Being foreclosed on?  No worries if you follow the example of Jerome Daly, a lawyer and political activist of sorts, who successfully had his mortgage declared null and void. 

In order for a mortgage agreement to be legal, the bank must put up legal ‘consideration’.  That’s a fancy lawyer word for ‘money’ or some such other tangible asset.  The Federal Reserve System creates money for lending as bookkeeping entries and as such, the bank fails to provide any real consideration in the contract.  As a result, the whole thing is null and void and you can’t be foreclosed upon. 

Don’t believe me?  Read it for yourself here:

http://www.lawlibrary.state.mn.us/CreditRiver/1968-12-09judgmentanddecree.pdf

This decision has never been overturned and Daly was able to keep his house.

bank · fed · federal reserve · Federal Reserve System · http · ILS · Jerome Daly · lawyer · lawyer and political activist · legal consideration · mortgage · Mortgage Crisis · pdf · Red · Rome · the fed · US Federal Reserve

I’ve been watching with horror as the US economy is reduced to socialism.  Few are asking how much this will cost.  Those who do ask are getting nonsense answers like 25 billion dollars.  The Savings and Loan crisis of the 90’s took 250 billion dollars to bail out.  This current crisis dwarfs that crisis by orders of magnitudes.  So let’s cut through the bull and look at some math.

The Government is now on the hook for 5 trillion dollars in loans.  The only way they can lose money is if people default on those loans AND the value of the underlying asset (the home) has depreciated since the time the loan was issued.

So let’s say that 3% of people default on their loans.  The government is now on the hook for 150 billion dollars.  The government will now try to sell those foreclosed houses at market value.  Suppose those houses were inflated by a factor of 2 (that is they’ve now lost 1/2 their value).  Now the government sells the foreclosed houses at half the price and they’re on the hook for the left over half.  Thus the cost to the government would be 75 billion dollars.  The formula is thus:

bailoutCost = totalValueMortgages * defaultRate * (1 – (1/inflationFactor))

Now the question is where do we come up with values for things like the defaultRate and inflationFactor? (The totalValueMortgages is given as 5 trillion dollars by the government.)

Google mortgage deliquency rates or mortgage default rates and you’ll find numbers ranging from 2-5,  (I took 3 as an average).  Next to figure out the inflation factor, look at this chart:
http://www.nytimes.com/imagepages/2005/08/21/business/21real.graphic.html
and you’ll see that homes are around 2X inflated in value. 

So given these current numbers, the best case cost would be 75 billion dollars.  If the default rate increases or housing devalues beyond 2X the numbers could of course be much higher.  I welcome any polite criticism and/or suggestions for alterations.

bailout · Case · cialis · Economy · fannie · Fannie Cost · freddie · Google · html · http · inflation · king · mortgage · Red · savings and loan · United States · USD

As I continue my studies of the Economy, I’m continually shocked and horrified to find more evidence of mass corruption.

http://www.gata.org/node/wallstreetjournal

The Gold Anti Trust Action Committee has taken out a full page ad in the Wall Street Journal asking, where is all our Gold?

For readers’ information… how did the gold get into Fort Knox in the first place? In 1933 Roosevelt passed a bill mandating that all citizens hand over their gold at base price. This gold was then melted down and stored in Fort Knox.

The last time a civilization was asked to hand over all its gold, they built a golden calf such that they could return to slavery. This time, there was no Moses to save us from our own stupidity. We don’t tromp in mud pits making bricks, but we do tromp to 9 to 5 jobs each day churning out contributions to our 401 K’s.

Fort Knox has never been officially audited. Moreover, strong rumours exist that the Federal Reserve has procured this gold as collateral against the US national debt. If there is no gold to be found in Fort Knox, perhaps with an open and honest audit, we may again find our liberty.

