Mutual assured destruction, M.A.D., is the term du jour out of Washington and Wall Street over the past 3 or so years. Regardless of who is in charge there seems to be fear mongering for every situation in today’s world. The latest MAD scare is over the debt ceiling and if it is not raised the world will stop and we all will die. I can assure you that none of this is true and the sun will surely rise and set the day after if the debt ceiling is not increased.
I am not saying that by not increasing the debt ceiling everything will be fine, but I am saying it is not as bad as we are all being told. It is insane to believe that the world will shut down if the debt ceiling is not increased and the fear mongering must stop. If the debt ceiling is not raised it simply means that government spending would slow down and be limited to what the Treasury Department collects everyday and no debt can be issued in excess of the designated debt ceiling. However, the debt that matures, since most interest is paid before maturity (I am simplifying this) the debt that has matured can in fact be rolled into longer term bonds. Basically, nothing major would happen right away but in time there may be issues.
What would happen is many federal employees would be fired and many agencies would close. Obviously this is not good news, but it is not horrible news either. The government collects some $200B in taxes or fees a month which means that all our debt servicing costs would be covered in just one month’s tax collection, obviously interest payments are spread out, but you get the idea. Interest rates will not rise out of control and we are not defaulting on our debt, don’t forget the Federal Reserve is our largest creditor and they hand over 95% of their profits to the treasury which reinforces my point since the government is paying interest to itself on over a trillion dollars of our debt.
If the debt ceiling is not raised things will be tough and unemployment, from government employees, will rise but life will go on and much of the private sector will remain untouched. In fact the private sector might just flourish since many regulations could not be enforced because government agencies are closed down. Subsidies would end and waste would be purged from the system, again I see no downside here. The government would be forced to live on what it collects and this clearly bothers the powers that be since they are buying political favor through wasteful spending.
Contrary to popular belief Social Security checks would go out and Medicare payments would still be paid since FICA withholdings cover these costs for now. Well, in theory that is what would happen, but since the government raids those programs excess reserves all the time they are not technically solvent. Even though these programs are safe through their own taxation Washington is telling you the exact opposite which is a lie unless they used those tax withholdings for something else. This is how MAD works though, scare you to death so you don’t question anything and do what you are told.
You see if the debt ceiling is not increased the house of cards begins to waver and that is the problem. The government and the powers that be do not want you to realize that this whole thing is very wobbly and unsound, meaning our economy. They do not want you want you to know that money is debt and the Federal Reserve cannot print money without being paid interest from the treasury department. They do not want you to know that things can get done on less money. They want to scare you into keeping the status quo which is on its last leg anyhow because debt cannot increase forever. Eventually everything comes to an end, look at Greece and Ireland.
Ultimately the debt ceiling will be increased without much of a fight some grandstanding of course, but no real resistance will come and the vote will come and go quietly. What is so crazy is the use of the MAD policy that is used for everything nowadays. No matter what is happening we are told that we are all going to die if so and so bill is not passed which is not true, ever. Why we all fall for this is beyond me, but most Americans do and insist that the wrong decision be made, i.e. preserving the status quo. However, the status quo is unsustainable even in the short-term and is completely evident when one looks at the value of the dollar and the price of commodities.
To be clear on my stance, I know longer term the debt ceiling must be increased as we would eventually default, but I am confident that the US could make it much longer than anyone thinks without issuing new debt. It is just most people who depend on the system for their survival would not like this and that is why the MAD card is being played. We should all be appalled that our leaders are using the MAD card so often and it should be perfectly clear to everyone that when the MAD card is played it is to preserve our leaders and it usually is not in our best interest to continue with their status quo. In time we must start to call our leaders out and see what would really happen if they do not get what they want and I am very sure that MAD will not happen.
John Carney at CNBC just put up a piece http://www.cnbc.com/id/39754650 which states: “This is a serious threat to financial stability. There’s no way Tim and Ben let this play out,” a senior banker told me, referring to Treasury Secretary Tim Geithner and Federal Reserve chair Ben Bernanke.
In short, Wall Street is betting that the bureaucrats will bail them out again.
