Financial Crisis

[lannarebirth]

Prolonged periods of low interest rates can certainly create bubbles, but bubbles can correct and generally speaking the risk takers lick their wounds, regroup and move on to the next economic cycle. The systemic risk is not from low interest rates, it is from excessive leverage and the use of portfolio/security "insurance" products, such as CDS's. CDS's create significant imbalances as they are not marked to market daily, nor are counterparties required to show ability to pay out on claims. That's the recipe for a calamity.

Bubbles correcting. I seriously believe that without very concerted Government intervention the financial system would have totally collapsed 2 years ago. Do you think that Naam thinks that multilateral guarantees are the 'correct' solution for the Euro. He just wishes to avoid the potential of a financial implosion.

Marx is very interesting on his analysis of risk. He essentially believes that all financial products from loans to derivatives (obviously there werent deriviatives then) do not reduce risk but simply build it up over time into a bigger crisis. The Euro is a classic case where the stabilization of the currency has resulted in increased destabilizing of countries fundamentals. Rakesh Saxena very much traded on this philosophy.

But Bernanke and Greenspan have the belief that bubbles cannot be spotted or effectively intervened in but that the Fed needs to intervene to cushion the fall out. The average 12 year old can see there is no logic to that argument (and they have written papers on it.)

I think Herr Naam is a pragmatist and I think the various governments would like to give the apearance of remedial action. I also think they'd like the action to appear as incremental as possible to give the appearnce that subsequent actions are "stronger measures" and more likely to effect a solution. What I think both Marx and Herr Naam know is that it is time and relief from new economic pressures that are the only thing that will bring about improved conditions. I think tha's why he evaluates his investments based on ability to pay the coupon rather than how bad it might smell.

[Abrak]

And that is why I cant see where the satisfaction is these days.....on top of trying to

analyse which direction the market will go, it seems you also have to look behind every set of statistics,

every statement, every report for the hidden lie or catch. And when you say " market is never right, but it always wins "-

would it always win even when it would be against the strategic plans of government players ?

Midas you are going on about the plunge protection team again it doesnt exist - it is a figment of your imagination. Governments do intervene in markets occasionally and nearly always get taken advantage of. For instance the BoT intervenes to stop the baht appreciating because the costs of doing so are outweighed by the benefits of maintaining a competitive currency. Unfortunately these costs are other peoples benefits. When they defended the baht the fight was so unfair because the players simply emailed their forward positions to everyone before they arrived at their desks in the morning.

I think the ECB attaching credibility to the belief in Greece's fiscal policy moves is a classic triumph of hope over experience.

[flying]

Kind of a cool animated map.

http://cohort11.americanobserver.net/latoy...mediafinal.html

[midas]

And that is why I cant see where the satisfaction is these days.....on top of trying to

analyse which direction the market will go, it seems you also have to look behind every set of statistics,

every statement, every report for the hidden lie or catch. And when you say " market is never right, but it always wins "-

would it always win even when it would be against the strategic plans of government players ?

Midas you are going on about the plunge protection team again it doesnt exist - it is a figment of your imagination. Governments do intervene in markets occasionally and nearly always get taken advantage of. For instance the BoT intervenes to stop the baht appreciating because the costs of doing so are outweighed by the benefits of maintaining a competitive currency. Unfortunately these costs are other peoples benefits. When they defended the baht the fight was so unfair because the players simply emailed their forward positions to everyone before they arrived at their desks in the morning.

I think the ECB attaching credibility to the belief in Greece's fiscal policy moves is a classic triumph of hope over experience.

Actually Abrak I wasn't ( although I will continue to believe in the existence of the PPT ).

my reference to " strategic plans of government players " followed this I read on Karl Denninger this morning

Fed Changes Terms In Front of OpEx Again

http://www.market-ticker.org/archives/P2.html

[midas]

I understand some of the problems in Europe include " unreasonable " pension expectations.........and if they are based on these

kind of maths then there is a real flaw in the system ..............

How's this for an investment?

You pay a total of $124,000 into your pension plan and, upon retiring at age 49, you receive $3.3 million in pension payments and $500,000 in health care benefits. You receive $3.8 million in total on a $124,000 investment.

http://directorblue.blogspot.com/2010/02/n...nsionomics.html

[Abrak]

I understand some of the problems in Europe include " unreasonable " pension expectations.........and if they are based on these

kind of maths then there is a real flaw in the system ..............

How's this for an investment?

You pay a total of $124,000 into your pension plan and, upon retiring at age 49, you receive $3.3 million in pension payments and $500,000 in health care benefits. You receive $3.8 million in total on a $124,000 investment.

http://directorblue.blogspot.com/2010/02/n...nsionomics.html

As a general rule it is a myth that anything you pay into public pension fund today at all contributes to your pension in the future. By and large your pension fund contribution merely pays someone's pension today.

Historically pension liabilities have been off balance sheet contingent liabilities on the basis that Governments argue that they are under no obligation to pay them. The numbers are so large they cant pay them but I think if someone doesnt want a liability on their balance sheet because they have no obligation to pay them, it is fairly clear they have no intention of paying. So your US$124,000 will help to fund OAPs and if they let you retire at 49 and you get your US$3.8m you will have probably won it in a lottery. The Demographics in 20 years time cannot fund a decent pension scheme.

[Abrak]

I think Herr Naam is a pragmatist and I think the various governments would like to give the apearance of remedial action. I also think they'd like the action to appear as incremental as possible to give the appearnce that subsequent actions are "stronger measures" and more likely to effect a solution. What I think both Marx and Herr Naam know is that it is time and relief from new economic pressures that are the only thing that will bring about improved conditions. I think tha's why he evaluates his investments based on ability to pay the coupon rather than how bad it might smell.

