You are currently browsing the category archive for the ‘Articles’ category.
More Power For the Fed? Seriously?
by Mike Larson 06-26-09
 |
In last week’s Money and Markets column, I gave you a broad outline of the Obama administration’s regulatory reform scheme. This week, I want to zero in on one of its weakest links. I’m talking about the idea of making the Federal Reserve an “uber-regulator,” responsible for managing system-wide risk.
First, what in the world is system-wide risk?
Well, that’s the risk that interconnected-institutions will drag down the whole financial system when they gamble with other people’s money and then blow up! Think AIG, Citigroup and other disgraceful members of the notorious “Too Big to Fail” club. Obama’s plan calls for giving the Fed more power to oversee these guys and to proactively head off any future systemic risks.
Well, that’s the risk that interconnected-institutions will drag down the whole financial system when they gamble with other people’s money and then blow up! Think AIG, Citigroup and other disgraceful members of the notorious “Too Big to Fail” club. Obama’s plan calls for giving the Fed more power to oversee these guys and to proactively head off any future systemic risks.
 |
| Obama now wants to make the Fed an “uber-regulator” in order to head off any future systemic risks. |
There’s just one humongous problem: The Fed has proven time and time again that it isn’t up to the challenge!
It has been too timid to use the regulatory authority it already has. It has repeatedly proven to be behind the curve when it comes to both cutting and raising rates. And lately, it has sacrificed all semblance of being an independent body. The Fed is now clearly a politicized institution, working hand-in-glove with the Treasury and the rest of the administration.
In short, the Fed is NOT an independent body willing and able to see around the economic corner and take decisive, proactive steps to head off disaster. Instead, it’s an institution that has failed repeatedly to uphold its responsibilities in the regulatory and monetary policy arenas. And thankfully, policymakers are coming around to that view, which I’ve expressed time and again over the past couple of years.
A Sorry Track Record on Bubbles, Inflation,
Regulation — You Name It
You probably don’t need me to tell you the whole long, sorry history of the Fed’s easy money policies — and their repercussions. Suffice it to say that under former Chairman Alan Greenspan, and later Ben Bernanke, the Fed’s policy has been to ignore asset bubbles as they inflate … then come in with monetary guns blazing when they burst, thereby laying the foundation for the next bubble.
In 1998, the Fed went totally overboard after the collapse of Long-Term Capital Management, slashing rates to soothe the capital markets even as the economy was heating up. Then it pumped huge amounts of money into the economy out of fear of the Y2K bug. These two events pumped even more helium into the Nasdaq bubble, which then popped in 2000.
The Fed’s response to that bust was to drive the cost of money into the gutter. Thanks to that policy, and the reckless disregard for prudence throughout the lending industry, we experienced the biggest housing and mortgage bubble in the history of the U.S. We also saw too much dumb lending and asset inflation in the leveraged buyout business, in the commercial real estate arena, in commodities, and in the emerging markets.
Rather than combat those bubbles head on, though, the Fed deferred. And now we’re living with the painful fallout.
Yet remarkably, after two huge bubbles and busts fueled in part by misguided policy actions, the Fed is going back to its old playbook. It’s flooding the economy with the biggest tsunami of easy money the world has ever seen. And predictably, it’s having a whole host of unintended consequences, as I spelled out on in my June 12 Money and Markets column.
 |
| Greenspan pooh-poohed the housing bubble while everyone else saw it coming like a runaway freight train. |
Look, how many speeches did Greenspan give pooh-poohing the housing bubble, even as anyone with half a brain could see disaster coming?
How many Fed governors essentially washed their hands of any concern for asset bubbles?
How many said that these bubbles were too tough to identify in advance, and that the only rational policy was to let them inflate, then burst, and then try to clean up the mess — rather than proactively attack them?
And what about Bernanke? The Wall Street Journal noted this week that it had sounded a huge warning about the falling dollar, surging commodities prices, and the inflation threat they posed way back in late 2003. In an editorial called “Speed Demons at the Fed,” the Journal urged policymakers to start reversing course and lay off the monetary gas pedal.
Bernanke’s response?
According to minutes of a Fed meeting at the time, he reverted to Ivory Tower theory to play down the inflation threat. He cited studies that essentially said the declining dollar doesn’t matter, commodities prices don’t matter, and weak labor markets would keep inflation tame. He added that anyone who disagreed with him was “not particularly well informed.”
Oops!
Within a few quarters, home prices were soaring at their fastest rate since the late 1980s. Oil prices surged 782 percent from their low. Gold more than quadrupled. The Consumer Price Index eventually notched a 5.6 percent year-over-year gain — the biggest in 17 years. Import prices soared by a whopping 21 percent in 2008, the biggest increase in recorded U.S. history.
Is there any doubt that Bernanke was dead wrong … and the Journal dead right? I don’t think so.
