Friday, October 30, nine (9!) banks failed and were taken-over by the FDIC. That brought the total bank failures to 115 so far in 2009. This number of failures hasn’t been exceeded since 1992 AND we still have two months to go in 2009 to probably set an all-time record. What a wonderful record at which to look forward.

Not to worry, though. U.S. Bancorp bought all nine of the failed banks. Specifically, they picked up $18.4 billion in assets and $15.4 billion in deposits. The bankrupt FDIC picked up the losses. Is this a great system, or what?

We haven’t even begun to recover from the imbecilic big-bank shenanigans of the recent past; yet here we are creating still more “Too-Big-To-Fail” banks.

Excuse me but if big banks created the problems were now facing, wouldn’t it be a tad more prudent to, say, limit the size any one bank could attain? Hello Barney, Chris – anyone home?

Oh, I forgot. On Friday, Barney Frank did address the problem. He decreed that the TBTF banks would henceforth be charged a “fee” during good times in order to cover potential losses during bad times as the TBTF bank problems are unwound.  I guess size does matter. Apparently all this will be done in secret:

A. There will be a secret club of financial institutions that will be considered “Too-Big-To-Fail.” So if you’re a member, what incentive do you have to act in a prudent manner? Do you not, in fact, now have a license to steal? Can you not do any foolish thing you wish? You know you’d be punished if you simply acted prudently but would benefit with a bailout if your wild schemes failed. Moral hazard? Naw!

B. The public will not be informed of who the members of this private club are. And you thought you had some semblance of privacy in financial matters? The FED still refuses to identify which banks were subjected to the so-called “Stress Test.” Why should we be surprised that they won’t tell us the names of the TBTF club members?

C. A fund will be established by taxing these financial institutions in good times to pay the costs to protect them in the bad times. Anyone really think these fees will cover the bad times? Who will determine when the “good times” are here? And when there are insufficient funds in the kitty, guess who will pay the difference? Moral hazard? Naw! License to steal? From guess whom?

D. The Federal Reserve will have the power to determine and therefore change what the definition of “solvency” is. Oh great, try playing the game when the ground rules keep changing. I’m going to take my bat and ball and go home now!

Did it occur to you that, by omission, the Too-Small-To-Matter banks will continue to be thrown to the wolves? Let’s see; we make big banks even bigger but we close small banks and merge them into already big banks making the big banks even bigger. Figures! First we experience a meltdown in our banking system due to too much debt. We then “solve” the problem by creating still more debt. Part of the fallout of the banking collapse was that we were told we had banks that were too-big-to-fail. Now we “solve” this problem by creating still more and even bigger too-big-to-fail banks? Wow! The logic underwhelms me. Next time my house catches on fire, I guess I’ll try pouring gasoline on it to extinguish the fire. Well, water is just “so-yesterday” a solution. Might as well be innovative.

Currently on the front burner is CIT Financial. Here is an institution that services Middle-American business. CIT apparently no longer qualifies as a TBTF bank, even though they did receive over $2 billion in bailout money a year ago. As a result, CIT finds itself in the middle of bankruptcy proceedings. The intent is reorganization under Chapter 11. Regardless of the outcome, small and medium-sized business will suffer. The Wall Street Journal estimates that perhaps only 20% of the prior level of financial services will be available, and that’s “IF” CIT is successful in reorganization. At best, it’s obvious that any attempt to replace these lost “services” will require much higher financial credit-worthiness and there will be fewer funds available for this process. Well…the TBTF banks have all the money so what’s left for small and medium-sized business? Now tell me this isn’t a License To Steal? Can you estimate how many small and medium sized businesses will be forced into bankruptcy? That really helps our recovery-NOT. Small business creates 90% of the new jobs Obama keeps looking for but, hey, why worry? Privatize the profits and socialize the losses. Just keep the big boys happy.

Every economic problem we face can be directly traced back to the Federal government and the interfering laws that they continuously pass. Remember the Resolution Trust Corp. back in the 1980s? It became “necessary” to bail out the Savings & Loan industry because so many of the S&Ls gambled wildly with their depositors’ money. Sound familiar? How could the S&Ls of the 1980s and the too-big-to-fail banks of the 00s make such horrible business decisions? Were/Are the management teams just stupid or are they also incompetent?

