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Hussman: "The Banking System Is Still Quietly Insolvent"
Nothing reall new here, just more confirmation from John Hussman, who tends to be somewhat more diplomatic than us, in highlighting what all those who care already know (the rest are buying AIG, Fannie and Freddie): the banking system is completely insolvent. And to make matters worse everyone in this administration from the very top, to the regulators, to the accountants, to the investors, and to the firms themselves, is in on it. The only thing that makes it palatable - the complete lack of any information about just how bankrupt America is and will continue to be for years, even as we hear every single day from the administration propaganda business stations how everything is doing great. Ignore all the talk about an economic recovery - with the cornerstone of the financial system still in default if it weren't for a variety of accounting gimmicks, not to mention the trillions in fiscal and monetary boosts, and the transfer of resurrection costs from the present to the future via the steep debt curve, real GDP would be down 10% or more, and all public financial firms would be undergoing liquidation (and their management teams likely in prison). Of course, public recognition of just how much of a ponzi the entire economy has become is never a good thing going into midterm elections. And with the Fed directly and indirectly monetizing, with Primary Dealers complicit in realizing full well their 4th Hamptons house would be on the block if they don't, with China forced to keep buying our debt as the alternative is a nor so glorious revolution, we all not only live in Wonderland, but are fully aware of this sad reality, yet happily will continue to do so until the day this lie can not be rolled into tomorrow.
Hussman's conclusion:
My impression is that investors are deluding themselves about the solvency of the banking system. People learned in the 1930's that when you don't require the reported value of assets to have a clear and tangible link to the value that the assets would have in liquidation, bad things happen. Yet this is what regulatory and accounting rules are allowing for the banking system at present. While I do believe that bank depositors are safe to the extent of FDIC guarantees, my impression is that the banking system is still quietly insolvent.
And some more thoughts from John Hussman on the Moral Hazard/Extend and Pretend doctrine which in many years is all that the Obama administration will be remembered for.
With regard to credit conditions, the U.S. financial system continues to pursue a strategy of "extend and pretend." A year ago, the Financial Accounting Standards Board (FASB) suspended rule 157, which had previously required banks to mark their assets to market value when preparing balance sheet reports. The basic argument was that fair values were not appropriate because there was "no market" for troubled assets. Certainly, the FASB could have implemented something at least modestly reasonable, such as 2-year or 3-year averaging, but instead, they changed the rules to allow "substantial discretion" in the valuation of bank assets in their financial reports.
To a large degree, the idea that there was "no market" for troubled assets was false even at the time. Last year, Dean Baker of the well-regarded Center for Economic Policy Research (CEPR) testified before Congress, observing "There has been considerable confusion about the nature of the troubled assets held by the banks. While banks do hold some amount of mortgage-backed securities, these securities are in fact a relatively small portion of their troubled assets. The troubled assets on the banks' books are overwhelmingly mortgages, both first and second or other junior liens, not mortgage-backed securities. The FDIC has acquired large quantities of mortgages from its takeover of several dozen failed banks over the last year. It auctions these assets off on an ongoing basis. The results of these auctions are available on the FDIC website. Non-performing mortgages typically sell in these auctions at prices in the vicinity of 30 cents on the dollar." [This is a topic we first discussed in April of 2009 - we are happy that our warnings are finally reaching a far broader audience].
He continued, "It is not clear on what basis these auctions can be said not to constitute a market. While the downturn and the constricted credit conditions affect the market, it is simply inaccurate to claim that there is no market for these assets. The major banks are undoubtedly not pleased at the prospect of having to sell off their loans at these prices, but this merely indicates that they are unhappy with the market outcome, just as a homeowner might be unwilling to sell her house at a loss. However, the unhappiness of the seller does not mean that there is no market."
The impact of "extend and pretend" is to create a gap between the reported value of assets and the value they would have on the basis of the cash flows that those assets can reasonably be expected to generate over their maturity. In order to avoid having to restate assets, banks have allowed an increasing gap to develop between the volume of delinquent loans and the volume of loans actually in foreclosure, creating a growing "shadow inventory" of impaired but unmodified and unforeclosed loans.
