Public attitudes to credit change in the face of the current crisis….

Public attitudes towards indebtedness have changed dramatically in the past few months. Overextended consumers are looking for ways to pay off their debts. This will make it more difficult for the Fed and it’s governor Ben Bernanke to reflate the equity bubble through credit expansion.

When people are frightened or pessimistic about the future, they naturally curtail their spending. A recent poll conducted by the Washington Post/ABC illustrates how the public’s attitude towards the economy has darkened in a matter of months. According to the survey:

“Nine out of ten Americans now give the economy a negative rating, with a majority saying it is in ‘poor’ shape, the most to say so in more than 15 years. And the sense that things are bad has spread swiftly. The percentage who hold a negative view of the economy is up 33 points over the last year, and the percentage who rate the economy ‘poor’ has increased 13 points in the last two months. That is the quickest 60-day decline since the Post and ABC started asking the question in 1985″ (Washington Post)

The average American is showing a better grasp of the deteriorating economic conditions than the stock market. Housing sales continue to tumble, manufacturing is off, unemployment is steadily increasing, retail sales are flat, and inflation is soaring. Consumers are feeling the pinch of rising food and energy costs, loss of home equity and a general downturn in the credit markets. Money is tight and jobs are scarce.

When George W. Bush took office in 2000, oil was $28 per barrel, the euro was $.87 on the dollar, gold was $274 per ounce.

Today, oil is a record $114 per barrel, the euro is nudging $1.60 on the dollar, gold is $945 per ounce.

The country is presently engaged in a $2 trillion war in Iraq with no end in sight.

The federal government has expanded over 30 per cent under Bush.

Wages for working people have stagnated, unemployment has risen, 47 million Americans are without health care, and the economy is slipping into recession.

The banks are buried beneath a mountain of bad investments and foreclosures are at record highs. In California 65,000 homes are now in some stage of foreclosure while the total number of homes sold in February – new and used—was a mere 20,513.

The knock-on effects of the housing bust are just now rippling through the broader economy. Consumer spending is sluggish, growth is weak, and the stock market is more volatile than anytime since the 1930s.

The Fed has usurped congressional powers to deal with insolvency problems at the banks. Public money is now being provided for the purchase of dubious assets held by unregulated investment banks owned by private speculators. The Fed is simply making up the rules as it goes along. Bernanke’s actions have not yet been challenged by any congressman or senator.

The Bank of England is in the same tough spot as the Fed. They’re trying to keep rates artificially low so the banks can increase their lending and recoup their losses, but the market is not cooperating.

The market is driving Libor rate upward (the rate that banks charge each other for loans), which means the central banks are losing control. The real cost of money is going up.

But then we already know that, we feel it in our pockets and in our lifestyle every day. When will this corrupt merry-go-round end?

Step out of the herd of sheep following the markets and trying to rescue their money from devaluation. Learn how to protect your assets, manage your money and invest to cretae real wealth with The Ultimate Entrepreneur.

So what’s the Fed been doing to rescue the American economy?

The Fed’s Open Market Committee wields so much power, according to Robert Reich, former US secretary of labor, it should be classed the “fourth branch of government.” Forget about Congress, the White House, the courts; the Fed holds “more power over your daily life than your congressman and Senator, maybe even your president,” Reich writes in his blog.

In short, the Federal Reserve “can do amazing things…” Things like:

• “Decide one big bank, JP Morgan, is going to take over another, Bear Stearns, backed by $29 billion of taxpayer money…
• “Expose taxpayers to hundreds of billions of dollars of potential losses without a single appropriation hearing, as it did when it allowed Wall Street’s major investment banks to exchange tainted mortgage-backed securities for nice clean loans from the Treasury…
• “Deciding the threat of recession is bigger than inflation, so it’s been lowering interest rates.”

This last super-heroic ability, notes Reich – now professor of public policy at Berkeley -”has made the Dollar drop further and faster, which means you’re paying more for gas and food.

In the past ten or so years US and UK households have suffered double-digit growth in the cost of living each year.

The US Dollar, along with the Pound Sterling, still lost half its value for consumers and savers between 1981 and today.

So what’s the Fed doing to rescue the American economy? Well, I would suggest it’s not trying to rescue our dollar but kill it off!

Built on a financial mirage……Nevada’s been betting on the Fed’s creation of easy money!

