billy blog Thu 2010-08-19 16:25 EDT

There is no credit risk for a sovereign government

Bill Mitchell

...UC Berkeley economist Brad DeLong...likes to think of himself alongside Krugman as part of the ``Keynesian'' army against all the neo-liberals. Both are in fact New Keynesians. In that sense, they are not very dissimilar to Mankiw and his gang. Interestingly, they appear to be continually trying to one-up Mankiw as part of some internecine struggle within the American economics academy. But from a Modern Monetary Theory (MMT) perspective, it is hard to tell their various narratives apart...a sovereign government is never revenue constrained because it is the monopoly issuer of the currency. That is a basic starting point in exploring the differences between spending and taxation decisions of a sovereign government and the spending and income-earning decisions/possibilities of the private sector entities (households and firms). The two domains -- government and non-government -- are very different in this respect and any attempt to conflate them as if both are subject to budget constraints is wrong and starts the slippery slide down into the total mispresentation of how the macroeconomics system operates...When a government runs a surplus it is not ``saving'' anything. The surpluses go nowhere! They are just flows that are accounted for and the aggregate demand which is drained by the surpluses is lost in that period forever...DeLong is actually teaching some bastardised course in Political Science here and only allowing the conservative side of the debate to be aired...HSBC economist Steven Major ...[writes in the Financial Times (FT)]...so contrary to what is being peddled each day in the financial press that a medal for bravery should be awarded...

Billy Blog; credit Risk; sovereign Government.

naked capitalism Mon 2010-07-19 17:02 EDT

Elizabeth Warren in Treasury Crosshairs Again, Geithner Opposes Her as Head of Consumer Financial Services Protection Agency

To say there is no love lost between Treasury and Elizabeth Warren is probably putting it mildly. Treasury was gunning for her ouster in early 2009...During the period when the COP was openly and effectively critical of the TARP, there was also a full court press in the media against Warren. Warren is the obvious choice to head the otherwise-guaranteed-to-be-a-joke consumer financial services agency due to set up its shingle at the Fed. She has been a tireless consumer advocate, is trusted and well liked by the public at large, an effective communicator and a respected legal scholar, and is willing to stare down political opponents. All those qualities make her hugely threatening. Banksters and their lobbyist allies have been saying loudly and clearly that they are firmly opposed to having Warren head the new consumer agency. So, predictably, Geithner acts as their water-carrier...this Administration...may actually see loss of the Democrat majority in the House as a win (as in is finding creative ways to rationalize its fallen standing as a possible longer-term advantage). First, it allows Team Obama to blame whatever happens (or fails to happen) on the Republicans. Second, it gives the Administration plenty of air cover to become more openly corporatist (recall Clinton's famed move to the right after the 1994 mid term debacle).

Consumer Financial Services Protection Agency; Elizabeth Warren; Geithner opposes; Head; naked capitalism; Treasury Crosshairs.

zero hedge Wed 2010-05-19 11:37 EDT

Guest Post: Goldman's CDOs Had Nothing to Do With the Real Estate Bubble

David Fiderer

If Goldman Sachs wanted to reduce its exposure to subprime mortgage investments, why didn't it simply sell the assets it owned? Two reasons: First, those large sales would have sent a signal that something was terribly, terribly wrong, and thereby pushed prices down further. That's how supply and demand normally works. Second, Goldman professed to be market maker, which uses its trading book to instill confidence. It ostensibly bought, sold and inventoried mortgage securities to provide stability and liquidity to the marketplace. Of course, we now know that such market confidence was entirely misplaced. To sidestep these issues, Goldman and other major banks found a solution that subverted the laws of supply and demand, and escaped the price discovery of a transparent marketplace. They fabricated synthetic CDOs, such as Abacus 2007 AC-1. These toxic assets, invented out of thin air, made the meltdown worse than it otherwise would have been...

Goldman's CDOs; Guest Post; real estate bubble; Zero Hedge.

