If you want to understand why Congress seems completely incapable of checking the power of Wall Street, look back to a hearing on the Hill last October 7, and the subsequent events surrounding it. On that day, the House Financial Services Committee hosted a panel on reform of the market for derivatives, the financial instrument which played such a notable role in the country’s economic meltdown.
Everyone rational knows that there is an enormous need to seriously reform the derivatives market, but the committee, headed by Congressman Barney Frank (D-Wall Street), invited a panel of eight guests who were distinguished by their uniformly pro-industry positions. They included Jon Hixson of Cargill, James Hill of Morgan Stanley (on behalf of the Securities Industry and Financial Markets Association), Stuart Kaswell of the Managed Funds Association (which, through one of its lobbyists, has delivered significant “bundled” donations to Frank) and Christopher Ferreri of the Wholesale Markets Brokers Association.
In response to complaints from Americans for Financial Reform, which represents hundreds of consumer groups and labor unions, the committee issued an invitation—the night before the hearing was held — to Rob Johnson of the Roosevelt Institute. For the committee, the last minute inclusion of Johnson — a former managing director at Bankers Trust Company and former economist at the Senate Banking Committee and Senate Budget Committee — apparently constituted sufficient balance.
Predictably, witnesses at the hearing trotted out positions urging caution in regard to the matter of reform. Derivatives and other exotic financial devices have reaped the finance industry vast profits, but for Hixson of Cargill the common man and woman would be the real losers if Congress were to act too severely. “We offer customized hedges to help bakeries manage price volatility of their flour so that their retail prices for baked goods can be as stable as possible for consumers and grocery stores,” he told the committee’s wagging heads. “We offer customized hedges to help a restaurant chain maintain stable prices on their chicken so that the company can offer consistent prices and value for their retail customers when selling chicken sandwiches.”
Johnson, who came last, offered the only serious critical viewpoint, saying that the American public had been “quite demoralized by…the bailouts that we experienced last fall.” After about five minutes of his testimony, Congresswoman Melissa Bean—another industry-funded committee member who chaired the hearing because Frank was absent—had heard enough. “I’m just going to ask you to wrap up because we’re running out of time,” she told Johnson.
Johnson gamely continued. “When I hear the testimony today that are largely financial institutions and end users, I believe that I represent a third group that comes to the table, which is the taxpayers, the working people of the United States,” he said.
“I do need a final comment,” Bean interjected seconds later.
That put an end to Johnson’s testimony. “I was just called to this hearing last night, so I will provide detailed comments on your bill and a statement for the record that will finish my comments,” he concluded.
About five days later Johnson submitted his full testimony to the committee, to be included on its website along with the statements of the other eight panelists. When it wasn’t posted, Johnson asked Lynn Parramore, editor of the Roosevelt Institute’s blog, to see what was up. Parramore emailed and spoke to staffers at the Financial Services Committee, and received a number of explanations for why Johnson’s testimony had not been posted: first she was told it hadn’t been received, then that it had to be submitted as a PDF, then that the committee was having IT problems. “I couldn’t decide whether it was incompetence or mischief, but I began to suspect the latter,” Parramore told me.
Finally, she was informed that the committee’s general counsel would not allow posting of the testimony because Johnson had not submitted it during the hearing. (Of course, since Johnson had been invited at the last minute it was impossible for him to fulfill this pointless requirement.) So you still can’t read Johnson’s prepared testimony at the committee website, but you can check it out on the Roosevelt Institute’s blog.
Meanwhile, Frank’s committee has put forth its “reform” bill. “Too tepid, too weak, too late,” Johnson says of the legislation. “Very industry influenced. We had a crisis and they are pandering to the perpetrators.”
http://harpers.org/archive/2009/10/hbc-90006000
Showing posts with label government. Show all posts
Showing posts with label government. Show all posts
19 April 2009
The Visible Hand ~ manipulation is a fact
That tip to Charles for this one! Zero Hedge publish sprott pdf on market manipulation.
http://zerohedge.blogspot.com/2009/04/visible-hand.html
http://zerohedge.blogspot.com/2009/04/visible-hand.html
25 February 2009
Doomed by the Myths of Free Trade: How the Economy Was Lost
By Paul Craig Roberts
Tuesday, February 24, 2009
http://www.counterpunch.org/roberts02242009.html
The American economy has gone away. It is not coming back until free trade myths are buried 6 feet under.
America's 20th century economic success was based on two things. Free trade was not one of them. America's economic success was based on protectionism, which was ensured by the union victory in the Civil War, and on British indebtedness, which destroyed the British pound as world reserve currency. Following World War II, the US dollar took the role as reserve currency, a privilege that allows the US to pay its international bills in its own currency.
World War II and socialism together ensured that the US economy dominated the world at the mid-20th century. The economies of the rest of the world had been destroyed by war or were stifled by socialism [in terms of the priorities of the capitalist growth model: Editors.]
The ascendant position of the US economy caused the US government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with America's cold war and foreign policies. For example, Turkey's US textile quotas were increased in exchange for overflight rights in the Gulf War, making lost US textile jobs an off-budget war expense.
In contrast, countries such as Japan and Germany used industrial policy to plot their comebacks. By the late 1970s, Japanese auto makers had the once dominant American auto industry on the ropes. The first economic act of the "free market" Reagan administration in 1981 was to put quotas on the import of Japanese cars in order to protect Detroit and the United Auto Workers.
Eamonn Fingleton, Pat Choate, and others have described how negligence in Washington aided and abetted the erosion of America's economic position. What we didn't give away, the United States let be taken away while preaching a "free trade" doctrine at which the rest of the world scoffed.
Fortunately, the U.S.'s adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to America's diminishing economic prowess.
This furlough from reality ended when Soviet, Chinese, and Indian socialism surrendered around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly American and other First World corporations discovered that a massive supply of foreign labor was available at practically free wages.
To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.
As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.
"Free market economists" covered up the damage done to the US economy by preaching a New Economy based on services and innovation. But it wasn't long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs. In America, the hardest hit have been software engineers and information technology (IT) workers.
