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RE: The Global Financial Meltdown - Admin - 05-25-2009
THE ECONOMY’s SEARCH FOR A "NEW NORMAL"
Shamus Cooke
http://www.globalresearch.ca/index.php?context=va&aid=13646
When the reality of the economic crisis first made itself known, many who realized what was happening dubbed it “the greatest crisis since the Great Depression.” This description was more than bombast; it was a sober analysis of the immensity of the economic problems in the country — problems that had been building up for years.
The mainstream media is now — for political reasons — in a constant clamor for the economy’s elusive “rock bottom.” This is so people will be more hopeful, less agitated, and more willing to let those who destroyed the economy continue running the country un-challenged. Every time a new economic indicator comes out that wasn’t “as bad as expected,” Wall Street cheers and politicians give their “we’ve turned the corner” speeches. Reality is thus turned on its head.
Regardless of what the media says, the reasons for calling this crisis the “worst since the Great Depression,” still exist. Not only this, but new problems are being created that are compounding the old.
One of the original, major concerns of the economy was the fact that the banks were bankrupt. This problem still persists, even after trillions of dollars of taxpayer money was given away, not to mention a “stress test” where the banks in fact “negotiated” the terms of the test. By pretending this problem doesn’t exist, the Obama administration is continuing the Bush-era approach to the banks: don’t ask, don’t tell. Banks will thus continue to be bailed out when their problems are too explosive to be ignored; credit will continue to be restricted, and a general level of instability will taint the system itself.
Another major problem of the economy is that consumers are bankrupt. Unemployment continues to skyrocket, ensuring that every month hundreds of thousands of less people will be able to consume, driving more establishments out of business. The people who lose their jobs thus fail to pay their mortgages, credit cards, student loans, etc., all furthering the losses of the banks.
The issue of debt is fundamental to understanding the current crisis: households, corporations, banks, and the government have all taken on massive levels of debt.
Getting rid of the debt is often referred to as “de-leveraging.” On all levels of society a gigantic de-leveraging is taking place; and only after this process is done will the elusive “bottom of the recession” be found, amidst a society that looks far different than the one we’re used to.
For example, households are rapidly getting rid of expenses they can no longer afford, due to either joblessness, low wages or lack of credit. They are thus saving more than they are spending. For an economy that depends on 70 percent consumer spending, this is a huge problem, not only for the U.S., but for the world as well, since many countries constructed their economies as export machines directed towards U.S. consumers.
Is this problem likely to go away anytime soon? Probably not. The recession is creating such dramatic effects on so many people that the consuming culture is being changed, much like what happened after the Great Depression. The New York Times notes:
“…forces that enabled and even egged on consumers to save less and spend more — easy credit and skyrocketing asset values — could be permanently altered [!] by the financial crisis that spun the economy into recession.” (May 9, 2009)
If the U.S. consumer can no longer be the driving force of the economy, what will replace it? The elitist Economist magazine offered a cure: because consumer spending will be debilitated, “something else will have to grow more quickly. Ideally that would be exports and investment.” (May 6, 2009)
There is in fact little else that can be done if one is playing by the strict rules of the market economy. Obama again gave his allegiance to this broken system by agreeing with the Economist, when he stated, “We must lay a new foundation for growth and prosperity, where we consume less at home and send more exports abroad.”
The average person will be totally uninspired by this “solution.” Nevertheless, Obama should have answered an important question: why isn’t the U.S. an exporting economy now? And what would it take for it to be one in the future? The answers to these questions are intertwined with Obama’s proposal that Americans “consume less.”
In order for US corporations to sell products (export) on the world marketplace, they must have competitive prices. Labor is a key ingredient in determining the price of a commodity, since the other ingredients have relatively stable prices. The price of labor in the U.S. was, in part, the result of a strong labor movement, which achieved a living wage. This not only drove down profits for corporations, but made them less competitive on the world market — they consequently defected to countries that pay slave wages.
How, then, does Obama plan to “send more exports abroad?” The answer is simple: by insuring that Americans are able to “consume less.” For example, Obama’s Auto Task Force told Chrysler and GM workers that their incomes were too high, that they needed to make less so that their companies could “remain viable” (compete) on the global market. They were thus threatened with bankruptcy if they did not offer “significant concessions.” The workers conceded, and bankruptcy happened anyway — a phenomenon bound to happen again soon at GM — unless workers fight back.
If such a “restructuring” happens at a company the size of GM, the precedent would be haunting. Corporations of all kinds are looking to “de-leverage” in the same way to successfully survive the recession. They need to balance the books, and workers’ wages are one of the few options they have. Obama’s Auto Task Force is overseeing the destruction of the U.A.W., and clearing the path for this restructuring to happen across the U.S.
But falling wages have a negative side effect, aside from disgruntled workers. As Nobel Prize- winner Paul Krugman points out:
“Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.” (New York Times, May 3, 2009 )
His conclusion is sobering: “The risk that America will turn into Japan — that we’ll face years of deflation and stagnation — seems, if anything, to be rising.”
Equally concerning is the amount of debt the U.S. government has taken in bailing out banks and fighting foreign wars. The New York Times notes:
“[the national debt] has prompted warnings from the Treasury that the Congressionally mandated debt ceiling of $12.1 trillion [!] will most likely be breached in the second half of this year.” (May 3, 2009)
The debt is so high that those financing it are getting worried, and thus demanding a higher rate of interest in repayment (since they correctly think they’ll be paid back in inflated dollars). Already the U.S. pays $176 billion a year in simply paying the interest on the debt, a number that is expected to reach $806 billion by 2019, according to the Congressional Budget Office.
This debt is of course unsustainable. There are numerous signs that overseas’ buyers are likely to reduce their investment, worried as they are about the U.S. money printing bonanza. In an effort to bolster confidence, Obama has plans to balance the budget by the end of his presidency. Again, a massive de-leveraging of debt will need to happen. Obama has made no secret of where this restructuring will come from: he has made repeated references to “reforming entitlement programs” (Social Security, Medicare, etc.).
It should be noted that the only other way Obama could balance the budget is if he taxed the super rich at a high rate while slashing military spending, neither of which is going to happen on its own. Nevertheless, these items must be central demands for the American worker, who is already under immense economic pressure, with more to come.
The recession is creating a “fight or die” environment for corporations and governments around the world. The super rich that currently control both entities are using their influence to ensure that workers carry the brunt of this burden. It doesn’t have to be so.
The fight for jobs, a living wage, progressive taxation, social security, and single payer healthcare are all topics capable of uniting the vast majority of U.S. citizens. If properly organized, and with the Labor Movement playing a leading role, such a coalition would have no problem overcoming the objections of those who oppose it — the tiny group of super rich benefiting from how things are currently.
RE: The Global Financial Meltdown - Admin - 05-25-2009
CREDIT WHERE CREDIT IS DUE
Economic Recovery? We're not out of the woods yet.
Mike Whitney
http://www.globalresearch.ca/index.php?context=va&aid=13674
The financial channels are abuzz with talk of a recovery, but we're not out of the woods yet. In fact, the deceleration in the rate of economic decline is not a sign of recovery at all, but proof that the economy is resetting at a lower level of activity. That means the recession will drag on for some time no matter what the Fed does. The problem is the breakdown in the securitzation markets which has cut off the flow of easy credit to consumers and businesses. The credit-freeze has caused a sharp drop in retail, auto sales, furniture, electronics, travel, global trade etc. Every sector has been hammered. Fed chief Ben Bernanke's lending facilities have helped to steady the financial system and Obama's fiscal stimulus will take up some of the slack in demand, but these are not a cure-all for a broken credit system. If the system isn't fixed, asset prices will continue to plunge and hundreds of financial institutions will face bankruptcy.
From Tyler Durden at Zero Hedge:
"In order to fully understand currency and price movements, one has to realize that the securitization of debt, and creation of derivatives amounted to a huge virtual printing press, primarily fueled by a massive increase in risk appetite which allowed for a huge expansion in the value of claims on financial assets and goods and services. It is worth pointing out, that the Fed has little to no control over this "printing press" at this point, which at last count was responsible for over 90% of the liquidity in the system." ("The Exuberance Glut or the Dollar-Euro Short Squeeze Race" Tyler Durden, Zero Hedge)
The faux-prosperity of the last decade was largely the result of a wholesale credit system which created a humongous amount of credit via sketchy debt instruments, off-balance sheet operations, massive leverage and derivatives. (The Fed's liquidity and conventional bank loans play a very small part in the modern credit system) Securitization--which is the conversion of pools of loans into securities--is at the center of the storm. It formed the asset-base upon which the investment banks and hedge funds stacked additional leverage creating an unstable debt-pyramid that couldn't withstand the battering of a slumping market. After two Bear Stearns funds defaulted 20 months ago, the securitization markets froze, credit dried up and the broader economy went into a tailspin. Now that investors know how risky securitized instruments really are, there's little chance that assets will regain their original value or that the market for structured debt will stage a comeback.
Bernanke's Term Asset-backed Loan Facility (TALF) is a attempt to restore the crashed system by offering participants generous government funding to purchase securities backed by mortgages, student loans, auto loans and credit card debt. But skittish investors have stayed on the sidelines. The severity of the downturn has dampened the appetite for risk. So Bernanke has cranked up the money supply, cut interest rates to zero and flooded the financial system with liquidity. His actions have convinced many of the experts that the country is on the fast-track to hyperinflation, but that may not be the case, as explained in the Hoisington Investment Management's Quarterly Economic Review:
"Despite near term deflation risks, the overwhelming consensus view is that “sooner or later” inflation will inevitably return, probably with great momentum.
This inflationist view of the world seems to rely on two general propositions. First, the unprecedented increases in the Fed’s balance sheet are, by definition, inflationary. The Fed has to print money to restore health to the economy, but ultimately this process will result in a substantially higher general price level. Second, an unparalleled surge in federal government spending and massive deficits will stimulate economic activity. This will serve to reinforce the reflationary efforts of the Fed and lead to inflation.
(But) let’s assume for the moment that inflation rises immediately. With unemployment widespread, wages would seriously lag inflation. Thus, real household income would decline and truncate any potential gain in consumer spending...
Inflation will not commence until the Aggregate Demand (AD) Curve shifts outward sufficiently to reach the part of the Aggregate Supply (AS) curve that is upward sloping.....Therefore, multiple outward shifts in the Aggregate Demand curve will be required before the economy encounters an upward sloping Aggregate Supply Curve thus creating higher price levels. In our opinion such a process will take well over a decade....
The statement that all the Fed has to do is print money in order to restore prosperity is not substantiated by history or theory. An increase in the stock of money will only lead to a higher GDP if V, or velocity, is stable. V should be thought of conceptually rather than mechanically. If the stock of money is $1 trillion and total spending is $2 trillion, then V is 2. If spending rises to $3 trillion and M2 is unchanged, velocity then jumps to 3.
... The historical record indicates that V may be likened to a symbiotic relationship of two variables. One is financial innovation and the other is the degree of leverage in the economy. Financial innovation and greater leverage go hand in hand, and during those times velocity is generally above its long-term average.
As the shadow banking system continues to collapse, velocity should move well below its mean, greatly impairing the efficacy of monetary policy...The problem for the Fed is that it does not control velocity or the money created outside the banking system. "( Hoisington Investment Management Quarterly review, thanks to Leo Kolivakis, of Pension Pulse, "Is Inflation inevitable?")
Bernanke can print as much money as he wants, but if the banks are hoarding, consumers are saving, businesses are cutting back, and all the money-multipliers are set to "Off"; there will be no inflation. Demand has to pick up, so that money begins to change hands quickly leading to vast amounts of new money competing for the same number of assets. But that won't happen while the economy is shedding 600,000 jobs a month, housing prices are tumbling and consumer balance sheets are being repaired.
So if inflation is not an immediate risk, and the economy continues to shrink, isn't Bernanke doing the right thing by trying to restart the securitization markets?
Opinions vary on this topic. On the one hand, Wall Street's method of deploying credit appears to be more efficient than conventional (bank) loans because the money is provided by investors who are looking for higher yield rather than bankers tapping into reserves. The problem is that securitization creates incentives for fraud by rewarding loan originators who lend to applicants who have no way of repaying the debt. Unless the system is heavily regulated to insure that traditional lending standards are maintained, speculative bubbles will reemerge and there will be more financial disasters in the future. The former head of the FDIC, William Seidman, anticipated this problem way back in 1993 after cleaning up the S&L crisis. Here's what he said in his memoirs:
“Instruct regulators to look for the newest fad in the industry and examine it with great care. The next mistake will be a new way to make a loan that will not be repaid.” (Bloomberg)
If regulators had heeded Seidman's advice, they could have steered the country away from the present calamity.
The problem with an unregulated credit system is that investment banks and hedge funds can skim lavish salaries and bonuses for themselves on the front end before anyone discovers that the loans are fraudulent and the securities worthless. Even so, neither congress nor the Treasury nor the Fed have taken steps to re-regulate the financial system or to hold any of the main players accountable. It's "anything goes". Bernanke has acted as Wall Street's chief enabler by underwriting shoddy non performing loans, propping up rotten assets with low interest funding, and bailing out investment giants with trillions in taxpayer-backed loans. None of the $12.8 trillion Bernanke has loaned or committed to financial institutions has been approved by Congress. The Fed operates beyond any mandate and outside of any law.
The debate about securitization goes beyond questions about the quality of the underlying loans to focusing on the process itself. Securitization greatly amplifies leverage by repackaging debt into complex instruments. It's a way of turbo-charging credit expansion. Joseph Stroupe summarizes the issue in a recent Asia Times article:
"Remember that there are two fundamental camps with respect to the answer to the question of what lies at the root of the present crisis. One camp holds that America's new generation of financial assets that resulted from the recently invented financial process known as "securitization" are fundamentally sound in value, and that an over-reaction on the part of investors to the subprime crisis has resulted in a panic-induced collapse in their valuations.
This camp believes that the securitization model can and should be revived, and that when investor confidence is restored in financial assets now seen as "toxic", then all will be well again, almost magically, as toxic assets become valuable and attractive once again. All that need be done, it is believed, is for the government to work with Wall Street to jump-start securitization, a model this camp vehemently denies has failed, even though many trillions of dollars both spent and committed already have so far failed to get securitization's heartbeat going again.
