Hanging the Taxpayer Again

Bank of America is practically bankrupt.  Back in 2008, during the subprime crisis, Bank of America was strong-armed in to buying the mortgage behemoth, Countrywide.  Now with foreclosures picking up at a rapid pace, Bank of America was getting killed in their mortgage losses.  To the point they are almost bankrupt.

Rumors were floating this week that JP Morgan would be buying Bank of America.  I couldn’t see it though.  Who would want to buy any bank that has the number of foreclosures awaiting them that Bank of America has?  Well it turns out I was right.

In a very under-reported news item, it was announced that Bank of America, in addition to receiving $5 billion from Warren Buffet, had sold their “real estate division” to Fannie Mae.  Now all of these foreclosures are going to be transferred to Fannie Mae.

Of course, Fannie Mae is the quasi-government entity that was used to finance so many of the mortgages in America.  As a result, the federal government has been having to provide Fannie Mae with 100’s of billions of dollars every month in order to keep them out of bankruptcy themselves.  This is, of course, paid for with taxpayers’ dollars.

So in effect, the taxpayer has again bailed out a bank that is considered “too big to fail.”  We are on the hook again for all of the foreclosures that Bank of America, through Countrywide, have.  They made the bad loans, but it’s the taxpayer, not the bank, that is going to pay for them.

And they did this so sneakily that few people are apparently aware of it, thus avoiding the outrage that is associated with bailing out the big banks.

Welcome to America!

How to bail out the states

I just saw an article where California was able to secure $5.4 billion in loans from 8 different banks, led by Goldman Sachs.

Why is this important?  California is out of money.  And yet they refuse to cut their spending.  So the only way they can continue to spend this kind of money is to borrow it since the states do not have their own printing press.

But this money that is being loaned to California is money that was given to the banks as part of the Federal Reserve’s money printing program.  Since California will probably never pay this loan back, the Federal Reserve has in effect printed money for the State of California.

I was wondering how the federal government was going to bail out the states that have overspent.  And this appears to be how they are going to do it.  And they did it in such a way that the vast majority of the people will never figure out that it was a bailout.

The First Domino

It seems to me a lot of Americans aren’t taking the Greek situation seriously.  After all, it is another country, half way across the world, how can it actually affect us.

What people don’t realize is that the banking system is a global banking system.  All of the banks around the world are tied together.  Who do you think owns all of this Greek debt?

Unfortunately U.S. banks own a large percentage of it.  European banks own a lot as well.  And even China has a pretty large stake in it.  If Greek fails, that is likely to cause banks throughout Europe, the U.S. and Asia to fail as well.

First Greek fails to pay back a European bank.  That causes that bank to be unable to make their payments to a U.S. bank.  That causes the U.S. bank to be unable to make their payment to China.  And so on.

It is lined up like dominos and once the first one falls, the others will be right behind it.  If Greece goes under, the entire global financial system will be right behind it.  This is why so many countries are fighting so hard to keep Greece afloat.

And it is something Americans should take very seriously.

However, as we have already seen, bailing out Greece doesn’t work.  They were already bailed out once, and here they are now needing more money again.  All they can hope to do is give Greece enough money that they can keep them afloat for a little while and hope that a miracle will occur somewhere.

That miracle is that one of these countries is going to have to cut their spending so dramatically that they can actually begin to pay down some of their debt.  It doesn’t appear that is going to happen, either in Europe or the United States.

It’s just a question of time before somebody defaults and the dominos begin to fall.

Richard Fisher's Speech

Yesterday, the Round Rock Chamber of Commerce hosted their monthly meeting by having Richard Fisher, the President of the Dallas Federal Reserve Bank and a member of the Federal Open Market Committee (which sets Fed monetary policy) as a speaker.  I was in attendance.

In his speech, Mr. Fisher said that the economy is on the path to recovery and he would not be surprised if GDP (Growth Domestic Product, which measures the U.S. economic productivity) growth was as high as 4% in the last half of the year.

Personally I don’t see this.  Mr. Fisher admitted that the Fed had provided plenty of liquidity to the system.  That banks had plenty of money to loan out, but loans weren’t occurring due to too many unknowns for businesses.  But as some of these things settled down, then economic activity should pick up.  He admitted that our economic activity is 70% consumption, so basically he is saying consumption should pick up.

If consumption picks up, then business will want to hire more.  Thus reducing unemployment and causing both consumers and businesses to want to borrow more.

Again I don’t see this.  What I see is that baby boomers are getting older and more and more are reaching retirement age.  When people retire, they spend less.  Also the financial crisis has caused many people to realize they need to get their own finances in order.  As a whole, the country is paying down its credit card and automobile debts and spending less.

Plus a whole lot of people are removed from the credit system due to foreclosures or personal bankruptcies or just due to increased lending standards.

