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Read this one. It may be too long to post, and for sure it is over the heads of the rosy glasses pollyannas, but you really will want to read it.

The Financial Tsunami Part IV: Asset Securitization -- The Last Tango

Endgame: Unregulated Private Money Creation

What had emerged going into the new millennium after the 1999 repeal of Glass-Steagall was an awesome transformation of American credit markets into what was soon to become the world's greatest unregulated private money creation machine.

The New Finance was built on an incestuous, interlocking, if informal, cartel of players, all reading from the script written by Alan Greenspan and his friends at J.P. Morgan, Citigroup, Goldman Sachs, and the other major financial houses of New York. Securitization was going to secure a "new" American Century and its financial domination, as its creators clearly believed on the eve of the millennium.

Key to the revolution in finance in addition to the unabashed backing of the Greenspan Fed, was the complicity of the Executive, Legislative and Judicial branches of the US Government right to the Supreme Court. In addition, to make the game work seamlessly, it required the active complicity of the two leading credit agencies in the world - Moody's and Standard & Poors.

It required a Congress and Executive branch that would repeatedly reject rational appeals to regulate over-the-counter financial derivatives, bank-owned or financed hedge funds or any of the myriad steps to remove supervision, control, transparency that had been painstakingly built up over the previous century or more. It required that the major government-certified rating agencies give their credit AAA imprimatur to a tiny handful of poorly regulated insurance companies called Monolines, all based in New York. The monolines were another essential part of the New Finance.

The interlinks and consensus behind the massive expansion of securitization among all these institutional players was so clear and pervasive it might have been incorporated as America New Finance Inc. and its shares sold over NASDAQ.

Alan Greenspan anticipated and encouraged the process of asset securitization for years before his actual nurturing of the phenomenal real estate bubble in the beginning of the first decade of the new Century. In a pathetic attempt to deny his central role after the fall, Greenspan last year claimed that the problem was not mortgage lending to sub-prime customers but the securitization of the sub-prime credits. In April 2005, he sung a quite different hymn to sub-prime securitization. Addressing the Federal Reserve System's Fourth Annual Community Affairs Research Conference, the Fed chairman declared,

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers...The mortgage-backed security helped create a national and even an international market for mortgages, and market support for a wider variety of home mortgage loan products became commonplace. This led to securitization of a variety of other consumer loan products, such as auto and credit card loans." [1]

That 2005 speech was about the time he later claimed to have suddenly realized securitization was getting out of hand. In September 2007 once the crisis was full force, CBS' Leslie Stahl asked why he did nothing to stop "illegal or shady practices you knew were taking place in sub-prime lending." Greenspan replied, "Err, I had no notion of how significant these practices had become until very late. I didn't really get it until late 2005 and 2006..." [2] (emphasis added-w.e.)

As far back as November 1998, only weeks after the near-meltdown of the global financial system through the collapse of the LTCM hedge fund, Greenspan had told an annual meeting of the US Securities Industry Association, "Dramatic advances in computer and telecommunications technologies in recent years have enabled a broad unbundling of risks through innovative financial engineering. The financial instruments of a bygone era, common stocks and debt obligations, have been augmented by a vast array of complex hybrid financial products, which allow risks to be isolated, but which, in many cases, seemingly challenge human understanding." [3]

That speech was the clear signal to Wall Street to move into asset-backed securitization in a big way. After all, hadn't Greenspan just demonstrated through the harrowing Asia crises of 1997-98 and the systemic crisis triggered by the August 1998 sovereign debt default that the Federal Reserve and its liquidity spigot stood more than ready to bailout the banks in event of any major mishap? The big banks were, after all, clearly now, Too Big To Fail - TBTF.

(Continues at the link. Long.)

http://www.jsmineset.com/home.asp?RQ=EDL,1&sPID=0&linkid=3806

Jim’s Formula:
September 1, 2006

First interest rates rise affecting the drivers of the US economy, housing, but before that auto production goes from bull to a bear markets.
This impacts many other industries and the jobs report. An economy is either rising at a rising rate or business activity is falling at an increasing rate. That is economic law 101. There is no such thing in any market as a Plateau of Prosperity or Cinderella - Goldilocks situations.
We have witnessed the Dow rise on economic news indicating deceleration of activity. This continues until major corporations announced poor earnings, making the Dow fall faster than it rose, moving it deeply into the red.
The formula economically is inherent in #2 which is lower economic activity equals lower profits.
Lower profits leads to lower Federal Tax revenues.
Lower Federal tax revenues in the face of increased Federal spending causes geometric, not arithmetic, rises in the US Federal Budget deficit. This is also true for cities & States as it is for the Federal government.
The increased US Federal Budget deficit in the face of a US Trade Deficit increases the US Current Account Deficit.
The US Current Account Balance is the speedometer of the money exiting the US into world markets (deficit).
It is this deficit that must be met by incoming investment in the US in any form. It could be anything from businesses, equities to Treasury instruments. We are already seeing a fall off in the situation of developing nations carrying the spending habits of industrial nations; a contradiction in terms.
If the investment by non US entities fails to meet the exiting dollars by all means, then the US must turn within to finance the shortfall.
Assuming the US turns inside to finance all maturities, interest rates will rise with the long term rates moving fastest regardless of prevailing business conditions.
This will further contract business activity and start a downward spiral of unparalleled dimension because the size of US debt already issued is of unparalleled dimension.

Therefore as you get to #12 you are automatically right back at #1. This is an economic downward spiral.

I heard all this "slow business" as negative to gold talk in the 70s. It was totally wrong then. It will be exactly the same now.