I am appalled by the news organizations condemning Israel for its attacks on the Palestinian terrorist organization Hamas operating in Gaza. Have these folks been asleep the last few years? Where were they when rockets smuggled into Gaza from Egypt were launched into Israeli neighborhoods?
Have they read the Hamas charter that binds every Muslim to jihad, which is defined as an endless state of war against Israel so long as one Jew remains alive?
Don’t they know that radical militants, who don’t stand a chance against the Israeli military, are simply using them to inflame world opinion against Israel, a nation that wants only to be left alone in the homeland granted to them by the UN in 1948?
Let me add one more ghastly piece of legislation recently enacted by Hamas that has nothing to do with Israel, and everything to do with its own people:
"Hamas members of the Palestinian Legislative Council in Gaza, having decided that stoning young girls to death is not brutal enough, enacted a law recently adding crucifixion to its list of punishments that already include hand amputation and whipping. Public decapitation for gays and rape victims (that’s right – victims) wasn't bad enough. Now they can look forward to being nailed to a cross and left hanging in agony until they suffocate to death." (This description and legislation appeared on the Al Arabiya web site http://www.alarabiya.net/articles/2008/12/24/62699.html.)
The legislation goes on to authorize “Koranic punishments, including hand amputation, corporal punishment and (other forms of) execution. Drinking, owning or producing wine is punished by 40 lashes, while drinking in public adds three months imprisonment. Several laws are directed against Hamas' Palestinian rivals, including a law intended to inhibit non-Hamas negotiators, by sentencing to death anyone who is 'appointed to negotiate with a foreign government on a Palestinian issue and negotiated against Palestinian interests.'”
There's a word for Hamas and Hamas-type organizations -- uncivilized. They are living in the 5th century when infidels -- non-Muslims -- and Muslim apostates were routinely killed. Think about this the next time you read the New York Times or any other newspaper or television commentator wailing about Israel defending its homeland.
The media don’t tell you that Israel goes to great lengths to avoid civilian casualties in Gaza. Israel's military could wipe Gaza off the map with little danger to its own soldiers; it chooses to warn Palestinian civilians they are coming after Hamas and that they should leave.
For their part, Hamas militants have hidden in civilian neighborhoods. They shoot rockets from Palestinian schoolyards in an effort to entice Israeli soldiers to respond. Hamas knows that dead or maimed children make excellent footage for TV camera crews looking for a story. Renegade soldiers who crucify girls or chop hands off children could care less about civilian casualties.
I don’t know about you, but I’m weary of the anti-Jewish bias in the American press. I can’t prove it but I think the media know Israel is supported militarily and economically by the United States, and that anything Israel does to advance its own interests advances American interests too
Could it be the media oppose what’s best for this country nationally and throughout the world? Careful readers of the news can form their own opinion. The only conflict is between Israelis and the thoroughly uncivilized and brutal Hamas terrorists.
Truth be known, the media could save thousands of lives by simply reporting news and leaving advocacy to others. But they do not, and that's a shame. It's also why media as we know it today will disappear one newspaper at a time until all that's left is the Internet, and that's a shame too.
Monday, January 12, 2009
Weather, wives and liberal politics
Bloggers sometimes wonder about whether people read their stuff. For me, the question was resolved the other night when a friend I’d not seen in months asked why I’d not written anything since August. While I was honored by his observation, his question reminded me that I should be posting more often.
The first thing I’d like to talk about this morning is my politician wife. It’s 7 a.m. and this lady is on her way out the door to go to work. It’s snowing outside and there will be 19 miles of rural roads to travel before she arrives at her Cripple Creek office. That’s 38 miles a day, five days a week, for the last 18 years, in all kinds of weather. Not bad for someone her age.
Connie promised to do her best when she was elected almost 20 years ago. She ran for the right reason -- she felt taxpayers deserved more from their elected officials; she also thought she could do a better job than her predecessor. She will leave office two years from now secure in the knowledge that she’s served with competency and integrity.
That’s more than can be said about the Rev. Donald Armstrong, rector of Grace Episcopal Church in Colorado Springs, where I worshipped for 15 years before becoming a Roman Catholic. A vestry chaired by a Springs banker hired Armstrong some 22 years ago. Today, personnel resignations, a split in the congregation, and allegations of financial impropriety will tarnish whatever reputation Armstrong had when he arrived here.
Media reports say Armstrong and the vestry voted to join an Anglican diocese based in Nigeria because the American church had become “too liberal and gay-friendly.” The vote came as a surprise to parishioners who knew nothing about the plans. They also didn’t know the diocese was investigating Armstrong for what it called the "misappropriation" of thousands of dollars from dedicated church funds, and that the rector had used parishioner money to support a non-church institute which he headed.
The congregation essentially split down the middle, with half the people, one priest and most of the choir leaving to worship elsewhere. However, this group remained loyal to the Episcopal faith and has filed suit to reclaim the venerable church building they say belongs to the diocese.
Being Catholic and without a vested interest in what happened, I stayed out of the line of fire. Prior to the split, however, and as a long-time member of the church’s Taylor Choir, Armstrong asked me to serve on a search committee to hire a replacement for an organist/choirmaster who resigned suddenly taking his retirement funds with him.
The committee recommended, and Armstrong approved, hiring Gordon Stewart, a concert organist from the UK, to rebuild what Armstrong called the church's "choral magnificence.” It didn’t take Stewart long to discover there was no money for music. He also found out about the diocesan investigation, which, until then, only the vestry and office insiders knew about.
Stewart resigned and went back to England. His assistant remained and helped choir members move music and new robes (previously bought by a choir member) to a new location. From the musicians' standpoint, an era of musical excellence going back to the 1940s had ended.
But time moves on and so do we. Barack Obama will soon to become the country's Dear Leader. Whatever change he brings had better leave this country as safe as when he found it. The terrorists are still around and he knows it. One 9/11-type attack and BHO will be toast. The media will still fawn over him, but people won’t.
That’s what makes this country great. We grew tired of George Bush, corrupt Republicans and outrageous Congressional spending programs. We figured if Republicans were going to act like Democrats we might as well vote for Democrats. And we did.
But we’ll vote Republican the next time around if Democrats don’t (as Bush might say) do what’s right. Voters instinctively know what’s right already and they’ll hold Obama’s feet to the fire if he goes too far astray. I can promise that if Democrats dink around with free enterprise they’ll be on the outside looking in four years from now.
My bet is Obama’s campaign rhetoric was just that – rhetoric. Now that security professionals are telling him what he needs to know, he’s singing a different tune. He’s backing off on closing Gitmo immediately and also on his pledge to end the Iraq war before the country is ready to be turned over to Iraqis.
But Obama is a liberal and there will be new social programs and higher taxes to support them. The government will print more money to pay for his recovery programs, and that will leave the country deeper in debt than we could have imagined. These chickens will come home to roost in 2010 and 2012 and, depending on how quickly the economy recovers, it might be a good time to be Republican again.
That concludes my catching up for now. I thank my friend James for pointing out how lax I’ve been in posting regularly. I’ll try to do better in the future.
The first thing I’d like to talk about this morning is my politician wife. It’s 7 a.m. and this lady is on her way out the door to go to work. It’s snowing outside and there will be 19 miles of rural roads to travel before she arrives at her Cripple Creek office. That’s 38 miles a day, five days a week, for the last 18 years, in all kinds of weather. Not bad for someone her age.
Connie promised to do her best when she was elected almost 20 years ago. She ran for the right reason -- she felt taxpayers deserved more from their elected officials; she also thought she could do a better job than her predecessor. She will leave office two years from now secure in the knowledge that she’s served with competency and integrity.
That’s more than can be said about the Rev. Donald Armstrong, rector of Grace Episcopal Church in Colorado Springs, where I worshipped for 15 years before becoming a Roman Catholic. A vestry chaired by a Springs banker hired Armstrong some 22 years ago. Today, personnel resignations, a split in the congregation, and allegations of financial impropriety will tarnish whatever reputation Armstrong had when he arrived here.
Media reports say Armstrong and the vestry voted to join an Anglican diocese based in Nigeria because the American church had become “too liberal and gay-friendly.” The vote came as a surprise to parishioners who knew nothing about the plans. They also didn’t know the diocese was investigating Armstrong for what it called the "misappropriation" of thousands of dollars from dedicated church funds, and that the rector had used parishioner money to support a non-church institute which he headed.
