A Song___A Plea...
The economic and mathematical truth___Paul Davidson; http://econ.bus.utk.edu/davidson.html
The deflationary debt truth___Irving Fisher; http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf
The historical economic truth___Robert Skidelsky; http://www.skidelskyr.com/books/
Monday, April 27, 2009
Saturday, April 25, 2009
Tuesday, April 21, 2009
Geithner’s ‘Dirty Little Secret’: The Entire Global Financial System is at Risk
When the Solution to the Financial Crisis becomes the Cause, by F. William Engdahl
The Realities of Understanding Capitalist Free-Trade, vs., Communist Controlled Trade, Intents and Practices…
National Security Alert #3___The Republic Destroying Democracy, Fix…
[Note], (Realize these are trading transactions turnover values. Total, possibly real/notional, values are about $54 trillion globally, a bit more than real global GNP, but then how much real GNP is, % wise, derivatives? That's the real question?)
US Treasury Secretary Tim Geithner has unveiled his long-awaited plan to put the US banking system back in order. In doing so, he has refused to tell the ‘dirty little secret’ of the present financial crisis. By refusing to do so, he is trying to save de facto bankrupt US banks that threaten to bring the entire global system down in a new more devastating phase of wealth destruction.
The Geithner Plan, his so-called Public-Private Partnership Investment Program or PPPIP, as we have noted previously is designed not to restore a healthy lending system which would funnel credit to business and consumers. Rather it is yet another intricate scheme to pour even more hundreds of billions directly to the leading banks and Wall Street firms responsible for the current mess in world credit markets without demanding they change their business model. Yet, one might say, won’t this eventually help the problem by getting the banks back to health?
Not the way the Obama Administration is proceeding. In defending his plan on US TV recently, Geithner, a protégé of Henry Kissinger who previously was CEO of the New York Federal Reserve Bank, argued that his intent was ‘not to sustain weak banks at the expense of strong.’ Yet this is precisely what the PPPIP does. The weak banks are the five largest banks in the system.
The ‘dirty little secret’ which Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks which are the source of the toxic poison that is causing such dislocation in the world financial system. What Geithner is desperately trying to protect is that reality. The heart of the present problem and the reason ordinary loan losses as in prior bank crises are not the problem, is a variety of exotic financial derivatives, most especially so-called Credit Default Swaps.
In 2000 the Clinton Administration then-Treasury Secretary was a man named Larry Summers. Summers had just been promoted from No. 2 under Wall Street Goldman Sachs banker Robert Rubin to be No. 1 when Rubin left Washington to take up the post of Vice Chairman of Citigroup. As I describe in detail in my new book, Power of Money: The Rise and Fall of the American Century, to be released this summer, Summers convinced President Bill Clinton to sign several Republican bills into law which opened the floodgates for banks to abuse their powers. The fact that the Wall Street big banks spent some $5 billion in lobbying for these changes after 1998 was likely not lost on Clinton.
One significant law was the repeal of the 1933 Depression-era Glass-Steagall Act that prohibited mergers of commercial banks, insurance companies and brokerage firms like Merrill Lynch or Goldman Sachs. A second law backed by Treasury Secretary Summers in 2000 was an obscure but deadly important Commodity Futures Modernization Act of 2000. That law prevented the responsible US Government regulatory agency, Commodity Futures Trading Corporation (CFTC), from having any oversight over the trading of financial derivatives. The new CFMA law stipulated that so-called Over-the-Counter (OTC) derivatives like Credit Default Swaps, such as those involved in the AIG insurance disaster, (which investor Warren Buffett once called ‘weapons of mass financial destruction’), be free from Government regulation.
At the time Summers was busy opening the floodgates of financial abuse for the Wall Street Money Trust, his assistant was none other than Tim Geithner, the man who today is US Treasury Secretary. Today, Geithner’s old boss, Larry Summers, is President Obama’s chief economic adviser, as head of the White House Economic Council. To have Geithner and Summers responsible for cleaning up the financial mess is tantamount to putting the proverbial fox in to guard the henhouse.
The ‘Dirty Little Secret’
What Geithner does not want the public to understand, his ‘dirty little secret’ is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global ‘off-balance sheet’ or Over-The-Counter derivatives issuance.
Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.
The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion.
After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Just to underscore the magnitude, trillion is written 1,000,000,000,000. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.
