Peter's Latest Video Blog - With Some Good Comments About The US Principles of Government

The message is ready to be sent with the following file or link attachments:
Shortcut to: http://www.europac.net/videoblog.asp?a=watch

Hello John,

Been awhile since I posted on this thread but I've been reading the information you post right along and it is vary revealing of the financial situation going on around the world these days, things are happening faster than most of us can keep up with.

I have been watching the stock markets on wall street and they have been vary eratic up and down like a yo-yo
qnd just am wondering if most of the rallies swinging upward are false rallies to entice investers to bite only to have it fall via short selling and insider trading? It seems to me the international bankers and the federal reserve which is actualy controlled by the wealthy elites from many Countries around the world are playing their final game to take all they can get from the working people around the world and then pull out leaving the rest of us in the world struggling to survive in severe poverty so they can promote more wars to pull us out of a depression and put folks back to work like what happened in world war two ? Anyway it appears that way to me.

Peace,
Fire Walker

Fire Walker,

Thank you very much for reading my posts. There has been over 4000 thousand hits which is encouraging - on this topic. The reason why I have persisted with this thread is that it is predicated on what I envision as a grand finale of roughly forty years of excesses and insane economic policies. It is going to be most severe - especially in the US. I hope I have served as a warning beacon before it blows wide open so we can take some cover. A warning is absolutely NO good after the fact!

The trading has been very bumpy. The slope of hope. People will keep on being invested in the wrong stocks as the slope steeppens and they loose their wealth. They will keep in the US dollar and other currencies as central banks print money to bail themselves out of mind blowing massive debts. At this point in time the economy is on the life support of trillions of dollars. The patient is not being helped - just kept alive. That has been grossly mistaken for the patient recovering. As we approach this unprecedented period of human history it would be very wise to buy some silver or gold which is real money. The fait currencies will likely fail and those countries that can do it - like China - will back their Yuan with gold. Those currencies will be set apart and be viewed as disciplined and dependable.

Unfortunately what is happening in the US which is ground "zero" for the debt crisis is far worse than in many other parts of the world. There might be a head for the hills mentality for those who see this coming but I think most governments and businesses will try to work their way out of this mess. After all their paper fait money will be worth little. It is going to be a "crash and burn" experience that is hard to determine the outcome.

At the same time this planet is struggling with 7 billion people who's survival is directly dependant on cheap net energyto feed themselves. The consumption has put a huge burden on the global life support eco-systems. IMHO - we need to go back a mere 100 years and use far less energy and support about 1 billion people as conditions were in that era! We need more people doing physical work and less emphasis on energy eating gadgets. A substantially greater number of people should be farming with less people crowed into cities with large buildings that again require disproportionate amounts of energy to keep all those systems active!!!

John

America sneezes and the world is germ-free!


The financial crisis has emboldened countries such as Brazil and South Africa. The global balance of power is shifting - Anatole Kaletsky

As the dust settles after the Great Depression That Never Was, the worldwide financial crisis is starting to look less like the seismic historical transformation so widely expected. With every week that passes, President Sarkozy's predictions about the death of Anglo-Saxon capitalism sound more premature, while ahistorical comparisons with the end of communism in 1989 seem ever sillier.

And yet it is clear that some permanent changes in the global balance of power really are occurring, as I saw this month while visiting Brazil and South Africa, two large economies hard hit by the crisis in statistical terms, but seemingly more emboldened by the experience than depressed.

Official data show both countries to have suffered serious recessions - in South Africa's case, for the first time in the post-apartheid era. And in the depth point of the crisis before Christmas, their currencies, the rand and real, were both falling so steeply that there were genuine worries about a total financial collapse. By early May, however, both currencies had bounced back to their pre-Lehman levels, business confidence was returning and consumers were again thronging the vast malls that have sprouted like tropical weeds in the ever-expanding suburbs of São Paulo and Johannesburg.

The remarkable resilience of these economies and the confidence of their business communities, their media and their financial markets, in contrast to the apocalyptic gloom in Britain, Europe and America, highlight the three transformations that this crisis has brought to light.

The first and most obvious is the rise of the middle class in developing countries and its emergence as the main engine of global growth in the decades ahead. Even if the US and other rich economies recover more rapidly than expected from the recession, it is clear that almost all of the global growth in consumer spending and industrial investment is going to occur in what used to be called the Third World and is now described, more appropriately, as the emerging markets.

According to IMF calculations, emerging economies will account for 100 per cent of the growth in world output in the three-year period 2008-10. And even assuming that the US and European economies return to their long-term growth paths from 2011 onwards, the IMF expects emerging markets to account for 70 per cent of global growth for the following five years.

The second, closely related, transformation is the newfound ability of emerging economies to determine their own destinies, regardless of the success or failure of US or European economic policies. Two years ago, when the credit crunch had just started, there was much discussion in the economic commentariat about the possibility that emerging economies could decouple from the problems that seemed to be emanating from the US and British financial markets.

While the emerging economies have not been able to insulate themselves completely from the global crisis, they have finally disproved the cliché that when America sneezes, the world catches pneumonia. They have been able to do this for a variety of reasons, all ultimately related to the growth of consumer societies within the developing world.

Commodity-producing countries such as Brazil and South Africa have obviously benefited from China's overtaking of the US and Europe as the world's main consumer of raw materials. As long as the Chinese economy keeps growing, Brazil is assured of demand for its iron ore and soya, South Africa for its platinum and coal. Thus the success of the huge fiscal stimulus package announced by the Chinese Government in December has turned out to be much more important for these countries than similar measures in the US or EU.

Even more important than the growth of trade with China is that many of the emerging economies, including Brazil and South Africa, have had the financial resources to implement their own independent stimulus packages.

South Africa, for example, is one vast building site today in preparation for next year's football World Cup. Despite the economic crisis, the Government has been able to continue financing the construction of new roads and public transport networks, as well as sports grounds - and now President Zuma plans to increase substantially the public investment in housing as well.

In Brazil the Government has also responded to the financial crisis by trying to revive growth with big programmes of public spending and tax cuts. And financial markets, which might in the past have panicked in reaction to such Keynesian policies in developing countries, have been supportive. Instead of triggering a capital flight, stimulus policies have attracted global investors to their bonds.

Why has this happened? Partly because the financial management of most emerging economies outside Eastern Europe has generally been competent and prudent. But mainly because these countries have begun to demonstrate the capacity for self-sustaining growth based not just on exporting raw materials or consumer goods to America and Europe, but also on domestic investment and consumer demand.

