By John Galt
October 5, 2008
“Forward, the Light Brigade!”
Was there a man dismay’d?
Not tho’ the soldier knew
Someone had blunder’d:
Their’s not to make reply,
Their’s not to reason why,
Their’s but to do and die:
Into the valley of Death
Rode the six hundred.
–Charge of the Light Brigade by Alfred Lord Tennyson
The particular charge for this article is the fiasco that was just completed by only five hundred and thirty four but the futility of their charge will soon be realized by anyone with one half of a clue about the reality of markets, monetary systems and the true reasons behind the largest assault on free market capitalism since the days of Franklin Delano Roosevelt. The real motivations behind what I call the Debt Nationalization Act of 2008 may never be known until Treasury Secretary Henry Paulson writes his memoirs, yet there is a nagging feeling that the days where capital innovation originating in the marketplace have been sunset, hopefully to arise when the dark pall of the new socialist America regresses in a fury of voter vengeance. It would appear that the American public needs to feel the pain of what so many people worldwide have lost their lives to run from and destroy: Marxist centralized planned economies.
Nous Sommes Francais
“We are French.”
While this might offend some people with the inference that it is a derogatory term, that is too bad. As for myself and our fellow frogs of Amerika, this is going to become a larger nightmare than anyone could ever conceive. The lack of hearings on this bill, the lack of study and discussion will come back to haunt our nation in spades. The pork that was loaded into the bill was indicative of the kind of games banana republics of the 1930’s in Latin America and the Caribbean used to play with their budgets which made them the mockery of the capitalist world of the time. Now we are the mocked, the joke, the sad fat bloated buffoon which gets featured on Jerry Springer as the wall to our house is cut out and the socialist forklift hauls our nation’s financial system into a dump truck because we are too large to fit into an ambulance.
The idea that we need centralized planning for our economy reminds me of the days in college where we studied under the Keynesian idealists and some of the professors actually praised a government planning committee to insure that resources and monetary needs were allocated based on a preconceived formula versus the capitalist utilization model where profit was the ultimate motive. Unfortunately the bailout does nothing more than create a GOSPLAN for the United States where not only the management of eighty plus percent of the housing industry now becomes the responsibility of the Department of the Treasury and an office building full of socialist bureaucrats, but the whims of political appointees in positions throughout the cabinet including HUD, the Fed and SEC. Scared yet? Better learn French just to get a taste of what is to come. Also buried in the bill is every wet dream fantasy of Al Gore and the Marxist environmentalist whacko movement laying the tax credit and planning for carbon sequestration, carbon credits along with IRS implications, and the penalties plus benefits for people who live in modern “green” homes and higher taxes for non-conformist homes, which means a tax increase on oh, most of us.
Unfortunately for the Bubblevision cheerleaders, the perception that this will instantly put the twenty percent down in the pockets of every man, woman, child, cat, dog, turtle, illegal, snake or hyena so everyone or anything can buy a home from the modern version of the National Recovery Administration is not only false, but a fantasy that is going to become even more impaired by the inflation this act will create. The only thing that will ultimately occur is that instead of 1,000 to 1,500 banks failing throughout the nation as such respected experts as Nouriel Roubini has speculated about, it is this writer’s opinion that in excess of 3,000 banks are probably doomed to failure. Before the debt nationalization and spurious comments about “urgency” and “disaster” sparked by vague and unsubstantiated comments from Paulson there was and always has been a prudent distrust by the American public of Wall Street, the banking system and most of all the government. Instead of calming these markets and the underlying institutions within our quasi-capitalist system, the actions of Bush, Paulson, the so-called Financial Mainstream Media, and our politicians has initiated a justifiable panic and loss of confidence in a system which was built upon data streams fraught with fraud and deliberate distortion. This is so much like the Euro-socialist model where the bad news was and always has been manipulated for political purposes instead of defining finite data points where capitalists can exploit the situation and expand economies using traditional investing methods.
Sadly, ever since John F. Kennedy, the concept of data distortion is now the unwritten policy of every administration and this is one of the reasons we have landed where we are today. The market’s distrust of inflation, unemployment, credit, real estate, and durable goods reports is one of the reasons the honest and practical investor is no longer wishing to participate in the system which appears “rigged” to the untrained eye. To the trained eye, with the manipulations and massive interventions in the system by central bankers worldwide and weekly edicts changing trading rules and roles, they know it has turned into a roulette wheel with a large magnet under the wheel designed to favor the few and punish the rest of the gambling public. Thus the real reason for this alleged rescue which does nothing but throw a lead laden life preserve and a Mai-Tai with a pretty umbrella to the man struggling in the ocean while sharks circle around him.
The Primary Bailout
Now the question everyone seems to have been asking:
Why the panic, why the sudden emergency, and why are foreign banks included?
