I'm not so sure that's a good idea. While it's been pointed out the Greek 50% CDS haircut caused a run on sovereign bonds, I still think plain cleaning out the banking casino hall is the way to go. Honestly I'm not so sure anymore beyond this is beyond to cause us pain.
Brilliant headline by Bloomberg! I love it. "Germany Buys Itself First-Class Ticket on the Titanic". That's the dilemma alright. And every dilemma has a solution .... or not.
It's a lot like war, isn't it? Albeit a cold war, a war where everyone works around the nuclear option.
"Let's stop this before we're all staring at the abyss. Problem is, don't ya know, it's only the abyss, a crisis of apocalyptic proportions, which allows special interests and lobbyists to push their their latest agendas through governments' parliamentary procedures." -- Robert Oak
The question is: "What exactly is the agenda that will be pushed to resolve Germany's dilemma?"
It's obvious what Germany gets out of the pipeline, but what does Russia get out of it? The answer is Euros, which Russia desperately wants and/or needs. How will it look to Russia if the Euro begins a precipitous decline just when gas deliveries are cranking up? Many people are still thinking in terms of German-Russian animosity, but the reality is very different. Let's face it. The potential for Germany of trade relations to their east is of far more importance to them than relations to their south.
It's like the Eastern front and the Western front that together presented huge problems to Germany in two world wars. (Germany is in the middle of Europe.) On the Western front, Germany needs to allow the ECB to create massively more Euros, but that would negatively impact German interests on the Eastern front -- again massively.
A solution has been proposed, namely that Greece, Italy, Spain, Portugal and others (Ireland? Hungary? Austria?) be allowed to stay in the Euro zone but also "print" their own national currencies. These countries would each then do business in two currencies, although their national currencies (floating against the Euro) would become the denomination for all debts and credits (for example, public employment and retirement paychecks). On some day soon to-be-announced, all accounts would be entered in two columns -- one for Euros, one for lire, drachma, etc..
Another factor that is regularly overlooked, in the news about Europe's prospective demise, is that Italy's central bank (Banca d'Itaglia) is still functional (as a part of the European system of central banks) and is said to retain very large holdings of gold bullion. If these reports are true, it's possible that Italy at least may remain (along with Germany, France and Benelux) as a country with the single currency of the Euro. Of course, many will say that it just doesn't pencil out, it's impossible .... but these nay-sayers forget that all EU nation-states remain sovereign countries, so if Germany says okay and waives Euro zone rules, there's nothing that is impossible. At some level or another, paper is the only way out.
The Euro -- which is thought to be backed to some extent by gold bullion -- actually may continue to function throughout the EU function as the 'gold' of the EU. The Euro zone is but a part of the EU, and British sterling, Swiss franc, etc., are all functioning within the system just fine. It's a win-win situation, because Greece and the others absolutely need to be able to paper their way out of the corners they have painted themselves into (or been painted into, if you prefer).
Finally, the solution to Germany's dilemma will probably be presented as a transitional plan. Even if the plan works very imperfectly and must be revisited constantly for the next few years, it still can work to calm the troubled waters as we go into 2012.
Inflation will be contained, although hardly conquered. The Titanic continues to float, although not everyone will have First Class tickets. Some of the passengers will be down below with the proletariat, shoveling coal ... but all the paychecks will keep coming, nothing will bounce, nobody will default. And, last but not least, gas will keep flowing in the Nord Stream pipeline.
While all of the Presidential "manufactured front runners" will give unlimited foreign guest workers per the demands of their corporate clients, don't exaggerate. Cite your numbers. Fraud is not 80%, while one could probably guess cheap labor, technology transfer is. In terms of skill sets, I don't remember the percentage of fake resumes, but it was high.
Not only did we lose tech manufacturing but the service tech sector for domestic workers is truly depression era. For example, in our biggest Metropolis, if you are over 50 and working a real technical job, you will be the only person in your shop doing what you do for a living. This has been born out again and again by the outsourcing stats on Visa workers (85 % substitution) domestic for foreign.
The reality on the ground is far more disturbing. Tech gypsies fly around the country like latter day dust bowl okies (no pun intended Bob). The work is all contract, the hours unbelievable. And other things, like the loss of human capital in the last ten years has left fewer and fewer to do real technical work. This results in one resource filling dozens of roles once worked by dozens of resources, keeping the unemployment stratospheric and the feeding troths of management compensation full to the brim. Just have George Will do a little research on say, Dr. McGuire at UHC with his $1.7Billion in Options.
And the fraud, major institutions have been brought to a halt by fraud by Visa workers whose skill was so light that they crippled whole parts of regional economies, banking, utilities, airlines and other things. Most in the know can only whisper about the horrors. To speak aloud would bring certain reprisal. Again, born out by DHC studies on fraud rates of at least 20%. I know from experience the real rate approaches 80%.
Have your son do the kinds of nice things to the Chinese they have been doing to us for years now. FTA now stands for Free Trade Asshole. I would never tell anyone to refuse work in these times. I did that in 2008 and really suffered.
Withhold, sabotage, and gather info. Explain that we are at war.
"What is astounding is the massive amount of cash corporations have for investment. Net cash flow increased 2.2% from Q2 and has increased 9.6% from a year ago. Corporations now have over $1.852 trillion dollars available for domestic investments and hiring people, which everyone in America is aware they are not doing, astounding." -- Robert Oak
I can't find links for this right now, but I am sure that there has been a not uncommon analysis of recent Berkshire Hathaway equity purchases as all about seeking very large companies well-situated to withstand shocks to the global economy. Holding cash is a defensive strategy, albeit very different from the defensive strategy that focuses on PM in anticipation of the collapse of major global currencies and related financial components of the global economy.
