27 February 2010

Pictures of a Market Crash: Beware the Ides of March, And What Follows After

There are a fair number of private and public forecasters with whom I speak that anticipate a significant market decline in March. As you know I tend to agree to some extent, but with the important caveat that we are in a very different monetary landscape than the last time the Fed engaged in quantitative easing, the early 1930's. In short, I may allow for it, but I am not doing anything different about it -- yet.

The biggest difference is the lack of external standards. This introduces an element of policy decision that has been discussed here on several occasions. In other words, the Fed retains the option, albeit with increasing difficulty, to create another bubble, and levitate stock market prices in the face of deteriorating economic fundamentals.

The dollar was formally devalued by around 40% in 1933. We may yet see that done this time, but more gradually and informally. This is what makes gold controversial today; it exposes the financial engineering. So they feel the need to manage it, to denigrate it as an alternative to their paper. They want to have their cake, and eat it too.

Let's review where we are today.

The Bear Market of 2007-2009, marked by the Crash of 2008, has been a massive decline in equity prices precipitated by the bursting of the credit bubble centered around housing prices and packaged debt obligations of highly questionable valuations. The cause of the bubble was easy Fed monetary policy and the loosened regulation of the financial sector, which reopened the door to old frauds with new names.

Even today, I think most people do not appreciate the sheer magnitude of the decline, and the damage it has done to the real economy. This is the result, I believe, of three factors:

1. An extraordinary expansion of the Monetary Base by the Federal Reserve not seen since the aftermath of the Crash of 1929, and a swath of financial sector support programs from the Fed and the Treasury, resulting in a spectacular fifty percent retracement rally from the stock market bottom. This is the narcotic that permits the country to not notice that a leg is missing.

2. A comprehensive program of perception management by the government in conjunction with the financial sector to sustain consumer confidence and reduce the chance of further panic. In other words, a web of well-intentioned deceit, subject to abuse.

3. An understandable preoccupation by the individual with the details of breaking news, and a short term focus on particular events, diversions, and controversies, bread and circuses, without a true appreciation of the 'big picture,' in part because of some very effective public relations campaigns and a natural human reluctance to face hard problems.

This is resulting in a remarkable case of cognitive dissonance in which some of the victims of a spectacular man-made calamity are opposing remedies and aid as too costly and impractical, even as they walk around amongst the bleeding carnage.

For those who read the contemporary literature in the early Thirties, this is nothing new. In the early Thirties there was no sense, except for a few notable exceptions, of the magnitude of what had so recently happened. There was the sense of life goes on which seems almost eerie now to a modern reader. Indeed, Herbert Hoover could dismiss a delegation of concerned citizens with the advice that they were too late, the crisis was past, and all was well. Sound familiar?

The parallels with the Thirties and the Teens (today) are many, and uncanny.

There is the reformer President, elected to redress the extremely pro-business policies of his Republican predecessor. In the Thirties they had FDR who was a decisive and experienced leader. In the Teens the US has a relatively inexperienced community organizer, more influenced by the Wall Street monied interests, and a past history of 'playing safe,' who is trying to manage through indirection and persuasion.

There is a Republican minority in the Congress which opposes all new programs and actions despite giving lip service in order to delay and debilitate. In the Thirties the Republicans were over-ridden by a powerful, activist President, who created a "New Deal" set of legislation, much of which was later overturned by a Supreme Court which had been largely seated by the previous Republican Administrations.

Indeed, the remaining New Deal programs that were successful, the reforms of Glass-Steagall and the safety net of Social Security, are being overturned or are under attack in an almost bucket list fashion.

So what next?

Another leg down in the economy and the financial markets is a high probability.

Although one cannot see it just yet in the fog of corrupted government statistics, the economy is not improving and the US Consumers are flat on their back, scraping by for the most part, except for the upper percentiles who were made fat by the credit bubble, and are still extracting rents from it through officially sanctioned subsidies.

This was no accident; there is a consciousness behind it.

There are far too many otherwise responsible people who are not taking the situation with the high seriousness it deserves. Some would even like to see the US economy collapse, inflicting serious pain and deprivation because it may:
1.suit their investment positions and feed their egos because they think themselves above it all,
2. satisfy their ideological and emotional needs to see punishment administered, almost always to others, for the excesses of the credit bubble, especially if they are relatively weak, unwitting victims, and
3. the sheer nastiness and immaturity of a portion of the population which wallows in stereotypes, childish behaviour, and disappointment with their own lives. They tend to find and follow demagogues that feed their bitter hatreds.

They know not what they do, until they do it, and see the results. It is often a good bet to assume that people will be irrational, almost to the point of idiocy and self-destruction. And some of them never wake up until they are overrun, and then will not admit their error out of a stubborn sense of pride and embarrassment.
It seems likely that there will be a new leg down in financial asset valuations, as reality overcomes often not-so-subtle propaganda and disinformation. It may start in March, or it may be a 'market break' that provides a subtle warning for a large decline that begins in September 2010, with multi year progression to lows that are, as of now, almost unimaginable, at least in real terms. I cannot stress this issue of nominal versus real enough. As inflation comes, it will initially be in a 'stealth' manner, with the backing of the currency eroding slowly but steadily, and largely unrecognized for some time. It is not enough to try and count the dollars; one also has to consider the value behind them, the quality of the wealth, and its vitality. This is the case for stagflation.

The Fed is acting to mask quite a bit of this. One would hope that they would also not re-enact the policy error of their predecessors and raise rates prematurely out of fear of inflation before the structural healing can occur.

The debt incurred during the credit bubble cannot be paid and must be liquidated. So far we have largely seen transference of debt obligations from insiders to the public. Ironically these same insiders are lobbying to maintain these subsidies and transfers, and also to take a hard line against any further remediation of the consequences of the collapse, which they caused, on the public, to have more for themselves. Their greed and hypocrisy know no bounds.

But the policy error might not be caused by the Fed's direct action, but replicated by a governmental failure to stimulate the economy effectively AND to reform the highly inefficient and impractical financial system. The purpose of stimulus is to provide a cushion for structural reform and healing to occur, after an external shock, or even a period of reckless excess and lawlessness. The natural cycle can be disrupted beyond its ability to repair itself. But stimulus without reform is the road to further deterioration and addiction.

As it stands today the global trade system is a farcical construct that favors national elites and multinational corporations. Public policy discussion has been trumped by a handful of economic myths and legends that, even though disproved every day, nevertheless remain resilient in public discussions and reactions. This is because they have become familiar, and because they are the instruments of deception for certain groups of disreputable economists and policy influencers.

A more serious market crash might cause people to recognize the severity of their problems, and the thinness of the arguments of the monied interests for the status quo which is most clearly unsustainable. But a sizable minority of the population is always highly suggestible; demagogues rely on this.

The eventual outcome for the US is difficult to forecast with any precision now because there are multiple paths that events might take at several key decision points. Some of them might be rather disruptive and upsetting to civil tranquility. Game changers.

But as the dust continues to settle, the probabilities will continue to clarify.
"Suffering can strengthen our endurance. Endurance encourages strength of character. Character supports hope and confidence even during hard times and trials. And hope does not disappoint us in the end, because God has given us the Spirit and filled our hearts with His love." Romans 5:3-5
It is right to be cautious, and it is human to be afraid. But let us not allow our fears and trials to turn us from our genuine humanity in God's grace no matter how dire the day, even if it may drive some of the world once again into the jaws of desperation and madness. And if you stumble, gather yourself up and go forward again without turning from the way. For what is the profit to gain and hold some small and temporary advantage in this world, but to lose your self, forever.

