Guest Post: The Jobs Plan We’d Get If Leading Growth Economists And Innovation Scholars Weren’t Being Volckerized — Part 2Submitted by Tyler Durden on 02/15/2010 19:14 -0500
Part 1 makes a case that an ideal way to catalyze job creation in the U.S. is to subsidize American consumers and producers of customized
education, and American operators of associated online markets. Part 1 concludes by speculating about the reasons that said subsidies are
absent from all talk of "jobs stimulus." From part 1: "A guess? In two words? Banks, children."
An informed view on the Greek fiscal crisis and a brilliant interview with Michael Hudson which exposes the reality on the global financial system and explains why we are sinking back into a new feudalism.
Here is a recent conversation (argument) that I, the not-famous Econophile, had with the famous Martin Wolf, the much lauded and highly awarded dean of economics writers and chief economics correspondent for the Financial Times. This time I take him on for what I thought was a pointless article about Germany and the Greeks. Win, lose, or draw?
Richard Koo's Views On The Macroeconomy, On Volcker's Plan, And Why "Extend And Pretend" Will Be With Us For A Long, Long TimeSubmitted by Tyler Durden on 02/12/2010 23:34 -0500
"Mr. Volcker has argued for some time that the operations of commercial banks and investment banks should be separated. It was said in the US not so long ago that as long as Mr. Volcker (he is currently 82 years old) is alive, the 1930s-era Glass-Steagall Act—which split up commercial and investment banks—would not be repealed.
But the 1990s saw a gradual rollback of the provisions of Glass-Steagall, and in 1999 the Act was finally repealed. I suspect Mr. Volcker was not happy to see this happen.
In what may or may not have been a coincidence, it was around the time that Glass-Steagall was repealed that the US moved towards a system of financial capitalism and its financial sector began a dramatic expansion. This phase continued until the housing bubble collapsed." - Richard Koo
All eyes on the Vancouver games but there is a post-Olympics winter chill headed our way, and you'll be surprised to find out that all is not peachy in good old boring Canada...
- Must read from the master: Lehman justice isn't blind, it's unconscious (Bloomberg)
There’s been much talk the past two years about moral
hazard, which is the risk that companies and their investors
will behave more recklessly when they believe the government
will bail them out. Less has been made of a similar hazard: The
danger that powerful companies won’t follow the law when their
executives believe the government won’t hold them to it. The latter risk threatens not only our economy, but our
democracy. There’s every reason to believe both kinds are
- China raises bank reserve requirement to cool economy (Bloomberg, Reuters)
- EU leaders deploy "Bazooka" to repel attack on Greece (Bloomberg)
- Goldman Sachs, Goldman Sachs, clicking in the votes? (Guardian)
- Evans-Pritchard: Will markets call EU bluff on Greek rescue? (Telegraph)
- Blackstone IPOs show barriers to returning fund cash (Bloomberg)
- Rise in retail sales brightens recovery picture (Reuters)
- Totally not out of leftfield post of the day: Steve "Busted IPO" Schwarzman: Lawmakers rush to punish banks threatens recovery (WaPo)
And you thought the $23 trillion in backstops for the financial system was bad, you ain't seen nothing yet. Earlier today, the Depository Trust & Clearing Corporation, best known for its Cede & Co. partnership nominee which is the holder of virtually every single physical stock certificate in the known universe, and accounts for over $2 quadrillion in stock transactions per year, announced that "the Federal Reserve Board had approved its application to establish a DTCC subsidiary that is a member of the Federal Reserve System to operate the Trade Information Warehouse (Warehouse) for over the-counter (OTC) credit derivatives." With this approval the DTCC is now the de facto legally accepted global repository for over-the-counter credit derivative transactions. Simply said, the Federal Reserve is now the guarantor behind all CDS transactions that clear via DTCC, which would be pretty much all of them (sorry CME, you lose). The total bottom line in terms of gross notional? 2.3 million contracts with a gross notional value of $25.5 trillion. When the next AIG implodes, and the CDS market is once again facing annihilation in the face, who will be on the hook? You dear taxpayer, that's who.
Must watch two part BBC series recapping recent events from the perspective of the other side of the pond, including some much needed "on location" reporting (as opposed to persistent theorizing of "what may happen"). The first part provides the background on the currency crisis and how hedge funds are profiting from shorting the euro. As a commentator points out, the dilemma is moral hazard or austerity measures. And while countries certainly prefer the former, sovereign bond and currency vigilantes are making the second the only viable outcome. The second part is a great exchange between Nobelist Stiglitz and the ever outspoken, and conversation dominating, Hugh Hendry.
