It's Not Your Grandfather's Bank Run...Yet

Yes, we understand that it is considered the duty of those in charge, the usher in the burning theatre, to maintain order, and certainly NOT to create a panic rush for the exits. But we wonder at what point as they reassure the public to remain placidly in their seats eating popcorn with their kids, and shut off the fire alarms, and describe the smoke wafting in between the rows as cigarette fumes from the Ladies Lounge, that a fine line in motive and outcome is crossed. And as the privileged few are allowed to slip out the side doors first, after collecting their expensive coats and valuables, we wonder at what point this becomes something more than the duty of a public servant, and a despicable act of fiduciary negligence.

Wall Street Bank Run
By David Ignatius
Thursday, February 21, 2008; Page A15
Washington Post

It doesn't look like an old-fashioned bank run because it involves the biggest financial institutions trading paper assets so complicated that even top executives don't fully understand the transactions. But that's what it is -- a spreading fear among financial institutions that their brethren can't be trusted to honor their obligations.

Frightened financiers are pulling back from credit markets -- going on strike, if you will -- to escape the unraveling daisy chain of securitized assets and promissory notes that binds the global financial system.

As each financier tries to protect against the next one's mistakes, the whole system begins to sag. That's what we're seeing now, as credit market troubles spread from bundles of subprime residential mortgages to bundles of other kinds of debt -- from student loans to retailers' receivables to municipal bonds.

Investors are nervous because they aren't sure how to value these bundles of securitized assets. So buyers stay away, prices fall further, and the damage spreads.

The public, fortunately, doesn't understand how bad the situation is. If it did, we might have a real panic on our hands...

The answer to Wall Street's bank run may be a version of what saved Main Street banks during the Great Depression. President Franklin Roosevelt created the Federal Deposit Insurance Corporation in 1933 to reassure the public that there was an insurer of last resort for the banks -- and that people's money was safe even if they couldn't see it or touch it or put it under a mattress. Rep. Barney Frank and other congressional experts are weighing different approaches to this problem of how to backstop the markets...

The hubris in this system was Wall Street's confidence that it could value paper securities that had been sliced and diced so many times that they no longer had solid connections to their underlying assets. [the essence of a bubble - Jesse]

The nation's leading financier, Warren Buffett, had warned years before that "derivatives," whose value was balanced loosely on the real assets underneath, were the equivalent of "financial weapons of mass destruction." But in the rush for profits, nobody listened. [His was a lonely voice in a stream of propaganda to the contrary, and conspiculous silence from almost all the financial commentators, economists, and media - Jesse]

I've saved the worst for last. Do you want to know who is bailing out America's biggest banks and financial institutions from the consequences of their folly -- by acting as the lender of last resort and controller of the system? Why, it's the sovereign wealth funds, owned by such nations as China and the Persian Gulf oil producers. The new titans are coming to the rescue, if that's the right word for their mortgage on America's future.

We respectfully differ with Mr. Ignatius on two points. The people did not "ignore" the warnings. The warnings were willfully muffled by the corporate media, and a steady stream of financial and government propaganda which assured them that the problem is contained, the stock markets are rising, the Fed's got your back, and so all is well.

Secondly, if the foreign Sovereign Wealth Funds pick up the tab for this, it might well be the desired endgame for the insiders and politicos, because in the ensuing liquidation the SWFs will be demonized and their markers will be ripped to shreds and tossed, one way or the other. When Wall Street and Washington look for someone to take a visible hit on this, it will be those who don't vote and don't sit on juries.

The best bet is that whatever cannot be laid off to foreigners is going to be spread over the American public, probably as a monetary inflation and a continued lowering of living standards for all but the top 1%. And a maximum effort will be made to "move on," and the same people that caused it will convene committees to come up with programs and reforms to fix the problems, and administer cursory slaps on the wrist for the worst of the perpetrators, with a few designated scapegoats taking the big hits. Déjà vu all over again.

But is now the time for abstract discussions about economics and stewardship? As a practical observer might conclude when the seas withdraw ahead of an approaching tsunami: head for higher ground!