26 February 2010

More Denials on the IMF Gold Purchase by China

No official denial, but lots of doubts.

The whole thing seems odd, from the story to the doubts to the blatant bear raids and price manipulation being conducted almost every day with the New York open around these option expirations on the futures contracts.

Just yesterday we saw rumours floated in the SP futures pits that triggered a striking turnaround in the US stock indices, shortly after Goldman bought a large number of SP futures contracts. When the rumours were proved false, the forced buying continued.

Gold and financial assets in general are becoming even more political than usual. Expect this to intensify as the recomposition of the SDR and the international reserve currency are negotiated this year. The Anglo-Americans are the status quo on this one, and the integrity of their motivations and reports and transactions are definitely on the table.

We may be seeing the next stage of the currency wars that are so many things to different people. But in the end, it involves the artificial control of wealth and transactional flows, as they conflict with public policy and national and private interests.

"China buying IMF gold" story unfounded: author
By Tom Miles and Zhou Xin
Thu Feb 25, 2010 11:24pm

BEIJING (Reuters) - The author of an article that said China had confirmed it would buy 191.3 tons of gold from the International Monetary Fund said on Friday she didn't have official sources for her story.

Nobody was available to comment on Friday at China's State Administration of Foreign Exchange, the arm of the central bank overseeing gold reserves.

The unverified report helped push up gold prices by 1 percent on Thursday, though other commodities fell, under pressure from a stronger dollar. Traders cited the talk about China as a significant factor why gold prices clawed higher.

China has not said anything officially about plans to buy the IMF gold, but there has been strong speculation because of China's $2 trillion reserves and its announcement last year that it had increased its gold holdings by 454 tons since 2003

Rough & Polished, a Moscow-based industry website, reported China had "confirmed its decision to acquire 191.3 tons of gold auctioned by the International Monetary Fund," which helped push prices up on Friday.

Contacted by Reuters, the author of the Rough and Polished story, Nadezhda Shagrova, who works as a tour guide and journalist in Shanghai, said she did not have any official information to back up her story.

"The source for the story? Well, that's been written about in lots of places. I mean, Xinhua news agency wrote about that and other official Chinese sources, lots of them. Why are you asking?"

Told that gold prices were moving on her story, she said: "No, no, there's just no way that could be because of my article."

Wednesday's China Daily newspaper cited an unnamed official from the China Gold Association as saying China was unlikely to buy the gold being offered for sale by the IMF.

(Editing by Clarence Fernandez)

25 February 2010

Goldman To Advise Greece On the Sale of Strategic Assets to Avert Debt Crisis

And then come the jackals...

Note: obviously this is a cartoon, and Greece is not selling the Parthenon, yet.

But it does carry a more serious sentiment that was known in English literature as 'tragic transcience,' at least when I studied it in university. It may best be embodied in the renaissance poem "A Litany in Time of Plague" by Thomas Nashe which goes "Beauty is but a flower, Which wrinkles will devour; Brightness falls from the air; Queens have died young and fair; Dust hath closed Helen's eye, I am sick, I must die, Lord have mercy on us.”

Here is a later expression of this same thought that I most recently came across again in a short poem by Rudyard Kipling titled "Recessional."

"Lo, all our pomp of yesterday
Is one with Nineveh and Tyre!
Judge of the Nations, spare us yet,
Lest we forget, lest we forget!"

Rudyard Kipling
How are the mighty fallen...

And then of course there is Shelley's classic--

"I met a traveller from an antique land
Who said: Two vast and trunkless legs of stone
Stand in the desert. Near them on the sand,
Half sunk, a shatter'd visage lies, whose frown
And wrinkled lip and sneer of cold command
Tell that its sculptor well those passions read
Which yet survive, stamp'd on these lifeless things,
The hand that mock'd them and the heart that fed.
And on the pedestal these words appear:

"My name is Ozymandias, king of kings:
Look on my works, ye mighty, and despair!"

Nothing beside remains: round the decay
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away."

Ozymandias, Percy Bysshe Shelley

China Said to Purchase Remainder of IMF Gold Sale

This is being reported by Finmarket, a Russian news agency.

I would like this to be confirmed by an official Chinese news agency.

There are recent stories to the contrary from the region: IMF Purchases Not Feasible for China Says China Gold Association The CGA thinks it is more appropriate for China to buy actual foreign mining properties rather than refined bullion, except of course from local sources I'm sure.

I think it is highly unlikely that China would pre-announce any deal or their intentions until the price was firmly set. They are not like the Bank of England which announces its intentions first, and then works against itself in the market.

Having said that, this is credible story, because the Chinese Central Bank is a known buyer of gold, from a variety of sources both foreign and domestic. Further, they were said to very disappointed that India was able to purchase the entire 200 tons initially offered by the IMF at a private pricing of $1050 per ounce.

China would like to increase gold as a percentage of their official reserves closer to the international average which is about 10 percent. Right now their holdings are only 1.2% as I recall.

The bullion banks can use paper gold to manipulate pricing around key events like this week's options expiration in the short term. They are powerful, and have many friends, their demimonde, who will help them to spin the facts, place opinion pieces, and resurrect old studies, to convince a gullible public once again that their promises are good, that their paper riches are wealth. This is the essence of the shaping of public opinion, the hidden persuaders, the not always subtle propaganda campaigns that so often pass for news these days.

But the international currency regime is changing, and the developing countries are choosing to protect their reserves in traditional ways. For the first time in over twenty years the central banks have become net buyers of gold.

The wealthy are buying physical silver and gold in anticipation of a dislocation in the structure of the existing international currency regime, no matter what they might say publicly to reassure the markets. This we know. Whether this is the most prudent thing to have done only time will tell, since there are a range of possible outcomes, and probabilities. But change is in the wind; the time of reckoning approaches and the accounts will be tallied and settled.

Eventually the price manipulators may not be able deliver what they have already sold, and will face a default. As they have done so many times in the past, they will obtain some relief from the exchanges, which they virtually control, in the form of a paper settlement. If necessary, they will ask for a bailout from their friends in the government, at your expense if you are holding their paper.

Then we will see who believes in freedom and fair markets, and who stands for tyranny, for whatever reasons, whenever it suits their needs.

China To Purchase Half of IMF's Gold


China has confirmed the intention to purchase 191.3 tons of gold from the International Monetary Fund at an open auction, Finmarket news agency said.

World central banks started to increase their gold reserves after prices on gold began to climb in 2001. The IMF sells gold within the scope of a program to diversify sources of income and achieve an increase in lending.

The IMF announced an intention to sell 403.3 tons of gold in accordance with the adequate decision made by the board of directors of the fund in September of 2009. India, Mauritius and Sri Lanka purchased about 212 tons of the amount at the end of 2009. India purchased most – 200 tons.

China’s interest in international trade is connected with the development of the nation’s economy, as well as with the growing consumer demand in the country.

“Chinese officials have confirmed previous announcements from IMF experts and said that the purchasing of 191 tons of gold would not exert negative influence on the world market. China is interested in the development of the domestic consumer market,” the agency reports...

Bernanke Says He Will Investigate

What Goldman and other the other banks have done in Greece is no different from what they have been doing around the world for the past ten years. They facilitate various forms of questionable financial instruments with corrupt partners, and then trade on their detailed knowledge of that misrepresentation, mispricing and even outright fraud to reap enormous profits, often at the expense of the productive economy and programs designed to protect legitimate commercial banking activities. This is at the very core of the CDO financial crisis in the States.