GATA has a video of a symposium they held. A summary can be found here:
http://www.gata.org/goldrush21

9 to 5 · Economy · fed · federal reserve · Federal Reserve System · fort knox · gold · Gold Anti Trust Action Committee · gold standard · golden calf · http · king · MIT · Red · roosevelt · slavery · the fed · the Wall Street Journal · United States · US Federal Reserve · video · Wall Street Journal

http://video.google.ca/videoplay?docid=-515319560256183936&q=the+money+masters&total=630&start=0&num=10&so=0&type=search&plindex=0

Normally any discussion of the economy or finance causes my eyes to glaze over. However, I chanced upon this documentary and started to watch it. Shortly thereafter, I was glued to it. I finally understand questions I’ve had for a long time.

1) How do they know how much money to print?

2) What causes recessions/depressions?

In addition I learned a lot more about the corruption inherent in our financial system. Well worth the 3.5 hours this documentary runs for. Just one question: what is with this guy and his pen?

Economy · federal reserve · finance · gold standard · Google · http · video

For years now, I’ve tried to understand how the Federal Reserve (the Fed) lowers interest rates and how it affects inflation. I mistakenly thought that the Federal Reserve was a wholesaler of money. I thought that it was a Federal institution which under the direction of the government could make money available to banks at a certain lending rate. Thus when the Fed lowered rates to say 3%, the banks could get money at that rate and pass the savings along to their customers by lending money at say 3.5%. I was partially mistaken in my interpretation as to how that affected interest rates. I thought that as a result of people being able to get money at a lower rate, people would spend more, and the more they spent, the more the market could tolerate higher prices for common goods. This is true, but isn’t the full story. So let’s get the full picture.

My first mistake occurred when I assumed the Federal Reserve was a federal institution of any sort. This is not at all true. It is a private bank enacted by an act of congress in 1913 to oversee the US monetary policy. I offer the following interesting nugget of information for those who are interested: It was passed on Dec 23 1913 when most of congress was on vacation, in absence of a proper quorum. If that tidbit piqued your interest, please see this post: http://mwiner.wordpress.com/2008/01/25/terrific-documentary-explaining-the-economy/

So how then does the Fed manage to control interest rates? First off, when you hear of the Fed lowering or raising the interest rate, it isn’t directly lowering or raising the interest rates, it is changing the target interest rate. At a high level, the Fed accomplishes this by controlling the supply of money. Money, just like any other commodity can respond to supply and demand. If there is a lot of money in the economy, interest rates will drop because banks will have an easier time of procuring money to loan. However, having more money in the economy encourages inflation because the value of the currency is lowered by increased supply.

If you want to understand how the Fed manages to expand or contract the supply of money, we need to first understand a few key concepts. The first is partial reserve banking. It was long ago that banks discovered that not every person needed their cash at any given time. It was thus that banks could loan money that technically they didn’t have on reserve. In the US, banks are required to maintain a 10% reserve which means they can loan out 10 times the amount they have on reserve. (This is often referred to as ‘banker’s reach’.)

Next you need to understand what a treasury bill is. A treasury bill is a promise issued to the buyer by the federal government to give you the maturation price of the bill on the maturation date. The bill is always sold at a discount rate, that is a rate, less than the maturation date. For example, a treasury bill may be sold at a discount rate of $950, a maturity rate of $1000 and a maturity date which is a year from now. This means you can buy the bill at $950 and make $50 dollars profit when it matures in a year.

So we now have enough knowledge to work a simple example of how the system works. Suppose that the interest rate is currently 8%. Suppose too that there are 100 people who have $10 each. These 100 people each put $2 in the bank. The bank thus has $200 in reserves and due to partial reserve banking, they can make ten times that amount, some $2,000 in loans. This means they can make a loan of $20 per person.

People typically want to buy things that are 4 times the amount they have on hand. In housing the standard financing model is you must have 1/4 the purchase price in capital. So people with $10 typically want to make a major life purchase which would be $40, but as we see, the bank can easily lend everyone $20, but $40 would be hard to come by at a reasonable interest rate. Thus, people stop purchasing, the economy stalls and the Fed decides to step in.