In the long term it is only such self-sustaining domestic growth that can generate the tax revenues needed to pay foreign creditors and maintain a stable financial system. And as global investors have come to understand this, they have rewarded countries whose economies are driven mainly by domestic consumption and investment, rather than export growth.

The first two trends also suggest a third change, which the financial crisis could encourage: political transformation. If emerging economies are going to turn themselves into consumer societies (organised around the needs and desires of their own citizens) rather than producer societies (dedicated to churning out the maximum physical output for the lowest possible price), they are likely to experience profound political and social change. Not only will they need to encourage the growth of a relatively prosperous middle class, but, in order to sustain consumer demand, wages will have to rise rapidly for manual and even agricultural workers, as they did in the 1940s in America and Europe.

Moreover, development of thriving service sectors will mean greater choice and individualism, challenging autocratic political structures in one-party states. This has been the story of South Africa and Brazil in the past decade and they seem to have made the transition successfully to pluralistic, liberal free-market democracies.

Whether China ever manages a similar transition is, of course, the great historical question of the 21st century. But if it forces China to direct economic development towards the needs of its own citizens, rather than the tastes of US consumers, the financial crisis is likely to accelerate China's evolution into a pluralistic market economy, rather than slowing it down.

By Martin Hutchinson
Contributing Editor
Money Morning

Could the massive Obama stimulus plan end up hurting the U.S. economy?


It’s long been a worry, and now it’s beginning to seem possible.

The latest housing reports suggest that the recent rapid run-up in 10-year Treasury bond yields may be having an unhealthy effect on the U.S. housing market. That tells me that - although home prices are back to their long-term average in terms of earnings - we may not yet be close to the price bottom.

If that’s true, it’s very bad news. A further substantial decline in housing prices would destabilize the U.S. banking system again, because of all the mortgage debt in it, which would cause a very nasty “second leg” economic downturn. That would have one very ironic further implication: U.S. President Barack Obama’s $787 billion stimulus package - intended to help the U.S. economy push back the recession - would instead have succeeded in pushing it deeper into the mire.

A month ago, it appeared that the housing market might be in the process of bottoming out. The ratio of house prices to average incomes - which peaked at about 4.5 to 1 in 2006 - had fallen 33% from that apex, which brought the ratio close to its long-term average of 3.2 to 1, according to an S&P/Case-Shiller Index report. While interest rates remained low and government-backed home financing was readily available, it appeared the forces pushing up house prices (low interest rates and accessible financing) might soon come into balance and then dominate the forces that push home prices down (an inventory overage).

The jump in interest rates - from 2.07% on the 10-year Treasury bond in December to around 3.65% today - has weakened the case for a stabilization of housing prices. Mortgage rates, which were far below their levels of the last 30 years, have moved back above 5% — even for “conforming” mortgages. Thus the Mortgage Bankers Association index of new mortgage applications was down 15% in the latest week. Meanwhile, new home sales have merely stabilized at very low levels of an annual rate around 350,000 - compared to more than 2.0 million at the peak of the market, while the latest price statistics suggest that price declines continued to be quite rapid in March, and possibly even accelerated slightly.

This interest-rate increase does not currently seem to be caused by expectations of inflation, which has remained around 2% annually, although oil, gold and other commodity prices have ticked up. Instead, it seems to have been caused by the exceptionally high demands being made on the government bond market by the U.S. federal deficit, which is expected to total about 13% of gross domestic product (GDP), or more than $1.8 trillion, this year.

It’s not surprising that such a blip should have occurred this month; federal tax receipts are at their peak in April, as companies and individuals pay their taxes due, so the beginning of May saw a resumption of mammoth U.S. Treasury funding needs after a month’s pause.

If interest rates continue to increase, the effect on the already-weak housing market could be severe, as housing “affordability” would be reduced in a period in which prices were declining and unemployment was rising. That, in turn, could have a self-reinforcing downward effect on prices, as home inventories bloat further, and buyers hold back.

Currently, according to the S&P/Case-Shiller 20-city house price index, prices are down 32% from their peak, but remain 40% above 2000 levels, while consumer prices are only 24% above those of 2000. However, 2000 was not a “bear-market” year; prices had already enjoyed several years of rapid recovery from their early-1990s low. Should rising interest rates cause prices to continue falling to 2000’s level (another 28% decline), then on average every 80% mortgage undertaken since May 2002 (when the index first went above 125% of 2000’s level) would be underwater, having an owed principal amount that exceeds the actual current market value of the house. That would cause a surge in mortgage defaults more severe than any yet seen, extending far into the prime mortgage category - and probably causing the U.S. banking system to implode once again.

The stimulus-package funds, which began flowing in April, may actually induce some GDP growth this quarter. At the very least, the Obama administration infusion should hold the economy to a very minimal decline in GDP.

However, if interest rates keep rising, the effect of further housing-sector weakness and the wobbling banking system would overwhelm any stimulus benefits, and would cause a second “dip” in this recession - one that’s far worse than the first. The stimulus would, in that event, have proved counterproductive, killing the very economic recovery it was supposed to have stimulated.

Rising interest rates will have adverse effects on all countries with large budget deficits, the most notable of which are Britain and Japan. The effects would be harsh enough to actually prevent those countries from recovering from their own recessions.

For investors, the remedy is clear: Look to invest in countries that have produced only modest stimulus packages, and whose budget deficits are currently the smallest. In the invaluable statistical section of The Economist, a number of countries are projected to have budget deficits of less than 3% of GDP in 2009, in spite of their recessions.

At that level, deficits are easy to finance, and do not force up interest rates, so economic recovery should be relatively rapid.

Let’s take a look at some of those countries in question:

Canada: Budget deficit forecast of 2.5% of GDP. Americans are fond of sneering at Canada for its high public spending and sluggish growth. Well, Canada’s public spending as a percentage of GDP peaked in the early 1990s and since 2000 the country has run budget surpluses. In 2009, Canada is forecast to have public spending lower than the United States, when provinces and states are taken into account, and to continue lower than its arch rival (the United States) for the foreseeable future. I wrote a few weeks ago about investment opportunities in the Canadian energy sector; those opportunities are even more compelling with the continued rise in the oil price to current prices of more than $62 a barrel.

Geithner Goes Begging in China;
What It Means to You ... and Tiny Tim Geithner Gets Laughed At


by Mike Larson
Dear Subscriber,


So this is what it's come to: Our Treasury Secretary, Timothy Geithner, has to jet off to Beijing to beg for mercy from our biggest global creditor.

He has to sit by and be lectured in the ways of finance by Chinese officials.

He has to endure the laughter of Chinese students at Peking University, who openly scoffed at his reassurances that "Chinese financial assets are very safe."