I simply don’t see consumption going up, therefore I don’t see any increase in lending or any increase economic productivity occurring.  My prediction is that GDP will be lower the next 6 months.  This prediction, of course, is based on the Federal Reserve not printing more money and artificially inflating all of our numbers including GDP numbers.  Unfortunately I have to present that caveat because I think that is what is most likely to occur.

Anyway his speech left me wondering.  Can the Fed not analyze the same way I do?  Do they lack the same information that I have?  Or do they have some other agenda that would cause them to misrepresent this information?

Richard Fisher is a very intelligent man.  He went to Harvard and to Stanford.  I’m sure he can analyze data as well as me.  It’s hard to believe they don’t have the information as I’m not privy to near the information they have access to.  Nor do I have the research manpower that they have.

Therefore I can only conclude that they know what is the truth, but have some other agenda.

Of course, they will just tell you that I can’t analyze data accurately.  And that I simply don’t understand.

We shall see.

Wake Up America!

Several decades ago, a man's word was his bond. Once a man said he would do something, he did it.  Million-dollar deals were done on the basis of a handshake.  And you could count on it.

If someone said, "The check is in the mail," it was actually in the mail. And when a couple promised before God, friends, and family, "Until death do us part…" it truly meant "until death do us part."

Words and promises meant something back then. And you were taught at an early age how important it was to be a man of your word.  There was a social stigma to going back on your word… to not meeting a deadline… to not sticking to a commitment.

But then, maybe four decades ago… the philosophy shifted.

We started giving people a pass if they came close to their promise.  "I’ll deliver it on Friday was taken to mean Friday or Saturday were okay. 

Society gave everyone an "out." You could make a promise but be excused from your commitment so long as you gave it your best shot.

A man's word was no longer his bond. It was his best quote. And as long as he came close to fulfilling it, it wasn't a problem. Society said, "We really didn't expect you to deliver it by Tuesday. But as long as you get it to us by the weekend, there's no problem."

Divorce? "Until death do us part" became “until I realize I would be happier without you.”  This idea was even promoted by Dear Abby, the advice columnist. 

Then, maybe 20 years ago or so, society eliminated all obligations… as long as we heard what we wanted to hear. It didn't matter if we knew the person was lying to our face.

"I did not have sex with that woman, Ms. Lewinski."

"No, I have never knowingly taken steroids."

"The United States is committed to a strong dollar policy."

We knew we were being lied to, but it didn't matter. It didn't really affect any of us anyway. So what was the harm?

Now we've shifted to the final stage. Let's call it the "realization" philosophy…

In this stage, everyone knows the promises made are baloney. Everyone knows they're being lied to. Everyone knows they're standing on the edge of the abyss. And everyone knows there will be serious consequences. But… nobody knows yet what they're supposed to do.

Look across the Atlantic and see the Greek citizens protesting. They were promised retirement at the age of 50 with a full pension paying 100% of their salary.

The realization is… that isn't going to happen.

Look at the Italian farmer who worked his land for decades and was promised top dollar for the crops he produced. That's not going to happen either.

Look at the firefighters in Vacaville, California. The city and the state are virtually bankrupt. So any promises made for pensions, medical care, and housing supplements are all but null and void.

I hate to be the bearer of bad news, but this is the state of our nation. Promises made will not be kept. They can’t be.  There's no money to pay for them all.

How many other things most people didn't think would ever happen in America have happened recently? What about the collapse of our investment banks, the bankruptcy of General Motors, the liquidation of Fannie Mae and Freddie Mac, the failure of AIG, hundreds of banks being seized, millions of homes in foreclosure, or real unemployment rates close to 20%? We could go on…

Wake up America!  It not only can happen to us, it is going to!  We’ve been lied to and promises are not going to be kept.

The question is, what are we going to do about it?

The Next Great Theft

Taxation is a form of legalized theft.  After all, the government is taking from the rich and then redistributing that money to the poor.

Today, over 45% of American households receive some form of direct government payments.  And nearly 50% pay no federal taxes whatsoever.  This is a record number of people who neither paid federal income taxes in 2010 nor were claimed as a dependent by another taxpayer.

What it comes down to is a small number of Americans that are paying for the well-being of a majority. While half of the population may pay something in taxes, only the top 10% – people earning more than $113,000 – pay a substantive amount. These few citizens pay 70% of all the income taxes collected.

President Obama can talk all he wants about the rich needing to pay more, but the truth is they can’t afford to pay much more because they are already paying too much.  The people receiving the benefits are the ones that have to start giving something up, and yet no one wants to give up their piece of the pie.

I guarantee when spending cuts begin to occur and it affects your lifestyle, then you will complain about the cuts in that area.  And I could easily be talking about social security.

So the government must come up with a new way to steal your money if they can’t tax you directly.  This is what they are doing.

The Federal Reserve has made it nearly impossible to live off your savings. Thanks to the Fed's manipulation of interest rates, anyone who chooses to simply save money is going to lose a lot of value.