In general, there's an atmosphere of fear and pessimism driving global capital these days. Thus, the mega-corporations are choosing to hold cash -- even though interest on demand deposits, US Treasurys or other forms of cash is low and even though all these forms of cash, in and of themselves, may carry some degree of risk.
One reason for the corporate deep-pockets defensive strategy is that management finds that they can hold cash, as opposed to a few years ago when holding cash meant that you were courting a hostile leveraged takeover. On the other hand, another reason for the defensive strategy may be that management finds that they must hold cash in order to survive over the next few years.
IMO, it all has to do with the relation between productive components of the global economy and financial components. The financial part of it is a huge and dysfunctional Gordian Knot that probably cannot be disentangled except by cutting though it. But will this mean that productive components of the global economy are destined to evaporate during what seems to be developing into a Second Great Depression? How an investor decides that key question likely depends to a great extent on how the investor sees the Peak Oil crunch (or Armageddon).
Here's from one of the long-term bulls who are looking to make lemonade from the lemons of a bear market:
Rather than review the most recent goings-on in Brussels and D.C. – which may have an impact in the short term – I want to concentrate on the bigger, long term picture. With the 24 hour news cycle it is hard to escape the “short termism” that permeates our society, but I believe long term investors would be well served by turning off CNBC and walking away from the Internet for a while to get some perspective. For long term investors, intelligent decisions made today could have a significant impact on their financial well being decades into the future. Fortunes are – and have been – made through long term investments bought during secular bear markets. In fact, the most successful investor of our time, Warren Buffett, made his fortune (well, made his fortune much larger) doing exactly that during the 1970s. And it appears he is trying to repeat the trick.
(Calhoun, who trained as an engineer and spent 8 years in the US Navy Submarine service, has worked in the financial services industry for 17 years as a broker and investment advisor.)
You always add some useful references which I might have missed. Watching how Boehner has shelved the China currency manipulation bill, when I believe in the House the majority have co-sponsored the bill (which is significant, it means it will pass with flying colors), says it all about Boehner's refusal to listen to even his own party, never mind the will of the people.
My son applied for a job as a pilot in China. They were very clear that he was to train Chinese who would replace him in his job. That kind of job protection in the US would be appreciated.
There is many another lucid and informative article to be found on the Economic Populist, starting of course with the contributions of our editor, Robert Oak. You can also find some of my previous articles on the archives in my Workspace file.
The action by Boehner to prevent a vote on currency exchange rate legislation puts the lie to the GOP claim that the agenda is all about defeating Obama in 2012. Since Obama will not be forced to take an unambiguous stand on currency regulation, it's a gift to his campaign. (I am not saying that President Obama necessarily would or would not veto the Act -- just that if he would sign it, so that it would be enacted into law, that would make international corporations less likely to contribute to his campaign fund. And, thanks to Senate GOP opposition to the DISCLOSE Act in 2010, we would never even know about those contributions!)
"The House Republican leadership should not stand in the way of jobs and the American people," said Rep. Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee.
"This is a lot of jobs we are talking about," said Rep. Bill Pascrell, D-N.J. "I hope the Republicans will rethink their knee-jerk reaction."
They noted that a year ago the House passed a more narrowly drawn measure on a 348-79 vote and that a majority of Republicans supported it. They said a bill introduced by Rep. Tim Ryan, D-Ohio, has 225 co-sponsors, more than half the House, with 61 Republicans signed on.
Republicans "know that if it comes up for a vote that it will pass," Levin said.
"There are always people who don't want to stand up to China, and I think they are, frankly, undercutting our ability to stop the hemorrhaging in our manufacturing jobs," said Democratic Sen. Sherrod Brown [originating sponsor of S. 1619]. Still, the bill could die in the House, where a companion measure has the sponsorship of more than half the members but lacks the support of the majority Republican leadership, including John Boehner.
What Robert Oak refers to as the "currency manipulation bill." The bill is titled "Currency Exchange Rate Oversight Reform Act of 2011" and is officially identified as "S. 1619" (Senate bill Number 1619).
"While the Senate passed a currency manipulation bill, it's not brought up for a vote in the House."
It's worse than that -- it hasn't been allowed to go to a vote even though a bipartisan majority sufficient to pass the bill were on record as co-sponsers of an identical House bill. See, APNews story (4 October 2011) via Townhall.com
Boehner is clearly abusing his power as Speaker, and there should be a demand for his resignation. (Some would say Boehner should be prosecuted for treason, but that would not be conforming with the elements required for an indictment under current statutory law for treason.) But what's Boehner's side of the story? We go to Xinhua news service for that --
Here's from Boehner-friendly China news service (Xinhua) story via webpage of the embassy of the People's Republic of China to the USA) --
WASHINGTON, Oct. 12 (Xinhua) -- A controversial currency bill passed by the U.S. Senate on Tuesday posed a "very severe risk" of a trade war, U.S. House of Representatives Speaker John Boehner warned on Wednesday.
Experts held that Boehner's opposition could kill the bill before any vote on the House floor. Boehner last week called the legislation a "dangerous" move.
There's a problem with my using the Medusa allegory as a prognostic -- if the head is removed, the entire body of the monstrous financial system of the current world-system, not just the writhing multi-snake head, would presumably have to die.