The congregation essentially split down the middle, with half the people, one priest and most of the choir leaving to worship elsewhere. However, this group remained loyal to the Episcopal faith and has filed suit to reclaim the venerable church building they say belongs to the diocese.
Being Catholic and without a vested interest in what happened, I stayed out of the line of fire. Prior to the split, however, and as a long-time member of the church’s Taylor Choir, Armstrong asked me to serve on a search committee to hire a replacement for an organist/choirmaster who resigned suddenly taking his retirement funds with him.
The committee recommended, and Armstrong approved, hiring Gordon Stewart, a concert organist from the UK, to rebuild what Armstrong called the church's "choral magnificence.” It didn’t take Stewart long to discover there was no money for music. He also found out about the diocesan investigation, which, until then, only the vestry and office insiders knew about.
Stewart resigned and went back to England. His assistant remained and helped choir members move music and new robes (previously bought by a choir member) to a new location. From the musicians' standpoint, an era of musical excellence going back to the 1940s had ended.
But time moves on and so do we. Barack Obama will soon to become the country's Dear Leader. Whatever change he brings had better leave this country as safe as when he found it. The terrorists are still around and he knows it. One 9/11-type attack and BHO will be toast. The media will still fawn over him, but people won’t.
That’s what makes this country great. We grew tired of George Bush, corrupt Republicans and outrageous Congressional spending programs. We figured if Republicans were going to act like Democrats we might as well vote for Democrats. And we did.
But we’ll vote Republican the next time around if Democrats don’t (as Bush might say) do what’s right. Voters instinctively know what’s right already and they’ll hold Obama’s feet to the fire if he goes too far astray. I can promise that if Democrats dink around with free enterprise they’ll be on the outside looking in four years from now.
My bet is Obama’s campaign rhetoric was just that – rhetoric. Now that security professionals are telling him what he needs to know, he’s singing a different tune. He’s backing off on closing Gitmo immediately and also on his pledge to end the Iraq war before the country is ready to be turned over to Iraqis.
But Obama is a liberal and there will be new social programs and higher taxes to support them. The government will print more money to pay for his recovery programs, and that will leave the country deeper in debt than we could have imagined. These chickens will come home to roost in 2010 and 2012 and, depending on how quickly the economy recovers, it might be a good time to be Republican again.
That concludes my catching up for now. I thank my friend James for pointing out how lax I’ve been in posting regularly. I’ll try to do better in the future.
Tuesday, October 7, 2008
Nature's hesitation
We are surrounded by color this time of year in Colorado. Mostly yellows, but some orange and red with enough green hangers-on from summer to make things interesting. People think aspen leaves turn from green to yellow in the fall. Actually, as the sun's angle changes, leaves lose their green color, leaving only the yellow behind. So it’s a case of “becoming” yellow rather than “turning.” I know, that's being picky, but I’d rather think in terms of becoming.
We become a year older. We become smarter (or dumber, if we still have money in the stock market). Children become grownup. We become grandparents or great-grandparents. You get the picture.
I call autumn nature’s hesitation. We go from the warm days of summer to a time of watching and waiting for winter. The leaves become yellow and tell us cold weather is right around the corner. Yet it’s still warm. We walk the hills, basking in the sunlight as though it belonged to us. It would be easy to think this could last forever. Soon, though, winter will be upon us. The leaves will fall, leaving behind bare trunks and naked limbs to face whatever the icy winds will bring.
But winter has charm too. There’s nothing so spectacular as a full moon on new snow. To quote from the poem, such splendor gives the “luster of midday to objects below.” I remember once, several years ago, catching up with a car driving without headlights. Before I could say “Dumb drunk!” I realized the driver was following other cars without their lights on. Then I realized none of us needed lights — the moon reflecting off the snow provided all the illumination we needed!
I too turned my lights off and reflected on the fact that here were several drivers who didn’t have a clue who the others were, yet we were united in silence as we convoyed down the highway together. It was quite a moment.
We’re alive and well, the trees are still beautiful and the mountains haven’t changed in, oh, a million years or so. Life goes on as it always has and so will we in one way or another.
We become a year older. We become smarter (or dumber, if we still have money in the stock market). Children become grownup. We become grandparents or great-grandparents. You get the picture.
I call autumn nature’s hesitation. We go from the warm days of summer to a time of watching and waiting for winter. The leaves become yellow and tell us cold weather is right around the corner. Yet it’s still warm. We walk the hills, basking in the sunlight as though it belonged to us. It would be easy to think this could last forever. Soon, though, winter will be upon us. The leaves will fall, leaving behind bare trunks and naked limbs to face whatever the icy winds will bring.
But winter has charm too. There’s nothing so spectacular as a full moon on new snow. To quote from the poem, such splendor gives the “luster of midday to objects below.” I remember once, several years ago, catching up with a car driving without headlights. Before I could say “Dumb drunk!” I realized the driver was following other cars without their lights on. Then I realized none of us needed lights — the moon reflecting off the snow provided all the illumination we needed!
I too turned my lights off and reflected on the fact that here were several drivers who didn’t have a clue who the others were, yet we were united in silence as we convoyed down the highway together. It was quite a moment.
We’re alive and well, the trees are still beautiful and the mountains haven’t changed in, oh, a million years or so. Life goes on as it always has and so will we in one way or another.
Friday, October 3, 2008
Dare we call it what it is?
By this time all of America is familiar with the financial crisis supposedly involving (take your pick) Wall Street financiers, corrupt politicians, greedy banks and predatory loan agencies.
We're told by President Bush, the Fed chairman, Treasury secretary and a handful of (mostly Democratic) Congressmen that taxpayers are the only ones who can bail us out.
It occurs to me that if crooks are robbing banks, we don't arrest the person who got robbed; we arrest the crooks first and work outward from there.
Regardless of your political affiliation, I want you to watch the YouTube videos below and come to your own conclusion who the crooks are.
Don't make a judgment until you've watched them through to the end. Then see if what you've seen isn't what police call an ongoing criminal enterprise.
Are we talking about violations of the federal Racketeer Influenced and Corrupt Organizations Act, commonly referred to as the RICO Act? It would seem so, but let's take a look and see what the statute says.
The RICO statute provides for extended penalties for criminal acts performed as part of an ongoing criminal organization. It also provides a civil cause of action for those injured by violations of the act.
So let's break this down. Have there been criminal acts? Is there an ongoing criminal organization? Have people been injured as a result of such acts and are other people civilly liable? There's been enough smoke around this financial fire to make me believe so.
That is, unless lawyers have figured out ways to keep the dots from being connected.
There's certainly been a loose organization involving men and women in Congress, lobbyists, and Fannie Mae and Freddie Mac, the government-sponsored but privately-owned guarantors of home loans.
This organization has perpetuated what seems to be a complex, albeit intentional, scheme aimed at defrauding taxpayers under the guise of providing loans to low-income homeowners. The question is whether the people involved knew or suspected their house of cards would fall.
For a crime to take place there must be an actus rea (criminal act) and mens rea (criminal intent). Generally speaking, there must also be one or more victims.
There certainly have been acts. We also have intent if you believe, as I do, that people at the top of these pyramid schemes knew the difference between right or wrong.
That's what we must prove then: whether the people involved knew or reasonably believed at the time these acts were being perpetrated that what they were doing was wrong and likely to result in people losing much if not all of their life's savings.
So before I go further, copy and paste the videos in your browser and watch them. See the accusations being made and make a mental note of who made them.
Also watch who denied the accusations and see if they aren't some of the same people standing in front of cameras today denying knowledge of any wrongdoing. Then come back to this post and let's chat further.
http://www.youtube.com/watch?v=NU6fuFrdCJY
http://www.youtube.com/watch?v=_MGT_cSi7Rs
Now that you've seen and heard what was said, some on the right will say kill the bastards. Some on the left will say the accusations were taken out of context. Maybe. That's why a special prosecutor should be appointed NOW to determine who knew what and when.
And that includes George W. Bush and members of Congress.
Let the chips fall where they may. Let wrongdoers be sent to jail for a looooong time. And let's all hope that never again will the American people allow greedy financiers to con them out of their money.
