The End of the American Empire?

[SPasse]

Hi All,

Twice recently, the BBC has had guest economists talk about our present difficulties as more than just a recession, but rather the end of the American empire.

Granted I have a weakness for dark thoughts and perhaps this is also a little “wish fulfillment” on the part of the British as they have witnessed their empire dissolve…

But are things possibly really that bad?

Regards,

Scott

[Ninong]

Scott,

The truth is we don't know the extent of our current financial difficulties. I have been saying this for the past several months now. The banks have been lying all along, Ben Bernanke has been deliberately holding back so as not to alarm the markets, the Bush Administration that facilitated this mess has been blissfully unaware of what they have wrought.

The housing bubble may be the least of our worries at the moment. Right now we're a little over two years into the unwinding of that hyperinflated market. It peaked in late 2005. Best case scenario is that it will bottom out at about 25-30% down for the previously hot markets and only 15% down for the rest of the country sometime late next year. Worst case scenario would be a drop of about 40% in the previously hot markets and a decline of about 20% in the rest of the country bottoming out sometime in 2010.

A lot depends on the financial markets. Right now the Federal Reserve doesn't know what to do. In their efforts to avert a recession, they are trashing the dollar. Sooner or later we will reach a new equilibrium, otherwise we wouldn't be able to keep up with the demand for our products. Instead of running a balance of trade deficit, we would be running a surplus. At the present rate of decline, people from Europe and Asia will be flying over here to buy their groceries, not just their clothes.

My most recent rant. There are two or three earlier threads, all with the words "gold" or "oil" in the titles.

I found this hilarious cartoon explanation of the subprime mortgage mess. It may take a minute or two to load. It's well worth the wait. It's sort of a slide show consisting of 45 pages. You have to turn the pages. There is no sound, so I guess it's safe for work as long as no one else is reading some of the text because they do use a few 'adult' words every now and then. Highly recommended!!!

Never before in the history of the United States have we embarked on a major overseas war while simultaneously cutting tax revenues. Former President George H. W. Bush coined an appropriate name for Ronald Reagan's idiotic notion that the more you cut taxes, the more revenue you would take in: Voodoo Economics. That was when he was running against Reagan for the nomination, back when he was still pro-choice, before he conveniently changed his position on taxes and abortion to become Reagan's VP.

We went from three years of successive gigantic budget surpluses to seven years of budget deficits under the Cheney-Bush criminal gang. These guys can't even shoot straight, literally. And it now looks like they can't even keep track of their own money (the NRCC just realized that their treasurer has been stealing them blind for at least five years).

I hate to repeat the litany of abuses that were allowed by this criminally incompetent administration but Enron would be a good place to start. The Cheney government (let's face it, he was the one calling the shots in the early years) allowed Enron to get away with murder. Look at what he allowed them to do to California.

People always wondered what would happen if the Republicans ever got control of everything. Now they know. These clowns like to call themselves conservatives. Ha! What have they conserved? Conservatives conserve the social hierarchy, whether that be today's monied elite or yesterday's monarchy. They resist equality and are not the least interested in the overall welfare of the unwashed masses. Left to them, we would all be singing God Save the Queen today and they would still be loyal Tories.

[Ninong]

Another point I forgot to make is that if the fed doesn't do something to shore up the dollar, it may soon lose its position as the world's reserve currency. As messed up as the euro is, it has still doubled in value against the dollar since Bush took office. If we lose our position as the world's reserve currency, we will be in very deep doo-doo.

What we are seeing right now in the financial markets is just how interconnected the rest of the world is to the U.S. financial markets. Look at the multi-billion dollar hits that some of the major European banks had to take because of our subprime debacle. They bought that crappy paper.* And the insurance that they thought would cover them is a joke. The insurance companies don't even have assets equal to 1% of the amount of the potential losses, so how can they pay off? It's all a big Ponzi scheme.

Not to worry, the Bush Administration intends to save the banks and charge us with the bill. Except that this will be much bigger than the S&L bailout.

*By late 2007, one in ten homes in Cleveland had been repossessed and Deutsche Bank Trust, acting on behalf of bondholders, was the largest property owner in the city.

There is approximately $1 trillion dollars worth of sub-prime mortgage bonds that have been packaged and repackaged, sold and resold, around the globe. Right now those bonds do not have a liquid market because no one knows for sure what they're worth because no one knows for sure what's in them or if the insurance backing them is real. What's in them is a lot of crap. The insurance backing them is a joke. Their current value is at least 40% down from their face value. That works out to a neat loss of approximately $400 billion!

Ben Bernanke just guaranteed (with our money) JP Morgan Chase that if they would pretty please buy Bear Stearns for the fire sale price of $2.00/share that we, the American taxpayers, would reimburse JP Morgan for up to $30 billion in losses on the crappy sub-prime mortgage backed bonds that Bear holds on the books right now. And that's nothing compared to exposure some of the really big banks (Citi, BofA, etc., and Washington Mutual because they are primarily a mortgage bank) have right now. Every quarter they tell us they're taking a $5 or $10 or $15 billion write-down because of "unexpected" revaluations in their assets.

