Bending the Rule of Law to Help the Banks: Effort to Draft a National Foreclosure Statute Underway

There is a slow moving but nevertheless troubling effort underway to change foreclosure laws across the US. The Uniform Law Commission, the same body that created the Uniform Commercial Code, a model set of laws that sought to harmonize commercial laws in all 50 states, has had two full day public but not well publicized meeting of a “study group” on mortgage foreclosure. Note that it took over a decade to draft the first version of the UCC and a protracted period for it to be implemented by states (most states have adopted the updated version of the UCC, although certain articles of the new version have not been implemented in any states).

Given its august history, one would think the ULC would be above political influences. That would appear to be a naive assumption these days. The study committee’s public meetings meetings to solicit opinion from “stakeholders” on “problems” with foreclosures. Curiously enough, these “stakeholder” meetings had no representation of investors (Tom Deutsch of the American Securitization Forum would claim he played that role, but everyone in mortgage land knows the ASF is a sell side organization) and effectively no input from homeowners or consumer advocates (none at the first meeting, and only, at the second, in Washington last week).

I got reports from three people who attended the latest session, in Washington, last week, na all were disheartening. Tom Cox, the Maine attorney who broke the robosigning scandal, provided a memorandum that argues that the commission has effectively assumed that the “problems” require a legislative solution:

Before there can be a determination made as to whether there is a need for a new uniform act dealing with foreclosure issues, there must be an clear accounting of (1) what the problems are that cause legislation to be considered, (2) what has caused those problems to occur, and (3) only then, whether the problems lend themselves to a legislative solution that would be offered by a new uniform act. Unfortunately, it appears that the JEBURPA letter of May 30, 2011 and all of the subsequent steps leading to this stakeholders’ meeting have failed to conduct the step 2 analysis. Further, it appears that the assumption has been made that new legislation is the solution to the perceived problems without there having been analysis of whether other non-­‐legislative solutions might be more appropriate.

I suggest you read Cox’s memo in full:

Cox provided a detailed account of the January 13 meeting. Despite the fact that he and the academics present (including Kurt Eggert, Adam Levitin, and Alan White) all argued that the there is nothing wrong with existing laws, the problem is that they aren’t being followed, and a new statue won’t solve that. (Interestingly, the senior counsel of the American Bankers Association was the only other party present to speak against the initiative. Some participants, namely Judge Mize of the National Center for State Courts, and Dennis Ceuvas of the National Association of Attorneys General, said they were neutral).

The most disturbing part of Cox’s report is that this plan is NOT to develop a model statute, a la the UCC, which state legislatures would then have to approve, but that Professor William Breetz (the chairman) and member Barry Nekritz (the American Bar Association representative to the Committee) want to create an overlay statue. Moreover, he was apparently the only person in the room with any foreclosure experience, and a considerable amount of disiformation was conveyed by industry participants.

His comments were considerable more moderate than those of another observer, who wrote:

I wanted to vomit. I don’t think it’s going anywhere fast, but I wanted to scrub off the subtle corruption that permeated the area.

Cox also reported his understanding is that the Study Committee is making a recommendation that a uniform act drafting process begin and that ULC president Michael Houghton and executive director John Sebart are keen to see the project move forward.

Not only is it disheartening that this sort of effort is underway, but its slow timetable and largely invisible nature (until it is too late) will make it hard to organize against it. At a minimum, investors and consumer groups need to make their voices heard. The idea that elite attorneys from banks, financial services lobbying organizations, the Fed, and academia amount to “stakeholders” is offensive and absurd, particularly on an issue of importance to most citizens, the integrity of the laws protecting their biggest asset.

Goldman Sachs enters £8bn 'parallel pay universe'

Bankers at Goldman Sachs have been accused of living in a parallel universe after the Wall Street firm announced it had set aside £8bn to pay its staff in 2011 – an average of £238,000 each.

Against a highly charged political backdrop in which the government is pledging to tackle top pay, the potential payments sparked anger among unions and were used as fresh ammunition by campaigners calling for a tax on financial transactions.

A spokesman for the Robin Hood Tax campaign said: "When even in a bad year each Goldman employee pockets an average of $367,000 – nearly 10 times the average UK salary – it is proof that banks live in a parallel universe."

The TUC's general secretary, Brendan Barber, said: "Goldman Sachs are brazenly defying their own sliding profits by dishing out pay and top bonuses worth £240,000 a head. This latest example of excessive rewards for mediocrity should give the government the green light to get tough on top pay.

"Ministers should start by putting workers on remuneration committees and making pay and bonuses exceeding £260,000 liable for corporation tax."

Bankers at Goldman will learn in the coming days about the size of their bonuses, which the firm insisted were lower than last year.

The Goldman payouts come amid fresh speculation about the size of the bonus for Stephen Hester, chief executive of Royal Bank of Scotland. He could be handed £1.5m – a headache for the government because it owes 83% of the shares in the Edinburgh-based bank – but RBS stressed no decisions had been made.

The potential scale of the pay deals was revealed as David Cameron prepared to join the growing debate on moral capitalism with a major speech in which he will argue that the Conservative agenda of markets, transparency and mutuality is well-placed to restore and reform a modern form of popular capitalism.

The speech, which will have echoes of his call for radical capitalism with a conscience at Davos in 2009, is intended to show that his politics and his party's history mean it is better equipped to address capitalism's amorality than socialism. Among Cameron's ideas are ways to support co-operatives. In what is being described as "co-ops in a box", he will set out measures to make it easier legally to create them.

Cameron will say that Conservatives instinctively abhor monopolies and protectionism, and regard transparency as the best antidote to bad company behaviour.

The prime minister is not expected to reveal an array of new policies, but is setting out his views before announcements next Tuesday by the business secretary, Vince Cable, on executive pay and proposals to address City short-termism.

Cable received a boost on Wednesday for his proposal to give shareholders more powers to throw out executive pay deals. City fund manager Fidelity put its weight behind his idea for a binding vote on remuneration reports.

The government's potential intervention comes as the US banks, all big employers in the City, report their results for 2011, when the eurozone crisis dampened activity and hit profits.

Goldman Sachs chief Lloyd Blankfein blamed "global macroeconomic concerns" for a 26% fall in full-year revenues to $28.8bn – down 26% – and a near halving in earnings to $4.4bn.

Goldman used more of its revenue (42%) to pay its 33,000 staff in 2011, even after cutting 7% of the workforce, or 2,400 jobs. The total payout per staff member of $367,000 – a figure that includes salaries, bonuses, equity awards and benefits – was down 15% on the the previous year. The actual amount set side to pay staff was down 21% at $12.2bn.

David Viniar, Goldman's finance director, maintained "discretionary" bonuses were down "considerably more than revenues".

The company recently disclosed more about its pay deals in the UK as a result of rules set out by the Financial Services Authority requiring firms to publish pay for "code staff" – those taking or managing risk. Regulatory filings for Goldman Sachs Group Holdings (UK) show that it had 95 code staff in 2010 who had an average pay deal of $6.2m (£4m) in 2010 – and had a further $595m awarded in a one-off mid-year award of shares in 2010.

In his speech, Cameron will also argue that the triumph of the City under Labour was due to Tony Blair and Gordon Brown's determination to create a form of equality through tax credits funded by the excess profits of the City. He will argue for what he sees as a deeper form of social mobility and fairness created through a better educated and skilled workforce.

A key test for the speech will be whether he repeats his Davos attack on a "winner takes all culture" that ends up with the poorest half of the world's population owning less than 1% of the world's wealth.

Zombie Europe

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

One of the major themes that I have been discussing in Europe for a long period of time is the simple failure of logic in which the European periphery is being instructed to push deflationary policy onto their economies, yet at the same time expected to meet their existing, and growing, debt obligations. In the most extreme case this has led to what you now see in Greece, but I don’t think Portugal or Spain are far behind. This failing policy is leading to the ‘zombification’ of nations, in which they can’t grow out off their debts yet aren’t being allowed to fail on them either. Kept alive by an ever-growing lifeline of foreign aid when the real solution is to let the beast die and re-build from the ashes. I think if we compare Iceland to Ireland we are beginning to get a clear picture of the benefits of writing off the debts and starting anew.

As I have also spoken about over the last month or so, what is happening in the real economies of Europe is being replicated in the banking system. This is most apparent in the interbank market, as I said:

Although the LTRO does seem to have done some good for short term sovereign debt via supporting direct purchases, or at least the perception of them, it doesn’t appear to be helping in the area that central bank operations actually target. That is, interbank market stability.

The latest ECB data shows that banks parked a near record 446bn Euro in the ECB’s deposit facility, but this in itself isn’t a problem. What is the problem is that the increasing use of the ECB’s marginal lending facility shows that not all of these parked reserves are actually “excess to market requirements”.

What appears to be occurring is that banks are hoarding reserves instead of providing them to the interbank market. If I took a guess I would suggest that this being caused by deposits flowing out of periphery banks into the core (and probably some non-Euro markets). These flows require the periphery banks to recoup some of their lost reserves which they would normally do in the interbank market.

If this is correct then appears that the banks themselves have already decided that there are some “Zombies” in the system. Under these circumstances what should occur is that these banks are identified, assessed and broken up in a structured way in order to purge the financial system of entities that are no longer solvent. Yes, this would mean that investors in those entities would be out of pocket, but that is the risk of investing which is why you get paid a premium. “Dividends” I believed they are called !

However, as I have stated numerous times, the Europeans appear to believe that the normal tenants of investing need not apply on their continent so we continually see policies implemented across Europe to keep the poison in the patient. The ECB’s 3-year LTRO is the latest incarnation of the band-aid to cover the ever-growing wound. Instead of properly stress testing the financial institutions to determine which ones are insolvent and in need of removal, we have an operation by the central bank to provide massive amounts of excessive liquidity. The hope is that this will stabilise the the interbank market and therefore banks will go on their merry way doing what banks do, that is providing credit to the private sector within the bounds of monetary policy.

This approach appears to be failing as, even Mr Draghi has admitted, the interbank market is still frozen. However, even if this wasn’t the case I doubt very much whether periphery banks would be falling over themselves to lend because:

Firstly the banks appear to be using the facility to re-capitalise while at the same time they shrink their asset base in order to meet capital requirements, and secondly, in a poor economy the appetite and/or desire for credit is low and the availability of credit-worthy customers is limited.