I said this yesterday and these executives are right, banks will get bailed out again probably through QE. It is wrong and these banks have earned the right to fail, but the problem is that politicians do not have the will to help them this time. However, the Fed, which is proving itself so independent nowadays, will bail them out. As Zero Hedge reported PIMCO levered up on MBS and they know something, like $500B in QE coming directly to the MBS market, rumor has it. Again, QE will do nothing and while $500B is in the cards for MBS there is no word yet what the Fed will do with long dated treasuries… but they will buy them.
Since the meltdown last year much attention has been paid to how rating agencies determine the difference between AAA and junk paper. In a nutshell, and as you already know, the agencies gave AAA ratings to paper that was literally worthless and according to several books I have just read it is clear that the agencies had no idea how these debt instruments actually worked, I am referring to CDO and asset backed paper. Therefore, I humbly submit this new, simplified, rating system to the SEC and the ratings agencies.
My rating system will clear up any confusion as to the safety of the bonds you buy and investors will be fully aware of the risks. I am confident my recommendations will be turned down because the last thing Wall Street wants is transparency or to give the average (or institutional for that matter) investor a shot of actually understanding the risk they are assuming when they buy fixed income. I mean, what kind of fun could we have if AAA rated paper was actually safe? I am assuming Wall Street likes the fact that they can game the system and make total junk into AAA, which is exactly what they did with ABS. The last thing they want is for investors to make money because that would mean there is less money for them to make, right Goldman?
So, here is my proposed rating system:
AAA – Will now will be called “we think you will get your money back”
AA – Will now be called “we are somewhat confident you will get your money back”
A – Will now be called “you probably will not get your money back”
BBB – Will now be called “crappier”
BB – Will now be called “total crap”
B – Will now be called “are you freaking serious?”
CCC – Will now be called “what, do you hate your money?”
Unrated – Will now be called “there is a sucker born every minute, congratulations you are the sucker”
After reading so many stories about the financial crisis there is one thing that is consistent, regardless of who is telling the story or what context that story is being told, the ratings agencies had no idea what they were doing. In fact, in The Big Short, I highly recommend that book, there were several accounts of money managers talking to the ratings agencies and they said they were totally clueless. They went on to say that their models could not even calculate negative returns, how is that possible? No one at the biggest agencies had any idea how CDO’s or asset backed securities were created. They had no interest in looking at the makeup of what was sub-prime and what was not. They never looked at individual loans and instead used an “average FICO score,” how could you give a AAA rating when you did not look at the instruments backing the bond? These agencies are clueless and they still have no clue.
Sure, they are now downgrading this junk paper, 2 years later, but where were they when defaults were at 4-5%? This is why I am confident that the U.S. and the U.K. will keep their AAA rating right up until the day these countries are in receivership. After all, past actions do dictate future results. For example, Did AIG keep their AAA rating pretty much right up until they were acquired by the government? How about Freddie and Fannie, by the way there was never a government guarantee to this debt, it was merely implied, read a prospectus if you don’t believe me, did they not keep a AAA rating until the end? Then there is Executive Life, an insurer in the early 1990’s that collapsed with the help of Michael Milken’s junk bonds, which kept their AAA rating right until they were in receivership. Executive Life was downgraded only after receivership.
These firms cannot foresee risk or rate risk properly. After lawsuits were filed these firms defenses revolved around “free speech” and not around actually rating risk. Seriously? They now admit that one needs to do their own research and not trust their ratings alone. This must be news to all the insurance companies or pension funds that can only invest in A to AAA paper only. What they are telling you is that their ratings are not real and must have been always been fake. So, how can you trust their ratings on such things as sovereign debt? One simple question, do you think the U.S. will ever actually pay off its debt, all $12T worth of their debt? Not a chance, but they keep the U.S. at AAA and that is why their ratings are a joke.
P.S. – Sorry for the bad attempt at humor, come on, I am a geek, what do you expect?
According to Mr., and I use that term loosely, Olbermann, if you are a pickup truck owner, like trucks, against bigger governments or, apparently, a white guy you are a racist. Hey, don’t yell at me, he said it and makes the suggestion and I just tell you about it since his audience consists of me and 2 other people locked in a basement somewhere. In fact, MSNBC has been playing the race card for the past year now asking how race relations have changed over the past year.
The irony is that I rarely if ever think about race of individuals at all and I don’t think most people do except those baiting for a fight, MSNBC in this case. I never even hear Fox make much reference to race, but MSNBC brings it up all the time, why? How in the world can race be more important than a person’s beliefs or policies? You see, that is what I pay attention to, what people say and do, not what color they are. I simply do not care what color people are, but apparently the progressive, liberal, MSNBC does and yet I am supposed to be the racists. No, I do not own a pickup truck, but I am a white guy and I detest big government, uh oh!
