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-- 03 October 2007 --

IT’S YOUR TURN TO ACT.

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“Oh, my, it is going to be bad...” Robert Manning
“I could never buy a house. I can’t travel. I can’t do anything. I feel like a prisoner.” –Attorney Kristin Cole, 30, who owes $150,000 in student loans.

OCT: 3, 2007: The squeeze is getting worse with the debt load growing and more families unable to pay their bills. The dollar may be in a free fall. Hold on to your hats and your homes.

We are now in the third quarter of 2007 with Citibank reporting a 60% plunge—over $5 BILLION-- in profits partly because of subprime loan “write downs.” UBS reports a $3.4 BILLION hit for the same reason. This proves how deeply complicit big banks were in financing the subprime scam.

The Marketwatch website has a front-page feature titled: “COULD IT CRASH AGAIN?” They are referring to the market drop of 1987. On Monday, the stock market rallied dramatically in what one observer called “A subprime relief rally.” That does not mean the problems have gone away.

HOPES AND ILLUSIONS

In fact, the NY Times headline said just that: “Stocks Soar on Hopes Credit Crisis Is Over.” In truth, it is not over, not by a long shot. Reuters reports:

“The warning from Citigroup that its quarterly earnings will drop 60% could be a sign of things to come from U.S. banks and brokerages. "I believe there is a systemic debt problem and it will take years to work out -- and the Federal Reserve cannot resolve the issues," said Richard Bove, bank analyst at Punk Ziege.”

NY Mayor and Financial guru Michael Bloomberg also says the causes are deeper. He says the global credit crunch has as much to do with public debt as the US sub-prime meltdown.

The billionaire media and business mogul talked about the “lunacy” of debt levels in the US and the UK at the Conservative Party conference in the Britain: “This is not a mortgage crisis,” he insists.” it’s a crisis in confidence and we’re all in it together.”

“DENIAL SQUARED”

So don’t be fooled by the rise in the Dow. Deep debt problems are not going away despite all the rosy optimism. It masks a deeper denial among those who think that if they believe or hope everything is ok, it will be. No sooner did I write that last line than I read on the Housing Panic blog: “The housing market may still be in denial, but it appears that Wall Street and foreign markets are in Denial Squared.”

IT'S GETTING BAD

I was in Boston last weekend. There was euphoria about the Red Sox winning a division title, but the team is also literally selling off bleacher chairs to raise funds to help repair Fenway Park. At the same time the Boston Globe reported on its front page “THOUSANDS BRACE FOR MORTGAGE RATE JUMP.” Ten thousand mortgages will be reset upwards. Hundreds, if not thousands, of homeowners are not expected to be able to afford the hike. An epidemic of defaults is anticipated. Experts on Wall Street say housing prices will dominate Fed policy for years.

On the way home, I saw USA TODAY leading with the housing mess, and then as I got closer to New York, a newspaper in the affluent town of Greenwich Connecticut reported foreclosures at a record level. In tony Greenwich! The Globe also noted that many in the housing sector believe the Fed will cut the interest rate again.

As for the banks: I loved a report that JP Morgan was fined heavily for failing to disclose shady internal emails. In a law suit The Bank had claimed falsely that the emails disappeared because of 9/11, a claim that officials repudiated. Now that is sleazy!

DEBT CEILING RAISED

And then there was this serious development which received so little attention:

"The Senate voted 53-42 to raise the debt ceiling to $9.815 trillion, the fifth increase in the U.S. credit limit since President George W. Bush took office in January 2001." The Senate Finance Committee Chairman said: "We have no choice but to approve it. If we fail to raise the debt ceiling soon, the U.S. Treasury will default for the first time in its history."

The article said U.S. debt stood at $5.6 trillion when Bush was elected, and quoted a Senator: "Increasing the debt limit is necessary to preserve the full faith and credit of the United States of America." [Emphasis added]

As the Kansas City Star explained, this means the US debt is rising $1.36 billion daily .  "We have increased the debt in the last 10 years by 50 percent," responds Oklahoma Republican Sen. Tom Coburn, who voted against a higher ceiling.

ANOTHER CRISIS ON THE WAY

Robert Manning, author of Credit Card Nation and editorial advisor to IN DEBT WE TRUST writes:

"The US debt crisis hits with the coming economic slowdown. It will not only hit students and recent grads but also parents that will spend money helping with student loans rather than contributing to their retirement accounts in the post-"defined" pension era. Oh, my, it is going to be bad.."

