STARVE THE ECONOMIC BEAST PART I / SEEKING ALPHA ( RECOMMENDED READING )

Starve the Economic Beast, Part 1

by: James Quinn

June 25, 2009

“Rather than love, than money, than fame, give me truth.” -- Henry David Thoreau


Time is running out. The public relations campaign being conducted by the Obama administration, Federal Reserve and nation’s largest banks is beginning to fail. The lies, half-truths, and cover-up regarding the solvency of the largest banks in the U.S. will be revealed as reality interrupts their master plan. The politicians and government bureaucrats know that 80% of the population don’t understand or care about economic issues. The plan is insidious, systematic and deceptively simple:

Part 1 of the plan was for the Federal Reserve to print billions of dollars and lend this money to the insolvent banks in return for worthless toxic assets as collateral. They have not revealed which banks received the money or the “assets” that have been hidden on the Federal Reserve balance sheet.

Part 2 of the plan was to reduce short term interest to 0% so that the insolvent banks could borrow money from the Fed for free and then lend it out at 6% or higher to consumers and businesses. Therefore, risk averse senior citizens like my mother are receiving 0.5% on their money market funds, while the horribly run insolvent banks are being propped up and enriched by the Fed. With billions in TARP funds, the FASB no longer requiring mark to market accounting, and free money from the Fed, the large banks reported fake profits in the 1st Quarter of 2009.

Part 3 of the plan was the fake stress test conducted by Tim Geithner, his Treasury Department, and the Federal Reserve. The entire stress test was a publicity stunt conducted to provide a false sense of confidence in the largest banks so they could fool investors into pouring billions of new capital into their bankrupt banks. The assumptions used in the stress test were stress free. Unemployment is already higher than the worst case scenario. The stress test time frame ended in 2010. The next wave of mortgage resets and foreclosures will hit in 2011 and 2012. William Black, former bank regulator and author of the book The Best Way to Rob a Bank Is to Own One, concluded:

There were no real examinations. Banks continue to overstate asset quality. The bankers pressured Congress, which extorted the Financial Accounting Standards Board, which gutted the accounting rules on loss recognition. Because there were no real examinations, there were no real stress tests.

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Even the Congressionally-appointed panel overseeing the Troubled Asset Relief Program concluded: “unanswered questions about the details of the tests, make it impossible to replicate the tests to determine how robust they are or to vary the assumptions to see whether different projections might yield very different results."

Part 4 of the plan had billions in TARP funds going to the likes of GMAC, Capital One (COF) and American Express (AXP) so they would lend it out to over-indebted consumers and jump start the economy. The $787 billion porkulus plan has dumped wads of dollar bills into the laps of government bureaucrats and unions throughout the country with hopes that something productive might happen. Senator Coburn of Oklahoma issued a report last week regarding stimulus spending. Millions of dollars are going toward bicycle lockers, bike paths, walking trails and skate parks. One town in North Carolina is using stimulus funds to hire an administrator whose job will be to procure more stimulus funds. You judge whether these projects will jump start our moribund economy:

- Optima Lake is in line to receive $1.15 million in federal stimulus money to construct a new guardrail for a lake that does not exist. The guardrail is needed for “public safety,” says the Army Corps of Engineers, but there is not much of the public around to protect. Because the lake has never filled with water it is all but useless to potential visitors.
- The repair of 37 rural bridges in Wisconsin that average little more than 500 vehicles apiece each day - with one carrying no more than 10 cars a day. The projects jumped over larger, urban repairs because they were "shovel ready." $840,000 to repair a bridge in Portage County, Wis., that carries 260 vehicles a day largely to a backwater saloon and a country club.
- $3.4 million Florida Department of Transportation project for an "eco-passage" - an underground wildlife road crossing for turtles and other wildlife in Lake Jackson, Fla., along U.S. 27.
- A Bureau of Land Management project to study the impact wind farms have on the sage grouse population in Oregon. The proposal calls for hiring people to tag sage grouse in areas where wind farms may be built, to help determine where turbines could be located.
- $1.5 million in stimulus money for a $5 million new wastewater treatment plant in Perkins, Okla. The stimulus money came with strings that will increase the costs. With a new total cost of $7.2 million, the city will be forced to borrow money and, as a result, utility taxes have increased by 60 percent this year.
- Grants and loans totaling $1.3 million to Solon Township in Leelanau County, Mich., to help pay for construction of a wastewater treatment plant. Local opposition killed the project. The money will now be used for a future treatment plant, for which there is no plan and questionable local support.
- Road signs costing $300 each, being placed at construction sites to alert motorists that the project is being paid for by the stimulus money. Transportation Department spokesman Jill Zuckman said each state decides whether to use stimulus money for signs, and the cost would vary in each state.
- A $3 million project to repair taxiways at Hanscom Field, Mass., which Coburn said is for corporate jets. Richard Walsh, a spokesman for the independent state agency that runs the airport, Massport, said only 18 percent of the traffic at the airport is for corporate jets. Most of the use, 70 percent cent, is for flight students, he said.
- Montana's state-run liquor warehouse, to receive $2.2 million in stimulus cash to install skylights. The project is part of the $27.7 million the state has been awarded for energy programs.