Then there’s the Fed’s regulatory track record. As I discussed in my landmark 2007 white paper, “How Federal Regulators, Lenders, and Wall Street Created America’s Housing Crisis — Nine Proposals for a Long-Term Recovery”:
“By 2004, it was nearly impossible to ignore that the housing market was overheating …
“Yet the Federal Reserve did not believe it should play a forceful role in stemming this mania via monetary policy, focusing instead on traditional measures of inflation, and deciding not to begin raising short-term rates until June 2004. Furthermore, the rate adjustments were slower and more hesitant than those of the preceding down phase of the interest rate cycle.
“Adding fuel to the speculative fires, monetary policymakers used their public pulpits to send mixed signals to the marketplace, often encouraging continued risk-taking that has proven harmful to borrowers, lenders and the industry as a whole.”
In the paper, I added that …
“Federal regulators, for their part, warned about high-risk mortgage lending. But they failed to back up those warnings with rules or regulations designed to contain or reduce lending abuses. So lenders routinely ignored the warnings.
“We believe these constitute a series of fatal policy errors. And we believe they virtually ensured the outcome: A climactic period of unrestrained risk-taking in the residential real estate market, followed by the painful bust we are now witnessing.”
Fed-Worship Finally Ending …
Good Riddance!
Throughout the 1990s and early 2000s, Fed worship was widespread in Washington. We had to endure endless claptrap about how great Alan Greenspan was (remember his nickname, “The Maestro”?).
That’s ancient history. A new skepticism is apparent in Congress and elsewhere in D.C., and I couldn’t be happier. Heck, when Treasury Secretary Geithner went before the Senate Banking Committee to champion the Obama regulatory plan, he got an earful from legislators:
- Sen. Chris Dodd of Connecticut said giving the Fed uber-regulator status was “like a parent giving his son a bigger, faster car right after he crashed the family station wagon.”
- Sen. Jim Bunning of Kentucky said “Your plan puts a lot of faith in the Federal Reserve’s ability to spot risk and exercise its power to prevent the next crisis. However, if the Fed and other regulators had been doing their jobs and paying attention to what the banks and other firms were doing earlier this decade, they almost certainly could have prevented the mess … What makes you think that the Fed will do better this time around?”
- In an interview given to The American Banker, Senator Richard Shelby of Alabama went even further. He said: “The idea of putting more and more power in the Federal Reserve is, in my judgment, a huge mistake … They have utterly failed the American people as the regulator of the bank holding companies, most of which have gotten into bad, bad trouble financially. They are doing so many things outside the norm that nobody knows — no accountability for — and to run to the Federal Reserve and to say ‘Gosh, they are going to be the winner of everything out of all this,’ that is just nonsense.”
My bottom line verdict: Entrusting the Fed with more power makes no sense. Policymakers there have gotten so many things so wrong over the past several years, that you could easily make a case that the whole lot of ‘em should get the hook … not the keys to the financial kingdom.
JAMIE MCINTYRE’S COMMENTS:
I agree completely with the article below.
Obama has a lot of potential and I think he is a huge improvement on his predecessor like almost everybody, but giving the Federal Reserve more power is a huge mistake.
Considering the Fed is privately owned by the largest banking families in the world,has little or no accountability to the US Government. And is largely responsible for the Global Credit Crisis and many say deliberately caused the Great Depression for its own advantage to buy up many bank assets at rock bottom prices. Obama should be sacking the Fed Board Members and bringing the printing of US dollars back under control of the American People instead of the US Treasury going into debt every time the Fed Prints more fake money and charges the US Government and its taxpayers interest..
Instead he is doing the opposite and giving more power away by boosting the Feds power even further.
A decision I’m sure hell live to regret and unfortunately we may all pay for in Western Societies by rampant profiteering by the Feds owners at the expense of the US taxpayer.
Have your say, Please comment below or Click the Share button below
Recession equals Opportunity if we let go of the Fear.
You may have heard the chinese proverb “crisis is opportunity”
This is so true and to overcome a recession we need to see it as the opportunity that it is.
As challenging as a recession can be it creates a lot of opportunities for those who are willing to embrace the changing economic environment.
The recession has made many including myself to look at our overheads and expenses and eliminate wastage whether in companies or in your personal life.
In a boom time this would never occur but thanks to a recession I have eliminated millions a year in wastage in my companies and achieved massive efficiencies that would never have been discovered if the recession never occurred.
So have you eliminated unnecessary spending and overhead to become more efficient?
Recessions once every 10 or 15 years can be a valuable cycle for ecomonies to eliminate underperforming companies and make society more efficient and move employees from inefficient jobs to more productive and rewarding careers.
On a personal level it can make us in a material society not take for granted all the wealth that exists in our lives and truly appreciate the wonderful things we often take for granted and also simplify our lives to focus on what really matters most.
However the challenge of a recession is if people get fixated on the fear of sales disappearing or being made redundant.If so we lose our creativity and fail to innovate.
I have some friends who are doing it tough in business who are close to going broke..Multi Millionaires who may lose everything.I’ve had to say to them they need to change what they are doing and change fast to avoid their business and investments becoming worthless.
