The Insanity Intensifies

Here's the exact quote from Marc Faber:  "If you put a gun on my head and you said 'you must choose either Mr. Obama or Mr. Romney,' I'd say 'please shoot.'"

That's a game we used to play in the late 90's in which someone holds a gun to your head and says, "you have to sleep with either Oprah or Hillary Clinton," and the correct answer was "pull the trigger..."

I wanted to briefly touch on three issues which were exposed this week and which need to be rectified.  First, Obama gave a speech in Ohio in which he claimed to have saved the U.S. auto industry and the associated jobs.  If there is ever a political claim that needs to be "fact checked," it's that one.  First, let's get one thing straight:  Obama "saved" some uneconomically overpaid union factory jobs by legislating a massive transfer of $100's of billions in taxpayer wealth in order to prop up General Motors and Chrysler and to prevent GMAC - the financing arm of GM - from going bust.

And we don't know the ultimate cost of Obama's "save," but it is going to cost many multiples more than the benefits generated.  We know for a fact that the Government is subsidizing the cost of leasing GM cars by guaranteeing the residual value of the car at the end of the lease.  We won't start seeing the costs of this until the generation of Govt subsidized leases start expiring (next year to two for the most part).  We also know that the Government is subsidizing the floor financing used by dealers, who then accommodate the channel-stuffing sales and massive inventories carried by GM dealers now.  I've covered both of those in previous blogs.

Now the the Government is subsidizing the re-expansion of sub-prime auto-financing.  With Government backing, GM acquired Americredit.  Americredit is a company that was on the verge of blowing up from its nuclear auto loan portfolio.  Now GM is using Americredit to drive sales:  "GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012."  Here's the LINK

It's only a matter of time before the Government support of GM backfires and the cost of Obama's "save" add $10's of billions more to the cost of keeping highly paid union employees well greased with high paychecks and bloated pension plans.  This at the expense of millions of unemployed who would likely be willing to work at restructured auto manufacturers for a lot less compensation and at no cost to the taxpayers.  And now Obama wants to apply this "business" model across several industries:  LINK  I don't even know how to respond to that other than to hope and pray that Congress stops him.

Second, the big banks have been instructed to come up with a collapse-prevention game plan in the event of a financial bomb detonating:  LINK  First, this tells us that something really ugly is getting ready to hit our system.  We can only speculate what that might be so I won't go into that.  But what I find interesting is that a big part of the "gameplan" is for the banks to identify assets they can sell in event of a market disaster.  What's hilarious about this is that in 2008 the banks were unable to sell any crappy assets other than to the Fed and the Taxpayer (Treasury).  This avenue only relieved the banks of a small portion of their illiquid assets.  Now those assets have been marked back up to fantasy valuation levels in an endeavor to exploit liberalized accounting rules and manufacture paper earnings.  I'm not sure why the Government could possibly think that these banks will have any chance in hell of unloading their crappy assets now unless the Government steps in once again.

My take on this is that it is nothing more than hypothetical exercise designed to justify the jobs, salaries and pension plan compensation of the Government idiots who came up with this idea.  We will see soon enough that this hypothetical endeavor was a complete waste of taxpayer resources because unless the the Government wants to watch as the banks quickly collapse in the next financial crisis, the Fed will once again be asked to print a lot of money and Geithner will once again expropriate $100's of billions in taxpayer money and give it to the big banks for liquidity, salaries and bonuses.

Finally, I wanted to refute a claim made by Bernanke earlier this week.  In a useless, rhetorical speech Bernanke made the claim that the growing Government-backed student loan burden was less risky than mortgage debt because student loan debt can not be discharged in bankruptcy.  This is probably one of the most absurdly incorrect and patently disingenuous statements made to date by Bernanke.

First, as everyone knows, the student loan burden under Obama has gone parabolic.  This chart shows the growth in student loans which are directly owned by the Government (sourced from John Williams' Shadow Statistics, who sourced it from the Fed):

You can click on the chart to enlarge it.  And this is only half the story.  The total amount of student loan debt outstanding is now at $1 trillion dollars.  This is bank-financed debt that is guaranteed by the Government.  I don't think anyone fails to understand that the motivation for Obama to ramp up student loan origination is that when someone leaves their job or gets terminated and then takes down a student loan to enroll at DeVries or University of Phoenix, they get removed from being counted as part of the labor force, thereby making the unemployment numbers look significantly better than they really are.  Then, they graduate with a pretty much useless degree and a large student loan debt obligation and can't find a job anyway other than maybe at Starbucks or selling i-phones.

At any rate, I had a short debate with the editor of www.forexlive.com over Bernanke's statement.  His argument was that they were more likely to pay their student loans than a mortgage because they can "strategically" default on a mortgage and get rid of it in bankruptcy.  This is empty logic as you'll see in my reply, plus a lot people with student loans rent anyway.  Here was my rebuttal:

People will pay for a roof over their head and a car before they’ll even think about paying a student loan. To begin with, everyone I know with one who isn’t making payments on their student loan is waiting for the Govt to eventually provide relief – which it will.

Even though strategic default makes sense, it’s not as common as the media makes it out to be. Most people default on their home because they simply can’t make the payments. The system let them take down too much debt. When you have Phd’s with $150k in SLMA debt working at Starbucks, you have someone who can make enough money for rent and transportation and a bag of weed who isn’t even thinking about making his SLMA payments…The idea that SLMA debt is higher quality than mortgage debt because it can’t be discharged in bankruptcy is typical ivory tower theoretical nonsense.

The explosion in outstanding student loan debt since Obama took office is another massive, unpayable debt problem that will have to be addressed with massive currency devaluation and by the Government transferring even more wealth from the dwindling part of the population that actually does work and pay taxes to the expanding part of the population that is becoming increasingly reliant on Government transfer payments to make ends meet.

It's become more like the system in "Atlas Shrugged" by the day.  Have a great weekend.