Friday, 30 April 2010
Fabulous Fab Finance. Read more about it below...
The idea is to push slimy packages of derivative debt onto people who don't know what they're doing. Serving lumps to chumps, in other words. Like a high-school cafeteria.
Sometimes the victims are German banks. Sometimes they're hedge funds. And sometimes....yes....the victims are all of us.
Here is how it works. The lowly householder can't pay his mortgage, so the mortgage company takes the loss. The mortgage company goes broke so the banks take a loss. The bank takes a loss so another bank, the one that bought its derivative debt bomb, goes broke. And then, the feds step in and take the debt over. And then they add trillions more - claiming to protect everyone from everything...
...the guy who hasn't saved for his retirement gets Social Security. The guy who hasn't got health insurance gets Medicaid or Medicare or some sort of freebie medical help. The bankers get bailed out. GM gets bailed out. Farmers get subsidies. Poor people get food stamps. Lobbyists get contracts....
...and then the little government that is paying for all this can't go on...so a bigger government bails it out...
...and then, investors buy the big government's bonds...because they're safer...even though they're all in the same boat...
...and then the boat sinks! That's Fab Finance. More about it below....
In the meantime, here's a news item...
Government workers out-earn private sector workers.
That is part of the reason why the state, cities, counties and school boards are agonizing over how to bring their budgets in line with reduced tax revenues. Those budgets bear the pressure of salary scales for government workers that exceed those of the average private-sector worker/taxpayer.
This month, the federal Bureau of Labor Statistics released its annual look at compensation by region, by employer, by occupation, by just about any way you want to slice or dice it. Here's what it shows for Hampton Roads, as of July 2009:
The average full-time state and local government worker in our region earned $23.46 per hour. The average private sector worker made $18.87.
You might pass that off as an artifact of differences in the labor force of the two - that the private sector has, for example, more low-end service jobs. And there's an element of that. But the BLS handily provides numbers by occupation, so you can line up apples with apples.
And when you look many of them, government workers have the advantage. Take secretaries and administrative assistants. In Hampton Roads, they make an average of $16.86 per hour in government offices, compared to $13.72 in the private sector. In our area, health workers get $29.63, on average, in government jobs and $23.80 in private industry. The one place government workers are at a disadvantage is in the top managerial ranks.
But wages don't tell the whole story - about compensation, or about why governments are in financial distress.
It's the benefits. The paid leave.The health insurance.And especially, the pensions.
The BLS estimates that nationally, private industry pays $8.03 per hour in benefits while state and local governments pay $13.65 per hour. Add together pay and benefits on that national scale, and government work earns a 45 percent premium over the private sector.
The private sector is de-leveraging...as near as we can tell. Private businesses cut their payrolls. They trimmed expenses. They protected their profit margins - generally.
But the public sector figures it has a different role to play...a countercyclical role. While the private sector eases off, the public sector puts the pedal to the metal.
That's been the story for the last year and a half. The government pays more. Hires more. And floats deeper in the water.
Walter Wriston once commented that the "government can't go broke." But that just shows you why the banking sector is in such trouble; Wriston ran Citibank...
The trouble with most people in economics and finance these days is that they study too much math and not enough history. If they read more history they'd know that governments go broke all the time. They'd probably get a hint about why governments go broke too - they pay too much; hire too many people; give away too much money on bread and circuses; and they get involved in too many costly foreign wars.
Nothing really. But the fab finance is an innovation. Now, with the debt spread among so many unaware debtors...we can all go broke in a much bigger way.
And more thoughts...
While the whole nation seems to have bought into the 'recovery,' idea, we remain very skeptical. Some of the numbers seem to have bottomed out. But they are still terrible...and will probably begin a new decline soon.
We say that because the underlying causes of the downturn remain unfixed...and because the government is unfixing it even more. From what we can tell, the biggest jolt of stimulus in the history of the human race has stabilized US unemployment at about 10%...nearer to 20%, if you use a broader measure. It seems to have temporarily stabilized the housing market, with housing prices down 20% to 30%. (The first-time buyer credit expiring tomorrow!) And it seems to have slowed the move towards higher savings and less consumer spending.
Stock market investors seem to think that this gives them a great opportunity to make money. But it's hard to see how stocks could advance very much further, with the winds of de-leveraging blowing in their faces...and icebergs of debt still floating hither and yon.
This week, Greek debt broke free from the icepack and promptly sank. You can now get a higher yield from the Greeks than you can from the Argentine, which shows you how dangerous Greek debt has become.
Spanish unemployment is officially around 20% with huge debt problems of its own. And England is not far behind. In the coming elections, Britain faces the possibility of a deadlock, with no clear winner...at the same time its public finances get hit by another big wave of borrowing and refinancing.
