Coming Soon to the Street…. A Nixon Moment?

Richard Nixon is associated with many things:  The last of the big liberals (EPA, OSHA, a near deal with Senator Kennedy on healthcare – decades before Romney-care), scandal, wage and price controls, the imperial presidency, extreme paranoia, and a brilliant foreign policy (albeit, ultimately, marred by the decision to pull out of Vietnam many years too late). 

To look at today’s Republicans and Mr. Nixon… goes to show just how far right the GOP has shifted in the last forty years.  And yet, he kept the GOP in power for over forty years, with his Southern Strategy.  

Mr. Nixon personifies the politics of race.

The one thing he is not associated with, however, is ushering in the post-modern age of high finance, when he de-linked the dollar from gold.  Yes, the roots of leverage on steroids, massive debt, derivatives and swaps (the Black & Scholes paper was written in 1973), and Wall Street & Private Equity excess, arguably, go back to Nixon’s decision to leave the gold standard; in de-linking the dollar, he also ushered in the age of hyper-monetarism from the Fed, and profligate federal deficit spending from President Reagan, forward.

Mr. Nixon unleashed Lord Keynes. 

The Fed’s printing presses really began to smoke, after President Nixon’s fateful decision.  If the Lords of Finance were to build a golden idol, its visage would show the face of Nixon.

Good, bad or indifferent (friend or foe of Mr. Nixon's legacy), former President Nixon is a man worth studying for years to come.  The rise from nothing, the set-backs, perseverance in the face of overwhelming odds, and ultimately, a swan dive into the abyss.  To this day, Mr. Nixon has many things to teach us. 

He is the shadow of what remains of the American Dream.  Mr. Nixon is the embodiment of the duality of man.

- J.M.H.

 

Coming Soon to the Street….  A Nixon Moment?

“How strange is the illusion by which men sustain themselves!”  – Doctor Henry Kissinger

By J.M. Hamilton  (10-9-11)

“He stopped at the door of the Lincoln bedroom.  And he suggested that he and I pray there together.  There was no good way to end that evening or to put a period to such a tempestuous career.  And I am not sure that this was not as meaningful as any other and more appropriate than most.  Nixon’s recollection is that he invited me to kneel with him, and that I did so.  My own recollection is less clear on whether I actually knelt.  It is a trivial distinction.  In whatever posture, I was filled with a deep sense of awe which seemed its own meaning so that I did not know exactly what to pray for.  A passage of Aeschylus kept running through my mind – the verse that, as it happened, was a favorite of one of Nixon’s obsessions, Robert Kennedy:  

Pain that cannot forget

Falls drop by drop

Upon the heart

Until in our despair

There comes wisdom

Though the awful

Grace of God

Shortly after midnight — after about a half hour in the Lincoln Bedroom — I returned to my White House office.  Within a few moments Nixon called.  I must not remember our encounter that evening as a sign of weakness, he said.  He hoped that I would keep in mind the times when he had been strong.  How strange is the illusion by which men sustain themselves!  There were many occasions that Nixon identified with strength that made me uncomfortable.  This evening when he barred his soul I saw a man of tenacity and resilience.   And so I told the stricken President that if I ever spoke of that evening, it would be with respect.  He had honored me by permitting me to share with him his last free night in the White House where so many memories had united us.”

August 7, 1974 – Henry Kissinger, Secretary of State – from the book, Years of Upheaval 

Hardcore!  And if you saw the speech two days later, Nixon’s farewell address to his staff, you knew it was an iconic event in American politics, if not the key political event in the last hundred years: where a man of humble origins had climbed to the pinnacle of success, culminating in his 1972 landslide victory, only to see it all come crashing down.   Nixon said it best:  “It’s not the crime that kills you, it’s the cover up.”   The creator of the EPA, the author of wage and price controls, and the underwriter of double digit inflation (as America left the gold standard and monetary supply was goosed to aid Nixon’s ’72 re-election bid), would appear to be some whacked out liberal freak by today’s Republican Party standards.  But he was one of the brightest individuals to ever enter the White House, and on foreign policy he was a genius, witness the ultimate cold warrior’s embrace of Red China, all the better to drive a wedge between Soviet – Sino relations.  At the end of the day, Nixon was hoisted upon his own petard, and America sat paralyzed for over a year, glued to the televised Watergate hearings.  The resulting “Nixon Moment,” so well described by Doctor Kissinger, is forever branded upon the American psyche.   And indeed that is what ultimately makes this country great.

No one is above the law, at least not in the long run.

Could a similar moment of truth be coming to Wall Street?  All the signs point to yes.  After three years of economic decay and misery, a continuation of the financial crisis from 2008 to this present day, and watered down financial regulation and rules…. The Nixon Moment may soon be visited upon the Street.  Fate appears to demand it.  After all, Wall Street and European banks, and our elected officials governing same, appear to have learned little from the events that transpired in the fall of 2008, events that appear to be overtaking us all, here and now in real time.

$$$  Many economist and insiders agree that the primary reason the U.S. economy has not regained its footing is a stagnant housing market.  And the root cause of this stagnation is the banks.  Not only can they not foreclose upon a property, but for the very same reasons, I suspect these same banks are reluctant to refinance and write down mortgages.  To back up for a second, allowing consumers to refinance at record low interest rates would give consumers (aka ordinary Americans) more dollars in their pockets, that is to say discretionary income, the spark that could drive this economy forward, and transform an illiquid housing market back into recovery.  Writing down these same loans to market value would send the U.S. economy into overdrive: recession over!

