Debt-a-holics

November 30, 2011

Our government and the entire economic system is addicted to easy debt growth.  Politicians know this and desperately try to keep the party from collapsing at any cost, even if it means greater ruin later on.  Think about this.  The whole Euro crisis could be ended at once if governments would just stop running deficits.  Without deficits they would not need to borrow any more money and would not be subject to the rate of interest of bonds.  They would be self sustaining and the crisis would be over.  But no.  Governments have become so adddicted to debt that they cannot even imagine living without an easy line of credit.  When bond rates get to 5% people are outraged.  What do we all expect when insolvent unsustainable governments want to borrow endless money?  Having governments actually live within their means is like a chain smoker trying to quit smoking.  The pain is just too great.

Here is anther great comment by Charles Hugh Smith on addiction to debt, and why pension plans are in deep trouble.


Next In Line for Implosion: Pension Plans   (November 8, 2011)

Pension plans are based on 8% annual growth forever. What happens to these plans in a zero-interest rate world as the global economy and stock markets contract?

I’m afraid it’s time for an intervention. I don’t enjoy being the bearer of difficult news, but now that Europe has stumbled drunkenly into the pool and been “rescued,” it’s once again tearfully blubbering that this time it’s all going to change, and a new prime minister in each dysfunctional, insolvent EU nation is going to make the pain and the addiction all go away.

It’s time we face the reality that Europe and the U.S. are full-blown financial alcoholics, addicted to illusion and debt. And what do they turn to as “solutions”? The very sources of their pain: illusory “fixes” and more debt. Have you ever seen a global market as dependent on rumors of “magical fixes” for its “resilience” as this one?

What’s truly remarkable is the psychotic distance between the facts–Europe’s debts are impossible to service, its economy is free-falling into recession, the U.S. is already in recession, China’s real estate bubble has popped and cannot be reinflated– and the heady leap of global markets on every trivial rumor of a magic fix.

Since it runs in our family, I do not use the word “alcoholic” lightly. Those of you who have to deal with alcoholics know the drill: the liquor stashed behind the fridge, as if everyone doesn’t know it’s there; the stumbling into the pool, the humiliating rescue, the tearful promise of change which goes nowhere, and all the rest.

I seriously suspect the entire global economy is alcoholic–not about liquor, but about debt and the impossibility of paying entitlements which expand by 8% a year in an economy which grows by 2% a year at best. In all the millions of words printed about the subprime meltdown, the gutting of the U.S. financial and housing markets and now about Europe’s impossible burden of debt, how often have we seen anyone in the MSM or mainstream financial press confess that “borrowing our way of out of trouble” is not just financially bankrupt but morally bankrupt as well?

Like a full-blown alcoholic, the people and governments of the U.S. and Europe stagger from debt source to debt source, weaving drunkenly between “stashes” of new debt in the Fed, Treasury and private sector markets. Despite the abject failure of the magical-thinking “fix” of becoming solvent by exponentially expanding debt, we see the same pathetic pattern repeating in Europe, where the apologists for the alcoholic debt-binge continue to claim the risk of systemic failure and collapse of asset values is low.

While everyone is focused on the drunk being pulled from the pool–Europe’s sovereign debt–another drunk is teetering on the edge: public and private pension plans. Here’s the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever.

Gripped by the mono-maniacal desperation of an addict who sees no other path but another hit, central banks have lowered interest rates to near-zero to “spark growth.” Unfortunately the only thing being goosed is the future cost of servicing the additional debt.

How do you earn 8% on money which yields at best 3%? You can’t. How do you reap a gain on bonds when interest rates have already hit bottom and can’t fall any lower? You can’t.

Which leaves the stock market as the only hope for pension plans. Since the bottom in March 2009, central banks engineered a “magic solution” that generated fantastic stock market returns: by constantly lowering interest rates and increasing liquidity, central banks force-fed stock markets with demand (there was no other place to get a fat return) and the see-saw of interest rates and “risk-on” equity markets: as rates decline, equities floated ever higher.

Now that rates are near-zero, then the central banks are pushing on a string: there is no “magic” left to juice equity markets.

