Perspectives on the global economic meltdown (Jan 26 2010)

Chinmayanand · Post by **Chinmayanand** » 15 Oct 2010 00:55

[youtube]XibgLkhkxIs&NR=1[/youtube]

ramana · Post by **ramana** » 15 Oct 2010 02:50

ShivaS wrote:Folks the only way to protect dollar is to cheapen it , and there by causing a short term deflation in the world economies both manufacturing and commodities.

When do you expect this to happen?
From cursory look even if Obama springs OBL from the caves, his party will be reduced in the Congress.
What will be the Repub impact on this way out?
And what will be the signs of it?
In effect will be there an inflection point which we cant see or will there be a clear turn that can be seen.

Satya_anveshi · Post by **Satya_anveshi** » 15 Oct 2010 04:13

What does "cheapening the dollar" means? How does one accomplish that? How does it lead to deflation? (1 line 3 questions:))
No, I am not done yet (4th one). How does all this protect the dollar assuming it is under threat now?

PS: these are honest questions.

Satya_anveshi · Post by **Satya_anveshi** » 15 Oct 2010 04:30

G-uncle has this as first link

Cheapening the Dollar - NYT -Published: February 09, 2004 - Bit dated but thinking didn't change, can was kicked further, problem is even worse- IOW SNAFU

Treasury Secretary John W. Snow has tacitly but unmistakably abandoned Washington's longstanding support for a strong dollar in favor of a weak dollar that is getting weaker, though he continues to insist there has been no change in policy.

Stripped of the code words and elliptical references to ''excessive volatility'' in exchange rates, the message that Mr. Snow delivered this weekend to finance ministers from Europe and Japan was that the dollar's plunge against the euro is just fine and that the dollar should now decline more rapidly against Asian currencies as well.

The United States needs to attract $1.5 billion a day in net capital inflows from abroad -- $500 billion a year more than it sends out -- which means that the world is being flooded by American I.O.U.'s at levels never seen before.

Put another way, Mr. Snow was not calling for the dollar to climb back in value but for it to sink more rapidly against the Asian currencies. For currency traders and analysts gearing up for the markets to open on Monday, the big question was not whether the dollar would stop declining but whether the Japanese yen would abruptly jump in value.

The problem confronting American and European officials alike is that China, the most explosive player on the Asian scene, is not even a member of the Group of 7 . ''China is the 800-pound gorilla and it isn't even part of the negotiations,'' Mr. McCully remarked.

''This doesn't do anything to alter the perception that the administration would like the dollar to decline further,'' said Robert Hormats, vice chairman of Goldman Sachs International. ''I don't think the markets will be very impressed.''

Ambar · Post by **Ambar** » 15 Oct 2010 05:12

Christopher Sidor wrote:
Since the BRIC countries are growing at a rate in excess of 6% they are not in red. But 129% is still very high as far as India is concerned. I always assumed that our GDP Debt is around 70-80%, this 129% figure is a shocker. This puts us in the company of greece, italy and worse japan.

I don't get it, Govt debt as in public debt is 129% of our GDP? The CIA factbook has listed our public debt at 58% of our GDP or are we talking about our total credit as a % of the GDP here?

Hari Seldon · Post by **Hari Seldon** » 15 Oct 2010 12:21

It appears among all the punditry and gas floating around, sri Krugman alone seems to be like a stable rock of cold logic and reason only....../snark
Krugman: We Need $8-10 Trillion Worth of Quantitative Easing
wow. $8-10 trn only. The range specified itself is $2 trn wide. Jai ho indeed.

On other matters, sri krugman seems to be more in line with mainstream opinion....
Krugman: China is ‘Really the Bad Guy’ in Currency War

One in three Britons could not survive a week on their savings (The Guardian)
So what, eh? Its more important to provide full security cover to the likes of musharraf nowadays, apparently. jai hor and all that.

wig · Post by **wig** » 15 Oct 2010 17:31

http://www.time.com/time/nation/article ... 21,00.html
the US based newsmagzine reports that the US Government Deficit Exceeds $1 Trillion

The Obama administration is set to report Friday that the federal budget deficit exceeded $1 trillion for the second straight year, providing critics of government spending with fresh ammunition ahead of the midterm congressional elections.
The Congressional Budget Office is projecting that the deficit for the 2010 budget year that ended Sept. 30 will total $1.29 trillion. That's down by $125 billion from the $1.4 trillion in 2009 — the highest deficit on record.

Christopher Sidor · Post by **Christopher Sidor** » 15 Oct 2010 18:23

Satya_anveshi wrote:What does "cheapening the dollar" means? How does one accomplish that? How does it lead to deflation? (1 line 3 questions:))
No, I am not done yet (4th one). How does all this protect the dollar assuming it is under threat now?

PS: these are honest questions.

Dollar has traditional been a strong currency. for example to buy 1 Dollar a person needs some 45-50 INR or 6-8 yuan or some hundreds of yen. In other words 70-80 USD buys a barrel of oil. I have taken approx values. When "cheapning" happens, it means dollars value falls w.r.t to other currencies. So there is the case of rupee/yen strengthening against dollar.

This is done by printing more dollars or pushing up the dollars in circulation by buying US Gov T-Bonds, etc.