And he has to abandon plans to pressure China on its currency. The Obama administration had previously been arguing that the yuan was undervalued, artificially subsidizing Chinese manufacturers at the expense of U.S.-based firms.

The bottom line? The balance of world financial power is shifting and not in a good way for America. Worse, I see no evidence that we're doing anything about it! Instead, we get a bunch of happy talk and spin, with little or no action.

Washington Happy Talk vs.
Reality on the Ground in China

Before, during, and after Geithner's China trip, the Washington spin machine was shifting into overdrive. I've already seen a few reports calling Geithner's trip a success. Geithner himself has been making statements like the following:

"I've actually found a lot of confidence here in China, justifiable confidence, in the strength and resilience and dynamism of the American economy and I think a very sophisticated understanding ... of the steps we're taking and why they're so important not just to the United States but to China and the rest of the world."


"We will be watching you very carefully." —Yu Yongding, a former Chinese central bank adviser
Excuse me, but does anyone believe that for a second? I sure as heck don't. And neither do the Chinese. The reality on the ground in China is much more skeptical and severe.

For example, Bloomberg recounted a conversation in which Geithner was lectured about U.S. profligacy:

Yu Yongding, a former central bank adviser who acted as the interviewer for The China Daily newspaper, told Geithner: "I worry about details. We will be watching you very carefully."

A report from The Washington Post was even more blunt, warning that "Geithner's remarks stand in sharp contrast to the commentary in China's official propaganda papers."

According to the Post ...

The China Daily said it will be "regrettable if [Geithner] underestimates and shuts his ears to voices from China's civil society," noting that there are worries that "Washington's mushrooming deficit, generated by massive government borrowing to fuel its economic recovery plan ... will undermine both the dollar and U.S. bonds."


The Global Times, which is affiliated with the Communist Party, said an online poll found that 87 percent of respondents believe China's dollar-assets are unsafe. The paper concluded, "Ordinary Chinese people are discontent with the declining value of China's huge foreign exchange reserves denominated in U.S. dollars."


And The Economic Information Daily, which is part of the official New China News Agency and affiliated with the State Council, in a headline demanded to know of Geithner: "How do you propose implementing fiscal discipline? How will you maintain the stability of the dollar after the crisis?"
Why Aren't the Chinese Buying
The Washington Party Line?

Well, the Obama administration and members of Congress on both sides of the aisle have been paying a lot of lip service to getting the deficit under control. We're getting plenty of talk, talk, talk. But policymakers are taking steps that have the exact opposite effect! They're spending like crazy and borrowing like mad!

The administration itself was just forced to raise its 2009 budget deficit estimate to a staggering $1.84 trillion, up 5 percent from a projection made just two months earlier. The 2010 estimate was jacked up by more than 7 percent to $1.26 trillion.


Geithner tried to sell the Chinese his pipe dream. But they're not buying it.
Geithner told the Chinese that we plan to eventually shrink the deficit to 3 percent of GDP. But that's a pipe dream. Right now, we're on track to hit 12.9 percent — by far the worst since the founding of the Republic (excluding an anomalous period during World War II when the war effort was the dominant force in the entire economy).

Getting that under control will require a massive boost in economic growth or a large increase in taxes. To anyone who believes those scenarios are in the cards, all I can say is: I've got a bridge to sell you!

Or as Pimco Chief Investment Officer Bill Gross put it in his latest monthly outlook:

"While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery's corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington's hat."

The Market is Extracting Its Pound of Flesh —
Make Sure You Protect Yourself ...

The approach from Geithner, Fed Chairman Ben Bernanke, and others in the political establishment continues to be akin to Alfred E. Neuman's. You know, the Mad Magazine character whose signature line is "What, me worry?"

They keep telling us to relax. They say the Chinese, the Russians, and everyone else have no alternative to the dollar. They figure they can continue getting away with shafting our creditors, with no consequences.


REAL MONEY investors are dumping the dollar and loading up on hard assets, like gold, oil and silver.
I've argued the opposite — and the market action shows I'm right. Just look at what REAL MONEY investors are doing. They're dumping bonds. They're dumping the dollar. They're buying gold, oil, and other hard assets.

The broad-based dollar index is down roughly 12 percent in just the past three months. Crude oil has soared as much as 113 percent from its December low. Gold is closing in on $1,000 an ounce, while silver has almost doubled.

Meanwhile, The New York Times recently reported that the Chinese are hiding in short-term Treasury bills because they don't want the risk that comes with long-term bonds. A key advisor to the Qatari ruling elite advised that country to diversify away from dollars. Then this week, Russian president Dmitry Medvedev proposed forming a new multi-national currency that would supplant the dollar as a central bank reserve asset.

Is any of this going to happen overnight? Is the dollar going to go to zero next week? Are 10-year Treasury Note yields going to hit double-digits next month? No on all counts. In fact, we could see a short-term bounce in the dollar and bonds here.

But the LONG-TERM trends should be abundantly clear by now. The forces I warned you about months ago are coming to a head, and the ramifications are clear for investors like you. You simply have to take steps to protect yourself from these out-of-control bureaucrats in D.C. and adjust to the new financial reality — that the balance of global financial power is shifting.

Until next time,

Mike

Coming: A third wave of U.S. foreclosures
The next group of Americans to lose their homes seemed to have good credit and affordable loans. But those families have been walloped by the recession.


By Michael Brush
June 03, 2009
There's a simple reason Americans shouldn't get too excited about the "green shoots" of an economic turnaround.

In the U.S. housing market, a lot of prime mortgages are becoming subprime as a new wave of foreclosures begins to hit. Mainstream homeowners -- those previously "safe" borrowers with sound credit who have conservative, fixed-rate mortgages -- are getting into trouble at an alarming rate.

In the first quarter, the percentage of these borrowers who were behind on their mortgages or in foreclosure had doubled from a year earlier, to nearly 6%. For the first time in the U.S. housing crisis, these homeowners accounted for the largest share of new foreclosures.

* Video: Real estate trend report

Job losses in the U.S. are a major reason once-safe borrowers are falling into trouble. With unemployment likely to rise, the problem will only get worse. So the core challenge at the heart of America's economic crunch -- a poor housing market that infects banks and the whole credit system -- is not going away soon. That's bad news for the stock market and the U.S. economy in general.

"A couple of months ago, a lot of people had hoped that the U.S. housing collapse was about over," says money manager and forecaster Gary Shilling, a well-known bear who called the housing problems early in the cycle. "But it was more hope than reality."