Banks should not be able to trade in their own proprietary portfolios on the integrity of financial assets of their own devices. Otherwise, the conflicts of interest are irresistible. This is the very problem that Glass-Steagall was originally enacted in 1933 to prevent.

Only the most conservative and restrained banking system can function in the face of such obvious temptations for self-dealing. And this does not describe the financial system in the US.

Setting up regulatory hurdles, 'chinese walls,' and capital requirements to try and stem such obvious temptation to greed is a fool's errand, but one that the banks encourage, knowing full well they will find ways to circumvent them as fast as they can be created.

The banks must be restrained, the financial system reformed, and the economy brought back into balance, before there can be any sustained recovery.

Bernanke: Looking at Goldman Sachs role in Greece
Thu Feb 25, 2010 10:03am EST

WASHINGTON (Reuters) - The Federal Reserve is examining the role that Wall Street firms including Goldman Sachs (GS.N) played in helping Greece arrange credit default swaps, Fed Chairman Ben Bernanke said on Thursday.

"We are looking into a number of questions related to Goldman Sachs and other companies in their derivatives arrangements with Greece," Bernanke said in response to a question for Senate banking Committee Chairman Chris Dodd.

Bernanke said the Securities and Exchange Commission was also "interested" in the issue and added: "Obviously, using these instruments in a way that potentially destabilizes a company or a country is counterproductive."

24 February 2010

How Bad Can It Get?

They have our wallets. What more can they want?

Keiser Report №19: Markets! Finance! Scandal! - And Karl Denninger

Although I don't always agree with them, obviously, I am always interested, informed, and entertained by what madcap Max Keiser and his cerebral colleague Stacy Herbert have to say on The Keiser Report. As you may know, Max is the latest American in Paris, having left the States after selling his Hollywood Stock Exchange to Cantor Fitzgerald of Wall Street. Perhaps some day we can have a drink at the Ritz and philosophize, as expatriates are often wont to do, about the tragic transience of empire. The Ritz. Alas, when I was a visiting student at ESSEC I could not afford it, and now that I can, I do not get around much anymore. But who can tell what the future may bring.

The most recent broadcast of the Keiser Report has an added attraction in its second half, Karl Denninger. Karl is probably more familiar to our American patrons as the outre financial commentator from The Market Ticker.

Karl always has something interesting to say, spoken plainly, and without the kind of courtly manner towards corporate America that is so fashionable among the journalists in the mainstream media who are members of the Wall Street demimonde.

Mr. Denninger is particularly effective, when he gets it right as he frequently does, in describing complex transactions because he is not an economist or a financial professional, but a computer engineer, an honest technical sort, who brings some formidable analytical skills to a relatively unfamiliar but certainly approachable subject. Like so many he gets 'nit-picked' by the pros who like to play word games with their jargon, but more often than not he is directionally correct.

And he occasionally admits it when he is wrong, and changes tack, a refreshing trait amongst the greater universe of financial commentators. But if you post on his chat board, be prepared for an ideological frisking, and little patience for deviation from the local standards and fundamental assumptions. A weakness perhaps, from the perspective of ideological diversity, but more common than most moderators care to admit.


23 February 2010

Financial Crisis Testimony That Would Be Worth Watching...

Is it impossible to get to the bottom of the bank bailouts?

Perhaps a change in questioning tactics might prove fruitful.

Even if it didn't it might at least be more entertaining...

Treasury to Resume the Monetization of the Fed's Programs to Support the Wall Street Banks

"It is impossible to introduce into society a greater change and a greater evil than this: the conversion of the law into an instrument of plunder." Frederic Bastiat

This Treasury Supplemental Financing Program is designed to provide public funds for the Fed's efforts to purchase and then liquidate toxic assets and derivatives from the financial sector, effectively absorbing their losses and monetizing them.

The Treasury creates new notes and sells them on the open market. The money obtained in these sales is deposited at an account at the Federal Reserve. The Federal Reserve uses this money to purchase toxic assets from the banks at its own discretion and pricing, subject to little oversight and market discipline.

Senator Chris Dodd said "the Fed could become an 'effective Resolution Trust Corporation,' purchasing and ultimately disposing of depreciated assets.

It looks very much like a stealth bailout. It is even more of a scandal because of the Fed's resistance to any disclosures on the principles and specifics by which they are allocating taxpayer money.

Where this gets even more interesting is that the Fed in turn is buying Treasury debt after issuance through its primary dealers, debt that was issued by the Treasury to provide funds to the Fed.

Even more than a stealth bailout, this is starting to smell like 'a money machine.' Money machines are what Bernanke euphemistically called 'a printing press.' What is odious about this particular printing press is that the output is being given directly to a few big banks by a private organization which they own.

I believe that it is still illegal, by the letter of the statutes, for the Fed to directly purchase Treasury paper. But in this case, the Fed is buying Treasury paper with money supplied by the Treasury. Since the paper is passing through the marketplace, and the Primary Dealers are taking their commissions, it may be in conformance with the letter of the law. But it looks like it violates the spirit of the law.

And given that in many cases the Primary Dealers are the principal beneficiaries of the subsidy programs, selling their toxic debt to the Fed at non-market prices, this starts to appear like a right proper daisy chain of self-dealing and fraud.

As you can see from the background information below, this is a 'temporary' program from 2008 that the Treasury keeps promising to 'wind down.'

This is not a resolution trust by any measure. One only has to compare what happened with the Savings and Loan Resolution Trust, with the orderly liquidation of assets, losses assumed by the individual banks and their management, and investigations and prosecutions for fraud.

And the bankers involved in the Savings and Loan bubble and collapse were not still in business and giving themselves record bonuses within twelve months of their collapse, and engaging in the same frauds and speculation that led to the crisis.

Wall Street bonuses jumped 17 percent last year
SteveEder and Jonathan Stempel
Tue Feb 23, 2010 2:39pm EST

NEW YORK (Reuters) - Bonuses on Wall Street rose 17 percent last year to $20.3 billion even as the industry faced a public backlash over pay practices.

The rise in payouts, reported by New York State's comptroller, came at a time when Wall Street was recovering from the financial crisis of 2008, which forced a taxpayer rescue of the industry that, in turn, stoked widespread anger across
the United States.

Comptroller Thomas DiNapoli said on Tuesday profit for all of Wall Street could top $55 billion for 2009, nearly triple the previous record year. Last year, the U.S. economy began to stabilize and lenders raced to repay federal bailout money they had come to view as a stigma."

Further, the Savings and Loan bankers were not flooding the Congress with lobbying money to hinder reform of the banking system, and to shift the focus of Congressional discussion to the reduction of legitimate programs like Social Security to finance the public subsidies being given to the very banks responsible for the financial crisis in the first place.

As a possibly related aside, today's US Treasury 2 year auction was unusual. Indirect Bidders had 100% of their bids filled as noted by ZeroHedge.

Treasury to expand Supplementary Financing program
By Greg Robb
Feb. 23, 2010, 12:01 p.m. EST

WASHINGTON (MarketWatch) -- The Treasury Department announced Tuesday that it is expanding its Supplementary Financing Program to help the Federal Reserve manage its enormous balance sheet. In a statement, Treasury said it will boost the SFA to $200 billion from its current level of $5 billion. The fund had been up to $200 billion but was scaled back when Congress delayed passage of an increase in the debt limit.

