Budget Buster: Pentagon Unable to Account for Trillions in Spending

They Don't Even Know How Much US Government Debt "We" Owe

How Much US Government Debt Do We Owe?

The United States military budget accounts for over 40% of the world’s annual military expenditures and, at around $700 billion per year, more than 20% of the federal budget. The Federal government wants to curb that spending as part of deficit reduction.

Last week’s deficit deal calls for up to $350 billion in cuts over the next decade on the departments of Defense, State, Homeland Security and Veterans Affairs, among others. And, if the debt “super-committee” fails to reach a deal on $1.2 trillion in budget cuts, it will automatically trigger an additional $500 billion in cuts over the next decade.

Cutting in a bureaucracy as large and convoluted as the Pentagon is no easy task, but Stephen Glain author of State vs. Defense: The Battle to Define America’s Empire says there are three issues at the heart of their spending problem.

Growing obligations: Much like other public sector groups, the Pentagon has growing liabilities coming from pension and medical insurance plans. It’s “very much a microcosm” of the problems facing the country, says Glain. The Pentagon’s liability for civilian employees is currently $60 billion and the “rate of growth is enormous,” says Glain. The figure was $15 billion a decade ago.

Accounting Problems: You think Enron’s accounting was troubled? The Pentagon has very little accountability when it comes to its books. Since first submitting financial accounts in 1991, the Pentagon “has been unable to account for trillions of dollars, well over almost $10 trillion by my own account,” says Glain. Conspiracy theorists suggest this is CIA money being laundered through the Pentagon, a claim Glain has some sympathy for.

Ending the Wars: Ending operations in Iraq and Afghanistan will instantly save the defense department $180 billion per year. According to Joseph Stiglitz the wars have cost the government $3 trillion and counting.

We Have A Few Years To Get Our Fiscal House In Order Or We Go Into A Depression

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Americans’ Mistrust of Govt. Is Rational and Warranted, But Also Dangerous”

The United States invariably does the right thing, after having exhausted every other alternative,” Winston Churchill once said.The problem is “we’re in the process of exhausting all the alternatives pretty quickly,” says William Galston, a senior fellow at the Brookings Institution.A recent CBS/NY Times poll showed only 19% of respondents say they trust the government “to do what is right all or most of the time,” while 78% believed the government is run by special interests, not for the benefit of the people.”If current levels of trust don’t improve, I don’t see how Americans can be persuaded to make sacrifices now for a better future,” says Galston, a former adviser to President Bill Clinton. “We have a few years to get our fiscal house in order before things really get out of control in ways that will be hard to reel back – the early signs are not encouraging.”With public deficits soaring and stratospheric bailouts for banks and automakers,Galston isn’t saying mistrust of government is irrational or unwarranted, but it is dangerous for society.”Unless it’s corrected we’re going to have a very hard time doing what needs to be done in the next decade or two,” he said. “So I hope we’re on the threshold of doing the right thing, not because we want to but because we have to. “

The U.S. Banking System is Close to Insolvency

ALERT
RGE Monitor
January 22, 2009

The US Banking System is BankruptRGE Monitor Estimates $3.6 Trillion Loan and Securities Losses in the U.S.

Nouriel Roubini and Elisa Parisi-Capone of RGE Monitor release new estimates for expected loan losses and writedowns on U.S. originated securitizations:

* Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, U.S. banks and brokers are expected to incur $1.1 trillion.

* Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached about $2 trillion ($1.92 trillion.) About 40% of these securities (and losses) are held abroad according to flow-of-funds data. U.S. banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.

* Total loan losses and securities writedowns on U.S. originated assets are expected to reach about $3.6 trillion. The U.S. banking sector is exposed to half of this figure, or $1.8 trillion (i.e. $1.1 trillion loan losses + $700bn writedowns.)

* FDIC-insured banks’ capitalization is $1.3 trillion as of Q3 2008; investment banks had $110bn in equity capital as of Q3 2008. Past recapitalization via TARP 1 funds of $230bn and private capital of $200bn still leaves the U.S. banking system borderline insolvent if our loss estimates materialize.

* In order to restore safe lending, additional private and/or public capital in the order of $1 – 1.4 trillion is needed. This magnitude calls for a comprehensive solution along the lines of a ‘bad bank’ as proposed by policy makers or an outright restructuring through a new RTC.