In the meantime, life goes on here in Pikes Peak country. Let's hope the markets eventually recover and that people who lost will recover enough to see them through their retirements.
That's it from this corner of beautiful Colorado. Happy autumn everyone.
We're told by President Bush, the Fed chairman, Treasury secretary and a handful of (mostly Democratic) Congressmen that taxpayers are the only ones who can bail us out.
It occurs to me that if crooks are robbing banks, we don't arrest the person who got robbed; we arrest the crooks first and work outward from there.
Regardless of your political affiliation, I want you to watch the YouTube videos below and come to your own conclusion who the crooks are.
Don't make a judgment until you've watched them through to the end. Then see if what you've seen isn't what police call an ongoing criminal enterprise.
Are we talking about violations of the federal Racketeer Influenced and Corrupt Organizations Act, commonly referred to as the RICO Act? It would seem so, but let's take a look and see what the statute says.
The RICO statute provides for extended penalties for criminal acts performed as part of an ongoing criminal organization. It also provides a civil cause of action for those injured by violations of the act.
So let's break this down. Have there been criminal acts? Is there an ongoing criminal organization? Have people been injured as a result of such acts and are other people civilly liable? There's been enough smoke around this financial fire to make me believe so.
That is, unless lawyers have figured out ways to keep the dots from being connected.
There's certainly been a loose organization involving men and women in Congress, lobbyists, and Fannie Mae and Freddie Mac, the government-sponsored but privately-owned guarantors of home loans.
This organization has perpetuated what seems to be a complex, albeit intentional, scheme aimed at defrauding taxpayers under the guise of providing loans to low-income homeowners. The question is whether the people involved knew or suspected their house of cards would fall.
For a crime to take place there must be an actus rea (criminal act) and mens rea (criminal intent). Generally speaking, there must also be one or more victims.
There certainly have been acts. We also have intent if you believe, as I do, that people at the top of these pyramid schemes knew the difference between right or wrong.
That's what we must prove then: whether the people involved knew or reasonably believed at the time these acts were being perpetrated that what they were doing was wrong and likely to result in people losing much if not all of their life's savings.
So before I go further, copy and paste the videos in your browser and watch them. See the accusations being made and make a mental note of who made them.
Also watch who denied the accusations and see if they aren't some of the same people standing in front of cameras today denying knowledge of any wrongdoing. Then come back to this post and let's chat further.
http://www.youtube.com/watch?v=NU6fuFrdCJY
http://www.youtube.com/watch?v=_MGT_cSi7Rs
Now that you've seen and heard what was said, some on the right will say kill the bastards. Some on the left will say the accusations were taken out of context. Maybe. That's why a special prosecutor should be appointed NOW to determine who knew what and when.
And that includes George W. Bush and members of Congress.
Let the chips fall where they may. Let wrongdoers be sent to jail for a looooong time. And let's all hope that never again will the American people allow greedy financiers to con them out of their money.
In the meantime, life goes on here in Pikes Peak country. Let's hope the markets eventually recover and that people who lost will recover enough to see them through their retirements.
That's it from this corner of beautiful Colorado. Happy autumn everyone.
Saturday, September 27, 2008
It's all about credit, folks
The following e-newsletter by John Mauldin explains the current financial crisis better than anything I’ve seen. Something does need to be done, and soon. I know it sounds harsh, but I hope banks never again finance homes and cars when people can’t afford to pay for them.
Jake Jabs of American Furniture Warehouse, with stores throughout central Colorado, has the best story I know of when it comes to buying on credit. He began small (selling guitars yet!) and reinvested profits in his business. In other words, Jake didn’t spend what money he made on cars or toys -- he bought more guitars to sell.
Jake borrowed money from a bank only once, just long enough to see the bank threaten to foreclose when times got hard. That taught him a lesson he never forgot and from then on out he's paid cash for everything.
When possible, Jake also does things himself instead of paying others to do it for him. Advertising is a good example. Everyone in Colorado has seen his weekly full-page furniture store ads in cities where his stores are located. They've also seen his TV ads, usually with a "wild" animal crawling around on the furniture. Jake doesn’t hire an advertising agency to build those ads. He designs them himself, saving tens of thousands of dollars that go back into buying more advertising. He figured early on he could take a tiger cub or two and do his own talking instead of paying an ad agency to write text and hire a professional pitchman.
What could have cost him $50,000 instead cost Jake about $250 for studio time!
Jake knows the value of the adage "when business is good you should advertise; when business is bad you must advertise." His philosophy is also on target: offer good products at low prices and people will flock to buy 'em. He’s never tried to make a killing by buying low and selling high. Instead, he buys wisely (and in quantity) and sells low on the theory that people will buy from him if they understand his business philosophy.
Jake originally bought a near-broke Denver furniture store using money he made selling guitars. The rest is history. Although not Jewish himself, Jake competed against a number of Jewish furniture store owners, prominent merchants who had been in business for years and were well thought of socially. Many of them are still in business, of course, but Jake is the dominant force.
While Jabs didn’t use credit to build his empire, that isn’t the way the American economy operates. Credit is the lifeblood of this country. A person might have good credit but it’s not worth a dime if the bank he does business with doesn’t have money to loan. Where a car dealer might need a credit line of, say, $5,000,000, in order to buy new cars to sell, he’s out of business if the bank can't lend him the money.
The dealer can’t buy cars and he can't sell cars. The consumer can’t get a car to drive to work, assuming he still has a job). First thing you know, the recession turns into a depression and there goes the economy -- all because of no credit.
Anyway, Mauldin says the current crisis is more about restoring a bank’s confidence in other banks, and in consumers’ confidence in banks they do business with, than it is a bailout of Wall Street brokerage firms. I believe him. I also believe it's a fixable problem. Herewith, his article:
Who's Afraid of a Big, Bad Bailout?
by John Mauldin
September 26, 2008
Flying last Tuesday, overnight from Cape Town in South Africa to London, I read in the Financial Times that Republican Congressman Joe Barton of Texas was quoted as saying (this is from memory, so it is not exact) that he had difficulty voting for a bailout plan when none of his constituents could understand the need to bail out Wall Street, didn't understand the problem, and were against spending $700 billion of taxpayer money to solve a crisis for a bunch of (rich) people who took a lot of risk and created the crisis. That is a sentiment that many of the Republican members of the House share.
As it happens, I know Joe. My office is in his congressional district. I sat on the Executive Committee for the Texas Republican Party representing much of the same district for eight years. This week, Thoughts from the Frontline will be an open letter to Joe, and through him to Congress, telling him what the real financial problem is and how it affects his district, helping explain the problem to his constituents , and explaining why he has to hold his nose with one hand and vote for a bailout with the other.
Just for the record, Joe has been in Congress for 24 years. He is the ranking Republican on the Energy and Commerce Committee, which is one of the three most important committees and is usually considered in the top five of Republican House leadership. He is quite conservative and has been a very good and effective congressman. I have known Joe for a long time and consider him a friend. He has been my Congressman at times, depending on where they draw the line. I called his senior aide and asked him how the phone calls were going. It is at least ten to one against supporting this bill, and that is probably typical of the phones all across this country. People are angry, and with real justification. And watching the debates, it reminds us that one should never look at how sausages and laws are made. It is a very messy process.
I think what follows is as good a way as any to explain the crisis we are facing this weekend. This letter will print out a little longer, because there are a lot of charts, but the word length is about the same. Let's jump right in.
It's the End of the World As We Know It
Dear Joe,
I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don't understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world.
First, let's stop calling this a bailout plan. It is not. It is an economic stabilization plan. Run properly, it might even make the taxpayers some money. If it is not enacted very soon (Monday would be fine), the losses to businesses and investors and homeowners all over the US (and the world) will be enormous. Unemployment will jump to rates approaching 10%, at a minimum. How did all this come to pass? Why is it so dire? Let's rewind the tape a bit.
We all know about the subprime crisis. That's part of the problem, as banks and institutions are now having to write off a lot of bad loans. The second part of the problem is a little more complex. Because we were running a huge trade deficit, countries all over the world were selling us goods and taking our dollars. They in turn invested those excess dollars in US bonds, helping to drive down interest rates. It became easy to borrow money at low rates. Banks, and what Paul McCulley properly called the Shadow Banking System, used that ability to borrow and dramatically leverage up those bad loans (when everyone thought they were good), as it seemed like easy money. They created off-balance-sheet vehicles called Structured Investment Vehicles (SIVs) and put loans and other debt into them. They then borrowed money on the short-term commercial paper market to fund the SIVs and made as profit the difference between the low short-term rates of commercial paper and the higher long-term rates on the loans in the SIV. And if a little leverage was good, why not use a lot of leverage and make even more money? Everyone knew these were AAA-rated securities.
