Vipers And Thieves / The Daily Reckoning

verfasst von - Elli -, 10.06.2003, 21:59

-->Vipers And Thieves

The Daily Reckoning

Paris, France

Monday, 10 June 2003

---------------------

*** Strikes in Paris...can democracy be reformed? Or must
it be destroyed?

*** Investment smoothies...real government debt...record
low mortgage rates...

*** Mr. Market...can you ever trust him?

Another day of strikes in Paris. We saw a few buses and
subway trains running...but two major unions have walked
off the job, and teachers have gone on strike for the 11th
time this year.

We mention the strikes because we believe they are not
merely comic, but historic.

The strikers' beef is that they do not want to submit to
the government's pension reforms. Promises get politicians
elected. And, as in all developed democracies, French
politicians made promises that can't be kept. Unless the
pension system is reformed, the French treasury will crack
under the weight of baby boomer retirees.

The situation is little different in the U.S., as Eric
explains below. In America, the politicians are as craven
and imbecilic...and the voters are every bit as larcenous,
happily voting themselves someone else's money every time
they approach the ballot box.

Everyone, everywhere knows you can't get 'something for
nothing'. But that doesn't seem to stop anyone from trying.
Government offers pensions it can't pay for...central
bankers offer 'money' out of thin air...and stock markets
promise rates of return that can't possibly be sustained.

The big question is: how does it end? Can a sophisticated
democracy reform itself before it is too late? Or does
every boom have to end in a bust?

We don't know. There have been few attempts at popular
democracy. Like paper money, they all degenerated and
collapsed. But maybe this time, it will be different...

Right Eric? Over to you...

-------------

Eric Fry in New York...

- The stock market stumbled yesterday...If only stocks
would go up each and every day, investing would be easy and
EVERY American would be rich. But, alas, life is not so
egalitarian. Stocks sometimes fall, and stock market
profits, like so many of life's most delicious delights,
are sometimes fleeting...especially during bear market
rallies. Like the euphoria of young love or the hot fudge
on a sundae, the capital gains of bear market rallies tend
to melt away as quickly as they appear. Yesterday, the Dow
slipped 83 points to 8,980, while the Nasdaq faded 1.4% to
1,603.

- Freddie Mac, the government-coddled mortgage lender,
"bummed out" investors yesterday with the disclosure that
it has been"smoothing" its earnings - a.k.a."massaging
the numbers." The stock tumbled a breathtaking 17% on the
news.

- The company forced chairman and chief executive, Leland
Brendsel, to resign, along with Freddie Mac's chief
financial officer and its chief operating officer. It seems
that one or more of these fellows may have been smoothing
the company's earnings. To smooth earnings, companies use
various quasi-legal accounting techniques to"stockpile"
earnings in good times in order to apply those earnings to
future quarters when business conditions deteriorate. The
object is to produce the sort of"consistently growing"
earnings that Wall Street analysts crave.

- Smoothing, therefore, is the corporate equivalent of
blood-doping - a company"extracts" its actual earnings,
tweaks them a bit and then re-injects them into the income
statement as flawless, consistently growing numbers...and
Wall Street loves it!

- In the real world, of course, earnings that grow
consistently year after year are as rare a poor
Republican...or a flawless diamond, which is why some
investors eagerly pay a rich valuation for any company that
purports to produce such a financial rarity. Coca-cola and
Starbucks are examples of companies that have actually
managed this rare feat. Freddie Mac, apparently, is not.
Which is why investors slashed away 17% of the company's
market capitalization on a single day, as soon as its
"consistent-earnings" fraud came to light.

- Smoothing earnings is but one of Wall Street's many"open
secrets." (The community of professional short-sellers has
been aware of - and critical of - the practice for years).
Many well-known companies engage in this practice to some
extent. But the line between accounting creativity and
criminality is not exactly black and white.

- Freddie Mac, however, seems to have crossed the line. The
company promises to restate prior financial results to
reflect the correct information. Which"correct
information" might now be forthcoming, we wonder?

- Meanwhile, out in the real world - far, far away from
Wall Street - more Americans fell behind on their credit
card payments in April than a year ago, according to
Moody's Investors Services.

