| | | Page 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28 | Watch, Its happening ,the global economic change.
| Anonymous Coward
User ID: 548505
11/12/2008 11:15 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Who knows how many actual dollar notes there are in circulation versus the electronic credit in dollars?, i think this will become a key issue in immediate days ahead. |
| Anonymous Coward
User ID: 548505
11/12/2008 8:46 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
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| Anonymous Coward
User ID: 548505
11/13/2008 8:05 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Baron David de Rothschild sees a New World Order in global banking governance
November 7, 2008 · 20 Comments
david_rothschild
Baron David de Rothschild, the head of the Rothschild bank. The Rothschilds have helped the British government since financing Wellington’s army to fight the French in 1815.
“We provide advice on both sides of the balance sheet, and we do it globally. There is no debate that Rothschild is a Jewish family, but we are proud to be in this region. However, it takes time to develop a global footprint.“
Banks will deleverage and there will be a new form of global governance.
UAE National | Nov 6, 2008
The first barons of banking
By Rupert Wright
Among the captains of industry, spin doctors and financial advisers accompanying British prime minister Gordon Brown on his fund-raising visit to the Gulf this week, one name was surprisingly absent. This may have had something to do with the fact that the tour kicked off in Saudi Arabia. But by the time the group reached Qatar, Baron David de Rothschild was there, too, and he was also in Dubai and Abu Dhabi.
Although his office denies that he was part of the official party, it is probably no coincidence that he happened to be in the same part of the world at the right time. That is how the Rothschilds have worked for centuries: quietly, without fuss, behind the scenes.
“We have had 250 years or so of family involvement in the finance business,” says Baron Rothschild. “We provide advice on both sides of the balance sheet, and we do it globally.”
The Rothschilds have been helping the British government – and many others – out of a financial hole ever since they financed Wellington’s army and thus victory against the French at Waterloo in 1815. According to a long-standing legend, the Rothschild family owed the first millions of their fortune to Nathan Rothschild’s successful speculation about the effect of the outcome of the battle on the price of British bonds. By the 19th century, they ran a financial institution with the power and influence of a combined Merrill Lynch, JP Morgan, Morgan Stanley and perhaps even Goldman Sachs and the Bank of China today.
In the 1820s, the Rothschilds supplied enough money to the Bank of England to avert a liquidity crisis. There is not one institution that can save the system in the same way today; not even the US Federal Reserve. However, even though the Rothschilds may have lost some of that power – just as other financial institutions on that list have been emasculated in the last few months – the Rothschild dynasty has lost none of its lustre or influence. So it was no surprise to meet Baron Rothschild at the Dubai International Financial Centre. Rothschild’s opened in Dubai in 2006 with ambitious plans to build an advisory business to complement its European operations. What took so long?
The answer, as many things connected with Rothschilds, has a lot to do with history. When Baron Rothschild began his career, he joined his father’s firm in Paris. In 1982 President Francois Mitterrand nationalised all the banks, leaving him without a bank. With just US$1 million (Dh3.67m) in capital, and five employees, he built up the business, before merging the French operations with the rest of the family’s business in the 1990s.
Gradually the firm has started expanding throughout the world, including the Gulf. “There is no debate that Rothschild is a Jewish family, but we are proud to be in this region. However, it takes time to develop a global footprint,” he says.
An urbane man in his mid-60s, he says there is no single reason why the Rothschilds have been able to keep their financial business together, but offers a couple of suggestions for their longevity. “For a family business to survive, every generation needs a leader,” he says. “Then somebody has to keep the peace. Building a global firm before globalisation meant a mindset of sharing risk and responsibility. If you look at the DNA of our family, that is perhaps an element that runs through our history. Finally, don’t be complacent about giving the family jobs.”
He stresses that the Rothschild ascent has not been linear – at times, as he did in Paris, they have had to rebuild. While he was restarting their business in France, his cousin Sir Evelyn was building a British franchise. When Sir Evelyn retired, the decision was taken to merge the businesses. They are now strong in Europe, Asia especially China, India, as well as Brazil. They also get involved in bankruptcy restructurings in the US, a franchise that will no doubt see a lot more activity in the months ahead.
Does he expect governments to play a larger role in financial markets in future? “There is a huge difference in the Soviet-style mentality that occurred in Paris in 1982, and the extraordinary achievements that politicians, led by Gordon Brown and Nicolas Sarkozy, have made to save the global banking system from systemic collapse,” he says. “They moved to protect the world from billions of unemployment. In five to 10 years those banking stakes will be sold – and sold at a profit.”
Baron Rothschild shares most people’s view that there is a New World Order. In his opinion, banks will deleverage and there will be a new form of global governance. “But you have to be careful of caricatures: we don’t want to go from ultra liberalism to protectionism.”
So how did the Rothschilds manage to emerge relatively unscathed from the financial meltdown? “You could say that we may have more insights than others, or you may look at the structure of our business,” he says. “As a family business, we want to limit risk. There is a natural pride in being a trusted adviser.”
It is that role as trusted adviser to both governments and companies that Rothschilds is hoping to build on in the region. “In today’s world we have a strong offering of debt and equity,” he says. “They are two arms of the same body looking for money.”
The firm has entrusted the growth of its financing advisory business in the Middle East to Paul Reynolds, a veteran of many complex corporate finance deals. “Our principal business franchise is large and mid-size companies,” says Mr Reynolds. “I have already been working in this region for two years and we offer a pretty unique proposition.
“We work in a purely advisory capacity. We don’t lend or underwrite, because that creates conflicts. We are sensitive to banking relationships. But we look to ensure financial flexibility for our clients.”
He was unwilling to discuss specific deals or clients, but says that he offers them “trusted, impartial financing advice any time day or night”. Baron Rothschilds tends to do more deals than their competitors, mainly because they are prepared to take on smaller mandates. “It’s not transactions were are interested in, it’s relationships. We are looking for good businesses and good people,” says Mr Reynolds. “Our ambition is for every company here to have a debt adviser.”
Baron Rothschild is reluctant to comment on his nephew Nat Rothschild’s public outburst against George Osborne, the British shadow Chancellor of the Exchequer. Nat Rothschild castigated Mr Osborne for revealing certain confidences gleaned during a holiday in the summer in Corfu.
In what the British press are calling “Yachtgate”, the tale involved Russia’s richest man, Oleg Deripaska, Lord Mandelson, a controversial British politician who has just returned to government, Mr Osborne and a Rothschild. Classic tabloid fodder, but one senses that Baron Rothschild frowns on such publicity. “If you are an adviser, that imposes a certain style and culture,” he says. “You should never forget that clients want to hear more about themselves than their bankers. It demands an element of being sober.”
Even when not at work, Baron Rothschild’s tastes are sober. He lives between Paris and London, is a keen family man – he has one son who is joining the business next September and three daughters – an enthusiastic golfer, and enjoys the “odd concert”. He is also involved in various charity activities, including funding research into brain disease and bone marrow disorders.
It is part of Rothschild lore that its founder sent his sons throughout Europe to set up their own interlinked offices. So where would Baron Rothschild send his children today?
“I would send one to Asia, one to Europe and one to the United States,” he said. “And if I had more children, I would send one to the UAE.”
Related
* The Coming One-World currency
* That Rothschild clan in full: eccentricity, money, influence and scandal
* How Jewish is Nathaniel Rothschild?
* Rothschild criticizes City of London for lack of ethics
* Jewish power dominates at ‘Vanity Fair’
* Roots of evil in Jerusalem
* Rothschilds Move To Bankrupt European Farmers
* Chinese buying up new book about Rothschild banking conspiracy
* Rothschild Global Warming Handbook Accompanies Hyped 7/7 Live Earth Concert
* The Man Who May Become the Richest Rothschild
* Lady Rothschild invites billionaire elites to exclusive headhunting party for Tony Blair |
| Anonymous Coward
User ID: 548505
11/13/2008 8:08 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Global Economic Tremors
By Stephen Lendman
11-12-8
On October 28, the Financial Times' columnist Martin Wolf wrote: "Preventing a global slump must be the priority." He cited Nouriel Roubini back in February listing "twelve steps to financial disaster," all of which the US took and dragged the whole world down with it.
Priority one is to rescue it and avoid a possible depression. "Given the near-disintegration of the western world's banking system, the flight to safe assets, the tightening of credit to the real economy, collapsing equity prices, turmoil on currency markets, continued steep declines in house prices, rapid withdrawal of funds from hedge funds and ongoing collapse of the so-called "shadow banking system." More worrisome is that "next year could be far worse" so what does Wolf think should be done?
Nothing to purge past excesses or everything possible to prevent the worst of all possible outcomes. Wolf calls the former path "a recipe for xenophobia, nationalism and revolution" and in combination like "let(ting) a city burn in order to punish someone who smoked in bed." In short, madness at a time world economies need huge amounts of proactive remedies:
-- to prevent deflation;
-- help the private sector delever with liberal amounts of government debt;
-- sustain lending inside and among economies; if banks won't do it, central banks must;
-- aid hard-hit emerging economies and keep them afloat; and
-- rebuild domestic demand with substantial fiscal measures.
At risk is the "legitimacy of the open market economy itself." It's wobbly and on life support because of what Roubini spotted early on. All having occurred or now happening. His 12-stage "systemic financial meltdown" scenario:
(1) the worst ever US housing recession with prices falling up to 30% from their peak and matching their Great Depression decline; most recently Roubini thinks a 40% drop is likely with a market bottom still way off;
(2) the subprime disaster causing hundreds of billions in losses and throwing millions of homeowners into foreclosure;
(3) a sharp increase in other defaults - credit cards, auto and student loans, and other borrowing; add bank losses to the mix (including from their securitized assets), and we've got a severe credit crunch;
(4) monoline losses will mount more severely than expected and other writedowns will follow;
(5) commercial real estate will be impacted; the housing crisis will cause a bust in non-residential construction;
(6) large regional or national banks may go bankrupt and worsen the already severe credit crunch;
(7) losses from large leveraged loans will impair banks' ability to syndicate and securitize them; today the market is dead; earlier losses froze it up; these assets were then stuck on bank balance sheets at well below par values and are headed lower; they're still there at undisclosed valuations most likely scraping bottom because no buyer will touch them above fire sale prices and most often not even those;
(8) a massive wave of corporate defaults will accompany a severe recession;
(9) the shadow banking system (hedge funds and the like) is heading for serious trouble;
(10) world stock markets will price in a severe recession; at the time, Roubini saw the S & P 500 falling about 28% or around the average decline for US recessions; it fared much worse, and he now sees a far lower valuation ahead;
(11) the worsening credit crunch will cause liquidity to dry up; it will require massive central bank intervention; and
(12) "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading cycle of losses and further credit contraction." The massive credit crunch will spread around the world. Monetary and fiscal measures won't prevent a systemic financial meltdown "as credit and insolvency problems trump illiquidity" ones. As a result, US and global financials will experience their most severe crisis in the last quarter of a century."
Roubini now sees the greatest one since the 1930s. Grudgingly, only small numbers of economists agree with him, and the majority think the worst is past and 2009 will bring recovery. Barrons economics editor, Gene Epstein, for one. He asks: "How long will the slump linger? (It's) already under way. But hopefully, it won't extend into 2009." An astonishing assessment at a time virtually all macro data point to hard times in the new year, and the big unknown is how hard and protracted.
It's the reason for unprecedented global amounts of monetary stimulus with limited effect so far. It's also why Congress may add hundreds of billions more in fiscal medicine on top of an orgy of past and upcoming government borrowing.
The Treasury already announced $550 billion more in Q 4. An amount greater than the announced FY 2008 $455 billion fiscal deficit. In addition, Goldman Sachs now believes Washington will have to borrow $2 trillion to finance an $850 billion federal deficit, buy $500 billion in toxic assets, and roll over $561 billion in maturing Treasury securities. Add to it unknown factors and another trillion may be needed.
For loans, investments and commitments, Washington already earmarked:
-- $700 billion for TARP;
-- another $150 billion tacked on to EESA funding for pork barrel spending;
-- $200 billion in the Fannie and Freddie takeover, and Fannie now says the amount is inadequate after reporting a record $29 billion loss and its difficulty in issuing and refinancing debt; in a November 10 SEC filing it stated: "This commitment may not be sufficient to keep us in solvent condition or from being placed into (effective bankruptcy) receivership" if further "substantial" losses occur or if the company can't sell unsecured debt;
-- $25 billion to the auto companies and another $50 billion more they may get; the industry is effectively insolvent; on November 11, General Motors stock hit a 65 year low and is down over 90% this year; the nation's once largest company is a mere shadow of its former self and won't survive without a bailout; the same holds for Ford and Chrysler;
-- $29 billion for Bear Stearns;
-- $85 billion to AIG; upped to $129 billion and again to $150 billion after the company reported a $25 billion Q 3 loss; add $15 billion more for its commercial paper with no end of this looting in sight - to a single company, albeit a big one;
-- $144 billion to buy mortgage-backed securities, in part included above;
-- $300 billion for the Federal Housing Administration Rescue Bill for FHA to insure up to that amount in new 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down loan balances to 90% of the homes' current appraised values;
-- $87 billion to JP Morgan Chase for financing bad Lehman Brothers' trades;
-- $200 billion in loans to banks under the Fed's Term Auction Facility (TAF);
-- $50 billion to support commercial paper held in money market funds; $1.3 trillion worth qualifies so a far greater liability may be incurred;
-- $620 billion in currency swaps with developed nations - central banks in Western Europe (the ECB, UK, Denmark, and Switzerland), Japan, Canada, and Australia;
-- another $120 billion for emerging markets - to Brazil, Mexico, South Korea and Singapore; and
-- potential great liabilities to cover the FDIC's expanded bank deposit insurance up to $250,000 per account.
These numbers are staggering in size and may go much higher. A trillion here, a trillion there, and pretty soon we're talking about real money, but if enough of it swirls around, today's deflation may one day become severe inflation.
Two Views on Potential Depression
The dreaded "D" word. Unmentioned and unconsidered in the mainstream but not off the table given the severity of today's crisis. What Michel Chossudovsky isn't alone calling "the most serious (one) in World history." He says the Treasury "bailout" isn't a solution. Just the opposite - "it is the cause of further collapse. It triggers an unprecedented concentration of wealth, which in turn contributes to widening economic and social inequities both within and between nations" - on top of how inequitable they are already.
President of the London-based Independent Strategy consultancy group, David Roche, disagrees in a November 8 Wall Street Journal article headlined "How Far Will Deleveraging Go?" He acknowledges the severity of the crisis and asks: "Will this lead to depression? And, if not, how long and deep will the recession be?" He examines the extent of deleveraging for the answer in the following analysis.
He says the amount of a bank's "risk-free" or "tier-one" capital is a "good reverse indicator of how leveraged it is." Financial institutions globally had about $5 trillion of it at the credit crisis' onset. For America and the EU, it was $3.3 trillion "supporting a loan book of some $43 trillion. Then came the crisis."
He gives three answers to the amount they lost:
-- using mark-to-market rules (what an asset would bring if sold today), an estimated 85% of their tier-one capital was lost; but this assumes selling today at fire-sale prices which largely isn't happening;
-- using "economic value," or the present value of future cash flows (assuming there are any), current losses are about half their mark-to-market valuations; and
-- if only so far recognized losses are considered, the amount taken is around $700 billion.
Despite these losses, loan portfolios have grown during the crisis. Shrinkage has only occurred for investment banks, prime brokers and hedge funds, Roche believes. All bank losses have been offset by "$420 billion from private sources" and another "$250 billion from governments."
At the onset of the crisis, US and EU leverage was about 13 times tier-one capital. Under mark-to-market rules, it's now more than double that. "But using economic value or declared losses reveals that leverage is now back to what it was before the crisis began" because of capital injections. Nonetheless, conditions remain dire, and growth isn't ready to resume. For three reasons, according to Roche:
-- financial sector leverage was too high in the first place, which is why the credit bubble collapsed;
-- the world economy uses $4 to $5 of credit for every $1 of GDP growth; a profligate amount; even at half that amount, between a 10 - 15% rate of credit expansion is needed to achieve real GDP growth of 2 - 3%; recapitalization amounts so far are only enough to maintain existing credit assets, not expand them; so the crisis continues; and
-- current bank-asset losses don't include allowances for future ones - from recession and its fallout; Roche estimates they'll be another $900 billion for a total $1.7 trillion during the whole crisis period; others estimate a much higher figure; if Roche is right, these losses will deplete new capital infusions and reduce US and EU tier-one capital back to $2.3 trillion at a leverage ratio of over 18 times.
Roche believes leverage and credit will shrink even with further capital injections. They're "temporary, expensive, and impose constraints on shareholders and management." It makes them unattractive.
In addition, banks need to reduce their "customer funding gap" and focus on "deposit rather than loan growth." It's a slow process during recession and can only be achieved "by reducing assets and liabilities" which means "cutting credit on the asset side of the balance sheet." And do it during a risk aversion period in wholesale and longer-term debt markets. It makes the task a lot harder at a time regulation is coming that "will reduce bank leverage to well below what it was before the crisis began."
Bottom line: if further credit losses reduce US and EU tier-one bank capital to where it was before crisis-induced infusions, financial sector credit "would have to shrink 37% just to keep leverage constant at pre-crisis levels," and it it happens we're talking about global depression.
But governments are now "part of bank management so may limit credit losses to less than 10%, Roche believes, but a a cost - more capital injections, further longer-term liability guarantees, tolerating higher leverage in "socialized banks," plus more than a little "dirigisme," or directing banks to lend. Under this scenario, Roche thinks global depression will be avoided - but "at the high long-term cost of a socialized financial system. And it still heralds a very long, gray, global recession as the world learns to use less capital to meet its needs."
Financial expert and investor safety advocate Martin Weiss disagrees with Roche and sees depression coming. He's not alone, and he's said it repeatedly, including in his latest commentary titled "Why Washington Cannot Prevent Depression." He cites what he calls "dire reality. Washington is not God. It cannot save the world. It cannot prevent the next depression," and he gives five reasons why:
(1) The Debt Crisis
It's far too big to control. Based on Fed Flow of Funds figures, "there are now $52 trillion in interest-bearing debts in the US." According to US Government Accountability Office estimates, add another $60 trillion in contingency debts and obligations - for Social Security, Medicare, Medicaid, and other pensions. In addition, the Bank of International Settlements (BIS) earlier cited a staggering global debt total, including derivatives, of $1 quadrillion, or 1000 trillion. In a separate report, it says $596 trillion, but even this number is unimaginable and unmanageable.