The equity markets are in effect living on vitamin C and cocaine: rumors of new “magic fixes” and the hit of central bank infusions.

Once rumor is no longer enough to float markets higher, then the consequences of depending on stock market returns will hit pensions with a terminal case of the DTs.

The “magic” of ramping up debt to create the illusion of a healthy economy only works once. The “fix” “worked” from 2009 to 2011, but now the high is wearing off. The next round of rumor and debt expansion won’t even create the illusion of growth, as the global economy is already careening back into the contraction that trillions in new debt staved off for three years.

I have covered the disconnect between the promises of 8% yields forever built into public pension plans and a slow-growth/no-growth economy many times:

Yes, There Will Be Armageddon: Government Goes Bankrupt (July 24, 2008)

How the Fed Pushed the Nation’s Pension Plans–and Local Government–into Insolvency (May 24, 2010)

Public Pension and Healthcare Costs and Financial Common Sense (February 28, 2011)

Every once in a while an MSM outlet addresses the issue directly, for example:

Pension issue balloons with soaring costs (S.F. Chronicle):

 

Pension costs are soaring to $800 million, tripling during the last decade, as Los Angeles faces years of projected budget deficits even with deep cuts in services and staff. The main driver of higher pension costs is the stock market crash. CalPERS (California’s primary public pension plan) gets about 75 percent of its revenue from investment earnings. Its portfolio peaked at $260 billion in 2007, fell to $160 billion last year and now is about $204 billion.

 

Why economic growth isn’t enough to fix budgets:

 

But under the laws now dominating government budgets, many expenditures essentially are or will be growing faster than both revenues and the rest of the economy. In fact, in many areas of the budget, automatic expenditure growth matches or outstrips revenue growth under almost any conceivable rate of economic growth. Now, so much spending growth is built into permanent or mandatory programs that they essentially absorb much or all revenue growth. Meanwhile, we’ve also cut taxes, widening the gap between available revenues and growing spending levels.

Consider government retirement programs. Most are effectively “wage-indexed” insofar as a 10 percent higher growth rate of wages doesn’t just raise taxes on those wages, it also raises the annual benefits of all future retirees by 10 percent. Meanwhile, in most retirement systems, employees stop working at fixed ages, even though for decades Americans have been living longer.

Today, so much of government spending is devoted to health and retirement programs that their growing costs tend to swamp gains we might achieve in holding down the ever-smaller portion of the budget devoted to discretionary spending. Still other programs add to the problem, such as tax subsidies for employee benefits, the cost of which grows automatically without any new legislation.

In other words, the entire system of state and local government is now based on the same 8% “permanent high growth” of the 1990s speculative market. Funding increases are wired in, regardless of how much tax revenues fall. That is a recipe for insolvency.

Now we get to the heart of the matter. Which institution engineered the heady stock market bubble of the 1990s that created the illusion of “permanent high returns” and growth of tax receipts? The Federal Reserve. Which institution has made the stock market the proxy for the economy? The Federal Reserve. Which institution has engineered a three-year stock market rally to put off the inevitable implosion of pension plans, entitlements and tax revenues that must grow by 8% annually while the real economy is flat-lined? The Federal Reserve.

We can ask the same questions of Europe and get the same answer there, too: the European Central Bank (ECB).

Addiction is a terrible disease, founded on the illusion that the pain of facing reality can be put off forever by dulling the pain of addiction itself with ever-higher doses of self-destruction. We are witnessing the self-destruction of economies and machines of governance that have chosen denial, illusion, rumor and magical thinking over facing reality. The drunk has been pulled from the pool once again, slobbering self-piteously and promising to really, really change tomorrow, and we believe the lie, at least until morning, because hope is so much easier than reality.

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How the Financial System is Corrupt

November 30, 2011

Here is a great summary of the growing corruption in the financial industry by Charles Hugh Smith

We start with David P.’s excellent exploration of systemic fraud:

Your essay The Collapse of Our Corrupt, Predatory, Pathological Financial System Is Necessary and Positive was entirely correct about risk. But let me come at this from a different angle – namely fraud. Finance skims a percentage off the real economy. Some part of the skim is legitimate reward for capital allocation – a necessary part of a capitalist system and part of what makes it more efficient than a command economy. But some part of the skim is fraud.

