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This one year old selection of news. It's really funny to read forecasts that are just one year old.
Note: Despite doom and gloom stock market went from 1260 to 1460 in one year. This new stock and bonds bubble was supported by Fed.
Earlier this month we were treated to Rep. Allen West throwing around the "communist" insult for his fellow House members in the Progressive Caucus. As Ed Schultz reported here, now West has found himself being uninvited to speak at a Florida NAACP event. Not long after West's remarks, Fox host Bill O'Reilly and Lou Dobbs decided to follow West's example, calling former Labor Secretary and professor Robert Reich a communist for some of his statements during an interview on The Daily Show earlier that week.
This Monday evening on MSNBC, Ed Schultz gave Robert Reich a chance to respond.
REICH: It's like being back in the 1950's, this communist witch hunt that suddenly has been launched. And the irony Ed is that there are not even many communists left in the world today. It would be one thing if we were back in the 1950's, but there's not a Communist threat. What are these conservatives, these righke Bill O'Reilly – they have nothing else to say. They have nothing else to do. They don't have arguments. They don't have logic. They don't have any analysis. What do they have? They don't have facts. What do they have? They just simply have the same old epithets and slurs they've been using for the last sixty years. […]
And for Bill O'Reilly to say that simply because I a suggesting that it is a role for government to invest in schools and infrastructure and basic R&D, that makes me a communist? Bill O'Reilly, you don't know what you are talking about. You have absolutely no sense of history. You have no understanding of government. You have no understanding of our society. Debate me, head to head, person to person, like a man! Or a woman.
As Reich noted, he's told O'Reilly he's willing to debate him anywhere, any time, name the place and O'Reilly won't do it. Reich also slammed the Republicans for wanting to take us back to the "dark ages" in America where anyone had even a modicum of economic security. Reich said he hadn't seen anything like the extremism we're seeing from the right in the modern ages and expressed his hopes that not only President Obama is reelected but that the Democrats get the Congress back from these extremists as well.
daganium - Okay...4/24/12 8:37amappnzllr - They don't know 4/24/12 6:01pm
As Reich noted, he's told O'Reilly he's willing to debate him anywhere, any time, name the place and O'Reilly won't do it.
I wish these corporate media hacks would drop this one.
This is their way of seeing who has the largest penis: They constantly challenge each other to debates that they know will never happen.
All Reich had to say is O'Reilly is a Rupert Murdock puppet who literally quotes into a studio monitor pre-written Roger Ailes' talking points.
That the perfect summation of the character O'Reilly plays on TV.
Say that & you are not forced to start measuring dick sizes.
Say that & O'Reilly is accurately framed for the harmful, hateful, worthless buffoon he is.
Then you move on to the next topic.
When Fascism comes to America, it will be wrapped in excess body fat & carrying a misspelled sign.Kreskin - The Vietnamese and Chinese 4/24/12 7:16pm
They don't even know what communists are - or what they were. They just throw around these insults.The Vietnamese and Chinese communists are among our best friends , just ask the US chamber of commerce .
"they have nothing else to say. They have nothing else to do. They don't have arguments. They don't have logic. They don't have any analysis. What do they have? They don't have facts. What do they have? They just simply have the same old epithets and slurs they've been using for the last sixty years." Reich really nailed it .
"The poor have sometimes objected to being governed badly; the rich have always objected to being governed at all."
Different Anonymous - 4/24/12 7:24pmIt's hard...
I try not to see a Koch under every bed, but I have to believe this is an outgrowth of the John Bircher wing who have somehow managed to move from the fringes of fringe politics to center stage. Commie this and commie that was their stock and trade back in the day, and now since there are no good so-called booger man names around any more to slur their enemies with - that or their brains have so ossified that they really are back in the '50s - they are back to regurgitating their old favorite, the communists.
Good on Reich for calling out O'Reilly though.
The Glenn Beck ... - 4/25/12 12:36pm
...to improve on Reich's response to BillO, so I won't.
I will point out, however, that during the interview with Stewart, Reich called for an end to corporate personhood (corporate Constitutional rights) and the doctrine that money is speech (the Buckley v Valeo decision). We saw Pelosi attacked for her support for an amendment to this effect on Fox (The Five), so I can't help but wonder if the right wing echo chamber is starting to tune into this movement and beginning their propaganda in an attempt to marginalize this growing effort across the nation that even many Republicans support.Pitiful...
Deniseindana point - 4/25/12 5:19pm
I watched the interview on The Daily Show and thought that Robert Reich is probably one of the most intelligent individuals around now. It is now the 'in' thing for the conservative right wingnuts to resort to name-calling instead of discussing anything on an intelligent level. Reason: they could not carry their weight in a true debate. C'mon, we all were bored to tears by the endless debacles referred to as debates among the recent GOP contenders. There was no debate ever; they were merely excuses to attack and criticize our President. Neither O'Reilly nor Dobbs are stupid people, but this behavior can only be compared to 5th grade level schoolyard bullying...Reich still comes out on top!
Jesse's Café AméricainJanet Tavakoli takes the gloves off and tells it like it is in the cover story in the May 2012 issue of Research Magazine.
You'll have to read it here, because I doubt you would hear this in any of the mainstream media.
I hate to apply the overused term 'expert,' but Janet is a highly credentialed expert in financial derivatives with years of practical experience. That does not mean that everything she says is necessarily right, but it certainly has credibility.
Someone asked me why would someone who is in the financial industry, and has benefited from their expertise in derivatives, speak out like this?
Have we really sunk that low that we cannot believe that some people could ever wish to speak the truth as they see it from moral principles, even against their short term material advantages? No wonder we are so easily taken in by lies, because that is what we want to hear. We are a lost generation.
This straight talk is a good spice to add to the somewhat bland presentation on the financial crisis last night from PBS Frontline.
It's all about fraud and the subsequent cover up and ongoing bailouts. Its the credibility trap, and it continues to undermine the recovery and the real economy today.
The cover story is that these are just well meaning and extremely bright people who did their best, but a few people got carried away, and well, you know, things just happen.
Just like MF Global, right?
Finding the Culprits
Derivatives expert Janet Tavakoli takes a hard look at what - and who - caused the financial crisis.
By Jane Wollman Rusoff
April 25, 2012
...Now Tavakoli sees another huge financial crisis looming.
The University of Chicago MBA has traded, structured and sold derivatives at firms including Merrill Lynch, PaineWebber and Westdeutsche Landesbank; and she had earlier stints at Bear Stearns and Goldman Sachs. Research recently talked with her about red flags and preventive solutions.
You write that, in the past three years nothing has been fixed but that we must hold Wall Street responsible for the fraud that resulted in the financial crisis. What should be done?
We need to have investigations. But with the pushback and all the lobbying, what they've been counting on is that the statute of limitations for some of these frauds is expiring. So if you don't file complaints, you may not be able to.
Members of Congress are enabling the lack of punishment and covering up great misdeeds in our financial system - and they're doing it with no fear of consequences - i.e., being voted out of office, in which case they could find themselves the subject of investigation.
What do you mean: "covering up"?
Many people are covering up for cronies who have a lot of money sloshing around. We threw money into the financial system with no accountability and thus made the problem worse. Our system has been completely infiltrated and bought off. Things aren't changing because Big Money doesn't want it to change.
What other indications are there of a cover-up?
The MF Global dog-and-pony show. The attitude toward bundlers like Jon Corzine [the firm's ex-CEO], who is a big bundler for the Obama campaign, is that the guy can do no wrong. This was before he even testified. People who are raising big money for campaigns get off with no real investigation.
In the Sarbanes-Oxley age, for MF Global to say they were unaware of what they were doing beggars belief. And yet there has been no indictment. Is President Obama part of the cover-up?
Yes, in that he's enabled it. He's left people in place who crashed the global financial system in the first place: [Treasury Secretary] Tim Geithner and [Federal Reserve chair] Ben Bernanke. Obama had told us: "You can't keep doing things the same way and expect different results." So he's been quite a hypocrite.
Who else is in the cover-up?
Mary Schapiro was appointed [by President Obama] to head the SEC. She was formerly head of FINRA, the antichrist of investor advocacy! Yet she was chosen SEC [chair] because the regulators are captive by and serve the people they're supposed to be regulating. They do not serve investors .
In a way, Obama has been the anti-regulator because he didn't put people in the regulatory agencies, the Fed or the Treasury who would investigate and fix things that are wrong in our global financial system.
If he's re-elected, then presumably, things will continue in this same way?
What if a Republican is elected President?
Who else is not in the pocket of Big Money interests! (Ron Paul - Jesse)
So, no matter who's President, these crimes - if you want to call them crimes - will be perpetuated?
Yes. And we do want to call them crimes! They are crimes.
What should Obama do now to help Americans?
He has a lot of resources at his disposal, one main one being moral suasion - he's got the pulpit. When there was a crisis, Reagan, Carter, Bush went on television and explained what needed to be done. We haven't seen that kind of leadership from President Obama. If anything, the American people have been told things to make them think [conditions] aren't really as bad as they are: inflation isn't as bad as you think because an iPad is cheaper now - nonsense like that.
So the public is being poorly informed?
Yes. Therefore, financial advisors need to be doing fundamental analysis of investments and not [only] be reading the Wall Street Journal or, God forbid, watching CNBC. (Don't look for any appearances on CNBC or Bloomberg TV, Janet - Jesse)
In other words, FAs should do their own research and figure things out for themselves.
Yes. Sadly, you're on your own. That's part of how we got into this mess: We lost the art of rolling up our sleeves and looking for opportunities.
On Internet TV, you stated that we're "absolutely vulnerable to a repeat [crisis] because the fraud went unpunished and we printed money like crazy to bail us out of the last one." That's scary.
But the fact is we've bailed people out and had no consequences for them. So it emboldened them to turn around and behave in the same way. Look at banks like JP Morgan: Shortly after the crisis, they thumbed their nose at the idea of trying to separate speculation from the rest of the bank. So if you don't have restraints on behavior, you'll see it repeated. And now we've made it worse. It's like handing a drunk driver who got into a crash the keys to a bigger, faster car together with a bottle of vodka.
In every area of finance where we bailed people out, you see the same wrongdoers volunteering to help fix the situation. That's pretty funny: They weren't trustworthy before, and they're not trustworthy now.
But what about the investigations that already have been held?
They're all for show, and people end up with a slap on the wrist for minor issues. Investigators should be looking instead at the interconnected fraud that infected the mortgage lending market. And there is still a lot today, especially fraud on borrowers. If you go to the root of the problem and choke off the money supply, you stop the fraud in its tracks.
But the banks say they lost money.
The fact that a bank lost money isn't an indication that they were a victim as opposed to being a perpetrator. A classic problem with control fraud is that the parasites destroy the host - in this case, the host being the bank and the parasites being the bank employees. If you were the victim of a control fraud by the people who worked in your own bank but meanwhile, you were collecting huge bonuses, you overlooked the control fraud within your own institution.
Why haven't the apparently guilty been punished?
We haven't seen the felony indictments that these people richly deserve because our regulators and investigators are captive - and Congress, more than ever, has been lobbied, courted and bought off by Wall Street. More than any time in the past, you've seen these big-money interests protected by Congress.
Is there an alternative to bailouts, such as those of the financial crisis?
Yes. Troubled financial entities should be restructured, old shareholders should be wiped out and we should return Glass-Steagall.
What should have been done in the case of, say, AIG?
Bankruptcy declared, and then [the government] says: "We'll back-stop your contracts for now, but we're going to investigate all those fraudulent credit derivative contracts and 'claw' money 'back' from your counterparties - like Goldman Sachs and Credit Suisse - if need be." So there's a controlled demolition. You're not just handing money out with no consequences....
Read the rest here.
Jesse's Café Américain
We had a little follow through today as the market shook off the weak US GDP number and the continuing problems in Europe.
Next week on Friday is the April Non-Farm Payrolls report.
It is well worth listening to this interview on the US economy by Richard Yamarone on King World News.
There will be no sustainable recovery until the system is reformed. Stimulus will not work because it is being applied to a broken system that is misallocating wealth and resources.
But austerity is even worse. Promoting austerity without significant economic reforms is quackery. It benefits those who took the most during the fraud of the financial bubble and its associated frauds, and punishes the innocent and the victims.
"The crisis didn't occur because of something that banks did. No, it was the natural consequence of the way banks are, even today." That little sentence in the middle of Mr Mayo's introduction to the book is perhaps the clearest statement of intent that one can expect from any author who sets out to write a book on a subject that he knows better than the back of his own hand.
Mike Mayo doesn't need an introduction to most "sophisticated" investors in the equity markets, far less anyone who has been a fund manager responsible for managing a portfolio of US banking stocks. He is perhaps one of the most distinguished equity analysts in financial market history; a person with one eye on market strategies and the other on bankers' integrity.
In a funny way, Mayo is also a victim: specifically of Michael Lewis (also reviewed below) who short-changed him famously in The Big Short by heaping accolades on the equity analyst Meredith Whitney for her brilliant call on Citigroup while largely ignoring Mayo, who had made the same call, only earlier (ie before Whitney) and with more market impact. Going through the rest of his history and other calls of stumbling US financial institutions - the former Bank One, Keycorp and so on, it is indeed difficult to fault the predictions of Mayo.
As one goes through the book, it becomes clear that Mayo was a rank outsider who worked diligently and steadily to move up the corporate ladder on Wall Street; an exception that isn't immediately obvious to anyone who isn't deeply familiar with the industry and its recruiting practices that focus on Ivy League schools and family connections. After being rejected for many a job, Mayo describes going to work for the Federal Reserve.
Perhaps he should have spent a bit more time examining the intricacies of the Fed bureaucracy and the lack of capabilities amongst its staffers (barring a few) but Mayo then moves on to Wall Street where his career takes him through UBS, Lehman, Prudential Bache and Deutsche Bank (in the book; I understand that Mayo then went to work for Credit Agricole in the US but he doesn't mention that in the book for understandable reasons). Using arcane financial models initially but then moving closer to the "story", ie the actual care and diligence of the banks amidst a stunning growth in their asset bases, Mayo starts outlining the structural failings of the banks.
He could have added that the pressure to perform on quarterly earnings was another big factor in banks focusing excessively on the short-term; essentially sacrificing their long-term viability at the altar of analyst expectations but he misses that particular angle (perhaps on purpose, seeing where he has been located for much of his career).
Other than that, I found his take on banks' management style refreshingly candid to the point where a number of CEOs evolve from their PR-burnished cardboard images (Jamie Dimon for example) to something altogether more human and likable. Even his bete noire in the book, Vikram Pandit of Citigroup, comes across not so much as a schoolyard bully but as someone who is fundamentally decent albeit with an over-protective or controlling inner circle.
A side note for Asian investors and readers: the context of Mayo complaining about access to banks' management would be thoroughly unfamiliar in a region where companies and banks are managed as personal fiefdoms and only lip service ever given to corporate disclosure and transparency. Reading through the publication I couldn't help but feel that Asians would be happy to have the kind of problems that Mayo has outlined in his book.
Mayo describes in detail the conflicts at the heart of investment analysis wherein the needs of profitable bankers to effect deals (equity calls, rights issues, bond buybacks) exceeds the more sedate commission-driven world of turnover that is dictated by the accuracy and strength of analyst recommendations.
Perhaps he could have actually explained the differences through a financial model in his book; but what does come through is the conviction of how good analysts are easily waylaid by their own franchises for a quick buck and anyone who doesn't play along is punished and cast out.
His long-running feuds with the likes of Citigroup and JPMorgan aside, Mayo comes across as a decent person with terrific insights into the now hopelessly arcane world of the big banks. Towards the end of the book, he relates how his wife, a doctor, keeps him grounded by telling him to "now take out the trash" whenever he comes back home gloating about his work achievements.
Reading that bit though made me think: from the perspective of a decent chunk of people exposed to the world of finance directly or indirectly, the need of the hour is to have leaders in place who are capable of standing up to the big banks and pushing through strong improvements in transparency and risk management.
