Stocks and Precious Metals Charts - And the Band Played On - Our Audacious Oligarchy

 

"We've become, now, an oligarchy instead of a democracy.  I think that's been the worst damage to the basic moral and ethical standards to the American political system that I've ever seen in my life." 

Jimmy Carter 

 

"They claim to be super-patriots, but they would destroy every liberty guaranteed by the Constitution.  They demand free enterprise, but are the spokesmen for monopoly and vested interest." 

Henry Wallace, April 1944

 

"Our plutocracy, whether the hedge fund managers in Greenwich, Connecticut, or the Internet moguls in Palo Alto, now lives like the British did in colonial India: ruling the place but not of it."

Mike Lofgren, The Deep State 

 

"Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear." 

Simon Johnson, The Quiet Coup, May 2009

 

“The main problem in any democracy is that crowd-pleasers are generally brainless swine who can go out on a stage and whip their supporters into an orgiastic frenzy— then go back to the office and sell every one of the poor bastards down the tube for a nickel apiece.” 

Hunter S. Thompson

 

"But there is a sort of 'Ok guys, you're mad, but how are you going to stop me' mentality at the top."

Robert Johnson, Audacious Oligarchy

Stocks moved lower again today, and went out near their lows.

Gold and silver were hit hard in the early trading, but managed to take back a good chun of their losses by the close.

The physical kilo bar inventory in Hong Kong is getting rather low again.  

Time to scour more physical out of the ETFs?

The Dollar rose on higher Treasury yields.

Congress engaged in the usual toothless showmanship in discussing the economy in testimony today.

I am sitting all in cash in my short term account now , although I did flip a few miners off the morning bloodbath.

Agnico-Eagle will be acquiring Kirkland Lake in a 'merger of equals (kind of).

The saga of the gambling Fed Presidents continues, and so we have another fine piece from the Martens today here.

Apparently a Fed President was actively placing short term million dollar directional bets, including the SP futures, during the crisis and the bailouts, with pockets full of insider information.

Must have been like shooting fish in a barrel.

And it was all legal so they say, and ethical.   But details are being stonewalled.

All in all not extraordinary, in this attractive but deceitful world of routine abuse of honor, office, power, and the truth.

Have a pleasant evening. 

Bill Cohan: The Truth About the Fed

"The truth is, although both incidents do reveal something about the way the powerful and famous get away with more stuff than the rest of us, there’s no real comparison. The Segarra Tapes actually reveal little or nothing that was not already known, assuming you have a shred of understanding how the Federal Reserve banks actually work. Nor is William Dudley, the president of the Federal Reserve Bank of New York, about to get pilloried in public like NFL Commissioner Roger Goodell.

Sorry, folks, but this is simply the way the New York Fed was designed to behave. The system of 12 Federal Reserve banks, established about 100 years ago by an act of Congress following secret meetings presided over by J.P. Morgan himself at an island off the coast of Georgia, has always existed for the benefit of the commercial and investment banks that created the system, that own the banks and that control their boards of directors.

To think that these banks exist for any other reason than to serve their Wall Street masters is complete folly. It has never been so and it will never be so – as long as the current system remains intact – despite what Segarra captured her bosses talking about on tape, without their knowledge."

William D. Cohan, Why the Fed Will Always Wimp Out On Goldman

The Wall

"The best weapon of a dictatorship is secrecy, but the best weapon of a democracy should be the weapon of openness."

Niels Bohr


"Every thing secret degenerates, even the administration of justice; nothing is safe that does not show how it can bear discussion and publicity."

John Dalberg Lord Acton

John C. Williams: The Federal Reserve's Brand of Modern Monetary Theory

I will comment more on this later but I thought it was interesting and probably quite important for future reference.

One point of contention for me has been this whole issue of the Fed paying interest on excess reserves, essentially incenting banks, if the rate is high enough, to cause banks to hoard reserves at the Fed rather than lend the money out to the real economy.

This point was argued quite vociferously some years ago during the first quantitative easing.  We were told by the New York Fed, as I recall, that this was not the case, and that the payment of interest on excess reserves was only a means for the Fed to manage rates at the zero bound, and did not affect the levels of reserves which are only an accounting identity, after all.

Williams seems to contradict this now.  But I have to give it an extra careful reading in this case.

However, some might look at his data and his reasoning and conclude that while the Fed's policies have been doing quite a bit to provide solvency to the banking system, it has not done well by the real economy.  The GDP and employment numbers seem to bear this out.

One might conclude that reducing the interest paid on reserves would cause the banks to make more loans to the real economy.  And yet not so long ago the NY Fed and several of their economists also argued against what seems like common sense that this was not the case, not at all.

So it might be important to pin the Fed down a bit on this now.  Their thinking could be evolving, or it might just be dissembling to suit the changing situation.   One might gather from what Mr. Williams is saying about rewriting established theory that they don't quite know what it is that they are doing, but instead are feeling their way along in uncharted waters.

This of course widens the risk of a policy error enormously.  Greenspan's Fed was replete with policy errors, but of course he was the gure, the infallible one.  And we should trust these same economists who lionized him now for what reason?

From my own perspective the Fed has spun what they are doing in so many different ways at different times that it is difficult to take what they are saying here at face value.

And that is another feature of the credibility trap.

I believe this speech by John C. Williams is significant, in the manner of Bernanke's famous printing press speech.  Deflation: Making Sure It Doesn't Happen Here. 

Let's give it a careful read and see if it provides any additional clues to what they are thinking, and what they might do next.

San Francisco Federal Reserve Bank
Monetary Policy, Money, and Inflation
John C. Williams, President and CEO
2 July 2012

Good morning. I’m very pleased to be in such eminent company, especially that of my former advisor at Stanford, John Taylor. And I’ll begin my presentation with a reference to another pathbreaking monetary theorist. Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” 1

We are currently engaged in a test of this proposition. Over the past four years, the Federal Reserve has more than tripled the monetary base, a key determinant of money supply.   Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation, à la Friedman.

Despite these dire predictions, inflation in the United States has been the dog that didn’t bark. As Figure 1 shows, it has averaged less than 2 percent over the past four years. (Past performance is not an indicator of future success - Jesse)  What’s more, as the figure also shows, surveys of inflation expectations indicate that low inflation is anticipated for at least the next ten years.  (Did they anticipate the financial collapse? - Jesse)

In my remarks today, I will try to reconcile monetary theory with the recent performance of inflation. In my view, recent developments make a compelling case that traditional textbook views of the connections between monetary policy, money, and inflation are outdated and need to be revised. As always, my remarks represent my own views and not necessarily those of others in the Federal Reserve System.

I’ll start with two definitions. The monetary base is the sum of U.S. currency in circulation and bank reserves held at the Federal Reserve. Figure 2 shows the key components of the monetary base since 2007. Up until late 2008, it consisted mostly of currency, with a small amount of bank reserves held mostly to meet regulatory requirements. Since then, the monetary base has risen dramatically, primarily because of a $1.5 trillion increase in bank reserves. The money stock is a related concept. It is the total quantity of account balances at banks and other financial institutions that can easily be accessed to make payments. A standard measure of the money stock is M2, which includes currency, and certain deposit and money market accounts.

