Tuesday, March 31, 2009
U.S. Spending 100% of GDP on Bailouts and Related Programs
As I have previously pointed out, Paul Krugman is calling for the U.S. and Europe to spend an amount equal to 4% of their gross domestic products on the financial crisis.
Today, Bloomberg notes:
The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.In other words, instead of spending 4% of GDP, the U.S. is committing to spending close to 100%. This dwarfs spending during the New Deal:
For those who argue that much of the trillions being spent today is in the form of loans and guarantees, I would argue that taxpayers will never see most of this money ever again. It is spent, and gone. Indeed, most of the financial giants which the loans were made to are insolvent and will be out of business in a couple of years.
Mark my words, the chart above will end up showing that spending will soon exceed 100% GDP.
War is a Racket
War is a racket, according to one of the most highly-decorated military men of all time, and also the guy who stopped a coup against FDR (see this, this and this), Smedley Butler:
Or read Butler's book online.
Off-World Events Effect Earth More Than Scientists Realized
Preface:Please read the endnotes before forming a conclusion on my views on global warming.
National Geographic reported in 2006 that the Earth's magnetic field is changing rapidly. However, according to the article, decreases in the strength of the magnetic field do not directly affect surface temperatures:
The decline in the magnetic field also is opening Earth's upper atmosphere to intense charged particle radiation, scientists say....
"It is in this region that the shielding effect of the magnetic field is severely reduced, thus allowing high energy particles of the hard radiation belt to penetrate deep into the upper atmosphere to altitudes below a hundred kilometers (62 miles)," Mandea said.
This radiation does not influence temperatures on Earth. The particles, however, do affect technical and radio equipment and can damage electronic equipment on satellites and airplanes, Olsen of the Danish space center said.
This confirms what NASA scientists have said. However, other scientists have concluded that the Earth's magnetic shield does affects climate.
In addition, two Danish geophysicists at Aarhus University in western Denmark propose that the increased cosmic radiation allowed by a weakened magnetic shield in turn changes the amount of rainfall at the tropics, thus affecting climate (they acknowledge that CO2 also affects climate, but state that climate is more complex than generally believed).
Nigel Marsh of the Danish Space Research Institute in Copenhagen also argues that clouds are scarce near the equator and thicker towards the tropics, because cosmic rays have a hard time punching through Earth's magnetic field at the equator, but can leak in through the relatively weaker field nearer the poles. If correct, this bolsters the Danish geophysicists' hypothesis that changes to the Earth's magnetic shield affect cloud cover (and thus precipitation and climate in general).
Moreover, it is known that intense solar activity can destroy ozone in the Earth's atmosphere, thus affecting climactic temperatures. See this, this, this, this and this. Indeed, the effects of solar energy on ozone may be one of the main ways in which the sun influences Earth's climate.
The sun itself also affects the Earth more than previously understood. For example, according to the European Space Agency:
Scientists ... have proven that sounds generated deep inside the Sun cause the Earth to shake and vibrate in sympathy. They have found that Earth’s magnetic field, atmosphere and terrestrial systems, all take part in this cosmic sing-along.
Indeed, the very position of the Earth and sun effect climate. Scientists know that Earth's weather is hugely affected by factors such as, according to a well-known treatise:
(1) the shape of the ellipitical orbit (with a time scale of about 95,000 years); (2) the tilt in the earth's axis of rotation (approximately 42,000 years); and (3) the time of year when the earth is closest to the sun, or perihilion (about 21,000 years)The Earth periodically enters ice ages and warming periods, and scientists have attempted to work out the cycles according to the Earth's orbit, tilt, etc. When I studied climate at a university in the early 1980's, I was taught that the Earth is in an "ice age" most of the time, and that the warmer interglacial periods were more rare.
Scientists have recently discovered that cosmic rays from a "mysterious source" are bombarding the Earth (and see this). This is occurring at the same time that the protective bubble around the sun that helps to shield the Earth from harmful interstellar radiation is shrinking and getting weaker.
In addition, a recent study shows that increased output from the Sun might be to blame for 10 to 30 percent of the global warming that has been measured in the past 20 years. The sun is simply getting hotter. Indeed, solar output has been increasing steadily ever since scientists have been able to measure it. Another study shows that solar activity variations have a "marked influence" on the Earth's climate.If extra-planetary events affect Earth's climate, wouldn't other planets in the solar system be affected as well?
Yes. In fact, there is evidence of global warming on Pluto, Mars, Jupiter and Neptune's moon. See also this.
The sun also apparently affects the amount of rainfall on Earth, which in turn affects climate.
Notes: I am not arguing for "doing nothing". I am all for reducing our reliance on oil and for developing clean energy alternatives. Oil does a lot of harmful things in addition to producing CO2. And I am strongly for alternative energy, as I believe that it decreases centralization and therefore increases democratic trends. Oil also produces a lot of plain old pollution, in the extraction, processing and burning phases.
But we shouldn't do something which will cause more harm than good, or which doesn't do much but make money for the same financial giants who created the economic crisis.
Like the Danish geophysicists discussed above, I believe that does increase warming trends. However, like them, I think that climate modeling is complex and that the effects from other causes have not been sufficiently taken into account. Indeed, if extra-planetary and other conditions align towards warming, then I think we could experience severe warming in the future. Under some scenarios, even modest warming at the Arctic could release methane, which could lead to dramatic results.
On the other hand, if the most important factors align towards cooling trends, then even with greenhouse gasses, we could experience cooling.
And - unless we understand the science of natural extra-planetary events - we could be sitting ducks if something really big happens "out there". I believe that the science of extra-planetary events on Earth is in its infancy. I passionately urge governments and universities to expand their research in this area.
Monday, March 30, 2009
Useful Idiots in Modern America
Paul Robeson was a great singer and a passionate activist for human rights.
But Robeson naively believed that Stalin - the murderous tyrant who killed millions of Russians and imposed tyranny on the Soviet Union - was a great man.
For example, when Robeson met with an old friend in a hotel room in Russia, the friend tried to tell Robeson that he was under arrest, was being persecuted, and might be killed by Stalin. But - the story goes - Robeson was so full of naive admiration for the communist leader that Robeson didn't notice what his friend (who disappeared shortly thereafter) was trying to tell him.
Robeson even wrote a poem called "To You Beloved Comrade" to honor Stalin.
Robeson and other Americans who were duped by the communist leaders - like playwright George Bernard Shaw - were called "useful idiots" by Lenin and Stalin. "Idiots" because they couldn't see the communists for the tyrants they were, "useful" because those tyrants could use them to spread propaganda to the West.
Useful Idiots in Modern America
Idiots were not just useful for the USSR.
Today, in modern America, there are useful idiots on the right who blindly support anyone who attacks Obama because Obama is a so-called "liberal".
Equally, there are useful idiots on the left who blindly support Obama and try to defend his bailouts of the financial giants, his escalation of the Afghanistan war, his defense of Bush administration torturers and war criminals, and other indefensible acts because they think he is the great liberal savior.
Stalin's useful idiots - like Robeson - were blind to the reality of what the communist tyrants were actually doing. They were too caught up in ideas about what was happening, instead of looking at the effect of the actual policies being carried out.
Those on both the left and the right who fall for the rhetoric of the Democratic and Republican party leaders are useful idiots who are failing to look at the effect that those parties' policies are actually having.
Nobel Economist Ed Prescott: "Don’t Subsidize Inefficiency.... Let These Businesses Go Bankrupt. They Gambled, They Lost. That’s Part Of Life"
Nobel economist Ed Prescott says:
Don’t subsidize inefficiency. Cut tax rates to get people to work more. This financial stuff is much ado about nothing. I don’t see any reason for the taxpayers to bail out Goldman Sachs in a roundabout way. Let these businesses go bankrupt. They gambled, they lost. That’s part of life.Numerous economists agree with Prescott. See this, this, this, this and this.
What Do the Khmer Rouge, Pinochet and Bush Have in Common?
The prison chief for the brutal Khmer Rouge regime is finally on trial for torture and murder.
The Spanish judge who investigated and charged Chilean dictator Augusto Pinochet for war crimes has his eye on - and may prosecute - Bush Officials for torture.
Now, one of the lawyers pushing for prosecution has advised Douglas Feith to "get a good lawyer".
And next week, the Senate Armed Services Committee will release new details on the Bush administration's role in torture.
What is the legal basis for prosecuting Bush administration lawyers for torture?
As I wrote in 2005:
Even the lawyers and other people who aided in the [torture] effort may be war criminals; see also this article , this one, and this press release.
The Khmer Rouge, Pinochet and Bush administration officials have a lot in common: they are all war criminals who escaped justice for too long. And if the Spanish judge carries through with his investigation, they will all end up being convicted criminals.
The Missing Link in Climate Change?
New York Times bestselling author Gregg Braden claims that climate change is largely driven by the strength of the Earth's magnetic shield at any point in time.
Only a couple of months ago, NASA discovered an unprecedented breach in the Earth's magnetic shield (watch the NASA video), and the strength of the magnetic shield is known to vary in intensity over geologic time. So this is an interesting claim.
My question to you is whether anyone has ever attempted to correlate the Earth's magnetic field strength with climate changes. My layman's logic wonders whether a reduction in field strength of 10% would result in some additional solar energy reaching the atmosphere, and hence cause an increase in overall global temperatures. I understand that the geologic record of magnetic field strength may span far more time than the records of global temperature in the polar ice core samples (or however those estimates are made), but has any attempt at correlation of the data been made?Any scientists wishing to weigh in on this question can comment below.
Reply
The "solar energy" received by Earth presumably includes sunlight and the solar wind (with the magnetic effects it brings with it). Let us compare.
Suppose the Earth had NO magnetism at all, so that the solar wind would hit its surface directly--as it hits the Moon, most of the time. The solar wind has a density of about 6 protons per cc, and velocity about 400 km/sec, so each square centimeter facing it is hit each second by as many protons as are in a column about 400 kilometers high and of 1 square centimeter cross section:
400,000 x 100 x 6 = 2.4 x 100,000,000 protons and each square meter (10,000 times larger) about 2.4 1012 protons
Each proton carries about 1000 electron volts, each of which is abut 1.6 10–19 joule So that each square meter gets about 4 10–4joules per second, that is, 0.0004 watt.
The "solar constant" of sunlight energy received by a square meter on the Earth perpendicular to sunlight is about 1300 watt. It's more than a million times larger.
The changing strength of the Earth's magnetic field may have less effect than its magnitude suggests. That field diverts the solar wind around the Earth, though some energy is transmitted in other ways, through reconnected field lines. If the field were only half as strong, the obstacle would be smaller, but still, most of the solar wind would flow around. The total effect remains roughly the same as before--that sunlight is more than a million times more effective as carrier of energy.
Sunday, March 29, 2009
Real Journalism Versus "Professional Journalism"
If Jon Stewart walked out of his studio with his camera crew, went to where establishment figures were speaking, and threw tough questions at them, you'd get something like We Are Change.
The We Are Change reporters have asked the tough questions - a la Stewart (well, minus the comedy) - to former presidents, secretaries of defense, leading Neocons and Iraq war architects, and many other establishment figures.
So their interviews are syndicated nationally and they've all received Pulitzer prizes, right?
Not exactly . . .
We Are Change founder Luke Rudkowski was arrested for trying to ask New York City Mayor Michael Bloomberg about his refusal to pay for the health care of 9/11 first responders.
The charges? "Impersonating a member of the press" and trespassing.
Saturday, March 28, 2009
Update on Torture
A second former high-level Bush administration official has confirmed that the neocons implemented a policy of torture. The chief lawyer for Guantanamo litigation - Vijay Padmanabhan - said that torture was widespread.
This confirms what Colin Powell's chief of staff, Lawrence Wilkerson, has said.
In addition, the Spanish judge who investigated and charged Pinochet for war crimes has his eye on - and may prosecute - Bush Officials for torture (for background information, see this).
And as I - and many others - have written repeatedly, torture doesn't work. In other words, torture isn't the way to get any real information.
Now, even the Washington Post seems to be acknowledging this fact:
Nearly all of the leads attained through the harsh measures quickly evaporated [and were proven false], while most of the useful information from Abu Zubaida -- chiefly names of al-Qaeda members and associates -- was obtained before waterboarding was introduced, they said....
"We spent millions of dollars chasing false alarms," one former intelligence official said.Despite the poor results, Bush White House officials and CIA leaders continued to insist that the harsh measures applied against Abu Zubaida and others produced useful intelligence that disrupted terrorist plots and saved American lives....
Since 2006, Senate intelligence committee members have pressed the CIA, in classified briefings, to provide examples of specific leads that were obtained from Abu Zubaida through the use of waterboarding and other methods, according to officials familiar with the requests.
The agency provided none, the officials said.
Friday, March 27, 2009
Experts On Third World Banana Republics: The U.S. has Become a Third World Banana Republic
Who are the leading experts on third world banana republics?
Probably those at the International Monetary Fund with years of experience lending money to corrupt regimes after their excess became so out of hand that they needed emergency assistance.
Today, two top IMF officials said that the U.S. has become a third world banana republic.
First, Simon Johnson, former chief economist of the IMF, says recovery will fail unless we break the financial oligarchy that is blocking essential reform, and calls the U.S. a banana republic. In his essay "The Quiet Coup" (which includes sections like "Becoming a Banana Republic"), Johnson writes:
Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. . . .
The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse....
Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. . . .
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). . . .But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.The government seems helpless, or unwilling, to act against them.
Second, Desmond Lachman - a long-time official with the IMF and former chief strategist for emerging markets at Salomon Smith Barney - agrees, writing in an essay entitled "Welcome to America, the World's Scariest Emerging Market":
The parallels between U.S. policymaking and what we see in emerging markets are clearest in how we've mishandled the banking crisis. We delude ourselves that our banks face liquidity problems, rather than deeper solvency problems, and we try to fix it all on the cheap just like any run-of-the-mill emerging market economy would try to do. And after years of lecturing Asian and Latin American leaders about the importance of consistency and transparency in sorting out financial crises, we fail on both counts....While such statements are generally taboo among officials or bankers in the U.S., even the former Vice President of the Dallas Federal Reserve agrees:
In visits to Asian capitals during the region's financial crisis in the late 1990s, I often heard Asian reformers such as Singapore's Lee Kuan Yew or Japan's Eisuke Sakakibara complain about how the incestuous relationship between governments and large Asian corporate conglomerates stymied real economic change. How fortunate, I thought then, that the United States was not similarly plagued by crony capitalism! However, watching Goldman Sachs's seeming lock on high-level U.S. Treasury jobs as well as the way that Republicans and Democrats alike tiptoed around reforming Freddie Mac and Fannie Mae -- among the largest campaign contributors to Congress -- made me wonder if the differences between the United States and the Asian economies were only a matter of degree....
If we insist on ... not facing our real problems, we might soon lose our status as a country to be emulated and join the ranks of those nations we have patronized for so long.
Gerald O'Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.
"Nontransparency in government programs is always associated with corruption in other countries, so I don't see why it wouldn't be here," he said.
How Much Is Left in Tarp?
According to the Wall Street Journal:
It appears that Treasury has, at most, $52.6 billion left in its [Tarp] rescue fund....
On Wednesday, Treasury Secretary Timothy Geithner twice was asked to specify how much remains in the Troubled Asset Relief Program. The question arose amid the series of new programs the Obama administration has announced in the past several weeks to boost ailing financial markets. In both instances, the secretary avoided a direct answer.
The first time came after Mr. Geithner delivered remarks to the Council on Foreign Relations Wednesday morning. The moderator asked the basic question: How much is left in TARP? Mr. Geithner's reply: "Very, very reasonable amounts of money -- significant enough money."
Is there "significant money" left in Tarp even though the Journal calculates there should only be left because Tarp was never actually limited to $ 700 billion?
Or is Geithner trying to bluff about having a bigger bazooka than he really has?
Leading Conservative Backs Nationalization of Banks and the Fed
I had assumed that virtually all conservatives were opposed to bank nationalization.
But Paul Craig Roberts, whose conservative credentials are pretty impeccable - former Assistant Secretary of the Treasury under President Reagan, former editor of the Wall Street Journal, listed by Who's Who in America as one of the 1,000 most influential political thinkers in the world, PhD economist - is calling for nationalization of both the banks and the Fed.
Roberts writes today:
Would it be cheaper for government to buy the shares of the banks and AIG at the current low prices than to pour trillions of taxpayers’ dollars into them in an effort to drive up private share prices with public money? The Bush/Paulson bailout plan of approximately $800 billion has been followed a few months later by the Obama/Geithner stimulus-bailout plan of another approximately $800 billion. Together it adds to $1.6 trillion in new Treasury debt, much of which might have to be monetized.Many liberal economists, as well as Alan Greenspan, free market advocate Marc Faber, and many others have previously called for bank nationalization.
Could this massive debt issue be avoided if the government took over the banks and netted out the losses between the constituent parts? A staid socialized financial sector run by civil servants is preferable to the gambling casino of greed-driven, innovative, unregulated capitalism operated by banksters who have caused crisis throughout the world.
Perhaps the Federal Reserve should be socialized as well. The notion of an independent, privately-owned Federal Reserve system was never more than a ruse to get a national bank into place. Once the central bank is part of the state-owned banking system, the government can create money without having to accumulate a massive public debt that saddles taxpayers’ and future budgets with hundreds of billions of dollars in annual interest payments.
Congressman Dennis Kucinich is also calling for the Fed to be nationalized.
Thursday, March 26, 2009
Pimco: Fed Needs to Double Its Balance Sheet
The world's biggest bond fund, Pimco, says the Fed needs to double the liabilities on its balance sheet to save the economy.
Does anyone see a possible conflict of interest here?
The government hired Pimco to help run its mortgage-backed securities purchase program - a program which benefitted Pimco. Specifically, as of June 30th, 2008, 61% of Pimco's holdings were in the very mortgage backed securities that it was hired by the Fed to buy back on behalf of American taxpayers, according to a September Bloomberg report that cited data on Pimco's own website.
The government also hired Pimco to advise it of the value of $118 billion of assets guaranteed in the bailout of Bank of America.
There are a couple of other quasi-governmental hats which Pimco is wearing as well.
In addition, Pimco is buying toxic assets through the PPIP program.
It appears that the bigger and more numerous the government bailout programs, the more money Pimco makes. So I'm not sure that Pimco is the most independent, objective observer on the government's response to the economic crisis.
Self-Regulation of Derivatives Industry - The Sequel
When the financiers volunteered in 1999 to self-regulate their derivatives trading, that worked out well, didn't it?
Not so much.
Similarly, the International Swaps and Derivatives Association (ISDA) is currently putting the finishing touches on a new framework for trading and clearing North American corporate credit default swaps.
But above and beyond the fact that industry self-regulation is largely what got us into this financial crisis, under the new framework, "legacy corporate CDS in North America will not fall under the new standards." In other words, the derivatives industry will not deal in any fashion with existing American CDS . . . you know, those little things which caused Bear Stearns, WaMu, Lehman and AIG to fail, and which are necessitating bzillions of dollars in taxpayer bailouts for Citigroup, Bank of America, etc.
Should we trust the industry insiders or nobel economists like Myron Scholes, who says that existing over-the-counter CDS should be "blown up" and closed out?
America Is Changing Its Name
Top financial company AIG is changing its name to "AIU Holdings".
Top private defense contractor Blackwater is changing its name to "Xe".
Following AIG and Blackwater's lead, the U.S. has decided to change its name.
White House spokesman Joe King today announced that the U.S. is changing its name in order to decrease associations the Founding Fathers and thorny issues like taxation without representation.
"There is so much anger among the American public", said King at a White House press conference, "that we think it would be helpful to refocus our national attention and to calm everyone down so we can get on with the important work of economic recovery."
The new name for the world's most powerful nation: the United Swaps of America.
"After weeks of consultation with Larry Summers, Tim Geithner, and the CEOs of Citigroup, Bank of America, Wells Fargo, JP Morgan and the financial leaders, we have crafted a new name which accurately conveys President Obama's new vision of hope and change", King said.
Nobel economists Paul Krugman, Joseph Stiglitz and Myron Scholes confirmed that the new change was a fair reflection of current economic realities in America.
"I thought we should 'blow up' the credit default swaps", Scholes said. "Since the administration has decided to instead gear its trillions of dollars in bailout programs to pay them off at their full face value, the new name change is an accurate label."
"It is true that the credit default swap counterparties are the new constituents of government", Stiglitz said. "All of the economic programs appear to be aimed at making sure they get paid in full . . . I guess it is 'one swap, one vote', so the new name is a better description for the current system".
Krugman, who was a vocal critic of the Bush administration and had previously said that he is in "despair" over Obama's economic policy, said that he is now in a much better mood:
"I was really frustrated when I thought that this was a government of the people, by the people and all of that kind of stuff ...