This affects countries trade balances and ability to compete. For an Export led country like Germany or Japan or China, it means loss of markets. So to compete and retain world market share these countries have to devalue their currencies. For these countries devaluing means inflation. You see the there is a fixed amount of goods and services that an economy produces and consumes. When there is more money chasing the same amount of goods and services their prices tends to go up.

For america cheaping dollar helps in two ways. Firstly It makes American exports more competitive w.r.t to other countries and pushes up the employment rate. Secondly it reduces the debt burden. It is known as inflating debt away.
Lets take an example. For Rs 500 a person buys 5 Shirts, each of Rs 100. Due to inflation the same shirt costs Rs 125 next year. So the person can buy only 4 shirts for Rs 500. Inflation for this example is 25%, with a base of Rs 100. Now assume that SBI has loaned Rs 500 to this person to buy this shirt. Next year he returns the money to SBI, i.e. Rs 500. But next year goods/services that can be bought for Rs 500 is reduced. So for SBI the purchasing power of Rs 500 has gone down. If you replace Rs with billions and trillions of dollars the change is more dramatic and the loss even more dramatic.

Deflation is a mechanism of falling prices. The problem with this is that due to human nature, in deflationary times, people tend to postpone consumption/buying. If an individual knows that price of item/good/service X was Rs 10 yesterday, and has fallen to Rs 9 today, he will wait till tomorrow to buy item/good/service X, so that the price falls further. This causes havoc. For example it is claimed that japan was in a big deflationary cycle from 1990s till early 2000s. Zero growth. Without growth, debts cannot be paid and debt servicing tends to take on more of the budget. That is one of the biggest worries of America currently. To avoid going through a lost decade, as japan did in the 1990s.
Again the above comments regarding Japan is the general consensus. Economic theory being what it is, is not precise or exact. There are simply too many variables and too many divergent forces at work.

Dollar is the world currency for two reasons.
1) America is the worlds largest economy. Bigger than the next 3 economies put together.
2) America is the sole super-power able to enforce its will through force anyplace.
These two reasons tend to reinforce each other.
With Chinas growth, you have a country which pays lip service to dollars hegemony, but actively seeks to supplant it where its trades and investments are concerned. If China's economy goes to a tail spin, due to a rising yuan, then there will not be any challenge to America's economic and military domination. With American domination assured, Dollars domination is also assured. American is the world super power because of the strength of its economy. Soviet Union is in the dustbin of history because it concentrated only on military strength and did not give due thought to the economic aspect.
Off course china has bought itself in a very precarious position. Just like Pakistan which finds itself where it is due to its own actions and not due to some other external actor. China should have paid attention to its internal market and not concentrated on an export led growth like Japan and Germany did.

I have used some very simplistic explanations and have assumed a lot. But I have painted the big picture.

Satya_anveshi · Post by **Satya_anveshi** » 15 Oct 2010 20:17

^^Thanks for the response Christopher Sidor ji.

But I am afraid those assumptions need to be questioned also:
- US cheapening the dollar and subsequently other countries responding with similar actions will nullify all the effect; On the other hand if other countries don't respond their survival will be at risk; So, US action of cheapening will help them continue their binge vs others’ actions will be to sustain their bare min needs;

- The whole argument of deflation seems suspect to me. As a consumer there is nary a thing I can afford now which I couldn't couple of years ago; Gas prices, groceries, bank loans, home prices (for the most part and US govt/institutions is doing everything to curtail fall in prices) - so, where is deflation. On the other hand, it is most convenient argument to continue with 24/7 printing; currently that is the only thing they can do and will do. Buying the deflation argument is perpetuating the plunder and also putting everyone at risk; It doesn't solve the root problem (deficit adjustment is temporary but can they pay those debts when it is due?) - that is highly suspect.

- Lastly, if US continues to dilute $ and push everyone else under the bus to not cheapen their currencies (obviously they have to threaten them for not doing it), what confidence $ will command post that action? If it is under threat, how does "cheapening" not worsen it and help it survive?

Neshant · Post by **Neshant** » 15 Oct 2010 20:37

^^ I agree 100%.

Deflation is what should be happening to overpriced junk. The only reason the federal reserve keeps trying to claim its a problem is because the private banking cartel it represents is stuck with real estate losses. They want to inflate to push the losses onto people who saved and did the right thing by not buying into the real estate mania.

Bernanke keeps talking "price stability" but why wasn't he talking price stability when real estate prices ran up 300%? The reason is his croney banks were making money.

The price stability con artistry is used only when they are losing money as an excuse to print money and transfer the losses to suckers down the line.

But real estate prices will never reach those ridiculous heights no matter how much printing he does to bail out his buddies. In the process however, he will destroy the living standards of millions of people who tried to work and save for a better future.

Carl_T · Post by **Carl_T** » 15 Oct 2010 21:48

Satya_anveshi wrote: But I am afraid those assumptions need to be questioned also:
- US cheapening the dollar and subsequently other countries responding with similar actions will nullify all the effect; On the other hand if other countries don't respond their survival will be at risk; So, US action of cheapening will help them continue their binge vs others’ actions will be to sustain their bare min needs;

Not exactly, other countries may not respond at all. Cheapening the USD will actually help US export of services, something which is sorely needed, judging by the astronomical trade deficit and restore balances rather than exacerbating them.

