Thursday, September 25, 2008

You Cannot Push on Piece of String Mr. Paulson

You Cannot Push on Piece of String Mr. Paulson

Treasury Secretary Paulson’s grand scheme to buy $700 billion of toxic derivatives from ailing financial institutions is a pipe dream that logic and history show will not work. The Paulson plan is nothing but manna from heaven for distressed institutions. No doubt there will be a momentary burst of confidence and markets will rally but longer term serious problems remain.

The bailout is an attempt to bring confidence back to the lending market that has seized up in fear and is not making loans. The concern is that the cessation of liquidity and lending will exacerbate the meltdown on Wall Street and ripple broadly into the economy. The Paulson plan fails to address the issue of fear that is behind the crisis.

History shows the Plan is Doomed to Fail

Over the past few weeks we have been consistently told that we face an epic crisis comparable to the 1929 stock market crash with its ensuing Great Depression of the 1930’s. So why are the lessons of the Great Depression being ignored?

During the Great Depression lending similarly dried up and confidence swooned. Lending and borrowing came to a standstill. The Lesson of the Great Depression was that it is next to impossible to get institutions to lend and companies/consumers to borrow once fear sets in. Renowned economist John Maynard Keynes said that trying to get banks to lend and borrowers to borrow during a banking crisis is like trying to “push on a string”—in other words it is impossible. Similarly in the 1990’s the Bank of Japan found trying to resuscitate lending in the wake of the Japan’s stock market collapse was impossible. The Bank of Japan even went to the extreme of making interest rates negative, in other words they paid you to borrow, and it proved ineffectual.

While pushing on a string refers to monetary policy, which the Fed has kept lose, and the Paulson plan is about buying assets they are similar because they are attempts to get banks to lend. Buying the bad assets of institutions is going to at best provide a temporary return to lending. Ultimately you can lead a horse to water but you cannot make him drink.

“All we to Fear is Fear Itself”
In his first inaugural speech FDR voiced the greatest challenge facing America and the world at the time when he said, “All we have to fear is fear itself”. Today fear has again set into the financial markets and is beginning to spread. Turning this tide is next to impossible.

The market runs from the extremes of greed to fear and once a mentality sets in its stays for a very, very long time. Nobel Prize winning economist Robert Mundell described the renitence of consumers to buy things in the 1930’s as a deflation (falling prices) mentality. Because demand fell off a cliff retailers were forced to reduce prices to sell their products. Consumers eventually realized that by postponing their purchases they could save money. As they held off buying retailers were forced to reduce prices further to entice buyers. This created a self fulfilling spiral pushing prices lower that eventually had many buyers forgoing buying totally.

Admit that Reaganomics and Free Markets Don’t Work
The unfortunate thing is that the Bush Administration and Republicans refuse to admit that the problem we are suffering from today is the failure of free market and Reaganomic ideology. The cause of our current problems from the meltdown on Wall Street, to higher gas prices, to higher food prices can be traced squarely to the failure of free market/neoliberalism/Reaganomics ideology.( See “Higher Gas Prices: The Failure of Free Markets and Reaganomics: )

Government needs to regulate and get rid of the excesses created by the free market’s binge of the past few decades. Bold and aggressive initiatives such as the government seizing control of financial institutions are needed at this time. Fear has set in and throwing good money at bad as we have done successively with bailouts since the 1987 stock market crash have not worked. Bailouts create a moral hazard and reckless behavior that necessitate further bailouts where eventually you reach a point where the size of the bailout bill is insurmountable. Today we are being forced to fork over a massive $700 billion.

Capitalism is failing again as it did during the 1930’s with the Great Depression. They say “fool me once shame on you, fool me twice shame on me.” How many more times will we allow our self to be fooled? Free market ideology does not work! Bold initiatives that empower “we the people” are needed.

Wednesday, September 24, 2008

No Bailouts—Fix the Problem & Reform of the Fed

No Bailouts—Fix the Problem & Reform of the Fed
By madis senner

Lost in the debate over the failing of financial behemoths and the meltdown of Wall Street is an accounting about how this mess came about. The housing bubble that created bad mortgage loans did not just materialize out of thin air. Toxic derivatives which threaten financial institutions and the overall economy were not cooked up in someone’s garage like some high tech internet startup. The fact is that much of what threatens the world economy can be placed squarely on the shoulders of the Federal Reserve. Instead of throwing good money at bad we need to fix the problem and reform the Fed.

We are not just talking about bad policy choices by the Fed. We all make poor decisions, and as a former global money manager I am all too familiar with how the best analysis can at times lead to the worst of results. I am talking about something more insidious. The Fed, particularly under Greenspan, not only made poor policy choices, but pursued a radical free markets agenda and an experiment in financial alchemy from which we now suffer.

