That whole source of funds is over, which is why both the US, UK and Australian housing markets will experience a 30% decline.
30 June 2008
The Death of Securitized Mortgages
That whole source of funds is over, which is why both the US, UK and Australian housing markets will experience a 30% decline.
29 June 2008
The Principles of Trading Also Apply to Life
(Harun I., June 19, 2008. a US perspective)
Trading principles correlate to everyday life. The odd thing is that 80-90% of traders fail. Trading draws primarily intellectuals (doctors, lawyers, engineers, etc.) who are usually successful in their field of expertise. They think the same set of tools that made them successful in their professional life is all that is needed but, ego dashed to a million pieces, they come, they see, and they fail.
Trading principles are easy to understand but difficult to implement because our mind, the great trickster, betrays us. But those who are successful are usually successful in all parts of their lives because they have embraced these principles as a way of life and by doing so avoid a multitude of troubles.
So what are some of these principles and how can they help us? I have outlined my thoughts below. While nothing is perfect, they have worked for me in all aspects of my life.
Trade with an edge.
"Know the enemy and know yourself
In a hundred battles you will never be in peril.
When you are ignorant of the enemy but know yourself
Your chances of winning and losing are equal.
If ignorant both of your enemy and of yourself
You are certain in every battle to be in peril." -- "Art of War" Sun Tzu
In trading an "edge" is nothing more than an advantage or what we like to call a "positive expectation." Most people think that this means that their methodology must produce more winning trades than losers, this is not the case. The edge should produce a scenario in which the average winning trade is greater than the average loser. This is how a trading system that wins only 30-40% of the time can be profitable.
All successful endeavors have been so because an advantage has been exploited. Knowing your strengths and weakness as well as those of the enemy put the odds in your favor. While a potential client or employer are not "enemies" they may been seen as an adversary who must be won over. Understanding their global needs and psychology is tantamount to being successful.
Every surviving species has an edge which has allowed it to survive. Man’s edge is his ability to think and change his environment in order to survive. The ability to understand universal principles and change our environment is what separates us from all other creatures on the earth. But with this unique ability comes the stewardship of the earth. Long on greed while short on wisdom and humility we (industrialized, first world countries) have disregarded this all-important responsibility. Driven by greed and high on hubris, we have burned through nature’s gift’s. Resource depletion has left us vulnerable to the inevitable perfect storm -- and now it is brewing.
Failure to understand the enemy and ourselves is where we blundered in Vietnam, and in Afghanistan and Iraq. Arguably, when we launched the WOT (War on Terror) we knew not ourselves or the "enemy" and therefore, 5 years later, the free world's best trained, most technologically sophisticated military is still embroiled in a conflict that appears to have no end with what one would think is a seriously disadvantaged foe.
Sun Tzu never went to a war college or had a Mac computer but he was much more brilliant than our military and civilian leaders today in that he understood the principles and statistics of winning.
Plan your trades, trade your plan:
Alan Lakein said: "Failure to plan is planning to fail. Planning is bringing the future into the present so that you can do something about it now."
"No battle plan ever survives contact with the enemy." — Field Marshall Helmuth Carl Bernard von Moltke
Someone who has been in the markets long enough and is successful knows that the worst time to make an unplanned decision is when the market is open. The majority of off the cuff decisions made while the market is open are the wrong decision.
Successful traders have a plan that has all the elements of winning: mind, method, and money management. Their plan has contingencies because they understand what the good Field Marshall laid out in the above quote.
Getting into a trade is easy, 80% of traders get in on the right side of the market. Where they toss it up is at the exit. Most traders have no exit strategy and therefore they lose.
What is our exit strategy for the petrochemical cycle? We have had over 150 years and we are in panic mode. What is our exit strategy for the end of credit expansion? Meltdown it seems. What is our exit strategy for Afghanistan and Iraq? Can’t think of one? That’s why we are losing.
Cut losses and let winners run:
Losing traders, business leaders and governments do the exact opposite. They cave to the "sunk cost" cognitive bias and don’t realize or seem to forget that by cutting losses they can live to win another day.
I hear this as the excuse to stay in failed relationships, failed government policies and programs, failed businesses, and war. "Too many have died to quit now" goes the refrain.
But losses should be planned for and shouldn’t be let to run. I can’t think of any successful trader who answers a margin call. They realize they are wrong, take the loss and reverse the position if it is within their methodology to do so. There is no use sending good money after bad. There is no use making SUV’s as crude oil prices skyrocket. There is no use in staying in an abusive relationship. 4000 dead soldiers does not justify, for the sake of it, the sacrifice of another 50,000.
These few principles are simple enough but difficult to implement. Like I have said, I can’t say that these principles would make for a perfect world. There are times when I lose my way, which are followed by instructive losses, and I have to get back on track. But each moment is perfect and all things are relative. Principles for trading successfully are not specific to trading but are universal to life. Because they are mostly ignored is why we have what we have.
Trading principles correlate to everyday life. The odd thing is that 80-90% of traders fail. Trading draws primarily intellectuals (doctors, lawyers, engineers, etc.) who are usually successful in their field of expertise. They think the same set of tools that made them successful in their professional life is all that is needed but, ego dashed to a million pieces, they come, they see, and they fail.
Trading principles are easy to understand but difficult to implement because our mind, the great trickster, betrays us. But those who are successful are usually successful in all parts of their lives because they have embraced these principles as a way of life and by doing so avoid a multitude of troubles.
So what are some of these principles and how can they help us? I have outlined my thoughts below. While nothing is perfect, they have worked for me in all aspects of my life.
Trade with an edge.
"Know the enemy and know yourself
In a hundred battles you will never be in peril.
When you are ignorant of the enemy but know yourself
Your chances of winning and losing are equal.
If ignorant both of your enemy and of yourself
You are certain in every battle to be in peril." -- "Art of War" Sun Tzu
In trading an "edge" is nothing more than an advantage or what we like to call a "positive expectation." Most people think that this means that their methodology must produce more winning trades than losers, this is not the case. The edge should produce a scenario in which the average winning trade is greater than the average loser. This is how a trading system that wins only 30-40% of the time can be profitable.
All successful endeavors have been so because an advantage has been exploited. Knowing your strengths and weakness as well as those of the enemy put the odds in your favor. While a potential client or employer are not "enemies" they may been seen as an adversary who must be won over. Understanding their global needs and psychology is tantamount to being successful.
Every surviving species has an edge which has allowed it to survive. Man’s edge is his ability to think and change his environment in order to survive. The ability to understand universal principles and change our environment is what separates us from all other creatures on the earth. But with this unique ability comes the stewardship of the earth. Long on greed while short on wisdom and humility we (industrialized, first world countries) have disregarded this all-important responsibility. Driven by greed and high on hubris, we have burned through nature’s gift’s. Resource depletion has left us vulnerable to the inevitable perfect storm -- and now it is brewing.
Failure to understand the enemy and ourselves is where we blundered in Vietnam, and in Afghanistan and Iraq. Arguably, when we launched the WOT (War on Terror) we knew not ourselves or the "enemy" and therefore, 5 years later, the free world's best trained, most technologically sophisticated military is still embroiled in a conflict that appears to have no end with what one would think is a seriously disadvantaged foe.
Sun Tzu never went to a war college or had a Mac computer but he was much more brilliant than our military and civilian leaders today in that he understood the principles and statistics of winning.
Plan your trades, trade your plan:
Alan Lakein said: "Failure to plan is planning to fail. Planning is bringing the future into the present so that you can do something about it now."
"No battle plan ever survives contact with the enemy." — Field Marshall Helmuth Carl Bernard von Moltke
Someone who has been in the markets long enough and is successful knows that the worst time to make an unplanned decision is when the market is open. The majority of off the cuff decisions made while the market is open are the wrong decision.
Successful traders have a plan that has all the elements of winning: mind, method, and money management. Their plan has contingencies because they understand what the good Field Marshall laid out in the above quote.
Getting into a trade is easy, 80% of traders get in on the right side of the market. Where they toss it up is at the exit. Most traders have no exit strategy and therefore they lose.
What is our exit strategy for the petrochemical cycle? We have had over 150 years and we are in panic mode. What is our exit strategy for the end of credit expansion? Meltdown it seems. What is our exit strategy for Afghanistan and Iraq? Can’t think of one? That’s why we are losing.
Cut losses and let winners run:
Losing traders, business leaders and governments do the exact opposite. They cave to the "sunk cost" cognitive bias and don’t realize or seem to forget that by cutting losses they can live to win another day.
I hear this as the excuse to stay in failed relationships, failed government policies and programs, failed businesses, and war. "Too many have died to quit now" goes the refrain.
But losses should be planned for and shouldn’t be let to run. I can’t think of any successful trader who answers a margin call. They realize they are wrong, take the loss and reverse the position if it is within their methodology to do so. There is no use sending good money after bad. There is no use making SUV’s as crude oil prices skyrocket. There is no use in staying in an abusive relationship. 4000 dead soldiers does not justify, for the sake of it, the sacrifice of another 50,000.
These few principles are simple enough but difficult to implement. Like I have said, I can’t say that these principles would make for a perfect world. There are times when I lose my way, which are followed by instructive losses, and I have to get back on track. But each moment is perfect and all things are relative. Principles for trading successfully are not specific to trading but are universal to life. Because they are mostly ignored is why we have what we have.
28 June 2008
Ex-Taliban fighter tells of training, cash, orders from Pakistani military
Alexander Panetta, THE CANADIAN PRESS
KANDAHAR, Afghanistan - A former Taliban fighter has provided a gripping first-hand account of being secretly trained by members of the Pakistani military, paid $500 a month and ordered to kill foreigners in Afghanistan.
Mullah Mohammed Zaher offered a vivid description of a bomb-making apprenticeship at a Pakistani army compound where he says he learned to blow up NATO convoys.
Notebooks: Don't pay for shipping
He's one of three former Taliban fighters introduced to The Canadian Press by an Afghan government agency that works at getting rebels to renounce the insurgency.
Zaher insists he was neither forced to go public with his story nor coached by Afghan officials, whose routine response to terrorism on their soil is to blame neighbouring Pakistan.
Pakistan officially sides with the West against the insurgents and vigorously denies mounting accusations that it is a two-faced participant in the war on terror.
A report produced for the Pentagon and released this month by the Rand Corp., a U.S. think-tank, claims individuals in the Pakistani government are involved in helping the insurgents.
An illiterate, career warrior, Zaher has not seen the 177-page report. But he made a series of claims in a 90-minute interview that supported its broad conclusions - and offered a deluge of new details.
He described how men in khaki army fatigues housed, fed, paid and finally threatened insurgents into carrying out attacks on foreign troops.
Perhaps most startling of all was his description of the repeated warning from Pakistani soldiers about where trainees would be sent if they refused to fight: Guantanamo Bay.
He said there was an inside joke among insurgents whenever the Pakistanis turned over a high-profile rebel to the Americans for detention at the U.S.-run prison camp in Cuba.
"Whenever we heard on the news that Pakistan caught a Taliban commander, we used to say: 'He stopped obeying them'," Zaher said through a Pashto-language interpreter.
Two other former insurgents interviewed by The Canadian Press said they were aware of colleagues being trained in Pakistan, but said such fighters were part of an elite minority.
Mullah Janan said he heard that some of his Taliban comrades had received training in Pakistan, with many more receiving shelter or medical treatment across the border.
When infighting broke out between Taliban factions, Janan said, mediators from Pakistan even came across the border to help settle the dispute.
Zaher said he was among the elite.
He said he arrived in 2003 for his first of several training sessions at a walled military compound in the Nawakilli area outside Quetta, Pakistan.
He said he was greeted warmly by men in military fatigues, introduced to his fellow trainees and taken to a single-storey white building where for the next 20 days he would eat, sleep and learn the finer points of waging jihad.
On his first day there he quietly sipped tea and gobbled down a hearty meal of chicken curry, and said he was brought to a classroom the next morning.
He said he remembers only the last name of the man in the khaki uniform, Khattak, who presided over the orientation session.
The man told his pupils their homeland had been invaded again by non-Muslims, just as it had been by the Soviets in the 20th century and the British in the 19th.
Zaher said the group was told that the infidels had been stopped before and they must be stopped again.
"You are supposed to get good training here - and you are supposed to go and kill them there," Zaher recalled being told.
"We have to kick their asses out of Afghanistan and send them back to their own country ... We have to fix mines for them, destroy them and get them out of Afghanistan."
Zaher said he learned to produce a variety of explosives. They ranged from a crude bomb with wiring and fertilizer stuffed into a plastic jug, to more sophisticated remote-contolled devices.
"I can even make a bomb by buying stuff at the bazaar - for $10."
Zaher said he attended three sessions at the compound, lasting from 20 days to two months.
A half-dozen trainees would sleep on the floor in a common dormitory in the single-storey white building, he said.
On a typical day, they had breakfast at 10 a.m., lunch at 2 p.m., and spent every other waking hour learning how to kill foreigners.
Zaher said he doesn't know how many soldiers died from the bombs he planted on roads in Zhari, Panjwaii, Khakrez and Maywand districts of Kandahar province. And he said he has no idea whether the vehicles he blew up were Canadian, American or British.
He showed no remorse.
On the contrary, his dark eyes softened, his smile sparkled and his nasally voice quivered with excitement as he listed the places where he had ended enemies' lives.
"Sure, I've killed many foreigners," he said. "I was very happy when I killed people. That was supposed to be my task - and it made me very happy."
Zaher said he doesn't know much about Canada except that it's a foreign country.
The Canadian military began moving operations from Kabul to Kandahar in August 2005, initially establishing a provincial reconstruction team. By February 2006, some 2,000 Canadian troops had arrived and taken charge of security in Kandahar province.
Zaher said he left the insurgency about two-and-a-half years ago - around the time the Canadians entered Kandahar in force.
He wanted to come back home.
Upon being offered amnesty under the Afghan government's reconciliation program, he crammed his family and a few possessions into their Mazda minivan, rolled out of Pakistan in the middle of the night and moved into Kandahar city's District Six.
Zaher has since trimmed his once-bountiful beard and turfed his turban in favour of a white skull cap.
But he eagerly showed off old pictures of himself holding rocket launchers, AK-47 assault rifles and dressed in trademark Taliban garb.
Zaher said he was a district commander outside the capital under the former Taliban regime in Afghanistan. After the Taliban were ousted by U.S.-led forces in the aftermath of Sept. 11, 2001, he returned to Kandahar and struggled to adapt to the changed life.
He said he grew tired of being harassed, threatened and extorted by corrupt officials in the new Afghan government.
Like many of his friends, he fled to Pakistan in 2003.
Almost immediately upon arriving in Quetta, he said he received phone calls from his old allies offering him a lucrative opportunity to work with the Pakistanis.
He called them generous employers.
They gave him a motorbike and later upgraded it to the minivan. He said he lived in a rent-free house in Quetta big enough to accommodate him, his wife and their 10 children.
And he said he could ask anytime for an advance of up to three months on his salary.
Because he was illiterate, Zaher said the soldier who handed over the cash accepted an ink thumbprint as proof of payment.
But the generosity came with strings attached.
He was expected to spend about half the year fighting in Afghanistan.
If he wanted to see his family in Pakistan, he had to find someone to replace him in Afghanistan. It was like shift work. "He would come from Pakistan, replace me, and I would go home to Quetta. It was very important for me to find a replacement."
There was another catch.
Each time he received his payment, and every time he went for training, soldiers would remind him about what happened to trainees who refused to fight in Afghanistan.
"'If you don't go there, you will go to Guantanamo'," Zaher said.
"People who were saying they didn't want to do the training ... they were sent to Guantanamo. They were accused of being Talibs and they're getting punished over there."
The Pakistani government has strongly denied allegations that hardline Islamist factions within its security forces have been helping the Taliban.
How could the army possibly be aiding the insurgency, Pakistani officials argue, when pro-Taliban rebels have killed far more soldiers from Pakistan than any other country?
The Rand Corp. report offered several possible reasons why certain elements in the Pakistani government would support the Taliban.
Islamic militancy is only one of those factors, wrote Seth Jones, the report's author.
His report said Pakistanis want to continue exerting more influence in Afghanistan than their arch-nemesis, India - an emerging economic superpower that has helped bankroll a number of construction projects including Afghanistan's new parliament building.
Jones suggested some people in Pakistan may want to hedge their bets in Afghanistan in case of a NATO defeat, maintaining close ties to the rebels as a backup plan.
Finally, Jones said they want to keep Pakistan's Pashtun population loyal - an unstable Afghanistan next door will solidify their sense of belonging to Pakistan.
Among former insurgents, Pakistan's involvement is described as a matter of fact.
Mullah Mirza Akhun said he met some of his old friends two months ago when he travelled to Quetta to get medical treatment for his mother.
"I met some Taliban there - and they offered me a job," said the Kandahar resident, a self-described former Taliban commander.
"I was told by some of my friends that the Pakistani government can give you training to destroy Afghanistan."
"But I refused."
-
A.R. Khan, a Kandahar-based journalist, did additional reporting and provided translation during the interviews.
KANDAHAR, Afghanistan - A former Taliban fighter has provided a gripping first-hand account of being secretly trained by members of the Pakistani military, paid $500 a month and ordered to kill foreigners in Afghanistan.
Mullah Mohammed Zaher offered a vivid description of a bomb-making apprenticeship at a Pakistani army compound where he says he learned to blow up NATO convoys.
Notebooks: Don't pay for shipping
He's one of three former Taliban fighters introduced to The Canadian Press by an Afghan government agency that works at getting rebels to renounce the insurgency.
Zaher insists he was neither forced to go public with his story nor coached by Afghan officials, whose routine response to terrorism on their soil is to blame neighbouring Pakistan.
Pakistan officially sides with the West against the insurgents and vigorously denies mounting accusations that it is a two-faced participant in the war on terror.
A report produced for the Pentagon and released this month by the Rand Corp., a U.S. think-tank, claims individuals in the Pakistani government are involved in helping the insurgents.