The other camp believes that the toxicity is inherent in the very nature of the newly developed financial assets themselves, and that once investors recognized this fact, then that is why their values collapsed. This camp sees the securitization model as fundamentally flawed, based as it is upon artificial inflation of assets, the shortsighted growth of serial asset bubbles created by an unholy de facto alliance of government, big Wall Street banks and credit-rating agencies whose credibility and integrity were profoundly compromised, and unsustainable negative real interest rates (the creation of a massive credit excess), without which the securitization model simply won't run." (Asia Times, Profits Mask the Coming Storm, W. Joseph Stroupe)
Bernanke says that the securitization markets are "frozen" and that the toxic assets should eventually regain much of their original value. But this is just wishful thinking. Investors aren't shunning these assets because they're afraid, but because the banks want too much for them given their implicit riskiness. Stroupe's analysis is closer to the truth; prices have collapsed because investors recognize the inherent toxicity of the assets themselves. The market isn't driven by fear, but by common sense. $.30 cents on the dollar is probably all they are worth.
PUTTING CREDIT BACK WHERE IT BELONGS
Do people realize that the reason their home equity is vanishing, their 401ks have been slashed in half and their jobs are at risk is because Wall Street was gaming the system with leverage and financial innovation? The current downturn is not really a recession at all; it's more like a self-inflicted wound perpetrated by avaricious speculators who put a gun to the economy's head and blew its brains out. The banks and Wall Street have created a capital hole so vast that the entire economy is being sucked into the abyss. And it all could have been avoided.
Credit production is too important and too lethal to entrust to profit-driven vipers whose only motivation is self-enrichment. The whole system needs rethinking and public input before Bernanke wastes trillions more trying to revive the same crisis-prone business model. If "credit is the economy's life's-blood," as President Obama says, then it should be distributed through a government-controlled public utility. The real lesson of the financial crisis is that privatizing credit has been a disaster.
RE: The Global Financial Meltdown - Admin - 05-25-2009
BOGUS SOLUTIONS TO THE FINANCIAL CRISIS : THE LATEST IN JUNK ECONOMICS
Prof. Michael Hudson
http://www.globalresearch.ca/index.php?context=va&aid=13702
Marginalist Panaceas to Today’s Structural Problems
It looks like bookstores are about to be swamped this summer and fall by a forest of advice for which publishers gave respectable advances a year ago as the economy was going off the rails. Seeking to minimize the risk of cognitive dissonance, the marketing strategy seems to be to offer advice by well-placed or celebrity insiders on how to recover the kind of free lunch that American pension plans – and popular hopes for easy wealth – have long assumed to be part of the natural law of economic growth, if only it can be better managed. The fantasy people want to buy is that the happy 1981-2007 era of debt-leveraged price gains for real estate, stocks and bonds can be brought back. But the Bubble Economy was so debt-leveraged that it cannot reasonably be restored. This means that publishers have achieved the marketer’s dream of planned obsolescence: Readers a year or so from now will have to buy a new slew of books as they feel hungry again from the lack of intellectual protein.
For the time being we are supposed to be satisfied Wall Street defenses of the Bush-Obama (Paulson-Geithner) attempt to re-inflate the Bubble by a bailout giveaway that has tripled America’s national debt in the hope of getting bank credit (that is, more debt) growing again. The problem is that debt leveraging is what caused the economic collapse. A third of U.S. real estate is now estimated to be in negative equity, with foreclosure rates still rising. So publishers have only a short window of opportunity to sell the current spate of books before people wake up to the fact that attempts to renew the Bubble Economy will make our financial overhead heavier.
In the face of this stultifying financial trend, the book-buying public is being fed appetizers pretending that economic recovery simply requires more “incentives” (a euphemism for special tax breaks for the rich) to encourage more “saving,” as if savings automatically finance new capital investment and hiring rather than what really happens: Money is being lent out to create yet more debt owed by the bottom 90 percent to the economy’s top 10 percent. Publishers evidently believe that the way to attract readers – and certainly to get reviews in the major media – is to propose easy solutions. The theme of most of this year’s Bubble books therefore is how we could have avoided the Bubble “if only…” If only there had been better regulation, for instance.
But to what aim? After blaming Alan Greenspan for playing the role of “useful idiot” by promoting deregulation and blocking prosecution of financial fraud, most writers trot out the approved panaceas: federal regulation of derivatives (or even banning them altogether), a Tobin tax on securities transactions, closure of offshore banking centers and ending their tax-avoidance stratagems. But no one is going so far as to suggest attacking the root of the financial problem by removing the general tax deductibility of interest that has subsidized debt leveraging, taxing “capital” gains at the same rate as wages and profits, or closing the notorious tax loopholes for the finance, insurance and real estate (FIRE) sectors.
Right-wing publishers are re-warming their articles of faith such as giving more tax incentives to “savers” (another euphemism for more giveaways to the rich) and a re-balanced federal budget to avoid “crowding out” private investment. One of Wall Street’s dreams is to privatize Social Security to create yet another Bubble to feed off of. (Fortunately, such proposals failed during the Republican-controlled Bush administration as a result of taxpayer outrage after the dot.com bubble burst in 2000.)
What is not heard is a call to finance Social Security and Medicare out of the general budget instead of keeping their funding as a special regressive tax on labor and its employers, available for plunder by Congress to finance tax cuts for the upper wealth brackets. Yet how can America achieve competitiveness in global markets with its pre-saving retirement tax (Social Security) and privatized health insurance, debt-leveraged housing costs and related personal and corporate debt overhead? The rest of the world provides much lower-cost housing, health care and related employee costs – or simply keeps labor near subsistence levels. Our lack of affordability is a major problem for continued dreams of a renewed Bubble Economy, yet the international dimension is ignored.
The latest panacea being offered to jump-start the economy is to rebuild America’s depleted infrastructure. Alas, Wall Street plans to do this Tony Blair-style, by public-private partnerships that incorporate enormous flows of interest payments into the price structure while providing underwriting and management fees to Wall Street. Falling employment and property prices have squeezed public finances so that new infrastructure investment will take the form of installing privatized tollbooths over the economy’s most critical access points such as roads and other hitherto public transportation, communications and clean water.
Surprisingly, one does not hear even an echo of calls to restore state and local property taxes to their Progressive Era levels so as to collect the “free lunch” of rising land prices and harness its gains over time as the main fiscal base. This would hold down land prices (and hence, mortgage debt) by preventing rising location values from being capitalized into new mortgage loans against “capital” gains and paid out as interest to the banks. Restoring Progressive Era tax philosophy (and pre-1930 property tax levels) would have the additional advantage of shifting the fiscal burden off income and sales – a policy that would make labor, goods and services more affordable. Instead, most reforms today call for further cutting property taxes to promote more “wealth creation” in the form of higher debt-leveraged property price inflation. Instead of housing prices falling and income and sales taxes being reduced, rising site values merely will be recycled to the banks for ever larger mortgages, not taxed to benefit local government. In this scenario, local governments are forced to shift the fiscal burden onto consumers and business, impoverishing the community.
The new books advocate merely marginal changes to deep structural problems. They include the usual pro forma calls to re-industrialize America, but not to address the financial debt dynamic that has undercut industrial capitalism in this country and abroad. How will these timid “reforms” look in retrospect a decade from now? The Bush-Obama bailout pretends that banks “too-big-to-fail” only face a liquidity problem, not the growing bad-debt problem we now face along with the economy’s widening inability to pay. The reason why past Bubbles cannot be re-inflated is that they have reached their debt limit, not only domestically, but also the international political limit of global Dollar Hegemony.
What needs to be written about is what the marginalists leave out of account and what academic jargon calls “exogenous” considerations, which turn out to be what economics really is all about: the debt overhead; financial fraud and crime in general (one of the economy’s highest-paying sectors); military spending (a key to the U.S. balance-of-payments deficit and hence to the buildup of central bank dollar reserves throughout the world); the proliferation of unearned income and insider political dealing. These are the core phenomena that “free market” idea strippers have relegated to the “institutionalist” basement of the academic economics curriculum.
For example, the press keeps on parroting the Washington mantra that Asians “save” too much, causing them to lend their money to America. But the “Asians” saving these dollars are the central banks. Individuals and companies save in yuan and yen, not dollars. It is not these domestic savings that China and Japan have placed in U.S. Treasury securities to the tune of $3 trillion. It is America’s own spending – the trillions of dollars its payments deficit is pumping abroad, in excess of foreign demand for U.S. exports and purchases of U.S. companies, stocks and real estate. This payments deficit is not the result of U.S. consumers maxing out on their credit cards. What is being downplayed is that military spending in most years since the Korean War (1951) that has underlain the U.S. balance-of-payments deficit. Now that foreign countries are starting to push back, this trend cannot continue much longer.
Inasmuch as China’s central bank is now the largest holder of U.S. Government and other dollar securities, it has become the main subsidizer of the U.S. balance-of-payments deficit – and also the domestic U.S. federal budget deficit. Half of the federal budget’s discretionary spending is military in character. This places China in the uncomfortable position of being the largest financier of U.S. military adventurism, including U.S. attempts to encircle China and Russia militarily to block their development as economic rivals during the past fifty years. That is not what China intended, but it is the effect of global dollar hegemony.
Another trend that cannot continue is “the miracle of compound interest.” It is called a “miracle” because it seems too good to be true, and it is – it cannot really go on for long. Heavily leveraged debts go bad in the end, because they accrue interest charges faster than an economy’s ability to pay. Basing national policy on dreams of paying the interest by borrowing money against steadily inflating asset prices has been a nightmare for homebuyers and consumers, as well as for companies targeted by financial raiders who use debt leverage to strip assets for themselves. This policy is now being applied to public infrastructure into the hands of absentee owners, who will themselves buy these assets on credit and build the resulting interest charges into the new service prices they collect, in addition to being allowed to treat these charges as a tax-deductible expense. This is how banking lobbyists have shaped the tax system in a way that steers new absentee investment into debt rather than equity financing.
The irresponsible cheerleaders applauding a Bubble Economy as “wealth creation” (to use one of Alan Greenspan’s favorite phrases) would like us, their audience, to believe that they knew that there was a problem all along, but simply could not restrain the economy’s “irrational exuberance” and “animal spirits.” The idea is to blame the victims – homeowners forced into debt to afford access to housing, pension-fund savers forced to consign their wage set-asides to money managers at the large Wall Street firms, and companies seeking to stave off corporate raiders by taking “poison pills” in the form of debts large enough to block their being taken over. One looks in vain for an honest acknowledgement of how the financial sector has turned into a Mafia-style gang more akin to post-Soviet kleptocrat insiders than to Schumpeterian innovators.
The cursorily reformist gaggle of post-Bubble tomes assumes that we have reached “the end of history” as far as financial problems are concerned. What is missing is a critique of the big picture – how Wall Street’s collaboration in financializing the public domain has inaugurated a neo-feudal tollbooth economy while privatizing the government itself, headed by the Treasury and Federal Reserve. Left untouched is the story how industrial capitalism has succumbed to an insatiable and unsustainable finance capitalism, whose newest “final stage” seems to be a zero-sum game of casino capitalism based on derivative swaps and kindred hedge fund gambling innovations.
What has been lost are the Progressive Era’s two great reforms. First, minimization of the economy’s free lunch of unearned income (e.g., monopolistic privilege and privatization of the public domain in contrast to one’s own labor and enterprise) by taxing absentee property rent and asset-price (“capital”) gains, keeping natural monopolies in the public domain, and anti-trust regulation. The aim of progressive economic justice was to prevent exploitation – e.g., charging more than the technologically necessary costs of production and reasonable profits warranted. Progressive Era reforms had a fortuitous byproduct: Minimization of the free lunch enabled economies such as the United States to out-compete others that didn’t embrace progressive fiscal and financial policy, creating a Leviathan that has now fallen to its knees.
The second Progressive Era reform was to steer the financial sector so as to fund capital formation. Industrial credit was best achieved in Germany and Central Europe in the decades prior to World War I. But the Allied victory led to the dominance of Anglo-American banking practice based on loans against property or income streams already in place. Because of this, today’s bank credit has become decoupled from capital formation, taking the form mainly of mortgage credit (80%), and loans secured by corporate stock (for mergers, acquisitions and corporate raids) as well as for speculation. The effect is to spur asset-price inflation on credit, in ways that benefit the few at the expense of the economy at large.
The consequences of debt-leveraged asset-price inflation are clearest in the post-Soviet “Baltic syndrome,” to which Britain’s economy is now succumbing. Debts are run up in foreign currency (real estate mortgages, tax-avoidance funds and flight capital), without exports having any prospect of covering their carrying charges as far as the eye can see. The result is a debt trap – chronic austerity for the domestic market, causing lower capital investment and living standards without hope of recovery.
These problems illustrate the extent to which the world economy as a whole has pursued the wrong course since World War I. This long detour has been facilitated by the failure of socialism to provide a viable alternative. Although Russia’s bureaucratic Stalinism got rid of the post-feudal free lunch of land rent, monopoly rent, interest and financial or property-price gains, its bureaucratic overhead overpowered the economy in the end and Russia fell. Ideology aside, the question is whether the Anglo-American brand of finance capitalism will follow suit from its own internal contradictions.
The flaws in the U.S. economy are tragic because they are so intractable, embedded as they are in the very core of post-feudal Western economies. This is what Greek tragedy is all about: A tragic flaw that dooms the hero from the outset. The main flaw embedded in our own economy is rising debt in excess of the ability to pay, which is part of a larger flaw – the financial free lunch that property and financial claims extract in excess of corresponding costs as measured in labor effort and an equitably shared tax burden (the classical theory of economic rent). Like land seizure and insider privatization deals, such wealth increasingly is inherited, stolen or obtained through political corruption. Adding insult to injury, wealth and revenue extracted via today’s finance capitalism avoids taxation, thereby receiving an actual fiscal subsidy as compared to tangible industrial investment and operating profit. Yet academics and the popular media treat these core flaws as “exogenous,” that is, outside the realm of economic analysis.
Unfortunately for us – and for reformers trying to rescue our post-Bubble economy – the history of economic thought has been suppressed to give the impression that today’s stripped-down, largely trivialized junk economics is the apex of Western social history. One would not realize from the present discussion that for the past few centuries a different canon of logic existed. Classical economists distinguished between earned income (wages and profits) and unearned income (land rent, monopoly rent and interest). The effect was to distinguish between wealth earned through capital and enterprise that reflects labor effort, and unearned wealth from appropriation of land and other natural resources, monopoly privileges (including banking and money management) and inflationary asset-price “capital” gains. But even the Progressive Era did not go much beyond seeking to purify industrial capitalism from the carry-overs of feudalism: land rent and monopoly rent stemming from military conquest, and financial exploitation by banks and (in America) Wall Street as the “mother of trusts.”