Who gave Greenspan the authority to push his agenda and have average Americans serve as guinea pigs for his experiments in free markets and financial sorcery? No one!

Fed 101
Greenspan was able to pursue his whims because the Federal Reserve exists as an independent entity unencumbered by rules that govern other government agencies.

The Fed is free from the checks and balances that are the backbone of the US constitution. The Fed is free from GAO reporting and Freedom of Information Act scrutiny. Its meetings are kept secrecy until long after the fact. It was mandated to report to Congress by the Humphrey Hawkins Full Employment Act until it expired in 2000. Although no longer required to report to Congress the Fed chairman still does. Arguably it is only beholding to its board of directors made up of primarily the largest financial institutions in America; a classic example of the industry supervising the regulator.

The Fed is responsible for conducting monetary policy, overseeing financial institutions and financial markets. In other words the Fed not only sets policy but oversees itself, a clear conflict of interest. Because the Fed can print its own money it is free from Congressional oversight. No need to worry about a budget, just turn on the presses; and don’t worry no one can audit you.

It is difficult for people outside the world of finance to understand the scope and power of the Fed since we are so used to thinking of line authority that gives certain powers to individuals. The Fed’s power rests in a mix of monetary policy tools and confidence in the institution; but in a world ruled by money, the one that controls money is the king. Bob Woodward’s book on Greenspan, Maestro: Greenspan’s Fed and the American Boom expressed the perspective of many that Greenspan was the most powerful person in the world when he said, "On January 20, 2001, a new president takes the oath of office. He assumes the presidency in a Greenspan era".

Amity Shlaes of the Financial Times similarly commented on the enormity of Greenspan’s power and the inherent failure of the design of the Federal Reserve system;
"How can it be, at a time of unprecedented faith in free markets, that we even think a government authority might have such strength? And how can it be that the world’s monetary order rests on the shoulders of an individual, much admired but still fallible economist?
The answer is America’s uniquely flawed and outdated monetary law, which gives the nation’s monetary chief the sort of discretion of which his peers in other developed countries can only dream. Mr. Greenspan is so powerful that today he is perceived as a loving dictator. This is only natural. For as we know from history, wherever the law is
weak-in any area of politics-public credibility tends to vest itself in an

A Radical Agenda
Greenspan is an ardent devotee of the most radical element of capitalism and free markets. As William Greider notes, “His thinking is still anchored by Ayn Rand's brittle social philosophy: Let the strong prevail, let the weak pay for their weakness.” ( )
Throughout his career beginning with the 1987 stock market crash Greenspan has bailed out the rich while ignoring the plight of average Americans. During the Fed engineered bailout of the speculative hedge fund, Long Term Capital Management, the Wall Street Journal’s op-ed page would lament (“Decade of Moral Hazard”, 2/25/98):
“As moral hazard grows you get a market so skewed by the expectation of bailouts that vital signals about genuine risk no longer get through. Eventually, the danger turns into one of systemic collapse…”

The bailouts have only increased in frequency and size of money needed for rescue that today we face the “systemic collapse” the Wall Street Journal forecast.
Instead of balancing the needs of the well to do (inflation) with the interest of working Americans (jobs) as mandated by the Humphrey Hawkins Full Employment Act, Greenspan consistently championed the rich. The Fed has almost exclusively focused on keeping the rate inflation low and ignored the needs of working Americans’ for a strong economy to create jobs. Generally speaking low inflation benefits financial assets and modest, or higher inflation stimulates the economy. The decision to focus almost exclusively on keeping inflation low sent the value of financial assets rocketing higher. Since the advent of Reaganomics and the Greenspan Fed, the PE ratio of the stock market tripled from its historical range of 10 to 15 to 30 to 45. The PE ratio (Price Earning Ratio) is the price of stock divided by its earnings per share. The higher the PE the greater the value.

This explosion in the value of financial assets was a boon to the wealthy that own the bulk of the stock market. Having the value of their investments triple in value by having the Fed simply wave a wand and put the onus on average Americans meant that they had more money to spend on funding conservative think tanks and lobbyists, both of which have dramatically increased. The Fed’s decision to hoist the value of stocks at the expense of average Americans underscores what James Livingston argued in Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913, that the creation of the Federal Reserve was part of an effort to create a new ruling class of ‘corporate-industrial business elite’.

The Financial Experiment Gone Bad
One of the incipient factors behind our current financial maelstrom is financial derivatives. Derivatives are financial assets whose value is based upon the price performance of some underlying asset. They usually entail leverage.

