What A Bailout Is And Is Not: Or Why You Should Run Away From Your Debt

There is a fundamental disconnect among many people about what they think is a “bailout,” and what a bailout actually is.  This disconnect is well represented by the bumper sticker off to the right.  The simple fact is that, with the exception of a couple people who had their notes canceled by the courts due to fraud, bad faith, a lack of standing, or other misconduct, no mortgage holder anywhere in the United States have ever received a government bailout. Period.

Rather, bailouts are all about protecting creditors, or the bondholders of creditors, by protecting their payment stream.  For example, Fannie and Freddie’s exist to buy up so-called “conforming” mortgages, and then they securitize them and sell them to large institutional investors, such as pension funds, university endowments, etc.  These investors are not, however, true investors because they are not adopting the risk of default.  If a large group of mortgages in the securitization pool default, i.e. the people stop making the payment, the investors still get paid.

Now, the mortgage holder (homedebtor, “homeowner,” whatever you want to call them) still loses the house.  Same with student loans, the securitized student loan is guaranteed by the government, so when the grad school grad can’t make the payments, it doesn’t matter to the “investor.”  But the graduate still goes into default, has his or her wages garnished, gets hit with tens of thousands in fees and collection costs, and has to leave the county to have any chance of a normal life.

The bailouts are a one-way ratchet in favor of the creditors.  They do not help the debtor at all – in fact because everything is guaranteed, it creates a perverse incentive for banks and finance companies to push ever-increasing levels of leverage (aka debt) onto those too stupid, too young, too desperate, or too optimistic to really understand what they’re getting themselves into.

For the most part, the bailouts simply make the rest of the outstanding credit markets work like the mortgage and student loan markets.  Have Greek debt?  No worries, slick, the ECB will make the payments and impose austerity on the Greek population!  Own securitized car loans?  Not a problem, it’s all on the Fed’s balance sheet now!  But this does the debtor precisely zero good.

Instead, the guarantees and the bailouts have driven the level of household leverage from 40% 50 years ago to more than 110% of household income today.  The only other time in American history where household debt levels were anywhere close to where they are today was right before the Great Depression struck in the late 1920s.

You can guarantee the debt from now until pigs take wing, and it does absolutely nothing to reduce the level of debt.  In fact, a “bailout” often just makes things worse, while giving the creditors free rein of the public fisc.  For example, take this interview with the former head of the German Central Bank, or Bundesbank:

Pöhl: All the same, it was a mistake. That much is completely clear. I would also have expected the (European) Commission and the ECB to intervene far earlier. They must have realized that a small, indeed a tiny, country like Greece, one with no industrial base, would never be in a position to pay back €300 billion worth of debt.

SPIEGEL: According to the rescue plan, it’s actually €350 billion …

Pöhl: … which that country has even less chance of paying back. Without a “haircut,” a partial debt waiver, it cannot and will not ever happen. So why not immediately? That would have been one alternative. The European Union should have declared half a year ago — or even earlier — that Greek debt needed restructuring.

SPIEGEL: But according to Chancellor Angela Merkel, that would have led to a domino effect, with repercussions for other European states facing debt crises of their own.

Pöhl: I do not believe that. I think it was about something altogether different.

SPIEGEL: Such as?

Pöhl: It was about protecting German banks, but especially the French banks, from debt write offs. On the day that the rescue package was agreed on, shares of French banks rose by up to 24 percent. Looking at that, you can see what this was really about — namely, rescuing the banks and the rich Greeks.

SPIEGEL: In the current crisis situation, and with all the turbulence in the markets, has there really been any opportunity to share the costs of the rescue plan with creditors?

Pöhl: I believe so. They could have slashed the debts by one-third. The banks would then have had to write off a third of their securities.

SPIEGEL: There was fear that investors would not have touched Greek government bonds for years, nor would they have touched the bonds of any other southern European countries.

Pöhl: I believe the opposite would have happened. Investors would quickly have seen that Greece could get a handle on its debt problems. And for that reason, trust would quickly have been restored. But that moment has passed. Now we have this mess.

