Prescient Economist Daniel Bruno Warned Against Bailouts Before Obama 2008 Win
Editor’s Note: In light of the upheaval on Wall Street as shares plummet, a banking crisis looms and protesters march, we take a look back at the warnings of a shrewd observer from 2008 as the Lehman Bros. bankruptcy unfolded.
Predicted Great Recession of 2008-2009
Predicted Obama win in 2007
Predicted historic downgrade of U.S. debt three years before it happened
Predicted political crisis for Obama in first term
Perhaps the reader will think it presumptuous of me to proclaim Obama
the winner before the first vote has been cast and arrogant of me to
contradict our financial high priests Hank Paulson and Ben Bernanke, the
successor to Alan Greenspan. They have declared that we are on the
edge of the abyss and their prescriptions must be followed to avoid
certain economic collapse. Democrats Chuck Schumer and Barney Frank
tell the press that there was no alternative to granting Paulson and
President Bush astonishing powers over government deficits, spending,
taxation, the budget and with them the national agenda for the next
eight years and more.
Let us assume that deteriorating economic indicators boost the
opposition party at election time. Even before last week’s market
meltdown, McCain’s prospects were already dim. Here’s why: Joblessness
is on the rise in all 12 battleground states with Michigan leading the
way at 8.9%. In Florida unemployment has surged by over 50% to 6.5%
since August, 2007. Nationwide, unemployment has hit a 5 year high of
6.1% and rose in no less than 44 states overall. The Labor Department
has reported that out of a dozen swing states, 11 had a “significant”
increase in joblessness over the last 12 months. In the key swing
states of Florida, Virginia, North Carolina ( 6.9%) , Colorado and
Nevada unemployment is up by over 40%. Michigan, Missouri, Nevada, New
Hampshire, New Mexico, Ohio and Pennsylvania have also seen heavy
increases. These 12 states account for 157 of the 270 electoral college
votes needed to win the White House. In Missouri, which has voted for
every presidential winner except one since 1900, unemployment is up to
6.6% from 5.2% last August. Nationwide unemployment claims now exceed
3.45 million, a 25 year high.
But there’s more bad news: Florida, Nevada and California have the
highest foreclosure rates nationwide. California, the electoral prize
of prizes, already leans Democratic and Florida has 27 electoral college
votes, more than any other swing state. The Wells Fargo Home Refinance
Index is in deep recession territory.
So what does any of this have to do with Obama becoming president in a
“close” election? Isn’t the real issue his skin color and whether
angry female Hillaryites will seek revenge by voting for McCain/Palin?
Isn’t the burning issue lipstick on a pig? For an answer to this
question, I invite the reader to examine “Why Obama Will Win in 2008
& 2012” at http://www.scribd.com/doc/15249818/WHY-OBAMA-WILL-WIN-IN-2008-2012
What we have seen this past week is a paradigm shift in the economy
of the United States that will have a frightening impact on our future.
Fannie, Freddie and AIG have been nationalized and with them two
thousand thousand million dollars in debt of unknowable value
transferred to the government’s balance sheet. On September 19 the
government promised to transfer another 700 thousand million dollars in
toxic debt ( debt instruments worth far less than par that nobody wants)
from both domestic and foreign bank ledgers to its own liabilities,
causing bank stocks to soar while Lehman Brothers, now extinct, was
removed from the DOW average. This is why the DOW rallied 700 points
this past Thursday and Friday. Meanwhile on September 17, Americans,
in a panic, pulled 89 thousand million dollars of their savings out of
money market funds in what may be the beginning of a run on the banks.
In response, Treasury has promised 400 thousand million dollars to
support the money markets.
The government (taxpayer) infusion of massive financial waste into
its portfolio is the socialization (spreading out) of risk and loss
while profit and reward remain in private hands. Its Adam Smith’s
invisible hand when stocks are up and the heavy hand of Socialism when
losses threaten to wreck the system. Deregulation, Milton Freedman and
his Chicago School, Reaganomics, George W. Bush and John McCain are in
the ash heap. Without getting too technical with a lot of dismal
economic theories and graphs, let me cut to the chase. Here are the
consequences of this past week :
The bank bailout will be (rightly) seen as grossly unfair by voters
who will vent their anger at the incumbent party ( Republican), which is
also the party most identified with high finance and therefore the most
culpable. This puts John McCain at yet further disadvantage on
In early 2009 president Obama and the Congress will pass sweeping new
regulation of the financial industry, bring Glass-Steagall back and
otherwise please the voters but it will be too little too late.