Satya_anveshi wrote: - The whole argument of deflation seems suspect to me. As a consumer there is nary a thing I can afford now which I couldn't couple of years ago; Gas prices, groceries, bank loans, home prices (for the most part and US govt/institutions is doing everything to curtail fall in prices) - so, where is deflation. On the other hand, it is most convenient argument to continue with 24/7 printing; currently that is the only thing they can do and will do. Buying the deflation argument is perpetuating the plunder and also putting everyone at risk; It doesn't solve the root problem (deficit adjustment is temporary but can they pay those debts when it is due?) - that is highly suspect.

It seems suspect to you because there really isn't deflation yet. Deflation may seem trivial but it is an extremely serious outcome. We're in a situation where there needs to be much more lending and borrowing in the markets, and there always needs to be some degree of inflation in order to ensure that.

Satya_anveshi wrote: - Lastly, if US continues to dilute $ and push everyone else under the bus to not cheapen their currencies (obviously they have to threaten them for not doing it), what confidence $ will command post that action? If it is under threat, how does "cheapening" not worsen it and help it survive?

Again, it's not clear at all that other nations will cheapen their currencies. Cheapening currency involves printing more of it, and it may not be beneficial depending upon each country's macroeconomic situation.

A cheaper dollar is the way to go for the US, there is no other way to reduce the trade deficit.

ramana · Post by **ramana** » 15 Oct 2010 21:57

Neshant , The Tea Party is saying exactly the same thing but in a more in-elegant manner.

SwamyG · Post by **SwamyG** » 15 Oct 2010 22:02

Neshant wrote:But real estate prices will never reach those ridiculous heights no matter how much printing he does to bail out his buddies. In the process however, he will destroy the living standards of millions of people who tried to work and save for a better future.

Tried to save? Savings is a joke in America. When the savings rate was going up just after the meltdown, the experts were warning how it is good in the long term but bad for short term. It has been quite sometime when humans were considered humans, now we are all just "consumers".

SwamyG · Post by **SwamyG** » 15 Oct 2010 22:03

ramana wrote:Neshant , The Tea Party is saying exactly the same thing but in a more in-elegant manner.

They are just people moved by the various talking points and Kochs of the country. Gullible people.

Satya_anveshi · Post by **Satya_anveshi** » 15 Oct 2010 23:29

Carl_T wrote:Not exactly, other countries may not respond at all.

EU-check;
Japan-check;
China-yes/no-yes/no; but they have most to lose;
Desh-already made a statement that we won't be willing bakra; we may end up being one but we have a statement to go with
BR-check

Who else that matter do you want to come out in open? Congo and/or DPRK?

And while you throw them under the bus and still expecting to buy your stuff (reasoning is based in exports) at the same or incresed level defies sense too.

>>>Deflation may seem trivial but it is an extremely serious outcome
so we are told but no proof point. Considering a $2 shirt selling for $35 in US malls falls to $30 will lead to serious outcome, may be it should. It may be good to have 300m overfed masti baaz suffer a little than others struggling for their bare min needs.

ramana · Post by **ramana** » 16 Oct 2010 00:25

Satya, The local radio station financial reporter was saying current Consumer Price Index shorn of some commodities is showing deflationary trends.

Ambar · Post by **Ambar** » 16 Oct 2010 02:41

I take CPI numbers with a pinch of salt. There could be deflation in certain sectors like real estate, new autos, designer clothes and wages, but by and large prices have shot up for basic necessities like food,rent,gas and local sales taxes.

As for debasing the currency as a path towards prosperity,well,US world dominance in 20th century,Germany's reemergence as a leader in high quality industrial products and Japan's rise in the 60s and 70s as a giant in high-technology goods came about when their currencies were stable and strong. If Ben Bernanke thinks that weakening the dollar by 20-25% will bring back manufacturing jobs then he is sadly mistaken. What's gonna stop companies from shipping jobs to countries like Cambodia,Vietnam,Bangladesh or an emerging Africa?

Trade among human societies have always been about two people selling each other their best products, unfortunately it is now down to selling cheapest junk to clueless consumers.

Satya_anveshi · Post by **Satya_anveshi** » 16 Oct 2010 04:53

ramana wrote:Satya, The local radio station financial reporter was saying current Consumer Price Index shorn of some commodities is showing deflationary trends.

Ramana garu, (apparel, recreation, used cars... prices declined, everything else increased

)

BLS Press Release on CPI - Oct 15, 2010

Consumer Price Index - September 2010

The Consumer Price Index for All Urban Consumers (CPI-U) increased
0.1 percent in September on a seasonally adjusted basis, the U.S.
Bureau of Labor Statistics reported today. Over the last 12 months,
the all items index increased 1.1 percent before seasonal adjustment.

Increases in food indexes and another rise in the gasoline index
contributed to the all items seasonally adjusted increase this month.
Four of the six major grocery store food group indexes increased in
September as the food index posted its largest increase since October
2008. The gasoline index rose again in September, leading to a third
consecutive increase in the energy index despite a decline in the
index for household energy.

The index for all items less food and energy was unchanged in
September, as it was in August. The shelter index was unchanged for
the second month in a row. The indexes for apparel, household
furnishing and operations, recreation, and used cars and trucks all
declined in September, offsetting a sharp increase in the index for
medical care and a slight increase in the index for new vehicles.