Something for Nothing – Courtesy of the Federal Reserve
Doug French

Nevada’s been betting on the Fed’s creation of easy money!

Las Vegas is a city built on the dream of getting something for nothing. But not only the tourists seek Lady Luck.

Casinos, small businesses and governments have all planned and expanded, counting on the dream of easy money – namely, more money and expanded credit for everyone, courtesy of the Federal Reserve.

During the past decade, “Americans could reap without planting,” financial author Bill Bonner writes. “They could consume without earning. They could invest without saving, and spend as much as they wanted without running out of money. They were the world’s luckiest people – they had the world’s reserve currency … and access to the whole world’s credit.”

With The Maestro, Alan Greenspan, at its controls, the Fed, America’s central bank, wildly created money out of thin air. The M-2 money supply (currency, demand deposits, money market funds, savings accounts and small time deposits) rose from just under $5 trillion to just over $6.7 trillion from January of 2001 to January 2006. Then Greenspan handed the reins of the Fed over to Ben Bernanke, who proceeded to create another $1 trillion more. The amount of money created just since the beginning of 2001 – $2.7 trillion – was the total M-2 money supply just two decades ago, in late 1986!

This furious monetary pumping – labeled “Operation Enduring Bubble” by investor and financial commentator William Fleckenstein – was a reaction to the tech stock crash of 2000 and the Y2K scare, and served to produce the housing bubble that is now busting.

With the Fed providing high-powered monetary punch, Americans were ready to party. Though they hadn’t saved any money, their houses were increasing in value everyday. So it was time to borrow some money and let the good times roll in Vegas. Gaming wins in Clark County climbed from $7.6 billion in 2001 to nearly $10.9 billion last year. Total employment increased by over 200,000 jobs in the same time period, and annual visitor volume increased from 35 million to over 39 million.

No wonder new resort projects totaling more than 4.7 million square feet of new convention space and 38,127 new hotel rooms are scheduled for construction between now and the end of 2010. Over $30 billion in bets on the Strip are riding on assumptions that Americans will not only maintain their pace of partying during the stock and housing bubbles, but that even more people will join in.

However, it’s not just private business that ramped up during the Greenspan/Bernanke bubbles. Nevada’s state government general fund budget is projected to be $3.5 billion in 2009, a near-doubling from 2003’s $1.8 billion. Local municipalities have also beefed up, as the city of Las Vegas budget more than doubled from 2001 to 2008, and Clark County and the city of Henderson nearly doubled.

Unfortunately, this explosion in development on the Strip and in local government was based not on sound economic fundamentals, but on an economic chimera created by the Fed. “The ‘boom,’ then, is actually a period of wasteful misinvestment,” economist Murray Rothbard wrote in America’s Great Depression. “It is the time when errors are made, due to bank credit’s tampering with the free market.”

What Rothbard was describing, as have other Austrian-school economists, was the business cycle – when “businessmen are misled by bank credit inflation to invest too much in higher-order capital goods,” like land, plant and equipment.

What follows is a bust – a recession or depression – where these wasteful investment errors are liquidated. As Rothbard explains that some investments will be totally abandoned, he mentions something Nevadans are very familiar with: Western ghost towns.

The cleansing of these malinvestments is now well underway, starting with the housing market. David Rosenberg of Merrill Lynch contends that the five-plus-year consumer spending binge is over, and that a long consumer de-leveraging process is underway.

Now, instead of casinos adding the jobs they once projected, Strip properties are shedding unneeded workers. State tax receipts have fallen nearly $1 billion short of the budget levels state lawmakers presumed last year, and rumors circulate that local government employers may soon be handing out pink slips. And while a lack of financing has stopped some projected resort properties, on the Strip construction continues around the clock. The anticipation is that once the new building is completed, the tourists will still come – and will spend generously.

As all gamblers know, bucking the house odds is no way, in the long run, to get rich. It’s the same with the printing of money and creation of easy credit: They won’t produce prosperity.

Which means that the next Vegas boom, almost certainly, is a long way off.

Surprise, surprise, the US loan industry fights new regulations that would stop them making abusive loans!

The mortgage industry, facing the prospect of tougher regulations for its central role in the housing crisis, has begun an intensive campaign to fight back. Now, as these rules are being created by the FED, I don’t expect them to be that tough, but our friends in the mortgage lending industry are happy with the status quo in their industry, ie. No Rules!