I am only boosting Keith’s ratings tonight because I want to see his face if/when Brown wins, he called brown a racists, homophobe (spelling??), bigot, sexist, and on and on while completely ignoring Coakley’s willingness to let a pedophile go free because of political ties. Of course, all Democrats seem to ignore things like this, don’t worry Republicans seem to ignore the tax cheats and corruptness of their friends to, but at least they are not touching little kids, except for Foley, even then the kid wasn’t 2. Regardless, the hypocrisy of the Democrats is, in my opinion, so much worse than the Republicans in 2006.
I recently wrote a liberal and asked if he knew why Obama received $23M from Wall Street, more than most other candidates, he did not know. I told him it is because most Democrats are too stupid to understand how Wall Street works and that is why the likes of Goldman give the Democrats more money than Republicans. Of course, the media and Democrats say Republicans are for Wall Street, but that is simply a lie. Proof of this is no further than Freddie and Fannie who gave massive amounts of money to, guess who? Democrats. Guess which party blocked attempts to regulate the GSE’s? Exactly.
Anyhow, I guess if you believe in the Tea Party movement, what a dumb name anyhow, you are a racist. That may come as a surprise to many of the black people I saw at the rallies, on TV, not in person. I just cannot get over the fact that these idiots on TV sit there and called protestors in 2004 patriots then, but now they are racist “tea baggers,” which by the way is a crude term for when a man sticks his you know what’s in someone else’s mouth, now you know and now you know the intellectual level of MSNBC hosts. What these idiots on TV do not get is that people are hurting, broke and see the level of corruption and spending in Washington from the people who were supposed to be “on their side” and all that spending and corruption never trickled down to the people, just to unions and, well we really don’t know where now, do we?
What Keith and the other idiots on MSNBC also do not realize is that is that Democrats had control of Congress since 2006 and only increased their margin of control in 2008. Knowing that fact, who do you think really owns the financial crisis? Sure, Bush owns a big chunk of it, but the Democrats own way more than they will ever admit to. Those are the little facts that the talking heads and Democrats want you to forget about, but how could anyone really forget that? I guess if you say it was the other guys fault enough times people will, but in time people will remember.
In the meantime, brown is kicking the snot out of Coakley and it looks like Ted’s seat is going to a Republican, he must be mortified wherever he is. I am willing to bet the market rallies tomorrow, but this is not good news for the market because this means spending is going to be reigned in, to a degree. I would not be a buyer tomorrow, but this makes me like utilities more and biotech along with other select healthcare stocks. If Coakley wins, I am buying insurers.
It’s funny how New York politics work especially since we have so many investment firms and layers located in New York City. We also have a very powerful senator, Charles ‘Chuck’ Schumer who is, huh hum, for the people and recently put the kibosh on flash trading. However, it would be nice if he voted less frequently for the big Wall Street firms and took far less money from them and their M&A lawyer friends. The same goes for his new partner in crime Kristen Gillibrand who replaced Hillary Clinton.
Both of these senators have taken large amounts of money from people who work in the investment community and who work for the large M&A firms out of New York City. Now, I get how politics work, but give the rhetoric they both have been giving about reforming the system and the fact that Schumer already has some $14 million in the bank you would think he would turn away some money from investment firms that he is supposed to be against. You would definitely think Gillibrand would turn away money from folks or PAC’s that represent Citi Group or Goldman Sachs as they represent the armpit of American finance at the moment, but nope that is not the case at all.
I guess they will continue their dog and pony show in front of the cameras about how they love the people and are doing all they can in Washington while at the same time taking money from Wall Street all but assuring that when they need another bailout they will surely get Schumer and Gillibrand’s vote, again. These two have got to go for the simple fact that Schumer has been in Washington for too long and, in my opinion, does not represent the people any longer and is way too self serving. Gillibrand is showing lack of common sense by accepting money from questionable sources, in my opinion, and voting to keep funding for ACORN even though employees were anxious to help with an under age prostitution ring.
Here is the breakdown of contributions.
Be the First to Comment 
Subscribe to Annuity IQ's Feed