Consider this: We’ve had a 115 bank failures just this year. Are you worried? Why not? Oh, your account is insured. By whom? So when the management of the bank that controls your deposits makes stupid business decisions, you don’t care? The FDIC will bailout your account. Not only that, the “insured” amount was increased from a “mere” $100,000 per account to $250,000 this year (this extra coverage expires at the end of 2013 and reverts back to the $100,000 figure in 2014 as currently scheduled). Do you see a slight problem here? Isn’t the FDIC just another government agency that gives the banks a License To Steal?

Just for giggles, suppose there were no FDIC and your deposits at any bank or S&L were simply not insured. Would you then perhaps have a slightly different outlook as to the safety of your money? Would you perhaps behave somewhat differently when selecting a bank in which to deposit your funds? Why? Do you now see that the FDIC is a Federal Government sponsored insurance scheme to protect you from greedy and stupid bankers? Or do you perhaps see that the FDIC actually facilitates excessive risk-taking on the part of the bankers since they have nothing to loose? Do you suppose there might be a slight moral hazard hiding somewhere in this mix? If the bank did not have the FDIC insuring your deposit and that same bank had to compete in the open, free market for your deposit account, would you suppose that the bank management might behave in a slightly more conservative manner? Wouldn’t you behave in a slightly more conservative manner when selecting a bank?

What’s to restrain the management of those banks today? If they mess-up, the government will protect them. And as we’ve all observed, the very folks that made the stupid and reckless business decisions will still get their multi-million-dollar bonus.’ Would you be willing to make a wild guess that maybe there is a slight moral hazard hiding somewhere in this scheme? Isn’t that a License To Steal?

You don’t want to hear this, but you and I are responsible. Yes we are. We grumble about politicians and yet we continue to re-elect the same folks who continuously lie to us. They tell us what they think we want to hear, and then go do whatever they want. As Walt Kelly’s eminent philosopher of the 1960s, Pogo, opined, “We have met the enemy and they is us.” Don’t we rationalize that “our representative is okay but it’s the other guy’s rep that needs to be voted-out? Well guess what? Our rep needs to go, too. They all need to go. We don’t need term limits. We just need the gumption to vote “no” every time we see the term “incumbent” after a candidate’s name. It’s that simple. I’d guess that the message would be heard loud-and-clear very quickly. Isn’t it about time we put an end to what seems to be an unlimited License To Steal?

Regards,
Tex Norton

November 3, 2009

Bankster’s Cartel: Licensed to Steal was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In a recent editorial, Peter Schiff reminded me of what my late friend Harry Browne, the former Libertarian Party candidate for president, used to say: “The government is great at breaking your leg, handing you a crutch, and then saying, ‘You see, without me, you couldn’t walk.’” That maxim is clearly illustrated by the financial industry regulatory reforms proposed recently by the Obama administration. (“Would you like a broken arm, or would you prefer a broken leg?”)

Every economic problem we face can be directly traced back to the federal government and the interfering laws that it continually passes. Remember the Resolution Trust Corp. back in the 1980s? It became “necessary” to bail out the savings and loan industry because so many of the S&Ls gambled wildly with their depositors’ money. Sound familiar? How could the S&Ls of the 1980s and the too-big-to-fail banks of the ’00s make such horrible business decisions? Were/Are the management teams just stupid or are they also incompetent?

Consider this: We’ve had a record number of bank failures just this year. As of June 19, 2009, the FDIC has closed 40 banks at a net cost of over $11.5 billion. Are you worried? Why not? Oh, your account is insured. By whom? So when the management of the bank that controls your deposits makes stupid business decisions, you don’t care? The FDIC will bail out your account. Not only that, the “insured” amount was increased from a “mere” $100,000 per account to $250,000 this year (this extra coverage expires at the end of 2013 and reverts back to the $100,000 figure in 2014 as currently scheduled). Do you see a slight problem here?

Just for giggles, suppose there were no FDIC and your deposits at any bank or S&L were simply not insured. Would you then perhaps have a slightly different outlook as to the safety of your money? Would you perhaps behave somewhat differently when selecting a bank in which to deposit your funds? Why? Do you now see that the FDIC is a federal government-sponsored insurance scheme to protect you from greedy and stupid bankers? Or do you perhaps see that the FDIC actually facilitates excessive risk-taking on the part of the bankers, since they have nothing to loose? Do you suppose there might be a slight moral hazard hiding somewhere in this mix? If the bank did not have the FDIC insuring your deposit and that same bank had to compete in the open, free market for your deposit account, would you suppose that the bank management might behave in a slightly more conservative manner? Wouldn’t you behave in a slightly more conservative manner when selecting a bank?