An illiterate, career warrior, Zaher has not seen the 177-page report. But he made a series of claims in a 90-minute interview that supported its broad conclusions - and offered a deluge of new details.
He described how men in khaki army fatigues housed, fed, paid and finally threatened insurgents into carrying out attacks on foreign troops.
Perhaps most startling of all was his description of the repeated warning from Pakistani soldiers about where trainees would be sent if they refused to fight: Guantanamo Bay.
He said there was an inside joke among insurgents whenever the Pakistanis turned over a high-profile rebel to the Americans for detention at the U.S.-run prison camp in Cuba.
"Whenever we heard on the news that Pakistan caught a Taliban commander, we used to say: 'He stopped obeying them'," Zaher said through a Pashto-language interpreter.
Two other former insurgents interviewed by The Canadian Press said they were aware of colleagues being trained in Pakistan, but said such fighters were part of an elite minority.
Mullah Janan said he heard that some of his Taliban comrades had received training in Pakistan, with many more receiving shelter or medical treatment across the border.
When infighting broke out between Taliban factions, Janan said, mediators from Pakistan even came across the border to help settle the dispute.
Zaher said he was among the elite.
He said he arrived in 2003 for his first of several training sessions at a walled military compound in the Nawakilli area outside Quetta, Pakistan.
He said he was greeted warmly by men in military fatigues, introduced to his fellow trainees and taken to a single-storey white building where for the next 20 days he would eat, sleep and learn the finer points of waging jihad.
On his first day there he quietly sipped tea and gobbled down a hearty meal of chicken curry, and said he was brought to a classroom the next morning.
He said he remembers only the last name of the man in the khaki uniform, Khattak, who presided over the orientation session.
The man told his pupils their homeland had been invaded again by non-Muslims, just as it had been by the Soviets in the 20th century and the British in the 19th.
Zaher said the group was told that the infidels had been stopped before and they must be stopped again.
"You are supposed to get good training here - and you are supposed to go and kill them there," Zaher recalled being told.
"We have to kick their asses out of Afghanistan and send them back to their own country ... We have to fix mines for them, destroy them and get them out of Afghanistan."
Zaher said he learned to produce a variety of explosives. They ranged from a crude bomb with wiring and fertilizer stuffed into a plastic jug, to more sophisticated remote-contolled devices.
"I can even make a bomb by buying stuff at the bazaar - for $10."
Zaher said he attended three sessions at the compound, lasting from 20 days to two months.
A half-dozen trainees would sleep on the floor in a common dormitory in the single-storey white building, he said.
On a typical day, they had breakfast at 10 a.m., lunch at 2 p.m., and spent every other waking hour learning how to kill foreigners.
Zaher said he doesn't know how many soldiers died from the bombs he planted on roads in Zhari, Panjwaii, Khakrez and Maywand districts of Kandahar province. And he said he has no idea whether the vehicles he blew up were Canadian, American or British.
He showed no remorse.
On the contrary, his dark eyes softened, his smile sparkled and his nasally voice quivered with excitement as he listed the places where he had ended enemies' lives.
"Sure, I've killed many foreigners," he said. "I was very happy when I killed people. That was supposed to be my task - and it made me very happy."
Zaher said he doesn't know much about Canada except that it's a foreign country.
The Canadian military began moving operations from Kabul to Kandahar in August 2005, initially establishing a provincial reconstruction team. By February 2006, some 2,000 Canadian troops had arrived and taken charge of security in Kandahar province.
Zaher said he left the insurgency about two-and-a-half years ago - around the time the Canadians entered Kandahar in force.
He wanted to come back home.
Upon being offered amnesty under the Afghan government's reconciliation program, he crammed his family and a few possessions into their Mazda minivan, rolled out of Pakistan in the middle of the night and moved into Kandahar city's District Six.
Zaher has since trimmed his once-bountiful beard and turfed his turban in favour of a white skull cap.
But he eagerly showed off old pictures of himself holding rocket launchers, AK-47 assault rifles and dressed in trademark Taliban garb.
Zaher said he was a district commander outside the capital under the former Taliban regime in Afghanistan. After the Taliban were ousted by U.S.-led forces in the aftermath of Sept. 11, 2001, he returned to Kandahar and struggled to adapt to the changed life.
He said he grew tired of being harassed, threatened and extorted by corrupt officials in the new Afghan government.
Like many of his friends, he fled to Pakistan in 2003.
Almost immediately upon arriving in Quetta, he said he received phone calls from his old allies offering him a lucrative opportunity to work with the Pakistanis.
He called them generous employers.
They gave him a motorbike and later upgraded it to the minivan. He said he lived in a rent-free house in Quetta big enough to accommodate him, his wife and their 10 children.
And he said he could ask anytime for an advance of up to three months on his salary.
Because he was illiterate, Zaher said the soldier who handed over the cash accepted an ink thumbprint as proof of payment.
But the generosity came with strings attached.
He was expected to spend about half the year fighting in Afghanistan.
If he wanted to see his family in Pakistan, he had to find someone to replace him in Afghanistan. It was like shift work. "He would come from Pakistan, replace me, and I would go home to Quetta. It was very important for me to find a replacement."
There was another catch.
Each time he received his payment, and every time he went for training, soldiers would remind him about what happened to trainees who refused to fight in Afghanistan.
"'If you don't go there, you will go to Guantanamo'," Zaher said.
"People who were saying they didn't want to do the training ... they were sent to Guantanamo. They were accused of being Talibs and they're getting punished over there."
The Pakistani government has strongly denied allegations that hardline Islamist factions within its security forces have been helping the Taliban.
How could the army possibly be aiding the insurgency, Pakistani officials argue, when pro-Taliban rebels have killed far more soldiers from Pakistan than any other country?
The Rand Corp. report offered several possible reasons why certain elements in the Pakistani government would support the Taliban.
Islamic militancy is only one of those factors, wrote Seth Jones, the report's author.
His report said Pakistanis want to continue exerting more influence in Afghanistan than their arch-nemesis, India - an emerging economic superpower that has helped bankroll a number of construction projects including Afghanistan's new parliament building.
Jones suggested some people in Pakistan may want to hedge their bets in Afghanistan in case of a NATO defeat, maintaining close ties to the rebels as a backup plan.
Finally, Jones said they want to keep Pakistan's Pashtun population loyal - an unstable Afghanistan next door will solidify their sense of belonging to Pakistan.
Among former insurgents, Pakistan's involvement is described as a matter of fact.
Mullah Mirza Akhun said he met some of his old friends two months ago when he travelled to Quetta to get medical treatment for his mother.
"I met some Taliban there - and they offered me a job," said the Kandahar resident, a self-described former Taliban commander.
"I was told by some of my friends that the Pakistani government can give you training to destroy Afghanistan."
"But I refused."
-
A.R. Khan, a Kandahar-based journalist, did additional reporting and provided translation during the interviews.
27 June 2008
House of Cards
You thought the housing crisis was bad? You ain’t seen nothing yet. Of course, these debts have all been bundled and sold as bonds. Late stage predatory capitalism about to implode.
By Danny Schechter
The Mess
Nationwide, two million homes sit vacant. Home sales are at a nine-year low. Former Treasury Secretary Larry Summers says that housing finance has not been this bad since the Depression. We still don’t know the full extent of the colossal subprime rip-off, but a recent Bank of America study did some guesstimating on the scale of the consequences of the “credit crisis.” The meltdown in the U.S. subprime real estate market, the bank said, had led to a global loss of $7.7 trillion dollars in stock market value since October.
While many eyes are focusing on the housing meltdown and its hugely negative effect on an economy clearly moving into recession, few are paying attention to the next bubble expected to burst: credit cards. Combined with the subprime losses, such a credit card nightmare has the potential, experts say, of bringing down the entire financial system and global economy. You and your credit card have become key players in the highly unstable financial crunch. Mortgage lender cupidity and bank credit card greed wedded to financial institution deregulation supported by both political parties, have been made manifestly worse by Bush administration support-the-rich policies. It has brought us to a brink not seen since just before the Great Depression.
While campaigning in Edinburg, Texas, in February, Barack Obama met with students at the University of Texas-Pan American. “Just be careful about those credit cards, all right? Don’t eat out as much,” he said. After the foreclosure crisis, he warned, “the credit cards are next in line.”
The coupling of home equity debt and credit card debt has gone hand in glove for years. The homeowners at risk can no longer use their homes as ATM machines, thanks to their prior re-financings and equity loans, often used in the past to pay off their credit cards. Indeed, homeowners cashed out $1.2 trillion from their home equity from 2002 to 2007 to pay down credit card debts and to cover other costs of living, according to the public policy research organization Demos.
To compound the problem, fewer people are paying their credit card bills on time. And, to flip the old paradigm, more are using high-interest credit card cash to pay at least part of their mortgages instead of the other way around.
How bad is it?
• Financial analysts say that in the U.S. alone more than $850 billion in unpaid credit card balances is at stake and fast approaching $1 trillion, roughly the same amount as in the subprime market.
• CNN reports that worldwide, consumers have racked up more than $2.2 trillion in purchases and cash advances on major credit cards in just the last year.
• The unpaid debt portion of this is continuing to pile up, with U.S. consumers last year adding $68 billion against their credit lines, boosting credit card debt by 7.8 percent, the largest increase in seven years, just when the last recession was beginning.
• Even as they spent, consumers have been going into default at a stunning rate. The percentage of people delinquent on their credit cards is soaring, and credit card companies are now writing off somewhere near 5 percent of payments.
• By last fall, the major banks were setting aside billions for loan-loss reserves while anticipating an increase of 20 percent in non-payments over the next two to four quarters.
• Capital One, one of the biggest credit card banks, was forced to write off $1.9 billion in bad debt just in the last quarter of 2007.
•By October, according to a survey of only the leading credit card banks by the Associated Press, the value of credit card accounts at least 30 days late was up 26% from the previous year, to $17.3 billion. Serious delinquencies among some of the biggest lenders rose by 50 percent or more in the value of accounts that were at least 90 days delinquent.
• Making matters worse, or more widespread throughout the economy, just as with mortgage debt, credit card debt is put into pools that are then resold to investment houses, other banks and institutional investors. About 45 percent of the nation’s $900-plus billion in credit card debt has been packaged into these pools, and so many companies, not just a few, are at risk of being forced out of business by credit card debt write-offs.
What this adds up to, and what Obama didn’t say, is that we are actually face to face with the results of the most massive failure of our political and economic system since the Depression. Since Ronald Reagan, we have been living in an era in which neither the meltdown of the savings and loan banks in the 1980s nor the Enron-like scandals of the Bush years has stopped the relentless advancement and protection by both parties of the ability of financial institutions to make a buck at any cost to the social good and economic fabric. Which is what you get, of course, when both parties are so dependent on massive financial contributions to get their candidates into office and when the corporate media, heavy with advertising from the FIRE sector – Finance, Insurance and Real Estate – doesn’t warn the public or investigate the egregious fudging, misrepresentation and outright fraud that underpins the subprime and looming credit card crisis.
Priceless!
The credit card industry (Visa, MasterCard, American Express, etc.) and the 10 banks that dominate the industry as the primary card issuers spend an estimated $2 billion a year in endless marketing worldwide. We are all bombarded with their solicitations and sales tie-ins and gimmicks. They know that they might only have a 2-3 percent return rate, but that more than pays the enormous costs. They have thus succeeded in supplying 1.5 billion cards to 158 million U.S. card holders. That averages to 10 cards per person. In the last few years, retailers, banks, a wide range of companies, sports teams, unions and even universities have launched specialized card programs. Like the car companies that discovered that they made more money on car loans than automobiles, the benefits of what’s been called “financialization” is obvious to more business sectors.
Credit card advertising for new card holders is especially effective now as inflation drives costs up and consumers have less to spend. “Charging it” on yet another new credit card is for many the only option to meet their budgets or maintain their lifestyles, especially as gas prices rise. It’s become habit for many to spend more than they have. As a result, overall U.S. credit card debt grew by 435% from 2002 to year-end 2007, from $211 billion to approximately $915 billion.
The relentless, continuing push by the credit card banks doesn’t target potential customers alone. Constant focus group studies and other research techniques are still being used to persuade retailers to encourage more credit card transactions. Increasingly, businesses simplify their use by “swiping” and other gimmicks, no signed receipt needed.
“More and more sectors of the American economy recognize that their financial success is based on the success of the credit card industry,” explains Robert Manning, the author of the definitive Credit Card Nation and a leading expert who has been sounding the alarm about the consequences of credit card debt.
“Everything is very clearly thought out and premeditated. Whether it’s having conferences and think tank sessions about how to encourage people to accept more debt [or] to work with merchants – for example, to persuade merchants with empirical information that ... if they use a credit card that they’ll buy 20-25 percent more.”
Manning notes that saving and thrift was historically a positive value in the U.S. As recently as the l980s, the national savings rate was 10 to 11 percent. Since 2005, Americans have saved less than 1 percent of their disposable incomes. In fact, the most recent figures from March show that the savings rate is negative, below zero. And also in March the government reported that for the first time since the Depression, Americans owe more on their ≠homes than they have in equity. Essentially, on average, America is broke and its credit cards played a dominant role in getting there.
Manning, who teaches at Rochester Institute of Technology, has taken on the issue with original research and financial literacy courses for students. He found that many of his students already had credit cards before they arrived on campus, some for years.
As we all know, the companies don’t tell about the downside when they are seducing customers. They offer low introductory or teaser rates, in the same way that mortgage brokers enticed sub-prime customers. They offer rewards, frequent flyer miles and other prizes. Students are especially targeted because they have little real-world financial experience. The U.S. Public Interest Research Group, which is campaigning against student debt, says the average is $4,000 per student, but it easily climbs after four years to $15,000 to $20,000.
All of this, in our globalized world, is not unique. Clear across the world and down under, the New Zealand Union of Students’ Associations (NZUSA) and bank workers’ union Finsec are joining forces to try and keep students out of high-interest debt. The amount students owe on credit cards has increased by 32 percent since 2004, according to the NZUSA Income and Expenditure Survey. Credit card debt has increased at a higher rate than low to no interest overdrafts.
Here in the U.S., one mother, Joan E. Lisante, has set up a website targeted at other parents, www.consumeraffairs.com, so they can tell their stories. She wrote recently about what she calls the “plastic prison.”
“My 22-year-old son Jon, a college senior, got 52 credit card offers in the last year. I know this because, like a CIA operative, I intercepted the offers pouring into our mailbox.
“He got 19 from Capitol One, 13 from Providian, six from Washington Mutual, four from Chase, four from eBay and one each from an assortment of lenders ranging from PayPal to First Premier Bank in Sioux Falls, South Dakota (co-capital with “Small Wonder” Delaware of the credit card kingdom).
“Most begged Jon to rip open the envelope and wallow in instant gratification. Capital One, the most persistent suitor, shouted, ‘Offer Status: Confirmed. No Annual Fee!’
“‘16 Card Designs’ (but none that tally the total whenever you use it). You could get a response in as little as 60 SECONDS when you apply online.
“Now this kid has never held a job (yet) for more than one summer. He spent one summer working in the FEMA flood insurance call center, which shows how much expertise you need to work there. Although he is familiar with the inner workings of Blockbusters and Starbucks, Jon’s not yet a member of any corporate elite, prestigious profession or skilled craftsman’s guild. Does this matter? Apparently not.”
“The key for the banks,” Manning says, “is to get them dependent upon consumer credit, shape their attitudes towards savings, consumption and debt and to then multiply the number of financial products that they’re buying from that particular bank so the credit card will lead to the student loan, to the car loan, eventually to a home mortgage and then maybe some insurance products and investment opportunity.
The banks, he says, want students in a condition of dependency. “Young people today that see credit as a social entitlement have no understanding of what it is going to entail to repay those loans back. Once they’re used to living on borrowed money, then the banks realize that they’ll be following that pattern possibly for the rest of their lives. By the time they graduate they’re so indebted, and they’re so dependent upon the use of credit and debt, that it’s already presaged their future. They can’t possibly pursue the kinds of careers that they anticipated.”
Defaults on student loans are climbing. Many students used those loans to pay off credit cards. Military recruiters are now promising to pay off debts to entice enlistments. Other government agencies are also offering funds as part of their head-hunting.
Rise Up
“Many of you have probably forgotten that the American Revolution was largely driven by the great American planners, that were heavily in debt to European banks and they had very onerous terms,” Manning said in a lecture I attended when I was making my film In Debt We Trust. “And they recognized that they could not financially prosper under such outrageous financial demands.”
On the day I visted Manning’s lecture in an alcove literally right next door to the lecture room in the student center, local branches of banks like Chase and HSBC were signing up students for checking accounts and credit cards. Freshmen lined up at the tables to set up accounts. The banks had permission from the same school administration that hires Manning to counsel students to avoid getting into debt.
I listened in at the pitches.
BANK REP: “You don’t need anything for deposit, and we’re giving out free backpacks.”
BANK REP: “You get zero percent on the purchases for the first six months and then it goes to the standard intrest rate.”
QUESTION: “What’s the interest rate?”
BANK OF AMERICA REP: “The interest rate is variable ... to be honest with you, off-hand, I don’t know the interest rate off-hand. Sorry.”
A student is counting out twenties as his first deposit.
BANK REP: “I just need your signature. Right here, please.”
ANOTHER BANK REP: “And it’s free while they’re a student.”
What will happen when they do have to pay it back includes nonstop calls to them and their parents. Credit card collection agencies know how to harass, threaten and then sweet-talk cardholders who are late. They even have a term for people squeezed by debt: “sweatbox.” They also know that the longer the debt goes unpaid, the larger the potential profit for companies, as interest builds up at rates of up to 30 percent. Credit card promoters call people who only pay minimums “revolvers.” Those of us who pay our bills in full? “Deadbeats.”
Recently the companies unilaterally hiked late fees and penalties that compound the debt. A few missing payments can earn you an interest rate hike to 29 to 30 percent. If you are late with a payment on some other debt not related to your credit card, you can readily find your interest fee doubled on your credit card. Some companies make more on fees and penalties than on interest payments. The companies racked up more than $17 billion in 2006, the last year for which records are available.
