How to Turn a Recession into a Depression
by William A. Niskanen
Four federal economic policies transformed the Hoover recession into the Great Depression: higher tariffs, stronger unions, higher marginal tax rates, and a lower money supply. President Obama, unfortunately, has endorsed some variant of the first three of these policies, and he will face a critical choice on monetary policy in a year or so.
Trade
The Smoot-Hawley Tariff Act was passed by the House in May 1929, before the stock market collapse in October, and was enacted in June 1930 despite the opposition of many economists and several leading businessmen. Tariffs were increased 60 percent on 3,200 imported products, although most imports remained duty free. Moreover, most of the tariffs were in dollars per unit, so the real cost of the tariffs increased with the subsequent deflation. This act provoked 60 other governments to enact retaliatory tariffs. The higher tariffs and the general recession reduced total world trade by about two-thirds by 1933, and the U.S. unemployment rate increased from 7.8 percent when the Smoot-Hawley Act was enacted to 25.1 percent in 1933.
Senator Obama had been a cosponsor of the Fair Currency Act of 2007, which would have authorized a countervailing duty on imported products from a nonmarket economy with an undervalued exchange rate. Although directed primarily against China, it was also broadened to include Canada and Mexico. Approval of this act would surely provoke some form of retaliation; the United States is especially vulnerable to retaliation by China, because we are dependent on China to finance our current account deficit. A statement by Treasury secretary-designate Timothy Geithner during his confirmation hearing increases the prospect that the Obama administration will rule that China has manipulated its currency. During his campaign for the presidency, Obama also proposed opening up NAFTA to renegotiate the labor and environmental standards, and he opposed the several outstanding bilateral trade agreements that had been negotiated but not yet approved. During the congressional deliberations on the 2009 fiscal stimulus bill, however, President Obama expressed caution about any Buy America provision that might provoke trade retaliation.
Labor
The Davis-Bacon Act of 1931 required that labor employed on a federally financed construction project be paid no less than the local rates on a similar project. The Norris- LaGuardia Act of 1932 made "yellow dog" contracts, which made an agreement not to join a union a condition for employment, unenforceable in federal courts, and it banned any federal injunctions in nonviolent labor disputes. This was followed by the 1935 Wagner Act—which guaranteed workers' rights to organize unions, collective bargaining, and strikes—and the 1938 Fair Labor Standards Act, which established a federal minimum wage and banned child labor. These acts increased the real price of labor services, especially in the industrial sector, and were an important contributor to the substantial increase in the unemployment rate during the Great Depression.
Senator Obama had been an original cosponsor of the Employee Free Choice Act of 2007, the primary effect of which would be to outlaw secret ballots on the decision to certify a union. Another provision of this proposed law would authorize the government to write the labor contract in newly unionized firms if management and the union have not agreed to an initial labor contract within a specified time. Obama has also been a consistent supporter of higher minimum wages, which increases the unemployment rate of young unskilled workers.
Taxes
A year before the bottom of the Great Depression, the Revenue Act of 1932 increased the top marginal federal tax rate on personal income from 25 percent to 63 percent, increased the corporate tax rate from 12 percent to 13.75 percent, and doubled the estate tax rate. The Revenue Act of 1936 further increased the top marginal tax rate on personal income to 79 percent and the rate on undistributed corporate profits to 42 percent. These two revenue acts increased federal tax rates more than in any other peacetime period and extended the length of the Great Depression by substantially weakening the incentive to work, save, invest, and increase productivity.
During his presidential campaign, Senator Obama proposed a combination of tax credits for low- and middle-income households, a substantial increase in marginal tax rates for those with an annual household income over $250,000, and several selective changes in business taxation. The top marginal rate on income would be increased from 35 percent to 39.6 percent, the marginal payroll tax would be increased from 1.45 percent to 5.45 percent (plus an equal increase to the employer), and the rate on capital gains and dividends would be increased from 15 percent to 20 percent. A phase-out of the personal exemption and specific deductions would add about 4.5 percentage points to the marginal tax rate (an estimate by the Tax Foundation).
The total marginal tax rate, thus, would be increased from 36.45 percent to 49.55 percent, reducing the after-tax return to additional earnings by about one-fifth; a lot of small business owners and professional couples would be subject to these higher marginal tax rates. Obama has not proposed a reduction in the corporate tax rate, although this rate is now the second highest among the industrial nations. His proposed changes in business taxation are designed to change the composition of U.S. business activity, increasing taxes on oil and gas companies and on U.S. multinationals that defer repatriation of foreign profits in favor of companies that produce renewable energy and increase domestic employment.
Obama's proposed federal tax rates do not look unusual compared to federal taxes before the Reagan-era rate reductions, but they would be a significant increase relative to recent years at a time when many other governments are reducing their personal and business tax rates.
Monetary Policy
In retrospect, the origin of the Great Depression seems surprisingly similar to recent conditions— with one huge exception. The Federal Reserve had increased the money supply from 1921 through 1927 by around 60 percent, contributing to the rapid increase in stock prices. In early 1928, however, the Federal Reserve began a policy of monetary restraint that continued through May 1929, increasing the discount rate from 3.5 percent to 5 percent in three stages. This triggered the stock market collapse in October.
The fall in stock prices and the subsequent general deflation led to a large increase in the demand for money. Following the collapse of the Bank of the United States in December 1930, however, the Federal Reserve increased interest rates again in early 1931. From 1929 to 1933, the money supply declined by around one-third, constrained by the rules of the gold standard, although the Federal Reserve Bank of New York had consistently urged a policy of monetary expansion. During this period, the number of U.S. banks also declined by around one-third due to either failure or merger.
This combination of a large increase in the demand for money and a substantial reduction in the supply of money was the primary cause of the first phase of the Great Depression. This period of monetary contraction ended only in 1933 when President Roosevelt raised the price of gold by 75 percent, permitting a renewed expansion of the money supply. In 1936 and 1937, however, the Federal Reserve doubled bank reserve requirements, leading to the short sharp recession of 1937–38 within the longer period of the Great Depression.
The monetary policy that led to the current recession was similar to the policy that led to the first phase of the Great Depression. The Federal Reserve maintained an expansionary monetary policy from 2001 into 2004, with a federal funds rate lower than the general inflation rate, contributing to both the housing boom and the increase in stock prices. Then from mid-2004 through mid-2007, the federal funds rate was increased by 4.25 percentage points, leading to a decline in residential investment beginning in the spring of 2006 and a decline in the stock market and national output beginning in the fall of 2007.
As in the 1930s, the decline in stock prices and the subsequent deflation greatly increased the demand for money and other financial instruments such as Treasury bills. The major difference from the earlier period is that the Federal Reserve has maintained a very aggressive monetary policy since mid-2007, reducing the federal funds rate by 5 percentage points. Moreover, beginning last fall, the Federal Reserve has purchased a wide range of private and public financial instruments, doubling the monetary base since last August. This dramatic change in monetary policy is primarily attributable to the lessons from Fed Chairman Ben Bernanke's studies of the monetary policy mistakes during the 1930s.
The very rapid increase in the monetary base since last August was, I believe, the correct response to the huge increase in the demand for money and is likely to be much more effective than any fiscal stimulus plan. But it presents a potentially large future danger. At such time as there is a revival of some general inflation and increased confidence in the security of nonmonetary assets, the demand for money will decline to a more normal level relative to total money income.
At that time, the Federal Reserve and the Obama administration will be faced with a very difficult choice—allow a high rate of inflation or raise interest rates fast enough to avoid that outcome. The first option would be the policy of inaction; the second option would require selling most of the financial assets that the Federal Reserve has accumulated in the past few months. My guess is that the time for this difficult choice is not too far off, probably in the next year or two, a guess based on observing that there has already been some increase in stock prices and commodity prices since November. And that will be a difficult time to make this difficult choice. Bernanke's term as Fed Chairman expires in January 2010 and, of course, there will also be a congressional election that fall, reducing the incentives and support for a rapid increase in interest rates. The second option would also present the potential for a W-shaped recession and recovery, extending the period of weak economic growth to avoid a high rate of inflation. In either case, the only way to avoid being faced with such a difficult choice in the more distant future is to correct the conditions that led this recession to be a financial crisis. This would require restructuring the mortgage market such that mortgages and mortgagebacked securities are more liquid and their risks are more transparent.
Other Related Policies
The trade and labor policies of the 1930s were designed to maintain the prices of products and labor services, usually at the expense of the amounts supplied. Other policies had the same objectives and effects. The 1933 National Industrial Recovery Act authorized cartels to maintain prices; until this act was declared unconstitutional in 1935, for example, members of these cartels were subject to fines for discounting. The most egregious of such policies was the Agricultural Adjustment Act of 1933; until this act was declared unconstitutional in 1936, this act authorized payments to farmers to reduce their acreage under cultivation. In effect, these policies established a floor under prices that prevented many product and labor markets from clearing, given the decline in nominal demand. These policies were an important reason why total output did not recover to the 1929 level until 1939, and the unemployment rate at the end of this decade was 17.2 percent.
Several current agricultural programs also have much the same objective and effects. The price of milk is maintained by a government- authorized cartel, the price of sugar by a quota on imports, and the price of corn has been increased by a regulation that requires a substantial production of corn-based ethanol as a motor fuel. I do not know Obama's position on the dairy cartel. During his campaign for the presidency, however, Senator Obama was a strong supporter of both the sugar quota and the ethanol program.
One other policy of both the Hoover and Roosevelt administrations was a substantial increase in federal expenditures for public infrastructure, especially hydroelectric facilities. These programs did not reduce total output but they were clearly not effective, given the combination of other policies, in reducing the depth or duration of the Great Depression. The government of Japan enacted a substantially larger public infrastructure program in the 1990s, also with no effect on ending what turned out to be a decade of very low economic growth. A major provision of President Obama's fiscal stimulus proposal, of course, is a substantial increase in federal expenditures for public infrastructure. Fed Chairman Bernanke was correct to observe recently that "Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."
Conclusion
The most important lesson of this paper is to avoid repeating the policies that increased the depth and duration of the Great Depression, particularly in combination. Unfortunately, some of these policies still have broad political appeal—limiting international trade, strengthening unions, other measures to support the prices of some products and labor services, and higher taxes on the wealthy and the income from capital. One important lesson that we seem to have learned from the 1930s is to avoid reducing the supply of money in response to an increased demand for money. Another important lesson that we have not yet learned is that some government spending for infrastructure may be both popular and valuable but is not very effective in countering a recession.
We have yet to learn the lessons about what caused the current recession and the general financial crisis. The United States had experienced 11 prior recessions since World War II without a general financial crisis, so something new must have happened that caused the current financial crisis. My judgment is that the government policies and private practices that changed the way mortgages are financed are that dangerous new development, but that is a story for another occasion. In this respect, I agree with Chairman Bernanke's recent conclusion that "we should revisit capital regulations, accounting rules, and other aspects of the regulatory regime to ensure that they do not induce excessive procyclicality in the financial system and the economy."
This article originally appeared in the March/April 2009 edition of Cato Policy Report.
Sunday, March 29, 2009
Total Meltdown and Civil Unrest
The numbers that have been bandied about is beyond the comprehension of the average Joe Six-Packs. I cannot even figure out $500 billion, what more $500 trillion. Ninety per cent of government leaders are also unable to figure out the enormity of the global debt sink-hole.
So, I have accepted the fact that 97 per cent of Americans will just accept whatever explanations and excuses thrown at them by President Obama, Fed Bernanke and Treasury Geithner for bailing out the banks and failing to prevent the implosion of the economy by summer of 2009.
Obama inherited the mess created by war criminal Bush, aided and abetted by Alan Greenspan, Bernanke and Geithner, so he can be excused for there is nothing that he can do at this late hour to change the outcome. But the rest should be lynched!
In the last two years, in several articles, I drew your attention to the fraudulent securities that have been peddled by the global banks and how they have caused the present grid-lock in the global financial system. In essence, these securities – MBS, CDOs, CLOs, etc. were all fraudulent papers. Whatever mortgages underlying these papers, were over-valued and now they have shown to be worth at the most 10 to 20 cents on the dollar.
There have been suggestions that if all these papers were to be shredded and the debts written off, the global banks' balance sheet would be wiped clean of such toxic assets. In the result the economy would restart and the good old days of cheap credit and unrestrained consumption would usher another boom!
This is a fairy tale.
In the old days, when the hoodlums want to kill someone and have him disappear for good, they would tie his legs together and attach the rope to a heavy object or an anchor and throw the poor fellow into the bottom of the lake or sea, never to be seen again. A small weight, say 10 kg is more than enough to drag the body to the bottom!
The current financial system is not unlike the man who has been thrown overboard and being dragged down by the heavy object. The only chance for survival is if the man could somehow loosen the rope and detach the weight from his legs and swim to the surface, if he could hold his breath long enough.
What is this small weight that is dragging the financial system down? And why writing off this particular debt will not save the banks?
Compared to the global derivative market which is valued in the hundreds of trillions, the global stock market by comparison is a midget. But it is this midget that will cause the financial implosion in America and Europe and reverberate across the world.
Let me explain in simple terms.
When the Dow collapsed from the stratospheric high of 14,000 to less than 7,000 recently (though recovered somewhat) and other stock markets also went south in tandem, it was estimated that at the minimum $30 trillion was wiped out.
What are the consequences of such a drastic collapse?
Let me explain in simple terms again.
Take the share price of Citigroup. At the height of the boom, its market capitalization was over $250 billion. Today, it is less than $10 billion.
Let us say that you bought the shares when it was trading at $150. You also borrowed from the bank to purchase the shares. These shares will have to be pledged to the bank as security for the loan. The shares are now trading a few dollars, say $5.
There is just no way that you can repay the loan and or to obtain additional security to “top-up” the value of the security pledged to the bank. Where are you going to get the cash to buy more shares? Shares of other companies that you may own have also collapsed, and their value may not be sufficient to cover the difference. You are dead meat!
The bank is also in deep trouble because there is no way that they can recover the loan from selling the shares, which is worth $5.
There is the added problem that companies, whose shares are traded in the stock exchange, are not worth even at current values because their core business and operations were premised on cheap credit and were therefore highly geared! These companies are in debt to their eyeballs!
They are insolvent, bankrupt!
Try as hard, the Fed and the Treasury will not be able to engineer a stock rally back to 14,000 points. And even if they could, it does not follow that the prices of the shares of specific companies would return to its previous high. In the case of Citigroup back to $200 per share!
There is no way in the next 3 to 5 years for companies whose businesses have collapsed to be able to recover fast enough and to be profitable enough to justify a market value of at least 50 per cent of its previous high. In the case of Citigroup, back up to $100.
That is an example in the financial sector.
In the manufacturing sector, an outfit like General Motors will take at least a decade to recover. Then there are those companies which have out-sourced and or re-located overseas. To restart local production again would take time and vast amount of credit. But would they be competitive, given cheaper cost of production elsewhere?
Corporate America is shutting down.
Stimulus and pump priming will not solve this huge problem.
Millions played at this casino using home equity. Pension funds risked your retirement benefits gambling at this casino and lost. Leveraging, 10, 20 or even 30 times was the norm. There is no money left in the kitty!
Quantity easing or printing money will not solve the problem, because a company's value and market capitalization can only be enhanced through actual production of goods and services. But the Western economies in the last twenty years were skewed towards consumption and the availability of cheap credit.
Applying common sense, what was missing was the creation of surplus value, which is the result of efficient production, and savings which in turn provide the essential capital for more production and savings.
