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Generational Dynamics Web Log for 8-Jan-2011
8-Jan-11 News -- Bernanke emphatically rejects bailing out states and cities

Web Log - January, 2011

8-Jan-11 News -- Bernanke emphatically rejects bailing out states and cities

First anniversary of the daily news summary

Here's what I wrote exactly one year ago:

"Dear Reader, I'm going to try this for a while and see if it works for me. Ideally I'll produce a news summary every day, but that's probably unrealistic. I'll try to do it as often as possible.
Every day I come across one or more stories that I believe are very important (or just amusing). Often web site readers refer such articles to me. But my work schedule keeps me from writing a full article on them. The news summary will briefly cover stories that I believe are of international geopolitical or financial significance, and will provide a link to one or more articles."

Much to my own amazement, I've only missed five days or so in the last year, even though I do this in addition to my full time job. (By that, I'm referring to my software engineering job that pays me a salary, as opposed to this full time job that pays nothing -- except for the donations that I receive from those of you who are kind enough to provide them.) Each evening as I write an article, I ask myself why the hell I keep doing this, and think it's about time to quit. But then I get the article written and posted, and it (hopefully) looks good, and then I decide that it was all worth it, for at least another day.

I should mention that even after all this time, I still respond to most e-mail and comment questions that I receive. However, I'm very often a few days or weeks behind, but in almost all cases I do respond (eventually). By the way, I give a higher priority to queries posted in the Generational Dynamics forum, since in that case the response is seen by more people.

I know that I've helped a lot of people, because many people have written to me thanking me for this service, which is entirely altruistic. The nation and the world are entering a truly terrible time, and I always say that you should treasure the time you have left, and use the time to prepare yourself, your family, your community and your nation. The purpose of this web site is to help you prepare, and I'm pleased to be able to provide that help.

Happy new year to everyone.

Bernanke emphatically rejects bailing out states and cities

Federal Reserve Chairman Ben Bernanke was appearing on Friday before the Senate Budget Committee, and was asked whether the Fed could provide money through quantitative easing to bail out state and municipal budgets.

It's a serious problem. States are collectively forecasting a budget gap of an enormous $113 billion for the fiscal year starting in July, according to Reuters.

I've heard several financial analysts and pundits say that there will have to be many municipal bankruptcies this year, especially in California. There's apparently a severe political compulsion that's going to lead to these bankruptcies.

The problem in many municipalities is that they're bound by enormous union contracts that demand cadillac salaries and cadillac benefits far in excess of corresponding salaries and benefits in the private sector. Most unions have been playing hardball and refusing to agree to any cuts whatsoever, under the assumption that either the state or the federal government will be forced to provide a bailout.

That's why so many municipalities are considering bankruptcies. The money to pay these salaries and benefits simply does not exist, and cannot be raised. By going into bankruptcy court, a municipality can ask the judge modify or eliminate the union contracts to affordable levels.

Naturally, this becomes a big issue for the Democrats in Congress, who are politically pressured to provide bailouts to the cities and states. The Reuters article referenced above points out that last year's $814 stimulus plan included the largest transfer of federal funds to states in U.S. history. There is little appetite to repeat this.

So Democratic Senators on Friday asked Bernanke if the Fed could bail out the states and municipalities. His response:

"They should not expect loans from the Fed. It's going to be difficult, but on the other hand there is some improvement in the economy and tax revenues have actually picked up. ...
"I don't think the Federal Reserve has the authority. And I don't think it would be appropriate for us to do that. This is something that would take place over a period of time ... And there'd be plenty of time, I think, for Congress and for the state legislature to look at alternative solutions."

Almost all Republicans and many Democrats are coming out against any fiscal bailout of the states as well, according to Wall Street Journal (Access).

Republican House Budget Committee chairman said, "If we bail out one state, then all of the debt of all of the states is almost explicitly put on the books of the federal government."

Thousands of foreclosures on hold after Massachusetts court ruling

The Massachusetts Supreme Judicial Court on Friday ruled that two foreclosures were invalid because the paper trail for the too tangled, and the foreclosing banks could not establish clear ownership, according to the Boston Globe.

Although only two mortgages are involved, this court ruling could affect thousands of foreclosures, and may have national implications. As I described in "22-Oct-10 News -- Foreclosure mess turns into a major crisis," this problem may be good news for homeowners, who now will be able to stay in their homes a while longer, but it's bad news for the real estate market as a whole, since it puts many purchases of foreclosed homes into question.

The Washington Post quotes one analyst as saying that this case is "enough to put serious cloud on title through the whole system and that's a problem."

Goldman Sachs investment plan for Facebook shows that little has changed

There's an SEC rule that says that once a privately held company has 500 investors, then the company is required to open its books and divulge financial information. This makes sense because you don't want a company to mislead or defraud thousands of investors.

However, as we're well aware, the people on Wall Street consider rules to be an annoyance to be avoided, and they've now found a way to get around this rule.

Well, Facebook is generating so much profit that a lot of investors want to invest in the company, but they don't want to have to divulge their financials, according to Reuters.

"No problem!" says Goldman Sachs, one of the leaders among the many banks that five years ago sold defective mortgage-backed collateralized debt obligations to millions of investors, causing the global financial crisis.

Goldman has created a special investment vehicle in which investors can buy shares. The special investment vehicle will then use the money to invest in Facebook. Voilà! You can have thousands of investors, but there's only one investor in Facebook itself, so there's no problem.

As I keep saying on this web site, the global financial crisis was caused by massive fraud in almost every major financial institution in the world, perpetrated by nihilistic, greedy Gen-Xers, enabled by their incompetent, greedy Boomer bosses.

And the point is that the same people are still in the same jobs, looking for news ways to screw investors for their own personal gain. That's one way that you know that there's still a worse major financial crisis yet to come.

