledged 10 percent of California cities have declared fiscal crises and disclosed that “across-the-board rating revisions are possible following a review of our ratings on California cities over the next month or two.” Based on the Fed report and Moody’s reaction, California and other municipal bondholders should be panicked.

Chriss Street and Paul Preston Co-Host
“The American Exceptionalism Radio Talk Show”
Streaming Live Monday Through Friday at 7-10 PM
Click Here to Listen:  http://www.mysytv.net/kmyclive.html

By Chriss Street

If there was an Academy of Motion Picture Arts and Sciences award for the best acting performance by a CEO, Jamie Dimon of J.P. Morgan Bank would surely win the Oscar for his dismissal of a $2 billion off-shore derivative loss as “a complete tempest in a teapot.”  Dimon tried to use all his theatrical skills to distract the American public from discovering that the U.S. Federal Reserve’s policy of loaning money to banks at zero-interest-rates has made derivative trading wildly profitable, but made lending to American businesses less profitable.

As fallout from the J.P. Morgan fiasco exposes the bloated derivative activities of major banks, the Federal Reserve will be forced to terminate the zero interest rate policy and let rates rise to retard bank speculative actions.  Higher interest rates will stimulate banks to make more commercial and industrial loans, resulting in higher U.S. economic growth.

Achilles Macris, J.P. Morgan’s CIO in their London office, began using the bank’s access to cheap capital from the Fed to amass a huge over-the-counter derivative gamble that high yield and sovereign debt interest rates would fall, after MF Global suffered a $1.2 billion loss on similar bets and was forced to file for bankruptcy last October 30.

Morgan’s gamble became very profitable after December 21 when the European Central Bank began making $640 billion off three year loans at 1 percent interest, referred to as “Long Term Refinancing Operations” — LTROs — available to the banks of Portugal, Ireland, Italy Greece and Spain — the PIIG countries.  By the end of December, J.P. Morgan’s total derivative exposure was $70.2 trillion on just $1.8 trillion of bank assets, according to the U. S. Controller of the Currency.  Morgan is reported to have continued heavy derivative buying in January and February.  Its profits soared again when the ECB announced LTRO2 as another $714 billion in three year low-interest loans to PIIGS banks.

The stock of J.P. Morgan vaulted from $29 per share in December to $45 a share in March as rumors swirled that Achilles Macris and his London team of six had already made $2-3 billion as high yield and sovereign debt interest rates continued to fall.  A jubilant Jamie Dimon announced that J.P. Morgan would increase its dividend and buy back $15 billion of its stock.

France and Greece

Everything seemed rainbows and unicorns for J.P. Morgan until two weeks ago, when France and Greece elected hardcore leftist candidates who want to abandon austerity spending cuts and increase social welfare spending.  Interest rates on the PIIGS sovereign debt shot back up and J.P. Morgan appears to have suffered a $4-5 billion loss.  It also appears the bank has been unable to limit its losses to $2 billion by selling out of their enormous derivative positions.

Jamie Dimon tried to dismiss the losses by promising heads will roll. But congressional hearings will soon illuminate to American taxpayers that the Fed has provided the capital that has allowed America’s three largest banks to engage in $173 trillion in leveraged derivative speculation:

The derivative exposure of these three banks alone exceeds 11 times the American economy and 2.7 times the economies of all the nations on earth.  On December 30, the derivatives leverage ratio of these three banks stood at 37 times.  Menacingly, this leverage ratio exceeds the average leverage ratio of 32 times assets for Lehman Brothers, Bear Stearns and Merrill Lynch, shortly before the shock of their collapse instigated the start of the Great Recession in 2008.

Federal Reserve Policy

After five years of miserable unemployment numbers and virtually no growth, it seems clear the Federal Reserve’s $2 trillion increase in bank lending at zero interest rates has been better at expanding the international derivatives markets than expanding the American economy.  The Federal Reserve owns much of the blame for this phenomenon.  By keeping interest rates so low, banks were unable to make a rate of return above their cost of capital on traditional lending.

Kansas City Federal Reserve Bank President Thomas Hoenig in a recent interview warned that an extended period of ultra-low interest rates invites speculative behavior:

“When you have zero rates that go on indefinitely, you are inviting future problems.”

The recent J.P. Morgan derivatives fiasco has demonstrated that the Fed’s zero interest rate policy has encouraged risky financial speculation that is highly dangerous and potentially destructive.  It’s time for the Fed to let interest rates rise, so banks can get back to the business of financing America’s real-economy.

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Chriss Street’s latest book: “The Third Way,” now available on   www.amazon.com

May 9, 2012

By John Seiler

Back during the People Power Revolution in the Philippines in 1986, which kicked dictator Ferdinand Marcos out of power, one U.S. Senator who played a role by flying to the country was Richard Lugar, R-Ind. I remember at the time he was dubbed by correspondents on the islands as the “Stepford Senator” for his robotic performance. The reference, of course, was to the 1975 movie, “The Stepford Wives,” in which men replace their feminist wives with obedient cyborgs.

Now the Stepford Senator finally has been defeated in the Republican primary in Indiana by the state treasurer, Richard Mourdock. The winner had big Tea Party backing. And his platform certainly is conservative.

But who knows. I only judge politicians by what they do in office, not by what they promise. When Lugar was elected to the Senate in 1976, he was a bright young consevative as well. But in Washington, there’s a cliche about the New York Times and the Washington Post soon saying such guys are “growing in office” and are “gaining strange new respect” — as they sell out their priniciples and constituents. Lugar was one of those.

