Category Archives: Finance

Blaming Asians Instead of the Federal Reserve

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“At no point did Asian savers force Fannie Mae to reduce down payments on houses or reduce mortgage rates. At no point did Asian savers force American banks to allow consumers to use their home equity as ATM machines. At no point did Asian savers force the Bush administration to run deficits to pay for foreign wars and domestic welfare. At no point did Asian savers force government-sanctioned ratings agencies to rubber stamp risk assessments. And at no point did Asian savers force Alan Greenspan to lower interest rates.

Neither the US government nor its federally controlled housing agencies had to spend the money it received from Asia. In fact, they could have refused the money altogether. No means no, right?

In addition, the government could have paid off its obligations and maintained a balanced budget. Instead it spent it all and continued borrowing. As a consequence, it is pure balderdash to insinuate that the uptick in Asian savings somehow coerced the House Committee on Ways and Means to appropriate billions in extra liabilities. No one in Asia pointed chopsticks, bamboo, or a gun at Larry Summers, Paul O’Neall, Dennis Hastert, Bill Thomas or American consumers and told them to spend the money.

True enough, Asian countries produced relatively cheap goods that Americans wanted to buy, but it was the Federal Reserve alone that created the “cheap” money that was then lent to Americans who in turn bought products from China.

In fact, the only “hot” money in the global system was that created by the Federal Reserve. Every dollar that the Chinese and Japanese used to buy US Treasury bonds originated from the Federal Reserve. And as much as they would have liked to do it, no evidence has surfaced to suggest that China, Japan, South Korea, or any other Asian country was involved with counterfeiting money. That responsibility is left solely with the Federal Reserve’s own printing press…..”

More at Mises.org by Tim Swanson

Comment:

Well, there you go. The Mises bloggers have it right. The fault, dear Brutus, lies not in our trading partners but in our Federal Reserve policies that we are underproducing….

Trust the MSM to shift blame away from the banksters and from their man in DC and instead blame the Chinese. Here’s Paul Krugman  of the New York Times whinging about the Asian glut. And here’s the Economist doing its own version of deep thinking…i.e. obfuscating the issue.

Look, there was a huge flood of savings from Asia, true. But, Asian savings is held in US dollars and bonds for a reason.

*The mortgage industry doesn’t exist in the same way there. So, while Americans can hold their savings in the form of home payments (mortgage equity), Asians usually have to hold them as deposits in a bank.

*Asian central banks have to adjust their policies to the Fed’s policies  and keep their currencies cheap internationally. That helps strengthen their exports.  They need to do that in part in order to build up reserves in foreign currencies that are hard (convertible), since their own currencies are not.

*If they don’t have hard currency reserves, Asian banks become vulnerable to capital flight when a financial crisis makes people withdraw money not only from the banks, but from the national currency and save it in a Western currency (pound or dollar or Euro, for example).

The “glut of savings” which Krugman and Greenspan  are complaining about looks a bit different if you understand that

1. It’s not comparable to our savings (it should rightly be compared to how much  savings we have in our houses)

2. It’s induced by central banks policies that are in turn instigated by Federal Reserve policy here

3. It protects against currency crises of the kind that we saw in the 1990s, where countries with high reserves saw their currencies actually appreciate, while currencies elsewhere were destroyed.

Greenspan Eggs On World War IV: China Versus US

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Some more blows in the ongoing World War IV, known as the War on Terror to the masses. WW IV was always about the perception of the US (and the Anglosphere in general) that the growing economies of China, and to a lesser extent India, posed a threat to access to world resources. The War on Terror was simply a pretext to establish bases from which WW IV could proceed at a more comfortable pace.

Thus Alan Greenspan’s recent piece in the Wall Street Journal, blaming Asia, especially China, for the US housing bubble:

“The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005. That decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble…”

Read this along with remarks by Tim Geithner in the Obama administration that China was manipulating the yuan to help its exports ( a sentiment also voiced by Obama during the elections).

That’s the perspective from which the little fracas (actually it’s the biggest fracas between China and the US since 2001) in the South China Sea should be seen. The USNS Impeccable – a civilian ship under Navy control – was apparently conducting surveillance in what it claims was international waters (where US doctrine insists on international freedom to move) but within the 200 mile zone in which Chinese economic control obtains. Chinese vessels came within 25 feet of the US ship which sprayed them with water, and then left.