In their downgrade of the EuroZone, S&P supported this assessment as they listed credit tightening as their number one reason why they took the downgrade action:

Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone. In our view, these stresses include:

(1) tightening credit conditions, (2) an increase in risk premiums for a widening group of eurozone issuers, (3) a simultaneous attempt to delever by governments and households, (4) weakening economic growth prospects, and (5) an open and prolonged dispute among European policymakers over the proper approach to address challenges.

So how can this be? How is it that the ECB can provide the banking system with so much money, yet there is still a credit squeeze and therefore a deflationary tendency in the periphery ? Obviously S&P’s point 3 plays a part with government austerity driving an already stressed private sector to save over borrow. I will also note that banks aren’t really ever constrained by reserve liquidity, it is capital and credit worthy clients that they need, however that is also not the full story either.

As I stated above, the financial policies of Europe appear to be that insolvent financial entities must be kept alive at all costs, and in this regard the LTRO is playing its part. One clue to how this is occurring is available from the actions of the Italian government just before the 3-year LTRO commenced:

The Italian Treasury offered guarantees for bonds issued by banks to give them access to ECB liquidity, in a move to lower funding costs. These bonds will stay on the banks’ books until their expiration, according to a ruling announced by Italian Prime Minister Mario Monti earlier in December.

In the lead up to the 3-year LTRO the Italian banks created billions of euros worth of bonds and got their government to rubber stamp them. These bonds were never actually issued to the market, they were simply tossed over to the ECB as collateral to get a 1% loan. So how much did the Italian banks get ?

“It’s a 116 billion euros,” one senior banking source told Reuters. Two other sources confirmed that amount. The Italian figure includes 40.4 billion euros of state-backed bank bonds which were used as collateral for the loans.

So now the Italian banks have an additional 40.4 billion euros with which to purchase government paper, created from nowhere, and backstopped by the very sovereign that would later be the recipient the loan. The ECB’s mandate says that they can’t fund sovereigns directly, but it appears it is fine as long as there is a commercial bank acting as an intermediary and taking their “carry trade” cut. That technical point aside, what this shows is that banks now have a way to re-capitalise independent of the state of their other assets and liabilities.

For Italy, with its private sector in relatively good shape, its banking system may be able to weather the storm. In this particular case this operation is probably more about re-capitalising the banks after their exposures to other periphery nations and about funneling money to the government. However, what you will note is that the banking system can now profit independent of its loan book. So why would it bother taking the risk of lending? In an environment of increased capital requirements and a slowing economy it is far more likely that banks will use this additional capital as a buffer as they shrink down their asset base. In short, more consumption of fresh brains.

Given the relative strength of Italy it is doubtful that these operations were about avoiding the collapse of the commercial banks. That, however, may not be the case for somewhere like Spain. The Spanish banking system still has hundreds of billions of dollars in outstanding loan exposure to its now defunct housing market. Under these circumstances you would expect the Spanish banks to require a significant purging. However, once again, the LTRO prevents this occurring. Spanish banks only need to package up these non-performing loans in some type of eligible vehicle ( possibly with a sovereign rubber stamp ) and present them to the ECB for a 1% loan.

The definition of a zombie banks is:

… a financial institution that has an economic net worth less than zero but continues to operate because its ability to repay its debts is shored up by implicit or explicit government credit support.

I believe that definition fits in this case. The problem for the periphery nations and also the ECB in regard to the transmission of monetary policy is that , as Japan can attest to, zombie banks don’t lend. The irony for Germany and its push to raise the performance of peripheral countries is not lost on me.

Real Reason for Lehman Bros. Collapse? Another Insane International Tribunal.

Finance tribunal opens to settle disputes ... Disputes arising from complex transactions can be put for possible resolution at the world's first international specialist finance tribunal from Monday. The Hague-based tribunal, funded by the Dutch government, aims to build up internationally recognised legal precedent in an area that can be opaque to even the most senior national judges who have previously heard disputes over credit derivatives, collateralised debt obligations or other exotic products that gained notoriety during the financial crisis. – Financial Times

Dominant Social Theme: Global justice is inevitable, and necessary. It's not totalitarian, mind you, merely part of the process of "rationalizing" the decision-making process so everyone knows where they stand.

Free-Market Analysis: "They" are at it again. Supposedly the Dutch government had the bright idea to create a global "financial tribunal." But who gets up in the morning and decides that what the world needs is a better way to resolve disputes about derivatives and other artificial securitized instruments?

The problem is NOT that there is no prestigious and final word from a judicial authority on these insane instruments. The problem is that they exist at all.

They are purely the flotsam and jetsam of central banking. By printing endless amounts of money from nothing, the great central banking families that control tens and even hundreds of trillions of dollars have entirely distorted the world's economy.

We call what has occurred "Dreamtime." It lasted for at least 100 years, throughout the 20th century, and during that time Western middle classes were convinced of the efficacy and necessity of the current system.

Pre-Internet, the power elite's dominant social themes ruled the day. It was a matter of certainty that various fear-based promotions were not only accurate but inevitable. Only a hopelessly optimistic person would have argued that there were not too many people in the world, that starvation was all-but-inevitable, that oil was running out, that the environment was hopelessly befouled, that the world was not in the transformative grip of a terrible global warming.

And yet none of these have proven to be true. They are the malicious memes of the elite, floated to frighten middle classes into giving up wealth and authority to global authorities such as the UN, IMF and World Bank.

An entire panoply of global facilities has been set up in the past 50 years. Many people STILL don't seem to have noticed it, but global government is proceeding apace. The New World Order is upon us even as the bought-and-paid-for pundits of the power elite continue to shout that those who see its parameters are "conspiratorialists" and worse.

In fact, there IS a conspiracy. It is a conspiracy joined by a handful of power elite families controlling money around the world (what passes for money) and supported by their military, religious, political and corporate enablers and associates. It is located in the City of London, Washington DC, the Vatican and Tel Aviv.

Its goal is to create world government and any time someone points this out in a mainstream publication the elite's house hysterics shout that this sort of logic is born of paranoia and worse.

In fact, this is a typical Freudian reaction, to label others with a trait that one perceives in oneself. It is called "projection."

What is occurring today is what we have taken to calling "directed history." This is the sort of history that can only be achieved with massive, even incomprehensible, funding. The elites – entirely allergic to EVER using their own funds for purposes of command and control – have used endless amounts of central banking fiat money to create "history" throughout the 20th and early 21st century.

No one can fully explain the formal hostilities of the 20th century. Several, such as the Vietnam War and Pearl Harbor, were obvious provocations, created by apparently false-flag events. But lift the curtain and Western funding becomes evident for both the Soviet Union and Germany's Nazi period. The wars of the 20th century in particular, both hot and cold, increasingly seem to have been phony ones.

And what was the result of these wars? In almost every case, an equally phony solution was applied. Having apparently created a military conflict, the power elite proposed the SOLUTION – more government, more authority-from-the-top-down, more economic interference, price fixing, market meddling – inevitably leading to more recessions, depressions, social tension and ... further justifications for military activity.

We could go on ... but really there is no need. It is all over the Internet now, thousands of articles, testimonies, descriptions, in manifold, merciless, electronic glory. The impossible crimes of the Western elite are reported, thusly, in detail. It is clear, indelible and unalterable.

Yes ... for anyone with the stomach to follow the ins and outs of the 20th century especially and its murderous reign that saw some 150 million extirpated in one way or another by "governments," the conclusions are inescapable.

The major events of the world have become part of a liar's liturgy, a presentation of a thousand facts that make it clear the power elite is providing – often via something approaching genocide – the problem and then the solution. Simple enough if one can bring oneself to recognize it.

Now add to the faux-globalist solutions of the elite one more: a global financial tribunal ...

Again, there is no NEED for a global financial tribunal. The insanity of the current monetary system is amply illustrated in the volume of so-called derivative products that now apparently tops one thousand trillion.

Wall Street, the City of London and other financial centers are entirely driven by central banking paper fiat. Without the super-fuel of monopoly cash, these "financial centers" and the banks they spawn would not exist. There would likely be no derivatives. There would be no modern stock market. There would be no "cult of Buffett." There would be no ... Buffett.

Modern financial speculation is a result of endless torrents of painted paper made available, first of all, to those closest to the spigot on Wall Street and Main Street. People do not grasp this simple fact – that the modern world is defined by monetary stimulation: Wars, global governance and financial engineering are all the result of central bank over-printing.

The booms and busts caused by central banking fiat money are criminal, as is the monetary inflation that is an inevitable part of the process. Those (an increasing number) who call for this monopoly money printing to take place under the aegis of the government itself are not doing anyone any favors.

The accursed system would still exist. It would still bankrupt hundreds of millions and continually deprive further billions of the basic necessities such as food and water. Unfortunately, even now, it continues. And this new global financial tribunal is one more aspect of it. Here's more from the article:

The tribunal will provide a three-member panel to decide disputes, with parties deciding their panel from a list of 80 specialists in either litigation or finance from around the world. "National courts and ad hoc arbitration have been unable to produce a settled and authoritative body of law," said Jeffrey Golden, a professor at the London School of Economics and the chairman of the management board overseeing the tribunal who made the case for the court in the Financial Times in 2009. "Decisions are unpredictable, too decentralised, often taken too slowly and not always enforceable in other jurisdictions."

The financial crisis, exacerbated by the collapse of Lehman Brothers in September 2008, hastened calls for a specialist tribunal to decide thorny matters of finance. While judges sitting in courts in London and Manhattan have traditionally presided over financial disputes – because contracts tend to be written under New York or English law – some rulings have either been difficult to enforce in other jurisdictions or one court has ruled in opposition to another.

A recent example was the Belmont decision arising from Lehman's bankruptcy. A London court ruled in July that noteholders of a particular CDO at the time of Lehman's collapse were entitled to have priority on collateral being held by a third-party trustee because of a so-called flip clause. A US court, meanwhile, had decided that flip clauses were unenforceable.

While judges in national courts will often have to decide complicated disputes in areas in which they are not expert, Mr Golden said the risks were especially great for finance. "There is more than $600tn notional outstanding, subject to the terms of one standard-form contract," Mr Golden said, referring to the value of over-the-counter derivatives contracts yet to be settled. Those contracts tend to be governed by the International Swaps and Derivatives Association (ISDA) master agreement, which Mr Golden helped draft.

