For those “economists” who’ve lately been singing his praises on CNBC, all I have to say is this…

It takes a special kind of system (government) to screw up this badly and still be resoundingly supported by its leader.

In his reappointment speech Obama also pledged support for the continued secrecy independence of the Federal Reserve.

How foolish of citizens to inquire where trillions of dollars are being spent… clearly we should trust the former bankers running the Federal Reserve that regulate the banking system. After all, they obviously know what they’re doing.

Instead of perpetuating the broken system financed by politically embedded financial organizations, Obama could have attempted any of the following:

• Raise awareness of the ghastly unaffordable pension schemes which will inevitably crumble
• Strictly enforce FASB mark to market accounting standards instead of allowing companies to use “judgment” to value their toxic assets
• Clamp down on High-Frequency Trading
• Require the FDIC to close and wind down insolvent banks before the government taxpayer-funded safety net has to be used
• Eliminate alphabet soup bailout programs which are forms of corporate welfare
• Demanded transparency for toxic assets which traveled from insolvent banks to taxpayers
• Slash parts of a budget (military, NASA, HUD, etc.) that are so bloated we must borrow billions from foreigners to stay afloat.

Would that severely correct the housing and stock markets? Yes, probably. Can we continue on our current path? No. Will we eventually face unbearable consequences for our decisions? Yes.

Ironically, neither Bernanke nor Obama nor either political party seem to care about the following message:

It is not the responsibility of the Federal Reserve–nor would it be appropriate–to protect lenders and investors from the consequences of their financial decisions. – Ben Bernanke

So, Obama reappointing the guy who didn’t see any of this coming, who bailed out the irresponsible, who continues to provide cover for banks in the hopes that things will return to normal still makes Obama the “man of the people”? Why aren’t those who voted for Obama clamoring that this Bush appointee is more of the same? Why do horrible decisions not matter when *their* party is in charge?

The reappointment of Bernanke does have a silver lining. All the people that bought into the hope proffered in eloquent speeches that government can provide jobs, clean energy, healthcare, education and other goodies will eventually learn a valuable lesson. The love affair Americans have with celebrity, good looks and good speeches and a lack of discourse/intellectual honesty will finally meet its match against a tidal wave of financial reality.

We are witnessing firsthand government selling Hope while funding Grift.

A generation will learn that our government system, like all systems which redistribute power and wealth, is one that is relentlessly gamed and manipulated for the benefit of those in charge.

Takeaway: Strip away the external validation that media/family/friends give to people and institutions and think for yourself.

Andrew Cockburn, a socialist, writes an important piece for Counterpunch detailing the extent to which a few financial firms have the full ear of the White House.  As the US consolidates more power at a national level and with the Executive Branch of government, we see that these conflicts of interest will be more pronounced and dangerous.

Takeaway:  Popular arguments are rarely thought-provoking.  That which assuages us, nurtures our pre-existing worldviews and cannot possibly help us learn and grow.  Read what you disagree with.

The most successful heists are the ones that occur every day that we are not even aware of.  The Federal Reserve, the quasi-governmental agency run by ex-bankers, that controls the money supply, interest rates and manages the economy is an agency very few are familiar with.

Given the trillions of taxpayer dollars on the hook and the delicate state our economy is in, H.R. 1207 aims to audit the ongoing Federal Reserve activities.

For years, the author of this bill, Ron Paul, has spoken up and drawn attention to the importance of sound money (money with tangible value, like gold and silver) and an economy which is not micromanaged by ex-bankers or manipulated in a secretive fashion. Paul has always been a political outsider and it is good to finally see his attempts to uncover the truth finally gain some momentum.

Since politicians, like all of us, are self-interested, we need to exert our influence and let them know we expect this bill to pass.

Since this bill would expose a great deal of financial/governmental/corporate connections, it would not surprise me if there is another financial panic/disaster and this bill is pushed aside to give even more power to the Fed and Executive Branch.

The above video speaks volumes about the shape of our economy and the level of dishonesty that is fraught in our financial and economic system.

Takeaway:  As a man, it is imperative to be ever-inquisitive, curious and non-complacent.  Reading and questioning your beliefs can help you generate an Accurate Model of Reality and prepare better for your future.  Think for yourself and stand up for what you believe in, even if you stand alone.

hat tip:  Zero Hedge

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My morning bus rides invariably begin with a visit to the Bloomberg app on my iPhone. I find their journalism to be second to none in the financial space, thanks to Bloomberg’s worldwide focus and very informed opinion writers. However, I was taken aback when I came across the following headline and attached article last Thursday:  Citigroup Rescue Earns Three Times as Much as S&P 500

It is important to note the new title was modified from the original title “Citi pays taxpayers 3 times as much as S&P“.

Regardless of the title, this article contains blatant propaganda that is designed to mislead and deceive the Average Joe.  The general tone of the article suggests that the entire Citigroup “situation” is now a complete piece of historical fact to be analyzed as such.

Logic leads the reader to conclude that we (the taxpayers) have locked in some sort of gain, thus proving the Citi bailout was a good idea since we’ve collected a couple billion in dividends.

