Fragile and Unbalanced in 2012

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Dec 172011

Policymakers are running out of options. Currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time. Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets). But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency – and thus creditworthiness – rather than liquidity.

Meanwhile, fiscal policy is constrained by the rise of deficits and debts, bond vigilantes, and new fiscal rules in Europe. Backstopping and bailing out financial institutions is politically unpopular, while near-insolvent governments don’t have the money to do so. And, politically, the promise of the G-20 has given way to the reality of the G-0: weak governments find it increasingly difficult to implement international policy coordination, as the worldviews, goals, and interests of advanced economies and emerging markets come into conflict.

As a result, dealing with stock imbalances – the large debts of households, financial institutions, and governments – by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings. Likewise, addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the eurozone.

Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition. But that is the challenge that a fragile and unbalanced global economy faces in 2012. To paraphrase Bette Davis in All About Eve, “Fasten your seatbelts, it’s going to be a bumpy year!”

Fasten Your Seatbelts For Rough 2012 – Nouriel Roubini, Project Syndicate

Nouriel Roubini is Chairman of Roubini Global Economics and professor at the Stern School of Business, New York University. His detailed 2012 global growth outlook is available at www.roubini.com

Mall Rats Can’t Bring About the Wealth of Nations

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Dec 042011

there is something fundamentally wrong with a culture that promotes spending as the key to health and wealth. A multidecade borrowing-and-spending binge whittled the U.S. savings rate from an average of 9.6 percent in the 1970s, to 8.6 percent in the 1980s, to 5.5 percent in the 1990s, to 3.3 percent in the 2000s. At one point during the housing bubble, the savings rate approached zero.

My generation learned about the virtues of thrift from our parents, who were children of the Great Depression. Subsequent generations haven’t had the benefit of real-world teachers. For them, the 1930s are a story told through sepia-toned photographs of ravaged dust-bowl farms and bread lines.

Younger generations of Americans have grown up on conspicuous consumption. The focus has been on what something costs today — the monthly interest payment on the credit card or mortgage — not whether the car or home is affordable. Easy and cheap credit made it all possible.

Incentive to Spend

The Federal Reserve is complicit, too, in discouraging saving by holding its benchmark rate close to zero and pledging to keep it there at least through mid-2013. Consumers aren’t getting paid to save. The rate they can earn on bank deposits is negative when adjusted for current or expected inflation. Therefore, they spend. High real rates induce consumers to forgo current spending and save.

Households have been deleveraging for three years in an attempt to repair their balance sheets. Yet many economists and policy makers advocate more borrowing and spending as a cure for what ails the economy, and cheer as mall rats infest stores in the middle of the night. How can that be?

I suspect it’s the old short-run/long-run dichotomy. By now, though, it should be obvious that the U.S. suffers from an extreme case of short-term thinking, and it underpins decisions on everything from tax-and-spend policy to monetary policy.

Even the stock market applauds more “consumption,” a synonym for spending I try to avoid. A former editor said the word made him think of people wasting away from tuberculosis, which happens to be Merriam-Webster’s first definition. It was enough to convince me.

In the context of this column, however, the alternate definition seems appropriate: “the utilization of economic goods in the satisfaction of wants … resulting chiefly in their destruction, deterioration, or transformation.”

“Destruction” should be a tip-off that whatever it is, it isn’t wealth.

Mall Rats Don’t Produce Wealth of Nations – Caroline Baum, Bloomberg

Most of you understand this.

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Nov 052011

One of the things that I suspect has brought many of you to Naked Capitalism is the hard lesson that conventional wisdom in finance and economics has been very costly to ordinary citizens around the world. If you had believed the prevailing world view of early 2007, that markets were efficient and bad actors would of course be found out and shunned, that were were in the midst of a Great Moderation and could expect to enjoy continued prosperity, punctuated by shallow recessions, and that financial innovation was a boon and therefore to be encouraged, you had an ugly awakening. The global financial crisis imposed tremendous costs on investors and society at large, via unemployment, a housing bust, plunging tax revenues, cuts in government services and increasing political discord.

Yet no one in power before the crisis has been punished or even suffered much. In fact, 2009 and 2010 Wall Street bonuses exceeded the record levels of 2007. As former IMF chief economist Simon Johnson described in a May 2009 Atlantic article, the US instead suffered a quiet coup, with the top end of the financial services industry becoming more concentrated, more powerful, even more concentrated and more firmly in charge of the political apparatus.

Most of you understand this. It’s awfully hard not to notice that we have a two-tier system of justice, in which the major financial firms get to flout the law and violate their own contracts, yet are able to get their agreements enforced against seemingly everyone, from credit card, mortgage, and student debt borrowers to municipalities who entered into risk-laden swaps they didn’t understand to nations like Greece, where a clearly insolvent borrower cannot get a deep enough restructuring out of fear of triggering payouts on credit default swaps. But complexity, leverage, and opacity have been the big banks’ best friends in executing this program of looting. You’ve come here to get educated so you won’t be so easily taken next time.

So the lies that the elite financiers have peddled appeared to be free, when in fact, many of them were sold via clever messaging and lobbying.
Read the Rest…

At Naked Capitalism

Missteps to Mayhem

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Oct 102011

Inside the Doomsday Machine with the outsider who predicted and profited from America’s financial Armageddon.

by Michael Burry, MD’97

I worry about the future of a nation that would refuse to acknowledge the true causes of the crisis. A historic opportunity was lost. America instead chose its poison as its cure, and the second “Greatest Generation” would never be born.