Now that I realize that the government is really for counterparties to these swaps, I guess its working well enough."
King said that the old initials "U.S.A." will still be used.
Roubini Backs Geithner's Toxic Asset Plan
Nouriel Roubini is backing Geithner's PPIP toxic asset plan, saying
Secretary Timothy Geithner's new toxic asset plan is a serious step in the right direction in that it creates a public-private partnership to buy the troubled assets of financial firms - in other words, to do the necessary cleansing.
Roubini admits, though:
The government bears the risk if and when the investors take a bath on the taxpayer-provided loans. If the economy gets worse, it could get very ugly, very quickly. The administration should be transparent in making clear that there is still a wealth transfer taking place here - from taxpayers to investors and banks.
Also, while this plan is designed by the Treasury, many of the big guarantees are being made by the Federal Deposit Insurance Corp. and the Fed. Why not use only Treasury funds? Well, then the administration would have to deal with Congress. While the populist hysteria of last week suggests this end run might make sense, there is something a little worrying about circumventing the legislative process on such a huge investment.
So even Roubini admits that PPIP is a massive wealth transfer from taxpayers to investors and banks, and that Treasury funds are being used to sidestep Congress and their constituents - the American people.
Nobel economist Michael Spence has also said that PPIP has a good chance of succeeding in cleansing banks of toxic assets.
And UC Berkeley professor Brad Delong has also defended the plan.
On the other hand, nobel economists Krugman and Stiglitz - and just about every other economist who has publicly commented on PPIP - have shredded the plan, saying it is robbing the taxpayers and that it will fail to turn the solvency of the banks or the economy around.
What do I think about PPIP?
I think - for two reasons - PPIP will fail:
(1) Citigroup, Bank of America and other players are already gaming the program (and see this), which will create unintended consequences; and
(2) Credit default swaps are some of the primary "toxic assets" which need to be cleared out of the system. As Nobel economist - and the "intellectual godfather of credit default swaps" - says, we must "blow up" the credit default swaps and close out the CDS contracts at less than full value. Anything less won't work to purge the banks and give them - and the economy - a chance to become solvent once again.
Wednesday, March 25, 2009
Fractals: The Missing Link?
A scientist named Tim Palmer may have just reconciled the worlds of classical and quantum physics - which have until now seemed irreconcilable - using fractals.
Before launching into Palmer's theory, remember the idea that the geometry of the universe may create its properties has excited scientists for a number of years. For example, Garrett Lisi's E8 theory claiming that the physics of the universe stems from its shape (a 248-dimensional object) made quite a buzz.
Similarly, some physicists believe that the properties of gravity stem from the geometry of higher dimensions in which gravity is active. And years before, Einstein concluded that gravity was an effect of the space-time geometry through which objects fall.
Okay, back to Palmer. As New Scientist writes:
Palmer's theory has - tentatively - been able to explain some of the mysteries and oddities of quantum physics.What if there were a way to reconcile these two opposing views, by showing how quantum theory might emerge from a deeper level of non-weird physics?
If you listen to physicist Tim Palmer, it begins to sound plausible. What has been missing, he argues, are some key ideas from an area of science that most quantum physicists have ignored: the science of fractals, those intricate patterns found in everything from fractured surfaces to oceanic flows....
Take the mathematics of fractals into account, says Palmer, and the long-standing puzzles of quantum theory may be much easier to understand. They might even dissolve away....
Palmer's ideas begin with gravity. The force that makes apples fall and holds planets in their orbit is also the only fundamental physical process capable of destroying information. It works like this: the hot gas and plasma making up a star contain an enormous amount of information locked in the atomic states of a huge number of particles. If the star collapses under its own gravity to form a black hole, most of the atoms are sucked in, resulting in almost all of that detailed information vanishing. Instead, the black hole can be described completely using just three quantities - its mass, angular momentum and electric charge....As a system loses information, the number of states you need to describe it diminishes. Wait long enough and you will find that the system reaches a point where no more states can be lost. In mathematical terms, this special subset of states is known as an invariant set. Once a state lies in this subset, it stays in it forever....
Complex systems are affected by chaos, which means that their behaviour can be influenced greatly by tiny changes. According to mathematics, the invariant set of a chaotic system is a fractal.
Fractal invariant sets have unusual geometric properties. If you plotted one on a map it would trace out the same intricate structure as a coastline. Zoom in on it and you would find more and more detail, with the patterns looking similar to the original unzoomed image.
Gravity and mathematics alone, Palmer suggests, imply that the invariant set of the universe should have a similarly intricate structure, and that the universe is trapped forever in this subset of all possible states. This might help to explain why the universe at the quantum level seems so bizarre.
For example, it may point to a natural explanation for one of the biggest puzzles of quantum physics, what physicists refer to as its "contextuality". Quantum theory seems to insist that particles do not have any properties before they are measured. Instead, the very act of measurement brings their properties into being. Or, put another way, quantum systems have meaning only in the context of the particular experiments performed on them....
According to Palmer's hypothesis, the invariant set contains all the physically realistic states of the universe. So any state that isn't part of the invariant set cannot physically exist.
Suppose you ... measure the position of an electron. Then you ask what you would have found if you repeated the experiment, only this time measuring the electron's velocity instead.
According to Palmer, when you repeat the experiment you are testing a hypothetical universe that is identical to the real one except that the position-measuring equipment is replaced with velocity-measuring equipment.
This is where the fractal nature of the invariant set matters. Consider a place of interest you want to visit along a coastline. If you get the coordinates even slightly wrong you could end up in the sea rather than where you want to be. In the same way, if the hypothetical universe does not lie on the fractal, then that universe is not in the invariant set and so it cannot physically exist....
Just as our eyes cannot discern the smallest details in fractal patterns, quantum theory only sees "coarse grain approximations", as if it is looking through fuzzy spectacles....
[Palmer's] theory backs Einstein's view that quantum theory really is incomplete. It is, Palmer says, blind to the fractal structure of the invariant set. If it wasn't, it would see that the world is not only deterministic, but it never exhibits any spooky effects.On the other hand, it also agrees with the view of Bohr and his followers: the properties of individual quantum systems are not independent of the entire world, especially the experiments we humans use to explore them. We are stuck with the disturbing fact that how we measure always influences what we find.
Whether or not Palmer is ultimately proven right, I believe that scientists will come to see that the geometry of the natural world plays a bigger part in explaining the observed physics than previously realized, and that we are in for some exciting discoveries in the years ahead.
Head of San Francisco Fed Bank: We Don't Know What We're Doing, So We'll Do More of It
The head of the Fed bank in San Francisco, Janet Yellen, has more or less admitted that the Fed has no idea what it is doing, but that such ignorance only argues for taking more aggressively action:
Yellen said that the wisdom of the Fed's approach is now the subject of "considerable debate." ...
Yellen admitted that it was hard to prove that the new programs were working."We simply don't have the experience needed to pin down the magnitude of the impacts," Yellen said.But this was just another argument in favor of a broad, aggressive, approach, she said.
Fed Uncertainty Principle:Arianna Huffington says that we should "take the steering wheel out of Geithner's hands". We should pry it out of the Fed's hands, as well, for they are collectively steering us off of a cliff.
The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.
Corollary Number One:
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three:
Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four:
The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
Geithner's Gaffe Roils Forex Markets
After Geithner said in a speech at the Council of Foreign Relations that he was "very open" to China's suggestion that the IMF's "special drawing rights" currency be used, the Forex markets went crazy, interpreting Geithner's statement as meaning that he endorsed China's call to end the Dollar as world reserve currency.
He quickly corrected his gaffe, saying that the Dollar would remain the world's currency for a long time. And Obama jumped in and reiterated that he was opposed to dropping the dollar as reserve currency. Australian Prime Minister Rudd gave his support by saying that replacement of the dollar was not on the agenda for this year's G-20 meeting. And Bernanke reiterated that he was opposed to moving away from reserve status for the dollar.
What does all of this mean?
Well, Geithner's gaffe was likely innocent (he hadn't read China's proposal at the time, and so he probably didn't understand the reporter's question).
The real meaning is that power is shifting away from the U.S.
Right on the heels of the call from China, Russia, the UN and perhaps the IMF itself for a replacement reserve currency, the fact that Obama, Geithner, Rudd, Bernanke and company are having to work so hard to reassure dollar-holders that the greenback will remain king speaks volumes.
When you have Washington Post headlines entitled "U.S. Vows To Sustain Dollar's Dominance: Geithner Defends Currency's Role", you know things are heating up.
Ten years ago, the Dollar's reserve status was so secure that they could have just laughed it off. And ten years ago, the Forex markets wouldn't have gyrated so wildly in response to Geithner's gaffe.
Whether it happens at next month's G-20 meeting (unlikely), by the end of the year, or in a couple of years, the fact is that the power of the Dollar is waning. No amount of temporary "safe haven" spikes in the Dollar can mask that long-term trend.
Tuesday, March 24, 2009
CNN Asks an Obvious Question: "Should USA Still be AAA?"
In an article entitled "Should USA still be AAA?", CNN writes:
According to credit rating agency Moody's, the amount of U.S. Treasurys held by the public, including foreign governments, is expected to rise to $7.8 trillion by the end of the government's fiscal year in September, up from $5.8 trillion a year earlier.
What's more, Moody's predicts that this figure could increase to $9 trillion by September 2010....So far, major credit rating firms such as Moody's and Standard & Poor's have yet to take any steps to lower the U.S. credit rating -- despite the increased spending and concerns about rising budget deficits.
Still, some smaller rating agencies have already lowered their U.S. rating. Egan-Jones Group actually removed the AAA rating from U.S. debt four years ago, well before the current crisis in financial markets prompted trillions in government bailouts.
"There is little doubt that the obligations of the U.S. government have risen faster than their means to absorb those obligation," said Sean Egan, the firm's managing director. "Hopefully this trend will be reversed."
Egan doesn't think there is much threat of the government defaulting on its debt. But he said that government policies will lead to a severe devaluation of the dollar, which could leave investors almost as bad off as a default.
Nonetheless, officials with Moody's and S&P defend their current AAA ratings for U.S. debt. They say that the U.S.' debt level as a percentage of gross domestic product and interest payments as a percentage of tax revenue are well within the range found in the other 17 nations that still have AAA ratings. Most of them are in Western Europe, which some argue has a worse banking and credit crisis than the U.S.
"If you rate U.S. sovereign debt as less than AAA, then there's probably nothing in the world that should be rated AAA," said David Wyss, chief economist for S&P. "To some extent you have to grade on the curve here."
Still, officials with S&P and Moody's say they are concerned about various U.S. debt ratios. They insist they wouldn't be afraid to lower U.S. ratings if the ratio of debt to the size of the U.S. economy or interest payments to government tax revenues become too great.
"We don't have a magic number," said Steven Hess, senior credit officer for Moody's. "But if at any point we became convinced that the debt and ratios would continue to grow, [a downgrade] is something we would consider."
But Egan argues that S&P and Moody's would be extremely reluctant to cut their ratings on U.S. debt. So if anyone is going to downgrade their opinion of the government's creditworthiness, it will be the marketplace that reacts first, not the agencies.
Egan is right. The USA should not still be rated AAA. See this, this, this and this.
Geithner Talks Up Regulation . . . Will It Happen, and Would That Be a Good Thing?
Tim Geithner said yesterday that the banking crisis shows that the U.S. financial system failed a major test and is in need of a regulatory overhaul.
Geithner said that the Obama administration wants to put in place a stronger, more stable system with a modernized government regulatory structure: " Our system basically failed its most fundamental test. It was too fragile."
As AFP writes:
"To make the system more stable in the future, to end this cycle of boom/bust, major financial crises every five years or so," the Treasury chief told the CNBC network.
To that end, he said, there will be "better resolution authority" to unwind collapsed firms such as AIG and Lehman Brothers, and curbs on executive compensation after a furor over lavish bonuses paid out by AIG....
Obama says more permanent changes are needed such as a "systemic risk regulator" to sound the alarm before a collapse becomes imminent.
Officials say the government also needs new powers similar to the authority enjoyed by a bankruptcy judge to restructure a failed company, to cover not just banks but major non-bank financial institutions such as hedge funds.
And exotic investment tools that long operated under the radar, such as the "credit default swaps" blamed for AIG's demise, are expected to be brought onto open exchanges....
In an unusual joint statement Monday, the Treasury and Federal Reserve pledged to work with Congress "to develop a regime that will allow the US government to address effectively at an early stage the potential failure of any systemically critical financial institution."
Is this new push to regulate for real? And will it be helpful?
Will the Foxes Let New Guards Into the Chicken Coop?
Will regulation actually occur?
Well, the most powerful player in Obama's economic team - Larry Summers - is one of the three or four people most responsible for the deregulation in the first place. As a 1999 New York Times article entitled "Congress Passes Wide-Ranging Bill Easing Bank Laws" quotes Summers as saying:
''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.''
The Times' article also quotes prophetic critics of the deregulation:
The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.
''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''
Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ''seemed determined to unlearn the lessons from our past mistakes.''
''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''
Will Summers - the most powerful economics player in the Obama administration - let any real regulation occur?
Will Geithner - the guy who let the banks run amok when he was head of the New York Fed, and who is adopting the banks' own fuzzy math in assessing their health today - really push for change?
I would like to hope so, but their track record doesn't make it seem likely.
If Regulation Is Enacted . . .
I agree that the system is in need of a regulatory overhaul.
The feds already have the authority to unwind collapsed companies. But I agree that more authority to unwind collapsed giants would be helpful, if for no other reason then that it might give more backbone to regulators to do so (by providing political cover in the form of explicit laws saying they can).
The Fed has been the bubble-blower-in-chief for decades. The Fed is a large part of the problem, and should be disbanded or brought under Federal control. In any event, don't give the Fed more powers to oversee and "stabilize" the economy. The Fed has proven for almost 100 years that it will botch the job.
And putting CDS on exchanges is not enough, and does not address the fundamental problems. Nobel economist Myron Scholes has slammed the business-as-usual approach of the Obama administration to credit default swaps:
The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over,” he said, referring to credit-default swaps and other complex securities that are traded off exchanges. “One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices.”By "close all contracts at mid-market prices", I think Scholes means reform the CDS contracts by insisting that counterparties take a haircut, insisting that the counterparties not get full value for the contracts, and that the CDS contracts be paid out and done with. That's what I've been pushing for months (see this, for example).
Finally, regulation should address the core issues that got us into this mess, including:
- Reigning in fractional reserve lending
- Reigning in leverage
- Re-enacting Glass-Steagall
- Reigning in all credit derivatives, including CDS
- Reigning in any future financial instrument or scheme - no matter what it is called - which creates too much leverage
- Making all financial institutions keep accurate books, and repealing all laws which give them wiggle room to cook their books
- Preventing any company from becoming too big to fail
Poll: Do You Think Geithner is Worse than Paulson, Better, or More of the Same?
Leading economists have said that Geithner's actions are just more of the same. For example, Paul Krugman says that "Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy".
In fact, Geithner is throwing a lot more money at the banks, hedge funds and other bigs than Paulson did.
Do you think that Geithner is worse than Paulson, better than Paulson or about the same?Final Poll Results:
Yes, he's worse than Paulson. | 113 (13%) |
No, he's better than Paulson. | 25 (3%) |
They're about the same. | 56 (6%) |
They all serve the same financial elites, so it doesn't matter who the Treasury secretary is. | 617 (76%) |
National Cancer Institute: Eating Too Much Red Meat Increases Mortality from Heart Disease and Cancer
The National Cancer Institute, in what has been called "the largest study of its kind", found that older Americans who eat large amounts of red or processed meat face a greater risk of death from heart disease and cancer.
In fact, a much larger study called "The China Study" was conducted years ago by one of the world's leading nutrition experts with the assistance of several country's governments. The China Study also found that eating too much red meat (or animal protein of any kind) caused heart disease, cancer and other problems.
I love hamburgers, pork and all other sorts of meat. I am hopeful that trying to eat grass fed and organic meat whenever possible, exercise, and eating lots of fresh fruits and vegetables will minimize the health risks.
But after reading The China Study, even I am eating a little more chicken and fish and a little less red meat.
Nobel Economist Stiglitz: Geithner Plan Will Rob Taxpayers, Won't Work
Nobel economist Joseph Stiglitz said that Geithner's toxic asset plan "amounts to robbery of the American people", is badly flawed and probably won't work, offers "perverse incentives" to banks.
He joins Paul Krugman, Dean Baker and many others in slamming the plan.
Monday, March 23, 2009
Head of China's Central Bank Proposes New World Currency
There have been rumors and announcements from China about a new reserve currency.
And the IMF has said that it is considering printing hundreds of billions of dollars worth of its own currency.
Today, the two stories came together in a dramatic development. Specifically, the head of China's central bank proposed making the IMF's currency the world's reserve currency, to replace the dollar.
Is this the start of a huge change, or just more posturing ahead of the G-20 summit next month?
Given that a U.N. panel will recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, the attack on the dollar from Geithner and Bernanke's various actions, and the fact that IMF is independently talking about printing large quantities of its own currency, the possibility that this is real cannot be totally dismissed.
We Asked for Change. But After Giving Trillions, We Only Get Chump Change
Change would be canceling the CDS contracts or at least cramming them down to a small dollar amount.
Chump change is putting up a trillion dollars of taxpayer dollars to buy CDS and other toxic assets.
Change would be stopping all bailouts to CDS counterparties, banks and other failed financial giants, and forcing the people who made money through illegal schemes give it back to the American people.
Chump change is making a big show about reducing a couple of hundred million in bonuses.
Change would be prosecuting Bush, Cheney, Rumsfeld, the Treasury and SEC regulators who let the financial giants cook their books, and all of the other clowns who broke every law in the book.Chump change is throwing Madoff - and no one else - in jail.
Change would be immediately withdrawing from Iraq and Afghanistan, and announcing that the U.S. will no longer launch any imperial wars.
Chump change is escalating the Afghanistan war, launching more drones into Pakistan, leaving "only" 50,000 troops in Iraq, and leaving Cheney's foreign-leader-assassination-team in place.
We asked for change. But after trillions of our hard-earned taxpayer dollars have been frittered away, all we're getting is chump change.
What ARE the Toxic Assets Everyone Is Talking About?
Paul Krugman has already eviscerated Geithner's toxic asset plan in the New York Times (see this, this and this). So have Yves Smith, Mish and many others.
But very few are taking a step back and addressing a more basic question: what are the toxic assets that Geithner is throwing taxpayer money at?
The answer is that the toxic assets include:
- Credit default swaps (CDS)
- Collateral debt obligations (CDOs)
- Mortgage backed securities
Some CDOs are bundles of subprime and other mortgages sold in "tranches" (when you use a fancy word which sounds French, people assume it must be good). The rating agencies like Moody's, S&P and Fitch's gave crazily high AAA ratings to many of the tranches on the assumption that real estate prices wouldn't fall nationwide.
They did, and so the CDOs plummeted in value and became "toxic".
Other CDOs - called "structured finance CDOs" - are bundles of mortgage-backed securities and other asset backed securities.
Moreover, some CDOs - called "synthetic CDOs" - are bundles of CDS and other credit derivatives.
Similarly, there were huge CDS bets made that the companies buying or selling CDOs would stay solvent. When those companies started becoming insolvent, the CDS became toxic.
Can you see the relationship between all of the toxic assets?
What Should We Do With the Toxic Assets?
I obviously agree with Krugman, Smith, Mish and everyone else who is not directly making money off of this scam that it is a horrible plan which will probably fail and end up sticking it to the taxpayer.
But what people should be discussing is cancelling the toxic CDS and CDOs. As I have written repeatedly over many months in different ways, the American people should demand that the government rescind the CDS and CDOs.
The government has that power. Indeed, the same arguments which have been made for the government's authority to cancel AIG's bonus contracts can be used to cancel CDS and CDO contracts. In order to receive any more bailout money (or to keep the money they already received), the CDS counterparties and CDO holders need to cancel their contracts. And for foreign CDS counterparties and CDO holders, the government could simply say "we will not loan your central banks any more money unless you cancel the contracts".
Do you think this is extreme?
Well, this is a much better plan that throwing trillions upon trillions of taxpayer dollars at banks (foreign and domestic), hedge funds, etc. And unlike Geithner's plan, this could actually work.
And this is a national emergency. Rescinding CDS and CDOs is is a much better plan than seizing gold or using governmental emergency powers in other ways.
The government can do something productive and force a rescission of all of the toxic assets (or at least the CDS and CDOs).
At the very least, the government must give the counterparties and CDO holders a haircut and cram the dollar value of those contracts down to a very small amount.
If Obama fails to do this, the economy will be poisoned for years to come and may not recover for a decade.
Headlines | 3-22-09
Some of the most important stories of the day . . .