The American corporations quickly learned that by declaring "shortages" of skilled Americans, they could get from Congress H-1b work visas for lower paid foreigners with whom to replace their American work force. Many US corporations are known for forcing their US employees to train their foreign replacements in exchange for severance pay.
Chasing after shareholder return and "performance bonuses," US corporations deserted their American workforce. The consequences can be seen everywhere. The loss of tax base has threatened the municipal bonds of cities and states and reduced the wealth of individuals who purchased the bonds. The lost jobs with good pay resulted in the expansion of consumer debt in order to maintain consumption. As the offshored goods and services are brought back to America to sell, the US trade deficit has exploded to unimaginable heights, calling into question the US dollar as reserve currency and America’s ability to finance its trade deficit.
As the American economy eroded away bit by bit, "free market" ideologues produced endless reassurances that America had pulled a fast one on China, sending China dirty and grimy manufacturing jobs. Free of these "old economy" jobs, Americans were lulled with promises of riches. In place of dirty fingernails, American efforts would flow into innovation and entrepreneurship. In the meantime, the "service economy" of software and communications would provide a leg up for the work force.
Education was the answer to all challenges. This appeased the academics, and they produced no studies that would contradict the propaganda and, thus, curtail the flow of federal government and corporate grants.
The "free market" economists, who provided the propaganda and disinformation to hide the act of destroying the US economy, were well paid. And as Business Week noted, "outsourcing's inner circle has deep roots in GE (General Electric) and McKinsey," a consulting firm. Indeed, one of McKinsey's main apologists for offshoring of US jobs, Diana Farrell, is now a member of Obama's White House National Economic Council.
The pressure of jobs offshoring, together with vast imports, has destroyed the economic prospects for all Americans, except the CEOs who receive "performance" bonuses for moving American jobs offshore or giving them to H-1b work visa holders. Lowly paid offshored employees, together with H-1b visas, have curtailed employment for older and more experienced American workers. Older workers traditionally receive higher pay. However, when the determining factor is minimizing labor costs for the sake of shareholder returns and management bonuses, older workers are unaffordable. Doing a good job, providing a good service, is no longer the corporation's function. Instead, the goal is to minimize labor costs at all cost.
Thus "free trade" has also destroyed the employment prospects of older workers. Forced out of their careers, they seek employment as shelf stockers for Wal-Mart.
I have read endless tributes to Wal-Mart from "libertarian economists," who sing Wal-Mart's praises for bringing low price goods, 70 per cent of which are made in China, to the American consumer. What these "economists" do not factor into their analysis is the diminution of American family incomes and government tax base from the loss of the goods producing jobs to China. Ladders of upward mobility are being dismantled by offshoring, while California issues IOUs to pay its bills. The shift of production offshore reduces US GDP. When the goods and services are brought back to America to be sold, they increase the trade deficit. As the trade deficit is financed by foreigners acquiring ownership of US assets, this means that profits, dividends, capital gains, interest, rents, and tolls leave American pockets for foreign ones.
The demise of America's productive economy left the US economy dependent on finance, in which the US remained dominant because the dollar is the reserve currency. With the departure of factories, finance went in new directions. Mortgages, which were once held in the portfolios of the issuer, were securitized. Individual mortgage debts were combined into a "security." The next step was to strip out the interest payments to the mortgages and sell them as derivatives, thus creating a third debt instrument based on the original mortgages.
In pursuit of ever more profits, financial institutions began betting on the success and failure of various debt instruments and by implication on firms. They bought and sold collateral debt swaps. A buyer pays a premium to a seller for a swap to guarantee an asset's value. If an asset "insured" by a swap falls in value, the seller of the swap is supposed to make the owner of the swap whole. The purchaser of a swap is not required to own the asset in order to contract for a guarantee of its value. Therefore, as many people could purchase as many swaps as they wished on the same asset. Thus, the total value of the swaps greatly exceeds the value of the assets.* [See footnote.)
The next step is for holders of the swaps to short the asset in order to drive down its value and collect the guarantee. As the issuers of swaps were not required to reserve against them, and as there is no limit to the number of swaps, the payouts could easily exceed the net worth of the issuer.
This was the most shameful and most mindless form of speculation. Gamblers were betting hands that they could not cover. The US regulators fled their posts. The American financial institutions abandoned all integrity. As a consequence, American financial institutions and rating agencies are trusted nowhere on earth.
The US government should never have used billions of taxpayers' dollars to pay off swap bets as it did when it bailed out the insurance company AIG. This was a stunning waste of a vast sum of money. The federal government should declare all swap agreements to be fraudulent contracts, except for a single swap held by the owner of the asset. Simply wiping out these fraudulent contracts would remove the bulk of the vast overhang of "troubled" assets that threaten financial markets.
The billions of taxpayers' dollars spent buying up subprime derivatives were also wasted. The government did not need to spend one dime. All government needed to do was to suspend the mark-to-market rule. This simple act would have removed the solvency threat to financial institutions by allowing them to keep the derivatives at book value until financial institutions could ascertain their true values and write them down over time.
Taxpayers, equity owners, and the credit standing of the US government are being ruined by financial shysters who are manipulating to their own advantage the government's commitment to mark-to-market and to the "sanctity of contracts." Multi-trillion dollar "bailouts" and bank nationalization are the result of the government's inability to respond intelligently.
Two more simple acts would have completed the rescue without costing the taxpayers one dollar: an announcement from the Federal Reserve that it will be lender of last resort to all depository institutions including money market funds, and an announcement reinstating the uptick rule.
The uptick rule was suspended or repealed a couple of years ago in order to permit hedge funds and shyster speculators to ripoff American equity owners. The rule prevented short-selling any stock that did not move up in price during the previous day. In other words, speculators could not make money at others' expense by ganging up on a stock and short-selling it day after day.
As a former Treasury official, I am amazed that the US government, in the midst of the worst financial crises ever, is content for short-selling to drive down the asset prices that the government is trying to support. No bailout or stimulus plan has any hope until the uptick rule is reinstated.
