In this episode of the Keiser Report, Max and Stacy discuss the next financial crisis lurking around the corner, according to the NYTimes and how it was Keiser Report who first warned you seven years ago that the economics of fracking makes no sense . . . at least yet, not if one is seeking a return on an investment. Fracking may make sense on national security grounds and it certainly creates a whole load of holes in the ground as economists like Paul Krugman believe are good for the economy. In the second half, Max interviews Wolf Richter of WolfStreet.com about the meltdown in Argentina. As the country was able as recently as last year to sell a ‘century bond,’ what has happened that so suddenly the finances collapse.
In this episode of the Keiser Report, Max and Stacy discuss the corporate media manufacturing consent on the big, fat success of the great Greek bond holder ‘bailout’ disaster. They also discuss the new NAFTA, same as the old. In the second half, Max interviews bitcoin analyst and enthusiast, Leah Wald, a former World Bank economist, on what bitcoin can do for developing countries.
Central bankers are now aggressively playing the stock market. To say they are buying up the planet may be an exaggeration, but they could. They can create money at will, and they have declared their “independence” from government. They have become rogue players in a game of their own.
Excluding institutions such as Blackrock and Vanguard, which are composed of multiple investors, the largest single players in global equity markets are now thought to be central banks themselves. An estimated 30 to 40 central banks are invested in the stock market, either directly or through their investment vehicles (sovereign wealth funds). According to David Haggith on Zero Hedge:
Central banks buying stocks are effectively nationalizing US corporations just to maintain the illusion that their “recovery” plan is working . . . . At first, their novel entry into the stock market was only intended to rescue imperiled corporations, such as General Motors during the first plunge into the Great Recession, but recently their efforts have shifted to propping up the entire stock market via major purchases of the most healthy companies on the market.
The nice thing about free to me money from any source is the recipients don’t have to change anything. Free money is the ultimate free-pass from consequence and adaptation: instead of having to make difficult trade-offs or suffer the consequences of profligacy, the recipients of free money are saved: they can continue on their merry way, ignoring the monumental dysfunction of their lifestyle.
This explains the appeal of Modern Monetary Theory (MMT), which holds that deficit spending is the “solution” to all our problems because governments can’t go broke–they can always emit whatever currency they need via printing or borrowing.
The problem with government deficit spending is it’s free money to the recipients: there are no feedback mechanisms to enforce any consequences for spending that’s wasteful, fraudulent or inefficient/ineffective.
Deficit spending simply enables the wasteful, corrupt, rewarding-insiders profiteering state-cartel kleptocracy to continue gorging on public spending.So what desperately needed efficiencies and improvements are imposed on the higher education cartel by handing the cartel another trillion dollars of public spending? None.
What desperately needed efficiencies and improvements are imposed on the healthcare cartel by handing the cartel trillions of dollars in publicly funded “Medicare for all”? None.
What desperately needed efficiencies and improvements are imposed on the national defense cartel by handing the cartel additional trillions of public spending? None.
What kind of sense does it make to encourage wasteful consumption on a finite planet with limited resources? The entire rationale of Modern Monetary Theory (MMT) is that the productive capacity of the economy isn’t being maxed out because we’re not consuming enough.
This is the insane ideology of endless growth on a finite planet.
Here is our Friday digest of the important news, market updates, charts and videos we were informed by this week.
We felt it important to do a video update which considers the risks that Brexit poses to the London property market. This is a very real risk that has not been assessed in the British and Irish media.
Our timing was good and the Bank of England must have been listening to us! Yesterday, Bank of England governor Mark Carney confirmed that there are real risks to UK property investors and the UK economy, when he warned that a “no- deal Brexit” would likely result in economic chaos and a UK house price correction or crash of some 35%.
In a stark warning to the British government, Mark Carney told ministers that the impact of a no-deal Brexit could be as “catastrophic” as the 2008 financial crisis.