Whether it is the Fed, the European Central Bank, the Bank of England or the Bank of Japan or indeed the International Monetary Fund/Bank of International Settlements and other truly global organizations involved in high finance; Mayo may well be the most suitable person to stare down the CEOs of the world's top 100 banks.
I say give Mayo the chance to actually supervise the top 100 banks in the world. The results may prove a fitting epilogue to his book when updated a few years from now.
Bailout Nation (with post-crisis update), by Barry Ritholtz and Aaron Task To be fair, Bailout Nation deserved better than to be reviewed a full two years after its publication. I did start reading it, but coming across more compelling works at the time dropped the book for a later date; little was I to know that the "later" would be two years. Perhaps because of that intervening period that has been rich in both explaining the effects of the financial crisis and the role played by various agencies in effectuating this result, the review is also perhaps more critical than it may have been if I had written it when the book was first published.
A compendium of tales that strings together the ever-increasing trend towards the socialization of losses in the United States, the book starts well with pre-bailout history of the US, the effects of launching the Federal Reserve (Fed) and the slow trend towards governments getting more involved in business with the attendant moral hazard.
Specifically, I loved the "intermezzo" between the various chapters as well as the tongue-in-cheek guide to funding the unfundable such as national healthcare (clue: launch a hedge fund). These ready reckoners are well worth the price of the book.
Where the book fails is in layout that reminds one of a hyperactive sports reality program on television where the televised action is all-too-often interrupted by the cameras panning back to the commentators for their expert views. That layout or book structure is in my opinion unsuitable for any serious book on the financial crisis, particularly because the books were written in the aftermath of the crisis rather than as a predictive fable written before the crisis.
Dude, we know how it all ended: what we wanted to read was how the machinery got jammed.
The corollary criticism of the book - like some of the others here - is that the authors are so obviously skimping on details or thorough analysis. Now, I have been in front of book editors and am well aware that they like to use a "name" (like Ritholtz) to sell the merchandise but also advise alongside that the material is kept simple enough that the casual airport browser would want to pick it up and also recommend it to their friends.
If Ritholtz did get such advice in writing his book, he would have been better off ignoring it completely; for the result in Bailout Nation is tantalizing glimpses of what the author knows (or knew beforehand) albeit without sufficient details to get readers focused on the key points.
An example is the chapter entitled "Tech Wreck", wherein the authors examine the causes for the tech bubble. Writing some 10 years after the fact, Ritholtz would have had ample time for detailed analysis - which he doesn't present. For example, he makes the statement that the "Y2K" bug increased tech spending by companies and banks, and led to a sharp drop in orders immediately thereafter; in effect bursting the dot-com bubble.
This is a point that has been repeatedly made by a number of people and the only way for Ritholtz to stand out would have been to show the actual trends: a break up firstly of total capital expenditure as a percentage of corporate revenues (clue: they rose massively in the second half of the 1990s), broken down between tech and non-tech (clue: tech spending was significant) and within tech, between normal upgrades, online expansion and Y2K.
It is in the analysis of tech spending that the actual story of the dot-com bubble is to be found, but since Ritholtz misses the opportunity to explain the point, he misses the opportunity to stand outside the crowd. Another such example is in the chapter on Bear Stearns, wherein the author makes a number of sweeping points in terms of comparisons with other situations such as the collapse of Lehman Brothers and AIG, but fails to complete the analysis by explaining exactly what those differences were.
In spite of the relentless cheerleading by Wall Street "strategists" and other alleged experts, many Americans have refused to play along with the "it's a bull market" song. A chart at Zero Hedge, which has for some time been chronicling the exodus by small investors from the U.S. equity market, reveals in colorful detail just how disinterested they have been:
An article in the New York Post, "No-Confidence Vote: Main Street Shunning Markets," offers a few explanations as to why individuals have been unwilling to jump on the train, including the fact that so many are, as the British slang expression goes, skint:
"I think most people are taking money out of these funds because they either need the money to live - because they're out of work or underemployed - or they're supporting their kids, who are out of college and not getting jobs," Mogavero said. "There is also a fear factor about the economy that is causing them to keep money in the bank and out of the markets."
Still, given my inherent cynicism -- yes, it's true -- I can't help but think that the view espoused by an Instapundit reader, who is apparently a professional money manager, ironically enough, represents a more accurate assessment of what's been going on:
Professional financial market activity is also way down these days. The drop in volumes is damning. The Fed's financial repression – forcing market yields below inflation – is one reason. The tsunami of administration diktats is another. And the Chinese-style theft of customer account capital by John Corzine and JP Morgan is the last nail in the coffin. The economics of investing make little sense, and even if you can thread the needle of profitability, you risk having your property seized by regime buddies. Why do anything with your money but stash it under the mattress, or try to get it offshore?"
"The big banks are buying up what they call fixed income instruments (bonds and other debt backed paper) and at the same time offering CDS insurance on the same. Just like they bought and sold protection on mortgages..."This is a fairly good description of why the policies of Bush and Obama have failed to effect an economic recovery.
The policy of 'saving the banks' first and foremost, and of stuffing them with cheap money in the hopes that they will stimulate the real economy with loans, is a cruel hoax.
Cheap money is hot money and it seeks high beta returns. It does not seek investment with returns over long periods of time. And in an environment of lax regulation and little deterrence for abusive financial practices, one sets up a scenario ripe for fraud and another, more chilling, financial collapse.
And the problem is not in the US alone. Europe and the UK are following similar practices, of serving the financial elites first, and the people very little or not at all.
There will be no sustainable recovery until the banking system is reformed, and balance is restored to the economy. Growth, not austerity, is the way out of the wilderness. But that growth is only achievable if the corruption that brought down the system in the first place is corrected and the real economy restored to some sort of natural order and sensible priority.
The hot money seeks out speculative returns, and when it cannot find them, it creates them. And that is the well spring of fraud, and of many of the corrosive economic problems facing our world today.
The problem is complicated because most of the western political leaders are complicit, by action or acquiescence, in the financial corruption that holds their nations by the throat, and allows the very few to prosper enormously at the expense of the people in general. The leadership is caught in a credibility trap. They are unable and unwilling to reform the system, and promote a renewal and change might bring them down with it as well as the corruption that feeds them with money and power."...The problem (one of them at least) is that while our leaders are banking on growth to save us, the banks are not. They are banking instead, on fear. Our leaders keep thinking if they 'save' the banks then the banks will help save us by investing in growth. They fail to understand that 'invest' is really not something high up on the global bank's 'to do' list. I spoke at length recently to bankers in The City who deal in investing in raising money for Small and Medium businesses. They were unequivocal – it is getting harder not easier to raise money for such investment. The big banks and big funds are looking for short term speculative returns not slow investment returns.Read the rest of this blog from 'Golem XIV' in the UK here.
When you have large and growing losses from bad debts you cannot and will not recoup and recover on the basis of wise but slow investment returns. The worse your previous debt mountain is, the greater the pressure to pursue exactly the sort of high-risk speculation that got you in trouble in the first place. If it is a choice between investing in Spanish factories or buying Spanish debt or selling CDS on that debt, the 'smart' bonus seeking money goes for the latter every time.
The brokerage Carmel whose study I have quoted is a good example. On page 9 of their study they say,We began buying Spain CDS in Q4 2011…[with a coupon of] 3.5% of notional per annum –effectively an option premium on the default of Spain.300%! Investing in small and medium businesses or a potential 300% speculating on Spanish default. You choose.
Should the Spanish crisis flare up in 2012 as we expect, we can generate a 300% return on the annual premium.
Banks are banking on fear and the volatility fear causes. They are not banking on or helping to support growth. They will do the politically necessary minimum and no more. The big banks are buying up what they call fixed income instruments (bonds and other debt backed paper) and at the same time offering CDS insurance on the same. Just like they bought and sold protection on mortgages..."
Also see his essay "We Are All In This Together."
This may also be a good time to read or re-read this essay of mine, Currency Wars: The Anglo-American Century. What is happening in the western world is no accident, anymore that the rise of tyrants and the destruction of freedom are accidental.
Mar 27, 2012 | Newsmax
The critical question over the next decade isn't "where will my returns be highest?" but "where will I lose the least money?"
That, according to economist and investor Marc Faber, is the scenario facing investors today.
As the author of the Gloom, Boom, and Doom Report, Marc Faber is a well-known contrarian, earning celebrity status because of his ominous predictions.
So his pessimism during a recent appearance on CNBC wasn't surprising for a man whose nickname is "Doctor Doom." What was surprising was the level of "wealth destruction" he sees in the not-too-distant future.
Faber stated, "I think somewhere down the line we will have a massive wealth destruction. That usually happens either through very high inflation or through social unrest or through war or credit-market collapse."
A Message on the Need to Reform the Financial System -- From Herbert Hoover
Jesse's Café Américain
The trick in trading is not to 'predict' in advance which way the metals will break in the short term, or any market for that matter. I have seen plenty of guys waste their trading accounts and their time trying to find 'the perfect system.'
Believe me, if there was such a system, you would not find it. And especially you would not find it on a publicly available site.
The best system is to sit as the house, and make money no matter which way the market goes, and have plenty of advantageous knowledge of the order flows to boot. The US markets are all about the asymmetrical dispersion and control of knowledge. And HFT has taken it to a literally inhuman degree.
Well, absent that exorbitant privilege of insiders, all we can do is trade to avoid the losses, and learn to recognize trends, and play them with some discipline.
Right now gold and silver are not trending, they are consolidating and winding up before they begin another move. I can argue the reasons for a move either way, and unless you are Ben Bernanke and ready to show your hand honestly I am not particularly interested in what you have to say, because you just don't know. And neither do I. This is not a 'natural market.'
But we can hope to find the trend as it begins again, miss part of it, but be sure to hop on board and take it for a ride. For most people, they have neither the time nor the inclination to do this for the short term, and probably even for the intermediate term. They just feed the trading letters and system creators and of course the brokerage firms.
Chat boards are a nice way to spend the time you may have on your hands in socializing, if you have nothing more pressing, but they offer little in the way of constructive trading advice. To paraphrase Dr. Greg House, traders lie. And most amateurs become bitter with their losses. Misery loves company.
Don't get me wrong. Fundamentals still matter in the longer term, and in the lesser covered stocks one can always find the undercovered gem or two, if you have the stomach for the risk and can wade through all the price manipulation and naked short selling that is tolerated, especially north of the US border.
So for now I am long bullion and short stocks, in a pretty robust hedge. I have taken the profits out of miners but am still willing to flip a trade in the case of some unusual deviations from trend. And they certainly happen. Sometimes you just have to wonder.
I am waiting to see which way the market breaks and if stocks continue to move with the metals or if there is a divergence developing. My 'bias' if I have one is to see the metals bounce and rally up to the top of the larger symmetrical triangles, but that is a 60-40 proposition at best. I mean, the market is being rigged, or isn't it? And if it is, probabilities are being written by other than 'the invisible hand' of supply and demand.
I am not trading nearly as frequently or aggressively as in the past because a) I am getting older b) these markets are almost ridiculous. Its like playing cards with the little girls.
If I put in a order for a few thousand shares, the liquidity from a large offered set of multiple positions evaporates instantly and I close on maybe 100 shares. If I offer to buy above market but below ask I get ten 'friends' appearing instantly along with my bid.
There is little genuine liquidity in the equity market. It is mostly a sham, a flash crash waiting to happen unless the ESF intervenes which I am sure they will. At the first sign of real trouble it will collapse like a house of cards.
As for gold and silver, price discovery is buried under a mountain of paper and faux trades. With 100:1 leverage and naked positions dominating the trade, its a bit of game in the short term at best, and not a particularly honest one at that.
Don't exhaust yourself chasing rainbows here. Sometimes the best trade is to stay out of the short term scrums, the wash and rinse cycles, and just ride the macro trends, ignoring the day to day noise. And judging by the shrinking volumes and low open interest, quite a few people are fine with that decision.
The pit crawlers had best start studying origami and advanced airplane design to while away their empy hours, with only phony computer generated order flows and Fed buying programs to light up their screens.
This speech was given by Herbert Hoover as the country was caught in the depths of the Great Depression 6 December 1932, as he was leaving office, largely perceived as a failure.
I have sympathy for Hoover and rightfully so. For many years I saw his portrait every time I would visit the headquarters of the IEEE in New York City. I read about his magnificent acts of logistical organization and the relief of suffering in the European famines. He was an accomplished and talented person.
And yet he failed, or at least has been judged a failure as President, because of a timidity and unwillingness to act, boldly and in a timely manner. He was constrained by bad advice, and an ideological bent that prevented common sense action from moving the country forward. Afterwards in his Memoirs he blamed the advice he received from his Treasury Secretary, Andrew Mellon, the great liquidationist, who had been appointed by Warren Harding in 1921, and who throughout the 1920's preached the gospel of tax cuts for the wealthy to stimulate growth.
"Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."This speech could be given with little alteration by Barack Obama today, although I am sure he would add quite a bit more flair.
The Too Big To Fail Banks are still with us, but even larger and more dangerous and powerful. Obama himself, despite pledges to the contrary, is taking large amounts of funds from the corrupt campaign process.
Instead of acting quickly to correct the causes of the financial collapse, he expended most of his early political capital on a healthcare plan that, despite some genuinely beneficial changes, serving to increase the control and reach of a few private healthcare monopolies by requiring all people to purchase insurance from them.
Fed policy still serves the few and is largely opaque in its dealings, becoming even more powerful as regulator.
And the markets are dominated by even fewer players, and tainted by a major scandal in which over a billion dollars was stolen from the customers.
Corporate profits are excellent and the very wealthy few are making enormous strides in increasing their wealth. And yet the bulk of the nation suffers from fear and uncertainty.
The people's vehement objections to the bailout, marked by faxes, calls and emails in their millions, were ignored.
Yes, Obama faces a rigid and uncompromising opposition in the Congress, which achieved its House majority during his term I might add, but he still has broad Presidential powers, including the ability to direct the enforcement activities of the regulators and the Justice Department.
And not one major participant in the fraud has been indicted and prosecuted. Instead, the perpetrators and beneficiaries of the fraud have crafted the words for the very reforms which they have opposed and weakened every step of the way. And the regulatory agencies continue to hand out wristslap fines for egregious market frauds that continue to add to the deterioration of the confidence of average market participants.
If the US had a Parliamentarian system, Prime Minister Obama would have most likely already been ushered out the door.
Am I being too harsh? He promised much, and achieved little, and broke almost every major pledge he had made to his constituency in his zeal to curry favor with those who would have nothing to do with his mandate. In this he is more Chamberlain than Hoover, who at least acted on his principles that were unfortunately mistaken as he later admitted.
When he writes his memoirs I will be shocked if the current President does not paint a picture of magnificent accomplishments, and for the shortcomings, blame everyone but himself and his inability to execute on principle.
President Obama will undoubtedly provide a good case study for the failure in leadership in a crisis for future historians.
"There are three definite directions in which action by the government at once can contribute to strengthen further the forces of recovery by strengthening of confidence. They are the necessary foundations to any other action, and their accomplishment would at once promote employment and increase prices.
The first of these directions of action is the continuing reduction of all government expenditures, whether national, state, or local. The difficulties of the country demand undiminished efforts toward economy in government in every direction. Embraced in this problem is the unquestioned balancing of the Federal Budget. That is the first necessity of national stability and is the foundation of further recovery. It must be balanced in an absolutely safe and sure manner if full confidence is to be inspired...
The second direction for action is the complete reorganization at once of our banking system. The shocks to our economic life have undoubtedly been multiplied by the weakness of this system, and until they are remedied recovery will be greatly hampered.
The third direction for immediate action is vigorous and whole-souled cooperation with other governments in the economic field. That our major difficulties find their origins in the economic weakness of foreign nations requires no demonstration...
The basis of every other and every further effort toward recovery is to reorganize at once our banking system. The shocks to our economic system have undoubtedly multiplied by the weakness of our financial system.
I first called attention of the Congress in 1929 to this condition, and I have unceasingly recommended remedy since that time. The subject has been exhaustively investigated both by the committees of the Congress and the officers of the Federal Reserve System.
