Thursday, September 1, 2011

Obama's Plan To Save The Country: Get Ready For More Debt And More Failure

After strategically leaking some details thru various usual "leak" holes, we now have a pretty clear picture - minus key details, of course - what Obama's big "shock and awe" economic faux-stimulus plan to be rolled out next Thursday will look like. The "key details" refer to the true costs of the plans to the Taxpayers and the ways in which those costs will be covered up and obscured.

Part 1 of the plan will entail the refinancing of $1 trillion in distressed Fannie Mae and Freddie Mac mortgages. These are the mortgages currently held by the Fed and guaranteed by the Government. The refi rate would be 4%. Obama will make claim that there won't be any cost of doing this and it will produce $85 billion per year in interest savings that will "flow" back into the economy. Sounds so perfect, huh? What this plan will actually do is will create the transfer of these failing mortgage off the balance sheet of the Fed and onto the balance sheet of the Taxpayer.

In reality what Obama is going to ask us to believe is that he is so almighty that he has the ability to make 2+2=5. The part that gets 2+2 to equal 5 is free. Anyone who knows anything about mortgage finance will tell you that it would be impossible to create a new mortgage with a lower interest rate that replaces a higher-rate mortgage without the cost of doing that being absorbed by either, the investor in that mortgage in form of a haircut the investor incurs on his investment, or the homeowner in the form of a higher amount of mortgage outstanding. Impossible. 2+2 will NEVER equal 5. What's not been leaked out are enough of key details of the plan that would reveal where the true costs of this plan are buried and how these costs will be funded. The money has to either come out of the Fed's pocket, the homeowner's pocket or the Taxpayer/Government's pocket.

We know from experience that the cost will be paid by the Taxpayer. The bottom line on this plan, just like the massive TARP plan in 2008, is that Obama will ask the country to once again socialize the cost of tragically bad decisions by BOTH the big banks who made the loans and the homeowners who overpaid for a home they just could never afford in the first place. There's just no other way to look at this. The people who currently pay taxes will have money taken from their pocket and it will be redistributed first to the banks and then to deadbeat homeowners.

Part 2 of the plan is even more troubling from a Taxpayer cost-burden perspective. This idea was leaked out a couple weeks ago although it's been getting almost no attention. Obama will propose setting up an "infrastructure" bank that will be funded by the Taxpayers and then will go out and raise a large amount of debt in the capital markets that will be guaranteed by the Government but the debt won't count toward the debt-ceiling limit. The number leaked out was $1 trillion.  Sound familiar? This is another version of the FAILED Fannie Mae/Freddie Mac "business" model.  For a good, quick summary of the plan, read this:  LINK

The goal of the "bank" will be to fund infrastructure projects in a way that creates jobs for those who want them. Again this is just another fantasy idea that will serve little economic purpose other than to transfer an enormous amount of Taxpayer wealth to the unemployed and - even more so - to the big contractors who will be awarded the projects. Get ready for a lot more traffic jams and beautiful "bridges to nowhere." This idea is set up to fail from the beginning and it's nothing but an even larger scale version of the $800 billion stimulus plan from 2009 that completely failed to create a sustainable economic recovery BUT it succeeded in ramping up the Taxpayer debt load by another $800 billion.

Please note: in the 3 years that Obama has been President, the outstanding amount of Government debt has increased by 40%. Nominally that number is $4 trillion. But wait, as I was discussing with someone last night, Obama also added $7 trillion in Fannie Mae/Freddie Mac debt to the Treasury debt-load, but this is still counted as "off-balance-sheet." I guess because there is hope that one day the housing market will recover enough to start paying off that debt. BUT, in reality, the Taxpayer debt burden under Obama has actually climbed - not from $10 trillion to $14 trillion - but to $21 trillion when you include the FNM/FRE debt, which technically needs to be included.

There's a statistic compiled by the IRS that shows 54% of the population is expected to pay 100% of the Federal taxes paid by individuals this year. Think about what the means for a minute. If you are one of the 46% of the U.S. population who does not pay taxes, you don't care if the Government spends money like Obama is proposing because it doesn't come out of your pocket. It's not food taken away from you or your family and given to someone else. To me that is a stunning reality about how badly the incentives are skewed in our system and it's why the Government can continuously implement spending programs that transfer wealth from the the Taxpayers to non-taxpayers and the elitists with little resistance from the masses: FORTY-SIX PERCENT of the country either benefits directly from this wealth transfer OR does not help to fund it or both. Think about that if you are one of the 54% who actually pays taxes.

I recall that in 2002, when a close colleague and I were discussing how we thought the collapse of the system would unfold. So far what we outlined has largely unfolded, only it's taken several years longer to occur than we originally envisioned. I remember him saying that "eventually we are going to see things that will blow our mind." I can truly say that the way the last three years under Obama have unfolded - and the incredible, tragic acceleration in fraud and massive theft of middle class wealth enabled by him - has truly blown my mind.

Be prepared because it's going to get a lot worse.