Now that an expansion of the debt limit has been signed into law, the department is able to resume the program. Starting on Wednesday, Treasury will conduct the first of eight weekly $25 billion 56-day SFP bills to restore the program. The department said it will then roll the bills over. "We are committed to work with the Fed to ensure they have the flexibility to manage their balance sheet," a Treasury official said.

September 17, 2008
Treasury Announces Supplementary Financing Program

Washington- The Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week. To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio.

The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program, which will provide cash for use in the Federal Reserve initiatives.

Calculated Risk
Treasury to Unwind Supplementary Financing Program

One of the credit indicators I was tracking was the activity in the Treasury's Supplementary Financing Program (SFP). This was the Treasury program to raise cash for the Fed's liquidity initiatives.

Once the Fed started paying interest on reserves, the supplemental financing program wasn't needed any more to sterilize the expansion of the Fed's balance sheet. The Treasury announced today that the program will be unwound...

As it should be obvious, these guys cannot give up the needle on their own.

SP 500 Futures - Daily Chart

According to reports, the bank prop trading desks are having troublem making their quotas for this month.

Bernanke will be speaking later this week, and that may move the markets.

The average person buys when they should sell, and sells when they should buy. Often they buy or sell when they should do nothing. The Wall Street insiders and their demimonde frequently help them to do this. That is how things are, and now moreseo than before because of the shrinking pools of exploitable non-banking czpital and the lack of financial reforms.

22 February 2010

Elizabeth Warren: Why Washington Is Not Reforming the Financial System

Elizabeth Warren Discussing the Lack of Bank Reform on the Bill Maher Show.

"The problems could not be more obvious, and quite frankly, the solutions are just about that obvious, but we just can't seem to get the two together...The reason that we are not changing things right now is because the banks have lobbyists in Washington in numbers I have never seen...People who just want to advocate for American families, people who want some changes to level the playing field do not have that kind of lobbying power. And so what we are really watching here is a David and Goliath story."

Five Former US Treasury Secretaries Endorse the 'Volcker Rule'

I do not expect the Volcker Rule to be passed by Congress for the simple reason that the Wall Street banks hate it. They spent hundreds of millions of dollars in lobbying money achieving the overturn of the original Glass-Steagall law.

The Senators who are beholden to the banks will simply not allow this restriction, which 'worked' for almost 70 years as effective regulation.

I have yet to read a coherent reason why the rule should NOT be passed, except that the Banks do not like it. I spent quite a bit of time listening to arguments and reading presentations, and even exchanging emails with a highly respected colleague who was not in favor of it.

Without exception, every argument was specious, misdirected, or founded on spurious assumptions. Most of the alternatives proposed are more complex and require the active vigilance of regulators.

Simple rules are best, and most easily enforced. This is why the banks hate them.

Part of the problem with this rule was the highly awkward method in which the Obama Administration chose to introduce it into the process, with little background and discussion. I would attribute this to the huge split amongst his advisors, with the Summers-Geithner group holding the most influence.

The reform will not be passed, no matter who endorses it. Congress is in the pocket of the Banks. That is the long and short of it, in my opinion.

US Treasury Secretaries of the last 40 years.

John Connally DEAD
William E. Simon DEAD
G. William Miller DEAD
Donald Regan DEAD
James Baker
Lloyd Bentsen DEAD
Robert Rubin
Lawrence Summers

Henry Paulson

Ex-Treasury secretaries back Volcker rule

by Philip Barbara
Feb 21, 2010 8:49pm EST

WASHINGTON (Reuters) - Five former Treasury secretaries urged Congress on Sunday to bar banks that receive federal support from engaging in speculative activity unrelated to basic bank services.

"The principle can be simply stated," the five said in a letter to The Wall Street Journal. "Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services."

The Treasury secretaries said, however, that hedge funds, private-equity firms and other organizations engaged in speculative trading should be "free to compete and innovate" but should not expect taxpayers to back up their endeavors.

"They should, like other private businesses, ... be free to fail without explicit or implicit taxpayer support," said the former secretaries for both Republican and Democratic presidents.

The appeal comes as Senate lawmakers are pressing ahead with efforts to produce a financial regulatory reform bill that would curb some of the practices that led to the 2008 financial crisis.

Several major financial firms collapsed, were sold or had to be bailed out after a bubble in the housing market popped, causing real estate prices to plummet and leaving markets uncertain about the value of billions of dollars in mortgage-backed securities.

The liquidity crisis that followed threatened the financial system and deepened a U.S. recession that became the worst since the Great Depression.

The regulatory reform proposal endorsed by the five former Treasury secretaries is the so-called Volcker Rule, formulated by former Federal Reserve Chairman Paul Volcker, a top economic adviser to President Barack Obama.

Obama surprised the financial markets in late January when he announced the proposal, which calls for new limits on banks' ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.

Volcker told the banking committee earlier this month that a failure to adopt trading limits would lead to another economic crisis and warned "I may not live long enough to see the crisis, but my soul is going to come back and haunt you" if proprietary trading is not curbed.

The five former Treasury secretaries -- Michael Blumenthal, Nicholas Brady, Paul O'Neill, George Shultz and John Snow -- said in their letter that banks should not be involved in speculative trading activity and still receive taxpayer backing.

"We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform," their letter said. "It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities."

A Fitting Award for Alan Greenspan

Inhale deeply of the madness and illusions of the financial engineers.

Greenspan was a magnet for the enablers, the spokesman for those primarily responsible for the fraud that led to the series of financial crises. But more Meinhof than Baader, one might say. The monied interests are often not famed economists, having more of a yearning for either raw power or opaque solitude. Their recognition must wait for another day and a different venue.

And as for Bernanke, his time has come, and he may eclipse even Greenspan given a little more tenure at the Fed.

Young Tim is no economist, just a useful pair of hands, the hired help.

For Immediate Release
22 February 2010

Greenspan wins Dynamite Prize in Economics

Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He and 2nd and 3rd place finishers Milton Friedman and Larry Summers have won the first–and hopefully last—Dynamite Prize in Economics.

In awarding the Prize, Edward Fullbrook, editor of the Real World Economics Review, noted that “They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.”

The prize was developed by the Real World Economics Review Blog in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, Black Swan event.

In reality, the public perception that economic theories and policies helped cause the crisis is correct.

The prize winners were determined by a poll in which over 7,500 people voted—most of whom were economists themselves from the 11,000 subscribers to the real-world economics review . Each voter could vote for a maximum of three economists. In total 18,531 votes were cast.

Fullbrook cautioned that not all economics and economists were bad. “Only neoclassical economists caused the GFC. There are other approaches to economics that are more realistic—or at least less delusional—but these have been suppressed in universities and excluded from government policy making.”

“Some of these rebels also did what neoclassical economists falsely claimed was impossible: they foresaw the Global Financial Crisis and warned the public of its approach. In their honour, I now call for nominations for the inaugural Revere Award in Economics, named in honour of Paul Revere and his famous ride. It will be awarded to the 3 economists who saw the GFC coming, and whose work is most likely to prevent another GFC in the future.”

Dynamite Prize Citations

Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.

Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.

Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.

In total 18,531 votes were cast. The vote totals for the other finalists were:

Fischer Black and Myron Scholes 2,016
Eugene Fama 1,668
Paul Samuelson 1,291
Robert Lucas 912
Richard Portes 433
Edward Prescott and Finn E. Kydland 403
Assar Lindbeck 375

The poll was conducted by PollDaddy. Cookies were used to prevent repeat voting.