Nothing illustrates this problem better than the case of a farmer who stops farming because he had so much cheap credit, that he stopped farming. He could now easily purchase all he needed, and earned five times more gambling in the stock market casino than he would earn from farming. He mortgaged his farm to secure the borrowings. He lived and consumed like the rich and famous!
When the casino collapsed, he could not maintain the lifestyle and had to resort to selling heirlooms to survive.
Until and unless the farmer starts farming and pays off his debts, he would not be able to accumulate sufficient capital to resume what was once a profitable business.
In short, the farmer like all the millions of gamblers who have been ensnared by the global casino, are now in the debt trap and being slowly dragged down to the bottom of the lake!
Therefore, pumping hundreds of billions to the banks will not solve the problem.
You can bet your last dollar that when millions are caught in the debt trap and there is no way out, and they see billions been given to the Wall Street fat cats, lynching parties will be the order of the day!
The Count Down has started.
So, I have accepted the fact that 97 per cent of Americans will just accept whatever explanations and excuses thrown at them by President Obama, Fed Bernanke and Treasury Geithner for bailing out the banks and failing to prevent the implosion of the economy by summer of 2009.
Obama inherited the mess created by war criminal Bush, aided and abetted by Alan Greenspan, Bernanke and Geithner, so he can be excused for there is nothing that he can do at this late hour to change the outcome. But the rest should be lynched!
In the last two years, in several articles, I drew your attention to the fraudulent securities that have been peddled by the global banks and how they have caused the present grid-lock in the global financial system. In essence, these securities – MBS, CDOs, CLOs, etc. were all fraudulent papers. Whatever mortgages underlying these papers, were over-valued and now they have shown to be worth at the most 10 to 20 cents on the dollar.
There have been suggestions that if all these papers were to be shredded and the debts written off, the global banks' balance sheet would be wiped clean of such toxic assets. In the result the economy would restart and the good old days of cheap credit and unrestrained consumption would usher another boom!
This is a fairy tale.
In the old days, when the hoodlums want to kill someone and have him disappear for good, they would tie his legs together and attach the rope to a heavy object or an anchor and throw the poor fellow into the bottom of the lake or sea, never to be seen again. A small weight, say 10 kg is more than enough to drag the body to the bottom!
The current financial system is not unlike the man who has been thrown overboard and being dragged down by the heavy object. The only chance for survival is if the man could somehow loosen the rope and detach the weight from his legs and swim to the surface, if he could hold his breath long enough.
What is this small weight that is dragging the financial system down? And why writing off this particular debt will not save the banks?
Compared to the global derivative market which is valued in the hundreds of trillions, the global stock market by comparison is a midget. But it is this midget that will cause the financial implosion in America and Europe and reverberate across the world.
Let me explain in simple terms.
When the Dow collapsed from the stratospheric high of 14,000 to less than 7,000 recently (though recovered somewhat) and other stock markets also went south in tandem, it was estimated that at the minimum $30 trillion was wiped out.
What are the consequences of such a drastic collapse?
Let me explain in simple terms again.
Take the share price of Citigroup. At the height of the boom, its market capitalization was over $250 billion. Today, it is less than $10 billion.
Let us say that you bought the shares when it was trading at $150. You also borrowed from the bank to purchase the shares. These shares will have to be pledged to the bank as security for the loan. The shares are now trading a few dollars, say $5.
There is just no way that you can repay the loan and or to obtain additional security to “top-up” the value of the security pledged to the bank. Where are you going to get the cash to buy more shares? Shares of other companies that you may own have also collapsed, and their value may not be sufficient to cover the difference. You are dead meat!
The bank is also in deep trouble because there is no way that they can recover the loan from selling the shares, which is worth $5.
There is the added problem that companies, whose shares are traded in the stock exchange, are not worth even at current values because their core business and operations were premised on cheap credit and were therefore highly geared! These companies are in debt to their eyeballs!
They are insolvent, bankrupt!
Try as hard, the Fed and the Treasury will not be able to engineer a stock rally back to 14,000 points. And even if they could, it does not follow that the prices of the shares of specific companies would return to its previous high. In the case of Citigroup back to $200 per share!
There is no way in the next 3 to 5 years for companies whose businesses have collapsed to be able to recover fast enough and to be profitable enough to justify a market value of at least 50 per cent of its previous high. In the case of Citigroup, back up to $100.
That is an example in the financial sector.
In the manufacturing sector, an outfit like General Motors will take at least a decade to recover. Then there are those companies which have out-sourced and or re-located overseas. To restart local production again would take time and vast amount of credit. But would they be competitive, given cheaper cost of production elsewhere?
Corporate America is shutting down.
Stimulus and pump priming will not solve this huge problem.
Millions played at this casino using home equity. Pension funds risked your retirement benefits gambling at this casino and lost. Leveraging, 10, 20 or even 30 times was the norm. There is no money left in the kitty!
Quantity easing or printing money will not solve the problem, because a company's value and market capitalization can only be enhanced through actual production of goods and services. But the Western economies in the last twenty years were skewed towards consumption and the availability of cheap credit.
Applying common sense, what was missing was the creation of surplus value, which is the result of efficient production, and savings which in turn provide the essential capital for more production and savings.
Nothing illustrates this problem better than the case of a farmer who stops farming because he had so much cheap credit, that he stopped farming. He could now easily purchase all he needed, and earned five times more gambling in the stock market casino than he would earn from farming. He mortgaged his farm to secure the borrowings. He lived and consumed like the rich and famous!
When the casino collapsed, he could not maintain the lifestyle and had to resort to selling heirlooms to survive.
Until and unless the farmer starts farming and pays off his debts, he would not be able to accumulate sufficient capital to resume what was once a profitable business.
In short, the farmer like all the millions of gamblers who have been ensnared by the global casino, are now in the debt trap and being slowly dragged down to the bottom of the lake!
Therefore, pumping hundreds of billions to the banks will not solve the problem.
You can bet your last dollar that when millions are caught in the debt trap and there is no way out, and they see billions been given to the Wall Street fat cats, lynching parties will be the order of the day!
The Count Down has started.
Friday, March 27, 2009
Was the Bailout Itself a Scam?
Professor Michael Hudson (Counter Punch, [editor: Global Research] March 18) is correct that the orchestrated outrage over the $165 million AIG bonuses is a diversion from the thousand times greater theft from taxpayers of the approximately $200 billion “bailout” of AIG. Nevertheless, it is a diversion that serves an important purpose. It has taught an inattentive American public that the elites run the government in their own private interests.
Americans are angry that AIG executives are paying themselves millions of dollars in bonuses after having cost the taxpayers an exorbitant sum. Senator Charles Grassley put a proper face on the anger when he suggested that the AIG executives “follow the Japanese example and resign or go commit suicide.”
Yet, Obama’s White House economist, Larry Summers, on whose watch as Treasury Secretary in the Clinton administration financial deregulation got out of control, invoked the “sanctity of contracts” in defense of the AIG bonuses.
But the Obama administration does not regard other contracts as sacred. Specifically: labor unions had to agree to give-backs in order for the auto companies to obtain federal help; CNN reports that “Veterans Affairs Secretary Eric Shinseki confirmed Tuesday [March 10] that the Obama administration is considering a controversial plan to make veterans pay for treatment of service-related injuries with private insurance”; the Washington Post reports that the Obama team has set its sights on downsizing Social Security and Medicare.
According to the Post, Obama said that “it is impossible to separate the country’s financial ills from the long-term need to rein in health-care costs, stabilize Social Security and prevent the Medicare program from bankrupting the government.”
After Washington’s trillion dollar bank bailouts and trillion dollar gratuitous wars for the sake of the military industry’s profits and Israeli territorial expansion, there is no money for Social Security and Medicare.
The US government breaks its contracts with US citizens on a daily basis, but AIG’s bonus contracts are sacrosanct. The Social Security contract was broken when the government decided to tax 85% of the benefits. It was broken again when the Clinton administration rigged the inflation measure in order to beat retirees out of their cost-of-living adjustments. To have any real Medicare coverage, a person has to give up part of his Social Security check to pay Medicare Part B premium and then take out a private supplemental policy. The true cost of Medicare to beneficiaries is about $6,000 annually in premiums, plus deductibles and the Medicare tax if the person is still earning.
Treasury Secretary Geithner, the fox in charge of the hen house, has resolved the problem for us. He is going to withhold $165 million (the amount of the AIG bonuses) from the next taxpayer payment to AIG of $30,000 million. If someone handed you $30,000 dollars, would you mind if they held back $165?
PR flaks have rechristened the bonus payments “retention payments” necessary if AIG is to retain crucial employees. This lie was shot down by New York Attorney General Andrew Cuomo, who informed the House Committee on Financial Services that the payments went to members of AIG’s Financial Products subsidiary, “the unit of AIG that was principally responsible for the firm’s meltdown.” As for retention, Cuomo pointed out that ”numerous individuals who received large ‘retention’ bonuses are no longer at the firm” .
Eliot Spitzer, the former New York Governor who was set-up in a sex scandal to prevent him investigating Wall Street’s financial gangsterism, pointed out on March 17 that the real scandal is the billions of taxpayer dollars paid to the counter-parties of AIG’s financial deals. These payments, Spitzer writes, are “a way to hide an enormous second round of cash to the same group that had received TARP money already.”
Goldman Sachs, for example, had already received a taxpayer cash infusion of $25 billion and was sitting on more than $100 billion in cash when the Wall Street firm received another $13 billion via the AIG bailout.
Moreover, in my opinion, most of the billions of dollars in AIG counter-party payments were unnecessary. They represent gravy paid to firms that had made risk-free bets, the non-payment of which constituted no threat to financial solvency.
Spitzer identifies a conflict of interest that could possibly be criminal self-dealing. According to reports, the AIG bailout decision involved Bush Treasury Secretary Henry Paulson, formerly of Goldman Sachs, Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, and Timothy Geithner, former New York Federal Reserve president and currently Secretary of the Treasury. No doubt the incestuous relationships are the reason the original bailout deal had no oversight or transparency.
The Bush/Obama bailouts require serious investigation. Were these bailouts necessary, or were they a scam, like “weapons of mass destruction,” used to advance a private agenda behind a wall of fear? Recently I heard Harvard Law professor Elizabeth Warren, a member of a congressional bailout oversight panel, say on NPR that the US has far too many banks. Out of the financial crisis, she said, should come consolidation with the financial sector consisting of a few mega-banks. Was the whole point of the bailout to supply taxpayer money for a program of financial concentration?
Americans are angry that AIG executives are paying themselves millions of dollars in bonuses after having cost the taxpayers an exorbitant sum. Senator Charles Grassley put a proper face on the anger when he suggested that the AIG executives “follow the Japanese example and resign or go commit suicide.”
Yet, Obama’s White House economist, Larry Summers, on whose watch as Treasury Secretary in the Clinton administration financial deregulation got out of control, invoked the “sanctity of contracts” in defense of the AIG bonuses.
But the Obama administration does not regard other contracts as sacred. Specifically: labor unions had to agree to give-backs in order for the auto companies to obtain federal help; CNN reports that “Veterans Affairs Secretary Eric Shinseki confirmed Tuesday [March 10] that the Obama administration is considering a controversial plan to make veterans pay for treatment of service-related injuries with private insurance”; the Washington Post reports that the Obama team has set its sights on downsizing Social Security and Medicare.
According to the Post, Obama said that “it is impossible to separate the country’s financial ills from the long-term need to rein in health-care costs, stabilize Social Security and prevent the Medicare program from bankrupting the government.”
After Washington’s trillion dollar bank bailouts and trillion dollar gratuitous wars for the sake of the military industry’s profits and Israeli territorial expansion, there is no money for Social Security and Medicare.
The US government breaks its contracts with US citizens on a daily basis, but AIG’s bonus contracts are sacrosanct. The Social Security contract was broken when the government decided to tax 85% of the benefits. It was broken again when the Clinton administration rigged the inflation measure in order to beat retirees out of their cost-of-living adjustments. To have any real Medicare coverage, a person has to give up part of his Social Security check to pay Medicare Part B premium and then take out a private supplemental policy. The true cost of Medicare to beneficiaries is about $6,000 annually in premiums, plus deductibles and the Medicare tax if the person is still earning.
Treasury Secretary Geithner, the fox in charge of the hen house, has resolved the problem for us. He is going to withhold $165 million (the amount of the AIG bonuses) from the next taxpayer payment to AIG of $30,000 million. If someone handed you $30,000 dollars, would you mind if they held back $165?
PR flaks have rechristened the bonus payments “retention payments” necessary if AIG is to retain crucial employees. This lie was shot down by New York Attorney General Andrew Cuomo, who informed the House Committee on Financial Services that the payments went to members of AIG’s Financial Products subsidiary, “the unit of AIG that was principally responsible for the firm’s meltdown.” As for retention, Cuomo pointed out that ”numerous individuals who received large ‘retention’ bonuses are no longer at the firm” .
Eliot Spitzer, the former New York Governor who was set-up in a sex scandal to prevent him investigating Wall Street’s financial gangsterism, pointed out on March 17 that the real scandal is the billions of taxpayer dollars paid to the counter-parties of AIG’s financial deals. These payments, Spitzer writes, are “a way to hide an enormous second round of cash to the same group that had received TARP money already.”
Goldman Sachs, for example, had already received a taxpayer cash infusion of $25 billion and was sitting on more than $100 billion in cash when the Wall Street firm received another $13 billion via the AIG bailout.
Moreover, in my opinion, most of the billions of dollars in AIG counter-party payments were unnecessary. They represent gravy paid to firms that had made risk-free bets, the non-payment of which constituted no threat to financial solvency.
Spitzer identifies a conflict of interest that could possibly be criminal self-dealing. According to reports, the AIG bailout decision involved Bush Treasury Secretary Henry Paulson, formerly of Goldman Sachs, Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, and Timothy Geithner, former New York Federal Reserve president and currently Secretary of the Treasury. No doubt the incestuous relationships are the reason the original bailout deal had no oversight or transparency.
The Bush/Obama bailouts require serious investigation. Were these bailouts necessary, or were they a scam, like “weapons of mass destruction,” used to advance a private agenda behind a wall of fear? Recently I heard Harvard Law professor Elizabeth Warren, a member of a congressional bailout oversight panel, say on NPR that the US has far too many banks. Out of the financial crisis, she said, should come consolidation with the financial sector consisting of a few mega-banks. Was the whole point of the bailout to supply taxpayer money for a program of financial concentration?
It's Time for a New Monetary System
The Obama administration is spending hundreds of billions of dollars trying to persuade the banking system to restart lending. Federal Reserve Chairman Ben Bernanke plans to create hundreds of billions more of new bank reserves by purchasing mortgage-related debt. With Bernanke and Treasury Secretary Timothy Geithner working together, “the initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases. The government will share the risks if the assets fall further in price.” (Martin Crutsinger, AP) Finally, President Obama is taking over the distinction of being the biggest Keynesian in history with a fiscal year 2009 deficit of $1.75 trillion.
The cancer of debt grows by the day. According to Michael Hodges’ famed “Grandfather Economic Report”: “America has become more a debt ‘junkie’ than ever before, with total debt of $57 trillion, and the highest debt ratio in history. That's $186, 717 per man, woman and child.”
With the federal bailouts of the financial system and the recession, the debt load has increased by $4 trillion in the last six months. What are we going to do with even more debt coming?