  1. Endgame: When Debt Is Fraud, Debt Forgiveness Is The Last And Only Remedy

    Debt forgiveness, therefore, accomplishes two important things. It eliminates the increasing and outsized portion of productive enterprise to pay off unproductive obligations, and it clears the ground for new opportunities, new thinking, invention, and entrepreneurialism. This is why the ability to declare bankruptcy is so essential in the pursuit of both happiness and innovation.

    Currently we are mired in a “new normal” and calls for “austerity” which are nothing more than the delusional efforts of a status quo to avoid the consequences of its own error and fraud and to profit evermore. So bedazzled by the false wealth created by debt multiplication and its concomitant fantasy of ever-higher returns, this status quo continues to be stupidly amazed that people are not spending and that the economy is not picking up. But how could it be otherwise?

    Productive wealth has been trapped in a web of parasitic theft, counterfeiting, liability evasion, non-regulation, and prosecutorial non-accountability. All the fundamental attributes of a functioning exchange economy have been warped to reward creative criminals. I spoke extensively about this in my posts from 2008. (Imaginary Worth, Empire of Debt: How Modern Finance Created Its Own Downfall (October 15, 2008)

  2. John Williams on Goldseek Radio

    I’m not a day to day timer here, but I can tell you long-term that we have a catastrophe ahead for the US dollar. It will eventually become worthless in a hyperinflation, which I have written about it’s the time of thing that will break in the not to distant future. It could be another couple of years, but it’s coming. So, looking at the long haul you don’t want to be in the US dollar. Gold is a primary hedge against that, as is silver.!

  3. Sane mind foresaw this day coming long ago and summarized it like below:

    "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

    "A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy. "

  4. You cannot get 85 billion by refi of a mere 1 trillion in mortgages from 6% to 4%. My calculator comes up with ~20 billion, and that assumes that the mortgages being refinanced are as high as 6%. That last assumption probably isn't true, since current variable rate loans are already very low - probably 3-5% for most. You have to refi $10 trillion in outstanding mortgages at least 1% below current rates regardless of LTV, to produce 100 billion in savings for households.

  5. I think a significant chunk of those Americans who are paying no taxes would vastly prefer having a job with middle class wages to having welfare benefits. I know a lot of middle aged professionals who have lost jobs and they should not be lumped in with the permanent underclass.

    Personally, I'd gladly go back to Clinton's tax structure if the rich will do it too.

  6. "Personally, I'd gladly go back to Clinton's tax structure if the rich will do it too."

    How about Clinton's "Community Reinvestment Act" that he signed into law which forced banks to make risky loans to those who probably could never pay them back. Hence, here we are today...

  7. A little primer for the dumbasses that keep blaming Community
    Reinvestment Act (CRA) of 1977 for whole mess

    no clinton fan..he's a sellout to highest bidder but stop spewing shit.

  8. The blogger left out one important part of the equasion. He has never read a "Prospectus" that was given to the "Investors" that was used to create the "Collateralized Debt Obligations".

    Had he or she done so, they would have found that in return for a higher "yield" on their investment, that they could expect a higher interest rate in the "pool", however that there would be a higher rate of "defaults" on the mortgage instruments that the investors were buying.

    In other words, "The investors assumed the risk" when they speculated on the "CDO'S" that are now the problem concerning Fannie Mae and Freddie Mac. The investors are attempting to charge back to the taxpayer their bad decision to buy these high risk investments.

    To be clear here, When I buy a stock and it goes down, why or how should I expect to have the Taxpayer pay for my poor investment decision?

    The investment managers are at fault for not reading the "prospectus" that clearly stated the risks.

    In an attempt to get their money back, the "investors" are blaming everyone except Bernie Maddof types for their investment losses.

    This loss was intentionally created by these people, and they knew the risks. In fact they signed statements that they understood the risks.


  9. Bleeding Out

  10. Also don't forget Clinton lifted that Nasdaq bubble all the way to 5000 before it went down to 1200. He did manage to get out fast it enough to drop it onto Bush, tho. But that's not exactly where you wanna go back to.

  11. Dear Dave,
    Don't know if you are just ignorant or dishonest. Income taxes are only one form of tax.

    Shares of Total Taxes Paid by Each Income Group Were Similar to their Shares of Total Income in 2009. Source:

    Anyway let's just make everything equal. Every group send the same percentage of children to the military.

    Why you are so insistent on giving more to those who have much and taking more from those who have little I don't know. Perhaps you are a little like your heroine Ann Rand who ended up applying for SS and Medicare under a fake name.

  12. Dude, Jesse took you off his list!

  13. Quote: "Why you are so insistent on giving more to those who have much and taking more from those who have little I don't know. "

    Why? It's called fairness. You want a sound economy you have to encourage people to be productive. You can not have the entire population consuming without producing, can you? The easiest way to encourage is simply allowing them to keep what they earn. The more they produce the more they get to keep for selves, and thus the more desire to continue to produce and benefit the entire society as the result.