This  week China will also be unveiling plans for an increase of 15% in its defense spending, including expansion of its naval capacity.

No Shortage of Gold and Silver Coins, Says Rogers

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From a Feb. 2 2009 interview of financial guru Jim Rogers with Warren Bevan:

 

Jim Rogers:

 

“Well I don’t know why anybody would pay that kind of premium.  What happened was all the dealers went and bought huge silver supplies back when silver was at $20 and now their stuck and they don’t want to take a loss and so they are telling people they don’t have coins. 

 

I promise you sir if you offer $25 for silver coins you’d get all you wanted.  There is no shortage.  It’s just that the shortage is because the dealers bought huge inventories that they don’t want to sell at a loss.  So I think it’s happening, dealers are just refusing to buy them.

 

They’re there, I don’t think we are running out of silver coins my god, there are millions and millions of silver coins, it’s the dealers are stuck.  And to some extent the same is with gold as well…..”

 

Comment

 

More evidence in an interview with Jim Rogers that you should be careful paying high prices for silver or gold coins when the spot price is lower. Rogers doesn’t see any silver shortage, only unwillingness to sell by dealers who bought at high prices, who hope for those prices to come around again (which in turn stimulates the newsletters to boost the prices). He thinks that’s partly true of gold as well, though gold acts much more like a currency.

 

Actual jewelry demand at these levels is flat (and Indian jewelry demand is a major driver of it) – this being the seasonal low of that demand. .ETF inflows have also been relatively smaller compared to the early part of the year.(Correction: Recent news says that ETF flows have reached an all-time high, so I figure the discrepancy is due to the divergence between the absolute numbers – all time high –  and the volume – which I recall reading had tapered off…will post further on this).

 

This doesn’t mean that gold’s fundamentals aren’t good. It just means that you should be careful when and how you buy it so you don’t get eaten alive by market manipulation. Fear is driving a lot of the buying right now. Not inflationary fears per se but panic over the  economy and the market…and that sentiment can turn sharply. Rogers feels that energy and commodities are better places to buy now since the prices are down.  I can’t say I disagree.

 

* Another interesting point in the interview is the mention of drug money laundered through government banks – which, as I’ve said before, is really where the banking story is.

UK Banks Now Owned By Government

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The public’s portfolio

What the taxpayer owns

Northern Rock – 100% state owned

Bradford & Bingley – mortgage book worth £50 billion

Royal Bank of Scotland – 75% of voting shares

Lloyds Banking Group (including HBOS)– up to 77% of voting shares

HSBC, Barclays, Abbey National and Nationwide are the main high street institutions still in private hands

How yesterday’s Lloyds deal hands us the keys to British business

Both Lloyds and HBOS have been very acquisitive in private equity investment over the past decade, entering into partnerships which mean they part-own – or rather, we do – a string of household names.

They include: House of Fraser, department stores McCarthy & Stone, housebuilder HSS Hire, tool hire chain Vue, cinema chain Crest Nicholson, housebuilder Alternative Hotel Group MacDonald Hotels David Lloyd Leisure, fitness clubs American Golf, sports goods St Tropez, beauty products Robinia, specialist care homes Leasedrive Velo, car fleet hire Kidsunlimited, day nurseries British Salt, salt products producer Snell & Wilcox, broadcasting technology GVA Grimley, property consultant

 Times Online

On the Brink: How Bad Is Bad?

