Ben Bernanke under pressure to spell out QE timeline ... Ben Bernanke under pressure to spell out QE timeline. US stocks jumped and the dollar climbed against the yen on Monday, amid expectations that Federal Reserve chairman Ben Bernanke will spell out how it will decide when to put the brakes on America's quantitative easing programme, at its two-day meeting this week. Ben Bernanke cautioned strongly that halting America's fiscal stimulus measures too suddenly could jeopardise the country's recovery. – UK Telegraph
Dominant Social Theme: One man stands between civilization and chaos.
Free-Market Analysis: Another quietly adulatory article.
One would not think, given the continued coverage of Federal Reserve chairman Ben Bernanke and other powerful central bankers, that the prestige of the entire institution has come under considerable attack in the past decade and the past five years in particular.
Gone are the days when Alan Greenspan, Bernanke's predecessor, was greeted as a kind of deity by US politicians when he made a rare appearance to explain the Fed's current actions in loquacious, indecipherable detail.
Watching Alan Greenspan was like watching a Hollywood version of what a Federal Reserve chairman was supposed to be like. Narrow, gaunt, as angular as a number, Greenspan spoke an elegant mumbo jumbo that everyone appreciated with the exception of perhaps his old nemesis, the libertarian-conservative Congressman Ron Paul.
In those days, Ron Paul was nothing but a curiosity to most observers on the Hill. Nicknamed "Dr. No" because he tended to vote "no" on any legislation he believed ran counter to the Constitution, Paul was regarded with the same kind of benevolent amusement as Greenspan himself, with a difference, though ...
Paul was amusing because he was Congress's resident crank. Greenspan was amusing because he was perhaps the world's most powerful man and relished the role. People laughed at Ron Paul, and then they laughed WITH Alan Greenspan.
How things have changed. Ron Paul is one of the most popular politicians in the US and Alan Greenspan has virtually retired from public life, unable to command the kind of adulatory audiences he once did. His is widely blamed, along with Ben Bernanke, for engineering the current, ongoing Great Recession by allowing monetary stimulation to get out of control.
The mainstream media still doesn't "get it," however. In this article excerpted above, we find an unchanged and quietly adulatory perspective. Mainstream journalism treads the weary narrative furrow much as it did in the 20th century even though public opinion has moved on.
People don't trust either central banking or central bankers these days, blaming them correctly for the latest global economic downturn. You won't know it from this article.
Here's more:
Mr Bernanke is also expected to reassure investors that the $85bn a month bond buying scheme can be stepped up again, even after the brakes are applied, in an attempt to ease market concerns that America is about to embark on a total withdrawal from QE.
Markets have experiences an unusually volatile few weeks, following the Fed chairman's warning last month that it could start winding down the programme "in the next few meetings" if economic data continued to show that America was well on the road to recovery.
He also cautioned strongly that halting America's fiscal stimulus measures too suddenly could jeopardise the country's recovery, but investors focused on the possibility of the US reining in its bond buying sooner than previously expected. Since then, most positive data which shows America is returning to health has sparked a drop in markets, whilst bad news about the economy has bolstered investor confidence.
... Some economists have predicted that the Fed will map out a detailed timeline for tapering after its meeting this week, but others think that it does not have enough information for this to have any real meaning at this stage.
This article provides a 20th century analysis (as much of the mainstream still does) of central banking establishment still firmly in control of its destiny and the world's economic future.
But people are not laughing with the Fed anymore, as they did in the latter part of the 20th century and especially under parts of Greenspan's regime. There is no subdued affection for the Fed chairman. There is no reservoir of good will for an institution that has virtually bankrupted billions of people around the world.
Today, thanks to what we call the Internet Reformation, people do understand once again the true price-fixing nature of central banking. They have seen the destruction of its policies and they have no faith, nor should they.
Conclusion: And as the Fed and other central banks try to remove the tens of trillions that they have injected into the world's economy over the past five years – and inevitably fail – we can say with some certainty that the worst is yet to come.
Source
DAILY BUSINESS REPORT - Financial Updates, International Markets and Business News
June 20, 2013
June 19, 2013
David Stockman's Non-Recovery Part 2: The Crash Of Breadwinners And The 'Born-Again' Jobs Scam
After exposing
the faux prosperity of the immediate post-2009 "wholly unnatural"
recovery and explaining the precarious foundation of the Bernanke
Bubble, David
Stockman's new book 'The Great Deformation' delves deeper (in Part 2 of
this 4-part series) into the dismal internals of the jobs numbers and only
the utterly politicized calculation of the “unemployment rate” that disguises
the jobless nature of the rebound. To be sure, the Fed’s Wall Street
shills breathlessly reported the improved jobs “print” every month,
picking and choosing starting and ending points and using continuously revised
and seasonally maladjusted data to support that illusion. Yet the
fundamentals with respect to breadwinner jobs could not be
obfuscated.
Via David Stockman's book The Great Deformation,
The Wall Street meltdown of September 2008 accelerated the recessionary forces already in motion, causing a total job loss of 7.3 million between the December 2007 peak and the end of the recession in June 2009. That the Fed’s bubble finance had camouflaged the failing internals of the American economy then became starkly apparent. Nearly three-fourths of this reduction was accounted for by the above mentioned loss of 5.6 million breadwinner jobs; that is, nearly 8 percent of their pre-recession total. That devastating hit left the nation with only 66.2 million prime jobs and set the clock back to the level of early 1998. This is an astonishing fact: before any of the Greenspan-Bernanke maneuvers to coddle Wall Street and pump up the wealth effects elixir—that is, the 1998 LTCM bailout, the 2001–2003 rate-cutting panic, the August 2007 Bernanke Put, and the Fed’s post-Lehman tripling of its balance sheet - there were more breadwinner jobs than there are today. Since the BlackBerry Panic the Fed has relentlessly pumped freshly minted cash into the bank accounts of the twenty-one government bond dealers. Not surprisingly, therefore, there has been a jarringly divergent outcome between Wall Street and Main Street.
By September 2012, the S&P 500 was up by 115 percent from its recession lows and had recovered all of its losses from the peak of the second Greenspan bubble. By contrast, only 200,000 of the 5.6 million lost breadwinner jobs had been recovered by that same point in time. To be sure, the Fed’s Wall Street shills breathlessly reported the improved jobs “print” every month, picking and choosing starting and ending points and using continuously revised and seasonally maladjusted data to support that illusion. Yet the fundamentals with respect to breadwinner jobs could not be obfuscated.
On the eve of the 2012 election, for example, there were 18.3 million jobs in the goods-producing sectors: manufacturing, mining, and construction. These core sectors of the productive economy had taken a beating during the Great Recession, shedding 3.5 million jobs, or 15 percent. Yet after three and a half years of so-called recovery, the jobs count in the goods-producing sectors had not rebounded in the slightest; it had actually declined slightly from the 18.5 million jobs recorded at the end of the recession in June 2009.
Likewise, there were 7.8 million jobs in finance, insurance, and real estate, meaning virtually no gain from the 7.7 million jobs at the end of the recession. As to lawyers, accountants, engineers, architects, and computer designers, there was no pick-up there, either: the 5 million jobs counted by the BLS in September 2012 barely exceeded the 4.8 million recorded in June 2009; and in the information industries—publishing, broadcasting, telecommunications, motion pictures, and music—the data had slightly deteriorated, with the 2.8 million jobs posted in June 2009 slipping to 2.6 million in the month before the 2012 election.
Similarly, the 10 million jobs in transportation and wholesale distribution in September 2012 had changed hardly a tad from June 2009. Finally, the other heavy-duty category of breadwinner jobs—that is, government employment (outside of education) where average compensation exceeds $65,000 annually—had actually gone south. The 11 million of these high-paying jobs on the eve of the 2012 election had shrunk by more than 4 percent since the recession ended in June 2009.
In short, after forty months of “recovery” there was virtually no change in every category of breadwinner jobs that had been slammed by the Great Recession.
THE “BORN AGAIN” JOBS SCAM
These data are extremely important. They belie the sunny paint-by-numbers jobs picture peddled by the Fed to distract the public from the fact that monetary policy is all about fueling the speculative urges of Wall Street, not the economic health of Main Street. This obfuscation is especially true with respect to the aforementioned headline gain of 3 million jobs. Never told is the fact that the majority of these, as indicated above, were part-time jobs in bars, restaurants, retail emporiums, and temporary employment agencies.
That fully 55 percent of the rebound has been in low-paying, part-time jobs not only illuminates the phony nature of the Fed’s so-called recovery, but it also comes with a news flash; namely, every one of these 1.6 million new part-time “jobs” had already been “created” once before. During the second Greenspan bubble the part-time job count had risen from 34.7 million in early 2000 to 37.2 million in December 2007. In still another episode of Charlie Brown and Lucy, however, the football had been moved backward during the Great Recession. By June 2009, in fact, the part-time job count had tumbled all the way back to its turn of the century starting point at 34.7 million.
What happened by election eve of 2012, therefore, was nothing more than a partial retracement. At that point the BLS reported 36.4 million part-time jobs, meaning that after three and a half years of “recovery” just 60 percent of the gain from the 2000–2007 bubble had been recouped. These were self-evidently “born again” jobs, but in a display of astounding cynicism the Bernanke Fed claimed to be meeting its statutory mandate to promote maximum employment.
The larger truth is that when these job rebirths are set aside there isn’t much left. The part-time job sector has gained an average of just 11,000 authentically new jobs per month during the twelve years between early 2000 and September 2012, thereby contributing hardly a drop in the bucket relative to the working-age population growth at 150,000 per month.
In fact, this “born again” syndrome actually applies to the entire non-farm payroll, and the modest rebound it has registered since the recession officially ended in June 2009. As shown by the data, the Greenspan-Bernanke policy was the monetary equivalent of a Billy Graham crusade: the same jobs got “saved” over and over.
Thus, there had been 130.8 million total jobs in January 2000, and this figure had reached 138.0 million by the December 2007 peak. The Great Recession sent the jobs count tumbling all the way back to the starting point, actually dipping slightly lower to 130.6 million by June 2009. Then, after forty months of “recovery,” the BLS reported 133.5 million nonfarm payroll jobs for September 2012. The Bernanke bubble had thus “recreated” only 40 percent of the jobs that had been “created” by the Greenspan bubble the first time around.
That the Bernanke bubble policies have not recouped even half of the total payroll gains that the Fed had already previously counted is still another testament to the sham nature of the “recovery.” When the Fed’s pump-and-dump cycling of the macro-economy is set aside, it becomes starkly evident that the American economy has been nearly bereft of sustained job growth. For the entire twelve-year period since early 2000, it has generated a net gain of only 18,000 jobs per month, a figure that is just one eighth of the labor force growth rate.
The reason for this anemic figure on total payroll growth is that the great expanse of the nation’s economy outside of the HES complex has been a jobs disaster area. Alongside the rounding-error growth in the part-time sector, the 66.4 million breadwinner jobs in September 2012 represented a drastic shrinkage from the approximate 72 million jobs in that category recorded in January 2000. This was the smoking gun: the prime breadwinner jobs market has been shrinking by a net of 35,000 jobs per month for more than twelve years!
Indeed, the tiny gain of 5,000 breadwinner jobs per month since June 2009 means that it would take 90 years to recoup the 5.6 million such jobs lost during the recession; that is, it would take until the twenty-second century to get back to the job count that existed at the end of the twentieth century! The absurdity of it surely puts paid to the notion that a conventional business recovery is underway.
Indeed, it is only the utterly politicized calculation of the “unemployment rate” that disguises the jobless nature of the rebound. Upward of 8 million working-age Americans were no longer classified as being in the labor force due to purely arbitrary counting rules. In fact, the unemployment rate on the eve of the 2012 election would have posted at about 13 percent based on the same labor force participation rate as January 2000, and would have clocked closer to 20 percent if further adjusted for the drastic shift from full-time to part-time employment.
Source
Via David Stockman's book The Great Deformation,
The Wall Street meltdown of September 2008 accelerated the recessionary forces already in motion, causing a total job loss of 7.3 million between the December 2007 peak and the end of the recession in June 2009. That the Fed’s bubble finance had camouflaged the failing internals of the American economy then became starkly apparent. Nearly three-fourths of this reduction was accounted for by the above mentioned loss of 5.6 million breadwinner jobs; that is, nearly 8 percent of their pre-recession total. That devastating hit left the nation with only 66.2 million prime jobs and set the clock back to the level of early 1998. This is an astonishing fact: before any of the Greenspan-Bernanke maneuvers to coddle Wall Street and pump up the wealth effects elixir—that is, the 1998 LTCM bailout, the 2001–2003 rate-cutting panic, the August 2007 Bernanke Put, and the Fed’s post-Lehman tripling of its balance sheet - there were more breadwinner jobs than there are today. Since the BlackBerry Panic the Fed has relentlessly pumped freshly minted cash into the bank accounts of the twenty-one government bond dealers. Not surprisingly, therefore, there has been a jarringly divergent outcome between Wall Street and Main Street.
By September 2012, the S&P 500 was up by 115 percent from its recession lows and had recovered all of its losses from the peak of the second Greenspan bubble. By contrast, only 200,000 of the 5.6 million lost breadwinner jobs had been recovered by that same point in time. To be sure, the Fed’s Wall Street shills breathlessly reported the improved jobs “print” every month, picking and choosing starting and ending points and using continuously revised and seasonally maladjusted data to support that illusion. Yet the fundamentals with respect to breadwinner jobs could not be obfuscated.
On the eve of the 2012 election, for example, there were 18.3 million jobs in the goods-producing sectors: manufacturing, mining, and construction. These core sectors of the productive economy had taken a beating during the Great Recession, shedding 3.5 million jobs, or 15 percent. Yet after three and a half years of so-called recovery, the jobs count in the goods-producing sectors had not rebounded in the slightest; it had actually declined slightly from the 18.5 million jobs recorded at the end of the recession in June 2009.