Greenspan has consistently championed and protected government oversight of derivatives. On 9/11/00 the NY Times in “Greenspan Urges Congress To Fuel Growth of Derivatives” reported that:
“The Federal Reserve chairman, Alan Greenspan, urged Congress today to encourage the growth of complex financial contracts known as derivatives before the United States share of that market and associated benefits are lost to other countries.”

One must wonder if would we be suffering today if Congress had not been railroaded?

One of the other financial innovations in derivative products creating havoc is subprime mortgages. The subprime market developed as a response to Reagan’s deregulation of the banking system. Banks were allowed to depart our inner cities where the most vulnerable in our country live. Greenspan stood by while this void was filled by loan sharks and shysters who found creative means to circumvent state usury laws and created the fringe banking market. New and innovative financial products were created to prey on the less well to do such as sub prime mortgages, payday loans, auto title loans, check cashing stores, tax refund anticipations loans and others all of which charged exorbitant interest rates. (see )

Many community groups correctly pointed out that fringe banking preyed on the poor, the elderly and people of color. The Fed turned a blind eye to this abuse and did nothing to prevent or even regulate this industry!

Reform the Fed

New Humphrey Hawkins Act—A new Humphrey Hawkins Full Employment Act needs to be passed that has the Fed focusing primarily on creating jobs, the real economy and the interests of average Americans. The Fed’s mandate must be to focus on all Americans.

New Board of Directors—The Fed needs a new board of directors who is primarily made up of individuals and organizations that serve the common good. They need to have the power to rein in the chairman.

Supervision needs to be separated from oversight—The policy arm and oversight functions of the Fed need to be separated.

Fed Head Should be Elected—The head of the Federal Reserve needs to be an elected official.

Congressional Oversight—The head of the Fed has to report to Congress on a regular basis. Congress should receive a detailed plan as to Fed’s policy objectives.

No More PKO’s for the stock market—Since the 1987 stock market crash it is widely rumored that the Federal Reserve, like the Bank of Japan before the precipitous decline of the Japanese market, has been pursuing an active “Price Keeping Operation” (PKO) to buy stocks during dramatic price declines. This must stop! Congress needs to investigate the books of the Fed to determine whether it holds any stocks in its portfolio.

Member Services—Financial institutions that are members of the Federal Reserve system have to offer basic checking, savings and cash checking at minimal cost to our most vulnerable communities.
No more bailouts.

For more information on the Fed go to:
Federal Reserve Links:
Fedhead Blog:
William Greider’s Secrets of the Temple—How the Federal Reserve Runs the Country after two decades since publication remains the authoritative text on the Fed. Greider has written a plethora of excellent articles on the Fed that can be accessed at:
The Financial Markets Center focuses on the Fed and has a rich archive of informative articles:

Wednesday, May 07, 2008

The Fed should push prices at the pump down

The idea of the Federal Reserve intervening in commodities markets to push down the price oil and basic food stuffs seems a preposterous proposition to many. It is not mandated to deal with commodities and does not have the necessary tools to do so; it is in the business of printing money, overseeing banks and maintaining the smooth flow of the economy. But if we look at how money has morphed and been redefined in the last few decades and how the Fed has responded to these changes, it becomes evident that the Fed should be intervening. The Fed has ignored the rise in price of basic necessities such as gas and food because it cares little about average Americans.

What is Money?
Everyone knows what money is, or do they? Since the advent of the Floating Rate Exchange rate regime beginning in 1973 the setting of exchange rates has shifted from countries to the market. The Float ushered in the period of free markets and hyper-capitalism. With money no longer tethered to gold or tied to convertibility into dollars it was free to do as it would and it did. In the 1970’s money began to morph and redefine itself with an explosion of new personas—credit cards, CD’s, money market funds, derivatives etc…. By the 1980’s money was growing great guns and continued to evolve as financial markets around the world opened up to allow foreigners to buy their securities. The mutual fund business took off as did the derivatives markets, structured products, etc.

All through this evolution of money the Fed was recalibrating how it was conducting policy and the factors it looked at to set policy.

By the 1990’s the Fed’s priorities in this evolution of money became all too apparent. For the affluent having your own personal banker became the mainstay. A plethora of innovative investment products and vehicles such as speculative hedge funds and commodity pools that invested in commodities and other non-traditional investments developed for the rich. The poor saw banks depart inner cities as they became the un-banked; the Fed turned a blind eye to the exodus. Fringe banking developed to fill the void left by the banks. Financial hucksters developed a host of innovative financial products to exploit the un-banked; predatory loans, payday loans, auto title loans, cash checking outlets, rent to own stores refund anticipation loans, and the like. Ingenious ways were found to circumvent state usury laws. (To learn more about fringe banking click on: .)