The banking and financial system is presumed to serve in furnishing the essential lubricant to the wheels of industry, agriculture, and commerce, that is, credit.
Its diversion from proper use, its improper use, or its insufficiency instantly brings hardship and dislocation in economic life. As a system our banking has failed to meet this great emergency.
It can be said without question of doubt that our losses and distress have been greatly augmented by its wholly inadequate organization. Its inability as a system to respond to our needs is today a constant drain upon progress toward recovery. In this statement I am not referring to individual banks or bankers. Thousands of them have shown distinguished courage and ability.
On the contrary, I am referring to the system itself, which is so organized, or so lacking in organization, that in an emergency its very mechanism jeopardizes or paralyzes the action of sound banks and its instability is responsible for periodic dangers to our whole economic system."
Herbert Hoover, Annual Message to Congress, 6 December 1932
April 16, 2012 | Jesse's Café Américain"We always want to keep in mind what the function, the purpose, of the economy is. The purpose of an economy is not producing GDP. It is increasing the welfare of citizens, and it is increasing the welfare of most citizens. And the American economic system has failed, and failed very badly. Most Americans today are worse off, most American households have lower real income adjusted for inflation than they had fifteen years ago."
Joe Stiglitz made an aside about half way through his talk about mercantilism at INET Berlin this month that is worth noting. I like the way he frames the problems and his fresh look on the situation but do not favor many of his suggested cures, especially the notion of something that sounds dangerously like central planning by a financial elite. I think that is something that needs much more work, but that is a discussion too often impeded by denial, misdirection, and diversion.
Although he initially addresses his talk to America, he goes on to include other countries, especially Germany. I would add the UK, among others including China, which is a disaster in the making.
I start the tape of his talk at 13:25, so you can hear the basic question and the simple truth that so many have overlooked. The American economic system has failed the public, and that failure has its roots in the 1990's, accelerating at the turn of the century into the financial collapse. It is a story of deceit, corruption, and betrayal.
And the majority of the people, who have suffered the most from this injustice, are being asked to suffer even more for a system that does not benefit them and actually works against them. And they are asking, 'is it worthy of our support?'
And history indicates that they will provide an answer that may be unpalatable for those who benefit the most from the current unsustainable arrangement, who are enriched by the misery of others.
I cannot say it more simply or more emphatically, that the gaming of the system by the monied interests, marked by but not wholly due to the repeal of Glass-Steagall, the trade agreement with China without a floating exchange rate, and the Bush tax cuts for the wealthy while initiating aggressive war on multiple fronts, have set the American economy on a spiral of demise and eventual self-destruction.
What has institutionalized this demise and made it pernicious is the corruption of American power and distortion of thought by big money, and the short term selfishness and self-interest of the status quo. That is what I call the credibility trap.
The point must be made, that the system did not fail because our economic models were no good, that our financial leaders were simply mistaken, that the political powers were pursuing the right path but that things went wrong in ways that no one could have foreseen, and that even now, the thought leaders and spokesmodels for the monied interests are hard at work concealing and deceiving and misleading, feeding the rotten system that has brought us to where we are today.
It was never a mistake. They knew, but it was easier to go along or do nothing, being either craven or compromised. It was always about easy money, and the fraud.
Giving even more money to the Banks, and asking the people to pay for it, in the hope that it will eventually trickle down to the people from whom it has been stolen is not a policy, and not even a policy failure. It is an obscenity.
I sense we are in the negotiation phase, in which the powerful monied interests want to be let off with a wrist slap, and no admission of guilt. And of course for change to come slowly, maximizing their returns.
The powerful think that they are the system, the economy and the government, and that it exists to serve them. And so any change must suit their needs, first and above all. But a prideful greed and will to power can never really contain itself, as it can never be truly satiated. It always craves just a little more.
The existing US dollar trade regime dominated by global corporations and banks, backed by widely deployed military power, is not sustainable. We are entering the next phase of this unfolding crisis, and some countries are already there, in which we will see growing domestic unrest and repression, and regional trade wars and alliances, in the evolution of the ongoing currency war.
Reform will come, one way or the other. The writing is on the wall.For in that universal call,
Few bankers will to heaven be mounters;
They'll cry, "Ye shops, upon us fall!
Conceal and cover us, ye counters!
When other hands the scales shall hold,
And they, in men's and angels' sight
Produced with all their bills and gold,
'Weigh'd in the balance and found light!'
Jonathan Swift, The Run on the Bankers
The report of the week is Industrial Production. This is one of the indicators that NBER uses to decide recessions. It has been flat for two months. I expect a small uptick over the next few months but it will start falling once the global economy weakens enough to start impacting exports. We are already seeing inventory builds, even a slow down in sales growth could trigger an inventory cycle.
My opinion is that capacity utilization is hopelessly out dated through drift and survivor bias. It was never tested in such a long recession. Much like the misallocation of houses we have manufacturing capacity of the wrong type, wrong place and idle so long as to be useless.
The Mother Of All Infographics: Visualizing America's Derivatives Universe | ZeroHedge
Top 5 US banks held 95.7%, or $221 trillion of the entire US derivative universe (which in turn is just a modest portion of the entire $707 trillion in global derivatives as of June 30, 2011).
April 21, 2012
Re Lynn Parramore's post, the three great issues of our times are kleptocracy, wealth inequality, and class war. You can guage how serious economists are by whether they are discussing these issues and giving them the centrality they deserve. However, from the little that I can see, Soros and the INET people have not come to grips with any of them. They may talk a little about wealth inequality but the other two are left untouched and unaddressed. Yet without an understanding of how the three are connected, no realistic description of the events of the last 35 years is possible.
Remember these are supposed to be the experts, and not just any experts, but the best and most insightful. The construction of kleptocracy has been going on, as I said, for 35 years. The housing bubble blew up 5 years ago, the meltdown hit 4 years ago, and yet these cutting edge economists have not taken even the first step to putting together what happened.
So my questions are these: How much longer are we expected to wait for them to come to terms with the systemic failure of their discipline? How can we look to them for leadership or understanding when they remain so obstinately behind the curve? And at what point should we start writing them off as irrelevant and/or just more elite distraction and obfuscation?
You're pretty much right on Hugh, although kleptocracy predates the financial crisis by a few thousand years. During which time they called it all sorts of things as long as the money flowed. Anyway.
I'm still hopeful I'll get a 1 million grant from INET to study money's relationship to group psychoanalysis, constructing of the ego and soul projection. If I don't get 1 million, I'll take half a million. and if not half a million, I'll take a quarter of a million, but no less than $100,000.
If I don't get even 100G, I'll write them all off as yackers who can't bring themselves to the point of action.
-Profeser Delerious Tremens, University of Magonia, Institute for Contemporary Analysis, Department of Financial Speculation and Teleology, PO Box 8, Magonia
Kevin de Bruxelles:
Your concepts are vague; for example are we to believe that 35 years ago kleptocracy just rose from nowhere? It didn't exist before? Sure you are correct, there is indeed class war going on, but what are the actual tools and processes that are leading to the demolition of the working and middle classes?
The problem is that with the Left / Right political ideological divide there are certain critiques that are sacrilegious to make and thus force people to avoid delving in too deep and instead stick to the use of such vague terms (on both sides, the Right blames "socialism"). There are "sacred" political ideas linked to each ideological box. For example on the Left one sure way to become declared a heretic is to criticize anyone poorer or darker skinned than you; on the Right I suppose it would be the opposite! But the sacred nature of these ideological boxes tend to help people to avoid the true picture. So I will go on to point out a few on the Left which is not to mean there are not just as many on the Right.
For example, one of the most obvious forms of class warfare in America is the process of globalization. The working classes are facing a pincer movement extraordonaire; the outsourcing of high-wage jobs to third world countries combined with the insourcing of low-wage third world labor to take the jobs that cannot be moved. The Left will moan about Neo-Liberalism in very vague terms but this job and labor migration is the Neo-Liberals most powerful weapon against the working classes. But because the Left has to be "for" immigration and "for" more jobs for Third world people, terms are kept real vague.
As to the rising of kleptocracy, all elites and states are to some extent kleptocratic, why did things get so much worse 35 years ago? One must really start at the beginning with an explanation of why states (and therefore elites) exist in the first place. It's actually very simple. States rose from agricultural societies who suffered from raiding by hunter gatherers, pastoralists or other agricultural societies. In the simplest of terms, people will always choose a fixed bandit / parasite over a roving bandit / parasite. And that is because the fixed parasite is more dependent on the survival of the host than the roving parasite is. Of course what often happens is that the people get a weak fixed parasite (state) and end up getting raided anyway by bandits.
Watch Kurosawa's "Seven Samurai" to see this dynamic explored in its most fundamental form.
All governments and their associated corporations are thieves and therefore kleptocrats. The key is to make sure your elites are fixed bandits and not the roaming type; this minimizes the amount of parasitic activity they can indulge in.
In the post WW-2 era, states and corporations were dependent on their citizens / workers since these were, at least indirectly, also the consumers of these corporation's products as well. This was a clear example of a fixed bandit / parasite. Things are not perfect, corruption certainly exists, but at a tolerable level. With the process of Neo-Liberal Globalization, national elites and corporations have emancipated themselves from their nations and societies by destroying the link between employee / customer. The employees are off in some God-forsaken sweat shop in China while the customers are either also overseas or the locals ones are supported by temporary credit instead of jobs. This other key ingredient of Neo-Liberalism, anti-Nationalism, is also strongly supported by many on the Left who dream of a global family of man living in perfect harmony and humming "Imagine" together even though this idea conflicts with every ounce of knowledge about human nature. In a nation-less global society, the Wealthy few are free of any borders and their parasitic destruction of the local peasantry has no limits.
The elites have become roaming bandits and thus why kleptocracy is now such a problem.
Neo-Liberal Globalization has not struck Europe as a whole as hard as it has the Unites States although it certainly has done some damage. The idea of having a strong manufacturing base is still not laughed at on the continent and although there is a huge amount of third work immigration that is hitting the welfare systems hard, this process has not lowered wages for the working classes as much as in the US. But still factories are getting shipped off to China, especially in southern Europe. On the other hand Europe is going through a painful transition from individual smaller nation states to an eventual European nation state in order to compete on an economic global battlefield of larger national groupings (US, Russia, China, India, Japan, etc).. But European nations, especially in the north, despite all the recent troubles, are still thriving social democracies which represent an affront to Neo-Liberals everywhere. So what shock troops are the Neo-Liberal elite throwing into Europe? American right-wingers? Hell no, they know that would never work. Instead they are attempting to take Berlin with their most destructive of all forces, the American Left, led by of all people the ultimate roving bandit parasite George Soros!
After all what have the American Left accomplished post WW2 in the States. Pretty much nothing. Universal Healthcare? No way! Free pre-school for all? Not even on the agenda! Five weeks vacation? Barely holding on to two! Affordable universities? No chance! Paid parental leave? The feminists say NO! Rejuvenation of Urban America? Detroit! Gini scores in the high 20's or low 30's? Nope, high 40's! Keeping GMO's out of the food stock? As if! Public Transportation? That's for sissies! And the list could go on.
Yes on the other hand the American Left have assured some modest welfare payments, Section 8, food stamps, aid for dependent children, etc, for some of the victims of the globalization and immigration policies that they cheerlead so hard.
The American Left, whether knowingly or unknowingly, often through their naïve good intentions, have supported Neo-Liberal economic policies and have been rewarded with token victories in the various Identity Politics arena. They are Neo-Liberalsm's ultimate Fifth Column and now they are being let loose on Europe.
But why would anyone on the Left in Europe, with all they have accomplished post WW2, want to listen their congenital loser cousins from across the pond? Would American baseball players listen if Europe suddenly decided to send lots of baseball coaches to America to teach how to properly play the game? Or might these Americans ask what the hell Europeans know about baseball? To be honest, American Leftists have accomplished on a relative basis even less than European baseball players.
So along with the Krugman types, they send in the MMT clowns as well. These are the guys who promise a government job for everyone to help provide political cover for the offshoring and inshoring that is destroying the working classes. But ask them if these jobs are limited to US citizens and they will not answer. The idea that you can have open borders with neighboring poor countries and an increasing welfare state for everyone is insane. Obviously all a guaranteed job would mean is an increase in the flow of poor immigrants into the US to take these jobs and an increase of the outflow of productive jobs to China as these temporary jobs, if they ever happened would just serve to sooth increasing tensions that if not dealt with could someday threaten these Neo-Liberal policies.
So now they insist that unproductive countries in Europe introduce a two currency system, the Euro for rich people and whatever useless currency for local peasants. No they don't say it like that but do you really think Greek hotels are going to stop charging in Euros? In Iceland they still charge in Euros or Dollars. They only pay their employees in an increasingly worthless local currency. Yes there are serious issues with the Euro but would the US ever try to solve its unemployment problem by paying people in Pesos?
What Europe does need to do is continue its move towards Federation by supporting productivity with the welfare state while at the same time attacking parasitism – both by Rentier and Lumpenproles. They need to use the advantages given to them by the wise Social Democratic decisions of the past and to reject all attempts to impose American Left Identity politics. The Southern Europeans have to become more like their northern brothers by importing more Social Democracy and to avoid falling into the trap of pathetic American victimolgy where bad results are never the consequence of previous unwise decisions.
It's asking a bit much to expect me to encapsulate the history of kleptocracy, wealth inequality, and class war in a single comment, and not a particularly long one at that.
You include in the American left Establishment liberals, faux progressives, even neoliberals. I do not. As you point out, just because someone uses a label does not mean it is any sense accurate or applicable.
I have written a lot about these three great themes here over the past year or so. You ask why I and others start the clock on kleptocracy 35 years ago in the Carter Administration when kleptocratic elements have been around throughout human history. I often use the example from psychiatry. A psychiatrist once was presenting to an audience various psychiatric disorders and running through the symptoms which characterized them. This created a certain amount of discomfort in the audience because many could identify many of the elements being discussed in themselves or in people they knew. Finally, someone raised their hand and made this point. The psychiatrist took the question completely in stride, and said simply, "Just because you have the trait, doesn't mean you have the disease." Well, that's the way it is with kleptocracy, wealth inequality, and class war. There have been many times in history when we have had the trait but now we have the fullblown disease.
And the reason we fix the onset of kleptocracy to the Carter Administration is that he was the first of the conservative Democratic corporate Presidents. He was anti-union in deregulating industries like the airlines and trucking. The usury laws were repealed under him. And perhaps most importantly there were the actions of Paul Volcker at the Fed. Volcker did not just ruthlessly wring inflation out of the economy. He set in place a dogma that all wage increases were to be taken as inherently inflationary and combatted at all costs. It is not with Reagan but with Carter that the wages of American workers go flat. Volcker took no similar action against investors. Indeed under Reagan supply side economics became a cover for the shift of the US economy from one that was worker based to one which was investor or rentier based, with all the transfer in wealth this implied. Money to workers = bad. Money to rentiers = good.
In the past, there have been countervailing trends. There has been real, popular opposition. But in the last 35 years, this has not happened despite 80% of Americans living on just 7% of the country's wealth, despite the housing bubble bust and the meltdown, and despite the brazen conduct of our elites since, accelerating rather than cutting back on their looting.
Sometimes, things really are different. We are currently living in such a time.
That there's a lot of words to say that the left doesn't exist in America nor hasn't since the turn of the 20th century.
In nearly half of your tome, you bemoan the inability of the "left" in America to get anything done and then you criticize them for being to idealistic.
There has never been a real American left since WWII.
Anything that can be described as "left" in America since the war has basically been warmed over neo-fascism similar to that envisaged by members of the European Social Movement (ESM) whose vision of Europe looked much like what the EU does today – states subservient to a centralized economy that straddles communism and capitalism – ie., the privatization of profit, the socialization of risk. See link to National Party of Europe below.
Remember in the US that McCarthy guy and how people's lives were destroyed over suggestions by some that they had socialist tendencies?
How the FBI, CIA and police were used to infiltrate and destroy any of the more radical leftist groups in the 1960s?
No, no, sir, let's cut the crap.
