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Joe Costello's blog
On fraud
Posted by Joe Costello on Dec 30, 2009
on fraud
Yves Smith has an excellent piece on some of the financial shenanigans, that is fraud, that occurred to bring about the financial crisis. It's a little technical for the financial unwashed, but I think anyone who reads it can get the basic idea. Particularly in this case, Goldman's selling of what they knew were worthless bonds and then on the backside covering with AIG the losses for when it was found it this paper was worthless.
The term "predatory" in business concerns a company that treats its customers as prey, that is it does not serve their interest, but simply is looking to gain the greatest profit in whatever way possible. The top of our financial system is predatory to the rest of the economy, they serve little interest but their own, and at this point provide little or more appropriately negative value to the rest of the economy, that is to you and me. An essential read.
PS. The AIG email trail is under investigation and it spells F-R-A-U-D.
Ben's Bet
Posted by Joe Costello on Dec 28, 2009
ben's bet
FT has a good piece with Chinese premier Wen Jiabo on the value of the renminbi, and as those concerned about global currencies say, "When Mr. Wen talks, people listen." Ho, Ho Ho. Mr. Wen states plainly that calls for appreciating the value of the yuan's only "purpose is to hold back China’s development."
Now, we saw Professor Bernanke on the front of Time taking George Washington's place on the dollar, people think he has a lot of control. Mr. Bernanke's policies have devalued the dollar and outside of global financial markets, the one great beneficiary are the Chinese. As FT states,
China dropped its formal dollar peg in 2005 and has since allowed the renminbi to trade within a narrow band. But since the middle of last year it has operated a de facto peg. This has meant that the renminbi
has depreciated about 9 per cent against the currencies of its main trading partners since early this year, even though the Chinese economy has rebounded quicker than any other major economy.
Phew, "de facto," I'll say. Professor Bernanke stated in the book he wrote on the Depression, currency devaluation had helped improve the situation. However, pre-monetarist thought and those who created the IMF considered the early 1930s beggar thy neighbor policies of currency devaluation having added globally to the deflationary environment. The Chinese have an advantage over a lot of manufacturers from this devaluation for sure. Ben's policies are causing problems in global manufacturing, people are reacting louder. I guess this is when Ben comes out and says as he wrote, what will really help is a coordinated global currencies devaluation, though first he and Mr. Geithner will have to quit claiming they're for a strong dollar. We'll see how that
goes.
The implications of Mr. Bernanke's unprecedented money policies are far from done playing out, any sharp waves in a very untethered global currency market would cause massive shifts.
Bernanke Year in Review
Posted by Joe Costello on Dec 23, 2009
Post has a real good piece of journalism on why Ben Bernanke should not be reappointed Fed chief. It's not correct to say it was the Fed's failure, but more importantly and accurately, the Fed's culpability in bringing about the whole bubble, of course bubbles don't exist in Econ 400 and above. Yves
Smith has some good comments.
Make no mistake, everything the Fed has done in response to the popping has been an attempt to blow a larger bubble with global currencies, keep that in mind as the coronation of Mr. Bernanke goes forth.
Update: Bloomberg says "U.S. senators are backing Federal Reserve Chairman Ben S. Bernanke for a second term by a 3-to-1 margin, based on a count of 77 lawmakers by Bloomberg News." We can push these senators: "Four Republicans -- John McCain and Jon Kyl of Arizona, Jeff Sessions of Alabama and Roger Wicker of Mississippi."
Subpoena
Posted by Joe Costello on Dec 21, 2009
subpoenas
Yves Smith has an important piece about Goldman and AIG. She points to another good piece by Spitzer, Partnoy, and Black in the NYT calling for AIG and Goldman to unload their communications of the past few years. How is it Goldman had so much "coverage" exclusively with AIG? AIG is after all now a public company. And well even if they weren't, we need to get the info if we're going to be able to understand what happened, and how are we suppose to start fixing things, if we don't know what happened?
A few people with a little guts can do a lot right now, like subpoena a whole bunch of people involved in the financial industry over the last few years and the last couple decades. Have them put their right hand in the air and their left on something they hold sacred, like their fortunes, and start explaining how things went down. Now a lot of the problems with the financial system were perfectly legal, and we need to change that, but there was a ton of fraud, and we have to understand that too.