Absolutely and I suspect he understands things far better than we do. My desire to play Lehman's again I agree would be difficult to implement and possibly disastrous. But essentially you are making a decision under duress simply to avoid disaster. Marx's point is that time is the big killer that the Euro will collapse underweight of its fundamental flaws that your is simply creating a bigger problem in the end. You have not solved and actually increased the probability of its long term destruction if not ensured it. A short term solution to stabilize has exacerbated the long term destabilization of the currency. You have not solved the crisis you are simply moving the date and making it bigger. Think of Maastricht, think of the concept and think the lowest cost result is bailing out Greece that has acted in such bad faith and so irresponsibly.

That is why I hate laissez faire economics (apart of being a concept with no rationale), there is no creative destruction solution here, just increasing moral hazard. (I realize this would not be a laissez faire solution but the way markets work is that they are just as likely to move away from equilibrium as towards it - the costs of a laissez faire solution may only be acceptable to Sokal.)

How a banker can argue that government controls over banks will make them less efficient while the Government has given them a blank cheque to act as irresponsibly as possible because they will bail them out is beyond me. We certainly need more Government regulation, unfortunately we also need better Governments.

And I do believe Naam is being a little economical with the truth when he says EU backed multilateral bonds wont cost you a penny. But (1) someone is going to have to pay Greek debt and now it is guaranteed I doubt they are going to contribute a penny simply borrow some more (2) this just another bailout of the banks which I admit would have happened on default (3) it doesnt seem logical that underwriting the least responsible is a no cost solution

[ding]

Check this out;

The Warning on PBS Frontline

The same team that let it all happen under Clinton is in charge of repairing the damage now under Obama. This film is about a whistleblower that tried to prevent the financial crisis and who was silenced. Of course the Bush team was fully in favor of it all. The topper is Greenspan admitting he was wrong his entire career to believe that the free market would solve everything. He's a crushed man acknowledging that his faith in Ayn Rand and her libertarian theories was absolutely wrong.

hahaha, are you serious ?

The Feds control of interest rates is not exactly what I would call a libertarian policy.

You may get something out of the flick. Those laughing may not have seen it. He decided he would be more effective in promulgating Ayn Rand styled libertarianism from the inside. He agreed to swallow his pride and follow the law. Those laughing need to see it and decide whether or not I should be embarrassed. The film expounds on the ignorance of arrogance.

So, how has that all that free market, laissez faire ideology worked out anyway? A couple bad apples, miscalcs maybe?

The number one cause of the financial crisis was GOVERNMENT CONTROL OF INTEREST RATES.

The number two cause of the financial crisis was GOVERNMENT SPONSORED MORTGAGE INSURANCE (FANNY MAE AND FREDDIE MAC.)

And the future currency crisis in the making will be caused GOVERNMENT INSURED BANK DEPOSITS (FDIC)

Does this look like free market, laissez faire ideology to you ? because it sure as hel_l doesn't look like it to me.

One by one;

1. Who sets interest rates?

2. Is that entity private or governmental?

[Gambles]

Heads you lose, tails we win.

http://www.guardian.co.uk/business/2010/feb/19/rbs-bonus-row

Loss-making Royal Bank of Scotland is braced for a row over City pay next week when it is expected to admit that its bonus pot for 22,000 investment bankers has reached £1.3bn – against last year's £1bn

How the fuc_k can they award a single quid in bonuses? Two years losing tens of BILLIONS and the bastards think that they deserve a BONUS! They should be repaying all the bonuses they have received in the past and have their pay slashed for another piss-poor result.

Brown should introduce legislation preventing any loss-making concern paying bonuses.

RBS owes BILLIONS to the UK tax payer.

I am utterly fed up with the continued arrogance of the bankers. And what on earth are all these TWENTY TWO THOUSAND employees doing? What do they do all day?

I just checked out the interest rates these guys offer.

http://www.rbsinternational.com/offshore/c...rest-rates.ashx

Depositors = 0.05%

Debtors = 19.24%

That should surely bring on a surge in debt deflation.

the industry is very like sports stars - they command colossal pay and can move to get higher pay at any time

the bonuses are often guaranteed for the duration of the contract so however bad the performance the banks still have to pay up

it's not so much RBS who are the problem as the entire system

and that stems from the distorted rewards that banks can make allowing them to pay distorted remuneration

and that's all because of the moral hazard of high leverage and excessive risk-taking

The problem is universal but is worse in New York and basically traces a nice neat line back to the creation of The Fed in 1913. Ever since then, in varying degrees, we've had this problem.

Fed today is worse than ever so problem is bigger than ever

[sokal]

The number one cause of the financial crisis was GOVERNMENT CONTROL OF INTEREST RATES.

The number two cause of the financial crisis was GOVERNMENT SPONSORED MORTGAGE INSURANCE (FANNY MAE AND FREDDIE MAC.)

And the future currency crisis in the making will be caused GOVERNMENT INSURED BANK DEPOSITS (FDIC)

Does this look like free market, laissez faire ideology to you ? because it sure as hel_l doesn't look like it to me.

This argument definitely swings both ways.

The number one reason for the financial crisis was that THERE WERE NO SUITABLE GOVERNMENT REGULATION OF THE BANKING SYSTEM.

The reason that China has escaped the worst ravages of the last two financial crises is BECAUSE THEY HAVE CAPITAL CONTROLS, CONTROL THEIR EXCHANGE RATE AND THEIR BANKING SYSTEM.