Over the last 12 months, the index for all items less food and energy
rose 0.8 percent, the lowest 12-month increase since March 1961, with
the shelter component down 0.4 percent. The food index rose 1.4
percent, with both the food at home index and food away from home
index rising the same 1.4 percent. The energy index rose 3.8 percent
over the last year, with gasoline up 5.1 percent.

Hari Seldon · Post by **Hari Seldon** » 16 Oct 2010 06:53

^^^ Errr, seems to me we may be conflating deflation with price dips only. The two are sometimes related but certainly not the same thing.

Deflation is, quite blandly, a decrease in the net supply or availability of money or money-substitutes. The latter is, overwhelmingly, credit. And the reason we say we have deflation on today despite base money soaring to levels unprecedented is that the extinguishing of debt - claims on others' revenue streams that today far exceed the sum total of said revenue streams - due to deleveraging, bankruptcies, delinquencies and the like is phenomenal, and far exceeds the rise in base money the fed has thus far allowed. QE2 may try to change that but IMHO, won't go very far simply because the total debt - public + private - is just so large only.

OK, but if inflation results in rising prices, shouldn't deflation result in falling prices? Well, yes and no. Deflation is already causing massive drops in the prices of certain asset classes such as realty and some financial securities. BUt these are being propped up brazenly and overtly by the Fed (i.e. the private banking cartel) and the ~~Feral~~ Federal gubmint.

Far before deflation may or maynot reach ordinary essentials and commodities, it will destroy sources of incomes and livelihoods for ordinary people - investments, job creation, capital formation - everything is indefinitely postponed as long as deflation is in play. That causes even slightly falling prices as appearing to be rising only since incomes crash at a much faster rate than the general price level. That is why deflation is hajaar more painful that the fed bogeyman inflation. Oh, IMVHO and all that.

Jai ho.

abhishek_sharma · Post by **abhishek_sharma** » 16 Oct 2010 10:12

Five Zombie Economic Ideas That Refuse to Die

http://www.foreignpolicy.com/articles/2 ... use_to_die

Neshant · Post by **Neshant** » 16 Oct 2010 14:16

ramana wrote:Neshant , The Tea Party is saying exactly the same thing but in a more in-elegant manner.

I prefer the inelegant manner. Its closer to the truth.

In other news, doesn't anyone find it the least bit crazy that one guy like Bernanke is fiddling away at the top and making decisions involving trillions of dollars as if he was the embodyment of the free market ? The entire concept of a free market has gone out the window with one guy at the top deluding himself into thinking he knows what ails the economy and how to spend peoples' money to cure it.

This is the guy who practically slept his way into the biggest economic scam in history.

By the time this crash is done, my guess is Bernanke will be revealed as knowing little more than a guy rolling dice at a craps table in Vegas.

Ron Paul asked him a pertinent question not to long ago : At what point will he regard his fiddling around with money printing and the economy in general as being unproductive. His indirect answer was never. But I believe he will eventually get the boot once the economy comes crashing down.

ShivaS · Post by **ShivaS** » 17 Oct 2010 00:07

The Americans are the most avaricious consumers, a cheaper dollar makes the imports of finished goods, food products, flower bouquet from Argentina expensive there by giving impetus to local manufacture. Unlike PRC America is a responsible democracy and million times more transparent than PRC, the flight of capital will not occur on the contrary it will attract even more capital.

The phoney investors will vanish , A cheaper dollar means America will be like India, PRC, as wages will fall will attract more investment, As the infrastructure is far better than most countries. Why do you think Toyota, BMW, Mecs opened plants in US because of cost advantage, extend that thinking to the whole economy.
Example of high price of peanuts(butter) and sugar is because they are protected in US agriculture, which Sugar lobby leaves no stone unturned to stop cane sugar from Haiti Cuba west Indies come in like wise peanut lobby. The US protects Chquitita bananas too

That the only way to level the field, and then wages will crawl back….

Neshant · Post by **Neshant** » 17 Oct 2010 01:13

Not unless America goes from first world to third world is manufacturing coming back. The wage disparity between the east and west is huge.

What's ridiculous is the banking and financing jokers who wrecked the economy with the real estate fraud are now back in the driver's seat leading the charge to wreck purchasing power to 'solve' the issue. Rather than letting the free market adjust prices downwards (leving them insolvent), they want prices to stay up and living standards of the people to be destroyed. That way their losses are passed on to society. Its a scam but many are too blind to see it.

There is no such thing as an economy that destroys its way to success.

The truth is the free market does not need any of these fools interfearing. It operates quite nicely on its own reducing or increasing prices & wages based on supply and demand.

I find it so bizzarre that things have got to a point where one clueless guy at the top like Bernanke is fiddling around with trillions and the lives of hundreds of millions as if he is some all-knowing Oracle. Its like a monkey in a nuclear power plant running around pushing buttons and pulling levers. I am almost certain this is going to end disasterously.

Hari Seldon · Post by **Hari Seldon** » 17 Oct 2010 09:35

U.S. backs off in currency dispute with China (Reuters)

The Obama administration backed away on Friday from a showdown with Beijing over the value of China's currency that would have caused new frictions between the world's only superpower and its largest creditor.