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From Karl Denninger:

  • All pension funds, private and public, are done. If you are receiving one, you won’t be. If you think you will in the future, you won’t be. PBGC will fail as well. Pension funds will be forced to start eating their “seed corn” within the next 12 months and once that begins there is no way to recover.
    .
  • All annuities will be defaulted to the state insurance protection (if any) on them. The state insurance funds will be bankrupted and unable to be replenished. Essentially, all annuities are toast. Expect zero, be ecstatic if you do better. All insurance companies with material exposure to these obligations will go bankrupt, without exception. Some of these firms are dangerously close to this happening right here and now; the rest will die within the next 6-12 months. If you have other insured interests with these firms, be prepared to pay a LOT more with a new company that can’t earn anything off investments, and if you have a claim in process at the time it happens, it won’t get paid. The probability of you getting “boned” on any transaction with an insurance company is extremely high – I rate this risk in excess of 90%.
    .
  • The FDIC will be unable to cover bank failure obligations. They will attempt to do more of what they’re doing now (raising insurance rates and doing special assessments) but will fail; the current path has no chance of success. Congress will backstop them (because they must lest shotguns come out) with disastrous results. In short, FDIC backstops will take precedence even over Social Security and Medicare.
    .
  • Government debt costs will ramp. This warning has already been issued and is being ignored by President Obama. When (not if) it happens debt-based Federal Funding will disappear. This leads to…
    .
  • Tax receipts are cratering and will continue to. I expect total tax receipts to fall to under $1 trillion within the next 12 months. Combined with the impossibility of continued debt issue (rollover will only remain possible at the short duration Treasury has committed to over the last ten years if they cease new issue) a 66% cut in the Federal Budget will become necessary. This will require a complete repudiation of Social Security, Medicare and Medicaid, a 50% cut in the military budget and a 50% across-the-board cut in all other federal programs. That will likely get close.
    .
  • Tax-deferred accounts will be seized to fund rollovers of Treasury debt at essentially zero coupon (interest). If you have a 401k, or what’s left of it, or an IRA, consider it locked up in Treasuries; it’s not yours any more. Count on this happening – it is essentially a certainty.
    .
  • Any firm with debt outstanding is currently presumed dead as the street presumption is that they have lied in some way. Expect at least 20% of the S&P 500 to fail within 12 months as a consequence of the complete and total lockup of all credit markets which The Fed will be unable to unlock or backstop. This will in turn lead to…
    .
  • The unemployed will have 5-10 million in direct layoffs added within the next 12 months. Collateral damage (suppliers, customers, etc) will add at least another 5-10 million workers to that, perhaps double that many. U-3 (official unemployment rate) will go beyond 15%, U-6 (broad form) will reach 30%.
    .
  • Civil unrest will break out before the end of the year. The Military and Guard will be called up to try to stop it. They won’t be able to. Big cities are at risk of becoming a free-fire death zone. If you live in one, figure out how you can get out and live somewhere else if you detect signs that yours is starting to go “feral” – witness New Orleans after Katrina for how fast, and how bad, it can get.

Washington Won’t Let Skilled Immigrants Solve Housing Crisis

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Solution:  “All you need is to grant visas to two million Indians, Chinese and Koreans,” says the editor of The Indian Express. 

“We will buy up all the subprime homes; we will work 18 hours a day to pay for them.  We will immediately improve your savings rate — no Indian bank today has more than 2% nonperforming loans because not paying your mortgage is considered shameful here.  And we will start new companies to create our own jobs and jobs for more Americans.” 

Problem:  February 6, 2009, the US Senate unfortunately voted to restrict financial institutions that receive taxpayer bailout money from hiring high-skilled immigrants on temporary work permits (H-1B visas).

Nationalization In a Time of Monopoly

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My piece on nationalization was published on Lew Rockwell:

“The witchdoctors are rattling their bones and spitting into their potions. Frogs’ legs, squawks one. Eye of newt, cries another.

The right blames Fanny and Freddy for setting off the financial tsunami. Naomi Klein says it’s the Chicago boys and capitalism.

The left denounces private sector greed. The right, public sector do-gooding.

Overpaid CEOs, overdrawn borrowers, underestimated risk. There’s enough blame to go around.

The only problem is that a half-baked understanding of a problem leads to half-baked remedies. And half-baked remedies are worse than no remedy at all.

Nationalization is the cry now. Nobel winner Paul Krugman at the New York Times says it’s as American as apple pie. I daresay that’s the first time Krugman ever appealed to tradition to sell anything.

