As concerns the many banks facing more difficult economic times ahead, supported by the extensive research in this book to these truths as found in newspaper, magazine, and internet articles virtually every single day, ultimately, no bank will be immune from the inevitable economic contraction ahead nor does our US government have the resources to continue to bail them out.
This reality will ultimately be embraced by all American citizenry as well as peoples the world over relative to their own institutions - insuring the coming economic storm for all. No longer will certain banks and companies be regarded as Too Big To Fail. And no longer can the US government and other governments continue to act as “Saviors” counter to “free market” practices.
This “too big to fail” philosophy has grave implications not only for the future bills facing the American taxpayer but also for the integrity of the dollar. For when a central bank rescues a commercial bank on a massive scale, it inevitably means printing lots of dollars. [lii]
[liii]
CIT Group, a major lender to small- and mid-size businesses, filed for bankruptcy protection on Sunday. This wasn’t a total surprise, because the lender has been in intensive care since the credit crunch intensified over a year ago. But CIT’s failure is significant. It is the largest financial failure since Washington Mutual was seized by regulators a year ago. It is also the first lender that had received government bail-out funds to go under ... taking $2.3 billion in taxpayer money down with it. That’s how much the U.S. Treasury injected into CIT late last year as part of the Troubled Asset Relief Program (TARP) — $2.3 billion. At the time, CIT was deemed “too big to fail”... along with many Wall Street firms ... but evidently, not anymore. [liv]
Ensuring big banks don’t fail is “politically, economically and ethically bankrupt,” JPMorgan Chase & Co. CEO Jamie Dimon said. “The term ‘too big to fail’ must be excised from our vocabulary.” JPMorgan Chase is the second-largest U.S. bank and among a small number of huge financial institutions analysts believe would be safeguarded against failure by regulators and the Federal government for fear of the damage their collapse might wreak on the global financial system. Others are Bank of America Corp., Citigroup Inc., Wells Fargo and Goldman Sachs Group Inc. and American International Group Inc. [lv]
A systematic meltdown is a chain reaction of failures forcing a temporary global shutdown of virtually every bank, insurance company, brokerage firm, and financial market in the world. Essentially, the planet's entire economy comes to a screeching halt. [lvi]
Just picture the American banking system's exposure from its derivative risk holdings, particularly among our nation’s largest banks. You probably know already how this factor must also be considered. It raises the likelihood of more trouble for these institutions and America’s fragile economy in the weeks, months, and years ahead. The chart that follows offers a compelling graphic on these risk derivatives being held by banks. First, you might enjoy this quotation on the same topic with still more pertinent quotes about US banks after the derivatives chart that follows on the next page.
A securitization mania was not confined to mortgages and spread to other forms of credit. By far the largest synthetic market is constituted by credit default swaps (CDS)…. The estimated nominal value of CDS contracts outstanding is $42.6 trillion, [or]… almost the entire household wealth of the United States. [lvii]
Despite a brief reduction in derivatives outstanding in last year's third quarter, U.S. commercial banks now hold a grand total of $203.5 trillion in derivatives, a new all-time high. A whopping 97 percent of all U.S. bank-held derivatives are concentrated in the hands of just FIVE institutions — JPMorgan Chase, Goldman Sachs, Bank of America, Citibank and Wells Fargo. Globally, the monster is three times larger than the $203.5 trillion in derivatives held by U.S. banks: According to the Bank of International Settlements (BIS), the worldwide total of just the unregulated, over-the-counter derivatives alone was $604.6 trillion at mid-year 2009. Although down from 2008 peak levels, it was up sharply from year-end 2008. [lviii]
"Merchants of Debt" was a phrase used in the 1930s by Joseph Schumpeter, an economist of the Austrian School, and then in the 1970s by Hyman Minsky. Both men argued that downturns evolved from financial and credit excesses. "Merchants of debt" was their epithet for banks and other financial entities that strove to market debt in as many (innovative) forms and to as many buyers as possible. The longer good times persisted - a description most of the last quarter century would fit - the more likely the financial sector was to be marketing unwise or risky products. [lix]
The wealth disparity in 1929 was the steepest ever. Speculative loans made by the banks were also at their zenith at that time. It is no wonder, then, that an ordinary recession in 1929 turned into an unprecedented economic disaster. [lx]