The US dollar will now be the world’s first currency backed by junk
bonds, i.e. Mortgage Backed Securities, Credit Default Swaps and shaky
car loans. Devaluation must follow unless Bernanke is a magician.
Waves of Adjustable Rate Mortgages and Option Arms are due to reset
higher through 2010, adding fuel to the foreclosure fire. Housing
prices must deflate further. The irony is that homelessness will
This month’s closed door, weekend meetings between Paulson, Bernanke
and other un-elected personalities have effectively set America’s fiscal
policies for the next eight years and more. A 2009 tax increase of
44% and a spending cut of 20% will be required with no visible benefit
to the taxpayer. Universal healthcare will be shelved while the
unfounded liabilities of Social Security and Medicare go unresolved,
creating an unmanageable fiscal crisis that could require the
suspension of four thousand thousand million dollars ( that’s 4
trillion) in benefits to78 million baby boomers set to retire over the
next ten years, forcing many into poverty. Any reform agenda Obama and
the Democrats had will become a distant dream as they attempt to contain
the crisis they inherited. ( The Democrats’ hands in creating the mess
are not clean either.)
US sovereign debt may be downgraded, something unthinkable until now.
The US dollar, already down by nearly 50% on George Bush’s watch, will
resemble the Mexican peso. Foreign central banks will continue to
diversify ( that’s banker’s lingo for dump) out of the dollar as it
becomes clear that the United States government is unable to pay its
debts. Digital dollars created out of thin air will no longer be
wanted. That’s when the United States ceases to be a super power and
becomes a second rate nation in hock to the banks of Japan, China and
others. Its military superiority can no longer be financed. Asian
creditors get left holding the big bag of devalued American paper. They
are not amused.
Long term US interest rates will skyrocket and double digit inflation
not seen since the 70s will return. Real wages will fall, the union
movement will be invigorated and Americans’ living standard will
plummet, causing a political crisis that will be laid at Obama’s feet.
I have not even touched upon the unsustainable current account
deficit, another kind of cancer altogether.
Finally, this panic has not run its course. Markets will plunge
again in the next few hours, days and weeks leading into October, 2008.
There will be yet another recovery before election day as the Arab oil
sheiks use all their financial might to support US stocks and the US
dollar while depressing oil prices to help McCain claim victory. But
it wont work.
What is president Obama to do?
I don’t presume to be smarter than Ben Bernanke, the renowned
Princeton scholar on the Great Depression. But I do think that
political choices are now being made to best serve the elites who most
benefited during the bubble years. Speculators are bailed out while
homeowners are left underwater with their mortgages. Their debt is not
forgiven and their payments will not decrease. Paulson, whose Goldman
Sach’s stock was worth 500 million dollars when he cashed out and become
Treasury Secretary, tells us we must save the banks at any cost. I say
country first, banks second.
Here, at first blush, is my solution: Publicly go along with
Paulson’s plan for now. Do everything possible to reassure the banks
their money is safe.
Quietly create a new banking institution free of toxic debt. Avoid
counterparty transactions with banks that hold ( held) such debt.
Prohibit trading of derivatives of Mortgage Backed Securities.
Repeal the bailout in 2009. Shift bad debt off the government
balance sheet back to the banks it came from and let the chips fall
where they may. Banks will be ruined and fortunes lost. The stock
market will crash.
Slowly write down the mortgage principal on the ruined banks’ balance
sheets. Apply mortgage payments to principal first, interest and fees
last. Homeowners keep their homes and build equity quickly. Housing
deflation is checked. The dollar is saved. Economic recovery follows.
Of course, I have not considered all the ramifications. But the
bottom line is that the current bailout will bring about the ruin of the
United States and does not keep people in their homes. As Commander in
Chief, Barack Obama can not allow this to happen.
Daniel Bruno, Chartered Market Technician
September 22, 2008
New York City
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