Likewise, there were 7.8 million jobs in finance, insurance, and real estate, meaning virtually no gain from the 7.7 million jobs at the end of the recession. As to lawyers, accountants, engineers, architects, and computer designers, there was no pick-up there, either: the 5 million jobs counted by the BLS in September 2012 barely exceeded the 4.8 million recorded in June 2009; and in the information industries—publishing, broadcasting, telecommunications, motion pictures, and music—the data had slightly deteriorated, with the 2.8 million jobs posted in June 2009 slipping to 2.6 million in the month before the 2012 election.
Similarly, the 10 million jobs in transportation and wholesale distribution in September 2012 had changed hardly a tad from June 2009. Finally, the other heavy-duty category of breadwinner jobs—that is, government employment (outside of education) where average compensation exceeds $65,000 annually—had actually gone south. The 11 million of these high-paying jobs on the eve of the 2012 election had shrunk by more than 4 percent since the recession ended in June 2009.
In short, after forty months of “recovery” there was virtually no change in every category of breadwinner jobs that had been slammed by the Great Recession.
THE “BORN AGAIN” JOBS SCAM
These data are extremely important. They belie the sunny paint-by-numbers jobs picture peddled by the Fed to distract the public from the fact that monetary policy is all about fueling the speculative urges of Wall Street, not the economic health of Main Street. This obfuscation is especially true with respect to the aforementioned headline gain of 3 million jobs. Never told is the fact that the majority of these, as indicated above, were part-time jobs in bars, restaurants, retail emporiums, and temporary employment agencies.
That fully 55 percent of the rebound has been in low-paying, part-time jobs not only illuminates the phony nature of the Fed’s so-called recovery, but it also comes with a news flash; namely, every one of these 1.6 million new part-time “jobs” had already been “created” once before. During the second Greenspan bubble the part-time job count had risen from 34.7 million in early 2000 to 37.2 million in December 2007. In still another episode of Charlie Brown and Lucy, however, the football had been moved backward during the Great Recession. By June 2009, in fact, the part-time job count had tumbled all the way back to its turn of the century starting point at 34.7 million.
What happened by election eve of 2012, therefore, was nothing more than a partial retracement. At that point the BLS reported 36.4 million part-time jobs, meaning that after three and a half years of “recovery” just 60 percent of the gain from the 2000–2007 bubble had been recouped. These were self-evidently “born again” jobs, but in a display of astounding cynicism the Bernanke Fed claimed to be meeting its statutory mandate to promote maximum employment.
The larger truth is that when these job rebirths are set aside there isn’t much left. The part-time job sector has gained an average of just 11,000 authentically new jobs per month during the twelve years between early 2000 and September 2012, thereby contributing hardly a drop in the bucket relative to the working-age population growth at 150,000 per month.
In fact, this “born again” syndrome actually applies to the entire non-farm payroll, and the modest rebound it has registered since the recession officially ended in June 2009. As shown by the data, the Greenspan-Bernanke policy was the monetary equivalent of a Billy Graham crusade: the same jobs got “saved” over and over.
Thus, there had been 130.8 million total jobs in January 2000, and this figure had reached 138.0 million by the December 2007 peak. The Great Recession sent the jobs count tumbling all the way back to the starting point, actually dipping slightly lower to 130.6 million by June 2009. Then, after forty months of “recovery,” the BLS reported 133.5 million nonfarm payroll jobs for September 2012. The Bernanke bubble had thus “recreated” only 40 percent of the jobs that had been “created” by the Greenspan bubble the first time around.
That the Bernanke bubble policies have not recouped even half of the total payroll gains that the Fed had already previously counted is still another testament to the sham nature of the “recovery.” When the Fed’s pump-and-dump cycling of the macro-economy is set aside, it becomes starkly evident that the American economy has been nearly bereft of sustained job growth. For the entire twelve-year period since early 2000, it has generated a net gain of only 18,000 jobs per month, a figure that is just one eighth of the labor force growth rate.
The reason for this anemic figure on total payroll growth is that the great expanse of the nation’s economy outside of the HES complex has been a jobs disaster area. Alongside the rounding-error growth in the part-time sector, the 66.4 million breadwinner jobs in September 2012 represented a drastic shrinkage from the approximate 72 million jobs in that category recorded in January 2000. This was the smoking gun: the prime breadwinner jobs market has been shrinking by a net of 35,000 jobs per month for more than twelve years!
Indeed, the tiny gain of 5,000 breadwinner jobs per month since June 2009 means that it would take 90 years to recoup the 5.6 million such jobs lost during the recession; that is, it would take until the twenty-second century to get back to the job count that existed at the end of the twentieth century! The absurdity of it surely puts paid to the notion that a conventional business recovery is underway.
Indeed, it is only the utterly politicized calculation of the “unemployment rate” that disguises the jobless nature of the rebound. Upward of 8 million working-age Americans were no longer classified as being in the labor force due to purely arbitrary counting rules. In fact, the unemployment rate on the eve of the 2012 election would have posted at about 13 percent based on the same labor force participation rate as January 2000, and would have clocked closer to 20 percent if further adjusted for the drastic shift from full-time to part-time employment.
Source
June 18, 2013
David Stockman's Non-Recovery Part 1: Post-2009 Faux Prosperity
Few others are better equipped to comprehend both the insider's and
outsider's perspective on what the government, the Fed, and the banks are doing
in this so-called 'recovery' we are experiencing than David Stockman. Nowhere
does he detail this better than Chapter
31 of his new book 'The Great Deformation'. In this first part (of a
four-part series), he explains just what happened after the US economy
liquidated excess inventory and labor and hit its natural bottom in June 2009.
Embarking upon a halting but wholly unnatural "recovery," doing nothing
but igniting yet another round of rampant speculation in the risk asset classes.
The precarious foundation of the Bernanke Bubble is starkly evident
in the internal composition of the jobs numbers.
Via David Stockman's book The Great Deformation,
After the US economy liquidated excess inventory and labor and hit its natural bottom in June 2009, it embarked upon a halting but wholly unnatural “recovery.” The artificial prolongation of the Bush tax cuts, the 2 percent payroll tax abatement and the spend-out of the Obama stimulus pilfered several trillions from future taxpayers in order to gift America’s present day “consumption units” with the wherewithal to buy more shoes and soda pop.
But there has been no recovery of the Main Street economy where it counts; that is, no revival of breadwinner jobs and earned incomes on the free market. What we have once again is faux prosperity. In fact, the current Bernanke Bubble is an even sketchier version of the last one and consists essentially of the deliberate and relentless reflation of financial asset prices.
In practice, this amounts to a monetary version of “trickle down” economics. By September 2012, personal consumption expenditure (PCE) was up by $1.2 trillion from the prior peak, representing a modest 2.2 percent per year (0.6 percent after inflation) gain from the level of late 2007. Yet half of this gain—more than $600 billion—reflected the massive growth of government transfer payments, and much of the rebound which did occur in private consumption spending was concentrated in the top 10–20 percent of households. In short, the Fed’s financial repression policies enabled Uncle Sam to fund transfer payments for the bottom rungs of society at virtually no carry cost on the debt, while they juiced the top rungs with a wealth effects tonic that boosted spending at Nordstrom’s and Coach.
The Fed’s post-Lehman money printing spree has thus failed to revive Main Street, but it has ignited yet another round of rampant speculation in the risk asset classes. Accordingly, the net worth of the 1 percent is temporarily back to the pre-crisis status quo ante. Needless to say, successful speculation in the fast money complex is not a sign of honest economic recovery: it merely marks the prelude to another spectacular meltdown in the canyons of Wall Street next time the music stops.
DEFORMATION OF THE JOBS MARKET: THE ECLIPSE OF BREADWINNERS
The precarious foundation of the Bernanke Bubble is starkly evident in the internal composition of the jobs numbers. At the time the US economy peaked in December 2007, there were 71.8 million “breadwinner” jobs in construction, manufacturing, white-collar professions, government, and full-time private services. These jobs accounted for more than half of the nation’s 138 million total payroll and on average paid about $50,000 per year—just enough to support a family.
Breadwinner jobs also generated more than 65 percent of earned wage and salary income and are thus the foundation of the Main Street economy. Yet after a brutal 5.6 million loss of breadwinner jobs during the Great Recession, a startling fact stands out: less than 4 percent of that loss had been recovered after 40 months of so-called recovery.
The 3 million jobs recovered since the recession ended in June 2009, in fact, have been entirely concentrated in the two far more marginal categories that comprise the balance of the national payroll. More than half of the recovery (1.6 million jobs) occurred in what is essentially the “part-time economy.” It presently includes 36.4 million jobs in retail, hotels, restaurants, shoe-shine stands, and temporary help agencies where average annualized compensation was only $19,000. This vast swath of the jobs economy—27 percent of the total—is thus comprised of entry level, second earner, and episodic jobs that enable their holders to barely scrape by.
The balance of the pick-up (1.1 million jobs) was in the HES Complex, which consists of 30.7 million jobs in health, education, and social services. Average compensation is slightly better at about $35,000 annually and this category has grown steadily for years. Its increasingly salient disability, however, is that it is almost entirely dependent on government spending and tax subsidies, and thus faces the headwind of the nation’s growing fiscal insolvency.
When viewed in this three category framework, the nation’s job picture reveals a lopsided aspect that thoroughly belies the headline claims of recovery. A healthy Main Street economy self-evidently depends upon growth in breadwinner jobs, but there has been none, even during the bubble years before the financial crisis. The Bureau of Labor Statistics (BLS) reported 71.8 million breadwinner jobs in January 2000, yet seven years later in December 2007—after the huge boom in housing, real estate, household consumption, and the stock market—the number was still exactly 71.8 million.
The faux prosperity of the Fed’s bubble finance is thus starkly evident. This is the single most important metric of Main Street economic health, and not only had there been zero new breadwinner jobs on a peak-to-peak basis, but that alarming fact had been completely ignored by the smugly confident monetary politburo.
Alas, the latter was blithely tracking a feedback loop of its own making. Flooding Wall Street with easy money, it saw the stock averages soar and pronounced itself pleased with the resulting “wealth effects.” Turning the nation’s homes into debt-dispensing ATMs, it witnessed a household consumption spree and marveled that the “incoming” macroeconomic data was better than expected. That these deformations were mistaken for prosperity and sustainable economic growth gives witness to the everlasting folly of the monetary doctrines now in vogue in the Eccles Building.
To be sure, nominal GDP did grow by 40 percent, or about $4 trillion, between 2000 and 2007. Yet there should be no mystery as to how it happened. As has been noted, total debt outstanding grew by $20 trillion during that same period. The American economy was thus being pushed forward by a bow wave of debt, not pulled higher by rising productivity and earned income.
Indeed, the modest gain of 7.5 million jobs during those seven years reflected exactly this debt-driven dynamic and explains why none of these job gains were in the breadwinner categories. Instead, about 2.5 million were accounted for by the part-time economy jobs described above. On an income-equivalent basis these were actually “40 percent jobs” because they represented an average of twenty-five hours per week and paid $14 per hour, compared to a standard forty-hour work week and a national average wage rate of $22 per hour. Thus, spending their trillions of MEW windfalls at malls, bars, restaurants, vacation spots, and athletic clubs, homeowners and the prosperous classes, in effect, temporarily hired the renters and the increasing legions of marginal workers left behind.
Likewise, another 5 million jobs were generated in the HES (health, education, and social services) complex. Here the job count grew by 20 percent, but it was mainly due to the fact that the sector’s paymasters - government budgets and tax-preferred employer health plans - were temporarily flush.
As discussed in part 2 of this series, however, these, too, were “debt-push” jobs that paid modest wages. While the steady 2.6 percent annual growth of HES jobs during the second Greenspan Bubble did flatter the monthly employment “print,” it was possible only so long as government and health plans could keep spending at rates far higher than the growth rate of the national economy.
Source
Via David Stockman's book The Great Deformation,
After the US economy liquidated excess inventory and labor and hit its natural bottom in June 2009, it embarked upon a halting but wholly unnatural “recovery.” The artificial prolongation of the Bush tax cuts, the 2 percent payroll tax abatement and the spend-out of the Obama stimulus pilfered several trillions from future taxpayers in order to gift America’s present day “consumption units” with the wherewithal to buy more shoes and soda pop.
But there has been no recovery of the Main Street economy where it counts; that is, no revival of breadwinner jobs and earned incomes on the free market. What we have once again is faux prosperity. In fact, the current Bernanke Bubble is an even sketchier version of the last one and consists essentially of the deliberate and relentless reflation of financial asset prices.
In practice, this amounts to a monetary version of “trickle down” economics. By September 2012, personal consumption expenditure (PCE) was up by $1.2 trillion from the prior peak, representing a modest 2.2 percent per year (0.6 percent after inflation) gain from the level of late 2007. Yet half of this gain—more than $600 billion—reflected the massive growth of government transfer payments, and much of the rebound which did occur in private consumption spending was concentrated in the top 10–20 percent of households. In short, the Fed’s financial repression policies enabled Uncle Sam to fund transfer payments for the bottom rungs of society at virtually no carry cost on the debt, while they juiced the top rungs with a wealth effects tonic that boosted spending at Nordstrom’s and Coach.
The Fed’s post-Lehman money printing spree has thus failed to revive Main Street, but it has ignited yet another round of rampant speculation in the risk asset classes. Accordingly, the net worth of the 1 percent is temporarily back to the pre-crisis status quo ante. Needless to say, successful speculation in the fast money complex is not a sign of honest economic recovery: it merely marks the prelude to another spectacular meltdown in the canyons of Wall Street next time the music stops.
