The Banks Must Be Restrained, The Financial System Must Be Reformed

There has been a loss of perspective with regard to the financial sector led by the Anglo-American banking interests.

This will have to change before there can be a sustainable economic recovery. This will be difficult to accomplish, because there exists a fusion of corporate and government desires to control the distribution of wealth and power that is opposed to any significant reforms.

"A certain type of person strives to become a master over all, and to extend his force, his will to power, and to subdue all that resists it. But he encounters the power of others, and comes to an arrangement, a union, with those that are like him: thus they work together to serve the will to power. And the process goes on." Friedrich Nietzsche, The Will to Power

Until then the world will experience a series of asset bubbles and increasing disparity in wealth and political power between the productive and administrative sectors of the economy ad society. This will continue until it becomes unsustainable, and unstable. And then it will change, as it always does.

UK Telegraph
Ex-Fed chief Paul Volcker's 'telling' words on derivatives industry
By Louise Armitstead
9:41PM GMT 08 Dec 2009

The former US Federal Reserve chairman told an audience that included some of the world's most senior financiers that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful".

Echoing FSA chairman Lord Turner's comments that banks are "socially useless", Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.

When one stunned audience member suggested that Mr Volcker did not really mean bond markets and securitisations had contributed "nothing at all", he replied: "You can innovate as much as you like, but do it within a structure that doesn't put the whole economy at risk."

He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and "proprietary trading should be pushed out of investment banks and to hedge funds where they belong".

Mr Volcker argued that banks did have a vital role to play as holders of deposits and providers of credit. This importance meant it was correct that they should be "regulated on one side and protected on the other". He said riskier financial activities should be limited to hedge funds to whom society could say: "If you fail, fail. I'm not going to help you. Your stock is gone, creditors are at risk, but no one else is affected."


Times UK
‘Wake up, gentlemen’, world’s top bankers warned by former Fed chairman Volcker
By Patrick Hosking and Suzy Jagger
December 9, 2009

One of the most senior figures in the financial world surprised a conference of high-level bankers yesterday when he criticised them for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms.

Paul Volcker, a former chairman of the US Federal Reserve, berated the bankers for their failure to acknowledge a problem with personal rewards and questioned their claims for financial innovation.

On the subject of pay, he said: “Has there been one financial leader to say this is really excessive? Wake up, gentlemen. Your response, I can only say, has been inadequate.”

As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”

Mr Volcker’s broadside punctured a slightly cosy atmosphere among bankers and regulators, assembled in a Sussex country house hotel to consider reform measures, at the Future of Finance Initiative, a conference organised by The Wall Street Journal.

Another chilling contribution came from Sir Deryck Maughan, a partner in Kohlberg Kravis Roberts, the private equity firm, who in the 1990s was head of Salomon Brothers, the investment bank.

He warned delegates that many of the flawed mathematical techniques that underpinned banks’ risk management approaches were still being used, saying that the industry had not “faced up to the intellectual failure of risk management systems, which are still hardwired into many banks and many trading floors”.

Sir Deryck also questioned whether it was right that taxpayers should continue to underwrite many of those risks: “There’s something wrong about large proprietary risks being taken at the risk of taxpayers. The asymmetry will not hold. I’m not sure we’ve thought about that.”

Earlier Baroness Vadera, adviser to the G20 — and an adviser to Gordon Brown during the banking crisis — had warned the world’s most senior bankers that continental lenders had yet to acknowledge the scale of their losses and bad debts. She said: “It’s not the UK banks that have to come clean, but some of the continental banks still have issues.”

She added that, contrary to City assumptions, the supposedly hardline French and German governments were more relaxed about leverage and liquidity constraints than Britain and America.

The former UBS banker said that she continued to have nightmares about how close the British banking system came to collapse last year.

She also warned bankers that the G20 process was “like herding cats” and that one of the main problems with the group of the world’s wealthiest nations was that they did not want to give up national sovereignty and co-ordinate their behaviour.

