Reaganites Did It! (Paul Krugman) Markets set to plunge again (Jim Rogers)

“This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. ... All in all, I think we hit the jackpot.” So declared Ronald Reagan in 1982, as he signed the Garn-St. Germain Depository Institutions Act. He was, as it happened, wrong about solving the problems of the thrifts. On the contrary, the bill turned the modest-sized troubles of savings-and-loan institutions into an utter catastrophe. But he was right about the legislation’s significance. And as for that jackpot — well, it finally came more than 25 years later, in the form of the worst economic crisis since the Great Depression.

One of my major themes since beginning this blog which deals with politics, economics and the pervasive (odoriferous) American culture that informs each is that the Reaganites did it (put all these mysteriously soon-to-fail systems in place) long ago. Paul Krugman published an essay today that agrees with me (and multitudes of others) and documents one more of those strange occurrences in law that changed policy in such a way as to guarantee (almost 30 years ago) that those at the top would always walk away with the spoils and the little guys would be left confused about why, when they could hardly get a loan, they were always designated the ultimate bankers. (Emphasis marks were added - Ed.)

For the more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn — the turn that made crisis inevitable — took place in the early 1980s, during the Reagan years. Attacks on Reaganomics usually focus on rising inequality and fiscal irresponsibility. Indeed, Reagan ushered in an era in which a small minority grew vastly rich, while working families saw only meager gains. He also broke with longstanding rules of fiscal prudence. On the latter point: traditionally, the U.S. government ran significant budget deficits only in times of war or economic emergency. Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980. But indebtedness began rising under Reagan; it fell again in the Clinton years, but resumed its rise under the Bush administration, leaving us ill prepared for the emergency now upon us. The increase in public debt was, however, dwarfed by the rise in private debt, made possible by financial deregulation. The change in America’s financial rules was Reagan’s biggest legacy. And it’s the gift that keeps on taking. The immediate effect of Garn-St. Germain, as I said, was to turn the thrifts from a problem into a catastrophe. The S.& L. crisis has been written out of the Reagan hagiography, but the fact is that deregulation in effect gave the industry — whose deposits were federally insured — a license to gamble with taxpayers’ money, at best, or simply to loot it, at worst. By the time the government closed the books on the affair, taxpayers had lost $130 billion, back when that was a lot of money. But there was also a longer-term effect. Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending — restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down. These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped. . . . We weren’t always a nation of big debts and low savings: in the 1970s Americans saved almost 10 percent of their income, slightly more than in the 1960s. It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life, culminating in the near-zero savings rate that prevailed on the eve of the great crisis. Household debt was only 60 percent of income when Reagan took office, about the same as it was during the Kennedy administration. By 2007 it was up to 119 percent. . . . There’s plenty of blame to go around these days. But the prime villains behind the mess we’re in were Reagan and his circle of advisers — men who forgot the lessons of America’s last great financial crisis, and condemned the rest of us to repeat it.

Read the rest here. "Legendary investor" Jim Rogers, who was always Lou Rukeyser's favorite huggy bear (throughout the "boom" Reagan/Bush years for business) warns that the markets are ready to dive off the cliff again. (Emphasis marks added - Ed.)

. . . Investment gurus Jim Rogers and Marc Faber agree on one thing. They see a major correction looming in equity markets with a currency effect for the US, since the current rally has been mostly based on printed money, a kind of 'reverse Robin Hood policy' of governments, to steal from the peasants to give to the rich. As with Faber, Rogers is mostly to be seen being interviewed on CNBC Asia or Europe, since their views are to put it mildly, somewhat negative on the US Dollar and the prospects for green shoots in the US economy. Legendary investor Jim Rogers told CNBC on Wednesday he is not short or hedged in anything at the moment, but buying Japanese Yen. The next crisis in his eyes is in currencies which makes sense since sovereign states have taken much of the bad debt from the banks and piled them onto their own balance sheets. The stock market may hit new lows this year or the next as the current rally has been largely caused by the money printed by central banks and fundamental problems remain unsolved, he said. His views echo those of renowned bear Marc Faber, who told CNBC last week that the rises in share prices did not mean the world was embarking on a path of sustainable economic growth. "I'm not buying shares if that's what you mean. Not at all," Rogers told Squawk Box Asia. Governments have not solved the essential problems that caused the crisis but instead they "flooded the world with money," according to Rogers. Trying to solve the problem of too much consumption and too much debt with more consumption "defies belief" and will not work, he said. The price of oil is also likely to remain high despite the fact that the recession is taking its toll on demand, he said. "You know supplies worldwide are declining at the rate of anywhere from 4% to 6% a year, yes, demand is down at the moment but in longer term, unless somebody discovers a lot of oil very quickly, the surprise is going to be how high the price of oil stays, and how high it eventually goes," Rogers added. The next financial meltdown will be in the currency markets, as central banks around the world have been printing money, giving the appearance of massive government intervention to weaken their currencies, legendary investor Jim Rogers, Chairman, Rogers Holdings, told CNBC on Wednesday. "At the moment I have virtually no hedges, I suspect it is going to be the next problem, big crisis will be in the currency markets, I'm trying to figure out what to do there," Rogers said. "If I am right, you're going to see a lot of currency problems in the next decade or two," Rogers said. Governments around the world are doing their best to destroy currencies, many currencies in fact. And people need to understand that; if they don't understand it now, they're going to find out, they're going to find out the hard way," he added. Marc Faber agrees that we will see a correction unfold in the equity markets. Faber said: “In general, the markets were very oversold on 6 March 2009 and there were some favourable technical divergences [which resulted in the subsequent rally].” “When the S&P made a new low, many markets and stocks were higher than they were in October-November. That means many stocks had entered bull markets including Asian stock markets,” said Faber, pointing out that now, most stocks were up by more than 100%."