The financial sector will face the devastating fallout of years of shoddy lending practices, excessive risk taking, and blatant mismanagement. Most likely, the early casualties will be smaller institutions and aggressive riffs. Over time, however, the numbers will add up, more than matching the extraordinary totals last seen during the Great Depression. In just under a year, from October 1930 through July 1931, nearly 1400 banks failed, accounting for around 2% of the nation's deposits, according to economist Milton Friedman. During a second wave, from August 1931 to January 1932, a total of 1860 financial institutions failed. [lxi]
I have always been afraid of banks. [lxii]
I hate banks. They do nothing positive for anybody except take care of themselves. They're first in with their fees and first out when there's trouble. [lxiii]
As noted before, there have been numerous recessions in the United States but only three great depressions, and each time it was the massive run on the banks that turned an ordinary fall in the GNP into a disaster…. Nearly two thousand banks suspended operations in 1931 alone. [lxiv]
A rising tide of defaults among borrowers with shaky credit histories has, thanks to the way that their debts have been securitized and sold globally, triggered chaos in the world’s credit markets as asset-holders struggle to re-evaluate their risk. [lxv]
Are you intrigued by the name of the next chapter, Population and Demographics? And what this may have to do with the economy? Will you be ready for this answer? Population and Demographics is the second reason behind the coming world economic storm. Ready?
Population and Demographics
[lxvi]
Did you know that national population growth patterns and their accompanying demographics are the life blood of a country’s economic growth? The economy of any nation will rise and fall as that nation’s population swells or declines. This chapter will help explain this factor in national economies.
Of course, you've heard that the largest populated generation in the history of America and much of the world, came with the arrival of its Baby Boomers born from 1946-1964. These babies were the consequence of the successful conclusion of World War II, where America emerged as the dominant world power.
[lxvii]
It was such a massive generation that it’s been likened to a pig moving through a python. Innovation and technologies were driven to accommodate this generation. New industries were born and flourished, existing businesses changed to accommodate, and others died.
Americans have been growing old quickly and 78 million baby boomers will soon draw upon the wealth of younger Americans. People are living longer too; the average life expectancy increased from 75.4 years in 1990 to an all-time high of 77.6 years in 2005 - two years in less than a generation. By 2030, twice as many people will be 65 or over as there are now. And by 2040, one out of every four Americans will be in that age bracket. [lxviii]
So, what innovations do you think the Boomers will bring about as they move in mass towards retirement and a slowing down? Could their legacy be higher than the “credit card” generation as many have labeled them?
Pollster John Zogby posed this question last summer to 4,000 Americans: "What
will be the historic legacy of baby boomers?" The responses were startling. Forty-two percent said boomers had "ushered in an era of consumerism and self-indulgence." Another group (27 percent) gave boomers credit for helping to "bring lasting change in social and cultural values and ending a war." After that, the answers ranged from "nothing really special" to "other" or "not sure." The loose translation: "Boomers might have done some good things back in the '60s and '70s, but where have you been lately?" [lxix]
[lxx]
In 2012, the eldest Baby Boomer turned 66 years old, while the youngest member became 48 years old. This mammoth generation is now several years past the first two most important ages for home purchases at 37 and 42. The eldest Boomer at 66 has their sights set more on retirement than achieving new heights in business.
While a country with a free market economy might feel the impact of Population and Demographics more, this one factor will affect the economies of all nations regardless of their Capitalist or non-Capitalist economic structure.
As you surely know, America has been considered the leading free market economy in the world, virtually, since its’ founding in the late 1700s. With America's growing entitlement programs that began during the Great Depression and have expanded or increased for mostly political reasons in the years since the 1930s, our democratic experiment has moved further and further away from those early values. The economic damage to the United States from entitlements and related political initiatives will be expounded upon more in later chapters.