Don't forget that all of these overpaid bank CEOs paid themselves gigantic bonuses in the tens of millions of dollars based on jacked up profits during the height of the 2003-2006 sub-prime mortgage scam. They faked their balance sheets by putting all the crappy stuff off-shore in what they decided to call SPVs (special purpose vehicles). That stuff is not on their books because they say they don't own it. Funny thing about that concept, even though they don't own it, they will be stuck with the losses. Enron played exactly the same game and it was these same large banks that helped Enron make it work. (P.S. -- Just to be clear, the SPVs are the stuff that was so crappy they couldn't sell it to anybody, so they kept it themselves but put it off-shore in something they invented called an SPV. That way it doesn't show up on their balance sheets. The sub-prime crap that is causing all those woes for Deutsche Bank in Cleveland is actually stuff that was good enough to pass off to other banks.)

When the proverbial stuff hit the fan last year, all those high-flying CEOs at Citi and Merrill, etc., were booted out with huge golden parachutes, on top of the outrageous bonuses they were already paid in years past for profits that are now being more than wiped out once the chickens have come home to roost.

The CEO of Countrywide Financial (the bankrupt mortgage lender that is being taken over by Bank of America for pennies on the dollar) made a profit of more than $300 million on company stock that he sold in 2005 and 2006. They crashed in 2007. Does anyone really believe he didn't see it coming? The CEO of Bear Stearns said that his company was doing fine and that it was NOT in bad shape. That was just four days before they were acquired by JP Morgan for pennies on the dollar with a guarantee from the Fed (meaning you and me) that losses up to $30 billion would be reimbursed by the filthy rich American taxpayers, because we having nothing better to do with our money. It's costing us "up to $30 billion" to bail out Bear Stearns. How much is it going to cost us to bail out Lehman Brothers and Goldman Sachs? Because they're next.

P.S. -- To show you how politics works, both Sen. Clinton and Sen. Schumer were quick to praise the Fed's action in bailing out Bear Stearns and in opening up the discount window to investment banks so that they could sell their crappy mortgages to the Federal Reserve, while Sen. Obama, who does not represent New York, wondered why the Fed and the Bush Administration (meaning Secretary Paulson) haven't shown an equal interest in bailing out the homeowners caught up in this scam. I'm not taking sides, I'm just sayin'. This is one of those issues where I have serious reservations about everything that has been done and not done. I have little sympathy for people who took out mortgages they knew they couldn't possibly afford and even less sympathy for the banks that got rich (for awhile) on this criminal enterprise.

[Ninong]

End of the American Empire?

No!

Where's the replacement? China? No way. At least not in the next 50 years or more.

The EU? Not likely, although they will overtake us in GDP only because they keep adding more and more countries. They're not interested in replacing us as a military power because they don't want to spend that kind of money on the military.

Russia? Nyet.

Those are the only potential superpowers for the next 50 years or so. China has growing pains and they will have problems adjusting to democratic rule. That could take them at least another 30 years. The EU is too fractured to do anything significant other than cooperate among themselves on trade. Think of them as a larger version of Sweden.

Russia can't cause trouble by herself. She would have to ally with other countries to become a problem. Right now they're too busy figuring out how this newfangled capitalism works. There are more billionaires living in Moscow than any other city in the world.

[Ninong]

Another point that I brought up in one of my more recent rants is that inflation right now is a lot higher than the government wants to admit. It's definitely running above an annual rate of 10% and probably closer to 15%. How long it will take for that to be reflected in prices is anybody's guess, but that's the real rate of inflation right now no matter what the government tells us. Bernanke is printing money like there's no tomorrow. The money supply is probably expanding at an annual rate of around 15% right now.

As far as recession goes, we're in a recession right now. It probably started in early February. I'm waiting to see if the first quarter (ending March 31st) shows negative growth. By the classical definition, a recession is two consecutive quarters of negative growth. So even if we show only 0.1% growth for the first quarter, then it doesn't count as the first of the necessary two consecutive quarters.

Best case scenario would be that we're already in a recession but that it will last no more than three to five quarters. Worst case scenario would be that it goes on for two or three years. That's probably what the Brits are predicting. They're probably wrong. Let's hope they're wrong.

I believe we're in a recession now but that it will end within six months after the inauguration of President Obama.

[Ninong]

"The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war." -- Andrea Mitchell's husband in a Financial Times op-ed published yesterday.

I just wish this pompous jackass would go away and shut up. This is the moron who recommended adjustable-rate mortgages at the same time that interest rates were at 40-year lows. More than anyone else in this country, he is responsible for the dot-com bubble and the real estate bubble. Now he wants to pontificate on how the current fed should deal with the mess he left them.

P.S. -- Here's a great line from that Greenspan op-ed: "Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked disbelief." That's the closest thing to an admission of incompetence we're going to get out of him. It's clear that he includes himself in "those of us" who are in "a state of shocked disbelief." It's also his way of denying personal responsibility by pretending to be shocked at current developments. I guess you could also call it an admission of his own ignorance and incompetence.

