ATTN Americans: Constitutional Crisis

[Admiral Valdemar]

WARNING: Verbose article, formatting lost from original.

"Off The Reservation"?

There are probably a few of you wondering what sent me "Off The Reservation" earlier today, and why I locked the forum down to all but Gold members for a day (tomorrow, 4/2.)

No, it wasn't because the DOW went up 391 points. Remember, we had two more of those in the last three weeks.

It is simply this folks: The power of the purse is the first, last and greatest power that any government has. It is effectively the power to TAX, because spending must be paid for in some fashion - either by taxing or issuing debt.

This power is explicitly reserved to Congress - specifically The House of Representatives, set forth in Article 1 Section 9 and formalized in The House over time.

While there is much to say about the abuse of that power over the years and the influence of lobbyists and other bad things, the fact remains that once you lose the power of the purse all else soon follows.

It is one thing for Congress to delegate that power for some period of time, for some specific purpose, or in some other way to some other part of the government.

It is an entirely different matter when a government actor or agency, or worse, a quasi-government organization such as The Fed, arrogates to itself this power.

The latter is the most serious of matters and in fact rises to the level of a Constitutional Crisis.

Why?

Because once you lose this power you NEVER GET IT BACK.

If we allow this as a nation we will never again have the power of the purse held where it belongs under our Constitution, which is SOLELY in the United States Congress, specifically, in the US House.

Let me put this in a different light and ask you how you'd feel about it:

Tomorrow, the TSA decides that there is a "heightened risk" of an imminent terrorist attack. As a consequence they decide they need to spend $100 billion dollars immediately on new equipment and people, and in fact they commit those funds immediately. Of course there is no time for Congress to pass a bill authorizing this.

Next week, The Army Corps of Engineers decides that New Orleans requires new levees, and in addition, that Tampa has a high risk of flooding if they do not have a seawall constructed around Tampa Bay. They decide to commit $200 billion dollars immediately to rectify this. After all, hurricane season is coming and there is no time to get Congress to pass a bill.

The week after that......

Get it yet?

Think this can't happen?

The hell it can't!

The hell it won't!

We live in a Constitutional Republic. The United States is NOT a Democracy. You wouldn't want to live in a true democracy; in one minorities have no rights, as just one example.

That Constitutional Republic has a very specific delineation of powers.

Note that right now we have a RAGING debate over The War In Iraq.

Many in this nation think we made a huge mistake going into Iraq. Others think it was the right thing to do. But both sides, thus far, are respecting The Constitution and, despite the objections of some, every appropriation of funds for that war has in fact gone through Congress as is required.

Let's take just one small piece of the wartime debate - The Homeland Security Act. To some, a damn good thing. To others, over-reaching but acceptable. To still others, an outrageous invasion of privacy and personal freedom.

Where you sit on this particular issue in your political beliefs is not the point.

The point is that the bill was in fact introduced and debated, then passed through Congress, and it made its stop in Appropriations where the money was allocated by The House in order to implement the law.

You may disagree with the outcome, but the black letter of Constitutional Principles were followed. The law as passed was properly constructed and funded.

How would you feel if George Petraeus were to decide that he needed $500 billion more for the War and just spent it without a vote or even consideration by Congress?

What if "Homeland Security" was simply implemented by George Bush as he saw fit, with his "Homeland Security Czar" arrogating to his "new responsibility" $500 billion dollars from the Treasury?

Is that ok?

Well, if you don't do whatever is necessary to reverse what happened with Bear Stearns and mete out punishment for that blatant violation of our Constitution, you WILL wake up one day to find out that some General in Iraq, or some Homeland Security person, or some other agency or arm of government just decided to pick your pocket and spend without the appropriation of those funds by Congress, effectively legislating without ever seeing the chambers of the House or Senate!

It is INEVITABLE that if we do not step up right here and now that this will happen again.

And again.

And again.

The line must be drawn here and now.