Neoliberalism is a virulent form of capitalism that effectively neuters and co-opts any political party it touches as it seeks to establish an inverted totalitarian society, one in which neoliberalism as economic system is installed above the power of party politics.
Neoliberalism is an economic system, not a political one.
One must remember, economics trumps politics in our world now. Politics is just to keep the masses mollified and disunited.
THAT is why Greek and Spanish "socialists" can vote for austerity policies that contradict every Marxist tenet.
THAT is why the "left" in America has been so week.
The post-war "left" in America has not ever been "left".
To say so just continues to keep the populace confused which is exactly what the elite want. People unable to use terms correctly such as "communism", "socialism", "left", "right", have a much smaller chance in uniting against the totalitarian structure because they can't even agree on terms.
Much better to stop trying to attribute blame to one side or the other and much more worthwhile to attribute blame to the system which – if you ARE going to do for accuracy's sake – actually springs from the hard right and not the hard left.
I mean, ask yourself, of the two – right or left – who had more power and money in Western Europe and the US to really affect policy?
Not many billionaire Bolsheviks, huh?
In general, one can say that the US is a kleptocracy.
Specifically, one should say that it is an inverted totalitarian society with neoliberal economic policies as the central tenets.
To see where many of the ideas for this "liberalism" came from check out the neofascist National Party of Europe from the 1960s and look at their aims. Then compare them to the EU today.
Also, see the Italian Social Movement. Gianfranco Fini, the current Head of the lower house of Italian Parliament and Deputy Prime Minister under Berlusconi was the leader of the THAT fascist party up until 1995.
I mean, the elite couldn't have gotten that clever so as to disguise their designs in confusing terms and thus avoid engendering reminders amongst the populace as to earlier totalitarian regimes, could they?
What, you thought 21st century fascists would goosestep down The Mall?
I tell y
Another classic, thought-provoking post by Kevin. It's great to see he's still (sporadically) haunting this blog that DownSouth seems to have deserted permanently.
I'll just ask this. Now that the credit based consumption is over, don't our parasites need workers with good wages to buy their products? Or are they counting on the emerging middle class in China or wherever to take up the slack?
It is, I think, undeniable that kleptocracy intensified these last few decades. It's a bit like the global warming debate. Even skeptics don't deny the warming anymore. It's the causes that are still under dispute. Is it the sun? Is it man-made? Similarly the intensification of kleptocracy seems well-documented. But the causes can still be debated. Kevin's local/roaming parasites' explanation is one of the best I've seen. You can probably find a few others in Yves Smith's Econned. There's another one I read I dont remember where. It says that the beginning of the end for the middle class was the implosion of the Soviet Union at the end of the 80ies. Until then the American 1% didn't treat its peasants too badly. But as soon as the USSR was kaput they could say there's no alternative and started treating the populace as they always wanted to.
Identity politics will never cease to amaze me. Here you have 2 political parties that rationally should never exist as mass parties since they represent the interest of so few. And yet you have the poor of both parties hating each other's guts. I wish I had an explanation.
The Republicans are every bit as pro-globalization as the Democrats. Bizarrely, the Ds seem to have accepted the mantle while the Rs seem to get away with it.
What I found particularly interesting about the original story of dubious Pentagon propaganda shops (link below), which led to some jejeune harassment as mentioned in the linked piece, was the sums of money involved. I didn't read this article-USA Today does _investigative journalism_? Who knew?-but I recommend reviewing it in its entirety.
By what was reported, the warhats have sourced upward of $500M in really, really mediocre propaganda on Iraqis, Afghanis, and surely quite a few other foreign national masses trying to make those there think *cough* we're good for them and their activist neighbors aren't. And of course the Pentagon can't come up with any kind of accounting for how the money was spent, or even who was hired and paid. Does that sound like a money-skimming bonanza to you? Sure does to me. The reported methods used don't have steep costs in those venues: leaflets, a few news reports, bus ads, promote a few 'feel good' concerts. Stuff like that. For half a billion. The article focuses on one particular contract shop with no prior experience and _no SW Asian national amongst its principals_ which nonetheless is supposed to be operating at least minimally functional PR shops by remote control in-country in those places. But of course no one can SAY just how the money is being used.
. . . And that's what's interesting, to me. Of course, these phantom contractors can simply be pocketing fat chunks of dough with heft kickbacks; that would be the natural trajectory of cost-plus money with no accounting. But the real opportunity in this is for the money to be skimmed _by the brass_ for propadangda, just not in the areas putatively budgeted. Like in the ol' US of A. That would be, of course, 100% illegal. And being illegal, one would never see a formal budged code and appropriation line for that. But think along with me now, brothers and sisters? Which is more important for the permanent war economy: a) dumbass, low-return PR by known to be ineffective methods amongst foreign populations who know very well not to trust us, or b) high-return domestic US media monitoring and plants to shore up eroding domestic morale in support of grotesque and unending neo-colonialist enterprises? $500M isn't a lot of money in Military Land, but siphoning 20-30% of that for a good bang-for-buck media fidgeting in the US would be extremely worth the money. Couldn't do it by folks in uniforms; too much risk of being caught. But by contractors hiring foreign contractors hiring domestic contractors through several shells of fronts; why that's routine on the cloak-and-pixel front.
Food for thought . . .-but it's a certainty that the warhats keep track of what's said domestically and by whom. Domestic morale is the most important asset in a long-term, 'low intensity' conflict, and this is understood by strategic planners. They'd be stupid not to fight the war on this front too, so one must assume they are. Here may be the kind of funding skim opportunity it takes to operationalize that element of strategy.
Considering that the current EuroZone crisis elicits much condemnation over the its very existence to the point of seeing it as some sort of ploy to enslave periphery nations under the jack boot oppression of it Teutonic betters, perhaps this thought can reframe the crisis. It is not the fault of the Euro and treaties binding nations together that is the problem, but the collapse of capitalism, the transnational New World Order that originates the problem, then finds fault with nation states for failing to compensate for the transnational discontinuity on a scale and of a type that the Euro was not placed into this world to accommodate.
Like the gold bugs that want a metal to back up the paper, some analysis want a nation to back up the paper. However, Europe as a whole is trying to accommodate itself into a new social, political and economic order simultaneously and this does not fit into the neat categories of economists and the people who love them. The world is driven by more than money and economics is not the master theory to understand what is going on globally. So, holding the Euro and The EuroZone responsible for the crisis by not immediately resolving it and calling for its dissolution and the rise of nationalism of its elemental states spits in the face of social unity and precipitates an unknown amount of new and potentially deadly inter state conflict. All to save a buck, er a Euro. The Austerity Technocrats are not going to manage their way through this without the politicians and people working through an amenable and egalitarian resolution. I offer for your serious viewing pleasure, an informed guide to an equitable solution.
The above link is a not too long interview with Prof Nancy Fraser.
You can view the lecture she gave, preceding the interview at the following link, so you can follow the interview with some more depth.
Prof Nancy Fraser, Henry A. and Louise Loeb Professor of Political and Social Science and Department Chair at the New School for Social Research in New York, delivers her keynote speech titled 'Crisis of Capitalism, Crisis of Governance: Re-reading of Karl Polanyi in the 21st Century' at the University of Warwick's Critical Governance conference.
'Bottom line: The Fed's excess reserves are not inflationary. As Greg Ip noted in 2009, "Reserves have not been a relevant constraint on bank lending for decades, if ever. Bank lending is constrained by customer demand and by capital." Forget about excess reserves. The Fed's easing simply doesn't have a lot of influence in a world of overleveraged households lacking in credit demand.' - Ed Harrison
Currently, the 12-month change in M2 is a robust 9.8%, while the expansion of M1 transaction accounts has quickened to an eye-popping 17.4%.
Apparently, low velocity has been offsetting these alarming rates of monetary expansion to keep prices muted.
When folks can earn a reasonable interest rate, they are diligent about quickly putting cash to work in interest-bearing accounts. Velocity rises. But currently, with short rates near zero, holding cash or non-interest bearing deposits has no opportunity cost. Velocity stagnates.
So, when the Fedsters finally are obliged to begin hiking their policy rate, accompanying rises in velocity will potentiate the large expansions in raw money supply, causing old-fashioned, nasty inflation in the mid single-digit range.
With the central planners currently frozen into a fetal, thumb-sucking ZIRP posture, it may take until 2014 or 2015 for inflation to appear. But it will, I assure you.
Madcap central banksters who have roughly tripled their balance sheets in the past five years could be compared to the Coyote in Road Runner cartoons:
The Coyote could stop anytime - if he were not a fanatic. (Repeat: "A fanatic is one who redoubles his effort when he has forgotten his aim." - George Santayana).
When interest rates finally start to rise like a Saturn V rocket at mid-decade, the Acme monetary dynamite will go bang in their fool faces. But will the pseudo-science of economics declare surrender? Dream on! They're tenured!
Let's not forget YoY CPI (jiggered up already) is running at 3.5%
I'm getting a little tired of econ types that refer to this as "nothing" or "temporary".
Especially with a return on savings of near zero, meaning your purchasing power is disappering at a 3% clip.
You could invest in the asset market of your choice, but prices are distorted, so that makes you a bagholder someday.
Unless you can invest in a quantum computer hooked to the internet backbone and win the HFT game.
April 21, 2012
Chunga's Revenge :
I've been told that if you count the USA's burgeoning prison population as "unemployed" (something that's not done now), we are in virtual lockstep with eurozone unemployment levels.
Good point. Not only are those in the 2.5 million-strong Gulag unemployed, they are also several times more costly to maintain than those receiving unemployment benefits.
Spend another 5% of GDP on the military - most of it wasted on global domination - and after a few decades, you're frickin' poor, not to mention more unequal.
The Washington D.C. metro area sports the most educated and affluent urban population in the country. But they just ain't very damned smart.
Tyranny of Consumption:
Prisoners are also being used to turn out office furniture, in other words, "Justice" has created an underclass of slaves. "Sweatshop labor is back with a vengeance. It can be found across broad stretches of the American economy and around the world. Penitentiaries have become a niche market for such work. The privatization of prisons in recent years has meant the creation of a small army of workers too coerced and right-less to complain." Needless to say Banksters like Wells are 'all over that'. – fraser/freeman
The analysis of the role of the imperial military in distorting both national priorities and employment should be brought to the forefront. Go to San Diego, Norfolk, Bremerton and a hundred other cities and you will find one dominant employer– the war machine– which supports the fast food restaurants and shopping malls that spread out from it.
If the US had a military system the size of Canada's, rather than as big as the entire rest of the world it would certainly be a different society. Why, we might even have to spend money on infrastructure that is sustainable rather than designed to blow up,create dead bodies and Shock & Awe, and be instantly obsolete.
Reading Andrew Bracevich's The Limits of Power, and he makes much the same point. The cost of the military to support the American Empire is a drain on the economy, though his view is it's the cost of the American economy. That is, America's outsized use of world resources, especially oil, is supported and defended by the military, who drain the American economy.
Others have noticed the Empire is a self-referential system, since the resources to fight the foreign wars come from foreign countries. The rest of us just have to pay for the round trip.
It's not easy to say if this large-scale armed robbery is a net gain or not. The costs are, indeed, more than those measured in dollars.
JH, Hannah Arendt is quoted in YouTube video: "A Brief History of Neoliberalism by David Harvey 1/5″ (ProFreeSpeech on Jul 17, 2007) - 2007! -
"Imperial adventures abroad and tyranny at home go hand in hand."
David Harvey remained perplexed after writing "The New Imperialism." He followed through with "A Brief History of Neoliberalism."
So, Hannah's Totalitarianism "by any other name smells as sweet" to the global 1%? Obama "knows his place" as "Commander in Chief" of the Global Imperial Military and Polizei. As for "pepper spray" table to face, think TABASCO Empire profits from salt to peppers to oil in a Closed DNA System at AVERY Island, Louisiana; together with the Global Oil/Oil Services "Trust" and BP/Shell in the Gulf of Mexico paving the way for Louisiana's de-population in favor of O&G profits unencumbered–a long-term goal of BIG "All your land is belong to us" privateers). The RUIN of water/land the People's livelihood are INTENTIONAL, from drilling to fracking, making "Lebensraum" for the .01%.
The People and Land of the Gret Stet of "Resource-Cursed" Louisiana are but SACRIFICES to the gods of private profit and their high priests in the "Privatized States of America." Louisiana Land is their Inner Temple. Next?
As a British professor has said of Sociopaths/Psychopaths in Power: They don't care about us. Why should we care about them?
William K. Black, Michael Hudson, Steve Keen point the way to go in reality, if civilization for the 99% is to continue to exist. The complete capture, via financial "coup d'etat" (Joseph Vogl at INET 2012), of NationState Governments by the 1% (.01% + .99% Agents du jour) - in order to seize Global "Lebensraum" (of land, water, air, energy, human energy) for .01% DNA in perpetuity - must come to a dead stop.
The Mad DNA Wars for Private Possession of Finite Resources on Earth, following the model of Infinite Growth/Resource Extraction Capitalism by the !%, must end by deliberate human choice. That is, if the "unintented consequences" of Fukushima Fallout don't accomplish the mission of the 1% first. Are we waiting for the denouement?
The system survives because most people believe its corruption and dysfunction can be overcome by their own individual effort.
By the time they realize that it can only be overcome by good luck, they are too old for collective effort.
Propaganda and celebrity are the keys to keeping the whole thing going. Television pumps out nothing else 24-7. Had television existed in the Nineteenth Century there would never have been a union movement.
Jake: There isn't an award for "Explaining The Universe In 73 Words", but if it existed, you would have won it!
Most concise statement of our current problems I've ever read.
Last part of part 3 says it in a nutshell – Dems, as well as Reps, are now controlled by finance and "old" Dem constituencies go along because finance has means to defeat Reps!
What a trip – anything to defeat Reps, including shooting yourselves in your feet and other parts of your anatomy (which is why I suppose, Viagara has taken off – it's natural counterpart has been put in the shredder ….)
Amazing to me how easy it is to distract folks from the real issue – finance, and refocus it on a political party – when both major parties are tools of the self same finance industry …. Never underestimate the power of team sports …
Well, folks, to me the answer is a bit obvious, altogether now:
"You apparently can survive betting against bull market irrationality if you meet three conditions. First, you must allow a generous Ben Graham-like "margin of safety" and wait for a real outlier before you make a big bet. Second, you must try to stay reasonably diversified. Third, you must never use leverage."...It is the classic failing of value managers (and poker players for that matter) to get impatient and bet too hard too soon. In addition, GMO was not always optimally diversified. We are generally more cautious (or, if you prefer, "more experienced") now than in 1998 with respect to, for example, both patience and diversification, and at least we in asset allocation always stayed away from leverage. The U.S. growth and technology bubble of 2000 was by far the biggest market outlier event in U.S. market history; we had previously survived the 65 P/E market in Japan, which was perhaps the greatest outlier in all important equity markets anywhere and at any time.
These were the most stringent tests for managers, and we were 2 to 3 years early in our calls in both cases. Yet we survived, although not without some battle scars, with the great help that we did, in the end, win these bets and by a lot. Hypothetically, resisting the temptation to invest too soon in 1931 may have been a tougher test of survival in bucking the market. Luckily we, and all value managers, were not around to be tempted by that one.
The week ended April 11th is when equities finally rolled over. Which is why those curious how retail fund flows did in the past week will not be very surprised: if individual investors avoided stocks like Bernie Madoff Asset Management on the way up, there is no reason why they should change their mind on the way down. Sure enough, in the past week, $1.5 billion was withdrawn from domestic equities. I
Instead, cash, solely with the aim of capital preservation enter taxable bond funds, as it has for the past 3 years now. With the latest redemption, total 2012 flows to date are over $25 billion, or more than double the comparable amount in 2011.
It appears that retail has seen right through the once in a lifetime opportunity, and is withdrawing money from stocks at the fastest pace ever, irrelevant of what the myth formerly known as the "market" actually does.