On Money - II
Posted by Joe Costello on Dec 21, 2009
There is no subtler, no surer means of
overturning the existing basis of society than to debauch the
currency. This process engages all the hidden forces of economic law
on the side of destruction, and does it in a manner which not one man
in a million is able to diagnose. -- J.M. Keynes, The
Economic Consequences of the Peace
The most interesting fact about money is it is the most unreal
component of all economies. Unless money is based on some commodity, it
has no intrinsic value. And if that commodity is gold, it has very
little intrinsic value, though it is shiny. Economies,
whether they're capitalist, socialist, agrarian, merchant, or industrial utilize money. It is never
a neutral agent, but must necessarily be a stable one. An historical
example of how important stability is to currency is Isaac Newton. The
definer of one of the most stable forces in the universe, gravity,
Newton also served as warden of the Royal Mint, where in 1717 he established
a link between gold and the pound that would survive for over two hundred
years -- that is till the end of the British empire.
Money may best be thought of, to paraphrase Keynes
in his Treatise on Money, as both a medium of exchange and a
little more esoterically though no less essentially, as a storer of
value. Keynes states the creation and defining of money is a natural
responsibility of government, " The State,
therefore, comes in first of all as the authority of law which enforces the payment of the
thing(money) which corresponds to the name(money)..." However Keynes
adds the kicker, "...and to vary declaration from time
to time—when, that is to say, it claims the right to re-edit the
dictionary." Meaning simply, the state creates and defines money,
though reserves the right at times to redefine the meaning.
Across history, governments have at many times
re-edited the monetary dictionary to both redefine and revalue money.
The most recent and cataclysmic re-editing of the money dictionary came
in the 1930s. This re-editing occurred across the globe, where
prevailing gold standards were thrown-out and currencies devalued in an
effort to both inflate national economies and gain global competitive
advantage. There was in short a definitional crisis of money.
In a half dozen years, almost all countries
abandoned the monetary gold standard. Those who jumped first gained
advantage. Some countries such as New Zealand and Denmark, at the time
still predominately commodity economies, engaged in competitive
devaluation known as the "Butter Wars" in order to gain advantage in
the British butter market. As the devaluations continued, the world
basically split into different trading blocks; the British and their
empire, the French and assorted European nations, the Japanese and
their growing Asian empire, and two of the largest national economies,
the US and Germany basically on their own.
As Jeffry Friedan writes in his book Global
Capitalism about Britain:
Trade with the rest of the world fell precipitously, but exports
to the sterling area—the empire, the
Nordic and Baltic countries, Argentina, and a few others—rose from
50-60 percent of Britian's exports.
Germany to the world's chagrin was probably the
greatest loser in the beggar-thy-neighbor devaluations and tariffs.
Adam Tooze points out in his excellent book, The Wages of
Destruction, in 1934, "German export volumes remained 40 percent
below their level in 1932(and) was one of the principal causes of
unemployment both in industry and commerce."
It would take another dozen years and a World War
to completely "re-edit" the monetary dictionary. The new global
officialdom instituted the International Monetary Fund to act as
official global currency editor. As the IMF states:
During the Great Depression of the
1930s, countries attempted to shore
up their failing economies by sharply raising barriers to foreign
trade, devaluing their currencies to compete against each other for
export markets, and curtailing their citizens' freedom to hold foreign
exchange. These attempts proved to be self-defeating. World trade
declined sharply, and employment and living standards
plummeted in many countries.
This breakdown in international monetary
cooperation led the IMF's founders to plan an institution charged with overseeing the
international monetary system.
The IMF created the new global currency standard,
which was the dollar tied to gold. This redefinition lasted twenty-five
years, when the gold standard was dropped and the dollar in and of
itself became the global currency standard. Today, how one defines or
values the dollar or other currencies is a open question. One might
say, in respect to Mr. Keynes, currency is no longer a dictionary
definition, but a Wiki.
Today, currency is defined by Treasuries, Central Banks, and large
corporate interests in global markets. As the great market propagandist
himself Milton Friedman wrote in his 1992 Money Mischief, the
contemporary global currency situation has "no historical
precedent....It has entered a new and urgent stage as the world
ventures into hitherto unexplored terrain."
