"End of Wall Street Boom" - Must-read history

[JackRiddler]

this is important.
how it's done.
what the endless keynesian printing Stiglitz and Krugman champion is for.

The Greek Bankruptcy: One Year Later - Exposing The Charlatans Formerly Lost In Translation
Submitted by Tyler Durden on 05/23/2011 15:30 -0400


What a difference a year makes. It was just over a year ago that Greece received its first (and certainly not last) $1 trillion + bailout package from the EU, the ECB and the IMF.

!! The Greek "bailout" was not a trillion! More like $130 bn, if memory serves. A trillion is the total size of the fund for potential bailouts mustered by ECB, EU and IMF.

Just over 12 months later, all those who peddled Greek bonds to the rest of the world (ahem Germany) are now furiously backtracking, having finally realized what we, and everyone else with half a brain said from the beginning: it's over for Greece, for the eurozone in its current configuration, and for the single currency. But fine, let's kick the can down the road for a few more months, which will allow banks, with access to interest-free central bank capital, to literally steal Greece's soon to be privatized assets for pennies on the dollar, and then send the carcass, now picked dry, to the international bankruptcy court.

Very much up to the Greek people to prevent this by forcing a default now, not later.

In the meantime, we would like expose all the idiots, who like various anchors on Comcast's bubblevision channel, pitched Greek paper to hapless investors, only to see losses (this is not some speculative asset - this is fixed income) of over 40% in one year, and for some reason continue to have a podium from which to spread their lunacy, greed and outright stupidity.

From "We are buying Greek Governmen Bonds!", published in Handelsblatt May 3, 2010:

SNIP (CHOICE QUOTES FROM BANKSTERS PUMPING GREEK BONDS)

http://www.zerohedge.com/article/greek- ... ranslation

So, VK. Hats off to TD for exposing the opportunistic lying of all those who pitched Greek bonds a year ago. I don't get your comment at the start, however, since quotes from Krugman (definitely not my top pick for an expert) or Stiglitz (quite a touch better) aren't included. What are you referring to?

I don't see how these examples of bond-market dominance must relate to Keynes. Keynesianism, which was eschewed and outre for 30 years while the Friedmanites ran riot with their market creed as the cover for total deregulation for bankers and credit markets, has been rediscovered opportunistically since 2008 as a justification for the banker bailouts and QEs. Only since then has the pretense again become loud that "we're all Keynesians," in an Orwellian switch. It's not at all clear how the real Keynes would have viewed these monetary-side measures, especially given how transparent the real motives are (i.e., they're to rescue the banks, any stimulatory effect as advertised is in truth incidental). The only halfway Keynesian or New Deal program was the stimulus package, a straight fiscal measure separate from the bailouts. It was a half-measure at best as it focused almost entirely on aggregate demand (tax credits and bulk spending grants), not on a rational program of investment targeting job creation.

You might love the following two "Keynes vs. Hayek" videos. They are brilliant and really fun as performance and poetry set to music; the skew becomes obvious especially in the second, which is "fixed" to have Hayek win the argument (and it's no surprise as a pro-Austrian think tank is responsible, and both pieces show real production budgets). I think the boom and bust mechanics are described well in the first, while the World War II and postwar history is mangled in the second. I dispute the equation of any stimulus with central planning, or the description of either as "top-down," while freeing markets is "bottom-up." The main fallacy I see is in thinking that the state is a corrupt and insensitive, centralized planning device, but the "market" when unleashed is a means for allowing needs to be met by producers in an organic, ultimately fine-tuned fashion without one big plan.

In fact the market is just as susceptible to centralizing tendencies that leave a relative handful of capital holders commanding a centralized power potentially even more autocratic and unaccountable than the state's (since the latter might be susceptible to democratic control or rule of law). This was the result of the 30-year deregulation advocated by the Friedmanites inspired by Hayek. In reality, the truly powerful central economic institutions of the state -- the Treasury, the Federal Reserve, the other major central banks -- are captured and captive to Wall Street and a few other international finance centers (and major corporations, especially the energy, war and pharmaceutical sectors). This is what the "Hayek" character is allowed to say in the second video, but omitting the matter of this being the inevitable result of unregulated market capitalism. Meanwhile, everything else that is "government" is broken into hundreds of local, state and national units that are ineffective in the face of uncontrolled capital flows and are reduced to little more than location managers who compete with each other in trying to offer the most attractive (low) wages and other perks for capital.


http://www.youtube.com/watch?v=d0nERTFo-Sk


http://www.youtube.com/watch?v=GTQnarzmTOc

[JackRiddler]

http://counterpunch.org/weisbrot05232011.html

May 23, 2011
Less Than Meets the Eye
Strauss-Kahn's Legacy at the IMF

By MARK WEISBROT


Now that Dominique Strauss-Kahn has resigned from his position as Managing Director of the International Monetary Fund (IMF), it is worth taking an objective look at his legacy there. Until his arrest last week on charges of attempted rape and sexual assault, he was widely praised as having changed the IMF, increased its influence, and moved it away from the policies that – according to the Fund's critics -- had caused so many problems for developing countries in the past. How much of this is true?

Strauss-Kahn took the helm of the IMF in November of 2007, when the IMF's influence was at a low point. Total outstanding loans at that time were just $10 billion, down from $91 billion only four years earlier. By the time he left this week, that number had bounced back to $84 billion, with agreed upon loans three times larger. The IMF's total capital had quadrupled, from about $250 billion to an unprecedented $1 trillion. Clearly the IMF had resources that it had never had before, mostly as a result of the financial crisis and world recession of 2008-2009.

However the details of these changes are important. First, the collapse of the IMF's influence in the decade prior to 2007 was one of the most important changes in the international financial system since the breakdown of the Bretton Woods system of fixed exchange rates in 1971. Prior to the 2000's, the IMF headed up a powerful creditors' cartel which was able to tell many developing country governments what their most important economic policies would be, under the threat of being denied credit not only from the Fund but also from other, then-larger lenders such as the World Bank, regional lenders, and sometimes even the private sector. This made the Fund not only the most important avenue of influence of the U.S. government in low-and-middle income countries – from Rwanda to Russia – but also the most important promoter of neoliberal economic "reforms" that transformed the world economy from the mid-1970s onward. These reforms coincided with a sharp slowdown of economic growth in the vast majority of low-and-middle-income countries for more than twenty years, with consequently reduced progress on social indicators such as life expectancy, and infant and child mortality.

The IMF's big comeback during the world recession did not bring the middle-income countries that had run away from it back to its orbit. Most of the middle-income countries of Asia, Russia, and Latin America stayed away, mostly by piling up sufficient reserves so that they did not have to borrow from the Fund, even during the crisis. As a result, even a low-income country like Bolivia, for example, was able to re-nationalize its hydrocarbons industry, increase social spending and public investment, and lower its retirement age from 65 to 58 – things that it could never do while it was continuously living under IMF agreements for twenty years prior. Most of the IMF's new influence and lending would land in Europe, which accounts for about 57 percent of its current outstanding loans.

As for changes in IMF policy, these have been relatively small. A review of 41 IMF agreements made during the world financial crisis and recession found that 31 of them contained "pro-cyclical" policies: that is, fiscal or monetary policies that would be expected to further slow the economy, or both. And in Europe, where the IMF has most of its lending, the policies attached to the loan agreements for Greece, Ireland, and Portugal are decidedly pro-cyclical and making it extremely difficult for these economies to get out of recession. The IMF's influence on Spain, which does not yet have a loan agreement, is similar. And in Latvia, the IMF presided over an Argentine-style recession that set a world historical record for the worst two-year loss of output (about 25 percent) – a complete disaster.

To be fair, some changes at the Fund during Strauss-Kahn's tenure were significant. For the first time ever, during the world recession of 2009, the IMF made available some $283 billion worth of reserves for all member countries, with no policy conditions attached. The Fund also made some limited credit available without conditions, although only to a few countries. The biggest changes were in the research department, where there was tolerance for more open debate. For example, there were IMF papers that endorsed the use of capital controls by developing countries under some circumstances, and questioning whether central banks were unnecessarily slowing growth with inflation targets [PDF] that may be too low.

But as can be seen from what is happening in the peripheral Eurozone countries, the IMF is still playing its traditional role of applying the medieval economic medicine of "bleeding the patient." To be fair to both Strauss-Kahn and the Fund, neither the Managing Director nor anyone else at the IMF is ultimately in charge of policy, especially with respect to countries that are important to the people who really run the institution. The IMF is run by its Governors and Executive Directors, of whom the overwhelmingly dominant authorities are the U.S. Treasury Department (which includes heavy representation from Goldman Sachs) and, secondarily, the European powers (except in Europe, where Treasury defers to the Europeans). Until decision-making at the IMF undergoes a dramatic change, we can expect only very small changes in IMF policy. This can be seen most clearly in the current case of Greece: Strauss-Kahn was aware that the fiscal tightening ordered by the European authorities and the IMF was preventing Greece from getting out of recession; but while he pushed for "softer" conditions, he was unable to change the lending conditions from punishment to actual help. That's ultimately because the European authorities (European Commission and European Central Bank), not the IMF, are calling the shots – although Strauss-Kahn had plenty of resistance within the Fund itself, too.