Even Fed Chairman Ben Bernanke floated it recently, and then backed off, when the market tanked in response. But by now we know that our rulers speak not just from both sides of their mouth, but out of both mouths of their two-faced tyranny…and from its derrière too. We can confidently predict that in the days ahead Republicans and Democrats, private and public sectors will join the breadline for nationalization

Now, in a different country, in a different context, nationalization might make sense. But trotting out Sweden’s history as a model for the U.S. is disingenuous. Sweden is about one-twentieth the size of the US and it has around one-thirtieth of the population. It’s not an empire with a vast portion of its economy dependent on its defense department. And it’s also one of the least corrupt and peaceable countries in the world, by standard measures.

Knowing exactly how corrupt this system is, how deceptive, and how out of control, we would be fools to place our faith in nationalization in America. Or in any other panacea pushed by the state. None of them stands any chance of being anything more than a change of label, a PR facelift. A jackass in a wig and stilettos can kick all it wants, it won’t turn into a chorus girl.

Only the Austrians so far seem to grasp this and only the Austrians seem to understand the underlying problem – which is money. Money backed by nothing tends toward nothing. But there is more to it. The cheapening of money, its lack of intrinsic worth is only an effect, not a cause. The cause lies deeper – in the unconstrained power of the government to print money. The source of corruption is this absolute power.

It’s because the US mint alone can print legal money that money has lost its link to real value and become rapidly cheapening paper. The monopoly of money, you could say, has given us toy dollars, monopoly money…….

Read the rest at Lew Rockwell.

March 2, 2009

Propaganda Nation: Swedish Model Wasn’t Nationalization

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“OK…more confusion….turns out the Swedish model that’s been touted (supposedly, this was nationalization) was not the way it’s been described in the media.

Here’s Anders Aslund at the Peterson Institute:

“Sweden did not nationalize its banks. It was Norway that did so, which is an alternative model. In Sweden, a temporary emergency bank authority was set up on the model of the US Federal Deposit Insurance Corporation. It had outside, mainly foreign, consultants to scrutinize all bank debts and establish objectively which were nonperforming. The banks were forced to write off their bad debts and transfer them to bad banks.

Sweden had no aggregator bad bank and the bad banks were not nationalized. Each big bank set up its own bad bank. They were given illustrious names such as Securum, Retriva, Nackebro and Diligentia. Securum was the biggest bad bank belonging to the already state-owned bank, Nordbanken, and it became a separate state company. The private bad banks, however, remained the property of the private banks from which they were removed.

Nobody traded toxic waste at the height of the crisis in Sweden. Such trade is an unnecessary complication. A bad bank is not a bank but a private equity fund, which does not need much capital or recapitalization. Its task is to isolate the rotten apples so that they do not contaminate the good loans in the cleansed banks.

The bad banks sold off their assets at a leisurely pace over several years to maximize their value, avoiding excessive depreciation of assets through fire sales. Any gain was to the benefit of its owners. In this way, Sweden avoided the problem of trading undervalued assets. In the end, even Securum made a small profit.

There is no reason to merge bad banks, because asset sales require plenty of management capacity. A major concentration of assets in an aggregator bank would only aggravate the functioning of asset markets.

The Swedish emergency bank authority divided the banks into three groups. One group consisted of two obviously bankrupt banks, the private Gota Banken and the state Nordbanken. They were merged into state-owned Nordbanken, eventually becoming Nordea, a thriving bank that has been gradually privatized. A second group of private banks, Swedbank and SEB, had too little capital but could be revived. After long negotiations with the state, their shareholders decided to recapitalize them at their own expense, and these farsighted shareholders gained handsomely, although their old capital had been consumed. A third group consisted of private banks in rude health, primarily Handelsbanken, which continued to thrive, but it also set up a bad bank, Nackebro.

Thus, the common American idea that the Swedish bank resolution involved major nationalization is a sheer misunderstanding. Only one failing private bank, Gota Banken, was merged with an equally bankrupt state bank. Sweden avoided private-public partnerships, of which Fannie Mae and Freddie Mac are the most telling and repulsive example, because, as Larry Summers so memorably has stated, public-private partnerships usually means that profits are privatized and losses nationalized.