Now, the great historical tradition that has been
shattered in the last several decades is the idea of fixed currency
rates. Instead, the idea of flexible current rates, or more accurately,
currency values defined by markets, has become dominant in this new era
of laissez faire. In support of this "market valuing," events of the
past have been reinterpreted, particularly the currency turmoil of the
1930s. Time Man of the Year and Fed Chairman Bernanke has been in the
forefront of this school and has enacted a policy of dollar devaluation
based upon it.
If you've in any way managed to follow this
ludicrously glib history of 20th century money, I'd like to
re-emphasize several points:
- Money has no intrinsic value.
- Times when the value of money is in
question, that is it is being redefined, are inherently unstable. - While, Mr. Friedman was right the global
currency regime is somewhat unprecedented, history still has lessons to
teach. The greatest of which is Mr. Bernanke's monetary policy, "Ben's Bet"
of dollar devaluation is not only adding instability, but fraught with
great risk.
Next: What's a Dollar, or a Yuan, or maybe most importantly, what the
hell is a Euro?
The Education of Howard Dean
Posted by Joe Costello on Dec 16, 2009
The Education of Howard Deann
Howard Dean was on Good Morning America calling the most recent Senate
health care bill, "the collapse of health care reform in the United
States." Now, I don't draw attention to this to talk about health care,
which was doomed from the start. I instead ask you to watch
this interview for what it says about politics in America in year
2009. Our politics are broken.
Doctor Dean's understanding of the problem has grown immensely since
2004, and everyone should listen carefully to what he says. We have a
system completely controlled by entrenched-interests and they don't
simply have influence on any issue, such as health care, banking, or
the environment, they define it. Just as importantly, watch the
arguments Mr. Stephanopoulis uses against Dr. Dean, it exudes the
insolvency of our politics. Even better is so-called "progressive" Tom
Harkin's argument that Democrats need to be for the bill because all 40
Republicans were against it. Ho-Ho-Ho. Gee Tom, where was such
sublimely simplistic thinking in 2002 when you voted for President
Bush's occupation of Iraq?
I was in the District of Corruption last week. A person I respect took
me to a meeting of progressives/liberals trying to decide about taking
on a incumbent Democrat in the primary. I learned quickly there were a
lot of labor people there, which made me nervous, because these days a
lot of labor people gathering pretty much equates with defeat, as they
remain completely bought into a system that rolls them at every
opportunity. Most interesting was a young articulate fellow who gave
just an extraordinary synopsis of the health care process in DC,
showing a completely broken system. But what was really extraordinary,
almost everyone attending completely ignored what he said and went on
acting like they just needed to elect someone else.
So, that's where we are. We can continue to delude ourselves the system
works, or we can come to terms that unless we have real reform, DC is
going to simply codify our decline for the profit of a few. We need to
change our government for the 21st century. You can continue believing
in tooth-fairies, Santa Claus, and Obamas, or you can start believing
in each other.
On Money - I
Posted by Joe Costello on Dec 15, 2009
Last year, we had a panic of the global financial elite. Instead of
their proponents assurances of stabilizing the financial system,
securitization and derivatives sped the downward spiral. Simply, they
failed. The downward spiral has been slowed by the Federal Reserve and
Treasury stepping in to unprecedentedly backstop the enormous debt-load
created over the past couple decades and reflating equity prices. So,
far from getting back soon to any kind of normal, we're on a much
longer path to some new financial destination.
The Fed was created at the beginning of last century in an attempt, one
that proved lacking during both financial crashes of the 1920s, to
bring stability to a financial system prone to catastrophic collapse.
Over the course of the late 19th century, bankers such as JP Morgan
would step in during such panics and provide "liquidity," that is
short-term infusion of money to get the system through the panic.
However, the 1907 panic revealed the financial system too large for
even Mr. Morgan to insure, so the Fed was created.
Providing liquidity in panics was one of the Fed's main reasons to
exist. In this most recent panic, the Fed's slashing of interest rates
and other measures to provide "liquidity" were completely in its
jurisdiction. However, the Fed and Treasury took many unprecedented
moves providing more than "liquidity," they attempted to massively
shore-up solvency. An easy difference to understand a "liquidity"
problem and a solvency crisis is that with liquidity problems a little
money lent over a short period can get you back on track. Insolvency
means it doesn't matter how much time and money I give you, you're not
going to be financially viable, if at all, without taking significant
losses.