Note: By way of disclosure, I voted for Fama, Greenspan, and Summers. - Jesse

21 February 2010

Modern Economic Myths and The Failure of Financial Engineering

"The whole history of civilization is strewn with creeds and institutions which were invaluable at first, and deadly afterwards." Walter Bagehot

The housing bubble did nothing for real median incomes in the US but it did wonders for the insiders in the financial sector.

This is why the average Joes in the States went into debt to continue to maintain their consumption.

Until this situation is addressed, there will be no sustained economic recovery in the US. The US Census Bureau only goes to 2007, but it is highly likely that the median income has taken another serious downturn in the latest financial crisis.

Very little has been done by the Obama administration to address this problem.

Trickle down or supply side economics does well for the upper percentiles of income but does much less for the median wage.

Why care? For several reasons.

First, the median wage is the bulwark of general consumption and savings, and the prosperity of a nation. It must match the character of the social fabric, or place a severe strain on the contract between classes and peoples. A nation cannot survive both slave and free without necessarily resorting to repression.

Second, in any relatively free society, the reversion to the mean in the distribution wealth and justice is never pleasant, and often bloody and indiscriminate.

There are several economic myths, popularized over the last thirty years, that are falling hard in the recent series of financial crises: the efficient market hypothesis, the inherent benefits of globalization from the natural equilibrium of national competitive advantages, and the infallibility of unfettered greed as a ideal method of managing and organizing human social behaviour and maximizing national production.

One has to wonder what would have happened if some more coherent, approachable science, had put forward a system of management that relied upon the nearly perfect rationality and unnatural goodness of men as a critical assumption in order to work? They would have been laughed out of the academy. Yes, there is a certain power to befuddle and intimidate common sense through the use of professionally specific jargon, supported by pseudo-scientific equations.

Why doesn't 'greed is good' work? Because rather than work harder, a certain portion of the population, not necessarily the most productive and intelligent, will immediately seek rents and extraordinary income obtained by unnatural advantages, by gaming the system, by cheating and coercion, by the subversion of the rule of law, which will sap the vitality of the greater portion of the population which does in fact work harder, until they can no longer sustain themselves. And then the greedy seek to expand their venality, and colonies and then empires are born.

What will take the place of these modern economic myths? Time will tell, and it will vary from nation to nation. But the winds of change are rising, and may soon be blowing a hurricane.

19 February 2010

Gold and Silver Weekly Charts - Explosive Silver Situation Intensifies

Gold Weekly

Gold held against two determined bear raid this past week, centered around 'announcements.' The first was the re-announcement of the IMF gold sale, and next was the largely symbolic gesture by the Fed in raising the Discount Rate to 75 basis points, without touching the target rate. That announcement was made AFTER the bell, rather than before as is more usual. There was noticeable front running of the miners before each announcement.

There is likely to be another bear raid, since this coming week is metals options expiration, and there is a cluster of contracts around 1100. There is also something brewing under the surface which is creating tension on the tape, with a violent back and forth motion in the spot price of gold. We can only speculate for now, but choose to wait and see what is revealed.

The most interesting speculation is that metals bears target is not gold, but rather silver.

Silver Weekly

Silver is in a potential inverse H&S formation that targets $30 per ounce. There are two or three big bullion banks that are massively short silver, that cannot possibly cover their short positions without significant pain, including a risk of default if a higher price fuels demand and breaks the confidence of the paper market.

If this is true, it is a big problem for the US government, because unlike gold, the central banks have no ready store of silver to sell into the markets, having exhausted their strategic stores some years ago.

If silver explodes because of a paper default, gold will follow. The central banks view that as a very risky development since several of the banks are already breaking ranks with the ECB, BofE, and the Fed over this issue of the de facto dollar reserve currency regime.

We do not anticipate a resolution of this quickly. DO NOT try and trade this for the short term. The 'beta' of the silver market could be terrific. The forces aligned around this market are determined and not easily moved. The small specs can get crushed if the titans start shoving.

These sorts of big changes tend to drag out over long periods of time. But we are aware of the situation. The breakout is at 19.50 and the pattern is negated with a drop below 12.

Look for more old arguments of the metals to resurfaces, and nonsensical arguments to be put forward by those banks and funds talking their books through contacts in the media and analyst community.

I cannot stress enough that if there is an all out stock market crash and liquidation both gold and silver will get deeply sold off, with everything which is what happens in a general liquidation of assets. Then we would begin to look for opportunities to buy in as the dust settles.

Miners 'Gold Bugs Index' Weekly

If silver breaks the paper shorts, the miners will break out, targeting 600 on this index. The silver plays would be remarkable.

What could trigger this? We suspect it would have to be a strong indication from the nations of the developing world for a bi-metallic content in the proposed SDR replacement for the dollar reserve currency.

Since central banks currently do not hold any significant silver bullion positions, the resulting buying panic could rival that of the 'Hunt corner' in the silver market. Therefore we would expect a maximum effort to control it ahead of time. A default on paper positions is certainly within the realm of probability.

Keep an Eye on the Long End of the US Bond Curve

This has been a long trend change as can easily be seen from this chart. The trend is bottoming and may be starting a reversal. Again, these things tend to play out over long periods of time. Don't expect to start day trading this next week.

Disclosure: I added initial positions in the gold and silver miners last week. I expect to add to them if the markets confirm. I have been hedging them against a 'market crash' in US equities such as the panic selloff in late 2008 which took us into the market lows.

"How Could I Be So Selfish and So Foolish"

Were Lloyd and Jamie and the pigmen of Wall Street and Washington taking notes during Tiger Woods' apology?


No one is perfect, of course. Everyone makes mistakes, everyone sins. We are all weak, and insufficient in ourselves. And yet we attempt great things, in fear and trembling. The spirit endures and abides.

But there are moments in history that are epidemic with excess, a pathological pursuit of lust, greed, and deceit with a nihilistic determination that is more like a fashion of the age than an aberration. Chic to be above conventional morality and the law, lacking all proportion. Accepted, and even admired.

Tiger himself is what they call 'small potatoes,' the personal foibles of a star athlete. What is more significant is the festival of fraud going on in the financial world, centered around Chicago and New York.

Tiger's words could be the new American Anthem for a generation of reckless, selfish, and self-destructive behaviour by those most blessed by its freedom, offered the greatest opportunities and privileges, sometimes undeserved, and most often paid for by the sacrifice of others.

Most of them still have no regrets, except of course for the fear of discovery. They will have to somehow grow a conscience for that. Or face the withdrawal of support by their sponsors. In the case of Tiger it was Nike. In the case of the Banks it is the US government. And in the case of the US government it is a gullible and complacent public.

"Many of you in this room know me. Many of you have cheered for me, have worked with me, always supported me. Now, every one of you has good reason to be critical of me. I want to say to each on of you simply and directly I am deeply sorry for my irresponsible and selfish behaviour I engaged in. I know people want to find out how i could be so selfish and foolish.

I knew my actions were wrong but I convinced myself that the normal rules didn't apply. I never thought about who I was hurting. Instead, I only thought about myself...

I felt that I had worked hard my entire life and deserved to enjoy all the temptations around me. I felt that I was entitled.

Parents used to point to me as a role model for their kids. I owe all those families a special apology. I want to say to them that I am truly sorry.

I recognize I have brought this on myself and I know, above all, I am the one who needs to change.

I was wrong. I was foolish. I don't get to play by different rules."

