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.

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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

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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

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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/

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Walter Kirn on The Colbert Report (Canadian Link): http://watch.thecomedynetwork.ca/the-colbert-report/full-episodes/#clip174780

Walter Kirn on The Colbert Report (USA Link):  http://www.colbertnation.com/the-colbert-report-videos/228190/may-19-2009/walter-kirn

Review of:
“Lost in the Meritocracy:  The Undereducation of an Overachiever”
By: Walter Kirn (Doubleday)
Reviewed By: Martin C. Winer
June 28, 2009

When I picked up “Lost in the Meritocracy:  The Undereducation of an Overachiever” by Walter Kirn (Doubleday), I expected a semi-dry expose on the problems facing the American Education system with an emphasis on the Ivy League schools.  The only semi-dry thing in the book was the champagne Kirn poured over two fawning exchange students during a graduation night orgy on his way to Princeton.  Told with prose and wit more common to novels, Kirn details his experiences as he rises out of the rural Minnesota winning one of 20 transfer student spots at Ivy League Princeton.

By Kirn’s account it is a wonder that there is any ivy left due to the propensity of the students to smoke any mildly herbaceous looking thing.

“There is no drug scene like an Ivy League drug scene.  Kids can’t just get high; they have to seek epiphanies.  They have to ground their mischief in manifestos.  The most popular one around … held that drugs, … especially plant based psychedelic drugs helped to break down the rigid inner partitions that restricted one’s full humanity.” (p. 124)

Recreational drug use was pervasive at Princeton as were many other illicit activities, with education taking a back seat.  I was so engaged with the stories that I was half way through when I reexamined the title and asked “what is a meritocracy anyways?”

Meritocracy was introduced as a more equitable replacement for aristocracy. Insofar as education, Harvard’s James Conant championed the cause of educational reform towards meritocracy as a realization of Thomas Jefferson’s dream of a “natural aristocracy among men, founded on virtue and talents.” (Jefferson used the term ‘natural aristocracy’ instead of ‘meritocracy’ because it wasn’t coined a term until the 1958 book “Rise of the Meritocracy” by Michael Young.  Incidentally it was intended pejoratively.) As with many high minded theories, the implementation often renders an imperfect reflection of the ideal.

Conant set the controversial School Aptitude Test (SAT) as gatekeeper for the bastions of higher learning guarding all the rewards of power that lay beyond.  When Walter Kirn took the SAT, he discovered he “had a natural talent for multiple-choice tests [which] landed [him] without the vaguest survival instructions [at Princeton]”. (p. 6)  Throughout the course of the book which details his experiences at Princeton Kirn suggests that his education consisted of learning how to succeed in the education system;  this is a far cry from becoming educated.

The distinction is eloquently revealed when Kirn is asked to discuss the ‘critical assumptions’ he’s made in reading the Norton anthologies;  unfortunately, Kirn had done little reading at all:

“With virtually no stored literary material about which to harbor critical assumptions, I relied on my gift for mimicking authority figures and playing back to them their own ideas as though they were conclusions I’d reached myself. I’d honed these skills on the speech team back in high school, and l didn’t regard them as sins against the [Princeton Student] Honor Code. Indeed, they embodied an honor code: my own “Be honored” it stated. “Or be damned.” To me, imitation and education were different words for the same thing, anyway.  What was learning but a form of borrowing? And what was intelligence but borrowing slyly?” (p.119)

Throughout the course of the book Kirn refers to himself as a fraud – sometimes proudly but more often with remorse.  But is Kirn a fraud or instead a sufferer of “Fraud Syndrome”?  Fraud Syndrome (also Impostor Syndrome) is not an official psychiatric diagnosis, but it is a topic well known and documented by psychiatrists and psychologists.  It is an intellectual condition where the intellect feels disconnected from any accomplishments or abilities.  If the intellect were a tree, then the tree would lack any knowledge of its roots and thus mistakenly think that its ability to grow upright was the result of undeserved serendipity.