Where are we now? Let’s look at the sources of skim:

First there are the more legitimate skim sources – interest payments, management fees, IPO fees, M&A fees, trade commissions.

Then there are the less legitimate bank sources: penalty credit card interest rates, late fees, usage fees, over-the-limit fees, late payment fees, bounced check fees, low balance fees. And the capital markets sources – front-running, insider trading, account churning, manipulation of the news cycle, the captive analyst “ratings game”, trading against your own client’s order book, forex trades which are marked at the day high or low irrespective of when the trade took place, market manipulations at options expiration, stuffing your managed client accounts full of dubious IPOs and new issues that your organization is earning fees from originating.

Bucket shops and ponzi schemes take it even a step further – no actual financial activity takes place. Its simply robbery.

And now we add the new stuff: credit default swaps without margin, fraudulent loan origination, sliced & diced mortgages, mark to myth accounting, foreclosure halts to avoid realizing losses, extend & pretend, quote stuffing, HFT trading activity that boils down to denial of service attacks on exchange computers causing delays in pricing information, highly complex derivatives sold to unsuspecting but optimistic public servants, too big to fail status providing cheap backup in the event of trouble, and increased organizational size that facilitate cartel-like control over government and regulators.

But if that’s not enough, there is the structure itself: they aren’t doing this with saved capital, but rather with freshly printed and/or borrowed capital. Its all done with 12:1 leverage at a minimum. So only 8.3% of the gambling (optimistically anyway) is actual capital – saved surplus. And if Basel II says it’s risk-free, well there’s no need for reserves at all. It is just manufactured money, which effectively mean each bet is diluting the actual savings of real people. And if the bet goes bad, the Fed will ride to the rescue with low-cost money. But usually the bet goes well, because ordinarily the number of sources of fraud today is so HUGE, its practically impossible not to succeed.

Unless of course they get too greedy. Or the debt levels rise so high that large numbers of borrowers default. And guess where we are.

The financial system is supposed to allocate capital and take a modest skim as reward for helping society to be efficient. When they are doing this, they provide a net benefit to society because it’s a win-win proposition. They are making society more efficient, and they thus earn their percentage.

However, and this is the key point: fraud provides no net benefit to society. Fraud extraction is a zero sum game. For every dollar extracted through fraud, someone in the productive society ends up losing – savings, salary, whatever. This is why fraud is bad.

(I say that leverage is zero sum because constructing money from thin air for a leveraged investment causes inflation and thus steals from savers.)

Currently, it is my opinion that the vast majority of today’s highly profitable financial activity is fraud. They have gone way, way beyond their mandate of capital allocators. Because most of its activities are based on fraud, the finance industry is acting as a parasite, sucking the life blood from the rest of society. Its bad enough we have peak everything, a world population of 7 billion people, and globalization to deal with – but we also have to face these challenges while a leech is weakening us with every step we take!

As a result, when this bloated, fraud-based financial system dies, we’ll have a awesome, positive chance to rip off the parasite and replace it with something more beneficial. Simply re-executing glass-steagall will do for a start. Bring back 9-3 boring banking, where banks retain the mortgage and live with the risk, and capital markets once again do their job of capital allocation — but without the fraud so rampant today.

Same conclusion, different angle. Intrinsically, I believe that capitalism does actually allocate capital more efficiently than competitive systems. And yet, how the current system works is so wrong. And I figured out it was fraud. Fraud was the bad guy. Remove fraud, and things get a lot better.

But after re-reading your essay, fraud wasn’t the whole answer either. Fraud might be the leech, but leverage is the system killer.


Growing Fraud in the Financial Industry

November 30, 2011

We tend to think of banks and company as strictly run businesses according to the law, but what has become apparent to me lately is just how criminal our financial industry has become.  And why not?  The government lets them keep getting away with schennanigans, so bending the rules just becomes a normal way of doing business.  Fraud and sloppiness are the order of the day right now.  This is a great article from the National Memo.