The bald fact is that the combination of ignorance, negligence, and ideology that permitted the crisis to happen still prevails and is blocking any remedy. Either the people in power in Washington and the financial community are total dimwits or they are manipulating an opportunity to redistribute wealth from taxpayers, equity owners and pension funds to the financial sector.
The Bush and Obama plans total 1.6 trillion dollars, every one of which will have to be borrowed, and no one knows from where. This huge sum will compromise the value of the US dollar, its role as reserve currency, the ability of the US government to service its debt, and the price level. These staggering costs are pointless and are to no avail, as not one step has been taken that would alleviate the crisis.
If we add to my simple menu of remedies a ban, punishable by instant death, for short selling any national currency, the world can be rescued from the current crisis without years of suffering, violent upheavals and, perhaps, wars.
According to its hopeful but economically ignorant proponents, globalism was supposed to balance risks across national economies and to offset downturns in one part of the world with upturns in other parts. A global portfolio was a protection against loss, claimed globalism's purveyors. In fact, globalism has concentrated the risks, resulting in Wall Street's greed endangering all the economies of the world. The greed of Wall Street and the negligence of the US government have wrecked the prospects of many nations. Street riots are already occurring in parts of the world. On Sunday February 22, the right-wing TV station, Fox "News," presented a program that predicted riots and disarray in the United States by 2014.
How long will Americans permit "their" government to rip them off for the sake of the financial interests that caused the problem? Obama’s cabinet and National Economic Council are filled with representatives of the interest groups that caused the problem. The Obama administration is not a government capable of preventing a catastrophe.
If truth be known, the "banking problem" is the least of our worries. Our economy faces two much more serious problems. One is that offshoring and H-1b visas have stopped the growth of family incomes, except, of course, for the super rich. To keep the economy going, consumers have gone deeper into debt, maxing out their credit cards and refinancing their homes and spending the equity. Consumers are now so indebted that they cannot increase their spending by taking on more debt. Thus, whether or not the banks resume lending is beside the point.
The other serious problem is the status of the US dollar as reserve currency. This status has allowed the US, now a country heavily dependent on imports just like a third world or lesser-developed country, to pay its international bills in its own currency. We are able to import $800 billion annually more than we produce, because the foreign countries from whom we import are willing to accept paper for their goods and services.
If the dollar loses its reserve currency role, foreigners will not accept dollars in exchange for real things. This event would be immensely disruptive to an economy dependent on imports for its energy, its clothes, its shoes, its manufactured products, and its advanced technology products.
If incompetence in Washington, the type of incompetence that produced the current economic crisis, destroys the dollar as reserve currency, the "unipower" will overnight become a third world country, unable to pay for its imports or to sustain its standard of living.
How long can the US government protect the dollar's value by leasing its gold to bullion dealers who sell it, thereby holding down the gold price? Given the incompetence in Washington and on Wall Street, our best hope is that the rest of the world is even less competent and even in deeper trouble. In this event, the US dollar might survive as the least valueless of the world's fiat currencies.
*(An excellent explanation of swaps can be found here.)
-----
Paul Craig Roberts was assistant secretary of the treasury in the Reagan administration. He is coauthor of "The Tyranny of Good Intentions." He can be reached at PaulCraigRoberts@yahoo.com.
Tuesday, February 24, 2009
http://www.counterpunch.org/roberts02242009.html
The American economy has gone away. It is not coming back until free trade myths are buried 6 feet under.
America's 20th century economic success was based on two things. Free trade was not one of them. America's economic success was based on protectionism, which was ensured by the union victory in the Civil War, and on British indebtedness, which destroyed the British pound as world reserve currency. Following World War II, the US dollar took the role as reserve currency, a privilege that allows the US to pay its international bills in its own currency.
World War II and socialism together ensured that the US economy dominated the world at the mid-20th century. The economies of the rest of the world had been destroyed by war or were stifled by socialism [in terms of the priorities of the capitalist growth model: Editors.]
The ascendant position of the US economy caused the US government to be relaxed about giving away American industries, such as textiles, as bribes to other countries for cooperating with America's cold war and foreign policies. For example, Turkey's US textile quotas were increased in exchange for overflight rights in the Gulf War, making lost US textile jobs an off-budget war expense.
In contrast, countries such as Japan and Germany used industrial policy to plot their comebacks. By the late 1970s, Japanese auto makers had the once dominant American auto industry on the ropes. The first economic act of the "free market" Reagan administration in 1981 was to put quotas on the import of Japanese cars in order to protect Detroit and the United Auto Workers.
Eamonn Fingleton, Pat Choate, and others have described how negligence in Washington aided and abetted the erosion of America's economic position. What we didn't give away, the United States let be taken away while preaching a "free trade" doctrine at which the rest of the world scoffed.
Fortunately, the U.S.'s adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to America's diminishing economic prowess.
This furlough from reality ended when Soviet, Chinese, and Indian socialism surrendered around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly American and other First World corporations discovered that a massive supply of foreign labor was available at practically free wages.
To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.
As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.
"Free market economists" covered up the damage done to the US economy by preaching a New Economy based on services and innovation. But it wasn't long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs. In America, the hardest hit have been software engineers and information technology (IT) workers.
The American corporations quickly learned that by declaring "shortages" of skilled Americans, they could get from Congress H-1b work visas for lower paid foreigners with whom to replace their American work force. Many US corporations are known for forcing their US employees to train their foreign replacements in exchange for severance pay.
Chasing after shareholder return and "performance bonuses," US corporations deserted their American workforce. The consequences can be seen everywhere. The loss of tax base has threatened the municipal bonds of cities and states and reduced the wealth of individuals who purchased the bonds. The lost jobs with good pay resulted in the expansion of consumer debt in order to maintain consumption. As the offshored goods and services are brought back to America to sell, the US trade deficit has exploded to unimaginable heights, calling into question the US dollar as reserve currency and America’s ability to finance its trade deficit.
