The ‘New Normal’ – How and why Republican and Democrat Progressives undermined Capitalism’s regulatory basis, creating a crisis to transition to Regime change
(Note: Many hyperlinks provide background for analysis)
The American electorate has bought into the notion that Capitalism has failed, therefore, relenting to the justification to what Mohamed El Erian, CEO of PIMCO on CNBC called Regime change, essentially a radical agenda intended by Republican and Democrat Progressives regarding a 4 years transition to achieve a New Normal. The questions that will be answered in this article are: What is this New Normal the Progressives have imposed through stealth regulations? Were the electorate aware of this stealth regulatory changei and is it desirable? If not, how to forestall and reverse the transition, where by obtaining a better understanding of the underlying capital leveraging mechanism, we are able not only to return to the Old vs New Normal, but achieve widespread expanding economic growth and prosperity without government infringement.
The Progressives have inflicted on the Private Sector a stealth regulatory change2, that between November 9, 2007 and September 2008 wiped out $14 Trillion in equity value that, without the reversal of this stealth regulation (as FDR was also forced to do in 1938, after Hoover imposed it on the Private Sector in 1929 precipitating the end of the Roaring 20’s), will culminate in the next 4 years in the complete transfer of Private Sector ownership and control of capital, production and productivity to the government and Federal Reserve. In order to understand this and see clearly what the Progressives have succeeded to conceal, it’s necessary to understand the economics of the bank regulatory mechanism, the underlying operating mechanism or regulatory underpinning through which equity capital is leveraged with debt capital, resulting in capital formation in support of innovation, creativity, hard work and luck, which enables such efforts to be converted by each new generation into wealth and prosperity. As the public has not been taught how the bank regulatory mechanism works, it is unaware of how Progressives in government, big banking and big business, together with minions duped into believing they are oppressed or victimized, have been able to use their knowledge to systemically undermine and destroy the potential of wealth right at the cusp of economic boom, giving the false idea again and again that American Capitalism and the Freedom and Liberty protected by the Constitution may not be viable, and that we should return to the 5,000 years prior to again allow an elite group to rule and allocate rights and privileges of life and the rewards of effort, perseverance and work.
Without the reversal of the SEC’s November 9, 2007 regulatory change, the Progressives will be able to complete the commandeering of Private Sector wealth, liberty and each individual’s freedom in the pursuit of their happiness, and complete the collapse of the economy and implosion into servitude to the elite at any time. This paper is intended to explain how this was done, and provide the knowledge and basic understanding of how to reverse it and rapidly bring about a permanent Golden Age of wealth and prosperity, versus enslavement and deprivation.
Everyone accepts without question that the subprime crisis caused by the Progressives was to blame for the US and global systemic collapse in Private Sector capital formation and access to credit. Yet, these Progressives, who orchestrated the subprime crisis, Barney Frank, Chuck Schumer, Chris Dodd, starting with Carter’s CRA 1977, expanded by Clinton 1995, by Bush 43 in 2002, then stalling regulatory correction, were not only never held accountable or brought to task, but given a pass to reassert the same program under the Dodd-Frank “Wall Street Reform and Consumer Protection Act”, published as H.R.4173. Meanwhile, they overtly scheme to expand the September 2008 government unconditional guarantee of Fannie Mae and Freddie Mac, instituted under pressure from China to bail out of their investment, to nationalize Fannie Mae and Freddie Mac by putting them under the H.R.4173 Too Big To Fail. The idea of H.R.4173 is to shift all originated and owned assets of these Too Big to Fail firms under direct regulatory control and guarantee of the government, much like a utility. We’ll understand why below.
In all the assertions regarding the causes of the sudden systemic collapse from the Subprime CRA loans, to the Too Big to Fail banks, credit default swaps, derivatives, unscrupulous lenders, greedy Wall Street executives, dishonest home buyers, etc., all blamed on regulatory inefficiencies that need to be corrected, no one considers or tries to understand how these regulations work together in terms of an underlying operating mechanism through which markets expand and contract. For example, there are rules and regulations for baseball, football, soccer, monopoly, chess, computer games, etc., where differences in rules and regulations result in different games.
Microsoft and Apple each have their distinct set of codes that make up their operating systems upon which all sorts of word and numbers games, e.g., Word, Works, Excel, etc. can be played.
Yet in terms of the law, rules and regulations that make up the underpinning of economic system, which in turn are the very basis through which market changes are realized, everyone looks at the data in the resulting markets and tries to explain where the markets will go, how they will move, based on their trends, algorithmic models, etc., without considering the mechanism of interrelated rules and regulations at work that is the very basis for these markets.
Comments regarding the Progressives’ agenda:
This operating mechanism is known as the economics of bank regulatory mechanism, which is, as Jefferson and later Marx understood, the regulatory basis for Capitalism. But, with a small stealth slip in an apparently innocuous regulatory change, the same operating mechanism becomes the basis for the realization of Progressive’s objective to institute a covert transition from free enterprise Capitalism to (i) Socialism, i.e., the repeated subjugation of Private Sector capital by the government to reward special interest (patronage) and achieve wealth transference from the productive to non-productive (buy votes) within the regulatory framework of Capitalism (1938-November 9, 2007), to (ii) Fascism, the conjoining big business financial interests with government to monopolize the ownership and control of capital, through a regulatory change causing the transition of ownership and control of capital from the Private Sector to the government and Central Banks resulting in the subjugation of labor and initiative, i.e., the Blair/Clinton New Wave, to (iii) Communism, the total ownership and control of capital, production, productivity by the government and enslavement of the populous, i.e., Marx’s Dictatorship of the Proletariat. To understand the cause for the sudden systemic and apparent collapse of Capitalism that ensued after November 9, 2007 culminating in September 2008, after which government took no heed of either the will of the people or their desire to retain individual rights and freedoms, one needs finally to become knowledgeable and educated regarding how that economic mechanism operates, i.e., the way in which debt capital and equity capital are valued and leveraged (a) within main street and the capital markets and (b) within the banking system itself, which is the regulatory basis for Capitalism. Once one understands how the leverage mechanism works, one can see that the Progressive agenda of the Republicans and Democrats has been behind a systematic and purposeful effort to cause the collapse of the Private Sector in order to justify and realize a 4 year regulatory and capital transition enabling a total and final government takeover of ownership and control of capital, production and productivity.
Groundwork to understand the economics of the bank regulatory mechanism:
This economic operating system is called “arcane” by some, only because it has purposefully been kept away from the scrutiny of the general public and electorate, knowledge used (i) as a financial weapon to manipulate the economy and siphon off the productive wealth of individuals, (ii) to gain political cover for this stealth theft, (iii) to regulate the transference of the wealth of the productive to reward the slothful (the very antithesis of Christ’s Parable of the Sower and Parable of the Talents), their unwitting supporters duped into believing they are victims, as a means (iv) to expand their ranks into a truly oppressed class, deprived of Freedom, (v) in order for an elite to monopolize generations of wealth creation, and stifle the possibility of a truly Golden Age that has been within the grasp of every American since the framing of the US Constitution.
Capitalism: While much maligned by Progressives, Capitalism is essentially the ownership and control of capital, production and productivity by individuals of each generation in the Private Sector. In essence, Capitalism is the economic mechanism through which individuals may access capital through which to strive to achieve their dreams, hence, the American Dream, as opposed to the 5,000 years prior to the advent of the American Constitution, where elite groups of Rulers and Patrons drew the lifeblood of the populous to themselves, with the latest rulers coming in the form of a stealth Progressive swindle that by stifling the steam of the locomotives, the passenger and cargo cars will somehow gain, when in reality their envy will have subjugated themselves.
Capital: There are 2 kinds of capital, debt capital represented by individual savings (e.g., Marx’s surplus value derived from work) held in banks for individual depositors, which banks lend to individuals and governments based on their ability to repay. In the case of the Private Sector, all loans and mortgages are based on formulas of affordability. Borrowers put up equity capital, as part of the mortgage formula, and the repayment of the debt capital converts the debt of the borrower into equity, which appreciates or declines in comparative markets.
