Tuesday, April 7, 2009
Geithner Hoses Economy to Help Banks
CNN says that Geithner will delay the results of the "stress tests" on banks "until after the first-quarter earnings season [ends for most banks on April 24] to avoid complicating stock market reaction".
In other words, instead of closing the insolvent zombie banks in order to save the economy (leading economists say that we have to let the banks fail or the economy will not recover), Geithner will delay announcing that the banks are broke so that their stock remains artificially high. Indeed, in Washington parlance, "delaying" the release of information often means burying them forever.
We may never see the results of the stress tests. This could just be a ploy from Geithner to buy time, just like the tobacco company scientists said they had to conduct further studies on whether or not cigarettes were harmful, and that they would announce the results as soon as the studies were complete.
Best Quotes on the Financial Crisis
In case you missed them, here are some of the best quotes from the last few weeks on the financial crisis:
- Senior S&L Regulator Says Government Engaging in Massive Cover-Up of Economic Crisis: "The entire strategy is to keep people from getting the facts"
- Nobel economist Paul Krugman: "These days America is looking like the Bernie Madoff of economies: For many years it was held in respect, even awe, but it turns out to have been a fraud all along"
- Nobel economist Joseph Stiglitz: "Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."
- Congress Grayson: "Stop stealing our money"
- Former AIG chief: Government used AIG "to funnel money to other institutions, including foreign banks"
- Leading economist: ""The Treasury is spreading the fire, not putting it out"
- Nobel Economist Ed Prescott: ""Don’t subsidize inefficiency.... let these businesses go bankrupt. They gambled, they lost. That’s part of life"
- Nobel economist Myron Scholes: Existing over-the-counter CDS should be ""blown up" and closed out"
- TARP watchdog: "We do not seem to be a priority for the Treasury Department"
- TARP watchdog: "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."
- Obama to Bankers: "“My administration is the only thing between you and the pitchforks."
Monday, April 6, 2009
Economics Professors: Global Crash Worse Than During First Year of Great Depression
Many people (including me) have pointed out that the crash in the U.S. has arguably been worse than during the first year of the Great Depression.
But the Great Depression was a global, not just a U.S. crash. So how does the last year compare to the 1929 depression on a world-wide basis?
Because a picture is worth a thousand words, you can quickly see what they're talking about by looking at the following 4 graphs:
Figure 1. World Industrial Output, Now vs Then
Figure 2. World Stock Markets, Now vs Then
Figure 3. The Volume of World Trade, Now vs Then
Figure 6. Government Budget Surpluses, Now vs Then
(Note: In the last chart, the colors are reversed, and the blue line is from the 1920's.)
Law School Professor: Republicans Are Blackmailing Obama on Torture
Law school professor and torture critic Scott Horton has dropped a bombshell: the Republicans are blackmailing Obama from releasing new torture documents.
Horton points out that:
The memos, authored by then-administration officials and now University of California law professor John Yoo, federal appellate judge Jay Bybee and former Justice Department lawyer Stephen Bradbury, apparently grant authority for the brutal treatment of prisoners, including waterboarding, isolated confinement in coffin-like containers, and “head smacking.”...
Unlike the torture memos that are already public, these memos directly approve specific torture techniques and therefore present a far graver problem for their authors ...
Horton also gets into specifics about the blackmail:
The release of the memos that the Senate Republicans want to suppress was cleared by Attorney General Eric Holder and White House counsel Greg Craig, and then was stopped when “all hell broke loose” inside the Obama administration . . .
Senate Republicans are now privately threatening to derail the confirmation of key Obama administration nominees for top legal positions by linking the votes to suppressing critical torture memos from the Bush era. A reliable Justice Department source advises me that Senate Republicans are planning to “go nuclear” over the nominations of Dawn Johnsen as chief of the Office of Legal Counsel in the Department of Justice and Yale Law School Dean Harold Koh as State Department legal counsel if the torture documents are made public. The source says these threats are the principal reason for the Obama administration’s abrupt pullback last week from a commitment to release some of the documents. A Republican Senate source confirms the strategy. It now appears that Republicans are seeking an Obama commitment to safeguard the Bush administration’s darkest secrets in exchange for letting these nominations go forward.