The Government bailouts of AIG to over $180 billion to date has primarily gone to pay off AIG’s Credit Default Swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank of America, the banks who believe they are ‘too big to fail.’ In effect, these five institutions today believe they are so large that they can dictate the policy of the Federal Government. Some have called it a bankers’ coup d’etat. It definitely is not healthy.
This is Geithner’s and Wall Street’s Dirty Little Secret that they desperately try to hide because it would focus voter attention on real solutions. The Federal Government has long had laws in place to deal with insolvent banks. The FDIC places the bank into receivership, its assets and liabilities are sorted out by independent audit. The irresponsible management is purged, stockholders lose and the purged bank is eventually split into smaller units and when healthy, sold to the public. The power of the five mega banks to blackmail the entire nation would thereby be cut down to size. Ooohh. Uh Huh?
This is what Wall Street and Geithner are frantically trying to prevent. The problem is concentrated in these five large banks. The financial cancer must be isolated and contained by Federal agency in order for the host, the real economy, to return to healthy function.
This is what must be put into bankruptcy receivership, or nationalization. Every hour the Obama Administration delays that, and refuses to demand full independent government audit of the true solvency or insolvency of these five or so banks, inevitably costs to the US and to the world economy will snowball as derivatives losses explode. That is pre-programmed as worsening economic recession mean corporate bankruptcies are rising, home mortgage defaults are exploding, unemployment is shooting up. This is a situation that is deliberately being allowed to run out of (responsible Government) control by Treasury Secretary Geithner, Summers and ultimately the President, whether or not he has taken the time to grasp what is at stake.
Once the five problem banks have been put into isolation by the FDIC and the Treasury, the Administration must introduce legislation to immediately repeal the Larry Summers bank deregulation including restore Glass-Steagall and repeal the Commodity Futures Modernization Act of 2000 that allowed the present criminal abuse of the banking trust. Then serious financial reform can begin to be discussed, starting with steps to ‘federalize’ the Federal Reserve and take the power of money out of the hands of private bankers such as JP Morgan Chase, Citibank or Goldman Sachs.
F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order; and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). His newest book, Full Spectrum Dominance: Totalitarian Democracy in the New World Order (Third Millennium Press) is due out at end of April. He may be reached through his website, http://www.engdahl.oilgeopolitics.net
The Realities of Understanding Capitalist Free-Trade, vs., Communist Controlled Trade, Intents and Practices…
National Security Alert #3___The Republic Destroying Democracy, Fix…
[Note], (Realize these are trading transactions turnover values. Total, possibly real/notional, values are about $54 trillion globally, a bit more than real global GNP, but then how much real GNP is, % wise, derivatives? That's the real question?)
US Treasury Secretary Tim Geithner has unveiled his long-awaited plan to put the US banking system back in order. In doing so, he has refused to tell the ‘dirty little secret’ of the present financial crisis. By refusing to do so, he is trying to save de facto bankrupt US banks that threaten to bring the entire global system down in a new more devastating phase of wealth destruction.
The Geithner Plan, his so-called Public-Private Partnership Investment Program or PPPIP, as we have noted previously is designed not to restore a healthy lending system which would funnel credit to business and consumers. Rather it is yet another intricate scheme to pour even more hundreds of billions directly to the leading banks and Wall Street firms responsible for the current mess in world credit markets without demanding they change their business model. Yet, one might say, won’t this eventually help the problem by getting the banks back to health?
Not the way the Obama Administration is proceeding. In defending his plan on US TV recently, Geithner, a protégé of Henry Kissinger who previously was CEO of the New York Federal Reserve Bank, argued that his intent was ‘not to sustain weak banks at the expense of strong.’ Yet this is precisely what the PPPIP does. The weak banks are the five largest banks in the system.
The ‘dirty little secret’ which Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks which are the source of the toxic poison that is causing such dislocation in the world financial system. What Geithner is desperately trying to protect is that reality. The heart of the present problem and the reason ordinary loan losses as in prior bank crises are not the problem, is a variety of exotic financial derivatives, most especially so-called Credit Default Swaps.