The Treasury Department delayed a much-anticipated decision on whether to label China as a currency manipulator until after the U.S. congressional elections on November 2 and a Group of 20 leaders summit in South Korea on November 11.

China left little doubt about the rancor that would ensue if it is branded as a currency manipulator -- a largely symbolic move by the United States that would mandate more consultations with Beijing but no immediate penalties.

"The Chinese yuan should not be a scapegoat for the United States' domestic economic problems," Commerce Ministry spokesman Yao Jian said on Friday.

Wow. Despite myself, can't help but admire cheeni negotiation positions. They have gotten the hyperpower to stand down yet again. Wow again.

Of course, the present course is unsustainable and something will have to give and when it happens it won;t be pretty and all. And of course, am sure nazi germany also looked admirably strong and upright and all in the late 30s. Time will tell where this is going.

Neshant · Post by **Neshant** » 17 Oct 2010 09:44

Ron Paul's "Audit the Federal Reserve" bill got over 320 politicians signing up to co-sponsor it when people where watching. When people were not watching, 114 of them quietly changed sides to vote against it and defeated the bill.

This shows you how deeply rooted corruption is in the system that 114 politicians can be bought off by banking lobbyists so easily. Its also testament to how powerful the federal reserve is in getting what it wants.

Despite the bill being shot down, it has woken up a lot of people. It shows how powerful this private banking cartel's role in politics is and the lengths it will go to preserve its monopoly over the fruits of peoples' labor.

Audit the Fed Update: The Fed has won the battle but they will lose the war
http://www.youtube.com/watch?v=7IixLg4AtNI

Chinmayanand · Post by **Chinmayanand** » 17 Oct 2010 14:48

Got this in email ... it's a bit long but worth posting in full

-------------------------------------------------------

The Foreclosure Mess

Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper—only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, the note, which is the actual IOU that people sign, promising to pay back the mortgage loan

Before mortgage-backed securities, most mortgage loans were issued by the local savings & loan. So the note usually didn’t go anywhere: it stayed in the offices of the S&L down the street.

But once mortgage loan securitization happened, things got sloppy—they got sloppy by the very nature of mortgage-backed securities.

The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.

Therefore, as everyone knows, the loans were “bundled” into REMIC’s (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes), and then “sliced & diced”—split up and put into tranches, according to their likelihood of default, their interest rates, and other characteristics.

This slicing and dicing created “senior tranches,” where the loans would likely be paid in full, if the past history of mortgage loan statistics was to be believed. And it also created “junior tranches,” where the loans might well default, again according to past history and statistics. (A whole range of tranches was created, of course, but for the purposes of this discussion we can ignore all those countless other variations.)

These various tranches were sold to different investors, according to their risk appetite. That’s why some of the MBS bonds were rated as safe as Treasury bonds, and others were rated by the ratings agencies as risky as junk bonds.

But here’s the key issue: When an MBS was first created, all the mortgages were pristine—none had defaulted yet, because they were all brand-new loans. Statistically, some would default and some others would be paid back in full—but which ones specifically would default? No one knew, of course. If I toss a coin 1,000 times, statistically, 500 tosses the coin will land heads—but what will the result be of, say, the 723rd toss? No one knows.

Same with mortgages.

So in fact, it wasn’t that the riskier loans were in junior tranches and the safer ones were in senior tranches: rather, all the loans were in the REMIC, and if and when a mortgage in a given bundle of mortgages defaulted, the junior tranche holders would take the losses first, and the senior tranche holder last.

But who were the owners of the junior-tranche bond and the senior-tranche bonds? Two different people. Therefore, the mortgage note was not actually signed over to the bond holder. In fact, it couldn’t be signed over. Because, again, since no one knew which mortgage would default first, it was impossible to assign a specific mortgage to a specific bond.

Therefore, how to make sure the safe mortgage loan stayed with the safe MBS tranche, and the risky and/or defaulting mortgage went to the riskier tranche?

Enter stage right the famed MERS—the Mortgage Electronic Registration System.

MERS was the repository of these digitized mortgage notes that the banks originated from the actual mortgage loans signed by homebuyers. MERS was jointly owned by Fannie Mae and Freddie Mac (yes, those two again —I know, I know: like the chlamydia and the gonorrhea of the financial world—you cure ‘em, but they just keep coming back).

The purpose of MERS was to help in the securitization process. Basically, MERS directed defaulting mortgages to the appropriate tranches of mortgage bonds. MERS was essentially where the digitized mortgage notes were sliced and diced and rearranged so as to create the mortgage-backed securities. Think of MERS as Dr. Frankenstein’s operating table, where the beast got put together.

However, legally—and this is the important part—MERS didn’t hold any mortgage notes: the true owner of the mortgage notes should have been the REMICs.

But the REMICs didn’t own the notes either, because of a fluke of the ratings agencies: the REMICs had to be “bankruptcy remote,” in order to get the precious ratings needed to peddle mortgage-backed Securities to institutional investors.

So somewhere between the REMICs and MERS, the chain of title was broken.

Now, what does “broken chain of title” mean? Simple: when a homebuyer signs a mortgage, the key document is the note. As I said before, it’s the actual IOU. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the “chain of title.”