However, I doubt that such is the case. I don't believe that the Japanese Yen, the Swiss franc or the Australian dollar (maybe also the Canadian dollar or even the Sterling) would disappear in a day, in a week or in a year -- nor would the renminbi. IMO, it's likely that even the Euro will somehow survive.
Certainly it's becoming possible, not to say probable, that there will have to be freeze-ups of the banking system -- perhaps including non-functioning ATMs for some period of time.
It may become necessary to once again outlaw private ownership of gold bullion, as was done by FDR back in the 1930s. As goldbugs frequently remind us, it won't be pretty when likely cures for the systemic ills of the global financial system are implemented locally.
The problems are global, but the solutions must be undertaken locally, at any rate, on the national level. Nation-states must stand up to trump the authority of the corrupt global system, by force majeure if necessary (and it probably will be necessary). If not USA, then who?
No doubt Ms. Born was on the right track when she talked about transparency. While that can imply that all derivatives should go through clearing houses, it was not completely what she was pushing. She was, nonetheless, on the side of the angels in terms of the basic argument. In fact, though she lost the battle, she won the war. The banking industry went ahead in the 00s and began building a clearing house for basic swaps. This is one reason why there have been no problems in this sector of the derivatives market despite all the turmoil in the industry.
A few other things to note. Particularly when it comes to options, many derivatives are difficult to price. The basic Black-Scholes options formula has gone through many iterations, applied to all sorts of products and circumstances, and with each new application, the market has gotten further and further away from an options pricing formula that works or makes any sense. The assumptions that go into the formula for many products are almost absurd. This was decidedly the case with Credit Default Swaps and Options. Robert did a post on this about a year ago with some technical detail; it should still be in the archives. The point is, the industry abused the Black-Scholes formula by going out into products, circumstances, and risks that could never really be modeled according to bell curve assumptions, Brownian motion statistics, and so on. This is not only why so many of these products blew up, it is why the industry could never really channel these products into a clearing house. No clearing house worth its risk management reputation would accept such products. I think by 2000 this divergence in approach between the exchanges and the OTC market was becoming pronounced and noticeable. Ms. Born's effort was in that sense doomed from the start. Had she gotten her way, the stable products might have been made worse with incompetent CFTC oversight, and the newer and riskier products given a veneer of undeserved respectability if the CFTC had forced them into a clearing house. They would have blown up the clearing house itself eventually.
Secondly, having talked to many senators and representatives in Congress about derivatives in the 1990s, I never met any who had even an adequate understanding of derivatives. Rep. Leach of Iowa came closest, and he worked very hard to figure them out. Mostly everyone else in Congress ran away when the word derivatives came up in the discussion. With that background, the fight between the CFTC and the OTC market boiled down to trusting either Brooksley Born, or The Maestro, Alan Greenspan. It was no contest, considering how much in awe people held Greenspan. I suppose that is an unfortunate lesson on how politics works, but it suggests Ms. Born was 5 or 7 years before her time.
As site administrator I periodically check who is linking to EP and this post is, using this overview as a data reference. The article describes the fiction and pain using chained CPI for social security adjustments will cause.
It's bad enough COLA adjustments are done using only 1 quarter per year, in terms of adjusting for inflation on social security benefits.
Maybe Brooksley Born didn't have the right answers, but at least she was asking questions that needed to be considered. I don't claim to understand the complexities of the derivatives issue, but I have been aware of the dangers for 15 years now ... and so should have every member of Congress and, certainly, President Clinton. I am referring to the bankruptcy of Orange County, California.
The entire program can be viewed online from a link at the above-linked webpage. (I'm sure that Numerian is very familiar with this popularized version of events, and it's probably been incuded in a round-up by Robert Oak, but there may be readers who are not aware of it.)
Whatever her shorcomings, it does appear that Born was asking a much-avoided question: "What about transparency?"
Here's a link to part 2 of the three-part series by Lynn Hume at the Bond Buyer website, 'Orange County versus Enron' (2004) --
Here's a quote of Brooksley Born asking the basic question about transparency (and admitting incomplete knowledge) from the webpage that plays the Frontline video --
We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"
You've taken us a level deeper into the history, enlarging our understanding from an inside point-of-view.
IMO, we keep returning to one key theme: that the entire world of finance capitalism, including regulators and legislators, put the entire world of global economics at risk. 'We' (the public) must also accept some measure of responsibility for the mess, because we let pass the basically suspect meme that capital always accumulates upwards automatically without any need to be invested in any fundamental economic activity -- and with those who stand to gain not obliged to assume any risk. It goes back to the money-grows-automatically myth, with that growth guaranteed by unregulated capitalism backed by governmental guarantees. You might as well believe that money grows on trees.
Looking at that meme from the outside, it should never have been accepted. It was, from the start, the essence of an obviously dangerous delusional system.
Even without understanding how to distinguish between positive or useful derivatives and destructive derivatives, common sense should have caused sirens to go off in everyone's minds, and I believe that was the case for a few members of Congress -- but no where near enough of them to slow down the momentum toward disaster. In the sense that a sufficient cause of any disaster lies with the last party to have declined a clear opportunity to avoid it, Bill Clinton deserves the lion's share of the blame. Of course, the deeper underlying problem is corruption of campaign financing and the concentration of mass media -- that and dumbing down of the American public.
