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January 28 NYC Event -- Whalen on Zombie Banks and The Real Economy: Are the Two Compatible?
It is a little sad reading today's comment from Marla about SAC putting the kabosh on the inside trading story by Thompson-Reuters, but not surprising. Remember that when Clinton Gilbert published The Mirrors of Wall Street in 1933, he did so annonymously. Even with Putnam as the publisher and banksters hanging from lamp posts.
In today's deflationary environment, with corporate and tax revenues still in a free fall, don't expect great courage from the fourth estate. Just look at how the New York Times, WSJ and other media leaders are falling all over themselves not to antagonize large advertisers and especially the large banks. The age of newspapers as being "special" is going the way of the free subway ride for NYC school children. Thus Zero Hedge and The IRA.
The sad thing about the rising regulatory scrutiny on
smaller firms like SAC and other hedge funds is that they are merely a
response to bad policy in Washington, from the Congress and the Fed
alike. The large dealers engage in the same type of insider trading
activities every day, yet some how the SEC does not investigate and the Big Media does not report it.
More, the chronic deficit spending by the
Congress and the monetary policy that enables these deficits actually
increases market volatility. Buy and hold investors are doomed in our
fiat money system. This is how I put it to Jim Sterngold from
Bloomberg earlier today when he asked me about re-instituting
Glass-Steagall era restrictions on bank activities:
Some
say take the casino out of the bank, but that is not the answer. The
Maginot Line along France's eastern boarder was not effective against
the German blitzkrieg through Belgium to the north. Instability in the
financial markets stems from runaway fiscal deficits in Washington and
Fed monetary emissions to accommodate same. Limiting bank activities
is treating the symptom, not the cause. Hedge funds and OTC
derivatives are the correct business model response by investors to
irresponsible monetary and fiscal policies. The Fed and the Congress,
and their growing emission of fiat paper dollars, are the cause of
financial markets instability, not any lack of activity limits on banks
or dealers.
So we prosecute Steve Cohen at SAC or Raj
Rajaratnam of Galleon for insider trading, but meanwhile we name Fed
Chairman Ben Bernanke "Man of the Year," even though he and other
officials of the central bank are stealing billions from the pockets of
every American this year in terms of inflation. Since the founding of
the Fed, the dollar has lost 95% of its value in terms of consumer
purchasing power. Think about that as you look into the faces of your
children this holiday season.
In the name of expanding the public debate, I am giving a talk on the conflict between the Zombie Banks and the Real Economy on January 28th in NYC. The event is sponsored by NYU and Columbia and will be held in midtown Manhattan. Below is the abstract for the discussion:
Do banks serve the real economy or does the real economy serve the financial services industry? In the past, the answer to this question might have been the former and obviously so. In 2010, the answer is far less clear. Bank analyst Christopher Whalen will argue that the largest banks, a spendthrift national Congress and a compliant central bank have come together in an "alliance of convenience" that seemingly is willing to sacrifice the real economy to heretofore unthinkable levels of debt and inflation -- all this in the name of short-run stability. Are the rescue of AIG in 2008 and $2 trillion in Fed asset purchases during 2009 indicia of central bank independence or evidence of a completely politicized central bank that is now run amok? Have the worst fears of Thomas Jefferson, Andrew Jackson, Carter Glass and the other American opponents of a central bank been proven correct?
Information about the event is found here:
You may RSVP for the event by clicking here:
http://www.cfe.columbia.edu/misc-pages/RSVP-NYQF.html
And be safe and well in 2010.
Best,
Chris
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The debate over fiat money versus gold backed money frustrates me to no end. Creating a gold standard to back government controlled "legal tender" without insisting on 100% reserve requirements in the banking system is completely useless. As long as banks are permitted to issue "check book" money in the form of loans all a gold standard will do is slow them down, to some extent. It won't stop them and they will engage in every form of deciet and intrique to find ways to legislate themselves around the limitations.