The Regulatory Cycle: What banks provide is the operating mechanism to the economic system, where in the past, prior to November 9, 20071Barrons, depending on the changing values of Private Sector assets, banks would shift lending to government securities, as the affordability of loans declined, causing interest rates to decline, then shift lending back from the Private Sector, as affordability of loans improved, i.e., the bank regulatory cycle, a mechanism through which equity value was sustained and debt capital preserved from cycle to cycle. In effect, banks, based on these lending formulas and movement of maturities of medium to long term financial contracts, are arbitrators of debt and equity values based on changes in monetary pressure, dependant on the resulting expansion and contraction of bank capital. So what you had was a regulatory mechanism that (i) maintained a balance between the Private Sector wealth creation for each emerging generation entering the work force striving forward with their ideas and abilities and (ii) preserved lending liquidity that enabled continuous expansion of a society’s ingenuity, innovation, production and productivity, which, being potentially relentless and inexorable, had the citizenry of America and the rest of the world on the cusp of a Golden Age, which Progressives have succeeded to suppress in their desire to return to the millenniums before America where the elite could garner the wealth of the individual to themselves.
Predominant market contracts: Prior to November 9, 20072, in a market slow downs, the banks withdrew from the Private Sector credit to consumers, then businesses. With reduced lending, the Private Sector streamlined, innovated, found ways to improve their productivity, production and product, improving their net disposable income, i.e., loan affordability. At the same time, the banks curtail their lending staff, improve operations and focus on reducing interest to depositors in order to widen their spread income, thus, improving their bottom line and equity capital. Then, as loans mature, based on the staggered maturities, which return principal of around 10% to 15% cash per year to the banks, banks begin a new cycle of lending. If the economy remains weak, the banks lend to the government, i.e., Treasuries and unconditional government guaranteed debt. However, with bank’s capital improving relative to their capital adequacy / risk adjusted ratios of assets to capital, and as borrowers net disposable incomes improve, the result of lending at lower interest automatically pushes up and improves the principal value of the borrower’s assets relative to the mortgage and loan formulas of affordability. In this way you can see that, prior to November 9, 20073CFO, there was a regulatory mechanism at the underpinning or substratum of all markets, which was based on the fixing of medium to long term maturities, based on the analysis of cash flows relative to affordability formulas, that preserved a tight range of comparable market pricing, i.e., “predominant market contracts.” These predominant market contracts sustained the value of debt and equity capital in the Private Sector through each regulatory cycle, by preventing collapses in bank liquidity.
The Leverage Mechanism: An additional and critical component to all this is the classification of assets relative to the leverage allowed in the banking system. There are 4 classifications or “risk buckets.” Under the Basel I Accord, accepted by bank regulators in order for banks to be in regulatory compliance, banks have to have at least 8% in capital relative to their assets on a risk adjusted basis in order to lend, expand credit and provide liquidity to the Private Sector.
In this regulatory mechanism it is important to understand that when the capital of the bank falls below 8% on a risk adjusted basis, they cannot lend to the Private Sector. They may look at loans, but they are out of the market. The first category is what’s called a 100% risk weight, where the leverage of assets to capital is 12.5/1, including all consumer, home equity, business, and commercial loans. The second is the 50% risk weight, providing a leverage of 25/1, which includes all home mortgages, and Municipal Bonds and Industrial Revenue Bonds. The third category is the 20% risk weight, giving a 62.5/1 leverage, including all AA and better rated Private Sector debt and any debt of the Private Sector conditionally guaranteed by the government, as was Fannie Mae and Freddie Mac prior to the government’s agreeing to wrap them with unconditional guarantees of interest and principal repayment. The final category is the zero risk weight, which allows a bank unlimited leverage to lend to any entity owned by the government or debt guaranteed by the Federal government, PSEs (public sector enterprises), SOEs (State owned enterprises), government owned banks, US States, Sovereign nations.
The overall leverage is limited, however to Tier-1 capital being no more than 4% of the aggregate value of the Principal of all assets, i.e., 25/1 average leverage.
What this means is that, when the principal value of Private Sector assets held by banks decline in value, meaning that their affordability ratios tighten relative to their originated values, then banks shift their lending from the Private Sector lower leverage requirements to the Public Sector higher leverage limits. If the markets continue to decline, a bank, avoid the collapsing of liquidity and remain in regulatory compliance by continuously shifting their lending from the Private Sector into AA rated assets, conditionally guaranteed government debt in the 20% risk weight and unconditionally guaranteed debt of the government in the zero % risk weight.
The Federal Reserve’s function: The role of the Federal Reserve was primarily to preserve the value of bank capital as the affordability of mortgages and loans, upon which their value is based, declines, by a combination of 1/ incremental lowering interest rates to preserve the principal value of a mortgage or loans within the affordability formula and 2/ to make sure there are enough zero risk weighted assets for banks to shift their cash from deposits and receipts from sales of lower risk weighted assets. As the market expands AND business and personal incomes begin to increase, the Fed’s role is to incrementally raise interest rates in order to maintain the principal value of bank assets, relative to the original lending formulas, and absorb the zero risk weighted assets, as banks shift their lending from government higher leverage risk weights having tight margins back to Private Sector lower leverage risk weights with greater profit margins, while maintaining a maximum Tier-1 leverage of 25x of 4% of assets that are risk adjusted to 12.5x or at least 8% of assets. Provided that the Federal Reserve Board is acting in the interest of the Private Sector and not special interests or the government effort to usurp political and financial power, prior to November 9, 2007, going back to 1938 and before 1929, it was, as further study of the bank regulatory mechanism shows, impossible to collapse Private Sector wealth, regardless of attack from foreign political and economic forces or, much to Progressives’ consternation, internal sabotage strategies by Republican and Democrat Progressives.
How the principal value of a bank asset is determined: To comprehend the Fed’s role, it’s important to understand what a bank asset is. Essentially, you have a mortgage or loan affordability formula, based on a determination of a percent of borrower’s equity and a cash flow based analysis of the ratio of net disposable income (net operating income for businesses) relative to the loan amount. The result of a stringent analysis is that the bank determines the borrower’s ability to afford a monthly mortgage or loan payment.
Now putting aside the computer formulations for mortgages and loans, what you have is a calculation of a monthly mortgage payment, which includes the interest and the principal. The lender then multiplies that monthly mortgage payment times 12 months and the number of years of the mortgage, then subtracts out the prevailing interest. Then, based on the level of comparative market risk assessed, what you have over is the principal amount the bank will lend you and the value that the bank books as an asset relative to its capital.
How government, markets, outside political forces and the special interests politics, affect the principal value of bank assets: Changes in loan affordability come about, for example
1/ with sharp oil price increases, such as (a) the OPEC oil embargo of 1973 and (b) again in 1979, (c) the sharp oil decline from 1981 to 1986, due to Reagan’s deregulation of oil prices, (d) the sharp oil price manipulation by proprietary funds and oil interests from May to November 2007 ($60/brl – $95/brl) and (e) again from December to July 2008 ($95/brl – $147/brl),
3/ regulatory burdens and cost to subsidize the expanding related bureaucracy,
4/ deflation due to declining market prices as well as productivity gains.
In the case of these first 3, the Federal Reserve’s role is to make a minor adjustment in interest rates, which, relative to a significant change in the net disposable income, sharply increases or decreases the value of the principal of a mortgage or loan relative to its risk adjusted ratio of assets to capital of the banking system, thus helping to preserve the value of the bank’s capital.
The Fed’s ability to preserve bank capital despite foreign political acts of terrorism / war: In a sharply declining market, such as after 9/11, when the net disposable incomes of individuals and net operating incomes of businesses retracted sharply after 2 weeks of all planes being grounded and the subsequent year it took for vacationers, business people and travelers to take to the air and road again, the decline in net incomes was so steep that the Fed had to lower interest rates within a couple of years from around 7% to 1%. What did this really mean? When you consider the value of a bond, say with a 10% yield and then the market yield on bonds goes up to 11%, the bond principal loses 10% of its value. The 9/11 attack represented (i) a reduction in net disposable income requiring a 6% decrease in interest rates or 86% drop in interest rates 9/11 2001 to 2003 for the Fed to maintain the principal value of assets to support bank capital adequacy, while also (ii) requiring Treasury to sharply increase the availability of government zero % risk weighted assets for banks to shift lending from the Private Sector to the government in order to preserve the value of their risk adjusted capital. Thus, the Fed’s counter measures to offset the collapse in the principal value of mortgages and loans was of an enormous magnitude.
