Far from reducing risk, derivatives increase risk, often with catastrophic results.
—Derivatives expert Satyajit Das, Extreme Money (2011)
The “toxic culture of greed” on Wall Street was highlighted again last week, when Greg Smith went public with his resignation from Goldman Sachs in a scathing oped published in the New York Times. In other recent eyebrow-raisers, LIBOR rates—the benchmark interest rates involved in interest rate swaps—were shown to be manipulated by the banks that would have to pay up; and the objectivity of the ISDA (International Swaps and Derivatives Association) was called into question, when a 50% haircut for creditors was not declared a “default” requiring counterparties to pay on credit default swaps on Greek sovereign debt.
After Gibson raids, feds say they won’t target owners of instruments that contain illegal wood NASHVILLE, Tenn. — Owners of musical instruments made with illegally imported wood don’t face prosecution, two federal agencies say in a letter that addresses fears stirred up after a major Tennessee guitar-maker was raided. “The federal government focuses its enforcement [...]
hat tip: Washington’s blog
Monday, March 29, 2010
On March 3rd, Richard Fisher – President of the Federal Reserve Bank of Dallas – told the Council on Foreign Relations:
A truly effective restructuring of our regulatory regime will have to neutralize what I consider to be the greatest threat to our financial system’s stability—the so-called too-big-to-fail, or TBTF, banks. In the past two decades, the biggest banks have grown significantly bigger. In 1990, the 10 largest U.S. banks had almost 25 percent of the industry’s assets. Their share grew to 44 percent in 2000 and almost 60 percent in 2009.
The existing rules and oversight are not up to the acute regulatory challenge imposed by the biggest banks. First, they are sprawling and complex—so vast that their own management teams may not fully understand their own risk exposures. If that is so, it would be futile to expect that their regulators and creditors could untangle all the threads, especially under rapidly changing market conditions. Second, big banks may believe they can act recklessly without fear of paying the ultimate penalty. They and many of their creditors assume the Fed and other government agencies will cushion the fall and assume the damages, even if their troubles stem from negligence or trickery. They have only to look to recent experience to confirm that assumption.
Some argue that bigness is not bad, per se. Many ask how the U.S. can keep its competitive edge on the global stage if we cede LFI territory to other nations—an argument I consider hollow given the experience of the Japanese and others who came to regret seeking the distinction of having the world’s biggest financial institutions. I know this much: Big banks interact with the economy and financial markets in a multitude of ways, creating connections that transcend the limits of industry and geography. Because of their deep and wide connections to other banks and financial institutions, a few really big banks can send tidal waves of troubles through the financial system if they falter, leading to a downward spiral of bad loans and contracting credit that destroys many jobs and many businesses.
Saturday, March 27, 2010
by Daily Bell Staff Report
Dr. Ron Paul
On Monday, Senator Chris Dodd rammed his “financial reform” legislation through his Senate Banking Committee on a strictly party-line vote. It’s no surprise that Chris Dodd’s answer to the economic crisis is the same as his answer to seemingly everything else: give the government more power … Dodd’s bill, which should be called the “Fed Empowerment Act,” will add more layers of bureaucracy to government. One of its provisions includes creating a new Consumer Financial Protection Bureau to be housed at the Fed and funded by it. Apparently, the Connecticut senator expects us to believe that an agency inside the Fed and financed by it will be “independent.” The legislation also includes a new Financial Stability Oversight Council to “monitor” companies that supposedly could become “too big to fail.” The Council will have the ability to require nonbank financial companies to be under the Federal Reserve’s supervision if the government deems they pose a “risk” to financial stability. Certain large companies will be expected to submit plans to the government “for their rapid and orderly shutdown” if the company goes under … Who knows how many businesses could be targeted and broken up, under the guise of “reform,” solely for standing up to the federal government! In yet another expected move, Dodd’s bill strips out a complete Fed audit and allows the Fed to decline to disclose specific information. – Ron Paul, Campaign for Liberty
Dominant Social Theme: More regulation is necessary …
Free Market Analysis: We were lucky enough recently to snag an exclusive, short interview (below) with libertarian congressman Ron Paul (R-Tex). And when we received the above missive via email from his Liberty organization, we found to some extent it paralleled the interview. In both this exclusive interview, and the call to action above, Ron Paul bemoans the power of the Federal Reserve and Congress’ lack of ability to create meaningful oversight over what can in many ways be considered a rogue monetary entity. Hopefully, the Fed does not end up with even more power after its latest series of economic disasters. See for yourself:
Daily Bell: Will the Fed be audited in your lifetime?
Ron Paul: To the extent that I want to see it audited, probably not. There may be some half-hearted attempts at auditing the now-ended liquidity programs, but the substantive things like open market operations, the discount window, and deals with foreign central banks will remain in the shadows. We’ve had great success with the language from HR 1207, managing to get the language through the House as part of HR 4173, but I fully expect the audit language to be watered down when the House and Senate bills go to conference.
Daily Bell: What’s in store for the dollar and fiat currency in general?
Ron Paul: Well, in the long run the value of all fiat currencies falls to zero. So, it’s just a matter of time before the fiat dollar disappears. The dollar has lost 96% of its value over the past century, and the Federal Reserve and federal government have been doing their best in the past two years to accelerate that.
Daily Bell: Where do you see gold and silver going from here?
Ron Paul: Long-term I think they will be much higher than they are right now. We live in a world of government-monopoly fiat currencies and they all inflate and destroy their value in unison. It wouldn’t surprise me at all to see gold much higher in the next couple of years.
Daily Bell: Can the fiat dollar recover in your opinion?