Like many of the homeowners who accepted subprime mortgages, and like you with your credit cards, youths and adults alike signed dense agreements that are largely unreadable. The credit card banks constantly update these with those small print notices with which you get assaulted in the mail, these drafted by risk-minimizing lawyers. Of course, it’s unlikely you bother to read these. In part of the unread text, the companies give themselves the right to unilaterally change the deal even after it is signed. Other small print insures that consumers cannot sue them over differences. All grievances have to be arbitrated in a process the companies created and control.
Even the Federal Reserve Bank condemns some of these practices, noting: “Although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have been consistently higher than returns on all commercial bank activities.”
The Failure Trifecta
Track the subprime and credit card mess back, and you will find its origins in free market policies since Reagan that deregulated banking and much of the oversight that managed for years to keep the greed-meisters on Wall Street in check. The failure of media-lionized Alan Greenspan’s Federal Reserve Bank to pay attention to predatory lenders and sub-prime schemers allowed them to prosper.
Add to these failures a complicit Congress, with Democrats and Republicans alike dependent on donations from the three leaders of the FIRE economy. To assure their freedom to run their businesses their own damn way, the banks in the 1990s persuaded Congress to deregulate the practices of financial service companies. Pro-business Court decisions have allowed them to base their operations in low-tax states like South Dakota and Delaware and to end consumer protections against usury.
This decade, Bush’s tax cuts and his bankruptcy “reform” bill strengthening the power of credit card companies were passed with bipartisan support, including that of Senator Dianne Feinstein. Add major media amnesia to this list and you get a trifecta of failure. The New York Times admitted that advocates warned them that a rise in predatory lending was destroying poor communities in 2001, but they sat on the story for nearly six years.
Neither the politicians nor the media told us that every major brand name banking firm and investment house had its fingers in the juicy pie of pedaling mortgage-backed securities worldwide without disclosing that many of these mortgages were deliberately offloaded on people whom they knew could not afford to pay them. As with the credit card industry, these mortgage borrowers were cleverly given “teaser rates” that would soon reset upwards. The banks then resold the mortgages as “asset-backed paper” even though the assets’ value was so questionable.
Meanwhile, media outlets took in hundreds of millions in ad revenues from deceptive lenders and credit card banks encouraging Americans to shop and charge till we drop. The Super Bowl broadcast ran all those cool but misleading ads by credit card companies and mortgage hustlers. It was, um, “priceless.”
Notes scholar Lionel Tiger: “Those who have been operating the managerial levers of the financial system have failed embarrassingly and massively to comprehend the processes for which they are responsible. They have loaned money avidly and recklessly to people who couldn’t pay it back.
“They fudged data to get loans approved and recalculated. Then they sausaged fragile figments of money reality into new ‘products’ which could be sold around the world to investors eager to enjoy the surprising returns which often accompany theft, managerial incompetence and fraud. When it comes to responsibility for all this, there appears to be no one here but us spring chickens.”
Danny Schechter blogs for Mediachannel.org. His film In Debt We Trust spawned the action website StopTheSqueeze.org. He’s written a new book on the crisis called PLUNDER: An Investigation Into Our Economic Calamity. Dissector@mediachannel.org.
By Danny Schechter
The Mess
Nationwide, two million homes sit vacant. Home sales are at a nine-year low. Former Treasury Secretary Larry Summers says that housing finance has not been this bad since the Depression. We still don’t know the full extent of the colossal subprime rip-off, but a recent Bank of America study did some guesstimating on the scale of the consequences of the “credit crisis.” The meltdown in the U.S. subprime real estate market, the bank said, had led to a global loss of $7.7 trillion dollars in stock market value since October.
While many eyes are focusing on the housing meltdown and its hugely negative effect on an economy clearly moving into recession, few are paying attention to the next bubble expected to burst: credit cards. Combined with the subprime losses, such a credit card nightmare has the potential, experts say, of bringing down the entire financial system and global economy. You and your credit card have become key players in the highly unstable financial crunch. Mortgage lender cupidity and bank credit card greed wedded to financial institution deregulation supported by both political parties, have been made manifestly worse by Bush administration support-the-rich policies. It has brought us to a brink not seen since just before the Great Depression.
While campaigning in Edinburg, Texas, in February, Barack Obama met with students at the University of Texas-Pan American. “Just be careful about those credit cards, all right? Don’t eat out as much,” he said. After the foreclosure crisis, he warned, “the credit cards are next in line.”
The coupling of home equity debt and credit card debt has gone hand in glove for years. The homeowners at risk can no longer use their homes as ATM machines, thanks to their prior re-financings and equity loans, often used in the past to pay off their credit cards. Indeed, homeowners cashed out $1.2 trillion from their home equity from 2002 to 2007 to pay down credit card debts and to cover other costs of living, according to the public policy research organization Demos.
To compound the problem, fewer people are paying their credit card bills on time. And, to flip the old paradigm, more are using high-interest credit card cash to pay at least part of their mortgages instead of the other way around.
How bad is it?
• Financial analysts say that in the U.S. alone more than $850 billion in unpaid credit card balances is at stake and fast approaching $1 trillion, roughly the same amount as in the subprime market.
• CNN reports that worldwide, consumers have racked up more than $2.2 trillion in purchases and cash advances on major credit cards in just the last year.
• The unpaid debt portion of this is continuing to pile up, with U.S. consumers last year adding $68 billion against their credit lines, boosting credit card debt by 7.8 percent, the largest increase in seven years, just when the last recession was beginning.
• Even as they spent, consumers have been going into default at a stunning rate. The percentage of people delinquent on their credit cards is soaring, and credit card companies are now writing off somewhere near 5 percent of payments.
• By last fall, the major banks were setting aside billions for loan-loss reserves while anticipating an increase of 20 percent in non-payments over the next two to four quarters.
• Capital One, one of the biggest credit card banks, was forced to write off $1.9 billion in bad debt just in the last quarter of 2007.
•By October, according to a survey of only the leading credit card banks by the Associated Press, the value of credit card accounts at least 30 days late was up 26% from the previous year, to $17.3 billion. Serious delinquencies among some of the biggest lenders rose by 50 percent or more in the value of accounts that were at least 90 days delinquent.
• Making matters worse, or more widespread throughout the economy, just as with mortgage debt, credit card debt is put into pools that are then resold to investment houses, other banks and institutional investors. About 45 percent of the nation’s $900-plus billion in credit card debt has been packaged into these pools, and so many companies, not just a few, are at risk of being forced out of business by credit card debt write-offs.
What this adds up to, and what Obama didn’t say, is that we are actually face to face with the results of the most massive failure of our political and economic system since the Depression. Since Ronald Reagan, we have been living in an era in which neither the meltdown of the savings and loan banks in the 1980s nor the Enron-like scandals of the Bush years has stopped the relentless advancement and protection by both parties of the ability of financial institutions to make a buck at any cost to the social good and economic fabric. Which is what you get, of course, when both parties are so dependent on massive financial contributions to get their candidates into office and when the corporate media, heavy with advertising from the FIRE sector – Finance, Insurance and Real Estate – doesn’t warn the public or investigate the egregious fudging, misrepresentation and outright fraud that underpins the subprime and looming credit card crisis.
Priceless!
The credit card industry (Visa, MasterCard, American Express, etc.) and the 10 banks that dominate the industry as the primary card issuers spend an estimated $2 billion a year in endless marketing worldwide. We are all bombarded with their solicitations and sales tie-ins and gimmicks. They know that they might only have a 2-3 percent return rate, but that more than pays the enormous costs. They have thus succeeded in supplying 1.5 billion cards to 158 million U.S. card holders. That averages to 10 cards per person. In the last few years, retailers, banks, a wide range of companies, sports teams, unions and even universities have launched specialized card programs. Like the car companies that discovered that they made more money on car loans than automobiles, the benefits of what’s been called “financialization” is obvious to more business sectors.
Credit card advertising for new card holders is especially effective now as inflation drives costs up and consumers have less to spend. “Charging it” on yet another new credit card is for many the only option to meet their budgets or maintain their lifestyles, especially as gas prices rise. It’s become habit for many to spend more than they have. As a result, overall U.S. credit card debt grew by 435% from 2002 to year-end 2007, from $211 billion to approximately $915 billion.
The relentless, continuing push by the credit card banks doesn’t target potential customers alone. Constant focus group studies and other research techniques are still being used to persuade retailers to encourage more credit card transactions. Increasingly, businesses simplify their use by “swiping” and other gimmicks, no signed receipt needed.
“More and more sectors of the American economy recognize that their financial success is based on the success of the credit card industry,” explains Robert Manning, the author of the definitive Credit Card Nation and a leading expert who has been sounding the alarm about the consequences of credit card debt.
“Everything is very clearly thought out and premeditated. Whether it’s having conferences and think tank sessions about how to encourage people to accept more debt [or] to work with merchants – for example, to persuade merchants with empirical information that ... if they use a credit card that they’ll buy 20-25 percent more.”
Manning notes that saving and thrift was historically a positive value in the U.S. As recently as the l980s, the national savings rate was 10 to 11 percent. Since 2005, Americans have saved less than 1 percent of their disposable incomes. In fact, the most recent figures from March show that the savings rate is negative, below zero. And also in March the government reported that for the first time since the Depression, Americans owe more on their ≠homes than they have in equity. Essentially, on average, America is broke and its credit cards played a dominant role in getting there.
Manning, who teaches at Rochester Institute of Technology, has taken on the issue with original research and financial literacy courses for students. He found that many of his students already had credit cards before they arrived on campus, some for years.
As we all know, the companies don’t tell about the downside when they are seducing customers. They offer low introductory or teaser rates, in the same way that mortgage brokers enticed sub-prime customers. They offer rewards, frequent flyer miles and other prizes. Students are especially targeted because they have little real-world financial experience. The U.S. Public Interest Research Group, which is campaigning against student debt, says the average is $4,000 per student, but it easily climbs after four years to $15,000 to $20,000.
All of this, in our globalized world, is not unique. Clear across the world and down under, the New Zealand Union of Students’ Associations (NZUSA) and bank workers’ union Finsec are joining forces to try and keep students out of high-interest debt. The amount students owe on credit cards has increased by 32 percent since 2004, according to the NZUSA Income and Expenditure Survey. Credit card debt has increased at a higher rate than low to no interest overdrafts.
Here in the U.S., one mother, Joan E. Lisante, has set up a website targeted at other parents, www.consumeraffairs.com, so they can tell their stories. She wrote recently about what she calls the “plastic prison.”
“My 22-year-old son Jon, a college senior, got 52 credit card offers in the last year. I know this because, like a CIA operative, I intercepted the offers pouring into our mailbox.
“He got 19 from Capitol One, 13 from Providian, six from Washington Mutual, four from Chase, four from eBay and one each from an assortment of lenders ranging from PayPal to First Premier Bank in Sioux Falls, South Dakota (co-capital with “Small Wonder” Delaware of the credit card kingdom).
“Most begged Jon to rip open the envelope and wallow in instant gratification. Capital One, the most persistent suitor, shouted, ‘Offer Status: Confirmed. No Annual Fee!’
“‘16 Card Designs’ (but none that tally the total whenever you use it). You could get a response in as little as 60 SECONDS when you apply online.
“Now this kid has never held a job (yet) for more than one summer. He spent one summer working in the FEMA flood insurance call center, which shows how much expertise you need to work there. Although he is familiar with the inner workings of Blockbusters and Starbucks, Jon’s not yet a member of any corporate elite, prestigious profession or skilled craftsman’s guild. Does this matter? Apparently not.”
“The key for the banks,” Manning says, “is to get them dependent upon consumer credit, shape their attitudes towards savings, consumption and debt and to then multiply the number of financial products that they’re buying from that particular bank so the credit card will lead to the student loan, to the car loan, eventually to a home mortgage and then maybe some insurance products and investment opportunity.
The banks, he says, want students in a condition of dependency. “Young people today that see credit as a social entitlement have no understanding of what it is going to entail to repay those loans back. Once they’re used to living on borrowed money, then the banks realize that they’ll be following that pattern possibly for the rest of their lives. By the time they graduate they’re so indebted, and they’re so dependent upon the use of credit and debt, that it’s already presaged their future. They can’t possibly pursue the kinds of careers that they anticipated.”
Defaults on student loans are climbing. Many students used those loans to pay off credit cards. Military recruiters are now promising to pay off debts to entice enlistments. Other government agencies are also offering funds as part of their head-hunting.
Rise Up
“Many of you have probably forgotten that the American Revolution was largely driven by the great American planners, that were heavily in debt to European banks and they had very onerous terms,” Manning said in a lecture I attended when I was making my film In Debt We Trust. “And they recognized that they could not financially prosper under such outrageous financial demands.”
On the day I visted Manning’s lecture in an alcove literally right next door to the lecture room in the student center, local branches of banks like Chase and HSBC were signing up students for checking accounts and credit cards. Freshmen lined up at the tables to set up accounts. The banks had permission from the same school administration that hires Manning to counsel students to avoid getting into debt.
I listened in at the pitches.
BANK REP: “You don’t need anything for deposit, and we’re giving out free backpacks.”
BANK REP: “You get zero percent on the purchases for the first six months and then it goes to the standard intrest rate.”
QUESTION: “What’s the interest rate?”
BANK OF AMERICA REP: “The interest rate is variable ... to be honest with you, off-hand, I don’t know the interest rate off-hand. Sorry.”
A student is counting out twenties as his first deposit.
BANK REP: “I just need your signature. Right here, please.”
ANOTHER BANK REP: “And it’s free while they’re a student.”
What will happen when they do have to pay it back includes nonstop calls to them and their parents. Credit card collection agencies know how to harass, threaten and then sweet-talk cardholders who are late. They even have a term for people squeezed by debt: “sweatbox.” They also know that the longer the debt goes unpaid, the larger the potential profit for companies, as interest builds up at rates of up to 30 percent. Credit card promoters call people who only pay minimums “revolvers.” Those of us who pay our bills in full? “Deadbeats.”
Recently the companies unilaterally hiked late fees and penalties that compound the debt. A few missing payments can earn you an interest rate hike to 29 to 30 percent. If you are late with a payment on some other debt not related to your credit card, you can readily find your interest fee doubled on your credit card. Some companies make more on fees and penalties than on interest payments. The companies racked up more than $17 billion in 2006, the last year for which records are available.
Like many of the homeowners who accepted subprime mortgages, and like you with your credit cards, youths and adults alike signed dense agreements that are largely unreadable. The credit card banks constantly update these with those small print notices with which you get assaulted in the mail, these drafted by risk-minimizing lawyers. Of course, it’s unlikely you bother to read these. In part of the unread text, the companies give themselves the right to unilaterally change the deal even after it is signed. Other small print insures that consumers cannot sue them over differences. All grievances have to be arbitrated in a process the companies created and control.
Even the Federal Reserve Bank condemns some of these practices, noting: “Although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have been consistently higher than returns on all commercial bank activities.”
The Failure Trifecta
Track the subprime and credit card mess back, and you will find its origins in free market policies since Reagan that deregulated banking and much of the oversight that managed for years to keep the greed-meisters on Wall Street in check. The failure of media-lionized Alan Greenspan’s Federal Reserve Bank to pay attention to predatory lenders and sub-prime schemers allowed them to prosper.
Add to these failures a complicit Congress, with Democrats and Republicans alike dependent on donations from the three leaders of the FIRE economy. To assure their freedom to run their businesses their own damn way, the banks in the 1990s persuaded Congress to deregulate the practices of financial service companies. Pro-business Court decisions have allowed them to base their operations in low-tax states like South Dakota and Delaware and to end consumer protections against usury.
This decade, Bush’s tax cuts and his bankruptcy “reform” bill strengthening the power of credit card companies were passed with bipartisan support, including that of Senator Dianne Feinstein. Add major media amnesia to this list and you get a trifecta of failure. The New York Times admitted that advocates warned them that a rise in predatory lending was destroying poor communities in 2001, but they sat on the story for nearly six years.
Neither the politicians nor the media told us that every major brand name banking firm and investment house had its fingers in the juicy pie of pedaling mortgage-backed securities worldwide without disclosing that many of these mortgages were deliberately offloaded on people whom they knew could not afford to pay them. As with the credit card industry, these mortgage borrowers were cleverly given “teaser rates” that would soon reset upwards. The banks then resold the mortgages as “asset-backed paper” even though the assets’ value was so questionable.
Meanwhile, media outlets took in hundreds of millions in ad revenues from deceptive lenders and credit card banks encouraging Americans to shop and charge till we drop. The Super Bowl broadcast ran all those cool but misleading ads by credit card companies and mortgage hustlers. It was, um, “priceless.”
Notes scholar Lionel Tiger: “Those who have been operating the managerial levers of the financial system have failed embarrassingly and massively to comprehend the processes for which they are responsible. They have loaned money avidly and recklessly to people who couldn’t pay it back.
“They fudged data to get loans approved and recalculated. Then they sausaged fragile figments of money reality into new ‘products’ which could be sold around the world to investors eager to enjoy the surprising returns which often accompany theft, managerial incompetence and fraud. When it comes to responsibility for all this, there appears to be no one here but us spring chickens.”
Danny Schechter blogs for Mediachannel.org. His film In Debt We Trust spawned the action website StopTheSqueeze.org. He’s written a new book on the crisis called PLUNDER: An Investigation Into Our Economic Calamity. Dissector@mediachannel.org.
26 June 2008
Hypocrisy and Hot Air
Charting around Asia
by John Needham,
Here’s Heresy! All profits are a function of mispriced resources.
Western investors love affair with Asian markets has ended. The global rush to be part of the great energy and diversity offered by Asian markets is quickly turning to disappointment and disillusionment with the dawning realisation that the glitter from superior returns was not so much part of an economic miracle as another branch of the flooding tide of global liquidity.