What makes today’s Bubble different from previous ones is that instead of being organized by governments as a stratagem to dispose of their public debt by creating or privatizing monopolies to sell off for payment in government bonds, the United States and other nations today are going deeply into debt simply to pay bankers for bad loans. The economy is being sacrificed to reward finance instead of remaining viable by subordinating and channeling finance to promote economic growth via an affordable economy-wide cost structure. Interest-bearing debt weighs down the economy, causing debt deflation by diverting saving into debt payments instead of capital investment. Under this condition “saving” is not the solution to today’s economic shrinkage; it is part of the problem. In contrast to the personal hoarding of Keynes’s day, the problem is that the financial sector is now using its extractive power as creditor instead of wiping out the economy’s bad-debt overhang in the historically normal way, by a wave of bankruptcies.
Today, the financial sector is translating its affluence (at taxpayer expense), into the political power that threatens to pry yet more public infrastructure away from state and local communities and from the public domain at the national level, Thatcher- and Blair-style. It will be sold off to absentee rentier buyers-on-credit to pay off public debt (while cutting taxes on wealth yet further). No one remembers the cry for what Keynes called “euthanasia of the rentier.” We have entered the most oppressive rentier epoch since feudal European times. Instead of providing basic infrastructure services at cost or subsidized rates to lower the national cost structure and thus make it more affordable – and internationally competitive – the economy is being turned into a collection of tollbooths. How disheartening that this year’s transitory wave of post-Bubble books fails to place the financialization of the U.S. and global economies in this long-term context.
CREDIT DEFAULT SWAPS: THE POISON IN THE FINANCIAL SYSTEM
Mike Whitney
http://www.globalresearch.ca/index.php?context=va&aid=13717
In a little more than a decade, Credit Default Swaps (CDS) have ballooned into a multi-billion dollar industry which has changed the fundamental character of the financial system and increased systemic risk by many orders of magnitude. CDS, which were originally created to reduce potential losses from defaulting bonds, has turned into a cash cow for the big banks, generating mega-profits on, what amounts to, nothing more than legalized gambling. In the case of insurance giant AIG, losses from CDS transactions has already cost the American people $150 billion, and yet their still has been no serious effort in Congress to ban them once and for all. Even worse, CDS is the root-cause of systemic risk which connects hundreds of financial institutions together in a lethal daisy-chain that threatens to crash the entire system if one of the main players goes under.
CDS contracts are not cleared on a centralized exchange nor are they government regulated. That means that no one really knows whether issuers of CDS can pay off potential claims or not. It's a Ponzi-insurance racket of the first order. AIG is a good example of a company that gamed the system and then walked away with millions for its efforts. They sold more CDS than they could cover and then--when the debts started piling up around their eyeballs--they trundled off to the Fed for a multi-billion dollar bailout. Fed chief Bernanke later said that he was furious over the AIG's fiasco, but it didn't stop him from shovelling the losses onto the public ledger and making the taxpayer the guarantor for all AIG's bad bets. Keep in mind, that AIG was selling paper that had zero capital backing, an activity is tantamount to counterfeiting. Still, no one has been indicted or prosecuted in the affair. Defrauding clients and then sticking it to Joe six-pack has become de rigueur on Wall Street.
CDS have spider-webbed their way into every corner of the financial system lashing-together banks and other financial institutions in a way that if one defaults the others go down too. This is what's really meant by "too big to fail"; a euphemism which refers to the tangle of counterparty deals which has been allowed to spread--regardless of the risk--so that a handful of banksters can rake in obscene profits. CDS has become the bank cartel's golden goose; a no-risk revenue-generating locomotive that accelerates the transfer of public wealth to high-stakes speculators. If it wasn't for the turbo-charged profits from derivatives transactions, many of the banks would have already gone belly up.
From Dr. Ellen Brown:
"Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff if the company defaults within a certain period of time, while the “protection seller” collects periodic payments for assuming the risk of default...
In December 2007, the Bank for International Settlements reported derivative trades tallying in at $681 trillion - ten times the gross domestic product of all the countries in the world combined." ("Credit Default Swaps: Evolving Financial Meltdown and Derivative Disaster Du Jour", Dr. Ellen Brown, globalresearch.ca)
The numbers boggle the mind, but they are real just the same, as are the losses, which will be eventually shifted onto the taxpayer. That much is certain.
Treasury Secretary Geithner has recently sounded the alarm for more regulation, but it's just another public relations stunt. Geithner is an industry rep whose sole qualification for the job as Treasury Secretary is his unwavering loyalty to the banking establishment. He has no intention of increasing oversight or tightening supervision. All the blather about change is just his way of mollifying the public while he tries to sabotage congressional efforts to re-regulate the derivatives market. In the next few weeks, Geithner will probably roll out a whole new product-line of reforms accompanied with the usual claptrap about free markets, innovation and "protecting the public's interest". It's all fakery; just more tedious sleight-of-hand carried out by agents of the banking industry working from inside the administration. Fortunately, sad sack Geithner is the world's worst pitchman, which means that every word he utters will be parsed by scores of bloggers trying to figure out what he really means. That will make it especially hard to for him to pull the wool over the public's eyes again.
Swaps originated in the 1980s as a way for financial institutions to hedge against the risk of sudden price movements or interest rate fluctuations. But derivatives trading took an ugly turn after congress passed the Clinton-era Commodity Futures Modernization Act of 2000. The bill triggered a sea-change in the way that CDS were used. Industry sharpies figured out how to expand leverage via complex instruments balanced on smaller and smaller morsels of capital. It's all about maximizing profits with borrowed money. CDS provided the perfect vehicle; after all, with no regulators, it's impossible to know who's got enough money to pay off claims. Besides, gambling on the creditworthiness of bonds for which one has no "insurable interest" can be fun; like taking out an insurance policy on a rivals home and waiting for it to burn down. This is the perverted logic of Wall Street, where every disaster ("credit event") turns into a fortune.
Cleaning up the financial system doesn't require a complete ban on CDS. There is a solution to this mess, and it's not complicated. There needs to be strict regulatory oversight of all issuers of CDS to make sure they are sufficiently capitalized, and there needs to be a central clearing-platform for all trades. That's it. (Note: There are serious questions about the IntercontinentalExchange, or ICE, due to its close connection to the banks) Geithner is trying to torpedo the nascent reform-effort by proposing bogus fixes that preserve the banks monopoly on the derivatives issuance. He's the banks main water-carrier. Now we can see why the financial industry is consistently the largest contributor of any group to political campaigns. They need friends in high places so they can continue their scams without interruption.
"Too big to fail" is a snappy PR slogan, but it's largely a myth. No financial institution is too big for the government to take into conservatorship; to put the bad assets up for auction, replace the management and restructure the debt. It's been done before and it can be done again without damaging the broader system. The real problem is separating healthy financial institutions from insolvent ones now that the whole system is stitched together in a complex net of counterparty deals.
Credit default swaps form the bulk of those counterparty transactions, which makes them the main source of systemic risk. To fix the problem, current contracts must be either unwound or allowed to lapse, while new contracts must be traded on a central clearinghouse where regulators can decide whether sellers are adequately capitalized or not. The Fed's solution--underwriting the entire financial system to prevent another Lehman Bros. fiasco---doesn't address the fundamental problem; it just puts more pressure on the dollar which is already beginning to buckle. The question now is whether Congress will pull their heads out of the sand long enough to do the people's work and pass the laws that will re-regulate the system. There is a remedy, but it requires action, and fast. Without course-correction, the prospect of a derivatives meltdown gets bigger by the day.
RE: The Global Financial Meltdown - Admin - 06-06-2009
THE BIG COLLAPSE COULD BE VERY NEAR
Robert Wenzel
http://www.globalresearch.ca/index.php?context=va&aid=13826
The Federal Reserve appears to be increasingly nervous about the long term bond market. This is serious. How panicked are they? After leaking a story on Friday, they are back at it on Sunday.
The Federal Reserve leaked to CNBC's Steve Liesman on Friday that they weren't targeting long rates. Why such a leak? Probably because the Fed did not want to appear impotent in controlling the long rate. So they put out the word through Liesman that they weren't targetting the long rate. Can you imagine what would happen to the markets if it sensed long rates were beyond the control of the Fed?
The Fed can of course print money to buy up every Treasury bond in existence, but the inflationary ramifications would be Zimbabwe like, and crush the dollar on international currency markets. Are we near the phase where all hell breaks loose? I have never even answered, maybe, to this question before. It's always been, "no." Now it's maybe.
What really has me spooked is another article out this afternoon (on a Sunday) that Drudge has even picked up. It's a Reuters story by Alister Bull. The headline: Federal Reserve puzzled by yield curve steepening.
Translation, the Fed doesn't know what is going on, but they are really scared.
Here's more from Bull:
The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank's strategy to combat the country's recession.
But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.
Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.
Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.
Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities...
An obvious culprit for the move in bond yields is the country's record fiscal deficit, which will generate a massive amount of new government issuance.
The U.S. Treasury must sell a record net $2 trillion in new debt in 2009 to fund a $1.8 trillion projected fiscal deficit, resulting from falling tax revenues, an economic stimulus package and sundry bank bailouts.
It's the Chinese, and any other Treasury bond buyer who follows the markets, that have pulled away, to varying degrees from buying Treasury long securities. No one wants to be the last one holding bonds, where the new debt about to be issued is in the trillions.
Bull continues with the part of the message the Fed really wanted to get out: With officials still grappling to divine the factors steepening the yield curve, a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.
"I'm in wait-and-see mode," said one Fed official who spoke on the condition of anonymity. "We laid out the asset purchase plan and we're following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don't think we should be chasing a long-term interest rate," the official said. It's the same message as Friday. The Fed does not want to spook the world into thinking that it can't push long term rates down, so it says it is not trying. But if rates continue to climb, a panic out of Treasury securities is a very likely scenario. And Bernanke has only one play to force long rates back down, buy every long bond in sight, which of course is highly inflationary and puts upward pressure on rates. How's that for a dilemma?
The end of the current financial system, as we know it, may be imminent. If you would have asked me even two weeks ago if collapse was imminent, I would have said it was highly unlikely, now I am saying it is possible. Bernanke may be able to patch things up short-term, if he is lucky, but in the long term the U.S. financial structure is in serious trouble. There is just too much Treasury debt that needs to be raised. An international panic out of Treasury securities, even a slow controlled panic, means the Fed will be the major buyer. This will ultimately mean record inflation.
And keep this in mind, we have never seen a collapse of a currency like the dollar. Even the hyperinflation during Germany's Wiemar Period can not serve as an example. Since the dollar is the reserve currency of most of the world, a panic out of the dollar means more dollars will return to the U.S. shores than any country has ever experienced.
Other countries have had collapsed currencies, but never in the history of world of finance has so much currency been held outside a country of issue that could come flying back, almost on a moments notice. If the panic out of the dollar starts, even if Bernanke stops printing money (unlikely), all the dollars flying back into the U.S. could cause a huge price inflation all on its own.
OUR ECONOMY IS GOING TO KEEP TANKING UNTIL WE STOP SHOVELING BILLIONS TO RICH PEOPLE
Pam Martens
http://www.globalresearch.ca/index.php?context=va&aid=13865
For the past eight months, we have been a nation focused on bailouts and bankruptcies.
For the past ten years, we have been a nation ignoring massive wealth transfer and wealth concentration through a rigged Wall Street.
As simple and clear as this picture is, some of the brightest minds in this country are unwilling to connect the cause and effect of wealth in too few hands to bankruptcies and a tanking economy.
Wealth-deprived consumers can't buy the goods and services being produced. This leads to repetitive cycles of layoffs and growing unemployment which leads to more wealth-deprived consumers leading to more overcapacity in production plants, more layoffs, more shrinking purchasing power.
The accompanying, and equally dangerous, problem is that concentrated wealth stifles the very innovation that is necessary to create new industries, new jobs and lead us out of the downward economic spiral.
Let's think about the individuals who tapped into Wall Street's rigged wealth transfer system and what they have done with their ill-gotten loot: typically, they own three or more homes, fancy cars, multiple country club memberships, airplanes, yachts, and numbered offshore bank accounts. The problem is, they just can't buy enough to compensate for the purchases they have deprived hundreds of thousands of other consumers from being able to make.
Goods sit on shelves, new orders get cancelled, leading to production cuts, layoffs, plant closings and bankruptcies.
In a nutshell, it's the $1 Billion that Sandy Weill extracted from Citigroup as its former CEO and Chairman that's the problem; it's the $42 million condo he bought that's depriving 140 other people from having $300,000 to buy a home ready to go into foreclosure for want of a buyer. It's the hundreds of millions Weill is throwing around to plaster his name and his wife's name on buildings that could be in the hands of 10,000 consumers going out to buy Chrysler and GM cars now gathering dust on the lots of dealers about to go bust.
It's also that Sandy Weill and his colleagues of that era on Wall Street did not do anything worthy or smart in exchange for extracting that wealth from the system. They repealed the regulations that had kept the system on a more solid footing, then looted the system and left it a basket case. We have no residual benefits of innovation to compensate for all that missing wealth.
And that is the real and overlooked attendant danger: too many billionaires sitting atop too many billions tied up in mansions and yachts means that millions of budding innovators and entrepreneurs are being deprived of adequate funds to create the breakthroughs that will lead to new industries and future job growth.
And let's not forget about the trillions of dollars of wealth that evaporated in bogus ventures that Weill and his fellow Wall Streeters brought to market on NASDAQ. Add those trillions to the bailout trillions and you're looking at a lost generation of funds for innovation.
What all of this means is that President Obama has precious little time left to stop rewarding failure and bad behavior before his own Presidency is deemed a failure. It was difficult enough to countenance the reappearance in his administration of all those Wall Street faces who failed to rein in the Wall Street abuses or, worse, aided and abetted the actual creation of the opaque system that permitted the looting and pillaging. But this past week's news that the President might be considering a pivotal role for the Federal Reserve in the new regulatory structure planned for Wall Street crosses the line, if true, from hubris to outright contempt for the American people.
The inherent cronyism of the Federal Reserve renders it utterly useless as a watchdog. (Why is it even necessary to have to state that obvious fact when no one can shake loose from the Fed what it's done with trillions in taxpayer dollars or why it failed to police these Frankenbanks in the first place.) The same thing is true of the U.S. Treasury, which can't auction its own debt without the goodwill of its Wall Street primary dealers.
According to March 31, 2009 data from the Federal Deposit Insurance Corporation, there are 8,246 FDIC insured institutions with total assets of $13.5 Trillion and domestic deposits of $7.5 Trillion. Four institutions, Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc., four institutions out of 8,246, control 35% of all the insured domestic deposits and 46% of the assets according to the March 31, 2009 figures from the FDIC.
