Friday, December 18, 2009
As the banksters rush to pay back TARP funds and clear themselves for year-end bonuses, the world moves closer to a hyperinflationary depression.
It is all too clear now. Far, far too clear. The banks are going to bring us another hyperinflationary depression (to borrow a phrase from John Williams of Shadowstats).
If only that were exaggeration… a bit of hyperbole to make a point. But it is not.
When the annals are written, the Obama presidency will be defined by titanic fiscal disaster in the same manner that the W. presidency was defined by Iraq… or the LBJ presidency by Vietnam. Tim Geithner and Larry Summers, among a cast of many, will go down as two of the most feckless, corrupt and incompetent shills in U.S. history.
Unless he changes course radically, dramatically and soon, our current president will be remembered not just as a booming and eloquent orator, but as one of the weakest, most ineffectual patsies to ever sit behind the Oval Office desk.
And the current chairman of the Federal Reserve, Ben S. Bernanke – who Time magazine has hilariously dubbed the 2009 “Person of the Year” – could perhaps wind up as the biggest laughingstock of them all, with the possible exception of Gideon Gono (head of the Reserve Bank of Zimbabwe).
Why the sudden burst of holiday cheer? Because the pieces are all coming together now, like the final stages of a grand movie plot. Except the twists and turns of this particular movie plot, as with the global financial crisis itself, are all too real.
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Sowing the Seeds of Coup
To get a better sense of where we are, let’s briefly rewind the tape to fall 2008.
The seeds of financial coup were sown as soon as team Obama clinched the election. After the votes were in, a massive bait-and-switch instantly took place. As journalist Matt Taibbi puts it in his latest exposé, “Obama’s Big Sellout,”
Come November 5th… [the original economic advisers] were banished from Obama’s inner circle – and replaced with a group of Wall Street bankers. Leading the search for President Obama’s new economic team was his close friend and Harvard Law classmate Michael Froman, a high-ranking executive at Citigroup…
Incredibly, Froman did not resign from the bank when he went to work for Obama: He remained in the employ of Citigroup for two more months, even as helped appoint the very people who would shape the future of his own firm…
Is it any wonder, then, that Citigroup received one of the sweetest of sweetheart deals imaginable just a few weeks later – Nov. 23, 2008 – in which hundreds of billions were shoveled into a smoking crater with Teflon executives untouched?
Is it further any wonder that the Citi giveaways are still taking place – the latest to the tune of a whopping $38 billion? “The Federal Government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup,” the Washington Post reported this week, “to wean the company from the massive taxpayer bailout that helped it survive the crisis.” Well glory be.
The twists and turns of the insider flowchart go just about as expected. Robert “Bob” Rubin (who at one point ran Goldman Sachs) was a high-placed Citigroup mandarin at the time of the $300-billion-plus bailout. “Turbo Timmy” Geithner served under Bob Rubin in the Clinton White House.
Then you had an ex-Goldman CEO at Treasury prior to Geithner… another major league shill with millions of dollars worth of Wall Street fees in his pocket, Larry Summers, bending Obama’s ear… and, of course, the outsized lobbying and bribing clout the megabanks have held over the Hill for decades.
Goldman, Citi, Goldman… in the face of this rampant insider orgy, free market capitalism never had a chance. For all the authority he had to effect real change on the wrecked financial system, Obama might as well have been the Queen of England.
Save the System, Screw the Country
With the banksters in charge (literally!) from day one, the financial crisis game plan was obvious. Do everything possible to save the insiders – no matter the dangers, no matter the cost.
This mentality led to a host of policy prescriptions that amounted to “more of the same.” Give more money to those who lost it. Give more credit to those who gorged on too much credit. Don’t step away from the roulette wheel; apply the martingale strategy. If at first you don’t succeed, then double, double down again.
For the most part, the very same bankster CEOs who drove their financial institutions into the ground were allowed to keep their jobs. (Those ousted by shareholders left with $100-million-plus parachutes.) At the same time, Washington worked overtime to shovel trillions of dollars into Wall Street’s greedy maw by means both direct and indirect.
After allowing Lehman Brothers (a noted rival of Goldman Sachs) to fail, the government hit on using the zombie shell of AIG, the imploded insurance giant, as a “beard” of sorts, pumping hundreds of billions into the carcass of one twitching firm so that those same dollars could be paid discreetly to other Wall Street firms (as counterparty trade settlements) via the back door.