There's been various measures the Fed and Treasury have taken to try
and provide solvency including the Fed's balance sheet, government
agencies stepping into buy loads of bad paper, and what may be most
important, simply allowing the banks not to account their losses. That
is simply pretending, but today Bloomberg(tx mish) has an important article stating,
"Banks will need to take
“substantial” writedowns on home-equity loans to enable loan
modifications that will allow the U.S. housing market to
recover, according to Amherst Securities Group LP."
So, despite all efforts by the Fed and Treasury,
the banking system remains insolvent, held together by a boatload of
government money and a continued officially sanctioned belief that
future growth will eventually make all the bad numbers good. But the
banks understand their financial predicament and this is why they
refuse to lend money.
The "financial innovation" of the last three decades failed spectacularly. You'd be hard pressed to figure that out listening to anything out of New York and DC. The idea that securitization and derivatives made
finance more stable was proved spectacularly wrong. The only person
close to any officialdom saying this is Paul Volcker, who yesterday in
the WSJ stated,
I hear about these wonderful
innovations in the financial markets, and
they sure as hell need a lot of innovation. I can tell you of
two—credit-default swaps and collateralized debt obligations—which took
us right to the brink of disaster. Were they wonderful innovations that
we want to create more of?...Wake up, gentlemen. I can only say that
your response is inadequate. I
wish that somebody would give me some shred of neutral evidence about
the relationship between financial innovation recently and the growth
of the economy, just one shred of information.
Not only did "financial innovation" not add a
shred of growth, it made the financial system more unstable than it's
been for seventy-years. The financial innovations and the Fed and
Treasury's responses have made the system more unstable, specifically
in two ways. First, it has greatly distorted the pricing mechanisms
across the economy. It is very difficult from housing, to energy, to
commodities, and currencies to understand if prices have any
correlation to the "real economy" -- the financial system is broken.
Secondly and more importantly, the Fed and Treasury created not a new
bubble, but a surrealistic version of the last one in which global
currency markets are now in the middle. The instability of the global
currency system has risen to a point not seen since the 1930s.
Next: The Dali Currency Bubble
The Circus Comes to Town
Posted by Joe Costello on Dec 14, 2009
the circus comes to town
Good Morning Aztlan
-- Los Lobos
Our political financial circus grows. In the center ring yesterday was the Maestro himself, Alan Greenspan or as NBC titles him "Doctor" Alan Greenspan -- Hey Ho! But best for this well rehearsed clown act, sitting next to Mr. Greenspan was none other than MSNBC's own Jim "Mad Money" Cramer. Mr. Cramer looked appropriately in awe, and why shouldn't he, there the apprentice sits next to the Maestro of Bullshit. Mr. Greenspan delivered the act's punchline:
People think stock prices are just paper profits. They are not. They create real purchasing power and, most importantly, they create a fluidity into the financial system which is the reason why even though banks are not lending freely at this particular stage, they are solvent and the problems that we had six to nine months ago have disappeared, because essentially $5 trillion worth of increased equity is pouring into the economy.
This is called bubble blowing Fed style. I underestimated back in March how much the Fed could goose the stock market. I was not sufficiently dazzled by the tricks the Maestro had demonstrated when he was Chairman. The Maestro claims the Fed inflated stock pop has created $5 trillion worth of "equity," bubble equity to be exact. And then with a wave of his wand Doctor Maestro claims the banks are solvent, which if you don't have to account losses I guess they are. All and all a bravo performance
Over in the left ring, the President dons a Teddy Roosevelt costume and claims he did not, "run for office to be helping out a bunch of fat cat bankers on Wall Street." Phew, one has to ask if he is including Larry and Rahm? Remember, before his most recent stint in "public service," Mr. Summers received $5.2 million in one year from a hedge fund. Rahm of course in between his stint as the Clintons' bag-man, and make no mistake that was a lot of heavy lifting, and his election as Congressman cleared $16 million in couple months as an investment banker in Chicago, as they say in Chicago, "Good work, if you can get it." And what do you get if you
were the main rain-maker for Rahm's investment banking career? Why you're appointed Chairman of the newly government owned General Motors.