Today I expect the U.S. government to attempt continuing an easy money policy into the next presidential term—past the meat of the foreclosure crisis, and past the corporate and public financing humps that are upcoming. Junk bonds, incredibly, again are at all-time highs. Quantitative easing seems to be working for now. But this is an invalid validation of what America is doing, a Pyrrhic gamble. As we continue to debase our currency, Bernanke says he is not printing money. Yet I receive an email every day from the Fed saying we just bought another $7 billion or $8 billion in treasuries, monetizing the debt. The scope and breadth of quantitative easing raise severe questions about the Treasury’s needs.

Government borrowing of money for the purpose of injecting cash into society, bailing out banks, brokers and consumers, is an easy decision for a population that has not yet learned that short-sighted easy strategies are the route to long-term ruin. We never quite achieved the catharsis necessary to stoke a deep reevaluation of our wants, needs and fears.

Importantly, the toxic twins—fiat currency and an activist Fed—remain even more firmly entrenched with the financial reforms of last year. The Federal Reserve, having acquired new powers of regulation, has insisted that nothing in the field of economics or finance was of any help in predicting the crisis—period, no more comments. It’s a worthless conclusion that guarantees we’ll make the same mistake again and again.

We need better leaders, but frankly this isn’t going to happen. A problem cannot be solved if it is never acknowledged.

Taxes need to be raised, spending needs to be cut, and loopholes need to be shut if we are to have any hope of returning to a stable base. Home ownership should not be a policy of the U.S. government. The banking system needs substantial reform and bank breakups. Glass–Steagall needs a second run in a strong form. And 22.5 million public workers have no business unionizing against the taxpayer. The list of things that won’t happen—but should happen—goes on and on.

By 2020, interest expense on our national debt could very well exceed $1 trillion. All personal income taxes collected in the U.S. in one year do not total $1 trillion. Our country’s math is scary big, but even scarier is that it simply doesn’t work…

Read the rest here.

Of Time and Marshmallows
by J. Grayson Lilburne on January 15, 2010

It seems that central banks, and the interventionist state in general, are inducing the squandering of capital at a rate that may prove fatal to civilization. We are plummeting fast into what Ludwig von Mises called the “Crisis of Interventionism”, and the only way out of it is through a widespread rediscovery of sound economics among the educated public.

In particular, it is imperative that as many people as possible gain as firm an understanding as possible of how central banks induce capital consumption. As Mises teaches us, this is done primarily through manipulation of the rate of interest. So, to understand how the Federal Reserve and its junior-partner central banks are literally destroying society, one must delve into the mystery of interest.

Posted in Catholic Social Teaching, Christian Economic Theory, Christian Freedom, Church & State

Currency Revulsion

Cash Is King!, Edward Harrison, Fiat Currency, U.S. Treasuries, Unintended Consequences, We Have Become Beggars To The World, What Is An Investment Asset?, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still! No Responses »

Oct 022011

I have said it a few times but it bears repeating: If you march down to the government with your paper IOU with $100 printed on it to demand your money, the government will simply hand you another paper IOU with the exact same amount printed on it. As the British ten pound note says, “I promise to pay the bearer on demand the sum of [fill in the blank sum][fill in the blank fiat currency].” All US government obligations are substantially identical promises to repay a specific amount of the currency unit of account backed by nothing but taxing authority.

So, Treasury bonds don’t ‘fund’ anything. If the Treasury were allowed to run overdrafts at the central bank, the US government could stop issuing bonds altogether and credit bank accounts with keystrokes. As I see it, in a fiat money environment, the first function of the Treasury bonds is to serve as a vehicle to add or subtract reserves in the system to help the Federal Reserve hit a target Fed Funds rate. The second is to give holders of government obligations a return on their investment. After all, bank notes or bank reserves don’t pay much if anything.

But what about currency revulsion, you ask? What if government deficit spends out of control?

Well, that’s the confidence trick of fiat currency. If confidence in the currency erodes, tax evasion will rise, citizens will begin surreptitiously using other media of exchange to transact and inflation and currency depreciation will spiral out of control. Notice, however, I mention currency depreciation and inflation instead of national solvency.

Currency Revulsion by Edward Harrison

The Psychology of Society

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Sep 102011

Europe was so organized socially and economically as to secure the maximum accumulation of capital. While there was some continuous improvement in the daily conditions of life of the mass of the population, Society was so framed as to throw a great part of the increased income into the control of the class least likely to consume it. The new rich of the nineteenth century were not brought up to large expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption. In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others. Herein lay, in fact, the main justification of the Capitalist System. If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a régime intolerable. But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect.

The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably. The railways of the world, which that age built as a monument to posterity, were, not less than the Pyramids of Egypt, the work of labor which was not free to consume in immediate enjoyment the full equivalent of its efforts.

Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of “saving” became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory,—the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.

“The Economic Consequences of the Peace.” J M Keynes

Standard & Poor’s Predatory Policy Agenda

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Aug 072011

While it’s useful to think of the ratings agencies as incompetent, or as greedy, it’s important to remember that they have an actual policy agenda. They weren’t just wrong in rating subprime tranches of toxic dreck AAA. They were also pivotal in actively creating the policies that led to the financial crisis.

In the early 2000s, several states attempted to rein in an increasingly obvious predatory mortgage lending wave. These laws, pushed by consumer advocates, would have threatened the highly profitable mortgage securitization pipeline.

S&P used its power to destroy this threat. Josh Rosner and Gretchen Morgenson told the story in Reckless Endangerment.

Matt Stoller: Standard & Poor’s Predatory Policy Agenda

WAVE GOODBYE TO THE DOLLAR

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Jun 112011

BEN BERNANKE’S speech on Tuesday got all the attention, but the speech later that day by Bill Dudley, head of the New York Fed, is more intriguing. In it he analyses the macroeconomic origins of the global imbalances that precipitated the crisis and prescribes the policy path forward.