Today we have hundreds of billions of dollars parked in hedge funds, commodity pools and other speculative investment vehicles, that if leveraged can reach into the trillions of dollars. We also have a host of products and ways to invest in and trade in basic commodities such as oil and food--futures, structured derivatives, investment pools/funds focused on oil drilling and exploration, farmland, etc... In other words for the well to do there are securities and investment pools that allow someone to speculate in just about anything they want. While most of these products are not as liquid as cash they are like money, or a CD, or a host of other things that the Fed defines to be money.

While a fraction of these speculative funds may increase the production of oil and basic foodstuffs the bulk are targeted to exploit and de facto exacerbate the rise in oil and food prices. What do I mean? Historically, before the advent of the Float and free markets the PE Ratio (Price Earning Ratio) of the stock market had averaged 10 to 20 times earning; meaning that a stock would trade at roughly 10 to 20 times its yearly earnings per share. Since the Float began the PE of the stock market has hovered between 20 to 40 times earnings. In other words financial deregulation has jacked up the value of stocks 2 to 3 times historical averages going back over a hundred years. That same flow of money is currently driving up the price of oil and basic food stuffs 2 to 3 times more than the norm. The price leap is due to speculators trading in these essential commodities. (To see a historical chart of USA stock market back to 1871 click on: )

It is clear that the Float and its malevolent children, deregulation and financial innovation, have made the rich a lot richer. Will they be allowed to make the rich richer still on the backs of average Americans needing to eat, heat their home and drive their cars?

I ask you again, what is money?

Overstepping its bounds

Overstepping its bounds, pushing laws aside and doing what it wants is nothing new to the Fed, particularly under Greenspan. Before the Gramm Leach Bliley act of 1999 (GLB) was passed the Greenspan Fed was blessing the then un-lawful Travelers Citibank merger. The GLB overturned the Glass Steagall Act passed during the depression to prevent mergers of investment banks with commercial banks as in the Citibank Travelers merger.

On March 16th of this year the Fed again broke new ground when it bailed out Bear Stearns, an investment bank. Prior to this the Fed had never opened its borrowing window to securities underwriters. A few days later on March 20th Jeannine Aversa (Investment Firms Tap Fed for Billions) of the AP reported on the rush of investment banks to borrow billions from their new sugar daddy.

As Kevin Phillips recently noted (Plunge Protection Team, Washington Independent April 25, 2008, ):
“Over the last decade or so, the Treasury Dept. and the Fed have both
developed something of a scofflaw attitude toward strict interpretation of federal statutes and regulations.”

He mentions this in reference to a secretive, arguably clandestine, group titled the Plunge Protection Team that is widely rumored to have supported the stock and other financial markets. He details several of the many believed forays by the PPT into the highly volatile stock index futures markets.

Phillips notes: “Some people foolishly think that Washington's recent high-profile effort to steer, subsidize and protect the American financial sector is the beginning of something new - a revolutionary development.” It is not.

If the Fed is intervening to support the stock market why doesn’t it intervene to influence the price of oil and basic foodstuffs? Especially since the price of oil and food is having debilitating consequences for the economy.

The Fed Is Limited
The argument against the Fed intervening in the markets for oil and foodstuffs is that it lacks the necessary tools to do so. But this did not stop them from buying stock index futures or other such vehicles. Would the clamor be louder if the Fed lost billions supporting the stock market and big corporations, or billions from trying to keep the price of necessities like food and gas from rising? I think that the answer is clear.

There are a host of other options beyond the futures markets available for the Fed to use for intervention. For example, the Fed has oversight over some of the pools driving oil and food markets. While the margin level (how much collateral must be put up to trade) is set by other organizations such as the CFTC (Commodities Futures Trading Commission), banks that report to the Fed are indirectly involved. Then there are other central banks and international organizations that should have a similar desire not to see oil and food prices rocket higher in price. Then there are….The fact is if there is a will, there is a way.

Lack of Will
If anything the Fed lacks the will to help keep oil and food prices from rising. It is a secretive organization that is independent of the checks and balances of American democracy—in other words it does what it wants. Its board members are some of the largest financial institutions in the world. Is it any wonder that they so readily bail out big banks and speculators?

The Fed also lacks the will because a lot of institutions (financial, pension, trusts, and endowments), corporations and individuals (aka the rich) are financially benefiting from the rise in oil and food prices.
The fact is as James Livingston points in Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913M, the Federal Reserve was established by a new ruling class of ‘corporate-industrial business elite’ to protect their interests;
"Upper Classes that seek to rule their part of the modern world must
therefore be able, above all, to specify the rules or methods that govern the designation of reality…the Federal Reserve System is an episode in, of evidence for, the emergence of a modern ruling class; neither historical event can be understood apart from the other."(
page 232-233)

Change is Needed

The morphing of money and new investment vehicles have redefined money and how it works. Consequently new institutions and methods need to be established to maintain order and protect the interests of ordinary Americans. Being able to feed yourself and heat your home is a basic human right and should not be contingent upon the whims of speculators.