Has the Federal Reserve taken steps to reduce this massive concentration since the financial crisis began? Quite the contrary. Bank of America was allowed to purchase the investment bank and brokerage firm Merrill Lynch as well as subprime lender Countrywide Financial; JPMorgan Chase took over the investment bank and brokerage firm Bear Stearns as well as Washington Mutual; Wells Fargo & Co. took over Wachovia.
The Federal Reserve's answer to concentrated wealth is to concentrate it further. The Federal Reserve's answer to unmanageable, dysfunctional banking institutions is to make them more unmanageable and more dysfunctional.
President Obama needs to do three things quickly to get the country back on course: he needs to separate investment banking/brokerage from commercial banks. This will restore risk taking and innovation to where it belongs, in non FDIC insured institutions. He needs to put new faces that Americans can trust in charge of real regulators with real powers. He needs to stop funneling money to zombie institutions that haven't created anything of innovative value in a decade and channel those funds into innovative research and development projects.
President Obama needs to step up to the plate and stop listening to conflicted advisors. The fate of a nation, as well as his place in history, hangs in the balance.
Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com
The Global Financial Meltdown - Admin - 06-07-2009
MORE FINANCIAL TURMOIL AHEAD:
A STOCK MARKET BEAR RALLY BUILT ON SAND
Bob Chapman
http://theinternationalforecaster.com/International_Forecaster_Weekly/Market_Distortions_A_Product_Of_Fed_Decisions
A recovery is supposed to be in the works in the midst of increased savings, declining debt balances on credit cards, more bankruptcies, higher unemployment and new wave of foreclosures. Consumer participation in GDP is down from 72% to 70.4%. Bank and other financial firms’ balance sheets are what they say they are and we have a stock market bear rally built on sand just as we had in 1931. And, lest we forget, bogus government statistics calculated to confuse professionals and investors alike.
What an upside down world. How do you make money when you are losing money? Wait until late July and in August when the second quarter earnings are released by financial firms. They won’t be pleasant reading. The market rally and much of the earnings are simply fraud. Wall Street and investors simply shrug their shoulders and look away. They know but they do not want to know. Ever present in the scams is the SEC, which has never seen a major firm they did not like. Acting on violations only when forced too at large firms and perpetually pursuing the small and medium sized brokers and brokerage firms and newsletter writers. Then there is the veracity of our government for which few have any respect, trust or confidence.
Our treasury department woefully short of revenues has the privately owned Federal Reserve monetizing sovereign debt because they cannot sell it all, some $300 billion in Treasuries and $750 billion in Agency debt as the Fed monetizes an additional $1.5 trillion in bank owned CDOs, collateralized debt obligations, so as to remove them from bank balance sheets so they can purchase Treasuries to compete the daisy chain of fraud. Ten-year Treasury note yields as a result have traded up to 3.84% from 2.35% just five months ago. Foreigners are sellers as an avalanche of Treasuries hit the street. The demand for Treasury funds over the next few years will be colossal. If government raises taxes the economy will fall further. As we forecast earlier the Fed could monetize $2.5 and $4 trillion in Treasuries and other toxic waste by the end of the calendar year. Incidentally, there is not a remote chance that the Fed will ever be able to withdraw funds from the system and every professional has to know that. The result is a collapsing dollar and higher gold and silver prices in anticipation of higher inflation. This year the dollar could easily break 71.18 on the USDX, the dollar index, versus six major weighted currencies. That would again cause, as it did from 11/07 to 6/08, countries and foreign businesses to reject taking dollars in trade. Such an event is in our crystal ball. Propaganda and smoke and mirrors won’t work this time.
Earlier this week our Secretary of the Treasury was booed, jeered and laughed at during a speech to students at Beijing University. That is what minds outside of the box think of our monetary policy. He said trust me, they said no. Needless to say, this was little reported in the mainstream media. The people representing the money powers that control our nation are viewed as an international disgrace. Foreigners recognize the financial Mafia that runs America, but most Americans are clueless to who the real power running America is.
We have heard much about the 40 to 60 times deposit ratios used by banks in the 2003 thru present period. Normally that ratio is 8 to 10 to one dollar on deposit. We painfully remember the subprime and ALT-A loans and the totally unqualified that received them. Then the loans that Fannie Mae and Freddie Mac should have never approved and finally the asset backed securities and collateralized debt obligation bonds foisted on professionals at AAA when they were in fact BBB.
What has not been publicized was the SEC position under pressure from the elitists on Wall Street during the easy money period and the steep yield curve to exempt brokerage houses from the net capital rule. That as well led to leverage of 40 to 60 to one. If the banks could do it they wanted to be able to do it too to compete. That decision ultimately led to five failures. Even a mitigating gold standard could not have surmounted lack of regulation. After almost 50 years in the markets and a former brokerage house owner we know financial institutions should never be allowed to self regulate. If we have financial regulation we cannot have regulators who are friend s with the people they regulate. No revolving door between Wall Street and the regulator. The same goes for the revolving door between Wall Street and banking and Washington, particularly in the Treasury Department. Real interest rates will always rise in a period of monetary and fiscal profligacy similar to what we are now experiencing as a result of unbridled leverage.
Keynesians will tell us such financial discipline is not possible in the real world, but of course it is. They just want to perpetually break the rules. There is no such thing as a self-regulating monetary policy. Distortion reigns instead of a slightly expansive classical free-market model. Markets can be far more rational then they are presently if the players are not allowed to run wild, as we have seen since 2002. In addition a privately owned Federal Reserve should never be allowed to exist never mind take on government responsibilities, such as financial regulation, which is currently contemplated. The Fed has always subordinated monetary policy to the desires of Wall Street and banking and at times has bowed to political expediency. The Fed is responsible for every recession and depression we have had since 1913. The great market distortions are all a product of Fed decisions. The Fed is now using adversity to expand its empire, taking on the responsibilities of government when it should not be allowed too. Its power to print money and credit has to be ended. No more papering over their mistakes or willful arrangements with Wall Street and banking. Who caused the dotcom boom and the housing bubble, they did.
As we predicted long end interest rates are already telling us that their policies are flawed as Treasuries fall in value and yields rise, a reflection of coming inflation, as the same time the dollar is falling and gold and silver are rising. The Fed is in a box and they cannot get out. From a fiscal perspective we have had five administrations that have created tremendous fiscal debt. The damage done by the last two administrations was horrendous. Don’t forget as interest rates rise on debt service the debt gets larger and larger. These higher rates are already limiting any housing recovery and we see rates moving higher; at least to 4% on the 10-year Treasury note. That would translate into a 30-year fixed rate mortgage of about 5-1/2%. That rate will disqualify many borrowers as unsold inventory increases via further foreclosures that will last into 2012. That means further price declines. That will further destabilize the banking system. The unsold housing inventory in lenders hands and the value of CDO and ABS bonds will fall as well.
The answer is elimination of the Fed. Its powers would be returned to the Treasury, which would have to be transparent and the revolving door between Treasury and Wall Street and banking closed. The Treasury would have to run a tight ship limiting money and credit creation to 5% and by raising interest rates. The crisis has to be addressed eventually and the longer it takes the worse it will be. The power to run Washington by Wall Street and banking has to end. The connection has to be broken. Treasury and Congress have to start acting responsibility and the financial service sector will have to accept lower profits, lower bonuses and a smaller industry.
Credit default swaps have to be settled and banned and all derivatives regulated. There has to be a permanent cap on leverage at banks and brokerage houses of 10 to one and their underlying financial bases have to be changed and closely monitored. If we do not make these changes the financial system as we now see it is doomed.
Within 2-1/2 years Treasury short-term debt will be $16.6 trillion, or 110% of GDP. This is close to 1`21% of GDP attained after WWII, as Thomas Jefferson said, “Loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible.” This is the kind of society we have today. This year foreigners will have to buy $862 billion treasuries, up from $724 billion. We don’t see that happening so the Fed will have to buy $1.5 trillion worth, perhaps more.
Legislation to give Congress greater oversight of the Federal Reserve has been severely watered down on the Senate floor in private negotiations between Sen. Charles Grassley (R-IO), the top ranking Republican on the Finance Committee, who wanted more oversight and Richard Shelby (R-AL).
The Grassley Amendment intended to give the Comptroller General of the Government Accountability Office power to audit any action taken by the Fed – the third undesignated paragraph of Section 13 of the Federal Reserve Act, which would be almost everything that the Fed has done on an emergency basis to address the financial crisis, encompassing its massive expansion of opaque buying and lending.
Handwritten into the margins, however, is the amendment that watered it down “with respect to a single and specific partnership or corporation.” With that qualification, the Senate severely limited the scope of the oversight. Richard Shelby was fully responsible for this course of action. Actions will be limited to specific companies. This modified version does not allow the GAO to look at all taxpayer risk. It in no way threatens the Fed’s monopoly on monetary policy and their secret independence. The list of Fed actions that can be probed are listed but they still could be knocked out in committee. They are:
1. Actions related to Bear Stearns and its acquisition by JP Morgan Chase, including:
a. Loan To Facilitate the Acquisition of The Bear Stearns Companies, Inc. by JPMorgan Chase & Co. (Maiden Lane I)
b. Bridge Loan to The Bear Stearns Companies Inc. Through JPMorgan Chase Bank, N.A.
2. Bank of America -- Authorization to Provide Residual Financing to Bank of America Corporation Relating to a Designated Asset Pool (taken in conjunction with FDIC and Treasury)
3. Citigroup -- Authorization to Provide Residual Financing to Citigroup, Inc., for a Designated Asset Pool (taken in conjunction with FDIC and Treasury)
4. Various actions to stabilize American International Group (AIG), including a revolving line of credit provided by the Federal Reserve as well as several credit facilities (listed below). AIG has also received equity from Treasury, through the TARP, which would also be captured in amendment #1020.
a. Secured Credit Facility Authorized for American International Group, Inc., on September 16, 2008
b. Restructuring of the Government's Financial Support to American International Group, Inc., on November 10, 2008 (Maiden Lane II and Maiden Lane III)
c. Restructuring of the Government's Financial Support to American International Group, Inc., on March 2, 2009
5. TALF -- finally, amendment #1020 would expand GAO's authority to oversee the TARP, including the joint Federal Reserve-Treasury Term Asset-Backed Securities Loan Facility (TALF)
*Neither* Amendment #1021 nor #1020 would include short-term liquidity facilities:
1. Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility?2. (AMLF)?3. Commercial Paper Funding Facility (CPFF)?4. Money Market Investor Funding Facility (MMIFF)?5. Primary Dealer Credit Facility and Other Credit for Broker-Dealers (PDCF)?6. Term Securities Lending Facility (TSLF)
Section 404 of the Sarbanes-Oxley legislation has been a bonanza for accounting firms. It has caused a high proportion of major foreign companies to de-list themselves from the NYSE and it has erected an artificial barrier to the globalization of capital markets. Thus, it isn’t all bad as depicted by corporate America.
The size of the commercial paper market, a vital source of short-term funding for daily operations of many companies, fell $3.6 billion to $1.245 trillion, from $1.248 trillion the previous week. Asset-backed CP outstanding fell 8.3 billion to $557.4 billion after falling $8.7 billion the prior week. The top was $2.2 trillion.
Mortgage rates surged 0.38%. The 30-year fixed rate was 5.29% up from 4.91%.
Sales were weaker than expected at 63% of the 30 retailers tracked by Thomson Reuters. The S&P retailers index fell 2.5%. May same store sales fell 4.8%.
The International Council of Shopping Centers forecast a 3 to 4 percent drop in June same store sales, down from 4.6% in May.
Freight traffic on railroads continued down for the week of 5/23 yoy, off some 21.5%, but up 4.9% week-on-week. Loadings were down 16.4% in the West and 28% in the East. Farm products fell 4.8% and metallic ores fell 59.7%.
Trailers or containers fell 19.1% yoy, and container volume fell 19.1% yoy, as trailer traffic fell 37.2%.
Year-to-date carloads are off 19.3% ytd and trailers and containers 16.8%. Total volume was down 18.2%.
Something that should be remembered is that in 1930 government bonds were used massively for capital safety. In 1931, investors had doubts and started switching to gold, which ran up in price forcing interest rates higher. This is what is happening today.
In 1930, there was no shortage of bank reserves and that carried into 1931. There were excess reserves and interest rates were very low.
The financial atmosphere in 1928-29 was the same as it was here in 2005 and 2006. It was a new era, nothing could possibly go wrong. The Fed refused to reign in cheap money and credit. Commercial paper rates were 1.25% and excess reserves increased four-fold. In the late summer of 1931 gold began its run. History is about to repeat itself.
Fed Chairman Ben Bernanke deliberately lied to Congress this week. The Fed and the NY fed pumped credit aggressively after the 1929 crash and for the remainder of the 1930s. The exception was 1932 when gold took its big run. Bernanke denied this and it is an historical fact. He also duplicitously told Congress the Fed will not monetize debt, but that is exactly what he is doing. Ben is part of the fascist propaganda machine. Tell a lie long enough and big enough and everyone will believe it. This can be called Fed speak. Big Brother would have been very proud of Ben and his fellow Illuminists.
Dick Cheney attempted to win support for harsh interrogation of 'suspected terrorists' by controlling the information Congress would receive on the matter, a report says.
In 2005, the former US vice president directed 'at least four' related briefings with Congressmen during which he would produce 'an impassioned defense' of 'enhanced interrogation techniques' -- the former administration's euphemism for torture, The Washington Post reported on Wednesday.
"This is a really important issue for the security of the United States," one official quoted Cheney as having told the lawmakers.
Officials, attending the meeting from the Central Intelligence Agency (CIA), with whom the program is associated, would also try quelling the Congressmen's concerns about the program saying the agency owed half of its information on alleged 'terrorists' to the methods.
The former top gun has produced an 'overrated' account of the security gains of the former administrations 'anti-terror' campaign.
He has claimed that the Bush administration's trademark 'war on terror' was likely to have saved "violent death of thousands, if not hundreds of thousands, of people" - an achievement which resembles that of World-War-II intelligence heroes.
The paper quoted Sen. Lindsey O. Graham (R-S.C.) as confirming Cheney's leading role in selling the program. "His office was ground zero. It was his office you dealt with at the end of the day."