Here I should make an important point about something that often confuses the public. The worry is not that the Fed is literally printing too much currency. 2 The quantity of currency in circulation is entirely determined by demand from people and businesses. It’s not an independent decision of monetary policy and, on its own, it has no implications for inflation. (It is the money stock that concerns people, not the adjusted monetary base per se - Jesse)

The Federal Reserve meets demand for currency elastically. If people want to hold more of it, we freely exchange reserves for currency. If people want less, then we exchange it back. Of course, currency doesn’t pay interest. People hold it as a low-cost medium of exchange and a safe store of value. In fact, over the past four years, U.S. currency holdings have risen about 35 percent. This reflects low interest rates, which reduce the opportunity cost of holding currency. It’s also due to worries about the economy and the health of the banking system, both here and abroad. In fact, nearly two-thirds of U.S. currency is held outside our borders. 3  U.S. currency is widely seen as a safe haven. When a country is going through economic or political turmoil, people tend to convert some of their financial assets to U.S. currency. Such increased demand for U.S. currency is taking place in Europe today.

For monetary policy, the relevant metric is bank reserves. The Federal Reserve controls the quantity of bank reserves as it implements monetary policy. To keep things simple, I’ll start with what happens when the Fed doesn’t pay interest on reserves, which was the case until late 2008. I’ll return to the issue of interest on reserves toward the end of my talk.

Before interest on reserves, the opportunity cost for holding noninterest-bearing bank reserves was the nominal short-term interest rate, such as the federal funds rate. Demand for reserves is downward sloping. That is, when the federal funds rate is low, the reserves banks want to hold increases. Conventional monetary policy works by adjusting the amount of reserves so that the federal funds rate equals a target level at which supply and demand for reserves are in equilibrium. It is implemented by trading noninterest-bearing reserves for interest-bearing securities, typically short-term Treasury bills.

Normally, banks have a strong incentive to put reserves to work by lending them out. If a bank were suddenly to find itself with a million dollars in excess reserves in its account, it would quickly try to find a creditworthy borrower and earn a return. If the banking system as a whole found itself with excess reserves, then the system would increase the availability of credit in the economy, drive private-sector borrowing rates lower, and spur economic activity. Precisely this reasoning lies behind the classical monetary theories of multiple deposit creation and the money multiplier, which hold that an increase in the monetary base should lead to a proportional rise in the money stock.

Moreover, if the economy were operating at its potential, then if the banking system held excess reserves, too much “money” would chase too few goods, leading to higher inflation. Friedman’s maxim would be confirmed. Here’s the conundrum then: How could the Fed have tripled the monetary base since 2008 without the money stock ballooning, triggering big jumps in spending and inflation? What’s wrong with our tried-and-true theory?

A critical explanation is that banks would rather hold reserves safely at the Fed instead of lending them out in a struggling economy loaded with risk. The opportunity cost of holding reserves is low, while the risks in lending or investing in other assets seem high. Thus, at near-zero rates, demand for reserves can be extremely elastic. The same logic holds for households and businesses. Given the weak economy and heightened uncertainty, they are hoarding cash instead of spending it. In a nutshell, the money multiplier has broken down. 4

The numbers tell the story. Despite a 200 percent increase in the monetary base, measures of the money supply have grown only moderately. For example, M2 has increased only 28 percent over the past four years. 5  Figure 3 shows that the money multiplier—as measured by the ratio of M2 to the monetary base—plummeted in late 2008 and has not recovered since. Nominal spending has been even less responsive, increasing a mere 8 percent over the past four years. As a result, the ratio of nominal gross domestic product, which measures the total amount spent in the economy, to the monetary base fell even more precipitously, as the figure shows. This ratio also has not recovered, illustrating how profoundly the linkage between the monetary base and the economy has broken.

A natural question is, if those reserves aren’t circulating, why did the Fed boost them so dramatically in the first place? The most important reason has been a deliberate move to support financial markets and stimulate the economy.  By mid-December 2008, the Fed had lowered the federal funds rate essentially to zero. Yet the economy was still contracting very rapidly. Standard rules of thumb and a range of model simulations recommended setting the federal funds rate below zero starting in late 2008 or early 2009, something that was impossible to do. 6  

Instead, the Fed provided additional stimulus by purchasing longer-term securities, paid for by creating bank reserves. These purchases increased the demand for longer-term Treasuries and similar securities, which pushed up the prices of these assets, and thereby reduced longer-term interest rates. In turn, lower interest rates have improved financial conditions and helped stimulate real economic activity. 7 

The important point is that the additional stimulus to the economy from our asset purchases is primarily a result of lower interest rates, rather than a textbook process of reserve creation, leading to an increased money supply. It is through its effects on interest rates and other financial conditions that monetary policy affects the economy.

But, once the economy improves sufficiently, won’t banks start lending more actively, causing the historical money multiplier to reassert itself? And can’t the resulting huge increase in the money supply overheat the economy, leading to higher inflation? The answer to these questions is no, and the reason is a profound, but largely unappreciated change in the inner workings of monetary policy. 

The change is that the Fed now pays interest on reserves. The opportunity cost of holding reserves is now the difference between the federal funds rate and the interest rate on reserves. The Fed will likely raise the interest rate on reserves as it raises the target federal funds rate. 8 Therefore, for banks, reserves at the Fed are close substitutes for Treasury bills in terms of return and safety. A Fed exchange of bank reserves that pay interest for a T-bill that carries a very similar interest rate has virtually no effect on the economy. Instead, what matters for the economy is the level of interest rates, which are affected by monetary policy.

This means that the historical relationships between the amount of reserves, the money supply, and the economy are unlikely to hold in the future. If banks are happy to hold excess reserves as an interest-bearing asset, then the marginal money multiplier on those reserves can be close to zero. As a result, in a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. In particular, the world changes if the Fed is willing to pay a high enough interest rate on reserves. In that case, the quantity of reserves held by U.S. banks could be extremely large and have only small effects on, say, the money stock, bank lending, or inflation.

As I noted earlier, inflation and inflation expectations have been low for the past four years, despite the huge increase in the monetary base. Of course, if the economy improved markedly, inflationary pressures could build. Under such circumstances, the Federal Reserve would need to remove monetary accommodation to keep the economy from overheating and excessive inflation from emerging. It can do this in two ways: first, by raising the interest rate paid on reserves along with the target federal funds rate; and, second, by reducing its holdings of longer-term securities, which would reverse the effects of the asset purchase programs on interest rates.

In thinking of exit strategy, the nature of the monetary policy problem the Fed will face is no different than in past recoveries when the Fed needed to “take away the punch bowl.” Of course, getting the timing just right to engineer a soft landing with low inflation is always difficult. This time, it will be especially challenging, given the extraordinary depth and duration of the recession and recovery. The Federal Reserve is prepared to meet this challenge when that time comes. Thank you.

End Notes

1. Friedman (1970), p. 24.

2. Technically, the Bureau of Engraving and Printing prints paper currency. The Federal Reserve is responsible for processing and distributing currency to the banking system. The Federal Reserve also distributes coins, which are distinct from paper currency, to the banking system, but the amount of coins in circulation is comparatively small.

3. See Goldberg (2010).

4. For a discussion of this, see Williams (2011a).

5. Similarly, an alternative measure of the money stock, MZM, increased 26 percent over the past four years.

6. See Chung et al. (2011) and Rudebusch (2010).

7. See Williams (2011b) for details.

8. For details on the Fed’s planned exit strategy, see the minutes for the June 2011 FOMC meeting (Board of Governors 2011).

Taibbi: The Epic Failure of the SEC

"The big thieves hang the little ones."

I cannot argue with what Matt Taibbi says here, having quoted others like Bill Black about the same situation in great detail.

But in fairness to the SEC, this is hardly the case of a single regulator falling into porn-surfing indolence while they wait for another turn through the Wall Street revolving door.

