This type of behavior from our leaders should no longer surprise us. We’ve watched Bush, Cheney and Bernanke use the same tactics in recent years to push their policies through Congress. We should take notice, however, of the types of threats now being thrown around. Martial law is not an idle threat. When a top official starts using this type of language – it would be wise for us to pay very close attention to what is happening. This is not some low level government employee making these threats – this is the Treasury Secretary of the United States.
There are two very big pieces of information to take away from Paulson’s statements. The first is that this financial crisis is, in fact, a crisis. This is not some mild recession that we will come out of in a few months. The financial system itself is collapsing. A Treasury Secretary would not threaten martial law if this were a minor hiccup in the system. This is a major, systemic problem – and it’s going to get worse. He’s saying that if the system collapses – there’s going to be widespread panic – and the government will need to maintain control.
The second item we should think about is this – why would the Treasury Secretary even mention martial law? Why would he even think about this? I suppose that it’s a combination of things. The obvious reason is that he’s strong-arming the legislative branch of our government to get what he wants. This isn’t the first time this administration has used these tactics. We also need to remember that the system is going to collapse at some point – and Paulson certainly knows this. Government bailouts are only delaying the inevitable while placing additional strain on our nation’s finances. From what I’ve seen, it doesn’t appear that the vast majority of our leaders in Congress understand economics and what is happening to our economy. Their lack of knowledge is being exploited by Paulson and Bernanke – so when they’re told that the U.S. Government needs to ‘bailout’ the system – they don’t have economic/monetary knowledge that would tell them this is not going to fix the problem. There will come a time in the future when our nation’s finances collapse – maybe then they will take the time to understand what is happening to us.
I believe that Paulson’s comments are foreshadowing our future. When the system collapses – we’re going to see our government’s true face.
jg – Dec 3, 2008
_____________________
Looting America: Treasury Secretary Paulson Threatened Senators with Martial Law
Tuesday, December 2, 2008, 9:04 am, by cmartenson
Some people think of Hank Paulson as our Treasury Secretary. I think of him as a 19 year veteran of Wall Street banking.
At every turn of this entire bailout he has specifically advantaged banks over taxpayers, banks over industry, banks over homeowners, and banks over the future health and prosperity of this country.
Is this surprising for a banking veteran? No, not really.
But the tactics he used certainly are. Consider this:
Sen. James Inhofe (R-Ok.) said yesterday that it was Treasury Secretary Henry Paulson who personally told Congressmen that there would be martial law in America if they did not pass the bailout of the banks as demanded by the Bush Administration.
On Oct. 2, Rep. Brad Sherman (D-Calif.) said on the House floor that "Many of us were told in private conversations that if we voted against this bill on Monday the sky would fall, the market would drop two or three thousand points the first day, another couple of thousand the second day, and a few members were even told that there would be martial law in America if we voted no."
Now, Senator Inhofe, speaking on KFAQ radio station in Tulsa, has confirmed who it was that issued this threat.
The interview host Pat Campbell asked Infhofe, "Somebody in D.C. was feeding you guys quite a story prior to the bailout, a story that if we didn't do this we were going to see something on the scale of the depression, there were people talking about martial law being instituted, civil unrest. Who was feeding you guys this stuff?"
Inhofe replied, "That's Henry Paulson. We had a conference call early on, it was on a Friday I think--a week and half before the vote on Oct. 1. So it would have been ... the 19th of September, we had a conference call. In this conference call and I guess there's no reason for me not to repeat what he said, but he said, he painted this picture you just described. He said, This is serious. This is the most serious thing that we faced."
I want you to consider that these threats of martial law were being bandied about in the final weeks before a national election. So the implied threat was that the elections themselves could have been jeopardized as a result. This is exceptionally serious. Paulson deserves to be brought up on charges of some sort.
Even leaving aside the implied election threats, such tactics were heavy-handed and unnecessary.This level of arm-twisting speaks of a certain desperation and I think the one hundred-to-one public opposition against the bailout was the impetus for raising the rhetorical stakes to such hysterical levels.
I'm just disappointed that our representatives were swayed by an administration that has proved itself over the years to be willing to use any and all methods to achieve its political aims, including lying and violating the public trust.
Speaking of which, yesterday Bush said this:
As he leaves office, Bush said he felt responsible for the economic downturn because it's occurring on his watch, but he added: "I think when the history of this period is written, people will realize a lot of the decisions that were made on Wall Street took place over a decade or so" before he became president.
But, of course and as always, reality is a different beast. This next bit is also from an article printed yesterday:
WASHINGTON - The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
“Expect fallout, expect foreclosures, expect horror stories,” California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:
· Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
· Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
· Regulators proposed a cap on risky mortgages so a string of defaults wouldn’t be crippling.
· Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
· Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.
Those proposals all were stripped from the final rules. None required congressional approval or the president’s signature.
What we are experiencing now was not some random accident. Plenty of people, myself included, could clearly see where this was all headed. But the entrenched interests, primarily bankers and their bought and paid for representatives, did not want any limits on their obscene profits and they got everything they desired.
We can draw two conclusions:
1. Banks have way too much power over our legislative process and have abused that power. Badly.
2. If it looks like, smells like and acts like a looting operation, it is a looting operation.
Folks, there's really no kind way to put this. Not only have we been subjected to the greatest theft of our wealth ever seen, but that looting operation is continuing today.
What can be done about a banking industry that has so thoroughly violated and abused the public trust?
1. Have banks return all profits from the period in question including claw-backs on all bonuses and dividends paid.
2. Eliminate all funding and lobbying money from financial institutions. Make it a felony with automatic, mandatory jail time for any person or organization found in violation of this stricture.
3. Immediately nationalize enough banks to allow our society to carry on and let the rest go under. We can no longer afford for 40% of all corporate profits to be earned by the essentially non-productive industry that is finance.
4. Begin directly issuing non-interest bearing money from the Treasury. Why pay the Federal Reserve interest on our own money?
5. Allow competing currencies to exist in parallel with Federal Reserve Notes. If the Fed wants to ruin its balance sheet by supporting its broken network of morally and economically ruined banks, we the people should be allowed to choose whether we prefer to conduct our affairs using promise notes from the Fed or some other currency. Competition is the only known way to assure that businesses remain honest and fair. Why should the business of money be any different?
6. Return accountability to our landscape. Obama needs to immediately distance himself from the Wall Street led looting operation and do so by announcing that mistakes were made and laws were broken and that accountability will be part of his solution set. We the people need to see that laws are not just for us. If our system operates on trust (and it does) then we need to trust that the system is capable of policing itself. Right now there is zero evidence of that and its absence is rapidly eroding our social contract.
Showing posts with label Government Bailouts. Show all posts
Showing posts with label Government Bailouts. Show all posts
Saturday, September 16, 2006
Why Government Can't Run a Business
I’ve mentioned in a couple of posts why it’s a very bad idea to allow government to gain control of private companies – banks, the auto industry, insurance companies, etc. Let’s disregard the dangers of socialism for a moment and simply think about what would happen if our government ran your company. If you like a bloated bureaucracy that is inefficient, wasteful and never focuses on the long term health of your company (only short term thinking) – then you should be A-OK with our government’s plan to get into a myriad of businesses. Just think about it – a never ending stream of committee meetings, summits and conference calls that delay any real decision-making.
Think about what would happen to your company if you only planned for the next 2-5 years and never considered that your decisions today – could have serious long-term consequences – consequences that could eventually bankrupt and destroy your company.
The article below by John Gordon is one of the best I’ve seen on why government should never run private businesses.
jg – May 21, 2009
_____________________________________________
Why Government Can't Run a Business
Politicians need headlines. Executives need profits.
Wall St. Journal
By JOHN STEELE GORDON
The Obama administration is bent on becoming a major player in -- if not taking over entirely -- America's health-care, automobile and banking industries. Before that happens, it might be a good idea to look at the government's track record in running economic enterprises. It is terrible.
In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.
When the plant was finally finished, however -- three years after World War I had ended -- it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.
Or take Medicare. Other than the source of its premiums, Medicare is no different, economically, than a regular health-insurance company. But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud. Last year the Government Accountability Office estimated that no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent. Medicare was so lax in its oversight that it was approving orthopedic shoes for amputees.
These examples are not aberrations; they are typical of how governments run enterprises.
There are a number of reasons why this is inherently so. Among them are:
1) Governments are run by politicians, not businessmen. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than long-term consequences even when those consequences can be easily foreseen. The gathering disaster of Social Security has been obvious for years, but politics has prevented needed reforms.
And politicians tend to favor parochial interests over sound economic sense. Consider a thought experiment. There is a national widget crisis and Sen. Wiley Snoot is chairman of the Senate Widget Committee. There are two technologies that are possible solutions to the problem, with Technology A widely thought to be the more promising of the two. But the company that has been developing Technology B is headquartered in Sen. Snoot's state and employs 40,000 workers there. Which technology is Sen. Snoot going to use his vast legislative influence to push?
2) Politicians need headlines. And this means they have a deep need to do something ("Sen. Snoot Moves on Widget Crisis!"), even when doing nothing would be the better option. Markets will always deal efficiently with gluts and shortages, but letting the market work doesn't produce favorable headlines and, indeed, often produces the opposite ("Sen. Snoot Fails to Move on Widget Crisis!").