- Moody's delinquency index on credit card payments 30 days
past due rose to 5.25% in April from 5.04% a year earlier,
but down a bit from March's 5.44%. But hold the
applause...April's rate of charge-offs - the annualized
rate that issuers write off card accounts as uncollectable
- rose to its highest level in than a year, up a whopping
47% from last year.

-"My country 'tis of debt," the Seattle Times quips,
referring to the new calculation of the nation's debt load
reported here last week. The real national debt totes to a
hefty $43 trillion, and NOT the piddling $3.8 trillion
shown in our official documents. The mind-numbing $43
trillion number includes all the formal debt of the U.S.
Treasury, along with all the government promises to provide
retirement income and medical care.

- When Kent Smetters, one of the economists responsible for
calculating the government's massive all-in-all debt,
testified before the House Subcommittee on the Constitution
of the United States, he stated matter-of-factly,"The
government reports that the national debt in 2003 was about
$3.8 trillion in the form of government 'debt held by the
public.' But that number ignores massive imbalances in
Medicare and Social Security programs and the government's
other programs. When the liabilities associated with those
programs are taken into account, the nation's fiscal policy
is currently off-balance by over $43.4 trillion in present
value, a number that is not reported in standard budget
documents."

- Hmmm...it might be little tricky to sweep that elephant
under the carpet.

-------------

Bill Bonner, back in Paris...

***"Wow...look at this...Who would have thought you could
get five and half percent mortgages? We probably refinanced
too soon."

Everybody in America seems to have refinanced his house and
bought a huge SUV land barge - at least twice. At least,
that was our conclusion after attending another wedding,
this one in Southwestern Virginia.

The lines quoted above were overheard at breakfast on
Sunday, at a small Bed & Breakfast in Scottsville. Checking
the paper, the couple at the next table discovered that
rates had hit a new low, 5.26%. Later in the day, almost
everyone we talked to had either refinanced recently or
financed for the first time.

"It doesn't make sense to not have a mortgage," said a
friend."They're lending money at these rates, fixed, for
15 years. You've got to take advantage of it."

*** If the economy picks up, and inflation rates rise,
people with large, fixed-rate loans will look like
geniuses. They'll pay off their mortgages with cheaper
money.

Almost every living, breathing soul in America is counting
on it - higher inflation rates, that is.

"As I speak with investors around the world," comments
Stephen Roach,"I find few who are willing to doubt the
reflationary endgame. After all, goes the logic, never
before has the modern-day global economy received such a
massive dose of stimulus. Policy interest rates have been
slashed to near-historic lows - zero in the case of Japan -
and budget deficits are high and rising in all the major
economies of the world. Most presume that it's only a
matter of when, not if, these actions boost aggregate
demand and bring the deflation nightmare scenario to an
end. Global equity markets are rallying in anticipation of
just such an outcome in the next 6-12 months. And global
bond markets are taking heart in the possibility that
central banks will do everything in their power to ensure
such a result by remaining accommodative for an indefinite
period of time. Policy traction is widely thought to be a
foregone conclusion."

And yet, the inflationary boomlet that was supposed to
follow the conclusion of the war against Iraq never showed
up. A Financial Times article tells us that Fed economists
have seen"no evidence of an accelerated upturn."

The best spin Alan Greenspan could put on it was that the
situation had"stabilized."

Perhaps it is neither accelerating to the upside nor
stabilizing. Joblessness, for example, seems to be
accelerating to the downside. In the last 3 months, for
example, 168,000 jobs were lost. That compares to just
99,000 lost in the same period last year.

But wouldn't that be just like Mr. Market? We mean, to
disappoint so many people...to give borrowers a good kick
in the pants with a dose of Japanese-style deflation? They
would pay down their debts, fear deflation...and buy bonds.
Then, he could destroy the currency, too.


---------------------

The Daily Reckoning PRESENTS: Thoughts on the legendary
tirade of Louis T. McFadden, and conspiracy theories
swirling about the Fed...