Kirn’s notion that he somehow managed to beguile and finesse the system into accepting him to its highest ranks is significantly, and ironically, weakened by the quality of the writing he uses in making said point.  What follows is an example of Kirn’s average writing:

“Certain questions which grown-ups deem unanswerable begin as answers which children find unquestionable.  For example: what is Death?  To me at eight years old, death was the signal for a person’s loved ones to cry and look stricken for a while and then begin dividing up his stuff.” (p. 30)

Witty and clever turns of phrases such as these are found on every other page.  While this made for a delightful read, it served to undermine one of his main tenets.  It seems far more likely that Kirn didn’t finesse the system, but that the system managed recognized his talent despite his own inability to do so – marshalling him exactly where he ought to be: in the commensurate Princeton English Program.

If Fraud Syndrome ever does make it one day to be an official diagnosis, then Kirn should appear on the Public Service Announcement poster.  The text is rife with examples of Kirn’s detachment from his talent and feelings of being a fraud:

“My genuine tears [over the news of John Lennon’s death] flowed along with my false tears, as they did the distinction between them blurred.  I wasn’t ashamed of this.  My fraudulence, I was coming to understand, was in a way the truest thing about me.” (p. 77)

“The need to finesse my ignorance through such trickery [(using catchphrases)] — honorable trickery to my mind, but not to other minds, perhaps — left me feeling hollow and vaguely haunted.  Seeking security in numbers, I sought out the company of other frauds.” (p. 121)

“I grew to suspect that certain professors were on to us, and I wondered if they too, were fakes.” (p. 122)

“[My poems] were concerned with grander matters such as the creeping loss of “personhood” in an era of technological change. How I’d hit on this theme I wasn’t sure, but the more time I spent on it the more convinced l grew that I’d borrowed it.” (p.140)

“I confessed that my poems were all a sham and that [my] Bittman [character] was a hybrid version of Eliot’s Prufrock and Berryman’s Henry two famously beleaguered characters from the North anthologies.” (p.144)

“I felt in [my friend’s] company, as in no one else’s, that my bullshitting was a defensible activity, a circular approach to enlightenment.” (p. 168)

One of Kirn’s Princeton encounters offers a possible cause for Fraud Syndrome.  Kirn has a conversation with Julian — undoubtedly Dr. Julian Jaynes best known for his book “The Origin of Consciousness in the Breakdown of the Bicameral Mind” – in a bar following the production of one of Kirn’s plays.  Julian explained that the human mind was actually two distinct entities, that in ancient times were:

“… virtual strangers to each other.  When a thought arose in one of them, the other one, acting as a receiver, processed the thought as a voice, an actual voice.  …  But who was this being?  …  Man had answered these questions in many ways.  He’d conceived of gods and spirits, angels and demons, trolls and fairies.  Muses.” (pps. 93-94)

When Julian asked Kirn: “did you ever feel, during the composition of your script, that someone else, not you, was in control?” Kirn replied: “Honestly, I feel that way a lot.  Down deep, in a quiet way, I feel it constantly.  And sometimes it shakes me up a little.” (p. 94)  Perhaps this is why Kirn was unable to identify with his obvious talent; it felt external to him.  While Kirn makes this point incidentally in his book, it is nonetheless a very important one.  While Kirn fails to connect with his talent due to this separation of the mind, many more do something far worse:  Many fail to express their talents at all – failing to listen to that other ‘voice’.

While Kirn fails to impress upon me that his placement at Princeton was either coincidental or accidental, he does make some well taken points about the education he received once there.  It seems that when reading in the English program, pretension superseded comprehension.