Needless to say this would result in a very serious recession indeed in the UK and would have consequences for the Irish economy, EU economies and other over-valued property markets – one of which is in Dublin, Ireland.
Protestors hold signs behind Richard Fuld, Chairman and Chief Executive of Lehman Brothers Holdings after its collapse led to the last global financial crisis. REUTERS/Jonathan Ernst/File Photo
After 10 years of unprecedented goosing, some of the real economy is finally overheating: costs are heating up, unemployment is at historic lows, small business optimism is high, and so on–all classic indicators that the top of this cycle is in.
Financial assets have been goosed to record highs in the everything bubble.Buy the dip has worked in stocks, bonds and real estate–what’s not to like?
Beneath the surface, the frantic goosing has planted seeds of financial crisis which have sprouted and are about to blossom with devastating effect. There are two related systems-level concepts which illuminate the coming crisis: the S-Curve and non-linear effects.
The S-Curve (illustrated below) is visible in both natural and human systems.The boost phase of rapid growth/adoption is followed by a linear phase of maturity in which growth/adoption slows as the dynamic has reached into the far corners of the audience / market: everybody already caught the cold, bought Apple stock, etc.
The linear stage of maturity is followed by a decline phase that’s non-linear.Linear means 1 unit of input yields 1 unit of output. Non-linear means 1 unit of input yields 100 unit of output. In the first case, moving 1 unit of snow clears a modest path. In the second case, moving 1 unit of snow unleashes an avalanche.
– Brexit in conjunction with severe price unaffordability, rising interest rates and global economic uncertainty is leading to sharp price falls in London home prices
– London home prices have fallen five months in a row with property prices more than 7% lower in 12 months in some areas
– The Economist has done research which suggests that London house prices are 50% overvalued and Dublin house prices are 25% overvalued
– The Economist believes that there are many cities with property bubbles vulnerable to sharp corrections due to rising interest rates and geopolitical uncertainty and unaffordability
– Reuters poll of housing market analysts and experts predicted that London house prices will continue to fall in 2018 and 2019, with a one-in-three chance of a house price crash
We’re edging ever closer to the financial crisis I’ve been investigating since 2012. I moved to four different cities in Australia to conduct my research, interviewing mortgage brokers and former bankers over four years.
Source: Australian Financial Review
Over the last few months, a Royal Commission has exposed what my research did back then. But the campaigner who first exposed the issue going back to the early 2000s continues to discover even more extraordinary facts.
Between the three of us, the conclusion is clear: Australia’s bankingsystem is about to blow, potentially triggering serious disruption in financial markets. Including here in Britain.
Let’s take a look at some of what the Royal Commission has found first.
Major financial service providers have stolen about a billion Australian dollars from customers through “fee for no service” deals. They charged people for services they never received, such as regular analysis of their financial position. One bank, formerly Australia’s central bank, even charged dead people a fee for no service. Having discovered the problem, the banks sat on it for two years.
A bank which provided commissions to anyone who introduced new borrowers to them was caught giving a tailor $488,000 for his help in securing $122 million in home loans.
In what could be the biggest class action in history, five million Australians are lining up to sue their pension funds, which are often owned by the banks. Instead of investing their customers’ savings in the highest interest offering products, the banks just held on to the cash in their own accounts. Because of the long periods of time during which pension funds hold savings, even small differences in interest rates add up to huge lost returns per person.
Funnily enough, the UK government is busily implementing the same sort of pension system under its opt-out rules…
During the Royal Commission hearings, a witness admitted to having lost count how often his firm had mislead the regulator.
All this should amount to some impressive fines and lawsuits in coming years.
But the biggest issue goes much deeper.
Australia’s version of the sub-prime crisis
What I’m about to show you is a re-enactment of the American sub-prime crisis in Australia. With two key differences.
In Australia, the lenders, not the borrowers, are the ones lying on liar loans. The lenders and their mortgage brokers fudge the figures, such as income, to get a loan past lending standards.