You can endorse the note as many times as you please—but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other.

If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.

To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

Read that last sentence again, please. Don’t worry, I’ll wait.

You read it again? Good: Now you see the can of worms that’s opening up.

The broken chain of title might not have been an issue if there hadn’t been an unusual number of foreclosures. Before the housing bubble collapse, the people who defaulted on their mortgages wouldn’t have bothered to check to see that the paperwork was in order.

But as everyone knows, following the housing collapse of 2007-’10-and-counting, there has been a boatload of foreclosures—and foreclosures on a lot of people who weren’t sloppy bums who skipped out on their mortgage payments, but smart and cautious people who got squeezed by circumstances.

These people started contesting their foreclosures and evictions, and so started looking into the chain-of-title issue, and that’s when the paperwork became important. So the chain of title became crucial and the botched paperwork became a nontrivial issue.

Now, the banks had hired “foreclosure mills”—law firms that specialized in foreclosures—in order to handle the massive volume of foreclosures and evictions that occurred because of the housing crisis. The foreclosure mills, as one would expect, were the first to spot the broken chain of titles.

Well, what do you know, it turns out that these foreclosure mills might have faked and falsified documentation, so as to fraudulently repair the chain-of-title issue, thereby “proving” that the banks had judicial standing to foreclose on delinquent mortgages. These foreclosure mills might have even forged the loan note itself—

Wait, why am I hedging? The foreclosure mills did actually, deliberately, and categorically fake and falsify documents, in order to expedite these foreclosures and evictions. Yves Smith at Naked Capitalism, who has been all over this story, put up a price list for this “service” from a company called DocX—yes, a price list for forged documents.

Talk about your one-stop shopping!

So in other words, a massive fraud was carried out, with the inevitable innocent bystanders getting caught up in the fraud: the guy who got foreclosed and evicted from his home in Florida, even though he didn’t actually have a mortgage, and in fact owned his house free –and clear. The family that was foreclosed and evicted, even though they had a perfect mortgage payment record. Et cetera, depressing et cetera.

Now, the reason this all came to light is not because too many people were getting screwed by the banks or the government or someone with some power saw what was going on and decided to put a stop to it—that would have been nice, to see a shining knight in armor, riding on a white horse.

But that’s not how America works nowadays.

No, alarm bells started going off when the title insurance companies started to refuse to insure the titles.

In every sale, a title insurance company insures that the title is free –and clear —that the prospective buyer is in fact buying a properly vetted house, with its title issues all in order. Title insurance companies stopped providing their service because—of course—they didn’t want to expose themselves to the risk that the chain –of title had been broken, and that the bank had illegally foreclosed on the previous owner.

That’s when things started getting interesting: that’s when the attorneys general of various states started snooping around and making noises (elections are coming up, after all).

The fact that Ally Financial (formerly GMAC), JP Morgan Chase, and now Bank of America have suspended foreclosures signals that this is a serious problem—obviously. Banks that size, with that much exposure to foreclosed properties, don’t suspend foreclosures just because they’re good corporate citizens who want to do the right thing, and who have all their paperwork in strict order—they’re halting their foreclosures for a reason.

The move by the United States Congress last week, to sneak by the Interstate Recognition of Notarizations Act? That was all the banking lobby. They wanted to shove down that law, so that their foreclosure mills’ forged and fraudulent documents would not be scrutinized by out-of-state judges. (The spineless cowards in the Senate carried out their master’s will by a voice vote—so that there would be no registry of who had voted for it, and therefore no accountability.)

And President Obama’s pocket veto of the measure? He had to veto it—if he’d signed it, there would have been political hell to pay, plus it would have been challenged almost immediately, and likely overturned as unconstitutional in short order. (But he didn’t have the gumption to come right out and veto it—he pocket vetoed it.)

As soon as the White House announced the pocket veto—the very next day!—Bank of America halted all foreclosures, nationwide.

Why do you think that happened? Because the banks are in trouble—again. Over the same thing as last time—the damned mortgage-backed securities!

The reason the banks are in the tank again is, if they’ve been foreclosing on people they didn’t have the legal right to foreclose on, then those people have the right to get their houses back. And the people who bought those foreclosed houses from the bank might not actually own the houses they paid for.

And it won’t matter if a particular case—or even most cases—were on the up –and up: It won’t matter if most of the foreclosures and evictions were truly due to the homeowner failing to pay his mortgage. The fraud committed by the foreclosure mills casts enough doubt that, now, all foreclosures come into question. Not only that, all mortgages come into question.

People still haven’t figured out what all this means. But I’ll tell you: if enough mortgage-paying homeowners realize that they may be able to get out of their mortgage loans and keep their houses, scott-free? That’s basically a license to halt payments right now, thank you. That’s basically a license to tell the banks to take a hike.

What are the banks going to do—try to foreclose and then evict you? Show me the paper, Mr. Banker, will be all you need to say.

This is a major, major crisis. The Lehman bankruptcy could be a spring rain compared to this hurricane. And if this isn’t handled right—and handled right quick, in the next couple of weeks at the outside—this crisis could also spell the end of the mortgage business altogether. Of banking altogether. Hell, of civil society. What do you think happens in a country when the citizens realize they don’t need to pay their debts?