So far, reckless government outlays amount only to a fraction of this amount - around $2.7 trillion. Weiss says the numbers aren't directly comparable, but "to get a sense of the magnitude of the problem, compare the size of the debts and (derivatives) bets outstanding" to the tiny amount injected to combat it. It's miniscule and may fall way short of being effective. Weiss is blunt in calling "the debt build-up in the US today far greater than it was on the eve of Great Depression I." Pre-1930, it was between 150 - 160% of GDP. Today, excluding derivatives, it's nearly 350% or more than double the earlier. Include them, and debt levels go off the charts. Weiss concludes: "government bailouts are too little, too late to end this crisis."
(2) Bailout Costs Are Too Great to Be Financed
Given the dire economy, higher taxes and expenditure cuts are off the table. Going forward, "the government will try to finance its folly largely by borrowing the money." The next tranche - $550 billion in Q 4 and $2 trillion in total, or four times the size of the entire official FY 2008 deficit. As a result, a tsunami of new Treasury supply is coming. It will crowd out private borrowers and pressure interest rates higher when lower ones are desperately needed.
(3) Supply Can't Stimulate Lending and/or Borrowing
Washington wants households to borrow and spend more, but they're doing the opposite. Banks are also urged to lend, dispense more access to credit cards, and provide capital for troubled businesses. They refuse and are using their handouts for acquisitions, bonuses and dividends. "No matter what the government says, it is the natural survival instinct of billions of people and businesses around the world that will determine the outcome" of today's crisis: "Depression and deflation."
(4) Powerful Debt and Deflation Cycles
Debt can continue accumulating for years as long as borrowers have enough income to repay it. Deflation (or disinflation) can increase the affordability of homes and other major purchases. But when debt and deflation converge, depression is inevitable. It happened in the 1930s, and (in different form) it's happening today. "We are witnessing powerful vicious cycles in which deflation brings down debts and debts help accelerate the deflation."
For example:
-- widespread mortgage delinquencies and foreclosures trigger massive real estate liquidations followed by severe price declines, and more delinquencies and defaults;
-- fear of bankruptcies causes equities, bonds, commodities and virtually every type asset to fall; more bankruptcies result the way today they threaten US auto makers; and
-- the same downward spiral affects households, small and mid-sized businesses, city and state governments, and entire countries; spending is slashed; workers laid off; assets sold, and revenues lost precipitating more of the same.
"In every sector of the economy and every corner of the globe, debt defaults are causing deflation; and deflation is causing debt defaults. No government can stop this powerful vicious cycle. It has to play itself out."
(5) The Ultimate Power of Markets
Why can't governments simply print enough money to buy up excess debt and inflate? Because governments need buyers for their bonds and to finance all new planned spending and deficits. "The power of the market is stronger than any politician or government bureaucrat. It is more powerful than any law. It is even more powerful than the gold standard."
Trust is needed to raise money. It's not built by "run(ning) the printing presses or destroy(ing) your money." Instead, deflation and depression must run its course. "It's preposterous to believe that Washington can save every failing individual, company, country and government on this planet."
It can't stop investors from dumping their assets or reverse decades of financial excesses. "It cannot win the battle against depression. It cannot stop the Dow or S & P from losing half their value from current levels, if not more. It cannot stop the collapse in real estate, commodities, and corporate bonds." It can't convince people to use their cash to invest or do anything they wish not to do. It can only reap the whirlwind.
Two Other Views on the Dire State of Things
One from Russian economist Mikhail Khazin in a recent (Russian web site) kp.ru/daily interview. He predicted the current crisis early on, but his views were largely dismissed. No longer, and today they're more dire than before.
In 2000, he wrote an Ekspert magazine article titled: "Is the US Digging for an Apocalypse?" At the time, he saw declining demand destroying 25% of the US economy. Today it's maybe one-third, he believes. Why? Because of an early 1980s policy "to stimulate demand through state support....(by) switch(ing) on the printing press" and building debt at a rate way above GDP growth. He mentioned 8 - 10% in an economy growing at around 2 - 3% or a maximum 4%.
It let America "create a very high standard of living by stimulating consumer demand....But it's impossible to live forever in debt. Household debt has now surpassed the national economy - more than $14 trillion. Now it's time to pay up. Of course, Wall Street tried to postpone this collapse....but this was just a gasp for air before an inevitable death....Whatever decision Wall Street takes right now, the demand is going to fall."
It points to "an uncontrollable increase in unemployment, a horrible depression, a sharp increase in the effect of social services on the budget....Now, the US is jumping all over the place doing everything it can to rescue this fraction of the economy (the portion Khazin thinks will evaporate). The government is stimulating banks and manufacturing....But regardless, in 2 - 3 years, the US will face a crisis similar to the Great Depression."
Harvard president Drew Faust is also alarmed in a recent letter to alumni and friends. She cites the "current global financial situation and its effect on the University." She mentions "extraordinary turbulence, the most serious (uncertainty and financial distress) in decades (as part of) our new economic reality."
Despite over three and a half centuries of surviving challenges, "Harvard is not invulnerable to the seismic financial shocks in the larger world. Our own economic landscape has been significantly altered. We will need to plan and act" accordingly.
Her focus, of course, is on revenue and the school's endowment. It provides income for over one-third of its operating budget, now severely impacted by today's crisis. Despite past outperformance in turbulent times, Harvard fared poorly in its current fiscal year ending June 2008 (before the worst of today's crisis struck). In FY 2007, an impressive 23% return was registered, and it lifted the total endowment to $34.9 billion. In FY 2008, it fell an estimated 30% or a $10.5 billion hit. Even mighty Harvard is impacted enough to "need to be prepared to absorb unprecedented endowment losses" in the current environment. Drew Faust wants help, of course, but clearly she's worried to the point of alarm at the gravest financial time in our lives.
Credit Normalization Is Stuck in a Debt Trap
It affects Harvard and world economies everywhere. Even mighty America isn't immune from its impact. From having lived way beyond our means for years. The chickens are now home to roost - big time.
In spite of extraordinary liquidity injections globally, risk markets remain paralyzed. Frozen. Uncertainty and turbulence continue, and economies are reeling in distress. They're like buckets leaking more out their bottoms than whatever flows in at their tops. Fed credit creation is counterbalanced by deleveraging and collapsing balance sheets, and there's no end to this in sight.
True enough, unclogging has occurred in inter-bank and money markets, but it hasn't freed up credit or its price for the vast majority of borrowers. In addition, junk and investment grade bond spreads have widened. Municipal bond yields have soared as their prices fell. Some offer tax-free returns topping 6% compared to taxable 10-year Treasuries under 4%. According to some analysts, they're screaming buys, and so are high-grade corporate bonds that are much more attractive (and safer at a time no financial asset is safe) than equities in the same companies, and a big reason why stock prices are falling. But by no means the only one.
The world pre-mid-2007, no longer exists. Risk is a dirty word. Leverage is out the window, and asset-backed securities (ABSs), collateralized debt obligations (ABSs), and securitization markets are closed and padlocked. All the king's horses and all the king's men can't reconstitute them. No amount of liquidity injections, rate-cutting, or high-minded rhetoric will reinflate that air that's now leaving the bubble.
Today's debt overhang is unmatched by a factor of more than three to one over any previous period without including derivatives. Add them, and it's unquantifiable in unchartered waters. Issue one for policy makers is how to keep economies from crashing. How to create enough new credit and get it flowing at a time lenders won't lend and borrowers are so indebted they can't assume more if they could get it.
Viable or not, the Fed will keep expanding its balance sheet to never before imagined amounts, and the government will run even greater multi-trillion dollar deficits. Amounts impossible to repay so they never will be with dark forebodings of how that problem will be resolved. It portends a very unpleasant future far worse than most now imagine. It also suggests another vicious downward spiral as recession deepens, and potential depression looms. The likes of which no one has experienced in our lifetimes or wishes to. Today's bubble economy is unlike anything ever in the past. Worse than all post-war excesses and what led to the Great Depression.
Can the worst of all possible outcomes be avoided? It's beyond this writer's ability to imagine. It's for the Fed, Treasury, GSEs (government sponsored enterprises like Fannie, Freddie, Sallie, Ginnie, etc.) and banks, if they're able and willing, to try. To create money, get it flowing, inflate or die, but it already may be too late. Things that can't go on forever, won't, and as writer Ellen Brown observes: "The parasite has run out of its food source." The engine is now out of fuel.
A Secret Revival Plan for the November 15 G-20 Summit
According to Webster Tarpley (on Rense.com, 11/10/08), a "British (and, of course, Washington) steered....confidential strategy paper (aims) to impose (an IMF) dictatorship on the entire planet, wiping out all hope of economic recovery, the modernization of the developing countries, and national sovereignty" as well.
It proposes the usual form of IMF orthodoxy - "austerity, sacrifice, deregulation, privatization, union busting, wage reductions, free trade, the race to the bottom, and prohibitions on advanced technologies." Quite literally an agenda from hell. So outlandish that BRIC countries are reportedly objecting - Brazil, Russia, India and China. China wants policies of the type it may pursue in its just announced $586 fiscal stimulus plan - for various internal needs like infrastructure. The IMF plan is mirror opposite in its five points. To:
(1) "require the credit rating agencies to be registered and monitored and submit to rules of governance;
(2) halt the principle of a convergence of accounting standards and re-examine the application of the fair market value rule in the financial field, so as to improve its coherence with the rules of prudence and conservatism;
(3) resolve that no market segment, territory, or financial institution shall escape from a proportionate and adequate regulation, or at the least, surveillance;
(4) set up a code of conduct to avoid excessive risk-taking in the financial industry, including in the area of compensation. Supervisors will have to follow this code in evaluating the risk profiles of financial institutions; (and)
(5) entrust to the IMF the primary responsibility, along with the FSF (Financial Stability Forum - Basel), to recommend the necessary measures to restore confidence and stability.
The IMF must be equipped with the essential resources and suitable instruments to support countries in difficulty, and to exert its role of macroeconomic surveillance to the fullest."
Translation: This is a Washington-UK-IMF scheme to increase their collective power at the expense of and to the detriment of the civilized world. An attempt to suck more of its wealth to the top by extracting it from all others.
Economist Michael Hudson reports that 1% of the US population owns 70% of its wealth, a huge increase over earlier periods. This plan aims to increase it. To turn the US and world economies into banana republics. To make its workers de facto serfs. To crush competition and empower corporate giants. Mostly ones in America.
To end any hope for progressive change at a time all humanity craves it. To revive Chicago School fundamentalism when it's totally discredited. To step back from a new direction that appears little more than a pipe dream. To harden the old failed one and suck us deeper into its quicksand.
It's hoped enough nations will balk, render this scheme dead on arrival, and consign it back to its hellish origins. The alternative is a view of our future. One too disturbing to imagine. That no one should tolerate and be willing to be disruptingly defiant enough to prevent.
Stephen Lendman is a Research Associate of the Center for Research on Globalization. He lives in Chicago and can be reached at lendmanstephen@sbcglobal.net. |
| Anonymous Coward
User ID: 548505
11/13/2008 8:10 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Uncle Sam's Credit Line Running Out?
By RANDALL W. FORSYTH | MORE ARTICLES BY AUTHOR
The yield curve and credit-default swaps tell the same story: The U.S. can't borrow trillions without paying a price.
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WHAT ONCE WAS UNTHINKABLE has come to pass this year: massive bailouts by the Treasury and the Federal Reserve, with the extension of billions of the taxpayers' and the central bank's credit in so many new and untested schemes that you can't tell your acronyms or abbreviations without a scorecard.
Even more unbelievable is that some of the recipients of staggering sums are coming back for a second round. Or that the queue of petitioners grows by the day.
But what happens if the requests begin to strain the credit line of the world's most creditworthy borrower, the U.S. government itself? Unthinkable?
American International Group (ticker: AIG), which originally had to borrow what was a stunning $85 billion from the Fed to keep it from cratering in September, upped the total Sunday to $150 billion.
Monday, Fannie Mae (FNM) reported a $29 billion third-quarter loss, far in excess of forecasts, raising the specter that the mortgage giant may need more money after the Treasury pledged to inject $100 billion in preferred stock financing in September.
Meanwhile, American Express (AXP) received Fed approval to convert to a bank holding company, joining the likes of Morgan Stanley (MS) and Goldman Sachs (GS), that have a direct pipeline to borrow from the Fed or the Treasury's TARP, the $700 billion Troubled Asset Relief Program.
And, of course, Detroit is looking for a credit line from Washington. General Motors (GM) Friday warned it could run out of cash next year without a government loan. GM plunged another 23% Monday, to 3.36, as several analysts helpfully recommended selling shares of the beleaguered auto maker that already had lost more than 85% of their value.
Visiting the White House Monday, President-elect Obama pressed President Bush to support emergency aid for GM and other auto makers. The prospect for federal aid for GM ironically weighed on its shares as one bearish analyst said the price of the bailout could be a wipeout of common holders.
Be that as it may, it's all adding up. If the late Sen. Everett Dirksen were around today, he might comment that a trillion here, a trillion there and pretty soon you're talking about real money.
Trillions are no hyperbole. The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. "Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.
It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.
The yield curve simply is the graph of Treasury yields of increasing maturities, starting from one-month bills to 30-year bonds. The slope of the line typically is ascending -- positive in math terms -- because investors would want more to tie up their money for longer periods, all else being equal. Which it never is.
If they expect yields to rise in the future, they'll want a bigger premium to commit to longer maturities. Otherwise, they'd rather stay short and wait for more generous yields later on. Conversely, if they think rates will fall, investors will want to lock in today's yields for a longer period.
The Treasury yield curve -- from two to 10 years, which is how the bond market tracks it -- has rarely been steeper. The spread is up to 250 basis points (2.5 percentage points, a level matched only in the past quarter century in 2002 and 1992, at the trough of economic cycles.
Based on a simplistic reading of that history and the Cliff Notes version of theory, one economist whose main area of expertise is to get quoted by reporters even less knowledgeable than he, asserts such a steep yield curve typically reflects investors' anticipation of economic recovery. Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished. Like the Bourbons, the French royal family up to the Revolution, he learns nothing and forgets nothing.
As with so much other things, something else is happening this year.
The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit-default swaps on the U.S. government and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes.
This link has been brought to light by Tim Backshall, the chief analyst of Credit Derivatives Research. The attraction of investors to the short end of the Treasury market is "juxtaposed with the massive oversupply and inflationary expectations of the longer end," he writes.
Backshall is not alone in this dire assessment. Scott Minerd, the chief investment officer for fixed income at Guggenheim Partners, a Los Angeles money manager, estimates that total Treasury borrowing for fiscal 2009 will total $1.5 trillion-$2 trillion. That was based on $700 billion for TARP, a $500 billion-$750 billion "cyclical deficit," an additional $500 billion stimulus program and some uncertain amount for the Federal Deposit Insurance Corp.
Minerd doubts that private savings in the U.S. and foreign purchases of Treasury debt will be sufficient to meet those government cash requirements. That leaves the Fed to take up the slack; that is, monetization of the debt.
However it comes about, Backshall's charts of the yield curve and the spread on U.S. Treasury CDS paint a dramatic picture. Both the yield spread and the cost of insuring debt moved up sharply together starting in September.
Let's recall what happened that month: the Fannie Mae-Freddie Mac bailouts, the AIG bailout and the Lehman Brothers failure. The two lines continued their parallel ascent with the announcement and ultimate passage of the TARP last month. And evidence mounted of an accelerating slide in growth.
Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. And it's not because of anticipated recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.
All of which suggests America's credit line has its limits.
At the beginning of the Clinton administration in the early 1990s, adviser James Carville was stunned at the power the bond market had over the government. If he came back, Carville said he would want to come back as the bond market so he could scare everybody.
President-elect Obama may come to think Clinton had it easy by comparison.
Comments: randall.forsyth@barrons.com |
| Anonymous Coward
User ID: 548505
11/13/2008 8:53 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Arrogant bastards need to be s
User ID: 225509
11/13/2008 8:48 AM
Report abusive post
Shit yourself: Greenspan: "Fed Reserve ABOVE THE LAW"
Quote
Look at this:
[link to www.google.com]
Alan Greenspan says, "The Federal Reserve is above the law."
That means they can rape you, steal your money, and they are not accountable to anybody or any law.
wtf
scream damned
This CANNOT STAND.
Kanigo2 Subscriber
User ID: 442313
11/13/2008 8:50 AM
Re: Shit yourself: Greenspan: "Fed Reserve ABOVE THE LAW" Quote
Greenspan says the Fed is above the law.
He says it at 7:40 |
| Anonymous Coward
User ID: 551296
11/14/2008 6:59 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
thanks for the greenspan post!
so, it would seem that 1% of us falible humans are ruling the world with disasterous consequences.
lets see to begin with.
george bush made a mistake. there were no WMD's.
tony blair made the same mistake.
alan green span made the mistake, of underestimating our ability to self regulate, given greed verses self preservation!
the PLANET is reeling from these mistakes, yet, very few are saying that this system, is a DISASTER, before it even got off the ground.
so, i suggest giving the power back to the people!
we simply cannot have the whole world effected every time one man at the top makes a mistake, that is simply wrong, and how is it being allowed at all! |
| Anonymous Coward
User ID: 552260
11/16/2008 7:27 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
A CHANGE OF BALANCE, Part 1
The party's over
By Chan Akya
The idea of paper money having a vague intrinsic value can be highlighted in the age-old story of the two brothers who owned equal shares in a pub. Whenever one wanted a pint of beer, he would pay the other a dollar, who would then pay him back for his own draw of beer. Pursued ad nauseum, this meant that the same dollar could account for unlimited quantities of beer; provided of course neither brother ever used it to buy something other than beer from his sibling.
More importantly, the game could continue until the brewery sent its chap around to collect money for all the beer that had been drunk by the brothers. As a general rule, the brewery would have wanted to get paid a little more than one solitary dollar for the whole keg of beer.
In essence, this story captures the idea of what happens when
stated transactions do not produce incremental cash flows, or when increased liabilities are disguised as new cash. Students of corporate balance sheets will look for these glaring examples of cash mismatch; unfortunately, most economists seem to misunderstand the difference between expenditure and liabilities.
In the above example, the dollar changing hands wasn't the payment - it was an exchange of liabilities; that is, each brother owed the pub a dollar for every pint drunk. Coming up with the aggregate of all the payments meant totaling up the liabilities, not simply exchanging the instrument of exchange, which is to say the dollar note, once again. All of this is particularly important because the brothers deferred their payment for their beer from the brewery - they had themselves benefited from credit.