3) Governments use other people's money. Corporations play with their own money. They are wealth-creating machines in which various people (investors, managers and labor) come together under a defined set of rules in hopes of creating more wealth collectively than they can create separately.
So a labor negotiation in a corporation is a negotiation over how to divide the wealth that is created between stockholders and workers. Each side knows that if they drive too hard a bargain they risk killing the goose that lays golden eggs for both sides. Just ask General Motors and the United Auto Workers.
But when, say, a school board sits down to negotiate with a teachers union or decide how many administrators are needed, the goose is the taxpayer. That's why public-service employees now often have much more generous benefits than their private-sector counterparts. And that's why the New York City public school system had an administrator-to-student ratio 10 times as high as the city's Catholic school system, at least until Mayor Michael Bloomberg (a more than competent businessman before he entered politics) took charge of the system.
4) Government does not tolerate competition. The Obama administration is talking about creating a "public option" that would compete in the health-insurance marketplace with profit-seeking companies. But has a government entity ever competed successfully on a level playing field with private companies? I don't know of one.
5) Government enterprises are almost always monopolies and thus do not face competition at all. But competition is exactly what makes capitalism so successful an economic system. The lack of it has always doomed socialist economies.
When the federal government nationalized the phone system in 1917, justifying it as a wartime measure that would lower costs, it turned it over to the Post Office to run. (The process was called "postalization," a word that should send shivers down the back of any believer in free markets.) But despite the promise of lower prices, practically the first thing the Post Office did when it took over was . . . raise prices.
Cost cutting is alien to the culture of all bureaucracies. Indeed, when cost cutting is inescapable, bureaucracies often make cuts that will produce maximum public inconvenience, generating political pressure to reverse the cuts.
6) Successful corporations are run by benevolent despots. The CEO of a corporation has the power to manage effectively. He decides company policy, organizes the corporate structure, and allocates resources pretty much as he thinks best. The board of directors ordinarily does nothing more than ratify his moves (or, of course, fire him). This allows a company to act quickly when needed.
But American government was designed by the Founding Fathers to be inefficient, and inefficient it most certainly is. The president is the government's CEO, but except for trivial matters he can't do anything without the permission of two separate, very large committees (the House and Senate) whose members have their own political agendas. Government always has many cooks, which is why the government's broth is so often spoiled.
7) Government is regulated by government. When "postalization" of the nation's phone system appeared imminent in 1917, Theodore Vail, the president of AT&T, admitted that his company was, effectively, a monopoly. But he noted that "all monopolies should be regulated. Government ownership would be an unregulated monopoly."
It is government's job to make and enforce the rules that allow a civilized society to flourish. But it has a dismal record of regulating itself. Imagine, for instance, if a corporation, seeking to make its bottom line look better, transferred employee contributions from the company pension fund to its own accounts, replaced the money with general obligation corporate bonds, and called the money it expropriated income. We all know what would happen: The company accountants would refuse to certify the books and management would likely -- and rightly -- end up in jail.
But that is exactly what the federal government (which, unlike corporations, decides how to keep its own books) does with Social Security. In the late 1990s, the government was running what it -- and a largely unquestioning Washington press corps -- called budget "surpluses." But the national debt still increased in every single one of those years because the government was borrowing money to create the "surpluses."
Capitalism isn't perfect. Indeed, to paraphrase Winston Churchill's famous description of democracy, it's the worst economic system except for all the others. But the inescapable fact is that only the profit motive and competition keep enterprises lean, efficient, innovative and customer-oriented.
Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).
Think about what would happen to your company if you only planned for the next 2-5 years and never considered that your decisions today – could have serious long-term consequences – consequences that could eventually bankrupt and destroy your company.
The article below by John Gordon is one of the best I’ve seen on why government should never run private businesses.
jg – May 21, 2009
_____________________________________________
Why Government Can't Run a Business
Politicians need headlines. Executives need profits.
Wall St. Journal
By JOHN STEELE GORDON
The Obama administration is bent on becoming a major player in -- if not taking over entirely -- America's health-care, automobile and banking industries. Before that happens, it might be a good idea to look at the government's track record in running economic enterprises. It is terrible.
In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.
When the plant was finally finished, however -- three years after World War I had ended -- it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.
Or take Medicare. Other than the source of its premiums, Medicare is no different, economically, than a regular health-insurance company. But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud. Last year the Government Accountability Office estimated that no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent. Medicare was so lax in its oversight that it was approving orthopedic shoes for amputees.
These examples are not aberrations; they are typical of how governments run enterprises.