[Ninong]

When the proverbial stuff hit the fan last year, all those high-flying CEOs at Citi and Merrill, etc., were booted out with huge golden parachutes, on top of the outrageous bonuses they were already paid in years past for profits that are now being more than wiped out once the chickens have come home to roost.

The CEO of Countrywide Financial (the bankrupt mortgage lender that is being taken over by Bank of America for pennies on the dollar) made a profit of more than $300 million on company stock that he sold in 2005 and 2006. They crashed in 2007. Does anyone really believe he didn't see it coming? The CEO of Bear Stearns said that his company was doing fine and that it was NOT in bad shape. That was just four days before they were acquired by JP Morgan for pennies on the dollar with a guarantee from the Fed (meaning you and me) that losses up to $30 billion would be reimbursed by the filthy rich American taxpayers, because we having nothing better to do with our money. It's costing us "up to $30 billion" to bail out Bear Stearns. How much is it going to cost us to bail out Lehman Brothers and Goldman Sachs? Because they're next.

P.S. -- To show you how politics works, both Sen. Clinton and Sen. Schumer were quick to praise the Fed's action in bailing out Bear Stearns and in opening up the discount window to investment banks so that they could sell their crappy mortgages to the Federal Reserve, while Sen. Obama, who does not represent New York, wondered why the Fed and the Bush Administration (meaning Secretary Paulson) haven't shown an equal interest in bailing out the homeowners caught up in this scam. I'm not taking sides, I'm just sayin'. This is one of those issues where I have serious reservations about everything that has been done and not done. I have little sympathy for people who took out mortgages they knew they couldn't possibly afford and even less sympathy for the banks that got rich (for awhile) on this criminal enterprise.

Remember this article from December 2006 when Paulson and Bernanke tell us they're bailing out Goldman Sachs. And Lehman Brothers. And all the other crooks who cooked the books to earn obscene bonuses. They should have to pay it all back!

$16 Billion Sachs of Loot

December 13, 2006 -- Wall Street giant Goldman Sachs is set to throw gigantic bags of money at its bankers, traders and stockbrokers this year - lavishing them with more than $16.5 billion in bonus loot, the most ever doled out by a Wall Street firm.

Most of the Wall Street trading houses had a great year - but Goldman's was spectacular, and its blockbuster numbers generated blockbuster bonuses for the fat cats.

Between regular salary and bonuses, the average pay of Goldman employees will be a mind-numbing $622,000 this year - and that includes all the low-end workers.

At the top end of the pay scale, it has been reported that Goldman was likely to pay a "golden 25" managers, bankers and traders at least a cool $25 million each.

But a source close to the firm told The Post that some of the top performers may actually get four times that.

The $100 million bonus babies are in charge of making big bets with Goldman's money on the direction of the prices of commodities, including oil and natural gas. And this year, they won big.

P.S. -- Last year Goldman Sachs' stock (GS) was $250/share. Just a couple of weeks ago they were down to $140/share. They climbed to $151/share Monday thanks to Bernanke's guarantee of $30 billion to bail out Bear Stearns and then they jumped another $24.57 today to close at $175.59 now that they know for sure that the Federal Reserve will cover everybody's losses.

[Ninong]

Greed and the markets
Exposing bloated CEO salaries and compromised corporate ethics

WaMu: Screw customers; save the execs

Around the country, Washington Mutual regularly plays the tough guy with homeowners who fall behind on mortgages. This as foreclosure filings overall rose 60% nationwide in February.

And its involvement in the subprime mess has been tough on stockholders. Since last summer, the company's shares have lost nearly 80% of their value. (Screw the shareholders, too.)

But the bank is a softy when it comes to bonus pay for top brass.

After CEO Kerry Killinger and other top executives missed all or a big part of their bonus pay last year, Washington Mutual wasted little time taking steps to apparently make sure it won't happen again -- even if the mortgage market and the company remain in the tank.

The board decided in February to use different performance yardsticks that could make it look like Killinger and other top executives were doing great jobs -- and all but ensure them millions of dollars in bonuses for 2008.

Those huge losses piling up because of subprime loans and foreclosures? At bonus time, the bank will ignore them.

(They're racking up gigantic losses and their stock is in the tank but they want to make sure their executives get paid gigantic bonuses for doing such a great job of running the company into the ground.)

You can read the rest here.

P.S. -- Somebody should file a class action lawsuit against their board. The outside directors, in particular, have no business going along with this ridiculous nonsense.

[Ninong]

I think the Germans are onto something here:

"Ben Bernanke has completely lost his bearings. The enormous liquidity he is pumping into the economy will create double-digit inflation in six months, just as the dawn follows the night. The European Central Bank is doing the job of a central bank. The Federal Reserve is acting like a bank in a banana republic."

