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

[JackRiddler]

DU's Time for change, one of a handful of original writers left there (him and Hannah Bell), brings a piece building off of Nassim Nicholas Taleb's 10 recommendations in "The Black Swan," interspersing passages from other readings. Worth the effort of re-formatting it for a post here, but not quite the additional effort of reproducing all of his many embedded links. So follow this one for the citations:

http://www.democraticunderground.com/di ... 439x358064

Ten Principles for Avoiding National Economic Catastrophe


The ten principles that I discuss in this post come from a book written by Nassim Nicholas Taleb, titled “The Black Swan – The Impact of the Highly Improbable”. The book is not primarily about economics. Rather, it is about how the laws of probability are misunderstood and incorrectly taught in the vast majority of academic institutions regarding highly “improbable” events – as applied to real life circumstances.

I put “improbable” in quotes because, as Taleb correctly points out, “improbable” is in the eye of the beholder, which in turn is highly dependent upon the information that the beholder is aware of. For example, the recent economic Meltdown of 2008 (which represents economic catastrophe for many millions of Americans, including some in my family) was considered to be highly improbable by the vast majority of Americans prior to its occurrence. But as Taleb points out, rational assessment of information that was publicly available with a certain amount of digging would have made the meltdown appear highly probable rather than improbable. Indeed, he predicted it, as did a handful of others. Another example is that most Americans alive today would have believed that circumnavigation around the North Pole would have been impossible in their life time, based upon the fact that it had been impossible for at least the past 125 thousand years. Yet those familiar with the extent and impact of global warming would not have been surprised to hear of the North Pole becoming circumnavigable – as indeed it became in 2008.

Taleb’s book does not espouse a political point of view. Rather, as noted above, it contains his views on assessing the probability of highly “improbable” events. So his ten principles for what he terms a “black-swan-robust” society are apolitically motivated. I will not go into his views on probability in this post. Rather, I will discuss only the two and a half pages near the end of the book that deal with a “black-swan-robust” society, as applied to our recent economic meltdown.


Principle 1 – What is fragile should break early, while it’s still small

Another way of saying this is that we should never allow our institutions to become “too big to fail” – in other words, so big that their failure would create great damage to our society, necessitating that society bails them out in order to avoid severe consequences.

Barry C. Lynn discusses the dangers of private monopolies in his book, “Cornered – The New Monopoly Capitalism and the Economics of Destruction”:

Monopoly is, after all, merely a form of government that one group of human beings imposes on another group of human beings. Its purpose is simple – to enable the first group to transfer wealth and power to themselves. Monopolists use such private governments to organize and disorganize, to grab and smash, to rule and ruin, in ways that serve their interests only…

Lynn notes that this battle has been fought since the first days of our republic, when Jefferson and Madison battled against the soon-to-be defunct Federalist Party on this issue. Lynn continues:

Ever since, the central battle in our political economy has been between those who would use our federal and state governments to establish and protect private monopolies to empower and enrich the few and those who would use our governments to break or harness private monopolies in order to protect the liberties and properties of the many.

More than a century ago, the Progressive movement became the driving force behind anti-trust laws, such as the Sherman Anti-trust Act of 1890 and the Clayton Anti-trust Act of 1914, which limited corporate economic power by requiring fair competition.

But by the Reagan Revolution of the 1980s, Americans had forgotten about the dangers of monopoly, and right wing propaganda convinced most of them that monopoly is not something to be feared. Consequently we got the Telecommunications Act of 1996 and the Commodity Futures Modernization Act of 2000, which paved the way for successive huge mergers in the telecommunications industry and the financial industry, respectively. Both set the stage, in their own way, for the record breaking income and wealth inequality and the economic meltdown that followed.

The bottom line is this: When an organization becomes “too big” it gains inordinate economic and political power, enabling it to arrange our economic and political system for its own benefit, at the expense of everyone else. Then, when it fails, it expects – correctly – that the rest of us will bail them out with our hard earned money.


Principle 2 – No socialization of losses and privatization of gains

Socialization of losses, as noted above, is a consequence of “too big to fail”. Taleb sums up the situation:

Whatever may need to be bailed out should be nationalized…. We got ourselves into the worst of capitalism and socialism… In the United States in the 2000s, the banks took over the government. This is surreal.

That is exactly what our government did. Several of our best economists warned about Treasury Secretary Tim Geithner’s plan for continuing President Bush’s bailout. This is what Nobel Prize winning economist Joseph Stiglitz had to say about it:

The U.S. government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work… The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors… Quite frankly, this amounts to robbery of the American people. I don't think it's going to work…

Worse yet, the taxpayer bailout of Wall Street was not even accompanied by a plan to enact significant financial reforms in return for the bailout. Taleb recommends nationalization of failed corporations that are “too big to fail”, rather than simple bailouts. Otherwise the irresponsible are rewarded for their failures, as the losses incurred by their irresponsible behaviors are socialized – i.e. transmitted to ordinary Americans who are much less able to pay for them than are the financial elites. Robert Reich commented on how the Wall Street “reform” legislation of 2010 utterly failed to address the basic perversions of our financial system, especially with regard to the issue of pawning off the losses of big banks onto the American people:

The American people will continue to have to foot the bill for the mistakes of Wall Street’s biggest banks because the legislation does nothing to diminish the economic and political power of these giants. It does not cap their size. It does not resurrect the Glass-Steagall Act that once separated commercial (normal) banking from investment (casino) banking. It does not even link the pay of their traders and top executives to long-term performance. In other words, it does nothing to change their basic structure. And for this reason, it gives them an implicit federal insurance policy against failure unavailable to smaller banks – thereby adding to their economic and political power in the future.

Principle 3 – People who were driving a school bus blindfolded (and crashed it) should never be given a new one

This is just another way of saying that those who harm society should be punished rather than rewarded by given another chance to wreak damage on us. Indeed, our system works in that manner with regard to ordinary Americans. But the wealthy and well-connected usually get a free pass when they harm us, no matter how massively.

Former Treasury Secretary Robert Rubin provides an excellent example of how this principle is ignored with respect to wealthy and powerful people. As U.S. Treasury Secretary, Rubin pushed hard for the repeal of the Glass-Steagall Act, and the Commodity Futures Modernization Act of 2000, both which did terrible harm to our economy and contributed greatly to our economic meltdown.

Yet despite this, the next elected Democratic president chose Rubin and men like him, including his protégé Larry Summers, to rely on for economic advice. Robert Kuttner discusses this issue in his book, “A Presidency in Peril – The Inside Story of Obama’s Promise, Wall Street’s Power, and the Struggle to Control our Economic Future”:

Given the abject failure of the financial deregulation that Rubin championed as Clinton’s top economic adviser, followed by the collapse of the business model that he promoted as senior executive at Citigroup, it is remarkable that a consummate outsider like Barack Obama did not view Rubin (or his protégé Summers) as fatally damaged goods. On the contrary, Obama felt he needed men like Rubin and Summers for tutelage, access, and validation. That itself speaks volumes about where power reposes in America…

Glass-Steagall was designed to prevent the kinds of speculative conflicts of interest that pervaded Wall Street in the 1920s and helped bring about the Great Depression (and that reappeared in the 1990s and helped cause the crash of 2007). The Clinton’ administration’s prime architect of the Glass-Steagall repeal was Robert Rubin….

Principle 4 – Don’t let someone making an “incentive” bonus manage a nuclear plant – or your financial risks

This principle speaks to the fact that today’s financial elites are rewarded with multi-million dollar “incentive” bonuses on the basis of short-term results. Consequently, many chose to pursue strategies that were likely to result in reasonably large profits in the short-term but which were highly vulnerable to economic catastrophe. No matter. They get their huge bonuses, and when their organization collapses many thousands of ordinary Americans lose their fortunes, while the top executives get to keep their multi-million dollar bonus. This is what happened when Robert Rubin, as the number two man at Citigroup, ran the organization into the ground while making $15 million a year. Robert Scheer describes this fiasco in his book, “The Great American Stickup – How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street”:

Citigroup, under Saint Rubin’s leadership, was rushing to the cliff like a lemming, pouring resources into markets that were about to collapse… Huge losses from these mortgage securities would soon trigger a dizzying fall for “the nation’s largest and mightiest financial institution”, with Citigroup’s stock value plunging more than 90% in just two years… Those charged with overseeing deals (and regulating pay structures) were so hungry to make short term profits, they neglected to manage their colleagues who were making bad deals…

Principle 5 – Compensate complexity with simplicity

Complex systems are systems in which the failure of one part of the system is likely to lead to a failure of other parts. Furthermore, complex systems can be so difficult to understand that nobody can predict their consequences.

Robert Kuttner explains how India escaped the financial crisis experienced by so much of the rest of the world, as explained to him by Dr. Yaga Reddy, the former governor of the Bank of India, a post equivalent to that of Chairmen of the Federal Reserve in the US:

India somehow missed the consequences of the toxic products invented and exported by US financial institutions. It had no financial crisis… I asked Dr. Reddy how India managed to dodge the financial bullet. “We don’t understand these complex instruments,” he told me with a smile, “so we don’t permit them. We leave them to the advanced nations like you.”…

My reporting has confirmed that Dr. Reddy stood firm in the face of intense pressure from the governments of Britain and the United States, as well as the world’s large banks and their Indian affiliates. He was attacked as old-fashioned and rigid. The Indian central bank under his leadership persisted… to make it unprofitable for Indian banks to create and gamble in the kind of exotic derivative securities that crashed the American system… and Dr. Reddy’s banking colleagues belatedly thanked him.

Principle 6: Do not give children dynamite sticks even if they come with a warning label

Taleb explains the reasoning behind this principle. Actually, it’s kind of a follow-up principle to principle # 5:

Complex financial products need to be banned because nobody understands them, and few are rational enough to know it. We need to protect citizens from themselves, from bankers selling them “hedging” products, and gullible regulators who listen to economic theorists.

Principle 7: Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”

Ponzi schemes, such as the one cooked up by Bernard Madoff, succeed only as long as more suckers can be found to buy into them. Such a process cannot last for the long-term because eventually you will run out of suckers. A large and legitimate system, on the other hand, such as the economic system of a superpower nation, should not have to depend upon “restoring confidence”. Matt Taibbi, in his book, “Griftopia – Bubble Machines, Vampire Squids, and the Long Con that Is Breaking America”, explains how former Chairman of the Federal Reserve, Alan Greenspan, completely missed this obvious point. In a chapter titled “The Biggest Asshole in the Universe”, Taibbi explains numerous instances of Greenspan attempting to “instill confidence” into the system:

In July 1990, at the start of the recession that would ultimately destroy the presidency of George H. W. Bush, Greenspan opined: “in the very near term there’s little evidence that I can see to suggest the economy is tilting over (into recession)”… By October, with the U.S. in the sixth of what would ultimately be ten consecutive months of job losses, Greenspan remained stubborn. “The economy”, he said, “has not yet slipped into recession.”… Before the S&L crisis exploded Greenspan could be seen giving a breezy thumbs-up to now-notorious swindler Charles Keating… The mistake he made in 1994 was even worse…. Greenspan told Congress that the risks involved with derivatives were “negligible”, testimony that left the derivatives market unregulated.

Taibbi explains the inappropriateness of “restoring confidence” in such a manner:

If the national economy is a casino and the financial services industry is turning one market after another into a Ponzi scheme, then frantically pumping new money into such a destructive system is madness, no different from lending money to wild-eyed gambling addicts… and that’s exactly what Alan Greenspan did, over and over again.

Finally, Taibbi explains Greenspan’s excuse for his many overly optimistic pronouncements and his failure to address our growing crisis in a constructive manner:

Because we at the Federal Reserve were concerned about sharp reactions in the markets that had grown accustomed to an unsustainable combination of high returns and low volatility, we chose a cautious approach… We recognized… that a shift could impart uncertainty to markets, and many of us were concerned that a large immediate move in rates could create too big a dose of uncertainty, which could destabilize the financial system.

In other words, Greenspan didn’t want to create uncertainty about the Ponzi schemes created by our financial industry.


Principle 8 – Do not give an addict more drugs if he has withdrawal pains

I’m not sure exactly what Taleb is trying to say with this one. Maybe he’s saying that if you have a bad system, you need to change the system rather than continuing to feed it. If the system is destroying people’s lives, and all we do to address that is to bail out those who caused the problem, while neglecting to make substantial changes in the system that got us into trouble, then we shouldn’t expect the results to be any better in the future. As I noted above in discussing principle # 2, in quoting Robert Reich, we bailed out the bad guys while failing to substantially change the system, and even continuing to leave the bad guys in charge of the system. That’s insane.


Principle 9 – Citizens should not depend on financial assets as a repository of value and should not rely on fallible “expert” advice for their retirement

Here is what Taleb has to say about this:

Economic life should be definancialized… Citizens should experience anxiety from their own businesses (which they control), not from their investments (which they do not control).

What Taleb is saying here is that we should not have to depend on a maze of complex financial instruments, which few if any people can understand, and which are invented by people whose main interest is to make a profit rather than to help us to ensure a comfortable retirement. As noted in my discussion of principle # 5, our economic system need not be extraordinarily complex, and in fact a major reason for our current economic tragedy is that many millions of people put their trust in a system that was so complex that nobody understood it.

In his book “Rulers and Ruled in the US Empire”, James Petras discusses what happens when we put too much trust in “expert” elite financiers, resulting in a substantial disconnect between rising productivity of the American worker and our economic health:

Within the ruling class, the financial elite is the most parasitical component… One measure of the enormous influence of the financial ruling class in heightening the exploitation of labor is found in the enormous disparity between productivity and wages. Between 2000 and 2005, the US economy grew 12 percent, and productivity (measured by output per hour worked) rose 17 percent while hourly wages rose only 3 percent. Real family income fell during the same period… Three quarters of Americans say they are either worse off or no better off than they were six years ago…. The growth of vast inequalities between the yearly payment of the financial ruling class and the medium salary of workers has reached unprecedented levels….

Principle 10 – Make an omelet with the broken eggs

What Taleb is saying here is that we should not worry about our current system failing. It is rotten to the core, and therefore is beyond repair. We must allow it to fail, and then use the pieces to put together a new system:

The crisis of 2008 was not a problem to fix with makeshift repairs any more than a boat with a rotten hull can be fixed with ad hoc patches. We need to rebuild the new hull with stronger material; we will have to remake the system before it does so itself. Let us move voluntarily into a robust economy by helping what needs to be broken break on its own… banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here (by claiming restitution of the funds paid to, say, Robert Rubin or banksters whose wealth has been subsidized by taxpaying schoolteachers)… Then we will see… smaller firms, a richer ecology, no speculative leverage… a world in which entrepreneurs, not bankers, take risks…

A final word on Taleb’s principles for avoiding national economic catastrophe

Though I don’t understand all of the philosophy on probability that Taleb espouses in his book, I believe that his principles that I discussed above are right on target. I do have one substantial beef with his ideas, however: He seems to say for the most part that failure to follow those principles is a matter of an error in thinking.

I don’t believe that most of this represents error. Rather, I believe that that it represents a purposeful attempt by the elites of our country to become wealthier at the expense of almost everyone else. The financial elites make reckless gambles with our money, not because they’re stupid but because they know full well that if they win they win big, whereas if they lose they still win, because we will bail them out. Their gains are privatized while their losses are socialized, not because such a system makes any sense, but because they have enough money to exert substantial control over a critical mass of our elected officials. They are not made accountable for the vast majority of their failures, simply because they have enough money, connections and power to avoid being made accountable. CEOs make multi-million dollar bonuses not because they deserve it, but simply because they have helped to design a system in which they can. They make huge short-term profits at the expense of the long-term health of their companies, not because they’re stupid, but because they personally profit from doing so. Their financial instruments are unnecessarily complex not because they need to be, but because the complexity enables them to elicit billions of dollars from suckers who are not capable of understanding those instruments or their harmful consequences. I believe that Alan Greenspan deceived the American people numerous times on the state of our economy, not to save our economy, but because that’s what Wall Street wanted him to do, and he knew his bread was buttered by Wall Street. And finally, our system has not been fixed despite overwhelming evidence that it needs to be fixed, not because those in charge of it are concerned about the welfare of ordinary Americans, but simply because they know that leaving the system as it is enables them to continue to enrich themselves.

Taleb probably knows all this, but in the interest of keeping his book apolitical he refrains from emphasizing these things – though his true feelings pop up at times through such means as his not infrequent use of the word “banksters”.

James Galbraith comments on this situation in great detail in his book, “The Predator State”, in which he describes how our country became a “predator state”:

In the late 1970s and 1980s… business leadership saw the possibility of… complete control of the apparatus of the state. In particular, reactionary business leadership, in those sectors most affected by public regulation, saw this possibility and directed their lobbies – the K Street corridor – toward this goal. The Republican Party… became the instrument of this form of corporate control… And to this group was added… those who saw the economic activities of government not in ideological terms but merely as opportunities for private profit on a continental scale… This is the predator state. It is a coalition of relentless opponents of the regulatory framework on which public purpose depends, with enterprises whose major lines of business compete with or encroach on the principal public functions of the enduring New Deal. It is a coalition, in other words, that seeks to control the state partly in order to prevent the assertion of public purpose…

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[JackRiddler]

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http://www.ssa.gov/oact/trsum/index.html

Status of the Social Security and Medicare Programs

A SUMMARY OF THE 2010 ANNUAL REPORTS
Social Security and Medicare Boards of Trustees
A MESSAGE TO THE PUBLIC:

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This message summarizes our 2010 Annual Reports.

The outlook for Medicare has improved substantially because of program changes made in the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (the "Affordable Care Act" or ACA). Despite lower near-term revenues resulting from the economic recession, the Hospital Insurance (HI) Trust Fund is now expected to remain solvent until 2029, 12 years longer than was projected last year, and the 75-year HI financial shortfall has been reduced to 0.66 percent of taxable payroll from 3.88 percent in last year’s report. Nearly all of this improvement in HI finances is due to the ACA. The ACA is also expected to substantially reduce costs for the Medicare Supplementary Medical Insurance (SMI) program; projected program costs as a share of GDP over the next 75 years are down 23 percent relative to the costs projected for the 2009 report.

SNIP

The financial outlook for Social Security is little changed from last year. The short term outlook is worsened by a deeper recession than was projected last year, but the overall 75-year outlook is nevertheless somewhat improved primarily because a provision of the ACA is expected to cause a higher share of labor compensation to be paid in the form of wages that are subject to the Social Security payroll tax than would occur in the absence of the legislation. The Disability Insurance (DI) Trust Fund, however, is now projected to become exhausted in 2018, two years earlier than in last year’s report. Thus, changes to improve the financial status of the DI program are needed soon.

Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983.

That was when the SS tax, FICA, was increased to build a trust fund out of the surpluses (even as income taxes had been cut).

The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers. The annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, and then by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084. The projected exhaustion date for the combined OASI and DI Trust Funds is unchanged from last year’s report.

The long-run financial challenges facing Social Security and those that remain for Medicare should be addressed soon. If action is taken sooner rather than later, more options will be available and more time will be available to phase in changes so that those affected have adequate time to prepare.

So adjustments should be made now to make up for projected shortfalls in 2040. Wherefore the supposed immediate SS crisis? Simple: They already spent the "trust fund" on wars long ago (though not wars that are over yet!) and although it was legitimately raised for SS, they'd rather not have to pay it back, since they want to keep paying for the wonderful, beautiful wars without raising taxes on anyone, especially not the life-giving rich folk without whom we would all drown in our own blood.

Medicare

The projected 75-year actuarial deficit in the Hospital Insurance (HI) Trust Fund is 0.66 percent of taxable payroll, down substantially from 3.88 percent projected in last year’s report. The HI fund still fails the test of short-range financial adequacy, as projected annual assets drop below projected annual expenditures within 10 years — by 2012. The fund also continues to fail the long range test of close actuarial balance. The projected date of HI Trust Fund exhaustion is 2029, 12 years later than in last year’s report, at which time dedicated revenues would be sufficient to pay 85 percent of HI costs. The share of HI expenditures that can be financed with HI dedicated revenues is projected to decline slowly to 76 percent in 2045 and then to rise slowly, reaching 89 percent in 2084. Over 75 years, HI’s estimated actuarial imbalance is 23 percent as large as payroll taxes, and 16 percent as large as program outlays.

Part B of Supplementary Medical Insurance (SMI), which pays for doctors’ bills and other outpatient expenses, and Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs. However, the aging population will result in SMI costs growing rapidly from 1.9 percent of GDP in 2009 to 3.5 percent of GDP in 2040; about three-quarters of these costs will be financed from general revenues and about one-quarter from premiums paid by beneficiaries. Relatively small amounts of SMI financing are received from special payments by States and from fees on manufacturers and importers of brand-name prescription drugs.

As occurred in 2010, it is expected that about one quarter of Part B enrollees will be subject to unusually large premium increases next year. This occurs because premium rates are set so that total premiums finance a specific share of Part B costs, and it is projected that the other three-quarters of Part B enrollees will not be subject to a premium increase in 2011 due to an expected zero Social Security benefit COLA in December 2010. A "hold-harmless" provision of current law limits those individuals’ premium increases to the increase in their Social Security benefits.

Social Security

The annual cost of Social Security benefits represented 4.8 percent of GDP in 2009 and is projected to increase gradually to 6.1 percent of GDP in 2035 and then decline to about 5.9 percent of GDP by 2050 and remain at about that level. The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds is 1.92 percent of taxable payroll, down from 2.00 percent projected in last year’s report.

The 0.08 percentage point reduction in the actuarial deficit reflects a 0.06 percentage point increase due to the change in the valuation date to 2010 and the inclusion of an additional year, 2084, in the projections, a 0.14 percentage point reduction due the ACA’s effect on the share of labor compensation that is subject to OASDI taxes, and other changes that net to zero. Although the combined OASDI program passes the short-range test of financial adequacy, the DI program does not; DI costs have exceeded tax revenue since 2005, and trust fund exhaustion is projected for 2018, two years earlier than was projected last year. In addition, OASDI continues to fail the long-range test of close actuarial balance. Projected OASDI tax income will be sufficient to finance about 75 percent of scheduled annual benefits in 2037 through 2084 after the combined OASI and DI Trust Funds are projected to be exhausted. Over 75 years, Social Security’s actuarial imbalance is 15 percent as large as payroll taxes, and 12 percent as large as program outlays.

