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According to the Quarterly Report to Congress (PDF) on the TARP (Troubled Asset Relief Program), "[E]ven if TARP saved our financial system from driving off a cliff back in 2008, ... we are still driving on the same winding mountain road, but this time in a faster car."
This is the conclusion of the report by Neil Barofsky, the Obama administration's Special Inspector General for the Troubled Asset Relief Program (SIGTARP).
Before turning to the content, I'd like to talk a little bit about being "alarmist." I've been heavily criticized for being to "alarmist" since starting this web site in 2002. I've also been called "crazy" and "sociopathic" any number of times (though it's happening less and less often now, as predictions that come from generational theory are all turning out to be valid). I was absolutely infuriated by what was going on long before it was fashionable to be infuriated.
This report, by an administration official, is just as "alarmist" as I am. And if I'm "sociopathic," then this report is just as "sociopathic."
The logic is as follows: If you believe the credit crunch that began in August 2007 was just some kind of blip caused by temporary conditions that have disappeared, this report points out that exactly those same conditions exist today, only they're much worse.
If you believe that President Bush or Alan Greenspan or Hank Paulsen created conditions that permitted the 2007 financial crisis to occur, then this report tells you that President Obama and Ben Bernanke and Timothy Geithner are creating EXACTLY the SAME conditions, only MUCH WORSE.
From the point of view of Generational Dynamics, this has never had anything to do with President Bush or President Obama or Ben Bernanke or Alan Greenspan or Hank Paulsen or Timothy Geithner or with any other politicians. This crisis is completely generational.
The much-despised Silent Generation would never have allowed any of this to happen. They grew up during the Great Depression and they were traumatized for life by the homelessness and starvation that surrounded them. They could never allow the debauched and depraved use of credit that has characterized the standard operating procedures of greedy, incompetent Boomers, managing and abetting greedy, nihilistic Generation-Xers.
When the Silents disappeared (retired or died) in the 1990s, the Boomers allowed the dot-com bubble to occur. After it burst in the early 2000s decade, the Gen-Xers reached middle-management positions of power, and cooperated with their incompetent Boomer bosses to abuse credit in every possible way, and to defraud investors and extort from consumers to make as much money as they could from fees and commissions.
Today the world belongs to Generation-X. The TARP report shows that people in this generation, aided and abetted by their remaining Boomer bosses, are continuing even worse forms of the same practices that caused the current crisis.
I've given many examples of fraud and extortion in web log articles, but I'll just review one here. Probably nothing more epitomizes what's going on today in the financial community than the practices by Citibank, Bank of America, and others. After defrauding investors for years by selling them mortgage-backed securities now known as "toxic assets," they now practice criminal extortion by charging 30% interest rates of credit card customers, in order to use the money to pay themselves million dollar bonuses.
These continuing practices, including those documented by the SIGTARP report, mean that a far worse crisis is coming, and probably is not very far off. This is not "alarmist"; this is reality, and it's been the realistic prediction of Generational Dynamics since I started this web site in 2002.
According to the report, "It is hard to see how any of the fundamental problems in the system have been addressed to date." Here's a list of the fundamental problems:
Thus, "Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car."
A large part of the report (Section 3, "Federal Support Of The Residential Mortgage Market"), deals with how government programs are creating a new real estate bubble.
According to the report, "Supporting home prices is an explicit policy goal of the Government. As the White House stated in the announcement of HAMP for example, 'President Obama’s programs to prevent foreclosures will help bolster home prices.' "
The report the provides, in great deal, the many ways that many government agencies are all acting to push up home prices.
Just to take one example, I wouldn't have thought first of the US Department of Agriculture (USDA) as having a major role in pushing up home prices, but the report says that indeed it is:
USDA differs from the other insurers in its maintenance of a local office system with direct lending capability. Several hundred USDA service centers in small towns around the country provide direct mortgage lending. Homebuyers can walk into a service center, fill out an application for a mortgage, receive personal financial counseling to determine qualification if necessary, and get their loan directly from the Government. This applies to USDA’s direct loan program. For USDA’s other program, the loan insurance program, homebuyers can go to their local bank or mortgage banker as they would with FHA or VA and their loan would be insured by USDA.
As of January 12, 2010, USDA had a total of $39.6 billion in single-family mortgages under coverage, as well as $15.9 billion in direct loans. Its volume has increased dramatically in the past two years since the private sector has reduced new lending — from $3.1 billion in new loans in 2007 to more than $16.2 billion in 2009.332 USDA’s current reported delinquency rate is approximately 5.8% for greater-than-90-day delinquencies."
In particular, the USDA has increased new home mortgage lending from $3.1 billion in 2007 to $16.2 billion in 2009. This example of just one agency illustrates the extent to which many federal agencies are pumping up home prices.
The major agencies boosting home prices are, of course, Fannie Mae and Freddie Mac. Numbers of these mortgages have skyrocketed since the credit crisis began in 2007. At the same time, the delinquency rate has also surged, and shows no sign abating.
