In retrospect it should become increasingly clear to most that the Federal Reserve and its associated money center banks were responsible for systematically undermining all regulatory restraint and sound judgement for the sake of their private profits, without regard to the resultant destruction visited upon the public and the larger global economy.
To suggest that the regulatory process should now be concentrated in the hands of the Federal Reserve, still opaque and arrogant, is disgraceful and disqualifies the public officials from service who promote such a travesty of common sense and prudence.
Guardian
Banking system like South Sea bubble, says senior Bank of England official
by Ashley Seager
1 July 2009 13.26 BST
'Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison,' says executive director for financial stability, Andy Haldane
A senior Bank of England official today compared the banking system over the last 20 years to the South Sea bubble of the early 18th century and said bankers had merely "resorted to the roulette wheel" to keep up with each other.
The Bank's executive director for financial stability, Andy Haldane, said in a speech in Chicago that having been stable over much of the 20th century, returns in the banking system relative to the wider stockmarket shot up after 1986 until 2006.
"Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison," he said.
He said bankers and policymakers became seduced by the excess returns available: "Banks appeared to have discovered a money machine, albeit one whose workings were sometimes impossible to understand.
"One of the South Sea stocks was memorably 'a company for carrying out an undertaking of great advantage, but nobody to know what it is'. Banking became the 21st-century equivalent."
He said banking returns over the period were magnified by leverage as banks borrowed excessively, he said.
During the golden era, competition simultaneously drove down returns on assets and drove up target returns on equity. Caught in this crossfire, higher leverage became banks' only means of keeping up with the Jones's. Management resorted to the roulette wheel."
He noted that the 80% slump in bank shares since the credit crunch hit meant that returns from the sector were now back in line with their longer-run average (see graphic above). The market capitalisation of global banks has fallen by $3tn (£1.8bn) since the crisis began, he said.
"We should aspire to a financial system where there is greater market and regulatory scrutiny of future such money machines. In achieving this, there is a role for some body – a systemic overseer – which is able to detect incipient bubbles and fads and, as importantly, act to correct them. This role is about removing the punchbowl from future financial sector parties." (We had a group that were responsible for doing this. They were called The Federal Reserve under Alan Greenspan. And Greenspan became the whoremaster of ceremonies for perversion of finance in the bubble economy. - Jesse)
He said that in future there would have to be a greater distinction between management skill, which improves return on assets, and luck, when return on equity can be magnified by leverage.
"Good luck and good management need to be better distinguished. Put differently, returns to investors and managers need to be more accurately risk-adjusted if the right balance between risk and return is to be struck for individual firms and for the financial system as a whole."
A second lesson, he added, was that there would have to be much stricter system-wide limits on leverage, particularly among big banks whose stability is crucial to the whole financial system. (Perhaps some prohibition of the types of activity that banks can engage in like Glass - Steagall? Oh yes, we had that as well and the banks repealed it with the help of the Federal Reserve. Perhaps we should have regulatory reform and place all the oversight responsibility with one group. Like the Federal Reserve? - Jesse)
"For a number of diseases, 20% of the population account for around 80% of the disease spread. The present financial epidemic has broadly mirrored those dynamics," he said, adding that the failure of a core set of large, interconnected institutions such as Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers and AIG contributed disproportionately to the spread of financial panic. (In this case there are a few Typhoid Mary's with names like JP Morgan and Goldman Sachs and Morgan Stanley, and they are still hard at work - Jesse)
"Epidemiology provides a second key lesson for financial policymakers – the importance of targeted vaccination of these 'super-spreaders' of financial contagion. Historically, financial regulation has tended not to heed that message." (Vaccination is one approach. Wall Street and the City of London really need a dilation & curretage - Jesse)
He welcomed a recent move by US authorities to bring the trading of credit derivatives, which were at the heart of the crisis, on to exchanges so they could be better understood and controlled. "This is a bold measure and one which deserves international support."
Haldane's speech was part of a growing debate among global policymakers to try to build a better system of regulation and control of the financial system to prevent such crises as the current one from occurring again.
01 July 2009
The Banking Bubble Began in 1986, Was Like 'the South Sea Bubble' Says Bank of England Official
Hasta La Vista Baby
Here's a green shoot for you to chew on in your happy place...
This news item merited a thirty second mention on Bloomberg Television with an immediate resumption of rally jubilation and feel good news. And on the personal interest side, poor Karl Malden has died at age 91.