DEFORMATION OF THE JOBS MARKET: THE ECLIPSE OF BREADWINNERS
The precarious foundation of the Bernanke Bubble is starkly evident in the internal composition of the jobs numbers. At the time the US economy peaked in December 2007, there were 71.8 million “breadwinner” jobs in construction, manufacturing, white-collar professions, government, and full-time private services. These jobs accounted for more than half of the nation’s 138 million total payroll and on average paid about $50,000 per year—just enough to support a family.
Breadwinner jobs also generated more than 65 percent of earned wage and salary income and are thus the foundation of the Main Street economy. Yet after a brutal 5.6 million loss of breadwinner jobs during the Great Recession, a startling fact stands out: less than 4 percent of that loss had been recovered after 40 months of so-called recovery.
The 3 million jobs recovered since the recession ended in June 2009, in fact, have been entirely concentrated in the two far more marginal categories that comprise the balance of the national payroll. More than half of the recovery (1.6 million jobs) occurred in what is essentially the “part-time economy.” It presently includes 36.4 million jobs in retail, hotels, restaurants, shoe-shine stands, and temporary help agencies where average annualized compensation was only $19,000. This vast swath of the jobs economy—27 percent of the total—is thus comprised of entry level, second earner, and episodic jobs that enable their holders to barely scrape by.
The balance of the pick-up (1.1 million jobs) was in the HES Complex, which consists of 30.7 million jobs in health, education, and social services. Average compensation is slightly better at about $35,000 annually and this category has grown steadily for years. Its increasingly salient disability, however, is that it is almost entirely dependent on government spending and tax subsidies, and thus faces the headwind of the nation’s growing fiscal insolvency.
When viewed in this three category framework, the nation’s job picture reveals a lopsided aspect that thoroughly belies the headline claims of recovery. A healthy Main Street economy self-evidently depends upon growth in breadwinner jobs, but there has been none, even during the bubble years before the financial crisis. The Bureau of Labor Statistics (BLS) reported 71.8 million breadwinner jobs in January 2000, yet seven years later in December 2007—after the huge boom in housing, real estate, household consumption, and the stock market—the number was still exactly 71.8 million.
The faux prosperity of the Fed’s bubble finance is thus starkly evident. This is the single most important metric of Main Street economic health, and not only had there been zero new breadwinner jobs on a peak-to-peak basis, but that alarming fact had been completely ignored by the smugly confident monetary politburo.
Alas, the latter was blithely tracking a feedback loop of its own making. Flooding Wall Street with easy money, it saw the stock averages soar and pronounced itself pleased with the resulting “wealth effects.” Turning the nation’s homes into debt-dispensing ATMs, it witnessed a household consumption spree and marveled that the “incoming” macroeconomic data was better than expected. That these deformations were mistaken for prosperity and sustainable economic growth gives witness to the everlasting folly of the monetary doctrines now in vogue in the Eccles Building.
To be sure, nominal GDP did grow by 40 percent, or about $4 trillion, between 2000 and 2007. Yet there should be no mystery as to how it happened. As has been noted, total debt outstanding grew by $20 trillion during that same period. The American economy was thus being pushed forward by a bow wave of debt, not pulled higher by rising productivity and earned income.
Indeed, the modest gain of 7.5 million jobs during those seven years reflected exactly this debt-driven dynamic and explains why none of these job gains were in the breadwinner categories. Instead, about 2.5 million were accounted for by the part-time economy jobs described above. On an income-equivalent basis these were actually “40 percent jobs” because they represented an average of twenty-five hours per week and paid $14 per hour, compared to a standard forty-hour work week and a national average wage rate of $22 per hour. Thus, spending their trillions of MEW windfalls at malls, bars, restaurants, vacation spots, and athletic clubs, homeowners and the prosperous classes, in effect, temporarily hired the renters and the increasing legions of marginal workers left behind.
Likewise, another 5 million jobs were generated in the HES (health, education, and social services) complex. Here the job count grew by 20 percent, but it was mainly due to the fact that the sector’s paymasters - government budgets and tax-preferred employer health plans - were temporarily flush.
As discussed in part 2 of this series, however, these, too, were “debt-push” jobs that paid modest wages. While the steady 2.6 percent annual growth of HES jobs during the second Greenspan Bubble did flatter the monthly employment “print,” it was possible only so long as government and health plans could keep spending at rates far higher than the growth rate of the national economy.
Source
June 17, 2013
Why You Should Stop Worrying About Central Bank Losses
Yves here. I guarantee this post will make some readers’ heads explode. It also explains why Germany would benefit from OMT.
By Paul De Grauwe, Professor of international economics, London School of Economics, and former member of the Belgian parliament, and Yuemei Ji, Economist, LICOS, University of Leuven. Cross posted from VoxEU
The monetary-fiscal policy connection is under scrutiny by the German Constitutional Court in the context of the ECB’s OMT bond-buying programme. This column argues that most analyses are deeply flawed by the misapplication of private-company default principles to the central bank. ECB bond-buying transforms public bonds into monetary base, and sovereign-default risk into inflation risk. The real question is: What is the non-inflationary limit to money-base expansion? This depends upon the economic situation and is much higher in the current liquidity-trap setting.
There is a lot of confusion about the fiscal implications of the government bond-buying programme – the OMT, or Outright Monetary Transactions – that the ECB announced last year.
This confusion arises mainly because the principles that guide the solvency of private companies (including banks) are applied to central banks.
Solvency Central Banks Versus Private Agents: The Key Difference
Private companies are said to be solvent when their equity is positive, i.e. when the value of their assets exceeds the value of their outstanding debt. The solvency of a private company can also be formulated in terms of the maximum amount of losses that a company can bear at any given time. Thus, a private company is said to be solvent when its losses do not exceed the value of its equity. Since in efficient markets the latter is equal to the present value of future profits, we arrive at the solvency constraint that says that the losses today cannot exceed the present value of expected future profits.
The problem arises when these solvency constraints are applied to central banks.
A central bank can issue any amount of money that will allow it to ‘repay its creditors’, i.e. the money holders.1 Such a ‘repayment’ would just amount in converting old money into new money.
Contrary to private companies, the liabilities of the central bank do not constitute a claim on the assets of the central bank. The latter was the case during gold standard when the central bank promised to convert its liabilities into gold at a fixed price. Similarly in a fixed exchange-rate system, the central banks promise to convert their liabilities into foreign exchange at a fixed price.
The ECB and other modern central banks that are on a floating exchange-rate system make no such promise. As a result, the value of the central bank’s assets has no bearing for its solvency. The only promise made by the central bank in a floating exchange-rate regime is that the money will be convertible into a basket of goods and services at a (more or less) fixed price. In other words the central bank makes a promise of price stability. That’s all.
Seigniorage is not a Limit
Thus it makes no sense to state that the limit to the losses a central bank can make at any point in time is given by the present value of future profits (seigniorage). There is no such limit. The central bank can make any loss provided the loss does not endanger its promise to maintain price stability.
Also it is not correct to claim that the central bank needs to hold positive equity ‘to remain solvent’. A central bank needs no equity. As a result the claim that is sometimes made that a central bank with negative equity needs to be recapitalised by the treasury is senseless. To be clear:
Let us now apply these first principles to the issue of how a bond-buying programme can have fiscal implications. We first discuss the situation of the central bank that faces only one sovereign. Then we discuss the problem of the central bank in a monetary union facing many sovereigns.
The Central Bank of a Stand-Alone Country
We will consider the case of a central bank that buys government bonds in the secondary market.2 By buying government bonds the central bank transforms the nature of the public-sector debt.
When the central bank buys its government’s debt, the debt is transformed:
After the transformation the government debt held by the central bank cancels out. It is an asset of one branch (the central bank) and a liability of another branch (the government). As a result, it disappears. The central bank may still keep it on its books, but it has no economic value anymore. In fact the central bank may do away with this fiction and eliminate it from its balance sheet and the government could then eliminate it from its debt figures. It has become worthless because it was replaced by a new type of debt, namely money, which carries an inflation risk instead of a default risk.
This is why It makes no sense to say central banks lose when the market price of the government bonds drops. If there were a loss for the central bank it would be matched by an equal gain of the government (whose market value of the debt has dropped in the same proportion). There is no loss for the public sector.
Public Debt Held by the Public Sector is Different
We arrive at an important conclusion:
Another way to see this is to look at the interest-rate flows underlying bond holdings. Let’s take an example and suppose the central bank has bought €1 billion of government bonds. These have a coupon of, say, 4%. Thus the central bank that keeps these bonds on its balance sheet receives €40 million from the government every year. The bookkeeping practice is to count this as profits of the central bank. At the end of the year the same central bank will have to hand over its profits to the government. Assuming that the marginal cost of managing this bond portfolio is zero, the central bank will hand over €40 million to the government. This is the left hand paying the right hand, so to speak.
This bookkeeping practice has led to the perception that the interest revenue is to be considered as seignorage. It is not. There is no profit for the public sector. The profit of the central bank is exactly offset by a loss of the government. Both could do away with this bookkeeping convention because there is no economic substance to these losses and profits.
What happens if the government defaults on its outstanding bonds?
Think about it in terms of the interest flows. After the default, the central bank stops receiving interest payments from the government, but by the same token it stops paying these back to the government. Nothing has happened in the public sector. Thus the loss that the central bank is making as a result of the default has no fiscal implications.
Price Stability and Public-Sector Default
There is an issue when it comes to price stability and its link to a government default. If the central bank keeps its liabilities (money base) under control, the default by itself will not lead to more inflation. The latter will arise only if the government were to force the central bank to issue more of these monetary liabilities, e.g. to finance current budget deficits that after the default the government cannot finance by issuing bonds anymore.
It is sometimes argued that if the central bank has no assets (because of a default by the government), then it no longer has instruments to reduce the money stock. This may sometimes be necessary to reduce inflationary pressures. This argument does not hold water. There are two ways a central bank that lacks assets can reduce the money stock.
The Central Bank of a Monetary Union
Things are more complicated in a monetary union that is not also a fiscal union. Here the fiscal implication of central-bank bond buying is more complicated. The crux is the presences of ‘n’ sovereigns. In the Eurozone, n = 17 (soon to be 18 with Latvia).
To clarify thinking about this problem, assume that the ECB buys €1 billion of Spanish bonds with a 4% coupon. The fiscal implications are now as follows.
Thus in a monetary union (and in the absence of a fiscal union) a bond-buying programme leads to fiscal transfers among countries – but not the one common in the public perception, especially in Germany.
What Happens Under a Public-Sector Default?
One often hears in the creditor countries that these would be the losers if one of the governments whose bonds are on the balance sheet of the ECB were to default. This is an erroneous conclusion.
Returning to our example of an ECB purchase of €1 billion of Spanish government bonds, consider a Spanish defaults on these bonds.
From Explicit Taxation to Inflation Tax
Every open-market operation involving the purchase of government bonds creates the potential of inflation because it increases the money base. The key question we have to ask ourselves is how the increase in the money base is transmitted to the money stock. After all, it is the money stock not the money base per se that determines inflation.
In Figure 1 we show the evolution of money base and money stock (M3) in the Eurozone since 2004. We find a striking difference between the period before and after the banking crisis of October 2008.
Figure 1. Money base, money stock (M3) in Eurozone (2007 December=100)
Source: European Central Bank, Statistical Warehouse.
Over the period 2008 (Oct) to 2013 (April), the relation between the money base and the money stock breaks down. The money base increased by more than 50%; the money stock increased by only 7%. This suggests that the money multiplier has dropped dramatically.
This dramatic decline in the money multiplier has everything to do with the liquidity trap (Krugman 2010). Banks, which accumulate reserves as a result of the liquidity injections by the ECB, hoard these reserves. Their degree of risk aversion is such that they do not use their cash reserves to expand bank credit. As a result, the money stock (M3) does not increase.
Figure 2 is also instructive. It shows the average yearly inflation rate and the average yearly growth rates of money base and money stock before and after the banking crisis of 2008.
Source: European Central Bank, Statistical Warehouse.
Conclusions
The previous analysis suggests the following:
How much higher depends on the money multiplier. In De Grauwe and Ji (2013) we estimate the size of the multiplier during the crisis period and we conclude that it has collapsed to zero. As a result, there is no limit to the size of the bond-buying programme, i.e. the ECB can buy any amount of government bonds without endangering price stability, as long as the crisis lasts.
______
1 We assume here that the central bank does not hold foreign currency liabilities. In that case the central bank can be pushed into defaulting on these foreign currency liabilities because it can only issue domestic currency liabilities (Buiter 2008).
2 Thus we do not discuss direct monetary financing of government budget deficits.
3 See Friedman and Schwartz(1961) for an analyis of the Great Depression in the US. These authors argued that the US Fed at the time failed to increase the money base sufficiently to counter the delflationary forces. As a result, the US money stock actually declined, reinforcing deflation.
See here for references
Source
By Paul De Grauwe, Professor of international economics, London School of Economics, and former member of the Belgian parliament, and Yuemei Ji, Economist, LICOS, University of Leuven. Cross posted from VoxEU
The monetary-fiscal policy connection is under scrutiny by the German Constitutional Court in the context of the ECB’s OMT bond-buying programme. This column argues that most analyses are deeply flawed by the misapplication of private-company default principles to the central bank. ECB bond-buying transforms public bonds into monetary base, and sovereign-default risk into inflation risk. The real question is: What is the non-inflationary limit to money-base expansion? This depends upon the economic situation and is much higher in the current liquidity-trap setting.
There is a lot of confusion about the fiscal implications of the government bond-buying programme – the OMT, or Outright Monetary Transactions – that the ECB announced last year.
This confusion arises mainly because the principles that guide the solvency of private companies (including banks) are applied to central banks.
• The level of confusion is so high that the president of the Bundesbank turned to the German Constitutional Court arguing that the OMT programme of the ECB would make German citizens liable for paying taxes to cover potential losses made by the ECB.Indeed, German taxpayers are the main beneficiaries of such a bond-buying programme.