The great American economy is an ocean whose total depth is overwhelmingly made up of the combined spending of all the various age groups. The heaving waves on the surface of this deep ocean are always the “big spending” of the 45 to 54 year old group. These waves produced the peaks and troughs -- the long-term booms and busts. Historically, as you have seen, they have both “raised and sunk ships”. We will soon have to man the life boats as the monstrous, greatest demographic wave of 45-54 year olds in American history crashes down with a thunderous roar! Like the great Titanic, there will not be enough time or enough life boats onboard, and only very limited rescue available. [lxxi]
Ironically, nations we once saw as anything but free market a few years ago, like China and Russia – as just two good examples – are increasingly pursuing free market initiatives while America is moving away from its free market foundations. India, Brazil, and many other countries are showing leadership in these same areas with marked improvements in their economy and quality of life.
I discovered, from the analysis of over 25,000 people, that men, who succeed in their astounding way, seldom do so before the age of 40, and more often they do not strike their real pace until they are well beyond the age of 50. [lxxii]
In June 2006, Standard and Poor’s rating service noted: “Without concerted policy and fiscal reforms, the aging population would lead to intense pressure on the public finances and the ratings” of the United States. In fact, S & P suggested that by 2025, the US sovereign credit rating could end up in the “junk” category if present circumstances continue. [lxxiii]
Population and Demographics is the second most important reason for difficult economic years ahead for America and certainly most Western countries – and the inevitability of the coming world economic storm.
Now, are you curious about the next chapter on Entitlements? You've become really interested from the several references to this subject in earlier chapters. You probably already know this, too: Entitlements are the third reason for the coming economic storm.
To become well prepared for any storm, you must first have the fore-knowledge of its approach and its intensity. Entitlements are a key part of this knowledge for Americans, in particular. This chapter will help you better understand why the future of Social Security, Medicare, and Medicaid is in serious jeopardy. In short, these are benefits neither you nor I can continue to depend on at least as they are structured today. Will you be ready for this chapter on Entitlements? Wouldn't you like to prepare yourself and your family members for the day when these benefits are no longer available?
Entitlements
As you sit there and read the beginning of this chapter, you start to feel a sense of fascination mixed with concerns. Just imagine the growing stress from the unfunded financial obligations towards the socialistic services known as Social Security, Medicare, and Medicaid, and that there’s a similar picture in Europe, too. To help share this story with you, I'll continue to offer pictures along with the text and quotations by authoritative sources.
[lxxiv]
As you probably know, President Franklin Roosevelt’s New Deal was designed to assist America’s recovery from the Great Depression. The Social Security Act of 1935 was a part of his New Deal when it was introduced. Four years later, survivor’s insurance was added.
It is rarely talked about these days, but at the time the New Deal programs were being passed into law, most people believed they were intended to be temporary measures. At the very least, these programs were never thought to be the cornerstones of a long-term change in the homeland. [lxxv]
In 1965, with President Lyndon Johnson’s Great Society, Medicare and Medicaid benefits were added to our growing and continuing Entitlements as US citizens.
If one looks at Social Security and Medicare together, including both Medicare’s hospital and physician programs, they go from a modest combined cash flow deficit of about $25 billion in 2003 to an unthinkable annual cash flow deficit of $783 billion in 2020. And that annual deficit is projected to reach $4.3 trillion by 2040…. The Kerrey-Danfort Commission… report [of 1994] concluded that if we did not reform tax and spending policies, the benefit outlays for just five programs -- Social Security, Medicare, Medicaid, and Federal civilian and military pensions -- would exceed total Federal revenues by the year 2030. This would leave zero tax revenue for any other purpose -- not even for interest payments, nor for national defense, nor for education, nor for child health, nor for the Federal payroll. [lxxvi]
In 2003 for availability on January 1, 2006, President George W. Bush added the Medicare Drug Benefit program, commonly referred to as Part D.