zero hedge Sun 2010-05-09 09:25 EDT

Dissecting The Crash

Here are two accounts dissecting in detail the events from yesterday. One is from Dan Hinckley at Wild Analytics, the second from Dan O'Brien. ...The idea that it was a 'fat finger' error is ludicrous; unless the fat finger hit every market in the world virtually simultaneously. Liquidity simply left the world financial markets for about four minutes this afternoon. The bids just vanished...In one second more or less someone (and yes, under these circumstances, human beings take control of the machines) made the decision to pull the bids on every equity in the S&P, every financial futures contract, every FX contract in every market in the world. This kind of thing just doesn't happen in a pure auction environment; there just isn't a tight enough communication link between the parties to allow the decisions to propagate within the same second -- even with HFT algorithms. No. Some human made the decision to pull the bids; all of them, all at once. If that is not a condemnation of the concentration of financial power and the systematic risk it engenders I don't know what is...How does all of this happen? Well, you can thank the Federal Reserve... 1) The Fed prints fake money out of thin air... 2) Large banks and hedge funds borrow money from the Fed at near-ZERO interest rates... 3) These institutions buy Treasuries with a guaranteed 4% return, thus guaranteeing the banks massive and risk-free profits on the backs of the middle class (remember, you're not allowed to earn an interest rate on your savings accounts!)... 4) These institutions then swap Treasuries with the Fed for cash... 5) These same institutions (banks) then take the cash and gun the stock market higher with its FREE MONEY from the government...I meant free money from you. By the way, were you asked to vote on this? Frankly, it's better than free money - they're being PAID to do this... 6) Banks pay the very clown-posse that cause the 2008 crash (and today's) the largest bonuses...EVER...with your tax dollars.

Crash; dissecting; Zero Hedge.

Jesse's Café Américain Sun 2010-05-09 09:08 EDT

PLUNGE! 1987 Style Sudden Drop in US Stocks Driven by Program Trading and a Ponzi Market Structure

Jesse

US equities were gripped by panic selling as the Dow plunged almost 1,000 points driven by a cascade of 100 share high frequency program trading, estimated to have been about 80% of volume. Gold rocketed higher to $1,210...This is highly reminiscent of the 1987 crash driven by a flawed market structure based on automated trading and bad theories. The entire stock market rally which we have seen this year off the February lows resembles a low volume Ponzi scheme, and formed a huge air pocket under prices. This US equity rally was driven by technically oriented buying from the Banks and the hedge funds. There was and still is a lack of legitimate institutional buying at these price levels. This was machine driven speculation enabled by the lack of reform in a system riddled with corruption...

1987 Style Sudden Drop; Jesse's Café Américain; plunge; Ponzi Market Structure; program-trading; Stocks driven.

Wed 2009-10-07 10:31 EDT

Beijing's derivative default stance rattles banks

Reuters

For banks that are hoping to sell more derivatives hedges in China, the world's fastest-expanding major economy and top commodities consumer, the danger goes beyond the immediate risk to existing contracts to the longer-term precedent that suggests Chinese companies can simply renege on deals when they like...Air China, China Eastern and shipping giant COSCO -- among the Chinese companies that have reported huge derivatives losses since last year -- had issued almost identical notices to banks.

Beijing's derivative default stance rattles banks.

Wed 2009-09-16 19:21 EDT

Corrosive, stinking Chinese drywall may be radioactive - Los Angeles Times

The final years of the U.S. housing boom and a disastrous series of Gulf Coast hurricanes created a golden opportunity for Chinese drywall manufacturers. With domestic suppliers unable to keep up with demand, imports of Chinese drywall to the U.S. jumped 17-fold in 2006 from the year before. That imported drywall is now at the center of complaints of foul odors seeping from walls. Hundreds of homeowners, most in Florida, have also reported corrosion to their air conditioners, mirrors, electrical outlets and even jewelry. State and federal authorities have traced the problems to Chinese-made drywall but haven't yet fully determined the causes. Some Chinese experts, however, suspect that the culprit is a radioactive phosphorus substance -- phosphogypsum -- that is banned for construction use in the U.S. but has been used by Chinese manufacturers for almost a decade.(china, building materials, defective products, health hazards)

corrosive; Los Angeles Times; Radioactive; stinking Chinese drywall.

naked capitalism Tue 2009-09-01 13:10 EDT

Twenty-Five Years to Work Off the Debt Overhang?

T. S. Eliot was right. Human beings cannot stand very much reality. As much as I have an appetite for bearish views (I figure the optimist case gets disproportionate air time), the headline of Ambrose Evans-Pritchard's latest piece, ``Our quarter-century penance is just starting,'' is grim even by the standards of the bearish faithful. Great comment by DownSouth, quoting Martin Luther King and Reinhold Niebuhr to the effect that by delegating to elites what should be the role of labor unions and grass-roots organizations. Niebuhr wrote: ``when collective power, whether in the form of imperialism or class domination, exploits weakness, it can never be dislodged unless power is raised against it'' ``Before we can fix the economy, the polity must be repaired first.''

debt overhang; naked capitalism; working; years.