As the American economy eroded away bit by bit, "free market" ideologues produced endless reassurances that America had pulled a fast one on China, sending China dirty and grimy manufacturing jobs. Free of these "old economy" jobs, Americans were lulled with promises of riches. In place of dirty fingernails, American efforts would flow into innovation and entrepreneurship. In the meantime, the "service economy" of software and communications would provide a leg up for the work force.
Education was the answer to all challenges. This appeased the academics, and they produced no studies that would contradict the propaganda and, thus, curtail the flow of federal government and corporate grants.
The "free market" economists, who provided the propaganda and disinformation to hide the act of destroying the US economy, were well paid. And as Business Week noted, "outsourcing's inner circle has deep roots in GE (General Electric) and McKinsey," a consulting firm. Indeed, one of McKinsey's main apologists for offshoring of US jobs, Diana Farrell, is now a member of Obama's White House National Economic Council.
The pressure of jobs offshoring, together with vast imports, has destroyed the economic prospects for all Americans, except the CEOs who receive "performance" bonuses for moving American jobs offshore or giving them to H-1b work visa holders. Lowly paid offshored employees, together with H-1b visas, have curtailed employment for older and more experienced American workers. Older workers traditionally receive higher pay. However, when the determining factor is minimizing labor costs for the sake of shareholder returns and management bonuses, older workers are unaffordable. Doing a good job, providing a good service, is no longer the corporation's function. Instead, the goal is to minimize labor costs at all cost.
Thus "free trade" has also destroyed the employment prospects of older workers. Forced out of their careers, they seek employment as shelf stockers for Wal-Mart.
I have read endless tributes to Wal-Mart from "libertarian economists," who sing Wal-Mart's praises for bringing low price goods, 70 per cent of which are made in China, to the American consumer. What these "economists" do not factor into their analysis is the diminution of American family incomes and government tax base from the loss of the goods producing jobs to China. Ladders of upward mobility are being dismantled by offshoring, while California issues IOUs to pay its bills. The shift of production offshore reduces US GDP. When the goods and services are brought back to America to be sold, they increase the trade deficit. As the trade deficit is financed by foreigners acquiring ownership of US assets, this means that profits, dividends, capital gains, interest, rents, and tolls leave American pockets for foreign ones.
The demise of America's productive economy left the US economy dependent on finance, in which the US remained dominant because the dollar is the reserve currency. With the departure of factories, finance went in new directions. Mortgages, which were once held in the portfolios of the issuer, were securitized. Individual mortgage debts were combined into a "security." The next step was to strip out the interest payments to the mortgages and sell them as derivatives, thus creating a third debt instrument based on the original mortgages.
In pursuit of ever more profits, financial institutions began betting on the success and failure of various debt instruments and by implication on firms. They bought and sold collateral debt swaps. A buyer pays a premium to a seller for a swap to guarantee an asset's value. If an asset "insured" by a swap falls in value, the seller of the swap is supposed to make the owner of the swap whole. The purchaser of a swap is not required to own the asset in order to contract for a guarantee of its value. Therefore, as many people could purchase as many swaps as they wished on the same asset. Thus, the total value of the swaps greatly exceeds the value of the assets.* [See footnote.)
The next step is for holders of the swaps to short the asset in order to drive down its value and collect the guarantee. As the issuers of swaps were not required to reserve against them, and as there is no limit to the number of swaps, the payouts could easily exceed the net worth of the issuer.
This was the most shameful and most mindless form of speculation. Gamblers were betting hands that they could not cover. The US regulators fled their posts. The American financial institutions abandoned all integrity. As a consequence, American financial institutions and rating agencies are trusted nowhere on earth.
The US government should never have used billions of taxpayers' dollars to pay off swap bets as it did when it bailed out the insurance company AIG. This was a stunning waste of a vast sum of money. The federal government should declare all swap agreements to be fraudulent contracts, except for a single swap held by the owner of the asset. Simply wiping out these fraudulent contracts would remove the bulk of the vast overhang of "troubled" assets that threaten financial markets.
The billions of taxpayers' dollars spent buying up subprime derivatives were also wasted. The government did not need to spend one dime. All government needed to do was to suspend the mark-to-market rule. This simple act would have removed the solvency threat to financial institutions by allowing them to keep the derivatives at book value until financial institutions could ascertain their true values and write them down over time.
Taxpayers, equity owners, and the credit standing of the US government are being ruined by financial shysters who are manipulating to their own advantage the government's commitment to mark-to-market and to the "sanctity of contracts." Multi-trillion dollar "bailouts" and bank nationalization are the result of the government's inability to respond intelligently.
Two more simple acts would have completed the rescue without costing the taxpayers one dollar: an announcement from the Federal Reserve that it will be lender of last resort to all depository institutions including money market funds, and an announcement reinstating the uptick rule.
The uptick rule was suspended or repealed a couple of years ago in order to permit hedge funds and shyster speculators to ripoff American equity owners. The rule prevented short-selling any stock that did not move up in price during the previous day. In other words, speculators could not make money at others' expense by ganging up on a stock and short-selling it day after day.
As a former Treasury official, I am amazed that the US government, in the midst of the worst financial crises ever, is content for short-selling to drive down the asset prices that the government is trying to support. No bailout or stimulus plan has any hope until the uptick rule is reinstated.
The bald fact is that the combination of ignorance, negligence, and ideology that permitted the crisis to happen still prevails and is blocking any remedy. Either the people in power in Washington and the financial community are total dimwits or they are manipulating an opportunity to redistribute wealth from taxpayers, equity owners and pension funds to the financial sector.
The Bush and Obama plans total 1.6 trillion dollars, every one of which will have to be borrowed, and no one knows from where. This huge sum will compromise the value of the US dollar, its role as reserve currency, the ability of the US government to service its debt, and the price level. These staggering costs are pointless and are to no avail, as not one step has been taken that would alleviate the crisis.
If we add to my simple menu of remedies a ban, punishable by instant death, for short selling any national currency, the world can be rescued from the current crisis without years of suffering, violent upheavals and, perhaps, wars.