In 2000 the Clinton Administration then-Treasury Secretary was a man named Larry Summers. Summers had just been promoted from No. 2 under Wall Street Goldman Sachs banker Robert Rubin to be No. 1 when Rubin left Washington to take up the post of Vice Chairman of Citigroup. As I describe in detail in my new book, Power of Money: The Rise and Fall of the American Century, to be released this summer, Summers convinced President Bill Clinton to sign several Republican bills into law which opened the floodgates for banks to abuse their powers. The fact that the Wall Street big banks spent some $5 billion in lobbying for these changes after 1998 was likely not lost on Clinton.
One significant law was the repeal of the 1933 Depression-era Glass-Steagall Act that prohibited mergers of commercial banks, insurance companies and brokerage firms like Merrill Lynch or Goldman Sachs. A second law backed by Treasury Secretary Summers in 2000 was an obscure but deadly important Commodity Futures Modernization Act of 2000. That law prevented the responsible US Government regulatory agency, Commodity Futures Trading Corporation (CFTC), from having any oversight over the trading of financial derivatives. The new CFMA law stipulated that so-called Over-the-Counter (OTC) derivatives like Credit Default Swaps, such as those involved in the AIG insurance disaster, (which investor Warren Buffett once called ‘weapons of mass financial destruction’), be free from Government regulation.
At the time Summers was busy opening the floodgates of financial abuse for the Wall Street Money Trust, his assistant was none other than Tim Geithner, the man who today is US Treasury Secretary. Today, Geithner’s old boss, Larry Summers, is President Obama’s chief economic adviser, as head of the White House Economic Council. To have Geithner and Summers responsible for cleaning up the financial mess is tantamount to putting the proverbial fox in to guard the henhouse.
The ‘Dirty Little Secret’
What Geithner does not want the public to understand, his ‘dirty little secret’ is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global ‘off-balance sheet’ or Over-The-Counter derivatives issuance.
Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.
The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion.
After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Just to underscore the magnitude, trillion is written 1,000,000,000,000. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.
The Government bailouts of AIG to over $180 billion to date has primarily gone to pay off AIG’s Credit Default Swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase, Bank of America, the banks who believe they are ‘too big to fail.’ In effect, these five institutions today believe they are so large that they can dictate the policy of the Federal Government. Some have called it a bankers’ coup d’etat. It definitely is not healthy.
This is Geithner’s and Wall Street’s Dirty Little Secret that they desperately try to hide because it would focus voter attention on real solutions. The Federal Government has long had laws in place to deal with insolvent banks. The FDIC places the bank into receivership, its assets and liabilities are sorted out by independent audit. The irresponsible management is purged, stockholders lose and the purged bank is eventually split into smaller units and when healthy, sold to the public. The power of the five mega banks to blackmail the entire nation would thereby be cut down to size. Ooohh. Uh Huh?
This is what Wall Street and Geithner are frantically trying to prevent. The problem is concentrated in these five large banks. The financial cancer must be isolated and contained by Federal agency in order for the host, the real economy, to return to healthy function.
This is what must be put into bankruptcy receivership, or nationalization. Every hour the Obama Administration delays that, and refuses to demand full independent government audit of the true solvency or insolvency of these five or so banks, inevitably costs to the US and to the world economy will snowball as derivatives losses explode. That is pre-programmed as worsening economic recession mean corporate bankruptcies are rising, home mortgage defaults are exploding, unemployment is shooting up. This is a situation that is deliberately being allowed to run out of (responsible Government) control by Treasury Secretary Geithner, Summers and ultimately the President, whether or not he has taken the time to grasp what is at stake.
Once the five problem banks have been put into isolation by the FDIC and the Treasury, the Administration must introduce legislation to immediately repeal the Larry Summers bank deregulation including restore Glass-Steagall and repeal the Commodity Futures Modernization Act of 2000 that allowed the present criminal abuse of the banking trust. Then serious financial reform can begin to be discussed, starting with steps to ‘federalize’ the Federal Reserve and take the power of money out of the hands of private bankers such as JP Morgan Chase, Citibank or Goldman Sachs.
F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order; and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). His newest book, Full Spectrum Dominance: Totalitarian Democracy in the New World Order (Third Millennium Press) is due out at end of April. He may be reached through his website, http://www.engdahl.oilgeopolitics.net
Tuesday, April 07, 2009
Flying Money___“Big Strong Dollar, Make Big Weak Nation…!”
