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ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Archive for July 20th, 2011

You want to fix the U.S. economy? Here’s a start…

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by Charles Hugh Smith
Posted July 19, 2011
on Of Two Minds 

A SIMPLE 8-POINT PLAN WOULD RESTORE BOTH THE BANKING and the real estate sectors, and end the political dominance of the parasitic “too big to fail” banks. Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore “aggregate demand.” OK, here’s how to start:

1. Force all banks to mark all their assets to market at the end of each trading day, including all derivatives of all types, including over-the-counter instruments.

2. Allow citizens to discharge all mortgage and student loan debt in bankruptcy court, just like any other debt.

3. Banks must mark all their real estate to market weekly as defined by “last sales of nearby properties” adjusted for square footage and other quantifiable measures (i.e. like Zillow.com).

4. Require mortgage servicers and all owners of mortgage-backed securities to mark every asset within each pool to market weekly.

5. Any mortgage, loan or note which was fraudulently originated, packaged and sold, including the misrepresentation of risk, the manipulation of risk ratings, fraudulent documentation by any party, etc., will be discharged as uncollectable and the full value wiped off the books and title records without recourse by any of the parties.

If a bank fraudulently originated a mortgage and the buyer misrepresented material facts on the mortgage documents, then both parties lose all claim to the note and the underlying asset, the house, which reverts to the FDIC for liquidation, with the proceeds going towards creditors’ claims against the bank.

6. Any bank which misrepresents marked-to-market asset values will be fined $10 million per incident.

7. Any bank which is insolvent at the end of a trading day will be closed and taken over by the FDIC the following day, and liquidated in an orderly manner via open-market auctions of all assets, including REO (real estate owned).

8. All derivative positions held by the insolvent bank will be unwound immediately, and counterparties who fail to make good on their claims will also be closed, given to the FDIC and liquidated.

You know what this is, of course: a return to trustworthy, transparent accounting.
And you know what the consequences would be, too: all five “too big to fail” banks would instantly be declared insolvent, and most of the other top-25 big banks would also be closed and liquidated.

At least $3 trillion in impaired residential mortgage debt would be written off, maybe more, and $1 trillion in impaired commercial real estate would also be written down. Derivative losses are unknown, but let’s estimate it’s at least $1 trillion and maybe much more.

If $5.8 trillion of fantasy “value” is wiped off the nation’s books, that’s only a 10% reduction in net household and non-profit assets, which total $58 trillion. Even an $11 trillion hit would only knock off 20%. If that’s reality, if that’s what the assets are really worth in the real world, then let’s get it over with. Once we’ve restored truthful accounting and stopped living a grand series of debilitating lies, then the path will finally be clear for renewed growth.

The net result would be the destruction of the political power of the “too big to fail” banks, the clearing of the nation’s bloated, diseased real estate market, and the restoration of trust in institutions which have been completely discredited.

Bank credit would flow again, and we could insist on a healthy competitive system of 250 small banks instead of a corrupting system of 5 insolvent parasitic monsters and 20 other bloated but equally insolvent financial parasites.

Those who lied would finally get fried. At long last, those who misprepresented income, risk, etc. would actually pay some price for their malfeasance. Criminal proceedings would be a nice icing on the cake, but simply ending the pretence of solvency would go a long way to restoring banking and real estate and ending regulatory capture by TBTF banks.

What’s the downside to such a simple action plan? Oh boo-hoo, the craven politicos would lose their key campaign contributors. On the plus side, the politicos could finally wipe that brown stuff off their noses.

Debt Ceiling Drama

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by Dr. Ron Paul
Posted July 19, 2011

THE DEBT CEILING DEBATE IS PROVIDING PLENTY OF OPPORTUNITY for political theater in Washington. Proponents of raising the debt ceiling are throwing around the usual scare tactics and misinformation in order to intimidate opponents into accepting more debt and taxes. It is important to distinguish the truth from the propaganda.

First of all, politicians need to understand that without real change default is inevitable. In fact, default happens every day through monetary policy tricks. Every time the Federal Reserve engages in more quantitative easing and devalues the dollar, it is defaulting on the American people by eroding their purchasing power and inflating their savings away. The dollar has lost nearly 50% of its value against gold since 2008. The Fed claims inflation is 2% or less over the past few years; however economists who compile alternate data show a 9% inflation rate if calculated more traditionally. Alarmingly, the administration is talking about changing the methodology of the CPI calculation yet again to hide the damage of the government’s policies. Changing the CPI will also enable the government to avoid giving seniors a COLA (cost of living adjustment) on their social security checks, and raise taxes via the hidden means of “bracket creep.” This is a default. Just because it is a default on the people and not the banks and foreign holders of our debt does not mean it doesn’t count.

Politicians also need to acknowledge that our debt is unsustainable. For decades our government has been spending and promising far more than it collects in taxes. But the problem is not that the people are not taxed enough. The government has managed to run up $61.6 trillion in unfunded liabilities, which works out to $528,000 per household. A tax policy that would aim to extract even half that amount of money from American families would be unimaginably draconian, and not unlike attempting to squeeze blood from a turnip. This is, unequivocally, a spending problem brought about by a dramatically inflated view of the proper role of government in a free society.

Perhaps the most abhorrent bit of chicanery has been the threat that if a deal is not reached to increase the debt by August 2nd, social security checks may not go out. In reality, the Chief Actuary of Social Security confirmed last week that current Social Security tax receipts are more than enough to cover current outlays. The only reason those checks would not go out would be if the administration decided to spend those designated funds elsewhere. It is very telling that the administration would rather frighten seniors dependent on social security checks than alarm their big banking friends, who have already received $5.3 trillion in bailouts, stimulus and quantitative easing. This instance of trying to blackmail Congress into tax increases by threatening social security demonstrates how scary it is to be completely dependent on government promises and why many young people today would jump at the chance to opt out of Social Security altogether.

We are headed for rough economic times either way, but the longer we put it off, the greater the pain will be when the system implodes. We need to stop adding more programs and entitlements to the problem. We need to stop expensive bombing campaigns against people on the other side of the globe and bring our troops home. We need to stop allowing secretive banking cartels to endlessly enslave us through monetary policy trickery. And we need to drastically rethink government’s role in our lives so we can get it out of the way and get back to work.