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Monday, July 02, 2007

[FL4RonPaul] Ron Paul Mentioned in Economist Warning of 2nd Depression (fwd)

---------- Forwarded message ----------
Date: Mon, 2 Jul 2007 03:14:04 -0400
From: Frank Gonzalez <>
To: Frank Gonzalez <>
Subject: [FL4RonPaul] Ron Paul Mentioned in Economist Warning of 2nd Depression

BlankWhile fools follow the standard lies of standard but economically
stupid candidates, only Ron Paul (and I) has been warning of this extremely
dangerous economic threat.

Don't say you weren't warned.

I wish I was dead wrong about this, but far greater minds than mine are
confirming it.

Incidentally, as you read it, remember that former Federal Reserve Chairman
Alan Greenspan's actions reflected TOO MUCH economic intervention, NOT not
enough of it, contrary to the wording below.

Force yourself to understand this information. It is NOT as difficult as
you think. If you don't understand it, ask for help but do not delete it.
It is just as much your responsibility to know what this means as it does
for Presidential candidates.

Frank J. Gonzalez
A Ron Paul Democrat for US House (FL-21) in 2008
2006 results here:
Updates & commentary:

"I hold it that a little rebellion now and then is a good thing, and as
necessary in the political world as storms in the physical."

"I contemplate with sovereign reverence that act of the whole American
people which declared that their legislature should make no law respecting
an establishment of religion, or prohibiting the free exercise thereof, thus
building a wall of separation between church and state."

--founder of the Democratic Party, 3rd President of the United States,
Thomas Jefferson (1743-1826)



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The Fed's role in the Bear Stearns Meltdown

By Mike Whitney

06/30/07 "ICH" -- -- The Bank for International Settlements
issued a warning this week that the Federal Reserve's monetary policies have
created an enormous equity bubble which could lead to another "Great
Depression". The UK Telegraph says that, "The BIS--the ultimate bank of
central bankers--pointed to a confluence a worrying signs, citing mass
issuance of new-fangled credit instruments, soaring levels of household
debt, extreme appetite for risk shown by investors, and entrenched
imbalances in the world currency system.

The IMF and the UN have issued similar warnings, but they've
all been shrugged off by the Bush administration. Neither Bush nor the
Federal Reserve is interested in "course correction". They plan to stick
with the same harebrained policies until the end.

The "easy credit" which created the subprime crisis in
mortgage lending has now spread to the hedge fund industry. The troubles at
Bear Stearns prove that Secretary of the Treasury Henry Paulson's assurance
that the problem is "contained" is pure baloney. The contagion is swiftly
moving through the entire system taking down home owners, mortgage lenders,
banks, rating agencies, and hedge funds. We are just at the beginning of a
system-wide breakdown.

The problem originated at the Federal Reserve when Fed-chief
Alan Greenspan lowered the Feds Fund Rate to 1% in June 2003 and kept rates
perilously low for more than 2 years. Trillions of dollars flowed into the
economy through low interest loans creating a massive equity bubble in real
estate which drove up housing prices and triggered a speculative frenzy.

The Feds' "easy money" policy has disrupted the
"debt-to-GDP" balance which maintains the integrity of the currency. By
expanding circulation debt via low interest rates; Greenspan put the country
on the path to hyperinflation and, very likely, the collapse of the monetary

The problems at Bear Stearns are the logical upshot of
Greenspan's policies. The over-leveraged hedge funds are a good example of
what happens during a "credit boom". Liquidity flows into the markets and
raises the nominal value of all asset classes but, at the same time, GDP
continues to shrink. That's because the wages of working class people have
stagnated and not kept pace with productivity. When workers have less
discretionary income, consumer spending—which accounts for 70% of GDP—begins
to decline. That's why this quarters earnings reports have fallen short of
expectations. The American consumer is "tapped out".