VIPERS AND THIEVES
by Addison Wiggin

"You are a den of vipers and thieves. I intend to rout you
out, and by the Eternal God, I will rout you out."

President Andrew Jackson,
stated in reference to the wildcat bankers


The Fed is guilty...

..guilty of"swindling the U.S. Treasury...";

..guilty of"conspiring with their foreign principals and
others to defraud the U.S. Government...";

..guilty of"having robbed the U.S. Government and the
people of the U.S. by their theft and sale of the gold
reserves of the U.S. and other unlawful transactions...";

..and guilty"of having reduced the U.S. from a first-
class power to one that is dependent, and...having reduced
the U.S. from a rich and powerful nation to one that is
internationally poor; and..."

These are but a few of the charges leveled at the Federal
Reserve Board on the floor of Congress, by the Honorable
Louis T. McFadden...in 1933. The charges remain open and
are pending (after all this time) at the Judiciary.

So claims a juicy bit of conspiracy theory detritus making
its way around the Internet.

Getting information off the Internet is a dubious
proposition, at best. It calls to mind the college
expression,"beer goggles" - in which a young man goes to a
party, drinks too many beers, and falls instantly in love
with the most beautiful woman in the room...only to
discover, the day after, that she has buck teeth, a third
eye, and a particularly bad case of 5 o'clock shadow.

Likewise, when you finally find the right bit of
information on the Internet, you think it's the smoking
gun...the perfect coup de grace to polish off your
argument, put away your opponent, and lay the issue, at
last, to rest...only to discover that said bit has been
debunked, discarded and exposed as a hoax by half a dozen
critics, whose credibility remains equally in question.
(Forthwith: the term"beer google" - in honor of our
favorite search engine - will be added to the Contrarian
Glossary on the Daily Reckoning website, defining the act
of finding then debunking exciting bits of dubious
information on the Internet).

It is in the spirit of the"beer google" in which we offer
today's observation. Not that we agree with the litany of
conspiracy sites on which we've discovered the legendary
tirades of Louis McFadden. Rather, the sentiment behind
McFadden's lawsuit, crackpot though he may - or may not -
have been, seems laudable...praiseworthy, even.

The story begins in the days when the neo-cons were still
fantasizing about a Trotskyite revolution in America...that
is to say, during the Great Depression and the birth of the
New Deal. The unemployment rate was inching its way toward
25% - the worst in the nation's history. Homelessness and
starvation, honors usually reserved for the poor, were
being bestowed at an ever-quickening pace on those who
formerly thought of themselves as"middle class".

"On June 10, 1932," explains the economic historian Edward
Flaherty,"the House was debating a bill which would expand
the types of securities the Federal Reserve could trade
when conducting monetary policy. McFadden used this
opportunity to launch a twenty-five minute tirade against
the Federal Reserve, and in so doing, became a legendary
champion amongst conspiracy theorists. McFadden began...

"'Mr. Chairman, we have, in this country, one of the most
corrupt institutions the world has ever known. I refer to
the Federal Reserve Board and the Federal reserve banks.
The Federal Reserve Board, a Government board, has cheated
the Government of the United States out of enough money to
pay the national debt. The depredations and the iniquities
of the Federal Reserve Board and the Federal reserve banks
acting together have cost this country enough money to pay
the national debt several times over. This evil institution
has impoverished and ruined the people of the United
States; has bankrupted itself, and has practically
bankrupted our Government. It has done this through defects
of the law under which it operates, through the
maladministration of that law by the Federal Reserve Board
and through the corrupt practices of the moneyed vultures
who control it.'

"However," Flaherty points out,"just because a claim
appears in the Congressional Record does not necessarily
mean it is true. Once the hyperbole and histrionics are
deducted, there is little remaining of substance in the
above quotation."

Flaherty goes on to show that from 1914 to 1931, the
Federal Reserve system collectively earned profits totaling
$607 million. About $102 million of which was distributed
to member banks as dividends, and about $147 million of
which was paid to the Treasury as a"franchise tax."

The Federal Reserve banks kept the remaining $359 million
in profits.