The Federal Reserve is ill equipped and to beholding to the wealthy and business elite to equitably deal with the challenges America faces today. It also needs to be brought in line with the American system of checks and balances and should at a minimum have its oversight and policy making divisions separated.

In the meantime extreme pressure should be put on the Fed to creatively intervene in oil and foodstuff markets. Innovative ways to curtail speculation, price manipulation and price gouging need to be developed. Unless the Fed or some other organization moves quickly the American dream will sink ever deeper into the quagmire.

Wednesday, April 16, 2008

Hedge Fund Managers Reap Billions

Predators gain from calamity and commodities

Hedge Fund managers in 2007 reaped huge profits by betting on commodities and the crisis in financial markets—John Paulson $3.7Bln., George Soros $2.9Bln. and James Simons $2.9bln. The 50th hedge fund manager’s $210 ml. seems paltry in comparison according to figures compiled by Alpha Magazine(

The problem with this goes beyond the injustice and inequality of earning such enormous amounts. These predators financially gained by exasperating rising prices for oil/gas and basic food stuffs—in other words the extra we had to pay for gas and to eat, went right to their bottom line.

Several also profited by betting against the mortgage market and in doing so aggravated the effort to keep those Americans struggling with their mortgage payments stay in their homes. If a handful of traders in the city of London made $2bln from the “meltdown in the subprime market” as the Times of London reported, how much did the thousands of others make? Understand that these figures are a fraction of what their wealthy investors made.

These predators are a major threat to regulators trying to prevent financial calamity and to keep the economy going.

Gaining from Our Misery
As the UK Guardian noted; “Millions of people are facing foreclosure on their homes, banks are going belly up, tens of thousands are being put out of work, America is on the brink of recession — it's another fantastic year to make money as a hedge fund manager.”

Paulson was reported to have made his billions by betting against the subprime market that devastated several banks. The NY Times reported that Soros came out of retirement last summer to exploit the banking crisis. Reaping huge profits at the expense of others is nothing new to Soros who profited handsomely from the 1987 stock market crash and the departure of the pound sterling from the ERM in 1992. Some credit Soros for single handily bringing the pound to its knees.

The Weight Money
The problem with all the speculator’s and large pools of capital is that they can make themselves right. In other words they can buy so much of a particular commodity or financial asset price that the sheer volume of their buying or selling, becomes self fulfilling. The huge amounts of Japanese capital in the 1980’s was known for its ability to take certain markets to price extremes and keep prices there for a very long time.

Derivatives have given speculators enormous leverage unknown only thirty years ago. Today a speculator has only to put up a fraction of an underlying assets price as collateral to make an investment bet. For example, it might be as low as only a 5% or less; so one could make a $1Bln bet with only putting up $50 mln. With the capital of some of the funds reaching into the tens of billions of dollars the leverage can reach into the hundreds of billions, if not trillions of dollars for one fund only.

It should be pointed out that many feel that margin buying in the 1920’s helped exasperate the great crash.

Ex Treasury Secretary Robert Rubin recently told PBS in regards to derivatives that; “I think that most people who deal with these instruments probably do not fully understand all the risks that are embedded in those instruments that can materialize under unusual circumstances.”

We don’t know is an understatement. Worse we have never been here before. Before 1973 when the Floating Exchange Rate Regime began derivatives were almost nonexistent. According to the Bank for International Settlements in 2007 there were $516 trillion in OTC (over the counter) derivatives outstanding; then there are exchange traded, …

Thanks to ex Fed Head Alan Greenspan’s advocacy of derivatives there has been little oversight and regulation of them. And as we are beginning to learn, little understanding of them.

Daisy Chain Reaction
The fear with derivatives is that they can start some sort of daisy chain reaction where if one goes sour they all go sour. Bear Stearns was recently bailed out because regulators felt that its collapse could lead to the subsequent failure of other banks. If a bank held a lot of assets backed by Bear Stearns there was a chance that they would go bankrupt if Bear Stearns failed. The collapse of Bear Stearns could also have lead to a panic; similar to the banking panics, or bank runs, of the 1930’s when fearing insolvency depositors ran went from bank to bank pulling out their funds before they became insolvent.