Mon, 11/28/2011 – 12:40pm —

Without prosecutions, there’s nothing keeping fraud from becoming a standard business practice.

In 2004, the FBI warned Congress of an “epidemic of mortgage fraud,” of unscrupulous operators taking advantage of a booming real estate market. Less than two years later, an accounting scandal at Fannie Mae tipped us off that something was very wrong at the highest levels of corporate America.

Of course, we all know what happened next. Crime invaded the center of our banking system. Wall Street CEOs were signing on to SEC documents knowing they contained material misstatements. The New York Fed, riddled with conflicts of interest, shoveled money to large banks and tried to hide it under the veil of central bank independence. Even Tim Geithner noted that Lehman had “air in the marks” in its valuations of asset-backed securities, as the bankruptcy examiner’s report showed that accounting manipulation to disguise the condition of the balance sheet was a routine management tool at the bank. There’s a reason Charles Ferguson got an Academy Award for his work on the documentary Inside Job.

And yet, no handcuffs. The big news on prosecutions in the traditionally high-powered Southern District of New York are convictions for relatively petty insider trading that are unrelated to the collapse of the economy. The criminal charges could have been filed in the 1980s. U.S. Attorney Preet Bharara has brought minor civil suits against banks, but nothing significant, and no criminal indictments for the Ponzi scheme of the last four years.

And what happens when this kind of fraud goes unprosecuted? It continues, even today. The same banks that ran the corrupt home mortgage securitization chain are now committing rampant fraud in the foreclosure crisis. Here’s New Orleans Bankruptcy Judge Elizabeth Magner discussing problems at Lender Processing Services, the company that handles 80 percent of foreclosures on behalf of large banks (emphasis added):

In Jones v. Wells Fargo, this Court discovered that a highly automated software package owned by LPS and identified as MSP administered loans for servicers and note holders but was programed to apply payments contrary to the terms of the notes and mortgages.

The bad behavior is so rampant that banks think nothing of a contractor programming fraud into the software. This is shocking behavior and has led to untold numbers of foreclosures, as well as the theft of huge sums of money from mortgage-backed securities investors.

Here’s how the fraud works: Mortgage loan notes are very clear on the schedule of how payments are to be applied. First, the money goes to interest, then principal, then all other fees. That means that investors get paid first and servicers, who collect late fees for themselves, get paid either when they collect the late fee from the debtor or from the liquidation of the foreclosure. And fees are supposed to be capitalized into the overall mortgage amount. If you are late one month, it isn’t supposed to push you into being late on all subsequent months.

The software, however, prioritizes servicer fees above the contractually required interest and principal to investors. This isn’t a one-off; it’s programmed. It’s the very definition of a conspiracy! Who knows how many people paid late and then were pushed into a spiral of fees that led into a foreclosure? It’s the perfect crime, and many of the victims had paid every single mortgage payment.

A lack of criminal prosecutions means that unethical business practices like this one drive out ethical business practices. After all, why should a bank hire an ethical default servicer that charges a high price for its product when it can pay nothing to one that simply extracts from investors and homeowners?

The joke that is the U.S. Attorney network has become very old and very stale. And unfortunately, because of Attorney General Eric Holder, that joke is on us.

Matt Stoller is a Fellow at the Roosevelt Institute and former Senior Policy Advisor to Congressman Alan Grayson.


Newt selling himself and the country out

November 30, 2011

I read this article from the National Memo exposing how Newt Gingrich has spent the past few years milking his contacts to do unofficial lobbying for his corporate paymasters.  He is just another creature of the system.  Please vote for Ron Paul instead.

Mon, 11/28/2011 – 10:33pm —
Newt Gingrich at the CNN debate (AP Photo/Evan Vucci)

To look closely at Newt Gingrich is to see a failed statesman who pocketed tens of millions of dollars by exploiting his political celebrity and government connections over the past decade or so. Although the former Speaker never registered as a lobbyist, the corporations that financed his “for-profit” think-tank and his consulting firm weren’t simply charmed into writing those enormous checks.