And secondly, only in Australia has the court system established a precedent where, if you can prove your mortgage broker or banker manipulated your loan application, you can keep your home and cancel your mortgage. It’s a free house for the victim of the fraud, and a whopping loss for the banks. Or the investors in the securitised mortgages.
In 2012, having signed on for a PhD on the topic, I considered doing a research project that tested all this. The plan was to get a loan I couldn’t afford with a mortgage broker who provided falsified documents, only to sue the bank and then get a free house.
Sounds ridiculous, but two Australian fund managers went most of the way there in the course of their own research. They posed as broke graphic designers and applied for mortgages. They were offered more than they even applied for!
According to the Royal Commission, cash bribes were paid to encourage mortgage brokers to overlook fraudulent supporting documents. Which is odd given they were instructed and trained to do so by the banks anyway.
According to Denise Brailey, who has been on the warpath for more than a decade about all this, along with personally helping hundreds of borrowers to fight the banks, things are far worse than the Royal Commission realises. Banks “robo-approve” the loans without even checking them.
My own research says they hired staff who couldn’t speak English to verify the documents.
According to Australian media reports, some mortgage brokers’ associates offered the service of fake employer phone confirmations in case the bank actually tried to verify the loan applicant’s employment. One broker in a media expose claimed a banker called him up and asked why he hadn’t fudged the figures sufficiently for a loan to pass.
Royal Commission research claims that bankers at one bank discussed creating a “straw man” false client to mislead regulators when they investigated.
When I exposed all this in my writing in 2012, the financial services regulator in Australia sent us a warning and demanded to know who had read my reports, including their personal details. Three months before I completed my PhD, my fourth supervisor quit the university after telling me the project wasn’t theoretical enough.
The bankers and regulators continue to insist this isn’t a big problem. Which is odd, because all the data they are basing their information on comes from falsified, fraudulent and incorrect documents, so they can’t possibly know.
According to Brailey, the problem is utterly massive.
What Australians haven’t figured out… yet
The most interesting part of Australia’s sub-prime mess is how surprised everyone is. Why do the bankers lend to people who can’t afford their debt? It makes no sense.
The usual answer is incomplete. Yes, banks stand to gain based on fees, creating a churn and burn model for borrowers who borrow and default. But what about the risk?
At the very heart of the issue is something I have not seen any other analyst write about. It’s the distinction between default risk and collateral risk.
While house prices are rising, it makes sense to borrow money to buy a house you can’t afford. The worst-case scenario, for you and the lender, is to sell your house. The borrower gets to keep the capital gain and the bank’s risk of not being repaid is tiny.
In this world, the default risk of a borrower is completely irrelevant in lending decisions. Especially when lenders are willing to provide a high interest bridging loan to cover the inability to make loan repayments while house prices rise. Brailey even says the banks are using their own funds to make it look like the securitised mortgages they’ve sold to investors are being paid…
But stick to the crucial point. While house prices rise, default risk is irrelevant because collateral risk is zero. The rising value of the house covers the bank’s risk.
If house prices stop going up, suddenly collateral risk and default risk strike in a dangerous way. If bankers can’t rely on rising house prices to bail them out of bad lending decisions, the default risk of their borrowers makes a comeback. It becomes the deciding factor on whether a loan makes sense or not.
Over the last few months, house prices in Australia have begun dropping. The spike in collateral risk, and the return of default risk, is leading bankers to realise they’re sitting on a time bomb.
Having written billions in loans to people without any idea how many can actually afford that debt, the bankers are panicking.
At the margin of this issue are interest only loans. Because borrowers don’t repay the principal, the collateral risk kicks in when house prices stop going up, not just when they fall.
According to Brailey, many borrowers don’t have a clue they’re actually paying an interest only loan. They just think they have a mortgage, with no idea what sort that might be.
And nobody told them about the spike in repayments which is coming as many of those interest only loans turn into normal principal + interest loans. The idea was for them to sell their investment property before then, for a tidy profit and plenty of fees for the banks.