My tips have been to them and I suggest to any entrepreneur or individual
TIP 1: Cut costs and overhead early and fast.
Don’t delay or procrastinate and hope things get better.
Survival is the first goal.You must stay in the game to win it.
TIP 2: Then its time to now focus on innovation and new and better ways to do things.
In a recession, companies must focus on much better customer service to keep their clients and go for more repeat business,and often work harder to generate sales.
And focus on margins more then overall sales.
My group of companies this year will do only 60% of last years sales yet make more profit.
Why?
Because a focus on sales at expense of profit margins is a waste of time and energy.
And because I cut overheads hard and fast earlier,ie 50% of my staff across the 21st Century Group I cut and thus can maintain and actually increase margins with less sales.
As my first goal was to survive the Recession.
Then the second goal is to grow and thrive in a recession. To do this I needed to become very creative and focus on innovation.
Changing marketing,changing products,and lately launching new companies that are recession proof and putting others that struggle in a recession into hibernation to just survive until theirs an upturn.
Which leads me to my final tip.
Look for industries that will boom in a recession and look at how to tap into them.
I’m launching a whole new company called www.21st CenturyGlobalEducation.com.au purely as a recessionary business as it offers a business opportunity and is in the education industry also a booming industry in recessions.
And in a recession business opportunity type companies boom as well.
Ie Avon has reported record new recruits since the recession started.
MLM companies such as Amway always boom in recessions.
Why ?
As people are looking for additional forms of income.
Other industries and products that will boom in a Recession.
Education as people need to be retrained.
Alcohol sales.
Farmers Markets.
Cookbooks.
Chocolate
Home day care.
Affordable Beauty Products
Greying sector.
Products tailored to ageing baby boomers ranging from holidays and health care Renovations Business Coaching and personal coaching.
Remember in past recessions some of the worlds largest firms were founded during a recession such as Microsoft,Mcdonalds,GE,Disney,HP.
Australia has had 17 years of growth but despite that recessions are actually quite common.ie Australia has had 8 in the last 50 years.
So let’s embrace the recession and make the most of the opportunities it brings.
If you would like a copy of my new book “Time Rich” Please visit http://www.timerichbook.com.au/
Make Australia Post a Government Bank to compete against the big 4 banks.
CEO of the 21st Century Group says the Federal Government should immediately move to make Australia Post a Federally Funded Bank to compete against the major 4 banks, especially after CBA just raised their interest rates.
The Government can criticise banks all they want, but they have little to no power to stop them raising rates at will; not even the Reserve Bank has the power it used to.
And because they allowed the ACCC to approve the CBA takeover of Bank West, they have allowed one super large and arrogant bank to evolve that can throw its weight around and it is.
Australia Post already has retail outlets and already facilitates some basic banking functions such as, bill payments, so to move to a full bank is both realistic and possible.
It could be provided with Federal Funds to loan Australians home loans at lower rates then the major 4 banks forcing other banks to be more competitive and reducing their market share, meaning the Australia Post Bank would gain some of the huge profits banks now have boosting the benefits to tax payers even further.
At least serious consideration should be considered to the idea says Mr McIntyre who is one of Australia’s leading Educators and owner of a dozen companies including 21st Century Finance.
For a copy of my best Selling Book and DVD for free visit www.21stcenturyacademy.com
I invite you to comment in the area provided below.
—————————————————————-
Dear Jamie,
I saw your media release today regarding an Australia Post bank, which is a very good idea.
You will be interested to know that the New Zealand Government set up a new bank, Kiwibank, about six or seven years ago, as all the major NZ banks were foreign (in fact Australian) owned.
The new bank is owned by New Zealand Post, and operates throughout NZ through Post Offices and agencies. It has about 600,000 accounts, and is growing at a rate of about 100,000 a year. It is also profitable, and has exercised an important influence in keeping the foreign-owned banks honest! We have run a number of articles on it over the years in our publication News Weekly (www.newsweekly.com.au), which you can search for all references over recent years.
Regards,
Peter Westmore
(President, National Civic Council)
How can you make yourself Recession Proof in this Global Credit Crisis?
I was fortunate to have had a millionaire mentor some 15 years ago when I first made a commitment to becoming a self made millionaire before I turned 30.
Despite learning many secrets to property investing and business, the one key distinction I learnt and modelled from him was developing multiple income streams.
At the time he had approximately 15 different income streams from his varying companies and investments.
Ever since then, over the past 15 years I built up over a dozen different forms of incomes from varying companies I’ve started to my varying investments also. It’s a concept which I recommend others to consider.
Imagine how much certainty you could have right now in a recession if you had 2 or 3 different income streams let alone 12 or 15.
The reason most people feel uncertain around money is they are technically 2 weeks away from bankruptcy, meaning if they were made redundant which is very possible in todays environment,they could only survive 2 weeks from their savings before being unable to maintain their lifestyle.
How can YOU get started with a second or third income.
There are 4 key areas I’d suggest to create further wealth.
