New Deal 2.0 Sun 2010-07-25 16:08 EDT

Marriner S. Eccles: Keynesian Evangelist Before Keynes

Henry C. K. Liu

...From direct experience, [1930s Federal Reserve chairman Marriner S. Eccles] realized that bankers like himself, by doing what seemed sound on an individual basis, by calling in loans and refusing new lending in hard times, only contributed to the financial crisis. He saw from direct experience the evidence of market failure. He concluded that to get out of the depression, government intervention, something he had been taught was evil, was necessary to place purchasing power in the hands of the public. In the industrial age, the mal-distribution of income (which was hugely unequal) and the excessive savings for capital investment always lead to the masses exhausting their purchasing power, unable to sustain the benefits of mass production that such savings brought...By denying the masses necessary purchasing power, capital denies itself of the very demand that would justify its investment in new production. Credit can extend purchasing power but only until the credit runs out, which would soon occur without the support of adequate income...Eccles, who never attended university or studied economics formally, articulated his pragmatic conclusions in speeches a good three years before Keynes wrote his epoch-making The General Theory of Employment, Interest, and Money (1936)....Eccles' transformation from a businessman, brought up to believe in survival of the fittest, to his belief in government spending on the neediest can teach us many lessons today...The solution is to start the money flowing again by directing it not toward those who already have a surplus, but to those who have not enough. Giving more money to those who already have too much would take more money out of circulation into idle savings and prolong the depression...Eccles promoted a limited war on poverty and unemployment, not on moral but on utilitarian grounds.

0; Keynes; Keynesian Evangelist; Marriner S. Eccles; new dealing 2.

zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Mon 2010-07-19 16:18 EDT

Financial Reform Bill Fixes the Economy ... Not!

Washington's Blog

Congress, Bernanke, Geithner and the boys are patting themselves on the back for passing the financial "reform" legislation...In reality, as discussed below, none of the real problems have been addressed...little in the legislation really restores trust in the system...the bill does nothing to address the ever-widening gap in wealth...The rule of law has not been restored...Unemployment continues to plague the economy...bailing out the banks has simply spread their problems into sovereign crises...the U.S. hasn't reined in its profligate spending...the U.S. has become a a kleptocracy, an oligarchy, a banana republic, a socialist or fascist state ... which acts without the consent of the governed...

dropped; economy; Financial Reform Bill Fixes; long; survival rate; Timeline; zero; Zero Hedge.

New Deal 2.0 Fri 2010-07-16 18:50 EDT

Despite Foreign Debts, U.S. Has the Upper Hand

Henry Liu

U.S. public debt as of July 8, 2010 was $ 13.192 trillion against a projected 2010 GDP of $14.743 trillion. As of April 2010, China held $900.2 billion of US Treasuries, surpassing Japan's holding of $795.5 billion. As of 2007, outstanding GSE (Government Sponsored Enterprises like Fanny Mae; Freddy Mac) debt securities (non-mortgage and those backed by mortgages) summed up to $7.37 trillion. Does this mean disaster for the US? ...the U.S., while vulnerable, is not critically over a barrel by massive foreign holdings of U.S. sovereign debt. The reason is because U.S. sovereign debts are all denominated in dollars, a fiat currency that the Federal Reserve can issue at will. The U.S. has no foreign debt in the strict sense of the term. It has domestic debt denominated in its own fiat currency held in large quantities by foreign governments. The U.S. is never in danger of defaulting on its sovereign debt because it can print all the dollars necessary to pay off foreign holders of its debt. There is also no incentive for the foreign holders of U.S. sovereign debt to push for repayment, as that will only cause the U.S. to print more dollars to cause the dollar to fall further in exchange rates... ...trade globalization through cross-border wage arbitrage also pushes down wages in the US and other advanced economies, causing insufficient consumer income to absorb rising global production. This is the main cause of the current financial crises which have made more severe by financial deregulation. But the root cause is global overcapacity due to low wages of workers who cannot afford to buy what they produce. The world economy is plagued with overcapacity as a result. It is not enough to merely focus on job creation. Jobs must pay wages high enough to eliminate overcapacity. Instead of a G20 coordination on fiscal austerity, there needs to be a G20 commitment to raise wages globally. [Henry C.K. Liu]

