TIPPING POINT

[charliep]

should be $700 bln - not mln. Numbers are too big for comprehension.

[cottonpicken]

I think we did fall off the cliff.

The real deficts of the us is about 4 trillion a year.

That means if there was a 100% tax on all personal and corprate profits there would still be a deficit.

In ten years 78 million boomers will retire.


It will cost 4 trillion a year in social security and medicare to take care of these oldsters.

The rumors coming out of the closed door meeting of congress back in march(only the fourth in 186 years)are some of the scariest things i have ever heard.


After the civil war the us was still following the constitution,which does not allow for these imbalances to occur.

The only way the usdx got away with it up until this point is that it is the worlds reserve currency.

And even then it has lost about 96% of its purchasing power.

[wedino]

Jim Sinclair's take on it.

Posted On: Monday, September 22, 2008, 12:12:00 PM EST


Consequences Is The Word To Remember



Author: Jim Sinclair








Dear Friends,

If the actions this weekend had not been undertaken, the world?s financial system would now be directly inside a category 5 hurricane. Between now and the election, intervention to keep markets somewhat calm is being undertaken

CONSEQUENCES is the word to remember.

The devil is in the details.

The purpose of this weekend's event is to attempt to consolidate a huge amount of OTC derivatives into one location in hopes of creating a wash. The point of this is to prevent OTC derivative counterparties from going broke.

When an OTC derivative fails, notional value becomes real value. They got a taste of what a broken counterparty meant when Lehman went Chapter 11. It wasn?t pretty.

Lehman Brothers, in Chapter 11, will be the first to benefit from the $700 billion to $1 trillion plus bailout.

Do not let your guard down. Continue to take all the precautionary measures spoken about here. The dollar is toast around election time. Gold will trade at $1200 and $1650.

The glory days of the naked short have passed even if they do not know it yet.

Respectfully yours,
Jim

[Fransisco]

From Bloomberg.com

<b>How the Democrats Created the Financial Crisis: Kevin Hassett</b>

Commentary by Kevin Hassett

Sept. 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.

But really, it isn't. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: <b>Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.</b>

Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.

<b>In the times that Fannie and Freddie couldn't make the market, they became the market</b>. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.

Turning Point

<b>Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.</b>

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

Greenspan's Warning

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

<b>Different World</b>

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

<b>But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.</b>

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.

[agstar77]

Although I believe they are all to blame , go back to Mr. Reagan , that astute economic expert , to see how the market was deregulated and the capitalist rabble unleashed.

[jensend]

fransisco do you think the usa is still a capitalist country as you watch them socialize their financial services industry? if not, what happened to cause this failure? maybe pure capitalism doesn't work any better than pure socialism.

[Fransisco]

Actually the start of this whole housing mess goes back to the Carter administration. That's when the regulation of creditors started.

It's regulation, not de-regulation that's responsible here. Look up the Community reinvestment act, you'll see what I'm talking about

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

Washington regulated creditors into taking on loans that they themselves did not want to take. It was done under the guise of "helping" the poor. If they didn't give out so many risky loans they got penalized.

Left on their own these banks/creditors never would have taken the risk. Economist Yaron Brook hits the nail on the head when he says , "The Government Did It:" through the stick of the CRA [and] the carrot of Fannie Mae and Freddie Mac, the fed created the mortgage market debacle.

This is not the free market and this is not capitalism, it is looney left wing economic engineering on a massive scale, the chickens have come home to roost and in true socialist fashion everyone is expected to pay for its economic failure.

[Fransisco]

Sorry about that jensen, I didn't see your question as I was writing my last post, and a power failure just took out my answer. I'll give it another try.

[jensend]

i don't see it as being that simple to determine the cause. there is no seminal moment when the system went askew. i think it's a natural evolution from free enterprise to where the usa is today. because it has happened in such a broad manner over a long period of time there is no simple fix to it either. it would be far better if they printed their $700 billion or however many trillions they will eventually throw at this, took the money and burnt it. that way it wouldn't add to the amount of crud they will have to flush out of the economy if it's to be healthy again.

[GrainBeetle]

Franny: why didn't your family immigrate to the USA instead of Canada? Social Benefits?
By the way, is your church Rebulican or Demorcratic, and why?

[Fransisco]

I do not believe the USA was ever a pure Capitalist country. They probably got closer to it than any other ever did when they started out, but they have always been what is called a mixed economy. Some parts free, some parts regulated, some parts completely run by government. Most western democratic countries follow this basic model its just that the mixture varies.

I have heard the line that pure capitalism doesn't work any better than pure socialism many, many times and frankly I don't buy into it. It is one of the rationals for the mixed economy that we are living in right now. Because it is mixed and that mix is always in flux, it is inherently unstable, we don't know which industries will be left alone and which ones will be meddled with.

You asked the question earlier, " do you foresee price controls on food?" It's a valid question and a valid concern. In a pure Capitalist society one would answer no, that is not an option, in a pure socialist one the answer would be of course we are going to control the price of food. Since we are in a mixed economy with mixed premises the answer is -maybe-. Maybe we will, maybe we won't, maybe not today, but maybe tomorrow.

We know that pure socialism doesn't work. History has taught us that time and again. But we have never tried pure capitalism so I think that it is unfair to say that it wouldn't work either.

This financial crisis is more evidence that when the government gets involved with the economy it screws things up. Look at the wikipedia entry on the community reinvestment act...

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

and ask yourself if you think this mess would be unfolding today if this government created ball never got rolling back in 1977. That is where the seeds of this failure can be found. It took thirty years to bear its rotten fruit, but here we are.

My guess is that this latest bailout/intervention is just going to make matters worse in the long run. It's the same type of people, using the same kind of thinking who are using the same tools they used to create this fiasco in the first place, to try and fix this thing. They have found themselves in a hole and have concluded that the only way out is to keep on digging.

[GrainBeetle]

Franny, you said on Sep 22, 2008, "jensen that is socialism, not Capitalism". "So-called businessmen or corporate welfare bums who are looking for help from Washington or Ottawa are not "capitalists".

Do you recall 1997? What was your take?

[Fransisco]

And from the ask a stupid question get a stupid answer file...

Grainbeetle: why didn't your family immigrate to Cuba or China instead of Canada? Freedom?
By the way, is your pastor Castro or Mao and why?

[Fransisco]

Are you asking about the Asian financial crisis of 1997?

[Fransisco]

If it is, I believe that it was not all together different than what we are seeing in the States right now. There were government policies in those Asian countries which put the kibosh on the normal borrower-lender relationships, creating an artificial cheap credit environment. This artificially drove asset prices which eventually collapsed.