This surging delinquency rate is, by itself, additional evidence that there's a new (or continuing) home pricing bubble, since it shows that people cannot afford to pay their mortgage bills, and therefore the current home prices are unsustainable.
As we discussed last month in "'Shadow inventory' of unsold homes continues to grow," another sign of a new or continuing housing bubble is the huge inventory of homes being held off the market by financial institutions in order to keep prices up. These are foreclosed homes and homes close to foreclosure.
As described in that article, a long-term trend analysis shows that housing prices will fall another 20-30% from their current nominal values. With the huge shadow inventory overhanging the market, the situation is perfect for a full-scale panic. All that's required is the right trigger.
Also, note that China is experiencing an even bigger real estate bubble. See: "Skyrocketing real estate prices in China alarm officials."
The document also reported on SIGTARP's investigations;
These investigations are ongoing, and have already resulted in some criminal charges.
One of the most interesting parts of the report was Section 5, where the report claimed that the Treasury Dept. was refusing to implement anti-fraud measures in the implementation of some parts of the TARP program.
"From its inception, SIGTARP’s most fundamental recommendation with respect to basic transparency in the operation of TARP has been that Treasury should require all TARP recipients to report periodically on their use of TARP funds." In other words, if you're going to give someone a few billion dollars of the taxpayers' money, then you should know what's going to be done with the money.
The report says that this "common-sense recommendation — initially made in December 2008" was completely rejected by the Treasury Dept. However, the Treasury Dept. is now willing to consider reporting this kind of information on a limited basis.
A second recommendation, this one completely rejected by Treasury, would require "firewalls" in companies managing TARP funds, in order to avoid conflicts of interest. This involves one particular TARP program, the Public-Private Investment Program (PPIP), which provides taxpayer money to investment managers who are willing to purchase toxic mortgage-backed securities. Since these securities now have a market value that's only a fraction of their original value, the government helps out an investor co-investing in the toxic securities, and taking on most of the risk.
The report gives an example of an ongoing investigation where an investment firm (not named) is managing two different funds, one using PPIP money, and the other using only private money. In the example, a fund manager in this firm was using insider information, selling securities back and forth between the two funds in order to mitigate the firm's own risk at the taxpayers' expense. The firewall recommended by SIGTARP would require the PPIP fund and the private fund to operate at arm's length.
This is a common sense anti-fraud measure, according to the report, and yet Treasury refuses to implement it.
The issue is too complex for me to attempt to pass judgment here, but I would point out the following: The SEC is also part of Treasury, and the SEC allowed Bernie Madoff to defraud investors out of tens of billions of dollars, even though the SEC was warned several times over a 19 year period. The SEC report that came out in September on the Bernie Madoff investigation was absurd. (See "Laughable SEC report on Madoff absolves SEC management of blame.")
After the Bernie Madoff fiasco, you'd think that Treasury would be bending over backward to give every appearance of implementing whatever reasonable measures are necessary. Instead, Treasury continues the same lax policies as ever.
There's an assumption underlying all these discussions. You particularly see it in numerous blogs that criticize Congress and Obama administration officials for not moving quickly enough to enact new laws and regulations to control the kind of abuses we've been discussing.
There's a good reason why these laws and regulations have not yet been passed. It's IMPOSSIBLE to control these abuses by law, as long as the current population of Generation-Xers and Boomers have not yet learned their lessons.
This is a morality play, but it's not about religion. It's about generations.
The Great Depression was so horrible that the survivors in the now-despised Silent Generation spent their entire lives making sure that it didn't happen again.
Once the traumatized Silents were too old to matter, the younger generations resumed all the old practices.
There is no law that can stop those practices, just as there's no law that can keep an alcoholic from drinking more and more until he reaches bottom.
The only thing that will stop those practices is a major crisis, much worse than anything we've seen so far, comparable to or far worse than the Great Depression. We will have to see a huge panic, followed by years of massive homelessness and starvation in America again, before the current population of Generation-Xers will learn their lessons. There is no other possibility.
And this is not just America. I've been writing frequently in the web log about Greece. Greece is just like an institution that's "too big to fail." The EU and the IMF have been adamant about not bailing Greece out, after the Greeks economy has been all but taken over by the labor unions, and the Greeks repeatedly lied to the EU about their deficits. And yet, in the last few days we're heard murmurs from financial experts that the EU HAS to bail Greece out, and those murmurs are sure to grow into louder and louder demands.
The same is true in China. China is experiencing an ENORMOUS real estate bubble, as it props up its bubble economy with huge artificial stimulus programs. China is on the edge of a huge collapse, because these bubbles must burst soon.
So Barofsky's SIGTARP report could have been written about Europe or China, and would have reached the same conclusions as the report about America.
I used to give a piece of advice on this web site, and perhaps now it's time to give it again: What's coming is coming. You can't stop it from coming, but you can prepare for it. Treasure the time you have left, and use it to prepare yourself, your family, your community and your nation.
This advice is not "alarmist." This is reality.
(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.)