In sum, in Sweden bad debts were not taken over by the state or transferred to any aggregator state bank; but each bank, private or state-owned, established its own bad bank. The Swedish model avoided the trading of depressed assets in the midst of the crisis, while they were internally valued at their low market value. If nobody can assess the value of an asset, it is probably not worth much. Only one bankrupt bank was nationalized.”

Comment:

So tell me why did Nouriel Rubini and Krugman both claim nationalization was necessary and as evidence cite Sweden? Just a mistake? Notice the line I emphasized in Aslund’s remarks – the centralization of the assets in one aggregator bank would actually cause trouble to the markets. Now, if so, why is that precisely what’s being pushed here….and why is that being palmed off as the Swedish model when Sweden did no such thing?

Is Krugman (as well as Rubini)  selling a plan intended mainly (perhaps only) to create more central control, not because it’s necessary for the financial markets...

Is he using the “Swedish model” meme because it’s great PR? It’s the sort of thing that goes down well with the influential Huffington Post  and the moderate liberal intelligentsia.  For them Sweden is the way things ought to be. (Remember the saw – America is a nation of Indians ruled by a bunch of Swedes – which suggests that regular folk in American are religious like East Indians, but the people who govern them are humanistic and atheistic like the Swedes.

On the opposite side, supporting the anti-nationalization position, there are at least a few disinterested and persuasive voices, like Robert Barro of Hoover.  I don’t call either Summers or Geithner disinterested, obviously, even though they are right on this, for whatever reason. I suspect they may just be playing good cop to Krugman’s bad cop for political play.

Barro writes:

“Periods without stock-market crashes are very safe, in the sense that depressions are extremely unlikely. However, periods experiencing stock-market crashes, such as 2008-09 in the U.S., represent a serious threat. The odds are roughly one-in-five that the current recession will snowball into the macroeconomic decline of 10% or more that is the hallmark of a depression.The bright side of a 20% depression probability is the 80% chance of avoiding a depression. The U.S. had stock-market crashes in 2000-02 (by 42%) and 1973-74 (49%) and, in each case, experienced only mild recessions. Hence, if we are lucky, the current downturn will also be moderate, though likely worse than the other U.S. post-World War II recessions, including 1982.

In this relatively favorable scenario, we may follow the path recently sketched by Federal Reserve Chairman Ben Bernanke, with the economy recovering by 2010. On the other hand, the 59 nonwar depressions in our sample have an average duration of nearly four years, which, if we have one here, means that it is likely recovery would not be substantial until 2012.

Given our situation, it is right that radical government policies should be considered if they promise to lower the probability and likely size of a depression. However, many governmental actions — including several pursued by Franklin Roosevelt during the Great Depression — can make things worse.

I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.”

Krugman Floats Capital Controls

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Paul Krugman writes:

“Catching up on my Willem Buiter, I find this interesting piece on capital controls in the response to the European crisis, which begins:

When Iceland’s banking system and currency collapsed last September, a key component of the emergency package that was introduced under the auspices of the IMF were controls on capital outflows, implemented through rigorous foreign exchange controls.

I have a bit of personal history here — and it has some bearing on broader economic policy issues right now. Back in 1998, in the midst of the Asian financial crisis, I came out in favor of temporary capital controls; a bit about that here. At the time it was regarded as a horribly unorthodox and irresponsible suggestion — and I had a long, very unpleasant phone conversation with a Senior Administration Official who berated me for my anti-market ideas.

Today, that wild and crazy idea is so orthodox it’s part of standard IMF policy.

There are obvious parallels with the current debate over bank nationalization….”

Paul Krugman’s Conscience of a Liberal Blog, March 2, 2009

Comment:
Run for cover…here it comes

Dow Hit By AIG

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AIG reported losses in the 4th quarter of 2008 of $60.7 $61.7 billion – the largest in corporate history (despite the bail-out). It’s asking for another $30 bn.

In response, the Dow went down to levels not seen since 1997 – below 7000. 

Here’s what AIG and other financial institutions have got from the government so far:

AIG – $180bn

Bank of America – $45bn

Citigroup – $50bn

JP Morgan Chase – $25bn

Wells Fargo – $25bn

Goldman Sachs – $10bn

Morgan Stanley – $10bn

State Street – $3bn

Bank of New York Mellon – $3bn

More at the BBC