And then the music stopped. It became evident that some of these SIVs contained subprime debt and other risky loans. Investors stopped buying the commercial paper of these SIVs. Large banks were basically forced to take the loans and other debt in the SIVs back onto their balance sheets last summer as the credit crisis started. Because of a new accounting rule (called FASB 157), banks had to mark their illiquid investments to the most recent market price of a similar security that actually had a trade. Over $500 billion has been written off so far, with credible estimates that there might be another $500 billion to go. That means these large banks have to get more capital, and it also means they have less to lend. (More on the nature of these investments in a few paragraphs.)
Banks can lend to consumers and investors about 12 times their capital base. If they have to write off 20% of their capital because of losses, that means they either have to sell more equity or reduce their loan portfolios. As an example, for every $1,000 of capital, a bank can loan $12,000 (more or less). If they have to write off 20% ($200), they either have to sell stock to raise their capital back to $1,000 or reduce their loan portfolio by $2,400. Add some zeroes to that number and it gets to be huge.
And that is what is happening. At first, banks were able to raise new capital. But now, many banks are finding it very difficult to raise money, and that means they have to reduce their loan portfolios. We'll come back to this later. But now, let's look at what is happening today. Basically, the credit markets have stopped functioning. Because banks and investors and institutions are having to deleverage, that means they need to sell assets at whatever prices they can get in order to create capital to keep their loan-to-capital ratios within the regulatory limits.
Remember, part of this started when banks and investors and funds used leverage (borrowed money) to buy more assets. Now, the opposite is happening. They are having to sell assets into a market that does not have the ability to borrow money to buy them. And because the regulators require them to sell whatever they can, the prices for some of these assets are ridiculously low. Let me offer a few examples.
Today, there are many municipal bonds that were originally sold to expire 10-15 years from now. But projects finished early and the issuers wanted to pay them off. However, the bonds often have a minimum time before they can be called. So, issuers simply buy US Treasuries and put them into the bond, to be used when the bond can be called. Now, for all intents and purposes this is a US government bond which has the added value of being tax-free. I had a friend, John Woolway, send me some of the bid and ask prices for these type of bonds. One is paying two times what a normal US Treasury would pay. Another is paying 291% of a normal US Treasury. And it is tax-free! Why would anyone sell what is essentially a US treasury bond for a discount? Because they are being forced to sell, and no one is buying! The credit markets are frozen.
Last week, I wrote about a formerly AAA-rated residential mortgage-backed security (RMBS) composed of Alt-A loans, better than subprime but less than prime. About 5% of the loans were delinquent, and there are no high-risk option ARMs in the security. It is offered at 70 cents on the dollar. If you bought that security, you would be making well over 12% on your money, and 76% of the loans in the portfolio of that security would have to default and lose over 50% of their value before you would risk even one penny. Yet the bank which is being forced to sell that loan has had to write down its value. As I wrote then, that is pricing in financial Armageddon. (You can read the full details here.)
Let's look at the following graph. It is an index of AAA-rated mortgage bonds, created by www.markit.com. It is composed of RMBSs similar to the one I described above. Institutions buy and sell this index as a way to hedge their portfolios. It is also a convenient way for an accounting firm to get a price for a mortgage-backed security in a client bank's portfolio. With the introduction of the new FASB 157 accounting rule, accountants are very aggressive about making banks mark their debt down, as they do not want to be sued if there is a problem. Notice this index shows that bonds that were initially AAA are now trading at 53 cents on the dollar, which is up from 42.5 cents two months ago.
Accountants might look at the bond I described above, look at this index, and decide to tell their clients to mark the bonds down to $.53 on the dollar. The bank is offering the bond at $.70 because it knows there is quality in the security. They are being forced to sell. And guess what? There are no buyers. An almost slam-dunk 12% total-return security with loss-coverage provisions that suggest 40% of the loans could default and lose 50% before your interest rate yields even suffered, let alone risk to your principal – and it can't find a buyer.
One of the real reasons these and thousands of other good bonds are not selling now is that there is real panic in the markets. The oldest money market fund "broke the buck" last week, because they had exposure to Lehman Brothers bonds. We are seeing massive flights of capital from money market funds, including by large institutions concerned about their capital. What are they buying? Short-term Treasury bills. Three-month Treasury bills are down to 0.84%.
It gets worse. Last week one-month Treasury bills were paying a negative 1%!!! That means some buyers were so panicked that they were willing to buy a bond for $1 that promised to pay them back only $.99 in just one month. The rate is at 0.16% today. If something is not done this weekend, it could go a lot lower over the next few days. That is panic, Joe.
I don't want to name names, as this letter goes to about 1.5 million people and I don't want to make problems for some fine banking names; but there is a silent bank run going on. There are no lines in the street, but it is a run nevertheless. It is large investment funds and corporations quietly pulling their money from some of the best banks in the country. They can do this simply by pushing a button. We are watching deposit bases fall. It does not take long. Lehman saw $400 billion go in just a few months this summer. Think about that number. Any whiff of a problem and an institution that is otherwise sound could be brought low in a matter of weeks. And the FDIC could end up with a large loss that seemed to have come from out of nowhere.
The TED Spread Flashes Trouble
There is something called the TED spread, which is the difference between three-month LIBOR (the London Inter Bank Offered Rate which is in euro dollars, also called The Euro Dollar Spread, thus TED) and three-month US Treasury bills. Three-month LIBOR is basically what banks charge each other to borrow money. Many mortgages and investments are based on various periods of LIBOR. Look at the chart below. Typically the TED spread is 50 basis points (0.50%) or less. When it spikes up, it is evidence of distress in the financial markets. The last time the TED spread was as high as it is now was right before the market crash of 1987. This is a weekly chart, which does not capture tonight's (Friday) change, which would make it look even worse. Quite literally, the TED spread is screaming panic.
The Fed has lowered rates to 2%. Typically, three-month LIBOR tracks pretty close to whatever the Fed funds rate is. Starting with the credit crisis last year, that began to change. Look at the chart below.
Remember, LIBOR is what banks charge to each other to make loans. Lower rates are supposed to help banks improve their capital and their ability to make loans at lower interest rates to businesses and consumers. Look at what has happened in the past few weeks, in the chart above. The spread between three-month LIBOR and the Fed funds rate is almost 200 basis points, or 2%! That is something that defies imagination to market observers. On the chart above, it looks like it has not moved that much, but in the trading desks of banks all over the world it is a heart-pounding, scare-you-to-death move. The chart below reflects what traders have seen in the past two weeks, and it moved up more today.
Now let's look at the next chart. This is the amount of Tier 1 commercial paper issued. This is the life blood of the business world. This is how many large and medium-sized businesses finance their day-to-day operations. The total amount of commercial paper issued is down about 15% from a year ago, with half of that drop coming in the last few weeks. Quite literally, the economic body is hemorrhaging. Unless something is done, businesses all over the US are going to wake up in a few weeks and find they simply cannot transact business as usual. This is going to put a real crimp in all sorts of business we think of as being very far from Wall Street.
I could go on. Credit spreads on high-yield bonds that many of our best high-growth businesses use to finance their growth are blowing out to levels which make it impossible for the companies to come to the market for new funds. And that is even if they could find investors in this market! There are lots of other examples (solid corporate loans selling at big discounts, asset-backed securities at discounts, etc.), but you get the idea. Suffice it to say that the current climate in the financial market is the worst since the 1930s. But how does a crisis in the financial markets affect businesses and families in Arlington, Texas, where my office and half of your district is?
The Transmission Mechanism
The transmission in a car takes energy from the engine and transfers it to the wheels. Let's talk about how the transmission mechanism of the economy works.
Let's start with our friend Dave Moritz down the street. He needs financing to be able to sell an automobile. To get those loans at good prices, an auto maker has to be able to borrow money and make the loans to Dave's customers. But if something does not stop the bleeding, it is going to get very expensive for GM to get money to make loans. That will make his cars more expensive to consumers. Cheap loans with small down payments are the life blood of the auto selling business. That is going to change dramatically unless something is done to stabilize the markets.
