Some Hopeful Signs

The first bit of good news comes from Italy. In Milan, authorities have seized the assets of several large banks who sold fraudulent derivatives to the city. This will be an important precedent in obtaining justice for many local governments and non-profits world-wide who were subject to a wide variety of fleecings at the hands of unctuous bankers.

The next bit comes from the U.S. Senate, where the Banking Committee comes closer to holding hearings on the Paulson-Bernanke-Lewis affair. This is a bit of 'he said - she said' drama that everyone should be looking forward to. The matter is quite serious for them as at least one in the group is probably going to end up in prison, and with their pants sued off. We seriously hope the drowsy Senate will start doing their jobs again and make the U.S. a nation of laws and not of strongmen.

Finally, we are heartened by news from Belgium, where normally sleepy shareholders showed some righteous indignation at the Board of Directors of Fortis. Throwing shoes is probably too good for the greedy, incompetent banksters who have done so much damage.

Now that shock and denial over losses are past, perhaps some healthy anger will be directed at deserving culprits. More importantly, it looks like legal reform may be in the works as well. Ironically, much of the recent financial damage resulted from recent undoing reforms of earlier eras. Perhaps a future of low- or no economic growth will have a plus: the cycle of reform and 'liberalising innovation' will come to an end along with the myth of growth.

Destructive Qualities of Stupidity in Government

Click here for part one of this topic.

Yesterday we wrote that we feel horrifyingly bad mis-investment has become the norm on the part of the U.S. Federal Government. As awful as that mis-investment is, at the same time, it only seems reasonable to assume that such activities can only go on for just so long before they cannot continue. When that end comes is anyone's guess, but we feel certain that the end will come.

At that time, American Citizens will collectively realise they live in a blasted country, and they will probably decide that changes are in order. The nation will have to learn humility and discipline. However, we feel the United States will likely have no domestic vision left to rebuild upon more-realistic and sustainable lines. The only choice will be to turn to the greatest economic and social friend the U.S. presently has: Canada.

As the largest trading partner of the U.S., as well as a cultural ally, Canada has been in a very good position to study the American mindset; it isn't a stretch to say that Canada understands the U.S. better than it does itself. In the future, it will likely be Canada, as the impartial observer, which will both understand the problems in the U.S., and have the best solutions.

That is, of course, unless the United States distances itself sufficiently from its northern neighbour. Although we understand the high-level visit by President Barack Obama to Canada was a warm success, we've been noticing what we feel is a very cold undercurrent in the Obama Administration. Point and case are the recent comments by Homeland Security Secretary Janet Napolitano. Here are some of the highlights:

"Yes, Canada is not Mexico... Nonetheless, to the extent that terrorists have come into our country or suspected or known terrorists have entered our country across a border, it's been across the Canadian border." "The fact of the matter is that Canada allows people into its country that we do not allow into ours."

These are not the first blatantly untrue things the Secretary has stated (read our article here). It confuses us: Secretary Napolitano is supposed to be one of the most informed persons in the U.S. Federal Government. In her hands rest the administration of, well, homeland security. Nevertheless, her comments are hogwash. As the Canadian ambassador to the U.S., Michal Wilson, to comment:

As the 9/11 commission reported in 2004, all of the 9/11 terrorists arrived in the United States from outside North America. They flew to major U.S. airports. They entered the U.S. with documents issued by the United States government, and no 9/11 terrorists came from Canada.

Since Secretary Napolitano should know this, we are forced to conclude she must, in fact, be an idiot. Her powerful position in the Obama Administration makes her a dangerous idiot. If she is successful in her attempts to strangle the U.S./Canadian border, in a manner akin to the U.S./Mexico border, we fear she will be negatively impacting the ability of the United States to pull itself together at the end of the 2007 Depression.

