30 April 2009

Unspun News from "Of two minds"

New Home Sales Plummet 30%; Govt and RE Industry Spin Phony "Bottom"

What few comment on is the complicity of all who remain silent in the face of the Big Lie because they have a self-serving interest in the Big Lie's success. Everyone with a stake in housing or the stock market is hoping the 24/7 propaganda tsunami succeeds in creating a renewed surge in stocks, housing, borrowing and spending, even as they know in their hearts and in their minds it's all lies, fabrications, dissembling, distortions, manipulation and brainwashing repetition of half-truths.

We all know the data is being spun so hard it's become a blur. New home sales fall from 1.4 million units a year to 350,000? Great! the bottom is in!

GDP is tanking? Great! Inventories will need to be restocked soon on a gigantic scale.

Banks made obscene profits from trading tricks and the usual accounting frauds? Great! The banking sector is healthy again! (Had a loss in December? Just drop that month from your reporting--it works every time!)

Ford only lost $1.4 billion last quarter? Great! It doesn't need a bailout (yet) so let's triple the stock because "the bottom is in."


"The world is burning to the ground" ~ Quinn

“The US government is on a ‘burning platform’ of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon. There are striking similarities between America’s current situation and the factors that brought down Rome, including declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government.”


Peak Oil Slide show

A first rate presentation.

29 April 2009

Winners; China, Poland, Chile

"And the losers now will be later to win, cause' the times they are changing.... Bob Dylan

Staying off financial meth will be better for you in the long run. and sticking with the methamphetamine paradigm for a moment; that excessive leverage gives you financial energy and makes you feel great but at the cost of running down your vitamins and immune system and making you prone to psychosis, whats he current course.

I think the European rehab of a week in bed ( severe recession) is better than kicking the corpse with more of the same.

From Times Online
April 28, 2009
Brown left red-faced by debt lecture from Polish Prime Minister

Gordon Brown's attempt to put the economic misery of Britain behind him on a whistle-stop world tour were stymied today when Poland's Prime Minister embarrassed him with a lecture on the perils of excessive public borrowing and culture of debt.

Speaking after a breakfast meeting between the two leaders in Warsaw, Donald Tusk, the Polish premier said that while he did not want to comment on any other economy, the Poles had fared so well because they behaved with "full responsibility in terms of their deficit".

While Britain is struggling to cope with the effect of three quarters of economic contraction, Poland is basking in 12 years of consecutive, uninterrupted growth.

With Mr Brown standing next to him, Mr Tusk said that one of the main reasons Poland has so far managed to avoid the ravages of the credit crisis was because Warsaw had "efficient supervision to banks and sticking to the rules.... not exaggerating with living on credit. These are the most certain ways of avoiding of financial crisis."

Only last week, Alistair Darling, the Chancellor, was forced to admit in his Budget that Britain's public borrowing was on course for a record £700 billion.

Mr Tusk said: "After a few months our Government made the assumption that the method to cope with the financial crisis was not to increase expenditure but the availability of public funds."

While Mr Brown has long backed measures to pump capital back into the banking system, the Prime Minister has been a proponent of trying to spend the way out of a recession, but failed last month to garner a massive co-ordinated fiscal stimulus package across the major economies of the world.

The unintentional slight from the Polish Prime Minister marks the second time in two months when Mr Brown has been reminded that the past course taken by the British economy of light financial regulation and massive over-endebtedness has contributed to the worst slowdown since the Second World War.

Last month, President Michelle Bachelet of Chlie embarrassed Mr Brown ahead of the G20 summit when she said that the Chilean economy had performed so well because the country was able to save during the good times as a cushion for the bad. She said: "I must say that because of the decisions we took in good times, we were able to save money during the bad times."

The Ages of Gold ~ The story of India watch now

Episode Four is the story of India in the Middle Ages. At the time of the fall of the Roman Empire in the West, and the European Dark Ages, India had a series of great flowerings of culture, both in the north and the south. In this episode Michael Wood shows us some of the amazing achievements of medieval India: In astronomy they discovered the heliocentric universe, zero and the circumference of the earth.

They mastered the world's first large scale wrought iron technology—the Delhi iron pillar, and their courtly culture was the setting the world's first sex manual, the Kama Sutra.

Meanwhile in the south the rising power of the Cholan empire spread Indian arms and culture to the Maldives, Sri Lanka, the Andamans, and to Java and the Malay peninsula, where the Tamil diaspora is still powerful today.

Wood visits the Cholan capital at Tanjore, and with extraordinarily privileged access takes us right inside the greatest temple of that time (founded in 1010), to see the ancient rituals still being performed.

Cholan temple, Tanjore

In a fascinating sequence we see traditional bronze casters, making religious images for the temples, just as their ancestors did 1500 years ago.

We visit a traditional Tamil family in the temple city of Chidambaram, go with them on pilgrimage and witness the ancient mountain top festival of fire that was already famous in 700AD!

The story ends in Multan in Pakistan in the early eleventh century with a shadow on the horizon—the first invasions by Turks and Afghans bearing the Muslim faith that will change the story of India and turn the subcontinent into the biggest Muslim civilization in the world.

Watch it now free for the next 48 hours

After and Overseas


for finance to work, it must be as simple and boring as water supply

Taleb makes the point. As we are now seeing with industrial scale pig farming, big systems provide temporary efficiency at the cost of stability, redundancy and robustness.

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.


The dude makes the point even better, money backstops the division of labour, when it is working properly it should be invisible, when it becomes significant as a profit center and in a boom, begins to dominate politics, it is a sure sign of nothing but immanent and total collapse..

Indeed, it wasn't a change in temporal standards that led to the current financial disorder. Rather, inter alia, it was, I believe, a loosening of monetary standards. If standards of time are crucial for accurate financial calculation so too, it seems, should be standards for money. These standards for money go beyond the basic decision to, for instance, set a fixed exchange rate to specie or some other method to ensure that no more money is created than there are goods and labor to buy with it. They would include restrictions on securitization and credit, and procedures for liquidation. The idea of unrestricted finance seems to me about as absurd as unrestricted time....how many seconds in a hour?...however many you prefer.

The calendar reform noted above can perhaps be seen as a lesson in compounding- error, that is. Eleven minutes is but 0.002% of a year, yet, over time such a seemingly trivial error- certainly one that went unnoticed by most people on earth- eventually pushed back the date of the vernal equinox by 10 days.

At least the error was constant. What if temporal standards had been "elastic?" Imagine the confusion that would result from days being 25 hours one year and 23 the next. Imagine, instead, the increased confusion that would result if the elasticity of temporal standards varied per individual. Tax payers might wish for years of 500 days while mortgage bond holders might wish for months of 10 days. Such mortgage bond holders, if they were able to implement this "short month" policy, would see the value of their assets, at least on paper, rise dramatically.

Of course, under such conditions, it wouldn't be long before the whole system of temporally based payments collapsed. If the desired changes in standards were less radical- call it the Fabian approach to loosened standards- the collapse would take longer to manifest. In any event, the lesson is clear, standards that vary over time and individual (or group) inevitably create confusion and discord. In the highly ordered modern world my month must be the same as everyone else's month.

Equally, in the modern world, my money must be the same as everyone else's money. There must be some standard of reference if calculations today are to have any merit tomorrow.


28 April 2009

How libertarian dogma led the Fed astray By Henry Kaufman ~FT

Interesting take anyway..

The Federal Reserve has been hobbled by at least two major shortcomings that were primarily responsible for the current and several previous credit crises. Its failure to spot the importance of changing financial markets and its commitment to laisser faire economics were big mistakes and justify a fundamental overhaul of the Fed.

The first of these shortcomings was its failure to recognize the significance for monetary policy of structural changes in the markets, changes that surfaced early in the postwar era. The Fed failed to grasp early on the significance of financial innovations that eased the creation of new credit. Perhaps the most far-reaching of these was the securitisation of hard-to-trade assets. This created the illusion that credit risk could be reduced if instruments became marketable.

Moreover, elaborate new techniques employed in securitisation (such as credit guarantees and insurance) blurred credit risks and raised – from my perspective, many years ago – the vexing question, “Who is the real guardian of credit?” Instead of addressing these issues, the Fed was highly supportive of securitisation.

One of the Fed’s biggest blind spots has been its failure to recognise the problems that huge financial conglomerates would pose for financial stability – including their key role in the current debt overload. The Fed allowed the Glass-Steagall Act to succumb without appreciating the negative consequences of allowing investment and commercial banks to be put together. Within two decades or so, financial conglomerates have come to utterly dominate financial markets and financial behaviour. But monetary policymakers failed to recognise that these behemoths were honeycombed with conflicts of interest that interfered with effective credit allocation.

Nor did the Fed recognise the crucial role that the large financial conglomerates have played in changing the public’s perception of liquidity. Traditionally, liquidity was an asset-based concept. But this shifted to the liability side, as liquidity came to be virtually synonymous with easy borrowing. That would not have happened without the marketing efforts of large institutions.

My second major concern about the conduct of monetary policy is the Fed’s prevailing economic libertarianism. At the heart of this economic dogma is the belief that markets know best and that those who compete well will prosper, while those who do not will fail.

How did this affect the Fed’s actions and behaviour? First, it explains to a large extent why the Fed did not strongly oppose the removal of Glass-Steagall restrictions.

Second, it also helps explain why the Fed failed to recognise that abandoning Glass-Steagall created more institutions that were “too big to fail”.