1. Property Investing; This can be a great long-term income generator and capital growth.
2. The share market is one of the fastest ways to generate instant cashflow and by instant I mean within the next 30 to 60 days.
I’m a big fan of using a combination of cashflow strategies such as “ share renting” which is a terminology I coined over a decade ago and have helped thousands retire from their jobs, along with other strategies that work hand in hand with share renting and also eminis trading.
3. Internet Businesses
A great way to develop multiple income streams with virtually no capital at risk and can be done whilst you still have the security of a full time job. This strategy simply requires education and time.
4. Perhaps the fastest way and mostly overlooked is your current ‘CAREER’.
I like to teach my students how to turn their job into a semi passive income and create a millionaires lifestyle within less then 12 months without even needing to become a millionaire and with the technology available today this is now possible.
Remember in times of financial crisis wealth is never lost but merely transferred and transferred to those that are financially educated and prepared to not only survive in this global credit crisis but thrive.
Jamie has kindly offered all Big Think readers a FREE downloadable copy of his best selling book ‘What I Didn’t Learn At School But Wish I Had’ and a free dvd to implement the above concepts into your life. Go to www.21stcenturyacademy.com to download your free ebook and order your DVD today.
It’s bad enough that Washington is throwing our money, our children’s money and our even grand children’s money to huge corporations. But when those companies turn out to be the very ones that produce shoddy products or nickel and dime us to within inches of our financial lives …
And when the millionaire-executives at those companies then use our money to fly around in $50 million corporate jets … install gold-plated toilets in their executive washrooms … and shower themselves and each other with lavish junkets and million-dollar bonuses … the outrage is unspeakable!
Now, even as these failed bankers, brokers and incompetent auto executives prepare to demand even more of your money in new bailouts … Another set of incompetent executives from still another sector is elbowing its way into the bailout line: THE INSURANCE INDUSTRY! That’s right: The U.S. Treasury Department has just announced that, in response to pleas from insurance companies, it’s expanding its TARP bailouts to include insurers who made terrible choices and are now twisting in the wind.
They say they’ve made so many dumb investments, they can’t possibly survive unless Washington takes more money from you — and gives it to them! This is worse than just “wrong” or “unfair.” Destroying your financial future to reward the CEOs who helped create the first Great Depression of the Twenty-First Century is absolutely criminal!
And worse: It’s guaranteeing that this depression will be far worse and last far longer than it has to! This is why I invited you to attend this week’s emergency online video briefing: To give you the tools you need to protect yourself and your family before it’s too late …
And also to launch a national grass-roots movement to STOP THE WHITE HOUSE AND CONGRESS before they bankrupt America! In this remarkable video, I reveal the practical, actionable steps you MUST take right now to protect your income, home, savings, investments and retirement in the next, devastating phase of this great crisis — how to …
• Erase your debt in far less time than you may now believe possible — so you’ll have plenty of money to see your family through …
•Secure your income at your current job … discover the truth about how secure your personal paycheck is now … lock in a secure paycheck — and even add additional streams of income — as long as this crisis lasts …
• Insulate your investment portfolio … your retirement nest egg … and even your kids’ or grandkids’ college savings accounts from the stock market meltdown ahead — absolutely guarantee you won’t lose a penny when stocks crash …
• Protect every dollar you have in the bank like a junkyard dog by making sure your bank is among the handful of truly safe banks in America … and guarantee yourself access to 100% of your money even if Washington closes ALL the banks in a 1930’s-style banking holiday …
• Keep a roof over your head with urgent, common sense strategies for keeping your home even in the worst-case scenario — or, if you prefer, for selling your home at the best possible price …
• USE this crisis to go for historic profits with investments that surge despite falling markets — and that even hand you profits BECAUSE of falling markets. PLUS, I show you how, working together, we can end Washington’s insane bail-outs of millionaires and billionaires that can only bankrupt our nation and our people! The good news is, we’re leaving the video of this all-important briefing online today.
To watch it now, just turn up your computer speakers and click here.
Hallelujah! We can all breathe a great sigh of relief now! This great economic crisis is magically over!
… Or so you would think, judging from the hype and hoopla emanating from the G-20 summit in London.
At this much-ballyhooed meeting, world leaders did everything they could think of to be seen as fighting the crisis …
- They called for $1.1 trillion in loans and guarantees for poor countries through the International Monetary Fund …
- They agreed to set up a new global Financial Stability Board to serve as a sort of financial early warning system of systemic crisis in the future …
- They pledged to extend regulations to cover hedge funds for the first time …
- And they vowed to take action against Switzerland and Caribbean nations, declaring that “The era of banking secrecy is over.”
Then, despite the fact that NONE of this does one, single thing to address the elephant in the room — $684 TRILLION in dangerous derivatives worldwide plus tens of trillions of debt still likely to go bad …
And regardless of the fact that both the World Bank and the Organization for Economic Cooperation and Development (OECD) have just warned that global production and trade will fall off the cliff this year …
Our leaders wasted no time in praising themselves for these meaningless “accomplishments.”