Meanwhile, George Soros argued that CDS should be banned. The billionaire investor likened the widely traded securities to buying life assurance and then giving someone a licence to shoot the insured person.

“They really are a toxic market,” he said. “Credit default swaps give you a chance to bear-raid bonds. And bear raids certainly can work."

They Were Making It Up as They Went Along - And Still Are

"Mr Kashkari admitted that he plucked “a number out of the air” when deciding with Mr Paulson how much funding to request from Congress for the Tarp."

A telling memoir of the financial crisis by neo-mountain man Neel Kashkari, soon to be maven of what he hath wrought at bond insiders firm Pimco. Where did the $700 Billion Paulson Plan come from? Neel simply made it up.

They not only did not know then, as should have been painfully obvious to anyone who looked at the ten page request for $700 billion or else, but they also do not know now. When you do not have the facts to support your case, employ fear, uncertainty and doubt (aka FUD factor).

There is an all too human tendency to give credit to planning and forethought to experts, particularly those in key positions, in both government and corporate life.

One of the most surprising things I learned as a young man working his way from the hinterlands of a multi-national behemoth into the lofty towers of headquarters is that quite simply, they do not know. They are too often just frightened people making it up as they go along. Decision making too often comes down to verbal acuity, cults of personality, tides of emotion, and totemistic tribalism.

And the scary part of course is that the same can be said of the Bernanke's Gamble today. They just do not know, but can only hope for the best, and make corrections as they go along. Ben is just doing what worked last time, with a modification for what has been perceived as the 'one big error' the Fed made in deepening and extending the Great Depression.

It is, after all, the best that can be done with what is hardly a science, more akin to medieval medicine than geometry. Bernanke, Master of Leeches.

But these modern day monetary witchdoctors are wielding enormous power over the people and the nations of the world, and they are most likely making it up as they go along, with all the avenues of corruption, groupthink, self-interest, and self-delusion that this implies.

It is hard to think of a better characterization of the Obama Administration than a dysfunctional US corporation led by a high profile CEO surrounded by mediocre functionaries with enormous egos and retinues, bounded by special interests, losing its long-time monopoly status, foundering on the unyielding rocks of change. The decline of the Soviet Union redux, writ larger.

Then as now, the world is giving 'the experts' far too much credit for knowledge and forethought, and most sadly, wisdom.

In February 2008, Mr Kashkari was charged with drafting an emergency plan in case the credit crunch became a full-blown financial crisis. By October the crisis had arrived and his ten-page plan became the blueprint for the banks' bailout that Mr Paulson presented to Congress.

Mr Kashkari admitted that he plucked “a number out of the air” when deciding with Mr Paulson how much funding to request from Congress for the Tarp.

He told The Washington Post that he used his BlackBerry to calculate the bailout figures: “We have $11 trillion residential mortgages, $3 trillion commercial mortgages. Total $14 trillion. Five per cent of that is $700 billion. A nice round number.”

Recalling a conversation with Mr Paulson, he said: “It was a political calculus. I said, ‘We don't know how much is enough. We need as much as we can get . What about a trillion?' 'No way,' Hank shook his head. I said, 'Okay, what about 700 billion?' We didn't know if it would work. We had to project confidence, hold up the world. We couldn't admit how scared we were, or how uncertain.” The American Bailout Nightmare - Times London

Gold Daily Chart

A fairly brutal correction from an overbought condition.

Ben relieved the downward pressure today when he dispelled the myth that the US will be raising interest rates any time soon.

What seems a little funny is that so many are commenting on the US economy and markets as though this has been an ordinary cyclical recession and it is done.

We think this is something obviously a little more 'consequential' given the years of reckless excess and malinvestment that have led up to where we are today.

The crisis is not over, not by a long shot. What we have seen so far is prelude.

US Dollar Very Long Term Chart