Tuesday, August 9, 2011





BANK OF AMERICA DRAGGING ECONOMY AND MARKETS DOWN: The experts and pundits are rushing to tell everyone that the plunging stock market is irrational irritation with Washington politics. In fact, the average person on the street seems more in tune with what is happening than the policy makers and pundits.
Investors lost one trillion dollars in the last day of trading, and around $3 trillion in the last 2 weeks. The reason is that investors are realizing more each day, just like Judges presiding over foreclosure litigation, that we are running on smoke and mirrors. Those assets on the books of Bank of America, JP Morgan, Citi, Wells et al, are largely fictitious and the rest are largely overvalued. Earnings projections for companies depending upon American consumer demand keep getting cut with each passing quarter.
It wasn’t just the credit rating of the United states government that got cut last Friday. The whole economy has been revealed as sagging with huge gaps in the capacity to produce and consume. Before this mortgage mess economists were always quick to point to the housing market as a harbinger of what we can expect. Now, mysteriously, they are unwilling to talk about the reality of the housing market and see themselves as appointed messengers of confidence and good news.
Here is the real news: Housing prices are now down to levels not seen in ten years or more. Mortgage obligations stay the same. So most people with homes or real estate investments of any kind are experiencing a shock that is real and very rational. The pundits ignore people who are being foreclosed out of their homes, bury their heads in sand to avoid talking about people whose mortgage debt is so far above the asset values that they will not, in a single lifetime, ever get out from under, and pretend that the next generation is going to get more than the generation before. It isn’t reality they are looking at, but the average person IS living reality.
The average person and the average investor knows that the government and Wall Street is lying to them and won’t stop. The average person knows several people who are unemployed or so far underemployed that their lives have been destroyed. The average person is hurting and their government is not concerned about their pain. Their government is concerned about supporting a myth and spin from the Wall Street oligopoly — with complete disdain for homeowners, consumers, workers, or anyone else who makes less than $10 million per year.
Investors are average people. Their reaction to this reality is entirely rational, predictable and appropriate. Neither our prospects nor the markets will ever actually improve unless we deal in reality. Bank of America prospects are bleak — a penny stock at best when this is all done. Yet the reality of 7,000 other banks, S&L, credit unions etc. who could service the needs of corporate and personal America is ignored. Profits would be made and taxes would be paid if the Megabanks were resolved. Still we continue to march to the beat of THEIR drum instead of our own.
The stock market is overpriced even after the current shock. Sure it will correct upward for a while, but earnings reports and assets on balance sheets can only be fudged so long before analysts cry foul. The market is headed down. It has been that way for several years. People forget that once upon a time the market even went to 14,000 in the DJIA.  Inflated dollars can hide the problem for a while, but anyone coming in from another country and steps onto the platform of one our rail stations or airports knows in an instant that something went very wrong with America.
There is a solution, but it would take a reversal of accepted ways of thinking. If we recognize the losses to the banks and recognize the gains to homeowners who are legally deleveraged already but don’t know it, then we would have some sort of equilibrium to work from as a base for what is now an unworkable, disgraceful economy.
Consumers ability to pay for things would increase and they would respond by buying, if there was something to buy. But that is only a start. Jobs need to be created — at least 30 million more than the number necessary to maintain the current “equilibrium.” That can happen — if we decide to get back in the game with our rotting highways, decaying rail system, and unreachable education. We’ve been here before and we did the right thing. It turned out pretty well although, like now, first people had to go through a lot of pain before they discarded ideology and went for the solution.
Putting 30 million people to work can be done with tax incentives (for hiring, also known as priming the pump) to small business and with massive government programs to rebuild our infrastructure which is about to fail us at any minute. 30 million people working decent jobs that challenge their minds and bodies will generate at least $200 billion per year in direct revenues to the government. Cutting back the tax gift to wealthy people who were just fine under Clinton’s administration, combined with closing loopholes and gifts to oil companies and farms and such would produce another $200 billion per year in direct revenue (or saved expenditures) to the government. Do the Math.
The economic multiplier effect of re-engineering our transportation, communication and education infrastructure would be nearly infinite and could re-ignite the American dream and the American spirit. The surplus of revenues would make debt ceilings and spending issues fade as we revel in our own success.
But first we have to start telling the truth. At least $15 trillion was stolen from U.S. taxpayers, consumers and World investors by certain banks whose arrogance was only exceeded by their greed. Much of that money was taxable when taken and should be recovered to the extent possible. Consumers who were tricked into transactions by fraudulent appraisals and representations should get restitution. World investors must be told that the assets they bought were overvalued from the start, first by mark-up by the investment banks (yield spread premiums on steroids) and second by the same fraudulent appraisals of value of real property that deceived the borrowers. we can’t keep pretending that those assets are real when we know they are not.
There will be no confidence in US financial markets until world investors believe that we are trustworthy. They know we are lying to them and so they are playing along only as far as necessary, waiting for their opportunity to abandon US financial markets in favor of anything that looks better. The reaction of investors to the down grading of the US government credit instruments is a very rational understanding that the United states has not stepped up to the plate and admitted guilt by association with the banks. They will stop reacting when they have reason to react to something more favorable — like the truth.

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