The most important part of this story isn't that the republicans are making threats, but that Obama is caving in to them.
In Depression-Era Move, Communities Print their Own Currency to Keep Cash Flowing
As USA Today points out, in another important story about alternatives to the dollar, local communities are printing their own currencies:
A small but growing number of cash-strapped communities are printing their own money.Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.
The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.
Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.
Ed Collom, a University of Southern Maine sociologist who has studied local currencies, says they encourage people to buy locally. Merchants, hurting because customers have cut back on spending, benefit as consumers spend the local cash....
About a dozen communities have local currencies, says Susan Witt, founder of BerkShares in the Berkshires region of western Massachusetts. She expects more to do it....
During the Depression, local governments, businesses and individuals issued currency, known as scrip, to keep commerce flowing when bank closings led to a cash shortage.
By law, local money may not resemble federal bills or be promoted as legal tender of the United States, says Claudia Dickens of the Bureau of Engraving and Printing.
"We print the real thing," she says.
The IRS gets its share. When someone pays for goods or services with local money, the income to the business is taxable, says Tom Ochsenschlager of the American Institute of Certified Public Accountants. "It's not a way to avoid income taxes, or we'd all be paying in Detroit dollars," he says.
Pittsboro, N.C., is reviving the Plenty, a defunct local currency created in 2002. It is being printed in denominations of $1, $5, $20 and $50. A local bank will exchange $9 for $10 worth of Plenty.
"We're a wiped-out small town in America," says Lyle Estill, president of Piedmont Biofuels, which accepts the Plenty. "This will strengthen the local economy. ... The nice thing about the Plenty is that it can't leave here."
The use of local currencies will mushroom as the economic crisis worsens. Barter will also be big.
Was the SDR Just Chosen as the New World Reserve Currency?
The Telegraph's lead financial writer Ambrose Evans-Pritchard argues that "the world is a step closer to a global currency, backed by a global central bank, running monetary policy for all humanity."
He's referring to the G-20's authorization of $250 billion in IMF Special Drawing Rights:
A single clause in Point 19 of the communiqué issued by the G20 leaders amounts to revolution in the global financial order.
"We have agreed to support a general SDR allocation which will inject $250bn (£170bn) into the world economy and increase global liquidity," it said. SDRs are Special Drawing Rights, a synthetic paper currency issued by the International Monetary Fund that has lain dormant for half a century.
In effect, the G20 leaders have activated the IMF's power to create money and begin global "quantitative easing". In doing so, they are putting a de facto world currency into play. It is outside the control of any sovereign body.
***
President Barack Obama [commented] "I think we did OK," he said. Bretton Woods in 1944 was a simpler affair. "Just Roosevelt and Churchill sitting in a room with a brandy, that's an easy negotiation, but that's not the world we live in."
***The Russians had hoped their idea to develop SDRs as a full reserve currency to challenge the dollar would make its way on to the agenda, but at least they got a foot in the door.
There is now a world currency in waiting. In time, SDRs are likely evolve into a parking place for the foreign holdings of central banks, led by the People's Bank of China. Beijing's moves this week to offer $95bn in yuan currency swaps to developing economies show how fast China aims to break dollar dependence.
Has the SDR already quietly won out against competing world reserve currencies? Evans-Pritchard seems to think so.
If correct, it will take some time to replace the dollar as reserve currency. But it may be starting.
Sunday, April 5, 2009
Bush and Obama Administrations Both Broke Law By Refusing to Close Insolvent Banks
Geithner's statements that he didn't have the power to close down the big banks are false. Moreover, Geithner and Paulson actually broke the law which requires the government to close down insolvent banks, no matter how big.
The Prompt Corrective Action Law (PCA) - 12 U.S.C. § 1831o - not only authorizes the government to seize insolvent banks, it mandates it.