Needham’s Law (#1) says that all profits are a function of the mispricing of resources usually created by legislative action. Miners and fisheries profit because they are not paying the natural economic rent for the asset they extract; value added industries profit because they do not pay the natural rent for the products they produce and service industries profit only because barriers to entry maintain artificial prices. The easiest way to look at this law is by a couple of simple examples. Fisheries are in the news as America's west coast looks set to lose almost all of its wild salmon harvest this year, depriving fish retailers and restaurants around the world of one of their key sources of high-quality fish, and raising long overdue questions about the viability of commercial fishing.
United States government regulators have already closed down the early fishing season along swathes of the west coast and are expected to issue a season-long ban in California and Oregon, in response to an unprecedented collapse in the region's salmon population. The most startling data comes from the Sacramento river, the source of more than 80 per cent of all the mature salmon caught off California. Last year, only 90,000 spawning adults returned to the river, the second lowest figure on record, and the projections for this year, based on sightings of two-year-old fish during last autumn's spawning run, are for fewer than 60,000. To put those figures in perspective: the Sacramento River once saw spawning populations of 800,000.
Globally, only 10 percent of all large fish—both open ocean species including tuna, swordfish, marlin and the large ground fish such as cod, halibut, skates and flounder—are left in the sea, according to research published in the 2003 issue of the scientific journal Nature, and things have only got worse in the intervening years. National Geographic introduced the finding this way:
"From giant blue marlin to mighty bluefin tuna, and from tropical groupers to Antarctic cod, industrial fishing has scoured the global ocean. There is no blue frontier left," said lead author Ransom Myers, a fisheries biologist based at Dalhousie University in Canada. "Since 1950, with the onset of industrialized fisheries, we have rapidly reduced the resource base to less than 10 percent—not just in some areas, not just for some stocks, but for entire communities of these large fish species from the tropics to the poles."
Fish as a cheap source of protein is rapidly disappearing. UK, European and Asian fisheries are depleted and whole species have been wiped out with monotonous regularity. So long as the fisheries turn a profit the plunder will continue and those profits arise only because the fishing businesses are not paying the natural economic price for their harvest. What is the natural economic price? The cost of maintaining or replacing the resource in the same state as it was pre-plunder. This is not an argument on global warming. It is a simple statement that natural resources are limited and absent the payment of the natural price which in economic terms means the cost of the alternate foregone, the resource will be used until it is depleted. That is the rapacious nature of the human animal. Capitalism is based on the exploitation of under priced resources.
The idea that all the oil in the world can be sucked up to use for energy is attractive only so long as the resource is available and the day must by definition be approaching when there is simply no more Oil recoverable. Since no natural rent has been paid for the resource, no alternate has been developed. Consider the automotive industry. If manufacturers had to pay the true cost of their product including the disposal of tyres, dirty oil, smoke and noxious gases, cars would long ago have passed from being the biggest single polluter on the planet.
In Asia this idea is having its consequences although few could give you the true argument behind the dramatic fluctuations in fortune that the major Asian power houses, China and India are undergoing, but the long swing cycles, often too long for economists to notice and certainly not within the ken of CEOs focused on annual balance sheets are gradually emerging, as the growth stage of the cycle wanes and the contractionary phase begins its unalterable course.
The Asian “miracle” is being revealed as a generational movement of labor arbitrage accompanied by technology transfers either to optimise the use of cheap labor or more often at the behest of savvy host governments who almost unanimously required partnerships with local corporations or citizens as the price of entry to their economies. In a decade Asia has achieved technological equality if not ascendancy with the west. The price of the labor arbitrage has been the improper pricing of labor which is the default setting for all governments. This practice not only applies to the west. It is an art form in the more technologically developed Asian economies.
Absent an understanding of natural economic rent, all assets including labor will be systemically mispriced. In China and India, the mispricing of labor has meant family dislocation, hardship and economic slavery at the factory level, tolerated only because the largely rural alternatives are worse. Market pricing and transfer manipulation by western trading blocs ensures that the agrarian peasant culture that built these nations for centuries can no longer sustain those dependant on a traditional lifestyle.
Hypocrisy and Hot Air at Trade Talks
It is curious that the greatest promoters of free market access are themselves the most abusive manipulators of artificial trade barriers. The UK Telegraph on 6 June reported on the latest abortive round of negotiations to salvage a result from the seven year long saga of the Doha round of trade liberalisation talks. Mention of the Doha talks usually serves to put the remaining audience to sleep but the choreography of this session is important for several reasons, and in particular the inclusion of China and India in this negotiating block called the G6 group of nations. Let’s follow the Telegraph’s report to see what is really happening.
Negotiators from the G6 group - the EU, the US, Brazil, Japan, China, and India - failed to break the deadlock over both industrial and farm tariffs at crisis talks yesterday. They agreed to keep the process alive into next week but experts warned that the seven-year drive for trade liberalization known as the Doha Round is close to collapse when the chair of the World Trade Organisation working-group on industry suspended all further meetings, saying the talks had gone backwards and that key parties were no longer even trying to reach a deal.
Peter Mandelson, as the EU External Trade Commissioner, is the main voice for exploitation of Asia and the third world. Mandelson started life as a journalist/economist for the British Trades Union Congress before becoming a TV producer. His ascension to high political office arose out of his Labour party affiliations where he is credited with helping Blair shape “New Labour”. He is a creature of the British left, an apparatchik with a pan European view. Writing in the Guardian on June 9 Mandelson says: But the open markets and economic integration that drive it are still by far the best tool we have for increasing global economic welfare. That is an essential contribution to global stability. Only stable, cooperating states can manage the coming squeeze on resources. For 60 years, the US has underwritten economic internationalism with openness of its own. A crisis of American confidence in globalisation could knock it off course.
If nothing else Mandelson is the master of disinformation. This little barb at US was prompted by the new US Farm Bill which also rankled China’s WTO ambassador Sun Zhenyu who said that the new $290 billion farm bill approved by Congress had sent negative signals by raising subsidies when WTO members were trying to negotiate a reduction in farm support. Reducing tariffs in the emerging economies in India, China and elsewhere has been one of the chief conflicts in the talks, pitting U.S. and European negotiators against developing world officials who say they need to protect their poor from the whims of the global economy. Meanwhile, in the height of hypocrisy, EU maintains a scandalous level of farm subsidies that adversely affect developing nations.
Because of the subsidies that farmers in Europe receive, the market price of a bag of potatoes produced, for example, in France is cheaper than a bag produced anywhere in the developing world. And since the EU produces too much food, this bag of potatoes lands in the shops in the developing world, whether as aid or trade, and costs less than the local produce…finally because the farmers in the developing world cannot compete with the incoming artificially cheap subsidised produce, they walk off the land. (Goodtalking’s weblog.)
You can add sugar, milk powder, eggs and a host of other food items to the list.
Peter Mandelson was also in Asian news lately complaining that Japan’s hostility towards foreign investors was a “globalisation paradox” that could lead to companies turning their backs on the world’s second-biggest economy. Mr Mandelson described Japan as
“the most closed developed market in the world and that imbalances of investment between the EU and Japan were “truly staggering”. Many foreign funds cite growing despair that Japan will ever embrace the principles of shareholder capitalism, or drop its scepticism of foreign investors. Takao Kitabata, the top bureaucrat in the Japanese Ministry for the Economy, Trade and Industry, recently described short-term stock investors as “greedy, irresponsible fools to whom voting rights should never be given”. Asia Business Correspondent 21 April 2008.
Mr Kitabata is quite right.
In Geneva, diplomats said India and Brazil (representing the developing countries) were reneging on pledges to open their markets to industrial goods, while Washington was happy to let the talks die since Doha would force the US to dismantle the great nexus of subsidies passed under the Farm Bill. Charlene Barshefsky, the former US Trade Representative, told a panel in London that the outsourcing revolution this decade has begun to threaten middle-class jobs in the US and sap support for globalisation. "Everybody understood in the Golden Nineties that we would shed blue-collar jobs, but now white-collar jobs are going too, and that makes the politics more volatile," she said. (Reuters)
Meanwhile at the UN’s crisis conference on soaring food costs and the conversion of food stuffs to bio fuel held in Rome on 3 June, all participants agreed that the lavish lunch menu was fine. That was all they could agree on.
He da Man
by John Needham,
Here’s Heresy! All profits are a function of mispriced resources.
Western investors love affair with Asian markets has ended. The global rush to be part of the great energy and diversity offered by Asian markets is quickly turning to disappointment and disillusionment with the dawning realisation that the glitter from superior returns was not so much part of an economic miracle as another branch of the flooding tide of global liquidity.
Needham’s Law (#1) says that all profits are a function of the mispricing of resources usually created by legislative action. Miners and fisheries profit because they are not paying the natural economic rent for the asset they extract; value added industries profit because they do not pay the natural rent for the products they produce and service industries profit only because barriers to entry maintain artificial prices. The easiest way to look at this law is by a couple of simple examples. Fisheries are in the news as America's west coast looks set to lose almost all of its wild salmon harvest this year, depriving fish retailers and restaurants around the world of one of their key sources of high-quality fish, and raising long overdue questions about the viability of commercial fishing.
United States government regulators have already closed down the early fishing season along swathes of the west coast and are expected to issue a season-long ban in California and Oregon, in response to an unprecedented collapse in the region's salmon population. The most startling data comes from the Sacramento river, the source of more than 80 per cent of all the mature salmon caught off California. Last year, only 90,000 spawning adults returned to the river, the second lowest figure on record, and the projections for this year, based on sightings of two-year-old fish during last autumn's spawning run, are for fewer than 60,000. To put those figures in perspective: the Sacramento River once saw spawning populations of 800,000.
Globally, only 10 percent of all large fish—both open ocean species including tuna, swordfish, marlin and the large ground fish such as cod, halibut, skates and flounder—are left in the sea, according to research published in the 2003 issue of the scientific journal Nature, and things have only got worse in the intervening years. National Geographic introduced the finding this way:
"From giant blue marlin to mighty bluefin tuna, and from tropical groupers to Antarctic cod, industrial fishing has scoured the global ocean. There is no blue frontier left," said lead author Ransom Myers, a fisheries biologist based at Dalhousie University in Canada. "Since 1950, with the onset of industrialized fisheries, we have rapidly reduced the resource base to less than 10 percent—not just in some areas, not just for some stocks, but for entire communities of these large fish species from the tropics to the poles."
Fish as a cheap source of protein is rapidly disappearing. UK, European and Asian fisheries are depleted and whole species have been wiped out with monotonous regularity. So long as the fisheries turn a profit the plunder will continue and those profits arise only because the fishing businesses are not paying the natural economic price for their harvest. What is the natural economic price? The cost of maintaining or replacing the resource in the same state as it was pre-plunder. This is not an argument on global warming. It is a simple statement that natural resources are limited and absent the payment of the natural price which in economic terms means the cost of the alternate foregone, the resource will be used until it is depleted. That is the rapacious nature of the human animal. Capitalism is based on the exploitation of under priced resources.
The idea that all the oil in the world can be sucked up to use for energy is attractive only so long as the resource is available and the day must by definition be approaching when there is simply no more Oil recoverable. Since no natural rent has been paid for the resource, no alternate has been developed. Consider the automotive industry. If manufacturers had to pay the true cost of their product including the disposal of tyres, dirty oil, smoke and noxious gases, cars would long ago have passed from being the biggest single polluter on the planet.
In Asia this idea is having its consequences although few could give you the true argument behind the dramatic fluctuations in fortune that the major Asian power houses, China and India are undergoing, but the long swing cycles, often too long for economists to notice and certainly not within the ken of CEOs focused on annual balance sheets are gradually emerging, as the growth stage of the cycle wanes and the contractionary phase begins its unalterable course.
The Asian “miracle” is being revealed as a generational movement of labor arbitrage accompanied by technology transfers either to optimise the use of cheap labor or more often at the behest of savvy host governments who almost unanimously required partnerships with local corporations or citizens as the price of entry to their economies. In a decade Asia has achieved technological equality if not ascendancy with the west. The price of the labor arbitrage has been the improper pricing of labor which is the default setting for all governments. This practice not only applies to the west. It is an art form in the more technologically developed Asian economies.
Absent an understanding of natural economic rent, all assets including labor will be systemically mispriced. In China and India, the mispricing of labor has meant family dislocation, hardship and economic slavery at the factory level, tolerated only because the largely rural alternatives are worse. Market pricing and transfer manipulation by western trading blocs ensures that the agrarian peasant culture that built these nations for centuries can no longer sustain those dependant on a traditional lifestyle.
Hypocrisy and Hot Air at Trade Talks
It is curious that the greatest promoters of free market access are themselves the most abusive manipulators of artificial trade barriers. The UK Telegraph on 6 June reported on the latest abortive round of negotiations to salvage a result from the seven year long saga of the Doha round of trade liberalisation talks. Mention of the Doha talks usually serves to put the remaining audience to sleep but the choreography of this session is important for several reasons, and in particular the inclusion of China and India in this negotiating block called the G6 group of nations. Let’s follow the Telegraph’s report to see what is really happening.
Negotiators from the G6 group - the EU, the US, Brazil, Japan, China, and India - failed to break the deadlock over both industrial and farm tariffs at crisis talks yesterday. They agreed to keep the process alive into next week but experts warned that the seven-year drive for trade liberalization known as the Doha Round is close to collapse when the chair of the World Trade Organisation working-group on industry suspended all further meetings, saying the talks had gone backwards and that key parties were no longer even trying to reach a deal.
Peter Mandelson, as the EU External Trade Commissioner, is the main voice for exploitation of Asia and the third world. Mandelson started life as a journalist/economist for the British Trades Union Congress before becoming a TV producer. His ascension to high political office arose out of his Labour party affiliations where he is credited with helping Blair shape “New Labour”. He is a creature of the British left, an apparatchik with a pan European view. Writing in the Guardian on June 9 Mandelson says: But the open markets and economic integration that drive it are still by far the best tool we have for increasing global economic welfare. That is an essential contribution to global stability. Only stable, cooperating states can manage the coming squeeze on resources. For 60 years, the US has underwritten economic internationalism with openness of its own. A crisis of American confidence in globalisation could knock it off course.
If nothing else Mandelson is the master of disinformation. This little barb at US was prompted by the new US Farm Bill which also rankled China’s WTO ambassador Sun Zhenyu who said that the new $290 billion farm bill approved by Congress had sent negative signals by raising subsidies when WTO members were trying to negotiate a reduction in farm support. Reducing tariffs in the emerging economies in India, China and elsewhere has been one of the chief conflicts in the talks, pitting U.S. and European negotiators against developing world officials who say they need to protect their poor from the whims of the global economy. Meanwhile, in the height of hypocrisy, EU maintains a scandalous level of farm subsidies that adversely affect developing nations.
Because of the subsidies that farmers in Europe receive, the market price of a bag of potatoes produced, for example, in France is cheaper than a bag produced anywhere in the developing world. And since the EU produces too much food, this bag of potatoes lands in the shops in the developing world, whether as aid or trade, and costs less than the local produce…finally because the farmers in the developing world cannot compete with the incoming artificially cheap subsidised produce, they walk off the land. (Goodtalking’s weblog.)
You can add sugar, milk powder, eggs and a host of other food items to the list.
Peter Mandelson was also in Asian news lately complaining that Japan’s hostility towards foreign investors was a “globalisation paradox” that could lead to companies turning their backs on the world’s second-biggest economy. Mr Mandelson described Japan as
“the most closed developed market in the world and that imbalances of investment between the EU and Japan were “truly staggering”. Many foreign funds cite growing despair that Japan will ever embrace the principles of shareholder capitalism, or drop its scepticism of foreign investors. Takao Kitabata, the top bureaucrat in the Japanese Ministry for the Economy, Trade and Industry, recently described short-term stock investors as “greedy, irresponsible fools to whom voting rights should never be given”. Asia Business Correspondent 21 April 2008.
Mr Kitabata is quite right.
In Geneva, diplomats said India and Brazil (representing the developing countries) were reneging on pledges to open their markets to industrial goods, while Washington was happy to let the talks die since Doha would force the US to dismantle the great nexus of subsidies passed under the Farm Bill. Charlene Barshefsky, the former US Trade Representative, told a panel in London that the outsourcing revolution this decade has begun to threaten middle-class jobs in the US and sap support for globalisation. "Everybody understood in the Golden Nineties that we would shed blue-collar jobs, but now white-collar jobs are going too, and that makes the politics more volatile," she said. (Reuters)
Meanwhile at the UN’s crisis conference on soaring food costs and the conversion of food stuffs to bio fuel held in Rome on 3 June, all participants agreed that the lavish lunch menu was fine. That was all they could agree on.
He da Man
23 June 2008
Run on shadow bank system
Brokers threatened by run on shadow bank system
Regulators eye $10 trillion market that boomed outside traditional banking
By Alistair Barr, MarketWatch
Last update: 2:37 p.m. EDT June 20, 2008
SAN FRANCISCO (MarketWatch) -- A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system.
Big brokerage firms have the most to lose from stricter regulation.
The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.
While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn't have reliable access to short-term borrowing during times of stress. Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.
Such vulnerability helped transform what may have been an uncomfortable correction in credit markets into the worst global credit crunch in more than a decade as monetary policymakers and regulators struggled to contain the damage.
Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.
"The shadow banking system model as practiced in recent years has been discredited," Ramin Toloui, executive vice president at bond investment giant Pimco, said.
Toloui expects greater regulation of big brokerage firms which may face stricter capital requirements and requirements to hold more liquid, or easily sellable, assets.
'Clarion call'
"The bright new financial system -- for all its talented participants, for all its rich rewards -- has failed the test of the market place," Paul Volcker, former chairman of the Federal Reserve, said during a speech in April. "It all adds up to a clarion call for an effective response."
Two months later, Timothy Geithner, president of the Federal Reserve Bank of New York, and others have begun to answer that call.
"The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system," he warned in a speech last week. That "made the crisis more difficult to manage."
On Thursday, Treasury Secretary and former Goldman Chief Executive Henry Paulson said the Fed should be given the authority to collect information from large complex financial institutions and intervene if necessary to stabilize future crises. Regulators should also have a clear way of taking over and closing a failed brokerage firm, he added. See full story.