Nothing could be further from the truth, and there are many examples of how this logic is an inappropriate way to analyze any investment.

First, the author of this article is only talking about one government department, the Treasury.  Let’s review what happened here:  The Fed has purchased some $2-5 trillion in assets (depending on who you ask, and don’t you dare ask the Fed what they’ve purchased) from U.S. banks. This is the most important aspect of the multi-faceted bank bailout, for without these purchases, most major U.S. banks would be out of business.

What’s relevant here is that the Fed and the Treasury are completely separate government entities. The Fed is directly responsible for bidding up toxic assets and exposing taxpayers to massive, unknown, impossible to define amounts of credit risk. This socialization of losses is what saved Citi, but it didn’t cost the Treasury a dime.  To suggest that the taxpayers somehow made out like bandits is untrue, amateur reporting.

By stepping in and literally becoming THE market in many segments of the credit market, the Fed has so far done a fantastic job of propping up the assets on their balance sheet. That’s not to say they’re showing a gain, that’s not to say the Fed is showing a loss. Once again: no one knows.

What we do know is that the eventual value of most of these assets is going to be dependent on cash flows from mortgage payments, rather than current marks. Right now, these cash flows are a monumental risk, a subject which is completely ignored by this Bloomberg article.

Perhaps most important, the Fed is desperate to see these investments work out. Ultimately, this will corrupt what’s left to be corrupted in the political process. No wonder the Fed recently hired Linda Robertson, former lobbyist for Enron. They need to convince Congress to bailout everyone who can’t pay their mortgage.

Finally, this article represents a shift in attitudes towards government intervention since the March lows in the markets.  I have been complaining about this for months and it really bothers me.

When governments around the world intervened and markets still fell off a cliff, I felt like everyday people were finally thinking critically about the futility and backward logic of government.  When S&P went from 1575 to 900, people were really freaking out. When we went from 900 to 666, people got to talking about genuine reform. They expressed anger about how the government incentivizes bad behavior and excessive use of leverage.  Now that markets have bounced from 666 back to 900, people have turned back into mindless cheerleaders.

Talk of genuine reform has stalled as our problems have been bandaged by trillions of borrowed dollars.

The government has declared victory and the media keeps churning out propaganda, as evidenced by the article discussed above.

Aren’t we better than this?

As we mature, we realize nothing worthwhile comes easy.  Just as an alcoholic has to struggle through the shame and humiliation of addiction and the superstar athlete has to struggle through off-season practice, individuals can only grow and strengthen through facing pain.

Nature also teaches us that nothing is free.   The Law of Conservation of Energy and The Law of Conservation of Mass state that all energy and mass are conserved.  They may be redistributed, however, they are neither created nor diminished.

On a national level, we cannot escape our economic problems pain-free either.

Here are a handful of financial problems we are facing:

• Drastically unfunded pensions
• Trillion dollar deficits
• Toxic assets bought with taxpayer assistance to avoid bank balance sheet meltdowns
• Total reliance on government retirement and health benefits as population ages
• Total lack of comprehension that government cannot create new wealth, it can only redistribute or reallocate previous wealth.

The answers from our leaders have been to buy more time, borrow more money and avoid reality as long as possible.  The sleight of hand of verbal obfuscation (Congressional grandstanding, Fedspeak) and cheerful optimism will not fix these underlying issues.  Debts need to be repaid or defaulted on, they cannot be rolled over forever at favorable interest rates.

The flood of new money and credit is not prosperity, it is a sugar high that is not sustainable.  Like a marathon runner who vomits with exhaustion and dehydration, we cannot expect a packet of sugary government goo to provide us with meaningful sustenance.

When will this painful “growth” of financial sanity occur?  When will this reality be faced?  When will the veneer of prosperity via interventionism be ripped off?

Takeaway:  We only grow when we challenge our worldviews, struggle, and exit our comfort zone.  Comfort and complacency is the enemy.

Cramer has declared that The Depression Is Over.  While I admire his optimism, I find many important questions unanswered:

• Is an inevitable bankruptcy of GM, Ford or Chrysler fixed?
• Has the US stopped throwing money at wars?
• Have Social Security, Medicare, Medicaid and municipal pension plans all been adequately funded?
• Do you think any of these issues will slap consumer spending in the face?
• Isn’t there a chance that people will liquidate their portfolios as savings draw down?
  
• Isn’t it very possible things will get worse if our expectations about perpetually rising asset values are erroneous?

Tocqueville Asset Management did a great piece on this a while back.  Head fakes of 45, 54, and 67 percent happened in Japan, and they could likely happen here.  Likewise, we could have three bear market rallies and still end up lower 10 years from now.

The stock market is not the economy and the economy is not the stock market.  A stock market rally does not portend an improvement in the economy if the underlying fundamentals (entitlements, unfavorable business climate, corporate welfare, all-time low interest rates, proliferation of the FIRE economy) are not solved.

Takeaway:  It is important to have the most accurate model of reality as possible.  No matter which way the stock market goes, if the fundamentals haven’t changed, our economic behaviors (saving habits, spending habits) should not change either.