To be sure, future Social Security and Medicare costs promise to balloon to oversized public sector burdens five, ten, or twenty years hence .... [lxxvii]
With America’s large aging population, these future obligations and Entitlements costs have grown. Now, as “the pig moves through the python," the first Baby Boomers are arriving at the Entitlement age of 65. The costs for these obligations are certain to skyrocket and consume a far greater share of our GDP.
Barring any dramatic changes in benefits, the already large cost of the social safety net will expand rapidly. But our means to support it and the working age population that underwrites it are not growing. In 1942, seven years after Social Security was first established, there were 42 workers for every beneficiary. By 2002, the ratio was down to 3.3, and by 2030, is expected to drop by another 50% to 2.2. [lxxviii]
[lxxix]
What about Medicare and other forms of socialized medicine? Well, if the statistics are correct, American socialized medicine may already be bankrupt . If socialized medicine is to be a national right, then taxes will go through the roof, and if taxes go up businesses will leave the country … aggravating an already overtaxed population…. Social Security and Medicare are taking on water as well. The Clinton administration's fiscal 2000 budget report stated, “Government trust funds do not consist of real economic assets that can be used in the future to fund benefits.“ In other words, the government is finally admitting that there really is no Social Security trust fund . It is a figment of our imagination. Is Social Security merely a modified Ponzi scheme? In America today, every employee looks at their pay stub and they see 7.65% of their pay, matched by the employer's 7.65%, for a total of 15.3%, going to Social Security and Medicare. Every employee is hoping that after retirement they will be on the receiving end. [lxxx]
Where did America in
its democratic heritage begin believing that each citizen is “entitled” to certain benefits simply because they are American? Entitlements are an outgrowth of our power and arrogance as a nation - or as an empire, and are far from our humble beginnings and the “free markets” we pride ourselves on being the model by which others should strive and measure their own progress towards a true democracy.
Entitlement programs may make good social policy, but they play havoc with fiscal policy. They lock the government into spending money that may not have. ... That's one problem with entitlement programs: They're hard to budget. [lxxxi]
Why, of why, do you think so many foreign nationals want to immigrate to America? For our Entitlements? I challenge that! Foreign nationals desiring to immigrate to our country want to do so for one reason: Life, Liberty, and the Pursuit of Happiness - the Freedoms given to all of us by our Founding Fathers.
So, let’s be honest: both parties are the problem…. The Republican Party have never met a tax they didn’t want to cut … and … the Democratic Party have never met an entitlement program they didn’t want to expand. [lxxxii]
In 2006, University of Pennsylvania risk management professor Kent Smetters and Jagadeesh Gokhale of the Cato Institute estimated that, because of entitlement programs, the gap between projected Federal spending and income might be as high as $65 trillion. Economist Lawrence Kotlikoff puts the total of unfunded liabilities nearer to $80 trillion, over seven times the value of the gross domestic product (GDP) , the nation's output of goods and services. [lxxxiii]
From this chapter, do you recognize the significant changes that must be made to our Entitlements for the future financial stability of our nation?
“What comes through strikingly in these graphics is that Washington has a spending problem that must be corrected,” Alison Acosta Fraser, director of Heritage’s Thomas A. Roe Institute for Economic Policy Studies, says, noting that entitlement programs continue to be the main driver of increased Federal spending. For example, ... a lack of entitlement reform pushes spending to engulf half of the economy by 2056. But one need not peer into tomorrow to see the effects that rampant government spending can have on a nation's economy. Greece is in the midst of a continuing fiscal crisis brought about by years of irresponsible spending—and its woes are impacting world markets among fears of the country's possible default. The United States, too, stands at the brink. And as the 2011 Budget Chart Book compellingly shows, short-term fixes won't solve America's problems. Unless Congress and the White House address the root of the country's spending problems—entitlement spending—it will remain on a path to ruin. [lxxxiv]
America's Worst Economic Depression Page 4