Joe's Investo-Blog

There Is No Such Thing as a Sovereign Budget Deficit.

By Mike Whitney

Deficits create demand. Demand generates spending. Spending generates economic activity. Economic activity generates growth. Growth generates jobs, increases government revenues, reduces deficits and ends recessions.

Simple, right?

When consumers have too much debt, they will not spend no matter how low interest rates are. This is not theory, this is fact.

If the government cuts spending at the same time as consumers, then overall spending declines and the economy slips into recession. This is what the deficit hawks want–a return to recession. This is politics, not economics.

KEYNE’S KOAN: Increasing the deficits, lowers the deficits
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Economics, Financial Crises, Inflation/Deflation, Politics Asset Allocation, collapse, Currencies, debt, deflation, Economics, EU, exchange rates, fiscal policy, history, IMF, inflation, monetary policy, Politics, Regulators, trade

The E.U.’s Dangerous Game

By MARK WEISBROT
Published: May 12, 2010

The agreement by the European Union and the International Monetary Fund to provide up to $960 billion of support to the Continent’s weaker economies, as well as to financial markets, has appeared to calm investors worldwide, for the moment.

But this does not resolve the underlying problem, even in the short run.

The problem is one of irrational economic policy. The Greek government has reached an agreement with the E.U. authorities (which include the European Commission and the European Central Bank), and the I.M.F. that will make the current economic problems even worse.

This is known to economists, including the ones at the E.U. and I.M.F. who negotiated the agreement. The projections show that if their program “works,” Greece’s debt will rise from 115 percent of gross domestic product today to 149 percent in 2013. This means that in less than three years, and most likely sooner, Greece will be facing the same crisis that it faces today.
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Asset Allocation, Bonds, Currencies, Economics, Inflation/Deflation, Politics Bonds, collapse, Currencies, debt, Economics, economy, EU, exchange rates, fiscal policy, IMF, monetary policy, Politics

• Force Credit Default Swaps onto Transparent Exchanges
• “Too Big to Fail” Must Go
• Excessive Leverage Must Go
• Separate Commercial and Investment Banking – Again

Read the entire John Mauldin article here: http://www.frontlinethoughts.com/article.asp?id=mwo040910

Credit Default Swaps

What happened in the last credit crisis was that interlocking credit default swaps among so many banks made the ENTIRE system too big to fail. AIG basically sold naked options in the form of credit default swaps to all. Yet nothing has changed. We again have credit default swaps (CDS) growing, and no one knows who could be overextended. Once again, everyone could be dependent on everybody else, and we have no idea if there is a Bear, Lehman, or AIG in these woods. CDS’s are good things, just like futures. But they must go to a transparent exchange. There needs to be position limits, just as there are in futures and commodities. There needs to be very transparent pricing and commissions. And someone needs to monitor who owns them and what risks they are taking.

Too Big to Fail Must Go
We have large banks that take massive risks, which allow them to pay huge bonuses to management and traders; and then if they have problems the taxpayer has to take the losses. We can see why the banks like it. The problem is that parts of these large banks are essentially hedge funds, working with cheap commercial deposit money and putting the entire bank at risk. As taxpayers, we don’t want to be taking the risk so some big bank can have a trading desk and make large profits that only benefit their shareholders and management, where we have to pick up the pieces with our tax dollars when they fail. Separate traditional banking and investment banks. Commercial banks should be boring, traditional lending to customers, services, etc.

Excessive Leverage Must Go
The problem of too big to fail is ultimately one of leverage. If a small bank fails, no one really notices. If a giant bank fails and puts the system at risk, it costs us a lot. We must reduce the allowable leverage the larger a bank gets? This would clearly reduce their risk and encourage them to only make prudent bets (otherwise known as loans), as their risk capital would be limited. If they wanted to make more loans, then they could raise more capital or retain more earnings. Would that hurt earnings and shareholders and limit share prices? Yes, but the world of privatizing the gains and socializing the risks must become a thing of the past.