0; Foreign debt; new dealing 2; U.S.; upper hand.

zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Fri 2010-07-16 14:41 EDT

Guest Post: Why Goldman Could Pull It Off

David Fiderer

The weaknesses in the S.E.C.'s case against Goldman were always obvious. At the end of the day, an investor who bought Abacus 2007 AC-1 was buying a static portfolio of risks....If you were a sophisticated investor who had done his due diligence, you didn't need to be told that the deal was designed to fail...If you actually reviewed the performance of mortgage backed securities held by the CDO, and understood how cash flow waterfalls and delinquency triggers worked, then you could see that subordinate tranches being insured for the benefit of Goldman were already worthless when the CDO closed. You could also figure out that the rating agencies had deliberately delayed announcing downgrades of the RMBS within the CDO, in order to keep the markets and the deal flow moving...The risk to Goldman was that more of its dirty laundry would be exposed...[but] the S.E.C. shows little appetite for digging deeper, especially since its new COO of the Enforcement Division is a 30-year-old kid from Goldman.

dropped; Goldman; Guest Post; long; pull; survival rate; Timeline; zero; Zero Hedge.

Mon 2010-05-24 10:11 EDT

Hussman Funds - Weekly Market Comment: Don't Mess with Aunt Minnie - May 24, 2010

John P. Hussman

...Last week, we observed an Aunt Minnie featuring a collapse in market internals that has historically been associated with sharply negative market implications....Treasury Secretary Eddie Haskell/Timothy Geithner has scheduled a trip to Europe this week to urge European leaders "to pay better attention to potential market reactions to policy moves, and to accelerate the European rescue program." This promises to be a fiasco. What could European leaders possibly find more arrogant than to be lectured on bailout policy - not simply by the U.S., but specifically by a one-trick pony bureaucrat whose chief trick is the ability to smoothly talk the language of prudence while simultaneously pillaging the fiscal stability of an entire nation for the benefit of bondholders who made bad loans?...Providing Greece (and possibly some of its neighbors) a graceful exit from the Euro requires greater courage but lower ultimate cost - particularly to the citizens of Greece itself - than a policy of forcing heavy austerity, dislocations, and internal deflation within Greece. The effect of austerity policies will be to damage the revenue side of the Grecian economy enough to leave the deficits little changed in any event. One would like to go back a decade in time and choose different policies that would have allowed Greece to maintain the Maastricht deficit limitations, but it is far too late to push a full-grown genie back into an itty-bitty bottle...

2010; 24; Aunt Minnie; Hussman Funds; Mess; weekly market comments.

Sat 2010-05-22 21:13 EDT

EconPapers: An Alternative View of Finance, Saving, Deficits, and Liquidity

L. Randall Wray

This paper contrasts the orthodox approach with an alternative view on finance, saving, deficits, and liquidity. The conventional view on the cause of the current global financial crisis points first to excessive United States trade deficits that are supposed to have "soaked up" global savings. Worse, this policy was ultimately unsustainable because it was inevitable that lenders would stop the flow of dollars. Problems were compounded by the Federal Reserve's pursuit of a low-interest-rate policy, which involved pumping liquidity into the markets and thereby fueling a real estate boom. Finally, with the world awash in dollars, a run on the dollar caused it to collapse. The Fed (and then the Treasury) had to come to the rescue of U.S. banks, firms, and households. When asset prices plummeted, the financial crisis spread to much of the rest of the world. According to the conventional view, China, as the residual supplier of dollars, now holds the fate of the United States, and possibly the entire world, in its hands. Thus, it's necessary for the United States to begin living within its means, by balancing its current account and (eventually) eliminating its budget deficit. I challenge every aspect of this interpretation. Our nation operates with a sovereign currency, one that is issued by a sovereign government that operates with a flexible exchange rate. As such, the government does not really borrow, nor can foreigners be the source of dollars. Rather, it is the U.S. current account deficit that supplies the net dollar saving to the rest of the world, and the federal government budget deficit that supplies the net dollar saving to the nongovernment sector. Further, saving is never a source of finance; rather, private lending creates bank deposits to finance spending that generates income. Some of this income can be saved, so the second part of the saving decision concerns the form in which savings might be held--as liquid or illiquid assets. U.S. current account deficits and federal budget deficits are sustainable, so the United States does not need to adopt austerity, nor does it need to look to the rest of the world for salvation. Rather, it needs to look to domestic fiscal stimulus strategies to resolve the crisis, and to a larger future role for government in helping to stabilize the economy. [MMT]