Our own President Obama even went so far as to call the G-20 summit the “turning point” in the global economic meltdown and praised the nations’ joint efforts as a historic step on the road to stability.
Do these assurances sound eerily familiar to you?
Do they remind you of the assurances the CEOs of Countrywide Financial, Bear Stearns and Lehman gave us just days or hours before those companies collapsed?
Or the assurances Freddie Mac’s primary regulator gave in Congressional testimony mere days before the mortgage giant imploded?
Make no mistake: The disease that triggered this crisis is still raging.
Foreclosures, bankruptcies and unemployment are still skyrocketing. And like Damocles’ sword, the hundreds of trillions in derivatives and bad debts are still hanging over the world banking industry.
If the G-20 meeting proves anything, it’s that if you’re waiting for the government to save you, you’ll be waiting until Kingdom Come.
Your ONLY hope is to take control of your own destiny … to engineer your own bailout.
And next Tuesday, we’re going to help you do just that!
This is precisely why I’ve just scheduled an historic online briefing for next Tuesday — to get you through this crisis with your wealth intact and growing.
At this unprecedented event — co-hosted by former CNN anchor David Goodnow — I’ll give you my comprehensive crisis-survival action plan: Six steps you MUST take next week to …
- Erase your debt in far less time than you may now believe possible — so you’ll have plenty of money to see your family through …
- Secure your income at your current job … discover the truth about how secure your personal paycheck is now … lock in a secure income flow — and even add additional streams of income — as long as this crisis lasts …
- Insulate your investment portfolio … your retirement nest egg … and even your kids’ or grandkids’ college savings accounts from the stock market meltdown ahead — absolutely guarantee you won’t lose a penny when stocks crash …
- Protect every dollar you have in the bank like a junkyard dog by making sure your bank is among the handful of truly safe banks in America … and guarantee yourself access to 100% of your money even in a worst-case 1930’s-style banking holiday …
- Keep a roof over your head with urgent, common sense strategies for keeping your home no matter what — or, if you prefer, for selling your home at the best possible price …
- USE this crisis to go for historic profits with investments that surge despite falling markets — and even surge BECAUSE of falling markets.
Plus, for the first time ever, I’m inviting
the NATIONAL PRESS to listen in
as I urge Washington to …
STOP THE INSANITY — NOW!
I’m inviting the Associated Press, Dow Jones and Reuters … CNN, CNBC and C-SPAN … The New York Times, The Wall Street Journal … plus every major news outlet to this unprecedented briefing.
And with your help, I’m launching a grassroots campaign to stop Washington and Wall Street before they bankrupt America!
You have my solemn promise that I will not pull a single punch!
FIRST, I will document why and how Washington is now doing everything possible to guarantee that this crisis will last far longer and inflict far more pain than it otherwise would …
SECOND, I will reveal why the failed “punish-the-innocent and bail-out-the guilty” path can only obliterate the American Dream …
THIRD, I will unveil the massive new, nationwide grassroots campaign we’re launching to help take America back from the brink.
This never-to-be-repeated briefing is free
— but you MUST REGISTER NOW to reserve your place!
Just click this link to reserve your place while there’s still time.
For a Copy of My Best Selling Book and DVD “How To Not Only Thrive But Survive In A Credit Crisis” Click Here
In the news this week, the Australian property market is proving to be extremely resilient as the G20 nations plan to inject $1 trillion into the world economy to boost liquidity and global confidence. A report released by RP Data this week shows Australian property values have grown by 1.1% in the first 2 months of 2009 after falling by a modest 3% in 2008.
We have been a lone voice in the property market advising clients that the property market is about to move. History shows us that when the broader economy cools, unemployment rises and interest rates fall. As rates fall, the first groups to be enticed back into the market are first home buyers and investors. This is exactly what is happening right now.
Yes it is true that the extra first home buyers grant is adding fuel to the fire however, it is high affordability driven by low interest rates that is the true catalyst.
The Australian property market, in particular Melbourne and Sydney, is entering the start of a new growth phase which will continue to gather momentum and peak in 2011/12.
|
|
||||||||||||||||||||||
|
Residential Property Market Back in Black as Property Values Bounce Back |
||||||||||||||||||||||
|
The resilience of Australia’s housing market has also been underpinned by our robust banking system, which CBA recently reporting that its 90-day mortgage default rate was a stunningly low 0.38 per cent.Read More |
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
Rapid-fire rate cuts set to take the brake off property |
||||||||||||||||||||||
|
In the February Edition of Australian Property Investor magazine we wrote that despite the gloomy media reports about the global economic outlook, big cuts to Australia’s official interest rate will create ideal buying conditions in 2009 and beyond. The trends are developing. Read More |
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
G20 agree to $US1 trillion global cash injection |
||||||||||||||||||||||
|
The British Prime Minister, Gordon Brown, has declared the end of the “old Washington consensus” and unveiled a unified, $US1 trillion injection for global economies Read More |
||||||||||||||||||||||
|
|
||||||||||||||||||||||
Upcoming Seminars – 2 Day Property and Finance Mastermind Seminar |
||||||||||||||||||||||
For more information and to register CLICK HERE Phone 1800 100 801 book your seat BONUS GIFT!Every person who attends the 2 Day Property and Finance Mastermind seminar receives a FREE Property Due Diligence Kit worth $295, PLUS a copy of Jamie McIntyre’s book ‘What I didn’t learn from my Real Estate Agent, but wish I had’ |
||||||||||||||||||||||
Alarming News: Bank Losses Spreading!