Deconstructing Europe: How A €20 Billion Liquidity Crisis Is Set To Become A €1.6 Trillion Funding CrisisSubmitted by Tyler Durden on 02/09/2010 17:03 -0500
Now that some sort of Greek bailout is imminent, most likely in asset guarantee form, it is high time to evaluate the full impact of Europe's decision to jettison monetary prudence at the expense of patching a crumbling fiscal dam holding back trillions in bad investment decision cockroaches, accumulated over the years. Relying on a presentation by ML's Jeffrey Rosenberg, we observe that by providing loan guarantees to the periphery, the core (Germany/France/Benelux) may have well destabilized the core problem for the Eurozone, namely a whopping €1.6 trillion (that's in euro) in total 2010 financing needs, a number which consists of €400 billion in 2010 bond maturities, €700 billion in rolling short term debt and €530 billion in combined 2010 fiscal deficits. Germany has just taken an acute liquidity crisis in the periphery, and courtesy of action we already saw earlier in Bund rates, has sown the seeds for a funding crisis of none other than the very heart of the Eurozone.
This latest on Greece, this time from Dow Jones. Why is Obama speaking about windmills as the future of global moral hazard, Larry Summers edition, is being decided in Berlin? From DJ: "Finance Ministry spokesman Michael Offer said EU members wanted to develop further recapitalization measures that calm the markets."
Now that there is no more risk, anywhere, here are the preliminary thoughts on how kicking the can down the road has just taken on a whole new meaning, courtesy of the FT Deutschland. We are certain that citizens of Germany and France will be ecstatic to see their tax money used to first save Greece, then Spain, the Portugal, then Italy, then Lithuania, then Bulgaria, etc.
More Posturing Or Actual Threat? Iran Warns It Will Deliver A "Punch" To Stun The West On February 11Submitted by Tyler Durden on 02/09/2010 10:45 -0500
While Iran is second in posturing only to North Korea, adding a geopolitical threat to an already simmering liquidity fire is certainly never a good thing to a market engrossed by yet another short squeeze. The Telegraph reports that Iran's supreme leader, Ayatollah Ali Khamenei, has said that the country was set to deliver a "punch" that will stun world powers during this week's 31st anniversary of the Islamic revolution.
Standard and Poor's whacks Citi and Bank of America, revising its outlook on both firms from Stable to Negative, cites "increased uncertainty about the U.S. government's willingness to provide additional extraordinary support to highly systemically important financial institutions in a way that will benefit debt holders."
Remarks By Bill Dudley At Australia Dodecatuple Secret Banker Meeting: Where We Have Been, Where We Are And Where We Need To GoSubmitted by Tyler Durden on 02/08/2010 19:51 -0500
"With respect to financial market infrastructures, the Federal Reserve is working with a broad range of private-sector participants, including dealers, clearing banks and tri-party repo investors to dramatically reduce the structural instability of the tri-party repo system." - Oh, so it is structurally unstable. All this, and many more remarks of the "I say X, but really mean Y" variety in the attached speech.
The key lesson from the ERM crisis of 1992 and the Asian crisis of 1997 is that contagion can emerge quickly and often in unpredictable ways. Unwinding of leveraged positions by distressed market participants, herding behaviour among investors, and loss of liquidity that gives way to general flight to quality can all lead to heightened correlations between markets and, in extremely circumstances, set off a self-filling crisis on a regional/global scale. There have been clear signs over the past week that the distress in the Greek government bond market is increasingly being felt in other euro area countries such as Spain and Portugal. The most likely explanation of this development is the “demonstration effect” – the Greek crisis is likely to have caused investors to re-evaluate the fundamentals of these countries. Spain and Greece may not have strong financial or economic links, but their fundamentals have a lot in common.
The possibility of contagion of the Greek crisis may not end with Spain. There is a presumption among investors that in the worst case scenario (and we are not there yet) the EU will give Greece financial assistance. If this is an isolated event, the effect on the overall public finances of the EU is unlikely to be substantial. However, a bailout of Greece may make aid to other countries in similar situations more likely (moral hazard). A series of open-ended bailouts would not only undermine the fiscal positions of core euro area countries such as Germany and France but, more dangerously, would weaken their political commitment to the continuation of the euro area project.