alternative view; Deficit; EconPapers; finance; liquidity; save.

Sat 2010-05-22 20:00 EDT

"Drop Dead Economics": The Financial Crisis in Greece and the European Union

Michael Hudson

Financial lobbyists are using the Greek crisis as an object lesson to warn about the need to cut back public spending on Social Security and Medicare. This is the opposite of what the Greek demonstrators are demanding: to reverse the global tax shift off property and finance onto labor, and to give labor's financial claims for retirement pensions priority over claims by the banks to get fully paid on hundreds of billions of dollars of recklessly bad loans recently reduced to junk status. The Greek bailout should be thought of as a TARP for German and other European bankers and global currency speculators. Almost $1 trillion is being provided by governments (mainly Germany, at the cost of its own domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks. They will make a killing, as will buyers of hundreds of billions of dollars of credit-default swaps on the Greek government bonds, speculators in euro-swaps and other casino-capitalist gamblers. (Parties on the losing side of these swaps now will need to be bailed out as well, and so on ad infinitum.) This windfall is to be paid by taxpayers -- ultimately those of Greece (in effect labor, because the wealthy have been untaxed) -- to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The ³sanctity of debt -- sacrificing the economy to pay bondholders -- is to be used as an excuse to slash Greek public services, pensions and other government spending...

Drop Dead Economics; European Union; Financial Crisis; Greece.

The Wall Street Examiner Sat 2010-05-22 19:56 EDT

Imagine There's No Credit Market: Another Look At German Controls

...Thus, when people speak of "rescuing the credit markets" they really mean to say rescuing the liquidity providers who failed to assess lending risks so profoundly they can't make required payments. When people talk of German restrictions killing the credit markets, they really mean killing the middle-men (which may or may not have a deleterious effect on government borrowing). German restrictions on certain types of equity and credit transactions are not aimed at reduced government borrowing. They are aimed at reducing the amount (and means of capture) of profit "earned" by middle-men in the transaction- profits, mind you, as per our model, in the case of government borrowing, come either as a result of the money's original owner getting less interest than a direct deal would generate, the government paying more interest (which only comes from higher tax revenues) than a direct deal would generate, or some combination thereof. ...liquidity providing actions of "credit market" middle-men has run amok. As per J.S. Mill, that credit markets are exerting a distinct and independent influence of their own means they are out of order. With increasing frequency, credit is mispriced or unwisely extended and liquidity, the raison d'être of these people, dries up when it is needed most. Yet the middle-men who fail in their tasks expect to be rescued from their failures, and given even more ways to profit from lending other people's money, while the pool of available savings shrinks. ...In one sense I'm quite happy about all of the financial sector bail-outs governments have provided these credit-market middle-men. Before the bail-outs, one had to argue that finance was like a tax on monetary exchange, now this point is clear, finance is, in fact, a tax- and a growing one at that.

credit markets; German-Controlled; imagine; looking; s; Wall Street Examiner.

