Perspectives on the global economic meltdown (Jan 26 2010)

Suraj · Post by **Suraj** » 20 Apr 2010 00:04

prad: Once again, if you have an issue with a post, then please report it, instead of derailing threads with your public fingerpointing and then using red fonts to attract moderator attention.

At various times and in various threads some US/UK/other political entity will be derided here for their actions. We'll make no attempt at balancing such posts. At most people will be told to tone it down before anything gets out of hand.

General statements like 'the Democrats are pakis for selling weapons to Pakis' or 'Tea party are idiots' will typically be ignored. If you're a Democrat, a tea party member in such circumstances, take it on the chin and move along.

We will respond harshly against those who bring in partisan distinctions - like "liberal" - here and start identifying BRF or its posters with such tags, implicitly or otherwise. You are treading on thin ice here, having already been warned for this in the past.

The last couple of pages of thread will be cleaned up in the next couple of days to remove your (and any other) offtopic posts on this matter.

Neshant · Post by **Neshant** » 20 Apr 2010 01:09

This is why central banking is a fraud of a profession. Some guy sitting in an office rolling dice and fiddling around with interest rates and money printing will inevitably run the economy amuck believeing he knows what's going on.

--------
Alan Greenspan's Slide Into Oblivion : The Complete Guide

There was a point when Alan Greenspan was known as "The Maestro," the economic genius who authored the great boom of the 1990s. Even after the crash in 2000, maker players obsessively tried to suss out wisdom from the cryptic statements he would make to Congress.

Even when Alan Greenspan stepped down from Federal Reserve Chairmanship on January 31, 2006, he was still highly regarded.He soon returned to economic forecasting, a role he enjoyed before entering government service in 1974.

Ever since then, he's been slowly declining from informed-economic-commentator land to short-sighted irrelevance. The worst is now. Greenspan has gone on the defensive and is now hesitant to admit he was wrong about the housing crisis and it's badly hurting his reputation.

Most recently, he's been delivering low blows to Michael Burry, a hedge fund manager who called the housing crisis back in 2005.

Watch the 16 piece slide show, click the forward arrow :
http://www.businessinsider.com/alan-gre ... emporary-1

Neshant · Post by **Neshant** » 20 Apr 2010 02:15

everyone now wants a seat at the table to be a reserve currency.

however the racket of printing money out of nothing and exchanging it for foreign goods & services has only a few seats at the table and they are all taken.

I foresee a clash coming where countries with that priveledge want to preserve the status quo and those without keep banging against the glass cealing that keeps them trapped in poverty and servitude to the high lords of paper printing.

Personally i think the latter can blow up the system by starting to buy large amounts of physcal gold and exposing the worthlessness of paper currencies.

-------------------

BRICs call for more say in world affairs

HONG KONG (MarketWatch) -- Leaders of Brazil, Russia, India and China late Thursday pledged closer cooperation and called for reform to the global financial system including the establishment of institutions to reflect the growing influence of emerging-market nations in global affairs.

The statement also called for further discussion at upcoming meetings this spring of reform to the voting system of the World Bank. It also said voting reforms related to the IMF could be concluded at the G-20 summit in November.

http://www.marketwatch.com/story/brics- ... 2010-04-16

Sanjay M · Post by **Sanjay M** » 20 Apr 2010 02:39

Neshant wrote:This is why central banking is a fraud of a profession. Some guy sitting in an office rolling dice and fiddling around with interest rates and money printing will inevitably run the economy amuck believeing he knows what's going on.

This is why I feel there should be no US Federal Reserve. It's just a con game.

If your child is burning up with fever, you don't respond by putting your hands around their throat and choking them in order to reduce their metabolism and thus lower their body temperature. Instead, specialized immune cells of the body can fan out to detect and kill the germs or viruses that are causing harm.

Likewise, I feel that when a sector of the market is becoming more active, there should automatically be more demand for private specialists who can de-bunk frauds and schemes.
If profit motive can produce innovators who invent unsound or fraudulent moneymaking schemes, then likewise profit motive can produce people to de-bunk those schemes.

When the housing market became more active, there was a rise in recruitment of home inspectors to assess properties to ensure/certify they were physically sound. There should have similarly been a rise in demand for financial inspectors to ensure that the financial schemes these purchases were based on were also similarly sound.

If quants/etc can exist to do bad, then quants/etc can exist to do good.

Sanjay M · Post by **Sanjay M** » 20 Apr 2010 04:46

prad wrote:that is the crux of the debate in US now. it's not in the open, but underneath the glam and sham, the real debate in high circles concerns the above. the problem is, for more than 200 years, US hasn't had to worry about equity control mechanisms. and there are yet no good alternatives. and as long as alternatives don't come up, the status quo will have to be maintained. and increasingly, this is the view that i'm subscribing to. the reason is simple, you can't abandon stability for some lofty goals when said goals are unrealistic. the whole situation is so fluid and without precedent in recent recorded history; and thus you see the floundering and sheer inability to grasp the fundamental forces that have created this storm.(that's not to say that i understand it any better than the myriad of other "experts", just imo).