03/09/2012 | ZeroHedgeLooks like it's time to start looking for somewhere else to peddle those Treasuries -- but then, when hasn't it been? Soc Gen's FX head Kit Juckes:
A cosy relationship has formed over the years whereby the resistance to allow currencies to appreciate too much in Japan and China has fuelled appetite for US assets, which in turn has allowed the US to run a huge deficit (with gradually falling Treasury yields). This is changing, and not (yet) in a good way.
Here are the current account balances he is referring to. Japan and China's combined current account has deteriorated significantly over the last few years and continues to head lower:
Also, why risk-on/risk-off will continue to be the norm:
Capital flows don't match up to current account flows -- and don't need to -- but since the global recession, the decline in the US deficit has mirrored the fall in the China/Japan surplus. The "big story" hasn't been on that side of the equation, but rather, about the increased flow of capital out of the US in response to seriously unattractive domestic yields, and the periodic breaks in that outflow that trigger dollar strength and 'risk off' moments across asset markets. The chart below shows the lurch back into capital repatriation into the US in 2008/2009, but other than that, it?s been a very one-way flow.
As Tyler Durden noted earlier, "the truth is that in this new normal only beta matters (the more lever the better), and the only beta that matters is that generated by relative USD strength/weakness." Observe:
Juckes sees the eurozone (Germany) presiding over the largest surplus provided the euro "escapes the weight of the threat to its existence," and reduced import demand due to austerity in many of the EMU countries running deficits will contribute. He concludes:
The image that comes to mind is of a puzzle where the pieces no longer fit easily together. In the end they will, but the way that happens will affect asset prices. The big price-insensitive buyers of dollars will be less important. That won't move US yields up much while rates are zero and QE (whether sterilised or not) is taking place. But Treasury yields are at the end of their 30-year bull market. As long as rates are anchored by the Fed and the US is running a large deficit without automatic demand for US assets from China and Japan, it isn't helpful for the dollar ... And sadly, the 'risk on-risk off' gyration will go on as US investors seek positive real returns where they can.
April 18, 2012 | nakedcapitalism.com
Philip Pilkington: At the beginning of your book From Financial Crisis to Stagnation you refer to the 2008 crisis as a 'crisis of bad ideas'. Could you please briefly explain why you refer to the crisis in this way?
Thomas Palley: A central and critical element of my book is its emphasis on the role of economic ideas in generating the crisis. This feature fundamentally distinguishes it from mainstream explanations that tend to represent the crisis in terms of surprise events and economic shocks (e.g. black swans).
My book starts with the fundamental idea that economies are made, not found. The way economies are organized and function is significantly the product of social choices, not the product of nature. Over the past thirty years we (society) have embraced a set of economic ideas that shaped economic arrangements – including the pattern of income distribution, the power of corporations and finance relative to labor, and the way in which the economy generates demand.
This shaping of economic arrangements was obviously driven by political forces acting on behalf of corporate and
financialelite interests, but economic ideas also played a critical role. First, the ideas of mainstream economists provided justification for the re-shaping of the economy in ways that elite interests wanted. Second, mainstream economists put forward additional ideas that were picked up and incorporated into the policy project of corporate and financial elites. Third, the monopoly capture of economic discourse by mainstream economics served to exclude other competing economic ideas from making it on to the policy table, into classrooms, and into the public debate.
The implication of this view is the crisis is at a deep level the product of a flawed economic policy paradigm derived from a set of flawed economic ideas. Escaping the crisis means replacing that policy paradigm and the ideas from which it derives. That is a massive challenge involving both a political contest and an intellectual contest. We need to win both. One without the other will be useless. It is no good winning the political contest if you simply replace Tweedledum (hardcore neoliberals) with Tweedledee (softcore neoliberals). Likewise, it is no good winning the intellectual contest if you do not win the political contest to implement different economic policy ideas.
PP: In the book you distinguish between two sorts of alternative approaches to the crisis. One you term 'Textbook Keynesianism' and the other you term 'Structural Keynesianism'. Could you briefly delineate the differences between the two approaches? Also, should it be understood that the two approaches overlap with different schools of economic thought?
TP: Textbook Keynesianism and structural Keynesianism both emphasize the significance of total (aggregate) demand for the determination of economic activity. That is what makes both of them forms of Keynesianism.
However, textbook Keynesianism sees the microeconomic structure of the economy as intrinsically healthy. If demand falls off, all that is needed is for policy to step in and temporarily fill the demand gap until private sector demand revives. That is the logic behind temporary fiscal stimulus and temporary easy monetary policy.
Structural Keynesianism argues that the economy's underlying income and demand generating process can be structurally flawed. For instance, income distribution can become badly skewed, creating a permanent shortfall of demand. In that case, private sector demand will not revive and the solution is structural remaking of the economy's income and demand generating process.
Textbook Keynesianism can be identified with neo-Keynesianism (what Joan Robinson less politely called bastard Keynesianism). It identifies the principal macroeconomic problem as price and wage rigidity. This way of thinking gradually morphed into so-called New Keynesianism, which means textbook Keynesianism and New Keynesianism overlap. However, we should be clear that New Keynesianism has little to do with Keynes' original logic and it is more a theory of market imperfections in the spirit of Arthur Pigou, Keynes' great rival.
Structural Keynesianism links with the work of Michal Kalecki who joined Keynes' insights about aggregate demand with Marx's insights about class conflict and income distribution. That means structural Keynesianism overlaps with Marxist sociological and economic analysis. However, classical Marxism views capitalist economies as destined to crisis because of a falling rate of profit. Structural Keynesianism does not.
PP: In the book you discuss various mainstream theories of the recent collapse. Without going into too much detail perhaps you could say something about the mainstream explanations of the crisis?
TP: In principle there are two alternative competing mainstream explanations of the crisis.
- The first is the hardcore neoliberal perspective, which can be labelled the "government failure hypothesis". In the U.S. it is identified with the Republican Party and with the economics departments of Stanford University, the University of Chicago, and the University of Minnesota.
- The second is the softcore neoliberal perspective, which can be labelled the "market failure hypothesis". In the U.S it is identified with the Obama administration and half of the Democratic Party. In Europe it is identified with the Third Way. Among economics departments it is identified with those such as Harvard, Yale and Princeton.
The government failure hypothesis maintains the crisis is rooted in the U.S. housing bubble and its bust. That bubble was due to failures of monetary policy and government intervention in the housing market. With regard to monetary policy, the Federal Reserve pushed interest rates too low for too long in the prior recession. With regard to the housing market, government intervention via the Community Reinvestment Act and Fannie Mae and Freddie Mac, drove up house prices and encouraged homeownership beyond peoples' means. The neoliberal perspective therefore characterizes the crisis as essentially a U.S. based phenomenon.
The market failure hypothesis maintains the crisis is due to inadequate financial regulation. First, regulators allowed excessive risk-taking by banks. Second, regulators allowed perverse incentive pay structures within banks that encouraged management to engage in "loan pushing" rather than "good lending." Third, regulators pushed both deregulation and self-regulation too far. Together, these failures contributed to financial misallocation, including misallocation of foreign saving provided through the trade deficit. The market failure hypothesis is therefore slightly more global than the government failure hypothesis, but it views the crisis as a purely financial phenomenon.
PP: Your interpretation of the present crisis is a little different, right? Could you explain it briefly please?
TP: Yes, my interpretation is different – very different. I call it the destruction of shared prosperity hypothesis. This view is not represented in mainstream economic discussions because it challenges the fundamental theoretical foundations of mainstream economics which are shared by both hardcore Chicago School (freshwater) and softcore MIT School (saltwater) neoliberal economics.
My argument is that around 1980 the U.S. adopted a fundamentally flawed economic paradigm. From 1945 through to the mid-1970s the U.S. economy was characterized by a "virtuous circle" Keynesian growth model built on full employment and wage growth tied to productivity growth. The political triumph of Ronald Reagan enshrined a new economic paradigm that abandoned full employment and severed the link between wages and productivity growth.
The new paradigm was fundamentally flawed.
- One flaw was that it relied on debt and asset price inflation to fuel growth instead of wages.
- A second flaw was the model of globalization which created an economic gash in the form of leakage of spending on imports (the trade deficit), leakage of investment spending offshore, and leakage of manufacturing jobs offshore. These twin flaws created a growing demand gap.
That is where finance enters the picture as its role was to fill the demand gap. Financial deregulation, regulatory forbearance, financial innovation, financial mania, and plain vanilla financial fraud kept the economy going by making ever more credit available, However, as the economy cannibalized itself by undercutting income distribution and accumulating debt, it needed ever larger speculative bubbles to grow. The house price bubble was simply the last and biggest bubble and was effectively the only way around the stagnation that would otherwise have developed in 2001.
The house price bubble delayed the onset of stagnation but at a cost. When it burst it created a financial
crisisbecause of the scale of financial excess. Moreover, it also makes it harder to escape stagnation now because of the scale of debt burdens and the extent of destruction of credit-worthiness.
PP: Your interpretation seems to make a lot more sense than the competing theories, which appear to me reductionist. Why do you think that your colleagues – especially your left-leaning colleagues – are missing the bigger picture?
TP: Thanks, Philip. That is a very good and difficult question. It is key to understanding why the crisis has so far generated little change in economics and economic policy.
There are many mainstream (orthodox) economists who have progressive values but they miss the big picture because their theory cannot accommodate it. Moreover, they can't abandon their theory for a host of psychological and sociological reasons. At the psychological level it would involve a devastating admission that they have been wrong; that they've been teaching their students a lot of nonsense for thirty years. At the sociological level it would mean giving up the trappings of power and pay that go with their current intellectual monopoly because the paymasters of the system would quickly replace them with others.
That said, many mainstream economists are starting to admit income distribution has played a role in fermenting the crisis (you have to be willfully blind not too see it). Consequently, they are busy trying to incorporate income distribution into their narrative. However, they do so in a way that leaves their core theory about markets and market efficiency unchanged. Unfortunately, journalists and the general public cannot see this and are taken in by this tactic. One of the contributions of the book is it unmasks these obfuscations by showing how these stories don't stack up and are inconsistent with the evidence.
Finally, this discussion shows why it is very important the general public be capable of distinguishing between "values" and "analysis". If not, people risk being fooled by the rhetoric of progressive values that provides cover for policies that are actually conservative.
PP: In the book you provide a very clear description of what actually occurred in the financial market in 2008. Reading it I thought that a lot of people – myself included – have never really put the pieces together in their own minds. Maybe you could summarise the key events briefly?
TP: The mechanics of the crisis within the U.S. financial system are actually quite simple and can be understood as a six step process.
- Step one was the build-up of toxic loans over several years.
- Step two was when loans eventually started turning sour with the bursting of the house price bubble in 2007, causing loan losses.
- Step three was the destruction of bank equity caused by mounting loan losses. This process began in the so-called "shadow banking system" and then moved into the Wall Street investment banks and the established commercial banking sector.
- Step four was the resulting threat of bank defaults triggered by equity destruction.
- Step five was the rush to cash spurred by the threat of default. That caused a liquidation trap as agents tried to sell financial assets to raise cash, which deepened the extent of asset price declines and caused further equity losses.
- Step six was the run in the commercial paper market immediately after the collapse of Lehman brothers (September 2008) whereby banks and financial institutions became unwilling to lend to each other. That put every bank (including Goldman Sachs) on the verge of default, prompting the Federal Reserve to step in and de facto take over the commercial paper market by acting as lender of last resort.
PP: In the book you mention the commodities bubble that blew up in the 2008 financial crisis a number of times. Many commodities – oil included – are nearly back at their 2008 levels. Do you think that this could be due to speculation? If so, why on earth are the US government allowing this?
TP: I firmly believe speculation is a significant part of the run up in commodity prices, particularly oil. Over the last decade there has been tremendous change in the character of commodity market participants. In the past, the market consisted of producers, end-users, and traders intermediating between these groups. Now, the market has been invaded by financial investors in the form of pension funds, endowment managers, hedge funds acting on behalf of high net worth individuals, investment bank entities trading on their own account, and exchange traded funds (ETFs) for ordinary punters who want to speculate on commodities. This transformation represents the 'financialization' of commodity markets and it has resulted in a tsunami of money chasing commodities as a speculative investment vehicle. After causing a bubble and a bust in 2008, it has again pushed up oil prices.
The fingerprints of speculation are all over the oil market: large one day price spikes and plunges that cannot possibly be explained by changes in economic fundamentals; high prices in the face of large and growing inventories; storage in unconventional forms like idle super-tankers; and investment banks like Goldman Sachs purchasing oil storage capacity in places like Cushing, Oklahoma.
Why have the Federal Government and Congress done little about this? Two reasons.
- First, Wall Street, the banks, and oil companies are big beneficiaries from these developments and they (as everyone knows) are some of the most powerful vested political interests. Money talks in politics and they have the money.
- Second, economists have been disastrous on this issue, continuously denying the role of speculation. The depth of this denial is evidenced by the fact that even the often critical and insightful Paul Krugman has consistently denied the role of speculation. This provides yet another example of the role of bad economic ideas in the destruction of shared prosperity.
PP: Many economists and politicians seek to blame the Fed for the housing bubble and the financial crisis. In your book you say that this is misleading. Why do you think this?
TP: In my view the Fed is both to blame and not to blame for the crisis.
The Fed is to blame because it strongly supported the over-arching neoliberal economic program that is the ultimate cause of the crisis. Its support for the neoliberal program is most evident in its support for financial deregulation, support for self-regulation, and opposition to regulation of financial innovations such as derivatives. Had the Fed not held these beliefs and done its job properly, the excesses of the sub-prime market and the house price bubble would likely have been significantly prevented. Alan Greenspan was the booster-in-chief but almost every member of the board of governors and the roster of economists working in the Fed deserve blame. They all sung from the same song book and were deaf to other music saying inflation targeting was not enough and needed to be accompanied by tough oversight and balance sheet regulation.
However, the Fed is not to blame for pushing interest rates too low and holding them there too long, which is the charge levelled by neoliberal economists like John Taylor of Stanford University. After the recession of 2001 the economy was stuck in jobless recovery and showed signs of falling back into recession. This was despite significant stimulus provided via the Bush tax cuts and Iraq war. From the point of view of escaping stagnation, the Fed did the right thing.
Unfortunately, most of the public discussion has focused on the Fed's interest rate policy after the 2001 recession. It should be focused on the neoliberal economic thinking that still permeates the Fed. Though there has been some change in attitude toward regulation, the Fed's fundamental thinking about the economy remains unchanged. This failure to go after deep failures of understanding is part of the mechanism that protects the policy establishment, and it explains why the people in charge of the Fed (and other central banks like the Bank of England and European Central Bank) are the same people who failed so disastrously before the crisis.
PP: Regarding the economic thinking about the broader causes of the crisis you are particularly critical of the 'savings glut hypothesis' that has become popular, especially with the Federal Reserve Chairman Ben Bernanke. My impression from the book is that you see this as ad hoc economic thinking that seeks to avoid the real issues. Would I be right in saying that and could you briefly outline what is wrong with the savings glut hypothesis – which, in my reading, is as pervasive on the left as it is on the right?
TP: In my view the savings glut hypothesis is nonsense economics. Looking at it from the big picture, you see it is just another in a series of explanations of the US trade deficit by mainstream economists. My book shows clearly how these explanations evolve to fit the political moment rather than to explain the phenomenon. And the enduring common feature of all these explanations is they avoid blaming globalization as the cause of the problem or having any downside.
That is absolutely staggering. Mainstream economists blind themselves to the most obvious explanation, and that is a pattern that repeats over and over again in other areas of economics. And because the explanation is so obvious and simple you can never write about it in journals which are fixated on complexity. The story about the emperor's new clothes really does apply for much of modern economics.
With regard to the saving glut hypothesis, it ignores the fact that the US trade deficit has been rising for 30 years, long before China emerged on the scene. And there is much other evidence and argument against it – but that is in the book.
PP: The book ends on a slightly pessimistic note. It appears that, given the entrenched dominant policy paradigm governments are likely not to begin the process of economic rebalancing. Do you see any light at the end of the tunnel? Are there any social or political forces you think might move the policy debate forward, both in the US and worldwide?