He does so in logical, crisp and accessible language. Mr Dudley is, however, still a central banker, which means he must be translated, especially when it comes to the delicate subject of the dollar. In a nutshell, Mr Dudley tells us that aggressively easy monetary policy is essential to both the cyclical recovery and to a structural rebalancing of the American economy away from consumption and toward exports. This process will go more smoothly for everyone if emerging market economies (EMEs) cooperate and let their exchange rates appreciate (i.e. let the dollar fall), but absent such cooperation, don’t expect the Fed to change course.

Mr Dudley starts with some striking statistics. EMEs now account for 38% of world GDP, up from 23% in 1990, and 59% of world growth in the 2000s, up from 25% in the 1980s. Since 2007, the BRICS’ GDP has risen 31%; the G7’s, just 1%.

He retells the familiar story of how global imbalances bred the financial crisis, but with a twist. In the past, the Federal Reserve and Mr Bernanke (here and here) have denied culpability for the credit bubble, blaming instead the influx of excess savings from EMEs into developed-world assets. Mr Dudley, in effect, says both bear the blame:

[T]he combination of rapid gains in production capacity and relatively repressed consumption in the EME world helped foster a global deficiency of demand relative to supply. In these circumstances, the United States and many other industrialized economies had to sustain domestic demand at elevated levels in order to achieve “full employment” and prevent deflation. For the United States, the consequence was elevated consumption facilitated by asset price inflation, easy underwriting standards for credit and structural budget deficits.

Read This, Then Sell The Dollar – Economist

Easy Money for the Banksters

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Jun 042011

A newly-released study from the Congressional Research Service bolsters claims that the nation’s largest banks profited off the Federal Reserve’s financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates.

The report reinforces long-held beliefs that the banking system in essence engaged in taxpayer-financed arbitrage: They got money for free, then lent it back to Uncle Sam while collecting juicy returns. Left out of the equation are the millions of everyday borrowers, like households and small businesses, who were unable to secure loans needed to tide them over until the crisis ended.

The Fed released records under pressure in December and March that showed the extent of its largesse. The CRS study shows for the first time how some of the most sophisticated financial firms could have taken the Fed’s money and flipped easy profits simply by lending it back to another arm of the government.

The report was requested by Sen. Bernie Sanders (I-Vt.), who likened the crisis-era emergency loans to “direct corporate welfare to big banks,” in a statement. The cash likely was lent back to Uncle Sam in the form of Treasuries and other debt “instead of using the Fed loans to reinvest in the economy,” Sanders added.

In all, more than $3 trillion was lent to financial institutions from the Fed, and terms were generous. Junk-rated securities were pledged as collateral for taxpayer-backed loans. The Fed did not provide conditions for how the money was to be used.

As part of one Fed program, on 33 separate occasions, nine firms were able to borrow between $5.2 billion and $6.2 billion in U.S. government securities for four-week intervals, paying one-time fees that amounted to the minuscule rate of 0.0078 percent.

Guest Post: Congressional Research Service Confirms Big Banks Borrowed Cash For Next To Nothing, Then Lent It Back to the Federal Government at Much Higher Rates

The End of QE2 Is Going to Be a Disaster

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May 152011

The end of the second round of quantitative easing (QE2) is going to be a complete disaster for the paper markets — specifically commodities, stocks, and then finally bonds, in that order, with losses of 20% to 50% by the end of October. The only thing that will arrest the plunge will be QE3, although we should remain alert to the likelihood that it will be named something else in an attempt to obscure what it really is. Perhaps it will be known as the “Muni Asset Trust Term Liquidity Facility” or the “American Prime Purchase Program,” but whatever it is called, it will involve hundreds of billions of thin-air dollars being printed and dumped into the financial system.

A Premature Victory Lap

Ben Bernanke recently stood at a lectern and announced to the assembled audience that the Fed’s recent policies could be credited with elevated stock prices and an improved employment statistic while somehow keeping inflation low.

It was his own version of a “mission accomplished” speech, just like the one G. W. Bush gave. Similarly, it does not mark the end of significant difficulties, but the probable beginning of a very long period of treacherous economic and financial disruption.

Here’s one recent version of how the Fed’s actions are being interpreted, courtesy of Bloomberg:

Bernanke’s QE2 Averts Deflation, Spurs Rally, Expands Credit

Ben S. Bernanke’s $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth.

The Standard & Poor’s 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008.

“Looking at market indicators, you have to be convinced it’s been a success,” said Bradley Tank, chief investment officer for fixed-income in Chicago at Neuberger Berman Fixed Income LLC, which oversees about $83 billion. “When you get into periods of aggressive central bank easing, and we’re clearly in the most aggressive period of easing that we’ve ever seen, the markets tend to lead the real economy.”

A rising stock market, low inflation expectations, and lots and lots of cheap credit for even the riskiest companies. What’s not to like?

The main problem is that this is all an illusion.
The End of QE2 Is Going to Be a Disaster – Chris Martenson, Minyanville

“They did it. Yes, there is a ‘they’: the captains of finance, their lobbyists, and allies among leading politicians of both parties, who together destroyed an American regulatory system that had been functioning splendidly. …”

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Apr 092011

The delusion of a classless America in which opportunity is equally distributed is the most effective deception perpetrated by the moneyed elite that controls all the key levers of power in what passes for our democracy. It is a myth blown away by Nobel Prize winner Joseph E. Stiglitz in the current issue of Vanity Fair. In an article titled “Of the 1%, by the 1%, for the 1%” Stiglitz states that the top thin layer of the superwealthy controls 40 percent of all wealth in what is now the most sharply class-divided of all developed nations: “Americans have been watching protests against repressive regimes that concentrate massive wealth in the hands of an elite few. Yet, in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret.”