The inability of one view to prevail over the other means that polarization and schism will only grow sharper. The socialist-leaning Obama camp will only slide ever farther down the slope of managed trade and welfare-statism, to the point where it will eventually stick like a bone in throat, unswallowable by the American people. Given the ease with which larger interest groups could yank their support from him, Obama's presidency could end up like Dinkins' mayoralty.

Meantime, who's to say that profit-motivated safety specialists - whether for financial products or anything else - can't do a better job than the ham-fisted macro-minded Fed?

i predicted that a major US-China protectionist trade war would erupt. i'm not so sure now. i think the extend-and-pretend has worked to well for everyone around the world and people are too risk averse right now to destabilize the current "recovering" situation. this extend and pretend will continue as long as there are no alternatives.

of course, the whole thing could blow up again just like it did in Sep 2008. and in that case, it's back to square one again. once again the entire system is in chaos. once again politicians/economists/etc will be forced to reevaluate their policy agendas and actions b/c they have to get votes from people.

That sounds like a Molotov-Ribbentrop pact, if you ask me. Everybody will be smiling at each other while tightening their grip on their daggers, and then suddenly a big knife-fest will break out. Look at China's latest move in lending money to Chavez. They are consolidating their grip on natural resources around the world, and the US will ultimately find itself either drawing a line in the sand belatedly, or else boxed in.

the double-dip is the contrarian view to what i believe, which is that extend and pretend will continue in a kind of amusing confidence game where everything is just automatically assumed. linear extrapolation will once again rule the day.

Extend-and-pretend won't mask the effect of prolonged US unemployment, and the hollowing out of the US economy. Even if the welfare benefits are extended, the gravity-defying dance will have to end at some point.
In the meantime, the Tea Party activists will grow in number and in ferocity, even if they get knocked down again and again, until Darwinism brings forth some Elvis-like champion who can credibly challenge the Obama machinery.

svinayak · Post by **svinayak** » 20 Apr 2010 04:57

Sanjay M wrote: i predicted that a major US-China protectionist trade war would erupt. i'm not so sure now. i think the extend-and-pretend has worked to well for everyone around the world and people are too risk averse right now to destabilize the current "recovering" situation. this extend and pretend will continue as long as there are no alternatives.

of course, the whole thing could blow up again just like it did in Sep 2008. and in that case, it's back to square one again. once again the entire system is in chaos. once again politicians/economists/etc will be forced to reevaluate their policy agendas and actions b/c they have to get votes from people.

That sounds like a Molotov-Ribbentrop pact, if you ask me. Everybody will be smiling at each other while tightening their grip on their daggers, and then suddenly a big knife-fest will break out. Look at China's latest move in lending money to Chavez. They are consolidating their grip on natural resources around the world, and the US will ultimately find itself either drawing a line in the sand belatedly, or else boxed in.

I spoke to few money managers and research types. The savings and retirement money of the baby boomers are to be undisturbed for the next 5-10 years. They will avoid all inflation situation including a currency adjustment until badly needed.

Neshant · Post by **Neshant** » 20 Apr 2010 05:07

How could they possibly know. They must be just giving their opinion.

These aren`t the same research types who never saw the crisis in the first place, are they.

My view is the federal reserve is destroying savers by printing money and pushing it in via the stock market to create some false notion of `recovery` and to keep asset prices high. Nobody can any industry which is creating high paying jobs on a vast scale that supposedly is leading to a recovery.

Sanjay M · Post by **Sanjay M** » 20 Apr 2010 06:04

Haha, Fed vs Judiciary - the Tea Partyers would love that!

I don't know if Dems could get away with casting Goldman-Sachs as the next Halliburton, though.
All the senior men at the Treasury Dept seem to be Goldman alumni, and the big banks - now bigger and richer than ever, after surviving the crisis - are all traditionally big contributors to both parties. The Democrats will have to take more campaign donations from rich trial lawyers in the future, since their financial industry donors will be rolling up the welcome mat in response to any witch hunts.

Hari Seldon · Post by **Hari Seldon** » 20 Apr 2010 09:40

The knives are out for Goldman, seems like. Denninger piece on the same. Hard hitting as usual.

Here's one web wag's technical pseudo-defense of GS behavior (Hint: defense's basis is "Everybody does it only"):

Improper disclosure is institutional and systematic. The FASB was forced to get rid of mark to market accounting for big banks. Institutions have been given the right to report assets of little value at face value instead of real value. What Goldman did, sticking its customers with CDOs, which were tranches of imploding mortgage backed securities, is no different than what the Federal Reserve, Fannie and Freddie still do, when they sanitize the big banks by absorbing between $3 and $4 trillion in imploding mortgage backed securities, and stick their customers (the US taxpayers) with the losses. Dirty Dodd's "reform bill" will not reform any of these practices. It's all a farce. Dodd will not bite the hands that feed him. Dodd will retire from the Senate as a very wealthy man, and with a highly lucrative job in the banking or insurance industry whenever he wants it.