As William K. Black - the senior regulator during the S&L crisis, and an Associate Professor of Economics and Law at the University of Missouri - told Bill Moyers in their recent interview:
[Question] In other words, they could have closed these banks without nationalizing them?
[Black] Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.
[Question] And that's a law?
[Black] That's the law.
[Question] So, Paulson could have done this? Geithner could do this?
[Black] Not could. Was mandated ....
Black provided the historical background to the PCA in a little-noticed essay last month:
PCA's premise was that regulatory discretion led to cover-ups of failed banks and excessive losses to the taxpayers. The PCA solution was to require higher capital requirements and to mandate that the regulators take over troubled banks before they deteriorated to the point that the failure would impose a cost on the Federal Deposit Insurance Corporation (FDIC). PCA also recognized that failing bankers had perverse incentives to "live large" and cause larger losses to the FDIC and taxpayers. PCA's answer was to mandate that the regulators stop these abuses by, for example, strictly limiting executive compensation and forbidding payments on subordinated debt.
Black then pointed out how the Bush and Obama administration's agenda has been the exact opposite of that of the PCA, and that both administrations have blatantly violated both the letter and the spirit of the law:
The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks. Treasury Secretary Paulson and other senior Bush financial regulators flouted the law. (The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) are both bureaus within Treasury.) The Bush administration wanted to cover up the depth of the financial crisis that its policies had caused.
Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth. He was supposed to regulate many of the largest bank holding companies in the United States. Far too many of these institutions are now deeply insolvent because the banks they own are deeply insolvent. The law mandated that Geithner and his colleagues place troubled banks in receivership long before they became insolvent. Why are the banking regulators, particularly Treasury Secretary Geithner, continuing to disobey the law?...
PCA's purpose is "to resolve... problems... at the least possible long-term cost to the [FDIC]." That means the least possible cost to taxpayers. Secretary Geithner's priority is [instead] protecting private shareholders....
Receiverships end unnecessary bailouts of private shareholders, reducing the cost to the FDIC, as the law requires. Receiverships place banks back in the hands of new shareholders. Geithner has so twisted the framing of this issue that he is warning that a cheaper, more effective means of resolving failed banks used under President Reagan is some alien form of socialism that President Obama must slay before it destroys capitalism. Geithner is channeling Rove when he conflates receiverships with "nationalization."
Secretaries Paulson and Geithner subverted the PCA law by allowing failed banks to engage in massive accounting fraud (which also means they are engaged in securities fraud). Treasury is telling the world that resolving the failed banks will require roughly $2 trillion dollars. That has to mean that the failed banks are insolvent by roughly $2 trillion. The failed banks, however, are reporting that they are not simply solvent, but "well capitalized." The regulators flout PCA by permitting this massive accounting and securities fraud.
Update: This writer purports to rebut Black's claims. But see this.
Economist: "What We Have Is Something Perilously Close To A Dictatorship Of The Fed And The Treasury, Acting In The Interests Of Wall Street"
Prominent economist Robert Kuttner said recently:
What we have is something perilously close to a dictatorship of the Fed and the Treasury, acting in the interests of Wall Street.Mussolini described fascism as the "merger of state and corporate power", and this seems to be what is happening in the merger of the interests of the big financial companies with the government.
Scientists Publish 3 Papers Raising Evidence Contradicting the Official Story of 9/11
You have probably heard that scientists have found "super-thermite" in the debris of the World Trade Centers (original scientific article).
In fact, two previous scientific papers have also found evidence contradicting the official story about 9/11:
- Fourteen Points of Agreement with Official Government Reports on the World Trade Center Destruction, The Open Civil Engineering Journal, pp.35-40, Vol 2
- Environmental anomalies at the World Trade Center: evidence for energetic materials, The Environmentalist, August, 2008
If you don't buy the scientists' arguments, that's fine. You can instead look at what the following highly-credible experts say about 9/11:
Saturday, April 4, 2009
Senior S&L Regulator Says Government Engaging in Massive Cover-Up of Economic Crisis: “The Entire Strategy Is to Keep People from Getting the Facts”
William K. Black was the senior regulator during the S&L crisis, and an Associate Professor of Economics and Law at the University of Missouri (bio).