Credit card debt is typically packaged and sold to investors like pension funds and insurance companies. But in today's environment, that credit card debt is going to have to pay a much higher price in order to find a buyer. That means higher interest rates. Further, because most of the large issuers of credit cards are struggling with their leverage, they are reducing the amount of credit card debt they will give their card holders. If they continue to have to write down mortgages on their books because of mark-to-market rules which price assets at the last fire-sale price, it will mean even more shrinkage in available credit.
Try and sell a home above the loan limits of Fannie and Freddie today with a nonconforming jumbo loan. Try and find one that does not have very high rates, because many lenders who normally do them simply cannot afford to keep them on their balance sheets. And a subprime mortgage? Forget about it. This is going to get even worse if the financial markets melt down.
We are in a recession. Unemployment is going to rise to well over 6%. Consumer spending is going to slow. This is an environment which normally means it is tougher for small businesses and consumers to get financing in any event. Congress or the Fed cannot repeal the business cycle. There are always going to be recessions. And we always get through them, because we have a dynamic economy that figures out how to get things moving again.
Recessions are part of the normal business cycle. But it takes a major policy mistake by Congress or the Fed to create a depression. Allowing the credit markets to freeze would count as a major policy mistake.
I have been on record for some time that the economy will go through a normal recession and a slow recovery, what I call a Muddle Through Economy. This week I met with executives of one of the larger hedge funds in the world. They challenged me on my Muddle Through stance. And I had to admit that my Muddle Through scenario is at risk if Congress does not act to stabilize the credit markets.
Let's Make a Deal
Why do we need this Stabilization Plan? Why can't the regular capital markets handle it? The reason is that the problem is simply too big for the market to deal with. It requires massive amounts of patient, long-term money to solve the problem. And the only source for that would be the US government.
There is no reason for the taxpayer to lose money. Warren Buffett, Bill Gross of PIMCO, and my friend Andy Kessler have all said this could be done without the taxpayer losing money, and perhaps could even make a profit. As noted above, these bonds could be bought at market prices that would actually make a long-term buyer a profit. Put someone like Bill Gross in charge and let him make sure the taxpayers are buying value. This would re-liquefy the banks and help get their capital ratios back in line.
Why are banks not lending to each other? Because they don't know what kind of assets are on each other's books. There is simply no trust. The Fed has had to step in and loan out hundreds of billions of dollars in order to keep the financial markets from collapsing. If you allow the banks to sell their impaired assets at a market-clearing fair price (not at the original price), then once the landscape is cleared, banks will decide they can start trusting each other. The commercial paper market will come back. Credit spreads will come down. Banks will be able to stabilize their loan portfolios and start lending again.
Again, the US government is the only entity with enough size and patience to act. We do not have to bail out Wall Street. They will still take large losses on their securities, just not as large a loss as they are now facing in a credit market that is frozen. As noted above, there are many securities that are being marked down and sold far below a rational price.
If we act now, we will start to see securitization of mortgages, credit cards, auto loans, and business loans so that the economy can begin to function properly.
What happens if we walk away? Within a few weeks at most, financial markets will freeze even more. We will see electronic runs on major banks, and the FDIC will have more problems than you can possibly imagine. The TED spread and LIBOR will get much worse. Businesses which use the short-term commercial paper markets will start having problems rolling over their paper, forcing them to make difficult cuts in spending and employment. Larger businesses will find it more difficult to get loans and credit. That will have effects on down the economic food chain. Jim Cramer estimated today that without a plan of some type, we could see the Dow drop to 8300. That is as good a guess as any. It could be worse. Home valuations and sales will drop even further.
The average voter? They will see stock market investments off another 25% at the least. Home prices will go down even more. Consumer spending will drop. What should be a run-of-the-mill recession becomes a deep recession or soft depression. Yes, that may be worst-case scenario. But that is the risk I think we take with inaction.
A properly constructed Stabilization Plan hopefully avoids the worst-case scenario. It should ultimately not cost the taxpayer much, and maybe even return a profit. The AIG rescue that Paulson arranged is an example of how to do it right. My bet is that the taxpayer is going to make a real profit on this deal. We got 80% of AIG, with what is now a loan paying the taxpayer over 12%, plus almost $2 billion in upfront fees for doing the loan. That is not a bailout. That is a business deal that sounds like it was done by Mack the Knife.
This deal needs to be done by Monday. Every day we wait will see more and more money fly out the doors of the banks, putting the FDIC at ever greater risk. Panic will start to set in, moving to ever smaller banks. Frankly, we are at the point where we need to consider raising the FDIC limits for all deposits for a period of time, until the Stabilization Plan quells the panic.
I understand that this is a really, really bad idea according classical free-market economic theory. You know me; I am as free market as it comes. But I also know that without immediate action a lot of people are really going to be hurt. Unemployment is not a good thing. Losses on your home and investments hurt. It is all nice and well to talk about theories and contend the market should be allowed to sort itself out; and if we have a deep recession, then that is what is needed. But the risk we take is not a deep recession but a soft depression. The consequences of inaction are simply unthinkable.
Joe, I am telling you that the markets are screaming panic. Yes, Senator Richard Shelby has his 200 economists saying this is a bad deal. But they are ivory tower kibitzers who have never sat at a trading desk. They have never tried to put a loan deal together or had to worry about commercial paper markets collapsing. I am talking daily with the people on the desks who are seeing what is really happening. Shelby's economists are armchair generals far from the front lines. I am talking to the foot soldiers who are on the front lines.
Every sign of potential disaster is there. You and the rest of the House have to act. It has to be bipartisan. This should not be about politics (even though Barney Frank keeps talking bipartisan and then taking partisan shots, but I guess he just can't help himself). It should be about doing the right thing for our country and the world. I know it will not be fun coming back to the district. Talking about TED spreads and LIBOR will not do much to assuage voters who are angry. But it is the right thing to do. And I will be glad to come to the town hall meeting with you and help if you like.
With your help, we will get through this. In a few years, things will be back to normal and we can all have stories to tell to our grandkids about how we lived through interesting times. But right now we have to act.
Colorado, California, London, and Sweden
It is time to hit the send button. This was personally a great week. For whatever reason, I did not suffer jet lag flying to South Africa for just two days, then overnight to London, and back the next day. It was a good trip. I will report more about South Africa in a later letter, but this e-letter is already a little long.
I leave Sunday for a quick trip to Longmont, Colorado (near Boulder) to look at a very interesting technology company (InPhase) that makes holographic memory disks, with good friend Dr. Bart Stuck of Signal Lake Partners.
I will be in San Diego and Orange County the 16th and 17th of October for back-to-back speeches, then I leave Sunday for London for two days and then on to Sweden for a conference and speeches there, a quick trip to Malta, and then back home, where I will be chained to my desk by daughter Tiffani as we do interviews and write a book.
I do enjoy traveling from time to time, seeing the rest of the world. One of my secret pleasures is reading International Living and thinking about what it would be like to have another home somewhere. Cheap thrills. You can subscribe if you like by following this link.
Have a great week. I fully believe (OK, deeply hope) that Congress will act. We can all breathe a collective sigh when they do.
Your still believing in Muddle Through analyst,
John Mauldin
John@FrontLineThoughts.com
Copyright 2008 John Mauldin. All Rights Reserved
Jake Jabs of American Furniture Warehouse, with stores throughout central Colorado, has the best story I know of when it comes to buying on credit. He began small (selling guitars yet!) and reinvested profits in his business. In other words, Jake didn’t spend what money he made on cars or toys -- he bought more guitars to sell.
Jake borrowed money from a bank only once, just long enough to see the bank threaten to foreclose when times got hard. That taught him a lesson he never forgot and from then on out he's paid cash for everything.
When possible, Jake also does things himself instead of paying others to do it for him. Advertising is a good example. Everyone in Colorado has seen his weekly full-page furniture store ads in cities where his stores are located. They've also seen his TV ads, usually with a "wild" animal crawling around on the furniture. Jake doesn’t hire an advertising agency to build those ads. He designs them himself, saving tens of thousands of dollars that go back into buying more advertising. He figured early on he could take a tiger cub or two and do his own talking instead of paying an ad agency to write text and hire a professional pitchman.