That is the harsh reality obscured by the media’s focus on celebrity gossip, sports rivalries and lotteries, situations in which the average person can pretend that he or she is plugged into the winning side. The illusion of personal power substitutes consumer sovereignty—which smartphone to purchase—for real power over the decisions that affect our lives. Even though most Americans accept that the political game is rigged, we have long assumed that the choices we make in the economic sphere as to career and home are matters that respond to our wisdom and will. But the banking tsunami that wiped out so many jobs and so much homeownership has demonstrated that most Americans have no real control over any of that, and while they suffer, the corporate rich reward themselves in direct proportion to the amount of suffering they have caused.

Instead of taxing the superrich on the bonuses dispensed by top corporations such as Exxon, Bank of America, General Electric, Chevron and Boeing, all of which managed to avoid paying any federal corporate taxes last year, the politicians of both parties in Congress are about to accede to the Republican demand that programs that help ordinary folks be cut to pay for the programs that bailed out the banks.

It is a reality further obscured by the academic elite, led by economists who receive enormous payoffs from Wall Street in speaking and consulting fees, and their less privileged university colleagues who are so often dependent upon wealthy sponsors for their research funding. Then there are the media, which are indistinguishable parts of the corporate-owned culture and which with rare exception pretend that we are all in the same lifeboat while they fawn in their coverage of those who bilk us and also dispense fat fees to top pundits. Complementing all that is the dark distraction of the faux populists, led by tea party demagogues, who blame unions and immigrants for the crimes of Wall Street hustlers.

The Delusion Of a Classless United States – Robert Scheer, The Nation

Hey America, It’s Your Fault! How’s That For Change?

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Apr 092011

My comrade Jonah Goldberg compares America’s present situation to that of a plane with one engine out belching smoke. But, if anything, he understates the crisis. Air America doesn’t need a busted engine because it’s pre-programmed to crash.

Our biggest problem is Medicare and other “entitlements.” They’re the automatic pilot of Big Government. Whoever’s in the captain’s seat makes no difference. The flight is pre-programmed to hit the iceberg, if you’ll forgive me switching mass-transit metaphors in midstream.

For some reason, Obama, Reid, Pelosi, Harkin & Co. don’t seem to mind this. If you recall the smile on the face of the “automatic pilot” in “Airplane!” as he’s being inflated, that’s pretty much the Democrats’ attitude to binge-spending as a permanent fact of life.

Hey America, It’s Your Fault! How’s That For Change? – Mark Steyn, IBD

At a time when corporate profits are through the roof, the Dow is flirting with 12,000, Wall Street paychecks are fat again, and big corporations are sitting on more than $1 trillion in cash, you’d expect jobs be coming back. But you’d be wrong.

The U.S. economy added just 36,000 jobs in January, according to today’s report from the Bureau of Labor Statistics. Remember, 125,000 are needed just to keep up with the increase in the population of Americans wanting and needing work. And 300,000 a month are needed — continuously, for five years — if we’re to get back to anything like the employment we had before the Great Recession.

In other words, today’s employment report should be sending alarm bells all over official Washington. Granted, unusually bad weather may have accounted for some of the reluctance of employers to hire in January. But even considering the weather, the economy is still terribly sick. (Technical note: The official rate of unemployment fell to 9 percent from 9.4 percent, but that’s because more workers have left the labor market, too discouraged to continue looking for work. The official rate reflects how many people are actively looking for work.)

We have two economies. The first is in recovery. The second remains in a continuous depression.

The first is a professional, college-educated, high-wage economy centered in New York and Washington, that’s living well off of global corporate profits. Corporations continue to make money by selling abroad from their foreign operations while cutting costs (especially labor) here at home. Wall Street is making money by taking the Fed’s free money and speculating with it. The richest 10 percent of Americans, holding 90 percent of all financial assets, are riding the wave. And their upscale spending has given high-end retailers and producers a bounce.

The second is most of the rest of America, and it’s still struggling with a mountain of debt, declining home prices, and job losses. In coming months most Americans will also be contending with sharply rising prices of food and fuel.

Our representatives in Washington see and hear mostly the first economy. The business press reports mainly on the first economy. Corporate and Wall Street economists are concerned largely with the first economy.

But the second economy will determine our politics in 2012 and beyond.

And not even the first can be sustained permanently on its own. Corporate profits cannot continue to rise on the basis of foreign sales (which are slowing as Europe adopts austerity and China raises interest rates), the purchases of the richest 10 percent of Americans (which are dependent on a rising stock market), and cost-cutting measures at home (which are necessarily limited). Without a strong and broadly-based middle-class recovery, America’s big money economy will fall in on itself. A major stock market “correction” is a certainty.

Robert Reich is the author of Aftershock: The Next Economy and America’s Future, now in bookstores. This post originally appeared at RobertReich.org.

The Jobs Report & America’s Two Economies – Robert Reich, Huffington Post

The QE Failure

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Oct 242010

The world seems full of smoke ahead of a world currency war. The weapon of choice is quantitative easing, a.k.a. QE. If you print a trillion, I’ll print a trillion. Of course, he and she will too. No change in exchange rates after a trillion? Let’s do it again, QE2. If you listen to people like Geithner, the end of the world is quite near. Rich people everywhere are buying gold for a little peace of mind, not just the Chinese. They are literally trucking it by the ton or two home. When currency values vanish in a QE melee, at least the rich have the gold to stay rich.

If you listen to American pundits, politicians or government officials, it’s all China’s fault. China is far from perfect. Its currency policy certainly isn’t. But it is not the cause for the world’s ills. The U.S. is by far the biggest source of uncertainty and the initiator of the QE war. Its elite created the biggest financial bubble since 1929, even removing regulations designed to prevent it, and left the U.S. economy in shambles after its burst. The same people want to find a quick cure to hold onto their power. Unfortunately, there is no quick cure.