* Back in September, Nouriel Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines a RTC to deal with toxic assets, a HOLC to reduce homeowers’ debt, and a RFC to recapitalize viable banks.

Decade of The Great Depression

A Short Summary:

It is August 1939 and Americans are still recovering from the Great Depression–the worse nightmare that has ever happened to the United States. For the last ten years, since 1929, this country has experienced total economic collapse. Who could have imagined that this would happen in our modern industrial world?

The Wall Street stock-market crash of 1929 signalled the beginning of this Great Depression, even if it did not actually cause it. Ten years have passed and this economic depression has had devastating effects on most people in this country. Production fell sharply. Unemployment went through the roof. No one had much money, so purchasing declined. Thousands of businesses and hundreds of banks have closed.
We are a country of small farmers, but farmers everywhere have gone into bankruptcy. People lost their jobs, homes, and savings, and now many depend on charity to survive. In 1933, more than 15 million Americans–one-quarter of the nation’s workforce–were unemployed.

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We’re On The Eve Of Financial Destruction

Eve of Destruction: How the Financial Crisis Was Built Into the System

by Robert Kiyosaki Posted on Monday, November 24, 2008

How did we get into the current financial mess? Great question.

Turmoil in the Making

In 1910, seven men held a secret meeting on Jekyll Island off the coast of Georgia. It’s estimated that those seven men represented one-sixth of the world’s wealth. Six were Americans representing J.P. Morgan, John D. Rockefeller, and the U.S. government. One was a European representing the Rothschilds and Warburgs.

In 1913, the U.S. Federal Reserve Bank was created as a direct result of that secret meeting. Interestingly, the U.S. Federal Reserve Bank isn’t federal, there are no reserves, and it’s not a bank. Those seven men, some American and some European, created this new entity, commonly referred to as the Fed, to take control of the banking system and the money supply of the United States. Continue reading

Financial Crisis is Becoming Severe

RGE Monitor

RGE Monitor

On Nouriel Roubini’s Global EconoMonitor, Nouriel explains why the Treasury rescue plan is very poorly conceived and does not contain many of the key elements of a sound, efficient and fair rescue plan – like a HOLC-style program and the need to recapitalize the financial institutions that are badly undercapitalized. Check out: RGE Conference Call on the Economic and Financial Outlook and why the Treasury TARP bailout is flawed.

The claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at the huge expense of the U.S. taxpayer – the common and preferred shareholders and even unsecured creditors of the banks. Check out Nouriel’s Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System‌ No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks.

In The US and global financial crisis is becoming much more severe in spite of the Treasury rescue plan. The risk of a total systemic meltdown is now as high as ever, Nouriel explains why the risk of a total systemic meltdown is now as high as ever as the severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option of a $700 billion package.

The next step of this panic could become the mother of all bank runs: a run on the 1 trillion dollar plus of the cross border short-term interbank liabilities of the U.S. banking and financial system as foreign banks start to worry about the safety of their liquid exposures to U.S. financial institutions. Such a silent cross border bank run has already started as foreign banks are worried about the solvency of U.S. banks and are starting to reduce their exposure. Check out: Roubini Sees ‘Silent’ Run on Banks, Urges `Triage’: Bloomberg Radio Interview and BBC Hardtalk Interview with Roubini: “US Bail-Out Special”.

Financial Doom – Current Best Sellers

MSN Money

Go ahead and read those apocalyptic books on the economy if you like a good scare. But be sure you recognize fiction when you see it.

By Jim Jubak

If fairy tales express our deepest fears, then investors must be on the verge of a psychotic breakdown.

The current crop of financial gloom-and-doom books carry titles such as “America’s Financial Apocalypse,” “Financial Armageddon” and the comparatively prosaic “The Coming Economic Collapse.”

Any way you go, it means the end of the world (the end of the financial world, anyway). And that’s scary. Really, really scary.

But we need to remember that while fairy tales may reflect real fears, they aren’t reliable guides to how the world works. That’s true whether the main character is named Snow White or Ben Bernanke.

