Iceland's Failure: Not All Banana Republics Deal in Bananas

Here is a nice snapshot of an oligarchy at work in a small country. It is a microcosm of the United States. One only has to substitute "major corporations" for power individuals and the parallel becomes more obvious.

It appears to outsiders that in the US, rather than reform or change, rival organizations are in conflict with each other in the US for the spoils of corruption, and alternatively exchange political power to provide the appearance of change, but never relinquishing the primary mission of transferring wealth from the many to their own particular constituents.

The solution in Iceland is for a third party, a progressive party, to rise up and be supported in the elections, despite the stiff opposition from the status quo. Iceland is a small country and its citizens on average reasonably well educated and easily reached. They simply need to get seriously concerned for the future of their children and grandchildren and take control of their country back from the political elite.

It is a much more daunting task for a third party to bring reform to a large country with diverse population, often easily managed into conflict with each other by propaganda from a co-opted mainstream media. Potential leaders often have large egos, and in the States bloggers too often tend to enjoy squabbling with each other over relatively inconsequential things, rather than the primary task at hand. I wonder if it is the same way in Iceland?

UK Telegraph
David Oddsson's ascent to Iceland's editor in chief splits opinion as bloggers gain ground
By Rowena Mason
September 29th, 2009

Plus ca change! And I thought Iceland was moving on from a society where the same elite that caused the financial crash held an iron grip on public life,” groaned one resident of Reykjavik.

The cause of her dismay was the news that David Oddsson, the former prime minister and central bank governor has been appointed editor of the country’s best-respected newspaper.

Only six months ago, shortly after a change in government, he was forced out of the central bank as campaigners lobbied for a new order to help the country recover from the failure of its banking system a year ago.

Mr Oddsson – whose Thatcherite policies led to the privatisation of Iceland’s three big banks in the 1990s – inspires both extreme devotion and antipathy in his home country.

Many blame him for de-regulation of the financial system in the years before the collapse that sparked a domino of corporate bankruptcies, rising unemployment and an investigation into “suspicions of criminal activity” at the failed banks.

Others, including one reader who emailed me this morning, believe the appointment of Mr Oddsson will be a steady force for good behind the many excellent reporters uncovering suspected corruption in Iceland’s financial system.

A couple of Morgunbladid journalists I spoke to were ambivalent – surprised by the choice, but willing to give Mr Oddsson a chance as an editor who must hold those who contributed to the crash responsible.

However this flamboyant politician chooses to sit in his editorial chair, the fact remains that almost a year after the crash Iceland has not yet quite escaped the financial and political powers who have a strong interest in maintaining the status quo and protecting their reputations.

One of the main factors behind Iceland’s financial implosion – an extreme microcosm for the problems in the rest of the world – is the secrecy, interconnection and conflicts of interest in its public life.

That the major shareholders of the banks also owned much of the non-state media undoubtedly helped to perpetuate many myths about Iceland’s economic strength.

Frettabladid, a free newspaper distributed to every home, and Channel 2 television, are both still owned by Jon Asgeir Johannesson – whose companies are strongly linked to Glitnir, one of the collapsed banks, and Baugur, the failed retail giant that owned dozens of British high street shops.

Another television channel, Skjareinn, is backed by the brothers that owned the biggest share of Kaupthing, Iceland’s biggest failed bank.

And Morgunbladid itself was previously owned by Bjorgolfur Gudmundsson, one of a billionaire father and son team behind the third collapsed bank, Landsbanki. It is now in the hands of fishing magnates, who fiercely oppose Iceland’s entry to the European Union out of fear that quotas may be restricted.

One consequence of the links between big business and the media has been that the Icelandic public’s faith in traditional and official sources of news has started to erode, increasing reliance on blogs to provide news services, spread gossip and provide a discussion forum.

This has increasingly irritated some of Iceland’s financiers. Lydur Gudmundsson, one of the two brothers who backed Kaupthing, has publicly blamed bloggers for creating a negative atmosphere and pointing too many fingers.

It’s a sure sign that these new media journalists, empowered by the internet, are digging around in the right back yards.

The Utility of Gold and Silver Over the Past 200 Years

A bit of an oversimplification as one might expect for a short video, but rather effective in making its several of its points. Some interesting data as well.

Warren Buffett has asked "What utility does gold have?"

Since his views are respected and he is unusually successful, it is important to consider this question.

The utility of gold is that it resists the manipulation of the statists, which is why they hate it. It provides a store of wealth that is difficult for the state to confiscate through debasement. Gold and silver have represented the instruments of freedom and safety, a secure store of wealth, for individuals faced with adversity and uncertainty over thousands of years.

For quite some time the various pieces of evidence with regard to the Central Banks and gold have been becoming public. It seems to this reader, based on a careful search and consideration of the facts, that the attempt to control the price of gold and to a lesser extent silver by some of the Banks, led by the Brits and the Yanks, is almost certain as an adjunct in their efforts at financial engineering.