According to its hopeful but economically ignorant proponents, globalism was supposed to balance risks across national economies and to offset downturns in one part of the world with upturns in other parts. A global portfolio was a protection against loss, claimed globalism's purveyors. In fact, globalism has concentrated the risks, resulting in Wall Street's greed endangering all the economies of the world. The greed of Wall Street and the negligence of the US government have wrecked the prospects of many nations. Street riots are already occurring in parts of the world. On Sunday February 22, the right-wing TV station, Fox "News," presented a program that predicted riots and disarray in the United States by 2014.
How long will Americans permit "their" government to rip them off for the sake of the financial interests that caused the problem? Obama’s cabinet and National Economic Council are filled with representatives of the interest groups that caused the problem. The Obama administration is not a government capable of preventing a catastrophe.
If truth be known, the "banking problem" is the least of our worries. Our economy faces two much more serious problems. One is that offshoring and H-1b visas have stopped the growth of family incomes, except, of course, for the super rich. To keep the economy going, consumers have gone deeper into debt, maxing out their credit cards and refinancing their homes and spending the equity. Consumers are now so indebted that they cannot increase their spending by taking on more debt. Thus, whether or not the banks resume lending is beside the point.
The other serious problem is the status of the US dollar as reserve currency. This status has allowed the US, now a country heavily dependent on imports just like a third world or lesser-developed country, to pay its international bills in its own currency. We are able to import $800 billion annually more than we produce, because the foreign countries from whom we import are willing to accept paper for their goods and services.
If the dollar loses its reserve currency role, foreigners will not accept dollars in exchange for real things. This event would be immensely disruptive to an economy dependent on imports for its energy, its clothes, its shoes, its manufactured products, and its advanced technology products.
If incompetence in Washington, the type of incompetence that produced the current economic crisis, destroys the dollar as reserve currency, the "unipower" will overnight become a third world country, unable to pay for its imports or to sustain its standard of living.
How long can the US government protect the dollar's value by leasing its gold to bullion dealers who sell it, thereby holding down the gold price? Given the incompetence in Washington and on Wall Street, our best hope is that the rest of the world is even less competent and even in deeper trouble. In this event, the US dollar might survive as the least valueless of the world's fiat currencies.
*(An excellent explanation of swaps can be found here.)
-----
Paul Craig Roberts was assistant secretary of the treasury in the Reagan administration. He is coauthor of "The Tyranny of Good Intentions." He can be reached at PaulCraigRoberts@yahoo.com.
24 February 2009
Supkis on Gold manipulation
The feisty lady is in good form.....
"His name was John Maynard Keynes. And soon afterwards, another great British economist, Lionel Robbins, declared that “no really impartial observer of world events can do other than regard the abandonment of the Gold Standard by Great Britain as a catastrophe of the first order of magnitude.” This was long before the final consequences of that step had become apparent — the political weakening of the “West which followed its economic breakdown and which contributed to the success of the Nazi revolution in Germany, and thus eventually to the outbreak of the Second World War and to the emergence of Communism as an imminent threat to world order.
As if neither Keynes, the founder of the anti-classical school of economics, nor Robbins, the leader of the neo-classical school, ever had spoken, some Keynesian and neo-classicist economists–fortunately with little support at home but with encouragement from a few foreign observers—are urging us to follow the British example of 1931 and to act once more in a way that would destroy a payments system based on the fixed gold value of the world’ s leading currency. In doing so, they not only show that they have not learned from monetary history; they also impute to our generation even less wisdom than was shown in the interwar period.
Wow! He is certainly battling on behalf of a secure, even-keeled, stable GOLD STANDARD, isn’t he? His contemporaries felt the loss of the British support of the gold standard was a disaster. Note also, the reference to ‘Keynesian and neo-classicist economists—FORTUNATELY WITH LITTLE SUPPORT AT HOME but encouragement from a few foreign observers—ARE URGING US TO FOLLOW THE BRITISH EXAMPLE OF 1931…’—- Martins Jr is of the old school. Yet, knowing all of this, he slides down the same ramp leading to the destruction of the currency. Even as he was sweating his way through this summer speech, the destruction of the dollar was gathering steam. Thanks to the Vietnam War.
See how he chides people demanding the US abandon gold entirely! He openly says, ‘They have NOT learned from monetary history!’ and is furious that these upstarts are mocking him and his generation for being foolish when they were struggling to right a ship that was sinking.
Martin Jr’s main problem here is, he doesn’t analyze the problem from the point of view of imperial overreach and rot. Britain was already being pushed downstairs by Germany, Japan and above all, the US itself. All were taking away British markets and were invading Britain’s home markets before WWI broke out. I would suggest, one of the major causes of WWI was Germany surpassing England in industrial development and trade.
The British Government in 1931, and the U. S. Administration in 1933, can rightly be accused of underestimating the adverse international effects of the devaluation of the pound and the dollar. But at least they had some plausible domestic grounds for their actions. They were confronted with a degree of unemployment that has hardly ever been experienced either before or after. They were confronted with disastrously falling prices, which made all fixed-interest obligations an intolerable burden on domestic and international commerce.
They were confronted with a decline in international liquidity, which seemed to make recovery impossible. Neither Keynes nor Robbins have denied that, from a purely domestic point of view, there was some sense in devaluation. In the United States of 1933, one worker out of four was unemployed; industrial production was little more than half of normal; farm prices had fallen to less than half of their 1929 level; exports and imports stood at one-third of their 1929 value; capital issues had practically ceased. In such a situation, any remedy, however questionable, seemed better than inaction.
They had the identical problem we have today: a steep decline in INTERNATIONAL LIQUIDITY. Of course, the US was the wellspring of liquidity and when countries borrowing money ceased to send payments back to the US, the entire structure of support of lending collapsed! You can’t borrow and not repay and then expect more loans to infinity. Nor can anyone spent to infinity while never repaying.
WWI was a horror. Due to the creation of the Federal Reserve, the warring states could borrow near-infinite money to fight. Instead of balancing real deficits with future desires, they simply poured money into the mess until all sides were nearly totally bankrupt. Then, to rebuild, all the same empires ran to the US to demand MORE loans so they could support each other’s economies. And the debts were just too much.