“We … concluded, before we’d read even a hundredth of it, that Western canon was “illegitimate,” a veiled expression of powerful group interests that it was our duty to subvert.  In our rush to adopt the latest attitudes and please the younger and hipper of our instructors, … we skipped straight from ignorance to revisionism, deconstructing a body of literary knowledge that we’d never constructed in the first place.” (p.121)

“To thinkers of this school, great literature was an incoherent con, and I — a born con man who knew little about great literature had every reason to agree with them. In the land of nonreadability the nonreader was king it seemed.   Long live the king.”  (p.122)

Kirn found that many of the supposed ‘greats’ they were asked to read were completely incomprehensible by students and professors alike:

“Here is a sentence (or what I took to be one because it ended with a period) from the contribution by the Frenchman Jacques Derrida, the volume’s most prestigious name. “He speaks his mother tongue as the language of the other and deprives himself of all reappropriation, all specularization in it.” On the same page I encountered windpipe-blocking “heteronomous’ and “invagination.” When I turned the page I came across – tucked in a footnote –“unreadability.”

That word I understood of course.” (p.120)

For Kirn, university was a process in learning to jockey jargon words and phrases effectively.  Phrases like ‘semiotically unstable’ (referring to T.S. Eliot’s “The Waste Land”) and words such as ‘hermeneutical’, ‘gestural’, ‘recursive’, ‘incommensurable’ were all synonyms for ‘hard’.  Kirn was extremely confused by the works he read but he realized that confusion was not something to be escaped by understanding, but instead something which could be exploited by mirroring it back at its source.

“I was a confused young opportunist trying to turn his confusion to his advantage by sucking up to scholars of confusion.  The literary works they prized — the ones best suited to their project of refining and hallowing confusion — were, quite naturally, knotty and oblique.  The poems of Wallace Stevens, for example.  My classmates and I found them maddeningly elusive, like collections of backward answers to hidden riddles, but luckily we could say “recursive” by then.  We could say “incommensurable”.”  (p.122)

Kirn was adrift in a sea of confusion but it seemed that he was managing to navigate it by drinking the sea water and rolling with the currents.  It wasn’t long before Kirn’s thirst for meaning caught up with him, just as he had become completely intellectually dehydrated, basking in the scorching sun of the top percentile.  Kirn suffered a collapse, unable to continue the charade:

“For a few weeks I was still able to write, but it was a punishing, grind, self-conscious labor. I began most of my sentences with “the.”  Then I went looking for a noun. “The book” was often the result. Next, I seemed to remember, should come a verb. “Is” is a verb. It because my favorite verb. I liked it for its open-endedness — the way it allowed for a wide range of next moves. “The book is always . . .”  “The book is thought to . . .”  “The book is green and . . .” Impermissible. Yes, a book might be a certain color, but starting an essay with the fact wasn’t what college was all about. What was it all about? It was about making statements that weren’t obvious for people who made such statements professionally. “The book is a gestural construct possessed of telos.”

There I could rest.  I’d done it.  An hour’s work.” (p.178)

Eventually Kirn recovered after undertaking a course of self guided education which he found more fulfilling.  He continued his academic career at Oxford as a recipient of the “Keasbey Prize”.  Kirn draws two broader conclusions from his experience.

The first is a ‘roll with the punches and everything will turn out alright’ sort of message.  “… I discovered the truth — if words like “truth” mean anything.  And even if they don’t perhaps.  Pause in your knowing to be known.  Quit pushing — let yourself be pulled.  Stop searching, frantic child, and be found.”  (p. 205)  This advice may bear meaning for someone like Kirn with an innate and wonderful talent.  Its relevance to the rest of us who must work at it is somewhat questionable.

The second conclusion comes out more strongly in the interviews surrounding the book, but it is mentioned briefly.    In an interview (The Colbert Report: May 19, 2009.) Kirn claims that the current meritocracy does not reward depth, but instead rewards the “ability to define ‘incipient’. “Basically people who are very good at cross word puzzles end up running the country.”  “They are able to shine in every cocktail party they attend, but when it comes to running the economy, fighting the war on terror, … not very good.”  Kirn is referring to Donald Rumsfeld and to certain Lehman Brothers board members, who are Princeton Alumni.  Given Kirn’s experiences, it is easy to imagine jargon slinging economists brandishing terms like “Collaterized Debt Obligations” and “Credit Default Swaps” using them as talking points, rather than understanding their deeper implications.  Terms like these undoubtedly are mentioned in numerous A+ Ivy League Economics theses, confounding both the authors and the readers while leading to economic ruin.