That excerpt is worth reading twice.  First, recognize that the Greek bailout is not a bailout of Greece at all, it merely protects the large banks and rich Greeks that are holders of the sovereign debt.  But more importantly, Pohl argues that the best thing you can do to restore fiscal confidence is not to layer on even more debt to pay off prior debt, which is a type of greater fool theory (with the other Eurozone governments, the IMF, and ECB being the greater fool).  Rather, the way to restore confidence and fiscal sanity to slash the amount of debt owed by the debtor.

Now, we over here at AFEP, would call that a “duh,” but it’s nice to see that those with some skin in the game are starting to get a clue about that reality.  On Saturday, we praised the Anecdotal Economist for recognizing the wisdom of walking from debt.

And today, Yves Smith over at Naked Capitalism has a guest post similarly discussing the wisdom, even necessity, or default – mass default!

What we are experiencing is called the global credit crisis for a reason. There is too much debt in the world. More and more economists are talking about the threat of a deflationary crisis ahead. What does this mean for you? Well, if you have a house that is under water, or more debt than you can reasonably hope to repay, your best options may be the unthinkable. But it really should not be unthinkable to default on a loan or even to declare bankruptcy.

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When debt exceeds a certain level it becomes a cancer on society. Easy credit fuels speculation which triggers bubbles. These bubbles lead to a temporary lift in apparent wealth, which increases economic activity beyond its sustainable level. But eventually more and more debt triggers economic decline with the inevitable glut of goods produced by an overheated economy.

What people are discovering too late is that their debt is not repayable. Ever. They once had a hope they could wait out their bad times. This is true of many homeowners, many businesses and many governmental bodies. The “great unwind” is going to be deflationary. Prices and salaries will decline, jobs will become more scarce, and debt will continue to increase.

The earlier you pull the rip cord the better off you will be later.

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There should no longer be any moral question about whether it is wrong to walk away from debt legally. The advent of limited liability corporations and the legal ‘personhood’ of corporate shells have allowed business to create one sided bets for years, and they happily walk away when the tide shifts. This is the calculus of 21st century finance, and you are a bit player in this game.
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The economy will continue to stagnate, and unemployment will increase. Asset values will continue to decrease until the defaults begin. When the rot is finally purged from our system, the great American wealth machine will start anew. It is time to party like its 1454. Start your own personal debt jubilee.

This is exactly right.  Exactly.  The amount of debt sloshing around American households, companies, and governments at every level (not to mention the rest of the world!) is a giant sinkhole that will swallow the economy for decades or more unless we get rid of it.

I’ve said many times that the most profound political statement that you can make is not to just walk away from your debt, but to run.  Send Sallie Mae a photocopy of your ass and hop a flight to Brazil, stop paying your mortgage and enjoy the year+ before they kick you out, make a youtube of you setting your bills on fire, or choose your own form of protest.

Just do it!  It’s the right thing to do!

In A Time Of Universal Deceit, Telling The Truth Is A Revolutionary Act

That’s what we believe here at AFEP. We don’t maintain this blog just to stroke our own ego, we exist to speak the truth about the corruption of the oligarchy, their manipulation of the public, and their wholesale attempt to destroy the American middle class (anyone below the 95th percentile of the income distribution). The economic strategy is thus:

Step 1: Increase household debt;
Step 2: Make debt increasingly resilient through bankruptcy “reform” measures, simple exclusions (e.g. student loans), and maintenance of databases allowing the “debt” to be sold and resold in the secondary or tertiary market;
Step 3: Push down wages through perverse definitions of inflation, global wage arbitrage, free-market fundamentalism, and wage garnishments;
Step 4: Insulate the elites from the process of creative destruction by a system of bailouts and failing upward for advocates of the interests of the oligarchy;
Step 5: ?????

Because economic interests are ultimately political, there is a deliberate strategy to get people worked up about stupid little “political” issues to distract them from overarching economic screwjob being administered to them: OMG gay marriage! OMG my school library has a history book by Howard Zinn! OMG people like to have a few drinks before driving home – .08 is too high! OMG I can’t have a silencer for my handgun! OMG fur and fast food are evil!