by Martin D. Weiss, Ph.D.
|
|
For the first time in history, U.S. banks have suffered large, ominous losses in a giant sector that, until now, they thought was solid: bets on interest rates.
In a moment, I’ll explain what this means for your savings and your stocks.
But first, here’s the alarming news: According to the fourth quarter report just released this past Friday by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives, or more than seven times their worst previous quarterly loss in that category.1
And here’s why the losses are so ominous:
Until the third quarter of last year, the banks’ losses in derivatives were almost entirely confined to credit default swaps — bets on failing companies and sinking investments.
|
|
But credit default swaps are actually a much smaller sector, representing only 7.8 percent of the total derivatives market.
Now, with these new losses in interest rate derivatives, the disease has begun to infect a sector that encompasses a whopping 82 percent of the derivatives market.2
Thus, considering their far larger volume, any threat to interest rate derivatives could be far more serious than anything we’ve seen so far.
Meanwhile, time bombs continue to explode in the credit default swaps as well, delivering another massive loss of nearly $9 billion in the fourth quarter.
And remember: These represent the aggregate total for the entire banking industry, after netting out the results of banks with profitable trading.
Why This Crisis Could Be Nearly as
Bad as the Banking Crisis of 1929-31
Yes, I know the standard argument: In 1929, bank regulation and depositor protection was primarily run by state governments. Now, with the FDIC, the OCC, and more direct Federal Reserve intervention, it’s far more centralized.
But offsetting that strength are serious weaknesses in the banking system that did not exist in the 1930s:
• In 1929, there were fewer giant banks. They controlled a smaller share of the total market. And they were generally stronger than the thousands of community banks around the country. Today, by contrast, the nation’s high-roller megabanks dominate the market.
• In 1929, derivatives were virtually nonexistent. Not today! U.S. banks alone control $200.4 trillion; and it’s precisely in this dangerous sector that the megabanks dominate the most.
|
External Sponsorship |
|
How to Profit from the “Obama Boom Sectors” In the past 6 months alone the Dow has dropped -29%. Meanwhile, 12 out of the 14 ETFs that Nathan Slaughter flagged for his ETF Authority readers back in September have seen gains of up to +402%. What’s next? Get ready … Nathan’s just uncovered four “Obama boom sectors” that are about to receive a tsunamic injection of government cash. The $3.6 trillion-plus stimulus plan should send his top ETFs soaring. Here’s how to profit today. |
|
|
According to the OCC’s Q4 2008 report, America’s top five commercial banks control 96 percent of the industry’s total derivatives, while the top 25 control 99.78 percent. In other words, for every $100 dollar of derivatives, the big banks have $99.78 … while the rest of the nation’s 7,000-plus banking institutions control a meager 22 cents!3
This is a massively dangerous concentration of risk.
The large banks are exposed to the danger that buyers will vanish, markets will suddenly become illiquid, and they’ll be unable to unload their positions without accepting wipe-out losses. Has this ever happened? Unfortunately, yes. In fact, it’s the primary reason they lost a record $3.4 billion in the last three months of 2008.
The large banks are exposed to the danger that, with exploding federal deficits and new fears of inflation, interest rates will suddenly surge, delivering a whole new round of even bigger losses in the months ahead.
Worst of all, the five biggest banks are exposed to breathtaking default risk — the danger that their trading partners could fail to make good on their gambling debts, transforming even the best winning trades into some of the worst losers.
Here’s our chart on these risks, updated to reflect the new data just released on Friday:
Specifically, at year-end 2008,
- Bank of America’s total credit exposure to derivatives was 179 percent of its risk-based capital;
- Citibank’s was 278 percent;
- JPMorgan Chase’s, 382 percent; and
- HSBC America’s, 550 percent.4
What’s excessive? The banking regulators won’t tell us. But as a rule, exposure of more than 25 percent in any one major risk area is too much, in my view.
And if you think these four banks are overexposed, wait till you see the super-high roller that the OCC has just added to its quarterly reports: Goldman Sachs.
According to the OCC, Goldman Sachs’ total credit exposure at year-end was 1,056 percent, or over ten times more than its capital.
The folks at Goldman think they’re smart, and they are. They say they can handle large risks, and usually they can. But not in a sinking global economy! And not when the exposure reaches such stratospheric extremes!
Major Impact on the Stock Market
In the 1930s, the banking crisis helped drive the economy into depression and the stock market into its worst decline of the century.