The criteria for the Fed to raise interest rates: It’s important to understand the Fed’s role in this operating mechanism. As explained above, in an expanding market, when the Fed has been under pressure to raise interest rates, such as between 2004 and November 2007, unless there is an increase in wages to individuals and income and profits to companies resulting in an increase in net incomes to maintain the affordability ratios relative to the principal value of a bank’s assets, any interest increase would reduce the ratio of mortgage affordability, resulting in a decline in the value of a bank’s assets. This results in bringing the banks below regulatory compliance, preventing banks from lending, thus putting the kibosh on any recovery. Thus, in this example, only in 2005 was the Fed finally able to start to increase interest rates. We’ll see below that the cause for the sudden systemic collapse that precipitated after November 9, 2007 was not due to the Fed’s providing liquidity, nor the subprime crisis, but was the stealth handiwork of Progressives in the Republican and Democrat Administration and Congress, as was also perpetrated by Progressives in government that caused the sudden collapse in 1929 that abruptly ended the Roaring 20’s, eliminated the regulatory basis for Capitalism, ending Private Sector capital formation and access to credit, and plummeted the nation into another Great Depression.
How asset backed and mortgage backed securitizations ended bank illiquidity: One of the great innovations of the 1980s expanded in the 1990s was the advent of loan pool securitizations. Understanding the nature of a mortgage backed or asset backed security is critical to understanding why in reality the subprime crisis, which corrections Progressives blocked, could not have caused the collapse of the Capitalist system and failures of corporations and banks throughout the US, Europe and globally. What happens in a loan pool securitization is that the cash flows relative to all formulas and resulting ratios of loan affordability are analyzed relative to default formulas in special models that project a tranching of loss risk, i.e., first loss rated B, second loss BB, so called junk bonds, are below investment grade securities, paying high yields. Investment grade starts with BBB, A, AA and AAA. Typically, the A and AA tranches will represent 60% of the mortgage securitization tranching, B and BB representing 10% to 15% of the total.
Congress enacted FIRREA in 1989, purportedly to stem the tide of failing S&Ls followed by the establishment of the RTC, but actually a government effort to dramatically end the shadow banking system related to the junk bond market established by Michael Milken of DREXEL BURNHAM LAMBERT. However, what this did for the banking system was to prohibit banks from buying B and BB rated debt, unless the banks themselves had originated the loans pooled into a securitization and the B and BB tranches were residuals the banks retained after selling the senior tranches to other institutional investors, financial institutions and banks.
This ABS/MBS system of selling of higher risk tranches first was an addition to the regulatory mechanism rendering banks impervious, and the major reason why subprime lending, purported to be the cause of the systemic crisis, could never have caused the US and global collapse of Private Sector capital formation and access to credit that followed the SEC regulatory change affirmed Oct. 2, 2008 by the Senate without the electorate understanding its real hidden intent.
As will be explained further below, many senior executives at the now “too big to fail” banks and investment banks and the Progressive leadership in Congress and the Administration understood very well that this singular stealth regulatory change would cause the collapse.
Understanding how the innovation of pooling cash flows into ABS/MBS secured prosperity: When loans are acquired and originated into a pool of assets and the tranching is determined in the specific securitization model, the Credit Committee of the underwriters, the accountants that certified the cash flows, the ratings agencies rating the tranches, and sometimes State or Federal regulators come together with market risk takers that buy the B and BB tranches. These market risk takers typically have a very detailed and stringent analysis and historical evidence and knowledge about all the credits, quality of cash flows and credit worthiness of the borrowers in the pool. Those credits they don’t like, they demand to have removed from the pool, or they require a different interest rate and/or credit controls to the particular loan they don’t like. If they perceive more risk, for example due to the inclusion of the subprime loans and bad credits in the pool, they will require a higher default quotient to the loan pool, resulting in the percent of the B and BB pieces be greater and their yield be higher. Once they agreed to purchase the resulting B and BB tranching, all the investment grade tranches lined up, and securities firms underwriters were easily able to sell the BBB tranche to pension funds, the A to life insurance companies, the AA and AAA to banks (as 20% risk weights), Central Banks and Sovereign funds.
Based on the demand levels of different tranches, the underwriters also brought in monoline insurers to guarantee a portion of a loan pool to credit enhance a greater portion of the pool to meet specific buyers’ market requirements. What this all means is that such B and BB tranche buyers would have been well aware of the subprime mortgage inclusion, as it would represent the first loss, the same for Fannie Mae and Freddie Mac, which were also selling off their own B and BB tranches to risk takers, with the remaining tranches going to banks seeking 20% risk weights and global Sovereign funds. What happened prior to November 9, 20074BillIssac, when there would be a sudden sharp drop in the real estate market resulting in excessive defaults, is that the B and BB bond holders took the first losses, the Trustee to the bond doing its best to recover to a level at least as good as the initial percent defaults quotients and percent recovery calculations. Depending on the extent of their loss, what happens next is that the B and BB tranche buyers stay away from the market for a while, during which time the banks and lenders, having no strong secondary market to sell off their securitized mortgage pool, curtail lending. Eventually, after assessing market, the B and BB tranche buyers returned to the market demanding higher yields and greater percentage of the B and BB tranches to the overall security, much like an insurer that has taken a hit from paying out tornado or hurricane damages returns to the market demanding higher premiums and greater deductibles from the insured. With the return of B and BB tranche risk takers, the secondary ABS/MBS markets reemerge, and the banks would start to lend again.
The critical role of Private Sector buyers of the first loss ABS/MBS tranches: After November 9, 2007, such risk takers were wiped out finding no premium price at which they would take any first loss risk. The result was that without Fannie Mae and Freddie Mac being able to sell these first loss tranches, without the ABS/MBS markets being able to sell these first loss tranches, the tranching of the investment grade securities could not be constituted and that market vanished.
It meant that without the sale of the B and BB trances giving banks, mortgage banks, finance companies, and investment banks the ability to roll over mortgages and loans into new securities, to be sold into the secondary markets represented by ABS/MBS, Fannie Mae and Freddie Mac, it would be impossible for banks to maintain their risk ratios necessary to stay in regulatory compliance without access to Private Sector 20% risk weighted assets. Thus, the Treasury was needed to wrap Fannie Mae and Freddie Mac with a 100% unconditional guarantee of all loan originations to maintain their solvency, and the Federal Reserve was required to buy up the collapsing values of AAA rated ABS/MBS to prevent the value of the lower investment grade tranches held by banks to entirely collapse in order for them to maintain a preponderance of capital adequacy. This included the Fed and Treasury’s providing of increasing levels of zero percent risk weighted assets to banks that needed to continuously shift cash receipts from maturing lower risk weighted Private Sector loans to government guaranteed zero risk weights, a slow 4 years process in the Progressive’s blueprint for Regime change to their New Normal that began with their ability to sneak in a stealth regulatory change November 9, 2007, which eliminated the key regulation upon which Private Sector Capitalism, capital formation, access to credit and the ownership and control of capital, production and productivity was based.
Credit Default Swaps (“CDS”): Another great innovation that started in the 1980’s by Jim von Germeten, then Chairman and CEO of the Boston Safe Deposit and Trust Corporation and President and CFO of owned its holding company Boston Company(1982-89), then owned by Shearson American Express, was the use of credit default SWAPs to protect and lock in spreads for various maturities of deposits and loans relative to sharp interest rate changes, which eventually expanded, evolving into the Derivatives market to protect all bank asset spreads on every kind of loan. In effect, the proper application by banks and financial institutions of CDS and Derivatives, based primarily on the locking in of “predominant market contract pricing” represented by the medium and long term maturities held to maturity by banks, representing 70% of their total assets, made it possible for banks to become virtually impervious to untoward market and political forces (such as Congress’ CRA subprime loans).