So, despite protests from consumer groups that have complained that the proposed rules are not strong enough, the industry’s criticism has already prompted the Fed to consider narrowing the scope of the plan so it applies to fewer loans.

Four months ago, the Fed proposed the new standards on exotic mortgages and high-cost loans for people with weak credit. The Fed’s proposals came after it was criticized sharply for failing to adequately supervise the lending industry, after all the Fed has its own authority under housing and lending laws to set and adopt mortgage standards.

The Fed’s plan would not cover existing mortgages but would apply only to new ones. It would force mortgage companies to show that customers can realistically afford their mortgages. It would require lenders to disclose the hidden fees often rolled into interest payments. And it would prohibit certain types of advertising considered misleading. Wow, no wonder those guys are mad!

Earlier this month, just as the comment period was about to close, the Fed was deluged with more than 5,000 comments, mostly from lenders who said the proposals could affect loans that have not presented problems. Some bankers and brokers also said the rules would discourage them from lending to some creditworthy borrowers.

The plan was criticized in separate filings by three of the industry’s most influential trade groups — the American Bankers Association, the Mortgage Bankers Association and the Independent Community Bankers of America. Because they don’t want to have to disclose how much they make on hidden fees, don’t want to stop misleading advertising and who cares if the borrower can afford the loan, right?

Let’s look at the Fed’s record on regulation…….

Before this year, the Fed had applied an extra set of protection from abusive lending practices to a subset of subprime borrowers under the Home Ownership Equity Protection Act of 1994. The Fed has applied the law to fewer than 1 percent of all mortgages — those with interest rates at least eight percentage points above prevailing rates on Treasury securities.

I think it’s fair to say that the Fed’s lax oversight helped enable lending companies to reap enormous profits by providing millions of unsuitable and abusive loans to homeowners who often did not fully understand the terms or appreciate their risk.

As of January, the most recent month of available data, about a quarter of all subprime adjustable mortgages were delinquent, twice the level of the same period last year. Lenders began foreclosure proceedings on about 190,000 of these mortgages in the last three months of 2007.

The new rules would apply extra protection to any mortgage with an interest rate three percentage points above Treasury rates. Officials said that they would cover all subprime loans, which accounted for about a quarter of all mortgages last year as well as many exotic mortgages known in the industry as “Alt-A”.

Many mortgage brokers and bankers complain that the lower threshold would unnecessarily include many borrowers who are not at risk from abusive practices.

“There are a lot of community banks that have shied away from these loans because nobody wants to be a higher-priced lender,” said Karen Thomas, a lobbyist for the Independent Community Bankers. “With the trigger being set so low, it is encroaching on traditional, common sense mortgages. Our fear is it will result in less credit availability, which is not what we need in an already tight credit market.”

However, consumer groups say that the proposed rules are already weak and that efforts to further weaken them would render them all but useless.

“The Fed has accurately diagnosed that this is a brain tumor and responded by prescribing an aspirin,” said Kathleen E. Keest, a former state regulator who is now a senior policy counsel at the Center for Responsible Lending, a group supporting home ownership.

“In the industry, there is a fair amount of denial. They just don’t get it. There is a calamity within the industry, and they don’t have a new script yet, so they rely on the old script, which is that regulation will raise costs.”

But as the Fed is effectively the parent company for the banks that created and delivered these abhorrent abusive loans, do we really think they’re going to crack down on their supply? after all, the banks are still freely making their money and any fears of bank bankruptcy are allayed by the Fed buying them out with government backed money creation. win – win for the banks. You lose all ways!

 

 

 

Britain’s biggest banks use astrology to play the markets

I swear, you couldn’t make it up. I am not commenting on whether or not astrology works, because there’s more to this world than the eye sees.

However for a business that’s dealing in multiples of billions of £pounds, that affects the financial markets, house prices, pension values etc. etc. it seems a bit irresponsible to let decisions hang on whether the ’stars are in alignment’. On the other hand, considering how badly the bankers have managed to screw up recently, maybe they should use all the help they can get and guidance from above can only help – could bank performances really be any worse?

Christeen Skinner blinks at the screen of her computer and takes another slurp of coffee. It’s half past seven in the morning and she’s preparing for a crucial meeting with the chief executive of the High and Mighty fashion chain.

Apart from the black cat dozing on her lap, the only clue to Christeen’s occupation as a 21st century astrologer is a copy of an Ephemeris that lies open at a page marked “Mercury March 25th”.