The voting shares of the IMF have changed only marginally, despite all the reforms of the last five years. The share of "emerging market and developing countries" – with the vast majority of the world's population -- has gone from 39.4 to 44.7 percent, while the G-7 countries have 41.2 percent, including 16.5 percent for the U.S. (down from 17.4 percent pre-reform).

But the voting and governance structure is not currently the main obstacle to changing IMF policy. At this point, the developing countries – and we should add in the victimized countries of the eurozone – are not using their potential influence within the Fund. Their representatives are mainly going along with the decisions of the G-7. If any sizeable bloc or blocs of these countries were to band together for change within the Fund, there could be some real reforms at the IMF.

This can be seen from the last decade of struggle within the World Trade Organization, where developing countries have often not accepted the G-7 consensus, and have successfully blocked the negotiation and implementation of rules that would hurt them – despite the fact that the WTO rules have been, from the outset, stacked against developing countries. It is true that the WTO operates by consensus rather than a quota-based voting structure, but that is not the key difference between it and the IMF. The key difference is in the role of developing countries and their representatives.

There is talk now of replacing Strauss-Kahn with an open, merit-based process of selection, breaking with the 67-year tradition of reserving the position for a European (most often French). At the moment this change does not appear likely to happen. It would be a step forward, but it would be only a symbolic change, and the odds are good that the next Managing Director – of whatever nationality – will be to the right of Strauss-Kahn. Real change at the IMF is in the hands of the governments of most of the world – if they dare to organize it.


Mark Weisbrot is an economist and co-director of the Center for Economic and Policy Research. He is co-author, with Dean Baker, of Social Security: the Phony Crisis.

This column was originally published by The Guardian.

(cross post with DSK thread)

[vanlose kid]

hey Jack, re this viewtopic.php?p=404450#p404450

glad you picked it out. in short for now cause i'm working on a paper, but my remark has to do mainly with the concept or practice of LOLR: lender of last resort. flooding the market with cash by way of QE is supposedly Keynesian. who gets the cash and for what is another matter. the IMF are funded and hence mainly controlled by the Treasury and the FED. their program funding demands are met by QE like any other bank. they're an extended arm of the Treasury and the FED. remember it was Timmah who announced DSK's unfitness to rule. there's more but you probably know all this already. i'll try and piece it together next week and post it so you can pick it apart and critique it. looking forward to that.

on edit: link: http://www.house.gov/jec/imf/lolr.htm : An International Lender of Last Resort, The IMF, and the Federal Reserve (1999)

*

[vanlose kid]

^ ^

re the above, thought i'd add this link: THE IMF'S IMPRUDENT ROLE AS LENDER OF LAST RESORT (1998)

it's the Cato institute but worth a read.

*

[JackRiddler]

.

Real headline for the following:

Ratings Agency, Bond-Market Terrorists Push Debtors Into Colosseum for Battle Royale

http://www.nytimes.com/2011/05/24/busin ... nted=print

May 23, 2011
In Europe, Rifts Widen Over Greece

By LANDON THOMAS Jr.


LONDON — Fissures among Europe’s currency partners are becoming even deeper and more widespread than was previously evident, raising new doubts about whether the group can resolve the regional debt crisis that has simmered for more than a year.

Gloomy investors on Monday drove down Europe’s stock indexes by about 2 percent, while the euro fell nearly 1 percent against the dollar, touching a two-month low.

Meanwhile, yields rose on 10-year Spanish and Italian bonds, reflecting a market perception that the risks are rising that those two indebted nations might be following the downward spiral of Greece. Greek 10-year bonds reached a record 16.8 percent as investors demanded a high premium for holding them.

On Wall Street, major stock indexes were also down more than 1 percent, in part over the uncertainties in Europe.

The markets seem to reflect the growing discord within the 17-member euro zone currency union, barely a year after European governments came together with a 750 billion euro ($1 trillion) safety net for debtor-nation members. Tensions also remain over whether to restructure Greece’s debt and force bondholders to take losses.

It is clear that the bailout package and the austerity terms imposed on Greece have deepened its recession and added to its already substantial debt burden. The debate now is whether making more cuts and recharging a program to privatize many formerly government-run agencies and social services in Greece will be enough to persuade a reluctant Europe to lend the country another 60 billion euros.

Chumbawamba's fake gospel song of capitalism went, "Well they broke my legs, by they gave me a crutch to walk." The above reads more like, "If you amputate your own leg, we'll give you more rat poison!"

“It looks like a real unraveling — everyone is taking their own position and as a result cooperation has become an impossibility,” said Paul De Grauwe, an economist in Brussels who advises the president of the European Commission, José Manuel Barroso.

The discord has become increasingly apparent since Greece’s financial decision makers were summoned to secret talks at a Luxembourg castle by their currency partners this month.

The Greeks probably knew that a tongue-lashing over the country’s stumbling financial overhaul effort was coming. What they probably did not expect was that beleaguered Spain and Italy, as opposed to economically robust Germany, would take the lead in upbraiding them.

The meeting, on May 6, showed that the disagreements in the euro zone were not just between richer northern countries like Germany and the less wealthy south.

Struggling countries like Spain and Italy fret that any Greek failure on spending cuts might cause investors to conclude that those two countries have no better growth prospects than Greece — even as their own austerity programs cause social and political unrest.

On Monday, the bond market seemed to fulfill Spain and Italy’s worst fears about being lumped in with Greece’s as a poor investment risk and the perception that the cuts meant to ease those countries’ debts will instead mire them deeper in recession.

Ten-year yields for Italian bonds edged up to 4.8 percent on Monday, from 4.7 percent last week. Rates for Spain’s comparable bonds rose to 5.5 percent, up from 5.2 percent. Euro zone unity has always been a challenge to maintain, given the member countries’ contrasting histories and cultures. That it should be crumbling barely a year after European governments agreed to a rescue package underscores the difficulty in translating grand policy ideals into workable achievements.

And that it is Spain and Italy now stressing the necessity of austerity — not Germany or the European Central Bank — is further evidence that bond market investors continue to be the most powerful voice in this debate, Mr. De Grauwe said.

Southern countries, he said, are afraid of contagion from Greece’s woes. “But history shows us that you cannot cut deficits in the midst of a recession.”

For Spain, devastating local election losses on Sunday by the governing Socialist Party created worries that Madrid’s plan to cut its budget deficit might founder. It had planned to reduce the deficit to 6 percent of gross domestic product this year in the face of a 20 percent unemployment rate.

Many Spaniards have now taken to the streets in protests organized through social media. (Spain’s deficit was 9.24 percent of gross domestic product in 2010.)

In Italy, a shift to a negative outlook last Friday by the Standard & Poor’s credit rating agency revived long-dormant fears that, even with Italy’s widely admired deficit-cutting program, the nation’s aging population and lack of competitiveness would prevent it from generating the growth needed to put a dent in its overall debt. At 120 percent of G.D.P., that debt is among Europe’s highest.

As for Greece, while Europeans continue their debate about whether to make bond investors accept a loss on their Greek bond holdings, the government must this week present yet another program of spending cuts to its already recession-weary populace.

According to a poll released last week in Greece for Skai Television, 62 percent of Greeks found that the austerity program, which the European Union and the International Monetary Fund have made a condition of financial aid, was hurting the country, as opposed to helping it. As for Prime Minister George A. Papandreou, 77 percent of those polled said they did not trust him to handle the economic problems.

In the debate over restructuring Greece’s debt so that bondholders might have to take losses, the European Central Bank, which is sitting on over 45 billion euros ($64 billion) in Greek government bonds, remains adamantly opposed.

At the Luxembourg meeting, Jean-Claude Trichet, the president of the central bank, stormed out after just one hour when it was proposed that some form of a possible restructuring of Greece’s debt should at least be discussed, according to a person who was there but was not authorized to discuss the meeting publicly.

Individual rich countries like Germany and France, however, have been willing to consider options like swapping short-dated Greek bonds for longer-dated ones — something that might constitute a loss or “haircut” on the holdings in the end, but that might seem more palatable in the near term.

But the larger issue of whether weaker economies can continue to impose pain upon their populations through cuts in social spending is likely to be the most important question in trying to resolve the euro zone crisis. That explains Italy’s and Spain’s frustration with Greece.

Outside lenders may be demanding even more austerity measures, “but does anyone really believe these measures will have a positive effect?” asked Edward Hugh, an economist and blogger in Barcelona who has written extensively about the euro zone crisis. “Everyone is arguing now. We have lost the vision of a year ago.”

[JackRiddler]

May 24, 2011

Asperger's Syndrome as the New Normal
The Autistic Confederacy

By SAM SMITH

The French students who drew a connection between contemporary economics and autism have made one of the more profound observations of our time. Technically, the kind of autism exhibited by leading economists - and (although the students did not note it) leaders in politics and media - is called higher functioning autism or Asperger's Syndrome. Here are some professional descriptions:

"Asperger's Syndrome, also known as Asperger's Disorder or Autistic Psychopathy, is a Pervasive Developmental Disorder characterized by severe and sustained impairment in social interaction, development of restricted and repetitive patterns of behavior, interests, and activities. These characteristics result in clinically significant impairment in social, occupational, or other important areas of functioning. In contrast to Autistic disorder (Autism), there are no clinically significant delays in language or cognition or self help skills or in adaptive behavior, other than social interaction. Prevalence is limited but it appears to be more common in males . . . Adults with Asperger's have trouble with empathy and modulation of social interaction - the disorder follows a continuous course and is usually lifelong . . . "

"There is a general impression that Asperger's syndrome carries with it superior intelligence and a tendency to become very interested in and preoccupied with a particular subject. Often this preoccupation leads to a specific career at which the adult is very successful . . . "

Nothing so well describes the monocular mania over "free markets" and related clichés that has characterized the thoughts and words of our elite since the days of Margaret Thatcher and Ronald Reagan. What better description of our typical political or media leader than: "Has an average or above average intelligence. Has highly developed language skills. Lacks social interaction skills. Exhibits inappropriate behavioral response to social situations. Lacks understanding of humor or irony . . ."

