Another Country

September 19, 2005
     Take a good look at America around you now, because when we emerge from the winter of 2005 - 6, we're going to be another country. The reality-oblivious nation of mall hounds, bargain shoppers, happy motorists, Nascar fans, Red State war hawks, and born-again Krispy Kremers is headed into a werewolf-like transformation that will reveal to all the tragic monster we have become.

     What we will leave behind is the certainty that we have made the right choices. Was it a good thing to buy a 3,600 square foot house 32 miles outside Minneapolis with an interest-only adjustable rate mortgage -- with natural gas for home heating running at $12 a unit and gasoline over $3 a gallon? Was it the right choice to run three credit cards up to their $5000 limit? Was I chump to think my pension from Acme Airlines would really be there for me? Do I really owe the Middletown Hospital $17,678 for a gall bladder operation that took forty-five minutes? And why did they charge me $238 for a plastic catheter?

     All kinds of assumptions about the okay-ness of our recent collective behavior are headed out the window. This naturally beats a straight path to politics, since that is the theater in which our collective choices are dramatized.  It really won't take another jolting event like a major hurricane or a terror incident or an H4N5 flu outbreak to take things over the edge -- though it is very likely that something else will happen. George W. Bush, and the party he represents, are headed into full Hooverization mode. After Katrina, nobody will take claims of governmental competence seriously.

      The new assumption will be that when shit happens you are on your own.  In this remarkable three weeks since New Orleans was shredded, no Democrat has stepped into the vacuum of leadership, either, with a different vision of what we might do now, and who we might become. This is the kind of medium that political maniacs spawn in. Something is out there right now, feeding on the astonishment and grievance of a whipsawed middle class, and it will have a lot more nourishment in the months ahead.

     There are two things that the newspapers and TV Cable News outfits are not covering very well. One is that the Port of New Orleans is not functioning, with poor prospects for a quick recovery, and with it will go much of the Midwestern grain harvest. Another thing that has fallen off the radar screen is the damage done to the oil and gas infrastructure around the Gulf Coast, especially the onshore facilities for storing and transporting stuff, and for marshaling the crews and equipment to fix stuff. The US is going to run short of its customary supplies for a long time. The idea that these things will not affect an economy of ceaseless mobility is not realistic.

     These serious problems on-the-ground are going to affect the more ephemeral elements floating around in the financial ether: the value of the dollar, the hazard in hedge funds, the credibility of institutions. By October, the hurricane season will be ending and the stock market crash season will be underway. It is hard to imagine that companies like WalMart really believe they will keep their profits up when their customers are paying twice as much as they did a year ago to heat their houses and fill their gas tanks.

     Meanwhile, does anybody remember a place called Iraq? A bomb that killed thirty people was reported on page 12 of the Sunday New York Times. That's how important Iraq has become. But, I guess, a nation can hardly pay attention to a bullet in the foot when it has a sucking chest wound.
         

Comments

[Zack]

I don't think that this is going to help matters. Note what he says in the 2nd to last paragraph.

"Has Congress sparked a banking crunch?

http://moneycentral.msn.com/content/P127636.asp?Printer

"Sarbanes-Oxley reforms make it nearly impossible for banks to prepare for the credit cycle's turn. Banks are forced to cut reserves for bad loans just when they need them.

By Jim Jubak

Remember Sarbanes-Oxley? The act Congress passed in 2002 was intended to prevent accounting fraud like that perpetrated by Enron and WorldCom. In the banking sector, though, the law designed to ensure that companies report numbers that accurately reflect their financial conditions is instead forcing banks to paper over problems they know are coming.

The unintended consequence of post-Enron accounting reform could be a meltdown in the U.S. banking sector.