Banking bedrock
The bedrock of traditional banking is borrowing money over the short term from customers who deposit savings in accounts and then lending it back out as mortgages and other higher-yielding loans over longer periods.
The owners of banks are required by regulators to invest some of their own money and reinvest some of the profit to keep an extra level of money in reserve in case the business suffers losses on some of its loans. That ensures that there's still enough money to repay all depositors after such losses.
In recent decades, lots of new businesses and investment vehicles have evolved that do the same thing, but outside the purview of traditional banking regulation.
Instead of getting money from depositors, these financial intermediaries often borrow by selling commercial paper, which is a type of short-term loan that has to be re-financed over and over again. And rather than offering home loans, these entities buy mortgage-backed securities and other more complex securities.
A $10 trillion shadow
By early 2007, conduits, structured investment vehicles and similar entities that borrowed in the commercial paper market and bought longer-term asset-backed securities, held roughly $2.2 trillion in assets, according to the Fed's Geithner.
Another $2.5 trillion in assets were financed overnight in the so-called repo market, Geithner said.
Geithner also highlighted big brokerage firms, saying that their combined balance sheets held $4 trillion in assets in early 2007.
Hedge funds held another $1.8 trillion, bringing the total value of asset in the "non-bank" financial system to $10.5 trillion, he added.
That dwarfed the total assets of the five largest banks in the U.S., which held just over $6 trillion at the time, Geithner noted. The traditional banking system as a whole held about $10 trillion, he said. "These things act like banks, but they're not."
— James Hamilton,Economics professor
While acting like banks, these shadow banking entities weren't subject to the same supervision, so they didn't hold as much capital to cushion against potential losses. When subprime mortgage losses started last year, their sources of short-term financing dried up.
"These things act like banks, but they're not," James Hamilton, professor of economics at the University of California, San Diego, said. "The fundamental inadequacy of their own capital caused these problems."
Big brokers targeted
Geithner said the most fundamental reform that's needed is to regulate big brokerage firms and global banks under a unified system with stronger supervision and "appropriate" requirements for capital and liquidity.
Financial institutions should be persuaded to keep strong capital cushions and more liquid assets during periods of calm in the market, he explained, noting that's the best way to limit the damage during a crisis.
At a minimum, major investment banks and brokerage firms should adhere to similar rules on capital, liquidity and risk management as commercial banks, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on Wednesday.
"It makes sense to extend some form of greater prudential regulation to investment banks," she said.
Separation dwindled
After the stock market crash of 1929, the U.S. Congress passed laws that separated commercial banks from investment banks.
The Fed, the Office of the Comptroller of the Currency and state regulators oversaw commercial banks, which took in customer deposits and lent that money out. The Securities and Exchange Commission regulated brokerage firms, which underwrote offerings of stocks and corporate bonds.
This separation dwindled during the 1980s and 1990s as commercial banks tried to push into investment banking -- following their large corporate clients which were selling more bonds, rather than borrowing directly from banks.
By 1999, the Gramm-Leach-Bliley Act rolled back Depression-era restrictions, allowing banks, brokerage firms and insurers to merge into financial holding companies that would be regulated by the Fed.
However, big brokerage firms like Goldman, Morgan Stanley and Lehman didn't become financial holding companies and stayed out of commercial banking partly to avoid increased regulation by the Fed.
Run on a shadow bank
The Fed's bailout of Bear Stearns in March will probably change all that, experts said this week.
Bear, a leading underwriter of mortgage securities, almost collapsed after customers and counterparties deserted the firm.
It was like a run on a bank. But Bear wasn't a bank. It financed a lot of its activity by borrowing short term in repo and commercial paper markets and couldn't borrow from the Fed if things got really bad.
Bear's low capital levels left it with highly leveraged exposures to risky mortgage-related securities, which triggered initial doubts among customers and trading partners.
The Fed quickly helped J.P. Morgan Chase, one of the largest commercial banks, acquire Bear. To prevent further damage to the financial system, the Fed also started lending directly to brokerage firms for the first time since the Depression.
"They stepped in because Bear was facing a traditional bank run -- customers were pulling short-term assets and the firm couldn't sell its long-term assets quickly enough," Hamilton said. "Rules should apply here: You should have enough of your own capital available to pay back customers to avoid a run like that."
Bear necessity
A more worrying question from the Bear Stearns debacle is why customers and investors were willing to lend money to the firm in the absence of an adequate capital cushion, Hamilton said.
"The creditors thought that Bear was too big to fail and that the government would step in to prevent creditors losing their money," he explained. "They were right because that's exactly what happened."
"This is a system in which institutions like Bear Stearns are taking far too much risk and a lot of that risk is being borne by the government, not these firms or the market," he added.
The Fed has lent between $8 billion and more than $30 billion each week directly to brokerage firms since it set up its new program in March. Most experts say this source of emergency funding is unlikely to disappear, even though it's scheduled to end in September.
"It's almost impossible to go back," FDIC's Bair said on Wednesday.
With taxpayer money permanently on the line to save big brokers, these firms should now be more strictly regulated to keep future bailouts to a minimum, Bair and others said.
"By definition, if they're going to give the investment banks access to the window, I for one do believe they have the right for oversight," Richard Fuld, chief executive of Lehman, told analysts during a conference call this week. "What that means, though, particularly as far as capital levels or asset requirements, it's way too early to tell."
Super Fed
Next year, Congress likely will pass legislation forcing big brokerage firms to be regulated fully by the Fed as financial holding companies, Brad Hintz, a securities analyst at Bernstein Research and former chief financial officer of Lehman, said.
Legislators will probably also call for tighter limits on the leverage and trading risk taken on by large brokers, while demanding more conservative funding and liquidity policies, he added.
Restrictions on these firms' forays into venture capital, private equity, real estate, commodities and potentially hedge funds may also follow too, Hintz warned.
This may undermine the source of much of the surging profit generated by big brokerage firms in recent years.
A newly empowered "super Fed" will likely encourage these firms to arrange longer-term, more secure sources of borrowing and even promote the development of deposit bases, just like commercial and retail banks, the analyst explained.
This will make borrowing more expensive for brokerage firms, undermining the profitability of businesses that require a lot of capital, such as fixed income, institutional equities, commodities and prime brokerage, Hintz said.
Such regulatory changes will cut big brokers' return on equity -- a closely watched measure of profitability -- to roughly 15.5% from 19%, Hintz estimated in a note to investors this week.
Lehman and Goldman will be most affected by this -- seeing return on equity drop by about four percentage points over the business cycle -- because they have larger trading books and greater exposure to revenue from sales and trading. Goldman also has a major merchant banking business that may also be constrained, Hintz added.
Morgan Stanley and Merrill Lynch.
) will see declines of 3.2 percentage points and 2.2 percentage points in
their return on equity, the analyst forecast.
If you can't beat them...
Facing lower returns and more stringent bank-like regulation, some big brokerage firms may decide they're better off as part of a large commercial bank, some experts said.
"If you're being regulated like a bank and your leverage ratio looks something like a bank's, can you really earn the returns you were making as a broker dealer? Probably not," Margaret Cannella, global head of credit research at J.P. Morgan, said.
Regulatory changes will be unpopular with some brokerage CEOs and could result in a shakeup of the industry and more consolidation, she added.
Hintz said the business models of some brokerage firms may evolve into something similar to Bankers Trust and the old J.P. Morgan.
In the mid 1990s, Bankers Trust and J.P. Morgan relied more on deposits and less on the repo market to finance their assets. They also operated with leverage ratios of roughly 20 times capital. That's lower than today's brokerage firms, which were levered roughly 30 times during the peak of the credit bubble last year, according to Hintz.
Regulators eye $10 trillion market that boomed outside traditional banking
By Alistair Barr, MarketWatch
Last update: 2:37 p.m. EDT June 20, 2008
SAN FRANCISCO (MarketWatch) -- A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system.
Big brokerage firms have the most to lose from stricter regulation.
The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.
While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn't have reliable access to short-term borrowing during times of stress. Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.
Such vulnerability helped transform what may have been an uncomfortable correction in credit markets into the worst global credit crunch in more than a decade as monetary policymakers and regulators struggled to contain the damage.
Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.
"The shadow banking system model as practiced in recent years has been discredited," Ramin Toloui, executive vice president at bond investment giant Pimco, said.
Toloui expects greater regulation of big brokerage firms which may face stricter capital requirements and requirements to hold more liquid, or easily sellable, assets.
'Clarion call'
"The bright new financial system -- for all its talented participants, for all its rich rewards -- has failed the test of the market place," Paul Volcker, former chairman of the Federal Reserve, said during a speech in April. "It all adds up to a clarion call for an effective response."
Two months later, Timothy Geithner, president of the Federal Reserve Bank of New York, and others have begun to answer that call.
"The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system," he warned in a speech last week. That "made the crisis more difficult to manage."
On Thursday, Treasury Secretary and former Goldman Chief Executive Henry Paulson said the Fed should be given the authority to collect information from large complex financial institutions and intervene if necessary to stabilize future crises. Regulators should also have a clear way of taking over and closing a failed brokerage firm, he added. See full story.
Banking bedrock
The bedrock of traditional banking is borrowing money over the short term from customers who deposit savings in accounts and then lending it back out as mortgages and other higher-yielding loans over longer periods.
The owners of banks are required by regulators to invest some of their own money and reinvest some of the profit to keep an extra level of money in reserve in case the business suffers losses on some of its loans. That ensures that there's still enough money to repay all depositors after such losses.
In recent decades, lots of new businesses and investment vehicles have evolved that do the same thing, but outside the purview of traditional banking regulation.
Instead of getting money from depositors, these financial intermediaries often borrow by selling commercial paper, which is a type of short-term loan that has to be re-financed over and over again. And rather than offering home loans, these entities buy mortgage-backed securities and other more complex securities.
A $10 trillion shadow
By early 2007, conduits, structured investment vehicles and similar entities that borrowed in the commercial paper market and bought longer-term asset-backed securities, held roughly $2.2 trillion in assets, according to the Fed's Geithner.
Another $2.5 trillion in assets were financed overnight in the so-called repo market, Geithner said.
Geithner also highlighted big brokerage firms, saying that their combined balance sheets held $4 trillion in assets in early 2007.
Hedge funds held another $1.8 trillion, bringing the total value of asset in the "non-bank" financial system to $10.5 trillion, he added.
That dwarfed the total assets of the five largest banks in the U.S., which held just over $6 trillion at the time, Geithner noted. The traditional banking system as a whole held about $10 trillion, he said. "These things act like banks, but they're not."
— James Hamilton,Economics professor
While acting like banks, these shadow banking entities weren't subject to the same supervision, so they didn't hold as much capital to cushion against potential losses. When subprime mortgage losses started last year, their sources of short-term financing dried up.
"These things act like banks, but they're not," James Hamilton, professor of economics at the University of California, San Diego, said. "The fundamental inadequacy of their own capital caused these problems."
Big brokers targeted
Geithner said the most fundamental reform that's needed is to regulate big brokerage firms and global banks under a unified system with stronger supervision and "appropriate" requirements for capital and liquidity.
Financial institutions should be persuaded to keep strong capital cushions and more liquid assets during periods of calm in the market, he explained, noting that's the best way to limit the damage during a crisis.
At a minimum, major investment banks and brokerage firms should adhere to similar rules on capital, liquidity and risk management as commercial banks, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on Wednesday.
"It makes sense to extend some form of greater prudential regulation to investment banks," she said.
Separation dwindled
After the stock market crash of 1929, the U.S. Congress passed laws that separated commercial banks from investment banks.
The Fed, the Office of the Comptroller of the Currency and state regulators oversaw commercial banks, which took in customer deposits and lent that money out. The Securities and Exchange Commission regulated brokerage firms, which underwrote offerings of stocks and corporate bonds.
This separation dwindled during the 1980s and 1990s as commercial banks tried to push into investment banking -- following their large corporate clients which were selling more bonds, rather than borrowing directly from banks.
By 1999, the Gramm-Leach-Bliley Act rolled back Depression-era restrictions, allowing banks, brokerage firms and insurers to merge into financial holding companies that would be regulated by the Fed.
However, big brokerage firms like Goldman, Morgan Stanley and Lehman didn't become financial holding companies and stayed out of commercial banking partly to avoid increased regulation by the Fed.
Run on a shadow bank
The Fed's bailout of Bear Stearns in March will probably change all that, experts said this week.
Bear, a leading underwriter of mortgage securities, almost collapsed after customers and counterparties deserted the firm.
It was like a run on a bank. But Bear wasn't a bank. It financed a lot of its activity by borrowing short term in repo and commercial paper markets and couldn't borrow from the Fed if things got really bad.
Bear's low capital levels left it with highly leveraged exposures to risky mortgage-related securities, which triggered initial doubts among customers and trading partners.
The Fed quickly helped J.P. Morgan Chase, one of the largest commercial banks, acquire Bear. To prevent further damage to the financial system, the Fed also started lending directly to brokerage firms for the first time since the Depression.
"They stepped in because Bear was facing a traditional bank run -- customers were pulling short-term assets and the firm couldn't sell its long-term assets quickly enough," Hamilton said. "Rules should apply here: You should have enough of your own capital available to pay back customers to avoid a run like that."
Bear necessity
A more worrying question from the Bear Stearns debacle is why customers and investors were willing to lend money to the firm in the absence of an adequate capital cushion, Hamilton said.
"The creditors thought that Bear was too big to fail and that the government would step in to prevent creditors losing their money," he explained. "They were right because that's exactly what happened."
"This is a system in which institutions like Bear Stearns are taking far too much risk and a lot of that risk is being borne by the government, not these firms or the market," he added.
The Fed has lent between $8 billion and more than $30 billion each week directly to brokerage firms since it set up its new program in March. Most experts say this source of emergency funding is unlikely to disappear, even though it's scheduled to end in September.
"It's almost impossible to go back," FDIC's Bair said on Wednesday.
With taxpayer money permanently on the line to save big brokers, these firms should now be more strictly regulated to keep future bailouts to a minimum, Bair and others said.
"By definition, if they're going to give the investment banks access to the window, I for one do believe they have the right for oversight," Richard Fuld, chief executive of Lehman, told analysts during a conference call this week. "What that means, though, particularly as far as capital levels or asset requirements, it's way too early to tell."
Super Fed
Next year, Congress likely will pass legislation forcing big brokerage firms to be regulated fully by the Fed as financial holding companies, Brad Hintz, a securities analyst at Bernstein Research and former chief financial officer of Lehman, said.
Legislators will probably also call for tighter limits on the leverage and trading risk taken on by large brokers, while demanding more conservative funding and liquidity policies, he added.
Restrictions on these firms' forays into venture capital, private equity, real estate, commodities and potentially hedge funds may also follow too, Hintz warned.
This may undermine the source of much of the surging profit generated by big brokerage firms in recent years.
A newly empowered "super Fed" will likely encourage these firms to arrange longer-term, more secure sources of borrowing and even promote the development of deposit bases, just like commercial and retail banks, the analyst explained.
This will make borrowing more expensive for brokerage firms, undermining the profitability of businesses that require a lot of capital, such as fixed income, institutional equities, commodities and prime brokerage, Hintz said.
Such regulatory changes will cut big brokers' return on equity -- a closely watched measure of profitability -- to roughly 15.5% from 19%, Hintz estimated in a note to investors this week.
Lehman and Goldman will be most affected by this -- seeing return on equity drop by about four percentage points over the business cycle -- because they have larger trading books and greater exposure to revenue from sales and trading. Goldman also has a major merchant banking business that may also be constrained, Hintz added.
Morgan Stanley and Merrill Lynch.
) will see declines of 3.2 percentage points and 2.2 percentage points in
their return on equity, the analyst forecast.
If you can't beat them...
Facing lower returns and more stringent bank-like regulation, some big brokerage firms may decide they're better off as part of a large commercial bank, some experts said.
"If you're being regulated like a bank and your leverage ratio looks something like a bank's, can you really earn the returns you were making as a broker dealer? Probably not," Margaret Cannella, global head of credit research at J.P. Morgan, said.
Regulatory changes will be unpopular with some brokerage CEOs and could result in a shakeup of the industry and more consolidation, she added.
Hintz said the business models of some brokerage firms may evolve into something similar to Bankers Trust and the old J.P. Morgan.
In the mid 1990s, Bankers Trust and J.P. Morgan relied more on deposits and less on the repo market to finance their assets. They also operated with leverage ratios of roughly 20 times capital. That's lower than today's brokerage firms, which were levered roughly 30 times during the peak of the credit bubble last year, according to Hintz.
The Game is Over. There Won't be a Rebound
Mike Whitney: Fed chairman Bernanke has been on a spree lately, delivering three speeches in the last two weeks. Every chance he gets, he talks tough about the strong dollar and "holding the line" against inflation. Treasury Secretary Henry Paulson even said that "intervention" in the currency markets was still an option. Is all of this jawboning just saber rattling to keep the dollar from plummeting, or is there a chance that Bernanke actually will raise rates at the Fed's August meeting?
Michael Hudson:The United States always has steered its monetary policy almost exclusively with domestic objectives in mind. This means ignoring the balance of payments. Like the domestic U.S. economy itself, the global financial system also is all about getting a free lunch. When Europe and Asia receive excess dollars, these are turned over to their central banks, which have little alternative but to recycle these back to the United States by buying U.S. Treasury bonds. Foreign governments – and their taxpayers – are thus financing the domestic U.S. federal budget deficit, which itself stems largely from the war in Iraq that most foreign voters oppose.
Supporting the dollar's exchange rate by the traditional method of raising interest rates would have a very negative effect on the stock and bond markets – and on the mortgage market. This would lead foreign investors to sell U.S. securities, and likely would end up hurting more than helping the U.S. balance of payments and hence the dollar's exchange rate.
So Bernanke is merely being polite in not rubbing the faces of European and Asian governments in the fact that unless they are willing to make a structural break and change the world monetary system radically, they will remain powerless to avoid giving the United States a free ride – including a free ride for its military spending and war in the Near East.