The real problem is not that money is paper. It's that money, even under a gold standard, is DEBT. Debt comes with interest and interest is not part of the newly created money, but must be paid out of the profits that debt was intended to generate. For banks to have the legal privilege to profit from a product they create from nothing is not only immoral, but ultimately a cancerous tumor which eventually will kill the economy. There is no way around it.
In a debt based monetary system the total burden of interest will eventually consume all productivity. There is no way to reason ourselves out of this reality.
A previous poster said we need to think outside the box. It's time we listened to the facts on the ground that are screaming for our attention.
A debt based monetary system has NO CHOICE but to aggregate the bulk of the wealth into the hands of those to create (loan) the money.
It is a patently absurd way to organize an economy and, by extension, society.
A gold standard in the hands of international financiers or in the hands of unregulated government is as fatal to a nation as fiat currency.
Much has been written in Arthur Kitson’s The Fraudulent Standard (1917) and The Bankers’ Conspiracy on how the universal adoption of the gold standard, advocated by the League of Nations, resulted in creation of “an irresponsible super-Government composed of a group of International Bankers. It required only a few years to prove the utter incapacity of these men to manage the world’s financial affairs.”
Said former director of the Bank of England, Vincent C. Vickers, in Finance in the Melting Pot: “We returned to the Gold Standard in 1925 for the benefit of the City of London, and so ruined our basic industries. It does not follow that what is best for the City of London is best for the country.
“In consequence of past policy, a farmer who borrowed from his bank, say in 1920, the money-equivalent of 100 sacks of wheat, might be obliged to sell 200 sacks of wheat a few years afterwards in order to repay that same loans, simply because a pound became twice as valuable.
“This is typical of the ‘Gold Standard System,’ which involves Inflations and Deflation. A Monetary system which begets such flagrant injustice cannot be regarded as an equitable system. Yet no one in authority here dares to attempt to alter it, because the financiers don’t want it altered.”
If Americans want reality and stability, they must not allow the “Rothschilds,” i.e., the financiers, to “issue the nation’s money,”, i.e., creating a "debt-based monetary system," commodity backed or no. The proceeds of the issue of new money belong to the nation where it is issued.
When a private group exercise the power to originate the exchange-medium and then manipulates the volume of it, that groups becomes a power greater than the government.
It opens the way to economic enslavement of the people.
G.M.Coogan, in her book Money Creators, says that creation of money -- the issuing of claims to goods and services valid and acceptable to all the citizens of a country -- is by right a prerogative of the authority exercising jurisdiction over the whole country.
“This is clearly seen by the fact that additional credit-money issued or loaned into existence, if it does not happen to coincide with a proportional increase of good for sale, will raise prices and make the value of everybody’s money in the country worth less in goods, so repudiating part of the nation’s debt in goods and services to the owners of money…” (Soddy, “The Role of Money”)
All private promises-to-pay (i.e. Fed fiat money) should be subjected to the penalties that apply to counterfeit money.
But the lending of the lawful money issued by the governmental should not be carried out by the governmental monetary authority, says Coogan, but by privately-owned Corporations erected into a Guild and functioning under a Guild Charter.
Says Miss Coogan: “The most dangerous things that could be done would be to place the merchandising of money in the hands of the National Government. Such a step would give the internationalists their final weapon to destroy the property and personal rights of loyal citizens… If the government controls the lending of money, it can determine who may or who may not borrow money and hence can control very single business in the country.
With regard to the lending of money by privately owned corporations, existing banks should be divided into two separate institutions… The first…carrying deposits subject to withdrawal would require 100 percent reserve and no interest would be paid but depositors would pay a bookkeeping service fee.
In addition, there would be loan-banks for lending or investing. These savings-banks would get the money to lend from their own money (capital), from the money received from customers (savings accounts), from the money repaid on maturing loans…” The only limitation on banks loans would be, that no money could be lent unless here was money to lend.
Feh. So it's come to this.
Yeah, we're getting ripped off, we know this.
And yet this seems to serve mostly as a dog whistle to every Austrian-doomer otaku fanboy out there to wave their bloody "inflation" flag and break out their "sound money" beats.