So, dear reader, now perhaps we see the reason – the REAL reason – for the collapse of Lehman Brothers. It was to justify further power elite meddling in the financial economy. Point to Lehman Brothers' collapse and you have a justification for yet further nonsensical judicial impetus.

We don't think for a moment this facility will remain "civil." Sooner or later the civil actions this facility decides will come under pressure for criminalization. It is a private facility for now, and a voluntary one. But how long will that last? We have no doubt that sooner or later people will be compelled to use it, or something like it.

Global governance, criminal and civil, is being erected at a record pace. The International Criminal Court, apparently funded by George Soros, continues to jostle aggressively for prestige and credibility on the international scene.

In this way a whole new body of criminal and civil law can be developed. It's not enough to put US citizens, for instance, in jail for 20 years for shoplifting tiny items. Eventually, perhaps, people will be jailed worldwide for incomprehensible financial crimes – and worse. At least that seems to be the plan.

Money Power will not rest until only its representatives can pursue financial transactions without the threat of punishment. It is not enough to control the manufacture of money. The use of it must be policed worldwide as well.

There is no end to it ... at least not for now. It is true, of course, that young people have continually engaged with the system in this Internet era. There are, for instance, spreading protests led by those involved with Occupy Wall Street. But this has been shown time and again to be a kind of false-flag operation, purposefully funded by the powers-that-be.

Those involved with Occupy Wall Street have been protesting Wall Street and are now apparently going to target the US Congress as well. But the goals of OWS are incoherent, from our view. Those involved, certainly those at the top, want to USE the current, corrupt system to punish those who have benefited the most from it.

Yes ... They want to use the totalitarian, monopoly-judicial mechanism to rectify the wrongs of monopoly-authoritarianism. As with the French Revolution, the terrible system itself is apparently to be brought to bear on wrongdoers, further justifying its horror. What sense does that make?

The system is flawed at a FUNDAMENTAL level; likely it cannot be changed. The best that can be hoped for (a good chance in our view) is that it will simply fall apart. In any event, until monopoly fiat is extirpated and competitive currencies allowed to float freely there will be no realistic change. And Money Power, implacably, will float endless false-flag protest movements to ensure that its central banking empire is not attacked head on.

Bigness is the order of the day. Money Power thrives on bigness. Corporate bigness. Military bigness. Judicial bigness. The power elite exercises its power via mercantilism, using the levers of government to achieve its goals behind the scenes.

Once upon a time, justice was truly private. If people wanted to resolve a problem they went out and hired a third party for that purpose. Or the two parties resolved it directly via peaceful or non-peaceful means. You can see our articles on the subject simply by 'Net searching on the terms "private justice" and "Daily Bell."

The judicial facility mentioned in this article excerpted above is a pretend solution to a cold-bloodedly created problem. Get rid of central banking and the problem of financial complexity goes away. The huge torrent of funding that supports military activity and sociopolitical charades around the world will subside. Even the judicial system itself, if starved of monopoly fiat, will begin to collapse.

People will take justice into their own hands once again. The idea of governments – and eventually one central government – pursuing people around the world to bring them to account for a continually more farcical list of fabricated crimes – will gradually disappear. It will prove too expensive and, ultimately, ludicrous.

It all begins and ends with monopoly money. The elites print it and drown the world in it. Then, when the distortions appear, they propose increasingly authoritarian, top down solutions to deal with the economic distortions they have created. In this way, they consolidate world power.

In our view, the Internet Reformation – as we often point out – is providing a powerful countervailing trend to Anglosphere power elite machinations. It is thus a race against time, as the elites continue to propose their authoritarian solutions on a groaning, distracted world.

Conclusion: Out of chaos ... order. At least that's what they hope. We don't.

Everything You Need to Know About Wall Street, in One Brief Tale

If there was ever a news story that crystalized the moral dementia of modern Wall Street in one little vignette, this is it.

Newspapers in Colorado today are reporting that the elegant Hotel Jerome in Aspen, Colorado, will be closed to the public from today through Monday at noon.

Why? Because a local squire has apparently decided to rent out all 94 rooms of the hotel for three-plus days for his daughter’s Bat Mitzvah.

The hotel’s general manager, Tony DiLucia, would say only that the party was being thrown by a "nice family," but newspapers are now reporting that the Daddy of the lucky little gal is one Jeffrey Verschleiser, currently an executive with Goldman, Sachs.

At first, I couldn't remember how I knew that name. But then I looked it up and saw an explosive Atlantic magazine story, published last year, called, "E-mails Suggest Bear Stearns Cheated Clients Out Of Millions." And then I remembered that piece, and it hit me: Jeffrey Verschleiser is one of the biggest assholes in the entire world!

The story begins at Bear Stearns, where Verschleiser used to work, up until the company exploded, in large part because of him personally.

Back in the day, you see, Verschleiser headed Bear’s mortgage-backed securities operations. Toward the end of his tenure, his particular specialty began with what at the time was the usual industry-wide practice, putting together gigantic packages of crappy subprime mortgages and dumping them on unsuspecting clients.

But Verschleiser reportedly went beyond that. According to a lawsuit later filed by a bond insurer called Ambac, Verschleiser also masterminded a kind of double-dipping scheme. What he would do is sell a bunch of toxic mortgages into a trust, which like all mortgage trusts had provisions written into their pooling and servicing agreements (PSAs) that required the original lenders to buy the loans back if they went into default.

So Verschleiser would sell bad mortgages back to the banks at a discount, but instead of passing the money back to the trust, he and other Bear execs allegedly pocketed the funds.

From the Atlantic story by reporter Teri Buhl:

The traders were essentially double-dipping -- getting paid twice on the deal. How was this possible? Once the security was sold, they didn't have a legal claim to get cash back from the bad loans -- that claim belonged to bond investors -- but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the decision-makers for the double dipping scheme.

Imagine giving someone a hundred bucks to buy a bushel of apples, but making a deal with him that he has to buy back any apples that turn out to have worms in them. That's what happened here: Bear sold the wormy apples back to the farmer, but instead of taking the money from those sales and passing it on to you, they simply kept the money, according to the suit.

How wormy were those apples? In one infamous email cited in the suit, a Bear exec colorfully described the content of the bonds they were selling:

Bear deal manager Nicolas Smith wrote an e-mail on August 11th, 2006 to Keith Lind, a Managing Director on the trading desk, referring to a particular bond, SACO 2006-8, as "SACK OF SHIT [2006-]8" and said, "I hope your [sic] making a lot of money off this trade."

So did Verschleiser himself know the mortgages were bad? Not only did he know it, he went so far as to tell his colleagues in writing that it was a waste of money to even bother performing due diligence on the bad bonds:

Jeffrey Verschleiser even said in an e-mail that he knew this was an issue. He wrote to his peer Mike Nierenberg in March 2006, "[we] are wasting way too much money on Bad Due Diligence." Yet a year later nothing had changed. In March 2007, Verschleiser wrote to Nierenberg again about the same due diligence firm, "[w]e are just burning money hiring them."

One of the ways that banks like Bear managed to convince investors to buy these bonds was by wrapping them in bond insurance through companies like Ambac, commonly known as “monoline” insurers. Investors who knew the bonds were insured were less worried about default.

Verschleiser, seeing that Bear had gotten firms like Ambac to insure its “sack of shit” bonds, saw here a new opportunity to make money. He first induced the monolines to insure the worthless bonds, then bet against the insurers! (Is it any wonder this guy ended up hired by Goldman, Sachs?) From the Atlantic story again:

Then in November 2007, Verschleiser wrote to his risk committee that he knew insurers for mortgage securities were going to have big financial problems. He suggested they multiply by ten times the short bet he'd just made against stocks like Ambac. These e-mails show Verschleiser's trading desk bragging to firm leadership that he made $55 million off shorting insurers' stock in just three weeks.

So in essence, Verschleiser was triple-dipping. First he was selling worthless “sacks of shit” to investors, representing them as good investments. Then, he kept the money from the return sales of the wormy apples. And then, on top of that, he made money by betting against the insurers he was sticking with these toxic assets.

We all know what happened from there. Bear, Stearns went under, thanks in large part to insane schemes like Verschleiser’s, and all of us were forced to pick up at least part of the tab as the Fed spent billions subsidizing Bear’s emergency takeover by JP Morgan Chase. In subsequent litigation, Chase has steadfastly refused to buy back the bad mortgages dumped on investors by the likes of Verschleiser, and has even fought tooth and nail to prevent the information in the Ambac suit from being made public.

Ambac went into Chapter 11 bankruptcy in 2010 for a variety of reasons, some of which had nothing to do with its losses in deals like these. But certainly Ambac and other monoline insurers like MBIA suffered for having insured worthless mortgage bonds sold onto the market by the Verschleisers of the world. Ambac in its suit asserted that it paid out over $641 million in claims related to the bonds from the Bear deals.

With all of this, though, Verschleiser landed happily on his feet. He reportedly heads Goldman’s mortgage division now. And after cutting a mile-wide swath of losses through the American economy, helping destroy two venerable firms in Bear and Ambac, bilking the taxpayer for untold millions more (he is also named in a lawsuit filed by the Federal Housing Finance Agency for allegedly speeding bad loans onto securitization before they defaulted), Verschleiser is now living the contented life of a proud family man, renting out a 94-room hotel for three days for his daughter’s Bat Mitzvah.

It’s certainly heartening that Verschleiser is spending this money on his daughter instead of, say, hiring a busload of Jamaican hookers to spend the weekend lounging with him in a hot tub full of Beluga caviar. People ought to give their children the best, I guess. But there’s this, too: at a time when one in four Americans has zero or negative net worth, renting a 94-room hotel for three days for a tweenager party might already be pushing the edge of the good taste/tact envelope. Even for the most honest millionaire in Aspen, it would seem a little gauche.

But for this burglarizing dickhead to do it? It’s breathtaking. I hope he at least invited his bankrupted investors to the pool party.

p.s. Since this blog was posted, I've received a number of letters all asking the same question -- how could it be possible that what Verschleiser did is not illegal? How is he not in jail?

The answer is that if the allegations in the Ambac suit are true, it certainly would seem to be illegal. Most notably, the pocketing of putback money almost has to be a form of theft or embezzlement.