Two more Iranian families accuse Blackwater, now known as Xe, of murdering their husbands and fathers in Baghdad and covering it up. Azhar Abdullah Ali, 33, a father of three, was a security guard for the Iraqi Media Network when Blackwater mercenaries killed him and two others on Feb. 7, 2007, according to the federal complaint. The family of Rahim Khalaf Sa'adoon claims drunken Blackwater mercenary Andrew Moonen killed Sa'adoon on Christmas Eve, "for no reason," as Sa'adoon guarded the vice president of Iraq. The security guard family's complaint states: "The Sabah Salman Hassoon, Azhar Abdullah Ali, and Nibrass Mohammed Dawood are but one of a staggering number of senseless deaths that directly resulted from Xe-Blackwater's misconduct," according to the complaint.?Sa'adoon left two young children and his wife.?Named as defendants are Erik Prince, Prince Group, EP Investments LLC, EP Investments LLC, Greystone, Total Intelligence, The Prince Group LLC, Xe, Blackwater Worldwide, Blackwater Lodge and Training Center, Blackwater Target Systems, Blackwater Security Consulting, and Raven Development Group.?Both families seek punitive damages for war crimes, wrongful death, assault and battery, spoliation of evidence, and negligence. They are represented by Susan Burke with Burke O'Neil of Philadelphia.
Nonmanufacturing activity lost ground at a slightly slower pace in May, amid signs the sector may be preparing for recovery.
The Institute for Supply Management, a private research group, reported Wednesday that its NMI/PMI index stood at 44.0 from 43.7 in April and 40.8 in March.
That reading was below the 45.0 expected by economists. The ISM also said that its May business activity/production index came in at 42.4, from 45.2 in April.
The ISM report, which is comprised mainly of the service sector activities that make up the bulk of U.S. economic activity, arrives at a time when economic data are suggesting the recession may no longer be getting worse.
Factory orders rose in April less than expected, a barometer of capital spending by businesses plunged, and inventories fell an eighth straight month.
Orders for manufactured goods increased 0.7%, following a downwardly revised 1.9% decline in March, the Commerce Department said Wednesday. Originally, factory orders were seen dropping by 0.9% in March.
Economists had forecast overall April factory goods orders would rise by 1.0%. The report underscored the weakness of a sector that, while showing signs of improvement, is still limping.
Non-defense capital goods orders excluding aircraft decreased 2.4% in April after sliding 1.4% in March. Those bookings are seen as a yardstick for capital spending by businesses. Demand for durable goods were revised down to an increase of 1.7% in April. Last week, Commerce, in an early estimate, said durables surged 1.9% in April. Durables are expensive goods made to last at least three years, such as cars. Durables fell 2.2% in March.
Non-durable goods factory orders decreased 0.1%, after falling by 1.6% in March. A sign of future factory demand fell, down for seven straight months. Unfilled orders decreased 1.2% in April, after dropping 1.7% in March.
Business spending was atrocious in the first quarter of this year. Outlays fell by 36.9% January through March, after dropping 21.7% in the fourth quarter. The economy in those six months was dreary, with gross domestic product down 6.3% in the fourth quarter and 5.7% during the first quarter. Nearly half of that 5.7% drop was caused by U.S. businesses liquidating inventories to adjust for receding demand. The factory data Wednesday showed manufacturers' inventories in April dropped 1.0%, after falling 1.2% in March.
More liquidation could be in the offing. The latest Commerce Department report on business inventories showed the inventory-to-sales ratio was a relatively high 1.44 in March. The gauge indicates how well firms are matching supply with demand. It measures how long in months a firm could sell all current inventory. A year earlier, the I/S ratio was 1.28.
The government now has an equity stake in auto lender GMAC Financial Services after providing $12.5 billion in aid to keep loans flowing to buyers of GM and Chrysler cars, the Treasury Department said Tuesday.
The Treasury holds a 35.4 percent stake in GMAC, after exchanging an $884 million loan it made to General Motors Corp. for that equity under an earlier agreement.
GM filed for Chapter 11 bankruptcy protection Monday, a historic move designed to remake the automaker as a smaller and leaner company, that also made the federal government its principal owner with a 60 percent stake.
The government has a vested interest in seeing GMAC, Chrysler and GM succeed in order to recoup the billions in aid it has doled out to the companies. Analysts have suggested the federal support for GMAC will help make it a lending powerhouse that will give GM and Chrysler a big advantage over their competitors — including U.S. rival Ford Motor Co. — which hasn't taken government aid.
Mortgage rates rose sharply last week, and the volume of mortgage applications filed fell a seasonally adjusted 16.2% compared with the previous week, the Mortgage Bankers Association said Wednesday.
Applications were up an unadjusted 14.4% for the week ended May 29 from the comparable week in 2008, according to the Washington-based MBA's survey, results for which were adjusted to account for the Memorial Day holiday.
The latest survey, which covers half of all U.S. retail residential mortgage applications, mirrored a similar pattern for mortgage filings seen in the week ended May 22. See full story.
Yields on Treasury notes, a key benchmark for setting mortgage rates, spiked a week ago. See Bond Report.
The most recent week-to-week drop in overall mortgage application volumes stemmed from a 24.1% decrease in refinancing activity among homeowners, the data showed. Filings seeking mortgages to purchase homes were up a seasonally adjusted 4.3%. The MBA's four-week moving average for all mortgages was down a seasonally adjusted 9.0%. Refinancings made up 62.4% of all mortgage applications last week, down from 69.3% the previous week. Applications for adjustable-rate mortgages accounted for 3% of all activity, up from 2.6%. Interest rates charged on 30-year fixed-rate mortgages averaged 5.25% last week, up from 4.81% the previous week -- the largest week-to-week jump since October 2008.
Points to obtain the rate averaged 1.02, down from 1.28 the week before. A point represents 1% of the total mortgage amount, charged as prepaid interest.
The average rate on 15-year fixed-rate mortgages came to 4.8% last week, up from 4.44% the week before, with points decreasing to 1.10 from 1.16.
And one-year ARMs averaged 6.61%, up from 6.55%, with points increasing to 0.15 from 0.12
Arthur Samberg, once the world’s biggest hedge-fund manager, said a federal insider-trading investigation is forcing him to shut Pequot Capital Management Inc. more than two decades after starting its first fund.
“With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business,” Samberg wrote in a letter to clients yesterday. Pequot oversees $3.47 billion, according to a May 15 regulatory filing, down from $4.3 billion in November and $15 billion in 2001, when it was the top-ranked hedge-fund firm by assets.
The U.S. Securities and Exchange Commission in January resumed a probe into whether Samberg’s funds illegally profited in 2001 by trading on inside information about Microsoft Corp., people familiar with the matter said at the time. That was about a year after the agency told Samberg and Morgan Stanley Chief Executive Officer John Mack they wouldn’t be accused of wrongdoing related to insider trading.
California is paying out so much for jobless benefits and collecting so little in payroll taxes that its unemployment insurance fund could be $17.8 billion in debt by the end of 2010, according to a new report from the state Employment Development Department.
This latest fiscal crisis won't immediately affect the 1.1 million Californians now collecting benefits because the state is using an interest-free federal loan to cover their checks. But the state is supposed to repay that loan and restore its unemployment fund to solvency by 2011 - and right now, policymakers aren't sure exactly how to do that, or at what cost. "The deficit that California looks like it is facing is staggering," said Bud Bridger, fiscal officer for the unemployment insurance program.
To rebalance the system and pay back the federal loan, lawmakers must raise payroll taxes on employers, reduce benefits for recipients, or both.
In 2009 and 2010, the state expects to pay out $29 billion in benefits. It will collect just $11 billion. Counting the small positive balance that was in the fund at the end of 2008, the result is a $17.8 billion deficit at the end of 2010.
Upon further review, April Factory Orders were revised lower, to -1.9% from -0.9%.
Under the FASB’s new rules, companies can exclude non-temporary losses from net income. That’s on top of other things it already excludes.
By the comprehensive income benchmark, S%P 500 companies had combined losses in their previous four quarters of about $200 billion.
The gulf between net and comprehensive income usually isn’t as wide as it is now. General Electric CO. reported 2008 net income of $17.4 billion and a $12.8 billion comprehensive loss. Citigroup Inc.’s $48.2 billion comprehensive loss was $20.5 billion wider than the bank’s net loss.
The financial-services industry is taking steps to delay an accounting rule
that would force banks and others to bring some of their off-balance-sheet vehicles back onto their books next year, which could force some to raise additional capital.
Citigroup disclosed that it “will seek authorization from investors to increase its
outstanding common shares to as much as 60 billion, from a current limit of 15 billion.”
The government’s approach to the bankruptcies of General Motors Corp. and Chrysler LLC illustrates how this new, unstated policy works: Bondholders are told to give up legal rights, and cash, as part of a government-mandated tradeoff that favors a politically connected special-interest group.
The big threat is that this policy will extend to all bonds, including Treasury and municipal debt, not just corporate obligations.
Rising yields on long-term Treasury debt is a signal that the Federal Reserve should being raising interest rates, said Thomas Hoenig, the president of the Kansas City Federal Reserve district bank on Wednesday…"I suggest strongly that we need to be alert to the markets' message and begin in earnest to bring monetary policy into better balance before inflation forces get out of hand," Hoenig said.
The number of U.S. workers filing new claims for jobless benefits fell slightly as expected last week while total claims dropped for the first time since the start of the year, a fresh signal that the worst of the labor-market downturn has passed.
Still, the figures point to another sizable drop in payrolls, in excess of 500,000, when May employment data are released Friday.
Initial claims for jobless benefits fell 4,000 to 621,000 in the week ended May 30, the Labor Department said in its weekly report Thursday. The previous week's figure was revised up slightly.
Economists surveyed by Dow Jones Newswires had expected initial claims would fall by 3,000.
The four-week average of new claims, which aims to smooth volatility in the data, rose 4,000 to 631,250. Meanwhile, the tally of continuing claims - those drawn by workers for more than one week in the week ended May 23 - slid 15,000 to 6,735,000, the first decline since Jan. 3. The unemployment rate for workers with unemployment insurance was 5%, unchanged from the previous week, which was revised down.
Not adjusted to reflect seasonal fluctuations, Illinois reported the largest jump in new claims during the May 23 week, 3,881, due to layoffs in the trade, service and manufacturing sectors.
North Carolina reported the largest decrease, 3,952, due to fewer layoffs in the construction, furniture and transportation industries
Productivity grew at a solid pace last quarter despite a steep contraction in output, suggesting companies have responded quickly to the recession by shedding workers and cutting hours. Non-farm business productivity rose 1.6%, at an annual rate, in the first quarter, the Labor Department said in revised figures released Thursday. That was double the first estimate of a 0.8% rise.
Economists in a Dow Jones Newswires survey had expected the revised data to show a 1.2% increase. Productivity, which is defined as output per hour worked, slid 0.6% in the fourth quarter of 2008.
Unit labor costs - a key gauge of inflationary pressures - rose 3% last quarter, at an annual rate, largely in line with expectations. They were up just 2.2% from one year ago, an indication that wage inflation remains contained.
Over the long run, productivity is key to improved living standards by spurring rising output, employment, incomes and asset values.
There's a downside to that type of efficiency, though. Labor markets will likely remain under pressure in the near term as firms cut back on labor in response to, or anticipation of, weak demand. The May employment report, due Friday, is expected to show another monthly drop in payrolls in excess of 500,000, though that decline wouldn't be quite as severe as the first four months of the year.
Non-farm business output tumbled 7.6% during the first quarter, at an annual rate, the Labor Department said Thursday. That was on the heels of a 8.8 plunge the previous quarter. Hours worked declined 9% last quarter, the biggest drop since 1975.
Productivity in the manufacturing sector slid 2.7% last quarter. Manufacturing output fell a record 21.7% and hours worked tumbled 19.5%, which was also a record.
Hourly compensation in the nonfarm business sector increased 4.6% last quarter. Real compensation, adjusted for inflation, jumped 7.1%
The Federal Deposit Insurance Corp., unable to get U.S. banks to sell toxic loans in a government program, plans to sell hard-to-price assets seized from failed lenders using guaranteed debt financing.
A test auction of illiquid bank assets, planned this month, was delayed yesterday after lenders raised capital without needing to sell bad loans, the agency said. The FDIC will instead use debt guarantees as an incentive for buyers of assets when lenders are in receivership, the agency said.
“If the FDIC can sell bad assets of failed banks, they will be a winner and it gives opportunities for the private sector as well,” said Ralph “Chip” MacDonald, a partner specializing in financial services at law firm Jones Day in Atlanta.
The Obama administration unveiled the two-part Public- Private Investment Program on March 23 as a centerpiece of its effort to shore up the financial system by removing illiquid assets. It would be funded by $75 billion to $100 billion from the
Treasury’s Troubled Asset Relief Program.
Since the program was announced, U.S. banks have raised capital through stock sales and by converting preferred shares, and as of yesterday the total reached almost $100 billion, according to data compiled by Bloomberg.
“Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system,” FDIC Chairman Sheila Bair said yesterday in a statement in Washington.
President Obama's push for healthcare reforms gets a boost today from a new study by Harvard University researchers that shows a sizable increase over six years in bankruptcies caused in part by ever-higher medical expenses.
The study found that medical bills, plus related problems such as lost wages for the ill and their caregivers, contributed to 62% of all bankruptcies filed in 2007. On the campaign trail last year and in the White House this year, Obama had cited an earlier study by the same authors showing that such expenses played a part in 55% of bankruptcies in 2001.
Medical insurance isn't much help, either. About 78% of bankruptcy filers burdened by healthcare expenses were insured, according to the survey, to be published in the August issue of the American Journal of Medicine.
With companies in no mood to hire, the U.S. unemployment rate jumped to 9.4 percent in May, the highest in more than 25 years. But the pace of layoffs eased, with employers cutting 345,000 jobs, the fewest since September.
If laid-off workers who have given up looking for new jobs or have settled for part-time work are included, the unemployment rate would have been 16.4 percent in May, the highest on records dating to 1994. Our calculation shows U6 to be 20.4% based on the 1980 formula which does not include the Birth/Death ratio.
Even with layoffs slowing, companies will be reluctant to hire until they feel certain that economic conditions are improving and that any recovery will last.
Since the recession began in December 2007, the economy has lost a net total of 6 million jobs.
As the recession -- which is now the longest since World War II -- bites into sales and profits, companies have turned to layoffs and other cost-cutting measures to survive the fallout. Those include holding down workers' hours and freezing or cutting pay.
The average work week in May fell to 33.1 hours, the lowest on records dating to 1964. The number of people out of work six months or longer rose to more than 3.9 million in May, triple the amount from when the recession began.
Construction companies cut 59,000 jobs, down from 108,000 in April. Factories cut 156,000, on top of 154,000 in the previous month. Retailers cut 17,500 positions, compared with 36,500 in April. Financial activities cut 30,000, down from 45,000 in April. Even the government reduced employment -- by 7,000 -- after bulking up by 92,000 in April as it added workers for the 2010 Census.
Education, health care, leisure and hospitality were among the industries adding jobs in May.