Times attack

For now, at least, the Times immediately attacked Mourdock. Wrote Andrew Rosenthal, a member of the family that long has owned the paper and the editorial page editor:

“Senator Richard Lugar used to get around 60 percent of the vote in his elections in Indiana. But he was opposed in the primary by the state treasurer, Richard Mourdock, and lost big. Mr. Mourdock’s campaign was fueled by millions from the Tea Party and national right-wing organizations that wanted to make an example of Mr. Lugar for the ultimate sin of seeking compromise across party lines. Senator Charles Schumer of New York put it well: ‘There are a lot of things wrong in Washington, but too much compromise is certainly not one of them.’

“Mr. Lugar, for 35 years a bedrock of sensible bipartisanship on foreign policy….”

See what I mean? The Times, although supposedly “liberal,” manufactured the lies that help get America into the Iraq War quagmire that bankrupted our country. It was their own Judith Miller who “stovepiped” propaganda from the Bush administration about Saddam Hussein supposedly having “weapons of mass destruction” — which he didn’t.

Lugar went along with Bush and the Times and now, naturally, is commended by the Times for “sensible bipartisanship.” Meanwhile, 4,486 brave young Americans are dead, along with more than 109,000 Iraqis, according to U.S. government estimates revealed by Wikileaks.

And Iraq is falling back into dicatorship.

Mourdock platform

Again, we don’t know what Mourdock will actually do in office. But his campaign platform said:

“Richard believes that military force should be used only when a vital national interest is at stake and that any U.S. mission should come with clearly defined goals and objectives.”

Unlike Iraq, Afghanistan, the GWOT, etc. And unlike Lugar’s Stepford Wife backing of Bush.

Surprisingly, Mourdock even brought up monetary policy. This clearly shows the influence of Ron Paul, who has made that a key policy issue, in calling for, “End the Fed.” Mourdock doesn’t go that far, but at least his position is:

“Richard supports efforts to require an audit of the Federal Reserve as a means of ensuring accountability.  Richard also believes that the Federal Reserve should narrowly focus its efforts on promoting stability and strengthening the dollar rather than attempting to artificially control such economic factors as employment levels and interest rates.  He opposes the Fed’s program of so-called ‘quantitative easing.'”

So he’s moving in the right direction. No wonder the inflationist New York Times, home of the ultra-inflationist Paul Krugman, hates him.

Dinosaurs

Mourdock was gracious to his defeated opponent:

“When I began my campaign for U.S. Senate in 2011, I started it in a unique way — asking for a round of applause for Dick Lugar. Senator Dick Lugar has served Indiana with distinction for 35 years of his life, and we are grateful. Let’s start the General Election in the same way we started the Primary – by honoring someone that we all owe a lot to — our Senator.”

Lugar was ungracious in defeat, clinging as Ferdinand Marcos had 26 years ago to the vast power now slipping from his grasp. In a farewell letter, he attacked Mourdock’s

“embrace of an unrelenting partisan mindset is irreconcilable with my philosophy of governance and my experience of what brings results for Hoosiers in the Senate….

“In effect, what he has promised in this campaign is reflexive votes for a rejectionist orthodoxy and rigid opposition to the actions and proposals of the other party.  His answer to the inevitable roadblocks he will encounter in Congress is merely to campaign for more Republicans who embrace the same partisan outlook.  He has pledged his support to groups whose prime mission is to cleanse the Republican party of those who stray from orthodoxy as they see it.”

Bipartisanship? Yeah. Click here for a list of Lugar’s bipartisan support, with Democrats, of police-state bills that have turned America into a closed society, beginning with the Soviet-style USA “Patriot” Act of 2001.

As to the New York Times… In the 1980s, even conservatives were forced to read the Times and the Washington Post because that’s what everybody else read, and those papers had the best, sometimes the only, coverage of national issues. But nowadays, people can better coverage online, from numerous alternative sources, without the far-left, “bipartisan,” police-state, perpetual-war advocacy positions of those papers. Now, people can find the truth on their own.

The Times lost $40 million last year. The Post just re-ported a $23 million loss in the first quarter of 2012.

Like Lugar, the Post and the Times are dinosaurs stumbling in the mud, on the way to extinction.

The housing crisis of recent years was caused by the government itself. The Federal Reserve Board — a quasi-private bank whose directors are appointed by the president — has debased the dollar while keeping interest rates artificially low. That caused the boom/bust cycle that wrecked the housing market.

Fannie and Freddie, the two giant quasi-private, quasi-government entities that provided millions of easy-money loans that made the boom even bigger, went bankrupt. And “affordable housing” is a scam to subsidize developers with tax dollars.

So, what are Gov. Jerry Brown and California Democrats demanding? Even more government involvement in housing!

Reported the L.A. Times:

Joining California’s congressional Democrats, Gov. Jerry Brown is calling on President Obama to appoint a new federal housing regulator, saying the acting director is “hindering California’s economic recovery and harming state efforts to promote clean energy.”

In a letter to the White House last week, Brown echoed the concerns of more than two dozen House Democrats, arguing that the Federal Housing Finance Authority under Acting Director Edward DeMarco has “ignored” the Golden State’s foreclosure crisis by “failing to exercise its full authority over residential mortgages underwritten by Fannie Mae and Freddie Mac,” the housing finance agencies seized by the government in September 2008 as mortgage losses mounted.

That’s like “helping” a drowning man by giving him a glass of water.

What California, and America, really need is for the government to get totally out of the housing business.

First, the Federal Reserve Board itself should be dissolved. Ever since it was imposed on us in 1913, it has inflated the currency, thereby effectively stealing people’s savings. And its inflationary policies cause the boom/bust cycles that devastate millions of people.

Second, Fannie and Freddie should be abolished, their assets auctioned off to the highest bidder.

Third, all tax-funded “assistance” to housing should be ended. As Wayne Lusvardi reports today on CalWatchDog.com, the free market itself is by far the best way to provide low-cost housing to Californians. Government only makes everything worse.

Jan. 17, 2012