Now consider the actions of the too-big-to-fail companies, be they banks, insurance companies, Freddie and Fannie, or even automobile manufacturing companies. What’s to restrain the management of those companies? If they mess up, the government will protect them. And as we’ve all observed, the very folks that made the stupid and reckless business decisions will still get their multimillion-dollar bonuses. Would you be willing to make a wild guess that maybe there is a slight moral hazard hiding somewhere in this scheme?

What about the business management that continues to make prudent decisions and continues to operate profitably? What is their incentive? How are they rewarded? The same federal government that bails out the too-big-to-fail companies totally ignores the hardworking, successful managements of the smaller businesses. Actually, it’s even worse than that. The companies and individuals that are successful now get penalized, because their tax dollars are used to bail out the unsuccessful. They get to subsidize the failures. Isn’t that a wonderful reward for doing a good job?

So I again ask what am I missing? Am I the only person (or only one of the very few) concerned? When I/we comment about these obvious inequities, does anyone pay attention? Does anyone question the wisdom of the federal government’s decisions? Based on the feedback I’ve received from the congressmen and -women who claim to “represent” me, they certainly don’t care. Aside from the folks who attended the various Tea Parties on April 15, the rest of the folks don’t seem to care. What am I missing?

One of the factors that caused me to write this white paper is the incredible discussion of so-called “green shoots” from our eminent Fed head “Helicopter” Ben Bernanke and the observation of the recovery light at the end of the tunnel that now seem to be so visible to the mainstream media. As Ronald Reagan used to say, the media know a great deal that just isn’t true.

There has been a tremendous recent effort to create “transparency” in and from government. Using that as a diversionary tactic, the public’s attention is now away from the facts. While perception is important and can mask facts for a period of time, it cannot avoid ultimate economic laws of nature. In this case, the public’s attention is being diverted from the undeniable facts that we are nowhere near the bottom of this economic downturn. Banks are still hiding toxic waste in their off-balance sheet accounts. These virtually worthless assets are not just going to disappear with no one noticing. Sooner or later, these near-worthless assets must be accounted for. The so-called bank stress tests were a joke. The intent was just to give the public the perception that the worst is over.

It isn’t. We have at least one more major leg-down in our economic future. And I believe that leg will take us to a Dow of 5,000 and perhaps as low as 3,000. Yes, the Dow may continue upward to 10,000 from its current level of 8,500, but then it will head down once again. All we have to do is look at Japan 1989-present and our own economy from 1929-1932. Oh, yes, it can happen again! Absolutely nothing has been done to prevent a repeat of this history. In fact, what has already been done by the federal government interference with our markets almost assuredly guarantees that it will happen once again.

What is it that will happen? A depression. Why? Because too many government interferences have occurred over the decades since the last depression. Perhaps it might be helpful to first define the difference between a recession and a depression — at least by my definitions of the terms.

Business cycles frequently become what are referred to as overheated economic cycles. (Note that every one of these so-called overheated situations is a direct result of government monetary interference with what otherwise would be free market behavior.) So a so-called cooling-off period of adjustment then takes place to correct the malinvestments that were made during these periods of irrational exuberance (thanks, Alan). These adjustments happen rather quickly, and then the recession is finished. You’ve heard it called the “V” recession because we tend to enter quickly but then we tend to also recover quickly. Today, the mainstream is talking of a “W” recovery, meaning a double in-and-out recession. But recessions usually take place rather quickly and are then finished. In a depression, structural changes to the economy actually occur and then it takes years to readjust. Can you say Japan? The new version of the resulting economy is a major change from the prior economy. Old bubbles are never reinflated, but new bubbles are ultimately formed. Note that our federal government is trying to reinflate the last bubble, meaning a return to a consumer-led economy. It simply won’t happen. We’ll waste a tremendous amount of taxpayer money and it will all be for naught.

Ultimately, a new bubble will be created. In the past decade, we’ve enjoyed the Greenspan dot-com bubble followed by the real estate bubble. Now we are starting to form what I see as a bond bubble. In the process, everything in the path of this “recovery” is being socialized: banks, insurance companies, mortgage lenders, even automobile companies. Yet to come will probably include national health care. If you think private health care is expensive, wait until you see how much “free” health care costs. But this is what I mean by “structural” changes. It’s new territory for most of the participants.