• In this column we argue that the fears that German taxpayers may have to cover losses made by the ECB are misplaced. They are based on a misunderstanding of solvency issues that central banks face.
Solvency Central Banks Versus Private Agents: The Key Difference
Private companies are said to be solvent when their equity is positive, i.e. when the value of their assets exceeds the value of their outstanding debt. The solvency of a private company can also be formulated in terms of the maximum amount of losses that a company can bear at any given time. Thus, a private company is said to be solvent when its losses do not exceed the value of its equity. Since in efficient markets the latter is equal to the present value of future profits, we arrive at the solvency constraint that says that the losses today cannot exceed the present value of expected future profits.
The problem arises when these solvency constraints are applied to central banks.
• This misapplication of private principles has led some to conclude that the loss the ECB (or any central bank) can bear should not exceed the present value of future expected seigniorage gains (see Corsetti and Delado 2013).These solvency constraints should not be applied to the central bank; central banks cannot default.
• Similarly, it is sometimes concluded that a central bank needs positive equity to remain solvent (Stella, 1997, Bindseil et al. 2004).
A central bank can issue any amount of money that will allow it to ‘repay its creditors’, i.e. the money holders.1 Such a ‘repayment’ would just amount in converting old money into new money.
Contrary to private companies, the liabilities of the central bank do not constitute a claim on the assets of the central bank. The latter was the case during gold standard when the central bank promised to convert its liabilities into gold at a fixed price. Similarly in a fixed exchange-rate system, the central banks promise to convert their liabilities into foreign exchange at a fixed price.
The ECB and other modern central banks that are on a floating exchange-rate system make no such promise. As a result, the value of the central bank’s assets has no bearing for its solvency. The only promise made by the central bank in a floating exchange-rate regime is that the money will be convertible into a basket of goods and services at a (more or less) fixed price. In other words the central bank makes a promise of price stability. That’s all.
Seigniorage is not a Limit
Thus it makes no sense to state that the limit to the losses a central bank can make at any point in time is given by the present value of future profits (seigniorage). There is no such limit. The central bank can make any loss provided the loss does not endanger its promise to maintain price stability.
Also it is not correct to claim that the central bank needs to hold positive equity ‘to remain solvent’. A central bank needs no equity. As a result the claim that is sometimes made that a central bank with negative equity needs to be recapitalised by the treasury is senseless. To be clear:
• The central bank (that cannot default) needs no fiscal backing from the government (who can default).With that power granted by the sovereign the central bank is freed from any solvency constraint.
• The only backing the central bank needs from the government is that it can keep its monopoly power to issue money in the territory over which the sovereign has jurisdiction.
Let us now apply these first principles to the issue of how a bond-buying programme can have fiscal implications. We first discuss the situation of the central bank that faces only one sovereign. Then we discuss the problem of the central bank in a monetary union facing many sovereigns.
The Central Bank of a Stand-Alone Country
We will consider the case of a central bank that buys government bonds in the secondary market.2 By buying government bonds the central bank transforms the nature of the public-sector debt.
When the central bank buys its government’s debt, the debt is transformed:
• Government debt that carries an interest rate and a default risk becomes debt that is a monetary liability of the central bank (money base) that is default-free but subject to inflation-risk.To understand the fiscal implications of this transformation, it is important to consolidate the central bank and the government (after all they are separate branches of the public sector).
After the transformation the government debt held by the central bank cancels out. It is an asset of one branch (the central bank) and a liability of another branch (the government). As a result, it disappears. The central bank may still keep it on its books, but it has no economic value anymore. In fact the central bank may do away with this fiction and eliminate it from its balance sheet and the government could then eliminate it from its debt figures. It has become worthless because it was replaced by a new type of debt, namely money, which carries an inflation risk instead of a default risk.
This is why It makes no sense to say central banks lose when the market price of the government bonds drops. If there were a loss for the central bank it would be matched by an equal gain of the government (whose market value of the debt has dropped in the same proportion). There is no loss for the public sector.
Public Debt Held by the Public Sector is Different
We arrive at an important conclusion:
• When the central bank has acquired government bonds, a decline in the market value of these bonds has no fiscal implications.The loss in one branch of the public sector (the central bank) is offset by an equal gain in another part of the public sector (the government), leaving nothing to be paid by the taxpayer.
Another way to see this is to look at the interest-rate flows underlying bond holdings. Let’s take an example and suppose the central bank has bought €1 billion of government bonds. These have a coupon of, say, 4%. Thus the central bank that keeps these bonds on its balance sheet receives €40 million from the government every year. The bookkeeping practice is to count this as profits of the central bank. At the end of the year the same central bank will have to hand over its profits to the government. Assuming that the marginal cost of managing this bond portfolio is zero, the central bank will hand over €40 million to the government. This is the left hand paying the right hand, so to speak.
This bookkeeping practice has led to the perception that the interest revenue is to be considered as seignorage. It is not. There is no profit for the public sector. The profit of the central bank is exactly offset by a loss of the government. Both could do away with this bookkeeping convention because there is no economic substance to these losses and profits.
• It is literally true that the central bank could put the government bonds ‘into the shredding machine’; nothing would be lost.In our example, the central bank would stop receiving €40 million a year, and would stop paying out €40 million to the government every year.
What happens if the government defaults on its outstanding bonds?
• Default leads to losses for private holders of these bonds.These are now valued at zero, but they were also already worthless before the default. This is the right hand taking it back from the left hand.
• But it is immaterial for central bank-held bonds.
Think about it in terms of the interest flows. After the default, the central bank stops receiving interest payments from the government, but by the same token it stops paying these back to the government. Nothing has happened in the public sector. Thus the loss that the central bank is making as a result of the default has no fiscal implications.
Price Stability and Public-Sector Default
There is an issue when it comes to price stability and its link to a government default. If the central bank keeps its liabilities (money base) under control, the default by itself will not lead to more inflation. The latter will arise only if the government were to force the central bank to issue more of these monetary liabilities, e.g. to finance current budget deficits that after the default the government cannot finance by issuing bonds anymore.
It is sometimes argued that if the central bank has no assets (because of a default by the government), then it no longer has instruments to reduce the money stock. This may sometimes be necessary to reduce inflationary pressures. This argument does not hold water. There are two ways a central bank that lacks assets can reduce the money stock.
• First, the central bank can issue interest-bearing bonds and sell them in the market.This has the effect of reducing liquidity (money base).
• Second, the central bank can raise minimum reserve requirements.As a result, the existing stock of liquidity is ‘deactivated’, which has the same effect of a decline in the money base.
The Central Bank of a Monetary Union
Things are more complicated in a monetary union that is not also a fiscal union. Here the fiscal implication of central-bank bond buying is more complicated. The crux is the presences of ‘n’ sovereigns. In the Eurozone, n = 17 (soon to be 18 with Latvia).
• If we could consolidate the ECB and the 17 sovereigns into one public sector, the analysis would carry through unchanged.As a result a bond-buying programme will lead to transfers among participating member countries.
• But we cannot; the Eurozone is not a fiscal union.
To clarify thinking about this problem, assume that the ECB buys €1 billion of Spanish bonds with a 4% coupon. The fiscal implications are now as follows.
• The ECB receives €40 million interest annually from the Spanish Treasury.The distribution is pro rata with national equity shares in the ECB (see ECB 2012).
• The ECB returns this €40 million every year to the EZ national central banks.
• The national central banks transfer this to their national treasuries.For example, the ECB will transfer back 11.9% of the €40 million to the Banco de España. The rest goes to the other member central banks. The largest receiver is the German Bundesbank; with its equity share of 27.1%, it would get €10.8 million.
Thus in a monetary union (and in the absence of a fiscal union) a bond-buying programme leads to fiscal transfers among countries – but not the one common in the public perception, especially in Germany.
• An ECB bond-buying programme leads to a yearly transfer from the country whose bonds are bought to the countries whose bond are not bought.It should be noted that the ECB could implement a bond-buying programme that avoids fiscal transfers by buying national government bonds in the same proportions to the equity shares of the participating NCBs. This has in fact been proposed sometimes. But this would not eliminate all transfers because the interest rates on the outstanding government bonds are not the same. In fact the countries with the highest interest rates would in this weighted bond-buying programme be net payers of interest to the countries with the lowest interest rates. Thus even a bond-buying programme weighted by the equity shares would involve fiscal transfers from the weaker (debtor) countries to the stronger (creditor) countries.
What Happens Under a Public-Sector Default?
One often hears in the creditor countries that these would be the losers if one of the governments whose bonds are on the balance sheet of the ECB were to default. This is an erroneous conclusion.
Returning to our example of an ECB purchase of €1 billion of Spanish government bonds, consider a Spanish defaults on these bonds.
• The Spanish government would stop paying €40 million to the ECB.In no way can one conclude that German taxpayers, or any EZ taxpayer, would pay the bill of the Spanish default – except in the narrow sense that they would no longer be able to count on the yearly interest revenues.
• The ECB would stop transferring this interest revenue back to the member central banks pro rata.
• The German taxpayer, for example, would no longer receive the yearly windfall of €10.8 million.
• There is of course the possibility of an inflation tax.We have noted before that at the moment of the bond buying programme interest bearing debt is transformed into monetary liabilities of the ECB (money base). This by itself could lead to inflation, and thus to an inflation tax that would be borne by all holders of euros. This leads to the issue of how large the ECB bond-buying programme can be without generating additional inflation.
From Explicit Taxation to Inflation Tax
Every open-market operation involving the purchase of government bonds creates the potential of inflation because it increases the money base. The key question we have to ask ourselves is how the increase in the money base is transmitted to the money stock. After all, it is the money stock not the money base per se that determines inflation.
In Figure 1 we show the evolution of money base and money stock (M3) in the Eurozone since 2004. We find a striking difference between the period before and after the banking crisis of October 2008.
• Prior to the Global Crisis, the two monetary aggregates move in unison suggesting that the money multiplier (the ratio of money stock to money base) is constant.A 1% increase in the money stock led to an increase of the money stock of approximately 1%. Things are very different during the crisis period.
Figure 1. Money base, money stock (M3) in Eurozone (2007 December=100)
Source: European Central Bank, Statistical Warehouse.
Over the period 2008 (Oct) to 2013 (April), the relation between the money base and the money stock breaks down. The money base increased by more than 50%; the money stock increased by only 7%. This suggests that the money multiplier has dropped dramatically.
This dramatic decline in the money multiplier has everything to do with the liquidity trap (Krugman 2010). Banks, which accumulate reserves as a result of the liquidity injections by the ECB, hoard these reserves. Their degree of risk aversion is such that they do not use their cash reserves to expand bank credit. As a result, the money stock (M3) does not increase.
Figure 2 is also instructive. It shows the average yearly inflation rate and the average yearly growth rates of money base and money stock before and after the banking crisis of 2008.
• Prior to 2008 both monetary aggregates increased at practically the same rates; the yearly inflation was 2.3%.The money base grows at a yearly rate of 11% while the growth rate of the money stock collapses to less that 2% and inflation drops below 2%.
• Since 2008 the growth rate of the monetary aggregates diverges dramatically.
• Our interpretation is that the strong increase in the money base helped to reduce the deflationary forces in the economy, rather than being a source of inflation.3Figure 2. Inflation, growth MB and M3 (average yearly growth rates)
Source: European Central Bank, Statistical Warehouse.
Conclusions
The previous analysis suggests the following:
• Limits to a bond-buying programme depend on the nature of the economic and financial situation, i.e. the existence of a liquidity trap.If the target for the increase in the money stock is 4.5% (as is the case in the Eurozone where a 4.5% target is assumed to lead to at most 2% inflation) this also means that the money base should not increase by more than 4.5% per year. But then during normal times there is very little need for a bond-buying programme.
• In normal times when an increase of the money base leads to proportional increases in the money stock the limit to a bond-buying programme is tight.
• The situation has changed dramatically since the start of the banking crisis.During the crisis period the limits to the amount of money base that can be created without triggering inflationary pressures is much higher because of the existence of a liquidity trap.
How much higher depends on the money multiplier. In De Grauwe and Ji (2013) we estimate the size of the multiplier during the crisis period and we conclude that it has collapsed to zero. As a result, there is no limit to the size of the bond-buying programme, i.e. the ECB can buy any amount of government bonds without endangering price stability, as long as the crisis lasts.
______
1 We assume here that the central bank does not hold foreign currency liabilities. In that case the central bank can be pushed into defaulting on these foreign currency liabilities because it can only issue domestic currency liabilities (Buiter 2008).
2 Thus we do not discuss direct monetary financing of government budget deficits.
3 See Friedman and Schwartz(1961) for an analyis of the Great Depression in the US. These authors argued that the US Fed at the time failed to increase the money base sufficiently to counter the delflationary forces. As a result, the US money stock actually declined, reinforcing deflation.
See here for references
Source
June 14, 2013
Is the Fed Going to Dial Down Its QE Taper Talk?
We’ve suggested that the Fed has drunken a bit too much of its own confidence Kool-Aid to be talking about tapering QE. The problem now, as we’ve stressed, is that the effect of QE may prove to be asymmetrical, that the flattening the yield curve exercise when short rates were already in ZIRP land haven’t done much to stimulate the real economy (where was the Fed in calling for more fiscal stimulus, or in arguing against deficit scare-mongering?). But perversely, taking it away could be more of an economic downer than the central bank anticipates. Mere talk of ending QE is tantamount to urging on a rate hike for the longer end of the yield curve. And higher rates there will not only prove to be a damper, but with economic growth slowing all over the world, has the potential to have knock-on effects.
Three front page stories at the Wall Street Journal tonight all highlight reasons why the Fed might dial down taper expectations.