Derivatives also give speculators the opportunity to create their own panic. For example, it was widely rumored that the collapse of the dollar after the stock market crash of 1987 was exasperated if not precipitated by one trader. This trader supposedly bought a large amount of options to sell the dollar at a very low price below the market price of the dollar at the time. To benefit from this trade the dollar had to fall precipitously below the price level (strike price) of the option. The bank selling the option to the trader would hedge (delta hedge) his position by selling a fraction of the face amount of options that he had sold the trader. For example, because the options were so far out of the money the banker might sell $5mln (5% of face) on a $100 mln option.

The trader bought lots and lots of options from banks all over the world. He then began too aggressively sell dollars. As the dollar fell the banks holding the trader's options would have to sell more dollars to keep their option hedged as the dollar fell. This added to selling pressure. The trader kept selling. As the dollar kept falling banks were forced to sell more dollars to stay hedged. It ultimately became a self-fulfilling prophesy.

There should be no doubt that derivatives and the ability of speculators to bet on the recent crisis in financial and housing markets helped foment the decline.

Too Big To Fail
Wall Street always reminds us about the risk of investing; that speculators can lose just as easily as they can gain. It is utter nonsense to think that speculators risk all when they speculate. If they are big players in the market history shows that the Federal Reserve or some other central bank will bail them out.
In 1998 Long Term Capital Management a speculative hedge fund made up of the who’s who of financial academia was bailed out when its bets went bad. Similarly Bear Stearns was in some unsavory businesses and evidently took on too much risk. In other words, for large pools of capital their is enormous upside and little downside.

The End is Nigh
The USA and much of the world is in financial straights. The USA economy that much of the world is dependent upon is slowing. The collapse of housing prices in the USA still has a long way to go and is beginning to reverberate around the world. Rising food and oil prices is creating hardship and famine around the world. The USA, much of the OECD and most of Americans are up to their eyeballs in debt. Hedge fund managers see all of this as a tremendous investment opportunity.

We have entered a new world order where derivatives and deregulation have made hedge fund managers and other predator investors the kings of the world. Central banks as we saw in with the collapse of the ERM in 1992/93 and the Asian contagion in 1997/98 are unable to stop them. We need to remember that the Floating Exchange Rate Regime began when central bankers acknowledged that they could no longer tow the line against Eurodollar and Eurobond holders in 1973—let the market set exchange rates. The pools of capital setting exchange rates since then have only gotten larger.

The housing crisis will not end until speculators have wrung every penny of profit from the pockets of Americans unable to make their mortgage payments. Commodities such as oil and wheat will not fall in price until the speculators say so.

The seeds of deregulation and free markets planted decades ago are bearing their malicious fruit. The end is nigh.

Friday, March 21, 2008

AP Reports Underwriters Gobbling up FED $$$'s

Investment banks have begun to tap into the borrowing line that the Fed opened up for them. The AP reports that the new window has been aggressively used since its inception this past week . See Below.

As I noted in my post yesterday my concern is that this window will be exploited by investment banks as commerical banks did in the immediate aftermath of the passage of Gramm Leach Biley in 1999.

Investment Firms Tap Fed for Billions
Thursday March 20, 5:03 pm ET
By Jeannine Aversa, AP Economics Writer

Investment Houses Borrow Billions From Fed's Emergency Lending Program

WASHINGTON (AP) -- Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday.
The lending is part of a major effort by the Fed to help a financial system in danger of freezing.
Those large firms averaged $13.4 billion in daily borrowing over the past week from the new lending facility. The report does not identify the borrowers.
The Fed, in a bold move Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, got under way Monday and will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.
Goldman Sachs, Lehman Brothers and Morgan Stanley said Wednesday they had begun to test the new lending mechanism.
On Wednesday alone, lending reached $28.8 billion, according to the Fed report.
The Fed created a way for financially strapped investment firms to have regular access to a source of short-term cash. This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.
Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.
The Fed, in another rare move last Friday, agreed to let JP Morgan Chase secure emergency financing from the central bank to rescue the venerable Wall Street firm Bear Stearns from collapse. Two days later, the Fed back a deal for JP Morgan to take over Bear Stearns.
Thursday's report offered insight on how much credit was extended to Bear Stearns via JP Morgan through the transaction the Fed approved last Friday. Average daily borrowing came to $5.5 billion for the week ending Wednesday.
Separately, the Fed said it will make $75 billion of Treasury securities available to big investment firms next week. Investment houses can bid on a slice of the securities at a Fed auction next Thursday; a second is set for April 3.
The Fed will allow investment firms to borrow up to $200 billion in safe Treasury securities by using some of their more risky investments as collateral.
By allowing this, the Fed is hoping to take pressure off financial companies and make them more inclined to lend to people and businesses.
The housing collapse and credit crunch have led to record-high home foreclosures and forced financial companies to rack up multibillion losses in complex mortgage investments that turned sour.
In the past day and weeks, the Fed has taken extraordinary moves aimed at making sure that problems in credit and financial markets do not sink the economy.