I think the following list from the Federal Reserve Bank of New York will answer your question.
List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York
BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Securities LLC
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.
If you notice those banks that are highlighted in red and bolded, they are all American subsidiaries of foreign banks with operations inside the United States. Since July 15, 2008 Countrywide Financial, Lehman Brothers and of course Bear Stearns have been removed from the list of Primary Dealers for United States Treasury Securities, leaving only seven domestically based operations and none of the American banks remaining operating solely as investment banks. What a difference a year makes.
This now begs the question, why the sense of urgency. The answer is simple. If the United States Government, meaning the legislative and executive branches did not reach an accommodation to create valuations for the so-called toxic debt instruments and agree to buy a substantial portion of them back into the U.S. Treasury portfolio, they would refuse to buy United States Treasury debt instruments, in essence blackmailing the people of this country into creating a market which was created under false Level III pretenses.
Although this entire piece is just my opinion, it does not take a rocket scientist or Hockey Mom from Alaska to figure this out. Without the primary dealership network, the U.S. Treasury would have auctions which consist of some computerized bids and a very empty room with a few drunks from the closed Lehman bond desk who act as bidders but haven’t received the memo that their company has been wiped out by Goldman’s right hand man, Hanky Panky Paulson. The foreign bidders are critical to the survival of the United States because we have to raise over $2,000,000,000.00 per day to keep the lights on and justify the existence of thousands of stupid people enforcing thousands of needless and stupid regulations. It also keeps the stupid people populations down on our streets, which is a net positive but is financially inefficient. If the foreign bidders via the banks in the primary dealer network from Scotland, Japan, Hong Kong, Germany, Switzerland, France, and the United Kingdom is not enough of a concern, add in the threat from our own institutions refusing to use their Caribbean Island proxy hedge funds to buy also.
Ignored in this flurry of fluffernuttery and malfeasance was the streamlining of a thirty day application process by one Ben Bernanke to enable Goldman and Morgan to divest themselves of the “investment bank” tag and become commercial retail banks in five freaking days. Gee, do you think the bank examiners still dusting themselves off at the craters Indymac, Washington Mutual and Wachovia have had enough time to review the books at GS and MS to insure that they are viable commercial banks? Probably not but “Ben’s” word is good enough for me (snicker). So if they were not allowed to change their structure, begin the process of gifts from the FDIC of free deposits and the ability to leverage funds in an unlimited manner via the new zero reserve requirement, what incentive would they have to call their offices in the cubicles down the hall and tell them to buy half a billion in government paper for the Pirates of the Caribbean? None. So the game was rigged and allowed to proceed forward at all costs, including the middle class and integrity of our markets, and voila, instant bailout.
If the President and Legislature refused to move forward on a taxpayer funded boondoggle to destroy the monetary system by acquiring assets at prices way in excess of their underlying value, the banksters were going to blackmail the United States public by destroying their retirements and deflating everything in sight to insure that no politician was safe in their comfortable position and the American public would be in full outrage mode to restructure both political parties and quite possibly the political system currently in place. Since the deal of 1913 was the first institutionalized incident of M.A.D. (Mutually-Assured-Destruction) of record and the Federal Reserve reminded the politicians of this, it was completely evident after the so-called meltdown on September 29th, that action of some sort would have to be taken, taxpayer be damned.
Taxpayer Benefits or “There’s a Sucker born every minute”
Now the political talking heads, the lying elected officials and so-called financial press are all reporting the “aw gee, this is so wonderful the homeowners won’t have their homes foreclosed on and the reforms in this bill are so sweeping that we have planned for the future that the taxpayer could actually turn a profit on these turds.”
If you believe that one, please contact me immediately as I have a printer and I love selling promises to stupid people.
The reality of what this will cost will start to hit home in about forty-eight hours. The insipid and insane FDIC insurance increase from $100,000 to $250,000 decades after inflation has already made the U.S. Dollar worth about $0.146 (That’s in 1967 dollars per the BLS) is only adding insult to injury. The real purpose was to prevent a bank run by wealthier depositors at smaller institutions which are on the GS and MS Christmas shopping list submitted as part of the “we’ll keep buying Treasuries if…” bailout provisions. Add in the costs that will be passed on to the smaller depositors and you can say goodbye to free checking, free online bill paying, free ATM usage, etc., etc. But don’t worry, increasing fees, creating unlimited reserves and diluting the monetary base is not inflationary because Ben told me so; allegedly.
Next will be an array of fees and tax increases across the government spectrum to raise revenues for everything from boarding an airplane to breathing as they have to raise money in the face of declining economic activity and since government is ruled by generally the least intelligent life forms other than those that lay their eggs on cowpies, it is about a 99.9% assurance that taxes and fees will be increased even as GDP sinks lower, and lower, and lower.