I wonder if there are credit default swaps on California? Woo hoo. Bring on those records bonuses for the boys in the back room.
Bloomberg Wire.... Governor Arnold Schwarzenegger declares "a state of emergency" for the State of California in its budget crisis.
As of 2007, the gross state product (GSP) is about $1.812 trillion, the largest in the United States. California is responsible for 13 percent of the United States gross domestic product (GDP). As of 2006, California's GDP is larger than all but eight countries in the world.
China Requests Debate on Reserve Currency at G14 Summit
China is proposing a new reserve currency regime less dependent on the dollar, along with other BRIC countries, and the US and its financial allies in the status quo will resist change because it is in their short term interest to do so.
China can take 'pre-emptive' action by diversifying its holdings ahead of any change, and there are some indications that it is doing so already. But while the dollar is the prime medium of international trade, China must buy dollars to support its mercantilist industrial policy. Its own alternative is to boost its domestic consumption and 'grow a middle class' which in some minds erodes the power of the narrow political elite which rules the country.
The US needs to stand firm in some areas, and acquiesce in others. Standing firm with regard to the yuan being free of a peg and currency controls is one area that ought to have been sine qua non when first Clinton and then Bush gave China its openings as a preferred trading partner even while maintaining de facto industrial subsidies through its currency and markets.
The first line of negotiation will be to agree on a dollar substitute, which will probably be the SDR. The US will resist and delay this as long as is possible.
The fallback position then will be the composition of the SDR, and a long phasing of the change in the primacy of the dollar and a few G7 currencies. China will seek more diversity and the inclusion of gold and silver, which is anathema to the Wall Street banking cartel.
The US must change or face more seismic, involuntary dislocations. As Britain surrendered its far flung colonial Empire, so the US must downsize its financial sector, restore balance to its own economy and its place in the world economy, and relinquish the primary reserve currency status which has become a powerful instrument of manipulation by the Wall Street banking cartel.
The dollar is the last, the mother of bubbles. Few understand this even now.
The epic US credit expansion was enabled by the preferred position of US debt instruments as the reserve currency of the world. The bond and the dollar are the absolute foundation of that debt pyramid.
Those days are undeniably over. What comes next and in what order and timing remains open to question for sure, but that substantial change is occurring is not.
The difficulty is that the financial institutions are a powerful influence over many key politicians in Washington and London and thought leaders and media outlets around the country, and in some parts of the world.
The military-industrial complex of which Eisenhower warned has become a real impediment to freedom in the US, but ironically it is not the manufacturing sector but the service, or FIRE sector, which has its grip on US political decision-making.
Obama could have changed this and there was hope that he would, but all that he has does so far appears to demonstrate that he and his advisors are fully compromised by the potent financial interests controlling their country.
What comes next, no one can say. But change is in the wind, and with that change comes the rise and fall of powerful but all too human institutions which many still believe can last for a thousand years, even as they are on the brink of der untergang, their downfall.
Reuters
China requests reserve currency debate at G8
Wed Jul 1, 2009 11:58am EDT
July 1 (Reuters) - China has asked to debate proposals for a new global reserve currency at next week's Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said on Wednesday.
One G8 source who was involved in the negotiations said China made the request during preparatory talks about a joint statement to be issued on the second day of the summit in L'Aquila by the G8 plus the G5 (Brazil, India, China, Mexico and South Africa) and also Egypt.
This forum, the so-called "G14", meets on July 9 to discuss the financial crisis, trade and climate change and for the first time a G8 summit will also produce a joint G14 statement.
A European source with knowledge of preparations for the summit also said China had raised the subject of a reserve currency debate and that it might be mentioned during the meeting, though the source added: "Any country at the meeting can raise issues they see fit." (China is not just 'any country' these days - Jesse)
"But whether there is a specific mention in the communique remains open," said the European source, adding that sherpas would discuss this further in preparatory talks on Friday.
The debate centres on proposals by some emerging powers that an alternative should be found to the U.S. dollar as the global reserve currency, to reflect the shifting balance of power in the globalised economy.
China's central bank governor said in March the world should consider using the International Monetary Fund's Special Drawing Rights (SDRs) as a super-sovereign currency. The SDR is an international reserve asset allocated to IMF members and its exchange rate is determined by a basket of dollars, euros, sterling and yen. (China also wishes to modify its composition - Jesse)
But the Chinese proposal failed to gain ground after several world leaders, and officials from the IMF, backed the dollar as the global reserve currency. (Reporting by Reuters bureaux)
