How Close Are We To A New Financial Meltdown? Ans. VERY

As too many Americans continue to be distracted by the bread and circuses of the modern corporo-media, some of us are looking seriously at the financial situation and whether, indeed, a repeat of the 2007-08 financial meltdown and recession may soon be upon us - possibly next year.

This isn't flighty crap like 'The Interview' and how idiots are "doing their patriotic duty" by watching that garbage (Can you also do your patriotic duty by eating dog shit  bearing the name 'Kim Jong-On'?) but rather a reality check that might be worthwhile for anyone with money stashed in 401ks.

Let's first look at some of the signs - which also preceded the earlier credit crisis:

- An inflated stock market well into bubble territory thanks to the Federal Reserve's continued cheap money infusions -via quantitative easing -  like crack to the Wall Street mob.

- Housing regulators have cut down payments to 3 percent in many cases, increasing the propensity for moderate to low income people to take out mortgages they may not be able to afford.

- A sub-prime loan enclave has materialized once more only now lodged in auto loans as opposed to home loans. The credit rating agency Standard and Poor's expects lenders to make no less than $21 billion in sub-prime auto loans this year, up from $20b last year and possibly as high as $23b next year.

- The last security backup, to protect against swaps (risky derivatives - used to 'bet the farm' by banks), was meanwhile removed by congress in the passage of a spending bill ending the last session.  Before this reckless move (by a Kansas Repug who stuck it into the bill at the last minute), Dodd-Frank regulations forced banks to separate their federally insured banks from their riskiest trading operations (which deal in derivatives). Now, they're all mixed together.

- Rising global debt imposes an added instability.  The Institute of International Finance, an industry research group, warned ten days ago that global debt (excluding debt held by banks), had reached a record 244 percent of worldwide economic output. This is now also propelled by the collapse in oil prices which means lenders won't receive payments from assorted oil operations that can no longer fund themselves and make good on their loans.

All the above in concert represent the perfect storm. All of them together create what is likely a 95% probability that the system will implode given one unforeseeable "X-event" (see the book by the same name, actually 'X-Events' - the chapters on financial catastrophe).

Yet, had the Wall Street gift amendment not been stuck into the spending bill, the probability might well be lower than 75 percent - given that despite the assorted instability agents, one still needed the swaps rule bailout to actually pose a serious systemic threat.

Incredibly, defenders of the amendment say they needed it to "preserve their ability to help farmers and businesses hedge their bets" - which is poppycock. The only remaining farmers of any note in this country today are the big agri-business farms, and the businesses which want to "hedge" their bets you don't want to know about. It's all a ruse to enable the banks to play with your hard earned money - bad enough when they're barely delivering 0.05% in typical passbook savings accounts.

Meanwhile, Thomas Hoenig, Vice-Chairman of the FDIC, has called the repeal "illogical", since the 2008 crisis "exposed the economic consequences of conducting derivatives trading in taxpayer-insured banks,"

One last heads up ought to scare the bejeezus out of any simpleton who feels extra -complacent: The so-called "too big to fail" banks that all needed a taxpayer bailout in 2008, now loom even larger than before the earlier crisis.  The nation's five biggest banks currently account for 44 percent of bank assets, up from 38 percent in 2007.

Einstein once defined insanity as doing the same thing over and over while expecting a different result. The banks are now set up, along with the nation - thanks to a reckless amendment - to test that definition to its limits at least in a first powerful iteration (there may be no resources left for later ones if this crash is as bad as I suspect).

And if you have money anywhere in the system, you had better be paying attention! In the words of Simon Johnson, Professor of global economics at MIT:

'We are on a very dangerous trajectory".

Barbados' Bond Position worsens...What's Next?

One year ago (Feb. 18 post, 'Is Barbados Soon to go the way of Greece') I noted that Barbados bonds were downgraded to junk by Moody's six odd months after Standard and Poor's did the same. I added that these events were disturbing in the extreme, given the island nation had been on a downward trend since I last visited in 2010.

The downgrade lowered the country’s foreign and local currency bond ratings to Ba1 from Baa3. (note: a junk bond, is defined as one that is “below investment grade” due to a heightened risk of default, is any bond with a rating of Ba1/BB+ or lower, according to the system used by Moody’s.) Moody’s  accompanying statement held that Barbados’ outlook remained negative, and cited two factors in the downgrade: Barbados’ “continuing lackluster economic performance,” and “ongoing deterioration in the government’s debt metrics.”