Read the rest here. Not exactly green shoots for all. Suzan ______________________

Let AIG Go Bankrupt for Good of US?

Jim Rogers, a favorite bear of mine from my old Lou Rukeyser-watching days (head bows for a moment in remembrance of sweeter if not much better times - the 80's), brought up an issue on CNBC Tuesday that bothers many people when he stated that we should "Let AIG Go Bankrupt" to save the U.S. (Some editing was necessary for clarity - Ed.)

because keeping it and other sick financials alive on government support risks ruining the US economy. AIG, whose $61.66 billion fourth-quarter loss was the largest ever for a US company, received $30 billion more in government funds Monday. The insurer's financial health hasn't improved despite getting as much as $150 billion from the government last year. "Suppose AIG goes bankrupt, it is better that AIG goes bankrupt and we have a horrible two or three years than that the whole US goes bankrupt," Rogers said. "AIG has trillions of dollars of obligations, let them fail, let the courts sort it out and start over. Otherwise we'll never start over." On Monday, CEO Edward Liddy told CNBC that the insurer is far more stable and secure than it was last Fall but acknowledged that it was "difficult to say" if AIG will need even more money from the government in the future. Bailing out the banks is going to increase the debt spiral and finally cause the destruction of the world's biggest economy, Rogers said.

Rogers went on to say that "I think it's astonishing, they're ruining the US economy, they're ruining the US government, they're ruining the US central bank and they're ruining the US dollar."

You are watching something in front of (y)our eyes, very historically, which is basically the destruction of New York as a financial center and the destruction of America as the world's most powerful country.

Rogers calls our attention to what we are risking by ignoring Japan's financial history.

Japan's economic "lost decade" was caused by trying to bail out the banks, and the West risks running out of money if it doesn't let the bad banks fail now, Rogers warned. Systemic risk is going to be the same in 10 months, 5 years o(r) 10 years if the fundamental problem is not solved, he added. "The idea that you have too much debt, too much borrowing and too much consumption and you're going to solve that problem with more debt, more consumption and more borrowing? These people are nuts." Wall Street and the City of London are going to be "disastrous" for years, like in the 1950s and 1960s, and in 30 years, finance will "dry up and wither away" as we are entering a "long period of hard times," he said. "Power is shifting now from the money shifters, the guys who trade paper and money, to people who produce real goods. What you should do is become a farmer, or start a farming network," Rogers said.

Reminding me once again of the late 60's/early 70's when my "Back to the Land" hippie comrades argued for a simpler life filled with non-X-box pleasures as the gate to Heaven . . . And then, out of nowhere, Eric Margolis hints that U.S. troops (combat-ready, you betcha!) will never leave Iraq and that the public will soon forget that it's not Obama's and the Democrats' war, and that none of the real perpetrators will ever be held accountable. (As if it's like a real plan!)

President Obama says U.S. combat troops will leave Iraq by the end of 2011. However, the U.S. military occupation will not end. What we are seeing is a public relations shell game. The U.S. has 142,000 soldiers and nearly 100,000 mercenaries occupying Iraq. Obama's plan calls for withdrawing the larger portion of the U.S. garrison but leaving 50,000-60,000 troops in Iraq. To get around his promise to withdraw all "combat" troops, the president and his advisers are rebranding the stay-behind garrison as "training troops, protection for American interests, and counterterrorism forces." At a time when the U.S. is bankrupt and faces a $1.75 trillion deficit, the Pentagon's gargantuan $664 billion budget (50% of total global military spending) will grow in 2009 and 2010 by another $200 billion to pay for the occupation of Iraq and Obama's expanded war in Afghanistan. Throw in another $40 billion to $50 billion for the CIA and other intelligence agencies. Obama insists the U.S. will withdraw from Iraq. But his words are belied by the Pentagon, which continues to expand bases in Iraq, including Balad and Al-Asad, with 4,400-metre runways for heavy bombers and transports.

Say it ain't so, Joe! Suzan ________________________