The U.S. has cut interest rates to zero and run up the budget deficit to 10 percent of GDP. It’s a shock-and-awe Keneysian policy. But, after a few quarters of strong growth, the economy is turning down again, and the unemployment remains close to 10 percent. And this figure would be much higher, close to 20 percent like Spain’s, if it included the underemployed and those who have stopped looking for work.

The stimulus has failed.

QE: The Numberless Oblivion Andy Xie, Caixin.

After China, the Fed’s Now the Largest Owner of US Treasuries

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Oct 102010

10/09/10 Stockholm, Sweden – Just this week an inevitable milestone came to pass, the Federal Reserve surged ahead of Japan as the second largest owner in the world of US debt… second only to China. Of course, the funds used to generate that massive debt position have only been made possible through the smoke and mirrors of quantitative easing. Zero Hedge notes this, and two other generally under-reported US debt facts, in a recent post.

Here’s the short version:

“#1: The US Fed is now the second largest owner of US Treasuries… Setting aside the fact that this is abject lunacy, this policy is trashing our currency which has fallen 13% since June… as in four months ago…

“#2: ‘There are only about $550 billion of Treasuries outstanding with a remaining maturity of greater than 10 years.’ [...] the US has entered a debt spiral: a time in which fewer and fewer investors are willing to lend to us for any long period of time… at the exact same time that we must roll over trillions in old debt and issue an additional $100-150 billion in NEW debt per month in order to finance our massive deficit… So we’re talking about TRILLIONS of old debt coming due in the next decade…

“#3: The US will Default on its Debt… either that or experience hyperinflation. There is simply no other option. We can NEVER pay off our debts. To do so would require every US family to pay $31,000 a year for 75 years… Obviously that ain’t going to happen…”

The last point should be no surprise to any regular…Read more…

10/08/10 The Mogambo Golden-Real Estate Project

War leads to prosperity!…Think again.

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Sep 122010

The Nobel Prize committee has never withdrawn a prize. It might want to consider it. In Tuesday’s New York Times, prizewinner in economics, Paul Krugman reveals either that he knows nothing about economics…or that there is nothing worth knowing in it. We’re beginning to think it’s the latter.

“From an economic point of view,” he writes, “World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Deficit spending created an economic boom – and the boom laid the foundation for long-run prosperity….”

In the 1938 US elections, voters showed what they thought of the New Deal; Democrats lost 70 seats in the House. Then as now, the public had lost faith in public spending, says Krugman. Nearly two out of three of those polled said they were opposed to stimulus efforts. Roosevelt buckled under the pressure; he drew back from further spending to fight the slump.

Thank God for WWII! No one opposes military spending in time of war. Krugman made his position clear in 2008 in his New York Times blog.

“The fact is that war is, in general, expansionary for the economy, at least in the short run. World War II, remember, ended the Great Depression.”

According to this line of thinking, the best form of stimulus spending is money spent on the military. It creates consumer demand without creating consumer supply. Consumer prices rise; people spend. The slump is soon over.

But if WWII helped the US economy, think what it must have done for Japan; proportionally, its stimulus efforts dwarfed those of the US…and began much earlier. Just this week, Ichiro Ozawa, running for prime minister of Japan, vowed to take “every measure” to lower the yen and promised a stimulus package more than twice as big as the current program. He was just following in the footsteps of Japan’s leaders from the ’30s. It was “economic security” they said they were after. And they thought they could get it by central planning and government spending. Military spending rose from 31% of the budget in the early ’30s to nearly 50% five years later. By the early ’40s it was around 70% and nearly 100% later on. Deficits and debt soared.

Did that create a boom? You bet it did. Japan was the first nation to get out of the global slump. It boomed…and boomed…and ka-boomed. When it came to warships, planes, and soldiers, Japan was soon among the richest nations in the world. Yes, Americans had more electric fans, automobiles, central heating, aspirin, ice cream, and the rest of the paraphernalia of civilized life at the time. In the mid-’30s, the US produced 40 times as many autos per person as did Japan. Even during the Great Depression, the US out-produced Japan by a factor of 7 and its workers earned 10-times as much money.

Economists can’t even measure real prosperity, let alone fiddle it. So they put on the GDP and employment numbers the way a bald man puts on a cheap wig. It makes him look ridiculous and fraudulent, but it’s the best he can do. Unemployment disappears in a war economy. Japan put a million men in uniform. Two million more were part-time reservists. Those who weren’t in the army were put to work building tanks and planes. By 1941, Japan could produce 10,000 planes a year. If you were a swallow you wouldn’t want to build your nest in Japan’s factory chimneys; they belched smoke night and day.

And talk about fiscal stimulus! Krugman would have loved it – stimulus unfettered by real money or even a casual regard for real prosperity. Takahashi Korekiyo was known as the “Japanese Keynes.” Gillian Tett notes in The Financial Times that he was assassinated in 1936 after he came to his senses and tried to bring state finances under control. He was done in by army officers who did not want the stimulus to stop. Not that we’re being judgmental about it. As far as we know, the quality of central banking could probably be improved by an occasional assassination.

Takahashi wasn’t the first. Before him Junnosuke Inoue had held out for the gold standard and balanced budgets. He was out of office by 1931 and out of luck in 1932, when he was murdered. The gold-backed yen was abolished the day he left office. Then, public spending, deficits, central planning, debt, and inflation ran wild. By 1939, the Japanese were spending $5 million a day on their war with China – a huge sum for the Japanese at the time.