More on investing:
The next crisis has already begun
Flaherty looks to revamp CPP
Where’s the stimulus Ottawa promised?
Have diamonds lost their shine?
Are ETFs a better investment than stocks or mutual funds?
Blog: Recession's toll on employees continues to mount
The third wave of woe
Economists call rising U.S. delinquencies and foreclosures among prime borrowers the third wave of trouble. The first two waves were housing speculators going bust and subprime borrowers -- those with poor credit histories and some version of no-down or low-down adjustable-rate mortgages -- getting into trouble.

Mark Zandi, the chief economist for Moody's Economy.com, calls the third wave a "significant threat" to the economy. "It is gathering momentum," he says. "The problem is now well beyond subprime and deep into prime."

It will cause at least three problems that could shrivel the "green shoots":

* Mounting U.S. foreclosures among prime borrowers will destroy their credit ratings, making it tough for them to contribute to growth by spending on credit.

* Rising U.S. foreclosures will add to an already high level of housing inventory on the market, pushing down home prices even more. That will make people feel poorer, so they'll spend less. It also will tempt more people to walk away from mortgages, adding to the problem.

* Foreclosures will mean more loan losses at banks, deepening the problems in the financial system.

Investment opportunities?
How do you play this as an investor? Well, if you missed the 30%-plus move off the bottom since early March but you're still confident enough to tiptoe back in, don't do anything more than that. Average in on down days.

Better yet, wait for the market pullback that this third wave makes more likely. Shilling has a bearish forecast of a trip down to 600 for the S&P 500 Index ($US:INX), more than a 30% decline from recent levels of 940.

Investors confident and daring enough to short stocks -- selling borrowed stock with the hope of buying it back later at a lower price -- may find profitable targets in the housing sector and among the regional banks. Homebuilder stocks look particularly tempting; they have risen more than 50% off their March lows on hopes for a quick recovery.

* Blog: Mortgage twist appeals to conservative investors

Whitney Tilson, a co-portfolio manager of the Tilson Focus Fund (TILFX) who also spotted the housing crisis early on, was recently short KB Home (KBH.N), Lennar (LEN.N) and Toll Bros. (TOL.N) in housing. He also has bearish bets against regional banks Regions Financial (RF.N), First Horizon National (FHN.N), Zions Bancorp (ZION.O) and New York Community Bancorp (NYB.N).

The 'subprime society'
Shilling suspects many so-called prime borrowers are now going bust because, well, they really weren't so prime to begin with. The same lax standards that created a zoo-like atmosphere in subprime lending infected prime mortgage lending to some degree. Many prime borrowers still stretched to qualify, and they lack the financial reserves to sustain any personal setbacks, Shilling says.

A few months of unemployment will throw them into default. The official unemployment rate stood at 8.6% in April, and many economists believe it will top 10% as the recession drags on.

How much worse will the foreclosure crunch get? Credit Suisse (CS.N) analyst Rod Dubitsky predicted last week that 8.1 million mortgages, or 16% of all U.S. mortgages, will go into foreclosure over the next four years. A weak American economy, continued declines in U.S. home prices and rising delinquencies among prime borrowers all but ensure that foreclosures "will march steadily higher," he says.

Dubitsky thinks such a high level of foreclosures could transform the U.S. into a "subprime society." The large number of people unable to borrow because of impaired credit will keep the consumer-spending engine on low idle.

Zandi predicts that a rising number of troubled prime borrowers will keep the number of distressed mortgages aloft for at least 18 more months. He thinks the number of mortgages in default or behind by more than 30 days (the definition of distressed) will rise to 9.2% in the current quarter from 9.1% in the first quarter, then stay above 7% through most of next year.

To put that into context, from 2000 through the end of 2006, 2.7% of mortgages were distressed, on average, at any one time.

Inventory overhang
A big problem stemming from all those foreclosures will be that huge excess inventories of homes for sale will continue to push down prices, Shilling says. "As long as you have those excess inventories, you have downward pressure on prices. It is no more complicated than that," he says.

The combined inventory of new and older homes on the market remained relatively constant at about 2.5 million for many years. Now, it's officially around 4 million, but Shilling thinks it could be higher because of miscounting.

* Video: Pricy oil and a smaller world

In his bearish scenario, the inventory overhang will push down home prices so much that up to 25 million U.S. homeowners will be "underwater," meaning they will owe more than their homes are worth. That would be a huge increase over recent levels of 13.5 million homeowners and bad news for the American economy.

Homeowners who are underwater can't borrow against their homes to fuel a rebound. They're reluctant to spend. And they are more tempted to simply walk away from what looks like a losing prospect.

* Tell us: Are you concerned about the Canadian housing market?

Two more waves
Bad enough? Well, this third wave of prime borrowers going bust will be followed by two more waves of credit-related problems, Tilson says:

* In a fourth wave, more U.S. homeowners with "jumbo prime" loans will go into default. These are loans to buy high-end homes that once boasted price tags upward of $1 million. "All over the (U.S.), the high end is starting to tip over," says Tilson. This wave will also bring more problems with home equity loans and second mortgages on homes.

* A fifth wave will carry rising defaults on commercial-real-estate and business loans.

Like Shilling, Tilson believes all of these waves of credit-related problems spell the most trouble for homebuilders and regional banks. "Homebuilders are going to face severe headwinds trying to sell homes at least for a couple of years," he says.

Regional banks will have problems because they got heavily involved in commercial-real-estate loans when they lost so much of their home-mortgage business to upstarts vying for a piece of the subprime action during the boom. Regional banks also lack the income from wealth management and trading that's helping big banks such as JPMorgan Chase (JPM.N) earn their way out of trouble.

There are 'green shoots'
There are some glimmers of hope in all this. For one thing, homes are more affordable than ever. Mortgage rates are still extremely low by historical standards despite a recent increase. So the cost of buying a home compared with average income levels is as low as it has been in nearly three decades.

And intriguingly, a U.S. housing sector analyst who first started warning of trouble back in 2003, way ahead of most people, now predicts a reversal is at hand. Stuart Feldstein, the president of SMR Research in Hackettstown, N.J., thinks home sales and prices are turning and will be in an uptrend soon.

* Follow us on Twitter!

One problem here is that Feldstein was early -- even if impressively prescient -- the last time around.

And of course, housing affordability doesn't mean much if so many people continue to lose their jobs. Goldman Sachs Group (GS.N) economist Ed McKelvey doesn't expect the jobless rate to peak until after 2010 -- in a sluggish economy that he expects will grow at a paltry 2% in the second half of next year.

With economic conditions like that, no matter how cheap houses get, it'll be tough for anyone to buy them.

At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.