[Samper]

I have never had to really worry or deal with a recession. 2001 didn't directly effect me that I know of. What does this all mean for a broke college student?

[Ninong]

I have never had to really worry or deal with a recession. 2001 didn't directly effect me that I know of. What does this all mean for a broke college student?

Please read this article for a fairly good overview of the financial mess we're in and the potential consequences of the Fed's actions. According to this guy's estimate, total losses in the financial sector could reach $1 trillion, with about 40% of that covered by the government (meaning the taxpayers).

Remember that Alan Greenspan lowered the Fed Funds Rate all the way down to 1% to pull the economy out of the 2001 recession and save Bush's presidency. He kept rates there well into 2003, long after the economy was out of recession. It was these outrageously low interest rates that fueled the housing bubble. This part is explained in detail in that article.

One point they forgot to mention is that for the past several years (at least between 2000-2005), homeowners have been treating their rising home equity as an ATM machine -- refinancing their first mortgage every 18 months and even taking out adjustable lines of credit tied to their real estate. On average, Americans have been spending about 106% of their income for the past several years. That's because many homeowners have been spending 125% of their income over the past several years by constantly refinancing their homes and pulling equity out to buy new cars, etc.

About three-fourths of the economy is based on consumption. If people are forced to live within their means (meaning their salaries and not their home equity), then spending will fall. Less spending equals layoffs equals even lower spending, etc. Foreclosures equal reduced home values, equals more foreclosures, equals even lower home values, etc.

The stock market inflated between 1995 to November 2000 based on the dot.com bubble, which was aided and abetted by Alan Greenspan. When the dot.com bubble burst, the NASDAQ fell 75% (some stocks -- e.g., Cisco Systems -- fell 90% and some went under completely), the DOW fell about 38%, and the market was down three years straight (2000, 2001 and 2002), which is something that hadn't happened since the 1930's. Then the market went up about 24% in 2003.

Unfortnately, the incredibly low interest rates that were available in 2002 and 2003 caused a surge in all sorts of risky home loans. Not only that, jackass Greenspan, in an effort to boost the economy to help Bush's reelection campaign in 2004, recommended that the mortage companies promote these new alternative home loans and said borrowers should consider adjustable rate mortgages. He said that when mortgage rates were at a 40-year low and he himself was responsible for it by lowering the fed funds rate to 1% and keeping it there too long.

Now the housing bubble is deflating. That started in the fall of 2005. And the people who bought houses with 100% financing are walking away because they can't afford to pay their new higher monthly mortgage payments (remember they're adjustable) on their $500,000 house that is now worth only $375,000. That means that the holders of these mortgages (which have been sold and resold several times) are left holding the bag. This part is sort of covered in that article. The insurance companies that insured the bonds that were backed by these risky mortgages don't have the assets to pay off. This is the fault of lax regulation by the SEC. Many of these bond insurers have assets equal to not much more than one or two percent of the face value of the bonds they insured.

The Federal Reserve Bank (meaning Ben Bernanke) stepped in last Sunday to rescue Bear Stearns because (according to the guy quoted in this artilce), if they hadn't, we would have had another financial crash equal to what we had in the 1930's. This guy seriously thinks (and he may be correct) that our entire financial system would have collapsed, sending the country into another depression -- not a recession, a depression.

However, the consequences of this action by the Fed will be felt by us, the taxpayers, for many years to come in the form of higher taxes, higher inflation, etc.

Read the article.

[Ninong]

Here is a serious look at the US subprime mortgage mess by the BBC but it's four months old, so it's outdated. Things are much, much worse now than was anticipated way back in November 2007.

You may prefer this hilarious cartoon explanation of the subprime mortgage mess that was based on that article. It's 45 pages and you have to turn each page. No sound but the text contains 'adult' words. May take a few minutes to load. Highly recommended!

[Samper]

I had no idea things are this serious.

"The effect of all this is a recession and a lower living standard than we would have had without having had this mess," Rosen says. "This generation and the next generation will pay for this."

My wife and I are in debt about 42K right now. The large majority of that is due to attending school. The vehicles are almost paid off but if we come out of school to greet an empty job market we're in big trouble. I have a minimum of four more years to go possibly more and my wife has about a year and a half.

[Ninong]

George W. Bush, Dick Cheney and John McCain are all Republicans. So was Dwight D. Eisenhower. But unlike Bush, Cheney and McCain, Eisenhower thought it was immoral to pass on the current generation's debts to be paid by that generation's children, grandchildren and great-grandchildren.

John McCain, who twice voted against the Bush tax cuts, the majority of which benefit the top 2% once you factor in the elimination of the estate tax, is now campaigning on a platform of making all of those tax cuts permanent, plus reducing the top corporate tax rate from 35% to 25%, plus the complete elimination of the AMT (alternative minimum tax). All of this tax cutting while we're racking up trillions of dollars in debt to wage our 100 Years War in Iraq is immoral. We're borrowing from the Japanese and the Chinese to wage a war that we can't afford to pay for. Our grandchildren will be stuck paying for it.