The one benefit for those taxpayers “who qualify” has been highlighted under Section 110 of the debt nationalization act, but there will be consequences to that. The mortgage forbearance program has been established to help homeowners before foreclosure proceedings begin or bankruptcy filings have been made. That could prove to be a great political benefit for any political party in power that is suffering from the market based reality of declining real estate prices and the inability of their constituents to read a contract. The other pork in the bill guarantees that biodiesel will be manufactured against the will of the market place and energy efficiency will be imposed as opposed to allowing market forces to take effect and do the job that Americans won’t do. None of the solutions or pork proposals are based on free market capitalism so Ellsworth Monkton Toohey, aka Lawrence Kudlow will have to go back to haranguing about “Goldilocks” and the fictional drug induced booming economy he perceives to see in his world of purple dinosaurs and hand mirrors on his dressing room desk.
And now the Consequences of Abandoning What Made America Great
The lesson of this past week is as obvious as the truth of the blue stained dress:
Capitalism, risk and the rule of law matter no more.
America became a great nation because we believed that individuals had the right to succeed or fail based on their abilities or lack thereof. The lesson we began teaching our children started to deteriorate with the ‘no scoreboard’ mentality at Little League Baseball games and furthered with the rewarding of mediocrity in our eduction system. That lesson has carried through to our political elites, ruling economic class and the middle class of America:
Failure is an option, and not a bad one at that; as long as it is your political opponent and their supporters.
Because you can never really fail as long as you force the remainder of the population to fork up blood, sweat, tears and dollars at gun point to reward the losers of society and let the misdeeds of the ruling class go unpunished. If an investor recognizes the shortcomings of a particular company and wishes to perform the legal act of shorting their equity because of the mistakes, the solution is simple; ban the activity on that stock and tell the investor that he’s evil for exercising his plans within the rule of law. However the CFO who maliciously assists in the creation of questionable investment vehicles for that same company has no fear of prosecution, as long as they are inside the game, purchasing the securities of the other players and government and becoming “too large to fail.”
That lesson has been transferred across our society and is best illustrated by the latest data that the mainstream media reported from this same inept government that approximately fifty seven percent of our population is receiving some sort of check or benefit from the government. So why not increase it to a nice, fat round sixty-five percent and tell the other thirty-five to shut up and “do their patriotic duty” to prevent the “safety net” from failing.
Instead of the process where the weak, inept and mismanaged are allowed to die and stronger companies with more dynamic models to replace them allowed to flourish, the good old boy network established by FDR and expanded by every President ever since has allowed a diversified group of companies that should not exist in a normal, straightforward Adam Smith model to survive every downturn or inept strategic decision. The result has been to pass judgment on companies not based on their capitalist performance, but on their ability to promote the “public good” or the contribution to the society as a whole. This is neither capitalist nor desirable in any society and the Soviet model best illustrates why with the automotive industry which flourished under the USSR Communist Party hierarchy, but in reality produced substandard products at prices totally out of line with the realities of the marketplace. Now one more time, someone please tell me the difference between the failed Soviet auto industry and the derivative models and quant hedge fund programs invented by our zit faced math whizzes just one more time?
What this means for our future is a bleak attempt at the “Lost Decade” model of Japan except the extreme risk of hyperinflation has been introduced not just into the U.S. Currency but into fiat currencies worldwide. The question is which central bank will shut it down first and try to establish a sound monetary base instead of an unlimited inflationary based economic model. My fear is that the entitlement society that America has become along with the aging work force and lack of an industrialized base will make any type of recovery a purely digital fantasy with short term hope being destroyed with long term reality. As American economic reporting is a mark to fantasy model at best, outright blatant political lies at worst, the lack of consistent and viable data measurements will result in a floundering nation with little desire by foreign investors to plow trillions into the black hole located in the District of Columbia. In the end, we will not witness ’stagflation’ per se; the consequences will be a persistent, grinding inflation with negative economic growth, some quarters worse than others and vice versa, destroying the viability of the current American system of the Federal Reserve central banking model and the political class shall emerge being viewed as the savior as opposed to self-reliance and the Constitutional alternatives.
The end result of two weeks of hysteria and rhetoric is that our Primary Dealership network for the Fed will remain intact and the banking system is now subservient to the political parties in control. This two shall see a reversal of roles as the ecnomic decline accelerates. The new era of emerging superbanks, able to create a new fractional reserve system with the limits only being the ability of the display screen to show numbers and the IT departments at the banks learning how to calculate “quadrillions” into the formulas has begun. As the superbanks in the U.S. and Europe begin to absorb those institutions deemed worthy of saving, billions, perhaps hundreds of billions of depositor’s wealth will be wiped out in uninsured accounts, money market funds that collapse and equity liquidations.
Welcome to the brave new world boys and girls.
Mr. Toohey would be proud.