The current rise in stock prices does not indicate a healthy
economy. It simply proves that the market is awash in cheap credit resulting
from the Fed's increases in the money supply. Consumer spending is a better
indicator of the real state of the economy than stocks. When consumer
spending drops off; it is a sign of overcapacity, which is deflationary.
That means that growth will continue to shrivel because maxed-out workers
can no longer purchase the things they are making.

The underlying problem is not simply the Fed's reckless
increases to the money supply, but the growing "wealth gap" which is
undermining solid economic growth. If wages don't keep pace with
productivity; the middle class loses its ability to buy consumer items and
the economy slows.

The reason that hasn't happened yet in the US is because of
the extraordinary opportunities to expand personal debt. The Fed's low
interest rates have created a culture of borrowing which has convinced many
people that debt equals wealth. It's not; and the collapse in the housing
market will prove how lethal that theory really is.

To large extent, the housing bubble has concealed the
systematic destruction of America's industrial and manufacturing base. Low
interest rates have lulled the public to sleep while millions of high-paying
jobs have been outsourced. The rise in housing prices has created the
illusion of prosperity but, in truth, we are only selling houses to each
other and are not making anything that the rest of the world wants. The $11
trillion dollars that was pumped into the real estate market is probably the
greatest waste of capital investment in the nations' history. It hasn't
produced a single asset that will add to our collective wealth or industrial
competitiveness. It's been a total bust.

The Federal Reserve produces all the facts and figures
related to the housing industry. They knew that trillions of dollars were
being diverted into a speculative bubble, but they did nothing to stop it.
Instead, they kept interest rates low and endorsed the lax lending standards
which paved the way for millions of defaults. Now the effects of their
"cheap money" policies have spread to the hedge fund industry where hundreds
of billions of dollars in pensions and savings are in jeopardy.

Alan Greenspan played a major role in the housing boondoggle.
On February 26, 2004, he said, "American consumers might benefit if lenders
provide greater mortgage product alternatives to the traditional fixed rate
mortgage. To the degree that households are driven by fears of payment
shocks but willing to manage their own interest-rate risks, the traditional
fixed-rate mortgage may be an expensive method of financing a home."

Greenspan tacitly approved the whacky financing which
produced all manner of untested loans—including ARMs, piggyback loans, "no
doc" loans, "interest only" loans etc. These loans are a break from
traditional financing and have contributed to the increase in bankruptcies.

Millions of people who were hoodwinked into buying homes with
"interest-only", "no down" loans will now either lose their homes or be
shackled to an asset of decreasing value for the next 30 years. They've been
tricked into a life of indentured servitude.

A recent article in the Wall Street Journal revealed the extent
of Greenspan's involvement in the housing fiasco. Here's an excerpt from the

"Edward Gramlich, who was Fed governor from 1997 to 2005,
said he proposed to Mr. Greenspan in or around 2000, when predatory lending
was a growing concern, that the Fed use its discretionary authority to send
examiners into the offices of consumer-finance lenders that were units of
Fed-regulated bank holding companies.

"I would have liked the Fed to be a leader" in cracking down
on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute,
said in an interview this past week. Knowing it would be controversial with
Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich
broached it to him personally rather than take it to the full board.

"He was opposed to it, so I didn't really pursue it," says

Still, Mr. Greenspan's views did color the regulatory
environment, facilitating growing concentration in banking and a hands-off
approach to derivatives and hedge funds. That approach, broadly shared by
both the Clinton and Bush administrations, is coming under increased
scrutiny". (Wall Street Journal)

So, Greenspan had the chance to "crack down on predatory
lending" and he refused. Now millions of low income people are saddled with
payments they have no reasonable prospect of paying off. How much of the
present carnage could have been avoided if he had Greenspan done the right

The "Not So Great" Depression

An article appeared this week in the UK Telegraph by Ambrose
Evans-Pritchard which supports the theory that Greenspan's "loose monetary
policy" fueled a huge credit bubble, which is pushing the global economy
towards a "1930s-style slump."