There are a number of reasons why this is inherently so. Among them are:
1) Governments are run by politicians, not businessmen. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than long-term consequences even when those consequences can be easily foreseen. The gathering disaster of Social Security has been obvious for years, but politics has prevented needed reforms.
And politicians tend to favor parochial interests over sound economic sense. Consider a thought experiment. There is a national widget crisis and Sen. Wiley Snoot is chairman of the Senate Widget Committee. There are two technologies that are possible solutions to the problem, with Technology A widely thought to be the more promising of the two. But the company that has been developing Technology B is headquartered in Sen. Snoot's state and employs 40,000 workers there. Which technology is Sen. Snoot going to use his vast legislative influence to push?
2) Politicians need headlines. And this means they have a deep need to do something ("Sen. Snoot Moves on Widget Crisis!"), even when doing nothing would be the better option. Markets will always deal efficiently with gluts and shortages, but letting the market work doesn't produce favorable headlines and, indeed, often produces the opposite ("Sen. Snoot Fails to Move on Widget Crisis!").
3) Governments use other people's money. Corporations play with their own money. They are wealth-creating machines in which various people (investors, managers and labor) come together under a defined set of rules in hopes of creating more wealth collectively than they can create separately.
So a labor negotiation in a corporation is a negotiation over how to divide the wealth that is created between stockholders and workers. Each side knows that if they drive too hard a bargain they risk killing the goose that lays golden eggs for both sides. Just ask General Motors and the United Auto Workers.
But when, say, a school board sits down to negotiate with a teachers union or decide how many administrators are needed, the goose is the taxpayer. That's why public-service employees now often have much more generous benefits than their private-sector counterparts. And that's why the New York City public school system had an administrator-to-student ratio 10 times as high as the city's Catholic school system, at least until Mayor Michael Bloomberg (a more than competent businessman before he entered politics) took charge of the system.
4) Government does not tolerate competition. The Obama administration is talking about creating a "public option" that would compete in the health-insurance marketplace with profit-seeking companies. But has a government entity ever competed successfully on a level playing field with private companies? I don't know of one.
5) Government enterprises are almost always monopolies and thus do not face competition at all. But competition is exactly what makes capitalism so successful an economic system. The lack of it has always doomed socialist economies.
When the federal government nationalized the phone system in 1917, justifying it as a wartime measure that would lower costs, it turned it over to the Post Office to run. (The process was called "postalization," a word that should send shivers down the back of any believer in free markets.) But despite the promise of lower prices, practically the first thing the Post Office did when it took over was . . . raise prices.
Cost cutting is alien to the culture of all bureaucracies. Indeed, when cost cutting is inescapable, bureaucracies often make cuts that will produce maximum public inconvenience, generating political pressure to reverse the cuts.
6) Successful corporations are run by benevolent despots. The CEO of a corporation has the power to manage effectively. He decides company policy, organizes the corporate structure, and allocates resources pretty much as he thinks best. The board of directors ordinarily does nothing more than ratify his moves (or, of course, fire him). This allows a company to act quickly when needed.
But American government was designed by the Founding Fathers to be inefficient, and inefficient it most certainly is. The president is the government's CEO, but except for trivial matters he can't do anything without the permission of two separate, very large committees (the House and Senate) whose members have their own political agendas. Government always has many cooks, which is why the government's broth is so often spoiled.
7) Government is regulated by government. When "postalization" of the nation's phone system appeared imminent in 1917, Theodore Vail, the president of AT&T, admitted that his company was, effectively, a monopoly. But he noted that "all monopolies should be regulated. Government ownership would be an unregulated monopoly."
It is government's job to make and enforce the rules that allow a civilized society to flourish. But it has a dismal record of regulating itself. Imagine, for instance, if a corporation, seeking to make its bottom line look better, transferred employee contributions from the company pension fund to its own accounts, replaced the money with general obligation corporate bonds, and called the money it expropriated income. We all know what would happen: The company accountants would refuse to certify the books and management would likely -- and rightly -- end up in jail.
But that is exactly what the federal government (which, unlike corporations, decides how to keep its own books) does with Social Security. In the late 1990s, the government was running what it -- and a largely unquestioning Washington press corps -- called budget "surpluses." But the national debt still increased in every single one of those years because the government was borrowing money to create the "surpluses."
Capitalism isn't perfect. Indeed, to paraphrase Winston Churchill's famous description of democracy, it's the worst economic system except for all the others. But the inescapable fact is that only the profit motive and competition keep enterprises lean, efficient, innovative and customer-oriented.
Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).
Friday, September 15, 2006
Euro Zone Bets The House - May 10, 2010
Will more debt solve a debt problem? No – of course not. The Euro Zone is simply playing the bailout game – to give the appearance that European political and financial leaders want to prevent their sovereign debt problem from taking down the entire system. As we’ve learned – massive sovereign debt isn’t causing the problem – it is simply another symptom of the world’s debt based monetary system disease.
