Thursday, August 11, 2011

A trillion here, a trillion there...

Can we blame S&P for the downgrade? Well, some say no more than we can blame the Post Office for putting up “Wanted Posters.” Yet we hear that the Regime is investigating S&P.

At the same time they are blaming the Tea Party. A group of loosely organized people who have no elected representatives, no fund raising organization, no nationally recognized leaders and no national means of communications, although as England and Egypt have discovered, perhaps Social Media and the Internet have replaced the Man on a White Horse. Email may have replaced the screaming crowds of worshipers. Indeed, Obama may have been the last “Dear Leader” who will have the capability to appear in front of us and mouth platitudes while draped in self righteousness to a chanting crowd of fainting females.

Email is cooler. Twitter is quick and Face Book commands attention. Yet they all, unlike old political speech, have an ability to be read by millions and a permanence. Just ask the so-called scientists at "East Anglia University" how quickly your “private” emails can effectively destroy a political movement. And, yes that is what the so-called “Global Warming” hoax is. But I digress.

To return to the downgrade, it is interesting that the RINOs of our elected officials and vaunted opinion makers, while making vague remarks intending to damn the Tea Party with faint praise, mutter such things as, “doing their job," etc., etc., etc., about S&P and the downgrade.

Really??? Aren’t these the same people who ignored the impending collapse of the housing market and what that would do to the banks? And it wasn’t like they weren’t warned. When Clinton expanded Freddie and Fannie in 1999:

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''


''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

NY Times

Was the dog asleep? Not really.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates

NY Times

What the dogs were was unconcerned. They were making tons of money from the industry they were supposed to be watching and if their words suggested that just maybe bundles of mortgages, which previously had 5% trash had morphed into bundles composed of 95% trash, who was going to take the blame for allowing the expansion?? Better to whistle by the graveyard and hope the Feds could stabilize things with interest rate cuts. And if things collapsed, the government would fix it. After all, we had done it before in SE Asia, why not for America?

And it was working. By April of 2008 the housing market, while shaky, was much better and looked to be stabilized. But there was a snake in the bushes just waiting to strike. Oil prices. And they went from around $90 a barrel in April/May to $145 by mid July and the economy started its collapse.

Some blamed the “exploding” demand from China and India. Some blamed the weak dollar being driven into commodities triggering a bubble in oil prices by the speculators. The former was wrong. The latter was correct to a degree. But the icing on the speculators cake was that the Democrats, driven by the EcoTerrists in their base, indicated that they would do nothing to prevent the assumed pending shortage. Note the assumed. In fact, during May the Democrats, in control of both Houses of Congress, stopped all attempts by the Republicans to increase drilling by opening up Federal lands and seas by removing restrictions.

Think I am wrong? Well, Bush issued his EO in August rescinding the previous restrictions and the Democrats followed in the early Fall. Damnably late and neither actually did anything logical like saying that no one can trade commodity futures unless they can demonstrate that they can take or receive the results of the trade. But it did pop the bubble and gasoline prices, slowly following oil, dropped from $4.00 plus in mid July ’08 to $1.81 the day Obama was inaugurated in 1/09. (He immediately took steps to undo what Congress had done, but that’s another story.)

The results speak for themselves.

Gas Prices

Drilling ban reinstated

Now let us fast forward to 2011 from 2007/2008. What is the same and what is different? Well, the banks and corporations were making tons of money from the government. Oil prices had/have been slowly inching upward. Unemployment had/has been slowly inching upwards.

The Feds had/have kept/cut interest rates driving commodity prices up. Check not only oil but corn, soybeans, cotton. (Of course corn has been impacted by our silly energy policy of using it to produce alcohol for 10% of our gasoline.)

In 2008 the Federal Budget was expanding. In 2011 the Federal Budget is expanding.

But in 2008 no one was shouting that we couldn’t keep this up forever and no one was pointing out that the debt was approaching our GDP.

Well in 2010 and 2011, the Libertarian members of the Tea Party were. Some politicians of the Conservative bent were. People started sending emails, twitter was twittering and Face Book displayed the image of our Senior Citizens all agreeing with each other.

The Republicans had actually won the House and were talking about stopping borrowing unless they got big cuts. Even Obama entered calling for a grand scheme with cuts and revenue increases. Bernie starts talking about QE3. The U6 Unemployment rate is around 18%.

What’s a credit agency to do? Well, one thing they don’t want is for their clients to take it in the shorts all at once. The banks, the large corporations and Wall Street were and are hooked on easy money. Let the crazy Republicans get into a fight with the crazier Democrats and who knows?? People are talking about defaults. Worse, the credit agencies can’t ignore this. Fool me once shame on you, fool me twice shame on me is one of the golden rules of business. If the credit limit was not extended and default happened on just some of the government’s obligations the result would be a helluva market hit.

So S&P decided to enter into politics. It said, you must extend the credit limit. And it even gave a number on how, along with the extension, the debt could be reduced. That was a mistake. They foolishly drew a line in the sand.

The credit limit was raised but S&P’s recommendations were not accepted. They were now trapped. If not doing what they wanted was accepted they would be like a bank credit line manager telling a business it must do certain things or suffer a credit lowering and then doing nothing when the business didn’t do what it was told. A toothless dog is no dog at all.

All S&P has to sell is its reputation and influence. Lose that and it is effectively dead. So they gave us a tongue whipping for not doing what we were told and then dropped us to AA+. Lower than France. Lower than Switzerland.

Has this helped? No. The market has taken a big hit. The future is uncertain and business does not expand to a large degree into an uncertain market

Blame S&P? Does anyone on this planet actually think we are less credit worthy than France? If, as we use to say in the Cold War, the rocket goes up whom do you trust to maintain western civilization? The US or Switzerland?

Blame S&P? Damn right. They had to know what the markets would do and yet they did what they did to try and recover some “face” lost in 2008. A corporation welding that much power and willing to use it for its self interest irrespective of the damage it does to the country should be blamed.

In the final analysis of any situation you are either with us or against us.

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"Unlimited tolerance must lead to the disappearance of tolerance. If we extend unlimited tolerance even to those who are intolerant, if we are not prepared to defend a tolerant society against the onslaught of the intolerant, then the tolerant will be destroyed, and tolerance with them." - Karl Popper

“Necessity is the plea for every infringement of human freedom. It is the argument of tyrants. It is the creed of slaves.” - William Pitt

"Logic. There is little logic among the cultural elite, maybe because there is little omnipresent fear of job losses or the absence of money, and so arises a rather comfortable margin to indulge in nonsense." - Victor Davis Hanson