Third, it diminished the supervisory role of the Fed, especially its direct responsibility to regulate bank holding companies. To be sure, the Fed’s supervisory responsibilities have never been very visible in the monetary policy decision-making process. But its tilt toward an economic libertarian approach pushed supervision a notch down just at a time when financial market complexity was on the rise. Fourth, as hands-on supervision slackened, quantitative risk modelling became increasingly acceptable. This approach, especially quantitative modelling to assess the safety of a financial institution, was far from adequate. But it worked hand in glove with a philosophy that markets knew best.

Fifth, adherence to economic libertarianism inhibited the Fed from using the bully pulpit or moral suasion to constrain market excesses. It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective. Such public pronouncements about financial excesses are hard to ignore, reaching the broad public as well as market participants.

Sixth, the Fed’s increasingly libertarian philosophy underpinned its view that it could not know how to recognise a credit bubble but knew what to do once a bubble burst. This is a philosophy plagued with fallacies. Credit bubbles can be detected in a number of ways, such as rapid growth of credit, very high price/earnings ratios and very narrow yield spreads between high- and low-quality debt.

By guiding monetary policy in a libertarian direction, the Fed played a central role in creating a financial environment defined by excessive credit growth and unrestrained profit seeking. Major participants came to fear that if they failed to embrace the new world of securitised debt, proxy debt instruments, and quantitative risk analysis, they stood a very good chance of seeing their market shares shrink, top staff defect, and profits dwindle.

Ironically, the problem was made worse by the fact that the Fed was inconsistently libertarian. The central bank stuck to its hands-off approach during monetary expansion but abandoned it when constraint was necessary. And that, in turn, projected an unpredictable and inconsistent set of rules of the game.

We should, therefore, fundamentally re-examine the role of the Fed and the supervision of our financial institutions. Are the current arrangements within the Fed structure adequate – from its regional representation to its compensation for chairman and governors to its terms of office for governors? How can the Fed’s decision-making process be improved? If we were to create a new central bank from the ground up, how would it differ? At a minimum, the Fed’s sensitivity to financial excesses must be improved.

The writer is president, Henry Kaufman & Company

27 April 2009

Icelandic bankers adorn urinals ~ Photo

Reykjavik, Iceland: The faces of former Icelandic bankers adorn urinals in a bar.

Democracies will need to repudiate the booms winners...this is one way to do it that doesn't involve violence.

The IMF's gold gambit ~ Wall Street Journal

The Fund's Misuse of Bullion Reserves is Crucial to its Plan to Use the Financial Crisis to Expand its Power.

By Judy Shelton
The Wall Street Journal
Monday, April 27, 2009


The International Monetary Fund deserves credit, figuratively speaking, for cleverly manipulating the financial troubles of emerging and low-income nations to procure a fresh infusion of capital for itself. But its tactics at this month's G-20 summit in London -- where President Barack Obama signed off on tripling the IMF's lending resources -- should not hoodwink anyone, least of all American taxpayers who pay the largest share of IMF expenses.

Lost in the lofty talk about putting the IMF in the center of world economic recovery is the fact that the organization has been quietly attempting to ensure its own survival by seeking permission to engage in gold sales. While IMF officials insinuate that the receipts would be used to help poor countries, the real goal is to set up a permanent endowment fund for the IMF.

The U.S. should not replenish the coffers of a multilateral bureaucracy that quite literally lost its reason for being on Aug. 15, 1971 -- the day President Richard Nixon "closed the gold window" and brought an end to the Bretton Woods agreement, which allowed countries to convert their dollar holdings, via the IMF, into gold at a fixed price. Instead, Congress should call for the IMF's dismantlement and restitution of its assets.

The most solid asset owned by the IMF, purely as a legacy of its original incarnation, is gold. The IMF holds 3,217 metric tons (103.4 million ounces) of gold, which makes it the world's third largest official holder. Actually, it's a misnomer to say the IMF "owns" the gold since the bullion belongs, according to the IMF articles of agreement adopted at Bretton Woods in 1944, to its member nations.

Nevertheless, the IMF is now seeking to sell a considerable chunk of those gold holdings -- some 12.9 million ounces -- which it insists are exempt from restitution to members in the event of IMF liquidation.

Its reason? Between December 1999 and April 2000, to fund its Heavily Indebted Poor Countries (HIPC) initiative, the IMF arranged to sell gold it held on its books at a price of roughly $50 to two member countries, Brazil and Mexico, at the market price of $355. It put the profits of close to $4 billion in a special HIPC account; simultaneously, the IMF accepted back the gold sold to Brazil and Mexico in settlement of their financial obligations of that amount.

Bottom line: The balance of IMF holdings of physical gold was left unchanged, although it raked in the substantial difference between the gold's market price and its book value. The IMF asserts a propriety claim over the 12.9 million ounces it "acquired" through these transactions.

Unfortunately, artful accounting -- from the deceptive practice of carrying gold at its former official price (about $52) rather than its current market value (about $914), to the arcane usage of an intangible monetary unit called a Special Drawing Right (SDR) -- has become the IMF's defining characteristic.

The IMF once served as administrator for the gold-anchored Bretton Woods system of fixed exchange rates among currencies. It now stands for laxity, for endless government fixes, for ineptitude, and political compromise. The IMF preaches budgetary discipline one moment, only to abandon it under pressure from the current crop of presidents, prime ministers, and potentates who authorize its spending.

Now the IMF is attempting an end run around Congress, as it quietly moves toward selling gold, most likely to China. Why does the IMF need the money? Just three years ago the bloated organization (half of its 2,600 staff are economists) was nearly defunct; headquartered in Washington, the IMF was desperate to create an endowment fund to provide for its continued existence.

But in 2007 a specially convened committee of "eminent persons" helpfully suggested that if the IMF could sell those 12.9 million ounces of gold and set up a trust fund with the windfall profits, the investment returns could plug the gap between its administrative expenditures and the amount it earns as an intermediary that channels funds from rich countries to poor countries.

Sound familiar? Only one problem: IMF gold sales must be approved by an 85 percent voting majority of its members. The U.S. has a 17 percent vote; thus the IMF cannot sell gold without the explicit consent of Congress. But Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee, has indicated his openness to approving IMF gold sales -- conditional that some of the receipts be used to "help finance debt relief for poor countries."

Ah, yes, it is always about helping the poor. Which is why the IMF emphasized its willingness to assist "poor countries" in its carefully calibrated request for additional resources from G-20 nations. Not surprisingly, the London stratagem proved successful. It was readily embraced by G-20 leaders eager to demonstrate how much they care about the human consequences of economic meltdown. Ironically, the IMF has been widely blamed by recipient nations in Africa and Latin America for perpetuating poverty. Excessive transfers to less-developed countries have the perverse effect of suppressing the entrepreneurial reserves of citizens. It is only when nations manage to get off the global dole that they are taken seriously by global capital markets and can start to achieve bankable growth.

The IMF has shown an uncanny ability to transmogrify into whatever politically acceptable form necessary to ensure its survival. Throughout the intervening decades since the end of Bretton Woods, the IMF has scrambled to redefine itself as (in rough chronological order): a global debt-collection agency, an economic-research organization, a referee for financial disputes among the Group of Seven leading industrialized nations, and a front to permit Western nations to avoid being blamed for problems arising in the transition to democratic capitalism for formerly communist nations.

In its latest manifestation as global financial surveillance monitor and G-20 sidekick, the IMF has taken to delivering somber pronouncements about the world economic outlook, concluding in mid-April: "The current recessions are likely to be unusually severe, and the forthcoming recoveries sluggish." And what does the IMF recommend? "Aggressive monetary and, particularly, fiscal policies could strengthen and bring forward recoveries."

This sage advice conveniently dovetails with the agenda of Mr. Obama, who, as mentioned earlier, agreed to tripling the IMF's lending resources at the London summit. And to remain au courant with British Prime Minister Gordon Brown, IMF chief Dominique Strauss-Kahn has also called for expanding "the regulatory perimeter to encompass all activities that pose economy-wide risks."

Zhou Xiaochuan, China's powerful central banker, has authored a proposal for international monetary reform that would replace the dollar with "a super-sovereign reserve currency managed by a global institution." Citing "the inherent deficiencies caused by using credit-based national currencies," he suggests the SDR could assume this role. In the view of Mr. Zhou, the way to enhance international monetary and financial stability is to have member countries gradually entrust their reserves "to the centralized management of the IMF."

Before anyone gives any credence to the notion of having the IMF take on the task of issuing a new global currency, however, we need to remember that the original Bretton Woods system worked precisely because the dollar was convertible into gold at a fixed price. And gold is real money.

Congress should just say no.


Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

Bill Moyers speaks with economist Simon Johnson and Ferdinand Pecora biographer and legal scholar Michael Perino

Bill Moyers speaks with economist Simon Johnson and Ferdinand Pecora biographer and legal scholar Michael Perino. Johnson is a former chief economist of the International Monetary Fund (IMF) and a professor at MIT Sloan School of Management, and Perino is a professor of law at St. John's University and has been an advisor to the Securities and Exchange Commission.

Like thunderheads roiling on the horizon, the clamor has been building as more and more Americans want to know exactly what, and who, brought on the worst economic crisis since the great depression. What happened and how do we keep it from happening again?

Congress has finally acknowledged the outcry and is supporting some 21st century version of the "Pecora hearings."

"Pecora hearings?" That's right, as in Ferdinand Pecora, the savvy immigrant from Sicily who became a Manhattan prosecutor with a memory for facts and figures that proved the undoing of a Wall Street banking world gone berserk with greed and fraud.