Economy and Business
- Dow closes up 497
- Paul Krugman shreds the Toxic Asset Plan
- Ron Paul predicts 15 year depression
Science and General Interest
This roundup may be updated periodically throughout the day.
Sunday, March 22, 2009
The Best Way to Predict the Stock Market and the Economy
Daniel Arnold may have discovered the single best way to predict what the stock market and economy as a whole will do.
Arnold is not an economist, and his technique does not use traditional charting tools like Elliot Wave or stochastics. Arnold is just a smart guy (electrical engineer with a master's in bio-mechanics, who became a manager and then consultant at General Electric, started a successful manufacturing company in Silicon Valley which got bought out by a bigger company, and did well enough to retire in his mid-40's) who wanted to get a handle on investing.
Big Spender
So what's Arnold's forecasting method?
He simply charts the number of 45-54 year olds in the population at any given time. This number is easy to calculate from census or birth records, and immigration numbers (immigrants average a certain age when they arrive, from which you can estimate how many will turn 45, 46, etc., in a given year).
Indeed, the number for any given period can be predicted fairly accurately several decades in advance.
Why 45-54 year olds?
Its nothing magical.
It is simply that people on average spend by far the most during this time of life, which is - on average - when they are paying for their kids' college, paying mortgage on the biggest house they will own during their lifetime, and otherwise shelling out more cash than at any other time in their lives.
It turns out that there is a stunning correlation between the number of 45-54 year olds and the stock market and economy as a whole, as explained in Arnold's Book, "The Great Bust Ahead". Specifically, the 45-54 year olds are the "big spenders" who drive the economy. When there are more as a percentage of the population, the economy as a whole, including the stock market, goes up. When there are less, it goes down. As Arnold writes:
Consumer spending accounts for about 60% to 70% of the economy as expressed by the GDP (Gross Domestic Product), and more like 90% when indirect spending of our income as taxes by the government(s) is included. When coupled with demographic analyses focused on who does the “big spending” within the population, the economic past, stretching back for about a century, is almost effortlessly accounted for with stunning accuracy.Says Who?
Take a look at the following chart:
(there are better charts in the book).
The red line represents the number of 45-54 year olds in the U.S. population. the black line represents the Dow Jones Industrial Average, invested for inflation.
The correlation is pretty good for most of the chart, right?
Arnold describes the slight divergence during the early 30's as being an effect of the New Deal, and the point where Dow first starts permanently underachieving the demographic trends is when the Nasdaq became popular, sucking money from the Dow (the two indexes added together would presumably track the demographic trends more precisely). But even without these explanations, the correlation is really very good.
But the Dow Won't Hit 20,000 in 2012, So Isn't Arnold Wrong?
People like Harry Dent have tried to explain why Arnold's model has gone of the rails in the last year or so (the 20,000 figure for the Dow in 2012 is looking pretty unlikely given that we're already in a Depression). Dent adds a bunch of other cycles less grounded in common sense to explain the change in trends.
But I think Arnold's own explanation makes more sense:
If Arnold is right - and my hunch is that he is, given how close the correlation is between 45-54 year olds and the Dow - then the American economy will not only suffer from the collapse of the world's biggest speculative bubble in history, multiple financial crises caused by credit default swaps financial fraud and overleverage, lack of savings, and massive debt, but also from a drastic decline in the number of "big spenders" (45-54) who can drive the economy. Indeed, Arnold's demographic model predicted the greatest Depression in history simply from demographics, without taking into account the other crisis factors.
- 2008 was the victim of a self inflicted sub-prime financial crisis. This has nothing to do with the demographics based massive depression that is yet to come, as described in the book. The sub-prime consequences are however very similar though mild so far compared to what is coming our way. The book clearly spelled out that along the way unpredictable short-term (1 to 3 years) disruptive events could happen. The sub-prime crisis is just that. It should be regarded as the “warmer upper” or “hors d'oeuvre” for the big one that is now rapidly closing in on us all.
- The great unknown at this point is whether the sub-prime based crisis will drag on beyond 2009 and then blend into the demographics based massive decline which, per the book, could begin as early as 2009-10. Being short-term by definition, this period is totally unpredictable.
- There is the strong possibility that we will see an interim recovery manifested as a “last hurrah” rally in 2009 of perhaps 30% on the Dow after a new low of around 7,000. However, this is very speculative. The only historical certainty is that in the long-term the Dow always returns to the demographic. This lends some credence to such a rally as the immutable demographic, as you can see from the chart, remains in a very strong upswing as it moves toward its 2012 peak before crashing. Also waiting in the wings ready to surge back into the markets are trillions of dollars earning very little in money market funds.
And if Arnold is right, using his demographic forecasting method may prove invaluable for deciding where to invest both during the Depression and afterwards.
Arnold's book is only $8.95 and only 57 pages long. Read it for yourself to see what you think.
Note 1: Arnold - like Dent - are proponents of holding bonds. They might be right, but I still think they underestimate how much political instability will drive up the price of gold.
Note 2: A reader said that Dent came up with this demographic theory, not Arnold. If so, Arnold seems to have tested it more thoroughly than Dent. In any event, credit where credit is due.
Note 3: I am not an investment advisor and this should not be taken as investment advice.
Saturday, March 21, 2009
The Meaning of the CIA's 3,000 Pages of Destroyed Interrogation Tapes
What does the fact that the CIA destroyed numerous videotapes of Guantanamo interrogations, but has 3,000 pages of transcripts from those tapes really mean?
Initially, it means that CIA's claim that it destroyed the video tapes to protect the interrogators' identity is false. Why? Well, the transcripts contain the identity of the interrogator. And the CIA is refusing to produce the transcripts.
Obviously, the CIA could have "blurred" the face of the interrogator and shifted his voice (like you've seen on investigative tv shows like 60 Minutes) to protect the interrogator's identity. And since the CIA is not releasing the transcripts, it similarly could have refused to release the videos.
The fact that the CIA instead destroyed the videos shows that it has something to hide.
Indeed, Pulitzer prize winning journalist Seymour Hersh says that children were tortured as part of the "war on terror", as does respected political scientist Michael Haas. A videotape would instantly show whether the detainee was a child or an adult, while a transcript could easily hide age.
Finally, the top interrogation experts in the world agree that torture doesn't work. Indeed, it has been known for hundreds of years that people will say whatever they think the interrogator wants to hear to stop the pain.
Videotapes would likely clearly show detainees saying things like "okay, okay, if you want me to say I blew it up, I'll say it. Okay, yes. It was me. Will you stop torturing me now?"
The fact that the CIA destroyed the videotapes speaks volumes.
CBO Forecasts $9.3 Trillion Deficit in 10 Years
According to the International Herald Tribune , the Congressional Budget Office forecasts that Obama's budget will produce a $9.3 trillion deficit in the next decade, "much more than the White House has predicted".
We Not Only Have a Shadow Banking System, But also a Shadow Government
Everyone is talking about "the shadow banking system".
But we've also got a shadow government, as shown by the following quotes from Rolling Stone:
No one knows who's getting that money or exactly how much of it is disappearing through these new holes in the hull of America's credit rating....
"They're supposed to be temporary," says Paul-Martin Foss, an aide to Rep. Ron Paul. "But we keep getting notices every six months or so that they're being renewed. They just sort of quietly announce it."
[S]enator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn't like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything." According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter....
In January, when Rep. Alan Grayson of Florida asked Federal Reserve vice chairman Donald Kohn where all the money went — only $1.2 trillion had vanished by then — Kohn gave Grayson a classic eye roll ....
Grayson pressed on, demanding to know on what terms the Fed was lending the money. Presumably it was buying assets and making loans, but no one knew how it was pricing those assets — in other words, no one knew what kind of deal it was striking on behalf of taxpayers. So when Grayson asked if the purchased assets were "marked to market" — a methodology that assigns a concrete value to assets, based on the market rate on the day they are traded — Kohn answered, mysteriously, "The ones that have market values are marked to market." The implication was that the Fed was purchasing derivatives like credit swaps or other instruments that were basically impossible to value objectively — paying real money for God knows what.
"Well, how much of them don't have market values?" asked Grayson. "How much of them are worthless?"
"None are worthless," Kohn snapped.
"Then why don't you mark them to market?" Grayson demanded.
"Well," Kohn sighed, "we are marking the ones to market that have market values."
In essence, the Fed was telling Congress to lay off and let the experts handle things. "It's like buying a car in a used-car lot without opening the hood, and saying, 'I think it's fine,'" says Dan Fuss, an analyst with the investment firm Loomis Sayles. "The salesman says, 'Don't worry about it. Trust me.' It'll probably get us out of the lot, but how much farther? None of us knows."
When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriations process, what's happening in the Fed amounts to something truly revolutionary — a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke. "We spend hours and hours and hours arguing over $10 million amendments on the floor of the Senate, but there has been no discussion about who has been receiving this $3 trillion," says Sen. Bernie Sanders. "It is beyond comprehension." ...
And the Fed isn't the only arm of the bailout that has closed ranks. The Treasury, too, has maintained incredible secrecy surrounding its implementation even of the TARP program, which was mandated by Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine which banks received bailout funds and which didn't — particularly the first $350 billion given out under Bush appointee Hank Paulson.
The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded — and this isn't a joke — by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless by the response.
"Do you believe that?" she says incredulously. "That's not what we had in mind."
Another member of Congress, who asked not to be named, offers his own theory about the TARP process. "I think basically if you knew Hank Paulson, you got the money," he says.
How To Curb Fraud At Financial Institutions
This interesting 16 minute talk by behavioral economist Dan Ariely gives some interesting - and counter-intuitive - tips for how to reduce fraud at financial institutions:
Friday, March 20, 2009
"Sources Say Toxic Asset Plan Near Completion"
That's the headline from the Associated Press.
I am sure that the plan will be toxic, as advertised.
Nobel Economists Slam Obama's Economic Policy
Nobel economists Paul Krugman and Joseph Stiglitz slammed Obama's economic policy this week.
Krugman said:
At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached.Stiglitz said the Obama administration has failed to address the structural and regulatory flaws at the heart of the financial crisis that stand in the way of economic recovery and that Obama has confused saving the bankers and saving the banks. He also said:
This was bad analysis, bad policy, and terrible politics. This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers.
We got cheated, to put it bluntly. What we don’t know is that—whether we will continue to get cheated. And that’s really at the core of much of what we’re talking about. Are we going to continue to get cheated?...Do American taxpayers want to be bailing out institutions abroad? That’s a question we ought to be debating....
The fact that there was so much campaign contributions from the financial sector at least raises the concern [that the Obama administration is throwing money at the bankers because of their campaign contributions].
And Nobel economist Myron Scholes has slammed the business-as-usual approach of the Obama administration to credit default swaps:
The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over,” he said, referring to credit-default swaps and other complex securities that are traded off exchanges. “One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices.”Update: Nobel economist Ed Prescott is slamming the Obama approach as well.
Ter·ror·ist (noun): Anyone Who Disagrees with the Government
The Department of Homeland Security and police forces label anyone who they disagree with - or who disagrees with government policies - as "terrorists".
Don't believe me?
Well, according to a law school professor, pursuant to the Military Commissions Act, "Anyone who ... speaks out against the government's policies could be declared an 'unlawful enemy combatant' and imprisoned indefinitely. That includes American citizens."
And according to an FBI memo, peace protesters are being labeled as "terrorists". Indeed, police have been terrorizing children, little old ladies and other "dangerous" people who attempted to peacefully protest.
And a 2003 FBI memo describes protesters' use of videotaping as an "intimidation" technique, even though - as the ACLU points out - "Most mainstream demonstrators often use videotape during protests to document law enforcement activity and, more importantly, deter police from acting outside the law." The FBI appears to be objecting to the use of cameras to document unlawful behavior by law enforcement itself.
And the Internet has been labeled as a breeding ground for terrorists, with anyone who questions the government's versions of history being especially equated with terrorists.
Now, the state of Missouri has labeled as terrorists current Congressman Ron Paul and his supporters, former Congressman Bob Barr, libertarians in general, anyone who holds gold, and a host of other people.
In other words, anyone who disagrees with the "acceptable" way of looking at things is a terrorist.
How is this different from Stalin or Mao's use of labels such as "enemy of the state"?
Is the Fed the Last Buyer of Long-Term Treasuries?
CFR economist Brad Setser writes:
Foreign demand for long-term Treasuries has disappeared over the last few months....The rolling 3m sum bounces around a bit, but foreign demand for long-term Treasuries in November, December and January was as subdued as it has been for a long-time. ...
For all the talk of safe haven flows to the US — foreign demand for all long-term US bonds has effectively disappeared....
What have foreign investors been buying? Short-term Treasury bills. In huge quantities.Setser notes with respect to China:
[The] surge in demand for [treasury] bills now seems to be fading....
If — as seems likely — foreign demand for Treasuries fades long before the US fiscal deficit, the US Treasury will need to sell an awful lot of Treasuries to American investors. For the past several years I have argued that it was almost impossible to overstate the impact of central bank demand on the Treasury market.That may no longer be the case going forward.
Over the past three months, almost all the growth in China's Treasury portfolio has come from its rapidly growing holdings of short-term bills not from purchases of longer-term notes.And with respect to Russia:
Russia also, interestingly, added to its holdings of short-term Treasury bills.With foreign governments shifting from long-term to short-term U.S. treasuries, the Fed itself may be one of the last remaining players of any significance still buying long-term treasuries.
Does a Single Independent Economist Buy the Geithner-Summers-Bernanke Approach?
Does a single independent economist buy the Geithner-Summers-Bernanke approach?
On the left, you have:
- Nobel economist Joseph Stiglitz saying that they have failed to address the structural and regulatory flaws at the heart of the financial crisis that stand in the way of economic recovery, and that they have confused saving the banks with saving the bankers
- Nobel economist Paul Krugman saying their plan to prop up asset prices "isn't going to fly". He also said:
At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached. This was bad analysis, bad policy, and terrible politics. This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers.
- Prominent economists like Nouriel Roubini, James Galbraith, Robert Kuttner, Dean Baker, Michael Hudson and many others slamming their approach (and Paulson's as well)
On the right, you have:
- Leading monetary economist Anna Schwartz saying that they are fighting the last war and doing it all wrong
- Former Assistant Secretary of the Treasury and former editor of the Wall Street Journal Paul Craig Roberts lambasting their approach
- Economist John Williams saying "the federal government is bankrupt ... If the federal government were a corporation … the president and senior treasury officers would be in federal penitentiary."
- Prominent economist Marc Faber and many others tearing their approach to shreds.
Sure, the economists for the banks and other financial giants which are receiving billions at the government trough think that the Geithner-Summers-Bernanke approach is swell.
And perhaps a couple of economists for investment funds which use their giant interventions into the free market to make some quick money.
But other than them, no one seems to be buying it.
Thursday, March 19, 2009
A.I.G. Sues U.S. for Return of $306 Million in Tax Payments, Some Involving Tax Deals in Offshore Havens - Uses Taxpayer Money to Pursue the Lawsuit
As the New York Times notes:
A.I.G. sued the government last month in a bid to force it to return the payments, which stemmed in large part from its use of aggressive tax deals, some involving entities controlled by the company’s financial products unit in the Cayman Islands, Ireland, the Dutch Antilles and other offshore havens....
A.I.G. is effectively suing its majority owner, the government, which has an 80 percent stake .... The company is in effect asking for even more money, in the form of tax refunds. The suit also suggests that A.I.G. is spending taxpayer money to pursue its case....
The lawsuit ... details, among other things, certain tax-related dealings of the financial products unit, the once high-flying division that has been singled out for its role in A.I.G.’s financial crisis last fall.
You Know Things Are Bad When . . .
CNBC runs a front-page article entitled:
"What the Pros Say: US Is Now 'Bankrupt' "
Pressure Mounts on the Dollar
There are various attacks on the U.S. dollar at the moment, including:
- The IMF is considering printing hundreds of billions of dollars worth of its own currency
- A U.N. panel will recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies
- The Fed is buying $300 billion (in the first round) of long-term treasuries
- China is saying it will diversify out of the dollar
- The rumor is that both Russia and China are pushing for the dollar to be replaced as the world's reserve currency
Financial Giants Are Too Big to Bail, But Not Too Big to Jail
Too Big Has Failed
The head of the FDIC says that the "too big to fail' strategy must end.
Similarly, Senator Leahy said "If a company is too big to fail, it is too big to exist."
And Kansas City Fed President and veteran Fed official Thomas Hoenig says:
Too big has failed....
Many of the [government's current policy revolves around the idea of] "too big to fail" .... History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger. ...So it should be obvious that the "too big to fail" idea is wrong.
Even large banks can be dealt with in a way in a manner which imposes market discipline on management and stockholders, while controlling taxpayer losses....
Banking regulators need to be willing to write down losses, bring in new managers and sell off businesses if institutions can’t survive on their own, no matter what their size.
Too Big To Bail
Instead of too big to fail, the proper concept is "too big to bail".
Financial giants that are so big that bailing them out would impoverish taxpayers or bankrupt America should be allowed to go bankrupt.
Not Too Big To Jail
Moreover, a lot of the top guys at the giant financial companies should be in jail.
It is clear that many of these guys cooked their books and made fraudulent promises to investors.
And "at least 13 firms receiving billions of dollars in bailout money owe a total of more than $220 million in unpaid federal taxes". These guys should be in jail for non-payment of taxes (that's how they got Al Capone).
And remember that - in certain cases - too big can itself be illegal.
Specifically, criminal penalties can be imposed on companies which have violated anti-trust laws, and used their size and power to manipulate the market.
Corporations engaging in unlawful restraints of trade by price fixing, bid rigging, customer and territorial allocation agreements or other blatantly anti-competitive acts can be prosecuted for criminal violations of the Sherman Act, and can be punished by up to a $100 million dollar fine. Indeed, individuals found guilty of criminal violations under the Sherman Act can be sentenced to up to 10 years in jail and up to a $1 million dollar fine.
I am 100% certain that the biggest financial players engaged in anti-competitive conduct. It would only take one aggressive prosecutor to prove it.
Clean up Wall Street, or the boys will keep breaking laws - in bigger and more destructive ways - in the future.
These giants may be too big to bail, but they are not too big to jail.
“By the Time its New Steps Are Done, the Fed’s Balance Sheet Will Reach $4.5 Trillion, or About a Third of GDP”
Paul Krugman has been calling for more government intervention into the economy than just about anyone else.
Krugman is calling for stimulus in the US and European Union of 4% of GDP:
“My back of the envelope says on both sides of the Atlantic we should be having a stimulus that peaks at 4 percent of GDP annually .... The United States is not doing enough to fight the crisis and Europe is doing a bit less than half as much as the United States.
However, as noted in the Economist:
By the time its new steps are done, the Fed’s balance sheet will reach $4.5 trillion, or about a third of GDP, up from less than $1 trillion a year ago, Capital Economics estimates.I understand that dollars spent on stimulus and the size of the Fed's balance sheet do not necessarily have an exact correspondence. But the size of the Fed's balance sheet does give an indication of the massive scale of Bernanke's tinkering.
There Is Still Hope
In response to the gloomy economic times we are in, I am re-posting 3 pieces I wrote a couple of years ago [edited slightly to fit the times].
Each of our Individual Voices Is More Important Than We've Realized
I just read a study which says that even one dissenting voice can give people permission to think for themselves. Specifically:
Solomon Asch, with experiments originally carried out in the 1950s and well-replicated since, highlighted a phenomenon now known as "conformity". In the classic experiment, a subject sees a puzzle like the one in the nearby diagram: Which of the lines A, B, and C is the same size as the line X? Take a moment to determine your own answer...Get it so far? People tend to defer to what the herd thinks.The gotcha is that the subject is seated alongside a number of other people looking at the diagram - seemingly other subjects, actually confederates of the experimenter. The other "subjects" in the experiment, one after the other, say that line C seems to be the same size as X. The real subject is seated next-to-last. How many people, placed in this situation, would say "C" - giving an obviously incorrect answer that agrees with the unanimous answer of the other subjects? What do you think the percentage would be?
Three-quarters of the subjects in Asch's experiment gave a "conforming" answer at least once. A third of the subjects conformed more than half the time.
But here's the good news:
Adding a single dissenter - just one other person who gives the correct answer, or even an incorrect answer that's different from the group's incorrect answer - reduces conformity very sharply, down to 5-10%.Why is this important? Well, it means that one person who publicly speaks the truth can sway a group of people away from group-think.
If a group of people is leaning towards believing the government's version of events, a single person who speaks the truth can help snap the group out of its trance.
There is an important point here regarding the web, as well. The above-cited article states that:
when subjects can respond in a way that will not be seen by the group, conformity also drops.What does that mean? Well, on the web, many people post anonymously. The anonymity gives people permission to "respond in a way that will not be seen by the group". But most Americans still don't get their news from the web, or only go to mainstream corporate news sites.