Banks, Economics, Financial Crises, Markets, Politics Banks, collapse, congress, debt, economy, Politics, Regulators, The Administration

Read the entire article here: http://baselinescenario.com/2010/03/04/why-exactly-are-big-banks-bad/#more-6656

Big banks cannot be reined in through some clever tweaking of the rules. The issue before us is intensely political – just as it was in the first decade of the twentieth century (and in Jackson’s era). There is again a confrontation between concentrated financial power and our democracy. One side will win and the other side will lose.

The banks start with a definite edge. The public relations machines of today’s bankers may be even more effective than those of Morgan and Rockefeller – although the campaign contributions and control of the Senate exercised by those titans was immense.

But it is still early days – the Senate legislation expected this week or next will achieve nothing, except make the stakes clearer and motivations more transparent. If the banks win this round, as seems likely, they will become even larger – and more dangerous. At current scale, our megabanks bring no social benefits and great social risks.

Just as a hundred years ago, the consensus on big banks has to change. In this instance, either we break them up or they will soon break us all.

Banks, Financial Crises, Politics Banks, collapse, history, Politics, Regulators, The Fed, US treasury

Here’s a guy who finally understands his job. Let’s see if Pres. Obama understands his and get’s behind this guy. It still remains to be seen if the banks really do own Congress and are able to derail this upstart.

CFTC’s Gensler Turns Back on Wall Street to Push Derivatives Overhaul

By Ian Katz and Robert Schmidt
Bloomberg News
Friday, February 12, 2010

http://www.bloomberg.com/apps/news?pid=20601109&sid=a3OkrdITAZtA&pos=10

WASHINGTON — Gary Gensler, chairman of the Commodity Futures Trading Commission, is shattering any illusions that his 18 years at Goldman Sachs Group Inc. would make him sympathetic to Wall Street’s effort to weaken derivatives legislation.

Over a private lunch at the Waldorf Astoria hotel on Jan. 6, Gensler, 52, told bank executives that while he once shared their goals — to boost revenue and increase their bonuses — his responsibility now was to American taxpayers. And if he gets his way, Gensler said, their firms will be less profitable, according to three people familiar with the discussion.

Attending the lunch were David B. Heller, co-head of the securities division at Goldman Sachs; Seth Waugh, chief executive officer of Deutsche Bank Americas; Timothy O’Hara, head of global credit at Credit Suisse Holdings USA Inc., and Robert P. Kelly, CEO of Bank of New York Mellon Corp. When one banker asked Gensler what he sees as the biggest obstacles to reform, he gestured toward his hosts and replied, “You.”

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Banks, Financial Crises, Politics Banks, collapse, Politics, Regulators, The Administration

Recently Sally Hutchins commented on a recent post as follows:

Please continue. So printing more money is creating more debt? Educate me. Love, Sally

Love? Yep. She’s my adorable sister.

Hi Sally:

Let me try to answer your question as succinctly as I can.

“Printing money” is a term used today that nobody really knows what it means. Historically it meant the government physically printed little pieces of paper which were then spent into circulation by buying goods and services the government needed. For example, in the Revolutionary War, the government printed continentals to pay the troops. Allegedly, British counterfieting rendered the currency eventually worthless. Again, when New York Bankers refused Abraham Lincoln additional financing during the Civil War, Lincoln then decided simply to print “greenbacks” to pay the troops. It worked. Merchants accepted greenbacks because Lincoln decreed that greenbacks would be accepted by the government for the payment of taxes. “Greenbacks” remained in circulation for decades and largely contributed to massive subsequent economic growth.

Today, 99 percent of all money in circulation isn’t currency at all, but mere electronic blips or signals recorded on the computerized ledgers of the banking system. Obviously actual printing of money doesn’t really happen anymore in any meaningful way. However, “money creation” is probably a more appropriate term. Money is created when a bank makes a loan. Presto. That’s it. I already know that you’re going to ask Read more…

Banks, Economics, Financial Crises, Inflation/Deflation, Politics Banks, collapse, Currencies, debt, deflation, Economics, economy, fiscal policy, history, inflation, monetary policy, Politics, taxes, The Fed, US treasury, war

Harsh lessons we may need to learn again
By Joseph E. Stiglitz (China Daily)

http://www.chinadaily.com.cn/opinion/2009-12/31/content_9249981.htm

Joseph Stiglitz recounts five “harsh lessons” from 2009:

1. Markets are not self-correcting.
2. Recent Markets failed because too-big-to-fail financial institutions had perverse incentives.
3. Keynesian policies do work.
4. There is more to monetary policy than just fighting inflation.
5. Not all innovation leads to a more efficient and productive economy – let alone a better society.

