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Asher Edelman Headshot

The Financial Crisis -- Are We Going Anywhere?

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On April 8, 2008, as the banking debacle began to unfold I pointed out that "this is no time to be throwing $30 billion at the (banking) problem and hoping it will staunch the hemorrhaging, because $30 billion will seem minor when the losses add up to, perhaps a hundred times that figure." Ultimately, between $12 trillion and $13 trillion dollars was put in place to save the banks. There are still trillions in place working to save financial institutions. These monies will remain in place for quite some time as the institutions have yet to be stabilized; there is no appetite to let them fail.

September 19, 2008
"... I have not yet seen mentioned that the recklessly issued debt will be purchased at fair market value rather than at face value. To purchase at face value would be an assault on the American taxpayer..." To date the various federal agencies and quasi-agencies have continued to purchase, guarantee, loan against, underwrite, etc. etc. disaster debt at face value. This has cost and will cost hundreds of billions, if not trillions, of dollars of tax payer money.

October 10, 2008
"Let's stop the favoritism and cronyism instantly! The administration has perpetrated some of the greatest financial frauds in history..." Witness the AIG-Goldman Sachs - Paulson scandal, the Halliburton tax shelter no bribery laws - move (Our largest defense contractor moves offshore). Witness the newly allowed accounting obfuscation laws designed to make the banks LOOK solvent. Witness the 0 - ¼ % lending from the Fed to the banks. (The emergency Fed window became an open door draining tax payer monies and gifting them to the banks. It goes on and on today and, if one reads newspapers, watches television or listens to the radio (Right, Left or Center) there is no end in sight of favoritism and cronyism in bestowing government (tax payer) funds to the privileged few.

November 24, 2008
"We have not yet reached out to the homeowners, credit card debtors and other of the disadvantaged borrowers. Without this outreach, bailouts to the banking community will not help the economy." Today we have made very little progress in either this outreach or in reviving the economy. I see no signs this will change in the near or medium term. I also said "The nature of the bailouts put in place so far is highly inflationary and unbalanced." It was, it is, and seems to continue. The inflation is already upon us (the world). It will accelerate.

December 18, 2008
"Recent weakness in the dollar has emphasized the international view that the U.S. recovery plan is corrupted... The escape routes are limited, as ultimately most countries will compete to degrade their own currencies as a matter of survival." Here we are today - political crisis in the mid-east; world economic crisis, THE FLIGHT CURRENCY OF THE PAST (THE DOLLAR), IS GOING DOWN. It is no longer seen as the flight currency - a safe currency. The U.S. is viewed today as possibly the next Weimar Republic "where the wheelbarrow became the wallet of the moment." The administration foolishly buys $600 billion of government bonds, bills and notes to "stimulate" the economy while, in fact, all the program does is stimulate bank earnings while plunging the country into stagnation, and inflation, STAGFLATION! It looks as though this policy continues as the present and future plan.

January 7, 2009
"Though much is said about the financial institutional crisis and the mortgage and housing crises, little, if anything at all, is mentioned about the imbalance in the economic landscape caused by war. It is always the case that wars draw on certain productive facilities and commodities in a pattern which throws the economy out of balance. An almost unnoticed phenomenon in prosperous times, war becomes a segmented inflationary propellant in periods of contraction. The economic factors in place today are those which have led to wide unrest and war in earlier days. Though the past is not an absolute predictor or augur of the future, the thought of greater conflagrations cannot be dismissed." We are at war in Afghanistan and Pakistan, albeit small wars. Will we allow ourselves to be drawn into the Middle East crisis as defenders of our right to rule or will we simply become the client of the winning factions? I hope we do not confuse our wish to control with the realities and consequences of war.

April 9, 2009
"In case you are wondering about the "exciting" profits of Wells Fargo and some other banking institutions? It goes like this: The Federal Reserve Bank supplies almost all new monies to the banks as loans at a rate of 0.25% per annum. That is to say, separate from TARP, taxpayers are lending to banks an undisclosed but extraordinary amount of money at 0.25%. The banks then turn around and lend that money out to the taxpayers at an approximate average of 6.0%, a profit of 5.75% or, in other terms, a mark-up of 24 times cost. As the average equity capital requirement is approximately 10% (5% in the case of mortgages) the banks are able to earn at least 57.5% per annum on equity. At the same time the equity of the banks is augmented by taxpayers, courtesy of TARP and 9 trillion other dollars of guarantees grants, investments, etc."