Adding to the concerns, was the fact that Barbados’ economy grew by 0.6 percent in 2011 and 0.2 percent through September of 2012, well below expectations. Meanwhile, The United Nations Economic Commission for Latin America  projected  the country’s GDP to improve in 2013 with a rate of 1 percent . Much of this obviously can be traced to the U.S. recession.

SO what has transpired in the interim? Barely three months ago (Nov. 5) I cited a report in the Barbados NATION (THREE DEVALUATION OPTIONS)  that reported on three options (internal, external and fiscal) for devaluation presented by the Inter-American Development Bank (IDB). The two with the most heft were "internal" and fiscal"- meaning across the board cuts in civil servants' pay (or numbers) or actual currency devaluation.

Earlier last month we learned for the first time of hundreds having been laid off in assorted banks, among whom was my niece Trudi. This followed an earlier government announcement on Friday 13 December by the government of Barbados that it will lay-off over 3,000 public servants in January as a first step in cutting back government expenditure and reducing national demand for goods and services. The announcement rattled other Caribbean Community (CARICOM) members. Since then the Bim government has played it coy and mustered a waiting game, though all eyes remain fixed on further actions. Make no mistake that such a cut - representing more than eight percent of civil service manpower - would be catastrophic from many perspectives.

But it is clear, from an even more recent report out of the Barbados NATION  by Tony Best (Jan. 28) that something will have to be done, and if it isn't rendering civil servants redundant it likely will have to be currency devaluation. Both wifey and I dread this last step because it would mean a severe cut in our retirement income, depending on the magnitude of devaluation.  For example, a 100% devaluation would cut our income nearly one third. (100% devaluation would mean $1 BDS would be equal to $4 U.S. instead of $2 U.S. as is currently the case)

In the latest report (ibid.)  it appears the lowering of Barbados' bond quality in 2013 led the island's cognoscenti to dismiss the signs and portents  - basically resulting in ignoring  Wall Street’s call to action. Since then, Barbados’ bonds have declined to a current BB rating with a negative outlook .  This was described by Richard Francis, S&P’s lead analyst on Barbados, as three notches below investment grade, the lowest it has been in almost two decades. What’s worrisome is his warning that the country stands a one-in-three chance of seeing that rating downgraded again.

If it is, it could well be 'curtains' for those of us dreading massive layoffs in Bim (which will lower its life quality drastically, as well as probably increase crime rates) or currency devaluation which could have many of the same effects.  To underscore this Francis added that while Barbados’ credit rating “isn’t among the lowest of the low”  any further decline would make a bad situation worse and eventually hit Barbados in the pocketbook.

Best emphasized that "the reality should be clear" and added ominously:


"Chris Sinckler, Minister of Finance, went to the financial markets last year to borrow money to prop up declining foreign reserves but couldn’t get an acceptable offer and had to withdraw the bonds largely because of the credit rating.

Obviously, Wall Street’s message had reached potential bond investors and it was that the risk of Barbados’ defaulting on its bonds had increased and to get the money it needed, the island had to pay a “premium”. It’s that straightforward. There is a nexus between the rating, an indication of risk, and the interest rate a country pays".


Best went on to report that eventually Barbados obtained a Credit Suisse loan but the terms were horrendous. According to Aaron Freedman, a Moody's analyst, the "terms are of concern" - which is really an understatement.

How bad? The Moody's analyst cited "LIBOR plus 700 (basis points" - or essentially yields implying Bim's gov't is trading in the "secondary market".  LIBOR denotes the interbank interest rate - what banks allow each other- and 700 basis points is 7 percent on top of that.  The Moody's analyst was further quoted as saying:

“Obviously there is a significant premium risk that the Government is paying. That has direct fiscal implications. If your interest expense rises, it makes it that much more difficult to achieve fiscal consolidation. Interest expense already consumes a significant portion of the Budget. We were expecting it would be close to 30 per cent of Government revenues, which is one of the highest levels we have seen anywhere.”

Best observed that the analyst's point was underscored by a headline in a Bloomberg News story: Barbados Bonds At Record Yields As IMF [International Monetary Fund] Urges Restraint:

“Yields on Barbados’ 2021 dollar bonds were at a record 9.58 per cent at 12:16 p.m. New York Time [December 20[ and were up 33 basis points, or 0.03 percentage point, this week. The 2022 bonds trade at 9.61 per cent after rising to a record 9.64 per cent on December 18.”
 