There has never been the slightest logical reason for believing that all of life's mysteries could be explained by reference to quarterly reports, yet over the past couple of decades this has become a wildly held assumption of those in charge of running our country, from the think tanks to the White House to NPR.

Critics have struggled vainly to suggest the contrary with a notable lack of success. The reason is now obvious: they have attempted to defeat pathology with logic. It doesn't work, not because the single-factor obsessives are idiots or even evil, but because they are afflicted.

And it's far from just a matter of Reaganomics. Politics have come to be characterized by the serial introduction of small ideas of even smaller rationality but which soon find themselves elevated to iconographic status in everything from op ed pages to the federal budget.

Among them: the fictional huge federal surplus, the even more fictional Bush tax cut, the false depiction of the status of Social Security, the enormously expensive capture and imprisonment those who prefer marijuana to vodka, the very autistic assumption that counting student test scores is the same as educating students, and, most recently, an obsession with anti-terrorism to the detriment of every other aspect of American existence.

Key to the Asperger style of politics and media is the constant repetition of thought patterns and the imperviousness of the practitioners' thinking to outside fact or argument. The technical name for this is perseveration which has been defined as "the persistent repetition of a response after cessation of the causative stimuli; for example, the repetition of a correct answer to one question as the answer to succeeding questions," an almost perfect description of what regularly occurs on your average Sunday talk show. A less technical but even more generally apt definition is "continuation of something usually to an exceptional degree or beyond a desired point."

How did it happen that we have become cursed with a perseverating elite that endlessly repeats the same thoughts to whatever is said to it, and which insists on pursuing ideas well past any possible usefulness? Well, one theory is that the SAT has played a role, helping to choose an establishment that, while seemingly diverse, is actually disproportionately comprised of those of above average intelligence but who think life consists mainly of coming up with the right answers.

Oh, you fucked me with that idea!

In their own ways, both Clinton and Bush (not to mention Ted Koppel and Jim Lehrer) have manifested this disconnect between "policy," i.e. the right answer, and something called life which is in the end an imaginative and moral creation and not merely a technical problem.

This is a matter of no little concern. Those of us still willing to let the empirical, the non-quantifiable, and the creative into our lives are being bullied, twisted, and threatened by a politically autistic confederacy at every level from the obdurate local bureaucrat to CNN with its propagandistic mantras parading as news to a president who doesn't know when to stop saying "terrorist." At its worst, the privatized and gated logic of our leaders is of the same ilk that once created a nation of good Germans willing to follow the pathology of a few.

Silently, without argument or recognition, the logic of our nation has drastically changed - from "show me" to "tell me," from experience to propaganda, from the empirical to the virtual, and from debate and discussion to addictive perseveration.


Sam Smith edits the Progressive Review.

[JackRiddler]

.

Hit job on Warren is "undecorous." That's one way of putting it.

http://www.nytimes.com/2011/05/25/busin ... me.html?hp


Decorum Breaks Down at House Hearing

Jonathan Ernst/Reuters
Elizabeth Warren at the House committee hearing into the structure of the new Consumer Financial Protection Bureau.


By EDWARD WYATT
Published: May 24, 2011


WASHINGTON — A House committee hearing into the structure of the new Consumer Financial Protection Bureau disintegrated into heated accusations of lying to Congress on Tuesday, with the panel’s chairman accusing Elizabeth Warren of giving misleading testimony at a March hearing and of lying about her agreement to testify this week.

Representative Patrick T. McHenry, a North Carolina Republican who is chairman of a subcommittee of the House Oversight Committee, told Ms. Warren, who is directing the start-up of the consumer agency, that he believed she misled Congress with testimony in March about her role in settlement talks between federal and state authorities and mortgage servicing companies.

Ms. Warren denied Mr. McHenry’s charge, saying that she clearly stated in March that she had provided advice to officials of the Treasury and Justice Departments about their investigations of fraud among mortgage-servicing companies and about their settlement discussions with the companies.

After an hour in which Ms. Warren repeatedly parried efforts by Mr. McHenry and other Republicans to nail her down with “yes or no” answers to questions concerning her testimony in March and about the bureau’s powers and responsibilities, Mr. McHenry moved to temporarily recess the hearing to allow members to travel to the House floor for a vote on an unrelated matter.

Ms. Warren objected, saying that she had juggled her schedule as the committee repeatedly changed the time of the hearing in recent days and had agreed to be present for only an hour.

A vigorous back-and-forth ensued.

“Congressman, you are causing problems,” Ms. Warren said. “We had an agreement.”

“You’re making this up,” Mr. McHenry replied. “This is not the case.”

The argument, an unraveling of the decorum that usually characterizes discussions among even the most fervent opponents during Congressional hearings, demonstrated the level of frustration that some Republicans apparently feel over the consumer agency, which was established as part of the Dodd-Frank Act that followed the financial and mortgage crisis.

The hearing Tuesday was intended to address the oversight that Congress should require for the agency.

Republicans have introduced bills in the House and Senate to eliminate some of the agency’s independence, which include its not being subject to Congressional appropriations. A group of 44 Republican Senators recently signed a letter saying they would not allow a director of the agency to be confirmed unless the Obama administration agreed to structural changes in the agency.

Mr. McHenry displayed on a screen in the hearing room documents that were created by the consumer bureau for the Iowa attorney general, who is overseeing talks between federal and state regulators and mortgage servicing companies. He said the documents indicated that Ms. Warren’s involvement extended outside her designated role as an adviser to the president and the Treasury secretary.

“You said you were providing advice to the Treasury secretary,” Mr. McHenry said. “Now it is apparent that you were providing advice to the attorney general of Iowa” regarding lawsuits by states against mortgage servicers.

Ms. Warren said she provided advice to state and federal agencies at the direction of the Treasury secretary, adding that she had been open about her meetings and involvement in the talks. She said she provided that information two months ago in response to a letter from House members and had heard nothing back since then.

[jfshade]

Nothing new, just further confirmation.

Bush Policies Dominant Cause Of National Debt

House Minority Whip Steny Hoyer made this argument in broad strokes on Monday. Hard numbers back it up.

The Center on Budget and Policy Priorities has updated and refined a widely cited chart, laying out the origins of the country's current fiscal trajectory. And as before, the lion's share of the problem comes from ongoing George W. Bush-era policies -- particularly deficit-financed tax cuts, which eliminated Clinton-era surpluses and left the Treasury poised for a huge hit when the financial crisis and economic downturn further eroded federal revenues.

By the end of the decade, CBPP projects that, on the current trajectory, the Bush tax cuts, exacerbated by the economic downturn, combined with the wars in Iraq and Afghanistan will account for the significant majority of public debt as a share of GDP.

Without those factors, and without the need for stimulus measures under President Obama, CBPP projects that the debt-to-GDP ratio would have dropped under both Presidents Bush and Obama.

[JackRiddler]

And that's not even counting the post-9/11 increases in regular military and "security" spending, which are good (bad) for about $200 billion a year.

One thing we don't know is how the always inherent crisis of capitalism -- due to the profit imperative combined with the tendency of profit to decline without intervention -- would have developed, or been responded to, in the absence of all this military Keynesianism (as Europeans like to call it). Bottom line, the megacorps have $2 trillion in cash reserves they wouldn't have otherwise had. Both the military Keynesianism and the housing securities bubble (i.e., before the crash and the bailout) are ultimately crisis responses. Something else would have taken their place as a way of goosing the ungooseable.

.

[JackRiddler]

http://www.youtube.com/watch?v=RET2Z5AVJ8A

[JackRiddler]

http://www.nytimes.com/2011/05/25/busin ... nted=print

May 24, 2011
U.S. Suit Sees Manipulation of Oil Trades

By GRAHAM BOWLEY

After oil prices surged past $100 a barrel in 2008, suspicions that traders had manipulated the market led to Congressional hearings and regulatory investigations. But they produced no solid cases in the record run-up in gasoline prices.

But on Tuesday, federal commodities regulators filed a civil lawsuit against two obscure traders in Australia and California and three American and international firms.

The suit says that in early 2008 they tried to hoard nearly two-thirds of the available supply of a crucial American market for crude oil, then abruptly dumped it and improperly pocketed $50 million.

The regulators from the Commodity Futures Trading Commission would not say whether the agency was conducting any other investigations into oil speculation. With oil prices climbing again this year, President Obama has asked Attorney General Eric H. Holder Jr. to set up a working group to look into fraud in oil and gas markets and “safeguard against unlawful consumer harm.”