The rest of Bear/Verschleiser's scheme, however, is also illegal, but in a more complicated way. If you read the complaint in the Ambac suit, what you see is a sort of extreme blueprint for how mortgage securitization worked in general during that period.

There is a veritable sea of fraudulent and corrupt practices one may gaze upon here, if the SEC were looking for something to target -- everything from withholding material facts from customers and ratings agencies, to threatening ratings agencies with lost business if they didn't overrate bonds, to lying in offering documents, to the manipulation of accounting procedures (this went on after the loans had moved onto Chase's books), etc. -- but the most flagrant violation in the suit involves the issue of due diligence, and here we do know a lot about Verschleiser's role.

It seems that when Bear did do due diligence in these deals, it very frequently overrode the firms they'd hired to do that due diligence, and put the loans in the deals anyway. In the third quarter of 2006, Bear overrode its due diligence firm an incredible 65% of the time, putting loans into their securitizations despite an outside firm finding red flags in the notes.

Even worse, Bear went out of its way to hide the evidence that it was knowingly ignoring due diligence. This is from the complaint:

Bear Stearns ignored the proposals made by the heads of its due diligence department in May 2005 to track the override decisions, and instead took the opposite tack, adopting an internal policy that directed its due diligence managers to delete the communications with its due diligence firms leading to its final loan purchase decisions, thereby eliminating the audit trail.

This is fraud because in its agreements with investors, Bear promised to conduct "due diligence," it promised to conduct "quality control" testing of the loan pools, it promised to "repurchase" defective loans, and it also promised to implement "seller monitoring," i.e. to prevent the securitization of loans from bad suppliers.

But it not only didn't do these things, it engaged the opposite behavior and knowingly covered up its fraud by deleting its communications.

Verschleiser was personally named in the evidence offered in the Ambac suit. In a letter to Ambac, Bear's RMBS Investor Relations managing director Cheryl Glory wrote that "Jeff will... provide you with the due diligence results of all three deals once complete."

But this is the same Jeff who we now have in writing saying this about those promised due diligence results: "We are wasting way too much money on Bad Due Diligence," and "We're just burning money hiring them."

It doesn't take a genius to deduce that Bear was not upholding its contractual obligations by delivering what it itself considered "bad due diligence" to Ambac. At the very least, this is actionable.

Verschleiser undermined due diligence in other ways. One good one was to demand that his due diligence people operate at speeds that made genuine due diligence impossible.

At one point during these deals, Verschleiser reamed out his immediate subordinate, co-head of mortgage finance Baron Silverstein, over the "problem" of the due diligence department taking too much time to do its work. Silverstein responded by issuing the following tirade to John Mongelluzzo, Bear's VP for Due Diligence, demanding that he not get in the way of Bear's insane goal of funding 500 mortgages a day:

I refuse to receive more emails from [Verchleiser] (or anyone else) questioning why we’re not funding loans every day. I’m holding each of you responsible for making sure we fund at least 500 each and every day… I was not happy when I saw the funding numbers and I knew NY would NOT BE HAPPY... I expect to see 500+ every day. I will do whatever is necessary to make sure you’re successful in meeting this objective.

Whenever any right-wing loon, or Bloombergite, tries to tell you the mortgage crisis was caused by the government forcing the poor banks to lend to broke black people, please direct them to this passage. The banks not only wanted to give out these loans, they wanted to give them out at the speed of light. They wanted to crank them out so fast that their own auditors literally couldn't read the writing on the loan applications. This was greed, not policy. Anybody who says anything else is high on something.

Anyway, given that much of Verschleiser's questionable behavior is in writing, his case sure seems court-ready. But for whatever reason, he has not been indicted.

One can almost understand a regulator not wanting to take on the whole circular securitization scheme -- Bear lends money to corrupt mortgage firm, mortgage firm makes bad loans, Bear packages bad loans and sells to investors, then takes the proceeds and creates more bad loans -- because it is so complex and difficult to prove.

But in this case there are simple issues of fraud and theft thatcould be taken on without having to prosecute broader crimes related to securitization. But prosecutors, apparently, just blew those off. In the current environment, regulators even miss the layups.

How's That Austerity Working?

From a Wall Street Journal article on the collapse of the Greek debt talks:

The negotiations have been tortuous. After first insisting no default by any euro-zone country would be possible, leaders agreed in July to seek a deal to cut about 10% from the face value of Greece's bonds in private hands. By October, Greece's prospects had deteriorated, and euro-zone governments and the IIF agreed to pursue a deal to cut the face value in half. Since October, Greece's economy, which is entering its fifth year of recession, has weakened further, worsening the state of its government finances. That means a bigger gap in Greece's budget that must be filled either by more debt relief or more new lending from official creditors.

How can this downward spiral end with anything other than a technical default? It can't, which is why the debt talks collapsed. The cuts necessary to bring Greek debt down to anything even remotely sustainable is much greater than the supposed 50% haircut agreed to last October. And that 50% headline number is now a source of heartburn for European politicians. Via the FT:

Charles Dallara, the IIF’s managing director, told the Financial Times on Sunday that he believed an agreement in principle needed to be completed by the end of this week if the restructuring deal was to be finalised in time for a €14.4bn Greek bond redemption due on March 20.

Though he said Greek officials were negotiating in good faith, he was critical of other eurozone negotiators, saying they were not living up to the outlines of the haircut deal reached at a tense October EU summit. “[Ms Merkel and Mr Sarkozy] and all the European heads of state said they wanted a deal with a 50 per cent [haircut] and a voluntary agreement,” Mr Dallara said. “Some of their own collaborators are not following that decision.”...

...Greek debt managers had agreed with bondholders on a coupon just below 5 per cent but creditors last week proposed a much lower interest rate.

Germany has proposed a 2-3 per cent coupon that would increase bondholders’ losses from 60 per cent to more than 80 per cent in net present value terms.

It looks like Merkel and Sarkozy are trying to pull the old bait and switch on creditors. The difference between a 60% and an 80% cut is meaningful, and sufficient to drive some debtholders, such as hedge funds that picked the stuff up on the cheap, to think they are better off to take the chance on their CDS counterparties rather than submit to a "voluntary" restructuring of the magnitude necessary to bring real relief to Greece's fiscal situation.

One has to say this about European policymakers - they sure keep it interesting.

Meanwhile, German Chancellor Angela Merkel appears to have learned nothing from the ongoing debt-deflation dynamics throughout much of Europe. Responding to the S&P downgrades, via the FT:

Ms Merkel said the downgrade made implementation of steps towards fiscal union – to be codified in an inter-governmental treaty which could be signed by the end of January – urgent. She called on leaders to resist softening up the so-called fiscal compact “here, there and everywhere” as details were hammered out.

Even after German GDP turned negative in the final quarter of last year, Merkel can find no other option than fiscal austerity. Perhaps some hope from France:

François Fillon, prime minister, at the weekend ruled out more austerity measures, saying the government’s efforts were aimed at boosting growth.

Then perhaps, maybe not:

But he also said in an interview with Journal du Dimanche, a Sunday newspaper: “We will do everything to get it [the triple A] back.”

Does France have any choice but additional austerity? What would happen politically if the core refused to embrace what it pushed upon the periphery? Spain appears ready to double-down on the austerity path, even as a slowing economy pushes the budget deficit over 8% of GDP:

Mariano Rajoy, the centre-right prime minister who took power in Spain last month, has responded to Friday’s credit downgrade from Standard & Poor’s by saying that his government will persevere with austerity and economic reforms, cutting the budget deficit, modernising labour laws and restructuring the banking sector.

Good luck with that - it has worked so well in Greece.

Bottom Line: The actions of the European Central Bank greatly eased the immediate financial pressures in the Eurozone. But the underlying problem of internal imbalances remain, and the European response is still not addressing those imbalances. Instead, the commitment to the fixed exchange rate combined with Germany's failure to recognize that their current account surplus must turn to deficit if they ever hope to be repaid promises to lock the Eurozone on the path of ongoing recession.

The Rise Of Dark Inventory In Housing And Oil

I'd like to try a little intellectual exercise. There were two pieces in my mailbox this week that concerned posts at Naked Capitalism. Though their topics have at first glance little to do with one another, there is a term that is pivotal to both. Inventory.

When it comes to real estate, it's popularly called "shadow inventory". With regards to commodities, the term "dark inventory" has been coined. While there are plenty of differences in the way the terms are applied, I'm for now intrigued more by - potential - similarities between them.

Not that I have the illusion that I can treat this in a way that could even border on comprehensive, don't get me wrong. I want to lift only part of the veil that hides from view what underlies how and why the financial system that rules our economies is going to the dogs: market manipulation.

In particular, I'm interested in how both shadow and dark inventory phenomena pervert their respective markets, as well as the entire free market system as a whole, where everyone is supposed to have "full access to information". Something both dark and shadow inventories make impossible. Something the 99% general public are not aware of. At all.

And it's not like they're alone. Try your average pension fund manager, banker, politician. Not a clue.

Let' start with a trip back to June 2011, when Izabella Kaminska for FT Alphaville perhaps first used the term "dark inventory":

The power of the dark inventory

Dark inventory: Inventory that’s out there, but which no-one else can see.

It comes in many shapes and forms. Equity inventory, which has been internalised by banks and parked off-balance sheet (appropriately via private dark pools). Copper inventory, which has been stashed off-market and encumbered via finance deals. It’s also yet-to-be-produced commodities which have been pre-sold, but which nobody else knows have been encumbered.

But if you have the power to see or command the darkside inventory, you have the power to stay ahead of the game. Especially if you can move quickly. Indeed, almost every befuddling market move of late can, if you think about it, be explained by the concept of dark inventory. For example, consider the impact of dark inventory accumulation (the possible consequence of cheap liquidity).

In oversupplied markets this can mislead fellow investors. They see buying interest coming from somewhere, though they can’t quite understand from where. The fundamentals don’t explain it, but prices are rising regardless, led usually by the cheapest securities, and in tandem. With no ability to see the dark inventory, the market finally falls for the trend. They believe the demand is real.

If you are the accumulator of dark inventory, or privy to the flow, you are able to foresee the market rallies and position yourself accordingly. This is a profitable time.