In the Britain of 1931, things were not quite as bleak as in the United States of 1933; but fundamentally, the economic problems were similar. Ever since 1925, the British economy had failed to grow, and by 1931, one out of five workers had become unemployed, exports–far more important for the British economy than for our own–had declined by nearly one-half, and most observers believed that over-valuation of the British pound was largely responsible for all these ills. Can anybody in good faith find any similarity between our position of today and our position of 1933, or even the British position of 1931 ?
Now, who is exactly like Britain, today? Why, Japan! Back in 1931 and even in 1965, we made most of the industrial goods we consumed. We even consumed our own oil! So it was OK for us to help England, who needed to export much more than us, to do this. But who was England to export to? The US suddenly had to fend off this export giant! This is what the trade barriers of the 1930’s were all about. Our own industrial base would have vanished by 1941 if we let the British weaken the pound while keeping the dollar strong! So we debased the dollar to the same degree [to the rage of the British, I dare say!].
In 1931 and 1933, an increase in the price of gold was recommended in order to raise commodity prices. Today, a gold price increase is recommended as a means to provide the monetary support for world price stability. In 1931 and 1933, an increase in the price of gold was recommended in order to combat deflation; today it is recommended in effect as a means to combat inflation. In 1931 and 1933, an increase in the price of gold was recommended as a desperate cure for national ills regardless of its disintegrating effect on world commerce; today it is recommended as a means to improve integration of international trade and finance. Can there be worse confusion?
This is a most interesting paragraph! In the Great Depression, gold prices were unilaterally and suddenly jacked up in price, and of course, Martin Jr doesn’t mention the confiscation of gold before this happened….YIKES…the devaluation of the paper representing gold values was not received with joy by either gold holders who lost their gold before the sudden devaluation of the paper money, nor by trade rivals who had carefully held gold dollar certificates issued all the way up until 1929 by the US Federal Reserve! These were supposed to ‘give gold on demand’ but the holders assumed, the value of gold to paper would be stable, not cut by nearly half!
This certainly was ‘theft’. And in England and the US, both central banks did this suddenly and viciously, there was no room for letting anyone prepare for this. Since it was theft, it had to be presented as a fait accompli.
Mc C Martin Jr’s testimony to Congress in 1934:
This is important, as control of credit placed within the power of one
agency, which in Europoan countries would bo a central bank, is a comparatively
new thing in the United States of America, and has developed since the inauguration
of the Federal Reserve System. We have little precedent in this country to guide
us as to the time, what, and how to do, but we do have the records of foreign
central banks to help us to come to conclusions, though no foreign banks have had
as large and varied domestic territory to care for and consequently have given
most of their attention to considering credit control in relation to foreign ex-
change transactions. Our problem it seems to me is like theirs, but has some dis-
tinct differences.
The Federal Reserve Board has one of the best organizations in the world
for research and statistics in regard to monetary affairs and thus there is at the
command of those charged with the responsibility for credit control data as adequ-
ate as can be compiled.
Since under the law the proceedings of the Board of Governors of the Feder-
al Reserve System and those of the Federal Open Market Committee are to be publish-
ed each year, the reasons for changes in reserve percentages, the fixing of dis-
count rates, the establishing of stock market margins and open market operations
can be carefully studied, with the result that from year to year there will be
added ability to develop the proper technique.
It is well said by Mr. R. G. Hawtrey in his “The Art of Central Banking”,
that “The art of central banking is something profoundly different from any of the
practices with which it is possible to become familiar in the ordinary pursuits
of banking or commerce• It is a field within which a certain degree of technical
knowledge is necessary oven to take advantage of expert advice.”
The hope was to finesse the queer non-central, central bank. The crisis of the Great Depression saw the powers of the Fed grow, not wither. A queer thing happened to us: We see from these speeches both in 1934 and 1965, that the Fed is supposed to regulate many markets. Such as STOCK MARKET MARGINS. This was to prevent the wild growth of leveraged betting. This is precisely what has totally collapsed. Instead of restricting lending, the Fed enabled wild lending. This caused the many bubbles that are now burst and which have ruined our entire economic system.
Instead of improving controls, the Fed threw away controls and did this in tandem with Congress and our Presidents throwing all caution to the winds as everyone tried to live off of credit, not savings.
True, most advocates of an increase in the price of gold today would prefer action by some international agency or conference to unilateral action of individual countries. But no international agency or conference could prevent gold hoarders from getting windfall profits; could prevent those who hold a devalued currency from suffering corresponding losses; could prevent central banks from feeling defrauded if they had trusted in the repeated declarations of the President of the United States and of the spokesmen of U. S. monetary authorities and kept their reserves in dollars rather than in gold. To this day, the French, Belgian, and Netherlands central banks have not forgotten that the 1931 devaluation of sterling wiped out their capital; and much of the antagonism of those countries against the use of the dollar as an international reserve asset should be traced to the experience of 1931 rather than to anti-American feelings or mere adherence to outdated monetary theories.
Please remember this paragraph, anyone who is ‘hoarding’ gold must be aware, the government views you all as enemies of the State and will move to fix this if they see they need the gold! Notice how he talks about preventing gold speculators from profiting from higher values of gold vis a vis, currencies!
Also, notice the comments about many European nations leery of using the US dollar as a trade value guide. Instead, they want gold to do this. We assume the transition from the British pound trade regime to the US $ regime was smooth. It wasn’t, not at all. When this 1965 speech was being made, the value of gold was not as volatile as it was going to be very shortly."
read the whole thing
"His name was John Maynard Keynes. And soon afterwards, another great British economist, Lionel Robbins, declared that “no really impartial observer of world events can do other than regard the abandonment of the Gold Standard by Great Britain as a catastrophe of the first order of magnitude.” This was long before the final consequences of that step had become apparent — the political weakening of the “West which followed its economic breakdown and which contributed to the success of the Nazi revolution in Germany, and thus eventually to the outbreak of the Second World War and to the emergence of Communism as an imminent threat to world order.