In the case filed Tuesday, the defendants — James T. Dyer of Australia, Nicholas J. Wildgoose of Rancho Santa Fe, Calif., and three related companies, Parnon Energy of California, Arcadia Petroleum of Britain and Arcadia Energy, a Swiss company — have told regulators they deny they manipulated the market.

If the United States proves the claims, the defendants may give up $50 million in profits that were believed to be made as a result of the manipulation and also pay a penalty of up to $150 million.

The commodities agency says the case involves a complex scheme that relied on the close relationship between physical oil prices and the prices of financial futures, which move in parallel.

In a matter of a few weeks in January 2008, the defendants built up large positions in the oil futures market on exchanges in New York and London, according to the suit, filed in the Federal Court in the Southern District of New York.

At the same time, they bought millions of barrels of physical crude oil at Cushing, Okla., one of the main delivery sites for West Texas Intermediate, the benchmark for American oil, the suit says. They bought the oil even though they had no commercial need for it, giving the market the impression of a shortage, the complaint says.

At one point they had such a dominant position that they owned about 4.6 million barrels of crude oil, estimating that this represented two-thirds of the seven million barrels of excess oil then available at Cushing, according to lawsuits.

This type of oil is also the main driver of prices of the futures contracts, and their actions caused futures prices to rise, the authorities say. “They wanted to lull market participants into believing that supply would remain tight,” the agency said. “They knew that as long as the market believed that supply was tight and getting even tighter, there would be upward pressure on the prices of W.T.I. for February delivery relative to March delivery, which was their goal.”

The traders in mid-January cashed out their futures position, and then a few days later began to bet on a decline in oil futures, with Mr. Wildgoose remarking in an e-mail about the “inevitable puking” of their position on an unsuspecting market, the federal lawsuit says.

In one day, Jan. 25, they then dumped most of their holdings of West Texas Intermediate oil, and profited by the drop in futures.

The traders repeated the buying and selling in March 2008, and were preparing to do it again in April but stopped when investigators contacted them for information, the suit says.

Between January and April, average gas prices rose roughly to $3.50 a gallon, from $3. It was not until later in 2008, after the defendants had ceased their reported actions, that oil prices soared higher — reaching $145 that July. By the end of the year, prices had fallen to about $44. The Texas oil is now around $100.

Many other factors were at work, including tight oil supplies in the Middle East and fears that a growing global economy would consume more oil. Yet the enforcement action by the commodities regulator was the first credible evidence that a small group of traders also played a role in manipulating prices.

“This will help to satisfy the desire to find a culprit and throw them under the wheels of justice,” said Michael Lynch, an oil market specialist at Strategic Energy and Economic Research, a consulting firm.

Calls to Arcadia Petroleum in London were not immediately returned. A person who answered the phone at Arcadia Energy in Switzerland said that he was unaware of the complaints and that Mr. Dyer and Mr. Wildgoose were on vacation and unavailable for comment.

In the last few years, the commission has settled a handful of cases of manipulation in the natural gas market.

In 2007, it settled charges for $1 million against the Marathon Petroleum Company for trying to manipulate West Texas Intermediate crude oil in 2003.

The agency brought an action similar to its latest case in 2008, asserting that Optiver Holding, a proprietary trading fund based in the Netherlands with a Chicago affiliate, used a trading program in 2007 to issue orders to manipulate the crude oil market. The case is pending. It involved claims of manipulation of futures contracts for light sweet crude, New York Harbor heating oil and New York Harbor gasoline.


Clifford Krauss contributed reporting.

[JackRiddler]

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And now we learn of a secret bailout that ran for most of 2008. The news in the following is that the Fed bailouts went into overdrive starting in March 2008, with a special tier for favored banks to receive credit at a half-percentage point less than others, with no announcement to Fed shareholders (i.e., banks not so privileged) or Congress. And they kept it out of the required disclosure of 2008 lending programs last year, which indicates something even they thought was fishy.

http://www.businessweek.com/news/2011-0 ... 0-01-.html

Bloomberg

Fed Gave Banks Crisis Gains on Secretive Loans Low as 0.01%

May 26, 2011, 11:09 AM EDT


By Bob Ivry

(Adds comments from Michael Greenberger at 18th paragraph.)

May 26 (Bloomberg) -- Credit Suisse Group AG, Goldman Sachs Group Inc. and Royal Bank of Scotland Group Plc each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public.

The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent.

“This was a pure subsidy,” said Robert A. Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. “The Fed hasn’t been forthcoming with disclosures overall. Why should this be any different?”

The Federal Reserve Bank of New York, which oversaw ST OMO, posted aggregate data about the program on its website after each auction, said Jeffrey V. Smith, a New York Fed spokesman. By increasing the availability of short-term financing when private lenders were under pressure, “this program helped alleviate strains in financial markets and support the flow of credit to U.S. households and businesses,” he said.

Not in Dodd-Frank

Congress overlooked ST OMO when lawmakers required the central bank to publish its emergency lending data last year under the Dodd-Frank law.

“I wasn’t aware of this program until now,” said U.S. Representative Barney Frank, the Massachusetts Democrat who chaired the House Financial Services Committee in 2008 and co- authored the legislation overhauling financial regulation. The law does require the Fed to release details of any open-market operations undertaken after July 2010, after a two-year lag.

Records of the 2008 lending, released in March under court orders, show how the central bank adapted an existing tool for adjusting the U.S. money supply into an emergency source of cash. Zurich-based Credit Suisse borrowed as much as $45 billion, according to bar graphs that appear on 27 of 29,000 pages the central bank provided to media organizations that sued the Fed Board of Governors for public disclosure.

New York-based Goldman Sachs’s borrowing peaked at about $30 billion, the records show, as did the program’s loans to RBS, based in Edinburgh. Deutsche Bank AG, Barclays Plc and UBS AG each borrowed at least $15 billion, according to the graphs, which reflect deals made by 12 of the 20 eligible banks during the last four months of 2008.

No Exact Amounts

The records don’t provide exact loan amounts for each bank. Smith, the New York Fed spokesman, would not disclose those details. Amounts cited in this article are estimates based on the graphs.

One effect of the program was to spur trading in mortgage- backed securities, said Lou Crandall, chief U.S. economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a research company specializing in Fed operations. The 20 banks -- previously designated as primary dealers to trade government securities directly with the New York Fed -- posted mortgage securities guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac in exchange for the Fed’s cash.

ST OMO aimed to thaw a frozen short-term funding market and not necessarily to aid individual banks, Crandall said. Still, primary dealers earned spreads by using the program to help customers, such as hedge funds, finance their mortgage securities, he said.

‘Spreads Vary’

“Spreads vary from one transaction to another,” making any calculation of dealers’ profits on the Fed loans impossible, Crandall said.

The Fed opposed disclosing details of its open market operations because doing so would probably cause borrowers “substantial competitive harm,” according to a March 2009 declaration by Christopher R. Burke, vice president of the New York Fed’s markets group. The declaration is filed in federal court.

Sounds like the rationale in Bush v. Gore -- the one that other courts are not allowed to use as a precedent.

Revealing the borrowing “could lead market participants to inaccurately speculate that the primary dealer was having difficulty finding term funding against its collateral in the open market and that the dealer itself must therefore be in financial trouble,” Burke said in opposing a media request for records about the borrowing.

Bidding Interest Rates

The New York Fed conducted 44 ST OMO auctions, from March through December 2008, according to its website. Banks bid the interest rate they were willing to pay for the loans, which had terms of 28 days. That was an expansion of longstanding open- market operations, which offered cash for up to two weeks.

Outstanding ST OMO loans from April 2008 to January 2009 stayed at $80 billion. The average loan amount during that time was $19.4 billion, more than three times the average for the 7 1/2 years prior, according to New York Fed data. By comparison, borrowing from the Fed’s discount window, its main lending program for banks since 1914, peaked at $113.7 billion in October 2008, Fed data show.

In March 2008, ST OMO was “desperately needed,” because of the shaken state of short-term credit markets, said Michael Greenberger, a professor at the University of Maryland School of Law in Baltimore and former director of the division of markets and trading at the Commodities Futures Trading Commission. After the Fed created other lending mechanisms and the Treasury Department began distributing money from the Troubled Asset Relief Program in October, ST OMO became “just a way for banks to have at it,” he said.

‘Profit-Making Enterprise’

“At such low interest rates, it’s no longer a rescue, it’s a profit-making enterprise,” Greenberger said. “By December, a lot of money was made off this program.”

Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein, tapped the program most in December 2008, when data on the New York Fed website show the loans were least expensive. The lowest winning bid at an ST OMO auction declined to 0.01 percent on Dec. 30, 2008, New York Fed data show. At the time, the rate charged at the discount window was 0.5 percent.

Stephen Cohen, a spokesman for Goldman Sachs, declined to comment.

December Peak

As its ST OMO loans peaked in December 2008, Goldman Sachs’s borrowing from other Fed facilities topped out at $43.5 billion, the 15th highest peak of all banks assisted by the Fed, according to data compiled by Bloomberg. That month, the bank’s Fixed Income, Currencies and Commodities trading unit lost $320 million, according to a May 6, 2009, regulatory filing.

Under ST OMO, cash changed hands through repos, or repurchase agreements, which the central bank has used to move money in and out of the banking system for at least 60 years. In a repo, the dealer sells securities to the Fed and agrees to buy them back for a higher price after a set period of time.