If Only the Dead Could be Stimulated

James Hagner: It shocked me and I laughed all at the same time and though how in the world could they do this.

TV Commentator: 83 year old James Hagner says he isn’t too big on surprises, but he got quite a big one when he visited his mailbox last Thursday.

James Hagner: I got a check for my mother. She has been dead 43 years, and I got a check for my mother. The $250 stimulus check in the mail.

TV Commentator: As part of President Obama’s American Recovery and Reinstatement act, the Social Security Administration somehow mailed a $250 stimulus check to his mother Rose, who passed away Memorial Day 1967.

James Hagner: I didn’t even expect to get one for myself, but to get one for my mother from 43 years ago…

Interviewer: kind of strange, right?

James Hagner: Yes sir.

TV Commentator: We contacted Social Security representatives over the phone and they told us there is a good explanation here. First of all, Social Security has mailed or is mailing out 52 million checks, and of those 8,000 to 10,000 have been sent to people who are deceased. Social Security blames the error on the strict mid-June deadline for mailing out all the checks which didn’t leave officials much time to clean up all their records. So that means there are 8 to 10 thousand James Hagners all over the country getting the same surprise in the mail box. The thing is what do you do with the check? Social Security kindly asks that you return it. As far as Hagner is concerned, he would like to frame it and hang it on a wall.

James Hagner: I just want to keep it as a souvenir. That’s all. I will never cash it.

This is just another quaint funny story about our incompetent government working to improve our lives. They sent $2.5 million to dead people. Social Security’s records haven’t been “cleaned up” for people who died before we put a man on the moon? Picture the scene when a government bureaucrat explains to your family that taking out your liver instead of your appendix was due to some computer system glitch. Once the government puts its efficiency expertise gained from running the IRS, Social Security, the Postal Service, and Amtrak to work on your healthcare, the fun will really begin. It will make dealing with Verizon’s “customer service” seem like a treat.

This is only the tip of the iceberg. A report by Deloitte Touche last week said that about $500 billion of the $787 billion in stimulus will be spent through the "traditional (government) procurement network." Using past performance as a gauge, Deloitte Touche predicted as much as $50 billion will end up being fraudulently spent — or 10% of the total. The entire United States government outlays in 1952 totaled less than $50 billion. Now, $50 billion is an acceptable fraud write-off.

Reality Bites

“Society in every state is a blessing, but government, even in its best stage, is but a necessary evil; in its worst state an intolerable one.” Thomas Paine

I’ve laid out the master plan of our “leaders”. The only problem is that facts are about to get in the way of a good yarn. Below is a chart that tells a disturbing truth for the largest banks in the U.S. The government supported banks have only written off $1.3 trillion thus far. Based on the realistic estimates from Nouriel Roubini and T2 Partners, there is only $2.3 trillion more write-offs to go for our glorious banking behemoths. The 19 stress tested banks were able to convince foolish investors to drop another $75 billion of capital onto their balance sheets after the stress test fraud publicity campaign. This $75 billion only comes up 30 times short of covering $2.3 trillion in future losses. As Mr. Roubini recently reported we need a little of Joseph Schumpeter’s creative destruction.

Once again, the question will be how the near-insolvent banks can be kept afloat, to avoid systemic risk. But the question we really should be asking is: why keep insolvent banks afloat? We believe there is no convincing answer; we should instead find ways to manage the systemic risk of bank failures. Why did creditors not prevent the banks taking excessive risks before the crisis hit? For the very same reason creditors are getting a free pass now: they expected to be bailed out. For capitalism to move forward, it is time for a little orderly creative destruction.

The Obama administration has chosen to go with a plan centered around creative accounting, creative financing, and a creative public relations campaign versus the system correcting creative destruction. This is a plan of imminent destruction of our economic system.

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The country has lost jobs in every month since December 2007. The number of unemployed has doubled over this time to approaching 15 million people. While 7 million people have lost their jobs in the private sector, government has increased their hiring by 600,000, from 21 million to 21.6 million. We can all be thankful there are 600,000 more bureaucrats increasing the efficiency of our government. Despite happy talk by CNBC pundits, investment managers, and government officials another 2 million people will lose their jobs this year. The unemployment rate will approach 11% by the end of 2009. Last week the “business correspondents” at CNBC proclaimed that the reduction in continuing unemployment claims was another green shoot. If they had just scratched the surface like Barry Ritholtz, they would have found the truth.

The ‘exhaustion rate’ for jobless benefits reveals that people are not leaving the pool of continuing unemployment claims because they are getting new jobs; Rather, they are leaving because they have exhausted their benefits. They are now unemployed AND broke.


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The continuing deterioration in employment, the tsunami of Alt-A mortgage resets coming in 2010 and 2011, home prices declining another 10% to 15%, doubling in oil prices since January, billions in credit card write-offs in the pipeline and the progressing collapse of the commercial real estate market will throw cold water on the Obama master plan to save the banks and the economy. The sooner this occurs, the better. Their solution of trying to borrow and spend our way out of debt was flawed and asinine from the start. If Americans are ready to accept the inevitable pain of deleveraging today, we can take back the country from the banking crime syndicate and the politicians that are in their back pocket.