This second summation is made in the book when Kirn discusses a run in, after graduating Princeton yet before going to Oxford, with an old friend who was self taught and well read.

“We had a great deal in common, Karl said.

But we didn’t, in fact, or much less than he assumed, and I didn’t know how to tell him this. To begin with, I couldn’t quote the transcendentalists as accurately and effortlessly as he could. I couldn’t quote anyone, reliably. I’d honed other skills: for flattering those in power without appearing to, for rating artistic reputations according to academic fashions, for matching my intonations and vocabulary to the backgrounds of my listeners, for placing certain words in smirking quotation marks and rolling my eyes when someone spoke too earnestly about some “classic” or masterpiece,”       for veering left when the conventional wisdom went right and then doubling back if it looked like it was changing.

Flexibility, irony, self-consciousness, contrarianism. They’d gotten me through Princeton, they hadn’t quite kept me out of Oxford, and these, I was about to tell my friend, were the ways to get ahead now–not by memorizing old Ralph Waldo. I’d found out a lot since I’d aced the SATs, about the system, about myself and about the new class that the system had created, which I was now part of, for better or for worse. The class that runs things.” (p. 210)

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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

In 1979 Jimmy Carter delivered a televised speech bemoaning the increasing US dependence on foreign oil.  In it he outlines his Energy Policy for the coming decades.

“[Foreign Oil is] a cause of the increased inflation and unemployment that we now face. This intolerable dependence on foreign oil threatens our economic independence and the very security of our nation. The energy crisis is real. It is worldwide. It is a clear and present danger to our nation.”

– Jimmy Carter  (http://www.pbs.org/wgbh/amex/carter/filmmore/ps_crisis.html)

Today the US relies on 60% foreign oil (http://www.fueleconomy.gov/FEG/oildep.shtml) in strong defiance of president Carter’s prescient warning.

As far as the US dependence on foreign oil, nothing has changed since the Carter’s clarion call aside from the problem getting far worse.  However, president Carter didn’t live in a world threatened by Global Warming (at least it wasn’t commonly known).   President Carter also didn’t live in a world with two superpopulations, India and China weighing in at a billion people each who are poised to ramp up their consumption.

Clearly oil will no longer do as a source of energy.  Luckily science has provided an alternative: The Hydrogen – Aluminum Cycle.  To be clear, I’m not speaking of hydrogen power alone.  Hydrogen power alone is a red herring of alternative energies.  The catch is that hydrogen is hugely expensive to make and today largely comes from the demethylization of hydrocarbons; ie oil.  No, the Hydrogen – Aluminum cycle is something different entirely.

When we think of hydrogen, some horrible images from the past might emerge.

Here we see the Hindenburg which was filled with hydrogen bursting into flames.  Many see the risks of hydrogen in cars and decry ‘oh the humanity!’.  Well there are no such worries with the hydrogen – aluminum power cycle because the hydrogen is produced in micro amounts and only as needed.  Hydrogen need not be stored in a cryogenic canister with motorists barrelling down the highways with a bomb on board.  This in situ or just in time production solves the danger of using hydrogen in a car.

Next, we must solve the problem of where to find our hydrogen.  Clearly deriving it from oil simply won’t do.  The other current method for obtaining hydrogen is through a process called hydrolysis which splits water into hydrogen and oxygen.  Regrettably, this process is too inefficient to be used on a wide scale.

Enter into the picture aluminum.  Aluminum has a high affinity for oxygen.  Whenever you hold a piece of aluminum it has a skin of oxidation.  This skin, once formed, prevents any further oxidation which is why you never have to worry about rust in components built of aluminum.  Aluminum likewise reacts with water;  A jealous lover of oxygen, it bonds strongly with it, ousting the hydrogen.  While a jealous lover aluminum may be, it is quickly satiated and forms a skin failing to react any further.

