Jesse's Café Américain

The AIG bonuses are a calculated distraction.

This is the heart of the problem:

We will have no recovery until the system is reformed and brought back into a sustainable balance. To achieve this end, the banks must be returned to business of banking again, with the reinstatement of Glass-Steagall. The hedge funds must be restrained through fundamental regulatory reform.

A private agency like the Fed is not capable of performing these tasks. The Fed, for all the rhetoric that surrounds it, is a private enterprise owned by the banks. The effectiveness of self-regulation and the rational efficiency of markets are the great myths that have led us to our current crisis.

The Fed as the great regulator for multiple markets is an attractive choice for the government, because when it fails the government may point the finger of blame, and absolve itself of all responsibility for our ruin as they are attempting to do now.

Slate
The Real AIG Scandal
By Eliot Spitzer
March 17, 2009, at 10:41 AM ET

It's not the bonuses. It's that AIG's counterparties are getting paid back in full.

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall.

Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes.

So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure...

The arrogant belief that you are the 'only game in town,' and indispensable, provokes reckless behaviour that takes advantage of such a belief with abusive excess.

The time for the dollar to fall from its reserve currency status is coming precisely because of the years of reckless deficit spending beginning with the Reagan Administration.

This is also a model for the Wall Street moneycenter banks, who have abused their position in the financial system egregiously since the repeal of Glass-Steagall.

The likely result of this long cycle of reckless speculation and arrogance was forecast here in 2005.

Forecast 2005: The Humpty Dumpty Economy
Jesse's Café Américain

The current trend in the United States economy is not sustainable. This is a
realization that will penetrate the national consciousness slowly and unevenly.
Most economists agree on how this cycle will end (even if it is only privately), but
the great debate is in the details of how, and most importantly, when.

If one does not accept that the situation is unsustainable, and believes that things
can continue on endlessly just as they are, with the United States consuming the
bulk of the world’s savings and production because of who we are, then perhaps
this is symptomatic of the national epidemic we now suffer which the ancient
Greeks called hubris.

"Where else will they put their surplus if not our debt? To whom will they sell their
goods if not to us? Who will teach them how to live, and govern them?" History
shows that even if such trends last far beyond most expectations, eventually a
day of reckoning arrives, in some frequently repeated patterns of systemic
failure....

Things rarely reach a turning point when we expect it. A true sea change is
slow to permeate the mentality of most people, because our experience is that
what happened yesterday will happen again tomorrow, and a long cyclical turn occurs
gradually and incrementally. We forget what happened even a few years ago.
Predictions of a continuance of recent trends are the common currency of most pundits...

However, and this is a common sense notion that has been nearly forgotten
by our generation, we have the ability to act in such a way so as to make the
improbable more likely to occur, to tempt fate by our actions. For example, there
is a certain probability of sustaining an automobile accident in the normal course of
our daily activities. High risk behaviors, such as speeding excessively or
drinking while driving, increase the chance of an accident. If one engages in high risk
activity, and nothing unusual happens, we become emboldened and think that
since we were able to drink moderately and drive last month, so we can drink
and drive this month and thereafter. Perhaps next month we drink a little more for
an indulgence, and again nothing happens. This cycle continues until something
changes our behavior, or simply ends when we literally hit the wall.

It would be our contention that the US is like such a driver, and we have been
economically tempting fate with increasingly risky behaviors. We are persuaded
that there is almost nothing we cannot do, almost nothing that can happen, that is
beyond our control. It is the propensity for people to increase and
repeat what they have been doing over time, to tempt fate through repeated and
increasingly risky behavior, and to forget the possibility of a sequence of
unfortunate events if you will, that gives rise to memorable events in history...

Predicting the failure of a complex system is not easy. One can examine it as a
whole, and determine that it will fail, and often calculate what must change in
order to allow the system to function more reliably. But it is often beyond our power to
calculate exactly how it will fail, and consequently when it will fail. This does not
invalidate the observation that the system will ultimately fail. It merely
underscores the unpredictability of timing a failure with the degrees of freedom
inherent in a calculation with a large number of exogenous variables. It is not
easy to predict exactly when a chronic DWI will demolish their automobile, but it
remains relatively predictable to say that they will do so as long as they maintain
their current mode of behavior....

There are four major types of tipping points:

o Demand: a break in the level of consumption in the US caused by the
unwillingness or ability of households to incur further debt to support
consumption beyond real wage growth

o Supply: a major disruption in the supply of an essential commodity like
energy, food, or raw materials, or even the realization that a major
commodity is in shorter supply than expected, such as silver or oil.

o Monetary: an inability of foreign central banks to continue to
monetize the US trade deficit and budget deficit through the recycling of
their trade surplus into US debt securities.

o Systemic failure: the failure of a major counter party that threatens the
US financial system, particularly in the hugely leveraged derivatives
market.

Two of the seals, Demand and Systemic Failure, have been broken, and the horsemen unleashed. Next comes Monetary, and then Supply, which is a Pale Horse.

There is still time to end this spiral of decline.

Reuters
U.N. panel says world should ditch dollar
By Jeremy Gaunt, European Investment Correspondent
Wed Mar 18, 2009 11:16am EDT

LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.

"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

It has significantly reduced the dollar's share in its own reserves in recent years....

Reuters
China backs talks on dollar as reserve -Russian source
By Gleb Bryanski
Thu Mar 19, 2009 11:24am

MOSCOW, March 19 (Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decisionmaking globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.

"They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency)," the source told Reuters, speaking on condition of anonymity.

The source said the Chinese paper envisaged the International Monetary Fund's Special Drawing Rights (SDRs) being first assigned a role of a clearing currency on some transactions and then gradually becoming the main global reserve currency. "They said that the role of reserve currency should be given to SDR," the source said.

A U.N. panel of experts is also looking at using expanded SDRs, originally created by the International Monetary Fund in 1969, but now used mainly as an accounting unit within similar organisations as a new reserve currency instead of the dollar.

Currency specialist Avinash Persaud, a member of the U.N. panel, told a Reuters Funds Summit on Wednesday that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and against those inside the basket....