But the Banks are failing. They are failing in particular since the market break of 2000 when the first of the post Asian financial crisis bubbles collapsed. They are being broken, once again, by the physical buying coming in particular from Asia and Europe, where currency risk is a familiar concept. Most American go through their lives never having handled another currency except the dollar, and their education in finance, and even their own history, is sadly lacking. For them, the US dollar is the monetary alpha and the omega, and its decline is incomprehensible.

We are now in the midst of a new financial bubble in world equity markets, and it too will collapse.

This is not to say the future will be straightforward and simple. It will not.

People sometmes worry about government confiscation. Since gold no longer has any official status in the US except as private property, this is a bit of a red herring. True, government can try to seize any of your private property not just gold. It can try to force you to wear a number, or imbed a chip in your head, to buy and sell, it can even try to pack you on a freight train for resettlement in New Mexico. The question is not what the state can try to do, but rather, what you will let them do and how you will respond to it.

At the moment the US dollar remains the linchpin of the Anglo-American financial oligarchy. That is it failing is probably one of the great issues facing world stability today.

Right now the Dollar is the subject of an aggressive carry trade, with traders selling it short to buy other assets. This obviously sets up the potential for another short term dollar squeeze such as we saw last year when the Eurobanks were devastated by the failure of the toxic dollar assets on their balance sheets which had to be paid in full in dollars to their depositors.

A reversal in the dollar and the collapse of carry trade would shake world equity markets to their core as the gamblers are forced to unwind positions. The vampire squid and associates would probably benefit, but many would suffer. In today's environment, that makes the possibility of this happening even more likely in our book.

But then again, sometimes things do go down into a long spiral, and finally are priced at 30 on a Friday, and open up on Monday at 2, or 'no bids.' It happens. But usually it happens in slow motion at first with national currencies. It is much easier to boil a batch of frogs slowly than to wade in and start chopping heads.

Likelihood is a dollar rally at some point if stocks start unwinding. And then things get interesting, and ugly. Not with a bounce, but a 'splat,' with interest rates running to levels that would make your jaw drop.

For a longer view and a warning likely to fall on deaf ears, the more the oligarchs and elitists take the world's people through these cycles, the greater they need to pay attention to one lesson that ripples throughout history: the trick is not only how to make a great fortune through theft and trickery, but how to hold on to it, and very likely your life, when the tide turns and the people have finally had enough.



Gold and Silver Video

Japan: An 'On the Ground View' from 1989 to 2009

A Japanese friend who lives and works outside Tokyo sent this description of life in Japan from 1989 to 2009. He thought it might be of interest to our patrons.

In considering prices, it is a good shorthand to think of 100 yen as $1 US. I thought that this was funny because this is the same shorthand price I used when I was working in Japan in the late 1990's.

My friend's opinions are his own.

In the inflation/deflation debate, I think what most people mean is "their own personal cost of living", in view of income, rather than a macroeconomic concept.

Pay, job availability, and expense accounts were nuts 1990 to 1995. Everyone was partying... all week long... Wednesdays were as busy as Fridays and Saturdays. Fun while it lasted, but was everyone actually better off at the time? I guess just more hungover and with more handbags.

Prices were often exaggerated in the media because, well, normal prices have no entertainment value. Of course you can find $200 a pound Kobe beef in high end stores like Isetan downtown, but who actually buys that? Even during the bubble, almost no one. Beef in a normal supermarket was and is about $5 a pound, very high quality, and might be half off at closing time.
Change 0%.

At the local greengrocer, vegetables, like a bag of three carrots, a head of cabbage, or broccoli, was 100 yen 20 years ago, and is 100 yen now. I would say on the whole, in yen terms, that overall food prices have not changed. A nice large whole mackerel, cleaned and salted and ready for the grill, enough for two people, is 100 yen. Tofu is 50 yen a block, 150 yen for premium kinds. A pot of premium Japanese rice is 100 yen, enough for six servings.

Change 0%.

One of the things I notice when I go to the US is that there is almost always only high fructose corn syrup colored water to drink. In Japan, there is almost none of that. 90% of what is on the shelf, even in a convenience store, is 100% fruit and vegetable juice for about 100 yen a carton/bottle... in other words, the same price as a coke. I think at least some of the health problems in the US are due to simple things like that.

Long distance calls went from about 100 yen a minute to 3 yen per minute via internet telephony using, for example, Yahoo Japan broadband. From around a decade ago, you could just pick up a Yahoo broadband modem while walking through a train station, take it home, plug it into the telephone jack, plug your phone into the modem, and suddenly all your calls were 3 yen a minute all day every day to most countries. I did not know at first about the telephony as I was only interested in the broadband. One day, I realized that I had not gotten a long distance bill in quite some time. I made many calls around the holidays, so was bracing for a $500 bill. Instead, there was a $15 charge on my credit card.

A decade ago, the modem was free, the broadband was 6M, and it was $20 dollars a month with the first 3 months free. Currently, the minimum is 8M for about $20 dollars a month. Skype has unlimited worldwide calling for a flat $10 a month. I think this has saved me about $20,000 over the last decade. NTT is very unhappy. New apartments now often include free broadband via optical fiber or cable at 100M.

Change (for me) -90%.