Away from the keyboard, we are not very anonymous. So that is where the conformity dynamic -- and the need for courageous dissent -- is vital. It is doubly important that we apply the same hard-hitting truthtelling we do on the Internet in our face-to-face interactions; because it is there that dissent is urgently needed.
Bottom line: Each person's voice has the power to snap entire groups out of their coma of irrational group-think. So go forth and be a light of rationality and truth among the sleeping masses.
Hope In a Time of Hopelessness
Several long-time activists have told me recently they are overwhelmed, worried, and think that we may be losing the struggle ....
One very smart friend asked me if there is any basis for hope.
But hope is an act of will, not a passive mood. Admittedly, things are easier when circumstances bring hope to us, and we can just receive the hopeful and inspiring news.
But if we care about winning, we have to be able to decide to have hope even when outer circumstances aren't so positive.
I have children who are counting on me to leave them with a reasonably safe and sane planet. As I've said elsewhere, "I care too much about my kids and my freedom to be afraid. I care enough about them that it gets my heart beating, connects me to something bigger than myself, and that gives me courage, even when the chips are down."
If I allowed myself to lose hope about exposing falsehoods, about protecting our freedom and building a hopeful future, I would be dropping the ball for my kids. I would be condemning them to a potentially very grey world where bigger and worse things may happen, where their liberties and joys are wholly stripped away, where every ounce of vitality is beholden to joyless and useless tasks.
Many of us may be motivated by other things besides kids .... Only you can know what that is. But we each must dig down deep, and connect with our most powerful motivations to win the struggle for freedom and truth.
I don't know about you . . . but I don't have the luxury of giving up hope. When I get depressed, overwhelmed or exhausted by the stunning acts of savagery, treason, and disinformation carried out by the imperialists, or the willful ignorance of many Americans, I will myself into finding some reason to have hope.
Because the struggle for liberty is too important for me to give up.
If you lose hope, somehow you lose the vitality that keeps life moving, you lose that courage to be, that quality that helps you go on in spite of it all. And so today I still have a dream.
- Martin Luther King, Jr.
Do not let your fire go out, spark by irreplaceable spark, in the hopeless swamps of the approximate, the not-quite, the not-yet, the not-at-all. Do not let the hero in your soul perish, in lonely frustration for the life you deserved, but have never been able to reach. Check your road and the nature of your battle. The world you desired can be won. It exists, it is real, it is possible, it is yours.
- Ayn Rand
Hope is like a road in the country; there was never a road, but when many people walk on it, the road comes into existence.
- Lin Yutang
Hope is passion for what is possible.
- Soren Kierkegaard
Turn your face to the sun and the shadows fall behind you.
- Maori Proverb
- Thomas Jefferson
He who does not hope to win has already lost.
- Jose Joaquin Olmedo
When you do nothing, you feel overwhelmed and powerless. But when you get involved, you feel the sense of hope and accomplishment that comes from knowing you are working to make things better.
- Pauline R. Kezer
Hope is a state of mind, not of the world. Hope, in this deep and powerful sense, is not the same as joy that things are going well, or willingness to invest in enterprises that are obviously heading for success, but rather an ability to work for something because it is good.
- Unknown
We should not let our fears hold us back from pursuing our hopes.
- John Fitzgerald Kennedy
Your hopes, dreams and aspirations are legitimate. They are trying to take you airborne, above the clouds, above the storms, if you only let them.
- William James
Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.
- Helen Keller
The capacity for hope is the most significant fact of life. It provides human beings with a sense of destination and the energy to get started.
- Norman Cousins
When I despair, I remember that all through history the way of truth and love has always won. There have been tyrants and murderers and for a time they seem invincible but in the end, they always fall -- think of it, ALWAYS.
- Mahatma Gandhi
We must accept finite disappointment, but we must never lose infinite hope.
- Martin Luther King, Jr.
There is no medicine like hope, no incentive so great, and no tonic so powerful as expectation of something better tomorrow.
- Orison Marden
- William Ellery Channing
Hope is medicine for a soul that's sick and tired.
- Eric Swensson
Hope has two beautiful daughters. Their names are anger and courage; anger at the way things are, and courage to see that they do not remain the way they are.
- Augustine of Hippo
- Emil Brunner
The very least you can do in your life is to figure out what you hope for. And the most you can do is live inside that hope. Not admire it from a distance but live right in it, under its roof.
- Barbara Kingsolver
Hope is not the conviction that something will turn out well, but the certainty that something makes sense regardless of how it turns out.
- Vaclav Havel
Hope is the companion of power, and mother of success; for who so hopes strongly has within him the gift of miracles.
- Samuel Smiles
- Abraham Cowley
Every area of trouble gives out a ray of hope; and the one unchangeable certainty is that nothing is certain or unchangeable.
- John Fitzgerald Kennedy
Let perseverance be your engine and hope your fuel.
- H. Jackson Brown Jr
Develop sincere desire for the goal. Out of fire of desire comes success.
- Unknown
- Mohandas Gandhi
Everything that is done in the world is done by hope.
- Martin Luther King, Jr.
Don't lose hope. When it gets darkest the stars come out.
- Unknown
Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no hope at all.
- Dale Carnegie
The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.
- Winston Churchill
The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless and yet be determined to make them otherwise.
- F. Scott Fitzgerald
It is from numberless diverse acts of courage and belief that human history is shaped. Each time a man stands up for an ideal, or acts to improve the lot of others, or strikes out against injustice, he sends forth a tiny ripple of hope, and crossing each other from a million different centers of energy and daring, those ripples build a current that can sweep down the mightiest walls of oppression and resistance.
- Robert F . Kennedy
Courage
It all comes down to courage . . .
If you have courage, then you're willing to face that really stinky mess in the garage and clean it up.
You have faith you can clean it up, because you've cleaned up other really stinky messes, or seen other people do it. In other words, you have faith because you have experience of succeeding in the past.
Fat and Happy
We Americans have led a very pampered life for the past couple of decades. Sure, there has been inequality and exploitation, and some have had it a lot worse than others. But, other than stopping extreme forms of racism (Ku Klux Klan, etc.), we haven't had to defend our borders or our liberties.
Basically, we complain if our tv goes on the fritz, or our team loses the game, or we can't afford that new, nicer whatzit, or if our boss is mean. We think those are big, Earth-shattering, history-changing events. But they are quite small in the grand scheme of things
And even those of us who think of ourselves as brave heroes usually only act like that when we know it is within the bounds of safety, within the limits of what we can handle. "Tough guys" tend to turn into meek mice whenever they are really threatened.
So we're basically lazy and timid, but we don't know or admit it. We like to pretend we are like the Founding Fathers or John Wayne (at least the cowboys had to rough it a little).
But we have no experience of successfully standing up to tyrants, so we have no faith that it can be done, and while the evidence is right before our noses that our current leaders are tyrants, we're so terrified that we have our knickers in a bunch.
What Would They Do?
Even if you haven't experienced success in standing up to tyrants, remember that the Founding Fathers did just that. They were just men, not gods. Sure, they were too persistent and stubborn to give up, but that's because they CARED about something: freedom and the possibility of a better life.
They may have lived hundreds of years before our time, but that doesn't matter -- we can still learn from their experience as if it were happening now. Time is an illusion, since human nature is the same now as it was then. Just as many people of faith ask "what would Jesus do?", we can also ask "what would the founding fathers do?" If they could do it, we can do it.
Take Heart
There is a real misunderstanding of what it means to be courageous. In America, courage is often thought of as a testosterone-driven toughness. There's nothing the matter with testosterone. Masculinity is a great thing. But many American men secretly fear that they don't have sufficient testosterone to really be brave when the chips are down. As I said above, even those of us who think of ourselves as brave men usually only act like that when we know it is within the bounds of safety, within the limits of what we can handle.
We might jump in a bar room brawl to protect our buddy, but that's because we know we're only going to get knocked around a little bit -- nothing but bruises that will go away in a little while. The stakes just aren't that high.
But most American men secretly doubt whether they are macho enough to pull it off under fire. They may watch alot of action movies, and talk tough, and stand up when its not really dangerous (or when they clearly outgun the other guy), but they are secretly terrified that they don't have quite enough backbone to pull it off against the big boys, such as tyrants.
I would argue that this view fundamentally misunderstands the nature of courage, and ensures that we will never have true courage when it counts.
By way of analogy, the word "discipline" comes from "disciple". If you are a true "disciple" of an idea of a plan or a strategy or a religion, then you will stick to it and "have discipline" to reach your goal. It is not just a matter of willpower; it is also devotion to something bigger than ourselves.
Similarly, the word "courage" comes from the French "with heart". Why does it have this root meaning? Because it takes heart to act bravely. That's how my childhood Karate teacher used the word: when I was practicing with courage, power and focus, he would say "you have alot of heart today" (indeed, many old-school warriors use the phrase "fighting with heart" in that way).
If courage is acting "with heart", we've lost heart. And without heart, we cannot face the truth.
So how do we regain our heart? Well, let's start with what gets our hearts beating.
Remember that the mother bear is one of the fiercest animals of all. Just get between a mother bear and her cub and you'll see what I mean. It is her love of her cub which gives her the heart to face any enemy when her cub is threatened. It is not her level of testosterone, but rather her love for her cub which makes her so fierce.
Just as discipline is more than just willpower, courage stems from something bigger than just cajones. In fact, the strongest courage comes from the love of something we care about, since our heart will sustain us even when the chips are really down and we are really up against a tyrant. As the ancient Chinese philosopher Lao Tzu said: "Being deeply loved by someone gives you strength, while loving someone deeply gives you courage. "
In addition, we're no longer living in the old west. Individualism is very important in numerous ways, but we can only win against the tyrants as a team, as a community, as a nation. And only by opening our hearts to what matters will we be able to work together, to fight for all of our kids, and all of our freedom. Only then will we be able to put the crooks and the looters and the tyrants back in the box.
Do we care about our kids, our significant others, our parents, our friends? Do we care about the freedom to choose what we want, instead of having our "great leader" choose for us?
If not, what DO we care about? Because if that is where your heart is, that is what will give you courage.
I care too much about my kids and their future to be afraid. I care enough about them that it gets my heart beating, connects me to something bigger than myself, and that gives me courage, even when the chips are down.
Courage is an innate human quality. It is within each of us, waiting to reveal itself when we open our hearts. When we act with heart, by definition, we are courageous.
Those who would trade safety for freedom deserve neither.
– Thomas Jefferson
Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure, or nothing.
- Hellen Keller
Whatever you can do or dream you can, begin it. Boldness has genius, power, and magic in it.
- Goethe
Courage is not the absence of fear, but rather the judgment that something else is more important than fear.
- Ambrose Redmoon
Courage is an everyday thing. When we look reality squarely in the eye and refuse to back away from our awareness, we are living courage.
- Anonymous
To have courage for whatever comes in life - everything lies in that.
- Mother Teresa
It is from numberless diverse acts of courage and belief that human history is shaped. Each time a man stands up for an ideal, or acts to improve the lot of others, or strikes out against injustice, he sends forth a tiny ripple of hope, and crossing each other from a million different centers of energy and daring, those ripples build a current that can sweep down the mightiest walls of oppression and resistance.
- Robert F . Kennedy
It is not because things are difficult that we do not dare; it is because we do not dare that they are difficult.
- Seneca, Native American
Courage is the first of human qualities because it is the quality which guarantees the others.
- Aristotle
Courage is being scared to death but saddling up anyway.
- John Wayne
Courage is doing what your afraid to do. There can be no courage unless you're scared.
- Eddie Rickenbacker
Courage is fear holding on a minute longer.
- George Patton
One man with courage makes a majority.
- Andrew Jackson
Be bold and courageous. When you look back on your life, you'll regret the things you didn't do more than the ones you did.
- H. Jackson Brown, Jr.
You gain strength, courage, and confidence by every experience in which you really stop to look fear in the face.
— Eleanor Roosevelt
Within each of us is a hidden store of energy. Energy we can release to compete in the marathon of life Within each of us is a hidden store of courage. Courage to give us the strength to face any challenge Within each of us is a hidden store of determination. Determination to keep us in the race when all seems lost.
- Roger Dawson
We must never despair; our situation has been compromising before; and it changed for the better; so I trust it will again. If difficulties arise; we must put forth new exertion and proportion our efforts to the exigencies of the times.
- George Washington
We must remember that one determined person can make a significant difference, and that a small group of determined people can change the course of history.
-Sonia Johnson
Never doubt that a small, group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.
- Margaret Mead
Bush White House Pushes Revisionist History of 9/11 and the Iraq War
Condoleezza Rice told Charlie Rose yesterday that no one in the White House pushed a link between Iraq and 9/11:
ROSE: But you didn’t believe it had anything to do with 9/11.
RICE: No. No one was arguing that Saddam Hussein somehow had something to do with 9/11.
ROSE: No one.
RICE: I was certainly not. The President was certainly not. … That’s right. We were not arguing that.
The truth is that the White House repeatedly made that linkage, and it is demonstrably provable that they intentionally made that linkage even though they knew it was false.
As I wrote in 2005:
"Ten days after the September 11, 2001, terrorist attacks on the World Trade Center and the Pentagon, President Bush was told in a highly classified briefing that the U.S. intelligence community had no evidence linking the Iraqi regime of Saddam Hussein to the attacks and that there was scant credible evidence that Iraq had any significant collaborative ties with Al Qaeda".(See also this).
In addition, a Defense Intelligence Terrorism Summary issued in February 2002 by the United States Defense Intelligence Agency cast significant doubt on the possibility of a Saddam Hussein-al-Qaeda conspiracy.
And yet Bush, Cheney and other top administration officials claimed and continue to claim that Saddam was behind 9/11. See this analysis. Indeed, Bush administration officials apparently swore in a lawsuit that Saddam was behind 9/11.
Indeed, President Bush's March 18, 2003 letter to Congress authorizing the use of force against Iraq, includes the following paragraph:
(2) acting pursuant to the Constitution and Public Law 107-243 is consistent with the United States and other countries continuing to take the necessary actions against international terrorists and terrorist organizations, including those nations, organizations, or persons who planned, authorized, committed, or aided the terrorist attacks that occurred on September 11, 2001.
Therefore, Bush expressly justified the Iraq war to Congress by representing that Iraq planned, authorized, committed, or aided the 9/11 attacks.
Grounds for impeachment based on 9-11 lies are just as important as those based on lies regarding Iraq's weapons of mass destruction. Why? Because the administration's false claims about Saddam and 9/11 helped convince a large portion of the American public to support the invasion of Iraq. While the focus now may be on false WMD claims, it is important to remember that, at the time, the Saddam-911 link was at least as important in many people's minds as a reason to invade Iraq....
Indeed, the WMD hoax probably would not have worked if it wasn't for the anti-Arab hysteria after September 11th. And the government policy of torture would not have been tolerated if we weren't misled into thinking that Saddam and Al-Qaeda had formed an unholy, all-powerful alliance on 9/11, and had to be stopped at any cost. Thus, I would argue that the Saddam-911 deception was a necessary precursor to the administration's WMD lies and torture policies.
And polls show that almost 90% of the troops in Iraq are under the mistaken belief that the U.S. mission in that country is “to retaliate for Saddam’s role in the 9-11 attacks.” In other words, our kids are fighting and dying because of this lie....
It has also just been revealed that 5 hours after the 9/11 attacks, Rumsfeld said "my interest is to hit Saddam". This confirms previous reports that hours after the 9/11 attacks, Rumsfeld said "Go massive . . . Sweep it all up. Things related and not." And at 2:40 p.m. on September 11th, in a memorandum of discussions between top administration officials, several lines below the statement "judge whether good enough [to] hit S.H. [that is, Saddam Hussein] at same time", is the statement "Hard to get a good case." In other words, top officials knew that there wasn't a good case that Hussein was behind 9/11, but they wanted to use the 9/11 attacks as an excuse to justify war with Iraq anyway.
In a similar revisionist fashion, the Bush administration also repeatedly stated that Bin Laden was behind 9/11. See this, this, this and this.
But Cheney now claims that the White House never said Bin Laden was behind 9/11.
Wednesday, March 18, 2009
The Geithner-Summers-Bernanke Plan to Prop Up Asset Prices Has Failed
Paul Krugman wrote a couple of weeks ago:
Top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.
Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.
And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions....
The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly ....
Why won't it fly?
One reason is that economic psychologists tells us that consumer psychology has shifted for many years to come, and Americans are hunkering down and not buying anything other than the bare necessities. The Fed can try to play the part of all of the actors in the economy, but it won't work.
Today, Edward Harrison's must-read post explains provides additional reasons why the Geithner-Summers-Bernanke plan to prop up asset prices cannot succeed (if you don't read the whole post, at least read the following excerpts):
Of course, whether or not the banks should be liquidated (the free market solution) or nationalized (the government intervention approach) is subject to debate. But regardless, it should now be obvious that the Geithner-Summers-Bernanke plan to prop up asset prices is not only crazily expensive, but it has not worked and cannot work. Therefore, it has already failed.The U.S. government's efforts point in four directions:
So I lied, there is only one direction the government is headed: increase asset prices (or, at least keep them from falling). Read White House Economic Advisor Larry Summers' recent prepared remarks to see what I mean. (Summers on How to Deal With a ‘Rarer Kind of Recession’ - WSJ) ....
- Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama's mortgage relief program and the original purpose of the TARP.
- Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly prosed FASB accounting rule change.
- Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.
- Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner's Capital Assistance Program is designed to do.
These plans are not going to work
As aggressive as this campaign by the U.S. government is, it will have limited effectiveness because the extent of the writedowns of assets already on the books is going to be too massive. ...
The U.S. banking system is effectively insolvent
So, it should be pretty clear that we have some serious losses still left to work through in the financial sector. I reckon the U.S. banking system is effectively insolvent. This is what Nouriel Roubini means when he says there will be $3.6 trillion in writedowns before this is all over. This means that banks do not have adequate capital to absorb the likely losses facing them later this year.
To date we have addressed this problem by throwing more money at it -- bailing out the banks and attempting to prevent asset prices from falling. I predict this solution will lead to another panic if continued indefinitely. (Remember, between now and the summer or fall, the unemployment rate could reach 9-10%, while home prices would still be falling and default rates rising.) American citizens would realize the system is insolvent and would cease to trust that a reasonable solution was in the offing.
Confidence in America's banking system is already lacking, especially in the large banks and large regional banks. This confidence can only be restored if banks are adequately capitalized now and in the future. Were we to suffer another round of major writedowns and capital injections into major institutions, I expect all confidence would be lost and bank runs would begin in earnest. This must be avoided at all costs.
Given the lack of capital the banking system now has and the likely level of writedowns, many institutions are fundamentally insolvent. They must, therefore, be liquidated or nationalized BEFORE confidence in the system is lost and bank runs occur.
Buying up assets at inflated prices, halting mark-to-market, and reducing interest rates to zero will not reduce the problem assets on bank balance sheets enough to avoid further massive writedowns.
Conclusion
In sum, most available evidence suggests bank writedowns will be massive -- perhaps larger than the present capital base of the U.S. banking system. While, present measures of recapitalizing and bailing out faltering institutions and buying up toxic assets may prove adequate to prevent further writedowns and capital erosion, I would rather err on the side of caution.
Caution dictates an aggressive response -- one which should include nationalization or liquidation of a significant number of banking institutions. Anything less is wishful thinking, the consequences of which could be very dire indeed.
"Traditionally, Gold Has Been A Store Of Value When Citizens Do Not Trust Their Government Politically Or Economically"
As Time Magazine notes:
Traditionally, gold has been a store of value when citizens do not trust their government politically or economically.
Given that trust in governments all over the world is plummeting due to corruption and mismanagement of the financial crisis, that bodes well for gold.
Note 1: As Time also points out:
The sheer amount of speculation in gold and uncertainty in the foreign-exchange market will keep gold prices as volatile and unpredictable (i.e., risky) as ever. Like any financial market, the gold market is susceptible to manipulation.Note 2: I am not an investment advisor and this should not be taken as investment advice.
Why is the Fed Buying Long-Term Treasuries?
It has finally started . . . the long-threatened purchase by the Fed of long-term U.S. treasuries.
The Federal Open Market Committee announced today:
To help improve conditions in private credit markets, the committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.This may be an attempt to prop up the bond market so that bondholders don't take a big haircut, and to lower the costs of corporate and mortgage debt (often called "quantitative easing").
As CNN wrote Monday:
Whatever one thinks of this, two things are clear: this is a desperate move, and the Fed is going to end up printing money like it's going out of style. See this, this, this, this, this, this and this.If the Fed started buying 10-year Treasury notes, that wouldn't do anything to reduce risk tied to soaring U.S. budget deficits.
But it would provide some support for the value of the bonds, especially if the Chinese start to pull back on purchases as some economists are expecting. ...