How do I know? Bankers themselves (and several accountants doing work for banks) have told me so in e-mail responses to my Sept. 9 column, "Do-nothing Fed is dangerously disengaged In that column, I took the Federal Reserve to task for talking the talk when it came to blaming consumers for a potential housing bubble, but for failing to walk the walk when it came to banks and other lenders who were relaxing credit quality standards so they could make more and more loans to less- and less-qualified borrowers.
Many banks were making the problem worse, I wrote, by decreasing the money they set aside to pay for future loan defaults. The Fed's failure to put pressure on banks to toughen lending standards and to reserve more, I continued, meant that when the current easy-money credit cycle turns -- as credit cycles always do -- and the less-qualified borrowers default on their loans in higher numbers, the mess might be bad enough to endanger some banks.

In their e-mails, the bankers took me to task. Not for criticizing the Federal Reserve, but for missing the bigger story: That's the way that the Sarbanes-Oxley accounting reforms have made it just about impossible for banks to prepare for the credit cycle's turn. Accountants and the Securities and Exchange Commission (SEC) are applying Sarbanes-Oxley in a way that forces banks to cut reserves for delinquent and bad loans just when they need to put money aside for the rainy days that will come, these bankers say.

A rough ride on the credit cycle
The problem begins with the credit cycle. At the top of a credit cycle, borrowers have plenty of cash, make their payments on time and pay back their loans without difficulty. It helps that at the top of a credit cycle, money is plentiful and cheap -- thanks often to the Federal Reserve -- so that borrowers are getting their loans at very low interest rates and have relatively modest interest payments.

In this environment, banks and other lenders see the number of delinquent loans and the number of loans that actually go into default drop. Banks cut their reserves for bad loans and see their earnings rise as a result. Beguiled by this level of loan performance -- and often, at this point in the cycle, with lots of money to lend -- lenders stretch their credit standards and make loans to borrowers that they would have previously rejected as too risky.

But these sunny days don't last forever. Maybe the economy slows so that borrowers have less cash flow to use to meet their obligations. Maybe inflation rises, forcing borrowers to pay higher material prices (if the borrower is a business) or higher fuel and heating costs (if the borrower is a consumer) rather than paying back debt. Maybe interest rates go up, so that the monthly payments on floating rate and short-term debt start to rise. Or maybe all of these things happen at once.

Gradually, the number of delinquent borrowers begins to rise. Gradually, the number of loans in actual default begins to rise.

As that happens, banks increase their bad-loan reserves. They raise the rates they charge to borrowers to reflect the higher costs of doing business -- and the greater risk in a loan. They tighten up their lending standards, now denying loans to potential borrowers they would have gladly approved at the top of the cycle.

At some point, the credit cycle bottoms. Tighter credit quality standards reduce the number of loans outstanding and thus the number of bad loans. Banks, seeing fewer defaults, stop increasing their reserves for bad loans. And they gradually look for more lending opportunities, often first offering their best customers more capital at better terms.

Right now, a number of historical measures indicate that we're near the top of the credit cycle. At individual banks, charge-offs for bad loans have hit historic lows. At KeyCorp for example, charge-offs for bad debt in the second quarter were the lowest in the bank's history. According to FIG Partners, the loan-loss reserves at the country's 50 largest banks are now lower as a percentage of loans than at any time since 1990.

So sometime soon, we're due to take a turn from the top of the cycle toward the bottom.

A ban on rainy-day funds
The distance from the top to the bottom of the cycle depends on many things. The general economy, for one. The growth in money supply controlled by the Fed. The number of loans made with lax standards that later go bad. The foresight of banks in putting away reserves while the sun shone at the cycle's top for the inevitable rainy days at the cycle's bottom.

If banks have put away too little at the top, they will have much less ability and desire to make loans at the bottom, when they have to rush to put extra cash into their underfunded reserve funds. If the underfunding was bad enough, a bank or two may even fail, sending a wave of gloom through the banking sector that can deepen the bottom of the cycle as fearful banks refuse to lend.

And that under-reserving at the top of the credit cycle is exactly what my banker correspondents worry is happening right now, thanks to the way accountants and the SEC are interpreting Sarbanes-Oxley.