Mike Whitney: How do you explain the soaring price of oil? Is it mainly a supply/demand issue or are speculators driving the prices up?
Michael Hudson: It's true that enormous amounts of speculative credit are going into commodity index funds. But bear in mind that as the dollar depreciates, OPEC countries have been holding back supply largely to stabilize their receipts in euros and to offset their losses on the dollar securities they have bought with their past export proceeds. For over 30 years they have been pressured to recycle their oil earnings into the U.S. stock market and loans to U.S. financial institutions. They have taken large losses on these investments (such as last year's money to bail out Citibank), and are trying to recoup them via the oil market. OPEC officials also have pointed to a political motive: They resent America's military intrusion in the Middle East, especially in view of how much it contributes to the nation's balance-of-payments deficit and federal budget deficit.
The U.S. press prefers to blame Chinese, Indian and other foreign growth in demand for oil and raw materials. This demand has contributed to the price rise, no doubt about it. But the U.S. oil majors are receiving a windfall “economic rent” on the price run-up, and are not at all unhappy to see it continue. By not building more refining and shipping capacity, they have created bottlenecks so that even if foreign countries did supply more crude oil, it would not be reflected in refined gasoline, kerosene or other downstream product prices.
Mike Whitney: The Fed has traded over $200 billion in US Treasuries with the big investment banks for a wide variety of dodgy collateral (mostly mortgage-backed securities). How can the banks possibly hope to repay the Fed when their main sources of revenue (structured investments) have been cut off? Are the banks secretly using the money they borrow via repos from the Fed to dabble in the carry trade or speculate in the futures markets?
Michael Hudson: The Fed's idea was merely to buy enough time for the banks to sell their junk mortgages to the proverbial “greater fool.” But foreign investors no longer are playing this role, nor are domestic U.S. pension funds. So the most likely result will be for the Fed simply to roll over its loans – as if the problem can be cured by yet more time.
But when a bubble bursts, time makes things worse. The financial sector has been living in the short run for quite a while now, and I suspect that a lot of money managers are planning to get out or be fired now that the game is over. And it really is over. The Treasury's attempt to reflate the real estate market has not worked, and it can't work. Mortgage arrears, defaults and foreclosures are rising, and much property has become unsaleable except at distress prices that leave homeowners with negative equity. This state of affairs prompts them to do just what Donald Trump would do in such a situation: to walk away from their property.
The banks are trying to win back their losses by arbitrage operations, borrowing from the Fed at a low interest rate and lending at a higher one, and gambling on options. But options and derivatives are a zero-sum game: one party's gain is another's loss. So the banks collectively are simply painting themselves into a deeper corner. They hope they can tell the Fed and Treasury to keep bailing them out or else they'll fail and cost the FDIC even more money to make good on insuring the “bad savings” that have been steered into these bad debts and bad gambles.
The Fed and Treasury certainly seem more willing to bail out the big financial institutions than to bail out savers, pensioners, social Security recipients and other small fry. They thus follow the traditional “Big fish eat little fish” principle of favoring the vested interests.
Mike Whitney: According to most estimates, the Fed has already gone through half or more of its $900 billion balance sheet. Also, according to the latest H.4.1 data "the current holdings of Treasury bills is $25 billion. This is down from some $250 billion a year ago, or a net reduction of 90 per cent." (figures from Market Ticker) Doesn't this suggest that the Fed is just about out of firepower when it comes to bailing out the struggling banking system? Where do we go from here? Will some of the larger banks be allowed to fail or will they be nationalized?
Michael Hudson: You need to look at what the Treasury as well as the Fed is doing. The Fed can monetize whatever it wants. And as you just pointed out in the preceding question, it has been buying junk securities in order to leave sound Treasury securities on the banking system's balance sheets. Government bailout credit will keep the big banks alive. But many small regional banks will go under and be merged into larger money-center banks – just as many brokerage firms in recent decades have been merged into larger conglomerates.
False reporting also will help financial institutions avoid the appearance of insolvency. They will seek more and more government guarantees, ostensibly to help middle-class depositors but actually favoring the big speculators who are their major clients.
What we are seeing is the creation of a highly concentrated financial oligarchy – precisely the power that the Glass-Steagall Act was designed to prevent. A combination of deregulation and “moral hazard” bailouts – for the top of the economic pyramid, not the bottom – will polarize the economy all the more.
Cities and states will preserve their credit ratings by annulling their pension obligations to public-sector workers, and raising excise taxes – but not property taxes. These already have fallen from about two-thirds of local budgets in 1930 to only about one-sixth today – that is, a decline of 75 percent, proportionally. While the debt burden and the squeeze in disposable personal income is pressuring workers, finance and property are using the crisis to get a bonanza of tax relief. Democrats in Congress are as far to the right as George Bush on this, as their base is local politics and real estate.
Mike Whtney: According to the Financial Times: "Analysts at Citigroup said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books. The off-balance sheet vehicles have been used by financial institutions to keep some assets off their balance sheets, thereby avoiding the need to hold regulatory capital against them." Is there any way the banks can find investors with "deep enough pockets" to provide the capital they need to meet the requirements on $5 trillion dollars? Are most of these off-balance sheets assets mortgage backed securities and other hard-to-value bonds?
Michael Hudson: The practice of off-balance-sheet accounting already has become quickly obsolete this year. The United States is going to adopt Europe's normal “covered bond” practice of bank head-office liability for mortgages and other loans. (The Wall Street Journal had a good article on this on June 17, anticipating that the U.S. covered bond market might rise quickly to $1 trillion as early as next year.)
This coverage is what has given European banks protection. In view of the heavy losses of German banks in Saxony and Düsseldorf in the U.S. subprime market last summer, it's unlikely that investors will buy mortgages that no major bank or government agency stands behind.
Regarding more investor bailouts, I don't see that it makes sense to lend money to a bank today without getting preferential treatment over existing holders, plus secure collateral. Government guarantees might help, especially for foreign investors. But then, the dollar's plunge is a problem here.
Mike Whitney: Many of the TV financial gurus --as well as Henry Paulson--keep assuring us that the worst is behind us, but I don't see it. Foreclosures are increasing, the dollar is falling, unemployment is rising, manufacturing is sluggish, food and fuel are soaring, and consumers are backed up on their credit cards, student loans and house payments. Where would you say we are in the present cycle? What will it take to rebound from the current slump? Will the stock market take a beating before all this is over? What do you think the greatest problem facing the economy is; inflation or deflation?
Michael Hudson: The idea that we're even in a business “cycle” is whistling in the dark. If we're in a cycle, then that implies there's an automatic recovery in store. This happy free-market idea was developed at the National Bureau of Economic Research by opponents of government regulatory policy. But the economy doesn't move by a sine curve. There is a slow buildup, and a sudden plunge, so the shape is ratchet-shaped. This is why 19th-century writers didn't speak of economic cycles, but rather of periodic financial crises.
Today's plunging real estate and stock market prices are not a self-correcting ebb and flow in which downturns set in motion automatic stabilizers that produce recovery. Each U.S. recovery since World War II has started out from a higher level of debt. The result is like driving a car with the brakes pressed more and more tightly. Alan Greenspan at the Federal Reserve flooded the banking system with enough credit to enable debts to be carried by borrowing against the rising price of homes and office buildings, corporate stocks and bonds. In effect, the interest charge was simply added onto the debt balance.
But today, the prospects are dim for paying off debts out of further price gains for homes and real estate. Speculators have pulled out of the market – and as late as 2006 they accounted for about a sixth of new purchases. Asset-price inflation fueled by the Federal Reserve – is giving way to debt deflation. The United States and other countries have reached a limit in which scheduled interest and amortization absorb the entire economic surplus of so many individuals, companies and government bodies that new construction, investment and employment are grinding to a halt. Families, real estate investors and companies are obliged to use their entire disposable income to pay their creditors or face bankruptcy. This leaves them without enough money to sustain the living standards of recent years.
This means that there won't be a rebound, and it will take longer than 2009 to recover.
MW: I read about 8 or 9 articles every day about the meltdown in housing. I always tell my wife that its like reading a Tom Clancy novel except the ending is less certain. As Yale economist Robert Schiller pointed out last month; the decline in prices is now greater than it was during the Great Depression. Will prices find a bottom in 2009 or will it take longer? If prices keep falling then how are the banks going to sell the hundreds of billions of dollars of mortgage-backed securities that they are presently holding?
Michael Hudson: Prices will keep going down, because they have been fed by plunging interest rates, zero-amortization mortgages and low or zero (or even negative) down payments in recent years. That world has ended.
It means that the banks can't sell their mortgage-backed securities – except to the government, at a loss except to insiders. The actual losses are much worse than the present price statistics show, because many people are frozen in with negative equity. So instead of price declines, we'll simply see many more foreclosures.
Mike Whtiney: How serious is the current crisis in the financial markets and housing and what steps do you think Obama or McCain should take to stabilize the markets, reduce the deficits, strengthen the dollar, increase employment, and put the economy on solid footing? Is it possible to have a strong economy without policies that distribute the nation's wealth more equitably? As chief economic advisor to Rep Dennis Kucinich, what one bit of advice would you give to Obama to restore America's economic vitality and put the country on the right path again?
Michael Hudson: In academic economic terms, America has never been in as “optimum” a position as it is today. That's the bad news. An optimum position is, mathematically speaking, one in which you can't move without making your situation worse. That's the position we're now in. There's nowhere to move – at least within the existing structure. “The market” can't be stabilized, because it was artificial to begin with, based on fictitious prices. It's hard to impose fiction on reality for very long, and the rest of the world has woken up.
In times past, bankruptcy would have wiped out the bad debts. The problem with debt write-offs is that bad savings go by the boards too. But today, the very wealthy hold most of the savings, so the government doesn't want to have them take a loss. It would rather wipe out pensioners, consumers, workers, industrial companies and foreign investors. So debts will be kept on the books and the economy will slowly be strangled by debt deflation.
The US can't reduce the balance-of-payments deficit without scaling back its foreign military spending. Congress is refusing to let foreign governments invest in much besides overpriced junk here, so central banks are treating the dollar like a hot potato, trying to buy foreign assets that can play a role in their own future economic development.
I think that at some point Obama will have to tell the public the bad news that restoring vitality will take radical measures – probably ones that Congress will try to water down so much that things are going to get worse – much worse – before the needed reforms will be made. He can say this before taking office, blaming the Republicans for their regressive tax policies and at the same time bringing pressure on the new Democratic Congress to back a return to progressive taxation and serious financial restructuring. As president, he will have to do what FDR did, and challenge the financial oligarchy with new government regulatory agencies staffed with real regulators, not deregulators as under the Bush-Clinton-Bush regime.
He should make large depositors and “savers” take the losses on their bad bets. And he should repeal the Clinton repeal of Glass Steagall.
Most of all, he will have to make the tax system back progressive again if the domestic market is Social Security and medical care should be paid out of the general budget, not as user fees. And until this change is done, FICA withholding should be levied on total income, without an upper cutoff point. There should be a LOWER cut-off point, however: Only people who earn over $60,000 a year should contribute. This would end up being fairly revenue-neutral. Pres. Obama should say that his policy is not to “soak the rich.” It is to make them pay their way once again by favoring a strong middle class.
Unless he does this, what used to be a democracy will be turned into an oligarchy. And oligarchies historically are so short-sighted that they stifle the domestic economy, driving enterprise and emigration abroad. This threatens to reverse America's long-term affluence, which means literally a flowing-in – an inflow of capital, of skilled immigrants and other labor, of technology, and of foreign support. All this has now been put in danger by the policies pursued at least since 1980.
Michael Hudson:The United States always has steered its monetary policy almost exclusively with domestic objectives in mind. This means ignoring the balance of payments. Like the domestic U.S. economy itself, the global financial system also is all about getting a free lunch. When Europe and Asia receive excess dollars, these are turned over to their central banks, which have little alternative but to recycle these back to the United States by buying U.S. Treasury bonds. Foreign governments – and their taxpayers – are thus financing the domestic U.S. federal budget deficit, which itself stems largely from the war in Iraq that most foreign voters oppose.
Supporting the dollar's exchange rate by the traditional method of raising interest rates would have a very negative effect on the stock and bond markets – and on the mortgage market. This would lead foreign investors to sell U.S. securities, and likely would end up hurting more than helping the U.S. balance of payments and hence the dollar's exchange rate.
So Bernanke is merely being polite in not rubbing the faces of European and Asian governments in the fact that unless they are willing to make a structural break and change the world monetary system radically, they will remain powerless to avoid giving the United States a free ride – including a free ride for its military spending and war in the Near East.
Mike Whitney: How do you explain the soaring price of oil? Is it mainly a supply/demand issue or are speculators driving the prices up?
Michael Hudson: It's true that enormous amounts of speculative credit are going into commodity index funds. But bear in mind that as the dollar depreciates, OPEC countries have been holding back supply largely to stabilize their receipts in euros and to offset their losses on the dollar securities they have bought with their past export proceeds. For over 30 years they have been pressured to recycle their oil earnings into the U.S. stock market and loans to U.S. financial institutions. They have taken large losses on these investments (such as last year's money to bail out Citibank), and are trying to recoup them via the oil market. OPEC officials also have pointed to a political motive: They resent America's military intrusion in the Middle East, especially in view of how much it contributes to the nation's balance-of-payments deficit and federal budget deficit.
The U.S. press prefers to blame Chinese, Indian and other foreign growth in demand for oil and raw materials. This demand has contributed to the price rise, no doubt about it. But the U.S. oil majors are receiving a windfall “economic rent” on the price run-up, and are not at all unhappy to see it continue. By not building more refining and shipping capacity, they have created bottlenecks so that even if foreign countries did supply more crude oil, it would not be reflected in refined gasoline, kerosene or other downstream product prices.
Mike Whitney: The Fed has traded over $200 billion in US Treasuries with the big investment banks for a wide variety of dodgy collateral (mostly mortgage-backed securities). How can the banks possibly hope to repay the Fed when their main sources of revenue (structured investments) have been cut off? Are the banks secretly using the money they borrow via repos from the Fed to dabble in the carry trade or speculate in the futures markets?
Michael Hudson: The Fed's idea was merely to buy enough time for the banks to sell their junk mortgages to the proverbial “greater fool.” But foreign investors no longer are playing this role, nor are domestic U.S. pension funds. So the most likely result will be for the Fed simply to roll over its loans – as if the problem can be cured by yet more time.
But when a bubble bursts, time makes things worse. The financial sector has been living in the short run for quite a while now, and I suspect that a lot of money managers are planning to get out or be fired now that the game is over. And it really is over. The Treasury's attempt to reflate the real estate market has not worked, and it can't work. Mortgage arrears, defaults and foreclosures are rising, and much property has become unsaleable except at distress prices that leave homeowners with negative equity. This state of affairs prompts them to do just what Donald Trump would do in such a situation: to walk away from their property.
The banks are trying to win back their losses by arbitrage operations, borrowing from the Fed at a low interest rate and lending at a higher one, and gambling on options. But options and derivatives are a zero-sum game: one party's gain is another's loss. So the banks collectively are simply painting themselves into a deeper corner. They hope they can tell the Fed and Treasury to keep bailing them out or else they'll fail and cost the FDIC even more money to make good on insuring the “bad savings” that have been steered into these bad debts and bad gambles.
The Fed and Treasury certainly seem more willing to bail out the big financial institutions than to bail out savers, pensioners, social Security recipients and other small fry. They thus follow the traditional “Big fish eat little fish” principle of favoring the vested interests.
Mike Whitney: According to most estimates, the Fed has already gone through half or more of its $900 billion balance sheet. Also, according to the latest H.4.1 data "the current holdings of Treasury bills is $25 billion. This is down from some $250 billion a year ago, or a net reduction of 90 per cent." (figures from Market Ticker) Doesn't this suggest that the Fed is just about out of firepower when it comes to bailing out the struggling banking system? Where do we go from here? Will some of the larger banks be allowed to fail or will they be nationalized?
Michael Hudson: You need to look at what the Treasury as well as the Fed is doing. The Fed can monetize whatever it wants. And as you just pointed out in the preceding question, it has been buying junk securities in order to leave sound Treasury securities on the banking system's balance sheets. Government bailout credit will keep the big banks alive. But many small regional banks will go under and be merged into larger money-center banks – just as many brokerage firms in recent decades have been merged into larger conglomerates.
False reporting also will help financial institutions avoid the appearance of insolvency. They will seek more and more government guarantees, ostensibly to help middle-class depositors but actually favoring the big speculators who are their major clients.
What we are seeing is the creation of a highly concentrated financial oligarchy – precisely the power that the Glass-Steagall Act was designed to prevent. A combination of deregulation and “moral hazard” bailouts – for the top of the economic pyramid, not the bottom – will polarize the economy all the more.
Cities and states will preserve their credit ratings by annulling their pension obligations to public-sector workers, and raising excise taxes – but not property taxes. These already have fallen from about two-thirds of local budgets in 1930 to only about one-sixth today – that is, a decline of 75 percent, proportionally. While the debt burden and the squeeze in disposable personal income is pressuring workers, finance and property are using the crisis to get a bonanza of tax relief. Democrats in Congress are as far to the right as George Bush on this, as their base is local politics and real estate.
Mike Whtney: According to the Financial Times: "Analysts at Citigroup said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books. The off-balance sheet vehicles have been used by financial institutions to keep some assets off their balance sheets, thereby avoiding the need to hold regulatory capital against them." Is there any way the banks can find investors with "deep enough pockets" to provide the capital they need to meet the requirements on $5 trillion dollars? Are most of these off-balance sheets assets mortgage backed securities and other hard-to-value bonds?
Michael Hudson: The practice of off-balance-sheet accounting already has become quickly obsolete this year. The United States is going to adopt Europe's normal “covered bond” practice of bank head-office liability for mortgages and other loans. (The Wall Street Journal had a good article on this on June 17, anticipating that the U.S. covered bond market might rise quickly to $1 trillion as early as next year.)