If what we hear being reported is true, that John Paulson packed the Goldman CDO with the MBS most likely to fail, then John Paulson had inside knowledge, and his shorting of that built-to-fail CDO was an act of insider trading. Martha Stewart was sent to jail for dumping $228,000 worth of ImClone Systems (IMCL) stock on Dec. 27, 2001. She knew that ImClone stock was going to take a hit. John Paulson made $1 billion, because he knew that Abacus 2007-AC1 was going to take a hit. In fact, he set it up to take the hit. He created the object of his own insider trading. You can't get more inside than that.

If they nail Paulson then they have to nail Jamie Dimon. As a director of the NY Fed, he packaged up $29 billion of the worst of the Bear Stearns garbage CMBS during his corporation's take over of Bear Stearns. He had his NY Fed President and toady, Tim Geithner, stick that toxic waste into the Fed. That garbage, Maiden Lane 1, is now imploding. Dimon and JP Morgan made billions in profits and the US taxpayers are stuck with billions in losses. At the time of the Maiden Lane 1 pigeon drop, both Geithner and Bernanke lied before Congress when they proclaimed that the $29 billion worth of financial asbestos was well collateralized. To the best of my knowledge, the SEC isn't talking about perp-walking either of them.

Hmmmm.

Hari Seldon · Post by **Hari Seldon** » 20 Apr 2010 09:44

OK, extreme D&G monerging warning: TIFWIW onlee.

Same web wag on a possible black swan (yup, it is black, it flies and nobody saw it coming onlee)

And now for a little fear mongering.

Europe has been hit so hard by the economic ramifications of Iceland's volcano ash, that it is said, if it goes on much longer, that the EU economy could turn negative for the year. Far worse would be the eruption of Mount Katla. This would be a volcano so large that the sky could stay dark for more than a year.
{Huh? Any evidence? Last Katla eruption was in 1918, AFAIK}
The possibility exists that magma could shoot into the Katla volcano channels from Eyjafjallajökull.

If that happens, Mish might finally get his strong dollar. The eruption of Katla, if it were to happen, could be the mother of all black swans.

Sanjay M · Post by **Sanjay M** » 20 Apr 2010 09:49

Big deal - read up on the magma dome bulging in the giant supervolcano that lies under Yellowstone National Park. If that ever blows, much of North America's population would die of starvation.

http://www.unmuseum.org/supervol.htm

Hari Seldon · Post by **Hari Seldon** » 20 Apr 2010 09:58

Some oirostani d&g now. Wolfgang Machau in the FT writes

The European Union finally agrees a bail-out, and the much-predicted rally of Greek bonds turns into a rout. A week later, spreads on Greek bonds had reached their highest levels since the outbreak of the crisis. The financial markets have recognised that, bail-out or no bail-out, Greece is in effect broke.

Yaw-www-n.

To avoid long-run insolvency, Greece will need to find a way to stabilise the debt-to-GDP ratio. This would in turn require a multi-annual deficit reduction plan and a programme of structural reforms to raise the potential growth rate. The Greek government has so far presented a one-year plan to cut the deficit from 13 per cent of GDP to about 8.5 per cent. While this sounds ambitious, it is not very credible, as it is based heavily on tax increases, with no structural reforms.

But even if the Greek government were to present a credible long-term stability plan, the risk of default would remain high. This means that some form of debt restructuring is unavoidable. Restructuring is a form of default, except that it is by agreement. It could imply a haircut – an agreed reduction in the value of the outstanding cashflows for bond holders. The Brady bonds of the late 1980s, named after Nicholas Brady, a former US Treasury secretary, worked on a similar principle. An alternative to restructuring would be a debt rescheduling, whereby short and medium-term debt is converted into long-term debt. This would push the significant debt rollover costs to well beyond the adjustment period.

Hey, how come nobody's talking debt waiver?? TSP has gotten 1 waiver already. Why not Greece?

Yves smith too is not terribly optimistic:

The austerity programs demanded of Greece are by some measures more than twice as severe as those imposed on Argentina at the turn of this century. And remember, Argentina defaulted

More from Yves:

Ambrose Evans-Pritchard turns to Portugal, and argues that while it is in better shape than Greece, it too is at risk, and were Portugal to suffer funding problems too, the eurozone might not survive the test

And this is what sri AEP spouts:

The long-drawn saga in Athens can perhaps be deemed a case apart. Greece lied. Its budget deficit was egregious at 16pc of GDP last year on a cash basis. It wasted its EMU windfall, the final chance to bring public debt back from the brink of a compound spiral….