18 February 2010

Managing Perceptions: Fed Raises Discount Rate After the Close

"The last duty of a central banker is to tell the public the truth." Alan Blinder, former Vice Chairman of the Federal Reserve

In a largely symbolic move, the Fed raised the Discount Rate after the bell by 25 basis points to .75%.

As you know, the Discount Rate is the interest rate that the Fed charges banks who borrow from them short term on an emergency basis.

This is the shaping of perception by the Fed. It does not raise rates for the consumer or businesses, and does not affect the rates and guarantees in the many Fed and Treasury programs which are still supporting the commercial banks.

One has to wonder why the Fed chose to jawbone at this time. Is this a move to help them with next week's $100+ Billion Treasury auction? We are discounting rumours that the nose counts among the Primary Dealers showed the risk of another 'failed' auction was rising.

Or was this mainly to provide another opportunity for the bullion banks to take the prices down ahead of their option expiration next week? Plan B stands for Bernays.
"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K." Eddie George, Bank of England Governor to Nicholas J. Morrell

Its all about managing perception.

When the Fed starts backing off on quantitative easing, we will know that things are truly changing. Bernanke is all too aware of the Fed's policy error in 1931 of raises rates prematurely, which caused the second leg down to the trough of the Depression in 1933. So let the Fed wave their hands all they want, but watch the Adjusted Monetary Base. In other words, its not what they say, but rather what they do.

One wonders if Obama is also aware of Hoover's policy error in trying to balance the budget as the nation slid into the most serious part of the Great Depression. He is certainly no FDR, and the nation is unlikely to be on the road to recovery during his hapless Administration. Will he, like Greenspan, later confess that he erred for a theory, a mistaken belief? A small comfort for those they have ruined.

Man wird nie betrogen, man betrügt sich selbst.
[We are never deceived; we but deceive ourselves.]
Johann Wolfgang von Goethe

Fed Raises Discount Rate Quarter Percentage Point

WASHINGTON— The U.S. Federal Reserve Thursday raised the rate it charges banks for emergency loans by a quarter percentage point, but emphasized that the step didn't represent a broader tightening of credit.

In a widely expected move, the U.S. central bank said the increase in the discount rate to 75 basis points from half a point was part of its step away from its emergency-lending efforts. The increase will be effective from Friday.

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities," the Fed said in a statement...

SP and Nasdaq 100 Futures

Here is where the equity markets stand.

Remember that tomorrow is options expiry for February.

As an aside, the bear raid on gold that occurred in conjunction with a non-announcement from the IMF about their previously announced gold sale did not stick, with prices snapping back today to the paint at which the raid hit, first the miners, and then the metals, largely in the thin after hours trade.

Next week is an option expiry in the metals futures markets, and the US is planning on auctioning an enormous amount of Treasuries, so we would not be complacement at this point.

Still, it was gratifying to see that Dennis Gartman bought back the gold position he sold before the rally. He sold at the bottom, let's see if he can do better and not jinx us for a short term top.

17 February 2010

Risk? What Risk? We Don't See No Stinkin' Risk..

"It is the absolute right of the state to supervise the formation of public opinion." Paul Joseph Goebbels

As measured by the VIX, the volatility index, the perception of risk in US markets has declined significantly in the last twelve months from over 50 to current readings around 20.

As a response to this changed perception, mutual funds are once again fully invested, with levels of cash reserves at record lows. In other words, the 'other people's money' crowd are all in.

There is an interesting distribution top forming in the US equity markets. This rally has been driven by liquidity delivered from the Fed and the Treasury primarily to the Wall Street banks, who are deriving an extraordinary amount of their income from trading for their own books, at least based on published results.

Much of the rally in US stocks has occurred on thin volumes and in the overnight trading sessions. Definitely not a vote of confidence, and a sign of potential price manipulation in fact.

Is this a 'set up' to separate the public from even more of their own money, using their own money? Perhaps.

The government is frantic to restore confidence in the US markets, and the toxic asset rich banks are more than capable of using that sincere interest to unload their mispriced paper on the greater fools again.

The perception of risk is a powerful tool in shaping the response of markets, and as an instrument of foreign and domestic government policy actions. It is nothing new, as indicated by the quote from Joseph Goebbels, but it is rising to new levels of sophistication and acceptance in nations with at least a nominal commitment to freedom of choice and transparency of governance.

"There is a social theory called reflexivity which refers to the circular relationship between cause and effect. A reflexive relationship is bidirectional where both the cause and the effect affect one another in a situation that renders both functions causes and effects.

The principle of reflexivity was first introduced by the sociologist William Thomas as the Thomas theorem, but more importantly it was later popularized and applied to the financial markets by George Soros. Soros restated the social theory of reflexivity eloquently and simply, as follows:

markets influence events they anticipate – George Soros

This theorem has become a basic tenant of modern central banking. The idea is that manipulation of the psychology of market participants affects the markets themselves. Therefore, if you artificially suppress the price of gold, you reduce inflationary expectations and reduce inflation itself…so the theory goes."

Why Do the World's Central Banks Manipulate the Price of Gold?

For now we must watch the key levels of resistance around 1115 in the SP. A trading range is most probable but there is a potential distribution top forming with a down side objective around 870 on the SP 500.

It does bear watching, closely, keeping in mind that this is an option expiration week, and the traders expect the market to misrepresent its price discovery, as the result of conscious manipulation.

SP Futures and Options Expiration

It's that time of month again, when the option players are gamed by the broker dealers and the hedge funds.

Volumes are light, and the market is range bound.

It needs to break out decisively from the area of resistance, otherwise the formation of a distribution top starts to look compelling.

Why the 'Trickle Down' Approach Is Not Working in the US

The approach taken by the last two administrations to the financial crisis has been to pack liquidity into the big Wall Street banks, certainly not the regional and local banks, without serious reform.

The notion is that by 'saving the banks' they will be able to support the real economy with loans to spur economic activity. It is the same mindset that provides for huge tax cuts to the top end of the income chain, the very group that benefited from the latest bubble. Its a variant of the 'trickle down' theory popularized by the Republicans under Reagan.

The banks prefer to take the Fed and Treasury money and guarantees at near zero percent cost, and loan it back to the public (after all it is their money) in revolving credit (credit cards) at 18%. It's a sweet setup, provided by the Fed and the Congress. Long term loans and leases? Why bother.

If they want risk, they shove the speculative markets around and make side bets on the failure of companies and now, even nations. Failures, we should add, that are intimately tied into various frauds marketed by the banks themselves.

This is the fatal policy error at the heart of the failure of the Obama Administration and the Fed to intervene effectively in the collapse caused by the Fed's heavy handed manipulation over the past fifteen years.

In fact, one could easily make the case that their intervention does much more harm than good, placing additional debt burdens that are strangling the productive economy, serving only to support and perpetuate a distorted and outsized financial sector concentrated in a few elite corporations that are heavy contributors to the Washington politicians of both parties.

It's trickling down all right. But not in the form of productive allocation of capital.

Soros More Than Doubled His Gold Position in 4Q '09

Regulatory filings disclose that Soros more than doubled the gold position in his Soros Fund Management LLC at the end of 2009. There is a lag in official reporting in regulatory filings, so he *could* have sold his entire position before he called gold 'a bubble' at Davos last month.

Then again, he might not have. In which case what would that make him?

We will have to wait for the next round of filings to see.

Certainly not a man of serious intent, regardless of his positions, since he is buying the Gold ETF rather than something more --- substantial.