However, this entire CDR market particularly as related to AIG came under threat of collapse due to the government’s stealth regulatory change November 9, 2007AIG, because it unwound the lock in of predominant market contract pricing of loans and securities, essentially invalidating their implicit/explicit hold to maturity basis, putting at risk (i) borrower’s equity capital, (ii) securities bond holders at risk, and (iii) undermining depositor’s cash resulting from any change to the Private Sector principal values of loans due to any declines in net incomes causing an immediate change in bank affordability models, which model losses banks had to deduct from their capital, regardless whether the loans were performing or not. As a result of the reg change,
1/ had the government not acquired 80% of AIG’s shares, which shifted all assets back into the government’s retained hold to maturity valuation, Trillions of US dollars in value would have collapsed on a mark to market basis essentially to zero. Moreover,
2/ had the government not forced the now called “too big to fail” banks to accept TARP, thereby coming under control of the Fed and Treasury, which provided them as well with temporary coverage under the government’s retained hold to maturity asset pricing, it would be difficult now to include them, under the Dodd/Frank Wall Street Reform and Consumer Protection Act, where the government and Fed are able to provide continuous coverage of all originations assets of financial institutions owned or controlled by the government and Fed, thereby retaining hold to maturity asset pricing.
3/ From this we grasp that the US global financial collapse was directly due to the Progressive Democrat leadership acquiescing to the Bank of International Settlements (“BIS”) pressuring the SEC, to approve the BIS’s Basel Accord II regulatory change to the Private Sector from hold to maturity accounting (FASB 115) to mark to market accounting (FASB 157), approved Nov. 9, 2007 by the Progressive Bush/Paulson Administration for enactment Nov. 15, 2007.
How the bank regulatory mechanism takes advantage of deflation to benefit the Private Sector: A final area in understanding how principal values of bank assets are changed is the effect of deflation in both expanding and contracting markets, the offset of which is government spending.
How government spending of taxes, government borrowings and printing cash play out in the bank regulatory mechanism: In this regard it’s important to understand something that the electorate has been snookered to forget that (i) any tax increase directly reduces the equity value of the Private Sector, i.e., capital formation and access to credit, as a critical component to the amount of leverage value one can access from a lending bank, based partially on the equity capital of the borrowers, is reduced, (ii) government borrowing in the market place competes with, reduces access and increases the cost of credit to Private Sector borrowers, sharply reducing the amount of money a bank can lend into the Private Sector, thus slowing and limiting market expansion and (iii) government or Fed printing of cash to spend dissipates the value of debt capital and equity capital, like being in a room, where the air we breathe is slowly sucked out, the vacuum ensuing collapsing and finally blowing up the occupants.
If the electorate understands this, then it follows that they would
(1) demand accountability for all government and Federal Reserve use of funds in the same way that investors and banks make borrowers accountable,
(2) demand a sharp reduction in the burdensome bureaucracy overhead of at least 50%, leaving it to the electorate in the States and Municipalities to affect social change, versus government fiat,
(3) if the intention is to maximize taxes to generate the greatest level of tax receipts and foster widespread economic growth, versus to establish an oligarchy of government and special interests to subjugate the Private Sector, then adapt a Laffer curve maximum tax and growth return flat tax rate of 11% income on those earning over $50,000 per year, while entirely eliminating all other punitive taxes and bureaucracies administering them. (See Laffer Curve I, Laffer Curve II, Laffer Curve III re Dynamic Scoring and Tax competition),
(4) shift the management of the receipts from Social Security to Private Sector asset management companies and Medicare/Medicaid to insurers, in order that non-productive capital now trapped by the government can be accessed by the Private Sector to generate wealth and prosperity,
(5) first and foremost, restore the key regulation required for Capitalism that the SEC removed November 9, 2007 so that capital may again flow back from the government to the Private Sector.
From the perspective of the economics of the bank regulatory mechanism, implementing of these would immediately make loans more affordable to borrowers, while increasing the amount of money, i.e., the principal that the banks can lend them, and because the government is no longer infringing of Private Sector access to capital, an economic boom would follow that would restabilize prices. Again, the success of these 4 depends entirely on a 5th sine qua non imperative, the reversing of the key regulation that was eliminated November 9, 2007.
Once these 4 and 5th, the reversal of the November 9, 2007 regulation (CFO) that ended the regulatory basis for Capitalism and predominant market pricing stability, are applied, the role of government and the Fed in fostering prosperity would be to overturn Progressives’ capital depletion agenda.
Then government would entirely stop borrowing in the market and use its deflation offset in rising and declining markets, coupled with the Treasury’s requirement to provide market liquidity for governments, Private Sector capital markets and banks to park their funds, to pay down the national debt to levels. Thereafter, the deflationary offset would be applied to gradually exchange non-performing government debt for debt related to R&D areas not pursued by the Private Sector, education and real infrastructure that creates an improved market value and has some Private Sector repayment process associated (as in China), for example, where (i) R&D and related developments are sold, leased and/or licensed to the Private Sector, typically at some profit, (ii) education is repaid, and (iii) infrastructure projects are purchased by the Private Sector at greater values than their cost of construction development. Because this bank regulatory economics is based on an analysis of a capital leverage mechanism, it is quite easy to predict the outcome resulting from the implementing of the above 3, provided the 4th is reversed first.
Regarding how Obama 2009 US $787 Billion Stimulus was applied: One might recall China’s Prime Minister Wen Jiabao warning anxiety that the “stimulus” was undermining the credit strength of the Private Sector, backing the Treasuries China owned, and Putin’s warning that it was putting America on track for Soviet style Socialism. Putin noted that $265 billion used to pay off Obama’s campaign promise to give cash to the 95% populous below $250,000 income, if he won, i.e., $400 per person, another 5% for cronies, e.g., Acorn, Soros, et al. Another 7% was called infrastructure, but went instead to one off boondoggles, with the balance of around $420 billion used, without public disclosure as to its real purpose, as a guarantee of the interest on the $13.5 Trillion national debt to cover the 3 remaining years Regime change to achieve a radical agenda intended by Republican and Democrat Progressives regarding a 4 years transition to a New Normal.
The big question that has perplexed everyone since the Obama stimulus passed in 2009: Why does this $420 billion remains untapped? Scott Minerd of the Guggenheim Foundation a year ago was on CNBC saying that this stimulus would push the US economy to a 10% growth by the end of 2010, but then $360 billion was wasted and the balance apparently held in reserve, but for what? The Teacher’s and Firefighters unions were bailed out. Billions USD added for welfare, and new stimulus was proposed for “real” shovel ready infrastructure, but none of it has tapped the remaining $420 billion original stimulus, for which the new stimulus was intended.
It becomes clear now that this $420 billion is an interest reserve intended as a guarantee of interest on the $13.3 Trillion in US government debt during this 3 remaining years Regime change transition to a New Normal, because under FASB 157e (see aicpa) Private Sector mark to market, as it pertains to how banks value assets, i.e., Level 1 based on comparative pricing accounting, Level 2 based on the underwriting affordability formula, Level 3 based on liquidity within the banking system relative to capital adequacy ratios versus liquidity in the capital markets, where collapse in liquidity in the banking sector precipitates a tipping point in value that collapses to the percent of liquidity on the capital markets relative to the support previously provided by liquidity in the banking sector. Thus the only difference between FASB 157 (see mofo) and FASB 157e is that FASB 157e allowed a refinancing of all loans based on their cash flows, where until the next collapse in loan affordability would appear, i.e., Level 1, then Level 2, which then triggers Level 3, banks could retain the assets at that revised value, a cash value achieved, which refinanced values banks claimed proved the subprime loans did not cause the collapse. Thus, April 2nd, 2009 FASB 157e was a only a temporary reprieve, intended to allow the government to raid / suck out additional capital from the markets, as banks continue to drain credit from lower risk weight mark to market valuations to zero risk weight hold to maturity government debt, all on the false notion that Capitalism failed, when in reality, it’s regulatory basis ceased to exist with the SEC’s approval of the FASB 157 (see Money Morning) mark to market accounting rule.