Brailey is fighting it out with bankers and regulators about just how many interest-only loans are out there. She estimates 80%, while regulators say it’s 30%.
Thanks to the Royal Commission, bankers have tightened lending standards. Which is absurd given they don’t check compliance with those standards anyway.
But lending is contracting. Without demand from the marginal borrower, who can’t afford to buy, house price demand is evaporating. The banks are on the hook for their dodgy loans, and for ordinary losses on their loan book.
Close to home
Now Australia may seem far away. But the London-based researcher of Absolute Strategy Research (ASR) says otherwise. Australia’s banks are absolutely massive, big enough to cause global disruptions. The Australian Financial Review newspaper explains ASR’s argument:
However, it’s a lesser-known fact that Australia’s big four banks are among the top 11 weightings in the MSCI Asia Pacific index along with the likes of Japanese industrial giants Toyota, Sony and Softbank. That is despite the entire Australian market accounting for just 18 per cent of the index.
The potential for issues in the banking sector to spread to the broader economy should not be underestimated, ASR said.
The power of a banking crisis to sink the Australian stockmarket, and pension system, is extraordinary. The big four banks make up a quarter of the ASX200 stockmarket index today, having reached over 30% in 2015, and surpassing the records set by other major economies before their banking sectors collapsed (see chart above).
The ASR firm co-founder Ian Harnett explained why things eventually turn down: “In a world of low rates, this entails an expansion of their assets. However, there are only so many financial assets that the home economy can generate before saturation kicks in, or the asset quality deteriorates.”
Which is what the first half of today’s Capital & Conflict was all about.
Australia’s banks source their funds from overseas, especially Europe.
With emerging markets and Italy struggling already, Australia’s banking crisis could be the butterfly that triggers a financial storm. It’s a bloody big butterfly though.
– The “Lehman moment”… could it happen again?
– The finance industry is infested with moral hazard
– Even more moral hazard today sowing seeds of next crisis
– “Next crisis will not look the same as the 2008 crisis”
Protestors hold signs behind Richard Fuld, Chairman and Chief Executive of Lehman Brothers Holdings after its collapse led to the last global financial crisis. REUTERS/Jonathan Ernst/File Photo
A decade ago this week, in the US, the government had just nationalised government-sponsored mortgage lenders Fannie Mae and Freddie Mac.
In the UK, the then-chancellor, Alistair Darling, had, at the tail-end of August, given The Guardian one of the most honest interviews ever given by a serving Cabinet minister, in which he warned that we were facing the worst financial crisis in 60 years.
In short, we all knew things were turning bad.
But the full-on tipping point came with the demise of Lehman Brothers, which was barrelling towards the end of its existence.
This week, ahead of the tenth anniversary of the “Lehman moment”, we’re going to be looking at what happened, what’s changed, and whether it could happen again.
Today I want to start with one of the most important concepts you have to understand in order to grasp what went on.
That’s a phenomenon with the rather curmudgeonly name of “moral hazard”.
The finance industry is infested with moral hazard
The notion of moral hazard originated in the insurance industry. It’s a very simple concept. It refers to the danger that if someone is insured against a loss, then they won’t take the necessary steps to prevent that loss from happening in the first place.
So, used more widely, moral hazard is what you get when an individual’s actions are divorced from their consequences. Or as Paul Krugman (loosely paraphrased) puts it, it’s when you take the risk, but someone else bears the cost.
This one notion explains why the entire financial crisis happened.
Human beings respond to incentives. If you pay them to take risk and shield them from the lion’s share of the consequences, then you will get a system that skews towards careless risk-taking.
Let’s start with the finance industry. The finance industry runs almost entirely on Other People’s Money (OPM). That creates an immediate problem. The finance industry likes to present itself as a steward of OPM, from institutional investors to individuals. Instead, it more often cares about getting as big a chunk of that OPM as it can. The more it has, the more fees it can extract from it.