Black says that massive fraud is what caused the economic crisis. As one example, he explains that everyone involved knew that the CDOs which packaged subprime loans were not AAA credit-worthy (which means that they are completely risk-free). He also said that the exotic instruments (CDOs, CDS, etc.) which spun the mortgages into more and more abstract investments were intentionally created to defraud investors.
Moreover, Black says that the government's entire strategy in dealing with the economic crisis is a massive cover-up:
Watch the interview here.[They] don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up....
Geithner is ... covering up. Just like Paulson did before him....
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed....
Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts....
[Question] Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?
[Black] Absolutely....
They're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.
[Question] So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse."
Friday, April 3, 2009
Toxic Asset Plan Will Leave The Same Amount Of Toxic Assets In The System, But With the Taxpayers Now Liable For Most Of The Losses
The most succinct description of what is wrong with Geithner's PPIP toxic asset plan comes from the Financial Times:
Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.
That's exactly right. American banks that have received billions in bailout funds, including Citigroup Inc, Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co, are considering buying toxic assets to be sold by rivals under the Treasury's trillion dollar plan (and Bank of America - another big bailout recipient - is buying toxic assets as well).
The amount of toxic assets isn't going to be meaningfully reduced - the assets will just be shuffled from one bailout buddy to another.
But the government is guaranteeing 85% of the value of the toxic assets.
So the taxpayers (who anteed up for the bailout funds which the banks are now using to purchase the assets) will again pick up the tab when the assets turn out to not be worth as much as the banks are paying for them.
But why would the banks overpay for the other guy's toxic assets?
Some financial writers have speculated that these banks are giving each other kickbacks under the table. But we don't even have to go there.
If all of the big banks holding the lion's share of toxic assets (about 5 banks, as discussed below) have a gentleman's agreement to overpay for the other guy's toxic assets, then they will end up in the same position as if they had all paid fair market value. You overpay for mine, I'll overpay for yours . . .
But since they can then say that they naively overvalued the assets, the government will pay them back for their "losses".
Get it?
It is well-known that JP Morgan, B of A, Citigroup, HSBC and Wells Fargo have by far the largest derivatives holdings (and see this). Their derivatives exposure - especially credit default swaps - are the core type of toxic asset (and one of the main causes of the financial crisis). These are really the players which would need to agree to play this game for it to work.
Obama to Bankers: “My Administration Is The Only Thing Between You And The Pitchforks.”
When the big bank CEOs tried to convince Obama that they deserved big bonuses, he reminded them that the public wanted their heads on a platter:
“These are complicated companies,” one CEO said. Offered another: “We’re competing for talent on an international market.”Tough talk which accurately reflects the righteous fury of the American people. Too bad Obama is just throwing our money at the banks and allowing them to game the system, and isn't actually doing anything to ensure that the banks act in the interests of the American people.
But President Barack Obama ... stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations. “Be careful how you make those statements, gentlemen. The public isn’t buying that.”
“My administration,” the president added, “is the only thing between you and the pitchforks.”
Suggest Topics
I'm running a poll at the right regarding the topics you'd like to see more of here at George Washington's Blog.
Please let me know which topics you would like to see more coverage of, and post your comments below.
Update: Here are the final poll results:
Which topics you would like to see more focus on at George Washington's Blog?
Thursday, April 2, 2009
IMF To Issue $250 Billion in Special Drawing Rights Currency
Today, the G20:
Agreed to an allocation of $250 billion in Special Drawing Rights, the artificial currency that the IMF uses to settle accounts among its member nations. The move is akin to a central bank such as the Federal Reserve effectively creating money out of thin air, except it’s on a global scale.It will be interesting to see whether or not special drawing rights will take on further importance in the future.