Treating a debt problem with another $1 trillion in debt is like throwing water on a drowning man. Thanks for the help. It would appear that most equity investors today (May 10th) think that this is a life preserver – they’ll soon learn the truth.
This following paragraph from the article below sums it up nicely.
“The whole package represents an enormous bet on governments' willingness and ability to implement austerity measures—and voters' willingness and ability to tolerate them—and that markets will now have confidence in these efforts. It doesn't address underlying solvency concerns.”
Now that we know how the system operates – what will these ‘austerity’ measures do to the system? The only thing keeping the world afloat (since private lending is tanking) for the past year and a half has been the willingness of the world’s governments to take on high levels of debt – to keep the world’s money supply from crashing. If governments pull back deficit spending – debt creation will fall far short of what is required to keep the money supply from crashing.
If you think this seems like a ‘no win’ situation – you would be correct. The system is ending. Debt saturation is taking down the entire system – individuals, corporations – now governments. It’s only a matter of time.
Get ready for massive market volatility. There are no more bullets left in the bailout gun. I believe we’re going to see wild swings ripple throughout the world’s financial system (stocks, bonds, commodities, etc.) – ending with a global flight from risk – long before anyone gets a chance to implement austerity measures.
One thing is for certain – with the ongoing debasement of the world’s currencies – gold will – once again – skyrocket in value.
jg – May 10, 2010
__________________________
MAY 10, 2010, 10:43 A.M. ET
Euro Zone Bets The House
By RICHARD BARLEY
Wall St. Journal
Euro-zone leaders, the International Monetary Fund and the European Central Bank have pressed the big red button marked "do not press" with a nearly $1 trillion package of loans, guarantees, swaps and outright bond purchases. Will it work?
The "shock and awe" strategy triggered a huge immediate relief rally, but key questions remain unanswered and ultimate success isn't assured. In any case, it represents a huge political gamble to restore confidence to markets, and it will have profound consequences.
The scale of the deal—in particular the size of the IMF's €250 billion ($318 billion) commitment, and the degree of international cooperation—surprised investors. At €750 billion, the package is around 8% of euro-zone GDP, an undoubtedly significant sum. Were anything approaching the full amount to be needed, it would mean that private creditors had deserted euro-zone markets: among them, Portugal, Spain and Ireland—the countries most in the markets' sights other than Greece, which has its own €110 billion package—need to borrow only around €90 billion for the rest of the year.
As a result, stocks soared, the euro surged, credit spreads screamed tighter and Greek, Italian, Irish, Portuguese and Spanish bonds racked up big gains Monday. But on the flipside, German Bund yields also rocketed, partly reflecting a reversal of last week's flight to safety, but also potentially marking the start of a longer-term convergence higher in euro-zone yields. The debt crisis has now been injected into the system itself.
But key details of the package are fuzzy. Of the up to €500 billion European Financial Stabilization mechanism, €60 billion will be available from the European Union budget, along the lines of an existing fund that was set up to aid EU members outside the euro zone facing difficulties. The other €440 billion would be funded via a special-purpose vehicle guaranteed by participating euro-area states. But how can states that might themselves be in need of support afford the guarantees? Will stronger states like Germany end up shouldering most of the burden? How will the conditionality attached to the plan work? Will funding be available when it is needed? Is this a step to a common euro-zone bond, leading ultimately to full-blown fiscal union?
Similar questions surround the European Central Bank's decision to start buying private and public debt securities, an astonishing U-turn coming just days after it had said that buying bonds wasn't under discussion. It's not clear what will be the scale and timing of purchases, or how they will they be sterilized. Is this simply a symbolic backstop bid? For the ECB to end up financing deficits that private creditors don't wish to would be a devastating blow to its credibility.
The whole package represents an enormous bet on governments' willingness and ability to implement austerity measures—and voters' willingness and ability to tolerate them—and that markets will now have confidence in these efforts. It doesn't address underlying solvency concerns.
If the bet fails, losses risk being socialized through an opaque, unsanctioned fiscal transfer mechanism. The euro zone already is being transformed. The need to prevent the European government-bond market from breaking down completely was urgent. But the price is harsh austerity, a further move toward a federal Europe, and the bailing out of private investors. Taxpayers may yet revolt at all three of those ideas.
—Richard Barley
Write to Richard Barley at richard.barley@dowjones.com
Treating a debt problem with another $1 trillion in debt is like throwing water on a drowning man. Thanks for the help. It would appear that most equity investors today (May 10th) think that this is a life preserver – they’ll soon learn the truth.
This following paragraph from the article below sums it up nicely.