But for Republican primary voters, Gingrich’s blatant buckraking may not be nearly as troubling as what he helped his corporate masters to achieve on Capitol Hill. Having accepted large sums from major drug companies as well as PhRMA, the industry lobbying group, he reportedly helped to push through the Bush administration’s Medicare drug benefit – which is anathema to the right-wing Tea Party voters whose support he is now courting.

As the Washington Post and other outlets have reported in recent days, the estimated take from Gingrich Inc., the conglomerate of Newt-centered consulting, publishing, and propaganda activities that he founded after leaving Congress in 1999, ranges upward of $110 million. He points out that he has written (or had ghost-written) about a dozen best-selling books and a number of television documentaries, and that he has also earned top dollar by delivering speeches – much like his old nemesis Bill Clinton (who has devoted a large proportion of his similarly huge earnings to charity and foundation work).

The largest proportion of the Gingrich bonanza, however, evidently derives from the Center for Health Transformation, an unusual profit-making “think-tank” in Washington, where most such organizations are not-for-profit; and the Gingrich Group, his consulting company which gave corporations “advice” while it supposedly refrained from traditional lobbying for legislation. He also operated a tax-exempt non-profit called American Solutions, which he seems to have used largely to finance millions of dollars worth of travel by private jet and limousine for himself and third wife Callista.

The “group” took in lucrative fees from the corporate likes of mortgage giant Freddie Mac, which paid Gingrich around $1.8 million over several years to help with troublesome Republicans seeking to shut down the government-backed firm. The “center” dispensed advice, videos, and conferences on health care to a huge variety of companies in the health field, which paid annual “dues” ranging from $5000 to $200,000 depending on their size after its doors opened in 2003. Familiar pharma names such as Astra Zeneca and Novo Nordisk were major customers, along with the official PhRMA lobby.

Precisely what the center did for these exorbitant sums is not clear, but some commentators suspect that its activities skirted lobbying even if it avoided the narrowest definition of that business. In his defense, both Gingrich and his friends have insisted he did nothing that could be construed as supporting legislation on behalf of a client.

Yet xonservative journalist Tim Carney, writing for the Washington Examiner, reports that the former Speaker used his connections on the Hill to promote passage of the Medicare drug bill, also known as Medicare Part D, in 2003 – which was designed to protect drug company profits no matter how high the cost to consumers and taxpayers. According to Carney, Gingrich was hired “by someone in the industry” during the contentious debate over the bill, when his successors in the House Republican leadership notorious twisted many arms in their own caucus to achieve passage.”

“Three former Republican congressional staffers told me that Gingrich was calling around Capitol Hill and visiting Republican congressmen in 2003 in an effort to convince conservatives to support a bill expanding Medicare to include prescription-drug subsidies,” Carney writes.
“Conservatives were understandably wary about expanding a Lyndon Johnson-created entitlement that had historically blown way past official budget estimates. Drug makers, on the other hand, were positively giddy about securing a new pipeline of government cash to pad their already breathtaking profit margins.”

There is much more to be found in the archives and bank accounts of Newt, Inc., from his relationship with the Chamber of Commerce to his advocacy of policies that benefited his corporate clients, whether or not he actually lobbied directly for them. But his promotion of the Medicare expansion may be his greatest vulnerability for the moment, as he assumes the front-runner position.

On Monday, the chair of Gingrich’s Center for Health Transformation estimated its revenues over the past decade at $55 million. Fees are flexible, she said, with “charter memberships” going for an annual fee of $200,000.


Which is worse America or Europe

November 28, 2011

The Euro is a horribly flawed currency rushed into production based on wishful thinking without an adequate plan B in case things did not work out.  The Euro allowed states like Greece to merrily borrow enormous sums of money at German interest rates.  It was like giving an open tab to an alcoholic.  Now we are dealing with the inevitable mess.