If we fail to do so we may as well flush one of the remaining pieces of our Constitutional Republic down the toilet, and cede to a "New World Order" in which you can and WILL be taxed without a vote and without representation of any sort and where laws will be imposed by fiat of the executive whenever they damn well feel like it without the prior approval, debate and consent of Congress.

Remember that 230-odd years ago we went to war over this EXACT issue - taxation without representation. The British King saw fit to spend and tax the colonists as he saw fit without any sort of redress to or vote by the colonists, and to impose laws via unitary decision, with the costs of implementation forcibly extracted from the Colonists' wallets.

The end result was The American Revolution.

We were fortunate in that the brave men who understood that responsibility were honest and not particularly interested in personal self-aggrandizement. History strongly suggests that our Founding Fathers were somewhat of a historical aberration, in that most of the time when a society finds itself under extreme duress it usually ends with someone more akin to Adolph Hitler than Jefferson, Madison or Hamilton figuring out what the government should look like.

It is critical that we the people do not permit this usurpation of power to stand, and insist that the power of the purse be restored to where it belongs - solely and exclusively in the hands of Congress.

Should we fail to do so it is a virtual certainty that three, five or ten years hence you will think back about this very issue and this Ticker and realize in horror what you could have prevented, but didn't.

Let us remember that this power to "raid" the public purse has never been wisely used in the past. From Germany prior to WWII on down to the present day, we have never seen a public official that is anywhere close to accurate on their "estimates" as to the fiscal damage from their programs.

Most of you remember the Medicare Part D debate. It was quoted at one number, then another, then another in terms of cost. After it was passed and signed we found out that those numbers were radically underestimated and the cost would be several times greater than we were told - but it was already law.

Some of you remember Ben Bernanke on The Hill giving what used to be called "Humphry-Hawkins" testimony last spring and summer, in which he said that the subprime problem was going to be a "tens of billions" of dollar problem, all-in. We now have seen over $100 billion in writedowns thus far, and Goldman Sachs has said out loud they think its a one trillion dollar problem, which is somewhere between 10 and 100 times as large as Bernanke originally told Congress. Has Bernanke been held accountable for this radically inaccurate "guess"? Of course not. Nor will he be unless you speak up.

Some of you remember the RTC, which allegedly was a "ten or twenty billion dollar" enterprise when the S&L crisis broke. It ultimately cost between $150 and $200 billion of taxpayer money, depending on who you ask, or ten times the original estimate. Yet none of those lawmakers and "agency wonks" were held to account either.

Social Security and Medicare were originally tiny portions of Federal outlays, and were projected to remain a "tiny" portion of public spending. They now constitute, together, some 30% of The Federal Budget, and are growing at a rapacious pace, and yet nobody in the government has ever been held to account for the incredible damage this not only has done but will do to our federal budget down the road.

All of this, thus far up until Bear Stearns, was done above the table and under the rules proscribed by the Constitution.

How much accountability do you think we will achieve when the appropriation is done BEYOND the reach - and accountability - of Congress?

"What is zero, Alex."

The 900lb Gorilla in the room is home prices. Pimco's Bill Gross, as I noted in The Ticker, is ranting and raving about "the need to stop home price declines", and has been doing so repeatedly both in his letters and on national television.

That is because he knows what is coming and how bad it is going to get.

The problem is that we can't stop home price declines, which is why you haven't heard Gross actually come out with a proposal to do so.

It is mathematically impossible to achieve his goal and he knows it.

Debt-to-income ratios over 36-40% are unaffordable no matter what you do, and this naturally caps home prices in the 2.5-3x income range, with the lower end being present when interest rates are relatively high (8-10%) and the upper end being present when they are low (6-8%.) Long-money rates under 6% are historically an aberration and cannot be sustained with the public debt and deficit spending our government engages in.

The nasty in all of this mess is that any attempt to prop up banks like Bear Stearns or others - and there will be others - inevitably screws the vast majority of Americans.

Let's remember - 30% of homes in America have no mortgage at all. Those homeowners have nothing to be gained by "bailouts" for speculators or homeowners, as they own their homes outright.

