Where is the Outrage? ... At least Rogers Calls it Out

[sunskyfan]

http://www.cnbc.com/id/26603489

Watching the market roar back this morning after Feds step in to bail out Freddie Mae and Freddie Mac.


All I can say is that I will listen and nod my head about the necessary evil that this was but never again will I listen to "investors" and Republicans preach free market capitalism when the rest of us are making hard choices about priorities such as schools, environment, and health care. This problem was obviously coming at least three years ago if not longer and the party went on. This sets the president once again that more collective security comes through cronyism and not through healthy market choices. For forty years I listened to pin striped suits and white Republicans badmouth welfare mothers as "they took advantage of our collective humanity and won't get off their ass and work" and funny how these guys are the biggest welfare mothers of all, claiming "too-big-to-fail", and not excepting the judgment and outcome of the markets, and coming to little ol' me wanting me to bail out their asses. Even bail-out is a BS term here since I will see nothing for the sacrifice I will make. That used to be called stealing. Makes me want to puke.


http://www.cnbc.com/id/26603489

[sn1p3r]

Re: Where is the Outrage? ... At least Rogers Calls it Out

This bailout isn't for the shareholders...this is slavery (proverbs 22:7)

"The move aims to assuage bondholders' fears about the creditworthiness of the companies, and to persuade the foreign central banks that have been big buyers of Fannie and Freddie bonds that their investments are safe."

[Tulpen]

Re: Where is the Outrage? ... At least Rogers Calls it Out

I believe the US government did not have an alternative.

[D-Mack]

Re: Where is the Outrage? ... At least Rogers Calls it Out

Love the headline and he is right about the candidates, who were parroting Hanky Panky

US Is "More Communist than China": Jim Rogers

...

Investors should not pin their hopes on this year's presidential election for a solution to the problems, as none of the candidates is likely to find one, Rogers said.

"This is a big huge mess and neither one of them has a clue what to do next year. It's going to be a mess."

[rj1]

Re: Where is the Outrage? ... At least Rogers Calls it Out

I believe the US government did not have an alternative.

Tulpen here IMO is right. I'm pissed off because I get screwed along with every other taxpayer, but the government had no choice.

That doesn't mean I'm any less pissed off. They should've never been in this position to begin with.

What we have to make certain of in the future that all these other companies don't sell all their bad assets to the GSEs, because they'll continue buying MBS til the end of 2009.

[FRED]

Re: Where is the Outrage? ... At least Rogers Calls it Out

Politics of Foreign Debt - Part I: Why Republicans and Democrats had to bail out Fannie Mae and Freddie Mac

To make a long story short, the practice of keeping foreign holdings of US agency and treasury debt on Fed account started under Arthur Burns in the early 1970s as a way for the US to regain control of its currency that the US was losing to the euro dollar market.

Banking expert Martin Mayer, author of The Bankers: The Next Generation The New Worlds Money Credit Banking Electronic Age and a dozen other books on banking and frequent writer for Barron’s Magazine, Institutional Investor, and others explains:

Exporters to America who keep the dollars and use them for American purchases and investments create what economists call an autonomous flow of funds back to the United States, financing the American trade deficit with an American investment surplus.

This produces the argument most closely associated with the new Federal Reserve chairman, Ben Bernanke (though Alan Greenspan believed it, too), that our trade deficit is caused by a surplus of savings that can't be profitably invested in the home countries of our trading partners. Financing for our trade deficit comes before — and actually causes — the deficit itself.

If instead of investing their dollars in the United States, foreign exporters want to take the proceeds of their sales in their own currency, their central banks will in effect sell them that currency for their dollars. Back in the late 1960's, when Great Society deficits and the Vietnam War prompted the first serious sell-off of dollars (and forced the United States to abandon the gold standard because too many holders of dollars, led by President Charles de Gaulle of France, wanted gold), those central banks lent those dollars into the new Eurodollar market, where they traded somewhat separately from domestic dollars.

This created a nightmarish prospect of the United States losing control of its own currency, and in 1971 the Fed chairman, Arthur Burns, negotiated a deal with the European and Japanese central banks. The deal was that they would return to America the dollars they acquired in their own economies, and the Fed would invest the money on their behalf, in absolutely safe government securities, without charge and at the best rates.