Former AIG Chief: Government Used AIG "To Funnel Money to Other Institutions, Including Foreign Banks"
Even the former chief of AIG, Hank Greenberg, said:
the government used AIG "to funnel money to other institutions, including foreign banks" ....
He also said that the government should "wall off" AIG Financial Products division, which was responsible for backing risky financial transactions that led to the company's downfall, from the rest of the group.
In other words, even the former head of the disgraced, bailed-out criminal enterprise is saying that the government has misrepresented and gamed the bailout and that Obama's economic team is doing it all wrong.
Is Abandonment of Mark-to-Market Bullish for Gold?
When people don't trust their government, gold prices rises.
Similarly, lack of trust in the stability of the financial system leads to increased "save haven" gold buying.
The abandonment of mark-to-market, which will undermine the credibility of the financial system and the governments which [fail to] regulate them, may therefore be bullish for gold in the years ahead.
Wednesday, April 1, 2009
Outstanding Credit Default Swaps Down to "Only" About Twice America's GDP
Over-the-counter credit default swap contracts - you know, the kind which brought down Bear, Lehman, AIG, etc. - totaled as much as $62 trillion at the end of 2007.
The New York Fed bragged today about how much the CDS totals have been reduced:
Market participants have significantly reduced levels of outstanding CDS trades via multilateral trade terminations (tear-ups) to lower outstanding notional amounts, reducing counterparty credit exposures and operational risk. To date in 2009, tear-ups have eliminated approximately $7 trillion of CDS trade notional amounts, in addition to the $32 trillion eliminated in 2008.Indeed, DTCC confirms that there are now approximately $25 trillion in outstanding CDS. That's still almost twice the size of America's gross domestic product.
And if the CDS numbers have been reduced from their astronomical 2007 peaks, it is partly because the American taxpayer has paid a pretty penny to make some of the CDS "go away".
Congressional Committee on Financial Services: AIG Paid Full Amount to Foreign CDS Counterparties, But Demanded 70% Haircut of U.S. Counterparties
In a stunning development, Representatives Frank and Bachus are alleging that AIG might have paid the full amount of credit default swap contracts to foreign counterparties, but demanded that U.S. counterparties take a haircut of up to 70%:
AIG Payments
I'm glad that haircuts were given. But if only American companies are taking haircuts - and not foreign companies - that is blatantly unfair, since the money came from American taxpayers.
GAO Recommends that Treasury Demand “Concessions” from AIG’s Counterparties “Including Seeking to Renegotiate Existing Contracts"
According to the Financial Times:
The Government Accountability Office on Tuesday recommended the Treasury should demand “concessions” from AIG’s counterparties and executives “including seeking to renegotiate existing contracts”.
Yes! This is what I and others have been urging for months.
This is what the nobel economist who helped created the pricing structures used in credit default swaps is suggesting.
Force the credit default swap counterparties to take a huge haircut. This is the only way to save the economy.
In related news, the Financial Times article also notes:
The special inspector-general for the troubled assets relief programme told Congress on Tuesday ... he was to prepare an audit of the decision to repay in full counterparties of AIG.
The audit - if allowed to proceed without interference - will prove very interesting.
The Scoop on Reserve Currencies
You've heard that the IMF is considering printing hundreds of billions of dollars worth of its own currency - called "Special Drawing Rights" or SDRs. Currently, the SDR is pegged to four currencies: the dollar, yen, euro and sterling.
You've heard that China's central bank proposed making SDRs the world's reserve currency.
You've likely heard that Tim Geithner has said that he supports the IMF's proposal to issue large amounts of SDRs (and that some people say that Geithner also supports making SDR the world's reserve currency).
You may even have heard that Russia also backs making the SDR the world's reserve currency, and that Russia wants the SDR to be pegged to a basket of yuans, rubles and gold.
But you probably have not heard that:
China's government has floated a variant of this idea, suggesting a currency based on 30 commodities along the lines of the "Bancor" proposed by John Maynard Keynes in 1944.
Posts
