naked capitalism Wed 2010-09-08 17:27 EDT

Economic consequences of speculative side bets -- The case of naked CDS

Yeon-Koo Che and Rajiv Sethi

...We argue that the existence of naked credit default swaps has significant effects on the terms of financing, the likelihood of default, and the size and composition of investment expenditures. And we identify three mechanisms through which these broader consequences of speculative side bets arise: collateral effects, rollover risk, and project choice...the existence of zero-sum side bets on default has major economic repercussions. These contracts induce investors who are optimistic about the future revenues of borrowers, and would therefore be natural purchasers of debt, to sell credit protection instead. This diverts their capital away from potential borrowers and channels it into collateral to support speculative positions. As a consequence, the marginal bond buyer is less optimistic about the borrower's prospects, and demands a higher interest rate in order to lend. This can result in an increased likelihood of default, and the emergence of self-fulfilling paths in which firms are unable to rollover their debt, even when such trajectories would not arise in the absence of credit derivatives. And it can influence the project choices of firms, leading not only to lower levels of investment overall but also in some cases to the selection of riskier ventures with lower expected returns...

Case; economic consequences; naked capitalism; Naked CDS; speculative side bets.

Phil's Favorites - By Ilene Thu 2010-08-19 15:58 EDT

Time for a New, New Deal?

Phil of Phil's Stock World

...The Big Lie being told by the right is that we can solve our problems by cutting spending and (ROFL) lowering taxes...Of course, let's keep in mind that the $1.5Tn the government spends directly employs 2.7M people and millions more indirectly so, for every person you cut, make sure you add back $20,000 a year for unemployment benefits and administration (or are we going to throw them all on the street?)...the real glove-across-your-face insult to your intelligence comes when they try to tell you that giving tax breaks to the rich and to corporations will help...US Corporations only paid a grand total of $138Bn in taxes in 2009 (6.5% of all taxes collected)...US Corporations have done nothing but outsource America's future for decades and it is time for the bottom 99% of the income earners (those earning less than $250,000 a year) to wake up and smell the class warfare that is being waged against them. How can we even begin to entertain the idea of cutting government and cutting government spending when the sum total contribution of Big Business America represents a rounding error in our national budget?...When private business fails to expand, when the budgets cannot be balanced because 25% of the population is unable to make income tax contributions due to loss of jobs and homes -- then a wise man knows when it is time to step in and let the Government fill the void. Not with more bailouts to the rich who, like Reagan's deficit ``are big enough to care for themselves'' but with bold programs that invest in the future of this country and utilize the skills and labor of this country and make America strong and independent...

Ilene; new; new deal; Phil's Favorites; Time.

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.

billy blog Mon 2010-06-14 18:13 EDT

The OECDs perverted view of fiscal policy

...the big neo-liberal economic organisations like the IMF and the OECD are trying to re-assert their intellectual authority on the policy debate again after being unable to provide any meaningful insights into the cause of the global crisis or its immediate remedies. They were relatively quiet in the early days of the crisis and the IMF even issued an apology, albeit a conditional one. It is clear that the policies the OECD and the IMF have promoted over the last decades have not helped those in poorer nations solve poverty and have also maintained persistently high levels of labour underutilisation across most advanced economies. It is also clear that the economic policies these agencies have been promoting for years were instrumental in creating the conditions that ultimately led to the collapse in 2007. Now they are emerging, unashamed, and touting even more destructive policy frameworks...

Billy Blog; fiscal policies; OECDs perverted view.

Tue 2010-06-01 16:23 EDT

billy blog >> Blog Archive >> In the spirit of debate ...