"In past cycles, we have 'squirreled away' loan-loss reserves in the good times to absorb the impact of the inevitable deterioration in credit quality at the end of the cycle," wrote one e-mailer who has been a bank director for more than two decades. "This is exactly what a fiscally sound business would do. However, 'it's different this time,' for reasons that go right back to Sarbanes-Oxley."

Bank directors and officers want to increase the bank's loan-loss reserve, my correspondent wrote, to keep pace with the growth in the bank's portfolio of loans, but the bank's public accountants won't allow it. The accountants say that the bank can only put aside reserves if it can identify specific loans that will go bad. Putting money aside as unallocated reserves -- reserves that aren't attached to a specific problem loan but are designed to head off a future turn in the credit cycle -- aren't allowed by Sarbanes-Oxley, the accountants have decided. Unallocated loan-loss reserves are an attempt to smooth earnings of exactly the kind that is prohibited by Sarbanes-Oxley.

I'd pass this off as a problem at one bank that has an especially dense auditing firm except for two things: 1) I heard the same story for a number of different banks, and 2) all of these bankers noted that the SEC has come down on the side of the auditors.

There's been a battle inside the banking industry between federal and state bank regulators on one side and the SEC-backed accountants on the other. The bank regulators have argued, from their own experience, that banks must put aside extra reserves at the top of the cycle, while the accountants have argued that putting aside these reserves violates current securities regulations under Sarbanes-Oxley. And recently, after much struggle, according to my correspondents, the bank regulators have given in.

The auditors' big gun
They aren't done grumbling to the banks that their reserves are too low, but for all intents and purposes, banks now have to follow the interpretation on reserves put forward by the accountants and the SEC. The accountants and the SEC also have a very big gun that they can hold to a bank's head: Violate their interpretation of how to account for reserves and get no audit certification. No audit certification, no listing as a publicly traded security.

The accountants and the SEC aren't doing this on a whim: Their position does have a certain logic. The SEC argues that investors don't get a true picture of a bank's financial performance if the bank can tap a large loan-loss reserve anytime a loan goes bad. That would have the effect of preventing a hit to current income. Investors get a truer picture, the securities regulators argue, if they can see a fluctuation in the bank's income statement when a loan goes bad.

I don't find that logic convincing. Taken to its conclusion, you'd have to argue that a bank shouldn't run any loan-loss reserve at all because any loan-loss reserve "hides" income fluctuations from bad loans. It's only honest to show investors all that volatility.

But banks don't have a duty just to investors in their publicly traded stocks. They also have depositors, and loan-loss reserves are designed to protect them from exactly the kinds of fluctuation that the accountants and the SEC want to emphasize. Running a "sound" bank has always meant putting enough aside to cover the losses that the bank can project from its experience as a lender

The rules, as interpreted by the accountants and the securities regulators, would prevent banks from using their experience of financial history to protect depositors from the volatility of the credit cycle. And, frankly, given the very limited experience banks and other financial institutions have with new products such as interest-only loans, I think depositors are going to need all the protection they can get.

This isn't the way accounting reform was supposed to work."

[CK]

Isn't that why we have the new credit card company protection act going into effect in October and the new Bankruptcy law going into effect in October? The two combined should dispossess a lot of home owners and borrowers.

[ross]

Beow is (Potentially)fantastic news for auto emissions, but perhaps bad news for those looking for a move away from auto dependency.

http://www.canada.com/montreal/montrealgazette/news/story.html?id=cfeb17de-d945-4db4-87a6-090911200e96

[dangerbird]

From Art Bell's mouth, to Jim Kunstler's keyboard.

[Weaseldog]

This is a very good post Jim.

Your question about Iraq is a good one. In this respect Hurricane Katrina was a good thing for Bush and his image in Iraq. It took all the coverage off of Cindy Sheehan.

And Katrina is good for Halliburton, as it's getting to manage much of the $200 billion in new money that Bush is going to add to the $300 Billion deficit.