The same is happening today. Whether the nation’s big banks are bailed out by the federal government or not, the fact remains that they’re jacking up credit standards, squeezing off credit lines, and even shutting down major segments of their lending operations.
And regardless of how much lawmakers try to arm-twist banks to lend more, it’s rarely happening. With scant exceptions, bank capital has been reduced, sometimes decimated. The risk of lending has gone through the roof. And many of the more prudent borrowers don’t even want bank loans to begin with.
Those credit shortages, both acute and chronic, have a big impact on the economy and the stock market. Moreover, unlike the 1930s, banks themselves are publicly traded companies whose shares make up a substantial portion of the S&P 500.
The big lesson to be learned: Don’t pooh-pooh comparisons between today’s bear market and the deep bear market of 1929-32.
From its peak in 1929, the Dow Jones Industrials Average fell 89 percent. Compared to the Dow’s peak in 2007, that would be tantamount to a plunge of more than 12,600 points — to a low of approximately 1500, or an additional 81 percent decline from the Friday’s 7776.
Even a decline of half that magnitude would still leave the Dow well below the 5000 level, which remains our current target.
Does this preclude sharp rallies? Absolutely not! From its recent March 6 bottom to last week’s peak, the Dow has already jumped a resounding 21 percent in just 20 short days. And the rally may still not be over.
But this is nothing unusual. In the 1929-32 period, the Dow enjoyed even sharper rallies, and those rallies did nothing to end the great bear market. My father, who made a fortune shorting stocks in that period, explains it this way:
“In the 1930s, at each step down the slippery slope of the market’s decline, Washington would periodically announce some new initiative to turn things around.
“President Hoover would give a new pep talk promising ‘prosperity around the corner.’ And often, the Dow staged dramatic rallies — up 30 percent on the first round, 48 percent on the second, 23 percent on the third, and more.
“Each time, I sought to use the rallies as selling opportunities. I persuaded more of my clients to get rid of their stocks and pile up cash. I even told them to take their money out of shaky banks.”
Your approach today should be similar. Specifically,
Step 1. Keep as much as 90 percent of your money SAFE, as follows:
- For your banking needs, seek to use only institutions with a Financial Strength Rating of B+ or better. For a list, click here. Then, in the index, scroll down to item 13, “Strongest Banks and Thrifts in the U.S.”
- Make sure your deposits remain comfortably under the old FDIC insurance coverage limits of $100,000. The new $250,000 per account limit is temporary and, in my view, not something to rely on long term.
- Move the bulk of your money to Treasury bills or equivalent. You can buy them (a) directly from the U.S. Treasury Department by opening an account at TreasuryDirect, (b) through your broker, or (c) via a Treasury-only money market fund. For further instructions, click here and review sections 1 through 3 — “How to Buy Treasury Bills or Equivalent,” “How to Use Your Treasury-Only Money Fund as a Bank,” and “How to Set Up a Single, Safe Account for Nearly All Your Savings and Checking.”
Important: You may have seen some commentary from experts that “Treasuries are not safe.” But when you review their comments more carefully, you’ll probably see they’re not referring to Treasury bills, which have virtually zero price risk. They’re talking strictly about Treasury notes or bonds, which can — and probably will — suffer serious declines in their market value.
Step 2. If you missed the opportunity to greatly reduce your exposure to the stock market in 2007 or 2008, you now have another chance. And the more the market rises from here, the more you should sell.
Step 3. If you are still exposed to stock market declines, seriously consider inverse ETFs, ideal for helping you hedge against that risk. (For more background information, see my 2007 report, How to Protect Your Stock Portfolio From the Spreading Credit Crunch.)
Step 4. If you have funds you can afford to risk, seriously consider two major profit opportunities in the months ahead:
- To profit handsomely from the market’s next decline. The best time to start: When Wall Street pundits begin declaring “the bear is dead.” They’ll be wrong. But their enthusiasm can be one of the telltale signs that the latest rally is probably ending.
- To profit even more when the market hits rock bottom and you can buy some of the nation’s best companies for pennies on the dollar. The ideal time to buy: When Wall Street is convinced the world is virtually “coming to an end.” They will be wrong, again. But that kind of extreme pessimism could be one of your signals that a real recovery is about to begin.
Good luck and God bless!
Martin
1 For the banks’ $3.42 billion loss in interest rate derivatives, see OCC’s Quarterly Report on Bank Trading and Derivatives Activities Fourth Quarter 2008, table at the bottom of pdf page 17, “Cash & Derivative Revenue,” line 1. As you can see, that was 7.2 times larger than the previous record — the fourth quarter of 2004, when the nation’s banks lost $472 million in interest rate derivatives.