In the early 1930's, during the Great Depression, and under threat of subpoena, one tycoon after another, including J.P. Morgan Jr., was hauled before the Senate Banking Committee and grilled by Pecora, the committee's chief counsel.

Here he is on the cover of TIME Magazine in June 1933. "Wealth on Trial" reads the headline inside, where Pecora is described in ethnic stereotypes of the day as "The kinky-haired, olive-skinned, jut-jawed lawyer from Manhattan." To their shock, pompous financiers, unaccustomed to having their actions or integrity questioned by anyone, much less some pipsqueak legalist making $255 a month, were no match for his cross examination.

The revelations of the Pecora hearings and the public's anger led to sweeping reform, reining in the high-handed, free-wheeling banking industry. Those reforms stabilized our financial world for half a century, until the titans of finance and friendly politicians began to dismantle them.

Ferdinand Pecora, your time has come again. Your biography is being written by this man, Michael Perino. A scholar of Law and Securities Regulation, Michael teaches at St. John's University here in New York, and has been an advisor to the Securities and Exchange Commission, the government agency that was created because of the Pecora investigation.

And, returning to the JOURNAL is Simon Johnson, former Chief Economist at the International Monetary Fund who now teaches at MIT's Sloan School of Management. Just this week Simon Johnson co-founded "The Hearing," a new economics blog at washingtonpost.com.

Simon Johnson, Michael Perino, Welcome to the JOURNAL.


BILL MOYERS: It's the spring of 1933, the height of the banking crisis. 38 of the 48 states have closed their banks. Unemployment is 25 percent. Breadlines are long. People are hungry and they're angry, and along comes this son of a shoemaker who takes on the movers and shakers of Wall Street. What did he do that touched such a nerve in the country?

MICHAEL PERINO: What Pecora did was to take complex, corporate maneuverings, complex transactions on Wall Street and really turn them into simple morality plays. That was his genius. He was a smart lawyer. And he knew that the game plan that he had to follow was to quite frankly whip some populace outrage.

So, when he put Charles Mitchell, the head of National City Bank, on the stand, he started off with the same things we're talking about today. He started off with, "What did you get paid? What were your bonuses?" And by the way, at the end of the first day on the stand, "Didn't you engage in this wash sale with your wife where you basically sold her securities as a loss so you could essentially pay no taxes in that year?"

BILL MOYERS: And he had to resign soon after he was grilled by Pecora, right?

MICHAEL PERINO: When Mitchell strode into that hearing room on February 21st, 1933, bankers had taken their fair share of lumps over the course of a few years. But, he was still the preeminent banker of his day.

Just a few weeks earlier, he had been quoted in "The New York Times" telling the shareholders of National City, "The economy is sound." And five days later, he resigned from City Bank, and as a matter of fact, there's this famous scene where Pecora and the Chairman of the committee are looking out the Senate window and they see Mitchell who had strode into the hearing room surrounded by his retinue of staffers and lawyers walking alone to Washington Station in D.C. carrying his own suitcase. His career was over.

Pecora was, if nothing else, an excellent courtroom lawyer. He knew how to ask questions. He was a pit bull. He would not let people get away with hemming and hawing and hedging their answers. And he would go after them, politely, of course. But, he would go after them until he got the answer that he wanted.

What Pecora did was he did the grunt work. He did the unglamorous document review. He was able to go in and do the detective work so that when people tried to evade his questions, he knew the answers already. And you're right. In your introduction, you said he had a prodigious memory. His staff was amazed. He would read these complex briefing memos and, without notes, without missing a figure at all during the hearings, he would run through it and not miss a beat.

BILL MOYERS: He also had to play against these awful stereotypes of the time, right? The ethnic jibes and the depictions.

MICHAEL PERINO: Absolutely. There was-- as I've been writing this book, I've begun to think of Pecora sort of the Jackie Robinson of Italian American lawyers. When he went to law school in the early 1900's, there were 15,000 lawyers in New York. There were 39 who were Italian Americans.

So, when he entered first the local stage, the New York City stage, and then when he entered the national stage, he was a novelty. I mean, an Italian American lawyer? He grew up in a time-- he came to the United States in 1886. It was a time of virulent anti-immigrant sentiment.

And he grew up in that. And-- and part of his motivation was proving the stereotype wrong. And the stereotype was that Italians, particularly southern Italians, were lawless. They were essentially all criminals. And, quite frankly, they weren't very smart. Part of the effectiveness of the hearings, part of why they were such a media sensation, was because they played so much against that stereotype. There was novelty in this theoretically lawless Sicilian showing the lawlessness and chicanery that was going on among the Anglo-Saxons on Wall Street.

BILL MOYERS: He discovered, as I understand it, that some of these banks were making interest-free loans to their own officers, right?

MICHAEL PERINO: One of the things that National City did was that as the stock market was collapsing in 1929, what they did was that they floated interest-free loans to their executives so that they wouldn't over extend themselves in the marketplace. Now, these were on top of the very large bonuses that they had already received. At the same time, some low-- they had to entice some lower-level employees to buy National City stock.

And they bought it when it was trading in the $500 range. After the crash it was trading in the $30 range or so. And even though they had floated the loans to the high-level executives, they continued to make those lower-level executives buy their stock at the inflated prices that they had bought it at. So, what he showed was essentially favoritism.

BILL MOYERS: And how did the country react?

MICHAEL PERINO: Angrily. People were outraged at what was going on in Wall Street. And when you look at Roosevelt's famous inaugural address in 1933, he famously tells Americans they have nothing to fear but fear itself, of course.

But he also says that the money-changers have fled the temple and it's a direct reference to Mitchell. He got that anger. And once that anger was in place, once that clamor for reform was in place, Congress essentially fell in line.

BILL MOYERS: In those days the new president was inaugurated in March of the follow-- of the year following the election. So, Roosevelt was coming into office in March of '33 just as the Pecora hearings were hitting their stride, right?

MICHAEL PERINO: He had just finished his stunning examination, which was front-page news across the country of Mitchell just before the inauguration.

BILL MOYERS: So, that dynamic played in. A new president who came in a banking crisis wanting reforms, needing public sentiment behind those reforms.

MICHAEL PERINO: And Roosevelt was a big booster for the hearings. He met secretly with Pecora on a number of occasions. He met with the committee chairmen who were running the hearings. And he was pushing the hearings. As a matter of fact, it was from Roosevelt that the suggestion came that the next person on the stand should be JP Morgan.


MICHAEL PERINO: Because J.P. Morgan was the epitome of Wall Street. Now, this is Jack Morgan. This is not the famous--

BILL MOYERS: The son of the--

MICHAEL PERINO: -- the son of J.P. Morgan, and he wasn't the banker his father was. But, J.P. Morgan still had the mystique. And--

BILL MOYERS: The House of Morgan, it was--

MICHAEL PERINO: It's The House of Morgan. Exactly right. And so, you know, you can assume that Roosevelt knew that that's the kind of public sentiment 'I need to keep going.' And people are going to have that kind of interest in what's going on in Morgan. And that will create the atmosphere where we can pass the first Federal Securities Laws ever. We can create reform of the banking industry. None of that stuff would have happened but for the clamor that Pecora created.

BILL MOYERS: Is there a House of Morgan today? SIMON JOHNSON: It's the House of Morgan. JPMorgan. And Citigroup.

BILL MOYERS: The house still stands, right?

SIMON JOHNSON: Absolutely.

BILL MOYERS: The house built upon--

SIMON JOHNSON: Yeah, well, it's been remade, and refashioned to some degree. But, these big finance houses and securities firms that merged with commercial banks, and vice versa, are incredibly powerful. And they have, you know, questionable practices in New York on and around Wall Street. They're also incredibly powerful in Washington. The strength of their connections possibly is even greater now than it was back in the early 1930's.

I think you see it everywhere. You see it this week, for example, in-- in these banks that receive massive amount of government assistance and I think a pretty good deal from Treasury pushing back against other Treasury initiatives, for example, to help consumers in changing the rules around mortgages and around credit cards.

And also with regard to Chrysler. So, the government has a broader set of public policy initiatives. One of them is: save the banks. Others are: help consumers and some auto companies. The banks are happy to take the money on pretty generous terms, and won't cooperate on the other aspects of public policy. That tells you how powerful they are and how much hubris they have in these kind of situations.

MICHAEL PERINO: It's not much different in that way. I mean, there was a regular communication between the House of Morgan and Washington back in those days. And if you look back at the history of financial regulation, you see the same pattern over and over again.

There are always huge biases toward the status quo. People want to keep the structure the way it is, because it's worked well for them. And it's only when there's the whiff of scandal, only when there's some crisis that's occurring that the forces for reform are strong enough to overcome that status quo.

SIMON JOHNSON: And the laws that came out of the-- after the Pecora hearings were-- were good laws, right? The founding of the Securities and Exchange Commission--


SIMON JOHNSON: The way the securities are regulated. I mean, these are things we've thought for a long time were sort of the bastion of good behavior and what really made financial markets in the United States better than in some other places. Turns out perhaps they were better, but not very good. Or at least it wasn't good in a sustainable way.

So, it's not the case if you have hearings, if you have this kind of dramatic, front-page investigation that you necessarily end up with populism or extreme measures. You may end up with very reasonable legislation. Which is what happened-

MICHAEL PERINO: You may end up with very reasonable measures. But if you whip up that sentiment too strongly, then there's going to be incentive to just go overboard and maybe perhaps regulate too much.