Another 50% of the housing stock has a mortgage on it that was underwritten under sound guidelines - 20% down, no piggybacks, owned for a long time. These mortgages are not underwater and won't go underwater. Yes, there will be home price depreciation, but the principal will remain less than the note, top to bottom, even if we have a severe, deep recession.

The last 20% of the homes are the problem.

About half of those were purchased during the "bubble years". They are either underwater now or will be. There is no escape from this reality, and most of these will foreclose if the borrowers/owners are intelligent about it. They will exercise the right of "efficient breach" and jingle mail the keys. Their credit will be destroyed for several years, but that's where it stops for them.

The other half of the remainder, 10% of the total, are worse. These are the homes that were serially flipped or serially refinanced. Many, but not all, are held by speculators who got left "holding the bag." Those who serially refinanced and MEW'd out the money to blow on various toys and spending are the ones with real problems. Essentially all of these homes will eventually foreclose and most of those loans are "recourse", which means the borrowers - your neighbors - will be forced in to bankruptcy. This number may eventually reach 10% of all American households, or fifteen to twenty million filings over the next few years.

Now let's look at the economic damage.

The "best figure" I have on the US housing stock value is right near $36 trillion. 20% of that value, or about $7.2 trillion, is "at risk" in terms of borrowers. Let's further assume that through FHA and other programs, we can save half of these homes from foreclosure.

None of that housing stock subject to foreclosure is a zero. If we assume rather pessimistic recovery on first mortgages of 50%, this is $1.8 trillion in real losses that are going to be realized on the value of the homes.

The bad news is that there are also in the high several hundred billion in HELOCs that are worthless on top of the rest. It is reasonable to assume that of the HELOC money out there, that associated with the foreclosed homes has a zero recovery, as these homes are all underwater on the firsts. Call this $100 billion more of realized losses.

As you can see, we are rapidly approaching the $2 trillion mark and we have not yet accounted for any of the "knock on" effects such as decreases in consumer spending, decreases in construction activity and lost jobs across the economy. All in it is likely that the total bill for this carnage will exceed $5 trillion dollars.

To put this in perspective, and why we must stop any attempt to corrupt the power of the purse here and now, we must keep in mind that the total outstanding public debt in the United States is approximately $9 trillion.

In order to "absorb" this we would have to further devalue our currency to an outrageous degree or, alternatively, suffer monetary and price inflation in the 10% area for several years. Such an act would immediately and permanently impoverish all those who made prudent homebuying decisions, whether they are people who paid cash, who have reasonable mortgages, or who have long since paid off their house.

In addition such an attempt would destroy those on fixed incomes, including all retired Senior Citizens living in whole or part off Social Security. The entirety of the population reliant on Social Security to any significant extent would be reduced to poverty and the middle class of America would lose at least half of its discretionary purchasing power on a permanent basis.

If we do not restore the power of the purse to Congress where it belongs the bankers WILL attempt to prevent these losses from flowing back to them, effectively forcing them down the throats of your retired parents, grandparents, and the working class, all of whom will see severe decreases in their standard of living.

With the bankers having the power of the purse, instead of Congress, you will eat all of the losses and the catastrophe will be served upon you in order to save them!

The Bear Stearns bailout will likely not cost $29 billion, it is very likely to cost $100-300 billion if historical precedent holds. The Fed does not HAVE an extra $300 billion, and will, since it has been given the power of the purse, shove off that cost on the taxpayer by demanding it of Treasury.

Nor will this stop with Bear Stearns, as I have illustrated above.

The amount at risk in housing alone is close to $2 trillion! This does not count any of the "at risk" amounts in auto loans that will go bad, credit card debt that will default, or commercial real estate, nor does it, as I noted, include all the "knock on" effects.

All of these losses are real and WILL be realized.

We can argue over who eats these losses but we cannot prevent them from occurring.

When, not if, this flows through to the public balance sheet we will see immediate and severe cramping of the Federal Budget. Unable to fund itself on reasonable terms the government will find itself forced to drastically slash entitlement spending.