Moreover, regulatory changes over the past year have affected what actually gets reported as "troubled." As the New York Times recently observed, " A bank owed, say, $4 million on a property now worth $3 million would previously have had to classify the entire loan as troubled. Now it can do that to the $1 million difference only." In effect, even though impaired loans tend to sell at only 30-50 cents on the dollar (reflecting a modest haircut to the amount typically received in foreclosure), banks can choose the amount of assets it reports as troubled simply by choosing what value to assign the property while it holds the bad loan on its books.
While it's interesting that credit card delinquencies have eased off modestly in recent months, this is not necessarily a healthy sign. [we wonder which GAAP loophole banks are exploiting for this piece of "great" news.] Even in the third quarter of 2009, TransUnion reported that consumers delinquent on their mortgages but current on their credit cards increased by 6.6%. In effect, people have been choosing to pay their credit cards in priority to their mortgages.
As for policy efforts to reduce delinquencies, I've long argued that it is a bad idea for policy makers to announce delinquency prevention plans that have, as their centerpiece, publicly subsidized reductions in mortgage principal. It's one thing to extend the loan in a way that preserves its present value, by swapping a claim on future appreciation in return for principal reduction, but it's quite another to offer to cut the principal outright. The reason is that instead of confining the assistance to presently troubled borrowers, you create a whole new set of borrowers who then choose to be troubled in order to get the assistance. According to a University of Chicago study, "strategic defaults" - where people choose to default on their mortgages even though they can afford to pay - accounted for 35% of all residential defaults in December 2009, up from 23% in March 2009. Offering public subsidies for this behavior, when too many homeowners are already legitimately struggling, does not smack of a bright idea.
The New York Times recently provided a good picture of how the delinquency situation stood at the end of 2009 (based on FDIC data):
Much more in the original piece by Hussman.
The take home is that the "success" of the USA is now based on one big lie: its economy, its finance, its consumer culture, even its integrity and reporting standards. Unfortunately, without historical exception, this is a preamble into various forms of armed conflict, either domestic or external, once the lie is sufficiently grasped by the majority, who care to read between the lines of the inexhaustible daily rally.
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"The take home is that the "success" of the USA is now based on one big lie: its economy, its finance, its consumer culture, even its integrity and reporting standards."
The big lie you guys haven't even faced yet and probably never will, you can't have a system based on compounding interest (exponential growth) and hope it to be around long-term. Usually a generation or 60-80years is the max you are going to get out of it.
Nobody wants to look at the truth, how many people on this blog think if they would just lockup enough people or put in regulations or enforce regulations then everything would have been ok? Or the gold bugs that think you just need a gold standard. I would say 99.9999%. Sorry none of those things are going to help the system long-term as long as you are willing to lend and borrow at a rate of compounding interest.
The Truth of the matter is virtually none of you want the Truth, you want to act like this is an event, no this is the system. You have a system that demands exponential growth, when you fail to fed it exponential growth it fails and people die... last time 100 million this time it will be billions because of humans stupidity in thinking they can beat Math.
Humans have been lying since way way way before your grandfather's grandfather was even a thought.
The books NEVER balance and NEVER have and NEVER will!!!!!
"Of course, public recognition of just how much of a ponzi the entire economy has become is never a good thing going into midterm elections."
The Whole financial system is a ponzi scheme... last one out is the biggest loser.
I think the Amish have a great approach. No debt, all cash, no video games or other distractions. Plus, they will always be able to feed themselves.
Now where did I put those overalls?
People have a choice, live like they do with the system they have in place.... it will run for about 60-80 years max, it will crumble and many people will die. The alternative is no easy road either, that means humans will live with what they need and not what they want.
Most religions figured the flaw of the equation thousands of years ago, modern man is nothing more than hairless monkeys that can't do basic Math.
if only the Amish were into porn, i'd join
LOL, it is my understanding that they do have sex,but I could be wrong..