Let me say right now that I think the AMT is a mess. It should have been indexed to inflation originally, but it wasn't. And I think the estate tax was obscenely high and yes, it amounts to double taxation (but we have double and triple taxation thoughout our economy) but I don't think we can afford to eliminate it completely. Just remember this: every time you eliminate or reduce a source of revenue, you have to either eliminate an equal amount of spending or you have to make up for the revenue lost by passing it on to other taxpayers. Spending under the Bush Administration has increased 42% since he took office in 2001.

Look at it like this. You and your wife buy a house with a mortgage, but instead of paying off the mortgage and leaving your children with a debt-free piece of real estate that they can sell and split up among themselves upon your death, you simply keep borrowing thousands and thousands of dollars every year to cover your current living expenses and then, upon your death, you leave your children a house that has a huge debt that they are required to pay off. That's exactly what the government is doing when it borrows money for current expenses and passes on that debt -- and gigantic interest burden -- to future generations.

It isn't fair to reduce taxes for today's generation at the expense of passing on the burden of paying back this debt to future generations.

[SPasse]

Ninong,

“George W. Bush, Dick Cheney and John McCain are all Republicans. So was Dwight D. Eisenhower. But unlike Bush, Cheney and McCain, Eisenhower thought it was immoral to pass on the current generation's debts to be paid by that generation's children, grandchildren and great-grandchildren.”

Yes Eisenhower is an example of a Republican that I would support, an example of a fiscal conservative that the neocons have no feeling for.

Eisenhower’s Farwell Address is a political speech that should be required reading as, IMO much of our present difficulties are a result of the fact that we ignored its warnings.

http://en.wikisource.org/wiki/Eisenhower%27s_farewell_address

Let us also not forget that it was a Democrat (President Johnson) that violated the trust fund structure of the Social Security Trust Fund by making it part of the General Fund. Once that cookie jar had been opened, putting the lid back on would have been much more difficult than not violating it in the first place.

Interestingly, it was Johnson’s desire to fund both the Great Society programs and the Vietnam War, simultaneously that put him in that predicament. (Even Johnson did not believe that massive national debts were kosher)

My sincere hope is that if Obama is elected, that he has the “audacity” to lay the truth in front of the American in no uncertain terms and to do so in a manner that will build a consensus for change.

In spite of our present “situation” if we really do come together as a people and address this as the national crisis that it is, that we can rise above it.

Regards,

Scott (A Proud Member of “Republicans for Obama")

[Ninong]

Let us also not forget that it was a Democrat (President Johnson) that violated the trust fund structure of the Social Security Trust Fund by making it part of the General Fund.

Regards,

Scott (A Proud Member of “Republicans for Obama")

The Social Security Trust Fund was established in 1939 to receive monies collected for Social Security through payroll taxes. The monies in this fund are managed by the Department of the Treasury; they are not, nor have they ever been, put into the "general operating fund."

The Social Security Act specifies that the monies in the fund may only "be invested in securities backed by the full faith and credit of the Federal government," such as treasury bills, treasury notes, and treasury bonds, as well as special issue bonds.

The monies that are collected for the Social Security Trust Fund go into your left pocket as treasuries and then the treasuries go into your right pocket where you can spend the money on whatever wars are in vogue that year. You pay back this money only as it is needed to fund Social Security benefits. As the Trust Fund redeems bonds, you pay back the money you "borrowed" to invade countries that had nothing to do with 9/11.

It's a confusing issue but the Social Security monies don't actually go into the General fund. They stay in government bonds in a separate Social Security Trust Fund. However, money invested in government bonds can be used by the government to fund whatever they please. And they do exactly that. It's only when the bonds are redeemed that the money is "paid back." Right now the annual receipts from Social Security exceed the annual benefits by $185 billion but that situation will change as the population receiving benefits grows larger and lives longer and the population contributing to the program becomes relatively smaller.

A SUMMARY OF THE 2008 ANNUAL REPORTS

Social Security and Medicare Boards of Trustees

A MESSAGE TO THE PUBLIC:


Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This message summarizes our 2008 Annual Reports.

The financial condition of the Social Security and Medicare programs remains problematic. Projected long run program costs are not sustainable under current financing arrangements. Social Security's current annual surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation retires. Medicare's financial status is even worse. This year Medicare's Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures than it receives in taxes and other dedicated revenues. The difference will be made up from general revenues which pay for interest credits to the Trust Fund. Growing annual deficits are projected to exhaust HI reserves in 2019 and Social Security reserves in 2041. In addition, the Medicare Supplementary Medical Insurance (SMI) Trust Fund that pays for physician services and the prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that grow substantially faster than the economy and beneficiary incomes over time.

The drawdown of Social Security and HI Trust Fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident. For the second consecutive year, a "Medicare funding warning" is being triggered, signaling that non-dedicated sources of revenues—primarily general revenues—will soon account for more than 45 percent of Medicare's outlays. The President recently proposed remedial action pursuant to the warning in last year's report and, in accordance with Medicare statute, a Presidential proposal will be needed in response to the latest warning.