    If you produce a lot but somehow cannot keep much b/c other less productive people simply have the vote to take the fruit of your labor away then you will lose the incentive to produce. You'd instead be more motivated to score that vote than to produce. When a nation starts to turn could-be productive people into vote-seeking thieves robbing each other, it goes down and down and eventually fails, which is where the entire West is at RIGHT NOW.

  14. Illusion of Recovery – Part I: Print and pray has officially failed

    The output gap we are in today is the difference between the actual output of the economy after the 2007 to 2009 economic contraction versus the potential output of the economy at full employment without inflation if the financial crisis and economic contraction had never happened.

    The gap created by the global financial crisis and recession must be – must be -- closed before the next recession arrives to widen the gap further, I warned in 2010. If that is not accomplished the US will find itself in an economic predicament far more dire than the one posed by the fallout of the financial crisis.

    I warned that if we don’t make the Q2 2011 deadline to get the US economy moving again at a 4% annual growth rate the US will run out of foreign buyers for its government debt and sooner or later face a full-blown debt and currency crisis. As the US is at the center of the global monetary system, and over 80% of the world’s international transactions are dollar-based, a dollar crisis is a global economic calamity without precedent that will drag all other currencies down with it, with no quick-fix solution like the multi-trillion dollar global fiscal stimulus and bailouts that pulled the world economy back from the brink in late 2008 and early 2009.

  15. @rui..drop it onto...bush? the ownership society? bush/cheney..deficits don't matter? bush went into war and cut taxes..we won't even go into the conflicts of interests he had(read The Iron Triangle/re:carlyle group story)...part, not all, of the reason we're in this deep shit mess...productive?...this has been a grab fest.

    meanwhile..I guess you call this fair?

    Nassim Taleb: The American Economy Will Transfer $5 Trillion To Banker
    Pay And Bonuses Over The Next 10 Years
    That $5 trillion dollars is not money invested in building roads,
    schools, and other long-term projects, but is directly transferred
    from the American economy to the personal accounts of bank executives
    and employees.

    Such transfers represent as cunning a tax on everyone else as one can
    imagine. It feels quite iniquitous that bankers, having helped cause
    today’s financial and economic troubles, are the only class that is
    not suffering from them – and in many cases are actually benefiting.

    Read more:

  16. Here are the two requirements for recovery:

    Liquidation of big US banks deemed too big to fail, since
    overloaded with toxic paper that inhibits their ability to function as
    credit engines, while they require unlimited funds to perpetuate their

    Liquidation of big housing inventory, since bloated and hanging
    over the entire market, preventing a price stability situation for
    another two years (2013), and whose continued bank held inventory
    expansion assures two more years (2015) on top of that, a result of
    deep distress if not internal chaos, voluntary loan defaults by
    homeowners, job insecurity, and property title challenges in court
    (i.e. permanent market decline).

    Any bank liquidation would cause the biggest ten US banks to enter a
    disruptive failure, much worse than Lehman Brothers. The fallout would
    take years to clean up, complete with a derivative meltdown nuclear
    chain of events. Any housing liquidation would result in at least a
    20% to 30% additional home price decline, sufficient to topple another
    500 midsized US banks. So neither liquidation will occur, not even
    close. All attempted solutions save the broken zombie banks,
    perpetuate their propped insolvent structure, waste new money, debase
    the currency further, and require 0% rates to continue. The deep
    distortions continue to rip apart the nation. None of the current
    steps taken are sincere legitimate attempts to remedy the system. The
    countless captains of the ship, coming from the usual suspect firms,
    have no vested interest in remedy. It is as simple as that.

  17. “There is no known way of dealing with an inflationary depression.” Paul Craig Roberts

  18. Dave, Marc faber quoted your whole article (the Buffet put 5billion in BAC one) in his monthly report. Good job!

  19. Let's keep it All In The Family - Everybody Tells The Thruth

    Sunday, September 4, 2011

    R-e-v-o-l-v-i-n-g D-o-o-r and Goldman Sachs, Yet Again

    As reported in Bloomberg, the Chair of the SEC, Mary Shapiro has asked Eileen P. Rominger to join the SEC's investment management division. In one year (2010-2011), Rominger made $57.5 million at Goldman Sachs as well as millions in investment income. She worked for Goldman Sachs for 11 years and retired as global chief investment officer there.

    Rominger will work overseeing mutual funds and hedge funds under Dodd-Frank Act rules. She will earn $220,000 at the SEC.

  20. keep believing in the right thing....

    A Story...The Last Whistleblower

    "Why is Washington so obsessed with Assange?"

    "It is power taking its revenge. Assange has made government transparency a moral issue and made people aware that classification and secrecy serve to hide government crimes and deception. This has empowered whistleblowers."

    "Won't there be other whistleblowers?"

    "Not without Wikileaks. Formerly, whistleblowers would release documents to the media. However, whistleblowers have learned that the law that was enacted to protect them is not obeyed in the post-9/11 environment, and the media has learned that the First Amendment has lost much of its authority. It has become too dangerous for whistleblowers to step forward.