Open-market operations traditionally use repos to influence the federal funds rate, which is banks’ cost of short-term borrowing, said Sherrill Shaffer, the officer in charge of the discount window at the Federal Reserve Bank of Philadelphia from 1994 to 1997. He’s now a banking professor at the University of Wyoming in Laramie.

When the central bank increases the money supply -- by paying cash for securities in repos -- interest rates tend to fall. When it drains cash from the system by selling securities in reverse repos, rates can climb.

Pedal to Metal

Using repos to provide emergency cash, a step the Fed announced on March 7, 2008, was a departure from that process, said John H. Cochrane, a finance professor at the University of Chicago Booth School of Business.

“The Fed was slamming the pedal to the metal in the lender-of-last-resort category,” Cochrane said. “What they did was so far from what we conventionally think of as monetary policy.”

Credit Suisse’s borrowing peaked at about $45 billion in September 2008, the Fed charts show. Steven Vames, a Credit Suisse spokesman in New York, declined to comment.

RBS’s use of ST OMO hit about $30 billion in October 2008. The U.K. government has had a stake in the bank since Oct. 13, 2008. “RBS no longer makes any use of these emergency Federal Reserve lending programs and all money borrowed from the Fed has been repaid in full with interest,” said Michael Geller, a spokesman for RBS Global Banking & Markets in Stamford, Connecticut.

Annual Report

Frankfurt-based Deutsche Bank’s use peaked at about $20 billion in October 2008, its chart shows. The bank had 87 billion euros ($122 billion) in repurchase agreements with all central banks as of the end of 2008, according to its annual report. John Gallagher, a bank spokesman, declined to comment.

London-based Barclays’s peak reached about $20 billion in December 2008, the chart said. Mark Lane, a Barclays spokesman, declined to comment.

UBS, based in Zurich, borrowed as much as about $15 billion in late 2008, the chart shows.

“UBS’s usage of those facilities should be seen in the context of our overall desire to maintain flexibility and diversification in our funding sources, even during the crisis,” said Kelly Smith, a spokeswoman for UBS in New York. “Given UBS’s substantial presence and commitment to U.S. dollar-denominated markets, utilization of such facilities was relatively modest.”

Other Banks

Other banks listed in the Fed charts borrowed less than their peers. New York-based Morgan Stanley and Paris-based BNP Paribas, France’s biggest bank by assets, took no more than about $10 billion. Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co., which is now part of Bank of America Corp., borrowed less than $5 billion each.

Mary Claire Delaney, a spokeswoman for Morgan Stanley, Jon Diat, a Citigroup spokesman in New York, Howard Opinsky, a spokesman for New York-based JPMorgan Chase, and Megan Stinson, a spokeswoman in New York for BNP Paribas, declined to comment on their banks’ borrowings.

“Look at it in hindsight and these programs did exactly what they were intended to do -- stabilize the financial system, provide liquidity and instill confidence,” said Jerry Dubrowski, a spokesman for Charlotte, North Carolina-based Bank of America.

The bar charts were included in the Fed’s court-ordered March 31 disclosure under the Freedom of Information Act. The release was mandated after the U.S. Supreme Court rejected an industry group’s attempt to block it. Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC had sued the central bank after it refused to release lending records under the FOIA.

--With assistance from Liz Capo McCormick and Bradley Keoun in New York. Editors: John Voskuhl, Robert Blau.

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.

To contact the editor responsible for this story: Gary Putka at gputka@bloomberg.net.

[JackRiddler]

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Two from my personal greats: Kagarlitsky and Hudson. The latter, being more optimistic (and once again giving a seminar in finance and fiscal economics), brings up the rear.

http://counterpunch.org/kagarlitsky05272011.html

Weekend Edition
May 27 - 29, 2011

Europe's Nationalists Waiting in the Dark
A Warning From Finland

By BORIS KAGARLITSKY

Moscow.


Finnish elections don't usually make headlines in Europe. But this spring Finnish voters managed to spoil the mood among Brussels bureaucrats and the liberal public by giving the nationalist True Finns party the third highest number of seats in parliament. The Social Democrats secured second place by a margin of only one-tenth of a percent of the vote.

This is indicative of the overall trend gaining momentum in Europe. As the financial crisis hits one country after another, voters become increasingly angry about having to make economic sacrifices. Residents of the poorest countries are unhappy with the austerity measures forced on them by the European Union as a prerequisite to receiving aid, and people in the wealthier countries do not like paying out of their national budget to help others.

Whenever free market policy fails, the only salvation offered is even higher doses of the same policy. And when the standard of living falls and domestic markets shrink, governments and central banks can find no better solution than to cut social spending, thereby lowering living standards and shrinking domestic markets still further.

That vicious cycle will continue until somebody has the courage to adopt the opposite course. But that would mean not only changing the economic ideology of one government or a group of countries, but the collapse of the entire system of current European institutions that is built upon this ideology. The need to support and maintain existing structures compels politicians of every stripe to persist in pursuing a policy that everyone, including themselves, can clearly see has already failed.

Critics of the euro have long warned that the attempt to integrate different economies under a single monetary system would not only fail to unify the people of Europe but would intensify the existing tensions between them. It has often been said the decision by most European governments to dismantle the European social model to increase competitiveness would not strengthen Europe but only spark a deep economic crisis, send domestic markets into disarray and undermine people's incentive to work and their sense of responsibility toward society.

All of those predictions came true in spades, but even now, when skepticism regarding the European project is gradually giving way to a single ideological doctrine uniting the peoples of Europe, the political class does not want to change.

Most tragically, conservatives and the parliamentary left are fully united in their stubborn desire to continue along their chosen liberal course. Practically foaming at the mouth, they passionately defend the European project without realizing that their own actions doom it to inevitable collapse. The majority of people see the experiment as a succession of hardships they are forced to endure.

As a result, they are searching for an alternative. Not finding one in the political left, they are turning to nationalist parties that promise their voters measures for combating unemployment, government regulation of the market and, most important, the willingness to challenge the ruling structures of the European Union. But along with a protectionist economic program, voters also receive the rest of the nationalists' ideological baggage that comes with it — ultraconservatism, authoritarianism and xenophobia.

The longer Europe's ruling elite persists in its flawed policies, the more devastating the eventual collapse of the entire system will be. The real question is who will come to power in their wake? For now, only the right-wing nationalists have shown that they are ready and willing.


Boris Kagarlitsky is the director of the Institute of Globalization Studies in Moscow

http://counterpunch.org/hudson05272011.html

May 27 - 29, 2011

Is Iceland's Rejection of Financial Bullying a Model for Greece and Ireland?
Breakup of the Eurozone?

By MICHAEL HUDSON


Last month Iceland voted against submitting to British and Dutch demands that it compensate their national bank insurance agencies for bailing out their own domestic Icesave depositors. This was the second vote against settlement (by a ratio of 3:2), and Icelandic support for membership in the Eurozone has fallen to just 30 per cent. The feeling is that European politics are being run for the benefit of bankers, not the social democracy that Iceland imagined was the guiding philosophy – as indeed it was when the European Economic Community (Common Market) was formed in 1957.

By permitting Britain and the Netherlands to blackball Iceland to pay for the mistakes of Gordon Brown and his Dutch counterparts, Europe has made Icelandic membership conditional upon imposing financial austerity and poverty on the population – all to pay money that legally it does not owe. The problem is to find an honest court willing to enforce Europe’s own banking laws placing responsibility where it legally lies.

The reason why the EU has fought so hard to make Iceland’s government take responsibility for Icesave debts is what creditors call “contagion.” Ireland and Greece are faced with much larger debts. Europe’s creditor “troika” – the European Central Bank (ECB), European Commission and the IMF – view debt write-downs and progressive taxation to protect their domestic economies as a communicable disease.

Like Greece, Ireland asked for debt relief so that its government would not be forced to slash spending in the face of deepening recession. “The Irish press reported that EU officials ‘hit the roof’ when Irish negotiators talked of broader burden-sharing. The European Central Bank is afraid that any such move would cause instant contagion through the debt markets of southern Europe,” wrote one journalist, warning that the cost of taking reckless public debt onto the national balance sheet threatened to bankrupt the economy.

Europe – in effect, German and Dutch banks – refused to let the government scale back the debts it had taken on (except to smaller and less politically influential depositors). “The comments came just as the EU authorities were ruling out investor ‘haircuts’ in Ireland, making this a condition for the country’s €85bn (£72bn) loan package. Dublin has imposed 80 percent haircuts on the junior debt of Anglo Irish Bank but has not extended this to senior debt, viewed as sacrosanct.” (Ambrose Evans-Pritchard, Daily Telegraph.)

At issue from Europe’s vantage point – at least that of its bankers – is a broad principle: Governments should run their economies on behalf of banks and bondholders. They should bail out at least the senior creditors of banks that fail (that is, the big institutional investors and gamblers) and pay these debts and public debts by selling off enterprises, shifting the tax burden onto labor. To balance their budgets they are to cut back spending programs, lower public employment and wages, and charge more for public services, from medical care to education.

