Thanks to Robert Wenzel for pointing me to this confirmation of my own previously expressed feeling that Nouriel Roubini was one of the “designated” doom-and-gloomers (not that I think he’s wrong necessarily, but how come everyone of them comes out of the Stern School of Business in New York, or has World Bank or IMF backgrounds, or worked for Goldman Sachs, or studied with Larry Summers….

You don’t suppose that’s all accidental, do you?)

Summers Was Paid $5.2 Million in Past Year by Hedge Fund; Owned “Asset” in Nouriel Roubini Firm

Top White House economic adviser Lawrence Summers received about $5.2 million over the past year in compensation from hedge fund D.E. Shaw, and also received hundreds of thousands of dollars in speaking fees from major financial institutions and other organzations.

A financial disclosure form released by the White House Friday afternoon (Friday afternoon. Got that?) and first reported on by WSJ shows that Summers made frequent appearances before Wall Street firms including J.P. Morgan, Citigroup, Goldman Sachs and Lehman Brothers.

In total, Summers made a total of about 40 speaking appearances to financial sector firms and other places, with fees totaling about $2.77 million. Fees ranged from $10,000 for a Yale University speech to $135,000 for an appearance paid for by Goldman Sachs & Co.

Probably the most curious item on the disclosure form is that Summers appears to have owned stock in Nouriel Roubini’s firm Roubini Global Economics. Summers shows that before he joined the White House he sold an asset in Roubini Global Economics for a capital gain of between $15,0000 [sic] and $50,000. Strongly suggesting that Summers had an equity position in the firm. The form also shows that he was an advisor to the board of Nouriel’s RGE Monitor and that he recieved advisory board compensation of $147,500 from Roubini Global Economics.

Given these new disclosures, it is interesting to note Roubini’s recent comment to NYT:

Mr. Roubini believes that the Treasury’s plan does not preclude nationalization at all. Rather, he said, it will help to clear the way to full government takeover of some troubled institutions.

“I see the option of nationalization” and the one presented by the Obama administration “as being complementary,” Mr. Roubini said. He believes that the stress tests the government plans on conducting on the banks will reveal which are solvent and which are insolvent.

In his view, those banks that are deemed insolvent will not participate in the toxic-asset plan and will be taken over by the government. Banks deemed solvent will be the ones that get to participate.

Nationalization “is fully on the table for banks that are insolvent,” Mr. Roubini said.

A special shout out goes to Lila Rajiva who has been on to Roubini for sometime and wrote in a comment to an EPJ blog post:

I don’t know what the financial press actually do, besides taking dictation….

By the way, I think Roubini is one of the “designated” doom and gloomers myself…

Comment

No crystal ball or mathematical forecasting ability here, alas. Just trying to tell it like it is without worrying about what people think.  But glad to know I’m not misleading anyone…

The uptick rule prevents traders from selling a stock short, unless it’s on a movement upward of the price (which shows that there are enough buyers for sellers).  It was repealed in July  6, 2007, after an SEC study  (begin in May 2, 2005) showed that it had no statistically significant correlation with greater volatility.

But that study itself, only 6 months in duration and limited to a period of relatively low volatility and up-trending prices, was probably flawed, say many critics. They blame the financial collapse of the banks in 2008, at least in part, to the repeal of the rule.

A later SEC study (from November 2008) now shows the repeal of the rule  (a rule originally enacted in 1934 to prevent just the sort of cascading selling that destroyed the financial industry) did  indeed have a huge effect on the volatility of trading in the markets.

As this piece. suggests, the repeal had a direct and sizable role in exacerbating the sudden bear raids on Bear Stearns and Lehman Brothers in 2008.  The piece references a study by Birinyi Associates in April 2008 on volatility in the market after the repeal.

* The VIX (Volatility Index) went up at once from 13.25 to 23.55

*In the same period the absolute dollar value of the daily change in each stock in the S&P 500 increased from $1.02 to $1.77.

*July 6, 2007 shows an immediate and striking change in volume of stock purchases,  from plus ticks to minus, indicating full-throttle shorting (mostly by hedge funds)

*Bear (with a float of 159,098,000 shares) traded down from $61.58 to $2.84 in 5 trading days (March 14 to March 20) on  volume of 4.2 times its total float. Lehman went down from $16.20 to 15 cents in 5 days on almost 3 times its float.

Critics of the reinstatement of uptick (i.e., supporters of the repeal of uptick) claim that all it does is help politically connected firms. They say that institutional firms and market makers can and do short whenever they want. The uptick rule only prevents the general public from shorting.

OK. If that’s so, the answer is to fix things so that the market-makers play by the same rules as everyone else.

But, actually, I don’t agree with the critics. If you look at the context of what’s happened to the economy to get us to where we are today, you’ll see that each step followed the previous one systematically and purposefully, at least to appearances.

Look at the way things have moved:

First, there was the Kelo decision, allowing eminent domain seizure of property by the government from private owners on behalf of developers (2005). That signaled the end of the housing bubble.