The Fed does some research and discovers that if the lending rate reduces to 5%, then most people will be able to make the payments and will take out loans and start spending again. So the Fed set the TARGET rate to 5%. To reach this level, the Fed offers to buy a treasury bill the bank has on hand with a maturity value of $500. The bank accepts and now the bank has $700 in reserves. Recall that the bank is allowed to loan out 10 times the amount it has on reserve. So the bank can make $7000 dollars in loans or $70 dollars per person. Since the amount to loan out is plentiful the bank lowers its lending rate to 5% to entice people to take out loans.

It’s important to keep track of the total amount of money in the economy while all this occurs. We started with 100 people having $10 each. Thus there was $1000 in the economy. When the Fed purchased the treasury bill, it printed money to do so. So now there is another $500 dollars in the economy for a total of $1500. You may be scratching your head over the previous sentence, but this is the second part of the misnomer “Federal Reserve”. The Federal reserve is not federal and it doesn’t have any reserves. It prints money to make purchases. I don’t want this post to become a rant against the Fed so I’ll cut it short here and explain the other side of the coin: how the Fed contracts the supply of money.

So now in our moot world, everyone can take out a $30 loan to get the $40 item they’ve been dreaming of. However, one of the principles of a free market is that prices will rise to the maximum that the market will bear. As a result, since most people can afford the $40 item, the market starts charging $42 or $44. Slowly the price creeps up because the value of money has been decreased by an increased supply. In short we are experiencing inflation.

So the Fed sees this situation and decides to curb inflation by raising the target interest rate. By raising the target interest rate, the Fed makes money harder to get, more scarce and thus the market can’t bear higher prices, slowing spending and curbing inflation. To accomplish this, the Fed sells treasury bills. By selling treasury bills, banks that purchase them are forced to spend their reserves to make the purchase, thus pulling cash out of the economy. Recall that banks can loan 10 times the amount they have on reserve. By lowering the amount of cash banks have on reserve, the Fed restricts the bank’s ability to make loans. Since the bank has less money to loan, it must charge more interest to compensate, and the interest rates rise. The key point here is that the difference between the discount rate and the maturity rate must be paid for at some future rate. When the bank comes to collect on this treasury bill, the Fed must pay the bank the promised maturity price. If you have an eye for catching trends then you may have already guessed that the money to pay the difference comes from, yup, you guessed it, printed money.

In conclusion, the Fed controls the supply of money. It accomplishes this by buying and selling treasury bills on the common market. It’s important to remember that when the Fed buys treasury bills it does so with printed money. Also when the Fed issues treasury notes and those notes are redeemed, the difference owed to the purchaser is paid with printed money. This is called a fiat currency, or a currency based on credit — in this case the credit of the United States. It doesn’t take a Harvard ecomonist to realize that every time the Fed runs through one of these cycles of inflation and contraction, that the amount of money in the economy is increased. It is only a question of time before the Fed destroys the currency it relies upon by making it too common. This process is called devaluation. If you want to see devaluation in action, see this graph of the US dollar vs. the Euro over the past 5 years:

http://finance.yahoo.com/currency/convert?from=USD&to=EUR&amt=1&t=5y

AID · ale · bank · banker · banking · Case · cash banks · Congress · Economy · fed · federal government · federal reserve · Federal Reserve System · fiat · fiat currency · finance · free market · Harvard · head · http · inflation · interest rate · king · life · monetary policy · partial reserve banking · private bank · Red · reserve banking · the fed · United States · US Federal Reserve · USD · wholesaler

What was presented to consumers as a clean, green alternative to fossil fuels turns out to be a wretched red herring.  Ethanol is a kludge attempt to address the Global Warming crisis.  The idea of using Ethanol as a substitute for fossil fuels is so stupid that it’s necessary to break down the stupidity into a list:

1) Food Diversion : Ethanol is produced from several sources, most notably corn. 

