Sun 2010-10-10 11:56 EDT

The Federal Reserve's Relevance Test - Project Syndicate

Joseph E. Stiglitz

...as investors look outside the US for higher yield, the flood of money out of the dollar has bid up exchange rates in emerging markets around the world. Emerging markets know this, and are upset -- Brazil has vehemently expressed its concerns -- not only about the increased value of their currency, but that the influx of money risks fueling asset bubbles or triggering inflation. The normal response of emerging-market central banks to bubbles or inflation would be to raise interest rates -- thereby increasing their currencies' value still more. US policy is thus delivering a double whammy on competitive devaluation -- weakening the dollar and forcing competitors to strengthen their currencies...

Federal Reserve's Relevance Test; Project Syndicate.

naked capitalism Thu 2010-09-30 08:22 EDT

Why Backstopping Repo is a Bad Idea

The normally sound Gillian Tett of the Financial Times endorses an idea that is both dangerous and unnecessary, namely, government backstopping of the system of short-term collateralized lending called repo, for ``sale with agreement to repurchase.''...But the real problem is that the only securities that were once considered to be suitable were those of the very highest quality, namely Treasuries. The real problem is in widening the market beyond that. If you have absolutely impeccable collateral, you don't care if your counterparty goes belly up if you aren't at risk of losses on the assets you hold...the real problem is the use of low quality collateral...why would we possibly WANT a system that might down the road encourage the pledging of less than stellar instruments as repo?...we need to go back and look hard at why the need for repo has risen since 2001, and how much is related to legitimate activity. The fact that it grew much more rapidly than the economy overall suggests not...official efforts should proceed...to shrink the repo market (as we've recommended for a market that has contributed to the growth of repo, credit default swaps)...our efforts NOT to restrain banks leads to a tremendous tax on all of us...a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive...

Backstopping Repo; Bad Ideas; naked capitalism.

Social Democracy for the 21st Century: A Post Keynesian Perspective Thu 2010-09-30 08:12 EDT

Would Keynes have endorsed Modern Monetary Theory/Neochartalism?

Lord Keynes

...what would Keynes have thought of neochartalism/modern monetary theory (MMT)? MMT developed from Abba Lerner's theory of functional finance, as well as G. F. Knapp's theory of chartalism, as propounded in his book The State Theory of Money...MMT tells us that the government is the monopoly issuer of its own currency. Hence the government is not revenue-constrained. Taxes and bond issues do not finance government spending. No entity with the power to create and destroy money at will requires anyone to ``fund'' its spending. Having said this, one must immediately say that, even though deficits are not ``financially'' constrained in the normal sense, they do face real constraints in the inflation rate, exchange rate, available resources, capacity utilization, labour available (= unemployment level), and external balance...My discussion is based on the fundamental article by David Colander on this subject...``Lerner approached Keynes and asked: `Mr. Keynes, why don't we forget all this business of fiscal policy, public debt and all those things, and have some printing presses.' Keynes, after looking around the room to see that no newspaper reporters could hear, replied: `It's the art of statesmanship to tell lies but they must be plausible lies.' ''...

21st century; endorsed Modern Monetary Theory/Neochartalism; Keynes; Post Keynesian Perspective; social democracy.

Satyajit Das's Blog - Fear & Loathing in Financial Products Thu 2010-08-19 16:16 EDT

Grecian Derivative

Satyajit Das

...In the 1990s, Japanese companies and investors pioneered the use of derivatives to hide losses...Since then, the use of derivatives to disguise debt and arbitrage regulations and accounting rules has increased...Italy used a currency swap against an existing Yen 200 billion bond ($1.6 billion) to lock in profits from the depreciation of the Yen. The swap was done at off-market rates...the swap was really a loan where Italy had accepted an off-market unfavourable exchange rate and received cash in return...A key element of the recent Greek debt problems has been the use of derivative transactions to disguise the true level of its borrowing...More recently, similar structures have emerged in Latvia...This follows a series of revelation regrading the use of derivatives by municipal authorities in the U.S., Italy, German, Austria and France where complex bets on interest rates were used to provide funding or cosmetically lower borrowing costs. Many of these transactions resulted in substantial losses and are now in dispute...Normal commercial transactions can be readily disguised using derivatives exacerbating risks and reducing market transparency. Current proposals to regulate derivatives do not focus on this issue...

fears; financial products; Grecian Derivative; loath; Satyajit Das's Blog.