Neshant · Post by **Neshant** » 17 Oct 2010 15:05

The cynical side of me says this is just a govt attempt to allow dead beats to live rent-free in their houses till inflation catches up with housing prices. That way banks are made whole. But guess who gets to absorb that loss.

The real suckers are people who saved or paid their mortgage on time even though their house is underwater now.

With the federal reserve goons setting an example, you are better off being a crook than behind honest in today's economy. Being a crook brings good dividends while being honest is a liability.

Singha · Post by **Singha** » 17 Oct 2010 16:55

by my estimation - the US is meekly going down and handing over the baton to china in area after area - albeit with some foot dragging and hostile noises to accompany the surrender ceremonies. this is not a empire with a lot of fight left.

their ability to stir up trouble on china's periphery - the traditional route to keep rivals off balance is non-existent imo
- Russia - alienated by the US over many issues like ABM in europe , georgia, chechnya, CAR control, iran
- India - nowhere near looking for a fight with china if we can help it
- Pakistan - need not say anything here - the next Shaanxi 2.0 - soot blackened mines and sweatshops presided over by a tyrant named DarkSeid
- Myanmar - smart junta who is balancing all players, and the US has no leverage on them - I guess the sons and daughters of their elites do not study in haavad or columbia

- japan - advanced technology but a aeging race of people who have lost the spark of hope and youth....going quietly into the night. the Elves of LOTR.
- south korea - poised to benefit from chinese import market in the decades ahead, ethnic blood brothers of the northern han and no need to upset the applecart. china is also glad to have "another rich small country" on the border to benefit from. kept in check by a suicidal basket case north korea.
- vietnam/cambodia/laos - poised to benefit from chinese/korean factories as a "bangladesh of the east"
- china has also ruthlessly crushed all internal dissent and any idea or person who can gather a alternative viewpoints followers around them - the falun gong is just one example.

so any way one tries to game it - the "american century" is well and truly over.

Hari Seldon · Post by **Hari Seldon** » 17 Oct 2010 18:40

^^ +1. Perhaps.

Am still hoping, against hope perhaps, that the US will be back at exactly the time we all write it off....who knows?

Singha · Post by **Singha** » 17 Oct 2010 19:17

I am avid reader of world history. very rarely does one see a declining empire claw its way back to the zenith and fight off deadly challengers once the dominos start to fall. perhaps rome was one who fought off carthage. the eastern roman empire did keep the turks at bay against severe odds for some time. but eventually even the walls of constantinople were breached by brute force.

USUALLY its never military force that forces the system to leave steady state - but internal disunity in politics, bad economic policy, misrule by oligarchs, lack of exportable products, middlemen taking more and more of trade transactions, weakening of traditional allies and trade markets, loss of export markets, loss of important sources of imported materials, weakening of r&d in warfare due to funds, people growing disinterested and turning more insular and religious/loss of faith in binding religious and cultural glues, environmental degradation or climate changes leading to loss of pasture/crops ...all of these the american empire is building up in good measure....case in point being the american south-west - an area of land that was devastated by overpopulation and farming/grazing a thousand years ago (anasazi indians) and virtually abandoned but settled by virtual of cheap energy(air conditioning) and colorado water and acqifiers. large parts of the american south have a climate unsuitable to caucasian settlement and were strongly populated only after indoor AC arrived perhaps.

future arbiters of world trade will be the Apokolips type nations like china, agricultural surplus nations in a time of climate change (those with land and forest to keep raping for a while longer) canada, brazil, ukraine, sweden..; mineral powers like australia, brazil, russia ..... generally climatic patterns tend to be good and moderate before turning bad for another few hundred years and so on.

only heavily armed and advanced nations able and willing to fight viciously for all slices of the pie will prosper in the new age.

Vamsee · Post by **Vamsee** » 17 Oct 2010 20:25

Singha wrote: future arbiters of world trade will be the Apokolips type nations like china, agricultural surplus nations in a time of climate change (those with land and forest to keep raping for a while longer) canada, brazil, ukraine, sweden..; mineral powers like australia, brazil, russia ..... generally climatic patterns tend to be good and moderate before turning bad for another few hundred years and so on.

only heavily armed and advanced nations able and willing to fight viciously for all slices of the pie will prosper in the new age.

Singha,
1) Agriculture Superpowers
Not likely. The days of Agriculture super powers dominating world are over. Climate change or no climate change.
Food and Water problems are nothing but energy problems. Even if global climate change destroys agriculture in majority of nations, most nations can still produce enormous amounts of food using http://en.wikipedia.org/wiki/Vertical_farming. It is not done today because it is costly (energy wise). There is no reason why advanced nations (including India) should not fire up nuclear power reactors and build farm scrapers on large scale (they would occupy way less space than traditional farms and consume less water).
2) China and its chamcha nations
This thread itself has so many pointers which indicate that the biggest impact of global financial meltdown may be on China. Lets wait another 5-10 years to see if China can weather this crisis.

Hari Seldon · Post by **Hari Seldon** » 17 Oct 2010 21:21

Great Mathematician - and easily among the greatest of the 20th century - sri Benoit Mandelbrot is dead. http://nyti.ms/bjyxN8

His work, AFAIK, led to fractal geometry and had a lot to do with predicting the financial crash.

shyamd · Post by **shyamd** » 18 Oct 2010 02:23

Hari Seldon wrote:^^^ Errr, seems to me we may be conflating deflation with price dips only. The two are sometimes related but certainly not the same thing.