Transportation prices have not changed much in 20 years. As was the case from 50 years ago, your employer will pay for your bus/train pass to go to work up to $800 per month, and you can use the pass to get off at any station in between. Even if you bought the pass yourself, to commute say 10 miles, the pass would be about $150 per month. AAA says to own and operate a new car in the US costs about $800 a month, $9,000 per year, and even if you drive your car until it dies, I think it still costs about $5,000 per year. Most people do not need a car, or have at most one for outings on the weekend.

Savings from free pass, no need for car, $5,000+ per year.

Trains are much safer than cars, and if the Japanese drove as much as Americans, there would be about 10,000 more fatalities per year. Over the last 20 years, there are 200,000 Japanese wandering around unaware that had they been driving like Americans, they would be dead. And many many more injured. If you want to be an actuary about it, assuming as in the US that a death in a law suit is roughly worth one million dollars, that is a benefit of 200 billion dollars, and untold billions less in hospital care, injury, disability, and misery.

Change 0%

A functioning train system means people actually walk 5 or 10 minutes to go to the station. Exercise automatically included, and another simple thing that could improve health in the US. (Every major city in the US used to have rail systems until General Motors and the oil companies and the tire companies bought them and ripped them out so everyone would be forced to buy cars and municipalities would be forced to buy buses. Rigging the system is far from new.)

Another reason you do not need a car here is that the home delivery system is terrific. You can send a box or suitcase anywhere in Japan within two days for less than $20. They will pick it up at your house, or you can send it from any convenience store, and you can specify the day and hour of delivery. Costco has solved the problem of customers needing a car to shop. Delivery of a box, up to 60 pounds, anywhere in Japan, is $6 (That is not a typo. You could send a 60 pound box from Costco in Hokkaido to Nagasaki in Kyushu, a distance of 1,000 miles, for 6 dollars). I shop for me and my friends, divide up the goods into boxes, and just send the boxes to them.

Costco did not have stores here 20 years ago, so hard to say, but I guess:

Change -60%.

WalMart has come to Japan by partnering with Seiyu. This and the proliferation of 100 yen shops (dollar stores) drove prices way down. Goods might be in some cases of lesser quality, but since the price can be 90% off, fine with me. A hammer to pound in a few nails is 100 yen, whereas before it would have been 2,000 yen for one of unnecessarily high quality. Even things like brand name high end shampoos at drug stores have come down by half or more.

On the whole, I would say the cost of dry goods has come way down.

Change -50 to -90%.

National health care is about $3,000 per person per year. No preexisting conditions are ever excluded. You can go to any doctor you wish. There is usually no waiting, so for routine things, people do not even make appointments.

Change 0%.

Energy efficiency has become a mania. From years ago, when Koizumi said "global warming", what he meant was "The cheap oil is running out! Get the energy efficiency up... now!"

Japan Railways cut energy use in new trains by half.

Compact fluorescents were great, but expensive ($10), from a decade ago, but are about to be superseded by LEDs.

LEDs are marketed showing that although they cost $40, they last for 40,000 hours, and you would have to buy 40 incandescents for that period of time, so at 99 cents per bulb, the price is actually the same. The LEDs use 1/10th the electricity. 2 yen per hour; in the US 1 cent per hour. Over 40,000 hours, an incandescent would use $4,000 in electricity, an LED $400. They clearly make economic sense now, and the transition is starting. They are a little dim, but fine for lights you leave on all the time like on the porch. Performance should improve and price of an LED light bulb should drop to about $10 in a few years.

New air conditioners use as little as 6 yen per hour (electricity is 20 yen per kilowatt-hour), so in the US, at an average of 10 cents per kilowatt-hour, that would be 3 cents per hour to run the air conditioner (they are all reversible heat pumps, so also warm in winter), so about $20 per month. Typical cooling August and September with older units like mine is $50 per month, heating December to March about $50 per month.

Change -50 to -90%.

Water is about $20 per month.

Change 0%.

Rent is $700 and up for 600 square feet, depending mostly on distance from downtown, type of building (wooden or concrete) and distance to the train station.
Change -20%.

Per capital floor space in Tokyo has doubled, mostly due to improved construction techniques that allow tall buildings to be built on deep soil, where it would have been previously cost prohibitive, by simply driving the pilings deeper into the soil. This in turn was made possible by Japanese steel manufacturers figuring out how to make super strong structural steel for the same price as regular steel simply by minimizing the energy it takes to process the steel. As in Manhattan, skyscrapers were concentrated where there were granite outcrops. Not any more. You can build tall buildings anywhere for a reasonable cost, and the Ginza 10 story limit is about to go. This should continue to put a lot of downward pressure on real estate prices and rents.

Change 0% to -50%.

Many of the above prices are in yen, as would be experienced by someone working and living in Japan. From 1989 to the present, very roughly, the yen went from 150 to the dollar to 100 to the dollar, with a lot of ups and downs. Although the yen appreciated, there was generally no inflation, and no increase in pay per hour (although the amount of work went down), so if you have a job, things just seem to be mostly unchanged over the last two decades. Although much reference is made to Japan's "lost decades", had you actually lived here and not read the newspaper or watched TV, you would have had no idea that anything bad was happening. There are still almost no vacant stores. Visitors said "Recession? What recession?" It is not at all like New York in the 70s.