His note was accompanied by an AP article headlined:

“High-Priced Student Loans Spell Trouble - Explosion in High-Priced Student Loans Sow Seeds of Trouble for U.S. Economic Growth”

DEJA VU ALL OVER AGAIN

It was deja vu all over again when I watched Bill Moyers interview John Bogle, 77, the businessman who created The Vanguard Group, Inc., in 1974, and which today is one of the two largest mutual fund organizations in the world, and was was the first index mutual fund. He retired as Chairman and Chief Executive Officer of the fund in 1996, yet remained Senior Chairman until 2000.

While Moyers had Bogle on to discuss the way that private equity companies --often using debt as a big part of their financing strategies-- take over companies and strip mine then, he echoed many of the arguments made in IN DEBT WE TRUST about the way financial institutions have taken over our economy and bleed us dry.

"My estimate is that the financial sector takes $560 billion a year out of society," Bogle explains to Bill Moyers. "Banks, money managers, insurance companies, certainly annuity providers. They're all subtracting value from the economy."

Rather than just manage money for customers, they manage it with the goal of enriching themselves. (Low level hedge fund managers make $129 million a year.) Rather than work in the interests of customers, they work in their own interest for greed and short-term gain.

These attitudes and practices have led to what Moyers calls the “Crisis of Capitalism.” This is important because usually the “C-word,” capitalism, is rarely used in polite company or in our media. But the people in business have no such compunctions. They know what they are doing. And they know why, and its often with a me-first, society be damned approach. That’s part of what led to this subprime—subcrime scandal.

Increasingly other commentators are saying what I have for months –that all of these ultra complex financial instruments were fraudulently designed , not to help borrowers, but to part them from their money. I am probably too explicit with my J’Accuse attitude which impugns motives to the money cartels. But when many newspapers start blaming the crisis on predatory lenders, that’s another way of saying this is a criminal and discriminatory enterprise.

MISCHARACTERIZING “SUBPRIME”

Here’s a business publication, Portfolio.com saying the same thing:

"Subprime is a very convenient term used by elites in the media and on Wall Street because it implies that there's something wrong with the borrowers, and also with the lenders," he said. "What you have in reality is just a broader mispricing of credit."

The fact is that it's wrong to simply paint all subprime lending as misguided. Subprime borrowers can be responsible borrowers, and enlightened lenders can make good money from them by helping them improve their credit and build themselves a solid financial foundation.

When subprime lending goes bad it's usually because lenders get greedy, and move into the realm of predatory lending, trying to extract as much juice from the borrower as possible before a bankruptcy made inevitable by usurious interest rates."

Read that again slowly and you will see that the term greedy is right up there as an explanation.

THE FIRE THIS TIME

Could that also be part of the explanation for other serious trends---the weakening of the dollar, and growing inflation with oil prices poised to go through the roof. Its called a “FIRE ECONOMY". That's an economy which ends up burning up. Don’t forget that business cycles are part of it, always have been, always will be. And that means that when there are big ups, downs are sure to follow. We have seen it before and we will see it again.

Clearly there are a lot of smart people in the financial sector working overtime to stabilize the situation, and manage the crisis. There is a “plunge protection” unit in the US Treasury. But the markets tend to be more irrational with investors often becoming speculators and following a herd instinct. It's like blackbirds—when one lands, they all land.

Markets are believed to self-“correct” but that doesn’t always happen which is why there is so much volatility. When an important sector like housing is in trouble, consumer confidence is down. When consumer confidence is in trouble... Just follow the chain.

Some experts say it will all come down. I hope not because the rich are well positioned to survive but the rest of us are not. I keep reading pessimistic scenarios as the national debt keeps going up and the savings rate down. That is a prescription for very scary scenarios. Check these articles out:

THE "GREATER" DEPRESSION UPDATE

David M. Levitt and Bryan Keogh for Bloomberg

The world economy "is probably at its scariest point since the Depression'' as fallout from the U.S. subprime mortgage crisis crimps access to credit, said Ethan Penner, a pioneer of the $600 billion commercial mortgage backed securities market in the early 1990s." We're probably at the closest point to a big meltdown, a depression type meltdown than we have been in our lives,'' said Penner, 46, now a principal at real estate fund management firm Lubert-Adler Partners LP in Philadelphia, during a speech at a Real Estate Media Inc. conference in New York.

The U.S. housing market is an "unmitigated disaster" and will take at least another 18 months to recover, as the U.S. Federal Reserve and European Central Bank respond to turmoil in credit markets, Penner said. As foreclosures rise, lenders will try to sell the properties they acquire at depressed prices, dragging the market down further, he said.