BILL MOYERS: And to scapegoat, right? I mean, it's possible the scapegoat in situations like this.

MICHAEL PERINO: There's a huge aspect of scapegoating in all of this. And if you look at some of the comments that have been made just in the last few days, what you see is very subtly the statements blending from, "We need to find out what happened" to, "We need to see who caused this." And that's--

BILL MOYERS: Well, that's a legitimate question.


BILL MOYERS: There are moments from the intersection between Wall Street and politics brought about the kind of compromise in regulation that encouraged these tendencies toward greed and fraud, right?

MICHAEL PERINO: There's no question about it. My point is simply that it sometimes becomes very easy to obscure the broader causes of a financial crisis by doing a little finger pointing and saying, "Ah-ha, here's the bad person. We found him. And we can move on."

BILL MOYERS: Do you think we need hearings like this now?

SIMON JOHNSON: Absolutely, what I take from what Michael's saying and my understanding, is the Pecora hearings, they were pretty focused. They were focused on specific individuals, specific potentially illegal or unethical practices.

And I would have thought today you could look much more carefully at predatory practices around the way that consumers were treated, for example. That's a very focused item. You could also look at some of the issues that come out of, at least, the spirit of our antitrust laws. So, the antitrust movement started out as a really a concern about political oligarchs at the end of the 19th Century.

John D. Rockefeller came through his company was broken up. He came through with a lot of money, became a great philanthropist. That should be a model of how you do this in a proactive, forceful-- and you have to talk to individuals. You have to a strong general counsel, I think, who ask the tough questions and who could-- who doesn't let you off the hook. You've got to push it through. So, I think if you can get those procedures, I'm strongly in favor.

MICHAEL PERINO: And I think you can do both. And one of the things that-- we forget a lot of what happened during the Pecora hearings. But, at the same time that Pecora was putting the chieftains of Wall Street on the stand and showing the bad things that he was doing, he was also engaging in a broad ranging investigation of actually how Wall Street worked.

He sent out questionnaires to all of Wall Street, essentially, asking a series of questions about the basic nuts and bolts of the operation of the business. And the answers to those questions, which appear in a long report that Congress eventually put out, formed a lot of the basis for what became the Securities and Exchange Act of 1934. The Act that created the SEC.

BILL MOYERS: It also led to the Glass-Steagall Act didn't it? The Glass-Steagall Act separated commercial from investment banking and that persisted up until the 1990's when the Clinton administration-- Bob Rubin, Larry Summers, Senator Phil Gramm of Texas-- did away with the Glass-Steagall Act.

MICHAEL PERINO: Glass-Steagall, or the idea behind Glass-Steagall, to separate the commercial banks from the investment banks, had been an idea that was floating around since at least 1930. And essentially, the political bias toward keeping everything the way it was, was sufficiently strong that the idea went nowhere until Pecora showed all the things that the securities affiliates were doing that were improper. And within six months, Glass-Steagall was passed.

BILL MOYERS: And it survived until, as I said, the 1990's. To what extent, Simon, do you think the repeal of the Glass-Steagall Act in the 1990's contributed to this present collapse?

SIMON JOHNSON: I think there was a much broader sort of wave of deregulation or removing restrictions on banking that definitely contributed. I'm not sure I would put Glass-Steagall at the top of the list. I think declining to regulate derivatives, which was also a decision made under the Clinton administration, was probably more critical. Because that allowed a very big market to develop, which a lot of people didn't understand. Even the people who were big players in that market.

BILL MOYERS: The Pecora Hearings became something of a circus, did they not? I mean, there's a famous photograph of J.P. Morgan, Jr. with a midget on his lap. Play that out for us.

MICHAEL PERINO: What happened was that Morgan was the event that everyone was anticipating. This was the public relations event of the day. They brought in special telegraph lines into the Senate so that people could get out their stories as quickly as they possibly could. Carter Glass was a Democrat from Virginia, probably the foremost expert on banking.

BILL MOYERS: Very powerful. It was the Glass-Steagall Act.

MICHAEL PERINO: It was the Glass-Steagall Act. Exactly right. Glass didn't really think much of Pecora's methods. He wanted to have a much more sober, academic discussion of the issues and not this kind of populist outrage. And he and Pecora had a very public clash during the Morgan hearings at which point, at one point Carter Glass said, "This is a circus. All we need is peanuts and colored lemonade." Well, one of the promoters for Ringling Brother's Circus caught onto that. And the next day, he showed up with Lya Graf who was one of the circus midgets.

And he had the idea that the shortest woman in the world should sit on the lap of the richest man. And that's what happened. And that photograph eventually captured what was going on in the hearings.

BILL MOYERS: Do you think these hearings that are approved by the Senate this week can avoid that? Or should they try to have some theatre in it?

SIMON JOHNSON: Obviously, you need theatre. And theatre emerges from anything like this. I think the issue is the focus. Is it something concrete? Is there a conceptualization that people can understand? Because these financial issues are complex, and just like Mr. Pecora did, you need to find some way to crystallize it.

I don't know if it's income tax. I suspect that it's not. I think the world is more sophisticated now. But, I think the way that consumers have been treated, predatory practices in and around housing, clearly prevalent.


SIMON JOHNSON: The way that mortgages are sold to people, and what they're told about their mortgages and the way they're pressured in to certain kinds of borrowings. And that's also true, by the way, for credit cards. And these are things that people can understand. They're very real. They're interactions that many, many people have had. At least potentially somebody's trying to sell you on a dubious loan.

And I think investigating, coming in with a focus, for example, Elizabeth Warren, who is the current head of the Congressional Oversight Panel, is a very distinguished lawyer, she's on the faculty of Harvard Law School, who's focused on these sort of consumer protection issues. Now, she's dealing with a broader financial bailout.

And I think she's doing a very good job of bringing an educated, legal, financial perspective, which hadn't been her focus before. She comes with expertise, but is now drilling into areas where she's not well-connected. She's not a Wall Street player by any means. You need someone like that to really get their teeth into these issues and to find a way to communicate the complexity to a broader audience.

BILL MOYERS: Even as we speak, though, the banking lobby is going after her, saying that she's promoting an anti business agenda, right?

SIMON JOHNSON: Yes, and I think that's a key point. So, on the Pecora hearings as I understand them-- I'll put it this way. I've never read anybody who suggested that the Pecora hearings caused the Great Depression, okay? But what we're hearing now from the banking industry is, "Oh, wait a minute. If you vilify us, if you say that we did these bad things or even if you hold a serious investigation, that will further undermine confidence and cause a much deeper recession and a slower recovery and you'll lose more jobs."

MICHAEL PERINO: Actually, the banks said exactly the same thing in the 1930's.

BILL MOYERS: About the Pecora hearings?

MICHAEL PERINO: About the Pecora hearings. They said, "If you investigate, you're going to find a world of mess, probably. It's going to create sensations and that's going to actually retard recovery." You know, you interestingly said about the Pecora hearings causing the Great Depression. You know, we need to be a little humble about what these kind of hearings are likely to be able to do not be able to do.

Pecora was a fabulous lawyer. There's no doubt that he did an amazing job at these hearings. If the hearings were intended to find the causes of the crash and the causes of the Great Depression, they failed. 'Cause they never actually did that. They did show bankers behaving badly. And there's no question about that. And showing that created the atmosphere in which reform could pass. But, he never actually showed what caused the Depression. Now, we can't really fault him really too much for that. I don't think people understood it very well then, and I think economists are still debating it today.

SIMON JOHNSON: And will be for another 50 years.

BILL MOYERS: Ben Bernanke spent a lifetime trying to figure that out, right?

SIMON JOHNSON: Right. Exactly.

BILL MOYERS: Is Elizabeth Warren potentially the new Pecora?

SIMON JOHNSON: She might be, and I think she comes with the right combination of qualifications. Relevant experience, and obviously you need a lawyer. You need somebody who knows how to handle themselves in a courtroom-type setting. And then somebody who's not too close to finance. Someone who's not compromised. Someone who hasn't-- isn't too deeply enmeshed in the belief system, which I think that we all, you know, one way or another either created or watched develop and didn't stop, okay? Maybe you need somebody who's a prosecutor and that's the other point I take from what Michael's saying, is that a prosecutorial background, somebody who doesn't let you off the hook doesn't ask questions just for five minutes or 20 minutes, but pursues the questions to the end of the day and presumably into the next day until they get the answer. And that's the framework I think people are looking for.

BILL MOYERS: Simon, you wrote earlier this week that or government seems helpless or unwilling to act against these financiers. Because of all these financial contributions, is the Senate Banking Committee compromised?

SIMON JOHNSON: I think it has some conflicts of interest. And I think the ordinary mechanisms of donations and the way that deals are worked out between that committee, those other committees on Congress with jurisdiction over finance and the financial industry, makes everybody uncomfortable right now. And we need to go back and find out how finance interacts with politics among other things. I think that has to be on the table, by the way, the connections, which I understand Mr. Pecora did get at to some degree, between Washington and Wall Street found that there had been some particular advantage or privileges given to politicians by the big bankers. Those are the kinds of things that need to be on the table, Bill, I think

MICHAEL PERINO: Let me underscore something you said. There's one way in which I think Pecora is not the model for the kind of lawyer we need to lead the hearings today. Pecora did some work when he was a DA going after what we call bucket shops, essentially fly-by-night securities operations. But, this was low-level fraud kind of stuff.