This coverage is what has given European banks protection. In view of the heavy losses of German banks in Saxony and Düsseldorf in the U.S. subprime market last summer, it's unlikely that investors will buy mortgages that no major bank or government agency stands behind.
Regarding more investor bailouts, I don't see that it makes sense to lend money to a bank today without getting preferential treatment over existing holders, plus secure collateral. Government guarantees might help, especially for foreign investors. But then, the dollar's plunge is a problem here.
Mike Whitney: Many of the TV financial gurus --as well as Henry Paulson--keep assuring us that the worst is behind us, but I don't see it. Foreclosures are increasing, the dollar is falling, unemployment is rising, manufacturing is sluggish, food and fuel are soaring, and consumers are backed up on their credit cards, student loans and house payments. Where would you say we are in the present cycle? What will it take to rebound from the current slump? Will the stock market take a beating before all this is over? What do you think the greatest problem facing the economy is; inflation or deflation?
Michael Hudson: The idea that we're even in a business “cycle” is whistling in the dark. If we're in a cycle, then that implies there's an automatic recovery in store. This happy free-market idea was developed at the National Bureau of Economic Research by opponents of government regulatory policy. But the economy doesn't move by a sine curve. There is a slow buildup, and a sudden plunge, so the shape is ratchet-shaped. This is why 19th-century writers didn't speak of economic cycles, but rather of periodic financial crises.
Today's plunging real estate and stock market prices are not a self-correcting ebb and flow in which downturns set in motion automatic stabilizers that produce recovery. Each U.S. recovery since World War II has started out from a higher level of debt. The result is like driving a car with the brakes pressed more and more tightly. Alan Greenspan at the Federal Reserve flooded the banking system with enough credit to enable debts to be carried by borrowing against the rising price of homes and office buildings, corporate stocks and bonds. In effect, the interest charge was simply added onto the debt balance.
But today, the prospects are dim for paying off debts out of further price gains for homes and real estate. Speculators have pulled out of the market – and as late as 2006 they accounted for about a sixth of new purchases. Asset-price inflation fueled by the Federal Reserve – is giving way to debt deflation. The United States and other countries have reached a limit in which scheduled interest and amortization absorb the entire economic surplus of so many individuals, companies and government bodies that new construction, investment and employment are grinding to a halt. Families, real estate investors and companies are obliged to use their entire disposable income to pay their creditors or face bankruptcy. This leaves them without enough money to sustain the living standards of recent years.
This means that there won't be a rebound, and it will take longer than 2009 to recover.
MW: I read about 8 or 9 articles every day about the meltdown in housing. I always tell my wife that its like reading a Tom Clancy novel except the ending is less certain. As Yale economist Robert Schiller pointed out last month; the decline in prices is now greater than it was during the Great Depression. Will prices find a bottom in 2009 or will it take longer? If prices keep falling then how are the banks going to sell the hundreds of billions of dollars of mortgage-backed securities that they are presently holding?
Michael Hudson: Prices will keep going down, because they have been fed by plunging interest rates, zero-amortization mortgages and low or zero (or even negative) down payments in recent years. That world has ended.
It means that the banks can't sell their mortgage-backed securities – except to the government, at a loss except to insiders. The actual losses are much worse than the present price statistics show, because many people are frozen in with negative equity. So instead of price declines, we'll simply see many more foreclosures.
Mike Whtiney: How serious is the current crisis in the financial markets and housing and what steps do you think Obama or McCain should take to stabilize the markets, reduce the deficits, strengthen the dollar, increase employment, and put the economy on solid footing? Is it possible to have a strong economy without policies that distribute the nation's wealth more equitably? As chief economic advisor to Rep Dennis Kucinich, what one bit of advice would you give to Obama to restore America's economic vitality and put the country on the right path again?
Michael Hudson: In academic economic terms, America has never been in as “optimum” a position as it is today. That's the bad news. An optimum position is, mathematically speaking, one in which you can't move without making your situation worse. That's the position we're now in. There's nowhere to move – at least within the existing structure. “The market” can't be stabilized, because it was artificial to begin with, based on fictitious prices. It's hard to impose fiction on reality for very long, and the rest of the world has woken up.
In times past, bankruptcy would have wiped out the bad debts. The problem with debt write-offs is that bad savings go by the boards too. But today, the very wealthy hold most of the savings, so the government doesn't want to have them take a loss. It would rather wipe out pensioners, consumers, workers, industrial companies and foreign investors. So debts will be kept on the books and the economy will slowly be strangled by debt deflation.
The US can't reduce the balance-of-payments deficit without scaling back its foreign military spending. Congress is refusing to let foreign governments invest in much besides overpriced junk here, so central banks are treating the dollar like a hot potato, trying to buy foreign assets that can play a role in their own future economic development.
I think that at some point Obama will have to tell the public the bad news that restoring vitality will take radical measures – probably ones that Congress will try to water down so much that things are going to get worse – much worse – before the needed reforms will be made. He can say this before taking office, blaming the Republicans for their regressive tax policies and at the same time bringing pressure on the new Democratic Congress to back a return to progressive taxation and serious financial restructuring. As president, he will have to do what FDR did, and challenge the financial oligarchy with new government regulatory agencies staffed with real regulators, not deregulators as under the Bush-Clinton-Bush regime.
He should make large depositors and “savers” take the losses on their bad bets. And he should repeal the Clinton repeal of Glass Steagall.
Most of all, he will have to make the tax system back progressive again if the domestic market is Social Security and medical care should be paid out of the general budget, not as user fees. And until this change is done, FICA withholding should be levied on total income, without an upper cutoff point. There should be a LOWER cut-off point, however: Only people who earn over $60,000 a year should contribute. This would end up being fairly revenue-neutral. Pres. Obama should say that his policy is not to “soak the rich.” It is to make them pay their way once again by favoring a strong middle class.
Unless he does this, what used to be a democracy will be turned into an oligarchy. And oligarchies historically are so short-sighted that they stifle the domestic economy, driving enterprise and emigration abroad. This threatens to reverse America's long-term affluence, which means literally a flowing-in – an inflow of capital, of skilled immigrants and other labor, of technology, and of foreign support. All this has now been put in danger by the policies pursued at least since 1980.
Weekly letter from ASPO President Kjell Aleklett
My report “Peak-Oil and the Evolving strategies of Oil Importing and Oil Exporting Countries - Facing the hard truth about an import decline for the OECD countries” was delivered at the end of September and now it has been released for official use. I cannot publish it as the OECD and the International Transport Forum hold the copyright but they will be publishing this document after the meeting in November. However, I do have the right to hand it to interested parties. A summary of the arguments in the document is as follows:
Statistical trends of oil intensity from individual countries and groups of countries show that an average increase of GDP of 3% per annum equates to a projected demand for liquids of 101 Million barrels per day (Mbpd) by the year 2030. This analysis shows that this demand cannot be fulfilled by production from current reserves and expected new discoveries.
Two models to assess peaks in production of oil are considered: the depletion model (DM), and the giant field model (GFM). The DM model shows Peak Oil (the maximum rate of production) date in the year 2011 with 90 Mbpd. Adding GFM we develop a “Worst Case” scenario of a plateau in production for the next 5 to 7 years at a rate of 84 Mbpd. A more optimistic case in the “Giant High Case” scenario is a peak in 2012 at 94 Mbpd. A less steep increase demand can move the peak to 2018. Both models show an oil production rate of the order of 50 to 60 Mbpd by 2030.
The demand for oil from countries that are importers is forecast to increase from current import levels of 50 Mbpd to 80 Mbpd. A detailed analysis shows that Saudi Arabia, Russia and Norway, today’s largest oil exporters, will experience a decline in their export volumes of the order of 4 to 6 Mbpd by 2030. The projected shortfall cannot be offset by exports from other regions.
In a business-as-usual case, the shortage of fossil fuel liquids for transportation will be substantial by the year 2030. The necessary decisions for the economic transformation required to mitigate this decline in available oil supply should already have been made and efforts to deploy solutions under way
We have climbed high on the “Oil Ladder” and yet we must descend one way or another. It may be too late for a gentle descent, but there may still be time to build a thick crash mat to cushion the fall.
When I submitted my report Stephen Perkins asked me if I also could write report about CO2 emission, and I have now submitted that report “Reserve driven forecasts for oil, gas and coal and limits in carbon dioxide emissions; Peak Oil, Peak Gas, Peak Coal and Peak CO2” The recent award of the Nobel Prize to the IPCC and Al Gore makes this report very interesting and topical. From the abstract
“This analysis is based on realistic reserve assessments. Resources that cannot be transformed into reserves are not allowed. First, we conclude that CO2 emissions from burning reserves-based oil and gas are lower than what all of the IPCC scenarios predict, and emissions from coal are much lower than the majority of the scenarios. IPCC emission scenarios for the period 2020 to 2100 must be altered to more accurately reflect the fossil fuels that are practically available.”
There are three other reports to be presented to the round table and they are:
* Price Instability: the determinants of oil prices in the short term, Lawrence Eagles, Head of the Oil Industry and Markets Division of the International Energy Agency.
* The determinants of oil prices and supply in the long term, Dr David Greene, Oak Ridge National Laboratory, Center for Transportation Analysis, USA.
* Long run trends in transport demand, fuel price elasticities and implications of the oil outlook for transport policy, Professor Kenneth Small, University of California Irvine, USA.
Another important event this week was the presentation of Aram Mäkivierikko’s, one of my students, diploma thesis “Russian Oil, an estimate of the future oil production and oil export potential of Russia using the Depletion rate model”. It can be downloaded from www.tsl.uu.se/uhdsg.
The following extract may be of interest to you:
Oil is a heavily used natural resource with a limited supply. Russia is one of the largest oil producers and the second largest oil exporting country in the world. Many surrounding countries are dependent on Russian energy. Swedish oil import from Russia has grown from 5% to 35% during 2001-2005.
The fall of the Soviet Union in 1991 caused the Russian oil production to drop by 50%. The production is currently growing again – but how will it develop in the future?
This report studies different scenarios for Russian oil production and export based on three different estimates of how much oil Russia has left today (70, 120 or 170 Gb), combined with estimates about how fast Russia can produce the oil (a depletion rate of 3%, 4.5% or 6%).
In the worst case, Russian oil production and also the oil export will peak very soon or has already done so in 2006. In the best case, a constant export can be held until 2036. It is not likely that the Russian production will increase more than 5-10% over today’s level.
There are different opinions about possible future Russian EUR grouped around the figures 70, 120 and 170 Gb. Today BP lists the number 79 Gb. With a modest increase in domestic use and depletion rates within acceptable values we have made predictions on future export capacity for Russia (see figure 1). The 70 Gb scenario appears pessimistic, the 170 Gb over optimistic leaving the 120 Gb scenario as the probable best case. The best case gives an export between 2 and 3 Mbpd for 2030 depending upon consumption within Russia.
Figure 1. Mean export comparison between the reference policy and the alternative policy for Russia with respectively 70, 120 and 170 Gb left to produce.
I like to end with the following statement from keynote speaker at ASPO6, Dr James R. Schlesinger, former US Energy Secretary: ”And therefore to the peakers I say, you can declare victory. You are no longer the beleaguered small minority of voices crying in the wilderness. You are now main streams. You must learn to take yes for an answer and be gracious in victory.”
Statistical trends of oil intensity from individual countries and groups of countries show that an average increase of GDP of 3% per annum equates to a projected demand for liquids of 101 Million barrels per day (Mbpd) by the year 2030. This analysis shows that this demand cannot be fulfilled by production from current reserves and expected new discoveries.
Two models to assess peaks in production of oil are considered: the depletion model (DM), and the giant field model (GFM). The DM model shows Peak Oil (the maximum rate of production) date in the year 2011 with 90 Mbpd. Adding GFM we develop a “Worst Case” scenario of a plateau in production for the next 5 to 7 years at a rate of 84 Mbpd. A more optimistic case in the “Giant High Case” scenario is a peak in 2012 at 94 Mbpd. A less steep increase demand can move the peak to 2018. Both models show an oil production rate of the order of 50 to 60 Mbpd by 2030.
The demand for oil from countries that are importers is forecast to increase from current import levels of 50 Mbpd to 80 Mbpd. A detailed analysis shows that Saudi Arabia, Russia and Norway, today’s largest oil exporters, will experience a decline in their export volumes of the order of 4 to 6 Mbpd by 2030. The projected shortfall cannot be offset by exports from other regions.
In a business-as-usual case, the shortage of fossil fuel liquids for transportation will be substantial by the year 2030. The necessary decisions for the economic transformation required to mitigate this decline in available oil supply should already have been made and efforts to deploy solutions under way
We have climbed high on the “Oil Ladder” and yet we must descend one way or another. It may be too late for a gentle descent, but there may still be time to build a thick crash mat to cushion the fall.
When I submitted my report Stephen Perkins asked me if I also could write report about CO2 emission, and I have now submitted that report “Reserve driven forecasts for oil, gas and coal and limits in carbon dioxide emissions; Peak Oil, Peak Gas, Peak Coal and Peak CO2” The recent award of the Nobel Prize to the IPCC and Al Gore makes this report very interesting and topical. From the abstract
“This analysis is based on realistic reserve assessments. Resources that cannot be transformed into reserves are not allowed. First, we conclude that CO2 emissions from burning reserves-based oil and gas are lower than what all of the IPCC scenarios predict, and emissions from coal are much lower than the majority of the scenarios. IPCC emission scenarios for the period 2020 to 2100 must be altered to more accurately reflect the fossil fuels that are practically available.”
There are three other reports to be presented to the round table and they are:
* Price Instability: the determinants of oil prices in the short term, Lawrence Eagles, Head of the Oil Industry and Markets Division of the International Energy Agency.
* The determinants of oil prices and supply in the long term, Dr David Greene, Oak Ridge National Laboratory, Center for Transportation Analysis, USA.
* Long run trends in transport demand, fuel price elasticities and implications of the oil outlook for transport policy, Professor Kenneth Small, University of California Irvine, USA.
Another important event this week was the presentation of Aram Mäkivierikko’s, one of my students, diploma thesis “Russian Oil, an estimate of the future oil production and oil export potential of Russia using the Depletion rate model”. It can be downloaded from www.tsl.uu.se/uhdsg.
The following extract may be of interest to you:
Oil is a heavily used natural resource with a limited supply. Russia is one of the largest oil producers and the second largest oil exporting country in the world. Many surrounding countries are dependent on Russian energy. Swedish oil import from Russia has grown from 5% to 35% during 2001-2005.
The fall of the Soviet Union in 1991 caused the Russian oil production to drop by 50%. The production is currently growing again – but how will it develop in the future?
This report studies different scenarios for Russian oil production and export based on three different estimates of how much oil Russia has left today (70, 120 or 170 Gb), combined with estimates about how fast Russia can produce the oil (a depletion rate of 3%, 4.5% or 6%).
In the worst case, Russian oil production and also the oil export will peak very soon or has already done so in 2006. In the best case, a constant export can be held until 2036. It is not likely that the Russian production will increase more than 5-10% over today’s level.
There are different opinions about possible future Russian EUR grouped around the figures 70, 120 and 170 Gb. Today BP lists the number 79 Gb. With a modest increase in domestic use and depletion rates within acceptable values we have made predictions on future export capacity for Russia (see figure 1). The 70 Gb scenario appears pessimistic, the 170 Gb over optimistic leaving the 120 Gb scenario as the probable best case. The best case gives an export between 2 and 3 Mbpd for 2030 depending upon consumption within Russia.
Figure 1. Mean export comparison between the reference policy and the alternative policy for Russia with respectively 70, 120 and 170 Gb left to produce.
I like to end with the following statement from keynote speaker at ASPO6, Dr James R. Schlesinger, former US Energy Secretary: ”And therefore to the peakers I say, you can declare victory. You are no longer the beleaguered small minority of voices crying in the wilderness. You are now main streams. You must learn to take yes for an answer and be gracious in victory.”
22 June 2008
BofA, Perhaps Countrywide Wrote Dodd-Shelby Bailout
BofA, Perhaps Countrywide Wrote Dodd-Shelby Bailout
Posted on June 21st, 2008 in Uncategorized
None of us really believed that Dodd could come up with anything close to this. Just go through transcripts or videos and look at the language and terminology he used just a few months back when referring to the subprime and credit meltdown. Think back to the left-field, irrelevent questions he asked at hearings when he could have made a difference by asking the right questions and getting information out. I have always wondered who was behind it all. Now we know what $70k in contributions, which is what BofA has given Dodd in the past 18-months, will buy. Only Hillary and Obama have received more from BofA.
This $300 billion Dodd-Shelby bailout is an absolute crime. It bails out the banks by limiting their loss to 10%; a joke since many of the problem areas like CA are down as much as 30% already on the median in the past 12-months and the rate of acceleration of the price declines are picking up steam. The subprime crisis is nearly over and now Prime, Alt-A, Pay Option ARMs and Home Equity Lines/Loans are failing. If they get this $300 billion passed, another $1 trillion+ will have to come on its heels for all of the other bailouts.
This needs to be fought and/or vetoed or it’s potentially $300 billion of taxpayer money down the toilet. Bernanke already cost global citizens enough by ratcheting down rates the most in the shortest amount of time in history, sparking a massive inflation wave in order to save the very investment banks who started all of this in the first place. Now, unless we all do something and get this story out there, another $300 billion will go up in smoke.
The National Review Online has obtained an internal 64 page document on Bank of America letterhead dated March 11th that matches the Dodd-Shelby Bill almost identically (see below).
First, we find out that Dodd is a Countrywide “insider” who claimed ignorance over being given special considerations saving him $75k over the life of his loan and is so ignorant he didn’t read his loan papers. Now, we find out that BofA, who is supposed to be closing on their Countrywide purchase in the next few months, wrote the Bill for him.
If this Bill passes, BofA’s Countrywide buyout is much more palatable and the $60+ billion in toxic loans are mostly covered by the taxpayers. This stinks to high-heaven. its no wonder why BofA is so comfortable closing the CFC deal, which with will cost them at least $40 billion when considering the value of theie toxic assets (loans) vs massive debt. I actually did a post on it, if you are so inclined.