The deepest job cuts of the recession came in January when 741,000 jobs disappeared, the most since 1949.
Federal Reserve Chairman Ben Bernanke repeated his prediction this week that the recession will end this year, but again warned that any recovery will be gradual.
Many economists believe the jobless rate will hit 10 percent by the end of this year. Some think it could rise as high as 10.7 percent by the second quarter of next year before it starts to make a slow descent. The post-World War II high was 10.8 percent at the end of 1982.
Ripple-effects from General Motors Corp.'s filing for bankruptcy protection -- the fourth largest in U.S. history -- could muddy the outlook, some analysts said. GM said earlier this week it will close nine factories and idle three others indefinitely as part of its restructuring. The closings, which will take place through the end of 2010, will cost up to 20,000 workers their jobs.
Government auditors would be allowed to examine the Federal Reserve’s response to the financial crisis – a move many believe would threaten the Fed’s independence – under an amendment adopted by the oversight committee of the US House of Representatives.
The amendment, proposed by congressman Dennis Kucinich, is subject to referral to the House financial services committee as well as approval in the Senate, and may never be law.
But it highlights the growing pressure in Congress for greater scrutiny of giant Fed lending and asset purchase programmes put in place to fight the financial crisis. The possibility of greater scrutiny could deter private sector companies from participating in some Fed programmes, reducing their effectiveness.
The Kucinich amendment goes far beyond legislation recently signed into law by Barack Obama, US president, which gives auditors access to Fed programmes that are blended with government bail-out funds.
It would give the Government Accountability Office authority to audit the Fed’s entire activities, including its commercial paper programme, primary dealer loans, term auction facility, foreign exchange swaps and asset purchases.
The Fed declined to comment on the amendment. But Ben Bernanke, Fed chairman, has told Congress’s joint economic committee he will “resist any attempt to dictate to the Federal Reserve how to make monetary policy”.
Mr Bernanke has said he views the Fed’s loan and asset purchase programmes as an extension of core monetary policy in extreme circumstances – a strategy he calls “credit easing”.
But critics, including within the US central bank, say its operations have crossed the line between fiscal and monetary policy, which is murky when interest rates are close to zero.
Some current and former senior Fed officials fear these actions invited a Congressional backlash against Fed independence, which is now emerging.
At the House budget committee this week, Democratic representative Lloyd Doggett told Mr Bernanke: “the Fed?.?.?.?seems to have sprung into action through the back door as a way for some to avoid another request to the Congress for public funds through the front door.”
In addition to pressure for more Fed disclosure, there has been talk of a renewed effort to strip the regional Fed presidents of votes at the federal open market committee.
The US Federal Reserve on Thursday damped expectations that it was preparing to prop up the market for distressed bubble-era securities backed by mortgages.
Hopes that the Fed would in the coming months start providing financing to investors seeking to buy residential mortgage-backed securities (RMBS) – many of which have lost their triple A credit ratings – have pushed prices on these assets higher in recent months.
William Dudley, president of the Federal Reserve Bank of New York, said on Thursday that a decision had not been made. “We have not made a final decision on whether it is doable and, if it is doable, whether it is worth the cost,” he said.
Mr. Dudley, who took over from Tim Geithner in January, has overseen the implementation of the $1,000bn term “asset-backed securities loan facility” (Talf), a key plank in the US government’s efforts to plug the hole left by the collapse of the asset-backed securities markets.
So far, the Talf has been used to finance the purchases of securities backed by loans to consumers, such as car and credit card loans. The Talf lends money to investors such as hedge funds on favourable terms, which encourages the purchases. This week, Talf financed 13 deals worth $16.4bn.
“We’re not back yet to the $200bn annual rate of issuance [for consumer loan-backed securities] before the crisis and we don’t expect to get there, but we are making a good start,” M.r Dudley said, stressing that the “securitisation markets are still significantly impaired”.
Now, the Fed is working to extend the Talf into more complex areas, such as loans backed by commercial property and also purchases of existing mortgage-backed securities, part of the pool of toxic assets that have contributed to billions of dollars of writedowns.
Funding purchases of toxic assets presents huge administrative hurdles because each security has to be analysed. Mr Dudley said many of these securities were no longer rated triple A, which may make them too risky. His comments on residential mortgage-backed securities are believed to also apply to commercial mortgage-backed securities. Although most of these are rated triple A, a wave of downgrades is anticipated soon by Standard and Poor’s.
It is in the commercial mortgage market – used to fund office blocks and shopping centres – that the Talf is most needed, however.
The 9.4 percent May unemployment rate is based on 14.5 million Americans out of work. But that number doesn't include discouraged workers, people who gave up looking for work after four weeks. Add those 792,000 people, and the unemployment rate is 9.8 percent.
--The official rate also doesn't include "marginally attached workers," or people who have looked for work in the past year but stopped searching in the past month because of barriers to employment such as child care, poor health or lack of transportation. Add those 1.4 million people, and the unemployment rate would be 10.6 percent.
--The official rate also doesn't include "involuntary part-time workers," or the 2.2 million people like Noel who took a part-time job because that's all they could get, plus those whose work hours dropped below the full-time level. Once those 9.1 million workers are added to the unemployment mix, the rate would be 16.4 percent.
All told, nearly 25 million Americans were either unemployed, underemployed or had given up looking for a job in May.
The ranks of involuntary part-timers has increased by 4.9 million in the past year, according to a May study by the Federal Reserve Bank of Cleveland. Many economists now predict unemployment won't peak until 2010. And since employers generally increase the hours of existing workers before hiring new ones, workers could be looking for full-time jobs for some time.
Even so, one economist said the increase in involuntary part-timers might have a silver lining. Gary Burtless, a senior fellow in economic studies at the Brookings Institute, said employers are likely cutting back everyone's hours instead of laying off people.
The Federal Reserve's latest weekly money supply report Thursday shows seasonally adjusted M1 rose by $12.2 billion to $1.602 trillion, while M2 rose $30.8 billion to $8.358 trillion.
Rumor has it that JPMorgan Chase has big loan problems in the Middle East.
Russian President Dmitry Medvedev says Russia and China should consider switching to domestic currencies without using the US dollar, as China has done with Brazil and Belarus, using currency swaps. Russian – Chinese trade in 2008 was $50 billion.
Yes, there were 345,000 jobs lost in May, but the Birth/Death ratio added 220,000 jobs out of thin air. The true number of jobs lost was 565,000.
Payrolls in construction fell 59,000 versus a fall of 108,000 in April as the government stimulus package takes hold. Services lost 120,000 and manufacturing 156,000 versus 154,000 in April.
The Economic Cycle Research Institute’s US Future Inflation
Gauge designed to anticipate cyclical swings in the rate of inflation, rose to 79.8 in May from 78.1 in April. This is exactly as we predicted, the affect of monetization.
The annualized growth rate climbed to a minus 26.9% from 33.8%.
As long as China continues to both run a trade surplus and manipulate its currency it has little choice but to put the proceeds in the Treasury market.
The Fed has hired lobbyist Linda Robertson as it seeks to counter skepticism in Congress about the Fed’s growing power over the US financial system. She previously headed the Washington lobbying office for Enron. She was also an adviser to all three of Clinton’s administration’s Treasury Secretaries.
The Fed is in deep trouble and we hope we were responsible for part of it.
On Thursday, the Fed reported holding 1.114 trillion in securities: held outright of which only $18 billion were T-bills, $540 billion were T-notes, $80 billion were Agency securities and $437 billion were mortgage backed bonds. The worse the Treasury market performs the longer the Fed becomes. The Fed is in deep trouble because as time goes on at least $2.5 trillion more will be added; perhaps by the end of the year.
Benefit spending soars to new high: The recession is driving the safety net of government benefits to a historic high, as one of every six dollars of Americans' income is now coming in the form of a federal or state check or voucher.
Benefits, such as Social Security, food stamps, unemployment insurance and health care, accounted for 16.2% of personal income in the first quarter of 2009, the Bureau of Economic Analysis reports.
That's the highest percentage since the government began compiling records in 1929. [More than 30s]
In all, government spending on benefits will top $2 trillion in 2009 — an average of $17,000 provided to each U.S. household, federal data show.
The Treasury said it will sell $127B of bills, notes and bonds next week - $35B in 3s, $19B in 10s and $11B of 30s, $31B in three-month bills and $31B in six-month bills.
South Korea’s National Pension Service, the country’s largest investor, said it will maintain its U.S. government bond holdings even as it cuts the percentage they comprise.
“We are planning to reduce the weightings of American Treasuries, but that doesn’t mean we will be selling Treasuries because our fund size is growing,” National Pension said in a statement in response to questions from Bloomberg News. “We don’t have a specific plan to sell Treasuries.”
The Fed monetized $7.49B of 2s and 3s on Thursday. After abstaining for about a week, the Fed has conducted back-to-back monetizations.
While most key economic indicators are decreasing at a slower rate, the year-over-year contractions in truck tonnage accelerated because businesses are right-sizing their inventories, which means fewer truck shipments. The absolute dollar value of inventories has fallen, but sales have decreased as much or more, which means that inventories are still too high for the current level of sales. Until this correction is complete, freight will be tough for motor carriers.
NYSE data released yesterday shows that Goldman Sachs again is dominating program trading. For the week of May 26 to 29, Government Sachs traded 741.7m shares for its own account, 13.5m for customer facilitation, and 115.4m as agent. This is approximately 7–1 proprietary to customer.
California is paying out so much for jobless benefits and collecting so little in payroll taxes that its unemployment insurance fund could be $17.8 billion in debt by the end of 2010, according to a new report from the state Employment
Development Department.
Unemployment insurance is funded primarily by a payroll tax that costs employers up to $434 per employee, per year. That formula hasn't been changed since 1985.
The decision, which would make it hard for Americans in London to open bank accounts and trade shares, is being discussed by executives at Britain’s banks and brokers who say it could become too expensive to service American clients. The proposals, which were unveiled as part of the president’s first budget, are designed to clamp-down on American tax evaders abroad. However bank bosses say they are being asked to take on the task of collecting American taxes at a cost and legal liability that are inexpedient.
A decision by Falls Police to use a Taser to obtain a DNA sample from a suspect in an armed robbery, shooting and kidnapping is not unconstitutional.
Ron Paul’s audit the Fed bill is now up to 186 cosponsors!
That means over 40% of the entire House of Representatives is currently signed onto HR 1207.
And thanks to your hard work, Representative Steve Scalise is one of the 186 proud cosponsors.
Not only has over forty percent of the House cosponsored HR 1207, but Barney Frank has even promised Ron Paul that he will hold hearings in the House Financial Services Committee.
When these hearings occur in a few months, Ron wants to have a majority of House members on board . . . so there will be no stopping Audit the Fed.
It is amazing what we’ve been able to accomplish in the House on the back of tireless grassroots efforts.
But now it is time to start thinking about the next step.
Pretty soon we will be turning our attention to the Senate, where we are certain to face a more difficult fight. There, corporate lobbyists and Beltway insiders wield even more powerful influence.
Many Senators are already bought and sold by Wall Street bankers and their Federal Reserve flunkies.
And the Banking Lobby is already pumping piles of cash into Senate campaign coffers in a preemptive stand against Federal Reserve transparency.
Fortunately, Campaign for Liberty has been developing a grassroots program and a massive marketing campaign to counter the banksters’ efforts.
And we’re almost ready to launch. But it won’t be cheap, and we can’t afford to run out of gas before the job is done and Audit the Fed is passed.
Can you chip in $25 to help counter the millions of Wall Street dollars and corporate contributions ?
If you can afford more, every extra dollar will be poured into our campaign to pass Audit the Fed in the Senate.
As we close in on 50% support for Audit the Fed in the House of Representatives, the time is nearing to officially unleash the Ron Paul R3volution on the Senate.
If you can, please click here to make a contribution to help Campaign for Liberty launch our Audit the Fed program in the Senate.
In Liberty,
John Tate
The Global Financial Meltdown - Admin - 06-11-2009
GLOBALIZATION AND THE `AUTO' BAILOUT
John Hoefle
http://www.larouchepub.com/other/2009/3623globezation_auto_bailout.html
The bankruptcy of General Motors, once one of the world's industrial giants, is the result of a policy shift which began the day President Franklin Roosevelt died. Though it officially filed for bankruptcy on June 1, 2009, GM has been bankrupt for years, hemorrhaging money at an accelerating rate. At the time of its bankruptcy filing, the company had a net worth of negative $90 billion.
The U.S. government has now pumped over $70 billion into GM and Chrysler, their suppliers, and GMAC, the former finance arm of GM—which is now a bank holding company. Our government could have bought the lot of them outright far cheaper: GM had a market capitalization of less than $1 billion when it failed, and, at about $1 a share, was still overpriced.
Chrysler is being taken over by Italian automaker Fiat, and the "new" GM has said it will reduce its dependence upon its domestic manufacturing capability by importing cars it makes overseas. GM will shed several of its brands, reduce its workforce by some 21,000 union workers (from about 125,000 U.S. employees prior to the bankruptcy), and close 14 plants and three parts-distribution centers. By 2012, it expects to have just 33 plants in the United States, down from 47 just last year. In the early 1980s, it had 150 U.S. assembly plants and employed some 349,000 workers.
It would appear that we taxpayers got very little for our $70 billion, and that is true—but this so-called "bailout" of the auto sector never has been about saving auto production and auto jobs. What it is, is part of the bailout of the financial sector.
Industrial Takedown
Coming out of World War II, the United States was the most powerful industrial power the world had ever seen, and under President Roosevelt, was committed to leading the world forward into new prosperity. One element of that prosperity was the elimination of the colonialism of the Anglo-Dutch Liberal system. Naturally, the oligarchs did not like that. And as soon as FDR died, on April 12, 1945, they set about dismantling the U.S. from within.
This was the origin of the policy of post-industrialism, which was based upon the phony theory that services, information, and finance were the natural successors to industry. Under the sway of this false ideology, we began to shift our attention from the development of our physical economy, towards pushing papers and manipulating money. It took a while to overcome America's can-do disposition, but we eventually turned our back on nuclear power, thus cutting off the leap into a new era of scientific and technological progress. As we lost contact with our heritage, we began to turn "green," adopting an anti-science outlook and viewing the world in terms of money and profit. It is that shift which has destroyed our productive base, and allowed the financial parasites to take over.
Under the control of the financier class and its expanding system of corporate cartels, we began to move our production of goods overseas, to places where labor was cheaper. We were told this would make us more competitive—and more profitable—but it was a lie. What happened is that we systematically dismantled our manufacturing base, eliminating skilled and decent-paying jobs by the millions, until our former industrial heartland became a disaster area. The parasites of Wall Street and the City of London did indeed get richer, some of them obscenely rich, but the American people, the working people who are the foundation of our nation, did not. Instead, they found themselves with ever declining standards of living, working in lower-paying jobs, with growing debts, and despair.