How then would the brothers pay for the beer in a normal situation? Simply by selling more beer at a profit to their customers than their own consumption would warrant. In other words, as long as the sum total profits of the pub were in excess of the accrued liabilities of the two brothers, the pub remained solvent at the end of the month. If on the other hand the brothers had drunk more than their profits for the month, the pub was insolvent at the end of the month, liable to be taken over by the brewery while the brothers went from being owners to mere employees.
Small beer in economics
In the world before 2008, this brotherly love was best exemplified by the US-China pair, wherein the former would buy billions in consumer goods from the latter and pay with a series of IOUs. As long as China continued to accept the IOUs rather than real money as payment for the goods, the cycle continued. While this describes the supposed cash flow situation, how does the picture change if we look at the balance sheet, that is to say, the relative value of assets and liabilities?
In this case, slightly different from the brothers above, Americans were using their borrowed money only partly for consumption, with the balance for speculation on assets such as houses, stocks and so forth. For the Americans, as long as the value of their assets increased faster than their liabilities, the overall balance sheet situation remained acceptable. Effectively, the increased consumption was warranted by the increased wealth. In turn, the assumed positive net worth of American households engendered further credit provision by China and other emerging markets, in turn boosting the value of American assets as well as further consumption.
Since the collapse of the bubble from the middle of last year, the game has changed dramatically. No longer do American households think of themselves as having positive net worth; many if not most Americans probably consider the size of their liabilities to be in excess of their asset values.
Added to this, the loss of jobs and reduction of corporate profits means a dramatic decline in the income expectations of most Americans. Given all that, the priority for many of them will be to reduce the size of their total liabilities - their mortgage and credit card balances - otherwise the all-important credit scores will become meaningless.
Unlike the citizens of most European countries, Americans pay attention to their credit scores because not only do these cover their ability to borrow, the score also provides flexibility to start new businesses: the basic engine of profit generation in America, which is vastly different from what we can see elsewhere.
To counteract the decline in their net worth, Americans will try to become net savers from being net spenders. This will push the economy further into a recession: this is why comparisons to the Great Depression of 1929 are apt. None of the above should be surprising to readers of Asia Times Online, given the commentary on these subjects by various authors on the website from the beginning of last year.
Many American companies are also stung by the higher costs of borrowing and will be reluctant borrowers, if at all. That leaves only the government as the sole agent to avail of credit in coming months and years.
Keynes, the barbaric relic
Confronting this situation, the new US administration along with its counterparts in Europe appears to have embarked on a Keynesian vision of monetary and fiscal expansion. The rapid rate cuts in Europe and the US in the past two weeks point to the idea of turning monetary policy into "super-easy".
Meanwhile, various governments have announced an expansion of fiscal spending to counteract the expected decline of the overall economy due to cuts in consumer spending. This is also classic Keynes, namely the notion that governments must act to counter the economic cycle.
Anyone reading through the above paragraphs with a grasp of the lessons of the two pub owners will immediately recognize the fatal flaw in the Keynesian design. This is the fact that governments no longer have the credit quality to borrow internationally.
As I have written before on these pages, the best thing about John Maynard Keynes is that he is dead. For no other branch of economics sprouts quite as much voodoo logic as the Keynesians manage in their short, pointless lives (or worse, long, pointless lives).
The United States along with a bunch of European countries is rated at the highest triple-A category. Yet, pretty much none of these countries has an ability to repay its debt from organic cash flows, that is tax revenues, any time soon. The ONLY source of repaying American and European debt that will be incurred in this new Keynesian expansion is new borrowings: essentially what bankers call the refinancing risks.
(There are different reasons between the Americans and Europeans for this. While the sheer size of government deficits run in the past eight years by George W Bush adds to the woes of the US effort, the new socialization of risk suggested by president-elect Barack Obama's team implies lower profit generation than would be consistent with tax revenue increases. As for the Europeans, my series of articles in Asia Times Online makes clear the idea that demographic and profit challenges will push many of these countries to default within our lifetimes.)
A whole bunch of banks went bust in the past 12 months for their failure to properly comprehend refinancing risk. The same is true for American and European governments which will attempt to sell new debt to fund their expansionism. The parlous state of their balance sheets means that anyone contemplating purchases of such debt is basically foolish.
The march towards the Washington summit in a couple of days seems bereft of any references to the balance sheets of US and European governments. Much like the vaunted triple-A ratings of various fixed income instruments in the past few months turned out to be bogus, Asian investors must be cognizant of similar risks for the bond ratings of the US and European governments in years to come.
This is the first article in a two-part report. |
| huge dot
User ID: 553328
11/18/2008 9:27 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
7 top goldmansachs execs decline bonuses till end of year
and now this
so its all bait and switch, and more lies and deception
Goldman Targeted by Investor Complaints of Naked Short-Selling
By Pierre Paulden and Caroline Salas
Enlarge Image/Details
Nov. 17 (Bloomberg) -- Investors in the $591 billion high- yield, high-risk loan market are accusing Goldman Sachs Group Inc. of naked short selling to profit from record price declines.
At least two fund managers complained verbally to officials of the Loan Syndications and Trading Association, saying they believe Goldman helped drive down prices by using the technique, according to people with knowledge of the objections. New York- based Goldman is acting against its clients by trying to profit at their expense, the investors said.
A $171 billion drop in the value of the loans in the past year is pitting banks against investing clients on assets once considered so safe they typically traded at par. The drop exposed flaws in an unregulated market where trades can take from several days to months to settle and banks may have information unavailable to investors. In a naked-short transaction, a firm would sell debt it didn’t already own, betting the price will fall before it purchases the loan and delivers it to the buyer.
“The LSTA is closely monitoring issues of naked short selling,” Alicia Sansone, head of communications, marketing and education at the New York-based industry association, said in an e-mail.
The group, comprising banks and money management firms that trade the debt, plans to tighten rules to ensure transactions are settled more quickly and prices reported accurately, Sansone said. She wouldn’t elaborate or discuss the claims against Goldman.
‘Different Causes’
“Increased volatility in the secondary market has been broadly documented and loan portfolio managers have suffered negative returns since July 2007,” Michael DuVally, a spokesman for Goldman, said in a statement.
“Investors are understandably focused on the many different causes of this volatility, but Goldman Sachs’ trading positions should not be one of them,” he said, declining to comment on whether the firm was short-selling loans.
Goldman rose to the fourth-largest U.S. originator of leveraged loans last year from eighth in 2005, according to data compiled by Bloomberg. The firm helped arrange financing for First Data’s purchase by Kohlberg Kravis Roberts & Co. as well as the $32 billion acquisition of First Energy Holdings Corp., formerly known as TXU Corp. by KKR and TPG Inc.
Most Aggressive
The bank was seen as the most aggressive in recent months in selling loans at prices below other dealers’ offers and taking longer than the LSTA’s recommended seven days to settle the deals, according to the investors complaining to the trade group.
There’s no rule preventing naked short selling of loans. The U.S. Securities and Exchange Commission this year banned the practice for 19 stocks including Lehman Brothers Holdings Inc. and Fannie Mae and Freddie Mac from July 21 to Aug. 12 as share prices plunged. New York-based Lehman, once the fourth-biggest securities firm, eventually went bankrupt and Fannie and Freddie, the two largest mortgage-finance providers, were brought under government conservatorship.
The slump in loan prices during the global seizure in credit markets is causing particular disruption in the loan market because the debt typically trades close to 100 cents on the dollar. Prices never were below 90 cents until February this year. By October they had fallen to a record low of 71 cents, according to data compiled by Standard & Poor’s. The decline, which S&P said equated to losses of about $171 billion, helped drive the complaints from fund managers.
‘Shell-Shocked’
“Investors are shell-shocked” by the decline, said Christopher Garman, chief executive officer of debt-research firm Garman Research LLC in Orinda, California. “In many ways they’re all but wiped out.”
Because prices were so stable, short sales of loans were unheard of until now, Elliot Ganz, general counsel of the LSTA, said at the group’s annual conference in New York last month.
“No one ever shorted loans,” Ganz said. “Prices never went down.”
High-yield, or leveraged, loans are given to companies with below-investment grade ratings, or less than Baa3 at Moody’s Investors Service and under BBB- at S&P. Banks typically form a group to arrange the financing. They then find other investors to take pieces of the debt, helping spread the risk.
Those loan parts can trade through private negotiations between banks and hedge funds or mutual funds. One of the lenders involved in the initial deal remains the so-called agent bank, which keeps track of who owns what piece. Unlike bonds and stocks, the debt doesn’t trade on an exchange and has no central clearinghouse.
Agent Banks
When a loan changes hands, the agent bank must sign off on the transaction, meaning it knows exactly who is buying and who is selling. The rest of the market is in the dark. Getting an agent to sign off, also can delay settlement.
“An agent will have a bird’s-eye view of who owns what and when,” said John Jay, a senior analyst at Aite Group LLC, a research firm that specializes in technology and regulatory issues in Boston. “They have information that no one else has.”
Conflicts within the syndicated loan market have escalated since the credit crisis began. Banks, stuck with more than $230 billion of loans they’d promised to fund leveraged buyouts, tried to renege on some agreements and others broke ranks with the typical banking syndicate.
Bain Capital LLC and Thomas H. Lee Partners LP, the Boston- based buyout firms that bought Clear Channel Communications Inc. sued banks including Citigroup Inc. and Deutsche Bank AG, in March accusing them of refusing to fund the acquisition. The banks counter-sued, claiming they were acting in good faith. The parties reached a settlement in May allowing the purchase to proceed at a lower price.
Tensions Increase
Tensions have also increased between investors that buy debt from banks. As banks ratcheted back credit and loan prices fell, fund managers that use borrowed money to buy loans have been forced to offload assets, further eroding prices and sparking more waves of selling.
Black Diamond Capital Management LLC, a Connecticut-based manager, filed a lawsuit last month against Barclays Plc, the U.K.’s second-largest bank, over derivative agreements tied to leveraged loans. Black Diamond is demanding the lender return $302 million.
The lawsuit is “without merit” and Barclays will fight it, Brandon Ashcraft, a spokesman for the bank in New York, said in an e-mailed statement.
Loans aren’t securities and are not governed by laws covering trading in bonds and stocks. While LSTA standards say a loan should settle within seven days of the trade, there’s no law governing the timing.
The average trade of a loan to a company not classified as distressed took 19 days to settle in the second quarter, according to LSTA data.
Three Days
In the bond market, the standard settlement time is three days following the trade. In a bond short sale, a trader acquires debt by borrowing the security in a deal known as a repurchase contract. The two sides specify how long the bond will be borrowed with the right to renew the pact. Because loans can’t be borrowed through such agreements, any short seller would have to go naked.
While the LSTA doesn’t track the amount of loans currently unsettled, at least 700 trades made by Lehman Brothers Holdings Inc. before it filed for bankruptcy hadn’t cleared, Ganz told last month’s conference.
Emergency Meeting
The strains over settlement prompted LSTA president Bram Smith to call an emergency board meeting on Oct. 20, people with knowledge of the session say. The complaints of Goldman’s trading methods were also discussed, said the people, who declined to be named because the talks were private.
Among those on the call was Lisa Opoku Busumbru, chief operating officer for loan trading at Goldman and a board member of the LSTA. Opoku Busumbru denied on the call that New York- based Goldman was short-selling loans, the people said.
Trading in the market is so opaque that it would be impossible to tell if a firm was short-selling, Jay Katz, managing director of Storm Networks LLC, a New York-based technology company launched in October with backing from Bank of America Corp. Credit Suisse Group AG and Morgan Stanley that helps settle loan trades within three days. A trade could be delayed for many reasons including not owning the debt, he said.
Heightened Concerns
While the delay in settlement had been an administrative issue for years, the tumbling loan prices and heightened concerns about creditworthiness of borrowers, banks and hedge funds have made it pernicious, said Ian Sandler, an executive director at Morgan Stanley and a board member of the LSTA.
A buyer or seller, or even the borrowing company, could go bankrupt in the time it takes for the loan to change hands, causing losses for the firm on the other side of the trade, Sandler said.
“Delayed settlement is a real concern because you have to worry about the loan deteriorating and the failure of the counterparty until the trade is completed,” said Sandler. He wouldn’t discuss the claims against Goldman or the emergency board meeting. “There is a tremendous amount of open trades currently in the loan market.”
Goldman has previously butted heads with investors, who are also clients through borrowing or advisory agreements.
In the early 1990s, the firm created the $783 million Water Street Corporate Recovery Fund to buy controlling stakes in the debt of financially distressed businesses. It was shut a year later when its negotiations upset clients such as Fidelity Investments and Tonka Toys.
While other banks are reining in capital, Goldman raised $10.5 billion last month for a fund run by Thomas Connolly in New York to make loans to high-yield companies.
The firm may write down its leveraged-loan portfolio by $1.3 billion in the quarter, Guy Moszkowski, an analyst at Merrill Lynch & Co., estimated last week.
To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net |
| .
User ID: 557970
11/24/2008 8:09 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
This Is Not A Normal Recession
Moving On To Plan B
By Mike Whitney
11-23-8
"The Winter of 2008-2009 will prove to be the winter of global economic discontent that marks the rejection of the flawed ideology that unregulated global financial markets promote financial innovation, market efficiency, unhampered growth and endless prosperity while mitigating risk by spreading it system wide." Economists Paul Davidson and Henry C.K. Liu "Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World Economy"
The global economy is being sucked into a black hole and most Americans have no idea why. The whole problem can be narrowed down to two words; "structured finance".
Structured finance is a term that designates a sector of finance where risk is transferred via complex legal and corporate entities. It's not as confusing as it sounds. Take a mortgage-backed security (MBS), for example. The mortgage is issued by a bank (the loan originator) which then sells the mortgage to a brokerage where it is chopped up into tranches (pieces of the loan) and sold in a pool of mortgages to investors that are looking for a rate that is greater than Treasurys or similar investments. The process of transforming debt ("the mortgage") into a security is called securitization. At one time, the MBS was a reasonably safe investment because the housing market was stable and there were relatively few foreclosures. Thus, the chance of losing one's investment was quite small.
In the early years of the Bush administration, Wall Street took advantage of the gigantic flow of capital coming into the country ($700 billion per year via the current account deficit) by creating more and more MBSs and selling them to foreign banks, hedge funds and insurance companies. It was real gold rush. Because the banks were merely the mortgage originators, they didn't believe their own money was at risk, so they gradually lowered lending standards and issued millions of loans to unqualified applicants who had no job, no collateral and a bad credit history. Securitization was such a hit, that by 2005, nearly 80 percent of all mortgages were securitized and the traditional criteria for getting a mortgage was abandoned altogether. Subprimes, Alt-As and ARMs flourished, while the "30 year fixed" went the way of the Dodo. Lenders were no longer constrained by "creditworthiness"; anyone with a pulse and a pen could get approved. The mortgages were then shipped off to Wall Street where they were sold to credulous investors.
The disaggregation of risk--spreading the risk to many investors via securitization--was as much of a factor in the creation of "the largest equity bubble in history", as the banks lax lending standards or Greenspan's low interest rates. By spreading risk throughout the system, securitization keeps interest rates artificially low because the real risks are not properly priced. The low interest rates, in turn, stimulate speculation which results in equity bubbles. Eventually, credit expansion leads to crisis when borrowers can no longer make the interest payments on their loans and defaults spiral out of control. This forces massive deleveraging and the fire-sale of assets in illiquid markets. As assets lose value, prices fall and the economy enters a deflationary cycle.
There are many types of of structured instruments including asset-backed securities (ABS), mortgage-backed securities (MBS), collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) all of which provide a revenue stream from loans that were chopped into tranches and turned into securities. There are many problems with these complex securities, the biggest of which is that there is no way to unravel the individual pools of loans to isolate the bad paper. That's why subprime mortgages had such a destructive affect on the secondary market, because--even though subprimes only defaulted at a rate of roughly 5 percent--MBS sales slumped nearly 90 percent. Why? Former Secretary of the Treasury Paul O'Neill explained it like this: "It's like you have 8 bottles of water and just one of them has arsenic in it. It becomes impossible to sell any of the other bottles because no one knows which one contains the poison."
Exactly right. So why weren't these structured debt-instruments "stress tested" before the markets were reworked and the financial system became so dependent on them?
Greed. Because the real purpose of these exotic investments is not to provide true value to the buyer, but to maximize profits for the seller by increasing leverage. That is the real purpose of MBS, CDOs and all the other bizarre-sounding derivatives; higher profits with less capital. It's a scam. Here's how it works: A mortgage applicant buys a house for $400,000 and puts 10 percent down. His mortgage is sold to Wall Street, chopped into pieces, and stitched together in a pool of similar loans. Now the brokerage can use the debt as if it were an asset, borrowing at ratios of 20 or 30 to 1 to fatten the bottom line. When Fannie Mae and Freddie Mac were taken into conservatorship by the government, they were leveraged at an eye-popping 100 to 1. This shows that nearly an infinite amount of debt can be precariously balanced atop a paltry amount of capital. This explains why the $4 trillion aggregate value of the 5 big investment banks and the $1.7 trillion value of the hedge funds is now vanishing more quickly than it was created. Once the mighty gears of structured finance shift into reverse, deleveraging begins with a vengeance pulling trillions into a credit vacuum.
It all started when two Bear Stearns hedge funds defaulted in July 2006 and there were no offers for their MBS and other structured investments. Panic quickly spread to every corner of Wall Street as the alchemists of modern finance began to see that their worst nightmare might be realized, that trillions of dollars of Frankenstein investments could be worth nothing at all.
Since the Bear Stearns funds fiasco, there have been huge explosions in the financial markets. Fannie Mae, Freddie Mac, Wachovia, Washington Mutual, Indybank, AIG, Lehman Bros and other industry giants have either gone under or been forced into shotgun weddings by the FDIC. The stock market has plunged over 40 percent and suffered wild gyrations not seen since the 1930s. The entire Wall Street landscape has changed completely. Investment banking is no longer a viable business model; the Big 5 have either vanished or transformed themselves into holding companies to escape short sellers. The hedge funds have been deleveraging with a ferocity that has sent sent stocks and commodities crashing. In one day last week, the stock market plunged 300 points in the morning only to bounce back 550 points a few hours later; a whopping 850 point-spread in one trading day! No one but a madman would dabble in this market. Cautious investors have pulled up stakes and moved to the safety of Treasurys. Meanwhile, the financial tsunami is roaring through the real economy where consumer confidence has plummeted, unemployment is soaring and retail sales have fallen to historic lows. The downdraft from the financial markets has flattened Main Street and set the stage for a humongous $500 billion stimulus package to be delivered in the first few months of the Obama administration. The meltdown appears to be playing out much like Henry Paulson anticipated. According to Bloomberg News : "Shortly after leaving Wall Street as Goldman Sachs' CEO, Henry Paulson was at Camp David warning the president and his staff of "over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy." (PAUL B. FARRELL, "30 reasons for Great Depression 2 by 2011", MarketWatch)
So far, the Federal Reserve has provided nearly $2 trillion through its lending facilities just to keep the financial system upright. The Treasury is currently distributing $700 billion to key banks and other financial institutions that are perceived to be "too big to fail". In truth, the "too big to fail" mantra is a just public relations hoax to conceal the web of counterparty deals that make it impossible for one institution to fail without dominoing through the rest of the system and wreaking havoc. That's why AIG is still on life-support with regular injections of taxpayer money; because it had roughly $4 trillion of credit default swaps (structured "hedges" that are not traded on a regulated exchange) for which AIG does not have sufficient capital reserves. In other words, the taxpayer is now paying the debts of an insurance company that didn't set aside the money to pay its claims. (As yet, No SEC indictments for securities fraud) In fact, the Fed and Treasury are now providing a backstop for the entire structured finance system which is frozen solid and shows no sign of thawing any time soon.