Best adds that the decline in foreign reserves is the major reason for the record-high interest rates Barbados is paying on its bonds. Such a decline, which also occurred before the IMF intervention in 1991 (after Barbados attempted to emulate the Reagan tax cuts in 1986) essentially was accelerated when people with monetary interests in Bim (but living in the U.S.) began pulling money out - or existing residents tried to get money into U.S. banks to escape possible devaluation. But even before this, foreign reserves were dropping because of the island's continued massive importation, e.g. of food stuffs, as well as automobiles.

 I pointed such problems out in a blog back in May, 2010 ('Will Barbados Fall to the Sovereign Debt Crisis', Pts. 1 and 2). I wrote:

 "In terms of food, nearly all has to be imported and fuel costs add to the import costs. Bajans do grow a lot of their own, e.g. chickens for example, but it can't meet the island's demands. Autos, meanwhile,  clog the island's narrow highways and biways. Each also must be imported, as does petrol, and the costs of both are eating up precious capital"

What must be done? Best's words are stark and unforgiving but probably spot-on:


"Barbados has to take tougher action in order to stabilize its finances and boost its credibility. So, despite the statements by unions about layoffs and the delay in accelerating the layoff by two weeks, Government must go ahead with its plans."

Carl Rose, a managing director of Oppenheimer in Atlanta, quoted in Tony Best's piece, observed:
 

"The market's signal is clear: Barbados must implement its adjustment report quickly and forcefully.”

Tony's parting words?


"The Barbados Workers’ Union and National Union of Public Workers may shout and scream but more painful cuts, even beyond the initial 3 000 tranche of layoffs, are needed to protect the currency, cut the deficit and reduce the debt."

Let's hope the island's leaders, and its people, do the right thing to protect the country ....and soon!
  

Parsing the S and P Credit Downgrade

So now the news is in: Standard and Poor's, the same credit rating monarchs that mis-rated credit default swaps in 2007-08 (giving them 'AAA' instead of BBC) have "downgraded" the U.S. credit rating from AAA to AA. In other words, we're now (in their terms) on the level of Slovenia and Luxembourg in terms of credit worthiness. What does this all mean, if anything?

In practical terms there's been little impact. Readers will want to note that two of the other big three rating agencies did not downgrade the U.S.'s credit rating when they made their own calls in recent days. (Though Moody's did assign a "negative outlook') In objective, quantitative terms (and weighting all three ratings firms equal) it translates to a credit downgrade by 1/3, or maybe a rating of:

A A (2A/3)


Hence, this downgrade may not immediately change anything and U.S. Treasurys will still be desirable in an uncertain world. (I'd definitely warrant they'd be preferable to anything Slovenia or Luxembourg had to offer!). Bottom line here: the U.S. retains the best reputation as a place to park capital, buy securities or invest in government debt.

Why the negative overtones? Blame most of it on the insane Tea Party radicals of the Repuke contingent, who could have easily agreed to just pass the debt ceiling increase cleanly - with no fanfare- and not make such a noise. Especially, not insist on using the debt ceiling as leverage to parlay their ideology into policy decisions that wouldn't have a rat's ass of a chance of passing in legislation. Not with the TEEpee brand claiming only one half of congress.

At the same time, Obama shares part of the blame for this, make no mistake. Standard and Poor's, recall, had asked for not only a clean debt ceiling increase but also at least $4 trillion delivered in revenue or cuts. This lump sum could have been delivered from December last year, had Obama and the Dems only disallowed the ghastly extension of the Zombie Bush tax cuts! I mean, taking out ALL of them!

In addition, that didn't require any active legislative moves, merely passively allowing them ALL to expire! (Middle class and for the richest). But, instead of acting with simplicity and delivering $4 trillion in revenues, they acted with political calculation and manipulation - defending the middle class cuts (which comprised over 3/4 of the total!) and attacking those for the wealthiest.

And, instead of crafting a solid narrative on WHY all these tax cuts needed to expire (i.e. that if not expired they'd threaten social programs down the road if spending cuts were called for to make up the deficit difference), they wimped out and allowed the repukes to seize control of the language and debate as they usually do. It was sickening to behold and one of the biggest reasons why Obama could never be counted as a true Socialist. A true Socialist would have allowed ALL Bush tax cuts to sunset for the common welfare!

In addition, had they an ounce of gumption, they could have included the debt ceiling raise with the tax cuts issue (even if they only passed the middle class extension).

