We face real challenges in maintaining liquidity in the mortgage market by “dropping” money out of central banking “helicopters.” It is one thing to keep the price of an asset inflated. It is another thing to keep the price of billions of dollars of securities secured by non-existent mortgages and collateral inflated.
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Note the following from “Discrepancies in America’s accounts hide a black hole” by Daniel Gros published in the Financial Times on June 15 2006:
“The global financial system seems to have a black hole at its centre. Over the last two decades, US residents have sold a total of about $5,500bn worth of IOUs to foreigners, yet the officially recorded net investment position of the US has deteriorated only by a little more than half of this amount ($2,800bn). The US capital market seems to have acted like a black hole for investors from the rest of world in which $2,700bn vanished from sight – or at least from the official statistics.”
“How can $2,700bn disappear?”
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Let me add a section from my article “The Myth of the Rule of Law”:
“In March 2000, the HUD Inspector General testified that HUD would not publish financial statements for fiscal 1999 and that the undocumentable adjustments made so far to balance the books was $59 billion. A close reading of the undecipherable preliminary audit indicated that, in fact, the number was $17 billion in fiscal 1998 and $70 billion on the asset side and $59 billion on the liability side in fiscal 1999. As a practical matter, since HUD was assuring us that their systems did not work and that they had simply not bothered to check their accounts and cash balances in the old fashioned way using paper and pencil, we had no numbers of any meaning. In fact, anything was possible. Worse yet, GAO reports of the Treasury accounting systems — both as to their reliability and control by private contractors — are also disturbing. With little or no “info-sovereignty”, the internal controls are insufficient to assure that cash balance reconciliation between an agency such as HUD and Treasury are accurate.”
“When an agency can issue government guarantees and not record what they have issued correctly and then write checks that are not recorded correctly, then one or more of the players that handle the money, namely the US Treasury, the Federal Reserve Bank of New York, AMS and Lockheed, may be in a position to steal literally hundreds of billions of dollars with no one the wiser except those enjoying the fruits.”
“Such a thought seemed far-fetched not that long ago. Indeed, in 1994 after the first FHA/HUD financial audit was published, a mortgage banker came to see me. He was a serious engineering type who clearly worked hard and mastered the details of his business. He was distressed, he said. For decades he had been keeping a tally of total outstanding FHA/HUD mortgage insurance credit. He had brought printouts of his database for me. It turned out that the government’s published financial statements showed the amount outstanding was substantially less than the actual amount outstanding. He was sure.”
“I assumed that the guy was crazy. If what he said were true, then the US Treasury and the Federal Reserve would have to be complicit in significant fraud, including securities fraud.”
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The way to contain the subprime mortgage situation is to simply print cash to buy up mortgage backed securities filled with mortgages for which no homes exist (or for homes that have multiple duplicative mortgages issued on them) as well as mortgages with principal amounts owed in excess of what the homes are worth and for which debt service is greater than the homeowner can afford. Looks like that is happening.
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An old trading story goes something like this:
“The story goes that sometime in the early years of the Twentieth Century there was a lull on the trading floor of theNew York Stock Exchange, a lull that extended from hours into days – and the boys were getting bored and restless. Comean afternoon, for want of any better entertainment, one of the traders pulled out an elderly sardine tin and announcedhis willingness to sell this unique item for no more than a nickel. In a moment two jobbers from the Railroads pitchhad bid and counter-bid for the tin, pushing the price up to a dime. Not to be outdone, the swells who trade Texas oilstocks jump in, doubling the price of the sardines, then doubling it again. The tin passes from professional hand toprofessional hand, with the ticket sometimes a cent or two higher, sometimes up a quarter. At last the hubbub attractsthe attention of the baby of the floor, a wet behind the ears college kid. He spots the unusual label and can’t missthe excitement in the open outcry yelling of the traders. The kid, determined to show he can play with the big boys andgenuinely intrigued by the apparent rarity of the item, firmly calls out ‘Ten bucks’ and is delighted when the biddingcomes to an abrupt end. Hefting out his pocket-knife, he punctures the tin, only to be met with the unmistakeable stinkof rotting fish. Bewildered and heavily out of pocket, the new boy turns to one of his elders and betters, who hadtaken a half Dollar turn out of the tin an hour previously. ‘I don’t get it’ says the kid, ‘these sardines are longgone.’ ‘Son’, says the old jobber, ‘those weren’t eating sardines, thems were trading sardines.’ ”
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I live in a farming community in the midst of a drought. No one is printing money to give our farmers to cover the cost of planting fields of corn that are now burning up.
One of my favorite people comments:
“Billions for the bankers burned by their own lies and greed, but not a cent for farmers burned by drought, to paraphrase Charles Cotesworth Pinckney.”
The result? The price of food and many other essential items is set to explode. I want you to do some scenarios on your family budget as to what you would do if the price of food went up 20-40% over the next 18 months.