Then there was the failure of the Bush administration to get social security privatized (which would have  let the elites get more ordinary people’s savings into their hands).That meant there was no more money to be pumped into the party.

Then came the repeal of the uptick rule, signaling that everything was in place for a crisis to occur.

Now, take a look at the resume of the chief regulator at this time, SEC Chairman Christopher Cox.

Significant highlights of his career include the following:

* Senior White House Counsel 1986-88.  Advised on the 1987 stock market crash.

*Authored the Private Securities Litigation Reform Act, which protects investors from fraudulent lawsuits

*Chairman of the Committee on Homeland Security

*Chairman of the Task Force on Capital Markets

*17 years in Congress, 10 in the Majority Leadership in the House of Reps.

*28th Chairman of the SEC from June 2, 2005 onward.

*Leadership role in integrating US and overseas regulation of the stock market

* Member of the Federal Housing Finance Oversight Board (2008), which advises the Director of the FHFA on the safety and soundness of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

*Member of the Financial Stability Oversight Board that oversees the $700 billion Troubled Assets Relief Program.

“SocGen is one of four banks due to appear at the Paris criminal court in the trial known as “Sentier 2”, due to its links with the capital’s Sentier textile district.

The other three banks in the case are HSBC (HSBA.L) unit Societe Marseillaise de Credit (SMC), Barclays France (BARC.L) and National Bank of Pakistan.

SocGen Chairman Daniel Bouton and three other officials at the bank are due to appear at the Paris criminal court in connection with the case.

In July 2006, a French magistrate ruled that more than 130 bankers should face money laundering charges in connection with an alleged cheque scam in the late 1990s.

The alleged money laundering took place between 1996 and 2001 in the Sentier area of the city and involved stolen or fraudulent cheques shuttled between France and Israel…”

From Reuters

 Comments:

Aren’t at least two of these banks counterparties of AIG?

Just to show you that here at The Mind-Body Politic we truly are on a mission to do things differently, we’re happy to turn our X-ray vision on those who wear the same set of blinkers as we do (i.e., they call themselves libertarians).

You hear the right complain about George Soros’ funding of the Open Society and over groups like Move On.org. Fair enough. But behind many libertarian groups is an even richer man, one most people have never even heard of – Charles Koch.  In 2008 Koch was the 37th richest man in the world, though he’s come down since. Koch’s business methods have had their share of criticism, from within the business – indeed, from within the family, from brother Bill.

The Kochtopus’ tentacles reach far and wide, as this map at Muckety shows.

The map isn’t clear when reduced for this blog, so I’ll mention some of the more important: The Cato Institute, Reason, The Heritage Foundation, The Federalist Society, the  Acton Institute…. which doesn’t necessarily compromise everything these worthy institutions do or say (and I like a few of them a lot). But it’s worth keeping in mind when you find libertarians whom you otherwise like suddenly toeing the statist line on something.  They could be speaking their minds, of course. But more likely, their funding is talking….

“It was the intention of John Maynard Keynes to return to the age before Noah Webster.  He wanted to go back to the Middle Ages when lending at interest was prohibited.  At that time, people did not save.  No capital was accumulated.  Without capital, when a new machine was invented (which was rare), it sat in its inventor’s workshop because there was not enough capital in the world to build many copies of the machine and put it to work in factories producing wealth for people.  In a word, the legalization of interest caused the factory system, which vastly increased wealth in the (northern) U.S. and Britain (including Commonwealth countries).  The bottom line of Keynesian economics was to do away with all of this and return to the Middle Ages. 

          Keynes provided an economic rationalization for paper money.  He stumbled across two Americans, William Trufant Foster and Waddill Catchings.  These were crackpots who had written a defense of paper money called, The Road to Plenty, in which they argued that the road to plenty for a society was to print money.

          Keynes was clever enough to perceive that Foster and Catchings were being rejected by the general public because they were conservatives.  Keynes plagiarized their theory and dressed it up as liberal and progressive.  This is why Keynesianism is called “the new economics” and why it is full of mathematical mumbo-jumbo (which appears absurd to any mathematician and has the sole purpose to intimidate people).

          Under Keynes’ influence, the U.S. started printing money in 1933  Since that time the U.S. money supply has multiplied by a factor of 80 (from $20 billion to $1.6 trillion) while the population multiplied by 2.3.  (Per capita money supply multiplied by 35.).

          But the point is that, if a person tried to save money in the U.S.A after 1933. in the manner that was done in the period 1788-1933, he found that, as his money accumulated from the interest, it lost its value from the depreciation of the currency.  Using the official government CPI, the saver (in safe instruments) gained no real value between 1933 and 2009.  His buying power was just the same.  In effect, Keynes was successful.  He did not stop the payment of interest.  But he did stop the payment of real interest.

          What does this mean for you and your economic plans?  It is very simple.  In general, you cannot retire.  If you save your money and invest it safely, as was normal in the 19^th and early 20^th centuries, you do not accumulate real interest.  The currency depreciates just as rapidly as your interest accumulates, and you are back in the Middle Ages when it was forbidden to pay interest and no one retired.