This is not a normal recession, which is a downturn in the business cycle and "a period of reduced economic activity" usually brought on by a mismatch between supply and demand. (that ends in two quarters of negative growth) The present situation is much more grave; it is the utter destruction of a system that was developed fairly recently and has proven to be thoroughly dysfunctional. It cannot withstand the effects of tighter credit or adverse market conditions. This is not a cyclical downturn; the structured finance system has collapsed leaving behind a multi-trillion dollar capital hole that is bringing the broader economy to its knees.
One by one, we have seen the structured instruments fail; mortgage-backed securities (MBS), collateralized debt obligations (CDOs), credit default swaps (CDS), commercial paper (CP), auction rate securities. Now we are seeing investors boycott anything related to structured investments. This is from Mish's Global Economic Trend Analysis:
"There were NO sales of bonds backed by credit-card payments in October, the first time since 1993, when the asset-backed securities market was in its infancy. Yields on top-rated credit card bonds relative to benchmark interest rates reached a record high of 525 basis points more than the London interbank offered rate, or Libor, last week, according to Bank of America Corp. data."
Wall Street has turned off the faucet for securitized investments. That market is toast. The only reason that Libor and the other gauges of interbank lending have normalized is because the Fed guaranteed money markets and commercial paper. It has nothing to do with trust between the banks themselves. There is no trust. Even so, the banks are not capable of making up for the vast amount of credit which was produced by the now-defunct investment banks and hedge funds which are constrained by losses of nearly $3.5 trillion; half of their total value. In the best case scenario, bank credit will only shrink 15 or 20 percent, which will put the US on track for a deep "18 month to 2 year" recession rather than another Great Depression.
Paulson's attempt to divert $30 billion to non-bank financial institutions to revive loan securitization when there is no appetite among investors for such structured junk is pure folly. More troubling, is that neither Paulson nor Bernanke have a Plan B; an alternate scheme for rebuilding the financial markets on a solid, sustainable foundation rather than low interest rates and pools of debt. Everything they have done so far, suggests that they are focused on one thing alone; inflating another equity bubble. "Inflate or die", as the saying goes; and Bernanke intends to achieve this objective using the same tools that brought us to the brink of catastrophe. Here's a clip from a recent speech by Bernanke which shows his determination to prop up the broken system:
"The ability of financial intermediaries to sell the mortgages they originate into the broader capital market by means of the securitization process serves two important purposes: First, it provides originators much wider sources of funding than they could obtain through conventional sources, such as retail deposits; second, it substantially reduces the originator's exposure to interest rate, credit, prepayment, and other risks associated with holding mortgages to maturity, thereby reducing the overall costs of providing mortgage credit."
Sorry, Ben, the funding has dried up and the banks have shown no interest in going back to the days of conventional "30-year fixed" mortgages. It's a dead letter. The Fed and Treasury need to stop looking for ways to reflate the bubble and work to restore confidence in the markets by increasing regulation and reducing the amount of leverage that's allowable to 12 to 1. After all, it's no coincidence that AIG, Fannie and Freddie, Lehman Bros, General Motors, General Electric have all fallen off a cliff at the very same time. They are all victims of the same low interest, easy money finance swindle which allowed them to roll over huge amounts of short-term debt at artificially low cost. When Bear blew up; lending tightened, demand weakened, and credit was flushed from the system at an unprecedented pace. Borrowing short for long-term investments is not feasible when credit becomes scarce, but it's not because the banks aren't lending. That's just another myth that keeps the public from seeing what's really going on. As Jon Hilsenrath points out in his Wall Street Journal article, "Banks Keep Lending, but that isn't easing the crisis", that is not the case:
"Banks actually are lending at record levels. Their commercial and industrial loans, at $1.6 trillion in early November, were up 15% from a year earlier and grew at a 25% annual rate during the past three months, according to weekly Federal Reserve data. Home-equity loans, at $578 billion, were up 21% from a year ago and grew at a 48% annual rate in three months....The numbers point to one of the great challenges of the crisis. The credit crunch is surely real, but it is complex and not easily managed. Banks are lending, but they're also under serious strain as they act as backstops to a larger problem -- the breakdown of securities markets..The worst of the credit crisis is being felt not in banks but in financial markets..."
The banks are not to blame. There is a generalized contraction of credit in the non-bank financial system where structured finance has blown up and taken half of Wall Street with it. It's the end of an era. Here's how economist Henry C. K. Liu sums it up in his "Open Letter to World Leaders attending the November 15 White House Summit on Financial Markets and the World Economy":
"Neoliberal economists in the last three decades have denied the possibility of a replay of the worldwide destructiveness of the Great Depression that followed the collapse of the speculative bubble created by unfettered US financial markets of the 'Roaring Twenties'. They fooled themselves into thinking that false prosperity built on debt could be sustainable with monetary indulgence. Now history is repeating itself, this time with a new, more lethal virus that has infested deregulated global financial markets with 'innovative' debt securitization, structured finance and maverick banking operations flooded with excess liquidity released by accommodative central banks. A massive structure of phantom wealth was built on the quicksand of debt manipulation. This debt bubble finally imploded in July 2007 and is now threatening to bring down the entire global financial system to cause an economic meltdown unless enlightened political leadership adopts coordinated corrective measures on a global scale."
Rome is burning. It's time to stop tinkering with a failed system and move on to "Plan B" before it's too late. |
| Anonymous Coward
User ID: 557970
11/24/2008 8:15 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Omega Subscriber
Total Unequivocal Bad Fuckin' News
User ID: 340280
11/17/2008 7:07 PM
Re: PAUL VOLCKER ISSUES DIRE WARNING : ECONOMIC SLUMP HAS METASTASISED - THAT'S A FUCKING UNDERSTATEMENT Quote
listening to alex jones refeed and he's got someone on stating it used to cost $150,000.00 to ship a cargo laden ship from China to US. States the asking price now is somewhere around $4000.00. States there is containers of grain and goods just sitting on docks because no one can get letters of credit to move the product. Anyone in shipping that can confirm this?
^^^^^sorry for the double post, my bad
Quoting: Treasure Bound
Might as well start here,lol.....
[link to www.nakedcapitalism.com]
Saturday, November 15, 2008
Yet More Trade Finance Worries (Not for the Fainthearted)
Readers may know we have been concerned about the dramatic fall in shipments of basic materials, as reflected in the collapse of the Baltic Dry Index. This in turn, as we have also stressed, is in large measure to the difficulty of obtaining trade finance, in particular letters of credit.
A very good post at London Banker, "Systemic Risk, Contagion and Trade Finance - Back to the Bad Old Days," (hat tip reader Bruce) gives a very good recap of the problem and the ramifications. Key excerpts:
"We are now starting to see the contagion effects of the current liquidity crisis feed through to the real economy...
The recent 93 percent collapse of the obscure Baltic Dry Index – an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage – has caused a bit of a stir among the financial cognoscenti. What is less discussed amidst the alarm is the reason for the collapse of the index – the collapse of trade credit based on the venerable letter of credit.
Letters of credit have financed trade for over 400 years. They are considered one of the more stable and secure means of finance as the cargo is secures the credit extended to import it. The letter of credit irrevocably advises an exporter and his bank that payment will be made by the importer's issuing bank if the proper documentation confirming a shipment is presented. This was seen as low risk as the issuing bank could seize and sell the cargo if its client defaulted after payment was made. Like so much else in this topsy turvy financial crisis, however, the verities of the ages have been discarded in favour of new and unpleasant realities.
The combination of the global interbank lending freeze with the collapse of the speculative, leveraged commodity price bubble have undermined both the confidence of banks in the ability of a far-flung peer bank to pay an obligation when due and confidence in the value of the dry cargo as security for the credit if liquidated on default. The result is that those with goods to export and those with goods to import, no matter how worthy and well capitalised, are left standing quayside without bank finance for trade.
Adding to the difficulties, letters of credit are so short term that they become an easy target for scaling back credit as liquidity tightens around bank operations globally. Longer term “assets” – like mortgage-back securities, CDOs and CDSs – can’t be easily renegotiated, and banks are loathe to default to one another on them because of cross-default provisions. Short term credit like trade finance can be cut with the flick of an executive wrist.
Further adding to the difficulties, many bulk cargoes are financed in dollars. Non-US banks have been progressively starved of dollar credit....
Fixing this problem shouldn't be left to the Fed. They aren't going to make it a priority. Indeed, their determination to accelerate the payment of interest on reserves and then to raise that rate to match the Fed Funds target rate indicates that the Fed are more likely to constrain trade finance liquidity rather than improve it. Furthermore, the Fed may be highly selective in its allocation of dollar liquidity abroad, prejudicing the economic prospects of a large part of the world that is either indifferent or hostile to the continuation of American dollar hegemony.
If cargo trade stops, a whole lot of supply chain disruption starts....
If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall.
Everyone along the supply chain should worry about their children going hungry.
When that happens, everyone in governments should worry about the riots.
Controlling access to trade finance determines who loses their jobs, whose children go hungry, who riots, which governments fall....Trade finance is rapidly communicating the stress on bank liquidity to the real economy. It presents a systemic risk much more frightening than the collapsing value of bits of paper traded electronically in London and New York. It could collapse the employment, the well being and the political stability of most of the world’s population.
[link to www.godlikeproductions.com] |
| .
User ID: 557970
11/24/2008 8:19 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Re: PAUL VOLCKER ISSUES DIRE WARNING : ECONOMIC SLUMP HAS METASTASISED - THAT'S A FUCKING UNDERSTATEMENT Quote
"credit alchemy"
such a lovely phrase...
Counterfeit Printing
Printing Money without Substance
Overseas Assistance Skimming
Credit Default Swaps
Dividend Twistage
Veto Investment
Kickbacks
Natural Disaster Skimming
Wartime Disaster Skimming
and our shiny new credit alchemy brew, "Bailout Skimming" WOOT!
what ever happened to illegal arms trading and heroine smuggling? Oh how times have changed.
Its so nice being totally pwned by the leaders of our country. Isn't it? |
| .
User ID: 557970
11/24/2008 8:19 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Re: PAUL VOLCKER ISSUES DIRE WARNING : ECONOMIC SLUMP HAS METASTASISED - THAT'S A FUCKING UNDERSTATEMENT Quote
"credit alchemy"
such a lovely phrase...
Counterfeit Printing
Printing Money without Substance
Overseas Assistance Skimming
Credit Default Swaps
Dividend Twistage
Veto Investment
Kickbacks
Natural Disaster Skimming
Wartime Disaster Skimming
and our shiny new credit alchemy brew, "Bailout Skimming" WOOT!
what ever happened to illegal arms trading and heroine smuggling? Oh how times have changed.
Its so nice being totally pwned by the leaders of our country. Isn't it? |
| Anonymous Coward
User ID: 558390
11/24/2008 5:13 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
the future is looking a bit like the potato famine, sadly, anyone have an idea of when the shop start running out?
i.e. do we have six months or less, or more?
blessed by the peace makers. |
| Anonymous Coward
User ID: 561378
11/28/2008 11:29 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Canadian Cold Front
User ID: 348319
11/28/2008 10:44 PM
Re: ANOTHER ANALYST PREDICTING THE DEMISE OF THE USA Quote
[link to www.thecomingdepression.blogspot.com]
Friday, November 28, 2008
GOLD AND SILVER is an ABSOLUTE MUST for the Coming GLOBAL Depression and COLLAPSE OF THE US DOLLAR
The U.S. dollar is being devalued at an alarming rate. Faster than what took place in Argentina, Mexico, and Russia put together. The only difference is that our government has better ways to hide it.
Just think about the recent bailouts, how much has our government thrown down the endless “bail out hole”…
Let’s add it up!
$ 800 billion to support mortgage consumer debt.
$100 billion for Fannie Mae
$100 billion for Freddie Mac
$150 billion for Stimulus package (from January)
$8 billion for Indymac
$29 billion for Bear Stearns
$ 700 billion for Wall Street ( Bank of America; Merill Lynch, City Group, JP Morgan, Washington Mutual, Wells Fargo; Wachovia, Morgan Stanley, Goldman Sachs…)
$143.8 Billion for AIG ( which keeps growing)
$25 Billion for the big three in Detroit.
$138 billion for Lehman Brothers (post bankruptcy) through JP Morgan.
$ 50 Billion for money market funds.
$ 620 billion for general currency swaps from the feds.
Totaling : $2,863,800,000,000
This doesn’t include the hundreds of billions the feds have and will continue to buy in commercial paper. Plus, what they lend out to other financial firms.
Not to mention, the feds recent supply of new credit lines to Brazil, Mexico, South Korea, and Singapore to “help those countries deal with the global credit crisis.” The feds will start at $30 billion and have promised up to $100 billion dollars per country.
Can someone say hyper-inflation!
If you can’t see where the U.S. dollar and gold are headed, I’ll be crystal clear! The dollar is going in the exact same direction as the Zimbabwe dollar and Mexican peso. Between the last devaluations of the peso, it’s lost 99.9%. If you want to know the price of gold in old pesos; you just have to multiply gold by 100,000.
With everything that has taken place, many “main-stream” TV commentators believe or want us to believe, that the U.S. dollar is now the currency of choice; a safe haven or flight to quality.
Nothing can be further from the truth.
The fact is that the U.S. dollar is now seen as a liability, not an asset. More and more countries are walking away from it.
The reason the U.S. dollar has gone higher is due to the $598 trillion dollar derivatives market. You see, hedge funds have over leveraged themselves and have been hit with tremendous margin calls as markets move against them. They have been forced to liquidate their investments overseas, which is why overseas markets are now crashing. They’re liquidating to come up with equity to pay off margin accounts, which need to be paid off in U.S. dollars.
The dollar is NOT rising because it’s a “safe haven” or a flight to quality; but rather to satisfy U.S. margin accounts. Remember until further notice, margin accounts in most emerging world markets can also be satisfied in U.S. dollars hence, the surge in demand for the U.S. dollar over the past few weeks.
FULL ARTICLE
NOTE: he federal government committed an additional $800 billion to two new loan programs on Tuesday, bringing its cumulative commitment to financial rescue initiatives to a staggering $8.5 trillion, according to Bloomberg News.
Posted by Economic analyst at 3:45 PM 0 comments |
| FHL(C)
User ID: 468982
12/8/2008 4:04 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
FU&FW
[link to www.euromoney.com]
December 2008
The treasury market reaches breaking point
by Helen Avery
As credit and equity markets crashed again in November, mounting problems in the US government bond markets went almost unnoticed. There are worrying signs that the treasury market itself, the last haven for risk-averse investors, is breaking down. Deliveries of treasuries failed at an all-time high of $2 trillion, and over periods lasting weeks, starting in October. Helen Avery reports.
The naked truth
THE US TREASURY market, the foundation of government bond and corporate bond markets worldwide, is suffering a crisis of confidence at the worst possible moment. Investors in treasuries are the lenders enabling the US government bail-out of the country’s broken financial institutions. That leaves them financing purchases of equity of volatile and highly questionable worth and backing a ragbag of distressed assets. There are more, presumably, to come. For now, treasury yields are at record lows across the term structure as investors with cash to invest conclude that they can trust no one else with their money. But investors must wonder at what point the expanded supply of government debt and its use will make the borrower inherently less creditworthy.
There is an even more pressing concern for many participants in this increasingly swollen market: the settlement system has broken down. Following the collapse of Lehman Brothers in September, fails to deliver among the 17 primary dealers in the US treasury market have rocketed to more than $2 trillion over a period of weeks and still lie above $1.3 trillion. Broker/dealers have stopped delivering bonds. Holders of US treasuries are now scared to lend into the repo market in case their bonds are not returned, and potential buyers sit on the sidelines fearful of handing over their money to a counterparty that at best might not deliver a bond on time, and at worst might go under.
With global stock markets plummeting, investors are still turning to treasuries as a safe haven. But investors might become nervous if something is not done soon to sort out the market’s problems. "As yet investors are still coming in, but in the longer term the worry is the lack of functionality in the treasury market. That could impact investor perception on a longer-term basis," says Mike Pond, US treasury and inflation-linked strategist at Barclays Capital in New York. If investors turn their backs on treasuries, the US government will find it increasingly difficult and expensive to raise money and roll over its maturing debts. Upward pressure on interest rates will occur at a time when the government needs to be loosening monetary policy in order to jump-start a domestic economy that is heading towards a depression.
As a result of fails to deliver, the most transparently priced instrument available now has investors scratching their heads. The natural balance of supply and demand has been altered and the true price of treasuries has become obscured. The effects are being seen across other bond markets. "The TIPS [Treasury Inflation Protected Securities] market is also clearly broken," says Pond. "An obvious trade right now would be to go long TIPS where real yields are high and short the nominal bond in a breakeven inflation trade but hedge funds are fearful that if they go through the repo market the borrow could fail. So we have a situation now in the 10-year TIPS where the market is pricing in zero or negative average inflation for the next 10 years. Inflation has not been that low since the 1930s." Economists also claim that fails have spread across to other bond markets such as municipals, agencies, mortgage-backed and corporates.
Why the Federal Reserve is not urgently considering regulation is bewildering. As yet, the US Treasury has merely asked for market participants to sort out the situation themselves. That might help reduce fails but it will not eliminate them, and in panic periods they will simply creep back up. The global economy has significantly contracted since the collapse of Lehman Brothers, which spurred the fails to deliver. More market-shocking events are certain to lie ahead. The solution is simple – delivery needs to be enforced, and liquidity returned. If not, confidence in the US treasury markets will be lost. Loans made using treasuries as collateral will be reconsidered, bond markets priced off treasuries will further dry up and, with equity markets so volatile, central banks and investors will not know where to turn.