In short, any reduction in net disposable / net operating income reducing mortgage and loan affordability ratios (Level2) resulting from (i) higher energy pricing as May 2007- November 2007, then December 2007 to July 2008, (ii) the end of the 10 year Bush tax cuts, both the 95% income deemed middle class and in particular those above $200,000 income or $250,000 as a couple whose asset represent more than 50% of bank asset and who represent 40% of product and service consumption, (iii) Obamacare current requirements that insures adjust premiums not to deny persons with preexisting illness, etc. already driving premiums up, provisioning for upcoming Obamacare taxes and higher medical costs will reduce the value of the principal of all Private Sector bank assets, where the loss tabulations relative to affordability formulas (Level 2) will immediately have to be reduced from bank capital, forcing banks to shift radically from their Private Sector loans in the lower 100% and 50% risk weights, even 20% risk weight, valued on a mark to market basis, regardless of their being performing loans or not, to government guaranteed debt and Treasuries having a zero percent risk weight retaining a hold to maturity valuation. i.e., a repeat of what happened November/December 2007, after sharp reductions in loan affordability due to the May to November $60/brl to $95/brl oil price increase reduced the principal values related to affordability models, the losses which were deducted against bank capital immediately after the imposition of FASB 157 (Bill Issac) mark to market accounting imposed on only the Private Sector , collapsing 2 years of solid economic growth in every market sector in the single month of December 2007, the designated start of the Bush Recession, as every market fell off a cliff (FASB 157 affecting a real Gore hockey stick tipping point).
The reason that the Obama Administration is proposing so many new “stimulus” programs now, such as the $50 billion proposed infrastructure project for unions, State bailouts for Teacher and Fireman union pensions, amongst others, is twofold:
1/ As State’s obligations to the government increase with precedence established for bailouts, the States will become financially subservient to the government guarantees, especially when FASB also converts the States’ current hold to maturity accounting rule to mark to market, which FASB, under pressure from Congress and pending SEC approval, has slated for 2011.
2/ With the sharp reductions in loan affordability being deducted from bank capital, banks will require an enormous amount of new zero risk weighted assets from the US Treasury, over and above the many Fed programs involving quantitative easing, where the Fed acquires Private Sector loans and securities, then places them, as needed, back to the banks as zero % risk weighted securities valued per the Fed and government’s retained hold to maturity accounting.
Thus, because the Private Sector no longer has access to credit from banks, unless accessed through banks that are owned or controlled by the Fed or government, or guaranteed through a Fed or government loan program, which shifts all loans from FASB 157 (see AIE) and SEC required mark to market accounting to the Fed and government’s retained hold to maturity valuation, the intent of the $420 billion Obama stimulus is to guarantee investors in the $13.5 Trillion US government debt their interest until the remaining 3 years transition to a New Normal has been fully implemented.
In short, the real intent is to provide an interest guarantee until the New Normal is achieved, where all Private Sector ownership and control of capital, production and productivity forced under government lending programs, will in effect and reality have been shifted to the government and Fed. That achieved, Progressives envision that the planned economy to follow, while stagnant, can remain stable, with the government and special interests able to continue to siphon off wealth to themselves, as Kingdoms had done for 5,000 years before the advent of “the great experiment” George Washington.
Taking a page from the US stimulus, the recent $550 billion IMF / Germany bailout of the European PIIGS was established for the same reason as the Obama $420 billion remaining retained stimulus, where, essentially, Germany, through the establishment of (i) the EU, which laws and regulations now supersede 80% of the Sovereign laws of the government States it comprises, and (ii) the Euro, has succeeded to conquer 25 countries without a shot fired, as its part being played in the global Progressive’s strategy.
This was based on the same failed regulatory change by Hoover in 1929 and then Germany and Italy that enabled Germany and Italy with the addition of charisma and coercion to implode their Private Sectors and nationalize their banks and major industries, an achievement in Regime change that ultimately FDR was unable to achieve in the US. Had FDR succeeded, it would have united at least Europe and the US under a government system they hoped to be able to merge eventually into one world government. This was undoubtedly the reason that FDR turned over the Eastern Bloc nations to Stalin (“Uncle Joe”) at Yalta in 1945 (with Alger Hiss as his scapegoat), and failed to support Chiang Kai-shek who took over from the Jeffersonian idealist Sun Yatsen, the Father of China after marrying his daughter, as the US continued its Progressive course.
Leveling the global economic playing field to achieve an easier meld of economies: The better orchestrated Bush/Obama Paulson/Bernanke Progressive strategies of the day are intended to equalize the economies of the nations of the world. On the US side (i) a roadmap of “fundamental transformation” was established to collapse the influence and leadership of its economic power, (ii) Europe to further meld, economically conquer and stabilize the already Socialized economies and (iii) China and Russia to expand through the implementation of Capitalist systems, where China and a few other Asian emerging economies have remained on hold to maturity accounting valuations and have not adapted the US FASB and European IASB mark to market (myth) accounting imposed by the SEC November 9, 2007 and on Europe January 2008 that plummeted the US and Europe into a global systemic collapse. Then, in a power-grab of unmitigated proportions, purportedly substantiated by the funding of slanted studies paid for by Progressive proponents that represent no more than a con job justifying regulatory changes, Progressives moved quickly with regulations intended to dismantle the orientation of Private Sector ownership and control of capital and wealth generation in favor of the creation of a global economy, under subservience to a global political elite and financial regulatory governance of the Bank of International Settlements.
Chinese stimulus versus US Progressive stimulus: Let’s consider what real stimulus is. The Chinese use their stimulus by developing infrastructure from city to city, converting raw or underutilized land into valuable commercial quality land, then lease off the land at a considerable return on the cost. The cost is then either repaid or amortized over the life of a lease or license.
This is real government Private Sector Partnership, versus the programs proposed by Clinton/Blair under their “New Wave”, designed without the essential understanding that debt capital, equity capital and wealth are derived entirely from the Private Sector.
Under the New Wave concept, wealth is siphoned off, through taxation, government borrowing and government pricing of cash without adherence to the principals mentioned above to maximize tax returns, minimize government borrowing and use of printing cash only in real infrastructure projects based on Private Sector design and build costs in order to maximize a return from the sale or lease of such developments. Value for money is depleted into what are essentially government make work programs that wind up burdening the Private Sector, e.g. the Tennessee Valley Authority. Instead, under the Progressive’s model we have the confiscation by subterfuge, corruption, bureaucratic planning and market manipulation and waste of Private Sector’s accumulated hard earned wealth and transfer of their ownership and power to the State.
Bureaucracy creep as a means for an elite and special interests to usurp ownership and control of Private Sector capital, production and productivity:
In the same way that Germany and France concocted the idea of the EU and then the Euro, which in stealth mode has surreptitiously, under the guise of a benefit / subsidy to the Sovereign nations it absorbed, developed laws and regulations that now superseded 80% of the Sovereign laws of each country, so too in the US, the Bush/Obama Administrations have ignored the Constitution, the 10th Amendment Rights of the States and will of the People, generating regulatory change initially by Executive Order, then in stealth mode converting the same into law by Congressional edict to create regulations that have, through wealth confiscation, subsidized and subverted control of Private Sector charity, religious organizations, Think Tanks, media news programming, public education from grammar school to Universities, R&D, and undermined the wealth creation of the Private Sector, while spending on ever expanding bureaucracies and Programs designed to run down the wealth of the Private Sector, overburden the States themselves, funding special interests that in turn keep the usurpers in power. The US and EU, having subverted by stealth and creeping bureaucracy, are now allowing the UN, International Courts and BIS (Basel Accord II mark to market accounting for banks) to set the rules and laws of the Sovereign nations and US States, while special interest power grabbers, such as Soros funding efforts to undermine the legal system by funding support for judges that base their decisions on international law versus the US Constitution in the US and the Sovereign laws of the countries comprising the EU.
Obama bureaucracy: Obama in a recent trip to Kenya in support of the Stalinist Constitution the dreams of his father who had spent his life to realize, Obama stated that until they adapted a comprehensive bureaucracy to run the country they would not become part of the globalization.