“The whole package represents an enormous bet on governments' willingness and ability to implement austerity measures—and voters' willingness and ability to tolerate them—and that markets will now have confidence in these efforts. It doesn't address underlying solvency concerns.”
Now that we know how the system operates – what will these ‘austerity’ measures do to the system? The only thing keeping the world afloat (since private lending is tanking) for the past year and a half has been the willingness of the world’s governments to take on high levels of debt – to keep the world’s money supply from crashing. If governments pull back deficit spending – debt creation will fall far short of what is required to keep the money supply from crashing.
If you think this seems like a ‘no win’ situation – you would be correct. The system is ending. Debt saturation is taking down the entire system – individuals, corporations – now governments. It’s only a matter of time.
Get ready for massive market volatility. There are no more bullets left in the bailout gun. I believe we’re going to see wild swings ripple throughout the world’s financial system (stocks, bonds, commodities, etc.) – ending with a global flight from risk – long before anyone gets a chance to implement austerity measures.
One thing is for certain – with the ongoing debasement of the world’s currencies – gold will – once again – skyrocket in value.
jg – May 10, 2010
__________________________
MAY 10, 2010, 10:43 A.M. ET
Euro Zone Bets The House
By RICHARD BARLEY
Wall St. Journal
Euro-zone leaders, the International Monetary Fund and the European Central Bank have pressed the big red button marked "do not press" with a nearly $1 trillion package of loans, guarantees, swaps and outright bond purchases. Will it work?
The "shock and awe" strategy triggered a huge immediate relief rally, but key questions remain unanswered and ultimate success isn't assured. In any case, it represents a huge political gamble to restore confidence to markets, and it will have profound consequences.
The scale of the deal—in particular the size of the IMF's €250 billion ($318 billion) commitment, and the degree of international cooperation—surprised investors. At €750 billion, the package is around 8% of euro-zone GDP, an undoubtedly significant sum. Were anything approaching the full amount to be needed, it would mean that private creditors had deserted euro-zone markets: among them, Portugal, Spain and Ireland—the countries most in the markets' sights other than Greece, which has its own €110 billion package—need to borrow only around €90 billion for the rest of the year.
As a result, stocks soared, the euro surged, credit spreads screamed tighter and Greek, Italian, Irish, Portuguese and Spanish bonds racked up big gains Monday. But on the flipside, German Bund yields also rocketed, partly reflecting a reversal of last week's flight to safety, but also potentially marking the start of a longer-term convergence higher in euro-zone yields. The debt crisis has now been injected into the system itself.
But key details of the package are fuzzy. Of the up to €500 billion European Financial Stabilization mechanism, €60 billion will be available from the European Union budget, along the lines of an existing fund that was set up to aid EU members outside the euro zone facing difficulties. The other €440 billion would be funded via a special-purpose vehicle guaranteed by participating euro-area states. But how can states that might themselves be in need of support afford the guarantees? Will stronger states like Germany end up shouldering most of the burden? How will the conditionality attached to the plan work? Will funding be available when it is needed? Is this a step to a common euro-zone bond, leading ultimately to full-blown fiscal union?
Similar questions surround the European Central Bank's decision to start buying private and public debt securities, an astonishing U-turn coming just days after it had said that buying bonds wasn't under discussion. It's not clear what will be the scale and timing of purchases, or how they will they be sterilized. Is this simply a symbolic backstop bid? For the ECB to end up financing deficits that private creditors don't wish to would be a devastating blow to its credibility.
The whole package represents an enormous bet on governments' willingness and ability to implement austerity measures—and voters' willingness and ability to tolerate them—and that markets will now have confidence in these efforts. It doesn't address underlying solvency concerns.
If the bet fails, losses risk being socialized through an opaque, unsanctioned fiscal transfer mechanism. The euro zone already is being transformed. The need to prevent the European government-bond market from breaking down completely was urgent. But the price is harsh austerity, a further move toward a federal Europe, and the bailing out of private investors. Taxpayers may yet revolt at all three of those ideas.
—Richard Barley
Write to Richard Barley at richard.barley@dowjones.com
King George 'Decoupling' Revisited
Couldn’t have said it better myself.
jg – May 13, 2010
____________________________________
Guest Post: The King George "Decoupling" Revisited
www.zerohedge.com
Submitted by Tyler Durden on 05/13/2010 08:34 -0500
http://www.zerohedge.com/article/guest-post-king-george-decoupling-revisited
Submitted by Chindit 13
Congress, always wont to congratulate itself for a job barely done, applauded itself for passage of the one-time audit of the Federal Reserve. Once is not enough. That this issue gets so little press owes as much to public misunderstanding as it does the vaunted secrecy the Fed coverts dearly enough to spend taxpayer money lobbying to keep those same taxpayers from having a window into its workings.