The reason Canada escaped without a serious banking crisis is that they have SENSIBLE COLLATERAL CONTROLS OVER LENDING BY BANKS.

Markets are essentially irrational and dumb driven by sentiment fear and greed. Even when you say that the problem is that interest rates are controlled by the Government and were too low for too long why would rational agents use this to borrow stupidly and lend stupidly apart from the fact they are stupid. Individual desires wants and needs do not aggregate to anything approaching a sensible equilibrium because to justify that the basic minimum assumption is that we act as totally independent agents which is ridiculous. I do sympathsize with the view that the crappy results you achieve with laissez faire are probably not much worse than we get with crappy Government intervention.

None of these exotic products could have ever existed without ultra low interest rates. There would have never been enough velocity in the housing market to support these products without government/Fed/Treasury controlled interest rates.

The Canadian housing market is as bloated and bubbled as any other place in the world thanks to low interest rates, the only difference is that this bubble is contained in a more traditional banking system. The fallout will eventually be the same when interest rates go up. Canada skipped round one of the financial crisis but it will not skip round 2 when interest rates go up.

Prolonged periods of low interest rates can certainly create bubbles, but bubbles can correct and generally speaking the risk takers lick their wounds, regroup and move on to the next economic cycle. The systemic risk is not from low interest rates, it is from excessive leverage and the use of portfolio/security "insurance" products, such as CDS's. CDS's create significant imbalances as they are not marked to market daily, nor are counterparties required to show ability to pay out on claims. That's the recipe for a calamity.

Excessive leverage is low interest rates, you cant have excessive leverage without low interest rates. Leverage gives more value to each unit of capital that you started with, so the less units of capital you need to pay the interest, the more units you have left over to speculate with.

[lannarebirth]

This argument definitely swings both ways.

The number one reason for the financial crisis was that THERE WERE NO SUITABLE GOVERNMENT REGULATION OF THE BANKING SYSTEM.

The reason that China has escaped the worst ravages of the last two financial crises is BECAUSE THEY HAVE CAPITAL CONTROLS, CONTROL THEIR EXCHANGE RATE AND THEIR BANKING SYSTEM.

The reason Canada escaped without a serious banking crisis is that they have SENSIBLE COLLATERAL CONTROLS OVER LENDING BY BANKS.

Markets are essentially irrational and dumb driven by sentiment fear and greed. Even when you say that the problem is that interest rates are controlled by the Government and were too low for too long why would rational agents use this to borrow stupidly and lend stupidly apart from the fact they are stupid. Individual desires wants and needs do not aggregate to anything approaching a sensible equilibrium because to justify that the basic minimum assumption is that we act as totally independent agents which is ridiculous. I do sympathsize with the view that the crappy results you achieve with laissez faire are probably not much worse than we get with crappy Government intervention.

None of these exotic products could have ever existed without ultra low interest rates. There would have never been enough velocity in the housing market to support these products without government/Fed/Treasury controlled interest rates.

The Canadian housing market is as bloated and bubbled as any other place in the world thanks to low interest rates, the only difference is that this bubble is contained in a more traditional banking system. The fallout will eventually be the same when interest rates go up. Canada skipped round one of the financial crisis but it will not skip round 2 when interest rates go up.

Prolonged periods of low interest rates can certainly create bubbles, but bubbles can correct and generally speaking the risk takers lick their wounds, regroup and move on to the next economic cycle. The systemic risk is not from low interest rates, it is from excessive leverage and the use of portfolio/security "insurance" products, such as CDS's. CDS's create significant imbalances as they are not marked to market daily, nor are counterparties required to show ability to pay out on claims. That's the recipe for a calamity.

Excessive leverage is low interest rates, you cant have excessive leverage without low interest rates. Leverage gives more value to each unit of capital that you started with, so the less units of capital you need to pay the interest, the more units you have left over to speculate with.

OK, I'll grant you that point, but it's still the ability to "hedge" that allows one to lay on the leverage. That is to say, to give the appearance of having hedged. There's no such thing as securities insurance that doesn't get marked to market in real time in the real world. That was the cause of the '87 crash and will be the cause of any subsequent crash where "insurance" products exist.

[sokal]

I think Herr Naam is a pragmatist and I think the various governments would like to give the apearance of remedial action. I also think they'd like the action to appear as incremental as possible to give the appearnce that subsequent actions are "stronger measures" and more likely to effect a solution. What I think both Marx and Herr Naam know is that it is time and relief from new economic pressures that are the only thing that will bring about improved conditions. I think tha's why he evaluates his investments based on ability to pay the coupon rather than how bad it might smell.

Absolutely and I suspect he understands things far better than we do. My desire to play Lehman's again I agree would be difficult to implement and possibly disastrous. But essentially you are making a decision under duress simply to avoid disaster. Marx's point is that time is the big killer that the Euro will collapse underweight of its fundamental flaws that your is simply creating a bigger problem in the end. You have not solved and actually increased the probability of its long term destruction if not ensured it. A short term solution to stabilize has exacerbated the long term destabilization of the currency. You have not solved the crisis you are simply moving the date and making it bigger. Think of Maastricht, think of the concept and think the lowest cost result is bailing out Greece that has acted in such bad faith and so irresponsibly.

That is why I hate laissez faire economics (apart of being a concept with no rationale), there is no creative destruction solution here, just increasing moral hazard. (I realize this would not be a laissez faire solution but the way markets work is that they are just as likely to move away from equilibrium as towards it - the costs of a laissez faire solution may only be acceptable to Sokal.)

How a banker can argue that government controls over banks will make them less efficient while the Government has given them a blank cheque to act as irresponsibly as possible because they will bail them out is beyond me. We certainly need more Government regulation, unfortunately we also need better Governments.