Tue 2010-06-01 18:24 EDT

billy blog >> Blog Archive >> In the spirit of debate ... my reply Part 2

Bill Mitchell

Today, I offer Part 2 of my responses to the comments raised in the debate so far...Modern monetary theory does not use the term ``money'' in the same way as the mainstream because it creates instant confusion. As Scott said ``Money is always someone's liability, so better to be precise about whose liabilities we are talking about than saying money.'' That is why we emphasis fully understanding the asset-liability matches that occur in monetary systems. And that leads you to realise that transactions between government and non-government create or destroy net financial assets denominated in the currency of issue whereas transactions within the non-government sector cannot create net financial positions...So modern monetary theorists prefer to concentrate on what is going on with balance sheets after certain flows have occured rather than narrowly defining some financial assets as money and others not...There is no doubt that the non-government institutions can increase credit. Some slack analysts call this an increase in money. But the accurate statement is that, as a matter of accounting it increases the (in Scott's words) ``the quantity of financial assets and financial liabilities 1 for 1 in the non-govt sector. So, with private credit, there is BY DEFINITION no NET increase in private sector financial assets created.'' Once we understand that and note that typically the non-government sector seeks to net save in the currency of issue then modern monetary theory tells you that the public sector must run a deficit to underwrite this desired net saving or else see an output gap widen...Who is in control is an interesting question. Clearly, the government cannot directly control the money supply which renders much of the analysis in mainstream macroeconomics textbooks as being irrelevant. The Monetarists via Milton Friedman persuaded central banks to adopt monetary targetting in the 1980s and it failed a few years later -- miserably...Then you might like to consider it from the other angle -- a government which accepts responsibility for full employment can ``finance'' the saving desires of the non-government sector by increasing its deficit up to the level warranted by the spending gap (left by the full employment non-government savings)...Orthodox macroeconomic theory struggles with the idea of involuntary unemployment and typically tries to fudge the explanation by appealing to market rigidities (typically nominal wage inflexibility). However, in general, the orthodox framework cannot convincingly explain systemic constraints that comprehensively negate individual volition. The modern monetary framework clearly explicates how involuntary unemployment arises. The private sector, in aggregate, may desire to spend less of the monetary unit of account than it earns. In this case, if this gap in spending is not met by government, then unemployment will occur. Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending...to maintain high levels of employment and given that the public generally desire to hold some reserves of fiat money, the government balance will normally have to be in deficit...modern monetary theory demonstrates that if you want the non-government sector to net save...

Billy Blog; blogs Archive; Debate; reply Part 2; Spirit.

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.

Satyajit Das's Blog - Fear & Loathing in Financial Products Mon 2010-04-05 15:01 EDT

Mark-to-Make Believe: Living on a Prayer

Satyajit Das

...Recent research indicates that MtM accounting may, in fact, distort the price of assets...The research highlights that MtM accounting is pro-cyclical and creates volatility of asset values through complex positive and negative feedback loops. Under normal market conditions where asset markets are liquid, MtM accounting works benignly. In volatile markets, where behaviour becomes linked by a common factor such as disclosure required by MtM accounting, co-ordinated actions of market participants can easily lead to sharp movements in asset prices. The process distorts market prices and ultimately the firm's financial position and value.

fears; financial products; lively; loath; Make-Believe; marked; prayers; Satyajit Das's Blog.