IMF External Relations Department,
Morning Press
Thursday, February 21, 2008
Wall Street Bank Run
David Ignatius, a Washington Post columnist, wrote today..."Wall Street Bank Run" Washington Post

We're Going to Make the Banks an Offer They Can't Refuse

Can you believe that there are people who think the forced splitting of the monoline insurers, like MBIA and AMBAC, into two entities would be a positive development for the banks?

The setup is that Eliot Spitzer's insurance enforcer, Eric "The Shiv" Dinallo, has brought the banks and the insurers together and made them an offer they can't refuse.

"Look, you truffatore have a good thing going down there in the City, running the stock market numbers rackets. And we envy the regulators and politicians you have in your pockets. But this move into counterfeit AAA debt and subprime is hurting the municipal and state bond business. That's our turf, and we don't like it when coglioni mess with our thing.

You banks are going to have to bail out these monoline insurers, and we don't care what deals you have to make to get the dough from Benny the Banker and Omar "the Turk" Sovereignfunzo, because we're not going to the public again to save you mamalukes. The terms are between them and you.

Oh, you're going to talk to your Texas stoonads in Washington? Fuhgheddaboutit! Barack "Bumpy" Obama from Chicago has them si stanno cagando sotto. Their scam has had a nice run but you can stick a fork in it fa Nabola, its done. A few of them are going to be sleeping with the fishes before this is over.

So you either paga in anticipo and make the problems you caused for us go away, or we are going to split up the monolines, take all the good parts to protect our business, and you are going to be picking about $580 billion worth of CDO and bad debt tranches out of your culone for the next ten years. Capice?"

New York's Dinallo Considers Splitting Bond Insurers
By Christine Richard and James Tyson

Feb. 14 (Bloomberg) -- Bond insurers may be split into two businesses in what would be the biggest overhaul of the industry since it was created almost four decades ago.

New York Insurance Department Superintendent Eric Dinallo said such a separation is one of the proposals regulators have been discussing with bond insurers, including MBIA Inc. and Ambac Financial Group Inc.

``One would have the municipal bond policies and any other healthy parts of the business,'' Dinallo said in prepared testimony for a hearing today of the House Financial Services subcommittee on capital markets in Washington. ``The other would have the structured finance and problem parts of the business.''

New York Governor Eliot Spitzer told the committee that the step, while ``not optimal,'' may be necessary if the companies can't raise the capital needed to stave off credit-rating downgrades. The world's largest bond insurers may lose the AAA ratings they use to guarantee $2.4 trillion of municipal and mortgage-backed debt, casting doubt on the rankings of thousands of schools, hospitals and local governments around the country.

Dinallo said his main goal is to protect the municipal borrowers and debt holders. Executives of Armonk, New York-based MBIA and Ambac are also scheduled to appear before the committee and will say they can survive the slump in mortgage securities.

Recapitalization

The best option is to recapitalize the bond insurers and stabilize the companies without dividing them, Spitzer told reporters after his testimony. ``That could happen within a couple of days [or else],'' he said.

Dinallo last month organized banks to begin plans for a rescue of the insurers and said he may consider tightening restrictions on what bond insurers can guarantee.

Splitting the companies in two was proposed by billionaire investor Warren Buffett, who this week said he offered to take over $800 billion of the municipal debt guaranteed by MBIA, Ambac and FGIC Corp., the fourth-largest bond insurer. The plan would leave behind the guarantees on mortgage-backed securities and other corporate debt responsible for the companies' losses.

Spitzer told the committee that such a ``good bank, bad bank structure,'' may be necessary if other rescue plans fail. Federal regulation may also be needed, he said. [Never screw with an ambitious district attorney].

``I am not opposed to federal regulation but how and when it is done needs to be thought through,'' Spitzer said in an interview with Bloomberg Television. [I'm not letting those clowns get in on this until OUR problem is solved.]

Insurers are supervised by states rather than the federal government, with New York often taking a lead role. New York regulates bond insurers under Article 69 of the state insurance law, Spitzer said in his testimony, calling the statute ``the standard for state insurance departments around the country...''