The first is that mortgage refinancings have fallen, which we predicted would happen. Even though there is some whistling-in-the-dark talk about how some consumers might refinance with rates going in the wrong direction, the most you are likely to see is people who’ve been distracted and haven’t gotten around to doing the paperwork. Anyone who is remotely attentive to rates has likely refied multiple times already. Refis are a weak but real source of stimulus, since lower mortgage payments means more money in consumers’ pockets to spend on other stuff. So a big drop in rates takes that source of incremental spending away.
The second is on how the Fed-induced interest rate increases have led to worrisome interest rate increases in Eurozone periphery countries. Suddenly the belief that the Eurozone crisis was over is coming into question> From the Journal:
The third article in the Journal addresses another topic near and dear to our heart, that inflation rates and inflation expectation are falling. The Fed has been taking the view that this is an aberration but if current patterns hold or intensify, it will have to rethink its assumptions. From the article:
Source
Three front page stories at the Wall Street Journal tonight all highlight reasons why the Fed might dial down taper expectations.
The first is that mortgage refinancings have fallen, which we predicted would happen. Even though there is some whistling-in-the-dark talk about how some consumers might refinance with rates going in the wrong direction, the most you are likely to see is people who’ve been distracted and haven’t gotten around to doing the paperwork. Anyone who is remotely attentive to rates has likely refied multiple times already. Refis are a weak but real source of stimulus, since lower mortgage payments means more money in consumers’ pockets to spend on other stuff. So a big drop in rates takes that source of incremental spending away.
The second is on how the Fed-induced interest rate increases have led to worrisome interest rate increases in Eurozone periphery countries. Suddenly the belief that the Eurozone crisis was over is coming into question> From the Journal:
Government bonds have recently taken a hit around the world, now that investors are preparing for the possible end of central banks’ boundless economic stimulus. And those bonds of the weakest euro-zone countries have shown some of the biggest drops…
Yields on the 10-year Greek bond, which had strengthened remarkably since last summer, ended Thursday at 10.03%. That is two percentage points higher than where they stood on May 22, when the U.S. Federal Reserve signaled its giant bond-buying program might slow this year. At 6.47%, the Portuguese 10-year is more than one percentage point above its May low. Bond yields rise when their prices fall.
The 10-year Spanish bond, which was near 4% in early May, closed Thursday at 4.61%, flat on the day. The Italian 10-year, a hair stronger Thursday at 4.35%, also is off over the month. The spread—or the amount of additional yield investors demand, above that paid by benchmark Germany—also has risen for both countries over the period.And the piece points out how putting these countries on the austerity rack is not going to improve their ability to make good on their obligations:
But a larger problem may be looming: In order to restore their economic viability, weaker countries must improve their industries’ competitiveness by pushing down wages and other costs, relative to Germany and other northern countries. But the German economy appears to have settled into a pattern of low growth and low inflation.
That means Italy, Spain and the others need more of this so-called internal devaluation. And devaluation makes it harder to pay down debt.Some economist have question whether wages are even the source of the periphery countries’ woes. One line of thought is the simple, “you can’t starve labor and expect to have anyone to buy.” A second is that the periphery countries have the wrong industrial mix, and cutting wages won’t make enough of a dent in their competitiveness. They need to be in more value-added products (which is basically the approach taken by Mondragon, and the Basque region has much lower unemployment than the rest of Spain as a result).
The third article in the Journal addresses another topic near and dear to our heart, that inflation rates and inflation expectation are falling. The Fed has been taking the view that this is an aberration but if current patterns hold or intensify, it will have to rethink its assumptions. From the article:
The Fed has a 2% inflation goal and doesn’t want consumer prices to veer too much above or too much below that number over time. Some recent inflation measures have dropped below that level this year, but Fed officials haven’t been too worried because expectations of future inflation were stable….
“It is no longer clear that inflation expectations are so stable,” Jan Hatzius, chief economist at Goldman Sachs Group Inc., said in an interview. Market-based measures of inflation expectations are now on “the low side of comfortable.” In a note to clients June 10, he predicted that expectations of lower inflation are likely to make Fed officials less willing to pull back on the bond-buying programs out of fear it could destabilize those expectations about future inflation….
In that context, the Fed launched its bond-buying program to bolster economic growth by pushing down long-term interest rates and pushing up asset prices, hoping that would spur spending, hiring and investment. If officials believe the economy is on track to gain strength in coming months, they might start to reduce the size of the bond purchases. But if they thought low inflation and falling expectations signaled new weakness in the economy, they might want to continue the program at its current level for longer.The Fed’s next pronouncement is late next week. It’s too bad no one is capable of Greenspanian obfuscation. I’m not much good as a Fedwatcher since I’m not good at identifying with their point of view. Logically, given the above, you’d expect the Fed to walk back the taper talk a bit. But they may believe more “we’re staying with the program” messaging is better for the confidence fairy.
Source
June 13, 2013
Western Workers Lose Faith in Retirement?
Saving for retirement? We wish we hadn't bothered, say one in 10 ... More than 10pc of people who are saving for retirement wish they hadn't bothered and one in five fears that it's a waste of money, research suggests. The past five years of economic and financial turmoil have left almost three quarters of retirement savers less confident in the ability of stock market investing to deliver their ambitions for retirement income. – UK Telegraph
Dominant Social Theme: The stock market will provide ...
Free-Market Analysis: Modern stock markets can provide profits, even tremendous profits, but they surely should not be seen as a panacea for a larger commitment to self-sufficiency and monetary diversification.
Those who trusted government propaganda over the efficacy of equity and its inevitable, endless rise have long been disappointed – certainly in the US and now in Britain, as this study shows.
It is a major dominant social theme that people ought to simply stick their money in stocks and ... wait.
Sure, equity does move up a good deal, especially certain stocks but those same stocks can move down, too.
In fact, the stock market is far more influenced by business cycles than any other factor. Central banks print money, forcing a boom that eventually turns into a bust. Stocks plunge, people lose wealth and then are counseled not to remove their funds, which may have been halved.
It is almost impossible for someone to lose half of their invested income and keep still. Most people don't have that much money. Frightened by the prospect that stocks might unravel further, they remove their life savings and who can blame them?
Then the stock market goes back up, thanks to monetary stimulation in large part, and those who lost money have no possibility of gaining it back, as they have been scared out of investing further.
This has long been our conclusion and now there are studies – see above – to back it up. Here's more:
In research among retirement savers aged 45 or more, Metlife, the insurer, found that 12pc wished they hadn't bothered saving for retirement and nearly one in five were unhappy with their pension savings or feared they had wasted money. Six per cent were unhappy with their retirement savings despite the recent stock market revival, the survey found.
The past five years of economic and financial turmoil have left almost three quarters of retirement savers less confident in the ability of stock market investing to deliver their ambitions for retirement income ...
Dominic Grinstead, the managing director of MetLife UK, said: "It's clear that the events of the past five years have hit confidence and undermined faith in pension saving."
But he added: "The Government has worked hard to make retirement saving pay, with plans for a universal state pension, automatic enrolment into company pensions and changes to the rules on taking retirement income that allow greater flexibility."
It is, of course, government that is the problem to begin with, however. The modern mechanism of monopoly monetary stimulation causes great booms and busts via endless currency inflation. People know intuitively at this point that stock markets aren't going to provide reliable riches while the money in their pockets loses value regularly.
For this reason, it is occurring to people that saving for retirement may not be a reasonable course of action. If one loses a chunk of money every five to ten years and if the rest of one's wealth is dissipated via price inflation, then what is the scrimping and saving really worth?
This is, of course, an extremely dangerous conclusion from the standpoint of the larger civil society. When middle classes lose faith that they can create and sustain their own futures within their various societies, then a bedrock certainty has been breached.
There are few in middle classes, historically, who wish to turn their futures entirely over governmental technocrats. The hallmark of a healthy culture traditionally is one that allows individual families to make their own way within the larger environment that safeguards their ambitions and their savings.
But now all that is becoming reversed as monopoly monetary stimulation grinds on relentlessly and the 21st century reveals itself as a replica of the 20th century ... only worse.
The difference is, of course, that people know more now and understand the impoverishment of their financial conditions more clearly. For millions, even tens of millions, the central banking mechanism has been revealed ... and people naturally are surprised by what they discover.
The idea that only a privileged few control the money spigots and that the vast majority inherit its inflations and destructive business cycles is increasingly prevalent and no doubt contributing to the disenchantment with modern retirement.
Conclusion: The viewpoints revealed by this survey are not merely surprising; they ought to be profoundly disturbing to those who have concocted the present system and seem determined to continue its inflictions no matter the cost.
Source
Dominant Social Theme: The stock market will provide ...
Free-Market Analysis: Modern stock markets can provide profits, even tremendous profits, but they surely should not be seen as a panacea for a larger commitment to self-sufficiency and monetary diversification.
Those who trusted government propaganda over the efficacy of equity and its inevitable, endless rise have long been disappointed – certainly in the US and now in Britain, as this study shows.
It is a major dominant social theme that people ought to simply stick their money in stocks and ... wait.
Sure, equity does move up a good deal, especially certain stocks but those same stocks can move down, too.
In fact, the stock market is far more influenced by business cycles than any other factor. Central banks print money, forcing a boom that eventually turns into a bust. Stocks plunge, people lose wealth and then are counseled not to remove their funds, which may have been halved.
It is almost impossible for someone to lose half of their invested income and keep still. Most people don't have that much money. Frightened by the prospect that stocks might unravel further, they remove their life savings and who can blame them?
Then the stock market goes back up, thanks to monetary stimulation in large part, and those who lost money have no possibility of gaining it back, as they have been scared out of investing further.
This has long been our conclusion and now there are studies – see above – to back it up. Here's more:
In research among retirement savers aged 45 or more, Metlife, the insurer, found that 12pc wished they hadn't bothered saving for retirement and nearly one in five were unhappy with their pension savings or feared they had wasted money. Six per cent were unhappy with their retirement savings despite the recent stock market revival, the survey found.
The past five years of economic and financial turmoil have left almost three quarters of retirement savers less confident in the ability of stock market investing to deliver their ambitions for retirement income ...
Dominic Grinstead, the managing director of MetLife UK, said: "It's clear that the events of the past five years have hit confidence and undermined faith in pension saving."
But he added: "The Government has worked hard to make retirement saving pay, with plans for a universal state pension, automatic enrolment into company pensions and changes to the rules on taking retirement income that allow greater flexibility."
It is, of course, government that is the problem to begin with, however. The modern mechanism of monopoly monetary stimulation causes great booms and busts via endless currency inflation. People know intuitively at this point that stock markets aren't going to provide reliable riches while the money in their pockets loses value regularly.
For this reason, it is occurring to people that saving for retirement may not be a reasonable course of action. If one loses a chunk of money every five to ten years and if the rest of one's wealth is dissipated via price inflation, then what is the scrimping and saving really worth?
This is, of course, an extremely dangerous conclusion from the standpoint of the larger civil society. When middle classes lose faith that they can create and sustain their own futures within their various societies, then a bedrock certainty has been breached.
There are few in middle classes, historically, who wish to turn their futures entirely over governmental technocrats. The hallmark of a healthy culture traditionally is one that allows individual families to make their own way within the larger environment that safeguards their ambitions and their savings.
But now all that is becoming reversed as monopoly monetary stimulation grinds on relentlessly and the 21st century reveals itself as a replica of the 20th century ... only worse.
The difference is, of course, that people know more now and understand the impoverishment of their financial conditions more clearly. For millions, even tens of millions, the central banking mechanism has been revealed ... and people naturally are surprised by what they discover.
The idea that only a privileged few control the money spigots and that the vast majority inherit its inflations and destructive business cycles is increasingly prevalent and no doubt contributing to the disenchantment with modern retirement.
Conclusion: The viewpoints revealed by this survey are not merely surprising; they ought to be profoundly disturbing to those who have concocted the present system and seem determined to continue its inflictions no matter the cost.
Source
June 12, 2013
Nouriel Roubini Seriously Misguided on Gold, on Equities, on Economic Growth, on Money
I just finished reading Nouriel Roubini's seven point analysis on the Bursting of the Gold Bubble in which Roubini's asks and answer the question "Gold skyrocketed to over $1,900 per ounce in the fall of 2011 from $800 in early 2009, but has since collapsed by around 27%. Why?"
I offer a point-by-point rebuttal.
Roubini: First, tail risks are lower. Gold tends to spike when the global economy faces severe economic, financial and geopolitical threats; but, thanks to a variety of policy actions, the tail-risks argument for holding gold is less compelling today than at any time since the start of the financial crisis in 2007.
Mish: Japan is flirting with a Yen crisis thanks to Abenomics. Nothing has been fixed in regards to structural problems in the eurozone. A US recession is at hand. A China slowdown is baked in the cake. Trade wars loom between China and Europe. A full scale housing bust is underway in Australia. The UK threatens to leave the EU. The eurozone is unlikely to survive in its current state. Tail risks are enormous (and growing). I would have thought tail risks were so obvious that any serious economist would notice them. I was mistaken.
Roubini: Second, inflation is low and falling. Gold does best when there is a risk of high inflation, as it is a traditional store of value against inflation. But, despite the very aggressive monetary and quantitative easing from many central banks, global inflation is actually low and still falling as growth in most of the global economy remains below trend.
Mish: Gold actually does well in periods of deflation, in periods of credit risk, in periods of stagflation, and in periods of hyperinflation (the latter is obvious). Price inflation fell from 2000 to 2013 and gold rose from $250 to $1900. When was there risk of high inflation in that time-frame?
To be fair, one also needs to look at the disinflationary period between 1980 and 2000 when the price of gold collapsed from $850 to $250. Yet, in disinflationary periods in the last decade, gold soared. The difference? Credit risk and global distrust of fiat currencies. It's easy to cherry pick a timeframe and say gold does this or that, when other timeframes and other factors disprove the thesis.