The Money Game Fri 2010-05-21 13:30 EDT

Sorry, We're Not Weimar Or Zimbabwe, And Gold Is Never Going To Be A Currency Again

Gold is hotter than ever...As an asset class gold has outperformed just about everything over the last 10 year period. It's been an impressive run. But is it all justified? Bear with me for a bit while I take a long-term macro look at gold as an asset class...the fiat currency system is here to stay (or at least some form of it). The odds of reverting back to a purely gold based system is next to zero in my opinion. The truth is, the gold standard as a currency system is a barbarous relic. It is a currency system that worked well in the old world economy, but simply does not have the flexibility to meet the demands of the growing global economy. The global economy has become too complex and too intertwined to be constrained by the gold standard. The fiat currency system is a product of economic evolution and the growing demands and strains of international trade. Famous examples of the break-down of the gold standard and its inflexibility to meet trade demands include the UK in 1931 and the U.S. government's destruction of the gold linked currency system under the Bretton Woods agreement...

currency; Go; gold; Money game; Sorry; Weimar; Zimbabwe.

Wed 2010-05-19 13:23 EDT

Conspiracy of Banks Rigging States Came With Crash (Update1)

...a nationwide conspiracy in which financial advisers to municipalities colluded with Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and 11 other banks... rigged bids on auctions for so-called guaranteed investment contracts, known as GICs, according to a Justice Department list that was filed in U.S. District Court in Manhattan on March 24 and then put under seal. Those contracts hold tens of billions of taxpayer money...The workings of the conspiracy -- which stretched from California to Pennsylvania and included more than 200 deals involving about 160 state agencies, local governments and non- profits -- can be pieced together from the Justice Department's indictment of CDR, civil lawsuits by governments around the country, e-mails obtained by Bloomberg News and interviews with current and former bankers and public officials. "The whole investment process was rigged across the board," said Charlie Anderson, who retired in 2007 as head of field operations for the Internal Revenue Service's tax-exempt bond division. "It was so commonplace that people talked about it on the phones of their employers and ignored the fact that they were being recorded." Anderson said he referred scores of cases to the Justice Department when he was with the IRS. He estimates that bid rigging cost taxpayers billions of dollars...

Banks Rigging States Came; conspiracy; Crash; Update1.

PRAGMATIC CAPITALISM Tue 2010-05-18 15:17 EDT

11 REASON WHY DEFLATION REMAINS THE GREATER RISK

TPC

A nice follow-up here on our earlier piece. David Rosenberg has really nailed the macro picture in terms of inflation and deflation...why deflation remains the greater risk... * Credit is contracting. * Wage rates are stagnating. * Money supply growth is vanishing * The U.S. dollar is strong. * Commodities have peaked. * U.S. home prices are rolling over ... again. * Lumber prices tumbling (down nearly 17% from April 2010 highs) * Wal-Mart is cutting prices on 10,000 items. * Home Depot just cut prices on flowers, fertilizers, lawn equipment and outdoor furniture. * Taco Bell is offering two dollar combo meals. * The April U.S. retail sales report hinted at deflation in groceries, electronics, apparel and sporting goods.

11 reasons; deflation remains; greater risk; PRAGMATIC CAPITALISM.

PRAGMATIC CAPITALISM Tue 2010-05-18 15:15 EDT

A DEFLATIONARY RED FLAG IN THE $U.S. DOLLAR

TPC

...the performance of the dollar is the surest evidence of the kind of environment we're currently in. The surging dollar is a clear sign that inflation is not the concern of global investors. This is almost a sure sign that deflation is once again gripping the global economy and should be setting off red flags for equity investors around the world. The recent action in the dollar is eerily reminiscent of the peak worries in the credit crisis when deflation appeared to be taking a death grip on the global economy and demand for dollars was extremely high...As for the gold rally, I think it's clear gold is rallying in anticipation of its potential to become a future reserve currency. The potential demise of the Euro has become a rally cry for inflationistas who don't understand that the Euro is in fact another single currency system (like the gold standard) which is destined to fail. In the near-term, the rise in gold is likely justified as fear mongering and misguided governments increase demand for the yellow metal. Ultimately, I believe investors will realize that there is little to no inflation in the global economy and that the non-convertible floating exchange systems (such as the USD and JPY) are fundamentally different from the flawed currency system in place in Europe. Debt deflation continues to plague the global economy. Thus far, policymakers have been unable to fend off this wretched beast and I attribute this largely to the widespread misconceptions regarding our monetary systems. This extends to the very highest levels of government...Positioning yourself for hyperinflation and a U.S. dollar collapse has been a recipe for disaster and will continue to be a recipe for disaster as debt deflation remains the single greatest risk to the global economy.