Fails to deliver in the treasury markets are not a new phenomenon. There is data for fails for treasuries, agencies and mortgage-backed securities as far back as 1990, says Susanne Trimbath, an economist at STP Advisory Services, and former employee of the Depository Trust Co, a subsidiary of Depository Trust and Clearing Corp.
"Investors are still coming in, but in the longer term the worry is the lack of functionality in the treasury market"
Mike Pond, Barclays Capital
Mike Pond, Barclays Capital
Back then, though, there would be $50 billion of fails in a whole year, she says. That figure has grown enormously. Failures in US treasuries were 8.6% of all treasuries outstanding in the first five months of this year, compared with 1.2% in the first five months of 2007. That has ballooned further over the past three months, hitting more than $2 trillion for almost the entire month of October – more than 20% of the daily trading volume in treasuries.
What the treasuries market faces now, at this critical moment, is the consequence of long neglect of some murky aspects of short-term tactical trading in government bonds.
For years, efforts by the US Treasury itself formally to resolve the growing fails issue have been brushed aside by market participants as unnecessary. Jeff Huther, the former director of the Office of Debt Management at the Treasury, had battled for several years for a solution, getting as far as a White Paper produced in April 2006 suggesting stricter enforcement of delivery and penalties.
No need, responded the Bond Market Association. "The Association has worked with its members [bond traders and dealers] to address chronic fail issues with respect to risk, pricing and liquidity," it asserted. "Indeed, the Association has focused its efforts on developing pre-emptive practices that would make it unlikely that a significant fails event would occur."
That was in spite of warnings by Treasury Committee members themselves at the end of 2005 that the chronic fails had begun to affect the mortgage-backed and corporate bond markets. Trimbath believes that given that a blind eye was turned to fails in the treasuries markets, that in turn encouraged fails to deliver in the mortgage bond markets and to a lesser extent the corporate bond market. "In 2004 the failure to deliver rate for government agency MBS was 40%," she says.
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 468982
12/8/2008 4:07 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
FU&FW
Significant fails in 2003 caused chaos for treasury market participants, but still no penalty was introduced. In June 2003, the Fed Funds target rate had been reduced to 1%. As the specials rate (a repo rate only for a specific security) approached zero there was little incentive to borrow the notes to cover short positions and failures. For five weeks, fails to deliver in the treasury market were more than $1 trillion. The consequences, admitted the BMA at the time, were "most particularly, regulatory capital requirements imposed lost opportunity costs on dealers as capital requirements increased. Firm personnel spent significant time in back-office and industry-wide attempts to resolve fails. In addition, customer relations became strained as fails to receive and deliver in customer transactions increased."
But despite the inconveniences of the fails, fears that stringent prevention of fails to deliver would reduce profits deterred the market from supporting Huther and his colleagues’ attempts at solution. "It was politically difficult to convince the market to put a stop to fails to deliver in treasuries," claims one former Treasury employee. "There were some forceful voices insisting that if the Treasury got involved, they would take the incentives out of the specials market altogether. Those making their living as specialist dealers, as well as those making a living shorting securities outright, were worried about potential supply changes which would eliminate trading opportunities for them."
In 2002, Michael Fleming and Kenneth Garbade, now at the Federal Reserve Bank of New York, reported that some market participants might indeed fail "strategically". They claimed that by failing to deliver bonds on the initial sell order of a repurchase agreement, a broker-dealer can nearly triple its net revenue in two weeks over what it would have earned in the straight execution of the repurchase agreement, banking on interest rates rising.
By simply enforcing delivery or deterring failed delivery by penalties and forced buy-ins, this market manipulation could have been stopped.
The inaction has led to the build-up of $2 trillion in undelivered bonds. Moreover, the number of fails is almost certainly higher than is being reported, claim insiders, possibly substantially so. The $2 trillion in fails fell to $1.3 trillion at the week ending November 5, according to the New York Fed. However, Trimbath points out this is only data volunteered by about 17 primary dealers. The fail rate by those dealers in US treasuries hit 30% one week in October. By November 11 it was still at 22%. "And what about the 200 to 300 bond dealers who settle through the DTCC? The DTCC does not reveal publicly the fails to deliver there. Imagine the magnitude of the true amount of fails to deliver," she says.
The former Treasury employee also explains that the Fixed Income Clearing Corp (part of the DTCC) started netting fails in 2005/06, whereby FICC uses bonds due to a participant to offset bonds due from the same participant in the same security. "The actual amount of true fails appears to be less, therefore. You can’t compare the figures now with historical fails."
At what risk
Although the catalyst that led to this record amount of fails in treasuries, spiking at $2 trillion, was the collapse of Lehman Brothers, it is the settlement system and lack of regulatory oversight that has led to this risk of market failure.
The treasury market has always been highly liquid. Dealers are able to sell treasuries without owning them, borrowing them in overnight through the repo markets in order to meet the T+1 delivery. The supply of treasuries into the repo market has, in calmer markets, been so bountiful that selling treasuries without owning them was not considered by most traders to be a concern. After Lehman collapsed, however, several things happened to dry up supply to the repo market, explains Rob Toomey, formerly with the BMA, which is now part of Sifma (The Securities Industry and Financial Markets Association). "There was a tremendous flight to quality so a lot more investors were buying treasuries," he says. "At the same time, holders of treasuries that would ordinarily lend the securities overnight in the repo markets stopped lending as they became fearful of counterparty risk."
Investors in treasuries are largely risk-averse by nature. Central banks, for example, and pension funds are large holders of treasuries. "They’re not going to risk lending out treasuries in this environment," says Stan Jonas, director of Axiom Capital Management, a New York investment and banking firm. "If you lend stock in a bear market you get collateral in exchange and then if your counterparty goes belly-up you’ll keep that and the stock will have dropped so you can buy it back cheaper than when you loaned it. Not so in the treasury market. A lender receives just the interest rate on the bond for the overnight period but if the borrower goes under, the bond is not returned and the lender has lost everything."
FTDs of US Treasuries balloon out of control
Primary dealer reportings to Federal Reserve Bank of New York
Source: Federal Reserve Bank of New York
Investors are essentially facing the proposition of being paid the Fed Funds rate overnight while waiting for delivery. That is the same as receiving US government yield for broker/dealer risk, says Trimbath. That’s not a great trade with risk premia on financial credits rising to record highs. "Those investors are being paid the "risk-free" rate of interest – what lenders charge the US government," she says. "As far as I’m aware Warren Buffett is getting paid 10% for taking on Goldman Sachs risk. So how is this being allowed to happen?"
With interest rates so low, and in some cases negative, there is even less incentive to lend out treasuries as the amount to be gained from lending out overnight is too small to compensate for the counterparty risk. The Fed Funds overnight rate was 0.37% on November 17, with the repo rate lower still and on occasions in negative territory.
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 468982
12/8/2008 4:09 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
FU&FW
The dramatic and rapid seize-up in overnight treasury supply resulted in a sharp uptick in the number of fails to deliver.
"The repo market was a great invention," says Jonas. "It was thought to be the safest form of lending and borrowing but that assumed you could complete the trade. Since we now know that is not the case, confidence has deteriorated." He points out that swaps are viewed as less risky than treasuries today.
Further discouraging the supply of treasuries into the repo market is the very fact that failure to deliver has not been punished. Huther and his colleagues were never able to enforce a severe enough repercussion for failure. At present, failing to deliver incurs only a continued overnight interest rate. When that interest rate is close to zero, and the penalty for failing is zero there is little incentive to deliver a bond.
This failure to deliver also has the effect of creating phantom securities – a higher number in the system than actually exist. "In a sense, the repo market is like a Ponzi scheme," says Jonas. "If no delivery is forced then that bond can be lent over and over again. One security can underlie a hundred trades. So the amount of securities traded is far more than exists. That is the way the world works today. If it doesn’t break, that’s great. But when one link in that system breaks, those trades have to be unwound..."
Sifma’s Toomey admits that "maybe there are more bonds sold than are available" although he claims that it is not a good metric for assessing fails to deliver.
Trimbath, however, is less sanguine about the impact that phantom bonds have on the financial system. She compares the situation to musical chairs. "Who is going to get the chair when the music stops? It’s not the individual investor. I’ve seen positions just deleted from people’s statements without investors even knowing as the security they supposedly owned turns out to not exist. When push comes to shove, and the buy-ins start, who will not receive their delivery? The individual investors or the institutional clients who are more profitable for the broker/dealers?"
Time to crack the whip
More bonds being traded than exist defies the natural laws of supply and demand. While greater demand for treasuries should be allowing the US government to lower borrowing costs, the inflated supply through duplicated bonds could lead to higher borrowing costs. "These undelivered treasuries represent unfulfilled demand – demand by investors willing to lend money to the US government," says Trimbath. "That money has been intercepted by the selling broker-dealers. By selling bonds that they cannot or will not deliver to the buyer, the dealers have been allowed to artificially inflate supply, thereby forcing prices down. These artificially low prices are forcing the US government to pay a higher rate of interest than it should in order to finance the national debt. It shouldn’t take a PhD-trained economist to tell you that prices are set where supply equals demand. If a dealer can sell an infinite supply of bonds then the price is, technically speaking, baloney. And the resulting field of play cannot be called a market.
"If regulators and the central clearing corporation will only enforce delivery of treasury bonds for trade settlement at something approaching the promised, stated, contracted and agreed upon T+1, there will be an immediate surge in the price of treasury securities. As the prices of bonds rise, the yield falls. This yield then translates into the interest rate that the US government will have to pay in order to borrow the money it needs to fund the budget deficit [and to refinance the existing national debt]."
Huther also pointed to the higher borrowing costs for the Treasury as a result of fails in November 2005 when proposing a securities lending facility. The reduced secondary market liquidity resulting from fails might lead to erosion of the liquidity premium the Treasury receives for securities at auction, he pointed out. Compliance would also increase costs for all participants, and ultimately fails could lead to "the potential erosion of benchmark status," warned Huther.
At present, investor appetite has not been discouraged. The auctions and issuance in two-year and five-year notes in October were well received by investors. The government’s $34 billion sale of two-year notes on October 28 drew a yield of 1.60%, the lowest since March 2004. The US also auctioned $24 billion of five-year notes on October 30 at a yield of 2.825%, less than the rate drawn in the previous month’s sale.
However, concerns about the system and its functioning did have an impact on the government’s $10 billion reopening of 30-year bonds in November. One trader says that investors were nervous how the process would turn out, resulting in the reopening being 20 basis points cheaper by the end of the day to yield 4.35%. That has since dropped to 3.64% as confidence and therefore demand has returned.
The Federal Reserve should now be running out of patience with industry participants that have allowed fails to deliver to continue for as long as they have. Promises from market participants to reduce fails have not only been broken – fails have in fact increased in number. Jonas says: "From a macroeconomic perspective, the Fed has to be annoyed. The repo market is not here to help dealers make money. It’s how the Fed implements monetary policy." Perhaps, the Treasury will finally crack the whip. It might have to.
The Treasury was forced to reopen some notes in the first week of October, a response which is credited with reducing fails to the reported $1.3 trillion. Such drastic action was also taken following 9/11 when cumulative fails to deliver in treasuries hit $1.3 trillion from just $1.7 billion the week before. The Treasury responded with a snap auction that brought daily average fails back down to $63 billion by November that year. At that time, Treasury under-secretary Peter Fisher warned that such responses would not happen again and that the market should resolve the issue itself, although he admitted "never is a long time".
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 468982
12/8/2008 4:10 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
FU&FW
Investigations into broker behaviour in certain notes is at least under way. On November 7, the Treasury called for reports from entities with $2 billion or more in two specific notes. These were to be submitted by November 14.
Both Sifma and the Fed-sponsored Treasury Market Practices Group have been rallying to offer a solution to the fails to deliver without formal regulation.
The TMPG is comprised of market participants. Tom Wipf, chairman of the group and global head of institutional securities group financing at Morgan Stanley, says the group was set up a few years back and is designed to deal with treasury market issues before they get to the point of additional regulation.
In November, the group recommended several changes. The first is a financial penalty on fails. While buy-ins are supposed to be enforced by the NYSE and Finra, up to now penalties have been undefined. The new recommended penalty is between 300bp and zero depending on the Fed Funds target. "History has shown us that fails only occur in excess when the Fed Funds target rate is near zero. At 3% and beyond, fails are less frequent," says Wipf. He adds that the DTCC will be responsible for charging the dealers. The penalty should encourage lending even in the low interest rate environment. At Sifma’s November 4 meeting, members pointed out there was little economic incentive to lend securities when general collateral rates stood at 20bp and the penalty for failing was zero basis points.
Sifma’s Toomey says the association is working with its members to implement some of the suggestions made by the TMPG. "The fails are steadily coming down but it can take time to find the bonds. We are looking at best practices for preventing fails to deliver, but we think it is important to take care not to limit liquidity by dampening shorting."
The former Treasury employee says he believes penalties alone will indeed dry up liquidity. "The chains involved in treasuries can often result in fails if one party does not deliver," he says. "If the penalty rate is too severe then it will simply deter borrowing and lending of treasuries, as parties will not want to open themselves up to fines for what could be simply a result of counterparty failure or administrative error."
He suggests that alongside the penalty there must be a backstop supply that the party that owes the fine can go to and pay for. This alternative supply will encourage more lending initially and eventually will not be required unless in extreme circumstances. TMPG is suggesting a backstop facility be created in the future.
Susanne Trimbath, STP Advisory Services
"This issue has gone unanswered for years. What is going on is simple stealing. We don’t need new laws against that, we already have them. If the Fed won’t step in, then the Department of Justice has to"
Susanne Trimbath, STP Advisory Services
Jonas is less convinced, however, that the proposals will be sufficient. "The 300bp penalty does change the risk profile now so that some parties may be tempted back in. The entire structure needs to be altered to be risk-free before people will truly start to have confidence in the treasury market again. There needs to be a government-guaranteed clearing mechanism like an on-exchange, with cash settlements like we are with CDS. But then, it won’t pay to be a dealer in that situation – their money is made in providing liquidity and they will no longer be needed. But we are at the point where change is needed, and I imagine in six months to one year the settlement process will look very different."
Trimbath is less optimistic that something will be done to prevent fails to deliver from continuing. "This issue has gone unanswered for years. What is going on is simple stealing. We don’t need new laws against that, we already have them. If the Fed won’t step in, then the Department of Justice has to. The problem is, however, that if delivery is forced, then the real price of treasuries will be much higher to the point where counterparties will go bust when they have to buy in. That’s when the music stops."
If nothing is done to correct prices, Trimbath says, investors will turn their backs on debt markets as their confidence in benchmarks and pricing deteriorates. Instead they might have to look to equity markets in their pursuit of better returns. Prices of equities will rise and public companies will be able to return to equity markets for financing. "But that assumes that broker/dealers also have to deliver securities in the equity markets," says Trimbath. Throughout 2008 it appears that has not been the case
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 468982
12/9/2008 2:42 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
When is enough?, workers by the multi millions(as in numbers of people) as well as money, are being tossed aside, so corporate and fascist companies can stick their noses in the trough of greed(coming to an end soon in many places).
FU&FW
[link to www.bloomberg.com]
Pension Funds Beg Congress to Suspend Billions in Contributions
Email | Print | A A A
By Brian Faler
Dec. 8 (Bloomberg) -- Pension funds at Pfizer Inc., International Business Machines Corp., United Parcel Service Inc. and dozens of other companies have joined the parade of businesses seeking relief from Congress amid this year’s economic meltdown.
Instead of money, they want legislation to suspend a federal law that would make them pump billions of dollars into retirement plans to offset stock-market losses as many struggle to find enough cash just to stay in business. They’re pressing Congress to consider the issue this week before this year’s session adjourns.
“The companies are not out there with their hand out for a bailout,” says Mark Ugoretz, head of the ERISA Industry Committee, a Washington advocacy group representing big businesses on benefit issues under the Employee Retirement Income Security Act. “This is not about money; this is about time.”
About 800 companies in the Standard & Poor’s 1500 Index have pension funds, and they were collectively $280 billion short of the sums needed to pay projected benefits as of Nov. 30, according to a study by New York-based benefits consulting firm Mercer LLC. Those 800 funds started the year with a $60 billion surplus, Mercer estimated.
To gain help from Congress, the companies will have to overcome skeptics who say they are using the market plunge to undermine retirement-funding provisions in a 2006 law they didn’t like in the first place.
“They’re trying to stampede Congress,” says Jeremy Gold, founder of Jeremy Gold Pensions, a New York-based actuarial consulting firm. Funds with prudent investment strategies were able to moderate market losses, he says.
‘Losers’ Cry ‘Help!’
“This is a failure of risk management by America’s pension plans,” Gold says. “They failed to reduce their exposure to the equities markets, they continued to gamble, and they lost the gamble. So like all the other losers, they’re standing on the Capitol Hill steps, saying ‘Help!’”
While employers increasingly offer 401(k) and similar retirement-savings plans, about 44 million private-sector U.S. workers, retirees and spouses still are covered by traditional defined-benefit pensions.
Starting this year, the Pension Protection Act of 2006 requires companies to increase pension-fund assets gradually to put them on firmer financial footing, reducing the chances the government will have to take them over for failing.
Full Funding
Previously, plans generally had to have about 90 percent of what they needed to meet future obligations. At the end of this year, the new threshold will be 92 percent. By the end of 2011, the law requires 100 percent funding. Companies that don’t reach a given year’s threshold can be required to immediately jump to full funding. Plans falling below 80 percent funding may face added limits on actions that would further drain assets, such as some lump-sum payments.
About half of the 800 companies in Mercer’s study are in danger of missing this year’s target, Mercer analyst Adrian Hartshorn says. World markets have been so volatile, though, that the outlook may change significantly -- for better or worse -- before year’s end, Hartshorn says.
The 800 companies’ pension plans, as of Nov. 30, had aggregate assets covering about 80 percent of projected liabilities, down from 97 percent in September, Mercer reported. Those estimates, based on financial statements prepared under U.S. accounting rules, give a rough idea of where companies stand in relation to this year’s target. The federal law, however, has its own standards for measuring pension funding.
Desperate for Cash
Pfizer, IBM and UPS and almost 300 companies, trade groups and unions petitioned Congress last month to suspend the funding mandate. The law requires “huge, countercyclical contributions” at a time “when companies desperately need cash to keep their businesses afloat,” the group says in a letter to lawmakers.
Spending to pump up pensions may cost jobs by diverting scarce capital from business operations, Ugoretz says. “If a company has to dump $150 million into their pension fund, they’ve got to make it up some place,” he says.