As if neither Keynes, the founder of the anti-classical school of economics, nor Robbins, the leader of the neo-classical school, ever had spoken, some Keynesian and neo-classicist economists–fortunately with little support at home but with encouragement from a few foreign observers—are urging us to follow the British example of 1931 and to act once more in a way that would destroy a payments system based on the fixed gold value of the world’ s leading currency. In doing so, they not only show that they have not learned from monetary history; they also impute to our generation even less wisdom than was shown in the interwar period.
Wow! He is certainly battling on behalf of a secure, even-keeled, stable GOLD STANDARD, isn’t he? His contemporaries felt the loss of the British support of the gold standard was a disaster. Note also, the reference to ‘Keynesian and neo-classicist economists—FORTUNATELY WITH LITTLE SUPPORT AT HOME but encouragement from a few foreign observers—ARE URGING US TO FOLLOW THE BRITISH EXAMPLE OF 1931…’—- Martins Jr is of the old school. Yet, knowing all of this, he slides down the same ramp leading to the destruction of the currency. Even as he was sweating his way through this summer speech, the destruction of the dollar was gathering steam. Thanks to the Vietnam War.
See how he chides people demanding the US abandon gold entirely! He openly says, ‘They have NOT learned from monetary history!’ and is furious that these upstarts are mocking him and his generation for being foolish when they were struggling to right a ship that was sinking.
Martin Jr’s main problem here is, he doesn’t analyze the problem from the point of view of imperial overreach and rot. Britain was already being pushed downstairs by Germany, Japan and above all, the US itself. All were taking away British markets and were invading Britain’s home markets before WWI broke out. I would suggest, one of the major causes of WWI was Germany surpassing England in industrial development and trade.
The British Government in 1931, and the U. S. Administration in 1933, can rightly be accused of underestimating the adverse international effects of the devaluation of the pound and the dollar. But at least they had some plausible domestic grounds for their actions. They were confronted with a degree of unemployment that has hardly ever been experienced either before or after. They were confronted with disastrously falling prices, which made all fixed-interest obligations an intolerable burden on domestic and international commerce.
They were confronted with a decline in international liquidity, which seemed to make recovery impossible. Neither Keynes nor Robbins have denied that, from a purely domestic point of view, there was some sense in devaluation. In the United States of 1933, one worker out of four was unemployed; industrial production was little more than half of normal; farm prices had fallen to less than half of their 1929 level; exports and imports stood at one-third of their 1929 value; capital issues had practically ceased. In such a situation, any remedy, however questionable, seemed better than inaction.
They had the identical problem we have today: a steep decline in INTERNATIONAL LIQUIDITY. Of course, the US was the wellspring of liquidity and when countries borrowing money ceased to send payments back to the US, the entire structure of support of lending collapsed! You can’t borrow and not repay and then expect more loans to infinity. Nor can anyone spent to infinity while never repaying.
WWI was a horror. Due to the creation of the Federal Reserve, the warring states could borrow near-infinite money to fight. Instead of balancing real deficits with future desires, they simply poured money into the mess until all sides were nearly totally bankrupt. Then, to rebuild, all the same empires ran to the US to demand MORE loans so they could support each other’s economies. And the debts were just too much.
In the Britain of 1931, things were not quite as bleak as in the United States of 1933; but fundamentally, the economic problems were similar. Ever since 1925, the British economy had failed to grow, and by 1931, one out of five workers had become unemployed, exports–far more important for the British economy than for our own–had declined by nearly one-half, and most observers believed that over-valuation of the British pound was largely responsible for all these ills. Can anybody in good faith find any similarity between our position of today and our position of 1933, or even the British position of 1931 ?
Now, who is exactly like Britain, today? Why, Japan! Back in 1931 and even in 1965, we made most of the industrial goods we consumed. We even consumed our own oil! So it was OK for us to help England, who needed to export much more than us, to do this. But who was England to export to? The US suddenly had to fend off this export giant! This is what the trade barriers of the 1930’s were all about. Our own industrial base would have vanished by 1941 if we let the British weaken the pound while keeping the dollar strong! So we debased the dollar to the same degree [to the rage of the British, I dare say!].
In 1931 and 1933, an increase in the price of gold was recommended in order to raise commodity prices. Today, a gold price increase is recommended as a means to provide the monetary support for world price stability. In 1931 and 1933, an increase in the price of gold was recommended in order to combat deflation; today it is recommended in effect as a means to combat inflation. In 1931 and 1933, an increase in the price of gold was recommended as a desperate cure for national ills regardless of its disintegrating effect on world commerce; today it is recommended as a means to improve integration of international trade and finance. Can there be worse confusion?
This is a most interesting paragraph! In the Great Depression, gold prices were unilaterally and suddenly jacked up in price, and of course, Martin Jr doesn’t mention the confiscation of gold before this happened….YIKES…the devaluation of the paper representing gold values was not received with joy by either gold holders who lost their gold before the sudden devaluation of the paper money, nor by trade rivals who had carefully held gold dollar certificates issued all the way up until 1929 by the US Federal Reserve! These were supposed to ‘give gold on demand’ but the holders assumed, the value of gold to paper would be stable, not cut by nearly half!
This certainly was ‘theft’. And in England and the US, both central banks did this suddenly and viciously, there was no room for letting anyone prepare for this. Since it was theft, it had to be presented as a fait accompli.
Mc C Martin Jr’s testimony to Congress in 1934:
This is important, as control of credit placed within the power of one
agency, which in Europoan countries would bo a central bank, is a comparatively
new thing in the United States of America, and has developed since the inauguration
of the Federal Reserve System. We have little precedent in this country to guide
us as to the time, what, and how to do, but we do have the records of foreign
central banks to help us to come to conclusions, though no foreign banks have had
as large and varied domestic territory to care for and consequently have given
most of their attention to considering credit control in relation to foreign ex-
change transactions. Our problem it seems to me is like theirs, but has some dis-
tinct differences.