He really didn't understand very well how Wall Street worked. He was a quick study. He was a very smart man, and he was able to overcome that. But, Wall Street's a lot more complicated place today than it was in the 1930's. And I think a lawyer who really didn't understand the workings of Wall Street very well would be at a severe disadvantage.

SIMON JOHNSON: Here, I might disagree a little bit. I think you need a brilliant person, and you need somebody who's a very quick study. And I have many friends who-- I'm not a lawyer myself. But, I have great admiration for my friends and colleagues who are lawyers who can really master the facts. And I think Wall Street is complicated, and maybe it's more complicated than the late 1920's. But I think it can be understood. And I think that, you know, you need a staff. And I think Mr. Pecora had a great staff.

BILL MOYERS: Well, he had only three people, I believe, right? A staff of three people believe it or not.

MICHAEL PERINO: When he started, at least, he had three-- it's such a quaint notion, right? You know? He had-- it's him, these three people he's just hired, and they go in and they investigate and the world changes, basically, as far as Wall Street is concerned.

BILL MOYERS: But, point taken. If you were asked by this commission what are the questions that you think we should try to answer, what would your first question be? Simon?

SIMON JOHNSON: I think I would want to understand whether the laws were broken in the predatory, potentially predatory practices, around the way the consumers were treated in the housing market and in the credit card market recently. And if it's a case that no laws were broken, then that investigation to answer that question will reveal a lot of unethical behavior or a lot of behavior that we should be uncomfortable with and that will then lead I think to sensible changes in the laws. So, really digging into the micro-details of who was taking advantage of, who was misled, how do you get, you know, retired people into some of these esoteric financial products, and of course the selling of savings products also. We know that local governments, for example, were enticed into schemes that they really didn't understand. And, of course, it may turn out in investigation that the banks didn't understand it either. But, going through that level of detail and showing, you know, who made what kind of mistake, who was misled by whom. Who misled themselves? That, I think, is going to give you the factual basis on what you could construct a lot of new, sensible laws.

MICHAEL PERINO: I think that is a very good first question to ask. I think I'd add to it, the role that the credit rating agencies played in this entire process. Particularly in the creation of these derivative instruments. It's an industry that I think is not well understood in Wall Street. I think there has been some reluctance to dig into exactly what's going on there. And that's something I think I'd want to take a hard look at.

SIMON JOHNSON: I would add on a proactive, going forward basis, ask the following question: Do we really need a banking industry that takes these kinds of risks? Professor Joe Stiglitz of Columbia, for example--

BILL MOYERS: Nobel Laureate.

SIMON JOHNSON: Nobel Laureate is proposing- proposed to the Joint Economic Committee in his testimony on Tuesday think about splitting financial services into two parts: a public utility model, which is where you put your money and where-- that's what handles payments. That doesn't take any risks. It runs like a utility. It's low risk, low return from an investor point of view. It's boring.

In fact Paul Krugman has a great line on this. Make banking boring again. And they're talking about that part of banking. But, at the same time, both Professor Stiglitz and Professor Krugman would emphasize, and I would absolutely want to second, that you need some risk takers. And you need some people to provide money to risk takers. And the good news is we have a very strong entrepreneurial sector in this economy. We have venture capital in this economy. And they've got a great attitude and maybe sometimes things go wrong. We have bubbles there. But, the dot com bubble and the bursting of that didn't do anything like the kind of damage that this debt finance bubble has done. Venture capital is about equity. Wall Street has been much more about debt.

And we need to be able to-- we need those entrepreneurs also to be able to go public. So, we need ability to raise capital, bring in investors, go public and sell your shares to people. That doesn't have to be part of the banking system. Boring banks and risk taking with the risk full disclosed. And maybe we have to work, you know, and that was the core idea as I understand it of the 1930's. A lot more disclosure around what are you selling exactly. And what are the problems-- potential problems and what are the conflicts of interest at stake.

More disclosure I would guess on the securities side. That's where you take the risk. We want the risks, this is an economy based and society based on risk taking. But, our banks don't have to be risk takers. In fact, it turns out, they don't understand the first thing about risk.

MICHAEL PERINO: Yeah, this is an important point to keep in mind. If you look back at that period in the 1930's, you see banks taking on these kinds of market risks, and they're doing it with leverage. The same thing we're really seeing today. But, the point you made about markets and entrepreneurial spirit is one that we have to keep in mind in all of this. Back in the beginning of the Roosevelt Administration, there were two sets of advisors.

One set of advisors basically said, we need to have a command and control economy. We need to have a regulator in Washington who decides which portion of the economy is going to get capital. And then within that portion of the economy, which are the right companies to get which amount of capital? The other group said, no, we can't be in that business. The business we need to be in is we need to let the market work to the extent that it can. And the way we're going to let the market work is we're going to tell people exactly what the material things they need to know are before they buy or sell these securities. And then we let them decide.

And, you know, this is a point that President Obama made recently when he was in Europe. He said, We can't forget the fact that, you know, markets do good things. And they're useful things to have. Which doesn't mean they're completely unregulated. But, it doesn't mean we abandon them either.

SIMON JOHNSON: The one thing, though, I think we've learned since the 1920's just to add onto this very nice distinction Michael's making, is that anything gets too big, if it gets too big relative to the economy it's dangerous. Too big to fail. Thomas Hoenig who's the president of the Kansas City Fed said on Tuesday again--

BILL MOYERS: And a fairly conservative guy, right?

SIMON JOHNSON: I think so--

BILL MOYERS: I mean, he--

SIMON JOHNSON: That's my understanding of where he's coming from. He said to the Joint Economic Committee something-- my recollection of what he said which I think is absolutely brilliant and really hits the nail on the head, is any time you have financial institutions, banks that are-- or also could be securities firms, that are too big fail, you're going to get oligarchs. He actually used the word oligarch which senior fed officials do not usually use that word. I think his point is a very good one, which is sensible regulation of behavior is what we got from the 1930's, and it was good.

BILL MOYERS: Sensible?

MICHAEL PERINO: Regulation of behavior. So, you're saying you have to disclose. You have to-- you musn't have the following conflicts of interest. If you had these other conflicts, you've got to tell people about them. So, your behavior is regulated. That's a fundamental approach to this. But, the problem with any kind of regulation, Bill is the regulators get captured, right? And that's a very-- that, by the way, is a very odd idea which comes in from the Chicago School of economics, which is, you know, the right and the left and the center are agreeing a lot on this issue here, which is very, very interesting.


SIMON JOHNSON: Well, I think that everyone's worried about power. And everyone's worried about, you know, disproportion of power in the hands of a relatively few financial big players, or maybe let's call them oligarchs. Which was the issue and that's what I think Mr. Pecora was really highlighting in the early 1930's, and I think that's what we've come back to today. And if you focus on that and worry about it, you can worry about it from a left point of view. You say, "Well, this is just unfair and it obviously affects distribution of power and income." You can worry about it from a right point of view because it leads to corporate welfare. Actually, I think everyone's opposed to corporate welfare when it's these big players.

Remember, Bill, the big banks have got massive amounts of money. Your money. My money. And our children's money, okay? There's future taxes. We're loading up on debt to bail them out to keep them with the same kind of compensation schemes, the same kind of approach to bonuses and the same wrongheaded approach to risk taking. And that issue, that central issue is something that both, that the right, and the left, and the center are not comfortable with. Particularly if they're not comfortable with big finance. Obviously, they do have some supporters.

BILL MOYERS: Even as we speak, some Wall Street sources and some conservative commentators are saying that Obama's got state control of the banks now and that he's dictator or he's a king. One column in the "Wall Street Journal" kept referring to him over and over again as a king because he is doing whatever it is he's doing in regard to debt.

SIMON JOHNSON: I think the banks have control of the state, Bill. Not the state control of the bank. If the state had control of the banks, the banks wouldn't be able to turn around and say, no on your Chrysler deal and no way on modifying the rules about mortgages and allowing bankruptcy judges to modify mortgages in bankruptcy. These are two hot issues this week. The banks are saying no to the government.

BILL MOYERS: Here are these people receiving billions of dollars in taxpayer money who are now raising fees on credit cards, who are resisting any more regulation of credit card interest rates, who are, you know, saying, "We're going to get out of the game if you insist that we do something about executive compensation." What is going there as you see it? Both of you.

SIMON JOHNSON: I think there's an arrogance of power. They think they won, Bill.

BILL MOYERS: Even now--

SIMON JOHNSON: And actually they're pretty confident they won. And I think probably at this point, they have won. They got the bailout. They got the money they needed to stay in business. They got a vast line of credit from the taxpayer, both the top money, which gets a lot of attention. But, also the guarantees they have on their debts from the FDIC, which really helps them borrow more cheaply. And the money that they get that they can borrow from the Federal Reserve when they need it, all right?

So, they got everything they wanted. They came-- a couple of players got knocked out. The guys who remain are more powerful, okay? And their position is, "Look, if you want a recovery, if you want get your economy back, you've got to be nice to us." And I'm afraid that the government has blinked and then--

BILL MOYERS: So, they're not hearing any of this clamor? This rage? They're not hearing this--

MICHAEL PERINO: I think they are hearing it. I don't think it's reached the level that it reached, anywhere the level it reached in that period that we've been talking about in the 1930's. So, maybe it isn't quite strong enough yet.

SIMON JOHNSON: To be honest, Bill, you know I think that these hearings as I understand it were 1932, 1933, right? So, you're three years, two or three years into a big decline, mass unemployment and so on. You laid it out at the beginning. We're not there yet. And if the economy-- I hope that we don't get there. If the economy turns around, if we-- even if we sort of get a recovery-- it's not completely convincing. But, we sort of feel like we're not falling, we're not having the massive unemployment of the '20s and '30s, the pressure will come off the banks.