Brussels admitted last week that Portugal’s external accounts have switched from credit in the mid-1990s to a deficit of 109pc of GDP. This has been caused by the incentive structures of EMU itself. “The more broadened access to credit induced a significant reduction in the saving rate, while consumption kept growing faster than GDP. This development led to an increase in Portuguese indebtedness,” it said.
The IMF’s January report said “The large fiscal and external imbalances that arose from the boom in the run-up to adoption of the euro have not been unwound, resulting in the economy becoming heavily indebted and growing banking system vulnerabilities. The longer the imbalance persists, the greater the risk the adjustment will be sudden and disruptive.” The IMF noted the “heavy reliance” of banks on foreign wholesale funding, equal to 40pc of total assets….

Yes, Portugal’s public debt will be 86pc of GDP this year against 124pc for Greece (EC estimates). That is small comfort. Giles Moec from Deutsche Bank said Portugal’s private debt reached 239pc in 2008: Greece was 123pc. Total debt levels matter. The last two years have taught us that private excess lands on the taxpayer one way or another. For Portugal, the figure is now is in the danger zone above 300pc….

Portugal does not face an imminent funding crisis. If Europe’s economy grows briskly, it may be enough to lift the country off the reefs. But one thing seems sure: Germany is not going to bail out any more countries, and the IMF is too small to cover.

Jai ho.

Sanjay M · Post by **Sanjay M** » 20 Apr 2010 18:04

Hari Seldon wrote: Hey, how come nobody's talking debt waiver?? TSP has gotten 1 waiver already. Why not Greece?

What is the size of Greece's debt compared to Pak's?

Hari Seldon · Post by **Hari Seldon** » 20 Apr 2010 19:41

Higher, I guess at close to 100% of greek GDP versus some 72% (that 72 number again!) of paki gdp.

But its the unfunded liabilities of greece that's roiling mkt sentiment, I reckon. TSP has no such obligations towards its abduls. There's no way greeks can cut down to the bone and still retain a gubmint. Default is the only way out. Strictly IMHO.

RamaY · Post by **RamaY** » 20 Apr 2010 20:33

Hari Seldon wrote:OK, extreme D&G monerging warning: TIFWIW onlee.

Same web wag on a possible black swan (yup, it is black, it flies and nobody saw it coming onlee)

And now for a little fear mongering.

Europe has been hit so hard by the economic ramifications of Iceland's volcano ash, that it is said, if it goes on much longer, that the EU economy could turn negative for the year. Far worse would be the eruption of Mount Katla. This would be a volcano so large that the sky could stay dark for more than a year.
{Huh? Any evidence? Last Katla eruption was in 1918, AFAIK}
The possibility exists that magma could shoot into the Katla volcano channels from Eyjafjallajökull.

If that happens, Mish might finally get his strong dollar. The eruption of Katla, if it were to happen, could be the mother of all black swans.

Its kinda funny. Iceland started the EU economic decline and now it is causing EU's Oh-o decline...

Neshant · Post by **Neshant** » 20 Apr 2010 20:57

Everything is at stake
http://www.youtube.com/watch?v=JtVC2JEnYVU

Hari Seldon · Post by **Hari Seldon** » 20 Apr 2010 21:22

TAE tweets roundup.

http://twitter.com/AutomaticEarth

Goldman's London Units Face Formal U.K. Probe, http://bit.ly/9tejut

Aha.

Germany warns of 'Lehman' crisis if Greece defaults, http://bit.ly/8XNhOD

Who exactly are ya trying to warn, Herr sahib??

Ambrose Evans: Must Germany bail out Portugal too? (Portugal's private debt reached 239pc in 2008) http://bit.ly/aUtUtz

Already linked to above.

Soros sees "death circle" if Greek loan rates high, http://bit.ly/cQrY8Q (Greece is trapped between a rock & a hard place)

Yawn.

The coming famine: risks and solutions for global food security, http://bit.ly/beGu5O (World losing 1% of farmland annually!)

Whoa! This is news. This ought to be splashed everywhere on newsfeeds. This is the real climate disaster happening as we speak.

China Lends Venezuela $20 Billion, Secures Oil Supply deal with Chavez, http://bit.ly/cLNkiS

Jai hu. Can't help but admire the dlagon-cubs.

Recession is ending? Some Americans don't buy it (Great headline Yahoo, when 76% of Americans think economy is poor) http://bit.ly/bvV5Z5

IATA says volcano impact on airlines bigger than Sept. 11, airlines losing $250 Mn per day, http://bit.ly/8ZCSzf

SwamyG · Post by **SwamyG** » 20 Apr 2010 21:32

Some thing noteworthy, Coca-Cola Beats Earnings Estimates but Revenues Fall Short.

Why noteworthy because, Indian consumers were some of the top contributers to the growth.

However, worldwide, case volume rose by 3%, boosted by strong international growth. Eurasia and Africa had an 11% jump in volume sales, India had a 29% jump in volume, and volume rose by 18% in Turkey.

The economic pressures in the developed countries will push the corporations to sell their merchandise in the emerging countries. It will bring both good and bad products to desh.

svinayak · Post by **svinayak** » 21 Apr 2010 02:25

Neshant wrote:How could they possibly know. They must be just giving their opinion.

These aren`t the same research types who never saw the crisis in the first place, are they.