Was the economy improved by all this spending? No, it was perverted…hammered into a grotesque imposter – a parody of a real economy. Most of the nation’s resources were put to work building things almost no one wanted. Then, after the attack on Pearl Harbor, the stimulus efforts were redoubled. Rations were reduced further. Working hours were extended. What few consumer items were available were three times as expensive at the end of the war as they had been when it began. Men were conscripted into factories and the army. Women were expected not only to make the tanks, but to join the home-guard and prepare themselves to repulse the American invaders with sharpened bamboo sticks. What a marvelous economy – operating at full capacity and full employment until General MacArthur finally put it out of its misery.

You say Obama; I say Ozawa! You say boom; I say ka-boom!

By Bill Bonner

Business As Usual

Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still! No Responses »

Aug 222010

Bank Bailout Bingo: How Both Parties Exploit Populist Anger

By Walter Shapiro

Two years after the TARP vote, hazy memories of the financial panic have created a bipartisan hatred of bailouts, as expressed in campaign commercials across the country.

Senate Leaves Credit-Starved Small Biz Hanging – Los Angeles Times

Small businesses desperate for government help getting loans will have to wait at least until September before Congress moves on long-awaited legislation to pay for higher loan guarantees, lower fees and other breaks.

As the Senate adjourned for its summer recess this week, a key bill to spur lending to small businesses remained stuck in a partisan stalemate.

As a result, the next month or more may be angst-ridden for many business owners. Nationwide, 995 government-backed small business loans that have been given initial approval since last spring are now stuck in limbo until Congress acts.

The Committee to Defraud the World

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Aug 012010

To say now that ‘No one knew’ or ‘I was mistaken’ or ‘I was just doing as I was told’ is another in a series of lies and deceptions that have supported one of the greatest frauds in the history of the world.

But this is not history. This episode of fraud is still playing itself out now. And to fail to understand the depth and breadth of this madness is to place oneself in peril, and in the power of those who are twisting the Western economic and political system even now to satisfy their lust for wealth and power. You are only successful if you can keep what you kill.

Glass-Steagall fell after a decade long campaign involving hundreds of millions in lobbyist money spread lavishly around the Congress, led by Sanford Weil of Citibank, supported by key banking and political figures in the Congress and at the Fed. It involved Senator Phil Gramm, who helped to put a stake in the heart of the financial regulatory process under the Reagan free markets banner, and who recently said the problem is that the middle class were a bunch of whiners. As did his wife Wendy, who as the chairperson of the CFTC had exempted Enron from regulatory oversight, and then left to take a position there on its board of directors.

Like the Mortgage Backed Securities scandal it involved surprisingly few principal players, like Alan Greenspan and Robert Rubin, who used their power and influence to silence and ostracize critics, and promote a climate of reckless disregard for the public trust under the meme of ‘efficient markets’ and deregulation. This might have been an innocent policy error if it did not involve premeditated theft on a massive scale, followed by cover ups, denials, and a control fraud that exists even today.

But it also involved literally thousands of collaborators and enablers, from mainstream media people, economists, analysts, and other thought leaders to politicians and regulators who saw that it was to their advantage to at least passively support this scheme which they knew very well was a fairy tale, a fraud, class warfare by a new name, but were able to hide their own guilty consciences behind self-serving rationalization and the shield of plausible deniability.

History, and hopefully the justice system, will sort this all out. It is difficult, even now, to get one’s mind around the enormity of it. This is its most powerful weapon. Who could be such monsters, so amoral, so destructively sociopathic? Future generations will regard it as an episode of madness, driven by a few people in a tight circle of self-reinforcing thought, people with remarkably similar cultural and educational backgrounds, driven by a consuming lust for power, that were able to dupe and delude an entire nation made vulnerable by propaganda, a co-opted press, and apathy.

In the meanwhile all the great mass of people can do is to watch, and wait, and seek to protect themselves from these ravening wolves grown increasingly desperate, as their arrogance comes to a tragic fall. They can vote out incumbents, but the parties choose the candidates, and too often they resemble competing crime families of special interests more than pillars of a representative government, saying one thing to get elected and doing another thing once in office.

This is the approach of trouble when hubris is at its height, and the few feel they have everything to gain and nothing to lose, if only they can gain more power, and necessarily become more ruthless. They are trapped in a cycle of fear and greed. The fear provokes the lies and the cover ups, but the greed promotes the extension of the fraud and the theft, requiring even more lies and cover ups. The operative word is ‘over reach,’ in a classic late stage Ponzi scheme. This will undoubtedly add to the confusion as the truth is assaulted by the big lie.

The last vestiges of polite society are often shed as the downfall reaches it final conclusion, at the end, when all is revealed, at last. And so there will be great danger.

Jesse’ s Cafe http://jessescrossroadscafe.blogspot.com/2010/07/committee-to-defraud-world.html

Jun 052010

I’ve seen some eye-poppin’, credulity-stretchin’ accounts in my time. The report “The Budgetary Impact and Subsidy Costs of the Federal Reserve’s Actions During the Financial Crisis,” just released by the Congressional Budget Office, ranks with the most extreme. It claims that the budgetary cost (which corresponds roughly to expected losses) of the Fed rescue facilities launched during the financial crisis is approximately $21 billion. Moreover, its peculiar formulation (”fair value subsidies”) conveys the misleading impression that this was the extent of the central bank’s support to the financial services industry.

In a (weak) defense to the CBO, my understanding (and readers are welcome to correct me) is that the office is tasked to execute analyses as they are framed. In other words, if the CBO is asked to opine on a particular matter, it has to deal with only the questions posed to it. It is not permitted to tweak the inquiry or broaden the focus to provide more insight.

The closest thing to a statement of scope and objectives comes in the Preface and it is remarkably thin. The most important remark:

The report also presents estimates of the risk-adjusted (or fair-value) subsidies that the Federal Reserve provided to financial institutions through its emergency programs.

CBO Issues Fed-Flattering Propaganda

It takes brains

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May 152010

The geniuses are at it again: Hide your wallet!