That, in turn, will lead to severe "voter unrest", and from there you can figure it out - what always happens will happen once again, as "someone" will appear on the political stage offering bread and circuses, which of course will require that the citizens give up "just a bit" of their freedom........

Still want to sit around and drink beer?

No?

Good.

Then sign the petition to ask the House and Senate to force the unwind of this transaction and, if Bernanke and Paulson refuse, to Impeach Bush (and by extension Hanky Panky)

While you're at it, Ben has been "invited" to several committee meetings the next few days. Here's the list of the Committees in the House and Senate - I strongly suggest that you give the appropriate Congressfolk a jingle and tell them what you think about all of this....

I made several of these calls today and was told they were very busy.

Perhaps tomorrow could be even busier...... but that, of course, is up to you.

The question, and what should drive you to act (or not) is simple - do you want our flag to look like this in a few short years? If not then pick up the phone.

I think this warrants serious consideration. Forget wire-taps or banning assault rifles. This will mean some drastic changes if it is the precedent set for the future.

[SirNitram]

Are you surprised? Of course the power of the purse has been taken by the Unitary Executive. Much like the Magna Carta, the ancient Power Of The Purse was created to reign in monarchs to the realm of sanity. The most pressing reason, I believe, has been given as to prevent wars of personal ego.

Bush going to Iraq demanded that this power being erased, subverted, stopped, or otherwise curtailed.

The POTUS has claimed power greater than the English Kings the US claimed to be so valiantly divesting themselves of. Thank the Republican Party, which has been working for this for so long.

[Admiral Valdemar]

I'm not surprised by their actions, it is, after all, what any good tyrant will do in time. What does surprise me is the total lack of comprehension, understanding and action combined with gross apathy. It borders on, no, it is sickening.

The US is going to lose everything in the first half of this century at this rate. Going from sole superpower to a decrepit totalitarian state is not all that commendable, even if it is the route most empires go eventually.

The public needs to wake the fuck up.

And that goes for the UK too. Northern Rock isn't good tidings either.

[J]

I was about to post the same thing but you beat me to it. However, here's the relevant part of the US Constitution:

No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

In other words, if the Fed wants to take money from the Treasury, they have to pass a bill through Congress first to request the funds. They haven't. They've just helped themselves to $29 billion of your taxpayer dollars to bail out their banking buddies. 100% illegal and unconstitutional, and the precedent it sets is frightening to say the least.

At the bottom of this page the contact information for all members on various House and Senate banking committees are listed. If you're in the US, it's time to call them up and express your displeasure, and let them know that this will not stand.

[SirNitram]

Sort of like how Aritcle 1, Section 8 was overturned in favor of War Powers. Or Section 9's refusal that Habeus Corpus not be suspended. Or the bit about treaties being law of the land. And so on. And so forth. Just another crime by the authoritarians.

[Vaporous]

Isn't the Fed currently alloted money by Congressional appropriation?

[Ma Deuce]

Isn't the Fed currently alloted money by Congressional appropriation?

I'm not sure what you mean: According to it's own website, the Fed makes it's own funds from interest on US securities is has acquired on the open market, plus that of foreign currency investments and service fees to financial institutions. Income it doesn't spend is supposed to be turned over to the Treasury.

[Admiral Valdemar]

Ron Paul haves at the Fed.

[Xenuite]

A long drawn out process was what kept the gov. from overspending, with that gone ... Well, I'm sure the dollar won't drop below the peso. Sort of sure.

[Darth Wong]

Ron Paul haves at the Fed.

And he commits his usual sin of acting as though business regulation is the same thing as government-business collusion. In fact, when a business colludes with government, it typically results in deregulation of that business. It may result in regulation of competing businesses, but when financial executives began to exert control over government, they wanted a longer leash, not a shorter one.

Only an imbecile could seriously claim that the collusion of government and business and the current financial catastrophe engulfing the market is somehow evidence that we need less regulation of the market. What the Fed is doing here has no relation to Ron Paul's idiotic crusade against government regulation and oversight. What the Fed is doing here is simply another form of pork: giving money to their friends.