Why did the Dems and Obama punk out again? The ostensible reason given was to "protect" 13 million unemployed from losing their benefits - which the repugs had tied to the deal: no tax cuts, no unemployment benefits extensions. The problem is, that while the 13 million were granted their extensions of benefits, it was at the cost of more than 43 million who now stand to suffer with this odious debt ceiling deal! (Via Medicare, Tri-care and Social Security cuts). Evidently, the Spock-like Obama had never heard of Spock's first maxim (enunciated at the end of ST III):

"The needs of the many outweigh the needs of the few, or the one."

So, having yielded with the Bush tax cuts, and not even tied the debt ceiling increase to them THEN, Obama and his Dems set themselves up as hostages to be taken in the next two rounds, which occured with the federal budget deal in March, then the Aug. 2 fiasco that will ensure poor economic growth for at least 40 quarters.

I ask you, folks, is it any wonder I am a Democratic Socialist as opposed to a Democrat? I ceased believing in the Democrats long ago, though I did vote for Clinton, as I did Obama - because the alternatives were simply too much to take.(It may be true all presidents end up as 'puppets' but why add toxic puppets to the mix?) That doesn't mean I liked the choices! What happened to the Dems? Why did they mutate into such perpetual wusses?

I ascribe most of it to the infusion of corporate cash. According to Michael Tomasky, writing in The American Prospect the Dems eschewed political point-making and "hard nosed", no-holds barred political partisanship sometime in the early 70s. They replaced it with discussing fact-based policy points, which appeal to "reason" and "temperance" but do little or nothing for core partisans. The very people Dems need to get out to the polls each mid-term election.

Tomasky attributes this substitution of "rational" policy talk for good, old-style politicking to a loss of identity that particularly accelerated with the onset of the Reagan plague years. Those years, which saw the rise of the Democratic Leadership Council (DLC, or what I call "corporate Dems") meant the Dem party would eschew its working class roots henceforth for brownie points and campaign contributions (not to mention lobbying perks)from big Business, the corporate and investor classes. Yeah, they might win a few elections, but how does one say it? "They lost the war".

The problem was that, in making this conscious switch of political emphasis, the Dems lost the ability to really fight verbally. Corporate whoredom and being in Neo-liberal thrall inevitably forced on them a 'back-off' mode, and pussification priority. Lest they upset the hands that fed them! No wonder they are constantly one-upped by Repub PR and spin machines, not to mention tea bagger gangsters who defy the Dems to stop them.

Factored into this was the diminution and loss of an overarching and motivating vision which keeps all the Reeps energized and going to the polls, though they may differ on various platform matters and how to implement them (like 'faith-based' charities).

As Tomasky notes(ibid.), the Reeps are unified around a central idea which can be expressed in both positive and negative language: that they are the conservators of liberty and morality, and that liberals are sending the country to hell in overdrive. Whatever Republicans do or don't believe they believe in those two hypotheses. "This unity gives them their passion." Indeed. But the question is what gives dem voters their passion? The answer is nothing, because they don't have any. Cycle after cycle - since the Carter era- they've beheld their visions and ideals debased on the altar of Neo-liberal tripe. Some perspective on this is provided by Robert McChesney in his excellent book, The Problem of the Media, Monthly Review Press, 2004, p. 49:

With the election of Ronald Reagan, the neoliberal movement had commenced. Neoliberal ideology became hegemonic not only among Republicans but also in the Democratic Party of Bill Clinton, Al Gore, and Joseph Liebermann. Differences remained on timing and specifics, but on core issues both parties agreed that business was the rightful ruler over society.

And of course, Obama has admitted to his worship of the "free Market" as well, and hence is another Neo-liberal. Little wonder then he fawns so much over Ronnie Reagan - the character who actually (by his massive military spending and tax cuts) converted this nation into a global debtor and deadbeat.

Before the next election, with the economic signs now portending a moribund future for this country - since spending cuts were chosen over job growth - the Dems and their Neo-liberal collaborators may well wish to ponder these words of JFK:


"For the Democratic Party is not a collection of diverse interests brought together only to win elections. We are united instead by a common history and heritage--by a respect for the deeds of the past and a recognition of the needs of the future." - John F. Kennedy

Common HISTORY and HERITAGE? Deeds of the past? Needs of the future? Any memory there?

Didn't think so!