What do you think will be the end result: inflation or deflation? I think we’re in for both deflation and inflation — in that order. Short-term deflation, but longer-term inflation. So I’d invest to protect myself against inflation. That means precious metals, energy, and commodities such as foods and water. Period. For the foreseeable future. Speculations would be in the area of biotech, nanotech, and stem-cell-tech.

I also hope that my comments are just being realistic — not doom and gloom. I admit my emotional reactions may be affecting my opinions. I hope not. But I’d rather be overprepared than underprepared or unprepared.

Considering that the value of our dollar is being actively destroyed by our government, how will you protect yourself and your family from further destruction of the dollar? Are you aware that the dollar is now worth 4% of what it was worth when the Federal Reserve was created with the charter mandate to provide a stable dollar? What did I just say? Are you happy with 4 cents of purchasing power left for your hard-earned 100-cent dollar? Don’t take my word for it — it’s on the Bureau of Labor Statistics (BLS) Web site. My recommendation includes making investments in areas that are not dollar denominated. As such, you can expect to benefit from a currency hedge as well as from the performance of the investment itself. Today, all currencies are fiat, so this becomes a relatively moot consideration — see my next comment below.

Still another area to consider is foreign exchange. Consider Swiss francs and Chinese renminbi (yuan) for starters. Also consider the Brazilian real, due to the country’s incredible discovery of offshore oil. The real would be a speculation, while the franc and yuan are slam-dunks. Norway’s kroner is also a consideration, due to the country’s oil economy. I’d stay away from the Canadian loonie simply because Canada’s economy is so closely tied to the US’.

I believe we are in a depression, not just a recession. By that, I mean we’re in for major structural changes, not just a clearing of some malinvestments that got out of hand in recent years. The Dow could go as high as 10,000 before the next drop, but there will be another drop. As I said, I expect the Dow to go as low at 5,000 and possibly 3,000. I know how that sounds, but that is what the markets are telling me. While we will then recover, it will be a long, drawn-out recovery. Years, not months. This is not the muddle-through recession that so many expect. I’m guessing we’ll remain in this morass for at least five years, if we’re lucky. We could go the way of Japan, which hasn’t recovered yet after two decades! The more Washington interferes with the markets, the more severe the problems then become and the longer the recovery period. As Bill Bonner is fond of saying, we’ll see “a corrective force equal and opposite to the deception and delusion that preceded it.” And of course, we could just be headed into outright and total socialism, so all this attempted planning could just be for naught.

But back to my original question: What am I missing? What do you know that I seem to be overlooking? Why am I not in agreement with all the mainstream economists and government officials such as “Helicopter” Ben Bernanke and Timothy tax cheat-in-charge-of-the-IRS Geithner? Why is it OK for the U.S. government to “fire” all the profitable Chrysler dealerships because they donated to the Republicans while keeping the unprofitable Chrysler dealerships because they supported the Democrats? Why is it OK to medically insure the 47 million uninsured at the expense of the folks that actually pay the premiums? Why is it OK to bail out AIG because it insured Goldman Sachs? Why is it OK to “gift” a major ownership of General Motors to the UAW simply because the union supported the Obama election campaign? Why is it OK to stiff the Chrysler and GM bondholders who, by USA contract law, have first right to the assets of the corporations in case of a bankruptcy? Why is it OK to simply ignore and override centuries-old corporate law? Why is it OK to issue presidential edicts that circumvent corporate and civil law? Why? What am I missing? Why?

There is much, much more to be said on this topic. However, what I’ve already written is probably more than enough for the moment. By the way, were I a registered broker or financial adviser, the securities rules and regulations would prohibit me from telling you the above. So don’t be too hard on your current financial adviser. The government would suspend his/her license for telling you the truth.

Regards,
Tex Norton

July 10, 2009

FDIC Fosters Moral Hazard Among Banks was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Inflation is destroying fixed-income bonds. Stocks have tipped into a bear market, down more than one-fifth worldwide. Real estate suffers both over-supply and an historic shortage (too many units vs. no mortgage finance). And this is clearly no time to launch a business relying on discretionary spending, consumer debt or prompt payment.

As for cash-on-deposit, you’re fighting not only tax and inflation, but also the very real threat of banking failure. Anyone taking sizable profits elsewhere has to go “on risk” until they’ve found a new home for their wealth.