Answering Mako above, I have studied the Amish and their lives are not that hard. Due to hundreds of years of practice and community continuity, they live more efficiently than any community that I know of. I have plowed a field with a horse and it is a very pleasant experience. Quicker than you would think too. And as the Amish like to state: "horses beget more horses, tractors beget nothing.
I like the way they self insure and it turns out a wise move to have opted out of social security. I am transitioning myself to an amish-modern hybrid lifestyle, combining the best of both world's. Not being of the amish religion allows me to do this. I have decided on horses for plowing and not tractors.Will rent or borrow tractor to get things started, which is the hard part. Will use electricity, led lighting, Microwave ovens,etc
Will use manual washing machine as we had one as a kid and its no big deal. In the early days of working our farm, I used a bucket to wash clothes in, and that worked fine too for farm purposes...
Mako
What's your blog address again?
http://worlddarkestdays.blogspot.com/
This Mako is making lots of sense, he just needs to explain how compound interest increases the gold supply.
Mako, please stop sugar coating reality and take off those rose-colored glasses.
The Truth is sometimes not too pleasant, matter of fact it can be downright harsh. Either way Truth is going to smack about 7 billion people in the face whether they want to know the Truth or not. It won't be as pretty as last time the equation collapsed.
I was explaining the equation to my sister this weekend. I think I scared the crap out of her.
Very scary indeed.
The tragedy is that the winners fail everyone when there is a zero sum gain. The value of having a society based on ethics and moralis is that everyone has the same chance to get on. What we dont have is the chance for the winners to get out of the game when the winners have won. We just have the chance for the losers to stay losers for life. This way, the winners (top quartile) pay 90% of the taxes and the bottom three quartiles have the votes to enforce borrowing for their own bail outs. I have posted this analogy elsewhere, but I like it so much I will post it here again!
"You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for,that my dear friend, is about the end of any nation.
You cannot multiply or create wealth by dividing it."
Dr. Adrian Rogers, 1931
The secret is to get the bottom three quartiles sharing the wealth and the tax burden of bankrupt policies at the Fed and the pork barrel politicians!
Actually, there is an easy solution to keep a debt-based system going - they called it a Jubilee in ancient times. Periodically, whether by government mandate or economic depression the excess debt must be purged from the system. True, there are winners and there are losers when a debt jubilee takes place but that mechanism is required to restore equilibrium to the overall economic system.
Mako believes in the compound interest paradox.
(a) There is no requirement to pay loans back in one lump payment, and
(b) creditors can spend the money they receive from loan repayment back into the general economy.
Aka when you pay back debt, the money you paid back doesn't suddenly disappear. It simply goes to the creditor. The creditor then spends, saves, or invests that money. Most of that money goes back into the economy and is available to another debtor who can perfrom services to obtain the use that money to pay back his debt. There can easily be more debt than money.
Which is perfectly rational until its not.
Hence depressions, busts , debt jubilees , defaults and wars.
Take your pick. Not every creditor wants to take a haircut to zero on some baby-boomers negative equity McMansion. Animal spirits : theyre a bitch when you build a system that cannot live in perpetuity.
My objection was to Mako's contention that any monetary system (including a hard money/commodity money system) is unsustainable dues to the compound interest paradox.
It's not.
Exactly! But tough nuts for them, the risk you run being a capitalist is that your compounding principal + interest outruns your debtor's ability to pay. It's on of the reasons they get to charge interest in the first place.
This type of profit/loss dichotomy will never go away and is the cause of the wave-like motion of growth in a market economy. Credit expansion can exaggerate the upward leg, temporarily, that's it.
Mako and others, I've been working on a short & succinct manifesto that has two-fold aims:
I'm trying to tighten it up so that it provides a quick & easy read for any & everyone - informed and uninformed alike. Comments, criticisms & helpful suggestions would be greatly appreciated.
***
Don't allow yourself to be placed in a position of defending that which is obvious & self evident. It is the odious task of economic holocaust deniers to take the morally repugnant position of defending crimes committed against humanity.