For my take on Cramer’s Daily Show appearance, click here.

A legitimate recovery will require prices bottoming and assets moving from weak hands (those incapable of paying debts) to strong hands (those that are). The notion that we need to “stabilize housing” is at the root of this crisis.

Recoveries cannot happen until losses are realized.

Since politicians are supposed to “do something” they will naturally do everything they can to fight economic reality and avoid this natural, painful part of the business cycle.

Five Things The Government Can Do Right Now to Help
Defeat the Stimulus Bill – The last thing we need to do is to get further into debt.

Eliminate the Commercial Paper Funding Facility, TARP, and all other financial acronyms that mask true transparency and price discovery – If you cannot succeed without the government backing your commercial paper, find a more viable source of funding, or start liquidating assets to raise capital. The taxpayer should not be on the hook for these losses. Instead of this corporate handout, eliminating payroll taxes and social security taxes is much more helpful solution for struggling families.

End the Wars in Iraq and Afghanistan and close non-essential bases around the world – There is no ROI for this spending, other than for the defense contractors and war-profiteers. Keeping America safe starts with a policy of common-sense national defense (easily cutting ¼ of our military budget) and avoiding involvement in foreign conflicts.

Eliminate bogus foreign aid – Giving billions after a natural disaster is one thing, but giving financial aid and weapons to warring countries has negative implications. Those actions come back to haunt us via blowback.

Most importantly, reset expectations – We have come to become dependent on cheap energy and resources, cheap sources of credit and government promises. These all need to be reset from “American” to “Reality”.

• Cheap energy and resources – China, India and all parts of the world are now competing over fewer and fewer resources. Prices will rise for water, oil and arable land. The President should communicate this since these higher prices are unavoidable.

• Cheap credit – A monetary system where bubbles continue to happen, banks with outrageous leverage can borrow from the government at below market rates and major distortions in the economy appear (growth of FIRE economy) are all signs of a broken system. Our fiat monetary system needs to be overhauled completely into something legitimate and stable (a whole topic for another day).

• Government promises – The entitlement mentality in America is alarming given what has occurred over the last few months. How can we borrow $900bn, pay it back with interest and still pay for all Social Security and medical entitlements? At the state level, the market has declined by 30%, yet serious pension renegotiation talks are not yet on the table for teachers, police, fire and other government “heroes”. If we want people to start saving money, living within their means, and not rely on taxpayers to raise their children for them, then we need to change our attitudes about what the role of government ought to be. Government cannot create wealth other than by redistributing it or printing up the money (devaluing the currency). This needs to sink in with citizens. It should start at the top.

Take power away from the federal government and give states, businesses, and individuals their power, money and responsibility back.

Takeaway: The government will pass the stimulus, but reality will continue. Continuing to try and force consumption and production when there is no demand for either will only delay the inevitable. It would be wise to start mentally accepting the fact that this recession will be long and drawn-out.

Thanks for reading.

To read about more harmful intervention, read here.

The main reason the stimulus is a poor idea is simply because the United States does not have the money. The actual “stimulation” will be done by Japanese and Chinese central banks lending our government the money. If you or I borrow money when we’re deep in debt, it is a miserable idea unless the money borrowed can miraculously pay off the debt one is currently in. By focusing on projects which do not yield positive returns, the existing bills guarantee the money spent will not be worth it.

Large portions of the proposed bills revolve around improving infrastructure. Pouring tax dollars into repairing bridges will not provide a positive return for the taxpayer since the money we are borrowing will never be paid back, it is simply maintenance. This plan might temporarily decrease unemployment, but that does not constitute a long term economic solution.

Companies overexpanded during the easy credit period from 2003-2006. As a result, we are left with huge overcapacities in factories, stores, and residential and commercial real estate. This easy credit-induced expansion was never sustainable and to try and prop up failing businesses and homeowners with a stimulus bill is a bad idea. The market does not need a kick-start, it needs a self-correction, where businesses close and orderly defaults take place since only a true correction can lead to normalcy and, then, legitimate expansion.

Future growth will also be far less than projected by this bill. If a corporation or “green company” needs to get federal assistance from the government to pay the bills and hire employees, is it really a solvent company? Also, why is government taking the risk with our money instead of entrepreneurs and venture capitalists? Why is the taxpayer put on the hook?

Lastly, the bill is chock full of good ol’ pork barrel spending and constituent handouts. Any politician that thinks spending $20bn on food stamps and $1bn on airport screening equipment will lead to future economic growth is delusional.

Once the stimulus has been spent, what are we left with? Bigger bills to pay. The almost trillion dollars we will have borrowed and spent will need to be paid back, with interest. Will new roads, green buildings and Head Start funding create a boom that will create enough economic growth to pay off over a trillion dollars? Obviously not.

We as a nation have grown accustomed to a lifestyle based on a continuous stream of credit from which to draw upon. The notion that the State will always be there to lend everyone money and make economic reality go away is ridiculous. The stimulus package is the last thing our country needs and will only worsen our existing problems.

To read how “right” the experts have been, read here.