The SEC is just another branch of regulatory incompetence and capture in good company with the CFTC and the FED, which gained even more regulatory powers in the recent 'reforms.' There are a few good regulators but they tend to be isolated and beleaguered.   The sad case of Brooksley Born was a good example of how bad regulatory policy drives out the good. 

This non-specific failure implies that there is much more than an SEC organizational or funding problem, and more likely systemic failure involving misplaced priorities and conflicts of interest that flow down from the Congress and the Administration among others. 

I would like to think that the people are getting a bit tired of handsomely paid and highly comped corporate and political 'leaders' who, when the time comes, don't know anything about anything that is surely within their direct responsibility. There are little to no downsides for failure if you are on the right side of the glass ceiling and a vetted member of the players club, a master of the universe.

And that moral hazard may be the most powerful attraction and incentive to bad behaviour of all. Power attracts the corruptible, without respect to race, gender, or creed.

Rolling Stone
SEC: Taking on Big Firms is 'Tempting,' But We Prefer Whaling on Little Guys
By Matt Taibbi

If you want to see a perfect example of how completely broken our regulatory system is, look no further than a speech that Daniel Gallagher, one of the S.E.C.’s commissioners, recently gave in Denver, Colorado.

It’s a speech whose full lunacy is hard to grasp without some background.

It’s by now been well-established that the S.E.C.’s performance in policing Wall Street before, after, and during the crash has been comically inept. It would be putting it generously to say that the top cop on the financial services beat has demonstrated particular incompetence with regard to investigations of high-profile targets at powerhouse banks and financial companies. A less generous interpretation would be that the agency is simply too afraid, too unwilling, or too corrupt to take on the really dangerous animals in this particular jungle. 

The S.E.C.’s failure to make even one case against a high-ranking executive involved in the mass frauds leading to the 2008 crash – compare this to the comparatively much smaller and less serious S&L crisis twenty years earlier, when the government made 1,100 criminal cases and sent 800 bank officials to jail – became so conspicuous that by the end of last year, the “No prosecutions of top figures” idea became an accepted meme in mainstream news media coverage of the economic crisis.

The S.E.C. in recent years has failed in almost every possible way a regulator can fail to police powerful criminals. Failure #1 was that it repeatedly fell down on the job even when alerted to problems at big companies well ahead of time by insiders. Six months before Lehman Brothers collapsed, setting off a chain reaction of losses that crippled the world economy, one of Lehman’s attorneys, Oliver Budde, contacted the S.E.C. to warn them that there were problems with the company’s accounting; the agency blew him off. There were similar brush-offs of insiders with compelling information in cases involving Moody’s, Chase, and both of the major Ponzi scheme scandals, i.e. the Bernie Madoff and Allen Stanford cases.

Read the rest here.

Gangsters of New York: The Real Housewives of Wall Street and Welfare for the Richest

This is tip of the iceberg stuff that might be defended by some as just the sort of thing that happens incidentally when one manages a large program under duress. So sorry. Nothing to see here, so move along.

That is like the defense being offered in the Raj Rajaratnam insider trading trial today that the defendant, Mr. Rajaratnam, is SO smart that he really didn't need all that insider information that people like Rajat Gupta had been giving him. I doubt they will get an acquittal giving all the tape recordings that they have, but they seem to be playing for a settlement, a wristslap and a fine and disgorgement of profits. That is the traditional outcome when some medium sized macher falls into the occasional government investigation of financial corruption.

The point of showing this here is to highlight the need for financial reform, transparency in government and especially at the Fed which handles huge sums of money and disburses them without effective oversight.

What is especially repugnant is not so much the epidemic of graft and corruption that has crippled the country and infested the regulators and the government. What is especially repugnant is the well financed campaign to go after the victims, the taxpayers and defrauded investors, and to force them to bear the brunt of the pain caused by that graft and corruption, by playing on the meanest and lowest impulses in the people.

And this after providing even more tax cuts and subsidies so these looters and white collar criminals could keep even more of their ill gotten gains. Now that takes some arrogant nerve, and some certainty in the service of your bought and paid for servants in the government, and the stupidity of the average person.

Iceland's voters have had the courage to say 'no.' It remains to be be seen what Ireland will do.

But one has to wonder how far this all goes, and why there was such a knee jerk impulse in so many places to bail out the banks and the insiders, and take the broader public to its knees through a calculated campaign of 'austerity' that plays on the impulse to make someone pay, preferably someone who is weak, and unable to effectively fight back, some outsider or scapegoat, some other.

And why do these disclosures keep showing up on the blogosphere and in relatively marginal publications while the mainstream media maintains its silence? I have been waiting for this story to surface, but I did not expect it to come from the sportswriter at Rolling Stone.

There will be some solemn mumblings on the network news, and then some Wall Street nightcrawler will be brought on the Sunday morning discussion programs to explain why these things are an anomaly, an unfortunate isolated incident, and how we have to stay on the bigger picture, handing out pain for everyone but those who caused the problem, and continue to cripple the real economy by distorting it through graft and corruption and the subornation of perjury and abuses of power.

And Dodd-Frank made the Fed the major regulatory body for the financial sector, and the bought and paid servants of big business continue to try and strangle all other competing regulators like Elizabeth Warren and the Consumer Protection Agency in the cradle.

Perhaps reform is too difficult, and the issues too complex, for anything to be done but surrender the Constitution to the monied interests and the oligarchs. They seem so powerful, and so clever, and after all, they hold your credit cards, and iPods, and favorite television shows hostage.

I would like to believe, even now, that all the people throughout history, ordinary men and women, who have stood for liberty, sometimes against fearsome odds, and given their pain and even their lives, the last full measure of their devotion, for the idea of a free America, shall not have done so in vain, with their memory shamefully dishonored by their children.  That at some point the people will rouse themselves from their slumber, slow to act, but deliberate and unstoppable once they are stirred.  And then the real work of reform and rebuilding can begin.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery.

Rolling Stone
The Real Housewives of Wall Street
By Matt Taibbi
April 12, 2011 9:55 AM ET

America has two national budgets, one official, one unofficial. The official budget is public record and hotly debated: Money comes in as taxes and goes out as jet fighters, DEA agents, wheat subsidies and Medicare, plus pensions and bennies for that great untamed socialist menace called a unionized public-sector workforce that Republicans are always complaining about. According to popular legend, we're broke and in so much debt that 40 years from now our granddaughters will still be hooking on weekends to pay the medical bills of this year's retirees from the IRS, the SEC and the Department of Energy.

Why Isn't Wall Street in Jail?

Most Americans know about that budget. What they don't know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the "official" budget in size — a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology...

Read the rest of this story here.

Related story Paul Ryan Has Balls by Matt Taibbi

Recently related blog Of the 1% By the 1% and For the 1%

Is JPM Covering Up a Naked Silver Short Held By China As a Claim Against the Yanks?

I freely admit that I have no inside knowledge of what is happening behind the scenes in the metals markets. But I do have a sense that things just do not seem to make sense, and the facts do not appear to fit the situation without some stretching.  

And this is one of those cases where my curiosity gets piqued. And so this seemed to be of interest to me as it might be to you.

While looking for information about the recent CFTC proposal on position limits I came across Harvey Organ's most recent report on things affecting the metals markets. As you may recall the CFTC took a 4-1 vote to send the proposal forward for market comments, with Rep Scott D. O'Malia casting the sole dissenting vote. I was specifically looking for Bart Chilton's statement on the vote which Harvey references, which is how google led me to Harvery's commentary here:

"I was intrigued with O'Malia's no vote. He seems to be wrapped up in the massive swaps by the banks and he does not know how to regulate these. He is probably scared to death if JPMorgan has to open their swap books and see the trades that I have highlighted to you to you on many occasions.