And, to paraphrase one of my favorite movies, while we’re out here dancing from one foot to the other, you know what the Stephen Schwarzmans Timmehs, Robert Rubins, Pete Petersons, and Jamie Dimons of the world are doing? They’re laughing their sick fucking heads off at our stupidity.  They laugh and figure out more and better ways to fuck us, and to remove and take for themselves whatever shreds of economic security exist for those with less than a few million in the bank.

With that as background, let’s take a look at one of the more outrageous bits of news this week, but to us here at AFEP, it’s about the least surprising news ever – or, perhaps, eva!

As top Federal Reserve officials debated whether there was a housing bubble and what to do about it, then-Chairman Alan Greenspan argued that dissent should be kept secret so that the Fed wouldn’t lose control of the debate to people less well-informed than themselves.

“We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand,” Greenspan said, according to the transcripts of a March 2004 meeting.

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“The substantial run-up in house prices, which we have followed in Florida and also see in the populous Northeast and West Coast of the United States, may be at least partially attributable to unusually low mortgage rates influenced by our very accommodative policy,” Guynn warned.

This March 2004 meeting was less than a month after serial killer Alan Greenspan actually encouraged the use of adjustable rate mortgages as an affordability product for purchasing housing:

WASHINGTON — Federal Reserve Chairman Alan Greenspan said Monday that Americans’ preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

In a standing-room-only speech to the Credit Union National Association meeting here, Greenspan also said U.S. household finances appeared generally sound, despite rising debt levels and bankruptcy filings. Low interest rates and surging home prices have given consumers flexibility to manage debt, he said.

Greenspan didn’t want dissent to go public because it might have defused some of the excesses of the bubble he was blowing in the wake of the tech crash.  And, of course, he wasn’t the least bit concerned about increasing levels of household debt, because that’s what the oligarchy wants – it’s what they need.  More household debt means more financial sector profits, it makes people more desperate for a job, any job, that will pay at least some of the bills – limiting wage inflation.

And that’s what we got and that’s where we are. With a protected, bloated, and virtually useless financial sector still suckling at the teat of government policies designed to save them and fuck us.  This recession is the culmination of steps 1 through 4 – they’re protected, we’re dying.  In step 5, the U.S. becomes Paraguay, or the people tell them to go fuck themselves, and take back the country.

I’ve done my part, and will be leaving the U.S. soon, so this will ultimately be your fight.  Whether it’s 1932, 1789, or a “true” banana republic in the U.S.’s future, I leave to you.  Good luck.

From The Department Of People Who Know What The Fuck Is Going On: Haiku Edition

A survey released by the National Federation of Independent Business (“The Voice of Small Business”), showed that optimism among small business owners declined in March (h/t Financial Armageddon).  Bloomberg covered the survey’s release and it ain’t a pretty picture:

The National Federation of Independent Business’s optimism index dropped to 86.8 last month from 88 in February, the Washington-based group said today. Seven of the index’s 10 components declined last month and two were unchanged from February.

“Usually we see the small businesses leading the way out since they’re the first ones to see the consumer come back, but what’s happened this time is the consumer didn’t come back,” William Dunkelberg, the group’s chief economist, said today in a Bloomberg Radio interview. While purchases have increased, “there’s not enough sales to go around to make the whole population of small businesses very healthy,” he said.

A gauge of expectations for business conditions six months from now was the sole component that improved from the prior month, rising one point. The report also showed that while workforce reductions may be over, small businesses weren’t ready to add workers or spend more on new equipment.

I prefer to summarize the survey findings utilizing Haiku:

Small business owner

Really talks to customers

Knows they are fucked

The reason isn’t some huge mystery.  Too much debt (whether charged off or not) coupled with declining incomes.  Individuals facing these constraints simply don’t open their wallets, so it’s no surprise that:

The measure of earnings expectations showed the biggest decline in March, falling 4 points to minus 43 percent. Thirty- four percent of respondents cited “poor sales” as the top business concern, the same as in February, and the net percent of owners projecting higher sales, adjusting for inflation, fell to minus 3 percent.

Or to put in Haiku form:

Credit card, car debt

Student loans, mortgages, and more

We’re fucking doomed

The survey also bodes poorly for the chances of a drop in unemployment since small businesses represent 99% of employers and create 64% of all jobs.