Sigmund Freud, Carl Jung and Bruno Bettelheim all theorized that we read fairy tales about evil stepmothers, parental abandonment in dark woods and child-eating witches to help us express and then cope with our darkest fears.

The psychological value of these tales, in this theory, lies in the formulaic, repeated return to archetypical fears in what the reader knows — even a reader as young as my 6-year-old daughter — is a fiction. It also helps that, unlike real-life horrors, these tales usually have happy endings.

This current crop of financial-disaster books should be read the same way — as financial fairy tales that represent our darkest financial fears and then allow us to cope with those fears by offering up happy endings in the form of investment strategies that can fend off disaster.

So what are investors’ deepest fears right now? Continue reading

Foreclosures Hit All-Time High

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Foreclosures hit all-time high

Over 900,000 borrowers are losing their homes, up 71% from a year ago, and a record number of home owners are behind on payments.

CNN Money
By Les Christie, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) — More home owners than ever are losing the battle to make their monthly mortgage payments.

Over 900,000 households are in the foreclosure process, up 71% from a year ago, according to a survey by the Mortgage Bankers Association. That figure represents 2.04% of all mortgages, the highest rate in the report’s quarterly, 36-year history.

Another 381,000 households, or 0.83% of borrowers, saw the foreclosure process started during the quarter, which was also a record.

Additionally, the number of mortgage borrowers who were over 30 days late on a payment in the last three months of 2007 is at its highest rate since 1985.

“Boy, that was ugly,” said Jared Bernstein, an Economic Policy Institute economist of the data.

“It’s another reminder that anyone who thought we had hit bottom was wrong. This was a huge bubble, and when a bubble of this magnitude breaks, it creates a huge mess,” he said.” It could take a lot longer for the correction to work through the system.”

One reason it may take so long is that there seems to be no end in sight for falling home prices.

“Declining prices are clearly the driving factor behind foreclosures, but the reasons and magnitude of the declines differ from state to state,” said Doug Duncan, MBA’s Chief Economist said in a prepared statement.

The foreclosure rates for prime and subprime adjustable rate mortgages both more than doubled compared with a year ago, from 0.41% for prime ARMs to 1.06% and from 2.70% for subprime ARMs to 5.29%.

But it was subprime ARMs that contributed most heavily to the nation’s soaring foreclosure rates. Many of these loans come with low introductory rates that reset higher, often to unaffordable levels, in two or three years. Although they represent only 7% of all outstanding mortgage loans, they accounted for 42% of foreclosure starts during the quarter.

Delinquencies stood at 5.82% of outstanding mortgages, up from 5.59% during the three months ended September 30, 2007, according to the MBA. In the last quarter of 2006, the rate was 4.95%.

“In states like Ohio and Michigan, declines in the demand for homes due to job losses and out-migration have left those looking to sell their homes with fewer potential buyers, particularly with the much tighter credit restrictions borrowers now face,” said Duncan.

“In states like California, Florida, Nevada and Arizona, overbuilding of new homes created a surplus that will take some time to work through.”

California and Florida are the states hardest hit by foreclosures. They accounted for 30% of all foreclosure starts in the United States last quarter, despite representing only 21% of the mortgage market.

Florida’s foreclosure start rate more than tripled during the last three months of the year compared with a year ago, and they more than doubled in California.

Both states still have a sizable over-supply of inventory, according to Duncan, due to over-building during the speculative boom that lasted through mid-2006. That will continue to depress home prices and add to mortgage delinquencies in those states.

“We expect to see home price declines to last there through the end of 2008,” he said, “after the rest of the country is in recovery.”

As prices plummet — already some California and Florida areas have seen price drops of 25% or more, according to Duncan — defaults will soar.

And falling prices and growing foreclosures create a vicious cycle; the more prices fall the less likely it is that borrowers can use home equity to refinance into more affordable loans, which leads to more defaults. And as foreclosures rise housing inventory increases, further depressing prices.

At the same time, these trends have lead to a contraction the construction industry, hurting overall U.S. economic activity and increasing the chances that the economy will fall into recession.

CNN Money

The Empire of Debt

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Money for nothing. Own a home for no money down. Do not pay for your appliances until 2012. This is the new American Dream, and for the last few years, millions have been giddily living it. Dead is the old version, the one historian James Truslow Adams introduced to the world as “that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement.”