Conclusion

The ACA makes significant progress toward making Medicare financially viable. But while it is projected that the Medicare HI Trust Fund is adequately financed until 2029, and the Social Security OASI and DI Trust Funds are adequately financed until 2040 and 2018, respectively, the significant longer term financial imbalances of the programs still need to be addressed. The sooner action is taken to address the long-run financial imbalances, the more reform options will be available, and the more time there will be to phase in changes so that those affected will have adequate time to prepare.

By the Trustees:

Timothy F. Geithner,
Secretary of the Treasury,
and Managing Trustee

Hilda L. Solis,
Secretary of Labor,
and Trustee

Kathleen Sebelius,
Secretary of Health
and Human Services,
and

Trustee Michael J. Astrue,
Commissioner of
Social Security,
and Trustee

Note again: "Because the two Public Trustee positions are currently vacant, there is no Message from the Public Trustees for inclusion in the Summary of the 2010 Annual Reports." What's that all about?

A SUMMARY OF THE 2010 ANNUAL SOCIAL SECURITY
AND MEDICARE TRUST FUND REPORTS

Who Are the Trustees? There are six Trustees, four of whom serve by virtue of their positions in the Federal Government: the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security. The other two Trustees are public representatives appointed by the President, subject to confirmation by the Senate. The two Public Trustee positions are currently vacant.

What Are the Trust Funds? Congress established the trust funds in the U.S. Treasury to account for all program income and disbursements. Social Security and Medicare taxes, premiums, and other income are credited to the funds. Disbursements from the funds can be made only to pay benefits and program administrative costs. All excess funds must be invested in interest-bearing securities backed by the full faith and credit of the United States.

The Department of the Treasury currently invests all program revenues in special non-marketable securities of the U.S. Government on which a market rate of interest is credited. The trust funds represent the accumulated value, including interest, of all prior program annual surpluses and deficits, and provide automatic authority to pay benefits.

There are four separate trust funds. For Social Security, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits. (The two trust funds are often considered on a combined basis designated OASDI.) For Medicare, the Hospital Insurance (HI) Trust Fund pays for inpatient hospital and related care. The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts: Part B, which pays for physician and outpatient services, and Part D, which covers the prescription drug benefit.

What Were the Trust Fund Results in 2009? In December 2009, 42.8 million people received OASI benefits, 9.7 million received DI benefits, and 46.3 million were covered under Medicare. Trust fund operations, in billions of dollars, are shown below (totals may not add due to rounding). The OASI and SMI Trust Funds showed net increases in assets in 2009; DI and HI Trust Fund assets declined.

There follows a table that will probably look lousy here, so follow the link:

OASI DI HI SMI
Assets (end of 2008) $2,202.9 $215.8 $321.3 $60.3
Income during 2009 698.2 109.3 225.4 282.8
Outgo during 2009 564.3 121.5 242.5 266.5
Net increase in assets 133.9 -12.2 -17.1 16.3
Assets (end of 2009) 2,336.8 203.5 304.2 76.6

How Has the Financial Outlook for Social Security and Medicare Changed Since Last Year? Under the intermediate assumptions, the combined OASDI Trust Funds have a projected 75-year actuarial deficit equal to 1.92 percent of taxable payroll, 0.08 percentage point smaller than last year’s estimate. The main reason for the smaller deficit is the anticipated effect on the rate of growth in the average wage level of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. This legislation, referred to more briefly in this summary as the Affordable Care Act (ACA), slows the rate of decline in the share of employee compensation paid in wages covered by Social Security after 2018 when an excise tax on high-cost, employer-sponsored, health insurance plans begins, thereby increasing projected growth in the average real wage. The OASI Trust Fund and the combined OASI and DI Trust Funds are adequately financed over the next 10 years. Evaluated on its own, the DI Trust Fund does not meet the short-range test for financial adequacy because its assets are projected to fall below 100 percent of annual expenditures by the beginning of 2013, and to become exhausted in 2018.

Medicare’s HI Trust Fund has a projected 75-year actuarial deficit equal to 0.66 percent of taxable payroll under the intermediate assumptions, a large improvement from the 3.88 percent figure reported last year. That change is largely attributable to the ACA, which mandates a reduction in the growth in Medicare payment rates for most health service providers, reduces payments to Medicare Advantage plans, and imposes higher HI payroll taxes for high earners. Those factors slow the depletion of HI Trust Fund assets and delay the anticipated fund exhaustion date to 2029, 12 years later than reported last year. Even so, the HI Trust Fund fails the short-range test of financial adequacy because its assets are projected to fall to 94 percent of annual expenditures by the beginning of 2012. It is important to note that the substantially improved results for HI (and for SMI Part B, below) depend in part on the long-range feasibility of the lower increases in Medicare payment rates. Moreover, in the context of today’s health care system, these adjustments would probably not be viable indefinitely into the future. As a result, the actual future costs for Medicare are likely to exceed those shown by the current-law projections in this year’s report.

The SMI Trust Fund is adequately financed under current law because of the automatic financing established for Medicare Parts B and D. The ACA’s reductions in the Medicare payment rates to most service providers result in substantially lower projected costs for Part B than reported last year. Note, however, that Part B costs are almost certainly understated as a result of incorporating substantial reductions in physician fees during the next several years that would be required under current law, but are very unlikely to occur. The ACA is expected to have a much smaller net effect on projected Part D costs. Lower-than-anticipated drug spending in 2008 and 2009, and a lower projected rate of growth in Part D costs during the next decade, are partially offset by the ACA’s phasing out of the benefit formula coverage gap (or “donut hole”) during 2011-20. Part D costs are projected to grow at an average rate of 9.4 percent annually over the next decade. Despite the reductions in cost growth described in this year’s report, the SMI Trust Fund will require large increases in enrollee premiums and general revenue funding over the long-range projection period.

How Are Social Security and Medicare Financed? For OASDI and HI, the major source of financing is payroll taxes on earnings that are paid by employees and their employers. The self-employed are charged the equivalent of the combined employer and employee tax rates. During 2009, an estimated 156 million people had earnings covered by Social Security and paid payroll taxes; for Medicare the corresponding figure was 160 million. The payroll tax rates are set by law and for OASDI apply to earnings up to an annual maximum ($106,800 in 2010) that ordinarily increases with the growth in the nationwide average wage.

When the cost-of-living adjustment (COLA) for December of any year is zero, which occurred in December 2009 and is projected for December 2010, the maximum taxable amount of earnings is not increased for the following year. This constraint will lower OASDI tax income in 2010 and 2011. In contrast, HI taxes are paid on total earnings.

The payroll tax rates (in percent) for 2010 are:

OASI DI OASDI HI Total
Employees 5.30 0.90 6.20 1.45 7.65
Employers 5.30 0.90 6.20 1.45 7.65
Combined total 10.60 1.80 12.40 2.90 15.30

Starting in 2013, the ACA imposes an additional HI tax equal to 0.9 percent of earnings over $200,000 for individual tax return filers, and on earnings over $250,000 for joint return filers.

About 75 percent of SMI Part B and Part D expenditures are paid from Federal general fund revenues, with most of the remaining costs covered by monthly premiums charged to enrollees. Part B and Part D premium amounts are based on methods defined in law and increase as the estimated costs of those programs rise.

In 2010, the Part B standard monthly premium paid by about one-quarter of enrollees is $110.50. There is also an income-related premium surcharge for Part B beneficiaries whose modified adjusted gross income exceeds a specified threshold. In 2010, the initial threshold is $85,000 for individual tax return filers and $170,000 for joint return filers. Under the ACA, the thresholds are not indexed to inflation during 2011-19; thereafter, the thresholds will be inflation-adjusted each year. Income-related premiums range from $154.70 to $353.60 per month in 2010. Under a “hold-harmless” provision, about three quarters of enrollees continue to pay the 2009 premium rate of $96.40 due to the zero Social Security COLA.

In 2010, the Part D "base monthly premium" is $31.94. (Actual premium amounts charged to Part D beneficiaries depend on the specific plan in which they are enrolled and are expected to average around $30 for standard coverage.) Part D also receives payments from States that partially compensate for the Federal assumption of Medicaid responsibilities for prescription drug costs for individuals eligible for both Medicare and Medicaid. In 2010, State payments are estimated to cover 7 percent of Part D costs.

Income, by source, to each trust fund in 2009 is shown in the table below (totals may not add due to rounding).

Income, by source, to each trust fund in 2009 is shown in the table below (totals may not add due to rounding). Source (in billions) OASI DI HI SMI
Payroll taxes $570.4 $96.9 $190.9 —
General fund revenue — — 1.9 $209.8
Interest earnings 107.9 10.5 15.3 3.0
Beneficiary premiums — — 2.9 62.3
Taxes on benefits 19.9 2.0 12.4 —
Other * — 2.1 7.7
Total 698.2 109.3 225.4 282.8

* Less than $50 million.

What Were the Administrative Expenses in 2009? Administrative expenses charged to the trust funds, expressed as a percentage of total expenditures, were: OASI DI HI SMI
Administrative expenses 2009 0.6 2.3 1.3 1.3


How Are Estimates of the Trust Funds' Future Status Made? Short-range (10-year) and long-range (75-year) projections are reported for all funds. Estimates are based on current law and assumptions about factors that affect the income and outgo of each trust fund. Assumptions include economic growth, wage growth, inflation, unemployment, fertility, immigration, mortality, disability incidence and termination, as well as factors that affect the cost of hospital, medical, and prescription drug services.

Because the future is inherently uncertain, three alternative sets of economic, demographic, and programmatic assumptions are used to show a range of possibilities. The intermediate assumptions (alternative II) reflect the Trustees’ best estimate of future experience. The low-cost alternative I is more optimistic for trust fund financing, and the high-cost alternative III is more pessimistic; they show trust fund projections for more and less favorable conditions for trust fund financing than the best estimate. The assumptions are reexamined each year in light of recent experience and new information about future trends, and are revised as warranted. In general, greater confidence can be placed in the assumptions and estimates for earlier projection years than for later years. The statistics presented in this Summary are based on the intermediate assumptions.

What is the Short-Range Outlook (2010-19) for the Trust Funds? For the short range, the adequacy of the OASI, DI, and HI Trust Funds is measured by comparing their assets at the beginning of a year to projected costs for that year (the “trust fund ratio”). A trust fund ratio of 100 percent or more—that is, assets at least equal to projected costs for a year—is considered a good indicator of a fund’s short-term adequacy. That level of projected assets for any year means that even if expenditures exceed income, the trust fund reserves, combined with annual tax revenues, would be sufficient to pay full benefits for several years, allowing time for legislative action to restore financial adequacy.

By this measure, the OASI Trust Fund is financially adequate throughout the 2010-19 period, but the DI Trust Fund fails the short-range test because its projected trust fund ratio falls to 93 percent by the beginning of 2013, followed by exhaustion of assets in 2018. The HI Trust Fund also does not meet the short-range test of financial adequacy; its projected trust fund ratio falls to 94 percent by the beginning of 2012. In contrast with the 2017 fund exhaustion date reported last year, the ACA is expected to result in much smaller HI deficits for the next several years, followed by small annual surpluses through the remainder of the short-range period, which postpones trust fund exhaustion to 2029. Chart A shows the trust fund ratios through 2040, the expected year of OASI Trust Fund exhaustion, under the intermediate assumptions.

Chart A—OASI, DI, and HI Trust Fund Ratios
(Assets as a percentage of annual expenditures)



For SMI Part B, a less stringent annual "contingency reserve" asset test applies because the major portion of the financing for that account is provided by beneficiary premiums and Federal general fund revenue payments automatically adjusted each year to meet expected costs. Part D is similarly financed on an annual basis. Moreover, the operation of Part D through private insurance plans, together with a flexible appropriation for Federal costs, eliminates the need for a contingency reserve in that account. Note, however, that estimated Part B costs are unrealistically low for 2011 and beyond because the projections assume that current law will substantially reduce physician payments per service beginning in December 2010. Multiple years of substantial physician fee reductions are very unlikely to occur before legislative intervention, as evidenced by Congress overriding scheduled reductions for 2003 through November 2010. These understated physician payments affect projected costs for Part B, total SMI, and total Medicare.

In addition, a "hold-harmless" provision prevented premiums for most Part B enrollees from increasing in 2010 and is projected to do so again in 2011. This provision limits the premium increase to the dollar amount of a beneficiary’s cost-of-living adjustment (COLA). This year’s report projects a zero COLA for December 2010 and a small COLA increase (1.2 percent) for December 2011. The hold-harmless provision would limit the premium increases that could be charged to about three-quarters of Part B enrollees. To prevent asset exhaustion and maintain an adequate contingency reserve requires unusually large premium increases for Part B enrollees who are not subject to the hold-harmless provision (new enrollees each year and those who pay the income-related premium adjustment) and for State Medicaid programs that pay the full premium for dual Medicare-Medicaid beneficiaries. Monthly premiums are estimated to be $120.10 and $113.80 for 2011 and 2012, compared with $96.40 in 2009. This method of addressing a revenue shortfall caused by the hold-harmless provision is the only one available under current law.

The following table shows the projected income and outgo, and the change in the balance of each trust fund (except for SMI) over the next 10 years. SMI income and expenditures are shown in separate columns for Parts B and D. Changes in the SMI Trust Fund are not shown because of the automatic annual adjustments in program income to meet the following year’s projected expenditures.

The big table that follows definitely will look like shit here, so follow the link if you really want it kids!

But here's a good one:

Chart B—Social Security and Medicare Cost as a Percentage of GDP

Costs for both programs rise steeply between 2015 and 2030 because the number of people receiving benefits will increase rapidly as the large baby-boom generation retires. During those years, cost growth for Medicare is higher than for Social Security because of the rising cost of health services, increasing utilization rates, and anticipated increases in the complexity of services. Social Security’s projected annual cost increases to about 6.1 percent of GDP in 2035, then declines to 5.9 percent by 2050, and remains between 5.9 and 6.0 percent through 2084. Under current law, Medicare costs increase to 5.5 percent of GDP in 2035, and to 6.4 percent in 2084.

It is important to understand that the projected costs for OASDI and HI depicted in Chart B and elsewhere in this document reflect the full cost of scheduled current-law benefits without regard to whether the benefits would be fully payable. Current law precludes payment of any benefits beyond the amount that can be financed by the trust funds. Therefore, the amount of benefits that are payable in years after trust fund exhaustion is lower than shown, as described later in this summary.

The long-range cost outlook for Medicare is much improved from last year’s report due mainly to the ACA legislation. The 2009 report projected Medicare costs to increase to 7.2 percent of GDP by 2035, reaching 11.4 percent by the end of the 75-year projection period (2083). The new long-range projections assume that the ACA’s mandated reductions in health care cost growth are implemented over the full 75-year projection period. To illustrate the potential understatement of Medicare cost projections under current law, if such implementation were not possible and payment rate adjustments were gradually phased out during 2020-34, and if Medicare payment rates to physicians were updated using the Medicare Economic Index rather than declining by 30 percent under the current-law formula, then projected Medicare costs would represent about 11.0 percent of GDP in 2084.

In 2009, the combined cost of the Social Security and Medicare programs equaled 8.4 percent of GDP. Social Security’s cost amounted to 4.8 percent of GDP in 2009 and is projected to increase to 6.0 percent of GDP in 2084. Medicare’s cost was smaller in 2009—3.5 percent of GDP— but is projected to surpass the cost of Social Security in 2049. In 2084, the combined cost of the programs would represent 12.4 percent of GDP, assuming that all provisions of current law remain unchanged throughout this period.

Both Social Security and Medicare costs are projected to grow considerably faster than the economy over the next three decades, but tax income to the OASDI and HI Trust Funds will not. Tax income for Social Security will increase from 4.6 percent of GDP in 2010 to 4.8 percent in 2040, and then decrease to 4.6 percent by 2084. For the Medicare HI program, projected tax income equal to 1.3 percent of GDP in 2010 is expected to increase to 1.7 percent by 2040, and then to increase further to 1.8 percent by 2084.

What is the Outlook for OASDI and HI Costs Relative to Tax Income? Because the primary source of income for OASDI and HI is the payroll tax, it is customary to compare the programs’ income and costs expressed as percentages of taxable payroll (Chart C).

Chart C—Income and Cost Rates
(Percentage of taxable payroll)


If you're still reading, give yourself a medal and go here for the denouement:

http://www.ssa.gov/oact/trsum/index.html

[JackRiddler]

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And now they're floating "state bankruptcy." Not to screw bondholders, however, not to free budgets from debt burdens and allow a fresh start with state banks, hell no! But it's an acceptable means to fuck state workers out of their pensions.

http://www.nytimes.com/2011/01/21/busin ... nted=print

January 20, 2011
A Path Is Sought for States to Escape Their Debt Burdens
By MARY WILLIAMS WALSH

Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.

Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.

For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.

Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.

Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.

“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.”

Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause. The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states’ immediate budget gaps with their long-term structural deficits.

“States have adequate tools and means to meet their obligations,” the report stated.

No state is known to want to declare bankruptcy, and some question the wisdom of offering them the ability to do so now, given the jitters in the normally staid municipal bond market.

Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow.

Mr. Maco said the mere introduction of a state bankruptcy bill could lead to “some kind of market penalty,” even if it never passed. That “penalty” might be higher borrowing costs for a state and downward pressure on the value of its bonds. Individual bondholders would not realize any losses unless they sold.

But institutional investors in municipal bonds, like insurance companies, are required to keep certain levels of capital. And they might retreat from additional investments. A deeply troubled state could eventually be priced out of the capital markets.

“The precipitating event at G.M. was they were out of cash and had no ability to raise the capital they needed,” said Harry J. Wilson, the lone Republican on President Obama’s special auto task force, which led G.M. and Chrysler through an unusual restructuring in bankruptcy, financed by the federal government.

Mr. Wilson, who ran an unsuccessful campaign for New York State comptroller last year, has said he believes that New York and some other states need some type of a financial restructuring.

He noted that G.M. was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008.

“Now Congress is much more conservative,” he said. “A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it’s a real problem. That’s what I’m concerned about.”

Discussion of a new bankruptcy option for the states appears to have taken off in November, after Mr. Gingrich gave a speech about the country’s big challenges, including government debt and an uncompetitive labor market.

“We just have to be honest and clear about this, and I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy,” he said.

A few weeks later, David A. Skeel, a law professor at the University of Pennsylvania, published an article, “Give States a Way to Go Bankrupt,” in The Weekly Standard. It said thorny constitutional questions were “easily addressed” by making sure states could not be forced into bankruptcy or that federal judges could usurp states’ lawmaking powers.

“I have never had anything I’ve written get as much attention as that piece,” said Mr. Skeel, who said he had since been contacted by Republicans and Democrats whom he declined to name.

Mr. Skeel said it was possible to envision how bankruptcy for states might work by looking at the existing law for local governments. Called Chapter 9, it gives distressed municipalities a period of debt-collection relief, which they can use to restructure their obligations with the help of a bankruptcy judge.

Unfunded pensions become unsecured debts in municipal bankruptcy and may be reduced. And the law makes it easier for a bankrupt city to tear up its labor contracts than for a bankrupt company, said James E. Spiotto, head of the bankruptcy practice at Chapman & Cutler in Chicago.

The biggest surprise may await the holders of a state’s general obligation bonds. Though widely considered the strongest credit of any government, they can be treated as unsecured credits, subject to reduction, under Chapter 9.

Mr. Spiotto said he thought bankruptcy court was not a good avenue for troubled states, and he has designed an alternative called the Public Pension Funding Authority. It would have mandatory jurisdiction over states that failed to provide sufficient funding to their workers’ pensions or that were diverting money from essential public services.

“I’ve talked to some people from Congress, and I’m going to talk to some more,” he said. “This effort to talk about Chapter 9, I’m worried about it. I don’t want the states to have to pay higher borrowing costs because of a panic that they might go bankrupt. I don’t think it’s the right thing at all. But it’s the beginning of a dialog.”

[JackRiddler]

http://www.nytimes.com/2011/01/24/busin ... nted=print

January 24, 2011
Mortgage Giants Leave Legal Bills to the Taxpayers

By GRETCHEN MORGENSON

Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud. The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress.

The bulk of those expenditures — $132 million — went to defend Fannie Mae and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted. The legal payments show no sign of abating.

Documents reviewed by The New York Times indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie’s former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller.

Late last year, Randy Neugebauer, Republican of Texas and now chairman of the oversight subcommittee of the House Financial Services Committee, requested the figures from the Federal Housing Finance Agency. It is the regulator charged with overseeing the mortgage finance companies and acts as their conservator, trying to preserve the company’s assets on behalf of taxpayers.

“One of the things I feel very strongly about is we need to be doing everything we can to minimize any further exposure to the taxpayers associated with these companies,” Mr. Neugebauer said in an interview last week.

It is typical for corporations to cover such fees unless an executive is found to be at fault. In this case, if the former executives are found liable, the government can try to recoup the costs, but that could prove challenging.

Since Fannie Mae and Freddie Mac were taken over by the government in September 2008, their losses stemming from bad loans have mounted, totaling about $150 billion in a recent reckoning. Because the financial regulatory overhaul passed last summer did not address how to resolve Fannie and Freddie, Congress is expected to take up that complex matter this year.

In the coming weeks, the Treasury Department is expected to publish a report outlining the administration’s recommendations regarding the future of the companies.

Well before the credit crisis compelled the government to rescue Fannie and Freddie, accounting irregularities had engulfed both companies. Shareholders of Fannie and Freddie sued to recover stock losses incurred after the improprieties came to light.

Freddie’s problems arose in 2003 when it disclosed that it had understated its income from 2000 to 2002; the company revised its results by an additional $5 billion. In 2004, Fannie was found to have overstated its results for the preceding six years; conceding that its accounting was improper, it reduced its past earnings by $6.3 billion.

Mr. Raines retired in December 2004 and Mr. Howard resigned at the same time. Ms. Spencer left her position as controller in early 2005. The following year, the Office of Federal Housing Enterprise Oversight, then the company’s regulator, published an in-depth report on the company’s accounting practices, accusing Fannie’s top executives of taking actions to manipulate profits and generate $115 million in improper bonuses.

