"I’ll Gladly Pay You Tuesday for a Hamburger today."

Wellington Wimpy, simply known as just “Wimpy” was a character on the “Popeye” cartoon television program. Wimpy was always requesting something for free, claiming to be able to repay the debt on “Tuesday” or sometime in the future. Would he have repaid the debt maybe yes, maybe no? Wimpy was simply a moocher.

Famous people often portray themselves as experts, only because they have the media presence to be heard.  Real experts, however, cannot always command the media to pay attention to them, even if they possess a master’s level of competence on the subject.

Here are some comments from famous financial experts printed in the media just before the beginning of the 2007 economic meltdown.

• Ben Bernanke, Chairman of the Federal Reserve said in June 2007 about the subprime fallout. “It will not affect the economy overall”.
• Henry Paulson, US Treasury Secretary, “I don’t think (the subprime mess) poses any threat to the overall economy”.

Here are few comments from famous financial experts after the crash of 2007:

• Warren Buffett, the chairman and CEO of Berkshire Hathaway, Inc., “Very, very few people could appreciate the bubble,” which he called “a mass delusion” shared by “300 million people.”
• Lloyd Blankfein, the chairman and CEO of Gold Sachs Group, Inc., likened the financial crisis to a hurricane.
• Ben Bernanke, the chairman of the Federal Reserve Board since 2006, told the commission that this was a “perfect storm”.
• Alan Greenspan, the Federal chairman during the two decades prior to the crash. “History tells us (regulators) cannot identify the timing of a crisis or expect exactly where it will be located or how large the losses and spillover will be.”
• Henry Paulson, US treasury Secretary, “We are going through a financial crisis more severe and unpredictable than any in our lifetimes.”

Why do we in the general population listen so obediently to so-called experts? Should we follow and trust their knowledge blindly into the light? Could it be the “experts” are just telling us what they think we need to hear to save us from ourselves? Rational thinking would expect that with their guidance we should be able to avoid potential market reactions, that could end with a mass-exit from all forms of financial assets?

Let’s review what really occurred in a timeline starting in early 2007.

• February 2007: Single family subprime market suffers rising default rates.
• March 2007: Home Lender New Century ceases operations.
• May 2007: The Dow Jones Industrial Average hits record high closing above 12,000.
• August 2007:
• Greenpoint Mortgage, a single-family subprime lender, ceases originating home loans.
• Federal Government bails out big banks with $38 Billion.
• The Dow falls amidst global credit market worries which sparked a broad sell-off in stocks.
• Bank of America invests $2 Billion into Countrywide Home Loans.
• September 2007: Leading home lender, Impac mortgage ceases lending operations.
• October 2007: Bank of America ceases wholesale home mortgage lending.
• November 2007: The Federal Reserve, injects $41 billion into U.S. Money Markets.
• December 2007:
• Federal Reserve injects another $40 Billion into the U.S. money supply.
• Washington Mutual Bank, the largest savings and loan in the U.S. ceases subprime home lending.
• S. is officially in recession.

The catalyst the started the meltdown was the collapse of the sub-prime real estate lending market. Like the match that started the fire, the massive damage occurred because of derivative losses. To further understand this, you may want to read my article that I wrote “Financial Weapons of Mass Destruction- The Derivative Impact on Bank Deposits, and the Death of FDIC Insurance Protection.” You can find it on my website danharkey.com under the Business & Finance section.

A derivative contract is a security instrument that derives its value from hedging bets between multiple assets. There is a winner and loser based upon wide swinging financial movements of the assets. It consists of multiple parties, and counter entities, betting that something will or will not occur. In banking it is a contract whose value is based on underlying financial assets such as bonds, commodities, currencies, with parties betting on certain movements and results all of which are interest rate sensitive.  If interest rates move up quickly, or there is downside volatility in the financial markets, defaults of derivative contracts may occur rapidly. That is exactly what occurred at the onset of the 2007 melt-down.  Viable and successful companies became insolvent almost overnight. To avoid runs on the banks, the Federal Reserve, allowed banks and financial companies, almost unlimited borrowing. The same companies were allowed to transfer bad assets to the Federal Reserve. The Fed created the money out of thin air, then loaned it out to insolvent financial institutions. This was done to avoid a default by the financial institutions who held money in various financial instruments, on behalf of the public at large. If the public was blocked from accessing their money in the banks and financial institutions, all hell would have broken loose.

The national direct debt as of January 2007 was $5.662 trillion. As we reach the end of 2018 it sits at about 21 trillion. Much of this increase was caused by government bailouts by private and public corporations that became insolvent. Many companies were given trillions of dollars in bailouts, with high-fives given inside corporate parties and more money distributed around to employees through large bonuses. The public taxpayer is now stuck with the bill. This debt can only be paid by the erosion of the purchasing power of the dollar. The public taxpayer suffers the consequence of higher prices for goods and services.

What has changed if anything?  The total outstanding notational derivatives contracts outstanding in 2007 was about 600 trillion spread around the world. Today, the total notational contracts spread around the world is about 1,500 trillion.  Yes, that is one thousand, five hundred, trillion.

Today there is great volatility in the markets worldwide. Debt will be the catalyst that will cause the next economic crisis, sometime in the future. All forms of debt consist of direct and indirect debt of 280 trillion worldwide and 210 trillion indebtedness for pension related liabilities that the government(s) cannot possibly fund.  All forms of borrowing creating debt from consumer, corporations, student, sovereign, unfunded and underfunded retirement and social safety net promises is up to about 500 trillion.  As interest rates rise there will be a natural point of no return where borrowers/debtors in all forms will not be able to sustain their debt load/service, and default(s)will spread far and wide. Debt default(s) will be the catalyst, but derivative defaults will be the financial atomic destruction device.

Why should we worry? The feds will merely bail out the risk-taking corporations and dump the result on the tax-payers again.  The fed’s do not have to worry about protecting access of the public to their checking, savings, and other financial instruments. Under a provision of Dodd-Frank, there is a sweet provision that makes your checking, savings, and safety of all financial instruments, subordinated to derivative losses. Many people do not understand this and even refuse to believe it.  If there is another systemic meltdown, the banks can close their doors for an extended holiday. Derivative losses will be required to be covered before you get access to your money. You will have a choice to receive stock in the insolvent entity or receive your proceeds back over 30 years, or some other statutory agreed date.

Having money in the bank is not all that it is trumped up to be. For those with checking and savings accounts they may find the themselves venerable to the “Wimpy’s” of the world. Will the government gladly pay you next Tuesday for a new money created today? The Federal Reserve is in charge when it comes to the process of creating new money. The government decides how to spend it, which of course, will become corresponding debt that will never be paid back. There was a good reason, the proprietor of the diner in Popeye’s rejected Wimpy’s request because he had the reputation for never paying back his debt. I guess the government never told you which “Tuesday,” in the future that a hamburger would cost twice, three or ten times as much, due to the erosion of purchasing power.

Dan Harkey

Business and Private Money Finance Consultant

Bus.  949 521 7115

Cell  949 533 8315

Email [email protected]

This article is intended for educational purposes only and is not a solicitation.