Such Puritan ideals – to work hard, to save for a better life – didn’t die from the natural causes of age and obsolescence. We killed them, willfully and purposefully, to create a new gilded age. As a society, we told ourselves we could all get rich, put our feet up on the decks of our new vacation homes, and let our money work for us. Earning is for the unenlightened. Equity is the new golden calf. Sadly, this is a hollow dream. Yes, luxury homes have been hitting new gargantuan heights. Ferrari sales have never been better. But much of the ever-expanding wealth is an illusory façade masking a teetering tower of debt – the greatest the world has seen. It will collapse, in a disaster of our own making.

Distress is already rumbling through Wall Street. Subprime mortgages leapt into the public consciousness this summer, becoming the catchphrase for the season. Hedge fund masterminds who command salaries in the tens of millions for their supposed financial prescience, but have little oversight or governance, bet their investors’ multi-multi-billions on the ability that subprime borrowers – who by very definition have lower incomes and/or rotten credit histories – would miraculously find means to pay back loans far exceeding what they earn. They didn’t, and surging loan defaults are sending shockwaves through the markets. Yet despite the turmoil this collapse is wreaking, it’s just the first ripple to hit the shore. America’s debt crisis runs deep.

How did it come to this? How did America, collectively and as individuals, become a nation addicted to debt, pushed to and over the edge of bankruptcy? The savings rate hangs below zero. Personal bankruptcies are reaching record heights. America’s total debt averages more than $160,000 for every man, woman, and child. On a broader scale, China holds nearly $1 trillion in US debt. Japan and other countries are also owed big. Continue reading

Today’s Bankruptcy Law helps the Banks

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The New Bankruptcy Law is protecting Banks and Lenders more than the Consumers.

CONGRESS REVISED THE nation’s bankruptcy laws under 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act, effectively making it harder for individuals to claim insolvency. The reform was seen by critics as protecting banks and lenders more than the consumers the legislation’s title claimed to help. Now, as the fallout from the subprime mess continues to expand, an uptick in bankruptcy filings may yet be another kink in the growing mortgage crisis.

Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, has long thought the revised law to be too restrictive. Now, Sommer says, it needs to be revamped again to better reflect the current mortgage market. (The original bankruptcy law dates back to 1978, when exotic mortgages were less common and foreclosure was rarely a reason to file for bankruptcy.)

Even with the toughened rules, personal bankruptcy filings for the first six months of 2007 are up 48.3% compared with the same period last year. As of June 30, 391,105 individuals filed for bankruptcy this year, up from 263,660 a year earlier, according to the American Bankruptcy Institute.

Once-confident homeowners who, during the real-estate boom, bought homes using adjustable-rate, interest-only, no-money-down mortgages are now overwhelmed by a weaker house values and crushing debts. Indeed, foreclosure filings reported in July jumped 93% from July 2006, and 9% from June.

Still, bankruptcy filings are well below pre-2005 levels. Sommer says the higher costs and increased paperwork of the new law make it too onerous for consumers to file. Ultimately, he says, that makes it harder for those facing foreclosure to use personal bankruptcy to protect their homes while they figure out how to meet ballooning mortgage payments.

“One of the nice things about bankruptcy until 2005 was that it was a pretty inexpensive proceeding,” says Sommer, who also serves as the supervising attorney of the Consumer Bankruptcy Assistance Project in Philadelphia. “Most places would have it done for under $1,000. Some places have gone up 50% to 100%. That’s a real big barrier.” Besides lowering costs, another part of his proposal involves stripping down the mortgage to the home’s current value and re-amortizing that over 30 years.

Here’s what else Sommer had to say about the bankruptcy code’s problems and his ideas to help borrowers facing foreclosure hold on to their homes.

SmartMoney.com: Why do you think the number of bankruptcy filings is higher so far this year than last year?

Henry Sommer: The number of bankruptcy filings has gone up steadily. They went way down right when the law went into effect [in 2005] — primarily because people rushed to file beforehand. Since then, it’s only at 70% of levels before…. It has been steadily going up. Certainly, people having problems with their mortgages is one reason why they’re filing.

SM: How do you propose to change the bankruptcy law?