And I do believe Naam is being a little economical with the truth when he says EU backed multilateral bonds wont cost you a penny. But (1) someone is going to have to pay Greek debt and now it is guaranteed I doubt they are going to contribute a penny simply borrow some more (2) this just another bailout of the banks which I admit would have happened on default (3) it doesnt seem logical that underwriting the least responsible is a no cost solution

You cant have government and central bank (FED FANNY FREDDIE FDIC) run markets disguised as capitalism and free markets on the way up and then blame laissez faire economics when it all blows up.

People still don't see the moral hazard that the FDIC is, it is just as bad or worse then FANNY and FREDDIE yet nobody sees it coming. If it wasn't for the FDIC, interest rates would already be up. If their was no government guarantee on bank deposits then people would care allot more about which bank they had their money in. There would be consumer reports on banks and people would find out which bank was the best and the safest. If their was no FDIC then there would have already been some bank runs (like Northern Rock in the UK) and some money would have been pulled out of US treasuries and bonds which would have brought interest rates up. But thanks to the moral hazard and government run market, this is not happening yet when it does, who's fault is it of course ? The free market, capitalism, this makes my <deleted> blood boil.

[sokal]

1. Who sets interest rates?

2. Is that entity private or governmental?

1. The Federal Open Market Committee (FOMC), a component of the Federal Reserve System, is charged under United States law with overseeing the nation's open market operations.[1] It is the Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply.[2] It is the principal organ of United States national monetary policy.

2.Congressional oversight

Under the Federal Reserve Act, the Chairman of the Board of Governors of the Federal Reserve System must appear before Congressional hearings at least twice per year regarding “the efforts, activities, objectives and plans of the Board and the Federal Open Market Committee with respect to the conduct of monetary policy”. The statute requires that the Chairman appear before the House Committee on Banking and Financial Services in February and July of odd numbered years, and before the Senate Committee on Banking, Housing, and Urban Affairs in February and July of even numbered years.

[lannarebirth]

I think Herr Naam is a pragmatist and I think the various governments would like to give the apearance of remedial action. I also think they'd like the action to appear as incremental as possible to give the appearnce that subsequent actions are "stronger measures" and more likely to effect a solution. What I think both Marx and Herr Naam know is that it is time and relief from new economic pressures that are the only thing that will bring about improved conditions. I think tha's why he evaluates his investments based on ability to pay the coupon rather than how bad it might smell.

Absolutely and I suspect he understands things far better than we do. My desire to play Lehman's again I agree would be difficult to implement and possibly disastrous. But essentially you are making a decision under duress simply to avoid disaster. Marx's point is that time is the big killer that the Euro will collapse underweight of its fundamental flaws that your is simply creating a bigger problem in the end. You have not solved and actually increased the probability of its long term destruction if not ensured it. A short term solution to stabilize has exacerbated the long term destabilization of the currency. You have not solved the crisis you are simply moving the date and making it bigger. Think of Maastricht, think of the concept and think the lowest cost result is bailing out Greece that has acted in such bad faith and so irresponsibly.

That is why I hate laissez faire economics (apart of being a concept with no rationale), there is no creative destruction solution here, just increasing moral hazard. (I realize this would not be a laissez faire solution but the way markets work is that they are just as likely to move away from equilibrium as towards it - the costs of a laissez faire solution may only be acceptable to Sokal.)

How a banker can argue that government controls over banks will make them less efficient while the Government has given them a blank cheque to act as irresponsibly as possible because they will bail them out is beyond me. We certainly need more Government regulation, unfortunately we also need better Governments.

And I do believe Naam is being a little economical with the truth when he says EU backed multilateral bonds wont cost you a penny. But (1) someone is going to have to pay Greek debt and now it is guaranteed I doubt they are going to contribute a penny simply borrow some more (2) this just another bailout of the banks which I admit would have happened on default (3) it doesnt seem logical that underwriting the least responsible is a no cost solution

You cant have government and central bank (FED FANNY FREDDIE FDIC) run markets disguised as capitalism and free markets on the way up and then blame laissez faire economics when it all blows up.

People still don't see the moral hazard that the FDIC is, it is just as bad or worse then FANNY and FREDDIE yet nobody sees it coming. If it wasn't for the FDIC, interest rates would already be up. If their was no government guarantee on bank deposits then people would care allot more about which bank they had their money in. There would be consumer reports on banks and people would find out which bank was the best and the safest. If their was no FDIC then there would have already been some bank runs (like Northern Rock in the UK) and some money would have been pulled out of US treasuries and bonds which would have brought interest rates up. But thanks to the moral hazard and government run market, this is not happening yet when it does, who's fault is it of course ? The free market, capitalism, this makes my <deleted> blood boil.

http://www.flamewarriors.com/warriorshtm/capitalista.htm

[ronz28]

Markets set interest rates. US Governments federal funds rate has followed market rates close enough. Government is very limited practically in what influence it has over rates and cannot defy the markets for very long.

To me, the financial crisis was caused by a lack of ethics by a few key business people at all levels (including Boards of Directors) and by the government regulators who didn't flag the offenders and stop it. The way to fix the problem is for legislators and regulators to fix the regulation processes, make the regulators do their job and put the cheats in jail including their Certified Public Accountants/Chartered Accountants and the credit rating agencies who looked the other way and certified that everything was OK. A few regulators probably deserve to be jailed too. These ridiculous compensation levels for the cheats also need to be eliminated too because we should not be bribing people with excessive compensation to responsibly protect and grow our money- just throw the cheats in jail if they steal from us.