Bill Mitchell

Readers of my blog often ask me about how modern monetary theory sits with the views of the debt-deflationists (and specifically my academic colleague Steve Keen). Steve and I have collaborated in the last few days to foster some debate between us on a constructive level with the aim of demonstrating that the common enemy is mainstream macroeconomics and that progressive thinkers should target that school of thought rather than looking within...hopefully, this initiative will broaden the debate and bring more people up to speed on where the real enemy of full employment lies...The modern monetary system is characterised by a floating exchange rate (so monetary policy is freed from the need to defend foreign exchange reserves) and the monopoly provision of fiat currency. The monopolist is the national government. Most countries now operate monetary systems that have these characteristics...the monetary unit defined by the government has no intrinsic worth...The viability of the fiat currency is ensured by the fact that it is the only unit which is acceptable for payment of taxes and other financial demands of the government.The analogy that mainstream macroeconomics draws between private household budgets and the national government budget is thus false. Households, the users of the currency, must finance their spending prior to the fact. However, government, as the issuer of the currency, must spend first (credit private bank accounts) before it can subsequently tax (debit private accounts)... Taxation acts to withdraw spending power from the private sector but does not provide any extra financial capacity for public spending...As a matter of national accounting, the federal government deficit (surplus) equals the non-government surplus (deficit). In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending...contrary to mainstream economic rhetoric, the systematic pursuit of government budget surpluses is necessarily manifested as systematic declines in private sector savings...Unemployment occurs when net government spending is too low. As a matter of accounting, for aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period). Involuntary unemployment is idle labour unable to find a buyer at the current money wage. In the absence of government spending, unemployment arises when the private sector, in aggregate, desires to spend less of the monetary unit of account than it earns. 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. Thus, unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save...Unlike the mainstream rhetoric, insolvency is never an issue with deficits. The only danger with fiscal policy is inflation which would arise if the government pushed nominal spending growth above the real capacity of the economy to absorb it...government debt functions as interest rate support via the maintenance of desired reserve levels in the commercial banking system and not as a source of funds to finance government spending...there is no intrinsic reason for...

Billy Blog; blogs Archive; Debate; Spirit.

Sat 2010-05-22 19:45 EDT

billy blog >> Blog Archive >> Zimbabwe for hyperventilators 101

Zimbabwe is the new Weimar Republic. Not! Zimbabwe is the front-line evidence that shows that government deficits will generate hyper-inflation. Not! Zimbabwe is the demonstration of the folly of a fiat monetary system. Not! Zimbabwe is an African country with a dysfunctional government. Yes!...Now at the risk of repeating myself a million times, this is the macroeconomic sequence that defines responsible fiscal policy practice. This is basic macroeconomics and the debt-deficit-hyperinflation hyperventilating neo-liberal terrorists seem unable to grasp it: [Mitchell summarizes modern monetary theory (MMT)]...So a responsible government will attempt to maintain spending levels sufficient to fill any saving....

Billy Blog; blogs Archive; hyperventilators 101; Zimbabwe.

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.

Jesse's Café Américain Wed 2010-02-03 20:13 EST

Italy Seizes Bank of America Assets In Derivatives Fraud Probe

Jesse

"more than 519 municipalities that face 990 million euros in derivatives losses"...Globalization is used as a rationale for stripping nations of their sovereign rights, and the people from their ability to rule and protect themselves in accord with their own beliefs and preferences...The US is a relative safe haven for multinational corporations that engage in various forms of fraud and market manipulation around the world, like modern day privateers. It appears unable to regulate them because of widespread political corruption and the self interest of its monied elite.

America assets; Derivatives Fraud Probe; Italy Seizes Bank; Jesse's Café Américain.

naked capitalism Thu 2009-10-08 16:47 EDT

Latvia in Crisis; Threatens to Stiff Swedish Banks With Mini-Jubilee

Latvia and to a lesser extent Estonia and Lithuania had a massive and unsustainable current account deficit...Foreign benefactors have just put the choke collar on Latvia. The government was unable to roll over its debt this week...Sweden on Tuesday put pressure on the tiny Baltic nation to fulfill required spending cuts, threatening to withhold payments [from a] euro rescue loan put together by Nordic countries...But Latvia does not appear to be ready to accede to Sweden's demands. The immediate cause for concern is that Latvia will simultaneously devalue its currency and provide a mechanism for its consumers to partially default on mortgages held by foreign banks.

Crisis; Latvia; Mini-Jubilee; naked capitalism; Stiff Swedish Banks; threatens.

Mish's Global Economic Trend Analysis Mon 2009-09-21 14:09 EDT

Is Pent-Up Inflation From Fed Printing Waiting On Deck?