The article quotes from a statement made by The Bank for
International Settlements:

"Virtually nobody foresaw the Great Depression of the 1930s,
or the crises which affected Japan and Southeast Asia in the early and late
1990s. In fact, each downturn was preceded by a period of non-inflationary
growth exuberant enough to lead many commentators to suggest that a 'new
era' had arrived".

But today we face "worrying signs" of another economic

The BIS said that they were "starting to doubt the wisdom of
letting asset bubbles build up on the assumption that they could safely be
'cleaned up' afterwards". (Greenspan's method) and that, "while cutting
interest rates in such a crisis may help, it has the effect of transferring
wealth from creditors to debtors and sowing the seeds for more serious
problems further ahead.'"

"The bank said it was far from clear whether the US would be
able to ignore the consequences of its latest imbalances, ($800 billion per
year) citing a current account deficit running at 6.5% of GDP, a rise in US
external liabilities by over $4 trillion from 2001 to 2005, and an
unprecedented drop in the savings rate. 'The dollar clearly remains
vulnerable to a sudden loss of private sector confidence."'

The BIS referred to the toxic effect of the "$470 billion in
collateralized debt obligations (CDO), and a further $524 billion in
"synthetic" CDOs which have spread through hedge funds industry. These CDOs
are the loans (many sub primes) which were bundled off to Wall Street and
turned into securities which are highly leveraged in hedge funds for maximum
profitability. As Bear Stearns is discovering, these CDOs are like roadside
bombs; exploding without notice whenever the stock market suddenly dips.

The BIS also cautioned about the excess of "leveraged buy-outs
(mergers) which touched $753bn, with an average debt/cash flow ratio hitting
a record 5.4…. 'Sooner or later the credit cycle will turn and default rates
will begin to rise.'"

The central banks around the world are increasingly worried
that the Bush administration's profligate spending and irrational monetary
policies will trigger a global depression. The recent volatility in the
stock market suggests that the credit boom is just about over. Once the
liquidity dries up---stocks will fall sharply.

The Housing Slump

Yesterday's housing data, shows that sales are still weak while
inventory continues to grow. Existing home sales dropped 3% while prices
dropped another 2.1%. Falling prices mean that cash-strapped home owners
will not be able to tap into their home's equity for other expenses. Last
year, mortgage equity withdrawals (MEWs) accounted for $600 billion of
consumer spending. This year, the amount will be negligible at best.

The media and the Fed continue to mislead the public about the
magnitude of the housing bubble. Fed chief Bernanke assures us that the sub
prime calamity hasn't "spread to other parts of the economy" (tell that to
Bear Stearns) and the media keeps cheerily reiterating that a "turnaround"
or "soft landing" is just ahead.

These claims are ridiculous. Apart from the 80 or more
sub-prime lenders that have gone "belly-up" in the last few months, the
rickety collateralized debt obligations (CDOs) and mortgage backed
securities (MBSs) are steamrolling their way through the stock market
bowling down everything their path. Bear Stearns is just the first on the
casualties list. There'll be many more before the storm is over.

Fed-chairman Bernanke knows what's going on. He was given a
full rundown by "John Burns Real Estate Consulting that the national sales
information for both new and existing homes, is "misleading and covering up
a deep plunge of the housing sector." The housing market is freefalling.
Existing-home sales are down 22% in May and mortgage applications have
fallen a whopping 18%....In Florida home sales are down 34%, not 28% as NAR
reported; Arizona sales are down 38%, not 28%; and California's down 37%,
not 24% as NAR reports."

Down 37% in California!?!

Gadzooks! It's a landslide.