What is confusing if you are looking at Japan from the outside is that while prices in yen have basically not changed for 20 years, because the yen increased by 30 to 50% against most currencies, the nominal price as viewed in dollars, pounds, etc., has gone up. However, there has been inflation outside Japan, so that is confusing. When I see salaries in the US, etc., now, I think, "Huh? They pay that much?" But of course, the prices of goods in those countries have gone up.

Using money as a proxy for goods and services is very confusing. The real question is, assuming one has a reasonable amount of work at reasonable pay per hour, what goods and services and of what quality can you get? On the whole, I would say that that has improved, some of the improvement being inherent in improved technology, building construction, etc., some of the improvement from better distribution and competition among retailers, some from the stronger yen, some from energy efficiency and improvements in public transportation. What we want is food, a place to live, electricity, water, telecommunication, education, and health care. If you have those things, you don't really need much money.

In summary, you could expect to live reasonably, within 20 minutes of downtown Tokyo by train on the following annual budget.

Rent $10,000 (60 square meters, 600 square feet)
Health insurance $3,000
Food $3,000 (if you cook yourself most of the time)
Electricity (heating and cooling included) $1,000
Water $300
Gas $300
Telephone and broadband $700
Transportation $1,000 (free $1,000 employer provided train pass + $1,000 incidental travel by train, taxi, bus; $8 buys pass for unlimited travel for one day on most subways throughout Tokyo)
(Car unnecessary -$5,000 to -$9,000)
National income tax + local income tax = US federal tax rate.
Consumption tax is 5% on all purchases and most restaurant meals.
Average salary is about $50,000.

Cash for Clunkers Will Go Wrong, But Not For the Right Reasons

If I were to design a stimulus plan, Cash for Clunkers might be among them.

The target of the plan was to incent the public to trade in gas guzzling 'clunkers' for more fuel efficient, safer cars. It provided a spark of buying at a time of serious economic recession.

This is a classic case of promoting an economic and societal 'good' while providing a stimulus to spur economic activity. This is precisely the type of program that Big Business and its demimonde of commentators like when they are the primary beneficiary. Let's say, in a program of tax incentives to promote useful capital expenditure spending. And what many of the private individuals who complain about the program like when it benefits them personally, such as the deduction of mortgage interest.

So why is this likely to fail, at least in part?

That is because the Obama Economic Team, under the leadership of Larry Summers, is grasping at stimulus and aids programs like bank capital asset subsidies that as part of a total package might be useful, but as remedies applied to a sick system do not promote a cure, but merely serve to mask the symptoms.

Stimulus and aid programs do not work when they are merely poured into a system that is broken, or worse, broken and corrupt.

And it cannot be reformed by actors who have been and continue to be willing beneficiaries of its flaws, such as the transference of wealth from the many to the few. Congress and the Administration have to take themselves away from the trough and start acting for the greater good of the people whom they represent, rather than the special interests who give them campaign contributions and fat, overpaid jobs when they leave office.

What we are experiencing is a collapsing Ponzi Scheme, as Janet Tavakoli describes so clearly and yet so well in Wall Street's Fraud and Solutions for Systemic Peril.

This is why we say that the banks must be restrained, and the financial system must be reformed, and the economy brought back into balance, before there can be any sustained recovery.

The Fed and Those Money Market Funds Redux

There is quite a bit of speculation on the reasons why the Fed is eyeing the shadow banking system, aka the Money Market Funds, as a target for the reverse repos when they see the need to drain liquidity from the system.

The following chart shows that as the Fed expanded the monetary base, the liqudity was not being accumulated across the financial system proportionately.

There was a quite obvious parabolic increase in excess reserves held at the Fed as one would expect from a balance sheet expansion, for which the Fed is now paying interest.

From the look of the institutional money funds, one might surmise that beginning with the first failures of major banks, there were heavy flows of liquidity into the institutional money market funds from a variety of sources, with less into the retail funds, and very little change in demand deposits at commercial banks. This would have been consistent with a flight to safety in 'cash.'

Why is the Fed eyeing the money market funds? Two reasons perhaps.

First and most simply because, as notorious criminal Willy Sutton once said, that is where the money is. And if it stays there, the Fed must find a way to affect it to drain liquidity while mitigating the effects of their actions on specific institutions and sectors of the financial system.

Secondly, there is a strong possibility that the Fed's initial attempts to drain will not only involve reverse repos, but also an increase in the interest rate which it pays on the excess reserves.

As you know, one of the reasons the Fed wished to pay this interest rate is as a means of putting a 'floor' under short term rates during a period of significant quantitative easing. If the Fed is paying .15 percent on reserves, for example, it is unlikely that short term rates will fall below .15 percent, without regard for the tranches of liquidity it may be adding to shore up the balance sheets of the banks.

Conventional open market operations tend to become sluggish, if not unmanageable, as one approaches zero rates. Therefore Benny 'got a brand new bag.'