"The national debt in 1932 was $19.5 billion," writes
Flaherty."So even if the Federal Reserve had been paying
all its profits to the government during this time, it
would have been enough to pay only 3 percent of the
national debt - a far cry from McFadden's 'several times
over'. Moreover, the Federal Reserve's total revenues for
the period were $971 million, so if the entirety of the
System's revenues had gone straight to the Treasury, it
still would not have been sufficient to make McFadden's
claim even remotely accurate."

As Flaherty points out, the speech has made McFadden a hero
of"The Creature from Jekyll Island" crowd (a book penned
by G. Edward Griffin on the conspiratorial origins of the
privately-held, for-profit Federal Reserve Board). Among
other things, conspiracy buffs like the Jekyll crowd
suggest that the Fed went so far as to have McFadden
'offed'.

Days after former Congressman McFadden's demise,"Pelley's
Weekly" of Oct. 14 commented:"Now that this sterling
American patriot has made the Passing, it can be revealed
that not long after his public utterance against the
encroaching powers of Judah, it became known among his
intimates that he had suffered two attacks against his
life. The first attack came in the form of two revolver
shots fired at him from ambush as he was alighting from a
cab in front of one of the Capital hotels. Fortunately both
shots missed him, the bullets burying themselves in the
structure of the cab.

"He [then] became violently ill after partaking of food at
a political banquet at Washington. His life was only saved
from what was subsequently announced as a poisoning by the
presence of a physician friend at the banquet, who at once
procured a stomach pump and subjected the Congressman to
emergency treatment."

Ultimately, as Pelley's Weekly reported, McFadden fell prey
to"heart-failure sudden-death" on Oct. 3, 1936, after a
"dose" of"intestinal flu."

To some, however, the conspiracy theory seems a little
curious. According to Flaherty, following McFadden's
twenty-five minute tirade, Senator Benjamin Strong of
Kansas stood to address the Congress:

"There is a disease that afflicts mankind which is very
vicious. It warps the judgment, it narrows the vision; it
even causes men to see red, to make mountains out of
molehills. This disease has sometimes been referred to as
B.A. Ladies may refer to it - 'tummy' ache, but out in the
wide-open spaces, men call it the 'belly' ache, and I know
of no man of my acquaintance that has this disease in so
violent a form as the gentleman from Pennsylvania, Mr.
McFadden.

"I have not the time to refer to the many charges he makes
against the Federal Reserve system, but I call attention to
the fact that for 12 years he has been the chairman of the
Banking and Currency Committee of this House and did not
see fit during that time to remedy any of the evils of
which he now complains. It seems to me entirely out of
place to wait until he is retired as chairman of that great
committee and then assault all of the institutions of which
it has control."

"Strong's statement suggested that McFadden's rant was
little more than political bluster," writes Flaherty.

"If McFadden had really been the anti-Fed crusader some
people today make him out to have been," Flaherty
continues,"then why did he not do anything about the Fed
when he had the chance? More likely, he was making
political points with his constituents by placing blame for
the Great Depression at the door of the Federal Reserve.
While this may have been justifiable, he went too far by
implying the Fed intended to wreck the economy."

Still, on May 23rd, 1933 - less than a year after his
initial tirade - Congressman McFadden brought formal
charges against the Board of Governors of the Federal
Reserve Bank system, The Comptroller of the Currency and
the Secretary of United States Treasury for"numerous
criminal acts, including but not limited to, CONSPIRACY,
FRAUD, UNLAWFUL CONVERSION, AND TREASON."

"The petition for Articles of Impeachment," claims the E-
Booklet we received from a reader,"was thereafter referred
to the Judiciary Committee and has YET TO BE ACTED ON. So,
this ELECTRONIC BOOKLET should be reprinted, reposted, set
up on web pages and circulated far and wide."

Politically motivated? No doubt. Justifiable? Perhaps. If
the suit is pending, perhaps there's still time to take a
look...even add a few new names to the list of defendants.


Cheers,

Addison Wiggin,
The Daily Reckoning

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• Vipers And Thieves / The Daily Reckoning - - Elli -, 10.06.2003, 21:59