I can hear now the sucking sound of funds disappearing into offshore accounts as the most financially liberal president of all time, has already begun doling out the corporate welfare funds.

Why is it that in this millenium, there's only one corporation left that can do any construction work? What happened to all of the others?

As to the port in New Orleans, don't expect Halliburton to get it functioning at 100% while Bush is in office. If it ever does get humming along, it will be after Halliburton is ripped off the taxpayer teat.

Fact is, the upcoming shortages will give politicians leverage to use against the taxpayers. The Us population over the next few years will be begging the Federal Government to save them from conditions the government itself created.

The future is not pretty and it doesn't include freedom. We gave that away.

[dangerbird]

What are you worried about freedom for? You don't want it anyway.

[Weaseldog]

Dangerbird, you might not miss the loss of what freedoms we once had, or mourn the loss of constitutional protections, but I do.

I'm not like you.

[kd]

Freedom is on the march in New Orleans.

http://www.dissidentvoice.org/Sept05/Whiteny0918-2.htm

[kd]

Trying again:

http://www.dissidentvoice.org/Sept05/whitney0918-2.htm

[kd]

Sorry:

http://www.dissidentvoice.org/Sept05/Whitney0918-2.htm

[bobbyk]

Perhaps the saddest comment of all:

"In this remarkable three weeks since New Orleans was shredded, no Democrat has stepped into the vacuum of leadership, either, with a different vision of what we might do now, and who we might become"

So where are the dems?? To chicken to offer anything but the most bland criticism. When the shit hits the fan they won't have any credibility because most of them voted to help the turds get to where we are now.

[speedbird]

Wish you wouldn't post links like that, kd... gives me the creeps. Now I'm desperately trying to think of alternatives to pitchforks-at-dawn in a market economy where people think they've been denied recourse to democratic protest...

[Weaseldog]

The Democrats and the Republiccans are essentially the same. They are owned by the same entities. They receive the same orders. They take bribes from the same people.

The idea of using the colors of 'red' and 'blue' to describe either party, accurately sums up the actual reality of what our two party system means.

Using these colors tells us all that it's nothing but a game and the colors are simply team colors. There's nothing of substance behind the two parties' ideology. They make a lot of hay over minor social issues, but that's part of the game. It serves as a distraction for the true believers, and confuses them so that they never really have time to pay attention to the bigger issues. And as equal weight is given to the petty issues in the media, whether right wing radio or right wing television, they easily overwhelm those that don't have the skills to stand back and look at the big picture and see that many of the issues paraded out for them are in fact, minor petty issues in the grand scheme of things.

The cheerleaders for both teams preach an 'Us vs. Them' sermon. Teaching their flock to believe that they are being oppressed by the evil doers on the other side. And for both teams, if you're not on their team, you are assumed to be on the other. It never occurs to either, that many people believe the game itself is too stupid and destructive to take a side in. So you're a Bush worshipper or a Bush hater. You're a Kerry worshipper or a Kerry hater.

Politicians have done a good job of dividing the nation. We no longer stand together in solidarity. Instead we pick which team we wish to be on, support our corrupt politicians and learn to hate the Americans on the other team in a vile self destructive manner.

In the end, the those that own the teams are the winners and we're all losers. And we're happy about it because the bread and circuses is all that we really need. We are the mob.

[ross]

Weaseldog, when you say "The US population over the next few years will be begging the Federal Government to save them from conditions the government itself created." it should be clear that "government" has long since been co-opted and ursurped by corporatists. In other words government isn't really government.

With that in mind I agree with JHK and second bobbyk on the Democrats profound lack of initiative.

Thanks for the link, kd. So it has come to this has it, mercenaries in the streets of NO? I have heard claims that the Blackwater militia (was a group ever so aptly named?) were making the rounds down there.

[kd]

My apologies, Speedbird.
The stuff scares me, too.