I think the basic destructive and obviously faulty meme has been well-epressed here by BruceJudson in recent blog 'Why Atlas Shrugged' --
Once the Chicago Mercantile Exchange abandoned its brokerage-owned structure and went public, it introduced the pernicious influence of the profit motive to the functioning of a registered exchange, which should be looked at as a financial utility moreso than even a commercial bank. Moreover, in the 1990s, the profit motive as expressed as an expected annual ROE for a financial institution was at least 15%. When the CME went public it was instantly competing for shareholder/investor dollars in a market where Goldman Sachs was offering 30% returns on equity, albeit with greater risk and volatility in the earnings stream.
What's an exchange to do under such circumstances? Expand; shut down the competition; look for synergies and efficiencies of scale; seek out new markets abroad, and so on. The quarterly pressure to generate yet another 15% return on ever-higher amounts of equity produces distortions in the mission of the institution, and eventually in its ethics. Before privitization, when owners of the exchange got their profit out only on retirement by selling their seat, the prized committee to be on was the Risk Management Committee, which set the rules for sharing of losses in the event of a bankruptcy of a fellow member. Floor members had a vested interested in how losses were allocated, and were forced to do so fairly and quickly without damaging customers. After privitization, nobody cared about Risk Management or the rules very much, because traders on the floor were owners only in the very limited sense of being a shareholder in a massive public company. Any losses the exchange incurred would ultimately be born by the shareholders, so the "pass the hat" practice that is embedded in the rules could effectively be junked in a real crisis.
I think this is in part how the CME got to the stage where it doesn't care that it has harmed or even bankrupt thousands of small investors/customers. We've seen this phenomenon before. Goldman Sachs as a partnership forced every partner to pay attention to the firm's risk, because their wealth was tied up entirely in the firm and not obtainable until they retired. After Goldman Sachs went public, the problem of risk ultimately became someone else's concern - the amorphous "shareholders" who were now bankrolling the company anonymously. The employees of the firm could take excessive risks because they were no longer personally liable for the losses. Similarly, securitization gave Wall Street the excuse to peddle absolute trash in the mortgage backed securities market, because after 90 days the securities could not be returned to the broker. Credit risk on 30 year mortgages effectively got truncated to 90 days maximum. After that, no one cared what happened to the securities or the mortgages underlying them.
We could go on and on about the deleterious effects of the profit motive on institutions which serve some public good, like hospitals, health clinics owned by doctors, universities and colleges, and so on. Society needs to step back and take a very deep look at this philosophy that the profit motive always generates the best outcome for all parties concerned. That means we will have to reject Ayn Rand, Margaret Thatcher, Ronald Reagan and a few other apostles of free markets, which turn out to be mostly excuses for the exercise of rampant, unfettered greed.
I recall when Brooksley Born was making her pitch for oversight of the over-the-counter derivatives market, we viewed it in the banking industry as yet another power grab by the futures industry. It was also viewed as another political battle between the Chicago markets, which were futures dominated, and the New York markets, which were bank dominated. The futures industry had its pals in Congress, most of whom were on the Agriculture committees. The banking industry had its support in the Banking committees.
Brooksley Born has been made into some far-seeing hero who would have saved the nation had she won the day, while Alan Greenspan was a tool who could never see anything wrong with derivatives. The first assumption, at least, is wrong. The CFTC had no staff to oversee OTC derivatives, and no experience providing oversight, since the futures industry worked on self-regulation. Had the CFTC won the battle in Congress, the result could have been disaster. The CFTC could have done serious damage to that part of the OTC market which worked well then and is working well now: basic interest rate swaps and options, currency swaps and options, and some few related products in commodities.
What has happened since 2000, however, is that the banking industry has sought new profit opportunities (surprise, surprise) in products like Credit Default Swaps and mortgage-backed securities, since the older derivatives mentioned above (like interest rate swaps) have become commoditized, much safer to trade, but also barely profitable for a trader. The industry obviously went crazy with these new instruments and has almost literally brought down the global financial system. Alan Greenspan stood by when this was developing rather than provide more intense and effective oversight.
This is a rather different and more accurate history of what happened than the meme in the internet that Brooksley Born would have saved the world if she had gotten her way. It is certainly true that putting derivatives into a clearing house structure would have helped, but she wasn't even arguing for this. She was arguing for CFTC oversight whether derivatives were traded on an exchange or not. Moreover, the CFTC did nothing to stop the exchanges from going public and changing the whole paradigm of their business. We've now seen the terrible consequences of that decision.
As I have been visiting family in California, I joined with two other courageous seniors and drove down the mountain to Occupy Sacramento, on Saturday, 19 November 2011. We ranged in age from 70 to 86. We were all favorably impressed with Occupy -- not that we were any of us clamoring for jobs, but that we were all of us disgusted with the globalist Wall Street banksters.
The crowd was most responsive to speakers who emphasized the demand for jobs. But there were speakers who were unafraid to call out against FTAs and even globalism. There was a sign proclaiming that congress critturs who take Norquist's pledge are guilty of 'treason'. (I assume that was a reference to the somewhat sophisticated argument that members of Congress have already taken a more basic oath of office that is effectively contradicted if they take the Norquist pledge.) Also, a few anti-war signs. Oh, and many signs expressing anger at, or disappointment with, SEIU-organized police agencies or departments -- "Occupy seiu.org". (Sacramento police were on their very best behavior that day.)