“Ironically,” reports MortgageNewsDaily.com, “while the Federal Deposit Insurance Corp. (FDIC) maintains a ‘watch list’ of banks in need of close supervision, IndyMac did not appear among the 90 names on the current roster.”

Between the demise of Countrywide in March and its own collapse last week, IndyMac was briefly the second-largest independent mortgage provider in the United States. Now one-in-twenty of its customers is owed a deposit exceeding the insured U.S. limit of $100,000. Attracted no doubt by the bank’s offer of 4.75% per year in interest — twice the interest paid most everywhere else on $50,000 or above — they’re now uninsured to the tune of $1 billion.

Of course, in hindsight, it’s easy to guess the good reason why IndyMac was paying above-market interest. Like everyone else, it needed the cash — only much more so! And until the FDIC either finds a buyer or goes ahead with running the new IndyMac Federal Bank as a going concern, those uninsured depositors have been told they can access only one-half of their funds. The other half-a-billion remains out of reach

The takeover of IndyMac is expected to drain $4-8 billion from the FDIC’s insurance pool. Quite what the Fed’s new loans to Freddie Mac and Fannie Mae will do to the purchasing power of what’s left — plus the Treasury’s explicit promise to underwrite their bonds — remains to be seen. They owe some $5.5 trillion between them. Now the credit-ratings agency Standard & Poor’s puts the full cost of a tax-funded bail out of the two government-sponsored home lenders at between $420 billion and $1.1 trillion.

That compares, as the RGE Monitor reports, with a final cost to U.S. taxpayers of $250 billion for the Savings & Loan rescue of the mid-1980s (inflation-adjusted).

No bail out, of course, and the destruction of wealth hardly bears thinking about. But just what would an extra $1.1 trillion in U.S. obligations mean for the value of existing dollars and T-bonds?

“[He] caused an Iron Chest to be brought, and put the money in it, then drove Posts into the Ground in his Cellar, and chained it down to the Stakes, then chained it also to the Wall, and barricaded the Door and Window of the Cellar with Iron, and all for fear, not of Thieves to steal the Money, but for fear the Money, Chest and all should fly away into the Air…”

So wrote the anonymous hack behind The Chimera, a pamphlet recalling the French Way of Paying National Debts for investors in London in 1720. The French way, the author explained — just before the British got caught using the same trick — was to print new paper money in whatever quantity took the government’s fancy, and use this new currency to pay off its creditors. It worked only as long as the paper retained some level of trust.

The anxious (if not deranged) investor described above was owed 10,000 crowns in such paper. But he gladly sold his claim for 2,500 in actual coin. Because a smaller quantity of very real wealth still beats a great sum of value-less debt.

Is that where investors today should hide their wealth, securely and safely? Inflation in prices and deflation in assets is an ugly combination. It also turns the “Long Boom” of the last 25 years on its head. So a growing number of advisors would point you to that long-forgotten asset class — physical gold or perhaps silver — as a rare store of wealth.

It might also help that you can chain down this wealth behind a thick vault door, deep underground.

“There really is no other place to hide,” believes Stephen Platt, an analyst at Archer Financial Services. “Gold’s about the only real currency out there that might hold value.”

Even after trebling in price from the low of eight years ago, there may be plenty of room for gold to rise from here. “In 1959, the amount invested in gold was about one-fifth of the market value of all U.S. common stocks,” writes Peter Bernstein in his classic, The Power of Gold. “In 1980, the $1.6 trillion invested in gold exceeded the market value of $1.4 trillion in U.S. stocks.”

The sum total of gold investment lags far behind the value of stock and bond markets today. Indeed, a 2005 study from Tocqueville Asset Management noted that, if taken altogether, “the market cap of all above-ground gold — including central bank reserves — [now] equals about 1.4% of global financial assets.”

“In 1934 and 1982,” on the other hand, “when investor stress reached extreme readings, that percentage was between 20% to 25%.” If you wanted to steal a march on the market, you might want to consider moving that portion of your wealth into physical gold today.

No, the metal isn’t guaranteed to keep gaining as “investor stress” rises to match the Great Depression or early ‘80s recession. But nor will its value fly away into the air.

For as long as the cost of living is rising but asset-prices are falling, that should prove a major advantage over holding bonds, stocks or cash.

Regards,
Adrian Ash
BullionVault
July 18, 2008

IndyMac’s Collapse was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.