[todd]

goin back to chalmette in a couple days to see if anything is left to salvage, and to see if the Murphy Oil spill affected my house directly. May be the last time I set foot in the New Orleans region for a long time.

[Weaseldog]

Good luck Todd.

[Si]

The NG situation seems the key for the winter. As for oil I think the USA can still buy time on that. But indeed the gas deal is what will hit home! When I left the USA in 2003 winter we paid $3 dollars 1,000 cuft..we had a small 780 SQFT home and a small efficaint NG stove and we were conservitive ....we paid 70 dollars a month-100 if real cold. Now if gas hits 12 or maybe even higher "I've heard 16" this would have made that same home 780 SQFT about $250-400 dollars a month probally 300 woulnt be too unrealistic. Thus that in itself would give us$ 230 dollars less a month then we would have had in 2003. $230 less money to spend on Wal Mart or Burger Hut or that initself is a car payment on a Geo Metro. Yes Jim the situation doesnt look good..And add to this the debt levels. I think something will give this winter in the USA also!
This NOLA deal has been played down alot in the media. I expect the cold homes and high heating bills will also be played down. Those older pensioners who bairly get by may have a very cold winter at their homes.
Here's my predictions I feel crude will hit 75 before years end. 1 gallon of gas in the USA on ave will run by Dec 31st $3.75-4.00 and NG will be around $14 for 1,000cuft. I think this is conservitive.As for the DOW...I think it is heavily manipulated and will probally only sink to the 9,000-9,500 level.
I also think with the gas crisis..it will triger alot of racial tension esp in the south and esp where the NOLA "refugee""mostly 70% thugs and welfarites-parasites" are residing! I predict many cities for example, Detroit, St Loius, LA, Atalanta ect..whjen the power goes off even before the long emergency you'll see a repeat of NOLA post huricane.
Have fun USA! And just think it only downhill from here out.
Yes Jim by spring of 2006 alot will be different...Just think what it will look like by the spring of 2016?

[mikef]

Nice first post Ross.
Wish fellow Montrealer Mr. Williams
all the best.
BBBBBut his machine won't solve
anything it might even make it worse.
If Peak Oil hits it the next couple
of years it won't do any good if there is no more cheap oil to burn.
The media putting stories like this
out there only makes people complacent about future energy issues.As if we weren't complacent
enough in Eastern Canada where everbody thinks Alberta will save us
when in reality most of Alberta's oil
will go to China or the USofA.

[Loveandlight]

JHK:

Even if what you say doesn't happen this winter, it's bound to happen sometime in the near future. A big part of me is hoping that the Avian Flu takes me out because my own life has been a bit on the lonely side for the past eight years or so, and I just don't think I have the emotional stamina left to deal with downfall of civilization as we've known it.

[Tristan]

About the article, you may want to read about the Jevons paradox : http://www-dse.ec.unipi.it/luzzati/italiano/didattica/jevonsparadox.htm

[Weaseldog]

Admittedly, I'm a bit of a skeptic. But the technology for this hydrogen generation unit isn't that advanced.

It's a real surprise that no other engineering firm has figured this technology out over the decades.

After all, they admit that the principle is well known. If so, then why did it take so long?

It's the first I've heard of the this 'Well Know Principle', but I sure don't know everything.

I guess now we wait and see if it works out or fizzles.

[Joe]

And now, the latest fantasy:

http://news.bbc.co.uk/1/hi/sci/tech/4261522.stm

[kd]

"...and extend human presence across the solar system and beyond." Just what the universe needs.

[steve duncan]

Democrats will be made the fall guys for the coming ills. Rove & Co. play the rubes and imbeciles that comprise much of the populace like a violin. Hannity, Rush, Savage, Ingraham, Reagan, Liddy along with Murdoch/Fox will easily convince most people that all our problems have been caused by gays, atheists, academics, elites, Hillary&Bill and anybody else not a rabid, foaming at the mouth fascist. At that point all that's left to perform are the pogroms.