My view is the federal reserve is destroying savers by printing money and pushing it in via the stock market to create some false notion of `recovery` and to keep asset prices high. Nobody can any industry which is creating high paying jobs on a vast scale that supposedly is leading to a recovery.

It could just be an opinion. But these are the standford/MIT types.
When some guys actually said that Chinese currency wont change then I understood.
The expectation is there

Neshant · Post by **Neshant** » 21 Apr 2010 07:17

If "the savings and retirement money of the baby boomers are to be undisturbed for the next 5-10 years", someone else has to bare the burden of paying for that luxury.

Its all well and good to guarantee benefits to everyone from the boomers to the public sector unions, pensions, bailouts, bonuses..etc. But in the end some sucker's money has to be confiscated to pay for it.

The system has become highly skewed with govt's main role being that of confiscator of wealth from anyone doing real work and handing it out to people doing no work or doing con jobs in the financial 'industry'.

Something is seriously rotten with the whole setup.

Neshant · Post by **Neshant** » 21 Apr 2010 07:23

Why noteworthy because, Indian consumers were some of the top contributers to the growth.

Its unfortunate Ramesh Chauhan of Parle group (maker of Limca, Thumbs Up, Mazaa, Citra ..etc) sold his soft drink empire to Coca Cola for a song back in 1994 - a mere $60 million.

Bet he regrets it big time.

Had he hung onto it, it would have netted him many times that much in profit.

Hari Seldon · Post by **Hari Seldon** » 21 Apr 2010 07:58

^^^Coca cola should be under no illusions where their bread is buttered in south asia. I still remember vividly their advertising a few yrs back - featuring shalwared urchins playing gulli-kirket in typical northern/punjabi mohalla settings. Something seemed odd about the ad and then I figured the same ad was used, as-is, in TSP.

With India rising in importance, it wouldn't hurt for a small group of consumers to fire a warning shot across the bow. No more ==. period.

Neshant · Post by **Neshant** » 21 Apr 2010 08:04

They have a monopoly now as there is no Indian brand soft drink capable of competing with them. They can dish out anything regardless of what shot is fired.

The one shot Ramesh Chauhan had at competing with them went down the toilet.

SaraLax · Post by **SaraLax** » 21 Apr 2010 12:10

The one shot Ramesh Chauhan had at competing with them went down the toilet.

I don't think it is as bad as you have put it.

Parle Agro still sells beverages like Frooti, LMN, Appy and etc....which are doing OK if not good and they compete upfront with C and Pepsi in these segments.

If i am not mistaken in the Bottled Mineral Water segment,....Bisleri (Ramesh Chauhan's...right ?) competes with Coca cola's Kinley, Pepsi's AquaFina and has a higher market share than both. Tata Tea's Himalaya brand is another upcoming competitor in the Bottled Mineral water segment.

SwamyG · Post by **SwamyG** » 21 Apr 2010 20:02

IMO, the good thing that comes from such companies is selling bottled waters across desh. It is good because, the companies would leave no stones unturned to get business. In the process some of the regions that have money but no water will get supplies of water. Water will remain a challenge for India, not energy.
The negative aspect of such companies is the unhealthy lifestyle that it eventually advocates. Out in Unkilland, there are voices that talk about the evils of such sugar loaded carbonated drinks on the system; and there is an attempt by consumers to seek healthier drinks like water.

In desh, the coolness factor associated with such drinks will keep these companies happy. What desh has to do is urge and coax these companies to innovate and mass produce healthier drinks - tender coconut for example. The shelf life would be short; but if the packaging and advertising is right it will be lapped up by every thirsty people.

A free society provides all sorts of options. Hopefully these companies realize or shown that they can make money by offering the good options (healthier, environment friendly ithiyadi) as well.

Neshant · Post by **Neshant** » 21 Apr 2010 22:54

India could have had its own Coca Cola type legacy with the Parle group lineup of soft drinks but it was given away for a song.

Who cares about bottled mineral water? Look at the legacy Coke has in the US. The brand name itself inspires nostalgia, patriotism and a whole lot of other feelings. Nobody is going to feel that way about bottled (tap) water.

Limca and those other drinks had the same Coke like patriotic feeling about them. But Ramesh Chauhan gave it away for a song. As I said, I bet he regrets it now.

Its very difficult to build a brand which becomes a national icon. There's nothing appealing about an American company owning such a national icon.

Neshant · Post by **Neshant** » 21 Apr 2010 23:00

The Labyrinth
http://www.youtube.com/watch?v=xUMvIfykePA

svinayak · Post by **svinayak** » 21 Apr 2010 23:19

Neshant wrote:The Labyrinth
http://www.youtube.com/watch?v=xUMvIfykePA

So the EU was just another NWO debt trap? yes? Drive the weak countries into the ground by getting them high on cheap money and importing inflation and then dump all the problems on the back of the stronger countries. Oh...and open up all the borders to put a strain on the stronger countries welfare systems e.g U.K (once upon a time we were)! The jigsaw pieces are starting to fit, let's bring down everyone...I'm mad as hell! 1 hour ago

Anujan · Post by **Anujan** » 22 Apr 2010 00:49

Neshant wrote:This is why central banking is a fraud of a profession. Some guy sitting in an office rolling dice and fiddling around with interest rates and money printing will inevitably run the economy amuck believeing he knows what's going on.
--------
Alan Greenspan's Slide Into Oblivion : The Complete Guide

I am tired of all these gurus claiming "Oh we didnt see it coming". That is a huge pile of BS. Here is a concise explanation for a mango man.

