Simon Johnson: Money, Power, and the Rule of Law

The dominant political parties in the US or the UK really 'get this,' because they do not want to. They are fine with collaborating with the status quo as long as it serves them.

They have become a brothel for the monied interests and nationless corporations.

They seem to have lost their sense of honor and civic duty. It has been choked by greed and selfishness, a lack of empathy and proportion. Their hypocrisy knows no bounds

NY Times
Money, Power and the Rule of Law
By Simon Johnson
October 4, 2012

Economic policy is always torn between helping the broader social interest – lots of ordinary people – and favoring particular special interests. Unfortunately, special interests typically win out in the kind of situation we have in America in 2012, when it’s all about spending money to win friends and influence people.

The most effective way to push back against powerful special interests is to have the same rules for everyone – and to enforce those rules fairly, even when they are broken by the richest and most politically connected people in the land. Attorney General Eric Schneiderman of New York took a major step toward restoring the rule of law this week, by bringing a case against JPMorgan Chase. But it will be an uphill battle; the forces against him are incredibly strong, including some within the Obama administration.

Special interests always want to take over and organize society for their own benefit. In the terminology of economics, there are always some “rents” to be had – meaning some form of extra compensation that you get from tilting the playing field in your favor. Powerful people are always “rent-seeking,” another way of saying that they would like to feather their own nests. And such activities impose costs on society, lowering incomes and limiting opportunities for everyone else.

When money is the primary source of power, the special interests win hands down. They can create advantages for themselves. One way is through the market mechanism – as monopolists did with railroads and industrial sectors at the end of the 19th century.

Or they can capture the government and use state policies to help themselves – for example, by deregulating the financial sector and allowing excessive risk-taking in big banks. The ability to take such risks hurts all consumers and taxpayers while helping the special interests who get this advantage...

Read the rest here.

Net Asset Value Premiums of Certain Precious Metal Trusts and Funds

There was a small reduction in the units outstanding in the Sprott Physical Gold Trust, and a commensurate decline in cash. it looks like some shares were bought back.

The cash level in Sprott Silver Trust continues to decline to historically low levels. I expect they will be doing an expansion sometime in the next few months.

W. E. Pollock: Faux 2012 Debates In a Very Real World

A bit of a rant, but not misplaced.

I did not watch the US Presidential debate, but from what I hear of it, it does sound like the bread and circuses which I had anticipated that they would be. A real discussion of the real issues might accidently trip over the credibility trap that ensnares both parties.

I am also seeing some sentiment on the extremes, of both right and left, that would favor a continuing harder push in the current direction, that would bring about a social dislocation, and more radical change.

Those on the extremes think that they can ride that change into greater power by undermining democracy, or at least further limiting it. And so from their perspective, there can be no compromise. They do not want any, they would like to see a confrontation, an armageddon of sorts, because it would serve their interests. Or so they think.

Welcome to The Hunger Games.

Financial Fukushima: US Big Bank Derivative Bets Double in Six Years To $236 Trillion

Well, the derivatives market is like Fukushima Daiichi before it failed and melted down, when the utility company and the Japanese government were blithely assuring themselves and everyone else that nothing could go wrong. Just as Greenspan and other very important people said nothing could go wrong with the US housing market and the wholesale collateralization of debt. Nothing to see here, move along.

I was working on my own update, between the usual distractions, of the Sept 2012 BIS information, when Peter Miller sent this nice summary of the situation my way. A relatively small number of very large banks represent enormous counterparty risk to the world financial system because of the almost geometric growth of the largely unregulated and historically unprecedented derivatives market.

The distortions caused by such massive leverage ripple through the financial system, with both intended and unintended consequences, including the distortion of real markets and the transfer to and concentration of wealth in the money manipulation sector. And the marriage that the financial sector has made with politics is particularly dangerous to the average person.

This affects every country through the transmission power of the US Dollar and its pre-eminent role in decision making in our financialized world economy.

OurBroker
Big Bank Derivative Bets Nearly Double In Six Years
By Peter G. Miller
October 4th, 2012

America’s major banks now hold derivatives with a notational worth of $225 trillion – about a third of the world total. No kidding. Trillion.

And that’s up from a mere $120 trillion six years ago. Rather than being weened off derivatives, America’s big banks are more deeply entrenched then ever.

Hopefully Wall Street has it figured out just right and there won’t be any major losses, say a few billion here or there. After all, when has Wall Street ever been wrong about financial instruments?

“Derivatives are dangerous,” says Warren Buffett. “They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks.”

While many in Washington would like to limit derivatives trading, make such trades open to public scrutiny or both, Wall Street is vehemently against regulation.

In fact, there’s a simple way to resolve derivative worries. Allow unlimited derivatives trading — but only by individuals and partnerships willing to personally take the risk of profits and losses...

According to the Bank for International Settlements (BIS), the notational value of derivatives at the end of 2011 was $648 trillion.

The gross credit exposure from these securities was believed to be $3.912 trillion according to the BIS — that’s up from $3.5 trillion at the end of 2009.

But what if the estimates are wrong? For instance, let’s say losses are just one tenth of one percent bigger than expected. Not a big deal, except in the context of international derivative levels that’s more than $640 billion.

Do taxpayers have exposure? You bet. According to the FDIC, at the end of June 2012 all depository institutions held derivatives with a notational value of $224,998 trillion. However, such bets are not spread across the entire banking system. Banks with at least $10 billion in assets hold virtually all derivatives, securities with a notational value of $224.803 trillion. While the FDIC insures deposits in some 7,200 banks and savings associations, only 59 FDIC-insured institutions have deposits of more than $10 billion. Your little community bank, savings association or credit union likely has no derivatives department.

Derivatives are simply bets. They finance no factories, no research, no colleges, no homes and no cars. Any jobs they produce are incidental and inconsequential relative to the potential risk they represent, the risk that credit exposure has been incorrectly figured by hundreds of billions of dollars if not more. Since big banks hold virtually all derivatives, and since taxpayers can face massive costs if big banks fail, it follows that something should be done to limit taxpayer risk....

Read the entire story with an explanation of derivatives here.

Here is a glossary of terms which you might wish to keep.