Michael Shedlock

Inquiring minds are wondering about the possibility of "pent-up" inflation from the massive expansion money supply by the Fed...Hardly. A funny thing happened to the inflation theory: Banks aren't lending and proof can be found in excess reserves at member banks. Because of rising credit card defaults, commercial real estate defaults, foreclosures, walk-aways, and other bad debts, banks need those reserves to cover future losses...banks are insolvent, unable or unwilling to lend. Moreover, tapped out consumers are unable or unwilling to borrow.

deck; Fed Printing Waiting; Inflation; Mish's Global Economic Trend Analysis; pent.

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.

The Guardian World News Sun 2009-08-30 14:43 EDT

Iceland votes to repay UK savings

Iceland's parliament today approved a plan to repay Britain and the Netherlands £3.4bn they used to compensate depositors after the collapse of an Icelandic bank. Johanna Sigurdardottir, the prime minister, said the "Icesave" bill was an important step in her country's economic recovery, paving the way for it to receive financial help from the International Monetary Fund and other countries and keeping open the option to join the EU. "It's obviously best for all three nations to reach an amicable agreement on this for it is in no one's interest to see Iceland economically unable to meet its obligations," Sigurdardottir told Reuters after the vote, which followed an acrimonious national debate. Critics objected to paying for mistakes made by private banks under the watch of other governments and for...

Guardian World News; Iceland votes; repay UK savings.

Mish's Global Economic Trend Analysis Sun 2009-08-30 12:03 EDT

Greater Than One in Four FDIC Insured Institutions are Unprofitable; Bank Problem List at 15 Year High

Michael Shedlock

The second quarter 2009 Quarterly Banking Profile has some interesting charts and facts that inquiring minds will be interested in.Insured Institution Performance Higher Loss Provisions Lead to a $3.7 Billion Net LossMore Than One in Four Institutions Are UnprofitableCharge-Offs and Noncurrent Loans Continue to RiseNet Interest Margins Show Modest ImprovementIndustry Assets Decline by $238 BillionThe Industry Posts a Net Loss for the Quarter The Industry Posts a Net Loss for the Quarter Burdened by costs associated with rising levels of troubled loans and falling asset values, FDIC-insured commercial banks and savings institutions reported an aggregate net loss of $3.7 billion in the second quarter of 2009. Increased expenses for bad loans were chiefly responsible for the industry's loss. Insured institutions added $66.9 billion in loan-loss provisions to their reserves... ``Conventional wisdom regarding money supply suggests there is massive pent up inflation in the works as a result of the buildup of excess reserves...The reality is excessive debt and falling asset prices have rendered the best efforts of the Fed impotent. Banks are not well capitalized, they are insolvent, unwilling and unable to lend.''

15-year high; Bank problem listings; FDIC insured institutions; greater; Mish's Global Economic Trend Analysis; unprofitable.

Fri 2009-07-24 00:00 EDT

naked capitalism: Federal Reserve Inspector General Unable to Answer Basic Questions on Where the Trillions Went

Answer Basic Questions; Federal Reserve Inspector General Unable; naked capitalism; trillion went.

The Economic Populist - Speak Your Mind 2 Cents at a Time Tue 2009-04-21 00:00 EDT

How we got here, and how to prevent it from happening again | The Economic Populist

``whatever the fundamental problem with banking system is it is at the very least 35 years old, if not older...Wall Street proved themselves to be unable to detect toxic debt from bubble assets''

economic populist; happened; Mind 2 Cents; prevent; speaking; Time.

Wed 2008-05-07 00:00 EDT

The Institutional Risk Analyst: An Involuntary Transaction: Why BAC + CFC May Never Close

Involuntary Transaction or Why BAC+CFC May Never Close, by Institutional Risk Analytics; Reis and Flynn, False Security; historic resemblence to 1920s; BAC is unable to close the CFC transaction due to uncertainty regarding CFC liabilities; CFC debt holders urged to pull Chapter 7 bankruptcy trigger!

BAC; CFC; closed; Institutional Risk Analyst; Involuntary Transaction.