The growth in debt will be impossible for households to deal with when more then half a million jobs are still being lost per month. Impossible too for U.S. businesses when the drop-off of consumer spending reflects not only job loss but also a new propensity to actually save a portion of our earnings after the mortgage-based spending spree of the last decade.
The debt will be more possible to bear perhaps for the Treasury Department, which has benefited from investors searching for a safe haven so still being willing to buy Treasury bonds. This includes Treasury’s biggest current customer, the Bank of China.
Yet what does it say when the government can open its doors in the morning only if the Chinese give us permission? Secretary of State Hillary Clinton traveled to Beijing in February to be sure they still looked on us with favor and returned home to assure the president they did. But is this any way to run a country? Why can't the most productive nation on earth afford to pay for its own government?
The Obama economic program, which so-called progressives call “revolutionary,” will take us further away from, not closer to, real solutions. The massive new debt it creates can only be enforced by the courts, the police, and ultimately military power. Within the U.S., the authorities are preparing for civil unrest. Overseas, "dollar hegemony," the system by which nations like China continue to enable our massive debt, is increasingly unstable as the world bails on the dollar as its reserve currency.
When is anyone in authority going to utter the unutterable, which is that our financial collapse ultimately goes back to the fact that every dollar in circulation derives from a loan made by a bank to a producer, consumer, or the government, and that all these loans have attached to them a rental charge known as interest which is paid to the bankers’ monopoly? When will someone admit that the government’s economic recovery plan is a welfare program for Wall Street billionaires?
We live and work under a debt-based monetary system that has been in force since Congress passed the Federal Reserve Act of 1913. It’s how the system works. The government goes into debt, and the banking system then uses it as a reserve base for lending to the public.
It wasn’t always this way. In the 19th century, until the Civil War, the government lived within its means. President Thomas Jefferson balanced the federal budget for eight consecutive years, and President Andrew Jackson paid off the national debt.
Back then the government issued currency based on gold and silver, and the U.S. mint stamped precious metals into coinage for anyone who brought it through the door. Local commerce was fueled by a system of state and local banks operating on the “real bills” doctrine. Inflation was virtually unknown, and unpaid debt led swiftly to bankruptcy and a sheriff’s sale.
When the Civil War began, President Lincoln needed money fast. The New York bankers offered outrageous terms: interest at 24-34 percent. So Lincoln was authorized by Congress to print and spend Greenback money directly into circulation. Contrary to later propaganda, the Greenbacks were not inflationary. They were upheld by the Supreme Court as constitutional and remained in circulation until the early 20th century. They even spawned the Greenback Party that elected members of Congress and ran candidates for president.
But the bankers, by now centered on Wall Street, gained a foothold with the National Banking Acts of 1863 and 1864, where the banks were allowed to purchase Treasury bonds as a lending reserve. Currency issued by the state and local banks with their hard money reserves were taxed out of existence.
In 1913 the bankers’ trap snapped shut when the Federal Reserve System came into existence. After World War I, the currency inflated so much that the value of both the Greenbacks and coinage were destroyed.
A monetary system based on bank lending means constant cycles of inflation and deflation. The banks create these financial bubbles then destroy them, always to their profit. In the 19th century, the deflations were called “panics.” The Great Depression was a bank-created panic on an unprecedented scale. The collapse of 2008-2009 is the panic we’re in now, but with plenty of assets on the market at fire-sale prices for those rich enough to cash in. For instance, there was a lot of hand-wringing when Citigroup’s stock dropped to $1 a share. But those who could still buy-in saw their holdings triple in value when the stock rose to $3 a share a few days later.
The solution is not to restart huge amounts of bank lending in order to create new bubbles. Unfortunately, the Obama budget is an attempt to create such a bubble based on Treasury securities. But this bubble too will likely collapse, because there is no economic engine on the horizon strong enough to pay the debt that will be used to inflate it. The next collapse could even lead to a world war if China and other creditor nations, possibly including those of Europe, decide to enforce their claims against us.
But economists, politicians, and others who say there is no immediate solution lie. They just don’t want to tell us what the solution is.
It’s to get rid of the debt-based monetary system altogether and return to one controlled by our representative government where a substantial amount of money is spent directly without borrowing or taxation. A Greenback system for the 21st Century is contained in the draft American Monetary Act developed by the American Monetary Institute and briefed to a number of members of Congress and congressional staffers.
A Greenback-type currency would be regulated to support the needs of the real producing economy, not bank speculation, and could be used to pay off the national debt, supplement taxes to pay federal expenses, capitalize a new federal infrastructure bank, or fund alternative energy R&D.
A currency based on real U.S. money would replace debt-derived Federal Reserve Notes. It doesn't matter whether that currency is paper, gold, or electronic entries. What is important is that it exists in the right amount to conduct the business of the nation, is non-counterfeitable, is not misused for speculation, and does not have debt or interest attached to it. The Federal Reserve would remain as a processor and clearinghouse, but not a bank of issue.
Greenbacks could also be used for a basic income guarantee for citizens that would restart the economy at the grassroots level much more effectively than government top-down job creation based on more Treasury deficits. The need for consumers to borrow from banks or use credit cards even for necessities like groceries and health care would sharply decrease.
I have proposed such a program through the Cook Plan that would provide citizens with a dividend in the form of vouchers in the amount of $1,000 a month. The vouchers could be used to capitalize a new network of community savings banks that would lend at the local level.
There is a good chance that the American Monetary Act will be introduced during the current session of Congress. It should be supported by anyone who cares about the future of our nation more than bankers’ profits.
Richard C. Cook is a former U.S Treasury analyst who also worked in the Carter White House and for NASA and writes on public policy issues. His new book is We Hold These Truths: The Hope of Monetary Reform (Tendril Press 2009). His website is http://www.richardccook.com He is a member of the U.S. Basic Income Guarantee Network and has been an adviser to Congressman Dennis Kucinich and the American Monetary Institute http://www.monetary.org
The cancer of debt grows by the day. According to Michael Hodges’ famed “Grandfather Economic Report”: “America has become more a debt ‘junkie’ than ever before, with total debt of $57 trillion, and the highest debt ratio in history. That's $186, 717 per man, woman and child.”
With the federal bailouts of the financial system and the recession, the debt load has increased by $4 trillion in the last six months. What are we going to do with even more debt coming?
The growth in debt will be impossible for households to deal with when more then half a million jobs are still being lost per month. Impossible too for U.S. businesses when the drop-off of consumer spending reflects not only job loss but also a new propensity to actually save a portion of our earnings after the mortgage-based spending spree of the last decade.
The debt will be more possible to bear perhaps for the Treasury Department, which has benefited from investors searching for a safe haven so still being willing to buy Treasury bonds. This includes Treasury’s biggest current customer, the Bank of China.
Yet what does it say when the government can open its doors in the morning only if the Chinese give us permission? Secretary of State Hillary Clinton traveled to Beijing in February to be sure they still looked on us with favor and returned home to assure the president they did. But is this any way to run a country? Why can't the most productive nation on earth afford to pay for its own government?
The Obama economic program, which so-called progressives call “revolutionary,” will take us further away from, not closer to, real solutions. The massive new debt it creates can only be enforced by the courts, the police, and ultimately military power. Within the U.S., the authorities are preparing for civil unrest. Overseas, "dollar hegemony," the system by which nations like China continue to enable our massive debt, is increasingly unstable as the world bails on the dollar as its reserve currency.
When is anyone in authority going to utter the unutterable, which is that our financial collapse ultimately goes back to the fact that every dollar in circulation derives from a loan made by a bank to a producer, consumer, or the government, and that all these loans have attached to them a rental charge known as interest which is paid to the bankers’ monopoly? When will someone admit that the government’s economic recovery plan is a welfare program for Wall Street billionaires?
We live and work under a debt-based monetary system that has been in force since Congress passed the Federal Reserve Act of 1913. It’s how the system works. The government goes into debt, and the banking system then uses it as a reserve base for lending to the public.
It wasn’t always this way. In the 19th century, until the Civil War, the government lived within its means. President Thomas Jefferson balanced the federal budget for eight consecutive years, and President Andrew Jackson paid off the national debt.
Back then the government issued currency based on gold and silver, and the U.S. mint stamped precious metals into coinage for anyone who brought it through the door. Local commerce was fueled by a system of state and local banks operating on the “real bills” doctrine. Inflation was virtually unknown, and unpaid debt led swiftly to bankruptcy and a sheriff’s sale.
When the Civil War began, President Lincoln needed money fast. The New York bankers offered outrageous terms: interest at 24-34 percent. So Lincoln was authorized by Congress to print and spend Greenback money directly into circulation. Contrary to later propaganda, the Greenbacks were not inflationary. They were upheld by the Supreme Court as constitutional and remained in circulation until the early 20th century. They even spawned the Greenback Party that elected members of Congress and ran candidates for president.
But the bankers, by now centered on Wall Street, gained a foothold with the National Banking Acts of 1863 and 1864, where the banks were allowed to purchase Treasury bonds as a lending reserve. Currency issued by the state and local banks with their hard money reserves were taxed out of existence.
In 1913 the bankers’ trap snapped shut when the Federal Reserve System came into existence. After World War I, the currency inflated so much that the value of both the Greenbacks and coinage were destroyed.
A monetary system based on bank lending means constant cycles of inflation and deflation. The banks create these financial bubbles then destroy them, always to their profit. In the 19th century, the deflations were called “panics.” The Great Depression was a bank-created panic on an unprecedented scale. The collapse of 2008-2009 is the panic we’re in now, but with plenty of assets on the market at fire-sale prices for those rich enough to cash in. For instance, there was a lot of hand-wringing when Citigroup’s stock dropped to $1 a share. But those who could still buy-in saw their holdings triple in value when the stock rose to $3 a share a few days later.
The solution is not to restart huge amounts of bank lending in order to create new bubbles. Unfortunately, the Obama budget is an attempt to create such a bubble based on Treasury securities. But this bubble too will likely collapse, because there is no economic engine on the horizon strong enough to pay the debt that will be used to inflate it. The next collapse could even lead to a world war if China and other creditor nations, possibly including those of Europe, decide to enforce their claims against us.
But economists, politicians, and others who say there is no immediate solution lie. They just don’t want to tell us what the solution is.
It’s to get rid of the debt-based monetary system altogether and return to one controlled by our representative government where a substantial amount of money is spent directly without borrowing or taxation. A Greenback system for the 21st Century is contained in the draft American Monetary Act developed by the American Monetary Institute and briefed to a number of members of Congress and congressional staffers.
A Greenback-type currency would be regulated to support the needs of the real producing economy, not bank speculation, and could be used to pay off the national debt, supplement taxes to pay federal expenses, capitalize a new federal infrastructure bank, or fund alternative energy R&D.
A currency based on real U.S. money would replace debt-derived Federal Reserve Notes. It doesn't matter whether that currency is paper, gold, or electronic entries. What is important is that it exists in the right amount to conduct the business of the nation, is non-counterfeitable, is not misused for speculation, and does not have debt or interest attached to it. The Federal Reserve would remain as a processor and clearinghouse, but not a bank of issue.
Greenbacks could also be used for a basic income guarantee for citizens that would restart the economy at the grassroots level much more effectively than government top-down job creation based on more Treasury deficits. The need for consumers to borrow from banks or use credit cards even for necessities like groceries and health care would sharply decrease.
I have proposed such a program through the Cook Plan that would provide citizens with a dividend in the form of vouchers in the amount of $1,000 a month. The vouchers could be used to capitalize a new network of community savings banks that would lend at the local level.
There is a good chance that the American Monetary Act will be introduced during the current session of Congress. It should be supported by anyone who cares about the future of our nation more than bankers’ profits.
Richard C. Cook is a former U.S Treasury analyst who also worked in the Carter White House and for NASA and writes on public policy issues. His new book is We Hold These Truths: The Hope of Monetary Reform (Tendril Press 2009). His website is http://www.richardccook.com He is a member of the U.S. Basic Income Guarantee Network and has been an adviser to Congressman Dennis Kucinich and the American Monetary Institute http://www.monetary.org
Saturday, March 21, 2009
The Federal Reserve Bank is Bankrupt!!!!!
The Federal Reserve is bankrupt for all intents and purposes. The same goes for the Bank of England!
This article will focus largely on the Fed, because the Fed is the "financial land-mine".
How long can someone who has stepped on a landmine, remain standing – hours, days? Eventually, when he is exhausted and his legs give way, the mine will just explode!
The shadow banking system has not only stepped on the land-mine, it is carrying such a heavy load (trillions of toxic wastes) that sooner or later it will tilt, give way and trigger off the land-mine![1]
In a recent article, I referred to the remarks of British Prime Minister Gordon Brown and President Obama calling for the shadow banking system to be outlawed.
Even if the call was genuine, it is too late. The land-mine has been triggered and the explosion cannot be averted under any circumstances.
The only issue is the extent of the damage to the global economy and how long it will take for the world to recover from this fiasco – a financial madness that has no precedent. The great depression is "Mary Poppins" in comparison!
The idea of a central bank going bankrupt is not that outlandish. I am by no means the first author who has given this stark warning. What underlies this crisis (which I initially examined in an article in December 2006) is the potential collapse of the global banking system, specifically the Shadow Money-Lenders.
Nouriel Roubini, the New York University professor said [2]:
"The process of socialising the private losses from this crisis has moved many of the liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case, the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued."
Please read the underlined words again. "Sovereign bank" means central bank. When a central bank "cracks" i.e. becomes insolvent, "all hell breaks lose", because as the professor correctly pointed out, "any government guarantees will ring hollow and will be useless".
If a central bank goes belly up, it is as good as the government going bankrupt. Period!
In another article, Roubini admitted that the pressure on "the financial land-mine" is totally unbearable. He wrote: "The US Financial system is effectively insolvent". It follows that if the financial system is bankrupt, it is a matter of time before the "sovereign bank" goes belly up. This is a given!
He stated further that:
"Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.
"AIG which lost $62 billion in the fourth quarter and $99 billion in all of 2008 is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.
"Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.
"News and banks analysts' reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)
"But some things are known: Goldman's
Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
"So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.
"And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate - given the macro outlook -that means
expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent."
McClatchy newspaper reported (03/08/2009) bad news affecting the banks:
"America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.
"Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
"The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.
"The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion, the worst quarterly performance in U.S. corporate history.
"The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.
"The banks' quarterly financial reports show that as of Dec. 31:
— J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion.
— Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion.
— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
— HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion.
— San Francisco-based Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks' combined reserves of $104 billion, but total future risks of about $109 billion.
"Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
Berkshire Hathaway Chairman, Warren Buffett is so livid by the sheer magnitude of the financial mess that he said:
"These instruments [derivatives] have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."
The above bad news refers to the losses and potential losses that the big banks have suffered and will suffer in the near future.
But what is overlooked by many financial analysts is that these very same derivative products have caused another financial organ failure. And there is no way that the said organ can be resuscitated to its former state of health.
The Repo Market is gridlocked!
There has been an incestuous relationship between the traditional banking system and the shadow banking system and the link that joined the two together is the Repo Market.[Repurchase Market]
This is in fact the weakest link in the entire financial system.
This is a very technical subject and I seek your indulgence and patience when reading the remaining part of this article. The gridlock of the repo market is the basis for my assertion that over and above the aforesaid dire financial facts, it is the major contributing factor to the bankruptcy of the Federal Reserve!
I want to use a simple analogy. This will make the issue easier to understand.
Picture a one-inch diameter thick rope. Such a rope is made up of a few strands of narrower ropes, say 1/10th inch which are twined together to make the thick one-inch diameter rope.