New, Important; Must read A Tale of Two Depressions, by Barry Eichengreen, Kevin O'Rourke
{New, Important} Can Future Systemic Financial Risks Be Quantified? Ergodic VS Nonergodic Stochastic Processes, by Paul Davidson
The Pragmatic Maxim___“Consider what effects, that might conceivably have practical bearings, we conceive the object of our conception to have. Then, our conception of these effects is the whole of our conception of the object.” C.S. Pierce
The Triadic Maxim___Any Idea; “Arithmetically check all possible effects, against all possible premises, and the combined results will be the total actions of the idea.” Me
“The Eclectic Ontological Geometry of Global Markets and Transactions…”
{New, Important} Can Future Systemic Financial Risks Be Quantified? Ergodic VS Nonergodic Stochastic Processes, by Paul Davidson
The Pragmatic Maxim___“Consider what effects, that might conceivably have practical bearings, we conceive the object of our conception to have. Then, our conception of these effects is the whole of our conception of the object.” C.S. Pierce
The Triadic Maxim___Any Idea; “Arithmetically check all possible effects, against all possible premises, and the combined results will be the total actions of the idea.” Me
“The Eclectic Ontological Geometry of Global Markets and Transactions…”
Saturday, April 04, 2009
Fabius Maximus___On Cue As Ever...
Fetters of the mind blind us so that we cannot see a solution to this crisis
Fabius Maximus | Apr 1, 2009
We know so little. This is one of the major themes of this site, hence the frequent rebukes to those speaking with great confidence about things far beyond our ken — based on the available data and tested theories. In the realm of public policy that is nowhere more salient than economics. Which brings us to what might be the primary similarity between our situation today and the Great Depression.
Contents;
1.History
2.That is was; what about now?
3.Afterword and for more information
History;
Back then policy makers were bound by what economist Barry Eichengreen called “golden fetters.” For reasons too complex to discuss here, nations could not take the necessary stimulus measures until they unplugged from the gold standard. That is, going off the gold standard was a necessary (not sufficient) prerequisite for recovery. They did so fearfully, not knowing what lay beyond this step into the unknown — under the force of events.
“As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability, a process that dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries finally left gold in 1936.” — Ben Bernanke, Essays on the Great Depression (2005)
“What E&T show is that circa 1930 key decision-makers had spent so many years equating adherence to gold not just with prosperity, but with morality, decency, civilization itself, that they couldn’t even contemplate breaking with that orthodoxy - even in the face of total catastrophe.” — Paul Krugman, “What’s our gold standard?“, blogging at the New York Times, 27 March 2009 ……….”E&T” refers to ”The Gold Standard and the Great Depression“, Eichengreen and Peter Temin, June 1997
What was mysterious to them, we can see this with the clarity of hindsight. As in this graph from Brad Delong’s site, “The Earlier You Abandon the Gold Standard and Start Your New Deal, the Better“, 26 March 2009: (Check link for graph, "The Great Slump Revisited")
The Earlier You Abandon Gold Standard, and Start Your New Deal, The Better...
Paul Krugman’s blog has a similar graph showing that the gold standard constrained monetary policy.
What about now?
In 1930 mainstream economists were confident they knew what to do. Now we know that most were wrong. If this were 1930, today’s economists would know exactly what to do. But that was then; this is now. The world has changed since then. Some share the confidence of their predecessor in 1930.
{W}e know what to do and how to do it to keep the world economy out of a depression. — Brad Delong, “Are We Handcuffed by Golden Fetters?“, posted at his blog, 27 March 2009
Our leaders have implemented the conventional remedies. Over the next 6 - 9 months we will see the results (lags are long in complex modern economies). They seek to restore the status quo ante-Depression, the post-WWII financial regime. Perhaps they will be successful.
Or — might there be an equivalent set of cognitive fetters, so that we cannot see the systemic factor that must be changed to end the downturn?
Paul Krugman speculates that “the mystique of finance is playing a somewhat similar role” (i.e., like the gold standard in the 1930’s), expanding on his thoughts in “The Market Mystique“, op-ed in the New York Times, 26 March 2009.
I believe there is an obvious candidate, one similar to that of the 1930 gold standard: the US dollar as the reserve currency. This is a foundational element of the post-WWII world. Just as the US is the global hegemon, the US currency is the primary medium of trade and store of value. But that era is ending. As we move to a multi-polar world, the US can no longer maintain the twin burdens of hegmony: monetary and militarily.