Deflation is, quite blandly, a decrease in the net supply or availability of money or money-substitutes. The latter is, overwhelmingly, credit. And the reason we say we have deflation on today despite base money soaring to levels unprecedented is that the extinguishing of debt - claims on others' revenue streams that today far exceed the sum total of said revenue streams - due to deleveraging, bankruptcies, delinquencies and the like is phenomenal, and far exceeds the rise in base money the fed has thus far allowed. QE2 may try to change that but IMHO, won't go very far simply because the total debt - public + private - is just so large only.

OK, but if inflation results in rising prices, shouldn't deflation result in falling prices? Well, yes and no. Deflation is already causing massive drops in the prices of certain asset classes such as realty and some financial securities. BUt these are being propped up brazenly and overtly by the Fed (i.e. the private banking cartel) and the ~~Feral~~ Federal gubmint.

Far before deflation may or maynot reach ordinary essentials and commodities, it will destroy sources of incomes and livelihoods for ordinary people - investments, job creation, capital formation - everything is indefinitely postponed as long as deflation is in play. That causes even slightly falling prices as appearing to be rising only since incomes crash at a much faster rate than the general price level. That is why deflation is hajaar more painful that the fed bogeyman inflation. Oh, IMVHO and all that.

Jai ho.

I couldn't have put it better. Spot on there. Just to summarise, nothing is going to stop the inevitable.

New evidence suggests that the low interest rates are causing a bubble in emerging market economies. Which is why all the emerging market nations are attempting to slow down inflows.

Neshant · Post by **Neshant** » 18 Oct 2010 03:25

Singha wrote:USUALLY its never military force that forces the system to leave steady state - but internal disunity in politics, bad economic policy, misrule by oligarchs, lack of exportable products, middlemen taking more and more of trade transactions, weakening of traditional allies and trade markets, loss of export markets, loss of important sources of imported materials, weakening of r&d in warfare due to funds, people growing disinterested and turning more insular and religious/loss of faith in binding religious and cultural glues, environmental degradation or climate changes leading to loss of pasture/crops

Way too many useless middlemen have set themselves up in the system collecting a fee and stealing from others through fiat money trickery. They do no real work but cut a hole in the jugular vein and siphon off the productive energies of society while bribing politicians and packing govt positions with their ex-employees.

Until this issue is solved, I don't see any forestalling of the decline. How is it even possible that a multi-trillion dollar fraud has taken place and not one person is in jail.

This is what motivated me to buy physical gold long ago to keep the fruits of my labor beyond the reach of these crooks. I'll sell it when I see basic levels of trust/honesty return to the system.

Time to sell it is when I see :

1) Fewer parasites
2) Way smaller govt (< 65% of its present bloated size)
3) End of the Federal Reserve private banking cartel & their scams
4) A return to honest money

Neshant · Post by **Neshant** » 18 Oct 2010 06:20

An alternate view from mine but here it is nonetheless :

Richard Duncan: U.S. Economy on Life Support
http://www.youtube.com/watch?v=Iv-FtMbP6bo

shyam · Post by **shyam** » 18 Oct 2010 06:27

Got this from TAE tweet

DYLAN RATIGAN: FORECLOSURE FRAUD & $45 TRILLION DOLLARS

Hari Seldon · Post by **Hari Seldon** » 18 Oct 2010 06:54

future arbiters of world trade will be the Apokolips type nations like china, agricultural surplus nations in a time of climate change (those with land and forest to keep raping for a while longer) canada, brazil, ukraine, sweden..; mineral powers like australia, brazil, russia ..... generally climatic patterns tend to be good and moderate before turning bad for another few hundred years and so on.

only heavily armed and advanced nations able and willing to fight viciously for all slices of the pie will prosper in the new age.

Clearly, India is ruled out from any and all victory-potentialed categories. Unsurprising.

The 'china model' is gaining currency, respect and has results to show on the ground. Unsurprisingly. In a time of strife, instability and crisis, people will prefer order to 'democrazy and phreedom', perhaps. Certainly, the gains wrought (and hard-won, btw) in the last century look likely to unwind and the 21st century may endup looking a lot like the 19th. Grave new world, indeed.

Neshant · Post by **Neshant** » 18 Oct 2010 07:39

Neshant · Post by **Neshant** » 18 Oct 2010 07:41

Robert Prechter radio interview : Is America Facing Deflationary Depression? Part 1 of 3

Part I : http://www.youtube.com/watch?v=V7YydysOhSw

follow it to part II and part III

Singha · Post by **Singha** » 18 Oct 2010 09:03

kazakhstan is one nation which is witnessing a building and commercial boom due to its oil and mineral resources plus ready markets in china and russia. its capital Astana is like a bizarre mirage in the middle of the desert like Urumqi. its leader is a 'strongman' in the chinese/brezhnev mould named Nazarbayev.

again - stability amidst chaos (afghanistan next door), strong police rule, results, food on the plate, money for the oligarchs rule.

http://www.thenational.ae/news/worldwid ... s-the-gulf