What could have cost him $50,000 instead cost Jake about $250 for studio time!
Jake knows the value of the adage "when business is good you should advertise; when business is bad you must advertise." His philosophy is also on target: offer good products at low prices and people will flock to buy 'em. He’s never tried to make a killing by buying low and selling high. Instead, he buys wisely (and in quantity) and sells low on the theory that people will buy from him if they understand his business philosophy.
Jake originally bought a near-broke Denver furniture store using money he made selling guitars. The rest is history. Although not Jewish himself, Jake competed against a number of Jewish furniture store owners, prominent merchants who had been in business for years and were well thought of socially. Many of them are still in business, of course, but Jake is the dominant force.
While Jabs didn’t use credit to build his empire, that isn’t the way the American economy operates. Credit is the lifeblood of this country. A person might have good credit but it’s not worth a dime if the bank he does business with doesn’t have money to loan. Where a car dealer might need a credit line of, say, $5,000,000, in order to buy new cars to sell, he’s out of business if the bank can't lend him the money.
The dealer can’t buy cars and he can't sell cars. The consumer can’t get a car to drive to work, assuming he still has a job). First thing you know, the recession turns into a depression and there goes the economy -- all because of no credit.
Anyway, Mauldin says the current crisis is more about restoring a bank’s confidence in other banks, and in consumers’ confidence in banks they do business with, than it is a bailout of Wall Street brokerage firms. I believe him. I also believe it's a fixable problem. Herewith, his article:
Who's Afraid of a Big, Bad Bailout?
by John Mauldin
September 26, 2008
Flying last Tuesday, overnight from Cape Town in South Africa to London, I read in the Financial Times that Republican Congressman Joe Barton of Texas was quoted as saying (this is from memory, so it is not exact) that he had difficulty voting for a bailout plan when none of his constituents could understand the need to bail out Wall Street, didn't understand the problem, and were against spending $700 billion of taxpayer money to solve a crisis for a bunch of (rich) people who took a lot of risk and created the crisis. That is a sentiment that many of the Republican members of the House share.
As it happens, I know Joe. My office is in his congressional district. I sat on the Executive Committee for the Texas Republican Party representing much of the same district for eight years. This week, Thoughts from the Frontline will be an open letter to Joe, and through him to Congress, telling him what the real financial problem is and how it affects his district, helping explain the problem to his constituents , and explaining why he has to hold his nose with one hand and vote for a bailout with the other.
Just for the record, Joe has been in Congress for 24 years. He is the ranking Republican on the Energy and Commerce Committee, which is one of the three most important committees and is usually considered in the top five of Republican House leadership. He is quite conservative and has been a very good and effective congressman. I have known Joe for a long time and consider him a friend. He has been my Congressman at times, depending on where they draw the line. I called his senior aide and asked him how the phone calls were going. It is at least ten to one against supporting this bill, and that is probably typical of the phones all across this country. People are angry, and with real justification. And watching the debates, it reminds us that one should never look at how sausages and laws are made. It is a very messy process.
I think what follows is as good a way as any to explain the crisis we are facing this weekend. This letter will print out a little longer, because there are a lot of charts, but the word length is about the same. Let's jump right in.
It's the End of the World As We Know It
Dear Joe,
I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don't understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world.
First, let's stop calling this a bailout plan. It is not. It is an economic stabilization plan. Run properly, it might even make the taxpayers some money. If it is not enacted very soon (Monday would be fine), the losses to businesses and investors and homeowners all over the US (and the world) will be enormous. Unemployment will jump to rates approaching 10%, at a minimum. How did all this come to pass? Why is it so dire? Let's rewind the tape a bit.
We all know about the subprime crisis. That's part of the problem, as banks and institutions are now having to write off a lot of bad loans. The second part of the problem is a little more complex. Because we were running a huge trade deficit, countries all over the world were selling us goods and taking our dollars. They in turn invested those excess dollars in US bonds, helping to drive down interest rates. It became easy to borrow money at low rates. Banks, and what Paul McCulley properly called the Shadow Banking System, used that ability to borrow and dramatically leverage up those bad loans (when everyone thought they were good), as it seemed like easy money. They created off-balance-sheet vehicles called Structured Investment Vehicles (SIVs) and put loans and other debt into them. They then borrowed money on the short-term commercial paper market to fund the SIVs and made as profit the difference between the low short-term rates of commercial paper and the higher long-term rates on the loans in the SIV. And if a little leverage was good, why not use a lot of leverage and make even more money? Everyone knew these were AAA-rated securities.
And then the music stopped. It became evident that some of these SIVs contained subprime debt and other risky loans. Investors stopped buying the commercial paper of these SIVs. Large banks were basically forced to take the loans and other debt in the SIVs back onto their balance sheets last summer as the credit crisis started. Because of a new accounting rule (called FASB 157), banks had to mark their illiquid investments to the most recent market price of a similar security that actually had a trade. Over $500 billion has been written off so far, with credible estimates that there might be another $500 billion to go. That means these large banks have to get more capital, and it also means they have less to lend. (More on the nature of these investments in a few paragraphs.)
Banks can lend to consumers and investors about 12 times their capital base. If they have to write off 20% of their capital because of losses, that means they either have to sell more equity or reduce their loan portfolios. As an example, for every $1,000 of capital, a bank can loan $12,000 (more or less). If they have to write off 20% ($200), they either have to sell stock to raise their capital back to $1,000 or reduce their loan portfolio by $2,400. Add some zeroes to that number and it gets to be huge.
And that is what is happening. At first, banks were able to raise new capital. But now, many banks are finding it very difficult to raise money, and that means they have to reduce their loan portfolios. We'll come back to this later. But now, let's look at what is happening today. Basically, the credit markets have stopped functioning. Because banks and investors and institutions are having to deleverage, that means they need to sell assets at whatever prices they can get in order to create capital to keep their loan-to-capital ratios within the regulatory limits.
Remember, part of this started when banks and investors and funds used leverage (borrowed money) to buy more assets. Now, the opposite is happening. They are having to sell assets into a market that does not have the ability to borrow money to buy them. And because the regulators require them to sell whatever they can, the prices for some of these assets are ridiculously low. Let me offer a few examples.
Today, there are many municipal bonds that were originally sold to expire 10-15 years from now. But projects finished early and the issuers wanted to pay them off. However, the bonds often have a minimum time before they can be called. So, issuers simply buy US Treasuries and put them into the bond, to be used when the bond can be called. Now, for all intents and purposes this is a US government bond which has the added value of being tax-free. I had a friend, John Woolway, send me some of the bid and ask prices for these type of bonds. One is paying two times what a normal US Treasury would pay. Another is paying 291% of a normal US Treasury. And it is tax-free! Why would anyone sell what is essentially a US treasury bond for a discount? Because they are being forced to sell, and no one is buying! The credit markets are frozen.
Last week, I wrote about a formerly AAA-rated residential mortgage-backed security (RMBS) composed of Alt-A loans, better than subprime but less than prime. About 5% of the loans were delinquent, and there are no high-risk option ARMs in the security. It is offered at 70 cents on the dollar. If you bought that security, you would be making well over 12% on your money, and 76% of the loans in the portfolio of that security would have to default and lose over 50% of their value before you would risk even one penny. Yet the bank which is being forced to sell that loan has had to write down its value. As I wrote then, that is pricing in financial Armageddon. (You can read the full details here.)
Let's look at the following graph. It is an index of AAA-rated mortgage bonds, created by www.markit.com. It is composed of RMBSs similar to the one I described above. Institutions buy and sell this index as a way to hedge their portfolios. It is also a convenient way for an accounting firm to get a price for a mortgage-backed security in a client bank's portfolio. With the introduction of the new FASB 157 accounting rule, accountants are very aggressive about making banks mark their debt down, as they do not want to be sued if there is a problem. Notice this index shows that bonds that were initially AAA are now trading at 53 cents on the dollar, which is up from 42.5 cents two months ago.
Accountants might look at the bond I described above, look at this index, and decide to tell their clients to mark the bonds down to $.53 on the dollar. The bank is offering the bond at $.70 because it knows there is quality in the security. They are being forced to sell. And guess what? There are no buyers. An almost slam-dunk 12% total-return security with loss-coverage provisions that suggest 40% of the loans could default and lose 50% before your interest rate yields even suffered, let alone risk to your principal – and it can't find a buyer.