They know this. This is why they think they've won. They faced down the dangers, and they've gone through this difficult phase. And they came through it stronger than ever. And so, the hearings at-- you know, if you held the hearings in '29 or '30, I would guess they wouldn't have been as pointed and would not have really galvanized opinion in the same way.

MICHAEL PERINO: Part of the effect, the long-term, long-lasting effect of any sort of hearings is going to be contingent on factors that are completely behind the control of the people who are running them. And if Pecora's hearings had happened a year earlier, if unemployment wasn't 25 percent, if banks weren't failing and, you know, this is the days before FDIC insurance. This is serious extremis that we are nowhere near yet in our economy. And it's the combination of the revelations on the hearing with that extremity in the economy that created the impetus for reform.

SIMON JOHNSON: Let's say the economy bottoms out and we start to get a recovery, which is certainly what I hope will happen. Although, I think the recovery will be sluggish. You still have to ask the question about risks in the future, right? We've learned that the financial structure that we allowed to develop after roughly 1980 is very dangerous for us as taxpayers. So, privately-held debt, government debt held by private citizens, okay, was about 40 percent of GDP when we started this fiasco, this crisis. When it really, really hit us. I think in about five years when you go through all the things that we see on the table and you talk to the administration officials about what they're going to do in various contingencies, my very personal estimate is we'll end up with 80 percent of our debt as GDP. We will double our debt to GDP. Now, on that basis--

BILL MOYERS: And what's the consequence of that?

SIMON JOHNSON: The consequence of that is high taxes for me and for you and for our children and grandchildren, okay? It's a big redistribution that we've participated in of the kind we often see in emerging markets in middle income countries like in Argentina or Brazil or a Korea when there's a crisis. But, not something we often see in the United States, okay?

So, if you look at it in those terms and say, Okay, we didn't repeat the Great Depression. Let's hope. But, we did take on this massive additional tax burden. Are we willing to really go forward with the same kind of financial structure that brought us to this point? Or should we try and find a way to take the risks out to, for example, go with Professor Stiglitz's public utility model, right? So, make banking boring and put the risk-- make the risk takers in a-- you know, put a wall between them and the risk takers. And keep the risk takers small relative to the economy so when they fail, when they do go out of business, they can actually go bankrupt as opposed to getting these kinds of bailouts. It the risks that we've created that we really have to address going forward.

BILL MOYERS: Do you think we can get that kind of remaking of the economic-- the financial system that Simon just said we should hope for?

MICHAEL PERINO: I think it's more difficult. Even if you look at more recent history. Look back to 2000, 2001. The dot-com bubble had burst. The stock market had dropped precipitously and then in the fall of 2001, the stories about Enron came out. And right after Enron there was some reform legislation that started to move forward in Congress and it basically went nowhere. Nothing happened until the other shoe dropped. And the other shoe was WorldCom. And it was only after WorldCom that Sarbanes-Oxley was passed.

BILL MOYERS: The paradox to me is that here is this son of a Sicilian shoemaker who actually saved American capitalism from itself. You're describing a situation where without some reform of the kind you've been talking about, the tendency toward oligarchy or monopoly or arrogance of power as you say could be building even as we speak now. So, do you think we need a Ferdinand Pecora right now?

SIMON JOHNSON: Well, I'm an immigrant, Bill. So, I like the idea that new people come to the United States and they challenge authority, and they become part of the system but, in a very healthy, renovating, rejuvenating kind of way. I'm not insisting that the hearings be run by an immigrant. But, I think that the one advantage we have because it's such a big country, because we have such an open fluid social structure is there are lots of people who are coming forward, very talented professionals, who can take this on. If you give them the right political backing.

BILL MOYERS: The Pecora Hearings as you indicated already produced a narrative, a story. Greed and scandal and privilege and exploitation of ordinary people. I mean, one of the banks went sort of door to door selling securities, right?

MICHAEL PERINO: They did. Yeah, one of the reasons that Mitchell, the President of National City was in many ways the banker of his day, much so than Morgan even though that Morgan still had the mystique was he fundamentally changed the way Wall Street worked. He went there and his view was that we can sell securities the same way we sell vacuum cleaners or groceries. He created a large retail network. He had door-to-door salesmen to sell securities. And he focused for the first time for Wall Street on the middleclass. This was the new market out there for the things that Wall Street was selling.

SIMON JOHNSON: Let me put it this way, Bill, 150 years ago, I could have stood outside your studio on the street of New York and sold anything in a bottle and called it a medicine, okay? Quack medicine is what it was called. And it could have been, you know, good for you or bad offer you or it could have killed you. And it would-- I could have done it. I would have done it, right? People did it.

Now that's illegal. You go to prison. There are serious criminal penalties for selling things that you claim are medicine that are-- that are not medicine. And obviously we argue even about very fine distinctions of how good is this for you under what circumstances? The same transformation will take place, I am sure, over the next 150 years for financial products. I'd like to bring it forward a little bit and have it happen in the next couple of years.


SIMON JOHNSON: I think that change of view of, you know, to what extent can the consumer decide for himself or herself, to what extent do you need protection, guidance, very strong labels on products? I think that we've changed many ways we think about things as we modernized our economy looking over the past century. But the financial products, not so much.

MICHAEL PERINO: If you look back at the history, the first securities regulations were not federal regulation but state regulation. They were called the "blue sky laws." And the "blue sky laws" were exactly the model you're talking about. The "blue sky laws" were what were called merit regulation. And the idea behind merit regulation is that there will be a state regulator who will look at the quality of these securities and will determine whether they are appropriate or not to sell to investors in that state.

It's a model that federal securities regulation rejected because the view was, you know, do we really want to be in a position where some bureaucrat is deciding what's an appropriate risk for an investor to take? Or are we better off with the progressive model, a model that Brandeis wrote about in his famous book called "Other People's Money" where he says, No, we don't need to be regulating the substance of this. What we need to rely on, in his phrase, is sunlight, electric light, he says, is the best policeman.

SIMON JOHNSON: Another thing we've learned about Wall Street and the way it works is they didn't understand that their own risks. David Brooks wrote a column in the New York Times where he criticized me. And he said that, you know, thinking of these people as all-powerful oligarchs is wrong. The issue is not their power, the issue was just they were stupid, right? They didn't understand what they were doing to ruin their own business.

Now, that's kind of an interesting defense to use. But I think if you apply it to this and you take the point, take with Michael's earlier point about how Wall Street has become more complex, right? What if it's become too complex for the Wall Street titans themselves to control even within their own organizations? Maybe these banks, seriously, became too big to manage and that's why they failed.

BILL MOYERS: You wrote on your new blog this week -- that's the one with the Washington Post-- that we have to get tough on bankers, bring in the antitrust division, and enforce the criminal penalties for bad behavior by executives. Is that where the debate is going?

SIMON JOHNSON: That's my read of the situation. Obviously that's my position. That's what I'm pushing for. But on this panel before the Joint Economic Committee on Tuesday was Joe Stiglitz, who I think is usually to the left of me; Mr. Thomas Hoenig who I think is usually to the right of me on most issues. And literally this is how we were sitting at the table, the right, center, and left. We were all agreeing on more or less this kind of formulation. I could completely live with what Mr. Hoenig is proposing in terms of the way you approach insolvent financial institutions, following the model used for Continental Illinois in the 1980's, which is called negotiated conservatorship using our existing legal frameworks, okay?

I could also completely live with what Joe Stiglitz was proposing as a public utility model for banking. And I don't know if the two of them would agree on everything. But there's a lot-- there was an enormous amount of common ground. And where is, Bill, where is the strong intellectual voice, the arguments on the table not behind closed doors? Where is the arguments on the table for why we should really keep this financial structure the way it is? Lloyd Blankfein wrote in the "Financial Times" a couple of months ago--

BILL MOYERS: Head of Goldman Sachs…

SIMON JOHNSON: Head of Goldman Sachs. He said the way Wall Street is structured, the way finance works in the United States today is an essential catalyst of risk, okay? Now, I'm in favor of risk. I'm a professor of entrepreneurship. I work with entrepreneurs, I work with venture capital. I was just at a big conference where all these people came together. And they think he's wrong. They think that the way big finance is operated has actually been a problem. In the good times, it was a problem.

Now they've created massive tax burdens which, of course, are going to fall disproportionately on people who have more money. So the entrepreneur-- people who built successful companies are going to face bigger taxes to pay off the problems created by the banks. They don't think Wall Street titans are essentially catalysts of risk. They, the entrepreneurs and the venture capitalists, think that these Wall Street titans are part of the problem, not at all part of the solution.

BILL MOYERS: Well, you have written that American financiers played a central role in creating this crisis, making ever-larger gambles with the implicit backing of the government until the inevitable collapse. That sounds a lot like the 1930s, doesn't it?

MICHAEL PERINO: You can't help but hear the echoes from back then, now. It's certainly the case. I want to go back to a point you made before and Simon's point about criminal enforcement.

There's no question that when we find criminal wrongdoing we need to vigorously prosecute it. There's absolutely no doubt about that. Criminal enforcement gets people's attention. If you want to create deterrents for that kind of activity, then that's the way to do it.

On the other hand, we need to recognize that not everything that-- not every behavior that was inappropriate, that was excessive risk taking, that was imprudent amounts to criminal conduct. And we have to recognize, have some humility for, the role that those kinds of criminal statutes can play in preventing these kinds of excesses.