"I'll tell you how it's going to end: It's going to end with a depression, and not just a depression; not just another Great Depression; it's going to be the Greater Depression."

GET READY FOR WEIMAR-REPUBLIC STYLE INFLATION - The End Of The World As We Know It

THE ENTIRE U.S. IS NOW ON SALE - This week's announcement that Dubai's investment company will take a 20% stake in the NASDAQ may have set off alarm bells in Congress, but it's probably just the beginning...

FIGHTING BACK

I am happy to report that our message—it’s time to fight back—is being heard by others. I ran into Jesse Jackson this week. He always has an instinct about where news is going to break and he will be touring Michigan this week organizing on the issue. I read this announcement of another grassroots initiative in a blog from Cleveland:

"Inner-city community organizations from nine cities in six states gathered this morning at Ernest Gardner’s house on East 113th St. to announce their new “Campaign to Save the American Dream” from predatory lending and foreclosures.

The organizations — from Cleveland, Cincinnati, Pittsburgh, Philadelphia, Syracuse, Chicago, central Illinois, Wichita and Des Moines — are all affiliated with the National Training and Information Center in Chicago, which has supported neighborhood organizing for bank reinvestment in Cleveland and other cities since the ’70s. The local NTIC partner is Cleveland’s ESOP, which hosted today’s press conference to kick off a campaign for national measures to prevent further foreclosures on family homes, reform the subprime credit market, criminalize abusive mortgage lending practices, and extend Federal Community Reinvestment Act regulation to all mortgage lenders and loan originators.

NTIC held this national press event on East 113th because 44105 is “the highest foreclosure zip code in the country.” (They got an excellent turnout of reporters and cameras.)" website

Note: the Center for Responsible Lending says a “tweak” in the bankruptcy laws can save 600,000 houses from foreclosure. The House is about to vote on H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007.

PREDATORS TO BLAME

Here’s another story from Cleveland—in the Washington Post:
It shows how foreclosures and predatory lending is changing neighborhoods for the worst (i.e. crime and drugs):

"Twenty years ago, the Slavic Village neighborhood of Cleveland was a tightly knit community of first- and second-generation Polish and Czech immigrants. Today, it's in danger of becoming a ghost town, largely because a swarm of speculators, real estate agents, mortgage brokers and lenders saw an opportunity to make a buck there.

You could say it was because of them that 12-year-old Asteve' "Cookie" Thomas lost her life on Sept. 1, shot in Slavic Village when she stumbled into the crossfire of suspected drug dealers. The neighborhood wasn't always a haven for criminals -- not until hundreds of foreclosures destabilized the community. Houses (800 at last count) and then entire streets were abandoned. Crime increased as vacant properties offered shelter to people who had a reason to hide."

HOMES ARE BEING STOLEN –Article via Denise Richardson

GOOD NEWS?

Some Good News: Starting October 1, 2007, a new federal regulation prohibits creditors making payday loans, vehicle title loans and tax refund anticipation loan.

Blog View: The Debt and The War

The Center for American Progress: nobody's paying anything to finance this war just yet. We're just racking up more debt, and that'll have to be paid off from now until eternity.

When the bill comes due, most likely it'll go like this: no politician worth their salt will support a massive progressive tax increase to pay off all the debt generated by the war. So instead, the annual interest paid on the debt will grow, putting more pressure on discretionary programs that typically help working and middle class people. This means either programs will grow slower or be cut. A tax increase could pay for part of it. But unless it's a big and hyper-progressive tax increase, which it probably wouldn't be, President Bush and the Republican Congress will have succeeded in making the middle and lower classes pay for this war.

Another way to look it is how we've been paying for the war: i.e. to a great extent, by borrowing from the Social Security trust fund. By law, the government will have to replace the money it's borrowed. But it's quite plausible that social security solvency will be achieved by payroll tax hikes and benefit reductions, at least in part. When that time comes, let's not forget what we're really paying for.

When Congress proposes to buy kids health care and actually pay for it, or prevent cuts to vital social programs, the President opposes it. Deficit-financed war is a-o-k, though.

QUOTE OF THE WEEK FROM A REAL ESTATE MAVEN:
” . . .we're in deep doodoo." -- Robert Toll, CEO of Toll Brothers

sounds like something I wrote...

Well folks, that’s it from here. Are we doom and gloomers?

I don’t think so. I think we are realists paying close attention to the details. As you know, they say that God Is In the Details. But the Good Lawd helps those who help themselves and that’s our challenge now—to educate ourselves and her communities about the debt danger and di something about. One place to start: Organize a screening of IN DEBT WE TRUST.

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