What's more, a large purchase by the Fed would help to lower the rates on longer-term Treasurys and other debt that is tied to the bond market, such as some corporate debt and mortgage loans. (Bond rates fall when prices rise.)
Former Fed Governor Lyle Gramley noted the Bank of England's announcement that it would buy about $100 billion in British government debt earlier this month was enough to lower long-term rates by a quarter-point to a half-point, even before the purchases started.
Terrorism By Another Name: AIG Is Blackmailing America
AIG's CEO, Edward Libby, admitted today that credit default swaps brought down the company:
Mistakes were made at AIG, and on a scale that few could have imagined possible. The most egregious of those began in 1987, when the company strayed from its core insurance competencies to launch a credit-default-swaps portfolio, which eventually became subject to massive collateral calls that created a liquidity crisis for AIG.But instead of letting AIG go quietly into the dark night, Liddy is trying to blackmail America and the world by using a threat. As Salon notes:
[He was] specifically referring to the the buildup of a $2.7 trillion portfolio of credit default swaps and other derivative products. About $1 trillion worth of that portfolio has been "wound down," said Liddy, but AIG is still on the hook for an unthinkable $1.6 trillion worth of liabilities.When will people start demanding that the government rescind AIG's credit default swaps? The government has that power. Indeed, the same arguments which have been made for the government's authority to cancel AIG's bonus contracts can be used to cancel AIG's CDS contracts. In order to receive any more bailout money (or to keep the money they already received), AIG's counterparties need to cancel their CDS contracts. And for foreign CDS counterparties, the government could simply say "we will not loan your central banks any more money unless you cancel the CDS contracts".
"There is still risk that that could blow up," said Liddy, and it was clear from his expression that the prospect was not a rhetorical exercise.
Liddy didn't need to further connect the dots. If AIG F.P.'s outstanding portfolio of derivative products "blows up" -- the cascade could likely bring down AIG's counterparties. Which would inevitably require the expenditure of further government trillions to prevent a systemic crash.
This is a national emergency. Instead of doing something dumb like seizing gold, the government can do something productive and force a rescission of all of AIG's outstanding CDS contracts or - at the very least - give the counterparties a haircut and cram the CDS contracts' dollar values down to a very small amount.
Outlaw "Naked" Credit Default Swaps
As I've previously written, credit default swaps should be rescinded or frozen until the global financial crisis is stabilized. At the very least. CDS should be illegal unless the CDS purchaser owns a stake in the referenced entity or in the related chain of supply. In other words, "naked" CDS should be outlawed.
Investment expert Yves Smith apparently agrees. In an article on hedge funds' purchase of CDS from AIG (and the fact that the hedgies will apparently get some bailout money), Smith writes:
If the public were to take offense at the idea of government money rewarding successful speculators, it might lead to restrictions on CDS writing in cases where the protection buyer did not own and continue to hold assets of the reference entity.Moreover, Congressman Peterson is apparently introducing a bill to ban naked CDS. Please support his bill.
Tuesday, March 17, 2009
US to "Wind Down AIG in an Orderly Way and Protect the American Taxpayer" ... Why Didn't That Happen From the Start?
Geithner just told Congress he would:
"Work with" AIG chief executive Edward Liddy "on measures to wind down AIG in an orderly way and protect the American taxpayer."
That's great, but why didn't that happen from the start?
Why was AIG paid $ 180 billion dollars of taxpayer money, when AIG was obviously failing and should have just been wound down?
Why did foreign banks get around $40 billion of that, when AIG was obviously failing and should have just been wound down?
Why did Goldman Sachs get $13 billion of that, when AIG was obviously failing and should have just been wound down?
Why did AIG executives receive billions in bonuses, when AIG was obviously failing and should have just been wound down?
Why would many billions more have been sucked into a bottomless pit with no accountability and no end in sight and no benefit for the American people, if the taxpayers had not gotten mad and stood up and yelled "NO!"... when AIG was obviously failing and should have just been wound down?
When even Business Week is running articles entitled "Off With Their Heads . . . Samples of AIG Outrage", it makes one wonder if the financial elites caved in to avoid a revolution.
Democrats Finally Waking Up to the Ongoing Looting of the Economy
Just as a certain percentage of republicans refused to admit that rotten things were happening under the Bush administration, many democrats have fought to defend the Obama administration against charges of mishandling the response to the economic crisis.
But now, as ABC news notes:
President Obama is facing growing liberal anger over his handling of the economy, with prominent voices on the left voicing concerns that taxpayer-funded bailouts are enriching corporate America while doing little to right the nation's economic ship....Talk, of course, is cheap.Several prominent Democrats are pointing out that Obama aides were more than willing to press auto workers to renegotiate contracts as a condition of bailouts for car companies -- but are now citing the sanctity of contracts in AIG bonuses, saying they can't be canceled.
"People have no confidence in what's happening right now," Jane Hamsher, the founder of the liberal blog FireDogLake, said Monday on ABC NewsNOW's "Politics Live."
"People on the right and the left are looking at all this money being shoveled to banks [by] friends of Timothy Geithner and Larry Summers ... and they're not seeing any accountability," she added. "They don't know where the money's going, they don't know how much is gone, and it's all nontransparent and extremely suspicious."...
"He's walking down a very, very dangerous path right now," liberal activist and author David Sirota told ABCNews.com. "It betrays the exact problem that people are angry at -- that there's one set of rules for Wall Street and Washington and another set of rules for everybody else."
"It's becoming real, what the difference is between Obama's rhetoric about power coming from outside of Washington, and the reality of an administration filled with Washington and Wall Street insiders," Sirota said....
Robert Reich, who was former President Clinton's labor secretary, called it a "scandal" that "Americans still have so little say over what is happening with our money."
"When our very own secretary of the Treasury cannot make stick his decision that AIG's bonuses should not be paid, only one conclusion can be drawn: AIG is accountable to no one. Our democracy is seriously broken," Reich wrote in a Huffington Post op-ed.
Democratic lawmakers joined Republicans in expressing outrage. They called on the president to do more to protect taxpayer dollars.
"The American people are being played for fools by AIG," Rep. Elijah Cummings, D-Md., said today on ABC's "Good Morning America."
Unless and until the democrats demand that Summers, Geithner and Bernanke be fired and replaced with people with a demonstrated commitment to the public interest, things will just get worse and - despite the faux populism of both the democrats and republicans in congress - the people will just get angrier and angrier.
Leading Analysts Slam Fed's Posture Towards Credit Default Swaps
Four leading analysts - a former long-time Fed veteran, an economics professor and former high-level S&L regulator, former managing director at Soros Funds Management and chief economist of the Senate Banking Committee, and a professor of political science
"Remember that this is a firm that is 79.9 percent owned by the United States government . . . . The trustees need to split off the derivatives unit from the rest of the firm and separately incorporate it. This step leaves AIG's other businesses free to operate as usual. If the recipients of the bonuses refuse to waive them, then the derivatives unit should at once be thrown into bankruptcy, terminating all obligations to pay them. ....Similarly, veteran financial writer Darrell Delamaide says in front-page article on MarketWatch:
"This leaves open the question of how to deal with all other obligations of the derivatives unit, including the notorious credit default swaps. We, like most independent analysts, are mystified by the determination of the Federal Reserve and Treasury to keep paying these off at 100 percent of their face value. But that's an issue for tomorrow. Today the task is to stop a grotesque abuse before it is too late. The path we outline here would do it, without throwing markets into turmoil. Nothing less than public confidence in the United States government as a whole is now at stake."
And what about those counterparties? Heaven forbid that Goldman Sachs Group should lose a penny on its reckless credit default swaps -- that would mean the end of civilization as Paulson knows it. But that, thankfully, has been averted, as we also learned over the weekend, because that impoverished institution has received $13 billion of taxpayer money via AIG. I'm betting some of that money will find its way into Goldman bonuses as well.And former New York governor Spitzer (who, notwithstanding some personal pecadilos, is a shrewd financial observer) writes today:
It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse
But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?
The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.
“There Was a Stampede by Foreign Investors to Exit Their U.S. Dollar Investments”
An article in Bloomberg includes the following quote:
“There was a stampede by foreign investors to exit their U.S. dollar investments,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Everyone wants to bring their money home. It’s not about return on capital. It’s whether you can get your capital back.”As AFP points out:
Indeed, there are indications that America's biggest creditor - China - is diversifying out of the dollar.Foreign investors sold a net 43 billion dollars in long-term US securities in January as the flow of capital turned negative, US Treasury data showed Monday.
The decline in foreign holdings was the steepest since August 2007.
The decline came after a revised capital surplus of 34.7 billion dollars December.
If the decline persists, it could spell trouble for the United States, which is issuing massive amounts of debt to finance its economic recovery efforts.
Attorney General Cuomo: "Numerous Individuals Who Received Large 'Retention' Bonuses are No Longer at the Firm"
While AIG has tried to characterize the bonuses as "retention" payments, New York attorney general Andrew Cuomo points out in a letter to Barney Frank written today that:
Numerous individuals who received large 'retention' bonuses are no longer at the firm ....You can't pay to retain someone who is already gone.
Eleven of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million ....
Here's Cuomo's letter:
House Committee Letter 3.17.09 - Free Legal Forms
Poll: Did the Bush Administration Aid and Abet the Financial Crimes Which - at Least in Part - Brought Down The Economy?
There's been a lot of corruption in the past 8 years, and the government hasn't exactly done much to prevent it.
Do you think that the Bush administration actively aided and abetted the financial crimes which have - at least in part - brought down our economy?
Final poll results:
Yes. | 873 (91%) |
Only a little aiding and abetting. | 20 (2%) |
Just a couple of bad apples. | 14 (1%) |
No. | 45 (4%) |
Bailouts Are Taxation Without Representation
Obama's chief economics advisor - Larry Summers - said that AIG's hundreds in billions of bonuses had to be paid because:
We are a country of law. There are contracts. The government cannot just abrogate contracts.The Revolutionary War was waged to fight taxation without representation.
What are the bailouts other than taxation without representation? Taxpayer money (directly or through inflation) will be used to pay off government debts incurred to bailout AIG, Citigroup, Bank of America, and everyone else.
The American people don't want these bailouts. (See this and this).
The money is not going to help the American people, but to feather the nests of the wealthy, or to foreign banks.
The Constitution is the founding document of the United States, and all other laws are secondary to the framing document.
And as a former high-level savings and loan regulator, William Black, points out out in an email to Yves Smith:
[Treasury's bailouts of AIG are] the consequence of six things on the Treasury end of things:
...Remember that covering up a crime committed by someone else is itself a crime:
(2) the failure to expose, and to the extent possible, remedy through restatements the massive accounting fraud that AIG was/is engaged in that triggers the bonuses
(3) the failure to bring criminal charges against the control frauds
...
(5) the weakness of Treasury's current lawyers who, if press reports are accurate, couldn't think of any way for the U.S. government to take effective action against what it reportedly views as a scandal....
"Whoever, knowing that an offense has been committed, receives, relieves, comforts or assists the offender in order to hinder or prevent his apprehension, trial or punishment, is an accessory after the fact; one who knowing a felony to have been committed by another, receives, relieves, comforts, or assists the felon in order to hinder the felon's apprehension, trial, or punishment."Are we a nation of laws, Mr. Summers?
If so, stop bailing out AIG, and Citigroup, and Bank of America and all of the other financial giants who are looting America.
If so, insist that the criminal schemes of the heads of these financial giants are prosecuted to the full extent of the law.
See also this.
Monday, March 16, 2009
9/11 Commissioner Bob Kerrey: It Might Take "A Permanent 9/11 Commission" to End the Remaining Mysteries of September 11
Some of us have been writing for years (see this and this) that the 9/11 Commission Report was unreliable because most of the information was based on the statements of tortured detainees. As I wrote in March 2007:
In fact, the 9/11 Commission Report was largely based on a third-hand account of what tortured detainees said, with two of the three parties in the communication being government employees.
I have also previously written that Senator Leahy's desire to base a torture investigation on the 9/11 Commission was problematic.
Now, Newsweek is running an essay by Philip Shenon saying the same thing:
The commission appears to have ignored obvious clues throughout 2003 and 2004 that its account of the 9/11 plot and Al Qaeda's history relied heavily on information obtained from detainees who had been subjected to torture, or something not far from it.
The panel raised no public protest over the CIA's interrogation methods, even though news reports at the time suggested how brutal those methods were. In fact, the commission demanded that the CIA carry out new rounds of interrogations in 2004 to get answers to its questions.
That has troubling implications for the credibility of the commission's final report. In intelligence circles, testimony obtained through torture is typically discredited; research shows that people will say anything under threat of intense physical pain.
And yet it is a distinct possibility that Al Qaeda suspects who were the exclusive source of information for long passages of the commission's report may have been subjected to "enhanced" interrogation techniques, or at least threatened with them, because of the 9/11 Commission....
Information from CIA interrogations of two of the three—KSM and Abu Zubaydah—is cited throughout two key chapters of the panel's report focusing on the planning and execution of the attacks and on the history of Al Qaeda.
Footnotes in the panel's report indicate when information was obtained from detainees interrogated by the CIA. An analysis by NBC News found that more than a quarter of the report's footnotes—441 of some 1,700—referred to detainees who were subjected to the CIA's "enhanced" interrogation program, including the trio who were waterboarded.
Commission members note that they repeatedly pressed the Bush White House and CIA for direct access to the detainees, but the administration refused. So the commission forwarded questions to the CIA, whose interrogators posed them on the panel's behalf.
The commission's report gave no hint that harsh interrogation methods were used in gathering information, stating that the panel had "no control" over how the CIA did its job; the authors also said they had attempted to corroborate the information "with documents and statements of others."
But how could the commission corroborate information known only to a handful of people in a shadowy terrorist network, most of whom were either dead or still at large?
Former senator Bob Kerrey of Nebraska, a Democrat on the commission, told me last year he had long feared that the investigation depended too heavily on the accounts of Al Qaeda detainees who were physically coerced into talking. ...
Kerrey said it might take "a permanent 9/11 commission" to end the remaining mysteries of September 11. Those now calling for more 9/11-style panels would be wise to heed his words.
Thank you to Newsweek for addressing this important issue.
Credit Default Swap Expert: Lehman Default Caused Much Higher Losses than Previously Admitted
Commonly-accepted wisdom is that the losses from credit default swaps against Lehman were really not that bad. The pundits say that the losses were grossly exaggerated, and that the low loss figures show that the CDS market still works, and does not pose that great a danger.
But Satyajit Das - a leading expert on credit default swaps - points out today that the CDS losses from the Lehman default are much higher than generally reported:
In other words, those saying that the CDS market is functioning well and that the CDS scare is overblown don't have all the facts.In the case of Lehman Brothers, the net settlement figure of $6 billion that was quoted refers to the auction. Some banks and investors that had sold protection on Lehmans did not participate in the auction choosing to take delivery of defaulted Lehman debt resulting in losses of almost the entire face value.
CDS contracts can amplify losses in credit market. Lehman Brothers defaulted with around $600 billion in debt implying a maximum loss to creditors of that amount. In addition, according to market estimates, there were CDS contracts of around $400-500 billion where Lehmans was the reference entity.
Market estimates suggest that only around $150 billion of the CDS contracts were hedges. The remaining $250-350 billion of CDS contracts were not hedging underlying debt. The losses on these CDS contracts (in excess of $200-300 billion) are additional to the $600 billion. The CDS contracts amplified the losses as a result of the bankruptcy of Lehmans by (up to) approximately 50%.
Headlines | 3-16-09
Some of the most important stories of the day . . .
Economy and Business
Science and General Interest
This roundup may be updated periodically throughout the day.
Mr. President, Instead of Getting "Choked Up With Anger", Please Do Something Useful By Stopping Your Economic Team from Choking the Economy
Mr. President, in a press conference today, you said that you were "choked up with anger" about AIG's shenanigans.
Mr. President, we don't need your populist rhetoric. We don't need you to be choked up with anger.
We need to you actually exercise your power and actually do something constructive.
Mr. President, the main bottleneck right now is your team of top economic advisors: Geithner, Summers and Bernanke.
These guys were largely responsible for creating most of the problems which we are experiencing right now. See this, this and this. Mr. President, these guys are choking the economy. They are strangling it. They are cutting off all of its oxygen.
Until you replace them with people who saw this crisis coming and who have ideas about how to actually reform the failed system instead of trying to prop it up, things will just get worse.
$40 Billion in AIG Bailout Money Went to Foreign Banks
AIG has finally disclosed a list of the credit default swap counterparties and buyers of other risky AIG investments who got paid through the AIG bailouts.
The list reveals that foreign banks received more than $405 billion dollars courtesy of the generosity of American taxpayers.
The list includes:
- Banco Santander
- Bank of Montreal
- Barclays
- BNP Paribas
- Caylon
- Credit Suisse
- Deutsche Bank
- Dresdner Bank
- HSBC
- ING
- KFW
- Landesbank Baden-Wuerttemberg
- Rabobank
- Royal Bank of Scotland
- Societe Generale
- UBS
Your hard-earned money is being shipped abroad through various other programs as well.
Bernanke Says He's Prevented a Depression, But He's Actually Created One
Bernanke said Sunday that the United States has averted another Great Depression:
I think we've averted that risk. I think we've gotten past that and now the problem is to get the thing working properly again.
Is it true?
Not exactly . . .
It is more or less official that we are already in a depression. And everyone from Bernanke's predecessor Paul Volcker to the former chief economists of various government agencies think it could very well be worse than the Great Depression.
I wouldn't fault Bernanke for trying to put a positive spin on things if he were doing everything possible to avert the worsening of the economy.
But everyone from high-level Fed officials to leading economists say that Bernanke is doing all the wrong things, and actually making the crisis much worse.
He says he's averted a depression . . . but I'm afraid he's actually brought one on.
Bernanke and the Fed have failed.
Sunday, March 15, 2009
Moody's: Anyone Who Believed Us Is an Idiot
Moody's - one of the big 3 credit rating agencies with an official government endorsement - helped cause the financial crisis by keeping the ratings of failing companies artificially high.
Moody's shareholders are now suing in federal court, saying that Moody's misrepresented the fact that its ratings are impartial. Once it became clear that Moody's was gaming its ratings, its share price plunged - 75% since February 2007.
The plaintiffs in the suit, led by a Teamsters union pension fund, cited newspaper articles chronicling occasions when Moody’s changed its rating in response to a customer’s complaint to keep the client’s business, replaced analysts seen as too cautious, or reassigned others after complaints by bankers....
In one instance, reported last year by the Financial Times, when Moody’s employees found a computer error had caused some debt ratings to be inflated, the company responded by changing the methodology it used rather than cutting the ratings.
In an October 2007 presentation to Moody’s directors, released last year by congressional investigators, Moody’s Chief Executive Officer Raymond McDaniel said adding more safeguards “does NOT solve the problem” of erosions in ratings integrity, and that “a certain complacency about ratings quality is inevitable.”
In response to the shareholder lawsuit, Moody's argued that its claims to independence and ratings integrity were just "puffery" - legalese for innocent exaggeration:
But the judge is having none of it:“Generalizations regarding integrity, independence and risk management amount to no more than puffery,” Moody’s said in court papers. As such, alleged “misstatements of this nature are insufficient to sustain a claim under the securities laws.”
Taken together, U.S. District Judge Shirley Wohl Kram wrote in her order, the facts as alleged by the plaintiffs “belie defendants’ claims of independence and ratings integrity.” Similarly, she wrote, “the revelations that it altered ratings at the request of issuers called into question Moody’s claim that it ‘maintains independence in its relationship with issuers and other interested entities.’”
Saturday, March 14, 2009
The Fed Has Failed By Its Own Terms
On the one hand, many people defer to the Fed as the experts on the arcane processes of the economy.
On the other hand, quite a few people accuse the Federal Reserve of being a private cabal owned by the banks, with the sole purpose of making the elite richer.
But let's sidestep these black-or-white approaches and instead focus on how well the Fed has done according to its own terms.
Specifically, the Fed's main justification has been that it can provide a "counter-cyclical" balance. In other words, during boom times, it can put on the brakes, and during busts it can get things moving again.
So how well has the Fed done in implementing counter-cyclical policies?