Chris, nobody who counts gives a damn.
Of course, you've forgotten more about banking finance in the last ten minutes than I've learned in the last two years (and I've been busy learning). True dat.
So why do you trot out the tired old "95% devaluation" chestnut? Do you think we cannot do exponents here?
You and I both know that the true measure of fiat money's performance as a store of value is the deposit rate vs CPI. At some points since 1913 it was possible for savings to outpace inflation. Other times, not so much. (I'd love to see that study).
Right now, it's looking bad, innit, considering the likely fate of the dollar. Right when saving has never been more important for folks, they're getting screwed.
But that kinda analysis doesn't satisfy like the juicy Austrian red meat. In fact it would kinda buy into the whole Keynesian paradigm a bit. Can't be a populist hero that way.
I've seen you on TV and your charming, authoritative, seen-it-all baritone shtick. I bet you do a great karaoke cover of Leonard Cohen's Everybody knows.
But if you want to be relevant, leave the crankist monetarism at home and argue the facts on the ground with the bare minimum of ideological baggage, because those of us who can do a little math and don't use a voodoo doll of JMK as a pincushion are just as eager to see the stables cleared out. And for better or worse, there are quite a few of us out there.
And no, ZH is not a representative sample.
"At some points since 1913 it was possible for savings to outpace inflation. Other times, not so much. (I'd love to see that study)."
Well sun king, a better question might be, at what point since 1971 has the deposit rate outpaced inflation? Given the current circumstances, will it *ever* outpace inflation?
Dunno but there have been periods where inflation is near zero, including now.
Maybe not, but it's still an open question as to whether inflation or deflation will take hold.
My beef with rcw remains the "95% devaluation" rhetoric: even if the deposit rate never kept up with inflation, the fact that the deposit rate was positive and not zero, together with the nature of exponential functions, means that the real devaluation number is less than 95%. Possibly much less. Possibly even negative.
I don't know. I'd like to, and I look to experts to tell me these things, not shovel rhetoric at me that is trivially disproved.
You just may be the best in the bank analysis business Chris. You certainly are honest and call them as you see them without all the other crap spewed by the sell siders.
I know you have been on the TV quite a bit lately though I've only seen the clips through ZH. I do hope you will visit ZH with your writings more frequently. Many of us would love some more thoughts from you on FASB 157 nonsense, FASB 166/167 and your reaction to the FDIC's very recent capital pronouncement, as well as any updates you have for Q4 bank earnings (i think i recall from your b'berg several weeks ago you had a pessimistic outlook for Q4 earnings, but then again, I can't remember what I had for dinner last nite).
Thank you for sharing your thoughts on ZH and best wishes to you for a healthy and happy 2010.
the 95% drop in the dollar valuation i keep hearing about...it is a useless statement. the value of the dollar shifts related to different entities (obviously). more useful would be a CPI but actually created using more useful items. for ex,
price of a soda relative to dollar
" slice of pizza "
" housing per square foot "
" processing power "
" beer "
" weed "
" suit "
" etc "
i don't think i could by my macbook for $50 in the early part of this century and to ignore this item alone in the 95% calculation makes me wonder how useful the statistic truly is.
additionally, for all of the "overleverage" talk, the question still remains: what is the correct amount of leverage?
this is not straightforward to answer. just b/c you can buy a house for 10% down does not mean 10:1 leverage is good for houses. just because banks had 40:1+ leverage ratios at some banks and there was a subsequent crash is also not a good definition of a bad amount of leverage. i mean there are people who buy houses with zero leverage who subsequently need cash one day and therefore sell, so should we require reverse leverage for houses (using extreme example).
i personally think financial leverage ratios should be tied to technological related leverage rations. too bad the latter are hard to identify.
despite the crazy bubble we have just seen (partially) burst, it should not come as a surprise if during the next century (when there will likely be a massive genetic, robotic, and nano technological storm), leverage levels will may be significantly higher than what we have seen to date.
i am betting that in 2050 there will be 500:1 leverage ratios for certain business sectors...(and of course, the vampire squid will still be draining as much from our souls then)
The problem is only in part the leverage. The real problem is that those with leverage and those investing in those with leverage are not swallowing the losses. BTW-500:1 leverage will never work because a 0.2% flutter in whatever market you are talking about will lead to insolvency.