The office sued Mr. Raines, Mr. Howard and Ms. Spencer in 2006, seeking $100 million in fines and $115 million in restitution. In 2008, the three former executives settled with the regulator, returning $31.4 million in compensation. Without admitting or denying the regulator’s allegations, Mr. Raines paid $24.7 million and Mr. Howard paid $6.4 million; Ms. Spencer returned $275,000.

Fannie Mae also settled a fraud suit brought by the Securities and Exchange Commission without admitting or denying the allegations; the company paid $400 million in penalties.

Lawyers for the three former Fannie executives did not respond to requests for comment. A company spokeswoman did not return a phone call or e-mail seeking comment.

In addition to the $160 million in taxpayer money, Fannie and Freddie themselves spent millions of dollars to defend former executives and directors before the government takeover. Freddie Mac had spent a total of $27.8 million. The expenses are significantly larger at Fannie Mae.

Legal costs incurred by Mr. Raines, Mr. Howard and Ms. Spencer in the roughly four and a half years prior to the government takeover totaled almost $63 million. The total incurred before the bailout by other high-level executives and board members was around $12 million, while an additional $18 million covered fees for lawyers for Fannie Mae officials below the level of executive vice president. Many of these individuals are provided lawyers because they are witnesses in the matters.

Employment contracts and company by-laws usually protect, or indemnify, executives and directors against liabilities, including legal fees associated with defending against such suits.

After the government moved to back Fannie and Freddie, the Federal Housing Finance Agency agreed to continue paying to defend the executives, with the taxpayers covering the costs.

But indemnification does not apply across the board. As is the case with many companies, Fannie Mae’s by-laws detail actions that bar indemnification for officers and directors. They include a person’s breach of the duty of loyalty to the company or its stockholders, actions taken that are not in good faith or intentional misconduct.

Richard S. Carnell, an associate professor at Fordham University Law School who was an assistant secretary of the Treasury for financial institutions during the 1990s, questions why Mr. Raines, Mr. Howard and others, given their conduct detailed in the Housing Enterprise Oversight report, are being held harmless by the government and receiving payment of legal bills as a result.

“Their duty of loyalty required them to put shareholders’ interests ahead of their own personal interests,” Mr. Carnell said. “Had they cared about the shareholders, they would not have staked Fannie’s reputation on dubious accounting. They defied their duty of loyalty and served themselves. At a moral level, they don’t deserve indemnification, much less payment of such princely sums.”

Asked why it has not cut off funding for these mounting legal bills, Edward J. DeMarco, the acting director of the Federal Housing Finance Agency, said: “I understand the frustration regarding the advancement of certain legal fees associated with ongoing litigation involving Fannie Mae and certain former employees. It is my responsibility to follow applicable federal and state law. Consequently, on the advice of counsel, I have concluded that the advancement of such fees is in the best interest of the conservatorship.”

If the former executives are found liable, they would be obligated to repay the government. But lawyers familiar with such disputes said it would be difficult to get individuals to repay sums as large as these. Lawyers for Mr. Raines, for example, have received almost $38 million so far, while Ms. Spencer’s bills exceed $31 million.

These individuals could bring further litigation to avoid repaying this money, legal specialists said.

Although the figures are not broken down by case, the largest costs are being generated by a lawsuit centering on accounting improprieties that erupted at Fannie Mae in 2004. This suit, a shareholder class action brought by the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio, is being heard in federal court in Washington. Although it has been going on for six years, the judge has not yet set a trial date. Depositions are still being taken in the case, suggesting that it has much further to go with many more fees to be paid.

[JackRiddler]

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Rounding up recent ones from some of my usual suspects...

http://counterpunch.org/hudson01182011.html

January 18, 2011
The Myth of the Baltic Tigers
The Death of "Social Europe"

By MICHAEL HUDSON and JEFFREY SOMMERS

"Be like Latvia,” bankers and the financial press are asking governments from Greece to Ireland and now Spain as well. “Why can’t you be like Latvia and sacrifice your economy to pay the debts that you ran up during the financial bubble?” The answer is, they can’t – without an economic, demographic and political collapse that will only make matters worse.

Only a year ago it was recognized that decades of neoliberalism had crashed the U.S. and several European economies. Years of deregulation, speculation and lack of investment in the real economy had left them with rising inequality and little consumer demand, except for what was financed by running up debt. But the financial press and neoliberal policymakers counterattacked, using the “Baltic Tigers” as an exemplary battering ram to counter Keynesian spending policies and the Social Europe model envisioned by Jacques Delors.

Analysts have viewed Latvia’s October election results as vindication of the efficacy of austerity for solving the economic crisis. The standard mantra (as recently rolled out in The Economist) is that Latvia’s taciturn and honest prime minister, Valdis Dombrovskis, won re-election in October even after imposing the harshest tax and austerity policies ever adopted during peacetime, because the “mature” electorate realized this was necessary, “defying conventional wisdom” by voting in an austerity government.

The Wall Street Journal has published several articles promoting this view. Most recently, Charles Doxbury advocated Latvia’s internal devaluation and austerity strategy as the model for Europe’s crisis nations to follow. The view commonly argued is that Latvia’s economic freefall (the deepest of any nation from the 2008 crisis) has finally stopped and that recovery (albeit very fragile and modest) is under way.

This view appeals to bankers looking to prevent defaults on private and public debt, hoping that austerity can lead to economic recovery. But Latvia’s model is not replicable. Latvia has no labor movement to speak of, and little tradition of activism based on anything other than ethnicity. Contrary to most press coverage, its austerity policies are not popular. The election turned on ethnic issues, not a referendum on economic policy. Ethnic Latvians (the majority) voted for the ethnic Latvian parties (mostly neoliberal), while the sizeable 30 per cent minority of Russian speakers voted with similar discipline for their party (loosely Keynesian).

Twenty years from independence, the consequences of Russian emigration to Latvia under Soviet occupation still shape voting patterns. Unless other economies can draw upon similar ethnic division as a distractive cover, political leaders pursuing Latvian-style austerity policies are doomed to electoral defeat.


While the economic crisis was deep enough to drive even Latvia’s depoliticized population into the streets in the winter of 2009, most Latvians soon after found the path of least resistance to be simply to emigrate. Neoliberal austerity has created demographic losses exceeding Stalin’s deportations back in the 1940s (although without the latter’s loss of life). As government cutbacks in education, health care and other basic social infrastructure threaten to undercut long-term development, young people are emigrating rather than to suffer in an economy without jobs. Over 12 per cent of the overall population (and a much larger percentage of its labor force) now works abroad.

Moreover, children (what few of them there are as marriage and birth rates drop) have been left orphaned behind, prompting demographers to wonder how this small country can survive. So unless other debt-strapped European economies with populations far exceeding Latvia’s 2.3 million people can find foreign labor markets to accept their workers unemployed under the new financial austerity, this exit option will not be available.


Latvia’s projected 3.3 per cent growth rate for 2011 is cited as further evidence of success that its austerity model has stabilized its bad-debt crisis and chronic trade deficit that was financed by foreign-currency mortgage loans. Given a 25 per cent fall in GDP over during the crisis, this growth rate would take a decade to just restore the size of Latvia’s 2007 economy. Is this “dead cat” bounce sufficiently compelling for other EU states to follow it over the fiscal cliff?

Despite its disastrous economic and social results, Latvia’s neoliberal trauma regardless is idealized by the financial press and neoliberal politicians seeking to impose austerity on their own economies. Before the global crisis of 2008, the “Baltic Tigers” were celebrated as the vanguard of New Europe’s free market economies. Critics of this economic “miracle,” built on foreign currency loans financing property speculation and privatization buyouts, were dismissed as naysayers. Without missing a beat, these commentators have branded the present Latvian option of austerity as policies for other nations to adopt.

The Latvian option serves several masters. The financial press pines for the fairytale that markets self-correction and the notion that austerity brings prosperity. Latvia’s Central Bank (about which even the IMF has expressed concern over its neoliberal stridency) wishes to run a victory lap, absolving itself for policies that imposed massive suffering on Latvia’s people. And Washington and EU neoliberals want other countries to adopt Latvia’s version of China’s colonial “Open Door” matched with a Dickensian welfare system. Openness to economic penetration is the standard on measure, and the Balts have this in spades, ergo, they are “successes,” regardless of how well or bad their economy serves its people’s needs.

Given the geographic proximity of Latvia and Belarus, it is illuminating to compare how neoliberals have assessed their respective economies. Latvia suffered Europe’s largest economic collapse in 2008 and 2009, with continuing double-digit unemployment. Its economy will show no growth until this year (2011), and its modest growth likely will remain accompanied by double-digit unemployment. A huge slice of its population has evacuated the country, leaving many children with relatives or to fend for themselves. Neighboring Belarus, with few of Latvia’s geographic advantages (ports and beaches), has a per capital GDP not too far behind Latvia’s. Belarus had a boom with double-digit growth before the crisis, and kept its economy at full employment during the crisis rather than collapsing by the 25 per cent rate that plagued Latvia. Belarus also has a GINI coefficient (inequality) roughly on par with Sweden, while Latvia’s is closer to the widening inequality levels that now characterize the United States.

Yet neoliberal Latvia is declared a success model and Belarus a failure. The CIA’s World Factbook reminds its readers that Belarus’s economic performance occurred “despite the roadblocks of a tough, centrally directed economy.” This is the standard characterization of Belarus. But one needs to ask to what degree its success may reflect its central planning. Latvia has produced greater political freedom for dissidents, but Belarus has less economic inequality and foreign debt.

Every economy in history has been a mixed economy. We are not defending Comrade Lukashenko’s media and political repression in Belarus. We simply are not going to the opposite extreme of applauding Latvia’s neoliberal model. One can criticize Belarus’ political system without endorsing the electoral oligarchy that characterizes much of Latvia’s political life. Yet win or lose on economic outcomes, in the western press and academies Latvia and the Starving Baltic Tigers will be declared the winners, while Belarus always will be declared the loser on economic performance, regardless of achievement. You will not see a measured look at both nations’ economies to examine objectively where they are succeeding and failing (including by sector) with an eye for what lessons might be derived from such an investigation. Economic comparisons are entirely political.

Our intention is not to blame the Latvian nation for the cruel neoliberal policy experiment to which it has been subjected, to question the global community of policymakers, intellectuals and some of Latvia’s own elites that persist in pursuing this failed policy and even recommend it to other countries as a path of growth rather than economic and demographic suicide. Latvia’s people have suffered from the ravages of two World Wars and two occupations, capped by neoliberalism dismantling its industry and driving it deeper and deeper into debt – indeed, foreign-currency debt – since it achieved independence in 1991. Neoliberalism has delivered poverty so deep as to cause in an exodus of Biblical proportions out of the country. To call this a forward economic step and a victory of economic reason reminds one of Tacitus’ characterization of Rome’s imperial military victories, put in the mouth of the Celtic chieftain Calgacus before the battle of Mons Graupius: “They make a desert and they call it peace.”

In the several years that we both have been visiting Latvia we have seen an industrious and talented people, with many displaying integrity despite being immersed in a corrupt environment. Our aim here is to explain why the failed “Latvian model” should be seen as a warning for what other countries should avoid, not a policy to be imposed on hapless Ireland, Greece and other European debtor countries. In fact, we both have worked to encourage a policy reversal in Latvia itself. What now is at stake, after all, is the future of European social democracy and the continuation of peace in a region plagued by war for a millennium prior to the 1950s.

The problem is that Europe’s economic difficulties are rooted not merely in profligacy, as the press and many politicians typically claim. Debt is a consequence of structural financial, economic and fiscal faults built into the design of post-Soviet Europe. In a nutshell, the European Union never developed sustainable mechanisms to transfer capital from its richest economies to poorer countries, especially on the periphery.

The Bretton Woods order after World War II was part of a more workable system for reconstruction lending and capital transfers between war-torn Europe and the United States. Marshall Plan aid, accompanied by capital controls and government investment to encourage economic development and monetary independence, enabled Western Europe’s national economies to buy imports from the United States while building up their own export capacity and raising their living standards. The system was not without fault, but the desire to avoid the previous half-century cycle of economic depression and war (and mounting Cold War concerns) led Western Europe’s economies to develop and pave the way for subsequent continental integration.

The post-Cold War period since 1991 reflects similar patterns of underdevelopment in the relationship between rich Western Europe and its poorer East and Southern European counterparts. In contrast what was done after World War II, structures were not put in place to make the latter economies self-sustaining. Just the opposite outcome was structured in: foreign currency debt, especially for domestic mortgage loans, without putting in place the means to pay it off.

Today, the wealthiest EU states are high-value added manufacturers. EU expansion twenty years ago was marked by rising exports and bank loans from these nations to what have become today’s crisis economies – and by rising debt levels in the context of privatization sell-offs without progressive income taxation and with little property tax (a major factor in promoting local real estate bubbles). The Baltics and East European countries have financed their trade deficits over the past decade mainly by Swedish, Austrian and other banks lending against real estate and infrastructure, being sold and resold with increasing debt leverage. This has not put in place the means to pay off these debts, except by a continued inflation of a real estate bubble to sustain enough foreign-currency borrowing to cover chronic trade deficits and capital flight.

The Baltic states have since brought their current account into line, not by producing more goods and services, but by impoverishing their people. Their neoliberal planners have slashed consumption – not to create capital for investment, but to pay down debts to bankers. This is how they are adjusting to the cessation of capital inflows from foreign banks now that real estate bubble lending has dried up (the bubble lending that was applauded for making their property markets “Baltic Tigers” to the banks getting rich off the process). Bankers and the financial press depict this austerity program to pay back banks as the way forward, not as sinking into the mire of debts owed to creditors that have not cared much about how the Baltic economies are to pay – except by shrinking, emigrating and squeezing labor yet more tightly.

The fiscal burden falls much more heavily on employment than it did in Western Europe sixty years ago during its period of reconstruction. Insider dealing and financial fraud have been widespread. To cap matters, euro-denominated debt for associate members was secured by income in their own local currencies. Worst of all, banks simply lent against real estate and public infrastructure already in place instead funds to increase production and tangible capital formation. In contrast to the Marshall Plan’s government-to-government grants, the ECB’s focus on commercial bank lending simply produced a real estate bubble. Bank lending inflated their real estate bubbles and financed a transfer of property, but not much new tangible capital formation to enable debtor economies to pay for their imports. Just the opposite: Their debts rose without increasing foreign-exchange earning power. So it was inevitable that this house of cards would collapse.

In setting up the EU’s economic relations, free-market trade theory assumed that direct investment and bank lending would provide the capital needed to help Europe’s poorer regions catch up. This assumption turned out to be unwarranted. Banks lent against real estate and other assets already in place, inflating their prices on credit. It is the debt overhang and related aftermath of this narrow-minded economic philosophy that now needs to be cleaned up.

These arrangements served the major EU exporters but did not develop European-wide stability based on more extensive economic growth. Without the looming threat of war or political threat from Russia, Europe’s richest nations pushed for trade liberalization and privatizations that accelerated de-industrialization in the former Soviet bloc. Southern European members were brought into the Eurozone with its strong currency and strict limits on government spending that failed to enable these countries to develop their manufactures in the way that Western Europe (and the United States) had done.

This state of affairs could only be temporary, because the East was reconstructed in a way that made it import-dependent and financially subordinate to the West, treated more as a colony than as a partner. And as in colonial regions, the West became a destiny for capital flight as property was sold on credit and the proceeds moved out of the post-Soviet and southern European kleptocracies and oligarchies. The foreign currency to pay banks on the loans that were bidding up real estate prices was obtained by borrowing yet more to inflate property prices yet more – the classic definition of a Ponzi scheme. In this case, European banks played the role of new entrants into the scheme, organizing the post-Soviet economies like a vast chain letter, providing the money to keep the upward-spiraling flow moving.

The problem was that credit \was only extended to fuel real estate and to finance the export of goods from export-dependent Western Europe (with its Common Agricultural Policy crop surpluses) to a deindustrialized and agriculturally unmodernized East. The expanding debt pyramid had to collapse, as no means of paying it off were put in place.

There was a vague hope that levels of economic development eventually would equalize across the EU, as if bank lending and foreign buy-outs would lead to greater homogeneity rather than financial polarization. The problem was that the EU viewed its new members as markets for existing banks and exporters (including as dumping ground for its agricultural surpluses), not to help these new members become economically self-sustaining or set up viable national financial systems of their own.

Given the restrictions the euro places on its member countries, EU’s creditor nations and banks understandably would like to resolve this crisis by “internal devaluation”: lower wages, public spending and living standards to make the debtors pay. This is the old IMF austerity doctrine that failed in the Third World. It looks like it is about to be reprised. The EU policy seems to be for wage earners and pension savers to bail out banks for their legacy of bad mortgages and other loans that cannot be paid – except by going into poverty.

So do Greece and Ireland, and now perhaps Spain and Portugal as well, understand just what they are being asked to emulate? The EU policy seems to be for wage earners and pension savers to bail out banks for their legacy of bad mortgages and other loans that cannot be paid – except by plunging their economies into poverty. How much “Latvian medicine” can these countries take? If their economies shrink and employment plunges, where will their labor emigrate?

Without public investment, how can they become competitive? The traditional path is for mixed economies to provide public infrastructure at cost or at subsidized prices. But if governments “work their way out of debt” by selling off this infrastructure to buyers (on credit whose interest charges are tax-deductible) who erect rent-extracting tollbooths, these economies will fall further behind and be even less able to pay their debts. Arrears will mount up in an exponential compound interest curve.

The EU’s creditor nations and banks are seeking to resolve the crisis in way that will not cost them much money. The best hope, it is argued, given the inability of the crisis countries to depreciate their currencies, is “internal devaluation” (wage austerity) on the Latvian model. Bankers and bondholders are to be paid out of EU/IMF bailout loans.

The problem is the austerity imposed by existing debt levels. If wages (and hence, prices) decline, the debt burden (already high by historical standards) will become even heavier. This is what the United States suffered in the late 19th century, when the price level was driven down to “restore” gold to its pre-Civil War (and hence, pre-greenback) price. Presidential candidate William Jennings Bryan decried crucifying labor on a cross of gold in 1896. It was the problem that England earlier experienced after the Treaty of Ghent ended the Napoleonic Wars in 1815. Aside from the misery and human tragedies that will multiply in its wake, fiscal and wage austerity is economically self-destructive. It will create a downward demand spiral pulling the EU as a whole into recession.

The basic problem is whether it is desirable for economies to sacrifice their growth and impose depression – and lower living standards – to benefit creditors. Rarely in history has this been the case – except in a context of intensifying class warfare. So what will Latvians, Greeks, Irish, Spaniards and other Europeans do as their labor is crucified by “internal devaluation” to shift purchasing power to pay foreign creditors?

What is needed is a reset button on the EU’s economic and

fiscal philosophy. How Europe handles this crisis may determine whether its history follows the peaceful path of mutual gain and prosperity that economics textbooks envision, or the downward spiral of austerity that has made IMF planners so unpopular in debtor economies.

Is this the path that Europe will embark on? Is it the fate of the Jacques Delors’ project of a Social Europe? Was it what Europe’s citizens expected when they adopted the euro?

There is an alternative, of course. It is for creditors at the top of the economic pyramid to take a loss. That would restore the intensifying GINI income and wealth coefficients back to their lower levels of a decade or two ago. Failure to do this would lock in a new kind of international financial class extracting tribute much like Europe’s Viking invaders did a thousand years ago in seizing its land and imposing tribute in the form of land. Today, they impose financial charges as a post-modern neoserfdom that threatens to return Europe to its pre-modern state.

Michael Hudson at the University of Missouri at Kansas City (michael.hudson@earthlink.net) and Jeffrey Sommers (jeffrey.sommers@fulbrightmail.org) at at the University of Wisconsin-Milwaukee are advisors to the Renew Latvia Task Force.

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http://www.leap2020.eu/geab-n-51-is-ava ... a5775.html

GEAB N°51 is available! Systemic global crisis - 2011: The ruthless year, at the crossroads of three roads of global chaos

- Public announcement GEAB N°51 (January 16, 2011) -



This GEAB issue marks the fifth anniversary of the publication of the Global Europe Anticipation Bulletin. In January 2006, on the occasion of the first issue, the LEAP/E2020 team indicated that a period of four to seven years was opening up which would be characterized by the “Fall of the Dollar Wall”, an event similar to the fall of the Berlin Wall which resulted, in the following years, in the collapse of the communist bloc then that of the USSR. Today, in this GEAB issue, which presents our thirty-two anticipations for 2011, we believe that the coming year will be a pivotal year in the roll out of this process between 2010 and 2013. It will be, in any case, a ruthless year because it will mark the entry into the terminal phase of the world before the crisis (1).

Since September 2008, when the evidence of the global and systemic nature of the crisis became clear to all, the United States, and behind it the Western countries, were content with palliative measures that have merely hidden the undermining effects of the crisis on the foundations of the present-day international system. 2011 will, according to our team, mark the crucial moment when, on the one hand, these palliative measures see their anesthetic effect fade away whilst, in contrast, the consequences of systemic dislocation in recent years will dramatically surge to the forefront (2).

In summary, 2011 will be marked by a series of violent shocks that will explode the faulty safety devices put in place since 2008 (3) and will carry off, one by one, the “pillars” on which the “Dollar Wall” has rested for decades. Only the countries, communities, organizations and individuals which, over the last three years, have actually undertaken to learn the lessons from the current crisis to distance themselves as quickly as possible from the pre-crisis patterns, values and behavior will get through this year unscathed; the others will be carried away in the procession of monetary, financial, economic, social and political difficulties that 2011 holds.

Thus, as we believe that 2011 will, globally, be the most chaotic year since 2006, the date of the beginning of our work on the crisis, in this GEAB issue our team has focused on 32 anticipations for 2011, which also include a number of recommendations to deal with future shocks. Thus, this GEAB issue offers a kind of map forecasting financial, monetary, political, economic and social shocks for the next twelve months.

If our team believes that 2011 will be the worst year since 2006, the beginning of our anticipation work on the systemic crisis, it’s because it’s at the crossroads of three paths to global chaos. Absent fundamental treatment of the causes of the crisis, since 2008 the world has only gone back to take a better jump forward.