Thursday, March 20, 2008

Hey Bernanke—Deregulation is Killing US

Fed Enters Securities Underwriting Business

On Sunday night March 16, 2008 the Federal Reserve made a major advance for financial liberalization and deregulation when it opened up the Fed window to investment banks. For the first time securities underwriters could now borrow at the same advantageous rate as banks from the Fed. Unfortunately it has been deregulation and measures such as this that have helped create the mess we are in.

Is the Fed is going to underwrite the stock market?

The idea of the Fed lending money to investment bank reinforces decade’s long rumors that the Fed has been buying S +P 500 (stock index futures) to selectively prop up the stock market at times of crisis. By buying stocks the Fed is defying the basic tenet that markets are self-correcting and should be left to their own devices.

By creating a special borrowing window for underwriters it is clear that the Fed has stepped up its involved in the stock market and may take on a role similar to the Japanese Postal Savings System who is rumored to have bought hundreds of billions of dollars(if not trillions) of worthless securities during the Nikkei’s decline. The unfortunate thing is that we will never know what the Fed does because it is basically an organization independent of the checks and balances of the democratic process. It is also highly secretive.

We do know that deregulation fuels speculation.

Take for example how banks exploited their lines of credit with the Fed when they were allowed to underwrite securities with the passage of Gramm Leach Biley Act (GLB) in 1999. GLB overturned Glass-Stegal and other laws created during the Great Depression to protect the public. The passage of GLB was a monumental step forward in the process of financial deregulation.

Andrew Bary in “Truth in Lending?: Wall Street Rivals say big banks use cut-rate loan commitments to snag underwriting business”, Barrons; May 28, 2001; notes how banks were using their ability to borrow cheaply from the Fed window to buy away business from investment banks. They did this by taking advantage of the Fed window and offering cut rate lines of credit, below what investment banks could offer to corporations. They then made access to these lines contingent upon underwriting business. Arguably they were using the Fed as their guarantor in speculation:
""The commercial banks have been aggressive in using bundled pricing and below-market pricing in some instances to win business,' says Henry McVay, brokerage analyst at Morgan Stanley,"
Not surprisingly the banks went hog wild and took on inordinate amounts of risk. Remember banks know all to well that if hard times hit the Fed will bail them out:
“In his report, Mayo (banking analyst at Prudential Securities) writes investors are underestimating the risks posed by the industry's $4.7 trillion in credit lines and other contingent liabilities because banks aren't reserving adequately…. Mayo argues that banks haven't reserved adequately for credit lines and other contingent loans. "The risks related to this issue are underappreciated,' he told Barrons. In the report, "Shh! Banks' contingent Liabilities Have Tripled in the past Decade," Mayo notes that off-balance-sheet exposure has exploded to $4.7 trillion form $1.5 trillion a decade ago and now equals 30% of total bank loans."
We must ask how much of the current financial malaise is tied to commercial banks that aggressively pursued underwriting business with enticing lines of credit after the passage of GLB? Secondly, what kind of maelstrom can we expect from investment banks now that they have access to the Fed’s window?

Deregulation—Birth Mother of Sub prime/predatory loans

Before complaining and worrying about the effect of the sub-prime market and predatory loans in our current financial crisis we need to go back and look to see what led to their creation. Before the 1990’s the sub-prime market was almost nonexistent. Fringe banking consisted of a few pawnshops in communities across the country. However, that all changed when financial deregulation began with Reagan and accelerated dramatically under Clinton. Overseeing this process was Fed Head Alan Greenspan who cared little for the poor or protecting them as Martin Mayer (The Fed) notes;
"Discrimination against low-income people in lending operations was a subject guaranteed of be of no interest to the Federal Reserve System. The fed could never be the agency of choice for a program to compel banks to invest in the ghetto." page 289
Banks deserted inner cities and diversified away from traditional businesses such as making home loans. One can only assume that the Greenspan Fed ignored the Community Reinvestment act and the Humphrey Hawkins Act meant to help the less well to do.

Greenspan a big devotee of financial innovation did all in his power to facilitate the growth of derivatives ( from almost zero in 1973 to $516 Trillion as of June 2007; For the poor this meant financial innovation rushed in to meet the void left by banks that had abandoned them. Hucksters developed creative measures to circumvent usury laws to take advantage of the poor. A host of snares were developed; predatory loans, pay day loans, auto title loans, check cashing stores, rent to own stores and whole lot more. The sub-prime market grew exponentially to fund all of them.