The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world. The world has also learned some valuable lessons, though at great cost both to current and future prosperity – costs that were unnecessarily high given that we should already have learned them.

The first lesson is that markets are not self-correcting. Indeed, without adequate regulation, they are prone to excess. In 2009, we again saw why Adam Smith’s invisible hand often appeared invisible: it is not there. The bankers’ pursuit of self-interest (greed) did not lead to the well-being of society; it did not even serve their shareholders and bondholders well. It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks.

Under the threat of a collapse of the entire system, the safety net – intended to help unfortunate individuals meet the exigencies of life – was generously extended to commercial banks, then to investment banks, insurance firms, auto companies, even car-loan companies. Never has so much money been transferred from so many to so few.
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Banks, Economics, Financial Crises, Inflation/Deflation, Markets, Politics Banks, collapse, deflation, Economics, economy, fiscal policy, history, inflation, monetary policy, Politics, taxes, The Fed, US treasury

In today’s Senate hearings to confirm the re-appointment of Federal Reserve Chairman Ben Bernanke, Senator Bunning succinctly lays out the greivous mistakes of the Fed in the years leading up to, during, and in the aftermath of the recent financial meltdown. It is hard to refute his argument that the privately owned Fed did nothing for the taxpayers and everything for it’s stockholders, the member banks of the Federal Reserve System.

Statement of Senator Bunning

Four years ago when you came before the Senate for confirmation to be Chairman of the Federal Reserve, I was the only Senator to vote against you. In fact, I was the only Senator to even raise serious concerns about you. I opposed you because I knew you would continue the legacy of Alan Greenspan, and I was right. But I did not know how right I would be and could not begin to imagine how wrong you would be in the following four years.
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Banks, Economics, Financial Crises, Markets, Politics Banks, collapse, debt, deflation, economy, history, monetary policy, Politics, The Fed, US treasury

Rep. Frank eyes Fed audit, emergency lending curbs

Saturday August 29, 2009, 10:47 pm EDT
By Tim Ahmann

WASHINGTON (Reuters) – Rep. Barney Frank, the chairman of the U.S. House of Representatives Financial Services Committee, said he plans legislation to restrict the Federal Reserve’s emergency lending powers and subject the central bank to a “complete audit.”

At a recent town hall meeting, Frank said the House would pass a bill to use an audit to crack open the central bank’s books more widely, but in a way that will not encroach on the central bank’s monetary policy independence.

In addition, he said the House would move to rein in the authority that allows the Fed to lend to a wide range of non-bank firms in “unusual and exigent circumstances.”

A bill sponsored by Texas Republican Rep. Ron Paul that would allow the Government Accountability Office, a federal watchdog agency, to audit Fed interest-rate decisions has won the co-sponsorship of more than half of the House.

Fed Chairman Ben Bernanke has warned that the bill would compromise the U.S. central bank’s policy-making independence and could undermine financial markets and the economy.

Frank said he has been working with Paul on compromise language…

Ahem…, but isn’t it incumbent upon the Fed Chairman, arguably the most powerful man in the world, to explain exactly how an audit can compromise policy-making independence? I’m holding my breath on this one.

Banks, Financial Crises, Politics Banks, Currencies, debt, deflation, monetary policy, Politics, The Fed

Most political speeches are just that, a speech, a lot of hot air. However, there exists in our recent history, one speech that single handedly won the cold war.  It is the speech President Reagan delivered to Moscow State University on May 31, 1988.  The New York Times editorialized: “When people some day look back to the milestones of the cold war, they are likely to remember the day Ronald Reagan extolled freedom, while Lenin looked on.” The speech follows in it’s entirety:

President Reagan:

Thank you, Rector Logunov, and I want to thank all of you very much for a very warm welcome.
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Politics history, Politics, strategy, war