We are increasingly concerned about inaction on the financial challenges facing the Social Security and Medicare programs. The longer action is delayed, the greater will be the required adjustments, the larger the burden on future generations, and the more severe the detrimental economic impact on our nation.

Medicare

As we reported last year, Medicare's financial difficulties come sooner—and are much more severe—than those confronting Social Security. While both programs face demographic challenges, rapidly growing health care costs also affect Medicare. Underlying health care costs per enrollee are projected to rise faster than the wages per worker on which payroll taxes and Social Security benefits are based. As a result, while Medicare's annual costs were 3.2 percent of GDP in 2007, or nearly three quarters of Social Security's, they are projected to surpass Social Security expenditures in 2028 and reach 10.8 percent of GDP in 2082.

Moreover, this is the second consecutive year that the Medicare Report triggers a Medicare funding warning. Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 the Medicare Report must include a determination of whether the difference between total Medicare outlays and dedicated financing (such as premiums and payroll taxes) exceeds 45 percent of total outlays within the first 7 years of the projection period (2008-2014 for the 2008 Report). The Act provides that an affirmative determination in two consecutive reports be treated as a "funding warning" for Medicare that would, in turn, prompt a Presidential proposal to respond to the warning and expedited Congressional consideration of such proposal. The 2008 Report projects that the difference will surpass 45 percent in 2014 and therefore again makes a determination of excess general revenue funding (as prior Reports did in 2006 and 2007). This determination triggers the second consecutive Medicare funding warning. Under the provisions of the 2003 Act, this calls for a Presidential proposal to respond to the warning within 15 days of the submission of the Fiscal Year 2010 budget and for Congress to consider the proposal on an expedited basis. This provision is expected to bring additional attention to Medicare's impact on the Federal budget.

The projected 75-year actuarial deficit in the Hospital Insurance (HI) Trust Fund is now 3.54 percent of taxable payroll, down slightly from 3.55 percent projected in last year's report. Were it not for new methods for projecting immigration that were implemented this year, the HI actuarial deficit would have increased rather than decreased. Despite the slight improvement, the fund again fails our test of short-range financial adequacy, as projected annual assets drop below projected annual expenditures within 10 years—by 2013. The fund also continues to fail our long-range test of close actuarial balance by a wide margin. The projected date of HI Trust Fund exhaustion is 2019, the same as in last year's report, when dedicated revenues would be sufficient to pay only 78 percent of HI costs. Projected HI dedicated revenues fall short of outlays in this and all future years. The Medicare Report shows that the program could be brought into actuarial balance over the next 75 years by an immediate 122 percent increase in the payroll tax (from 2.9 percent to 6.44 percent), or an immediate 51 percent reduction in program outlays or some combination of the two. As with Social Security, adjustments of greater magnitude would be necessary if changes are delayed or phased in gradually. Larger changes would also be required to make the program solvent on a sustainable basis beyond the 75-year horizon.

Part B of the Supplementary Medical Insurance (SMI) Trust Fund, which pays doctors' bills and other outpatient expenses, and Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year's expected costs. However, expected steep cost increases will result in rapidly growing general revenue financing needs—projected to rise from 1.3 percent of GDP in 2007 to 4.1 percent in 2082—as well as substantial increases over time in beneficiary premium charges.

Social Security

The annual cost of Social Security benefits represented 4.3 percent of Gross Domestic Product (GDP) in 2007 and is projected to increase to 6.1 percent of GDP in 2035, and then decline to 5.8 percent of GDP by 2048 and remain at that level. The projected 75-year actuarial deficit in the combined Old-Age and Survivors and Disability Insurance (OASDI) Trust Fund is 1.70 percent of taxable payroll ($4.3 trillion in present value terms), down from 1.95 percent projected in last year's report. This decrease is due primarily to changes in projection methods. Although the combined OASDI program passes our short-range test of financial adequacy, the Disability Insurance Trust Fund does not; in addition, OASDI continues to fail our long-range test of close actuarial balance by a wide margin. Projected OASDI tax income will begin to fall short of outlays in 2017, and will be sufficient to finance only 78 percent of scheduled annual benefits in 2041, after the combined OASDI Trust Fund is projected to be exhausted.

Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 14 percent in payroll tax revenues (from 12.4 percent to 14.1 percent) or an immediate reduction in benefits of 12 percent or some combination of the two. Ensuring that the system is solvent on a sustainable basis beyond the next 75 years would require larger changes, because an aging population and increasing longevity cause the projected current-law OASDI cash-flow deficits to be substantially larger after the 75-year projection period than they are on average during the period.

The projected actuarial deficit in the OASDI Trust Fund over the infinite future is 3.2 percent of taxable payroll (1.1 percent of GDP), or $13.6 trillion in present value terms. The system could be brought into actuarial balance over this time horizon with an immediate increase in payroll tax revenues of 26 percent (from 12.4 percent to 15.6 percent) or an immediate reduction in benefits of 20 percent, or some combination of the two.