SIMON JOHNSON: I think that's exactly right. And what I would say, Bill, is having a commission, having independent investigation, really drilling down is going to show you perhaps some things that were criminal. I'm not saying very many. But a lot of things that, you know, when you shine this light on them, a very, very bright light, they look inappropriate, unethical, or at least things we're not comfortable with going forward.

And then there's another set of issues which may be totally ethical. Perhaps you don't have a problem with them from a legal, moral point of view. But as an economist I'm going to come in and say, you know, this creates danger for the system. This is where the origin of "you're too big to fail" is.

And you got to remember the dynamics. Maybe we'll be-- maybe we can, you know, rejigger things a little bit so they'll be okay, two or three years, we'll be comfortable. But remember where this goes. Remember Mr. Hoenig's point. Anything that's too big to fail is going to lead to oligarchs. Right? Maybe they're not oligarchs right away. But they're going to become too powerful because a big difference from the '20s is what happened in the '30s.

We create an FDIC. There is a government guarantee implicitly available to many aspects of banking. And we've actually extended that massively in the past two years under severe duress. So that makes the "too big to fail" and "too connected with government to fail" even more of a problem going forward.

BILL MOYERS: Can these hearings go anywhere if President Obama remains passive about them and if people like Larry Summers, who is very close to the financial industry, and Tim Geithner, who came out of that world, can it-- can they really do any good unless there's a strong and vigorous push from these people?

MICHAEL PERINO: Yeah, I think there's got to be strong political support behind these hearings because if they're doing their job, people are going to be unhappy. And that unhappiness is going to get voiced back in Washington. And unless the political support is there it's going to be very easy to wind things up without doing much.

SIMON JOHNSON: I think President Obama is the key to the whole situation. I voted for him. I believe he has exactly the right instincts in this kind of situation. Hasn't done it yet, it's trueBut I think across other policies, you can see the kind of attitude that you could bring to bear now on finance. I think that the President has to insist on the details being a lot of openness, a lot of-- you know, the modern equivalent of the telegraph wires being put in, I suppose, is live blogging. I think what you need is a sensible, responsible process, not a demonization, not a witch hunt. That I think would be unproductive.


SIMON JOHNSON: But there are many really important questions that can be examined in a responsible manner. I think you want to do this expeditiously. And you want to have a general counsel like Mr. Pecora, who really can ask the questions and follow through. And, of course, you've got to have subpoena power. If you don't have subpoena power, no one's going to take you seriously.

BILL MOYERS: In the memoir he published in 1939, Ferdinand Pecora himself wrote that as soon as business recovered, and I'm quoting, "The titans of finance developed, once again, an arrogant self-confidence and a dogmatic assurance that any attempt to restrain their own activities must inevitably mean the ruin of the country." Are we doomed never to learn?

SIMON JOHNSON: No. I think this country's good at learning and good at moving on. We will cycle, okay, honestly. Even in my best case, when we break up the power of the big finance and we make it all small, they'll find a way to come back. Somebody will make a finance company grow. And maybe they'll buy the name Morgan on the way up, by the way.

And maybe we'll think, "Oh, that's good. They've figured this one out," and we'll have the-- we'll have a crash again. My point, Bill, is, don't do that every five years. Do it every, you know, at most every 50 years. And when it happens next time, I don't want 40 percent of GDP loaded onto our national debt. Four percent of GDP would be plenty, okay?

In Europe, this problem exists. It's much worse. In Europe-- if that's where we're going, if we really pick up on what, you know, follow through on what Mr. Pecora's saying and if we start to have a bit of economic recovery and we ignore what happened, say, "Oh, let's just go about what we're doing," we'll end up with what the Europeans have. And their banks, seriously, right now, are too big to save, let alone too big to fail.

MICHAEL PERINO: We have to be humble about what law can and cannot accomplish. There is no magic bullet out there. We could have the most intensive hearings in the world find out the precise causes of all of the problems, enact whatever reforms that we see are the ones to enact, it's not going to prevent the next bubble. You can't legislate against those kinds of-- Keynes called it the animals spirits in the marketplace. But you can lessen them.

SIMON JOHNSON: And you can push the bubble to being about equity and to being-- people understand the risk of equity. They make money, they lose money on an equity basis. If it's debt, which is what this one's about, right, and about default, it spreads around the world in an incredibly scary, synchronized manner, you're going to get much bigger costs out of them.

BILL MOYERS: Are you scared right now?

SIMON JOHNSON: Yes, I'm scared.


SIMON JOHNSON: But in a good way. I'm scared that we'll stop worrying about this problem, that we'll move on, that we will-- you know, we're having a moment of relative clarity right now where a lot of people are agreeing. But these things pass. The baseball season is upon us.

I mean, there are many new distractions. We'll soon be on our summer vacations. These moments pass Bill. And unless they're taken up in a responsible, diligent manner by the right people and at the very top, then we'll lose the opportunity to remove the risks for the future.


MICHAEL PERINO: I'm not scared yet. I agree, though, that there's an evanescence to these moments in politics when actual change can happen. And you may be right. We may have already slipped past the time when anything could change.

BILL MOYERS: So what would Ferdinand say?

MICHAEL PERINO: Ferdinand closed that same book that you quoted from with this phrase: he said, laws aren't a panacea and they're not self-executing.

BILL MOYERS: Michael Perino and Simon Johnson, thank you very much for this very interesting discussion. I appreciate your being on the Journal.



BILL MOYERS: While the groundswell calling for new "Pecora hearings" has indeed reached Washington congress hasn't made up its mind yet as to how independent a commission should be. Will members of Congress control the hearings, or outside experts and citizens? The problem is for the last twenty years the financial services industry has been the largest campaign contributor in every federal election cycle.

So we would do well to remember the tale, perhaps apocryphal but containing a powerful truth, of the Great Wall of China. Fifty- five hundred miles long and twenty-five feet tall. Too high to climb over, too thick to break through and too long to go around, or so its builders thought. And in its first century of the Wall's existence, China was successfully breached three times by invaders, they didn't have to break through, climb over or go around. They simply were waved through the gates by obliging watchmen.

So, as this debate on the investigation in Washington moves forward, let's keep an eye on the gatekeepers. That's it for the JOURNAL.

STEVE MEACHAM: This is a white collar crime scene

BILL MOYERS: Next week, working people are fighting to keep a roof over their heads and to hold big banks accountable.

UNNAMMED WOMAN: We need to have our neighbors to be able to stay in their homes and to be able to live here and to keep it the thriving community that we've worked so hard to bring it to be.

STEVE MEACHAM: When a person comes to their first rally it is a very scary thing to kind of raise your voice in a public setting like that. It's very transformative. People find their voice that way. And I've seen it happen a lot of times that people in moments of struggle become different people and they become better people.

MELONIE GRIFFITHS: It seems like just yesterday that we stood in front of my property, almost in the same way, a lot of the same people, defending the same cause.

Watch the video

IMf Bond sales needed to fund stimulus

The move, announced after the IMF's annual spring meeting, indicates the world's leading economies are having difficulty following through on a pledge made in London on April 2 to boost an IMF emergency-lending facility $500 billion. The bonds will contribute toward that goal, but will provide shorter-term financing than the loans that Japan, the European Union, and the United States have promised.

The Group of 20, which includes wealthy and developing countries, pledged in London to provide a total of $1.1 trillion to the IMF and other international lending institutions.

"The major emerging markets have made it clear that they . . . will no longer be pushed around by the advanced economies," said Eswar Prasad, an economics professor at Cornell University and former IMF official. While "the net effect" on IMF resources of loans or bond sales is the same, Prasad said, "the symbolic difference between these two types of contributions is huge."

Meanwhile, more than 100 demonstrators angered by how world leaders have handled the economic crisis took on police outside the headquarters of the IMF and World Bank. Authorities used batons and pepper spray when activists tried to march onto a prohibited street, and several people were pushed to the ground by police. The protesters swarmed officers, and police had to respond, said D.C. Police Capt. Jeffrey Harold.

Treasury Secretary Timothy Geithner yesterday urged world finance officials to pony up more money to meet the $500 billion goal. Progress toward that target "must be an important outcome of these meetings," he said.

President Obama is seeking congressional approval for up to $100 billion, matching commitments for the same amount made by Japan and the European Union. Canada and Switzerland have pledged $10 billion, and Norway about $4.5 billion. But the full $500 billion has not yet been raised.

A Japanese official said Friday that countries would meet again with the hope of closing the gap before the end of June.

The additional funds reflect the growing importance of the IMF in dealing with the global downturn, the worst the world economy has experienced in six decades. Just a year ago, the 185-member organization was seen as increasingly irrelevant as the economies of many developing countries boomed.

The additional money could aid countries in Latin America, Eastern Europe, and elsewhere that are reeling from sharp drops in exports and foreign investment. Many poor countries and nongovernmental organizations have long criticized the IMF for failing to give sufficient voice to emerging economies.

Geithner urged that developing countries be given a greater voice. He called for reducing the number of seats on the IMF's governing board to 20 from 24 over the next three years, while maintaining the same number of seats for developing countries. The IMF "needs a more representative, responsive, and accountable governance structure," he said.


Surge in secondary offers threatens stocks' advance

NEW YORK (Reuters) - Companies seeking to repair their balance sheets are swamping investors with tens of billions of dollars in equity offerings that threaten to put a lid on recent gains in global stock markets.