It seemed to some in the crowd that the ubiquitous demand for jobs was too passive -- after all, creative people understand that the fundamental necessity is to create your own job, or anyway to pull your weight. But at least the demand for jobs indicates a willingness to contribute to fundamental economic enterprises with no guarantees of effortless success -- in contrast to that worst of all entitlement mentalities, that investors are such wonderful beings that they are entitled to something for nothing, that they are entitled to automatic growth of capital even though no risk is involved, that they are entitled to automatic protection from risk by the supposed operation of some law of invisible-hand economics with no necessity for political diligence.
It's time for us all to realize that the greatest risk accompanies any financial-monetary system that fails to meet tests of transparency. We can no longer count on some invisible hand that like Santa Claus rewards us for being good kids. No, all we can count on is the slight of hand, not the invisible hand.
I'm not so sure that's a good idea. While it's been pointed out the Greek 50% CDS haircut caused a run on sovereign bonds, I still think plain cleaning out the banking casino hall is the way to go. Honestly I'm not so sure anymore beyond this is beyond to cause us pain.
Brilliant headline by Bloomberg! I love it. "Germany Buys Itself First-Class Ticket on the Titanic". That's the dilemma alright. And every dilemma has a solution .... or not.
It's a lot like war, isn't it? Albeit a cold war, a war where everyone works around the nuclear option.
The question is: "What exactly is the agenda that will be pushed to resolve Germany's dilemma?"
One factor here that is often overlooked is the importance to Germany of gas imports from Russia. See, news report on opening of Nord Stream gas pipeline by Merkel and Medvedev (8 November 2011).
It's obvious what Germany gets out of the pipeline, but what does Russia get out of it? The answer is Euros, which Russia desperately wants and/or needs. How will it look to Russia if the Euro begins a precipitous decline just when gas deliveries are cranking up? Many people are still thinking in terms of German-Russian animosity, but the reality is very different. Let's face it. The potential for Germany of trade relations to their east is of far more importance to them than relations to their south.
It's like the Eastern front and the Western front that together presented huge problems to Germany in two world wars. (Germany is in the middle of Europe.) On the Western front, Germany needs to allow the ECB to create massively more Euros, but that would negatively impact German interests on the Eastern front -- again massively.
A solution has been proposed, namely that Greece, Italy, Spain, Portugal and others (Ireland? Hungary? Austria?) be allowed to stay in the Euro zone but also "print" their own national currencies. These countries would each then do business in two currencies, although their national currencies (floating against the Euro) would become the denomination for all debts and credits (for example, public employment and retirement paychecks). On some day soon to-be-announced, all accounts would be entered in two columns -- one for Euros, one for lire, drachma, etc..
Another factor that is regularly overlooked, in the news about Europe's prospective demise, is that Italy's central bank (Banca d'Itaglia) is still functional (as a part of the European system of central banks) and is said to retain very large holdings of gold bullion. If these reports are true, it's possible that Italy at least may remain (along with Germany, France and Benelux) as a country with the single currency of the Euro. Of course, many will say that it just doesn't pencil out, it's impossible .... but these nay-sayers forget that all EU nation-states remain sovereign countries, so if Germany says okay and waives Euro zone rules, there's nothing that is impossible. At some level or another, paper is the only way out.
The Euro -- which is thought to be backed to some extent by gold bullion -- actually may continue to function throughout the EU function as the 'gold' of the EU. The Euro zone is but a part of the EU, and British sterling, Swiss franc, etc., are all functioning within the system just fine. It's a win-win situation, because Greece and the others absolutely need to be able to paper their way out of the corners they have painted themselves into (or been painted into, if you prefer).
Finally, the solution to Germany's dilemma will probably be presented as a transitional plan. Even if the plan works very imperfectly and must be revisited constantly for the next few years, it still can work to calm the troubled waters as we go into 2012.
Inflation will be contained, although hardly conquered. The Titanic continues to float, although not everyone will have First Class tickets. Some of the passengers will be down below with the proletariat, shoveling coal ... but all the paychecks will keep coming, nothing will bounce, nobody will default. And, last but not least, gas will keep flowing in the Nord Stream pipeline.
While all of the Presidential "manufactured front runners" will give unlimited foreign guest workers per the demands of their corporate clients, don't exaggerate. Cite your numbers. Fraud is not 80%, while one could probably guess cheap labor, technology transfer is. In terms of skill sets, I don't remember the percentage of fake resumes, but it was high.
Not only did we lose tech manufacturing but the service tech sector for domestic workers is truly depression era. For example, in our biggest Metropolis, if you are over 50 and working a real technical job, you will be the only person in your shop doing what you do for a living. This has been born out again and again by the outsourcing stats on Visa workers (85 % substitution) domestic for foreign.
The reality on the ground is far more disturbing. Tech gypsies fly around the country like latter day dust bowl okies (no pun intended Bob). The work is all contract, the hours unbelievable. And other things, like the loss of human capital in the last ten years has left fewer and fewer to do real technical work. This results in one resource filling dozens of roles once worked by dozens of resources, keeping the unemployment stratospheric and the feeding troths of management compensation full to the brim. Just have George Will do a little research on say, Dr. McGuire at UHC with his $1.7Billion in Options.
And the fraud, major institutions have been brought to a halt by fraud by Visa workers whose skill was so light that they crippled whole parts of regional economies, banking, utilities, airlines and other things. Most in the know can only whisper about the horrors. To speak aloud would bring certain reprisal. Again, born out by DHC studies on fraud rates of at least 20%. I know from experience the real rate approaches 80%.