1. *All* aspects of a transaction, the benefits and the risks, need to be reflected accurately in asset pricing -- especially in the financial sector.

Here is a layman translation: If you are playing with your uncle's money in the stock market, there is no guarantee (or incentive) that your behavior will be responsible or good. One way of fixing this is for your uncle to hire goondas or to make a rule that you can play only with your own money.

2. In cases where risk is an externality, it should be backed by a collateral. This is also Econ 101.

Let us assume you are unwilling or unable to bear risk. For example, you bought a laptop and cannot afford another (and hence unable to bear the risk of laptop getting fried). You pay an insurance company to bear the risk on your behalf. So if you break it, the insurance company will buy you a new one. This scheme will work only if the Insurance company has money and doesnt go bankrupt.

Way back in 2002, Warren Buffet said http://www.fintools.com/docs/Warren%20B ... atives.pdf (read it, every word is a gem and a pearl of wisdom)

"We view them as time bombs, both, for the parties that deal in them and the economic system. ....Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counter-parties to them....The errors usually reflect the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them."

and ends it with

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

This was in 2002!!

What happened was fraud, pure and simple. People using words like "too complicated to understand" are simply pulling arguments out of their musharraf. Incentivized by greed and unchecked by risk, because everybody was playing with their uncle's (mango abdul) money and "regulation" is a bad word and will bring socialism!!

Sanjay M · Post by **Sanjay M** » 22 Apr 2010 05:56

Absolute power corrupts absolutely. The concentration of power in one individual - the Fed chairman - has resulted in this failure. He led the rest of the whales onto the beach. Had responsibility been distributed in a more natural/organic way through market mechanisms, then it would have been much less likely to happen.

Proponents of the US Federal Reserve system refuse to put it under political control and accountability, claiming that this would compromise its independence. But as I've said, not having the responsibility monopolized by one person/institution, and instead distributing it across the marketplace is the ultimate form of independence.

There's no way that the existing setup can magically remain immune to abuse. Indeed, it was created for the purpose of allowing such abuse, gambling on the premise that the "house always wins".

The only reason that the vulnerabilities of the US Federal Reserve system stand exposed today, is because the ultimate maverick (Dubya) made multiple bad bets, which the "house" tried to cover but found that even it ultimately could not. Greenspan's stimulatory low interest rates, intended to cover the wars in both Afghanistan and Iraq, ultimately blew up in America's face by generating a bubble that wreaked havoc on the US economic circulatory system.

The economic cryo engines were straining at full tilt, but the low-interest rate vacuum allowed bubbles to appear and slip into the fuel lines, causing mutliple banking turbopumps to blow apart. Then Greenspan haplessly appeared before the cameras to claim that the regulatory Verniers had failed to develop the necessary force to keep things on trajectory. Meanwhile a shocked public is wondering where all the crores went. "But you must understand," protests the Fed chief, "Economics is a complex technology. We will recover within a year."

Hari Seldon · Post by **Hari Seldon** » 22 Apr 2010 05:56

What happened was fraud, pure and simple.

400% correct. But we're yet to see any investigations even, forget prosecutions and perp-walks into organized, systematic and pervasive fraud. Under both admins and under different parties in power at the white house as well as congress.

Incentivized by greed and unchecked by risk, because everybody was playing with their uncle's (mango abdul) money and "regulation" is a bad word and will bring socialism!!

There is a third, underlying factor - not just greed and unchecked risk - that explains the mess. It is the desperate need to realize outsized returns on the part of institutional behemoths - pension funds and the like - who'd made these obscenely unrealistic assumptions (8% returns here on, types) to cover up for woeful underfunding and funds-diversion. It takes 2 hands to clap. Its not just wall st greed but also main street need that brought about the present mess. Strictly imvho and all that.

As for playing with others' money leading to unchecked risk, 100% agree. Denninger has long been pushing a 'one dollar of capital collateral for every dollar of loans and bets' mantra - effectively making the reserve ratio 100%. Good start that.

People using words like "too complicated to understand" are simply pulling arguments out of their musharraf.

And yup, doesn't take anything away from the fact that the products and deals were deliberately structured to look and feel much more complicated than perhaps they needed to be. It was a necessary (but not sufficient) condition for pushing poison as manna with a straight face. It certainly didn't help that everything from the law to regulation, disclosure and accounting standards were altered, gamed, ignored and violated with impunity where feasible (Lehman provides a classic look-in into all these different shades of manipulation) to wall st's benefit.