Jerry Woodall, a professor of Computer Science and Electrical Engineering at Purdue, discovered in the 60’s that when aluminum, gallium and water were mixed, the aluminum oxidized fully, liberating massive amounts of hydrogen.  It would seem that the gallium acts as a mediator in the reaction and prevents the formation of the oxidation skin on aluminum.  The end results of this reaction are hydrogen gas, aluminum oxide (aka alumina) and gallium.  The gallium is not consumed, and thus can be recycled.  The alumina can be electrically converted back into aluminum and thus recycled.  Burning hydrogen produces only water.

The idea of using hydrogen to power a vehicle is certainly not a new one.  While Woodall was experimenting with gallium in the 60’s, GM was trying to prototype a hydrogen fuel cell vehicle: The Electrovan.  It is recognized as the first hydrogen fuel cell prototype.  The prototype was scrapped due to the high cost of the rare (precious) metals used in its fuel cells and the complexity of storing hydrogen.

The aluminum-gallium-hydrogen cycle may allow us to succeed where the Electrovan failed.  So now, let’s put the pieces together: How does this get you to work in the morning?  Your new, non-polluting car has two fuel tanks, one containing water, the other containing aluminum and gallium flakes.  As hydrogen is needed the water and the flakes are mixed.  The hydrogen is harvested and runs the engine.  Also the heat produces by the chemical reaction may be harvested for energy by a Stirling Engine which is a type of engine which can run off of temperature differentials.

When it comes time to fuel your vehicle, the new filling station attaches three hoses to your car.  One removes the slurry of used alumina to be recycled.  The other two replenish your supply of water and aluminum-gallium flakes.  When it comes time to pay for your aluminum flakes, will it be competitive with gasoline?

“Since standard industrial technology could be used to recycle our nearly pure alumina back to aluminum at 20 cents per pound, this technology would be competitive with gasoline,” Woodall said. “Using aluminum, it would cost $70 at wholesale prices to take a 350-mile trip with a mid-size car equipped with a standard internal combustion engine. That compares with $66 for gasoline at $3.30 per gallon. If we used a 50 percent efficient fuel cell, taking the same trip using aluminum would cost $28.”

–  (http://www.purdue.edu/UNS/x/2007b/070827WoodallNanotech.html)

Next, some may wonder where the aluminum will come from.

Enough aluminum exists in the United States to produce 100 trillion kilowatt hours of energy. That’s enough energy to meet all the U.S. electric needs for 35 years.  If impure gallium can be made for less than $10 a pound and used in an onboard system, there are enough known gallium reserves to run 1 billion cars.”

–  (http://www.purdue.edu/UNS/x/2007b/070827WoodallNanotech.html)

Recall that alumina (aluminum oxide, the waste product) can be recycled electrically back into aluminum.  So it’s not like oil where, once burnt, we can’t reclaim it.  We can electrically reclaim the waste alumina back into aluminum.

Ecologically this is a dream come true.  When thinking ecologically it’s important to think in terms of cycles.  Everythings output must be something’s input cycling back to the original source.  Here we have aluminum going to aluminum oxide (alumina) going back to aluminum.  The alumina to aluminum step can be powered by non polluting nuclear or renewable sources such as solar or wind etc.  The water turns to hydrogen which combines back with oxygen to produce water.  Gallium is never consumed and is recycled continuously.

So there you have it: president Carter’s dream some thirty years later, but not too late.  With the skyrocketing prices of oil the need for this change has never been more clear.  The only missing ingredient in this equation is the political motivation to fund and accelerate the conversion process.  This may prove to be the trickiest part of the equation to balance.

Further reading:

Please don’t take my word on this matter, feel free to do your own research:

http://www.google.ca/search?hl=en&sa=X&oi=spell&resnum=0&ct=result&cd=1&q=aluminum+gallium&spell=1

http://youtube.com/results?search_query=aluminum+gallium&search_type=

There is also a similar approach using boron

http://www.google.ca/search?hl=en&q=boron+hydrogen+car&meta=

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Dumb:

Project Lifeline is a Bush administration initiative to give distressed mortgagees an additional month before their homes are foreclosed upon. This reprieve goes not only to subprime borrowers but to all distressed borrowers. The subtext to this move is that not only are subprime borrowers in distress. One month’s grace is dumb because the amount of debt that we’re dealing with coupled with the loss of equity from falling housing prices is not something that is going to resolve itself that quickly. This is akin to giving a starving man a rice cake. We all know that rice cakes are good only as coasters, so too is Project Lifeline.