As the defaults continue to pile up; the hedge funds will
take a bigger and bigger pounding. It can't be avoided. That's what happens
when bankers abandon traditional lending standards and lend trillions of
thousands of dollars to people who have bad credit and lie on their loan

Thousands of these same shaky sub primes loans have been
wrapped up like the Crown Jewels and sold off to Wall Street as CDOs. Now
they are ripping through the hedge fund industry like a tornado in a trailer
park. The media has tried to downplay the damage, but its not hard to see
what is really going on. According to Reuters:

"Banks doubled the amount of CDOs outstanding in the past two
years to $2.6 trillion, including a record $769 billion sold last year,
according to J.P. Morgan. These figures include funded and unfunded
issuance. Pimco's Bill Gross said there are hundreds of billions of dollars
of subprime residential mortgage-backed securities (RMBS), derivatives on
subprime RMBS and collateralized debt obligations (CDOs) that buy subprime
RMBS and/or the derivatives on the RMBS -- all of which he considers "toxic

"$2.6 trillion"! That's enough to bring down the whole
economy. And, as Bear Stearns proves, the whole mess is beginning to unwind
pretty quickly.

"Foreign investors have been the dominant buyers of these
exotic debt instruments in recent years, owing to their insatiable demand
for yield. 'If investors start dumping them, oh boy, watch out for some
massive credit widening," said Dan Fuss, Vice Chairman at Loomis Sayles.

If the hedge fund industry follows the downward slide of the
housing bubble, foreign investors will run for the exits. In fact, this may
already being happening.

China sold $5.8 billion in US Treasuries in May; the first
time they have dumped USTs on the market. This may be the first sign of
"capital flight"---foreign investment fleeing the US for more promising
markets in Asia and Europe. The greenback's survival now depends on the
generosity of foreign bankers. If they refuse to recycle our $800 billion
current account deficit by purchasing US bonds and securities, then the
dollar will sink like a stone and lose its place as the world's reserve

More Housing Blowdown

Last Friday, the stock market took a 185-point nosedive on
the news that Bear Stearns was trying to raise $3.2 billion to rescue its
battered hedge fund. According to the New York Times, however, Bear was only
able to came up with "$1.6 billion in secured loans to bail out one of the 2
hedge funds".

The funds are the latest victim of the sub-prime meltdown
which Bernanke and Paulson assured us was "largely contained". In fact,
Paulson even said, "We have had a major housing correction in this country,"
and "I do believe we are at or near the bottom."

Anyone who believes Paulson should take a look the chart
linked below:
It illustrates that how loan "resets" will continue to pound the housing
market for at least another year and a half getting steadily worse as
inventory grows.

The disaster is so bad that even the realtors are beginning
to tell the truth. As one agent noted, "It's a bloodbath."

But the debacle in housing is only the first part of a much
larger problem—a global liquidity crisis. Banks and mortgage lenders have
already begun to tighten up their lending practices and many have abandoned
sub prime loans altogether. (20% of the housing market in 2006 was sub
prime) Now the focus has shifted to the stock market, where banks are
beginning to see that "risk" has not been properly calculated. That means
that if more hedge funds collapse, the banks may not be able to cover the

The Bear Stearns fiasco has had a chilling affect on lending.
In fact, the New York Times reported on 6-26-07 that "After years of
supersize private equity deals…the buyout boom may be about to hit a
bump…Rising interest rates and tougher terms from investors may signal that
private equity players will soon be struggling to continue reaping the
outsize returns that have made the buyout business so lucrative." (Private
Equity Investors Hint at Cool Down" NY Times)

Liquidity is drying up in the private equity business. The
troubles at Bear Stearns has changed the credit-landscape overnight. Bankers
are nervous, money is getting tighter, and liquidity is vanishing.

"We know that these holdings are not unique to Bear Stearns,"
said Professor Joseph R. Mason, co-author of a recent study warning of
dangers in securities backed by home loans to high-risk borrowers. "It would
be hard to find a Wall Street firm that hasn't created similar funds."

That's right; the industry is waist-deep in these sub-prime
time-bombs. Shaky loans and rising foreclosures threaten to knock the
foundation blocks out from under the stock market and set off a wave of
panic selling.