How are the mighty fallen.

And speaking of the fallen, Dennis Gartman advised that he was selling out his gold position last week, near the lows for the correction around $1060, at least so far, and just in time to miss a rather sharp rally to the upside of $1100. Of course, no one is always right; we all make bad calls. But then again, not everyone goes on financial television and makes a prat of themselves by talking trash about those who have been mostly right about a market while he has been so often wrong.

"When your heart is covered with the snows of pessimism and the ice of cynicism, then, and then only, are you grown old. And then, indeed as the ballad says, you just fade away.” Douglas MacArthur
A fade indeed.

Soros More Than Doubles Gold ETF Holding in Fourth Quarter

By Katherine Burton

Feb. 17 (Bloomberg) -- Billionaire George Soros’s Soros Fund Management LLC more than doubled its holding in the SPDR Gold Trust exchange-traded fund in the fourth quarter, according to a regulatory filing.

The $25 billion New York-based firm added shares valued at $421 million in the SPDR Gold Trust, the biggest ETF backed by the metal, according to yesterday’s filing with the U.S. Securities and Exchange Commission. Its holding in the fund was worth about $663 million as of Dec. 31.

The filings are done quarterly with a 45 day lag, so Soros could have sold some or all of the position since then. Soros, while speaking last month at the World Economic Forum in Davos, called gold the “ultimate asset bubble” and said the price could tumble, according to a report in the Daily Telegraph...

16 February 2010

Eleven Principles of Financial Reform

Personally I doubt that the US is capable of self-reform at this time.

The corruption of the socio-political system runs deep, and is embedded in the national consciousness as a reflexive set of slogans (the big lies) that substitute for practical thought and effective policy formation. The examples of thinkspeak are numerous. People become parrots for their favorite corporate news/opinion channel, to which they become emotionally addicted, because otherwise, reality is too painful and complex to face. And so they are blinded and cut off from productive and even civil discourse, trapped within deep wells of subjectivity.

The major media in the States are owned by a few corporations. The Congress listens to its large contributors and ignores the public except at election time, when it inundates them with expensive media campaigns, political spin, false promises, and propaganda. And then it is back to business as usual.

"When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it." Frederic Bastiat

What will it take? It took the Japanese about twenty years of economic privation to finally get rid of the LDP political party that had ruled the country since the Second World War. It may take ten years of stagflation and economic hardship for the American people to wake up and put an end to the crony capitalism that has captured its two party political system. A good start would be to continue to defeat incumbents from both parties, and to start electing viable third party candidates.

But that demands a more thoughtful venue than is currently the norm. It really does seem that bad to a relatively objective observer.

Eleven Lessons From Iceland
Thorvaldur Gylfason
13 February 2010

...What can be done to reduce the likelihood of a repeat performance – in Iceland and elsewhere? Here are eleven main lessons from the Iceland story, lessons that are likely to be relevant in other, less extreme cases as well.

Lesson 1. We need effective legal protection against predatory lending just as we have long had laws against quack doctors. The problem is asymmetric information. Doctors and bankers typically know more about complicated medical procedures and complex financial instruments than their patients and clients. The asymmetry creates a need for legal protection through judicious licensing and other means against financial (as well as medical) malpractice to protect the weak against the strong.

Lesson 2. We should not allow rating agencies to be paid by the banks they have been set up to assess. The present arrangement creates an obvious and fundamental conflict of interest and needs to be revised. Likewise, banks should not be allowed to hire employees of regulatory agencies, thereby signalling that by looking the other way, remaining regulators may also expect to receive lucrative job offers from banks. (I would add a prohibition of movement between regulators and the banks without a significant hiatus of at least four years. - Jesse)

Lesson 3. We need more effective regulation of banks and other financial institutions; presently, this is work in progress in Europe and the US (Volcker 2010). (Too slow, too driven by the banks themselves in the US - Jesse)

Lesson 4. We need to read the warning signals. We need to know how to count the cranes to appreciate the danger of a construction and real estate bubble (Aliber’s rule). We need to make sure that we do not allow gross foreign reserves held by the central bank to fall below the short-term foreign liabilities of the banking system (the Giudotti-Greenspan rule). We need to be on guard against the scourge of persistent overvaluation sustained by capital inflows because, sooner or later, an overvalued currency will fall. Also, income distribution matters. A rapid increase in inequality – as in Iceland 1993-2007 and in the US in the 1920s as well as more recently – should alert financial regulators to danger ahead. (The problem was not seeing the developing problems and bubbles in the US. The problem was that the regulators were compromised, the politicians were bought, the economists and media were craven, and most of the stewards of the public trust were willing to turn a blind eye - Jesse)

Lesson 5. We should not allow commercial banks to outgrow the government and central bank’s ability to stand behind them as lender – or borrower – of last resort.

Lesson 6. Central banks should not accept rapid credit growth subject to keeping inflation low – as did the Federal Reserve under Alan Greenspan and the Central Bank of Iceland. They must take a range of actions to restrain other manifestations of latent inflation, especially asset bubbles and large deficits in the current account of the balance of payments. Put differently, they must distinguish between “good” (well-based, sustainable) growth and “bad” (asset-bubble-plus-debt-financed) growth. (An honest measure of inflation might go a long way to reforming this. The current CPI measure in the US is a limp measure as compared to the CPI of even twenty years ago - Jesse)

Lesson 7. Commercial banks should not be authorised to operate branches abroad rather than subsidiaries if this entails the exposure of domestic deposit insurance schemes to foreign obligations. This is what happened in Iceland. Without warning, Iceland’s taxpayers suddenly found themselves held responsible for the moneys kept in the IceSave accounts of Landsbanki by 400,000 British and Dutch depositors. Had these accounts been hosted by subsidiaries of Landsbanki rather than by branches, they would have been covered by local deposit insurance in Britain and the Netherlands.

Lesson 8. We need strong firewalls separating politics from banking because politics and banking are not a good mix. The experience of Iceland’s dysfunctional state banks before the privatisation bears witness. This is why their belated privatisation was necessary. Corrupt privatisation does not condemn privatisation, it condemns corruption.

Lesson 9. When things go wrong, there is a need to hold those responsible accountable by law, or at least try to uncover the truth and thus foster reconciliation and rebuild trust. There is a case for viewing finance the same way as civil aviation: there needs to be a credible mechanism in place to secure full disclosure after every crash. If history is not correctly recorded without prevarication, it is likely to repeat itself. (Good luck with this one. All those in power reach immediately for the cover up and a dilution of guilt to 'everyone' so as to hold no one accountable - Jesse)

Lesson 10. When banks collapse and assets are wiped out, the government has a responsibility to protect jobs and incomes, sometimes by a massive monetary or fiscal stimulus. This may require policymakers to think outside the box and put conventional ideas about monetary restraint and fiscal prudence temporarily on ice. A financial crisis typically wipes out only a small fraction of national wealth. Physical capital (typically three or four times GDP) and human capital (typically five or six times physical capital) dwarf financial capital (typically less than GDP). So, the financial capital wiped out in a crisis typically constitutes only one fifteenth or one twenty-fifth of total national wealth, or less. The economic system can withstand the removal of the top layer unless the financial ruin seriously weakens the fundamentals. (I would provide guarantees from the bottom up, rather than financial backstopping from the top down. Keep the depositors whole within limits, and let the banks and their owners take the maximum pain. - Jesse)

Lesson 11. Let us not throw out the baby with the bathwater. Since the collapse of communism, a mixed market economy has been the only game in town. To many, the current financial crisis has dealt a severe blow to the prestige of free markets and liberalism, with banks – and even General Motors – having to be propped up temporarily by governments, even nationalised. Even so, it remains true that banking and politics are not a good mix. But private banks clearly need proper regulation because of their ability to inflict severe damage on innocent bystanders. (The blow is not to free markets and liberalism, but to the efficient market theory, supply side economics, neo-liberalism and neo-conservatism, and of course the magic of deregulation and privatization as inherently good, as a substitute for the proper role of government. - Jesse)

Bomb Explodes At J. P. Morgan Offices in Athens

A bomb was detonated outside the JP Morgan offices in Athens, Greece. No one is reported injured at this time. A warning was called in prior to the explosion allowing police to cordon the area.