These practices continue - drawing taxpayer money to create profits for the banks. If you were ever curious about the high subscription rate for low coupon treasuries - wouldn't you lend money to the Fed (buy bills and notes) at 2-4% if they would lend you money dollar for dollar at 0.25%? Not a bad deal!!?? No risk, infinite return paid by the tax payers. No statement known to me from any corner of government has broached the idea of a discontinuance of this giveaway. We have to expect it to continue. All is sufficiently obfuscated as to prevent any meaningful analysis of how much the taxpayers have subsidized bank profits. A good guestimate might be in the many billions of dollars! For the moment this is "off the books" of the Fed.

May 18, 2009
"A disaster in the making-not only because in total this problem is probably equal to or greater than that of the larger institutions but also because of the ripple effects of the enormous number of FDIC closings of banks. ALREADY fifty-eight banks have been closed during 2008-2009. Yes, the FDIC guarantees depositors. However, it does not provide a serious facility to continue the loans outstanding to responsible borrowers. Typically, loans are sold or transferred to other banks. Normally these loans are not renewed. A home equity borrower, though current, may lose his house. A small business may lose its working capital and worse, not through its irresponsibility but simply because the loan was transferred."

The great catastrophe of the concentration of US banking into the hands of a few banks has crippled the system. The small and medium size institutions have gone by the wayside. No redemption is in sight. Most would be underwater if the accounting standard required mark to market accounting. What next? At best, a long period of stagnation in this sector. More likely - accelerated closures! Interestingly, most, of these institutions played a very small role in the "great debacle." They are being punished for being small. This sector was the backbone of small business banking, a role not filled by other larger institutions.

May 19, 2010
"WHO WILL SAVE THE COUNTRIES? WHO WILL SAVE THE CURRENCIES?"

"The banks seemed a problem (actually most still are) but there were countries, governments and tax payers who gave the banks access to unlimited cash in a multitude of packages. It almost worked! Who will save the countries? Who will save the system? There is no world government, world Fed or world taxation system to help the countries - let alone the economic blocs. Most currencies - certainly the most circulated ones are in a competition to become worthless in terms of each other - in fact they are quickly becoming worth less in terms of what they can buy, a frightening precursor to inflation without growth.

It is all becoming evident as the Euro currency zone falls into disarray. Not only the "Southern" countries are in trouble but also the Northern countries; France is at the most risk (well obfuscated as only the French can do). Germany is not exactly healthy other than savings rates (internal financing) and some advantage (short lived) to its exports. The Euro currency zone will experience a series of sovereign and corporate defaults. If the Euro currency zone is to stay intact there is no choice but selective default! In the interim the Euro will be under pressure as to goods, at least, and perhaps as to other currencies. This, perhaps, is only because there are other currency zones in similar or worse situations - the dollar, for example - which are in the currency devaluation competition. Only emerging countries and perhaps Norway and Switzerland will maintain some semblance of consistent buying power of their currencies. The European cycle will take time. Europe will look more like a combination of the 30′s and/or the Weimar Republic rather than like Japan of the last 15 years. Probably we will experience an extreme resemblance to the 70′s in most of the rest of the developed world. There is no SUPREME DONOR to save the economic blocs, or the sovereign nations. Medium term stagnation with product price inflation will be the result."

That is certainly how it has gone so far. What went unnoticed in May of 2010 was the state of the states & cities in the U.S. Clearly there is no supreme donor to serve our states. The fallout has yet to be understood. It could equal that of the Euro zone.

My October 2010 letter discussed the new mortgage crisis (illegal foreclosures) as likely to have a serious impact on the banks. It is and will continue to. Watch for commodities derivative defaults -- the banking community's next performance.

Recent unemployment figures indicate that unemployment continues at 16%, including those folks who are no longer able to collect unemployment checks and those who have given up looking for jobs. There has been no improvement in the unemployment statistics over the past year. Certainly we are in for more of the same as to unemployment.

Over the years I have proffered possible solutions to some of the problems. I continue to stand behind these recommendations though the system is sufficiently injured that the solutions are fewer.