The Meaning of the S&P Projected Downgrade

As most people who follow finance are aware, Standard & Poor's, one of the primo credit rating agencies, issued a projected negative credit rating for the U.S. on Monday. Specifically, it said there was a "one in three chance" it would lower the Treasury Department's current AAA rating (the highest, and the U.S. is one of 17 nations sporting it) on U.S. debt in the next two years.

To more fix ideas on what that means, currently the AAA rating allows the U.S. to borrow each dollar at 6.5 cents interest on the dollar. By comparison, Greece, with a BB rating, must shell out a full 20 cents for every dollar it borrows. In other words, it can make an enormous difference, especially to those who depend upon loans, which would include most college students, as well as small business owners and potential home buyers. Suffice it to say, a degradation of rating to even AA would be horrendous and millions would suffer.

How serious should this warning be taken? First, let's understand that this is one of the same credit ratings agencies (along with Moody's) that in the runup to the 2008 financial meltdown conferred inflated ratings on securities known as "collateral debt obligations" that were laden not only with subprime mortgages (that even Goldman Sachs bet against) but also toxic derivatives known as "credit default swaps". Normally, such crud (which in earlier decades bond traders called "Toxic waste") would have been graded at junk level, BB or lower. But what did the genii at Standard and Poor's do? They awarded AAA ratings! This is supposed to only be associated with the safest securities, and hence was a green light for people to buy, including state pension funds (now paying the price for their beliefs) as well as private plans.

So given that this credit agency 'fubared' out the wazoo with those securities' credit ratings, why on Earth should we take them with any level of seriousness now? As Chris Hayes said on MSNBC's 'Morning Joe' today, it's a joke. They lack credibility and by all means the Dems shouldn't be browbeaten by them into any vast spending cut formula that punishes the most vulnerable, as already occurred in Greece. (And we saw how many riots and burning cars erupted there!)

The White House so far appears to be following Hayes' perceptions and dismissed the rating agency's move as a "political gesture" that failed to recognize America's history of political opponents coming together in times of crisis. But will they? That remains to be seen, and despite the evidence that the Tea Party's influence is waning (they're now getting crowds of 200-300 compared to 9-20,000 last year), many Republicans are still using them as a drum with which to beat Dems over the head toward some spending cut frenzy that will leave Granma eating cat food and kibbles.

And we know that 99% of the problem is totally ideological! That is, the Republicans' insistence in pursuing a theory (trickle down) that hasn't been shown to work, period! Even the Reagan former budget director David Stockman has renounced supply side tax cutting bunkum in numerous forums, asserting that raising revenue is just as critical or moreso.

Esteemed Financial Times columnist Clive Crook ('Tax Reform Can Yet Save America', FT, 4/ 18, p. 9) portrayed the purblind GOP attitude in stark and uncompromising terms
:
"Republicans need to admit that maintaining adequate public provision as the population ages requires, as a matter of arithmetical necessity, more revenues. The long term borrowing cannot be solved by cutting spending alone."

Indeed, and I would only further paraphrase Crook's excellent take by stating that: as a population INCREASES, maintaining adequate public provisions requires more revenue. In other words, you simply cannot provide the same level of public support for a population of 310 million that you could for 215 or 250 million! This ought to be common sense, but evidently not to Repugs. Obviously, as a population expands it requires more services, more hospitals, more doctors, more health care delivery, more roads, more schools....more everything! It is stupidity of the basest caliber to try to argue that one must cut government spending to 1990s levels, when the population is 20% more now! Besides, there is a constitutional injunction to see to the population's basic interests and needs, and that is in the Preamble: "to promote the GENERAL welfare".

That doesn't mean military welfare or corporate welfare, but that welfare which benefits the commonweal - including hospitals, roads and schools - which by the way, also means more teachers!

Whether the Repugs get it will be on the national and global center stage by the middle of next month when the nation reaches the $14.3 trillion debt ceiling. Either more funding must be approved then, or the nation goes into default, and the government for all intents will not even be able to send out a single check, whether for disability, Social Security or VA benefits. Do the Repukes really want to test the nation's patience by going to the wall like they did in the budget debate? I hope not, but then with the reptiles you never know! Apparently, so worried is the U.S. Chamber of Commerce that even they've been working hard to persuade the elephant party not to hold up any debt ceiling votes or legislation. They probably also asked the Republicans to put a leash on Teepees!

In that regard, Standard and Poor's warning does have some meaning for the rest of the world and in particular the bond pirates, traders and credit markets. If the U.S. defaults then, the Standard and Poor's negative projection will perversely be seen to be validated.....by default!