Of course, in continually oversupplied markets you will begin to suffer the costs of hedging inventory, if you are bothering to hedge, (since forward curves may eventually flatten out) as well as the burden of balance sheet expansion. Eventually it will make sense to park that inventory off-balance sheet.

Thanks to matching, aggregation and netting you can use the inventory (in a sliced up, mixed up manner) to back equitised structured products, exchange traded notes, exchange traded products as well as synthetic funds. Lots of launches follow. This especially makes sense if by then everyone is a believer in the rally, a fact which has translated into genuine buying interest which can now be captured to back your dark inventory.

The game is afoot.

Ilargi: I certainly recommend reading Izabella's entire piece (like all other pieces I quote from). But even from the quote above alone, you can, even if you're not familiar with the topic, still get a genuinely queasy feeling. We're talking market manipulation here, a way to influence investment decisions without anyone ever knowing they’re being manipulated. And fully legal.

Chris Cook, former compliance and market supervision director of the International Petroleum Exchange, writes this about "dark oil inventory" at Naked Capitalism:

Naked Oil

All is not as it appears in the global oil markets, which in my view have become entirely dysfunctional and no longer fit for its purpose. I believe that the market price is about to collapse as it did in 2008 and that this will mark the end of an era in which the market has been run by and on behalf of trading and financial intermediaries.

In this post I forecast the imminent death of the crude oil market [..]

Global Oil Pricing

The "Brent Complex" is aptly named, being an increasingly baroque collection of contracts relating to North Sea crude oil, originally based upon the Shell "Brent" quality crude oil contract which originated in the 1980s.

It now consists of physical and forward BFOE (the Brent, Forties, Oseberg and Ekofisk fields) contracts in North Sea crude oil; and the key ICE Europe BFOE futures contract which is not a deliverable contract and is purely a financial bet based upon the price in the BFOE forward market.

There is also a whole plethora of other 'over the counter’ (OTC) contracts involving not only BFOE, but also a huge transatlantic "arbitrage" market between the BFOE contract and the US West Texas Intermediate (WTI) [..]

North Sea crude oil production has been in secular decline for many years, and even though the North Sea crude oil benchmark contract was extended from the Brent quality to become BFOE, there are now only about 60 cargoes of BFOE quality crude oil (and as low as 50 when maintenance is under way), each of 600,000 barrels, delivered out of the North Sea each month, worth at current prices about $4 billion.

It is the 'Dated’ or spot price of these cargoes – as reported by the oil price reporting service Platts in the 'Platts Window’– which is the benchmark for global oil prices either directly (about 60%) or indirectly, through BFOE/WTI arbitrage for most of the rest.

[..] traders of the scale of the oil majors and sovereign oil companies do not really have to put much money at risk by their standards in order to acquire enough cargoes to move or support the global market price via the BFOE market.

[..] the evolution of the BFOE market has been a response to declining production and the fact that traders could not resist manipulating the market by buying up contracts and "squeezing" those who had sold forward oil they did not have [..] The fewer cargoes produced; the easier the underlying market is to manipulate.

[..] The Platts window is the most abused market mechanism in the world.[..]

In the early 1990s Goldman Sachs created a new way of investing in commodities. The Goldman Sachs Commodity Index (GSCI) enabled investment in a basket of commodities – of which oil and oil products was the greatest component – and the new GSCI fund invested by buying futures contracts in the relevant commodity markets which were 'rolled over’ from month to month. The genius dash of marketing fairy dust which was sprinkled on this concept was to call investment in the fund a 'hedge against inflation’. Investors in the fund were able to offload the perceived risk of holding dollars and instead take on the risk of holding commodities.

The smartest kids on the block were not slow to realise that the GSCI – which was structurally 'long’ of commodity markets – was taking a long term position which was precisely the opposite of a commodity producer who is structurally 'short’ of commodities because they routinely sell futures contracts in order to insure themselves against a fall in the dollar price. ie commodity producers are offloading the risk of owning commodities, and taking on the risk of holding dollars.

So in 1995 a marriage was arranged.

BP and Goldman Sachs get Married

From 1995 to 2007 BP and Goldman Sachs were joined at the head, having the same chairman – the Irish former head of the World Trade Organisation, Peter Sutherland. From 1999, until he fell from grace in 2007 through revelations about his private life, BP’s CEO Lord Browne was also on the Goldman Sachs board.

The outcome of the relationship was that BP were in a position, if they were so minded, to obtain interest-free funding via Goldman Sachs, from GSCI investors through the simple expedient of a sale and repurchase agreement: ie BP could sell title to oil with an agreement to buy back the oil later at an agreed price.

The outcome would be a financial 'lease’ of oil by BP to GSCI investors and the monetisation of part of BP’s oil inventory. Such agreements in relation to bilateral physical oil transactions are typically concluded privately, and are invisible to the organised markets.

Due to the invisibility of the change of ownership of inventory, 'information asymmetry’ is created where some market participants are in possession of key market information which others do not have. This ownership by investors of inventory in the custody of a producer has been termed 'Dark Inventory’

I must make quite clear at this point that only BP and Goldman Sachs know whether they actually did create Dark Inventory by leasing oil in this way, and readers must make up their own minds on that.

Planet Hype

The 'inflation hedging’ meme gradually gained traction and a new breed of Exchange Traded Funds (ETFs) and structured investment products were created to invest in commodities. In 2005 Shell entered quite transparently into a relationship with ETF Securities which enabled them to cut out as middlemen both investment banks and the futures market casinos, and with them the substantial rent both collect.

Other investment banks also started to offer similar products and a bandwagon began to roll. From 2005 to 2008 we therefore saw an increasing flood of dollars into the oil market, and this was accompanied by the most shameless, and often completely misleading hype, and led to a bubble in the price.

There was (and still is) no piece of news which cannot be interpreted as a reason to buy crude oil. The classic case was US environmental restrictions on oil products, which led to restricted supply, and to price increases in oil products. Now, anyone would think that reduced refinery throughput will reduce the demand for crude oil and should logically lead to a fall in crude oil prices.

But on Planet Hype faulty economic logic – the view that higher product prices are necessarily associated with higher crude oil prices – was instead used as justification for the higher crude oil prices which resulted from the financial buying of crude oil attracted by the hype.

You couldn’t make it up: but unfortunately, they could, and they did.

More worrying than mere hype was that a very significant amount of oil inventory had actually changed hands from producers to investors. Only those directly involved were aware that below the visible part of the oil market iceberg lurked massive unseen 'Dark Inventory’.

Ilargi: In a nutshell: Cook argues that QE measures from the Fed and BOE have caused large investors to flee from dollars into commodities.

This in turn has led to a price bubble through contango (forward prices are higher than spot prices), for which they are all positioned, but this will down the line inevitably lead to the opposite - backwardation -, and the bubble must burst. Severely, says Cook: to as low as $45 a barrel. Given how conservative Cook is in the numbers he uses, even that may be a high estimate.

In yet another article at Naked Capitalism, Irish journalist Philip Pilkington summarizes Cook’s point so well it seems pointless to try and improve on it:

Fear and Loathing in the Financial Markets – What Happens to the Economy When the Oil Bubble Bursts?

Looking at recent market trends Cook raises concerns that we could be seeing the beginnings of the end of a bubble that began to inflate in the oil market after the crash of the previous bubble in 2008. This bubble, Cook argues, was inflated due to inflation fears after the QE programs undertaken by the Federal Reserve and the Bank of England. With the markets awash with dollar and sterling liquidity, banks and investors piled into commodities to escape what they saw to be a looming inflation.

In recent months Cook focuses on the move of the market from a position of 'contango’ to a position of 'backwardation’ – which he sees as evidence of a bubble deflating. While some investors read in this that the short-run demand for oil has risen, Cook points out that with the global recession grinding along there is no fundamental reason that this should be occurring. Instead Cook sees in this move a sign that the long-run demand for oil is falling as the current bubble begins to burst.

Cook thinks that the price collapse is going to be very painful – falling possibly as low as $45-$55 a barrel. In response to this OPEC will try to ramp up prices by cutting production and, most importantly for our purposes, a financial crisis of sorts will occur as inflation hedged investors see their net worth cut to pieces.

If this is as Cook says – if this is a bubble of fear and it bursts – the financial sector is going to see a huge wiping out of the profits they have been reaping from it. We have no way of knowing how much profitability is tied up in these dodgy markets – but my thinking is: a lot.

Ilargi: So far, so good. We must realize, however, that while lower oil prices seem very beneficial to many sectors of our economies, a wiping out of everyone who's betting the wrong side of this wager is not.

And if Cook is right, a large segment of the financial world, that is: those who are not privy to the magnitude of the dark inventory, have been, and are being, manipulated to be on that wrong side. And without a new bubble to flee into to boot. Indeed, there's a real risk the entire global oil market will cease to - properly - function.

Come to think of it, again, if Cook is right, it probably already has. Since to the extent that it still seems to function, it does so only to service the interests of those that control the dark inventory, and who squeeze those investors not "in the know". Oil prices are thus set, in essence, by derivative contracts, not by supply and demand, which is a mere illusion. Thing is, who would know?

Needless to say, there's another party that stands to lose big if oil prices collapse: producers. The Arab Spring may well return more powerful than ever.

Still, while I think it's important for everyone to see and understand that, and how, manipulation sets market prices for commodities (and stocks, but that's another story) on a daily basis, and not some free market principle, I started out trying to figure out what connects dark oil inventory and shadow housing inventory.

Michael Olenick, founder and CEO of Legalprise, and creator of FindtheFraud, has - extensively- looked at the latter:

9.8 Million Shadow Inventory Says Housing Market is a Long Way From the Bottom

"Shadow inventory," the number of homes that are either in foreclosure or are likely to end up in foreclosure, creates substantial but hidden pressure on housing prices and potential losses to banks and investors.

This is a critical figure for policymakers and financial services industry executives, since if the number is manageable, that means waiting for the market to digest the overhang might not be such a terrible option. But if shadow inventory is large, housing prices have a good bit further to go before they hit bottom, which has dire consequences for communities, homeowners, and the broader economy.

Yet estimates of shadow inventory, and even the definition of what constitutes shadow inventory property, vary widely. For example, the Wall Street Journal published a Nov. 11, 2011 article, "How Many Homes Are In Trouble?" where values varied from 1.6 million (CoreLogic), [..] to between 8.2 million and 10.3 million (Laurie Goodman, Amherst Securities). [..]