Of course, the ones of the other side of the trade weren't babies and this doesn't absolve them of the responsibility for buying into something they do not understand.

Meanwhile, from a TAE tweet we are now told:
http://twitter.com/AutomaticEarth

AIG Said to Insure Goldman Sachs’s Board Against Investor Suits, http://bit.ly/9wi3jh (So the US taxpayer is insuring GS board...incredible)

Wah re duniya.

Sanjay M · Post by **Sanjay M** » 22 Apr 2010 08:54

Well, the collapse of the Breton Woods system, and the move to a full fiat currency situation meant that deficit-spending could flourish unchecked. Currency valuation has to be tied to something tangible, otherwise there'll be no check on this game of building castles in the sky.

Hari Seldon · Post by **Hari Seldon** » 22 Apr 2010 09:24

prad,

even India doesn't have that policy. would you want India to implement it too? forget the 8% growth rate, with 100% reserve ration, India will be lucky to not find itself in a depression. the small business dynamism that is just now starting to take shape will go strait down the drain.

Take a chill pill, dude.

It doesn't matter what I want. I quite realize a 100% reserve ratio is not conducive to growth of any hue.

OK, so make it 50% then. Point is, have some check against fractional reserve banking where for every $ in deposits, I can lend out $10 in loans of which a good fraction go bust anyway.

BTW, under the gold standard, we had a mega depression in the 30s -> another speculative excess (the roaring 20s) gone predictably wrong only. Other ways to get mega depression there are, seems like.

Anujan · Post by **Anujan** » 22 Apr 2010 09:36

Fractional banking is not as much of a problem as contracts being classified as liquidity. In massa banks took deposits from customers, lent it all as mortgage and insured these mortgages so that the banks would be paid if the mortgage holders defaulted In their monthly payment. (these are essentially what credit default swaps are).

The argument then went that banks need not have reserves because if the borrowers didn't pay, the insurers will pay so the customer's deposit was safe. All was well till the homeowners stopped paying *and* the insurers went bankrupt

Again don't fall for those TV talking heads who call *this* as fractional banking. It is not! A fraction should be held as cash and not a "I o u" piece of paper from AIG!!!

But the fashion in massa is to put "unproductive" capital to work (zero reserve or better still essentially negative reserve due to massive leveraging). Even Alan Greenspan famously said India had too much "unproductive" capital and lost a lot of oppotunities.

Sanjay M · Post by **Sanjay M** » 22 Apr 2010 09:59

Well, when you balance a twig on a card on a needle, the risks of collapse will multiply beyond reason. Each layer poses yet another obstacle to transparency, providing a false veneer of assurance against risks that aren't visible to the ultimate party buying it all at the end. It's like that cocktail party game 'broken telephone', where the true message (value) gets mangled/garbled by the time it reaches the end of the chain.

Each trading window by itself isn't a problem, but if you stack a window behind a window behind a window behind a window, it all ends up looking quite opaque - which is just no good.

Somebody should have been allowed to make money be exposing all this crap to the public, rather than quietly profiting by betting against it.

Hari Seldon · Post by **Hari Seldon** » 22 Apr 2010 10:20

^^Fair enough Prad, thanks for the gyan. I'm trying not to get too invested in one POV here. That way, more gyan flow happens. Suffice to say that I disagree with your mega-depression hypothesis. Post-soviet and default Russia could be said to have had a mega-depression of sorts. Folks simply discard or derecognize their accounts payable en masse way before those scenarios develop, IMHO. Its chaos sure, but nothing like NoKo where no pvt sector can exist. Independent farms will alway be there in remote Montana and the Dakotas, I reckon.

Richard Koo, Nomura chief economist and author of the delectable "Holy grail of Economics" makes some predictable observations about the state of the SU banking system. Absolves or at least rationalizes quite a few Fed actions besides. Good read.

link to ZH

The critical observation from the Nomura economist explains why the realists and the naive idealists are at greater odds than ever before: the government continues to perpetuate, endorse and legalize accounting fraud in the hope that covering everything up under the rug will rekindle animal spirits. {Sounds horrible, I know but pray what were the realistic alternatives back then? IMO, the bank nationalization alternative was never seriously explored only....}

The truth, as Koo points out, is that were the FASB to show the real sad state of affairs, the two core industries in the US - finance and real estate, would be bankrupt. "If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of bankruptcies as borrowers became unable to roll over their debt."

In other news Citi, Bank of America, and Wells just reported fantastic earnings beats on the heels of reduced credit loss provisions. Nothing on the conference call mentioned the fact that all would be bankrupt if there was an ounce of integrity left in financial reporting, and that every firm is committing FASB-complicit 10(b)-5 fraud. One day, just like Goldman's mortgage follies, all this will be the subject of epic lawsuits. But not yet. There is some more money to be stolen from the middle class first, by these very firms.

Nomura note is attached in scribd on the linked page. Read it all, if you wanna.

The ZH collective does have its share of wise web wags. ROLFL level only.