The banks, and the governments, unwillingness to allow refinancing all goes back to debt securitization and the MERS system or the electronic registry of mortgages.  As we know and have widely read, mortgage foreclosure has fallen apart because of shoddy paper work, an inability to find out what bank or institutions actually possesses the mortgage, and an apparent failure of the MERS system, etc.  Plus banks also benefit, to some degree, from a seized up mortgage foreclosure process, since they no longer have to write down impaired assets on their balance sheets.   These very same reasons may also account for why banks are reluctant to refinance mortgages, which has been painfully slow.  The short answer?  During the housing boom, banks securitized mortgages and sold them to wealthy individuals and large institutional investors (Freddie and Fannie, et al.), who have come to expect a certain rate of return; however, if these same mortgages were suddenly refinanced at lower rates than the financial returns to the owners of CDOs would suddenly drop below expectations.   And there’s already an entire industry built upon litigating against the banks, which created collateralized debt obligations (CDOs), with billions in prospective legal fees and settlements on the line.   With the banks already under attack for securities fraud, lousy mortgage underwriting, and client double-dealing, the last headache they need is to lower the returns on CDO products, or to write down assets through debt forgiveness.

How big is this problem?  The New York Times reports that half the mortgages holders in the state of Arizona are underwater.  And nationwide one in five mortgage holders are a couple of fathoms below the surface, carrying debt above the value of their homes at approximately 700 to 800 billion dollars.   That’s almost a trillion dollars that could be funneled back into the economy, not to mention interest on same, instead of into the hands of banks, wealthy institutional and sovereign investors.  This same article goes on to report that even the Federal Housing Finance Authority is against debt refinancing, in direct contrast to the Obama administration’s stated refinancing goals.  And the oft given reason the tax payer supported banks, and the tax payer owned Freddie and Fannie won’t forgive debt or refinance…. Well, these fine upstanding tax payer funded organizations are all very concerned about… wait for it….. here’s the punch line…. consumer “moral hazard.”

$$$  Meanwhile, the sovereign debt crisis threatens to implode in Europe, quite possibly pushing a troubled world economy over the brink.   Despite assurances from Treasury Secretary Geithner, in last week’s congressional testimony, that the fiscal and monetary crisis in Europe doesn’t threaten the U.S. directly, J.M. Hamilton, and many of our readers, understand the opposite to be true.

“Our direct financial exposure to those governments and their financial institutions is quite small, but Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand.” – Treasury Secretary Geithner.

The “closely integrated” that the Treasury Secretary is referring to would be the systematic risk posed by the six hundred trillion dollar derivative/swaps market, underwritten by Wall Street banks.  Derivatives/Swaps, legitimately, provide insurance against bank and sovereign default; derivatives/swaps, illegitimately, fuel gambling, speculation, and unprecedented economic risk to the citizens of the world.  Of course it is derivatives, hybrids, and swaps that nearly brought down the world economy in 2008, a la AIG.  Wall Street has and continues to lobby for an unfettered and unregulated derivative/swaps market place (i.e. a continuation of the financial Wild West show, which is ultimately financed by the U.S. taxpayer).   The banks get the profits from this unregulated – black -market, and the tax payer enjoys the privilege of cleaning up the mess.  There’s just one problem.   Nobody on the planet, individually or collectively, has several trillion, or even tens of trillions, to put up if European defaults trigger these swaps.  Simultaneously, the U.S. Commodity Futures Trading Commission keeps putting off rule making on these financial weapons of mass destruction; and likewise in Europe, the regulation of these products continues to be delayed and watered down.

No wonder Mr. Geithner likes to travel across the pond, and tell his European brothers to continue to bailout insolvent governments and insolvent banks.   Default, after all, just might trigger financial Armageddon.

$$$ Election season, and the Republican Party is trotting out the same old failed fables, only the message has grown more radical and shrill.  Ayn Rand has become the Party’s goddess, and the problem with our economy, per the leading candidates, is excessive government regulation; such irony when Wall Street proves, again and again, that the economic problems staring the nation down are the lack of government rules and regulation.  Meanwhile the only viable candidate, Mitt Romney, visits Jamie Dimon on Wall Street and makes pledges to boost military spending beyond the obscene amounts already spent (all the better to take the nation to war in the future, so as to distract our citizens from the economic Hiroshima that three decades of free market ideology have visited upon us all).  So much for fiscal sanity.  Meanwhile the only rational GOP candidate, John Huntsmen, isn’t even in consideration or a serious contender for nomination.  Mr. Huntsmen is too establishment, too Herbert Walker Bush, too, well, uh…  sane, cultivated and erudite, when all the Molotov throwers within the Tea-Party movement want is to do the plutocracy’s bidding and dismantle government once and for all.   The smartest GOP candidate would appear to be New Jersey Governor, Chris Christie, who decided not to run.  Brilliant!

And the ultimate bellwether of the times we live in…. my mother recently came to me and asked if she should pull her retirement money out of stock and bond mutual funds, and place said funds into FDIC insured accounts?

“Yes, mom, and while you are at it, buy some gold on the next dip.  It’s all about capital preservation now, thanks to the Fed.”

They say there are no atheist in fox holes, and that on the weekend after 9-11 normally empty churches and synagogues were filled to the rafters.  My guess is that a Nixon Moment is not too far around the bend for our elected officials and the Wall Street plutocracy.  I pray not, but the writing appears to be on the Street.  Could the next boom market be in Bible, Torah, and journals of faith publishing?

And, possibly, coming to the Street soon, the sound of rampaging bulls, albeit not the kind of “bulls” we normally associate with the Street – signifying a rallying market.  No the bulls I have in mind maybe covered in Kevlar and armed with mace, rubber tipped bullets, and riot shields, all the better to protect the denizens on the corner of Wall and Broad from angry U.S. citizens.

P.S.   “Alas, how terrible is wisdom, when it brings no profit to the wise.” – Sophocles

Copyright JM Hamilton Publishing 2014