One of the real reasons these and thousands of other good bonds are not selling now is that there is real panic in the markets. The oldest money market fund "broke the buck" last week, because they had exposure to Lehman Brothers bonds. We are seeing massive flights of capital from money market funds, including by large institutions concerned about their capital. What are they buying? Short-term Treasury bills. Three-month Treasury bills are down to 0.84%.
It gets worse. Last week one-month Treasury bills were paying a negative 1%!!! That means some buyers were so panicked that they were willing to buy a bond for $1 that promised to pay them back only $.99 in just one month. The rate is at 0.16% today. If something is not done this weekend, it could go a lot lower over the next few days. That is panic, Joe.
I don't want to name names, as this letter goes to about 1.5 million people and I don't want to make problems for some fine banking names; but there is a silent bank run going on. There are no lines in the street, but it is a run nevertheless. It is large investment funds and corporations quietly pulling their money from some of the best banks in the country. They can do this simply by pushing a button. We are watching deposit bases fall. It does not take long. Lehman saw $400 billion go in just a few months this summer. Think about that number. Any whiff of a problem and an institution that is otherwise sound could be brought low in a matter of weeks. And the FDIC could end up with a large loss that seemed to have come from out of nowhere.
The TED Spread Flashes Trouble
There is something called the TED spread, which is the difference between three-month LIBOR (the London Inter Bank Offered Rate which is in euro dollars, also called The Euro Dollar Spread, thus TED) and three-month US Treasury bills. Three-month LIBOR is basically what banks charge each other to borrow money. Many mortgages and investments are based on various periods of LIBOR. Look at the chart below. Typically the TED spread is 50 basis points (0.50%) or less. When it spikes up, it is evidence of distress in the financial markets. The last time the TED spread was as high as it is now was right before the market crash of 1987. This is a weekly chart, which does not capture tonight's (Friday) change, which would make it look even worse. Quite literally, the TED spread is screaming panic.
The Fed has lowered rates to 2%. Typically, three-month LIBOR tracks pretty close to whatever the Fed funds rate is. Starting with the credit crisis last year, that began to change. Look at the chart below.
Remember, LIBOR is what banks charge to each other to make loans. Lower rates are supposed to help banks improve their capital and their ability to make loans at lower interest rates to businesses and consumers. Look at what has happened in the past few weeks, in the chart above. The spread between three-month LIBOR and the Fed funds rate is almost 200 basis points, or 2%! That is something that defies imagination to market observers. On the chart above, it looks like it has not moved that much, but in the trading desks of banks all over the world it is a heart-pounding, scare-you-to-death move. The chart below reflects what traders have seen in the past two weeks, and it moved up more today.
Now let's look at the next chart. This is the amount of Tier 1 commercial paper issued. This is the life blood of the business world. This is how many large and medium-sized businesses finance their day-to-day operations. The total amount of commercial paper issued is down about 15% from a year ago, with half of that drop coming in the last few weeks. Quite literally, the economic body is hemorrhaging. Unless something is done, businesses all over the US are going to wake up in a few weeks and find they simply cannot transact business as usual. This is going to put a real crimp in all sorts of business we think of as being very far from Wall Street.
I could go on. Credit spreads on high-yield bonds that many of our best high-growth businesses use to finance their growth are blowing out to levels which make it impossible for the companies to come to the market for new funds. And that is even if they could find investors in this market! There are lots of other examples (solid corporate loans selling at big discounts, asset-backed securities at discounts, etc.), but you get the idea. Suffice it to say that the current climate in the financial market is the worst since the 1930s. But how does a crisis in the financial markets affect businesses and families in Arlington, Texas, where my office and half of your district is?
The Transmission Mechanism
The transmission in a car takes energy from the engine and transfers it to the wheels. Let's talk about how the transmission mechanism of the economy works.
Let's start with our friend Dave Moritz down the street. He needs financing to be able to sell an automobile. To get those loans at good prices, an auto maker has to be able to borrow money and make the loans to Dave's customers. But if something does not stop the bleeding, it is going to get very expensive for GM to get money to make loans. That will make his cars more expensive to consumers. Cheap loans with small down payments are the life blood of the auto selling business. That is going to change dramatically unless something is done to stabilize the markets.
Credit card debt is typically packaged and sold to investors like pension funds and insurance companies. But in today's environment, that credit card debt is going to have to pay a much higher price in order to find a buyer. That means higher interest rates. Further, because most of the large issuers of credit cards are struggling with their leverage, they are reducing the amount of credit card debt they will give their card holders. If they continue to have to write down mortgages on their books because of mark-to-market rules which price assets at the last fire-sale price, it will mean even more shrinkage in available credit.
Try and sell a home above the loan limits of Fannie and Freddie today with a nonconforming jumbo loan. Try and find one that does not have very high rates, because many lenders who normally do them simply cannot afford to keep them on their balance sheets. And a subprime mortgage? Forget about it. This is going to get even worse if the financial markets melt down.
We are in a recession. Unemployment is going to rise to well over 6%. Consumer spending is going to slow. This is an environment which normally means it is tougher for small businesses and consumers to get financing in any event. Congress or the Fed cannot repeal the business cycle. There are always going to be recessions. And we always get through them, because we have a dynamic economy that figures out how to get things moving again.
Recessions are part of the normal business cycle. But it takes a major policy mistake by Congress or the Fed to create a depression. Allowing the credit markets to freeze would count as a major policy mistake.
I have been on record for some time that the economy will go through a normal recession and a slow recovery, what I call a Muddle Through Economy. This week I met with executives of one of the larger hedge funds in the world. They challenged me on my Muddle Through stance. And I had to admit that my Muddle Through scenario is at risk if Congress does not act to stabilize the credit markets.
Let's Make a Deal
Why do we need this Stabilization Plan? Why can't the regular capital markets handle it? The reason is that the problem is simply too big for the market to deal with. It requires massive amounts of patient, long-term money to solve the problem. And the only source for that would be the US government.
There is no reason for the taxpayer to lose money. Warren Buffett, Bill Gross of PIMCO, and my friend Andy Kessler have all said this could be done without the taxpayer losing money, and perhaps could even make a profit. As noted above, these bonds could be bought at market prices that would actually make a long-term buyer a profit. Put someone like Bill Gross in charge and let him make sure the taxpayers are buying value. This would re-liquefy the banks and help get their capital ratios back in line.
Why are banks not lending to each other? Because they don't know what kind of assets are on each other's books. There is simply no trust. The Fed has had to step in and loan out hundreds of billions of dollars in order to keep the financial markets from collapsing. If you allow the banks to sell their impaired assets at a market-clearing fair price (not at the original price), then once the landscape is cleared, banks will decide they can start trusting each other. The commercial paper market will come back. Credit spreads will come down. Banks will be able to stabilize their loan portfolios and start lending again.
Again, the US government is the only entity with enough size and patience to act. We do not have to bail out Wall Street. They will still take large losses on their securities, just not as large a loss as they are now facing in a credit market that is frozen. As noted above, there are many securities that are being marked down and sold far below a rational price.
If we act now, we will start to see securitization of mortgages, credit cards, auto loans, and business loans so that the economy can begin to function properly.
What happens if we walk away? Within a few weeks at most, financial markets will freeze even more. We will see electronic runs on major banks, and the FDIC will have more problems than you can possibly imagine. The TED spread and LIBOR will get much worse. Businesses which use the short-term commercial paper markets will start having problems rolling over their paper, forcing them to make difficult cuts in spending and employment. Larger businesses will find it more difficult to get loans and credit. That will have effects on down the economic food chain. Jim Cramer estimated today that without a plan of some type, we could see the Dow drop to 8300. That is as good a guess as any. It could be worse. Home valuations and sales will drop even further.
The average voter? They will see stock market investments off another 25% at the least. Home prices will go down even more. Consumer spending will drop. What should be a run-of-the-mill recession becomes a deep recession or soft depression. Yes, that may be worst-case scenario. But that is the risk I think we take with inaction.