Roubini: Third, other assets provide better returns. Now that the global economy is recovering, other assets, such as equities or even real estate, are performing much better than gold.
Mish: Lovely! The same sort of argument regarding housing could have been presented in 2002, in 2003, in 2004, and in 2005. Yes, other assets are performing better, for now. But for how long? Is the current trend supposed to last forever? Has Roubini suddenly become a momentum trader in what is performing best?
Roubini: Fourth, exit from ZIRP will be bearish for gold. Real interest rates and gold prices are highly inversely correlated. Although real rates are still negative, the more positive outlook for the U.S. and global economy implies that the Fed and other central banks will gradually exit from QE and ZIRP. Real rates will rise over time rather than fall.
Mish: Precisely when is the Fed supposed to end ZIRP? Tomorrow? Next Month? Next year? A decade? If "real rates rise" won't that be a sign of increasing inflation? Is increasing inflation good for gold or not? Roubini attempts to make a case that rising inflation and falling inflation are both bad for gold and both are about to happen simultaneously. Let me also point out that Roubini thinks 'QE' won't end for another two years! He can't have it both ways.
Roubini: Fifth, highly indebted countries are planning to sell their gold. Some argued that a world full of highly indebted sovereigns would push investors into gold as government bonds would become more risky. Instead, these countries are likely to dump their gold reserves to reduce their debts, or at least are considering doing so.
Mish: Roubini's thesis has gone from circular silliness to the point of complete absurdity. Other than Cyprus (and Cyprus was forced at gunpoint) what central banks are dumping gold? And what central banks are buying gold? ZeroHedge reports Russia, Greece, Turkey, Other Central Banks Buy Gold
Mish: The biggest gold rally of all time (1979) occurred while the dollar was going sideways with a slight upward bias. The dollar and gold both rose in 2005 as well. If the dollar were all-important for gold, it would never rise in terms of foreign currencies, but it definitely does do that.
Roubini: Seventh, gold has been hyped for irrational political reasons. Some extreme politically conservative gold bugs think that all government is evil, that there is a government conspiracy to expropriate most private wealth and that gold is the only hedge against this risk. This group also believes that we will return to the gold standard as central banks “debase” paper money and as hyperinflation ensues. However, inflation is falling globally and gold is not in any way a currency.
Mish: Yes gold has been hyped by many hyperinflationists. The same was true two years ago, five years ago, and 10 or more years ago.
That makes Roubini's own hype all the more laughable. Roubini ends his hype with this statement: "The price of gold may temporarily go higher in the next few years, but it will be very volatile and trend lower over time as the global economy slowly mends itself. RGE expects gold to go to $1,300 by end-2013 and $1,000 by 2015. For the most part, it is time to offload and underweight Keynes’s barbarous relic."
People ask me all the time where the price of gold is headed. I do not pretend to know, especially in the short-term.
However, I understand the fundamentals and Roubini clearly doesn't.
Nor does Roubini have a clue about money or what causes economic growth. His statement "It is time to offload and underweight Keynes’s barbarous relic" is quite telling.
Can Printing Money Create Wealth?
Clearly Roubini believes that printing money creates wealth. The average 7th-grader (not yet influenced by Keynesian and Monetarist clown teachers) can easily figure out the fallacies of such ridiculous economic theories.
Who benefits from printing? The answer is those with first access to money (the banks, the already wealthy, and the government). Printing money does nothing but exacerbate the trend of income inequality. This is so obvious that Roubini cannot see it.
Buying gold is a perfectly rational reaction to the crazy central bank and governmental policies that Roubini advocates.
Precious Metal Fundamentals
Those interested in a primer on precious metal fundamentals can find it in Precious Metals – An Update by Pater Tenebrarum on the Acting Man Blog.
Those who think Fed asset levitation can and will last forever need to consider John Hussman's June 3, 2013 article Following the Fed to 50% Flops.
Finally, those who wish to see a brilliant takedown of Roubini's recent bullishness might enjoy “Dr. Doom” Becomes “Dr. Boom” – 1,000 SPX Points Too Late, also on the Acting Man Blog.
Things Roubini is Wrong About
I offer a point-by-point rebuttal.
Roubini: First, tail risks are lower. Gold tends to spike when the global economy faces severe economic, financial and geopolitical threats; but, thanks to a variety of policy actions, the tail-risks argument for holding gold is less compelling today than at any time since the start of the financial crisis in 2007.
Mish: Japan is flirting with a Yen crisis thanks to Abenomics. Nothing has been fixed in regards to structural problems in the eurozone. A US recession is at hand. A China slowdown is baked in the cake. Trade wars loom between China and Europe. A full scale housing bust is underway in Australia. The UK threatens to leave the EU. The eurozone is unlikely to survive in its current state. Tail risks are enormous (and growing). I would have thought tail risks were so obvious that any serious economist would notice them. I was mistaken.
Roubini: Second, inflation is low and falling. Gold does best when there is a risk of high inflation, as it is a traditional store of value against inflation. But, despite the very aggressive monetary and quantitative easing from many central banks, global inflation is actually low and still falling as growth in most of the global economy remains below trend.
Mish: Gold actually does well in periods of deflation, in periods of credit risk, in periods of stagflation, and in periods of hyperinflation (the latter is obvious). Price inflation fell from 2000 to 2013 and gold rose from $250 to $1900. When was there risk of high inflation in that time-frame?
To be fair, one also needs to look at the disinflationary period between 1980 and 2000 when the price of gold collapsed from $850 to $250. Yet, in disinflationary periods in the last decade, gold soared. The difference? Credit risk and global distrust of fiat currencies. It's easy to cherry pick a timeframe and say gold does this or that, when other timeframes and other factors disprove the thesis.
Roubini: Third, other assets provide better returns. Now that the global economy is recovering, other assets, such as equities or even real estate, are performing much better than gold.
Mish: Lovely! The same sort of argument regarding housing could have been presented in 2002, in 2003, in 2004, and in 2005. Yes, other assets are performing better, for now. But for how long? Is the current trend supposed to last forever? Has Roubini suddenly become a momentum trader in what is performing best?
Roubini: Fourth, exit from ZIRP will be bearish for gold. Real interest rates and gold prices are highly inversely correlated. Although real rates are still negative, the more positive outlook for the U.S. and global economy implies that the Fed and other central banks will gradually exit from QE and ZIRP. Real rates will rise over time rather than fall.
Mish: Precisely when is the Fed supposed to end ZIRP? Tomorrow? Next Month? Next year? A decade? If "real rates rise" won't that be a sign of increasing inflation? Is increasing inflation good for gold or not? Roubini attempts to make a case that rising inflation and falling inflation are both bad for gold and both are about to happen simultaneously. Let me also point out that Roubini thinks 'QE' won't end for another two years! He can't have it both ways.
Roubini: Fifth, highly indebted countries are planning to sell their gold. Some argued that a world full of highly indebted sovereigns would push investors into gold as government bonds would become more risky. Instead, these countries are likely to dump their gold reserves to reduce their debts, or at least are considering doing so.
Mish: Roubini's thesis has gone from circular silliness to the point of complete absurdity. Other than Cyprus (and Cyprus was forced at gunpoint) what central banks are dumping gold? And what central banks are buying gold? ZeroHedge reports Russia, Greece, Turkey, Other Central Banks Buy Gold
Russia, Greece, Turkey, Kazakhstan and Azerbaijan expanded their gold reserves for a seventh straight month in April, buying bullion to diversify foreign exchange reserves due to concerns about the dollar and the euro.Roubini: Sixth, U.S. dollar appreciation is bearish for gold. There is usually an inverse relationship between the value of the U.S. dollar and the dollar price of commodities, including precious metals like gold. Looking ahead, the relative strength of the U.S. economy and of U.S. asset prices compared with those of other DMs suggests that the dollar may appreciate—as it has done recently—against a basket of DM currencies.
Russia’s steady increase in its gold reserves saw its holdings, the seventh-largest by country, climb another 8.4 metric tons to 990 tons, taking gains this year to 3.4% after expanding by 8.5% in 2012, International Monetary Fund data show.
Kazakhstan’s reserves grew 2.6 tons to 125.5 tons, taking the increase to 8.9% this year after a 41% expansion in 2012, data on the website showed.
Turkey’s holdings rose 18.2 tons to 427.1 tons in April, increasing for a 10th month as it accepted gold in its reserve requirements from commercial banks.
Belarus’s holdings expanded for a seventh month as did Azerbaijan’s.
Interestingly, Greece’s gold holdings climbed for a fourth month, according to the IMF data. Cyrus has about 14 tons of gold. If Cyprus sold all of it, the addition by Turkey alone would cover all of it.
Mish: The biggest gold rally of all time (1979) occurred while the dollar was going sideways with a slight upward bias. The dollar and gold both rose in 2005 as well. If the dollar were all-important for gold, it would never rise in terms of foreign currencies, but it definitely does do that.
Roubini: Seventh, gold has been hyped for irrational political reasons. Some extreme politically conservative gold bugs think that all government is evil, that there is a government conspiracy to expropriate most private wealth and that gold is the only hedge against this risk. This group also believes that we will return to the gold standard as central banks “debase” paper money and as hyperinflation ensues. However, inflation is falling globally and gold is not in any way a currency.
Mish: Yes gold has been hyped by many hyperinflationists. The same was true two years ago, five years ago, and 10 or more years ago.
That makes Roubini's own hype all the more laughable. Roubini ends his hype with this statement: "The price of gold may temporarily go higher in the next few years, but it will be very volatile and trend lower over time as the global economy slowly mends itself. RGE expects gold to go to $1,300 by end-2013 and $1,000 by 2015. For the most part, it is time to offload and underweight Keynes’s barbarous relic."
People ask me all the time where the price of gold is headed. I do not pretend to know, especially in the short-term.
However, I understand the fundamentals and Roubini clearly doesn't.
Nor does Roubini have a clue about money or what causes economic growth. His statement "It is time to offload and underweight Keynes’s barbarous relic" is quite telling.
Can Printing Money Create Wealth?
Clearly Roubini believes that printing money creates wealth. The average 7th-grader (not yet influenced by Keynesian and Monetarist clown teachers) can easily figure out the fallacies of such ridiculous economic theories.
Who benefits from printing? The answer is those with first access to money (the banks, the already wealthy, and the government). Printing money does nothing but exacerbate the trend of income inequality. This is so obvious that Roubini cannot see it.
Buying gold is a perfectly rational reaction to the crazy central bank and governmental policies that Roubini advocates.
Precious Metal Fundamentals
Those interested in a primer on precious metal fundamentals can find it in Precious Metals – An Update by Pater Tenebrarum on the Acting Man Blog.
Those who think Fed asset levitation can and will last forever need to consider John Hussman's June 3, 2013 article Following the Fed to 50% Flops.
Finally, those who wish to see a brilliant takedown of Roubini's recent bullishness might enjoy “Dr. Doom” Becomes “Dr. Boom” – 1,000 SPX Points Too Late, also on the Acting Man Blog.
Things Roubini is Wrong About
- Gold
- Tail Risk
- Benefits of monetary printing
- Benefits of fiscal stimulus
- On what causes economic growth
- Inflation
- Stock market risk
That is one heck of a lot of things to be wrong about!
Source
June 11, 2013
From 9/11 To PRISMgate - How The Carlyle Group LBO'd The World's Secrets
The short but profitable tale of how 483,000 private individual have "top
secret" access to the nation's most non-public information begins in 2001.
"After 9/11, intelligence budgets were increased, new people needed to be hired,
it was a lot easier to go to the private sector and get people off the shelf,"
and sure enough firms like Booz Allen Hamilton - still two-thirds owned
by the deeply-tied-to-international-governments investment firm The Carlyle
Group - took full advantage of Congress' desire to shrink federal agencies and
their budgets by enabling outside consultants (already primed with
their $4,000 cost 'security clearances') to fulfill the needs of an
ever-more-encroaching-on-privacy administration.
Booz Allen (and other security consultant providing firms) trade publicly with a cloak of admitted opacity due to the secrecy of their government contracts ("you may not have important information concerning our business, which will limit your insight into a substantial portion of our business") but the actions of Diane Feinstein who promptly denounced "treasonous" Edward Snowden, "have muddied the waters," for the stunning 1.1 million (or 21% of the total) private consultants with access to "confidential and secret" government information.
Perhaps the situation of gross government over-spend and under-oversight is summed up best, "it's very difficult to know what contractors are doing and what they are billing for the work — or even whether they should be performing the work at all."
First, Diane Feinstein's take on it all...
For individuals and firms alike.
Curiously once public, The Booz Allens of the world still operate like a psuedo-private company, with extensive confidential cloaks preventing the full disclosure of financial data. But don't worry - we should just trust them. Via Bloomberg's Jonathan Weil.
From Bloomberg, May 2008:
Going back to the topic at hand, we will however ask just how much and what kind of confidential, classified, and or Top Secret information is shared "behind Chinese walls" between a Carlyle still majority-owned company and the private equity behemoth's employees and advisors, among which are some of the most prominent political and business luminaries currently alive. The following is a list of both current and former employees and advisors. We have used Wiki but anyone wishing to comb through the firm's full blown roster of over 1,000 employees and advisors, is welcome to do so at the firm's website.
Source
Booz Allen (and other security consultant providing firms) trade publicly with a cloak of admitted opacity due to the secrecy of their government contracts ("you may not have important information concerning our business, which will limit your insight into a substantial portion of our business") but the actions of Diane Feinstein who promptly denounced "treasonous" Edward Snowden, "have muddied the waters," for the stunning 1.1 million (or 21% of the total) private consultants with access to "confidential and secret" government information.
Perhaps the situation of gross government over-spend and under-oversight is summed up best, "it's very difficult to know what contractors are doing and what they are billing for the work — or even whether they should be performing the work at all."
First, Diane Feinstein's take on it all...