A bloodless international system

The first path that the crisis can take to cause world chaos is simply a violent and unpredictable shock. The dilapidated state of the international system is now so advanced that its cohesion is at the mercy of any large-scale disaster (4). Just look at the inability of the international community to effectively help Haiti over the past year (5), the United States to rebuild New Orleans for six years, the United Nations to resolve the problems in Darfur, Côte d'Ivoire for a decade, the United States to progress peace in the Middle East, NATO to beat the Taliban in Afghanistan, the Security Council to control the Korean and Iranian issues, the West to stabilize Lebanon, the G20 to end the global crisis be it financial, food, economic, social, monetary, ... to see that over the whole range of climatic and humanitarian disasters, like economic and social crises, the international system is now powerless.

In fact, since the mid-2000s at least, all the major global players, at their head of course the United States and its cortege of Western countries, do no more than give out information, or gesticulate. In reality, all bets are off: The crisis ball rolls and everyone holds their breath so it doesn’t fall on their square. But gradually the increasing risks and issues of the crisis have changed the casino’s roulette wheel into Russian roulette. For LEAP/E2020, the whole world has begun to play Russian roulette (6), or rather its 2011 version, “American Roulette” with five bullets in the barrel.


Monthly progression of the FAO food index (2010) and the price of principal foodstuffs (2009/2010) (base 100: averaged over 2002-2004) - Source: FAO/Crikey, 01/2011

Soaring commodity prices (food, energy (7),...) should remind us of 2008 (8). It was indeed in the six months preceding Lehman Brothers and Wall Street’s collapse that the previous episode of sharp increases in commodity prices was set. And the actual causes are the same as before: a flight from financial and monetary assets in favour of “concrete” investments. Last time the big players fled the mortgage market and everything that depended on it, as well as the U.S. Dollar; today they are fleeing all financial stocks, Treasury bonds (9) and other public debts. Therefore, we have to wait for a time between Spring and Autumn 2011 for the explosion of the quadruple bubble of Treasury bonds, public debt (10), bank balance sheets (11) and real estate (American, Chinese, British, Spanish,... and commercial (12)), all taking place against a backdrop of a heightened currency war (13).

The inflation induced by US, British and Japanese Quantitative Easing and similar stimulus measures of the Europeans and Chinese will be one of the destabilizing factors in 2011 (14). We will come back to this in more detail in this issue. But what is now clear with respect to what is happening in Tunisia (15), is that this global context, especially the rise in food and energy prices, now leads on to radical social and political shocks (16). The other reality that the Tunisian case reveals is the impotence of the French, Italian or American “godfathers” to prevent the collapse of a “friendly regime” (17).

Impotence of the major global geopolitical players

And this impotence of the major global geopolitical players is the other path that the crisis can use to produce world chaos in 2011. In effect, one can place the major G20 powers in two groups whose only point in common is that they are unable to influence events decisively.

On one side we haves a moribund West with, on the one hand, the United States, for whom 2011 will show that its leadership is no more than fiction (see this issue) and which is trying to freeze the entire international system in its configuration of the early 2000s (18), and on the other hand we have Euroland, “sovereign” in the pipeline, which is currently mainly focused on adapting to its new environment (19) and new status as an emerging geopolitical entity (20), and which, therefore, has neither the energy nor the vision necessary to influence world events (21).

And on the other side are the BRIC countries (with China and Russia in particular) who are, at the moment, proving to be incapable of taking control of all or part of the international system and whose only action is therefore limited to quietly undermine what remains of the foundations of the pre-crisis order (22).

Ultimately, impotence is widespread (23) at the international community level, increasing not only the risk of major shocks, but also the significance of the consequences of these shocks. The world of 2008 was taken by surprise by the violent impact of the crisis, but paradoxically the international system was better equipped to respond being organized around an undisputed leader (24). In 2011, this is no longer the case: not only is there no undisputed leader, but the system is bloodless as we have seen above. And the situation is aggravated further by the fact that the societies of many countries in the world are on the verge of socio-economic break-up.


US petrol prices (2009-2011) - Source: GasBuddy, 01/2011


Societies on the edge of socio-economic break-up

This is particularly the case in the United States and Europe where three years of crisis are beginning to weigh very heavily on the socio-economic and therefore political balance. US households, now insolvent in their tens of millions, oscillate between sustained poverty (25) and rage against the system. European citizens, trapped between unemployment and the dismantling of the welfare state (26), are starting to refuse to pay the bills for financial and budget crises and are beginning to look for culprits (banks, the Euro, government political parties…).

But amongst the emerging powers too, the violent transition which constitutes the crisis is leading societies towards situations of break-up: in China, the need to control expanding financial bubbles is hampered by the desire to improve the lot of whole sectors of society such as the need for employment for tens of millions of casual workers; in Russia, the weakness of the social security system fits badly with the enrichment of the elite, just as in Algeria shaken by riots. In Turkey, Brazil and India, everywhere the rapid change these countries are seeing is triggering riots, protests and terrorist attacks. For reasons that are sometimes contradictory, growth for some, penury for others, across the globe our diverse societies tackle 2011 in a context of strong tensions and socio-economic break-up, which have the making of political time bombs.

It’s its position at the crossroads of three paths which thus makes 2011 a ruthless year. And ruthless it will be for the States (and local authorities) which have chosen not to draw hard conclusions from the three years of crisis which have gone before and / or who have contented themselves with cosmetic changes not altering their fundamental imbalances at all. It will also be so for businesses (and States (27)) who believed that the improvement in 2010 was a sign of a return to “normal” of the global economy. And finally it will be so for investors who have not understood that yesterday’s investments (securities, currencies,...) couldn’t be those of tomorrow (in any case for several years). History is usually a “good girl”. She often gives a warning shot before sweeping away the past. This time, it gave the warning shot in 2008. We estimate that in 2011, it will do the sweeping. Only players who have undertaken, even painstakingly, even partially, to adapt to the new conditions generated by the crisis will be able to hang on; for the others, chaos is at the end of the road.

----------

Notes:

(1) Or of the world that we have known since 1945 to repeat our 2006 description.

(2) The recent decision by the US Department of Labor to extend the inclusion of the measure of long-term unemployment in the US employment statistics to five years instead of the maximum of two years until now, is a good indicator of the entry into a new stage of the crisis, a step that has seen the disappearance of the “practices” of the world before. As a matter of fact, the US government cites “the unprecedented rise” of long-term unemployment to justify this decision. Source: The Hill, 12/28/2010

(3) These measures (monetary, financial, economic, budgetary, strategic) are now closely linked. That’s why they will be carried away in a series of successive shocks.

(4) Source: The Independent, 01/13/2011

(5) It’s even worse because it was international aid that brought cholera to the island, causing thousands of deaths.

(6) Moreover Timothy Geithner, US Treasury Secretary, little known for his overactive imagination, has just indicated that “the US government could once again have to do exceptional things”, referring to the bank bailout in 2008. Source: MarketWatch, 01/13/2011

(7) Moreover, India and Iran are in the course of establishing a system of exchange “gold for oil” to try and avoid supply disruptions. Source: Times of India, 01/08/2011

(8) In January 2011 the FAO food price index (at 215) has just exceeded its previous record set in May 2008 (at 214).

(9) Wall Street banks are currently unloading their US Treasury bonds as fast as possible (unseen since 2004). Their official explanation is “the remarkable improvement in the US economy which no longer requires us to seek refuge in Treasury Bonds”. Of course, you are free to believe it, like Bloomberg ’s journalist on 01/10/2011.

(10) Thus Euroland is already taking big steps forward along the path described in the GEAB N°50 with a discount in the case of refinancing the debts of a member state, whilst Japanese and US debt are now about to enter the storm. Sources: Bloomberg, 01/07/2011; Telegraph, 01/05/2011

(11) We believe that, in general, global banks’ balance sheets contain at least 50% ghost assets which in the coming year will require to be discounted by between 20% to 40% due to the return of the global recession combined with austerity, the rise in defaults on household, business, community and state loans, currency wars and a pickup in the fall of real estate prices. The American, European, Chinese, Japanese and others “stress-tests” can still continue to try and reassure markets with “Care Bears” scenarios except that this year it’s “Alien against Predator ” which is on the banks’ agenda. Source: Forbes, 01/12/2011

(12) Each of these real estate markets will fall sharply again in 2011 in the case of those which have already started falling in recent years, or in the case of China, which will begin its sharp deflation amid economic slowdown and monetary tightening.

(13) The Japanese economy is, moreover, one of the first victims of this currency war, with 76% of the CEOs of 110 major Japanese companies surveyed by Kyodo News now reported being pessimistic about Japanese growth in 2011 following the rise in the yen. Source: JapanTimes, 01/04/2011

(14) Here are several instructive examples put together by the excellent John Rubino. Source: DollarCollapse, 01/08/2011

(15) By way of reminder, in the GEAB N°48 we had classified Tunisia in the category of countries “with significant risks” in 2011.

(16) No doubt, moreover, that the Tunisian example is generating a round of reassessment amongst the rating agencies and the “experts in geopolitics”, who, as usual, didn’t see anything coming. The Tunisian case also illustrates the fact that it’s now the satellite countries of the West in general and the US in particular, who are on the way to shocks in 2011 and in the years to come. And it confirms what we regularly repeat: a crisis accelerates all the historical processes. The Ben Ali regime, twenty-three years old, collapsed in a few weeks. When political obsolescence is involved everything changes quickly. Now it's all the pro-Western Arab regimes which are obsolete in the light of events in Tunisia.

(17) No doubt this « Western godfather » paralysis will be carefully analyzed in Rabat, Cairo, Jeddah and Amman, for example.

(18) A configuration that was all the more favorable because it was without a counterweight to their influence.

(19) We will return in more detail in this GEAB issue, but seen from China we are not mistaken. Source: Xinhua, 01/02/2011

(20) Little by little Europeans are discovering that they are dependent on centres of power other than Washington. Beijing, Moscow, Brazilia, New Dehli,… Source: La Tribune, 01/05/2011; Libération, 12/24/2010; El Pais, 01/05/2011

(21) All Japan's energy is focused on its desperate attempt to resist the attraction of China. As for other Western countries, they are not able to significantly influence global trends.

(22) The US Dollar’s place in the global system is a part of these last foundations that the BRIC countries are actively eroding day after day.

(23) As regards deficit, the US case is textbook. Beyond the speeches, everything continues as before the crisis with a deficit swelling exponentially. However, even the IMF is now ringing the alarm. Source: Reuters, 01/08/2011

(24) Moreover, even Market Watch on 01/12/2011, echoing the Davos Forum, is concerned over the lack of international coordination, which is in itself a major risk to the global economy.

(25) Millions of Americans are discovering food banks for the first time in their lives, whilst in California, as in many other states, the education system is disintegrating fast. In Illinois, studies on the state deficit are now comparing it to the Titanic. 2010 broke the record for real estate foreclosures. Sources: Alternet, 12/27/2010; CNN, 01/08/2011; IGPA-Illinois, 01/2011; LADailyNews, 01/13/2011

(26) Ireland, which is facing, purely and simply, a reconstruction of its economy, is a good example of situations to come. But even Germany, with remarkable current economic results however can’t escape this development as shown by the funding crisis for cultural activities. Whilst in the United Kingdom, millions of retirees are seeing their incomes cut for the third year running. Sources : Irish Times, 12/31/2010; Deutsche Welle, 01/03/2011; Telegraph, 01/13/2011

(27) In this regard, US leaders confirm that they are rushing straight into the wall of public debt, failing to anticipate the problems. Indeed, the recent statement by Ben Bernanke, the Fed chairman, that the Fed will not help the States (30% fall in 2009 tax revenues according to the Washington Post on 01/05/2011) and the cities collapsing under their debts, just as Congress decides to stop issuing “Build America Bonds” which enabled States to avoid bankruptcy these last few years, shows a Washington blindness only equal to that which Washington demonstrated in 2007/2008 in the face of the mounting consequences of the “subprime” crisis. Sources: Bloomberg, 01/07/2011; WashingtonBlog, 01/13/2011

Dimanche 16 Janvier 2011

Did I really not yet post Baker's piece making fun of all the economists who "Didn't See It Coming (And Don't Care If They Did)"? Also slaps around Reinhardt and Rogoff.

http://counterpunch.org/baker01192011.html

January 19, 2011
Why Should We Listen to Them?
The Economists Forgive Themselves

By DEAN BAKER

The American Economics Association held its annual meeting in Denver last weekend. Most attendees appeared to be in a very forgiving mood. While the economists in Denver recognized the severity of the economic slump hitting the United States and much of the world, there were few who seemed to view this as a serious failure of the economics profession.

The fact that the overwhelming majority of economists in policy positions failed to see the signs of this disaster coming, and supported the policies that brought it on, did not seem to be a major concern for most of the economists at the convention. Instead, they seemed more intent on finding ways in which they could get ordinary workers to accept lower pay and reduced public benefits in the years ahead. This would lead to better outcomes in their models.

The conventional wisdom among economists is that the economy will be forced to go through a long adjustment process before it can get back to more normal rates of unemployment. The optimists put the return to normal at 2015, while the pessimists would put the year as 2018 and possibly even later.

Furthermore, many economists believe that the new normal will be worse than the old normal. The unemployment rate bottomed out at 4.5 percent before the housing bubble began to burst. If we go back to 2000, the United States had a year-round average unemployment rate of just 4.0 percent.

The optimists now envision that normal would be 5.0 percent unemployment, while the pessimists put the new normal at 6.0 percent unemployment and possibly even higher. As a point of reference, every percentage point rise in the unemployment corresponds to more than 2 million additional people without jobs.

The willingness of economists to so quickly embrace this darker future is striking. After all, one of the reasons that we have economists is ostensibly so that we don't get such unpleasant news about a "new normal." This is like a football team calmly accepted the sports writers' prediction that they would have a winless season and deciding that their new goal was to minimize the margin of defeat.

The prospect of an extended period of higher unemployment would be easier to accept if there was a good argument as to why the economy cannot achieve the same levels of employment as it had in the recent past. Economists really don't have much basis for this lowering of expectations of their own and the economy's performance.

The main argument seems to stem from the work of two economists, Carmen Reinhardt and Ken Rogoff, who have examined financial crises around the world. Their analysis finds that in most cases it has taken countries roughly a decade to recover from the effects of a financial crisis and to return to a more normal growth path.

There is an important limitation in the Reinhardt and Rogoff analysis. Most of the crises they examine were in the distant past, before the development of modern economics and its bag of tools. If the thousands of economists gathered in Denver know anything more about economics than those not educated in the field, then it would be reasonable to expect better outcomes than in prior centuries.

After all, through most of human history a large portion of children died in their first years of life. However, with modern medicine and good nutrition, infant mortality is a rare event in wealthy countries. By the Reinhardt and Rogoff extrapolation we would still expect most children to be dying before the age of five based on the historical experience.

The methods for generating demand are not a mystery. It basically amounts to the government spending more money until the private sector is again in a position to fuel demand. The fears of deficits and debt that the pessimists promote stem from a misunderstanding of basic economics.

Deficits can be a problem when they crowd out private economic activity. In a severe slump like the current one, this crowding out is not a realistic fear; there are vast amounts of idle resources. Furthermore, there is no reason that the debt needs to pose an interest burden on taxpayers in the future. The Fed and other central banks can simply buy and hold the debt, refunding the interest payments to the government.

If economists did their job, they would be pushing policies to quickly get the economy back to full employment. Instead they just repeat lines about how "we" will just have to accept some rough times. Unfortunately, no one ever asks the economists who preach austerity how much time they expect to spend in the unemployment lines.

If they don't know anything, then why should we listen to them.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.

[JackRiddler]

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I liked this piece for its rare, sober look at China for what it is, without the usual scaremongering and exaggerations.


http://counterpunch.org/walsh01192011.html

January 19, 2011
US Policies Demand That China Remain Poor
An Anti-Interventionist Looks at China

By JOHN WALSH

Most discussion of China in the mainstream press, especially the left liberal press, focuses on China’s human rights record or freedom of press and speech or labor issues or family planning policies. One may argue endlessly about those matters. But they are China’s internal affairs, and for a genuine anti-interventionist they are none of our government’s business and have no place in setting foreign policy. There is a world of difference between an anti-interventionist and an advocate for “humanitarian” imperialism, witting or not. How does an anti-interventionist look at China?

Let us begin with some stubborn, cold hard facts about the US and China. In very round numbers the world’s annual GDP is about $ 60 trillion. That of the U.S. is $15 trillion, that of the EU is $15 trillion, that of China and Japan about $5 trillion each, with China about to pull a bit ahead of Japan this year. The per capita GDP of the U.S. is about $46,000 and that of China is about $4000. In sum, China is still a developing country although one with a very large aggregate GDP. It is number two to the US but not a close number two, and it trails the developed world considerably in its standard of living.

What about trade? Is China not the world’s largest exporter? Yes, it is; but until last year, it was number two; Germany was number one – and Germany has slipped now to number two. So Germany with its high wages and generous social benefits was able to outdo both the U.S. and China in exports until recently. How did Germany do this? By exporting high quality, high tech and well-branded goods. (Germany has not outsourced production to other countries as has the US.) In fact as China came into the number one exporter spot, its leaders proclaimed that they were not really number one but number one only in quantity. They said China’s goal was to follow in Germany’s path to become an exporter of “high tech, high quality, well-branded goods.” Why cannot the U.S. do this instead of blaming China for its unemployment.

What about China as a military “threat” to the U.S.? The US now spends about $1 trillion a year on “national security,” a staggering 1 dollar in 15 of our total GDP and 1 dollar in 60 of the world’s GDP, a colossal waste. And that does not include the military spending forced upon our “allies,” the NATO countries, South Korea, Japan and now India. Simply to equal US military spending alone China would have to spend 20 per cent of its GDP on the military, an impossibility unless development is forsaken. Its navy is not powerful but soon it will at least be able to patrol and defend the nearby seas. Most assuredly the US will not for long be able to sail aircraft carriers within sight of China’s shores – and that is to the good. It will make for less tension. Consider how the US would react if a Chinese fleet were conducting maneuvers within sight of Los Angeles or Seattle.

Next let us consider U.S. military doctrine in the ways it might affect relations with China. U.S. doctrine is clear and unchanging from one administration to the next since the end of the Cold War. No country is to be allowed to come close to the U.S. in military might. The most explicit statement of this came in the Defense Planning Guide for 1994-1999, a secret document prepared in 1992 and leaked to the NYT and Washington Post. "Our first objective," the highly classified document stated, "is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union."

From the outset Obama has left no doubt that the policy of permanent military superiority continues under him, proclaiming just after his election, on the occasion of appointing his “foreign policy team” of Clinton, Gates, and others: "…we all share the belief we have to maintain the strongest military on the planet.” Just last week Pentagon chief, Robert Gates, declared in a speech in Tokyo that the 47,000 troops in Japan were there to “keep China’s rising power in check” and so will remain for the indefinite future . One must also conclude that the wars in Central Asia and the implantation of US bases there, right on China’s back doorstep, and the courting of India over the past ten years are also part of the “containment” policy, whatever other purposes those wars and bases may have. This dimension of the U.S. wars is rarely discussed in the mainstream or liberal press.

The implications of this doctrine are pernicious in the extreme. First, the very threat encourages those who might want to be friends to arm themselves to preserve their independence and sovereignty. Second and much more important, military might grows out of economic power, as we have known at least since Thucydides. Thus the US is declaring that China cannot have a total GDP which comes close to that of the US. Let us consider the consequences of that. What would it mean for China if it achieved an aggregate GDP not larger that of the US but simply the same size? Quite simply, since China has four or five times our population, it would mean that China would have a per capita GDP one fourth of ours – or about $10,000 a year. That means unending poverty for the Chinese people. Thus China is forced to choose between poverty or provoking the ire of the U.S. Such is the iron logic of US military policy.

The U.S. must either content itself to be eclipsed by China in the economic and therefore military sphere if indeed China continues to be successful in developing – or prevent China from rising to the standard of living in Europe and the U.S. That is the meaning of the policy of “containing China.” Sadly this policy also forecloses a win-win outcome whereby China and the US and the entire globe prosper. US policy dictates a win-lose outcome. Such is the bellicose strategy and dismal future dictated by US military policy. And in the sweet talk from Obama and Clinton leading up to the visit of President Hu Jintao of China, there has been no suggestion of a change in U.S. military policy, not even a hint of such a change. It is long overdue.

John V. Walsh can be reached at john.endwar@gmail.com

[JackRiddler]

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One of the more conventional DU types, Statistical, had these, worth keeping as reference...

http://www.democraticunderground.com/di ... _id=234345

Actually manufacturing make a huge amount of money. It just all goes to the top.



Due to productivity gains. Average manufacturing worker now produces roughly 3x as much annually compared to the 1970s.
US manufacturing is hugely profitable.

There are just three issues
1) While US manufacturing hugely profitable plants require continual upgrades. Rather than upgrade it can even more profitable to simply build a less efficient plant in China

2) The productivity gains hasn't translated into higher wages. However don't think wealth isn't being generated it just isn't being generated for the worker.

3) Productivity is growing faster than demand thus less and less workers are needed to satisfy demand.



The idea that the US either doesn't manufacture anything (largest industrial output in the world) or it isn't profitable are misnomers.

Note how radical the decline in absolute employment in manufacturing was starting in 2000. (The relative decline is longer term, not growing to match population growth.)

.

[JackRiddler]

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Sorry vanlose! I see in my senile state I'm posting stuff you already posted as though I just discovered it myself (because I still had the window in my browser -- I'm clearing it all out right now).

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[JackRiddler]

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A dollar triple:
1) Project Censored says the "#1 Censored Story" is "Global Plans to Replace the Dollar."
2) Former Brazilian Central Bank prez seems to contradict, says a currency war of all against all is coming.
3) Hudson's "De-Dollarization" plan from 2009 (which he mentions in his addendum to Project Censored).

I'm also posting the Bloomberg story about the Fed naming the recipients of the bailouts, back from December 1st, since I'd collected it (also: links to earlier stories on same).

http://www.projectcensored.org/top-stor ... he-dollar/

Top 25 Censored Stories of 2011

1. Global Plans to Replace the Dollar

Nations have reached their limit in subsidizing the United States’ military adventures. During meetings in June 2009 in Yekaterinburg, Russia, world leaders such as China’s President Hu Jintao, Russia’s President Dmitry Medvedev, and other top officials of the six-nation Shanghai Cooperation Organisation took the first formal step to replace the dollar as the world’s reserve currency. The United States was denied admission to the meetings. If the world leaders succeed, the dollar will dramatically plummet in value; the cost of imports, including oil, will skyrocket; and interest rates will climb.