Since the Money Market Funds do not place their excess reserves with the Fed, there is an obvious need to somehow tie them into the process, if one intends to manage it gracefully, not tilting the real economy in one direction or the other, as we are sure our Maestro Ben wishes to do.

It was a bit of an eye opener for us to see this comparison of the Funds with the Banks, and the overall expansion of the Base in the period of fiancial crisis.

Granted, wherever the Fed drains there will be at least a temporary 'crowding out' that needs to be managed carefully. Goldilocks and all that.

No doubt the Banks who own the Fed are keenly interesting in making sure that no additional advantage is being given to the Funds in their ability to attract capital, and invest in even short term paper which might prove advanageous in a recovery. The Vampire Squid and its Merry Band of Lame-os do not like competition.

It is also interesting to note the hints being dropped by various Fed heads for the need to draw the regulation of the Funds under their purview, away from the SEC.

And the SEC is contemplating tougher rules on required reserves for the retail and institutional funds, as well as stricter guidelines on what they may hold on their books.

Sometimes the simplest, most straightforward possiblities are the best. And until additional data may prove otherwise, it does not appear that the Fed wishes to 'dump toxic assets' on the Money Market Funds. Rather, it looks to be all about financial engineering, and a desire to attempt to manage the downstream effects more carefully.

Financial engineering is quite possibly a quagmire, and the Fed in fairly deep within it.

The Federal Reserve School of Monetary Witchcraft and Wizardry

Here are some key excerpts from the account by The Institutional Risk Analyst of his trip to "The International Financial Crisis" conference in Chicago. You may read it in its entirety here.

It matches up with our feel from reading on the web, that most economists are going to be painfully slow to change their thinking, particularly in the US, even after this latest financial crisis of historic proportions. It is hard to change when one cannot even admit one's mistakes, and the green shoots of a false Spring bring out new hopes that old ways might still work once again.

The status quo often has a powerful grip on the levers of thought leadership, and a social science like economics is especially vulnerable to peer pigheadedness, even when it is shown to be flat out wrong. The lack of innovation seems even slower now than in the 1970's when the appearance of a virulent stagflation shook up the assumptions of the economic establishment.

One thing which is almost certain is that change will not come from within, but from without. The great opportunity for reform that Obama was presented is passing quickly, probably from the point at which he surrounded himself with highly atrophied economic thinkers, from the atavistic Larry Summers to the clever but highly tailored Ben Bernanke, who is like Alan Greenspan with a real PhD. The Treasury Secretary is not a thinker, but a pair of hands, at best, what T. S. Eliot called 'a willing tool, glad to be of use.'

A new school of economics will rise out of this crisis, and we are more sure now than before that it will not originate in the States, which is seeing an appalling failure in economic thought leadership, in part caused by a dominant Fed, acting in part to stifle innovation as MITI did in Japan.

But the stock market is up, after a brief period of housecleaning last week by the funds and the banks, opening the door to the end of quarter window dressing. So let's ignore our problems once again and keep the printing presses and that wealth transfer mechanism turning. For now.

The US may indeed suffer a lost decade after all.

Institutional Risk Analytics
The Global Carry Trade and the Crimes of Patriots
September 29, 2009

Our trip to Chicago last week to participate in "The International Financial Crisis" conference sponsored by the Federal Reserve Bank of Chicago and the World Bank was instructive in several ways. First and foremost, it confirmed that the US economics profession is still trying to defend the old ways and means in terms of analytical methods for bank safety and soundness.

While there were many calls for "reform" of regulation, we heard nary a suggestion that the mish-mash of quantitative methods that currently comprise the framework for assessing the safety and soundness of banks needs to be set aside and a new approach defined. Indeed, the foreign participants in the two-days of presentations seem to be far more advanced in their thinking about bank safety and soundness than their counterparts from the US.

Andrew Sheng of the China Banking Regulatory Commission, reproached us for thinking that throwing debt at a global problem of insolvency will be successful. We have created the world's largest ever carry trade, Sheng noted, and suggested that the approach of exchanging a bank solvency problem for a sovereign debt problem could effectively replicate the lost decade of Japan on an international scale. He also wondered how any nation will be able to raise interest rates when vast sums of cash (i.e. fiat paper dollars) are ready to immediately pounce on any carry trade opportunities that arise.

Charles Goodhart of the London School of Economics.... reminded the audience that whereas Americans still debate the merits of regulation vs. innovation, in the EU the political class has already decided the robust regulation of banks is a necessary condition for stability. He also dismissed the idea that you can separate the "utility" bank from "the casino," again suggesting that the EU view of regulation of banks is comprehensive and should be emulated by the US....

While the members of our panel suggested various ways to restore balance and even virtue to the regulatory process, we suggested that Washington does not need another oversight agency or more platonic guardians. Rather, we need to address the problem where it truly resides, first with the debt issuance of our profligate government and second with the accommodative monetary policy of our central bank. As one participant noted, there is no longer any distinction between fiscal and monetary policy in the US.