Conclusion The financial difficulties facing Social Security and Medicare pose enormous challenges. The sooner these challenges are addressed, the more varied and less disruptive their solutions can be. We urge the public to engage in informed discussion and policymakers to think creatively about the changing needs and preferences of working and retired Americans. A national conversation and timely political action are essential to ensure that Social Security and Medicare continue to play a critical role in the lives of all Americans.


P.S. -- Lyndon Johnson didn't make Social Security part of the General Fund. A change was implemented at the end of the Johnson administration (1969) that altered how the fund was accounted for in the federal budget but did not change the actual operations of the fund itself. The change that Johnson implemented was reversed by Congress in 1990 anyway.

Beginning in fiscal year 1969, Social Security and other Federal programs that operate through trust funds were counted officially in the budget. This was done administratively by President Johnson. At the time Congress did not have a budget-making process. In 1974 Congress adopted procedures for setting budget goals through passage of annual budget resolutions. Like the budgets prepared by the President, these resolutions were to reflect a "unified" budget that included trust fund programs such as Social Security in the budget totals.

Beginning in the late 1970s, Social Security faced financial problems, and over a period of time legislation was enacted to restore the financial health of the program. However, because the Federal budget deficit remained large, interest in reducing Social Security spending continued. This routine consideration of Social Security constraints led to concerns that cuts in Social Security were being proposed for budgetary purposes rather than programmatic ones.

In response to this concern, a series of measures were enacted in 1983, 1985, and 1987 making the program a more distinct part of the budget and permitting Congressional floor objections (points of order) to be raised against budget bills containing Social Security changes.

Late in the decade, when Social Security income substantially exceeded outgo, critics argued that the program was masking the size of the budget deficits. In response, Congress in 1990 excluded Social Security income and outgo from all calculations of the Federal budget, including the deficit or surplus. This measure applied to the budgets prepared by the President, to the Federal budgets formulated by the Congress, and to the budget process provisions designed to reduce and control the budget deficits (with the exception of Social Security's administrative expenses which can be reduced to bring spending down to prescribed limits). Since Social Security taxes and benefits now are not part of the budget, the fiscal constraints of the budget process technically no longer apply (with the exception of administrative expenses). Concerned that this would weaken Social Security's financial condition, Congress in 1990 established separate rules for the House and Senate that attempt to make it difficult to bring measures for a vote that would weaken the financial condition of the program by reducing revenue or increasing spending without offsetting changes.

[Ninong]

Here is a serious look at the US subprime mortgage mess by the BBC but it's four months old, so it's outdated. Things are much, much worse now than was anticipated way back in November 2007.

You may prefer this hilarious cartoon explanation of the subprime mortgage mess that was based on that article. It's 45 pages and you have to turn each page. No sound but the text contains 'adult' words. May take a few minutes to load. Highly recommended!

UBS Sub-prime Losses Now Total $37 Billion!!!

PARIS — UBS, the largest Swiss bank, said Tuesday that it would write down another $19 billion related to the American real estate market and said that its chairman, Marcel Ospel, would step down.

UBS said the write-down would result in a first-quarter loss of about 12 billion Swiss francs, or $12 billion, and that it would seek new capital of about $15 billion, the second time it has announced plans to raise money since the credit markets began to contract.

UBS has written off $37.1 billion in losses related to the American housing market, including the $18.1 billion it wrote off in the third and fourth quarters of 2007, a bank spokesman, Dominik von Arx, said in Zurich.

That's $37 billion in sub-prime losses reported by just one bank! And it's not even a U.S. bank! Total announced losses worldwide are already well over $200 billion! That total will probably exceed $400 billion before all is said and done and the total economic impact will be well over $1 trillion. All because the SEC and Federal Reserve allowed the banks to go berserk!

(P.S. -- Sept. 14, 2008: Total announced losses are now well over $400 billion and could easily go twice that high if we include Fannie Mae and Freddie Mac. Our (the taxpayers) exposure there could be anywhere from $50 billion to $200 billion. They hold a combined $5 trillion in mortgages and a significant percentage of those are on homes that are upside down.)

Believe it or not, the stock market has decided that things are so bad right now we must be near a bottom, so the Dow is up more than 250 points right now. Analysts are actually attributing this rally to the UBS announcement that they have taken another $19 billion in write-downs. Apparently the thinking is that things can't possibly get any worse, therefore lets all start buying again. I think this rally is premature by several months.

P.S. -- Sort of related: Brand new condos in Oakland were sold at auction this past Sunday for 25-34% below original prices. A 3-BR unit that had been priced at $806,000 went for $534,000. This same thing has been happening for more than a year now in the Miami-Ft. Lauderdale market. Home prices in Alameda county are now down 21% compared to last year. The same is not true for San Francisco where prices really haven't fallen at all. Sales there are down but prices are holding firm.

[Ninong]

Hi All,

Twice recently, the BBC has had guest economists talk about our present difficulties as more than just a recession, but rather the end of the American empire.