Today, the Fed continues as custodian of the "foreign official holdings" of such government obligations. During the Clinton administration, the Fed agreed to invest in federally guaranteed housing securities for those foreign central banks that wanted a better yield on their dollar reserves than they would get from government bonds, and now half a trillion dollars* of the total official holdings are invested in agency paper.

Foreign official holdings of government paper is a miner's canary number. It tells you if there is big trouble ahead. The most common worry is that the number will shrink suddenly, with foreign governments dumping their dollar holdings, driving down the dollar's value and driving up American interest rates, but that's not a real danger. If the price of our government securities dived, the foreign central banks would have to bear the loss. This would be a budget item for their governments, whose leaders would not like it at all.

- Federal Reserve System: The Mark of the Bust, Martin Mayer, June 14, 2006

* Half a trillion two years ago, almost a trillion today.

In 1999 we developed a theory of asset bubble inflations, crashes, and government economic reflation that forecasts the process as ultimately inflationary: Ka-Poom Theory. The theory holds that at the end of one of the bubble cycles that started in the late 1980s, foreign investors sell US debt, the dollar falls, and an inflation cycle begins driven by rising import prices, leading to economic contraction, further loss of confidence in the US economy and foreign sales of US debt and repatriation of dollars, creating a whirlpool of inflation and economic contraction.

The “Poom” portion of the cycle did not occur after the 2000 technology stock bust for reasons that, while profound, were unforeseen by us and passed largely unnoticed in the business press. When it occurred in 2003, alarm bells should have rung from sea to shining sea: private money exited the market and government money filled in the gap.

Foreign central banks rushed in starting in 2003 where private investors
feared to tread after the technology stock bubble collapsed in 2000

In 1998 foreign private and official holdings of US Treasury debt by foreign central banks were about equal, at 51% and 49% respectively. But after the technology stock bubble and bust, private investors lost faith in the US economy and markets. To prevent a destructive self-reinforcing cycle of rising interest rates and economic contraction if foreign flows were allowed to reverse, starting in 2003 foreign central banks purchased treasuries at a higher rate to compensate for the decline in private foreign investment until by Q1 2008 the ratio stood at 61% official holdings to 39% private.

This marked the beginning of a period of political versus economic investment by foreign governments in the US. One government does not support another without purpose; compensation is expected in return, which compensation may not accord with US domestic interests. The bailout of Fannie and Freddie is the first example of a domestic economic policy decision made to satisfy short term foreign and US interests to the detriment of long term US interests. As we circle the whirlpool created by foreign debt and the folly of the FIRE Economy that the debt has enabled, you can be certain it will not be the last. To make matters worse, the maintenance of the FIRE Economy depends on foreign lending from non-market oriented, unelected often repressive governments. More on that and the implications later.

In 2006, when Treasuries get too expensive, the US sells agency debt instead

After the tech bubble burst, treasury bond yields fell below 5%

After the bursting of the technology bubble and private foreign investors left the US Treasury market to investment by foreign lenders, Treasury bond yields dropped below 5%, the lowest rate in decades. Both foreign private and government investors sought US debt that earned more interest. The Treasury had a solution: buy more debt issued by GSEs known as agency debt, especially Fannie Mae and Freddie Mac whose bonds were earning over 6%. While not explicitly guaranteed by the US government, an implicit US government guarantee of agency debt is widely perceived in the marketplace.

Agency debt carries an implicit US government guarantee and pays a
higher rate of interest than US treasuries

Foreign private and official investors began to pile into agency debt after the end of the last recession, A in the chart below, that followed the technology stock bubble bust because the yield was better than Treasury bonds but with perceived similar default risk due to an implicit government guarantee. In 2006, B in the chart below, as the housing bubble started to peter out once again private investors pulled back from US markets and foreign central banks took up the slack, just as they had by buying treasury bonds following the technology stock bubble bust in 2003.