[sokal]

Markets set interest rates. US Governments federal funds rate has followed market rates close enough. Government is very limited practically in what influence it has over rates and cannot defy the markets for very long.

To me, the financial crisis was caused by a lack of ethics by a few key business people at all levels (including Boards of Directors) and by the government regulators who didn't flag the offenders and stop it. The way to fix the problem is for legislators and regulators to fix the regulation processes, make the regulators do their job and put the cheats in jail including their Certified Public Accountants/Chartered Accountants and the credit rating agencies who looked the other way and certified that everything was OK. A few regulators probably deserve to be jailed too. These ridiculous compensation levels for the cheats also need to be eliminated too because we should not be bribing people with excessive compensation to responsibly protect and grow our money- just throw the cheats in jail if they steal from us.

So the FED in your opinion had 0 effect on interest rates when it purchased 300 billion worth of UST ?

The FED had no effect on the price of mortgaged backed securities when it purchased 1 trillion worth of them ?

The price of MBS and UST have no effect on interest rates ?

[Naam]

I think Herr Naam is a pragmatist and I think the various governments would like to give the apearance of remedial action. I also think they'd like the action to appear as incremental as possible to give the appearnce that subsequent actions are "stronger measures" and more likely to effect a solution. What I think both Marx and Herr Naam know is that it is time and relief from new economic pressures that are the only thing that will bring about improved conditions. I think tha's why he evaluates his investments based on ability to pay the coupon rather than how bad it might smell.

"pragmatist" = correct. "ability to pay coupon" = one of my top priorities. "how bad it might smell" = i refer to an exchange of views with "Flying" mid december 2009 where i mentioned the purchase of nom $ 500k Petroleos de Venezuela 2017 and $ 500k Venezuela 2018. Hugo Chavez is a pain in the àss of the Greatest Nation on Earth™ that's why Wall Street has been advised to publish on a continous basis "Venezuela smells bad". this game has been going on since Chavez came to power ten years ago.

pragmatic investors like me don't care what Wall Street says and clipped fat coupons ranging from a mere 8% up to 25%. when the bonds show nice capital gains one gets out, leans back and waits till Hugo nationalises another foreign company, promises "war on capitalism", visits Ahmadinejad in Tehran and listens to the salivating barking clowns which smear on Hugo whatever they can imagine, e.g. "Hugo and Mahmoud are going to have nuclear weapons". then you get 'satisfying' results like PdVSA up 28% plus pro rata interes and that all in six weeks from mid dec2009 till end jan2010. cashed in PdSA but still hold VEN2018 (CRT 13.9% / YTM 15.01%) although the CDS values for Venezuela are sky high.

yes, i agree that Hugo smells. but i am used to the smell since many years

[Naam]

Markets set interest rates. US Governments federal funds rate has followed market rates close enough. Government is very limited practically in what influence it has over rates and cannot defy the markets for very long.

BIINGO! period. case closed. no other fairy tales please!

[sokal]

Markets set interest rates. US Governments federal funds rate has followed market rates close enough. Government is very limited practically in what influence it has over rates and cannot defy the markets for very long.

BIINGO! period. case closed. no other fairy tales please!

THE FED IS PARTICIPATING IN THE MARKET

[Gambles]

Guys,

The causes of the current crisis aren't that simple or easy to pinpoint. The immediate causes all date back to World War I when 2 of the 3 leading global financial centres of the time (Paris and London) handed global financial primacy to New York and in its new role as the main global supplier of capital Wall Street started to dictate global capital supply. This hegemony is only now looking even capable of being challenged by China and the shake out of that will be extremely protracted and contain some nasty surprises on the way. So we probably shouldn't be looking for any simple cause when there's a very messy trail from The Knickerbocker failure in 1907, through WWI, to the Great Depression, The Lords of Finance, WWII, Bretton Woods, the abandonment of the BW, the public listing of the investment banks (an even bigger impact than Glass-Steagall repeal in my view), the Greenspan put, the Bush administration deficits. But.....if you're looking to anyone blame The Fed - here's a piece I did for The Nation at the start of the year.

Cheers,

Paul

In the aftermath of the credit crunch, asking “whose fault was it?” has been a popular pastime, although mainly in The West, not Asia, which probably reflects;

1) the West’s need to attach blame and wherever possible financial responsibility for all courses of events. Mind you it’s hard to imagine, even in today’s litigious society, that anyone could ever enforce judgement for the trillions of dollars of losses and damages stemming from the Global Financial Crisis even if they can prove that any parties were criminally negligent (we’d hate to guess what a typically sharp New York attorney would claim in punitive damages!).

2) The greater immediacy (AKA short-termism) that dominates western political and economic thought. In journeys around China travel writer Paul Theroux tried to initiate dialogue concerning the Cultural Revolution that began in the 1940s. The virtually unanimous response Chinese was that “it’s too soon to be able to tell.” Asian thinking often seems less inclined to jump to hasty conclusions concerning events whose consequences are still playing.

While it may be too soon to tell if anyone was to blame for the GFC there is no shortage of opinions: Blogs are full of criticism of The Federal Reserve Bank’s role. It may be that this criticism ultimately turns out even more right than is now being imagined.

Liaquat Ahamed’s book “Lords of Finance” explains how the creation of the Fed, in the period between the banking crisis surrounding the collapse of The Knickerbocker Trust co. in 1907 and the signing into legislation of The Federal Reserve Act on December 23rd 1913, was shaped so strongly and furtively by bankers themselves, primarily Henry Davison the de facto head at J.P Morgan. This branch of quasi-government was designed to serve the bankers, not the people. It was the bankers who had the most to gain from the creation of the Federal Reserve System and who stood to lose most if this didn’t happen!