The Dollar Crisis Has Already Begun


The message is ready to be sent with the following file or link attachments:
Shortcut to: http://finance.sympatico.msn.ca/Investi ... d=20144377

Well, when it comes to real estate advertisment I notice things have changed , it has been a long time since I've seen any sellers stating: no down payment
and no payments for the first three months, just paint your way in" that has all changed.

Now the other day I heard from my brother, he told me his nieghbor bought a house some 15 years ago on a thirty year loan contract with one of those "no down payment, just paint your way in" deals, now he lost his job about six months ago and is trying to sell the house but no one is buying, he can't make his payments much longer on unemployment. He called the bank up to see if they would let him paint his way out of the house for his equity and they take the house, they told him they could not do this way, so unless he goes back to work it looks like the bank is going to forclose on the house and there goes all his hard earned equity! It has been this way for quite awhile now for large numbers of folks and is getting worse, some recovery hu? The government wants to call this a recession when in fact this is a depression.

Peace,
Fire Walker

Fire Walker,

Great to hear from you!! There is absolutely no recovery at least not much of a bang for all those trillions of bucks! You cannot stimulate with borrowed money - and at that borrowed from other countries. China has a huge stimulus package - but it is from their own savings - and boy what a big bang they are getting. Their stocks are fully recovered and they are buying up Canadian mines and oil. They are so very rich!

john

Chinese Investments Surge

The message is ready to be sent with the following file or link attachments:
Shortcut to: http://www.bloomberg.com/apps/news?pid= ... sjOed_Wf9s

China on a Commodities Spending Spree



The message is ready to be sent with the following file or link attachments:
Shortcut to: http://www.nytimes.com/2009/06/11/busin ... f=business

Mounting Deficits Spark US Economy Jitters


The message is ready to be sent with the following file or link attachments:
Shortcut to: http://business.smh.com.au/business/mou ... -c3xr.html

Wow! Thanks for All the Wisdom!



by Nilus Mattive
Dear Subscriber,


I was amazed and overwhelmed by all of the great feedback you shared with me after last week's column. My blog was filled with your wonderful anecdotes, advice, and even a little good-hearted admonishment (Okay, maybe I did overestimate Mr. and Mrs. Median's taxes a bit, guys!).

The depth of your comments and the wealth of knowledge were just terrific. And since you put so much effort into sharing with me, I want to highlight some of your points in today's column, along with my own thoughts.

By reviewing everything that was said over the past week, I came up with five simple rules that I think will help all of us get through life a little wiser, wealthier, and happier ...

Rule #1: Start Budgeting!

Sure, it seems like a real pain to track all of your regular expenses. And it is at first. But listen to what Bill had to say:

"I have always kept a monthly record of everything I spend and it has been an eye opener. I suggest everyone do it. I track dining out and grocery, utilities, insurances, health care etc. and it helps me stay in budget, particularly with these times. Besides monthly costs, I have divided my expenses into quarterly (real estate/estimated federal taxes) and yearly (auto/home insurance), as that helps me monitor my cash flow much better. For those that think this tedious, it actually becomes rather fun when you set goals and attempt to meet them. It also makes decisions about buying things very easy. If you are out of budget, then the answer is simply 'no.'"

Bill's right! My wife and I track our household expenses with a simple Excel spreadsheet. It takes a little effort to save our receipts and tally everything up, but what we're left with is a greater sense of control over our lives. And though a budget seems confining, it is actually the key to financial freedom.

But HB says the art of budgeting is nearly lost today:

"All I can say is 'Amen.' I am a Financial Adviser and I see what you are addressing more often than not. After a real look at cash flow, 'real wealth' has been squandered on lavish remodels, flat screens, expensive vacations and luxury autos. When you look at the historic ratios of income to purchases, it really puts things into perspective."

Ray, another professional in the field, echoed HB's experience and outlined how he helps people take their financial pulses ...

"As a Financial Advisor in the 403(b) market I must say your numbers are on target. In fact I would go a little further. When I meet with a client I go thru a budget worksheet. The purpose is to find out what their cash flow looks like. In addition to the most common expenses that you touch on - my worksheet also includes childcare expenses, credit card payments and personal expenditures such as going to the barber/hair salon, clothing, laundry and dry cleaning, charitable and commuting expenses. I would then have the client subtract their net income from the monthly expenses to arrive at their monthly cash flow. Once this is put on paper most people are surprised at the amount that goes out each month."

So if you haven't done a budget in a while ... and if you don't have a clue what your real monthly outlays look like ... I suggest you spend an hour or two getting back on top of your finances.

Once you find out where you stand ...

Rule #2: Formulate a Realistic Plan

Tracking your expenses is one thing. But the more important part is establishing realistic parameters for your life and your investment portfolio.

Bonnie shared her inspirational story:

"My husband and I planned our lives and future before we got married. We agreed on no debt, bought 70 mostly-wooded acres in the country for cash, built our own little house with our own hands for cash as we earned it, saved every penny we could. After 30 years, we are well-off and retired. People need to plan and to live by their own ideas and ideals, not worrying about what their neighbors think. It takes guts to do so, but that's what freedom is all about."

I think Bonnie's right. So many people are out there chasing the appearance of wealth that they're not actually accumulating anything but DEBT.

Fortunately, Katy sees this mentality changing right before her eyes in California. As she puts it,

"Thankfully, everyone I know here is hunkering down, and changing their lifestyle. Savings has gone up, and we are all paying down debt. We're all scared that taxes are going to jump (local, state, and federal) because LA and CA are both close to bankrupt and the Treasury doesn't seem that far behind."

According to the latest U.S. saving rate figures, Americans are exercising more restraint than they have in the past. That's great news, and I hope the trend continues.

Of course, no matter how much planning and adjusting you do in life, conditions are constantly changing. That brings me to ...

Rule #3: We Have to Be Flexible

A number of you told me how sudden illnesses or job losses drastically altered your financial standing ... in some cases overnight. And as our country is beginning to remember — economic prosperity ebbs and flows. Booms never last forever.

But if we approach our financial lives with flexibility — and if we prepare for darker days when the sun is still shining — we're far more likely to survive and thrive.

I loved hearing about the varying ways you've approached life, and the changes you've personally made.

For example, Ken said,

"Downsize by moving to a rural area, for instance. Get rid of the car payment just for starters. Grocery shopping — go in the middle of the week and only buy bargains and/or sale items. The only meat I buy is fillet Mignon and organic chicken breast when they are marked down. I don't pay taxes and refuse to do so, legally."

Now, I'm not sure how Ken is avoiding taxes, but as I've noted before ... there are plenty of legal tax-shelters available to us all.

Meanwhile, John is taking a different approach by living a simple, city life ...