First arrow A shows an increase in agency debt purchases by foreign investors
starting around the last recession in 2001. Central banks picked up
where private investors left off in 2006, as shown by second arrow B

In 1994, private foreign investment in US agency debt was more than 11 times the level of investment by foreign central banks. By 2002, central banks stepped up their purchases in search of higher yields than Treasury bonds offered and private investors shunned the US post-bubble economy; the proportion of private foreign investment fell to a level not quite twice the level of the central banks. As of Q1 2008 foreign central bank agency liability increased 442% to $984 billion from $181 billion in 2002. Foreign central banks now hold almost twice as many agency bonds as private holders.

For the first time in history, the US government is now beholden to foreign governments for the bulk of the treasury debt used to finance its government and the bedrock of its financial system, and also agency debt, the foundation of its housing market, the crown jewel of the FIRE Economy. Here’s the total foreign debt picture since 2001 from a 2007 presentation by the Congressional Budget Office.

[j4f2h0]

Re: Where is the Outrage? ... At least Rogers Calls it Out

Politics of Foreign Debt - Part I: Why Republicans and Democrats had to bail out Fannie Mae and Freddie Mac

To make a long story short, the practice of keeping foreign holdings of US agency and treasury debt on Fed account started under Arthur Burns in the early 1970s as a way for the US to regain control of its currency that the US was losing to the euro dollar market.

Banking expert Martin Mayer, author of The Bankers: The Next Generation The New Worlds Money Credit Banking Electronic Age and a dozen other books on banking and frequent writer for Barron’s Magazine, Institutional Investor, and others explains:

Exporters to America who keep the dollars and use them for American purchases and investments create what economists call an autonomous flow of funds back to the United States, financing the American trade deficit with an American investment surplus.

This produces the argument most closely associated with the new Federal Reserve chairman, Ben Bernanke (though Alan Greenspan believed it, too), that our trade deficit is caused by a surplus of savings that can't be profitably invested in the home countries of our trading partners. Financing for our trade deficit comes before — and actually causes — the deficit itself.

If instead of investing their dollars in the United States, foreign exporters want to take the proceeds of their sales in their own currency, their central banks will in effect sell them that currency for their dollars. Back in the late 1960's, when Great Society deficits and the Vietnam War prompted the first serious sell-off of dollars (and forced the United States to abandon the gold standard because too many holders of dollars, led by President Charles de Gaulle of France, wanted gold), those central banks lent those dollars into the new Eurodollar market, where they traded somewhat separately from domestic dollars.

This created a nightmarish prospect of the United States losing control of its own currency, and in 1971 the Fed chairman, Arthur Burns, negotiated a deal with the European and Japanese central banks. The deal was that they would return to America the dollars they acquired in their own economies, and the Fed would invest the money on their behalf, in absolutely safe government securities, without charge and at the best rates.

Today, the Fed continues as custodian of the "foreign official holdings" of such government obligations. During the Clinton administration, the Fed agreed to invest in federally guaranteed housing securities for those foreign central banks that wanted a better yield on their dollar reserves than they would get from government bonds, and now half a trillion dollars* of the total official holdings are invested in agency paper.

Foreign official holdings of government paper is a miner's canary number. It tells you if there is big trouble ahead. The most common worry is that the number will shrink suddenly, with foreign governments dumping their dollar holdings, driving down the dollar's value and driving up American interest rates, but that's not a real danger. If the price of our government securities dived, the foreign central banks would have to bear the loss. This would be a budget item for their governments, whose leaders would not like it at all.

- Federal Reserve System: The Mark of the Bust, Martin Mayer, June 14, 2006

* Half a trillion two years ago, almost a trillion today.

In 1999 we developed a theory of asset bubble inflations, crashes, and government economic reflation that forecasts the process as ultimately inflationary: Ka-Poom Theory. The theory holds that at the end of one of the bubble cycles that started in the late 1980s, foreign investors sell US debt, the dollar falls, and an inflation cycle begins driven by rising import prices, leading to economic contraction, further loss of confidence in the US economy and foreign sales of US debt and repatriation of dollars, creating a whirlpool of inflation and economic contraction.

The “Poom” portion of the cycle did not occur after the 2000 technology stock bust for reasons that, while profound, were unforeseen by us and passed largely unnoticed in the business press. When it occurred in 2003, alarm bells should have rung from sea to shining sea: private money exited the market and government money filled in the gap.