The Federal Reserve Board has one of the best organizations in the world
for research and statistics in regard to monetary affairs and thus there is at the
command of those charged with the responsibility for credit control data as adequ-
ate as can be compiled.
Since under the law the proceedings of the Board of Governors of the Feder-
al Reserve System and those of the Federal Open Market Committee are to be publish-
ed each year, the reasons for changes in reserve percentages, the fixing of dis-
count rates, the establishing of stock market margins and open market operations
can be carefully studied, with the result that from year to year there will be
added ability to develop the proper technique.
It is well said by Mr. R. G. Hawtrey in his “The Art of Central Banking”,
that “The art of central banking is something profoundly different from any of the
practices with which it is possible to become familiar in the ordinary pursuits
of banking or commerce• It is a field within which a certain degree of technical
knowledge is necessary oven to take advantage of expert advice.”
The hope was to finesse the queer non-central, central bank. The crisis of the Great Depression saw the powers of the Fed grow, not wither. A queer thing happened to us: We see from these speeches both in 1934 and 1965, that the Fed is supposed to regulate many markets. Such as STOCK MARKET MARGINS. This was to prevent the wild growth of leveraged betting. This is precisely what has totally collapsed. Instead of restricting lending, the Fed enabled wild lending. This caused the many bubbles that are now burst and which have ruined our entire economic system.
Instead of improving controls, the Fed threw away controls and did this in tandem with Congress and our Presidents throwing all caution to the winds as everyone tried to live off of credit, not savings.
True, most advocates of an increase in the price of gold today would prefer action by some international agency or conference to unilateral action of individual countries. But no international agency or conference could prevent gold hoarders from getting windfall profits; could prevent those who hold a devalued currency from suffering corresponding losses; could prevent central banks from feeling defrauded if they had trusted in the repeated declarations of the President of the United States and of the spokesmen of U. S. monetary authorities and kept their reserves in dollars rather than in gold. To this day, the French, Belgian, and Netherlands central banks have not forgotten that the 1931 devaluation of sterling wiped out their capital; and much of the antagonism of those countries against the use of the dollar as an international reserve asset should be traced to the experience of 1931 rather than to anti-American feelings or mere adherence to outdated monetary theories.
Please remember this paragraph, anyone who is ‘hoarding’ gold must be aware, the government views you all as enemies of the State and will move to fix this if they see they need the gold! Notice how he talks about preventing gold speculators from profiting from higher values of gold vis a vis, currencies!
Also, notice the comments about many European nations leery of using the US dollar as a trade value guide. Instead, they want gold to do this. We assume the transition from the British pound trade regime to the US $ regime was smooth. It wasn’t, not at all. When this 1965 speech was being made, the value of gold was not as volatile as it was going to be very shortly."
read the whole thing
8 December 2008
41 US States Face Bankruptcy In 2009
A recent study by The Center on Budget and Policy Priorities revealed that 41 states are facing severe budget shortfalls for 2009. Some states are worse off than others, with California ($31.7 billion) and Florida ($5.1 billion) leading the deficit pack. In all, the 41 states are currently facing a $71.9 billion budget shortfall. The key word here is "currently," since a similar study was conducted by the same group only three months earlier, at which time "only" 29 states were predicted to face shortfalls of a "mere" $48 billion. As the recession deepens, so will the state's budget problems, turning this "budget crisis" into a humanitarian disaster. Projections have already been made for a $200 billion shortfall by 2010.
These deficits have already transcended the computer screen of the statistician into real suffering of the most vulnerable sections of society. In dozens of states across the country, vital services are being cut to the elderly, disabled, the poor, and recently unemployed. Teachers are being cut from schools and tuitions are rising. Workers from state construction sites are being laid off, while social service employees suffer a similar fate. Non profits are closing their doors.
Most likely, these pains only mark the beginning. Many states have a "rainy day fund" of some kind that they use to plan for such crises. These funds are already depleted, or certain to dry up quickly, with "hard decisions" now having to be made. This is especially troubling when one considers that, in many cases, state cutbacks made from the 2001 recession remained in place. Not to mention that successive presidents have successfully plundered federal social programs. The new, extraordinary state budgets that are being drawn up to address the current deficit crisis will essentially destroy the social safety net for millions of people, including access to daycare, food stamps, welfare, and basic medical services. The fact that the federal budget is in even worse shape, and will likely choose to follow a similar route of massive cuts, makes future predictions of social calamity all but certain.
The options available to states to respond to budget crises are limited since states are not allowed to run deficits; they must solve their budget problems immediately. Nearly every state government is reacting to the crisis in essentially the same way: by cutting essential services and raising "secondary" taxes (alcohol, cigarettes, gas, etc). In reality, after spending their reserve funds, states have only two viable options: cutting spending and raising taxes.
These deficits have already transcended the computer screen of the statistician into real suffering of the most vulnerable sections of society. In dozens of states across the country, vital services are being cut to the elderly, disabled, the poor, and recently unemployed. Teachers are being cut from schools and tuitions are rising. Workers from state construction sites are being laid off, while social service employees suffer a similar fate. Non profits are closing their doors.
Most likely, these pains only mark the beginning. Many states have a "rainy day fund" of some kind that they use to plan for such crises. These funds are already depleted, or certain to dry up quickly, with "hard decisions" now having to be made. This is especially troubling when one considers that, in many cases, state cutbacks made from the 2001 recession remained in place. Not to mention that successive presidents have successfully plundered federal social programs. The new, extraordinary state budgets that are being drawn up to address the current deficit crisis will essentially destroy the social safety net for millions of people, including access to daycare, food stamps, welfare, and basic medical services. The fact that the federal budget is in even worse shape, and will likely choose to follow a similar route of massive cuts, makes future predictions of social calamity all but certain.
The options available to states to respond to budget crises are limited since states are not allowed to run deficits; they must solve their budget problems immediately. Nearly every state government is reacting to the crisis in essentially the same way: by cutting essential services and raising "secondary" taxes (alcohol, cigarettes, gas, etc). In reality, after spending their reserve funds, states have only two viable options: cutting spending and raising taxes.
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