Student Researchers:
Nicole Fletcher (Sonoma State University)
Krystal Alexander (Indian River State College)
Bridgette Grillo (Sonoma State University)

Faculty Evaluators:
Ronald Lopez (Sonoma State University)
Elliot D. Cohen (Indian River State College)
Mickey Huff (Diablo Valley College)

Foreigners see the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO) as Washington surrogates in a financial system backed by US military bases and aircraft carriers encircling the globe. But this military domination is a vestige of an American empire no longer able to rule by economic strength. US military power is muscle-bound, based more on atomic weaponry and long-distance air strikes than on ground operations, which have become too politically unpopular to mount on any large scale.

As Chris Hedges wrote in June 2009, “The architects of this new global exchange realize that if they break the dollar they also break America’s military domination. US military spending cannot be sustained without this cycle of heavy borrowing. The official US defense budget for fiscal year 2008 was $623 billion. The next closest national military budget was China’s, at $65 billion, according to the Central Intelligence Agency.”

To fund the permanent war economy, the US has been flooding the world with dollars. The foreign recipients turn the dollars over to their central banks for local currency. The central banks then have a problem. If a central bank does not spend the money in the United States, then the exchange rate against the dollar increases, penalizing exporters. This has allowed the US to print money without restraint, to buy imports and foreign companies, to fund military expansion, and to ensure that foreign nations like China continue to buy American treasury bonds.

In July 2009, President Medvedev illustrated his call for a supranational currency to replace the dollar by pulling from his pocket a sample coin of a “united future world currency.” The coin, which bears the words “Unity in Diversity,” was minted in Belgium and presented to the heads of G8 delegations.

In September 2009, the United Nations Conference on Trade and Development proposed creating a new artificial currency that would replace the dollar as reserve currency. The UN wants to redesign the Bretton Woods system of international exchange. Formation of this currency would be the largest monetary overhaul since World War II. China is involved in deals with Brazil and Malaysia to denominate their trade in China’s yuan, while Russia promises to begin trading in the ruble and local currencies.

Additionally, nine Latin American countries have agreed on the creation of a regional currency, the sucre, aimed at scaling back the use of the US dollar. The countries, members of the Bolivarian Alliance for the Americas (ALBA), a leftist bloc conceived by Venezuela’s President Hugo Chávez, met in Bolivia where they vowed to press ahead with a new currency for intraregional trade. The sucre would be rolled out beginning in 2010 in a nonpaper form. ALBA’s member states are Venezuela, Bolivia, Cuba, Ecuador, Nicaragua, Dominica, Saint Vincent and the Grenadines, and Antigua and Barbuda.

The cycle supporting a permanent US war economy appears to be almost over. Once the dollar cannot flood central banks and no one buys US treasury bonds, the American global military empire collapses. The impact on daily living for the US population could be severe.

Our authors predict that in addition to increased costs, states and cities will see their pension funds drained. The government will be forced to sell off infrastructure, including roads and transport, to private corporations. People will be increasingly charged for privatized utilities that were once regulated and subsidized. Commercial and private real estate will be worth less than half its current value. The negative equity that already plagues 25 percent of American homes will expand to include nearly all property owners. It will be difficult to borrow and impossible to sell real estate unless we accept massive losses. There will be block after block of empty stores and boarded-up houses. Foreclosures will be epidemic. There will be long lines at soup kitchens and many, many homeless.

Update by Michael Hudson

Foreign countries are presently seeking to create an international monetary system in which central bank savings do not fund the United States’ military deficit. At present, foreign “dollar holdings” take the form of US treasury bonds, used to finance the (largely military) US domestic budget deficit, a deficit that is largely due to military spending.

Russia, China, India, and Brazil have taken the lead in seeking an alternative system. But almost no information about such a system was available in the US or even the European press, except for a shorter version of my “De-Dollarization” article that I published as an op-ed in the Financial Times of London.

Discussions about creating an alternative monetary system have not been public. I was invited to China to discuss my views with officials there and to lecture at three universities, and was subsequently asked to write up my proposals for Premier Wen Jiabao, pending another visit just prior to this year’s meetings between China, Russia, India, and Brazil, with Iran attending with visitor status. All of this signals that other countries are seeking an alternative. Now that the euro has collapsed,

Here I must take serious issue with my favorite economist's choice of language.

As of February 10, 2011
1 euro = 1.3722 US dollars
120 days lowest (Aug 31) 1.268 highest (Nov 4) 1.4244

I suppose he means, "Now that the reputation of the euro in the minds of capitalists around the world (including in Europe) has collapsed..." Anyway, to resume:

--there’s currently little alternative to the dollar as a reserve currency. This implies that there is no national currency that is a stable store of value for international savings.

Meanwhile, US money managers are leading the flight from the dollar to Brazil, China, and other “emerging market” countries. As matters stand, these countries are selling their resources and companies for free—as the dollars being spent to buy them end up in their central banks, to be recycled into US treasury bonds, or to be used to purchase euro debt that is plunging in international value.

The result of this conundrum is the pressure to end the postwar era of “free capital movements” and to introduce capital controls.

There has been almost no press discussion of my story or indeed of the issue itself. US and European media have successfully ignored the proposal of an alternative to the existing state of affairs.

Update by Fred Weir

This story illustrates one aspect of post–Soviet Russia’s search for a place in the US-led global order—a position that would reflect that country’s own distinct geopolitical interests and how it differs from the West in terms of history, culture, and level of economic development. Russia inherited from the former Soviet Union close relations with many countries that the US regards as “rogue states,” including Iran, Cuba, and Venezuela. There continues to be a lot of official, public sympathy for those countries and their opposition to the US global system, even though Moscow no longer has any grand sense of anti-Western ideology or even any practical goal of mobilizing toward an “alliance” that would serve Russia’s ends.

Under the George W. Bush administration, Moscow felt itself under pressure from what it viewed as Western encroachments into the post-Soviet space, what Russians term the “near abroad.” This took the form of “colored revolutions,” or what the Western media referred to as “pro-democracy uprisings” in Georgia, Ukraine, and Kyrgyzstan, which removed corrupt but Moscow-friendly regimes and brought to power much more outspoken and active pro-Western ones. The Kremlin, rightly or wrongly, interpreted these upheavals as US-sponsored and orchestrated attempts to reengineer the political loyalties of neighboring states with which Russia has deep historical ties. Two of those new leaders, Georgia’s Mikheil Saakashvili and Ukraine’s Viktor Yushchenko, sought to put their countries on a fast track to membership in the North Atlantic Treaty Organization (NATO), a prospect that Russia viewed with alarm bordering on panic. Another Bush-era initiative that engendered deep hostility in Moscow was a plan to station strategic antimissile interceptors in neighboring Poland, with associated radars in the Czech Republic. Russian military experts argued these deployments were the beginning of a strategic process that might eventually undermine Russia’s own aging, Soviet-era nuclear deterrent, which is the main priority of Russia’s national defense.

In response to these perceived threats, Russia seemed to sometimes go out of its way to cultivate relationships with other countries that were at odds with the US, which is the subject of this story. The Russians also held war games with the Venezuelan navy in the Caribbean, resumed cold war–era nuclear bomber patrols along the North American coast, and talked about revitalizing former Soviet air bases in Cuba.

In the past year, with substantially changed foreign policy priorities brought in by President Barack Obama, Moscow’s attitude has relaxed somewhat. Obama shelved the controversial plan to station antimissile weapons in Poland, and implicitly removed from the agenda any question of inducting Ukraine and Georgia into NATO. The so-called Obama “reset” of relations between Moscow and Washington seems to be improving prospects for cooperation, even on such thorny issues as Iran, though it may be too early to draw any firm conclusions.

Sources:

Chris Hedges, “The American Empire Is Bankrupt,” Truthdig, June 15, 2009, http://www.truthdig.com/report/item/200 ... _bankrupt/.

Michael Hudson, “De-Dollarization: Dismantling America’s Financial-Military Empire: The Yekaterinburg Turning Point,” Global Research, June 13, 2009, http://www.globalresearch.ca/PrintArtic ... leId=13969.

Fred Weir, “Iran and Russia Nip at US Global Dominance” Christian Science Monitor, June 16, 2009, http://www.csmonitor.com/2009/0616/p06s12-woeu.html.

Lyubov Pronina, “Medvedev Shows Off Sample Coin of New ‘World Currency’ at G-8,” Bloomberg, July 10, 2009, http://www.bloomberg.com/apps/news?pid=20601087 &sid=aeFVNYQpByU4.

Edmund Conway, “UN Wants New Global Currency to Replace Dollar,” Telegraph (UK), September 7, 2009, http://www.telegraph.co.uk/finance/curr ... ollar.html.

Jose Arturo Cardenas, “Latin American Leftists Tackle Dollar with New Currency,” Agence France-Presse, October 16, 2009, http://www.google.com/hostednews/afp/article/ ALeqM5jisHEg79Cz8uRtYfZR6WK4JmWsIg.

Stories on Russia’s overtures to Cuba and Venezuela:
http://www.csmonitor.com/World/Americas ... -woam.html
http://www.csmonitor.com/World/Global-N ... in-america
http://www.csmonitor.com/World/Americas ... -woam.html
http://www.csmonitor.com/World/Europe/2 ... -woeu.html

Stories on Russia’s relations with Iran:
http://www.csmonitor.com/World/Europe/2 ... ower-plant
http://www.csmonitor.com/World/Global-N ... le-to-iran
http://www.csmonitor.com/World/Europe/2 ... -woeu.html

Stories on US–Russian relations:
http://www.csmonitor.com/World/Europe/2 ... e-pro-West
http://www.csmonitor.com/World/Europe/2 ... com/World/
Europe/2009/1028/p06s14-woeu.html
http://www.csmonitor.com/World/Europe/2 ... e-pro-West

[[Mostly for the lulz, a few of the]] Responses to Project Censored #1 Story...

Doug Nusbaum says:
October 10, 2010 at 3:34 pm
A cooperative currency… Does anyone really believe that any of these countries could cooperate on anything for more than six months? The only reason that OPEC was able to do any cooperative thing for more than a few years was that there was a 600 lb gorilla in the room. And even then, that gorilla may or may not have been a hand puppet of the US.
All the potential members will see the other “partners” as possibly attempting to manipulate things for their own benefit at the expense of themselves. The two biggest players, Russia and China, are systems ruled by autocratic individuals.
The only possible solution would be a currency backed by commodities, but these states want a reality based system less than they want the current one.
So … Ain’t gonna happen.

Jay Gamel says:
October 11, 2010 at 3:23 am
You haven’t mentioned that all currencies today are floaters — essentially worth only what people decide they are worth. You don’t mention the price of gold or who possesses the majority of the world’s gold. Guess who?
While everyone, including Wall St., knows that the dollar is a poor reserve currency, there are no replacement’s on the horizon; not without more cooperation than the current players can put into results. It would require a degree of stability and contract equity that is not available in today’s global political climate.
Citing the coin circulated by Medeyev as evidence of a new world currency order is pathetic. It was pure hype and symbolic in the extreme.
The dollar may fail on any number of fronts, but there are no contenders on the horizon, as much as many, many people wish there were. I’m no defender, but no one is about to reduce the existing teetering economic system to compete rubble without a viable alternative. I’ve yet to see it.

Lester W says:
October 11, 2010 at 4:39 am
Great list and everyone should remember that policies such as this are not overnight adjustments. These ideas are being planned through a slow (20 years) process of implementing new terms and ideas to the public. Everyone would jump out of the boiling pot water if things happen too fast.
********To the author of the article or to web site masters, the link to the mdvedev article in which he showed off the new “world currency” coin… here is the working link:
http://www.bloomberg.com/apps/news?pid= ... FVNYQpByU4

George Kay says:
October 12, 2010 at 3:01 am
I think some miss the point here. It’s not that all currencies float, it’s that the US dollar has had a free run as a reserve currency, at the expense of central banks and ultimately foreign people, the world over. If one thinks the US dollar is a stable enough currency to base all trade in, then one needs to come back down from the clouds. Leaders around the world know this and are faced with a dilemma. They cannot dump their US Treasury ‘securities’, because they are now ultimately worthless ie. who would want to buy them? At the same time, they cannot maintain US hegemony by buying any more. The free ride is over Uncle Sam.

Haydn Stevenson says:
October 12, 2010 at 6:42 am
It’s not hard to see where the power is shifting to. It’s shifting to Asia -and in particular China. Just as the USA became a great power on the back of its industrial innovation and productivity, so China is rising into that role -as the world’s future leading economic power.
One thing is certain. Whichever country gains number one place in the economic power stakes, will also rise to wield considerable political clout. And such a situation is a direct threat to the existing (USA-centric) order. And given this reality, it can be expected that the USA will mount a rear guard action -to ward off the decline of its own Empire. But history is not kind. Empires come and go -and present company is not excepted.
The downside to this geopolitical reality is that the USA is likely to act in various irrational ways -while attempting to fend off contenders to its “throne”. And in so doing, threaten the international political and financial order. We are witnessing this already, with the “war on terror” -the attempt to create a new international pariah “bogeyman” -in order to sustain the military-industrial complex.

guard says:
October 12, 2010 at 1:14 pm
Doug above is right. Any “basket” currency will fail just the way the Euro is failing – one or more socialist states bringing down the whole system. --

-- Any currency backed by a single nation will fail for exactly the same reason the US Dollar is failing – one country sucking the life out of all the others. And there is not going to be any commodity-backed money – that would defeat the true purpose of fiat money which is shafting everyone with inflation and asset bubbles.
No, I expect there will be a slow torturous US currency collapse that will last years, during which time every last penny will be extracted from the poor and the environment.

Fred says:
October 14, 2010 at 11:01 am
How is the euro failing with respect to the USD? It takes 1.4 USD to buy a euro as I write this. The Euro was set at 1.16 to the USD when it was introduced as I recall.
I believe the EU overall has the right mix of “socialism” and private enterprise. More private than China but less private than the US. There is virtue in moderation.

[[etc. etc.]]


............................

Brace Yourself: Currency War Is the Next Crisis

by Arminio Fraga (/authors/arminio-fraga.html) January 01, 2011

At their November meeting in Seoul, the leaders of the G20 nations once again patted themselves on the back for their massive efforts to stabilize the global economy since the 2007–08 financial panic. The rest of the world might be forgiven for not sharing their enthusiasm.

Leaders might swear in public to work together, but at home they continue to wall off their own economies against immediate dangers—with no concern for the consequences next door. The U.S. Federal Reserve is flooding the still-struggling U.S. economy with dollars, many of which end up chasing more promising returns in emerging nations, threatening to overvalue their currencies, create asset bubbles, and price their goods out of world markets. Beijing shows no signs of letting the yuan appreciate significantly, a virtual guarantee that Chinese exports will keep gaining market share all over the world. Smaller nations brace for the fallout, which includes declining exports and pressure on companies and jobs. Recently Alan Bollard, Reserve Bank governor of New Zealand, put it succinctly: “When elephants make love, or war, the grass gets crushed, and that’s the risk smaller economies face in this situation.”

So it was that Brazilian Finance Minister Guido Mantega—alarmed as the Brazilian real rose to near record highs against the greenback—dubbed this the era of currency wars: each nation tries to keep its own economy going, in part by managing the exchange rate and intervening in the markets to keep a step ahead of its neighbors. Already, scores of nations are taking aggressive measures to try to stanch the flood of incoming dollars and shore up faltering industries. Central banks everywhere are moving beyond merely buying up excess dollars to outright intervention in the exchange markets to stop their currencies from spiking against the dollar. Taiwan and Thailand recently imposed capital controls on foreign investments in their bond markets. Brazil tripled its tax on international financial capital from 2 to 6 percent. Worryingly, blaming the foreigner is back in fashion. One way or another, everyone ends up a combatant in the currency wars.

But it could get worse. Without a truce, South African Finance Minister Pravin Gordhan recently warned, a full-blown trade war could break out, as each country seeks to compensate the damage that a rising currency causes at home by hurling up trade barriers against others believed to be resorting to so-called monetary dumping.

So much for the symphony of global consensus. The expected new world of cooperation has now turned into a nightmare of accusations of exchange-rate manipulation, beggar-thy-neighbor policies, and currency wars.

What can be done? It is clearly impossible for all countries to devalue their exchange rates at the same time. The answer here is the same one that the G20 has already reached but not yet acted upon. Some international cooperation on exchange rates is necessary, but that alone will not do the job. At the national level—especially in the mature economies—there must be more emphasis on the long-term reduction of deficits as well as structural reforms and investments (such as in education, innovation, and infrastructure) that raise productivity and growth.

(Does he see the contradiction here? Hello?)

But that is unlikely to happen soon in any broad and coordinated way, so the danger is in fact that currency war escalates into trade restrictions and more extreme controls of capital flows. Confidence would remain low, and a vicious circle of bad policies could ensue. In this context a relapse of the global crisis cannot be ruled out. In all likelihood it would be worse than the original version.

Unfortunately, this high-anxiety momentseems like the new normal in international relations. The sobering fact is thatin recent years the most important attempts to forge global cooperation have ended in failure. The Doha Round of trade negotiations has languished inconclusively for years, the Copenhagen discussions on climate change ended with anodyne statements, and the many attempts to overhaul the regulations of the international financial system have fared little better. In hindsight, even the measures undertaken at the start of the global financial crisis were not so much a show of cooperation as it was each individual country pursuing its own domestic objectives. It just so happened that, at least for a while, everyone was pursuing the same objective: avoiding a deep recession.

This means that for now we are left with more of the same: each country will, for the most part, continue to fend for itself. If the history of crises in the emerging world tells us anything, it is that to succeed in dealing with a crisis it is necessary to blend short-term firefighting—of which nations have now done plenty—with reforms that address key long-term problems. This means the advanced economies must now solve their structural problems, boost productivity, and reform their economies to promote growth, but above all tackle unsustainable government deficits and debts. If and when this is done, things will turn out all right. If not, watch out—then the currency wars will be the least of our troubles.

Fraga is the chairman of Gávea Investimentos and a former president of the Central Bank of Brazil.

Link
http://www.newsweek.com/2011/01/01/brac ... print.html
Archived here for strictly non-commercial fair-use purposes of having a good goddamn discussion, see? With da link to youse guys, see?

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De-Dollarization: Dismantling America’s Financial-Military Empire

By Prof. Michael Hudson
Global Research, June 13, 2009

The Yekaterinburg Turning Point

The city of Yakaterinburg, Russia’s largest east of the Urals, may become known not only as the death place of the tsars but of American hegemony too – and not only where US U-2 pilot Gary Powers was shot down in 1960, but where the US-centered international financial order was brought to ground.

Challenging America will be the prime focus of extended meetings in Yekaterinburg, Russia (formerly Sverdlovsk) today and tomorrow (June 15-16) for Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization (SCO). The alliance is comprised of Russia, China, Kazakhstan, Tajikistan, Kyrghyzstan and Uzbekistan, with observer status for Iran, India, Pakistan and Mongolia. It will be joined on Tuesday by Brazil for trade discussions among the BRIC nations (Brazil, Russia, India and China).

The attendees have assured American diplomats that dismantling the US financial and military empire is not their aim. They simply want to discuss mutual aid – but in a way that has no role for the United States, NATO or the US dollar as a vehicle for trade. US diplomats may well ask what this really means, if not a move to make US hegemony obsolete. That is what a multipolar world means, after all. For starters, in 2005 the SCO asked Washington to set a timeline to withdraw from its military bases in Central Asia. Two years later the SCO countries formally aligned themselves with the former CIS republics belonging to the Collective Security Treaty Organization (CSTO), established in 2002 as a counterweight to NATO.

Yet the meeting has elicited only a collective yawn from the US and even European press despite its agenda is to replace the global dollar standard with a new financial and military defense system. A Council on Foreign Relations spokesman has said he hardly can imagine that Russia and China can overcome their geopolitical rivalry,1 suggesting that America can use the divide-and-conquer that Britain used so deftly for many centuries in fragmenting foreign opposition to its own empire. But George W. Bush (“I’m a uniter, not a divider”) built on the Clinton administration’s legacy in driving Russia, China and their neighbors to find a common ground when it comes to finding an alternative to the dollar and hence to the US ability to run balance-of-payments deficits ad infinitum.

What may prove to be the last rites of American hegemony began already in April at the G-20 conference, and became even more explicit at the St. Petersburg International Economic Forum on June 5, when Mr. Medvedev called for China, Russia and India to “build an increasingly multipolar world order.” What this means in plain English is: We have reached our limit in subsidizing the United States’ military encirclement of Eurasia while also allowing the US to appropriate our exports, companies, stocks and real estate in exchange for paper money of questionable worth.

“The artificially maintained unipolar system,” Mr. Medvedev spelled out, is based on “one big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks.”2 At the root of the global financial crisis, he concluded, is that the United States makes too little and spends too much. Especially upsetting is its military spending, such as the stepped-up US military aid to Georgia announced just last week, the NATO missile shield in Eastern Europe and the US buildup in the oil-rich Middle East and Central Asia.

The sticking point with all these countries is the US ability to print unlimited amounts of dollars. Overspending by US consumers on imports in excess of exports, US buy-outs of foreign companies and real estate, and the dollars that the Pentagon spends abroad all end up in foreign central banks. These agencies then face a hard choice: either to recycle these dollars back to the United States by purchasing US Treasury bills, or to let the “free market” force up their currency relative to the dollar – thereby pricing their exports out of world markets and hence creating domestic unemployment and business insolvency.

When China and other countries recycle their dollar inflows by buying US Treasury bills to “invest” in the United States, this buildup is not really voluntary. It does not reflect faith in the U.S. economy enriching foreign central banks for their savings, or any calculated investment preference, but simply a lack of alternatives. “Free markets” US-style hook countries into a system that forces them to accept dollars without limit. Now they want out.

This means creating a new alternative. Rather than making merely “cosmetic changes as some countries and perhaps the international financial organisations themselves might want,” Mr. Medvedev ended his St. Petersburg speech, “what we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries will not dominate.”