Even apart from this deal, Facebook looks to me like a disaster in the making. I don't have anything against the company -- as far as I know, they're a fine company run by a fine management team.

But Facebook appears to me to be a one-company bubble. It's a social networking web site with more than 500 million users, and it has rock star popularity. The problem is that there may be a different rock star next year, and the next generation of teenagers may decide to leave Facebook just as fast as they joined. The situation is even worse because the Goldman deal shows that they're willing to cut corners to make money unethically.

It wouldn't take much for that bubble to burst, causing investors to lose a lot of money.

Investment firm predicts repeat of 2005-2007 stock market bubble

As I've pointed out a number of times, financial pundits and analysts seem to believe that "prosperity is just around the corner," because they believe that the real estate and credit bubbles of the mid 2000s decade can be reflated. From the point of view of Generational Dynamics, this is impossible, but that doesn't stop the analysts from predicting it.

Here's a Bloomberg article that says it explicitly:

"The Standard & Poor’s 500 Index will rally back up to “mid-2008 levels,” in part because conditions resemble those at the end of 2004, when shares gained almost three more years, said MKM Partners.
The S&P 500 broke to new highs at the end of 2010, just as in 2004. In both years, the index’s Moving Average Convergence/Divergence line, calculated by subtracting the index’s average level during the past 26 months from the average over the past 12 months, rose above zero and its stochastics chart shows usually strong momentum. The similar pattern suggests the current bull market may have more room to rally, said Katie Stockton, MKM’s chief market technician.
“The uptrend is equally mature” as it was at the end of 2004, Stockton, who is based in Stamford, Connecticut, wrote in a note dated Jan. 2. “We are thus encouraged by the ability of the market to extend its uptrend from 2005 through 2007 and would not be scared away from the market simply because it has already seen two years of impressive gains.”"

Believe me, Dear Reader, this is a pile of crap. Katie Stockton, who is quoted in the article, doesn't have the vaguest idea what's coming, but she's developed this mathematical model that justifies her six or seven-digit salary, since it tells people what they want to hear.

It reminds me of the super-sophisticated mathematical models that were used to justify the sales of collateralized debt obligations five years ago. Those models, it turned out, were based on mathematically impossible assumptions. (See "Financial Crisis Inquiry hearings provide 'smoking gun' evidence of widespread criminal fraud.")

As I keep saying, over and over, the same people who caused the financial crisis in the first place are still in the same jobs, doing the same kinds of things, looking for new ways to skirt the rules and defraud investors. That's how we know for sure that the worst of the financial crisis is far from over.

Additional links

Yields (interest rates) on the bonds of several European countries rose sharply this week, indicating that investors are betting that there will be defaults. The euro currency fell sharply against the dollar. The reason is that the euro is facing a major test next week: Germany, the Netherlands, Italy, Spain and Portugal are all going into the bond market next week, seeking to borrow 20-22 billion euros. Reuters

Despite the fall in the unemployment rate to 9.4%, analysts are deeply disappointed by the Friday's jobs report, because employers added only 103,000 jobs in December, when analysts had predicted a figure closer to 200,000. The fall in the employment rate is apparently caused by a shrinkage in the nation's workforce by 260,000 persons from November, as more Americans retired, went back to school or simply gave up looking for jobs. LA Times

Financial superstar nation Brazil may be facing a financial crisis. Consumer credit has shot up fivefold since 2002, and the credit bubble is showing signs of being about to burst. Bloomberg

As we've reported, Greece has generated a great deal of controversy by proposing to build a fence (similar to the one on the US border with Mexico) along the border with Turkey, to prevent illegal migration. This has triggered a meeting between Greek Prime Minister George Papandreou and Turkish Prime Minister Tayyip Erdogan, at which they showed unity over the problem of illegal migrants. Reuters

Pakistan's government had been close to collapse this week, because a key party, the MQM, had pulled out of the PPP's governing coalition. The split had been triggered when Prime Minister Yousuf Raza Gilani had imposed a fuel surcharge as an austerity measure, so that Pakistan can avoid bankruptcy. Gilani has caved in and rescinded the fuel surcharge, and the MQM will rejoin the coalition. I guess the MQM is hoping for a bailout from either China or the U.S. What this shows, as much as anything, is that unpopular austerity programs will not survive long, until there's a crisis that forces austerity. Nation (Pakistan)

Older generations in Pakistan are mourning the loss of a once tolerant, relaxed nation. Associated Press

Food riots in Algeria spread into Tunisia on Friday, as protests and strikes driven by unemployment and high food prices swept across the country. Videos of demonstrations are appearing on the internet, despite attempts by Tunisia's government to control internet postings. LA Times

Tunisia's government is conducting a vigorous attack on internet users to prevent information unfavorable to the government from reaching the internet. The Tunisian authorities have allegedly carried out targeted "phishing" operations: stealing users passwords to spy on them and eradicate online criticism. Al-Jazeera

Muslim girls are often forced to lead double lives in Europe. They have sex in public restrooms and stuff mobile phones in their bras to hide their secret existences from their strict Muslim families. They are often forbidden from visiting gynecologists or receiving sex ed. In the worst cases, they undergo hymen reconstruction surgery, have late-term abortions or even commit suicide. Says one mother to her daughter, "An unmarried woman who has lost her virginity might as well be a whore." Spiegel

(Comments: For reader comments, questions and discussion, see the 8-Jan-11 News -- Bernanke emphatically rejects bailing out states and cities thread of the Generational Dynamics forum. Comments may be posted anonymously.) (8-Jan-2011) Permanent Link
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Generational Dynamics Web Log for 8-Jan-2011 8-Jan-11 News -- Bernanke emphatically rejects bailing out states and cities