Though there were many insightful and interesting comments made at the two-day conference in the FRB Chicago, the one thing that we heard virtually no one say is that the current financial crisis stems from irresponsible monetary and fiscal policies. Many participants talked about the role of "global capital flows" in fueling the crisis, but none made the basic statement that having printed this money to pay for imports and fund domestic deficit spending, the US was bound to see the dollars eventually come home in the form of a credit bubble.

Since the October 1987 financial crisis, the Federal Reserve System has not denied the Street either liquidity or collateral. The objective goal of policy, it seems, has been to keep the ability of Congress to issue debt intact all the while keeping the casino part of the banking system operating at full steam regardless of the impact on inflation and, more important, investor behavior. Seen in this light, the proliferation of hedge funds and OTC securities is the natural response of investors to inflationary fiscal and monetary policies in Washington, a city where income and the proceeds of borrowing are seen as being equivalent.

Today the amount of debt and fiat money issued by the US government is threatening not only the solvency of private financial institutions and companies, but the stability of the entire global economy. Yet virtually no observers make the connection between the reality of secular inflation in the US and the bad outcomes in the financial markets, and in the global economy, where trade flows continue to shrink. Indeed, if members of Congress ever wanted a reason not to give the Fed more power as a regulator of financial institutions, they should start with an investigation of the Fed's conduct of monetary policy, not bank regulation. Just imagine how the US economy would look several decades from now were the Congress to give the Fed hegemony over bank supervision via the rubric of "systemic risk" even as the central bank continues its reckless policies with respect to monetary policy and its accommodation of US debt issuance.

Systemic risk, it seems, is not the result of bad regulatory policies, but the natural outcome of a system where income from productive economic activities is being increasingly supplemented with debt and inflation. Our political leaders say that such policies are meant to help the American people, but we've heard such empty justifications before. Call the policies of borrow and spend and print the "crimes of patriots," a powerful metaphor used by author Jonathan Kwitny to describe the bad acts of the CIA in the banking world decades ago. Since then, the money game and the role of government in our financial markets has only grown larger.

If the American people want to get the US financial system under control, then the first areas of investigation, we submit, must be fiscal and monetary policies. And if Americans do not soon get control over the habit of borrow and spend practiced by the Congress and facilitated by the Fed, then end result must be a populist backlash against Washington and incumbents in politics and the corporate world. As Congressman Ron Paul (R-TX) writes in his latest book, End the Fed: "Nothing good can come from the Federal Reserve… It's immoral, unconstitutional, impractical, promotes bad economics, and undermines liberty."

Reading for the Weekend

“We are slow to master the great truth that even now Christ is, as it were, walking among us, and by His hand, or eye, or voice, bidding us to follow Him. We do not understand that His call is a thing that takes place now. We think it took place in the Apostles' days, but we do not believe in it; we do not look for it in our own case.

God's presence is not discerned at the time when it is upon us, but afterwards, when we look back upon what is gone and over. The world seems to go on as usual. There is nothing of heaven in the face of society, in the news of the day.

And yet the ever-blessed Spirit of God is there, ten times more glorious, more powerful than when He trod the earth in our flesh.

God beholds you. He calls you by your name. He sees you and understands you as He made you. He knows what is in you, all your peculiar feelings and thoughts, your dispositions and likings, your strengths and your weaknesses. He views you in your day of rejoicing and in your day of sorrow. He sympathizes in your hopes and your temptations. He interests Himself in all your anxieties and remembrances, all the risings and fallings of your spirit.

He encompasses you round and bears you in His arms. He notes your very countenance, whether smiling or in tears. He looks tenderly upon you. He hears your voice, the beating of your heart, and your very breathing. You do not love yourself better than He loves you. You cannot shrink from pain more than He dislikes your bearing it; and if He puts it on you, it is as you would put it on yourself, if you would be wise, for a greater good afterwards.

There is an inward world, which none see but those who belong to it. There is an inward world into which they enter who come to Christ, though to men in general they seem as before. If they drank of Christ's cup it is not with them as in time past. They came for a blessing, and they have found a work.

To their surprise, as time goes on, they find that their lot is changed. They find that in one shape or another adversity happens to them. If they refuse to afflict themselves, God afflicts them.

Why did you taste of His heavenly feast, but that it might work in you—why did you kneel beneath His hand, but that He might leave on you the print of His wounds?

God has created me to do Him some definite service; He has committed some work to me which He has not committed to another. I have my mission -- I may never know it in this life but I shall be told it in the next. I am a link in a chain, a bond of connection between persons. He has not created me for naught.

I shall do good, I shall do His work. I shall be an angel of peace, a preacher of truth in my own place while not intending it if I do but keep His commandments. Therefore I will trust Him.

Whatever I am, I can never be thrown away. If I am in sickness, my sickness may serve Him; in perplexity, my perplexity may serve Him. If I am in sorrow, my sorrow may serve Him. He does nothing in vain. He knows what He is about.

He may take away my friends. He may throw me among strangers. He may make me feel desolate, make my spirits sink, hide my future from me -- still He knows what He is about.

Let us feel what we really are--sinners attempting great things. Let us simply obey God's will, whatever may come. He can turn all things to our eternal good. Easter day is preceded by the forty days of Lent, to show us that they only who sow in tears shall reap in joy.