"Maybe if more people would live in the city, own just one car, and ride transit, they could save the money they would have spent on the car payments, gas, insurance, and maintenance for retirement. It's worked great for my wife and I."

The idea here is that you can make changes in your life in response to what gets thrown at you. And it's never too late to get started or to try something completely different.

In fact, many of you told me that you were tired of "keeping up with the Joneses." Hence ...

Rule #4: Think Outside the Box!

I think DoctorM summed it up best:

"If Mr. & Mrs. Median have any 'problems,' it is with their wish list. We all want vacation and toys now, and bountiful retirement later. But it is a balancing act, and what most of us lack is a tool that we can use directly to tell us how to balance today's wants from tomorrow's (when we want to retire.) We always have options, tradeoffs and substitutions available to us."

No question about it. There are a million and one ways to go through life. And I was amazed to hear some of your tales off the beaten path. Listen to what Rob did:

"I saw the writing on the wall before the bust - and took a job in Saudi Arabia. For the past 16 years I've legally avoided paying Federal income tax (the 'expat' tax exemption of $85,000). Not owning a house in good ol' Connecticut dropped me off their income tax radar too. Since then I've been able to put close to $800,000 in the bank."

And he wasn't the only reader. Alfred says,

"Sold my Dallas house of 24+ years in Dec. 2004 and moved to my house in colonial Mexico. Sold that place and bought a 6,500 sq. ft. 4-story with world class views on the Eastern mountain in the centro of San Miguel de Allende, GTO. Our annual property taxes are $432 vs. $19,000 in Dallas. We have a housekeeper and gardener and no longer pay (any) income nor U.S. property taxes. Expat retired life is wonderful!"

Meanwhile, some of you are just plain moving to the country, not out of it! Get a load of Stefanie, who proves that prosperity is possible even on a small income:

"Who cares how fast the Joneses rush towards bankruptcy! My daughter and I both have incomes below the poverty level in this country. We save close to $1,000 per month. We just bought 15 acres in TN, cash ... people can save if they stop looking to the Joneses for guidance."

JC sums it up as well as I could:

"Lots and lots of Americans are smart enough to have figured out that the system in which we live will work for you, but only if you do not go with the flow and do not listen to and follow conventional wisdom (which seems always to be wrong in the long run)."

Lastly, no matter how bad we think our individual situations might be, it's important to remember that we still have it pretty darn good compared to a lot of people. That's why I'm suggesting ...

Rule #5: Be Thankful!

If you've ever visited a third world country, you've probably seen real poverty first hand. Heck, potable water is a luxury in some of the places I've been to!

And in case anecdotes aren't enough, here are a couple statistics that bring the point home:

More than three billion people — half the world's population — live on less than $2.50 a day ...


At least 80% lives on less than $10 a day ...


And the richest 20% of the world accounts for 75% of global income.
It's important to remember that we still have far more opportunity than most.

As Matt told me: "Americans are paid well, and the median family has plenty to live on. Our problem is that we are not satisfied with the amazing blessings we have."

Right he is!

So let's do the best we can with what life throws at us ... continue to budget and plan ... and never lose sight of all the great people and pleasures we have in our lives.

By the way, if you didn't see your comment mentioned here today, don't think I'm ignoring you ... you had so many great questions that I plan on devoting plenty more space to the specific concerns you raised in my next few columns.

One message that I got from you loud and clear was that you want more information on these all-important personal finance issues. So stay tuned and keep that great feedback coming!

Best wishes,

Nilus

The Great Global Gap
by Martin D. Weiss, Ph.D.
Dear Subscriber,


Good morning!

Some exciting new changes are now unfolding, and later this week, I will tell you more about them via video from my home. (Look for my email announcement with the subject "Important Fireside Chat.")

For now, here's a heads-up on one of the most important developments:

While the U.S. and Europe are still mired in the mud pits of recession, Brazil, India, China, and other countries are already riding a new wave of growth.

It's a great global gap that's widening with nearly every new release of data. Just last week, for example, we learned that ...

In the U.S., consumer confidence, which seemed to be climbing, suddenly took a new tumble, as the Reuters/University of Michigan index sank from 70.8 to 66.

U.S. consumers have little hope the stimulus package will work. Worse: There were fewer consumers reporting income gains than at any time in the entire 60-year history of the survey.

The reason is obvious: 16.5 percent of U.S. workers are unemployed, according to the government's broadest measure — and even the most optimistic of Washington economists expect the jobless rate to continue rising for the rest of the year.

That means more home foreclosures, more defaults on consumer credit, and more big obstacles to growth in the U.S.

Similarly, in the U.K., second-quarter gross domestic product plunged 5.6 percent compared to the prior year, the worst decline since the government began tracking quarterly GDP in 1955. And ...

In Spain, public despair is rising so quickly, it's setting the stage for a massive social upheaval. Reason: The unemployment rate has surged to 17.9 percent and is expected to go even higher as Spain's labor-intensive construction industry continues to collapse.

Meanwhile ...

In Brazil, the unemployment rate unexpectedly plunged from 8.8 percent in May to 8.1 percent in June, a six-month low. And unlike the U.S. Federal Reserve — which has already dropped its official interest rates to virtually zero — Brazil's central bank has room to reduce its rates further to spur more growth ... and that's precisely what it did last week, slashing its official rate by a full half percent.

India's economy is likely to expand by 6.25 to 7.75 percent in the current fiscal year, according to government estimates. And ...

China's economy grew by more than 7.1 percent in the first half of this year. Indeed, China's GDP is likely to surpass Japan's as the world's second-largest before the end of this year.

Why the huge contrast? A key reason is the one I've been harping on since the day I launched this publication: DEBT!

The Great Debt Dichotomy

The U.S. and most of Europe are buried in mountains of debts which, even in the best of circumstances, could take many years to unwind. Brazil, India, China, and others (such as Indonesia, Malaysia, and South Korea) are not.

According to the Fed's Flow of Funds Accounts of the United States, at the end of the first quarter, the U.S. had $6.8 trillion in Treasury debt, $8.2 trillion in government agency debt, $2.7 trillion in municipal debt, $11.6 trillion of corporate debt, $14.6 trillion in mortgage debt, $2.5 trillion in consumer debt, plus $6.5 trillion in other debts.

Grand total: $52.9 trillion, the highest in history. (To see exactly where I get these numbers, click here.)

Moreover, the U.S. government has future obligations to Social Security, Medicare, and pensions that exceed $60 trillion ... while U.S. banks now hold derivatives obligations exceeding $202 trillion, according to the latest tally by the OCC.

This is a huge, unprecedented burden to every single segment of our economy:

U.S. families are buried in their mortgages and credit cards, getting forced out of their homes by the millions.