When foreign military spending forced the US balance of payments into deficit and drove the United States off gold in 1971, central banks were left without the traditional asset used to settle payments imbalances. The alternative by default was to invest their subsequent payments inflows in US Treasury bonds, as if these still were “as good as gold.” Central banks now hold $4 trillion of these bonds in their international reserves – land these loans have financed most of the US Government’s domestic budget deficits for over three decades now! Given the fact that about half of US Government discretionary spending is for military operations – including more than 750 foreign military bases and increasingly expensive operations in the oil-producing and transporting countries – the international financial system is organized in a way that finances the Pentagon, along with US buyouts of foreign assets expected to yield much more than the Treasury bonds that foreign central banks hold.

The main political issue confronting the world’s central banks is therefore how to avoid adding yet more dollars to their reserves and thereby financing yet further US deficit spending – including military spending on their borders?

For starters, the six SCO countries and BRIC countries intend to trade in their own currencies so as to get the benefit of mutual credit that the United States until now has monopolized for itself. Toward this end, China has struck bilateral deals with Argentina and Brazil to denominate their trade in renminbi rather than the dollar, sterling or euros,3 and two weeks ago China reached an agreement with Malaysia to denominate trade between the two countries in renminbi.[4] Former Prime Minister Tun Dr. Mahathir Mohamad explained to me in January that as a Muslim country, Malaysia wants to avoid doing anything that would facilitate US military action against Islamic countries, including Palestine. The nation has too many dollar assets as it is, his colleagues explained. Central bank governor Zhou Xiaochuan of the People’s Bank of China wrote an official statement on its website that the goal is now to create a reserve currency “that is disconnected from individual nations.”5 This is the aim of the discussions in Yekaterinburg.

In addition to avoiding financing the US buyout of their own industry and the US military encirclement of the globe, China, Russia and other countries no doubt would like to get the same kind of free ride that America has been getting. As matters stand, they see the United States as a lawless nation, financially as well as militarily. How else to characterize a nation that holds out a set of laws for others – on war, debt repayment and treatment of prisoners – but ignores them itself? The United States is now the world’s largest debtor yet has avoided the pain of “structural adjustments” imposed on other debtor economies. US interest-rate and tax reductions in the face of exploding trade and budget deficits are seen as the height of hypocrisy in view of the austerity programs that Washington forces on other countries via the IMF and other Washington vehicles.

The United States tells debtor economies to sell off their public utilities and natural resources, raise their interest rates and increase taxes while gutting their social safety nets to squeeze out money to pay creditors. And at home, Congress blocked China’s CNOOK from buying Unocal on grounds of national security, much as it blocked Dubai from buying US ports and other sovereign wealth funds from buying into key infrastructure. Foreigners are invited to emulate the Japanese purchase of white elephant trophies such as Rockefeller Center, on which investors quickly lost a billion dollars and ended up walking away.

In this respect the US has not really given China and other payments-surplus nations much alternative but to find a way to avoid further dollar buildups. To date, China’s attempts to diversify its dollar holdings beyond Treasury bonds have not proved very successful. For starters, Hank Paulson of Goldman Sachs steered its central bank into higher-yielding Fannie Mae and Freddie Mac securities, explaining that these were de facto public obligations. They collapsed in 2008, but at least the US Government took these two mortgage-lending agencies over, formally adding their $5.2 trillion in obligations onto the national debt. In fact, it was largely foreign official investment that prompted the bailout. Imposing a loss for foreign official agencies would have broken the Treasury-bill standard then and there, not only by utterly destroying US credibility but because there simply are too few Government bonds to absorb the dollars being flooded into the world economy by the soaring US balance-of-payments deficits.

Seeking more of an equity position to protect the value of their dollar holdings as the Federal Reserve’s credit bubble drove interest rates down China’s sovereign wealth funds sought to diversify in late 2007. China bought stakes in the well-connected Blackstone equity fund and Morgan Stanley on Wall Street, Barclays in Britain South Africa’s Standard Bank (once affiliated with Chase Manhattan back in the apartheid 1960s) and in the soon-to-collapse Belgian financial conglomerate Fortis. But the US financial sector was collapsing under the weight of its debt pyramiding, and prices for shares plunged for banks and investment firms across the globe.

Foreigners see the IMF, World Bank and World Trade Organization as Washington surrogates in a financial system backed by American military bases and aircraft carriers encircling the globe. But this military domination is a vestige of an American empire no longer able to rule by economic strength. US military power is muscle-bound, based more on atomic weaponry and long-distance air strikes than on ground operations, which have become too politically unpopular to mount on any large scale.

On the economic front there is no foreseeable way in which the United States can work off the $4 trillion it owes foreign governments, their central banks and the sovereign wealth funds set up to dispose of the global dollar glut. America has become a deadbeat – and indeed, a militarily aggressive one as it seeks to hold onto the unique power it once earned by economic means. The problem is how to constrain its behavior. Yu Yongding, a former Chinese central bank advisor now with China’s Academy of Sciences, suggested that US Treasury Secretary Tim Geithner be advised that the United States should “save” first and foremost by cutting back its military budget. “U.S. tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of ‘fighting two wars.’”6

At present it is foreign savings, not those of Americans that are financing the US budget deficit by buying most Treasury bonds. The effect is taxation without representation for foreign voters as to how the US Government uses their forced savings. It therefore is necessary for financial diplomats to broaden the scope of their policy-making beyond the private-sector marketplace. Exchange rates are determined by many factors besides “consumers wielding credit cards,” the usual euphemism that the US media cite for America’s balance-of-payments deficit. Since the 13th century, war has been a dominating factor in the balance of payments of leading nations – and of their national debts. Government bond financing consists mainly of war debts, as normal peacetime budgets tend to be balanced. This links the war budget directly to the balance of payments and exchange rates.

Foreign nations see themselves stuck with unpayable IOUs – under conditions where, if they move to stop the US free lunch, the dollar will plunge and their dollar holdings will fall in value relative to their own domestic currencies and other currencies. If China’s currency rises by 10% against the dollar, its central bank will show the equivalent of a $200 million loss on its $2 trillion of dollar holdings as denominated in yuan. This explains why, when bond ratings agencies talk of the US Treasury securities losing their AAA rating, they don’t mean that the government cannot simply print the paper dollars to “make good” on these bonds. They mean that dollars will depreciate in international value. And that is just what is now occurring. When Mr. Geithner put on his serious face and told an audience at Peking University in early June that he believed in a “strong dollar” and China’s US investments therefore were safe and sound, he was greeted with derisive laughter.7

Anticipation of a rise in China’s exchange rate provides an incentive for speculators to seek to borrow in dollars to buy renminbi and benefit from the appreciation. For China, the problem is that this speculative inflow would become a self-fulfilling prophecy by forcing up its currency. So the problem of international reserves is inherently linked to that of capital controls. Why should China see its profitable companies sold for yet more freely-created US dollars, which the central bank must use to buy low-yielding US Treasury bills or lose yet further money on Wall Street?

To avoid this quandary it is necessary to reverse the philosophy of open capital markets that the world has held ever since Bretton Woods in 1944. On the occasion of Mr. Geithner’s visit to China, “Zhou Xiaochuan, minister of the Peoples Bank of China, the country’s central bank, said pointedly that this was the first time since the semiannual talks began in 2006 that China needed to learn from American mistakes as well as its successes” when it came to deregulating capital markets and dismantling controls.8

An era therefore is coming to an end. In the face of continued US overspending, de-dollarization threatens to force countries to return to the kind of dual exchange rates common between World Wars I and II: one exchange rate for commodity trade, another for capital movements and investments, at least from dollar-area economies.

Even without capital controls, the nations meeting at Yekaterinburg are taking steps to avoid being the unwilling recipients of yet more dollars. Seeing that US global hegemony cannot continue without spending power that they themselves supply, governments are attempting to hasten what Chalmers Johnson has called “the sorrows of empire” in his book by that name – the bankruptcy of the US financial-military world order. If China, Russia and their non-aligned allies have their way, the United States will no longer live off the savings of others (in the form of its own recycled dollars) nor have the money for unlimited military expenditures and adventures.

US officials wanted to attend the Yekaterinburg meeting as observers. They were told No. It is a word that Americans will hear much more in the future.

Notes

1 Andrew Scheineson, “The Shanghai Cooperation Organization,” Council on Foreign Relations,

Updated: March 24, 2009: “While some experts say the organization has emerged as a powerful anti-U.S. bulwark in Central Asia, others believe frictions between its two largest members, Russia and China, effectively preclude a strong, unified SCO.”

2 Kremlin.ru, June 5, 2009, in Johnson’s Russia List, June 8, 2009, #8.

3 Jamil Anderlini and Javier Blas, “China reveals big rise in gold reserves,” Financial Times, April 24, 2009. See also “Chinese political advisors propose making yuan an int’l currency.” Beijing, March 7, 2009 (Xinhua). “The key to financial reform is to make the yuan an international currency, said [Peter Kwong Ching] Woo [chairman of the Hong Kong-based Wharf (Holdings) Limited] in a speech to the Second Session of the 11th National Committee of the Chinese People’s Political Consultative Conference (CPPCC), the country’s top political advisory body. That means using the Chinese currency to settle international trade payments …”

4 Shai Oster, “Malaysia, China Consider Ending Trade in Dollars,” Wall Street Journal, June 4, 2009.

5 Jonathan Wheatley, “Brazil and China in plan to axe dollar,” Financial Times, May 19, 2009.

6 “Another Dollar Crisis inevitable unless U.S. starts Saving – China central bank adviser. Global Crisis ‘Inevitable’ Unless U.S. Starts Saving, Yu Says,” Bloomberg News, June 1, 2009. http://www.bloomberg.com/apps/news?pid= ... refer=asia

7 Kathrin Hille, “Lesson in friendship draws blushes,” Financial Times, June 2, 2009.

8 Steven R. Weisman, “U.S. Tells China Subprime Woes Are No Reason to Keep Markets Closed,” The New York Times, June 18, 2008.

© Copyright Michael Hudson, Global Research, 2009

The url address of this article is: http://www.globalresearch.ca/index.php? ... &aid=13969

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Fed Names Recipients of $3.3 Trillion in Crisis Aid
By Craig Torres and Scott Lanman - Dec 1, 2010

The Federal Reserve, under orders from Congress, today named the counterparties of about 21,000 transactions from $3.3 trillion in aid provided to stem the worst financial panic since the Great Depression.

Bank of America Corp. and Wells Fargo & Co. were among the biggest borrowers from one program, the Term Auction Facility, with as much as $45 billion apiece. Some aid went to U.S. units of foreign institutions, including Switzerland’s UBS AG, France’s Societe Generale and Germany’s Dresdner Bank AG. The Fed posted the data on its website to comply with a provision in July’s Dodd-Frank law overhauling financial regulation.

“We owe an accounting to the American people of who we have lent money to,” Richmond Fed President Jeffrey Lacker said today in an interview on Bloomberg Radio’s “The Hays Advantage,” with Kathleen Hays. “It is a good step toward broader transparency.”

Even so, the release may heighten political scrutiny of the central bank already at its most intense in three decades. The Fed’s Nov. 3 decision to add $600 billion of monetary stimulus has sparked a backlash from top Republicans in Congress, who said in a Nov. 17 letter to Chairman Ben S. Bernanke that the action risks inflation and asset-price bubbles.

“These disclosures come at a politically inopportune moment for the Fed,” Sarah Binder, a senior fellow at the Brookings Institution in Washington whose research focuses on Congress’s relationship with the Fed, said before the release. “Just when Chairman Bernanke is trying to defend the Fed from Republican critics of its asset purchases, the Fed’s wounds from the financial crisis are reopened.”

Six Programs

The information, which also includes the amounts of transactions and interest rates charged, spans six loan programs as well as currency swaps with other central banks, purchases of mortgage-backed securities and the rescues of Bear Stearns Cos. and American International Group Inc.

The data detail the breadth of central bank support that reached beyond banks to companies such as General Electric Co., which accessed a Fed program 12 times for a total of $16 billion in commercial paper. Lawmakers demanded disclosure, over the Fed’s initial objections, as U.S. central bankers pushed beyond their traditional role of backstopping banks. The Fed bought short-term IOUs from corporations, risky assets from Bear Stearns and more than $1 trillion in U.S. housing debt.

Need for Liquidity

“Consistent with what we said at the time, we participated in the program to support investors’ need for liquidity during the financial crisis and to manage the company’s commercial- paper maturity profile,” said Russell Wilkerson, a GE spokesman.

Companies’ participation in the programs “reflected the severe market disruptions during the financial crisis and generally did not reflect participants’ financial weakness,” the Fed said today in a statement in Washington. “The Federal Reserve followed sound risk-management practices in administering all of these programs” and incurred no credit losses, the statement said.

At Goldman Sachs Group Inc., Wall Street’s most profitable securities firm, borrowing from the Primary Dealer Credit Facility peaked at $24 billion in October 2008. “Without question, direct government support was critical in stabilizing the financial system, and we benefitted from it,” Chief Executive Officer Lloyd Blankfein said in January 2010.

Michael DuVally, a Goldman Sachs spokesman in New York, said today that the Fed’s actions “were very successful.”

Dollar Squeeze

The presence of foreign banks in the program underscores the squeeze in dollar liquidity after the collapse of Lehman Brothers Holdings Inc. on Sept. 15, 2008. UBS, Switzerland’s largest bank, was the biggest borrower from the Commercial Paper Funding Facility, tapping the program 11 times for $74.5 billion.

The emergency programs included the Term Asset-Backed Securities Loan Facility, which has supported billions of dollars in credit to small businesses, credit card borrowers, and students, and the Term Auction Facility, which helped banks get cheaper funding.

Bernanke pushed the boundaries of the Fed’s powers, using section 13(3) of the Federal Reserve Act, which allowed the central bank to aid non-banks under “unusual and exigent circumstances.” In some facilities, the Fed engaged in non- recourse lending, meaning it loaned against collateral alone and took a greater risk of loss.

‘Risk Exposures’

“By moving into the world of non-recourse loans, they started to accept risk exposures that the private sector was no longer capable of maintaining,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “That effectively turned the Fed into an asset warehouse.”

Congress excluded one Fed lending program from disclosure, the discount window, which is the subject of a 2008 lawsuit filed by Bloomberg LP, parent of Bloomberg News, against the central bank. A group of banks is appealing to the Supreme Court over lower-court decisions ordering the Fed to identify loan recipients. The program peaked at $110.7 billion in October 2008.

“We see this not as the end of a process but really a significant step forward in opening the veil of secrecy that exists in one of the most powerful agencies in government,” Senator Bernard Sanders, the Vermont Independent who wrote the provision on Fed disclosure, said to reporters Nov. 17.

Request Rebuffed

Sanders said he was motivated to use legislation to force the Fed to reveal borrowers after Bernanke rebuffed his request to identify the firms.

“Given the size of these commitments, it is incomprehensible that the American people have not received specific details about them,” Sanders said in a letter to Bernanke on Feb. 4, 2009.

“The Federal Reserve does not release specific information regarding the borrowings of individual institutions from our lending facilities,” Bernanke said in a reply to Sanders. “The approach is completely consistent with the long-standing practice of central banks.”

A year after his 2009 correspondence with Sanders, Bernanke said in House Financial Services Committee testimony the Fed would agree to reveal the names of borrowers of emergency facilities with a “sufficiently long” lag. Once again, he said that the confidentiality of the discount window “must be maintained.”

Today’s information relates to aid from Dec. 1, 2007, through July 21, 2010, when President Barack Obama signed Dodd- Frank into law. The act also requires the Fed, after a two-year delay, to identify firms that, following the law’s passage, borrow through its discount window and participate in its purchases or sales of assets such as mortgage-backed securities and Treasuries.

Emergency Powers

The Dodd-Frank legislation has also limited the Fed’s emergency lending powers from now on to programs with broad- based eligibility, curtailing bailouts of individual institutions.

“You have to balance the different considerations,” said Roberto Perli, managing director at International Strategy & Investment Group in Washington and a former Fed Board staff member. “They crossed a line, but what would have been the alternative? You can’t have a huge run on money funds. The situation was very delicate. The alternative would have been a lot worse.”

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Link
http://www.bloomberg.com/news/print/201 ... risis.html
Archived here, and no one's makin' any money off it, for sure not, just talkin' guv.

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viewtopic.php?f=8&t=21495&start=675#p371862

Here's the Fed's bailout disclosure page. Links to data on each program:
http://www.federalreserve.gov/newsevent ... action.htm

Usage of Federal Reserve Credit and Liquidity Facilities
This section of the website provides detailed information about the liquidity and credit programs and other monetary policy tools that the Federal Reserve used to respond to the financial crisis that emerged in the summer of 2007.

[[...SNIP...]]

Facilities and Programs
Agency Mortgage-Backed Securities (MBS) Purchase Program
Term Auction Facility (TAF)
Central Bank Liquidity Swap Lines
Primary Dealer Credit Facility (PDCF)
Term Securities Lending Facility (TSLF) and TSLF Options Program (TOP)
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
Commercial Paper Funding Facility (CPFF)
Term Asset-Backed Securities Loan Facility (TALF)
Bear Stearns, JPMorgan Chase, and Maiden Lane LLC
American International Group (AIG), Maiden Lane II and III
Bank of America
Citigroup

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Bernie Sanders after getting the Fed's disclosure on recipients of $3.3 trillion
viewtopic.php?f=8&t=21495&start=660#p369343

Remember, these are separate from the overnight loans we heard about later (which were three or more times as much).

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[vanlose kid]

^ ^ it's cool, J.

question for you: what is wrong with this picture?

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Deutsche-NYSE Deal Supports 'Free Markets': Ron Paul
Published: Wednesday, 9 Feb 2011 | 4:53 PM ET Text Size
By: Michelle Lodge
CNBC.com Writer

The planned purchase by the German Deutsche Boerse of the NYSE Euronext fits in with Rep. Ron Paul’s support of globalization and free markets, the congressman told CNBC Wednesday.

“We shouldn’t be afraid of people investing here,” said Paul, (R-Texas), a member of the House Financial Services Committee, which has a say in whether the deal will go through. Paul is also chairman of the House Domestic Monetary and Technology Subcommittee.

"If we believe in globalism and we believe in free markets, I think we shouldn't be afraid of other countries investing here," Paul explained.

The Boerse-NYSE deal would create a combined group with headquarters in New York and Frankfurt: The Deutsche Boerse shareholders would hold about 60 percent of the combined company and the NYSE [NYX 38.10 4.69 (+14.04%) ] shareholders would hold the rest.

Paul said the deal is an example for the U.S. to follow.

“We should be investing elsewhere, too,” Paul added. "I would say we should have done this a long time ago with Cuba and we’d have been a lot better off. And for years, we stayed out of China. We get along much better with China now. They’re our banker and they loan us all that money for our debt so they allow us to live beyond our means."


http://www.cnbc.com/id/41494672

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[vanlose kid]

NYSE Euronext in merger talks with Deutsche Börse
Euronext news follows announcement that London Stock Exchange will merge with Canada's TMX

Julia Kollewe and Dominic Rushe
guardian.co.uk, Wednesday 9 February 2011 18.34 GMT

NYSE Euronext is in merger talks with Deutsche Börse to create a powerhouse global share-trading platform worth $20bn (£12.4bn).

Shares in both exchanges were suspended this afternoon before the two companies confirmed they were in talks.

In a joint statement, the companies said the combined group would have dual headquarters in New York and Frankfurt. Deutsche Börse shareholders would hold about 59%-60% of the combined company, and NYSE Euronext shareholders would hold about 40%-41%.

The chief executive would be Duncan Niederauer, now NYSE Euronext's chief executive, and would be based in New York. Reto Francioni, Deutsche Börse's chief executive, would become chairman and be based in Frankfurt.

The merger of NYSE Euronext and Deutsche Börse would create a huge global company, covering exchanges across the US and Europe. As well as the New York Stock Exchange, NYSE Euronext owns stock exchanges in Paris, Amsterdam, Brussels and Lisbon as well as the NYSE Liffe derivatives market in London.

NYSE beat a competing bid from Deutsche Börse to buy Euronext in 2006. The move followed rival Nasdaq's ultimately unsuccessful bid for the London Stock Exchange.

Deutsche Börse owns the main German stock market and half of Eurex, another large derivatives market. It tried unsuccessfully to take over the London Stock Exchange on several occasions. Its market value is $10.86bn, compared with $9.18bn for NYSE Euronext.

The news came after the London Stock Exchange confirmed that it was to join forces with the operator of the Toronto and Montreal stock exchanges to create another global bourse.

The all-share deal between the LSE and Canada's TMX group, which formed a strategic partnership in 2009, is being billed as a merger of equals, but LSE shareholders will own 55% of the combined group.

Shares in the LSE jumped more than 10% in early trading, valuing the combined company at about £5bn.

It will be headquartered in London and Toronto and run by the LSE's chief executive, Xavier Rolet, from London. The new chairman is TMX's Wayne Fox, while the LSE's chairman, Chris Gibson-Smith, and his deputy, Paolo Scaroni, will serve as deputy chairmen of the combined group. Thomas Kloet, chief executive of TMX, becomes president, based in Toronto.

Rolet said: "This is an incredibly exciting merger with considerable growth opportunities. We are creating the world's largest listings venue for the commodities, energy and natural resources sectors, as well as the premium market for small, mid-size and growth companies."

The new transatlantic group will be the largest bourse for trading in mining, energy and clean technology shares. Most of the world's mining firms are listed on the 150-year-old Toronto Stock Exchange, although the largest miners are listed on the LSE.

The merged group will also be the world's largest exchange by the number of companies traded. However, by market value it will rank seventh, behind rivals such as NYSE Euronext, Deutsche Börse and Chicago Mercantile Exchange Group.

The deal comes after years of speculation over the future of the LSE, which has fought off advances from various predators, including Deutsche Börse, Sweden's OM Exchange, Euronext, Nasdaq of the US and Australia's Macquarie Bank.

http://www.guardian.co.uk/business/2011 ... k-exchange

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[JackRiddler]

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Now that he's an important fellow on the inside with a senator son: Did Ron Paul have his Bill Hicks moment?