“I don't look at this as being a whistleblower. I think it's an act of treason,” the chairwoman of the Senate Intelligence Committee told reporters. The California lawmaker went on to say that Snowden had violated his oath to defend the Constitution. “He violated the oath, he violated the law. It's treason.”So how did all this get started?... (via AP)
The reliance on contractors for intelligence work ballooned after the 9/11 attacks. The government scrambled to improve and expand its ability to monitor the communication and movement of people who might threaten another attack.Which has led to what appears to be major problems.
"After 9/11, intelligence budgets were increased, new people needed to be hired," Augustyn said. "It was a lot easier to go to the private sector and get people off the shelf."
The reliance on the private sector has grown since then, in part because of Congress' efforts to limit the size of federal agencies and shrink the budget.
But critics say reliance on contractors hasn't reduced the amount the government spends on defense, intelligence or other programs.... And to the current PRISMgate whistleblowing situation:
Rather, they say it's just shifted work to private employers and reduced transparency. It becomes harder to track the work of those employees and determine whether they should all have access to government secrets.
"It's very difficult to know what contractors are doing and what they are billing for the work — or even whether they should be performing the work at all,"
Of the 4.9 million people with clearance to access "confidential and secret" government information, 1.1 million, or 21 percent, work for outside contractors, according to a report from Clapper's office.Why not - it's lucrative!!
Of the 1.4 million who have the higher "top secret" access, 483,000, or 34 percent, work for contractors.
...
Because clearances can take months or even years to acquire, government contractors often recruit workers who already have them.
Snowden says he accessed and downloaded the last of the documents that detailed the NSA surveillance program while working in an NSA office in Hawaii for Booz Allen, where he says he was earning $200,000 a year.Analysts caution that any of the 1.4 million people with access to the nation's top secrets could have leaked information about the program - whether they worked for a contractor or the government.
For individuals and firms alike.
Booz Allen has long navigated those waters well.Or, a full-majority stake.
The firm was founded in 1914 and began serving the U.S. government in 1940, helping the Navy prepare for World War II. In 2008, it spun off the part of the firm that worked with private companies and abroad. That firm, called Booz & Co., is held privately.
Booz Allen was then acquired by the Carlyle Group, an investment firm with its own deep ties to the government. In November 2010, Booz Allen went public. The Carlyle Group still owns two-thirds of the company's shares.
Curiously once public, The Booz Allens of the world still operate like a psuedo-private company, with extensive confidential cloaks preventing the full disclosure of financial data. But don't worry - we should just trust them. Via Bloomberg's Jonathan Weil.
Psst, here's a stock tip for you. There's a company near Washington with strong ties to the U.S. intelligence community that has been around for almost a century and has secret ways of making money -- so secret that the company can't tell you what they are. Investors who buy just need to have faith.And while the media and popular attention is currently focused on who, if anyone else, may be the next Snowden struck by a sudden pang of conscience, perhaps a better question is what PE behemoth Carlyle, with a gargantuan $170 billion in AUM, knows, and why it rushed to purchase Booz Allen in the months after the Bear Stearns collapse, just when everyone else was batting down the hatches ahead of the biggest financial crash in modern history.
To skeptics, this might seem like a pitch for an investment scam. But as anyone who has been paying attention to the news might have guessed, the company is Booz Allen Hamilton Holding Corp.
...
"Because we are limited in our ability to provide information about these contracts and services," the company said in its latest annual report, "you may not have important information concerning our business, which will limit your insight into a substantial portion of our business, and therefore may be less able to fully evaluate the risks related to that portion of our business."
This seems like it would be a dream arrangement for some corporations: Not only is Booz Allen allowed to keep investors uninformed, it's required to. I suppose we should give the company credit for being transparent about how opaque it is.
From Bloomberg, May 2008:
Carlyle Group, the private-equity firm run by David Rubenstein, agreed to acquire Booz Allen Hamilton Inc.'s U.S. government-consulting business for $2.54 billion, its biggest buyout since the credit markets collapsed in July.And in addition to the UAE, who can possibly forget Carlyle's Saudi connection. From the WSJ circa 2001:
The purchase would be Carlyle's biggest since it agreed to buy nursing-home operator Manor Care Inc. last July for $6.3 billion. Deal-making may be rebounding from a 68 percent decline in the first quarter as investment banks begin writing new commitments for private-equity transactions. Buyouts ground to a halt last year because of a global credit freeze triggered by record U.S. subprime-mortgage defaults.
The Booz Allen government-consulting unit has more than 18,000 employees and annual sales of more than $2.7 billion. Its clients include branches of the U.S. military, the Department of Homeland Security and the World Bank.
Carlyle, based in Washington, manages $81.1 billion in assets [ZH: that was 5 years ago - the firm now boasts $170 billion in AUM]. Rubenstein founded the firm in 1987 with William Conway and Daniel D'Aniello. The trio initially focused on deals tied to government and defense.
Carlyle and closely held Booz Allen have attracted high-level officials from the government. Carlyle's senior advisers have included former President George H.W. Bush, former British Prime Minister John Major, and Arthur Levitt, the ex-chairman of the U.S. Securities and Exchange Commission.
R. James Woolsey, who led the U.S. Central Intelligence Agency from 1993 to 1995, is a Booz Allen executive. Mike McConnell, the U.S. director of national intelligence, is a former senior vice president with the company.
...
Carlyle last year sold a minority interest in itself to Mubadala Development Co., an investment fund affiliated with the government of Abu Dhabi, capital of the United Arab Emirates.
If the U.S. boosts defense spending in its quest to stop Osama bin Laden's alleged terrorist activities, there may be one unexpected beneficiary: Mr. bin Laden's family.We can clearly see why. We can also clearly see why nobody has mentioned Carlyle so far into the Booz Allen fiasco.
Among its far-flung business interests, the well-heeled Saudi Arabian clan -- which says it is estranged from Osama -- is an investor in a fund established by Carlyle Group, a well-connected Washington merchant bank specializing in buyouts of defense and aerospace companies.
Through this investment and its ties to Saudi royalty, the bin Laden family has become acquainted with some of the biggest names in the Republican Party. In recent years, former President Bush, ex-Secretary of State James Baker and ex-Secretary of Defense Frank Carlucci have made the pilgrimage to the bin Laden family's headquarters in Jeddah, Saudi Arabia. Mr. Bush makes speeches on behalf of Carlyle Group and is senior adviser to its Asian Partners fund, while Mr. Baker is its senior counselor. Mr. Carlucci is the group's chairman.
Osama is one of more than 50 children of Mohammed bin Laden, who built the family's $5 billion business, Saudi Binladin Group, largely with construction contracts from the Saudi government. Osama worked briefly in the business and is believed to have inherited as much as $50 million from his father in cash and stock, although he doesn't have access to the shares, a family spokesman says. Because his Saudi citizenship was revoked in 1994, Mr. bin Laden is ineligible to own assets in the kingdom, the spokesman added.
...
People familiar with the family's finances say the bin Ladens do much of their banking with National Commercial Bank in Saudi Arabia and with the London branch of Deutsche Bank AG. They also use Citigroup Inc. and ABN Amro, the people said.
"If there were ever any company closely connected to the U.S. and its presence in Saudi Arabia, it's the Saudi Binladin Group," says Charles Freeman, president of the Middle East Policy Council, a Washington nonprofit concern that receives tens of thousands of dollars a year from the bin Laden family. "They're the establishment that Osama's trying to overthrow."
...
A Carlyle executive said the bin Laden family committed $2 million through a London investment arm in 1995 in Carlyle Partners II Fund, which raised $1.3 billion overall. The fund has purchased several aerospace companies among 29 deals. So far, the family has received $1.3 million back in completed investments and should ultimately realize a 40% annualized rate of return, the Carlyle executive said. But a foreign financier with ties to the bin Laden family says the family's overall investment with Carlyle is considerably larger. He called the $2 million merely an initial contribution. "It's like plowing a field," this person said. "You seed it once. You plow it, and then you reseed it again."
The Carlyle executive added that he would think twice before accepting any future investments by the bin Ladens. "The situation's changed now," he said. "I don't want to spend my life talking to reporters."
A U.S. inquiry into bin Laden family business dealings could brush against some big names associated with the U.S. government. Former President Bush said through his chief of staff, Jean Becker, that he recalled only one meeting with the bin Laden family, which took place in November1998. Ms. Becker confirmed that there was a second meeting in January 2000, after being read the ex-president's subsequent thank-you note. "President Bush does not have a relationship with the bin Laden family," says Ms. Becker. "He's met them twice."As one can imagine the rabbit hole just gets deeper and deeper the more one digs. For now, we will let readers do their own diligence. We promise the results are fascinating.
Mr. Baker visited the bin Laden family in both 1998 and 1999, according to people close to the family. In the second trip, he traveled on a family plane. Mr. Baker declined comment, as did Mr. Carlucci, a past chairman of Nortel Networks Corp., which has partnered with Saudi Binladin Group on telecommunications ventures.
Going back to the topic at hand, we will however ask just how much and what kind of confidential, classified, and or Top Secret information is shared "behind Chinese walls" between a Carlyle still majority-owned company and the private equity behemoth's employees and advisors, among which are some of the most prominent political and business luminaries currently alive. The following is a list of both current and former employees and advisors. We have used Wiki but anyone wishing to comb through the firm's full blown roster of over 1,000 employees and advisors, is welcome to do so at the firm's website.
Business
- G. Allen Andreas - Chairman of the Archer Daniels Midland Company, Carlyle European Advisory Board
- Daniel Akerson -CEO of General Motors, Board member at 7 companies, Managing director at Carlyle
- Joaquin Avila - former managing director at Lehman Brothers, Managing director at Carlyle
- Laurent Beaudoin - CEO of Bombardier (1979-), former member of Carlyle’s Canadian Advisory board
- Peter Cornelius - Managing Director of Nielsen Australia.
- Paul Desmarais - Chairman of the Power Corporation of Canada, former member of Carlyle’s Canadian Advisory board
- David M. Moffett - CEO of Freddie Mac, Former Senior advisor to the Carlyle
- Karl Otto Pöhl - former President of the Bundesbank, Former Senior advisor to the Carlyle Group
- Olivier Sarkozy (half-brother of Nicolas Sarkozy, former President of France) - co-head and managing director of its recently launched global financial services division, since March 2008.
Political figures
- North America
- James Baker III, former United States Secretary of State under George H. W. Bush, Staff member under Ronald Reagan and George W. Bush, Carlyle Senior Counselor, served in this capacity from 1993 to 2005.
- George H. W. Bush, former U.S. President, Senior Advisor to the Carlyle Asia Advisory Board from April 1998 to October 2003.
- Frank C. Carlucci, former United States Secretary of Defense from 1987 to 1989; Carlyle Chairman and Chairman Emeritus from 1989 to 2005.
- Richard G. Darman, Director of the Office of Management and Budget in the Bush Administration; Managing director from 1993, later Senior Advisor
- William E. Kennard, chairman of the Federal Communications Commission from 1997-2001 and United States Ambassador to the European Union; Carlyle managing director from 2001-2009
- Arthur Levitt, Chairman of the U.S. Securities and Exchange Commission (SEC) under President Bill Clinton, Carlyle Senior Advisor from 2001 to the present
- Luis Téllez Kuenzler, Mexican economist, former Secretary of Communications and Transportation under the Felipe Calderón administration and former Secretary of Energy under the Zedillo administration.
- Frank McKenna, former Premier of New Brunswick, Canadian Ambassador to the United States between 2005 and 2006 and current Deputy Chairman of Toronto-Dominion Bank; served on Carlyle's Canadian advisory board.
- Mack McLarty, Carlyle Group Senior Advisor (from 2003), White House Chief of Staff to President Bill Clinton from 1993 to 1994.
- Randal K. Quarles, former Under Secretary of the U.S. Treasury under President George W. Bush, now a Carlyle managing director
- Europe
- John Major, former British Prime Minister, Chairman, Carlyle Europe from 2001–2004
- Asia
- Anand Panyarachun, former Prime Minister of Thailand (twice), former member of the Carlyle Asia Advisory Board until the board was disbanded in 2004
- Fidel V. Ramos, former president of the Philippines, Carlyle Asia Advisor Board Member until the board was disbanded in 2004
- Peter Chung, former associate at Carlyle Group Korea, who resigned in 2001 after 2 weeks on the job after an inappropriate e-mail to friends was circulated around the world
- Thaksin Shinawatra, former Prime Minister of Thailand (twice), former member of the Carlyle Asia Advisory Board until 2001 when he resigned upon being elected Prime Minister.
Media
- Norman Pearlstine - editor-in-chief of Time magazine from (1995–2005), senior advisor telecommunications and media group 2006-
Source
June 10, 2013
Sheila Bair: Everything the IMF Wanted to Know About Financial Regulation and Wasn’t Afraid to Ask
I was honoured when the IMF asked me to moderate the Financial Regulation panel at this year’s Rethinking Macro II conference. And while naturally, I delivered one of the more enlightening and thought-provoking policy discussions of the conference, I did fail in my duties as moderator to make sure my panellists covered all the excellent questions our sponsors submitted to us. Of course, this was to be expected, as panellists at these types of events almost never address the topics requested of them (I certainly never do), but rather, like Presidential candidates, answer the questions they want to answer. However, being the conscientious person I am, who accepts responsibility for my mismanagement (unlike some bank CEOs we know), I will now step up and answer those questions myself.
1) Does anybody have a clear vision of the desirable financial system of the future?
Yes, me. It should be smaller, simpler, less leveraged and more focused on meeting the credit needs of the real economy. And oh yes, we should ban speculative use of credit default swaps from the face of the planet.
2) Is the ATM the only useful financial innovation of the last thirty years?