TP: You are right. I am pessimistic which is why the book predicts stagnation. And by the way that prediction was made in 2010 when the book was written, so it has already been proven right. I had great difficulty finding a publisher because 2010 was the time of "green shoots" and "V-shaped" recovery and there was widespread denial about the systemic nature of the crisis. Princeton University Press who published my prior book turned it down.
I am guided by Gramsci's aphorism regarding pessimism of the intellect and optimism of the will. My intellect tells me that as of now there is no significant political force for progressive change that moves the political and policy debate in the direction I would like to see it go. At best, we are muddling through in a way that contains the economic crisis at its current level. Moreover, if anything, the risks are to the downside from contraction in Europe, risks of trouble in China, slowing growth in emerging market economies, and the prospect of fiscal drag in the US.
In many ways the economic die have been cast. We are now moving into the stage where political risk starts to assume a bigger role. I begin my book with some comparisons with the 1930s and I believe those comparisons remain valid. Mark Twain talked of history rhyming rather than repeating, and today's rhyme is clearly with the 1930s.
That said I am an optimist of the will. Why else write a book that contains a map for change of economics, politics and economic policy. One has to be an optimist if one believes in constitutional democracy, and I do.Thomas Palley is has served as the chief economist for the US – China Economic and Security Review Commission. He is currently Schwartz Economic Growth Fellow at the New America Foundation. His latest book From Financial Crisis to Stagnation is available at a 20% discount here [Select country location (top right hand corner) & enter code "palley2012" at checkout]
Interview conducted by Philip Pilkington
DiSc :Middle Seaman
Amen to that. I am also of the opinion that the problem is a departure from post-war equality-enhancing policies. Wage moderation, tax breaks for the wealthy and union-busting does not work.
No quantitative easing, LTRO, or austerity measure will get us out of the crisis, and no stimulus spending for that matter. We need to go back to strong unions, welfare programs, and progressive taxation, and we need to tackle tax evasion and fiscal paradises.
I believe in German-style social-democracy, or at least what it used to be in the '70s, but even in "socialist" Europe there is no believable political party or trade union that advocates anything remotely resembling that.fresno dan
Even if we assume that Palley offers a new model for understanding the current financial system, the real question is whether he offers different solutions to the financial crisis than are offered by previous models. From this interview, haven't read the book, Palley's model doesn't offer solutions we haven't discussed in public before.
Many of us support less debt, especially when we borrow from the non-rich and give the borrowed money to the rich. Many of us believe that wage stagnation and retreat and massive unemployment, a form of wage retreat, cause huge moral, societal and finance damage. All that was true even in FDRs days when he wanted to propose the 2nd bill of rights.
A model is worthy if it sheds light on unseen before elements. Palley's model doesn't do it although his intentions are excellent.jake chase:
April 18, 2012 at 5:31 am
"Many of us support less debt, especially when we borrow from the non-rich and give the borrowed money to the rich"
I have never seen it said better.Dan B:
Nice to know there are two economists (Steve Keen being the other) who may understand what is really going on in the economy. I am not certain economics has any relevance except as it contributes to propaganda on behalf of elite interests. I suppose this guy will be drummed out of the Flat Earth Econmic Society. Hope he has a guaranteed income (or is tenure the same thing?)Ramanan:
"My intellect tells me that as of now there is no significant political force for progressive change… At best, we are muddling through in a way that contains the economic crisis at its current level. Moreover, if anything, the risks are to the downside from contraction in Europe, risks of trouble in China, slowing growth in emerging market economies, and the prospect of fiscal drag in the US."
A thoughtful interview. However, we'll suffer as long as we think restarting real growth is the answer. Energy, water, climate, etc., are now imposing limits to growth. Future generations will ask how we could not make the connection -it's much like Simmelweiss being ridiculed and ostracized for proposing to his fellow MDs in Vienna that they should wash their hands between contacts with patients.Susan the other:
"There are many mainstream (orthodox) economists who have progressive values but they miss the big picture because their theory cannot accommodate it. Moreover, they can't abandon their theory for a host of psychological and sociological reasons. At the psychological level it would involve a devastating admission that they have been wrong; that they've been teaching their students a lot of nonsense for thirty years. At the sociological level it would mean giving up the trappings of power and pay that go with their current intellectual monopoly because the paymasters of the system would quickly replace them with others."
"They (mainstream economists) all avoid blaming globalization" for the mess we are in. Instead they all talk about the imbalances caused by things like "savings gluts." Does Palley imply (or does he imply the opposite?) that if we all just spent all our money buying and selling that global growth would be maintained and money would saturate the world with prosperity like the ocean stream? Or is Palley saying we are willfully simplistic and out of balance in the most fundamental way – we don't have any jobs – aka: we don't have an economy at all. That perhaps we should have been more self sufficient nationally? Or is he saying that 4 decades of "inflation" have so destroyed money as a means of exchange or investment it has become meaningless? And we are going to have to start over.
But never fear, soon the globalizers will commoditize unemployment and trade it just a photon faster than the speed of light. Thereby turning back time.JurisV says:
Another superb interview Mr Pilkington!
Palley's explanations are very clear, helped my growing understanding - and I share his pessimism about our times rhyming with the 1930′s. I also was impressed with how much his views rhymed with, what I felt was pretty much a majority sentiments in the recent INET conference:
1. The current economic models are "Science Fiction" - Dirk Bezemer. They don't now, but must include "money", banking, and capital flows across borders to be even minimally useful.
2. Any new Paradigm has to focus on "reducing injustice –Prof Amartya Sen . He also said to make the distinction between "justice and injustice." He said "reducing injustice" would be a more appropriate focus.
3. GDP (and its growth) should not be the economic focus; rather it must be focused at the root on human beings. So focus on improvement in "human welfare." - Joseph Stiglitz
4. One of the results on the financial crisis has been to produce a growing "Democracy Deficit." - many speakers and discussants mentioned this.
5. ETHICS…… The moderator in the Amartya Sen session had a good discussion in responding to several questions on ethics. He said (and I'm paraphrasing) "New Economic Thinking" needs to, in part, go back to the ideas of the "Old Thinkers" -- He mentioned David Hume and Adam Smith who he said had much to say about ethics and its importance.
6. Understanding the historical record in Economic thought and theory was brought up time after time. The years after the rhyming 30′s saw an understanding of Economics with Fisher, Keynes, Shumpeter, Minsky that spoke to ethics, morality, justice in Economic Theory - and ultimately to the welfare of the human inhabitants of THE MARKET !
A positive note: The moderator of the session in which Dirk Bezemer presented, in his summary said that this INET conference (the third one) had ideas and conversations that were radical compared to the one just two years ago in Cambridge. The current crisis is forcing the economics community to question the established Pillars and re-evaluate fundamental assumptions.
A pessimistic note: POWER… The financial community and their political supporters have amassed an incredible amount of Power in the last decades along with wealth. They are not going to easily relinquish that power. Andrew Haldane said that the burgeoning "revolution" in economic thinking has to keep coming up with facts supporting a new narrative so that those in politics can use those as "weapons". I think Haldane was being overly optimistic. Things are going to get a lot worse for the middle class before we see any hints of the necessary "pitchforks and torches" argument.Chris Wroth :
oops… I forgot to list the mention of regulation, regulation, regulation that was also said to be imperative in any system that has even a hint of being effective.
And having just now read Fred's comment above - I have to say that my pessimism is overwhelming. If we closely look at the historical record - it's excruciatingly difficult to be very optimistic of achieving rational progress over any extended period. And not just in economics.Paul Tioxon:
Thank you for a terrific interview. May I offer Mr. Palley an optimistic ray of hope? If someone (?!!) is able to convince Ireland to offer Mosler bonds, the subsequent success of that issue could push MMT to the front of the conversation. After all, look what happened after Iceland started listening to Michael Hudson. There is always hope.
The change from the New Deal to the rotten deal for the middle class, is still not quite apparent from this interview, but then, I'd have to read the whole book. But let me say this based on what Philip has teased out of the author. I believe I understand and agree with the big concept you are trying to articulate. From the virtuous cycle of mass production, mass consumption, America liberated a massive middle class. It was the wages of the big businesses that gave the middle class the new moniker, consumer, which drove more businesses and more prosperity into more corners of American society than ever before. Low Unemployment and wage growth equaled more consumption of finished goods keeping factories humming, tractor trailers rolling, and shopping center parking lots jammed. But it took wages, rising income on the part of the massive middle class to do all of this.
As capital escaped first to Europe via the Marshall Plan and then to Japan, slowly what was made and sold in America became first made somewhere else and secondly, the profits were harbored somewhere else. The increasing incomes based on increasing productivity leaked elsewhere. The differential in wages of course had not escaped the capitalist, who pocketed the difference and kept it offshore. The trade imbalance grew, without Chinese or Korean savings glut, it grew with American capital's glut. So, the wages stagnated and then given the death by a thousand cuts. Cuts in benefits, cuts in pensions, cuts in public services that were once nominal in cost, now unaffordable. Such as quality public education, low or free college tuition.
And all of this has to be justified. The economics profession is little more than pseudo-scientific justification for political domination by those who use money and its debt as social control. Even among the other 2 pillars of social science, sociology and political science, simple analysis of how to win elections has replaced serious research into policy alternatives. That, and menial counting of misery without any political access to reduce the suffering recounted in a thousand studies of unemployed, the poor and criminals the new names of the citizens formerly known as consumers, voters, and labor.
could you expand on this. I know it is a favorite of yours, and I assume you mean destruction of assets...or acknowledging the dead loans that clutter TBTF bank balance sheets. Am I rite?
I am talking about a surplus of capital that matches (or exceeds- and I am betting on exceeds) the surplus of labor reflected in the unemployment rate.
That surplus (to go real old school economics) is reflected in the paltry low risk returns, and even moderate high risk returns. Further, when you look at in terms of Miller Modigliani life cycle analysis, you find the savings rate of the under 60 crowd is insufficient to purchase the assets of the retired folks, causing the eventual valuation of those assets in real terms to decline. In other words, as we print money, because we don't stimulate enough to get nominal wages to rise, let alone real wages, we find that domestic savings is insufficient to maintain asset valuations as they are transferred between generations. Right now, thanks to the Euro panic, we have healthy capital inflows disguising this imbalance, but if we had to rely solely on domestic savings we would be in trouble.
In other words, while capital loves austerity, because they think everything will be cheaper and they will be richer, a modern fiat state has to vote against austerity because labor ultimately votes and will eventually rebel against capital over time.
This, of course, ignores a bunch more supporting analysis, but is the short form.
Someday this war's gonna end...
Comrade Alexei Mikhailovich:
Citizen AllenM wrote:
Further, when you look at in terms of Miller Modigliani life cycle analysis, you find the savings rate of the under 60 crowd is insufficient to purchase the assets of the retired folks
I thought that was the reason why we gave Chindia access to our markets? They'd buy whatever my generation couldn't.
Ironic, isn't it?
In multiple ways. How can public policy that led to banks/government agencies easing credit not fiscal irresponsibility?
Ironic, isn't it? "Easy of credit" can be the cause and the cure at the same time.
Sure, if you have an unlimited CB balance sheet, and you want bigger and more spectacular busts one after another. Um, wait, yeh, that's pretty much what we're doing. Each crisis worst than the former, each response more aggressive, each result leaving us more divided, bifurcated and teeming with those left behind. I'm wondering how they think they can continue along this path without major league backlash eventually.
Comrade Alexei Mikhailovich wrote:
I thought that was the reason why we gave Chindia access to our markets? They'd buy whatever my generation couldn't.
Sure, but when they lower their savings rate, their capital uptake will preclude continued subsidization of our markets by capital reinvestment. That exorbitant privilege is going to take a hit too, and I sort of follow Eichengreen wrt the timing, because the Chinese are now committed to starting to develop their own consumer economy, which will require more wages (goods) paid in China, and profits to fall for especially local Chinese companies. The Central Committee is, I think, going to squeeze capital hard to appease labor over the next five years.
Many balls in the air, and it is guess to see which one falls first.
'Germany' isn't driving austerity
The questions isn't simply austerity or no austerity. Certainly, government spending has to be curtailed. But a more traditional IMF-style austerity is cutting government spending while devaluing the currency. The cheaper currency is a source of growth that counteracts some of the bad effects of cutting spending.
But the German position is cutting spending and no devaluation, which as we have seen in Greece just leads to bigger deficit ratios because GDP falls faster the deficit.
There is also a fetish about reaching 3% deficit by 2013. This is an entirely arbitrary target, as slower glide path in cutting government spending would certainly be more productive. Spain is not Cinderella and its carriage doesn't turn into a pumpkin at midnight.
Bingo. Agree 1000% Retirees have to sell their assets to fund retirement. Who will buy when the labor force is poorly paid and is a fraction the size of the retired population; especially at the retiree wishing prices?
Repeat: Retirees have to sell their assets to fund retirement.convexity:
Mr Slippery wrote:
What will be trigger for the vassal states to lose faith in the the political ability of the US to solve its problems?
Sanity in economic policy abroad? That seems like a very unlikely development at this time.
Jefferies Describes The Endgame: Europe Is Finished | ZeroHedge
- shows EU banks avg leverage 69:1 versus US banks 22:1 now
- French bank assets 4X French GDP
- Fiscal irresponsibility
Is it an ideological campaign?
Neo-mercantilism: the belief that nations can become wealthy by using non-tariff trade barriers to accumulate reserve assets (sovereign bonds)
an update of
Mercantilism: the belief that nations can become wealthy by using tariff trade barriers to accumulate reserve assets (gold)
it will not have the benefit of a relatively democratic political system.
But it does have the benefit of a well equipped army that has shown a willingness to kill civilians
But it does have the benefit of a well equipped army that has shown a willingness to kill civilians.
This is bullish...right?
LL, the answer to that is do you feel lucky? If you feel lucky and have no cancer or other bad luck get you before 78- waiting is absolutely the best course until full retirement, and waiting until 70 pays even better. On the other hand, no money, no job, no nothing and 62- early it is.
That is not to say there are not some more exotic options available re spousal benefits, but most are in the simple boat.
SSI is totally exotic to most folks, and well, paying for it is going to be a bit of a strain after the fake bonds are sold, but hey, Greenspan promised that it would continue, he just told everyone I have no idea how much it will buy, and my guess is it will buy groceries.
That is it -- buy groceries and pay your cell phone bill, and maybe the internet.
Now, greyboomers, plan on that!
Convexity gets it, and now a few more do too -- bring on the euthanasia of the rentier!
The working class has been in the pot for quite a while, time for some company!
And anyone who whines about the deficit can soon enjoy higher taxes to save the dollar, now do you feel better?
Someday this war's gonna end...
"Achilles Macris, hired in 2006 as the CIO's top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York- based bank, three of the former employees said. Dimon, 56, closely supervised the shift from the CIO's previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said."
Risk on...no need for risk management as Fed will cover all losses.
There is much talk about the "London Whale" in JPMC's London trading group, who is taking huge derivative positions against the hedgies. Purportedly.
Interesting, I have a very interesting take on this one. I think Jamie D is using those big swinging bets taken at the bottom in 2008 to spin out profits to smooth his earnings. It sort of reminds me of Rigged Online or the GE model. Having huge unrealized profits allows them to write huge insurance against it to spin out even more cash while leaving the original positions unbooked.
In other words, he is using those big unrealized profits to pad his executive compensation through increasing profits, and he will retire and be gone just before they run out, and JPM Chase reverts to a pumpkin of a big bank.
Smaaarrrrrttttt, I like it. So, buy until Jamie D gets out, then sell it down.
Nobody says he is a fool.
Someday this war's gonna end...
JPMorgan Chase Knew MF Global All Too Well - Bank Think Article - American Banker
"JPM could have been also feeling a bit skittish about being a beneficiary of inappropriate commingling. Its own broker/dealer recently committed the sin of not segregating customer funds in the U.K.
JPM and its auditor PricewaterhouseCoopers – also MF Global's auditor – recently admitted to UK regulators that for at least seven years, about $23 billion of JPM clients' assets had been inappropriately commingled. JPM was fined 33.3 million pounds."