HS: There are a couple of different types of changes we propose. One is to make filing for bankruptcy less complicated. One of the side effects of the new law — and I’d like to think Congress didn’t intend this — is the phenomenal increase in paperwork and cost associated with filing, and it’s therefore denying access to people who can’t afford them. So one type of change we’d like to see is a cutback on the paperwork and the expense of bankruptcy. The other is that bankruptcy laws be changed to give people more tools to deal with foreclosures, including these exploding adjustable rate mortgages (ARMs) you see now, where payments just go so high because of the interest rate adjustments. So we propose changes to make bankruptcy more useful.

SM: What’s an example of that?

HS: Typically, when people face a foreclosure, bankruptcy has allowed them to take up to five years to catch up on their arrearages. In a Chapter 13 case, [usually you would] start paying your monthly mortgage payment of, say, $1,000. You [pay] arrearages over 12 months…. Bankruptcy allows you to do that. That’s worked well for people who had a temporary income interruption that caused them to fall behind on payments. [Our proposal] gives three, four or five years to catch up, instead of typically two months…. The two months, or slightly longer, is how long mortgage companies will usually give debtors to catch up outside of bankruptcy.

That doesn’t work so well when your monthly payment has been bumped up because of an adjustable rate mortgage. That’s the problem suddenly facing a lot of people. It doesn’t work if you can’t even afford the monthly payment. Our proposal is to take the ARMs and re-amortize them over 30 years as a fixed rate. They’d do that as part of Chapter 13 bankruptcy. [This would apply] if your house was overappraised or it’s fallen in value. Say you got a 100% mortgage for your $200,000 house, and now it’s worth $170,000. You re-amortize it over 30 years and pay off the mortgage that way. That’s the crux of our proposal — strip down the mortgage to the current value of the house and re-amortize that over 30 years. We’re hoping that will be introduced in Congress in September.

SM: Is that considered at least a partial loan forgiveness?

HS: No, definitely not. It’s been done for years with cars. In 1978 [when the law was first established] we didn’t have these kinds of mortgages either. Even if it made sense in 1978, it doesn’t make sense now.

We’re not trying to repeal the 2005 law wholesale, but we’re trying to get rid of the excess paperwork and deal with the particular mortgage problem, which really wasn’t addressed in the 2005 revisions. One of the nice things about bankruptcy until 2005 was that it was a pretty inexpensive proceeding. Most places would have it done for under $1,000. Some places have gone up 50% to 100%. That’s a real big barrier.

SM: How much paperwork are we talking about?

HS: The paperwork is roughly doubled. Among other things, debtors must provide tax returns, 60 days’ worth of pay stubs, bank statements and complete a six-page “means testing” form. All of these are new requirements, along with the requirement of obtaining credit counseling before bankruptcy and a credit education course during the case. On top of this, the United States Trustee’s office, part of the Justice Department, often demands numerous additional documents, like six months’ worth of pay stubs, two years of tax returns, all credit card statements.

SM: Steve Bartlett, president and chief executive of Financial Services Roundtable, an organization that represents financial-services companies, in May testified in Congress that the new bankruptcy reform law is working well as evidenced by the big decrease in filings since it was enacted.

HS: I disagree with him. He’s employed by banks and other creditors. He bases that on the fact that the number of bankruptcy filings are down. He said the number of bankruptcies was down something like 40%…. But what about all the people who want to file but can’t? People aren’t filing because it’s much more difficult. It’s something of a misperception out there that you can’t file for bankruptcy anymore.

SM: Why do people think that?

HS: There was kind of a superficial publicity when the new law went into effect. Many were told that by debt collectors, which of course makes the debt collectors’ job easier. That’s another reason why that [notion] will slowly go away — when people know of others who have file for bankruptcy.

One of the things mortgage companies say is that they’ll do a loan modification, they’ll reduce the principal. But it’s extremely hard to get those. A lot of people are led down the path thinking they’ll get them and the next day they’re facing foreclosure. So what the companies claim to be doing and what they’re actually doing are two different things.

SM: What would you advise at-risk consumers do?

HS: People have tendencies to put their heads in the sand and wait for a solution to come. But the sooner they deal with it, the better…. If people think they’re going to have a problem, it’s a good time to figure out what their options are.