This is somewhat remniscent of the bombing of the J.P. Morgan headquarters on Wall Street in 1920, presumably by anarchists. The marks and pitted holes on the JPM building remained to the modern day. I saw them myself some years ago.

The Wall Street bombing occurred at 12:01 p.m. on September 16, 1920, in the Financial District of New York City. The blast killed 38 and seriously injured 400.

The investigation had quickly stalled when none of the victims turned out to be the driver of the wagon. Though the horse was newly shod, investigators could not locate the stable responsible for the work. When the blacksmith was located in October, he could offer the police little information.

The Bureau of Investigation and local police investigated the case for over three years without success. Occasional arrests garnered headlines but each time false hopes evaporated within days. Most of the investigative effort focused on the same network of Galleanist anarchists law enforcement tied to the 1919 bombings and to Sacco and Vanzetti. In the Harding administration, new attention was paid to the Soviets as possible masterminds of the Wall Street bombing and then to the renascent Communist Party USA.

In 1944, the Federal Bureau of Investigation, successor to the BOI, performed a final investigation and concluded by saying its agents had explored the involvement of many radical groups, "such as the Union of Russian Workers, the I.W.W., Communist, etc....and from the result of the investigations to date it would appear that none of the aforementioned organizations had any hand in the matter and that the explosion was the work of either Italian anarchists or Italian terrorists." Wikipedia

The actual perpetrators of the 1920 bombing were never discovered. There was no warning and the bomb was detonated at the height of business hours.

It is good that no one was hurt in this recent bombing. Violence is never the answer. Never.
"An eye for an eye makes the whole world blind." Mohandas K. Ghandi

Bomb goes off at JP Morgan offices in Athens
By Renee Maltezou
16 Feb 2010 18:17:54 GMT

ATHENS, Feb 16 (Reuters) - A bomb exploded outside the JP Morgan offices in Athens on Tuesday, causing minor damage to the building, police said.

There were no immediate reports of injuries.

"It was a time-bomb at JP Morgan's offices in central Athens," a police official said. "The explosion damaged the outside door and smashed some windows."

The official said police cordoned off the area after a local newspaper had received a warning call.

14 February 2010

Simon Johnson: Goldman Faces Special Audit and Possible Ban in Europe

"The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government - a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF's staff could speak freely about the U.S., it would tell us what it tells all countries in this situation; recovery will fail unless we break the financial oligarchy that is blocking essential reform." ~ The Atlantic Monthly, May 2009, by Simon Johnson

Regular readers will be aware of our thesis that the American Wall Street banks have become dominated by a culture of compulsive sociopaths who are incapable of reforming or restraining their greed. Like all addicts, they push the envelope looking for a new high, emboldened by each successful scam, the weakness of regulators, and the craven support of politicians, going further and further until at long last they go one step too far, with spectacularly destructive results.

Goldman Sachs may have reached that point. And as also suggested here, the rebuke may be coming from European and Asian nations who become weary of the extra-legal antics of the rogue American banks.

In the interests of harmony, the Europeans may once again bow to US pressure and continue to permit the Money Center privateers to roam through the interational financial system wreaking havoc, as they have been doing through the domestic US economy. It will be too bad if they do.

This is in no way an excuse for the Greek government. But what Simon Johnson is saying in this essay below is that Goldman is not only not blameless, but is enabling, complicit and perhaps even presenting the opportunity for market manipulation and fraud to other parties. Typically they like to 'package' these scams and take them from one customer to another, so that greed meets need, as a corrupting influence. It is no different than a bank engaging in money laundering in support of the criminal activity of another organization.

Is he right? Will the EU begin to act to curtail the transgressions of multinational banks based in the US? I think he may very well be. It is one thing to take on pension funds and speculators, and to run raids on companies. It is another thing to start taking on countries, and especially those not so alone and weak as Iceland.

And even more than that. If it ever comes to the light of day, the complicity of a few central banks and governments in the actions of one or two of the money center banks in manipulating several global commodity and asset markets may ignite a firestorm of a political scandal of epic proportions.

At the very least, it remains a practical imperative that the banks be restrained, the financial system reformed, and the economy brought back into balance, before there can be any sustainable recovery and stability.

And it is now apparent that Obama and the US Congress, for whatever reasons, are incapable of doing this. And yet, hope remains.
"It is said an Eastern monarch once charged his wise men to invent him a sentence to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: And this, too, shall pass away. How much it expresses. How chastening in the hour of pride. How consoling in the depths of affliction." Abraham Lincoln

Baseline Scenario
Goldman Goes Rogue - Special European Audit to Follow

By Simon Johnson

"...We now learn – from Der Spiegel last week and today’s NYT – that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November. These actions are fundamentally destabilizing to the global financial system, as they undermine: the eurozone area; all attempts to bring greater transparency to government accounting; and the most basic principles that underlie well-functioning markets. When the data are all lies, the outcomes are all bad – see the subprime mortgage crisis for further detail.

A single rogue trader can bring down a bank – remember the case of Barings. But a single rogue bank can bring down the world’s financial system.

Goldman will dismiss this as “business as usual” and, to be sure, a few phone calls around Washington will help ensure that Goldman’s primary supervisor – now the Fed – looks the other way.

But the affair is now out of Ben Bernanke’s hands, and quite far from people who are easily swayed by the White House. It goes immediately to the European Commission, which has jurisdiction over eurozone budget issues. Faced with enormous pressure from those eurozone countries now on the hook for saving Greece, the Commission will surely launch a special audit of Goldman and all its European clients...

...Goldman will probably be blacklisted from working with eurozone governments for the foreseeable future; as was the case with Salomon Brothers 20 years ago, Goldman may be on its way to be banned from some government securities markets altogether. If it is to be allowed back into this arena, it will have to address the inherent conflicts of interest between advising a government on how to put (deceptive levels of) lipstick on a pig and cajoling investors into buying livestock at inflated prices.

And the US government, at the highest levels, has to ask a fundamental question: For how long does it wish to be intimately associated with Goldman Sachs and this kind of destabilizing action? What is the priority here - a sustainable recovery and a viable financial system, or one particular set of investment bankers?

To preserve Goldman, on incredibly generous terms, in the name of saving the financial system was and is hard to defend – but that is where we are. To allow the current government-backed (massive) Goldman to behave recklessly and with complete disregard to the basic tenets of international financial stability is utterly indefensible. (There is a case to be made that the money center banks, in particular Goldman and JPM, are sometimes acting as instruments of US foreign policy - Jesse)

The credibility of the Federal Reserve, already at an all-time low, has just suffered another crippling blow; the ECB is also now in the line of fire. Goldman Sachs has a lot to answer for."

Read the entire essay from Simon Johnson here