That incentivises the creation of complicated, fee-heavy products. It incentivises the expansion of balance sheets. It incentivises short-term behaviour.
And it incentivises careless expansionism, because caution is penalised if you are trying to win business in a “race to the bottom” environment – note that financial industry whistleblowers were fired or victimised in most cases ahead of the financial crisis.
“Career risk” – whereby falling behind your peers in a booming market means getting fired – militates against a more balanced approach. And a lack of genuine “skin in the game” – investing with your own money – means that the finance industry gets the upside with very little of the downside.
If you get paid a life-changing sum on an annual basis then does it matter if you get fired and the value of your shares collapses? Not really.
As Jimmy Cayne, the bridge-playing, dope-smoking ex-CEO of Bear Stearns, put it to finance writer William D Cohan, on the consequences for him of the financial crisis: “The only people [who] are going to suffer are my heirs, not me… Because when you have a billion six and you lose a billion, you’re not exactly, like, crippled, right?”
You can dismiss some of that as the macho bravado of a wounded Wall Street ego. But the basic point is true.
Ex-Lehman Brothers CEO Dick Fuld might cry himself to sleep every night, mourning his lost reputation (I don’t think he does, by the way, although it clearly still rankles with the man), but he’s crying himself to sleep on a big golden pillow.
– Jitters surrounding London property are finally starting to show up in home prices – Brexit uncertainty, rising interest rates, higher sales tax and stretched affordability – Islington suffered the biggest declines, with home prices falling 7.8 pct in 12 months as per official data – Surveys have shown declines for several months, but now the end of the boom is clear in official statistics too according to Bloomberg analysis
London median, Islington, Wandsworth & Southwark prices. Must See Interactive Graphic Piece From Bloomberg News
News, Market Updates, Charts and Videos You May Have Missed
Here is our Friday digest of the important news, market updates, charts and videos we covered this week.
The crisis in emerging markets deepened this week with currencies around the world collapsing in value and gold reaching new record highs in these fiat currencies. Equity indices in emerging markets have seen sharp drops and now developed markets are seeing weakness in their stock markets.
It is important to consider the potential impact on the wider markets and the risk of contagion to our inter connected, indebted and vulnerable financial markets and system.
Watch Bloomberg Video of BNP Paribas’ global head of equity derivative strategy Edmund Shing on hedging the U.S. markets and gold as a long term hedge and insurance
The “recovery”/Bull Market is in its 10th year, and yet central banks are still tiptoeing around as if the tiniest misstep will cause the whole shebang to shatter: what are they so afraid of? The cognitive dissonance / crazy-making is off the charts:
On the one hand, central banks are still pursuing unprecedented stimulus via historically low interest rates, liquidity and easing the creation of credit on a vast scale. Some central banks continue to buy assets such as stocks and bonds to directly prop up the “market.” (If assets don’t actually trade freely, is it even a market?)
On the other hand, we’re being told the global economy is in synchronized growth and this is the greatest economy ever in the U.S. and China.
Wait a minute: so the patient has been on life-support for 10 years and authorities are telling us the patient is now super-healthy? If the patient is so healthy, then why is he still on life support after 10 years of “recovery”? If the global economy is truly healthy, then central banks should end all their stimulus programs and let the market discover the price of credit, risk and assets.
If the economy is truly expanding organically, i.e. under its own power, then it doesn’t need the life-support of manipulated low interest rates, trillions of dollars in central bank asset purchases, trillions of dollars in backstopping, guarantees, credit swaps, etc.
Protestors hold signs behind Richard Fuld, Chairman and Chief Executive of Lehman Brothers Holdings after its collapse led to the last global financial crisis. REUTERS/Jonathan Ernst/File Photo
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Protestors hold signs behind Richard Fuld, Chairman and Chief Executive of Lehman Brothers Holdings after its collapse led to the last global financial crisis. REUTERS/Jonathan Ernst/File Photo