AP
GM wants to re-enter auto financing
Tom Krisher
Tuesday May 11, 2010

DETROIT (AP) — General Motors Co. executives want their own auto-financing arm so they can offer more competitive lease and loan deals, according to a person briefed on their plans.

The executives want to buy back the auto financing business from the former GMAC Financial Services or start their own operations, said the person, who asked not to be identified because the plans have not been made public.

A top GM executive has told dealers about the plans, the person said.

GM sold a 51 percent stake in GMAC Financial Services in 2006 when it was starved for cash. The new owners, led by private equity firm Cerberus Capital Management LP, ran into trouble in 2008 with bad mortgage loans and had to be bailed out by the federal government, which now owns 56 percent of the company.

Earlier this month, GMAC changed its name to Ally Financial.

GM dealers say that since GMAC is responsible for making its bottom line look good, it is less likely to lose money by offering to finance sweet lease deals or zero-percent financing. A GM-owned auto financing business would be more likely to “take a bullet” for the company to sell more cars and trucks, the person said.

Competitors, such as Ford Motor Co. or Toyota Motor Corp., control their own financing arms.

GM spokesman Tom Wilkinson said Tuesday that the company would not comment on speculation….

Wall Street Big Fish Stink From The Head Down

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Apr 242010

Obama’s financial reform will fail because all the masters of the universe know how to do is make money.

Wall Street’s Big Fish Stink From The Head Down – Robert Lenzner, Forbes

There is a thesis that the banks are in control of the Fed and as a result have gained control over the issuance of the currency of the United States. This thesis is based on the fact that the shares of the Federal Reserve Bank are held by these private banks. Does that mean that the private banks own the Fed?

The short answer is yes, but it is a hollow ownership with very restricted rights. This ownership basically exists to give credence to the claim that the fed is independent. It is appropriately described as follows in the Fed’s own publication “Federal Reserve System Purposes & Functions”:

The holding of this stock, however, does not carry with it the control and financial interest conveyed to holders of common stock in for-profit organizations. It is merely a legal obligation of Federal Reserve membership, and the stock may not be sold or pledged as collateral for loans. Member banks receive a 6 percent dividend annually on their stock. (p. 12)

This is exactly the manner in which Special Purpose Vehicles (or Special Purpose Entities) are created in the corporate world. There is usually a promoter who does not wish to be seen to own an entity but who wishes to derive some benefit from the existence of such an entity. Usually, overt ownership would adversely impact the presentation of the promoter’s financial reporting.

The authorities and regulators, including the Fed, are very aware of these Special Purpose structures, as is the accounting profession. Rules have been devised and implemented to assess any such arrangement in order to establish its true nature. It is therefore appropriate to assess the Fed’s independence — or, alternatively, interdependence — according to the very rules that it uses to assess Special Purpose Entities. First, let’s draw the simple ownership structure.

Anyone with a rudimentary knowledge of accounting principles would know that ownership of an entity without control over that entity requires further investigation. Consolidation of a group of companies can become complex when ownership and control are split. The GAAP (Generally Accepted Accounting Principles) method in this case disregards ownership and focuses on control.

For example, a right to appoint the majority of the board of directors even in the absence of ownership would trigger a consolidation of that entity. Thus the controller and the entity would be seen as part of a group and collectively as a single interdependent consolidated entity. It follows that the simple structure of the Federal Reserve Banks drawn above is a split structure, where “ownership” is of limited significance and “control” must be established. Control will tell us whether the entities are independent or interdependent.

All regulation targets “control,” not just the legal form of ownership. Accounting principles of consolidation have evolved from Special Purpose Vehicles, to Special Purpose Entities, and very lately — with the revision in June 2009 for implementation in January 2010 of Financial Accounting Standard 46(R) (“FIN 46(R)”) — they have evolved into the concept of a “Variable Interest Entity.”

In effect, the test of whether one organization is a “Variable Interest Entity” controlled by another organization is similar to a DNA test to determine whether two people are members of the same family. FIN 46 (R) defines a “variable interest” as follows:

The enterprise with a variable interest or interests that provide the enterprise with a controlling financial interest in a variable interest entity will have both of the following characteristics:

a. The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance

b. The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. (par. 1A)[1]

The first test is to check for “the power to direct the activities.” Who exactly holds that power?

Here we turn to the Federal Reserve Act, which instructs the Regional Federal Reserve Banks to each elect their own board of directors, of which the chairman and vice chairman of the regional board will be appointed by the Board of Governors of the Federal Reserve System. The regional boards must have nine directors in three classes of three each (A, B and C directors): three A directors chosen by the stockholders; three B directors to represent the “public”; and three C directors to be appointed by the Board of Governors of the Federal Reserve System. The Board of Governors of the Federal Reserve System will appoint the chairman and vice chairman from the ranks of the three C directors.

The Board of Governors of the Federal Reserve System seems to have powers that could indicate “control,” including the appointment of the power positions of chairman and vice chairman. However, we must also ask whether the regional boards have the independent powers normally associated with ownership and control, or if their powers are restricted and controlled in any manner.

The answer again lies in the Federal Reserve Act:

Said board of directors shall administer the affairs of said bank fairly and impartially and without discrimination in favor of or against any member bank or banks and may, subject to the provisions of law and the orders of the Board of Governors of the Federal Reserve System, extend to each member bank such discounts, advancements, and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks, the maintenance of sound credit conditions, and the accommodation of commerce, industry, and agriculture. The Board of Governors of the Federal Reserve System may prescribe regulations further defining within the limitations of this Act the conditions under which discounts, advancements, and the accommodations may be extended to member banks. (section 3, par.