The historical record of usury is quite clear, with specific admonishments dating back over 2,500 years:
(Exodus 22:25-27)
25If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.
26If thou at all take thy neighbour's raiment to pledge, thou shalt deliver it unto him by that the sun goeth down:
27For that is his covering only, it is his raiment for his skin: wherein shall he sleep? and it shall come to pass, when he crieth unto me, that I will hear; for I am gracious.
The exponential math is irrefutable; compounding principal+interest always outruns loan serviceability. Thus, the end result is preordained: usurers take possession of forfeited real property and productive assets pledged as collateral while borrowers are reduced to a state of debt peonage.
Deniers are merely earning their respective thirty pieces of silver as paid apologists for their banking masters. Let deniers make ridiculous spectacles of themselves attempting to explain the unexpected hoocoodanode.
I'll quote myself from our previous, brief discussion:
Knock gold bugs/sound money advocates all you want, but absent in your posts is an explanation of how a finite pool of capital with a market-determined rate of interest can't impose a real limit on growth that would otherwise go exponential. Under sound money without government backstops the debt just cannot pyramid on top of itself the way it needs to to go exponential.
How does compound intrest increase the gold supply ?
I live two lives: ZH "reality" and keeping my mouth shut when I'm sober.
Anybody notice the irony of the publication date?
http://ndn3.newsweek.com/media/8/041910_DOMcvr.jpg
Gonna be a lot of protestors with guns in DC then, too.
Holy mackeral, now I've seen everything. Please tell me that's really from The Onion.
It that's not an ultra-bad contrary signal, what is?
Daniel Gross is the clown who wrote 'Why Bubbles Are Great For The Economy'. You can't make this stuff up.
Note to self: Change text of cynical quote regarding credibilty to "The only honest professions left are politics, professional wresting and writer for Newsweek Magazine."
Stop the planet, I want off...
Just when I was ready to capitulate and resign myself to DOW 36000 by March 2010, the ultimate trend-reversal confirmation. Thanks.
this magazine issue will be historic. i will be buying and saving a copy of it as an investment.
But Tyler... what do you REALLY think?
Hussman is so logical and clear, but hard to make money listening to his advice. But he is a voice of sanity amidst all the noise and stupidity. Must read for me every Monday morning.
Moin from Germany,
compare this kind of "reality" with
Cramer´s Bull Case For Banks.....http://immobilienblasen.blogspot.com/2010/03/cramers-bull-case-for-banks-i-can-smell.html
Jim Cramer is something of a sociopath.
Unlike gold, there is no "scarcity" in the banking industry because barriers to entry are not THAT great.
You round up capital and create a de novo. Pretty simple.
AND...you get a clean balance sheet in the Year 2010.
Now THAT is a strategic advantage!
Of course, public recognition of just how much of a ponzi the entire economy has become is never a good thing going into midterm elections.
Actually, if this happened reasonably soon Obambi and The Pelosicrats could probably successfully pin it on George Bush (like, well, pretty much everything bad that has happened since 1/20/09). In fact, it could be one of the last times such spin might actually work (that is, assuming it's expiration date hasn't already come and gone).
So I really don't think that's it. It's probably the realization that such a revelation would instantly produce a whole lot of pissed off "great unwashed", that there's a whole lot of lamp posts in Washington DC, and that there never seems to be a shortage of rope when it's needed.
PS: Hussman is an absolute must read.
Speaking of govt. propaganda, the newest Monthly Treasury Statement just hit the streets. Can anyone tell me, in the Outlays section, what the $85.75 billion reversal is under Treasury securities payments? That's a pretty big burrito to call "Other," and drastically changes the whole balance picture for the monthhttp://www.fms.treas.gov/mts/mts0310.pdf
It may be "quiet" but it's still obvious. It's all part of extend and pretend.
It has been extend and pretend since the beginning. It's all based on enough brick being put into the pyramid scheme at an exponential rate. Long-term unsustainable.
Nothing has changed, this is what has been going on for thousands of years.