In a country that claims to be a democracy, this is a travesty on par with the grievances that prompted our Founding Fathers to seek independence from King George.
Little known to the average taxpayer, the Fed is a public-private entity that not only issues the nation’s currency, but sets interest rate policy and has supervisory authority over the banking system.
Its private owners, who are anything but neutral, number the largest banking and finance institutions in the country, the so-called Too Big to Fail banks.
Along with Treasury, the Fed has been instrumental in what SIGTARP Chief Barofsky has estimated has been $23 trillion of bailouts, loans, backstops and guarantees, since the financial crisis struck two years ago. To put that number in perspective, it represents almost twice the US GDP and 40% of World GDP. It also represents $75,000 for every man, woman, and child in the US.
Although not all of that money has been created or spent, much has, which means the US taxpayer now carries the responsibility for paying it back. Oddly, one might even say immorally, the Fed goes out of its way to prevent even the democratically elected representatives of the people from seeing the inner workings of that entity. The Fed---with help from the Obama White House---has lobbied to block access to information about what the taxpayer has bought, though the taxpayer is still required to pay for it, either directly in taxes or through inflation and a depreciating currency. If this is not the definition of “Taxation without Representation”, I do not know what is.
In the last two years, from what little we can gather, the Fed has lowered interest rates to zero in order to help the banks (who are its private shareholders), thereby rewarding the reckless and profligate and punishing the saver and the prudent. The Fed has increased its balance sheet from a few hundred billion dollars to nearly two and a half trillion dollars over that time, handing out money to bad banks, overpaying for both Treasury issuances and toxic mortgage backed securities, and effectively monitizing the debt of Treasury, which by its charter it is proscribed from doing. The Fed has also provided more than $2 trillion to certain unnamed banks to shore up the balance sheets, that they themselves destroyed (this is the subject of an FOIA request by Bloomberg News which the Fed is currently appealing).
Apparently it was not enough to bail out American banks only. Now the Fed is bailing out both European banks and sovereign states such as Greece via an unlimited foreign exchange swap facility whose primary goal is to further weaken the dollar and promote enough domestic inflation so as to make debt repayment easier for the spendthrifts.
What has America received in return for the Fed’s furtive efforts?
Unemployment stands at 10% and underemployment at 17%. Savers have been punished and encouraged to seek risk rather than security. Major banks have absolutely no incentive whatsoever to lend because they can borrow from the Fed at virtually zero percent, then lend the same money back to Treasury by buying somewhere along the yield curve, where the spread allows them to cover their operating costs with no risk. Banks have also used that 0% Fed money to speculate in the stock market, where a low volume rally has carried prices to levels hardly justified by economic fundamentals. It is no wonder why bank lending is still falling. Why should they bother lending, when they can profit without risk by simply taking free money and playing the yield curve?
In the last week it was reported that three major banks---Goldman Sachs, JPMorgan, and Bank of America---all had 100% winning days in Quarter 1 on their Proprietary Trading Desks or prop desks. Nobody is that good, and such results could not be achieved unless the desks had access to information and funding which is unavailable to mere mortals. The odds of achieving this feat are as great as a baseball player hitting 1.000 for the first two months of the season; it could not be done even if the player was allowed to use his own batting practice pitcher. Prop desks are where the banks use your money to trade for their account. In no way whatsoever do these proprietary activities serve society or the taxpayer. For these banks there is absolutely no risk, while the gains---as evidenced by record Wall Street bonuses in 2009---all accrue to the banks. As we learned in the last two years, if banks happened to lose money, both the Fed and the Treasury will make sure they are made whole again with US Taxpayer funds. For the Too Big to Fail banks, this is not only the best of times, but the financial crisis has proven to be the best thing that ever happened to them. For the rest of America not working on Wall Street and not with an ownership position in the Fed, times are not quite so rosy.
Why is it that a combination of the Fed, Treasury, major banks and the White House have decided that the American people have no right to know all of the things the people are responsible for through the machinations and activities of the Federal Reserve? Is America not a democracy? Have we reverted to colonial times, and instead of being beholden to a foreign monarch, we are now beholden to a domestic monarchy in the form of the Federal Reserve and the Too Big to Fail banks?
Those in Congress and the Administration, as well as the Fed and Wall Street, would do well to remember what happened last time the people had to pay without any say. [emphasis added]
jg – May 13, 2010
____________________________________
Guest Post: The King George "Decoupling" Revisited
www.zerohedge.com
Submitted by Tyler Durden on 05/13/2010 08:34 -0500
http://www.zerohedge.com/article/guest-post-king-george-decoupling-revisited
Submitted by Chindit 13
Congress, always wont to congratulate itself for a job barely done, applauded itself for passage of the one-time audit of the Federal Reserve. Once is not enough. That this issue gets so little press owes as much to public misunderstanding as it does the vaunted secrecy the Fed coverts dearly enough to spend taxpayer money lobbying to keep those same taxpayers from having a window into its workings.