“The financial crisis has ensured that I’m busier than ever,” says Christeen. “People in the City need to know what is just around the corner. I can help with that.”

Dr Percy Seymour, an astrophysicist recently retired from Plymouth University, agrees. He’s spent decades studying astrology and has come up with a theory as to how it might actually work. Crucially, his ideas do not violate any of the laws of physics although they may over-tax some people’s credulity.

Dr Seymour believes that low frequency magnetic fields emanating from the sun interact with those of the Earth, which in turn affects the functioning of the human brain.

“The magnetic field of the sun can be affected by the movement and position of the planets,” he says. “Having said all that, I don’t believe that the cosmos controls us but it can influence us.”

It’s a neat theory but does it stand up to scrutiny?

Jim Porter, chief technical analyst for one of the UK’s largest banks, believes it does. He uses heliocentric magi astrology to predict the direction of the international financial markets. Millions of pounds worth of commodities, shares and currencies are traded on his command. His decisions may affect the value of your pension, your home, and perhaps decide whether or not you have a job tomorrow.

When I spoke to him late last year, he told me that the position of the planets indicated a 3.2 percent fall in the American markets. The following week they duly fell 3.5 percent.

“My attitude is that if you can test it, and it works, then it’s just another tool that you can use to predict the direction of the markets,” he says.

“I have tested it and astrology works. Used with other techniques it can give you confidence, and the more confidence you have, the bigger the risks you can take.”

Jim has recently compiled a report for a major central bank charting the likely economic trends of the coming few years. According to Jim’s forecasts, the economy and the financial and housing markets all face a rocky road and have a dismal short-term future.

Magic and star gazing, it may prove more reliable than the previous tools used by bankers – hubris and blind optimism and greed.

Read the rest of this story here.

Will you spend your tax rebate to ‘restimulate’ the economy?

Come on, just how stupid does Bush and Co think we all are. they’re giving us a tax rebate in the hope that we will all rush out and spend it in a frenzy and that will then kickstart the stuttering American economy.

I don’t think so. More likely with banks increasing the interest rates and tightening controls on lending, we’ll use the money to pay a few bills and keep some to one side in case of emergencies in the next few months.

We’ve had almost 9 months of ‘credit crunch’ news and it keeps getting blacker and blacker. The full impact of the credit crisis, the sub-prime loan scandal and the bankers venal greed has yet to become clear, so anyone who spends the rebate in an orgy of denial would indeed be considered very foolish.

The federal government, deadly keen to boost the flagging economy, will start distributing the special tax rebates on Monday – five days earlier than expected. If only they could have delivered them on the weekend. We’d be more likely to forget our responsibilities on a Friday night - poor planning there, George old boy!

Now, 800,000 tax filers will get rebates on Monday, Tuesday and Wednesday. No rebates will be distributed on Thursday, and 5 million payments will be made on Friday.

Overall, the Treasury will distribute more than $110 billion to 130 million taxpayers by July and hopes to get the first $50 billion out by the end of May, said Treasury spokeman.

This money still doesn’t compare to the billions being pumped into the economy by the Fed to pump up the banks, and keep them afloat after their dodgy business deals went wrong, but why should the ordinary tax payer expect more? After all the system isn’t there to benefit us!

 

Debt Collection -a new industry springs up in India chasing you for money and making immense profits

In a glass tower on the outskirts of New Delhi, dozens of young Indians are on the telephone, calling America’s out of work, forgetful and debt-stricken and asking for cash.

Americans are used to receiving calls from India for insurance claims and credit card sales. But debt collection represents a growing business for outsourcing companies, especially as the American economy slows and its consumers struggle to pay for their purchases.

Armed with a sophisticated automated system that dials tens of thousands of Americans every hour, and puts confidential information like Social Security numbers, addresses and credit history at operators’ fingertips, this new breed of collectors is chasing down late car payments, overdue credit card debt and lapsed installment loans. Debt collectors in India often cost about one-quarter the price of their American counterparts, so more profit for the companies.

Companies like Encore buy bad loans from banks and credit card issuers for pennies on the dollar and pocket the cash they collect. The delinquent borrowers often owe at least a thousand dollars.

Encore — which also operates as Midland Capital Management — also files sheaves of lawsuits against customers who do not respond. Sometimes the debt is so old that the statute of limitations for filing a suit has passed, and it may already have vanished from a person’s credit report. If the debtor makes a new payment, though, the statute of limitations starts all over again.