Knickerbocker was the Lehman Brothers of its day – America’s biggest banking failure, the 3rd biggest bank in New York. Once the immediate crisis passed the biggest worry for the bankers was the threat to the fractional reserve banking system, whereby banks lend out many times the value of the cash that they take in on client deposits. Frank D Graham subsequently observed in 1936 –

“The attempt of the banks to realize the inconsistent aims of lending cash, or multiplied claims to cash, and still to represent that cash as available on demand is even more preposterous than … eating one’s cake and counting on it for future consumption… The alleged convertibility is a delusion dependent upon the rights not being unduly exercised.”

Had governments shown the collective will to constrict fractional banking in 1907 or simply let the markets do that for them then there would have been a very painful period of adjustment, a severe depression and a raft of bank failures. Murray Rothbard’s seminal work “The Causes of The Great Depression” argues that there would also have been an end to the boom and bust excesses, an end to speculative asset bubbles and an end to excessive inflation. In turn there would have been less reliance on the role of banks within the economy and consequently a reduction in rewards for both banks and bankers. Clearly, the cabal of bankers led by Davison would not have welcomed this. Although the final form of the Federal Reserve System that became law in 1913 didn’t give them all the powers that they sought, it encouraged the leverage that was already embedded in the banking system to more than double within 3 years or so – spearheading a 6 fold increase in monetary potential. This expansion of the monetary base helped fuel the ‘roaring twenties’, delaying the occurrence of normal business cycle adjustments until the end of the decade when their impact was many times greater. The increased confidence stemming from the assumption that the US government implicitly guaranteed the new Federal Reserve System, and thereby underwrote the entire registered banking system, was the main contributory factor to the booms and bubbles of the 1920s.

Previously the regular failure of banks acted as a pressure value. Creating The Federal Reserve System in 1913 was the biggest single contributor to the hitherto unimaginable forces which quickly built up and by 1929 created the greatest economic explosion that the world had seen and the ensuing Great Depression.

Fast forward to 2008 and the same Fed that originally created the perfect conditions to incubate the leverage boom that preceded The Great Depression could be argued to have done it again, this time aided and abetted by other central banks (reportedly Swiss behemoth UBS was operating at 82 x leverage). By 2008, banks had become too big to fail and the system had built up even more powerful forces than in the 1920s. Undoubtedly it is too soon to tell but early indications suggest that the continued implementation by Alan Greenspan and Ben Bernanke, of expansive credit policies, comparable to those of the 1920s may have been directly responsible for the Global Financial Crisis that started in 2008.

96 years in existence and outright responsibility for the 2 biggest global economic crises in history - that’s quite some record!

[Gambles]

Prolonged periods of low interest rates can certainly create bubbles, but bubbles can correct and generally speaking the risk takers lick their wounds, regroup and move on to the next economic cycle. The systemic risk is not from low interest rates, it is from excessive leverage and the use of portfolio/security "insurance" products, such as CDS's. CDS's create significant imbalances as they are not marked to market daily, nor are counterparties required to show ability to pay out on claims. That's the recipe for a calamity.

Bubbles correcting. I seriously believe that without very concerted Government intervention the financial system would have totally collapsed 2 years ago. Do you think that Naam thinks that multilateral guarantees are the 'correct' solution for the Euro. He just wishes to avoid the potential of a financial implosion.

Marx is very interesting on his analysis of risk. He essentially believes that all financial products from loans to derivatives (obviously there werent deriviatives then) do not reduce risk but simply build it up over time into a bigger crisis. The Euro is a classic case where the stabilization of the currency has resulted in increased destabilizing of countries fundamentals. Rakesh Saxena very much traded on this philosophy.

But Bernanke and Greenspan have the belief that bubbles cannot be spotted or effectively intervened in but that the Fed needs to intervene to cushion the fall out. The average 12 year old can see there is no logic to that argument (and they have written papers on it.)

The bad banks in the western banking system should have been allowed to fail. By supporting bad banks we are following Japanese policies that have so far led to 2 decades being lost. The US, Uk and European economies would have continued anyway - Belgium, Ireland and the Netherlands would have been faced banking disasters on the scale of Iceland, but you know what, Iceland is still there and will still be there in years to come (possibly with too great a financial dependency on Russia but that's where politics comes into play again) - and the short term crisis would have been off the scale but it would have done what's neccessary to start the healing. As it is we'e now in much worse shape than we were in Spetember 2008. The Euro should have been allowed to fail but it won't. The cost to Germany will be immense and continental disputes are now inevitable. The Euro, rather than the EU itself, has become the zollverein of the 21st centry but there are parts of Europe that either don't want or just won't be able to play and the cost to Germany of bribing them or enabling them is potentially even greater than the $ 5 trn spent by American authorities on $ 1 trn worth of junky assets to bail the bad banks.

politicians are trapped into short termism - they don't seem to be able to recognise that a spike to 25% unemployment for a year and then a gradual return to prosperity sure as heck beats getting to 25% in steps over a 10 year downtuen and then needing another world war to fix it....

[jazzbo]

Winston Churchill said in his 1940 'Battle of Britain' speech:

Never was so much owed by so many to so few

Reading these pages and the posts by 'the usual suspects' makes me think:

Never have so few known so little about so much.

[sokal]

Winston Churchill said in his 1940 'Battle of Britain' speech:

Never was so much owed by so many to so few

Reading these pages and the posts by 'the usual suspects' makes me think:

Never have so few known so little about so much.

All of this financial and economic stuff is so over your head that it frustrates you so you try and insult the people in the forum that have some knowledge on the subject.