Today, we see the last vestiges of our former industrial might withering on the vine. What remains of our productive base largely revolves around that which President Dwight Eisenhower warned us about, the military-industrial complex. We still produce weaponry and war materiel, ever-intrusive police-state products, and related items, though even there, we buy much from overseas.
Auto-Destruct
What we are witnessing in the auto sector is not a "rescue," but continued destruction, another looting operation by the global financier parasites. The so-called auto bailout is nothing but an attempt to control the damage to the financial sector caused by the collapse of the auto companies. What is being protected is not production, but the valuations of the debt and other financial obligations of the auto sector, and the derivatives bets piled atop those obligations. That is why the government bailed out GMAC, why it poured $5 billion into Chrysler and $50 billion into GM. It was yet another backdoor bailout of banks like JP Morgan Chase and Citigroup, of the hedge and private equity funds, and others. Auto production was not saved—it will continue to decline and be globalized.
The unions are not being saved, far from it. Chrysler's union retiree health fund will own 55% of the post-bankruptcy, Fiat-run Chrysler, but in return gave up claims to much of the $10 billion Chrysler owed it. The union members may have believed it was the best deal they could get, but they are being taken for a ride. The Chrysler dealers are also getting the shaft. After helping the company by loading up on inventory, many of them were cut loose, given a month to liquidate their stocks of cars and trucks. Money talks, everyone else walks.
The GM case is not much different. In its bankruptcy filing, it listed $173 billion in debts, against assets of $82 billion. Under its bankruptcy plan, the U.S. government would own 60% of the "new" GM, while the governments of Canada and Ontario would own a combined 12%. The union health trust would own 17.5%, and the company's pre-bankruptcy bondholders would own 10%. In return for its 60% share of a company with a net worth of minus $90 billion, the U.S. government will pay $30 billion. The United Autoworkers' retiree health fund will exchange the $20 billion it is owed by GM for that 17.5% stake, plus $9 billion in notes and preferred stock. That may seem reasonable, until you consider what such a stake in a dying company is really worth.
Death of a Nation
To understand what is happening here, and to effectively fight it, one must step back and view the matter in a larger perspective. The issue is not GM or Chrysler, or even auto production, but the collapse of the U.S. economy, and its looting by the global financial oligarchy. The auto sector is not in trouble because its executives made poor decisions—though they did. The auto sector is in trouble because a decision was made by the financiers to collapse the core of the U.S. machine-tool capability, which is crucial for new leaps of productivity in the United States and the world. It is the nation which is dying, and taking the auto sector with it.
Rather than deal with that crucial problem, the Obama Administration, like the Bush Administration before it, has decided to save the fictitious paper values of Wall Street, the trillions of dollars of unpayable debts and quadrillions of dollars of derivatives bets. To do so, it must mercilessly impose austerity upon the American people, raising taxes, cutting services, dismantling the social safety net at a time when our citizens need it more than ever.
The purpose of all of this is not really to save the financial system, which is already dead. The purpose is to complete the destruction of the United States, as a necessity for destroying the nation-state system as a rival to imperial rule. The United States, which was committed under FDR to ending the colonial system, is instead being reabsorbed into the Anglo-Dutch Liberal empire, under the guise of "saving our economy."
We are killing ourselves, destroying our economy and our people, and for what? The perpetuation of some medieval system which should have died last century, and would have, had FDR lived, and we not been so damned stupid.
RE: The Global Financial Meltdown - Admin - 06-13-2009
EMERGENCY STATEMENT FROM LYNDON LAROUCHE
http://www.larouchepac.com/node/10575
The information from Europe, from experts — let's keep it that way — is that what happened with the Air France Flt447, as far as anyone can tell now, from among the relevant experts — this is not official, but it's the opinion of the relevant experts — that one of two things could have brought down the plane, in a pattern of the type which has been presented to us. Both involve an explosion underneath the cockpit, in the nose of the aircraft. Such an explosion would have neutralized all control of the electronics for the pilot and the plane would have gone out of control.
That is what the best guess of the experts is, and there's no information available which points in any contrary direction, and there's no evidence presented, which precludes exactly what the alternatives are I've proposed: Either a clever sort of bomb, placed underneath the cockpit of the plane, or some equivalent type of development, would explain the whole process. But that's the only option we have.
The problem is now, apparently, is that this is a hot potato, and we're in a period of governments, in which no government in any part of the world, is presently prepared to face reality. And among those who are least prepared to face reality, is the present government of the United States, because we have lunatic in the cockpit of the U.S. Presidency. And that's the other problem.
Now, the other side of this case is, you know, we're talking about the incompetence of various economists, groups of economists, and the incompetence of governments, to deal with the present world, onrushing general breakdown crisis, of both the present monetary system of the world, but also a breakdown of the physical economic systems of the world, as a by-product of the breakdown of the monetary system.
Now, if something happened, such as Russia pressuring China to break with the dollar, and if China agreed, you would have an immediate breakdown of the functioning of the U.S. Federal and state governments! And, of course, a catastrophe throughout Europe.
Now, the key point here is: As we know, the present President of the United States and his crew in charge now, and the financial interests which have been controlling the government since no later than September of 2007, that these people, who are running the United States, who are managing its policies, particularly its economic-financial policies, have been going in exactly the wrong direction, in everything they've done! And what Obama has done, with his so-called health-care program is the worst possible thing that could happen. Because, not only is it genocide — in fact, Hitler-modeled genocide — but it is accelerating the rate of structural breakdown, of the internal institutions of the United States, and we're in such a situation, with what's being done to the health-care system by Obama and his crew, is that if a worst-case development — that is, one of the likely worst-case developments in terms of the flu epidemics could occur, we could have a disaster beyond belief inside the United States itself.
Now, let's assume the case, that China, under crisis pressure — and the British and the United States government are now putting China under tremendous pressure with this game about the Tienanman Square scenario, the way it's being played now — they're putting China under tremendous pressure. And if China were to agree, under the strain of U.S. current pressure, and European pressure at the same time, to cancel its relationship to the dollar, as it's being pressed to do, you would have an instant disintegration of the U.S. government, and the entire system of government.
Now: This comes into the next point. There is no one, in a position now, to deal with this problem, unless I'm on deck and directing it. I know how to deal with this problem, as I've specified. None of the current actors, controlling the U.S. financial-economic management policy, is competent. There are competent people in the wings in the U.S. government. But they're not in charge, they're not shaping policy. We have a similar situation, even worse in some respects, in Western and Central Europe. Western and Central Europe is in a process of self-inflicted disintegration, under the present euro system.
We have a crisis in Britain, in which the dumping of Gordon Brown, which is something he richly deserves, but the world doesn't deserve it, because there is no one in the British situation who is capable of handling the situation from that side!
So, what you have, you have, in Europe, the Continental nations of Europe, of Western and Central Europe, have no competence presently to deal with the present situation. They don't have the institutional authorities, or other competences required. The British system is chaotic, and a crisis there can be fatal. If the China break occurs, then the whole world system is going down, and it comes down to who's sitting on top of the policy-shaping under emergency conditions in Washington. And I'm afraid, that without my being in a kind of supercargo position, to steer these guys through what they don't know how to do, I don't think the United States will survive.
So, while people are worried about a lot of things, while the Obama crew is pulling police-state, Gestapo-type operations against our people in the field, in reaction to our participation in the Tuesday event, while that's going on, we're the only ones on the scene, with my know-how, who knows how to steer, advise and steer leading circles in the United States to deal successfully with this crisis. And of course, the first thing would be, to scrap the whole Obama health-care program: scrap it, entirely! No Hitler policies in the United States!
We have to go into an emergency reorganization, establish emergency agreements with various governments in the world, put the whole world system, overnight, in an operation very similar to what happened in March 1st of 1968: to have a sudden, international agreement freezing the systems of the world, under an interim working agreement to maintain stability, to freeze continued payments in certain categories of financial assets, and to create new vehicles of credit of long-term secured credit by international agreement, which will enable us to immediately reverse the trend toward massive unemployment, and reduction in agricultural and industrial production, and related infrastructural production, in the United States, and Europe, and elsewhere. Emergency actions of that type can be taken. It requires immediate agreement among certain nations, at least a significant number of major ones, who, if they agree, can agree within 24 to 48 hours of negotiation, on these kinds of measures, I know the kind of measures that will work, and I know where I can find the kinds of people, who will know, in various governments, how to implement those kinds of measures.
We can prevent this planet from going into a Dark Age, which we're on the edge of plunging into right now! And we have this combination.
People are looking at the crisis they want to look at; they're looking at the issues they wish to look at; they're looking at the problems they like to talk about: They're not facing the real, deadly danger here: We are now in the process of a general breakdown crisis of the financial-monetary and physical economic systems of the entire planet! There's been no such thing in all known history, as history, at any one time in this planet, of this type. Certainly not in what we call, normally, ancient history, since 1700 B.C. and so forth, up to the present time. There is no precedent, in that known history, for anything like which is coming down on us
RE: The Global Financial Meltdown - Admin - 06-21-2009
GLOBAL SYSTEMIC CRISIS IN SUMMER 2009:
THE CUMULATIVE IMPACT OF THREE ROGUE WAVES
Summer 2009 GEAB N°36 (June 17, 2009)
http://www.leap2020.eu/GEAB-N-36-is-available!-Global-systemic-crisis-in-summer-2009-The-cumulative-impact-of-three-rogue-waves_a3359.html-
Three rogue waves by H-J Fandrich for LEAP/E2020 As anticipated by LEAP/E2020 as early as October 2008, on the eve of summer 2009, the question of the US and UK capacity to finance their unbridled public deficits has become the central question of international debates, thus paving the way for these two countries to default on their debt by the end of this summer.
At this stage of the global systemic crisis’ process of development, contrary to the dominant political and media stance today, the LEAP/E2020 team does not foresee any economic upsurge after summer 2009 (nor in the following 12 months) (1). On the contrary, because the origins of the crisis remain unaddressed, we estimate that the summer 2009 will be marked by the converging of three very destructive « rogue waves » (2), illustrating the aggravation of the crisis and entailing major upheaval by September/October 2009. As always since this crisis started, each region of the world will be affected neither at the same moment, nor in the same way (3). However, according to our researchers, all of them will be concerned by a significant deterioration in their situation by the end of summer 2009 (4).
This evolution is likely to catch large numbers of economic and financial players on the wrong foot who decided to believe in today’s mainstream media operation of “euphorisation”.
In this special « Summer 2009 » edition, our team describes in detail these three converging « rogue waves » and their impact, and gives a number of strategic recommendations (currencies, gold, real estate, bonds, stocks, currencies) to avoid being swept away in this deadly summer.
Duration (in months) of US recessions since 1900 (average duration: 14,43 months) - Sources: US National Bureau of Economic Research / Trends der Zukunft
LEAP/E2020 believes that, instead of « green shoots » (those which international media, experts and the politicians who listen to them (5) kept perceiving in every statistical chart (6) in the past two months), what will appear on the horizon is a group of three destructive waves of the social and economic fabric expected to converge in the course of summer 2009, illustrating the aggravation of the crisis and entailing major changes by the end of summer 2009… more specifically, debt default events in the US and UK, both countries at the centre of the global system in crisis. These waves appear as follows:
1. Wave of massive unemployment: Three different dates of impact according to the countries in America, Europe, Asia, the Middle East and Africa
2. Wave of serial corporate bankruptcies: companies, banks, housing, states, counties, towns
3. Wave of terminal crisis for the US Dollar, US T-Bond and GBP, and the return of inflation
World trade shrinks : Chart 1: Year-over-year change in total exports from 15 major exporting countries (1991-02/2009) / Chart 2: Year-over-year change in exports from 15 major exporters between February 2008 and February 2009 (size of circles reflects vo
In fact, these three waves do not appear in quick succession like the « sisters rogue waves ». They are even more dangerous because they are simultaneous, asynchronous and non-parallel. Hence their impact on the global system accentuates the risks because they hit at various angles, at different speeds and with varying strength. The only certain thing at this stage is that the international system has never been so weak and powerless to face such a situation. The IMF and global governance institutions’ reforms announced by the London G20 are at a standstill (7). The G8 becomes more like a moribund club whose utility is increasingly questioned (8). US leadership is the shadow of what it used to be, mostly concerned by desperately trying to find purchasers for its T-Bonds (9). The global monetary system is in a process of disintegration, with the Russians and Chinese in particular accelerating their positioning in the post-Dollar era. Companies foresee no improvement in the business climate and speed up the pace of layoffs. A growing number of states falter under the weight of their accumulated debt created to “rescue banks” and are about to be faced with a welter of failings by the end of this summer (10). And, last but not least, the banks, once they have squeezed money out of naive savers thanks to the market upsurge orchestrated in the past few weeks, will be have to admit that they are still insolvent by the end of summer 2009.
In the United States and United Kingdom in particular, the colossal public financial effort made in 2008 and at the beginning of 2009 for the sole benefit of large banks became so unpopular that it was impossible to consider injecting more public money into banks in spring 2009, despite the fact that they were still insolvent (11). It then became necessary to invent a “fairy tale” to convince the average saver to inject his/her own money into the financial system. By means of the « green shoots » story, overpriced stock indices based on no real economic grounds and promises of « anticipated public funding repayment », the conditioning was achieved. Hence, while big investors from oil-producing and Asian countries (12) withdrew capital from these banks, large numbers of small individual investors returned, full of hope. Once these small investors discover that public funding repayment is only a drop in the ocean of public aid granted to these banks (to help them dispose of their toxic assets) and that, after three or four months at best (as analyzed in this GEAB N°36), these banks are again on the verge of collapse, they will realize, powerless, that their share is worth nothing once again.
Growth in GDP (green) and US debt (red) (Bn USD) - Sources: US Federal Reserve / US Bureau of Economic Analysis / Chris Puplava, 2008
Intoxicated by financiers, world political leaders will be surprised - once again – to see all the problems of last year reappear, all the more severe since they were not addressed but only buried under piles of public money. Once that money has been squandered by insolvent banks compelled to « rescue » even more insolvent rivals, or by ill-conceived economic stimulus plans, problems will re-emerge, further exacerbated. For hundreds of millions of citizens in America, Europe, Asia and Africa, the summer 2009 will be a dramatic transition towards lasting impoverishment due to the loss of their jobs, with no hope of finding new ones in the next two, three or four years, or due to the disappearance of their savings invested in stocks or capital-based pension funds, or in banking investments linked to stock markets or denominated in US dollars or British pounds, or investment in shares of companies pressured to desperately wait for an improvement not coming soon.