Ron Paul: That’s hard to predict, but I don’t think it’s likely. The dollar has lost 96% of its value since 1913, and there’s just no way we can get back to that level under a fiat system. In order to recover, the same Federal Reserve that caused that 96% drop would have to suddenly get wise, stop the inflation and debt monetization, and get serious about sound money. That just won’t happen.
Daily Bell: Will we have a China-centric or Asia-centric world in the 21st century?
Ron Paul: This is a difficult forecast, but it’s certainly possible. When you have Russian leaders chiding American leaders for embracing socialism and Chinese students laughing at the Treasury Secretary’s assertion that US assets remain a safe investment, people begin to wonder when the world flipped upside down. For over a century, whether rightly or wrongly, the US has been seen as the epitome of free-market capitalism, where anyone could pull themselves up by their bootstraps and make it big. Over the past several decades that ability for entrepreneurial success has been suffocated by excessive regulation, taxation, and government intervention. Forcing American businesses and workers to get government permission for everything they want to do is not the recipe for economic success.
By Debbie Morgan
hat tip: TakeBackWashington.com
March 26, 2010
Watching the debate on healthcare was like having a nightmare while living in the circus. The clowns never hear those they “entertain,” yet they continue to throw nasty legislation at the public. In one of the better moments from the debate, a Representative said the bill was totally unconstitutional, as the Federal Government does not have the authority to force the public to purchase anything. In an online forum, one gentleman stated that the bill is tantamount to extortion. It is apparent that we are down to the only peaceful recourse available…Support local State Sovereignty bills; the only way to overturn the healthcare nightmare, as well as all other over-reaching federal legislation!
When the subject of the Tenth Amendment has been raised in past conversation, some have laughed and some have said, “Oh, that will never work.” Since its passage, many States have tried to invoke their Tenth Amendment rights on several occasions. The largest combined effort, before now, was during the Civil War, when eleven states sought to secede from the united States. Interestingly enough, the last time people got truly fired up about their States rights was during the Roosevelt Administration’s “New Deal.” Why do we have such a magnificent amendment to protect the states if we are not going to use it?
The February 2008 CRS Report for Congress, after quoting the Tenth Amendment, states, “While this language would appear to represent one of the most clear examples of a federalist principle in the Constitution, it has not had a significant impact in limiting federal powers. Initially, the Supreme Court interpreted the Tenth Amendment to have substantive content, so that certain ‘core’ state functions would be beyond the authority of the federal government to regulate.” Yet, in the past, as now, the Federal Government continues to take what it wants, expecting the states to bow down in servitude.
hat tip: Washington’s Blog
Sunday, March 14, 2010
This is an open letter to the economics, finance and banking communities.
I don’t have any dog in the fight, other than to figure out and then publicize what is best for the greatest number of people. People I greatly respect advocate for federal-level public banking, state public banks or a return to the gold standard. I am simply attempting to start a high-level debate about what the best option is.
Please see responses posted by economists and others below. I will update the responses as I receive them.
How Is Credit Created?
I pointed out in September:
As PhD economist Steve Keen pointed out recently, 2 Nobel-prize winning economists have shown that the assumption that reserves are created from excess deposits is not true:
The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.
The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.
Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.
Hat tip: Washington’s Blog
March 4, 2010
Joseph Stiglitz – former head economist at the International Monetary Fund (IMF) and a nobel-prize winner – said yesterday that the very structure of the Federal Reserve system is so fraught with conflicts that it is “corrupt” and undermines democracy.
If we [i.e. the IMF] had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure.
Stiglitz pointed out that – if another country had presented a plan to reform its financial system, and included a regulatory regime that copied the makeup of the Federal Reserve system – “it would have been a big signal that something is wrong.”
Stiglitz stressed that the Fed banks have clear conflicts of interest, since the banks are largely governed by a board of directors that includes officers of the very banks they’re supposed to be overseeing:
So, these are the guys who appointed the guy who bailed them out … Is that a conflict of interest?
The US Economy is Set for a “Double-Dip” Recession
by Paul Craig Roberts
Happy news! The government has come up with a 5.9 percent GDP growth rate in the fourth quarter of 2009. The recession is over.
Or is it?
Statistician John Williams has informed us that 69 percent of this growth, or 4.1 percentage points, is the result of inventory accumulation. That leaves a 1.8 percent growth rate, and the 1.8 percent is likely due to the underestimate of inflation and other statistical problems.
The Federal Reserve’s own monetary evidence contradicts the recovery assurances from Fed chairman Ben Bernanke. The Federal Reserve continues to pour massive reserves into the banks. The monetary base, which consists of currency in circulation and bank reserves (the basis for new loans), has surged from $850 billion in 2009 to $2.2 trillion on February 24.
Despite this potential for massive new money creation, the broadest measure of money growth is still contracting.The banks are too impaired and so are consumers for the banks to create new money by making loans.
The economy, in other words, is going nowhere.
By Ron Paul
Last week I had the opportunity to bring up spending and transparency in two important hearings. On Wednesday I questioned Federal Reserve Chairman Ben Bernanke on some highly questionable uses of funds at the Federal Reserve, and on Thursday I asked Secretary of State Hillary Clinton about exorbitant spending at the State Department.
It is extremely important to continue bringing these issues up, especially in light of our difficult economic times, when so many are out of work, as I saw up close in my district at the Oceans of Opportunity Job Fair in Galveston two weeks ago. Those who are working live with the fear of losing their jobs as they struggle to pay bills. Meanwhile, Washington is talking of increasing their taxes, something voters were promised, clearly and adamantly, would not happen in this administration.
Government also struggles with money, but the struggle centers on how to get more of your money into government coffers. Rather than expanding the Federal budget in the face of economic downturn, we should be focusing on eliminating waste and being the very best stewards of public funds that we can possibly be. Most businesses have had to streamline and cut back in order to survive, and so it is only fair for our government to do the same.