It is has been my contention all along that the real short position on silver is not JPMorgan or HSBC but mainland China. The USA needed a hoard of silver supply to compliment the banking gold supply to keep the suppression scheme alive.

China had about 300 million oz of silver inherited with the overtake of China in 1949. The gold was air-freighted to Taiwin (69 tonnes) but the silver remained in Shanghai and Beijing. In 1990 the usa had 2 billion oz of above ground silver and by 2003 their supply went to zero. They needed the Chinese supply.

Here was their supposed deal: in or around the year 2000 and events leading up to now:

1. USA gives most favoured nation treatment to China.

2. China lends silver in a swap position. China gets dollars as collateral and USA gets silver.

3. China can get their silver back at any time say past 3 or 4 years.

4. China loves the deal as they pick up gold on the cheap.

5. It is now 2010 and China want its silver back but the usa state that the silver is gone. They can keep the usa dollars in collateral.

6. China refuses and is angry. They now massively short on the comex knowing that they will not supply the metal. It is up to the bankers.

7. They [China or the Banks? - Jess] use conduits on the buy side and take delivery.

This is what O'Malia is frightened of when the CFTC sees the swap book on Morgan."

The point that both Harvey and Ted Butler have made is that China is behind the big short in silver being held by JPM and HSBC (Hong Kong and Shanghai Banking Corporation), but if pushed for delivery will throw its unsatisfied metal claim with the US on the table and will say, 'Get it from them.'

This does seem a little convoluted to me, and the first time I heard Ted mention China as principal behind the big silver short I thought it was ludicrous. Harvey Organ's explanation makes it at least plausible.

But I do think there is an element of unstated truth in this situation somewhere, and that there are serious scandals buried in the naked silver short position and the gold markets that will eventually see the light of day.

Those who can look at the structure of the silver market positions and see nothing suspicious, if not out of whack, are either talking their book or enjoying a pinch of jimson weed between cheek and gum.

Is China black-mailing the US with evidence of market manipulation in gold and silver? It sounds like the plot of some novel, but stranger things have happened when government goes into partnership with finance.

My personal bias is to stick with the simplest explanations unless more data indicates otherwise. A short selling operation at JPM gone awry, combined with significant silver shorts they inherited from Bear Stearns, has taken the bank into the position of being unable to deliver what they has already been sold.  This is complicated by the 'wink and a nod' that was likely given to the banks by a Treasury and Fed eager to keep the fat canary in the monetary coal mine from singing in the precious metals markets.

Given the current state of the US banking industry, the regulators are afraid of what a default on the Comex by the poster child of the Wall Street Banks recovery would do to investor confidence. So they are trying to kick the can down the road.  Almost seems to be a reflex reaction in Washington these days.

The more complex scenario put forward by Harvey and Ted would certainly be a case of the Chinese hanging the capitalists with the same rope which the capitalists sold to them. But I would look for a simpler solution, with an underpinning of well intentioned perception management gone bad with the taint of corruption and cover up.

As a rule of thumb, it's never the act itself, but always the subsequent cover-ups that blossom into a gut-wrenching, career-destroying scandal.

More testimony from Secretary Geithner after this message...

I remember vividly how the testimony in the Clarence Thomas-Anita Hill Supreme Court nomination hearings riveted the world's television audiences each evening. The Nixon Watergate hearings were also high drama indeed, over a much longer period of time, keeping the US locked into what Gerald Ford called a 'national agony.'

Although I was far too young to watch and understand them, I even remember the aftermath of the McCarthy Army hearings, the Red Scare, and Roy Cohn, dipping back further into history of tawdry political affairs. 

Wait until Ron Paul opens for business as the Chairman of the House Finance Service Committee and starts grilling Timmy and Ben about TARP and the banking bailouts, among other things.

There seems to be plenty of smoke coming out of the cracks in the Fed's stonewalling so far.  Likely there is a fire in there somewhere.  And don't forget there are several highly experienced legal firms with discovery orders and lawsuits in hand circling the building, looking for a way in.

This year could be interesting, maybe even 'pass-the-popcorn-Gracie' interesting.

Charles Ferguson: MIT Brunel Lecture on Economics and the Financial Crisis

See Charles Ferguson's documentary Inside Job when you have the opportunity.  I understand that the DVD may be released sometime around March 2011.

Ferguson starts his presentation at about 7 minutes in.

I was glad to hear him admit that he was wrong, honestly wrong, about his assessment of Japan Inc. and the Japan asset bubble. He also goes on to make a rather pointed observation about economics which needs to be heard dispassionately by related institutions in particular, whose own credibility and integrity is at risk.

"It is one thing to be honestly correct or not correct about something; it's another thing for an academic discipline to have a systemic corruption problem. And that's what I will be talking about in part later, because the economics discipline in my view does have that problem."

In Charles' defense he is only saying publicly what is being said privately amongst academic scientists and mathematicians about the inordinate effect of power and money on the integrity of economic opinions and research.

As you may recall Alan Greenspan was caught up in the Keating Five S&L scandal. The point of this is that the 'empirical objectivity' of the Federal Reserve in setting policy is a myth as egregious as the trickle down theory and the efficient markets hypothesis.

At the heart of the current financial crisis is the weakening and even corruption of a number of institutions, both public and private. And their reform and restoration to a fully functional state remains to be accomplished. Reforms risks disclosure, and coverups protect the status quo against such the effects of such a disclosure. This is why reform from within is problematic.

Yes, there is always the need for some discretion and privacy in executive decisions. But it must be limited and exceptional, subject to overview by a more relatively impartial third party, always.

The Fed, and particularly the New York Fed, is a largely private institution making decisions not only about its own industry, but is taking actions with public funds that approach and sometimes become de facto public policy decisions with far reaching effects, and is doing so largely in secret. It is therefore highly vulnerable to insider dealing and conflicts of interest. Excessive secrecy is inimical to a free society, for wherever secrecy and power exist, corruption quickly follows.

The only cure for these conflicts of interest is a balance of power and above all, transparency. Sunlight is a marvelous disinfectant. Disclosure, disclosure, disclosure. The more that a bureaucratic organization resists even routine disclosure the more likely it is that they have become internally focused, less effective, and probably have some things to hide.




Link to original video at MIT here.

h/t to Paul Kedrosky and Yves Smith.

Gold Daily and Silver Weekly Charts: Judge Orders Fed to Release Gold Records to Court

The New York traders are trying hard to keep a lid on silver and gold here.

Gold is struggling to break through the 1375 pivot and hold its gain, and silver is toying with the 29 handle.

Unless there is another liquidity market panic I expect these metals to follow their charts higher.

District Court Judge Orders Federal Reserve to Hand Over Gold Records

"If the U.S. gold reserves are just sitting somewhere, inert, unencumbered, and unused for surreptitious market intervention, what's the problem with full disclosure?"

Both Bernanke and Greenspan have testified that there have been no transactions in gold. Yet the Fed refuses to disclose documents that suggest circumstantially that there have been.

Even moreso, since the US bullion reserves belong to the people and not to a private banking cartel, there should be no records of any transactions by the Fed. Any transactions should have been handled by Treasury.

How Much Gold Does the US Have In Its Reserves?

How can the Fed be a trusted government regulator, given its position as a quasi-private banking cartel and an obsessive predilection for secrecy in its own dealings with what are clearly public assets?

If the Fed comes back and argues that it is not able to disclose its records of any gold transactions including sales, loans, and swaps because it was acting as agent for another party, whether it be the Treasury, BOJ, ECB, or the Bundesbank, then its time to audit the reserves by a third party answerable to the people.