[jazzbo]

All of this financial and economic stuff is so over your head... You don't have the slightest f---ing idea what is and what is not.

[Naam]

BERLIN (Reuters) - Germany's finance ministry has sketched out a plan in which countries using the euro currency will provide aid worth between 20 billion and 25 billion euros ($27-$33.7 billion) for Greece, a magazine reported on Saturday.

Citing "initial considerations" by the ministry, German weekly Der Spiegel said the share of financial aid for Greece would be calculated according to the proportion of capital each country holds in the European Central Bank.

A spokesman for the German finance ministry said he would not comment on the report, which stated that the financial assistance should take the form of loans and guarantees.

The report said all euro countries would shoulder the burden and that Germany's share in the package would amount to 4-5 billion euros, and be handled by state-owned bank KfW.

According to the German planning, the aid should be tied to strict conditions, the magazine said, adding that loan tranches should only be paid out once these are met.

Spokesmen for both the Greek finance ministry and the European Commission declined to comment on the report.

Chancellor Angela Merkel's government has so far resolutely deflected appeals to promise Greece aid despite fears that failure to help Athens could threaten the euro.

Germany in public argues that leniency would take pressure off Athens and other euro zone debtors to cut their budget deficits. Behind the scenes, lawmakers acknowledge that Berlin has prepared measures if a rescue becomes inevitable.

Merkel's position has been complicated by the fact the country is embroiled in a highly charged debate on the sustainability of Germany's welfare state.

This has helped to galvanize public opposition to Berlin funding a bailout just as her center-right coalition braces for a big test of its popularity in May, when voters go to the polls in Germany's most populous state, North Rhine-Westphalia.

TRANSPARENCY

Speaking to Der Spiegel, Greek Prime Minister George Papandreou told Germany he was not seeking aid, and criticized the Commission for failing to ensure member states adhered to the EU's Stability and Growth Pact that limits budget deficits.

"The union could in the past have more rigorously policed whether the stability pact was being observed -- with us too," he said. "In future we should allow the European statistics office direct access to individual member states' data."

"We suggested that, but not all countries wanted to have so much transparency," Papandreou said.

Greece's deficit swelled to 12.7 percent of gross domestic product in 2009, way above the EU's cap of 3 percent, and Athens needs to sell some 53 billion euros of debt this year, including at least 20 billion euros in April and May.

In case demand should falter, German lawmakers have been quietly thinking about how Greece could be helped.

A senior financial official in the ruling coalition told Reuters last week Germany was considering using the KfW to buy Greek government bonds. A separate proposal saw the KfW issuing guarantees to German banks that bought the Greek bonds.

Separately, Der Spiegel said that an internal report by Germany's financial market watchdog BaFin concluded that German banks could be seriously threatened if Greece or other countries including Spain, Portugal and Italy become insolvent.

[Gambles]

BERLIN (Reuters) - Germany's finance ministry has sketched out a plan in which countries using the euro currency will provide aid worth between 20 billion and 25 billion euros ($27-$33.7 billion) for Greece, a magazine reported on Saturday.

Citing "initial considerations" by the ministry, German weekly Der Spiegel said the share of financial aid for Greece would be calculated according to the proportion of capital each country holds in the European Central Bank.

A spokesman for the German finance ministry said he would not comment on the report, which stated that the financial assistance should take the form of loans and guarantees.

The report said all euro countries would shoulder the burden and that Germany's share in the package would amount to 4-5 billion euros, and be handled by state-owned bank KfW.

According to the German planning, the aid should be tied to strict conditions, the magazine said, adding that loan tranches should only be paid out once these are met.

Spokesmen for both the Greek finance ministry and the European Commission declined to comment on the report.

Chancellor Angela Merkel's government has so far resolutely deflected appeals to promise Greece aid despite fears that failure to help Athens could threaten the euro.

Germany in public argues that leniency would take pressure off Athens and other euro zone debtors to cut their budget deficits. Behind the scenes, lawmakers acknowledge that Berlin has prepared measures if a rescue becomes inevitable.

Merkel's position has been complicated by the fact the country is embroiled in a highly charged debate on the sustainability of Germany's welfare state.

This has helped to galvanize public opposition to Berlin funding a bailout just as her center-right coalition braces for a big test of its popularity in May, when voters go to the polls in Germany's most populous state, North Rhine-Westphalia.

TRANSPARENCY

Speaking to Der Spiegel, Greek Prime Minister George Papandreou told Germany he was not seeking aid, and criticized the Commission for failing to ensure member states adhered to the EU's Stability and Growth Pact that limits budget deficits.

"The union could in the past have more rigorously policed whether the stability pact was being observed -- with us too," he said. "In future we should allow the European statistics office direct access to individual member states' data."

"We suggested that, but not all countries wanted to have so much transparency," Papandreou said.

Greece's deficit swelled to 12.7 percent of gross domestic product in 2009, way above the EU's cap of 3 percent, and Athens needs to sell some 53 billion euros of debt this year, including at least 20 billion euros in April and May.

In case demand should falter, German lawmakers have been quietly thinking about how Greece could be helped.

A senior financial official in the ruling coalition told Reuters last week Germany was considering using the KfW to buy Greek government bonds. A separate proposal saw the KfW issuing guarantees to German banks that bought the Greek bonds.