A list of all bank executives noted in the article:
Diane Genova, deputy general counsel for JPM's investment bank
"Genova told lawmakers she asked MF Global General Counsel Laurie Ferber and Deputy Counsel and Chief Compliance Officer Dennis Klejna to put in writing that funds transferred from customer segregated accounts to cover the shortfall did not belong to customers. Genova testified that Ferber and Klejna verbally assured her that the transfers complied with the rules regarding protection of customer funds, but that JPM never received a signed letter."
"JPM had a history with Dennis Klejna. He was the head of compliance at Refco when that firm failed. "
"Klejna was not criminally charged over his involvement in the Refco fraud, but he did sign a consent order with the Department of Justice and paid $1.25 million in disgorgement of his IPO gains. Then he went to work in the same job for MF Global."
Time to stop talking generically and point out names of individuals involved...
some investor guy:
there is no **current **private market for peripheral debt
I'm going to step into the middle of this debate. You can find that you don't have a private market for new debt for a number of reasons, including:
1. The interest rates are too low. This is one of the big reasons you don't have much private MBS in the US now.
2. Position limits. Most of the people who would normally buy the debt already have as much as they want. It's not that they dislike it. The people who really really really should have position limits in the EU don't. Banks should have limits on the amount of sovereign debt they own, on a per country basis. Local banks buying lots of the debt of their home country makes things worse when you have a problem.
3. There is a huge perceived default risk. If the interest rates are high enough, you would expect to get investors. Ultimately, you do. However, much like foreclosures competing with new construction, the people who bought Spanish debt when it was more highly rated often are letting it mature and not buying more. Some others are dumping it below par. The type of people who invest in AAA sovereigns are not usually the same ones who do distressed debt. It takes time for them to adjust.
4. Headline risk. This is the complimentary problem to the BS statement "nobody could have known" about what would happen with the housing bubble. People who are full of crap don't want to know. People who are idiots really don't know. The people who do know are ignored, and later, the other groups will pretend they never existed. For Headline Risk, because problems or alleged problems are quite well known, it is supposed to be a very risky bet to buy such bonds, and a dumb one. The smart people might have a very different opinion. They might see that certain maturities or issuers have far less risk (some governments issue with several different ultimate forms of obligations or obligors). I got the downpayment for my house by betting against scared stupid bond investors in 2008/09. Somebody else might be doing this on Spain.
5. A perception that it's not a normal market, and you don't just have the usual risks. A perception that people will mess with the rules. That makes a lot of typical analysis hard or impossible. After Greece, lenders and bondholders are quite justified in wondering whether they will get an especially good or bad deal for political reasons.
merchants of fear:
The nonchalant and maybe aloof response about the wreckage of a decade of securitization blowing up this bubble might indicate it will happen again or is happening again as the public isn't tuned in and the folks at HCN (small sample) who are tuned in seem to think it's nothing to worry about now... as this process continues moving into new lending areas...
Arthur_500 :Inflate Away
There is circumstancial evidence that the austerity measures of 1937 coincided with a stalemate in the recovery but there is little to suggest a cause and effect relationship. A great deal of other things were taking place at this time, not the least of which was the United States had the majority of the Gold and the Gold Standard had failed. In addition, there were great problems in Europe which resulted in reduced exports and great fear for businesses regarding future prospects overseas.
Employment is a factor of production. As equipment continues to replace repetitive work it becomes an economy to develop new ideas and technologies. We can have zero unemployment tomorrow if we go back to the labor proactices of the 1950's. Few would want that, especially those who use computers.
Fiscal "austerity" in the 1930's, as evidenced by federal budgetary outlays:
Federal Budget Receipts and Outlays
So, a decrease of $600 million in federal government outlays in 1937 was enough to cause a second depression? Hmmm. As you can see, the $6.8b in 1938 was still $400m more than in 1935.
Good article. Second to last para could do with filling out a bit further.
Q: what did the Spanish banks do with the LTRO money?
A: bought Spanish sovereign bonds, because apparently the problems were all going away.
So, if you bought the Spanish short end at 2.5% yield in the February LTRO, it's now at 3.5% give or take a tick, and going higher.
That's not going to be pleasant or sustainable even over the next quarter. A bit like dumb French banks buying up Greek debt for reasons of solidarity with the country, Sarko, various regional hallucinations of state power etc. Ooh, turns out yields go up too, even after the most ardent proclamations from political leaders.
These banks are not too big to fail. But they're certainly too stupid to exist.
Petey Wheatstraw Says:
April 14th, 2012 at 10:43 am KidDynamite:
Something is absolutely foul in this picture. Being that he banks are/were arguably insolvent prior to the Fed's foray into QE, one has to ask where all of the excess reserves on the Fed's balance sheet came from, if not the Fed itself?
The commonly held and promoted (but, I believe, false) belief that private capital is the only capital, and that the Fed is merely the conduit to a money supply based on said capital, begs the question: exactly where did that capital originate? What private store of capital was used to replenish the banks after their ruinous credit-fest?
National and global "wealth" would appear to be the most extensive criminal fraud ever perpetuated - the perpetuation being advanced by the byzantine structure and elaborate but completely false economic theories which keep the common person from understanding just how political the entire system is, at its heart. Central banking makes organized religion look positively honest by comparison.
I believe we are currently in the Mother of All Bubbles - a bubble that encompasses everything financial: banking, stocks, bonds, currencies, wages, prices, and commodities. The whole shooting match. When it bursts, it will burst politically. The shockwave alone will make heads explode.
I see lots of complacency, even here at TBP. Not a good sign.
I believe we are currently in the Mother of All Bubbles - a bubble that encompasses everything financial: banking, stocks, bonds, currencies, wages, prices, and commodities. The whole shooting match. When it bursts, it will burst politically. The shockwave alone will make heads explode.
Jesus, this is how I start out my Saturday morning. :)
Mar 23, 2012 | CNBC
Bullish sentiment among the most active clients of Charles Schwab hit its highest level since the current bull market began, according to a recent survey by the firm.
The jump in optimism from this group may signal the less active crowd will soon follow, propelling the rally to a fourth year, market analysts said.
Fifty-one percent of individual investors who trade frequently are now bullish, according to the Charles Schwab Active Trader Sentiment Survey, the highest level since they began surveying these clients in April 2008.
John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team.
Commentary: There is too much bullishness and complacency
March 23, 2012 | Marketwatch.com
The stock market's long-awaited correction appears to have begun.
I say this because the market's successful assault on Dow 13,000 brought a number of eager bulls out of the woodwork - so much so, in fact, that even though the Dow Jones Industrial Average has now fallen back to just above that 13,000 level, there is a lot more bullish sentiment than existed just two weeks ago.
That's worrisome from a contrarian point of view.
Consider the average recommended stock market among a subset of short-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). After the Dow's initial failure in late February and early March to burst through the 13,000 level, this average dropped by March 9 to as low as 17.6% - which meant that the average market timer was keeping more than 80% of his equity portfolio out of the market.
Today, even though the Dow is less than 1% higher than where it stood then, the HSNSI stands at 42.1%. So a tiny net increase in the market has led the average market timer to increase his or her equity exposure by 25 percentage points.
That's not reminiscent of the veritable Wall of Worry that bull markets like to climb.
March 31, 2012 | Jesse's Café Américain
Here is a fascinating Chris Martenson interview with Charles Biderman.
This interview highlights the Ponzi-like, artificial nature of the current stock market rally.
It reminds me very much of the 2003-2007 bull market that ended in tears. I have included a chart of what I called at the time 'The Great Reflation' at the end.
Charles Biderman: The Problem with Rigged Markets
Friday, March 30, 2012
"Even Wile E. Coyote had to come back down to earth sooner or later", says Charles Biderman, founder of TrimTabs Investment Research. In his opinion, the prices of stocks and bonds - enabled by excessive financialization of our economy and central bank money printing - have been defying gravity for a dangerously long time.
If we continue to do all we can to preserve the status quo -- to maintain "phony" asset price levels as Charles calls them -- at best we will restrict overall growth and handicap the economy.
The problem isn't so much the unfairness and malinvestment evident in a rigged market. As Charles shrewdly asks: what happens when the market becomes un-rigged?
We've never experienced the unwinding of an entirely manipulated financial system, so we can't predict for sure. But at this point, a painful collapse of our markets and loss of the US dollar as the world's reserve currency seem entirely plausible...
Read the rest here.
As far as other views, a couple caught my eye this morning. The first was from spencer at Angry Bear:
The index of hours worked has been raising a red flag about the numerous other signs of stronger employment and an acceleration of economic growth. They are not showing the recent improvement that other employment data have been reporting Recently, unit labor cost has been rising faster than prices, implying margin pressure and very weak profits. To sustain profits growth, firms have to reestablish stronger productivity growth. The weakness in March employment is a strong indicator that business is trying to rebuild productivity growth and profits growth.
This bodes poorly for the sustainability of the recent upward trend in equities. Another issue is what does this mean for monetary policy? I think Ryan Avent (via Brad DeLong as the Economist server appears to be down at the moment) captures the general spirit:
This report will be widely analysed within the context of this year's political elections, despite the fact that the single most important influence on employment growth now and over the next four years will be the stance of monetary policy. As this report is consistent with recent Federal Reserve forecasts, indicating that the Federal Open Market Committee is satisfied with present employment trends, policy is unlikely to change in reaction to anything released today
The data is sufficiently disappointing as to not alter the view of the doves, and notably Federal Reserve Chairman Ben Bernanke, that there is no need to tighten policy in the near future, leaving the 2014 timing intact. Thinking about the trends as noted above, there is no reason on the basis of this report to believe that a significant deterioration in the outlook has or is about to occur, and thus no reason to expect this will nudge the FOMC toward another round of QE. This I find unfortunate because, as I noted earlier, the longer the Fed continues to operate policy along the post-recession growth trend the more likely it is that this will indeed become the new trend for potential output.
This also makes the case that resuming fiscal stimulus should certainly be on the table, to anyone with eyes to see.
There is so much more that has to be balanced in the economy beyond fiscal stimulus which by itself is not likely... (taxes, wages, unions, non-competitive markets, lack of public goods, economic inequalities...) The economy is sick and won't get back to 100% healthy on a sustainable basis if these imbalances continue, even with a sizable fiscal stimulus. It's all a matter of getting marginal social benefits to equal marginal social costs and we are so far from doing that.This bodes poorly for the sustainability of the recent upward trend in equities.anne:
-- Tim Duy
[I have no possible idea where stock prices are going, but from an historical perspective stocks are not inexpensive:
Ten Year Cyclically Adjusted Price Earnings Ratio, 1881-2012
(Standard and Poors Composite Stock Index)
April 5 PE Ratio ( 23.31)
February PE Ratio ( 21.64)
Annual Mean ( 16.42)
Annual Median ( 15.82)
-- Robert Shiller]
Dividend Yield, 1881-2012
(Standard and Poors Composite Stock Index)
April 5 Dividend Yield ( 1.96)
March Dividend Yield ( 2.02) *
Annual Mean ( 4.33)
Annual Median ( 4.27)
* Vanguard yield after costs
-- Robert Shiller
comma1:Darryl FKA Ron:
Who can replace Bernanke? Are there less rentier focused people out there that could replace Bernanke? Charles Evans. Anyone else? Is there anybody who noticed this crisis building?comma1:
"Who can replace Bernanke?"
Do you really think it would matter? Can one lone gun do what our elected government will not? Yes, blame the Fed, because they do not have to be elected by the people. How far can you push on a string?
"Is there anybody who noticed this crisis building?" Lots of people saw it coming. Certainly the betting mob over at Goldman Sachs that was hanging on to credit default swaps waiting since 2005 saw it coming. The Fed chair that retired early in 2006 probably saw it coming. The new younger Fed chair that had written his doctoral thesis on the Great Depression probably saw it coming. Dean Baker saw it coming. Mike Stathis saw it coming. Hell, I even saw it coming loosely as return to recession by 2004 and then by 2006 as a major financial system collapse and prolonged recession.
What could anyone have done during the Bush administration (or probably any other in the last forty years or more) to rein in Wall Street investment banks from there CDO/MBS and derivative bets feeding frenzy while so much money was exchanging hands. That would have take credibility and courage that did not exist because you can easily take measures in a crisis that are dozens of times more extreme than what you could politically survive undertaking against the flow of Wall Street financial rewards regardless of the risks considerations. The stop light cannot go up until the dead are counted.
We each have a part to play, and Mr. Bernanke or his replacement has a bigger role than most.
To point at Congress and say they aren't acting so I won't act, is the same mentality that gave us CDS's and the housing bubble in the first place. It is herd mentality. Bernanke is afraid of the herd. Someone with the courage of their convictions may not be. Who would that person be?
Our national debt has increased from 10 to 16 trillion dollars between 2008 and 2012, and we have been very little positive to show for this massive debt increase. So far, infrastructure spending and not cutting social security has had a beneficial effect on the economy. The administration put money into the economy, and interest rates never rose to crowd out private investment, so it's been like free money up to now. However, we really don't seem to have gotten that much for the 6 trillion, and at some point interest rates will rise, and we'll have to pay the back what we owe. After you add all the negative impact on the economy when we go from receiving benefits to paying cost it may not seem worth the price.
Maybe the Democrats's plan is like one of those net present value problems where you look at the plan and decide if it's worth doing based on the timing of the cash flows, and the cost of capita. I doubt that anyone at the Whitehouse or the FED is doing this type of analysis. And I doubt they are evaluating competing plans to find the one with the highest return. I favor broad-based tax cuts, cuts, liberalizing regulation, and explicitly reversing economic policy such as preventing drilling and building pip lines where the policy lowers economic growth. However, I suspect that for ideological reasons the current administration will keep pushing marginal infrastructure projects and abusing the social security system to push some spending money to the middle class and minimize the payout to those controlling new job creations in the economy.Charlie Baker
" ... and at some point interest rates will rise, and we'll have to pay the back what we owe."
I don't see any evidence that anyone ever intends to pay it back. The most aggressive plans on offer just reduce the rate of debt increase.
The "Grand Bargain" discussed some months ago was typically characterized as reducing the deficit by $4 billion; it would have been more accurate to characterize it as increasing the debt by $6 trillion (rather than $10 trillion).
I looked for the Stein quote to check the wording, and found this Krugman from 2003:
"Academic economists often cite Stein's Law, a principle enunciated by the late Herbert Stein, chairman of the Council of Economic Advisers during the Nixon administration. The law comes with various wordings; my favorite is: ''Things that can't go on forever, don't.'' Believe it or not, that's a useful reminder.
For we're now led by men who think that macho posturing makes Stein's Law go away. On issues ranging from budgets to foreign policy, they insist that we can sustain the unsustainable. And when challenged to explain how, they engage in magical thinking.
The prime example I have hammered on in this column is, of course, the federal budget. Realistic budget projections say that current policies aren't remotely sustainable. For example, a month ago a joint report of the Committee for Economic Development (a business group), the bipartisan Concord Coalition and the Center on Budget and Policy Priorities concluded that under current policies, federal debt would rise by $5 trillion over the next decade. And then baby boomers will start collecting benefits, and our debt will really explode.Such explosive growth in debt can't go on forever, and it won't.
Yet our current leaders and their apologists insist that the problem will magically solve itself. Last year's deficit came in slightly below forecasts, and we've had one quarter of good economic growth -- see, we'll grow out of the deficit!
But we won't, and there will eventually be a day of reckoning. As Bill Gross of Pimco, the giant bond manager, says, ''Sooner, perhaps later, our Asian creditors will wake up and smell the coffee.'' (Yes, the federal budget and the value of the dollar now depend on huge purchases of Treasury bills by the governments of Japan and China.) When they do, he predicts ''higher import costs, a cutback in spending on cheap foreign goods, rising inflation, perhaps chaotic financial markets, a lower standard of living.''
Something to look forward to."
http://www.nytimes.com/2003/11/04/opinion/this-can-t-go-on.html"...the inflation hawks on the Fed -- the people who see inflation ahead even though there are no signs at all of an impending inflation problems -- are standing in the way."