Get your ZeroHedge extend and pretend uni-sex swim wear! Just in time for summer.
http://img.ttmimg.com/images/product/images/091207/3f/091207220434151486pxwx6w_130.jpg
Something is different this time, Its called Hubbert's Peak. Billions of people depend upon turning oil into food, otherwise known as modern agriculture (and I know you are well aware of this fact, just restating so that folks do not forget)
Many other dependencies, of course, that billions of people have on cheap, abundant oil.
Of course the banking system and most of the banks are insolvent. Nobody's dumb enough to believe they're not. The question has become who's dumb enough to believe it matters. The gaping value hole out of which all these cretins have pulled big bonuses for decades will be filled in with the sweat of salaried taxpayers and the accrued savings of the old and honest. Suckers!!!!
If Hussie is so smart, how come he can't make any money? Hussman Strategic Growth Fund is a joke.
Moin,
you are really "funny".......
http://www.hussmanfunds.com/pdf/hsgperf.pdf
http://www.hussmanfunds.com/pdf/hstperf.pdf
Your choice of strategies in the Casino, sir:
Insane, nonsensical and criminal: make money up all night at roulette wheel.
Sane, rational and sensible: preserve capital and stay away from tables.
The verdict on this sort of craziness epidemic takes years, certainly not the period of time from March 2009 to now.
Does this mean Ann Margaret is not coming?
http://www.youtube.com/watch?v=WAvWQa64B8M
John Hussman aka. Captain Obvious
This is great writing. I love your soul dude.
I added "resurrection costs" to my lexicon today.
What I love about that quote is that it points to something greater. The US, Europe and China are three interconnected Wonderlands, each having to accede to the others economic and social reality because to say 'no' would cause the entire planet's economic system to collapse. In a strange way the bankers may have achieved peace in our time by creating a new system of mutual assured destruction to replace the cold war nukes.
As a result we are living in an economic system that has no correlation to Smith or Marx. There is no invisible hand or apocalyptic zero-sum struggle. Production, consumption, leisure and labor are tied to nothing. Welcome to the new global wonderland.
So we have arrived, globally, into the era of the simulacra, the truth that hides the truth that there is no truth.
Insolvency? Irrelevant.
Balanced books? Accounting always was a fiction, an oppressive metanarrative.
Currency? The culmination of the era of the sumulacra. The ultimate expression of productive capacity gone haywire, where the amount of money (and goods, witness pollution) in circulation does not correspond to any truth (any real need) at all.
I bet it is worse than what we think. I bet the charts and reports, as bad as they look, are profoundly meaningless, that they have lost track of everything they created through "printing" a looong time ago.
Scuse the rant, but it is ranting time...has been since I was born, just catching up to the curve.
Yep. Baudrillard gets a cookie.
And in a strange way, this is comforting. Fify years ago this would have resulted in a world war. It means that we as a species, thanks to globalization, has arrived to a point of safety where the metanarratives are dead. Money and wealth have ceased to be defined as objects of nationalist, racial or class struggle but have been transformed into floating symbols that each of us has the freedom to tweak and define or even ignore.
Its heady stuff. The Great Depression then becomes nothing more than a clash of illusory narratives that led to mutual destruction as each trading block locked its doors to its neighbors after making apocalyptic demands based on how each defined money and wealth. By removing meaning theres nothing 'solid' to crash on, so everything then harmlessly and safely floats.
I'm going to have a beer and gaze at my navel for a while ...
Or so it would seem. Locally, little "t" truth is that there is a lot of suffering. Beyond the obdurate truths of no shelter, healthcare, safety or food; communities, businesses, and identities are being destroyed. If you take the deconstruction story to the next place, the destruction is necessary to make new stories possible. The absurd accounting may make for a soft landing, shielding us from global strife while we settle local discontinuities/disruptions/conflicts, but I am not going to count on it. Interesting thesis you were playing with. Enjoy navel gazing in wonderland! At least wonderland is enchanted. I will go find some red wine now...
I love you guys. Snif.