Separately, Der Spiegel said that an internal report by Germany's financial market watchdog BaFin concluded that German banks could be seriously threatened if Greece or other countries including Spain, Portugal and Italy become insolvent.

politics predictably wins out over economic common sense

well done Der Spiegel for pointing out the obvious but sadly the decision makers are unlikley to take heed. Europe's wealthy nations are embarking on a futile attempt to bankrupt themselves on the altar of political ideology

You knew that they were going to do this but you can't help being dissappointed that they have

still at least that creates opportunities to be expoited when this happens ->

[Bizz]

BERLIN (Reuters) - Germany's finance ministry has sketched out a plan in which countries using the euro currency will provide aid worth between 20 billion and 25 billion euros ($27-$33.7 billion) for Greece, a magazine reported on Saturday.

Citing "initial considerations" by the ministry, German weekly Der Spiegel said the share of financial aid for Greece would be calculated according to the proportion of capital each country holds in the European Central Bank.

A spokesman for the German finance ministry said he would not comment on the report, which stated that the financial assistance should take the form of loans and guarantees.

The report said all euro countries would shoulder the burden and that Germany's share in the package would amount to 4-5 billion euros, and be handled by state-owned bank KfW.

According to the German planning, the aid should be tied to strict conditions, the magazine said, adding that loan tranches should only be paid out once these are met.

Spokesmen for both the Greek finance ministry and the European Commission declined to comment on the report.

Chancellor Angela Merkel's government has so far resolutely deflected appeals to promise Greece aid despite fears that failure to help Athens could threaten the euro.

Germany in public argues that leniency would take pressure off Athens and other euro zone debtors to cut their budget deficits. Behind the scenes, lawmakers acknowledge that Berlin has prepared measures if a rescue becomes inevitable.

Merkel's position has been complicated by the fact the country is embroiled in a highly charged debate on the sustainability of Germany's welfare state.

This has helped to galvanize public opposition to Berlin funding a bailout just as her center-right coalition braces for a big test of its popularity in May, when voters go to the polls in Germany's most populous state, North Rhine-Westphalia.

TRANSPARENCY

Speaking to Der Spiegel, Greek Prime Minister George Papandreou told Germany he was not seeking aid, and criticized the Commission for failing to ensure member states adhered to the EU's Stability and Growth Pact that limits budget deficits.

"The union could in the past have more rigorously policed whether the stability pact was being observed -- with us too," he said. "In future we should allow the European statistics office direct access to individual member states' data."

"We suggested that, but not all countries wanted to have so much transparency," Papandreou said.

Greece's deficit swelled to 12.7 percent of gross domestic product in 2009, way above the EU's cap of 3 percent, and Athens needs to sell some 53 billion euros of debt this year, including at least 20 billion euros in April and May.

In case demand should falter, German lawmakers have been quietly thinking about how Greece could be helped.

A senior financial official in the ruling coalition told Reuters last week Germany was considering using the KfW to buy Greek government bonds. A separate proposal saw the KfW issuing guarantees to German banks that bought the Greek bonds.

Separately, Der Spiegel said that an internal report by Germany's financial market watchdog BaFin concluded that German banks could be seriously threatened if Greece or other countries including Spain, Portugal and Italy become insolvent.

It's 10 day's now since a stimulus was announced by the Ecb

The Greenspan put option was used to describe the situation that, whenever financial markets fell, Greenspan would cut interest rates, which would put a floor under how low prices could go. The same can now be said of Germany. If Germany bails out Greece, it puts a floor on how low Greek bond prices can fall. It therefore gives the Greek government the incentive to gamble that it doesn’t matter how much it borrows because Germany will always bail it out.

[sokal]

All of this financial and economic stuff is so over your head... You don't have the slightest f---ing idea what is and what is not.

If you knew anything, then why don't you ever contribute to the discussion ?

[jazzbo]

I believe my main contribution so far -- as most of the contributions consist of quotes and URL referrals -- has been to point out when quotes or headlines have been taken out of context...

... and if this is a 'contribution:

That is only because the rest of the world is still using misguided keynesian policies like devaluing their own currency, when the rest of the world wakes up and stops using keynesian policies then the US dollar is done

then I guess I haven't contributed by adding such simplistic BS...

One of you gents once said that they feel sorry for anyone who has a 'managed account'. When I was in line to receive a significant portion of the company I helped found -- instead of continuing my formal education in mathematics and quantitative logic -- the provision was that it go into a Trust with an investment bank as co-trustee. So I do not have the liberty to move funds around as some of you gents do... however it is in emerging markets, commodities, International Treasuries, etc. even gold shares...

and 'Spazzbo' is just high school stuff... so these days I am content to just read some of the postings and let you gents be big fishes in a little pond... in the meantime, Dr. Krugman is awaiting your comments.

[ding]

1. Who sets interest rates?

2. Is that entity private or governmental?

1. The Federal Open Market Committee (FOMC), a component of the Federal Reserve System, is charged under United States law with overseeing the nation's open market operations.[1] It is the Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply.[2] It is the principal organ of United States national monetary policy.

2.Congressional oversight

Under the Federal Reserve Act, the Chairman of the Board of Governors of the Federal Reserve System must appear before Congressional hearings at least twice per year regarding “the efforts, activities, objectives and plans of the Board and the Federal Open Market Committee with respect to the conduct of monetary policy”. The statute requires that the Chairman appear before the House Committee on Banking and Financial Services in February and July of odd numbered years, and before the Senate Committee on Banking, Housing, and Urban Affairs in February and July of even numbered years.

From wiki;

# The Federal Open Market Committee (FOMC), which oversees Open Market Operations, the principal tool of national monetary policy.

# Twelve regional privately-owned Federal Reserve Banks located in major cities throughout the nation, which divide the nation into 12 districts, acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors.

# Numerous other private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks.

# Various advisory councils.

This is after the board of governors. Used to be the OMBC if I recall. Open Market Banking Commission

The FOMC is not the government. But it needs to be!