Just over 4.5 percent of all bank credit card accounts were delinquent in the fourth quarter of 2007, according to the Federal Reserve, up from 3.5 percent two years before. Businesses in the United States put $141 billion in delinquent consumer debt up for collection in 2005, according to a PriceWaterhouseCoopers survey commissioned by an industry group, and debt collection agencies collected $51 billion that year. They kept nearly a quarter of that in profits.

However, the transfer of debt is illegal, and if you know this, you can eliminate the debt. In fact, once your loan, or credit card has been handed to a debt collection company, then you know you’ve won the fight to eliminate the debt.

This is just one of the invaluable economic and legal facts that bust the myths of the financial world that you will learn when you join The Ultimate Entrepreneur.

Manipulated Markets – is it possible that the credit crunch has been enginered?

In a 1999 interview, Nobel Prize winning economist and Stanford University Professor Milton Friedman stated: “The Federal Reserve definitely caused the Great Depression.”

Well, if they can do it once…….

The end of the free market?

What a topsy-turvy world we are living in?!?! The US Dollar is hovering at or slightly below parity to the Swiss franc, gold’s breached the $1,000 per ounce mark, stock markets are crashing, and inflation is accelerating everywhere. Some central banks – the more responsible ones – have increased rates, while Ben Bernanke keeps cutting.

This is all happening more quickly than we can yell an emphatic “Achtung!”. President Bush continues to tell the world that “we have it all under control. We are taking solid measures and will come out of this crisis as strong as ever”. Obviously, this is absolute nonsense. First of all, the measures taken will not help – if anything, they will ultimately make things worse. Moreover, even if he and his helpers could control the situation, they shouldn’t! Controlling and manipulating the economy is not the government’s job and we would all be better off if they just kept their hands off.

In this context, we found the comments of Jim Rogers on CNBC a few weeks back right to the point. Click on the following link and have a listen:

http://www.cnbc.com/id/15840232?video=682734828

Mr. Rogers calls it like he sees it…nothing more need be said!

Bankers not trusting other bankers? What’s the world coming to?

WSJ Says Major Banks may be Falsifying Reports to hide Desperation

A worrying but informative article by Carrick Mollenkamp (Wall Street Journal, April 16th) about how “one of the most important barometers of the world’s financial health could be sending false signals.”

LIBOR, the London Interbank Offered Rate, is becoming unreliable because, so the article speculates, banks are sending in false reports. In other words, banks are providing misleading information to Reuters about their financial situations.

For those readers not famililar with LIBOR, it’s a measure of the average interest rate at which banks make short-term loans to one another. Banks typically set their lending rates at a certain “spread” above Libor: A company with decent credit, for example, might pay an interest rate of Libor plus one-half percentage point. A risky “subprime” mortgage may carry an interest rate of Libor plus six or more points. If you check the small print on your loan agreement, most likely it makes reference to the LIBOR rate.

LIBOR is set every morning for ten different currencies. Although the actual rates at which banks borrow from each other are known only to the lenders and borrowers, every morning before eleven o’clock coffee,  London time, “panels”  of banks send data to Reuters, on what it would cost them to borrow a “reasonable amount” in a designated currency. The USD Libor panel, for example, consists of 16 banks, including Bank of America, J.P. Morgan Chase, HBOS and HSBC. Reuters uses the reported borrowing rates to calculate Libor “fixings.” As Reuters’ spokesman is quoted as saying, “It is their data alone we distribute. Reuters is purely the facilitator.”

LIBOR is trusted implicitly in the financial community… or should I say, it was been truisted implicitly until late last year.  The concern expressed in the WSJ article is that,  

“Some banks don’t want to report the high rates they’re paying for short-term loans because they don’t want to tip off the market that they’re desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That’s good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.”

The article goes on to quote Chris Freemott, a Naperville, Illinois, mortgage banker who depends on Libor to tell him how much his firm, All America Mortgage Corp, owes First Tennessee bank for a credit line that he uses to make loans. As Mr Freemott says, concerns about LIBOR’s reliability are “actually kind of frightening if you really sit and think about it.”

Of course, if this info makes the public newspapers, that means the cat is out of the bag. We can be sure that the banking community no longer trust LIBOR. Fundamentally, this translates into what we already knew: banks can no longer trust each other.

We live in interesting times.