Now that the “robo-signing” scandals have achieved full notoriety through the media, it is time to address the real issues facing investors and the country as a whole with respect to both the foreclosure debacle and the Fed continuing to print money. As usual, the media is staring at the wrong target. Each major media outlet is copying what is popular or what their competitors are doing versus analyzing where the true economic problems lie. The real story is that the United States is losing its hegemony as the financial capital of the world! Mind numbing amounts of capital have been destroyed in the past 2 years because we did not liquidate the “zombie banks” when this crisis began. Instead, we simply allowed politicians to shovel hundreds of billions of taxpayer dollars into failed institutions. Then we watched as those failed institutions ultimately paid much of that money out as bonuses to their employees. As a result, the original problem has metastasized; the banks are still in “zombie status” and resources have not been redirected towards truly productive ventures. For investors, equity prices are at extreme multiples of the actual values of the entities that they allegedly represent, leading me to believe that we are looking at a perfect storm for a market crash that will make 2008 look like a bull rally.
One of the reasons why the economy is so bad right now is because the general public does not understand the complexities of the mortgage backed securities and other derivatives markets. The public believed that the Securities and Exchange Commission was actually doing its job looking out for major fraud in some of the countries’ biggest banks, but the public was wrong then and they are even more wrong today. Instead the SEC allowed banks to create secondary markets which allowed them to trade with each other for one purpose only- to collect more fees. This was highlighted in the Goldman Sachs case, where Goldman flat out admitted to betting against the same securities that it created, marketed and sold to investors as a good investment. In the span of approximately the last month, we have managed to negate the past two years of the Federal Reserve’s trillion dollar spending spree in an attempt to reignite a failed economy.
The scary part about the “robo-signing” fiasco is its simplicity. As unbelievable as it may seem, the banks have lost the titles to some of the homes they claim they own. If no one holds the title for a house, then why the heck should that homeowner pay his mortgage? As the banks have yet to produce the necessary forms that show that they own the property, we are now seeing people who have already moved out of their foreclosed homes break back into those homes to squat. And who can really blame them? The US middle class has gotten absolutely CRUSHED the past 10 years. The last 2 years have seen some of the worst hypocrisy by politicians towards the hardworking middle class people of this country. The anger is starting to reach a boiling point as more potential fraud and crooked behavior will only make things worse. Let me make this perfectly clear, without clear property rights and a legal system that insists on proof of those rights before transferring ownership by force, the economy will fall apart like nothing we have ever imagined.
As we have expressed on this blog for over two years now, the Federal Reserve is fueling the fire and only prolonging the agony. The Fed was by far and away the biggest reason we got into this mess with cheap money flooding the system and now THEY have spent a gazillion dollars of taxpayer money on failed policies that can quickly turn our society upside down. For a good example of what cheap money can do to nations, just look at the period leading up to World War I, where the Central Banks of France, Britain and Germany all printed money in order to pay for their War efforts. With endless money, European Generals believed that they could build trenches for their troops and simply wait for the enemy to run out of supplies. Thus, instead of the War being “ quick and glorious” as many Europeans believed at the time, the fighting lasted for 4 years (1914-1918), nearly destroying an entire generation with over 9 million men dead and millions more wounded.
After the war, Britain and France wanted the Germans to pay reparations, but the Germans, who obviously expected to win the war, had financed their own war effort and were now effectively broke. After a couple of years of back and forth between politicians, Germany would eventually be forced to pay reparations and the only way for that to happen, the leaders concluded, was to print even more money. We have all seen the photos in history books of Germans burning paper marks to heat their homes because it was cheaper than coal, or as incredible as it may seem, how the cost of a loaf of bread went from 13 cents in 1914 (in US dollar terms) to just around $100 billion (in US dollar terms) by the end of 1923. Needless to say, the effect of hyperinflation on the German population over the next twenty years (1925-1945) was disastrous. In the end, Germany was essentially dissolved, but only after millions of lives were lost in WWII. All of which could have been avoided if politicians weren’t allowed to fund deficits by printing money in the first place. After the war, politicians again had a chance to save Germany from the hyperinflation that ultimately engulfed it had they created a fair restructuring program for the German debt. Instead, the Germans were pushed and embarrassed into printing more Marks to pay back their loans which led to the collapse of their economy. One doesn’t have to go far to draw parallels between the actions of the Central Banks from 1915-1945, to the money printing orgy of our current Central Bankers/ Planners.
Today there are at least 12 conflicts around the globe involving countries that have a clear agenda against the West and America. One of the most dangerous unintended consequences of the Fed’s money printing is that it props up not only failed economic systems like ours, but it also props up failed political systems and our enemies. Take Iran for example, which was months away from being completely shut down after the crash of 2008 due to $30 oil prices (Iran’s major export). Now, after two years of the Fed printing money, oil is back to over $80 and the leaders of Iran are again enjoying the windfall of cheap American dollars which inevitably go to finance the countries’ nuclear program. The same can be said for Venezuela, Russia, and, to a lesser degree, China. It’s a vicious circle because as we all know, in the eyes of our political leaders, war is one of the best ways to get inflation going. And the scariest part is that the Fed obviously knows all of this, yet their actions are telling us that they believe saving a few “zombie bank” bondholders is more important than the potential for another major war.
Thankfully, the internet has made media less centralized so the policies out of Washington and the Fed are scrutinized and exposed on a daily basis before things are allowed to spiral completely out of control. We are two years into this fiasco, dealing with another fraud relating to mortgage backed securities, and the Fed is expected to print at least another $500 billion in a second attempt to get the economy growing again. This November 2nd, expect to see a full scale revolt on voting day as most people are beginning to understand that the Fed has to stop printing money and unwind the “zombie banks” now. Any politician who doesn’t understand that this is what’s needed in order to get our economy growing again will hopefully be sent back home. This horrible chapter in American history should have been put to bed two years ago when we had a chance, but as the old saying goes, better late than never.
