Archive for July 20th, 2011
I don’t usually post twice in one day, but there is a story which requires our immediate attention (hat tip, Mish). This post’s title is riff on Arthur Fullerton’s Only poor people can be allowed to fail. His story is short & sweet. I believe it speaks for itself.
Reading Lawrence Summers in the Financial Times yesterday I came across this statement as his third principle of dealing with the Euro crisis:
…there must be a clear commitment that, whatever else happens, no big financial institution in any country will be allowed to fail. The most serious financial breakdowns – in Indonesia in 1997, Russia in 1998, and the US in 2008 – came when authorities allowed doubt over the basic functioning of the financial system. This responsibility should rest with the ECB, with the requisite political support.
And so we have a clear unambiguous statement of the principle of socialism for the rich and powerful, and capitalism, red in tooth and claw, for the poor. Notice that too big to fail has now gone global.
I felt the need to publish this immediately because Fullerton notes that coverage has been lacking.
Over the past 24 hours this has been sitting out there with no push back or comment from the media. Is it simply an accepted fact that governments around the world — including our own — will now maintain a system where no large financial institution — no matter how corrupt or incompetent — will be allowed to fail?
My regular readers surely remember George Carlin’s Great Big Club, the one you’re not in. The club’s members are the elites who have a large say in how the U.S. (and world) economy is run. They often come from the world of Big Finance. Usually they are former (and future) employees of the big Wall Street banks. There is no overt conspiracy to run the world. Instead, there is a loose but incredibly effective coalition of common interests. Washington politicians, at least the important ones, are often in their pocket.
Larry Summers carries water for those interests. He is their mouthpiece and back in 1999 under Clinton, he was their enforcer. There he is (far right) on the cover of Time Magazine in February, 1999 along with Bob Rubin and Alan Greenspan. And how was this 3-man committee to save the world going to accomplish this great feat? By deregulating derivative securities, repealing Glass-Steagall, etc.
When Barack Obama won the election in 2008, the meltdown of unregulated derivatives (like credit default swaps) had only recently brought the financial system, and the U.S. economy, to its knees. One of Obama’s first acts before he actually assumed the presidency was to appoint Larry Summers to be his chief economic adviser, and Tim Geithner to be his Treasury secretary. (See the video below.) Thus, the Change You Can Believe In was thrown out with the trash even before it had a chance to begin.
I have a small problem with Fullerton’s title. It is incomplete with respect to the true wishes of the financial elites. Perhaps it should read something like this—
Only poor people should be allowed to fail, and if they don’t fail, we should rip them off, just pound the shit out of them, until they do
When you watch this video, and you really should watch it, sit up and take notice at the 3:00 minute mark. You’ll see what I mean. Americans have been f&*ked over to a far greater extent than most of them will ever know.
It’s Russian Roulette for the Washington Set
“I know what you’re thinking; “Did he fire six shots or only five?” Well, to tell you the truth, in all this excitement I kind of loast track myself.” — Harry Callahan
NEW YORK (MarketWatch) — The more things change, the more they stay the same.
I shared some foresight in September 2007 and while some might view the vibe is out-dated, I would humbly counter that it’s not only relevant; it’s increasingly cumulative in cause and effect. See: Russian Roulette.
And I quote:
“After years of focusing investor attention on the risks of inflation, the market demanded — and the Fed delivered — a policy shift designed to alleviate credit market pressures.
In doing so, they effectively told foreign holders of dollar-denominated assets that every nation must fend for itself. That, when push comes to shove, the devil we know — inflation — is more palatable than the devil we don’t.
As the dollar slips to multi-year lows, it is incumbent on us to understand the implications of this policy sea change.
First, it would be helpful to familiarize ourselves with the underlying basics of the dollar dynamic. Kevin Depew wrote a fantastic primer that should be required reading for anyone trying to get a better grip on the subject. See: Five things you need to know about the dollar.
For the last few years, while hiding behind the beard of hawkish vernacular, the FOMC has printed and pumped massive amounts of money into the financial system. That liquidity, while providing a rising tide for virtually every asset class, has come with a cost.
It’s been my long-standing belief that we will continue to toggle between “asset class inflation” and “dollar devaluation.” While both could manifest, I don’t foresee a scenario that includes both a stronger dollar and higher asset classes.
The Federal Reserve, if given the choice, would opt for hyperinflation over watershed deflation. With inflation the rich get richer, the poor get poorer, and the middle class steadily erodes. With deflation, everyone loses. See Pick a Side: Inflation or Deflation .
Wasn’t it Billy Ray Valentine who said that the best way to hurt rich people is by turning them into poor people?
We’ve been monitoring this evolution since 2002, opining that the 30% run in the S&P has been masked by the 33% decline in the greenback. That hasn’t mattered to “us” but it’s the central tenet of foreign angst and a seed that will sow protectionism and isolationism.
Think about it — if you’re a foreign central bank that bought the S&P in 2002, you’ve lost money on the margin. That’s the chief beef with the dollar being the world reserve currency; while we’re enjoying the benefits of our economic “expansion,” they’re sucking wind in local currencies.
That may seem like an obtuse perspective but it’s pertinent in the context of the globally intertwined economy. Americans have been slow to embrace the notion that our basis of valuation is eroding. We earn, spend, and save dollars so, apples to apples there was little impetus to pay attention.
However, as globalization was the perceived catalyst on the front of the tech bubble, it stands to reason that it’ll be a culprit on the other side of the ride. International investors own more than 50% of total US debt, which basically means that they’re holding the trump card on stateside policy.
In our finance-based economy, the velocity of money and elasticity of debt are essential ingredients to the upside equation. That is the crux of the credit crunch that brought this conundrum to bear; money stagnated and credit seized. The global response, verbally and structurally, was to shock the patient back to life.
All things being equal, a decline in the dollar could be “asset class positive,” much as it has been for the last five years. But if the greenback catches a sustainable bid, it’ll likely serve as a clarion call that something entirely more disturbing is afoot.
At the end of the day, our financial health becomes a question of how far the dollar will fall before foreigners scream “Uncle Sam” and, by extension, unwind dollar-denominated positions without committing the financial equivalent of hari-kari.
And it leaves us, investors, in the unenviable position of gaming an invisible catalyst. For regardless of whether we’re wading into inflation, deflation, or both, we’re left to wonder how many weapons the Fed has left in its arsenal.
For when they arrive at the last bullet in the gun, it will likely be pointed inward.”
Fast-Forward to Modern Day
If the last bullet in the Federal Reserve arsenal is indeed pointed inward, wouldn’t that be triggered by a crisis of confidence?
And wouldn’t that start with a negative market reaction to intentionally placed “positive” news, be it resolution surrounding the debt ceiling or an unveiling of QE3?
This isn’t a vibe for today, per se; I’m just putting it out there. The Bernanke Put is a walking, talking contradiction; it will arrive if the economy falters, but the economy won’t improve without stimuli (or, it hasn’t yet, despite oodles of infusions).
The definition of frustration is doing the same thing over and over again and hoping for a different outcome. That also happens to be the definition of “stuck.”
As employment and housing continue to flounder, folks are waking up to the fact that there’s the market… and there’s an economic reality. There’s inflation in things we need (food, energy, education) and deflation in things we want (laptops, plasmas, cell phones) and most of America is stuck in the middle with you.
Bottom line: Policymakers have a God Complex and the simple truth is that nobody is bigger than the market. See: God Complex
It’s clear that they — and “they” includes European policymakers — won’t willingly give up the ball.
The market will have to take it from them.
Todd Harrison for MarketWatch