As economist Jane D'Arista points out, as quoted by veteran journalist William Greider (who literally wrote the book on the Federal Reserve in 1987) in his new essay in the Nation, the Fed has failed miserably using its own yardstick:
Instead of frankly acknowledging the problem, Fed governors proceeded in the past two decades to engineer exaggerated swings in monetary policy--raising interest rates, then lowering them, in widening extremes. This led to the series of bubbles in financial prices--first stocks, then housing and commodities--that collapsed with devastating consequences, climaxing in the present crisis. In other words, the central bank's weakened condition and its misguided policy decisions have been a central factor in destabilizing the American economy. More to the point, the Fed's operating disorders are directly threatening to recovery; the economy is not likely to get well if the dysfunctional Fed is not also reformed....Should the Fed be abolished or reformed?Jane D'Arista, a reform-minded economist and retired professor with a deep conceptual understanding of money and credit [has a] devastating critique of the central bank. The Federal Reserve, she explains, has failed in its most essential function: to serve as the balance wheel that keeps economic cycles from going too far. It is supposed to be a moderating force in American capitalism on the upside and on the downside, the role popularly described as "leaning against the wind." By applying its leverage on the available supply of credit, the Fed can slow down a boom that is dangerously overwrought or, likewise, stimulate the economy if it is sinking into recession. The Fed's job, a former chairman once joked, is "to take away the punch bowl just when the party gets going." Economists know this function as "counter-cyclical policy."
The Fed not only lost control, D'Arista asserts, but its policy actions have unintentionally become "pro-cyclical"--encouraging financial excesses instead of countering the extremes. "The pattern that has developed over the last two decades," she wrote in 2008, "suggests that relying on changes in interest rates as the primary tool of monetary policy can set off pro-cyclical foreign capital flows that tend to reverse the intended result of the action taken. As a result, monetary policy can no longer reliably perform its counter-cyclical function--its raison d'être--and its attempts to do so may exacerbate instability."...
Most politicians do not even know the Fed is broken. The central bank's awesome authority is an intimidating mystery to most elected officials, and they typically defer to its oracular pronouncements. But the Federal Reserve, like all human institutions, is subject to folly and error. In fact, it has experienced colossal failure once before in its history. After the stock market crash of 1929, the Fed was utterly disgraced because its response led directly to the Great Depression. Fed governors were motivated by conservative orthodoxy and their desire to protect the profitability of the largest banks, but they misunderstood the mechanics of monetary policy and also stuck to outdated theory that produced the disastrous results. D'Arista's analysis is chilling because she suggests the modern central bank, albeit in very different circumstances, may again be pursuing wrongheaded theory, blinded by similar political biases and obsolete doctrine
Meanwhile, acting at the behest of bankers, the Fed has practically eliminated the old safety cushion by allowing reserve levels to fall nearly to zero. Bankers complained that reserves were a drag on profits and were no longer needed given the capital rules. In a shocking new arrangement, the Fed, with approval from Congress, has started to pay interest to the banks on their reserves. The commercial banks already enjoyed privileges and protections from the government that were unavailable to any other business sector. Now they insist on getting paid for their public subsidy....
By its very design, the cloistered central bank is an offense to democratic principles--and now the Fed's secretive, unaccountable political power has failed democracy again. The question of how to democratize the temple or whether to tear it down has to be on the table too, the subject of future discussion.
D'Arista argues that the Fed should be reformed.
Followers of the Austrian school of economics, such as Ron Paul and Mish, on the other hand, argue that the Fed should be abolished altogether.
I personally agree that the Fed should be abolished. At the very least - given that the Fed plunged the United States into the Great Depression and failed to prevent the current crisis, and that it is an "offense to democratic principles" since its deliberations are hidden from the public and it is not answerable to the American people or its representatives - the Fed should be made part of the government, made fully transparent, and made wholly accountable to the American people.
Why Obama Really Classified the Anti-Counterfeiting Trade Agreement
You've heard that Obama is citing national security to justify keeping the terms of a new international copyright treaty secret. The treaty would allegedly criminalize peer-to-peer sharing, make iPods searchable at the border, and allow internet service providers to monitor their customers' communications.
If the only participants in the treaty negotiation were governments and internet service providers, then there might be some argument (no matter how far-fetched) that the treaty really does involve national security. For example, it could really be some back-door way to catch terrorists on the internet.
But it is common knowledge that the Recording Industry Association of America (RIAA) and Motion Picture Association of America (MPAA) have had a large hand in drafting and revising the language of the treaty. The RIAA and MPAA are solely concerned with maximizing the profits of their members from record and movie sales. These folks are obviously not in the anti-terrorism business. They presumably don't have any national security clearance.
Moreover, any argument that the treaty is being kept secret for authentic national security reasons evaporates the minute you learn that the "cleared advisors" who have been allowed to view the treaty allegedly also include:
- A lawyer specializing in business planning and taxation
- A law firm "representing a biotechnology industry organization"
- The Intellectual Property Owners Association
- The Entertainment Software Association
- The U.S.-China Business Council
- Anheuser-Busch
- Time Warner
- Eli Lilly
- Wal-Mart
- General Motors
- Monsanto
- IBM
- Dupont
Rather than keeping the contents of the treaty away from people who would harm the U.S., it seems that the national security classification is more for the purpose of keeping the details of an outrageous treaty away from the American people.
Friday, March 13, 2009
Former White House Counsel Dean: If Hersh Allegations True, Cheney Guilty of War Crimes, Murder
Dick Cheney is almost certainly guilty of war crimes for his role in setting up and promoting the policy of torture. Even Colin Powell's former chief of staff thinks so.
In addition, former White House counsel John Dean says that - if Hersh's allegations that Cheney ordered executive assassinations are true - Cheney is guilty of war crimes and murder:
Actions speak louder than words - and so the answer will be provided by whether or not Cheney is actually prosecuted.
Headlines | 3-13-09
Some of the most important stories of the day . . .
Economy and Business
- The real Adam Smith was more complex than people realize
- Marc Faber recommends investing in gold exploration companies with strong backers that have money to essentially develop the exploration result that they may or may not achieve. The one's that are partially owned by the majors like Novagold, Ivanhoe Mining and Gabriel Resources.
- Obama cites national security for keeping the terms of a new international copyright treaty secret which would allegedly criminalize peer-to-peer sharing, make iPods searchable at the border, and allow internet service providers to monitor their customers' communications
This roundup may be updated periodically throughout the day.
Why the Patient Is Not Getting Better: Government is Strengthening the Parasite and Poisoning the Real Economy
Why isn't the economy getting better, even though the government is pumping trillions of dollars into bailouts and stimulus packages and intervening in markets left and right?
Because the government is treating the wrong patient.
Let's say you travel to the tropics and pick up a parasite. You go to your doctor who gives you very powerful drugs that make you sick. You go back to the doctor, he looks you over, and then adds more potent drugs to your prescription.
You go back a third time and say "Doctor, I'm getting sicker and sicker, why isn't it working?"
He responds "Oh, I thought the parasite was the patient. The drugs are making it healthier".
The Government is Strengthening the Parasite
The real economy is:
According to top federal reserve officials and economists, the government's actions will encourage big financial players to make even riskier gambles in the future.(1) People making things or providing real, useful services
(2) People saving money
and
(3) People investing the money they saved into productive businesses which will make more things or provide needed services.
Indeed, the government is in the process of giving hundreds of billions - if not trillions - of dollars and guarantees to hedge funds (hedge funds are some of the biggest speculators of all). Indeed, the various bailout programs are giving huge sums to companies that make money by pushing paper around without actually producing any useful goods or services.
The heads of the big banks and financial companies are also getting huge bonuses even though they have driven their companies so far into the ditch that they need government bailouts. Even Paul Volcker says the incentive system is broken. Indeed, the government is making the CEOs richer by giving them billions of dollars of bailout money with which to feather their own nests.
And credit derivatives act as a parasite on the real economy: credit default swap buyers bet that the referenced company will go down the tubes (see this and this). And yet the government is allowing the credit default swap trades to increase, driving CDS spreads against many companies and governments to reach all-time highs.
Not only is the parasite being boosted by government actions, but the patient - the real economy - is being poisoned.
Manufacturing has been shipped out of America for decades, and the government is still actively encouraging companies to move manufacturing abroad.
Taxpayers will be on the hook for trillions of dollars of obligations through taxes/or inflation (even Bernanke has admitted that inflation is a tax, because people have less money in their pockets after buying necessities). So Americans will be able to save less.
And government has not only failed to require that companies accurately report their finances - so that investors can know which companies are stable and productive - but it has actually thwarted such accuracy. For example:
- A government agency prevented the SEC from investigating multi-billion dollar Ponzi-schemer Stanford
- As of 2006:
"President George W. Bush has bestowed on his intelligence czar ... broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations."
- One or more treasury department officials actively allowed banks to "cook their books"
The government has been strengthening the parasite and poisoning the real economy. No wonder the patient is getting worse.
In Case You Haven't Yet Watched Jon Stewart Grill Jim Cramer
In case you haven't yet watched the must-see interview of Jim Cramer by Jon Stewart, here it is . . .
Part 1Part 2
Part 3
Thursday, March 12, 2009
Headlines | 3-12-09
Some of the most important stories of the day . . .
Economy and Business
- Dow closes up 239
- General Electric lost its top AAA credit rating Thursday as Standard & Poor's downgraded the company
- Lawyer: Nationalize the Federal Reserve
- Larissa Alexandrova asks "How did 5 alleged Al Qaeda members come together to form this statement, given that they are being held each in isolation at Gitmo?"S
- Varying cosmic-ray flux may explain cycles of biodiversity (potential 62 million year cycle discovered)
- Most widely read global warming author says things much worse than even he thought.
This roundup may be updated periodically throughout the day.
China Finally Diversifying Out of the Dollar?
Everyone knows that China has $2 trillion in foreign reserves. Two-thirds of those reserves are said to be denominated in dollars.
But - after years of speculation - there are increasing signs that China is diversifying out of the dollar.
For example, the head of China's energy bureau said in comments published on Monday "China should use part of its nearly $2 trillion in foreign exchange reserves to buy more gold, oil, uranium and other strategic commodities".
And as Bloomberg writes today:
“We have lent a huge amount of money to the United States,” [Chinese premier] Wen said at a press briefing in Beijing today .... “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”
China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves and will safeguard its own interests, Wen said. Chinese investors held $696 billion of U.S. Treasuries as of Dec. 31, an increase of 46 percent from the prior year.
“We have adopted a principle of diversification with our foreign-exchange investments,” said Wen. “So far, our holdings are generally safe. China will mainly use the reserves for outbound investments and trade.”
There it is, straight from the horses mouth. China appears to finally be diversifying out of the dollar.
Mainstream Financial Publication Finally Admits that Austrian Economists Were Right
Barron's is finally admitting what few in the mainstream have been willing to acknowledge: the Austrian school of economics was right.
The Austrians have been saying for well over a hundred years that big bubbles lead to big crashes, and that - if you want to avoid depressions - you have to avoid the bubbles.
In today's article, entitled "Ignoring the Austrians Got Us in This Mess", Barron's agrees:
The credit crisis and the ensuing global economic contraction have failed to make an impression on academe, where free-market orthodoxy still reigns supreme, the New York Times asserted in an article in arts section recently ("Ivory Tower Unswayed by Crashing Economy," March 4.)...What definitely is ignored in academe is the Austrian school of economics, especially for baby boomers brought up on Samuelson's economics text, which was pure Keynesian orthodoxy. I did not learn the names von Mises and Hayek or their ideas until a decade or more after graduation (with a degree in economics, by the way.)
The Austrian view is a mirror image on the right to Minsky's from the left. The economy, if left alone, is self-correcting, say the Austrians. But central banks' inflationary expansion of credit produces booms and malinvestments, which inevitably lead to a crashes and depressions.
The only prevention for boom and busts are sound money, which is impossible with government-controlled central banks. Once the bust comes, the only cure is to let it run its course; allow the malinvestments go bankrupt and let the market reallocate the capital to productive uses....
But the Austrians were the ones who could see the seeds of collapse in the successive credit booms, aided and abetted by Fed policies, especially under former chairman Alan Greenspan. ...
Greenspan always contended that monetary policymakers can neither predict nor prevent bubbles in asset markets. They can, however, clean up the after-effects of the bust -- which meant reflating a new bubble, he argued.
That had a profound effect on risk-taking. Knowing that the Greenspan Fed would bail out the markets after any bust, they went from one excess to another. So, the Long-Term Capital Management collapse in 1998 begat the easy credit that led to the dot-com bubble and bust, which in turn led to the extreme ease and the housing bubble.
Austrian economists assert the current crisis is the inevitable result of the Fed's successive efforts to counter each previous bust. As the credit expansion pumped up asset values to unsustainable levels, the eventual collapse would result in a contraction of credit as losses decimate banks' balance sheets and render them unable to lend. That sounds like an accurate diagnosis of the current problems.
While Barron's acknowledges that the Austrian school is right about how to avoid depressions, it doesn't agree with the other main tenet of the Austrians: that the quickest way to get out of a depression is to let the bad investments clear themselves out of the markets by letting the companies which made dumb decisions fail. (The sub-title for the article is "Their ideas warned us of the bubble; their prescription for the bust is too harsh, however"; and the article ends with the phrase "Make us non-interventionist, but not yet.")
Readers have written to me saying the same thing: the Austrians might be right, but their remedy for an economic crisis is too draconian and we have to do something to help the people.
I am all for helping people and doing something that will speed up a recovery. But remember the 2,000 year old medical wisdom of Hippocrates: "First, do no harm".
The two leading economists of the 20th century - Friedman and Keynes - were both wrong, and so all of the approaches being implemented by economists right now are actually making things worse.
Advocates of the Austrian school - such as Marc Faber, Ron Paul, Peter Schiff, Mish, and others - argue that any interventionist approach by governments will only prolong the economic crisis, and that there really is no choice but to let the gunk clear out of the system.
At the very least, everyone - liberal and conservative alike - should demand that:
(1) The federal reserve be eliminated (as Ron Paul, Mish, and others propose) or at least reigned in so that it cannot blow any more bubbles; and
(2) That no "medicine" be administered to the economy - whether Keynesian spending stimulus, Friedmanite monetary stimulus, or anything else - unless it is proven (using Austrian economic models) to do more good than harm.
Unemployment in 7 States May Have Exceeded 20% in February
As I have previously pointed out, unemployment may actually be higher than during the same phase of the Great Depression. Specifically, as of 1930 - the year after the 1929 crash - the unemployment rate was 8.7 percent.
As of December 2008, U-6 unemployment was 13.5 percent. (U-6 is actually more accurate, because it includes those who would like full-time work, but can only find part-time work, or have given up looking for work altogether). And PhD economists John Williams and Paul Craig Roberts - former Assistant Secretary of the Treasury and former editor of the Wall Street Journal - both say that if the unemployment rate was calculated as it was during the Great Depression, today's figure would actually be 17.5% nationally.
Yesterday, the Bureau of Labor Statistics published a report showing that 7 states had unemployment rates above 10% in February. Ranked from largest to smallest, they are:
- Michigan: 12.5 %
- Rhode Island: 11.4 %
- South Carolina: 10.9 %
- Oregon: 10.9 %
- California: 10.6%
- North Carolina: 10.3%
- Nevada: 10.2%
Remember, that these figures are calculated using U-3. The U-6 unemployment numbers for some of these states probably exceeds 20%, which is substantially higher than the numbers for the comparable period of 1930 (today is comparable to 1930 because we are one year or less into the current financial crisis).
Indeed, unemployment is accelerating, and so by the end of this year, unemployment could be even higher.
Jamie Dimon Whines that Corporate America is Suffering Unfair "Vilification"
Jamie Dimon - head of the second largest bank, JP Morgan- is whining about the "vilification" of corporate America for the financial crisis.
Dimon is one to talk.
JP Morgan is by far the largest holder of derivatives.
JP Morgan also invented credit default swaps, which are largely responsible for the crisis, and is itself one of the largest CDS counterparties.
Government bailout money given to JP Morgan was invested in India.
JP Morgan also made bets that companies like GM - which actually make something (even if they are gas-guzzlers) - would fail. Such bets have sped up the demise of GM.
Damon also said "he was 'very optimistic' about JP Morgan and its ability to work through the financial crisis."Uh huh . . .
Whenever the head of a corporation says he is optimistic that the company will survive, you know it is about to crash and burn. That's what the heads of Bear and Lehman and WaMu and every other failed company said right before their companies failed
In reality, JP Morgan is one of 5 "dead man walking" banks whose credit default swaps and other exotic investments have doomed the company to the dustbin. See this.
Wednesday, March 11, 2009
You Don't Know Dick
In February 2006, I chronicled some of then vice president Cheney's little-known shenanigans.
Given Pulitzer-prize winning investigative reporter Seymour Hersh's new revelation that the military ran an "Executive Assassination Ring" throughout the Bush years which reported directly to Cheney, I have reposted below - as context - my 2006 essay, called "All Roads Lead to Dick Cheney".
Most people know that Vice President Dick Cheney is former CEO of Halliburton, which makes billions of dollars a year from oil and primarily defense-related construction contracts (and that war and chaos increase Halliburton's profits, which in turn increase the value of Cheney's stock options). Most people also know that Cheney was secretary of Defense under George H. W. Bush.
Many people know that Cheney was a congressman from Wyoming. Some even know that he was one of the founders of the Project for a New American Century.
Well-read people know that the Project for a New American Century, in turn, called for a new American empire well before 9/11, and lamented that, without a "catastrophic and catalyzing event — like a new Pearl Harbor", transformation of America into an empire would be very slow.
But even well-informed people probably don't know that -- in the 70's -- Cheney was instrumental in generating fake intelligence exaggerating the Soviet threat in order to undermine coexistence between the U.S. and Soviet Union, which conveniently justified huge amounts of cold war spending. See also this article. This scheme foreshadowed Mr. Cheney's role in generating fake intelligence in Iraq by 30 years.
And did you know that, according to former high-level intelligence officer Melvin Goodman, Cheney orchestrated phony intelligence for the Congress in order to get an endorsement for covert arms shipments to anti-government forces in Angola?
Have you heard that Cheney has been perhaps the leading advocate for strengthening the powers of the White House to the point of monarchy for at least 20 years?
And did you know that Cheney has been instrumental in creating and practicing Continuity of Gvernment measures for the last 20 years or so. These "COG" measures -- which were implemented on 9/11 -- could lead to the destruction of the Constitution, the virtual disbanding of Congress, and the loss of the American form of government.
Or that newly-released documents show that Cheney was involved in debates concerning illegal wiretaps 30 years ago?
Did you catch that the former director of the CIA accused Cheney of overseeing American torture policies ? Or that Colin Powell's former chief of staff stated that Dick Cheney is guilty of war crimes for his role in facilitating torture? Or that Cheney is the guy who actually led the briefings of lawmakers to defend torture?
And, according to to the Pulitzer prize-winning reporter who uncovered the Iraq prison torture scandal and the massacre against Vietnamese civilians, Cheney is the main guy helping to fund groups which the U.S. claims are terrorists (see confirming articles here and here)
And guess who is the prime architect of efforts to bomb Iran? Yup, Mr. Cheney (see also this article).
To recap, Cheney's past includes:
• Oil
• Defense
• Faking intelligence and using scare tactics about enemies to justify a pre-planned military agenda
• Lobbying to give the president the powers of the king
• Calling for an American empire and lamenting the lack of a "new Pearl Harbor"
• Police state type wiretapping
• Selling war
• Promoting torture
• Funding Al-Qaeda
Did all of these aspects of Mr. Cheney's background converge in the Iraq debacle? Well, a top official at the State Department stated there was a secret "cabal" involving Cheney, and that Cheney and a handful of others had hijacked the country's foreign policy.
Did they converge on 9/11?
This last question is not merely academic: vice President Cheney was apparently in charge of ALL 5 of the war games which occurred on 9/11 and coordinated the government's "response" to the attacks. See this CNN article; and this essay.
And Cheney is the one who monitored flight 77 for many miles as it approached the Pentagon and -- when a military man asked "do the orders still stand?" -- Cheney responded affirmatively:
"The plane is 50 miles out. The plane is 30 miles out." And when it got down to, "The plane is 10 miles out," the young man also said to the vice president, "Do the orders still stand?" And the vice president turned and whipped his neck around and said, "Of course the orders still stand. Have you heard anything to the contrary?"
Watch the video for yourself (and see this essay).
Mr. Cheney's motive concerning 9/11 was strong. As a well-known writer said:
"For his entire career, he sought untrammeled power. The Bush presidency and 9/11 finally gave it to him . . ."
Postscript: For the sake of brevity, I have left out numerous additional acts committed by Mr. Cheney. For example, you may have heard that the Energy Task Force chaired by Cheney prior to 9/11 collected maps of Iraqi oil fields and potential suitors for that oil. But did you know that a secret document written by the National Security Council on February 3, 2001 directed the N.S.C. staff to cooperate fully with the Energy Task Force as it considered the “melding” of two seemingly unrelated areas of policy: “the review of operational policies towards rogue states,” such as Iraq, and “actions regarding the capture of new and existing oil and gas fields”? In other words, it is difficult to brush off Cheney's Energy Task Force's examination of Iraqi oil maps as a harmless comparison of American energy policy with known oil reserves because the N.S.C. explicitly linked the Task Force, oil, and regime change. Indeed, a former senior director for Russian, Ukrainian, and Eurasian affairs at the N.S.C. said “if this little group was discussing geostrategic plans for oil, it puts the issue of war in the context of the captains of the oil industry sitting down with Cheney and laying grand, global plans” (see also this essay).