The UN says it takes 232kg of corn to fill a 50-litre car tank with ethanol. That is enough to feed a child for a year. Last week, the UN predicted “massacres” unless the bio fuel policy is halted.

Certain critics will point out that ethanol is produced by feed corn, not human corn.  Those critics would do best to consider that the amount of arable land on the planet is finite.  Thus the more feed corn we grow, the less food corn can be grown.

2) Ethanol isn’t economical.  That is, it costs MORE than crude oil.  For comparison:

Goldman Sachs says the cost of ethanol from corn is $81 a barrel (oil equivalent), with wheat at $145 and soybeans $232. It is built on subsidy.

3) Farm land isn’t green land.  The more we come to rely on ethanol, or bio fuels in general the more farmland we’ll need.  For example Brazil has the largest reserve of potentially arable land.  The problem is that land coexists with the rainforest.

The catch is obvious. “The idea that you cut down rainforest to actually grow bio fuels seems profoundly stupid,” said Professor John Beddington, Britain’s chief scientific adviser.

4) As a corollary to 1) Ethanol is a weak attempt to assuage the West’s abuse of the planet, at the cost of the world’s poor. 

The global food bill has risen 57pc in the last year. Soaring freight rates make it worse. The cost of food “on the table” has jumped by 74pc in poor countries that rely on imports, according to the FAO.

The world food situation is very serious: we have seen riots in Egypt, Cameroon, Haiti and Burkina Faso,” said Mr Diouf. “There is a risk that this unrest will spread in countries where 50pc to 60pc of income goes to food,” he said. 

Original source: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/14/ccview114.xml

AID · ale · bio fuel · biofuel · Brazil · CHIEF · crude oil · egypt · ethanol · farmland · food · food bill · global warming · gold · html · http · oil · Paris · professor · quote · rainforest · Red

The media coverage of the AIG crisis is completely off the mark.  The Fed DID NOT bail out AIG.  It did something better and worse.  The fed had two choices, 1) bail out AIG or 2) let it go bankrupt.  The Fed made both choices.  It bailed them out per se with an $85 billion dollar loan, taking 80% of the company in the process.  However, the loan came with an 11% interest rate.  This effectively prevents AIG from ever getting back on its feet.  Instead the company has been given time to arrange for the orderly sale of its assets to repay the loan, but AIG will not survive the process.    So the correct coverage of this story would  be to say that AIG has gone bankrupt and the Fed has stepped in to allow for a slow controlled sale of its assets.

aig · ale · bailout · bank · blog · fed · Federal Reserve System · http · interest rate · king · media coverage · the fed · US Federal Reserve · USD

http://www.nytimes.com/imagepages/2005/08/21/business/21real.graphic.html

This is a graph of historical housing prices relative to inflation since 1890.  The graph is indexed to inflation so you are seeing the bubble in house prices above and beyond inflation. 

The take home message to this graph is the following.  Take a look at the average home value over the past 100 odd years.  It seems to average somewhere around $112,000.  Now look at the peak which is somewhere around $180,000.  Dividing through we get a ‘bubble-factor’ = 180/112 = 1.6 .  What that means to you is that if you own a house currently valued at $500,000, if the bubble corrects you’ll actually own a $312,500 house (500/1.6 = 312.5).

Will the bubble correct?  Historically bubbles do one of two things:  1) they correct or 2) they flatten and wait for inflation to catch up with them.  What will this bubble do?  I can’t tell you and neither can any of the supposed experts. 

What caused this bubble?  The Federal Reserve lowered interest rates to as low as 1%.  This flooded the market with money which people invested in housing, since the internet bubble had burst. 

Who benefits from this bubble?  This bubble benefits 3 groups of people, bankers, the recently dead, and people with in laws.  Bankers make huge profits on the the inflated mortgages people must now take out to put a roof over their head.  Those who have recently died (since we’re at the peak of the bubble) benefit as their estate sells their property at the inflated price with record profit.  Hopefully they have children to benefit from the heavily taxed inheritance.  Regrettably, if they don’t have children to pass the benefit on to, then it’ll be hard to enjoy their windfall, being dead and all. 