A net minus 2 percent of respondents plan to hire over the next three months, down one point from February. Nine percent of firms said they currently had job openings that were hard to fill, compared with 11 percent a month earlier, a “negative” for hope that the unemployment rate will drop, Dunkelberg said.

Or to put it in Haiku form:

No recovery

Cap One, Chase, collection cos

Kiss my expat ass

Hey Rush! Care to Bankroll My Trip to Costa Rica?

I’m no fan of the health insurance reform bill currently ping ponging around Congress, after all as I have little income, no unemployment benefits, and little hope for reversing these trends, the idea of being mandated to buy health insurance is almost the definition of a cruel joke, but I have been given some hope by none other that the richest (most annoying) and most successful (loud mouthed drug addict) political commentators in the States — Rush Limbaugh!

You see, Rush Limbaugh is also not a fan of Obamacare.

CALLER: If the health care bill passes, where would you go for health care yourself? And the second part of that is, what would happen to the doctors, do they have to participate in the federal program, or could they opt out of it? [...]

LIMBAUGH: My guess in even in Canada and even in the UK, doctors have opted out. And once they’ve opted, they can’t see anybody Medicare, Medicaid, or what will become the exchanges. They have to have a clientele of private patients that will pay them a retainer and it’ll be a very small practice. I don’t know if that’s been outlawed in the Senate bill. I don’t know. I’ll just tell you this, if this passes and it’s five years from now and all that stuff gets implemented — I am leaving the country. I’ll go to Costa Rica.

Great minds, my friend, or whatever.  You see, Rush, I am also planning to head for Costa Rica.  Not because of health care reform – just try to collect a tax penalty on me you cocksuckers! — but because I was ruined when the economy collapsed in 2008.

Here’s my proposal Rush, I’ll head down to Costa Rica in a few months, after all I’m going to get sued eventually, and I will act as a real estate agent/scout for your forthcoming move.  For the bargain price of only 30k/year (cash preferred), I will scout out some good oceanfront mansions, some decent country clubs, locations where a committed viagra user such as yourself can put it to good use, and just in case the move is traumatic I’ll try to find an oxy source (won’t make any buys for you though).

In any event, I’m looking forward to hearing from you Rush.  Feel free to email me if you wish to discuss this further.

Holy Fuck! Hey, Michelle Bisutti Leave The Country With Me!!!

Here is the most un-fucking-believable example of abuse by the blood-sucking vultures called the student loan companies I’ve seen.

When Michelle Bisutti, a 41-year-old family practitioner in Columbus, Ohio, finished medical school in 2003, her student-loan debt amounted to roughly $250,000. Since then, it has ballooned to $555,000.

Now think about this for a minute.  In the 7 years, that’s right 7 years!, since she graduated from medical school her debt burden has more than doubled despite her parents making payments on the loans and her making, at least partial, payments on the loans.  Back to the story:

She maxed out on federal loans, borrowing $152,000 over four years, and sought private loans from Sallie Mae to help make up the difference. She also took out two loans from Wells Fargo & Co. for $20,000 each. Each had a $2,000 origination fee. The total amount she borrowed at the time: $250,000.

In 2005, the bill for the Wells Fargo loans came due. Representatives from the bank called her father, Michael Bisutti, every day for two months demanding payment. Mr. Bisutti, who had co-signed on the loans, finally decided to cover the $550 monthly payments for a year.

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After completing her fellowship in 2007, Dr. Bisutti juggled other debts, including her credit-card balance, and was having trouble making her $1,000-a-month student-loan payments. That year, she defaulted on both her federal and private loans. That is when the “collection cost” fee of $53,870 was added on to her private loan.

Crazy shit.  Now, I am actually proud of Michelle Bisutti – she may not have intended her default as a political statement – but that’s what it is.  More importantly, as far as I can tell from the picture attached to the Wall Street Journal article she is actually pretty cute, and would be genuinely hot if she didn’t have the stress of student loan collectors breathing down her neck.

So, Michelle, let me make you a proposition.  I’ll be leaving for Costa Rica fairly soon, and I would like to invite you to come with me.  If you’re interested in making a break for it, I’d love to hear from you – angryfutureexpatATgmailDOTcom.  Between the two of us we can stick it to the banksters for a cool million.

It’s ok.  They deserve it.