The latest inflation numbers show wholesale inflation having risen 6.8% over last year.  Savings accounts are paying less than 1%. So if you had $1 million in the bank, you lost roughly $50,000 in value last year. You'll go broke fast if you can't earn at least as much as inflation on your savings.

This forces the CD purchaser to take additional chances with their savings in order to earn enough to offset the impact of higher inflation and higher taxes.  Most investors can’t manage risk well enough to want to take chances with their money.

So the government will continue to steal $50,000 a year from a $1,000,000 account.  You won’t notice it, because the $1,000,000 will remain the same.  It’s just that the $1,000,000 will not buy as much as it used to.  And that is how the government steals your money.

By increasing inflation, they can take money from the savers and continue to give it to the non-savers – the spenders.

Yes, we have a government that rewards financial irresponsibility and punishes financial responsibility.

And it looks like it is only going to get worse.  The government, of course, controls this by manipulating the inflation statistics.  They’re trying to convince you there is no inflation, but you know there is.

Inflation is called “the hidden tax.”  As opposed to a direct tax.  And they implement this every time they need more money and don’t feel they can raise taxes enough directly.  And taxing only the wealthy will not come remotely close to being enough – regardless of the amount they increase it.

They’ve been doing it for a while now, but I predict it is fixing to get worse.  If they don’t dramatically reduce the budget, they will have no choice.  Watch for it.

America is Essentially Bankrupt

America is essentially bankrupt.  While my numbers aren’t accurate they are close enough to explain why this is so in a clear manner.

America brings in about $500 billion a year in tax revenue.  They are spending about $1.5 trillion a year.  This means they have been running a deficit of $1 trillion a year.

Our current official debt is around $14 trillion.  Our unofficial debt is debt America is not contractually obligated to pay and includes such items as Social Security, Medicare, Medicaid, Fannie Mae, and Freddie Mac.  When we add in our unofficial debt, the debt skyrockets to $70 trillion to $120 trillion, depending on whose calculations you wish to use.

If we tripled taxes we could at least balance our budget and quit adding to our deficit.  Obviously raising taxes is not going to be the solution.  Cutting spending is the only way to solve this dilemma.

But we have to cut a lot.  Look at the numbers.  Even if we raised taxes by 50% and raised our revenues to $750 billion, we would still have to cut the budget by half in order to balance it.  Of course if we raised taxes by 50% this would cripple the economy and we wouldn’t collect $750 billion dollars anyway due to people earning less money.

Also even if we follow this route, what happens if interest rates rise?  Currently about 40% of out budget expenses are to pay interest on our debt.  Yet our rate is only 0.65% on all of our debt as we have been moving from long-term Treasury bills to shorter term ones where the Fed has set the rate at close to 0%.  If rates only rise ½ of 1 percent, we would be looking at another $450 billion dollars of expenses which would then be added to our debt.

No, the numbers are clear.  The only way to solve this crisis is to cut spending and to cut it drastically.  Therefore I don’t even want to get involved in the argument as to whether the rich in this country should pay more taxes or not.  It’s meaningless.

We need to cut our budget by 75% so that we can spend $125 billion a year or so in paying down our debt.  Defense spending represents the major portion of our budget and we can’t continue to ignore that as an uncuttable expense.  Even if we cut defense spending by two thirds, we would still spend more on defense than any other country in the world.  If we have to cut 75%, no program can be off limits.

On top of that, we need to address Social Security and Medicare.  Fannie Mae and Freddie Mac, the government mortgage arms, should be closed and eliminated.  Medicaid is going to need a serious overhaul if not a flat elimination.

It isn’t that these programs aren’t good.  It’s that we can’t afford them.

I understand the issue of spending cuts attacking the poor and the elderly.  After all they are the ones receiving most government benefits.  But they are going to lose out either way.  If America goes bankrupt, those payments will stop any way.  Wouldn’t it be better to have an orderly decline as opposed to a chaotic one?  And at least preserve the integrity of the United States as a country that pays their bills?

Does America have a chance to solve these problems?  I would say no.  Just from reading and talking to people, I would say the vast majority of Americans do not have a clue as to how bad our economic situation is.  Therefore they have been unwilling to support the drastic spending cuts that are needed.

Apparently our politicians are not even aware of it.  The cuts proposed by President Obama are not near deep enough to ward off this crisis.  President Obama has proposed spending cuts of $4 trillion over 12 years.  That is only $300 billion a year.  So our spending gets reduced to $1.2 trillion while we continue to take in only $500 billion.  Not enough!

The cuts proposed by the Republicans are better, but also not deep enough.  They have proposed $6 trillion over 10 years.  Or $600 billion a year.  This would lower our spending to $900 billion while we are only taking in $500 billion.  Not enough!

Seriously, we need to cut 75% of our spending.

Wake up America!  We’re in trouble.