Even more disturbing, in the BofA draft it proposes than Ginnie Mae gives an explicit guaranty on the loans. I wonder if you read the fine print of the Dodd-Shelby Bill if it is in there somewhere but has just has not been publicized?
This just in, found by a TickerForum memeber… www.FreedomWorks.org says that “Senate Housing Bill Requires eBay, Amazon, Google, and all Credit Card companies to Report Transactions to the Government”.
“Washington, DC - Hidden deep in Senator Christopher Dodd’s 630-page Senate housing legislation is a sweeping provision that affects the privacy and operation of nearly all of America’s small businesses. The provision, which was added by the bill’s managers without debate this week, would require the nation’s payment systems to track, aggregate, and report information on nearly every electronic transaction to the federal government.
FreedomWorks Chairman Dick Armey commented: “This is a provision with astonishing reach, and it was slipped into the bill just this week. Not only does it affect nearly every credit card transaction in America, such as Visa, MasterCard, Discover, and American Express, but the bill specifically targets payment systems like eBay’s PayPal, Amazon, and Google Checkout that are used by many small online businesses. The privacy implications for America’s small businesses are breathtaking.”
National Review Online story and link to document below. -Best Mr Mortgage
NRO Doc Drop: BofA-Scripted Bank Bailout Looks Awfully Similar to Dodd-Drafted Housing Bill [Stephen Spruiell]
National Review Onlinehas obtained an internal Bank of America “discussion document” (pdf here) on the subject of the FHA Housing Stabilization and Homeownership Retention Act of 2008, a.k.a. the Dodd-Shelby mortgage-lender bailout bill.
Yesterday, Tim Carney reportedthat the prevailing sentiment on Capitol Hill is that the Dodd-Shelby bill “is exactly what Bank of America and Countrywide wanted.” BofA is in the process of acquiring Countrywide. Countrywide is currently embroiled in a scandal over its V.I.P. program, under which several powerful politicians, including Sen. Chris Dodd, got preferential loan rates.
This discussion document (dated March 11, 2008) would appear to support the contention that BofA essentially wrote the bailout section of the bill. Almost all of BofA’s preferences are mirrored in the Dodd-Shelby legislation. The BofA document even offers PR tips, such as “We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market.”
The president has threatened to veto Dodd-Shelby because it would “unfairly benefit lenders who made bad loans.” The Senate will resume debating the bill on Monday.
The BofA doc is worth posting here for a couple of reasons: First, the similarities between BofA’s ideal bill and the bill before the Senate are obvious even to the layperson — read the document, then read David C. John’s analysis of the bailout and see for yourself.
Second, we’d invite our readers with some expertise in this area to look over the document for things we might have missed. Opponents of the bailout are lucky that a few tenacious Republicans (Kit Bond, DeMint et al) were able to hold up the bill and keep it from passing as quickly as expected. The fight resumes next week, so take a look at this document and keep digging.
Posted on June 21st, 2008 in Uncategorized
None of us really believed that Dodd could come up with anything close to this. Just go through transcripts or videos and look at the language and terminology he used just a few months back when referring to the subprime and credit meltdown. Think back to the left-field, irrelevent questions he asked at hearings when he could have made a difference by asking the right questions and getting information out. I have always wondered who was behind it all. Now we know what $70k in contributions, which is what BofA has given Dodd in the past 18-months, will buy. Only Hillary and Obama have received more from BofA.
This $300 billion Dodd-Shelby bailout is an absolute crime. It bails out the banks by limiting their loss to 10%; a joke since many of the problem areas like CA are down as much as 30% already on the median in the past 12-months and the rate of acceleration of the price declines are picking up steam. The subprime crisis is nearly over and now Prime, Alt-A, Pay Option ARMs and Home Equity Lines/Loans are failing. If they get this $300 billion passed, another $1 trillion+ will have to come on its heels for all of the other bailouts.
This needs to be fought and/or vetoed or it’s potentially $300 billion of taxpayer money down the toilet. Bernanke already cost global citizens enough by ratcheting down rates the most in the shortest amount of time in history, sparking a massive inflation wave in order to save the very investment banks who started all of this in the first place. Now, unless we all do something and get this story out there, another $300 billion will go up in smoke.
The National Review Online has obtained an internal 64 page document on Bank of America letterhead dated March 11th that matches the Dodd-Shelby Bill almost identically (see below).
First, we find out that Dodd is a Countrywide “insider” who claimed ignorance over being given special considerations saving him $75k over the life of his loan and is so ignorant he didn’t read his loan papers. Now, we find out that BofA, who is supposed to be closing on their Countrywide purchase in the next few months, wrote the Bill for him.
If this Bill passes, BofA’s Countrywide buyout is much more palatable and the $60+ billion in toxic loans are mostly covered by the taxpayers. This stinks to high-heaven. its no wonder why BofA is so comfortable closing the CFC deal, which with will cost them at least $40 billion when considering the value of theie toxic assets (loans) vs massive debt. I actually did a post on it, if you are so inclined.
Even more disturbing, in the BofA draft it proposes than Ginnie Mae gives an explicit guaranty on the loans. I wonder if you read the fine print of the Dodd-Shelby Bill if it is in there somewhere but has just has not been publicized?
This just in, found by a TickerForum memeber… www.FreedomWorks.org says that “Senate Housing Bill Requires eBay, Amazon, Google, and all Credit Card companies to Report Transactions to the Government”.
“Washington, DC - Hidden deep in Senator Christopher Dodd’s 630-page Senate housing legislation is a sweeping provision that affects the privacy and operation of nearly all of America’s small businesses. The provision, which was added by the bill’s managers without debate this week, would require the nation’s payment systems to track, aggregate, and report information on nearly every electronic transaction to the federal government.
FreedomWorks Chairman Dick Armey commented: “This is a provision with astonishing reach, and it was slipped into the bill just this week. Not only does it affect nearly every credit card transaction in America, such as Visa, MasterCard, Discover, and American Express, but the bill specifically targets payment systems like eBay’s PayPal, Amazon, and Google Checkout that are used by many small online businesses. The privacy implications for America’s small businesses are breathtaking.”
National Review Online story and link to document below. -Best Mr Mortgage
NRO Doc Drop: BofA-Scripted Bank Bailout Looks Awfully Similar to Dodd-Drafted Housing Bill [Stephen Spruiell]
National Review Onlinehas obtained an internal Bank of America “discussion document” (pdf here) on the subject of the FHA Housing Stabilization and Homeownership Retention Act of 2008, a.k.a. the Dodd-Shelby mortgage-lender bailout bill.
Yesterday, Tim Carney reportedthat the prevailing sentiment on Capitol Hill is that the Dodd-Shelby bill “is exactly what Bank of America and Countrywide wanted.” BofA is in the process of acquiring Countrywide. Countrywide is currently embroiled in a scandal over its V.I.P. program, under which several powerful politicians, including Sen. Chris Dodd, got preferential loan rates.
This discussion document (dated March 11, 2008) would appear to support the contention that BofA essentially wrote the bailout section of the bill. Almost all of BofA’s preferences are mirrored in the Dodd-Shelby legislation. The BofA document even offers PR tips, such as “We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market.”
The president has threatened to veto Dodd-Shelby because it would “unfairly benefit lenders who made bad loans.” The Senate will resume debating the bill on Monday.
The BofA doc is worth posting here for a couple of reasons: First, the similarities between BofA’s ideal bill and the bill before the Senate are obvious even to the layperson — read the document, then read David C. John’s analysis of the bailout and see for yourself.
Second, we’d invite our readers with some expertise in this area to look over the document for things we might have missed. Opponents of the bailout are lucky that a few tenacious Republicans (Kit Bond, DeMint et al) were able to hold up the bill and keep it from passing as quickly as expected. The fight resumes next week, so take a look at this document and keep digging.
Bankers around the World go for it -Needham
Banker’s humour shines out with what is euphemistically referred to as “The Great Moderation”. Like most of these monikers it is another spin designed to put the mindless punters at ease while the bankers shuffle the cards. “Moderation” in the context of this expression refers to the unusually extended and smooth economic cycles over the past two decades but I recently saw NZ Reserve Bank boss Alan Bollard refer to the global deleveraging currently being espoused as part of the great moderation. Undoubtedly Governor Bollard like all other central bank rulers is aware of what is going on. The current round of deleveraging being miraculously reported by bankers and investment banks is just another sleigh-of-hand trick to make those dollars fly around to parts of the globe and others balance sheets where they will appear more palatable or at least avoid scrutiny.
Don’t you wonder when bankers report a $55 billion deleveraging in one quarter how they were clever enough to do it? The problem with deleveraging is that both sides of the balance sheet have to be skinned. There is no known way (yet) to get rid of the liability (loans) and hold onto the asset other than something very old fashioned like reducing liabilities through retained earnings and surplus cash flows, and that my friends is not the business these turkeys are in.
Theirs is the arcane world of leverage. Thimble and pea tricks where unpaid interest on mortgages is taken to account as profit, where highly leveraged assets are parked in SIVs from which banks collect fees whilst pretending that it is an arm’s length transaction for which they have no supportive funding liability. The acquiescence to this behaviour by central banks, regulators and governments is truly staggering. The almost universal acceptance now, of what I wrote four months ago-that taxpayers will finish up shouldering most of the bill for the bankers’ shenanigans- is profoundly interesting to me.
In the US, Congress is preparing to pass legislation to bail out over reaching banks and borrowers; US Fed without Congressional approval has acted to forestall the inevitable consequences of the great debt boom; in relatively conservative banking communities down under (no ARMs or negative amortization mortgages), the Australian Reserve Bank has been quietly accepting impaired mortgage backed paper from not only the four pillars (major national banks), but from the next tier of slime meisters as well, since last September. In New Zealand the Reserve will start allowing mortgaged backed bonds to be used as repo collateral starting next month.
Not content with sticking their snouts into the central banking system for relief, Australian banks have gone a step further and managed to offload some of those onerous assets to a strange beast called the Australian Future Fund as reported this week by the Sydney Morning Herald on June 12:
Cash-strapped banks are tapping Australia's sovereign wealth fund to raise new finance as traditional sources of funding dry up in the ongoing global credit crisis. ANZ Bank, the country's third-biggest lender by assets, has raised about $500 million in term funding from the Future Fund, an industry source said today. The Future Fund, Australia's largest single investment fund with $60 billion in assets, was set up by the government to cover public service pension liabilities. Its assets are set to grow to about $148 billion by 2020. "My understanding is that all Australian banks have done transactions with (the Future Fund). If you want debt in your portfolio, having some bank term debt is not a bad option, particularly given that you are getting more attractive spreads,'' said one industry source, who declined to be identified.
ANZ and Westpac spokesmen declined to comment, while NAB was not immediately available for comment. "It's smart move for the Future Fund and it's a smart move for the banks,'' said Martin North, managing consulting director of Fujitsu Australia and New Zealand. He said the risks attached to putting investment capital into a mortgage business are relatively low, as such businesses are backed by secured assets.
As a piece of uncritical reporting, this is a doozy. I thank my colleague Derek J in the far West for drawing it to my attention. To my knowledge these transactions have not been reported elsewhere and have drawn no flack from the usual columnists and scribes. Why the Herald is acting as a shill for the banks is unknown but why the rest of the financial community accepted this action so uncritically must have some meaning. To explain these strange transactions requires some knowledge of the Futures Fund.
It is not a sovereign wealth fund as reported by the Herald. Its funding comes from government surpluses which will disappear quickly as the economic cycle turns. It is a triumph of bureaucratic power in a country where one in four workers are public servants. After generations of accrual of public service pensions which are light years more generous than those in the private sector, the Howard government was forced by the certainty of the law of compounding numbers to deal with the inevitable consequences of these massive unfunded liabilities, so they established this fund to meet those liabilities. Many other countries including the US face similar problems as legislators happily appropriate not only immediate funding for their pet programs but continue to ignore the legacy costs that compounding numbers always create.
The government appointed trustees of the fund are charged with its maintenance and management so no doubt the spin from Mr North that “risks of putting investment capital into a mortgage business are relatively low and such businesses are backed by secured assets,” was most welcome. Indeed the only way for the trustees to have approved this arrangement was if they had also formed that view on advice.
To state the obvious that mortgage backed securities have hardly proved to be a safe, secure investment elsewhere in the world highlights the very real disconnect between the hemispheres. That the new Australian Labour government has acquiesced in this charade shows what is churning under the surface. With the Australian stock market already under pressure, the prospect of the big four banks coming clean and facing up to their losses with a public issue is obviously not a prospect that can be willingly contemplated. In the scheme of things the amounts mentioned are pin pricks but we simply don’t know what these transactions have been, nor do we know the extent of Reserve bank and quasi government funding extended. In a country where sporting figures make headlines while politics and finance are largely ignored, there is no clamor for disclosure. How this all complies with the Australian Stock Exchange’s rules on continuous disclosure to shareholders is a mystery to me. Australian company directors are required to sign statements that their annual accounts give a “true and fair” view of the company’s position. Banks creating off balance sheet SIVs and other non reportable entities, then taking them back on their books when the SIVs are unable to fund themselves makes a mockery of the process.
Neither shareholders or regulators seem concerned so the joke goes on.
Don’t you wonder when bankers report a $55 billion deleveraging in one quarter how they were clever enough to do it? The problem with deleveraging is that both sides of the balance sheet have to be skinned. There is no known way (yet) to get rid of the liability (loans) and hold onto the asset other than something very old fashioned like reducing liabilities through retained earnings and surplus cash flows, and that my friends is not the business these turkeys are in.
Theirs is the arcane world of leverage. Thimble and pea tricks where unpaid interest on mortgages is taken to account as profit, where highly leveraged assets are parked in SIVs from which banks collect fees whilst pretending that it is an arm’s length transaction for which they have no supportive funding liability. The acquiescence to this behaviour by central banks, regulators and governments is truly staggering. The almost universal acceptance now, of what I wrote four months ago-that taxpayers will finish up shouldering most of the bill for the bankers’ shenanigans- is profoundly interesting to me.
In the US, Congress is preparing to pass legislation to bail out over reaching banks and borrowers; US Fed without Congressional approval has acted to forestall the inevitable consequences of the great debt boom; in relatively conservative banking communities down under (no ARMs or negative amortization mortgages), the Australian Reserve Bank has been quietly accepting impaired mortgage backed paper from not only the four pillars (major national banks), but from the next tier of slime meisters as well, since last September. In New Zealand the Reserve will start allowing mortgaged backed bonds to be used as repo collateral starting next month.
Not content with sticking their snouts into the central banking system for relief, Australian banks have gone a step further and managed to offload some of those onerous assets to a strange beast called the Australian Future Fund as reported this week by the Sydney Morning Herald on June 12:
Cash-strapped banks are tapping Australia's sovereign wealth fund to raise new finance as traditional sources of funding dry up in the ongoing global credit crisis. ANZ Bank, the country's third-biggest lender by assets, has raised about $500 million in term funding from the Future Fund, an industry source said today. The Future Fund, Australia's largest single investment fund with $60 billion in assets, was set up by the government to cover public service pension liabilities. Its assets are set to grow to about $148 billion by 2020. "My understanding is that all Australian banks have done transactions with (the Future Fund). If you want debt in your portfolio, having some bank term debt is not a bad option, particularly given that you are getting more attractive spreads,'' said one industry source, who declined to be identified.
ANZ and Westpac spokesmen declined to comment, while NAB was not immediately available for comment. "It's smart move for the Future Fund and it's a smart move for the banks,'' said Martin North, managing consulting director of Fujitsu Australia and New Zealand. He said the risks attached to putting investment capital into a mortgage business are relatively low, as such businesses are backed by secured assets.
As a piece of uncritical reporting, this is a doozy. I thank my colleague Derek J in the far West for drawing it to my attention. To my knowledge these transactions have not been reported elsewhere and have drawn no flack from the usual columnists and scribes. Why the Herald is acting as a shill for the banks is unknown but why the rest of the financial community accepted this action so uncritically must have some meaning. To explain these strange transactions requires some knowledge of the Futures Fund.
It is not a sovereign wealth fund as reported by the Herald. Its funding comes from government surpluses which will disappear quickly as the economic cycle turns. It is a triumph of bureaucratic power in a country where one in four workers are public servants. After generations of accrual of public service pensions which are light years more generous than those in the private sector, the Howard government was forced by the certainty of the law of compounding numbers to deal with the inevitable consequences of these massive unfunded liabilities, so they established this fund to meet those liabilities. Many other countries including the US face similar problems as legislators happily appropriate not only immediate funding for their pet programs but continue to ignore the legacy costs that compounding numbers always create.
The government appointed trustees of the fund are charged with its maintenance and management so no doubt the spin from Mr North that “risks of putting investment capital into a mortgage business are relatively low and such businesses are backed by secured assets,” was most welcome. Indeed the only way for the trustees to have approved this arrangement was if they had also formed that view on advice.
To state the obvious that mortgage backed securities have hardly proved to be a safe, secure investment elsewhere in the world highlights the very real disconnect between the hemispheres. That the new Australian Labour government has acquiesced in this charade shows what is churning under the surface. With the Australian stock market already under pressure, the prospect of the big four banks coming clean and facing up to their losses with a public issue is obviously not a prospect that can be willingly contemplated. In the scheme of things the amounts mentioned are pin pricks but we simply don’t know what these transactions have been, nor do we know the extent of Reserve bank and quasi government funding extended. In a country where sporting figures make headlines while politics and finance are largely ignored, there is no clamor for disclosure. How this all complies with the Australian Stock Exchange’s rules on continuous disclosure to shareholders is a mystery to me. Australian company directors are required to sign statements that their annual accounts give a “true and fair” view of the company’s position. Banks creating off balance sheet SIVs and other non reportable entities, then taking them back on their books when the SIVs are unable to fund themselves makes a mockery of the process.
Neither shareholders or regulators seem concerned so the joke goes on.
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