Personally I am tired of their obfuscation, cronyism, and ad hominem attacks on even honest critics. If there is nothing to hide then disclose what are essentially public documents about public assets. If there is something to hide, it is time to come clean and stop the coverup.

As an aside, ex-Congressional powerbroker Tom DeLay was sentenced to three years in prison today for conspiracy and money laundering. 

Fiat justitia ruat caelum.

Chris Whalen: Nothing Has Changed Because It's The Fraud and Corruption, Stupid

Chris Whalen provides a devastating analysis of the Financial Reform legislation, and then goes on to eviscerate the Federal Reserve as regulator.

"Even as the big banks make a public show for the media of implementing the new Dodd-Frank law with respect to limits on own account trading and spinning off private equity investments, these same firms are busily creating the next investment bubble on Wall Street -- this time focused on structured assets based upon corporate debt, Treasury bonds or nothing at all -- that is, pure derivatives."

What I resent most about this current climate are the whispering campaigns and not so subtle attacks on the whistleblowers and victims: the unemployed, the homeless, the dislocated. These use stereotypes, character assassination, prejudice, and the darker elements of the human soul.

The better educated and fortunate members of the middle class are too often too willing to stand by and permit this without lifting a finger or saying a word, sometimes because it is to their benefit, or so they think. That is a mistake, because as history as shown, it is only a matter of time before the predators come for them.

Enjoy.

Institutional Risk Analyst
Is Fed Supervision of Big Banks Really Changing?
By Chris Whalen

With the passage of the Dodd-Frank Wall Street reform legislation, many financial analysts and members of the press believe that investment banking revenues and resulting earnings are in danger, but nothing is further from the truth. The Volcker Rule and other limitations on the principal trading and investment activities of the largest universal banks.

It is not own account trading but the derivatives sales desks of the largest BHCs whence the trouble lies. Even as the big banks make a public show for the media of implementing the new Dodd-Frank law with respect to limits on own account trading and spinning off private equity investments, these same firms are busily creating the next investment bubble on Wall Street -- this time focused on structured assets based upon corporate debt, Treasury bonds or nothing at all -- that is, pure derivatives. Like the subprime deals where residential mortgages provided the basis, these transactions are being sold to all manner of investors, both institutional and retail. It is the perverse structure of the OTC markets and not the particular collateral used to define these transactions that creates systemic and institution specific risk.

One risk manager close to the action describes how the securities affiliates of some of the most prominent and well-respected U.S. BHCs are selling five-year structured transactions to retail investors. These deals promise enhanced yields that go well into double digits, but like the subprime debt and auction rate securities which have already caused hundreds of billions of dollars in losses to bank shareholders, the FDIC and the U.S. taxpayer, these securities are completely illiquid and often come with only minimal disclosure.

The dirty little secret of the Dodd-Frank legislation is that by failing to curtail the worst abuses of the OTC market in structured assets and derivatives, a financial ghetto that even today remains virtually unregulated, the Congress and the Fed are effectively even encouraging securities firms to act as de facto exchanges and thereby commit financial fraud. Allowing securities firms to originate complex structured securities without requiring SEC registration is a vast loophole that Senator Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA) deliberately left open for their campaign contributors on Wall Street. But it must be noted these same firms have a captive, client relationship with the Fed and other regulators as well, thus a love triangle may be the most apt metaphor.

Of course retail investors love the higher yields on complex structured assets. Who can blame them for trying to get a higher yield than available on treasuries, while the Fed keeps rates at historic lows to, among other things, re-capitalize the zombie banks. The only trouble is that the firms originating these ersatz securities, as with the case of auction rate municipal securities, have no obligation to make markets in these OTC structured assets or even show clients a low-ball bid. And because of the bilateral nature of the OTC market, only the firm which originates the security will even provide an indicative valuation because the structures and models behind them are entirely opaque.

In fact, we already know of two hedge funds that are being established specifically to buy this crap from distressed retail investors as an when rates start to rise. The sponsors expect to make returns in high double digits by making a market for the clients of large BHCs who want to get out of these illiquid assets. But the one thing that you can be sure of is that nobody at the Fed or the other bank regulatory agencies know anything about this new bubble. As with the early warnings brought to the Fed about private loan origination and securitization activities as early as 2005, the central bank and other regulators are so entirely compromised by the political pull of the large banks that they will do nothing to get ahead of this new problem.

Consider a specific example:

Shall We Reward Incompetence? The Case of Sarah Dahlgren and the Fed of New York

Despite initial indications that Congress would reduce the scope of Federal Reserve's financial company supervision, in the end the Dodd-Frank legislation substantially increases the Federal Reserve's responsibility. Chairman Ben Bernanke and other Federal Reserve officials made the argument that the Fed's supervision function didn't do any worse than any other financial regulators -- an assertion we cannot validate. This combined with heavy lobbying by other Reserve Bank Presidents and the grudging acknowledgement to the Congress by Fed Chairman Bernanke and Fed Governor Daniel Tarullo that significant improvements are necessary ultimately won the day.

Given its second lease on regulatory life, one might expect that the Fed's bank supervision function would be gearing-up to take a fresh, smart, and tough line with respect to financial company oversight. However, a recent key supervisory officer appointment by the Federal Reserve Bank of New York (FRBNY) indicates this may not be the case. The largest and most important of regional Reserve Banks appears to be going back to the future with its choice of Sarah Dahlgren as Head of Supervision. See FRBNY press release link.

If the name sounds familiar, that's because Ms Dahlgren has been at the center of many of the Federal Reserve's most embarrassing failures in the area of bank supervision and in particular with respect to the failure of American International Group (AIG). Going back in time now and remembering the period before the crisis, Dahlgren typified the arrogance and refusal of Fed officials to acknowledge warnings from various members of the financial community that the subprime mortgage market was melting down after years of unsafe and unsound lending and underwriting practices by the largest banks. Roger Kubarych, a former economist for the FRBNY, described the refusal of Fed officials to acknowledge the crisis in a 2008 interview with The IRA ('Fed Chairmen and Presidents: Roundtable with Roger Kubarych and Richard Whalen', October 30, 2008).

"It makes me so mad to think back how ignorant, arrogant, and dismissive she was with people who knew what they were talking about pre-crisis," one former Fed colleague told The IRA. Dahlgren was running the AIG show for the FRBNY. She ignored the recommendations from the Fed's own advisors and the Board of the FRBNY that AIG counterparties be forced to take haircuts. For her to ignore good advice on AIG and then deliberately take steps to hide that decision from the Congress and the public, and then be rewarded with a promotion, is quite disheartening..."

Read the rest here.

What Next from the Fed: the Obvious, More of the Same, Secrecy, and Inevitably Devaluation

I suspect that this is a 'trial balloon' story that the Fed sends out as a means of informing its constituents about the likely paths of it policy, to solicit feedback and prepare the way.

What is most disappointing is that they are considering the obvious, and more of the same.

The cutting of the interest paid on reserves to zero is something which I have been predicting for some time, despite serious wonkish scoffing from some economic circles that I will not shame to mention. No, it is not a useless or meaningless thing to do.

That will be a real move to ZIRP. But it also removes a welfare payment to a few of the Too Big To Fail Banks which are still remarkably insolvent and running on unsustainable business models, so the Fed will proceed slowly. That is the real 'technical issue.' The Fed never paid such interest before, so to say now that it is a systemic requirement is a bit disingenuous. It is a requirement if your system is broken, and not in the process of being fixed.