We need to keep the fraud going to save the economy. This doesn't sound right.

Oh wait, was it "keep the economy going to save the fraud." I'm so mixed up.

Kill the host to save the parasite

Hari Seldon · Post by **Hari Seldon** » 22 Apr 2010 18:17

Finance Overhaul Draws a Lobbying Swarm (NYT)

A main weapon being wielded to fight the battle, of course, is money. Agriculture Committee members have received $22.8 million in this election cycle from people and organizations affiliated with financial, insurance and real estate companies — two and a half times what they received from agricultural donors, according to the Center for Responsive Politics.

Much of that lobbying has centered on Senator Blanche Lincoln, the Arkansas Democrat who is the committee’s chairwoman and who last week introduced the bill that would prevent banks from trading derivatives directly. The daughter of a sixth-generation rice farmer, she has found herself navigating a dangerous channel between Wall Street firms, which raised $60,000 at two fund-raisers for her re-election campaign so far this year, and her constituents, many of whom want a crackdown on the speculation that led to the financial crisis.

Sinking the campaign finance reform bill (flawed as it was) was a huge setback for true democracy (or jamhooriyat, as the packees say) only.

An in case you're wondering why the agri subcommittee's Ms Lincoln is at the centre of this lobbying storm....

Wall Street bankers were stunned by the most aggressive portion of Ms. Lincoln’s bill, one that is opposed even by the Obama administration. That proposal would essentially ban banks from being dealers in swaps or other derivatives by taking away their access to federal deposit insurance and their ability to borrow from the Federal Reserve if they kept those businesses.

You go, girl! Ms Lincoln has been impressive thus far. But make no mistake, there's no effing way the big banks will allow this proposal to pass. None, nada, nyet, zilch. The big (bankrupt) banks own congress. They'll derail this in any 1 of a 100 different ways as it moves through the legislative labyrinth on capitol hill.

Anyway, here's a delectable soundbyte from Sri Geithner in that article above:

"The best that we can do for the American people is to put in place rules that will prevent firms from taking this risk again, make sure we protect the taxpayer, bring derivatives out of the dark — that’s what we can do, " said Timothy F. Geithner, the Treasury secretary.

To which ilargi at TAE responds:

If that’s the best you think you can do for the American people, Tim, you’re way out of your league. You and your pals, Summers, Rubin, and yes, Obama, if it were the American people you were worried about, you could for instance break up the Wall Street banks engaged in derivatives trading into tiny slivers of their former selves. You could ban all derivatives for anyone who has no skin in the game, i.e. who owns no piece of the underlying assets the bets are tied to. You could fight to establish a 2010 version of Glass Steagall. And you could also fight for a 2010 Pecora Commission. Just to name some options. So don't give us that meaningless drivel. Be a man, and state openly who’s your daddy.

Ouch. Indeed.

But the main question remains the same:

So where is the main problem? Why can't the US get any initiative worthy of the name going 2.5 years after the walls of finance got crumbling that would do what the US government indeed COULD do, let's see, 77 years ago.

My guess is what Bill Buiter blurted some qtrs ago. Its not regulatory capture the banks have achieved. Its state capture itself. Ponder that.

Ameet · Post by **Ameet** » 22 Apr 2010 23:06

Greece's budget deficit worse than first thought

http://news.bbc.co.uk/2/hi/business/8637270.stm

Greece had a far larger budget deficit than expected last year and the figures may yet get worse, according to the European Union's statistics office.

New data from Greece shows a gap of 13.6% of gross domestic product (GDP), not the 12.7% first reported.

Eurostat, which was given new data by Greece, said doubts over the figures meant they could be revised again.

Greece is swamped by 300bn euros of debt and needs to borrow about 54bn euros this year alone.

The Greek government has said it wants to reduce the deficit to 5.6% of GDP in 2011, and 2.8% of GDP in 2012.

SwamyG · Post by **SwamyG** » 22 Apr 2010 23:39

Anujan wrote:Even Alan Greenspan famously said India had too much "unproductive" capital and lost a lot of oppotunities.

And he talked about irrational exuberance

Heard this recently: Federal Reserve is as federal in nature as Federal Express is

Ameet · Post by **Ameet** » 23 Apr 2010 01:48

Japan Tries to Face Up to Growing Poverty Problem

http://www.nytimes.com/2010/04/22/world ... ef=general

After years of economic stagnation and widening income disparities, this once proudly egalitarian nation is belatedly waking up to the fact that it has a large and growing number of poor people. The Labor Ministry’s disclosure in October that almost one in six Japanese, or 20 million people, lived in poverty in 2007 stunned the nation and ignited a debate over possible remedies that has raged ever since.

Many Japanese, who cling to the popular myth that their nation is uniformly middle class, were further shocked to see that Japan’s poverty rate, at 15.7 percent, was close to the Organization for Economic Cooperation and Development’s figure of 17.1 percent in the United States, whose glaring social inequalities have long been viewed with scorn and pity here.