Its called "postmodernism". It destroyed the study of language first, then history. Now its spread to business as well. It is the purposeful destruction of truth. And remember: When truth is gone, all that remains is power.
I am only arguing for the sake of it. Take it to the next step and some PoMo types will tell you that "Knowledge" is how power codes bodies to do society's bidding. If there is power, it is being practiced through the production of knowledge. Economists are experts competing for the definition of the situation as a way to totalize and guide conduct. It matters not what the conduct is, but the hold itself.
All any "theory" does is serve as a sensitizing concept and provide a lens or a particular variety of illumination on a subject that may not be in everyday parlance. I can't give pomo the credit for the destruction of history, literature, or the economy. Any of these things should be able to stand scrutiny. It's just another theory.
PoMo taken as a way to label a kind of decadence, or an era, that may be another matter.
there is ALWAYS a market for assets even when the bid price is 0. liquidate and deflate. that is the cure to what ails the economy and prison is the cure for what ails the banksters.
Mako is the only one who has the balls to say what the problme is. Its what I said to evryone right from the start of thsi crash. What it meant was the entire system has reached its mathematical limit. Choice is this we either all live in poverty or billions have to die and it doesn't matter what money system you have in place now the damge is done. We should have thought about all this before we had a systemn relying on exponential growth and 7 billion mouths to feed. Anyone who says the world can support this many people is talking out their ass. Sure it can support this many if we all live in poverty but if we all want to live like americans you can forget it we need 4 more earths for that to happen. This is nature just as nature would find a way of culling any species that overgrows itself. There really is no point talking about reform. Only thing to do is try to survive what is coming and the survivers then use a system that doesn't involve growth and keep their numbers down. Nathans Freedom Vision could be used but he is delusional if he thinks it can work now before the culling
And i thought i was bearish...
i spent the best part of 2 years getting my wife comfortable with the idea of buying gold and moving house without thinking i was trying to join a militia.
My parents still think this is about bank bonus' and my friends are too busy worrying about house prices.
I know how it ends but the best i can profer is wars in the middle east will get uglier. Mention atom bombs and people still think it will be contained. The worst they fear is a spike in oil price...
Maybe Ben Bernanke is really doing us all a favour and forcing us to spend spend spend. Might aswell enjoy life rather than be prudent. Splurge on that dream vacation or sports car whilst you can. Cant take it with you and gold bars dont prevent radiation poisoning.
Bullshit, it is mathematically and physically impossible to get into this problem if you had hard money.
NO! Really? Insolvent? I thought the accounting tricks fixed that??................................
http://www.market-ticker.org/
somebody go read his posts today something's up with the Fed Reserve reported numbers. It looks pretty whacked out.
how long do people think this shell game can continue?
Indefinitely. The next major world war will restore balance to the equation and then we will proceed to the next, and the next, etc. Look back. See the pattern?
Just like to say Mako
love your blog
cuts to the chase
I was in Cambodia just before its fall in 1975.
The inflation rate was around 3000%.
I remember one day going to the post office to mail some letters only to be told that they had no stamps. On the way back home I stopped into the museum and was approached by the curator about buying some artifacts for cash (US dollars).
The next day I quit my job and got the hell out of Dodge. The country fell in two weeks.
Keep your eyes on the Post Office. They are the canaries in the coal mine.
Not disagreeing with you, but... hasn't the Internet and communications technology changed things a bit?
People are rightly focused on the potential losses from second liens but they are missing the losses from the increasing flow of mortgages put back to the banks from the 2 GSE's due to Reps and warranty violations. Was on a conference call a few weeks ago with FHR and they mentioned that like any insurer, they will exercise their right for claims resulting from misrepresentations. My understanding is that the numbers can be very large - in the range of 50-100bb. As a taxpayer, I am hopeful that it happens. Transfer some of the bad assets back to the private sector from the public sector -
Hussman still fighting the trend? Not surprised at all.
"...the very essence of fractional-reserve banking is that the bank is inherently insolvent..." -Rothbard