Have your son do the kinds of nice things to the Chinese they have been doing to us for years now. FTA now stands for Free Trade Asshole. I would never tell anyone to refuse work in these times. I did that in 2008 and really suffered.
Withhold, sabotage, and gather info. Explain that we are at war.
"What is astounding is the massive amount of cash corporations have for investment. Net cash flow increased 2.2% from Q2 and has increased 9.6% from a year ago. Corporations now have over $1.852 trillion dollars available for domestic investments and hiring people, which everyone in America is aware they are not doing, astounding." -- Robert Oak
I can't find links for this right now, but I am sure that there has been a not uncommon analysis of recent Berkshire Hathaway equity purchases as all about seeking very large companies well-situated to withstand shocks to the global economy. Holding cash is a defensive strategy, albeit very different from the defensive strategy that focuses on PM in anticipation of the collapse of major global currencies and related financial components of the global economy.
In general, there's an atmosphere of fear and pessimism driving global capital these days. Thus, the mega-corporations are choosing to hold cash -- even though interest on demand deposits, US Treasurys or other forms of cash is low and even though all these forms of cash, in and of themselves, may carry some degree of risk.
One reason for the corporate deep-pockets defensive strategy is that management finds that they can hold cash, as opposed to a few years ago when holding cash meant that you were courting a hostile leveraged takeover. On the other hand, another reason for the defensive strategy may be that management finds that they must hold cash in order to survive over the next few years.
IMO, it all has to do with the relation between productive components of the global economy and financial components. The financial part of it is a huge and dysfunctional Gordian Knot that probably cannot be disentangled except by cutting though it. But will this mean that productive components of the global economy are destined to evaporate during what seems to be developing into a Second Great Depression? How an investor decides that key question likely depends to a great extent on how the investor sees the Peak Oil crunch (or Armageddon).
Here's from one of the long-term bulls who are looking to make lemonade from the lemons of a bear market:
(Calhoun, who trained as an engineer and spent 8 years in the US Navy Submarine service, has worked in the financial services industry for 17 years as a broker and investment advisor.)
You always add some useful references which I might have missed. Watching how Boehner has shelved the China currency manipulation bill, when I believe in the House the majority have co-sponsored the bill (which is significant, it means it will pass with flying colors), says it all about Boehner's refusal to listen to even his own party, never mind the will of the people.
My son applied for a job as a pilot in China. They were very clear that he was to train Chinese who would replace him in his job. That kind of job protection in the US would be appreciated.
There is many another lucid and informative article to be found on the Economic Populist, starting of course with the contributions of our editor, Robert Oak. You can also find some of my previous articles on the archives in my Workspace file.
Boehner and Obama are bedfellows on trade issues!
The action by Boehner to prevent a vote on currency exchange rate legislation puts the lie to the GOP claim that the agenda is all about defeating Obama in 2012. Since Obama will not be forced to take an unambiguous stand on currency regulation, it's a gift to his campaign. (I am not saying that President Obama necessarily would or would not veto the Act -- just that if he would sign it, so that it would be enacted into law, that would make international corporations less likely to contribute to his campaign fund. And, thanks to Senate GOP opposition to the DISCLOSE Act in 2010, we would never even know about those contributions!)
From APNews report (4 October 2011), via Townhall Magazine --
More from the APNews story (emphasis added) --
From later (11 October 2011) APNews story, via Newser.com --
What Robert Oak refers to as the "currency manipulation bill." The bill is titled "Currency Exchange Rate Oversight Reform Act of 2011" and is officially identified as "S. 1619" (Senate bill Number 1619).
Here's the bottom four lines from Thomas (Library of Congress) webpage for S. 1619, 'All Congressional Actions", (emphasis added) --
"While the Senate passed a currency manipulation bill, it's not brought up for a vote in the House."
It's worse than that -- it hasn't been allowed to go to a vote even though a bipartisan majority sufficient to pass the bill were on record as co-sponsers of an identical House bill. See, APNews story (4 October 2011) via Townhall.com
Boehner is clearly abusing his power as Speaker, and there should be a demand for his resignation. (Some would say Boehner should be prosecuted for treason, but that would not be conforming with the elements required for an indictment under current statutory law for treason.) But what's Boehner's side of the story? We go to Xinhua news service for that --
Here's from Boehner-friendly China news service (Xinhua) story via webpage of the embassy of the People's Republic of China to the USA) --
WOW! "Who is that masked man?" Is it the Lone Ranger? No it's Numerian!
I've read volumes about the financial markets and just keep getting less informed. This is the first time I feel like I actually learned something.
Thank you
"Keep those cards and letters coming"
Tom
There's a problem with my using the Medusa allegory as a prognostic -- if the head is removed, the entire body of the monstrous financial system of the current world-system, not just the writhing multi-snake head, would presumably have to die.
However, I doubt that such is the case. I don't believe that the Japanese Yen, the Swiss franc or the Australian dollar (maybe also the Canadian dollar or even the Sterling) would disappear in a day, in a week or in a year -- nor would the renminbi. IMO, it's likely that even the Euro will somehow survive.
Certainly it's becoming possible, not to say probable, that there will have to be freeze-ups of the banking system -- perhaps including non-functioning ATMs for some period of time.
It may become necessary to once again outlaw private ownership of gold bullion, as was done by FDR back in the 1930s. As goldbugs frequently remind us, it won't be pretty when likely cures for the systemic ills of the global financial system are implemented locally.
The problems are global, but the solutions must be undertaken locally, at any rate, on the national level. Nation-states must stand up to trump the authority of the corrupt global system, by force majeure if necessary (and it probably will be necessary). If not USA, then who?