Could it have been avoided?

Perhaps, if there were better regulations on rating bonds and
restricting leverage.

Consider this: one of Bear Stearns hedge funds took a $600
million investment and leveraged it 10 times its value to $7 billion. Their
portfolio was chock-full of dicey CDOs and "illiquid assets" such as timber
holdings in foreign countries and toll roads. These assets are difficult to
price and nearly impossible to quickly auction off if the market suddenly
takes a downturn.

It looked like Merrill Lynch & Co., was going to auction off
$850 million of Bear Stearns CDOs this week, but backed off at the last
minute. (They were reportedly only offered 30 cents on the dollar!) Once the
hedge funds start selling these CDOs, then everyone will know how little
they're worth. That could trigger a wave of selling that could bring down
the stock market. Even if that scenario doesn't play out, the Bear Stearns
incident ensures that CDOs in other hedge funds will be face a substantial
downgrading that could take a big chunk out of their bottom line.

And, there's a bigger fear on Wall Street than the fact that 2
hedge funds are headed into bankruptcy, that is, that a sudden tightening of
credit will send the over-leveraged stock market into a downward spiral.

The market is particularly sensitive to any rise in interest
rates or tougher lending standards. It's become addicted to cheap credit and
any break in the chain will cause equities to plummet.

Economist Henry C K Liu sums it up like this:

"The liquidity boom has been delivering strong growth through
asset inflation without adding commensurate substantive expansion of the
real economy. …. Unlike real physical assets, virtual financial mirages that
arise out of thin air can evaporate again into thin air without warning. As
inflation picks up, the liquidity boom and asset inflation will draw to a
close, leaving a hollowed economy devoid of substance. …A global financial
crisis is inevitable". (Henry C K Liu "Liquidity boom and looming crisis"
Asia Times)

In other words, the "virtual" wealth of Wall Street is a
chimera which was created by the Fed's inexorable expansion of debt. It can
vanish in a flash if the sources of liquidity are cut off.

Puru Saxena draws the same conclusion in his article "A
Gradual Transition":

"Thanks to the Federal Reserve's expansionary monetary
policies over the past 5 years, US asset-prices have risen considerably;
also known as the "wealth effect". At the end of last year, the market
capitalization of the US stock market rose to a record-high of US$20.6
trillion, matching the value of household real-estate, which also rose to a
record-high at the same time. On the surface, this may seem like brilliant
news, however you must realize that this "wealth illusion" achieved by an
ocean of money and record-high indebtedness is only a consequence of

Code Red: Subprime Chernobyl

We expect that the mounting losses in CDOs and the continuing
defaults in the housing industry will precipitate a "severe credit crunch"
which will end in a stock market crash. A report which appeared yesterday in
the UK Telegraph appears to agree with this analysis. Lombard Street
Research predicted that:

"Excess liquidity in the global system will be slashed. Banks
Capital is about to be decimated, which will require calling in a swathe of
loans. This is going to aggravate the US 'hard landing"' ("Banks set to call
in swathe of loans" UK Telegraph 6-26-07)

Three of the main hoses which provide liquidity for the
market, have either been cut off or severely damaged. These are
"securatized" subprime CDOs, corporate mega-mergers and hedge fund
leveraging. Without these instruments for expanding debt; liquidity will dry
up and stocks will fall. The period of "easy credit" will end in disaster.

We should now be able to see the straight line that connects
the Fed's low interest rates to the impending stock market meltdown. The
problems began at the central bank.

Presidential candidate Rep. Ron Paul (R-Texas) summed it up
best when he said:

"From the Great Depression, to the stagflation of the
seventies, to the burst of the bubble; every economic downturn
suffered by the country over the last 80 years can be traced to Federal
Reserve policy. The Fed has followed a consistent policy of flooding the
economy with easy money, leading to a misallocation of resources and
artificial "boom" followed by recession or depression when the Fed-created
bubble bursts".

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