If you’re alive you never benefit from this type of bubble.  People typically want to move up, that is move to a better home.  Thus you have to sell your current home and move to a better home.  Thus, you make a profit on the sale, but take a hit on the inflated purchase.  Basically it’s like borrowing from Peter to pay Paul, and it all ends up even in the wash. 

If you have in laws and can sell at the inflated price and move in with your in laws (avoiding having to buy an inflated property) you may benefit from the bubble by waiting for it to bottom out, if indeed it does.  Living with your in laws may allow you to sell high and buy low, but that assumes the bubble corrects and moreover, living with your parents you may wish you were recently dead.

Who suffers from this bubble?  The most notable group of people to suffer are the first time home buyers.  Entering the market at the peak you’ll be paying 1.6 times what you should hadn’t the bubble occured.  Ultimately all property owners suffer because the bubble leads them to think that they have more money than they actually do.

ale · bank · banker · bubble · cent · fed · federal reserve · Federal Reserve System · head · html · http · inflation · interest rate · Internet · internet bubble · mortgage · real estate · Red · Robert J Shiller · the fed · US Federal Reserve · USD

Growing up I often heard people remark that the “poor get poorer as the rich get richer.”  I was led to believe that this was an unfortunate side effect of a free market economy.  This flaw aside, the free market economy was said to be a much better approach than anything else that had come along.  I spent my time focused on ways of making laissez faire capitalism more compassionate.  We exist in a welfare state and I, living in Canada, live in a society which offers socialized medicine.  Both of these measures are great first steps in assuring the compassion of capitalism however, I was always frustrated knowing that the only true compassion of capitalism would come in allowing everyone to earn wealth.

As I continued to study the problem, imagine my shock and dismay when I learned that we do not live in a free market system.  We live in a central bank monetary system (ie, the Federal Reserve) which has an invisible, moreover, malevolent hand in conducting the nation’s monetary policy.  This may sound like a conspiracy theory however if it was, it’s an awfully dull one given that the chairman of the Federal Reserve openly admits this.

http://www.youtube.com/watch?v=x56MpWZh88s
http://broadband.thecomedynetwork.ca/comedy/?vid=19058

Through the Federal Reserve’s mucking with the money supply and the resulting inflation, those with savings saw their savings erode silently falling into the hands of the nations richest few.  In order to escape inflation, you must own debt free assets which index to inflation.  Only the richest few of us can accomplish this and thus evade the silent erosion of our savings into the hands of bankers and the financial elite.  Here are a few graphs showing the effects:

source : http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

source : http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

Central banking (The Fed) is an age old scheme of mob rule over the money supply. 

“Give me control of a nation’s money and I care not who makes the laws.”
– Mayer Amschel Rothschild

It has origins dating back to the temple days when Jesus drove out the money changers.  (The word ‘bank’ comes from the Latin ‘bench’ from which the temple money changers made their predatory exchanges.)  The only way to restore justice and equity is to restore the issuing power over money back to the people.  For more info, please see:

http://inflationtax.blogspot.com/

AID · alan greenspan · ale · America · bank · bank monetary system · banker · banking · blog · Canada · capitalism · cent · central bank · central banking · chair · chairman · Economy · fed · federal reserve · Federal Reserve System · free market · html · http · income disparity · inflation · king · MIT · monetary policy · money changers · piracy · quote · Red · socialized medicine · the fed · US Federal Reserve · wealth · welfare state

In 2001 Alan Greenspan at the Fed (Federal Reserve) lowered the interest rate to try to rejuvenate the economy after the fallout of the .com bubble burst. History will record that Greenspan went from the sublime to the ridiculous when he cut the interest rate to 1%. This set off a spate of irresponsible borrowing and lending the effects of which are still being dealt with today.The banks took advantage of this by starting to offer mortgages to subprime borrowers. Subprime borrowers are borrowers with a poor credit rating (specifically a FICO (credit) score of < 620). Typically these are individuals who habitually are unable to make credit card payments, or those who have suffered a foreclosure or bankruptcy. In the past they wouldn’t be able to get a loan, but thanks to the low interest rate, some could now afford the payments. With great fanfare out went the ads: “Send us your poor, your homeless, your great creditless masses!” Lured by the prospect of home ownership and lulled by the chimera of ‘buy now, pay later’, loans were issued as fast as the printers could print them.