No doubt Ms. Born was on the right track when she talked about transparency. While that can imply that all derivatives should go through clearing houses, it was not completely what she was pushing. She was, nonetheless, on the side of the angels in terms of the basic argument. In fact, though she lost the battle, she won the war. The banking industry went ahead in the 00s and began building a clearing house for basic swaps. This is one reason why there have been no problems in this sector of the derivatives market despite all the turmoil in the industry.
A few other things to note. Particularly when it comes to options, many derivatives are difficult to price. The basic Black-Scholes options formula has gone through many iterations, applied to all sorts of products and circumstances, and with each new application, the market has gotten further and further away from an options pricing formula that works or makes any sense. The assumptions that go into the formula for many products are almost absurd. This was decidedly the case with Credit Default Swaps and Options. Robert did a post on this about a year ago with some technical detail; it should still be in the archives. The point is, the industry abused the Black-Scholes formula by going out into products, circumstances, and risks that could never really be modeled according to bell curve assumptions, Brownian motion statistics, and so on. This is not only why so many of these products blew up, it is why the industry could never really channel these products into a clearing house. No clearing house worth its risk management reputation would accept such products. I think by 2000 this divergence in approach between the exchanges and the OTC market was becoming pronounced and noticeable. Ms. Born's effort was in that sense doomed from the start. Had she gotten her way, the stable products might have been made worse with incompetent CFTC oversight, and the newer and riskier products given a veneer of undeserved respectability if the CFTC had forced them into a clearing house. They would have blown up the clearing house itself eventually.
Secondly, having talked to many senators and representatives in Congress about derivatives in the 1990s, I never met any who had even an adequate understanding of derivatives. Rep. Leach of Iowa came closest, and he worked very hard to figure them out. Mostly everyone else in Congress ran away when the word derivatives came up in the discussion. With that background, the fight between the CFTC and the OTC market boiled down to trusting either Brooksley Born, or The Maestro, Alan Greenspan. It was no contest, considering how much in awe people held Greenspan. I suppose that is an unfortunate lesson on how politics works, but it suggests Ms. Born was 5 or 7 years before her time.
As site administrator I periodically check who is linking to EP and this post is, using this overview as a data reference. The article describes the fiction and pain using chained CPI for social security adjustments will cause.
It's bad enough COLA adjustments are done using only 1 quarter per year, in terms of adjusting for inflation on social security benefits.
Maybe Brooksley Born didn't have the right answers, but at least she was asking questions that needed to be considered. I don't claim to understand the complexities of the derivatives issue, but I have been aware of the dangers for 15 years now ... and so should have every member of Congress and, certainly, President Clinton. I am referring to the bankruptcy of Orange County, California.
See, short PBS' Frontline story, Two Early Derivative Blow-Ups
The entire program can be viewed online from a link at the above-linked webpage. (I'm sure that Numerian is very familiar with this popularized version of events, and it's probably been incuded in a round-up by Robert Oak, but there may be readers who are not aware of it.)
Whatever her shorcomings, it does appear that Born was asking a much-avoided question: "What about transparency?"
Here's a link to part 2 of the three-part series by Lynn Hume at the Bond Buyer website, 'Orange County versus Enron' (2004) --
link to BondBuyer.com (article and series)
Here's a quote of Brooksley Born asking the basic question about transparency (and admitting incomplete knowledge) from the webpage that plays the Frontline video --
You've taken us a level deeper into the history, enlarging our understanding from an inside point-of-view.
IMO, we keep returning to one key theme: that the entire world of finance capitalism, including regulators and legislators, put the entire world of global economics at risk. 'We' (the public) must also accept some measure of responsibility for the mess, because we let pass the basically suspect meme that capital always accumulates upwards automatically without any need to be invested in any fundamental economic activity -- and with those who stand to gain not obliged to assume any risk. It goes back to the money-grows-automatically myth, with that growth guaranteed by unregulated capitalism backed by governmental guarantees. You might as well believe that money grows on trees.
Looking at that meme from the outside, it should never have been accepted. It was, from the start, the essence of an obviously dangerous delusional system.
Even without understanding how to distinguish between positive or useful derivatives and destructive derivatives, common sense should have caused sirens to go off in everyone's minds, and I believe that was the case for a few members of Congress -- but no where near enough of them to slow down the momentum toward disaster. In the sense that a sufficient cause of any disaster lies with the last party to have declined a clear opportunity to avoid it, Bill Clinton deserves the lion's share of the blame. Of course, the deeper underlying problem is corruption of campaign financing and the concentration of mass media -- that and dumbing down of the American public.
I think the basic destructive and obviously faulty meme has been well-epressed here by BruceJudson in recent blog 'Why Atlas Shrugged' --
"Heads I win, tails you lose."
I call it the Enron error.
Once the Chicago Mercantile Exchange abandoned its brokerage-owned structure and went public, it introduced the pernicious influence of the profit motive to the functioning of a registered exchange, which should be looked at as a financial utility moreso than even a commercial bank. Moreover, in the 1990s, the profit motive as expressed as an expected annual ROE for a financial institution was at least 15%. When the CME went public it was instantly competing for shareholder/investor dollars in a market where Goldman Sachs was offering 30% returns on equity, albeit with greater risk and volatility in the earnings stream.