Atlanta-based UPS, the world’s largest package-delivery company, supports pension-law changes because “given where we are economically today as a country, we think that some reform that allowed those funds to be used in other ways would be beneficial to the economy,” spokesman Malcolm Berkley says. Calls seeking comment from Pfizer and IBM weren’t returned.
Investment losses by pension funds have hit companies in a range of industries as the S&P 500 plunged more than 40 percent so far in 2008. Houston-based Lyondell Chemical Co.’s pension fund lost $154 million in the first nine months of the year, a 17 percent drop, according to a Securities and Exchange Commission filing.
Record Losses
Assets fell a combined $130 billion during November in the S&P 1500’s 800 or so pension plans, Mercer estimated. That topped total losses in the first nine months of 2008, and broke October’s record $110 billion decline.
“Without relief, plan sponsors must shoulder the immediate burden of sudden, unexpected, large increases in plan contributions at a time when cash may be difficult to generate internally or to obtain in the credit markets,” Mercer’s Hartshorn says.
Plans with more conservative investment strategies have at least softened the blow. General Motors Corp., the biggest corporate pension sponsor with $84 billion in projected benefit obligations at the end of 2007, is among companies that shifted assets from stocks before the worst of the market rout. The biggest U.S. automaker decided in 2006 to cut its target allocation for equities to 29 percent, from 49 percent.
GM made a “determination that, for the best interests of maintaining the funded status as well as we could, we needed to make that shift into the fixed-income market,” says Nancy Everett, chief executive officer of GM Asset Management Corp.
Notably Absent
GM was notably absent from the five-page list of companies and organizations asking Congress for relief from the asset thresholds. GM said its pension plans had a $1.8 billion deficit as of Oct. 31, down from a $20 billion surplus 10 months earlier. At that level, GM’s plans would top the pension law’s 2008 asset threshold.
David Zion, head of accounting research for Credit Suisse Securities USA, says investment managers should have been able to control volatility.
“I just find it interesting: You take some risk in the plan; if it works in your favor, then great,” Zion says. “If it works against you, then go ask Congress for help.”
On average, the 800 pension plans in the S&P 1500 had 61 percent of their assets in stocks at the end of 2007, Mercer’s Hartshorn says.
Bigger Stock Bets
Some made much bigger bets on stocks. Investment strategies at more than 20 S&P 500 pension funds allocated at least 75 percent of their assets to equities at the end of 2007, according to an October report by Goldman Sachs Group Inc.’s Global Markets Institute.
Fannie Mae, the mortgage-finance company taken over by the U.S. government, ranked fourth with 84 percent of pension assets in stocks. Because of the market plunge, Fannie Mae made an unplanned $80 million payment to its pension fund last month “to offset some of the recent investment losses,” according to an SEC filing.
Bradley Belt, former executive director of the federal Pension Benefit Guaranty Corp., says lawmakers should endorse a case-by-case approach that lets the government pension agency negotiate funding requirements with individual companies and reserve assistance for those in danger of bankruptcy.
Compromise Measure
The top Democrats and Republicans on both the Senate Finance and the Health, Education, Labor and Pensions committees -- Democrats Max Baucus of Montana and Ted Kennedy of Massachusetts, and Republicans Charles Grassley of Iowa and Mike Enzi of Wyoming -- are backing a compromise. It would maintain the funding targets but ease the consequences of missing them, scrapping the threat of an immediate 100 percent-funding requirement.
That proposal was stymied last month when supporters couldn’t get unanimous consent in the Senate to consider it.
The bill “strikes an appropriate balance between helping plan sponsors cope with the recent economic downturn while also protecting the worker safeguards established two years ago,” Grassley says.
The ERISA Industry Committee’s Ugoretz says the proposal doesn’t go far enough.
“We’re going to have to go back to them to explain again what needs to be done,” he says. “We’re not blowing smoke here.”
To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net.
[link to freewordofgod.yuku.com] |
| Anonymous Coward
User ID: 563391
12/9/2008 2:49 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
I'm not reading all this shit.
Give me the Cliff notes. |
| Anonymous Coward
User ID: 468982
12/12/2008 2:27 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Anonymous Coward
User ID: 331956
12/11/2008 11:22 AM
Report abusive post
Just got back from bankruptcy court, things are bad
Quote
from poster on another forum :
"About once a month I end up in bankruptcy court on behalf of a creditor. During the lunch break, I eat lunch with the "debtors and creditors attorney bar" and visit. None of the attorneys or trustees have anything positive to say about things. It always makes me extremely pessimistic, puts me in "doomer mode" that we are going to collapse. In about 48 hours, I will recover and think I was over reacting.
In 2007, Bernanke told Congress the housing crisis would be contained. One year later, for all practical purposes, it has completely decimated our financial system. What better proof than Bernanke now asking Congress to give the Federal Reserve the authority to issue its own bonds/money (backed by what, by who, doesn't matter. Its worthless). However, hearing Bernanke cry he needs more money should send chills down your spine, because if Bernanke is screaming for his own authority to issue more money, that means but one thing, the once unsinkable US economy is flat ass broke and sinking.
Unfortunately, just like the third class on the sinking Titanic, we here are all locked down in the bowels of this sinking ship by the first class. All we can do is listen to the cold waters of deflation filling the floors below us trumpeting our demise, listen to Bernanke scream he needs more money to plug the holes, and listen to the footsteps of the rich running above deck for the safety of treasury lifeboats that pay negative yields, which means, they don't float very well. They certainly won't be enough to keep anyone holding them dry from the cold waters of deflation setting in.
And, in case things weren't bad enough, you may have also just heard the ship as it hit a second ice berg, yes, a second. It was bigger and the cut is deeper. The Bernanke crew was so busy trying to stem the flow of deflation rushing in from the first iceberg, that they didn't have time to cry out iceberg dead ahead for the second, but Donald Trump did last night on CNBC. Its the commercial loan bust which just struck the ship. If you thought the last hit was a deal killer, just look at the look on Trump's face as he is sued, personally, to pay back $40 million plus interest on a commercial loan gone bad that he personally guaranteed - oops. He's pissed at the Bernanke banking crew for steering us into these waters and also calling it an Act of God because it happened to him. People will soon be throwing each other overboard if they think it will help, certainly locking the rabble below decks seems reasonable.
If my small cabin on the ship is any gauge of how things are going, then, we still haven't bottomed in the housing market, meaning the water is still rushing in and we are still sinking. The cold water around our waist line is definitely causing "shrinkage" of the economic wallet. Keep in mind, all I can report are the residential side of things, but they are bad enough and getting worse, but I do know we hit a second iceberg, because I heard the hit.
On the ongoing residential bust, I always wondered why banks weren't simply willing to pull the trigger and get rid of the foreclosed homes for whatever they could get. Well, its not that simple, bc in the end, they don't have enough capital to allow them to get rid of them. They have to hold the houses and claim a false value on the defaulted properties hoping they can sell them later at the price they have in the properties - Enron banking style.
Why must they show them on their books with false inflated values? Keep in mind the assets and liabilities of a bank. Deposits are liabilities that in addition they have to pay interest on. Loans are considered assets, as long as they are good. Basically, the assets and liabilities of a bank must maintain a certain proportion, otherwise, they are bankrupt. So, when a bank forecloses, they take the house back, replacing the asset value of the good loan with the asset value of the home they are holding - if they take a loss on the home or mark it down to its true deflated value, it reduces their assets.
The problem is, with this housing crisis and so many houses in default, the banks cannot possibly take the losses or mark the homes they hold down to their true value. If the banks told the truth and wrote the value of these assets down or sold them for less than owed, the banks would effectively bankrupt themselves. Thus, out of economic necessity, the banks do not mark the value of the houses down. Even though they show these homes as an asset on their books, they are really a liability because the bank has to maintain insurance on them and pay taxes. Ouch!
The bank regulators, the FDIC or the OCC can't possibly do their job and "examine" the books, otherwise, most banks would go into receivorship. So, the regulators turn a blind eye to all but the most egregious.
This little charade leads to a very real practical problem which is this, they can't keep making loans. They are effectively out of capital to lend (compounded even further by deposits going down bc of job losses etc). This is true in my area. The banks all here say, no worries, we're doing fine. They all say they are still making home loans. But, actions speak louder than words. So, what are they doing? They aren't making home loans. A bankruptcy trustee said a realtor had 21 contracts to buy with qualified buyers, but not a single one of them "qualified" for a loan. What does that mean? It means the banks are effectively all bankrupt, even though the FDIC hasn't closed them yet. Its a charade. Don't believe it. Get your money out." |
| FHL(C)
User ID: 468982
12/12/2008 2:30 AM | | Re: Watch, Its happening ,the global economic change. | Quote |
Apologies re prior post, was NLI.
Some Gems for this thread from
[link to www.godlikeproductions.com]
FU&FW
Over racting? Dude trust your current feelings. Ive been in the financial business for sometime. I have been tracking and warning about our current situation since 2001. They arent doomers, theyre clear headed americans facing the truth.
The bad part about all this....
1) Bushes excuse for the ecomony was the trickle down effect. But he never mentioned it until things were REAL bad.
2) Off shoring of money rose 66% since Bushes tenure.
3) The top 400 families in the US gained 1.7 trillion dollars worth of wealth from 2001-2007.
4) The companies theyre so willing to bail out are heavily invested by the people bailing them out. Take for instance Paulson he has 700 million in AIG stock. Bushes connection with the carlyle group and their connection with freddie mac.
5) The reason theyre bailing out the banks that could have counter acted this delema 100% instead of the millions losing their homes...because of CDS insurance pays them 9 times more if the house is foreclosed on....
With the rate the country is losing jobs, the rate businesses and housing are being foreclosed on. You would be a fool to think theres going to be an easy way out of this. Their maybe a way.....but its going to effect every American bad.....Well every american but...the eletists.
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 572309
12/14/2008 8:42 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
FU&FW
[link to www.atimes.com]
because governments and central banks around the freaking world are creating so much money and credit so as to finance massive deficit-spending that it is now accelerated to terrifying degrees undreamt of heretofore, as unwieldy and pretentious as that is to say, and so inflation in consumer prices in response to this tsunami of new money will be equally as terrifying, while the deflations of the other asset bubbles as they go predictably bust from so much stupid leverage that losses are thus magnified 20 times, 30 times, 40 times or more,
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 572309
12/14/2008 8:44 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
FW&FU
[link to www.atimes.com]
Snake-oil theory of big market, small government
For decades, aggressive globalization and wholesale deregulation of finance have been propagated by the flawed US ideology of faith-based, capitalistic, free-market fundamentalism and of the alleged merits of government nonintervention in markets.
The snake-oil slogan of "big market and small government" has been promoted around the world as a win-win, neo-liberal miracle, good for all trade-participating economies and regurgitated tirelessly by neo-comprador economies such as that of Hong Kong. Ironically, free-market Hong Kong finds it necessary to turn to socialist China for government bailouts whenever its free market slows, while it continues to mindlessly boast the superiority of its free-market regime.
Predatory dollar hegemony
The exporting economies have been lured into shipping real wealth to the US in exchange for US debt denominated in fiat dollars, which cannot be spent in their own domestic economy without monetary penalty and which must be returned to the US as capital to finance US sovereign debt. The adverse effects of this predatory monetary regime, known as dollar hegemony, differ on economies at different stages of development. But one common effect can be observed clearly: the helpless working poor in all trading economies around the world, who had no voice in economic, trade and monetary policymaking, did not benefit throughout the phantom boom phase from trade globalization and are now suffering the most in these days of reckoning when the boom bust.
US neoliberal trade globalization, having promised a primrose garden of economic growth, has instead led the global economy into a jungle of poison reed, resulting in the worst financial disaster in a century, setting the whole world ablaze with a financial firestorm. This unhappy fate was finally acknowledged as having been policy-induced by Alan Greenspan, the former chairman of the US Federal Reserve who was largely responsible for the monetary indulgence that had caused this hundred-year financial perfect storm. Greenspan confessed before Congress that his trust on transnational finance institutions for self-regulation as a survival instinct had been misplaced, leading him to a flawed policy in support of anarchical financial deregulation and permissive risk management.
Still, Greenspan left unmentioned his equally misplaced faith in central bank ability to mitigate the adverse effect of burst bubbles by creating larger sequential bubbles with more liquidity. The Federal Reserve under Greenspan repeatedly created money faster than the global economy could profitably absorb, creating serial bubbles denominated in fiat dollars. Greenspan insisted that it was not possible, nor desirable to identify an economic bubble in the making as he was inflating it with easy money lest economic growth should be prematurely cut short. It was a perfect example of the rule that intoxication begins when a drinker becomes unable to know its time to stop drinking.
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 572309
12/14/2008 8:49 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
FU&FW
[link to www.fuck_off.com]
December 2, 2008, was a landmark in the saga of the collapsing international monetary system, yet it did not deserve to be reported in the press: gold went to backwardation for the first time ever in history. The facts are as follows: on December 2nd, at the Comex in New York, December gold futures (last delivery: December 31) were quoted at 1.98% discount to spot, while February gold futures (last delivery: February 27, 2009) were quoted at 0.14% discount to spot. (All percentages annualized.) The condition got worse on December 3rd, when the corresponding figures were 2% and 0.29%. This means that the gold basis has turned negative, and the condition of backwardation persisted for at least 48 hours. I am writing this in the wee hours of December 4th, when trading of gold futures has not yet started in New York.
www.safehaven.com...
As stated in the article "It is no exaggeration to say that this event will trigger a tsunami wiping out the prosperity of the world." Well folks if the worlds gold dries up then it is not just the poor who will suffer, it is the rich as well. This is the final nail in our coffin if you will. I think I am going to take a large chunk of money while it is still worth something and buy a boat load of MRE's. This is in my opinion the NWO's final push. I feel we will now see large scale riots and demonstrations happen very quickly.
reply to this post: copyright & usage
reply posted on 6-12-2008 @ 10:22 AM by xoxo stacie
They are devaluing the gold standard because in late December the calls come in for physical delivery and Russia has a crap load of certificates it has said its going to call. Normally the comex only keeps a max of 1%-2% of physical gold on hand; as in the past very few have turned in to have physical delivery. So basically much like the bankers they over extended themselves and dont have the physical gold for all the certificates that are outstanding, hence the need to devalue the standard. All I have to say is GOOD LUCK getting it if you have the certificates! They dont have it and everyone is now out or on their last leg on supplies, with no further deliveries being anticipated this means big trouble....
reply to this post: copyright & usage
reply posted on 6-12-2008 @ 10:25 AM by stikkinikki
I don't understand how this is going to be as bad as what the article mentions. Gold is not the only valuable commodity. Seems to me something else will emerge as numero eine.
reply to this post: copyright & usage
reply posted on 6-12-2008 @ 10:26 AM by disgustedbyhumanity
Why is everyone surprised at the fall of Gold? It is used as an industrial metal, tooth fillings and jewelry. We are in a recession/depression and there is going to be less and less demand for gold. Somehow people have it locked into their heads that it is going to be used as the basis for some future currency. It isn't going to happen as there is simply not enough to back the amount of currency we need, and if by some far fetched scenario where it is used for that purpose, it will become immediately illegal for anyone to hold it and you will be forced to turn it in to the goverment and the goverment will not pay top price.
Charts withstanding, anyone with half a brain can see that Gold is going to keep dropping over both the near and long term.
reply to this post: copyright & usage
reply posted on 6-12-2008 @ 10:49 AM by CaptGizmo
Well alot of people started buying into gold futures when the world economy started going south.In other words paper gold. Now with the fact that there is not enough gold to go around and the people that have large sums of gold holding on to what they have means the people that bought the paper gold are left with pretty much a worthless piece of paper that translates into no gold. They had their money basically stolen from them.
reply to this post: copyright & usage
reply posted on 6-12-2008 @ 10:52 AM by pause4thought
The OP and xoxo stacie (-nice ring to that-) are not exaggerating.
International finance has been nothing but a game of call-my-bluff for far too long. Now Russia has the gall to actually do it!
Think of it this way: finding you've invested significant portions of the nation's wealth in un-redeemable IOUs. As long as everyone pretended the slips of paper represented something in the real world everyone had secure investments.
Then one day, late in 2008, the Russians seem to have learned a lesson from poker. When they see drops of perspiration dripping down the other guy's forehead - no matter how hard he tries to stop it - Ivan smiles a wry smile.
He calls the American's bluff.
But then he notices the guy who issued the chips is also sweating...
reply to this post: copyright & usage
reply posted on 6-12-2008 @ 05:59 PM by St Udio
Originally posted by CaptGizmo
Well alot of people started buying into gold futures when the world economy started going south.In other words paper gold. Now with the fact that there is not enough gold to go around and the people that have large sums of gold holding on to what they have means the people that bought the paper gold are left with pretty much a worthless piece of paper that translates into no gold. They had their money basically stolen from them.
there is to my knowledge, there is at least one article
which suggests that London is shipping a good size tonnage of gold to the COMEX in the USA, (in time for the 31 Dec. settlement date) one reason being the manipulators are not yet ready for the paper gold trading to fold ~ just yet ~
the list of financial focused sites are numberous so i shant list any, but 321gold.com is a good starting point to find the unsubstantiated claim of London gold being destined for gold delivery thru the COMEX gold
reply to this post: copyright & usage
reply posted on 6-12-2008 @ 07:55 PM by CaptGizmo
reply to post by St Udio
Thanks for the link. Interesting that the Swiss who still have their currency backed by Gold are suggesting Platinum as a good future investment. Can not say i disagree with them as there appears to be a rise in the Platinum backed exchange.
reply to this post: copyright & usage
reply posted on 6-12-2008 @ 09:03 PM by MischeviousElf
This is a waiting game really.
Have watched the futures and certified (joke) gold for a while with a wry fear to be honest.
More is about and being produced than your source gives claims for, but it still is real and does have to come home to roost.
I also expect by spring of next year something similar though not so widespread, and more nation area specific and less drawn out timewise (as new gold is being mined, and put back into circulation from unregistered and accounted sources every day) with the fiasco that was the Brent Crude trading, after the recent widespread run from stocks in the mainstream.
Much much more futures are held than the wells can provide in their lifetime, and many of them come home to roost in the timeframe I mention above!
It will without want of a better description probably tip the UK. If the mainstream catch on and some REAL and HONEST auditing is done, (that would be a first remember enron lol) before it would be the trigger for the massive rise in Oil again wanted by the TPTB.
Especially if Russia as seems likely will cut of Ukraine from supplying or rather shipping about 60-80% of the European Gas this winter, and people start looking properly to guarantee supplies.