The Federal Reserve system did its part, too, in dramatically expanding its balance sheet and dropping short-term interest rates to zero. As a result of the Fed’s bank-friendly efforts, the Treasury yield curve recently hit its steepest levels in decades. “The spread between 2- and 30-year treasuries reached 374 basis points on Dec. 10, the most in 29 years,” Bloomberg reports, “as the U.S. sold $13 billion of the so-called long bonds in last week’s auctions.”
A super-steep yield curve is manna from heaven for the banks… and toxic poison for the loan-starved heartland. This is because, when there is a fat spread between short-term money and long-term money, banks have no real incentive to lend to consumers and businesses.
Why? Because a fat yield spread means the banks can simply borrow short-term at next-to-no cost… plow the cash into long-dated U.S. Treasuries at something like 5X leverage… and thus make a very respectable return, in the neighborhood of 15%-20% or more, courtesy of the Bernanke Fed.
Is it any wonder, then, that the banks don’t give a damn about lending? Would you lend out your precious capital in this uncertain environment if you had the alternative of raking in risk-free profits courtesy of Uncle Sam instead? Of course not.
President Obama held a sit-down with the giant banks earlier this week, in a publicized effort to get them to make “extraordinary” efforts to revive lending for consumers and small businesses. Ha! The meeting was, all but literally, a joke. The heads of Goldman Sachs, Morgan Stanley and Citigroup didn’t even show up, citing a fog delay of their commercial flights.
The Madness of TARP
But all that is basically recap. Now let’s talk about what’s ahead for 2010… the next big twist in the plot, and the one that could lead us down the path to hyperinflationary depression.
In case you’ve forgotten (or blocked it from your mind), “TARP” stands for Troubled Asset Relief Program. It was one of the grand giveaways in which Washington funneled hundreds of billions into the banks, in an effort to “restore economic health” by making the big guys obscenely profitable again as quickly as possible.
The latest twist is the megabanks’ efforts to pay back TARP. They have been wading into the capital markets, raising tens of billions of dollars through new share issues, to get out from under Uncle Sam’s thumb. Wells Fargo sought $10.4 billion in equity to help pay back $25 billion in TARP funds. Citi sold equity and debt to repay $20 billion. Bank of America has already exited the program. Smug Goldman has long been free.
Treasury Secretary Geithner, aka “Turbo Timmy,” has applauded the bank’s heroic efforts to pay back the TARP money as fast as possible. “With the recent announcements on repayments, we are now on track to reduce TARP bank investments by more than 75 percent,” Geithner beamed, “while earning a healthy profit on that commitment.”
Geithner is a fool… and this rush to pay back the TARP funds is going to usher in the next leg of the banking crisis at some point in 2010. Why is your editor so firmly convinced? Because the banks are deliberately weakening their balance sheets again, in the false belief that the crisis is over, when the next wave is truly yet to come.
Let’s put aside the fact that the whole TARP program was another giant rip-off. Geithner says that taxpayers will be paid back with a profit. Apart from the highly speculative nature of this claim, Geithner makes no mention of the fact that the “profit” will come about, if it does, through obscene levels of government debt accumulation and printing press abuse. Thus the TARP “profit,” if it materializes, will be another slick accounting trick.
Worse than that, though, is the insanely stupid notion that the all clear has been signaled and the banks are healthy again. Greed factors into the picture because the banks do not care about the health of their balance sheets. They care about the ability to pay bonuses.
In 2010, under the guise of routine business, five powerful men from around the globe will meet behind closed doors…
What they decide will change your idea of “money” forever – and set you up with a chance to earn a once-in-a-lifetime paycheck.
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Epic Stupidity Born of Epic Greed
That’s right. This whole rush to pay back the TARP funds is built on a desire to pay bonuses.
You see, as a result of public relations pressure, the TARP funds came with government-mandated restrictions on bonuses and executive pay. While holding on to government cash, the banksters could not pay their top people as much as they would like. (This was one of the few semi-sensible measures that actually got pushed through as a sop to Main Street.)
Bankers don’t like having their bonuses capped, even when (or especially when) the paychecks are underwritten by John Q. Taxpayer. And so, insofar as Washington enabled an epically profitable year for Wall Street, the “plan” worked… and now the fat cats want the freedom to fully enjoy their big slice of pie.