2 See OCC table at the bottom of pdf page 11, “Derivative Contracts by Type.” In it, the OCC reports total U.S. bank-held derivatives of $200,382 billion at year-end 2008. Among these, the single largest category is interest rate derivatives, representing $164,404 billion, or 82 percent of the total. In contrast, credit derivatives are only $15,897 billion, or 7.93 percent of the total. Within the credit derivative category, the OCC reports (page 1, fourth bullet) that nearly all — 98 percent — are credit default swaps, which have proven to be the most toxic and damaging category of derivatives so far. But they represent only 7.77 percent of all derivatives (7.93 percent x 98 percent).
3 OCC. In Table 1, pdf page 22, “Notional Amount of Derivatives Contracts.”
4 OCC, table at bottom of pdf page 13.
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Did You Like This Article Share it with your friends.
Wednesday March 25th
I have a meeting scheduled at my home with an old friend.
I’ve asked him to come over to discuss a potential capital raising for some of my companies.
Even though my companies don’t require additional capital my intention is to consider all options considering the worsening economic environment and the world recession threatening to turn into a depression and the fact most companies have been raising capital to be better positioned.
I’m interested in being prepared for the opportunity to buy out distressed companies in the different industries my companies operate in. So if I did a capital raising it would be predominantly for this purpose.
After deciding to not list on the ASX last year I’d only consider a capital raising if it was little effort and not overly costly.
Meeting is productive and it gives me food for thought.
When I’m at home I work from the front of my house overlooking the canal and it’s such an empowering environment to work from.
I decide to cancel a boy’s trip to Fraser Island bike riding due to leave on the weekend as my book distributor sends through orders for two new books they have promoted to bookstores.
And the challenge is – I’m yet to finish either of them so I set aside the next 10 days to focus on finishing them as it will take a further 3 to 5 weeks thereafter before they can be printed and send to bookstores.
The books are 70% done but even with a ghost writer it takes a lot of time to complete.
Many people ask me what do I think is going to happen with the Global Credit Crisis?
My response has been its far worse than the media and Governments realise.
I’ve been stating for over 6mths the world is heading towards a severe recession and even bet it will head into a depression.
Many people even many successful intelligent people were surprised by my comments and didn’t quite see why I’d think that.
No one knows for sure what will happen but each month since I made my predictions everything I suggested would happen is.
It’s almost like many people including Governments around the world and in Australia have been hopelessly optimistic, and almost in denial thinking somehow it would be a small downturn and then a recovery in later 2009.
I’ve watched in dismay as I see how foolish these people have been and now how surprised they are, as things start to get worse and they slowly start to figure out.
“Houston we have a problem”
I mean the Australian politicians are still trying to argue we aren’t in a recession and we may avoid a recession.
When we are definitely in a recession, and will do well to avoid a depression, as majority of the world economy do go into depression.
Just last week whilst in America leading economists admitted the US is now a 30% chance of going into a depression.
These comments would have been scoffed at 6 mths ago just like many people scoffed at my view.
Some people ask what the difference between a recession and a depression is.
The best answer I heard is a recession is when your neighbour loses his job and a depression is when you lose your job.
Seriously the exact definitions vary.
What people must understand is Governments don’t wish to cause panic and thus don’t tell people how bad it is, and how bad it will be, and also often they aren’t smart enough to know.
What should you do?
I’d suggest financial intelligence is, you should slash unnecessary spending and built up your savings. Eliminate and any bad debt or excessive debt.
Go to work on improving your job related skills and financial education to be prepared to take advantage of opportunity.
Actually a severe recession or depression has been the catalyst for many to create a lot of wealth.
Innovate if you’re a business owner and cut overheads early and hard and fast
I know it’s not a fun thing to do but if companies don’t they won’t be around and thus all staff will lose their jobs so it’s best to shed some to save the rest.
And remember we don’t want to ignore the reality of the world economy.
We want to acknowledge it and then focus on how to I create abundance amongst the world recession, as there is still a massive amount of wealth around.
Wealth is never lost in a financial crisis but merely transferred.
The financially educated and the ones who can see into the future even 6 mths into the future can be better prepared than those who are on the Titanic while its sinking. They still don’t realise there is a serious problem because the authorities don’t wish to create a panic and they should have already got off into a lifeboat before it’s to late.
The above advice conflicts with what Governments want us to do. They want us to spend not save to boost the economy. In fact they will borrow billions and throw the money at us to get us to spend. And it’s this paradox that explains why we are in this mess in the first place.
Growth at all costs, especially by easy credit and over leveraging and spending more then you earn to boost the economy is why the growth in the past hasn’t been sustainable.
My advice is to see what’s going to happen and act now.
I’ll be covering more at the 21st Century 4 day seminars so get yourself to one.
If you’re already a 21st Century Member you can attend as many times as you wish for free.
if your not a Member then become one now and get prepared for the great financial challenges ahead and learn how to not only survive but thrive in the Global Credit Crisis Visit www.21stCenturyacademy.com
Regards Jamie McIntyre
CEO 21st Century Education
To view my blog visit www.jamiemcintyre.com
For a copy of my best Selling Book and DVD for free visit www.21stcenturyacademy.com
To visit any of the 21st Century Group of Companies go to www.21stcenturyeducation.com.au