Of course this will practically end the shares in most of the world, 1/4 or so of the FTSE wealth is based on Oil and its derivatives. 1/5th or so of Britains economies income into it is based on the Service and mainly Financial services, industry. If both go, and the latter nearly is totally already, another quarter(Q prof/costs) is all that is needed Really, and the realisation that the other 1/4 of britains income/wealth needs to be written down by about 30-40% by my rough and quick calculations.... well then goodbye the Financial Heart of the worlds trading economies.
And before anyone shouts it's New York, know your subject please and research
They have bought and sold about 50-60 yrs of Oil from Brent (total as is now not field) with about 30-40 yrs total supply left. No regulation, cross continent, and panic buying as the rest of the market fell, the volatility was as sacry as CBOE still is... but you cant do that with a FIXED and DECLINING and LESS PROFITABLE (extraction costs) resource. Much worse and dubious than any Financial problems we have seen already.
Of course this will have massive implications for the Op post, and the REAL price of Gold may become much higher even than the Citigroup estimates of 2k an ounce this week, for 09.
Like I said at 272 in 05 buy gold, but as always like I maintain, get a safety deposit box, or really really good safe and have it hidden, have the actual stuff in your possession.
Again not in a position to make a profit myself, life choices, however This will come to pass too.
Elf
I would put a bet on the oil thing lol, if only could afford it now... but certainly not a timeframe though I am fairly confident about 90% sure by this time next year at the very latest. Doubt if it will need more than one winter, even with gloabl downturn, and the increased accounting and bookeeping. Looks like its going swimmingly to plan for those who are really burning those bright LIGHT gas towers on the oil well's eh?
[edit on 6-12-2008 by MischeviousElf]
[link to freewordofgod.yuku.com] |
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12/14/2008 8:50 PM | | FHL(C)
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12/14/2008 8:54 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
FU&FW
[link to www.financialsense.com]
HAS AMERICA JUMPED THE SHARK?
by James Quinn
December 9, 2008
America has given indications that it has reached its peak and is on a downward slope. The U.S. government has taken measures in the last 11 months that appear to be a desperate attempt to keep our dysfunctional corrupt financial system propped up. The phrase “Jumped The Shark” comes from the 1977 episode of Happy Days where Fonzi jumps a shark on water skis. It was so far outside the 1950’s nostalgia realm of the show that it marked the peak of the great sitcom. It was all downhill to its ultimate cancellation. Have the extreme socialist schemes implemented by the President, Treasury, Federal Reserve, and Congress marked the climax of our great capitalist experiment? There is still time to get our Republic back on its original capitalist path, but time is running short. It will take straight talk from our leaders, intense political pressure from common citizens, politicians scared of losing their jobs, and Americans willing to change their ways and sacrifice for the good of the country.
1
DYING TO SPEND
Another media created consumer fraud called Black Friday has passed again. The media and retailers have created a false sense of necessity and urgency to drive sales on this particular day. Americans are so consumed with materialism on this day they are willing to trample an innocent man to death so they can get a deal on a flat screen TV. When did Americans turn into savages to the point where they will murder an innocent man in their desperate pursuit of a bargain at Wal-Mart? On the same day, two men shot each other to death in a Toys R Us after their women got into a fight. Why does anyone carry a gun when you go toy shopping? I guess you need some extra leverage to get an Elmo Live doll. Happy Holidays!!!
On Monday, the depressing stories of death were cast aside with the marvelous news that weekend sales were 3% higher than last year. The pundits on CNBC were thrilled that clueless Americans ignored the worst recession since the 1930’s by spending more money they don’t have, for things they don’t need, with credit cards charging 23% interest. Over 2 million people have lost their jobs this year, with another 3 million likely to lose their jobs next year. If ever there was a time to cut back and save, now is the time. But, the government and media are encouraging consumers to keep the spending ponzi scheme going for as long as possible. God bless us, everyone!
ARE WE SAVING THE RIGHT BANKS?
According to the FDIC, there were 8,384 banking institutions with $13.6 trillion of assets as of September 30, 2008. Hank Paulson has dished out $180 billion to the largest 30 banks in the country in an effort to keep them solvent. It has now become quite clear that the largest banks in the country, with the “smartest” MBAs, took excessive risk, created and then bought their own toxic derivatives, and lied to the public and their shareholders about their true financial position. So, we had about 8,000 banks that loaned money to people they knew in their local communities, kept the loans on their books and generally acted like George Bailey. A handful of large banks did all of the damage to our global financial system and these are the banks who are receiving all of the TARP billions. Maybe just maybe we should be giving the TARP money to the 8,000 conservative banks run by George Bailey type bankers rather than the horrible, too big to fail, banks run by Mr. Potter type bankers. Badly run banks need to be replaced by well run banks. Every time a bell rings, another bad banker gets a billion dollars. I see many Potterville’s in our future.
The honorable professor from Princeton, Federal Reserve Chairman Ben Bernanke, couldn’t have been any clearer in his November 21,2002 speech:
U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.
The U.S. dollar is a green piece of paper. The only thing that gives it any value is confidence and trust. Confidence and trust are the only thing that distinguishes a U.S. Buck from a Schrute Buck. The more that we print, the less valuable they become. The government certainly appears to be printing money and distributing it willy-nilly. In 2002, Mr. Bernanke honestly admitted he had no idea what the economic effects of injecting money into the system would be. I guess we will find out.
2
Following is a chart put together by Barry Ritholtz that details what the Federal Reserve and Treasury have accomplished in the last 10 months with your money. This hodgepodge of frantic programs has committed you, your children and grandchildren to a maximum of $8.5 trillion in bailouts for dreadfully run financial institutions. Our government officials have already dished out $3.1 trillion or $300 billion per month. It was only a year ago that President Bush submitted a budget that showed surpluses by 2012. Ho Ho Ho. That President Bush is a real card. He should have submitted that budget with a Mission Accomplished banner behind him. These programs have been rolled out non-stop during 2008 and the result has been a stock market that is down 37%. The Federal Reserve has been printing dollars in mass quantities. Famed investor Jim Rogers observed that, “Bernanke’s gonna keep printing money ’til they run out of trees”.
Columnist Robert Samuelson points out Mr. Bernanke’s dilemma in a recent column.
“All this is a vast and daring monetary experiment, global in scope and fraught with hazards. The new money and credit issued by the Fed are created out of thin air. But too much money and credit might someday boomerang as higher inflation. Considering the consequences of being wrong, Bernanke faces an enormous intellectual challenge and no less an agonizing personal burden.”
- -
maximum amount
current amount
Federal Reserve - $5.255 trillion - 62%
Commercial Paper Funding Facility LLC (CPFF) $1,800,000,000,000 $270,879,000,000
Term Auction Facility (TAF) $900,000,000,000 $415,302,000,000
Other Assets $601,963,000,000 $601,963,000,000
Money Market Investor Funding Facility (MMIFF) $540,000,000,000 $0
Unnamed MBS Program announced 11/25/08 $500,000,000,000 $0
Term Securities Lending Facility (TSLF) $250,000,000,000 $190,200,000,000
Term Asset Backed Securities Loan Facility (TALF) $200,000,000,000 $0
Other Credit Extensions (AIG) $122,800,000,000 $122,800,000,000
Unnamed GSE Program announced 11/25/08 $100,000,000,000
Primary Credit Discount $92,600,000,000 $92,600,000,000
ABCP Money Market Fund Liquidity Facility (AMLF) $61,900,000,000 $61,900,000,000
Primary Dealer and Others (PDCF) $46,611,000,000 $46,611,000,000
Net Portfolio Maiden Lane LLC (Bear Sterns) $28,800,000,000 $26,900,000,000
Securities Lending Overnight $10,300,000,000 $10,300,000,000
Secondary Credit $118,000,000 $118,000,000
Federal Deposit Insurance Corporation - $1.788 trillion - 21%
FDIC Liquidity Guarantees $1,400,000,000,000 $0
Loan Guarantee to Citigroup* $249,300,000,000 $249,300,000,000
Loan Guarantee to Lending arm of General Electric $139,000,000,000 $139,000,000,000
Treasury Department - $1.15 trillion - 13.5%
Troubled Asset Relief Program (TARP) $700,000,000,000 $350,000,000,000
Fannie Mae / Freddie Mac Bailout $200,000,000,000 $0
Stimulus Package $168,000,000,000 $168,000,000,000
Treasury Exchange Stabilization Fund (ESF) $50,000,000,000 $50,000,000,000
Tax breaks for banks $29,000,000,000 $29,000,000,000
Federal Housing Administration - $300 billion - 3.5%
Hope For Homeowners $300,000,000,000 $300,000,000,000
Total $8,490,392,000,000 $3,124,873,000,000
When I take a gander at this chart I can’t help but hear Wagner’s Ride of the Valkyries playing in the background as Bernanke and Paulson fire up the Helicopters and prepared to drop dollars rather than napalm.
3
One helicopter won’t do when there is $8.5 trillion to drop. Colonel Kilgore explained why he was taking that particular beach with, “Charlie don’t surf”. Colonel Paulson could explain his latest bailout with, “Citi don’t lend”. If these efforts to revive our economy follow the plot of Apocalypse Now, it will end with Timothy Geithner gasping, “the horror, the horror”, when the hyperinflationary bust eventually brings our existing financial system down.
“I love the smell of napalm in the morning” “I love the smell of bailouts on the weekend”
45
HAVE YOU LISTENED TO AN EXPERT LATELY?
Our great country was founded upon Trust; trust in our government leaders, trust in our commercial system, trust in our currency, and trust in each other. Without trust, a Republic will fail. A Republic is ruled by the people, not power hungry politicians, lifetime bureaucrats, or corporate interests. Our currency is imprinted with the words, “In God We Trust”. It is not imprinted with “In Ben We Trust” or “In Hank We Trust”. Over time, trust in our government, financial leaders and corporate leaders has declined to the point where Americans cannot and should not trust anything they are told. It is essential that every citizen do their duty and skeptically assess everything they are told by politicians, bureaucrats and corporate CEOs. They will continue to speak authoritatively like they know exactly what will happen in the future. They are lying. None of these experts can even predict what will happen next week, let alone next year. If you don’t think my advice is applicable, just read what these “experts” have said in the last few years:
Political “Experts”
“The Federal government will not bail out lenders — because that would only make a recurrence of the problem more likely. And it is not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.” (George W. Bush, Sept 2007)
“These institutions [Fannie and Freddie] are fundamentally sound and strong. There is no reason for the kind of [stock market] reaction we’re getting.” (Christopher Dodd, Chair, Senate Banking Committee, Financial Post, July 12, 2008)
“Misery sells newspapers. Thank God the economy is not as bad as you read in the newspaper every day.” (Phil Gramm 7/10/08)
“I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing.” (Barney Frank regarding Fannie & Freddie, 2005)
“I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.” (Barney Frank regarding Fannie & Freddie, 2007)
Financial “Experts”
"Improvements in lending practices driven by information technology have enabled lenders to reach out to households with previously unrecognized borrowing capacities." (Alan Greenspan, October 2004)
“There is a chance that housing prices could fall, but its effect on the economy will be limited.” (Alan Greenspan, 2005)
"The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions .... Derivatives have permitted the unbundling of financial risks." (Alan Greenspan, May 2005)
“I suspect that we are coming to the end of the housing downturn, as applications for new mortgages, the most important series, have flattened out…I think that the worst of this may well be over.” (Alan Greenspan, October 1, 2006)
“The market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades.” (Henry Paulson, January 2007)
“All the signs I look at show the housing market is at or near the bottom. The U.S. economy is very healthy and robust.” (Henry Paulson, 4/20/07)
“I’m not interested in bailing out investors, lenders and speculators.” (Henry Paulson, 3/2/08)
“At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” (Ben Bernanke during Congressional Testimony 3/2007)
"We will follow developments in the subprime market closely. However, fundamental factors—including solid growth in incomes and relatively low mortgage rates—should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system." (Ben Bernanke, 6/5/07)
“It is not the responsibility of the Federal Reserve—nor would it be appropriate—to protect lenders and investors from the consequences of their financial decisions.” (Ben Bernanke, 10/15/07)
“Changes in financial markets, including those that are the subject of your conference, have improved the efficiency of financial intermediation and improved our confidence in the ability of markets to absorb stress. In financial systems around the world, the capital positions of banks have improved and capital markets are becoming deeper and playing a larger role in financial intermediation. Financial innovation has improved the capacity to measure and manage risk. Risk is spread more broadly across countries and institutions.” (Timothy Geithner, May 15, 2007)
Investment “Experts”
“The worst is over.” (Warren Buffett, on Bloomberg TV, May 3, 2008)
“Sometimes, we drink the kool-aid.”(Moody’s internal email)
“It could be structured by cows and we would rate it.” (S&P internal email)
“Let’s hope we are all wealthy and retired by the time this house of cards falters.” (S&P internal memo)
“Chairman Bernanke has succeeded; the economy has been positioned on a sustainable track for manageable expansion: A Goldilocks scenario that is neither too hot nor too cold.”(MikeThomson, Financial Post, April 25, 2007)
“And I believe there will be NO FALLOUT whatsoever beyond the funds, despite the innate desire by so many people to rumor and panic the marketplace.” (Jim Cramer regarding Bear Stearns, 6/22/07)
“I am indeed sticking my neck out right here, right now… declaring emphatically that I believe the market will not revisit the panicked lows it hit on July 15, and I think anyone out there who’s waiting for that low to be breached is in for a big disappointment and [they’re] missing a great deal of upside. My bottom call isn’t gutsy. I think it’s just a smart call that all the evidence points toward. Bye, bye bear market. Say hello to the bull and don’t let the door hit you on the way out.” (Jim Cramer, August 4, 2008 – market is down 28% since then)
“The stock market is cheap on a price-earnings basis, profits are fabulous, both here and abroad, stocks are a lovely place to be. I have no idea what the S&P will be ten days from now, but I am confident it will be a lot higher ten years from now, and for most Americans, that's what we need to think about. The subprime and private equity and hedge fund dogs may bark, but the stock market caravan moves on.” (Ben Stein, August 13, 2007 – market down 40% since then)
“The losses in the stock market since the highs of October 2007 are about 14 percent. This predicts — very roughly — a fall in corporate profits of roughly 14 percent. Yet there has never been a decline of quite that size for even one year in the postwar United States, and never more than two years of declining profits before they regained their previous peak.” (Ben Stein, January 27, 2008)
Corporate “Experts”
“We finished the year positioned better than ever to capitalize on the array of opportunities still emerging around the world as a result of what we believe are fundamental and long-term changes in how the global economy and capital markets are developing.” (Stanley O’Neal, former CEO of Merrill Lynch, January 2007)
"We deliberately raised more capital than we lost last year ... we believe that will allow us to not have to go back to the equity market in the foreseeable future." (John Thain, another former CEO of Merrill Lynch, April 8, 2008)
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” (Charles Prince, former CEO of Citigroup, July 2007)
But as I do reflect on it, and I do a lot, that nobody saw this coming. S&P and Moody's didn't see it coming, but they simply just downgrade bonds, they don't take hits. Bear Stearns certainly didn't see it coming. Merrill Lynch didn't see it coming. Nobody saw this coming. (Angelo Mozilo, former CEO of Countrywide Financial, July 2007 after he sold $138 million of stock)
I’m confident our company is in the right businesses for the long term and that our strategy of being in high growth businesses and markets, our laser focus on customer service, our expense discipline, and our commitment to strong credit risk management, will create value for our shareholders in the future. (KenThompson, former CEO of Wachovia, October 2007)
The lesson that must be learned is that you cannot trust anything “experts” tell you. They are looking out for their own best interests, not yours. For the last two weeks I’ve watched “experts” conclude that the U.S. automakers must be saved and a stimulus package of at least $700 billion is needed to save America. The same experts that told us everything was fine a year ago are now telling us we must spend at least $700 billion to save our economy. Why should we believe them now? Our country, our banks, our consumers, and our corporations are extremely overleveraged. We cannot stimulate ourselves out of this over leveraged situation. The debt must be paid off, and it cannot be done without much pain and sacrifice. Stimulus is just another name for more leverage. President elect Obama says that we can’t worry about the short term impact on the deficit. When was the last time that government worried about the short-term, medium term, or long-term impact of their actions on deficits? That is why our National Debt is $10.6 trillion and we have $53 trillion of unfunded liabilities. When this crisis subsides, the government will not recapture the stimulus spending and pay down our National Debt. There will be another crisis that “must” be addressed.
SHOES FALLING EVERYWHERE
“And what we have now is more dissaving, where you have got a spike in credit card usage because consumers are trying to keep up their level of consumption, when they should be reducing it and saving. So, Mr. Market is going to have to kick their teeth down their throat to change their behavior.” (David Goldman)
6
Source: Creditwritedowns.com
Colossal amounts of credit card debt and auto loans will be defaulting in 2009. Consumers currently owe $2.6 trillion of consumer debt, up from $2.1 trillion in 2004, or a 24% increase. $976 billion of this debt is revolving. This amounts to approximately $9,000 per household. According to a recent article in BusinessWeek Magazine Innovest projected that credit card write-offs would reach $41 billion in 2008 and $96 billion in 2009. This was before the recent upsurge in unemployment. With 3 million more job losses in 2009, the credit card losses will be much greater than $100 billion. JP Morgan, Bank of America, and Citigroup will sidle up to the taxpayer trough again due to these unforeseen losses. With their proven risk management models, these banks have managed to loan 30% of these funds to subprime borrowers. This is much higher than the 11% of subprime mortgage borrowers. This will surely end well.
7
8
Source: BusinessWeek
Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders. About 30% of the loans that are originated by banks, and 100% of those issued by automaker financiers, are, like mortgages, repackaged and sold as securities, according to the Consumer Bankers Assn. Most lenders offer financing on 100% or even 125% of the sticker price, and some offer the most credit-worthy buyers loans for twice the value of the vehicle they’re purchasing. The average amount financed for new cars reached 99%, according to the Consumer Bankers Assn., up from 95% in 2005. With the average length of auto loans exceeding 5 years and the tremendous downturn in demand, there are millions of consumers underwater with their car loans. Rising home equity and easy credit are history. Losses on auto loans will soar in 2009. If there are public companies that make money by repossessing cars, their stocks should soar in 2009.
It is quite clear that consumers are collapsing. The toxic combination of reduced spending and mass layoffs will bring down the last remaining pillar of the economy, commercial real estate. According to the Wall Street Journal,
Commercial real-estate loans, including commercial mortgage-backed securities and collateralized debt obligations, total $3.7 trillion. It is only a slow burn right now: Many of those CMBS and CDOs mature in 2010 and 2011, leading Barrack to predict a “refinancing crisis” in the next three years–and with buyers drying up, egress will be difficult. “The overriding problem for all refinancing issues is that sale is not a viable option. Who stands to hurt the most? The list starts with the biggest holders of the loans, which include insurance companies, hedge funds and banks, specifically regional banks.