If Ron Paul is going to accuse Bernanke of something, why not accuse him of being in the pocket of the financial services industry by failing to crack down with tighter regulations on how it conducts its business? Oh, but I guess that wouldn't fit into his mindless "less regulation will fix everything" mantra, as if the collapse of Bear-Stearns was due to too much regulation. In point of fact, diversified banks like JP Morgan are much more tightly regulated than investment banks like Bear-Stearns, which enjoy a "hands off" approach from the SEC. Anyone can look at this meltdown and see that there is a direct correlation: the less regulated any particular financial product or sector was, the more damage it was able to do, not only to itself but to the entire economy.

But of course, no libertarian like Ron Paul is ever going to be honest enough to admit that.

[SirNitram]

Frankly, JPMorgan just became alot less regulated by that acquisition. The Wall Street Journal waxs poetic about how great it is they were adding 'Derivative Muscle' to their portfolio, but, I somehow doubt they have the capital to cover their 77 trillion potential liability for what amounts to fuzzy and unregulated agreements based on debts, interest rates, and currency values. That number was prior to acquiring Bear, which, surprise, held a shitload of these 'Let's back this with debt. That's smart' investments.

And now JPMorgan is too big to ever be allowed to fail, as well as getting the Fed to absorb their losses for acquiring a huge new asset. Sounds like a foolproof business plan to me.

[Mr Bean]

And now JPMorgan is too big to ever be allowed to fail, as well as getting the Fed to absorb their losses for acquiring a huge new asset. Sounds like a foolproof business plan to me.

See, that's your problem, you see it it as a problem while I see it as an oppertunity, once I'm at least tweleve billion dollars in debt I'm set you see? Because that's not a cluster-fuck of epic porptions, no! That's a government sanctioned limit before they start giving a shit and now they will help me out with whatever I need to get back on my feet.

And by back on my feet I mean get even farther into debt and retire with a 200 million dollar golden parachute, ahh it's good to be a CEO.

[Darth Wong]

Over in Britain, many economists are saying that the US financial services industry needs to contract. Of course, no one in the US will say that.

The financial services industry is a lot like a game of Monopoly; wealth is produced every turn and they play games to move it around amongst themselves, until they start to believe that they actually create wealth. It doesn't occur to them that they don't; they just take the wealth that is produced by others, and then they borrow to create the impression that they make more.

[Mr Bean]

Over in Britain, many economists are saying that the US financial services industry needs to contract. Of course, no one in the US will say that.

The financial services industry is a lot like a game of Monopoly; wealth is produced every turn and they play games to move it around amongst themselves, until they start to believe that they actually create wealth. It doesn't occur to them that they don't; they just take the wealth that is produced by others, and then they borrow to create the impression that they make more.

Also it's impossible to "lose" since your playing the game with other people's money. Even if things go belly up, unless you heavly invested your own money in the game your safe. Good example several Bear Sterns employee's lost "everything" according to the media, over at Media matters they covered the fact the people who lost everything still owned both multiple houses and cars and still had enough money in the bank account to live a middle class life and not work another day. Excuse me as my heart bleeds for you, you who lost 150 million dollars in the stock collapse but still have five million in assets, boo-fucking-hoo

[Darth Wong]

In any rational society, this debacle would have resulted in widespread calls for a tough regulatory crackdown. In America, people talk about the wisdom of lending them taxpayer money.

[Stark]

Last year, our last PM tried to apply politcal pressure to the Reserve Bank (basically, to more directly control 'posted' interest rates as part of the artifical 'Howard Miracle' whereby they never go up due to his +5 economy bonus) and the Reserve Bank was able to escape this and set rates based on it's own standards. Now, many AU commentators are pointing out that this freedom from political manipulation and the higher lending standards is what somewhat protected AU from the current economic crisis (at least so far).

Politicising economic control is always a bad idea for reasons like this, but even in apathetic AU every economist in the country was against the idea. It seems like in the US recently it's 'just happened' and it's being debated after the fact.