Foreign central banks rushed in starting in 2003 where private investors
feared to tread after the technology stock bubble collapsed in 2000

In 1998 foreign private and official holdings of US Treasury debt by foreign central banks were about equal, at 51% and 49% respectively. But after the technology stock bubble and bust, private investors lost faith in the US economy and markets. To prevent a destructive self-reinforcing cycle of rising interest rates and economic contraction if foreign flows were allowed to reverse, starting in 2003 foreign central banks purchased treasuries at a higher rate to compensate for the decline in private foreign investment until by Q1 2008 the ratio stood at 61% official holdings to 39% private.

This marked the beginning of a period of political versus economic investment by foreign governments in the US. One government does not support another without purpose; compensation is expected in return, which compensation may not accord with US domestic interests. The bailout of Fannie and Freddie is the first example of a domestic economic policy decision made to satisfy short term foreign and US interests to the detriment of long term US interests. As we circle the whirlpool created by foreign debt and the folly of the FIRE Economy that the debt has enabled, you can be certain it will not be the last. To make matters worse, the maintenance of the FIRE Economy depends on foreign lending from non-market oriented, unelected often repressive governments. More on that and the implications later.

In 2006, when Treasuries get too expensive, the US sells agency debt instead

After the tech bubble burst, treasury bond yields fell below 5%

After the bursting of the technology bubble and private foreign investors left the US Treasury market to investment by foreign lenders, Treasury bond yields dropped below 5%, the lowest rate in decades. Both foreign private and government investors sought US debt that earned more interest. The Treasury had a solution: buy more debt issued by GSEs known as agency debt, especially Fannie Mae and Freddie Mac whose bonds were earning over 6%. While not explicitly guaranteed by the US government, an implicit US government guarantee of agency debt is widely perceived in the marketplace.

Agency debt carries an implicit US government guarantee and pays a
higher rate of interest than US treasuries

Foreign private and official investors began to pile into agency debt after the end of the last recession, A in the chart below, that followed the technology stock bubble bust because the yield was better than Treasury bonds but with perceived similar default risk due to an implicit government guarantee. In 2006, B in the chart below, as the housing bubble started to peter out once again private investors pulled back from US markets and foreign central banks took up the slack, just as they had by buying treasury bonds following the technology stock bubble bust in 2003.

First arrow A shows an increase in agency debt purchases by foreign investors
starting around the last recession in 2001. Central banks picked up
where private investors left off in 2006, as shown by second arrow B

In 1994, private foreign investment in US agency debt was more than 11 times the level of investment by foreign central banks. By 2002, central banks stepped up their purchases in search of higher yields than Treasury bonds offered and private investors shunned the US post-bubble economy; the proportion of private foreign investment fell to a level not quite twice the level of the central banks. As of Q1 2008 foreign central bank agency liability increased 442% to $984 billion from $181 billion in 2002. Foreign central banks now hold almost twice as many agency bonds as private holders.

For the first time in history, the US government is now beholden to foreign governments for the bulk of the treasury debt used to finance its government and the bedrock of its financial system, and also agency debt, the foundation of its housing market, the crown jewel of the FIRE Economy. Here’s the total foreign debt picture since 2001 from a 2007 presentation by the Congressional Budget Office.

This is a very clear thought process to explain what is going on, and i am grateful for the knowledge. However i am no less angry now that I clearly understand our government exist to ASS RAPE it citizenry(as if there was ever a doubt). I quit yelling at everyone that thinks government will fix the problem and started accumulating Au and Ag until my faith is restored in the crazies driving our bus!

[metalman]

Re: Where is the Outrage? ... At least Rogers Calls it Out

welcome to the club. we all know how this will turn out. sooner or later one of those central banks will demand something we can't give them... say, china demands we choose them over another big gse stock holder russia in some future eurasian conflict over land and oil/gas. if we say 'yes' russia pounds our allies in europe. if we say 'no' they sell bonds. then it's all over but the crying.