Once again, the whole thing is a giant bait-and-switch. This idea, that paying back TARP funds releases the banks from taxpayer obligation free and clear, is yet another talking-points ruse. MSNBC host Dylan Ratigan breaks it down as follows:
The whole notion that TARP repayment means these banks are off the government dole is preposterous, and is quite simply an outright lie. When looking at how the banks are getting their money from you, the taxpayer – keep paying your taxes baby! – think of Congress as their Visa and the Federal Reserve Bank as their American Express. The banks might be repaying their billions to congress, but they are still using their American Express over at the Federal Reserve all day long…
Tyler Durden of Zero Hedge further serves up a pithy summary (emphasis mine):
Banks are willing to wager systemic stability so they can get another bonus payment before everything hits the fan next year. What happens when (not if) TARP is needed again? Well, these banks will have to [be] nationalized, or else there will be a revolution. And these banks know this, so they would rather cash in at least one more bonus after which who the hell cares.
Classic stuff. One may marvel at the stupidity that pours forth from Washington and Wall Street, but the stupidity is not without purpose. It is born of epic greed. Over and over again we see the same pattern… the long-term well-being of the many is sacrificed at great expense for the short-term well-being of the few.
Round Two: Hyperinflation?
As faithful Taipan Daily readers know, your editor has been pounding the table for a U.S. dollar rally in recent months. That rally is now very much upon us. The greenback is ultimately a flawed and doomed instrument… but so too, in their own way, are the dollar’s main competitors (the euro and the yen).
During the great stimulus-driven rally of 2009, the serious problems of Europe were covered up by euphoria and loads of free cash. Now those problems are coming to light. Austrian banks are imploding. Greece is struggling under the weight of downgrades and debt. Eastern Europe remains a toxic sinkhole. Spain and Ireland stare into the abyss.
Meanwhile, Britain and Japan do not look much better… and so, suddenly, in relative strength terms, the plight of Uncle Sam and the good old U.S. of A. does not look so bad after all. This, coupled with a general flight from risk and risk-related assets – the early beginnings of a forced unwinding of the “dollar carry trade” – explain why the buck is strong.
But, regardless of the rest of the world’s problems the United States is no economic safe haven. (Nor is Asia.) Serious problems WILL return to the fore in 2010. In fact, we already have a preview of what those problems will look like. See the Nov. 25 Taipan Daily, “Of Roller Coasters and Mortgages,” for more detail.
When the next wave of mortgage-related crisis hits… and it will… it will be the most painful case of déjà vu imaginable. As with the second half of 2008, the major banks will find themselves, once again, staring into a gaping black hole. The rest of the country will be worse off than before, having been bled dry these past months for the sake of the banksters. And public patience for renewed action – oh boy, let’s bail out Wall Street to the tune of trillions all over again! – will be zero.
This is why your editor believes that, when crisis returns in 2010, ALL the major Western governments (plus Japan) will find their hands restricted by sheer public outrage. ALL major fiat currencies will be subject to panic debasement. In this hog-tied state, with the struts and supports crumbling all around, the only play left for Fed Chairman Bernanke and his hapless peers will be the ultimate Hail Mary… a direct and deliberate printing press binge of the likes we have not yet seen.
You thought 2008 was a financial supernova? No. The supernova is still coming. Ben S. Bernanke, hailed by Time magazine for saving the world in 2009, will yet have his Zimbabwe moment.
Needless to say, this is a VERY bullish scenario for inflation-linked hard assets. As of this writing, various hard asset plays, pumped up by recovery euphoria, are falling through the floor as speculative fever retreats and the dollar surges. The early and aggressive “dip buyers” are getting their fingers smashed. (Macro Trader members were duly warned that this would happen.)
As for early 2010… if the dollar continues to rally (which your editor has predicted and believes likely), the 2009 love affair with hard assets (and inflation-linked assets in general) may suddenly grow cold in the new year.
This cooling will prove ironic, though – not unlike the country’s deep cold spell against a backdrop of global warming fraud – because the withdrawal of speculative “hot money” over the next few weeks and months could, at a point some time in future, set up one of the greatest hard-asset buying opportunities the world has ever seen.
In the hyperinflationary depression scenario as outlined in these pages, not only precious metals but agriculture would look particularly appealing. Patience is required, however. Such an unfolding will become apparent not tomorrow or next week, but fully on the other side of the dollar’s long overdue countertrend rally – when it comes time to reap the fruits of hyperinflationary depression sown by Washington and Wall Street.
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