Ambrose Evans-Pritchard - Finance and business comments Thu 2010-01-07 19:00 EST

Global bear rally of 2009 will end as Japan's hyperinflation rips economy to pieces

The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises -- the final error that triggered the implosion of Lehman, AIG, and the Western banking system. As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression -- more akin to Japan's Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era. The surplus regions (China, Japan, Germania, Gulf ) have not increased demand enough to compensate for belt-tightening in the deficit bloc (Anglo-sphere, Club Med, East Europe), and fiscal adrenalin is already fading in Europe. The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of GDP sits near record levels in two-fifths of the world economy. Our long purge has barely begun.

2009; Ambrose Evans Pritchard; Business Comment; ending; finance; Global Bear Rally; Japan's hyperinflation rips economy; pieces.

naked capitalism Thu 2009-11-19 10:33 EST

Guest Post: Herding the Sheep

George Washington of Washington's Blog

Financial insider and commentator Yves Smith wrote an essay last week entitled ``MSM Reporting as Propaganda'' arguing that the government has been using propaganda to make people think that things are getting better, no one is angry, and -- therefore -- no one should get upset...Is Smith right? And even if she is, isn't ``propaganda'' too strong a word?...Even if true, propaganda is too strong a word for attempts to convince people that important issues are boring, that no one else is angry about them, and that everything is normal. Perhaps ``herding the wayward sheep'' would be better . . .

Guest Post; Herd; naked capitalism; sheep.

zero hedge Sat 2009-10-10 11:57 EDT

The Federal Reserve's Balance Sheet: An Update

Ben S. Bernanke

...the Federal Reserve has faced two historically unusual constraints on policy. First, the financial crisis, by increasing credit risk spreads and inhibiting normal flows of financing and credit extension, has likely reduced the degree of monetary accommodation associated with any given level of the federal funds rate target, perhaps significantly. Second, since December, the targeted funds rate has been effectively at its zero lower bound (more precisely, in a range between 0 and 25 basis points), eliminating the possibility of further stimulating the economy through cuts in the target rate. To provide additional support to the economy despite these limits on traditional monetary policy, the Federal Open Market Committee (FOMC) and the Board of Governors have taken a number of actions and initiated a series of new programs that have increased the size and changed the composition of the Federal Reserve's balance sheet. I thought it would be useful this evening to review for you the most important elements of the Federal Reserve's balance sheet, as well as some aspects of their evolution over time. As you'll see, doing so provides a convenient means of explaining the steps the Federal Reserve has taken, beyond conventional interest rate reductions, to mitigate the financial crisis and the recession, as well as how those actions will be reversed as the economy recovers...

Federal Reserve's balance sheet; Update; Zero Hedge.

Thu 2009-10-01 17:56 EDT

98489 -- Landmark National Bank v. Kesler -- Leben -- Kansas Court of Appeals

J. J. LEBEN

Landmark National Bank brought a suit to foreclose its mortgage against Boyd Kesler and joined Millennia Mortgage Corp. as a defendant because a second mortgage had been filed of record for a loan between Kesler and Millennia. In a foreclosure suit, it is normal practice to name as defendants all parties who may claim a lien against the property. When neither Kesler nor Millennia responded to the suit, the district court gave Landmark a default judgment, entered a journal entry foreclosing Landmark's mortgage, and ordered the property sold so that sale proceeds could be applied to pay Landmark's mortgage. But Millennia apparently had sold its mortgage to another party and no longer had interest in the property by this time. Sovereign Bank filed a motion to set aside the judgment and asserted that it now held the title to Kesler's obligation to pay the debt to Millennia. And another party, Mortgage Electronic Registration Systems, Inc. ("MERS"), also filed a motion to set aside the judgment and asserted that it held legal title to the mortgage, originally on behalf of Millennia and later on behalf of Sovereign. Both Sovereign and MERS claim that MERS was a necessary party to the foreclosure lawsuit and that the judgment must be set aside because MERS wasn't included on the foreclosure suit as a defendant. The district court refused to set aside its judgment. The court found that MERS was not a necessary party and that Sovereign had not sufficiently demonstrated its interest in the property to justify setting aside the foreclosure. ...The district court properly determined that MERS was not a contingently necessary party in Landmark's foreclosure action. The district court also was well within its discretion in denying motions from MERS and Sovereign to intervene after a foreclosure judgment had been entered and the foreclosed property had been sold. The judgment of the district court is affirmed.