Definition of a Bureaucrat: “Someone lying sideways in the public trough lapping it up like there’s no tomorrow.” In fact, as the Private Sector generates productivity and its derivative of wealth, or real income, versus inflated income from bureaucratic cost inflation, e.g., Obamacare, Cap&Trade, where value for money actually deteriorates, the money the government spends to pay a bureaucrat has the actual effect of undermining productivity and weakening the wealth generation potential of the Private Sector. Thus while the Progressives in government and government supportive Think Tanks talk about (i) raising taxes, which as stated above depletes Private Sector equity, (ii) increasing stimulus, which undermines Private Sector access to credit, and (iii) printing electronic cash for quantitative easing to avoid a liquidity trap, what they should be promoting is a 50% reduction of the bureaucratic workforce and the sun setting of all bureaucracies that undermine and obstruct the ability and opportunity of the Private Sector to generate wealth. This was done upon the election of Harding/Coolidge in 1922, ending the Wilson 1920-1922 Depression, then by Truman in 1945, ending the Democrat Socialism of Hoover/FDR, and again under Reagan, ending the Johnson through Carter malaise debacles, each time resulting in the restoration of the Private Sector and economic boom, subsequently subverted and undermined by Progressives in the Democrat and Republican Parties.
Progressives’ suppressing Capitalism to thwart the advent of a Private Sector Golden Age: When the above is understood, it becomes clear that the entire national debt borrowings have virtually little to show in the tangible assets that could have been developed, sold or leased to and repaid by the Private Sector, represents a lost credit value (debt capital), an undermining and depletion of the wealth of the nation of unmitigated proportions.
Had this government waste of credit, combined with the loss of equity capital due to taxes and wasted electronic printed not been inflicted on the Private Sector since Hoover/FDR, the size of the economy would probably be 5 times greater than it is today. Had Progressive Republicans and Democrats not siphoned off the wealth of the nation, the Private Sector would have produced a Golden Age for every man woman and child on the planet. Instead we have a systemic collapse into an implosion returning the world to the 5,000 years leading up to the American Revolution, with the government elite owning and controlling capital, production and productivity. To understand the stealth regulatory change that caused this systemic collapse from Private sector Capitalism into Democratic Socialism, read further.
The Theory of the economics of the bank regulatory mechanism
Having understood the basics, we can now summarize the theory of the economics of the bank regulatory mechanism, therefore, as follows:
The regulatory basis for Capitalism:
The expansion and contraction of the economy is directly related to the increasing and decreasing values of bank capital as that relates to
1. How assets are valued: the determination of principal loan values based on affordability formulas, in particular changes in net disposable income relative to the principal value of a mortgage or loan (as a bank asset),
2. How risk ratios determine regulatory compliance
a. the risk adjusted ratio of those asset values in ratio to bank capital determines how a bank allocates lending of cash from deposit and generated from operations towards assets of different maturities either towards the Private Sector, as markets improve, i.e., 100%, 50% and 20% risk weights, or towards the government zero % risk weighted assets as markets or underlying Private Sector assets decline in value, with the objective that a maximum combined leverage of all assets doesn’t exceed 8% on a risk adjusted basis and 4% overall, where
b. lending ceases, when the risk adjusted value of bank assets falls below 8% of bank capital, and can be increased when risk adjusted capital exceeds 8%, provided the banks perceive an expanding AND sustainable market.
3. Mechanism of Private Sector hold to maturity accounting (“HTM”) (formerly FASB 115)
a. Prevents a “tipping point” that is intended to prevent the collapse in lending liquidity through regulatory cycles
b. Protects and sustains the value of medium and long term financial contracts between borrowers and lenders
c. Protects and sustains borrower’s equity,
d. Protects and sustains the value of bank assets relative to depositor’s cash
e. Establishes predominant market values for all Private Sector maturities/assets, preventing manipulative market speculation and price manipulation by unscrupulous Private Sector and government parties, because cash flow based medium and long term contracts related to pricing of goods and services are locked in to 70% of bank lending.
4. The combination of these provides the Private Sector with ownership and control of capital, production and productivity, enables capital formation, access to long term credit, predominant market contracts providing credit stability and retention of wealth created.
How the government, together with special interests was able to end the regulatory basis for Capitalism through a 4 years process of Regime change, essentially a radical agenda intended by Republican and Democrat Progressives regarding a 4 years transition to achieve a New Normal:
The nail in the coffin of Capitalism, which ended its regulatory basis, was when the Democrat leadership pressured FASB to accept the Bank of International Settlement’s Basel II Accord and implement mark to market accounting (“MTM”) through FASB 157, a relinquishment of Sovereign power to a foreign private entity, through which hold to maturity accounting (“HTM”), FASB 115, the regulatory basis for Capitalism, i.e., the ownership and control of capital, production and productivity by those who created it in the Private Sector was eliminated.
As only the government retained HTM after November 9, 2007, it meant that all Private Sector generated loans have a constant guillotine hanging over every asset maturity whenever there is a decline in the affordability of loans, due to, for example, the net disposable (net operating) capital of a borrower relative to the standard loan affordability ratio upon origination, due to
1. Any government taxation, regulation, bureaucratic cost: the economic collapses that followed the taxes of FDR, LBJ, Carter, Bush 41, and prospectively the Obama end of the 10 years Bush tax cut, where cuts in taxes restored the affordability of loans to borrowers and bank capital on a risk adjusted basis to banks asset values, Truman, Kennedy, Reagan, Bush 43
2. Market speculation: e.g., the proprietary funds: such as those of Goldman Sachs, that manipulated oil prices from $60/brl to $95/brl from May to November 2007, while shorting MBS in anticipation of November 9, 2007 change in Private Sector assets from HTM to MTM, which collapsed 2 years of sustained economic growth in the single month of December 2007, the designated start of the Bush Recession, as banks were forced to make a radical shift of lending from collapsing Private Sector MTM asset values to government zero risk weighted HTM value, thus substantially depleting credit form the Private Sector. Once this first stage was established with liquidity close to collapse, the proprietary funds at Goldman Sachs, Citibank and others together with oil interests, such as Soros, Mark Rich, BP and others, such as those Obama kowtowed to, continued to speculate and drive oil prices upwards by systematically buying shipments of oil, then hoarding the oil in ships off the US and UK shore, while positioning futures contracts, with oil prices rising from $95/brl to $147/brl between December 2007 and July 2008, before shorting the upward trend and bringing to market over 5 million brls of oil in September, as CNBC reported as proof that the market was manipulated by proprietary funds and speculators, who were on the one side driving oil prices up, and on the other shorting MBS and bank stocks, while forcing banks to completely curtail all lending from the Private Sector bottomless MTM values to government Treasury zero risk weighted HTM values. Once the predominant market pricing controls related to medium and long term financial contracts between borrowers and lenders was eliminated by FASB 157 MTM, market speculators could easily short bank stocks, because without sustainable financial contract values, deposits could be removed from a bank to establish a regulator caused liquidity collapse, as happened to Washington Mutual, Wachovia Bank, Lehman Brothers and Bear Sterns and others, without other depositors covering the shortfall, because the values of the bank’s assets became nebulous.
3. Federal Reserve supportive Sabotage: Hold to maturity accounting is the same regulation, which had prevailed since FDR was forced to reinstate HTM, the regulatory basis for Capitalism, in 1938, after 9 years of Depression brought on by Hoover’s enactment of mark to market accounting in 1929, that abruptly ended the Roaring 20’s, when the Fed sharply raised interest rates, which under MTM required that the resulting losses in the principal value of all Private sector loans relative to the lending ratios had to be booked against the bank’s capital, not as under HTM, where only losses resulting from loan defaults are reduced. Thus instead of having a reduction in bank capital that may have been a couple of percent, there was a loss in bank capital of more than 30%. The Fed kept raising interest rates until FDR was elected, thus entirely draining the financial power and wealth of the Private Sector to set the stage for FDR’s Democratic Socialism, same as was being implemented in Germany and Italy, with the aid of Dictators’ charisma and Police coercion that FDR was unable to impose.
4. Foreign incursion, e.g. 9/11: Had the US banking system been on MTM on 9/11, there would have been a total US and global financial economic meltdown, because loan affordability relative to collapsing net disposable income relative to formulas in loan origination ratios and debt service coverage ratios (DSCR) for businesses and commercial property loans collapsed to such a degree that, as mentioned earlier in this article, the Fed over less than a 2 year period, had to reduce interest rates by 86% or from 7% to 1%, after which it took 2 more years before net incomes began to rise again for individuals and business, finally enabling the Fed to raise interest rates. In fact, Progressives’ stealth forcing of FASB 157 MTM / FASB 157e MTM light puts US at total risk of collapse should another 9/11 type of attack hit America.