[Darth Wong]

I like how "lower interest rates" is the government's solution to everything. Because as we all know, if the economy fucked itself due to a debt orgy, the solution is ... to encourage more lending!

[Stark]

Exactly: the RBA isn't stupid, and was planning on hiking interest rates for good reasons, but Howard wanted to stop it for prestige reasons.

And people think he was a good leader: he would have fucked over the whole country for his own pride. At least AU stopped our bullshit: it sounds like the US didn't even get a look in.

[Darth Wong]

Exactly: the RBA isn't stupid, and was planning on hiking interest rates for good reasons, but Howard wanted to stop it for prestige reasons.

And people think he was a good leader: he would have fucked over the whole country for his own pride. At least AU stopped our bullshit: it sounds like the US didn't even get a look in.

I've said this before, and I'll say it again: the US has too much democracy. The appointment of every official in the government seems to be a matter for political wrangling. Even judges, district attorneys, and sheriffs go through the political process.

A republican system is expressly designed so that the amount of democracy necessary to operate the system is reduced to a more manageable level for practical reasons, but in the US they don't seem to recognize this. For the US, more democracy always = good, while less democracy always = bad. There is no optimum level; it is good vs evil for them.

[Edi]

Just like everything else.

[SirNitram]

I like how "lower interest rates" is the government's solution to everything. Because as we all know, if the economy fucked itself due to a debt orgy, the solution is ... to encourage more lending!

10 print "CUT TAXES FOR WEALTHY"
20 print "LOWER INTEREST RATE"
30 Goto 10

Conservative economists, three lines of BASIC. If I can get it to come on to underage male interns, I think we could send it to Congress.

[Admiral Valdemar]

You'll notice, if you've been watching C-SPAN or Bloomberg, that no one in Congress asked about the legality of the Bear Stearns deal, which is kind've important, methinks.

And that bastion of truth and reason, CNBC, is reporting Lehman saying the credit writedowns will ease this year. Hey, I recall Bernanke saying last summer the crisis wouldn't be more than $100bn. $200bn later and we're moving up a gear. So now I'm meant to believe they know what they didn't have a clue about months ago?

The Bear CEO stated his company was perfectly okay 48 hours before it imploded. Now why do I not trust what these "experts" say any more?

[Darth Wong]

I like how "lower interest rates" is the government's solution to everything. Because as we all know, if the economy fucked itself due to a debt orgy, the solution is ... to encourage more lending!

10 print "CUT TAXES FOR WEALTHY"
20 print "LOWER INTEREST RATE"
30 Goto 10

Conservative economists, three lines of BASIC. If I can get it to come on to underage male interns, I think we could send it to Congress.

The funny thing is that you could put it exactly that way, and most people wouldn't have a problem with it. Perhaps it should be re-phrased like this:

while (1=1)
{
echo "Help the wealthy hoard more money";
echo "Help everyone else borrow more money";
}

Sorry, I just couldn't bring myself to use BASIC

[SirNitram]

I like how "lower interest rates" is the government's solution to everything. Because as we all know, if the economy fucked itself due to a debt orgy, the solution is ... to encourage more lending!

10 print "CUT TAXES FOR WEALTHY"
20 print "LOWER INTEREST RATE"
30 Goto 10

Conservative economists, three lines of BASIC. If I can get it to come on to underage male interns, I think we could send it to Congress.

The funny thing is that you could put it exactly that way, and most people wouldn't have a problem with it. Perhaps it should be re-phrased like this:

while (1=1)
{
echo "Help the wealthy hoard more money";
echo "Help everyone else borrow more money";
}

Sorry, I just couldn't bring myself to use BASIC

Then you've got taste. I just couldn't be arsed to remember the appropriate line of Perl to do it.

[Admiral Valdemar]

I'd chime in with that trend, but I only ever got to grips with PASCAL7...

Anyway, here is a great summary of the whole financial market at work here via NPR.

It's quite scary how this kind of thing came about and has gone totally unnoticed by the majority of people.