98489; appealing; Kansas court; Kesler; Landmark National Bank; leben.

zero hedge Tue 2009-09-22 16:22 EDT

Top Goldman Lobbyist Barred From Communicating With House's Financial Services Committee

In a rare example of testicular fortitude, Barney Frank has "banished" Goldman's Michael Pease from communicating with the U.S. House of Representatives Financial Services Committee. According to Reuters, the Goldmanite, and former committee staffer, has been "asked" not to interfere with the Congressional panel for a period of 12 months. According to Barney Frank aide Steven Adamske: "Mr. Paese left our offices in September 2008, and was not allowed to communicate with any committee members or staff for a period of one year due to normal ethics restrictions that apply to all House and Senate employees. Out of an abundance of caution due to the nature of financial regulation reform, the chairman has extended Mr. Paese's recusal for another year." Pease "was the committee's deputy staff director before he quit to work for the Securities Industry and Financial Markets Association as a lobbyist. Goldman hired him in April.

communications; House's Financial Services Committee; Top Goldman Lobbyist Barred; Zero Hedge.

naked capitalism Thu 2009-09-17 09:46 EDT

``How China Cooks Its Books''

We've commented from time to time on dubious Chinese data releases. But this report from Foreign Policy reports on an interest aspect: that the statistics are not manipulated only in the normal bureaucratic manner (fudging them) but also by getting companies to change behavior so it can be tallied in a more flattering fashion....unemployment is likely 40 to 50 million, as opposed to the widely reported 20 to 30 million; the statistical manipulations are a surprisingly broad-based initiative.

books; China Cooks; naked capitalism.

ClubOrlov Wed 2009-08-26 14:22 EDT

That Bastion of American Socialism...the United States military

kollapsnik

Over the past few months the American mainstream chatter has experienced a sudden spike in the gratuitous use of the term "Socialist." It was prompted by the attempts of the federal government to resuscitate insolvent financial institutions. These attempts included offers of guarantees to their clients, injections of large sums of borrowed public money, and granting them access to almost-free credit that was magically summoned ex nihilo by the Federal Reserve. To some observers, these attempts looked like an emergency nationalization of the finance sector was underway, prompting them to cry "Socialism!" Their cries were not as strident as one would expect, bereft of the usual disdain that normally accompanies the use of this term. Rather, it was proffered with a wan smile, because the commentators could find nothing... ``Since the end of the Civil War, Americans have become accustomed to thinking of war as something that happens elsewhere, to other people. Thus, the news that the US is bombing this or that land, for no adequate reason, killing and maiming numerous civilians, produces in us neither the normal human reaction of revulsion, nausea and disgust, nor the conviction that we must take the fight to our own monstrous leaders, lest we too become monsters. Life under domestic military occupation might bring home some welcome realizations, and start Americans down the long road of atoning for the sins of their forefathers, who have run roughshod over much of the rest of the planet for far too long.''

American social; bastion; ClubOrlov; United States military.

Thu 2009-01-15 00:00 EST

naked capitalism: Guest Post: "If You Can't Tell Who The Sucker Is...."

by Cassandra Does Tokyo; normalcy; ``what we've seen in leverage and credit growth during the past 15 years is NOT normal, nor is it sustainable - neither relative to history or in absolute terms.''

Guest Post; naked capitalism; suckers; tells.