Picture again that all the outer strands have been burnt away, and what remains is the middle strand, still lifting the weight. But this strand cannot on its own, lift such a weight and sooner or later, it will snap. When that happens, the weight will come crashing down!
The middle strand is the repo market.
Alternatively, you can use the analogy that the repo market is the heart that pumps the blood (the cash flow). The financial system is the body and it has suffered a massive heart attack!
What is the repo market?
The repo market is the market whereby all financial institutions (regulated and unregulated) invariably go to obtain financing to meet reserve requirements, bridging finance, to lend or purchase securities, to hedge and or to invest on short-term basis.
It used to be that mainly US Treasuries (bear this in mind at all times) were used as security for Repo transactions, as it is considered as most secure i.e. as good as cash since it is backed by the credit of the US government!
This requirement is no longer the case. More of this issue later.
The Nature of Repo Transactions
In repo transactions, securities are exchanged for cash with an agreement to repurchase the securities at a future date. The securities serve as collateral for what is effectively a cash loan. A distinguishing feature of repos is that they can be used either to obtain funds or to obtain securities. As repos are short-maturity collateralized instruments, repo markets have strong linkages with securities markets, derivative markets and other short term markets such as inter-bank and money markets. [3]
Like other financial markets, repo markets are subject to credit risks, operational risks and liquidity risks. However, what distinguishes the credit risks on repos from that associated with uncollateralized instruments is that repos credit exposures arise from volatility (or market risk) in the value of collateral. Bear this in mind at all times.
Repos allow institutions to use leverage to take larger positions in financial markets which could add to systemic risks. Bear this in mind at all times.
And because of the close linkages between repo markets and securities markets, any shocks will be transmitted quickly, resulting in a gridlock. Bear this in mind at all times.
Transactions covered by definition of repos are as follows:
(A) Repurchase Agreement
A repurchase agreement involves the sale of an asset under an agreement to repurchase the asset from the same counter-party. Interest is paid on the repurchase agreement by adjusting the sale and purchase price. A reverse repo is the purchase of an asset with an agreement to re-sell the same or a similar asset.
A hold-in-custody repurchase agreement
is a trade whereby the repoer (the borrower of cash) continues to hold the collateralizing securities in custody for the lender of cash. The risks are obvious!
A deliver-out repurchase agreement
is where securities are delivered to the cash lender for custody in exchange for cash.
A tri-party repurchase agreement
is similar to a deliver-out repurchase agreement, except that the security is placed in the custody of a third-party entity. The third-party ensures that the security meets the cash lender's requirements and provides valuation and margining services. This is the primary form of repurchase agreement for securities dealers in the United States. Bank of New York and JP Morgan Chase are the two main custodians or clearing banks in the US and supervise the vast majority of the tri-party repos. Bear this in mind at all times.
(B) Sell/Buy-Back Agreement
A sell buy-back is two distinct outright cash market trades, one for forward settlement. The forward price is set relative to the spot price to yield a market rate of return.
(C) Securities Lending
This is where the owner of the security lends them to another person in return for a fee. The borrower of the security is contractually obliged to redeliver a like quantity of the same securities, or return precisely the same securities.
Repos can be of any duration but are most commonly over-night loans. Repos longer than over-night are called Term Repos. There are also Open Repos which are transactions which can be terminated by both parties on a day's notice.
The largest players of repos and reverses are the dealers in government securities. There are about 20 primary dealers recognised by the Fed which are authorised to bid for new-issued treasury securities for resale in the market. The dealers are highly leveraged, 50 to 100 times their own capital. To finance the purchase of treasury securities, the dealers need to have repo monies in large amounts on a continuing basis. The institutions that supply such huge funds in the repo market are money funds, large corporations, state and local governments and foreign central banks.
The Repo Market and the Financial Crisis
As stated earlier when the repo market first started, US treasuries were the preferred security. But when financial engineering exploded and many financial products (i.e. CDOs) were rated AAA by rating agencies, these securities were also traded as described above in the repo market. This was when problems started.
According to Gary Gorton [4], the repo market before the crisis was estimated to be worth a whopping $12 trillion as compared to the total assets in the entire US banking system of $10 trillion.
The former CEO of Federal Reserve Bank of New York (NYFRB) and now the US Treasury Secretary, Tim Geithner observed in 2008:
"The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system. This non-bank financial system grew to be very large, particularly in money and funding markets.
"This parallel system financed some of these very assets on a very short term basis in the bilateral or tri-party repo markets. As the volume of activity in repo markets grew, the variety of assets financed in this manner expanded beyond the most highly liquid securities to include less liquid securities, as well. Nonetheless, these assets were assumed to be readily sellable at fair values, in part because assets with similar credit ratings had generally been tradable during past periods of financial stress. And the liquidity supporting them was assumed to be continuous and essentially frictionless, because it had been so for a long time.
"The scale of long term risky and relatively illiquid assets financed by very short-term liabilities made many of the vehicles and institutions in this parallel financial system vulnerable to a classic type run, but without the protection such as deposit insurance that the banking system has in place to reduce such risks."
Economic historians will argue for another century as to the cause for the run on the repo market. The collapse of Bear Stearns is as good a starting point as any. When the market discovered that its securities were duds, pure junk, shock waves ripped through the system.
Recall that I had mentioned earlier that Federal Bank of New York and JP Morgan Chase were the primary clearing banks for repos.
The Fed's rescue of Bear Stearns through JP Morgan was not so much to save the former but rather to shore up the "clearing system" of the repos for which JP Morgan Chase and the Bank of New York were the main pillars. One of the functions of a "clearing bank" for repos is to value and match securities tendered for cash borrowings. If Bear Stearns securities are now valued as junks, the integrity of JP Morgan and Federal Bank of New York as clearing banks in this market is as good as zero! And bearing in mind that the five major investment banks in the US rely heavily on the repo market for their funding, any gridlock in this part of the shadow banking system would tear wide open the entire banking system, including the traditional counter-part.
Hence, the FED intervention by the creation of the Primary Dealer Credit Facility (PDCF) which was in effect the backstop for all investment banking using tri-party repos!
This was what Bernanke said:
"We have been working with market participants to develop a contingency plan should there ever occur a loss of confidence in either of the two clearing banks that facilitate the settlement of tri-party repos."
Louis Crandall, economist at Wrightson ICAP observed:
"The vulnerability of the tri-party repo system has been a recurring theme among Federal Reserve and Treasury officials in recent weeks."
The inherent weakness of tri-party repos is that the counter-party risks of billions worth of funding agreements are shouldered by essentially two players – Federal Bank of New York and JP Morgan Chase.
Yet, way back then, they were held up as rock solid. It is almost hilarious to read the then advert of the Federal Bank of New York as to their expertise and service:
"Sophisticated collateral selection: enforce diversification and credit quality; control adequacy, volatility & liquidity.
"Cutting edge infrastructure: economies of scale facilitate extensive data warehousing, access to more asset classes and markets, auto-substitution, auto-allocation & optimisation technology, same day reporting.
"Introduction to new counterparts: A Global Collateral Clearing House."
Panic swept across the entire repo market.
No securities were considered safe enough for repos except US treasuries.
Fundings in the repo market grind to a halt.
Market players withdrew funds and began hoarding treasuries.
The rest who own structured products were slaughtered.
I would like to quote Gary Gorton again:
"Imagine a firm that is levered 30:1, by borrowing in the repo market. If the haircut [5] doubles, or goes from zero to a positive amount, the required deleveraging is massive! Most investment banks were levered 30:1, equivalent to about a 3 per cent haircut. If the haircut rises to 6 per cent, at least half the assets will have to be sold.
"Another sign of trouble is a ‘repo fail'. A ‘repo fail' occurs when one side of the agreement fails to abide by the contract. [Fail to deliver the security under the repurchase agreement.]
"Dealer banks would not accept collateral because they rightly believed that if they had to seize the collateral should the counter-party fail, then there would be no market in which to sell it. This was due to the absence of buyers because of the deleveraging. This led to an absence of prices for these securities. If the value cannot be determined because there is no market – no liquidity or there is the concern that if the asset is seized by the lender, it will not be saleable at all, then the dealer will not engage in repo. Repo dealers report that there was uncertainty about whether to believe the ratings on these structured products, and in a very fast moving environment, the response was to pull back from accepting anything structured. If no one would accept structured products for repo, then these bonds could not be traded – and then no one would want to accept them in repo transactions."
This change led to a sharp increase in the demand for government securities for repo transactions, which was compounded by significantly higher safe-haven demand for US Treasuries and the increased unwillingness to lend such securities in repo transactions. As the crisis unfolded, this combination resulted in US government collateral becoming extremely scarce. [6]
I will now turn to the issue of the FED's solvency.
As has been observed, the Fed intervened aggressively to check the run on the repo market. Various measures were taken, but in my view the most dangerous was the widening of the collaterals which the Fed was willing to accept to secure funding of the players in the repo market. The Fed also intervened by lending a huge chunk of its US treasuries in exchange for junks to facilitate credit expansion.
In the result, what happened was that the Fed's present balance sheet of approximately $2 trillion is made up mostly of junk securities.
The Fed is no different from banks in that confidence in the quality of its assets is critical and that if and when the market recovers, there is in fact a market for the junk assets that it took on to unravel the gridlock in the financial markets.
By way of analogy, if your high street bank's balance sheet is made up of junk, what would you do? There are just not enough assets to meet its liabilities.
But of course, one can argue that the Fed is not your high street bank. It is the central bank of the mighty USA. It will always be able to "print money" or "digitalise" money and keep the markets going.
But beware that the Federal Reserve Note is mere paper, fiat money which cannot be redeemed for anything tangible such as gold. And although it is stated boldly in the notes issued - "In God we trust" - you and I are not actually placing our trust in God when accepting the Federal Reserve Notes as "money".
When Joe Six-Packs realises that the Federal Reserve Note is not even secured by US treasuries and or the FED has real tangible assets, but its balance sheet is littered with junks and toxic waste, there will be a run on the Fed i.e. when Americans and foreigners no longer have faith in the Federal Reserve Notes as "money".
If confidence could vaporise in a second and cause a stampede in what was once considered solid security, the triple A rated bonds in the repo and money markets, the same confidence that is now reposed in the Federal Reserve Notes can likewise disappear into the memory hole.
All these years, the con was maintained by the Fed that it was solid because it has on its balance sheet over $800 billion of US treasuries i.e. its notes "were so-called backed by these treasuries". It could sell its treasuries in the repo market for cash and thereby control the money flows in the economy and vice versa.
In their subconscious mind, Americans and stupid foreign central banks and their executives (brain-washed by the Chicago School of Economics) somehow believe in the infallibility of the Fed.
Now it has been exposed that the Fed's "assets" comprise of junk bonds and toxic wastes.
The Emperor has no clothes!
Paul Volcker, former Chairman of the Federal Reserve may have given the ultimate epitaph: "The bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place."
And it is any wonder that Professor Nouriel Roubini declared:
"The process of socialising the private losses from this crisis has already moved many liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued."
In my opinion, the Fed has already become "unglued". Whatever guarantees given to secure the indebtedness of CitiGroup and others to prevent a run on these banks are useless.
It is bankrupt!
Posted with Permission
This article will focus largely on the Fed, because the Fed is the "financial land-mine".
How long can someone who has stepped on a landmine, remain standing – hours, days? Eventually, when he is exhausted and his legs give way, the mine will just explode!
The shadow banking system has not only stepped on the land-mine, it is carrying such a heavy load (trillions of toxic wastes) that sooner or later it will tilt, give way and trigger off the land-mine![1]
In a recent article, I referred to the remarks of British Prime Minister Gordon Brown and President Obama calling for the shadow banking system to be outlawed.
Even if the call was genuine, it is too late. The land-mine has been triggered and the explosion cannot be averted under any circumstances.
The only issue is the extent of the damage to the global economy and how long it will take for the world to recover from this fiasco – a financial madness that has no precedent. The great depression is "Mary Poppins" in comparison!
The idea of a central bank going bankrupt is not that outlandish. I am by no means the first author who has given this stark warning. What underlies this crisis (which I initially examined in an article in December 2006) is the potential collapse of the global banking system, specifically the Shadow Money-Lenders.
Nouriel Roubini, the New York University professor said [2]:
"The process of socialising the private losses from this crisis has moved many of the liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case, the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued."
Please read the underlined words again. "Sovereign bank" means central bank. When a central bank "cracks" i.e. becomes insolvent, "all hell breaks lose", because as the professor correctly pointed out, "any government guarantees will ring hollow and will be useless".
If a central bank goes belly up, it is as good as the government going bankrupt. Period!
In another article, Roubini admitted that the pressure on "the financial land-mine" is totally unbearable. He wrote: "The US Financial system is effectively insolvent". It follows that if the financial system is bankrupt, it is a matter of time before the "sovereign bank" goes belly up. This is a given!
He stated further that:
"Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.
"AIG which lost $62 billion in the fourth quarter and $99 billion in all of 2008 is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.
"Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.
"News and banks analysts' reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)
"But some things are known: Goldman's
Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
"So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.
"And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate - given the macro outlook -that means
expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent."
McClatchy newspaper reported (03/08/2009) bad news affecting the banks:
"America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.
"Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
"The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.
"The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion, the worst quarterly performance in U.S. corporate history.
"The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.
"The banks' quarterly financial reports show that as of Dec. 31:
— J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion.
— Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion.
— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
— HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion.
— San Francisco-based Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks' combined reserves of $104 billion, but total future risks of about $109 billion.
"Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
Berkshire Hathaway Chairman, Warren Buffett is so livid by the sheer magnitude of the financial mess that he said:
"These instruments [derivatives] have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."
The above bad news refers to the losses and potential losses that the big banks have suffered and will suffer in the near future.
But what is overlooked by many financial analysts is that these very same derivative products have caused another financial organ failure. And there is no way that the said organ can be resuscitated to its former state of health.
The Repo Market is gridlocked!
There has been an incestuous relationship between the traditional banking system and the shadow banking system and the link that joined the two together is the Repo Market.[Repurchase Market]
This is in fact the weakest link in the entire financial system.
This is a very technical subject and I seek your indulgence and patience when reading the remaining part of this article. The gridlock of the repo market is the basis for my assertion that over and above the aforesaid dire financial facts, it is the major contributing factor to the bankruptcy of the Federal Reserve!
I want to use a simple analogy. This will make the issue easier to understand.
Picture a one-inch diameter thick rope. Such a rope is made up of a few strands of narrower ropes, say 1/10th inch which are twined together to make the thick one-inch diameter rope.
Picture again that all the outer strands have been burnt away, and what remains is the middle strand, still lifting the weight. But this strand cannot on its own, lift such a weight and sooner or later, it will snap. When that happens, the weight will come crashing down!
The middle strand is the repo market.
Alternatively, you can use the analogy that the repo market is the heart that pumps the blood (the cash flow). The financial system is the body and it has suffered a massive heart attack!
What is the repo market?
The repo market is the market whereby all financial institutions (regulated and unregulated) invariably go to obtain financing to meet reserve requirements, bridging finance, to lend or purchase securities, to hedge and or to invest on short-term basis.
It used to be that mainly US Treasuries (bear this in mind at all times) were used as security for Repo transactions, as it is considered as most secure i.e. as good as cash since it is backed by the credit of the US government!
This requirement is no longer the case. More of this issue later.
