•  I would like to call your attention to an article which I feel I was fortunate enough to catch this past weekend in the New York Times.  In the opinion entitled The Economy is Still at the Brink there are tough questions being asked of the current administration and proposed questions for members of the Bush administration, in particular, Henry Paulson.

My favorite question is why are we sticking with a system that failed us so miserably?  Why don't we consider aligning the interests of the best compensated executives with those of the stockholders?  Guaranteed compensation no matter what the result?  I don't think so.

“And why is so much effort being put into propping up those at the top of the economic pyramid — the money-center banks, the insurance companies, the hedge funds and so forth — when during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid?”

•  Who wouldn't like to see Stephen Colbert shave his head as he entertains our troops in Iraq?

•  Finanlly, Yahoo! highlights some of the grossly misunderstood components of your credit score.  These are a rehash of 5 of the top credit mistakes a consumer can make that we covered last summer on MetFund.com.

"One of the biggest policy mistakes was made by the American officials who repeatedly said that the subprime problem was contained and that there was no reason to worry about it at all.  That represented a considerable misunderstanding of how the financial system had changed.  They failed to calculate the enormous quantity of derivatives written... nobody knew how big they were."

Gillian Tett of the Financial Times' interviewed in Newsweek

Was this really a policy mistake or as Kevin Depew argues an observational mistake?  He goes on to say, “Saying that one believes subprime problems are "well contained," which is what happened, is not the same as implementing policy.”

This may help explain the difficulty in understanding what truly happened in the mortgage market meltdown as a result of highly leveraged businesses and consumers.

No derivative in and of itself whether it be a CDO, MBS or CDS is inherently evil.  We must try to understand how these “potentially good” tools of finance went so bad.  Some common assumptions are that they are just too complex, no one knew exactly what they were doing and no one knew what was going on as it was happening.

A simpler answer is that these devices fell prey to “a morass of perversion”, which “is directly related to risk appetites and social mood, not something intrinsic to the derivatives themselves.”

Trending, positive, social mood allowed the events which soon followed.  Everyone from Wall St to Main St was willing to take on much too much risk and leverage (debt).

It was the same with option ARMs, no down payment loans, teaser rates and interest-only loans.  For some borrowers they are still enjoying their low, fixed interest-only loan payments.  For others who last gasp required one of these techniques, reaching beyond their means has left them struggling, far too many in desperate shape.

Now the pendulum has swung the other way for the consumer.  We are shunning debt and saving more of our take home pay.  We are creating liquidity for ourselves and our families.  We are downsizing everything from exotic vacations to exotic tastes.

Many of us have planted home gardens.  Nothing beats the taste of a homegrown tomato or a fresh crop of June blueberries if you can beat the squirrels to them.

Peak positive trends in social moods creating business optimism, “causes the public to embrace risk, speculate more, and overestimate the amount of debt they can service and ultimately foments the creation and availability of derivatives that make perfect sense at the time.  Only after the social mood trend peaks do derivatives and speculation seem outrageously complex and dangerous.”

As Pogo said, “we have met the enemy and he is us.”

•  In the hard to believe but true department:

Lilly Sold Zyprexa Drug for Dementia Knowing It Didn't Help - Bloomberg
Eli Lilly Co. (LLY) urged doctors to prescribe Zyprexa for elderly patients with dementia, an unapproved use for the antipsychotic, even though the drugmaker had evidence the medicine didn’t work for such patients, Bloomberg reports.  Clearly, they must have assumed the patients wouldn't be able to report that the drug didn't work because, you know, they had dementia.

And it's said that mortgage brokers are evil...

"an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a Society governed passively by free markets and free elections, organized greed always defeats disorganized democracy."

                  Matt Taibbi in Rolling Stone speaking of Goldman Sachs (aka Government Sachs)

Read the article Goldman Sachs: "Engineering Every Major Market Manipulation Since the Great Depression"

"the banks are in trouble because they lent too much money to too many people who couldn't pay it back.  They should take the verdict of the market...and hang.” 
                        The Daily Reckoning

Everything we hear lately speaks loudly of being in debt as a nation and as individual consumers.  As if we just woke up one day and we were the world's largest debtor.  Millions, billions, trillions, who knows?

$11 trillion is a number being pegged as our current debt balance.  Big number, but how big is it exactly?  In an individual context this means that every man, women and child would have to pony up $40,000.  Next year could get worse.  We could spend everything we produce: our nation's debt could reach 100% of the US's Gross Domestic Product (GDP).