Contemplate then yourself, not as yourself, but as you are in the Eternal God. Fall down in astonishment at the glories which are around you and in you, poured to and fro in such a wonderful way that you are dissolved into the Kingdom of God.

The more we do, the more shall we trust in Christ; and that surely is no morose doctrine, that leads us to soothe our selfish restlessness, and forget our fears, in the vision of the Incarnate Son of God.

May the Lord support us all the day long, till the shades lengthen, and the evening comes, and the busy world is hushed, and the fever of life is over, and our work is done. Then in His mercy may He give us safe lodging, and a holy rest, and peace at last.”

John Henry Newman

This is a collection of quotatons woven into a whole thought by Le Proprietaire as a young man for a circle of friends.

Do Ben and Tim = Thelma and Louise?

One cannot help but note that Team Obama is trying to derail serious proposals regarding financial reform for Wall Street at the G20 meeting, as we suggested they would.

The concerns raised by US revelations at the G20 today about new intelligence regarding Iran's secret underground nuclear facility have overshadowed financial reform and economic problems, and Gordon Brown's prescription yesterday that the G20 would become the new governing council for the world. It also stepped rather heavily on the House Hearings on HR 1207 "Audit the Fed" bill sponsored by Ron Paul and a good part of the Congress.

Why waste a crisis indeed. Especially when you can cop a two-fer.

Yesterday we put forward a somewhat lengthy piece on the Fed and reverse repos being considered titled Fed Eyes US Money Market Funds.

There is a key quote in there that we would like to highlight today.

The central bank is now considering dealing with money market funds because it does not think the primary dealers have the balance sheet capacity to provide more than about $100 billion... Money market mutual funds have about $2.5 trillion under management..."

Only 100 billion in available capital for a relatively risk free short term investment in the global banking system including the Primary Dealers, does seem a bit tight for a set of such 'well capitalized' banks, especially since they aren't making many commerical loans, preferring to speculate in the commodity and equity markets for daytrading profits.

BNP Paribas Securities Corp., Banc of America Securities LLC, Barclays Capital Inc., Cantor Fitzgerald & Co., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Daiwa Securities America Inc., Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc. , Jefferies & Company, Inc., J. P. Morgan Securities Inc., Mizuho Securities USA, Morgan Stanley & Co. Incorporated, Nomura Securities International, Inc., RBC Capital Markets Corporation, RBS Securities Inc., UBS SecuritiesLLC.

Couple that with the revelation reported some time ago at ZeroHedge and covered here, that the Fed is taking on more than 50 percent of the longer dated Treasuries, and there is only about Ten Billion left on their balance sheet for expansion, and you get the picture of a financial system not cruising into recovery but heading straight at a confrontation with harsh reality.

We have considered the possibility that the Fed is doing this to place exclusively AAA and Treasuries on the balance sheets of the Funds, aka the Shadow Banking System, who are holding some seriously awful garbage. But this does not quite make sense unless those reverse repos are of a very long duration or rolled over automatically for a long period of time. A proper program such as was extended to the banks where the Fed buys the assets outright would be that solution. It made more sense to us that the banking system is still very tight on good capital assets and liquidity.

Here is an update from ZH that is somewhat compelling if one understand the implications. Visualizing the Upcoming Treasury Funding Crisis.

"Summary: foreign purchasers are congregating exclusively around the front end of the Treasury curve, meaning that the primary net purchaser of dated bonds has been the Federal Reserve. As everyone knows by now, the Fed only has $10 billion left out of the $300 billion total allotted for Treasury QE. That should expire next week. ... The time of unravelling may be upon us sooner than most think."

Do Tim and Ben = Thelma and Louise?

As the Eagles sang:

"Take it, to the limit, one more time..."

Federal Reserve Eyes the US Money Market Funds

The Fed is holding a significant amount of assets on its books in the form of Treasuries. For example, the Fed has purchased an enormous amount of US Treasury issuance in the past six months as part of its quantitative easing program, aka monetization. It has also taken on tranches of mortgage debt obligations from the banks, purportedly to improve the banks capitalization profile because of the dodgy nature of the assets.

This has added significant short term liquidity to the system, much of it held by the banks for interest at the Federal Reserve itself.

At some point the Fed will wish to reduce the levels of liquidity in the system. One way to do this is by increasing interest rate targets. It can achieve this, for example, by increasing the amount it pays for reserves.

The traditional way for the Fed to drain liquidity is to conduct what is known as a reverse repurchase agreement, or reverse repo.

In a normal repurchase agreement or repo, the Fed purchases assets held by the banks, normally Treasuries, which obviously increases the 'cash' being held by the bank. A repurchase agreement is by definition for a specific amount of time. At the end of the period the Fed sells the asset back to the bank. The difference in amounts is the 'interest' which changes hands for the transaction.

There is also a type of purchase agreement with no buyback. It is known as a PMO, or Permanent Market Operation. These are used to add liquidity as the name implies, permanently.

A reverse repo is just the opposite. In this case, the Fed sells an asset from its balance sheet to an institution for 'cash' and thereby drains or takes cash liquidity out of the system.