As for tweaking their wording, OMG. Benny is losing confidence fast. In the last few statements the Fed was largely talking to themselves. In the second part they make a great deal of playing to foreign creditors. That makes more sense, but we are clearly in that endgame. China does not buy Treasuries because they enjoy the returns on their bonds. They buy them because it is part of the policy of currency manipulation to subsidize their domestic economy. When they decide to stop they will stop. And that goes for the oil states as well, with slightly different motives.

More monetization, the buying of existing debt, gets down to the heart of the program, their game plan, but note please that this is just a way to subsidize the creditors, keeping people in houses that they cannot afford almost at any interest rate. The principal still reflects bubble pricing, and must be reduced. The associated debts will have to be written off, not refinanced.

The Fed is still acting primarily in the interest of the Wall Street banks, and Timmy and Larry are they yes-men in the government.

Based on what I am seeing, when push comes to shove, Benny is going to print, and devalue the dollar, because he sees no other options, lacking the will and imagination to create other choices in addition to merely debasing the currency and stealing the rest of the savings of a generation.

The monied elite do not favor this, and will attempt to promote ridiculous austerity programs, to direct the pain more heavily towards the middle and lower class.

And so the class and currency wars begins to gain momentum.

Washington Post
Federal Reserve weighs steps to offset slowdown in economic recovery
By Neil Irwin
Thursday, July 8, 2010

Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth.

With Congress tied in political knots over whether to take further action to boost the economy, Fed leaders are weighing modest steps that could offer more support for economic activity at a time when their target for short-term interest rates is already near zero. They are still resistant to calls to pull out their big guns -- massive infusions of cash, such as those undertaken during the depths of the financial crisis -- but would reconsider if conditions worsen.

Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent. (They know this is not true, but it does not hurt to try and talk up the good news while waiting for a break, even if it is the outbreak of war - Jesse)

But weak economic reports, the debt crisis in Europe and faltering financial markets have led them to conclude that the risks of the recovery losing steam have increased. After months of focusing on how to exit from extreme efforts to support the economy, they are looking at tools that might strengthen growth.

"If the economic situation changes, policy should react," James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview Wednesday. "You shouldn't sit on your hands. . . . I think there's plenty more we could do if we had to."

One pro-growth strategy would be to strengthen language in Fed policy statements that the central bank's interest rate target is likely to remain "exceptionally low" for an "extended period." The policymakers could change that wording to effectively commit to keeping rates near zero for even longer than investors now expect, perhaps adding specifics about which economic conditions would lead them to raise rates. Such a move would be opposed by many members of the Fed policymaking committee who are wary of the "extended period" language, arguing that it limits their flexibility. (zzzzzzz - Jesse)

Another possibility would be to cut the interest rate paid to banks for extra money they keep on reserve at the Fed from 0.25 percent to zero. That would give banks slightly more incentive to lend money to customers rather than park it at the Fed, although it also could cause technical problems in the functioning of certain credit markets. (As I have predicted. The Fed NEVER paid interest on reserves before now. How can it suddenly cause serious problems if they stop it? If they had the nerve, they could take those interest rates mildly negative. That would give the banks some incentive to get the funds moving, although it would be disruptive and would have to be done slowly, with plenty of warning - Jesse)

A third modest possibility would be to buy enough new mortgage securities to replace those on the Fed balance sheet that are paid off as people take advantage of low interest rates to refinance. (More monetization to support the creditors and Wall Street. Oh yeah that will work. - Jesse)

Role of mortgage rates

None of those steps amounts to the kind of massive unconventional effort to drive down mortgage rates and prop up growth that the Fed took in late 2008 and early 2009, when the economy was in a deep dive. Then, the Fed began buying Treasury bonds, mortgage securities and other long-term assets -- more than $1.7 trillion worth by the time the purchases concluded in March. (The Fed and Treasury have done very little to restructure the financial system and the US economy to make it sustainable, and that is their failure. They think Wall Street is the sine qua non - Jesse)

Some economists have encouraged the Fed to launch a new asset-purchase program, saying that with the unemployment rate at 9.5 percent (really north of 17 % - Jesse) and little apparent risk of inflation, (this is not true and it why the Fed is so cautious - Jesse) the Fed should use every tool at its disposal to get the economy back on track.

Fed leaders view such a strategy as likely to have only a small impact on the economy and as carrying a risk of slowing growth.

One of the key ways the earlier securities purchases stimulated the economy was by driving down mortgage rates, which in turn propped up the housing market. But with mortgage rates near all-time lows, it is not clear that actions to lower rates another, say, quarter percentage point would result in much additional home sales or refinancing activity. (It would save some foreclosures perhaps, but the problem is that the wealth transfer from the many to the few is running overtime now that the banking frauds collapsed and they have to scrambled for earnings with great vigor on old scams like price manipulation in the markets - Jesse)

Moreover, the Fed's purchases of mortgage securities have reduced the role of private buyers in that market, and some leaders at the central bank fear that further intervention could delay the resumption of normal market functioning. (ROFLMAO - when it makes sense they will buy regardless of what Benny is doing. They just want subsidies now and high yielding hot money schemes. They are not interested in low paying high risk investments - Jesse)

"The Fed probably believes that unconventional policy does not have much traction as market functioning gets better," said Vincent Reinhart, a resident fellow at the American Enterprise Institute and a former Fed official.

Asset-purchase plan

Another risk is that global investors could lose faith that the Fed will be able or willing to pull money out of the economy in time to prevent inflation. That would lead the investors to demand higher interest rates on long-term loans, which could reverse the rate-lowering effects of the Fed's asset purchases. (This is the inflation risk which I said exists, which they said above does not exist - Jesse)

When the Fed was buying $300 billion in Treasurys in mid-2009, part of its try-everything approach to dealing with the crisis, rates on 10-year bonds temporarily spiked amid concerns that the Fed was "monetizing the debt," or printing money to fund budget deficits. With deficit concerns having deepened in the past year, such fears could be even more pronounced now.

All that said, Fed officials do not rule out launching a major new asset-purchase program. Rather, they say they would consider one only if their basic forecast -- of continued steady expansion in the economy -- proves to be wrong. A key factor that would build support for new asset purchases would be a rise in the risk of deflation, or a dangerous cycle of falling prices -- which has become more of a concern as the world economy slows. (Deflation is a policy choice, always, in a purely fiat currency regime - Jesse)

Fed officials express confidence that they have tools to address the economy further if conditions worsen.

"I think we do have a variety of tools available, and we shouldn't rule any tool out," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview. "If we're uncomfortable with how long it's going to take us to reach either element of our dual mandate [of maximum employment and stable prices], we'll have to make some adjustments to policy."

The Financial Crisis Is Everywhere a Fraud, and Official Complacency Inevitably Leads to a Crisis

"A revolution is coming — a revolution which will be peaceful if we are wise enough; compassionate if we care enough; successful if we are fortunate enough — But a revolution which is coming whether we will it or not. We can affect its character; we cannot alter its inevitability." Robert F. Kennedy, 9 May 1966

The Fed is now engaged in a control fraud, and what appears to be racketeering in conjunction with a few big investment banks. They may have entered into it with good intentions, but they seem to have been turned towards deceit and corruption.

This is not an historical event, but an ongoing theft in conjunction with a number of Wall Street banks, and politicians whom they have paid off through a corrupt system of campaign financing and influence peddling.

This is nothing new in history if one reads the unsanitized version. But people never think it can happen today, that somehow yesterday things were different, as if one is looking at some distant, foreign land. This is a facet of the illusion of general progress.

Audit the Fed. Vote out incumbents until they give you what you demand. Take back the billions stolen through millionaire's taxes similar to those in place before the 'Reagan Revolution.' If there is no profit in theft, it will not happen. EU Puts Tough Restrictions on Banker's Bonuses.