Europe deserves what it has got, but there is one silver lining to it all.  The crisis is forcing governments to finally begin to deal with out of control government spending, chronic deficits, and even-hopefully- uncompetitive economies.  In the past-especially in the Med. countries-politicians would continually raise salaries by government fiat to win votes.  This would quickly make their economies uncompetitive, so politicians would engage in periodic rounds of devaluation to lower their countries costs.  The effect was high inflation.  This is why Spain had 14% interest rates in 1991, and why the Italian Lira got up to 1500 Lira to the dollar.

But now the party is over and countries can no longer devalue to get out of the mess.  Finally they are being forced to liberalize markets, cut costs and reform the system.  They are valiantly trying at all costs to avoid any meaningful reform, and play a game of chicken both with the European Union, and bond holders.  But, sooner or later they are going to have to face the fact that their economies are overpriced, over regulated, over buruocratize and over spending, and they will have to do something about it or default and leave the Euro.  Germany will not continually bail them out, and the bond markets sure are not going put up with business as usual in the PIIGS.

Measures until now have been too little and too late, but at least something is beginning to be done.  In the US, however, nothing is being done.  It may appear that the US is in a better position than Europe, because Europe is beginning to go thru the pain of confronting its problems.  The US can afford to deny its problems, and allow them to grow ever greater.  The analogy is of the heroine addict who is trying to go clean and going thru the pain of withdrawal, while the other addict merrily goes on getting high.  Superficially it may appear that the guy shooting up is in better shape, but the other addict, if he can successfully get clean, will end up doing much better.  This is similar to the US and Europe.  If Europe can go thru the pain and implement real reform, it will be much better off than the US, which simply ignores its growing problems.

Peter Schiff explains it very well:

Whose Fuse is Shorter?
November 23, 2011 – 12:13pm — europac admin

By:

Peter Schiff

Wednesday, November 23, 2011

With fiscal time bombs ticking in both Europe and the United States, the pertinent question for now seems to be which will explode first. For much of the past few months, it looked as if Europe was set to blow. But Angela Merkel’s refusal to support a Federal Reserve-style bailout of European sovereigns, as well as her recent statement the she had no Hank Paulson-style fiscal bazooka in her handbag, has lowered the heat. In contrast, the utter failure of the Congressional Super Committee in the United States to come up with any shred of success in addressing America’s fiscal problems has sparked a renewed realization that America’s fuse is dangerously short.

Chancellor Merkel has been emphatic that European politicians not be given a monetary crutch similar to the one relied on by their American counterparts. Her laudable goal, much derided on the editorial pages of the New York Times, is to defuse Europe’s debt bomb with substantive budget reforms and, as a result, to make the euro “the strongest currency in the world.” Much has been made of the poorly received auction today of German government bonds, with some saying the lack of demand (which pushed yields on 10-year German bunds past 2% — hardly indicative of panic selling) is evidence of investor unease with Merkel’s economic policies. I would argue the opposite: that many investors still think that Merkel is bluffing and that eventually Germany will print and stimulate like everyone else. It is likely for this reason that yields on German debt have increased modestly.

In contrast, the US is crystal clear in its intention to ignore its debt problems. With the failure of the Super Committee this week, it actually became official. American politicians will not, under any circumstances, willingly confront our underlying debt crisis. While the outcome of the Super Committee shouldn’t have come as a great surprise, the sheer dysfunction displayed should serve as a wakeup call for those who still harbor any desperate illusions. Some members of Congress, such as John McCain, have even come out against the $1.2 trillion in automatic spending cuts that would go into effect in January 2013. Expect more politicians of both parties to cravenly follow suit.

Over the next decade, the US government expects to spend more than $40 trillion. Even if the $1.2 trillion in automatic cuts are allowed to go through, the amount totals just 3% of the expected outlays. In a masterstroke of hypocritical accounting, $216 billion of these proposed “cuts” merely represent the expected reductions in interest payments that would result from $984 billion of actual cuts. These cuts won’t make a noticeable dent in our projected deficits, which, if history can be any guide, will likely rise by much more as economic reality proves far gloomier than government statisticians predict. Finally, the cuts are not cuts in the ordinary sense of the word, where spending is actually reduced. They are cuts in the baseline, which means spending merely increases less than what was previously budgeted.