Aren't Treasuries as good as 'cash?' Why does it matter whether a bank is holding Treasuries or cash on its books? Apparently not the case, at least for accounting and regulatory purposes. Remember that the next time someone tells you that banks do not need depositors. Sometimes they do.

Typically the Fed has only done this type of operation with a group of about twenty or so financial institutions known as the Primary Dealers.

According to this news piece, the reason the Fed is looking to the Money Markets is that, just like Willie Sutton, that's where the money is. There, and in the 401k's, and the IRA's.

The central bank is now considering dealing with money market funds because it does not think the primary dealers have the balance sheet capacity to provide more than about $100 billion... Money market mutual funds have about $2.5 trillion under management..."

To digress, please note that somewhat startling statistic. The Fed is going to the money market funds, because they think that the primary dealers among them cannot raise more than $100 billion dollar in liquid capital to take repos from the Fed, without impairing the banking system. If you look it up in the dictionary, try looking under 'fragile' or 'insolvent.'

Back on topic, there has been a longtime animosity between the banks, or at least what used to pass as a bank, and the money market funds. The funds are not covered by FDIC, are not regulated as banks, and typically pay higher rates of interest to depositors than conventional commercial banks. They tend to invest their funds in the commerical paper markets. It was the seizure of the short term paper markets that brought the money market funds to the brink, and a potential run on the funds, as fears grew that they would 'break the buck,' that is, the Net Asset Value of One Dollar for every dollar deposited.

Obviously this entire proposition is a bit puzzling on the surface, and is certain to raise fears of Fed shifting toxic assets from the banking system to the more 'public funds.' It is not a huge concern if these are truly repurchase agreements since the value of the assets will be backed 100 percent by the Fed. We would also assume that the Funds might be able to express some preference for Treasuries, rather than bundles of sludge backed by Joe Subprime Sixpack LLC.

It was also interesting today that in his testimony before the Congress which was widely ignored by the mainstream media, Paul Volcker had some very strong words about what is a bank, and what is not. Money market funds are not banks, and banks have no business using their banking platforms to fund proprietary trading operations that are merely seats at a rather risky virtual casino known as Wall Street.

We admit now as before that we do not fully understand the accounting system of the banking industry, having grown up on the productive side of the economy, but are learning quickly.

One thing we can judge is character, and the character of many of the actors on this stage appear to be less than trustworthy to say the least, especially in the Obama Administration and their cronies on Wall Street. In reviewing the biographies of many of the key players, we were struck by how few of them have ever done anything, built anything, in the productive economy. Its all about FIRE institutions and governments, and revolving doors where one is paid for connections and influence, and following orders.

Increasingly it seems that the Wall Street financial institutions, led by the gang of four, will push their power grip on the nation until something stops them. What that will be, no one can know for sure. The Ponzi scheme they have been running is starting to fall apart. The target bag holders, the Chinese, Japanese, and Europeans seem to be slipping towards the exit. When the music stops, someone may be left with a big pile of worthless paper. It looks to us like the Fed is interviewing candidates.

And this is why we say:

The banks must be restrained, and the financial system reformed, and the economy brought back into a balance between the productive and administrative sectors, before there can be any sustained recovery.

Reuters
Fed's exit strategy may use money market funds
Thu Sep 24, 4:02 am ET

LONDON (Reuters) – The U.S. Federal Reserve is studying the idea of borrowing from money market mutual funds as part of eventual steps to withdraw stimulus, the Financial Times reported on Thursday.

The Fed would borrow from the funds via reverse repurchase agreements involving some of the huge portfolio of mortgage-backed securities and U.S. Treasuries that it acquired as it fought the financial crisis, the newspaper reported, without citing any sources.

This would drain liquidity from the financial system, helping to avoid a burst of inflation as the economy recovered.

The FT said Fed officials had in recent days held discussions with market participants on how it might implement such a scheme.

The Fed is considering whether to conduct a pilot scheme, but worries such a test might be seen as a signal that the central bank was about to drain liquidity on a large scale, the newspaper said. In the near term, a big drain remains unlikely, it added.

The central bank held interest rates at close to zero on Wednesday and upgraded its assessment of the U.S. economy, saying growth had returned after a deep recession.

The Fed also said it would slow its purchases of mortgage debt to extend that program's life until the end of March, in a move toward withdrawing the central bank's extraordinary support for the economy and markets during the contraction.

The idea of the Fed using reverse repos to help unwind policy is not new; Fed chairman Ben Bernanke identified them as a potential means of soaking up liquidity in July. But the market had previously expected the repos to be done with primary dealers, including former Wall Street investment banks.

The central bank is now considering dealing with money market funds because it does not think the primary dealers have the balance sheet capacity to provide more than about $100 billion, the Financial Times said.

Money market mutual funds have about $2.5 trillion under management so they could plausibly provide between $400 billion and $500 billion, it said.

The newspaper added that the Fed did not think it would need to drain liquidity all the way to where it was before the crisis, because it was confident it could raise interest rates even with a much larger amount of reserves in the system than existed before the crisis.