It is the absence of the free market within the capital markets that is the problem. If GS had to borrow MY savings to place their bets, I can assure you that they would be paying a higher interest rate for the right. Central banks are the problem because they remove the checks and balances--the attempts by the system to maintain a semblance of equilibrium--as part of their policy.
Bravo!
"Hedge funds and OTC derivatives are the correct business model response by investors to irresponsible monetary and fiscal policies."
What a simple by elegant thought. It is quite true and explains a lot.
good article which correctly identifies congress and the fed as the root of the problem....however, this does not exculpate the banksters who control the fed and congress....thus whalen's implicit defense of banksters is mistaken....
OK, let's run a little thought experiment.
Assume a world economy in the form of many national economies that strongly interact with each other. Additionally, each depends on the other.
Now, assume each uses printed money that is only backed by the full faith and confidence of each respective nation.
Now, let the printing presses out of their shackles and have each country print as they will.
What do you have if all act together? Oddly enough, over at least the short run, you have an equilibrium and the appearance of stability. Remember a * 100 + b * 100 = (A+B)*100. All inflation here and now occurs in proportion to all other inflation. It's a prisoner's dilemma. Everyone wins if all stick together and cheat in the same way.
So the real question is "what happens to the World economy if everyone inflates together and coordinates as they inflate, and then one or more stops inflating?" Abstractly, is the concept of money being redefined or is creation a substitute for organic velocity? This is really a time to think outside the box with respect to monetary economics.
Is it hyperinflation if everyone in the world is doing it?
Your thought experiment is not complex at all: You get global inflation with all the ills that come with inflation, except on a huge scale. We will all suffer.
I think the way this one plays out is that we get crisis, part 2, at which point we find that the banking industry, on being pulled into safe harbor by the taxpayers (which is really a metaphor for future sufferers of inflation), burned the damned ships with their post crisis bad behavior. The bankers will, once again, be hanging from the lamp posts. There will be no political will for heroic bailouts. Tilt.
Yes, it's hyperinflationary if everyone in the world is doing it. Zimbabwe, Argentina and America counterfeiting together are inflating together, confiscating wealth together. As Greenspan himself said, paper money and deficit spending are nothing more than a "scheme for the hidden confiscation of wealth."
In the absence of the gold standard, a fiat monetary system working in tandem nationwide or worldwide, allows power to fall into the hands of those who control the creation of the new money, and to those who get to use the money or credit early in its circulation. In short, it transfers power and the wealth of the people to the owners or controllers of the central banks. An actual transfer of wealth goes from the poor and the middle class to those in privileged positions—to JP MorganCHASE; to the Goldman Sachses at the Fed, the Treasury, the World Bank, the IMF, and into its web of tentacles that stretch across the globe; to Morgan Stanley, to UBS Warburg, to Citigroup, to the Chinese dictators…
So as the central banks inflate worldwide, worldwide the people become the unidentified victims. It’s fraud. It’s immoral. It’s inflation.
It is desert-making on behalf of greed throughout the world. And it can be laid at the door of finance.
Every dollar created beyond the rate of actualization of goods produced dilutes the value of existing dollars in circulation—in your pocket, in your bank account, in your IRA, in your 401K, in your savings account, in your child’s piggy bank, in your life insurance, in your pension, in your Social Security check, in your mattress…
As regards the deflation/inflation debate, these comments, written a year ago by an anonymous blogger, are worth the read:
Forgive my ignorance. I did not go to Harvard and did poorly in economics, which qualifies me to comment.