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Here's a piece from NYT that, basically, although criticizing income inequality also justifies it with the most ludicrous arguments. There are a lot of interesting facts in it, however. But the pretense that "superstar" CEO salaries have grown by the same mechanisms that have seen sports and performer salaries skyrocket is, well, just what those parasite failures who are actually destroying wealth at the top would like you to believe. Athletes rise on the basis of winning field performance; they partake in perhaps the closest thing to a meritocracy in modern civilization, which is one of the uncelebrated appeals of sports.

December 25, 2010
How Superstars’ Pay Stifles Everyone Else

This article was adapted from “The Price of Everything: Solving the Mystery of Why We Pay What We Do,” by Eduardo Porter, an editorial writer for The New York Times. The book, to be published on Jan. 4 by Portfolio, examines how pricing affects all of our choices.

IN 1990, the Kansas City Royals had the heftiest payroll in Major League Baseball: almost $24 million. A typical player for the New York Yankees, which had some of the most expensive players in the game at the time, earned less than $450,000.

Last season, the Yankees spent $206 million on players, more than five times the payroll of the Royals 20 years ago, even after accounting for inflation. The Yankees’ median salary was $5.5 million, seven times the 1990 figure, inflation-adjusted.

What is most striking is how the Yankees have outstripped the rest of the league. Two decades ago. the Royals’ payroll was about three times as big as that of the Chicago White Sox, the cheapest major-league team at the time. Last season, the Yankees spent about six times as much as the Pittsburgh Pirates, who had the most inexpensive roster.

Baseball aficionados might conclude that all of this points to some pernicious new trend in the market for top players. But this is not specific to baseball, or even to sport. Consider the market for pop music. In 1982, the top 1 percent of pop stars, in terms of pay, raked in 26 percent of concert ticket revenue. In 2003, that top percentage of stars — names like Justin Timberlake, Christina Aguilera or 50 Cent — was taking 56 percent of the concert pie.

The phenomenon is not even specific to the United States. Pelé, from Brazil, the greatest soccer player of all time, made his World Cup debut in Sweden in 1958, when he was only 17. He became an instant star, coveted by every team on the planet. By 1960, his team, Santos, reportedly paid him $150,000 a year — about $1.1 million in today’s money. But these days, that would amount to middling pay. The top-paid player of the 2009-10 season, the Portuguese forward Cristiano Ronaldo, made $17 million playing for the Spanish team Real Madrid.

Of course, the inflated rewards of performers at the very top have to do with specific changes in the underlying economics of entertainment. People have more disposable income to spend on entertainment. Corporate sponsorships, virtually non-existent in the age of Pelé, account today for a large share of performers’ income. In 2009, the highest-earning soccer player was the English midfielder David Beckham, who made $33 million from endorsements on top of a $7 million salary from the Los Angeles Galaxy and AC Milan.

But broader forces are also at play. Nearly 30 years ago, Sherwin Rosen, an economist from the University of Chicago, proposed an elegant theory to explain the general pattern. In an article entitled “The Economics of Superstars,” he argued that technological changes would allow the best performers in a given field to serve a bigger market and thus reap a greater share of its revenue. But this would also reduce the spoils available to the less gifted in the business.

So far, so semi-credible. Corporate consolidation encourages a drive to the extent possible to reduce the real number of products, to sell the same thing in as many markets as possible, which is why the same sports teams and the same singers are marketed globally. It's not really about the "gifts," certainly not in the case of the singers, who ideally in this business model are made more interchangeable and selected for LCD appeal; although the sports stars cannot be manufactured as easily, they have to actually be able to jump, run, shoot better.

The reasoning fits smoothly into the income dynamics of the music industry, which has been shaken by many technological disruptions since the 1980s. First, MTV put music on television. Then Napster took it to the Internet. Apple allowed fans to buy single songs and take them with them. Each of these breakthroughs allowed the very top acts to reach a larger fan base, and thus command a larger audience and a bigger share of concert revenue.

Superstar effects apply, too, to European soccer, which is beamed around the world on cable and satellite TV. In 2009, the top 20 soccer teams reaped revenue of 3.9 billion euros, more than 25 percent of the combined revenue of all the teams in European leagues.

Pelé was not held back by the quality of his game, but by his relatively small revenue base. He might be the greatest of all time, but few people could pay to experience his greatness. In 1958, there were about 350,000 television sets in Brazil. The first television satellite, Telstar I, wasn’t launched until July 1962, too late for his World Cup debut.

By contrast, the 2010 FIFA World Cup in South Africa, in which Ronaldo played for Portugal, was broadcast in more than 200 countries, to an aggregate audience of over 25 billion. Some 700 million people watched the final alone. Ronaldo is not better then Pelé. He makes more money because his talent is broadcast to more people.

And here's where this is suddenly applied to CEOs, who (in non-banking corporations) rise on the basis of being the best and most ruthless in selling the corporate self-image back to the other executives, walking the tightrope of maximizing conformity while appearing to be "creative" while pushing their competitors off the tightrope; and who (in banking) rise on the basis of how many grandmothers they can successfully sell for parts at the highest price.

IF one loosens slightly the role played by technological progress, Dr. Rosen’s framework also does a pretty good job explaining the evolution of executive pay. In 1977, an elite chief executive working at one of America’s top 100 companies earned about 50 times the wage of its average worker. Three decades later, the nation’s best-paid C.E.O.’s made about 1,100 times the pay of a worker on the production line.

This has separated the megarich from the merely very rich. A study of pay in the 1970s found that executives in the top 10 percent made about twice as much as those in the middle of the pack. By the early 2000s, the top suits made more than four times the pay of the executives in the middle.

Top C.E.O.’s are not pop stars. But the pay for the most sought-after executives has risen for similar reasons. As corporations have increased in size, management decisions at the top have become that much more important, measured in terms of profits or losses. Top American companies have much higher sales and profits than they did 20 years ago. Banks and funds have more assets.

With so much more at stake, it has become that much more important for companies to put at the helm the “best” executive or banker or fund manager they can find.

At least he puts it in quotes. Which shows some awareness that it's not about the "best," that he's got it in reverse. That they are defined as the "best" (by themselves and their class and their sycophants) after they make the top. But of course he thus begs the question of why they're really there, and of why their incomes have exploded.

This has set off furious competition for top managerial talent, pushing the prices of top-rated managers way above the pay of those in the tier just below them. Two economists at New York University, Xavier Gabaix and Augustin Landier, published a study in 2006 estimating that the sixfold rise in the pay of chief executives in the United States over the last quarter century or so was attributable entirely to the sixfold rise in the market size of large American companies.

And therein lies a big problem for American capitalism.

CAPITALISM relies on inequality. Like differences in other prices, pay disparities steer resources — in this case, people — to where they would be most productively employed.

This explains nothing. It implies pay disparities exist because they steer people to wherever they can find the best pay for themselves? And for whom is it most productive?

Despite the great danger and cost of crossing the border illegally into the United States, hundreds of thousands of the hardest-working Mexicans are drawn by the relative prosperity they can achieve north of the border — where the average income of a Mexican-American household is more than $33,000, almost five times that of a family in Mexico.

In poor economies, fast economic growth increases inequality as some workers profit from new opportunities and others do not. The share of national income accruing to the top 1 percent of the Chinese population more than doubled from 1986 to 2003. Inequality spurs economic growth by providing incentives for people to accumulate human capital and become more productive.

The article will contradict that a bit later...

It pulls the best and brightest into the most lucrative lines of work, where the most profitable companies hire them.

The tautology continues. How do we know they're the best and brightest? They're making the best money, aren't they?

Yet the increasingly outsize rewards accruing to the nation’s elite clutch of superstars threaten to gum up this incentive mechanism. If only a very lucky few can aspire to a big reward, most workers are likely to conclude that it is not worth the effort to try. The odds aren’t on their side.

Inequality has been found to turn people off. A recent experiment conducted with workers at the University of California found that those who earned less than the typical wage for their pay unit and occupation became measurably less satisfied with their jobs, and more likely to look for another one if they found out the pay of their peers. Other experiments have found that winner-take-all games tend to elicit much less player effort — and more cheating — than those in which rewards are distributed more smoothly according to performance.

Ultimately, the question is this: How much inequality is necessary? It is true that the nation grew quite fast as inequality soared over the last three decades. Since 1980, the country’s gross domestic product per person has increased about 69 percent, even as the share of income accruing to the richest 1 percent of the population jumped to 36 percent from 22 percent. But the economy grew even faster — 83 percent per capita — from 1951 to 1980, when inequality declined when measured as the share of national income going to the very top of the population.

One study concluded that each percentage-point increase in the share of national income channeled to the top 10 percent of Americans since 1960 led to an increase of 0.12 percentage points in the annual rate of economic growth — hardly an enormous boost. The cost for this tonic seems to be a drastic decline in Americans’ economic mobility. Since 1980, the weekly wage of the average worker on the factory floor has increased little more than 3 percent, after inflation.

The United States is the rich country with the most skewed income distribution. According to the Organization for Economic Cooperation and Development, the average earnings of the richest 10 percent of Americans are 16 times those for the 10 percent at the bottom of the pile. That compares with a multiple of 8 in Britain and 5 in Sweden.

Next paragraph can't be quoted enough for putting the lie to one of the most cherished of myths among Americanist cheerleaders.

Not coincidentally, Americans are less economically mobile than people in other developed countries. There is a 42 percent chance that the son of an American man in the bottom fifth of the income distribution will be stuck in the same economic slot. The equivalent odds for a British man are 30 percent, and 25 percent for a Swede.

NONE of this even begins to account for the damage caused by the superstar dynamics that shape the pay of American bankers.

Remember the ’80s? Gordon Gekko first sashayed across the silver screen. Ivan Boesky was jailed for insider trading. Michael Milken peddled junk bonds. In 1987, financial firms amassed a little less than a fifth of the profits of all American corporations. Wall Street bonuses totaled $2.6 billion — about $15,600 for each man and woman working there.

Yet by current standards, this era of legendary greed appears like a moment of uncommon restraint. In 2007, as the financial bubble built upon the American housing market reached its peak, financial companies accounted for a full third of the profits of the nation’s private sector. Wall Street bonuses hit a record $32.9 billion, or $177,000 a worker.

Just as technology gave pop stars a bigger fan base that could buy their CDs, download their singles and snap up their concert tickets, the combination of information technology and deregulation

Yeah, well, the technology is in there to make it sound natural and inevitable somehow, but tech is what we make of it. Just say deregulation and you've said most of it already. Let's recall they managed the same thing in 1928 technology:

-- gave bankers an unprecedented opportunity to reap huge rewards. Investors piled into the top-rated funds that generated the highest returns. Rewards flowed in abundance to the most “productive” financiers, those that took the bigger risks and generated the biggest profits.

Finance wasn’t always so richly paid. Financiers had a great time in the early decades of the 20th century: from 1909 to the mid-1930s, they typically made about 50 percent to 60 percent more than workers in other industries. But the stock market collapse of 1929 and the Great Depression changed all that. In 1934, corporate profits in the financial sector shrank to $236 million, one-eighth what they were five years earlier. Wages followed. From 1950 through about 1980, bankers and insurers made only 10 percent more than workers outside of finance, on average.

This ebb and flow of compensation mimics the waxing and waning of restrictions governing finance. A century ago, there were virtually no regulations to restrain banks’ creativity and speculative urges. They could invest where they wanted, deploy depositors’ money as they saw fit. But after the Great Depression, President Franklin D. Roosevelt set up a plethora of restrictions to avoid a repeat of the financial bubble that burst in 1929.

Interstate banking had been limited since 1927. In 1933, the Glass-Steagall Act forbade commercial banks and investment banks from getting into each other’s business — separating deposit taking and lending from playing the markets. Interest-rate ceilings were also imposed that year. The move to regulate bankers continued in 1959 under President Dwight D. Eisenhower, who forbade mixing banks with insurance companies.

Barred from applying the full extent of their wits toward maximizing their incomes, many of the nation’s best and brightest who had flocked to make money in banking left for other industries.

Then, in the 1980s, the Reagan administration unleashed a surge of deregulation. By 1999, the Glass-Steagall Act lay repealed. Banks could commingle with insurance companies at will. Ceilings on interest rates vanished. Banks could open branches anywhere. Unsurprisingly, the most highly educated returned to banking and finance. By 2005, the share of workers in the finance industry with a college education exceeded that of other industries by nearly 20 percentage points. By 2006, pay in the financial sector was again 70 percent higher than wages elsewhere in the private sector. A third of the 2009 Princeton graduates who got jobs after graduation went into finance; 6.3 percent took jobs in government.

Then the financial industry blew up, taking out a good chunk of the world economy.

Finance will not be tamed by tweaking the way bankers are paid. But bankers’ pay could be structured to discourage wanton risk taking. Similarly, superstar effects are not the sole cause of the stagnant incomes of regular Joes. But the piling of rewards on our superstars is encouraging a race to the top that, if left unabated, could leave very little to strive for in its wake.

Link
http://www.nytimes.com/2010/12/26/busin ... nted=print
Archived here for strictly non-commercial fair-use purposes of debate, education, all that stuff, with a link, and effectively functioning as a free ad for your stupid paper and Porter's book. You still won't be grateful, will you?

.............................

Profit from Insider Sales by Short Selling: New Evidence
By Insider Monkey

Monkeying insider purchases has been a very profitable investment strategy. Insiders usually own a lot of stocks and/or options in their companies. Increasing concentration of wealth in a single stock usually is not rational. Random events may strike the company and the investor might lose most of the wealth in a heartbeat (i.e. Bear Stearns and Lehman Brothers insiders). So when insiders take the risk of buying more shares, usually it’s because they know something we don’t. That’s why imitating insider purchases is such a rewarding strategy.

On the other hand, selling is the rational thing to do for most insiders even when they think they expect slightly better results from their companies. The benefits of diversification compensate for the loss of future stock returns. Of course selling is the right thing to do when insiders are pessimistic about the future. As a result insider sales is much more common than insider purchases, but the act is much less informative. Insider sales have been intensifying during the past two decades as insiders receive increasing quantities of stock and option awards. There’s now a greater need to diversify compared to 10 or 20 years ago.

Academic research on insider sales has revealed that imitating all insider sales transactions is not profitable. It’s because most insider sales transactions are done for diversification or demand for liquidity. So, the lists of the largest insider sales published in the Wall Street Journal or Barron’s really don’t mean much.

However, it’s possible to get rid of the noise in insider sales transactions and develop a potentially profitable investment strategy. A 2009 research paper by Alan Jagolinzer (Stanford University) analyzed insider transactions conducted under the protection of Rule 10b5-1. The SEC enacted Rule 10b5-1 to protect insiders’ preplanned, non-information based trades from litigation. When Angelo Mozillo was selling his Countrywide shares in the millions, he was doing so under a 10b5-1 plan. Jagolinzer found that insiders participate in these plans preceding negative firm performance. A substantial proportion of plans were initiated before adverse news disclosures. Jagolinzer also found evidence of early terminations of the plans when there was pending positive firm performance.

Jagolinzer also calculated market adjusted buy and hold returns for stocks sold under 10b5-1 plans. These stocks underperform the market by 70 basis points for a 1-month holding period. The underperformance is 220 basis points for a 3-month horizon and 360 basis points for a 6-month horizon. Alternatively, this strategy’s alpha was calculated using Carhart’s four factor model. Insiders who participated in a 10b5-1 plan and sold their holdings had a monthly alpha of 70 basis points (t-stat=-2.28). That’s consistent with buy-and-hold abnormal returns. Insiders who didn’t participate in a 10b5-1 plan and sold their shares in the open market had a negative alpha of 50 basis points (t-stat=1.93) per month, meaning the stocks beat the market after the insiders sold them.

These are very promising results. The only drawback of Jagolinzer’s study is that it covers the 2000-2005 period, a relatively short period from which to draw a definitive conclusion. If the results held up during the post-2005 period, they could be used to create a very profitable short selling strategy.

Tags: Insider Sales, The Art of Short Selling

Link:
http://www.insidermonkey.com/blog/2010/ ... -evidence/

[JackRiddler]

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Somehow I missed this one, which I decided to post here a long time ago because it explains balance sheets (corporate and bank), debt vs. equity, leverage and Basel III.

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The Huffington Post


What Jamie Dimon Won't Tell You


First Posted: 12/ 4/10 11:14 PM Updated: 02/ 3/11 05:12 AM
This post first ran on BaselineScenario.

By Anat Admati, Professor of Finance and Economics at Stanford Graduate School of Business.

To see her explain these issues in person, watch this Bloomberg interview.
http://www.dailymotion.com/video/xfawgb ... incre_news



The debate is raging about banks and their size, financial regulation, and the international capital standards known as "Basel". Jamie Dimon of JP Morgan Chase, in his New York Times magazine profile, expresses admiration for the Basel committee and says,

"… they are asking the questions that, in theory, bankers ask of themselves: how much capital do banks need to withstand the inevitable downturn, and what is an acceptable level of risk?"

There is one problem, however. Basel may have asked the right question, but it did not come up with the right answers, mainly because it allows banks to remain dangerously leveraged, setting equity requirements way too low. This fact is not understood because the debate on capital regulation has been mired with a cloud of confusion, and filled with un-substantiated assertions by bankers and others. As a result, the issues appear much more mysterious and complicated than they actually are.

After a massive and incredibly costly financial crisis, we seem to have a financial system that is a more consolidated, more powerful, more profitable and, yes, as fragile and dangerous as we had before the crisis. How did this happen and what can we do?

Here are some questions on which the confusion is staggering.

(i) Is "too big" the same as "too big to fail?"
(ii) Do capital requirements force banks to "set capital aside for a rainy day" and not use it to help the economy grow?
(iii) Are banks different than non-banks in that high leverage is essential to banks' ability to function?
(iv) Would terrible things happen if capital requirements were to increase dramatically?

The first order of business is to clear the fog and focus on the right things. I will try to explain. With the basics in place, answers will begin to emerge, or at least the right questions to ask.

By the way, I answer an emphatic NO to each of the above questions.


Let's start with balance sheets

Take a bank; indeed take any firm. The balance sheet is a snapshot of assets and liabilities. It has two sides, often shown piled on top of one another in financial statements or online data.

[Assets]
On the left hand side, or the top, of the balance sheet are the firm's assets, what the firm owns. The numbers come either in the oxymoron called "book value" that accountants produce based on historical costs, or in the more meaningful "market value," which for illiquid assets might not be readily available, and which can change frequently. More typically, some assets appear at cost and some are "marked to market."

[Liabilities & Equity]
On the right hand side, or the bottom, of a balance sheet are the liabilities and "shareholder equity," a summary of the claims that are held by various parties "against" the assets. There are two basic types of claims here: one called broadly "debt" (or "liabilities") and the other is "equity."

[Types of Debt Claims]
There is a huge variety of debt claims. One that we all provide to banks is called "demand deposits." Depositors can demand that this debt is paid back at any time. Other debt claims are distinguished by the length of the commitment, the interest rate, the collateral and the "seniority" (the place in the creditors' queue in a bankruptcy) and other provisions. Depositors are the most senior creditors of a bank; junior, unsecured debt-holders, or holders of certain "hybrid" securities, are the last in this priority line. If a bankruptcy occurs, however, it can take years to sort all these different debt claims out.

One feature of corporate debt is that the tax code allows interest paid on debt to be called a business expense and it is deductible before corporate taxes are calculated. This is similar to the deductibility of mortgage interest payments for homeowners.

But the main feature of debt that distinguishes all debt claims from equity, is that debt is a hard claim, an "I Owe You." Creditors have rights to take legal action if they are not paid what they are owed. They can cause a financial failure or bankruptcy. This process can be a terrible thing or not so terrible. Airlines "fail" routinely and they renegotiate some contracts, re-organize, and emerge out of bankruptcy. No stigma is attached, and operations often continue, although of course it is bad news. And debt contracts work well when the bank finances individuals and businesses. Things are different, and much more problematic, when banks use a lot of debt to fund themselves. More on this later.

[Equity = what banks call "capital"]
The final part of the balance sheet is the category of "equity." Bankers like to call it "capital," but let's stick to the standard terminology of equity. (Using a different lingo than for other types of firms is part of the mystique of banking and helps in creating confusion.)

[Preferred & Common Equity]
There are a few distinctions within equity too, mostly between "preferred" and "common" equity. Preferred equity, like debt, specifies how much the holder of the preferred will be paid. The lowest-class equity, called "common equity" cannot be paid at all until the preferred equity is paid what it was "promised." The key difference with debt, however, is that the firm does not "fail" if it does not pay its equity holders, even if they are "preferred."

Why does anyone buy this bottom-feeding equity? Because equity gets the upside, the profits of the firm, and if the firm is successful –and banks make a lot of money most of the time — this can be a very good deal. For banks, in fact, the return on equity is very high, often in the order of 25%. This is not something "abnormal." It is likely the "appropriate" return, because this "leveraged" equity is also quite risky. In financial markets, the higher the risk, the higher the average or required return.


Leverage and funding costs: the basics

Financial leverage is about how much debt relative to equity a firm has. The more debt relative to equity, the higher is the leverage. Does it matter to overall funding costs how much debt vs equity a firm uses? There was a great deal of confusion about this way back in the first half of the 20th century. In 1958, two economists, Franco Modigliani and Merton Miller (who separately won Nobel prizes, partly for this work) considered this issue and showed that, while leverage does typically affect overall funding costs, this is not due to the reasons people were giving at the time, which were based mostly on the fact that equity has a higher required return than debt.

The so-called MM result from 1958 builds on a basic "conservation of value" principle. As leverage changes, so does the riskiness of equity (and sometimes that of debt as well), and thus its required return. If there were no other factors, such as third parties (think governments) taking or injecting cash in taxes or subsidies, and if the funding method did not affect the investment decisions of the firm that determine what is on the assets' side of the balance sheet, then it would be irrelevant how much debt vs. equity is on the balance sheet. Of course, none of these "ifs" are true in reality, particularly for banks, so capital structure does matter, sometimes a lot.

MM is a basic "physical law," taught in every basic corporate finance course, and the starting point of any intelligent discussion of financing decisions. Yet, quite astonishingly, bankers and others, with a straight face, routinely and to this date, make the outrageous claim that "Modigliani and Miller does not apply to banks." As if banking is so different from the rest of the world that it is exempt from natural laws. This is akin to saying that one can ignore the force of gravity because of air friction.