The individuals in government are not a ruling class, and were never intended to be, although after a second term they start to feel themselves to be privileged, with better pensions and benefits and pay raises than the people whom they serve. These are your chosen representatives, sworn to uphold the law and governing with your consent. The United States is not the Congress, the Supreme Court and the Executive in Washington, it is the people joined freely by their mutual consent under the Constitution. It is of the people, by the people, and for the people.

Goldman Sachs, AIG, and the NY Fed are at the heart of it. Everyone in the government, the media, and on the Street knows this. We are now in the coverup stage of a scandal, similar to Watergate when the White House was stone-walling. The difference is that the corruption and capture of the government is much more pervasive now, and includes a significant portion of the mainstream media, so meaningful reform is difficult. Most of what has transpired so far has been designed to distract and placate the people in their righteous anger.

Here is a commentary from one of my favorite analysts, Howard Davidowitz, and then the story from Bloomberg on how the Fed deceives the Congress and the public, turns a blind eye to glaring conflicts of interest, and is essentially debasing the currency while transferring the wealth of the nation to their cronies. Janet Tavakoli has been articulate and outspoken on recent financial developments, identifying the fraud and its specifics while taking on the apologists in open forums, for quite some time. And still the regulators do not enforce the laws they have, and Washington drags its feet while accepting buckets of cash from the perpetrators.

The longer reform is delayed and the peaceful protestations of the public are ignored, the worse it will be if the people actually rise and put a stop to this. The Fed could conceivably become a latter day Bastille, one would advise and hope, in a figurative manner.

One of the things I like about the English form of government is that if they behave badly enough, a prime minister can face a vote of no confidence and trigger an election. In the US, it appears that politicians scramble to be elected, and then stay safely in office barring the high hurdle of impeachment, and do what they will, breaking promises and behaving badly, with significant short term impunity. And when the next election comes over the horizon, they start behaving again, and playing the short term memory game. If the US had the British system, there is little doubt that the current Administration would be facing a general election now.

But have no doubt, change is coming, and it is still an open question if hell is also coming with it.

"Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in “assets” the government agreed to purchase in the rescue of Bear Stearns Cos. were “investment-grade.” They didn’t share everything the Fed knew about the money.

The so-called assets included collateralized debt obligations and mortgage-backed bonds with names like HG-Coll Ltd. 2007-1A that were so distressed, more than $40 million already had been reduced to less than investment-grade by the time the central bankers testified. The government also became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds.

By using its balance sheet to protect an investment bank against failure, the Fed took on the most credit risk in its 96- year history and increased the chance that Americans would be on the hook for billions of dollars as the central bank began insuring Wall Street firms against collapse. The Fed’s secrecy spurred legislation that will require government audits of the Fed bailouts and force the central bank to reveal recipients of emergency credit.

“Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact,” Senator Sherrod Brown, an Ohio Democrat and member of the Senate Banking Committee, said in an e-mail when informed about the credit quality of holdings in the Maiden Lane LLC portfolio. The committee held the April 3 hearing."

Fed Made Taxpayers Unwitting Junk Bond Buyers - Bloomberg

Federal Reserve Is Intervening in the Currency Markets While Wall Street Whines about Reform

I think we all already knew this, but I wanted to bookmark it on my site for some future occasion when the government and the Fed deny it, probably in a response to a question from Ron Paul.

The question I have in my mind is where does this show up on their books, and what other markets are they active in?

It also seems a bit ironic, since the current topic of discussion on Bloomberg TV is "investor trust in freefall?" The consensus of the talking heads is that Wall Street's holy men are under attack by evil governments, particularly those of the European persuasion, and the odd US regulatory agency.

Steve Wynn is gushing about the business friendly, stable atmosphere in the People's Republic of China, as opposed to the US and those anti-business fascists in Washington. Although it is funny that he thinks the place in the US that most closely resembles China for being 'business friendly' is Massachusetts because they are willing to give him tax guarantees for 15 years. I suppose that when you turn them upside down all corrupt oligarchies look alike.

In an email this morning my friend Janet T. dropped me a note about Vietnam's new bank friendly atmosphere, and wondered aloud if Jamie Dimon would take his operations to Ho Chi Minh City in the unlikely event that meaningful financial reform is passed in the US.

One can only hope. Should we take up a collection for airfare? I would love to see the terms of their bailout packages over there after the next financial crisis, which is sure to come. A water hose, bare steel bedsprings, copper jacketed ben wa balls, and a well charged car battery would probably serve for openers, instead of softball questions and false protests of indignation from Barney, Chris, and the boys which is what those meanies in the Congress frighten them with now.

German Econ Minister:
U.S. Fed Is Also Active In Currency Markets
By Roman Kessler

MAINZ, Germany -(Dow Jones)- The U.S. Federal Reserve is also active in currency markets, German Economics Minister Rainer Bruederle said Friday.

His comments come on the heels of remarks made by his Swiss counterpart who said that the Swiss National Bank purchased euros to buttress the single currency.

"It is a regular procedure of central banks," to intervene in currency markets, Bruederle said. "It is not a secret," that central banks have a foreign exchange rate target, he added.

Bruederle said "eruptive" movements have to be avoided. He previously said that China holds 25 percent of its foreign exchange reserves in euros.

-By Roman Kessler, Dow Jones Newswires, +49 69 2972 5514;

roman.kessler@dowjones.com

Read more: NASDAQ

Guest Post: The Perils of Credit Money Systems Managed by Private Corporations

In this instance the 'paper money' system would be analagous to money created by private banks by means of expanding credit. The Second Bank of the United States is the predecessor to the Federal Reserve Bank System which was established in 1913.

"The paper system being founded on public confidence and having of itself no intrinsic value, is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain.

The corporations which create the paper money cannot be relied upon to keep the circulating medium uniform in amount. In times of prosperity, when confidence is high, they are tempted by the prospect of gain or by the influence of those who hope to profit by it to extend their issues of paper beyond the bounds of discretion and the reasonable demands of business.

And when these issues have been pushed on from day to day until the public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given; suddenly curtail their issues; and produce an unexpected and ruinous contraction of the circulating medium which is felt by the whole community.

The banks, by this means, save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people. We have already seen its effects in the wild spirit of speculation in the public lands and various kinds of stock which, within the last year or two, seized upon such a multitude of our citizens and threatened to pervade all classes of society and to withdraw their attention from the sober pursuits of honest industry. It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country.

But if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption which will find its way into your public councils and destroy, at no distant day, the purity of your government. Some of the evils which arise from this system of paper press, with peculiar hardship, upon the class of society least able to bear it...

Recent events have proved that the paper money system of this country may be used as an engine to undermine your free institutions; and that those who desire to engross all power in the hands of the few and to govern by corruption or force are aware of its power and prepared to employ it. Your banks now furnish your only circulating medium, and money is plenty or scarce according to the quantity of notes issued by them. While they have capitals not greatly disproportioned to each other, they are competitors in business, and no one of them can exercise dominion over the rest. And although, in the present state of the currency, these banks may and do operate injuriously upon the habits of business, the pecuniary concerns, and the moral tone of society, yet, from their number and dispersed situation, they cannot combine for the purpose of political influence; and whatever may be the dispositions of some of them their power of mischief must necessarily be confined to a narrow space and felt only in their immediate neighborhoods.