No. IF bankers approach the business of banking as a way to provide greater value at less cost to their customers, (I know – for a few bankers, that might be big ‘if’) technology provides a virtual gold mine for product innovations. For instance, I am currently testing out a pre-paid, stored value card which lets me do virtually all my banking on my I-phone. It tracks expenses, tells me when I’ve blown my budget, and lets me temporarily block usage of the card when my daughter, unbeknownst to me, has pulled it out of my wallet to buy the latest jeans from Aeropostale. The card, aptly called Simple, was engineered by two techies in Portland, Oregon. (Note to mega-banks: ditch the pin stripes for dockers and flip flops. The techies are coming for you next.)
3) Does the idea of a safe, regulated, core set of activities, and a less safe, less regulated, non-core make sense?
No.
The idea of a safe, regulated, core set of activities with access to the safety net (deposit insurance, central bank lending) and a less safe, MORE regulated, noncore set of activities which DO NOT UNDER ANY CIRCUMSTANCES have access to the safety net – that makes sense.
4) How do the different proposals (Volcker rule, Liikanen, Vickers) score in that respect?
Put them all together and you are two-thirds of the way there. The Volcker Rule acknowledges the need for tough restrictions on speculative trading throughout the banking organisation, including securities and derivatives trading in the so-called “casino bank”. Liikanen and Vickers acknowledge the need to firewall insured deposits around traditional commercial banking and force market funding of higher risk “casino” banking activities. Combining them would give us a much safer financial system.
But none of these proposals fully address the problem of excessive risk taking by non-bank financial institutions like AIG. Title I of Dodd-Frank empowers the Financial Stability Oversight Council to bring these kinds of “shadow banks” under prudential supervision by the Fed. Of course, that law was enacted three years ago and for nearly two years now, the regulators have promised that they will be designating shadow banks for supervisory oversight “very soon”. This was repeated most recently by Treasury Secretary Jack Lew on 22 May 2013, before the Senate Banking Committee (but this time he REALLY meant it). For some reason, the Fed and Treasury Department were able to figure out that AIG and GE Capital were systemic in a nano-second in 2008 when bailout money was at stake, but when it comes to subjecting them to more regulation now, well, hey we need to be careful here.
5) How much do higher capital ratios actually affect the efficiency and the profitability of banks?
You don’t have to be very efficient to make money by using a lot of leverage to juice profits then dump the losses on the government when things go bad. In my experience, the banks with the stronger capital ratios are the ones that are better managed, do a better job of lending, and have more sustainable profits over the long term, with the added benefit that they don’t put taxpayers at risk and keep lending during economic downturns.
6) Should we go for very high capital ratios?
Yep. I’ve argued for a minimum leverage ratio of 8%, but I like John Vickers 10% even better (and yes, he put out that news-making number during my panel…)
7) Is there virtue in simplicity, for example, simple leverage rather than capital ratios, or will simplicity only increase regulatory arbitrage?
The late Pat Moynihan once said that there are some things only a PhD can screw up. The Basel Committee’s rules for risk weighting assets are Exhibit A.
These rules are hopelessly overcomplicated. They were subject to rampant gaming and arbitrage prior to the crisis and still are. (If you don’t believe me, read Senator Levin’s report on the London Whale.) A simple leverage ratio should be the binding constraint, supplemented with a standardised system of risk weightings to force higher capital levels at banks taking undue risks. It is laughable to think that the leverage ratio is more susceptible to arbitrage than the current system of risk weightings given the way risk weights were gamed prior to the crisis, e.g. moving assets to the trading book, securitising loans to get lower capital charges, wrapping high risk CDOs in CDS protection to get near-zero risk charges, blindly investing in triple A securities, loading up on high-risk sovereign debt, repo financing … need I go on?
8) Can we realistically solve the “too big to fail” problem?
We have to solve it. If we can’t, then nationalise these behemoths and pay the people who run them the same wages as everyone else who work for the government.
9) Where do we stand on resolution processes, both at the national level and cross border?
Good progress, but not enough. Resolution authority in the US could be operationalised now, if necessary, but it would be messy and unduly expensive for creditors. We need thicker cushions of equity at the mega-banks, minimum standards for both equity and long-term debt issuances at the holding company level to facilitate the FDIC’s “single point of entry” strategy, and most importantly, we need regulators who make clear that they have the guts to put a mega-bank into receivership. The industry says they want to end “too big to fail” but they aren’t doing everything they can to make sure resolution authority works smoothly. For instance, industry groups like ISDA could greatly facilitate international resolutions by revising global standards for swap documentation to recognise the government’s authority to require continued performance on derivatives contracts in a Dodd-Frank resolution.
10) Can we hope to ever measure ‘systemic risk’?
Yes. It’s all about inter-connectedness which mega-banks and regulators should be able to measure. Ironically, inter-connectedness is encouraged by those %$#@& Basel capital rules for risk weighting assets. Lending to IBM is viewed 5 times riskier as lending to Morgan Stanley. Repos among financial institutions are treated as extremely low risk, even though excessive reliance on repo funding almost brought our system down. How dumb is that?
We need to fix the capital rules. Regulators also need to focus more attention on the credit exposure reports that are required under Dodd-Frank. These reports require mega-banks to identify and quantify for regulators how exposed they are to each other. Mega-bank failure scenarios should be factored into stress testing as well.
[Since these questions relate to financial regulation, I will not opine on measuring systemic risks building as a result of loose monetary policy.]
10) Are banks in effect driving the reform process?
Sure seems that way.
11) Can regulators ever be as nimble as the regulatees?
Yes. Read Roger Martin’s Fixing the Game. Financial regulators should look to the NFL for inspiration.
12) Given the cat and mouse game between regulators and regulatees, do we have to live with regulatory uncertainty?
Simple regulations which focus on market discipline and skin-in-the-game requirements are harder to game and more adaptable to changing conditions than rules which try to dictate behaviour. For instance, thick capital cushions will help ensure that whatever dumb mistakes banks may make in the future (and they will), there will be significant capacity to absorb the resulting losses. Unfortunately, the trend has been toward complex, prescriptive rules which smart banking lawyers love to exploit. Industry generally likes the prescriptive rules because they always find a way around them, and the regulators don’t keep up.
You can see that dynamic playing out now, where the securitisation industry is seeking to undermine a Dodd-Frank requirement that securitisers take 5 cents of every dollar of loss on mortgages they securitise. They say risk retention is no longer required because the Consumer Bureau has promulgated mortgage lending standards. But these rules are pretty permissive (no down payment requirement, and a whopping 43% debt-to-income ratio) and I’m sure that the Mortgage Bankers Association is already trying to figure out ways to skirt them.
Rules dictating behaviour can sometime be helpful, but forcing market participants to take the losses from their risk-taking can be much more effective. One approach tells them what kinds of loans they can make. The other says that whatever kind of loans they make, they will take losses if those loans default.
Source
1) Does anybody have a clear vision of the desirable financial system of the future?
Yes, me. It should be smaller, simpler, less leveraged and more focused on meeting the credit needs of the real economy. And oh yes, we should ban speculative use of credit default swaps from the face of the planet.
2) Is the ATM the only useful financial innovation of the last thirty years?
No. IF bankers approach the business of banking as a way to provide greater value at less cost to their customers, (I know – for a few bankers, that might be big ‘if’) technology provides a virtual gold mine for product innovations. For instance, I am currently testing out a pre-paid, stored value card which lets me do virtually all my banking on my I-phone. It tracks expenses, tells me when I’ve blown my budget, and lets me temporarily block usage of the card when my daughter, unbeknownst to me, has pulled it out of my wallet to buy the latest jeans from Aeropostale. The card, aptly called Simple, was engineered by two techies in Portland, Oregon. (Note to mega-banks: ditch the pin stripes for dockers and flip flops. The techies are coming for you next.)
3) Does the idea of a safe, regulated, core set of activities, and a less safe, less regulated, non-core make sense?
No.
The idea of a safe, regulated, core set of activities with access to the safety net (deposit insurance, central bank lending) and a less safe, MORE regulated, noncore set of activities which DO NOT UNDER ANY CIRCUMSTANCES have access to the safety net – that makes sense.
4) How do the different proposals (Volcker rule, Liikanen, Vickers) score in that respect?
Put them all together and you are two-thirds of the way there. The Volcker Rule acknowledges the need for tough restrictions on speculative trading throughout the banking organisation, including securities and derivatives trading in the so-called “casino bank”. Liikanen and Vickers acknowledge the need to firewall insured deposits around traditional commercial banking and force market funding of higher risk “casino” banking activities. Combining them would give us a much safer financial system.
But none of these proposals fully address the problem of excessive risk taking by non-bank financial institutions like AIG. Title I of Dodd-Frank empowers the Financial Stability Oversight Council to bring these kinds of “shadow banks” under prudential supervision by the Fed. Of course, that law was enacted three years ago and for nearly two years now, the regulators have promised that they will be designating shadow banks for supervisory oversight “very soon”. This was repeated most recently by Treasury Secretary Jack Lew on 22 May 2013, before the Senate Banking Committee (but this time he REALLY meant it). For some reason, the Fed and Treasury Department were able to figure out that AIG and GE Capital were systemic in a nano-second in 2008 when bailout money was at stake, but when it comes to subjecting them to more regulation now, well, hey we need to be careful here.
5) How much do higher capital ratios actually affect the efficiency and the profitability of banks?
You don’t have to be very efficient to make money by using a lot of leverage to juice profits then dump the losses on the government when things go bad. In my experience, the banks with the stronger capital ratios are the ones that are better managed, do a better job of lending, and have more sustainable profits over the long term, with the added benefit that they don’t put taxpayers at risk and keep lending during economic downturns.
6) Should we go for very high capital ratios?
Yep. I’ve argued for a minimum leverage ratio of 8%, but I like John Vickers 10% even better (and yes, he put out that news-making number during my panel…)
7) Is there virtue in simplicity, for example, simple leverage rather than capital ratios, or will simplicity only increase regulatory arbitrage?
The late Pat Moynihan once said that there are some things only a PhD can screw up. The Basel Committee’s rules for risk weighting assets are Exhibit A.
These rules are hopelessly overcomplicated. They were subject to rampant gaming and arbitrage prior to the crisis and still are. (If you don’t believe me, read Senator Levin’s report on the London Whale.) A simple leverage ratio should be the binding constraint, supplemented with a standardised system of risk weightings to force higher capital levels at banks taking undue risks. It is laughable to think that the leverage ratio is more susceptible to arbitrage than the current system of risk weightings given the way risk weights were gamed prior to the crisis, e.g. moving assets to the trading book, securitising loans to get lower capital charges, wrapping high risk CDOs in CDS protection to get near-zero risk charges, blindly investing in triple A securities, loading up on high-risk sovereign debt, repo financing … need I go on?
8) Can we realistically solve the “too big to fail” problem?
We have to solve it. If we can’t, then nationalise these behemoths and pay the people who run them the same wages as everyone else who work for the government.
9) Where do we stand on resolution processes, both at the national level and cross border?
Good progress, but not enough. Resolution authority in the US could be operationalised now, if necessary, but it would be messy and unduly expensive for creditors. We need thicker cushions of equity at the mega-banks, minimum standards for both equity and long-term debt issuances at the holding company level to facilitate the FDIC’s “single point of entry” strategy, and most importantly, we need regulators who make clear that they have the guts to put a mega-bank into receivership. The industry says they want to end “too big to fail” but they aren’t doing everything they can to make sure resolution authority works smoothly. For instance, industry groups like ISDA could greatly facilitate international resolutions by revising global standards for swap documentation to recognise the government’s authority to require continued performance on derivatives contracts in a Dodd-Frank resolution.
10) Can we hope to ever measure ‘systemic risk’?
Yes. It’s all about inter-connectedness which mega-banks and regulators should be able to measure. Ironically, inter-connectedness is encouraged by those %$#@& Basel capital rules for risk weighting assets. Lending to IBM is viewed 5 times riskier as lending to Morgan Stanley. Repos among financial institutions are treated as extremely low risk, even though excessive reliance on repo funding almost brought our system down. How dumb is that?
We need to fix the capital rules. Regulators also need to focus more attention on the credit exposure reports that are required under Dodd-Frank. These reports require mega-banks to identify and quantify for regulators how exposed they are to each other. Mega-bank failure scenarios should be factored into stress testing as well.
[Since these questions relate to financial regulation, I will not opine on measuring systemic risks building as a result of loose monetary policy.]
10) Are banks in effect driving the reform process?
Sure seems that way.
11) Can regulators ever be as nimble as the regulatees?
Yes. Read Roger Martin’s Fixing the Game. Financial regulators should look to the NFL for inspiration.
12) Given the cat and mouse game between regulators and regulatees, do we have to live with regulatory uncertainty?
Simple regulations which focus on market discipline and skin-in-the-game requirements are harder to game and more adaptable to changing conditions than rules which try to dictate behaviour. For instance, thick capital cushions will help ensure that whatever dumb mistakes banks may make in the future (and they will), there will be significant capacity to absorb the resulting losses. Unfortunately, the trend has been toward complex, prescriptive rules which smart banking lawyers love to exploit. Industry generally likes the prescriptive rules because they always find a way around them, and the regulators don’t keep up.
You can see that dynamic playing out now, where the securitisation industry is seeking to undermine a Dodd-Frank requirement that securitisers take 5 cents of every dollar of loss on mortgages they securitise. They say risk retention is no longer required because the Consumer Bureau has promulgated mortgage lending standards. But these rules are pretty permissive (no down payment requirement, and a whopping 43% debt-to-income ratio) and I’m sure that the Mortgage Bankers Association is already trying to figure out ways to skirt them.
Rules dictating behaviour can sometime be helpful, but forcing market participants to take the losses from their risk-taking can be much more effective. One approach tells them what kinds of loans they can make. The other says that whatever kind of loans they make, they will take losses if those loans default.
Source
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