In the meantime, the prospect of sovereign default in Europe is driving “safe haven” demand for the dollar. So, contrary to the political blame game, Europe’s problems are actually providing a temporary boost to America’s bubble economy. However, a resolution to the crisis in Europe could reverse those flows. And given the discipline emanating from Berlin, a real solution is not out of the question. If confidence can be restored there, each episodic flight to safety may be less focused on the US dollar. Instead, risk-averse investors may prefer a basket of other, higher-yielding, more fiscally sustainable currencies.

The irony is that Europe is actually being criticized for its failure to follow America’s lead. This misplaced criticism is based on the mistaken belief that our approach worked. It did not. Sure, it may have delayed the explosion, but only by assuring a much larger one in the future. Once again, many have mistaken delay for success.

However, if Merkel’s hard line works, and real cuts follow, Europe will be praised for blazing a different trail. As a result, the euro could rally and the dollar sink. Commodity prices will rise, putting even more upward pressure on consumer prices and interest rates in the United States.

Any significant reversal of the current upward dollar trend could provide a long awaited catalyst for nations holding large dollar reserves to diversify into other currencies. My guess is that Merkel understands the great advantage the US has enjoyed as the issuer of the world’s reserve currency. I believe she covets that prize for Europe, and based on her strategy, it is clearly within her reach.

There is an old saying that one often does not appreciate what one has until it’s lost. The nearly criminal foolishness now on display in Washington may finally force the rest of the world to cancel our reserve currency privileges. The loss may give Americans a profound appreciation of this concept.


Yet more corruption in Congress

November 28, 2011

Beyond the usual influence peddling between our leaders and special interests, there are other ways for politicians to exploit the system.  Companies routinely make sweetheart IPO deals with members of Congress to curry favor.  Now we find out that they have been insider trading.  Let us not forget the Martha Stewart was imprisioned and later put on probation with a band around her ankle for months, for the crime that her stock broker might have possibly mentioned something to her that might have been construed as a form of insider trading.  Meanwhile our financial industry brings the whole economy to the brink of collapse, has to be rescued with taxpayer money, no one goes to jail-despite massive wrong doing and law breaking, and they are rewarded with record bonuses.  Now Congress is engaging in insider trading with impunity.  Here is the story from Yahoo Finance.

The Congress Insider Trading Scandal Is Outrageous

You cannot read the description of the personal stock trading allegedly conducted by Rep. Spencer Bachus and other members of Congress during the financial crisis and conclude anything other than the following:

Our government is completely corrupt.

Yes, this behavior may be technically legal, because of an absurd loophole that makes insider-trading rules not apply to Congress.

Yes, this behavior may be widespread on Capitol Hill.

But there is no universe in which a reasonable person would consider this behavior ethical or okay. And for the 300+ million Americans who aren’t members of Congress, it would be just plain illegal

Many members of Congress seem guilty here, including John Kerry, Dick Durbin, and Jim Moran. But Spencer Bachus takes the cake.

According to a new book called Throw Them All Out by Peter Schweizer, as relayed by Dave Weigel at Slate, Rep. Bachus made more than 40 trades in his personal account in the summer and fall of 2008, in the early months of the financial crisis.

The fact that Bachus personally traded on private information he received as a result of his job is bad enough. The fact that he was the ranking member of the House Financial Services Committee at the time is simply outrageous.

In one case, the day after getting a private briefing on the collapsing economy and financial system from Ben Bernanke and Hank Paulson, Rep. Bachus effectively shorted the market (by buying options that would rise if the market tanked.)

A few days later, after the market tanked, Bachus sold his position and nearly doubled his money.

If a corporate executive or Wall Street trader did this–cashed in personally after getting private, non-public information from his work–Rep. Bachus and every other member of Congress would be screaming from the rooftops about how the financial system is deeply corrupt and how the executive should be charged with insider trading.

And they would be right.