The Nature of Repo Transactions
In repo transactions, securities are exchanged for cash with an agreement to repurchase the securities at a future date. The securities serve as collateral for what is effectively a cash loan. A distinguishing feature of repos is that they can be used either to obtain funds or to obtain securities. As repos are short-maturity collateralized instruments, repo markets have strong linkages with securities markets, derivative markets and other short term markets such as inter-bank and money markets. [3]
Like other financial markets, repo markets are subject to credit risks, operational risks and liquidity risks. However, what distinguishes the credit risks on repos from that associated with uncollateralized instruments is that repos credit exposures arise from volatility (or market risk) in the value of collateral. Bear this in mind at all times.
Repos allow institutions to use leverage to take larger positions in financial markets which could add to systemic risks. Bear this in mind at all times.
And because of the close linkages between repo markets and securities markets, any shocks will be transmitted quickly, resulting in a gridlock. Bear this in mind at all times.
Transactions covered by definition of repos are as follows:
(A) Repurchase Agreement
A repurchase agreement involves the sale of an asset under an agreement to repurchase the asset from the same counter-party. Interest is paid on the repurchase agreement by adjusting the sale and purchase price. A reverse repo is the purchase of an asset with an agreement to re-sell the same or a similar asset.
A hold-in-custody repurchase agreement
is a trade whereby the repoer (the borrower of cash) continues to hold the collateralizing securities in custody for the lender of cash. The risks are obvious!
A deliver-out repurchase agreement
is where securities are delivered to the cash lender for custody in exchange for cash.
A tri-party repurchase agreement
is similar to a deliver-out repurchase agreement, except that the security is placed in the custody of a third-party entity. The third-party ensures that the security meets the cash lender's requirements and provides valuation and margining services. This is the primary form of repurchase agreement for securities dealers in the United States. Bank of New York and JP Morgan Chase are the two main custodians or clearing banks in the US and supervise the vast majority of the tri-party repos. Bear this in mind at all times.
(B) Sell/Buy-Back Agreement
A sell buy-back is two distinct outright cash market trades, one for forward settlement. The forward price is set relative to the spot price to yield a market rate of return.
(C) Securities Lending
This is where the owner of the security lends them to another person in return for a fee. The borrower of the security is contractually obliged to redeliver a like quantity of the same securities, or return precisely the same securities.
Repos can be of any duration but are most commonly over-night loans. Repos longer than over-night are called Term Repos. There are also Open Repos which are transactions which can be terminated by both parties on a day's notice.
The largest players of repos and reverses are the dealers in government securities. There are about 20 primary dealers recognised by the Fed which are authorised to bid for new-issued treasury securities for resale in the market. The dealers are highly leveraged, 50 to 100 times their own capital. To finance the purchase of treasury securities, the dealers need to have repo monies in large amounts on a continuing basis. The institutions that supply such huge funds in the repo market are money funds, large corporations, state and local governments and foreign central banks.
The Repo Market and the Financial Crisis
As stated earlier when the repo market first started, US treasuries were the preferred security. But when financial engineering exploded and many financial products (i.e. CDOs) were rated AAA by rating agencies, these securities were also traded as described above in the repo market. This was when problems started.
According to Gary Gorton [4], the repo market before the crisis was estimated to be worth a whopping $12 trillion as compared to the total assets in the entire US banking system of $10 trillion.
The former CEO of Federal Reserve Bank of New York (NYFRB) and now the US Treasury Secretary, Tim Geithner observed in 2008:
"The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system. This non-bank financial system grew to be very large, particularly in money and funding markets.
"This parallel system financed some of these very assets on a very short term basis in the bilateral or tri-party repo markets. As the volume of activity in repo markets grew, the variety of assets financed in this manner expanded beyond the most highly liquid securities to include less liquid securities, as well. Nonetheless, these assets were assumed to be readily sellable at fair values, in part because assets with similar credit ratings had generally been tradable during past periods of financial stress. And the liquidity supporting them was assumed to be continuous and essentially frictionless, because it had been so for a long time.
"The scale of long term risky and relatively illiquid assets financed by very short-term liabilities made many of the vehicles and institutions in this parallel financial system vulnerable to a classic type run, but without the protection such as deposit insurance that the banking system has in place to reduce such risks."
Economic historians will argue for another century as to the cause for the run on the repo market. The collapse of Bear Stearns is as good a starting point as any. When the market discovered that its securities were duds, pure junk, shock waves ripped through the system.
Recall that I had mentioned earlier that Federal Bank of New York and JP Morgan Chase were the primary clearing banks for repos.
The Fed's rescue of Bear Stearns through JP Morgan was not so much to save the former but rather to shore up the "clearing system" of the repos for which JP Morgan Chase and the Bank of New York were the main pillars. One of the functions of a "clearing bank" for repos is to value and match securities tendered for cash borrowings. If Bear Stearns securities are now valued as junks, the integrity of JP Morgan and Federal Bank of New York as clearing banks in this market is as good as zero! And bearing in mind that the five major investment banks in the US rely heavily on the repo market for their funding, any gridlock in this part of the shadow banking system would tear wide open the entire banking system, including the traditional counter-part.
Hence, the FED intervention by the creation of the Primary Dealer Credit Facility (PDCF) which was in effect the backstop for all investment banking using tri-party repos!
This was what Bernanke said:
"We have been working with market participants to develop a contingency plan should there ever occur a loss of confidence in either of the two clearing banks that facilitate the settlement of tri-party repos."
Louis Crandall, economist at Wrightson ICAP observed:
"The vulnerability of the tri-party repo system has been a recurring theme among Federal Reserve and Treasury officials in recent weeks."
The inherent weakness of tri-party repos is that the counter-party risks of billions worth of funding agreements are shouldered by essentially two players – Federal Bank of New York and JP Morgan Chase.
Yet, way back then, they were held up as rock solid. It is almost hilarious to read the then advert of the Federal Bank of New York as to their expertise and service:
"Sophisticated collateral selection: enforce diversification and credit quality; control adequacy, volatility & liquidity.
"Cutting edge infrastructure: economies of scale facilitate extensive data warehousing, access to more asset classes and markets, auto-substitution, auto-allocation & optimisation technology, same day reporting.
"Introduction to new counterparts: A Global Collateral Clearing House."
Panic swept across the entire repo market.
No securities were considered safe enough for repos except US treasuries.
Fundings in the repo market grind to a halt.
Market players withdrew funds and began hoarding treasuries.
The rest who own structured products were slaughtered.
I would like to quote Gary Gorton again:
"Imagine a firm that is levered 30:1, by borrowing in the repo market. If the haircut [5] doubles, or goes from zero to a positive amount, the required deleveraging is massive! Most investment banks were levered 30:1, equivalent to about a 3 per cent haircut. If the haircut rises to 6 per cent, at least half the assets will have to be sold.
"Another sign of trouble is a ‘repo fail'. A ‘repo fail' occurs when one side of the agreement fails to abide by the contract. [Fail to deliver the security under the repurchase agreement.]
"Dealer banks would not accept collateral because they rightly believed that if they had to seize the collateral should the counter-party fail, then there would be no market in which to sell it. This was due to the absence of buyers because of the deleveraging. This led to an absence of prices for these securities. If the value cannot be determined because there is no market – no liquidity or there is the concern that if the asset is seized by the lender, it will not be saleable at all, then the dealer will not engage in repo. Repo dealers report that there was uncertainty about whether to believe the ratings on these structured products, and in a very fast moving environment, the response was to pull back from accepting anything structured. If no one would accept structured products for repo, then these bonds could not be traded – and then no one would want to accept them in repo transactions."
This change led to a sharp increase in the demand for government securities for repo transactions, which was compounded by significantly higher safe-haven demand for US Treasuries and the increased unwillingness to lend such securities in repo transactions. As the crisis unfolded, this combination resulted in US government collateral becoming extremely scarce. [6]
I will now turn to the issue of the FED's solvency.
As has been observed, the Fed intervened aggressively to check the run on the repo market. Various measures were taken, but in my view the most dangerous was the widening of the collaterals which the Fed was willing to accept to secure funding of the players in the repo market. The Fed also intervened by lending a huge chunk of its US treasuries in exchange for junks to facilitate credit expansion.
In the result, what happened was that the Fed's present balance sheet of approximately $2 trillion is made up mostly of junk securities.
The Fed is no different from banks in that confidence in the quality of its assets is critical and that if and when the market recovers, there is in fact a market for the junk assets that it took on to unravel the gridlock in the financial markets.
By way of analogy, if your high street bank's balance sheet is made up of junk, what would you do? There are just not enough assets to meet its liabilities.
But of course, one can argue that the Fed is not your high street bank. It is the central bank of the mighty USA. It will always be able to "print money" or "digitalise" money and keep the markets going.
But beware that the Federal Reserve Note is mere paper, fiat money which cannot be redeemed for anything tangible such as gold. And although it is stated boldly in the notes issued - "In God we trust" - you and I are not actually placing our trust in God when accepting the Federal Reserve Notes as "money".
When Joe Six-Packs realises that the Federal Reserve Note is not even secured by US treasuries and or the FED has real tangible assets, but its balance sheet is littered with junks and toxic waste, there will be a run on the Fed i.e. when Americans and foreigners no longer have faith in the Federal Reserve Notes as "money".
If confidence could vaporise in a second and cause a stampede in what was once considered solid security, the triple A rated bonds in the repo and money markets, the same confidence that is now reposed in the Federal Reserve Notes can likewise disappear into the memory hole.
All these years, the con was maintained by the Fed that it was solid because it has on its balance sheet over $800 billion of US treasuries i.e. its notes "were so-called backed by these treasuries". It could sell its treasuries in the repo market for cash and thereby control the money flows in the economy and vice versa.
In their subconscious mind, Americans and stupid foreign central banks and their executives (brain-washed by the Chicago School of Economics) somehow believe in the infallibility of the Fed.
Now it has been exposed that the Fed's "assets" comprise of junk bonds and toxic wastes.
The Emperor has no clothes!
Paul Volcker, former Chairman of the Federal Reserve may have given the ultimate epitaph: "The bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place."
And it is any wonder that Professor Nouriel Roubini declared:
"The process of socialising the private losses from this crisis has already moved many liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued."
In my opinion, the Fed has already become "unglued". Whatever guarantees given to secure the indebtedness of CitiGroup and others to prevent a run on these banks are useless.
It is bankrupt!
Posted with Permission
Friday, March 20, 2009
"Getting Tough" with Predator Financial Institutions
Finally the US authorities have gotten ‘tough' with the predator financial institutions. The world has been waiting for such decisive intervention since an unending series of Government bailouts of financial institutions began early in 2008 amounting to now trillions of taxpayer dollars. Now, with the world's largest insurance giant, AIG, the White House Economic Council chairman, Larry Summers has expressed ‘outrage.' President Obama himself has entered the fray to promise ‘justice.' US Senators have threatened a law to change the injustice. The only problem is they are all exercising ‘politics of deflection,' taking attention away from the real problem, the fraudulent bailout.
The issue is over AIG announcing it was obligated to pay its traders in its high-risk London unit a sales bonus totaling $165 million for the year. Obama Treasury Secretary, Tim Geithner has announced a novel strategy for ‘justice.' AIG will ‘reimburse' the taxpayers up to $165 million for bonuses the company is giving employees. AIG will pay the Treasury an amount equal to the bonuses, and the Treasury will deduct that amount from the $30 billion in government (taxpayer) assistance that will soon go to the company. But he said that the Obama administration hasn't given up on efforts to recoup the money from the employees who got the bonuses. Good luck.
Larry Summers is the man directly responsible for the mess. As Clinton Treasury Secretary from 1999-January 2001 he shaped and pushed the financial deregulation that unleashed the present crisis. He was Treasury Secretary after July 1999 when his boss, Robert Rubin left to become Vice Chairman of Citigroup, where Rubin went on to advance the colossal agenda of deregulated finance directly.
As Treasury Secretary in 1999, Summers played a decisive role in pushing through the repeal of the Glass Steagall Act of 1933 that was instituted to guard against just the kind of banking abuses taxpayers now are having to bail out. Not only Glass-Steagall repeal. In 2000 Summers backed the Commodity Futures Modernization Act that incredibly mandated that financial derivatives, including in energy, could be traded between financial institutions completely without government oversight, ‘Over-the-Counter' as in where the taxpayer is now being dragged. Credit default Swaps, at the center of the current storm, would not have been possible without Larry Summers and the Commodity Modernization Act of 2000. He is now the White House Economic Council chairman, mandated to find a solution to the crisis he helped make along with Tim Geithner, his friend who is Treasury chief. Foxes should never be asked to guard the henhouse.
Theatre of the absurd or deflection?
This all makes great food for tabloid headlines and popular outrage. They can write that elected politicians are finally acting in taxpayer interests. Until we look a bit more closely. Paying $165 million in employee bonuses or any amount for a company that is in the middle of a multi-trillion dollar fraud that is bringing the world economy down with it is ‘outrageous.'
The problem is the tax bailout haemmorrhage will go on. The reason is the Obama Administration like its predecessor refuses to take consequent action with AIG, despite the fact today the US Government owns at least 80% of AIG stock, bought for $180 billion of, yes, taxpayer dollars. To demand AIG ‘pay back the government' is absurd as the government is in effect demanding it pay itself back with its own money. The latest claim that the Treasury will subtract the $165 million bonus money from the next $30 billion tranche it will give AIG says it all.
Preserving the CDS bubble
The political ‘outrage' expressed by the Obama Administration is an example of ‘perception management.' The population is being slylyduped into believing their officials are working in their interest. In reality the officials are channeling growing popular outrage over endless bank bailouts away from the real problem to an entirely tertiary one. The US Government has injected $180 billion since September 2008 to keep the ‘brain dead' AIG in business and honoring its Credit Default Swap obligations. In effect, they are propping up the casino to continue endless gambling with taxpayer dollars.
The rise of a market in derivatives or ‘swaps' contracts supposedly to ‘insure' against a company going into default and not being able to honor its debts, the Credit Default Swaps market, is at the heart of the global financial catastrophe. The market was ‘invented' by a young economist at JP MorganChase, interestingly enough one of the few big banks recording profit today.
As noted, CDS trading was created free from US Government regulation by President Clinton when he signed the Commodity Futures Modernization Act of 2000 that mandated that financial derivatives not be under government regulation scrutiny. Enron crony and UBS bank adviser, Texas good ‘ol boy Senator Phil Gramm helped pass the laws at a time his wife, Wendy headed the putative regulator, the Commodity Futures Trading Corporation (CFTC). That gave the green light to a derivatives market nominally worth more than $62 trillion in 2008. No one knows the exact size because this is a ‘phantom banking market' completely private and between banks, so-called OTC for Over-The-Counter, ‘just between us.'
Michael Greenberger who headed the CFTC Division of Trading and Markets in the late 1990's at the time of the financial deregulation acts, says that banks and hedge funds"were betting the subprimes would pay off and they would not need the capital to support their bets." The unregulated Credit Default Swaps, he says, have been at "the heart of the subprime meltdown. In 1998 Greenberger proposed regulating the growing derivatives market. At the prospect, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."
The confidence between banks, the ‘just between us,' collapsed after the ill-conceived decision by the US Government on September 15 2008 not to save the world's fourth largest investment bank, Lehman Brothers. By then, there was no alternative but to nationalize and then sort out the mess. Bankruptcy, as the world now realizes, was not an option. But neither was the Henry Paulson TARP ‘casino rescue plan' and Geithner's continuation any option.