First, why is deflation bad? If you have savings in the bank, e.g. you've lived within your means and saved what you could as your grandparents taught you, falling prices are your reward. To the extent you think it's government's business to monkey around with the economy, shouldn't it be encouraging savings? And deflation is just part of the process of reaching equilibrium. Businesses miscalculated and produced more goods than were wanted. To get rid of them, they have to reduce the price. Until they've gotten rid of that inventory and then adjusted their input costs to produce a product that will be purchased, fiddling around with inflation/deflation mechanisms will just screw the process up. . . But then again, that's really the point of all this isn't it?
Second, inflation is not just a function of the supply of goods and the demand for those goods. It's also a function of the amount of money in circulation. If, for example, you double the amount of money in circulation, prices will rise once that new money works its way into the system regardless of demand for goods. (Incidentally, the banks who receive those injections of money first, get the benefit of the deflation. They're buying at deflated prices using inflated dollars before the economy realizes the dollars have been inflated. Score another one for the big banks, who will be eating your grandchildren.)
Third, what difference does monetization of the debt (printing more money) versus issuance of more government debt (bonds) really make for purposes of inflation? The bonds will be put on the market. If they're purchased (an increasingly dubious proposition) the money will come from outside the country (because everyone here is broke). That money will go into the banks. The banks using those deposits will create more money (i.e. loans) limited only by the reserve requirements which are effectively non-existent. Those loan proceeds will in turn be deposited in other banks that will also create money based on those deposits etc. etc. ad infinitum.
You get the idea. I think it's incredibly naive to think the government doesn't want inflation and so will avoid it. The debts of the government are astronomical. It has only 3 choices: (1) hugely confiscatory taxes (everyone paying 90% of their income), (2) defaulting on the debt and starting over, or (3) inflate away and pay off the debts with devalued dollars. Which do you think the government is choosing? And since the big banks own the government, who do you think is going to get the inflated dollars first? Reminds me of something. The bailout? Yes. That money ain't going to you. You're the sucker who gets it last, when it's lost all its juice.
Assume for a moment that a country closed its borders to all outside trade, investment, exchange, business, and so forth. It's an economically "closed system." What happens if such a country inflates its currency?
It's basically the same thing that would happen if the world were to inflate in unison. Just as water seeks its own level, the currency supply would too (exchange rates would balance out everything). But the number of goods and services that currency supply would be chasing would not be rising correspondingly, would it?
Abstractly, is the concept of money being redefined or is creation a substitute for organic velocity?
Maybe some would like to redefine money, and in the exact manner you describe, and they'd like very much to get away with it. Your scenario suggests that money is merely a token. How do savers react when tokens are being printed willy-nilly, if the newly-printed tokens are claimed to have the same value as the ones that already existed, the ones they've saved? What the hell is "capital" if the system is awash in tokens? How many Zim dollars does it take to build a factory? You cannot substitute printed tokens for velocity. Another thought experiment answers your question. If value comes from the output of a printing press, everyone can stop working because everyone can be printed to a wealthy condition. No more poverty. No more wrangling about health care.
I do believe your scenario is the one that is being attempted, and there are many trying to sell it to the public as a working solution. I am not necessarily suggesting you are one of them.
Many points - well said.
No, I am a traditionalist when it comes to economic and monetary valuation and ordinary life.
But too often, dogmatic ideas become ideological traps, and using a far out point to generate ideas and explanations adds value to the discussion.
Personally, I think clever thieves are running the world economies, and Uncle Stupid is just a dupe in the process. If you want to make money, you have to wonder "What would a clever thief do next?" When I say "clever thieves", I don't mean the X files like table discussions. Rather, I think clever and exceptionally will financed opportunists exploit everything and influence others for the purpose of greed. It's not complicated in concept, although some of the methods might be.
Rather, I think clever and exceptionally will financed opportunists exploit everything and influence others for the purpose of greed.
I agree completely they are opportunists motivated by greed. Further, I see this as the vehicle for the destruction of the productive economy. It was obvious early on that part of the plan to recap the banks was to sawtooth the economy and enrich them with trading revenue. Those who knew when chairs would be pulled were able to profit handsomely. Covert wealth redistribution from bottom to top. Those who weren't privy to the timing but knew the game withdrew their capital and hid it in precious metals, where it remains to this day.