This is true, but there's plenty of blame to go around. Over 500k government jobs lost due to fake concerns about the deficit. Team Obama's failure to fully assess the impact of the downturn. Geithner's "save the banks first" policy. Fact-free discourse in our legislative branch. An untethered, fully indemnified financial system given free reign to resume looting.
So the short answer to the question "Will Policymakers Respond?" is "not really." They will give us word salad, of course, but words like deleveraging, disinflation, inequality, and lack of demand won't be on the plate.
For those who like pictures better, once again, from Calculated Risk, the scariest chart in the world:
April 03, 2012 | Jesse's Café Américain
SP 500 and NDX Futures Daily Charts - Desperately Seeking Buyers for the Bernanke BubbleThe FOMC minutes precipitated a drop in the markets.
Gold and some of the miners were hit hard, with silver, bonds and stocks down to a lesser extent. The US dollar rallied.
The rationale was that there would be no QE and that perhaps the FED would raise rates. Given the recent data from income tax receipts and wages this appears to be more a fantasy than a sound fiscal policy.
I don't expect this to 'stick' especially in stocks. These moves have the appearance of perception management and the usual trading desk antics.
The spokesmodels were rather eager to twist this into an endorsement by the Fed of 'the recovery' and did the segway to 'buy stocks.'
Bernanke and the Fed have given themselves over to the monied interests. They are no true regulators, and serve only themselves. But the same could be said of those who have taken the oaths of regulators, who sit idly by while the people are cheated and their savings are stolen.
Wall Street is desperate to hand this rally off to the retail buyers. Without volume it cannot continue without becoming increasingly unstable.
TODAY is my last day at the Empire.
'I no longer have the pride, or the belief'After almost 12 years, first as a summer intern, then in the Death Star and now in London, I believe I have worked here long enough to understand the trajectory of its culture, its people and its massive, genocidal space machines. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
To put the problem in the simplest terms, throttling people with your mind continues to be sidelined in the way the firm operates and thinks about making people dead.
The Empire is one of the galaxy's largest and most important oppressive regimes and it is too integral to galactic murder to continue to act this way. The firm has veered so far from the place I joined right out of Yoda College that I can no longer in good conscience point menacingly and say that I identify with what it stands for.
For more than a decade I recruited and mentored candidates, some of whom were my secret children, through our gruelling interview process. In 2006 I managed the summer intern program in detecting strange disturbances in the Force for the 80 younglings who made the cut.
I knew it was time to leave when I realised I could no longer speak to these students inside their heads and tell them what a great place this was to work.
How did we get here? The Empire changed the way it thought about leadership. Leadership used to be about ideas, setting an example and killing your former mentor with a light sabre. Today, if you make enough money you will be promoted into a position of influence, even if you have a disturbing lack of faith.
What are three quick ways to become a leader? a) Execute on the firm's 'axes', which is Empire-speak for persuading your clients to invest in 'prime-quality' residential building plots on Alderaan that don't exist and have not existed since we blew it up. b) 'Hunt Elephants'. In English: get your clients - some of whom are sophisticated, and some of whom aren't - to tempt their friends to Cloud City and then betray them. c) Hand over rebel smugglers to an incredibly fat gangster.
When I was a first-year analyst I didn't know where the bathroom was, or how to tie my shoelaces telepathically. I was taught to be concerned with learning the ropes, finding out what a protocol droid was and putting my helmet on properly
so people could not see my badly damaged head.
My proudest moments in life - the pod race, being lured over to the Dark Side and winning a bronze medal for mind control ping-pong at the Midi-Chlorian Games - known as the Jedi Olympics - have all come through hard work, with no shortcuts.
The Empire today has become too much about shortcuts and not enough about remote strangulation. It just doesn't feel right to me anymore.
I hope this can be a wake-up call. Make killing people in terrifying and unstoppable ways the focal point of your business again. Without it you will not exist. Weed out the morally bankrupt people, no matter how much non-existent Alderaan real estate they sell. And get the culture right again, so people want to make millions of voices cry out in terror before being suddenly silenced
As 79 million of my fellow Baby Boomers retire over the next 20 years, federal spending related to Social Security and Medicare benefits will skyrocket. Let's see which Congressmen and Senators want to campaign on reducing the entitlements of the "entitled" generation. By the way, for an excellent article on current and future entitlement spending, see [ the U.S. economy is likely to avoid slipping back into a recession in the next 12 months as moderate strength in domestic demand offsets weaker foreign demand.
Although a recession is likely to be avoided, U.S. growth will not be sufficient to bring down the unemployment rate significantly, which, in the context of moderating inflation, could prompt another round of Federal Reserve asset purchases, i.e., quantitative easing (QE). The Federal Reserve will keep the federal funds rate near zero and the ECB will continue to lower its policy interest rate. Central banks in developing economies will ease their policies aggressively. Sluggish global economic growth and the sovereign-debt problems in the eurozone are likely to keep global investors¡¦ risk aversion at a relatively high level. According to mainstream commentary, a tax cut and/or government spending increase is supposed to result in faster economic growth. Thus, according to mainstream commentary, changes in the cyclically-adjusted federal deficit should be negatively correlated with changes in GDP. That is, a tax cut and/or an increase in government spending resulting in a larger cyclically-adjusted federal deficit should be associated with faster GDP growth. Almost 50 years of U.S. data show no significant relationship, i.e., a very low correlation coefficient, between changes in government deficits and changes in GDP.
Mish's Global Economic Trend Analysis
Yes, but things are getting better says CNBC on a daily basis.
When gas prices climb another 50 cents to dollar by memorial day, it's going to hit the US like a hammer that not even QE3 or Twist 2 can stop. I do think the next recession for the US starts before 2013. We'll see if the president can hold it off until he can get re-elected.Relax, in the short term of Q1, inventory buildup will be good for GDP numbers. Bernanke pushes on a string long enough, people may stockpile even more inventory, or just enough for Republicans to keep the House and Obama to keep the White House. Everything ends nicely for everybody already in power.
It's just the rest of us that have to pay for it.
black dog wrote:
But while 'econometeorology' has been an interesting sidebar to jobs growth of the past several months, what we are really seeing is economists seeking to explain a significant one percentage point drop in the unemployment rate with more modest actual GDP growth ...
I can explain it, (not that anyone cares about my opinion).
"Normal" recession works like this:
1) Unemployed total climbs by about 2 million over a 9-18 month period while GDP goes negative for a couple of quarters.
2) GDP turns positive, and the 2 million unemployed get re-employed over roughly the same time frame they got laid off (9-18 months).
3) If GDP growth is "strong", then "recovery" (re-hiring the lost workers), turns into "expansion" - and unemployment rate can continue down.
What happened in 2007-present.
- Unemployed total climbs by about 2.7 million over 18 months from March of '07 to Sept of '08 - (fairly normal recession).
- At point where "normal" recession would end and "recovery" would begin, instead we had the financial shock of Sept '08.
- The response to the financial shock was from Sept '08 to Oct '09, total unemployed climbed by an ADDITIONAL 6 million.
- Since late '09, we have had a "recovery" from the "normal" recession - effectively gaining back the initial 2.7 million lost jobs - a tad slower than normal - but that's understandable given the economic shock added job losses for an extra year.
The reason unemployment can drop despite low GDP growth is because this is a "recovery" of jobs lost, (and IMO, the majority of the 6 million lay offs after the financial shock were not "required" layoffs). It is my belief that the economists as a group are not differentiating between "expansion" and "recovery".
All of this happening right at the cusp of the Baby Boomer Exodus just makes the waters that much murkier in attempting to judge what is really happening. The "panic" firing of 2009 breaks normal recession recovery rules. The Boomer Exodus into retirement breaks the historic unemployment comparisons. If not for the Exodus, the peak unemployment would've been well over 11% and the current would be well over 9%. But, we have had the Exodus, so it is what it is.
To greatly oversimplify - at the end of 2007, we had an economy X-size - and it employed 146 million people. ZERO net growth over the next 4 years should (in theory) support 146 million jobs. Instead, we have 142 million jobs, AND an economy that is somewhat larger.
Technically, in regards to employment, you do not have "expansion" until you have exceeded the total employment figure from before the recession, you have recovery. While inflation and wages are variables that muck this up - GDP (allegedly) takes inflation into account. In short - you don't "need" excessive GDP growth to simply recover what you lost -- you only "need" solid GDP growth to move beyond where you were before.
"Normal" recession works like this:
I'm so sick of this recession being called a "balance sheet recession" when it was an OFF balance sheet recession, and still is.
Inflation is not growth.
Former Idealist wrote:
Inflation is not growth.
Economist's View- No Sign of an Inflation Problem
If not for the Exodus, the peak unemployment would've been well over 11% and the current would be well over 9%. But, we have had the Exodus, so it is what it is.
While we rail at Bernank, for reflating asset prices, this still will help the exodus continue. Seems completely overlooked sometimes. I think if you could have an honest answer from him this would be his rational.
I think, but don't know, that he realizes it helps the banks; but, he sees no viable alternative. Get the BB out with some assets; and, meke room for the next generation.
Traders fear a major case of dÃ©jÃ vu this spring, where investors pocket their profits, and really do go away. The "sell in May" phenomena occurred in the past two years, after stocks peaked in April.
However, some analysts expect a less severe sell off this year and mostly agree a pullback is overdue. Last year, the S&P 500 lost 21.6 percent between May 2 and Oct. 4. "Everything suggests it," said Binky Chadha, Deutsche Bank chief global strategist.
"Pull backs are normal, and in the sense the length of this really smooth ride up is unusual. I think there's been very limited participation in this rally. So, it's very likely the pull backs will get bought. On the basis of history, we're due for a pull back," he said.
LPL Financial chief market strategist Jeffrey Kleintop says, in a note, that the sell off this year could be more shallow because of two positives that weren't there last year. One is that central banks around the world are now cutting rather than hiking rates, and the second is that housing is showing signs of life.
The negatives include concerns about China slowing down, a European recession, election uncertainty, the end of the Fed's "operation twist" program.
Kleintop said there are ten things he's watching to see if a spring sell off is in the offing.
The Fed tops his list. In the past two years, the Fed's quantitative easing programs came to an end in spring or summer and stocks sold off until the next program was announced. Last' year's "operation twist" was announced in September, and stocks began to take off on their current run in October. That program expires in June, and traders are watching the Fed's April meeting for a reading on whether the program will end, be extended or replaced with something else.
Also on his list are economic surprises, which if you watch the Citigroup economic surprise index it appears it may be retreating from a peak in February. Consumer confidence is another indicator, and its close to highs now but will be watched to see if it turns lower.
Earnings revisions will also matter. In the first quarter of 2010 and 2011, earnings estimates moved higher as earnings reports looked better, but in the second half guidance disappointed as the number of upward revisions declined. This year, he says the same may occur.
The yield curve is another guide. The spread between the 2-year and 10-year Treasury , currently about 1.80, could indicate concern about he economy if it continues to narrow, or flatten.
A big flash point for stocks has been oil prices. Kleintop notes that's oil in 2010 and 2011 was up $15 to $20 a barrel from the start of February, two months before the market began to sell off. This year, oil was already high and it is up only about $10 since the beginning of February., but a further surge would be worrisome.
Kleintop also watches LPL's financial current conditions index, which peaked around 240 to 250 in April of the past two years. This year it reached 249 already and has fallen to 232.
The VIX, the CBOE's volatility index, is another widely watched signal. On Wednesday, it was up almost 10 percent, but it is still at very low levels around 17. Kleintop said the low reading in the VIX could be suggesting that investors are complacent and could be surprised by a negative event.
Weekly jobless claims, reported Thursday morning, are another important indicator for the stock market. Viewed as one of the most consistent measures of employment activity, weekly claims have been holding at the 350,000 level, but in early 2010 and 2011, they stopped improving in April.
With rising gasoline prices, inflation expectations is another concern. The University of Michigan survey showed a rise in inflation expectations in March and April in 2010 and 2011. This year inflation expectations also jumped, reaching 4 percent in March, Kleintop noted.
A report by the organization, "The Price of Prisons," states that the cost of incarcerating one inmate in Fiscal 2010 was $47,421 per year. "In states like Connecticut, Washington state, New York, it's anywhere from $50,000 to $60,000," he said.
Yes - $60,000 a year. That's a teacher's salary, or a firefighter's. Our epidemic of incarceration costs us taxpayers $63.4 billion a year.
The explosion in incarceration began in the early 1970s - the political response to an explosion in urban violence and increased drug use.
"So 'Tough on crime,' 'three strikes, you're out,' 'Let 'em rot, throw away the key' - all that stuff resulted in more mandatory sentencing, longer and longer sentencing," said Jacobson.
Anton Valukas: There was evidence which would show that that's not accurate. The president of Lehman Brothers told us that in fact he had conversations with Dick Fuld about this and documents were shared with him which would reflect the Repo 105 transactions and how they were being used. Richard Fuld's view on that was that he has no knowledge of it. You have other evidence that he did. A jury would have to decide who's telling the truth.
But so far there has been no jury to hear the evidence. Despite Valukas' findings -- and the supporting documents and testimony to back them up -- the Securities and Exchange Commission has not brought any charges of any kind against former Lehman executives. For the past few months, we've made numerous requests to interview the SEC's head of enforcement. All of those requests have been declined.
Steve Kroft: The Securities and Exchange Commission has not brought a case.
Anton Valukas: No, they have not.
Steve Kroft: Does that bother you?
Anton Valukas: I'm not permitted to be bothered by that. You know, my job was to set out the facts, lay it out. They have to make their own prosecutive decisions.
There is one plausible explanation why SEC hasn't has not gone after top Lehman executives. As it turns out, some of Lehman's most egregious accounting shenanigans took place right under the noses of government regulators.
Steve Kroft: How closely was the SEC monitoring Lehman Brothers during this time?Anton Valukas: They were on premises. They were talking to the Lehman people daily. They officed there.
It was not widely known at the time, but during the last six months of Lehman's existence, teams of officials from the SEC and the Federal Reserve took up residence inside the firm to monitor its precarious financial situation. They were inside the building when Matthew Lee wrote his letter to Lehman executives alleging unlawful accounting practices, and they were there when the practices took place. Valukas says the SEC also knew that Lehman was being less than truthful when it said it had enough assets to survive the crisis. But that and other damaging information was never disclosed to investors who continued to pump billions of dollars into the firm.
Steve Kroft: Should it have been disclosed?
Anton Valukas: Absolutely.
Steve Kroft: Isn't the government, the SEC in this case, the people who were supposed to protect the investors?
Anton Valukas: Yes.
Steve Kroft: Aren't they charged with informing investors?
Anton Valukas: Yes.
Steve Kroft: Why didn't they do it?
Anton Valukas: They may not have had the expertise necessary to understand the material they were receiving. They were getting the material. Whether they understood it is another question.
The very fact that government regulators were inside the company with access to its books and records would complicate any prosecution of Lehman officials.
Until four months ago, David Kotz was the SEC's inspector general. Over the previous four years, he issued more than 100 reports about major deficiencies in the way the SEC did its job.
Steve Kroft: If the SEC knew about some of these problems at Lehman Brothers and they weren't disclosed, doesn't that make it difficult for the SEC enforcement division to come back and bring action against Lehman Brothers? They were there; they saw it.
David Kotz: Yeah. I think that that's definitely an impediment to a potential case. And, certainly, if you go before a jury, the defense lawyers can make a big point about the fact that, "You were there. You knew about it. Why didn't you do anything at the time? Now, you're coming after them."
In fact, former Lehman CEO Richard Fuld seemed too be trying out that defense when he testified before Congress in 2008.
Financial analyst Reggie Middleton is interviewed on a range of topics by
- Fed bought 61% of new Treasury debt issuance distorting markets
- Higher oil prices are due to monetization of the currency and not increased demand
- Higher education has all the characteristics of a debt bubble
- Big name investment banks are taking advantage of their clients in order to make short term financial goals
- JPM and other TBTF banks have forged partnerships with governments to public detriment
- Facebook IPO is good for Mark Zuckerberg but not for shareholders, Wall St. marketing
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