Dumber:

Interest rate cuts are an even dumber idea. Last month the Fed cut rates by a staggering 1.25%. There is strong rumour that more cuts are coming. This is a dumber idea for a few reasons. First interest rate cuts are the cause of debenture spending. The reason we’re in the mess we’re in is because people are/were spending money they didn’t have. Next, lowered interest rates cause economic bubbles such as the housing bubble which is just in the process of bursting. Finally, interest rate cuts increase government debt. The way that the Fed lowers interest is by buying treasury bills with printed money. This devalues the currency and increases government debt. Thus, interest rate cuts are the cause of the current economic quagmire, and certainly aren’t the cure.

Dumbest

The US Stimulus Package is the dumbest possible idea. Under the package, people could see $600 to $1200 in tax rebates. First off, the amount itself is a pittance. Next, where is the money coming from? The money is being borrowed from China to be repaid with interest. Where is the money going? The money, it is hoped, will be spent into the economy to buy ’stuff’. Where does all the stuff come from? The stuff comes from… China. The real underlying problem is that the US economy has shifted from a production based economy to a consumer based economy. Until you address that problem, any attempts to throw money at the problem will simply throw money in other people’s pockets. I’ll give the government some credit though, the US Stimulus Package does manage to stimulate an economy; perhaps the government will fund moving its citizens to Beijing where the positive effects can be felt.

AID · Beijing · bubble · bush · Bush administration · China · Coming · Economy · fed · federal reserve · Federal Reserve System · george bush · http · interest rate · life · mortgage · OJ · prime · project lifeline · Red · stimulus package · subprime · the fed · United States · US Federal Reserve · USD

Corruption and collusion are what is wrong with the economy.  The Federal Reserve (Central Banking) is a criminal organization which uses inflation to manufacture debt.  The tax you pay in income tax or retail tax is simply collateral for the vast sums of inflated money that is printed on behalf of the federal government, a willing accomplice in this scheme. 

A picture is worth a thousand words:

(click to see larger version)

What you’re looking at is a chart of inflation from 1800 on.  Notice the blips that correspond to the war of 1812 and the Civil War of 1863.  Note that aside from these blips, inflation was relatively flat for around 113 years.  Then in 1913 the Federal Reserve was created.  In 1933 FDR confiscated all public monetary gold and removed the gold standard.  In 1971 Nixon removed the last vestiges of the gold standard (the foreign currency gold standard) and the results of this are clear.

What does this mean to you?  It means that any money you save becomes devalued.  Money in the bank is no longer a sure thing.  Inflation makes the funds you hold an investment in the currency.  The Federal Reserve was invented to prevent self-financing and financial independence.  As you can see from the graph above it has been quite successful. 

Who let’s the Federal Reserve continue to operate?  You do.  Apathy and lack of education the keys to the success of the Federal Reserve.  They throw bits of cheese at you in the form of 401K’s and fancy beach houses and watch you scurry after them laughing all the while as they devalue the dollars you earn. 

Inflation is nothing other than a tax.  The ‘tax’ you think of as tax is only collateral on the huge reams of printed money that the Federal Reserve pumps out at the behest of Congress’ bloated budgets.  It siphons value out of all your assets and ensures you remain in debt for as long as possible.

Don’t believe me.  Good, you need to be skeptical to survive in this world.  Here are some starting points for more information:

http://video.google.com/videoplay?docid=-515319560256183936
http://video.google.com/videoplay?docid=-8484911570371055528
http://video.google.com/videoplay?docid=-594683847743189197

a fun calculator:
http://www.minneapolisfed.org/Research/data/us/calc/

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