Rep. Bachus should return whatever money he made by betting on the direction of the markets (or anything else) in the fall of 2008. He should apologize for his behavior and jaw-dropping lack of judgement. He should urge his fellow members of Congress to immediately enact legislation that defends the fairness of the markets by holding Congress to the same insider trading laws as everyone else. He should then resign in disgrace.

Here’s the passage from Throw Them All Out, as relayed by Slate’s Dave Weigel. According to Weigel, it is only one of many examples of Bachus’s insider trading:

On the evening of September 18, at 7 p.m., Bachus received [a] private briefing for congressional leaders by Hank Paulson and Federal Reserve Bank Chairman Ben Bernanke about the current state of the economy. They sat around a long table in the office of Nancy Pelosi, then the Speaker of the House. These briefings were secretive. Often, cell phones and Blackberrys had to be surrendered outside the room to avoid leaks.

What Bachus and his colleagues heard behind closed doors was stunning. As Paulson recounts, “Ben [Bernanke] emphasized how the financial crisis could spill into the real economy. As stocks dropped perhaps a further 20 percent, General Motors would go bankrupt, and unemployment would rise . . . if we did nothing.” The members of Congress around the table were, in Paulson’s words, “ashen-faced.”

Bernanke continued, “It is a matter of days before there is a meltdown in the global financial system.” Bachus was among those who spoke. According to Paulson, he suggested recapitalizing the banks by buying shares.

The meeting broke up. The next day, September 19, Congressman Bachus bought contract options on Proshares Ultra-Short QQQ, an index fund that seeks results that are 200% of the inverse of the Nasdaq 100 index. In other words, he was shorting the market. It was an inexpensive way to bet that the market would fall. He bought options for $7,846 on a day when the Dow Jones Industrial Average opened at 8,604. A few days later, on September 23, after the market had indeed fallen, he sold the options for over $13,000 and nearly doubled his money.


Was Dominique Straus Kahn Set Up?

November 28, 2011

I am not sure if DSK was the victim of a conspiracy or just a crazy woman.  The interesting story below will help you decide.

Sat, 11/26/2011 – 11:47am —

Popular, charismatic, and experienced in government, Dominique Strauss-Kahn, we should be careful not to forget, was once the French Socialist Party’s frontrunner to take on incumbent Nicolas Sarkozy in next spring’s presidential election. Edward Jay Epstein hints that beyond the (now obvious) fact the legal case against the politican and former head of the International Monetary Fund was flawed, the entire rape case may be tainted with the stuff of political conspiracy:

May 14, 2011, was a horrendous day for Dominique Strauss-Kahn, then head of the International Monetary Fund and leading contender to unseat Nicolas Sarkozy as president of France in the April 2012 elections. Waking up in the presidential suite of the Sofitel New York hotel that morning, he was supposed to be soon enroute to Paris and then to Berlin where he had a meeting the following day with German Chancellor Angela Merkel. He could not have known that by late afternoon he would, instead, be imprisoned in New York on a charge of sexual assault. He would then be indicted by a grand jury on seven counts of attempted rape, sexual assault, and unlawful imprisonment, placed under house arrest for over a month, and, two weeks before all the charges were dismissed by the prosecutor on August 23, 2011, sued for sexual abuse by the alleged victim.

He knew he had a serious problem with one of his BlackBerry cell phones—which he called his IMF BlackBerry. This was the phone he used to send and receive texts and e-mails—including for both personal and IMF business. According to several sources who are close to DSK, he had received a text message that morning from Paris from a woman friend temporarily working as a researcher at the Paris offices of the UMP, Sarkozy’s center-right political party. She warned DSK, who was then pulling ahead of Sarkozy in the polls, that at least one private e-mail he had recently sent from his BlackBerry to his wife, Anne Sinclair, had been read at the UMP offices in Paris.1 It is unclear how the UMP offices might have received this e-mail, but if it had come from his IMF BlackBerry, he had reason to suspect he might be under electronic surveillance in New York. He had already been warned by a friend in the French diplomatic corps that an effort would be made to embarrass him with a scandal. The warning that his BlackBerry might have been hacked was therefore all the more alarming.