[The Outback Oracle]

Re: Where is the Outrage? ... At least Rogers Calls it Out

There seem to me to be two obvious questions that if i were interviewing paulson I would ask. Maybe I don't watch enough TV but i have not seen the problems addressed on MSM[LIST=1]If the government cannot run at a profit when it has total power to tax its citizens whatever it likes, how the hell are they going to run a commercial enterprise that is already in deep s..t at a profit? I did see Mark Whatshisface on Squawk on the Street say almost under his in breath, and they couldn't get the cameras away fast enough "you mean it's a bit like Iraq would finance its own reconstruction"[LIST=2] The government is already running at a loss and is borrowing moeny from all over the world to keep itself going, so where does the money to finance this come from?

I note Paulson was asked 'how much' and he has no idea whatsoever. He admitted there has been not a single number crunched on a single calculator to see what might be the possible outcomes to all this.

[metalman]

Re: Where is the Outrage? ... At least Rogers Calls it Out

There seem to me to be two obvious questions that if i were interviewing paulson I would ask. Maybe I don't watch enough TV but i have not seen the problems addressed on MSM[list=1]If the government cannot run at a profit when it has total power to tax its citizens whatever it likes, how the hell are they going to run a commercial enterprise that is already in deep s..t at a profit? I did see Mark Whatshisface on Squawk on the Street say almost under his in breath, and they couldn't get the cameras away fast enough "you mean it's a bit like Iraq would finance its own reconstruction"[list=2] The government is already running at a loss and is borrowing moeny from all over the world to keep itself going, so where does the money to finance this come from?

I note Paulson was asked 'how much' and he has no idea whatsoever. He admitted there has been not a single number crunched on a single calculator to see what might be the possible outcomes to all this.

recall one of the early ej/hudson interviews where they debated where the bernanke helicopter money gets stopped, where the pallets go?

not everyone gets a pallet. it's not a random spray of money like jim sinclair thinks ala 1970s.

the weimar inflation, forget the 1970s usa inflation, is egalitarian by comparison :eek:

[The Outback Oracle]

Re: Where is the Outrage? ... At least Rogers Calls it Out

CNBC Poll on whether it is the right thing to bail out the GSE's
Yes - 40%
No - 46%
Not Sure - 13%

[Nervous Drake]

Re: Where is the Outrage? ... At least Rogers Calls it Out

.

[LargoWinch]

Re: Where is the Outrage? ... At least Rogers Calls it Out

Its funny that no one is defending new home buyers.

These GSEs were meant to lower the cost of owning a house... more like inflating the value and lowering the monthly payment.

I say let them fail and let house prices crash. People will now be able to afford home with 25% deposit and a 10-year mortgage at 21 years old.

---

but wait; are we missing something?

I was under the impression that S&P said that US credit rating would be downgraded if they take over these GSEs. Where is S&P and Moody's today?

[tombat1913]

Re: Where is the Outrage? ... At least Rogers Calls it Out

I started accumulating Au and Ag until my faith is restored in the crazies driving our bus!

Sounds like you're going to have a gold and silver coffin.

[sunskyfan]

Re: Where is the Outrage? ... At least Rogers Calls it Out

Excellent analysis. The point of my post is that people get lost in their analysis (I am an analyst by-the-way ) and lose sight of of the basics. Usually complex financial instruments and actions are giant rationalizations to reconsile rhetorically and otherwise the fudging of a choice that either leaders or people don't want to make. Historically it is has been guns or butter. In your starting point for this crisis being the Vietnam War and the Great Society program. Perhaps as the world has grown richer their are times when the this decision is between Casinos and Schools. In either case we build complex rationilizations when we have to choose between these two things and my point is that the Republicans have ruled deriving the justification of their desire to choose guns over butter and casinos over schools by deriding the lower end of the economic spectrum who have to work and struggle for butter let alone guns. The financial people have too often been there to justify the Republicans head-in-the-sand morality when making these arguments.

In this particular crisis as it stands now. Politicians combined with financial guys looking for a buck and justification of their ridiculous incomes got caught with their hand in the cookie jar when their BS intertwined with one of the basics of life (housing) and instead of falling on their swords when they have realized that they have created nothing and generally dsitorted badly a necessary part of the economy they will take the rest of us down with them.

It still makes me want to puke.