This austerity program (“financial rescue”) has come to a head just one year after Greece was advanced $155 billion bailout package in May 2010. Displeased at how slowly the nation has moved to carve up its economy, the ECB has told Greece to start privatizing up to $70 billion by 2015. The sell-offs are to be headed by prime tourist real estate and the remaining government stakes in the national gambling monopoly OPAP, the Postbank, the Athens and Thessaloniki ports, the Thessaloniki Water and Sewer Company and the telephone monopoly. Jean-Claude Juncker, Luxembourg’s Prime Minister and chairman of the Eurozone’s group of finance ministers, warned that only if Greece agreed to start selling off assets (“consolidating its budget”) would the EU agree to stretch out loan maturities for Greek debt and “save” it from default.

The problem is that privatization and regressive tax shifts raise the cost of living and doing business. This makes economies less competitive, and hence even less able to pay debts that are accruing interest, leading toward a larger ultimate default.

The textbook financial response of turning the economy into a set of tollbooths to sell off is predatory. Third World countries demonstrated its destructive consequences from the 1970s onward under IMF austerity planning. Europe is now repeating the same shrinkage.

Financial power is to achieve what military conquest had done in times past. Pretending to make subject economies more “competitive,” the aim is more short-run: to squeeze out enough payments so that bondholders (and indeed, voters) will not be obliged to confront the reality that many debts are unpayable except at the price of making the economy too debt-ridden, too regressively tax-ridden and too burdened with rising privatized infrastructure charges to be competitive. Spending cutbacks and a regressive tax shift dry up capital investment and productivity the long run. Such economies are run like companies taken over by debt-leveraged raiders on credit, who downsize and outsource their labor force so as to squeeze out enough revenue to pay their own creditors – who take what they can and run. The tactic attack of this financial attack is no longer overt military force as in days of yore, but something less costly because its victims submit more voluntarily.

But the intended victims of predatory finance are fighting back. And instead of the attacker losing their armies and manpower, it is their balance sheets that are threatened – and hence their own webs of solvency. When Greek labor unions (especially in the public enterprises being privatized), the ruling Socialist Party and leading minority parties rejected such sacrifices, Eurozone officials demanded that financial planning be placed above party politics, and demanded “cross-party agreement on any overhaul of the bail-out.” In other words, Greece should respond to its wave of labor strikes and popular protest by suspending party politics and economic democracy.

(Papandreou dutifully tried high-level talks to get a Greek all-party consensus in favor of the Troika plan this week, and failed. )

“The government and the opposition should declare jointly that they commit to the reform agreements with the EU,” Mr. Juncker explained to Der Spiegel.

Criticizing Prime Minister George Papandreou’s delay at even starting to sell state assets, European financial leaders proposed a national privatization agency to act as an intermediary to transfer revenue from these assets to foreign creditors and retire public debt – and to pledge its public assets as collateral to be forfeited in case of default in payments to government bondholders. Suggesting that the government “set up an agency to privatize state assets” along the lines of the German Treuhandanstalt that sold off East German enterprises in the 1990s,” Mr. Juncker thought that “Greece could gain more from privatizations than the €50 billion ($71 billion) it has estimated” (Evans-Pritchard).

European bankers had their eye on the sale as much as $400 billion of Greek assets – enough to pay off all the government debt. Failing payment, the ECB threatened not to accept Greek government bonds as collateral. This would prevent Greek banks from doing business, wrecking its financial system and paralyzing the economy. This threat was supposed to make privatization “democratically” approved – followed by breaking union power and lowering wages (“internal devaluation”). “Jan Kees de Jager, Dutch finance minister, has proposed that any more loans to Greece should come with collateral arrangements, in which European state lenders would take over Greek assets in the event of a sovereign default.” (Peter Spiegel, Financial Times.)

Incredible. It's like nothing's changed since 1821 and the Bavarian royalty is still in charge of Greece, on appointment of the European great powers.

The problem is that ultimate default is inevitable, given the debt corner into which governments have recklessly deregulated the banks and cut property taxes and progressive income taxes. Default will become pressing whenever the ECB may choose to pull the plug.

The ECB makes governments unable to finance their spending

Introduction of the euro in 1999 explicitly prevented the ECB or any national central bank from financing government deficits. This means that no nation has a central bank able to do what those of Britain and the United States were created to do: monetize credit to domestic banks. The public sector has been made dependent on commercial banks and bondholders. This is a bonanza for them, rolling back three centuries of attempts to create a mixed economy financially and industrially, by privatizing the credit creation monopoly as well as capital investment in public infrastructure monopolies now being pushed onto the sales block for bidders – on credit, with the winner being the one who promises to pay out the most interest to bankers to absorb the access fees (“economic rent”) that can be extracted.

Politics is being financialized while economies are being privatized. The financial strategy was to remove economic planning from democratically elected representatives, centralizing it in the hands of financial managers. What Benito Mussolini called “corporatism” in the 1920s (to give it its polite name) is now being achieved by Europe’s large banks and financial institutions – ironically (but I suppose inevitably) under the euphemism of “free market economics.”

Language is adapting itself to reflect the economic and political transformation (surrender?) now underway. Central bank “independence” was euphemized as the “hallmark of democracy,” not the victory of financial oligarchy. The task of rhetoric is to divert attention from the fact that the financial sector aims not to “free” markets, but to place control in the hands of financial managers – whose logic is to subject economies to austerity and even depression, sell off public land and enterprises, suffer emigration and reduce living standards in the face of a sharply increasing concentration of wealth at the top of the economic pyramid. The idea is to slash government employment, lowering public-sector salaries to lead private sector wages downward, while cutting back social services.

The internal contradiction (as Marxists would say) is that the existing mass of interest-bearing debt must grow, as it receives interest – which is re-invested to earn yet more interest. This is the “magic” or “miracle” of compound interest. The problem is that paying interest diverts revenue away from the circular flow between production and consumption. Say’s Law says that payments by producers (to employees and to producers of capital goods) must be spent, in the agregate, on buying the products that labor and tangible capital produces. Otherwise there is a market glut and business shrinks – with the financial sector’s network of debt claims bearing the brunt.

The financial system intrudes into this circular flow. Income spent to pay creditors is not spent on goods and services; it is re-invested in new loans, or on stocks and bonds (assets in the form of financial and property claims on the economy), or increasingly on “gambling” (the “casino capitalism” of derivatives, the international carry trade (that is, exchange-rate and interest-rate arbitrage) and other financial claims that are independent of the production-and-consumption economy. So as financial assets accrue interest – bolstered by new credit creation on computer keyboards by commercial banks and central banks – the financial rake-off from the “real” economy increases.

The idea of paying debts regardless of social cost is backed by mathematical models as complex as those used by physicists designing atomic reactors. But they have a basic flaw simple enough for a grade-school math student to understand: They assume that economies can pay debts growing exponentially at a higher rate than production or exports are growing. Only by ignoring the ability to pay – by creating an economic surplus over break-even levels – can one believe that debt leveraging can produce enough financial “balance sheet” gains to pay banks, pension funds and other financial institutions that recycle their interest into new loans. Financial engineering is expected to usher in a postindustrial society that make money from money (or rather, from credit) via rising asset prices for real estate, stocks and bonds.

It all seems much easier than earning profit from tangible investment to produce and market goods and services, because banks can fuel asset-price inflation simply by creating credit electronically on their computer keyboards. Until 2008 many families throughout the world saw the price of their home rise by more than they earned in an entire year. This cuts out the troublesome M-C-M’ cycle (using capital to produce commodities to sell at a profit), by M-M’ (buying real estate or assets already in place, or stocks and bonds already issued, and waiting for the central bank to inflate their prices by lowering interest rates and untaxing wealth so that high income investors can increase their demand for property and financial securities).

The problem is that credit is debt, and debt must be paid – with interest. And when an economy pays interest, less revenue is left over to spend on goods and services. So markets shrink, sales decline, profits fall, and there is less cash flow to pay interest and dividends. Unemployment spreads, rents fall, mortgage-holders default, and real estate is thrown onto the market at falling prices.

When asset prices crash, these debts remain in place. As the Bubble Economy turns into a nightmare, politicians are taking private (and often fraudulent) bank losses onto the public balance sheet. This is dividing European politics and even threatening to break up the Eurozone.

Breakup of the Eurozone?

Third World countries from the 1960s through 1990s were told to devalue in order to reduce labor’s purchasing power and hence imports of food, fuel and other consumer goods. But Eurozone members are locked into the euro. This leaves only the option of “internal devaluation” – lowering wage rates as an alternative to scaling back payments to creditors atop Europe’s economic pyramid.

Latvia is cited as the model success story. Its government slashed employment and public sector wages fell by 30 per cent in 2009-10. Private-sector wages followed the decline. This was applauded as a “success story” and “accepting reality.” So now, the government has put forth a “balanced budget amendment,” to go with its flat tax on labor (some 59 percent, with only a 1 percent tax on real estate). Former U.S. neoliberal presidential candidate Steve Forbes would find it an economic paradise.

“Saving the euro” is a euphemism for governments saving the financial class – and with it a debt dynamic that is nearing its end regardless of what they do. The aim is for euro-debts to Germany, the Netherlands, France and financial institutions (now joined by vulture funds) are to preserve their value. (No haircuts for them). The price is to be paid by labor and industry.

Government authority is to lose most of all. Just as the public domain is to be carved up and sold to pay creditors, economic policy is being taken out of the hands of democratically elected representatives and placed in the hands of the ECB, European Commission and IMF.