But when the charter of the Bank of the United States was obtained from Congress, it perfected the schemes of the paper system and gave its advocates the position they have struggled to obtain from the commencement of the federal government down to the present hour. The immense capital and peculiar privileges bestowed upon it enabled it to exercise despotic sway over the other banks in every part of the country. From its superior strength it could seriously injure, if not destroy, the business of any one of them which might incur its resentment; and it openly claimed for itself the power of regulating the currency throughout the United States. In other words, it asserted (and it undoubtedly possessed) the power to make money plenty or scarce, at its pleasure, at any time, and in any quarter of the Union, by controlling the issues of other banks and permitting an expansion or compelling a general contraction of the circulating medium according to its own will.

The other banking institutions were sensible of its strength, and they soon generally became its obedient instruments, ready at all times to execute its mandates; and with the banks necessarily went, also, that numerous class of persons in our commercial cities who depend altogether on bank credits for their solvency and means of business; and who are, therefore, obliged for their own safety to propitiate the favor of the money power by distinguished zeal and devotion in its service.

The result of the ill-advised legislation which established this great monopoly was to concentrate the whole money power of the Union, with its boundless means of corruption and its numerous dependents, under the direction and command of one acknowledged head; thus organizing this particular interest as one body and securing to it unity and concert of action throughout the United States and enabling it to bring forward, upon any occasion, its entire and undivided strength to support or defeat any measure of the government. In the hands of this formidable power, thus perfectly organized, was also placed unlimited dominion over the amount of the circulating medium, giving it the power to regulate the value of property and the fruits of labor in every quarter of the Union and to bestow prosperity or bring ruin upon any city or section of the country as might best comport with its own interest or policy.

We are not left to conjecture how the moneyed power, thus organized and with such a weapon in its hands, would be likely to use it. The distress and alarm which pervaded and agitated the whole country when the Bank of the United States waged war upon the people in order to compel them to submit to its demands cannot yet be forgotten. The ruthless and unsparing temper with which whole cities and communities were oppressed, individuals impoverished and ruined, and a scene of cheerful prosperity suddenly changed into one of gloom and despondency ought to be indelibly impressed on the memory of the people of the United States.

If such was its power in a time of peace, what would it not have been in a season of war with an enemy at your doors? No nation but the freemen of the United States could have come out victorious from such a contest; yet, if you had not conquered, the government would have passed from the hands of the many to the hands of the few; and this organized money power, from its secret conclave, would have directed the choice of your highest officers and compelled you to make peace or war as best suited their own wishes. The forms of your government might, for a time, have remained; but its living spirit would have departed from it.

The distress and sufferings inflicted on the people by the Bank are some of the fruits of that system of policy which is continually striving to enlarge the authority of the federal government beyond the limits fixed by the Constitution. The powers enumerated in that instrument do not confer on Congress the right to establish such a corporation as the Bank of the United States; and the evil consequences which followed may warn us of the danger of departing from the true rule of construction and of permitting temporary circumstances or the hope of better promoting the public welfare to influence, in any degree, our decisions upon the extent of the authority of the general government. Let us abide by the Constitution as it is written or amend it in the constitutional mode if it is found defective.

The severe lessons of experience will, I doubt not, be sufficient to prevent Congress from again chartering such a monopoly, even if the Constitution did not present an insuperable objection to it. But you must remember, my fellow citizens, that eternal vigilance by the people is the price of liberty; and that you must pay the price if you wish to secure the blessing. It behooves you, therefore, to be watchful in your states as well as in the federal government.

The power which the moneyed interest can exercise, when concentrated under a single head, and with our present system of currency, was sufficiently demonstrated in the struggle made by the Bank of the United States. Defeated in the general government, the same class of intriguers and politicians will now resort to the states and endeavor to obtain there the same organization which they failed to perpetuate in the Union; and with specious and deceitful plans of public advantages and state interests and state pride they will endeavor to establish, in the different states, one moneyed institution with overgrown capital and exclusive privileges sufficient to enable it to control the operations of the other banks.

Such an institution will be pregnant with the same evils produced by the Bank of the United States, although its sphere of action is more confined; and in the state in which it is chartered the money power will be able to embody its whole strength and to move together with undivided force to accomplish any object it may wish to attain. You have already had abundant evidence of its power to inflict injury upon the agricultural, mechanical, and laboring classes of society, and over whose engagements in trade or speculation render them dependent on bank facilities, the dominion of the state monopoly will be absolute, and their obedience unlimited. With such a bank and a paper currency, the money power would, in a few years, govern the state and control its measures; and if a sufficient number of states can be induced to create such establishments, the time will soon come when it will again take the field against the United States and succeed in perfecting and perpetuating its organization by a charter from Congress.

It is one of the serious evils of our present system of banking that it enables one class of society, and that by no means a numerous one, by its control over the currency to act injuriously upon the interests of all the others and to exercise more than its just proportion of influence in political affairs. The agricultural, the mechanical, and the laboring classes have little or no share in the direction of the great moneyed corporations; and from their habits and the nature of their pursuits, they are incapable of forming extensive combinations to act together with united force. Such concert of action may sometimes be produced in a single city or in a small district of country by means of personal communications with each other; but they have no regular or active correspondence with those who are engaged in similar pursuits in distant places. They have but little patronage to give the press and exercise but a small share of influence over it; they have no crowd of dependents about them who hope to grow rich without labor by their countenance and favor and who are, therefore, always ready to exercise their wishes.

The planter, the farmer, the mechanic, and the laborer all know that their success depends upon their own industry and economy and that they must not expect to become suddenly rich by the fruits of their toil. Yet these classes of society form the great body of the people of the United States; they are the bone and sinew of the country; men who love liberty and desire nothing but equal rights and equal laws and who, moreover, hold the great mass of our national wealth, although it is distributed in moderate amounts among the millions of freemen who possess it. But, with overwhelming numbers and wealth on their side, they are in constant danger of losing their fair influence in the government, and with difficulty maintain their just rights against the incessant efforts daily made to encroach upon them.

The mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control; from the multitude of corporations with exclusive privileges which they have succeeded in obtaining in the different states and which are employed altogether for their benefit; and unless you become more watchful in your states and check this spirit of monopoly and thirst for exclusive privileges, you will, in the end, find that the most important powers of government have been given or bartered away, and the control over your dearest interests has passed into the hands of these corporations.

The paper money system and its natural associates, monopoly and exclusive privileges, have already struck their roots deep in the soil; and it will require all your efforts to check its further growth and to eradicate the evil. The men who profit by the abuses and desire to perpetuate them will continue to besiege the halls of legislation in the general government as well as in the states and will seek, by every artifice, to mislead and deceive the public servants. It is to yourselves that you must look for safety and the means of guarding and perpetuating your free institutions. In your hands is rightfully placed the sovereignty of the country and to you everyone placed in authority is ultimately responsible. It is always in your power to see that the wishes of the people are carried into faithful execution, and their will, when once made known, must sooner or later be obeyed. And while the people remain, as I trust they ever will, uncorrupted and incorruptible and continue watchful and jealous of their rights, the government is safe, and the cause of freedom will continue to triumph over all its enemies.

But it will require steady and persevering exertions on your part to rid yourselves of the iniquities and mischiefs of the paper system and to check the spirit of monopoly and other abuses which have sprung up with it and of which it is the main support. So many interests are united to resist all reform on this subject that you must not hope the conflict will be a short one nor success easy. My humble efforts have not been spared during my administration of the government to restore the constitutional currency of gold and silver; and something, I trust, has been done toward the accomplishment of this most desirable object. But enough yet remains to require all your energy and perseverance. The power, however, is in your hands, and the remedy must and will be applied if you determine upon it."

Andrew Jackson, Farewell Address, March 4, 1837