          However, Keynes slipped up in two areas: stocks and real estate.  If you own stocks, then the stock pays a dividend.  This roughly corresponds to the interest on a savings account.  It is a return on capital.  And the price of the stock goes up as the value of the currency goes down.  This makes up for the depreciation of the currency.  It is the same with real estate.  If you buy apartments or commercial property, in both of which the tenant pays rent, you are receiving a return on capital.  And the rise in the price of the real estate offsets the depreciation of the currency.  (Speculative real estate, such as raw land, does not apply here.)

          There is one serious problem with both of these investments.  They are very speculative.  The stock market rose by a factor of 18 times from 1982 to 2007.  But from 1966 to 1982, it fell by over 70%.  These swings are speculative and tricky.  But you cannot retire unless you play them because Keynes has taken away the traditional American (and British) method of safe investment……

 – One Handed Economist.

Comment

I was wondering why the name Waddill Catchings sounded familiar. Now I remember. He was involved in one of the most famous Ponzi schemes of all times, one at the center of the Great Crash of 1929. Mr. Catchings was part of the launch of the Goldman Sachs Trading Corporation (GSTC). Yes (sigh) Goldman was a part of that mess too…..

“The CFTC also publishes a Bank Participation Report [2] on a monthly basis. This report gives the long and short positions of Banks who hold positions in commodities grouped as foreign and domestic. They also state how many banks make up the domestic bank holding and the foreign bank holding. In silver there are only two US Banks involved and in Gold there are three.

The position of the banks is also included in the “Commercial” category of the COT. So once per month we can see what share of the commercial trading in gold and silver is performed by these US Banks.

To observe what influence anyone is having on the market we have to determine what “Net Position” they hold. If you were to buy 100 contracts long of silver and sell 100 contracts short at the same time, your influence on the market price will be nil. If however you buy 10 contracts long and you sell short 100 contracts your effect on the market price is a function of the net short position of 100-10=90 contracts.

The commercials collectively are nearly always net short. Their effect on the price is a function of the commercial net short position which is the total commercial short position minus the total commercial long position. To determine how influential the positions of the US bank participation are in the market we need to compute what percentage the net short of the banks represents compared to the total commercial net short position.”

Adrian Douglas in “Pirates of the Comex”

Comment:

 As the article indicates, the commercials have a huge influence on gold and silver prices. Investors may be buying but if the commercials are short, that is going to cap the prices.  That’s one reason why I am not (yet) long gold and have only a small silver position.  And I’m not nimble  or confident enough to short something that’s in a long-term bull market.

(By the way, my trader comments are only asides. I am not a professional trader of any kind., and only manage my own money because bank accounts don’t pay enough to cover inflation and brokers – in my experience –  are mostly good for leaving you broke. As I’ve said elsewhere,  I’m an ex-school teacher and academic, who would much  rather have nothing to do with finance, if I could. But I can’t.)

“There are plenty such victims available. “Farmers and schoolteachers and plumbers are taking responsibility for their own investments,” says John Yost, whose San Francisco firm, Black Rocket, created the famous TV commercial for Discover Brokerage about the tow truck driver who bought his own private island from his stock-trading profits. “If you really care about your health, you have to be more involved in learning about medical care,” says Yost. “If you really care about your financial health, you have to be more involved in investing your own money.”

Harvey Houtkin, the CEO of All-Tech Direct, a pioneering daytrading firm, has long argued that the more people there are who actively trade for themselves, the more liquidity and competition the market has. He believes that the new, high-volume daytrading scene is producing so much volume that the traditional exchanges will soon be obsolete. “Why do you think the New York Stock Exchange and Nasdaq want to go public?” asks Houtkin. “To bail out on the public. You’ll be able to enter orders through an electronic mechanism, so what does the New York Stock Exchange do? ‘Hmm, well, there’s a lot of suckers out there; we’ll go public.'”

But while advocates of the Internet stock market see the growth of amateur electronic trading as a popular triumph, a stream of greedy and ill-informed newcomers shoring up the bottom layer of the pyramid is also helpful. Anthony laughs with scornful delight at the notion of a fair and massively popular stock market. He views the competition among brokerage firms, market makers, and the new electronic trading system merely as a staged showbiz feud, and he pictures the Nasdaq market as an evil partnership: The online brokerages lure new herds of sheep into the game and collect the admission fees while the market makers do the shearing. “Right now,” Anthony says, “people just get wild hairs up their ass, and all of a sudden a whole sector will move and there is no rhyme or reason to it. Take online banking. Net banks are at 20 or 30 bucks and then they shoot up to 200 because everybody is talking about how people will do more banking online, and over a four-month period they drop back down to 20 bucks. The more volatile the market, the more risk associated with it, and undoubtedly the more losers. You have the public versus the professional, and the public is going to lose in the end.”

Joey Anuff and Gary Wolf, Adventures of a Day Trader (excerpted in Wired magazine, 2000)   citing convicted fraudster-turned-FBI informant, Anthony Elgindy, on the rigged market.