Spain’s unemployment rate of 20 per cent, just a bit more than in the Baltics, with nearly twice as high an unemployment rate among recent school graduates. But as William Nassau Senior is reported to have said when told that a million Irishmen had died in the potato famine: “It is not enough!”

Can anything be enough – anything that works for more than the short run? What “helping Greece remain solvent” means in practice is to help it avoid taxing wealth (the rich aren’t paying) and help it roll back wages while obliging labor to pay more in taxes while the government (i.e. “taxpayers,” a.k.a. workers) sells off public land and enterprises to bail out foreign banks and bondholders while slashing its social spending, industrial subsidies and public infrastructure investment.

One Greek friend in my age bracket has said that his private pension (from a computing company) was slashed by the government. When his son went to collect his unemployment check, it was cut in half, on the ground that his parents allegedly had the money to support them. The price of the house they bought a few years ago has plunged. They tell me that they are no more eager to remain part of the Eurozone than the Icelandic voters showed themselves last month.

The strikes continue. Anger is rising. When incoming IMF head Christine Lagarde was French trade minister, she suggested that: “France had to revamp its labor code. Labor unions and fellow ministers balked, and Ms. Lagarde backtracked, saying she had expressed a personal opinion.” This opinion is about to become official policy – from the IMF that was acting as “good cop” to the ECB’s “bad cop.”

I suppose that all that really is needed is for people to understand just what dynamics are at work that make these attempts to pay in vain. The creditors know that the game is up. All they can do is take as much as they can, as long as they can, pay themselves bonuses that are “free” from recapture by public prosecutors, and run to their offshore banking centers.


Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com

This article is an excerpt from Prof. Hudson’s work in progress, “Debts that Can’t be Paid, Won’t Be,” to be published later this year.

[JackRiddler]

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"Tip of the iceberg." As our man Ruppert would agree!

http://www.borderlandbeat.com/2011/05/t ... p-for.html

Too Big to Do Time?: Fed Wrist-slap for Wachovia Bank Makes a Farce of the Drug War


Friday, May 27, 2011 | Borderland Beat Reporter Gari

By:
Linn Washington Jr.


The U.S. government won convictions against 23,506 drug traffickers nationwide during 2010, sending 96 percent of the offenders to prison, according to U.S. Sentencing Commission statistics.

Yet one of the biggest entities busted by the feds for involvement in drug trafficking last year received just a wrist-slap deal from federal prosecutors with nobody getting prison time.

During 2010, the U.S. government also won convictions against 806 persons involved in smaller-time drug-related money laundering, sending nearly 77 percent of those offenders to prison.

Yet when it came to a case involving billions of dollars in illegal drug profits, the federal government gave the same unusual wrist-slap to the same entity caught giving greed-blinded assistance to Mexican drug cartels by laundering billions of dollars in illegal profits for them.

So, what is this entity that federal prosecutors found worthy of big breaks for its laundering of billions of dollars, and for its blatant facilitating or tons of smuggled cocaine?

Meet Wachovia – once the nation’s sixth largest bank by assets and now a part of Wells Fargo Bank… a too-big-to-fail bank that for the feds is apparently too-big-to jail.

Wachovia recently completed what amounted to a year-long probation arising from a March 2010 settlement deal with federal prosecutors who were pursuing criminal proceedings against Wachovia for its facilitating of illegal money transfers from Mexico totaling $378-billion…a staggering sum greater than half of the Pentagon's annual budget, which included billions of dollars traced directly to violent Mexican drug cartels.

The record $160-million fine slapped on Wachovia under terms of that settlement deal included a $50-million assessment for failing to monitor cash used to ship into the US 22 tons of cocaine. (That fine amounted to less than two percent of Wachovia's profits during the prior year.)

Wells Fargo now owns Wachovia. Wells Fargo, federal prosecutors stress, was not involvement in the misdeeds that landed Wachovia in court, where it received a deferred prosecution deal.

Wells Fargo purchased Wachovia in early 2009 for $12.7-billion, shortly after Wells Fargo had received $25-billion in federal bail-out funds from the TARP program. That purchase helped make Wells Fargo America’s second-largest bank.

Many condemn the federal government settlement with Wachovia as a farce.

Criticism has come from persons in law enforcement frustrated by big-bank involvement in laundering drug money and from those who claim federal drug enforcement practices provide bigger breaks to drug kingpins than to low-level operators.

“All the law enforcement people wanted to see this come to trial. But no one goes to jail,” said Martin Woods, an English expert on anti-money laundering, whose work while with Wachovia’s London office helped unravel the drug connections. Woods says Wachovia officials bashed him for his investigative diligence and whistle-blowing as an employee.

“It’s simple: it you don’t see the correlation between the money laundering by banks and people killed in Mexico, you’re missing the point,” Woods said in an April 3, 2011 article published in The Observer, a British newspaper published on Sundays.

Wachovia’s involvement in big-time money laundering paralleled the period of a murderous escalation in violence in Mexico’s Drug War that has claimed the lives of over 40,000 Mexicans since 2006 alone, with the dead including politicians, prosecutors, police, soldiers, drug gang members and innocent bystanders.

During the same month last year when federal prosecutors gave Wachovia a break, finding no need to imprison any bank personnel for their involvement in massive drug-tainted money laundering, other federal prosecutors were pounding domestic drug dealers with long prison sentences.

For example, an Anchorage, Alaska man received a ten-year term for selling four ounces of crack cocaine, while an East St. Louis, Ill. businessman received a life sentence plus a $2.25-million fine for distributing three thousand pounds of cocaine between 2004 and his arrest in April 2008.

The amount of cocaine trafficking that sent the Illinois man to prison for life – one and a half tons - was much smaller than that single 22 ton cocaine shipment referenced in the Wachovia settlement document.

The settlement agreement Wachovia officials signed with federal prosecutors in Miami last year clearly stated that the bank knew that many of the transactions with Mexican financial institutions from 2004 to 2007 carried the stench of drugs.

That settlement agreement stated in part that as early as “2005 Wachovia was aware that other large US banks were exiting the [Mexican] business based on [anti-money laundering] concerns…Despite these warnings, Wachovia remained in business” according to news media reports.

One reason Wachovia stayed in the business as others pulled out is that the bank reaped hefty fees from that money-laundering "business," in which billions of dollars in wire transfers, traveler’s checks and bulk cash shipments went into Wachovia accounts from Mexican exchange facilities called casa de cambios (CDCs).

Jeffery Solman, the federal prosecutor who handled the Wachovia case, stated last year that “Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations.”

Last year Bloomberg News, in an article on the Wachovia money laundering scandal, reported how the federal government cited other mega-financial institutions in the U.S. like American Express Bank International and Bank of America for their complicity in laundering drug money.

Making a farce out of the nation's supposed War on Drugs, none of the mega-financial institutions identified by federal authorities as having been involved with laundering drug money and none of the well-paid individuals at those institutions which were facilitating that laundering has faced go-to-jail federal criminal prosecutions like those targeting small fry in the drug trade.

Days after Wachovia received its wrist-slap deal for laundering billions of dollars in drug money, federal prosecutors secured a five-year sentence for a 26-year-old Johnstown, Pa. man involved with a drug ring it claimed was responsible for $10,000 in drug sales per month.

Imprisoning that Johnstown street dealer for five years will cost taxpayers $113,115, based on the average cost of $22,623 annually to house a federal prisoner. He was one of six people netted during a drug crackdown in that small former steel town located in the mountains 66 miles east of Pittsburgh.

Alarming evidence of the Drug War farce – the prosecutorial pounding of small fry while major players get a pass – is evident in statistics from the U.S. Sentencing Commission, the federal agency that advises Congress on criminal sentencing matters.

During 2009, in the Southern Florida district where Miami is located, 96.1 percent of the 669 persons convicted in federal courts for drug trafficking received prison time. Twenty-percent of the persons convicted in Southern Florida federal courts for simply possessing drugs received prison time.

Of the 67 persons convicted of money laundering during 2009 in those same Southern Florida courts, 77.6% went to prison, according to U.S. Sentencing Commission statistics.

As noted in that April 2011 article in The Observer, the conclusion of the Wachovia case “was only the tip of an iceberg, demonstrating the role of the “legal” banking sector in swilling hundreds of billions of dollars – the blood money from the murderous drug trade in Mexico and other places in the world – around their global operations, now bailed out by the taxpayer.”

That Observer article included observations made in 2008 by the then head of the United Nations office on drugs and crime providing evidence suggesting that drug/crime money was “the only liquid investment capital” available to banks on the brink of collapse.

“Inter-bank loans were funded by money that originated from the drug trade,” the Observer article quoted the U.N. official as stating. “There were signs that some banks were rescued that way.”

The June 2010 Bloomberg News article provided an ominous observation about the wrist-slap protection large banks receive from criminal indictments due to a variant of the too-big-to-fail theory:

“Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets," says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering. The theory is like a get-out-of-jail free card for big banks, Blum says.

Another anti-money laundering expert disappointed with the federal government’s settlement with Wachovia is Robert Mazur, identified in the Observer article as one of the world’s “foremost figures” in providing anti-money laundering training and the point-man for US law enforcement during prosecutions against Columbian drug cartels two decades ago.

Mazur told The Observer, “The only thing that will make the banks properly vigilant to what is happening is when they hear the rattle of handcuffs in the boardroom.”