And Cheney was largely responsible for generating fake intelligence about Iraq in order to justify the war.
And Cheney was probably responsible for outing CIA agent Valerie Plame.
And, according to former British Defense Secretary, Cheney has called the shots in the failed Iraq war.
Of course, Cheney has not acted alone in his actions. But he's been an important player in many different arenas and is, perhaps, the most widely-known figure who has had a hand in all of the above-described events. Cheney might not be the ultimate Mr. Big in these crimes, but he appears to have gotten his hands dirtier -- and to be closer to the true seat of power -- even than Mr. Bush.
In addition, while Cheney was not solely responsible for the above-listed actions, he hired many of the people who caused the mischief, such as the chief architect of the Iraq war - Paul Wolfowitz.
See also this round-up of Cheney's actions.
The Government is Using the Wrong Tools to Fix the Economy
Treasury Secretary Geithner said today that the U.S. is "in a deep mess", but that the government will fix it.
But high-level officials of the Federal Reserve have slammed the government's response to the financial crisis.
And a Nobel laureate economist has said that the entire market for credit default swaps has to be changed, and that the superficial tinkering the government is now doing is not nearly enough.
Indeed, top experts have said that the government is using the wrong tools entirely to try to fix the economy.
In October, probably the top monetary economist alive told the Wall Street Journal that the government's approach to the crisis was wrong, because they were treating it as a liquidity crisis, when in was really a solvency crisis.
And Huffington Post pointed out yesterday that Nobel laureate Paul Krugman, economist James Galbraith, and - apparently - the chair of the Council of Economic Advisors, think the same thing:
The stakes in taking the right approach to the crisis are obviously high. For example, PhD economist Marc Faber recently warned: “I think it might be far worse [than the great depression] precisely because of the interventions” by the government.Christina Romer, at a speech at the Brookings Institution Monday afternoon, appeared to give support to critics of Treasury Secretary Timothy Geithner who say that he is wrongly treating the economic collapse as a "liquidity crisis" when it is instead a crisis of solvency in the banking system brought on by a collapse in asset prices.
"Most obviously, like the Great Depression, today's downturn had its fundamental cause in the decline in asset prices and the failure or near-failure of financial institutions," she said in prepared remarks, where she compared and contrasted the current crisis with the Great Depression. The assets in question are, by and large, houses and other real estate....
It's more than just an academic question. The administration can't fix the economy if it can't accurately diagnose the problem. But if Romer did say publicly, in an explicit way, that the banking system faced a solvency crisis, that statement in itself could cause chaos in the markets as was seen on a smaller level when Sens. Chris Dodd (D-Conn.) and Charles Schumer (D-N.Y.) said they were open to nationalizing insolvent banks, causing CitiGroup and other bank stocks to dive.
Critics of Geithner, including Nobel Prize winning economist Paul Krugman, insist that the real problem is an asset collapse that led to a crisis of solvency in the banking system. In other words, Krugman argues that home values have come back to Earth, while Geithner hopes to solve the problem by pushing home values back to where they were. The conflict is a serious one because it dictates what response is appropriate.
Geithner's understanding of the crisis as one of liquidity -- which Fed chief Ben Bernanke agrees with -- leads to some bizarre conclusions, Krughman has written:
Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the "basic inherent economic value" of troubled assets and the "artificially depressed value" that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they're worth much, much more.Economist James Galbraith, who has been critical of the administration's rescue effort as insufficient, said in an e-mail that "the recognition that the fundamental decline (collapse) in asset prices is the problem firmly contradicts the administration's line that credit is 'blocked' and can be made to 'flow.' The asset price (read: housing price) problem undercuts that completely, not so much by establishing insolvency of the banks, but by establishing the lack of credit-worthiness of the borrowers. Whether Christina Romer recognizes this is an interesting question."...And the government's job, he declared, is to "provide the financing to help get those markets working," pushing the price of toxic waste up to where it ought to be.
What's more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions....
At a closed-door meeting with House Democrats on Monday night, according two members of Congress who were in the meeting, Geithner repeated that he believed the problem with the financial system was a lack of liquidity and that if he could get credit flowing again, the problem would right itself. Key to this analysis is the question of whether one thinks the rise of housing prices was an artificial bubble or if the collapse is reversible and we can return to those highs. Policymakers have resisted labeling it as a bubble. Romer, on Monday, came close, referring to a "run-up in housing prices that sure looks like a bubble."...
If the crisis is understood as one of liquidity, then the appropriate response is to continue injecting capital into the banking system and fiscal stimulus into the general economy until asset prices return toward previous highs. Japanese policymakers initially understood their crisis to be one of liquidity and injected hundreds of billions during the 1990s, to little effect. But if the problem is something different -- a solvency crisis brought on by essentially permanent asset-price declines -- then the policy response needed is different.
Headlines | 3-11-09
Some of the most important stories of the day . . .
Economy and Business
- Big banks strike again: Didn't pay their FDIC premiums for 10 years
- CFR: The shadow financial system – as illustrated in three new papers that cut through the London fog
- Geithner: U.S. "in a deep mess" but we will fix it
- Greenspan refuses to take blame for housing bubble (background)
- Overvalued euro set to plunge "within months"?
- US companies pull out of retirement contributions
- In 2006 interview, Jim Cramer admitted to market manipulation
- Chinese exports fell sharply in February (background)
- Pulitzer-Prize Winning Investigative Reporter Seymour Hersh: Military Ran an "Executive Assassination Ring" Throughout the Bush Years Which Reported Directly to Cheney (background)
- Iran nuclear plant to open for tourists to highlight peaceful intentions
- Poll: Americans evenly divided between liberals/progressives and conservatives/libertarians (background)
- Ron Paul: Obama foreign policy identical to bush
- AIPAC kills nomination of Charles Freeman as Chair of National Intelligence Council (Freeman's own statement)
- Pelosi using air force planes as her "personal airline", according to Fox news
- Ocean said to be more acidic than at any time since dinosaurs, and rising twice as fast as forecast 2 years ago
- A bug in cat poop may cause schizophrenia and bipolar disorder (background)
- Google tests service that examines what its users do on other Web sites to help it target advertising, raising privacy concerns.
- Big spenders are becoming frugal; the already-frugal are becoming even more frugal
This roundup may be updated periodically throughout the day.
Bondholders To Take a Big Haircut
Bloomberg writes that bondholders are going to take a haircut, due to the extreme stresses on bank debt:
Bank debt is as stressed as when Bear Stearns Cos. had to be bailed out and Lehman Brothers Holdings Inc. collapsed, according to analysts at BNP Paribas ....
The Markit iTraxx Financial index of credit-default swaps linked to the senior debt of 25 banks and insurers were more expensive today than the Markit iTraxx Europe corporate index. That hasn’t happened since Lehman went bankrupt in September and, before that, JPMorgan Chase & Co.’s takeover of Bear Stearns and it reflects “systemic stress” in the financial system, according to BNP Paribas.
“We’re seeing the start of the next leg of the crisis and that’s going to be financial bondholders taking a haircut as lenders default,” said Mehernosh Engineer, a London-based strategist at BNP Paribas. “There’s been a perception that banks’ senior bondholders are untouchable but that’s going to change.”
This mirrors what the chief economist for Business Week - Michael Mandel - and Mish previously wrote about the government's real plan with regard to Citigroup and the other financial giants:
"At some point the bondholders are going to have to take a big haircut."
We can now see that the plan is to slowly boil the frogs in order. In other words, the government preferred shareholders need to be wiped out first in a manner that offends foreign investors the least. That manner was to wipe out US government (taxpayer) preferred shares along with foreign governments common equity and preferred positions.
The next frog to be boiled will be after Citigroup fails the stress test. At that point, there will be no way to avoid "an adult conversation" between the US government and foreign bondholders.
In other words, the government's plan is not to "save" the banks or to protect taxpayers, but to set up a situation where the government can beg foreign bondholders to be patient, take a haircut, and not to get so mad that they pull the plug on the U.S.
Here's an update from Bloomberg.
Tuesday, March 10, 2009
Headlines | 3-10-09
Some of the most important stories of the day:
- A new poll shows that 53% of Americans think it's likely U.S. will enter depression like the 1930's (background)
- The chair of the Council of Economic Advisors diplomatically slapped down Geithner and Bernanke, hinting that their approach has been wrong (background)
- Libor increased for 11th straight day as Dollar-starved banks refrain from making loans (background)
- China faces a threat of deflation (background)
- Faber recommends buying oil service stocks like Fluor (background)
- Jim Rogers recommends buying into water treatment and agricultural companies in China, and thinks China will come out of the economic crisis before the U.S. (background)
- Dow up more than 300 (background)
- Catherin Austin Fitts argues that the bank bailouts are actually north of $12 trillion and climbing
- Director of National Intelligence Dennis Blair tells Congress that Iran has not re-started its nuclear weapons program (background)
- Top cybersecurity official quits, says NSA has too much power (background)
- America becoming less Christian, survey finds
This roundup will be updated periodically, so keep checking back.
53% of Americans (and Senator Specter) Think It's Likely U.S. Will Enter Depression Like the 1930's
53 percent of Americans think that it is likely that the U.S. will enter a depression like during the 1930's, according to a new poll by Rasmussen.
Senator Specter thinks so also, saying:
Our economic problems are enormously serious, more serious than is publicly disclosed. And I think we’re on the brink of a depressionABC News suggests that Specter is talking gloom and doom for political reasons:
Sen. Specter is fully aware of the vulnerability on his right flank [for supporting Obama's budget] which may be why he painted such a dire and mysterious economic outlook when speaking with reporters.”I wish that all of the fears of a depression were unfounded, or political hype.
However, many experts actually agree with Specter.
Citi, B of A, HSBC, Wells and JP Morgan’s Current Net Loss Risks from Derivatives $587 Billion as of Dec. 31 (Up 49% in 90 Days)
Everywhere you look, there's evidence that derivatives are what is killing the economy.
McClatchy reports that derivatives, mainly credit default swaps, are destroying Citibank, B of A, HSBC, Wells and JP Morgan:
America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.
Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days....
Federal regulators portray the potential loss figures as worst-case. However, the risks of these off-balance sheet investments, once thought minimal, have risen sharply as the U.S. has fallen into the steepest economic downturn since World War II ....
The biggest concerns are the banks' holdings of contracts known as credit-default swaps, which can provide insurance against defaults on loans such as subprime mortgages or guarantee actual payments for borrowers who walk away from their debts.
The banks' credit-default swap holdings, with face values in the trillions of dollars, are "a ticking time bomb, and how bad it gets is going to depend on how bad the economy gets," said Christopher Whalen, a managing director of Institutional Risk Analytics, a company that grades banks on their degree of loss risk from complex investments....
Trading in credit-default contracts has sparked investor fears because they are bought and sold in a murky, private market that is largely out of the reach of federal regulators. No one, except those holding the instruments, knows who owes what to whom. Not even banks and insurers can accurately calculate their risks.
"I don't trust any numbers on them," said David Wyss, the chief economist for the New York credit-rating agency Standard & Poor's....
Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
The banks' credit-default portfolios have gotten little scrutiny because they're off-the-books entries that are largely unregulated.
Good Time or Bad Time To Buy Gold?
Whenever the price of gold tanks, goldbug investment advisors say that it's the perfect time to stock up on cheap gold.
On other other hand, well-known chartists such as the Aden Forecast say to stay out of the market, as the bull market trend might be reversing, with a long-term (secular) bear market in gold setting in.
Who's right?
Well, Mark Hulbert says its a good time to buy because goldbug investor sentiment has turned bearish. In other words, he says that if traditional goldbugs are staying out of the market, so it's time to get in.
And the head of China's energy bureau said in comments published on Monday "China should use part of its nearly $2 trillion in foreign exchange reserves to buy more gold, oil, uranium and other strategic commodities".
Hedge funds are pouring into gold, and banks may pour their money into commodities as well, which could create a rally in gold prices. See this.
Wealthy individual investors are also buying gold as a safe haven asset.
And many credible people are saying that the economic crisis could cause widespread unrest. Unrest drives the price of gold up.
Finally, Elliot Wave chartists say this is the last bear market rally for the stock market for years to come (and see this). Since they think the stock market will tank all the way down to 5,000 or less as soon as this last dead cat bounce rally ends, money might pour out of stocks and back into gold in the near future.
So is now the time to buy gold?
Well, it depends how long this bear market rally in stocks will continue. Market timing is hard, but you should obviously wait to buy until the price of gold is at its lowest.
But the long-term outlook for gold is likely bullish. See this.
For an opposing view, see this.
Note: I am not an investment advisor and this should not be taken as investment advice.
Pension Funds Broke Because They Sold Credit Default Swaps, Bought Risky Investments
You've probably heard that pension funds are in big trouble. As Bloomberg notes:
With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.
But, there's more to the story than stock market losses.
As the former senior investment analyst for two of the largest public pension funds in Canada points out, the pension funds' trouble largely stems from the fact that they engaged in casino capitalism:
They were contributing to systemic risk by shoveling billions of dollars into commodities, hedge funds, real estate, private equity, CDOs, etc.? What were they possibly thinking selling CDS just like AIG?States must guarantee public pension fund debts. Therefore, Bloomberg estimates that the government will have to give a trillion dollar bailout to pension funds. Another trillion dollars taxpayers will have to pay for either directly through taxation or inflation.
Why Commodities Prices May Rise, Even In Deflation
As people like Mish point out, we're currently in a highly deflationary environment. As such, commodities would seem to be a poor investment.
But Jim Rogers says that agriculture will go through the roof. A lot of people say gold will soar. And peak oil advocates say that oil will skyrocket.
So who's right?
Well, it isn't a big secret that China is going all over the world buying up commodities.
And an article in the Financial Times yesterday entitled "Hedge funds turn to gold" notes:
Hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks....[Hedge fund managers] such as Mr Einhorn are turning to gold because they are worried about the response of the US Federal Reserve and other central banks to the global economic crisis. A bet on gold is essentially a bet against all paper currencies.
“The size of the Fed’s balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed,” Mr Einhorn wrote in a recent letter to his investors. “Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself.”
Mr Einhorn’s comments – and the revelation he is buying gold itself – are in line with the views held by other large institutional investors in Europe, according to bankers in London. The head of commodity sales at one major bullion bank told the Financial Times that he had never been so busy dealing in gold for large investors in his life.
Goldman Sachs, Morgan Stanley and UBS all forecast the gold price will surge above $1,000 this year. Peter Munk, chairman of Barrick Gold, the world’s largest miner of bullion, told investors last week that all countries have embarked on policies that will favour gold.“The only option to governments is to print and print more money,” he said. “That will end in tears.”
Moreover, the government is in the process of giving hundreds of billions - if not trillions - of dollars and guarantees to hedge funds. Whether the hedgies directly use that money to invest in commodities, or use other monies they possess, the shot in the arm of cash and guarantees from Uncle Sam is going to restart a speculative frenzy by the hedgies.
Finally, financial blogger Mike Whitney also makes a good point about another factor driving up commodities prices:
There is another part of Geithner's plan that is even more troubling, that is, after the banks sell their dodgy assets to the hedge funds, what will they do with the money? Consumers are retrenching, so the pool of creditworthy customers will remain small. And businesses are trying to work off existing inventory, so they won't be borrowing to increase investment or retool anytime soon. If the opportunities for lending dry up, the banks will be forced to seek unconventional means for generating profits. My guess is the banks will put a large portion of their money into hedge funds for commodities speculation, which will push the price of oil, natural gas and other raw materials into the stratosphere just like they did last year when oil shot up to $147 bbl. The banks really have no choice; 65 percent of their business was securitized investments. That door has been slammed shut for good.
The bottom line is that, even in this highly-deflationary environment, commodities may do fairly well this year.
And eventually, most analysts think deflation will give way to inflation. Whether that happens in the short-term or long-term is open to debate.
Note: I am not an investment advisor and this should not be taken as investment advice.
Monday, March 9, 2009
The Truth About Blogs
Obama is dissing economic blogs, saying they are unreliable.
The editor of the Aurora Sentinel says that there is "very little real news on blogs".
Time magazine asks "Does the News Industry Deserve a Bailout?", and trumpets the heroic work of mainstream newspapers:
Politicians have every reason to want to see print media fail . . . too many governors and congressmen have lost jobs after newspaper investigations to make the relationship between Fourth Estate and politicians a comfortable one. A neutered press would benefit a number of elected officials.
But the whole debate about blogs versus mainstream media is nonsense.
In fact, many of the world's top PhD economics professors and financial advisors have their own blogs. For example (in no particular order):
And the conclusions of economists who don't have their own blogs are collected by other bloggers and on YouTube videos. For example, this blog rounds up everything Marc Faber says.
The same is true in every other field: politics, science, history, international relations, etc.
So what is "news"? What the largest newspapers choose to cover? Or what various leading experts are saying - and oftentimes heatedly debating one against the other?
As blogger Michael Rivero pointed out years ago, mainstream newspapers aren't losing readers because of the Internet as an abstract new medium. They are losing readers because they have become nothing but official stenographers for the powers-that-be, and people have lost all faith in them.
Indeed, only 5% of the pundits discussing various government bailout plans on cable news shows are real economists. Why not hear what real economists and financial experts say?
To the extent that blogs offer actual news and the mainstream media does not, the latter will continue to lose eyeballs and ad revenues to the former.
Poll: Should Geithner, Summers and Bernanke Be Fired?
The calls to fire Geithner are growing.
I think Summers and Bernanke must be fired too.
What do you think (I've posted a poll on the right margin; and feel free to comment below).
Update: Here are the poll results:
Should Geithner, Summers and Bernanke Be Fired?
Your Hard-Earned Money is Being Shipped to France, Germany and China
Under the guise of "bailing out" AIG, your hard-earned money is actually being shipped by the U.S. government to:
- French banks Société Générale and Caylon
- Germany's Deutsche Bank AG ($6 Billion between mid-September and December 2008)
- HSBC Holdings (England)
Moreover, bailout money that went to Citigroup was loaned to Dubai, bailout money that went to Bank of America China was invested in China, and bailout money given to JP Morgan was invested in India.
And the government is in the process of providing billions more - along with trillions more in guarantees of worthless assets - to sovereign wealth funds and hedge funds.
And remember that the U.S. may have already given hundreds of billions to foreign banks. Indeed, foreign banks - including certain Chinese banks - can receive bailout money through the TARP program itself.
Your future - and your children's and grandchildren's future - is being shipped overseas.
As Congressman Dennis Kucinich, chairman of the domestic policy subcommittee for the House Oversight and Government Reform Committee, said:
"When the American people find that their tax dollars, which were supposed to be used to get us out of this financial crisis, instead are being used to ship jobs and investments overseas, there will be outrage".
As I've previously written, this isn't a pro-America anti-everyone-else rant. If I lived in England, or Canada or Japan, I would resent my money going to the fatcats in the U.S.
When I say your "hard-earned money", I'm talking about your current and future taxes. If you don't think the government will raise your taxes, just wait. Moreover, inflation will be a tax on everyone. Finally, shipping dollars overseas means that there will be less to spend on things the government cold otherwise provide - whether it is defense, emergency food and shelter, etc.
The Difference Between Liberals and Conservatives
The powers-that-be use the words "conservative", "Republican", "liberal" and "Democrat" as wedge issues.
But those terms are largely without substance. They are really "brand names" like Coke and Pepsi, and with about as much difference.
For example, Bush is a "Republican" and so-called "conservative", and yet he spent our country into staggering debt levels, launched various imperial adventures, and rolled back 200-year old traditions contained in the Constitution.
Nancy Pelosi is a "liberal" and "Democrat", yet she has apparently flown all over the country on air force jets using them as her "personal airline", prevented impeachment against war criminals, and encouraged torture and spying on Americans, and covered-up of the fact that the supposed sources of information for the 9/11 investigation were unreliable. Pelosi talked about ending the Iraq war, but then voted for spending increases for the war every single time.
And both Bush and Pelosi helped throw trillions of dollars at failed, corrupt financial companies without requiring any oversight or control.
True, there are some real and important differences on certain issues.
But on many issues, the difference is mainly one of style and images, and the parties are no more different than Coke is from Pepsi: both are drinks made with a lot of sugar, carbonation, food coloring, preservatives and water. Their "secret flavoring ingredients" might be slightly different, but they are 99.9% the same.
Progressives Versus Libertarians
The words "progressive" and "libertarian" still have some meaning, and have not yet been totally co-opted. People who consider themselves "progressive" are largely critical of the DNC agenda, and are pushing for real change.