At the point the Government let Lehman Bros go down only months after saving the far smaller Bear Stearns and also AIG, not even a bank, there was no clear idea who would be saved and who not. No bank could afford to trust any other bank not to be holding just as risky loans as they. The crisis became a global systemic crisis. Notably, the man who participated in the decision to let Lehman Bros fail ‘to teach a lesson' was then President of the New York Federal Reserve, US Treasury Secretary Tim Geithner.
The US Government has stated that AIG cannot be allowed to fail, that, to use the jargon, AIG is ‘too big to fail.' The reason the Government says it can't let AIG fail is that if the company defaulted, hundreds of billions of dollars' worth of Credit-Default Swaps (CDS) would ‘blow up,' and US and European banks whose toxic assets are supposedly insured by AIG would suddenly be sitting on immense losses. Quite the contrary, AIG is ‘too big to save' under current rules of the game that have been written by Wall Street and the privately-owned Federal Reserve, Treasury Secretary Geithner's former employer.
The CDS fraud
Credit Default Swaps purported, in theory, to let banks remove loan risk from their balance sheet onto others such as AIG, an insurer. It was based on a colossal fraud using flawed mathematical risk models.
AIG went big into the selling Credit Default Swaps with banks around the world, from its London ‘Financial Practices' unit. AIG in effect issued pseudo ‘insurance' for the hundreds of billions of dollars in new Asset Backed Securities (ABS) that Wall Street firms and banks like Citigroup, Goldman Sachs, Deutsche Bank, Barclays were issuing, including Sub-prime Mortgage Backed Securities.
It was a huge Ponzi scheme built by AIG that depended on the fact the world's largest insurance company held a rare AAA credit rating from Moody's and S&P rating agencies. That meant AIG could borrow more cheaply than other companies with lower ratings
AIG issuing of CDS contracts acted as a form of insurance for the various exotic Asset Backed Securities (ABS) securities being issued by Wall Street and London banks. AIG was saying ‘if, by some remote chance' those mortgage-backed securities suffered losses, AIG would pay the loss, not the banks.
Then it got really wild. Because credit-default swaps were not regulated, not even classed as a traditional insurance product, AIG didn't have to set aside loss reserves! And it didn't. So when housing prices started falling, and losses started piling up, it had no way to pay off.
AIG then issued of hundreds of billions of dollars worth of CDS instruments to allow banks to make their balance sheets look safer than they really were. Banks were able to get their loan risk low not by owning safer assets. They simply bought AIG's credit-default swaps. The swaps meant that the risk of loss was transferred to AIG, making the bank portfolios look absolutely risk-free. That gave banks the legal illusion of BIS minimum capital requirements, so they could increase their leverage and buy yet more ‘risk-free' assets.
How could that be allowed? The level of venal corruption in the Clinton and then Bush Administration rivals that of the last days of Rome before its fall from the internal rot of corruption. Banks invested billions in lobbying Washington politicians to get their way.
What can be done?
Fortunately there is a simple way out of the AIG debacle. The US Government can step in and fully nationalize AIG, 100%, kick out responsible management, declare AIG's CDS contracts null and void and let holders sue the US government to regain value for what were in reality lottery gambles not loans to the real economy. They own 80% so the step is small to 100%. Doing that would end the global market in CDS and open the door for countless legal challenges. But AIG's counterparties, as we begin to learn, were exactly the big Wall Street players like Goldman Sachs, Citigroup, even Deutsche Bank. They have gotten enough taxpayer bailouts to cover their risk in CDS. Let them recognize risk is the heart of banking, not the opposite.
Myron Scholes, the ‘father' of financial derivatives, who won a Nobel Prize in economics in 1997 for inventing the stock options model that led to financial derivatives back in the 1970's, has declared that derivatives and Credit Default Swaps have gotten so dangerously out of hand that authorities must ‘blow up' the market.
Scholes says derivatives traded over the counter should be shut down completely. Speaking at York University Stern School of Business recently, he said the "solution is really to blow up or burn" the over-the-counter market and start over. He included derivatives on stocks, interest rate swaps and credit default swaps that should be then moved into regulated markets.
The idea is simple and not that radical. A US law banning OTC derivatives and moving them to regulated exchanges would end a colossal ‘shadow banking' fraud. Banks would not lose much more than already, but the world financial system would get back to ‘normal.' OTC derivatives are unregulated precisely to hide risk and enable fraud by the banks. It is past time to end that. There is where the US Treasury and other Governments must focus, not on meaningless ‘transparency' calls or trading bonus ‘justice.'
The issue is over AIG announcing it was obligated to pay its traders in its high-risk London unit a sales bonus totaling $165 million for the year. Obama Treasury Secretary, Tim Geithner has announced a novel strategy for ‘justice.' AIG will ‘reimburse' the taxpayers up to $165 million for bonuses the company is giving employees. AIG will pay the Treasury an amount equal to the bonuses, and the Treasury will deduct that amount from the $30 billion in government (taxpayer) assistance that will soon go to the company. But he said that the Obama administration hasn't given up on efforts to recoup the money from the employees who got the bonuses. Good luck.
Larry Summers is the man directly responsible for the mess. As Clinton Treasury Secretary from 1999-January 2001 he shaped and pushed the financial deregulation that unleashed the present crisis. He was Treasury Secretary after July 1999 when his boss, Robert Rubin left to become Vice Chairman of Citigroup, where Rubin went on to advance the colossal agenda of deregulated finance directly.
As Treasury Secretary in 1999, Summers played a decisive role in pushing through the repeal of the Glass Steagall Act of 1933 that was instituted to guard against just the kind of banking abuses taxpayers now are having to bail out. Not only Glass-Steagall repeal. In 2000 Summers backed the Commodity Futures Modernization Act that incredibly mandated that financial derivatives, including in energy, could be traded between financial institutions completely without government oversight, ‘Over-the-Counter' as in where the taxpayer is now being dragged. Credit default Swaps, at the center of the current storm, would not have been possible without Larry Summers and the Commodity Modernization Act of 2000. He is now the White House Economic Council chairman, mandated to find a solution to the crisis he helped make along with Tim Geithner, his friend who is Treasury chief. Foxes should never be asked to guard the henhouse.
Theatre of the absurd or deflection?
This all makes great food for tabloid headlines and popular outrage. They can write that elected politicians are finally acting in taxpayer interests. Until we look a bit more closely. Paying $165 million in employee bonuses or any amount for a company that is in the middle of a multi-trillion dollar fraud that is bringing the world economy down with it is ‘outrageous.'
The problem is the tax bailout haemmorrhage will go on. The reason is the Obama Administration like its predecessor refuses to take consequent action with AIG, despite the fact today the US Government owns at least 80% of AIG stock, bought for $180 billion of, yes, taxpayer dollars. To demand AIG ‘pay back the government' is absurd as the government is in effect demanding it pay itself back with its own money. The latest claim that the Treasury will subtract the $165 million bonus money from the next $30 billion tranche it will give AIG says it all.
Preserving the CDS bubble
The political ‘outrage' expressed by the Obama Administration is an example of ‘perception management.' The population is being slylyduped into believing their officials are working in their interest. In reality the officials are channeling growing popular outrage over endless bank bailouts away from the real problem to an entirely tertiary one. The US Government has injected $180 billion since September 2008 to keep the ‘brain dead' AIG in business and honoring its Credit Default Swap obligations. In effect, they are propping up the casino to continue endless gambling with taxpayer dollars.
The rise of a market in derivatives or ‘swaps' contracts supposedly to ‘insure' against a company going into default and not being able to honor its debts, the Credit Default Swaps market, is at the heart of the global financial catastrophe. The market was ‘invented' by a young economist at JP MorganChase, interestingly enough one of the few big banks recording profit today.
As noted, CDS trading was created free from US Government regulation by President Clinton when he signed the Commodity Futures Modernization Act of 2000 that mandated that financial derivatives not be under government regulation scrutiny. Enron crony and UBS bank adviser, Texas good ‘ol boy Senator Phil Gramm helped pass the laws at a time his wife, Wendy headed the putative regulator, the Commodity Futures Trading Corporation (CFTC). That gave the green light to a derivatives market nominally worth more than $62 trillion in 2008. No one knows the exact size because this is a ‘phantom banking market' completely private and between banks, so-called OTC for Over-The-Counter, ‘just between us.'
Michael Greenberger who headed the CFTC Division of Trading and Markets in the late 1990's at the time of the financial deregulation acts, says that banks and hedge funds"were betting the subprimes would pay off and they would not need the capital to support their bets." The unregulated Credit Default Swaps, he says, have been at "the heart of the subprime meltdown. In 1998 Greenberger proposed regulating the growing derivatives market. At the prospect, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."
The confidence between banks, the ‘just between us,' collapsed after the ill-conceived decision by the US Government on September 15 2008 not to save the world's fourth largest investment bank, Lehman Brothers. By then, there was no alternative but to nationalize and then sort out the mess. Bankruptcy, as the world now realizes, was not an option. But neither was the Henry Paulson TARP ‘casino rescue plan' and Geithner's continuation any option.
At the point the Government let Lehman Bros go down only months after saving the far smaller Bear Stearns and also AIG, not even a bank, there was no clear idea who would be saved and who not. No bank could afford to trust any other bank not to be holding just as risky loans as they. The crisis became a global systemic crisis. Notably, the man who participated in the decision to let Lehman Bros fail ‘to teach a lesson' was then President of the New York Federal Reserve, US Treasury Secretary Tim Geithner.
The US Government has stated that AIG cannot be allowed to fail, that, to use the jargon, AIG is ‘too big to fail.' The reason the Government says it can't let AIG fail is that if the company defaulted, hundreds of billions of dollars' worth of Credit-Default Swaps (CDS) would ‘blow up,' and US and European banks whose toxic assets are supposedly insured by AIG would suddenly be sitting on immense losses. Quite the contrary, AIG is ‘too big to save' under current rules of the game that have been written by Wall Street and the privately-owned Federal Reserve, Treasury Secretary Geithner's former employer.
The CDS fraud
Credit Default Swaps purported, in theory, to let banks remove loan risk from their balance sheet onto others such as AIG, an insurer. It was based on a colossal fraud using flawed mathematical risk models.
AIG went big into the selling Credit Default Swaps with banks around the world, from its London ‘Financial Practices' unit. AIG in effect issued pseudo ‘insurance' for the hundreds of billions of dollars in new Asset Backed Securities (ABS) that Wall Street firms and banks like Citigroup, Goldman Sachs, Deutsche Bank, Barclays were issuing, including Sub-prime Mortgage Backed Securities.
It was a huge Ponzi scheme built by AIG that depended on the fact the world's largest insurance company held a rare AAA credit rating from Moody's and S&P rating agencies. That meant AIG could borrow more cheaply than other companies with lower ratings
AIG issuing of CDS contracts acted as a form of insurance for the various exotic Asset Backed Securities (ABS) securities being issued by Wall Street and London banks. AIG was saying ‘if, by some remote chance' those mortgage-backed securities suffered losses, AIG would pay the loss, not the banks.
Then it got really wild. Because credit-default swaps were not regulated, not even classed as a traditional insurance product, AIG didn't have to set aside loss reserves! And it didn't. So when housing prices started falling, and losses started piling up, it had no way to pay off.
AIG then issued of hundreds of billions of dollars worth of CDS instruments to allow banks to make their balance sheets look safer than they really were. Banks were able to get their loan risk low not by owning safer assets. They simply bought AIG's credit-default swaps. The swaps meant that the risk of loss was transferred to AIG, making the bank portfolios look absolutely risk-free. That gave banks the legal illusion of BIS minimum capital requirements, so they could increase their leverage and buy yet more ‘risk-free' assets.
How could that be allowed? The level of venal corruption in the Clinton and then Bush Administration rivals that of the last days of Rome before its fall from the internal rot of corruption. Banks invested billions in lobbying Washington politicians to get their way.
What can be done?
Fortunately there is a simple way out of the AIG debacle. The US Government can step in and fully nationalize AIG, 100%, kick out responsible management, declare AIG's CDS contracts null and void and let holders sue the US government to regain value for what were in reality lottery gambles not loans to the real economy. They own 80% so the step is small to 100%. Doing that would end the global market in CDS and open the door for countless legal challenges. But AIG's counterparties, as we begin to learn, were exactly the big Wall Street players like Goldman Sachs, Citigroup, even Deutsche Bank. They have gotten enough taxpayer bailouts to cover their risk in CDS. Let them recognize risk is the heart of banking, not the opposite.
Myron Scholes, the ‘father' of financial derivatives, who won a Nobel Prize in economics in 1997 for inventing the stock options model that led to financial derivatives back in the 1970's, has declared that derivatives and Credit Default Swaps have gotten so dangerously out of hand that authorities must ‘blow up' the market.
Scholes says derivatives traded over the counter should be shut down completely. Speaking at York University Stern School of Business recently, he said the "solution is really to blow up or burn" the over-the-counter market and start over. He included derivatives on stocks, interest rate swaps and credit default swaps that should be then moved into regulated markets.
The idea is simple and not that radical. A US law banning OTC derivatives and moving them to regulated exchanges would end a colossal ‘shadow banking' fraud. Banks would not lose much more than already, but the world financial system would get back to ‘normal.' OTC derivatives are unregulated precisely to hide risk and enable fraud by the banks. It is past time to end that. There is where the US Treasury and other Governments must focus, not on meaningless ‘transparency' calls or trading bonus ‘justice.'
Thursday, March 19, 2009
Playing the Banking Game
“He that will not apply new remedies must expect new evils; for time is the greatest innovator.” Francis Bacon
On February 19, 2009, California narrowly escaped bankruptcy, when Governor Arnold Schwarzenneger put on his Terminator hat and held the state senate in lockdown mode until they signed a very controversial budget.1 If the vote had failed, the state was going to be reduced to paying its employees in I.O.U.s. California avoided bankruptcy for the time being, but 46 of 50 states are insolvent and could be filing Chapter 9 bankruptcy proceedings in the next two years.2
One of the four states that is not insolvent is an unlikely candidate for the distinction – North Dakota. As Michigan management consultant Charles Fleetham observed last month in an article distributed to his local media:
“North Dakota is a sparsely populated state of less than 700,000, known for cold weather, isolated farmers and a hit movie – Fargo. Yet, for some reason it defies the real estate cliché of location, location, location. Since 2000, the state's GNP has grown 56%, personal income has grown 43%, and wages have grown 34%. This year the state has a budget surplus of $1.2 billion!”
What does the State of North Dakota have that other states don't? The answer seems to be: its own bank. In fact, North Dakota has the only state-owned bank in the nation. The state legislature established the Bank of North Dakota in 1919. Fleetham writes that the bank was set up to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. By law, the state must deposit all its funds in the bank, and the state guarantees its deposits. Three elected officials oversee the bank: the governor, the attorney general, and the commissioner of agriculture. The bank's stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. The bank operates as a bankers' bank, partnering with private banks to loan money to farmers, real estate developers, schools and small businesses. It loans money to students (over 184,000 outstanding loans), and it purchases municipal bonds from public institutions.
Still, you may ask, how does that solve the solvency problem? Isn't the state still limited to spending only the money it has? The answer is no. Certified, card-carrying bankers are allowed to do something nobody else can do: they can create “credit” with accounting entries on their books.