Such a clamping-down on the U,S./Canadian border is the worst possible thing to do during the Depression. There is no other time when international friendship and cooperation more important than a Depression, and Canada is the nearest functional neighbour of the U.S. What Secretary Napolitano proposes to do is, in a word, madness. She is voicing a destructive, out-of-control obsession with 'terrorists' and 'national security,' and she does not have the wits to see what she is doing.

There are many more examples of this stupidity in the Federal Government, but we feel that Secretary Napolitano's personal brand does not get the attention it deserves. We frankly consider her as destructive as Treasury Secretary Timothy Geithner's incessant Goldman Sachs donations, or Federal Reserve Chairman Ben Bernanke's voodoo monetary policies. All three persons are working hard to destroy what hopes the United States has: Geithner destroys the wealth; Bernanke destroys the money; Napolitano destroys relationships with those who can help save us from the previous two.

The Federal Reserve as Superhero?

The United States has a very long tradition of superhero worship. The ongoing popularity of superhero movies, such as The Watchmen and Hancock seems to justify what we see. There is, perhaps, nothing that the average American audience likes more than a plain schmoe who's a superhero and a regular guy at the same time.

In the past, we've seem to remember that the Federal Reserve was a plain and relatively straightforward organisation. Even under the much-maligned Sir Alan Greenspan, the Fed was pretty vanilla. No off-balance-sheet loan programs, no toxic mortgage debt... in a word, no mystery whatsoever.

Then Mr. Ben Bernanke came along, and then the crash in October 2008 occurred, and suddenly the Federal Reserve is looking even spookier than Goldman Sachs. Now, far from being a stoic, conservative organ of finance, the Fed has turned itself into a front-line warrior, running around like a berserker of old with monetary axes in each hand. Yet, it still lays claim on being a classic, responsible central bank.

Take, for instance, the recent news that the Fed will buy $300 billion of U.S. long-term bonds, as well as $750 billion of mortgage-backed securities. This, added to about $1.25 trillion of toxic assets with unknown -- probably zero -- value, around $1 trillion of government agency debt, and $2 trillion's worth of mystery, creates a balance sheet that would make a hedge-fund manager blanche.

Perhaps the cultural idiom of hero worship has gone to Mr. Ben Bernanke's head. Maybe he sees himself as the mighty superhero Helicopter Ben, successfully fighting off the minions of the evil genius, Deflation Man. We don't know for certain, since we've never met the man, but he strikes us as just an academic schmoe with delusions of grandeur. Whatever the case, though, Mr. Bernanke is putting what's left of financial stability in the United States at risk with his heroics.

The Dark(er) Side of Raising Taxes

As our co-writer noted in yesterday's post, raising taxes during a recession is a bad idea. Raising taxes during a depression is a very, very bad idea. President Herbert Hoover raised taxes during the 1929 Depression, and thereby helped dig a deeper pit for the American economy.

As President Obama's new tax regime is cranked up, it will turn a problem into a crisis. When -- if we are correct -- the U.S. dollar is devalued significantly, it will turn a crisis into a disaster. Let us explain:

According to the President, 'rich' is now classified as a couple making $250,000+ a year. At present purchasing power, only about 1.5% of all households are making that much money. So, by the numbers, these people are apparently 'rich.' Tax them!

But wait... what about all those bank bailouts, car-maker bailouts, insurance funds, synthetic CDOs, pension funds, hedge funds, ad infinitum? Surely the top 1.5% of households by income cannot support such largesse on the part of the government... so the money's got to come from elsewhere. We turn to Messrs. Ben Bernanke and Gideon Gono, as they know the answer: the printing presses.

With money flowing magically into being from the sky, those little financial concerns disappear in a puff of inflation. The question is how much inflation will happen: we posit a nice, comfy ten-times devaluation. In that scenario, today's dollar coin is tomorrow's dime.