U.S. cities and states are jettisoning essential services, abandoning decades-long commitments to their citizens.

U.S. corporations are defaulting on their debts in record numbers, with worse to come.

Even the Obama administration, despite a super-majority in Congress and all the political clout it can muster, is unable to overcome a simple reality: Washington's finances are also in disarray.

Ironically, some of the countries with the least debt and the most cash reserves today are precisely the same ones that, just a few years ago, were among the most reliant on advanced industrial nations for capital:

Brazil has reversed from one of the world's largest debtor countries to one of the world's largest creditors. It's the fourth-largest lender to the U.S. government. It has virtually eradicated its foreign debt. And its international reserves have now grown to a record $209.6 billion as of July 16.


India's foreign-exchange reserves are even larger, at $266.2 billion. And ...


China's foreign-exchange reserves have just surged to $2.132 trillion, after growing by $177.87 billion in the second quarter, the largest rise on record.
Moreover, virtually every sector of their economies — from households to the federal government — has FAR less debt than their U.S. counterparts, even in proportion to their lower incomes.

And it's largely due to this massive debt discrepancy that we now see ...

A Disturbing Disparity in Stimulus Packages

In a nutshell, economic policies in the United States are failing. In Brazil, India, and China, they are succeeding.

But the greatest disparity of all is between the fiscal stimulus packages in the U.S. and Europe compared to the stimulus now being pursued by China:



In the U.K., the government is spending only $30 billion in an economy that's almost one hundred times larger. That's just 1.1 percent of GDP!


Even adding up all the stimulus packages among the 16 nations of the eurozone, the total is only $268 billion, or just 1.4 percent of GDP.


The Obama administration's stimulus, at 5.5 percent of GDP, is over three times more aggressive than that of the eurozone, where governments are more fearful of the inflationary consequences.


But it still pales in comparison to the stimulus package in China, which represents an unusually robust 13.9 percent of GDP.
More important than the sheer size of the stimulus, however, is the way it's being pursued.

In the U.S., the stimulus is being financed by debt, despite the fact that federal debt as a percent of GDP is already the highest among the four.

In China, it is being financed out of massive cash surpluses, which, as I just mentioned, continue to grow despite Beijing's stimulus outlays so far.

Plus, here's a big point most analysts are missing:

The Obama administration is planning to spend its stimulus money in just one year and is unlikely to have the political or financial capital to come back for a second round.

In contrast, China is spreading its stimulus expenditures out over two or three years; and, if needed, can easily renew it for another few years.

Bottom line: While America's investors and business planners see just a one-time shot in the arm from Washington that's already showing signs of failing, their counterparts in China can count on a steady flow of capital from Beijing as long as it's needed.

Countries and companies that are have hitched their revenues to this powerhouse are among the most likely to benefit. Those that are bogged down in debt are the most likely to be left behind.

Right now, most stocks in Brazil, India, and China are a bit pricey. But soon, major investment opportunities will abound.

Good luck and God bless!

Martin

Ben Bernanke's "EXIT STRATEGY"???

By Shah Gilani
Contributing Editor
Money Morning

At its most basic level, the U.S. Federal Reserve’s so-called “exit strategy” is designed to let government bailout and liquidity programs unwind on their own, as markets return to a state of “normalcy.”

But what investors don’t realize is that without an exit strategy that includes plans for unwinding insolvent mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) - now more accurately defined as government-sponsored hedge funds - recent market gains will be limited and will likely reverse. If those setbacks cause the nascent U.S. housing market rebound to stall, it could even lead to a decade-long downturn.

And Fed Chairman Ben Bernanke’s exit strategy ignores Fannie and Freddie.

The Government-Sponsored (800 Pound) Gorilla
When the U.S. government - succumbing partly to pressure from foreign bondholders - last September forced Fannie and Freddie into government conservatorship, it essentially nationalized what amounted to the world’s two largest hedge funds.

Essentially, in the government-brokered deal, taxpayers bought senior preferred stock (with a 10% annual dividend yield) from Fannie and Freddie, which each received $1 billion in capital. Both firms were also granted a backstop guarantee worth $200 billion. In March, amid escalating fears that these arrangements wouldn’t provide enough support, an additional $200 billion of taxpayer muscle was added to the support pyramid.

Why are we supporting run-amok government-sponsored hedge funds?

Describing Freddie Mac - and especially Fannie Mae - as “aggressively competitive” is a lot like calling the Grand Canyon “a ditch.” Both firms use their special status as “government-sponsored enterprises” (GSEs) to borrow trillions of dollars in the public markets - at spreads just a couple of basis points above U.S. Treasury debt.

This GSE status induced investors throughout the world - including virtually every major government- to load up on Fannie and Freddie debt, since that nurtured the belief these institutions were backed by the full faith and credit of the United States. As it turned out, any doubt about the status of GSE backing was put to rest. The September 2008 Congressional Research Service (CRS) Report for Congress - titled “Fannie Mae and Freddie Mac in Conservatorship” - plainly states that “the U.S. Treasury has put in place a set of financing agreements to insure that GSEs continue to meet their obligation to holders of bonds that they have issued or guaranteed. This means that the U.S. taxpayer now stands behind about $5 trillion of GSE debt.”

By borrowing cheaply and stymieing any threatening regulation by means of dispensing payoffs from its $350 million Fannie Mae Foundation - as well as from a 10-year, $170-million lobbying effort - Fannie and Freddie eventually managed to leverage themselves at a ratio of 60-to-one. Both firms successfully glad-handed powerful legislators into granting them clearance to keep expanding their balance sheets: Eventually, the two firms accumulated more than $6 trillion in mortgage balance sheet assets between them. The explosion of debt and leveraged assets was even more troubling because it came against a backdrop of lower and lower capital, the result of an ongoing relaxation of capital requirements, the specific result of targeted campaign donations

From Mortgage Facilitator to Financial Market Predator
Fannie and Freddie - with the GSE status acting as a U.S. government imprimatur - had easy access to cheap capital, and a massive leveraging capacity that would be the envy of even the most aggressive private-sector hedge funds. Does any one remember Long-Term Capital Management?

Together these two factors enabled Fannie and Freddie to buy back massive amounts of their own securitized pools of mortgage loans and - in a brazen money grab - to purchase huge amounts of private-label, bank-pooled securities that didn’t have their own mortgage-borrower guarantees. The game was about juicing up net-interest income by using cheaply borrowed money to buy high-yielding “junk” mortgages.

Originally, the term “hedge fund” applied to managers of alternative assets who once actually “hedged” their portfolios. Not only did Fannie and Freddie fail to hedge their rising risk exposure to any meaningful degree, they were insanely non-diversified, because they held only one class of assets: Mortgage-backed securities.