DEFLATIONARY RED FLAG; PRAGMATIC CAPITALISM; U.S. dollar.

Dr. Housing Bubble Blog Sun 2010-05-16 15:17 EDT

Housing never really improved -- 10 charts showing the United States housing market is entering the second wave of problems. 1 out of 4 people with no mortgage payment in the last year are still not in the foreclosure process.

To put it bluntly, the U.S. housing market today is in deep water. Nothing exemplifies the transfer of risk to the public from the private investment banks more than the deep losses at Fannie Mae and Freddie Mac. Fannie Mae announced a stunning first quarter loss of $13.1 billion while Freddie Mac lost $8 billion. At the same time, toxic mortgage superstar JP Morgan Chase announced a $3.3 billion profit for Q1. This reversal of fortunes has been orchestrated perfectly by Wall Street. Since the toxic assets were never marked to market, the big losses have been funneled to the big GSEs (and as we will show in this article, now makes up 96.5 percent of the entire mortgage market). In other words, banks are making profits gambling on Wall Street while pushing out mortgages that are completely backed by the government...

1; 10 Charts Showing; 4 people; Dr. Housing Bubble Blog; enters; Foreclosures process; Housing; mortgage payments; problem; really improving; United States housing market; wave; years.

Fri 2010-05-14 12:11 EDT

"Banging" the U.S. Stock Market

Janet Tavakoli

Chicago residents grew up to the sound of local early morning radio rundowns of pork belly futures and other exchange traded commodities. Every trick in the book from manipulation of soybeans to silver has played out in Chicago's trading pits. Every market professional I've talked to in Chicago since Thursday is of the same opinion. It makes no difference whether human beings or computers are front running and manipulating trades. The gyrations in the market last week have the look and feel of classic market manipulation...

bang; U.S. stock market.

Thu 2010-05-13 13:39 EDT

The People v. the Bankers

Michael Hudson

Financial lobbyists here in the U.S. are using the Greek crisis as an object lesson to warn about the need to cut back public spending on Social Security and Medicare. This is the opposite of what the Greek demonstrators are demanding: to reverse the global tax shift off property and finance onto labor, and to give labor's financial claims for retirement pensions priority over claims by the banks to get fully paid on hundreds of billions of dollars of recklessly bad loans recently reduced to junk status. Let's call the ``Greek bailout'' what it is: a TARP for German and other European bankers and global currency speculators. The money is being provided by other governments (mainly the German Treasury, cutting back its domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks...This windfall is to be paid by taxpayers -- ultimately those of Greece (in effect labor, because the wealthy have been untaxed) -- to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The payment to bondholders is to be used as an excuse to slash Greek public services, pensions and other government spending. It will be a model for other countries to impose similar economic austerity...

bankers; people.

Tue 2010-05-11 09:02 EDT

Barofsky Says Criminal Charges Possible in Alleged AIG Coverup - Bloomberg.com

Richard Teitelbaum

...The TARP watchdog [Neil Barofsy] has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York. The secrecy that enveloped the deal was unwarranted, Barofsky says, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges. In Senate Finance Committee testimony on April 20, Barofsky said SIGTARP would investigate seven AIG-linked mortgage-related securities similar to Abacus 2007-AC1, the instrument underwritten by Goldman Sachs Group Inc. that is at the center of a U.S. Securities and Exchange Commission lawsuit filed against the investment bank on April 16...

Alleged AIG Coverup; Barofsky Says Criminal Charges Possible; Bloomberg; com.