A License to Create Money
Under the “fractional reserve” lending system, banks are allowed to extend credit (create money as loans) in a sum equal to many times their deposit base. Congressman Jerry Voorhis, writing in 1973, explained it like this:
“[F]or every $1 or $1.50 which people – or the government – deposit in a bank, the banking system can create out of thin air and by the stroke of a pen some $10 of checkbook money or demand deposits. It can lend all that $10 into circulation at interest just so long as it has the $1 or a little more in reserve to back it up.”3
That banks actually create money with accounting entries was confirmed in a revealing booklet published by the Chicago Federal Reserve titled Modern Money Mechanics.2 The booklet was periodically revised until 1992, when it had reached 50 pages long. On page 49 of the 1992 edition, it states:
“With a uniform 10 percent reserve requirement, a $1 increase in reserves would support $10 of additional transaction accounts [loans created as deposits in borrowers' accounts].”4
The 10 percent reserve requirement is now largely obsolete, in part because banks have figured out how to get around it with such devices as “overnight sweeps.” What chiefly limits bank lending today is the 8 percent capital requirement imposed by the Bank for International Settlements, the head of the private global central banking system in Basel, Switzerland. With an 8 percent capital requirement, a state with its own bank could fan its revenues into 12.5 times their face value in loans (100 ÷ 8 = 12.5). And since the state would actually own the bank, it would not have to worry about shareholders or profits. It could lend to creditworthy borrowers at very low interest, perhaps limited only to a service charge covering its costs; and it could lend to itself or to its municipal governments at as low as zero percent interest. If these loans were rolled over indefinitely, the effect would be the same as creating new, debt-free money.
Dangerously inflationary? Not if the money were used to create new goods and services. Price inflation results only when “demand” (money) exceeds “supply” (goods and services). When they increase together, prices remain stable.
Today we are in a dangerous deflationary spiral, as lending has dried up and asset values have plummeted. The monopoly on the creation of money and credit by a private banking fraternity has resulted in a malfunctioning credit system and monetary collapse. Credit markets have been frozen by the wildly speculative derivatives gambles of a few big Wall Street banks, bets that not only destroyed those banks' balance sheets but are infecting the whole private banking system with toxic debris. To get out of this deflationary debt trap requires an injection of new, debt-free money into the economy, something that can best be done through a system of public banks dedicated to serving the public interest, administering credit as a public utility.
Some experts insist that we must tighten our belts and start saving again, in order to rebuild the “capital” necessary for functioning markets; but our markets actually functioned quite well so long as the credit system was working. We have the same real assets (raw materials, oil, technical knowledge, productive capacity, labor force, etc.) that we had before the crisis began. Our workers and factories are sitting idle because the private credit system has failed. A system of public credit could put them back to work again. The notion that “money” is something that has to be “saved” before it can be “borrowed” misconstrues the nature of money and credit. Credit is merely a legal agreement, a “monetization” of future proceeds, a promise to pay later from the fruits of the advance. Banks have created credit on their books for hundreds of years, and this system would have worked quite well had it not been for the enormous tribute siphoned off to private coffers in the form of interest. A public banking system could overcome that problem by returning the interest to the public purse. This is the sort of banking system that was pioneered in the colony of Pennsylvania, where it worked brilliantly well.
Restoring Michigan to Solvency
Among other advantages to a state of owning its own bank are the substantial sums it could save in interest. As Fleetham notes of his own ailing state of Michigan:
“According to recent financial reports (available online), the State of Michigan, the City of Detroit, the Detroit Water and Sewerage Department, the Wayne County Airport, the Detroit Public Schools, the University of Michigan, and Michigan State University pay over $800 million a year in interest on long term debt. If you add interest paid by Michigan cities, school districts, and public utilities, the cost to our taxpayers easily tops a billion a year. What does Wall Street do with our billion plus dollars? They decorate their offices like kings.”
Interestingly, the projected state budget deficit for 2009 is also $1 billion. If Michigan did not have to pay over a billion dollars in interest to Wall Street, the budget could be balanced and the state could be restored to solvency. A state-owned bank could not only provide interest-free credit for the state but could actually generate revenues for it. Fleetham notes that in 2007, the Bank of North Dakota earned a net profit of $51 million on a loan volume of $2 billion. He comments:
“Last year, Michigan citizens paid over $5 billion dollars in personal income tax. With a state bank like North Dakota's we could reduce this burden, fund new businesses, and restore our crumbling water and sewer systems. And we don't have to feel sorry about Wall Street losing our business. They didn't ‘earn' the money they lent us. They created it in computers and charged us interest to boot. Let's follow North Dakota's lead and get free from Wall Street's web.”
Taking the Initiative in California
California could do this as well. Robert Ellis is a Tucson talk show host who once worked on Wall Street and has been involved in setting up several banks and financial institutions. In January of this year, he proposed in a letter to Governor Schwarzenegger that California could resolve its financial woes by setting up a bank on the model of the Bank of North Dakota. Ellis wrote to the governor:
“I admire your tenacity in dealing with California's financial problems. Your idea of using IOU's was ingenious but there is a better way. The State of California can charter its own bank and issue its own checks to all state employees . . . . It can also pay all its vendors, contracts and contractors through the bank . . . . Additionally, once the bank is operational, you can fund your own state projects and you determine the interest rate paid as opposed to being at the mercy of the banks you currently deal with or the interest rates the investment bankers make you pay to issue bonds. By doing this, you will put the state in control of its own destiny and make it the benefactor of its own money.
“. . . What I am proposing is not new. It has been done by one other state in the nation [North Dakota]. Why should you continue to pay the banks for services and interest on loans when you can receive that interest for the benefit of the state of California? Wouldn't it be better if you could fund your own infrastructure projects without having to get the approval of independent banks or investment bankers? Additionally, you set the interest rate on your own projects. You can even set it at zero if you deem the project worthy enough.”
Ellis offered his services in setting up the bank, which he thought could be chartered in a few short months. The Governor has not replied, but some pressure from constituents might encourage a response.
Failing that, there is the initiative and referendum process pioneered in California. It allows state laws to be proposed directly by the public, and the state's Constitution to be amended either by public petition (the “initiative”) or by the legislature submitting a proposed constitutional amendment to the electorate (the “referendum”). The initiative is done by writing a proposed constitutional amendment or statute as a petition, which is submitted to the California Attorney General along with a submission fee, which was a modest $200 in 2004. The petition must be signed by registered voters amounting to 8% (for a constitutional amendment) or 5% (for a statute) of the number of people who voted in the most recent election for governor.5
As Gandhi said, “When the people lead, the leaders will follow.” We the people can beat the Wall Street bankers at their own game, by moving our legislators to set up publicly-owned banks that create credit using the same banking principles that are accepted as standard and usual in the trade by bankers themselves.
Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature's Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.
On February 19, 2009, California narrowly escaped bankruptcy, when Governor Arnold Schwarzenneger put on his Terminator hat and held the state senate in lockdown mode until they signed a very controversial budget.1 If the vote had failed, the state was going to be reduced to paying its employees in I.O.U.s. California avoided bankruptcy for the time being, but 46 of 50 states are insolvent and could be filing Chapter 9 bankruptcy proceedings in the next two years.2
One of the four states that is not insolvent is an unlikely candidate for the distinction – North Dakota. As Michigan management consultant Charles Fleetham observed last month in an article distributed to his local media:
“North Dakota is a sparsely populated state of less than 700,000, known for cold weather, isolated farmers and a hit movie – Fargo. Yet, for some reason it defies the real estate cliché of location, location, location. Since 2000, the state's GNP has grown 56%, personal income has grown 43%, and wages have grown 34%. This year the state has a budget surplus of $1.2 billion!”
What does the State of North Dakota have that other states don't? The answer seems to be: its own bank. In fact, North Dakota has the only state-owned bank in the nation. The state legislature established the Bank of North Dakota in 1919. Fleetham writes that the bank was set up to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. By law, the state must deposit all its funds in the bank, and the state guarantees its deposits. Three elected officials oversee the bank: the governor, the attorney general, and the commissioner of agriculture. The bank's stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. The bank operates as a bankers' bank, partnering with private banks to loan money to farmers, real estate developers, schools and small businesses. It loans money to students (over 184,000 outstanding loans), and it purchases municipal bonds from public institutions.
Still, you may ask, how does that solve the solvency problem? Isn't the state still limited to spending only the money it has? The answer is no. Certified, card-carrying bankers are allowed to do something nobody else can do: they can create “credit” with accounting entries on their books.
A License to Create Money
Under the “fractional reserve” lending system, banks are allowed to extend credit (create money as loans) in a sum equal to many times their deposit base. Congressman Jerry Voorhis, writing in 1973, explained it like this:
“[F]or every $1 or $1.50 which people – or the government – deposit in a bank, the banking system can create out of thin air and by the stroke of a pen some $10 of checkbook money or demand deposits. It can lend all that $10 into circulation at interest just so long as it has the $1 or a little more in reserve to back it up.”3
That banks actually create money with accounting entries was confirmed in a revealing booklet published by the Chicago Federal Reserve titled Modern Money Mechanics.2 The booklet was periodically revised until 1992, when it had reached 50 pages long. On page 49 of the 1992 edition, it states:
“With a uniform 10 percent reserve requirement, a $1 increase in reserves would support $10 of additional transaction accounts [loans created as deposits in borrowers' accounts].”4
The 10 percent reserve requirement is now largely obsolete, in part because banks have figured out how to get around it with such devices as “overnight sweeps.” What chiefly limits bank lending today is the 8 percent capital requirement imposed by the Bank for International Settlements, the head of the private global central banking system in Basel, Switzerland. With an 8 percent capital requirement, a state with its own bank could fan its revenues into 12.5 times their face value in loans (100 ÷ 8 = 12.5). And since the state would actually own the bank, it would not have to worry about shareholders or profits. It could lend to creditworthy borrowers at very low interest, perhaps limited only to a service charge covering its costs; and it could lend to itself or to its municipal governments at as low as zero percent interest. If these loans were rolled over indefinitely, the effect would be the same as creating new, debt-free money.
Dangerously inflationary? Not if the money were used to create new goods and services. Price inflation results only when “demand” (money) exceeds “supply” (goods and services). When they increase together, prices remain stable.
Today we are in a dangerous deflationary spiral, as lending has dried up and asset values have plummeted. The monopoly on the creation of money and credit by a private banking fraternity has resulted in a malfunctioning credit system and monetary collapse. Credit markets have been frozen by the wildly speculative derivatives gambles of a few big Wall Street banks, bets that not only destroyed those banks' balance sheets but are infecting the whole private banking system with toxic debris. To get out of this deflationary debt trap requires an injection of new, debt-free money into the economy, something that can best be done through a system of public banks dedicated to serving the public interest, administering credit as a public utility.
Some experts insist that we must tighten our belts and start saving again, in order to rebuild the “capital” necessary for functioning markets; but our markets actually functioned quite well so long as the credit system was working. We have the same real assets (raw materials, oil, technical knowledge, productive capacity, labor force, etc.) that we had before the crisis began. Our workers and factories are sitting idle because the private credit system has failed. A system of public credit could put them back to work again. The notion that “money” is something that has to be “saved” before it can be “borrowed” misconstrues the nature of money and credit. Credit is merely a legal agreement, a “monetization” of future proceeds, a promise to pay later from the fruits of the advance. Banks have created credit on their books for hundreds of years, and this system would have worked quite well had it not been for the enormous tribute siphoned off to private coffers in the form of interest. A public banking system could overcome that problem by returning the interest to the public purse. This is the sort of banking system that was pioneered in the colony of Pennsylvania, where it worked brilliantly well.
Restoring Michigan to Solvency
Among other advantages to a state of owning its own bank are the substantial sums it could save in interest. As Fleetham notes of his own ailing state of Michigan:
“According to recent financial reports (available online), the State of Michigan, the City of Detroit, the Detroit Water and Sewerage Department, the Wayne County Airport, the Detroit Public Schools, the University of Michigan, and Michigan State University pay over $800 million a year in interest on long term debt. If you add interest paid by Michigan cities, school districts, and public utilities, the cost to our taxpayers easily tops a billion a year. What does Wall Street do with our billion plus dollars? They decorate their offices like kings.”
Interestingly, the projected state budget deficit for 2009 is also $1 billion. If Michigan did not have to pay over a billion dollars in interest to Wall Street, the budget could be balanced and the state could be restored to solvency. A state-owned bank could not only provide interest-free credit for the state but could actually generate revenues for it. Fleetham notes that in 2007, the Bank of North Dakota earned a net profit of $51 million on a loan volume of $2 billion. He comments:
“Last year, Michigan citizens paid over $5 billion dollars in personal income tax. With a state bank like North Dakota's we could reduce this burden, fund new businesses, and restore our crumbling water and sewer systems. And we don't have to feel sorry about Wall Street losing our business. They didn't ‘earn' the money they lent us. They created it in computers and charged us interest to boot. Let's follow North Dakota's lead and get free from Wall Street's web.”
Taking the Initiative in California
California could do this as well. Robert Ellis is a Tucson talk show host who once worked on Wall Street and has been involved in setting up several banks and financial institutions. In January of this year, he proposed in a letter to Governor Schwarzenegger that California could resolve its financial woes by setting up a bank on the model of the Bank of North Dakota. Ellis wrote to the governor:
“I admire your tenacity in dealing with California's financial problems. Your idea of using IOU's was ingenious but there is a better way. The State of California can charter its own bank and issue its own checks to all state employees . . . . It can also pay all its vendors, contracts and contractors through the bank . . . . Additionally, once the bank is operational, you can fund your own state projects and you determine the interest rate paid as opposed to being at the mercy of the banks you currently deal with or the interest rates the investment bankers make you pay to issue bonds. By doing this, you will put the state in control of its own destiny and make it the benefactor of its own money.
“. . . What I am proposing is not new. It has been done by one other state in the nation [North Dakota]. Why should you continue to pay the banks for services and interest on loans when you can receive that interest for the benefit of the state of California? Wouldn't it be better if you could fund your own infrastructure projects without having to get the approval of independent banks or investment bankers? Additionally, you set the interest rate on your own projects. You can even set it at zero if you deem the project worthy enough.”
Ellis offered his services in setting up the bank, which he thought could be chartered in a few short months. The Governor has not replied, but some pressure from constituents might encourage a response.
Failing that, there is the initiative and referendum process pioneered in California. It allows state laws to be proposed directly by the public, and the state's Constitution to be amended either by public petition (the “initiative”) or by the legislature submitting a proposed constitutional amendment to the electorate (the “referendum”). The initiative is done by writing a proposed constitutional amendment or statute as a petition, which is submitted to the California Attorney General along with a submission fee, which was a modest $200 in 2004. The petition must be signed by registered voters amounting to 8% (for a constitutional amendment) or 5% (for a statute) of the number of people who voted in the most recent election for governor.5
As Gandhi said, “When the people lead, the leaders will follow.” We the people can beat the Wall Street bankers at their own game, by moving our legislators to set up publicly-owned banks that create credit using the same banking principles that are accepted as standard and usual in the trade by bankers themselves.
Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature's Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.
Friday, March 6, 2009
Barter... The new Buzzword!
Even though barter has been around for eons and remains the most tested and stable form of commerce to date, the recent economic decline has perked up people’s interest. Is it just me, because I’m in the industry, or are others seeing this huge resurgence of the B-word?
All I seem to hear about these days are new-fangled, web-based barter clubs trying to vie for some of the barter “action”. I’ve done a little bit of research (and out of professional integrity I won’t name any names directly) and all they seem to be are shabby, online yard sales offering yesterday’s garbage: old CDs and DVDs, obsolete computer equipment, used furniture, old clothing, stuff nobody wants.