.... things are actually worse than any of the prevailing estimates indicate, although Goodman is very close to the mark. Current loss experience suggests that this figure is staggering, easily in the $1 trillion range.

Why aren’t those losses more visible yet? Well, evidence suggests that servicers are stalling the foreclosure process, not taking title to and selling these houses. For the lenders, such delay likely allows them avoid the write-offs of both the negative equity as well as the worthless second liens. More generally, it keeps the trillion dollar losses hidden.

Lenders aren’t acknowledging their stall tactics, however. When people notice how slowly foreclosures are progressing from initial steps to resale, lenders point at their foreclosure fraud related dysfunction. Lenders conveniently don’t mention that such dysfunction was self-induced, instead blaming borrowers and courts. [..]

.... there are 9,800,000 houses in shadow inventory.

If these loans were taken out for the median value of a state-by-state home price, using data from the FHFA, for Q2, 2006, there is $2.3 trillion of home values at near the market peak. The mortgage balances are going to be lower than that, but given how widespread equity extraction came to be (and it is probably that the most levered homes are hitting the wall), it is not unreasonable to assume LTV ratios relative to peak values of 80%.

Loss severities on prime mortgages are running at roughly 50% and are 70% on subprime (note that with more borrowers fighting foreclosures, and given that loss severities on a contested foreclosure can come in at 200% or even higher, so using these assumption is certain to understate actual results). $2.3 trillion x 80% x 50% = $900 billion.

These losses will be distributed across the GSEs (meaning taxpayers), banks that have second liens (with the biggest losers being Bank of America, Citibank, JP Morgan, and Wells Fargo), investors in private label (non GSE) mortgage securities, and other US and foreign banks.

Balanced against this liability is some amount figure for the underlying asset, the house. Given that servicer advances, foreclosure costs and servicer fees come close to and even exceed the value of the property, comparatively little of this $2.3 trillion will be recovered in property liquidations. [..]

In support of the conclusion that banks cannot afford to recognize this shadow liability is the sharp decrease of foreclosure filings in 2011 and the seeming unwillingness of banks to move foreclosures through the system.

They file foreclosures, then let them linger, not taking homes even when every possible borrower defense is exhausted. Some of this slowdown may be due to more scrutiny of foreclosure documentation, particularly in judicial foreclosure states, but there is clearly more at work. [..]

There is other anecdotal evidence suggesting banks do not want these houses or, more accurately, do not want the write-offs that actually taking the houses would force:

• Foreclosure defense lawyers have clients who have not paid their mortgage in years, but face neither a foreclosure nor even a negative mark on their credit report. I recently received a call from a man who said he had not paid his $1.6 million mortgage in two years but his servicer has not foreclosed, and he faces no derogatory information on his credit report; he was frustrated because he is retired and just wants to move to a cottage.

This phenomenon, which apparently isn’t rare, might explain why shadow inventory reports that rely on credit reports to extrapolate shadow inventory are often dramatically lower than these calculations. [..]

• It is common for foreclosure mill lawyers to argue for delays in selling a home when nobody is representing a borrower. Judges, who want to clear their dockets, will rail at bank lawyers about the age of the case even while bank lawyers argue for yet another delay, while the other table — where the borrower, the defendant, is supposed to sit — is empty. [..]

Yes, servicers continue to prey upon ordinary Americans. But evidence suggests that they’re also preying on investors. Individual American families do not deserve to suffer these behaviors, that increase the losses while delaying the uncertainty, and neither do pension funds, European villages, municipalities, or other unsuspecting entities who actually funded these loans.

Few people are going to complain when they’re not paying their mortgage that there is no mark on their credit-report nor a foreclosure; a few of the more perplexed ones — or those that want to bring a bad mortgage to resolution — may speak out, but most remain silent.

Similarly, many investors, and surely the banks themselves, know about these figures. But as both sides spin their wheels, the problem continues to spiral out of control.

Ilargi: I think perhaps the best way to make the connection between dark inventory in commodities and shadow inventory in real estate is to look at, no surprise, what pays for it. And that leads me to what I have long since coined "zombie money".

Zombie money is the money that seems, but only seems, to exist because of unrecognized losses. QE measures, for instance, basically serve to keep those losses unrecognized. That’s what they're for. To make markets, and ordinary people, believe that banks are still solvent when in reality they're not.

Funny thing is, even with all the accounting tricks that hide those losses, the entire system is still, and already, on the verge of collapse. And when it goes, the loser will be you, not the gamblers that lost fair and square. If dark inventory shows you anything, it’s that fair and square is a thing of some mythical fairy tale past. The reality for you and me is, and this is not the first time I put it like this: heads you lose, tails you die.

Zombie money pays for dark oil inventory; this is for instance why tar sands can look profitable, even as their EROEI is very low. If there's sufficient difference between spot prices and forward prices for natural gas and oil, it makes sense to turn the former into the latter (which is all that tar sands are about). Nothing to do with energy efficiency, everything to do with market manipulation. The same goes for shale gas, and for oil shale. It will all soon give a whole new meaning to the term "unsustainable". Promise.

Zombie money also allows, and causes, lenders, aided and abetted by governments all over, who want no part of a crashing real estate market, to keep millions of homes off the market, which in turn allows them to keep billions, if not trillions of dollars, in losses off their books. This results in hundreds of millions of people, throughout the western world, who think their homes are worth much more than they are. And then they wake up.

Dark inventory and shadow inventory keep us all from having a realistic picture of what is actually out there, what anything at all is worth. Prices are not set in any sort of "free" market; they are set in "shadow markets", "dark markets", in which - derivative - financial instruments rule, not the actual assets they are based on. Until they don't.

Today’s prices are set by bets on expectations of tomorrow’s prices, and these expectations in turn are manipulated by parties that have a vested interest in making investors - and the general public - think a certain expectation is realistic; all it takes is to make that expectation sufficiently opaque, to make sure investors have access to far less information than the parties that deal and/or hold the derivative instruments.

That's all it takes to create, out of thin air, a whole new generation of suckers and greater fools.

This creates a tremendous cognitive dissonance, a picture of the world that is entirely delusional. And that, of course, can and will not last. Even if a majority of people still wishes to think that it can. What do they know about what's going on behind the curtain? Hardly anything at all.

And then they wake up.

Bam! Bam! Bam! Huge Financial Bombs Just Got Dropped All Over Europe

The European debt crisis has just gone to an entirely new level. Just when it seemed like things may be stabilizing somewhat, we get news of huge financial bombs being dropped all over Europe. Very shortly after U.S. financial markets closed on Friday, S&P announced credit downgrades for nine European nations. This included both France and Austria losing their cherished AAA credit ratings. When the credit rating of a country gets slashed, that is a signal to investors that they should start demanding higher interest rates when they invest in the debt of that nation. Over the past year it has become significantly more expensive for many European nations to borrow money, and these new credit downgrades certainly are certainly not going to help matters. Quite a few financially troubled nations in Europe are very dependent on the ability to borrow huge piles of cheap money, and as debt becomes more expensive that is going to push many of them over the edge. Yesterday I wrote about 22 signs that we are on the verge of a devastating global recession, and unfortunately that list just got a whole lot longer.

Over the past several months we have seen quite a few credit downgrades all over Europe, but we have never seen anything quite like what S&P just did. Standard & Poor’s unleashed a barrage of credit downgrades on Friday....

-France was downgraded from AAA to AA+

-Austria was downgraded from AAA to AA+

-Italy was downgraded two more levels from A to BBB+

-Spain was downgraded two more levels

-Portugal was downgraded two more levels

-Cyprus was downgraded two more levels

-Malta was downgraded one level

-Slovakia was downgraded one level

-Slovenia was downgraded one level

This is really bad news for anyone that was hoping that things in Europe would start to get better. Borrowing costs for many of these financially troubled nations are going to go even higher.

In addition, there was another really, really troubling piece of news that came out of Europe on Friday.

It was announced that negotiations between the Greek government and private holders of Greek debt have broken down.

The Institute of International Finance has been representing private bondholders in negotiations with the Greek government about the terms of a "voluntary haircut" that is supposed to be a key component of the "rescue plan" for Greece.

Greece desperately needs private bondholders to agree to accept a "voluntary haircut" of 50% or more. Without some sort of an agreement, the finances of the Greek government will collapse very quickly.

For now, negotiations have failed. There is hope that negotiations will resume soon, but Greece is rapidly running out of time.

The Institute of International Finance issued a statement on Friday which said the following....

"Unfortunately, despite the efforts of Greece's leadership, the proposal put forward … which involves an unprecedented 50% nominal reduction of Greece's sovereign bonds in private investors' hands and up to €100 billion of debt forgiveness — has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt"
The IIF says that negotiations are "paused for reflection" right now, but they are hoping that they will be able to resume before too long....

"Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach"
Something needs to be done, because Greece is experiencing a complete and total financial meltdown.

Back at the end of July, the yield on one year Greek bonds was sitting at about 40 percent. Today, the yield on one year Greek bonds is up to an astounding 396 percent.

That is how fast these things can move when confidence disappears.

Those living in the United States should keep that in mind.

Unfortunately, Greece is not the only European nation that is completely falling apart financially.

We aren't hearing much about it in the U.S. media, but Hungary is a total basket case right now. The credit rating of Hungary was reduced to junk status some time ago, and now the IMF and the EU are threatening to withhold financial aid from Hungary if the Hungarians do not run their country exactly as they are being told to do.

In particular, the IMF and the EU are absolutely furious that Hungary is trying to take more political control over the central bank in Hungary. The following is from an article in the Daily Mail....

The European Union has stepped up pressure on Hungary over the country's refusal to implement austerity policies and threatened legal action over its new constitution.

The warnings escalated the standoff between Budapest and the EU, as Hungary negotiates fresh financial aid from Europe and the International Monetary Fund.

Over the past months, the country's credit rating has been cut to junk by all three major rating agencies, unemployment is 10.6 percent and the country may be facing a recession.

But bailout negotiations broke down after Budapest refused to cut public spending and implemented a new constitution reasserting political control over its central bank.
Slovenia is a total mess right now as well. The following comes from a recent article posted on EUObserver.com....