Also in that senario, today's $250,000 is tomorrow's $25,000. Feeling a cold chill, dear Reader? We do. We'll work hard to preserve our modest lifestyle, but that means we'll be making more and more money -- nominally -- in order to keep up with inflation. At some point, we see no reason why we won't slam headlong into the 'rich' tax bracket... even though we're far from the classic definition of 'rich.' What's your income, Reader? And what tax bracket would you be in if you tacked another zero at the end of it? If you're not careful, you may become rich without even knowing it!

Trillion Dollar Welfare

We're certain that you have seen the recent flap about Ms. Nadya Suleman, from whose loins recently sprung a brood of eight premature babies. We extend our condolences to the people of California, whose tax-dollars will go toward the bill Ms. Suleman's fourteen children are piling up.

Honestly, we have to agree with the more negative views of Ms. Suleman's irresistable urge to breed: she is patently unable to feed and care for her previous six children, much less the additional eight. She should never have had any children, since she is unwilling or unable to work. If we were more impolitic, the term 'welfare queen' would come to mind. Thomas Malthus never seems quite so right...

But, we really must protest about Ms. Suleman's unfair treatment. Or rather, the unfair treatment of the bankers, the car companies, and the United States Government. Ms. Suleman's spawn will cost California tens of millions of dollars... but the unspeakable excesses of Wall Street and other scams are costing trillions, not to mention the integrity of the entire world banking system.

Let us be perfectly honest: Ms. Suleman is a leach, sucking money from productive people so that she can breed; Mr. Ben Bernanke, Mr. Bernard Madoff, Messrs. Timothy Geithner and Hank Paulson, Jr., and the rest of that lot... they are worse that leaches. They -- the Investorati -- are internal parasites, consuming everything of value from within, leaving only a dead husk behind.

Ms. Suleman rightly deserves the scorn she is receiving. But the Investorati deserve far, far worse than what she is getting. A sense of proportion must be kept in matters of welfare and bailouts; TARP and the $787 billion stimulus package is welfare of a grander scale than anything Ms. Suleman could ever absorb. American citizens should be rightly offended by Ms. Suleman, and frothing with pure rage at the bailouts.

Painted into a Corner

Mr. Henry Paulson, Jr., has had $350 billion burning a hole in his pocket since October. It's a terrible thing: he had far more money than he knew what to do with. He's been passing out the bucks willy-nilly, handing off bags of cash to friends, former co-worker, and former employers. Even so, it took him awhile to burn up the taxpayer's hard earned dollars: the last of TARP's initial $350 billion are set to roll out from the Treasury's loading dock. Now Mr. Paulson has pockets filled with lint; it is within his powers to now request the second $350 billion immediately... but he's making no moves to break open that piggy bank. 'Tis strange, we think: it's the season of giving, and he looked like he was having a ball of a time.

His compadre, Mr. Ben Bernanke, is having an even better time: $1.388 trillion worth of goodness, to approximate from the Fed's inscrutable balance sheet. We've looked at the Fed's latest excuse for a report... good luck making headway into its decipherment. Bloomberg has apparently sued the Fed for more information about the central bank's various lending programs... but the Fed may fall back to its legal trump card: the Federal Reserve System is a private bank, and therefore doesn't fall under the Freedom of Information Act.

We put ourselves in the shoes of these two men, and we can't help but feel... nervous.

Let us explain: the Treasury wants to keep the bailouts rolling, and the incoming Obama Administration is planning on spending trillions. At present the Treasury's bailouts are funded by investors buying Treasury debt... but when the cost of make-work programs start rolling in, these investors will be swamped. They just don't have enough money.

Enter the Federal Reserve, which can create a theoretically infinite supply of money. The Fed wants to prevent deflation by any means necessary, and buying up Treasury debt on the open market is just the thing for stoking inflation. The Treasury gets its money, the Fed gets its inflation and liquidity.

The policies of the Treasury and the Fed seem to be forcing them into an inflationary corner. Surrounded by seas of financial red ink, they have nowhere to turn but to the presses. They are playing with fire: sooner or later, all that paper money is going to start burning - first, in the people's pockets; and second, in their furnaces.