We must ask ourselves—had the Fed done its job would their even be a sub-prime market? Predatory loans? Pay day loans? While we may not have sold the poor for a pair of sandals we have financially indentured them to line the pockets of the rich. ( To learn about Fringe banking go to: )

Deregulation is the problem

By creating a special window for investment banks on Sunday night the Federal Reserve moved one step closer to becoming an appendage of the market and giant corporations. The problem is that the market and corporations have unbounded greed and as history tells us gluttons eventually devour themselves in their own avarice.

We continue to be in a full fledged financial markets meltdown. More financial deregulation only exasperates the problem. We will see a respite here, a bear market rally there, but ultimately the end is nigh!

Monday, September 24, 2007

Washington Post's Novak points out Greenspan's lies

The Maestro's False Notes

By Robert D. Novak
Monday, September 24, 2007; A19

After four decades of
Alan Greenspan's nimble maneuvers, it seemed no accident that publication of his long-awaited memoir, "The Age of Turbulence," coincided with global financial turmoil. Instead of examining his frequently suspect management of monetary affairs during 18 years as chairman of the Federal Reserve Board, the political and financial worlds focused last week on Greenspan's self-portrait as a "conservative libertarian" who deplores Republican leaders and their policies.
Greenspan knows that the surest route to praise in Washington is for a purported man of the right to be seen as embracing the left. Although appointed by Republican presidents to four of his five terms heading the nation's central bank, Greenspan in his memoir is markedly more negative about those political benefactors than reviewers have suggested. Only
Gerald Ford, the hapless, short-term president, gets passing grades.
But the "Maestro" sounds false notes in a book that probably reveals more than intended. Instead of a detached policymaker, Greenspan comes across as engaged in political games. I have had enough contact with Greenspan to know that in private the central banker is a political junkie, but I had no idea how deeply he was involved with the one Democratic president who appointed him:
Bill Clinton.
One veteran Greenspan-watcher, going first to the book's photo section, was surprised that Greenspan had selected an image of himself between
Hillary Clinton and Tipper Gore, a place of honor, at President Clinton's first State of the Union address, in 1992. Federal Reserve colleagues had viewed his taking that seat as undermining the central bank's cherished independence. Greenspan's memoir does not mention Clinton's quest to get him to cut interest rates as compensation for tax increases, but the Fed chairman was quite concerned at the time about being seen as the president's pawn. When my column suggested then that his presence in the presidential box played into Clinton's designs, he called me (for the last time) to complain.
In "The Age of Turbulence," Greenspan buys into the discredited depiction of
Ronald Reagan (who first named Greenspan to the Fed) as an amiable dunce and does not conceal his contempt for both Bushes (each of whom nominated him). Even more surprising is his adoration of Clinton. While scathing in attacking increased spending by George W. Bush, he ignores massive non-defense spending hikes under Clinton and embraces the Democrat's tax increase "as our best chance in 40 years to get stable long-term growth."
Greenspan's book treats Reagan's tax-cutting, supply-side movement as if it never happened. Seeing no inherent benefits from a lower tax burden, he accepts the Democratic deficit-reduction formula that a dollar of higher taxes is equivalent to a dollar of reduced spending.
With the memoir retreating from his passive endorsement of Bush's 2001 tax cuts, it is hard to tell the Greenspan of this book from a conventional Democrat. He indicates that his favorite colleague in the younger Bush's administration was the dysfunctional Treasury Secretary Paul O'Neill, who opposed the tax-cut strategy while ruining morale in his department.
The tip-off to Greenspan's mind-set is his reference to Democratic Sen.
Kent Conrad as a "fiscal conservative." Conrad is an avowed deficit hawk whose advocacy of high taxes and high spending earned him a 16 percent fiscally conservative rating last year from the National Taxpayers Union.
Though Greenspan's memoir makes him a virtual member of the Clinton administration, he describes himself as a reluctant public servant -- which runs counter to my firsthand observations. He writes that he turned down a job in the
Nixon administration, but in fact he was rejected by the new president's staff because of his performance as part of the 1968 campaign. (Temporarily exiled to political Siberia, a distraught Greenspan was reduced to scheduling breakfast with me on his trips from New York to Washington.) His book has him reluctantly accepting Reagan's appointment as Fed chairman in 1987, but in fact he aggressively promoted himself for the job. (He approached me at a Washington reception that year to say he had heard I opposed his appointment and asked me why.)
"The Age of Turbulence" lacks the confessional candor of the best memoirs, but it tells enough to leave intriguing questions for a future biographer. Why did three Republican presidents name a Federal Reserve chairman fundamentally opposed to the
GOP's economic doctrine? Did Greenspan deceive them?

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