Notes:
(1) Not even the « jobless recovery » many experts are trying to make us believe in. In the United States, United Kingdom, Eurozone and Japan, it is a « recoveryless recovery » we must expect, i.e. a pure invention aimed at convincing US and UK insolvent consumers to start buying again and keeping US T-Bonds’ and UK Gilts’ country purchasers waiting as long as possible (until they decide that there is really no future selling their products to the lands of the US Dollar and British Pound.
(2) « Rogues waves » are very large and sudden ocean surface waves which used to be considered as rare, though we now know that they appear in almost every storm above a certain strength. « Rogue waves » can reach heights of 30 meters (98 ft) and exert tremendous pressure. For instance, a normal 3 meter-high wave exerts a pressure of 6 tons/m². A 10 meter-high tempest wave exerts a pressure of 12 tons/m². A 30 meter-high rogue wave can exert pressure of up to 100 tons/m². No ship yet built is able to resist such pressures. One specific kind of rogue wave is called the “three sisters”, i.e. a group of three rogue waves all the more dangerous in that, even if a ship had time to react properly to the first two waves, there is no way she could be in the right position to brave the third one. According to LEAP/E2020, it is a similar phenomenon that the world is about to encounter this summer; and no country (ship) is in a favourable position to face them, even if some countries are more at risk than others, as explained in this GEAB (N°36).
(3) LEAP/E2020 estimate that their anticipations of social and economic trends in the various regions of the world - published in GEAB N°28 (10/16/2008) – are still relevant.
(4) More precisely, in every region, media and stock markets will no longer be able to hide the deterioration.
(5) Our readers have not failed to notice that the same people, media and institutions, considered everything was for the best in the best of worlds 3 years ago, that there was no risk of a severe crisis 2 years ago, and that the crisis was under control a year ago. Their opinion is therefore highly reliable!
(6) As regards US economic statistics, it will be interesting to follow the consequences of the revision of the indexing formula by the Bureau of Economic Analysis due to take place on 07/31/2009. Usually, this type of revision results in further complexity of historical comparisons and favourable modification of important figures. For example, some previous revisions enabled the division of the average level of measured inflation by three. Source: MWHodges, 04/2008.
(7) Except at a regional level where each political entity is organized the way that it wants. For instance, the EU is taking advantage of the political fading away of the UK - mired in a financial, economic and political crisis - and taking supervisory control of the City of London (source: Telegraph, 06/11/2009). It is likely that summer 2009 will be the end of 300 years of the City’s supremacy at the centre of British power. On this subject, it is instructive to read George Monbiot’s article in The Guardian dated 06/08/2009 and take the time to read John Lanchester’s brilliant essay published in the London Review of Books dated 05/28/2009 entitled « It's finished ».
(8) Who cares any more about G8 final statements, such as that following the June 13th G8-Finance meeting (source: Forbes, 06/13/2009), at a time when each player in fact plays by his own rules: Americans on one side, Canadians and Europeans on another, British and Japanese in the middle, while the Russians play a complete different game?
(9) US Treasury’s Secretary of State, Timothy Geithner, recently suffered a very embarrassing experience whilst giving a speech in front of Beijing University students: his audience simply burst into laughter when he reassured that the Chinese government had made the right choice investing their holdings in US T-Bonds and Dollars (source: Examiner/Reuters, 6/02/2009)! There is nothing worse than arousing irony or ridicule when you are an established power because that power is nothing without respect (on the part of both friends and enemies), especially when the one mocking is supposed to be “trapped” by the one mocked. According to LEAP/E2020, this laughter is worth a thousand explanations of the fact that China does not feel at all « trapped » by the US dollar and the Chinese authorities know exactly what tracks greenbacks and T–Bonds are following. This kind of situation was unthinkable only 12 months, maybe even 6 months ago, first because the Chinese were still naive, second because they thought it was in their interest to make everyone believe they were naive. Obviously, on the eve of summer 2009, this situation has vanished: no need to pretend anymore, as highlighted by this survey of 23 famous Chinese economists, published on the first day of Timothy Geithner’s visit to Beijing, and revealing that most of them deem US assets « risky » (source: Xinhuanet, 05/31/2009). This student burst of laughter will continue to echo for many months to come…
(10) Not only in the US will shareholders be systematically prejudiced by the state under the pretext of higher common interest, as in the case of pension fund and bondholder losses related to the Chrysler and GM bankruptcies, or when the US government and Federal Reserve pressured Bank of America to hide the calamitous state of Merrill Lynch from its shareholders at the time of the latter’s takeover. Sources: OpenSalon, 06/10/2009 / WallStreetJournal, 04/23/2009. In the UK, Europe and Asia, the same causes will produce the same effects: the « raison d'état » has always been the simplest excuse to justify large-scale plundering … and severe crises are perfect times to call in the « raison d'état ».
(11) Germany has a similar problem due to next September’s national election. After the election, the country’s banking problems will be in the headlines, as several hundreds of billions of risky assets on the balance sheets of a number of banks, mainly regional ones, will need dealing with. It is far from the scope of US and UK banking problems, nevertheless Berlin will probably be faced with a number of potential bank failures. Source: AFP/Google, 04/25/2009. In the United States, the banks bailed out by the federal state have simply lowered the amount of loans granted when they are supposed to do the contrary. Source: CNNMoney, 06/15/2009
(12) Sources: Financial Times, 06/01/2009; YahooFinance, 06/04/2009; StreetInsider+Holdings/4656921.html, 05/15/2009; Financial Times, 06/01/2009
The Global Financial Meltdown - Admin - 07-12-2009
THE GREAT AMERICAN BUBBLE MACHINE
http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine
Matt Taibbi on how Goldman Sachs has engineered every major market manipulation since the Great Depression
Matt Taibbi takes on "the Wall Street Bubble Mafia" — investment bank Goldman Sachs. The piece has generated controversy, with Goldman Sachs firing back that Taibbi's piece is "an hysterical compilation of conspiracy theories" and a spokesman adding, "We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance in being a force for good." Taibbi shot back: "Goldman has its alumni pushing its views from the pulpit of the U.S. Treasury, the NYSE, the World Bank, and numerous other important posts; it also has former players fronting major TV shows. They have the ear of the president if they want it." Here, now, are excerpts from Matt Taibbi's piece and video of Taibbi exploring the key issues.
The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
Any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.
They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They've been pulling this same stunt over and over since the 1920s — and now they're preparing to do it again, creating what may be the biggest and most audacious bubble yet.
See Taibbi discuss Goldman Sachs' big scam.
The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren't much more than pot-fueled ideas scrawled on napkins by up-too-late bong-smokers were taken public via IPOs, hyped in the media and sold to the public for megamillions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.
It sounds obvious now, but what the average investor didn't know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system — one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman's later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry's standards of quality control.
Goldman's role in the sweeping global disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren't in IPOs but in mortgages. By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that shit out the window and started writing mortgages on the backs of napkins to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar.
And what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical-commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.
The history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled-dry American empire, reads like a Who's Who of Goldman Sachs graduates. By now, most of us know the major players. As George Bush's last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton's former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup — which in turn got a $300 billion taxpayer bailout from Paulson. There's John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multibillion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain's sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden-parachute payments as his bank was self-destructing. There's Joshua Bolten, Bush's chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York — which, incidentally, is now in charge of overseeing Goldman.
But then, something happened. It's hard to say what it was exactly; it might have been the fact that Goldman's co-chairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. While the American media fell in love with the story line of a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised crush on Rubin, who was hyped as without a doubt the smartest person ever to walk the face of the Earth, with Newton, Einstein, Mozart and Kant running far behind.
Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national cliché that whatever Rubin thought was best for the economy — a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline the committee to save the world. And "what Rubin thought," mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White House made a series of moves that would have drastic consequences for the global economy — beginning with Rubin's complete and total failure to regulate his old firm during its first mad dash for obscene short-term profits.
After the oil bubble collapsed last fall, there was no new bubble to keep things humming — this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.
It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers — one of Goldman's last real competitors — collapse without intervention. ("Goldman's superhero status was left intact," says market analyst Eric Salzman, "and an investment-banking competitor, Lehman, goes away.") The very next day, Paulson greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.
Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bank-holding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding — most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs — and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret.
Converting to a bank-holding company has other benefits as well: Goldman's primary supervisor is now the New York Fed, whose chairman at the time of its announcement was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was technically in violation of Federal Reserve policy by remaining on the board of Goldman even as he was supposedly regulating the bank; in order to rectify the problem, he applied for, and got, a conflict-of-interest waiver from the government. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bank-holding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped down in May, but the man now in charge of supervising Goldman — New York Fed president William Dudley — is yet another former Goldmanite.
The collective message of all of this — the AIG bailout, the swift approval for its bank-holding conversion, the TARP funds — is that when it comes to Goldman Sachs, there isn't a free market at all. The government might let other players on the market die, but it simply will not allow Goldman to fail under any circumstances. Its edge in the market has suddenly become an open declaration of supreme privilege. "In the past it was an implicit advantage," says Simon Johnson, an economics professor at MIT and former official at the International Monetary Fund, who compares the bailout to the crony capitalism he has seen in Third World countries. "Now it's more of an explicit advantage."
RE: The Global Financial Meltdown - Admin - 07-13-2009
WE HAVE CREATED A MONSTER ...
BANKS WITH ACCESS TO PUBLIC FUNDS
Ian Macwhirter
http://www.globalresearch.ca/index.php?context=va&aid=14061
THE ECONOMY: an apology.
"Readers of the nation's press over the last six months might have been forgiven for believing that there was an economic recession. Headlines like: Doom Britain, It's Worse Than The Great Depression and Mothers Start Selling Children For Food might have led casual readers to conclude that Britain was in a very severe financial crisis. We would like to make it clear that there was not a jot or tittle of truth in these reports and that the British economy is bouncing back, house prices are booming and happy days are here again. On behalf of all newspapers and politicians, we would like to apologise for any confusion. Mr Robert Peston of the BBC has agreed to a 40% salary reduction, which he will donate to charity."
It is the most dramatic turnaround in economic history: from bust to boom in a matter of weeks. The pound is up, oil prices are up, consumer confidence is up, bank lending is up and house prices rose 2.6% in May. That last figure is the most astonishing, since hardly any houses are actually being sold right now, and the vast majority of mortgages require a 25% deposit. But who am I to argue with the green shoots consensus? Killjoys might point out that unemployment is still growing fast, that most of our manufacturing industry is collapsing, and that personal and public debt levels remain at intolerable levels. You could point out that the Baltic Dry Shipping index - a measure of world trade - has collapsed again. But the word has gone out that the recession has "bottomed out" and anyone who departs from it is seen as talking down the economy.
So, what has happened exactly to achieve this remarkable turnaround? Well, it's just a guess, but £1.3 trillion in public money may have had something to do with it. That's how much the government has put at the disposal of the banking system in loans, equity, swaps and asset protection schemes. All this cash has to go somewhere, and it is going, first to bank profits and then indirectly to middle-class home-owners. Anyone with a relatively large mortgage has just had a colossal windfall, with their monthly repayments slashed in many cases by more than half. So long as interest rates are kept artificially low the relatively well-off are being insulated from economic uncertainty. They are also feeling better off because the stock market has increased by nearly a third in the last six months. This feeds into pensions and other investments. Banks can start selling mortgage bonds again; they lend more, people buy houses, retail sales rise, taxes recover and we're all off to the races again.
Except, of course, that it isn't quite that easy. This is all being done at a cost, and that money used to bail out insolvent banks has to come from somewhere. And as the real economy sheds jobs, the government has to pay more money in unemployment benefits while getting less revenue from taxes because fewer people are in work. Hence the "great debate" last week about who is going to cut public spending most: Labour or the Tories. The Conservative health spokesman, Andrew Lansley, admitted that there would have to be a 10% cut in spending in non-health departments. This allowed Labour to indulge in some electioneering by painting the Tories as the party of cuts in services. In reality, the cuts are clearly set out in the government's own spending forecasts to 2014. These show that spending will have to rise much more slowly than before, which means that planned spending is being cut even if it is rising in cash terms.
The government doesn't want to admit this because it is banking on our flexible friend, inflation, to come along and pay off the debt for it. The Bank of England is in the process of effectively printing billions of pounds through Quantitative Easing, which will have the effect of undermining the purchasing power of the pound. The government hopes this will erode the deficit, expected to rise to over £150 billion.
And the losers? Well, the usual victims. Older people living on fixed incomes have seen their wealth transferred to middle-aged home-owners. Anyone who has had the misfortune to save for the future is being robbed blind right now because interest rates are less than CPI inflation. Young families will have to take on immense debt to buy a house which will chain them for life to the banks. Public services will decline as inflation erodes the pounds we put into health and education and public service workers lose their jobs.
The real winners are the big banks - the ones left standing, that is. Recessions generally involve structural changes in the economy, and the big gain for the financial sector this time is consolidation. We have been left with a handful of giant financial behemoths like Lloyds, which alone has one-third of all UK mortgages and 40% of retail banking. We already had banks that were too big to fail; now we have banks that are so big, they can make the government fail.
Last week, Lloyds axed hundreds jobs by closing the Cheltenham & Gloucester branches without a murmur from government, even though we own nearly half of Lloyds. The government is desperate for the economic recovery to be sustained, and the last thing it wants to do is interfere. It wants to go back to the golden days of bank lending in 2006/07, when money was so cheap HBOS was practically giving it away. We no longer hear Lord Turner of the Financial Services Authority, threatening to get tough on the banks. Britain is even resisting EU reforms which would regulate private equity and hedge fund activity.
We are emerging from this recession with a new kind of economy: a banking kleptocracy that has captured government and regulators. After a two-year financial crisis, largely of their own making, the banks have been rewarded by massive public subsidies, freedom from regulation and the lifting of anti-monopoly rules. No government will stand up to banks for fear of precipitating another crisis, such as the one that followed the collapse of Lehmans last October. Talk about moral hazard. The banks can return to their gambling table again, confident that the government will bail them out, should they lose. Notice how few bankers lost their jobs and how rapidly bosses of even nationalised banks like RBS have returned to paying themselves multi-million-pound bonuses again.
We may now have six months of "recovery" from the latest trauma, but we have assuredly laid the foundations for another even more epic crash a few years down the line. We have created a monster: banks which have ceased being capitalist entities working in a market, and have effectively become a branch of the state, with a pipeline straight into our wallets. Enjoy.