5. Summary: The Progressives have used their knowledge of the economics of the bank regulatory mechanism to prevent the Private Sector from entering a Golden Age in US and global economic prosperity in favor of subversion and wealth destruction in their own vested interests repeatedly through
a. tax increases, depleting Private Sector equity,
b. expanding government bureaucracy to subvert the value of Private Sector productivity,
c. government borrowing, depleting Private Sector credit,
d. printing electronic cash to undermine value for money and
e. the Fed raising of interest rates to harm the economy and help Progressive candidates, as Jack Kemp accused Volker of in 1986. But, as Progressives understand the economics of the bank regulatory mechanism, they have used their knowledge and infiltration into Universities, Think Tanks, Bureaucracies, the leadership of certain, now “too big to fail” banks and industry to orchestrate the imposition of MTM on the Private Sector, while retaining HTM to the government, Federal reserve and government owned and controlled financial institutions, such as AIG, now Chrysler and GM, and soon the “Too Big to Fail” banks, while at the same time thwarting any efforts of the Private Sector to reinstate HTM valuations.
6. Conclusion: Progressives have put the US, and in fact the countries of the world in a state of unmitigated Sovereign risk, while undermining the wealth and productivity of the Private Sector, where, as we can see above, the Progressives and their manipulative interests have many means of subverting the US economy at their disposal, even threatening collapse, as Paulson and Bernanke did in their quest for TARP money knowing full well that the entire economic system would have immediately recovered had HTM been reinstated to the Private sector. Others clearly in the know included Barney Frank, Chris Dodd in Congress, Bush, now Obama in the Executive Branch and their financial operatives, the special interests proprietary funds that took advantage of their knowledge of the economics of the bank regulatory mechanism, understanding historically the real cause for the November 2007 to September 2008 melt down and then to force a systemic collapse in the economy, while having the “audacity” to blame Capitalism, which, without HTM, no longer exist, as people have the right to capital only where the government or Federal Reserve controlled or owned entities, which retain HTM or through government guarantee programs, which become HTM loans are provided. So, for example, when GM and Chrysler collapsed the only dealerships allowed to stay open, where those where the dealers were known Democrats or Progressives, all others were forced to close, meaning that under the Progressive’s Obanization of the USA, access to credit will require political patronage. These actions are nothing short of treasonous, or as many are calling it, financial terrorism.
What people don’t understand regarding how the economy really works, i.e., the underlying regulatory mechanism, is that Progressives now managing the big banks, Unions, the Fed and government Legislature and Administration feel that the economics of the bank regulatory mechanism will not be understood by the electorate, allowing them to get away with a stealth coup of the Private sector’s wealth.
Most of the opposition to November 9, 2007 SEC approval of FASB 157 mark to market accounting (“MTM”) imposition to the Private Sector, while government and the Fed retain hold to maturity accounting (“HTM”), wanting to revert to FASB 115 HTM for the Private Sector, still do not understand why HTM in the Private Sector gives the ownership and control of capital, production and productivity to the individuals in the Private Sector, while MTM in the Private Sector with government alone retaining HTM shifts such ownership and control of capital to the government and Federal Reserve. The reason is that
1. under HTM in the Private Sector banks only book losses in loans that default, which losses are reduced from bank capital. But no losses are booked regarding performing loans. This creates a market pricing stability, because the banks holding of 70% of their loans in HTM create a predominant market pricing, sustained because the cash flow basis for the loans is locked in through the long term maturity of HTM based loans the same as an electric utility tariff rate enables long term financing providing sustained energy and industrial, manufacturing stability. This means that speculation to the upside or below the predominant market pricing for commodities, property, goods and services will be met with investors / arbitrage taking the opposite positions that return pricing to the predominant market contracts upon which markets are based.
2. under MTM in the Private Sector, any changes in the affordability of mortgages and loans are immediately booked against bank capital, regardless of the credit worthiness of borrowers and their ability to pay their monthly mortgage or loan, thus collapsing the capital, capital adequacy and lending liquidity, forcing the banks to systemically shift all lending
a. from the Private Sector values (intentionally) subverted by MTM and lower risk weights, e.g., loans requiring 100% of 8% minimum bank capital, such as consumer, business and commercial loans (12.5x asset to capital leverage), 50% of 8% bank capital, such as all housing loans and Municipal bonds (12.5x leverage), and 20% of 8% bank capital, such as previously AA and better rated bonds and conditionally guaranteed Private Sector debt by the government, formerly Fannie Mae and Freddie Mac (62.5x).
b. to government zero % risk weight asset class, valued on an HTM basis based on government and Fed’s having retained sole right MTM, i.e., all loans guaranteed by the government or Federal Reserve, as administered by government agencies and owned and controlled financial institutions, where the risk adjusted limit is 25x leverage.
This means that under FASB 115 HTM, since 1938, whenever there would be an oil price spike, a sharp tax increase, a new costly bureaucratic regulation, which reduced the net disposable income of private persons and businesses, thus reducing the amount of money that banks could lend against a property or business, because the bank asset values would remain intact, all the Fed had to do to retain the principal value of the mortgages and loans relative to the bank’s capital was to lower interest rates by small fractions, relative to significant losses in income. The combined effect of the lowering interest rates, businesses, consumers and banks tightening their belts to achieve higher productivity, resulted within around 6 months to a year in stabilization of bank capital to their asset underwriting ratios, depending on how long the reduction in net disposable income continued. And with the advent of securitization, the parties buying the B and BB tranches of ABS and MBS would take minor losses on any loans, but banks prohibited, since FIRREA 1989, to buy B and BB tranches had no risk. Therefore, that had the Bush43 Administration thwarted the Progressive Democrat attempt to impose the BIS lobby for FASB 157 MTM, as Hoover, also a Progressive, like Bush 43, did in 1929, which with the help of the Fed, precipitated the fall off the economic precipice that ensued and the illusion that Capitalism had failed, justifying the election of FDR a Progressive Democrat Socialist, and had the Bush Administration SEC instead continued FASB 115 HTM after November 9, 2007, the economy would have continued to boom, market prices for oil would have returned to the predominant market pricing, Goldman Sachs (financial terrorist I, II) and other proprietary funds would have been forced to cover their MSB shorts, probably at enormous losses, the EU and IASB would not have dared to also convert to MTM in January 2008, and a worldwide economic boom would have continued robustly through to the next election. McCain would probably not have been the Republican candidate, and in any case neither Hillary nor Obama would have been electable.
Once the Compassionate Conservative (aka Progressive light, same as Hoover to FDR) Bush/Paulson Administration allowed FASB 157 MTM to prevail, thus ending the force of market stability of predominant market financial contracts between borrowers and lenders, it also put at risk the entire deposits held by banks. Progressives with their proprietary funds continued their oil pricing manipulation up to $157/brl by July 2008, while aggressively shorting the MBS market, thereby draining all Private Sector lending. This made it easy to then short Lehman’s, Bear Stearns, Wachovia, Washington Mutual and many other banks that the Progressives wanted to have out of the way, as without HTM protection of predominant market contract values, there would be no replacement for deposits, thereby easily collapsing bank capital and shares value.
Meanwhile, with IASB MTM implemented January 2008 for all of European banks and businesses and much of the rest of the world, apart from China and the Philippines which did not agree to adapt MTM, the lending liquidity and access to credit in the Private Sector also evaporated.
This justified the solutions proposed of market stimulus packages, because without HTM in the Private Sector, the Private Sector market vehicles had all collapsed, as predominant market contracts no longer had value unless wrapped by the government guarantee or unless they were owned or controlled by a government entity, which guarantees automatically thrust the value of the assets back to HTM values, e.g., AIG preventing the derivatives and SWAPs and Life policies from collapsing in value, and then under pressure from China, Fannie Mae and Freddie Mac, thereby allowing their asset values to retain HTM predominant market contract valuations, and allowing the Fed to buy up AAA rated MBS at 70% book value and immediately write the value back up to the Fed’s right to HTM valuations, reaping hundreds of billions USD in profit at the expense of the Private Sector pricing subverted by Progressives push for FASB 157 MTM.