There's also the situation in China. Real estate in some parts of Beijing is headed down, with some areas off 18%. Chinese stocks have been coming down too, with the index about 20% below its recent peak.
As near as we can tell, the US Economy is in the middle of a dangerous iceflow...and steaming ahead much too fast.
We reported yesterday that passengers are abandoning ship at a record rate - with citizens and stowaways headed for the life rafts. For the first time ever, more people are said to be leaving the US than entering it.
The smart money is putting on life vests and buying gold...and getting in the life boats.
Jules: "Dad, those are nice boots."
Dad: "Yep, bought them in Salta. Had them made."
Jules: "Can I get a pair made the next time I'm down there?"
Dad: "Sure, but this fellow won't make handmade boots for just anyone. You need an introduction. And 800 pesos. Well, actually, you probably just need 800 pesos. But I'll introduce you anyway.
"A man doesn't like to give away the name of his bootmaker...or the telephone number of his cook. Unless the cook isn't any good."
Jules: "Dad, we don't have a cook."
By Bill Bonner
This week, "Fabulous Fab" Tourre was forced to appear before a US Senate. . The senators may not have been able to tell a derivative from a hole in the ground, but they knew what the mob wanted - blood. The poor French lamb was bled on Tuesday.
Meanwhile, an Englishman wrote to the TIMES, suggesting that media was being distracted from the big story:
"Based on recent Budget reports, since 2001 the proportion of GDP spent by [the UK] government has increased from 47 per cent to 55 per cent of GDP. Over the same period total revenues decreased from 48 per cent to 42 per cent of GDP; while total expenditures increased by 70 per cent, total revenues increased by only 25 per cent...
"The rates of growth in expenditures in the three largest items are: social protection and services, 92 per cent; health; 102 per cent; and education, 76 per cent. The main sources of tax revenue increased by much less: the increases in the three largest sources of tax revenues are income tax, 36 per cent; national insurance, 56 per cent; and VAT, 1.6 per cent."
He's right. Fabulous Fab is a side show. The real story is fab finance. And at some point in the future, the effect of modern financial theory will become clear: it turns little problems into big ones.
Chesterton wrote that a landlady should consider a new boarder's philosophy, not his bank account. But the financial whizzes cared nothing about philosophy. In every instance, they brushed aside qualitative judgments in favor of quantitative ones, turning trifling, idiosyncratic risks into systemic catastrophes. Naturally, Tourre comes from the math-mad French school system. All they care about is numbers. Because you can crunch them, massage them, and twist them into whatever shape you want.
If you look at the financial industry over the past two or three decades, you see more or less the same trends - economists turned into mathematicians, investors turned into gamblers, and finance professionals turned into conmen.
But behind these trends is a bigger one : little, current risks have turned into much bigger future ones. Mutual funds took away the risk of selecting a single bad company but they increased the risk that the whole stock market might become dangerously overvalued. Likewise, other new investment vehicles removed from the investor the burden of making his own decisions. He didn't have to study balance sheets or meet company executives. He needn't worry that his office building would be struck by lightning or that his favorite new technology would be upstaged by even newer technology. The investment industry made it easy for him. He could now act with the insouciance of a mortgage lender; he could buy an ETF or a REIT.
The man on the street found himself in a similar territory. No longer were his financial risks entirely his own. If he fell sick, he could count on the National Health Service in England...and now Obama's new nationalized health care program in America. And in the largest financial takeover of all time, the government took on the burden of retirement finance too. Now the consumer could spend all his money, rather than save it. Grasshoppers and aunts -- both got about the same government pension check. And now, society no longer faces the risk that some retirees will go broke; now it faces the risk that they all will.
The rise of the state corresponds to a decline in individual judgment.
The idea was to eliminate the risk personal failure by socializing them, much in the way an insurance company spreads the risk of fire hazard among hundreds of different homeowners.
Thus did the risk that one or two individual mortgages might go bad get replaced by the risk that the whole housing market would go bad. And instead of a relatively few bad decisions by a few bad bankers, we got a whole rotten mortgage industry. As for the risk that the homeowners might turn into pyromaniacs...the quants chose to ignore it. Then, in 2007, the whole town burned down.
The banks took horrible losses. The state rushed to the scene. It put out the fire at AIG, for example, and thereby kept the sparks off Goldman's roof. Iceland...Greece...Britain...the US - all poured liquidity onto the small forest brushfires...while debt tinder piled up in their public accounts. The big banks were saved. But now, government's own credit is at risk. From the householder to the mortgage lender to the big banks to the small governments to the big governments - fab finance pushes the costs of error into the future and onto a bigger and bigger pool of chumps.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.