In a country that claims to be a democracy, this is a travesty on par with the grievances that prompted our Founding Fathers to seek independence from King George.
Little known to the average taxpayer, the Fed is a public-private entity that not only issues the nation’s currency, but sets interest rate policy and has supervisory authority over the banking system.
Its private owners, who are anything but neutral, number the largest banking and finance institutions in the country, the so-called Too Big to Fail banks.
Along with Treasury, the Fed has been instrumental in what SIGTARP Chief Barofsky has estimated has been $23 trillion of bailouts, loans, backstops and guarantees, since the financial crisis struck two years ago. To put that number in perspective, it represents almost twice the US GDP and 40% of World GDP. It also represents $75,000 for every man, woman, and child in the US.
Although not all of that money has been created or spent, much has, which means the US taxpayer now carries the responsibility for paying it back. Oddly, one might even say immorally, the Fed goes out of its way to prevent even the democratically elected representatives of the people from seeing the inner workings of that entity. The Fed---with help from the Obama White House---has lobbied to block access to information about what the taxpayer has bought, though the taxpayer is still required to pay for it, either directly in taxes or through inflation and a depreciating currency. If this is not the definition of “Taxation without Representation”, I do not know what is.
In the last two years, from what little we can gather, the Fed has lowered interest rates to zero in order to help the banks (who are its private shareholders), thereby rewarding the reckless and profligate and punishing the saver and the prudent. The Fed has increased its balance sheet from a few hundred billion dollars to nearly two and a half trillion dollars over that time, handing out money to bad banks, overpaying for both Treasury issuances and toxic mortgage backed securities, and effectively monitizing the debt of Treasury, which by its charter it is proscribed from doing. The Fed has also provided more than $2 trillion to certain unnamed banks to shore up the balance sheets, that they themselves destroyed (this is the subject of an FOIA request by Bloomberg News which the Fed is currently appealing).
Apparently it was not enough to bail out American banks only. Now the Fed is bailing out both European banks and sovereign states such as Greece via an unlimited foreign exchange swap facility whose primary goal is to further weaken the dollar and promote enough domestic inflation so as to make debt repayment easier for the spendthrifts.
What has America received in return for the Fed’s furtive efforts?
Unemployment stands at 10% and underemployment at 17%. Savers have been punished and encouraged to seek risk rather than security. Major banks have absolutely no incentive whatsoever to lend because they can borrow from the Fed at virtually zero percent, then lend the same money back to Treasury by buying somewhere along the yield curve, where the spread allows them to cover their operating costs with no risk. Banks have also used that 0% Fed money to speculate in the stock market, where a low volume rally has carried prices to levels hardly justified by economic fundamentals. It is no wonder why bank lending is still falling. Why should they bother lending, when they can profit without risk by simply taking free money and playing the yield curve?
In the last week it was reported that three major banks---Goldman Sachs, JPMorgan, and Bank of America---all had 100% winning days in Quarter 1 on their Proprietary Trading Desks or prop desks. Nobody is that good, and such results could not be achieved unless the desks had access to information and funding which is unavailable to mere mortals. The odds of achieving this feat are as great as a baseball player hitting 1.000 for the first two months of the season; it could not be done even if the player was allowed to use his own batting practice pitcher. Prop desks are where the banks use your money to trade for their account. In no way whatsoever do these proprietary activities serve society or the taxpayer. For these banks there is absolutely no risk, while the gains---as evidenced by record Wall Street bonuses in 2009---all accrue to the banks. As we learned in the last two years, if banks happened to lose money, both the Fed and the Treasury will make sure they are made whole again with US Taxpayer funds. For the Too Big to Fail banks, this is not only the best of times, but the financial crisis has proven to be the best thing that ever happened to them. For the rest of America not working on Wall Street and not with an ownership position in the Fed, times are not quite so rosy.
Why is it that a combination of the Fed, Treasury, major banks and the White House have decided that the American people have no right to know all of the things the people are responsible for through the machinations and activities of the Federal Reserve? Is America not a democracy? Have we reverted to colonial times, and instead of being beholden to a foreign monarch, we are now beholden to a domestic monarchy in the form of the Federal Reserve and the Too Big to Fail banks?
Those in Congress and the Administration, as well as the Fed and Wall Street, would do well to remember what happened last time the people had to pay without any say. [emphasis added]
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