Despite such ill-advised strategies, the executive echelon at Fannie and Freddie paid themselves like private-sector hedge-fund honchos. In the middle part of this decade, Fannie Mae was involved in an $11 billion accounting scandal in which shareholders were allegedly deceived and regulators stonewalled. The company “managed” (manipulated) its quarterly earnings to smooth out returns and impress stockholders enough to induce them to drive its stock price higher and higher - a gambit designed to trigger big bonus payments for top executives.

Once a Vice, Now a Habit
In last week’s “Semiannual Monetary Policy Report to the Congress“ and in his July 21 Wall Street Journal Op-Ed piece, Bernanke, the U.S. central bank chairman, laid out plans to wind down government credit extension programs and combat any potential inflationary pressures. What was not addressed was how - or even if - the two government-owned and operated de-facto hedge funds, with combined assets of more than $6 trillion, would be unwound, or whether they would remain in place as they are in order to be used as back-door fiscal and monetary policy tools.

In what amounts to more than just a bailout on an unprecedented and under-reported scale, the takeover of both Fannie and Freddie provides the Fed and the U.S. Treasury Department a super sponge to both guarantee new mortgages and absorb all the unwanted mortgage-backed securities that banks and non-bank originators package and need to offload.

Because they lack sufficient capital - or lack the appetite to hold any new mortgage paper on their balance sheets - banks need this government-sponsored outlet for the mortgages they want to unload. The Fed and the Treasury Department are using their taxpayer-supported hedge funds to grease the rusted wheels of the mortgage money machine to gain traction where there is none.

The Housing Market is the Key to an Economic Rebound
Without a rebound in the U.S. housing market, most economists agree that the overall U.S. economy has almost no chance for a resurgence of its own. In fact, barring a turnaround in housing, the best we can hope for is to have the U.S. economy just limp along for years. And the reality is that without a resurgent housing market, the outlook for the general economy is actually much, much worse.

The prospect for a housing recovery is predicated on an end to the ongoing slide in real estate prices, followed by sufficient availability of low-interest credit - as well as a buying public that’s willing to use that credit to buy new homes if the cycle isn’t likely to repeat itself.

In an uncertain real-estate environment Fannie’s and Freddie’s wholesale purchasing of new mortgage pools is the only hope the U.S. government has of stimulating and accelerating the velocity of mortgage money. These hedge funds are now indispensable fiscal and monetary policy levers.

Beware of the “Bear Trap”
Propping up teetering banks may serve to shore up near-term public confidence in the financial system. But it also destroys the same system by dislocating any meaningful capital-allocation strategy by extending the life of sick institutions that suck up scarce resources. What’s happening at Fannie and Freddie is no different - except that it’s happening on an exponentially more debilitating scale.

As the buyer of last resort, the U.S. government is letting its two hedge funds continue to borrow and leverage themselves to backstop the nation’s mortgage-origination market. The Treasury Department also is buying up any mortgage-backed securities that Fannie and Freddie don’t add to their own balance sheets.

Taxpayers are being duped into believing that the mortgage market is recovering and that money will be flowing when they decide it is time to buy homes again.

But there’s a big problem here: At some economic “inflection point” - a point that will come together very quickly if interest rates unexpectedly spike - losses at the “twin terrors” of Fannie and Freddie could spike into the stratosphere, as well, meaning the financial reality that we’re detailing here will necessitate another bailout, but on a scale we’ve yet to envision.

In the first quarter alone, Fannie lost $23.2 billion - its seventh-consecutive quarterly loss - and it drew another $19 billion from its government piggybank. The firm has a negative-net-worth of $18.9 billion.

Fannie Mae isn’t just insolvent, it’s dead - though its functions are being maintained by a federal-government life-support system.

Freddie Mac had a $9.9 billion loss for the quarter and drew $6.1 billion from the U.S. Treasury. Freddie’s 10% dividend to the government on the $51.7 billion it has drawn to date is costing it $5.2 billion a year - an amount that exceeds what it earned in nine of the last 10 years.

Investors should be afraid. While the “bear trap” hasn’t been sprung yet - it’s clearly been set. Recently trotted out earnings that only look good because they exceed analysts’ doomsday estimates are not going to override the reality that mortgage financing won’t be easy or cheap when buyers return en masse. Unless our government weans itself off its own tainted tonic - and makes a concerted effort to create a financially viable private-sector mortgage-origination and investment outlet - the U.S. stock market will remain weak for decades.

Two Moves the U.S. Government Needs to Make Now
Unlike the unworkable plan that Bernanke outlined last week, there is an “exit strategy:” that will work. Government leaders need to understand that bigger is not always better, especially in light of the concentration of risk and taxpayer exposure that’s been created by these government-sponsored hedge funds. This exit strategy consists of two key initiatives:

•Get Competitive Again: Break up all the big banks and create a greater number of highly localized, community-centric banks. Let community and regional bankers securitize pools of mortgages using transparent “conforming” disciplines, and force originators and lenders to keep skin in the game. Create national ratings standards and let originators pool strictly defined, varying-quality loans into properly labeled packages, and let investors determine their risk tolerances without being blindsided. Large loans can easily be syndicated across multiple banking institutions and large risk-taking, non-deposit-taking institutions - such as real hedge funds and private-equity companies that will constitute the new “equity merchant banks” - can do a better job of high-stakes lending.
•Bring Down the Curtain on Fannie and Freddie: It’s time to break up Fannie Mae and Freddie Mac. The government has proposed reducing their portfolios by about 10% per year, but that’s not happening. In an end-around maneuver, while Fannie and Freddie are being propped up and still growing, the government is buying mortgages through the Federal Reserve. Either way, taxpayers end up holding massive pools of mortgages that no one else wants. Doing away with the socialization of homeownership financing will put the market back in control of appropriating risk.
The bottom line is this: The only “exit strategy” we really need is to position ourselves to diversify risk and promote stable rewards by taking apart what history has proven to be too-big-to-control.

Shutting down sick banks and unwinding government schemes to mask illiquidity will be painful and would certainly stress the financial markets again. But those are short-term pains that will lead to meaningful long-term change. On our current path, we may be keeping things copasetic in the near-term - but in the long run we remain on a potential collision course with some painful periods that will be deep and drawn out.

•The old adage tells us that “those who forget the past are doomed to repeat it.” After the tragic financial travails of the past year or so, the last thing the U.S. economy needs is to spring a bear trap that results in a 10-year financial malaise. Let’s learn from the mistakes of the most-recent past and make the changes needed to avoid this pending dour outcome.