Since January 1, investors have been tapped for $109 billion worldwide in secondary share sales -- or 37 percent more than at this point last year, according to Thomson Reuters data.

Analysts expect that pace to continue this year as companies, particularly banks and other financial firms, desperately seek to shore up their capital after the destruction wrought by the financial crisis.

The International Monetary Fund estimated on Tuesday that banks would need to raise $875 billion of fresh capital.

Companies may find a cool reception.

"It will be dilutive for common stockholders no matter what," said Matt McCormick, a portfolio manager with Bahl & Gaynor Investment Counsel in Cincinnati.

"'Stock by stock' dilution will likely have a cumulative impact on the broad market," McCormick added.

Any slowing of the market could be exacerbated if banks sell new shares because the government forces them to raise money, said Marc Pado, U.S. market strategist with Cantor Fitzgerald.

"The secondaries could slow the market in the mid-term, especially if the money is raised because banks failed their stress test," Pado said, referring to various simulations being conducted by the U.S. government to see how the 19 largest U.S. banks would hold up if the recession persisted and possibly deepened.

Under the best circumstances, a secondary issuance can depress a stock.

Last week, shares of Goldman Sachs Group (GS.N) fell nearly 12 percent a day after the investment bank said it would sell shares to raise $5 billion, in part to reimburse the U.S. government for money received through the Troubled Asset Relief Program.


The results of the stress tests, set to be made public May 4, will likely determine the flow of secondary offerings.

"It'll only be after the results of the banks' stress tests are public that we may see some further recapitalization in the financial industry -- either as a necessity after the stress tests or as some look to repay TARP," said Jeff Bunzel, managing director for equity capital markets at Credit Suisse.

Banks deemed to have an insufficient capital cushion might have little choice but to seek more money from the government or sell additional shares to investors, who may only snap up shares if they are priced low.

"We think there's no hurry to jump into these offerings," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion.

And the going could be particularly tough for banks that fail their stress test.

"If you fail that stress test, no one is going to touch you," said Brad Hintz, a banking analyst with Sanford C. Bernstein & Co. After the collapse of banking stocks in the last year, many investors are wary, he said.

Banks aren't alone in trying to replenish their coffers.

While the largest secondary this year was a $19.4 billion deal by UK-based bank HSBC Holdings (HSBA.L), companies in other sectors have sold billions of dollars in new shares too.

For example, Swiss metals concern Xstrata PLC (XTA.L) sold $5.8 billion of new shares, and Australian conglomerate Wesfarmers Ltd (WES.AX) raised $3 billion in a secondary offering.

A major challenge to the market's recovery could come from the number of shares some companies, especially banks, will need to sell to raise money.

That resulting dilution could prompt short sellers to pummel the shares even more.

"If you are a short seller and think someone will do a dilutive secondary, why wouldn't you short them," McCormick said.

Either way, banks in particular may have to settle for lower prices.

"There's more money that needs to be raised than people expect, and the terms may not be as favorable as the banks would like," McCormick said.

(Additional reporting by Jennifer Ablan; Editing by Steve Orlofsky)


26 April 2009

Gold - The Yuan goes Global Consequences! by Julian D. W. Phillips

by Julian D. W. Phillips

For years now we have been warning of the decline of the $ as the globe's reserve currency. The threat is not so much that the monetary policies of the U.S. are cheapening the worth of the $, but that these are pressing so many other nations to search for ways to avoid the US $ in international dealings. China has now taken a momentous, structurally adjusting step to change matters in their favor.

The bulk of international trade transactions have nothing to do with the U.S. except through the use of the $ to denominate their trade. Approximately 75% of global trade is denominated in the U.S. $ in this way. But the volatility of the U.S. $ has distorted and damaged, this aspect of global trade. Thus has been created an ideal environment for gold to rise as its importance in the changing global monetary system grows again.

Having been cornered by the sheer percentage of U.S. $s in their foreign exchange reserves [every nation has this problem] the Chinese are, at last, moving to make their own currency a reserve currency.

The credit crunch and policies taken to rectify it, have triggered these actions by the Chinese. Despite the fact that the € is an up and coming global reserve currency that has not threatened the almost imperial dominance of the $, the arrival of the Yuan as a global currency will reduce the role of the U.S. $ in global trade significantly. We believe that the recent moves to introduce the Yuan across the globe will shrink the use of the $ in global trade. With the U.S. in decline, will come a fragmentation of world monetary power. In such a climate, gold will be attractive again, as a long-term investment, as a protection against the uncertainties and strains this will cause. It will also become a more vital hedge against local currency volatility. As the Yuan appreciates against the U.S.$ and other currencies as a consequence of these changes even the Chinese will find gold more attractive as part of the 'basket' in which they hold foreign currencies in their reserves and personal portfolios. Will this bring about the ban on Chinese exports of gold and sale of any such exports to the central bank? It is more than probable at some point in time!

So where will all these dollars go? They will have to go home to where they will add to the massive recent issues of dollars and will precipitate inflation dramatically, once the process is really underway. Bear in mind that it is not only the Chinese who will lower the use of the $, all nations with an overexposure to the $ in their reserves will leap at the chance to reduce this percentage and introduce the Yuan to these reserves as a replacement to the $. It is a major structural move that is part of the process of $ de-colonization. It is likely that even central banks will appreciate gold in their reserves again. This will result in a cessation of "Official" gold sales and the accumulation of gold in central bank reserves in an increasing number of countries.

Actions taken already to make the Yuan global

China has agreed a 70 billion Renminbi [Yuan] currency swap with Argentina that will allow it to receive Renminbi instead of U.S. dollars for its exports to the Latin American country.

Beijing has signed 650 billion Renminbi ($95 billion, €72 billion) worth of deals since December with Malaysia, South Korea, Hong Kong, Belarus, Indonesia. This, and now Argentina, in an attempt to unblock trade financing that has been severely curtailed by the crisis.

Now, the Chinese government has permitted five major trading cities to use the Yuan in overseas trade settlement. This is a very important step towards the establishment of the Yuan as a global and reserve currency.

Shanghai, Guangzhou [The old Canton], Shenzhen, Dongguan, and Zhuhai, are the cities that have been designated for the purpose. Concentrated in the South the Pearl River Delta cities are the spearhead of Chinese exports and already developed to the extent that even the most high tech of products is rapidly approaching international standards.


The Chinese government has watched with deep concern the prospect of it export surpluses [held in the U.S. $] move to the point where their buying power will drop heavily. On the horizon sits the prospect of the U.S. $ being used in as one of four or five global reserve currencies and not as the dominant one! Understandably then, the Chinese government is taking steps now to reduce the risk from exchange rate volatility and the prospect of the U.S.$'s buying power falling. With China's growth to a global economic driver, these moves had to come in time and that time is now.

Rising Yuan?

Consistent with these moves will, eventually, come the 'floating' of the Yuan, so that a break in the current managed float of the Yuan tied to the U.S. $ will allow a separation of the Yuan from the $. This will only happen when the Chinese are convinced that the move will not damage the international competitiveness of China. The hoped-for stability that this brings with it will allow Chinese international trade to improve and will cause an appreciation in the international value of the Yuan. The central bank of China is likely to use this appreciation as an opportunity to diversify away from the U.S. $, export the Yuan and bring in currencies that accurately reflect the spread of international trade the Chinese have at present. This would reflect the decades-long Japanese policies of exporting goods when the Yen is cheap and exporting capital when the Yen becomes expensive.

The Impact on Gold

While market attention has been riveted on the price of gold a more important feature of the gold market has caused gold to evolve as money, in increasingly difficult times. The concerns of the Chinese are the concerns of all investors particularly U.S. investors the main buyers of gold shares in the gold Exchange Traded Funds. Consequently, this has broadened the base and improved the quality of gold investors worldwide. While the jewelry trade has retreated from gold and scrap sales have supported the supply of gold, the time is coming when supplies will just not be enough to satisfy investors and scrap sales peter out. The only way such investors will be deterred from buying then is a gold price rising out of their buying zones. This will certainly mean an over four-figure gold price.

The fears of investors are outside the gold market and concern exchange rates, massive tsunamis of dollars and other currencies being printed to shore up the present system in the grips of a credit crunch. Many investors are certain inflation is roaring towards us, to spring up, as deflation is overcome. The future of the monetary system is bleak and extreme.

Locally, gold is priced in home currencies and serves as a hedge against the dramatic moves of those currencies. Rapidly, investors are seeing that their price of gold doesn't reflect only the value of gold, but the value of their local currencies as well. Awareness of gold as a protection against weakening currencies is growing rapidly. This awareness is growing in central banks, sovereign wealth funds, institutions, amongst wealthy individuals and is now spreading to the man in the street. Once sound money backed by assets was forsaken in favor of man managed and created money, the disintegration of the banking system, the credit system and confidence in currencies and economies was inevitable. Only the credibility of and confidence in paper money made it work anyway. That now stands badly mauled with potentially worse to come. But most observers are not buying gold yet! Once they do, sit back and wonder!

As Greenspan wrote decades ago, "Without a gold standard in place, there is little to prevent governments indulging in wild credit creation. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process." We do not believe there will be a Gold Standard because it is anathema to all bankers, central bankers included. What is likely to happen is that a formula will be worked out where gold can be used to increase the credibility of and confidence in paper money again. Before that discussion comes to reality, individuals and institutions are and will turn to gold. When governments contemplate gold's use in money again, you can be sure they will want the metal to themselves and exclude Joe public!

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com.