Ever since American Express blew a budget of $800m trying to get BigVine.com off the ground back in 2000, smart business folks have been trying to make online barter work. Strange that the year 2000 sounds familiar…? Oh yes, that’s when Merchants Barter Exchange began. Where is BigVine now? Amazing. With all the power and clout of AmEx, their business client list, and an Obama-like budget, they failed and MBE succeeded. Why?
MBE launched with a tiny fraction of their budget, less resources, less manpower - basically less everything. We decided to do barter right, and not try to cut corners and do things online. MBE uses a highly trained team of brokers to interact with their members, and an elite sales force to continue to build and grow their nationwide economy. To date, MBE is the ONLY national barter company that has achieved ‘pure’ bartering (no cash-barter blends, no inflated pricing, no black-out dates, etc.) Why is that so important, you may ask?
1. Why only eat half a meal?
2. Would you only clean half your car?
3. Would you only take half a vacation?
Exactly, why would you only get part of the benefit of bartering? Additionally - and this is much more important - how can you control trading, if part of it does not go via the exchange and is paid ‘under the table’ in cash? This is how the price is inflated. This is how businesses don’t always get a fair deal.
None of this can happen with the perfected MBE-barter system. We are proud that we have done what AmEx could not. We are excited that we have set the lead and the pace for the industry. We are not much liked by all the other lowly barter folk out there (barter companies from last century, and the new kids on the internet-block), BECAUSE we can do what we do and they cannot, and some folks try to dog us when they can, but we stick to what we are best at: being the best barter company there is.
We love barter, it’s our life. We love the fact that barter is booming right now, but we also know that there are far too many ‘me-too’ folks out there that are just in it for a quick buck and will be gone no sooner than Obama can sign his next bail-out bill.
Thanks for reading, until the next entry. God bless!
All I seem to hear about these days are new-fangled, web-based barter clubs trying to vie for some of the barter “action”. I’ve done a little bit of research (and out of professional integrity I won’t name any names directly) and all they seem to be are shabby, online yard sales offering yesterday’s garbage: old CDs and DVDs, obsolete computer equipment, used furniture, old clothing, stuff nobody wants.
Ever since American Express blew a budget of $800m trying to get BigVine.com off the ground back in 2000, smart business folks have been trying to make online barter work. Strange that the year 2000 sounds familiar…? Oh yes, that’s when Merchants Barter Exchange began. Where is BigVine now? Amazing. With all the power and clout of AmEx, their business client list, and an Obama-like budget, they failed and MBE succeeded. Why?
MBE launched with a tiny fraction of their budget, less resources, less manpower - basically less everything. We decided to do barter right, and not try to cut corners and do things online. MBE uses a highly trained team of brokers to interact with their members, and an elite sales force to continue to build and grow their nationwide economy. To date, MBE is the ONLY national barter company that has achieved ‘pure’ bartering (no cash-barter blends, no inflated pricing, no black-out dates, etc.) Why is that so important, you may ask?
1. Why only eat half a meal?
2. Would you only clean half your car?
3. Would you only take half a vacation?
Exactly, why would you only get part of the benefit of bartering? Additionally - and this is much more important - how can you control trading, if part of it does not go via the exchange and is paid ‘under the table’ in cash? This is how the price is inflated. This is how businesses don’t always get a fair deal.
None of this can happen with the perfected MBE-barter system. We are proud that we have done what AmEx could not. We are excited that we have set the lead and the pace for the industry. We are not much liked by all the other lowly barter folk out there (barter companies from last century, and the new kids on the internet-block), BECAUSE we can do what we do and they cannot, and some folks try to dog us when they can, but we stick to what we are best at: being the best barter company there is.
We love barter, it’s our life. We love the fact that barter is booming right now, but we also know that there are far too many ‘me-too’ folks out there that are just in it for a quick buck and will be gone no sooner than Obama can sign his next bail-out bill.
Thanks for reading, until the next entry. God bless!
Titanic America
I’m not old enough to have been on the original Titanic and I’m sure none of you are either, but the activity in Washington reminds me of what it must have been like on board that ship after they hit the iceberg and realized there were not enough life rafts!
Is it just me, or does it really not make any sense to try to fix our current economic problems with the very vehicle that got us in this mess in the first place? How can we solve this decline by irresponsible lending and borrowing in the short term? The ripple effects of the Federal Reserve printing more ‘debt notes’ and selling them to the US Government to circulate among us are going to be felt for multiple generations to come.
Prior to all this economic decline, Steve Walker, the ex-comptroller of the US left in disgust after over ten years because of what he called the “$400,000 hidden mortgage” our children are saddled with due to our Social Security problem. I shudder to think what “hidden debt” our Grandchildren have now been stuck with.
Using fiscal policies of last century (predominently based upon data during the times of the Gold Standard, and prior to globalization) are not going to solve our current dilemma. It’s rather like trying to fix a hyrid car with a bow and arrow!
But nobody seems to be making much noise. That is except Glenn Beck. I have diligently been following his show and his forecasts, as mine have been spookily similar - and I’m no economist either.
The answer? We need to go back to basics. Obviously, MBE-barter is an integral part of the solution. Frugality is too. The MBE-barter system cannot solve the entire economic problem, but it is a large step in the right direction.
Unfortunately I see things getting much, much worse before we hit rock bottom towards the end of 2009. Once folks have spent their tax rebates and realized the Obama Administration has no solid plan for economic survival, I predict bankruptcies escalating to record levels, as ordinary folk just pass on the bad debt to good, taxpaying citizens. The credit card bubble will finally burst. And the effects of printing TRILLIONS of new debt-dollars will start to effect pricing.
Natural forces have a way of righting the boat, but in this case, we’ve put the iceberg directly in the way. Things will have to crash in order to fix the real problem. Hopefully you are already bartering, if not, heed my words: “Barter or go bust!”
[This is just my opinion. Anthony Donnelly]
Is it just me, or does it really not make any sense to try to fix our current economic problems with the very vehicle that got us in this mess in the first place? How can we solve this decline by irresponsible lending and borrowing in the short term? The ripple effects of the Federal Reserve printing more ‘debt notes’ and selling them to the US Government to circulate among us are going to be felt for multiple generations to come.
Prior to all this economic decline, Steve Walker, the ex-comptroller of the US left in disgust after over ten years because of what he called the “$400,000 hidden mortgage” our children are saddled with due to our Social Security problem. I shudder to think what “hidden debt” our Grandchildren have now been stuck with.
Using fiscal policies of last century (predominently based upon data during the times of the Gold Standard, and prior to globalization) are not going to solve our current dilemma. It’s rather like trying to fix a hyrid car with a bow and arrow!
But nobody seems to be making much noise. That is except Glenn Beck. I have diligently been following his show and his forecasts, as mine have been spookily similar - and I’m no economist either.
The answer? We need to go back to basics. Obviously, MBE-barter is an integral part of the solution. Frugality is too. The MBE-barter system cannot solve the entire economic problem, but it is a large step in the right direction.
Unfortunately I see things getting much, much worse before we hit rock bottom towards the end of 2009. Once folks have spent their tax rebates and realized the Obama Administration has no solid plan for economic survival, I predict bankruptcies escalating to record levels, as ordinary folk just pass on the bad debt to good, taxpaying citizens. The credit card bubble will finally burst. And the effects of printing TRILLIONS of new debt-dollars will start to effect pricing.
Natural forces have a way of righting the boat, but in this case, we’ve put the iceberg directly in the way. Things will have to crash in order to fix the real problem. Hopefully you are already bartering, if not, heed my words: “Barter or go bust!”
[This is just my opinion. Anthony Donnelly]
Monday, March 2, 2009
If the Big Guys Do it... Why wouldn't you?
Please allow me to take you back to the 1984 Summer Olympics. Head of the U.S. Olympic Committee, Peter Ueberroth bartered the promotional value of his Olympic logo for a mass of products and services needed by his staff and athletes. United Airlines provided free transportation, Buick the use of 500 autos, Fuji Film 250,000 rolls of film plus processing, and Levi Strauss and Converse clothing and shoes. Ueberroth even traded the logo for a swimming pool to be built by McDonald's. Bartering got more attention when Carl Icahn set up a deal to trade some $10 million of TV time he had acquired in exchange for products and promotions to aid his newly acquired but ailing TWA.
Bartering is coming of Age with the heavyweights like:Amoco,Goodyear,Caterpillar,3M,USX,Kmart and Pfizer. Marketers at Amoco saved the company's parent, Standard Oil of Indiana, the cost of steel piping, thanks to a carefully planned barter. They supplied the latter with chemicals, which were traded to Goodyear for rubber belting materials and later disposed of in another barter. Amoco was paid for the chemicals with trade credits, which Amoco passed up to Standard Oil. It used them in a cashless deal for the pipes.
I'm not real smart, but if the big guys are bartering why wouldn't everyone else barter?
Bartering is coming of Age with the heavyweights like:Amoco,Goodyear,Caterpillar,3M,USX,Kmart and Pfizer. Marketers at Amoco saved the company's parent, Standard Oil of Indiana, the cost of steel piping, thanks to a carefully planned barter. They supplied the latter with chemicals, which were traded to Goodyear for rubber belting materials and later disposed of in another barter. Amoco was paid for the chemicals with trade credits, which Amoco passed up to Standard Oil. It used them in a cashless deal for the pipes.
I'm not real smart, but if the big guys are bartering why wouldn't everyone else barter?
Are you smarter than Einstein? Don't kid yourself!
"If I had my life over again, I would elect to be a trader of goods, rather than a student of science. I think barter is a noble thing." (Albert Einstein)-
The economics of industry change daily, as gasoline and other commodities fluctuate widely, so does our relationship to those economics.The time has come to insulate your company against economic short falls and prepare for the future. Now is the time to grow your business in the direction of a lucrative 100%trade 100% barter company like mine, Merchants Barter Exchange. Start enjoying the benefits of barter! Barter accounts for nearly $1Trillion annually in world commerce.
Barter is not new, throughout history the exchange of goods or services has been the salvation of economies. Barter has always been on the sidelines awaiting rebirth at the time of it's need,and has many success stories. You have probably heard about some of the big deals, but each day millions of small deals are made which help keep thousands of small businesses in the market place.
Using barter, business owners and corporations cover such cost as travel, sales expenses, entertainment, employee benefits, bonus and incentive programs, automotive repairs, remodeling, advertising, inventory and a host of personal expense such as vacations, clothing, Christmas shopping, gifts, flowers and on …and on …and ...These expenses are covered by incremental sales of surplus products or services, that might have gone to competitors.
Incremental, meaning: within the framework of existing expense any increase in sales without added cost represents a higher incremental margin of profit than new sales with increased marketing cost. Unfortunately many business owners are not tuned in to the new sales potential through barter and the barter opportunities that exist.
Think hard for a moment and come up with at least two ways to generate new sales , then think of how to pay the cost for the increases, then think barter, Barter is smarter.
Trade your product with others for advertising, Art, auto repairs, billboards, coupons, clothing, hotels, resorts,getaways, gifts, Jewelry, printing, signs, tools, home and business services, you name it and we will find it for you.
All transactions are guaranteed, no bad checks or credit cards, immediate credit in your account.
Remember cash is not a storehouse of value, but barter is a warehouse of good will, business relationships, parity of value and incremental profits. Money is only money because we believe its money and the government tells us that it is.
Like everything else in life it costs a little to play,though much less than a low budget ad campaign. My company, Merchants Barter Exchange charges a one time fee of $795.00 to join, "cheap as chips" . We will allow you to purchase what you need($2000 barter credit line) , then guarantee to send new business to you to pay for it. Your transaction fees help defray the cost of the significant services that you receive from us.
The economics of industry change daily, as gasoline and other commodities fluctuate widely, so does our relationship to those economics.The time has come to insulate your company against economic short falls and prepare for the future. Now is the time to grow your business in the direction of a lucrative 100%trade 100% barter company like mine, Merchants Barter Exchange. Start enjoying the benefits of barter! Barter accounts for nearly $1Trillion annually in world commerce.
Barter is not new, throughout history the exchange of goods or services has been the salvation of economies. Barter has always been on the sidelines awaiting rebirth at the time of it's need,and has many success stories. You have probably heard about some of the big deals, but each day millions of small deals are made which help keep thousands of small businesses in the market place.
Using barter, business owners and corporations cover such cost as travel, sales expenses, entertainment, employee benefits, bonus and incentive programs, automotive repairs, remodeling, advertising, inventory and a host of personal expense such as vacations, clothing, Christmas shopping, gifts, flowers and on …and on …and ...These expenses are covered by incremental sales of surplus products or services, that might have gone to competitors.
Incremental, meaning: within the framework of existing expense any increase in sales without added cost represents a higher incremental margin of profit than new sales with increased marketing cost. Unfortunately many business owners are not tuned in to the new sales potential through barter and the barter opportunities that exist.
Think hard for a moment and come up with at least two ways to generate new sales , then think of how to pay the cost for the increases, then think barter, Barter is smarter.
Trade your product with others for advertising, Art, auto repairs, billboards, coupons, clothing, hotels, resorts,getaways, gifts, Jewelry, printing, signs, tools, home and business services, you name it and we will find it for you.
All transactions are guaranteed, no bad checks or credit cards, immediate credit in your account.
Remember cash is not a storehouse of value, but barter is a warehouse of good will, business relationships, parity of value and incremental profits. Money is only money because we believe its money and the government tells us that it is.
Like everything else in life it costs a little to play,though much less than a low budget ad campaign. My company, Merchants Barter Exchange charges a one time fee of $795.00 to join, "cheap as chips" . We will allow you to purchase what you need($2000 barter credit line) , then guarantee to send new business to you to pay for it. Your transaction fees help defray the cost of the significant services that you receive from us.
Sunday, March 1, 2009
Survival of the Fittest(Smartest)
I'm a firm believer in this: If you're not standing on the edge you're wasting space. In today's economy if you are in business and you aren't implementing new and innovative concepts in to your business plan, you're inevitably going to be history. Our politicians and economists are continuing to put on a brave face. The global economy is collapsing around us and we continue to artificially inseminate it with worthless paper. The world needs a secondary economy to resuscitate the current one that is on life support. My company Merchants Barter Exchange is doing just that. We are educating the business community on the oldest form of commerce...Barter. If there is one thing that I'm irrevocably convinced of is that we live in a barter economy. To date 19 banks have failed and experts forecast at least 100 more before 2009 is over. Businesses are folding at a record clip and some Fortune 500 companies are included. The writing is on the proverbial wall; BARTER or BE HISTORY! Business owners heed my advice, HELP YOURSELF! The government has forgotten about Main street and left you to fend for yourself. Let MBE insulate your business from the impending DEPRESSION. Stop spending cash on things you need and want, reduce your cash expenditures by 40%, allow us to expose you to new business that you wouldn't have the reach to find, move your excess inventory and surplus, fill the inefficiencies in capacity and time and above all else... distance yourself from your competition by doing something that they aren't.
“I am convinced that most companies don’t maximize their barter possibilities. Instead of aggressively reducing costs by trading their services with those of their suppliers, they seem content to pay top dollar for everything.”
-Mark H. McCormack
“What They Still Don’t Teach You at Harvard Business School”
“I am convinced that most companies don’t maximize their barter possibilities. Instead of aggressively reducing costs by trading their services with those of their suppliers, they seem content to pay top dollar for everything.”
-Mark H. McCormack
“What They Still Don’t Teach You at Harvard Business School”
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