The regional boards are limited in their ability to perform the primary functions of the Regional Federal Reserve Bank by the terms of the act and by the control of the Board of Governors of the Federal Reserve System. It is clear from the Federal Reserve Act that control does not rest in the Regional Federal Reserve Boards, nor are they independent, but they take instruction and are controlled by the Board of Governors of the Federal Reserve System.

It is now appropriate to update the simplified structure drawn above, in order to add these two steps of control.

The question of who has control is not yet resolved; the nature of the Board of Governors of the Federal Reserve System must be investigated next. Is the Board of Governors of the Federal Reserve System an independent body or beholden to another entity?

The “Purposes & Functions” document describes the nature of the Board of Governors of the Federal Reserve System:

The Board of Governors of the Federal Reserve System is a federal government agency. The Board is composed of seven members, who are appointed by the President of the United States and confirmed by the U.S. Senate.

The Chairman and the Vice Chairman of the Board are also appointed by the President and confirmed by the Senate. The nominees to these posts must already be members of the Board or must be simultaneously appointed to the Board. (p. 4)

The Board of Governors of the Federal Reserve System is a federal government agency. The power to appoint its members, chairman, and vice chairman is vested in the president of the United States, with the Senate having a veto power over any appointment.

The first requirement for a “variable interest,” “the power to direct the activities” is fulfilled: the federal government at the presidential level holds “the power to direct activities.”

The final version of the structure of control is as follows:

The next requirement that must be met for a “variable interest” is either an “obligation to absorb losses” or a “right to receive benefits.”

I would argue that the Fed’s right to create currency, together with the vested interests of federal government, are more than sufficient to infer an “obligation to absorb losses.” The Federal Reserve Act adds a complication to this argument by holding the shareholders responsible to the extent of their stockholding for the liabilities of the Regional Federal Reserve Banks. However, the “obligation to absorb losses” is not a requirement that needs to be met so long as the alternative, the “right to receive benefits” requirement, is met. Since the obligation is not clear cut, it is better to concentrate on the right. Note that neither the obligation nor the right need to be absolute.

Again we can turn to the two sources, the Federal Reserve Act and the Fed publication “Federal Reserve System Purposes & Functions” for guidance.

Federal Reserve Act:

Dividends and Surplus Fund of Reserve Banks

(a)

After all necessary expenses of a Federal reserve bank have been paid or provided for, the stockholders of the bank shall be entitled to receive an annual dividend of 6 percent on paid-in capital stock.

The entitlement to dividends under subparagraph (A) shall be cumulative.

That portion of net earnings of each Federal reserve bank which remains after dividend claims under subparagraph (1)(A) have been fully met shall be deposited in the surplus fund of the bank.

(b) Transfer for fiscal year 2000.

The Federal reserve banks shall transfer from the surplus funds of such banks to the Board of Governors of the Federal Reserve System for transfer to the Secretary of the Treasury for deposit in the general fund of the Treasury, a total amount of $3,752,000,000 in fiscal year 2000.

Of the total amount required to be paid by the Federal reserve banks under paragraph (1) for fiscal year 2000, the Board shall determine the amount each such bank shall pay in such fiscal year.

During fiscal year 2000, no Federal reserve bank may replenish such bank’s surplus fund by the amount of any transfer by such bank under paragraph (1). (section 7)

“Federal Reserve System Purposes & Functions”:

The income of the Federal Reserve System is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other major sources of income are the interest on foreign currency investments held by the System; interest on loans to depository institutions; and fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations.

After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914. (Income and expenses of the Federal Reserve Banks from 1914 to the present are included in the Annual Report of the Board of Governors.) In 2003, the Federal Reserve paid approximately $22 billion to the Treasury. (p. 11)

The statement that “about 95% of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914″ says it well enough. It is an irrefutable fact that the federal government possesses the overwhelming “right to receive benefits.”

The outright, indisputable conclusion is that the Fed, when tested against GAAP as the Fed itself uses it in the Fed’s assessments of those it regulates, is a Special Purpose Entity of the federal government (or, according to the latest definition, is a Variable Interest Entity of the federal government). The rules of consolidation therefore apply, and the Fed must be seen as controlled by federal government, making it indivisibly part of the federal government. The pretence of independence is no more that that, a pretence.

There is, however, no denying that the banks have tremendous vested interest in influencing the policies of the Fed, nor that the power being so narrowly vested in the president makes him a special target for influence. Still, the power to control the Fed is not in the hands of its “owners” but firmly in the hands of the federal government and the president of the United States.

Sarel Oberholster is a South African living in Johannesburg, Gauteng province. He is an economist by training, a specialist financial engineer by craft, and an inquisitive spirit by nature. He has been involved in banking for over 30 years. His quest for understanding complex economic phenomena is his muse for writing and he shares his insights on his blog.

Notes

[1] Financial Accounting Standards Board of the Financial Accounting Foundation; Connecticut, No 311; June 2009, Statement of Financial Accounting Standards No 167.

Richard Smith, a London-based capital markets information technology manager, was kind enough to provide an advance copy of his review for the book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism by Yves Smith, the author of the well-known financial blog Naked Capitalism.

Mr. Smith (real name, and no relation to Yves) helped in the proofing of the copy and fact searches, so he was already well familiar with the text. Perhaps this makes him a not entirely dispassionate source, given the regard that even copy editors can obtain for their associated works. But I thought it was a very nice summary of many of the salient points, and that you would enjoy having the opportunity to read it.

I intend to read the book in order to both learn something, and to be entertained as well. I love reading accounts of this period of time that are both authoritative and well-written, and understandable by the non-expert. Given the author’s performance on her blog, and her detailed industry knowledge and experience, it looks to be a ‘must read’ for those following the financial crisis and its associated developments.

Reading ECONned
By Richard Smith

http://jessescrossroadscafe.blogspot.com/2010/03/guest-post-econned-book-review.html

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