A properly constructed Stabilization Plan hopefully avoids the worst-case scenario. It should ultimately not cost the taxpayer much, and maybe even return a profit. The AIG rescue that Paulson arranged is an example of how to do it right. My bet is that the taxpayer is going to make a real profit on this deal. We got 80% of AIG, with what is now a loan paying the taxpayer over 12%, plus almost $2 billion in upfront fees for doing the loan. That is not a bailout. That is a business deal that sounds like it was done by Mack the Knife.
This deal needs to be done by Monday. Every day we wait will see more and more money fly out the doors of the banks, putting the FDIC at ever greater risk. Panic will start to set in, moving to ever smaller banks. Frankly, we are at the point where we need to consider raising the FDIC limits for all deposits for a period of time, until the Stabilization Plan quells the panic.
I understand that this is a really, really bad idea according classical free-market economic theory. You know me; I am as free market as it comes. But I also know that without immediate action a lot of people are really going to be hurt. Unemployment is not a good thing. Losses on your home and investments hurt. It is all nice and well to talk about theories and contend the market should be allowed to sort itself out; and if we have a deep recession, then that is what is needed. But the risk we take is not a deep recession but a soft depression. The consequences of inaction are simply unthinkable.
Joe, I am telling you that the markets are screaming panic. Yes, Senator Richard Shelby has his 200 economists saying this is a bad deal. But they are ivory tower kibitzers who have never sat at a trading desk. They have never tried to put a loan deal together or had to worry about commercial paper markets collapsing. I am talking daily with the people on the desks who are seeing what is really happening. Shelby's economists are armchair generals far from the front lines. I am talking to the foot soldiers who are on the front lines.
Every sign of potential disaster is there. You and the rest of the House have to act. It has to be bipartisan. This should not be about politics (even though Barney Frank keeps talking bipartisan and then taking partisan shots, but I guess he just can't help himself). It should be about doing the right thing for our country and the world. I know it will not be fun coming back to the district. Talking about TED spreads and LIBOR will not do much to assuage voters who are angry. But it is the right thing to do. And I will be glad to come to the town hall meeting with you and help if you like.
With your help, we will get through this. In a few years, things will be back to normal and we can all have stories to tell to our grandkids about how we lived through interesting times. But right now we have to act.
Colorado, California, London, and Sweden
It is time to hit the send button. This was personally a great week. For whatever reason, I did not suffer jet lag flying to South Africa for just two days, then overnight to London, and back the next day. It was a good trip. I will report more about South Africa in a later letter, but this e-letter is already a little long.
I leave Sunday for a quick trip to Longmont, Colorado (near Boulder) to look at a very interesting technology company (InPhase) that makes holographic memory disks, with good friend Dr. Bart Stuck of Signal Lake Partners.
I will be in San Diego and Orange County the 16th and 17th of October for back-to-back speeches, then I leave Sunday for London for two days and then on to Sweden for a conference and speeches there, a quick trip to Malta, and then back home, where I will be chained to my desk by daughter Tiffani as we do interviews and write a book.
I do enjoy traveling from time to time, seeing the rest of the world. One of my secret pleasures is reading International Living and thinking about what it would be like to have another home somewhere. Cheap thrills. You can subscribe if you like by following this link.
Have a great week. I fully believe (OK, deeply hope) that Congress will act. We can all breathe a collective sigh when they do.
Your still believing in Muddle Through analyst,
John Mauldin
John@FrontLineThoughts.com
Copyright 2008 John Mauldin. All Rights Reserved
Saturday, September 20, 2008
Autumn
Leaf by leaf, branch by branch, Colorado’s aspen trees are turning. Before we know it, entire forests will be ablaze in yellow, orange and red. Then, suddenly, this annual symphony of color will be over. Like Carl Sandburg’s fog, autumn comes on little cat feet. It sits on silent haunches, then moves on. Winter will be with us again and we will wait for whatever it has to offer.
I often think that life is like that, a series of seasons lit with brightness and light while others are dark and silent. I am reminded of the Latin phrase, “mutantur omnia nos et mutamur in illis.” All things change and we change with them. The time will come when we no longer are willing to change. Then it will be time for us too to move on.
In the meantime, of course, we smile as we consider the beauty of God's creation. We will not wonder, since hearts are tough, whether a lifetime is long enough.
I often think that life is like that, a series of seasons lit with brightness and light while others are dark and silent. I am reminded of the Latin phrase, “mutantur omnia nos et mutamur in illis.” All things change and we change with them. The time will come when we no longer are willing to change. Then it will be time for us too to move on.
In the meantime, of course, we smile as we consider the beauty of God's creation. We will not wonder, since hearts are tough, whether a lifetime is long enough.
Friday, September 12, 2008
Is Obama the savior?
Until the last generation or two this was a country of producers. We were farmers, mechanics, restaurant owners, engineers, scientists and people working in industry. We produced things until we grew too old, at which time we relied on younger producers to support us until we passed on.
Everyone but the elderly and offspring still in school worked and produced. True, there were doctors, lawyers and government workers, but they supported the nation's workers and kept them and America’s infrastructure safe.
Obama is proposing a society comprised primarily of users -- government workers supported by taxpayer dollars. But guess what? The more people working for government, the fewer people left to produce what society needs.
It’s clear there won’t be enough money available to pay these new workers, so guess where the money will come from? Higher taxes on fewer people remaining in the work force.
This is simplistic, but today we’ve gone from being a nation of producers to what’s called an “information” or, as some would suggest, service society. Information societies produce ideas -- computers and things. Service societies are more people serving fewer people who produce things. And so it goes.
People working the fields have been replaced by machines. Small farms are bought up by mega-corporations. Industries that employed thousands of workers moved overseas when they no longer could afford to pay wages forced on them by unions. Along comes Obama who, instead of addressing the problems, wants to add more millions of people to the taxpayer load.
I’m not saying the McCain/Palin ticket is the answer -- after all, it was corruption among congressional Republicans, and Bush's management of the economy and the Iraq war, that gave us Barack Obama and a Democratic majority in Congress.
I am saying Obama is not the answer. Not only is he not the answer, he would hasten the time when this country becomes a mini-China, a nation of people ruled by an exclusive elite who belong to the ruling party.
Is Obama a communist after the manner of officials in N. Korea, China and Russia? Maybe not officially, but his writings, and those of his wife Michelle, tell all who care to read it that he is a socialist, which all communists claim to be. Moreover, both Obamas see the world — and especially the United States — as a struggle between classes of people.
There are workers (the oppressed) and the capitalists (the oppressors). Everything is a struggle between diametrically opposed forces and there can be no peace until the latter has been subjugated in favor of the former.
Lenin must be smiling.
Everyone but the elderly and offspring still in school worked and produced. True, there were doctors, lawyers and government workers, but they supported the nation's workers and kept them and America’s infrastructure safe.
Obama is proposing a society comprised primarily of users -- government workers supported by taxpayer dollars. But guess what? The more people working for government, the fewer people left to produce what society needs.
It’s clear there won’t be enough money available to pay these new workers, so guess where the money will come from? Higher taxes on fewer people remaining in the work force.
This is simplistic, but today we’ve gone from being a nation of producers to what’s called an “information” or, as some would suggest, service society. Information societies produce ideas -- computers and things. Service societies are more people serving fewer people who produce things. And so it goes.
People working the fields have been replaced by machines. Small farms are bought up by mega-corporations. Industries that employed thousands of workers moved overseas when they no longer could afford to pay wages forced on them by unions. Along comes Obama who, instead of addressing the problems, wants to add more millions of people to the taxpayer load.
I’m not saying the McCain/Palin ticket is the answer -- after all, it was corruption among congressional Republicans, and Bush's management of the economy and the Iraq war, that gave us Barack Obama and a Democratic majority in Congress.
I am saying Obama is not the answer. Not only is he not the answer, he would hasten the time when this country becomes a mini-China, a nation of people ruled by an exclusive elite who belong to the ruling party.
Is Obama a communist after the manner of officials in N. Korea, China and Russia? Maybe not officially, but his writings, and those of his wife Michelle, tell all who care to read it that he is a socialist, which all communists claim to be. Moreover, both Obamas see the world — and especially the United States — as a struggle between classes of people.
There are workers (the oppressed) and the capitalists (the oppressors). Everything is a struggle between diametrically opposed forces and there can be no peace until the latter has been subjugated in favor of the former.
Lenin must be smiling.
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