Whether they are clever is debateable, and they are certainly well-financed, for the same reasons. They are backed by a sovereign printing press, a sovereign taxing authority, a sovereign regulatory body, and a sovereign media system, so how clever do they really need to be?
2 things
1. This is really a time to think outside the box with respect to monetary economics.
- You might say that OR you might say it's a time for people to actually STUDY Interest Rate theory and Monetary economics.... I think a return to learning what the fuck is actually happening on the balance sheet would be a huge boon.
2. Is it hyperinflation if everyone in the world is doing it?
- The problem is that we're still experiencing hyper-DEFLATION. Eh? Deflation I say? HOW COULD I SAY THAT??? Look at the housing statistics... we had increased sales of 8% (which is hard to believe, but I have friends who are worrying about having their offer accepted while I tell them, oh don't worry, they'll take your first bid, but you should wait another year... bids are usually accepted in a day or two), but yet home prices STILL DROPPED.
It's time people understood economic theory... not POLITICAL ECONOMIC THEORY... but the actual calculations of monetary economics... How the hell you can consider a theory complete WITHOUT understanding a single calculation? That's like saying I'm a mechanic when all I know how to do is change my oil and rotate my tires.
Commodities have not exactly deflated during the past year. A simple check of the gas pump prices and those at the local food store over the course of the past year suffice to demonstrate the point.
you're wrong about general deflation - all you
have cited is a single asset class suffering
from credit deflation....there are many others
which suffer the effects of monetary inflation...
i will repeat myself by saying that the usa will
experience a combination of inflationary and
deflationary effects side by side especially if
prices are measured in nominal terms....if you
measure in real terms (gold) things look different....
in many cases. the fact that prices in housing
have not fallen further is evidence of housing
inflation - the bubble is still breathing....
the problem with learning actual calculations is
that there are none for macro-economics - and that
is what interests most people in a rubber necking
kind of fashion....the quack economic establishment
generally introduces linear concepts to think about
the economy when the economy is anything but...
and throwing out a legion of differential equations
to feign sophistication is not an an answer either...
but applying classical economics to a politburo
based economy is also not a solution. thus there
is no way out of alice's mad mad world without
destroying the fed....and doing that has about
as much of a chance as a snow ball in hell.
we are so far fooled in the many generations of peasant folly that no one knows where the poverty line will be drawn once the FED is dead. Perhaps we'll get our Mayan destruction fantasy courtesy of global fiat implosion
"One of the evils of paper money is that it turns the whole country into stock jobbers. The precariousness of its value and the uncertainty of its fate continually operate, night and day, to produce this destructive effect. Having no real value in itself it depends for support upon accident, caprice, and party; and as it is the interest of some to depreciate and of others to raise its value, there is a continual invention going on that destroys the morals of the country."
Thomas Paine
Zombie girl pics. TIA.
"Have the worst fears of Thomas Jefferson, Andrew Jackson, Carter Glass and the other American opponents of a central bank been proven correct?"
My first instinct was to answer "Yes" but upon further reflection, the answer is "No" because none of them could have imagined the monstrosity the USA has become. The level of corruption, conflict of interest and self dealing we are witnessing makes the head wobble and the hand tremble. The sad and self evident truth is that we are rapidly becoming inured to the ever increasing outrageousness of it all.
It's only just begun. Do not underestimate the level to which we can and will sink.
The Federal Reserve Banks have given trillions of dollars to those who are politically connected and to foreign nationals to support money and aid to our enemies. All of which has led to a debasement of our currency without the approval of Congress. Ben Bernanke, the Fed Board of Governors LLoyd Blankfein and Hank Paulson should be tried for corruption, theft and Treason and punished to the fullest extent of the law
they would of long died as martyrs to this farce - the nightly news is designed to scare everyone of their common neighbor to further enclose themselves from healthy community.. alone they are led to decisions that fill their void - selfishness reigns as we all slide down