If there are frictions, we must consider their impact. Do air frictions work against gravity or in the same direction? Do frictions associated with funding favor debt or equity, in the sense that — in their presence — funding costs or the total value that can be created on both sides of the balance sheet favors a particular mix of funding means? And, importantly in the context of banks, because the funding decisions of any bank may have broader implications, if a bank chooses a certain way to fund itself, does it follow that society is best off under this structure?


Key observations on the effects of leverage

It turns out that the biggest friction in bank funding is not one that is "inherent" in the banking system or in funding more generally, something unavoidable and found "in nature," like the wind. The main friction is the result of government policies. That would not be so bad if these policies worked to our collective benefits. Unfortunately, these policies go exactly in the wrong direction, favoring leverage that inflicts systemic fragility and extraordinary costs during crisis, precisely because they give bankers strong reasons to choose high leverage.

The fact is that, because of government policies, the funding costs of banks are lower the more debt they have relative to equity, i.e., the higher is their leverage.

Even worse, these same policies, and the resulting excessive leverage, distort the investment decisions of banks. They give incentives for excessive risk taking, which means that banks may overinvest in risky loans (something we witnessed quite clearly in the housing market leading up to the crisis). And it can interfere sometimes with banks' ability to provide credit and fund valuable investments, because, with a lot of prior debt commitments hanging over them, it may be harder for highly leveraged firms to raise new funds. This so-called "debt overhang" problem contributed to the credit crunch that we experienced in the crisis.

Clearly, the consequences to society of highly leveraged banks are exceedingly negative. Yet, we have a system where we subsidize leverage!

If this sounds crazy to you, this is because it is crazy. The analog would be a government policy that subsidized pollutants, such that the more they pollute, the larger the subsidy. If pollution is bad for health and for the environment, and you required pollutants to limit emissions, they would obviously complain that their cost of production would increase, and this might be true because they lose subsidies. Does this mean we must subsidize pollution? Clearly not, especially if there is an alternative!

Continuing with the analogy, what if there was another process by which to produce the same product, which would actually not increase the cost of production but which is not chosen because of the subsidies given to the polluting technologies? This analogy is key to understanding the battle over bank funding. The way in which subsidies are given to banks makes no sense. If we believe that banks provide important services, and if we want to subsidize them, we must find other ways to do so which do not lead to this perverse situation. We should not effectively penalize equity as a form of financing.


Leverage in banking and elsewhere

The tax code gives an advantage to debt financing not just for banks, of course. (Whether this makes sense is highly debatable. Many economists, including Michael Boskin, advocate abolishing the corporate tax code in part because of this effect.) But despite the tax incentives, many highly productive firms hardly use any debt at all, and no one chooses to fund themselves with anywhere near as much debt as banks. (The following, for example, are funded virtually only by equity: Apple, Google, Gap, Yahoo, eBay, Bed, Bath and Beyond, Broadcom, and Citrix.) This is because there are other forces that work against leverage, such as constraints lenders put on firms, and the distortions in investment decisions that are due to conflict of interest between equity and debt. An "all equity" firm is the gold standard for making good investment decisions, as it takes into account properly the upside and the downside of its decisions.

Everything is different for banks. Banks love high leverage. Whenever they make money, which is most of the time, they pay much of it out (to managers and shareholders), and they keep rolling over their huge debt, continuing to borrow more as they pay off what they owe. Equity is always a relatively small fraction of the total balance sheet. High leverage creates fragility because even a small change in the asset value can wipe out the equity and cause insolvency and financial "failure."

Bankers tell us that they must be allowed to maintain high leverage because this is part of the business of banking. They assert that economies will suffer if they are made to fund more of their investments with equity, there will be credit crunches, terrible things will happen. We clearly must examine these statements carefully before agreeing.


Why banks choose high leverage, and why this has awful consequences

The "safety net" that was created to make sure banks' operations are not disrupted by economic shocks, i.e., the fact that the FDIC, the Treasury, or the Fed, often stand ready and are expected to back up the banks' liabilities, plays havoc on banks' incentives to manage their risk and their leverage prudently and create a gap between what the banks find optimal and what is good for society. This is a very unhealthy situation.

The reason banks strongly prefer debt over equity is because their creditors or debt holders feel reasonably safe about being paid and thus do not require much in average return from the bank. Such creditors don't have to put restrictions and conditions on banks' activities. As long as they are confident they will be paid, creditors don't care what the bank does with its money. When they become nervous, it's often too late and the system freezes.

Why have we established this safety net for banks? Experience and research has shown that bank runs are very inefficient and disruptive. To prevent inefficient runs, deposit insurance was introduced. The safety net was expanded because the distress or failure of a bank has certain "contagion" effects and can thus be very disruptive and costly to the financial system and to the economy.

Even the suspicion of possible insolvency for a bank can lead creditors to withhold further funding. Banks then may need to engage in massive "fire sale" of their assets to pay their debts, and even that might not be sufficient if they are truly insolvent. This can lead the entire system of credit and payment to freeze. Does this sound familiar?

Allowing the legal process of bank "failure" to work itself out is extraordinarily costly and disruptive, particularly for global banks subject to different legal systems. There are no great options here. The Lehman bankruptcy process, which is still going on for more than two years, has consumed many billions of dollars in direct and indirect costs. And we are still dealing with its fallouts.

So when Jamie Dimon says that he favors resolution authorities and that JP Morgan "should file for bankruptcy" if the situation arises, we must ask ourselves the following: first, do we believe that the government will actually let JP Morgan go into bankruptcy, and if they did, would this be the right thing? Second, is there an alternative? Can we prevent more of these costly and disruptive failures and the need for bankruptcy and resolution procedures? And if so, how?


Is high leverage necessary for banks?

Here is the good news, and the simple and powerful answer. NO! Quite simply, high leverage is not necessary for banks! We can significantly lower the fragility and the likelihood of needing resolution and bankruptcy in banking by insisting that they use a lot more equity and less debt to fund themselves. And, for society, this will only have positive side effect, despite what the bankers say. Focusing on more equity funding is the simplest and most effective approach to the "too big to fail" problem, because it directly works to reduce the likelihood of "failure." It does not rely on costly resolution or "bail-in" mechanisms that we are not sure would work or on bankruptcy courts. And it forces banks to "own up" to their investment decisions and alleviates many distortions associated with high leverage.

The business of banking does mean that banks cannot be funded completely with equity as Apple or Gap, because demand deposits and even money market funds and certificates of deposit are part of their business of financial intermediation. Thus, a certain amount of debt is built into banks' balance sheet. But this does not imply that banks' leverage must be as high as it is or as they would like it to be or even as high as Basel III would allow.

There is simply nothing that prevents banks from doing everything valuable for society at dramatically lower leverage, say 30% of total balance sheet.

That's dramatic, to say the least. They'd have a lot less short-term play cash created instantaneously to speculate with. Obviously they don't want to lose most of their volume (and their profits). I don't see how this works without regulations on lending to assure they're lending to consumers and the productive economy.

(In an interview on CNBC in May, Gene Fama suggested 40% or 50% in equity for banks would be a good thing.) Some of the banks' debt is not part of their business model and just serves to provide funding. And issuing more equity to support the liability on their own would not increase their funding cost in a way that represents any social cost. (If they lose some subsidies, we save on providing these subsidies!) .

Not only would we have a safer system if equity levels were dramatically higher, it is hard to think of any negatives, from society's perspective, of doing so. Back to the pollution analogy, the alternative, clean technology of funding turns out to be cheaper than the polluting one once subsidies are removed!

The fact that so much fog was created to prevent the above from being recognized by decision makers in Basel and in many governments, including US, is maddening.

There are other claims made in this debate, but the bottom line holds up upon closer examination: there does not seem to be any compelling reason that banks must be as highly leveraged as Basel III would allow. Those who say otherwise, and bank executives such as Vikram Pandit of Citi have complained that Basel III is too harsh on banks cannot justify their claims coherently. The only interpretation is that they are motivated by self interest.

In a paper I wrote with Stanford colleagues Peter DeMarzo and Paul Pfledierer and with Martin Hellwig from Bonn, we discuss in some detail every argument we are aware of regarding the mantra that "equity (or, as bankers call it, "capital") is expensive." We also discuss contingent capital and bailout funds, arguing that the equity-based solution dominates them. The paper is available here.
http://www.gsb.stanford.edu/cgrp/cgwire ... ensive.pdf

Many experts agree with the conclusion of our paper, as is clear in this letter signed by some very prominent academics in finance and banking.
http://www.gsb.stanford.edu/news/resear ... iopen.html

For another letter I sent to Financial Times this week as part of this debate, see this link.
http://www.gsb.stanford.edu/news/resear ... Dec10.html


Conclusion

The case for much more equity funding for large banks (and possibly other financial institutions) is overwhelming. The main challenges are to define the "regulatory umbrella" appropriately, to understand the "shadow banking" system, and to find effective ways to monitor the true risk and leverage of financial institutions on and off the balance sheets. These challenges can be met if energy is focused appropriately.

Sensible capital regulation does not necessarily involve a hard and fixed "number" for the equity ratio, but rather a flexible system of buffers and adjustments where the balance sheet of the banks is managed with the objective of allowing them to operate without overly endangering themselves and the system. Supervising the payouts and the funding methods of banks so as to keep the system healthy and functional is eminently possible if we take up the challenge.

First, however, we should remove the fog of confusion. Then we must find the political will to insist on prudent regulation before another crisis hits.


Comments on Hoenig, Dimon and banks being "too big"

Many argue that banks that are "too big to fail" are simply "too big." In an excellent op ed in the New York Times this week, Kansas Fed president Thomas Hoenig identifies the key problems of "too big to fail" banks and argues that we should strive to create smaller banks, none too big to fail. Related proposals were made by Andy Haldane from the Bank of England (see this link), and by Simon Johnson and James Kwak, authors of the important book "13 Bankers." These proposals, and the so-called Volcker Rule, focus on the total size of the bank and more generally on the "asset" side of the balance sheet. How does this relate to leverage?

If managed properly, breaking up the banks would likely be a step in the right direction. But we cannot ignore leverage. Many small but interconnected banks would still be fragile and subject to systemic risk and possible crises if each of them was highly leveraged. A small drop in the asset value of a leveraged bank leads to distress and possible insolvency, and this can be contagious in such a system. So fragility in the banking system invariably relates to the degree of leverage.

Jamie Dimon of JP Morgan says large banks are useful and efficient. He wants to be the Walmart of banking. Presumably, he wants to have the size of Walmart but he is not planning to have the type of capital structure that Walmart and firms like it have, with more than twice as much equity as debt on the balance sheet (at least by market value).

Mr. Dimon, how about you start helping the world of banking and the economy by pushing for banks to be much less leveraged, relying more on equity funding than Basel III allows, and for regulators to make sure they are? If you do that, your growth aspirations might seem a bit less scary.

Link
http://www.huffingtonpost.com/2010/12/0 ... view=print

[JackRiddler]

From the "Empire Tax Havens" thread, the first of several interesting posts on the special status of the City of London.

viewtopic.php?f=8&t=30832&start=30

Posting this here as it seems to fit, although I suppose it would also be quite at home in the End of the Wall St Boom thread, some very interesting stuff about the City of London. A must read

http://www.redpepper.org.uk/Confronting-the-city/
...

thanks. great find. posting it in full.

*

Confronting the city
Mat Little profiles Maurice Glasman, dubbed the father of 'Blue Labour' and learns more about Glasman's plans to clean up the City of London

'They think I'm a communist', smiles Maurice Glasman impishly. Gazing through horn-rimmed spectacles, the genial politics lecturer from London Metropolitan University does not make the most fearsome of revolutionaries.

His front door is pink, and his front room a beguiling mess of books, children's toys and old jazz records. There no bust of Marx, but there is a Tottenham Hotspur pendant hanging from the wall.

The 'they' in question are the Corporation of London, the ancient political entity that represents the City of London. Accustomed to anonymity, the Corporation has been unnerved by the persistent desire of Glasman and his associates at campaigning group London Citizens to open up a political dialogue. The aim is some kind of recompense for the banking bail out. But incensed by the group's anti-usury campaign, which demands a cap on interest rates at 20 per cent, and was launched provocatively at a synagogue in the City, officials stormed out of meetings. 'Last week they were so beside themselves with fury they threatened to cut off all relations with us,' Glasman says.

But it's not just Glasman's campaigning activities that have cast him as a modern-day Spartacus in City eyes. It's also his determination to hold the City accountable for the crash. To him, the worst global economic crisis since the '30s is the culmination the City's decades-long striving to free finance from all regulation, a model assiduously exported around the globe. 'The Corporation of London is responsible for the entire economic policy and all its consequences, that we've lived through for the last 30 years,' he says. 'It's time for a reckoning.'

Glasman's City odyssey began in 2000 when he joined the opposition to plans to demolish part of Spitalfields Market, which adjoins the City. He advised campaigners to apply for a planning review just before building was due to start. Usually such delays stop developments in their tracks because companies cannot afford to pay workers to do nothing. But not in this case. 'The work was halted while there was a review, and I was amazed that all the workers there were paid, everything was fine,' he says. 'I couldn't understand where they money came from for millions of pounds of idle workers. I looked into it and realised it was the City of London that was funding the project.'

The Lord Mayor, Glasman discovered, has at his disposal the City Cash, a fund which generates £200m in interest alone. But no one knows the real size of the City's assets because it's never been in debt, and never taken a loan. Even Parliament is not entitled to ask. 'It was at that point I began to realise I was dealing with something strange and outside my experience,' he says. 'Both the political and academic person in me realise this was more interesting that I ever expected.'

For 900 years the City has eluded control by the British State, says Glasman. William the Conqueror overwhelmed the rest of England but 'came friendly' to the City. Charles the First attempted to send the army into the City and precipitated the Civil War. The City chartered the Empire-building East India and Hudson's Bay Companies. It committed treason by supporting George Washington in the American War of Independence and brokered the peace. No government since Charles the Second - barring the symbolic banning of City banquets after the Second World War by Attlee - has made any attempt to interfere with the City's privileges, he says.

Nowadays, its role is assumed to be largely ceremonial. But quaint medieval trappings mask real, undiluted power, says Glasman. The Lord Mayor may wave to the crowds each November as he processes in a state coach to pledge allegiance to the Crown. But he is also a global lobbyist for the UK financial sector, spending a third of the year overseas. This 'non-political' figure is, according to the Corporation of London, treated as a Cabinet level minister abroad, as he expounds the "values of liberalisation" and opens markets for City businesses.

At home, the City possesses the Remembrancer, the oldest lobbyist in the world, dating from the 14th century. He is paid by the Corporation to lobby government and Parliament. He has, in the words of the Corporation,' day to day contact with officials in government departments responsible for developing government policy' as well as a role in the drafting of legislation. He has a seat behind the Speaker in the House of Commons and has the power to enter the chamber and brief MPs during debates.

Glasman believes the fruit of this influence has been the relentless promotion of the financial sector at the expense of the rest of the British economy, and the progressive freeing of finance from regulation. The City funded events, hosted meals and underwrote think tanks in order to persuade the Thatcher government to introduce the 'Big Bang', which ended national regulation of capital flows. It pushed for privatisation in policy papers and lobbying. It helped ensure that the Financial Services Authority's constitution did not 'discourage the launch of new financial products' and 'avoided erecting regulatory barriers.'

'Over a period of 500 years the City has supported deregulation at every turn', states Glasman. At the time of the crash regulations in the City of London were softer than they were on Wall Street. 'The consequences of this are massive,' he says. 'You had fraudulent products - the cause of the crash - debt being repackaged as an asset and then being used as leverage. The assets they held and credit they generated were on a ratio of 50-1. There was no effective regulation of this, no effective oversight.'

This year, to his surprise, the Corporation started answering Glasman's letters for the first time. Then in June, they agreed to meet him and London Citizens. He senses apprehension. 'They have been exposed by the bailout', he says. 'They have refused more than ten years of requests from us and suddenly they agree to meet. I think they are concerned that the political parties will move to a more manufacturing, less financially-based economy.'

It is a grudging relationship. Corporation officials have walked out of meetings only to return ten minutes later. None of London Citizens' demands - a living wage for the City's other workforce of security guards, cleaners and cooks , the transfer of assets to build affordable housing and the 20 per cent interest cap - is close to being accepted. But Glasman's ultimate ambition would probably have the Lord Mayor reaching for his pearl-encrusted ceremonial sword.

The Square Mile is a city within a city. London's other Mayor, Boris Johnson, has no jurisdiction over the capital's thirty-third borough, which even boasts its own police force. And while Johnson has to answer questions in Parliament each year, the Prime Minister and Chancellor - in their annual Guildhall and Mansion House speeches - both come to the City to justify how they are serving the interests of finance.

The City may have a population smaller than Norwich in the 9th century but the Corporation towers above, in influence and wealth, any other institution of municipal government in the capital.

As Glasman puts it, 'There is the City of London but London was originally called the London County Council, then the Greater London Council. Now it called the Greater London Authority. And it has no status at all. While the City is a commune, autonomous of government, the GLA is a more akin to an elected quango, subordinate to the state.'

Glasman wants a single London Mayor, based in the Mansion House and an all London Parliament in the Guildhall. In this, he says, he is merely trying to make good the attempt by Charles the First in 1632 to unify London by asking the City to extend civic rights to thousands of refugees from enclosure in Whitechapel, Clerkenwell and Southwark. The City refused. Now Glasman think it's time to ask again.' I don't want to see the Corporation of London abolished, but expanded,' he says.

One London government would mean the City's assets - its funds and global property portfolio, thought to encompass substantial parts of London, New York, Hong Kong and Sydney - would pass to the population of the capital. The City has never published an inventory of its assets but they generate £600 million a year in interest; Glasman says the chair of the corporation's finance once told him the full amount was 'truly colossal'. Such a transfer of wealth would mean a draining of its influence. 'The City's power would be diminished,' says Glasman, 'and the financial sector would have to work with the same rules as everyone else, through the British Bankers Association, for example.'

It's not hard to see why the City would regard this as the kind of nightmare of expropriation thought to have passed safely into history with the Berlin Wall. But Glasman's reputation as a Marxist in misplaced. He is director of the faith and citizenship programme at London Metropolitan University, and has joined forces with London Citizens, an alliance of faith groups, schools and trade union branches, inspired by the US community organising movement that trained the young Barack Obama. And while he does confess an intellectual allegiance to an émigré economist who settled in England, it is isn't Karl Marx. Glasman's main debt is to Karl Polanyi, whose work The Great Transformation sought to explain the collapse in the nineteenth century liberal economy into depression and war. Markets turn both people and nature into commodities, with consequences lethal to both, argued Polanyi, and they needed protection in a regulated economy.

In fact Glasman espouses a 'very conservative socialism' rooted in family, the work ethic and mutualism. He considers family life and faith institutions as 'huge moral resources' in resisting capitalism. 'You need faith communities, unions, families, local people with long-term relationships with each other, trying to live their lives without being commodified', he says. 'But for the Left the minute you mention family and faith, you are automatically considered to be reactionary'.

Yet beneath his conservatism lurk some very radical proposals. The problem with the bail out, he says, is it did not change the banks' corporate governance and the same irresponsible interests are still dominant. Inspired by the co-determination model of the West German economy after the Second World War and the original ideals of Solidarity in Poland, he believes in a new balance of power in the way companies are run. All institutions, public and private, with more than fifty workers, should be governed by boards made up of equal representatives of owners, workers and the locality in which they are located.

Glasman has grouped these ideas under the rubric of Blue Labour, in contrast to the Red Toryism of 'progressive Conservative' Philip Blond. He will present them to a seminar at Number 10 in February, that will be attended backbench thinkers Jon Cruddas and James Purnell, as well as energy secretary Ed Miliband. 'For the first time leading Labour politicians are listening', Glasman remarks.

Glasman expects a 'shabby compromise' with the powers that be. But he is determined not to let the Corporation of London off the hook. 'Everything depends on how we narrate the crash .... Do we narrate it as just one of those things, say we depend on financial services for our wealth and get on with it, or do we narrate it as the culmination of a catastrophic period of English history, where we've become politically powerless, where work has been degraded, where the pressure is on every individual to sell themselves to make ends meet, to pursue short-term financial ends rather than the common good? And that now has to change.'

•

[2012 Countdown]

Greece slams intl debt inspectors after IMF and EU visit, says they overstepped their roles

Elena Becatoros, The Associated Press, On Saturday February 12, 2011, 9:45 am EST
By Elena Becatoros, The Associated Press

ATHENS, Greece - An indignant Greece slammed EU and International Monetary Fund inspectors overseeing its efforts to reform its debt-crippled economy, accusing them Saturday of overstepping their role and interfering in Greece's internal affairs.

In an unusually harshly worded, pre-dawn statement, government spokesman Giorgos Petalotis called the behaviour of the inspectors at a Friday news conference unacceptable.

"We have needs, but we also have limits. And we do not negotiate the limits of our dignity with anyone," Petalotis said. "We take orders only from the Greek people."

It was the first time the government has publicly struck back at the IMF and the European Union, which rescued Greece from bankruptcy but at a price that many Greeks consider too harsh.

The IMF, the European Central Bank and the European Commission delegation said Greece must privatize €50 billion ($68 billion) in state assets and speed up structural reforms in the next few months to keep the country's troubled finances afloat. The IMF representative also said some of the frequent demonstrations against the Greek government's reforms were being carried out by groups angry at losing their "unfair advantages and privileges."

Greek Prime Minister George Papandreou expressed his dismay at the comments to IMF Managing Director Dominique Strauss-Kahn in a phone call Saturday, according to his office. The statement said Strauss-Kahn had called Papandreou.

"Mr. Strauss-Kahn expressed his understanding for the spirit of the prime minister's remarks and his respect toward the Greek government and the Greek people," the statement said.

The opposition conservative party, however, struck back at the Socialist government, saying it was "too late for false tears," and the government's "post-midnight theatrical performance is a farce."

Greece's economy is under strict supervision as part of a €110 billion ($149 billion) bailout loan package from the IMF and the other European Union countries that use the euro — funds that saved Greece from defaulting on its mountain of debt last May.

full-
http://ca.finance.yahoo.com/news/Greece ... 7.html?x=0