After the coming horrific holiday sales, weak heavily indebted retailers will be filing for bankruptcy en mass. Mall owners that had expanded hastily with generous amounts of debt in the last few years will see rents dry up and their debt payments will choke them to death. Vacant strip malls and ghost town regional malls will dot the landscape. With 2 million job losses this year and likely 3 million more in 2009, the need for office space is declining rapidly. Office occupancy will decline and rental income will tank. There are over $700 billion of commercial back mortgage securities outstanding. Banks have done their usual magic and sliced and diced junk into AAA rated securities. I’m sure there won’t be further implications to our banking system.
There are $50 trillion of credit default swaps still outstanding. The hundreds of billions in taxpayer funds that have been poured into AIG have been used to pay out CDSs. According to the brilliant bank analyst, Chris Whalen, at least $15 trillion of these CDSs will need to be paid out. All the Central Banks in the world cannot create that much paper out of thin air. He insists that the government needs to let AIG go bankrupt and get our system functioning correctly:
“President-elect Obama and the American people have a choice: embrace financial sanity and safety and soundness by deflating the last, biggest speculative bubble using the time-tested mechanism of insolvency. Or we can muddle along for the next decade or more, using the Paulson/Geithner model of financial rescue for the AIG CDS Ponzi scheme and embrace the Japanese model of economic stagnation.”
CAPITALISM WITHOUT LOSS IS LIKE RELIGION WITHOUT HELL
There has been much chatter about John Maynard Keynes in the last six months. Stimulus packages are based on his concept of the government stepping in as the spender of last resort when demand evaporates. I prefer to focus on these wise words of Mr. Keynes and another astute man of the Depression era.
“What a Government spends the public pay for. There is no such thing as an uncovered deficit.” (John Maynard Keynes)
“Politics is the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies.” (Groucho Marx)
There is an overwhelming consensus that government must do something to save us. Whenever I see Republicans, Democrats, supply-siders, and Keynesians all agree about something, I know it will be a calamity. Haven’t they done enough already. Based on the chart below, they have committed our grandchildren to spending more than all the major initiatives in the history of our country.
9
Our country is now permitting government leaders to pick the winners in our economic system. Their history of picking winners is not comforting. Government chose ethanol as the winner in the alternative fuels business. It requires more than a gallon of fuel to produce a gallon of ethanol. The windfall profits for farmers gave them incentive to grow only corn. This led to rising prices for other commodities, higher feed costs which led to higher meat costs, and a frenzy of ethanol plant construction. Now that oil is $43 per barrel, ethanol makes no financial sense. Ethanol plants are closing by the hundreds. The government is now selecting which banks will survive and which will fail. They are practicing protectionism by pouring at least $15 billion into failing American carmakers, at the expense of Honda, Toyota, and Nissan. These three companies employ hundreds of thousands of Americans, make better cars, and are profitable. We are punishing them for running their companies well. Jim Rogers again hits the nail on the head. “They’re taking the assets away from the competent people, giving them to the incompetent people and saying to the incompetent: ‘OK, now you can compete with the competent people, with their money.’ I mean, this is terrible economics.”
The FDIC has been pushing for modification of loans to stop mortgage foreclosures. The latest data shows that 50% of all the homeowners that received modified mortgages are in default again. People that cannot make their mortgage payment must be foreclosed upon. They should become a renter. If the government uses TARP money to delay foreclosures, the housing market will not recover for a decade. Ten percent of all homeowners in the country are either in foreclosure or in default on their mortgages. Letting foreclosures run their course will contribute to lowering prices and will lead people to buy homes again. The twisted form of capitalism we are currently practicing is summed up by Winston Churchill, “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” The bankers on Wall Street received the blessings of millions in compensation, and the taxpayers are experiencing the misery of bailing their companies out.
RISE AND FALL OF ROMAN EMPIRE – CRITICAL CROSSROADS
“The budget should be balanced. Public debt should be reduced. The arrogance of officialdom should be tempered, and assistance to foreign lands should be curtailed, lest Rome become bankrupt.” (Marcus Tullius Cicero 106 BC to 43 BC)
Even Rome had politicians with some common sense. Decisions we make in the next decade will determine whether the American Republic follows the path of the Roman Empire or can reverse course and fulfill the noble dream of our Founding Fathers. Thomas Jefferson and George Washington foresaw the hazards ahead.
“Yes, we did produce a near-perfect republic. But will they keep it? Or will they, in the enjoyment of plenty, lose the memory of freedom? Material abundance without character is the path of destruction.” (Thomas Jefferson)
“I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” (Thomas Jefferson)
“As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible.” (George Washington, Farewell Address, September 17, 1796)
Our country was founded upon the principles of freedom, responsibility, and opportunity to succeed or fail. Government was supposed to play a limited role in our lives. Government’s function was to defend against foreign invaders, provide basic services, enforce the laws, and maintain the public infrastructure of the country. Over time government has incessantly intervened in the economic system and by successive steps has moved the country toward socialism. Millions of Americans are now totally dependent upon handouts from the government. This policy of government expansion through the use of credit at the expense of taxpayers is detrimental to the rest of society. Interventionist wars, undeclared by Congress, and maintaining military bases in 117 countries were not envisioned by the Founding Fathers. The more we consent to government intervening in our lives, the more freedom that we lose. We are now experiencing the utmost intervention by government in our 222 year history.
We are in the midst of a major recession. A $700 billion stimulus package will not eliminate our debt and will not make the recession shorter. It will be a pork filled waste of taxpayer money, but it will be spent. The 156,000 structurally deficient bridges, miles of crumbling water pipes, and antiquated power grid should be the focus of any infrastructure spending. With the millions of unemployed, funds should be set aside to keep people from being forced onto the streets. We should focus our efforts on the poorest and least able to make it through this recession. These efforts should be funded by reducing our global military empire. Propping up failing companies and artificially keeping home prices from declining to their natural level will be a miserable failure and will lead to economic stagnation for at least a decade. David Walker throws down the gauntlet and we must face up to his challenge.
“We must learn the lessons of history. The Roman Republic was the longest-standing republic in the history of mankind. The Roman Empire lasted over a thousand years. There were many people that said Rome was too big to fail. I am sure that most of the citizens of the Roman Empire felt that way. The simple facts of the matter are that Rome fell for at least four reasons, and please listen carefully. A decline in moral values and political civility at home; an overconfident and overextended military; fiscal irresponsibility by the central government; and an inability to control one’s borders. Does that sound familiar? It’s time to wake up, study history, learn from it, and take steps to make sure that we are the first republic to stand the test of time.”
It ultimately comes down to courage. The reason I always fall back on the wisdom of Thomas Jefferson, Samuel Adams, George Washington, and John Adams is because they showed true courage in shaping this great Republic. If they had failed, they would have been hung as traitors by the British. It takes no courage to vote for a $700 billion bailout package or a $700 billion stimulus package. Barney Frank and Chris Dodd are not Thomas Jefferson and John Adams. If our leaders do not have the courage to do what is morally right for future generations, we will have to put in place a structure that forces them to appear courageous. Some ideas are:
* Put back into place the spending limits that worked so well during the Clinton administration. Any increase in spending must be offset by a cut somewhere else or an increase in revenue. Congressmen could then fall back on this as their excuse to not push for frivolous initiatives demanded by their constituents.
* Create a bi-partisan commission that will have the authority to create solutions for our $53 trillion unfunded liability problem. Congress could not tinker with the recommendations. They would need to make a yes or no vote on the entire package.
* Limit all citizens to six years of public service as elected officials for their country. They would do what was right for their country and then go back to their regular occupation. Stewardship of our country rather than a lifelong career would be their purpose.
If we kick the can down the road for another decade, it will be too late to reverse course. The choice is ours - decline or redemption.
story end
© 2008 James Quinn
Bio: James Quinn is a senior director of strategic planning for a major university. These articles reflect the personal views of James Quinn. They do not necessarily represent the views of his employer and are not sponsored or endorsed by his employer. He can be reached at quinnadvisors@comcast.net.
[link to freewordofgod.yuku.com] |
| FHL(C)
User ID: 572309
12/14/2008 8:56 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
FU&FW
[link to londonbanker.blogspot.com]
Friday, 12 December 2008
Deflation has become inevitable
For a while now I have been on the fence on the inflation/deflation issue – whether the massive monetisation of bad debts by central banks and governments will lead to rapidly escalating inflation as currencies are debased or, alternatively, lead to deflation as bad debts and illiquidity undermine all commercial and financial activity in the economy. I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels.
In Lombard Street, Bagehot’s seminal tome on fractional reserve central banking, Bagehot advises any central bank facing a simultaneous credit crisis and currency crisis to raise interest rates. By raising rates they will ensure that foreign creditors remain incentivised to maintain the general level of credit available while the central bank resolves the local liquidity crisis through liquidation of failed banks and temporary liquidity support of stressed banks.
The very opposite policies have been pursued by central banks in the US, Europe and UK since the beginning of the sub-prime crisis in August 2007. They have cut policy rates drastically, and as the crisis escalated and spread, the yield on government debt has dropped to negative territory. Meanwhile they have shielded those responsible for the creation of record levels of bad debt from any regulatory accountability, relaxed transparency of accounts, and provided massive taxpayer-funded financial infusions to prevent failure and liquidation.
While in the short term these policies have expediency and the maintenance of market “confidence” on their side, in the longer term these policies must undermine any confidence a rational and objective saver or investor might have that savings or investment in the US, EU or UK will be fairly remunerated at an above-inflation rate, or that savings and investments will be protected by effective oversight and regulation from the sorts of executive debasement and outright misappropriation and fraud that are beginning to colour our perceptions of the past decade.
Anyone sitting on a pile of cash now is unlikely to want to either (a) place it in a bank, or (b) invest it in the stock market. As a result, the implosion of the financial and real economy must continue no matter how big the central bank’s aspirations for its balance sheet or the treasury’s aspirations for its deficit.
If US, EU and UK had substantial domestic savings to fund their banks (as in Japan in 1990), then perhaps the consequences would not be so imminently disastrous. Lacking sufficient domestic savings, however, their actions will likely make foreign creditors in Japan, China, the Gulf and elsewhere question whether it is worthwhile to keep pumping scarce savings into such flawed and reckless economies.
During the reckless boom years, savings collapsed in bubble economies as retail and commercial and financial actors alike chased speculative yields with greater and greater leverage. During the reckless bust years, savings will collapse further as retail and commercial and financial actors chase safety by hoarding their meagre remaining assets from further erosion by refusing to lend at negative returns and refusing to finance failed corporate and investment models that only enrich poltically-connected management and intermediaries.
The determination to avoid any accountability for failed banks, failed business models, failed regulatory systems and failed academic rationales for all the above invites anyone with spare cash – an increasingly select crowd – to withhold it from further depredations. It is this instinct, more than confidence in the government, which is driving so many to seek the temporary safety of short-dated government securities.
The result of discouraging domestic and foreign creditors and investors must be inevitable deflation as debt levels become increasingly hard to finance and ultimately contract. Irresponsible central banks and governments can try to bail out the failed banks, businesses and municipalities at the centre of every popped bubble, but the bubble economies are ever more certain to deflate with each bailout. Each bailout further undermines the market discipline which is bedrock to a saver or investor’s decision to part with hard-earned cash by trusting it to the intermediation of the management of a bank or business.
It’s this simple: I won’t invest in a country that bails out failure and punishes savers. I won’t invest in the US or UK until they change course and protect savers and investors, ensuring a reasonably predictable positive return. In the EU, I will be very selective, preferring those conservative states like Germany that never embraced the worst excesses, although sadly still have fall out from individual banks' stupidity in buying into foreign excess. I will know when it is safe to reinvest when policy interest rates, bank/intermediary oversight and accounting standards give me confidence I am better protected than the corporate or financial elite.
While it may take the Asian and the Gulf State investors longer to embrace my analysis, I have no doubt that they too will eventually conclude that parting with their savings under the terms now on offer will only deepen their losses. They would be better off keeping the money at home, investing locally under local laws and vigilance, and letting the US and UK implode.
The argument against this has always been that with trillions already invested in the US during the deficit years, the Chinese and Gulf States would suffer even more horrible losses from a collapse of the western economies. This is accurate, but not complete, as it ignores the relative value of cash investment at the top and bottom of a bursting bubble. Once the collapse has bottomed out, so long as a globalised economy survives, there will be even better opportunities for those with savings to invest selectively in businesses with clearer prospects and more certain profitability under regulatory frameworks which have been restored to a proper balance of investor protection and intermediary oversight.
Right now survival of businesses in the West depends largely on political pull and access to regulatory forbearance and central bank or treasury finance. The market has failed, and officialdom is collaborating in perpetuating that failure.
Should the western economies implode in deflation, however, there will be new opportunities to return to market-based policies that reward effective, efficient management and punish corrupt, debased management. Until that happens, those that invest will continue to lose money. Once deflation is exhausted, then those that invest can expect to make and retain profits again.
I think it took me so long to feel confident about predicting deflation because the floating currency system under dollar hegemony and Bretton Woods II distorts the workings of both inflation and deflation. Despite the US being the epicentre of all the failed debts, failed securitisations, failed credit derivatives, failed rating agencies, failed banking businesses, failed corporate governance, failed accounting standards, failed capital adequacy models, and failed regulatory forbearance, the US dollar has recently strengthened as deflation globalised. The US exported inflation in the boom years, and now exports deflation in the bust years.
Since spring 2008, as US investment banks sold off assets, imposed margin calls, and used access to unsegregated wholesale assets in custody in the rest of the world to upstream liquidity to their US-based parents and affiliates, the dollar has strengthened relative to other currencies. The media reports this as a “flight to quality”, but it is more like a last looting of the surrounding countryside before dangerous brigands hole up in their hilltop fortress. The brigands appear temporarily wealthy compared to the peons left stripped and penniless and facing winter. When the brigands have eaten all the stolen grain and livestock, however, they will have no means to replenish except to use force to raid the countryside again. The peons can always hunt, forage, farm and carefully husband a surplus to gradually increase their wealth. If the brigands raid too thoroughly or too regularly, the peons have no incentive to grow crops or keep herds (negative savings returns) and everyone starves (deflation).
In the meanwhile, the peons just might wise up, hide any surplus more securely and organise mutual defense against further attacks to ensure that their peon children prosper and the brigands die off. That would be the end of Bretton Woods II, and the rise of China, India, the Gulf and other productive and/or resource rich states which invest surplus in domestic productivity and regional growth.
I reread my piece on Fisher’s Theory of Debt Deflation in Great Depressions the other day. One of the more confusing aspects is his assertion that the dollar “swells” as debt deflation takes hold. What he meant, of course, is that deflation increases the quantity of assets and the likely investment return each dollar purchases as deflation wrings debt and misallocation of capital out of the economy.
It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world. Only when that deflation has played out and rational policies that reward market-based management and returns are restored will it be worthwhile to invest again. In the meanwhile, any wealth saved securely from state seizure will "swell" to buy more assets in future - a key aspect of deflation and a key means of restoring the control of the economy into the hands of more farsighted savers and investors.
I have quoted Mr John Mill before, but it bears repeating: ““Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.” The extent to which capital has been betrayed in the past quarter century under Bretton Woods II, bank deregulation and the Basle Capital Adequacy Accords is unrivalled in the history of fiat banking. The bankers, lawmakers, regulators and academics who collaborated in the betrayal still hold power, like the well-armed brigands in the fortress, and their continued collaboration to prevent accountability must inevitably discourage honest savers from risking further loss. Even so, it is the savers/peons who hold the ultimate power as they can starve the brigands.
Some day soon savers will revolt at financing further depredations. They will refuse to buy even government securities, gagging at the quantities of issue forced upon them under terms of only negative return. When that final massive bubble bursts, deflation will follow its harsh corrective course and clean out deficit-financed “unproductive works”.
When that happens, if reason is restored in markets with effective oversight, I might consider investing again, very selectively, in whatever productive works might then be on offer and only when secure in realising - and retaining - a positive yield.
_________________
Apologies for not posting last Friday.
Writing for this blog has been a great experience, forcing me to refine my views about current events and the principles which should underpin financial market interactions and supervision. In parallel, I have been forced to re-evaluate whether I should commit to sorting out some of the practical aspects of the future of banking in the global economy. Writing takes a lot of time and passion, and these are limited commodities for any of us.
I have accepted a full time executive position which will take all of my time and passion going forward in 2009, so the blogging has to be suspended at year end. The job will enable me to put into practice the principles I’ve illuminated here, hopefully mitigating some of the impacts of financial instability. I’ll still lurk, and maybe comment on Professor Roubini’s thread from time to time.
Wish me luck!
Posted by London Banker at 03:56
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| Anonymous Coward
User ID: 574525
12/17/2008 8:09 PM | | Re: Watch, Its happening ,the global economic change. | Quote |
Spy vs Spy
User ID: 568015
12/16/2008 11:24 PM
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Madoff's Ponzi Scheme Dwarfed By Illuminati Rubin's
Quote
Madoff's Ponzi Scheme Dwarfed By Illuminati Rubin's
[link to rense.com]
The arrest of financier Bernard Madoff Thursday for operating a "Ponzi scheme" costing investors $50 billion made the TV network news. Curiously, a lawsuit the same day against Clinton Treasury Secretary Robert Rubin for defrauding Citibank shareholders of more than $122 billion, also described as a "Ponzi scheme," got no airplay whatsoever.
As we shall see, Rubin, a Director of Citibank, profited from the shady practices that destroyed the financial system and sent the world's economies into a tailspin. Then, to repair the damage, he and his banker friends put the taxpayer on the hook for trillions.
Rubin didn't get the same publicity as Madoff because of his close connection to Barack Obama.
Robert Rubin's son Jamie was Obama's main Wall Street fund raiser and is now one of his principal advisers. More significant, Obama's economic team consists of Rubin's proteges including Timothy Geithner, Treasury Secretary, Lawrence Summers, Senior Economic Adviser and Peter Orszag, Budget Director. The Times of London has already dubbed them the "Robert Rubin Memorial All Stars."
Clearly, the media don't want people to see that the candidate of "Change" chose the people responsible for this calamity to be his "economic team." While in the Clinton White House, Rubin, with Summers, helped tear down the regulatory walls between banks, brokerages and insurance companies and freed them to trade in unregulated and little-understood derivatives worth trillions of dollars. |
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