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

http://www.bloomberg.com/apps/news?pid=20601103&sid=aqpASviGyLQc

April 26 (Bloomberg) — The bond vigilantes who punished governments for profligate spending in past years have gone into hiding.

Sovereign bonds yield an average 2.385 percent, about the same as a year ago and below the average of 3.08 percent in 2008 when the credit market seizure led investors to seek the safety of government debt, according to Bank of America Merrill Lynch index data. The cost to borrow is steady even though the amount of bonds in the index that includes nations from the U.S. to Germany and Japan has grown to $17.4 trillion from $13.4 trillion two years ago.

While the debt helped the global economy recover from its first recession since World War II, yields show bond investors aren’t troubled that the growth will spur inflation. Consumer prices excluding food and energy costs rose 1.5 percent in February from a year earlier in the 30 countries that form the Organization for Economic Cooperation and Development, the smallest gain on record.

“The fact that inflation is very well behaved, that provides the cover for central banks to remain on the sidelines and continue to pursue accommodative policies to help the economy,” said Thomas Girard, a senior money manager who helps oversee $115 billion in fixed-income assets with New York Life Investment Management in New York.
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Asset Allocation, Bonds, Economics, Inflation/Deflation, Markets Asset Allocation, Bonds, collapse, debt, deflation, Economics, economy, fiscal policy, inflation, monetary policy, Politics, Regulators, strategy, The Fed, US treasury

• 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