We do not want to let go that role. Nor does most of the world want us to do so. Almost every nation has adapted to the current world order and fears the large, unknown changes that will follow its ending. The last such transition was 1914 - 1945; nobody enjoyed it.
The clock is running on the “developed world” — Japan, Europe, and America. All face some combination of demographic decline, bankrupt social retirement systems, and unsustainable government debt loads. A new world looms ahead. We close our eyes to this transition, hoping that it will go away — and we’ll open our eyes to the old world, shiny and new again.
Afterword — and an important note about comments to this post
This is not a post about the gold standard, and comments about its wonderfulness are off-topic and will be deleted.
Fabius Maximus | Apr 1, 2009
We know so little. This is one of the major themes of this site, hence the frequent rebukes to those speaking with great confidence about things far beyond our ken — based on the available data and tested theories. In the realm of public policy that is nowhere more salient than economics. Which brings us to what might be the primary similarity between our situation today and the Great Depression.
Contents;
1.History
2.That is was; what about now?
3.Afterword and for more information
History;
Back then policy makers were bound by what economist Barry Eichengreen called “golden fetters.” For reasons too complex to discuss here, nations could not take the necessary stimulus measures until they unplugged from the gold standard. That is, going off the gold standard was a necessary (not sufficient) prerequisite for recovery. They did so fearfully, not knowing what lay beyond this step into the unknown — under the force of events.
“As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability, a process that dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries finally left gold in 1936.” — Ben Bernanke, Essays on the Great Depression (2005)
“What E&T show is that circa 1930 key decision-makers had spent so many years equating adherence to gold not just with prosperity, but with morality, decency, civilization itself, that they couldn’t even contemplate breaking with that orthodoxy - even in the face of total catastrophe.” — Paul Krugman, “What’s our gold standard?“, blogging at the New York Times, 27 March 2009 ……….”E&T” refers to ”The Gold Standard and the Great Depression“, Eichengreen and Peter Temin, June 1997
What was mysterious to them, we can see this with the clarity of hindsight. As in this graph from Brad Delong’s site, “The Earlier You Abandon the Gold Standard and Start Your New Deal, the Better“, 26 March 2009: (Check link for graph, "The Great Slump Revisited")
The Earlier You Abandon Gold Standard, and Start Your New Deal, The Better...
Paul Krugman’s blog has a similar graph showing that the gold standard constrained monetary policy.
What about now?
In 1930 mainstream economists were confident they knew what to do. Now we know that most were wrong. If this were 1930, today’s economists would know exactly what to do. But that was then; this is now. The world has changed since then. Some share the confidence of their predecessor in 1930.
{W}e know what to do and how to do it to keep the world economy out of a depression. — Brad Delong, “Are We Handcuffed by Golden Fetters?“, posted at his blog, 27 March 2009
Our leaders have implemented the conventional remedies. Over the next 6 - 9 months we will see the results (lags are long in complex modern economies). They seek to restore the status quo ante-Depression, the post-WWII financial regime. Perhaps they will be successful.
Or — might there be an equivalent set of cognitive fetters, so that we cannot see the systemic factor that must be changed to end the downturn?
Paul Krugman speculates that “the mystique of finance is playing a somewhat similar role” (i.e., like the gold standard in the 1930’s), expanding on his thoughts in “The Market Mystique“, op-ed in the New York Times, 26 March 2009.
I believe there is an obvious candidate, one similar to that of the 1930 gold standard: the US dollar as the reserve currency. This is a foundational element of the post-WWII world. Just as the US is the global hegemon, the US currency is the primary medium of trade and store of value. But that era is ending. As we move to a multi-polar world, the US can no longer maintain the twin burdens of hegmony: monetary and militarily.
We do not want to let go that role. Nor does most of the world want us to do so. Almost every nation has adapted to the current world order and fears the large, unknown changes that will follow its ending. The last such transition was 1914 - 1945; nobody enjoyed it.
The clock is running on the “developed world” — Japan, Europe, and America. All face some combination of demographic decline, bankrupt social retirement systems, and unsustainable government debt loads. A new world looms ahead. We close our eyes to this transition, hoping that it will go away — and we’ll open our eyes to the old world, shiny and new again.
Afterword — and an important note about comments to this post
This is not a post about the gold standard, and comments about its wonderfulness are off-topic and will be deleted.
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