Copyright © Borderland Beat

And what does this mean on the ground?

http://www.guardian.co.uk/world/2011/ma ... ern-states

Mexican drug battle leaves 28 dead

Police discover dead men on federal highway in Nayarit while scores of villagers flee their homes in Michoacán
Associated Press
guardian.co.uk, Thursday 26 May 2011 11.59 BST


Mexican soldiers carry out an anti-drugs operation in Monclova, Mexico. Photograph: Semar/EPA


Fierce fighting among apparent rival drug gangs in western Mexico has left 28 people dead on a highway, while in a nearby state more than 700 people fled villages that have become battlegrounds.

The violence, which appeared to be unrelated, escalated on Wednesday in the western states of Nayarit and Michoacán, where drug cartels have been warring over territory.

Police in Nayarit were initially responding to a complaint of a kidnapping by a group of armed men who escaped on a federal highway near the town of Ruiz, when they heard a report of a shootout, according to the state prosecutor's office.

They found 28 men lying dead and four others wounded, as well as bullet casings from high-powered weapons and 10 abandoned vehicles.

The statement released late on Wednesday by the attorney general's office gave no further details.

Earlier in the day, an official in the nearby western state of Michoacán said drug cartel violence had prompted frightened villagers to flee hamlets and take refuge at shelters set up at a church hall, recreation centre and schools.

It is at least the second time a large number of rural residents have been displaced by drug violence in Mexico. In November, about 400 people in the northern border town of Ciudad Mier took refuge in the neighbouring city of Ciudad Aleman following gun battles.

The Michoacán state civil defence director, Carlos Mandujano, said about 700 people spent Tuesday night at a water park in the town of Buenavista Tomatlan, with most sleeping under open thatched-roof structures.

Mandujano said state authorities were providing sleeping mats, blankets and food.

Residents told local authorities that gun battles between rival drug cartels had made it too dangerous for them to stay in outlying hamlets. The latest reports said arsonists were burning avocado farms in the nearby town of Acahuato.

The fighting in Michoacán is believed to involve rival factions of the La Familia drug cartel, some of whose members now call themselves "the Knights Templar".

Drug violence has been on the rise in Nayarit, a Pacific coast state known for its surfing and beach towns. In October, gunmen killed 15 people at a car wash in the capital of Tepic, an attack that police said bore the characteristics of organised crime. The bodies of 12 murder victims, eight of them partially burned, were found on a dirt road in Nayarit last year. Officials have not identified the gangs fighting there.

The Norway-based Internal Displacement Monitoring Centre estimates about 230,000 people in Mexico have been driven from their homes by the violence, often to stay with relatives or in the US.

[vanlose kid]

The Greek "Ultimatum": Bailout (For The Bankers) And (Loss Of) Sovereignty
Submitted by Tyler Durden on 05/29/2011 19:19 -0400


So after one year of beating around the bush, it is finally made clear that, as many were expecting all along, the ultimate goal of the Greek "bailouts" is nothing short of the state's (partial for now) annexation by Europe. According to an FT breaking news article, "European leaders are negotiating a deal that would lead to unprecedented outside intervention in the Greek economy, including international involvement in tax collection and privatisation of state assets, in exchange for new bail-out loans for Athens. People involved in the talks said the package would also include incentives for private holders of Greek debt voluntarily to extend Athens’ repayment schedule, as well as another round of austerity measures." Thus Greece is faced with the banker win-win choice, of not only abandoning sovereignty, a first in modern "democratic" history, in the pursuit of "Greek" policies that are beneficial for Europe, or not get a bailout, which would only serve to prevent senior bondholder impairments. How could Greek leaders and its population possibly not accept such an attractive option which either leaves the country as another Olli Rehn protectorate, or forces it to not bailout Europe's overleveraged banker class. In essence Europe is now convinced, just like Hank Paulson was on September 14, 2008, that the downstream effects from letting Greece implode are manageable. But the key development is that the Greek bankruptcy, which from the beginning, and as Peter Tchir's note below demonstrates, was always simply a Greek choice, was just made that much easier.

From the FT:

People involved in the talks said the package would also include incentives for private holders of Greek debt voluntarily to extend Athens’ repayment schedule, as well as another round of austerity measures.

Officials hope that as much as half of the €60bn-€70bn ($86bn-$100bn) in new financing needed by Athens until the end of 2013 could be accounted for without new loans. Under a plan advocated by some, much of that would be covered by the sale of state assets and the change in repayment terms for private debtholders.

Eurozone countries and the International Monetary Fund would then need to lend an additional €30bn-€35bn on top of the €110bn already promised as part of the bail-out programme agreed last year.

Officials warned, however, that almost every element of the new package faced significant opposition from at least one of the governments and institutions involved in the current negotiations and a deal could still unravel.

In the latest setback, the Greek government failed on Friday to win cross-party agreement on the new austerity measures, which European Union lenders have insisted is a prerequisite to another bail-out.

In addition, the European Central Bank remains opposed to any restructuring of Greek debt that could be considered a “credit event” – a change in terms that could technically be ruled a default.

One senior European official involved in the talks, however, said ECB objections could be overcome if the rescheduling was structured properly.

Despite the hurdles, pressure is building to have a deal done within three weeks because of an IMF threat to withhold its portion of June’s €12bn bail-out payment unless Athens can show it can meet all its financing requirements for the next 12 months.

And the latest set of very timely observations from TF Market's Peter Tchir.

You Can Lead A Trojan Horse To Water But You Can't Make Him Drink

Restructuring in one form or another seems imminent rather than years away

Well, it seems as though this week's news flow has spurred the mainstream media into action. Everywhere you look there are stories about the Greek credit crisis. It is encouraging to see that more of them now agree with my view that a restructuring would occur sooner rather than later. Only a month ago, almost every article and every piece of official street research made it clear that a restructuring was at least a year off, if not longer. I demonstrated why I thought that opinion was wrong, and although I haven't been proven correct yet, I am no longer in a tiny minority. Restructuring (reprofiling or default or whatever you want to call it) will not be easy, but I remain convinced that it is the best outcome for Greece and in the long run will be the best outcome for Europe even with the short term pain it will cause.

There is growing scrutiny of the ECB's actions and motivations

It has also become painfully obvious to everyone that the actions of the ECB are making any resolution more difficult. Someone, other than me, has now called the ECB 'pathological' in their resistance to restructuring. The ECB, led by Trichet, made a major mistake in their purchase of Greek bonds in the secondary market. It is unclear what they intended to gain (other than a short squeeze) as Greece was not tapping the capital markets for new bond deals. If Trichet worked at a real bank, he would have been fired by now, or allowed 'to pursue time with his family'. Someone who was not part of the bad decision would be brought in to oversee the positions. The ECB needs to change personnel immediately and bring in someone fresh to be part of the negotiations who can focus on what is best going forward and not on how best to cover up previous mistakes.

It is Greece's decision to default or not, NOT the ECB's or EU's

I continue to be confused by the fact that most people talk about the issue from the lender's perspective. "Should Greece be allowed to default?" "Does it teach Greece a bad lesson if they let them walk away? " "Won't Greece just default again if the ECB lets them walk away?"

The reality is the IMF, or ECB, or EU can offer money to Greece, but it is Greece's decision to borrow more to pay off old debts. Only Greece can decide to make payments and not default or demand restructuring. Other entities or countries can make it easier for Greece to kick the can down the road, but in the end, only Greece can decide whether or not to pay its bills.

The people of Greece seem to prefer default. It is fairly clear that this is not a short term liquidity problem, but a longer term solvency problem for Greece. Greece has some assets it can sell, but as I have said time and again, they will still have those assets to secure new funds after a default/restructuring. I continue to believe it is in the best interest of Greece to default and it is their decision, no one else's. It may be bad for the rest of Europe if Greece defaults, but that really should not be the priority of the Greek government.

If Greece defaults, the creditors can then take steps to enforce their rights. If a person fails to pay on their mortgage, the banks can enact their rights to foreclose. If a U.S. company fails to pay its debt, creditors will suit, and the company and debtors will typically resolve the issue in the courts under Chapter 11 or Chapter 7. There are similar statutes for corporate defaults in other countries. The real reason that we are hearing so much about this from the lenders perspective, rather than the borrowers, is because it is not very clear what the lenders' rights are if Greece stops paying.

If Greece stops paying, the lenders cannot 'foreclose' on it. There is no law that dictates how to proceed like chapter 11 does. The bonds have very few if any covenants. The lawsuits would have to be won in Greek courts and then enforced by people employed by the Greek government. Good luck with that.

The reason the lenders have an almost irrational need to avoid a default, is they don't know what they will get if Greece does default. There is no good way to analyze it. Their ultimate recovery will be based on some threats of future lending, rights of set-off, and maybe some threats of trade sanctions, but unlike a mortgage or a corporate bond, there is no good way to analyze the potential outcome. There is a reason 'vulture' funds focus on corporate debt much more than sovereign - there is a way to analyze the outcomes, it is not just guess work.

So people can continue to comment on whether Greece should be allowed to default, but that misses the point. Lenders can make it easy for Greece to make payments, but choosing to default or not remains solely a Greek decision and they should do what is best for them.

http://www.zerohedge.com/article/greece ... overeignty

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