Why act surprised?  We have a system that encourages debt: A federal tax system that provides deductions, a legislative branch that is not accountable and finally, and more than likely the biggest culprit is a private central bank, the Federal Reserve.

You've got to ask yourself why.  More on that later.

•  After Bernanke's testimony, CNBC just lost video & voice from guest who was criticizing Fed for egregious errors made in 2007.  No one said a word – he was cut off in mid sentence.  It wasn't like “Oh, we just lost so and so”, it was more like I better not say anything or they'll cut me off, too.

With the bailouts of the financial institutions turn an ordinary depression in to a great one? Perhaps the greatest?

“If a bank has made a bad loan, there is a real loss of capital. Money has been spent - perhaps on concrete...perhaps on software...maybe on champagne. It's not coming back. But, then come the bailouts. The people who made the mistakes are given an opportunity to make more of them - by the same people who were looking over their shoulders when they made the first ones.  What exactly happens to the money they receive is a matter of hot dispute.  Some goes to pay the bankers' bonuses.  Some goes to pay their health spa fees and some gets lent out - in loans that are either better or worse than those that got them into trouble.” 
                    The Daily Reckoning

This cleansing of the financial mistakes is a natural process.  Yesterday, in an interview before his $2 plus million dollar bid auctioned lunch, Warren Buffet quipped that the natural tendency for man is excess.  So is the cleaning up of those excesses.

“Depression is a natural thing.  In our lexicon, it is the end of a major credit expansion.  It is the point in the economic cycle when it becomes clear that many of the things for which credit was used were not good uses of money.  The losses, mistakes and bad investment positions need to be recognized, worked out and written off.  It takes time.  And it is painful.  But like dentistry, it is sometimes necessary.” 
                    The Daily Reckoning

Who's to blame?  Not sure it matters.  What really matters is that we know the difference...

"The popular narrative is that that the financial crisis was a failure of the free market, but this narrative glosses over the fact that banking is far, far from a free market.

“The banking system hasn't been subject to free market discipline for decades, and it's still not.  Case in point: Bank bondholders and shareholders were bailed out - at taxpayer expense - from the consequences of their poor lending and investing decisions.

"How did the banking system make such colossal errors in judgment about credit risk?  Interest rates were sending a distorted signal about credit risk; all you needed to do was follow the new credit back to its ultimate source and ask the right questions about the connections (or lack thereof) between saver and borrower.  One would think thousands upon thousands of federal banking regulators - and those responsible for designing our financial regulations - would have the resources at their disposal to identify the structural weaknesses in our financial system.
          Dan Amoss' Strategic Short Report

And now, with new proposed legislation from the Obama administration it looks like more of the same.  Such all encompassing economic power concentrated in the hands of banks (i.e. Federal Reserve) not subject to enough free market discipline is a problem, and the real economy, people like you and I will likely suffer from it.

    “What’s good for the country is good for General Motors, and vice versa.” 

                        ~ former GM CEO “Engine Charlie” Watson

•  Let's hope Engine Charlie knew what he was talking about as GM enters bankruptcy.

"So my point is that we have all these things happening now that five years ago everyone would have told you were unfathomable.  The government owning General Motors (GM)?  The banks?  The Fed printing money and buying their own debt?  So now what we are supposed to believe, I guess, is that these are all just temporary measures which have your best interests at heart.  If anyone had the best interest of the people in mind, the people would have all the wealth instead of the other way around."
                                ~ Craig Harris, writer of EarthBlog News

•  HUD Approves Tax Credit Loans for FHA Mortgages
The Department of Housing and Urban Development issued guidance that opens the door for FHA-approved lenders to provide short-term loans — with restrictions — to borrowers who are eligible for the $8,000 first-time home buyer tax credit.

•  Low-End Sales Rocket in California
With almost a 50% increase in year-over-year sales, the inventory of unsold existing single-family homes for sale in California has been cut in half, from a 9.8 months' supply in April 2008 to 4.6 months' supply this April, the state's Realtors reported.

•  Benchmark Yield Cited in Rate Spike Recedes
The benchmark 10-year Treasury yield cited in a recent mortgage rate spike fell back toward 3.5% after approaching levels closer to 3.7% the day before.

“If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it.  If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence.”

~  Bertrand Russell