The Progressive’s idea to have all global banks come under the control of governments and of the BIS’s association of Privately owned Central Banks, such as the Federal Reserve requires a broad stimulus, higher taxes, burdensome bureaucratic costs, that drain the Private Sector systematically through a process openly discussed on CNBC, CNN and Bloomberg as called Regime change to achieve a New Normal, where the government will have set up programs throughout the banking system to guarantee all Private Sector loans, thus shifting them to HTM revaluation as zero risk weighted assets, where the planned final nail in the Capitalist coffin will come with FASB’s plan to fully implement FASB 157 MTM coupled with the regulatory development under Dodd/Frank Financial Reform Act to force the banks, States and Municipalities, the entire Private Sector into subservience to the government’s will. The bill also has stealth provisions to eliminating the influence of the 12 regional Feds to consolidate control in Washington, as part of a shift from Fascism, as now under Private Sector MTM to Communism.
Meanwhile, the Federal Reserve is proceeding with quantitative easing (Q/E) to buy any shortfall in the sale of US Treasuries and to buy up Private Sector debts to convert to government guaranteed debt at discounts for resale to the Private Sector as guaranteed by the Federal Reserve or one or another government agency or program, as Bernanke outlined in a Senate Hearing, now carrying the full HTM value, in the process converting losses to the Private Sector into enormous profits to the government and Federal Reserve.
To assist in this process, i.e., to give the international markets, bond funds, banks and governments confidence to continue to buy US government backed debt, out of the Obama $787 billion stimulus, of which $256 went to pay $400 to every person in the 95% lower income brackets a campaign promise, around $150 billion in mostly wasted spending providing no sustainable value, the $423 billion remaining sits there as a guarantee of interest on the current $13.5 Trillion in debt. This is intended to give the government and Federal Reserve breathing room to launch the programs in the Dodd/Frank Financial Reform Bill, while higher taxes, costs, etc suck the final life blood from the Private Sector over the next few years to achieve the Regime change to a New Normal, the Marxist Communist State that the Progressives in the Republican and democrat Parties have been pushing for under Wilson, then Hoover/FDR, then LBJ, then Carter, then Bush41/Clinton/Bush43/Obama.
After the final unraveling of the Private Sector economy by September 2008, with the idea that Capitalism had failed, obfuscating the fact that its regulatory basis, i.e., HTM, had been removed, thus, hiding the real cause, the first $700 billion Bush 43 stimulus was passed to bail out the “Too Big To Fail” banks and auto unions of GM and Chrysler. Under considerable pressure from Congress, FASB gave a temporary reprieve to the banks – FASB 157e on April 2nd 2009 – to allow them to book all new loan originations at HTM values. This allowed banks to retain new loan originations at HTM values, until there would be a major change in either comparative asset values, i.e., a predominant sale of foreclosed homes at losses, which would require that banks lend less on all other homes (MTM Level 1), and a change to the affordability models, such as sharp increases in taxes, due to Obamacare, the end of the Bush tax cut, the stealth bills recently passed enacting a Cap &Trade (MTM Level 2), while the government continues to siphon off all access to credit, as the only entity in the market with assets that can be acquired by banks and retained at HTM values. What Progressives in government and Central Banks have orchestrated is to become the only safe haven for bank lending, as all financial models will collapse in January 1, 2011.
FASB is planning to put the final nails in Private Sector Capitalism coffin with the repeal of FASB 157e, and full reinstatement of FASB 157 partly in 1012 and partly in 2014, preventing any return to Private Sector access to credit (and capital formation) without government guarantee programs to select the winners, thereby achieving for the government and Federal Reserve the complete coup and transfer of all ownership and control of capital, production and productivity from the Private Sector to the government and Federal Reserve, similarly around the world.
Government’s stealth war against the States: The States still have the possibility of 10th Amendment Nullification. However, under pressure from Congress, FASB is also planning to shift the States and Municipalities as well from HTM to MTM. The result of this is that it is estimated that the values of these assets, now booked by bond funds and pension funds at HTM values, will collapse by 50%, forcing the States to come under the US government guarantees, same as Fannie Mae and Freddie Mac, in order to retain HTM values. In this way the States, as well as the Private Sector electorate, will become totally subservient, and effectively enslaved by the Ruling Class and elite in Washington, Wall Street and Basel.
The Solution, a solution that can reverse this in very short order are several:
1. Reinstate FASB 115, HTM to the Private Sector, as a priority, which will return ownership and control of capital to the Private Sector, as well as the force of market pricing stability and predominant market values of medium and long term financial contracts.
2. Cut the Bureaucracy by more than half, putting all employees back to the Private Sector, similar to what Truman did at the end of WWII releasing 10 million soldiers into the workforce, that were quickly absorbed into full employment.
3. Cut wages and Pensions in the government Sector by half, also Truman after WWII
4. Shift the SSS and most Socialized programs to the Private Sector, asset management, where government would arrange hedges to provide a conditional guarantee of all managed accounts of principal and Fed Funds interest rate, like an annuity, meaning no downside to the potential of the SSS system and other government Social programs.
5. Reduce taxes to Laffer Curve maximum revenues at around 11% for all persons and corporations over $50,000 per year in income, no taxes for those below (same as the rate for the first income tax), eliminating all tax deductions except the marriage tax exemption, thus simplifying the tax code and eliminating the need for most of the IRS, including enforcement, while maximizing tax receipts. The result to allow a combination of vast expansion of the Private Sector and much higher tax receipts.
6. Eliminate Capital gains tax, inheritance tax, dividend tax, which are all double taxation of the income tax.
7. Cut all welfare and jobless benefits by half.
8. Engage a new Grace Commission, funded by Peter Grace, with Edwin Rubenstein as Head of Research, to go through the Bureaucracy and recommend upgrading of technologies, elimination of Bureaucracies that infringe on Private Sector productivity, and sunset Bureaucracies that have served their purpose.
9. Repeal Obamacare, institute Tort Reform to lower medical insurance overhead for Doctors and Hospitals.
10. Repeal the latest stealth Cap & Trade, and institute tax credits as incentives to those wanting to “green” their homes and businesses.
11. Repeal the entire Dodd/Frank, and all unnecessary burdens on the Private Sector, phasing out most government guarantee loan programs.
12. Repeal the 17th Amendment to restore States’ control over the Senate, as the Framers/Founders intended.
13. Restore lending norms of mortgage and loan affordability, such as 20% down payment, proof of income.
14. Phase out Fannie Mae and Freddie Mac to allow the Private Sector MBS market to return and displace the government guarantee market.
15. Eliminate the Czars, leaving over only the Cabinet members approved by the Senate.
16. Congress should go through all the deals and secret treaties made by the Administration with China, Russia, Saudi, etc. and void them. Congress should have Supreme Court go through all the Executive Orders and Bills passes to see if they are constitutional, including the changing of FASB 115 to FASB 157.
17. Restore the full force of the Constitution, which, without HTM in the Private Sector, has no legally or ethically binging purpose or relevance, thus ending the Imperial Presidency.
18. Restore the true meaning of the first Amendment to end the erroneous ideas of “Separation of Church and State” imposed by progressives.
19. Reverse the 17th Amendment making Senators selected by the State Legislatures and not the State electorate, which has brought about the levels of corruption and vote buying in government
20. Eliminate the NEA and the government’s influence on grammar schools, high schools, Universities, displacing government grants with tax credits for the choice of grammar and high schools and tax credits for donations to schools.
21. Expand grants and tax credits for R&D that can be potentially sold, leased or licensed to the Private Sector or provides some hitherto unknown future scientific benefit.
22. Use cash printing from deflationary offsets to invest in true infrastructure, which can be sold or leased to the Private Sector, where such developments are deemed to support continued Private Sector Productivity, versus one off boondoggle spending.
23. Term Limits on Senators and Congressmen. 24. Restore government as referee.
All people talk about are examples of the failures they blame on Capitalism, without knowing the real cause, and therefore unable to come to the real solution. This explains the cause fostered by the Progressives, and therefore the solution, where the unburdening of the bank regulatory mechanism, currently weighted to deplete and undermine Private Sector wealth, in a stealth coup, will result in an immediate and dramatic turnaround in capital formation and access to credit that will put the nation and the world on the cusp of a truly Golden Age of Prosperity.
Pieter Schoonheim Samara