Slovenia's borrowing costs have reached 'bail-out territory' after lawmakers rejected the premier-designate, putting the euro-country on the line for further downgrades by ratings agencies.

Zoran Jankovic, the mayor of Slovenia's capital Ljubljana, fell four votes short of the 46 needed to be approved as prime minister by the parliament, with the country's president set to re-cast his name or propose someone new within two weeks.
Some time ago, I warned that 2012 was going to be a more difficult year for the global economy than 2011 was.

Well, things are certainly starting to shape up that way.

Europe is heading for some really hard times. What is about to happen in Europe is going to shake the entire global financial system.

Those that live in the United States should take notice, because the U.S. financial system is far more fragile than most people believe.

Our banking system is a gigantic mountain of debt, leverage and risk and it could fall again at any time.

In addition, the U.S. debt problem is bigger than it has ever been before.

For example, did you know that the federal government is on a pace to borrow 6.2 trillion dollars by the end of Obama's first term in office?

That is more debt than the U.S. government accumulated from the time that George Washington became president to the time that George W. Bush became president.

For now the U.S. government is still able to borrow giant piles of super cheap money, but such a situation does not last forever.

Just ask Greece.

Already there are indications that foreigners are starting to dump large amounts of U.S. debt. If this trickle becomes a flood things could become very bad for the United States very quickly.

We are on the verge of some very bad things. The kinds of "financial bombs" that we saw dropped today are going to become much more frequent. As governments, banks and investors scramble to survive, we are going to see extreme amounts of volatility in the financial marketplace.

Things are not going to be "normal" again for a really, really long time.

Hold on tight, because 2012 is going to be a very interesting year.

What Recovery?

If we add 200,000 jobs a month, will recovery take 7 years or 12 years? ... On Friday, we got the December jobs number: +200,000. That's good, but not good enough. I posted a graph from the Hamilton Project showing that, at that rate, the labor market wouldn't recover till 2024. But perhaps that's too pessimistic. The Economic Policy Institute took a look at the same numbers and concluded that a growth rate of 200,000 jobs per month would lead to a full recovery in seven years or so. That's nothing to celebrate, but it's better than the Hamilton Project's estimate of 12 years. It's also a bit odd: Isn't this a simple matter of taking job losses and dividing by monthly job gains? Well, no. The date of our eventual recovery depends on some crucial unknowables about the future of the American labor force. – WonkBlog Washington Post

Dominant Social Theme: This was a bad recession but it'll be all right soon.

Free-Market Analysis: We have learned that the US recession is over and that the only reason Europe is in trouble is because Southern European countries like Greece won't rein in their spendthrift ways. But as an alternative news site, we have never subscribed to the idea that what has occurred in the early 2000s is a merely a normal business cycle event.

In fact, we are on record numerous times as explaining that what has occurred in the 2000s is the END of the dollar-reserve economic system. If the cycle itself is left to run its course, gold looks (possibly) to finish above US$3,000 or US$4,000 (maybe US$5,000) and Western-style paper-money economies cannot stand that sort of strain, in our view.

Something will have to happen. This is why the analysis of dominant social themes of the power elite, which we regularly offer, is a useful tool in understanding the Way the World Works. The elites use fear-based promotions to guide the world toward global governance. US$5000 an ounce gold is likely intolerable to them.

It blows up almost every really important meme they've spent a century promoting. It blows up the central banking meme that the good, gray men in expensive suits can gently adjust and guide a paper money supply. US$5,000 gold will indicate that they cannot and that people have no faith in central banking or central bankers.

It blows up the idea that US dollars are a repository of value. If and when gold rises to a value equivalent to US$5,000, the US dollar will be seen truly as a kind of paper tiger, folding notes that are increasingly devoid of value. Why, in fact, would people want to hold notes that have been so thoroughly reduced? A high gold price will destroy whatever dollar-reserve (petro-dollar) credibility remains.

Finally, US$5,000 gold is a stunning repudiation to Western governance generally. The capstone of the modern money politics is the fiat dollar. For it to be devalued so radically will call into question the fundamentals of the system – not just the economic system but the larger configuration of the modern regulatory state.

Within this context, articles about jobs and economic recovery (like the one published in the Post, excerpted above) seem to us to miss the point. This is NOT a normal recession within a stock bull-market context but a vicious countercyclical bull market in precious metals that likely has three or four years to run.

The only way to stop the cycle from its completion is to confiscate gold or silver or do something else of a radical nature to ensure that gold (and silver) doesn't complete its run. This is not a new idea. From our point of view, World War II was at least partially caused by the inability of the power elite to damp the worldwide depression.

Notice that after World War II, the paraphernalia of world government was put into place – the UN, the World Bank, the IMF and then later NATO, Interpol and now the International Criminal Court. The implementation of all these massive facilities indicates that much more was taking place after Word War II than just a reset of what had gone before.

In fact, an entirely new economy was in the process of being developed. That's because the Depression had basically wiped out the old one. And we would argue that's what is happening today. The old dollar-reserve system is basically dead.

We estimated years ago that the financial crisis would cost the powers-that-be some US$100 trillion to fight. Such numbers sound impossible, illusory. But add up all the money poured into the system by different central banks around the world and we have a gut-feeling it already amounts to around US$50 trillion, maybe more. Heck, the Fed loaned some US$15 trillion IN ONE WEEKEND, from what we can tell.

These numbers, as we have long pointed out, have themselves killed the modern central banking system because they have been reported throughout the Internet. Not everybody is aware of them but millions of people are. Some of these millions, perhaps tens of millions, have lost their jobs and houses, and in some cases, their families.

It has occurred to these people that the system is neither rational nor beneficent. The idea that Ben Bernanke can loan trillions to colleagues while the average person is sinking into bankruptcy is not merely a casual observation of modern society. It is a rage-inducing phenomenon.

This is what will sink the system. This is the reason we've proclaimed it dead. It's the reason, as well, that the central banking system is set up with such mind-numbing bureaucracy and its every nuance is clothed in language that makes the eyes glaze over.

The idea is to hide the reality of what's going on in a blizzard of big words and statistics. Terms like "quantitative easing" come from nowhere into the modern lexicon. But in the past, such phraseology would find its home in a New York Times article. Today, these terms are all over the Internet.

It is the Internet and what we call the Internet Reformation that is fracturing the modern central banking economy. For the first time since the invention of global central banking about a hundred years ago, a free, untrammeled press has been able to comment on this "invention."

In fact, anyone who looks at the situation with a clear vision can see instantly that price-fixing the value and amount of money in an economy is BOUND to be distortive. Once one realizes the contradiction at the heart of central banking, the rest of the system begins to be comprehensible.

There IS no justification for it. It doesn't work and merely ruins the economics over time of those who engage in it. Worse, those intergenerational power elite families that have created the system and control it KNOW that it ruins economies. The POINT of central banking is ruination.

It cannot be otherwise. Those who control the printing of trillions can raise economies up until they crash. Then, by printing yet more money, they can buy up ruined businesses for a pittance. Eventually, the entire economy (not just the banking sector) belongs to them.

But national greed and rapine is not enough. The Anglosphere elites seek to impose this system worldwide. The New World Order, they call it. They will not be satisfied, apparently, until they control the world's money. This is not merely a hypothesis, either. Evidently and obviously, central banking has its own logic; the system is prone to collapse and needs to get constantly bigger in order to survive.

The system is also unstable within the larger business cycles it generates. This is because the imbalances created by fiat money build up until the system can no longer support itself. By this time, most of the major corporations are basically bankrupt. Absent the current system, nobody would lend to them because it is impossible to tell whether they are viable. Think GM.

For this reason, the powers-that-be must use extra-curricular methodologies to retain the system. War is perhaps the best (if not the only) method of maintenance. It is war that allows the elites to create the necessary social discipline that gives bought-and-paid-for legislatures the justification to insist on the militarization of society.

It is only through this militarization – by turning a collapsing economy into a command-and-control one – that the current power elites can continue to maintain their hegemonic grasp. Within the context of war, critics can be jailed, young men can be pulled off the street and made to work within a military context for a pittance and the larger corporate structure, with all its inefficiency and bloat, can be continually propped up for the "good of the nation."

This is likely what's happening now. The ridiculous – obscene – system, in which a handful control the world's wealth, is going to be sustained by mad, regional war, probably in the Middle East. The foundation has been laid by the phony war on terror and now economic totalitarianism is going to be sustained by a larger military conflagration, perhaps one that will begin with Iran.

It will be cast as a war between civilizations (between Islam and the West) but it will be no such thing. It will be far grubbier than that. It will simply be another desperate effort to maintain a failing monetary system within the context of saddling domestic populations with the authoritarianism of currencies they would otherwise reject.

Ironically, books may be written about the "struggle for freedom" that an upcoming war will entail. But those in the West who fight this war will be contributing to their own further enslavement. They will be dragooned into an epic struggle that probably end with some kind of world currency that will make their already miserable lives worse not better. Monopoly-issued fiat money is a curse.

We have gone to this length to set up a frame of reference for this Washington Post article. Treating the current leg of the business cycle as business-as-usual strikes us tendentious. The reality is that the system is collapsing and trying to figure out when the recession or when "business will get back to normal" strikes us as a questionable and even unnecessary exercise. Here's some more from the article:

Here's the issue: Before the recession, the economy needed to produce 120,000 jobs a month just to keep up with new entrants into the labor market. Lately, that number has been closer to 90,000. Part of this is that immigration has fallen and many immigrants are leaving. Part of it is that some workers are leaving the labor force — either they can't find a job and have given up, or they have decided to stay home with the kids or focus on other pursuits rather than take the sort of jobs they can get right now.

The question is whether the growth of the labor force bounces back or holds steady. And it turns out, this question matters a lot ... This is a case where a longer recovery could mean a better recovery. If we continue growing at 90,000 jobs a month, it likely means that many of the long-term unemployed never made it back into the labor force, and that the economy is producing less than it otherwise could.

It means, in other words, that the recovery is proving unable to reverse some of the deepest wounds inflicted by the recession. If we get catch-up growth in the labor market, that may push back the return of full employment, and it may even temporarily increase the unemployment rate, but it will mean we're seeing a fuller recovery.

This is surely a neatly reasoned argument but we would argue it is being applied to the wrong economy. The system is so sick it has needed trillions in interest-free loans and giveaways simply to survive. Nor has the system purged itself.