Granted I have a weakness for dark thoughts and perhaps this is also a little “wish fulfillment” on the part of the British as they have witnessed their empire dissolve…

But are things possibly really that bad?

Regards,

Scott

Scott,

The May 12 issue of Newsweek has an extensive article on the decline and fall of the American Empire.

P.S. -- The author, Dr. Fareed Zakaria, has a Ph.D. from Harvard and he lives in New York city, so we can discount everything he says since he's obviously an Obama-loving liberal elitist in spite of what his Wikipedia profile says.

Zakaria likes to publish academic articles on the real causes of discontent in the Arab world instead of simply posing for photo-ops with dumb white people while promising to save them 18 cents a gallon on gasoline for three months if they'll just vote for Hillary. It wouldn't surprise me one bit if he were to say that Hillary's threat to "obliterate" an Islamic country isn't conducive to productive discourse aimed at resolving problems in the region.

Hillary pays no attention to economists, so you know she's not going to pay attention to an elitist liberal with a Ph.D. in government from Harvard, of all places. Hillary's a Yalie, just like Bush, and poppy Bush, and grandpappy Bush. At heart she's still a Goldwater Girl. In your heart, you know she's right. In your guts, you know she's nuts. I remember that from the 1964 campaign. Barry Goldwater's slogan was, "In your heart, you know he's right." To which the Democrats appended, "In your guts, you know he's nuts."

[Ninong]

No More Bear Stearns-Type Bailouts

As I predicted in this forum many months ago, Lehman Bros. has now failed. They will NOT be bailed out by the government and no other financial institution in their right mind would touch them at any price. They are totally and completely upside down and they have been lying about their condition for several months now. They will file for bankruptcy tomorrow morning.

Merrill Lynch, another bunch of crooks and liars, seeing the handwriting on the wall, has agreed to be taken over by Bank of America. This serves them right for all the lying they did pushing phony dot.com stocks. Who's left? Morgan Stanley? Can they survive on their own?

Bank of America picked up Countrywide Financial a few months back for a mere $2.5 billion. They're paying $44 billion for Merrill, supposedly $29 a share. That's a hefty premium over Merrill's $17 a share closing price Friday but Merrill was selling at $50 a share in May and more than $90 a share early last year.

And Washington Mutual, which in not in the same business but which is another institution that has been lying right and left, is about to fail. Their stock, which traded at $43.00 a share in 2007 is now trading at $2.24 a share and that's much more than it's really worth. They're stuck with a boatload of crappy mortgages they made that are upside down.

The government took over both Fannie Mae and Freddie Mac last week. As usual, the shareholders were screwed. They got nothing. That's likely to cost us (taxpayers) a minimum of $50 billion and possibly a lot more. What I don't understand about this business is why the lying execs at Fannie and Freddie (they cooked the books!!!) are being sent on their merry way with millions of dollars in bonuses? Since we're the ones who will be paying for this bailout, why do we have to pay them millions in bonuses? They're not in charge of anything anymore. Both of these outfits are being run by the government now. We booted their lying asses out the door.

P.S. -- The Bear Stears bailout was illegal but there was no other way out. The government could not allow them to fail. They could have brought down the entire U.S. financial markets system.

[Ninong]

Stock Markets In Turmoil... Again!

As expected, the world's stock markets are falling today. In New York, the Dow Jones Industrial Average is currently down more than 300 points and that's just within the first 20 minutes of trading. The Dow, the S&P500 and the NASDAQ are all down close to 3% so far.

London is down about 5% right now, Paris is down close to 5% and Frankfurt is down almost 4%. The major Asian markets were closed today for a holiday.

Crude oil is plunging and is now well below $100 at $95.64/bbl. With the world's economies going down the toilet, there won't be as much demand.

And, just think, we haven't even begun to feel the full effects of the foreclosures yet. All we have felt so far is the collapse of the derivatives market that was a phony pyramid scheme cooked up by the crooks at all the major financial institutions who pawned off these 100% loan-to-value mortgages sold to people who could never afford the jacked up payments once the loans reset. No one knows for sure just how much leverage there was in this crooked scheme. All they know now is that somebody is left holding the bag and it's a pretty empty bag at that.

In some newer subdivisions in California more than 25% of the homes have been foreclosed already. That depresses the value of the remaining homes, resulting in even more foreclosures. Which depresses the real estate market in general. About a year ago I predicted that the national real estate market could drop as much as 20% and the overheated markets, such as California and Southern Florida, could drop 30%. Boy, was I ever optimistic. It now looks like the national market could easily drop 25% and the overheated markets will probably drop at least 40%. Certain counties in California have dropped 30% just in the past 12 months. I remember when real estate in Houston dropped 40% in one year. That was a long time ago during one of the oil busts. I know my uncle was freaking out at the time.

P.S. -- I guess I should have said at the top of this post that the reason the markets are in turmoil today is due to the Lehman bankruptcy and Merrill Lynch selling themselves to BofA.