If you want a not so funny but enlightening view of the Democrats as fat-cat bankers, try Matt Taibbi's excellent piece in Rolling Stone. For the circus' next act, let's subpoena Bob Rubin and Mr. Bill and ask about the creation of Citi, that might not only be entertaining, but useful.
The Economic Weather
Posted by Joe Costello on Dec 12, 2009
A report called Battered by the Storm, put together and released by several
organizations documents the vast number of people being crushed by our economic problems. Our corporate media doesn't give much time to reporting the devastation occurring at the bottom rungs of our economy's ladder. Blacks, Hispanics, women, children, and less-educated white males have felt the full force of the crash. This report documents that rising stock prices in no way correlate with any sort of broader economic health. It also should be noted by our cultural warriors of the last decades, cultural liberalism is always tied to economic vitality, without the latter, the former struggles mightily.
Meanwhile, in our global economy, our Ministry of Financial Propaganda, that is the corporate media, blared headlines all over that China's exports improve. The AP states, "The trade figures for November were the best in a year with exports falling just 1.2 percent from the same month of 2008." Remember, global trade numbers were off a cliff last fall, so a further 1.2% decline is an interesting improvement. There are growing problems with over-capacity in China. The WSJ had a good piece on the steel industry stating, "Crude steel output touched records this year, with the latest monthly posting in October reaching the second highest in history at 51.75
million tons, up 42% compared with a year earlier." Now China currently produces half of all global steel, so if its exports are down 1.2%, while its production is up 42%, things are not right.
Paul Volcker continued his campaign in the financial wilderness against financial innovation. The former Fed chair once again stating the obvious that, "credit default swaps and collateralised debt obligations had taken the economy 'right to the brink of disaster' and then added that most uncomfortable fact, the economy had grown at 'greater rates of speed' during the 1960s without such products." Volcker concluded, "The industry's 'single most important' contribution in the last 25 years has been automatic telling machines, which he said had at least proved 'useful'. Who knew Volcker had a sense of humor? All financial reform thinking needs to begin with innovation in the financial industry over the last three decades has been of little value to the economy, but great profit for Wall Street.
Finally, a very unpalatable Paul Krugman gives up Keynes' ghost in the NYT stating in so many words, "We're all monetarists now." Mr Krugman meet Mr. Eccles, Fed Chairman 1935 who stated, "We are in the depths of a depression and... beyond creating an easy money situation through reduction of discount rates, there is very little, if anything, that the reserve organization can do to bring about recovery." However, Mr. Eccles never won a Nobel Prize.
Environmental Economics
Posted by Joe Costello on Dec 7, 2009
The NYT has an interesting dichotomy on the climate issue today. On one side is the paragon of industrial economic thinking Paul Krugman, on the other is scientist James Hansen who has been warning about the ecological part of the equations industrial economists have never found much use to include in their thinking.
Krugman's piece is pure political hackery, but that's what he gets paid for at the NYT. He puts out the standard advocacy lines for a cap n trade system, the market based or more accurately the Wall Street based "solution" to cutting fossil fuel use. Krugman states it's so magical it will even get the economy moving again. Hansen's piece evicerates this thinking. Krugman demonstrates how all our public policy remains completely captured in the market based fundamentalism that has dominated our politics for the last three decades.
Mr. Krugman's states moving away from fossil fuels is going to be in traditional industrial economic thinking good for economic growth. This just ain't so. Our industrial society is based on fossil fuels, swapping installed fossil fuel capacity with energy efficiency measures and non-fossil energy generation is not the creation of new wealth, it is redistributing existing wealth. And that is a giant difference. It calls for a different notion of poltical economy. The fact is this process can be better, but not based on current political economy measures.
If we're going to create a sustainable global economy, it's not going to be based on 19th and 20th century industrial thinking. The serious environmental challenges we face, whether climate or a half dozen other things I can immediately think of, will not be met with our contemporary thinking and practices on political economy. One example, there's no environmental Fed, which means any system that goes into crisis, well, there's no bailout.
We can meet these challenges, but we must change both our thinking and our actions.
Tell Congress
New laws should be put in place that end government support for companies becoming “too big to fail” and instead support jobs.