Most of the "jobs" that the Washington Post speaks of are actually employment measures that prop up the current dysfunctional economy. Union employment, public school teaching, legal positions, even medical berths all contribute to continuing the system as it is. And the current system is failing.

It is certainly a weird situation. The very jobs that people are so keen on realizing contribute in many cases to the demise of the culture in which they live and try to survive. This is because the power-elite has had the time and money to create an economy that supports the destruction purveyed by central banks.

One can continually try to calculate when and how Western countries emerge from the current travails. One can make statistical arguments for or against fuller employment. One can treat the current situation – as does the Washington Post – as one in which business-as-usual shall re-emerge sooner or later.

But for all the reasons listed in this article, we think this is the wrong approach to analyzing what is taking place. The current economic climate is an entirely artificial one. It is propped up by men desperate to hold onto what they have got – and who have proven in the past they will do anything - anything! – to retain the Money Power they believe is their birthright.

Conclusion: To talk about whether the American economy is capable of producing a given number of jobs within this context is in our view to have the wrong discussion at the wrong time. A bigger game is afoot. And that's the one we ought to be paying attention to.

24 Statistics To Show To Anyone Who Believes That America Has A Bright Economic Future

Beware of bubbles of false hope. Right now there is a lot of talk about how the U.S. economy is improving, but it is all a lie. The mainstream media can be very seductive. When you sit down to watch television your brain tends to go into a very relaxed mode. In such a state, it becomes easy to slip thoughts and ideas past your defenses. Sometimes when I am watching television I realize what the media is trying to do and yet I can still feel it happening to me. In this day and age, it is absolutely critical that we all think for ourselves. When you look at the long-term trends and the long-term numbers, a much different picture of the U.S economy emerges than the one that is painted for us on television. Over the long-term, the number of good jobs in America has been steadily going down. Over the long-term, the number of Americans living in poverty and living on food stamps has been steadily going up. Over the past couple of decades, tens of thousands of businesses, millions of jobs and trillions of dollars of our national wealth have gone out of the country. Our debt is nearly 15 times larger than it was 30 years ago, and U.S. consumer debt has soared by 1700% over the past 40 years. Year after year the rate of inflation goes up faster than our incomes do, and this is absolutely devastating the middle class. Anyone who believes that we can keep doing the same things that we have been doing and yet America will still have a bright economic future is delusional. Until the long-term trends which are taking the U.S. economy straight into the toilet are reversed, any talk of a bright economic future is absolute nonsense.

In America today, we have such a short-term focus. We are all so caught up with what is happening right now. Our attention spans seem to get shorter every single year. At this point it would not be hard to argue that kittens have longer attention spans than most of us do. (If you have ever owned a kitten you know how short their attention spans can be.) Things have gotten so bad that most of our high school students cannot even answer the most basic questions about our history. If people are not talking about it on Facebook or Twitter it is almost as if it does not even matter.

But any serious student of history knows that is is absolutely crucial to examine long-term trends. And when you look at the long-term trends, it rapidly becomes apparent that the U.S. economy is in the midst of a nightmarish long-term decline.

The following are 24 statistics to show to anyone who believes that America has a bright economic future....

#1 Inflation is a silent tax that steals wealth from all of us. We continue to shell out increasing amounts of money for the basic things that we need, and yet our incomes are not keeping pace. Just check out the following example. Gasoline prices have been trending higher for several years in a row as one blogger recently noted....

January 2009 $1.65

January 2010 $2.57

January 2011 $3.04

January 2012 $3.29

#2 If you can believe it, the average American household spent approximately $4,155 on gasoline during 2011.

#3 Electricity bills in the United States have risen faster than the overall rate of inflation for five years in a row.

#4 Health care costs continue to rise at a very alarming pace. According to the Bureau of Economic Analysis, health care costs accounted for just 9.5% of all personal consumption back in 1980. Today they account for approximately 16.3%.

#5 Getting a college education has also become insanely expensive in America. After adjusting for inflation, U.S. college students are borrowing about twice as much money as they did a decade ago.

#6 To get the same purchasing power that you got out of $20.00 back in 1970 you would have to have more than $116 today.

#7 To get the same purchasing power that you got out of $20.00 back in 1913 you would have to have more than $457 today.

#8 There are fewer payroll jobs in the United States today than there were back in 2000 even though we have added more than 30 million extra people to the population since then.

#9 The U.S. economy is bleeding millions of good jobs. Greedy CEOs are systematically shipping them overseas and our politicians are standing around and doing nothing about it. This has gone on year after year after year. The following is from a recent article by Paul Craig Roberts....

In the first decade of the 21st century, Americans lost 5,500,000 manufacturing jobs. US employment in the manufacture of computer and electronic products fell by 40%; in the production of machinery by 30%, in motor vehicles and and parts by 44%, and in the manufacture of clothing by 66%.

#10 Our economic infrastructure is being torn apart right in front of our eyes. In 2010, an average of 23 manufacturing facilities a day shut down in the United States. Overall, more than 56,000 manufacturing facilities in the United States have shut down since 2001.

We have made it legal for big corporations to send millions of jobs to countries where it is legal to pay slave labor wages, where the tax burden is much lighter and where there are barely any regulations. The following is a brief excerpt from a recent article posted on Economy in Crisis....

Back in the ‘80s, I called my friend Walter in California and asked: “On your next expansion we need a plant in South Carolina.” Walter replied: “We don’t produce anything in the United States. It’s all in China. China furnishes you the plant on a year-to-year basis. If your investment works out, you don’t have to pay any corporate tax; just reinvest it for another plant and more profit. If it doesn’t work out, you can walk away with no legacy costs. I send a quality controller to watch production. I check on it every day. I don’t have any labor, health, safety, or environmental concerns, and have time to play a round of golf.” The bleeding of jobs off-shore started in the ‘80s — now hemorrhages under Bush and Obama. Waiting for the economy to bounce back; calling this “the worst recession” is a bum rap. The reason the economy hasn’t bounced back since 2008 is because the economy is being off-shored.

#11 As a result of our insane economic policies, our trade balances are absolutely exploding. For example, the U.S. trade deficit with China in 2010 was 27 times larger than it was back in 1990.

#12 As you read this, there are millions of Americans out there wondering why they can't find any jobs. According to Reuters, 23.7 million American workers are either unemployed or underemployed right now.

#13 The number of good jobs has been steadily shrinking in America. Since the year 2000, the United States has lost 10% of its middle class jobs. In the year 2000 there were about 72 million middle class jobs in the United States but today there are only about 65 million middle class jobs.

#14 Over the last three decades, the percentage of low income jobs has consistently risen. Back in 1980, less than 30% of all jobs in the United States were low income jobs. Today, more than 40% of all jobs in the United States are low income jobs.

#15 The number of middle class neighborhoods also continues to decline. In 1970, 65 percent of all Americans lived in "middle class neighborhoods". By 2007, only 44 percent of all Americans lived in "middle class neighborhoods".

#16 A decade ago, the United States was ranked number one in average wealth per adult. By 2010, the United States had fallen to seventh.

#17 Our incomes continue to go down. Since December 2007, median household income in the United States has declined by a total of 6.8% once you account for inflation.

#18 Unfortunately, middle class Americans have been seeing their incomes decline for a very long time. According to one study, between 1969 and 2009 the median wages earned by American men between the ages of 30 and 50 dropped by 27 percent after you account for inflation.

#19 Since 1971, consumer debt in the United States has increased by a whopping 1700%. Unfortunately, U.S. consumers have still not learned how to stay out of debt. According to a recent article posted on Financial Armageddon, the rate of personal savings in the United States is rapidly falling right now at the same time that the total amount of consumer credit is absolutely skyrocketing.

#20 The number of children living in poverty in America keeps rising year after year. The percentage of children living in poverty in the United States increased from 16.9 percent in 2006 to nearly 22 percent in 2010.

#21 The number of Americans on food stamps continues to set new all-time records. Just check out the following progression....

October 2008: 30.8 million Americans on food stamps

October 2009: 37.6 million Americans on food stamps

October 2010: 43.2 million Americans on food stamps

October 2011: 46.2 million Americans on food stamps

#22 The U.S. debt problem has gotten completely and totally out of control. Recently, the debt of the federal government surpassed 100% of GDP for the first time ever.

#23 During the Obama administration, the U.S. government has accumulated more debt than it did from the time that George Washington took office to the time that Bill Clinton took office.

#24 Barack Obama's proposed 2012 budget projects that the national debt will rise to 26 trillion dollars a decade from now. And his budget numbers are ridiculously optimistic.

Are you starting to get the picture?

All of the long-term economic numbers are progressively getting worse.

As the economy continues to crumble, large numbers of Americans are becoming really desperate. For example, a recent Mother Jones article detailed how large numbers of formerly middle class Americans are now actually growing marijuana in an effort to make ends meet.

As things continue to get worse, people will become even more desperate. There are millions of people out there that find themselves unable to pay the mortgage and put food on the table for their families. When people hit rock bottom, they often find themselves doing things that they never dreamed that they would do.

Meanwhile, the big Wall Street banks just keep getting larger and more powerful. We have allowed the "too big to fail" banks to become much bigger than they have ever been before. The total assets of the six largest U.S. banks increased by 39 percent between September 30, 2006 and September 30, 2011.

Wealth is becoming increasingly concentrated at the very top even as the overall economic pie in America continues to get smaller.

As our economic problems become worse, more Americans than ever are trying to find ways to "escape".

For example, according to one new government report one out of every six adults in America is a binge drinker.

Other Americans "tune out" by watching endless hours of television, by playing endless hours of video games or by indulging in endless hours of other forms of entertainment.

There are even some Americans that are giving up completely. For example, one elderly man actually robbed a bank just so that he could get arrested and be taken to prison where he would get free health care.

But as I have written about previously, now is not the time to give up. Instead, now is the time to prepare for the great challenges that are ahead.

Almost every generation in history has been faced with great challenges and great hardships at some point.

Yes, there will be some incredibly hard times ahead, but that also means that there will be a need for some great heroes.

Just because the U.S. economy is falling apart does not mean that life is over.

We are living during one of the most exciting times in all of human history. Instead of cowering in fear, let us embrace these times and focus on becoming the people that we were created to be.