To contact the reporter on this story: Christine Richard in Washington at crichard5@bloomberg.net ; James Tyson in Washington at jtyson@bloomberg.net

Last Updated: February 14, 2008 16:14 EST

After Many a Summer Dies the Swan

"The woods decay, the woods decay and fall,
The vapours weep their burthen to the ground,
Man comes and tills the field and lies beneath,
And after many a summer dies the swan.
Me only cruel immortality
Consumes; I wither slowly in thine arms,
Here at the quiet limit of the world,
A white-hair'd shadow roaming like a dream
The ever-silent spaces of the East,
Far-folded mists, and gleaming halls of morn.
Alas! for this gray shadow, once a man--
So glorious in his beauty and thy choice,
Who madest him thy chosen, that he seem'd
To his great heart none other than a God!"
Tithonus, Alfred Lord Tennyson

The recognition of a US slide into stagflation is beginning to appear in the mainstream media, in this case The New York Times. A slackening in aggregate demand was offset by higher prices paid for necessities such as food and energy, which are running at the shocking annual rate of 13%. This is no surpise to use, as it is in-line with the growth of broader monetary aggregates such as MZM.

It has been the custom of Americans since WWII increasingly to place their savings in their homes, or the housing portion of their balance sheet. The decline of total credit outstanding as debt defaults increase will be charged against the value of that housing asset, which is equivalent to the US consumers savings account. Money is the transmission mechanism between balance sheets and income statements. Therefore we see no fundamental reason for the aggregate money supply to contract, except for brief periods of liquidity constriction which will be more than offset by the Fed. generating monetary inflation as it attempts to restore the bank's balance sheets.

The US middle class will receive the worst of all worlds: higher prices for necessities while their savings evaporate, in large part to underpin the financial system and rescue the banks, ironically securing the advantage gained by the top 1% of US families over the past 27 years, from Reagan to Bush. The situation is a classic case of overreach by the ruling elite.

We expect this trend to intensify, wax and wane, and not abate until median US wage growth starts to outpace inflation. This will require a much cheaper dollar than we have today, perhaps on the order of thirty-five percent or more, to achieve a sustainable equilibrium.

These gains cannot be achieved solely against the euro, but must include the Asian countries running large trade imbalances with the US. Since this conflicts with their long established mercantilist industrial policy we can look for considerable turmoil in the world's government-managed markets. Trade wars will be interspersed by localized military conflicts in resource important areas at worst if we are fortunate.

Politically it will be a replay of the politics of the New Deal in which a Democratic majority attempts to reform and provide relief, while a Republican minority in Congress and a Republican backed Supreme Court use every method to thwart and overturn these reforms and programs.

Unless the Fed mismanages the situation badly, or there is a precipitous shift in world reserves away from the dollar, we believe that hyper-inflation is as unlikely as a true monetary deflation in the US. Stagflation of varying intensity for a period of fifteen years of adjustment seems more probable, unless it is interrupted by an exogenous global conflict or domestic revolutionary change. The desired outcome which will be proffered by the power elitest will be a regional to global oligarchically managed economy.

"FACED with tightening credit and a slowing economy, America’s consumers are being forced to scale back their purchases, but high prices of necessities are keeping their overall purchases rising at a reasonably strong rate.

The retail sales report for January showed overall retail sales that were stronger than many economists had expected, and was well received by the stock market on Wednesday, the day it was released. In total, retail sales are running more than 4 percent over the level of a year ago, an increase that is above the overall inflation rate and much stronger than the sales were when the last recession began in early 2001.

But the overall change is misleading. One reason for its strength is that prices of necessities are up sharply over the past year, meaning that those items consume more and more of the household budget, leaving less for other things.

Over all, Americans are spending about 13 percent more on food and energy now than a year ago. The figures, as are all the figures shown in the charts accompanying this article, are based on three-month moving averages of seasonally adjusted figures, and compare this year with last year."

New York Times, Floyd Norris, Feb 16, 2008

The Dollar Vs. the Euro

A brief discussion of the Dollar Vs. the Euro by Tom Campbell, Haas School of Business, UC Berkley.

The Dollar Vs. the Euro: Video Presentation

A Chart of the Euro Versus the US Dollar Index

A Chart of the Euro and US Dollar Index Versus the Currency of Enduring Resort

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.(1967)...Gold still represents the ultimate form of payment in the world....(May, 1999) " Alan Greenspan

"Gold is not necessary. I have no interest in gold. We will build a
strong state without an ounce of gold behind it. Anyone who sells above
the set price, let him be marched off to a concentration camp. That's
the bastion of [fiat] money." Adolf Hitler