What's an exchange to do under such circumstances? Expand; shut down the competition; look for synergies and efficiencies of scale; seek out new markets abroad, and so on. The quarterly pressure to generate yet another 15% return on ever-higher amounts of equity produces distortions in the mission of the institution, and eventually in its ethics. Before privitization, when owners of the exchange got their profit out only on retirement by selling their seat, the prized committee to be on was the Risk Management Committee, which set the rules for sharing of losses in the event of a bankruptcy of a fellow member. Floor members had a vested interested in how losses were allocated, and were forced to do so fairly and quickly without damaging customers. After privitization, nobody cared about Risk Management or the rules very much, because traders on the floor were owners only in the very limited sense of being a shareholder in a massive public company. Any losses the exchange incurred would ultimately be born by the shareholders, so the "pass the hat" practice that is embedded in the rules could effectively be junked in a real crisis.
I think this is in part how the CME got to the stage where it doesn't care that it has harmed or even bankrupt thousands of small investors/customers. We've seen this phenomenon before. Goldman Sachs as a partnership forced every partner to pay attention to the firm's risk, because their wealth was tied up entirely in the firm and not obtainable until they retired. After Goldman Sachs went public, the problem of risk ultimately became someone else's concern - the amorphous "shareholders" who were now bankrolling the company anonymously. The employees of the firm could take excessive risks because they were no longer personally liable for the losses. Similarly, securitization gave Wall Street the excuse to peddle absolute trash in the mortgage backed securities market, because after 90 days the securities could not be returned to the broker. Credit risk on 30 year mortgages effectively got truncated to 90 days maximum. After that, no one cared what happened to the securities or the mortgages underlying them.
We could go on and on about the deleterious effects of the profit motive on institutions which serve some public good, like hospitals, health clinics owned by doctors, universities and colleges, and so on. Society needs to step back and take a very deep look at this philosophy that the profit motive always generates the best outcome for all parties concerned. That means we will have to reject Ayn Rand, Margaret Thatcher, Ronald Reagan and a few other apostles of free markets, which turn out to be mostly excuses for the exercise of rampant, unfettered greed.
I recall when Brooksley Born was making her pitch for oversight of the over-the-counter derivatives market, we viewed it in the banking industry as yet another power grab by the futures industry. It was also viewed as another political battle between the Chicago markets, which were futures dominated, and the New York markets, which were bank dominated. The futures industry had its pals in Congress, most of whom were on the Agriculture committees. The banking industry had its support in the Banking committees.
Brooksley Born has been made into some far-seeing hero who would have saved the nation had she won the day, while Alan Greenspan was a tool who could never see anything wrong with derivatives. The first assumption, at least, is wrong. The CFTC had no staff to oversee OTC derivatives, and no experience providing oversight, since the futures industry worked on self-regulation. Had the CFTC won the battle in Congress, the result could have been disaster. The CFTC could have done serious damage to that part of the OTC market which worked well then and is working well now: basic interest rate swaps and options, currency swaps and options, and some few related products in commodities.
What has happened since 2000, however, is that the banking industry has sought new profit opportunities (surprise, surprise) in products like Credit Default Swaps and mortgage-backed securities, since the older derivatives mentioned above (like interest rate swaps) have become commoditized, much safer to trade, but also barely profitable for a trader. The industry obviously went crazy with these new instruments and has almost literally brought down the global financial system. Alan Greenspan stood by when this was developing rather than provide more intense and effective oversight.
This is a rather different and more accurate history of what happened than the meme in the internet that Brooksley Born would have saved the world if she had gotten her way. It is certainly true that putting derivatives into a clearing house structure would have helped, but she wasn't even arguing for this. She was arguing for CFTC oversight whether derivatives were traded on an exchange or not. Moreover, the CFTC did nothing to stop the exchanges from going public and changing the whole paradigm of their business. We've now seen the terrible consequences of that decision.
As I have been visiting family in California, I joined with two other courageous seniors and drove down the mountain to Occupy Sacramento, on Saturday, 19 November 2011. We ranged in age from 70 to 86. We were all favorably impressed with Occupy -- not that we were any of us clamoring for jobs, but that we were all of us disgusted with the globalist Wall Street banksters.
The crowd was most responsive to speakers who emphasized the demand for jobs. But there were speakers who were unafraid to call out against FTAs and even globalism. There was a sign proclaiming that congress critturs who take Norquist's pledge are guilty of 'treason'. (I assume that was a reference to the somewhat sophisticated argument that members of Congress have already taken a more basic oath of office that is effectively contradicted if they take the Norquist pledge.) Also, a few anti-war signs. Oh, and many signs expressing anger at, or disappointment with, SEIU-organized police agencies or departments -- "Occupy seiu.org". (Sacramento police were on their very best behavior that day.)
It seemed to some in the crowd that the ubiquitous demand for jobs was too passive -- after all, creative people understand that the fundamental necessity is to create your own job, or anyway to pull your weight. But at least the demand for jobs indicates a willingness to contribute to fundamental economic enterprises with no guarantees of effortless success -- in contrast to that worst of all entitlement mentalities, that investors are such wonderful beings that they are entitled to something for nothing, that they are entitled to automatic growth of capital even though no risk is involved, that they are entitled to automatic protection from risk by the supposed operation of some law of invisible-hand economics with no necessity for political diligence.
It's time for us all to realize that the greatest risk accompanies any financial-monetary system that fails to meet tests of transparency. We can no longer count on some invisible hand that like Santa Claus rewards us for being good kids. No, all we can count on is the slight of hand, not the invisible hand.
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