Banks noticed that the default rates were lower than they expected. This led them to think that there was an untapped market in subprime lending. They developed many products, of which 3 were common 1) Variable rate mortgage with a higher rate due to the risk, 2) An interest only loan where they would start paying off the capital after an initial period and 3) low fixed rate initially, resetting to market rate after a few years.

The people who took these loans did so for two principal reasons 1) they hoped their income/credit would improve during the initial period of the loans and 2) the housing market was so hot, they hoped to use the newly gained equity in their homes to refinance the loans with more agreeable terms. Regrettably, Alan Greenspan, noting the now uncontrolled inflation, agressively started to increase the interest rates in 2004 right back up to around 5% and beyond.

For people with loans of type 1) and 3) above, the loans were typically huge so these interest rate increases made the payments impossible to cover, leading to defaulting. Those with loans of type 2) were pushed over the edge when the capital component of their loan kicked in.

Now, were it not for the avarice of the bankers, this crisis would have ended there; that is, a large number of repossessions but no further economic upheavel. However, bankers are weasels and behind the scenes they were pulling more ridiculous stunts.

Behind the scenes, bankers were looking to mitigate the risk of this subprime debt and also to make more profit on profit by creating and selling subprime mortgage bonds. To accomplish this they pooled together all subprime debt. Next they broke the subprime debt into levels. Suppose there were 3 banks involved in a given mortgage. The banks that would get hit by a default first were put into the lower levels and the banks that would be hit last were put into higher levels. By doing so, each level bore a reduced amount of the total risk. Now, many financial institutions that cannot purchase subprime debt were able to get around this limitation by purchasing bonds in the higher levels (less risk) of these mortgage bonds. Now, subprime debt was distributed all around the world to various institutions in this masked mortgage debt trading instrument.

So when the debt hit the fan, the big institutions which normally make loans to one another on a regular basis to keep the economy rolling, suddenly mistrusted one another. No one knew who held what amount of subprime debt. As a result the overnight lending rate went sky high and the Fed had to step in to push cash into the economy to help stave off a liquidity crisis — a crisis where cash flow starts to freeze.

At the time of this writing (Dec 2007) we are beginning to see the end result of this crisis. The large financial houses are beginning to crumble under the weight of their own stupidity. Just yesterday financial giant Morgan Stanley reported its first quarter loss in its 73 year history. Even more alarming, in seeking to assuage their woes, not only are they turning to the US government for help, but have successfully enlisted the help of the Chinese Government.

What may not be obvious, but should have the reader seeing red is that as the result of the irresponsibility of US financial institutions, we’re witnessing a wide scale buy out of US assets and institutions. What’s more, who speaks for the countless duped masses who have lost homes, equity and security as the result of this mass irresponsibility? There can be only a partial answer in paraphrasing Herbert Hoover who said: “Older men declare war. But it is the youth that must fight and die.” In this situation it is the financiers who tinker with the economy. But it is the working class that must work and suffer.

AID · alan greenspan · ale · bank · banker · bankruptcy · bubble · Chinese Government · Economy · fed · federal reserve · Federal Reserve System · finance · financial giant · Herbert Hoover · http · inflation · interest rate · king · liquidity crisis · MIT · Morgan Stanley · mortgage · prime · Red · subprime · subprime mortgage finance recession economy · the fed · United States · US Federal Reserve · US government · writing