The Boy Who Cried Wolf

Most have heard the story of the boy who cried wolf! It was one of Aesop's fables written in 1673. For those who haven't heard it, here is a condensed version.

There was a Shepherd Boy who tended his sheep at the foot of a mountain near a dark forest. It was lonely for him, so he devised a plan to get a little company. He rushed down towards the village calling out "Wolf, Wolf," and the villagers came out to meet him. This pleased the boy so much that a few days after he tried the same trick, and again the villagers came to his help. Shortly after this a Wolf actually did come out from the forest. The boy cried out "Wolf, Wolf," still louder than before. But this time the villagers, who had been fooled twice before, thought the boy was again lying, and nobody came to his aid. So the Wolf made a good meal off the boy's flock.

The moral of the story is that a liar will never be believed, even when he is telling the truth.

So why I am writing about this? Well, for the last year, I've included many stories and warnings about the sagging economy and its likely demise. My last post recapping many of those warnings document this fact. I am certainly no liar, but because my warnings may have sounded incredible, they were not listened to by many.

Well, look at what is happening to the economy and the stock market now. Was I lying? Here are a few notes from today's headlines.

• US stocks fell for an eight consecutive day during a roller coaster session that sent the Dow Jones Industrial Average to its biggest point swing ever.
  
• The Dow posted its steepest weekly slide ever in its history falling to 8,451.19
  
• The S&P 500 index had its worst week since 1933 falling to 899.22
  
• The Dow and S&P 500 index are down 18.2% for the week, reaching lowest levels in 5 1/2 years
• The S&P 500's eight day losing streak is its longest since 1996
• Both the Dow and the S&P 500 are down more than 40% since their peaks reached last October
  
• The price of oil dropped below $80 per barrel for the first time in a year on concern the weakening economy will hurt demand
• The Main Street Bank of Northville, Michigan and the Meridian Bank of Eldred, Illinois were closed by regulators today, boosting the total to 15 banks that have failed this year
• Sellers of credit-default protection on bankrupt Lehman Brothers Holding Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion derivatives market

That was just today. Earlier in the week, central banks from around the world including the Federal Reserve all lowered their key interest rates by .5 percent or 50 basis points. The federal funds rate in the US is now down to 1.5%. This was a desperate attempt to instill confidence on the crumbling stock markets from around the world. Not even after the $700 billion bailout package which was approved last week eased fears of the rapidly slumping economy.

U.S. Treasury Secretary Henry Paulson signaled his top priority, having secured $700 billion rescue package from Congress, will be to buy equity in financial companies to restore market stability and ensure economic growth.

The International Monetary Fund earlier this week said banks around the world would need $675 billion in fresh capital in the next several years to recover from the credit crisis. The IMF also raised its estimate of losses tied to U.S. loans and securitized assets to $1.4 trillion -- roughly half of which have already been written down or recognized as losses.

Wolf! Maybe someone will listen now.

So what does this all mean? Ordo ab chao. Latin for "order from chaos". If you have read the History of Money series beginning January 28, 2008, you will find that the manipulators have used this formula time and time again throughout history. This is the Hegelian dialect of thesis, antithesis, and synthesis. An event is created to cause a problem, resources are made available to combat or correct the conditions of the problem, and then a solution is created that they always wanted that would not have been possible if the problem didn't exist.

First, the sub-prime mortgage crisis was initially created by the Federal Reserve knocking interest rates down to 1% in 2003. This started a mad frenzy of banks and mortgage companies allowing prospective homeowners to buy homes with little or no money down because money was so cheap. Many got suckered into interest only loans on these mortgages on homes that they could barely afford. When interest rates went back up to 5% in 2005, the corresponding adjustable rate mortgages (ARMs) went up as well. Many ARMs have caps on them allowing only a 1% increase per year. Thus, it took 2-3 years for many of these mortgages to hit monthly payment levels the mortgagees couldn't pay. They start defaulting on these loans (August 2007). The banks and mortgage companies start getting into trouble.

Meanwhile, the big banks and investment firms start bundling big blocks of mortgages as security for investments (credit-default swaps, CDS). Nothing is more secure than real estate, right?! It's like an insurance policy for an investments. But because they called them credit-default swaps, the regulation is not as strict as for insurance. For several years, these investments do really well. Everyone is making money and happy. Little did the buyers of these credit-default swaps know that the mortgages the investments were secured by were very shaky to begin with. (By the way, CDSs are just the tip of the iceberg when you consider the magnitude of the $400 trillion derivative market.)

When the sub-prime mortgage crisis started to unravel, the investment banks and mortgage companies started to sweat. But, most of these derivative investments were sold off to other investors, so they would probably be OK. Then, more and more homes were foreclosed on because people couldn't make their payments. As the foreclosures mounted, the banks could no longer hide their tenuous position. Liquidity dropped because the monthly payments were not being made. This would weaken their reserve requirement with the Federal Reserve of keeping approximately 10% of all money loaned out. Hence, you begin to have bank failures. This also caused many of the mortgage companies that underwrote the loans to have liquidity problems such as Fannie Mae and Freddie Mac.

So the dominoes start falling. Bear Stearns, IndyMac, Fannie Mae, Freddie Mac, Wachovia, Washington Mutual, Lehman Brothers Holding, American Internation Group, etc. etc. Many of the smaller banks and investment companies are getting sold off at pennies on the dollar to the larger banks and to the Treasury. Can the US taxpayer afford this? Absolutely not! But what the heck, what is another trillion or so in debt. The $700 billion bailout is just the beginning.

Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product. The rescue legislation increased the government's debt limit to more than $11.3 trillion from $10.6 trillion. The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt.

Let me get back to "order from chaos". This was the plan all along. The World Bank and IMF could not implement all of their plans the way they wanted to. Consolidation was necessary. So it took 5 or 6 years to accomplish. So what! No one really understands the workings of the economy anyway. Who will understand that the Federal Reserve dramatically lowering interest rates in 2003 (after which the economy was already recovering from the high tech bubble burst from 2000-2002) would set off a chain of events that will rapidly consolidate the financial world down to a few major players (Citigroup, JP Morgan Chase, Bank of America, Goldman Sachs, all of which own shares in the privately held Federal Reserve Corporation)? Oh, and whatever these institutions can't buy themselves, the federal government will take over to stabilize the economy throught the bailout packages and the FDIC (another private corporation owned by the Federal Reserve). Sythesis - a solution never before possible.

Many of these lessons were first learned by no other than J.P. Morgan himself when he orchestrated the bank panic of 1907. History repeats itself.

Wolf! Few believed me.

Are you one of the sheep eaten by the big bad wolf? If you haven't been, your time will come soon enough. We are a long way from this sad story being over.

Will fear from the big bad wolf stop you from taking action?

As always, the choice is yours.

O LORD, do not your eyes look for truth?
You struck them, but they felt no pain;
you crushed them, but they refused correction.
They made their faces harder than stone
and refused to repent.

I thought, "These are only the poor;
they are foolish,
for they do not know the way of the LORD,
the requirements of their God.

So I will go to the leaders
and speak to them;
surely they know the way of the LORD,
the requirements of their God."
But with one accord they too had broken off the yoke
and torn off the bonds.

Therefore a lion from the forest will attack them,
a wolf from the desert will ravage them,
a leopard will lie in wait near their towns
to tear to pieces any who venture out,
for their rebellion is great
and their backslidings many.

"Why should I forgive you?
Your children have forsaken me
and sworn by gods that are not gods.
I supplied all their needs,
yet they committed adultery
and thronged to the houses of prostitutes. Jeremiah 5:3-7 (NIV)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com