Likewise, "libertarians" are highly critical of the Republican party, and support real change.
Indeed, despite the divide-and-conquer strategy of the powers-that-be, and its false "left-right" dichotomy, progressives and libertarians think a lot alike on many issues. That's why progressives who support Dennis Kucinich and libertarians who like Ron Paul actually work together on many issues.Neo-Blank
Of course, part of the problem is that "Neoconservatives, like Bush, are not really conservative. And "Neoliberals" are not really liberal.
So whatever distinction the terms conservative and liberal might formerly have had are largely gone, co-opted by the wealthy and powerful to serve their needs. As such, they have become largely indistinguishable.
How Could He Be Both Conservative and Liberal?
George Washington was neither a "republican" or a "democrat". Those parties didn't exist when he was president. He was simply an "American".
Let's play a game. Who are the all-time most conservative people in America? Who are the most liberal?
You might assume that the most conservative people are small-town midwestern Christians, and that the most liberal people are San Franciscan gays or hippies. But are those stereotypes accurate?
What could be more conservative than a native american who followed traditions largely unchanged for hundreds of years, who took only as much as he and his family needed, who used every single part of the animal he killed and wasted nothing, and whose spiritual beliefs formed the basis for every part of his life?
What could be more liberal than the "seven generations" concept of the Iroquois:
The Great Law of the Iroquois League imposed a duty upon leaders to "have always in view not only the present, but also the coming generations, even those whose faces are yet beneath the surface of the ground—the unborn of the future Nation," and the Iroquois tradition is to consider the impact of decisions on the next seven generations.
The Iroquois sought to protect their environment so that it could keep providing healthy food and good living. They were peacemakers who negotiated conflicts between other tribes. And the women elders had impeachment power to sideline a male leader who acted for himself instead of for the good of the tribe.
Am I saying that we should all dress up like native Americans and show up at pow wows? Of course not. I'll I'm saying is that the strategy of the elite is always to create false stereotypes to divide and conquer us and turn us against one another.
I'm saying that we need to think for ourselves about what conservative and what liberal means, and which parts of each we want to embrace and which parts we don't want any part of.
I'm saying don't let others define you. Define yourself.
Note: The Iroquois also came up with the separation of powers form of government which, apparently, inspired the Founding Fathers. See this and this.
Saturday, March 7, 2009
Nobel Economist: Ban Over-the-Counter Credit Default Swaps
Bloomberg notes:
Myron Scholes, the Nobel prize- winning economist who helped invent a model for pricing options, said regulators need to “blow up or burn” over-the-counter derivative trading markets to help solve the financial crisis.
The markets have stopped functioning and are failing to provide pricing signals, Scholes, 67, said today at a panel discussion at New York University’s Stern School of Business. Participants need a way to exit transactions and get a “fresh start,” he said.
The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over,” he said, referring to credit-default swaps and other complex securities that are traded off exchanges. “One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices.”
Scholes also recommended moving the trading of credit- default swaps, asset-backed securities and mortgage-backed securities to exchanges to allow for “a correct repricing” of the assets. The securities are currently traded between banks and investors, without any price disclosure on exchanges.
Time Magazine's Justin Fox notes that:
What that means, he elaborated, is that regulators should "try to close all contracts at mid-market prices" and then start up the market anew with clearer rules and shorter-duration contracts.
(Fox also notes that this is especially dramatic given that Scholes is the "intellectual godfather of the credit default swap").
I agree with Scholes.
Legally, you can cancel CDS based upon fraud or mistake. Or you can reform (that is, modify) CDS if one party to the contract was mistaken about what he was getting into. The government must use its power to do so, or the economy will continue to go down the tubes.
The Future of Energy
There is plenty of energy for everyone.
Sure, I know all about peak oil and the dangers of nuclear energy and the high cost to produce solar and wind energy.
But those things are all trivial compared to the untapped energy sources we have all around us.
That's Hot
In hot climates, black thermal-electric mats could be installed on roofs to generate electricity.
Heat is a byproduct of other processes, and so nothing special needs to be done to create it. Just about every human activity and many natural processes create heat, so we just have to utilize it.
Stomp
For example, a train station in Japan installed piezo-electric equipment in the ground, so that the foot traffic of those walking through the train station generates electricity (turnstiles at train, subway and ferry stations, ballparks and amusement parks can also generate electricity).
Similarly, all exercise machines at the gym or at home can be hooked up to produce electricity.
But perhaps the greatest untapped sources of piezo-electric energy are freeways and busy roads. If piezo-electric mats were installed under the busiest sections, the thousands of tons of vehicles passing over each day would generate massive amounts of electricity for the city's use.
Harvesting The Ocean of Energy
We are like a starving man who can't see or smell and is surrounded by food, but doesn't know it. We can learn how to cheaply "harvest" the energy that is all around us.
How?
Well, scientists have figured out that solar collection is much more efficient if you focus the sunlight:
And see this.
Similarly, we can build devices that efficiently collect and concentrate other types of electromagnetic energy. Initially, engineers should tinker with Faraday cages - trying by trial and error every conceivable natural and high-tech material - until they figure out how to build collectors which can channel, concentrate and collect useful forms of electromagnetic energy. (Instead of a rectangular shaped Faraday mesh to keep electromagnetic energy out, you can build out shapes to channel energy, like a fountain can channel and collect water - get it?).
The sun produces light and heat, but also various forms of magnetic and other energies. It also produces exotic particles like neutrinos.
At first, we will be only able to collect and use very limited portions of the EM spectrum. Eventually, we will be able to use more and more parts of the spectrum to power our machines directly or through conversion to other types of energy.
One day, virtually every surface will be turned into an energy-production medium. Instead of having discreet energy-producing machines, roofs, exterior walls, sidewalks, roads and many other surfaces will be coated with "smart materials" which convert light, heat, pressure and other inputs into useful energy, which are then collected, stored and distributed as needed.
Hundreds or thousands of years in the future, mankind might even learn how to collect the virtual particles which are constantly popping into and out of existence.
Indeed, one of the world's leading trend forecasters, Gerald Calente, believes that zero point energy or energy generated by neutrinos or other high-tech methods might be stumbled upon fairly soon - and that such a discovery would lift us out of the economic depression. He also says that producing our own energy for our homes and cars (called "micro generation") will become a huge trend in the next couple of decades. See this.
Harvesting The Ocean of Energy
Perhaps the biggest evolution needed in people's thinking - in any area of life - is how we think about energy.
The current paradigm is that energy is produced expensively by governments or large corporations through gigantic projects using enormous amounts of money, materials and manpower. Because energy can only be produced by the big boys, we the people must bow our heads to the powers-that-be. We must pay a lot of our hard-earned money to buy electricity from them, and we can't question the methods or results of their energy production.
Note 1: A better future of plentiful energy will only happen if we loudly demand it from our politicians and other "leaders". If we just sit back and wait for it, the powers-that-be will buy up and suppress all promising technology, to ensure that the models of scarcity and centralized energy production - and thus high prices and concentration of power - prevail.
Note 2: Buckminister Fuller worked for 50 years to show that things can be designed and built efficiently and with little input of energy, materials, money and manpower. Energy engineers must obviously ensure high EROI (energy return on investment, to ensure more energy output than input). However, high energy requirements during the R&D and production phase may be more than compensated for by a long lifetime of energy generation once installed. In other words, it is obviously necessary to look at the entire lifecycle of the technology.
Note 3: Engineers looking for ideas to test need not brainstorm from scratch. For example, you can look at sites like this one for brainstorming from non-scientists on means of generating energy. If you throw out 99 ideas as contrary to the laws of physics or impractical but find one good one, that one idead could be worth its weight in gold.
Friday, March 6, 2009
What Obama Must Do To Have Any Hope of Fixing the Economy
I voted for Obama.
I passionately want him to succeed in solving the economic crisis.
But before he can succeed, there is something he has to do.
Paul Krugman wrote an article yesterday hinting at the answer:Geithner will never be willing to face the facts. Bernanke will never change his views. never change his discredited perspective. Similarly, Larry Summers, the head of Obama's National Economic Council - the most powerful economic advisor on Obama's team - will never change his ways.Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.
Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.
And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions....
The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly .... Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.But would it be enough to make the banking system healthy? No.
Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.
And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) ...
Officials still aren’t willing to face the facts.
They are too wedded to an overly-leveraged, highly-securitized, derivatives-based, bubble-blown financial system. They are too entrenched in outdated economic theories.
Democrats assume that Summers is a tried-and-true veteran, a big wheel during Clinton's presidency, when the economy was booming. But that was before the things which Summers championed - unregulated derivatives, increased leverage, and repealing Glass-Steagal (the New Deal legislation which separated investment banks from commercial banks, insurers and stock brokers, and which kept companies from becoming "too big to fail") - had any effect. Now that the fuse he lit has exploded, it should be obvious that he is part of the problem, not part of the solution.
Unless Obama replaces Geithner, Bernanke and Summers with people who get it, and who are willing to fix the things that really need fixing, Rush Limbaugh will get his wish: Obama will fail.
If Bernanke cannot be replaced in the middle of his term, he should at least be sidelined.
High-Level Fed Officials Slam Government Response to Crisis
Fed Vice Chairman Donald Kohn conceded yesterday that the government's actions "will reduce [companies'] incentive to be careful in the future." In other words, he's admitting that the government's actions will encourage financial companies to make even riskier gambles in the future.
Kansas City Fed President and veteran Fed official Thomas Hoenig said:
Too big has failed....
The sequence of [the government's] actions, unfortunately, has added to market uncertainty. Investors are understandably watching to see which institutions will receive public money and survive as wards of the state....
The U.S. Treasury has failed to take “decisive” action to address the bank crisis, pursuing an ad-hoc approach that leaves management in place and avoids necessary asset writedowns....The current head of the Philadelphia fed bank, Charles Plosser, disagrees with Bernanke's strategy of the endless printing-press and ever-increasing fed balance sheet:
Any financial crisis leaves a stream of losses among the various participants, and these losses must ultimately be borne by someone. To start the resolution process, management responsible for the problems must be replaced and the losses identified and taken. Until these actions are taken, there is little chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery....
Many of the [government's current policy revolves around the idea of] "too big to fail" .... History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger. ...
Even large banks can be dealt with in a way in a manner which imposes market discipline on management and stockholders, while controlling taxpayer losses....
Banking regulators need to be willing to write down losses, bring in new managers and sell off businesses if institutions can’t survive on their own, no matter what their size.
Plosser urged the Fed to "proceed with caution" with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.***
Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed's various asset purchase programs are not easily summarized in a single number.
But Plosser said that the growth of the Fed's balance sheet was a key metric.
"It is not appropriate to ignore quantitative metrics in this new policy environment," Plosser said.***Plosser is bringing the spotlight right back to the Fed's balance sheet."The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions," Plosser said.
The former head of the Fed's Open Market Operations says the bailout might make things worse. Specifically, the former head of the Fed's open market operation - the key Fed agency which has been loaning hundreds of billions of dollars to Wall Street companies and banks - was quoted in Bloomberg as saying:
"Every time you tinker with this delicate system even small changes can create big ripples,'' said Dino Kos, former head of the New York Fed's open-market operations . . . "This is the impossible situation they are in. The risks are that the government's $700 billion purchase of assets disturbs markets even more.''And William Poole, who recently left his post as president of the St. Louis Fed, is essentially calling Bernanke a communist:
But the strongest criticism may be from the former Vice President of Dallas Federal Reserve, who said that the failure of the government to provide more information about the bailout could signal corruption. As ABC writes:Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.The current situation at the Fed seems eerily similar, he said."What is discipline - where are the hard choices - when does Fed say our resources are exhausted?" Poole asked.
Gerald O'Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.
"Nontransparency in government programs is always associated with corruption in other countries, so I don't see why it wouldn't be here," he said.
Faber: "Ben Bernanke Appears to Have Robert Mugabe as His Mentor"
In the best one-liner this week, Marc Faber joked that the chairman of the Fed appears to have Robert Mugabe as his mentor.
Mugabe, of course, is the dictator in Zimbabwe who created hyperinflation . . . leading to things like this:
Credit Default Swap Holders Changed Laws So They Get Paid Ahead of Bankruptcy Creditors
You probably know that credit default swap counterparties drive company after company into bankruptcy.
And you probably know that they are getting billions of dollars of taxpayer funded bailouts,
But did you know that - once a company they are betting against goes bankrupt - the CDS counterparties cut in line in front of all of the bankruptcy creditors to get paid?
TPM summarizes the story:
One of the features of the 2005 Bankruptcy bill was to put derivative counter parties at the front of the line ahead of other creditors in bankruptcy proceedings. Actually, from what I can tell, they don't just go to the head of the line. They got to skip the line entirely.Great. As if CDS weren't causing enough problems, they often elbow out all other creditors who hold claims against a bankrupt corporation. One question: Does that include taxpayers who are paying for the bailouts?
As the Financial Times noted last fall, "the 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company's assets until a court decides how to apportion them among creditors."
Note 1: I am for reigning in CDS. But even if you are opposed to regulation, everyone should be against letting powerful groups manipulate laws to game the system.
Note 2: Please don't direct your fury at those folks people whose day job is to trade CDS, but who don't have a say in policy or practice (like the financial blogger Tyler). It is the giant financial companies and wealthiest investors -- and their lobbyists and political yes-men -- who deserve our anger for gaming the system.
Thursday, March 5, 2009
Bailout Money - Instead of Being Used to Stabilize the Economy or Even the Bailed-Out Companies - is Just Going to Line the Pockets of the Wealthy
The bailout money is just going to line the pockets of the wealthy, instead of helping to stabilize the economy or even the companies receiving the bailouts:
- Bailout money is being used to subsidize companies run by horrible business men, allowing the bankers to receive fat bonuses, to redecorate their offices, and to buy gold toilets and prostitutes
- A lot of the bailout money is going to the failing companies' shareholders
- Indeed, a leading progressive economist says that the true purpose of the bank rescue plans is "a massive redistribution of wealth to the bank shareholders and their top executives"
- The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)
In other words, through a little game-playing by the Fed, taxpayer money is going straight into the pockets of investors in AIG's credit default swaps and is not even really stabilizing AIG.By law, the Fed isn't allowed to buy assets -- it can only lend, as lender of last resort. That was a problem for the Bear Stearns bailout, because JP Morgan said it would only buy Bear if someone else assumed responsibility for the crap. [The] Fed came up with this idea to start a shadow company, called a special purpose vehicle (SPVs were how Enron operated, creating "Chewco" and the like named after Chewbacca - the New York Fed called their SPV "Maiden Lane LLC" for name of the street the NY Fed is located on in southern Manhattan). The deal then was JP Morgan put $1 billion into Maiden Lane, the Fed put $29 billion in cash into it. Maiden Lane paid Bear Stearns $30 billion, which went straight back to JP Morgan as this deal happened simultaneously to JP's purchase of Bear. So Morgan got $30 billion in cash ($29 billion net) and the Fed got stuck owning the crap, but was legally only making a loan to Maiden Lane, who was the legal owner (Maiden Lane was incorporated not in NYC, but in Delaware to avoid paying taxes). By the Fed's own accounting - which is very different from a real company's accounting - Maiden Lane has lost $5 billion between its creation and today....
Using the loophole it had learned during Bear Stearns, the Fed set up two new companies: Maiden Lane II and Maiden Lane III [to help bail out AIG's investors]. Two dealt with the secured lending and Three the shitty credit default swaps. The Fed lent each Maiden Lane $20 billion and $25 billion and then Maiden Lane paid off the investors that had either lent AIG the money to buy the shitty mortgage backed securities (ML II) and those who had the shitty mortgages and the corresponding insurance (ML III). To avoid booking a loss on the Fed's balance sheet, because the Fed had some legal problems if either of these Maiden Lanes lost money, and because of a reporting requirement that Dodd had put into TARP which actually required the Fed to report to the Congress and the public about the cost to taxpayers from ML I, the Fed did some creative accounting. They still paid all of the investors off at full value (par), so that they didn't lose anything. But they booked the loss on AIG's balance sheet and kept Maiden Lane clean. This is the hidden story behind how AIG went from losing $38 billion during the first 9 months of 2008 to losing $61 billion in the 4th quarter.
This was all exposed at today's hearing. And despite repeated requests from Senators on both sides - Dodd, Shelby, Corker, Warner - the Fed is still refusing to say who it bailed out through Maiden Lane II and III.
Congressman Barney Frank Wants to Prosecute the People Who Caused the Meltdown - Has No Specific Targets in Mind
The chairman of the U.S. House Financial Services Committee - Barney Frank - wants to prosecute those who caused the financial meltdown, although he has no targets in mind.
I'd like to provide a list of where Congressman Frank might start:
- Of course, there is Madoff and Stanford, the guys who ran multi-billion dollar Ponzi schemes
- And there are the senior military officials who stole approximately $125 billion dollars out of money earmarked as Iraq reconstruction funds
- And there are the rating agencies, which committed massive fraud
- And there are the Treasury department officials who allowed banks to "cook their books"
In reality, the list could go on and on.
Indeed, while it might not be criminal, Frank himself bears some responsibility for the crisis. He has thrown trillions of dollars of hard-earned taxpayer money down the drain, in concert with Bernanke, Geithner, Dodd, Pelosi and the gang. Mish slams Frank on that count.
But there's something above and beyond that:
Frankly, boneheads on both the left and the right caused the meltdown.Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that "these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis." When the White House warned of "systemic risk for our financial system" unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing.
Now that the bubble has burst and the "systemic risk" is apparent to all, Frank blithely declares: "The private sector got us into this mess." Well, give the congressman points for gall. Wall Street and private lenders have plenty to answer for, but it was Washington and the political class that derailed this train. If Frank is looking for a culprit to blame, he can find one suspect in the nearest mirror.
Investment Advice | 3-5-09
Here's a round up of what investment advisors are saying today:
- Marc Faber advises buying stock in gold explorers backed by giant gold companies:
Faber currently owns Ivanhoe Mines Ltd., NovaGold Resources Inc. and Gabriel Resources Ltd. because explorers will gain the most as bullion rallies. Commodities will be the first assets to rally when growth returns after a credit collapse led to the worldwide recession, Faber said. Gold explorers backed by larger miners are less expensive than bigger firms and have the financial support to stay in business should the economy worsen, he added. [Remember, this might be a long-term play; Faber thinks we might not get out of this depression for many years.]
- Greg Donaldson points out that the following eight companies have actually recently increased their dividends: Coke, Sysco, Colgate, Kinder Morgan Energy Partners, Abbott Labs, FTL Group and Chub. On a similar tack, eChristian Investing says that the companies with the safest dividends are Coke, United Technologies, McDonald's, 3M and Merck.
I am not commenting on who - if anyone - I think is right and who I think is wrong, but only summarizing what some of the top advisors are saying. In addition, you should check the links to make sure that the information contained herein is accurate, and to read any price or timing recommendations (concerning when to buy, sell, or short) of the advisors.
I am not an investment advisor and this should not be taken as investment advice.Fed Refuses to Release Identity of Credit Default Swap Counterparties
As you know, the Fed and Treasury are refusing to reveal to Congress, their overseers or the American people who is getting the bailout money.
But did you know that the Fed is now refusing to disclose who the counterparties are to AIG's billions of dollars of credit default swaps?
An article from Market Watch summarizes the issue:
Calls increased Tuesday to reveal the financial institutions that got almost $40 billion in collateral from American International Group shortly after the government first bailed out the insurer last year.
AIG almost collapsed in September after ratings agency downgrades triggered demands for billions of dollars in extra collateral from firms that had bought derivative-based protection from the insurer on complex mortgage-related products known as collateralized debt obligations, or CDOs.
AIG didn't have that much money and faced bankruptcy. But it was saved by an $85 billion emergency loan facility from the Federal Reserve.
By Nov. 5, the insurer had paid out $37.3 billion of that money to counterparties who had purchased a certain type of derivative-based protection from AIG called multi-sector credit-default swaps, according to the company's third-quarter regulatory filing.
"AIG has given the counterparties $20 billion. Those people could be just about anybody in the world. Why won't the Fed disclose who those are?" Sen. Ron Wyden, D-Ore., asked Fed Chairman Ben Bernanke during congressional testimony on Tuesday.
Bernanke said the counterparties made "legal, legitimate, financial transactions" with AIG and presumed at the time that the contracts would remain private. "That is a consideration we have to take into account," he added.
Sen. Mark Warner, D-Va., suggested that AIG's counterparties should have to take a "haircut," rather than be made whole, because some of them probably didn't do enough due diligence on whether the insurer was financially strong enough to be selling such protection.
"In effect, what we're saying is, consequently, folks who bought these instruments and that, at some point in their process, should have been doing some level of credit analysis of what AIG was selling who didn't do that credit analysis are going to s